СONTENTS

LETTER FROM THE PRESIDENT 3 ABOUT THE COMPANY 4 COMPANY PHILOSOPHY 5 MAIN EVENTS OF 2008 6 BEER MARKET. THE COMPANY’S POSITION 9 BRAND PORTFOLIO 15 FINANCE. INVESTMENT 19 KEY PROJECTS 23 SOCIAL RESPONSIBILITY 27 CORPORATE GOVERNANCE 33 SECURITIES 38 CONSOLIDATED FINANCIAL STATEMENTS 43 INTERESTED PARTY TRANSACTIONS 77 INFORMATION FOR SHAREHOLDERS AND INVESTORS 85 CONTACT INFORMATION 86 LETTER FROM THE PRESIDENT

2008 was another successful year in the history of Baltika Breweries LETTER FROM THE PRESIDENT

Ladies and Gentlemen,

2008 was another successful year in the history of Baltika It is important to note that the Baltika brand moved up to the Breweries. This period was challenging for us, especially in first position in Europe in terms of sales, which is especially the context of the outside world: inflation in raw materials, symbolic given that 2008 was declared within the Company a sharp increase in excise tax, unfavourable weather and to be the year of the title brand. The forthcoming year 2009 global financial crisis all negatively affected the beer market can boldly be called a year of opportunities: the complex as a whole. economic situation at the same time presents us with a stim- ulus to find more effective ways of pursuing further growth and competitive strength. Nevertheless, Baltika succeeded in strengthening its lead- ership position and in sustaining high profitability. Given strong financial results, the Company maintains its policy of Baltika is a stable business. We have very strong brands and increase in annual dividend. a powerful position in Russia. In 2009, we expect to main- tain high profitability, devoting special attention to optimising business processes. We will strive to consolidate our lead- The main event for Baltika in 2008 was joining the global ership on the market, streamlining the portfolio, continuing brewer – Carlsberg Group, which opens new opportunities, innovations and improvements in distribution and sales. including the growth of our brands abroad and the exchange of experience with other companies in the Group. I would like to emphasise that we were able to deliver strong results in 2008 thanks to the innovative spirit, sense In 2008, we implemented a number of major investments: of responsibility and constant quest for perfection of our the brand new Novosibirsk brewery, increase of capacity employees. I express my appreciation to all of my col- in Voronezh and the acquisition of the largest brewery in leagues – the staff of Baltika – for devoted work, for know- Azerbaijan, the first brewery owned abroad in our history. ing how to overcome difficulties and readiness for changes. Another important event in the year gone was the start of I want to thank our partners for fruitful cooperation and their licensed production of Baltika №3 Classic and Baltika №9 contribution to the Company’s growth. Extra at the Carlsberg Uzbekistan brewery in Tashkent.

As in the past, Baltika remains the leading exporter of Rus- sian beer: the number of countries where our products are available has grown to fifty. In 2008, the Government of the Russian Federation awarded the title of ‘Best Russian Exporter’ to Baltika for the seventh time in a row.

ANTON ARTEMIEV President, Baltika Breweries Senior Vice President, Eastern Europe, Carlsberg Breweries

ANNUAL REPORT 2008 3 ABOUT THE COMPANY

Baltika Breweries was founded in 1990. Modern equipment The Company’s breweries are located in 10 cities across and the application of advanced technologies made it pos- Russia: St. Petersburg, Yaroslavl, Tula, Voronezh, Rostov- sible to bring to the market high quality products, all of which on-Don, Samara, Chelyabinsk, Novosibirsk, Krasnoyarsk enabled Baltika to become the leader on the Russian beer and Khabarovsk. In 2008, the Company acquired a brew- market in 1996. The Company has maintained this status ery in Azerbaijan. The combined production capacity of the right up to the present day. breweries in Russia amounts to 50 mln hectolitres of beer per year. In order to satisfy its demand for malt, Baltika has Over the course of its history, Baltika grew at a very rapid built two malt plants in Tula and Yaroslavl, and it is also de- pace. It purchased breweries, built new ‘green field’ facilities veloping an agricultural project in eight regions of Russia. and actively extended the network of its sales subdivisions. At the end of 2006, Baltika merged with three Russian brew- The Company has an extensive distribution network and it ing companies – Vena, Pikra and Yarpivo. is possible to purchase Baltika products in 98% of Russia’s points of sale. In April 2008, Baltika joined the global brewer Carlsberg Group, which owns 88.86% of the Company’s charter capital. The Company’s products are exported to 50 countries around the world, including countries of Western Europe, At present, Baltika is the largest FMCG company in Russia North America and the Near East region. and Eastern Europe. Baltika participates actively in the work of the Union of Rus- The Company’s broad brand portfolio makes it possible to sian Brewers. Company President Anton Artemiev has been satisfy the most demanding consumer taste. Besides the the Chairman of the Union’s Board since 2007. key Baltika brand, which is one of the three most valuable brands in Russia, the Company’s portfolio has around 30 well-known beer brands, such as Arsenalnoye, Nevskoye, Yarpivo, Tuborg, Carlsberg, Kronenbourg 1664, a whole range of regional varieties and more than 10 non-beer brands.

BALTIKA BREWERIES IN 2008

Leader on the Russian beer market with more than 38% market share Baltika is brand №1 in Europe in terms of sales Sales volume: 45.2 mln hl Revenue: RUB 92.5 bn EBIT: RUB 22.3 bn Operating margin: 24.1% More than 12,500 employees

4 BALTIKA BREWERIES COMPANY PHILOSOPHY

Mission Values We are creating a high quality product which gives people Responsibility pleasure at their get-togethers, making their lives brighter and more interesting Cooperation Innovation Vision Striving for perfection We strive to be the benchmark for the brewing industry, the company setting the standards and a reference point for Winning behaviours brewing companies around the world For us, being the benchmark means being the leader in Our customers and consumers are at the heart of every three areas: decision we make Best brands: Together we are stronger We are each empowered to make a difference In each segment of the market, we occupy the leading position and we have strong brands which people select We are engaged with society not only on the basis of their tastes and possibilities but also thanks to their attitude towards our Company We want to win

Best team: In our Company the most professional specialists in each field cooperate with one another effectively

Best results: Our Company works with the highest and most steady profitability from operations among the biggest brewing companies in the world Objectives To raise our market share on the Russian beer market while keeping high profitability To take the Baltika brand to the leading positions in the world

Strategy

Building strong brands with focus on premium and in- novations Leadership in all price segments, regions and sales channels Search for additional sources of profitable growth by: geographic expansion development of closely related areas Raise the efficiency of business processes and opera- tional excellence Creation and continuous development of the best team of professionals

ANNUAL REPORT 2008 5 MAIN EVENTS OF 2008

JANUARY

29.01 Baltika received the prize HR-Brand of the Year-2007 in the category ‘FMCG: Food and Bever- age Products.’ The award attests to the high level of trust in the Company as an employer among job applicants

FEBRUARY

20.02 Baltika received the highest public award of the Russian Federation in the field of food production ‘For abundance and the prosperity of Russia’ in the category ‘For a special contribution to imple- mentation of the priority national project Development of the Agro-industrial Complex’

MARCH

13.03 Baltika Breweries JSC and Asahi Breweries Ltd (Japan) signed an agreement on the start of li- censed production of Asahi Super Dry at Baltika Breweries

APRIL

09.04 Launch at the Baltika-Khabarovsk branch of a unique ecological project using biogas as fuel for combustion. The basic objective of the project is to cut expenditures on generation of thermal en- ergy and to reduce the impact on the environment 29.04 Baltika became a full member of Carlsberg Group. President of Baltika Breweries Anton Artemiev was appointed Senior Vice President, Eastern Europe, Carlsberg Breweries A/S

MAY

07.05 The Company began production of a new premium brand, Baltika LITE, which joins the Baltika brand line-up. This is a light beer with lower alcohol content compared to classical lagers 15.05 A contract was signed in Baku between Baltika Breweries JSC and Brasseries Internationales Hold- ing (Eastern) Ltd (BIH Eastern) for the purchase of a brewery in Azerbaijan 23.05 A licensed agreement was signed in Tashkent under which Baltika granted Carlsberg Uzbekistan the right to produce and sell the varieties Baltika №3 Classic and Baltika №7 Export beer on the territory of the Republic of Uzbekistan 26.05 Baltika successfully completed its largest ever investment project, the construction of a brewery in Novosibirsk. The brewery has the latest generation equipment from the world’s best manufactur- ers and can bring to market world-class products. Production of a new regional brand, Sibirsky Bochonok, began at the Baltika-Novosibirsk brewery

JUNE

01.06 The Company started production of the licensed beer Asahi Super Dry 05.06 Four beer varieties – Yarpivo Yantarnoye, Baltika №3 Classic, Baltika №9 Extra and Arsenalnoye Extra were awarded silver prizes at the Superior Taste Award competition in Brussels (Belgium) 18.06 Baltika’s large-scale project to double the production capacity of the Baltika-Voronezh brewery was completed. Its rated capacity increased from one to two million hectolitres of product per year 20.06 The Government of the Russian Federation announced the results of its annual competition: Baltika Breweries was named ‘The Best Russian Exporter’ for the seventh year in a row 24.06 Baltika joined the Russian Union of Industrialists and Entrepreneurs

6 BALTIKA BREWERIES MAIN EVENTS OF 2008

JULY 03.07 A collective labour agreement was signed at the Baltika headquarters in St. Petersburg. The document was expected to govern social and working relations in the Company for the coming three years 28.07 The Company began production of the licensed beer Kronenbourg 1664 Blanc

AUGUST

14.08 Baltika completed the purchase of the brewery in Azerbaijan 26.08 The Company adhered to the Russian Union of Industrialists and Entrepreneurs’ Social Charter of Russian Business

SEPTEMBER

30.09 Baltika carried out raids of the Beer Patrol in Moscow and St. Petersburg. The objective of the cam- paign is to expose unprincipled sales people who violate the federal law and sell beer to minors

OCTOBER

31.10 Bottling of Baltika №3 Classic brewed under license began in Tashkent at the Carlsberg Uzbekistan brewery

NOVEMBER

07.11 According to data published by the international agency Canadean, the Baltika brand has moved up to first place in Europe in terms of sales in 2007 10.11 For the fourth time, Baltika figured among the three most valuable brands in Russia according to ratings compiled by the international consulting company Interbrand Group 30.11 At the end of November, Russia’s first and exclusive to date equipment for analysing nanoparticles named Zetatrac was set up at the Baltika brewery in St. Petersburg. The equipment helps to moni- tor the stability of the beer

DECEMBER

02.12 Company President Anton Artemiev was elected to the Board of the Russian Union of Industrialists and Enterpreneurs 03.12 Five varieties of Baltika beer received medals at the World Beer Championships 2008 (USA) 05.12 Baltika received the All-Russian prize People Investor for its effective policy of investing in develop- ment of the Company staff

ANNUAL REPORT 2008 7 BEER MARKET. THE COMPANY’S POSITION

Baltika exports its products to 50 countries THE RUSSIAN BEER MARKET

In 2008, following a long period of buoyant growth, the Russian beer market stabilised and then contracted very slightly, drop- ping 0.4%, compared to 2007. This dynamics was brought about by a number of factors including the unfavourable weather conditions during the summer season and higher inflation in the category than during previous years due to a rise in the prices of the main raw materials and the unprecedented growth in excise. At the end of the year, the market’s direction was also influenced by the global financial crisis which was reflected in the purchasing power of the population. The volume of the beer market in Russia in 2008 amounted to 110.6 mln hectolitres. Development of the beer market in Russia

Year 2004 2005 2006 2007 2008

The Russian beer Beer market (mln hl) 82.2 87.2 96.0 111.0 110.6 market stabilised

Growth of the beer market (%) 11.1 6.0 10.0 15.7 - 0.4

Source: Company estimates

Consumption of beer in Russia during 2008 was maintained on the level of 2007 and came to 78 litres per capita. However, the regions, as previously, were not homogeneous in their level of consumption: the most beer of all is consumed by resi- dents of Moscow and the Northwest regions, where consumption approaches 100 litres per person and the market is close to saturation, while in several regions the figure stands at around 60 litres. Precisely in these less saturated regional markets growth of consumption is occurring at a faster pace. Beer consumption in Russia per capita, litres

78 78 80 70 67 60 60 57 50 40 30 20 10 0 2004 2005 2006 2007 2008

Sources: Rosstat, Company estimates

ANNUAL REPORT 2008 9 THE RUSSIAN BEER MARKET

Around 80% of the beer market in Russia is held by four key international players: Baltika Breweries (Carlsberg Group), SUN InBev, Heineken and Efes. The shares of the leading producers on the Russian beer market

2007 2008

20.8% 20.8% Baltika

37.6% 38.3% SUN InBev

9.4% 10.0% Heineken

Efes

13.3% 13.9% Others

18.9% 17.0%

Sources: data from the companies, Business Analytica, Baltika’s estimates

In 2008, premiumisation continued on the market: the most dynamic growth came from the most expensive segments, pre- mium and licensed beer.

