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FSC logo means that this Report was printed on paper that comes from responsibly managed forests Federal Passenger Company Annual Report 2016 Annual Report 2016

Federal Passenger Company In 2016, RZD Holding’s key focus throughout the year was on improvements to customer service.

We strove to improve the quality of passenger service by leveraging our own resources and capabilities. Through our efforts undertaken as part of the Year of the Passenger Programme, we succeeded in reversing the negative trend in passenger transportation, carrying 1.37 billion people by rail, a 1.6% increase over 2015.

Domestic travel has gained popularity with passengers, including leisure travel, which was particularly visible in strong passenger numbers during the summer holiday period. To make our services even more convenient for our passengers, we started selling tickets for all long-distance trains 60 days before departure. We plan to increase this period to 120 days, to enable customers to plan their travel well in advance. We remained fully aware of passengers with restricted mobility or other special needs, focusing on providing greater comfort to these customer groups aboard trains and at stations. From a message by RZD President Oleg Belozerov JSC RZD Annual Report 2016 – Year of the Passenger Improvement of service quality throughout the customer journey

Before travel During travel After travel

Care for passengers E-ticket sales New routes New rolling New customer with reduced Passenger Corrective stock experience mobility feedback actions

Loyalty Dynamic New travel experience New services Satisfied programme pricing and loyal customer

Year of the Passenger 2016 Priorities

HIGHER AFFORDABILITY HIGHER COMFORT DEVELOPING A CUSTOMER CENTRIC OF SERVICES AND SERVICE QUALITY APPROACH TO PASSENGER SERVICE

• 50% discount off the price of tickets • Development of ticket sales Stronger customer focus among for children • Expansion of the product portfolio the personnel • Lower tariff indexation for third-class • Provision of additional • Passenger feedback sitting and sleeping carriages on-board services • Development of the Revenue Management System and Loyalty Programme

SERVICES TO PASSENGERS WITH REDUCED MOBILITY

IMPROVED GOVERNMENT RELATIONS • Inter-Regional Passenger Service Long-Term Regulation Concept • Reduction of the VAT rate for passenger services to 0% A new Moscow – Berlin Strizh train was launched in the Year of the Passenger. Its carriages are equipped with a variable gauge system, unique in the Russian market, which automatically adjusts axle gauges for efficient conversion between Russian and European tracks.

Moscow Berlin

Children on Board Programme

Under Children on Board Programme, FPC purchased two double decker inter-regional (open-plan seating) carriages with a children playroom for passengers with children. The carriage has everything a child may need: educational games, cuddle toys, a TV set, and colouring books. The first run of such train took place on the Moscow – Voronezh route on 27 December 2016.

Oleg Belozerov President of Russian Railways Content

Company Government 4 Profile 60 Relations

Geography 4 Investment appeal and key indicators 6 Company history 8 Competitive advantages of long-distance trains 12 FPC peer companies 14 Key events in 2016 16 Message from the Chairman of the Board of Directors 20 Message from General Director 22 Risk 64 Management

Overview of the risk management framework 66 Risk management structure 67 Stages of the risk management process 68 Risk matrix 69 Company Risk map 70 24 Strategy

Mission, Vision, and Strategy 26 Strategic projects 31 Key objectives for 2017 37

Passenger The Company’s 88 Service Business Model 38 and Assets Quality policy 90 Quality monitoring 90 Business model 40 New carriage types 92 Assets 42 On-board passenger services 94 Organisational structure 45 Projects implemented 102 Expanding the area covered by Daytime Express train services 104 Examples of projects planned for 2017–2018 105

46 Market Overview

Macroeconomic environment 48 Russian market of transport services 50 International transport services market 51 Pricing policies 52 108 Safety and Security

Train operation safety 110 Fire safety 111 Marketing Industrial safety 112 54 Policy Transportation safety and security 112 Corporate, economic and information security 113 Occupational health and safety 113 Key marketing initiatives in 2016 56 Anti-corruption policy 114 Dynamic pricing system 57 Loyalty Programme 58 Review of Operating and Financial Corporate 116 Results 150 Governance Operating results 118 Overview of the corporate governance model and practice 152 Highlights 119 Share capital 156 Changes in key indicators over 2016 120 Dividend policy 157 Financial results 120 Shareholders Meetings 158 Board of Directors 159 Board of Directors’ Report 164 Report of the Audit Committee 171 Report of the Human Resources, Remuneration and Corporate Governance Committee 174 Report of the Strategic Planning Committee 177 External evaluation of corporate governance 180 General Director 180 Deputy General Directors 181 Investment Report on compliance with the Bank of Russia’s Corporate Governance Code 186 Management 134 Audit Commission 187

Investments ranking 136 Structure of investments 137 Priority investment areas 138 Mid-term investment 139

Sustainable 190 Development

Personnel 192 Social Policy 198 Environmental Impact Management 202 Charitable Activities 204 140 Procurement

206 Appendix Glossary and List of Abbreviations 206 Disclaimer 207 International FPC’s Registrar Details 208 144 Activities Contacts 208

Improvement of the Pricing Policy and optimisation of international rail services 147 Promotion of transport products on international markets 147 Improvements to the international regulatory framework 148 Expansion of bilateral cooperation 149 Company Profile Geography Russian Railways rail infrastructure

Murmansk

Kaliningrad Riga Saint Petersburg Arkhangelsk

Vorkuta Norilsk Vologda Salekhard Novy Urengoy Moscow Kostroma Kiev

Kirov

Voronezh Ulyanovsk Nizhnevartovsk Yekaterinburg Samara Rostov-on-Don Ufa Chelyabinsk Tomsk Volgograd Krasnoyarsk Krasnodar Elista Omsk Novosibirsk

Vladikavkaz Astrakhan

Astana Tbilisi

Baku

Russian regions FPC route network includes European and Asian countries FPC provides passenger several routes within FPC carries passengers on 40 international 77 rail transportation in 77 Russia which have no other 19 long-distance routes to 19 countries in of 85 Russian regions alternative modes of transport Europe and Asia – Germany, France, and ensures transport available, such as: Italy, Poland, Austria, the Czech Republic, accessibility and Tynda – Komsomolsk, Latvia, Lithuania, Estonia, Finland, China, connectivity between Petrozavodsk – Kostomuksha, Mongolia, North Korea, Azerbaijan, locations. Kamyshin – Moscow, Tomsk – Kazakhstan, Kyrgyzstan, Uzbekistan, Bely Yar, etc. Belarus, Moldova.

4 Federal Passenger Company Annual Report 2016 Types of activities

FPC is engaged in the following types of activities.

FPC is a national passenger rail carrier of the Russian Federation, and an entity subject to antimonopoly Rail passenger transportation on regulation. Russian Railways domestic routes in the regulated rail infrastructure forms the sector using: basis of FPC’s route network • third-class sleeping carriages; (over 85.3 thousand km as at • third-class sitting carriages; 1 January 2016) – the world’s • multiple unit trains. third longest rail network.

Passenger transportation on Khabarovsk domestic routes in the deregulated sector using: Blagoveshchensk • luxury and saloon carriages; • first-class carriages; Chita • compartment carriages; carriages with open-plan seating; Ulan-Ude • passenger transportation by special Vladivostok • order and regular tourist trips; Irkutsk • provision of third-party carriages in FPC trains on domestic routes.

International long-distance passenger Baggage, unaccompanied baggage, Other types of business transportation: and mail transportation: activities include:

• passenger transportation • baggage transportation; • repair and maintenance of clients’ rolling on international routes; • unaccompanied baggage transportation; stock; • provision of third-party carriages • provision of freight forwarding • provision of additional services on trains; in FPC trains on international routes. companies’ carriages in FPC’s trains. • other types of activities: • lease of rolling stock; • lease of real estate and equipment.

Federal Passenger Company 5 Annual Report 2016 FPC’s investment appeal

1. Monopolistic position in the 3. The Company’s high social 4. Strategic importance for long-distance rail passenger and strategic importance for the implementation of long- transportation market in Russia. the state as the main transport term objectives of state-owned operator for long- and medium- RZD Holding. 2. Low competition in the domestic distance travel covering most rail passenger transportation of Russia, including regions with 5. State regulation of fares for long- market from international extreme climatic and natural distance passenger transportation, companies due to challenges conditions which lack road and income loss compensation paid in entering the Russian market. transport infrastructure. by the state.

Key indicators

Indicators 2014 2015 2016 2016/2015, %

Passenger turnover, billion passenger-kilometres 94.6 86.1 89.5 103.9

on trains made up by FPC 87.5 81.1 85.1 104.8 deregulated segment 28.7 24.2 26.0 107.2 domestic traffic 25.2 22.7 24.3 107.1 interstate traffic 3.5 1.6 1.7 108.2 regulated segment 58.8 56.9 59.1 103.8 on trains made up in the CIS and Baltic states 7.1 4.9 4.4 89.2 Passengers carried, million people 98.7 91.3 93.8 102.7

deregulated segment 35.9 30.3 31.1 102.5 regulated segment 62.8 60.9 62.7 102.9 Average number of carriages in a train, carriages 13.0 12.7 12.7 100.0

Passenger turnover by train type in 2014–2016, % Passenger turnover by carriage type in 2014–2016, %

66.1 71.2 Third-class All-year express sleeping carriages 67.2 trains 72.1 66.8 71.2 1.4 2.2 First-class, luxury 1.3 Other1 2.1 1.3 0.8 1.6 Third-class sitting carriages 0.8 6.2 0.6 Seasonal passenger trains 5.2 27.5 Compartment 27.1 5.6 carriages 28.4 20.4 2016 2016 All-year 4.2 20.6 2015 Open-plan 2015 passenger trains seating 3.7 21.7 2014 3.0 2014

1 Other trains include seasonal express trains, one-off passenger trains, local passenger trains (running on one railway line only).

6 Federal Passenger Company Annual Report 2016 6. Conservative financial policy 8. Railway passenger services and low debt level. to support major passenger flows in Russia. 7. High potential growth of population mobility.

Average revenue per passenger Revenue from operating activities EBITDAR and EBITDA margin (incl. VAT) in 2014–2016, RUB in 2014–2016, RUB billion (incl. Subsidies) in 2014–2016 Среднее значение доходных поступлений (с НДС) от одного пассажира, руб. 24.3

145 142 138 201.2 18.6 185.6 181.2 11.0 16.9 1,949 2,016 1,830

9.0 8.1

2014 2015 2016 2014 2015 2016 2014 2015 2016 Transport services EBITDA Additional services on trains EBITDA margin

Total debt to EBITDA and total debt Rolling stock acquisition in 2014–2016, carriages to revenue ratios in 2014–2016

1.04 115 0.87 0.81 86 78 80 73 70 62 57 50

31 25 16 10 0.09 0.09 0.10

Compartment and Third-class Double-decker RIC carriages Other 2014 2015 2016 ﬁrst-class carriages sleeping carriages carriages 2016 2015 2014 Total debt / EBITDA Total debt / revenue

Federal Passenger Company 7 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Company history1

Key milestones 2010 2011 2012 2013

FPC gained the actual status FPC was officially admitted FPC was awarded FPC was assigned the status of a national rail long-distance to the international with the Company of observer at the OSJD, carrier: The Company was Organisation for Cooperation of the Year 2012 National Award which entitles it to represent included in the Register of Railways (OSJD) and by RosBusinessConsulting the Company at the meetings of Natural Monopolies eligible was made a member (RBC) information agency. of the OSJD working for subsidies from the federal of the International Union bodies, thus strengthening budget. of Railways (UIC). the Company’s position in the international transport services market.

State and restructuring 2010 2011 2012 2013

Restructuring of long-distance Regulatory and legal Cooperation Agreements were The Plan to Develop and passenger infrastructure framework for revenue signed with the Governments Implement a Mechanism under Stage III of the Railway shortfall calculation was of the Republic of Karelia, for Long-Term Subsidising Restructuring Programme was finalised. the Komi Republic, and of Long-Distance Rail completed. the Republic of Ingushetia. Passenger Transportation was approved by instruction of Russian Deputy Prime Minister Arkady Dvorkovich.

8 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

2014 2015 2016

Credit rating was assigned to FPC Award at the national loyalty marketing The Year of the Passenger Programme was by the leading rating agencies. competition Loyalty Awards Russia successfully implemented: in 2016, FPC 2015 in the Best Loyalty Programme managed to stop the declining passenger FPC Annual Report was awarded by a Transportation Company category. turnover rates for the first time in five years in the Best Presentation of a Business and achieve a 4% growth. Model for Non-Public Companies Double-decker train from Moscow category at the Annual Report to Voronezh was entered in the Russian FPC won the Best Employer for Young Competition by the Moscow Exchange. Book of Records as the “year-round People 2016 award in the Reliable regular long-distance train with the largest Partnerships category. number of passenger seats” – 1,320 seats. FPC 2015 Annual Report was awarded FPC Annual Report was awarded the Best Annual Report of a Non-Public for the second time in the Best Company by the Moscow Exchange. Presentation of a Business Model for Non- Public Companies category at the Annual Report Competition by the Moscow Exchange.

2014 2015 2016

Fares for travel in third-class sitting The Russian Government resolved The Russian Government resolved and sleeping carriages were reduced to reduce the VAT rate applicable to long- to reduce the VAT rate applicable to long- following the resolution of the Federal distance rail passenger services to 10% distance rail passenger services to 0% Tariff Service (FTS of Russia). between 1 January 2016 and 31 December between 2017 and 2030. 2017. In accordance with the Russian The Federal Antimonopoly Service (FAS) Government’s Resolutions No. 1223 dated of Russia resolved to reduce infrastructure 19 November 2014 and No. 1044 dated 11 tariffs for higher-speed trains travelling October 2014, FPC was entitled to receive at 91 to 140 km/h. subsidies covering part of interest expenses under loans granted to purchase rolling stock (double-decker carriages), and to benefit from the Programme to Support Investment Projects in Russia on the basis of project financing.

1 The terms “Company” and “FPC” are used interchangeably in this Report.

Federal Passenger Company 9 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Business development

2010 2011 2012 2013

FPC started independent All FPC’s domestic trains FPC 2030 Development Double-decker train was operations. support online registration. Strategy was approved. launched on the Moscow – Adler route. RZD’s website was adjusted Ticket sales on credit were to enable the sale of e-tickets launched. Co-branding card project was for FPC’s trains via mobile launched in cooperation with devices. Implementation Bank VTB 24 (PJSC). of the technology for including Controlling share of RZD Travel trains in the general Unified maintenance facility LLC was acquired to expand turnaround schedule was for double-decker rolling FPC’s presence in the tourist expanded. stock was launched at market (rail travel segment). the Mineralnye Vody depot. A logistics company engaged in unaccompanied baggage Procedure for e-ticket and mail transportation – purchase and refund was FPC-Logistics – was launched. simplified; the English version of the website for ticket Revenue Management System purchase was launched. and RZD Bonus Loyalty Programme were launched. High-Speed Traffic Improvement Programme was Car carriers were put into implemented. service.

Сarriage operator

10 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

2014 2015 2016

Pilot project on multimodal transportation Strizh high-speed train made up of Talgo New international Strizh train set off on its was implemented (Moscow – Valuyki). carriages was launched on the Moscow – first passenger journey from Moscow Nizhny Novgorod route. to Berlin with travel time of 20 hours, i.e. FPC fully adopted the technology shorter by 4.5 hours. for transporting baggage in a dedicated Double-decker train made up of carriages compartment. with open-plan seating was launched Booking dates for domestic trains were between Moscow and Voronezh. increased to 60 days. Lastochka electric trains were launched. Sales of e-tickets for multimodal routes Trains to resort destinations were Cost Optimisation Programme was were launched. accelerated. implemented, bringing RUB 15 billion of savings. Total effect in 2010–2014 Cost Optimisation Programme was Passengers were offered to use non-cash reached RUB 39 billion. implemented, bringing RUB 15.7 billion payment for goods on board of all FPC’s of savings. trains for the first time.

On-board Shower service was made available in 266 trains.

In June 2016, FPC successfully completed its RUB 5.0 billion three-year debut bond issue on the Moscow Exchange.

Integrated mobility provider

Federal Passenger Company 11 Annual Report 2016 Competitive advantages of long-distance trains

ENVIRONMENTAL FRIENDLINESS BAGGAGE ALLOWANCE AND SAFETY Compartment – up to 36 kg The most environment-friendly and safe mode Luxury carriage – up to 50 kg of transport

RAILWAY STATIONS’ PROXIMITY TRAVELLING WITH A CAR TO CITY CENTRES Opportunity to travel with own car Departure from / arrival to city centre avoiding traffic jams

COMFORTABLE TRAVEL PASSENGER SERVICES TO CHILDREN Proper rest throughout the trip Children up to five years old travel free of charge 12 Federal Passenger Company Annual Report 2016 WEATHER CONDITIONS AFFORDABLE TICKET FARES Travel in any weather conditions Benefits, relatively low prices, regular special offers

QUICK BOARDING REFUND TERMS AND CONDITIONS No lengthy check-in procedure Minimum commission for ticket refund and reissue, refunds can be processed via the website

CATERING TRANSPORTATION OF PASSENGERS Dining carriage, meals à la carte, WITH REDUCED MOBILITY room service Specially equipped compartment, Federal Passenger Company 13 assistance during the trip Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

FPC peer companies1

FPC2 Amtrak (USA)3

94 +2.5 31 +0.3 million million million million passengers passengers passengers passengers carried change vs 2015 carried change vs 2015

FPC’s activities cover a full range of business processes: acquisition, Amtrak’s business includes all business processes associated with maintenance and repair of rolling stock, sales organisation, transportation, including a network of repair depots and facilities collection of revenue, management and administration, IT and in 12 US states. The company also operates own locomotives communications. FPC has 15 branches and an extensive network and sections of high-speed passenger service infrastructure of depots and carriage sites, as well as personnel to support of the Northeast Corridor. all business processes. FPC’s income comprises income from passenger transportation excluding income from baggage and unaccompanied baggage transportation.

1 Data on DB and SNCF taken from their 2015 annual reports; and on Amtrak – from the company’s press release on FY2015 results. 2 FPC data for 2016. 3 https://www.amtrak.com/servlet/ContentServer?c=Page&pagename=am%2FLayout&cid=1246041980246 4 Deutsche Bahn – 2015 Integrated Report. 5 SNCF – 2015 Financial Report.

14 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

DB Bahn Long Distance (Germany)4 SNCF Voyages (France)5

129 +3.0 127 +0.1 million million million million passengers passengers passengers passengers carried change vs 2015 carried change vs 2015

DB Bahn Long Distance is a business unit within Deutsche Bahn Voyages is a business unit within SNCF Holding, which comprises Group comprising several carriers with extensive geography and several companies offering rail and bus services in Europe, as well wide range of activities (day/night trains, tourism, train catering, as specialist companies engaged in sales, customer relations, IT, marketing, and sales). Rolling stock repair, maintenance, and and rolling stock management. Repair operations are not part management, IT and communications are provided by specialist of the unit’s activities and are provided by Masteris, a company companies within DB Services, another Deutsche Bahn unit. within the Holding that provides services to SNCF Holding and third-party customers across Europe.

Federal Passenger Company 15 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Key events in 2016

Year of the Passenger Route network expansion and rolling stock upgrades

RZD Holding declared 2016 the Year Daytime express trains • the number of double-decker trains of the Passenger. During the year, Three new daytime express trains were on the Moscow – Saint Petersburg the Company became more transparent launched in 2016: and Moscow – Voronezh routes was for its customers and introduced new increased. passenger feedback channels: open • No. 120/119 Moscow – Saransk, meetings with passengers, online office as from 30 May 2016; Since 27 December 2016, double- of General Director, online trip feedback • No. 103/104 Ufa – Samara – Saratov, decker trains No. 69/70 and No. 45/46 engine. as from 10 June 2016; Moscow – Voronezh have featured • No. 250/249 Irkutsk –Ulan-Ude, new administrative carriages with rest as from 20 December 2016. areas for passengers with children. Such playrooms have children’s furniture, TV Second Lastochka train was put on sets, cuddle toys and educational toys existing routes No. 801/802 Adler – (toy blocks, mosaics, building sets), and Krasnodar (as from 2 May 2016), painting sets. and No. 721/724 Moscow – Kursk (as from 11 December 2016). Three Moscow – Belgorod trains were International Strizh train transferred to the higher-speed category. Since 17 December 2016, a new 13/14 Strizh train has been running between In 2016, daytime express trains carried over Moscow and Berlin. 10 million passengers. The innovative technology helped reduce the travel time from Berlin to Moscow Double-decker trains to 20 hours 14 minutes. The geography of double-decker trains was expanded: Each train includes various carriage types manufactured by Patentes Talgo S.L., • a new Saint Petersburg – Adler train was Spain. Innovation technologies used launched; in train design ensure higher comfort

16 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Special projects

for passengers during a trip, in particular, In 2016, FPC trains were used to run major scientists, travellers, photographers and compensate for centrifugal force on small- national social and educational projects. members of the Russian Geographical radius turns. Society dedicated to the Trans-Siberian As part of the Year of Russian Cinema, Railway history, Russian geography, On board passengers, are offered 12 double-decker trains were designed environmental protection, and historical Wi-Fi access to the Internet through to celebrate famous writers, directors, and contemporary expeditions conducted a multimedia portal. The portal may be actors and cameramen, and passengers by the Society. used to view a timetable, a dining carriage were offered to watch masterpieces menu or passenger news, get information of Russian cinema. The Company also supported the all- on a route, purchase a ticket or watch Russia Amur Tiger and Far Eastern Leopard a film. In addition, passengers of first- To celebrate the 100th anniversary Conservation Project by decorating class carriages with open-plan seating of the Trans-Siberian Railway and the 50th a campaign train that crosses the entire are provided, upon request, with tablets anniversary of the Rossiya train travelling country. for viewing multimedia content. from Moscow to Vladivostok, the Company jointly with the Russian Geographical The 85th anniversary of the launch Society launched the Road of Discovery of the historical Krasnaya Strela (train scientific and educational project. Rossiya No. 1/2) running between St Petersburg trains interiors were decorated with visual and Moscow was celebrated representations of the Trans-Siberian on 9 June 2016. The fifth anniversary Railway: maps and layouts, photographs of Moscow – Berlin – Paris train No. 23/24 showing the history of the railway was celebrated on December 14. construction and launch, landscapes, and interesting facts. The country’s largest railway stations hosted lectures and master classes by explorers,

Federal Passenger Company 17 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Key events in 2016

Development of Improvements to electronic sales on-board passenger channels services

2016 saw extensive development By late 2016, Wi-Fi Internet access and FPC seeks to make its services affordable of electronic passenger services, including access to on-board entertainment services for all passenger groups. For example, e-ticket sales. Days before departure platform were provided in 51 trains. in 2016, the Company purchased were increased from 45 to 60, and Russian 565 wheelchairs enabling physically Railways’ e-ticket purchase procedure has All FPC’s trains have non-cash payment challenged passengers not only to travel now three steps instead of seven. terminals to pay for goods or services in a specialised administrative carriage on board. compartment, but also to use a lower Russian Railways website now offers berth in any compartment of the carriage. e-tickets for international trains running Long-distance passengers are now offered FPC purchased 18 administrative carriage to non-CIS countries at fares equal to first- an On-board Shower service available with compartments for special needs class single ticket fares. in 266 trains. passengers; overhauled 40 administrative carriage with service life extension to make The Company launched an Android-based In 2016, over 1,600 carriages were fitted compartments fit for passengers with mobile app for purchasing tickets for long- with additional power outlets to charge reduced mobility. The Company also had distance trains. mobile devices. 16 passenger carriage models certified to carry passengers with special needs. FPC’s website contains a page for corporate Car transportation service by car carriers customers where legal entities can apply is gaining popularity. In 2016, FPC’s trains online for the transportation of organised carried 4 703 cars, up 44% year-on-year. groups of passengers and children. In 2016, FPC started testing a motorbike transportation service by specialised Since 6 September 2016, Russian car carriers included in passenger train Railways’ website has offered sets on the Moscow – Saint Petersburg, e-tickets to school students with Moscow – Petrozavodsk, Moscow – a 50% discount for seats/berths Astrakhan, Saint Petersburg – Astrakhan in third-class sitting and sleeping carriages routes. In spring 2017, this service will and carriages with open-plan seating become permanent. The Company on express and passenger domestic long- also expects to launch motorbike distance trains operated by FPC. In 2016, transportation on the Saint Petersburg – the share of electronic sales was 40.2% Adler and Moscow – Adler routes. of the total number of tickets sold across RZD’s network.

18 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Pricing policy RZD Bonus Loyalty Awards and marketing Programme promotions

In 2016, FPC offered a 50% discount On 19 November 2016, FPC greeted In 2016, the RZD Bonus Loyalty Programme for children aged 10 to 17 for the first the two millionth RZD Bonus card holder at won the Loyalty Award Russia 2016 time. The discount is effective from 1 June Kazan station. for the Best Transportation Company to 31 August. Before that, travel privileges Loyalty Programme. were only available during the school year, Last year, the Programme card holders from 1 September to 31 May. It resulted were offered new privileges. RZD FPC won the Best Employer for Young in a 16% growth of traffic in this passenger Bonus card holders who are pensioners People 2016 award in the Reliable group in 2016. The number of passengers now enjoy a 5% discount for travelling Partnerships category. aged 10 to 17 totalled about 2.5 million in compartments. The discount is in June–August. applicable to tickets for domestic trains In December 2016, FPC, as a bond issuer, departing from 1 September 2016 to 31 won a Cbonds Awards in the Debut In December 2016, the dynamic pricing May 2017. of the Year category. system covered 100% of the deregulated domestic segment, excluding some socially To boost the Loyalty Programme, FPC 2015 Annual Report was awarded necessary trains. in September 2016, FPC, Gazprombank the Best Annual Report of a Non-Public and Mastercard launched the first joint Company by the Moscow Exchange. On 14 January 2017, another 150 regular project to issue co-branded bank cards trains were launched using the flexible for students using contactless payment pricing mechanism. Applied since 2013, technology. Card holders enjoy a year- the dynamic pricing system for long- round 25% discount for compartment distance trains is FPC’s most flexible pricing carriages on domestic routes, which is tool. a distinctive offer on the Russian banking market.

Allegro train passengers were also offered to join the RZD Bonus Loyalty Programme in 2016.

Federal Passenger Company 19 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Message from the Chairman of the Board of Directors

Dear Shareholders and Colleagues,

In 2016, which was declared the Year of the Passenger, FPC’s activities were carried out according to the RZD Holding's Common Action Plan on improvement of passenger services. An extensive range of projects and new approaches to the Company’s workflow organisation drove stronger financial performance – according to the year-end results, the Company‘s profit reached RUB 5.3 billion.

The Company successfully implements Modern rolling stock is a key component It should be emphasised that the Russian project management methods. In 2016, of a high-quality service. In 2016, FPC Government’s resolution to reduce the VAT five strategic projects were initiated allocated over 90% of its investments rate to 10% in 2016 allowed FPC to expand in key areas: Affordability, Network, to increasing carriage purchases, its Investment Programme, thereby Fleet, Repairs, and Crew. Comprehensive and the continued replacement and purchasing more carriages from domestic efforts within these projects are aimed at upgrading of its passenger rolling stock. manufacturers. As of 2017, the VAT enhancing the Company’s performance The remaining funds under the Investment rate will see a further reduction to 0%, and customer focus, improving consumer Programme were invested in depot applicable to long-distance rail passenger properties of transport services, and upgrades, innovation and information services. The reduction will provide boosting labour productivity. initiatives, as well as implementation the Company additional opportunities of the Integrated Programme to Ensure to continue its carriage fleet renewal. Public Safety on Transport. A strong marketing strategy has A total of 294 new passenger carriages enabled us to develop attractive offers were purchased in 2016 under both in the regulated and deregulated the Investment Programme, including segments for various passenger categories. The bulk of investments were double-decker and conventional carriages We offered a discounted fare for children allocated to rolling stock, to replace the rolling stock of high class aged from 10 to 17 during the summer amounting to trains, as well as innovative carriages period and launched by Patentes Talgo S.L., which are equipped marketing promotions in third-class with an automatic variable gauge wheelset sitting and sleeping carriages. >90 % system.

20 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Sergey Maltsev

In the deregulated segment, the dynamic of members within the RZD Bonus engineering facilities. In 2016, FPC’s pricing system now covers almost Programme to 3 million. standard Environmental Protection 100% of routes, and a significant Management System was developed. All amount of tickets within the dynamic In 2016, the Company made significant the positive changes implemented during pricing system are sold at prices lower progress in improving its corporate the Year of the Passenger will certainly or comparable to basic fares. According governance practice. The target framework be further developed within new projects to surveys, 94% of passengers claim they of key performance indicators at FPC in 2017. At the core of each project, FPC have benefited from the implementation was approved, and the risk management will pursue its mission to improve quality of the system, and actively take advantage and internal control system was further of life by making travel safe, reliable, and of it. developed. The results of these efforts comfortable. have been praised by independent experts: Within the Russian Railways Bonus in 2016, RAEX (Expert RA) rating agency loyalty programme, benefits for students affirmed the Company’s 2015 rating at and corporate customers were further A+ .gq, Very High Level of Management developed, discounts were introduced Quality. for pensioner members, and Allegro trains passengers were included into Environmental protection and energy the programme. In 2017, new co-branding efficiency are among the Company’s initiatives with select banking institutions highest priorities. The Company regularly are to be launched, and additional conducts various activities to mitigate 294 privileges for passengers implemented. the negative impact on the environment, new passenger carriages The Company plans to increase the number and upgrades its rolling stock and purchased in 2016

Federal Passenger Company 21 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Message from General Director

Dear Shareholders, Partners, and Colleagues,

2016 was announced the Year of the Passenger at RZD Holding, and became a milestone in further development of the entire rail passenger infrastructure. A significant share of activities implemented across the Holding was within FPC’s area of responsibility. All planned projects were successfully implemented. As a result, passengers gave a positive evaluation of our efforts: in 2016, FPC managed to reverse the downward trend in passenger turnover, and achieved a 4 per cent growth.

In 2016, the Company’s activities were more affordable. A 50% discount The Company allocated over 90% of its primarily focused on developing its for children aged from 10 to 17 travelling investments in a major effort to replace customer-oriented approach, particularly in third-class sitting and sleeping carriages and upgrade the rolling stock. In 2016, with a focus on people people with during the summer period was introduced new carriages were included in the rolling reduced mobility, as well as enhancing for the first time. As a result, over stock of high-class trains, and more routes passenger satisfaction, increasing 2.5 million children travelled at reduced were made available for double-decker affordability, and improving government fares, up 16% year-on-year. Flexible trains. Those are the ones with children’s relations. pricing was introduced in December playrooms, fully equipped to entertain 2016 – almost 100% of routes were young passengers with educational games, We strove to hear every passenger’s covered by the dynamic pricing system soft toys, colouring books, and cartoons voice, and to this end the efficiency of our in the deregulated segment. Special from Soyuzmultfilm’s gold collection. feedback mechanism was improved initiatives within the RZD Bonus loyalty by introducing open meetings at railway programme were also developed and Improvements were also made on offers stations, the General Director’s virtual implemented, aimed at students and covering international routes. The Strizh reception, and online questionnaires pensioners. train, manufactured by Patentes Talgo for travel feedback. Prompt, high-quality S.L., has been operating between Moscow feedback has played an important role In the reporting year, the advance booking and Berlin since 17 December. Its carriages in driving significant improvements period for domestic services was extended are equipped with a variable gauge in service quality throughout the customer from 45 to 60 days. E-ticket sales services system, unique on the Russian market, journey, beginning with the travel were further developed, and a number which automatically adjusts axle gauges planning stage. of trains became much faster, primarily for efficient conversion between Russian on routes to Russian resorts. and European tracks. This innovative In the Year of the Passenger, technology has enabled a considerable long-distance trains became reduction in travel time, and has

22 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Petr Ivanov

undoubtedly ensured a more comfortable and over 1.6 thousand carriages have tiger – a campaign train has been running travel experience for all passengers, been fitted with additional power outlets across the country since September. As including those with special needs, as there to charge mobile devices. Experimental part of the Year of the Russian Cinema, are more compartments for people with trials of motorcycle transportation have 12 double-decker trains received a themed limited mobility. been introduced on passenger trains design, and Russian cinema masterpieces which contain car carriers. In spring 2017, were played aboard trains. It’s a high priority for the Company motorcycle transportation is planned to provide a comfortable trip for launch as a permanent service, and Summing up the Company’s performance for passengers with limited mobility – the list of routes with this service is to be in 2016, I can say with certainty that new administrative carriages equipped expanded. the Year of the Passenger has become with compartments for passengers with a year of fundamental change and reduced mobility and with wheelchairs; It also stands to mention that transformation. However, these different models of passenger trains were the Company’s trains have become accomplishments should not make us certified for transportation of people with venues for major nation-wide social complacent. And so our progress does reduced mobility. and educational projects. Scientific and not stop here – our objective is to further educational project the Road of Discoveries enhance passenger comfort and service In 2016, we expanded the list of on- was launched in cooperation with quality, and to expand our product board passenger services and added new the Russian Geographical Society to mark portfolio. From now on, FPC will make service offerings. Specifically, passengers the 100th anniversary of the Trans- every year the Year of the Passenger. can now use a bank card to pay for all Siberian Railway and the 50th anniversary products offered aboard FPC trains, and of the Rossiya train, which operates shower units are now available for use on the Moscow – Vladivostok route. on a number of trains. More trains have We supported a national Russian been equipped with Wi-Fi internet access, project on protection of the Amur

Federal Passenger Company 23 Annual Report 2016 As a response to external challenges, at its annual strategy session held in February 2016, FPC initiated new strategic projects with the aim to make improvements to the main components of its business system: improvement of the route network, Company 01 Strategy

Our five current strategic projects:

Affordability

Network Fleet

Repairs Crew

interactions with the regulator and infrastructure, operation and maintenance of the rolling stock, and enhancement of a train crew focus on the customer-oriented approach. The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Company Strategy

Mission, Vision, and Strategy

Mission

We improve the quality of life by making your travel experience as safe, affordable, and comfortable as possible.

