SUCCESS STORY

Success means achieving good and expected results or the desired outcome of some event. Success comes natural as there can be no eventualities in operation of any company. A company’s operation repre- sents a sequence of causes and effects. One just needs to see the correct relation between events and use it for his own ends. A company brings together different persons forming a team. As part of the company we determine what our life will be in the company and beyond with our thoughts, feelings and actions. «The weak trust in luck and the strong trust in cause and effect» (R. Emerson), «Winners do not believe in an eventuality» (F. Nietzsche) — speaking of success said philosophers. Successes achieves by IBA-MOSCOW on certain days have analogues in the world history. Successes achieved in different periods of time and in different countries are in some way connected, influence each other and pave an uninterrupted path towards progress of our society. CONTENTS

1. Chairman of the Board address 5 Summing up the Bank’s performance in 2010 and plans for the future 5 2. General information about the Bank 9 Brief data 9 Mission, goals and corporate values 10 Administration 11 Members of the board 12 Management 12 Main developments in 2010 12 Charity and sponsorship programs 12 Ratings and awards 13 Membership in organizations 13 3. External environment 15 Global economy and international markets 15 Financial situation in the Russian Federation in 2010 16 Overview of the Russian banking sector in 2010 16 4. Bank's operations in 2010 19 Overall financial performance 19 Corporate business 21 Customer lending 25 Retail business 27 Operations in financial markets 31 5. Bank’s operations in Russian Federation regions in 2010 33 Saint Petersburg 34 Yekaterinburg 36 6. Bank’s support services 39 Risk management and internal control 39 Information technologies 40 Human resources department 41 Corporate communications 43 7. Priority directions of the Bank's operations and development prospects 45 8. Contact information 47 Main Bank details 47 ATM’s addresses 48 9. Financial Statements For the Year Ended December 31, 2010 49

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2010 49 INDEPENDENT AUDITORS REPORT 50 Income statement 51 Statement of comprehensive income 52 Statement of financial position 53 Statement of changes in equity 54 Statement of cash flows 55 Notes to the financial statements 57

1. ORGANIZATION 57 2. SIGNIFICANT ACCOUNTING POLICIES 57 3. RECLASSIFICATIONS 65 4. NET INTEREST INCOME 66 5. ALLOWANCE FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 66 6. FEE AND COMMISSION INCOME AND EXPENSE 67 7. OPERATING EXPENSES 67 8. INCOME TAXES 68 9. CASH AND BALANCES WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION 69 10. MINIMUM RESERVE DEPOSITS WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION 69 11. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 69 12. DUE FROM BANKS 70 13. LOANS TO CUSTOMERS 70 14. PROPERTY AND EQUIPMENT 73 15. DEPOSITS BY BANKS 74 16. DEPOSITS BY CUSTOMERS 76 17. SUBORDINATED DEBT 76 18. EQUITY 77 19. COMMITMENTS AND CONTINGENCIES 77 20. TRANSACTIONS WITH RELATED PARTIES 78 21. FAIR VALUE OF FINANCIAL INSTRUMENTS 79 22. CAPITAL RISK MANAGEMENT 81 23. RISK MANAGEMENT POLICIES 82 24. SUBSEQUENT EVENTS 96

25JANUARY2002 Opening of IBA-MOSCOW, the first bank with Azerbaijani capital in Russia

Events that took place in the world on the same day:

83 YEARS EARLIER 87 YEARS EARLIER 25JANUARY1919 25JANUARY1915

Pennsylvania Hotel, the biggest Alexander Bell, inventor, carried out in the world opens in New York the first transamerican telephone communication session (New York – San Francisco)

281 YEARS EARLIER 25JANUARY1721

Peter I established the Ecclesiastical College, in future Most Holy Synod

29MAY2002 IBA-MOSCOW becomes a member of the Association of Russian Banks

Events that took place in the world on the same day:

49 YEARS EARLIER 99 YEARS EARLIER 29MAY1953 29MAY1903

Man conquers the Chomolungma Ceremonial opening of Troitski bridge (Everest) for the first time in Saint Petersburg

135 YEARS EARLIER 29MAY1867

Justices of Peace are instituted in Russia 25JANUARY2002 Opening of IBA-MOSCOW, the first bank with Azerbaijani capital in Russia Events that took place in the world on the same day: 1

83 YEARS EARLIER 87 YEARS EARLIER 25JANUARY1919 25JANUARY1915 CHAIRMAN OF THE BOARD

Pennsylvania Hotel, the biggest Alexander Bell, inventor, carried out ADDRESS in the world opens in New York the first transamerican telephone communication session (New York – San Francisco) Summing up the Bank’s performance in 2010 281 YEARS EARLIER and plans for the future 25JANUARY1721 Customers, partners Peter I established the Ecclesiastical and shareholders! College, in future Most Holy Synod The year 2010 was another year of progressive development and better financial performance for IBA- MOSCOW. The Bank’s assets grew by 23% against 01.01.10 and as of 01.01.11 amounted to RUB 17,767.8 million, while the internal capital grew by 6% to RUB 1,123.9 million. In the year the profit increased by 105% and constituted RUB 106.7 million. As of 01.01.11 the Bank rated 139th with the RBC by 29MAY2002 its net assets, 134th by the credit portfolio and 116th by the amount of loans extended to legal entities. IBA-MOSCOW becomes a member In 2010 balances in the customers accounts grew of the Association of Russian Banks dynamically reaching RUB 5,119 million. Moreover funds in the individuals accounts grew by 95.7% reaching RUB 2,192 million in the year. Funds in legal entities accounts Events that took place in the world on the same day: grew by 6.5% reaching RUB 2,927 million. In the year the credit portfolio increased by 17.2% to RUB 11,824.9 million. The amount of credits extended to 49 YEARS EARLIER 99 YEARS EARLIER legal entities increased by 21% to RUB 10,486 million. IBA-MOSCOW is an active player in the international 29MAY1953 29MAY1903 bank lending market. In the year the funds raised in the international bank market grew by 36.1% to RUB 11,445 Man conquers the Chomolungma Ceremonial opening of Troitski bridge million. The deals included a club deal for USD 15 million (Everest) for the first time in Saint Petersburg with the participation of Raiffeisen Zentral Bank Osterreich AG, CJSV Raiffeisenbank, OTP Bank Plc, JSC «OTP Bank». In 2010 the Bank serviced 115,000 money transfers, mainly between Russia and Azerbaijan for the amount 135 YEARS EARLIER of USD 106 million. Visa и MasterCard issue constituted 26,000 cards. As of 01.01.11 the Bank installed 173 POS 29MAY1867 terminals and 40 ATMs to service the banks cards. In 2010 the Federal Customs Service entered Justices of Peace are instituted IBA-MOSCOW in the register of banks and other credit in Russia institutions entitled to extend customs payments bank guarantees. As of 01.01.11 the IBA-MOSCOW service network includes 2 branch offices and a network of outlets in Saint Petersburg and Yekaterinburg as well as eight offices

IBA-MOSCOW ANNUAL REPORT 2010 5 in Moscow. In 2010 outlets of regional branch offices techniques of borrowers’ assessment, risk evaluation and were opened in Saint Petersburg and Yekaterinburg. The control that meet the most advanced requirements. total number of the Bank’s service offices increased to The Bank needs funding to pursue active lending 14. The Bank is planning to increase the number of its policy and assets growth. In previous years traditionally points of presence in locations of potential customers we borrowed in the international capital market and in concentration, primarily in the Moscow Region. 2010 raised funds there too. IBA-MOSCOW has always IBA-MOSCOW is a rightful and active member honored its obligations under contracts in full and in due of a number of recognized professional and social time thus earning a positive borrower image. We plan to organizations in the territory of the Russian Federation; go on with such deals as becomes necessary. We rely on it is an authorized bank of the Government of Moscow. our customers funds the amount of which grows with the IBA-MOSCOW takes an active part in the work of the Bank all the time. We constantly develop special offers Azerbaijan-Russia Intergovernmental Commission. for funds placing that are of interest to our customers We have always firmly believed that customers are the and carry out promotional campaigns. The efforts do base of any business, especially in during a crisis. Since its yield adequate results. Through stepping up operations foundation IBA-MOSCOW has proved itself to be a reliable in the small business segment the Bank may participate business partner: we constantly improve our service, the in various state purpose-oriented programs and get the service infrastructure, develop new areas of banking in relevant resources. Like before IBA-MOSCOW has access demand with the customers. It is there that we see our to resources of its parent bank but we aim at obtaining competitive advantage and our future. funds through using our own opportunities. In 2010 we started implementing our new strategic In addition to new lending programs designed to plan for the years 2010-2015 developed jointly with obtain interest income the Bank faces no less important PricewaterhouseCoopers. The new strategy provides for task of radically increasing its commission fee yield. I the changing external environment and defines the market would say that it is more difficult to earn commission position of the Bank. Now our main goal is to join TOP 100 income while it more visibly reflects the efficiency of a Russian Banks by the end of 2015 or maybe earlier. It is bank. Currently IBA-MOSCOW has a well-balanced set an ambitious task as it means more than quadrupling of services for legal entities that is constantly adjusted assets and achieve annual growth rates of at least 30%, according to the customers demands and the results of higher than the banking sector growth rates. We chose a market research. Main attention is given to the quality of variant that envisages preservation and improvement of service as we consider this element to be crucial in gaining all the best aspects of our business and at the same time competitive advantage as on the whole banks have fairly stimulates development of new promising areas. In 2010 similar sets of services that differ insignificantly. Our plans the Bank set up a Strategic Committee that has started include development of such services as payroll card active work. programs, corporate cards, trade finance, placement of Presently IBA-MOSCOW has developed a new concept time funds, depositary service, consulting. We may well try of the network development. We intend to divide our sales to offer organization of external funding to our customers. units by status into several categories thus servicing our I would like to add that quality of service suggests up to customers more efficiently. Each format shall have its date technical support and introduction of advanced IT set of requirements. This is done for better segmenting technologies. At the very beginning of 2010 our bank was the customers, developing competitive offers and admitted as a member of the Russian Customs Union. Not maintaining a high level of service. More active work with every bank can boast of that due to high requirements to small and medium sized businesses mainly based on participants. We offer to our customers the whole range implementation of lending programs shall be the basis of services (guarantees, etc) connected with customs of our corporate business growth. Such lending programs clearance of cargos. We expect that this offer will be of will not only be implemented on a mass scale, but also interest to exporters and importers and will enable the be properly packaged, have clear criteria for selection of Bank to expand its customer base with businesses of that potential borrowers and timeframes, a well established profile. procedure of risk assessment. We plan to expand our As for retail services we are going to make a point presence in the Moscow region and in Saint Petersburg of providing a number of services to our customers using and Yekaterinburg, where we have our branch offices. We bank cards. In fact if they have a bank card customers may open additional branches in Nyzhniy Novgorod and may obtain quite a lot of bank services though an ATM Kazan. In order to optimize operations of the new outlets that under current conditions functions as a mini bank, and improve customer service it will be necessary to only unmanned. Population is becoming more and more do careful economic feasibility study of each outlet and knowledgeable about economy and technology and the project logistics of customer flows. number of such operations grows accordingly. In the near We are not planning to go with lending products to future we are planning to make a transfer to a new type mass retail market segments where competition is high of ATMs capable of providing a whole range of services and major investments are required. At the same time to the customers including recharging the account, cash the Bank intends to pay attention to corporate retail withdrawals, money transfers, retail services payment, business and implementation of lending programs inside change of the PIN, transfer of funds from card to card the segment which includes employees and managers and to various accounts. At the same time we work at of organizations on service. We will be using Visa and introduction of customer service via the Bank’s corporate MasterCard cards for retail lending. New programs based web site. Already today customers are able to order on bank cards will promote their issue and expansion of bank cards, obtain account information, etc. The task of the credit portfolio. There is a lot to do within this area any modern bank consists in making it possible for the connected with the introduction of new procedures and customer to obtain services at home or at work instead 6 CHAIRMAN OF THE BOARD ADDRESS of visiting the bank office. For instance the customer may choose the type of deposit he/she needs on the web site, send an application to the bank, sign the documents delivered by courier to the designated place and at the designated time and dispatch some funds from his/her card account to current account performing a few simple operations. That is let me repeat once again that it is unlikely that many new service will appear, but the quality and form of service provision may change radically. In 2010 we started actively using the IBA-Express system of money transfer servicing. So far it means mostly money transfers between Russia and Azerbaijan using our settlements network and that of the parent bank (IBA). Moreover we already invite other banks to collaborate with us acting as a clearing centre. In future we plan to develop other areas, such as the CIS and far abroad countries. There are also good prospects in the Russia-Azerbaijan area of business thanks to the large volume of funds transferred annually. The past year 2010 was not easy for our Bank and brought many events. In spite of all the circumstances our performance in the year has proved again that IBA- MOSCOW is a stable, reliable and dynamically developing bank. I would like to thank all our stuff members for their contribution to IBA-MOSCOW development. I am grateful to our customers and shareholders for their trust in the Bank. Our professional capabilities and personal efforts guarantee the stability and reliability of the Bank and look forward to further productive operation. I am greatly honored to offer to you the IBA-MOSCOW annual report and financial statements for 2010 approved by the international auditors Deloitte & Touch CIS.

Faithfully yours, Fuad R. Abdullayev Chairman of the Board

IBA-MOSCOW ANNUAL REPORT 2010 7 27MARCH2003 IBA-MOSCOW joins the Association of Regional Banks of Russia

Events that took place in the world on the same day:

11 YEARS EARLIER 125 YEARS EARLIER 27MARCH1992 27MARCH1878

Interparliamentary Assembly F. Blinov, Russian peasant filed of CIS member states established an application for a patent of «a coach on unending rails» (first caterpillar tractor in the world) invented by him

89 YEARS EARLIER 27MARCH1914

First successful blood transfusion in a hospital in Brussels

5JUNE2003 First IBA-MOSCOW branch office opened in Saint Petersburg

Events that took place in the world on the same day:

15 YEARS EARLIER 49 YEARS EARLIER 5JUNE1988 5JUNE1954

Russian Orthodox Church celebrates Moscow State Variety Theatre the Millennium of Christianity in Russia opened in Moscow

259 YEARS EARLIER 5JUNE1744

First porcelain factory opened in Saint Petersburg 27MARCH2003 IBA-MOSCOW joins the Association of Regional Banks of Russia

Events that took place in the world on the same day: 2

11 YEARS EARLIER 125 YEARS EARLIER 27MARCH1992 27MARCH1878 GENERAL INFORMATION

Interparliamentary Assembly F. Blinov, Russian peasant filed ABOUT THE BANK of CIS member states established an application for a patent of «a coach on unending rails» (first caterpillar tractor in the world) invented by him 89 YEARS EARLIER BRIEF DATA 27MARCH1914 «THE INTERNATIONAL BANK OF AZERBAIJAN-MOSCOW» Limited Liability Company was established on January 25, 2002. First successful blood transfusion «IBA-MOSCOW» LLC (hereinafter IBA-MOSCOW) is a subsidiary of the Open Joint Stock Company «The International in a hospital in Brussels Bank of Azerbaijan» (The Republic of Azerbaijan). IBA-MOSCOW is a legal entity with 100% foreign capital established according to the legislation of the Russian Federation.

Full name: «THE INTERNATIONAL BANK OF AZERBAIJAN-MOSCOW» Limited Liability Company

Short name: «IBA-MOSCOW» LLC

General license of the Bank of Russia: № 3395 — to effect banking transactions with funds in rubles and foreign currency for legal entities and individuals

5JUNE2003 Official registration date: First IBA-MOSCOW branch office opened in Saint Petersburg January 25, 2002 Auditors: Events that took place in the world on the same day: ZAO «Deloitte & Touch CIS»

Registered address: 15 YEARS EARLIER 49 YEARS EARLIER 6/2 Tverskaya street, Moscow, 125009 5JUNE1988 5JUNE1954 Telephones: Russian Orthodox Church celebrates Moscow State Variety Theatre + 7 (495) 937 77 27 + 7 (495) 933 83 15 the Millennium of Christianity in Russia opened in Moscow Fax: + 7 (495) 937 77 19 259 YEARS EARLIER E-mail: 5JUNE1744 [email protected]

First porcelain factory opened Corporate web site in the Internet: in Saint Petersburg www.ibamoscow.ru

IBA-MOSCOW ANNUAL REPORT 2010 9 MISSION, GOALS Corporate values IBA-MOSCOW regards its customers and business AND CORPORATE VALUES partners as its main asset. The Bank promotes business development of its customers and business partners ensuring growth of its own capitalization, IBA-MOSCOW MISSION scale of operation and financial stability. IBA-MOSCOW pursues the policy of mutually beneficial and long-term Main items cooperation with its customers. The Bank holds to its own ‹‹Operate as a «universal banking institution» traditions of business operation based on the principles providing all types of credit, settlement and financial of openness, responsibility, trust and social justice. The services to the customers inside environment of the Bank is trust-based, positive ‹‹Shape and maintain the image of a reliable and and business-friendly. stable bank, a perfect business partner IBA-MOSCOW values also include: ‹‹Maintain liquidity at the level corresponding to execution of all the liabilities Competence ‹‹Ensure high quality and modern financial servicing In its work the Bank relies on careful analysis of market to corporate and retail customers conditions and highest standards of financial services. It ‹‹Steadily develop the product range oriented at the constantly develops these by supporting creative initiative needs of different customer categories and upgrading professional qualifications of its employees. ‹‹Pursue competitive pricing policy ‹‹Achieve maximum possible efficiency of operation Honesty and confidentiality ‹‹Bring banking services closer to end customers The Bank is straightforward and regardful in relations through expanding the service network with all its counterparts, competitors and employees. It ‹‹Participate in the development of trade and firmly adheres to the principles of banker’s duty of secrecy, economic relations between Russia and Azerbaijan ensuring complete confidentiality of business information. ‹‹Help strengthen Azerbaijani business positions in Interest in the customer the Russian market ‹‹Promote interests of the parent bank (IBA) and The Bank’s philosophy is that of mutually look for possibilities of expanding its business in Russia beneficial cooperation as a basis of interoperation with customers exemplifying reliability and efficiency to all its Main strategic goal counterparties. IBA-MOSCOW positions itself as a universal dynamically Information transparency developing and highly reliable bank promoting successful The Bank maintains effective information exchange operation of its customers by offering high-quality financial within its structure and in relations of openness with services. IBA-MOSCOW strives to achieve its strategic priorities external interested parties, at the same time ensuring using a functional model oriented primarily at differentiated proper confidentiality of business information and servicing of corporate business with simultaneous banker’s secret. development of a specialized retail products and services portfolio designed for a wide range of customers. Social responsibility As a result of activating the model IBA-MOSCOW will join The Bank contributes to growing welfare of the TOP 100 Russian banks by «assets value» in the next few years. community, providing to its partners first-rate economic opportunities and implementing cultural and other projects.

10 GENERAL INFORMATION ABOUT THE BANK ADMINISTRATION

Supreme administrative body The sole participant, Open Joint Stock Company «The International Bank of Azerbaijan» is the supreme administrative authority of the Bank. The Participant makes the main decisions, examines the performance of IBA-MOSCOW and the annual reports of the Board.

Supervisory Board The Supervisory Board is an administrative body of IBA-MOSCOW in charge of general management of its activity except issues referred to the exclusive competence of the sole Participant. The Supervisory Board determines long-term strategy of the Bank, develops main provisions and documents and takes part in operative decision making. The Supervisory Board of IBA-MOSCOW consists of three persons and is headed by the Chairman, Gubad A. Husseynov.

Board of Directors The IBA-MOSCOW Board of Directors is a collective executive body of the Bank. The Board of Directors develops mid-term strategy of the Bank and makes the most important operative decisions. The Board of Directors consists of 5 members.

Chairman of the Board Chairman of the Board is the Chief Executive Officer of the Bank and Head of the Board. His terms of reference include a wide range of issues relating to the Bank’s operation and current transactions. Chairman of the Board is Fuad R. Abdullayev.

Asset and Liability Committee The Asset and Liability Committee of the Bank is a working collective body of the Bank responsible for package solutions of problems connected with the management of the Bank’s asset and liability structure, its tariff policy, liquidity risks and interest rate risks. The Committee consists of 5 members and with Chairman of the Board as its head.

Credit Committee The Credit Committee is a working collective body of the Bank. The Committee is in charge of the Bank’s credit portfolio management, evaluates credit risks and examines credit requests and makes decisions thereon. The Committee consists of 5 members.

Risk Management Committee The Risk Management Committee is a working collective body of the Bank responsible for package solutions of problems arising from the analysis of overall risks of the Bank and for developing a policy of their management. The terms of reference of the Committee also include development of procedures and documents referring to business processes of the Bank. The Committee consists of 5 members.

Information Technology Committee The Information Technology Committee is a working collective body of the Bank. The Committee shapes the general strategy of development and implementation of info-communication technologies in the Bank and promotes their introduction, authorizes purchases of necessary hardware and software, oversees technological problems emerging in provision of services to the customers by structural divisions. The Committee consists of 5 members.

Strategic Committee The main task of the Strategic Committee is to monitor and control implementation of the approved strategy by working groups and to draft recommendations for the Bank Board on making decisions about development strategy adjustments for the middle and long term. The Committee consists of 7 members.

IBA-MOSCOW ANNUAL REPORT 2010 11 MEMBERS OF THE BOARD MAIN DEVELOPMENTS Fuad R. Abdullayev IN 2010 Chairman of the Board ‹‹IBA-MOSCOW joined TOP 150 Russian Banks by Lidiya S. Startseva such main financial indicators as «credit portfolio» and First Deputy Chairman of the Board «loans to legal entities» ‹‹New Development for the period to 2015 adopted Balabek S. Balabekov ‹‹CRM SalesLogix system launched into operation Deputy Chairman of the Board ‹‹IBA-MOSCOW began collaboration with Western Valentina P. Onushkevich Union international payment system of money transfers ‹ Chief Accountant ‹IBA-MOSCOW was awarded a diploma «Stress Resistant Bank» at the IV Russian Banking Festival Rafael S. Abbasov ‹‹IBA-MOSCOW status as an authorized bank of Head, Legal Department the Government of Moscow was extended for the next two years with the collaboration program drafted and approved MANAGEMENT ‹‹The Bank raised an international bank loan in the amount of USD 6 million from VTB Bank (France) Azer M. Safarov ‹‹A club deal for USD 15 million was signed Adviser to the Chairman of the Board with Raiffeisen Zentral Bank Osterreich AG, CJSC Raiffeisenbank, OTP Bank Plc, JSC «OTP Bank» Anton V. Malahov ‹‹A new outlet was opened in Saint Petersburg Adviser to the Chairman of the Board ‹‹A new outlet was opened in Yekaterinburg ‹‹An agreement on issuing and servicing «Green Gulu A. Abbasov Channel» bank card was signed with the «Customs Head, Information Technologies Department Payment System» LLC Elina V. Bagreeva ‹‹The Federal Customs Service entered IBA- Head, Administrative Management Department MOSCOW in the register of banks and other credit institutions entitled to extend bank guarantees of Nikita Y. Bizin customs payment Head, Strategic Development and Marketing Department CHARITY AND SPONSORSHIP Fuad G. Gasymov Director, Branch Office, Saint Petersburg PROGRAMS Tatiana Y. Moshinskaya IBA-MOSCOW regards social responsibility as one of Director, Branch office, Yekaterinburg its main priorities. Irina Y. Dubova The Bank wishes to share its success with the Head, Customer Service Department community in which it operates focusing its attention on key areas of the environment from the point of view of its Alexander V. Birulin harmonious development. Head, Economic Security Department The Bank is well aware of its role in shaping a healthy social situation and it is determined to go on with Ludmila A. Izhokina participation in social life as much as possible. Head, Currency Control The Bank traditionally provides material support to and Financial Monitoring Division various public events, sponsors printed mass media, Zulfia A. Kamalova funds individual projects in the sphere of science and art. Head, Plastic Cards Department Svetlana E. Sarzhina Head, Internal Control Division Shahram S. Gasimly Head, Treasury Alla V. Kulagina Head, Credit and Guarantee Department Tamilla V. Doroshenko Head, Correspondent Banking and International Settlements Department

12 GENERAL INFORMATION ABOUT THE BANK RATINGS AND AWARDS MEMBERSHIP IN ORGANIZATIONS Ratings ‹‹Non-governmental no-commercial «Association of According to its performance in 2010 IBA-MOSCOW Russian Banks» gained the following positions in the RBC rating «Major ‹‹Non-commercial «Association of Russian Regional Russian Banks»: Banks» ‹‹139th by «net assets» ‹‹Non-commercial partnership «Moscow Banking ‹‹134th by «credit portfolio» Union» ‹‹116th by «loans to legal entities» ‹‹Moscow Chamber of Commerce and Industry ‹‹240th by «deposit portfolio» ‹‹Associated member of the Chamber of Commerce ‹‹219th by «legal entities deposits» and Industry of the Russian Federation According to the results of 2010 IBA-MOSCOW gained ‹‹American Chamber of Commerce in Russia the following positions among Russian banks (RBC rating): ‹‹Associated member of Visa International payment 82 — 83rd among «Banks — leaders by the number of system ATMs as of 01.01.11» ‹‹Principal member of MasterCard Worldwide international payment system ‹‹Russian National Association of Members of SWIFT Awards ‹‹Closed Joint Stock Company «Moscow Interbank Winner of the National Banking Award for 2008 in Currency Exchange» the category «Bank with participation of foreign capital ‹‹Urals Banking Union that contributed significantly the development of Russian ‹‹Member of the Azerbaijan-Russia Intergovernmen- economy». tal Commission Association of Russian Banks, Association of Regional ‹‹Co-founder of the public organization «Centre of Banks of Russia with support of the Bank of Russia are Business Partnership for CIS Countries» organizers of the Award. The National banking magazine ‹‹Authorized bank of the Government of the City of is the founder of the Award. Moscow The main purposes of the National Banking Award IBA-MOSCOW is a participant of the Mandatory De- include: enhancing the public image of the Russian posit Insurance System (Certificate No 264 of December banking system, provision of banking services to real 02, 2004). customers, objective, simple and clear guidelines for selection of the Bank’s customers; adding openness and transparency to the banking system, forming the elite of the banking sector. This award is a kind of a quality stamp granted annually to banks in the capital and regions. After examination of the documents submitted by the Expert Board of the Award the panel determines the winners.