Growth of the licensed segment follows from the continuing change in the structure of beer consumption towards European and world standards and a shift of domestic consumers to more premium products. Meanwhile, against a background of expansion of international brands, there was continuing growth of sales volumes of the leading national brands of premium and mainstream price segments thanks to innovations, new propositions for consumers, development of the assortment and communications tools. Structure of beer market and beer portfolio of Baltika Breweries by price segments

Market Baltika 0.3% 0.4% 11.4% 12.6% 8.2% 9.4% Import 17.7% 17.4% 18.6% 19.9% Licensed 29.6% 22.9% 23.5% 31.1% Premium 48.0% 44.9% 44.5% 39.6% Mainstream

Lower mainstream 20072008 2007 2008

Source: Business Analytica Source: Company data

In packaging segments, sales of canned beer grew most dynamically. At the same time, growth of sales of premium bottle formats was continuing.

10 BALTIKA BREWERIES THE COMPANY’S POSITION IN RUSSIA

In conditions of intensifying competition, the Company strengthened its position: Baltika’s market share rose by 0.7%, from 37.6% in 2007 to 38.3% in 2008. Sales of all the Company’s products grew by 2%, including a 1.4% growth in sales of beer in Russia against a background of slight decline in the volume of the market. The Company’s 2008 sales amounted to 45.2 mln hectolitres, including 44.5 mln hectolitres of beer. Trend of the Company’s market share in Russia % 37.6 38.3 40 36.3 36.4 34.2

30 Baltika’s share of the 20 Russian market in 2008 grew by 0.7%

10

0 2004 2005 2006 2007 2008

Source: Company estimates

Over the course of 2008, the Company consolidated its absolute leadership in all price segments of the market.

Such results were achieved thanks to development of the entire brand portfolio, but chiefly by the growth in the line-up of the Baltika brand, where the sales volume increased by 14.5%. For the year 2008, double digit sales growth was reported by the varieties Baltika №7 Export beer (+24%) and Baltika Cooler (+22%). The leader of the mainstream segment, Baltika №3 Classic, increased sales volume by 8%. The launch of Baltika LITE in the premium segment also made a positive contribution to the growth of the umbrella brand.

Excellent results also were delivered by the Company’s licensed brands – Tuborg (+20%) and Kronenbourg 1664 (+35%).

The successful development of premium and licensed brands confirms the effectiveness of Baltika Breweries’ strategy, with its focus on premiumisation of the portfolio. Trend of the beer market and of the Company’s sales in Russia

% 19.3 20

15.3 15.7 15 12.3 11.1 10.1 10.6 10 6.0 Growth of the beer 5 market 1.4 Growth of the 0 Company’s sales -0.4

-5 2004 2005 2006 2007 2008

Sources: Rosstat, Company estimates

ANNUAL REPORT 2008 11 WORLD BEER MARKET

In 2008, the growth rate of the global beer market has slowed down to a significant extent due to the world financial crisis, which influenced the trend of consumer activity. According to data from the research company Plato Logic, in 2008 beer sales worldwide grew by 2.4% and reached 182 bn litres. Trend of the global beer market in the world, bn litres

200 177.5 181.8 180 168.1 154.4 158.8 160 140 120 100 Growth rate of the 80 global beer market 60 has slowed down 40 20 0 2004 2005 2006 2007 2008 F Source: Plato Logic

Russia remains one of the largest beer markets in the world by volume of consumption. According to estimates of the inter- national research company Canadean, Russia occupies third place in the world after China and the USA. Leading countries on the world beer market in 2008, mln hl (forecast) 450 426 400 350 300 Russia occupies the 243 250 third place in the 200 world by volume of 150 111 110 beer consumed 100 89 67 66 53 50 0 China USA Russia Brazil Germany Japan Mexico Great Britain

Source: Canadean

The leading players on the world beer market in 2008, mln hl

450 400 350 300 284.7 Almost 40% of the 250 global beer market 200 150.8 is shared between 150 125.8 109.3 4 brewing companies 100 50 0 Anheuser-Busch InBev SABMiller Heineken Carlsberg

Sources: Canadean, Companies data

12 BALTIKA BREWERIES BALTIKA IN THE WORLD

In 2008, Baltika Breweries extended the geographic reach of its sales in Europe and strengthened its position in other regions. For the first time, Baltika beer appeared on sale in Latin America. At present, Baltika products are available to consumers in 50 countries around the world. The Company accounts for 70% of all export shipments of Russian beer.

Over the past 5 years, the Company’s share of the world market grew by 0.6%. According to the forecasts of Euromonitor, Baltika’s market share in 2008 amounted to 2.5%.

The volume of Baltika Breweries’ export sales in 2008 grew by 11.6% compared with a year earlier and came to 2.2 mln hectolitres. Taking into account licensed production, the growth of sales abroad amounted to 16.8% compared to the previ- ous year, and this was in excess of 2.8 mln hectolitres. The Baltika brand holds the leading position in the overall volume of Company sales abroad, and the growth in sales of the title brand in 2008 stood at 15.4%. Today every eighth bottle of Baltika beer is sold beyond the frontiers of Russia.

According to data from the international agencies Canadean and Euromonitor, in 2007 the Baltika brand took over number one position in Europe in terms of sales. In 2008 the brand strengthened its leading positions in Europe. Leading beer brands of Europe in 2007 (by sales volume), mln hl

14.3 Baltika 17.3 Heineken 13.0 The Baltika brand Carlsberg 10.5 took over №1 position Carling 8.4 in Europe in terms of sales Amstel 8.4

Stella Artois 8.2

Efes 8.1

Kronenbourg 7.4 2007 Obolon' 7.2

Tuborg 7.2 2008

Sources: Euromonitor, 2008 – Company data

ANNUAL REPORT 2008 13 BRAND PORTFOLIO

Baltika brand portfolio includes around 30 beer and 10 non-beer brands BRAND PORTFOLIO

Baltika owns a unique brand portfolio which is the strongest on the market and includes around 30 beer and 10 non-beer brands at the national and regional levels satisfying the most diverse requests of consumers.

Baltika's beer brand portfolio by price segments

ANNUAL REPORT 2008 15 BRAND PORTFOLIO

The basis of the Company’s marketing strategy in 2008 was premiumisation of the brand portfolio, as well as a flexible policy in the field of innovations and diversification of the assortment.

One of the most successful innovations of 2008 was the launch of the super-premium class white wheat beer Kronenbourg 1664 Blanc, which became the most expen- sive brand in the Company’s portfolio. In addition the line-up of licensed brands was extended by a new beer, Asahi Super Dry, which is the brand №1 in Japan in sales.

The success of Baltika №7 Export beer was assisted by an innovation introduced at the start of the year – a unique contemporary bottle which made it possible to differentiate on shelves between premium and mainstream price segments. Beginning in the spring of 2008, the new bottle has also been used to fill the elite varieties Baltika №5 Gold, Baltika №6 Porter and Baltika №8 Wheat beer, all of which are joined together in the series of ‘Baltika Select’ varieties.

A key launch of 2008 was the new premium class brand Baltika LITE, which entered the Baltika brand line-up. This is a light beer with lower alcohol content compared to clas- sical lager beer (not more than 4.0% by volume). A special feature of the recipe of Baltika LITE is the use of ‘green’ malt, which is distinguished by highly active natural fermenting agents which give the beer a light taste.

As previously, Baltika remains the only Russian producer using a 1-litre aluminium can. In the autumn, production of the premium brand Nevskoye in this packaging got underway.

One of the key sub-brands in the Baltika line-up – Baltika №3 Classic – was brought out in a 1.5-litre PET bottle with special football design to mark the occasion of the Russian Football Championship.

In April restyling of the national brand Yarpivo was com- pleted: the label became brighter and more noticeable.

In the lower mainstream segment, the main new product of the year was the brand Sibirsky Bochonok, which was cre- ated especially for the new Baltika brewery in Novosibirsk. The Company also carried out a restyling of the packaging of the Arsenalnoye brand, making its appearance still more masculine.

The Baltika brand has already been listed for the fourth time among the 3 most valuable brands in ratings pre- pared by the international consulting company Interbrand Group, and each year the value has gone higher. In 2008, the brand grew by 9% compared with the results of the preceding year. Its value amounted to 2.38 bn US dollars, which attests to the unconditional leadership of Baltika in the FMCG category among Russian brands.

16 BALTIKA BREWERIES BRAND PORTFOLIO

Awards

Baltika regularly receives confirmation of the high quality of its products. Just in the course of 2008, various brands of the Company obtained 70 awards of all types at Russian and international competitions, exhibitions and festivals. Overall, more than 500 awards have gone to the arsenal of Company brands over time.

In April, Yarpivo Yantarnoye was given the Grand Gold prize at the international competition Monde Selection (Belgium) in the category ‘Bottom Fermentation Beer.’ The Grand Gold is awarded to beer varieties which have the best flavour characteristics and have collected more than 90% of the possible points. In the same month, the professional jury of the World Beer Cup competition (USA) awarded the bronze medal to the variety Baltika №6 Porter.

For the tenth time, Baltika №3 Classic received the highly prestigious national prize ‘Product of the Year.’ In addition, in 2008 Baltika №3 obtained the silver prize at the Supe- rior Taste Award (Belgium). Silver awards of this competition also went to the varieties Yarpivo Yantarnoye, Baltika №9 Extra and Arsenalnoye Extra.

In the autumn of 2008, the variety Baltika №4 Original won the gold medal in the category ‘Red and Amber Beer’ at one of the most prestigious international competitions of the beer brewing industry, the European Beer Star Awards (Germany). One of the conditions for participation is strict conformity to the traditional laws of European brewing.

In December, the Company participated for the first time in the World Beer Championships (USA). Five Baltika varieties were given medals in various categories. Baltika №4, Baltika №6, Baltika №7, Baltika Cooler and Baltika №9 received four silver and one bronze medal respectively.

The Australian International Beer Awards (Australia) brought Baltika new awards for the varieties Baltika №0, Baltika №4, Baltika №6, Baltika №7, Baltika №8, Nevskoye Ice and Baltika Cooler.

This impressive list of awards is the best proof of the supreme level of professionalism of the Company’s brewers.

ANNUAL REPORT 2008 17 FINANCE. INVESTMENT

The Company demonstrated good results in 2008 FINANCE. INVESTMENT

Financial situation

2008 marked yet another successful financial year for Bal- RUB 88.1 bn in 2008 (+16.8% compared to 2007). Revenue tika Breweries. Revenue for the year reached RUB 92.5 bn, from export sales increased 25.9% during the same period which represents a 17.2% increase over the previous and amounted to RUB 4.4 bn. Beer sales accounted for 97.2% year. Revenue from sales on the domestic market totaled of the Company’s total revenue during the reported period.