Our mission is centered around customer Every change ultimately contributes focus. Customer-oriented approach is to the Company’s mission. a core principle of everything we do.

Vision

FPC is a highly efficient, financially sound, innovative, rapidly developing company focused on enhancing shareholder value.

• FPC acts as a national carrier providing We offer convenient and comfortable the Russian Government to ensure traditional and high-speed long- travel experience, including connections general access to the most environment- distance rail passenger services in Russia with other modes of transport friendly mode of transport. and abroad. and multimodal transportation. • FPC operates under a recognisable • FPC is a customer-focused company, • FPC is a socially responsible company international brand and is a reliable leading the market in service quality. acting under instruction from partner across Europe and Asia.

Strategic goals

FPC plays a crucial role in RZD According to the Programme, RZD ensuring that up to 20% of the services Holding, being the largest subsidiary Holding’s targets in the passenger sector (in the structure of passenger turnover) in the passenger segment, and is involved are as follows: are provided at new speed levels in the holding company’s financial by 2030; planning. • maintaining the existing share • consistent renovation of assets using in the passenger turnover of Russia’s innovative technology and solutions The key document defining the key areas transport system and growing based on the effective management of RZD Holding’s long-term strategic passenger numbers on long-distance of the life cycle cost, availability, development is the Long-Term and interregional routes 1.3 to 1.7-fold and reliability of core assets; Development Programme of JSC RZD, its by 2030; • raising customer satisfaction levels Subsidiaries and Affiliates until 20201. • implementing projects by improving the quality of services for the development of higher-speed while keeping transportation costs and high-speed passenger services, competitive.

26 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

FPC’s initiatives are synchronised with • passenger turnover; RZD’s goals in the passenger service sector • revenue; through a list of the following performance • EBITDA; indicators set out as targets in FPC’s • investment volume; Development Strategy: • labour productivity improvement.

Since the Company was founded, no traffic incidents (train crashes, accidents) have happened due to FPC’s fault.

COMFORT

SAFETY AFFORDABILITY

Since the establishment of FPC, fares Since FPC was founded, more than 20% in the deregulated segment have been of the railcar fleet has been renovated3. rising slower than an inflation rate2.

1 Approved by JSC RZD’s Board of Directors (Minutes No. 24 dated 1 December 2014).

2 Cumulative fare increase from 2011 to 2016 (29% in the deregulated segment, CPI is 50%).

3 Ratio of carriages purchased or overhauled with service life extension between 2011 and 2016 to the 2016 operating fleet.

Federal Passenger Company 27 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

FPC Strategy indicators1

Passenger turnover, billion passenger-kilometres Revenue, RUB billion

94.6 91.0 90.0 201.2

89.5 181.2 185.6 187.3 86.1 179.0

2014 2015 2016 2014 2015 2016

EBITDA, RUB billion Investments, RUB billion 24.3

24.5

19.4 17.8

18.6 16.9 16.9 18.5 18.0 14.4

2014 2015 2016 2014 2015 2016

Labour productivity improvement by 2012, %

107.2 The following factors have contributed to changes in the passenger turnover:

99.5 97.5 • reduced subsidies to FPC; • increased state support for air transport; slowdown in the Russian economy; 92.4 92.4 • • decreased international passenger traffic due to the situation in Ukraine.

2014 2015 2016

1 RZD LDP means the Long-Term Development Programme of JSC RZD, RZD LDP1 FPC its Subsidiaries and Affiliates until 2020, approved by JSC RZD’s Board of Directors on 1 December 2014.

28 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Strategic management framework

JSC FPC Development Strategy is currently In addition to the completion of a number with the aim to make improvements being updated. of strategic projects, the need to update to the main components of its business the Strategy was driven by significant system: improvement of the route In 20122, the implementation changes in the external business network, interaction with the regulator of the Company‘s Development Strategy environment which have taken place since and infrastructure, operation and resulted in the creation of new transport the approval of the Strategy. maintenance of the rolling stock, and products and passenger services, including enhancement of train crews’ customer daytime trains, double-decker trains, As a response to external challenges, at its focus. Strizh higher-speed trains, car carriers, and annual strategy session held in February multimodal services. 2016, FPC initiated new strategic projects

FPC 2030 Development Strategy, New strategic projects were initiated at approved by the Board of Directors FPC’s strategy session4 of FPC (Minutes No. 19 dated 28 June 2012) Strategy development/ update

Corrective Strategy measures implementation

Progress monitoring The implementation of FPC JSC RZD’s Management Board resolved Development Strategy resulted in new to have JSC FPC Development Strategy transport products and passenger updated3 services

2 JSC FPC 2030 Development Strategy and Its Key Development Priorities Until 2015, approved by the Board of Directors of JSC FPC (Minutes No. 19 dated 28 June 2012).

3 FPC’s strategy session, themed “2015 Results and Outlook”.

4 Wrap-up Meeting of JSC RZD’s Management Board dated 17–18 December 2014 (Minutes No. 45).

Federal Passenger Company 29 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Project management

Introducing a project management To address problems, and monitor progress Translation of FPC’s mission into framework in FPC has become and compliance with the established strategic projects a prerequisite for the successful functional requirements and budgets, implementation of the strategic projects the Company set up JSC FPC Strategic which were initiated by the Company. Project Management Committee.

Project management is a key tool A regulatory and methodology framework Mission of FPC to improve FPC performance, which is fully setting out the principles, methods, and in line with the Economic Policy outlined procedures for project management in FPC in the Policy Priorities of the Government was created. of the Russian Federation and Instruction of the President of the Russian Federation Each strategic project has its Charter which to set up project offices and improve details the names of the project manager the investment climate. and sponsor, as well as the project Strategic objectives objectives and key performance indicators. To develop project management expertise, FPC set up the Project Management Unit FPC Development Strategy to address the following tasks:

• training and methodology support for managers and employees of the Company on identification and development of strategic initiatives and project management; • organising project teams; • ensuring consistency between plans Strategic initiatives and results of project activities.

To organise and manage activities under each particular project, the Company set up project teams composed of the Company’s specialists and external experts.

Strategic projects

30 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Strategic projects

The Company has identified five strategic projects.

STRATEGIC PROJECTS PROJECT GOALS

Review of the pricing policy for infrastructure services: Affordability • applying a discounting factor to existing rates for transportation by higher- Project speed trains with average speeds of 91 km/h to 140 km/h • establishing rate caps

• Building the Company’s product portfolio Network Project • Optimising train routes and schedules • Improving the consumer experience of transport services

• Improving fleet management Reducing carriage non-productive time Fleet Project • • Developing and introducing a centralised rolling stock automatic management system

• Reducing carriage repair costs and carriage repair-related downtime Improving labour productivity and carriage repair quality Repairs Project • • Reducing the failure rates (including through the introduction of lean approaches)

Enhancing customer focus and improving passenger experience Crew Project • • Raising labour productivity of train crews through new technologies

Federal Passenger Company 31 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Affordability Project

The goal of the Affordability project is of Russia Decree No. 156-t/1) to change to increase the passenger numbers carried the tariff schemes for infrastructure by FPC by reducing transportation costs services, which will enable the Company Review of the existing rates will to costeffective levels, leading to lower to save RUB 3.2 billion annually, increase enable the Company: prices for passengers. the number of passengers carried to achieve annual savings of by daytime trains by 24.6% per year, The Affordability project provides review boost revenues by 22.1%, and reduce of the pricing policy for infrastructure the need for subsidies by RUB 1 billion RUB 3.2 billion services for long distance public rail (since higher-speed trains are included transportation: in the deregulated segment). increase revenues

• applying a discounting factor to existing The development of a pricing cap rates for transportation by higher- mechanism for long-distance trains will be by 22.1 % speed trains with average speeds continued in 2017. of 91 km/h to 140 km/h, while potentially increase the number raising the infrastructure access tariffs The effort is aimed to provide of passengers carried for express trains to maintain RZD’s the infrastructure owner with revenues; the authority to offer to carriers • establishing rate caps1 on infrastructure discounts off infrastructure services by 24.6 % access tariffs for long-distance trains. in passenger transportation. Discounts are The objectives of the first stage subject to increased passenger volumes of the project were achieved in 2016. through higher traffic on a specific route The FAS of Russia has amended the Tariff during a particular period (year, quarter). Guidelines (Decree No. 1836/16 dated 23 December 2016 amending FTS

1 A rate cap on infrastructure services means that the provider of infrastructure services (JSC RZD) may reduce (below the tariff established by the Russian Federal Antimonopoly Service, FAS of Russia) the infrastructure access tariff for passenger trains on particular routes without consent of the FAS Russia. The purpose of this is to provide more trains in the timetable by selling tickets at lower prices.

32 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Network Project

The purpose of the Network project is The Programme covers the period from The Comprehensive Long-Term to generate target demand and satisfy it 2017 to 2022 and will be implemented Programme to Introduce Double- effectively through optimising train routes in three stages: Decker Passenger Carriages on RZD’s and schedules, the Company’s product Network5 aims to improve the operational portfolio2, and improving the consumer • Stage I (2017–2018); performance of long-distance experience of transport services. • Stage II (2019–2020); passenger rolling stock in the context • Stage III (2021–2022). of the infrastructure throughput capacity In 2016, the Company continued shortage and lower state subsidies. to develop its Daytime Express Eleven train pairs will be accelerated Programme3. In 2016, these trains carried on eight routes during Stage I: Between 2017 and 2020, more than over 10.2 million passengers (+20.6% Saint Petersburg – Belgorod, 20 routes for higher-speed double- year-on-year). Moscow – Voronezh, Krasnodar – decker trains will be launched under Adler, Saint Petersburg – Petrozavodsk, the Programme, with prices lower The Company continues to develop Moscow – Belgorod, Moscow – Saransk, than in single-decker compartment the multimodal transportation segment Moscow – Bryansk, Moscow – Smolensk. carriages, boosting the passenger traffic that combines railway and bus services. by 2.6 million people. The Company introduced eight multimodal Double-decker trains, which have proven routes combining train and bus services their cost efficiency, will be another An important factor for the successful to increase passenger traffic and improve major contributor to the expansion implementation of the Programme passenger experience. In 2016, over 75 of the Company’s product portfolio. is the Russian Government’s decision thousand passengers benefited from to reduce VAT rates for long-distance multimodal transportation services Double-decker trains run on six routes services to zero, allowing FPC to allocate provided by FPC, which is 1.5 times and enjoy increasing popularity among additional funds to purchasing new higher than in 2015. To increase train passengers. In 2016, double-decker trains passenger carriages to develop its route speeds, the Company has developed carried 2.8 million passengers, which is network. the Programme to Increase an Average twice as many as in the previous year. Speed of Long-Distance Passenger Trains4.

2 In the context of the Network project, a product means a set of consumer properties provided by the Company to customers on a paid basis. A product is based on tangible components (carriage, route, train, meals, services, etc.); however, the main aspects are its value for the customer and the consistency of the customer experience and perception of using each product. An illustrative example: a future product called Luxury Single would be sold to customers for various routes to travel by single or double-decker carriage with a composting toilet, in a private compartment with free Wi-Fi access, air conditioning unit, hot meals, fresh newspapers and magazines, and slippers, at an average speed of not less than 90 km/h. The product portfolio means the entire range of a company’s products.

3 Daytime trains with high average speeds put on routes where launching trains without reducing infrastructure costs would not be profitable. RZD may not reduce the rates without introducing a pricing cap mechanism, as the rates are set by the FAS of Russia.

4 Approved by RZD Order No. 2028r dated 30 September 2016.

5 Approved by RZD Order No. 2822r dated 30 December 2016.

Federal Passenger Company 33 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Fleet Project

The purpose of the Fleet project is and consumer properties) carriages to improve utilisation of the rolling stock within a cluster will help reduce by reducing carriage non-productive time. the inventories of spare parts, improve The Fleet project will reduce the need their supply logistics, and increase RUB 1.5 billion for additional carriages. the product line consistency; financial effect of the Fleet • developing target railcar fleet project in 2016 The key steps within the Fleet project are: management processes to optimise fleet operation while maintaining • aligning trains within an overall the required volumes of passenger turnaround schedule, providing transportation. for the use of a single train set on several routes and optimisation of train set The implementation of the project options; improved carriage productivity • standardising and unifying carriages by 15%1 in 2016. The total financial effect within clusters. Localising relatively of the project was RUB 1.5 billion in 2016. homogeneous (in terms of technical

1 Carriage productivity is measured in passenger-kilometres per carriage.

34 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Repairs Project

The Repairs project is aimed at reducing in Service approach to a repair approach Passenger Carriage Maintenance carriage maintenance and repair costs based on Run Only. The implementation and Repair Costs. According to early through: of the concept enabled us to reach estimates, the pilot implementation an agreement with JSC TVZ to amend of the programme in 2017 will help • reducing carriage downtime due the design documentation for carriages reduce maintenance and repair costs to repair; produced by JSC TVZ; by 10%. • increasing the labour productivity • analysing, describing, and simulating of the maintenance staff; maintenance and repair business Based on the estimated project • increasing the quality of carriage processes as a pilot project in four performance at the pilot facilities, decision repair services, including through carriage depots: Samara, Voronezh, will be made to upscale the project to FPC’s the introduction of lean approaches; Kirov, and Kotlas. As a result, we entire network. • adjusting the maintenance and repair identified key areas for improvement frequency for locomotive-hauled in carriage maintenance and repair. passenger carriages. In 2017, we plan to: In 2016, measures undertaken as part of the project included: • introduce a new procedure for passenger carriage maintenance • developing the concept of a new and repair, i.e. the Run Only approach; 10 % procedure for passenger carriage develop the Programme • targeted reduction maintenance and repair, providing of Organisational and Technical of maintenance and repair costs for transition from the Run and Time Measures to Optimise JSC FPC’s in 2017

Federal Passenger Company 35 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Crew Project

The Crew project is aimed at enhancing assigning cleaning positions to train crews further phased roll-out of the new service the customer focus of train crews, and excluding cleaning and garbage approach to 53 train sets of 20 trains improving passenger experience, and disposal responsibilities not directly operated by FPC, between April and increasing the labour productivity and related to passenger service from September, starting in 2017. wages of attendants by introducing the attendants’ job scope. The pilot project new technologies. In 2016, as part was implemented at 13 FPC branches. The Company is aware that the overall of the brand new ideology, Attendant The experiment covered 13 trains, which satisfaction of its employees contributes for the Passenger, Not for the Carriage, made a total of over 70 journeys. to the positive financial result through the Company implemented in two waves their attitude towards their colleagues and a pilot project to introduce progressive Based on the results of the test journeys, customers. service standards on FPC’s trains, the decision was made to proceed with

36 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

FPC’s key objectives for 2017

Based on results of the 2016 annual strategy session, FPC’s key objectives for 2017 are as follows.

Digitalisation of business processes (increasing the share of electronic sales, the automation Development of multimodal transportation of maintenance and repair system, the based on innovative mobility implementation of a CRM system in FPC)

Product offering improvements Improvement of the pricing system

Development of new mechanisms for financing Improving the performance of the maintenance the Company's fleet replacement and upgrades and repair system

Federal Passenger Company 37 Annual Report 2016

The Company’s Business Model 02 and Assets

63.1 thousand 19.6 thousand employees carriages

22 RUB 19.4 billion depots of capex The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Business model

Key value proposition State JSC FPC for customers

Regulation, subsidies, and interest in higher population mobility Lines of business Product range Promotion VALUE FOR PASSENGERS

Control of service quality and Regulated domestic long-distance International long-distance passenger Transport services Recognisable RZD brand Safe, accessible and comfortable passenger services services transportation safety levels to ensure they meet Regional branded Standard trains: RZD Bonus Loyalty Programme the approved standards trains: luxury, first- luxury, first-class, Deregulated domestic long-distance Long-distance baggage, unaccompanied class, compartment, compartment, Marketing promotions Great travel experience passenger services baggage, and mail transportation third-class sleeping, third-class sleeping, Enhanced investment appeal of multiple unit, open-plan multiple unit, open-plan Internet presence the transport services industry Other lines of business seating carriages seating carriages Time saving Advertising campaigns International Tourist trains Enhanced budgetary efficiency services: luxury, of transport RIC, open-plan seating carriages Sales channels, % VALUE FOR THE STATE Lines of business Other 13.5 46.5 Key partners 63.1 thousand employees 3.0 billion carriage kilometres Baggage, Provision Transport mobility staff locomotive and infrastructure unaccompanied of additional of population and efficient (average headcount) services baggage, and mail services on trains FPC’s ticket transportation offices use of budget funds RZD HOLDING 19.6 thousand carriages >300 contractors Internet technical services and maintenance railcar fleet Repair and Other services Agents JSC RZD billion worth maintenance of (third parties) 22 depots RUB 19.7 of loans and credits clients’ rolling stock 40 Provider of locomotive equipment and materials borrowings VALUE FOR CORPORATE and infrastructure services AND OTHER CUSTOMERS

oseldorsnab Cost breakdown, RUB billion Revenue breakdown, RUB billion High quality of service at affordable prices within Supplier of equipment 15.3 8.7 reasonable time and materials 18.9 4.1 67.4 OPERATING EXPENSES 207.1 21.1 ommuter companies Passenger service expenses – 191.8: Passenger transportation revenue RUB infrastructure – 67.4; 6.8 RUB Ticket sales, multimodal Revenue from baggage, unaccompanied baggage, transport services locomotives – 39.5; 224.2 and mail transportation MARKET 215.7 carriages – 84.9 billion billion Revenue from other activities Customers JOINTSTOCK COMPANY RAILWAYCAR Expenses on other activities – 15.3 Federal budget subsidies BUILDING WORKS TVER TVZ 84.9 Other – 8.7 Other revenue Supplier of carriages 39.5 173.3 Passengers inance market abour market Investment expenses Proﬁt Corporate aterials and euipment Acquisition of rolling stock Net proﬁt market Other ecnolog market Upgrade of rolling stock ecnical services Depot upgrade and safety and maintenance market IT programme Governmental authorities Other RUB 19.4 billion RUB 5.3 billion and agencies Resource suppliers

40 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Key value proposition State JSC FPC for customers

Regulation, subsidies, and interest in higher population mobility Lines of business Product range Promotion VALUE FOR PASSENGERS

Federal Passenger Company 41 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Asset map

Northwest Branch Northern Branch Gorky Branch 223.8 thousand sq m 110.9 thousand sq m 107.6 thousand sq m 6.8 thousand sq m 13.6 thousand sq m 1.6 thousand sq m 2.5 thousand units 1.3 thousand units 1.5 thousand units RUB 0.6 billion RUB 0.2 billion RUB 0.2 billion

Moscow Branch 417.8 thousand sq m 6.2 thousand sq m 3.0 thousand units Kaliningrad RUB 2.8 billion Riga

Saint Petersburg

South East Branch (Voronezh passenger carriage depot) Yaroslavl 71.5 thousand sq m Kiev Moscow 0.1 thousand sq m Nizhny Novgorod 0.8 thousand units Voronezh RUB 0.2 billion Yekaterinburg Saratov Samara Rostov-on-Don

North Caucasus Branch Chelyabinsk 209.9 thousand sq m

14.4 thousand sq m Novosibirsk 2.1 thousand units RUB 1.0 billion

Baku

Volga Branch Ural Branch South Ural Branch 183.5 thousand sq m 101.1 thousand sq m 107.6 thousand sq m 0.9 thousand units 1.6 thousand sq m 1.0 thousand units RUB 0.2 billion 1.3 thousand units RUB 0.4 billion RUB 0.2 billion

42 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Kuybyshev Branch LOCATIONS OF FPC’S BRANCHES 124.5 thousand sq m 5.7 thousand sq m • Northwest Branch: Saint Petersburg; 1.4 thousand units RUB 0.3 billion • Moscow Branch: Moscow;

West Siberian Branch • Gorky Branch: Nizhny Novgorod; 240.4 thousand sq m Northern Branch: Yaroslavl; 16.7 thousand sq m • 1.5 thousand units • North Caucasus Branch: Rostov-on-Don; RUB 0.3 billion • South East Branch: Voronezh; Yenisey Branch (Krasnoyarsk passenger • Volga Branch: Saratov; carriage depot) 53.8 thousand sq m • Kuybyshev Branch: Samara; 2.2 thousand sq m Ural Branch: Yekaterinburg; 0.5 thousand units • RUB 0.1 billion • South Urals Branch: Chelyabinsk;

East Siberian Branch West Siberian Branch: Novosibirsk; (Irkutsk passenger • carriage depot) Yenisey Branch: Krasnoyarsk; 95.3 thousand sq m • Khabarovsk 0.6 thousand units • East Siberian Branch: Irkutsk; RUB 0.1 billion • Zabaikalie Branch: Chita; Krasnoyarsk Chita • Far East Branch: Khabarovsk. Irkutsk

Zabaikalie Branch (Chita carriage site) Far East Branch Railcar fleet

87.9 thousand sq m 64.0 thousand sq m Real estate

1.4 thousand sq m 1.0 thousand units Land 0.4 thousand units RUB 0.2 billion Other property RUB 0.1 billion

Federal Passenger Company 43 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Assets

Asset structure and changes in the asset structure

ASSET STRUCTURE AS AT 31 DECEMBER 2016, RUB BILLION ACQUISITION OF ROLLING STOCK

Assets Book Value Carriages 2012 2013 2014 2015 2016

Carriages 166.4 Compartment and first- 29 17 73 – 31 class carriages Real estate 29.8 Third-class sleeping 290 169 57 25 115 Other movable property 6.9 carriages Intangible assets 0.9 Double-decker carriages – 50 50 70 86 Land 0.2 RIC carriages 30 82 78 10 – Total 203.9 Other carriages 33 77 16 80 62

ROLLING STOCK STRUCTURE

Fleet as of 31 Fleet as at 31 Average age of carriages as Carriage type Acquired Retired December 2013 December 2016 at 31 December 2016, years

Luxury carriages 1,472 32 128 1,376 17.1 Compartment carriages 9,827 104 682 9,249 19 Third-class sleeping 7,798 115 828 7,085 18.7 carriages Interregional carriages 754 23 71 706 14 Dining carriages 860 14 20 854 26.4 Baggage carriages 305 – 14 291 19.8 Other 43 6 – 49 21 Total 21,059 294 1,743 19,610 18.9

Changes in asset structure in 2015–2016, %

81.6 1 One train comprises five Carriages 80.3 carriages.

2 14.5 ED4M series trains have Real estate 15.1 a different number of sections depending on 3.3 Other movable the lease period. property 3.9

0.4 Intangible assets 0.6 2016 Land 0.1 0.1 2015

44 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Multiple-unit trains

In 2016, Lastochka1 electric trains were of multiple-unit trains with crew signed Services, a branch of Russian Railways, operated under agreements for lease by FPC and the Directorate for Higher-Speed on the following routes:

Route Series Number of trains Composition Series Number of trains Composition

Lastochka electric trains As at 31 December 2015 As at 31 December 2016 Saint Petersburg – Petrozavodsk ES-1 2 5 ES-1 2 5 Moscow – Kursk ES-1 1 5 ES-1 1 5 Moscow – Orel ES-1 1 5 ES-1 1 5 Moscow – Smolensk ES-1 2 5 ES-1 2 5 Moscow – Nizhny Novgorod ES-1 4 5 ES-1 4 5 Krasnodar – Adler ES-1 2 5 ES-1 4 5 800s trains As at 31 December 2015 As at 31 December 2016 Petropavlovsk – Omsk ED4M 1 6 ED4M 1 6 Novosibirsk – Omsk ED4MK 1 6 0 0 Kurgan – Yekaterinburg ED4M 1 5.32 ED4M 1 5.1 Chelyabinsk – Kurgan ED4MK 1 4 0 0 Chelyabinsk – Yekaterinburg ED4MK 1 4 0 0 FPC’s organisational structure

JSC FPC

Regional branches (15) Central carriage site Subsidiaries

(PCDs) 22 99 % JSC FPC-Logistics 100 % Passenger carriage depots (unaccompanied baggage transportation) 33 (CSs) 1 % OOO NTS 51 % Carriage sites (beverages retail sales)

11 50.01 % (RWAs) OOO Travel-Tour Railway agencies (tourist services)

1 Vehicle Transportation OOO RTK 51 % Centre (tourist services)

RZD Tour Co. Ltd 100 % (tourist services)

OOO IM (planning and booking of, and payment for passenger services by different modes of transport)

Federal Passenger Company 45 Annual Report 2016 Higher demand for domestic transport services was driven by the rise of domestic tourism (including routes to the resorts in the Krasnodar Territory and the Caucasian Market 03 Overview

4.7 % 4.8 % 42 %

Increase Decline Domestic in domestic in international passenger passenger passenger turnover traffic traffic in 2016

Mineral Waters), particularly after leisure destinations in Egypt and Turkey were closed to Russians who had originally planned to go there on holiday. The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Market Overview1

In 2016, domestic passenger traffic increased by 4.7%, while international passenger traffic declined by 4.8%

Macroeconomic environment

KEY ECONOMIC GROWTH INDICATORS, % YEAR-ON-YEAR

Indicator 2016

Gross Domestic Product 99.8

Consumer Price Index 107.1

Investment in fixed assets (9M 2016) 97.7

Real household disposable income 94.1

Real wages 100.6

Change in the number of unemployed 99.5

Retail turnover 94.8

Paid retail services 99.7

Source: Rosstat.

In 2016, consumer price inflation declined The period from February to July 2016 saw increase in transport mobility (due to pent- to 7.1%. In the previous year, inflation an active accumulation of income in cash. up demand). was 15.5%. Consumer demand depends By July, the positive balance of household on, among other factors, the two most income and expenditure amounted critical parameters: actual take-home to RUB 252.3 billion (according to Rosstat). pay, which remained flat year-on-year, In August–September household and the number of unemployed, which consumption was on the rise; accumulated decreased by 0.5%. income in cash started to decline driving an

1 This section is based on data of the Federal State Statistics Service (Rosstat): http://www.gks.ru.

48 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Cash income and expenditure balance (on an accrual basis for the period from February to November 2016), RUB billion

252.3 247.3 231.9

203.3 188.4

162.9 169.1

123.2

44.8 24.4

February March April May June July August September October November

Source: Rosstat.

Pent-up demand along with certain improvements in the macroeconomic environment boosted population mobility in Q3 2016 and helped increase the overall 8.4 % passenger turnover in 2016. decline in inflation in 2016

Federal Passenger Company 49 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Russian market of transport services

In 2016, domestic traffic reached 104.7% of the 2015 level, specifically, 103.9% in the regulated segment and 107.1% in the deregulated segment.

An upward trend in traffic in 2016 was to the Black Sea coast in the Krasnodar over recent years (–12.6% year-on-year), due to higher demand transport services Territory and the Crimea was also with an upward trend in domestic flights in Q2 and Q3 2016 (following the switch predictable. Passenger surveys regarding (+4.9% year-on-year). of passengers from international holiday plans for the summer of 2016 to domestic routes); in April–September showed that over 38% of respondents In 2016, passenger traffic on FPC trains 2016, traffic was up 9.8% year-on-year. intended to go to Russian resorts, (passenger turnover) increased by 4.8% while in 2015 they accounted for only year-on-year. Higher demand for domestic transport 30%. The share of potential passengers services was driven by the rise still wishing to spend their holidays of domestic tourism (including routes in Turkish and Egyptian resorts amounted to the resorts in the Krasnodar Territory to approximately 6% in 2016. and the Caucasian Mineral Waters), particularly after leisure destinations According to the Federal Air Transport in Egypt and Turkey were closed Agency (Rosaviatsia), in 2016, airlines to Russians who had originally planned continued to experience a decline 4.8 % to go there on holiday. An increase in passenger numbers on international increase in passenger traffic on in passenger numbers on routes flights, the key market growth driver FPC trains

Domestic passenger turnover in 2015–2016, %

The structure of domestic traffic remained 9 9 unchanged in 2016. The share of rail transport declined by 1%. These results were caused by an accelerated absolute 43 42 increase in domestic air traffic.

2015 2016 Rail transport Air transport Buses 48 49

Sources: Statistical Reporting Forms TsO-33 and TsO-32 for rail transport, Rosaviatsia (http://www.favt.ru) for air transport, an expert assessment based on Rosstat’s data (http://www.gks.ru) for buses.

50 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

International transport services market

International long-distance passenger services

According to the train schedule In 2016, international passenger traffic Decline in international passenger for 2015/2016, FPC operated direct continued to decline, albeit much slower. traffic in 2015–2016, % year-on-year and transit passenger services on 40 In particular, the number of passengers international routes to 19 European and carried in 2016 was 7,253.8 thousand 2015 2016 Asian countries – Germany, France, Poland, people, down 4.8% year-on-year (–31.9% Austria, Slovakia, the Czech Republic, year-on-year in 2015), including: Hungary, Serbia, Montenegro, Bulgaria, –4.8 Monaco, Italy, Finland, China, Mongolia, • 6,300.4 thousand passengers on routes and North Korea. FPC also provided rail to the CIS and Baltic states (–6.5% services to the CIS and Baltic states. year-on-year); • 645.7 thousand passengers on routes to other countries (+8.5% year-on-year). 7,253.8 –31.9 Structure of international passenger thousand passengers services in 2016, % carried on international routes in 2016 8.9 3.8

The share of passengers carried on routes The largest growth was reported in traffic to other countries in the total international to Uzbekistan, Tajikistan and Estonia CIS countries traffic in 2016 grew to 8.9% (in 2015, this (+19%, +56% and +82%, respectively). Baltic states share was 7.8%). Other countries In 2016, trains running to Abkhazia carried Trains running to the CIS and Baltic 307.7 thousand passengers, up 8.9% year- states carried 6.3 million passengers on-year (in 2015, the increase was 4.2% 87.3 in the reporting period, down 7% year-on- year-on-year). year. In 2016, FPC carried 2,256.2 thousand passengers to Ukraine, down 2.3% year-on-year.