IBA-MOSCOW ANNUAL REPORT 2010 13 18MAY2004 IBA-MOSCOW is granted the status of «Authorized Bank of the Government of Moscow»

Events that took place in the world on the same day:

51 YEARS EARLIER 300 YEARS EARLIER 18MAY1953 18MAY1704

Jacqueline Cochran, American Kronshlot (Kronstadt since 1723) aviatress becomes the first woman sea fortress is commissioned to break the sound barrier

251 YEARS EARLIER 18MAY1753

The first in Russia Dvoryanskiy Zayomniy Bank (Nobleman’s Credit Bank) is instituted under the Empress Elizabeth’s decree

2DECEMBER2004 IBA-MOSCOW becomes a member of the deposit insurance system and launches the retail business development program

Events that took place in the world on the same day:

33 YEARS EARLIER 140 YEARS EARLIER 2DECEMBER1971 2DECEMBER1864

Descent module of Soviet spacecraft Judiciary reform in the Russian «Mars-3» landed on Mars Empire

134 YEARS EARLIER 2DECEMBER1870

Rome is proclaimed capital of Italy 18MAY2004 IBA-MOSCOW is granted the status of «Authorized Bank of the Government of Moscow»

Events that took place in the world on the same day: 3

51 YEARS EARLIER 300 YEARS EARLIER 18MAY1953 18MAY1704 EXTERNAL

Jacqueline Cochran, American Kronshlot (Kronstadt since 1723) ENVIRONMENT aviatress becomes the first woman sea fortress is commissioned to break the sound barrier

goods started growing. However the persisting downturn 251 YEARS EARLIER GLOBAL ECONOMY in construction of production and commercial purpose buildings and facilities hindered growth of aggregate 18MAY1753 AND INTERNATIONAL investments into fixed capital. MARKETS Employment grew at a slow rate in many foreign The first in Russia Dvoryanskiy economies after the slump. Production growth was Zayomniy Bank (Nobleman’s Credit In 2010 for Russia foreign economic conditions were mostly due to higher productivity of labor rather than Bank) is instituted under the Empress shaped under the influence of global economic recovery intensive use of facilities comparable with that before after financial and economic crisis. According to the Elizabeth’s decree the crisis. International Monetary Fund (IMF) production of goods However the crisis was not accompanied by sharp and services in the world grew by 5% after dropping credit shrinking thanks to provision of liquidity to banks by 0.5% in 2009. Rehabilitation processes started and support of system forming financial institutions in the second half of 2009 were helped by financial on the part of governments and monetary and credit markets stabilization measures taken by governments regulators of many countries. This allowed avoiding the and central banks in 2008-2009. Automatic fiscal worst social and economic consequences including stabilizers in combination with discretionary decisions deflation and lengthy stagnation of production and on changing the tax policy and government spending employment and contributed to relatively fast economic 2DECEMBER2004 helped to level off crisis consequences. Low interest recovery. rates and a significant growth of assets and liabilities At the same time in the post crisis period demand IBA-MOSCOW becomes a member of the deposit insurance system of monetary regulatory authorities stimulated economic for lending capital picked up slowly due to relatively low and launches the retail business development program activity in a number of countries. investment activity in the real sector of economy and Stabilization and resumed accumulation of some other reasons. On their part financial institutions material current assets and diminishing imports share pursued cautious credit policy avoiding higher risks. Events that took place in the world on the same day: in the internal intermediate and terminal consumption This was due to banking crisis consequences as a played an important role in the majority of countries at significant part of clogging and high risk loans, the need the beginning of the post crisis rehabilitation. Gradually to complete debt restructuring and provide for covering 33 YEARS EARLIER 140 YEARS EARLIER increasing investments into fixed assets and household risks as well as limited possibilities of securitization. 2DECEMBER1971 2DECEMBER1864 consumption sector created prerequisites for more High unemployment and weak credit markets stable economic growth. Enhanced consumer and prevented growth of demand thus stipulating moderate investment demand, stable expansion of raw material Judiciary reform in the Russian inflation. In 2010 monetary stimuli, primarily low Descent module of Soviet spacecraft and food resources in major developing economies nominal and real interest rates, introduced during the «Mars-3» landed on Mars Empire stipulated revival of international trade. According crisis as part of the measures to stabilize financial to the IMF international trade in goods and services markets and diminish deflation risk continued to play grew by 12.4% in 2010 while in 2009 it fell by 10.9%. an important role in many economies. In some cases 134 YEARS EARLIER Growing exports became a leading GDP growth factor in these were even used on a wider scale. a number of countries. Global economic recovery created conditions for 2DECEMBER1870 GDP of major trade partners of Russia among the higher global stock exchange indices and prices of CIS states grew noticeably. Internal demand influence on commodities, including oil and other raw materials. Rome is proclaimed capital of Italy economic growth in the Republic of Belarus, Kazakhstan At the same time market situation in 2010 was fairly and the Ukraine intensified gradually in particular volatile. The debt crisis in Greece and resumed thanks to resumption of fixed capital investments. monetary stimulation in the USA influenced the market In 2010 investment activity in foreign economies quite a lot. resumed gradually. Stabilization in financial markets and gradually improving financial situation of enterprises contributed to this. Investments into capital

IBA-MOSCOW ANNUAL REPORT 2010 15 FINANCIAL SITUATION OVERVIEV OF THE RUSSIAN IN THE RUSSIAN FEDERATION BANKING SECTOR IN 2010 IN 2010 In 2010 the banking sector assets increased by 14.9%, to RUB 33,804.6 billion (in 2009 these grew by In 2010 Russian economy recovered after the global 5% only) and their ration to the GDP went down from financial and economic crisis. With external and internal 75.9% as of 01.01.10 to 75.2% as of 01.01.11. demand growing production in many economic sectors Internal funds (capital) of credit organizations grew increased. Employment grew too. Inflation rate was the by 2.4% in 2010 (in 2009 — by 21.2%) to RUB 4,732.3 same as in the previous year. billion. Slower growth of banking sector capital was In 2010 the GDP went up by 4% against the previous mainly due to repayment of subordinated loans raised year reaching RUB 44 trillion 491.4 billion. Growing within the framework of anti-crisis measures of state exports became one of the factors of increased production support. As a result the ratio of the aggregate capital of goods and services. Industrial production grew by 8.2% of credit organizations to the GDP went down from (in 2009 it went down by 9.3%). Unfavorable weather 11.9% to 10.5%. As of 01.01.11 75.7% of Russian credit conditions had a negative effect on agricultural production. organizations had capital over RUB 180 million (as of It dropped by 11.9%. In the construction sector production 01.01.10 — 71.8%). was also below that of 2009. During 2010 the number of credit organizations in Fixed capital investments increased by 6% (in 2009 operation reduced from 1,058 to 1,012. dropped by 15.7%). Improved financial situation of Foreign capital actively expanded its presence organizations and growing accessibility of credit in the in the RF. The number of credit organizations with the economy promoted higher investment activity. participation of foreign capital increased in 2010 from Industrial producers prices in 2010 increased by 108 to 111 banks, 19 of which are within 50 major 16.7% against 13.9% in 2009 (December to December). Russian credit organizations by their assets. Their higher growth rates were due to fast growing prices In 2010 the share of credit organizations controlled in manufacturing to 16.9% from 5.9% in 2009. Producer by non-residents in the banking sector assets went down prices of consumer goods grew faster. from 18.3% to 18%, while it grew from 17% to 19.1% in In 2010 producer prices for fuel and energy materials the internal capital. Loans extended by these banks in grew by 16.1% against 61% in 2009. By the end of 2010 2010 to non-financial organizations grew by 14.2%, to prices in the electricity, gas and water supply sectors of individuals — by 16.8% and the share of such loans in increased by 13.8%, that is 4.5% below the figure of the the total loan volume of the banking sector constituted previous year. 15.1% and 25.7% respectively as of 01.01.11. The ratio In 2010 pricing environment in global commodity of debt in arrears in the corporate credit portfolio of the markets became favored Russian exporters. Oil price banks controlled by non-residents reduced in 2010 from grew significantly. Russian oil «Urals» became 28.9% more 8.3% to 6%, while it increased from 9.5% to 9.9% in the expensive reaching USD 78.2 per barrel in the global portfolio of individual loans. market. At the same time oil and other energy products The share of banks with foreign capital somewhat prices were below the maximum registered in 2008. dropped in the market of individual deposits: as of Prices of non-ferrous and precious metals grew at a high 01.01.10 from 12% to 11.5% as of 01.01.11. rate so that these except aluminum price) exceeded the In 2010 the majority of credit organizations did not figures for 2008.Virtually all raw materials became dearer, experience any shortage of funding that enabled these to including foodstuffs. In 2010 foreign trade conditions raise funds of individuals and legal entities at a lower cost improved for the Russian Federation. than in 2009. As concerns transactions in rubles for the With the internal demand growing in 2010 imports term under one year the average rate on time deposits recovered mainly through their volume increase. of individuals went down from 10.4% per annum in 2009 According to Ministry for Economic Development to 6.8% per annum in 2010; as for time deposits of legal of Russia in 2010 imports grew by 29.7% against 2009 entities it dropped from 6.6% to 3.1% accordingly. The amounting to USD 248.8 billion, including growth of average ruble rate for the term between one to three years imports from far abroad by 27.3% (USD 213.5 billion), for individual deposits went down by 4% to 7% against from the CIS countries by 46.8% (USD 35.3 billion). 2009 and for deposits of legal entities — by 4,2% to 7.7% Imports growth was due to gradual recovery of volumes per annum. with contractual prices increasing moderately. Gradual macroeconomic stabilization had a positive influence on the Russian banking sector in 2010. Credit organizations built up their resource base using various sources, primarily attracting individual funds. Improved financial situation in most areas of the non- financial sector enabled the banks to lend more actively to economy, contributed to enhancing the quality of their credit portfolios. Under these conditions credit organizations were able to ensure profit growth and cost effectiveness of banking.

16 External environment Assets structure of credit organizations. Financial performance of credit organizations. In 2010 as overall economic environment and financial In 2010 net return of operating credit organizations situation of the borrowers improved there was a recovery of increased 2.8 times against 2009 (in 2009 it halved the credit market, though growth rates remained moderate. against 2008) to RUB 573.4 billion. In 2010 aggregate loans to non-financial organizations grew The share of profitable credit organizations in the by 12.6% constituting RUB 18,147.7 billion. Moreover their total number of operating credit organizations grew share in the banking sector assets dropped from 54.8% to from 88.7% to 92% in 2010.The number of loss making 53.7%. The ration of aggregate loans to these categories of organizations decreased (from 11.3% to 8% of the total borrowers the GDP decreased from 41.5% to 40.4%. number of operating credit organizations). Their losses in In 2010 loans and other invested assets provided 2010 constituted RUB 21.7 billion (in 2009 — RUB 79.8 to non-financial organizations increased by 12.1% in billion). 2009 — by 0.3%) to RUB 14,062.9 billion, but their share In 2010 profitability of credit organizations assets in the banking sector assets decreased from 42.6% as of reached 1.9%, return on equity was 12.5% (in 2009 — 01.01.10 to 41.6% as of 01.01.11. The bulk of the loans 0.7% and 4.9% respectively). were in rubles (74% as of 01.01.11). In the period under review lending to individuals resumed growing. In 2010 loans to individuals by 14.3% to RUB 4,084.8 billion (in 2009 it decreased by 11%). The share of loans to individuals in the aggregate loans extended in the banking sector grew from 18% as of 01.01.10 to 18.4% as of 01.01.11, and did not change noticeably in the aggregate assets of the banking sector: constituting 12.1% as of 01.01.11. The bulk of loans to individuals was in rubles (91.2% as of 01.01.11). Liabilities structure of credit organizations. In 2010 credit organizations gradually went back to their anti crisis funding structure. Loans, deposits and other borrowed funds provided to credit organizations by the Bank of Russia decreased 4.4 times to RUB 325.7 billion. As of 01.01.11 1% of banking sector liabilities (as of 01.01.10 — RUB 1,423.1 billion or 4.8% of liabilities) fell on this source. The use of traditional sources of shaping the resource base of credit organizations grew steadily. In 2010 balances in customers accounts increased by 23.1% to RUB 21,080.9 billion with their share in the banking sector liabilities growing 31.2% (in 2009 — by 26.7%), to RUB 9, 818 billion with their share in the banking sector liabilities growing from 25.4% as of 01.01.10 to 29% as of 01.01.11. At the same time the upward trend in ruble deposits remained — these increased by 43.7%. Deposits in foreign currency decreased by 4.5% (in US dollar terms). The share of foreign currency deposits in the aggregate amount dropped from 26.4% as of 01.01.10 to 19.3% as of 01.01.11. In 2010 competition in the individual deposits market intensified. The share of JSC «Sberbank of Russia» in the aggregate volume of individual deposits dropped from 49.4% to 47.9%. Aggregate funds raised with organizations (excluding credit organizations) grew by 16.4% in 2010 (in 2009 — by 8.9%) to RUB 11,126.9 billion; the share of this figure in the banking sector liabilities went up from 32.5% to 32.9%. Deposits of legal entities increased by 10.4% in 2010 (in 2009 — by 10.5%). Rate of increase of balances in the current and other accounts grew noticeably against 2009 (from 9.6% to 25.6%), with the share of the figure in the liabilities growing from 13.1% as of 01.01.10 to 14.3% as of 01.01.11. In 2010 demand for debt securities (bonds and bills of exchange) of credit organizations remained limited: the share of newly issued bonds in the banks’ liabilities increased from 1.4% to 1.6%, and the share of new bills of exchange dropped from 2.5% to 2.4%.

IBA-MOSCOW ANNUAL REPORT 2010 17 15APRIL2005 IBA-MOSCOW is granted the status of an associated member to Visa International payment system

Events that took place in the world on the same day:

109 YEARS EARLIER 553 YEARS EARLIER 15APRIL1896 15APRIL1452

The first Olympic Games renewed since Born Leonardo da Vinci antiquity in Athens over

156 YEARS EARLIER 15APRIL1849

Ceremonial consecration of the Big Kremlin Palace in Moscow

1SEPTEMBER2005 IBA-MOSCOW branch office opened in Yekaterinburg

Events that took place in the world on the same day:

52 YEARS EARLIER 85 YEARS EARLIER 1SEPTEMBER1953 1SEPTEMBER1920

The Moscow State University skyscraper Opening of the First Congress opened in Leninskiy Hills in Moscow of Peoples of Orient in Baku

105 YEARS EARLIER 1SEPTEMBER1900

Paveletskiy Terminal opened in Moscow 15APRIL2005 IBA-MOSCOW is granted the status of an associated member to Visa International payment system Events that took place in the world on the same day: 4

109 YEARS EARLIER 553 YEARS EARLIER 15APRIL1896 15APRIL1452 BANK’S OPERATIONS

The first Olympic Games renewed since Born Leonardo da Vinci IN 2010 antiquity in Athens over

156 YEARS EARLIER OVERALL FINANCIAL 15APRIL1849 PERFORMANCE Ceremonial consecration As in 2010 Russian economy was emerging from the of the Big Kremlin Palace in Moscow crisis financial performance of IBA-MOSCOW was positive: the Bank assets increased by RUB 3,479.6 million or by 24.3% reaching RUB 17,767.8 million by the end of the year. Such successful performance resulted from IBA- MOSCOW purposeful policy of diversification its business Assets model which virtually excludes the risk of dependence on (figures in dynamics for 2002-2010, RUB, million) individual customers or groups of customers and types of activity. The existing liabilities structure enables IBA-MOSCOW to ensure transactions stability on a timely basis. In 2010 IBA-MOSCOW went on successfully developing 1SEPTEMBER2005 and expanding its business in virtually all the areas. The participant’s net assets (capital according to IBA-MOSCOW branch office opened in Yekaterinburg IFRS) grew by RUB 63.5 million or by 6%, constituting 767,8 17 RUB 1,123.9 million by the end of the 2009. The Bank’s syndicated income was the main source of this growth as Events that took place in the world on the same day: the net assets of the participant grew, the capital ratio of 14 288,2 14 the Bank went up. Orientation at the corporate segment of the market 52 YEARS EARLIER 85 YEARS EARLIER in combination with intensive business development 1SEPTEMBER1953 1SEPTEMBER1920 enabled IBA-MOSCOW to expand lending. In 2010

principal receivable grew by 24.5% and constituted RUB 9 829,6 11,824.9 million. The share of principal receivable in The Moscow State University skyscraper Opening of the First Congress the Bank's aggregate assets was 66.5%. Loans to legal opened in Leninskiy Hills in Moscow of Peoples of Orient in Baku entities accounted for 90% in the loan portfolio. IBA-MOSCOW managed to demonstrate good 7 113,1 dynamics of customer funds growth which confirms their stable confidence in the Bank. Funds in customers 105 YEARS EARLIER

accounts grew by 31.9% and by the end of 2010 3 921,3 constituted RUB 5,119.1 million (RUB 3,882.1 million in 1SEPTEMBER1900 2009). Corporate customers funds in the Bank’s accounts were RUB 2,927 million (6.5% growth against the previous 1 845

Paveletskiy Terminal opened in Moscow 835,7 695,4

year) and those of retail customers were RUB 2,192 494,6 million (growth by 93.2%). In 2010 interest income grew noticeably by RUB 648.4 million or 51.8%, reaching RUB 1,899.1 million, with the 2002 2003 2004 2005 2006 2007 2008 2009 2010 non-interest commission income growing insignificantly and constituting RUB 198 million (32% growth).

IBA-MOSCOW ANNUAL REPORT 2010 19 Participant’s net assets Loan portfolio share in assets (figures in dynamics for 2002-2010, RUB, million) (figures in dynamics for 2002-2010, %) 1 123,9 78,1 1 060,4 69,9 69 1 018 66,5 66,4 66,1 803,3 53,2 50,6 455,5 435,4 366,1 342,9 317,8 5,9

2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010

The income structure shows the Bank’s orientation According to the results of 2010 profitability of at lending operations that are consistently expanded. the Bank’s assets constituted 0.3% and of the internal Moreover the Bank strives to achieve a better balanced capital — 7% that speaks of fairly effective business ratio between interest revenue and fee revenue that development. currently has not been fully ensured. Customer base expansion, growing volume of active In 2010 net profit according to IFRS increased by banking operation, primarily lending and business 53.2% and was registered at RUB 54.7 million (pretax profitability serve as a basis for the bank’s progress profit RUB 106.7 million). towards achieving its goals.

Interest income Commission income (figures in dynamics for 2002-2010, RUB, million) (figures in dynamics for 2004-2010, RUB, million) 1 899,1 198,5 150,5 147,4 1 250,7 872,9 79,3 554,8 38,3 273,4 20,6 120,4 13,3 67,8 36,2 18,5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 20 Bank’s operations in 2010 Currently the Bank’s corporate business includes a CORPORATE BUSINESS package of services in demand in the market: The results of 2010 confirm that IBA-MOSCOW holds Settlement and cash services traditionally strong positions in the corporate segment of the banking market. In spite of tougher competition in ‹‹Opening and managing current accounts in rubles the banking market IBA-MOSCOW managed to retain its and foreign currency customer base growth rate. ‹‹Cashless money transfers in rubles and foreign The Bank has gained a lot of experience of financial currency servicing of enterprises and organizations of different ‹‹Transactions with cash funds profiles. The Bank successfully works n both with big ‹‹Servicing through «Bank-Customer» system corporate customers and medium and small enterprises. ‹‹Payroll card programs with Visa International cards IBA-MOSCOW as a universal banking institution offers ‹‹Trade acquiring comprehensive servicing to various categories corporate Trade finance and currency control customers. Holding a full range of banking licenses and a wide network of correspondence banks the Bank is able ‹‹Export and import Letters of Credit to make competitive offers to the corporate segment and ‹‹«Stand-by» Letters of Credit consistently expand its customer base. ‹‹Confirmed LC opened in favor of IBA (parent bank) In 2010 the following factors assisted confident ‹‹Documentary collection growth of IBA-MOSCOW business: ‹‹Tender guarantees, performance guarantees, ‹‹Well-balanced set of banking services meeting the advance repayment guarantees needs of various customers ‹‹Guarantees with counter-guarantees of IBA (parent ‹‹Adequate resources at an acceptable cost for bank) funding current operations of the customers on beneficial ‹‹Customs guarantees terms ‹‹Currency control function under export-import ‹‹Consideration of credit applications in the shortest contracts possible time Transactions in money and financial markets ‹‹Individual approach and high level of customer ‹ service ‹Term deposits ‹ ‹‹High quality services in the area of trade finance ‹Conversion transactions ‹ transactions ‹Transactions with bills of exchange ‹ ‹‹Possibility of issuing customs guarantees ‹Financial consulting These advantages provide the basis for corporate The Bank gets on with expanding and updating its customers collaboration with the Bank. The complex of product range, develops new offers that are oriented at the above features promoted establishment of relations of the specific features of operation, industry specifics and trust and strengthening of mutually beneficial cooperation individual needs of every customer. with companies that had already been IBA-MOSCOW Currently the corporate customer base of IBA- customers. MOSCOW is fairly well diversified and collaboration is The Bank’s strategic goal in the sphere of customer based on maintaining the right balance between the policy consists in shaping long-term mutually beneficial interests of the customer and the Bank. The customer relations based on offers of high quality products flexibly base includes a wide range of industries thus enabling tailored to the customer’s needs and ensuring efficient the Bank to avoid many risks generated by the external cooperation between the customer and the Bank. situation. IBA-MOSCOW uses uniform service techniques and The main principles of building the customer base tariffing principles all over its network thus ensuring high include: ‹ quality of customer service regardless of the region of ‹Establishing long-term and mutually beneficial operation. This approach does ensure higher geographical relations with customers ‹ diversification of the Bank’s business and meets the ‹All-round approach to solving customers problems ‹ needs of corporate customers that have ramified regional ‹Maximum satisfaction of customers requirements structure. to banking products and services with due regard to their During its operation in the Russian stock market business specifics IBA-MOSCOW has consistently pursued its own corporate The Bank customers include resident and non-resident policy. It implements the main principles of this approach companies, organizations servicing economic relations through a constructive dialogue with various companies, between Russia and Azerbaijan, representatives of big paying attention to their problems, offering up-to-date and Russian business operating in production, construction, progressive solutions. It was thanks to such policy that the transport, trade and services, mass media and leasing. Bank continues recruiting new customers in 2010. The Bank pays much attention to its image and to The number of corporate customers increased to enhancing its recognizability in target markets, uses 1,763 by the end of the year. advertising and PR methods to promote effective attracting IBA-MOSCOW develops long-term and mutually and servicing of corporate customers. beneficial partnership relations with corporate customers In 2010 the Bank opened accounts for 590 legal offering to them a wide range of banking services and entities. As of 01.01.11 the total number of corporate products at a high professional level. accounts was 3,569, exceeding the figure for 2009 by 14%.

IBA-MOSCOW ANNUAL REPORT 2010 21 Corporate customers funds structure by industry (figures for 01.01.11, RUB, million) Services 1 312,9 Mass media Trade Construction and real estate 567,7 516,5 412,9 Transport Insurance Production Other 43,2 28,4 32,4 12,6

Corporate customers funds structure by industry (figures for 01.01.11, % of the total corporate customers funds)

1,1 Insurance 0,4 Other 14,1 Construction and real estate 17,6 Trade 1,5 Transport

19,4 1 Mass media Production

44,9 Services

22 Bank’s operations in 2010 By the end of 2010 legal entities’ funds amounted Legal entities accounts to RUB 2,927 million, i.e. 6.5% or RUB 179 million more (figures in dynamics for 2002-2010, units) than in 2009. The funds in current/settlement accounts of legal entities equaled to RUB 1,915.4 million. In 2010 the Bank set up a special unit on the basis of «In Pokrovka» outlet for convenience of corporate customers. The main functions of the unit include individual high quality customer service, provision of 3 569 package banking services, guaranteed confidentiality of transactions and prompt solutions. The important feature 3 131 of service is that a personal manager is assigned to 2 803 monitor all the necessary transactions. According to the results of 2010 non-interest commission income reached RUB 180.8 million or 71% over the figure for 2009. Such positive dynamics may be accounted for by steady growth of ruble and foreign currency customers payments during the year and well- 1 711 balanced tariff policy of the Bank. IBA-MOSCOW major customers include: Russian representative office of «AZAL» state concern (passenger 1 257 air travel), FSUE «Russia» State TV Channel (Mass Media), «Crocus International» (construction, trade, 823 exhibition services), «NISSA» Group of Companies (printing 599 476 industry), ZAO «LEKRUS» (pharmaceuticals retailer),

ZAO «Mosazervinzavod», OOO «Elgo-Leasing» (leasing 146 transactions), «Proford Investment Limited» (investments, wholesale trade), representative office of «Azerbaijan Hava Yollary» (passenger air travel). 2002 2003 2004 2005 2006 2007 2008 2009 2010 IBA-MOSCOW services the accounts of the Embassy of the Republic of Azerbaijan in Moscow and Saint Petersburg and the General Consulate in Saint Petersburg and Geydar Aliyev Foundation. During 2010 the Bank worked at investing free Balances in current/settlement accounts monetary funds of organizations in financial instruments of legal entities offered by the Bank (time deposits). Competitive interest (figures in dynamics for 2002-2010, RUB, million) policy and the possibility of coordinating individual terms and conditions enabled the Bank to put together a deposit portfolio of legal entities of RUB 1,201.1 million is planning to get on with this work in future. In 2010 IBA-MOSCOW continued offering the service of salary payments to organizations employees using Visa 1 725,9 cards (payroll card program). During the year the Bank signed 27 agreements with organizations (overall 110 agreements as of 01.01.11) issuing 3,300 cards within the framework of the project. The most sizable organizations using the service are: «Rosokhotryblovsoyuz», ZAO «LEKRUS», ZAO «Aipara & Co», OAO «Mosazervinzavod», 1 121,4

OOO «Fleco-service», OOO «Nissa-Centrum» and others. 1 087,1 Future development of IBA-MOSCOW corporate business lies with further growth of the customer base particularly in the medium and small business segments. The Bank will focus on enhancing customer servicing, 799,3 including through cross-sales and offers of new products. IBA-MOSCOW hopes to noticeably expand sales of banking products per one customer thus increasing

revenues that are not connected with lending. 403,9 The Bank will focus on enhancing the quality of service primarily through developing advanced technologies with the help of CRM system and introduction of high tech 145,3 52,3 banking products. This work is pursued on the basis of 38 customers proposals and recommendations. 6,6

2002 2003 2004 2005 2006 2007 2008 2009 2010

IBA-MOSCOW ANNUAL REPORT 2010 23 28AUGUST2006 IBA-MOSCOW new office opened in Shopping Mall «Tvoy Dom» in Moscow within the framework of the network development project

Events that took place in the world on the same day:

70 YEARS EARLIER 1144 YEARS EARLIER 28AUGUST1936 28AUGUST862

Foundation of Toyota car company Foundation of Rostov Veliky, one of the oldest towns in Russia

155 YEARS EARLIER 28AUGUST1851

Opening of end-to end rail service between Petersburg and Moscow

23DECEMBER2006 IBA-MOSOW raises the first syndicated loan from Western banks

Events that took place in the world on the same day:

93 YEARS EARLIER 93 YEARS EARLIER 23DECEMBER1913 23DECEMBER1913

Foundation of the US Federal Reserve. First flight of I. Sikorski airplane Up till now the member banks are «Ilya Muromets». This airplane broke entitled to issue dollar notes a number of records: weight-lift ability record, number of passengers, endurance and maximum flight altitude. 207 YEARS EARLIER It was the first mass produced bomber 23DECEMBER1799 in the world

Born Karl Brullov, painter In 2010 the major borrowers of the Bank included the CUSTOMER LENDING following companies: ZAO «Soyuz Dor NII», OOO «AST Gof», 28AUGUST2006 In 2010 lending remained one of the priority areas of OOO «AgroInvest», ZAO «LEKRUS», OOO «Raduga». IBA-MOSCOW operation generating the bulk of its revenue. In the year under report regional diversification of the IBA-MOSCOW new office opened in Shopping Mall «Tvoy Dom» When shaping its credit portfolio the Bank aims at loan portfolio did not change — the share of loans in the ensuring maximum satisfaction of its customers needs Moscow region constituted 79.5% of the Bank’s lending in Moscow within the framework of the network development in borrowed funds on the one hand and most secure as of 01.01.11. The loans extended to other regions also project investment of the borrowed funds on the other. constitute a sizable part of the total — 20.5%. The sectoral In each case IBA-MOSCOW tries to find an individual structure of the Bank’s corporate loan portfolio is fairly approach to the borrower. Special attention is paid to well diversified. The portfolio contains loans to companies Events that took place in the world on the same day: minimization of credit risks as a rule through careful and enterprises in many economic sectors so that the analysis of creditworthiness of potential borrowers, Bank is able to maintain an acceptable level of risks. diversification of the credit portfolio and availability of In shaping its credit portfolio the Bank pursued 70 YEARS EARLIER 1144 YEARS EARLIER highly liquid security. moderately conservative policy and paid special attention In 2010 the main objectives of the lending policy of to credit risks management. When lending to legal 28AUGUST1936 28AUGUST862 the Bank were: entities the Bank made decisions after a detailed study of ‹‹Meeting the needs of the customers in credit projects to be funded, analysis of financial statements and Foundation of Toyota car company Foundation of Rostov Veliky, products necessary for their business operations appraisal of marketability of collaterals. one of the oldest towns in Russia ‹‹Gaining the interest and other types of revenues When examining loan applications the Bank from lending according to the plan specialists paid special attention to the possibility of ‹ obtaining a 100% security from the borrower in the form of 155 YEARS EARLIER ‹Maintaining and enhancing the business reputation of the Bank with its customers marketable collateral. 28AUGUST1851 ‹‹Studying all the aspects of customers needs, In 2010 revolving credit facilities with drawdown sphere and specifics of their business in order to be able limit, credit facilities with debt ceiling, loans and bank guarantees constituted the bulk of the corporate credit Opening of end-to end rail service to make well-grounded lending decisions ‹ portfolio. between Petersburg and Moscow ‹Providing high quality service to the customers and attracting more promising credit applications through Buyer’s credits were extended to most reliable offering a wide range of various credit products individual borrowers. The retail loan portfolio was RUB ‹‹Diversifying the credit portfolio 1,338.8 million (in 2009 — RUB 729.2 million). The main credit products in 2010 were: ‹‹Loans ‹‹Credit facility with a drawdown limit ‹‹Revolving credit facility with a limit of indebtedness Credit portfolio ‹‹Overdraft (figures in dynamics for 2002-2010, RUB, million) ‹‹Bank guarantee ‹‹Buyer’s credit 23DECEMBER2006 In 2010 the Bank’s credit portfolio grew from RUB 9,491.1 million to RUB 11,824.9 million (24.6% IBA-MOSOW raises the first syndicated loan from Western banks growth). As of January 01, 2011 the share of credits in Russian currency constituted 19.07% and 80.93% in 11 824,9 11 foreign currency. Altogether loans extended in the past Events that took place in the world on the same day: year amounted to over RUB 1,927.5 million, USD 75.5 million and EUR 32 million. In the year under review the number of credit agreements was 371 and the number of 93 YEARS EARLIER 9 491,1 93 YEARS EARLIER borrowers 194. 23DECEMBER1913 In 2010 the Bank’s revenue from lending constituted 23DECEMBER1913 RUB 741.9 million. Preference was given to medium size and large organizations. All the Bank’s borrowers 7 676,7 Foundation of the US Federal Reserve. First flight of I. Sikorski airplane are profitable companies with steadily growing income, Up till now the member banks are «Ilya Muromets». This airplane broke «transparent» accounting and good development entitled to issue dollar notes a number of records: weight-lift ability prospects. record, number of passengers, The loan portfolio share under highly liquid security endurance and maximum flight altitude. was 75.3%. Debt in arrears in the lending portfolio was 4 707,1 4.3%. 207 YEARS EARLIER It was the first mass produced bomber in the world According to the results of 2010 corporate loan portfolio of the Bank amounted to RUB 10,486.1 million 23DECEMBER1799 2 707,5 (growth by 21.4% against 2009). In 2010 the Bank extended short-term (under 1

Born Karl Brullov, painter 1 289,8 year) and mid-term (over 1 year) loans. Credit funds were

provided to customers of the Bank, legal entities, both 509,3 352,2

residents and non-residents of all forms of ownership 29,3 that actively use their current accounts. Each potential borrower’s economic activity is subject to all-round 2002 2003 2004 2005 2006 2007 2008 2009 2010 analysis.