The Company’s main financial indicators, prepared in accordance with the International Financial Reporting Standards (IFRS)

Key Performance Indicators 2008 2007 Change 2008/2007

Sales, million HL 45.2 44.3 2.0%

Revenue, million RUB 92,482.3 78,891.8 17.2%

Cost of production, million RUB -46,668.5 -37,810.5 23.4%

Gross profit, million RUB 45,813.8 41,081.3 11.5%

Cost of sales, million RUB -20,765.9 -19,609.2 5.9%

Administrative expenses, million RUB -2,913.4 -2,653.4 9.8%

Other expenses, million RUB 125.9 19.6 540.7%

Operating profit (EBIT), million RUB 22,260.4 18,838.3 18.2%

Net profit, million RUB 15,511.3 13,960.6 11.1%

Operating margin, % 24.1 23.9 0.2 p.p.

Gross margin, % 49.5 52.1 -2.6 p.p.

ROA, % 29.7 27.2 2.5 p.p.

ROE, % 41.0 40.1 0.9 p.p.

ROCE, % 38.1 35.8 2.3 p.p.

EPS, RUB 98.01 83.16 17.9%

Growth in net prices (after tax deduction) for beer sales – products. Sales growth in the premium category significantly the Company’s primary product – on the Russian market outpaced growth seen among the beer of lower mainstream was limited by a substantial increase in the 2008 domestic segment during the reported period. Changes in the product excise tax (which was 32.4% higher than in 2007). sales mix accounted for 3.7% of the Company’s achieved growth in net prices. Despite the effect of the higher excise tax, Baltika still achieved a 14.6% increase in its average price (after tax deduction) The Company’s operating profit grew by 18.2% during the compared to the previous year. The primary reason for this reported period compared with 2007 results and totaled increase came from greater sales of premium and licensed RUB 22.3 bn.

ANNUAL REPORT 2008 19 FINANCE. INVESTMENT

Factors affecting the Company’s operating margin 0.7% 24.1% 23.9% 2.6% 2.1%

Operating Margin Raw materials Distribution Volume, mix and Operating Margin 2007 operational leverage 2008

Operating profit growth outpaced revenue increases for Depreciation in the ruble exchange rate against other world the year primarily due to the Company’s efforts to success- currencies (which began in the autumn of 2008) contributed fully contain upward pressure on sales and administrative significantly to cost increases for a wide range of imported expenses. The Company achieved its primary savings by materials (primarily packaging products – cans and pre- cutting distribution costs. Despite higher transportation forms for PET-bottles). Ruble devaluation also had a signifi- rates, Baltika successfully reduced unit expenditures on cant impact on the Company’s cost of borrowing, principally logistics per liter of product by 3.3% compared to 2007. This due to the fact that some of Baltika’s borrowings are in other reduction was achieved in part by carrying out investment currency than ruble. During the reported period, the Rus- projects, optimizing the Company’s delivery matrix and sian financial market experienced a severe contraction in improving the efficiency through which the Company uses the available credit supply and an increase in the cost of its own and third party transport. borrowed funds. These factors all contributed to an increase in the Company’s expenditures on financing and in turn led to a decrease in net profit margin during 2008. During 2008, the Company’s expenditures on raw and other materials grew. The most significant factors contributing to this cost increase were higher prices for malt and hops. Overall cost In 2008, net profit at the Company grew by 11.1% and of sales increased 23.4% compared to 2007. Despite these reached RUB 15.5 bn. significant cost increases, in 2008, Baltika was able to increase its operating margin by 0.2% compared to the previous year. For the year, the Company’s operating margin amounted to an impressive 24.1%.

INVESTMENT

During 2008, Baltika’s investments totaled RUB 10.9 bn – an programs accounted for 31% of total investment. Remain- 18.5% increase in capital investment compared to the pre- ing investments (totaling 10%) were directed at developing vious year. This investment level was the greatest amount the Company’s management systems and spending on key of cash directed at capital investment during a year in the social and ecological projects. Company’s entire history. A significant part of the Compa- ny’s investment (59% оf the total) was devoted to expand- In 2008, Baltika Breweries completed a major phase of its ing production capacity, including implementing major important program to increase production capacity in the investment projects (for additional details, see the section key regions where its products are consumed. These plans ‘Key Projects’) and modernizing production. Investments will enable Baltika to satisfy short- and medium-term demand directed at increasing the Company’s sales included pur- for its products (assuming no sharp growth in the market for chasing trade equipment and marketing innovations; these the Company’s products).

20 BALTIKA BREWERIES FINANCE. INVESTMENT

Principal areas of investment, bn rubles

Production 6.4

Sales development 3.4

Other 1.1

Liquidity and efficiency

During 2008, as in the previous year, the Company’s return In 2008, the Company actively carried out work to upgrade on assets (ROA) increased and amounted to 29.7%* (+2.5% the effectiveness of its working capital management. compared to 2007). Measures were implemented to reduce the share of raw materials, packaging and finished goods in stock within 2008 was marked by increased free cash flow: during the the overall structure of the Company’s assets. At the same year, Baltika received RUB 21.3 bn from its operations. The time, there was a growth in individual parts of Baltika’s Company used these funds to actively implement its invest- working capital. Changes in these entries were due in large ment programmes, to pay out increased dividends to share- part to the Company’s focus on receiving improved com- holders and to reduce its outstanding debt. mercial terms. The recorded increase in receivables was primarily due to increased turnover and a higher portion of Despite the ongoing global financial crisis, Baltika success- direct RKA sales, whereas at the same time, trade credit fully maintained a high return on capital employed (ROCE) – terms were maintained. 38.1%* – during the reported period. This impressive result was achieved by the Company and its management team maintaining high levels of efficiency in most spheres of the Company’s activities.

Structure of the Company’s current assets (net of cash and financing)

2007 47% 22% 10% 10% 7% 4% 2008 40% 28% 14% 7% 7% 4% 0% 20% 40% 60% 80% 100%

Raw materials and basic supplies Advances to suppliers Other receivables Trade receivables Finished goods Work in progress

Year to year, Baltika has consistently improved its efficiency, liquidity available to both commercial enterprises and finan- including the use of its assets, which has led to sustained cial organizations. The financial crisis has also tested the growth in the Company’s profit margin. And as a result of Company’s resilience and, in particular, the stability of its these efficiency upgrades, there has been a substantial supply chain. Financial analysts, however, believe that the increase in the amount of dividends paid out to the Com- FMCG sector is the sphere of the Russian economy least pany’s shareholders. affected by economic uncertainty. Due to sustained, posi- tive efforts by the Company, its partners and its contractors, The global economic crisis has led to a floating devalua- Baltika remains confident in the continued success of its tion of the Russian national currency and has reduced the operations going forward.

* The 2008 ROA and ROCE ratios (as well as the comparable figures for 2007) were calculated taking into account operating profit results

ANNUAL REPORT 2008 21 KEY PROJECTS

In 2008 the Company acquired a brewery in Azerbaijan – its first production facility abroad KEY PROJECTS

Baltika is striving to come closer to the consumer

In order to supply its consumers with fresh beer at affordable prices, the Company is pursuing a strategy of distributing its production capacity across the territory of Russia. In 2008, an important phase in the implementation of this strategy was completed.

New brewery in Novosibirsk

On 26 May 2008, a new Baltika’s brewery in Novosibirsk with rated annual capacity of 4.5 million hectolitres was ceremo- niously opened. Construction of this brewery on ‘green field’ basis made it possible to create a high technology enter- prise. When designing the facility, the experience of building modern breweries across Europe was taken into account.

The most up-to-date equipment supplied by the world’s larg- est manufacturing companies was put into operation at this branch. The brewery was built in conformity with all norms of Russian environmental legislation in keeping with the high standards that the Company strictly adheres to.

Baltika-Novosibirsk produces more than 15 varieties of beer, among them the Company’s key brands – Baltika №3 Classic, Baltika №7 Export, Arsenalnoye, Yarpivo, Baltika LITE, the licensed beer Tuborg, as well as the regional brand Sibirsky Bochonok, which was especially created for Sibe- rian consumers.

Baltika-Voronezh became twice as powerful

June 2008 marked the completion of a project to double the production capacity of the Baltika-Voronezh brewery. Its output rose from one to two million hectolitres of product per year.

To ensure the highest possible level of quality of products released by the Baltika-Voronezh brewery, only the most up- to-date equipment from the world’s largest manufacturers – Ziemann, Krones, Pall was installed there. It enabled Baltika- Voronezh to produce additional national beer varieties for the first time: Baltika №3 Classic, Baltika Cooler, Baltika №7 Export beer. The brewery also produces such key beer vari- eties of the Company as Arsenalnoye and Yarpivo.

ANNUAL REPORT 2008 23 KEY PROJECTS

Baltika expands the geography of production

In 2008, two major projects were completed for arranging production of Baltika beer varieties on the territory of CIS coun- tries: the launch of licensed production in Uzbekistan, as well as the acquisition and start of modernisation of a brewery in Azerbaijan.

Licensed production in Uzbekistan

Bottling of the beer varieties Baltika №3 Classic and Baltika №9 Extra brewed under license at the Carlsberg Uzbekistan facility in Tashkent began in the autumn of 2008. Licensed production inside the country made it possible to significantly reduce expenses relating to transport and payment of excise tax. Thus, these popular brands became more available for Baltika beer lovers in Uzbekistan.

In the time between the signing of the license agreement in May 2008 and the launch of production, additional equip- ment was installed at the facility, staff was trained and a sys- tem of joint distribution on the territory of Uzbekistan was developed. In future, the project provides for an increase in the number of varieties in the Baltika line-up produced under license, which will make it possible to satisfy existing demand on the market.

Acquisition of a brewery in Azerbaijan

The brewery in Azerbaijan which was purchased under a transaction completed in August 2008 became the first Bal- tika production facility outside the Russian Federation and the Company’s twelfth brewery.

Baltika Breweries plans to invest in modernising the brewing line, the fermentation and filtration departments, as well as on re-equipping the filling line. A modern high-technology filling line for bottle and PET-packaging will be installed.

Baltika intends to continue growing the existing brands of the Baltika-Baku brewery – Afsana, Bizim, Xirdalan and 33 Export. There are plans to launch production of varieties from the Baltika line-up and Arsenalnoye in time for the 2009 season. The combined share of the Azerbaijan market held by these local brands plus Baltika varieties amounted to around 74% at the moment of acquisition.

24 BALTIKA BREWERIES KEY PROJECTS

The Company introduces ‘Lean Production’

In order to reduce costs, in 2008 Baltika began implementa- tion of its ‘Lean Production’ project.

In the initial phase, the system has been introduced at the Baltika-Rostov brewery. During the course of the year, around 300 employees’ ideas on cutting expenses were put forward and applying the most effective among them made it possible for the Company to save significant amounts.

The ‘Lean Production’ project is being realised at all of Baltika’s production facilities. Within the breweries working groups are successfully operating along the projects ‘Putting Things in Order,’ ‘Visualisation,’ ‘Quick Resets,’ ‘Protection Against Unintended Errors,’ and ‘Raising Leaders.’

Nanotechnologies help to quality control

Baltika Breweries is striving to maintain uniformly high quality of beer at all breweries, as well as to use the most modern technologies in production. In 2008, the first and at the time Russia’s only Zetatrac equipment was installed at the brew- ery in St. Petersburg to control the stability of the beer with the help of nanotechnologies.

Like many liquids, beer consists of particles which are constantly moving and interacting. Having an idea of their weight, charge and size, Company specialists got the possi- bility to control the colloidal stability – the ability of a product to preserve its characteristics from the moment of brewing to the moment of its consumption. Unlike all other equip- ment existing in Russia, the device installed in St. Peters- burg carries out an analysis of fluids having both high and low concentration of nanoparticles.