Federal Passenger Company 51 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Pricing policies

Regulated segment

Fares for domestic long-distance passenger by the state, represented by the FTS In 2016, pursuant to Decree services vary by age (adult and children of Russia. Pricing flexibility in the regulated of the FAS of Russia No. 1227/15 fares, based on rate components) segment was only provided under dated 10 December 2015 (as amended depending on: the Flexible Tariff Regulation Schedule by Decree of the FAS of Russia No. set by the FTS of Russia on an annual 103/16 dated 4 February 2016), FPC • the train category (branded express; basis. In 2015, FPC was authorised continued to run marketing promotions express; branded passenger; passenger); to run marketing promotions for third-class sitting and sleeping carriages • carriage type (third-class sleeping, open- for third-class sitting and sleeping carriages depending on the location plan seating) and travelling distance; depending on the location of seats/berths of seats/berths. The price differentiation • seasonal coefficients set out and booking date. of tickets for various seat categories in the flexible tariff regulation schedule, in third-class sleeping carriages made and are consistent throughout From 2016 train fares more affordable to various the Russian railway network. consumer categories. The Company did In accordance with paragraphs 1 and not increase fares in this segment as Before 2016 2 of Decree of the Russian President the upper limit of the tariff range is set No. 373 On Certain Issues of Government in the Tariff Guidelines and the Flexible Under regulatory documents (Tariff Management and Control in Antimonopoly Tariff Regulation Schedule, and is adjusted Guidelines, approved by Decree and Tariff Regulation dated 21 July for a service category coefficient. No. 156-t/1 of the FTS of Russia dated 2015, the functions of the disbanded 27 July 2010), domestic fares for third-class FTS of Russia were assigned to the FAS sitting and sleeping carriages are regulated of Russia.

52 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Deregulated segment

FPC may set the prices of fares for first- The deregulated segment also covers running various marketing promotions class and compartment carriages at its own tourist and commercial services. to stimulate consumer demand discretion1. in the deregulated segment and boost In this segment, FPC may set the prices its revenue. Besides, the Company In the deregulated segment, FPC provides of passenger fares at its own discretion. continuously improves the flexibility of its passenger services in compartment, pricing tool in use: since March 2013, FPC first-class and luxury carriages, and in all To reinforce its positions in the passenger has been phasing in a dynamic pricing carriages of higher-speed trains. services market, the Company has been system.

1 According to item 5 of the List of Services of Natural Rail Monopolies with Regulated Fares, Fees and Charges, as approved by the Russian Government’s Resolution No. 643 On Government Regulation of, and Control Over, Fares, Fees and Charges for Services of Natural Rail Monopolies dated 5 August 2009.

Federal Passenger Company 53 Annual Report 2016 In December 2016, the Company’s dynamic revenue management system covered 100% of the deregulated domestic segment (except for its socially important Marketing 04 Policy

Campaign Lucky Tuesday for children: campaign:

50 % 47 campaigns summer discount ran in 2016 for children’s tickets

2.5 million >220 thousand passengers (children) tickets issued carried as part of the campaign

component). The dynamic pricing system is the most flexible pricing tool ever used by FPC. The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Marketing Policy

RZD Bonus Loyalty Programme launched by RZD Holding won the annual national Customer eXperience Awards Russia for the Best Customer Experience in the Transport Sector, and the Loyalty Awards Russia 2016 for the Best Transportation Company Loyalty Programme.

Key marketing initiatives in 2016

As a socially responsible company, FPC significantly increased the share of special fares in the regulated segment in 2016:

• in the summer of 2016 (from 1 June to 31 August 2016), children aged between 10 and 17 were offered a 50% discount on fares The Lucky Tuesday campaign for third-class sitting and sleeping carriages. Over 2.5 million young passengers covering domestic routes ran benefited from this campaign, which is a 21% increase year-on-year in passenger traffic in this age group; 47 times in 2016 • in 2016, the number of passengers who took advantage of other special fares increased 2.5 times year-on-year. The share of passengers in the regulated segment who benefited from these special fares exceeded 10%.

Along with its flexible Tariff Policy, In 2016, the Lucky Tuesday campaign FPC constantly runs the Lucky Tuesday covering domestic routes ran 47 times; over marketing campaign inviting passengers 220 thousand tickets were issued at special to purchase tickets for long-distance trains fares. Every “Lucky Tuesday” the Company on Tuesdays at highly attractive prices. sold on average 2.5 times more tickets for the selected routes than on other, non- promotion days.

56 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Dynamic pricing system

In December 2016, the Company’s dynamic fares for certain legs. Discounted fares In 2016, 96% of tickets for train No. 23/24 revenue management system covered may apply to low-demand routes or trains Moscow – Kazan were sold at prices 100% of the deregulated domestic through to the departure date. lower than basic fares driving an increase segment (except for its socially important in passenger traffic. component). Ticket fares for each train mainly depend on the expected booking profile. In case In summer, almost all tickets were The dynamic pricing system is the most of significant deviation from the projected purchased at discounted fares. flexible pricing tool ever used by FPC. parameters, fares are adjusted It is a powerful combination of most in a consistent manner. We increase Dynamic pricing helps the carrier identify approaches previously used as marketing fares when actual demand exceeds a balance between demand and service promotion tools: pricing depending the projected level and decrease them pricing and improve the overall efficiency on seat/berth category (upper or lower when projected demand is low. of the initiative. As at 2016, the areas berth); day of the week; booking date, etc. covered by the revenue management Unlike static marketing promotions, where Customers appreciate the current system reported an upward trend the rates are set in advance for a long Tariff Policy. According to surveys, 94% in passenger traffic, with a 108.8% growth period of time, the dynamic pricing system of passengers say that they benefited in passenger turnover. offers flexible ticketing. from the implementation of the system and actively take advantage of it. Their Seizing the opportunities offered The dynamic pricing system applies choice is driven by objective reasons: by the system, passengers may save consistent pricing principles for each approximately 68% of tickets that are significantly on transport fares. All destination, train and route leg. subject to dynamic pricing are sold at trains covered by the system are labelled prices lower than or comparable to basic in online ticketing systems by a special icon Fare plans are in place for each fares. (“dynamic pricing”). destination, which take into account seasonal fluctuation, day of the week The share of tickets sold at reduced fares and passenger traffic. In some cases, varies by destination and train category. the lowest fare for compartment carriages For instance, although the Moscow – may be just a little higher than fares Adler route (operating a double-decker) for third-class sleeping carriages. provides high passenger traffic, in 2016 the Company sold 80% of tickets As tickets get sold, and the departure date for the route at prices lower than basic draws nearer, fares for the main route leg fares. generally grow higher. At the same time, the fare at different route legs may vary disproportionally.

In case of high demand, the fare for a certain route leg may get closer to the main route leg fare. The Company may also apply the Discounted Fares Policy for the main train route to boost For the list of trains covered by the dynamic pricing system, relevant passenger traffic. Thus, the fare please visit Russian Railways website. for the main route may be lower than

Federal Passenger Company 57 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Loyalty Programme

Since 2012, RZD Holding has in place the RZD Bonus Loyalty Programme for railway passengers.

Over 600 thousand new members were • Allegro train services are included payment of premium ticket price, issue registered in the Programme in 2016. in the Programme, and points are of premium tickets for international The year-on-year growth in the number awarding for travelling in Allegro trains routes, etc.); of cardholders was 34%, with their total (more ways to earn points); • an option to earn points by purchasing number reaching 2.16 million people. • a 5% discount is offered goods and services from third parties; to the Programme members • attracting new members As at 2016, the number of members of retirement age under a project to join the Corporate Programme holding RZD – Alfa-Bank co-branded for pensioners (implementation and encouraging existing customers cards, exceeded 100 thousand people of the Programme’s social functions); through marketing promotions. (the joint project with Alfa-Bank was • a CRM system is implemented launched in December 2015). (enabling automatic customer Social projects under the RZD Bonus relations management, development Programme in 2017: In 2016, 40 thousand students from of marketing promotions 200 universities joined the RZD Bonus and customised offers based • issue of premium tickets programme for students. on advanced analysis of trips made for compartments for disabled persons by each passenger). at FPC’s ticket offices; In the same year, the Programme members • implementation of the Family booked 172 thousand premium tickets, In 2017, the Programme’s efficiency will be Programme offering a possibility and over 100 thousand members travelled enhanced through the following initiatives: to accumulate bonus points of all family on these tickets, up 31.2% year-on-year. members on a joint account. • launch of new co-branding initiatives To develop the Loyalty Programme, with banks (with Otkritie Bank, Rosbank The key objective is to increase the number enhance its efficiency and improve and Gazprombank joining in); of the RZD Bonus Programme members customer service, the Company • additional privileges to passengers to 3 million. implemented the following initiatives: (an option to use points for partial

58 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

600 34 % 172 thousand members year-on-year growth thousand premium in the number of members of the RZD Bonus Programme tickets registered in 2016 issued in 2016 under the Programme

Federal Passenger Company 59 Annual Report 2016

Government Relations The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Government Relations

In 2016, FPC continued to collaborate closely with federal and regional authorities to improve quality and availability of long-distance passenger rail services.

As government subsidies in the long- Legislative Acts of the Russian Law On Amendments to Article 83 distance passenger service sector tend Federation dated 30 November 2016, of the Federal Law Railway Transport to shrink (from RUB 24.7 billion in 2015 which set a zero VAT rate for the long- Statute of the Russian Federation, seeking to RUB 18.9 billion in 2016, and with distance passenger services, came into facilitate lower ticket prices for long- RUB 9.7 billion expected in 2017), boosting effect; distance passenger rail services throughout the efficiency of long-distance passenger • Order of the Federal Antimonopoly Russia. The draft introduces amendments services through updating the regulatory Service of the Russian Federation No. authorising a carrier to sell non-refundable framework and optimising traffic 1836/16 dated 23 December 2016 tickets, i.e. tickets which are not refunded on unprofitable destinations has become updated the current pricing for long- if the trip is cancelled by the passenger. a priority task. distance railway infrastructure services, The State Duma of the Russian Federation thus driving development of high-speed approved the draft in the first reading In 2016, very important regulatory train services. in March 2015. initiatives were adopted at the federal level, seeking to improve the competitive However, no long-term transparent Regionally, the Company liaised with ability and appeal of railway services: subsidy mechanism to support transport Russian regional governments to improve services based on government contracts the network and find new profitable • from 1 January through 31 December is in place yet. FPC jointly with Russian routes, including tourist destinations. 2016, a 10% VAT rate was applicable Railways, its parent company, continues For example, in 2016, workshops were to long-distance rail services to cooperate with sectoral ministries and held with the Governors of the Nizhny for passengers and baggage (Federal agencies and the Russian Government Novgorod Region, Krasnoyarsk Territory, Law No. 386-FZ On the Deflator on draft Regular Railway Passenger Saratov, Rostov and Yaroslavl Regions, Coefficient for 2016 and Amendments Services Bill, Amendments to Individual the Head of the Komi Republic, and to Individual Legislative Acts Legislative Acts of the Russian Federation, Pskov Region and Trans-Baikal Territory of the Russian Federation dated 29 and the Interregional Passenger Service government officials, who supervise December 2015); Long-Term Regulation Concept. the transport sector. The work will be • Federal Law No. 401-FZ On Amendments continued in 2017. to Parts One and Two of the Tax Code In 2016, the Company also went on with of the Russian Federation and Certain the preparation of the draft Federal

62 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Federal Passenger Company 63 Annual Report 2016

Risk 06 Management

In a major development, the Risk Management Committee of JSC FPC was established in 2016.

The Committee has the following roles: • Overall coordination of risk management activities for all identified risks; • Drafting proposals for FPC’s Board of Directors on the principles of, and approaches to, setting up a risk management system. The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Overview of the risk management framework

FPC makes full use of the existing risk management tools, continually improves its Risk Management and Internal Control System, and develops new powerful risk management tools.

The Company plans to complete and improvement of risk management assessment, selection, preparation, the development of a formalised risk processes and the development of internal and implementation of risk mitigation management framework and present control framework. plans with due consideration of the cost the system’s architecture, operating vs benefit balance; procedure, and the Company’s updated FPC’s risk management activities are • ensuring integrity, reliability Risk Map for consideration by the Board governed by the following key principles: and effectiveness of risk management of Directors by the end of 2017. in FPC; • comprehensive approach to risk • allocation of risk management The purpose of risk management management; responsibilities among FPC’s personnel in FPC is to provide reasonable assurance • continuity of the risk management and inclusion of these in corporate on the achievement of the Company’s process; regulations; strategic, tactical and operational goals • involvement of all employees in risk • development of FPC employees’ skills in an uncertain environment by effectively management as part of their duties; to ensure successful performance of risk taking advantage of attractive • inclusion of all FPC’s activities management roles and responsibilities; opportunities, and mitigating risks. in the scope of the Risk Management • integration of the risk management System; process into FPC’s management FPC’s risk management process is governed • uniform principles and approaches and operational processes by the Company’s Risk Management Policy of the risk management process; and regulation of interactions as approved by its Board of Directors. • segregation of duties among the risk between the risk management process management system participants; participants; The Policy defines the goals and objectives • the most optimal scope and complexity • allocation of required and sufficient of, and outlines overall approaches of risk management procedures; resources to support risk management; to, setting up the Company’s risk • balanced criteria for making decisions • creation and maintenance of effective management system, principles of its on risk handling – striking the right communication channels to support structure and operation, and determines balance between potential losses engagement of internal and external the risk management process participants, and opportunities, and between risk stakeholders in risk management; their roles, responsibilities and interactions, management cost and potential damage • development of risk management as well as the infrastructure and stages if the risk occurred. reporting mechanisms, ensuring of the risk management process. the completeness, reliability The FPC’s Risk Management System aims and timeliness of reporting; The Risk Management Committee to address the following tasks: • continuous improvement of the risk established in 2016 is a central decision- management infrastructure and process. making body for risk management in FPC. • development and maintenance of a uniform methodology-based FPC has in place a dedicated risk approach to risk management across management and internal control unit. FPC; Its main tasks are the coordination • identification, analysis,

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Risk management structure

• Defines the principles of, and approaches to, setting up FPC’s Risk Management and Internal Control System (RM&ICS) JSC FPC Board Approves risk appetites for FPC’s principal and individual risks of Directors • • Reviews matters related to the organisation, operation and performance of the RM&ICS

• Monitors the reliability and effectiveness of the RM&ICS including Audit Committee at FPC’s through performance assessments of FPC’s risk management and internal control procedures and preparation of improvement Board of Directors proposals • Reviews and assesses compliance with the Risk Management and Internal Control Policy

Makes sure the FPC Board of Directors resolutions concerning JSC FPC General Director • the organisation of RM&ICS are implemented • Ensures the sustainable and effective operation of the RM&ICS

• Provides overall coordination of risk management activities for all JSC FPC Risk Management identified risks facing JSC FPC Committee • Drafts proposals for FPC’s Board of Directors on the principles of, and approaches to, setting up a risk management system.

JSC FPC Deputy General • Responsible for the maintenance, operation and improvement of the RM&ICS Director for Safety • Makes arrangements for forecasting external and internal risks and Security and analysis of their impact on FPC’s business

• Coordinates the risk management processes and systematises Risk Management the internal control mechanisms of FPC and Internal Control Unit • Develops and maintains FPC’s company-wide risk register, risk matrix and risk map

• Identify and analyse risks that can impact the achievement JSC FPC business units of the relevant unit’s goals (risk owners) • Develop and maintain a risk register, risk matrix and risk map within their remit

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Stages of the risk management process

Data sharing 1 and advice Informs decision-making at all stages of risk management with due consideration of risk perceptions by interested parties

Monitoring Goal- 6 and control 2 setting Procedures to ensure Setting of strategic, tactical the effectiveness and operational goals and timeliness of risk by the management management activities

Stages of the risk management process

Risk Risk 5 mitigation 3 identification Selection and implementation Identification of risk modification options of potential events capable of impacting the achievement of the Company’s goals

Risk analysis 4 and assessment Analysis of the impact of risks on goal achievement. Decisions on the need of risk mitigation are made based on the analysis results

68 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Risk matrix

LIKELYHOOD

25 23 29 26 Frequent 28 12 14 15 11 16 8 24 19 22 27

Likely 21 9 4

5 3 Occasional 30 18 6 1

Rare 31 7 17 34 2

Highly unlikely 32 33

Unlikely 13 10 20

Insignificant Minor Significant Critical SEVERITY OF CONSEQUENCES

RISK LEVELS

Negligible Tolerable Undesirable Intolerable

34 risks in total, including: • 6 intolerable risks • 16 tolerable risks Measures to mitigate risks and measures (##1, 3, 4, 5, 6 and 8); (##12, 14, 15, 19, 20, 21, 22, 23, 24, 25, to mitigate their consequences should • 7 undesirable risks 26, 27, 28, 29, 30 and 32); these risks occur can be found in FPC’s risk (##2, 9, 11, 16, 18, 33 and 34); • 5 negligible risks map. (##7, 10, 13, 17 and 31).

Federal Passenger Company 69 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Risk map

Risk classification Risk likelihood / Risk Risk tolerance Measures to mitigate consequences No. Risk Risk Owner Risk description by area severity of Measures to maintain or reduce risk level occurrence level should the risk occur of occurrence consequences in 2016

Marketing and tariff policy

• Implementation of the Marketing and Competition Strategy to retain existing and acquire new customers from alternative modes (including private cars). • Implementation of an optimal Tariff Policy • Wider application of the Revenue Management (promotions both in the regulated and Declines in passenger System (to cover 100% of trains on regular Marketing and Declines in passenger volumes on deregulated segments). volumes on domestic domestic routes, excluding socially necessary 1 Tariff Policy domestic routes (declines in passenger Market-based risk Occasional/critical Intolerable • Leveraging the Loyalty Programme to No routes (declines in train services) – dynamic pricing is used for 650 Department traffic) enhance customer relations (when building passenger traffic) trains serving 364 destinations. relationships with individuals, corporates, • Optimisation of train schedules (to make them and university students). more convenient for passengers), including shorter journey times. • Development and promotion of new routes. • Rolling stock replacement and upgrades.

Declines in passenger • Dynamic pricing. volumes on Marketing and Declines in passenger volumes on • Optimisation of international train schedules, Various marketing initiatives (special fares for 2 international routes Tariff Policy international routes (declines in Market-based risk Rare/critical Undesirable including shorter journey times. No international long-distance trains). (declines in passenger Department passenger traffic) • Development and promotion of new routes. traffic) • Rolling stock replacement and upgrades.

• Use of innovative rolling stock. • Implementation of the Marketing and Competition Strategy to retain existing and acquire new customers from alternative modes (including private cars). Passengers shifting to other modes, • Implementation of an optimal Tariff Policy • Wider application of the Revenue Management resulting in lower passenger volumes (promotions both in the regulated and Passenger preferences System on domestic routes (to cover 100% of Marketing and on domestic and international routes deregulated segments). shifting towards trains on regular domestic routes, excluding 3 Tariff Policy (lower passenger traffic) and reduced Market-based risk Occasional/critical Intolerable • Leveraging the Loyalty Programme to No alternative modes of socially necessary train services) – dynamic Department market share for FPC (FPC lost 11 p.p. enhance customer relations (when building transport pricing is used for 650 trains serving 364 of the domestic market between 2012 relationships with individuals, corporates, destinations. and 2016). and university students). • Dynamic pricing for international trains. • Optimisation of train schedules (to make them more convenient for passengers), including shorter journey times. • Development and promotion of new routes.

Fares in the regulated segment growing at Fares in the regulated segment a different pace from Marketing and • Adjustment of train frequencies (train growing at a different pace from that • Mileage reductions on loss-making routes. 4 that projected in the Tariff Policy Regulatory risk Likely/critical Intolerable cancellations). Partial projected in the Strategy, with no • Change of VAT rate. Strategy, with no Department • Reduction of VAT from 18% to 10%. compensation from the Government compensation from the Government

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Marketing and tariff policy

Federal Passenger Company 71 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

• Use of innovative rolling stock. • Implementation of the Marketing and Competition Strategy to retain existing and acquire new customers from alternative modes (including private cars). • Implementation of an optimal Tariff Policy FPC losing market share due to • Wider application of the Revenue Management (promotions both in the regulated and Loss of market Marketing and increased competition and shifting System on domestic routes (to cover 100% of deregulated segments). 5 share due to stiffer Tariff Policy consumer preferences (FPC lost 11 p.p. Market-based risk Occasional/critical Intolerable trains on regular domestic routes, excluding • Leveraging the Loyalty Programme to No competition Department of the domestic market between 2012 socially necessary train services) – dynamic enhance customer relations (when building and 2016) pricing is used for 650 trains serving 364 relationships with individuals, corporates, destinations. and university students • Dynamic pricing for international trains. • Optimisation of train schedules, including shorter journey times. • Development and promotion of new routes.

• Implementation of the Marketing and Competition Strategy to retain existing and • Implementation of an optimal Tariff Policy acquire new customers from alternative modes (promotions both in the regulated and (including private cars). deregulated segments). • Wider application of the Revenue Management • Leveraging the Loyalty Programme to Marketing and Declines in rail passenger volumes in Increased state support System (to cover 100% of trains on regular enhance customer relations (when building 6 Tariff Policy the deregulated segment (declines in Regulatory risk Occasional/critical Intolerable No for air transport domestic routes, excluding socially necessary relationships with individuals, corporates, Department passenger traffic) train services) – dynamic pricing is used for 650 and university students). trains serving 364 destinations. • Adoption of the Inter-Regional Passenger • Development of the Inter-Regional Passenger Service Long-Term Regulation Concept and Service Long-Term Regulation Concept and the the Regular Railway Passenger Services Bill. Regular Railway Passenger Services Bill.

Marketing and • Data link encryption at http://pass.rzd.ru. Leakage of personal Tariff Policy Programme participants making • Certification of the Automatic Route Control data of the Loyalty Award of compensation points under the 7 Department, complaints to courts under Federal Reputational risk Rare/negligible Negligible System. No Programme Loyalty Programme. Loyalty Law No. 152-FZ On Personal Data • SMS authentication for logging in to personal participants Programme Unit accounts.

Development

• Monitoring the operational performance of the Failure to achieve the new fixed asset. target performance Longer payback periods due to larger • Selection of fixed asset providers through Drafting an Action Plan to improve the of investment Investment investments, longer project timelines 8 Investment risk Frequent/critical Intolerable tendering procedures. operational performance of the new fixed Partial projects during the Department and higher planned operating costs, • Making sure the contract contains a clause asset. implementation of as well as lower planned returns providing for the provider’s responsibility for the Investment Programme fixed asset quality and delivery in due time.

Technical, economic • No opportunity to increase train • Development of RZD’s infrastructure to improve and performance speed on RZD's infrastructure. average speeds. characteristics Rolling Stock Research, • Having to keep more carriages in • Higher allocations for innovative rolling stock • Larger purchases of new rolling stock. 9 of the passenger Management technological and Likely/minor Undesirable No the Company’s fleet. purchases. • Timely preventive maintenance. rolling stock lagging Department operational risk • Failure to accommodate passenger • Setting technical specifications for newly behind international volumes. developed and upgraded rolling stock. benchmarks

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• Use of innovative rolling stock. • Implementation of the Marketing and Competition Strategy to retain existing and acquire new customers from alternative modes (including private cars). • Implementation of an optimal Tariff Policy FPC losing market share due to • Wider application of the Revenue Management (promotions both in the regulated and Loss of market Marketing and increased competition and shifting System on domestic routes (to cover 100% of deregulated segments). 5 share due to stiffer Tariff Policy consumer preferences (FPC lost 11 p.p. Market-based risk Occasional/critical Intolerable trains on regular domestic routes, excluding • Leveraging the Loyalty Programme to No competition Department of the domestic market between 2012 socially necessary train services) – dynamic enhance customer relations (when building and 2016) pricing is used for 650 trains serving 364 relationships with individuals, corporates, destinations. and university students • Dynamic pricing for international trains. • Optimisation of train schedules, including shorter journey times. • Development and promotion of new routes.

Development

Federal Passenger Company 73 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Strategic and Organisational • Improvement of project management Development Poor management of strategic Poor management of methodology. 10 Department, projects resulting in strategic project Management risk Unlikely/negligible Negligible No negative impact from the risk occurrence. No strategic projects • Allocation of human resources for strategic Project failures projects. Management Unit

Traffic safety

• Requiring contractors and subcontractors Implementation of the Action Plan to Improve Rolling Stock Train schedule disruptions as well as Research, to comply with the Company’s Traffic Safety Breach of traffic safety Traffic Safety Measures and to Achieve Accident 11 Management other safety-related consequences technological and Frequent/minor Undesirable Policy when performing work for FPC. Partial rules Reduction Targets at JSC FPC for 2017, approved by Department (train crashes, accidents, etc.) operational risk • Building personal and collective ownership FPC Order No. FPC-618 dated 29 December 2016. of traffic safety among FPC’s employees.

Technical and technological aspects of product manufacturing, delivery of works and services

• Implementation of the Operational Programme for Fire Safety, including: –– centralised contracting for fire prevention/ fighting and emergency response, maintenance of fire protection systems; Fire containment and extinguishing according –– procurement and maintenance of first Operation and to specific fire-fighting plans and the existing response fire fighting equipment; Production Research, contract with FGPVO ZDT (Federal State Injuries and death, damage to –– pressure measurements in indoor and 12 Fire safety Facilities technological and Frequent/negligible Tolerable Enterprise Departmental Security Service of Partial property caused by fires outdoor fire water mains; Development operational risk Railway Transport) of Russia for emergency –– fireproofing of metal and wooden structures. Department response and fire fighting services at FPC's • Implementation of the Investment Programme facilities. to Equip FPC’s Stationary Facilities with Fire- Protection Systems. • Implementation of an action plan covering organisational and technical measures. • Audits and inspections.

• Implementation of the Operational Programme for Industrial Safety (expert review of industrial safety of buildings, structures and equipment). • Execution of contracts for the provision • Implementation of the Investment Programme Operation and of emergency response services for gas for Industrial Safety (replacement of equipment Production Research, distribution and consumers’ gas systems. Accident or incident at a hazardous that has reached the end of its standard service 13 Industrial Safety Facilities technological and Unlikely/negligible Negligible • Execution of contracts with professional No industrial facility. life). Development operational risk emergency response organisations. • Implementation of action plans covering Department • Ongoing contract with FGP VO ZDT of Russia organisational and technical measures. for emergency response services. • Development of an Emergency Response Plan. • Development of an Oil Spill Response Plan. • Audits, inspections and certifications.

74 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Traffic safety

Technical and technological aspects of product manufacturing, delivery of works and services

Federal Passenger Company 75 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

• Ongoing contract with FGP VO ZDT of Russia • Administrative sanctions or fines for emergency response services. levied against the Company or • Emergency containment and response plans. its officers; extra payments for • Plans to prevent and clean-up spills of crude negative environmental impact. oil and petroleum products. • Implementation of the Operational Programme • Suspension of operations by • Procedure for interaction between FPC, Operation and for Environmental Safety. authorities, environmental Rail Transport Department at the Russian Production • Implementation of investment projects to pollution. Federal Service for Surveillance on Consumer 14 Environmental Safety Facilities Environmental risk Frequent/negligible Tolerable improve environmental performance. Partial • Negative environmental Rights Protection and Human Wellbeing, Development • Implementation of action plans covering impact of operations in excess and other involved governmental agencies Department organisational and technical measures. of predetermined limits; in situations where radioactive substances • Audits, inspections and training. contamination of soils or waste or other sources of ionising radiation above water; damage to sewerage systems natural background levels or hazardous due to petroleum product spills or substances are discovered in carriages of damaged treatment facilities. long-distance passenger trains crossing the national border of the Russian Federation.

• Procedure for interaction between FPC, Rail Transport Department at the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing, and other involved governmental agencies • Implementation of Operational Programmes for in situations where radioactive substances Fire, Industrial and Environmental Safety. Operation and • Administrative sanctions or fines or other sources of ionising radiation above • Implementation of the Investment Programme Production levied against the Company or its Research, natural background levels or hazardous Administrative for Industrial Safety. 15 Facilities officers. technological and Frequent/negligible Tolerable substances are discovered in carriages of Partial sanctions and fines • Implementation of action plans covering Development • Suspension of operations at the operational risk long-distance passenger trains crossing the organisational and technical measures. Department facility in question by authorities. national border of the Russian Federation. • Audits, inspections, certifications and • Ongoing contract with FGP VO ZDT of Russia examinations. for emergency response services. • Site-specific fire fighting plans. • Emergency containment and response plans. • Plans to prevent and clean-up spills of crude oil and petroleum products.

The risk of injury to employees is associated with the lack of control Occupational over compliance with occupational Risk of occupational Preventive health and safety measures (briefings, Payment of sick pay and payments to injured 16 Occupational injuries Health and Frequent/minor Undesirable Partial health and process safety injuries training in safe work practices, etc.). people in accordance with Russian laws. Safety Unit requirements as well as regulatory requirements for health and safety.

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Federal Passenger Company 77 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Product manufacturing, delivery of works and services

Lower passenger numbers carried Implementation of the Programme to Increase Transport Research, Infrastructure by FPC due to failure to provide Average Speeds of Long-Distance Passenger Trains Submission of a request to RZD to develop a 17 Management technological and Rare/negligible Negligible Partial constraints convenient schedules; passengers for 2017–2022, approved by Order of JSC RZD No. train schedule with shorter journey times. Department operational risk shifting to alternative modes. 2028 dated 30 September 2016.

• Higher rates of rolling stock replacement and upgrades (procurement + overhaul with service Rolling Stock • Failure to accommodate passenger life extension (KVR)). Shortage of passenger Replacement of third-class sleeping carriages 18 Management volumes. Investment risk Occasional/significant Undesirable • Early repair of third-class sleeping carriages. No carriages with other types of rolling stock. Department • Mileage reductions. • Maintenance and depot repair of third-class sleeping carriages approaching the end of their service life to increase capacity at peak times.

• Monthly reliability and quality analysis. • Achieving targets for reducing the amount • Development of rapid corrective measures. Lower quality of Rolling Stock Failure to control the quality of Research, of running repair that involves uncoupling of • More stringent requirements and greater 19 passenger carriage Management contractors’ services and performance technological and Frequent/negligible Tolerable rolling stock. Partial responsibility (including larger fines) in new repairs Department under carriage repair contracts. operational risk • Inspections of the Company’s branches and contracts with contractors. contractors to monitor compliance with contractual obligations.

• Professional training in educational • Review of the training system (both for new institutions listed by FPC and licensed Lower customer Passenger Lower passenger volumes (due to hires and professional development). to deliver training under the training 20 focus by FPC’s staff vs Service Human resource risk Unlikely/significant Tolerable No modal shifts). • Launching specialised training involving programmes agreed with FPC. competition Department psychologists. • Participation of FPC’s representatives in qualification examinations.

Lower passenger satisfaction levels • Implementation of motivational programmes due to substandard (Ranks, Personal Salaries, Passport of Trust). Passenger • Specialised training (under TWI and other customer service by Lower passenger volumes (due to • Professional training and education of 21 Service Reputational risk Likely/negligible Tolerable programmes). No RZD Holding’s business modal shifts). personnel. Department • Young employee support programmes. units involved in the • Engagement of student train attendant teams in passenger service the summer holiday period. value chain

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Product manufacturing, delivery of works and services

Federal Passenger Company 79 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Public relations

• Detailed Regulations on Cooperation of the Heads of FPC Business Units with the Media were developed to make sure such dealings are • Lower satisfaction or complete properly conducted (Order No. 536, dated 24 dissatisfaction of customers with May 2016). FPC’s services can result in a loss of • JSC RZD Order on Emergency Response passenger traffic on specific routes Communications Procedures (Order No. 1, dated or across the country in general. Monitoring of negative publicity incidents Corporate 9 January 2017) has been communicated to the Public dissatisfaction Consumers shifting to road and air involving the Company or its employees 22 Communications Reputational risk Frequent/negligible Tolerable employees dealing with the media. No with FPC’s services modes. currently covers not only the media but social Centre • A Quick Reference Card for RZD Holding’s Front- • The occurrence of this risk may networks as well. Line Staff Dealing with Media Members Taking result in major financial losses up to Photos or Videos was developed for train crews the level where the Company would (Order No. SH-169, dated 11 January 2017). have to go into liquidation due to • Special instructions for the heads of FPC business unprofitability. units, FPC’s Standard Publicity Threat Response Procedure, was drafted and approved (Order No. FPC-519, dated 21 November 2015).