IBA-MOSCOW ANNUAL REPORT 2010 25 As of the end of 2010 with the loan portfolio of RUB ‹‹Development of standard loan products meeting 11,824.9 million, collateral security of the loan amount, the requirements of small business interest and possible costs constituted about RUB ‹‹Motivated and properly trained personnel 26,489.3 million. The Bank accepted for collateral bank ‹‹Replication of products in all the regions on the guarantees, guarantee deposits, mortgage, pledge of basis of uniform business processes with due regard for equipment, vehicles, material assets, warrantees provided regional particularities by legal entities and individuals. The Bank’s experts constantly monitor the current state of the credit portfolio, appraise parameters dynamics in connection with loans granted and repaid, average Loan portfolio structure by industry weighted interest rates, interest revenues of the past and (figures for 01.01.11, % of the total loan portfolio) future periods. In its operations in the loan market IBA-MOSCOW wants to meet the needs of its customers, ensure adequate yield and keep risks at an acceptable level. 31,9 The Bank grants credit resources within the limits of its 11,3 Trade capital and borrowed funds, ensuring a proper balance Individuals of assets and liabilities in relations to time and volume. The Bank has gained sufficient experience of lending to Russian businesses, mastered the techniques of selection 3,4 of reliable customers and risk appraisal procedures. Mass media In implementing its lending policy the Bank aims at 3,2 Leasing meeting its customers requirements at the same time 8,6 ensuring adequate return on its operations and keeping Real estate risks at an acceptable level. The Bank provides loan funds within the limits of its capital and borrowed funds, ensuring a balance of assets and liabilities of in relation to time and volume. The Bank has gained a lot of experience 11,7 of lending to Russian business, has mastered the search Manufacturing and selection of borrowers techniques and risk appraisal methods. 15,1 Construction 14,8 In implementing its lending policy the Bank pursues Services the following targets: ‹‹Consolidating business relations and expanding trade between Azerbaijan and Russia ‹‹Enhancing the Bank’s efficiency through granting liquid loans with maximum profitability ‹‹Consolidating relations between the Bank and Loan portfolio structure by industry real sector of economy, expanding mutually beneficial (figures for 01.01.11, RUB, million) cooperation with manufacturing companies of consumer goods, organizations of wholesale and retail commerce, etc. ‹‹Promoting strategic goals of the Bank in accordance with the approved development business Trade plans and guidelines of the Bank’s operation ‹‹Developing and introducing new loan products in order to strengthen competitive position of the Bank in the financial services market with minimum risk component of lending operations 3 774,4 IBA-MOSCOW believes that future development of Construction

corporate lending lies with stepping up work with small Services and medium size businesses as the most promising Individuals Production segment of the market. This segment is getting priority Real estate Real and scale for the Bank. When developing the product line and adjusting it for 1780,4 the segment the Bank cannot ignore the specific feature 1755,4 Mass media Leasing

of this segment i.e. higher demand for loan products. 1 377,8 1 338,8 The following factors ensure efficient operations with small and medium size businesses: 1 024,3 ‹‹Prioritizing operations with small and medium size 410,2 business 363,6 ‹‹Correct determination of a target customer segment and its key financial requirements ‹‹Service model offered to small businesses anв most comfortable servicing 26 Bank’s operations in 2010 In 2010 IBA-MOSCOW energetically developed all RETAIL BUSINESS the aspects of retailing focusing on widening the range of Retailing development is a strategically important services, enhancing the quality of service and development guideline of IBA-MOSCOW operation. High service of new products fully meeting the expectations and needs standards based on advanced bank technologies and of the customers. development of a wide range of popular and competitive products enable IBA-MOSCOW to provide speedy and Money transfers high quality service. A ramified branch network, the single There is no doubt that doubt in today’s world the need infrastructure and uniform product line format ensure and the possibility of effecting money transfers speedily another advantage to the Bank enabling it to provide high and safe conduct grow all the time. Transfers without quality service to a wide range of customers. opening an account in this segment are most convenient Within the framework of retailing development and and accessible for people in any country. As the Bank boosting customer loyalty in 2010 the Bank exerted every attaches great importance to this mass direction of effort to achieve the following key targets: retailing since the beginning of 2010 IBA-MOSCOW jointly ‹‹Raising retail customers funds and «prolongation» with IBA has commissioned its own IBA-Express network of the deposit portfolio term for express money transfers without opening an account. ‹‹Increasing non-interest revenue IBA-Express, the international express money order ‹‹Enhancing the quality of service network allows for fast and simple money transfer ‹‹Development of cross sales along the priority direction for the Bank from Russia to ‹‹Further development of key areas of IBA-MOSCOW Azerbaijan. It is possible due to the ramified network of retailing IBA-MOSCOW outlets including of over 250 in Azerbaijan, During the years of operation IBA-MOSCOW has that is virtually all over the territory of the country. Thus earned the reputation of a stable time-tested partner. By express money order have become more accessible both the end of 2010 the funds raised by the Bank to individual in cities and small locations. deposits amounted to RUB 2,192.5 million or 93.3% In the Russian market IBA-MOSCOW gradually over the figure for 2009. This shows high confidence in further develops IBA-Express network through connecting the Bank and serves as an important stimulus for retail correspondent banks in different regions of the RF thus products and services development continuous enhancing expanding the service possibilities. the quality of service. IBA-Express network is gradually expanding to the Fee revenue for servicing retail customers amounted CIS countries markets. Currently its services are already to RUB 59.4 million. available in Georgia and Tajikistan. IBA-MOSCOW policy is aimed at long-term coopera- Individual money transfers without opening an tion with customers. A wide range of financial services account via IBA-Express network can be made in US offered allows taking into account the interests of dollars, Euro and Russian Rubles in the territory of Russia different customer categories, and development of market and to the CIS countries. balanced and clear products adds to the present ability of With putting IBA-Express network in operation the the Bank. Professional staff works to further strengthen Bank introduced the most beneficial pricing plan for cooperation. As a dynamic universal financial institute the money transfers. The commission fee is only 1% of the Bank offers to its customers a wide range of high quality money order amount so that our customers can use one services. of the most convenient and advantageous systems of In 2010 the Bank offered to its retail customers the express money orders in the territory of Russia, Azerbaijan following products and services: and the CIS states. ‹‹Money transfers servicing with opening an account High speed and low cost transactions via IBA-Express in rubles and foreign currency network constitute their main consumer appeal. That is ‹‹Money transfers servicing without opening an why bank customers and everyone interested more and account in rubles and foreign currency, including via IBA- more often use the IBA-Express network. Express payments network and Contact and Western In consequence the amount of individual money Union systems orders without opening an account in rubles and foreign ‹‹Deposit banking currencies serviced in the network grow steadily. ‹‹Issuing and servicing of bank cards of international In 2010 USD 81.2 million or 15% more than in the payment systems Visa International and MasterCard previous year was transferred over the IBA-Express Worldwide network. The income constituted RUB 13.08 million. ‹‹Consumer lending In 2010 the aggregate amount of funds transferred ‹‹Overdraft lending using bank cards by IBA-MOSCOW in the express money order systems ‹‹Leasing of individual safe deposit boxes constituted the equivalent of USD 110 million or 16% over ‹‹Conversion and currency exchange operations the previous period, with the total income of RUB 24.1 ‹‹Servicing express payments via «Mobil Express» million. system. The number of money orders transferred in express ‹‹Individual servicing of well-to-do customers transfer systems also increased. In 2010 the number of In the mass retail segment the Bank uses standardized transfers in the IBA-Express network was 67 thousand or banking technologies, a uniform product line, uniform 22% over the number in the previous year (55 thousand instructions and regulatory and methodological materials, in 2009). reporting system, pursues flexible tariff and marketing The average amount of one money order to Azerbaijan policy with due account of regional market particularities was about USD 1,850. In 2010 one regular customer’s in locations of the Bank’ branch offices. money transfers totaled to about USD 3-4 thousand.

IBA-MOSCOW ANNUAL REPORT 2010 27 Total number of money transfers The Bank has acquired a stable and growing customer without opening an account between base for the service — about 28 thousand customers Russia and Azerbaijan serviced regularly transfer funds to Azerbaijan every year in in IBA-MOSCOW offices Moscow and in regions. The money transfers are of social (figures in dynamics for 2002-2010, thousand units) importance as they enable people living and working abroad provide material assistance to their relatives. With this factor in view IBA-MOSCOW maintains the lowest possible rates for servicing money transfers to Azerbaijan.

67 In 2010 the amount of money transfers via Contact system continued to grow. This system allows for 61 transferring and receiving funds in rubles, US dollar and

55 Euro over the territory of Russia, the CIS countries and 53 Baltic states and far abroad. Most money transfers go to the CIS states. IBA-MOSCOW has been offering the service 45 since December 2006. In 2010 the number of money transfers via Contact system was about 42 thousand units 38 and the amount of customer transactions reached RUB 286.6 million, USD 12.6 million and EUR 0.53 million or 30 the equivalent of RUB 693.2 million. It should be noted that the Bank offers money transfer servicing via Contact system as an additional service.

17 Moreover IBA-MOSCOW attaches special attention to developing and promoting its service of money transfers between Russia and Azerbaijan.

3 Express payments servicing Servicing of customer can effect various express 2002 2003 2004 2005 2006 2007 2008 2009 2010 payments such as housing and utility payments, international calls, pay TV and access to the Internet in all the outlets of IBA-MOSCOW. To service express payments of the population the Bank signed a special agreement with «Mobil Express» payment system in 2008. In 2010 the aggregate amount of transfers via «Mobil Express» system almost doubled, reaching RUB 7.79 million. Aggregate amount of money transfers without opening an account between Russia and Azerbaijan serviced in IBA-MOSCOW Raising individual funds offices via IBA-Express network In 2010 the Bank continued improving its product line (figures in dynamics for 2002-2010, USD, million) offered to the individual customers through optimizing interest rates, interest charging mode, deposit time frames and additional services. During 2010 the Banks customers were able to see that IBA-MOSCOW offered a wide range of banking 113 services and efficiently adapted these to every customer’s

99 needs. The efficiency, high quality of service, individual approach and readiness to meet the needs of every customer helped IBA-MOSCOW to keep intact and even 84 expand its deposit portfolio. 81 The deposit line of the Bank is designed for population 70 masses and provides the possibility of using the full specter of functions: from saving to using universal instruments of 59 managing money funds and effecting settlements. In 2010 meeting the customers requirements IBA- 47 MOSCOW continued offering to its customers the deposit with the possibility of an early termination of the depositary contract and revenue assurance.

21 Thanks to these new offers by the end of 2010 the amount of individual funds raised to time deposits reached RUB 1,971.1 million or 100.6% over the year before.

5 The average individual deposit amounts to about RUB 1.09 million. The aggregate number of individual time and current 2002 2003 2004 2005 2006 2007 2008 2009 2010 accounts grew by 143.3% to about 13,384 units by the end of 2010. 28 Bank’s operations in 2010 Money balances in individual current, Money balances in individual time accounts time and bank card accounts (figures in dynamics for 2004-2010, RUB, million) (figures for 01.01.11, RUB, million) 1 971,1 1 971,1 1 971,1 1 971,1 982,6 982,6 729,6 729,6 411,4 411,4 227,7 227,7 50,1 50,1 134,7 134,7 3 3 86,7 86,7 Current accounts Current accounts Bank card accounts Bank card accounts Bank card 2004 2005 2006 2007 2008 2009 2010 Time accounts Time accounts

With due regard for the changing situation in the Structure of money funds in individual market of individual time deposits in the RF in 2010 IBA- accounts MOSCOW was developing for its customers special offers (figures for 01.01.11, % of the total funds) of deposits with higher return and additional attractive conditions. To promote special offers the Bank advertised in mass media and organized numerous promo actions among the Bank’s customers. In 2010 IBA-MOSCOW invested individual funds in rubles, US dollars and Euro. Depending on the type of deposit interest could be paid monthly, quarterly at the 6,1 89,9 end of the term with capitalization of interest envisaged Current accounts Time accounts as well. Customers could refill their deposits during their terms. By the end of 2010 the Bank offered to its customers 11 types of time deposit accounts. In 2010 IBA-MOSCOW did its best to service its 4 customers in a convenient and speedy mode. Thus it took Bank card accounts them 10-15 minutes to open a current or deposit account. In 2011 increasing the amount of individual deposits will be one of priority tasks of the Bank in the retailing area. To achieve this the Bank will go on developing the deposit product line gradually improving terms of deposits and introducing new services. IBA-MOSCOW will rely of the potential of the regions, competitive environment and the existing customer base. Another most important task in retailing is to enhance the customers loyalty and expand the scale of cross sales and ensure growth of return on transactions.

IBA-MOSCOW ANNUAL REPORT 2010 29 Individual safe deposit boxes Further development of bank card business of IBA- MOSCOW shall be based on expanding the customer base IBA-MOSCOW offers to its customers the service of and enhancing return on transactions with bank cards. To individual safe deposit box leasing for keeping valuables achieve this in the next year the Bank is planning to offer and documents in a specially equipped vault. to its customers some high tech products and services. The Bank uses most advanced technologies that IBA-MOSCOW customers will be able to open accounts ensure utmost safety of valuables left in trust with the with ATMs without going to the Bank’s offices and effect Bank and convenience for the customers. IBA-MOSCOW transactions via remote access channels (mobile phone, customers can lease individual safe deposit boxes of the Internet). different sizes for any convenient period. By the end of 2010 IBA-MOSCOW offices (the Central Retail lending office and «In Pokrovka» outlet in Moscow and the Saint In 2010 IBA-MOSCOW continued extending loans to Petersburg branch) were equipped with individual banks its retail customers. The service allows overdrafts on bank deposit safe boxes. cards and within the framework of payroll card programs In 2010 the Bank completed technological and granted consumer loans. It is worth noting that retail preparations for equipping with safe boxes the outlet «In lending is developing on individual basis rather than on Pokrovka». a mass scale. In the area of retailing IBA-MOSCOW Bank The aggregate Bank’ commission fee for the service prefers dealing with top managers and staff members of constituted RUB 890.4 thousand. its corporate customers. Bank cards Individual servicing of wealthy In 2010 bank card business developed according to the schedule and the aggravated financial market conditions customers did not affect the Bank’s performance in this area. Work with wealthy customers is both a privilege and a The year 2010 was fairly successful for IBA-MOSCOW great responsibility. in the area of bank card business. The Bank continued Individual banking service is an important component introducing new products and services. In the year under of the Bank’s retailing. Its specific features include review, the Bank started issuing discount bank cards of the individual approach to each customer, comprehensive largest global programs Priority Pass and IAPA providing solutions of service problems and a high standard additional advantages and privileges to the holders when of consulting. Activities in this area are supported by traveling in the world. reliability and stability of IBA-MOSCOW, while it aims at In 2010 the Bank joined the program of global support establishing relations of trust with the customers based of premium Visa and MasterCard cardholders. Within the on mutually beneficial cooperation and balanced interests framework of the program the holders are entitled to such of the customer and the Bank. services as emergency card freezing, swift replacement of IBA-MOSCOW has a long positive record of servicing the card and urgent cash disbursement, while the holders VIP customers offering to these a wide range of financial of Visa Gold and Visa Platinum are also entitled to medical transactions that include both standard banking services insurance and legal support. and unconventional solutions. Individual approach and In addition to that in 2010 IBA-MOSCOW offered to regard for any special needs of the customer are important its bank cardholders a new service accessible via ATMs, constituents of the Bank’s operation. Thanks to the namely the change of PIN. Now the Bank’s customers experience and expertise of IBA-MOSCOW team members can change the standard PIN to one that can be easily as well as its reputation and scale of operations the Bank memorized. invariably offers high quality products and services that Thanks to boosting sales of IBA-MOSCOW bank card ensure recognition and loyalty of «special» customers. products and organization of a number of marketing In 2010 IBA-MOSCOW product range for VIP customers promotions the Bank continued expanding card issue. included standard banking products and services, assets As of 01.01.11 card emission constituted 27,125 management, financial planning, consulting, additional units. programs in support of the way of life, (holiday and In the year the card issue increased by 5,400 units. business trips, real estate transactions, etc.) and special About 3,300 bank cards were issued within the framework products and services for VIP customers. of payroll card projects for organizations that signed The Bank offers to its VIP customers a comfortable contracts with the Bank. office equipped with due regard of confidentiality To dispense cash on cards by the end of 2010 the needed for dealing with this customer category. High Bank put into operation 40 ATMs in Moscow and the professionalism of the staff allows effecting many regions. The amount of cash funds dispensed through the transactions on-line. The Bank offers individual solutions ATM network constituted RUB 675.9 million in 2010. to the customers that meet their needs and preferences. To service cashless operations on bank cards the Individual and flexible tariffing is used for personalized Bank installed some 173 POS terminals in its sales and approach to the customer’s every requirement. service network. The amount of transactions within the An individually assigned manager maintains framework of merchant account constituted RUB 548.5 constant contact with each VIP customer and carries million in 2010. out the necessary transactions. The personal manager In 2010 cash balances in card accounts were RUB also informs his customer about the changing economic 29.9 million, USD 1.34 million, EUR 0.39 million. situation and all the events in the capital markets and In 2010 commission fee for servicing bank card promising developments. The personal manager’s work is transactions constituted RUB 26.73 million. based on mutual trust and responsibility to the customer. 30 Bank’s operations in 2010 All the customer’s transactions are strictly confidential as ‹‹ACB «Bank of Moscow» (OAO) the Bank staff has no access to the customer’s personal ‹‹ZAO «Raiffeisen Austria» (Moscow) data at the personal manager’s disposal. ‹‹Bank Zenith (ОАО) The yearly growth of the number of VIP customers ‹‹Joint Stock Commercial bank «EUROFINANCE speaks of the high level of confidence in IBA-MOSCOW MOSNARBANK» (ОАО) and confirms its reputation as a reliable financial partner. ‹‹ACB «RUSSLAVBANK» (ZAO) ‹‹ОАО Bank «URALSIB» ‹‹Bank «Vozrozhdenie» (ОАО) OPERATIONS IN FINANCIAL ‹‹Citibank, N.A., USA ‹‹JPMORGAN CHASE BANK MARKETS ‹‹DEUTSCHE BANK AG Though 2010 was far from easy for the banking services in the investments market operations in financial As a member of the global network of international markets remained an important element of IBA-MOSCOW bank payments IBA-MOSCOW pays much attention to activity. In the previous year the Bank went on with active compliance with legislative acts on money laundering. The operations in financial markets. Bank fully complies with Federal Law No115-FZ and has Stable partnership relations with counterparty banks adequate internal control mechanisms. enabled IBA-MOSCOW to create optimum conditions The Bank operates with its free money funds pursuing for solving problems connected with customer service. balanced limit policies aimed at controlling and diminishing Development of the correspondent bank network is risks of operations in the international bank market. important for ensuring efficient and smooth servicing of In 2010 the Bank’s turnover of international bank loans the growing number of IBA-MOSCOW customer payments constituted RUB 69,184.3 million, USD 3,780.2 million, in all directions and for supporting operations of the Bank’s EUR 3.9 million and of raised international bank loans were Treasury in the area of raising and placing short-term free RUB 440 million, USD 288.7 million and EUR 63.5 million. funds, sale and purchase of currency, transactions with The net income of IBA-Moscow from conversion securities. transactions reached RUB 9.9 million. Main correspondent banks: In 2010 turnover of raising long-term loans (deposits) ‹‹Sberbank of Russia (OAO) increased through implementation of the club deal ‹‹VTB Bank (OAO) organized by ZAO «Raiffeizenbank». The amount of the deal ‹‹Rosselkhozbank (OAO) was USD 15 million. Raiffeizen Zentral Osterreich AG, ZAO ‹‹Raiffeisen Zentralbank Osterreich AG (RZB-Austria) «Raiffeizenbank», OTP Bank Plc and, OJSC «OTP Bank» were ‹‹«The International Bank of Azerbaijan» (OAO) participants of the deal. ‹‹«CAPITAL BANK» (ОАО) The funds raised were used for trade finance ‹‹Joint Stock bank of gas industry «Gasprombank» (ZАО) transactions and for increasing the Bank’s credit portfolio.

Correspondent accounts (figures in dynamics for 2002-2010, units)

Opened NOSTRO correspondent accounts 69 Opened LORO correspondent accounts 62 62 61 59 58 59 58 58 56 54 51 47 43 42 35 25 15

2002 2003 2004 2005 2006 2007 2008 2009 2010

IBA-MOSCOW ANNUAL REPORT 2010 31 23MARCH2007 IBA-MOSCOW is granted the status of Principle member of MasterCard Worldwide international system

Events that took place in the world on the same day:

131 YEARS EARLIER 309 YEARS EARLIER 23MARCH1876 23MARCH1698

P. N. Yablochkov obtains the patent The order of St. Andrew the First-Called for electric bulb is instituted. The motto is «For faith and Loyalty»

159 YEARS EARLIER 23MARCH1848

Hungary announces its independence from Austria

6JUNE2007 IBA-MOSCOW is granted te General License of the Bank of Russia

Events that took place in the world on the same day:

63 YEARS EARLIER 208 YEARS EARLIER 6JUNE1944 6JUNE1799

Allied forces land in Normandy in World Born A. S. Pushkin War II and Second Front is opened the great Russian poet to have great importance for the defeat of the Fascist Germany 343 YEARS EARLIER 6JUNE1664

New Amsterdam is renamed as New York 23MARCH2007 IBA-MOSCOW is granted the status of Principle member of MasterCard Worldwide international system

Events that took place in the world on the same day: 5

131 YEARS EARLIER 309 YEARS EARLIER 23MARCH1876 23MARCH1698 BANK’S OPERATIONS IN THE RUSSIAN

P. N. Yablochkov obtains the patent The order of St. Andrew the First-Called FEDERATION REGIONS IN 2010 for electric bulb is instituted. The motto is «For faith and Loyalty»

159 YEARS EARLIER In 2010 operation of the IBA-MOSCOW regional In 2010 thanks to the efficiently operating regional network was based on overall economic trends. With the network IBA-MOSCOW was able to diversify sectoral and 23MARCH1848 regional network being the strategic framework of the regional risks, concentrate money flows in the uniform Bank’s development in 2010 work went on to enhance payments system through full scale and high quality Hungary announces its independence outlets efficiency, to overcome negative trends incidental financial servicing provided to all customer categories. from Austria to the crisis. Active development and modernization of Last year the Bank went on pursuing the strategy of the regional network went on. The infrastructure of the regional development of establishing mutually beneficial network was improved through opening a number of new relations with small and medium companies in the regions outlets. of the Bank’ presence and private customers. The «Ozerki» outlet in Saint Petersburg opened at Promotion of the Bank’s products and services the beginning of 2010 demonstrated high development constitutes the main challenge facing the Bank. dynamics and ensured significant growth of all the figures. Priority areas of the regional network development IBA-MOSCOW continued expansion in Yekaterinburg include: and in March 2010 the new outlet «Taganskiy» was opened ‹‹Developing the network of regional offices in big there laying a foundation for more effective and stable cities subject to full compliance with the Bank’s practicality development of the network. criteria 6JUNE2007 The efficiently operating network of branches is the ‹‹Establishing effective business key factor of attracting both corporate and retail customers ‹‹Shaping the basis for long-term investment IBA-MOSCOW is granted te General License of the Bank of Russia and thus serves as a basic element of IBA-MOSCOW attractiveness through maximum use of the Bank’s successful strategy. resources and market opportunities Events that took place in the world on the same day: Establishment and expansion of the branch offices ‹‹Recoupment of cost of opening regional offices network in the Russian Federation regions is one of the Priority regions for the Bank are determined as strategic goals of the Bank. Russian federal entities of the TOP 20 according to the 63 YEARS EARLIER 208 YEARS EARLIER The branch offices offer a modern range of banking favorable situation rating (social and economic situation services with due regard for licenses and types of in the entity with due regard for the financial sector 6JUNE1944 6JUNE1799 business, thus ensuring that their customers are able to development). have a full set of necessary banking transactions. Priority regions for IBA-MOSCOW: Allied forces land in Normandy in World Born A. S. Pushkin The program of expansion of the regional network ‹‹Central Federal District: the city of Moscow, War II and Second Front is opened the great Russian poet suggests increasing the number of sales offices through Moscow Region to have great importance for the defeat going into promising and dynamically developing regions ‹‹North-West Federal District: Saint Petersburg, of the Fascist Germany of the Russian Federation, opening of branch offices there Leningradskiy Region and further expanding the network providing there are ‹‹Urals Federal District: Yekaterinburg 343 YEARS EARLIER good prospects for business development. ‹‹Privolzhskiy Federal District: Nizhniy Novgorod Business in regions plays an important role in the By the end of 2010 the regional network of IBA- 6JUNE1664 Bank’s development enabling it to raise additional MOSCOW consisted of a branch office and 3 outlets financial resources and place these efficiently, expand its in Saint Petersburg and a branch office and an outlet New Amsterdam is renamed customer base, ensure proper balance between its assets in Yekaterinburg. The task set before managers of the as New York and liabilities and diversify its resource base. regional network offices is to ensure as soon as possible Another priority area for the Bank was ensuring high sufficient transactions volume and reach operational quality of customer service and professional development self-repayment. In this connection, special attention is of the outlets personnel. paid to business development issues, attraction of new It became possible to ensure proper business customers, formation and expansion of the credit portfolio. standards thanks to systemic control over all areas of Today’s Bank’s strategy in the Russian Federation the outlets’ operations and timely provision of practical regions includes balanced rational approach to developing assistance on location. its regional network of branch offices and service offices. It

IBA-MOSCOW ANNUAL REPORT 2010 33 is planned to expand the Bank’ presence in regions on the In order to enhance competiveness of the real basis of Saint Petersburg branch office through opening sector of economy a number of mid-term programs of new outlets and operating cash desks in the city and the development of different economic sectors are under way, region. In addition to this the Bank studies the situation that provide support to enterprises in the post crisis period in other regions of the RF characterized by a high level and create necessary conditions for technological updates of economic development where the Bank could open its and innovation-based industrial development. offices. In 2010 in Saint Petersburg investments into fixed The trust of over 16.5 thousand customers assets increased by 8.1% to RUB 225.8 billion. In 9 successfully collaborating with IBA-MOSCOW is justly months of 2010 foreign investments constituted USD 3.7 earned thanks to a wide range of banking services, billion, i.e. 22.3% over the same period of the previous convenient location and high quality service supported by year. faultless business reputation of the Bank. Consumer market in Saint Petersburg — one of the biggest in Russia — is one of the main budget donors, accounting for 24% of the Gross Regional Product. It SAINT PETERSBURG employs every fifth worker in the city economy. In 2010 alongside with consumer demand growth retail trade turnover grew by 6% against 2009, that of paid services Economic situation in Saint- by 1,4% and public catering by 4.4%.In 2010 retail trade Petersburg in 2010 turnover constituted RUB 695 billion or 6% over 2009, In 2010 after the financial crisis economic recovery including foods turnover growth by 2.1% and nonfoods — in Saint Petersburg went on as confirmed by the Fitch by 8.9%. company’s upgrading its long-term rating forecast for Communication services constitute the lion’s share of Saint Petersburg from «stable» to «positive» in national and paid services (24.5% of the total), with transport services foreign currencies, with the city’s rating ВВВ remaining 20%, utilities 14.5% and education services 8.7%. unchanged. The rate of growth of the Gross Regional Product (GRP) in Saint Petersburg have been traditionally higher than the average for Russian regions. In 2010 the GRP grew by 5.5% or 1.5% over of all-Russian figures. Industrial production is the most important sector of Loan portfolio by economic sectors Saint Petersburg economy. Currently it accounts for over (figures for 01.01.11, RUB, million) one fourth of the GRP, 28% of tax revenue and 18% of the workforce. The industrial complex operation exerts direct influence on the development of other economic sectors: transport, construction, communications, trade and as a consequence determined to a great extent the possibilities of solving main social and economic problems of Saint Petersburg. In 2010 industrial production index was 108.9% against 2009. The index in manufacturing grew by 10.1%, companies Investment in mining by 44%, in energy generation and distribution, gas and water supply by 0.9%. Production Saint Petersburg is the only megapolis in the RF Trade Individuals where transport and logistics complex includes all types 317.68 of urban, suburban and main-line services. The transport Real estate transactions estate Real and logistics complex does not just meet the needs of Services 270.33 270.33

Saint Petersburg economy but is also a local economic 253.54 mainstay providing a sizable contribution to the GRP, to the city budget; it is important for employment and population 219.93 193,97

income. 189.39 In 2010 production of vehicles grew most noticeably. Construction The growth index in the sector increased 2.4 times and the output of passenger cars by three Saint Petersburg factories — General Motors, Nissan и Toyota more than tripled to 69,400 cars. Chemical production index grew by 24% thanks to 82,49 24% growth of the output of medicines and 29% growth of the output of paints, vanishes and lacquers by Saint Petersburg factories. In metallurgy the index went up by 26.3%, in machine building by 2.8%. As of the end of 2010 there was growth of the leather goods production index by 32% against 2009. In food industry the index went down by 1.4%

Bank’s operations 34 in THE Russian Federation regions in 2010 Small business ensures the necessary flexibility and Branch loan portfolio by term versatility of the city economy which is most important for (figures for 01.01.11,RUB, million) its innovation based development. It is the small business that has better possibilities for introduction of innovative products and technologies sector and it is on its basis that mid size and big corporations grow. In 2010 the city budget allocations for 16 programs of small business support constituted RUB 620 million

plus RUB 278 million from the federal budget. Within 1 368,9 the framework of 8 programs about 1,000 contracts were signed for direct subsidies to the aggregate amount of about RUB 340 million. In 2010 the number of such contracts was 1,848 for RUB 448.8 million and the city budget allocations in support of small business constituted RUB 738 million and the federal budget allocations were RUB 482.5 million. Improved financial situation in enterprises contributed to the city budget revenues growth reaching in 2010 RUB 346 billion. Thus the city budget virtually reached the pre- crisis level of 2008. In 2010 housing construction in Saint Petersburg constituted 2.6 million square meters, more than in 2009. It was the highest figure in Russia. Real population income in 2010 grew significantly. In December 2010 average wages in the city was RUB 27.6 thousand. 159,5 As of January 01, 2010 the population of Saint Petersburg was 4,627.2 thousand and it has increased by 26.9 thousand or by 0.6% since the beginning of the year. 1,9 Under 1 year Under Over 1 year Over Under 30 days 30 days Under Branch office and outlets In 2010 IBA-MOSCOW continued expanding its network in Saint Petersburg on the basis of its branch office. In March it opened its «Ozerki» outlet. The new Branch loan portfolio by type of borrowing outlet contributed to development dynamics and growth (figures for 01.01.11, RUB, million) of all the performance indicators of the branch network in the city. By the end of 2010 the number of corporate accounts in Saint Petersburg branch office reached 1,107 (14% growth) and the number of individual current and term accounts grew by 45% to 6,041 units. Aggregate funds on customers accounts were RUB 684.84 million with corporate funds constituting RUB 291.87 million. Aggregate funds in retain customers grew by 36% to RUB 373.78 million in 2010. Attention to the customers needs, professional aid and beneficial service conditions contributed to the growth of the customer and resource base of the Bank in 2010. The branch credit portfolio also increased considerably reaching RUB 1,527.33 million by the end of 2010, with the corporate loans portfolio constituting RUB 1,303.93 million or 85% of the total. In 2010 the main credit products included overdrafts, credit facilities with drawdown limit, bank guarantees, etc. Prime borrowers’ (1-2 quality categories) share in the loan portfolio of the branch office constituted 64%. 27% of the loan portfolio Overdraft was secured with highly liquid assets. The borrowers Loan limit credit facility Drawdown line of credit with debt ceiling Revolving Bank guarantee mostly raised used loans to replenish their current assets and for financing construction projects. The borrowers included investment and production companies, trade 18,9 652,7 and services enterprises. Most loans were granted for the 743,3 113,9 80,5 term of over 1 year.