The technology used at Baltika received a prize at the 3rd annual Nano 50 awards conferred by the official publication of the National Aeronautics and Space Administration, USA (NASA Tech Briefs) for technical solutions introducing nano- technologies in key sectors of manufacturing.

ANNUAL REPORT 2008 25 SOCIAL RESPONSIBILITY

The Company presented Krasnoyarsk a children's playing ground for the 380th city anniversary SOCIAL RESPONSIBILITY

Effective and stable development of the business has enabled Baltika Breweries to carry out external and internal social programmes, to invest money in developing the regions and closely related business sectors, to provide support to socially important projects and events in the regions and to devote attention to implementing environmental programmes. Baltika bears responsibility to consumers for the high quality of its products; to its employees for dignified working conditions; to society for respecting its values, norms and rules, as well as for conducting its business in a conscientious manner. Charity work

Over the course of many years, Baltika has been busy with charitable projects providing targeted assistance to various regions of the country.

In 2008, the Company allocated more than 136 mln rubles for socially important projects and charity. One of the main areas for this work is to assist in carrying out the national project ’Health.’ Five institutions providing health care to children received grants to purchase high-technology medi- cal equipment.

As in the past, the Company continues to provide financial assistance to orphanage №8 and the children’s hospice in St. Petersburg, to the centre for rehabilitation of alcoholics – the ‘Home of Hope on the Hill’ in the Leningrad Region. In May 2008, acting within the framework of the charitable programme ‘Duty’ under the patronage of the Governor of St. Petersburg, Baltika purchased automatic tonometers for WWII veterans and survivors of the Siege of Leningrad.

In 2008, Baltika began to implement a large-scale charitable project timed to coincide with the 1,000 th anniversary of the founding of the city of Yaroslavl. In the course of 2008-2010, Company funds will be used to carry out a major repair of the children’s hospital in the region.

Baltika could not remain indifferent to the tragic events in South Ossetia. In the first days following the end of military conflict, the Company delivered 70 tonnes of foodstuffs and drinking water to the camp of South Ossetian refugees in the village of Biragzang (North Ossetia). In addition, funds were allocated to prepare play complexes for kindergartens in the city of Tskhinvali which will be restored in 2009.

In 2008, children’s play complexes were also set up in Kras- noyarsk and Tula thanks to Company funds.

ANNUAL REPORT 2008 27 SOCIAL RESPONSIBILITY

Taxes

Baltika pays its taxes to the Treasury at all levels of govern- ment on time and in full measure. In a number of regions where the Company’s breweries are located, Baltika is among the largest taxpayers.

In 2008, the Company’s aggregate tax payments to the fed- eral Treasury of the Russian Federation amounted to more than 9 bn rubles, while more than 16 bn rubles went to the regional treasuries, which in total were 5 bn rubles more than in 2007.

In 2008, for the fourth time in a row, Baltika was named the best taxpayer in St. Petersburg.

Concern for the environment

Reducing negative impact on the environment is part of the social policy of a mature modern business. Baltika is actively investing funds in projects to lower the interference of indus- try in the ecosystem. The Company builds contemporary purification facilities, reuses packaging material and also saves on natural resources.

In 2008, Baltika completed ecological projects in three main areas: water conservation projects, protection of the atmos- phere and optimising handling of waste. In St. Petersburg a second barley corn dryer line was installed. In Samara construction was begun on new biological purification equipment. In Yaroslavl a unit for reprocessing waste was introduced. In all regions where Company breweries are located, acting with the support of environmental organi- sations, campaigns were conducted for rehabilitating the urban land.

In April 2008, an installation for burning biogas formed in the brewery’s water treatment plant started operations at the Baltika-Khabarovsk branch. The unit is unique in Russia. Use of biogas as an alternative source of energy will lead to thermal energy savings on the order of 8-10% per year.

The Company is not only investing funds in large-scale ecological programmes, but also supports the initiatives of city residents and carries out projects allowing everyone to make his contribution to the beautification of the city. In 2008, with the support of city administrations, competitions to redecorate courtyards organised by Baltika took place in Rostov-on-Don, Vladivostok, Krasnoyarsk and Yaroslavl.

28 BALTIKA BREWERIES SOCIAL RESPONSIBILITY

Collective labour agreement

During the period of April-June 2008, collective labour nego- tiations were held within Baltika Breweries resulting in the conclusion of a three-year collective agreement which is expected to govern the social and labour relations in the enterprise. The document establishes mutual obligations between the Company and its employees and sets down the social guarantees of workers. The initiator for signing was the Collective Labour Council and it will monitor per- formance of the provisions of the document.

System of compensation and benefits

The salary level in Baltika is one of the most competitive in the industry. The Company offers its employees a social package which includes an extensive list of compensations and benefits. The investment made in developing and train- ing personnel, as well as in corporate social programmes exceeded 550 mln rubles in 2008.

Relaxation and sports

In many regions, Baltika rents sports halls so that its employ- ees may engage in competitive sports and hold corporate championships among subdivisions of the breweries. Thus, for example, during four years now the teams of the Com- pany branches compete for the Baltika Cup in mini-football. In 2008, there were summer sports and athletic days for per- sonnel in all cities where the Company has breweries.

In the period of winter and summer school holidays, the Company offers the children of employees special pack- ages to stay at the children’s health camp ‘Baltika’ located in the Leningrad Region, as well as at health camps in the regions.

During 2008, new buses were purchased to transport employees to work in the cities of St. Petersburg, Tula, Samara, Novosibirsk and Krasnoyarsk. In Chelyabinsk the canteen was renovated, new equipment was purchased for the canteens in St. Petersburg and Voronezh.

ANNUAL REPORT 2008 29 SOCIAL RESPONSIBILITY

‘From Baltika to Russia!’

In 2008, a national programme entitled ‘From Baltika to Rus- sia!’ arranged more than 100 large scale city celebrations which were visited by more than 3 million Russians. A cul- tural programme with concerts, contests and tournaments, a large selection of varieties of high quality beer, cozy festival tents – all of this contributed to a pleasant way of spending time and development of the beer consumption culture.

Within the framework of this programme, the Company completed a new social project – the ‘Beer Patrol.’ Its aim is to oversee respect for the rules of beer sales at large pub- lic events. The ‘patrol’ members stopped the sale of beer to minors and in case of need reminded the sales staff about the laws prohibiting such action with respect to per- sons under 18 years of age. In 2008, the patrols operated at 15 large public gatherings organised by the Company in Khabarovsk, Samara, Moscow, Magnitorgorsk, Krasnoyarsk, St. Petersburg and other cities. A total of 250 people took part in the ‘Beer Patrols.’ They were Company employees, representatives of the mass media, of government bodies and social organisations. In 2009, there are plans to increase the number of raids as the project is further developed.

Baltika Breweries was the organiser of beer festivals in St. Petersburg, Moscow, Chelyabinsk, Samara, Khabarovsk, Krasnoyarsk, Tula, Yaroslavl, Voronezh, Rostov-on-Don, Novosibirsk and Veliki Ustyug. Under the aegis of the Compa- ny’s popular brands, there were large-scale music concerts.

Baltika also participates in organising City Days, creating in the regions of Russia unique entertainment venues. It arranges appearances by popular Russian ensembles and performers. In 2008, Baltika provided sponsorship support to City Days in Magnitogorsk, Krasnoyarsk, Tula, Khabarovsk, Togliatti and Novgorod.

30 BALTIKA BREWERIES SOCIAL RESPONSIBILITY

Satisfaction of consumers

During the summer of 2008, Baltika carried out a unique opin- ion poll among beer lovers called the ‘People’s Mark of Qual- ity.’ In order to clarify what features are used by ‘folk experts’ to determine the quality of a beverage, this large-scale cam- paign was held in eleven cities around the country.

More than 3,000 adult Russians expressed their opinion about beer quality by filling out the questionnaire. A heated discussion of criteria of quality developed on the Internet. The ‘folk experts’ also expressed their opinions by telephone using a free ‘hot line.’

All the advice, suggestions, critical remarks and ideas of the Russians who took part in the research of the ‘People’s Mark of Quality’ were reviewed by Company specialists. Thanks to the comments of beer lovers, a number of steps were taken to further perfect production. Baltika entered the Russian Union of Industrialists and Entrepreneurs

On 24 June 2008, the inclusion of Baltika Breweries in the register of members of the Russian Union of Industrialists and Entrepreneurs (RUIE) was announced at the session of the Union’s Board held in Moscow. On 27 August, the Company adopted the RUIE’s Social Charter of Russian Business. The Charter is a system of principles and areas of potential contribution of business in the development of society. The position set out in this document has many things in common with the Code of Honour of Russian Brew- ers to which Baltika adheres.

On 28 November, at the session of the RUIE Board in Mos- cow, Company President Anton Artemiev was elected to the Board of the Union – a collegial body which guides the activity of the Union in the period between congresses and consists of representatives of the country’s largest compa- nies which are actively participating in development of the Russian economy. Work in the Union of Russian Brewers

In 2008, the Company actively took part in work within the Union. Baltika representatives are members of the Union’s commissions.

Active work was carried out by the working group of the Union for developing a draft of Technical Regulations for brewery products and production which was introduced in the State Duma in December 2008. The Commission on public relations and the mass media coordinated measures taken to ensure the observance of legislation on the ban of beer sales to minors.

ANNUAL REPORT 2008 31 CORPORATE GOVERNANCE

Baltika Breweries adheres to best standards of corporate governance CORPORATE GOVERNANCE

Baltika Breweries adheres to best standards of corporate go- Guaranteeing that shareholders receive in a regular and vernance in full accordance with the principles of the Code timely manner complete and reliable information about of Corporate Conduct approved by the federal body of the the Company and its activities; executive branch of the Russian government responsible for Ensuring that shareholders do not abuse the rights con- the Russian securities market. These standards include: ferred on them; Providing equal treatment to all shareholders owning the Monitoring the use of confidential and other business same number of shares of a single type (category). In information within the Company. situations where shareholders’ rights have been violat- ed, they have the opportunity to seek legal recourse; Official information about Baltika Breweries’ activity is pub- Protecting shareholders by providing reliable and effective lished on the Company’s website www.baltika.ru. In addi- means of registering ownership of the Company’s shares; tion, information which must be disclosed for the Russian securities market is published on the Interfax newswire. The Offering shareholders the right to actively participate in Russian newspaper Izvestiya is the official print media that the Company’s management by making decisions on the Company uses to inform shareholders about upcoming the most important issues of the Company’s activities at meetings. general shareholders meeting;

Company’s management structure

General Shareholders Meeting

Board of Directors

President

Vice President, Vice President, Acting Vice President, Vice President, Finance and HR & Corporate Vice President, Marketing Supply Chain Economics Affairs Sales in Russia

ANNUAL REPORT 2008 33 CORPORATE GOVERNANCE

General Shareholders Meeting 12. Decision on how to conduct shareholders meetings.

The General Shareholders Meeting is the Company’s highest 13. Split and consolidation of the Company’s shares. management body. In accordance with Russian law and the 14. Adoption of resolutions to approve transactions speci- Company Charter, the general shareholders meeting has the fied by article 83 of the Russian Law on Joint-Stock competence to examine and address the following issues: Companies.