• Participation in industry exhibitions and conferences and holding image-building events to promote positive perceptions of the Company among experts. In order to mitigate the risk of loss of business • Monitoring consumer loyalty to FPС’s reputation and to comply with the requirements Damage to business reputation may activities (initiating and maintaining of the Federal Antimonopoly Service of Russia, result in lower credit ratings, which, in passenger feedback). Corporate FPC’s Corporate Communications Centre publishes Damage to business turn, may lead to higher interest rates • Monitoring negative reports about the 23 Communications Reputational risk Frequent/negligible Tolerable (discloses) the following financial statements at No reputation on loans raised by the Company or Company in the media space and ensuring Centre the Company’s website: annual reports, annual even complete banks’ refusal to lend prompt anti-crisis responses. accounting statements, and consolidated financial to the Company. • Monitoring competitors – key players statements of JSC FPC, and the issuer’s quarterly in the air, road and rail sectors of the statements. transportation services market. Ensuring the Company’s full visibility in the media. Generation of own positive information flow.

Safety and security

Act of unlawful interference is an Timely communication of threats to federal illegal action (omission), including Transport Research, executive authorities and helping them to Threat of terrorist a terrorist attack, threatening the Implementation of JSC FPC’s Transport 24 Security technological and Frequent/negligible Tolerable discover, prevent and thwart acts of unlawful No attacks safety of transportation and inflicting Infrastructure and Vehicle Security Plans. Department operational risk interference as well as identify the causes and damage to life, health and property or conditions facilitating such acts. posing a threat of such consequences.

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Public relations

Safety and security

Federal Passenger Company 81 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

• Third parties obtaining trade secrets, confidential information or other insider information. Disclosure of • Verification of compliance with FPC’s local Corporate • The Company’s confidential or Internal investigation of information leaks the Company’s regulations covering the protection of the 25 Security insider information shared with Management risk Frequent/negligible Tolerable and disciplinary/administrative action against Partial confidential or insider Company’s confidential and insider information. Department third parties. offenders. information • Preventive activities. • Unauthorised persons entering FPC’s premises to steal materials or employees’ personal belongings.

• Communicating provisions of the anti- corruption laws of the Russian Federation and internal anti-corruption policies of JSC FPC to FPC’s employees. • Educating FPC’s employees on the importance of avoiding behaviours at work that can be interpreted by others as a promise or offer of a bribe, or as a consent to accept a bribe or a • Abuse of office, giving/accepting request for a bribe. bribes, abuse of power. • Educating FPC employees on anti-corruption • Commercial bribery or other and corruption prevention requirements abuse of office by an individual and liability for corrupt practices; corruption to obtain benefits in the form of prevention workshops; production and Corporate money, valuables, other property distribution of printed anti-corruption materials. Cooperation with law-enforcement and 26 Risk of corruption Security or other services of pecuniary value Management risk Frequent/negligible Tolerable • Educating FPC’s employees to cultivate a culture judicial authorities to redress damage Partial Department or property rights for himself/ against accepting gifts that are related to their sustained by FPC. herself or third parties or unlawful office or duties. provision of such benefits to • Checking compliance by FPC’s employees with said person by other individuals job-related anti-corruption and corruption (economic damage, financial losses, prevention procedures, including those related reputational risks for FPC). to accepting gifts, and reporting attempts to lead employees into corrupt practices. • Cooperation with law-enforcement agencies in the implementation of anti-corruption measures. Joint inspections. • Maintaining a security hotline to provide FPC’s employees, citizens and third-party organisations with a means to promptly report corrupt practices.

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Federal Passenger Company 83 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Human resource management

• Working meetings with teams. • FPC’s Employee Information Day. • Working meetings with teams. • Drafting a Procedure for the Reorganisation of HR and Social • Damage to the Company’s image. • Monthly monitoring of the downsizing Social tensions among Business Units of FPC’s Branches. 27 Development • Employees’ complaints to various Social risk Frequent/negligible Tolerable process and managing employment Partial staff • Inspecting compliance with labour law in the Department authorities. relationships with employees being business units of FPC’s branches. dismissed. • Cooperation with regional job centres to provide employment for dismissed personnel.

• Professional development training of employees • Failure to train skilled personnel in involved in train operations at least once every Professional training only in educational due time: HR and Social three years. institutions that are listed by FPC and hold Shortage of highly • growing number of passenger 28 Development Human resource risk Frequent/negligible Tolerable • Timely training and engagement of student relevant educational licenses; FPC participation Partial skilled staff complaints; Department train attendant teams for passenger services in in qualification examinations; provision of • equipment failures; the summer holiday period in order to prevent training courses. • increased overtime. overtime.

Financial and economic management of resources

• Use of fixed prices in contracts covering more than one year or unit rate formulas linked to actual inflation. • Drafting a Cost Cutting and Optimisation Supplier prices and the • Budgeting below inflation, based on the indices Plan or amending programmes implemented cost of long-distance Mismatch between the actual costs used by RZD Holding (e.g. ref. No. 18868, dated by FPC (train cancellations, Repair Economics 29 passenger services of transportation and the Company’s Market-based risk Frequent/negligible Tolerable 14 October 2016). Programme, etc.). No Department growing faster than revenues. • No entering into contracts linked to exchange • Shortened working hours for administrative fares rates; renegotiation of existing contracts staff. denominated in foreign currencies. • Adjusting approved budget parameters. • Notifying the branches of maximum allowed price increases in decentralised contracts.

• Hedging of payments in foreign currencies with Increased FPC’s expenditures Financial derivatives. 30 Foreign currency risk under agreements and contracts Financial risk Occasional/negligible Tolerable – No Department • Renegotiation of contracts denominated in denominated in foreign currencies. foreign currencies.

• Obtaining credit ratings from leading international rating agencies. • Renegotiation of interest rates for existing loan agreements (adjusted by agreement of the parties). The risk of increase of interest rates Financial • The main risk factor was eliminated in 2016 – 31 Interest rate risk on borrowed funds and funds being Financial risk Rare/negligible Negligible – No Department FPC’s debut bond offering on the Moscow raised. Exchange helped refinance the debt owed to VTB Bank under a loan agreement by repaying RUB 2.7 billion on 15 June 2016 and replacing the remaining debt with 9.95% p.a. coupon payments.

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Human resource management

Financial and economic management of resources

Federal Passenger Company 85 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

The risk related to threats and • Daily planning of FPC payments. Financial opportunities arising in the process Borrowing; early termination of deposit 32 Liquidity risk Financial risk Unlikely/minor Tolerable • Placement of surplus cash into deposit accounts No Department of managing FPC’s surplus funds agreements. with early withdrawal provisions. (insolvency risks, cash gap risks).

• Use of standard payment terms to minimise advance payments and receive pre-payment for Risk of contractors’ failure to fulfil Financial services rendered to counterparties. 33 Credit risk their obligations to FPC under signed Financial risk Unlikely/minor Undesirable – No Department • Requirement for high-risk contractors to provide contracts/agreements. bank guarantees to secure fulfilment of their obligations to FPC.

Risk of a significant reduction in Providing substantiating documents to support Sharp decrease Financial • Checking the completeness and validity of 34 governmental financial support Financial risk Rare/critical Undesirable calculations; out-of-court settlements and No in subsidies Department provided calculations. (subsidies). litigation.

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Federal Passenger Company 87 Annual Report 2016

Passenger 07 Service

Services popular in 2016:

Daytime Express double-decker trains trains

Moscow – Berlin Electronic ticket Talgo trains service The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Passenger Service

Quality policy

In November 2016, FPC completed On 28 November 2016, FPC obtained standard ISO 9001:2015, FPC approved the certification of its corporate quality Certificate No. 16.1779.026. the new Quality Policy in November 2016. management system for compliance with the requirements of the national To develop its corporate quality standard GOST R ISO 9001:2015 (Quality management system in compliance with Management Systems – Requirements). the requirements of the international

Quality priorities

• Meet customer requirements • Continuously improve the Company’s lean production technologies, rolling and expectations in full by continuously operational efficiency and performance stock preparation, and passenger improving service quality and ensuring by enhancing the corporate quality service. high levels of service, comfort, and safety; management system, business processes,

Quality management principles

• Follow the Management’s Leadership • Manage potential corporate • Continuously improve the corporate principle, foster collaboration between risks, prevent recurring potential quality management system, enhance employees in achieving goals, enhance inconsistencies, and make decisions operational efficiency and performance their competence, motivation, based on objective evidence through process improvement, and corporate relations culture; and stakeholder requirements; innovation, and cost optimisation. • Support and develop mutually • Ensure the compliance of the corporate beneficial long-term relations with quality management system with FPC’s management assumes responsibility suppliers, improve the satisfaction the requirements of the international for taking steps to implement the Quality of the Company’s customers and all standard ISO 9001:2015 and stakeholder Policy and provide relevant resources. stakeholders; requirements;

Quality monitoring

Between 2008 and Q3 2016, switched to a more advanced methodology on a weekly and even daily basis and the quality of service was evaluated based of monitoring service quality online at enables the Company to react promptly on extensive quarterly questionnaire- http://www.opros.fpc.ru. The monitoring to passengers’ complaints and suggestions. based surveys of passengers during has already yielded positive results, journeys. In Q4 2016, the Company as it generates relevant information

90 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

CHANGES IN CUSTOMER SATISFACTION LEVEL (CSI, FPC’S METHODOLOGY)1

1 High level of customer satisfaction Aspects 2014 2015 Q1–Q2 2016 corresponds to scores between 4.5 and Overall assessment of travel 5 points. Medium level of customer 4.45 4.56 4.75 experience satisfaction corresponds to 4–4.4 points. Low level of customer satisfaction corresponds to 3.9 points and below. Additionally, in 2017, in compliance with repeated journeys and recommend the best industry practices (including the Company’s services across all international), FPC will, for the first time, components: ticket purchase procedures, assess the Net Promoter Score (NPS) on-board services, additional services, and to evaluate customers’ willingness to make safety.

COMPARISON OF CUSTOMER FOCUS ASSESSMENT METHODOLOGIES

CSI quality service FPC’s methodology (CSI), Aspects monitoring from Q4 NPS index from 2017 2008–2016 (Q1–Q2) 2016 Passengers complete Online survey at Data collection method questionnaires during Phone survey opros.fpc.ru journeys Sample, respondents 40,000 2,000 40,000 Frequency 4 times a year Weekly 4 times a year Phone/online questionnaire containing 3 questions in each of Printed questionnaire, Electronic questionnaire, Tools the following sections: Information, 37 questions 28 questions Booking and Sales, Products and Services, After-Sales Service

The NPS index will help identify FPC's passenger services (Year of the Passenger), eventually, to devise corrective measures position in the passenger transportation FPC intends, for the first time, to publish based on passenger feedback. In addition, market, evaluate the quality of individual on its website the summary results we will introduce personal accountability components of services (ticket purchase of quality monitoring, in the form and performance control for our officers, procedure, on-board services, RZD Bonus of the Company’s average score and NPS to evaluate their compliance with service Loyalty Programme, Unified Information index counter. quality requirements and create relevant and Service Centre) and the operations motivation and incentive systems based of relevant units (KPIs), as well as find The Company plans to use survey results on a customer-focused work style, direct ways to boost the Company’s competitive to build comprehensive ratings of trains feedback, and customer evaluations. edge. Also, as part of its efforts to improve and passenger infrastructure facilities, and,

Federal Passenger Company 91 Annual Report 2016 New carriage types

Average carriage life – at least 40 years Double-decker compartment carriage with berths. Model 61-4465 Lastochka higher-speed electric train (Desiro RUS)

64 passengers 443 passengers 160 km/h 160 km/h

• Environmentally friendly toilet facilities • Environmentally friendly toilet facilities • Air conditioning unit • Air conditioning unit –: separate units in each compartment • Drinking water cooler and every passenger cabin • Audio and video system • Sliding steps for easy boarding from and alighting to low platforms (200 mm) • Passive passenger safety system • Floor-mounted racks for large hand luggage

RIC-standard sleeping carriage for international routes. Passenger carriage with open-plan seating. Model 61-4476 Model 61-4458

32 passengers 60 passengers 160– 160 km/h 200 km/h

• Environmentally friendly toilet facilities, including shower • Environmentally friendly toilet facilities • Climate control system (heating, ventilation and cooling) • Air conditioning unit • Running water • Drinking water cooler • Individual reading lamps • Audio and video system • Power sockets to charge phones or laptops • Attendant call buttons • Loudspeaker with volume control

Compartment carriage for train sets. Third-class sleeping carriage. Model 61-4462 Model 61-4447

36 (18) passengers 54 passengers 160 km/h 160 km/h

• Environmentally friendly toilet facilities • Environmentally friendly toilet facilities • Air conditioning unit • Air conditioning unit • Drinking water cooler • Fire-extinguishing system connected to the train water supply • Audio and video system system

92 Federal Passenger Company Annual Report 2016 Double-decker compartment carriage with seats. Double-decker carriage with open-plan seating. Model 61-4465 Model 61-4492

64 passengers 160 km/h 160 km/h

• Environmentally friendly toilet facilities 60 seats in the first-class 104 seats in the second-class carriage • Air conditioning unit carriage • Drinking water cooler • Environmentally friendly toilet facilities • Audio and video system • Air conditioning and purification system • Passenger information display • Audio and video system • Fire alarm system • Train security and communication monitoring system

Strizh higher-speed train (Talgo)

443 passengers For use on international routes 160 km/h 3 train sets with 1,520 / 1,435 mm variable-gauge wheelsets 216 passenger seats • 2 first-class carriages with open-plan seating • 9 first- and second-class sleeping carriages 7 train sets • 2 VIP-class sleeping carriages with a toilet and a shower manufactured by Patentes Talgo S.L. in each compartment • 3 first-class sleeping carriages for passengers with reduced mobility 20 carriages Schedule for commissioning in 2016 in each train set, including:

For use on domestic routes 1 buffet carriage 1 dining carriage 2 railway service 4 train sets with fixed-gauge wheelsets carriages with a diesel generator 414 passenger seats

• Environmentally friendly toilet facilities (multiple unit trains) • 11 first- and second-class carriages with open-plan • Air conditioning unit — separate units in each compartment seating and every passenger cabin • 5 VIP-class sleeping carriages with a toilet • Sliding steps for easy boarding from and alighting to low and a shower in each compartment platforms (200 mm) • Passive passenger safety system Scheduled for commissioning in June 2015 (Moscow – Nizhny Novgorod route) • Floor-mounted racks for large hand luggage

Federal Passenger Company 93 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

On-board passenger services

SERVICE CLASSES ON DOMESTIC ROUTES

Carriage type Service class Note

Luxury (VIP) carriages

Shower, composting toilet, washbasin and air conditioning in the compartment. Luxury Fold-out sofa 120 cm wide and upper berth 90 cm wide, armchair. 1А (4 compartments and a bar), The tariff applies to the entire compartment. Only the entire compartment can be purchased (one or two adults can ride in the Two-berth 1И (5 compartments), compartment). Children under 10 years of age travel on domestic routes free of charge. compartments. 1М (6 compartments) Premium carriage (meals, sanitary kit, print media, bed sheets). 8 to 12 berths per carriage Animals are allowed in the carriage.

First-class or RIC carriages (two-berth)

1Б (no more than one The carriage is equipped with air conditioning and composting toilet. passenger), Premium carriage (meals, sanitary kit, print media, bed sheets). 1Э Animals are allowed in the carriage.

The carriage is equipped with air conditioning and composting toilet. 1У Bed sheets are included in the fare. Animals are allowed in the carriage.

The carriage is equipped with air conditioning. Composting toilet is not guaranteed. 1Л Bed sheets are included in the fare. First-class Animals are allowed in the carriage.

Two-berth The carriage is equipped with air conditioning. compartments. 1Д (tourist) Composting toilet is not guaranteed. 10 to 20 berths Bed sheets are included in the fare. per carriage

Strizh train

1Э

Shower, washbasin and composting toilet in the compartment. The carriage is equipped with air conditioning. Two berths. Lower berth can be converted into two seats. 1Е (all seats must be purchased Animals are allowed in the carriage. by one or two passengers) TV set with a film selection option. Premium carriage (meals, sanitary kit, print media and bed sheets are included in the fare).

Air Composting Print Shower Washbasin Sanitary kit Meals conditioning toilet media

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Carriage type Service class Note

Luxury (VIP) carriages

First-class or RIC carriages (two-berth)

The carriage is equipped with air conditioning and composting toilet. 1У Bed sheets are included in the fare. Animals are allowed in the carriage.

The carriage is equipped with air conditioning. Composting toilet is not guaranteed. 1Л Bed sheets are included in the fare. First-class Animals are allowed in the carriage.

Two-berth The carriage is equipped with air conditioning. compartments. 1Д (tourist) Composting toilet is not guaranteed. 10 to 20 berths Bed sheets are included in the fare. per carriage

Strizh train

1Э

Bed Children travel Fold-out Lap Animals Armchair TV set sheets free of charge sofa blanket allowed

Federal Passenger Company 95 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Carriage type Service class Note

Compartment carriages (К)

Premium carriage (meals, sanitary kit, print media, bed sheets). 2Э The carriage is equipped with air conditioning and composting toilet. Animals are allowed in the carriage.

Premium carriage (meals, sanitary kit, print media, bed sheets). The carriage is equipped with air conditioning. 2Б Composting toilet is not guaranteed. Animals are allowed in the carriage.

The carriage is equipped with air conditioning and composting toilet. К (compartment) 2К Bed sheets are included in the fare. Four-berth Animals are allowed in the carriage. compartments. 32 to 40 berths per carriage The carriage is equipped with air conditioning. Composting toilet is not guaranteed. 2У Bed sheets are included in the fare. Animals are allowed in the carriage.

Air conditioning and composting toilet are not guaranteed. 2Л Bed sheets are included in the fare. Animals are allowed in the carriage.

Air conditioning and composting toilet are not guaranteed. 2Д (tourist) Bed sheets are included in the fare.

Third-class sleeping carriages (П)

3Э The carriage is equipped with air conditioning and composting toilet.

The carriage is equipped with air conditioning. 3Т Composting toilet is not guaranteed.

The carriage is equipped with air conditioning. 3Д Composting toilet is not guaranteed. П (third-class sleeping) Animals are allowed in the carriage. Open-plan carriage with berths. Air conditioning and composting toilet are not guaranteed. 52 to 54 berths in the 3У carriage Animals are allowed in the carriage.

3Л Air conditioning and composting toilet are not guaranteed.

3П (for organised groups The carriage is equipped with air conditioning and composting toilet. of children, based on a compartment carriage)

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Carriage type Service class Note

Compartment carriages (К)

Premium carriage (meals, sanitary kit, print media, bed sheets). 2Э The carriage is equipped with air conditioning and composting toilet. Animals are allowed in the carriage.

Premium carriage (meals, sanitary kit, print media, bed sheets). The carriage is equipped with air conditioning. 2Б Composting toilet is not guaranteed. Animals are allowed in the carriage.

Air conditioning and composting toilet are not guaranteed. 2Л Bed sheets are included in the fare. Animals are allowed in the carriage.

Air conditioning and composting toilet are not guaranteed. 2Д (tourist) Bed sheets are included in the fare.

Third-class sleeping carriages (П)

3Э The carriage is equipped with air conditioning and composting toilet.

The carriage is equipped with air conditioning. 3Т Composting toilet is not guaranteed.

3Л Air conditioning and composting toilet are not guaranteed.

3П (for organised groups The carriage is equipped with air conditioning and composting toilet. of children, based on a compartment carriage)

Federal Passenger Company 97 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Carriage type Service class Note

Open-plan seating carriages (С)

Premium carriage (meals, sanitary kit, lap blanket). 1Р The carriage is equipped with air conditioning and composting toilet.

Premium carriage (meals, sanitary kit, print media). 1Р (Strizh train) The carriage is equipped with air conditioning and composting toilet. Seating carriage with improved seat Premium carriage (meals, sanitary kit, print media, lap blanket). arrangement 1Р (double-decker trains) The carriage is equipped with air conditioning and composting toilet.

Premium carriage (meals, sanitary kit, print media, lap blanket). 1В (with single occupancy; all The carriage is equipped with air conditioning and composting toilet. seats must be purchased) Animals are allowed in the carriage.

Seating carriage based on Premium carriage (meals, sanitary kit, lap blanket). a sleeping carriage with 3Р The carriage is equipped with air conditioning and composting toilet. four-berth compartments

Premium carriage (sanitary kit). 2Р The carriage is equipped with air conditioning and composting toilet.

2С The carriage is equipped with air conditioning and composting toilet.

The carriage is equipped with air conditioning. 2В Composting toilet is not guaranteed. Seating carriage with Animals are allowed in the carriage. standard arrangement The carriage is equipped with air conditioning. 2Е Composting toilet is not guaranteed.

Air conditioning and composting toilet are not guaranteed. 3Ж Animals are allowed in the carriage.

3С Air conditioning and composting toilet are not guaranteed.

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Carriage type Service class Note

Open-plan seating carriages (С)

Premium carriage (meals, sanitary kit, lap blanket). 1Р The carriage is equipped with air conditioning and composting toilet.

Premium carriage (sanitary kit). 2Р The carriage is equipped with air conditioning and composting toilet.

2С The carriage is equipped with air conditioning and composting toilet.

Air conditioning and composting toilet are not guaranteed. 3Ж Animals are allowed in the carriage.

3С Air conditioning and composting toilet are not guaranteed.

Federal Passenger Company 99 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Carriage type Service class Note

Multiple unit train

Seating carriage with improved seat 1С The carriage is equipped with air conditioning and composting toilet. arrangement

2С The carriage is equipped with air conditioning and composting toilet.

The carriage is equipped with air conditioning. 2В Composting toilet is not guaranteed. Animals are allowed in the carriage. Seating carriage with standard arrangement 2М Air conditioning and composting toilet are not guaranteed.

Air conditioning and composting toilet are not guaranteed. 3Ж Animals are allowed in the carriage.

3С Air conditioning and composting toilet are not guaranteed.

Third-class sitting carriages

Air conditioning and composting toilet are not guaranteed. 3О О (third-class sitting) Animals are allowed in the carriage. Open-plan carriage with seats. ЗВ Air conditioning and composting toilet are not guaranteed. (without numbers)

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Carriage type Service class Note

Multiple unit train

Seating carriage with improved seat 1С The carriage is equipped with air conditioning and composting toilet. arrangement

2С The carriage is equipped with air conditioning and composting toilet.

Air conditioning and composting toilet are not guaranteed. 3Ж Animals are allowed in the carriage.

3С Air conditioning and composting toilet are not guaranteed.

Third-class sitting carriages

Federal Passenger Company 101 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

High-quality ticket service

In 2016, the Company launched a mobile School students can now purchase tickets FPC’s website contains app for purchasing tickets for long- online and from ticket offices without a page for corporate customers distance trains. The app was installed presenting a certificate from the school. where legal entities can apply online by over 505 thousand users. Over The certificate is required when boarding for the transportation of organised 526 thousand e-tickets were purchased a train. groups of passengers and children. using the app. 1,162 applications were submitted in 2016. Ticket offices of the railway network have Electronic sales account for 40% been equipped with integrated payment All points of sale have been equipped with of the total number of tickets purchased, terminals (IPTs). Over 1,862 IPTs have been conversation recorders to help improve up 7% year-on-year. The share of e-tickets installed in ticket offices. passenger service. for Strizh (Moscow – Nizhny Novgorod) trains reached 79%.

Projects implemented: new transportation products

Daytime Express Car transportation Double-decker programme service trains

10.2 4.6 around 2.8 million passengers thousand cars million passengers carried transported carried +22.5% year-on-year in 2016 double growth versus 2015 +42% year-on-year

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New carriages and trains

The comprehensive long-term programme implementation of the Programme is Stage II (2019–2020) – introduce double- to introduce double-decker passenger planned on 12 routes (490 carriages worth decker trains on the Moscow – Rostov, carriages on RZD’s network (approved more than RUB 40 billion), including: Moscow – Kazan, Moscow – Novorossiysk, by RZD’s Order No. 2822r dated 30 Moscow – Adler, Moscow – Petrozavodsk, December 2016) is intended to maintain Stage I (2017–2018) – introduce double- Saint Petersburg – Murmansk, the competitive ability of railway transport decker trains on the Moscow – Kislovodsk Moscow – Penza, Moscow – Anapa, and in the passenger transportation market, (August 2017), Rostov – Adler (September Moscow – Samara routes in December improve the cost efficiency of operating 2017), and Moscow – Izhevsk (December 2019. 371 carriages must be purchased passenger rolling stock, and make 2018) routes. 119 carriages must be to implement this stage. rational use of the throughput capacity purchased to implement this stage; of RZD’s railway network. The practical

Increased demand Launch of Talgo trains Multimodal for Strizh trains 17 December 2016 transportation Launch of Talgo trains 1.2 on the Moscow – 8 routes million passengers Berlin route carried in 2016 1.9 million passengers carried over 75 from the start of operation thousand passengers 1.5 times growth versus 2015

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Expanding the area covered by Daytime Express train services

Saint Petersburg

Pskov Ostashkov Petrozavodsk

Smolensk Cherepovets

Bryansk MOSCOW Yaroslavl Orel Kursk Nizhny Novgorod

Belgorod Kirov Voronezh Saransk Penza Ulyanovsk Existing routes Saratov Togliatti Rostov-on-Don Prospective routes Krasnodar Volgograd Stage I (2017) Samara Ufa Stage II (2018)

Adler Stage III (2019) Kislovodsk

Astrakhan

Omsk Tomsk

Irkutsk Ulan-Ude

Novosibirsk

train pairs Organising interregional routes train pairs on 25 routes on 23 routes is expedient between large cities 45 45 on routes from 500 km to 700 km. Train schedule Train schedule Therefore, the majority of daytime for 2016/2017 for 2015/2016 trains operate in the central part of Russia.

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Examples of projects planned for 2017–2018

Expanding the geography of double-decker trains: Stage I (2017–2018)

MOSCOW Main objectives

Enhance passenger service quality, 3 routes improve affordability of railway transport for the population by decreasing ticket prices, and increase passenger comfort

Rostov-on-Don Izhevsk by enhancing the technical equipment of the new rolling stock.

Adler Kislovodsk

Expanding the geography of higher-speed trains in 2017

Saint Petersburg New routes

Moscow – Bryansk, Moscow – Voronezh, Smolensk Vyazma Moscow – Vyazma, Moscow – Yaroslavl, MOSCOW Existing higher-speed routes Saint Petersburg – Nizhny Novgorod, Bryansk in 2016 Yaroslavl Saint Petersburg – Belgorod. There are Orel Daytime express train routes plans to make higher-speed trains even Kursk in 2016 Nizhny faster on the Moscow – Belgorod and Novgorod Belgorod +1 city Higher-speed train routes Moscow – Smolensk routes. Voronezh planned for launch in 2017

Changes in passenger traffic, Growth in the number of RZD Bonus Development of electronic million passengers cardholders, million sales, %

10.2 40 8.3 2.2 33

6.0 1.5

3.8 2.4 1.7 0.9

2010 2011 2012 2013 2014 2015 2016 2015 2016 2015 2016

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Faster services and improved long-distance passenger train schedule

Travel time is the main criteria in selecting time on this route can be further reduced is 16 hours 31 minutes (acceleration the mode of transport. Therefore, to 32 hours. by 70 minutes). to prepare for the upcoming season, RZD Holding carried out extensive work as part On 29 May 2016, the following trains were From 31 May 2016, the 3/4 (715/716 was of the Year of the Passenger Programme accelerated: 12 Moscow – Anapa (by 22 reclassified into the higher-speed to accelerate FPC’s high-class trains minutes), 30 Moscow – Novorossiysk (by 38 category) Moscow – Belgorod train was which enjoy the highest demand among minutes) and 144 Moscow – Kislovodsk accelerated by 1 hour in both directions, passengers. (by 96 minutes). from 7 hours 45 minutes to 6 hours 45 minutes. On 29 May 2016, 102/101 Moscow – Adler Acceleration of the 33/34 Moscow – Tallin and 104/103 Moscow – Adler trains were train: From 2 August 2016, the 66/65 Moscow – accelerated, with travel times reduced Togliatti train was accelerated: the travel by 74/24 minutes and 42/23 minutes, • as of 13 December 2015, the travel time time from Togliatti was reduced by 30 respectively. Thus, travel from Moscow from Moscow was reduced by 1 hour 56 minutes; from Moscow – by 34 minutes. to Adler now takes less than 24 hours. minutes to 14 hours 22 minutes; • as of 1 June 2016, departure time from On 31 May, the 124 Belgorod – Novosibirsk On 29 May 2016, the travel time Tallin was changed to 17:09 (instead train was accelerated by 1 hour 20 minutes; of the 35/36 Saint Petersburg – Adler train of 16:25), arrival in Saint Petersburg departure time from Belgorod was was reduced by 65 minutes / 51 minutes. is 23:17 (instead of 23:07), departure changed from 07:50 to 09:10. The journey from Saint Petersburg to Adler from Saint Petersburg is 01:09, arrival now takes around 39 hours. The travel in Moscow is 09:40. The travel time

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Equipping carriages with air-conditioning units and environmentally friendly toilet facilities

All new rolling stock is equipped with In 2016, the number of carriages equipped environmentally friendly toilet facilities – environmentally friendly toilet facilities with air conditioning units increased by 8% of the assigned fleet. and air conditioning units. by 7.1%, the number of carriages with

Availability of carriages equipped with air conditioning units and environmentally friendly toilet facilities

62.9 55.8

42.5 34.5

2015 2016 2015 2016

% of the assigned ﬂeet equipped % of the assigned ﬂeet equipped with air conditioning units with environmentally friendly toilet facilities

Federal Passenger Company 107 Annual Report 2016 Consistent efforts to reduce the number of incidents connected with a breach of traffic or railway safety rules are an integral part of the Transport Strategy Safety 08 and Security

36 % 69 less failures technical audits in 2016

31 % 321 carriages less economic equipped with upgraded losses caused by fires fire-fighting equipment

for Guaranteed Security and Reliability of Transportation Process in the Russian Federation for the Period until 2030. The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Safety and Security

The safety of FPC’s passenger trains is one of the Company’s top priorities.

Train operation safety

Since the Company was founded, no traffic threshold of 0.0092 across RZD Holding) • on-schedule delivery of the Action incidents (train crashes, accidents) have and by 20% year-on-year (4 incidents Plan to Ensure Functional Traffic Safety happend through FPC’s fault. in 2016 and 5 in 2015). on the Infrastructure of JSC RZD; • 9 technical audits and 7 inspections Consistent efforts to reduce the number In 2016, the Company reduced the total conducted in FPC’s branches and their of incidents connected with a breach number of failures by 36% (58 failures structural units to ensure traffic safety, of traffic or railway safety rules are in 2016, 90 failures in 2015). monitor elimination of revealed defects, an integral part of the Transport and develop corrective actions; Strategy1 for Guaranteed Security and Higher safety and stable traffic safety • 69 technical audits of repair Reliability of Transportation Process targets resulted, among other things, and maintenance processes conducted in the Russian Federation for the Period from: in structural units of FPC’s branches, until 2030. including 34 scheduled audits, 10 ad-hoc • implementation of FPC's Action Plan audits and 25 tracking audits. FPC exceeded its traffic safety target to Improve Traffic Safety Measures by 72% (0.0026 incidents per one million and to Achieve Accident Reduction train-kilometres, with the incident Targets;

By the end of 2016, the total number of facilities equipped with automatic fire-fighting 20 % 36 % systems reached year-on-year improvement of year-on-year decline in the total traffic safety number of failures 997 facilities, or 72.4% of the target

1 Decree of the Government of the Russian Federation No. 1734-r On the Transport Strategy of the Russian Federation dated 22 November 2008.

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Fire safety

Two fire incidents occured in 2016 (1 fire Number of fires at passenger infrastructure facilities in 2016 incident in 2015). 10 In 2016, fires caused 31% less economic losses year-on-year. 6 The Company carried out fire risk 4 assessments at 128 stationary facilities 3 to verify their compliance with Federal Law 2 2 No. 123-FZ Technical Regulations on Fire 1 Safety Requirements dated 22 July 2008.