IBA-MOSCOW ANNUAL REPORT 2010 35 Major borrowers of the branch office are ZAO «MBIK» (construction), OOO «LogoTrade» (production). YEKATERINBURG The main principles of lending policy in 2010 were: ‹‹Diversification of the loan portfolio Yekaterinburg economy in 2010 ‹‹Getting the planned amount of interest and other revenues In the tear 2010 city economy of Yekaterinburg began ‹‹Meeting the customers needs in required loan to pick up. In the first half of the year there was growth products in sectors worst hit by the crisis and it was mostly due to ‹‹Maintaining and consolidating positive business compensation for the downturn in 2008-2009. Economy repute of the Bank among customers recovery in 2010 was supported by growing consumer ‹‹Ongoing and all-round study of the customers demand due to a better situation in the labour market and needs, spheres and specific features of their business in population income growth. Starting with the second half of be able to make reasonable decisions about lending 2010 there was growth in most sectors though production ‹‹High quality of service and attraction of new in not all of these reached the level of 2008. However applications through offering a wide range of various loan certain figures for 2010 were record for Yekaterinburg. products By the end of 2010 industrial production index for In 2010 the interest income of the branch office was large and medium size enterprises of Yekaterinburg RUB 238.6 million (growth by 23%). was 107% (shipments in current prices grew by 22.9%). In 2010 the regional division of the Bank serviced Manufacturing production index was 109.1% (shipments 14,820 money transfers to Azerbaijan (15% growth) to grew by 28.5%). the amount of USD 18,44 million. Commission fee for The situation in the labour market in Yekaterinburg servicing money transfers to Azerbaijan was RUB 2.7 in the difficult period of 2008-2009 was better than in million. The average amount of a money transfer in the Sverdlovskiy Region and the RF as a whole. As of the end branch office was USD 1,244. The branch office has a of 2010 unemployment in Yekaterinburg was 1.13% while stable customer base of about 7,000 persons for money it was 2.2% in Sverdlovskiy Region and 2.5% in Russia. transfers to Azerbaijan. The money transfers via Contact The number of registered unemployed went down 1.9 system constituted the equivalent of RUB 47.6 million , times (8,738 persons) by the end of the year. The ratio of and the number of transfers was 2,972 units. registered unemployed and current vacancies equaled the By the end of 2010 bank cards issue reached 5,716 pre crisis level. units or 38.5% over the previous year. In the past year the branch office issued 1,810 bank cards of Visa and MasterСard international payment systems. Branch office credit portfolio by economic In 2010 the Bank went on with expanding its ATM sectors network. To support card transactions the bank installed (figures for 01.01.11, RUB, million) 12 ATMs and 77 POS terminals in the trade and services network. The cash dispense through the ATMs was RUB 278.33 million, transactions with POS terminals constituted RUB 115.13 million. IBA-MOSCOW branch office customers include such

locally well-known companies as OOO «INREAL», ZAO Production «MBIK», GK «FORUM BROKER». The IBA-MOSCOW branch office in Saint Petersburg manages the accounts of the General Consulate of the Republic of Azerbaijan. Commission income of the Bank was RUB 96.23 million including corporate customers servicing — RUB 409,53 83.5 million . Priority challenges facing the branch office in 2011 include customer base development, mainly through attracting and servicing small and medium businesses and expanding the outlet network. Trade 154,01 Mass media Services Individuals Construction 43,74 39,62 33,9 5,76

Bank’s operations 36 in THE Russian Federation regions in 2010 Since the beginning of 2010 the rate of growth of By the end of 2010 the issue of bank cards constituted retail trade turnover picked up. In the year the retail trade 1,431 units. In the past year the branch issued 246 cards turnover in comparable prices increased by 12.6% while in of Visa and MasterCard international payment systems. 2009 there was a 4.4% decrease. As of the end of 2010 To support card transactions the branch office installed 5 retail trade turnover reached RUB 450.7 billion. ATMs by the end of 2010. Yekaterinburg consumer market growth rate is still Major customers of Yekaterinburg branch office much higher than the average growth rates in Russia or included the General Consulate of the Republic of Sverdlovskiy Region. Azerbaijan, ZAO «Rostverk», OAO «Family Practice Centre», Average wages in 2010 was RUB 26,697, with OOO «Managing company», «Sever Ek». growth of over 4% in real terms. The gap between wages in Yekaterinburg and Russia in general remained considerable in 2010. Average wages in Yekaterinburg are Branch loan portfolio by term 23% higher than in Russia. (figures for 01.01.11, RUB, million) In 2010 investments in fixed assets of big and medium size enterprises were RUB 62.2 billion or 114.2% against the figure for the previous year in comparable prices. Investment growth into housing construction was most spectacular (growth 2.3 times) which accounts for commissioning all-time volume of housing of over 1 million square meters (1,026.8 thousand sq.m). In 2010 515,86 658 thousand sq.m of nonresidential premises were commissioned. Population size is an objective indicator of social and economic development of a city and its appeal for citizens. In Yekaterinburg population growth goes on through natural increase and migration. As of the end of 2010 the number of births increased by over 800 against 2009. The number of deaths went down by 170 against 2009. In Yekaterinburg in 2010 the 170,7 surplus of births over deaths was 1,633. The estimated population size constituted 1,387.7 thousand by the beginning of 2011. From 1 to 3 years 1 to From Over 3 years Over 0 Branch office and outlet 1 year Under The main objective of the branch office lending policy in 2010 included rational and efficient investment of funds ensuring maximum gain with minimum risk, maintaining the necessary liquidity level at the same time. When developing its lending policy the branch office Branch loan portfolio by types of borrowing relied on the following principles: (figures for 01.01.11, RUB, million) ‹‹Maintaining an optimum structure of working assets coordinated with liabilities by terms and amounts ‹‹Ensuring operations efficiency in the sphere of investments that promises higher income over the costs ‹‹Safety of operations connected with funds

placement and maintenance of the bank’s stable 462,06 operation (this is the most important principle as when placing the funds the Bank looks to gaining revenue on the basis of market realia rather than at any cost) In 2010 the branch network of the Bank in Yekaterinburg gained interest income of RUB 104.29 million and commission fee of RUB 10.16 million. In 2010 the Bank’s regional branch serviced 3,456 money transfers to Azerbaijan to the amount of USD 5.7 million. Commission for servicing money transfers to Azerbaijan constituted RUB 0.75 million. The average 125,38 amount of a transfer in Yekaterinburg was USD 1,634. 85,83 The branch office has a stable customer base for money transfers to Azerbaijan of about 5,400 persons (in 2010 the total number of customers grew by 1,087). Money transfers via the Contact system constituted the equivalent Loan limit credit facility Drawdown Credit line with debt ceiling of RUB 26.7 million and USD 0.36 million, and the number of transfers more than quadrupled constituting 399 units.

IBA-MOSCOW ANNUAL REPORT 2010 37 12MAY2008 IBA-MOSCOW starts servicing money orders via its own IBA-Express payment network

Events that took place in the world on the same day:

2 YEARS EARLIER 438 YEARS EARLIER 12MAY2010 12MAY1570

National high level domain — the first Donskoi Cossak Troops established domain in Cyrillic in the Internet — is in Russia launched in Russia

103 YEARS EARLIER 12MAY1905

First Soviet of Workers Deputies is formed

25NOVEMBER2008 IBA-MOSCOW receives the National Banking Award in the category of «Bank with foreign capital making a noticeable contribution to the economic development of Russia»

Events that took place in the world on the same day:

141 YEARS EARLIER 273 YEARS EARLIER 25NOVEMBER1867 25NOVEMBER1735

Alfred Nobel, Swedish chemist, Tsar Bell is cast in Russia. engineer and inventor patents dynamite It weighs about 200 ton with the height of 6.24 m high, and diameter of 6.6 m

536 YEARS EARLIER 25NOVEMBER1472

Double eagle becomes the symbol of the Russian state 12MAY2008 IBA-MOSCOW starts servicing money orders via its own IBA-Express payment network

Events that took place in the world on the same day: 6

2 YEARS EARLIER 438 YEARS EARLIER 12MAY2010 12MAY1570 BANK’S SUPPORT

National high level domain — the first Donskoi Cossak Troops established SERVICES domain in Cyrillic in the Internet — is in Russia launched in Russia

‹‹Non-involvement of the Bank and its staff in any 103 YEARS EARLIER RISK MANAGEMENT illegal activities, including legalization of criminal revenues (money laundering) and financing of terrorist actions and 12MAY1905 AND INTERNAL CONTROL timely reporting of available information to government Internal control and effective risk management are authorities and the Bank of Russia in conformity with the First Soviet of Workers Deputies important conditions of ensuring reliability and successful RF legislation is formed development of IBA-MOSCOW. ‹‹Compliance with regulatory acts, statutory and The Bank attaches priority importance and risk internal documents of the Bank minimization. The Risk management strategy aims at Internal control embraces the following main areas of ensuring optimum balance between profitability and activity: acceptable risks. ‹‹Control over organization of the Bank’s operation Under financial instability conditions risk control on the part of the administrative bodies system in IBA-MOSCOW passed the efficiency test with ‹‹Control over operation of the system of banking flying colours and ensured achieving target figures. risk management and appraisal of banking risks The current risk management system enables IBA- ‹‹Control over distribution of powers in effecting MOSCOW to allow for risks at the time of managerial banking transaction and other deals 25NOVEMBER2008 decision making and in the process of banking operations, ‹‹Ongoing monitoring of the internal control system The system is based on timely discovery of possible risks, functioning aimed at appraising its correspondence IBA-MOSCOW receives the National Banking Award in the category their identification and classification, analysis, assessment with the Bank’ operation objectives, identification of and appraisal of risky positions and on the use of specific failures, development of suggestions and control over of «Bank with foreign capital making a noticeable contribution risk management methods. Risk appraisal procedures implementation of decisions designed to improve the to the economic development of Russia» and risk management are integrated in execution of internal control system of the Bank current transactions. ‹‹Control over the system of countering money laundering and financing of terrorist activities Events that took place in the world on the same day: INTERNAL CONTROL SYSTEM ‹‹Control over compliance of the Bank’s operation in the securities market with the RF legislation and regulatory To ensure authenticity of financial statements, acts of the federal activity for financial markets. 141 YEARS EARLIER 273 YEARS EARLIER compliance with regulatory acts, efficiency of the Bank, observation of legal interests of depositors, creditors and 25NOVEMBER1867 25NOVEMBER1735 other Bank’s counterparties IBA-MOSCOW has lined up an effective internal control system. The system includes Alfred Nobel, Swedish chemist, Tsar Bell is cast in Russia. reviews aimed at disclosing in due time cases of violation engineer and inventor patents dynamite It weighs about 200 ton with the height of internal policies and procedures, coordination and of 6.24 m high, and diameter of 6.6 m delegation of powers, observation of limits and follow-up control over remedial actions. Internal control is aimed at ensuring: 536 YEARS EARLIER ‹‹Efficient assets and liabilities management including security of the assets, banking risks management 25NOVEMBER1472 and effectiveness of financial and economic activity in banking transactions and other deals Double eagle becomes the symbol ‹‹Authenticity, fullness and timely delivery of of the Russian state financial statements, accounting and other reports and of information security

IBA-MOSCOW ANNUAL REPORT 2010 39 RISK MANAGEMENT The Legal Department of the Bank carries out analysis of legal risks in order to identify unconformities Effective risk management is one of the key aspects between draft documents (including local regulations, of successful operation of a financial organization. internal rules and procedures, contracts, orders, etc.) and In order to ensure adequate assessment of risks the current RF legislation, common business practices emerging in the process of banking operation IBA- and the Bank’s interests. MOSCOW has developed a comprehensive approach to risk assessment that includes regulations, methodology Reputation risk and procedures allowing for analysis and monitoring of The risk of losing business reputation is connected banking risks and a system of collegiate bodies of decision with the possibility of the Bank’s losses due to decreasing making. number of customers (counterparties) because of a Credit risk negative public image of the Bank. To diminish the risk the Bank adheres to the principles Credit risk means the risk of financial losses through of transparency of transactions and openness of its non-execution of obligations by the Bank’s counterparties, relations with counterparties and the business community primarily by borrowers. on the whole and pursues a balanced marketing policy. This risk is most critical for the Bank’s operation as it The Press Service of IBA-MOSCOW on a regular basis leads to serious consequences for financial stability of the carries out mass media analysis in order to prevent and Bank. Therefore, it merits special attention of the Bank. in due time react to instances of unfair competition (in The minimum overdue loan debt speaks of the particular information attacks). effectiveness of the current system of risk assessment, control and credit risk management in IBA-MOSCOW: its share in the aggregate loan portfolio of the Bank has not INFORMATION TECHNOLOGIES exceeded 1.1% for a long time. Liquidity risk IBA-MOSCOW continuously develops and updates it technological base ensuring that it is adequate to the The imbalance between the Bank’s assets and growing scale of business, expanding product range and liabilities lead times determines liquidity risk. regional network. The Bank has a full range of modern Liquidity risk management in the Bank is designed banking information technologies: industrial automated to ensure its creditworthiness, shaping of its assets and banking systems (ABS) with every functionality for servicing liabilities structure that allows for optimum balancing of corporate customers, a centralized ABS for registering liquidity and profitability. retail transactions, a corporate data bank, a system of Operations risk simulation and optimization of business processes. The Bank’s information technologies are based on the best Operations risk means the possibility of losses for domestic and foreign automated systems and solutions in the Bank due to lack of correlation between internal the area of corporate communication facilities. In 2010 rules and procedures of banking operations and the the Information Technologies Department of the Bank nature and scale thereof and the requirements of the started introducing the following systems: Russian legislation. ‹‹«Managerial accounting and analysis» — a To minimize operations risk IBA-MOSCOW on a specialized system designed for automating and analyzing regular basis carries out detailed analysis of the internal managerial accounting procedures procedures, established document flow and accounting, ‹‹«Financial planning and analysis» — a that enables the Bank to improve its banking operations. multifunctional subsystem Market risk ‹‹«Economic expenditures and payments control» — Market risk is connected with unfavorable changes in a module of the financial planning and analysis system the market situation resulting in losses for the Bank. The integrated with the ABS «XXI CENTURY BANK» allowing for: changes may include: ‹‹establishing connection with the ABS «XXI CENTURY ‹‹Changing market value of financial instruments BANK» for payments control (stock exchange risk) ‹‹Checking the availability of funds needed for ‹‹Changing interest rates (interest rate risk) effecting controlled payments ‹‹Changing currency rates of exchange (currency risk) ‹‹Drawing up first and consolidated requests for The Bank manages market risk through ongoing departments expenditures cooperation of collegiate bodies and structural divisions ‹‹Checking and reserving funds for departments of IBA-MOSCOW. expenditures ‹‹Drawing up the economic contract in the subsystem Legal risk «Economic contracts» Legal risk is connected with complete or partial non- In the sphere of retail communications at the execution of the terms of an agreement by the other party, beginning of 2010 IBA-MOSCOW was able to make the growing liabilities due to illegal transactions, mistakes, transition to its own payments network for servicing errors of judgment and irregularities in execution of individual money transfers without opening an account documents, forging or stealing thereof, lack of powers of between Russia and Azerbaijan. In 2010 67 thousand persons, signing the agreement, incorrect execution of money transfers were effected. backup documentation and ensuing possible losses of the Information technologies development is important Bank’s assets. for establishing real time collaboration of internal services and providing high quality services to the customers. 40 Bank’s support services From the very beginning, IBA-MOSCOW has adopted a ‹‹Positive approach to solving any complex problem most flexible IT-strategy envisaging ongoing improvement ‹‹Adequate education of the information technology system along with the ‹‹The ability to make use of the acquired experience growing needs. and practical knowledge in everyday work The Bank further develops customer service via ‹‹The ability to work in a team and observe discipline «Bank-Customer» system with many new organizations ‹‹Creative ability and the ability to make non- connected thereto. standard decisions To increase non-cash operations with bank cards ‹‹The ability to get on well with people of IBA-MOSCOW and cash disbursements by the end IBA-MOSCOW specialists possess high qualification, of 2010 the Bank installed and put into operation competence and unfailing graciousness to the customers. about 173 POS terminals and 40 ATMs. In 2010 the Another characteristic that plays a decisive role in IBA-MOSCOW also installed the new application on the selecting a candidate is his/her readiness to upgrade his/ Bank’s web-site — «Internet Service», enabling its users her skills. to monitor their account transactions on-line. We in IBA-MOSCOW believe that human resources In 2010 IBA-MOSCOW launched trial operation of are the basis of any organization, therefore ongoing CRM SalesLogix system that will enable the Bank to professional development of the personnel is an use modern facilities of collaboration with potential and indispensable condition for successful operation and existing customers, will simplify their identification and development of the Bank. In 2010 about 70 Bank segmentation, help to organize a feedback system and employees (over 30% of the personnel) underwent provide an opportunity for more detailed analysis of training. This is how the Bank investing into its staff invests market programs efficiency and adjust their schedules in into business development. due time. In 2010 the Bank’s employees took training in the Thanks to the CRM SalesLogix system IBA-MOSCOW following areas: personnel will be able to more efficiently plan their work ‹‹Corporate and retail customers servicing and quickly respond to the customers requests thus ‹‹Banking products enhancing the efficiency of IBA-MOSCOW operations. ‹‹Professional upgrading ‹‹Training branch offices personnel to work with CRM system HUMAN RESOURCES In selecting personnel, the Bank attaches great importance to correspondence of the candidates to MANAGEMENT corporate culture of the Bank. All the employees are expected to accept the corporate ethics of IBA-MOSCOW The human resources management policy of the that include attentive attitude to the customers, Bank aims at tapping the internal potential of each compliance with the legislation, teamwork, professional employee. The Bank’s priorities in this area include ability, and desire to improve services, products and motivating the personnel to achieve key business targets, procedures. setting an efficient system of internal communications In addition to professional and career development, and professional development of the employees. material incentives play an important role in stimulating Pursuing its human resources management policy the personnel. The Bank has developed and successfully based on the strategic aims and development priorities introduced a motivation system based on a competitive the Bank purposefully and consistently puts together a wage system. team that would do its best to achieve the Bank’s targets In 2010 the staff of the Bank grew by 6% reaching by joint efforts of all the employees. 300. The average age of the employees is 35 years. The human resources management goes back to Thanks to such a strong team the Bank achieved such IBA-MOSCOW mission and is designed at ensuring and good performance in the past year. promoting it competitive advantages. In 2011 IBA-MOSCOW is planning to increase further The Bank strives to establish long-term labor relations its staff in order to ensure achievement of its strategic with its employees on principles of social partnership and development targets. compliance with labor legislation. Strategic goals of the IBA-MOSCOW human resources policy: ‹‹Mobile highly professional team ‹‹Strong administrative staff ‹‹Balanced optimum staff The main areas of the Bank’s human resources policy in 2010 included: recruitment of high banking professionals to structural divisions of the Bank, professional development and training of the personnel, enhancing motivation of the employees, development of corporate culture and activation of each promising employee’s potential. When selecting experts and managers IBA-MOSCOW first looks at the following characteristics of the candidates: ‹‹The ability to understand their duties and objective self-esteem.

IBA-MOSCOW ANNUAL REPORT 2010 41 18AUGUST2009 IBA-MOSCOW is ranked among TOP 30 most stress-resistant Russian banks

Events that took place in the world on the same day:

33 YEARS EARLIER 227 YEARS EARLIER 18AUGUST1976 18AUGUST1782

Soviet space station «Luns-24» lands Monument to Peter I is unveiled on the surface of the Moon in Saint Petersburg

808 YEARS EARLIER 18AUGUST1201

The city of Riga is founded

1OCTOBER2009 IBA-MOSCOW joins TOP 150 Russian Banks by financial performance

Events that took place in the world on the same day:

ON THE SAME DAY 60 YEARS EARLIER 1OCTOBER2009 1OCTOBER1949

Assets of the International Bank The Peoples Republic of China of Azerbaijan (IBA), the largest is proclaimed Azerbaijani bank, reach USD 6 billion

17 YEARS EARLIER 1OCTOBER1992

Privatization certificate, the voucher is launced in Russia, marking an important stage of economic reforms 42 СЛУЖБЫ ПОДДЕРЖКИ БИЗНЕСА БАНКА Regional Banks of Russia and was one of the sponsors CORPORATE of the forum “Banks of Russia XXI”. Within the framework 18AUGUST2009 of the IV Banking Festival organized by the Russian Banks COMMUNICATIONS Association, the National banking magazine IBA-MOSCOW IBA-MOSCOW is ranked among TOP 30 For IBA-MOSCOW Information openness in was awarded the diploma of “Stress-resistent bank”. interoperation with all the interested parties represent The newly adopted Development strategy for most stress-resistant Russian banks one of the most important priorities. The Department 2010 — 2015 contains high requirements to corporate for Strategic Development and Marketing provides communications of IBA-MOSCOW. Events that took place in the world on the same day: communication support of the Bank’s operation. Thanks The work will go on in all directions. The Bank will to the measures taken, high quality and operational continue improving the system of informing all the key efficiency and accessibility of information the Bank holds customer groups based on informational openness. To 33 YEARS EARLIER 227 YEARS EARLIER one of the top places in the Russian banking system from shape a uniform corporate culture some research work is the point of view of information openness. planned designed to identify certain specific features of 18AUGUST1976 18AUGUST1782 In 2010 federal and regional mass media regularly corporate culture and internal communications system. published advertising and informational statements for In 2010 the Bank plans to obtain a credit rating of an Soviet space station «Luns-24» lands Monument to Peter I is unveiled customers and partners and interviews with the Bank’s international rating agency as it will open up new business on the surface of the Moon in Saint Petersburg top managers within the framework of activities connected opportunities for the Bank. In 2011 there will also be re- with streamlining corporate communications. The Bank branding of the Bank in connection with the change of its pays much attention to relations with the Azerbaijani name (the new name is “Bank “IBA-MOSCOW”). The Re- Diaspora in the RF territory as the Bank regards it as a branding will be accompanied by an integrated information 808 YEARS EARLIER target group for promotion of its products and services campaign for the personnel, customers and partners of both in the corporate and retail segments. the Bank designed to explain and develop the concept and 18AUGUST1201 Printed advertising materials (leaflets, booklets, values of the new brand. posters) were developed and placed in thr Bank’s offices The city of Riga is founded in support of front office operations alongside with some elements of internal and external design, such as banners, posters and light boxes. The Bank extensively uses mailing and emailing and telemarketing to promote its services. To ensure effective interoperation between divisions of the Bank, different lavels of management and regional offices and to disseminate information in the external environment the following communication channels are used: top management messages to the personnel on key issues of everyday work, intranet, e-mailing. The corporate web site plays a significant part in the IBA-Moscow communication policy. A dialogue with 1OCTOBER2009 various groups is established via the web site. Information relating to all the aspects of the Bank’s operation is timely IBA-MOSCOW joins TOP 150 Russian Banks placed on the web site. The news releases let all the interested parties to obtain information about events in by financial performance IBA-MOSCOW and the parent bank and attracts attention to new offers. In 2010 the sections “Ask a question” and Events that took place in the world on the same day: “Leave an opinion” enabled the customers and partners to ask questions and what is more important get answers thereto and appraise operation of different units. Thanks ON THE SAME DAY 60 YEARS EARLIER to the pro-active attitude the Bank’s corporate site traffic increased by 40% in the year and Rambler ranked the web 1OCTOBER2009 1OCTOBER1949 site itself among 100 major banking Internet resources. Electronic banners of the Bank and information Assets of the International Bank The Peoples Republic of China about services were placed in ibar.az, azkongress.ru, azerros.ru, baku-media.ru, bank.ru, azeri.ru, crocustours. of Azerbaijan (IBA), the largest is proclaimed ru, sdiscontom.ru, expomenu.ru which also contributes to Azerbaijani bank, reach USD 6 billion traffic and sales growth. Special offers of IBA-MOSCOW were e-mailed to bank.ru subscribers. In 2010 by tradition IBA-MOSCOW actively participated 17 YEARS EARLIER in various business and social events. Alongside with its parent bank IBA-MOSCOW acts as a sponsor and active 1OCTOBER1992 participant of annual events held by the CIS Financial and Banking Council. In 2010 two events were held in Moscow Privatization certificate, the voucher and Baku with participation of the Bank’s representatives. During the event in Moscow Chairman of the Board of is launced in Russia, marking IBA-MOSCOW was awarded a commemorative token for an important stage of economic business development in the CIS. In 2010 IBA-MOSCOW reforms participated in some events held by the Association of

IBA-MOSCOW ANNUAL REPORT 2010 43 13JANUARY2010 IBA-MOSCOW is entered in the register of banks entitled to issue bank guarantees for customs duties payment

Events that took place in the world on the same day:

307 YEARS EARLIER 165 YEARS EARLIER 13JANUARY1703 13JANUARY1845

The first issue of «Vedomosti» The State Office of Weights periodical. It was the first newspaper and Measures established in Russia in Russia. In honor of this event the Day of Russian Press was established in 1992 400 YEARS EARLIER 13JANUARY1610

Galileo Galilei discovers the forth satellite of Jupiter and names it Callisto

30MARCH2010 IBA-MOSCOW adopts the new development strategy to 2015

Events that took place in the world on the same day:

29 YEARS EARLIER 154 YEARS EARLIER 30MARCH1981 30MARCH1856

Summer time introduced in the USSR The Treaty of Paris that settled for the first time the Crimean War is signed

40 YEARS EARLIER 30MARCH1970

First screening of Vladimir Motyl’s film «White sun of the desert» that become a «cult» film of Soviet cinematography 13JANUARY2010 IBA-MOSCOW is entered in the register of banks entitled to issue bank guarantees for customs duties payment

Events that took place in the world on the same day: 7

307 YEARS EARLIER 165 YEARS EARLIER 13JANUARY1703 13JANUARY1845 PRIORITY DIRECTIONS OF THE BANK’S

The first issue of «Vedomosti» The State Office of Weights OPERATION AND DEVELOPMENT periodical. It was the first newspaper and Measures established in Russia in Russia. In honor of this event PROSPECTS the Day of Russian Press was established in 1992 400 YEARS EARLIER 13JANUARY1610 In 2010 IBA-MOSCOW adopted new Development the accounts and time deposits. IBA-MOSCOW adheres to Galileo Galilei discovers the forth Strategy got 2010-2015 and started implementing it in the conservative lending policy, receiving medium yield rate to satellite of Jupiter and names it Callisto second half of the year. When developing the new Strategy maintain its stable financial position and guaranteeing to the situation in the Russian banking market in the post its customers due operations execution and safety of their crisis period and recommendations of the stockholders funds. In relations with corporate borrowers with financial and the Advisory Board were taken into account. It should problems due to the crisis period in 2010 the Bank used be noted that the new Strategic Plan of IBA-MOSCOW individual schemes of debt restructuring that helped to will be part of the strategy of the whole IBA Group that deal with problem loans the amount of which was below operated in a number of countries. average market figures. In the near future IBA-MOSCOW will be working According to the new Strategy recruitment of small to strengthen its positions in the Russian market through and mid-size businesses as customers will be the key more accurate positioning and joining TOP 100 leading area of corporate business alongside with implementation banks by assets in the Russian Federation. Infrastructure of lending programs in these segments. Other strategic development in combination with intensive work in the targets will include assets diversification through corporate and retail segments should ensure growth of increasing the share of companies, increasing profitability qualitative and quantitative indicators of the Bank. By of corporate business, enhancing operational efficiency of 2015 IBA-MOSCOW should become a bank active in the front and back offices dealing with corporate customers. 30MARCH2010 small and medium size business segment with the rate of The corporate credit portfolio of the Bank should more assets growth ahead of the banking sector growth rate. than quadruple by 2015 with the share of small and IBA-MOSCOW adopts the new development strategy to 2015 Assessment of internal development of the Bank, medium size companies growing to 45% and the number its customer base and the product range shows that IBA- of customer companies should grow 6 times. Events that took place in the world on the same day: MOSCOW possesses sufficient development potential The Bank considers its corporate business as a in the corporate and retailing sectors. In addition to possibility to organize work with several customer groups, that, the Bank has a large group of loyal customers in the so called «corporate retail» group — top managers and 29 YEARS EARLIER 154 YEARS EARLIER the corporate segment — companies with business ties other officials of companies (VIP retail segment), company with Azerbaijan, and in the retailing segment, these employees (mass retail segment). The Bank regards such 30MARCH1981 30MARCH1856 are numerous representatives of the Azerbaijani expat customers as a target retail segment for which specific community residing or temporarily staying in the territory offers will be designed. Summer time introduced in the USSR The Treaty of Paris that settled of the Russian Federation. The Bank actively introduces the pattern of for the first time the Crimean War is signed In its relations with corporate business the Bank collaboration with the customers that ensures individual attaches great importance to lending issues. The Bank service and specially structured product solutions with has a vast credit portfolio diversified by the type of due regard for the customer’s specific needs. The product business, loan amounts and terms of lending. When portfolio will include such key products as bank cards, 40 YEARS EARLIER selecting potential customers the Bank gives preference various lending products, attractive types of deposits. to companies in the real economy sector, manufacturing Implementation of such relations with customers enables 30MARCH1970 companies producing competitive products and the Bank to expand effectively its customer base and successful trading companies. The Bank also carefully transactions volume with the existing customers. First screening of Vladimir Motyl’s film studies long-term investment projects of companies for Further on IBA-MOSCOW is planning to activate its «White sun of the desert» that become the possibility of funding. In its work with borrowers the relationship with small and medium businesses mainly a «cult» film of Soviet cinematography Bank actively introduces cross sales, goes for increasing through lending. For this purpose it is planning to gradually joint transactions, raising funds in the form of balances in restructure operations of the lending department that will