1. Introduction of amendments and additions to the Com- 15. Adoption of resolutions to approve major transactions pany Charter or approval of a new edition of the Charter specified by article 79 of the Russian Law on Joint- (except in those cases that are determined by the Rus- Stock Companies. sian Law on Joint-Stock Companies). 16. Acquisition by the Company of issued shares in situ- 2. Re-organisation of the Company. ations that are stipulated in the Russian Law on Joint- Stock Companies. 3. Liquidation of the Company, the appointment of a liqui- dation commission and the approval of interim and final 17. Agreement to participate in holding companies, finan- liquidation balances. cial and industrial groups, associations and other simi- lar types of commercial organizations. 4. Determination of the number of members on the Board of Directors, the election of members and the early ter- 18. Approval of internal documents governing the activities mination of members’ authority. of the Company’s bodies. 5. Decisions on the quantity, nominal value and category 19. Decisions on other issues that are mandated in the Rus- (type) of authorised shares, as well as the rights issuing sian Law on Joint-Stock Companies. from these shares. In 2008, the Company held three general shareholders 6. Increase in the Company’s charter capital by increas- meetings: the annual meeting (AGM) and two extraordinary ing the nominal value of the Company’s shares. In addi- meetings (EGMs), including one conducted in the form of tion, an increase in charter capital occurring through absentee voting. the issuance of additional shares (only in those cases when the law stipulates that such a decision shall only On March 6, 2008, an Extraordinary General Sharehold- be made at the shareholders meeting). ers Meeting (EGM) was held in the form of absentee vot- 7. Reduction in the Company’s charter capital occurring ing. The shareholders approved changes to the Company through a decrease in the nominal value of shares, via Charter reflecting a reduction in Baltika Breweries’ charter the Company’s purchase of shares designed to reduce capital as a result of a share buy-back and cancellation at the overall number of shares or by the cancellation of the end of 2007. shares which the Company acquired or bought back. On April 29, 2008, the Company held its Annual General 8. Election of members of the Company’s Internal Audit- Shareholders Meeting (AGM). The Company’s annual ing Committee and the termination of these members’ report, the report on profit and loss (P & L) for the financial authority ahead of schedule. year and the distribution of profit for 2007 were all approved during the meeting. The AGM also established the dividend 9. Approval of the Company’s external auditors. payment for both ordinary and preference shares at 52.00 10. Payment (declaration) of dividends based on financial rubles per share. At the AGM, elections were held for mem- results from the first quarter (Q1), first half year (H1) and bers of both the Board of Directors and the Company’s first nine months of the financial year. Internal Auditing Committee. In addition, the shareholders also approved the Company’s external auditors: A&P Audit 11. Approval of the Company’s annual report(s), annual CJSC, ZAO KPMG and Ernst & Young Ltd. accounting, including reports on profit and loss (accounts of profit and loss), as well as distribution of On August 13, 2008, an Extraordinary General Sharehold- profit (including payment (declaration) of dividends, ers Meeting (EGM) was held. At this meeting, a decision except for profit distributed as dividends according to was made to terminate the authority of the previous Board results from the first quarter (Q1), first half year (H1), of Directors ahead of schedule and to elect new members first nine months and the full financial year (FY)) and of the Board. The need to elect a new Board of Directors for losses of the Company, according to results from the the Company arose due to changes in the composition of financial year. the Company’s shareholders.

34 BALTIKA BREWERIES CORPORATE GOVERNANCE

Board of Directors Chairman of the Board of Directors

The activities of the Company’s Board of Directors are prin- Born in 1955, Higher education cipally focused in the following areas: strategically mana- Member of the Company’s Board ging the Company, adopting effective managerial decisions of Directors since 2006 Holds positions in the following that correspond to international best practice in corporate organisations: governance and monitoring the activity of the Company’s President, Carlsberg Breweries A/S Member of the Board of Directors, single-member executive body. Baltic Beverages Holding AB The main tasks of the Company’s Board of Directors include: Shaping a system to effectively manage the Company; Ensuring stable financial conditions for the Company Jørgen Buhl and its operations; Rasmussen Determining the most promising areas and key priorities for the Company’s activity; Members of the Company’s Board of Directors Developing and implementing programmes to address Born in 1960, strategic tasks facing the Company. Higher education Member of the Company’s Board of Direct since 2001 Holds positions in the following organisations: The Company’s Board of Directors is made up of seven President, Baltika Breweries JSC members, including three independent directors. Senior Vice President, Eastern Europe, Carlsberg Breweries A/S During the reported period, the following changes occurred Chairman of Supervisory Board, DERBES Brewery Ltd Chairman of Supervisory Board, JV UZCARLSBERG Ltd in the composition of the Company’s Board of Directors: as Chairman of Supervisory Board, Slavutich OJSC of August 13, 2008, Hans Kasper Madsen and Alexander Chairman of Supervisory Board, Lvovskaya Pivovarnya Shokhin (independent director) replaced Andrew Stevenson OJSC Chairman of Supervisory Board, Baku-Pivo OJSC and John Nicolson on the Board. Chairman of Board of Directors, Baltika-Baku LLC Anton Artemiev Member of the Board of Directors, Malt Plant Soufflet During the reported period, the Company’s Board of St. Petersburg CJSC Directors held 19 sessions. These meetings were carried Member of the Board of Directors, Khlebny Dom OJSC out both in person and in the form of absentee voting.

Bjørn Søndenskov Hans Kasper Madsen Alexander Izosimov Alexander Ikonnikov Alexander Shokhin Independent director Independent director Independent director

Born in 1962, Born in 1961, Born in 1964, Born in 1971, Born in 1951, Higher education Higher education Higher education Higher education Higher education Member of the Company’s Member of the Company’s Member of the Company’s Member of the Company’s Member of the Company’s Board of Directors since 2006 Board of Directors since 2008 Board of Directors since 2005 Board of Directors since 2005 Board of Directors since 2008 Holds positions in the following Holds positions in the following Holds positions in the Holds positions in the following Holds positions in the organisations: organisations: following organisations: organisations: following organisations: Vice President, Carlsberg Senior Vice President, General Director, Vimpelcom Chairman of the Board of President, Russian Union Breweries A/S Carlsberg Breweries A/S OJSC Directors, The Association of Industrialists and Member of the Board of Member of the Board of General Director, Sakhalin- of Independent Corporate Entrepreneurs Directors, Baltic Beverages Directors, The Danish Malting Telekom Mobile CJSC Directors (a non-commercial President of the State Holding AB Group A/S Member of the Board partnership to assist University – Higher School of of Directors, Limnotex professional activities) Economics Development Ltd General Director, Board Member of the Board of Member of the Board of Solutions CJSC Directors, Lukoil OJSC Directors, MTG AB Member of the Board of Member of the Board of Member of the Board of Directors, The National Directors, TGK-10 OJSC Directors, The Dynasty Depository Centre (a non- Member of the Board of Foundation for Non- commercial partnership) Directors, Russian Railways commercial Programs Member of the Board of OJSC Directors, East Capital Explorer Member of the Board of Plc Directors, TMK OJSC

ANNUAL REPORT 2008 35 CORPORATE GOVERNANCE

Committees of the Company’s Board of Directors Single-member executive body

Audit Committee The Company’s single-member executive body is President Anton Artemiev, who directs the Company’s ongoing, day- The Company’s objective for creating the Audit Committee to-day activities. Since 2005, Anton Artemiev has been the was to upgrade the effectiveness and quality of the Board Company’s President. of Directors’ work in the area of ensuring open communi- cation with external auditors, the Internal Auditing Commit- On April 29, 2008, the Company’s Annual General Share- tee, the structural sub-divisions of internal audit and with holders Meeting (AGM) established the maximum allowable the financial reporting and financial-economic group of the compensation for independent members of the Board of Company through the preliminary review and preparation of Directors (in full accordance with point 2, article 64 of the recommendations to the Company’s Board of Directors on Russian Law on Joint-Stock Companies). The compensa- matters within the Committee’s core competencies relating tion was set at $130,000 (in ruble equivalent terms), which to the following issues: was the same maximum payout as in 2007. The maximum reimbursable expense level established for members of Risks associated with the Company’s operations; the Board of Directors in 2008 was the ruble equivalent of Management reporting; $15,000. During 2008, independent members of the Com- pany’s Board of Directors received compensation in the Financial reporting; sum of 3,243,108 rubles. Independent external and internal audit; The rights and obligations of the Company’s President are Internal control procedures. governed by the Russian Law on Joint-Stock Companies (point 3, article 69), as well as by the Company Charter and Nominations and Remuneration Committee the applicable contract concluded between the President The principal motivating reason to create the Nominations and the Company. Compensation for performing the func- and Remuneration Committee was to help the Company tions of the executive body – as well as other relevant work- attract qualified specialists and managers and to provide ing conditions for the President – are determined by a labour proper incentives to these new employees. contract which has been signed by both the President and the Company. Provisions about the committees adopted by the Compa- ny’s Board of Directors are basic documents governing the Internal Auditing Committee activities of said committees and defining issues within their The Company’s Internal Auditing Committee is a permanently core competencies, and also the manner of shaping the functioning elected body created in keeping with current le- composition of these committees and how they function. gislation in the Russian Federation and the Company Charter. The Committee carries out periodic control and oversight of the Company’s financial and economic activity and the actions of its management bodies and officials (including individual sub-divisions, departments, subsidiaries and representative offices) through the following types of verification:

Legality, economic justification and effectiveness (expedi- ency) of the economic and financial operations carried out by the Company during the period under examination; Completeness and accuracy in the way that the Com- pany’s economic and financial operations are reflected in management documents; Legality, economic justification and effectiveness (expe- diency) of the actions of individuals in the Company’s management bodies and directors of its structural sub- divisions in complying with current Russian legislation, the Company Charter, approved plans, programs and other internal Company documents.

36 BALTIKA BREWERIES CORPORATE GOVERNANCE

The Internal Auditing Committee is comprised of three individuals who are elected at the Company’s Annual General Share- holders Meeting (AGM). Regulations stipulate that members of the Internal Auditing Committee cannot serve as members of the Board of Directors or hold any other positions within the Company’s management bodies (while being on the Committee). At the AGM (held on April 29, 2008), the following individuals were elected to the Internal Auditing Committee:

Name / year of birth / education: Position(s) held:

Vibeke Aggerholm Vice President, Internal Audit, Carlsberg Breweries A/S Born: 1964 Member of the Board of Directors, The Institute of Internal Auditors (IIA) Education: higher

Steven Wheatherley* Born: 1968 *In May 2008, he resigned from the Internal Auditing Committee Education: higher

Nadezhda Bazilevich Born: 1975 Finance Manager, Baltic Beverages Holding АВ Education: higher

Interested party and major transactions

During 2008, Baltika Breweries completed 80 interested party transactions approved by the Board of Directors. In the report- ing period, there were no major transactions as defined by the laws of the Russian Federation and the Company Charter.

A complete list of the interested party transactions is provided in the section entitled ‘Interested Party Transactions.’

ANNUAL REPORT 2008 37 CORPORATE GOVERNANCE

BALTIKA MANAGEMENT

Denis Daniil Anton Ekaterina Alexander Oleg Sherstennikov Briman Artemiev Azimina Dedegkaev Burkhanov

Vice President, Vice President, President Vice President, Vice President, Acting Vice President, Marketing HR & Corporate Finance and Supply Chain Sales in Russia Affairs Economics

38 BALTIKA BREWERIES SECURITIES

Charter capital

As of December 31, 2008, the Company’s charter capital totaled 164,041,164 rubles.

Authorized and issued shares

Forms of shares Number of shares Nominal value per share, rubles

1. Issued shares Ordinary registered shares 151,714,594 1 Preference type ‘A’ registered shares 12,326,570 1

2. Authorized shares Ordinary registered shares 3,808,291 1 Preference type ‘A’ registered shares 440,450 1

Share issues

The following issues of the Company’s shares are currently in circulation:

Registration Type of shares Number of Nominal value Nominal value number shares in the of the issue, per share, issue rubles rubles

1-04-00265-А Ordinary registered shares 151,714,594 151,714,594 1

2-04-00265-А Preference type ‘A’ registered shares 12,326,570 12,326,570 1

Distribution of the Company’s charter capital

The Company’s largest single shareholder and the owner with controlling interest is a subsidiary of Carlsberg Breweries A/S – Baltic Beverages Holding AB.