2010 2011 2012 2013 2014 2015 2016 In 2016, FPC developed and introduced:

fire safety instructions in FPC’s carriages • One arson One short circuit (as approved by the order of FPC issued 1 in a carriage 1 at a stationary facility in 2016); • FPC’s standard for Fire Safety Management System (FPC STO 1.21.009– Equipping FPC depot workshops and other stationary facilities with security and 2016) (as approved by the order of FPC fire alarms and automatic fire extinguishers. issued in 2016). Total of 1,378 facilities 100 % In line with the repair and maintenance 997 programme, 321 carriages were equipped facilities 917 with new fire-fighting equipment in 2016. 868 facilities facilities 72.4 % 767 784 facilities 66.5 % 693 facilities 63.0 % 636 facilities facilities 55.7 % 56.9 % 50.3 % 46.2 %

2010 2011 2012 2013 2014 2015 2016

Equipped with security and ﬁre alarms Total facilities

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Industrial safety

In 2016, FPC implemented a Centralised As at 31 December 2016, the State Register In 2017, the Company intends to reduce Industrial Safety Programme. During 2016, listed 212 FPC’s hazardous production the number of hazardous production 448 initiatives were launched, with total facilities (224 facilities in 2015), which facilities from 212 to 200, and the number costs amounting to RUB 32.4 million. operated 490 technical devices (526 devices of technical devices from 490 to 467. in 2015). In 2016, production process optimisation In 2016, FPC developed and introduced and efforts to ensure compliance with In line with Federal Law No. 225-FZ a standard for Industrial Safety the requirements of federal laws helped On Compulsory Insurance of Civil Liability Management System at FPC (FPC STO the Company reduce the number of the Owner of a Hazardous Facility 1.21.008–2016) (as approved by the order of its hazardous production facilities for Inflicting Damage as a Result of an of FPC). and technical devices operated by such Accident at the Hazardous Facility dated 27 facilities. July 2010, all FPC’s hazardous production facilities are insured.

Transportation safety and security

FPC’s arrangements for transportation infrastructure facilities and vehicles instructors, which brought a significant safety and security of transport listed in the Register. FPC developed and reduction in the number of technical infrastructure facilities and vehicles are introduced transport security action plans failures in carriages, on-board equipment, governed by Federal Law No. 16-FZ for all vehicles. electrical equipment and fire-fighting On Transportation Safety dated 9 February systems on such trains. 2007 and other regulations. All international passenger trains made up in foreign countries and travelling During 2016, the Company prevented The Company carried out the vulnerability in the territory of the Russian Federation any unlawful interferences1 at transport assessment of FPC’s transport were escorted by train crew safety infrastructure facilities and in carriages.

1 Unlawful interference is an unlawful action (omission), including a terror attack, such as to jeopardise the safety of the transport system, resulting in damage to life and health of individuals, financial damage or posing a threat of such consequences; unlawful and illegal actions, etc.

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Corporate, economic and information security

The Company’s carriages are escorted In the reporting year, as part of the state Due to FPC’s economic security initiatives by squads of transport police officers Integrated Programme to Ensure Public the amount of unjustified losses recovered and security guards from private Safety on Transport, the Company fitted as a result of inspections in 2016 exceeded security companies. Based on the review 23 FPC’s facilities, including 18 FPC’s RUB 47 million, and prevented losses of the public order situation and within facilities involved in hosting the FIFA totalled over RUB161 million. the limits of the budget allowance, Confederations Cup Russia 2017 and 896 long-distance trains were escorted the 2018 FIFA World Cup, with state- The Company’s information security by squads of security providers of-the-art systems ensuring transport is ensured in accordance with on a monthly basis. In 2016, a total security. the requirements of the Information of 10,798 FPC’s trains were escorted, up Security Concept approved by FPC’s 33.7% year-on-year. The Company strongly FPC’s facilities located in the cities hosting General Director. focused on providing security for children the above sports events are fully equipped travelling in groups. with security posts.

Occupational health and safety

In 2016, FPC’s occupational health and validity of the Company’s management of FPC’s administration and branches safety management system was validated system compliance certificate enabled the Company to obtain special as compliant with the requirements No. 1 614 was renewed. terms of the Social Insurance Fund of GOST R 54934-2012 / OHSAS 18001:2007 for the insurance rate for compulsory standard (Occupational Health and Safety In 2016, ensuring safe working insurance covering industrial accidents and Management Systems. Requirements), and environment for the employees occupational diseases.

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Anti-corruption policy

FPC’s arrangements to prevent corruption information boards, including the “safe • Anti-Corruption Committee (established comply with the requirements of Article hotline” number and e-mail for reporting by the order of FPC issued in 2016). 13.3 of Russian Federal Law No. 273-FZ on corruption offences, as well as contact On Countering Corruption dated details of anti-corruption officials. FPC also consistently interacts with law 25 December 2008. enforcement bodies to identify breaches FPC developed and introduced its anti- of anti-corruption laws. According to the resolution of FPC’s corruption regulations. General Director, the Corporate Security Department is responsible for prevention The Company has in place: of corruption. • Commission for Resolving Conflicts All the Company’s branches place anti- of Interest (established by the order corruption information on dedicated of FPC issued in 2016);

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Federal Passenger Company 115 Annual Report 2016

Review of Performance and Financial 09 Results

Passenger turnover Passengers carried 89.5 93.8 billion passenger- million kilometres

Net profit Operating revenues

RUB 5.3 +11 % billion year-on-year The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Operating Performance Review

The year 2016 was a more favourable for FPC than 2015.

In 2016, FPC carried 4.7% more passengers Increased demand for domestic Average revenue per passenger (incl. VAT), on domestic routes, including a year-on- passenger services was due to the growth СреднееRUB значение доходных поступлений year increase of 3.9% in the regulated in the Russian tourism sector (resorts (с НДС) от одного пассажира, руб. segment and 7.1% in the deregulated in the Krasnodar Territory, the Caucasian 145 142 segment. Mineral Waters region, and Crimea), 138 particularly after a ban was imposed 1,949 2,016 The growth during 2016 was driven on leisure flights to Turkey and Egypt, 1,830 by increased demand for rail services popular holiday destinations for Russians. in Q2 and Q3 2016 (due to a shift in passenger traffic from international to domestic routes), with passenger rail traffic growing 9.8% year-on-year over the period from April to September 2016. 2014 2015 2016

From transportation services From additional on-train services

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Highlights

In 2016, passenger turnover amounted to 89.5 billion passenger-kilometres, 3.9% higher year-on-year, with trains made up by FPC accounting for 85.1 billion passenger-kilometres, or up 4.8% from 2015.

HIGHLIGHTS

Indicator 2014 2015 2016 2016/2015, %

Passenger turnover, billion 94.6 86.1 89.5 103.9 passenger-kilometres

• on trains made up by FPC 87.5 81.1 85.1 104.8

• deregulated segment 28.7 24.2 26.0 107.2

• domestic traffic 25.2 22.7 24.3 107.1

• interstate traffic 3.5 1.6 1.7 108.2

• regulated segment 58.8 56.9 59.1 103.8

• on trains made up in the CIS and Baltic states 7.1 4.9 4.4 89.2

Passengers carried, million people 98.7 91.3 93.8 102.7

• deregulated segment 35.9 30.3 31.1 102.5

• regulated segment 62.8 60.9 62.7 102.9

Average number of carriages in a train, 13.0 12.7 12.7 100.0 carriages

In the deregulated segment, the number Baltic states totalled 4.4 billion passenger- • 89.2 million passengers (103.5% of passengers carried amounted kilometres, or 89.2% of the previous year’s of the 2015 level) carried on trains made to 107.2% of the previous year’s level, level. up by FPC; while in the regulated segment passenger • 4.6 million passengers (90.5% volumes reached 103.8% of the 2015 The number of passengers carried of the 2015 level) carried on trains made level. In the reporting year, passenger amounted to 93.8 million people (102.7% up in the CIS and Baltic states. turnover on trains made up in the CIS and of the 2015 level), including:

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Changes in key indicators over 2016

Passenger turnover Number of passengers carried 89.5 93.8 billion passenger-kilometres million passengers

103.9%* 102.7%*

Trains made up by FPC Trains made up in the CIS and Baltic states 85.1 89.2 4.4 4.6 billion passenger- million passengers billion passenger- million passengers kilometres kilometres

104.8%* 103.5%* 89.2%* 90.5%*

* Of the 2015 level.

With the Company’s passenger turnover +2.9% year-on-year), we improved our growing faster than its carriage-kilometre carriage capacity utilisation rates to 71.5%, performance (+3.9% year-on-year vs up 1.9% year-on-year.

Financial results

In 2016, operating revenues amounted Subsidies from the federal budget to RUB 201.2 billion, up 11.0% amounted to RUB 18.9 billion (2015: year-on-year. RUB 24.7 billion). 5.3 Operating expenses increased EBITDA for 2016 was RUB 24.3 billion, RUB billion to RUB 207.1 billion, or by 4.1% which is higher by RUB 5.7 billion than year-on-year. in 2015. Net profit for 2016FY

FY2016 net profit totalled RUB 5.3 billion.

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CHANGES IN NET ASSETS, RUB BILLION The Company’s non-current liabilities increased from Indicator 2014 2015 2016 RUB 14.7 billion to RUB 19.4 billion, or by 32.5%, in the year. The growth was Net assets 181.1 181.2 186.1 driven by an increase in long-term loans by RUB 4.6 billion.

Short-term liabilities fell to RUB 30.2 billion, or by RUB 4.6 billion year-on-year, due to a decrease in payables.

FINANCIAL RESULTS, RUB BILLION

Indicator 2014 2015 2016 2016/2015, %

Revenue, total 185.6 181.2 201.2 111.0 • passenger transportation 164.2 160.0 180.1 112.6 • other activities 21.4 21.2 21.1 99.4 Expenses, total 204.9 199.0 207.1 104.1 • passenger transportation 189.7 183.6 191.8 104.4 • other activities 15.2 15.4 15.3 99.5 Operating profit –19.3 –17.8 –5.9 33.0 • passenger transportation –25.4 –23.6 –11.7 49.5 • other activities 6.2 5.9 5.8 99.2 Other revenue 27.1 28.8 23.0 79.8 • subsidies from the federal budget 23.3 24.7 18.9 76.8 Other expenses 6.6 8.6 8.7 100.3

Result from other revenue and expenses 20.5 20.2 14.3 71.0 Profit (loss) before tax 1.2 2.4 8.5 348.6 EBITDA 16.9 18.6 24.3 130.8 EBITDA margin, % 8.1 9.0 11.0 122.2 Income tax and other similar liabilities 1.6 2.3 3.2 139.0 Net profit/loss –0.4 0.1 5.3 – Net profit margin, % –0.21 0.08 2.63 –

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Revenue

In 2016, the Company’s operating revenues were RUB 201.2 billion, up 11.0% year-on-year, with 3.9% more passengers carried as compared to 2015.

CHANGES IN OPERATING REVENUES, RUB BILLION

Indicator 2014 2015 2016 2016/2015, %

Operating revenues 185.6 181.2 201.2 111.0

passenger transportation 164.2 160.0 180.1 112.6

• in the deregulated segment 79.3 73.9 85.6 115.9 • in first-class and compartment carriages 59.4 58.5 70.2 120.1 • international services 19.8 15.4 15.4 99.8 • in regulated segment 85.0 86.1 94.5 109.7 • passenger transportation 76.8 79.2 87.7 110.7 • in third-class sleeping carriages 73.7 74.8 82.5 110.3 • in third-class sitting carriages 3.1 4.5 5.2 115.7 • baggage, unaccompanied baggage, and mail transportation 8.1 6.9 6.8 99.3

other activities 21.4 21.2 21.1 99.4

• repair and maintenance of non-owned rolling stock 2.3 2.2 2.1 94.8 • provision of additional on-train services 11.6 11.3 11.3 100.6 • premium services 3.0 2.9 3.1 105.2 • bed sheets on trains 7.7 7.7 8.2 106.5 • tea, confectionery and printed media sales 0.9 0.6 0.04 6.6 • other lines of business (property lease to third parties, agency 7.5 7.8 7.7 99.0 contracts)

Revenue from passenger transportation

In 2016, revenue from passenger of the Russian Government to amend Revenue in the deregulated segment transportation increased paragraph 2 of Article 164 of the RF Tax increased to RUB 85.6 billion, or by 16.4% to RUB 180.1 billion, up 12.6% year-on- Code to set a VAT rate of 10% for long- from 2015. year. One of the key drivers behind this distance public rail services for passengers growth was an additional price indexation and baggage (Federal Law No. 386-FZ of 7.3% vs 2015, pursuant to a decision dated 29 December 2015).

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Revenue from domestic services was Revenue in the regulated segment totalled Revenue from baggage, unaccompanied RUB 70.2 billion, up 20.9% year-on- RUB 94.5 billion, up 9.3% year-on-year. baggage, and mail transportation totalled year. This growth was driven by higher RUB 6.9 billion, down 2.7% year-on- passenger turnover in the segment (up Revenue from domestic passenger year. The decrease was due to a decline 7%), price indexation (+5%), and an rail services in the regulated segment in baggage and unaccompanied baggage additional indexation of 7.3% vs 2015. was RUB 87.7 billion, an increase turnover in the Company’s own and leased of 10.3% year-on-year. The increase was baggage carriages by 9.6% year-on-year In 2016, international traffic continued driven by higher passenger turnover and tariff indexation by 4%. to decline, particularly on trains made up in the segment (up 3.8%), price indexation in the CIS and Baltic states (down 10.8% (+4%), and an additional indexation year-on-year), which negatively affected of 7.3% vs 2015. the related revenue. At RUB 15.4 billion, it was 99.8% of the 2015 level.

VAT rate change

In order to reduce the burden sector, Federal Law No. 401-FZ dated 30 of 0% for long-distance public rail services on the federal budget and support November 2016 amended the Tax Code for passengers and baggage for the period the Russian mechanical engineering of the Russian Federation to set a VAT rate between 2017 and 2029.

Revenue from other activities

Other business activities include repairs of non-owned rolling stock, additional on- train services, leasing rolling stock and real estate to third parties, etc.

Breakdown of revenue from other activities, % In 2016, revenue from other activities totalled RUB 21.1 billion, down 0.6% year-on-year. 20 28 At the same time, in 2016, the demand Repair and maintenance of rolling stock for leasing of carriages to third-party Bed sheets on trains clients was down by 3.7% year-on-year, 11 Premium services and the demand for repairs of non-owned Lease of property rolling stock dropped by 5.2% as compared 10 Other services to 2015, resulting in a considerable decline in revenue from other activities over the year. 31

In 2016, revenue from other activities accounted for about 10.5% of the total revenue, against 11.7% in 2015.

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Expenses

Passenger service expenses

In 2016, passenger service expenses amounted to RUB 191.8 billion, up 4.4% year-on-year.

EXPENSES BREAKDOWN, RUB BILLION

Indicator 2014 2015 2016 2016/2015, %

Payroll costs 28.5 28.2 29.9 106.2 Social contributions 7.8 7.7 8.1 105.2 Materials 6.1 5.0 5.5 109.7 Fuel 0.7 0.6 0.6 92.4 Electricity 0.3 0.3 0.4 111.0 Other material costs 22.6 18.7 19.2 102.4 Other 110.6 110.5 115.7 104.7 including expenses for infrastructure services and 101.6 101.6 106.9 105.2 locomotives Depreciation 12.9 12.5 12.5 99.4 Expenses, total 189.7 183.6 191.8 104.4

Payroll costs amounted to RUB 29.9 billion, RUB 1.0 billion, down 1.1% year-on-year. demonstrating a 2.4% increase year- which is 106.2% of the previous year’s The lower costs were due to declines on-year. Depreciation charges were level. Expenses for materials amounted in fuel oil prices, which were 36.5% RUB 12.5 billion, down 0.6% year-on-year. to RUB 5.5 billion, or 109.7% of 2015 lower than forecast for the period. Other Other costs amounted to RUB 115.7 billion. level. Fuel and electricity costs totalled material costs totalled RUB 19.2 billion,

Breakdown of passenger service expenses, % Expenses on other activities

In 2016, expenses on other activities were 15.6 Infrastructure payments and locomotive lease Fuel and electricity RUB 15.3 billion, down 0.5% year-on-year 55.8 Materials 10.0 Social contributions The decline was due to fewer requests Depreciation for leasing of rolling stock from third 6.5 Other material costs parties, and, consequently, fewer lease 4.6 Payroll costs contracts, and to lower volumes of rolling 4.2 stock repair, which had a negative impact 2.9 Other costs 0.5 on related revenues.

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Overhauls of fixed assets

During 2016, overhauls were carried out • 2,448 carriages received a 6-year • 364 carriages received an 18-year on 2,812 passenger carriages owned overhaul (KR-1); and overhaul (KR-2). by FPC, including:

FIXED ASSETS OVERHAUL COSTS, RUB BILLION

Indicator 2014 2015 2016 2016/2015, %

Overhauls of fixed assets 8.6 5.4 5.7 105.6 • carriages 8.1 5.1 5.5 107.8 • buildings and structures 0.5 0.3 0.2 67.4

In 2016, actual expenses for overhauls • RUB 5.5 billion for overhauls and structures by third parties – only of fixed assets were RUB 5.7 billion of passenger carriages (107.8% of 2015 facilities that were in need of an urgent (105.6% of 2015 level), including: level); overhaul (67.4% of the 2015 level). • RUB 0.2 billion for overhauls of buildings

Cost optimisation measures

In 2016, costs savings achieved through totalled RUB 6.3 billion against the planned the implementation of FPC’s medium- RUB 5.2 billion, a remarkable 21.2% term Stabilisation Programme, approved over-achievement. by the Board of Directors on 27 April 2015,

STABILISATION PROGRAMME, RUB BILLION

2016 Activities Plan Actual +/– % Reduction of rolling stock maintenance and repair costs 1.4 1.8 0.4 130.6 Optimisation of train-kilometre performance 2.6 2.6 0.0 100.0 Reduction of costs for maintenance and repair of buildings, structures and equipment 0.6 0.7 0.1 126.8 Mothballing of fixed assets 0.1 0.6 0.5 579.6 Rightsizing to match performed tasks 0.6 0.6 0.05 108.7 Total 5.2 6.3 1.1 121.2

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In addition to the Stabilisation Programme, Costs of Consumed Services in 2016 and The actual savings achieved under which was taken into consideration the Programme of Additional Measures, the programmes over the year totalled in the cost budgeting process1, to reduce were both approved by FPC’s Board RUB 3.3 billion, or 105.0% of the target. operating expenses by 10% JSC FPC’s of Directors on 7 October 2016 (Minutes Programme for the Reduction of Scope and No. 5).

JSC FPC’S ADDITIONAL PROGRAMME FOR THE REDUCTION OF SCOPE AND COSTS OF CONSUMED SERVICES IN 2016, RUB BILLION

Activities Plan Actual +/– %

Organisational structure optimisation 0.07 0.1 0.03 144.7 Working with suppliers and contractors to achieve lower cost inflation for goods and services, and reduce the scope of 3.1 3.2 0.07 103.2 consumed services Total for activities 3.2 3.3 0.1 105.0

Average headcount and Optimisation Programme

Labour productivity in transport services Overall, the average headcount across was improved by 9.8% from 2015, and all business lines was reduced from by 10.3% vs 2014. 71,629 in 2014 to 63,109, or by 8,519 FTEs (–11.9%). Headcount was reduced The operations staff increased its by 7,390 FTEs for the production productivity in terms of value by 17%, staff (–11.7%), and by 1,130 FTEs the production staff by 17.4%. for the management staff (–13.2%).

Indicator 2014 2015 2016 2016/2015, %

Passenger turnover on trains made up by FPC, billion 87.5 81.1 85.1 97.2% passenger-kilometres Total average headcount, FTEs 71,629 66,515 63,109 –8,519 Production headcount, FTEs 63,092 58,898 55,702 –7,390 Management headcount, FTEs 8,537 7,616 7,407 –1,130 Productivity of FTEs in transport services, thousand 1,327.8 1,334.5 1,465.0 110.3% passenger-kilometres / FTE Productivity of operations FTEs, thousand RUB / FTE 2,591.3 2,724.7 3,188.3 123.0% including production FTEs 2,941.9 3,077.0 3,612.3 122.8%

1 Pursuant to Russian Government Directive No. 4750p-P13 dated 4 July 2016; paragraph 4 of Section II of the minutes of the 18 January 2016 Meeting at the Office of the Russian Prime Minister; and instruction of the Russian Government No. ISh-P13-2047 dated 11 April 2016.

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Other income and expenses

The financial result from other income and expenses amounted to RUB 14.3 billion.

Key revenues received by FPC as part A significant part of revenue from other The main items in other expenses are of other income were government budgeted income and expenses was interest expenses on loans, amounting subsidies allocated as a compensation interest on bank deposits and interest to RUB 2.0 billion (102.2% of the 2015 for the revenue shortfall caused accrued oncurrent account balances. level), and cash collection and bank by the government regulation of the prices Through effective management account management costs, which totalled of long-distance fares for third-class of FPC’s liquidity, in 2016 we generated RUB 1.9 billion for the year (116.4% sitting and sleeping carriages. Government RUB 0.9 billion (78.3% of the 2015 of the 2015 level). subsidies allocated with regard level) from placement of surplus funds to the results of transport services in 2016 on deposits. FX rate changes during FX settlements amounted to RUB 18.9 billion (76.8% resulted in a foreign exchange loss of the 2015 level). Over 2016, we posted a foreign exchange of RUB 0.5 billion for 2016 (49.0% gain of RUB 0.5 billion (92.8% of the 2015 of the 2015 level). level) during FX settlements.

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Debt policy

The Company’s key borrowing principles the Russian Railways’ Unified Corporate JSC FPC’s Debt Policy sets out covenants as are described in the Regulations on JSC Standard for debt transactions to provide follows. FPC’s Debt Policy approved by the Board sufficient funding for investing and of Directors on 15 May 2015. The Debt operating activities, approved by Order Policy of JSC FPC is fully compliant with of JSC RZD No. 847r dated 1 April 2015.

Covenant Limit 2016

Debt structure (short-term loans to total borrowings ratio) max 0.4 0.18 Debt coverage (net debt to EBITDA ratio) max 2.5 0.18 Interest coverage (EBITDA to net interest expenses ratio) min 4.0 22.62 Equity structure (total borrowings to equity ratio) max 1.5 0.11

In 2016, FPC borrowed RUB 18.9 billion, to fund long-term projects included completed its RUB 5.0 billion 3-year debut of which RUB 7.2 billion were allocated in the Investment Programme and bond issue on the Moscow Exchange. to cover cash gaps due to high seasonality refinance the current loan portfolio. of passenger traffic, and RUB 11.7 billion In June 2016, JSC FPC successfully

As at 31 December 2016, the Company’s loan portfolio was RUB 19.7 billion.

IN DECEMBER 2016, FPC WON A CBONDS AWARD IN THE DEBUT OF THE YEAR CATEGORY.

The Cbonds Awards are an annual recognition of the best players in the Russian bond market, chosen by bond market players themselves through an open vote. The vote is fully transparent and is held annually since 2006.

Market players are traditionally invited to vote for the best DCM, sales, and trading teams, best bond market analytics, and the best debut issue among corporate and subfederal borrowers. Over the years, a number of the best IB teams in the Russian market were chosen winners of the Cbonds Awards, including VTB Capital, Sberbank CIB, Region Group, Promsvyazbank, Raiffeisenbank, Otkritie, and others.

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Balance sheet total

In 2016, FPC’s balance sheet total increased by RUB 5.1 billion, or by 2.2%.

KEY BALANCE SHEET ITEMS, RUB BILLION

2016/2015 Indicator 2014 2015 2016 2016/2015, % change, +/–

Non-current assets 206.7 206.7 208.6 1.9 100.9 Current assets 25.1 23.4 26.7 3.2 113.9 Assets 231.8 230.2 235.3 5.1 102.2 Equity and reserves 180.5 180.6 185.6 5.0 102.8 Non-current liabilities 15.8 14.7 19.4 4.8 132.5 Current liabilities 35.5 34.9 30.2 –4.6 86.7 Liabilities 231.8 230.2 235.3 5.1 102.2

BALANCE SHEET CHANGES, RUB BILLION

Indicator 2014 2015 2016

Non-current assets 206.7 206.7 208.6 Current assets 25.1 23.4 26.7 Equity and reserves 180.5 180.6 185.6 Non-current liabilities 15.8 14.7 19.4 Current liabilities 35.5 34.9 30.2

Non-current assets, RUB billion Current assets, RUB billion

208.6 26.7

25.1

206.7 206.7 23.4

2014 2015 2016 2014 2015 2016

Federal Passenger Company 129 Annual Report 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

As at 31 December 2016, FPC’s registered uncertified shares with the same was 99.999999999%, with JSC KRP-Invest non-current liabilities amounted par value of RUB 1 each. holding 0.000000001%. to RUB 19.4 billion, including loans and borrowings in the amount On 18 August 2016, changes were JSC FPC’s registrar is JSC STATUS, which of RUB 16.2 billion. made to JSC FPC’s shareholding maintains the FPC securities register under structure – one share held by JSC contract No. 201-14/FPC-14-216 dated As at 31 December 2016, JSC FPC’s Baminvest was transferred to JSC KRP- 11 June 2014. authorised capital was RUB 165.5 billion, Invest. As at the end of 2016, RZD’s comprised of 165,461,040,539 ordinary shareholding in FPC’s authorised capital

CHANGES IN NET ASSETS, RUB BILLION

Indicator 2014 2015 2016

Net assets 181.1 181.2 186.1 RUB 186.1 In the reporting year, the Company’s net assets increased by 2.7% billion to RUB 186.1 billion. The Company’s net assets in 2016

Net assets, RUB billion Balance sheet changes, RUB billion

185.6 180.5 180.6 186.1

181.1 181.2

35.5 34.9 30.2

15.8 14.7 19.4

2014 2015 2016 2014 2015 2016

Equity and reserves Non-current liabilities Current liabilities

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Payables and receivables

As at 31 December 2016, FPC’s receivables to RUB 1.21 billion, or 17.1%, – an increase As at 31 December 2016, trade receivables amounted to RUB 7.06 billion. of RUB 0.30 billion, or 33.0%, year-on- due for passenger services made up year. The largest share of trade receivables RUB 1.10 billion, or 15.6%, in line with Taxes and charges receivable were 50.0%, was due for repair and maintenance the terms of relevant contracts. or RUB 3.53 billion. of the rolling stock, amounting to RUB 0.46 billion, or 38.0%, and for lease As at 31 December 2016, prepayments As at the end of 2016, trade receivables of the rolling stock and property assets, were RUB 0.48 billion, or 6.8%. (except for transport services) amounted amounting to RUB 0.35 billion, or 28.9%.

Receivables 31 December 2014 31 December 2015 31 December 2016

Trade receivables (except for transport services) 0.80 0.91 1.21 Trade receivables (for transport services) 1.20 1.00 1.10 Prepayments 0.49 0.70 0.48 Taxes and charges 3.27 1.72 3.53 Other receivables 2.09 0.92 0.74 Total 7.85 5.25 7.06

As at 31 December 2016, payables The largest share of payables is As at the end of 2016, prepayments decreased year-on-year by 9.4% attributed to trade payables amounting for transport services were to RUB 22.09 billion. to RUB 9.22 billion, or 41.7%. RUB 7.48 billion, or 33.9%.

Payables 31 December 2014 31 December 2015 31 December 2016

Trade payables 10.91 10.88 9.22 Payroll liabilities 1.42 1.36 1.42 Taxes and charges, social insurance 2.41 1.74 1.77 Prepayments for other activities 0.39 0.23 0.16 Prepayments for transport services 8.55 7.99 7.48 Other payables 2.78 2.17 2.04

As payables are above the receivables, Receivables to payables ratio is 0.32. the Company can use payables as an additional source of financing.

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Cash flows

As at 1 January 2016, the Company’s cash balances amounted to RUB 2.2 billion.

Cash flows from operating activities

In 2016, the cash flow from operating to RUB 216.5 billion less transit charges. or 52.4% of the costs. Positive cash activities amounted to RUB 262.8 billion, Operating expenses amounted flow from operating activities increased including RUB 18.9 billion from the federal to RUB 245.8 billion. Expenses to RUB 17.0 billion (on the back budget. Most income (82.4%) was received for infrastructure services and of the growth of revenue from passenger from passenger services amounting locomotives were RUB 126.4 billion, services).

CASH FLOWS FROM OPERATING ACTIVITIES, RUB BILLION

Indicator 2014 2015 2016

Net cash flow 16.1 15.4 17.0 Cash inflow 260.6 258.0 262.8 Cash outflow 244.5 242.5 245.8

Cash flows from investing activities

Negative cash flow from investing activities RUB 19.8 billion (93.0% of investment) • RUB 3.7 billion for upgrades amounted to RUB 20.2 billion. were allocated for passenger rolling stock of passenger rolling stock; replacement and upgrades, including: • RUB 1.6 billion for other investment Expenses under investment activities purposes. (financing of the Investment Programme) • RUB 16.1 billion for acquisition of new were RUB 21.4 billion. In 2016, passenger carriages;

Cash flows from financing activities

Cash inflows from financing activities were • repayment of loans and borrowings – As at 31 December 2016, FPC’s cash RUB 25.2 billion for 2016, of which 75.4% RUB 15.5 billion. balance amounted to RUB 2.1 billion. were attributed to borrowings. Net cash flows from financing activities As at 31 December 2016, FPC’s balance Cash outflows from financing activities amounted to RUB 7.6 billion. of cash and cash equivalents in the current amounted to RUB 17.6 billion, including: account (including short-term deposits) FPC’s total negative cash flow for the year amounted to RUB 15.4 billion. • interest payments on loans was RUB 0.1 billion. and borrowings – RUB 2.0 billion;

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Financial review

Indicator 2014 2015 2016

Liquidity

Absolute liquidity ratio 0.31 0.32 0.51 Current liquidity ratio 0.71 0.67 0.88 Leverage ratio 0.78 0.78 0.79

Margins, %

Sales margin (including subsidies) 1.91 3.35 5.94 Return on equity (ROE) –0.22 0.08 2.85 Return on assets, including subsidies (ROA) –0.17 0.06 2.25

Liabilities

Liabilities in the balance sheet total 0.22 0.22 0.21

Financial leverage (interest-bearing borrowings / equity) 0.28 0.27 0.27

Total debt / EBITDA 1.04 0.87 0.81 Total debt / revenue (including subsidies) 0.08 0.08 0.09

As at the end of 2016, liquidity ratios the end of 2016, the current liquidity increased year-on-year. ratio was 0.88, up 0.21 year-on-year, due to lower current liabilities, down Absolute liquidity ratio improved to 0.51 by RUB 4.7 billion, or 13.3%. As at 0.79 due to higher cash and cash equivalents the year-end, the leverage ratio was 0.79, Leverage ratio and lower current liabilities. As at as compared to 0.78 at the end of 2015. at the end of 2016

Federal Passenger Company 133 Annual Report 2016

Investment 10 Management

RUB 19.4 billion 92.4 % spent under the Investment Programme

RUB 14.7 Share of investment billion in replacement and upgrades spent on new carriages of passenger rolling stock The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Investment Management

As an integral component of the Development Strategy, the Company’s Investment Policy establishes investment priorities, structure, criteria, areas, and sources.