IBA-MOSCOW ANNUAL REPORT 2010 45 operate on the basis of mass technologies. This approach expansion of service will give IBA-MOSCOW an advantage will enable the Bank to significantly expand the customer in the competitive market of bank cards. base, gain more fee revenue and create conditions for The Bank is planning to develop further channels developing the commission area of its business. The of remote access to its services, including ATMs, thus Bank's regards employees of such customers as a target diminishing the load of work on its offices and cutting the retail segment for which it will develop special offers. costs. The Bank will also offer to its private customers The Bank regards corporate business as a possibility some modern Internet and mobile communication based of working with several retail customer groups. services. IBA-MOSCOW focuses on development of the product To optimize sales and customer servicing the corporate range, introduction of modern products and services and and retailing sectors the Bank gas stated introducing a information support of sales and on bringing information CRM system and accompanying applications. about the Bank’s possibilities to end consumers. It should Currently the market strategy of the Bank can be be noted that the current product range is fairly well summed up as follows: balanced and meets the main requirements of corporate ‹‹Developing operations in the segment of small and and retail customers. The new areas of business include medium size corporate business on the basis of lending, the customs card (introduced at the beginning of 2010) diversification of the Bank’s customer operations through and plans of developing individual funds. priority servicing Russian companies and expansion of the IBA-MOSCOW capital grows constantly (with the Bank corporate customer base considering the process as one of its priorities) enabling ‹‹Expanding the scale of operations with corporate the Bank to expand its loan portfolio and raise the credit retail customers, building up the Bank’s credit portfolio rate to one borrower. However today the Bank’s operations through lending to personnel of customer companies, are somewhat restricted due to the fact that its capital is raising resources; increasing commission fee yield through not always sufficient for lending to big business. specially designed package offers To fund corporate projects IBA-MOSCOW is planning ‹‹Developing a product line meeting the needs of to raise additional resources in the international capital target customer segments market and use customers funds to the extent possible. ‹‹Upgrading the system of mass sales in target Moreover, the Bank has in its disposal sufficient funds of segments (small and medium size business, corporate the parent bank. IBA-MOSCOW is also planning to assert retail customers), gaining a competitive advantage its reliability and financial stability through gaining a credit through a high quality service; establishing the institute of rating of a first class international rating agency as this will customer managers further enable it to raise additional funds. ‹‹Expanding and optimizing the service network, In order to expand its presence in the corporate and opening of new format sales offices, developing the retail market the Bank focuses on network development mini offices network for servicing mass retail operations issues. Currently there are 8 sales offices in Moscow. (money transfers) The Bank has branch offices in two most developed ‹‹Optimizing the branch office network format, entry Russian regions: in Saint Petersburg and Yekaterinburg. into new regions A network of outlets is being developed on the basis of ‹‹Funding in the amount adequate to target figures, Saint Petersburg branch. IBA-MOSCOW service network raising funds in the international capital market, using consists of 14 offices in the territory of the RF. In the near customers funds, diminishing dependence of the parent future it is planned to expand the Bank’s presence in the bank’s resources Moscow region as the most promising economically and to ‹‹Development of partnership programs within the bring the number of offices to 10-15, with the total number framework of diversification of channels of attracting growing to 20. At the end of 2010 two new outlets were corporate customers and promotion of retail products and opened in Saint Petersburg and Yekaterinburg. services As for the network divisions the Bank is planning to ‹‹Servicing trade and economic relations between offer mass retail depositary and card products, developing Russia and Azerbaijan, funding various joint projects relations with small and medium business according to ‹‹Acquiring an international credit rating the territorial principle within the framework of specialized ‹‹Optimizing the organizational and functional programs. In order to develop mass retailing (money structure of the Bank, upgrading the management system, transfers without opening an account) it is planned to introducing a system of personnel motivation expand the network of mini offices in Moscow and the ‹‹Ensuring information and marketing support to cities of branch offices. To service big corporate business sales, gaining loyalty of the customers, segmenting and and VIP retail customers a special office «In Pokrovka» is identifying the group of corporate and retail customers allocated in Moscow. that bring the bulk of the revenue Network development, establishment of efficient ‹‹Organizing PR campaigns, raising awareness of service centers should help to enhance the Bank’s the Bank, shaping its positive image, enhancing loyalty on competitiveness and its capitalization. Moreover after the the part of corporate and retail customers; Bank was granted the Bank of Russia General License it ‹‹Ensuring internal technological balance of the became possible to implement the plans to open shortly Bank, mobility, purposefulness, unity and professionalism. an IBA-MOSCOW representative office in Frankfurt on the All these elements of the Bank’s market strategy create Main (Federal Republic of Germany). prerequisites for establishing long-term comprehensive Establishment of the Bank’s own processing centre and mutually beneficial relations with customers based within the IBA ensuring provision of a modern range of on offers of first-rate products, understanding of the high quality banking services and further expansion and customer’s specifics and needs and ensuring effective partnership.

Priority directions of the Bank's operations 46 and development prospects 8 CONTACT INFORMATION

MAIN BANK DETAILS

Moscow Central office 6/2 Tverskaya street +7 (495) 933 83 15 Outlet «In Pokrovka» 43/1 Pokrovka street +7 (495) 937 77 27 Outlet «Movie theatre «Baku» 12/14 Usievicha street +7 (499) 151 89 02 Outlet «Hotel «Moskvich» 1 Tekstilschikov 11th street +7 (499) 176 88 11 Outlet «Cherkizovo» 3/1 Tschelkovskoye highway +7 (495) 988 78 14 Operating cash desk «In Kutuzovskiy» 24 Kutuzovskiy prospect +7 (495) 510 60 56 Operating cash desk «Golovinskoye» 1 Golovinskoye highway +7 (495) 708 03 46

Moscow Region

Outlet «Tvoy Dom» Shopping mall «Tvoy Dom», ring road 24 km +7 (495) 228 12 17

Saint Petersburg

Branch office 63 Marata street +7 (812) 334 20 80 Outlet «Obukhovskiy» 75A Obukhovskoy oborony prospect +7 (812) 365 31 27 Outlet «Kushelevskiy» 20A Kushelevskaya road +7 (812) 535 81 84 Outlet «Ozerki» 124 Engels avenue +7 (812) 610 03 10

Yekaterinburg

Branch office 26 Rosa Luxemberg street +7 (343) 350 15 50 Outlet «Taganskiy» 3 Minometchikov street (shopping mall «Hanoi») +7 (343) 253 67 57

IBA-MOSCOW ANNUAL REPORT 2010 47 ATM’s addresses

Moscow Saint Petersburg 6/2 Tverskaya street 63 Marata street 43/1 Pokrovka street 75A Obukhovskoy oborony prospect 43/3 Pokrovka street 2 Alexander Nevskiy square 15 Voznesenskiy pereulok 20A Kushelevskaya road 4 Trifonovskaya street 5 prospect Bakunina 4/2 Mukomolniy proezd 177 Moscovskiy prospect 1 11th Tekstilschikov street 93 Leningradskaya street Pushkin 1 Golovinskoye highway 150/1 Obvodny Canal embankment 1A Golovinskoye highway 12 Khimicheskiy pereulok 3 Schelkovskoye highway 18 Bumazhnaya street 1 Novgorodskaya street 124 Engel’s prospect Saint-Petersburg 14/3 Ferganskiy proezd 2 Voskova street Sestroretsk 22 prospekt 40 Let Oktyabrya 13/1 Sharikopodshipnikovskaya street 5 Nizhnyaya Radischevskaya street Leningradskiy Region 4 Venevskaya street 2 Voskova street, Sestroretsk 2/90 Ugreshskaya street 93 Leningradskaya street, Pushkin

Moscow Region Yekaterinburg Domodedovo airport 26 Rosy Luxemburg street Shopping mall «Tvoy Dom» (main entrance), 4 Scherbakova street ring road 24 km 9 Vainera street Shopping mall «Tvoy Dom» (supermarket), 32 Blukhera street ring road 24 km 1/3 Nachdiva Vasil'eva street Shopping mall «Vegas» (ground floor entrance 1), Kashirskoye highway ring road 24 km Shopping mall «Vegas» (ground floor entrance 4), Kashirskoye highway ring road 24 km 1/A Entuziastov highway, Balashikha 9 Sovetskaya street, Zheleznodorozhnyy ring road 65-66 km Trade and exhibition centre case № 4, Krasnogorsk

48 Contact information 9 Financial Statements For the Year Ended December 31, 2010

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2010

Management is responsible for the preparation of ‹‹Maintaining statutory accounting records in the financial statements that present fairly the financial compliance with legislation and accounting standards of position of the Limited Liability Company “International the Russian Federation; Bank of Azerbaijan — Moscow” (the “Bank”) as at ‹‹Taking such steps as are reasonably available to December 31, 2010, and the results of its operations, them to safeguard the assets of the Bank; and comprehensive income, cash flows and changes in equity ‹‹Preventing and detecting fraud and other for the year then ended, in compliance with International irregularities. Financial Reporting Standards (“IFRS”). The financial statements of the Bank for the year In preparing the financial statements, management ended December 31, 2010 were authorized for issue by is responsible for: the Bank’s Management Board on June 30, 2011: ‹‹Properly selecting and applying accounting On behalf of the Management Board: policies; ‹‹Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; ‹‹Providing additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Bank’s financial position and financial performance; F.R. Abdullaev ‹‹Stating whether IFRS has been followed, subject Chairman of the Management Board to any material departures disclosed and explained in the June 30, 2011 financial statements; and Moscow ‹‹Making an assessment of the Bank’s ability to continue as a going concern. Management is also responsible for: ‹‹Designing, implementing and maintaining an effective and sound system of internal controls, throughout V.P. Onushkevich the Bank; Chief Accountant ‹‹Maintaining adequate accounting records that are June 30, 2011 sufficient to show and explain the Bank’s transactions Moscow and disclose with reasonable accuracy at any time the financial position of the Bank, and which enable them to ensure that the financial statements of the Bank comply with IFRS;

IBA-MOSCOW ANNUAL REPORT 2010 49 INDEPENDENT AUDITORS’ REPORT

To the Participant and the Board of Directors of Limited Auditors' Responsibility Liability Company “International Bank of Azerbaijan — Moscow” (the “Bank”): Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Report on the financial statements International Standards on Auditing. Those standards We have audited the accompanying financial require that we comply with ethical requirements and plan statements of Limited Liability Company “International and perform the audit to obtain reasonable assurance Bank of Azerbaijan — Moscow” (hereinafter — LLC “IBA- about whether the financial statements are free from Moscow”), which comprise the statement of financial material misstatement. position as at December 31, 2010, and income statement, An audit involves performing procedures to obtain the statement of comprehensive income, statement of audit evidence about the amounts and disclosures in the changes in equity and statement of cash flows for the financial statements. The procedures selected depend year then ended, and a summary of significant accounting on the auditor’s judgment, including the assessment policies and other explanatory information. of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those Management’s responsibility for the risk assessments, the auditor considers internal control Financial Statements relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit Management of the Bank is responsible for the procedures that are appropriate in the circumstances, preparation and fair presentation of these financial but not for the purpose of expressing an opinion on the statements in accordance with International Financial effectiveness of the entity’s internal control. An audit also Reporting Standards and for such internal control as includes evaluating the appropriateness of accounting management determines is necessary to enable the policies used and the reasonableness of accounting preparation of financial statements that are free from estimates made by management, as well as evaluating material misstatement, about whether due to fraud or the overall presentation of the financial statements. error. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects the financial position of the Bank as at December 31, 2010 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

June 30, 2011 Moscow

50 Financial Statements INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2010 (in thousands of Russian Rubles)

Year ended Year ended December, 31 Notes December, 31 2010 2009

Interest income 4,20 1 899 094 1 250 701 Interest expense 4,20 (1 231 671) (673 030) NET INTEREST INCOME BEFORE PROVISION FOR MPAIRMENT 667 423 577 671 LOSSES ON INTEREST BEARING ASSETS

Provision for impairment losses on interest bearing assets 5,20 (217 809) (458 752) NET INTEREST INCOME 449 614 118 919

Net (loss)/gain on financial assets and at fair value through 20 (4 848) 146 444 profit or loss Net gain on foreign exchange operations 86 645 134 758 Fee and commission income 6,20 198 055 151 192 Fee and commission expense 6 (42 806) (48 355) Other income 3 162 2 452 NET NON-INTEREST INCOME 240 208 386 491

OPERATING INCOME 689 822 505 410

Operating expenses 7, 20 (583 105) (453 480) PROFIT BEFORE INCOME TAX 106 717 51 930

Income tax expense 8 (51 944) (14 226) PROFIT FOR THE YEAR 54 773 37 704

On behalf of the Management Board:

F.R. Abdullaev V.P. Onushkevich Chairman of the Management Board Chief Accountant June 30, 2011 June 30, 2011 Moscow Moscow

The notes on pages 57 — 96 form an integral part of these financial statements.

IBA-MOSCOW ANNUAL REPORT 2010 51 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2010 (in thousands of Russian Rubles)

Year ended Year ended Notes December 31, 2010 December 31, 2009

NET PROFIT FOR THE YEAR 54 773 37 704

OTHER COMPREHENSIVE INCOME Net gain resulting on revaluation of property 14 10 961 5 851

Income tax relating to components of other comprehensive (2 192) (1 170) income OTHER COMPREHENSIVE INCOME AFTER INCOME TAX 8 769 4 681

TOTAL COMPREHENSIVE INCOME 63 542 42 385

On behalf of the Management Board:

F.R. Abdullaev V.P. Onushkevich Chairman of the Management Board Chief Accountant June 30, 2011 June 30, 2011 Moscow Moscow

The notes on pages 57 — 96 form an integral part of these financial statements.

52 Financial Statements STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2010 (in thousands of Russian Rubles)

Notes December 31, 2010 December 31, 2009

ASSETS: Cash and balances with the Central Bank of the Russian 9 588 327 555 015 Federation Minimum reserve deposits with the Central Bank of the 10 99 964 80 200 Russian Federation Financial assets at fair value through profit or loss 11 45 390 149 745 Due from banks 12, 20 5 890 733 4 545 556 Loans to customers 13, 20 10 563 059 8 447 008 Property and equipment 14 464 968 472 200 Current income tax assets 25 576 11 508 Deferred income tax assets 8 3 064 - Other assets 86 733 26 986 TOTAL ASSETS 17 767 814 14 288 218

LIABILITIES AND EQUITY LIABILITIES: Deposits by banks 15 10 858 075 7 951 250 Deposits by customers 16 5 119 163 3 882 150 Other borrowed funds - 896 470 Deferred tax liabilities 8 - 14 463 Subordinated debt 17, 20 630 691 460 525 Other liabilities 35 904 22 921 Total liabilities 16 643 833 13 227 779

EQUITY: Charter capital 18 544 663 544 663 Additional capital 17 038 17 038 Property revaluation reserve 253 636 244 867 Retained earnings 308 644 253 871 Total equity 1 123 981 1 060 439 TOTAL LIABILITIES AND EQUITY 17 767 814 14 288 218

On behalf of the Management Board:

F.R. Abdullaev V.P. Onushkevich Chairman of the Management Board Chief Accountant June 30, 2011 June 30, 2011 Moscow Moscow

The notes on pages 57 — 96 form an integral part of these financial statements.

IBA-MOSCOW ANNUAL REPORT 2010 53 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2010 (in thousands of Russian Rubles)

Property Additional Retained Note Charter capital revaluation Total equity capital earnings reserve

January 1, 2009 544 663 17 038 240 186 216 167 1 018 054

Total comprehensive income for the year - - 4 681 37 704 42,385

December 31, 2009 544 663 17 038 244 867 253 871 1 060 439

Total comprehensive income for the year - - 8 769 54 773 63 542

December 31, 2010 544 663 17 038 253 636 308 644 1 123 981

On behalf of the Management Board:

F.R. Abdullaev V.P. Onushkevich Chairman of the Management Board Chief Accountant June 30, 2011 June 30, 2011 Moscow Moscow

The notes on pages 57 — 96 form an integral part of these financial statements.

54 Financial Statements STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2010 (in thousands of Russian Rubles)

December 31, 2009 Notes December 31, 2010 Reclassified

CASH FLOWS FROM OPERATING ACTIVITIES Interest received 1 407 843 1 065 348 Interest paid (1 190 127) (647 444) Realized (losses)/gains from trading in trading securities (3 745) 146 509 Realized gain on foreign exchange operations 88 799 134 756 Fee and commission income 198 055 150 243 Fee and commission expense (42 806) (48 355) Other operating income 3 162 9 420 Staff costs paid (261 945) (248 447) Other operating expenses paid (292 855) (194 012) CASH (OUTFLOW) / INFLOW FROM OPERATING ACTIVITIES BEFORE (93 619) 368 018 CHANGES IN OPERATING ASSETS AND LIABILITIES

CHANGES IN OPERATING ASSETS AND LIABILITIES Net increase in minimum reserve deposits with the Central Bank of the (19 764) (65 224) Russian Federation Net increase in due from banks (637 570) (3 193 986) Net increase in loans to customers (1 842 252) (1 628 210) Net decrease in financial assets at fair value through profit or loss 103 252 41 038 Net (increase)/decrease in other assets (64 852) 10 868 Net (decrease)/increase in other borrowed funds (902 668) 902 668 Net increase in deposits by banks 2 877 900 2 829 258 Net increase in deposits by customers 1 236 893 604 379 Net increase/(decrease) in other liabilities 12 983 (4 346) NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES BEFORE 670 303 (135 537) TAXATION

Income tax paid (85 731) (37 958) NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 584 572 (173 495)

IBA-MOSCOW ANNUAL REPORT 2010 55 STATEMENT OF CASH FLOWS (continuation)

FOR THE YEAR ENDED DECEMBER 31, 2010 (in thousands of Russian Rubles

December 31, 2009 Notes December 31, 2010 Reclassified

CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment 14 (10 482) (15 169) Proceeds from disposal of property end equipment 5 473 5 321 NET CASH OUTFLOW FROM INVESTING ACTIVITIES (5 009) (9 848)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from subordinated debt received 162 777 110 323 NET CASH INFLOW FROM FINANCING ACTIVITIES 162 777 110 323

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH (14) - EQUIVALENTS

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 742 326 (73 020)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1 815 175 1 888 195

CASH AND CASH EQUIVALENTS, END OF YEAR 9 2 557 501 1 815 175

On behalf of the Management Board:

F.R. Abdullaev V.P. Onushkevich Chairman of the Management Board Chief Accountant June 30, 2011 June 30, 2011 Moscow Moscow

The notes on pages 57 — 96 form an integral part of these financial statements.

56 Financial Statements NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2010 (in thousands of Russian Rubles)

1. ORGANIZATION The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery International Bank of Azerbaijan — Moscow Limited or settlement within 12 months after the statement of Liability Company (the “Bank”) is a limited liability company, financial position date (current) and more than 12 months which was incorporated in the Russian Federation (the after the statement of financial position date (non-current) “RF”) in 2002. The Bank is regulated by the Central Bank for financial assets and liabilities is presented in Note 23. of the Russian Federation (the “CBR”) and conducts its Financial assets and financial liabilities are offset business under general license number 3395. The Bank and the net amount reported in the statement of financial is a member of the obligatory deposit insurance scheme position only when there is a legally enforceable right to as approved by Federal Law No. 177-FZ On Insurance offset the recognized amounts and there is an intention of Individual Bank Deposits in the Russian Federation to settle on a net basis, or to realize the assets and dated December 23, 2003. The State Deposit Insurance settle the liability simultaneously. Income and expense Agency guarantees the repayment of 100% of individual is not offset in the income statement unless required or deposits of up to RUB 700 thousand per individual in permitted by any accounting standard or interpretation, case of withdrawal of a Bank’s license or a CBRF imposed and as specifically disclosed in the accounting policies of moratorium on payments. the Bank. The Bank’s primary business consists of commercial The principal accounting policies are set out below. activities, trading with securities, foreign currencies, originating loans and guarantees and money transfers. Recognition of interest income and expense The registered office of the Bank is located at Interest income and expense are recognized on an 6 Tverskaya St., Bld.2, Moscow, 125009, Russian accrual basis using the effective interest method. The Federation. effective interest method is a method of calculating the As at December 31, 2010 the Bank had 2 branches amortized cost of a financial asset or a financial liability operating in the RF (December 31, 2009: 2). (or group of financial assets or financial liabilities) and of The sole participant of the Bank is International Bank allocating the interest income or interest expense over the of Azerbaijan Republic (the “Parent” or the “Participant”). relevant period. These financial statements were authorized by the The effective interest rate is the rate that exactly management board for issue on June 30, 2011. discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other 2. SIGNIFICANT ACCOUNTING premiums or discounts) through the expected life of the POLICIES debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Statement of Compliance Income is recognized on an effective interest basis These financial statements have been prepared for debt instruments other than those financial assets in accordance with International Financial Reporting classified as at FVTPL. Standards (“IFRS”) issued by the International Accounting Once a financial asset or a group of similar financial Standards Board (“IASB”) and Interpretations issued assets has been written down (partly written down) as a by the International Financial Reporting Interpretations result of an impairment loss, interest income is thereafter Committee (“IFRIC”). recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the Other basis of presentation criteria impairment loss. These financial statements have been prepared on Interest earned on assets at fair value is classified the assumption that the Bank is a going concern and will within interest income. continue in operation for the foreseeable future. Recognition of fee and commission income These financial statements are presented in thousands Loan origination fees are deferred, together with the of Russian Rubles (“RUB thousand”), unless otherwise related direct costs, and recognized as an adjustment to indicated. These financial statements have been prepared the effective interest rate of the loan. Where it is probable on the historical cost basis except for certain properties that a loan commitment will lead to a specific lending and financial instruments that are measured at revalued arrangement, the loan commitment fees are deferred, amounts or fair values, as explained in the accounting together with the related direct costs, and recognized as policies below. Historical cost is generally based on the fair an adjustment to the effective interest rate of the resulting value of the consideration given in exchange for assets. loan. Where it is unlikely that a loan commitment will lead The Bank maintains its accounting records in to a specific lending arrangement, the loan commitment accordance with Russian Accounting Standards (“RAS”). fees are recognized in profit or loss over the remaining These financial statements have been prepared from the period of the loan commitment. Where a loan commitment statutory accounting records and have been adjusted to expires without resulting in a loan, the loan commitment conform with IFRS. fee is recognized in profit or loss on expiry. Loan servicing fees are recognized as revenue as the services are

IBA-MOSCOW ANNUAL REPORT 2010 57 provided. Loan syndication fees are recognized in profit or is included in the ‘other gains and losses’ line item. Fair loss when the syndication has been completed. value is determined in the manner described in Note 21. All other commissions are recognized when services Loans and receivables are provided. Trade receivables, loans, and other receivables that Financial instruments have fixed or determinable payments that are not quoted The Bank recognizes financial assets and liabilities in in an active market are classified as loans to customers or its statement of financial position when it becomes a party are included within other assets as other financial assets. to the contractual obligation of the instrument. Regular Loans and receivables are measured at amortized cost way purchases and sales of financial assets and liabilities using the effective interest method, less any impairment. are recognized using settlement date accounting. Interest income is recognized by applying the effective Financial assets and financial liabilities are initially interest rate, except for short-term receivables when the measured at fair value. Transaction costs that are directly recognition of interest would be immaterial. attributable to the acquisition or issue of financial assets Impairment of financial assets and financial liabilities (other than financial assets and Financial assets, other than those at FVTPL, are financial liabilities at fair value through profit or loss) are assessed for indicators of impairment at the end of each added to or deducted from the fair value of the financial reporting period. Financial assets are considered to be assets or financial liabilities, as appropriate, on initial impaired when there is objective evidence that, as a recognition. Transaction costs directly attributable to the result of one or more events that occurred after the initial acquisition of financial assets or financial liabilities at fair recognition of the financial asset, the estimated future value through profit or loss are recognized immediately in cash flows of the investment have been affected. profit or loss. For all other financial assets, objective evidence of Financial assets impairment could include: ‹‹Significant financial difficulty of the issuer or Financial assets are classified into the following counterparty; or specified categories: financial assets ‘at fair value through ‹‹Breach of contract, such as default or delinquency profit or loss’ (FVTPL), ‘held-to-maturity’ investments, in interest or principal payments; ‘available-for-sale’ (AFS) financial assets and ‘loans and ‹‹Default or delinquency in interest or principal receivables’. The classification depends on the nature and payments; or purpose of the financial assets and is determined at the ‹‹It becoming probable that the borrower will enter time of initial recognition. bankruptcy or financial re-organization; Financial assets at FVTPL ‹‹Disappearance of an active market for that Financial assets are classified as at FVTPL when the financial asset because of financial difficulties. financial asset is either held for trading or it is designated For certain categories of financial assets, such as as at FVTPL. loans to customers and other financial assets, assets A financial asset is classified as held for trading if: that are assessed not to be impaired individually are, in ‹‹It has been acquired principally for the purpose of addition, assessed for impairment on a collective basis. selling it in the near term; or Objective evidence of impairment for a portfolio of loans ‹‹On initial recognition it is part of a portfolio of and receivables could include the Bank’s past experience identified financial instruments that the Bank manages of collecting payments, an increase in the number of together and has a recent actual pattern of short-term delayed payments in the portfolio, as well as observable profit-taking; or changes in national or local economic conditions that ‹‹It is a derivative that is not designated and effective correlate with default on receivables. as a hedging instrument. For financial assets carried at amortized cost, A financial asset other than a financial asset held the amount of the impairment loss recognized is the for trading may be designated as at FVTPL upon initial difference between the asset’s carrying amount and the recognition if: present value of estimated future cash flows, discounted ‹‹Such designation eliminates or significantly at the financial asset’s original effective interest rate. reduces a measurement or recognition inconsistency that For financial assets carried at cost, the amount of the would otherwise arise; or impairment loss is measured as the difference between ‹‹The financial asset forms part of a group of the asset’s carrying amount and the present value of the financial assets or financial liabilities or both, which is estimated future cash flows discounted at the current managed and its performance is evaluated on a fair market rate of return for a similar financial asset. Such value basis, in accordance with the Bank's documented impairment loss will not be reversed in subsequent risk management or investment strategy, and information periods. about the grouping is provided internally on that basis; or The carrying amount of the financial asset is reduced ‹‹It forms part of a contract containing one or more by the impairment loss directly for all financial assets with embedded derivatives, and IAS 39 Financial Instruments: the exception of loans and receivables, where the carrying Recognition and Measurement permits the entire amount is reduced through the use of an allowance combined contract (asset or liability) to be designated as account. When a loan or a receivable is considered at FVTPL. uncollectible, it is written off against the allowance Financial assets at FVTPL are stated at fair value, with account. Subsequent recoveries of amounts previously any gains or losses arising on remeasurement recognized written off are credited against the allowance account. in profit or loss. The net gain or loss incorporates any Changes in the carrying amount of the allowance account dividend or interest earned on the financial asset and are recognized in profit or loss. 58 Financial Statements For financial assets measured at amortized cost, if, in rewards have been neither retained nor transferred, the a subsequent period, the amount of the impairment loss Bank assesses whether or not it has retained control decreases and the decrease can be related objectively to of the asset. If it has not retained control, the asset is an event occurring after the impairment was recognized, derecognized. Where the Bank retained control of the the previously recognized impairment loss is reversed asset, it continues to recognize the asset to the extent of through profit or loss to the extent that the carrying amount its continuing involvement. of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been Financial liabilities and equity instruments issued had the impairment not been recognized. Classification as debt or equity Renegotiated loans Debt and equity instruments are classified as either Where possible, the Bank seeks to restructure loans financial liabilities or as equity in accordance with the rather than to take possession of collateral. substance of the contractual arrangements and the This may involve extending the payment arrangements definitions of a financial liability and an equity instrument. and the agreement of new loan conditions. Once the terms Equity instruments have been renegotiated any impairment is measured An equity instrument is any contract that evidences a using the original effective interest rate as calculated residual interest in the assets of an entity after deducting before the modification of terms and the loan is no longer all of its liabilities. Equity instruments issued by the Bank considered past due. Management continually reviews are recognised at the proceeds received, net of direct renegotiated loans to ensure that all criteria are met and issue costs. that future payments are likely to occur. The loans continue Repurchase of the Bank’s own equity instruments is to be subject to an individual or collective impairment recognized and deducted directly in equity. No gain or loss assessment, calculated using the loan’s original effective is recognized in profit or loss on the purchase, sale, issue interest rate. or cancellation of the Bank’s own equity instruments. Write off of loans and receivables Financial liabilities Loans and receivables are written off against Financial liabilities are classified as either financial allowance for impairment losses when deemed liabilities ‘at FVTPL’ or ‘other financial liabilities’. uncollectible, including through repossession of collateral. Loans and receivables are written off after management Other financial liabilities has exercised all possibilities available to collect amounts Other financial liabilities, including deposits by banks due to the Bank and after the Bank has sold all available and customers, other borrowed funds and subordinated collateral. Subsequent recoveries of amounts previously debt, are initially measured at fair value, net of transaction written off are reflected as an offset to the charge for costs. impairment of financial assets in the income statement in Other financial liabilities are subsequently measured the period of recovery. at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. Derecognition of financial assets The effective interest method is a method of A financial asset (or, where applicable a part of the calculating the amortized cost of a financial liability and of financial asset or part of a group of similar financial allocating interest expense over the relevant period. The assets) is derecognized where: effective interest rate is the rate that exactly discounts ‹‹Rights to receive cash flows from the asset have estimated future cash payments through the expected life expired; of the financial liability, or (where appropriate) a shorter ‹‹The Bank has transferred its rights to receive cash period, to the net carrying amount on initial recognition. flows from the asset or retained the right to receive cash flows from the asset, but has assumed an obligation to pay Derecognition of financial liabilities them in full without material delay to a third party under a The Bank derecognizes financial liabilities when, ‘pass-through’ arrangement; and and only when, the Bank’s obligations are discharged, ‹‹The Bank either (a) has transferred substantially cancelled or they expire. Where an existing financial all the risks and rewards of the asset, or (b) has neither liability is replaced by another from the same lender on transferred nor retained substantially all the risks and substantially different terms, or the terms of an existing rewards of the asset, but has transferred control of the liability are substantially modified, such an exchange or asset. modification is treated as a derecognition of the original A financial asset is derecognized when it has been liability and the recognition of a new liability. The difference transferred and the transfer qualifies for derecognition. between the carrying amount of the financial liability A transfer required that the Bank either (a) transfers the derecognized and the consideration paid and payable is contractual rights to receive the asset’s cash flows; or recognized in profit and loss. (b) retains the right to receive the asset’s cash flows but Financial guarantee contracts assumes a contractual obligation to pay those cash flows A financial guarantee contract is a contract that to a third party. After a transfer, the Bank reassesses the requires the issuer to make specified payments to extent to which it has retained the risks and rewards of reimburse the holder for a loss it incurs because a ownership of the transferred asset. If substantially all the specified debtor fails to make payments when due in risks and rewards have been retained, the asset remains accordance with the terms of a debt instrument. in the statement of financial position. If substantially Financial guarantee contracts issued by the Bank are all of the risks and rewards have been transferred, the initially measured at their fair values and, if not designated asset is derecognized. If substantially all the risks and as at FVTPL, are subsequently measured at the higher of:

IBA-MOSCOW ANNUAL REPORT 2010 59 ‹‹The amount of the obligation under the contract, of the decrease previously expensed. A decrease in the as determined in accordance with IAS 37 Provisions, carrying amount arising on the revaluation of such land Contingent Liabilities and Contingent Assets; and and buildings is recognized in profit or loss to the extent ‹‹The amount initially recognized less, where that it exceeds the balance, if any, held in the properties appropriate, cumulative amortization recognized in revaluation reserve relating to a previous revaluation of accordance with the revenue recognition policies. that asset. Depreciation on revalued buildings is recognized in Cash and cash equivalents profit or loss. On the subsequent sale or retirement of a In the statement of cash flows the cash and cash revalued property, the attributable revaluation surplus equivalents, include cash on hand, unrestricted balances remaining in the properties revaluation reserve is on correspondent and term deposit accounts with the transferred directly to retained earnings. Central Bank of the Russian Federation and amounts due Freehold land is not depreciated. from the credit institutions, which may be converted to Fixtures and equipment are stated at cost less cash within a short period of time (less than 90 days). accumulated depreciation and accumulated impairment Leases losses. Leases are classified as finance leases whenever the Depreciation is recognized so as to write off the contract terms of the lease transfer substantially all of the cost or valuation of assets (other than freehold land and risks and rewards of ownership to the lessee. All other properties under construction) less their residual values leases are classified as operating leases. over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation The Bank as lessee method are reviewed at the end of each reporting period, Assets held under finance leases are initially with the effect of any changes in estimate accounted for recognized as assets of the Bank at their fair value at the on a prospective basis at the following annual rates: inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial Buildings and other real estate 2.5% position as a finance lease obligation. Furniture and computer equipment 20% Lease payments are apportioned between finance expenses and reduction of the lease obligation so as Assets held under finance leases are depreciated over to achieve a constant rate of interest on the remaining their expected useful lives on the same basis as owned balance of the liability. Finance expenses are recognized assets or, where shorter, the term of the relevant lease. in profit and loss. Contingent rentals are recognized as An item of property and equipment is derecognized expenses in the periods in which they are incurred. upon disposal or when no future economic benefits are Operating lease payments are recognized as an expected to arise from the continued use of the asset. expense on a straight-line basis over the lease term, except Any gain or loss arising on the disposal or retirement of where another systematic basis is more representative an item of property and equipment is determined as the of the time pattern in which economic benefits from the difference between the sales proceeds and the carrying leased asset are consumed. Contingent rentals arising amount of the asset and is recognized in profit or loss. under operating leases are recognized as an expense in Impairment of tangible and intangible assets the period in which they are incurred. At the end of each reporting period, the Bank reviews In the event that lease incentives are received to enter the carrying amounts of its tangible and intangible assets into operating leases, such incentives are recognized as a to determine whether there is any indication that those liability. The aggregate benefit of incentives is recognized assets have suffered an impairment loss. If any such as a reduction of rental expense on a straight-line indication exists, the recoverable amount of the asset basis, except where another systematic basis is more is estimated in order to determine the extent of the representative of the time pattern in which economic impairment loss (if any). benefits from the leased asset are consumed. Recoverable amount is the higher of fair value less Property and equipment costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their Buildings and other real estate held for use in present value using a pre-tax discount rate that reflects the supply of services, or for administrative purposes, current market assessments of the time value of money are stated in the statement of financial position at and the risks specific to the asset for which the estimates their revalued amounts, being the fair value at the of future cash flows have not been adjusted. date of revaluation, less any subsequent accumulated If the recoverable amount of an asset is estimated depreciation and subsequent accumulated impairment to be less than its carrying amount, the carrying amount losses. Revaluations are performed with sufficient of the asset is reduced to its recoverable amount. An regularity such that the carrying amounts do not differ impairment loss is recognized immediately in profit or materially from those that would be determined using fair loss, unless the relevant asset is carried at a revalued values at the end of each reporting period. amount, in which case the impairment loss is treated as a Any revaluation increase arising on the revaluation revaluation decrease. of such land and buildings is recognized in other Where an impairment loss subsequently reverses, comprehensive income and accumulated in equity, except the carrying amount of the asset is increased to the to the extent that it reverses a revaluation decrease for the revised estimate of its recoverable amount, but so that same asset previously recognized in profit or loss, in which the increased carrying amount does not exceed the case the increase is credited to profit or loss to the extent carrying amount that would have been determined had 60 Financial Statements no impairment loss been recognized for the asset in prior Provisions years. A reversal of an impairment loss is recognized Provisions are recognized when the Bank has a immediately in profit or loss, unless the relevant asset is present obligation (legal or constructive) as a result of a carried at a revalued amount, in which case the reversal of past event, it is probable that the Bank will be required to the impairment loss is treated as a revaluation increase. settle the obligation, and a reliable estimate can be made Taxation of the amount of the obligation. The amount recognized as a provision is the best Income tax expense represents the sum of the tax estimate of the consideration required to settle the currently payable and deferred tax. present obligation at the end of the reporting period, taking Current income tax into account the risks and uncertainties surrounding The tax currently payable is based on taxable profit for the obligation. When a provision is measured using the the year. Taxable profit differs from profit as reported in the cash flows estimated to settle the present obligation, its statement of comprehensive income because of items of carrying amount is the present value of those cash flows income or expense that are taxable or deductible in other (where the effect of the time value of money is material). years and items that are never taxable or deductible. The When some or all of the economic benefits required Bank's liability for current tax is calculated using tax rates to settle a provision are expected to be recovered from a that have been enacted. third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and Deferred income tax the amount of the receivable can be measured reliably. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in Contingencies the financial statements and the corresponding tax bases Contingent liabilities are not recognized in the used in the computation of taxable profit. Deferred tax statement of financial position but are disclosed in the liabilities are generally recognized for all taxable temporary financial statements unless the possibility of any outflow in differences. Deferred tax assets are generally recognized settlement is remote. A contingent asset is not recognized for all deductible temporary differences to the extent in the statement of financial position but disclosed when that it is probable that taxable profits will be available an inflow of economic benefits is probable. against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities Fiduciary activities are not recognised if the temporary difference arises from The Bank provides trustee services to its customers. goodwill or from the initial recognition (other than in a The Bank also provides depositary services to its business combination) of other assets and liabilities in a customers which include transactions with securities on transaction that affects neither the taxable profit nor the their depositary accounts. Assets accepted and liabilities accounting profit. incurred under the fiduciary activities are not included The carrying amount of deferred tax assets is reviewed in the Bank’s financial statements. The Bank accepts at the end of each reporting period and reduced to the the operational risk on these activities, but the Bank’s extent that it is no longer probable that sufficient taxable customers bear the credit and market risks associated profits will be available to allow all or part of the asset to with such operations. Revenue for provision of trustee be recovered. services is recognized as services are provided. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in Foreign currencies which the liability is settled or the asset realized, based The financial statements are presented in Russian on tax rates (and tax laws) that have been enacted or rubles which is the Bank’s functional currency and the substantively enacted by the end of the reporting period. currency of presentation. In preparing the financial The measurement of deferred tax liabilities and assets statements transactions in currencies other than the reflects the tax consequences that would follow from entity’s functional currency (foreign currencies) are the manner in which the Bank expects, at the end of the recorded at the rates of exchange prevailing at the dates reporting period, to recover or settle the carrying amount of the transactions. At the end of each reporting period, of its assets and liabilities. monetary items denominated in foreign currencies are Current and deferred tax for the year retranslated at the rates prevailing at that date. Non- monetary items carried at fair value that are denominated Current and deferred tax are recognized in profit or in foreign currencies are retranslated at the rates prevailing loss, except when they relate to items that are recognized at the date when the fair value was determined. Non- in other comprehensive income or directly in equity, monetary items that are measured in terms of historical in which case, the current and deferred tax are also cost in a foreign currency are not retranslated. recognized in other comprehensive income or directly in equity respectively. Operating taxes The Russian Federation also has various other taxes, which are assessed on the Bank’s activities. These taxes are included as a component of operating expenses in the income statement.

IBA-MOSCOW ANNUAL REPORT 2010 61 The exchange rates used by the Bank in the highly susceptible to change from period to period as the preparation of the financial statements as at year-end are assumptions about future default rates and valuation of as follows: potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Bank’s December, 31 December, 31 estimated losses and actual losses would require the 2010 2009 Bank to record provisions which could have a material impact on its financial statements in future periods. The Bank uses management’s judgment to estimate the amount of any impairment loss in cases where a RUB/ US Dollar 30.4769 30.2442 borrower has financial difficulties and there are few RUB/ Euro 40.3331 43.3883 available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on past performance, past customer Collateral behavior, observable data indicating an adverse change in The Bank obtains collateral in respect of customer the payment status of borrowers in a group, and national liabilities where this is considered appropriate. The or local economic conditions that correlate with defaults collateral normally takes the form of a lien over the on assets in the group. Management uses estimates customer’s assets and gives the Bank a claim on these based on historical loss experience for assets with credit assets for both existing and future customer liabilities. risk characteristics and objective evidence of impairment similar to those in the group of loans. The Bank uses Equity reserves management’s judgment to adjust observable data for The reserves recorded in equity (other comprehensive a group of loans to reflect current circumstances not income) on the Bank’s statement of financial position reflected in historical data. include property revaluation reserve, which is used to The allowances for impairment of financial assets record effects of property revaluations, net of deferred in the financial statements have been determined on taxes. the basis of existing economic and political conditions. The Bank is not in a position to predict what changes in Critical accounting judgments and key sources of conditions will take place in the Russian Federation and estimation uncertainties what effect such changes might have on the adequacy of In the application of the Bank’s accounting policies the allowances for impairment of financial assets in future management is required to make judgements, estimates periods. and assumptions about the carrying amounts of assets As at December 31, 2010 the gross loans to customers and liabilities that are not readily apparent from other totaled RUB 11 824 973 thousand and allowance for sources. The estimates and associated assumptions are impairment losses amounted to RUB 1 261 914 thousand based on historical experience and other factors that are (December 31, 2009: RUB 9 491 113 thousand and RUB considered to be relevant. Actual results may differ from 1 044 105 thousand, respectively). these estimates. Property and equipment carried at revalued The estimates and underlying assumptions are amounts reviewed on an ongoing basis. Revisions to accounting Buildings and real estate are measured at revalued estimates are recognized in the period in which the amounts. The date of the latest appraisal was December estimate is revised if the revision affects only that period, 31, 2010. The next revaluation is preliminary scheduled or in the period of the revision and future periods if the as at December 31, 2011. revision affects both current and future periods. The carrying value of revalued property amounted Critical judgements in applying accounting policies to RUB 420 087 thousand as at December 31, 2010 The following are the critical judgements, apart from (December 31, 2009: RUB 419 628 thousand). those involving estimations, that management have made in the process of applying the Bank’s accounting policies Recoverability of deferred tax assets and that have the most significant effect on the amounts The management of the Bank is confident that no recognized in the financial statements. valuation allowance against deferred tax assets at the reporting date is considered necessary, because it is more Key sources of estimation uncertainty likely than the deferred tax asset will be fully realized. The The following are the key assumptions concerning the carrying value of deferred tax assets amounted to RUB 3 future, and other key sources of estimation uncertainty at 064 thousand as at December 31, 2010 (December 31, the end of the reporting period, that have a significant risk 2009: RUB Nil thousand). of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Standards and Interpretations affecting amounts Impairment of loans and receivables reported in the current period (and/or prior The Bank regularly reviews its loans and other periods) financial to assess for impairment. The Bank’s loan The following new and revised Standards and impairment provisions are established to recognize Interpretations have been adopted in the current period incurred impairment losses in its portfolio of loans to and have affected the amounts reported in these financial customers. The Bank considers accounting estimates statements. Details of other Standards and Interpretations related to allowance for impairment of loans customers a adopted in these financial statements but that have had key source of estimation uncertainty because (i) they are no effect on the amounts reported are set out in section 62 Financial Statements New Standards and Interpretations affecting the reported results or financial position. New and revised IFRSs affecting presentation and disclosure only

Amendments to IFRS 5 Non-current The amendments to IFRS 5 clarify that the disclosure requirements in IFRSs other than Assets Held for Sale and Discontinued IFRS 5 do not apply to non-current assets (or disposal groups) classified as held for sale or Operations (as part of Improvements to discontinued operations unless those IFRSs require (i) specific disclosures in respect of non- IFRSs issued in 2009) current assets (or disposal groups) classified as held for sale or discontinued operations, or (ii) disclosures about measurement of assets and liabilities within a disposal group that are not within the scope of the measurement requirement of IFRS 5 and the disclosures are not already provided in the financial statements. These amendments had no effect on amounts reported in the financial statements.

Amendments to IAS 1 Presentation The amendments to IAS 1 clarify that the potential settlement of a liability by the issue of of Financial Statements (as part of equity is not relevant to its classification as current or noncurrent. These amendments had Improvements to IFRSs issued in 2009) no material effect on amounts reported in the financial statements.

Amendments to IAS 7 Statement of The amendments to IAS 7 specify that only expenditures that result in a recognized asset in Cash Flows (as part of Improvements to the statement of financial position can be classified as investing activities in the statement IFRSs issued in 2009) of cash flows. These amendments had no material effect on amounts reported in the financial statements.

Amendments to IFRS 7 Financial The amendments to IFRS 7 clarify the required level of disclosures about credit risk and Instruments: Disclosures (as part of collateral held and provide relief from disclosures previously required regarding renegotiated Improvements to IFRSs issued in 2010) loans. The Bank has applied the amendments in advance of their effective date (annual periods beginning on or after January 1, 2011). The amendments have been applied retrospectively.

Amendments to IAS 1 Presentation The amendments to IAS 1 clarify that an entity may choose to present the required analysis of Financial Statements (as part of of items of other comprehensive income either in the statement of changes in equity or in Improvements to IFRSs issued in 2010) the notes to the financial statements.

New and revised IFRSs applied with no material effect on the financial statements The following new and revised Standards and Interpretations have also been adopted in these financial statements. Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements.

Amendments to IFRS 1 First-time The amendments provide two exemptions when adopting IFRSs for the first time relating to Adoption of International Financial oil and gas assets, and the determination as to whether an arrangement contains a lease. Reporting Standards — Additional Exemptions for First-time Adopters

Amendments to IFRS 2 Share-based The amendments clarify the scope of IFRS 2, as well as the accounting for group cash-settled Payment — Group Cash-settled Share- share-based payment transactions in the separate (or individual) financial statements of an based Payment Transactions entity receiving the goods or services when another group entity or shareholder has the obligation to settle the award.

Amendments to IFRS 5 Non-current The amendments clarify that all the assets and liabilities of a subsidiary should be classified Assets Held for Sale and Discontinued as held for sale when the Bank is committed to a sale plan involving loss of control of Operations (as part of Improvements to that subsidiary, regardless of whether the Bank will retain a non-controlling interest in the IFRSs issued in 2008) subsidiary after the sale.

IAS 39 Financial Instruments: The amendments provide clarification on two aspects of hedge accounting: identifying Recognition and Measurement — inflation as a hedged risk or portion, and hedging with options. Eligible Hedged Items

IFRIC 17 Distributions of Non-cash The Interpretation provides guidance on the appropriate accounting treatment when an Assets to Owners entity distributes assets other than cash as dividends to its shareholders.

IFRIC 18 Transfers of Assets from The Interpretation addresses the accounting by recipients for transfers of property, plant Customers and equipment from ‘customers and concludes that when the item of property, plant and equipment transferred meets the definition of an asset from the perspective of the recipient, the recipient should recognize the asset at its fair value on the date of the transfer, with the credit being recognized as revenue in accordance with IAS 18 Revenue.

Improvements to IFRSs issued in 2009 Except for the amendments to IFRS 5, IAS 1 and IAS 7 described earlier, the application of Improvements to IFRSs issued in 2009 has not had any material effect on amounts reported in the financial statements.

IBA-MOSCOW ANNUAL REPORT 2010 63 New and revised IFRSs in issue but not yet effective The Bank has not applied the following new and revised IFRSs that have been issued but are not yet effective:

Amendments to IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters1 Amendments to IFRS 7 Disclosures — Transfers of Financial Assets2 IFRS 9 (revised in 2010) Financial Instruments3 IAS 24 (revised in 2009) Related Party Disclosures4 Amendments to IAS 32 Classification of Rights Issues5 Amendments to IFRIC 14 Prepayments of a Minimum Funding Requirement4 IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments1 Improvements to IFRSs issued in 2010 (except for the amendments to IFRS 3(2008), IFRS 7, IAS 1 and IAS 28 described earlier in section 2.1)6

1 Effective for annual periods beginning on or after July 1, 2010. 2 Effective for annual periods beginning on or after July 1, 2011. 3 Effective for annual periods beginning on or after January 1, 2013. 4 Effective for annual periods beginning on or after January 1, 2011. 5 Effective for annual periods beginning on or after February 1, 2010. 6 Effective for annual periods beginning on or after July 1, 2010 and January 1, 2011, as appropriate.

IFRS 9 Financial Instruments issued in November and financial liabilities. However, it is not practicable 2009 and amended in October 2010 introduces new to provide a reasonable estimate of that effect until a requirements for the classification and measurement detailed review has been completed. of financial assets and financial liabilities and for The amendments to IFRS 7 titled Disclosures — derecognition. Transfers of Financial Assets increase the disclosure IFRS 9 requires all recognized financial assets that requirements for transactions involving transfers of are within the scope of IAS 39 Financial Instruments: financial assets. These amendments are intended to Recognition and Measurement to be subsequently provide greater transparency around risk exposures when measured at amortized cost or fair value. Specifically, a financial asset is transferred but the transferor retains debt investments that are held within a business model some level of continuing exposure in the asset. The whose objective is to collect the contractual cash flows, amendments also require disclosures where transfers of and that have contractual cash flows that are solely financial assets are not evenly distributed throughout the payments of principal and interest on the principal period. outstanding are generally measured at amortized cost at Management does not anticipate that these the end of subsequent accounting periods. All other debt amendments to IFRS 7 will have a significant effect on investments and equity investments are measured at their the Bank’s disclosures. However, if the Bank enters into fair values at the end of subsequent accounting periods. other types of transfers of financial assets in the future, The most significant effect of IFRS 9 regarding the disclosures regarding those transfers may be affected. classification and measurement of financial liabilities IAS 24 Related Party Disclosures (as revised in 2009) relates to the accounting for changes in fair value of a modifies the definition of a related party and simplifies financial liability (designated as at fair value through profit disclosures for government-related entities. or loss) attributable to changes in the credit risk of that The amendments to IAS 32 titled Classification of liability. Specifically, under IFRS 9, for financial liabilities Rights Issues address the classification of certain rights that are designated as at fair value through profit or loss, issues denominated in a foreign currency as either an the amount of change in the fair value of the financial equity instrument or as a financial liability. To date, the liability that is attributable to changes in the credit risk of Bank has not entered into any arrangements that would that liability is recognized in other comprehensive income, fall within the scope of the amendments. However, if unless the recognition of the effects of changes in the the Bank does enter into any rights issues within the liability's credit risk in other comprehensive income would scope of the amendments in future accounting periods, create or enlarge an accounting mismatch in profit or loss. the amendments to IAS 32 will have an impact on the Changes in fair value attributable to a financial liability's classification of those rights issues. credit risk are not subsequently reclassified to profit or IFRIC 19 provides guidance regarding the accounting loss. Previously, under IAS 39, the entire amount of the for the extinguishment of a financial liability by the issue change in the fair value of the financial liability designated of equity instruments. To date, the Bank has not entered as at fair value through profit or loss was recognized in into transactions of this nature. However, if the Bank does profit or loss. enter into any such transactions in the future, IFRIC 19 will IFRS 9 is effective for annual periods beginning on or affect the required accounting. In particular, under IFRIC after January 1, 2013, with earlier application permitted. 19, equity instruments issued under such arrangements Management anticipates that IFRS 9 that will be will be measured at their fair value, and any difference adopted in the Bank's financial statements for the annual between the carrying amount of the financial liability period beginning January 1, 2013 and that the application extinguished and the fair value of equity instruments of the new Standard will have a significant impact on issued will be recognized in profit or loss. amounts reported in respect of the Bank’ financial assets 64 Financial Statements 3. RECLASSIFICATIONS Certain reclassifications have been made to the financial statements as at December 31, 2009 and for the year then ended to conform to the presentation as at December 31, 2010 and for the year then ended as current year presentation provides better view of the financial position of the Bank. Statement of financial position:

As previously reported Reclassification amount As reclassified December 31, 2009 December 31, 2009 December 31, 2009

Cash and cash equivalents 4 180 325 (4 180 325) - Cash and balances with the Central Bank of the Russian - 555 015 555 015 Federation Due from banks 920 246 3 625 310 4 545 556

Statement of cash flows:

As previously reported Reclassification amount As reclassified December 31, 2009 December 31, 2009 December 31, 2009

Due from banks (828 836) (2 365 150) (3 193 986) Cash and cash equivalents, 4 180 325 (2 365 150) 1 815 175 end of year

IBA-MOSCOW ANNUAL REPORT 2010 65 4. NET INTEREST INCOME

Year ended Year ended December 31, 2010 December 31, 2009

Interest income comprises: Interest income on financial assets recorded at amortized cost, including: ‹‹interest income on unimpaired loans 1 788 317 1 217 380 ‹‹interest income on impaired loans 98 046 4 012 Interest income on financial assets at fair value through profit and loss 12 731 25 297 Total interest income 1 899 094 1 250 701

Interest income on financial assets recorded at amortized cost comprises: Interest on loans to customers 1 414 073 1 196 434 Interest on due from banks 472 290 28 970 Total interest income on financial assets recorded at amortized cost 1 886 363 1 221 392

Interest income on financial assets at fair value through profit and loss: Interest on financial assets at fair value through profit or loss 12 731 25 297 Total interest income on financial assets at fair value through profit and loss 12 731 25 297

Interest expense comprises: Interest expense on financial liabilities recorded at amortized cost (1 231 671) (673 030) Total interest expense (1 231 671) (673 030)

Interest expense on financial liabilities recorded at amortized cost comprises: Interest on deposits by banks (871 347) (393 410) Interest on deposits by customers (312 891) (254 117) Interest on subordinated debt (47 433) (25 503) Total interest expense on financial liabilities recorded at amortized cost (1 231 671) (673 030) Net interest income before provision for impairment losses on 667 423 577 671 interest bearing assets

5. ALLOWANCE FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS The movements in provision for impairment losses on interest bearing assets were as follows:

Loans to customers

December 31, 2008 (585 353) Additional provisions recognized (458 752) December 31, 2009 (1 044 105) Additional provisions recognized (217 809) December 31, 2010 (1 261 914)

66 Financial Statements 6. FEE AND COMMISSION INCOME AND EXPENSE Fee and commission income and expense comprise:

Year ended Year ended December 31, December 31, 2010 2009

Fee and commission income: Settlements 113 697 91 012 Plastic cards 26 730 32 192 Agency fee on operations with securities 24 454 - Cash transactions 19 697 14 645 Other 13 477 13 342 Total fee and commission income 198 055 151 192

Fee and commission expense: Settlements (30 661) (30 098) Plastic cards (11 760) (14 729) Other (385) (3 528) Total fees and commissions expense (42 806) (48 355)

7. OPERATING EXPENSES Operating expenses comprise:

Year ended Year ended December 31, 2010 December, 31 2009

Staff costs (261 945) (214 908) Professional services (79 687) (17 544) Operating leases (36 278) (32 459) Security services (30 878) (26 408) Unified social tax (30 741) (27 947) Taxes, other than income tax (29 858) (32 294) Property and equipment maintenance (25 514) (14 574) Depreciation (23 202) (22 526) Insurance (11 228) (8 751) Telecommunications (8 854) (14 150) Advertising (7 080) (9 541) Business trips (3 393) (3 582) Charity (2 675) (1 566) Other (31 772) (27 230) Total operating expenses (583 105) (453 480)

IBA-MOSCOW ANNUAL REPORT 2010 67 8. INCOME TAXES The Bank provides for income taxes based on the tax accounts maintained and prepared in accordance with the tax regulations of the RF. The Bank is subject to certain permanent tax differences due to the non-tax deductibility of certain expenses. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at December 31, 2010 relate mostly to different methods of income and expense recognition as well as to carrying values of certain assets and liabilities. The statutory tax rate is 20%. Temporary differences as at December 31, 2010 comprise:

December 31, 2010 December 31, 2009

Deferred tax assets/(liabilities) in relation to: Loans to customers 60 672 41 885 Other assets 8 888 14 702 Other liabilities 970 1 407 Property and equipment (66 768) (68 033) Subordinated debt (698) (2 175) Other borrowed funds - (2 249)

Net deferred tax assets/(liabilities) 3 064 (14 463)

The effective tax rate reconciliation is as follows for the year ended December 31, 2010:

Year ended Year ended December 31, 2010 December, 31 2009

Profit before income tax 106 717 51 930 Tax at the statutory tax rate (20%) (21 343) (10 386) Tax effect of permanent differences: (30 601) (3 840) Income tax expense (51 944) (14 226)

Current income tax expense (71 663) (57 132) Deferred tax expense recognized in the current year 19 719 42 906 Income tax expense (51 944) (14 226)

Deferred income tax assets/(liabilities) 2010 2009

As at January 1 — deferred tax liabilities (14 463) (56 199)

Changes in deferred income tax balances recognized in other (2 192) (1 170) comprehensive income Change in deferred income tax balances recognized in profit or loss 19 719 42 906

As at December 31– deferred tax assets/(liabilities) 3 064 (14 463)

68 Financial Statements Income tax effects related to other comprehensive income:

Before tax Before tax Tax amount After tax amount Tax amount After tax amount amount amount

2010 2010 2010 2009 2009 2009

Revaluation of buildings 10 961 (2 192) 8 769 5 851 (1 170) 4 681

9. CASH AND BALANCES WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION

December, 31 2010 December, 31 2009

Cash 247 667 228 147 Correspondent account with the Central Bank of the Russian Federation 340 660 326 868 Total cash and balances with the CBR 588 327 555 015

Cash and cash equivalents for the purposes of the statement of cash flows comprise the following:

December, 31 2010 December, 31 2009

Cash and correspondent account with the Central Bank of the Russian Federation 588 327 555 015 Due from banks (Note 12) 1 969 174 1 260 160 Total cash and cash equivalents 2 557 501 1 815 175

10. MINIMUM RESERVE DEPOSITS WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION As at December 31, 2010 the Bank maintained mandatory balances of RUB 99 964 thousand with the CBR (December 31, 2009: RUB 80 200 thousand). The Bank is not able to use its mandatory balances with the CBR for payments and other purposes. According to the Russian legislation mandatory balances are interest-free.

11. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets at fair value through profit or loss comprise:

December 31, 2010 December 31, 2009

Financial assets held for trading: Bank bonds 45 390 113 166 Notes and corporate bonds - 36 579 Total financial assets held for trading 45 390 149 745

Total financial assets recognized at fair value through profit 45 390 149 745 or loss

Bank bonds at December 31, 2010 represents RUB denominated bonds issued by VTB Bank at 7.2% and maturing in 2016 (December 31, 2009: bank bonds, 7.34%-8.10% and 2011-2017). Notes and corporate bonds at December 31, 2009 were issued at 8.25% and matured in 2010.