The Structure of the Company’s Charter Capital as of December 31, 2008 Natural persons 8.11% Legal entities 0.28% Nominal holders 2.75%

Baltic Beverages Holding AB 88.86%

ANNUAL REPORT 2008 39 SECURITIES

Share circulation

Trading in Baltika Breweries’ shares (both ordinary and stock exchanges experienced significant declines. The RTS preference) occurs both on and off the Russian stock Index tumbled more than 72% and the MICEX Exchange exchanges. The Company’s shares are quoted on two of dropped 67%. Russia’s largest organised trading platforms – the MICEX Exchange CJSC (since 2003) and RTS OJSC (since 2001). As of December 31, 2008, Baltika’s market capitalisation The Company’s stock is traded under the symbol PKBA. stood at $2.4 bn.* Based on this end-of-year valuation, the Company remains (as of before) Russia’s largest FMCG At present, the Company’s shares which are circulated on company. the Russian stock exchanges are included in the special section: ‘The list of securities allowed to circulate but not According to data provided by the MICEX Exchange CJSC included in the quotation lists.’ (closing price), the value of ordinary shares was 385 rubles as of December 31, 2008, whereas the Company’s prefer- In the second half of 2008, facing numerous negative fac- ence shares were priced at 308 rubles on the same date. tors linked to the ongoing global financial crisis, the Russian

Statistics from trading of the Company’s shares in 2008 (MICEX Exchange CJSC, closing price)

2008 price per Price of the last Volume of trades, Total number of share transaction, rubles transactions min./ max., rubles rubles

Ordinary shares (PKBA) 300 / 1,209 385 387,473,618 9,695

Preference shares (PKBAP) 277 / 815 308 147,337,937 4,831

Dividend policy

The Company’s dividend policy is based on the principle of In recent years, the dividends paid per share have shown fairly distributing profit among all Company shareholders in consistent growth. Thus, comparing 2007 results with the proportion to the number of shares they own in any given same indicator from 2003, the dividend per ordinary share share category, taking into consideration a rational balance has grown more than 4 times; during the same period, the between the amount paid out in dividends and the funds dividend paid on preference shares has increased more than needed to carry out the Company’s strategic plans. 3 times. Based on 2007 results, the Company’s dividend pay- out has increased substantially – 1.32 times – compared to The Company actively seeks to steadily increase the amount the preceding year. of money allocated to shareholders for dividends. The mini- mum dividend for the Company’s preference shares is deter- mined by the Company Charter.

* Data obtained from RTS OJSC

40 BALTIKA BREWERIES SECURITIES

Company's dividends

Period for which the Dividend paid Dividend paid Change in the Change in the dividend was paid per ordinary share, per preference share, dividend amount dividend amount rubles rubles per ordinary share per preference share (as % of 2003 (as % of 2003 payments) payments)

2003 11.64 15.13 100 100

2004 13.94 18.12 120 120

2005 24.33 24.33 209 161

2006 39.50 39.50 339 261

2007 52.00 52.00 446 344

2008* 85.10 85.10 731 562

Information about the pay-out of declared (allocated) dividends on the Company’s shares

During the reported period, the total amount allocated for dividends amounted to:

For ordinary registered shares – 7,889,158,888 rubles For type ‘A’ preference registered shares – 640,891,640 rubles

As of December 31, 2008, more than 99% of the Company’s allocated dividends had been paid out to shareholders.

* Recommendation of the Company’s Board of Directors

ANNUAL REPORT 2008 41 Baltika Breweries JSC CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2008 CONTENTS

Independent Auditors’ Report 44 Consolidated Income Statement 45 Consolidated Balance Sheet 46 Consolidated Statement of Cash Flows 47 Consolidated Statement of Changes in Equity 49 Notes to the Consolidated Financial Statements 50

CONSOLIDATED FINANCIAL STATEMENTS 2008 43 ZAO KPMG Telephone +7 (812) 313 7300 69 -71 A Marata st Fax +7 (812) 313 7301 Business centre «Renaissance Plaza» Internet www.kpmg.ru St. Petersburg 191119, Russia

Independent Auditors’ Report

To Management OAO Baltika Breweries Report on the Consolidated Financial Statements We have audited the accompanying consolidated fi nancial statements of OAO Baltika Breweries (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated balance sheet as at 31 December 2008, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash fl ow statement for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated fi nancial statements in ac- cordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of fi nancial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audit. We con- ducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the fi nancial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of ma- terial misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluat- ing the overall presentation of the fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our opinion.

Opinion In our opinion, the consolidated fi nancial statements present fairly, in all material respects, the consolidated fi nancial position of the Group as at 31 December 2008, and its consolidated fi nancial performance and its consolidated cash fl ows for the year then ended in accordance with International Financial Reporting Standards.

ZAO KPMG 19 February 2009

ZAO KPMG, a company incorporated under the Laws of the Russian Federation and a member fi rm of the KPMG network of independent member fi rms affi li- ated with KPMG International, a Swiss cooperative.

44 OAO Baltika Breweries and subsidiaries Consolidated Income Statement for the year ended 31 December 2008

2008 2007 Note ’000 RUR ’000 RUR Revenue 92,482,283 78,891,758 Cost of sales (46,668,505) (37,810,458) Gross profit 45,813,778 41,081,300 Distribution expenses (20,765,881) (19,609,227) Administrative expenses 8 (2,913,352) (2,653,445) Other income 9 78,487 3,615 Financial income 11 1,619,812 974,647 Financial expenses 11 (3,678,392) (660,978) Share of profit of equity accounted investees (net of income tax) 47,370 16,030 Profit before income tax 20,201,822 19,151,942 Income tax expense 12 (4,690,561) (5,191,329) Profit for the year 15,511,261 13,960,613

Earnings per share Basic and diluted earnings per share 23 98.01 RUR 83.16 RUR

These consolidated financial statements were approved by Management on 19 February 2009 and were signed on its behalf by:

Anton Artemiev Ekaterina Azimina President Vice-President of finance and economy

The consolidated income statement is to be read in conjunction with the notes to, and forming part of, the consolidated financial state- ments set out on pages 50 to 76.

CONSOLIDATED FINANCIAL STATEMENTS 2008 45 OAO Baltika Breweries and subsidiaries Consolidated Balance Sheet as at 31 December 2008

Note 2008 2007 ’000 RUR ’000 RUR ASSETS Non-current assets Property, plant and equipment 13 43,356,748 39,366,381 Intangible assets 14 13,791,191 11,736,964 Investments in equity accounted investees 15 340,038 267,990 Other investments 16 9,796 9,796 Total non-current assets 57,497,773 51,381,131

Current assets Inventories 18 7,683,466 7,797,390 Other investments 16 - 2,335,890 Income tax receivable 583,952 7,131 Trade and other receivables 19 7,511,041 5,015,410 Cash and cash equivalents 20 1,691,594 2,708,501 Total current assets 17,470,053 17,864,322 Total assets 74,967,826 69,245,453

EQUITY AND LIABILITIES Equity 22 Preference shares 84,978 85,442 Ordinary shares 736,129 736,164 Share capital 821,107 821,606 Additional paid-in capital 4,171,716 4,239,807 Foreign currency translation reserve 433,587 18,234 Retained earnings 48,850,841 41,869,720 Total equity 54,277,251 46,949,367

Non-current liabilities Loans and borrowings 24 176,304 580,051 Deferred tax liabilities 17 1,453,654 1,514,548 Total non-current liabilities 1,629,958 2,094,599

Current liabilities Loans and borrowings 24 7,562,837 11,171,172 Trade and other payables 25 11,101,272 8,967,957 Income tax payable 396,508 62,358 Total current liabilities 19,060,617 20,201,487 Total liabilities 20,690,575 22,296,086 Total equity and liabilities 74,967,826 69,245,453

The consolidated balance sheet is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 50 to 76.

46 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Consolidated Statement of Cash Flows for the year ended 31 December 2008

2008 2007 ’000 RUR ’000 RUR OPERATING ACTIVITIES Profit for the year 15,511,261 13,960,613 Adjustments for: Depreciation 4,615,461 4,511,246 Amortisation 180,436 71,572 Gain on disposal of property, plant and equipment and intangible assets (82,546) (2,128) Share of profit of equity accounted investees (47,370) (16,030) Interest expense 573,336 251,871 Interest income (253,209) (506,192) Income tax expense 4,690,561 5,191,329 Operating profit before changes in working capital and provisions 25,187,930 23,462,281 Decrease/(increase) in inventories 216,246 (2,474,825) Increase in trade and other receivables (2,321,940) (972,854) Increase in trade and other payables 3,720,693 1,231,145 Cash flows from operations before income taxes and interest paid 26,802,929 21,245,747 Income taxes paid (4,978,598) (4,930,991) Interest paid (528,448) (223,819) Cash flows from operating activities 21,295,883 16,090,937

INVESTING ACTIVITIES Proceeds from disposal of property, plant and equipment and intangible assets 193,363 31,561 Interest received 279,006 606,327 Dividends received 18,564 21,599 Repayment of loans made to banks - 1,500,006 Loans made to banks - (999,992) Acquisition of property, plant and equipment, intangible assets (8,744,468) (9,344,040) Acquisition of subsidiary, net of cash acquired (2,182,556) - Acquisition of bank promissory notes (3,232,271) (1,684,163) Proceeds from bank promissory notes 5,542,365 5,558,490 Cash flows utilised by investing activities (8,125,997) (4,310,212)

The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 50 to 76.

CONSOLIDATED FINANCIAL STATEMENTS 2008 47 OAO Baltika Breweries and subsidiaries Consolidated Statement of Cash Flows for the year ended 31 December 2008

2008 2007 ’000 RUR ’000 RUR FINANCING ACTIVITIES Proceeds from sale of treasury shares - 126,693 Proceeds from borrowings 29,798,605 21,588,134 Repayment of borrowings (33,855,575) (13,302,067) Dividends paid (8,609,718) (6,769,833) Redemption of shares (1,520,105) (12,324,936) Cash flows utilised by financing activities (14,186,793) (10,682,009) Net (decrease) /increase in cash and cash equivalents (1,016,907) 1,098,716 Cash and cash equivalents at beginning of year 2,708,501 1,609,785 Cash and cash equivalents at end of the year (note 20) 1,691,594 2,708,501

The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 50 to 76.

48 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Consolidated Statement of Changes in Equity for the year ended 31 December 2008

Preference Ordinary Additional Treasury Foreign Retained Total shares shares paid-in shares currency earnings capital translation ’000 RUR reserve

Balance at 1 January 2007 93,344 783,818 17,940,172 (105,267) 10,477 34,821,537 53,544,081 Profit for the year - - - - - 13,960,613 13,960,613 Foreign currency translation differences - - - - 7,757 - 7,757 Total recognised income and expenses ------13,968,370 Dividends to shareholders - - - - - (6,912,430) (6,912,430) Redemption of shares (7,902) (47,654) (13,720,889) - - - (13,776,445) Treasury shares sold - - 20,524 105,267 - - 125,791 Balance at 31 December 2007 85,442 736,164 4,239,807 - 18,234 41,869,720 46,949,367

Preference Ordinary Additional Treasury Foreign Retained Total shares shares paid-in shares currency earnings capital translation ’000 RUR reserve

Balance at 1 January 2008 85,442 736,164 4,239,807 - 18,234 41,869,720 46,949,367 Profit for the year - - - - - 15,511,261 15,511,261 Foreign currency translation differences - - - - 415,353 - 415,353 Total recognised income and expenses ------15,926,614 Dividends to shareholders - - - - - (8,530,140) (8,530,140) Redemption of shares (464) (35) (68,091) - - - (68,590) Balance at 31 December 2008 84,978 736,129 4,171,716 - 433,587 48,850,841 54,277,251

The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 50 to 76.