Investments ranking

The Company’s investment projects are • cost effective projects; Each project is ranked from 0 to 100. ranked into five categories: • replacement of retired fixed assets, generating technological impact; The higher the score, the higher priority • long-term projects; • technology and social projects. is given to the project when included • replacement of retired fixed assets, in the Investment Programme. generating economic impact;

INVESTMENT PROGRAMME STRUCTURE BY PROJECT CATEGORY

Share in the overall Programme investment programme, Score %

Long-term projects: renovation of Orekhovo-Zuyevo passenger carriage depot, 18 63 to 100 carriage-washing, as well as blasting and painting facilities Replacement of retired fixed assets, generating direct economic impact, 23 46 to 100 including new rolling stock for high-class trains Projects with a direct economic effect, including acquisition of double-decker carriages and development of e-ticket 38 26 to 80 sales Replacement of retired fixed assets, generating technological impact, 15 18 to 45 including upgrade of rolling stock and re-equipment of depot facilities Technology and social projects 6 0 to 25 Total 100

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Structure of investments

Expenditures for the FPC’s Investment • Saransk – Moscow; with service life extension (KVRs). During Programme totalled RUB 19.4 billion • Vologda – Saint Petersburg; KVRs, carriages are equipped with air in 2016. • Khabarovsk – Komsomolsk-on-Amur; conditioners and environmentally friendly • Khabarovsk – Blagoveshchensk; toilet units, making them comparable In the reporting period, RUB 17.9 billion • Tynda – Blagoveshchensk; in terms of comfort with newly built (92.4% of investment) were allocated • Novokuznetsk – Saint Petersburg. carriages. KVR costs 2.4–2.6 times less for the rolling stock replacement and than a new carriage, which is critical upgrades, including: Additionally, for high-demand profitable in a situation of mass retirement of rolling passenger destinations the Company stock for reasons of expired service life. • RUB 14.7 billion for acquisition purchased 86 double-decker carriages of 294 new passenger carriages, (worth RUB 6.7 billion), including 17 In addition, the Investment Programme including: double-deckers (worth RUB 1.4 billion) provided for depot upgrade projects and –– 115 third-class sleeping carriages, for interregional services: IT projects. –– 31 compartment carriages, –– 2 dining carriages, • Moscow – Saint Petersburg; RUB 0.8 billion were spent on depot –– 86 double-decker carriages, • Saint Petersburg – Adler; upgrades. –– 60 Talgo carriages; • Moscow – Voronezh. • RUB 3.2 billion for passenger rolling Investments in depots were used stock upgrades. The double-deckers improved primarily to: the Company’s competitiveness The remaining capex totalling by reducing passenger fares. • upgrade existing production facilities RUB 1.5 billion, or 7.6 % (RUB 0.5 billion); of the Programme, was used to support For the Moscow – Berlin route, in 2016, • purchase equipment to ensure depot upgrades, IT projects, and other the Company purchased 60 Talgo carriages continuous depot operations initiatives. worth RUB 2.7 billion. The project seeks (RUB 0.2 billion); to ensure: • upgrade hazardous production facilities The new rolling stock was purchased and install security and fire alarm to upgrade the fleet and replace retired • comfortable passenger services systems at workshops (RUB 0.1 billion). carriages. on the above routes in terms of shorter travel time; The Company’s Carriage Procurement • more passenger traffic on the routes; Programme gives priority to the acquisition • higher profitability of the Company; of new rolling stock for upgrading high- • better Russian Railways’ image class trains. To achieve this goal, in 2016, and brand awareness in the global the Company purchased 148 carriages market. worth RUB 5.3 billion, including 115 third- class carriages. The carriages were used As part of its 2016 Investment Programme, RUB to upgrade 15 trains running between: the Company financed a RUB 3.2 billion 19.4 Passenger Rolling Stock Upgrade project. billion • Belgorod – Moscow; Most funds (RUB 2.8 billion) were used spent under the 2016 Investment • Pskov – Moscow; to perform overhauls for 166 carriages Programme

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RUB 0.3 billion were spent on IT projects Investments in other projects totalled Sources of financing for the 2016 in 2016 (setup of an information security RUB 0.4 billion. (implementation Investment Programme: management system, supply of software of the Comprehensive Transport and hardware, network equipment, etc.). Safety & Security Programme, and • equity (depreciation): RUB 13.7 billion. the Innovative Mobility project). • borrowings: RUB 5.7 billion.

The key reason for the year-on-year INVESTMENT PROGRAMME STRUCTURE, RUB BILLION change in the size of capital investments was the larger number of passenger Item 2015 2016 +/– carriages purchased in 2016 (294 carriages vs. 185 in 2015), – 109 passenger carriages Rolling stock acquisition 12.6 14.7 2.1 or RUB 2.1 billion more, year-on-year. Rolling stock upgrades 3.9 3.2 –0.7 Depot upgrades 0.8 0.8 – IT projects 0.4 0.3 –0.1 Other projects 0.1 0.4 0.3

Total 17.8 19.4 1.6

Priority investment areas

Customer-focused investment

In 2016, FPC spent RUB 17.8 billion • Transit time reduction and enhancement • Passenger carriage KVRs (166 carriages to improve its customer experience of passenger experience and transport for RUB 2.8 billion). through a number of initiatives, including: safety by purchasing new highly efficient passenger carriages with improved In addition, RUB 0.3 billion were spent performance and passenger comfort on the implementation of information (294 new carriages for RUB 14.7 billion); technology innovations.

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Investment in safety

RUB 0.8 billion were spent • RUB 0.4 billion to implement • RUB 0.1 billion to ensure the compliance in 2016 on enhancing safety and quality the Comprehensive Transport of FPC’s facilities with fire safety of passenger services. Major investments Safety & Security Programme; requirements; in transport safety included: • RUB 0.2 billion to replace retired rolling • RUB 0.1 billion to install new frames, stock; bolsters, and 1,520 mm gauge bogies during scheduled carriage repairs.

Upgrades

In 2016, to maintain its existing carriage invested RUB 0.8 billion in renovation repair and maintenance facilities, FPC and upgrades of its fixed assets.

Mid-term investment

FPC’s Investment Programme The Passenger Rolling Stock Upgrade carriage depot to improve the depot’s for 2017–2019 provides project for 2017–2019 sets an capacity and take on KVR repairs. for the purchase of 264 double-deckers amount of RUB 16.8 billion, including Total 2017 investments including worth RUB 23.0 billion to be used RUB 9.8 billion worth of KVRs the cost of equipment are RUB 0.2 billion. on profitable routes. for 553 carriages. Additionally, in the concerned period, the Company is going to raise external Priority rolling stock investment is In addition, the Investment Programme investments to upgrade its carriage- the purchase of carriages for high-class provides for RUB 5.6 billion to be washing facilities and blasting and painting trains. To this end, the Company plans spent on depot upgrade projects and systems, and construct a laundry plant to purchase 643 Russia-made single- RUB 0.6 billion on information technology in Yekaterinburg worth RUB 1.5 billion. deckers in 2017–2019. innovations. In particular, the Company In 2017–2019, the Company plans to invest plans to complete renovation of the repair a total of RUB 72.7 billion. facilities in the Orekhovo-Zuevo passenger

Federal Passenger Company 139 Annual Report 2016

11 Procurement

RUB 314 million procurement savings 42.4 %

4,756 Share of annual contracts entered procurement from into in 2016 SMEs The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Procurement

FPC achieved RUB 314 million of procurement savings in 2016 as per the procurement register.

Procurement activities in FPC are (a leading rolling stock manufacturer) In the competitive bidding governed by the corporate Regulation and Russian Railways (carriage repair for procurement of goods, work or services on Procurement of Goods, Work and maintenance, and Roszheldorsnab where only SMEs took part, in 2016, and Services. The document is based services). 1,058 bids were filed. on the following laws and regulations of the Russian Federation: In the reporting period: FPC’s annual procurement from SMEs was 42.4% of the aggregate annual value • Federal Law No. 223-FZ On Procurement • 881 contracts were entered into through of contracts. of Goods, Work and Services competitive bidding for the total by Certain Types of Legal Entities dated of RUB 14.7 billion less VAT, or 59% FPC’s annual procurement from SMEs 18 July 2011; of the total price of contracts; through bidding or other procurement • Resolutions adopted by the Russian • the price of contracts with the single- procedures provided for by the Regulation Government; source supplier (contractor, service on Procurement, with SME bidders only, • other documents adopted pursuant provider) totalled RUB 3.3 billion, or 13% totalled 18.4% of the aggregate annual to Federal Law No. 223-FZ. of the total price of contracts. value of contracts.

In 2016, FPC entered into 4,756 contracts The ongoing collaboration between FPC FPC is aware of its key role for the total of RUB 25.1 billion less and Russian Small and Medium Business in the development of Russian small and VAT, including contracts for the total Corporation (RSMB Corporation)1 provided medium-sized business and is committed of RUB 7.0 billion less VAT with JSC favourable conditions for involvement to rise their share in its procurement from Railwaycar-Building Works Tver (TVZ) of SMEs in the Company’s procurement. year to year.

For reference: annual procurement from SMEs should constitute at least 18% of the aggregate annual value of contracts entered into by a customer through bidding. The aggregate annual value of contracts entered into by and between a customer and SMEs through bidding held in line with paragraph 4b of the Regulation should constitute at least 10% of the aggregate annual value of contracts entered into by a customer through bidding2.

1 RSMB Corporation acts as a development institution for support of small and medium-sized enterprises (SMEs).

2 Russian Government’s Resolution No. 1352 On Specifics of Participation of Small and Medium-Sized Enterprises in the Procurement of Goods, Work and Services by Certain Types of Legal Entities.

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4,756 1,058 contracts bids entered into by FPC in 2016 for for procurement contracts filed the total of RUB 25.1 billion by SMEs in 2016

Federal Passenger Company 143 Annual Report 2016

International 12 Activities

In 2016, the first Strizh 40 higher-speed train was put international on the route between routes Moscow and Berlin

Moscow Berlin The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

International Activities

2016 saw a 6.5% fall of passenger flow carried by the Company on international routes.

In 2016, FPC operated 40 international As in the previous year, the decline was as OSJD, UIC, CIS Railway Transport Council routes, providing direct and transit mainly driven by lower household incomes and CIT (the International Rail Transport passenger services to 19 European and and depreciation of the national currency Committee). Asian countries, including Germany, against the US dollar, Euro and Swiss franc. France, Poland, Austria, Slovakia, the Czech The Company was able to maintain its Republic, Hungary, Serbia, Montenegro, In this context, the Company continued leadership in the international railway Bulgaria, Monaco, Italy, Finland, China, to cut costs and focus on service quality sector through collaborative efforts, Mongolia, and North Korea. improvement in an effort to address including proactive adjustments increased competition in the passenger proposed to the Tariff Policy and Despite relative macroeconomic services market through leveraging policies for providing access to rail stabilisation in Russia, 2016 saw a 6.5% opportunities offered by both infrastructure for international trains, as fall in the passenger numbers carried bilateral cooperation and membership well as improvements to the quality of its by the Company on international routes. in international industry associations such passenger services.

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Improvement of the Pricing Policy and optimisation of international rail services

In 2016, FPC stayed in contact with in first-class and compartment carriages in groups (more than two or more than six railway authorities and carriers from (Russia – Latvia). Discounts ranged from passengers), to just married couples and the CIS and Baltic states to discuss pricing, 10% to 58% depending on the route and on the passenger’s birthday. Discounts discounts and surcharges. The Company applicable tariff. ranged from 20% to 50%. continued to pursue the pricing strategy introduced in 2015, which offered Another set of discounts was offered In the reporting year, FPC continued discounts and special prices for certain on all category tickets in international to optimise its international route network. trains running to the CIS and Baltic states. trains (17/18 Moscow – Nice, 23/24 In particular, discounts were offered Moscow – Paris, 21/22 Moscow – Prague, Due to lower passenger flows, direct depending on the booking date (Russia – and direct carriages Moscow – Vienna, carriages on the routes to Eastern Europe Belarus / Moldova / Lithuania / Latvia / Estonia / Moscow – Cheb, Saint Petersburg – became unprofitable, and in 2016 Kazakhstan / Uzbekistan / Kyrgyzstan / Vienna and Saint Petersburg – Prague). Moscow – Budapest, Moscow – Sofia, Tajikistan), on side bunks in third-class carriages These discounts were offered on upper Moscow – Varna, Moscow – Burgas, (Russia – Belarus / Moldova), round-trip bunks depending on booking dates, Moscow – Bar and Moscow – Cheb routes tickets (Russia – Belarus), and for purchasing passenger age (children, young and were removed from the train schedule tickets for an entire compartment senior people), to passengers travelling for 2016/2017.

Promotion of transport products on international markets

On 17 December 2016, the new higher- The Strizh train has a unique technical The new train provides a more comfortable speed Strizh train set off on its first journey profile that enables automatic track gauge journey for all passengers, including those from Moscow to Berlin, departing from changeover from 1,520 mm to 1,435 mm with special needs, since it has an increased Kursky railway station in the Russian track gauge and vice versa, a 20% increase number of compartments for people capital. The train was launched as part in travel speeds without the need with reduced mobility. Another benefit is of the events to celebrate the “Day of High to upgrade railway tracks, and reduced a 5-hour faster travel to Berlin – the entire Speeds” in Russia. centrifugal force on passengers in small- trip now taking a little over 20 hours. radius turns.

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Improvements to the international regulatory framework

During 2016, FPC’s representatives of the UNECE ITC Working Party ITC for inclusion into the final document took part in a number of meetings held on Rail Transport (SC.2), during which of its next session scheduled by the Inland Transport Committee (ITC) the Company made a presentation at for February 2017. Working Parties at the UN Economic the Workshop on International Rail Commission for Europe (UNECE) and Passenger Traffic on the Route East- During the meeting, the Working Party in meetings of the OSJD’s Informal Ad West and contributed to the discussion made progress towards achieving Hoc Working Group of Experts focused on the Draft Convention. consensus among all members on the development of a convention on the need to develop a new Convention on the facilitation of border crossing The Company’s presentation focused on the facilitation of border crossing procedures for passengers, luggage and on the current state of affairs procedures for passengers. To finalise load-luggage carried in international in the international passenger services the draft do cument, the Secretariat traffic by rail (the “Convention”). sector, outlined the current issues, and of Working Parties SC.2 and WP.30 offered solutions to them. Participants proposed a roadmap which provides In particular, from 22 to 24 November of the Workshop supported the initiative for signing of the Convention at the 2018 2016, FPC’s delegation participated of the Russian side and decided to develop Session of the UNECE ITC. in the 70th Anniversary Session a draft resolution submitted to the UNECE

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Expansion of bilateral cooperation

Ticket sales via the Euronet system the Company into the EU’s transport segment of the European market, which for trains operated by SNCF and other system. In 2016, FPC ran a joint project now offers attractive opportunities European carriers remain high on FPC’s with SNCF to include Russian carriages into for new entrants to exploit. agenda for bilateral cooperation. the night trains serving the Paris – Nice route. The target market for the proposed JV In December 2016, FPC and Voyages- is overnight trips lasting between 6 and SNCF Benelux SPRL signed a new bilateral The project participants noted 12 hours, including, in particular, the routes contract for distribution of international the high occupancy rates of the carriages with no alternative to high-speed train services which provides for continued (approximately 69% on average) and services. At the moment, this segment sales of tickets for trains run by European passengers welcoming the opportunity of the European market for passenger operators, using Euronet ticket forms and to travel across Europe in highly- services faces severe competition from available in Moscow, Saint Petersburg comfortable Russian carriages. In 2016, high-speed services and airlines, but still it and Rostov-on-Don. From March 2017, the project delivered a positive rate has some undeniable advantages such as passengers will be able to buy e-tickets of return for the Company. high level of comfort, convenient schedule, for European trains via the Russian version boarding and alighting at the centre of the agent website www.voyagessncf.eu Given the success of the pilot project, of departure and destination cities (unlike in ticket offices of Moscow, Northern, a Russian-French Ad Hoc Working Group air mode); therefore, there are customers Northwest, North Caucasus, Gorky and was established to look into the case loyal to this segment of services. Ural ticket agencies. Since 2012, FPC for launching a joint venture for operating has been taking efforts to integrate passenger services in the night train

Federal Passenger Company 149 Annual Report 2016

Corporate 13 Governance

4 General Shareholders Meetings of JSC FPC:

1 3 annual extraordinary General General Shareholders Shareholders Meeting Meetings The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

JSC FPC Corporate Governance

Overview of the corporate governance model and practice at JSC FPC

1 2

CORPORATE Protecting shareholder Equal treatment of all GOVERNANCE interests and rights shareholders PRINCIPLES

The Regulations on Preparing and Holding Shareholders have equal and fair the General Shareholders Meeting of JSC rights to share profits of JSC FPC FPC (published on FPC’s website) provide by receiving dividends. The Regulations for the corporate governance rights on JSC FPC’s Dividend Policy (published of shareholders. on FPC’s website) establish a mechanism for determining the amount of dividends Protection of interests and rights and their payment. of the Company’s shareholders is provided due to a reliable method for recording All shareholders are provided with their rights to shares – the share register materials required for the General is maintained by an independent entity, Shareholders Meeting and have equal Company STATUS. access to all required information at the offices of the Company. As part of the preparation for the General Shareholders Meeting, shareholders are provided with additional information in addition to the mandatory information required by law.

Link to the Regulations on the Procedure for Preparing Link to the Regulations on JSC and Holding the General FPC’s Dividend Policy Shareholders Meeting of JSC FPC

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3 4 5

Timely disclosure A uniform Corporate Policy Mutual trust and respect of information for all subsidiaries and for all stakeholders affiliates of the Company

The Company ensures timely disclosure JSC FPC pursues a uniform Corporate Relationships between the Company’s of information on JSC FPC’s website at Policy covering its subsidiaries to ensure shareholders, members of the Board http://www.fpc.ru and in the news feed the implementation of uniform corporate of Directors and management are of SKRIN information agency, which is standards, including standard Articles based on integrity, trust, mutual respect authorised to disclose information about of Association and Regulations governing for legitimate interests, and all parties securities and other financial instruments. the activities of management and control performing their obligations in good faith. bodies, uniform business planning standards, uniform corporate reporting, and uniform principles of financial and budget control.

Link to FPC’s official website

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The Company’s corporate governance model

Audit elects General Shareholders approves Auditor Commission Meeting

elects

Secretary elects recommends Strategic Planning of the BoD Committee

ensures Human Resources, Board recommends Remuneration and of Directors Corporate Governance Committee

interacts recommends Audit Committee

elects

Company Management appoints General Director appoints Internal Audit Centre

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JSC FPC’s corporate governance model is built in line with Russian statutory requirements and is a multi-tier system of relationships between participants in the corporate governance process.

The Company’s supreme management year, approval of the Company’s annual of Directors, and appointment of members body is the General Shareholders reports, annual accounting statements, to the Board of Directors Committees are Meeting, with the Board of Directors including profit and loss statements (profit reserved to the Board of Directors. occupying a central place in the corporate and loss accounts), as well as distribution governance system, and the management of the Company’s profit (including Three Committees have been set up at JSC of Company’s day-to-day operations payout (declaration) of dividends, except FPC’s Board of Directors for preliminary delegated to the General Director. for the profit distributed as dividends consideration of the most important following the results of the first quarter, matters related to the Company’s The General Director is accountable first six months, and first nine months activities: the Strategic Planning to the General Shareholders of the financial year) and loss following Committee, the Audit Committee and Meeting and the Board of Directors. the end of the financial year, approval the Human Resources, Remuneration and The Board of Directors, in its turn, reports of transactions as provided for by Federal Corporate Governance Committee. to the General Shareholders Meeting Law No. 208-FZ On Joint Stock Companies of JSC FPC. dated 26 December 1995. The Corporate Secretary of the Board of Directors ensures effective ongoing The jurisdiction of all management The Board of Directors occupies a key interaction with shareholders, coordinates bodies is clearly defined and formalised position in JSC FPC’s system of corporate the Company’s efforts to protect in the provisions of the Company’s Articles governance, as it determines the focus shareholder rights and interests and of Association. areas for the Company’s development, supports the activities of the Board approves the key financial and economic of Directors. Matters reserved to the General targets for the Company and monitors Shareholders Meeting include approval their achievement, sets strategic priorities To provide the Company’s shareholders of the Company’s independent Auditor, both for the near- and longer-term, and with reliable and complete information election of the Audit Commission oversees the activities of the Company’s on the Company’s financial and business and the Board of Directors, payout executive bodies. activities the Company appoints its Auditor (declaration) of dividends following on an annual basis and has the Audit the first quarter, the first six months, Election of the General Director and Commission in place. the first nine months of the financial the Corporate Secretary of the Board

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Share capital

In August 2016, JSC FPC’s shareholding previously owned by Baminvest was structure was changed as one share transferred to KRP-Invest.

VOTING SHARES BY CLASS OF SHARES

Type, class of securities Registered ordinary shares

Form of shares issued uncertified Number of shares issued 165,461,040,539 shares

State registration number 1-01-55465-E

Par value per share RUB 1

Name Number of voting shares Percentage of voting shares, %

RZD 165,461,040,538 99.999999999 KRP-Invest 1 0.000000001

Total 165,461,040,539 100

As at 31 December 2016, the Company’s authorised capital was RUB 165,461,040,539.

Changes in the Company’s share capital, RUB billion

165 165 147 152 137

2009 2012 2013 2015 2016

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Dividend policy

Under the Regulations on JSC FPC’s The General Shareholders Meetings held In 2015, the Company made a net profit Dividend Policy, if depreciation and in 2010–2013 resolved not to pay out any of RUB 141,081,000. RUB 70.5 million external funding sources are insufficient dividends. were paid out as dividends. A decision to finance the Investment Programme, on the amount of dividends for 2016 the Company may draw additional funds In 2014, RUB 4.1 billion were allocated will be made by the annual General from the net profit that would be due as to dividends and RUB 4.5 billion were Shareholders Meeting in June 2017. dividends to RZD. contributed by RZD to the Company’s authorised capital to finance its Investment Programme.

Calculating the amount of dividends

On 17 December 2012, JSC FPC’s Board Where the variance between the actual from the net profit (reserve fund and of Directors approved the Regulations and target net profit is no greater than charities) – the amount of fixed dividend on JSC FPC’s Dividend Policy. 15%, CT is equal to 0. (DIV1) – the portion of the Company profit used to finance the Company’s Investment In accordance with the Regulations, Where the variance between the actual Programme (investment programme – the amount of a full year dividend is and target net profit is greater than 15% depreciation – borrowings). a sum total of a fixed dividend (DIV1) and but less than 50%, CT is equal to 5%. a residual dividend (DIV2). Where the variance between the actual Fixed dividend (DIV1) = net profit and target net profit is greater than 50%, for the reporting year* (fixed dividend CT is equal to 10%. payable (no less than 25%)) + fixed dividend adjustment coefficient reflecting Residual dividend (DIV2) = net profit the variance between the Company’s for the reporting year – the amount actual net profit and the target value (CT). of mandatory contributions deducted

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Shareholders Meetings

The Company’s supreme management In 2016, four General Shareholders and three extraordinary General body is the General Shareholders Meeting. Meetings of JSC FPC were held – Shareholders Meetings. the annual General Shareholders Meeting

Extraordinary General 9 February 2016 14 March 2016 30 November 2016 Shareholders Meeting

Annual General Shareholders 30 June 2016 Meeting Number of issues reviewed 2 2 10 3

RESOLUTIONS APPROVED BY THE ANNUAL GENERAL SHAREHOLDERS MEETING

Approve the Annual Report of the Company.

Approve JSC FPC’s annual accounting statements.

Approve Ernst&Young LLC as FPC’s Auditor for 2016 to audit financial statements prepared under the Russian Accounting Standards (RAS), the International Financial Reporting Standards (IFRS), and the Group’s IFRS consolidated financial statements. 30 June 2016 Resolve to pay annual remuneration to the Board of Directors and the Audit Commission of JSC FPC.

Elect the new Board of Directors and the new Audit Commission of JSC FPC.

Resolve to distribute the net profit of JSC FPC based on the results of financial and business activities in 2015 and pay out dividends to the Company’s shareholders.

RESOLUTIONS APPROVED BY EXTRAORDINARY GENERAL SHAREHOLDERS MEETINGS

Approve the new version of the Regulations on the Board of Directors of JSC FPC. 9 February 2016 Approve the new version of the Regulations on Remuneration and Reimbursement for Members of the Board of Directors of JSC FPC.

Early terminate the mandate of members of the Board of Directors of JSC FPC. 14 March 2016 Elect a new Board of Directors of JSC FPC.

Approve the new version of the Regulations on Remuneration and Reimbursement for Members of the Board of Directors of JSC FPC. 30 November 2016 Approve amendments to the Regulations on the Board of Directors of JSC FPC. Amend JSC FPC’s Articles of Association.

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Board of Directors

Education: body of the Government Commission Graduated from Leningrad Higher Military for Transport. School of Railway and Transport Services with a degree in Command and Tactics In November 2015, he was appointed in Military Transport Services. Vice-President of RZD; he is a member of Russian Railways’ Management Board. Experience: Since March 2017, he has been an Advisor From 1993 to 2008, he held senior positions to the President of Russian Railways. at a number of commercial entities in the transport industry. Key professional competencies: From 2008 to 2009, he was CEO and PR and marketing, corporate governance, a member of the board of directors at strategic planning and development, Sergey Maltsev Globaltrans Group. finance and audit. Chairman of the Board of Directors From 2009 to 2014, he acted as Chairman of the presidium of the non-profit Positions held in other companies: Year of birth: 1963. partnership Council of Railway Operators Chairman of the boards Nationality: Russian Federation. Market. of directors of JSC High-Speed Rail From 2014 to 2015, he headed Lines and JSC Federal Freight, a member Elected to the Board of Directors in March the Consumer Council on the Activities of the supervisory board of Gefco S.A. 2016. He has acted as Chairman of JSC of RZD, an advisory and deliberative FPC’s Board of Directors since March 2016.

of JSC FPC’s Board of Directors since March From 2002 to 2003, he acted as 2016. Chairman of the Strategic Planning Deputy Minister, First Deputy Minister Committee of JSC FPC’s Board of Directors. of the Russian Ministry of Transport. From 2004 to 2005, he was Head Education: of the Federal Agency for Railway Graduated from Moscow Institute Transport of the Russian Ministry of Railway Engineers with a degree of Transport. in Electrification of Railway Transport, and Since 2005, he acted as Vice-President the Academy of National Economy under of Russian Railways and a member the Government of the Russian Federation. of Russian Railways’ Management Board. From 2009 to 2016, he acted as General Experience: Director of JSC FPC. Mikhail Akulov In 1982, he started his career in the railway Deputy Chairman of the Board of transport industry as a foreman at Key professional competencies: Directors the Moscow-Passazhirskaya – Kievskaya Corporate governance, macroeconomic locomotive depot of the Moscow Railway. and industry analysis, strategic planning Year of birth: 1960. From 1983 to 1999, he held senior positions and development, strategic management. Nationality: Russian Federation. at various entities and business units of the Moscow Railway. Positions held in other companies: First elected to the Board of Directors From 1999 to 2002, he was First Deputy Member of the board of directors at Oy in December 2009 by the founders’ Head, Head of the South Eastern Railway. Karelian Trains Ltd. meeting. He has acted as Deputy Chairman

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Member of the Audit Committee of JSC From 2004 to 2005, she was Head FPC’s Board of Directors. of the Financial Management Department at Russian Railways. Education: Since 2005, she has acted as Head Graduated from Novosibirsk Institute of the Corporate Finance Department at of Railway Engineers with a degree Russian Railways and a member of Russian in Accounting. PhD in Economics. Railways’ Management Board. In 2017, she was appointed Economics and Experience: Finance Director at Russian Railways. Started her career in railways in 1981 as an accountant at the West Siberian Railway. Key professional competencies: In 2000, she was appointed Chief corporate finance and investor relations, Olga Gnedkova Accountant at the West Siberian Railway. macroeconomic and industry analysis, From 2002 to 2004, she acted as Deputy taxation, strategic planning and Year of birth: 1960. Head and Chief Accountant at the Moscow development, finance and audit. Nationality: Russian Federation. Railway. In 2004, she was appointed Deputy Head Positions held in other companies: First elected to the Board of Directors of Economics and Finance at the Moscow Member of the board of directors at in December 2009 by the founders’ Railway. Company TransTeleCom. meeting.

Education: From 2015 to 2016, he was Deputy Graduated from Financial Academy under Chairman / Transport Minister the Government of the Russian Federation of the Moscow Region Government. with a degree in International Economic In January 2016, he was appointed General Relations and from Moscow State Law Director of JSC FPC. Academy with a degree in Law. Key professional competencies: Experience: macroeconomic and industry analysis, From 1998 to 2005, he acted as Vice- law, government relations, strategic President and Deputy General Director at management. Mosgortrans. From 2005 to 2006, he acted as Deputy Positions held in other companies: Petr Ivanov Head of the Moscow Transport and Chairman of the board of directors at Communications Department. FPC-Logistics. Year of birth: 1970. From 2006 to 2013, he acted as General Nationality: Russian Federation. Director of Mosgortrans. From 2013 to 2015, he was Deputy Elected to the Board of Directors in March Chairman of the Moscow Region 2016. Government.

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Education: In 2005, she was appointed Head Graduated from Irkutsk Institute of Railway of the Organisational and Administrative Engineers with a degree in Construction Department at Russian Railways. of Railways, Track and Track Facilities, and Since 2012, she has been Head the Academy of National Economy under of the Economics Department at Russian the Government of the Russian Federation Railways. with a degree in Public Economic and Financial Management of Railway Key professional competencies: Transport. Corporate governance, macroeconomic and industry analysis, strategic planning Experience: and development, HR management and In 1998, she was appointed Head corporate social responsibility. Irina Kostenets of the Economics Service, Deputy Head of Economics at the Krasnoyarsk Railway. Positions held in other companies: Year of birth: 1961. From 2003 to 2005, she acted as Deputy Member of the board of directors at Nationality: Russian Federation. Head of the Planning and Budgeting TransContainer and South Caucasus Department. Railway. Elected to the Board of Directors in June 2013.

Education: Since 2014, she has acted as Deputy Graduated from Moscow State Linguistic Executive Director of the not-for-profit University, Faculty of English. foundation Forum Analytical Centre. Holds MBAs from California State University (Hayward, USA) and Key professional competencies: the Academy of National Economy under Finance and audit, internal audit and the Government of the Russian Federation. internal control, risk management, Obtained the IoD Certificate corporate governance, management and in Company Direction under the IoD’s optimisation of major investment projects, Chartered Director global programme strategic planning and development. for qualification of directors. Positions held in other companies: Alla Saltykova Experience: Independent member of the board Until the beginning of 2014, she held of directors at JSC High-Speed Rail Lines. Year of birth: 1970. senior positions at major international Member of the Council for Financial Nationality: Russian Federation. audit and consultancy firms. Accounting and Reporting Standards Until 2011 (inclusive), she was of the National Organisation for Financial Elected to the Board of Directors in June Director of the Audit Department Accounting and Reporting Standards 2016. Chairwoman of the Audit Committee of PricewaterhouseCoopers International Foundation. of JSC FPC’s Board of Directors. Network. From 2011 to 2014, she has been a partner at Deloitte international network of firms.

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Education: From 2014 to June 2015, he acted as Graduated from Gorky Ural State Deputy Head of the Passenger Services University with a degree in Economics. Management Department at Russian Railways, and from June 2015 to December Experience: 2015, as Head of the Central Directorate From 1998 to 2000, he served as an for Passenger Facilities, a branch of Russian economic modelling consultant at Railways. the Sverdlovsk Region Food Market Since December 2015, he has been Head Development Agency, a public unitary of the Passenger Services Management enterprise. Department at Russian Railways. From 2001 to 2004, he was CFO at Avtolainer. Key professional competencies: Maxim Shneider In 2005, he was appointed Deputy Head Government relations, corporate of Commuter Service at the Sverdlovsk governance, macroeconomic and industry Year of birth: 1979. Railway, a branch of Russian Railways. analysis, strategic management. Nationality: Russian Federation. From 2005 to 2010, he was General Director of Sverdlovsk Commuter Positions held in other companies: Elected to the Board of Directors in March Passenger Company. Member of the boards of directors at 2016. From 2010 to 2014, he worked as Head Vagonremmash and Sverdlovsk Commuter of the Corporate Governance Centre Company. Chairman of the Human Resources, for Commuter Transport, a business unit Remuneration and Corporate Governance of Russian Railways. Committee of JSC FPC’s Board of Directors.

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Education: Federal Tax Service, and the Government Graduated from Moscow Institute Executive Office. of Economics and Statistics with a degree in Economy and Mathematics, and from From 2012 to 2014, he acted as Director Moscow State Law Academy with a degree for Economic Policy at the Centre in Law. PhD in Economics. for Strategic Research Foundation. Since 2014, he has headed a laboratory Experience: at the Institute of Economic Forecasting From 1990 to 1993, he was a deputy of the Russian Academy of Sciences. of the Moscow Regional Council of People’s Deputies and Chairman Key professional competencies: of the Council’s Economic Reform Government relations, strategic planning Kirill Yankov Committee. and development, law, route network From 1994 to 2012, he worked at of JSC FPC and other transport carriers. Year of birth: 1962. federal executive bodies, including Nationality: Russian Federation. the Federal Administration for Insolvencies Positions held in other companies: (Bankruptcies), Federal Energy Chairman of the Union of Passengers Elected to the Board of Directors Commission, Ministry of Natural Resources, Interregional Public Organisation in March 2016. Federal Agency for Real Estate Cadastre, for the protection of passengers’ rights.

Andrey Sergeev

Nationality: Russian Federation.

Elected to the Board of Directors in March 2016.

Chairman of the Human Resources, Remuneration and Corporate Governance Committee of JSC FPC’s Board of Directors.