IBA-MOSCOW ANNUAL REPORT 2010 69 12. DUE FROM BANKS Due from banks comprise:

December, 31 2010 December, 31 2009

Correspondent accounts with banks 1 969 174 1 260 160 Time deposits 3 921 559 3 285 396 Total due from banks 5 890 733 4 545 556

As at December 31, 2010 the Bank had balances due from three banks (including corresponding accounts) amounting to RUB 5 294 713 thousand (December 31, 2009: RUB 4 246 819 thousand) which individually exceeded 10% of the net assets attributable to the participant of the Bank. 13. LOANS TO CUSTOMERS Loans to customers comprise:

December, 31 2010 December, 31 2009

Loans to customers 11 824 973 9 491 113 Less: allowance for impairment losses (1 261 914) (1 044 105) Total loans to customers 10 563 059 8 447 008

Movements in the allowance for impairment losses for the years ended December 31, 2010 are disclosed in Note 5. The table below summarizes carrying value of loans to customers analyzed by type of collateral obtained by the Bank:

December, 31 2010 December, 31 2009

Loans collateralized by Participant’s guarantees 4 750 033 3 338 972 Loans collateralized by Participant’s guarantee deposits 3 035 373 2 791 441 Loans collateralized by pledge of real estate 1 113 451 917 500 Loans collateralized by pledge of equipment 1 047 409 1 253 338 Loans collateralized by other assets 984 540 938 266 Unsecured loans 894 167 251 596 11 824 973 9 491 113

Less: allowance for impairment losses (1 261 914) (1 044 105) Total loans to customers 10 563 059 8 447 008

70 Financial Statements December, 31 2010 December, 31 2009

Analysis by sector: Trade 3 774 348 3 990 357 Construction 1 780 374 698 982 Services 1 755 394 205 417 Manufacturing 1 377 748 1 311 043 Individuals 1 338 848 729 272 Real estate 1 024 345 1 501 378 Mass media 410 230 354 918 Finance lease 363 686 699 746 11 824 973 9 491 113

Less: allowance for impairment losses (1 261 914) (1 044 105) Total loans to customers 10 563 059 8 447 008

Loans to individuals comprise the following products:

December, 31 2010 December, 31 2009

Consumer loans 1 220 907 636 460 Overdrafts 80 079 69 266 Mortgage loans 25 730 17 106 Car loans 8 387 1 440 Individual entrepreneurs 3 745 5 000 1 338 848 729 272

Less: allowance for impairment losses (156 498) (182 317) Total loans to individuals 1 182 350 546 955

As at December 31, 2010 the Bank granted loans to 23 and 24 borrowers totaling RUB 6 518 992 thousand (December 31, 2010: 24, RUB 4 833 678 thousand), which individually exceeded 10% of the equity. As at December 31, 2010 a significant amount of loans (75% of total loans to customers) (December 31, 2009: 81%) is granted to companies operating in the RF, which represents a significant geographical concentration in one region. As at December 31, 2010 loans to customers included loans totaling RUB 4 750 033 thousand and RUB 3 035 373 thousand (December 31, 2009: RUB 3 338 972 thousand and RUB 2 791 441 thousand respectively) that were secured by the Participant’s guarantees and guarantee deposits respectively.

IBA-MOSCOW ANNUAL REPORT 2010 71 As at December 31, 2010 loans to customers included loans totaling RUB 4 889 913 thousand (December 31, 2009: RUB 4 897 319 thousand), whose terms were renegotiated. Otherwise these loans would be past due or impaired. The table below summarizes an analysis of loans to customers by impairment:

December 31, 2010 December 31, 2009 Carrying Allowance for Carrying Allowance for value before impairment Carrying value value before impairment Carrying value allowance losses allowance losses

Loans to customers individually 1 267 563 (657 431) 610 132 109 779 (109 779) - determined to be impaired Loans to customers collectively 5 235 930 (604 483) 4 631 447 9 381 334 (934 326) 8 447 008 determined to be impaired Unimpaired loans 5 321 480 - 5 321 480 - - Total 11 824 973 (1 261 914) 10 563 059 9 491 113 (1 044 105) 8 447 008

As at December 31, 2010 loans totaling RUB 1 267 563 thousand (December 31, 2009: RUB 109 779 thousand), that were individually determined to be impaired were collateralized by real estate, equipment, inventories, promissory notes and secured by the Participant’s guarantees totaling RUB 1 192 802 thousand (December 31, 2009: RUB 31 087 thousand).

72 Financial Statements 14. PROPERTY AND EQUIPMENT Property and equipment comprise:

Buildings and other Furniture and Leasehold Total real estate equipment improvements

At historical/revalued cost December 31, 2008 434 997 85 662 3 377 524 036

Additions - 15 169 - 15 169 Revaluation 5 851 - - 5 851 Disposals - (5 321) - (5 321)

December 31, 2009 440 848 95 510 3 377 539 735

Additions - 10 482 - 10 482 Revaluation 10 961 - - 10 961 Disposals - (5 473) - (5 473)

December 31, 2010 451 809 100 519 3 377 555 705

Accumulated depreciation December 31, 2008 (10 610) (33 955) (444) (45 009)

Depreciation charge (10 610) (13 480) (101) (24 191) Eliminated on disposals - 1 665 - 1 665

December 31, 2009 (21 220) (45 770) (545) (67 535)

Depreciation charge (10 502) (17 516) (101) (28 119) Eliminated on disposals - 4 917 - 4 917

December 31, 2010 (31 722) (58 369) (646) (90 737) Net book value

December 31, 2010 420 087 42 150 2 731 464 968

December 31, 2009 419 628 49 740 2 832 472 200

As at December 31, 2010 included in property and equipment were fully depreciated assets totaling RUR 15 355 thousand (December 31, 2009: RUR 12 822 thousand). As at December 31, 2010 the buildings were owned by the Bank and were recognised at revalued amounts. Revaluation was performed by the independent appraiser as at December 31, 2010 and was based on the observable prices for similar properties in the market. Carrying value of these buildings as at December 31, 2010 totaled RUB 420 087 thousand. If the buildings were recorded at historical cost less accumulated depreciation and impairment losses, their carrying value would be RUB 93 525 thousand as at December 31, 2010.

IBA-MOSCOW ANNUAL REPORT 2010 73 15. DEPOSITS BY BANKS Deposits by banks comprise:

December 31, 2010 December 31, 2009

Correspondent accounts of other banks 196 321 691 779 Loans from banks and other financial institutions 10 661 754 7 259 471 Total deposits by banks 10 858 075 7 951 250

As at December 31, 2010 included in deposits by banks were RUB 4 038 038 thousand (37% of total deposits by banks) (December 31, 2009: RUB 3 236 958 thousand, 41% respectively) that were due to the Bank’s participant, which represents a significant concentration.

Balance at Contract amount Contract Financial December 31, 2010 December 31, 2009 Creditor (in thousands of Rate, % Issue date Maturity date currency covenants contract currency) in thousands of In thousands of in thousands of In thousands of contract currency RUB equivalent contract currency RUB equivalent

73 075 USD 7.70-8.00% December 2009 — December 2010 January 2011 — December 2012 74 065 2 257 268 57 117 1 727 455 International Bank of Azerbaijan 41 775 EUR 7.70-7.90% November 2009 — December 2010 January 2011 — December 2012 41 975 1 692 964 33 638 1 459 491 (Participant) 50 000 RUR 9.50% May 2010 May 2011 50 000 50 000 50 013 50 013 OJSC BANK URALSIB 10 000 EUR 6.00% November 2010 May 2011 Yes 10 000 403 331 - - CJSC Raiffeisenbank 15 000 USD Libor6M + 4.75% October 2010 September 2012 Yes 15 000 457 154 - - JSCB ROSEVROBANK 9 000 USD 6.00% December 2010 January 2013 Yes 9 000 274 292 - - VTB BANK (FRANCE)SA 6 000 USD Libor12 M +5.00% February 2010 February 2011 Yes 6 271 191 141 - - OJSC JSCB ROSBANK 10 000 USD Libor6M +6.00% December 2010 June 2012 10 000 304 769 - - OJSC Rosselkhozbank 50 000 USD 11.50% January 2010 July 2011 50 000 1 523 845 - - OJSC Rosselkhozbank 50 000 USD 11.50% December 2009 June 2011 50 000 1 523 845 50 000 1 512 210 Branch of OJSC MDM BANK 20 000 USD 5.00% December 2010 June 2011 20 000 609 538 - - FBME BANK LTD 25 000 USD 4.13-5.80% October-December 2010 March-July 2011 25 000 761 923 - - COMMERZBANK 2 647 EUR Euribor+0.80% October 2008 October 2013 1 588 64 060 2 124 9 2170 Bayerische Landesbank 1 333 EUR 3.33% October 2009 November 2014 1 066 43 007 1 342 58 224 Bayerische Landesbank 1 968 EUR 4.02% September 2010 September 2015 1 968 79 392 - - Bayerish Hypo Vereinsbank 1 906 EUR Euribor6M +0.90% August 2008 January 2014 1 334 53 812 1 733 7 5172 5 200 USD 1.10-13.00% January2010 — December 2010 January 2011 — February 2011 5 200 158 480 65 538 1 982 154 Other short-term borrowings 100 000 RUR 11.50% June 2010 June 2011 100 000 100 000 120 000 120 000 2 800 EUR 8.00% July 2010 January 2011 2 800 112 933 4 208 182 582

Total 10 661 754 7 259 471

74 Financial Statements Balance at Contract amount Contract Financial December 31, 2010 December 31, 2009 Creditor (in thousands of Rate, % Issue date Maturity date currency covenants contract currency) in thousands of In thousands of in thousands of In thousands of contract currency RUB equivalent contract currency RUB equivalent

73 075 USD 7.70-8.00% December 2009 — December 2010 January 2011 — December 2012 74 065 2 257 268 57 117 1 727 455 International Bank of Azerbaijan 41 775 EUR 7.70-7.90% November 2009 — December 2010 January 2011 — December 2012 41 975 1 692 964 33 638 1 459 491 (Participant) 50 000 RUR 9.50% May 2010 May 2011 50 000 50 000 50 013 50 013 OJSC BANK URALSIB 10 000 EUR 6.00% November 2010 May 2011 Yes 10 000 403 331 - - CJSC Raiffeisenbank 15 000 USD Libor6M + 4.75% October 2010 September 2012 Yes 15 000 457 154 - - JSCB ROSEVROBANK 9 000 USD 6.00% December 2010 January 2013 Yes 9 000 274 292 - - VTB BANK (FRANCE)SA 6 000 USD Libor12 M +5.00% February 2010 February 2011 Yes 6 271 191 141 - - OJSC JSCB ROSBANK 10 000 USD Libor6M +6.00% December 2010 June 2012 10 000 304 769 - - OJSC Rosselkhozbank 50 000 USD 11.50% January 2010 July 2011 50 000 1 523 845 - - OJSC Rosselkhozbank 50 000 USD 11.50% December 2009 June 2011 50 000 1 523 845 50 000 1 512 210 Branch of OJSC MDM BANK 20 000 USD 5.00% December 2010 June 2011 20 000 609 538 - - FBME BANK LTD 25 000 USD 4.13-5.80% October-December 2010 March-July 2011 25 000 761 923 - - COMMERZBANK 2 647 EUR Euribor+0.80% October 2008 October 2013 1 588 64 060 2 124 9 2170 Bayerische Landesbank 1 333 EUR 3.33% October 2009 November 2014 1 066 43 007 1 342 58 224 Bayerische Landesbank 1 968 EUR 4.02% September 2010 September 2015 1 968 79 392 - - Bayerish Hypo Vereinsbank 1 906 EUR Euribor6M +0.90% August 2008 January 2014 1 334 53 812 1 733 7 5172 5 200 USD 1.10-13.00% January2010 — December 2010 January 2011 — February 2011 5 200 158 480 65 538 1 982 154 Other short-term borrowings 100 000 RUR 11.50% June 2010 June 2011 100 000 100 000 120 000 120 000 2 800 EUR 8.00% July 2010 January 2011 2 800 112 933 4 208 182 582

Total 10 661 754 7 259 471

With regard to certain deposits by banks as tabulated above the Bank is required to comply with certain financial and non-financial covenants including stipulated ratios, debt to equity ratios and other financial and non-financial performance ratios. The Bank has not breached any of these covenants during the year ended December 31, 2010.

IBA-MOSCOW ANNUAL REPORT 2010 75 16. DEPOSITS BY CUSTOMERS Deposits by customers comprise:

December, 31 2010 December, 31 2009

Time deposits 3 203 740 2 608 835 Current accounts 1 915 423 1 273 315 Total deposits by customers 5 119 163 3 882 150

As at December 31, 2010 the Bank had four customers (December 31, 2009: three) with balances exceeding 10% of the net assets attributable to the participant. As at December 31, 2010 these customers balances totaled RUB 1 938 503 thousand, which represents 38% of the total customer accounts (December 31, 2009: RUB 1 939 403 thousand, 50%). As at the date of authorization of these financial statements for issue, these customers maintained significant balances with the Bank.

December, 31 2010 December, 31 2009

Analysis by economic sector/customer type: Individuals 2 192 563 1 134 451 Services 1 312 909 234 569 Mass media 567 726 288 414 Trade 516 491 1 749 663 Construction and real estate 412 889 329 093 Transport and communication 43 195 32 582 Insurance 32 359 29 490 Manufacturing 28 424 72 563 Other 12 607 11 325 Total deposits by customers 5 119 163 3 882 150

17. SUBORDINATED DEBT Subordinated debt comprises:

Carrying amount at Carrying amount at Currency Maturity date Effective Interest rate % December 31, 2010 December 31, 2009

Subordinated debt from the Participant USD March 2012 7.00% 116 977 112 461 USD March 2012 7.00% 87 733 84 346 USD February 2015 9.00% 61 550 61 370 USD July 2014 9.00% 92 192 91 934 EUR September 2016 9.00% 102 433 110 414 USD May 2017 8.00% 77 069 - USD October 2017 8.00% 92 737 - Total 630 691 460 525

In accordance with the Subordinated Debt Agreements, in the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to the repayments of the Bank’s liabilities to all other creditors. For the purposes of RAS capital adequacy calculations, the carrying amount of subordinated debt is included in the amount of additional capital (Note 22). 76 Financial Statements 18. EQUITY The Bank has the legal form of a limited liability company with a sole participant, International Bank of Azerbaijan (Note 1). In accordance with the Russian legislation, participants in limited liability companies may unilaterally withdraw from the company. In such cases the company will be obliged to pay to the withdrawing participant the value of his share of net assets of the company, determined on the basis of statutory accounting reports for the year of withdrawal, in cash or, subject to consent of the participant, by an in-kind transfer of assets. The payment should be made no later than six months after the end of the year of the withdrawal. In accordance with the Bank’s Charter its participants can sell or otherwise transfer its share (or part thereof) to third parties without consent of other participants. According to the Charter the sole participant is not allowed to withdraw its share from the capital of the Bank. 19. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the statement of financial position. The Bank uses the same credit control and management policies in undertaking off-balance sheet commitments as it does for on-balance operations. As at December 31, 2010 provision for losses on contingent liabilities was not created (December 31, 2009: Nil). As at December 31, 2010 contingent liabilities comprise:

December, 31 2010 December, 31 2009

Credit commitments Guarantees issued and similar commitments 569 528 378 419 Letters of credit and other transaction related contingent 623 199 578 535 obligations Total credit commitments 1 192 727 956 954

Extension of loans to customers within credit line limits is approved by the Bank on a case-by-case basis and depends on borrowers’ financial performance, debt service and other conditions. As at December 31, 2010 such unused credit lines come to RUB 831 573 thousand (December 31, 2009: RUB 643 543 thousand). Legal proceedings — In 2010, the Bank did not receive any claims from its customers and counterparties and accordingly no provisions were formed in its financial statements (2009: Nil). Taxation — Commercial legislation of the RF and countries where the Bank operates, including tax legislation, may allow more than one interpretation. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management’s judgment of the Bank’s business activities, was to be challenged by the tax authorities, the Bank could be assessed additional taxes, penalties and interest. Such uncertainty may relate to the valuation of financial instruments, provision for impairment losses and the market pricing of deals. Additionally such uncertainty may relate to the valuation of temporary differences on the provision and recovery of the provision for impairment losses on loans to customers and other financial assets, as an underestimation of the taxable profit. The management of the Bank believes that it has accrued all tax amounts due and therefore no allowance has been made in the financial statements. Generally, taxpayers are subject to tax audits with respect to the three calendar years preceding the year of the audit. However, completed audits do not exclude the possibility of subsequent additional tax audits performed by upper-level tax inspectorates reviewing the results of tax audits of their subordinate tax inspectorates. Also according to the clarification of the RF Constitutional Court the statute of limitation for tax liabilities may be extended beyond the three year term set forth in the tax legislation, if a court determines that the taxpayers has obstructed or hindered a tax inspection. Economic situation — The Bank's principal business activities are within the RF. Laws and regulations affecting the business environment in the RF are subject to rapid changes and the Bank’s assets and operations could be at risk due to negative changes in the political and business environment. Operating Environment — Emerging markets are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. As has happened in the past, actual or perceived financial problems or an increase in the perceived risks associated with investing in emerging economies could adversely affect the investment climate in Russia and its economy in general. Laws and regulations affecting businesses in Russia continue to change rapidly. Tax, currency and customs legislation are subject to varying interpretations, and other legal and fiscal impediments contribute to the challenges faced by entities currently operating in Russia. The future economic direction of Russia is largely dependent upon economic, fiscal and monetary measures undertaken by the government, together with legal, regulatory, and political developments.

IBA-MOSCOW ANNUAL REPORT 2010 77 The global financial turmoil that has negatively affected Russian financial and capital markets in 2008 and 2009 has receded and Russian economy returned to growth in 2010. However significant economic uncertainties remain. Adverse changes arising from systemic risks in global financial systems, including any tightening of the credit environment or from decline in the oil and gas prices could slow or disrupt the Russia’s economy, adversely affect the Bank’s access to capital and cost of capital for the Bank and, more generally, its business, results of operations, financial condition and prospects. Because Russia produces and exports large volumes of oil and gas, Russian economy is particularly sensitive to the price of oil and gas on the world market that fluctuated significantly during 2010 and 2009. 20. TRANSACTIONS WITH RELATED PARTIES Details of transactions between the Bank and its related parties are disclosed below:

December 31, 2010 December 31, 2009 Related party transactions Total category Related party transactions Total category as per the as per the Management financial Management financial Participant IBA-Georgia Participant IBA-Georgia Board statements Board statements caption caption

Due from banks 3 967 357 - - 5 890 733 3 320 889 - - 4 545 556 Loans to customers - 12 281 - 11 824 973 - 6 945 - 9 491 113 Allowance for impairment of loans - (1 719) - (1 261 914) - (1 736) - (1 044 105) to customers Deposits by banks 4 038 038 - 120 10 858 075 3 763 743 - - 7 951 250 Deposits by - 9 158 - 5 119 163 - 10 968 - 3 882 150 customers Subordinated debt 630 690 - - 630 691 460 525 - - 460 525 Guarantees received and similar 5 064 497 - - 5 064 497 5 452 736 - - 5 452 736 commitments

As at December 31, 2010, guarantees received and similar commitments include RUB 4 750 033 thousand of guarantees received from the Participant against loans made by the Bank to certain customers (December 31, 2009: RUB 3 338 972 thousand) (Note 13).

Included in the income statement for the year ended December 31, 2010 are the following amounts which arose due to transactions with related parties:

Year ended December 31, 2010 Year ended December 31, 2009 Related party transactions Related party transactions Total Total category category as per the as per the financial Management Management financial Participant IBA-Georgia statements Participant IBA-Georgia Board Board statements caption caption

Interest income 438 529 991 - 1 899 094 11 030 207 144 1 250 701 Interest expense (341 672) (1 037) - (1 231 671) (254 787) (807) - (673 030) (Provision for)/ recovery of provision for - 17 - (217 809) - (1 596) - (458 752) impairment losses on interest bearing assets Fee and commission 25 086 - - 198 055 880 - - 150 522 income Net gain on financial assets at fair value - - (4 848) (4 848) 146 204 - - 146 444 through profit and loss Operating expenses (4 700) - - (583 105) (3 867) - - (453 480)

78 Financial Statements The remuneration of the Bank’s management was as follows:

Year ended December 31, 2010 Year ended December 31, 2009 Total category as per Total category as per Related party transactions the financial statements Related party transactions the financial statements caption caption

Key management personnel compensation: Short-term employee (18 544) (261 945) (23 588) (214 908) benefits Total (18 544) (261 945) (23 588) (214 908)

21. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm’s length transaction, other than in forced or liquidation sale. Assets for which fair value approximates carrying value For financial assets and liabilities that have a short term maturity (less than 3 months), it is assumed that the carrying amounts approximate to their fair values. This assumption is also applied to demand deposits and savings accounts without a maturity. Due from banks The fair value of due from banks has been estimated using the same valuation technique for financial instruments accounted for at fair value as described in the valuation techniques below. Loans to customers Loans to customers are generally made at fixed rates. As there is no active secondary market in Russia for such loans and advances, there is no reliable market value available for this portfolio. Fair value has been estimated by reference to the market rates available at the reporting date for similar loans of maturity equal to the remaining fixed period. The following table compares the carrying amounts of financial assets and financial liabilities to their estimated fair values:

December 31, 2010 December 31, 2009

Net carrying amount Fair value Net carrying amount Fair value

Financial assets Cash and balances with the Central Bank of 588 327 588 327 555 015 555 015 the Russian Federation Minimum reserve deposit with the Central 99 964 99 964 80 200 80 200 Bank of the Russian Federation Due from banks 5 890 733 5 890 733 4 545 556 4 545 556 Financial assets at fair value through profit 45 390 45 390 149 745 149 745 or loss Loans to customers 10 563 059 10 563 059 8 447 008 8 447 008 Other financial assets 47 372 47 372 3 679 3 679

Financial liabilities Deposits by banks 10 858 075 10 858 075 7 951 250 7 951 250 Deposits by customers 5 119 163 5 119 163 3 882 150 3 882 150 Other borrowed funds 896 470 896 470 Subordinated debt 630 691 634 691 460 525 471 402 Other financial liabilities 35 904 35 904 21 474 21 474

IBA-MOSCOW ANNUAL REPORT 2010 79 The fair values of financial assets and financial liabilities are determined as follows. ‹‹The fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes listed redeemable notes, bills of exchange, debentures and perpetual notes). ‹‹The fair values of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments. Fair value measurements recognized in the statement of financial position The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: ‹‹Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. ‹‹Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). ‹‹Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Statement of financial position December 31, 2010 December 31, 2009

Category Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

Non-derivative financial assets at fair 45 390 - - 149 745 - - value through profit or loss

80 Financial Statements 22. CAPITAL RISK MANAGEMENT The Bank manages its capital to ensure that the Bank will be able to: (i) comply with capital requirements established by the CBR; (ii) ensure that the Bank continues as a going concern. The Bank manages capital to continue as a going concern while maximizing the return by optimizing debt and equity structure. The adequacy of the Bank’s capital is monitored using, among other measures, the ratios established by the CBR in supervising the Bank. During the past year, the Bank had complied in full with all its externally imposed capital requirements. Compliance with the minimum capital adequacy ratios set by the CBR is monitored daily and monthly reports are prepared, which contain the relevant calculations checked and signed by the Chairman of the Management Board and the Chief Accountant of the Bank. The capital structure of the Bank consists of subordinated debt disclosed in Note 17, and net assets attributable to the participant comprising charter capital, reserves and retained earnings as disclosed in the statement of changes in equity. The Bank’s overall capital risk management policy remains unchanged from 2009. The following table analyzes the Bank’s regulatory capital resources for capital adequacy purposes in accordance with the requirements of the Russian legislation:

Year ended Year ended December 31, 2010 December 31, 2009

Composition of regulatory capital: Tier 1 capital 906 103 811 298

Additional paid-in capital 705 163 418 210 Total equity 1 611 266 1 229 520 Less: intangible assets (10) (12) Total regulatory capital 1 611 256 1 229 508

Capital ratio (N1 ratio): 11.7% 12.3%

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total capital (10%) to total risk weighted assets. As at December 31, 2010 the Bank included carrying amount of subordinated debt in the computation of total regulatory capital (Note 17).

IBA-MOSCOW ANNUAL REPORT 2010 81 23. RISK MANAGEMENT POLICIES credit risk exposures within its credit approval authority. It also continuously reviews and makes recommendations Management of risk is fundamental to the Bank’s as to analysis methodology and portfolio quality, including banking business and is an essential element of the overall structure, diversification and pricing. The Credit Bank’s operations. The main risks inherent to the Bank’s Committee is one of the bodies, which ensures approval operations are those related to: of limits of authority and compliance of the Bank with high ‹ ‹credit exposures; quality standards for risk analysis and assessment. ‹ ‹liquidity risk; ALCO is responsible for the management and ‹ ‹market risk; optimization of the Bank’s asset and liability structure. ‹ ‹operational risk. It is an integral part of the risk management process The Bank recognizes that it is essential to have that focuses on market risks, including liquidity, foreign efficient and effective risk management processes in currency and interest rate risks. ALCO’s functions include place. To enable this, the Bank has established a risk making recommendations on strategies, policies and management framework, whose main purpose is to protect limits associated with the aforementioned risks. The the Bank from risk and allow it to achieve its performance Committee is also responsible for the provision of up-to- objectives. date and reliable information and reports regarding the The risk management function is an integral part above risks. ALCO assists in setting pricing policies and of the Bank’s centralized internal control system. The funding strategies. The Committee is also responsible, Bank’s risk management policies and approach aim to along with other risk management and controlling units of identify, mitigate and manage risks faced by the Bank. the Bank, for ensuring This is accomplished through setting appropriate risk that the Treasury Department and other relevant limits and controls, continuous monitoring of risk levels units comply with the parameters set by ALCO, Risk and adherence to limits and procedures, and ensuring Management Committee, Management Board and the that business processes are correctly formulated and Supervisory Board. maintained. The Internal Audit Department reports directly to Risk management policies and procedures are the Supervisory Board. The Internal Audit Department’s reviewed regularly to reflect changes in market conditions, working plans, schedule of audits and its reports, including products and services offered and ensure that “best unplanned audits, are closely reviewed and approved by practices” are implemented. The Bank, as part of its risk the Supervisory Board. management culture, emphasizes integrity, standards of professional behaviour and management in order to Credit risk maintain and continuously improve a conservative control The Bank is exposed to credit risk which is the risk that model. one party to a financial instrument will fail to discharge an Risk management policy, assessment, approval, obligation and cause the other party to incur a financial monitoring and control are conducted by specialized loss. business units of the Bank which also monitor compliance Risk management and monitoring are performed with risk management policies. The Bank has established within set limits of authority by the Credit Committee executive bodies, committees and departments in and the Management Board of the Bank. Daily risk accordance with the Russian legislation and the best management is performed by the Head of the Division of industry practices. Credit and Guarantee Transactions. The Management Board of the Bank is established by The Bank controls credit risk by setting limits on a and subordinates to the Participant’s Meeting. The Bank’s borrower or on a group of related borrowers. authorized working groups include the Asset and Liability Such risks are monitored on a regular basis and are Committee (ALCO), revised at least once a year. Risk Management Committee (RMC), Strategy The Bank’s Credit Committee and the Committee on Committee and the Credit Committee. Bank Cards set credit limits for borrowers. The members of the committees are appointed by ‹‹The Credit Committee considers and approves and report to the Management Board. limits of up to USD 750 thousand (equivalent of RUB 22 The Risk Management Committee is chaired by the 858 thousand). The Committee meets on a regular basis. Chief Financial Officer. The Committee is responsible for It is also responsible for issuing guidance to lower level the development of risk management methodologies credit committees. and ensuring that the risk appetite of the Bank is ‹‹The Credit Committee on Bank Cards considers correctly reflected in strategic and business plans of and approves credit limits of below USD 75 thousand the Bank. It is the main forum for discussing changes (equivalent of RUB 2 858 thousand). The Committees and recommendations with regard to risk management meet on a regular basis. approaches and procedures to be submitted to the The Management Board takes decisions with regard Management and Supervisory Boards. Therefore, the Risk to credit risk on loan applications from USD 750 thousand Management Committee, Credit Committee and ALCO, to USD 3 million (equivalent to amounts from RUB 22 as well as the Management Board, address all potential 858 thousand to RUB 91 431 thousand respectively); risks facing the Bank and report on these issues to the applications above USD 3 million (equivalent of RUB 91 Supervisory Board. 431 thousand) are referred to the Supervisory Board of The Credit Committee consists of five members the Bank. elected by the Supervisory Board. The Credit Committee Loan applications originated by the relevant client manages and approves, or recommends for approval, relationship managers are passed on to the relevant corporate, retail and financial organizations’ counterparty Credit committee for the approval of credit limits. 82 Financial Statements Where appropriate, and in the case of most loans, the In order to monitor credit risk exposures, regular Bank obtains collateral and guarantees and guarantee reports are produced by officers of the Division of Credit deposits of the participant, as well as corporate and and Guarantee Transactions based on a structured personal guarantees. However, certain loans are not analysis of the client’s business and financial performance. secured and such risks are monitored on a continuous Any significant exposures against clients with deteriorating basis. creditworthiness are reported to and reviewed by the Commitments to extend credit represent unused Management Board. The Bank uses formalized internal portions of credit in the form of loans, guarantees or credit ratings to monitor exposures to credit risk. The letters of credit. The credit risk on off-balance sheet Division of Credit and Guarantee Transactions performs financial instruments is defined as a probability of losses an ageing analysis of loans and follows up past due due to the inability of a counterparty to comply with balances. Management therefore considers it appropriate the contractual terms and conditions. With respect to to provide ageing and other information about credit risk credit risk on commitments to extend credit, the Bank is as disclosed in Notes 13 and 23. All past-dues statistics potentially exposed to a loss in an amount equal to the are reported to the Credit Committee on a monthly basis. total unused commitments. However, the likely amount of All corporate and large retail loan past-due issues are the loss is less than the total unused commitments since individually reported to the Credit Committee. most commitments to extend credit are contingent upon While collateral is an important mitigating factor in customers maintaining specific credit standards. The Bank assessing the credit risk, it is the Bank’s policy to establish applies the same credit policy to the contingent liabilities that loans are within the client’s capacity to repay rather as it does to the balance sheet financial instruments, i.e. than to rely solely on security. Collateral is considered as the policy based on a secondary source of repayment. The Bank has in place the procedures for approving loan issuance, limits various limits on unsecured loans of its portfolio. to mitigate credit risks, and current monitoring. The Bank monitors the term to maturity of off balance sheet contingencies because longer term commitments generally have a greater degree of credit risk than short- term commitments.