CONSOLIDATED FINANCIAL STATEMENTS 2008 49 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

1. BACKGROUND

(a) Russian business environment The Russian Federation has been experiencing political and economic change that has affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in the Russian Federation involve risks that typically do not exist in other markets. In addition, the recent contraction in the capital and credit markets has further increased the level of economic uncer- tainty in the environment. The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

(b) Organisation and operations OAO Baltika Breweries (the “Company”) is an open joint stock company as defined by the Civil Code of the Russian Federation and was registered on 21 July 1992, and, through a controlling interest in ten companies and ten branches (together referred to as the “Group”), produces and distributes beer and mineral water. The Company’s registered office is situated at 6 Verkhny pereulok, 3, St. Petersburg, 194292, Russia. As at 31 December 2008 Baltic Beverages Holding AB owned and controlled 93.5% of the Company’s ordinary shares and 31.9% of the Company’s preference shares. The remainder of the ordinary and preference shares are widely held. As at 31 December 2008 the Group consisted of eleven production plants: Baltika-Saint-Petersburg, Baltika-Tula, Baltika-Rostov, Baltika- Samara, Baltika-Khabarovsk, Baltika-Vena, Baltika-Chelyabinsk, Baltika-Pikra, Baltika-Yaroslavl, Baltika-Voronezh, Baltika-Novosibirsk and Baltika-Baku and ten subsidiaries: OOO Universalopttorg, OOO Terminal Podolsk, OOO Baltika-Ukraine, OsOO Baltika, Baltika S.R.L., Baltika-Almaty LLP, OOO Baltika-Bel, Baltika Deutschland GmbH, Baku Castel LLC and Baku Pivo JSC. The Group’s subsidiary, OOO Baltika-Moscow, was liquidated in December 2008. Most of the Group's customers are located in Russia. The Group's raw materials are readily available and the Group is not dependent on a single supplier or only a few suppliers. Related party transactions are detailed in note 29.

2. BASIS OF PREPARATION

(a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standard (“IFRSs”).

(b) Basis of measurement The consolidated financial statements are prepared on the historical cost basis except that property, plant and equipment was revalued to determine deemed cost as part of the adoption of IFRSs; and the carrying amounts of assets, liabilities and equity items in existence at 31 December 2002 include adjustments for the effects of hyperinflation, which were calculated using conversion factors derived from the Russian Federation Consumer Price Index published by the Russian Statistics Agency, GosKomStat. Russia ceased to be hyperinflation- ary for IFRS purposes as at 1 January 2003.

(c) Functional and presentation currency The national currency of the Russian Federation is the Russian Rouble (“RUR”), which is the Company’s functional currency, the functional currency of the majority of the Company’s subsidiaries and the currency in which these consolidated financial statements are presented because it reflects the economic substance of the underling events and circumstances of the Group. In previous years the Group’s consolidated financial statements were presented in EURO. Management believes that it is more appropriate to use the Rouble as the Group’s presentation currency in the current environment.

(d) Use of judgements, estimates and assumptions Management has made a number of judgements, estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with IFRSs. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments made by management in preparing these consolidated financial statements are described in note 14 – Intangible assets.

50 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

3. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of the consolidated financial statements are described in notes 3(a) to 3(q). These accounting policies have been consistently applied.

(a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating poli- cies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (ii) Associates (equity accounted investees) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. As- sociates are accounted for using the equity method. The consolidated financial statements include the Group’s share of the income and expenses of associates, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are elimi- nated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

(b) Foreign currencies (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising in translation are recognised in the income statement, except for differences arising on the translation of available-for- sale equity instruments. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to RUR at the exchange rate at the reporting date. The income and expenses of foreign operations are translated to RUR at exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in foreign currency translation reserve in equity. When a foreign operation is dis- posed of, in part or in full, the relevant amount in the translation reserve is transferred to the income statement. Foreign exchange gains and losses arising from a monetary item received from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity.

(c) Financial instruments (i) Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs, except as described below. Subsequent to initial recognition non-derivative financial instruments are measured as described below. Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Accounting for financial income and expenses is discussed in note 3(n).

CONSOLIDATED FINANCIAL STATEMENTS 2008 51 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

Held-to-maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-to-maturity. Held-to- maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Available-for-sale financial assets The Group’s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (refer note 3(i)(i)), and foreign exchange gains and losses on available-for-sale monetary items (refer note 3(b)), are recognised directly in equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to the income statement. Repurchase transactions The Group purchases financial instruments under agreements to resell identical financial instruments at a future date at a fixed price. Financial instruments purchased subject to commitments to resell them at a future date are not recognized. The amounts paid are ac- counted for as held-to-maturity bank loans and included in investments in the balance sheet. The difference between the sale and repur- chase prices is recognized as interest over the period of the agreement. Other Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Investments in equity securities that are not quoted on a stock exchange and where fair value cannot be estimated on a reasonable basis are stated at cost less impairment losses.

(d) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are rec- ognised as a deduction from equity, net of any tax effects. Preference share capital Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognised as distributions within equity. Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is net of any tax effects, and is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred from/to additional paid-in capital.

(e) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less impairment losses and, except for land, accumulated depreciation. The cost of property, plant and equipment at 1 January 2004, the date of transition to IFRSs, was determined by reference to its fair value at that date. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construc- tion of qualifying assets are recognized in profit or loss as incurred. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major com- ponents) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are recognised net within “other income” in the income statement. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognised in the income statement as incurred. (iii) Depreciation Depreciation is recognised in the income statement on a straight-line basis over the estimated useful lives of each part of an item of prop- erty, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

52 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

The estimated useful lives for the current and comparative periods are as follows: • Buildings 20 to 40 years • Machinery and equipment 3 to 20 years • Kegs 10 years. Depreciation methods, useful lives and residual values are reviewed at each reporting date. Estimates in respect of useful lives of certain items of buildings, machinery and equipment were revised in 2008.

(f) Intangible assets (i) Goodwill Goodwill (negative goodwill) arises on the acquisition of subsidiaries and associates. Acquisitions on or after 1 January 2004 For acquisitions on or after 1 January 2004, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in the income statement. Acquisitions of minority interests Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment. (ii) Other intangible assets Intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accu- mulated impairment losses. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the spe- cific asset to which it relates. Expenditure on internally generated goodwill and brands is recognised in the income statement as incurred. Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives of other intangible assets for the current and comparative periods vary between 1 to 10 years.

(g) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Group’s balance sheet.

(h) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

(i) Impairment (i) Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed col- lectively in groups that share similar credit risk characteristics.

CONSOLIDATED FINANCIAL STATEMENTS 2008 53 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

All impairment losses are recognised in the income statement. Any cumulative loss in respect of an available-for-sale financial asset rec- ognised previously in equity is transferred to the income statement. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in the income statement. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity. (ii) Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is esti- mated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business acquisition, for the purpose of impair- ment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impair- ment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(j) Employee benefits A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans, including Russia’s State pension fund, are recognised in the income statement when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

(k) Provisions A provision is recognised if, as a result of past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

(l) Revenue Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, excise taxes, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Transfer of risks and rewards vary depending on the individual terms of the contract of sale. For certain sales, transfer occurs when the goods are delivered to the customer’s warehouse; for other sales, transfer occurs when the goods are dispatched from the Group’s premises.

(m) Other expenses (i) Lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the contingency no longer exists and the lease adjustment is known.

54 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

(ii) Social expenditure To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s em- ployees, they are recognised in the income statement as incurred.

(n) Financial income and expenses Financial income comprises interest income on funds invested (including available-for-sale investments) dividend income, gains on the disposal of available-for-sale financial assets and foreign currency gains. Interest income is recognised as it accrues in the income state- ment, using the effective interest method. Dividend income is recognised in the income statement on the date that the Group’s right to receive payment is established. Financial expenses comprise interest expense on borrowings, unwinding of the discount on provisions, losses on the disposal of availa- ble-for-sale investments, foreign currency losses and impairment losses recognized on financial assets. All borrowing costs are recog- nised in the income statement using the effective interest method. Foreign currency gains and losses are reported on a gross basis.

(o) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the report- ing date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the follow- ing temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary dif- ference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(p) Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

(q) New Standards and Interpretations not yet adopted A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2008, and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the Group’s operations. The Group plans to adopt these pronouncements when they become effective.

• Revised IAS 1 Presentation of Financial Statements (2007) which becomes mandatory for the Group’s 2009 consolidated financial state- ments is expected to have a significant impact on the presentation of the consolidated financial statements. The Standard introduces the concept of total comprehensive income and requires presentation of all owner changes in equity in the statement of changes in equity, separately from non-owner changes in equity. The new Standard will not have any impact on the Group’s financial position or performance. • Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become mandatory for the Group’s 2009 consolidated financial statements and will constitute a change in accounting policy for the Group. In accordance with the transitional provisions the Group will apply the revised IAS 23 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective date. The Group has not yet analysed the likely impact of the new Standard on its financial position or performance. • IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. It relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13, which becomes mandatory for the Group’s 2009 consolidated finan- cial statements. The Group has not yet analysed the likely impact of the new Standard on its financial position or performance.

CONSOLIDATED FINANCIAL STATEMENTS 2008 55 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

• Revised IFRS 3 Business Combinations (2008) and amended IAS 27 (2008) Consolidated and Separate Financial Statements, which come into effect on 1 July 2009 (i.e. become mandatory for the Group’s 2010 consolidated financial statements). The revisions address, among others, accounting for step acquisitions, require acquisition-related costs to be recognised as expenses and remove exception for changes in contingent consideration to be accounted by adjusting goodwill. The revisions also address how non-controlling interests in subsidiaries should be measured upon acquisition and require to recognise the effects of transactions with non-controlling interest directly in equity. The Group has not yet analysed the likely impact of the new Standards on its financial position or performance. • Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purpose, will come into effect not earlier than 1 January 2009. The Group has not yet analysed the likely impact of the improvements on its financial position or performance.

4. DETERMINATION OF FAIR VALUES A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

(a) Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is based on market values when pos- sible. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of items of plant, equipment, fixtures and fittings is based on the quoted market prices for similar items. When no quoted market prices are available, the fair value of property, plant and equipment is primarily determined using depreciated replacement cost. This method considers the cost to reproduce or replace the property, plant and equipment, adjusted for physical, functional or economical depreciation, and obsolescence.

(b) Intangible assets The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.

(c) Inventories The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.

(d) Investments in equity and debt securities The fair value of held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date. The fair value of held-to-maturity investments is determined for disclosure purposes only.

(e) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

(f) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by refer- ence to similar lease agreements.

5. SEGMENT REPORTING The Group produces and distributes mainly beer, the revenues, results and assets attributable to this activity comprise substantially all of the Group’s revenues, results and assets. Therefore no separate information in respect of business segments is presented. The Group’s production operations are mainly based in Russia and, accordingly, no geographical segment information is presented.