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Board of Directors’ Report

Structure of the Board of Directors

The composition of the Board of Directors The mandates of Tamara Stebunova, changed two times during 2016. member of JSC FPC’s Board of Directors and Advisor to the President of Russian In March 2016, the extraordinary General Railways, were terminated. Shareholders Meeting of JSC FPC decided on early termination of the mandate of all The Board of Directors, therefore, now has the Directors and elected the new Board, 2/3 of new members, and independent including six Directors elected for the first directors are all new. time: Petr Ivanov, Sergey Maltsev, Andrey Sergeev, Tamara Stebunova, Maxim In March 2016, Sergey Maltsev, Senior Vice- Shneider, and Kirill Yankov. President of Russian Railways, was elected Chairman of the Board of Directors, and The Board of Directors is elected every year In June 2016, Alla Saltykova, Deputy Mikhail Akulov, Vice-President of Russian by JSC FPC’s annual General Shareholders Executive Director of the not-for-profit Railways, was elected Deputy Chairman Meeting in accordance with the Company’s foundation Forum Analytical Centre, was of the Board by a unanimous vote Articles of Association and is composed elected to JSC FPC’s Board of Directors of Directors. of nine members. by the annual General Shareholders Meeting.

BOARD OF DIRECTORS’ MEMBERSHIP IN 2016

From 1 January 2016 From 30 June 2016 From 14 March 2016 to 30 June 2016 to 14 March 2016 to 31 December 2016

Mikhail Akulov Mikhail Akulov Mikhail Akulov

Olga Gnedkova Olga Gnedkova Olga Gnedkova

Irina Kostenets Irina Kostenets Irina Kostenets

Valery Reshetnikov Sergey Maltsev Sergey Maltsev

Gennady Verkhovykh Petr Ivanov Petr Ivanov

Valery Veremeev Maxim Shneider Maxim Shneider

Semyon Smolyak Andrey Sergeev Andrey Sergeev

Irina Shytkina Kirill Yankov Kirill Yankov

Yuri Saakyan Tamara Stebunova Alla Saltykova

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Structure of the Board of Directors from 1 January to 14 March 2016, %

33 33

Non-Executive Director Executive Directors Men Independent Directors Women

56 67 11

Structure of the Board of Directors from 14 March to 30 June 2016, %

22 33

Non-Executive Director Executive Directors Men 11 Independent Directors Women

67 67

Structure of the Board of Directors from 30 June to 31 December 2016, %

33 33

Non-Executive Director Executive Directors Men Independent Directors Women

56 67 11

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JSC FPC’s Board of Directors performs decisions. The Company generally course under the Induction Programme efficiently due to a balanced composition meets the Code’s recommendations as for Newly Elected Members of JSC of members in terms of their age and to members of the Board of Directors: FPC’s Board of Directors as approved gender: the Board includes three women the share of executive directors by the Board in December 2015. As part and six men from different age groups, on the Board is less than 1/4, and the share of the introductory training, the Company allowing the Board members to have of independent directors is 1/3. organised office meetings with the General a deep insight into agenda items. Director and Deputy General Directors and To gain a prompt and efficient insight site visits to FPC’s facilities (Moscow and Independent directors play an important into FPC’s production, financial and Moscow-3 passenger carriage depots). role in the Board, and their fresh insight business operations, all new independent helps improve the quality of management directors have had an introductory training

Length of service on the Board, %

Board of Directors’ Membership Board of Directors’ Membership Board of Directors’ Membership from 1 January to 14 March 2016 from 14 March to 30 June 2016 from 30 June to 31 December 2016

22 22 22

Over Over Over 5 years 5 years 5 years 2 to 5 2 to 5 2 to 5 years 11 years 11 years Less than Less than Less than 2 years 1 year 1 year 22 56 67 67

Directors Mikhail Akulov and Olga Director Irina Kostenets has over three Gnedkova have been on the Board since years’ experience on JSC FPC’s Board first elected by the founders’ meeting of Directors. in 2009.

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Educational background, skills and experience of the Board members

Members of JSC FPC’s Board of Directors reputation and an extensive track-record which ensures effective decision-making have an impeccable business and personal in the rail transport and related industries, within the jurisdiction of the Board.

Educational background1

3 2 2 1

Economics Industry-speciﬁc Business Law Other and ﬁnance degrees

Five Directors have a track-record in the rail over 20 years’ experience in the railway transport, including three Directors with industry.

Experience in the railway industry2, %

22 34

Over 20 years’ experience in the railway industry 10 to 20 years’ experience in the railway industry Experience in industries related to the railway industry 22 No experience in the railway industry

1 Directors Mikhail Akulov, Petr Ivanov, Irina Kostenets, Alla Saltykova, and Kirill Yankov each have two higher education degrees. Director Olga Gnedkova has an academic degree.

2 Data shown covers the current Board of Directors.

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Meetings of the Board of Directors

In 2016, 23 meetings of JPC FPC’s Board in person. The Board reviewed 164 issues of Directors were held, including 16 during 2016 meetings in absentia and seven meetings

Statistics of the Board meetings in 2016

12 21.3 4.3 5.5 Financial and business issues Subsidiaries and Afﬁliates Organisational support Property transactions 6.7 Internal documents Strategic issues 17.7 6.7 Social and HR issues RZD Holding’s documents Charity Other 6.7

11 12.8

KEY RESOLUTIONS OF THE BOARD OF DIRECTORS IN 2016

1. Approve JSC FPC’s Investment 6. Approve Procedure for Reorganisation 10. Approve Regulations on Conflict of Programme for 2016. of Business Units of FPC’s branches. Interest Resolution at FPC.

2. Approve Regulations on Incentives 7. Approve candidates to the boards of 11. Approve JSC FPC’s Programme for for the Person Acting as JSC FPC’s Sole directors and audit commissions of the Reduction of Scope and Costs of Executive Body. FPC’s subsidiaries and affiliates. Consumed Services in 2016, and JSC FPC’s Programme of Additional Cost 3. Approve JSC FPC’s Insurance Coverage 8. Approve target framework of key Optimisation Initiatives in 2016. Programme for 2017. performance indicators at FPC. 12. Approve competence profiles of 4. Set traffic safety targets for 2016. 9. Approve candidate Deputy General FPC’s independent directors for the Directors and Heads of FPC’s 2017–2018 corporate year. 5. Adopt Regulations on the Internal Branches approved; changes to FPC’s Audit Organisation at RZD Holding. organisational structure.

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ATTENDANCE AT MEETINGS OF JSC FPC’S BOARD OF DIRECTORS BY MEMBERS OF JSC FPC’S BOARD OF DIRECTORS IN 2016

In-person Board In absentia Board Name meeting meeting

Mikhail Akulov 5(1)/7 13/16 Olga Gnedkova 3(2)/7 16/16 Petr Ivanov 7/7 9/11 Irina Kostenets 2(5)/7 16/16 Sergey Maltsev 4/7 10/11 Alla Saltykova 4(1)/5 6/8 Andrey Sergeev 4(1)/7 8/11 Maxim Shneider 4(2)/7 10/11 Kirill Yankov 6(1)/7 11/11 Valery Veremeev – 5/5 Gennady Verkhovykh – 5/5 Valery Reshetnikov – 4/5 The format "5(1)/7" in the table means Yuri Saakyan – 5/5 that the concerned Director personally attended five of seven meetings, and Semyon Smolyak – 5/5 participated in one in-person meeting Irina Shytkina – 5/5 by submitting a written opinion. Tamara Stebunova 1(1)/2 3/3

Attendance at Board meetings by individual members in 20161, %

100 100 100 100 100 100 100 100

91 89 89 83 85 78 80 72

Mikhail Olga Petr Irina Sergey Andrey Tamara Alla Maxim Kirill Valery Gennady Valery Yuri Semyon Irina Akulov Gnedkova Ivanov Kostenets Maltsev Sergeev Stebunova Saltykova Shneider Yankov Veremeev Verkhovykh Reshetnikov Saakyan Smolyak Shytkina

1 Extraordinary General Shareholders Meeting of JSC FPC (Resolution No. 30 dated 14 March 2016) resolved to elect a new Board of Directors of FPC. Mandates of Valery Veremeev, Gennady Verkhovykh, Valery Reshetnikov, Yuri Saakyan, Semyon Smolyak, and Irina Shytkina were early terminated. The annual General Shareholders Meeting (Resolution No. 31 dated 30 June 2016) elected Alla Saltykova to the Board of Directors. Mandate of Director Tamara Stebunova was early terminated.

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Directors do not hold the Company’s No conflicts of interest were identified at including information about interests shares; no claims were filed in 2016 the Board level. related to any given transaction. against members of the Board of Directors in relation to their performance of duties Members of the Board of Directors To avoid potential conflicts of interest as Directors. provided timely information to the Board members of the Board of Directors did not about the circumstances that could vote on transactions in which they had an The Company did not extend any loans potentially lead to a conflict of interest, interest. to members of the Board of Directors.

Remuneration of members of the Board of Directors

The principles regarding motivation This remuneration is not payable if Non-executive and independent directors for members of JSC FPC’s Board the Company has losses above an are not eligible for pension contributions, of Directors, as well as payment anticipated level as at the last reporting Insurance Programmes, Investment of compensation / reimbursement date preceding the date when the Board Programmes, or other benefits and of expenses to members of the Board meeting is held. privileges. of Directors are set out in the Regulations on Remuneration and Reimbursement The level of a Director’s annual In 2016, the remuneration (including for Members of the Board of Directors remuneration depends on his/her personal annual remuneration) paid to members of JSC FPC. attendance at the Board meetings and of the Board of Directors totalled personal contribution to the Company’s RUB 4,591,275.50. A Director’s remuneration comprises results. two parts: remuneration for involvement in the activities of the Board of Directors The Regulations also provide and annual remuneration. for the payment of an extra 50% and 25% to Chairman and Deputy Chairman A Director’s remuneration for attendance of the Board of Directors, respectively, at the Board meetings (irrespective for performing their roles. of the form) equals three times the minimum wage at Russian Railways. Members of JSC FPC’s Board of Directors Aggregate Director’s remuneration are reimbursed for expenses incurred for attendance at the Board meetings when travelling to the venue of the Board may not exceed the limit set out meetings or making other trips as part 4.59 in the Regulations on Remuneration and of their duties as members of JSC FPC’s million RUB Reimbursement for Members of the Board Board of Directors. remuneration paid to members of Directors of JSC FPC. of the Board of Directors in 2016

170 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Report of the Audit Committee

Roles of the Committee

Monitor the completeness, accuracy and integrity of the accounting (financial) statements of the Company; review the material aspects of the Accounting (financial) Company’s Accounting Policies; participate in the statements consideration of material matters and judgements relating to the accounting (financial) statements of the Company; approve the draft budget, Investment Programme and relevant performance reports

Monitor the risk management and internal control systems for reliability and effectiveness; review Risk management and the effectiveness of risk management and internal Statistics on the internal control control procedures; prepare proposals for their Committee meetings improvement; review and assess the implementation of the Risk Management and Internal Control Policy

In 2016, the Committee held a total of nine meetings: five meetings in person and four meetings in absentia. Ensure independent and unbiased approach of the internal audit function, and review its effectiveness; review the Company’s Internal Audit In 2016, the Audit Committee discussed Internal and external audit Policy and Internal Audit Plan; assess nominees to 33 agenda items. the Company’s auditors and make proposals on the auditor’s remuneration; oversee external audits and assess audit quality and the Auditor’s reports

Monitor the performance of the Company’s system of alerting on potential fraud being committed by 4 the company's or third parties' employees; oversee Combating fraud committed special investigations of potential fraud, misuse of 10 by the Company’s insider or confidential information; monitor the employees or third parties 4 implementation of measures taken by the Company in response to reports of suspected fraud or other 5 violations

2015 2016

In person In absentia

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Key items discussed by the Committee

1. Agreed and recommended for Russian Railways’ recommendations 8. Agreed and recommended for approval to FPC’s Board of Directors (approvals). approval to FPC’s Board of Directors the Master Agreement for Revolving the Loan Agreement between FPC Framework Credit Facility with 5. Reviewed and note of interim audit and FPC-Logistics and the Facility differentiated interest rates between results of FPC’s accounting (financial) Agreement between VTB Bank and FPC and Sberbank. statements and FPC’s consolidated FPC. financial statements for 2016. 2. Reviewed and took note of 9. Agreed and recommended for performance reports of FPC’s Internal 6. Reviewed and recommended for approval to FPC’s Board of Directors Audit Centre for 6M and 9M 2016. approval to FPC’s Board of Directors FPC’s Budgeting Methodology and FPC’s draft Financial Plan and amendments to the structure of the 3. Reviewed the progress of FPC’s risk Investment Programme for 2017, and Budget Explanatory Note. management system and amended forecasts for 2018–2019. FPC’s Risk Management Policy. 10. Reviewed and recommended for 7. Reviewed and took note of approval to FPC’s Board of Directors 4. Agreed and recommended for information on FPC’s Credit Policy, the Regulations on FPC’s Debt Policy. approval to FPC’s Board of Directors Borrowing Programme, and risk the Guidelines for Corruption Risk management system. Assessment at FPC, taking account of

The Committee’s plans for 2017

1. Review the General Director’s report Statements, and provide opinion on nominees to the position of external on FPC’s financial and business whether and how FPC’s net profit for auditor, and material terms of the performance in 2016. 2016 can be distributed. relevant agreement and service fee.

2. Review the audit reports on RAS 4. Consider payment of the full year 6. Review a Report on risk management accounting (financial) statements dividend for 2016. system performance at FPC, discuss and on IFRS consolidated financial recommendations on system statements of FPC for 2016. 5. Propose nominees for voting on enhancements. the “Approval of FPC’s Auditor” 3. Review FPC’s accounting statements agenda item at the annual General for 2016, including the Profit and Loss Shareholders Meeting. Review

The Committee was set up by resolution were removed from office before members shall also terminate. of FPC’s Board of Directors to enhance the expiration of their term. Pursuant In September 2016, the Board of Directors oversight of the Company’s financial to the Regulations on the Audit resolved to elect a new Audit Committee. and business operations by the Board Committee, if FPC’s Directors are removed The Committee is led by Alla Saltykova as of Directors. In March 2016, all Directors from office, powers of the Committee an independent director.

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CHANGES IN THE COMMITTEE’S MEMBERSHIP IN 2016

Members of the Committee in January–March 2016 Members of the Committee in September–December 2016

Olga Gnedkova, Chair of the Committee, Head of the Alla Saltykova, Chair of the Committee, Deputy Executive Corporate Finance Department at Russian Railways, member of Director of the Forum Analytical Centre, independent director FPC’s Board of Directors

Olga Gnedkova, Chair of the Committee, Head of the Corporate Oleg Ivanov, Director for Internal Control and Audit, Russian Finance Department at Russian Railways, member of FPC’s Board Railways of Directors1

Natalia Lem, Head of the Accounting Department, Russian Elena Chamortseva, Deputy Head of Zheldorkontrol Internal Railways Control Centre, a business unit of Russian Railways

Tamara Andranovich, Deputy Head of the Department of Sergey Milokhin, Head of the IFRS Consolidated Statements Economics, Russian Railways Department at the Accounting Service of Russian Railways

Andrey Derin, Deputy Head of the Subsidiaries and Affiliates Andrey Derin, Deputy Head of the Subsidiaries and Affiliates Management Department, Russian Railways Management Department, Russian Railways1

Alexander Muslovets, Deputy General Director of FPC for Alexander Muslovets, Deputy General Director of FPC for Economics and Finance Economics and Finance

Semyon Smolyak, CEO of PF Capital, an Independent Alexander Ananyev, Deputy Head of the Department of Director Economics, Russian Railways, Head of Unit

1 Positions as at the date of election to FPC’s Audit Commission.

The Audit Committee acting No in person meetings were held. meetings in person and two meetings in January–March 2016 held two meetings The Audit Committee acting in absentia. in absentia. in September–December 2016 held five

Statistics on individual attendance of the Committee meetings in 2016, %

100 100 100 100 100

86 86 86 78

50 50

Olga Alexander Tamara Andrey Oleg Natalia Alla Semyon Sergey Alexander Elena Gnedkova Muslovets Andranovich Derin Ivanov Lem Saltykova Smolyak Milokhin Ananyev Chamortseva

The remuneration paid to members of the Committee in 2016 totalled RUB 553,192.

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Report of the Human Resources, Remuneration and Corporate Governance Committee

Roles of the Committee

Develop and regularly review the Company’s Policy on remuneration of members of the Board of Directors, executive bodies and other key managers; make recommendations on the levels of remuneration and reimbursement for members of the Board of Directors and Effective and Audit Commission of the Company and its subsidiaries and transparent affiliates; set material terms of contracts with executive remuneration officers of the Company; authorise the Company’s General practice Director to serve in governing bodies or hold other paid positions elsewhere; oversee the disclosure of information on remuneration levels, policy and practice and on shareholdings in the Company by members of the Board of Directors and members of collective executive bodies in the Statistics on the Annual Report and on the website of the Company Committee meetings Develop an Induction Programme for Newly Elected Members of the Company’s Board of Directors and oversee its implementation; develop a Training and Development Since the appointment in September Programme for Members of the Board of Directors 2016, the Committee held three meetings, and oversee its implementation; analyse the current including two meetings in person and one and anticipated needs of the Company in terms of the meeting in absentia. During the period, professional qualifications of members of its executive the Committee discussed 13 agenda items. bodies and other key managers, and ensure succession HR planning planning for these positions; discuss, review and make recommendations to the Company’s Board of Directors as to appointments of the Company’s representatives to supreme governing bodies of its subsidiaries and affiliates, and nominate candidates to the boards of directors and audit commissions of the Company’s subsidiaries and affiliates; approve candidates to positions of the Company’s executive officers and to certain positions in the Company’s administration as determined by FPC’s Board of Directors 5 Monitor compliance with the Company’s Information 5 Policy; monitor reliability and effectiveness of the corporate Development and governance system; review the effectiveness of the improvement of corporate governance practice and make proposals for 2 the corporate its improvement; monitor procedures which ensure the 1 governance practice Company’s compliance with Russian laws on corporate 2015 2016 governance; determine the Conflict of Interest Management in person Policy and review and assess its implementation in absentia

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Key items discussed by the Committee

1. Approved nominee heads of FPC’s Directors, committees of the Board of 5. Reviewed proposed changes to branches. Directors and members of the Board the organisational structure of the of Directors. Company’s administration. 2. Approved competence profiles of FPC’s independent directors for the 4. Reviewed the outcomes of FPC’s 6. Reviewed the General Director’s 2017–2018 corporate year. Action Plan for the Integration of Report on FPC’s performance in 9M Key Provisions of the Corporate 2016 (implementation of the Board’s 3. Made a number of organisational Governance Code. resolutions). decisions on evaluation of performance by FPC’s Board of

The Committee’s plans for 2017

1. Review the General Director’s report 3. Determine the levels of remuneration 4. Review the outcomes of performance on FPC’s performance in 2016 and Q1 for members of FPC’s Audit evaluation of FPC’s Board of Directors, 2017; Commission and the Board of Committees of the Board of Directors Directors; and members of the Board of 2. Determine the levels of remuneration Directors; for members of audit commissions and boards of directors of FPC’s subsidiaries;

The Committee was set up by resolution efficiency of the Board of Directors; In September 2016, the Company’s Board of the Board of Directors to assist and the development of effective and of Directors resolved to reduce the number the Board of Directors in developing and transparent remuneration practice of Committee members from seven to six. improving the corporate governance in the Company. system and practice; managing The Committee is led by Maxim Shneider, relationships between the Company’s Members of the Committee are appointed member of the Board of Directors. shareholders, the Board of Directors, by resolution of the Company’s Board executive bodies, and interaction of Directors based on the Board members' with the Company’s subsidiaries; HR proposals. planning, professional composition and

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CHANGES IN THE COMMITTEE’S MEMBERSHIP IN 2016

Members of the Committee in January–March 2016 Members of the Committee in September–December 2016

Irina Shytkina, Doctor of Law, Professor of Business Law, Maxim Shneider, Deputy Head of the Passenger Services Faculty of Law, Moscow State University, Independent Director Management Department, Russian Railways, Chairman of the at FPC Committee

Lyudmila Paristaya, Deputy General Director, FPC Lyudmila Paristaya, Deputy General Director, FPC

Nikolay Zakharov, First Deputy Head of the Personnel Nikolay Zakharov, First Deputy Head of the Personnel Management Department, Russian Railways Management Department, Russian Railways

Andrey Tikhomirov, First Deputy Head of the Employment, Andrey Tikhomirov, First Deputy Head of the Employment, Remuneration and Motivation Department, Russian Railways Remuneration and Motivation Department, Russian Railways

Tamara Andranovich, Deputy Head of the Department of Sergey Kust, Head of the Subsidiaries and Affiliates Economics, Russian Railways Management Department, Russian Railways

Lyudmila Levina, Head of Unit at the Subsidiaries and Affiliates Andrey Sergeev, Independent Director Management Department, Russian Railways

Aleksandr Golochalov, Head of the Corporate Construction and Organisational Development Department, FPC

Statistics on individual attendance of the Committee meetings in 2016, %

100 100 100 100 100 100

Maxim Shneider Sergey Kust Andrey Sergeev Lyudmila Paristaya Nikolay Zakharov Andrey Tikhomirov

The remuneration paid to members of the Committee in 2016 totalled RUB 316,313.

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Report of the Strategic Planning Committee

Roles of the Committee

Determine strategic goals of the Company’s activities; participate in the development of the Company’s Strategy, and monitor its implementation; and make recommendations to the Board of Directors as to adjustments to the Company’s existing Strategy

Determine the Company’s business priorities

Preliminary consideration and making of recommendations to the Board of Directors on: • the Company’s Dividend Policy; • the Company’s Investment Policy, including the establishment of key principles for the development of the Investment Policy; • the Company’s membership in other entities (including direct or indirect acquisition Statistics on the and disposal of interests in the share capitals of such entities and imposing a charge on shares or interests); Committee meetings • approval of, and adjustments to, the Company’s annual Budget and Investment Programme and approval of the relevant Performance Report; • determining the amount of dividend on shares; and In 2016, the Committee held three • approval of the Company’s material transactions. in person meetings and discussed ten agenda items. Evaluate long-term performance of the Company

Assess voluntary and mandatory offers for the Company’s securities

Review the Company’s financial model and a model for valuation of its business and business segments

Consider reorganisation or liquidation of the Company and its controlled entities

5 Consider changes to the organisational structure of the Company and its controlled 5 entities

3 Consider reorganisation of business processes in the Company and its controlled entities

2015 2016

in person in absentia

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Key items discussed by the Committee

1. Reviewed a draft version of the 3. Reviewed the budget for 2017–2019 5. Approved the approach to running updated FPC’s Development Strategy and adjustments for 2016. the Innovative Mobility project. until 2030; 4. Reviewed drafts of FPC’s Financial 2. Reviewed the Investment Programme Plan for 2017 and forecasts for for 2017–2019 and adjustments for 2018–2019. 2016.

The Committee’s plans for 2017

1. Review a Progress Report on FPC’s 3. Review FPC’s draft Annual Report for Strategy implementation in 2016. 2016.

2. Review the General Director’s Report 4. Consider payment of the full year on FPC’s performance in 2016. dividend for 2016.

The Committee’s membership in 2016

In September 2016, FPC’s Board of Directors resolved to reduce the number of Committee members from nine to five.

Statistics on individual attendance of the Committee meetings in 2016, %

100 100 100 100

Mikhail Akulov Vladimir Maksimushkin Vladimir Vargunin Alexander Muslovets Andrey Tonkikh

The remuneration paid to members of the Committee in 2016 totalled RUB 269,452.

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CHANGES IN THE COMMITTEE’S MEMBERSHIP IN 2016

Members of the Committee in January–March 2016 Members of the Committee in September–December 2016

Valery Veremeev, Member of FPC’s Board of Directors, Mikhail Akulov, Vice-President of Russian Railways, Member of Chairman of the Committee FPC’s Board of Directors, Chairman of the Committee Maxim Artemov, Deputy Head of the Passenger Services Alexander Muslovets, Deputy General Director, FPC Management Department, Russian Railways Vladimir Vargunin, First Deputy Head of the Transport and Vladimir Vargunin, First Deputy Head of the Transport and Logistics Management Department, Russian Railways Logistics Management Department, Russian Railways Vladimir Maksimushkin, First Deputy Head of the Economic Vladimir Maksimushkin, First Deputy Head of the Economic Environment and Strategic Development Department, Russian Environment and Strategic Development Department, Russian Railways Railways, Deputy Chairman of the Committee Vadim Mishanin, Deputy General Director for Strategic Andrey Tonkikh, Head of the Department of Business Project Development and Corporate Governance at FPC Management, Russian Railways Yuri Saakyan, CEO at the Institute of Natural Monopolies Research, Independent Director Vasily Shipilov, Deputy Director of the Department for the State Regulation of Tariffs, Infrastructure Reforms and Energy Efficiency, Russian Ministry of Economic Development Igor Zyablitsky, Head of the Economics and Finance Directorate, Federal Agency for Railway Transport Aleksandr Romanov, Deputy Head of the Corporate Finance Department, Russian Railways

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External evaluation of corporate governance

Since 2013, FPC has engaged an The positive factors highlighted • highly organised activities of the Board independent expert to conduct external by the agency include: of Directors’ committees; qualitative assessment of its corporate • high level of cooperation between governance. • high ownership concentration (RZD’s the Company’s governing bodies; shareholding in FPC’s authorised capital • high level of disclosure; In 2016, RAEX (Expert RA) affirmed amounts to 100% less one share); • highly organised corporate social the Company’s 2015 rating A+.gq Very • highly organised risk management responsibility; High Level of Management Quality. system; • ISO 9001 certificates. The management quality system greatly • highly organised system for control contributes to the promotion and over financial and business activities protection of stakeholders’ rights. of the Company; • highly organised Board of Directors; • high credit ratings;

General Director

of the Company’s Science and Technology Director, termination of his/her powers, Board, and also Chairman of the Board and approves terms of employment of the Heads of the Company’s Branches. contract, including remuneration and termination. The General Director is accountable to FPC’s shareholders and the Board The General Director is responsible of Directors and submits quarterly for timely and quality budgeting and reports to the Board on the Company’s budget performance at the Company, performance (budget performance, preparing budget performance reports, contract work performance, HR Policy, and organising activities at the Company’s Credit Policy, social programmes, insurance branches. coverage, implementation of the Board’s The management of FPC’s day-to-day resolutions). On 25 January 2016, Petr Ivanov was operations is delegated to the General nominated FPC’s General Director Director as a sole executive body. The Board of Directors resolves for a three-year term by resolution The General Director acts as Chairman on the election of the Company’s General of the Board of Directors.

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Deputy General Directors

FPC’s governance structure provides the key areas of the Company’s activities for the division of responsibilities across among Deputy General Directors.

General Director

Deputy General Director Deputy General Director for Transportation Support for Economics and Finance

Deputy General Director for Human Resources Deputy General Director and Social Development for Business Development and Operations

Deputy General Director for Marketing, Deputy General Director Head of the Marketing and Tariff Policy Department for Maintenance Services

Deputy General Director for External Relations Deputy General Director and Legal Affairs for Safety and Security

Deputy General Director for Transport Management, Head of the Transport Management Department

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Year of birth: 1970. From 2005 to 2006, he acted as Deputy Head of the Moscow Transport and Education: Communications Department. Graduated from the Finance Academy From 2006 to 2013, he served as General under the Government of the Russian Director of Mosgortrans. Federation in 1993 with a degree From 2013 to 2015, he was Deputy in International Economic Relations. Chairman of the Moscow Region In 2005, graduated from the Moscow State Government. Law Academy with a degree in Law. From 2015 to 2016, he was Deputy Chairman / Transport Minister Experience: of the Moscow Region Government. From 1998 to 2005, he served as Vice- In January 2016, he was appointed General Petr Ivanov, President and Deputy General Director at Director of FPC. General Director Mosgortrans.

Year of birth: 1962. Experience: Started his career in railways in 1985. Education: In February 2010, he was appointed Head Graduated from Moscow Institute of the Moscow Branch of FPC. of Railway Engineers in 1985 with a degree Since 2015, he has held the post of Deputy in Carriage-Building and Rolling Stock. General Director of FPC.

Konstantin Torubarov, Deputy General Director for Transportation Support

Year of birth: 1977. From 2004 to 2005, he headed the Finance Department at the Moscow-Ryazan Education: Division at the Moscow Railway, a branch Graduated from Far Eastern State of Russian Railways. Transport University with a degree From 2005 to 2009, he was First Deputy in Economics and Management at Railway Chief Accountant at the Moscow Railway, Transport Enterprises; PhD in Economics. a branch of Russian Railways. From 2009 to 2010, he served as Deputy Experience: CEO at the Federal Passenger Directorate, He has worked in railway transport since a branch of Russian Railways. 1999. Since 2010, he has held the post of Deputy General Director of FPC. Alexander Muslovets, Deputy General Director for Economics and Finance

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Year of birth: 1958. Experience: Started his career in railways in 1977. Education: From 2009 to 2011, he was Chief Engineer Graduated from Moscow Institute at the Traction Rolling Stock Repair of Railway Engineers with a degree Directorate of Russian Railways. in Electrification of Railway Transport. From 2011 to 2012, he served as Deputy Holds a degree from the Academy Head of the Technical Policy Department at of National Economy under the Government FPC and headed the Engineering Office. of the Russian Federation. From 2012 to 2013, he was Deputy Chief Engineer at FPC. Since 2013, he has held the post of Deputy General Director of FPC. Aleksandr Petrunin Deputy General Director for Business Development and Operations

Year of birth: 1960. Passenger Directorate, a branch of Russian Railways, and Head of the Executive Education: Personnel Office. Graduated from Moscow Institute From 2009 to 2010, she served as Head of Railway Engineers with a degree of the Agents Network Department in Railway Operation. at the Federal Passenger Directorate, a branch of Russian Railways. Experience: From 2010 to 2012, she was Head Started her career in railways in 1983. of the Human Resources and Social From 2006 to 2009, she was Deputy Development Department at FPC. Head of the Human Resources and Social Since 2012, she has held the post of Deputy Development Department at the Federal General Director of FPC. Lyudmila Paristaya Deputy General Director for Human Resources and Social Development

Year of birth: 1979. Experience: Started his career in railways in 1998. Education: From 2011 to 2013, he was Deputy Head Graduated from St Petersburg State of the Northwest Branch of FPC. Transport University in 2001 with a degree From 2013 to 2015, he was First Deputy in Water Supply and Drainage. Head of the Northwest Branch of FPC. Graduated from St Petersburg State From 2015 to 2016, he was Head Transport University in 2006 with a degree of the Northwest Branch of FPC. in Railway Operation and Logistics. Since 2016, he has held the post of Deputy General Director of FPC.

Stanislav Zotin Deputy General Director for Maintenance Services

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Year of birth: 1969. From 2007 to 2009, he served as Director of the Revenue Management and Tariff Education: Policy Department at Aeroflot – Russian Graduated from Moscow State Aviation Airlines. Institute with a degree in Economics and From 2010 to 2012, he was Head Management at Engineering Enterprises. of the Centre for Revenue and Loyalty Programme Management of FPC. Experience: From 2012 to 2014, he served as Head From 2004 to 2006, he served as Advisor of the Revenue and Loyalty Programme to the Sales Director of Aeroflot – Russian Management of FPC. Airlines. In December 2014, he was appointed From 2006 to 2007, he served as Head Deputy General Director for Marketing Dmitry Gorbatov of the Revenue Loss Prevention and Cost and Head of the Marketing and Tariff Deputy General Director Control Service at Aeroflot – Russian Policy Department of FPC. for Marketing, Head of the Marketing Airlines Global Distribution Systems. and Tariff Policy Department

Year of birth: 1967. Experience: From 2009 to 2010, he served as Head Education: of the Transport Safety Department at Graduated from the Moscow Higher the Federal Road Agency. Combined-Arms Command School with From 2010 to 2013, he served as Advisor a degree in Automotive Engineering. to the Chairman of the Management In 2008, he graduated from the Moscow Board at the State Company Russian Academy of Public and Municipal Highways. Administration of the Russian Presidential From November to December 2013, Academy of National Economy and Public he was Member of the Management Administration with a degree in Public and Board and Deputy Chairman At-Large Municipal Administration. of the Management Board of the State Boris Suvorov In 2012, he graduated from the Academy Company Russian Highways. Deputy General Director for Safety of Security and Special Programs, a private From December 2013 to December 2016, and Security educational institution, with a degree he acted as Deputy Chairman At-Large in Anti-Corruption Practices at Federal and of the Management Board of the State Local Government Authorities, Entities, Company Russian Highways. Institutions and Organisations. In December 2016, he was appointed Deputy General Director of FPC.