IBA-MOSCOW ANNUAL REPORT 2010 83 Maximum credit risk exposure The Bank’s maximum exposure to credit risk varies significantly and is dependent on both individual risks and general market economy risks. The following table presents the maximum exposure to credit risk on balance sheet and off-balance sheet financial assets. For on-balance sheet financial assets, the maximum exposure is equal to the carrying amount of those assets prior to any offset or collateral. The Bank’s maximum exposure to credit risk under contingent liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments.

Maximum exposure Collateral pledged * Net exposure

December 31, 2010 Balances with the CBR 440 624 - 440 624 Financial assets at fair value through profit or loss 45 390 - 45 390 Due from banks 5 890 733 - 5 890 733 Loans to customers 10 563 059 10 930 806 - Other financial assets 47 372 - 47 372 Guarantees issued and similar commitments 569 528 485 087 84 441 Letters of credit and other transaction related contingent 623 199 - 623 199 obligations

December 31, 2009 Balances with the CBR 407 068 - 407 068 Financial assets at fair value through profit or loss 149 745 - 149 745 Due from banks 4 545 556 - 4 545 556 Loans to customers 8 447 008 9 239 517 - Other financial assets 3 679 - 3 679 Guarantees issued and similar commitments 378 419 378 419 - Letters of credit and other transaction related contingent 578 535 - 578 535 obligations

(*) The value of collateral pledged is determined on the basis of the carrying amount of loans for which it is provided.

Off–balance sheet risk The Bank applies fundamentally the same risk management policies for off-balance sheet risks as it does for its on- balance sheet risks. In the case of commitments to lend, customers and counterparties will be subject to the same credit management policies as for loans and advances. Collateral may be sought depending on the strength of the counterparty and the nature of the transaction.

84 Financial Statements Geographical concentration The Assets and Liabilities Management Committee («ALMC») exercises control over the risk in the legislation and regulatory arena and assesses its influence on the Bank’s activity. This approach allows the Bank to minimize potential losses from the RF investment climate worsening. The geographical concentration of assets and liabilities is set out below:

December 31 Other non-OECD RF OECD countries 2010 countries Total

NON-DERIVATIVE FINANCIAL ASSETS Cash and balances with the CBR 688 291 - - 688 291 Financial assets at fair value through profit or loss 45 390 - - 45 390 Due from banks 284 672 1 609 751 3 996 310 5 890 733 Loans to customers 7 968 873 1 993 875 600 311 10 563 059 Other financial assets 47 372 - - 47 372 TOTAL NON-DERIVATIVE FINANCIAL ASSETS 9 034 598 3 603 626 4 596 621 17 234 845 NON-DERIVATIVE FINANCIAL LIABILITIES Deposits by banks 5 331 344 1 336 088 4 190 643 10 858 075 Deposits by customers 3 844 521 1 219 401 55 241 5 119 163 Subordinated debt 35 904 - 630 691 630 691 Other financial liabilities - - - 35 904 TOTAL NON-DERIVATIVE FINANCIAL LIABILITIES 9 211 769 2 555 552 4 876 512 16 643 833

NET POSITION ON NON-DERIVATIVE FINANCIAL INSTRUMENTS (177 171) 1 048 074 (279 891) 591 012

December 31 Other non-OECD RF OECD countries 2009 countries Total

NON-DERIVATIVE FINANCIAL ASSETS Cash and balances with the CBR 635 215 - - 635 215 Financial assets at fair value through profit or loss 149 745 - - 149 745 Due from banks 370 059 825 876 3 349 621 4 545 556 Loans to customers 6 852 064 1 110 259 484 685 8 447 008 Other financial assets 3 679 - - 3 679 TOTAL NON-DERIVATIVE FINANCIAL ASSETS 8 010 762 1 936 135 3 834 306 1 3781 203 NON-DERIVATIVE FINANCIAL LIABILITIES Deposits by banks 3 456 054 695 511 3 799 685 7 951 250 Deposits by customers 2 072 335 1 565 514 244 301 3 882 150 Other borrowed funds - 896 470 - 896 470 Subordinated debt - - 460 525 460 525 Other financial liabilities 21 474 - - 21 474 TOTAL NON-DERIVATIVE FINANCIAL LIABILITIES 5 549 863 3 157 495 4 504 511 13 211 869

NET POSITION ON NON-DERIVATIVE FINANCIAL INSTRUMENTS 2 460 899 (1 221 360) (670 205) 569 334

IBA-MOSCOW ANNUAL REPORT 2010 85 Collateral The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows: ‹‹For commercial lending, charges over real estate properties, inventory and deposits and guarantees of the participant; ‹‹For retail lending, mortgages over residential properties, motor vehicles, corporate and personal guarantee. At December 31, 2010, the fair value of collateral that the Bank holds relating to loans individually determined to be impaired amounted to RUB 1 192 802 thousand. Collateral includes real estate, equipment, inventory, and corporate guarantees. Management monitors market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. The following table details credit quality of financial assets:

Neither past due nor individually impaired Financial asset class Past due but Individually Impairment Total carrying at December 31, 2010 Standard Substandard not impaired impaired allowance value High grade grade Grade

Cash and balances with 588 327 - - - - - 588 327 the CBR Minimum reserve 99 964 - - - - - 99 964 deposits with the CBR Financial assets at fair value through profit or 45 390 - - - - - 45 390 loss Due from banks 5 841 256 3 434 46 044 - - - 5 890 733 Loans to customers 39 453 3 356 350 2 466 924 63 237 1 267 563 (1 261 914) 10 563 059 Other financial assets - 47 372 - - - - 47 372 6 614 389 3 407 155 2 512 968 63 237 1 267 563 (1 261 914) 17 234 845

Neither past due nor individually impaired Financial asset class Past due but Individually Impairment Total carrying at December 31, 2009 Standard Substandard not impaired impaired allowance value High grade grade Grade

Cash and balances with 555 015 555 015 the CBR Minimum reserve 80 200 80 200 deposits with the CBR Financial assets at fair value through profit or 149 745 149 745 loss Due from banks 4 498 944 29 659 16 953 4 545 556 Loans to customers 109 779 (1 044 105) 8 447 008 Other financial assets 3 679 3 679

5 283 904 33 338 16 953 109 779 (1 044 105) 13 781 203

86 Financial Statements Renegotiated loans and advances Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an extension of the due date of payment or repayment plans under which the Bank offers a concessionary rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will be individually impaired where the renegotiated payments of interest and principal will not recover the original carrying amount of the asset. In other cases, renegotiation will lead to a new agreement, which is treated as a new loan. Carrying amount by class of financial assets whose terms have been renegotiated: The table below shows the carrying amount of renegotiated financial assets, by class:

Financial asset class December, 31 2010 December, 31 2009

Loans to customers: 4 889 912 4 897 319 ‹‹loans to legal entities 4 755 075 4 588 360 ‹‹loans to individuals 134 837 308 959

The banking industry is generally exposed to credit risk through its loans to customers and inter bank deposits. With regard to the loans to customers this risk exposure is concentrated within the Russian Federation. The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Bank’s risk management policy are not breached. Liquidity Risk

Liquidity risk management Liquidity risk refers to the availability of sufficient funds to meet cash withdrawals and other financial commitments associated with financial instruments as they actually fall due. The Bank’s liquidity management issues are the responsibility of ALCO which controls liquidity risk by means of maturity analysis, determining the Bank’s strategy for the next financial period. Current liquidity is managed by the Treasury Department, which deals in the money markets for current liquidity support and cash flow optimization. Liquidity risk is managed by the Bank’s Risk Management Committee. In order to manage liquidity risk, the Bank performs daily monitoring of future expected cash flows on clients’ and banking operations, which is a part of assets/liabilities management process. In the process of assets and liabilities management, ALCO sets optimal ratio between the Bank's assets and liabilities to cover deposit withdrawals at unexpected levels of demand. The Bank seeks to maintain a stable funding base comprising primarily amounts due to other banks, individual deposits and invest the funds in diversified portfolios of liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. The Treasury Department then provides for an adequate portfolio of short-term liquid assets, largely made up of deposits with banks and other inter-bank facilities.

IBA-MOSCOW ANNUAL REPORT 2010 87 An analysis of the liquidity and interest rate risks is presented in the following table. The table below is based upon the information provided internally to the Bank's key management personnel.

Weighted average December 31, 1 month effective interest Up to 1 month 3 months to 1 year 1 year to 5 years Over 5 years 2010 to 3 months rate Total

NON-DERIVATIVE FINANCIAL ASSETS Fixed interest rate instruments Financial assets at fair value through profit or loss 7.2% 45 390 - - - - 45 390 Due from banks 9.8% 3 331 372 609 538 624 788 - - 4 565 698 Loans to customers 15.3% 682 907 2 752 808 4 457 490 2 456 078 - 10 349 283 Total fixed interest bearing financial assets 4 059 669 3 362 346 5 082 278 2 456 078 - 14 960 371 Variable interest rate instruments

Due from banks 9.3% - - - 213 776 - 213 776 Loans to customers - - - 213 776 - 213 776 Total variable interest bearing financial assets Non-interest bearing financial assets Cash and balances with the CBR (excluding minimum reserve deposits with CBR) 588 327 - - - - 588 327 Due from banks 1 325 035 - - - - 1 325 035 Other financial assets 47 372 - - - - 47 372 Total non-interest bearing financial assets and precious metals 1 960 734 - - - - 1 960 734 Total non-derivative financial assets 6 020 403 3 362 346 5 082 278 2 669 854 - 17 134 881

NON-DERIVATIVE FINANCIAL LIABILITIES AND COMMITMENTS Fixed interest rate instruments Deposits by banks 8.6% 420 891 1 457 711 4 753 599 2 050 695 - 8 682 896 Deposits by customers 9.7% 630 516 1 220 793 1 220 300 132 131 - 3 203 740 Subordinated debt 7.5% - - - 362 235 268 456 630 691 Total fixed interest bearing financial liabilities 1 051 407 2 678 503 5 973 900 2 545 061 268 456 12 517 327 Variable interest rate instruments Deposits by banks 5.0% 503 499 809 609 770 1 002 195 - 2 112 277 Total variable interest bearing financial liabilities 503 499 809 609 770 1 002 195 - 2 112 277

Non-interest bearing financial liabilities and commitments Deposits by banks 62 902 - - - - 62 902 Other financial liabilities 35 904 - - - - 35 904 Deposits by customers 1 915 423 - - - - 1 915 423 Total non-interest bearing financial liabilities and commitments 2 014 229 - - - - 2 014 229

Total non-derivative financial liabilities and commitments 3 066 139 3 178 313 6 583 669 3 547 256 268 456 16 643 833

Interest sensitivity gap 3 007 759 184 033 (1 501 391) (877 402) (268 456) 544 543 Cumulative interest sensitivity gap 3 007 759 3 191 792 1 690 401 812 999 544 543

Liquidity gap 2 954 264 184 033 (1 501 391) (877 402) (268 456) 491 048 Cumulative liquidity gap 2 954 264 3 138 297 1 636 906 759 504 491 048

88 Financial Statements An analysis of the liquidity and interest rate risks is presented in the following table. The table below is based upon the information provided internally to the Bank's key management personnel.

Weighted average December 31, 1 month effective interest Up to 1 month 3 months to 1 year 1 year to 5 years Over 5 years 2010 to 3 months rate Total

NON-DERIVATIVE FINANCIAL ASSETS Fixed interest rate instruments Financial assets at fair value through profit or loss 7.2% 45 390 - - - - 45 390 Due from banks 9.8% 3 331 372 609 538 624 788 - - 4 565 698 Loans to customers 15.3% 682 907 2 752 808 4 457 490 2 456 078 - 10 349 283 Total fixed interest bearing financial assets 4 059 669 3 362 346 5 082 278 2 456 078 - 14 960 371 Variable interest rate instruments

Due from banks 9.3% - - - 213 776 - 213 776 Loans to customers - - - 213 776 - 213 776 Total variable interest bearing financial assets Non-interest bearing financial assets Cash and balances with the CBR (excluding minimum reserve deposits with CBR) 588 327 - - - - 588 327 Due from banks 1 325 035 - - - - 1 325 035 Other financial assets 47 372 - - - - 47 372 Total non-interest bearing financial assets and precious metals 1 960 734 - - - - 1 960 734 Total non-derivative financial assets 6 020 403 3 362 346 5 082 278 2 669 854 - 17 134 881

NON-DERIVATIVE FINANCIAL LIABILITIES AND COMMITMENTS Fixed interest rate instruments Deposits by banks 8.6% 420 891 1 457 711 4 753 599 2 050 695 - 8 682 896 Deposits by customers 9.7% 630 516 1 220 793 1 220 300 132 131 - 3 203 740 Subordinated debt 7.5% - - - 362 235 268 456 630 691 Total fixed interest bearing financial liabilities 1 051 407 2 678 503 5 973 900 2 545 061 268 456 12 517 327 Variable interest rate instruments Deposits by banks 5.0% 503 499 809 609 770 1 002 195 - 2 112 277 Total variable interest bearing financial liabilities 503 499 809 609 770 1 002 195 - 2 112 277

Non-interest bearing financial liabilities and commitments Deposits by banks 62 902 - - - - 62 902 Other financial liabilities 35 904 - - - - 35 904 Deposits by customers 1 915 423 - - - - 1 915 423 Total non-interest bearing financial liabilities and commitments 2 014 229 - - - - 2 014 229

Total non-derivative financial liabilities and commitments 3 066 139 3 178 313 6 583 669 3 547 256 268 456 16 643 833

Interest sensitivity gap 3 007 759 184 033 (1 501 391) (877 402) (268 456) 544 543 Cumulative interest sensitivity gap 3 007 759 3 191 792 1 690 401 812 999 544 543

Liquidity gap 2 954 264 184 033 (1 501 391) (877 402) (268 456) 491 048 Cumulative liquidity gap 2 954 264 3 138 297 1 636 906 759 504 491 048

IBA-MOSCOW ANNUAL REPORT 2010 89 Weighted average December 31, 1 month effective interest Up to 1 month 3 months to 1 year 1 year to 5 years Over 5 years 2009 to 3 months rate Total

NON-DERIVATIVE FINANCIAL ASSETS Fixed interest rate instruments Financial assets at fair value through profit or loss 7.1% 149 745 - - - - 149 745 Due from banks 11.0% 2 968 514 620 213 - - - 3 588 727 Loans to customers 17.5% 486 948 1 594 236 5 900 735 233 594 - 8 215 513 Total fixed interest bearing financial assets 3 605 207 2 214 449 5 900 735 233 594 - 11 953 985

Variable interest rate instruments Loans to customers 10.9% - - - 231 495 - 231 495 Total variable interest bearing financial assets - - - 231 495 - 231 495

Non-interest bearing financial assets ------Cash and balances with the CBR (excluding minimum reserve deposits with CBR) 555 015 - - - - 555 015 Due from banks 956 829 - - - 956 829 Other financial assets 3 679 - - - - 3 679 Total non-interest bearing financial assets 1 515 523 - - - - 1 515 523

Total non-derivative financial assets 5 120 730 2 214 449 5 900 735 465 089 - 13 701 003

NON-DERIVATIVE FINANCIAL LIABILITIES AND COMMITMENTS Fixed interest rate instruments Deposits by banks 9.6% 238 985 1 122 855 3 795 675 1 533 414 - 6 690 929 Deposits by customers 11.4% 17 747 409 558 1 799 099 381 592 - 2 607 996 Subordinated debt 7.3% - - - 302 442 158 083 460 525 Total fixed interest bearing financial liabilities 256 732 1 532 413 5 594 774 2 217 448 158 083 9 759 450

Variable interest rate instruments Deposits by banks 6.91% 744 469 944 679 224 143 - 695 510 Other borrowed funds 4.71% - - 896 470 - - 896 470 Total variable interest bearing financial liabilities 744 469 944 897 149 224 143 - 1 591 980

Non-interest bearing financial liabilities and commitments Deposits by banks 564 811 - - - - 564 811 Deposits by customers 1 274 154 - - - - 1 274 154 Other financial liabilities 21 474 - - - - 21 474 Total non-interest bearing financial liabilities and commitments 1 860 439 - - - - 1 860 439

Total non-derivative financial liabilities and commitments 2 117 915 2 002 357 6 491 923 2 441 591 158 083 13 211 869

Interest sensitivity gap 3 347 731 212 092 (591 188) (1 976 502) (158 083) 834 050 Cumulative interest sensitivity gap 3 347 731 3 559 823 2 968 635 992 133 834 050

Liquidity gap 3 002 815 212 092 (591 188) (1 976 502) (158 083) 489 134 Cumulative liquidity gap 3 002 815 3 214 907 2 623 719 647 217 489 134

90 Financial Statements Weighted average December 31, 1 month effective interest Up to 1 month 3 months to 1 year 1 year to 5 years Over 5 years 2009 to 3 months rate Total

NON-DERIVATIVE FINANCIAL ASSETS Fixed interest rate instruments Financial assets at fair value through profit or loss 7.1% 149 745 - - - - 149 745 Due from banks 11.0% 2 968 514 620 213 - - - 3 588 727 Loans to customers 17.5% 486 948 1 594 236 5 900 735 233 594 - 8 215 513 Total fixed interest bearing financial assets 3 605 207 2 214 449 5 900 735 233 594 - 11 953 985

Variable interest rate instruments Loans to customers 10.9% - - - 231 495 - 231 495 Total variable interest bearing financial assets - - - 231 495 - 231 495

Non-interest bearing financial assets ------Cash and balances with the CBR (excluding minimum reserve deposits with CBR) 555 015 - - - - 555 015 Due from banks 956 829 - - - 956 829 Other financial assets 3 679 - - - - 3 679 Total non-interest bearing financial assets 1 515 523 - - - - 1 515 523

Total non-derivative financial assets 5 120 730 2 214 449 5 900 735 465 089 - 13 701 003

NON-DERIVATIVE FINANCIAL LIABILITIES AND COMMITMENTS Fixed interest rate instruments Deposits by banks 9.6% 238 985 1 122 855 3 795 675 1 533 414 - 6 690 929 Deposits by customers 11.4% 17 747 409 558 1 799 099 381 592 - 2 607 996 Subordinated debt 7.3% - - - 302 442 158 083 460 525 Total fixed interest bearing financial liabilities 256 732 1 532 413 5 594 774 2 217 448 158 083 9 759 450

Variable interest rate instruments Deposits by banks 6.91% 744 469 944 679 224 143 - 695 510 Other borrowed funds 4.71% - - 896 470 - - 896 470 Total variable interest bearing financial liabilities 744 469 944 897 149 224 143 - 1 591 980

Non-interest bearing financial liabilities and commitments Deposits by banks 564 811 - - - - 564 811 Deposits by customers 1 274 154 - - - - 1 274 154 Other financial liabilities 21 474 - - - - 21 474 Total non-interest bearing financial liabilities and commitments 1 860 439 - - - - 1 860 439

Total non-derivative financial liabilities and commitments 2 117 915 2 002 357 6 491 923 2 441 591 158 083 13 211 869

Interest sensitivity gap 3 347 731 212 092 (591 188) (1 976 502) (158 083) 834 050 Cumulative interest sensitivity gap 3 347 731 3 559 823 2 968 635 992 133 834 050

Liquidity gap 3 002 815 212 092 (591 188) (1 976 502) (158 083) 489 134 Cumulative liquidity gap 3 002 815 3 214 907 2 623 719 647 217 489 134

IBA-MOSCOW ANNUAL REPORT 2010 91 In the tables above, the terms to maturity correspond to the contractual terms. However, individuals are entitled to terminate their deposit agreements ahead of schedule according to effective laws. The amounts included above for variable interest rate instruments for both non-derivative financial assets and liabilities is subject to change if changes in variable interest rates differ to those estimates of interest rates determined at the end of the reporting period. The following tables detail the Bank’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Bank can be required to pay. The tables include both interest and principal cash flows.

Weighted average Up to 1 1 month to 3 3 months to 1 year to 5 Over 5 December 31, effective month months 1 year years years 2010 Total interest rate

Fixed interest rate instruments Deposits by banks 8.6% 436 521 1 639 610 4 944 685 2 147 922 - 9 168 738 Deposits by customers 9.7% 680 271 437 346 2 102 188 132 131 - 3 351 936 Subordinated debt 7.5% - 11 823 36 127 498 625 296 942 843 517 Total fixed interest bearing 2 778 1 116 792 2 088 779 7 083 000 296 942 13 364 191 financial liabilities 678

Variable interest rate instruments Deposits by banks 5% 8 344 511 328 728 761 969 127 - 2 217 560 Total variable interest bearing financial liabilities 8 344 511 328 728 761 969 127 - 2 217 560 and commitments

Non-interest bearing instruments Deposits by banks 62 902 - - - 62 902 Deposits by customers 1 915 423 - - - 1 915 423 Other financial liabilities 35 904 - - - 35 904 Guarantees issued and similar 59 151 - 510 377 - - 569 528 commitments Other credit related commitments 881 860 - 240 205 332 707 - 1 454 772 Total non-interest bearing financial liabilities and 2 955 240 - 750 582 332 707 - 4 038 529 commitments

Total financial liabilities and 4 080 376 2 600 107 8 562 343 4 080 512 296 942 19 620 280 commitments

92 Financial Statements Over December Weighted average Up to 1 1 month to 3 months to 1 year to 5 5 31, 2009 effective interest rate month 3 months 1 year years years Total

Fixed interest rate instruments Deposits by banks 9.6% 242 751 1 140 817 4 258 760 1 621 167 - 7 263 495 Deposits by customers 11.4% 47 419 451 848 1 849 375 404 245 - 2 752 887 Other borrowed funds - - - Subordinated debt 7.3% - - 34 859 594 616 - 629 475 Total fixed interest bearing 290 170 1 592 665 6 142 994 2 620 028 - 10 645 857 financial liabilities

Variable interest rate instruments Other borrowed funds 6.91% 9 062 475 571 46 689 180 783 - 712 105 Deposits by banks 4.71% - - 945 014 - - 945 014 Total variable interest 9 062 475 571 991 703 180 783 - 1 657 119 bearing financial liabilities

Non-interest bearing instruments Deposits by banks 564 811 - - - 564 811 Deposits by customers 1 274 154 - - - - 1 274 154 Other financial liabilities 21 474 - - - - 21 474 Guarantees issued and similar 1 951 3 940 372 528 - - 378 419 commitments Other credit related commitments 643 544 155 780 120 403 302 351 - 1 222 078

Total non-interest bearing financial liabilities and 2 505 934 159 720 492 931 302 351 - 3 460 937 commitments

Total financial liabilities and 2 805 166 2 227 956 7 627 628 3 103 162 - 15 763 912 commitments

The amounts included above for financial guarantee contracts are the maximum amounts the Bank could be forced to settle under the arrangement for the full guaranteed amount if that amount is claimed by the counterparty to the guarantee. Based on expectations at the end of the reporting period, the Bank considers that it is more likely than not that no amount will be payable under the arrangement. However, this estimate is subject to change depending on the probability of the counterparty claiming under the guarantee which is a function of the likelihood that the financial receivables held by the counterparty which are guaranteed suffer credit losses.

IBA-MOSCOW ANNUAL REPORT 2010 93 Financing facilities Interest rate sensitivity The Bank is exposed to interest rate risk because it Market risk borrows funds at floating interest rates. The management Market risk is that the risk that the Bank’s earnings sets limits on the level of exposure by inconsistency of rate or capital or its ability to meet business objectives will be renegotiation periods, which are monitored daily. adversely affected by changes in the level or volatility of The sensitivity analyses below have been determined market rates or prices. Market risk covers interest rate based on the exposure to interest rates for financial risk, currency risk and credit spread risk to which the Bank instruments at the end of the reporting period. For is exposed. There have been no changes as to the way floating rate liabilities, the analysis is prepared assuming the Bank measures risk or to the risk it is exposed. The the amount of the liability outstanding at the end of the management sets limits on the level of exposure which reporting period was outstanding for the whole year. A 50 are monitored daily. basis point increase or decrease is used when reporting The Bank does not enter into transactions with interest rate risk internally to key management personnel derivatives. and represents management's assessment of the The ALCO also manages interest rate and market reasonably possible change in interest rates. risks by matching the Bank’s interest rate position, which If interest rates had been 50 basis points higher/lower provides the Bank with a positive interest margin. The and all other variables were held constant, the Bank's: management conducts monitoring of the Bank’s current ‹‹Equity and profit for the year ended December 31, financial performance, estimates the Bank’s sensitivity to 2010 would decrease/increase by RUB 9 482 thousand changes in interest rates and its influence on the Bank’s (2009: decrease/increase by RUB 6 802 thousand). This profitability. effect is attributable to the Bank’s exposure to interest The majority of the Bank’s loan contracts and other rates on its variable rate borrowings. financial assets and liabilities that bear interest are either variable or contain clauses enabling the interest Currency risk rate to be changed at the option of the lender. The Bank Currency risk is defined as the risk that the value of monitors its interest rate margin and consequently does a financial instrument will fluctuate due to changes in not consider itself exposed to significant interest rate risk foreign exchange rates. The Bank is exposed to the effects or consequential cash flow risk. of fluctuations in the prevailing foreign currency exchange Market risk exposures are measured using sensitivity rates on its financial position and cash flows. analysis. The Bank’s Management Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions. The Treasury Department performs daily monitoring of the Bank’s open currency position with the aim to match the requirements of the CBR.

94 Financial Statements The Bank’s exposure to foreign currency exchange rate risk is presented in the table below:

USD 1 = EUR 1 = December 31, RUB Other currencies 30.4769 RUB 40.3331 RUB 2010 Total

Non-derivative financial assets Cash and balances with the CBR 554 924 88 091 41 952 3 323 688 291 Financial assets at fair value through profit 45 390 - - - 45 390 or loss Due from banks 263 578 4 609 878 892 095 125 182 5 890 733 Loans to customers 2 698 099 5 647 927 2 217 033 - 10 563 059 Other financial assets 11 037 12 308 24 026 - 47 372 Total non-derivative financial assets 3 573 028 10 358 206 3 175 106 128 505 17 234 845

Non-derivative financial liabilities Deposits by banks 142 229 8 110 726 2 602 367 2 753 10 858 075 Deposits by customers 1 876 170 2 448 884 670 783 123 326 5 119 163 Subordinated debt - 529 858 100 833 - 630 691 Other financial liabilities 25 098 10 295 512 - 35 904 Total non-derivative financial 2 042 497 11 099 763 3 374 494 126 079 16 643 833 liabilities

OPEN BALANCE SHEET POSITION 1 529 531 (741 557) (199 388) 2 426 591 012

USD 1 = RUB EUR 1= RUB December 31, RUB Other currency 30.2442 43.3883 2009 Total

Non-derivative financial assets Cash and balances with the CBR 493 296 59 471 81 010 1 438 635 215 Financial assets at fair value through profit 149 745 - - - 149 745 or loss Due from banks 373 476 3 279 555 870 625 21 900 4 545 556 Loans to customers 1 630 920 4 708 018 2 108 070 - 8 447 008 Other financial assets 2053 79 1 547 - 3 679 Total non-derivative financial assets 2 649 490 8 047 123 3 061 252 23 338 13 781 203

Non-derivative financial liabilities Deposits by banks 176 976 5 753 295 2 020 899 80 7 951 250 Deposits by customers 1 094 168 2 099 867 666 818 21 297 3 882 150 Other borrowed funds - 465 432 431 038 - 896 470 Subordinated debt - 352 027 108 498 - 460 525 Other financial liabilities 8187 12 741 289 257 21 474 Total non-derivative financial 1 279 331 8 683 362 3 227 542 21 634 13 211 869 liabilities

OPEN BALANCE SHEET POSITION 1 370 159 (636 239) (166 290) 1 704 569 334

IBA-MOSCOW ANNUAL REPORT 2010 95 Currency risk sensitivity The following table details the Bank’s sensitivity to a 10% increase and decrease in the RUB against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes loans to customers of the Bank where the denomination of the loan is in a currency other than the functional currency of the lender or the borrower. A positive number below indicates an increase in profit and other equity where the RUB strengthens 10% against the relevant currency. For a 10% weakening of the RUB against the relevant currency, there would be a comparable impact on the profit and other equity, and the balances below would be negative.

USD impact EUR impact

2010 2009 2010 2009

Other equity/profit (2 767) (1 395) (664) (594) before tax

There is no additional effect on the participant’s funds other than the above effect on profit and loss. Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. The sensitivity analyses do not take into consideration that the Bank’s assets and liabilities are actively managed. Additionally, the financial position of the Bank may vary at the time that any actual market movement occurs. For example, the Bank’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value on in the statement of financial position. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Bank’s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion. Operational Risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes. 24. SUBSEQUENT EVENTS Bank has initiated the procedure of registration of the changes to the constituent documents related to the increase in the authorized capital of the Bank.

96 Financial Statements