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Year of birth: 1957. From 2006 to 2007, he was Head of the Passenger Service Department Education: of Russian Railways. Graduated from Moscow Institute From 2007 to 2008, he served as of Railway Engineers with a degree Deputy Head for Passenger Service at in Railway Operation; PhD in Technical the Oktyabrskaya Railway, a branch Sciences. of Russian Railways. From 2008 to 2010, he was First Deputy Experience: CEO at the Federal Passenger Directorate, Started his career in railways in 1979. a branch of Russian Railways. From 2003 to 2006, he served as Head Since 2010, he has held the post of Deputy of the Long-Distance Passenger Service General Director of FPC. Oleg Nikitin Department of Russian Railways. Deputy General Director for External Relations and Legal Affairs

Year of birth: 1979. Department of the Federal Passenger Directorate, a branch of Russian Railways. Education: From November 2012 to December Graduated from Moscow State University 2014, he served as Head of the Transport of Railway Engineering (MIIT) in 2003 Management Department at FPC. with a degree in Railway Operation and From December 2014 to June 2016, he Logistics. acted as Head of the Passenger Transport Graduated from Moscow State University and Logistics Centre at FPC. of Railway Engineering (MIIT) in 2014 with Since June 2016, he has been Deputy a degree in Corporate Management. General Director for Transport Management and Head of the Transport Experience: Management Department. Aleksey Zhigunov From 2006 to 2010, he was passenger Deputy General Director for Transport traffic operator of the operation and Management, Head of the Transport regulation unit at the Passenger, Baggage, Management Department and Unaccompanied Baggage Transport

In March 2016, the employment contract Deputy General Director for Maintenance Management and Head of the Transport with Oleg Stelmachenko, Deputy General Services. Management Department. In December Director, was terminated. 2016, FPC’s Board of Directors approved In June 2016, FPC’s Board of Directors nomination of Boris Suvorov as Deputy In April 2016, FPC’s Board of Directors approved nomination of Aleksey Zhigunov General Director to lead the Safety and approved nomination of Stanislav Zotin as as Deputy General Director for Transport Security Section.

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Report on compliance with the Bank of Russia’s Corporate Governance Code

In 2016, FPC continued to improve its • followed the Code’s recommendations phases, through FPC’s stand-alone corporate governance practice in line with as to the membership of the Board Risk Management and Internal Control FPC’s Action Plan for the Integration of Key of Directors: the share of executive Unit. As part of the system formation, Provisions of the Corporate Governance directors on the Board is less than 1/4, the Company develops and updates Code in 2015–2016, as approved and the share of independent directors internal regulatory documents; by the Board of Directors. is 1/3; • continued to shape the risk • reviewed the Company’s website In 2016, to follow recommendations management and internal control to check whether it provides all of the Corporate Governance Code, system by way of: necessary information, is regularly the Company: –– general coordination of risk updated and whether disclosed management processes and alignment information is easy to find. The Company • reviewed and assessed the current of internal controls to minimise risks implements recommendations motivation system for executive bodies affecting the Company’s financial and on website enhancement prepared and other key officers, followed business results, including information following the review. by development and approval of a target sharing and advising for all risk KPI system; management and internal control

STATISTICS OF COMPLIANCE WITH THE PRINCIPLES AND RECOMMENDATIONS OF THE CORPORATE GOVERNANCE CODE IN 2016*

Corporate Compliance with corporate governance principle Governance Principles Sections Recommended by the Code Full Partial None

Shareholder Rights 13 6 5 2

Board of Directors 36 9 18 9

Corporate Secretary 2 1 1 – Compensation System 10 7 – 3 Risk Management 6 5 1 – System Information Disclosure 7 1 4 2 Material Corporate 5 1 2 2 Actions Total 79 30 31 18

* In line with Letter of the Bank of Russia dated 17 February 2016 No. N-06-52/8 On Reporting on Compliance with the Corporate Governance Code by Public Joint-Stock Companies.

186 Federal Passenger Company Annual Report 2016 Review of Operating Corporate Safety and Financial Investment International Governance Sustainable and Security Results Management Procurement Activities Framework development Appendix

Audit Commission

The Audit Commission is FPC’s permanent In June 2016, the annual General Payment of annual remuneration internal control body responsible Shareholders Meeting of FPC elected to the Audit Commission members for regular control over financial and members of the Audit Commission as is decided by FPC’s annual General business activities of the Company, follows: Shareholders Meeting as proposed its branches, officers of management by the Board of Directors. Annual bodies and administrative units to ensure • Andrey Zhakov; remuneration paid to a member compliance with laws of the Russian • Natalia Lem; of the Audit Commission may not exceed Federation, the Articles of Association, and • Olesya Chernysheva; an amount equivalent to twenty times the Company’s internal regulations. • Anastasia Dolgaleva; the minimum wage at Russian Railways • Elena Yudina. for each completed audit. The Audit Commission acts in the best interests of the Company’s shareholders Incentives for members Pursuant to a decision of the annual and is accountable to FPC’s General of the Audit Commission are established General Shareholders Meeting, in 2016, Shareholders Meeting. The Audit by the Regulations on Remuneration and members of the Audit Commission were Commission is independent of officers Reimbursement for Members of the FPC’s paid remuneration totalling RUB 363,272. of the Company’s management bodies and Audit Commission and imply payment administrative units. of remuneration for participation in every audit of the financial and business The Audit Commission is composed activities of the Company as well as annual of five members elected annually remuneration. by the annual General Shareholders Meeting in accordance with the Articles For each audit, the Audit Commission of Association. FPC’s employees are not member receives remuneration which elected to the Audit Commission. equals three times the minimum wage at Russian Railways.

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The Company’s external auditor

To audit and verify the Company’s In June 2016, the Annual General statements prepared under RAS, IFRS, annual financial statements the General Shareholders Meeting approved and the Group’s IFRS consolidated financial Shareholders Meeting approves an Auditor OOO ERNST&YOUNG as the Company’s statements. on an annual basis. Auditor for 2016 to audit FPC’s financial

Internal Audit Centre

FPC has set up the Internal Audit Centre1, with the requirements of Russian laws to ensure independent and unbiased a separate business unit which helps and corporate documents of FPC; approach to the internal audit the Board of Directors and executive • monitor and assess the reliability function, the Audit Committee reviews bodies to enhance the Company’s and effectiveness of internal control, risk the Company’s Internal Audit Policy and governance practice, improve its financial management and corporate governance Internal Audit Plan, existing restrictions and business operations through systems; on the powers or budget constraints a systemic and consistent approach • promptly supply FPC’s management of the internal audit function that to the analysis and assessment of the risk with reliable information may adversely affect the internal audit management and internal control systems on financial and business operations function, and evaluates effectiveness and corporate governance as tools and effectiveness of business of the internal audit function. to provide reasonable assurance that processes, reliability of internal control the Company will achieve its goals. and risk management procedures The Head of the Internal Audit Centre in the administrative and business units reports to the Audit Committee at Objectives of the Internal Audit Centre: of FPC, its branches and their business the Board of Directors on internal audits units and, in line with an established in the Company. • organise and carry out internal procedure, in FPC’s subsidiaries audits of FPC’s business processes and affiliates. The Head of the Internal Audit Centre (including passenger services is appointed by the Company’s General and their documentation); ensure Under the Regulations on the Audit Director. asset integrity; ensure compliance Committee of the Board of Directors,

1 As instructed by the Audit Committee of the Board of Directors and in line with the Corporate Governance Code, the Company is working to spin the internal audit function off into a dedicated internal audit unit accountable to the Committee in 2017.

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Alexander Mizon Year of birth: 1961. Graduated from the Military Academy Head of the Internal Audit Centre of Logistics and Transportation in 1991 Education: majoring in Staff Command, Tactical Graduated from Kharkov Higher Military Control and Logistics. Logistics School of the USSR Ministry Graduated from the Military Academy of Internal Affairs in 1982 majoring of the General Staff of the Armed Forces in Command and Tactics, Artillery of Russia in 1997 majoring in Staff Weapons; Command and Strategic Control.

Federal Passenger Company 189 Annual Report 2016

Sustainable 14 Development

65.9 RUB 86.9 thousand staff million spent on training, re-training, and professional development of employees in 2016

18.8 776 thousand FPC FPC employees employees awarded for their professional received training in 2016 achievements in 2016 The Company’s Company Company Business Model Market Marketing Government Risk Passenger Profile Strategy and Assets Overview Policy Relations Management Service

Sustainable Development

Personnel

FPC regards its staff as its main asset and most valuable resource. The key priorities of the Company’s HR Policy are to recruit and retain people with required skills, ensure their continuous development, and provide social support to them. To this end, the Company has adopted and implements programmes to motivate and provide social support to its employees and their families, as well as retired employees.

Staff profile

The Company employs 65.9 thousand services to passengers. The HR-related in a decrease of the staff headcount people. organisational measures and the increased by 2.6% year-on-year. number of routes serviced by new rolling Most employees (40.6 thousand, stock (including double-decker carriages or 62%) are directly involved in providing and Strizh higher-speed trains) resulted

PERSONNEL BY OCCUPATION, EMPLOYEES

As at As at Employees by occupation 31 December 2015 31 December 2016

Employees involved in on-train services 37,005 35,806 Employees involved in ticket sales 4,767 4,754 Employees involved in maintenance and repair of rolling stock 6,377 6,375 Other employees 19,528 18,993 Total 67,677 65,928

FPC personnel by age, % FPC personnel by gender, %

22 The Company maintains a balance 33 35 between young and more experienced

<35 years old employees. The average age of FPC 36–45 years old Women employees is 40 years. Young people under 46–50 years old Men 35 years account for 33% of the total 16 >50 years old headcount. Most employees (65%) are women. 65 29

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FPC personnel by position/profession, % In 2016, the Company paid specific attention to the development and retention of its employees. Staff turnover 6.9 Passenger train attendants fell by 0.3 p.p. from 8.4% in 2015 to 8.1% Train masters 1 16.6 in 2016. The employee stability index , at Train electricians 68%, has not changed since last year. Ticket clerks 4.0 51.7 Specialists 8.2 Managers Other workers and clerks 7.2 Rolling stock repair technicians and carriage inspectors 2.8 2.6

Staff recruitment FPC personnel by educational background, % The Company regularly assesses corporate competences in an effort to improve 25 management decision-making practice as part of personnel recruitment and development. In 2015, nearly 28 thousand University graduates employees were assessed, 80% of which 53 Vocational college graduates are front-line personnel. Managers and Secondary schools graduates, vocational trainees specialists are assessed in accordance with 22 the 5C+L corporate competence model.

Corporate competence profile for managers / specialists (5C+L)

Competence Ability to develop. Employee development Customer focus Development of CRM system Corporate culture and responsibility Teamwork promotion. Drive for results Quality and Safety Safety assurance Creativity and drive for innovations Creation of an innovative environment Leadership Leadership as a management style

1 Ratio between the number of persons employed for more than five years with the Company and overall headcount.

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Given their job profiles, the corporate In 2016, FPC was recognised competence model for front-line personnel with the Best Employer for Young was modified into 4C+L. People 2016 award

Corporate competence profile for front-line personnel (4C+L)

Ticket clerk 4C+L Carriage attendant

Ability to develop (intelligence) Competence Ability to develop (intelligence) Focus on customer satisfaction Customer focus Focus on customer satisfaction Drive for results Corporate culture and responsibility Teamwork High performance Quality and safety High performance Leadership skills Leadership Leadership skills

During the reporting year, the Company the Moscow Department for Labour and students and young specialists from closely collaborated with the Moscow Social Security, and participated in vacancy Moscow and the Moscow Region. Centre for Youth Employment and fairs attended by over 10 thousand

Based on the results of the year, the Moscow Centre for Youth Employment recognised FPC with the Best Employer for Young People 2016 award in the Reliable Partnerships category. The Company also received a recognition letter from V.A. Petrosyan, a Moscow Government Minister and the Head of the Moscow Department for Labour and Social Security, for its caring attitude, support, and responsiveness in providing employment opportunities to young people.

Personnel training and development

FPC has in place an effective personnel In 2016, 18.8 thousand employees, 18.8 training and development system. or 28.5% of FPC’s total headcount, thousand received training. FPC employees received training in 2016

TRAINING SYSTEM PERFORMANCE

Indicator 2014 2015 2016

FPC headcount, people 73,935 67,677 65,928 Total employees trained, people 22,731 21,787 18,853 Share of employees trained at FPC’s Corporate Staff Training 37.0 41.4 48 Centre, % Budget, RUB million 113.6 97.5 86.9

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Performance of training centers, people

22,731 21,787 18,853

13,528 11,462 2.6 9,801 thousand people 10,325 9,203 9,052 completed training as railway or office workers in 2016

2014 2015 2016 Total FPC Corporate Staff Training Centre Other educational institutions

Training by profession, people In 2016, more than 2.6 thousand people were trained as railway and office workers, while around 14 thousand employees Carriage attendant 58 % 10,870 completed professional development courses.

Ticket clerk 8 % 1,520

Rolling stock repair technician 6 % 1,030

Train electrician 4 % 689 14 thousand people

Carriage inspector 3 % 488 completed professional development courses in 2016

Personnel training courses covered • Operation, maintenance and fault • Organising induction training using the following areas: diagnostics of systems and assemblies the TWI (Training Within Industry) in double-decker carriages; method; • Ticket sales via the Ticket Clerk • Data input into the passenger carriage • Business ethics code as part of corporate Workplace firmware; operation and maintenance system; culture; • Operation and maintenance of Strizh • Operation and maintenance of air brake • Building a safety culture in passenger higher-speed trains manufactured control valves; services. by Patentes Talgo S.L. on Moscow – • Marketing as a promotion tool Berlin – Moscow international route; for passenger transportation;

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The Company constantly updates its customer-focused behaviour models and Professional training programmes were existing training programmes and improving passenger service quality. delivered for 2.8 thousand managers develops new ones: we updated around and office workers in order to achieve 20% of our existing programmes in 2016, The personal image laboratory is equipped the Company’s strategic objectives and are developing the inventory base with a simulation of a passenger carriage and increase business efficiency. of our Corporate Staff Training Centre with seats, a baggage rack, and hand Expenses on training, re-training, and (the Centre). luggage racks, allowing train crews professional development courses reached to develop their passenger service skills RUB 86.9 million in 2016. Training facilities and programmes in situations of various complexity, available in the Centre allow for: including catering services, with the use of portable ATLAS trolleys, widely used • Training effective customer-focused in aviation. service and communication skills; • Improving knowledge of corporate Employees are trained in basic service service standards. behaviour, business etiquette, positive RUB 86.9 communication skills, and services million The Centre has a personal image to disabled passengers. spent on training, re-training, laboratory and a make-up studio and professional development for training train crews in building of employees in 2016.

Targeted training programmes for young talent

To attract young talent, FPC cooperates Full-time students doing targeted training 54 train crew members are currently taking with nine universities offering courses had an opportunity to attend distance learning courses for a Bachelor’s railway-related degrees. 523 students public lectures and professional days degree in Management. opted for targeted training courses to learn about the Company’s operations in professional colleges and universities. and objectives.

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Development of student train teams

Starting from 2010, the Company has period. In 2016, some 8.8 thousand branches. For three years in a row, FPC has been annually engaging students as train students from over 300 non-railway been employing students during winter attendants, to ensure adequate train educational institutions were employed holidays. crew staffing during summer holiday for the summer season by the Company’s

Summertime services Wintertime services

In 2016, the Company spent 1,682 RUB 60.5 million on student train teams 2016 2016/2017 500 7,161 working under service contracts.

1,361 2015 2015/2016 465 7,095

2,616 2014 2014/2015 383 5,215

0 2,000 4,000 6,000 8,000 0 2,000 4,000 6,000 8,000

Other student teams Russian Student Teams all-Russia youth organisation

Staff remuneration and motivation system

The Company improves the competitiveness including maintenance of the next- the number of unscheduled carriage of its salaries through enhancing generation rolling stock and proficiency repairs. the effectiveness of motivation mechanism in foreign languages. taking into account FPC’s growing In a bid to improve customer experience efficiency. Extra bonuses are offered for high and boost revenue from other activities, performance on railway traffic safety and the Company pays bonuses for on-board The Company’s staff motivation system maintenance and repairs of carriages sales and providing services to passengers is aimed at creating financial incentives reducing the number of incidents on trains. In 2016, average bonus payments for the staff to improve the quality caused by breaches of traffic or railway per employee increased 1.2 times. of passenger service and comfort on trains, safety rules, technical malfunctions, and

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Social Policy

Implementation of the Collective Bargaining Agreement

In 2016, the Company pursued its Social measures beyond social guarantees In 2016, FPC’s individual social package Policy in accordance with FPC’s Collective specified in the labour law. for each employee was RUB 52.2 thousand; Bargaining Agreement. the package of benefits for FPC’s retired The Company’s system of social benefits pensioners was worth RUB 6.2 thousand. The benefits and guarantees set out and guarantees is centred on sustaining, in the Collective Bargaining Agreement stimulating, and improving the employees’ In 2016, the Company’s expenses under and corporate regulations of the Company performance and maintaining social the Collective Bargaining Agreement provide for additional social security stability among the staff. totalled RUB 7.1 billion.

Housing policy

The Company has adopted and is carrying Monthly subsidies are paid (RUB 116.2 million for subsidised out the Mortgage Subsidy Programme to more than 860 of the Company’s mortgages and RUB 30.7 million for free for its employees in need of improving employees to repay their mortgage childbirth subsidies and to persons their housing conditions. loans. In 2016, the Company spent in particular categories). RUB 146.9 million on its Housing Policy

Healthcare

The Company has in place the Employee The Company is committed to protecting of FPC employees. The Company spent Healthcare Programme aimed at creating and improving the health of its employees’ RUB 65.2 million (compensating from 10% conditions for proper recreation and children, preventing children’s diseases, to 20% (depending on shift) of parents’ treatment, thereby improving employees’ and providing conditions for proper expenses for tours to the children’s health work efficiency. Under the Programme, rest and engagement of children resorts, and 10% of tour costs for large over 3 thousand employees and retired in the summer. In the reporting year, and disadvantaged families, regardless pensioners of FPC enjoyed subsidised tours the summer health improvement of shift). to health centres and resorts in 2016. campaign involved 2,415 children

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Competition

Based on the results of the 2016 FPC staff • Kaliningrad passenger carriage depot and 58 employees, awarding the titles team competition, the following teams of the Northwest Branch; of the FPC Best Master, FPC Best Middle were announced winners: • Moscow Railway Agency of the Moscow Manager, and FPC Best in Profession. Branch. • Northern Branch; • Pskov carriage site of the Northwest In 2016, FPC’s Central Contest Commission Branch; recognised the achievements of 13 teams

The 2016 First Among the Best corporate competition was won by the crew of Passenger Train 55/56 Krasnoyarsk – Moscow headed by the train master Alla Shuvarova (Krasnoyarsk passenger carriage depot of the Yenisey Branch).

CREW OF PASSENGER TRAIN NO. 55/56 KRASNOYARSK – MOSCOW

A.V. Shuvarova, train master.

Carriage attendants: M.V. Doronina, L.V. Ivantsova,I.Yu. Kosalapova, O.O. Litvinova, G.V. Mantikova, N.A. Markelova, D.I. Rukosueva, K.A. Ryndina, I.A. Skachilova, N.N. Smirnova.

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During 2016, 776 employees were Council of the Federal Assembly awarded with all types of awards for their of the Russian Federation – 8 persons; achievements in the workplace and • awards of the Ministry of Transport dedicated work, including: of the Russian Federation – 144 persons; 776 • RZD awards – 158 persons; FPC employees • Russian Federation Government • FPC awards – 465 persons. awards – 1 person; were awarded for their achievements in the workplace • awards of the Head in 2016 of the Administration of the Federation

Occupational health

The Company takes care front-line personnel), thus maintaining and treat PES and relieve psychological of the occupational health of its front- the optimal level of staff working capacity. and physiological stresses in employees line employees, having introduced (Sensorium system). Psychological support the Health Management system that The Company pays specific attention offices are particularly popular with assesses the psychoemotional condition to preventing occupational stress and carriage attendants during the summer of employees and prevents professional maintaining professional reliability peak season and right afterwards since burnout. In 2016, over 4.5 thousand of the personnel. As part of this effort, these offices enable them to restore employees had their psychoemotional several branches established psychological their psychoemotional balance and high condition assessed (71% of which are support offices fitted out to diagnose performance within 15 to 20 minutes.

The Sensorium psychophysiological anti-stress system enables quick relief and deep muscle and mind relaxation within 15 to 30 minutes. The system relieves physical tension caused by stress, lowers the level of chronic psychoemotional stress, anxiety, and depression, improves attention and effectiveness of information processing, and quickly restores working capacity.

Youth policy

The seventh annual FPC Youth Assembly to a team which presented the “Carriage The Z Project” concept, was held in Sochi in October 2016. of the Future” concept; the second prize suggesting the implementation The Assembly was attended by young was awarded to a team with the “Just- of a multi-level transport system with employees from FPC branches and In-Time Repairs” concept, providing a built-in retail service. In addition, administration. The participants presented for a new approach to creating designs the winners of the Assembly proposed their ideas for achieving the Company’s of future carriages; and the first prize went creating personal online accounts strategic objectives to managers and to a team which proposed the “HUBS and for passenger carriage attendants. an expert panel. Based on the results New Service Technology. of the Assembly, the third prize was given

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Corporate pension system

Corporate pensions are included Based on the principle of matched funding In 2016, the Company invested a total in employees’ social security packages. At of private pension plans, FPC, on a monthly of RUB 624.2 million in private pension the end of the reporting period, around basis, pays pension contributions for each plans. 24 thousand employees participated participant, until he/she is assigned in the corporate private pension plan, corporate pension, and additional pension The Company continues to provide accounting for 35% of the Company’s total contributions for participants when comprehensive support to all of its staff. they are assigned corporate pensions. 64 thousand pensioners.

Corporate research

The Company is fully aware Based on the results of the surveys, In comparison with the previous year’s of the importance of employee feedback. the employee satisfaction index is result (62%), the number of loyal To obtain this feedback, around stable, amounting to 65.5 in 2016. At employees increased by 2%. 1.5 thousand employees are covered the same time, employees show a high annually by social surveys of motivation, level of loyalty towards the Company: social and psychological environment 64% of employees are committed in employee teams, social surveys of young to building long-term labour relations with employees, and corporate culture surveys. the Company. 64 % employee loyalty level in 2016

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Environmental Impact Management

Environmental protection

Environmental protection and negative Aiming to prevent tracks from being In 2016, discharge of polluted waste water impact mitigation are among FPC’s polluted and maintain an adequate level decreased by 2.3% year-on-year, to 13.45 priorities. In its environmental activities, of sanitation at infrastructure facilities, thousand cubic metres. Air emissions were the Company is guided by the applicable the Company acquires only carriages reduced by 8.3% in 2016. laws of the Russian Federation and equipped with environmentally friendly the Environmental Strategy of Russian toilet facilities. In addition, old carriages Aiming to reduce the sources of discharge Railways until 2017 and, for the longer are being fitted out with environmentally negatively affecting the centralised water term, until 2030. friendly toilet facilities during overhauls. discharge systems and the environment, the Company implements annual To reduce the man-made impact In an effort to reduce air pollution, programmes involving modernisation of passenger services, the Company took the Company is installing boilers fired with of water treatment and carriage-washing efforts to upgrade its rolling stock and environmentally friendly fuels, switching facilities, including the installation of water facilities across its branches. its carriages to electricity, and purchasing recirculation systems and on-site water carriages with central power supply. treatment facilities.

Waste water discharge to the environment, thousand cubic meters

66.33 67.20 63.59 61.26 57.57 59.35

13.62 13.66 14.73 14.63 13.76 13.45

2011 2012 2013 2014 2015 2016 Polluted waste water Waste water cleaned as per standards

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Air emissions, thousand tonnes

1.35 1.29 1.20 1.05 6.69 6.42 0.99 6.06 5.92 0.75 5.07 4.81

2011 2012 2013 2014 2015 2016 Stationary sources Mobile sources

In 2016, FPC developed its Environmental Management System standard (FPC 1.16.001–2016 Company Standard).

Energy consumption

In 2016, fuel savings achieved under FPC’s • coal – 3,652.4 tonnes against the planned 154.6 tonnes, Energy Conservation and Energy Efficiency the planned 2,533.5 tonnes, or RUB 6.0 million; Improvement Programme were 5,744.4 t or RUB 1.0 million; • natural gas – 612.4 thousand c.e. against the actual 2015 baseline vs • fuel oil – 474.5 tonnes against cubic meters against the planned planned 4,402.4 t c.e., which amounts the planned 411.4 tonnes, 294.5 thousand cubic meters, to RUB 46.4 million in monetary terms. or RUB 4.5 million; or RUB 2.9 million; By type of fuel and energy resources • gasoline – 75.9 tonnes against • electricity – 4,015.3 thousand kWh (excluding water and heat), savings were the planned 64.2 tonnes, against the planned 3,995.4 thousand as follows: or RUB 2.9 million; kWh, or RUB 20.1 million. • diesel fuel – 190.8 tonnes against

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Charitable Activities

An important component of FPC’s business is social and charitable activity, as well as support for projects in culture, education, healthcare, sports, and other socially focused programmes.

Since 2012, FPC has been providing the Company resumed its Donor’s Day the VDNKh exhibition complex hosted support to the Safonovsky Children’s charity event in July 2016. Our employees the Achieving the Goal! charity run, Home – School (Smolensk Region state took active part in the event, with nine with 240 FPC employees taking part educational institution). Numerous litres of blood and over RUB 60 thousand in the event. Donation boxes were installed events were held at the children’s home, collected in donations to the Podari Zhizn at the event. The funds collected at including charitable projects “Realising (Gift of Life) charity foundation. The blood the sports event were given to the Life Line Children’s Dreams”, “Do the Good”, received from FPC employees was used charity foundation for treating severely ill and “For a Better Future”, as well as for treatment of patients of the municipal children. a New Year Charity Fair, a Knowledge perinatal centre and multi-purpose Day event, etc. In 2016, in keeping adult and children’s hospitals. The total amount approved by FPC’s with good tradition, the Company The funds donated to Podari Zhizn (Gift General Shareholders Meeting in 2016 organised a New Year charity event of Life) foundation were spent to provide for allocation to charitable activities from for orphans, with the school students treatment for two-year-old Lisa K. and the 2015 net profit was RUB 2.8 million. visiting the Chekhov Moscow Art Theatre replenish the “Courage Box”. Taking into Out of previously allocated amounts, and the Living Systems, a human being account the wishes of the Company’s RUB 20.7 million were spent on charity museum. In addition, the Company’s employees to create a corporate donorship in 2016 based on the decisions by FPC’s employees organised a donation campaign system and given the success of the event, Commission on Donations to Non- to purchase confectionery as New Year decision was taken to make it a regular Governmental, Religious, and Other presents for all students of the school. event. Organisations, and Citizens.

Given the high social importance As part of celebrations of voluntary blood donorship, of the Day of the Railway Worker,

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Appendix

Glossary and List of Abbreviations

Abbreviation Description

Carriage-kilometre performance An indicator based on the distance travelled by carriages as part of the train.

Passenger carriages conforming to the requirements of the International Union of Railways (Regolamento Internazionale delle Carrozze) and used on railways within the RIC carriages European countries – members of the International Union of Railways. These carriages are suitable for 1,435 mm gauge.

A luxury sleeping carriage used for passenger transportation and providing adequate facilities for passengers. The Russian abbreviation SV dates back to the times before First-class carriage (Pullman car) the 1917 Revolution and was originally used to denote carriages designated for the Emperor’s entourage.

The loss in the carrier’s revenue resulting from state regulation of long-distance Carrier's revenue shortfall passenger fares for third-class sitting and sleeping carriages.

Passenger fare in international trains which includes the ticket cost and seat Global prices reservation.

An item accepted in the prescribed manner from an individual or a legal entity for Unaccompanied baggage transportation on a passenger, postal-baggage, or passenger-freight train.

A segment covering passenger transportation in first-class carriages and compartment Deregulated segment carriages, as well as international passenger transportation. Fares in this segment are set by FPC.

A market situation where, due to technological characteristics of production (unit cost is significantly reduced as production volume increases), demand is more efficiently met in the absence of competition. At the same time, demand for products of a natural Natural monopoly monopoly is less dependent on price fluctuations than demand for any other type of products, as products of a natural monopoly cannot be replaced with other products. FPC is a natural monopoly as it provides services pertaining to a natural monopoly.

An integrated network of technological facilities which includes public railways and other structures, railway stations, power supply systems, communication RZD infrastructure networks, centralisation, blocking and signalling systems, information systems, traffic management system, and other buildings, structures, devices and equipment that ensure the functioning of this integrated network.

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Abbreviation Description

Overhaul with service life extension. Intended to extend the design life of a passenger KVR carriage using refurbished bodies and bogies, as well as renovation of on-board equipment and installation of modern interiors.

Overhaul. Intended to recover the good working condition and fully or nearly fully KR restore the capacity of a passenger carriage by replacing or restoring any of its components, including basic components.

UIC International Union of Railways.

Transportation of goods, passengers and baggage by two or more modes of transport. Multimodal transportation As a rule, multimodal transportation is carried out on the basis of a single transport document drawn up for the entire route.

OSJD Organisation for Cooperation of Railways.

An indicator reflecting passenger traffic measured in passenger-kilometres. It is Passenger turnover calculated by multiplying the number of passengers carried by the average distance covered.

RZD Holding’s RZD Bonus Programme enabling passengers to collect points for Loyalty Programme completed trips in FPC trains and carriages and exchange them for bonus trips.

Disclaimer

This Annual Report of Federal Passenger the Company operates. Such forward- not the only possible scenario of future Company (the “Company”) for 2016 looking statements are inherently subject events. (the “Annual Report”) has been prepared to risks and uncertainties as they deal with using the information available events and depend on circumstances that The sum of the parts may not add up to the Company at the time of its may not take place in the future. to the total due to rounding. preparation. The Company makes no direct or implied The Company accepts no obligation The Annual Report contains information representations or guarantees and to revise or confirm expectations and about the results of the Company’s assumes no responsibility in the event estimates or to update publicly or revise activities in 2016, forecast data and of losses incurred by individuals or legal the forward-looking statements made forward-looking statements regarding entities as a result of using the forward- in this Annual Report whether as a result the Company’s intentions, opinions looking statements contained in this of new information, future events or current expectations regarding its Annual Report due to any reason, either or otherwise, except to the extent required operations, financial position, liquidity, directly or indirectly. These persons should pursuant to applicable laws of the Russian growth prospects, and Strategy, as well as not rely entirely on the forward-looking Federation. the development of the industry in which statements contained herein as they are

Federal Passenger Company 207 Annual Report 2016 FPC’s Registrar Details

To ensure protection of their interests Full name of the registrar: Joint Stock E-mail: [email protected], and rights the Company’s shareholders Company Registry Society STATUS. [email protected]. are provided with a reliable method for recording their rights in shares – Abbreviated name of the registrar: Website: http://www.rostatus.ru. the share register is maintained by an Company STATUS. independent entity, JSC STATUS. Location: 32 Novorogozhskaya St., Bld. 1, On 28 April 2014 (Minutes No. 15), Moscow, 109544, Russia. JSC FPC’s Board of Directors approved Joint Stock Company Registry Society STATUS INN 7707179242 / KPP 770901001. as FPC’s registrar and approved the terms of the contract therewith. Tel.: +7 495 974 8350 (general inquiries).

Contacts

Full name: Joint Stock Company Federal Tel.: +7 495 988 1000 (IVR); Passenger Company. +7 499 260 8474. Fax: +7 499 262 3349. Abbreviated name: JSC FPC. Website: www.fpc.ru. Location: 34 Mashi Poryvaevoy St., Moscow, 107078, Russia.

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