56 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

6. FINANCIAL RISK MANAGEMENT

(a) Overview The Group has exposures to the following risks from the use of financial instruments: • Credit risk • Liquidity risk • Market risk This note presents information about Group's exposure to each of the above risks, the Group's objectives, policies and processes for measuring and managing risk and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board has established an Audit Committee which is responsible for developing and monitoring the Group’s risk management policies. The Audit Committee reports regularly to the Board of Directors on its activities. The Group’s risk management systems are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a dis- ciplined and constructive control environment in which all employees understand their roles and obligations. The Audit Committee oversees how management monitors compliance with the Group’s risk management system and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

(b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obliga- tions and arises principally from the Group's receivables from customers and investment securities. (i) Trade and other receivables The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group’s customer base, including the default risk of the industry in which customers operate, has less of an influence on credit risk. Sub- stantially all of Group's customers are located in the Russian Federation. Approximately 14.5% (2007: 15.7%) of the Group's revenue is attributable to sales transactions with a single customer. Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group's standard payment and delivery terms and conditions are offered. The Group’s review includes background checks on new cus- tomers. Purchase limits are established for each customer. Customers that fail to meet the Group's benchmark creditworthiness may transact with the Group only on a prepayment basis. About 79% of the Group's customers have been transacting with the Group for more than 2 years, and losses have occurred infrequently. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, whether they are a wholesale or retail customers, geographic location, maturity, and existence of any previous financial dif- ficulties. The Group requires collateral in respect of financial assets. Credit evaluations are performed on all customers, other than related parties, requiring credit over a certain amount. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. (ii) Investments The Group limits its exposure to credit risk by only investing in liquid securities in accordance with Group's deposit policy and only with counterparties that are included in the top 50 rated banks of Russian Federation according to the size of total assets. In order to determine the amounts to be deposited with each bank the Group studies the financial statements of bank and bank credit ratings. The status of the banks is reconsidered each 6 months.

(c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

CONSOLIDATED FINANCIAL STATEMENTS 2008 57 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

The Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 7 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot be reasonably predicted, such as instability of financial system and the impact of monopolists and changes in statutory regulations. In addition the Group maintains the following lines of credit: • USD 76,070 thousand multicurrency unsecured credit facility. Interest would be payable for EURO/USD/RUR at the rate LIBOR/ EURIBOR/Cost of funds for lender+0.75%; • USD 77,520 thousand multicurrency secured credit facility. Interest would be payable for EURO/USD/RUR at the rate from LIBOR/ EURIBOR/Mosprime+1.50%; • USD 126,830 thousand multicurrency unsecured credit/overdraft facility. Interest would be determined when the tranche is drawn down.

(d) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. (i) Currency risk The Group is exposed to currency risk on purchases and borrowings that are denominated in a currency other than the respective func- tional currencies of the Group entities. The currencies in which these transactions are primarily denominated are USD and EURO. The Group used forward exchange contracts to hedge its currency risk in 2007. During 2008 the Group did not use forward exchange contracts. (ii) Interest rate risk Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the Group's exposure should be subject to fixed or variable rates. However, at the time of raising new loans or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favorable to the Group over the expected period until maturity. (iii) Other market risk Material investments are managed on an individual basis and all buy and sell decisions are approved by the Board of Directors. The Group does not enter into commodity contracts other than to meet the Group’s expected usage and sale requirements; such con- tracts are not settled net.

(e) Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the level of dividends to ordinary shareholders. The Board of Directors seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. From time to time, the Group repurchases its own shares in the market; the timing of these purchases depends on market prices. All buy and sell decisions are made on a specific transaction basis by the Management of the Group. In 2007, the Group commenced a capital reduction programme, that was completed at the beginning of 2008, as disclosed, in note 22. There were no other changes in the Group’s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

7. ACQUISITION AND DISPOSALS OF SUBSIDIARIES (a) Acquisition of subsidiaries On 15 August 2008 the Group acquired all of the shares of Baku Castel, LLC and 91.03% of the shares of Baku Pivo, JSC for RUR 2,308,507 thousand which was settled in cash. In acquiring the shares, transaction costs of RUR 18,869 thousand were incurred. Baku Castel produces and distributes beer. Baku Pivo was acquired for the purpose of obtaining the right of long term lease of land plot on which Baku Castel plant is located. The impact of acquiring the subsidiaries was to increase profit for the year by RUR 1,998 thousand. If the acquisition had occurred on 1 January 2008, Group revenue for the year would have been RUR 93,242,777 thousand and the con- solidated profit for the year would have been RUR 15,668,646 thousand. In determining these figures it has been assumed that the fair value adjustments at 1 January 2008 would have been the same as the fair value adjustments that arose on the date of acquisition.

58 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

The acquisition of the subsidiaries had the following effect on the Group’s assets and liabilities at the dates of the acquisitions:

Recognised fair values on acquisition ’000 RUR Non-current assets Property, plant and equipment 410,920 Intangible assets 45,060 Deferred tax assets 15,970 Current assets Inventories 102,323 Trade and other receivables 159,065 Cash and cash equivalents 144,820 Current liabilities Income tax payable (1,272) Trade and other payables (188,125) Net identifiable assets, liabilities and contingent liabilities 688,761 Goodwill on acquisition 1,638,615 Consideration paid 2,327,376 Cash acquired (144,820) Net cash outflow 2,182,556

The above data on net assets of the acquired subsidiary is based on the best available management estimates and assumptions. The values are, therefore, provisional and subject to change within twelve months from the date of acquisition. It has not been practicable to determine the carrying amounts of the subsidiary’s assets, liabilities and contingent liabilities on an IFRS basis immediately prior to the date of acquisition because the subsidiary’s financial statements were prepared in accordance with local accounting principles, which are significantly different from IFRSs. The goodwill recognized on the acquisition is attributable mainly to the growth of sales in Azerbaijan and near-by regions and the syner- gies to be achieved from integrating the companies into the Group’s existing business (see note 14).

(b) Disposal of subsidiaries During the year ended 31 December 2007 the Company disposed of its 100% owned subsidiary OOO Leasing-Optimum to a third party. The net loss on disposal was RUR 691 thousand. The contribution of the subsidiary to the profit for the period and the effect of disposal of the subsidiary on the Group’s assets and liabilities at the date of disposal were insignificant. In December 2008 the Company liquidated its 100% subsidiary OOO Baltika-Moscow. The contribution of the subsidiary to the profit for the year and the effect of liquidation of the subsidiary on the Group’s assets and liabilities at the date of disposal were insignificant.

CONSOLIDATED FINANCIAL STATEMENTS 2008 59 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

8. ADMINISTRATIVE EXPENSES

2008 2007 ’000 RUR ’000 RUR Wages and salaries 902,668 892,521 Depreciation and amortisation 455,320 395,424 Facilities 201,554 205,413 Information technology and communications 188,031 165,640 Other payroll expenses 171,521 130,769 Payroll taxes 143,772 130,128 Charity 50,547 65,600 Other administrative expenses 799,939 667,950 2,913,352 2,653,445

9. OTHER INCOME 2008 2007 ’000 RUR ’000 RUR Gain on disposal of property, plant and equipment and intangible assets 82,546 2,128 Other (expense)/income (4,059) 1,487 78,487 3,615

10. PERSONNEL COSTS 2008 2007 ’000 RUR ’000 RUR Wages and salaries 5,956,992 5,022,237 Contributions to state pension fund 803,800 696,528 Other payroll taxes 288,156 270,242 Other payroll expenses 504,836 359,602 7,553,784 6,348,609

11. FINANCIAL INCOME AND EXPENSES 2008 2007 ’000 RUR ’000 RUR Financial income Interest income 253,209 506,192 Foreign exchange gain 1,366,603 468,455 1,619,812 974,647 Financial expenses Interest expense 573,336 251,871 Foreign exchange loss 3,105,056 409,107 3,678,392 660,978

60 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

12. INCOME TAX EXPENSE 2008 2007 ’000 RUR ’000 RUR Current tax expense Current year 4,734,655 5,347,837 Deferred tax expense Origination and reversal of temporary differences (44,094) (156,508) 4,690,561 5,191,329

The Group’s applicable tax rate is the corporate income tax rate of 24% for Russian companies (2007: 24%). With effect from 1 January 2009, the income tax rate for Russian companies has been reduced to 20%. This rate has been used in the calculation of deferred tax assets and liabilities.

Reconciliation of effective tax rate: 2008 %2007 % ’000 RUR ’000 RUR Profit before income tax 20,201,822 100 19,151,942 100 Income tax at applicable tax rate 4,848,437 24.0 4,596,466 24.0 Non-deductible expenses 557,832 2.8 786,359 4.1 Change in tax rate (282,376) (1.4) - - Effects of local concessions granted to branches (234,484) (1.2) (152,337) (0.8) Effects of concessions granted in respect of the local portion of the statutory tax rate (106,496) (0.5) (122,073) (0.6) Other (92,352) (0.5) 82,914 0.4 4,690,561 23.2 5,191,329 27.1

CONSOLIDATED FINANCIAL STATEMENTS 2008 61 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

13. PROPERTY, PLANT AND EQUIPMENT

Land and Machinery Construction Total buildings and Kegs in progress ’000 RUR equipment Cost/deemed cost At 1 January 2007 9,901,882 28,871,143 1,516,644 5,054,304 45,343,973 Additions 131,591 6,432,294 194 2,509,707 9,073,786 Disposals (1,509) (84,732) (13,904) (4,057) (104,202) Transfers (70,060) 1,012,099 64,549 (1,015,294) (8,706) Effect of movements in exchange rate - 1,173 (84) - 1,089 At 31 December 2007 9,961,904 36,231,977 1,567,399 6,544,660 54,305,940 Additions 811,428 5,029,809 416,877 1,993,180 8,251,294 Acquisitions through business combinations 109,263 297,886 670 3,101 410,920 Disposals (7,974) (308,753) (7,416) - (324,143) Transfers 862,959 2,462,801 302,561 (3,646,021) (17,700) Effect of movements in exchange rate 18,494 56,324 113 1,108 76,039 At 31 December 2008 11,756,074 43,770,044 2,280,204 4,896,028 62,702,350

Depreciation and impairment losses At 1 January 2007 (788,174) (9,291,847) (422,742) - (10,502,763) Depreciation charge (298,548) (4,035,976) (176,722) - (4,511,246) Disposals 1,316 63,525 9,931 - 74,772 Transfers 83,437 (62,939) (20,498) - - Effect of movements in exchange rate - (342) 20 - (322) At 31 December 2007 (1,001,969) (13,327,579) (610,011) - (14,939,559) Depreciation charge (322,457) (4,101,108) (191,896) - (4,615,461) Disposals 1,977 204,789 6,560 - 213,326 Transfers (8,347) 8,347 - - - Effect of movements in exchange rate - (3,908) - - (3,908) At 31 December 2008 (1,330,796) (17,219,459) (795,347) - (19,345,602)

Net book value At 1 January 2007 9,113,708 19,579,296 1,093,902 5,054,304 34,841,210 At 31 December 2007 8,959,935 22,904,398 957,388 6,544,660 39,366,381 At 31 December 2008 10,425,278 26,550,585 1,484,857 4,896,028 43,356,748

Depreciation expense of RUR 2,496,584 thousand has been included in cost of goods sold (2007: RUR 2,590,056 thousand), RUR 1,819,530 thousand in distribution expenses (2007: RUR 1,584,047 thousand) and RUR 299,347 thousand in administrative expense (2007: RUR 337,143 thousand). Estimates in respect of useful lives of certain items of buildings, machinery and equipment were revised in 2008. The change in estimated of useful lives of certain items of buildings, machinery and equipment resulted in a decrease in depreciation expense, recognised in cost of sales, during the year ended 31 December 2008 of RUR 653,716 thousand.

62 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

14. INTANGIBLE ASSETS

’000 RUR Goodwill Trademarks Software, brands Total and licences Cost At 1 January 2007 11,598,819 - 289,518 11,888,337 Additions - - 101,998 101,998 Disposals - - (131) (131) Transfers - - 8,706 8,706 Effect of movements in exchange rate - - (4) (4) At 31 December 2007 11,598,819 - 400,087 11,998,906 Additions - - 248,487 248,487 Acquisitions through business combinations 1,638,615 45,004 56 1,683,675 Transfers - - 17,700 17,700 Effect of movements in exchange rate 277,246 7,608 13 284,867 At 31 December 2008 13,514,680 52,612 666,343 14,233,635

Amortisation At 1 January 2007 - - (190,470) (190,470) Amortisation charge - - (71,572) (71,572) Disposals - - 128 128 Effect of movements in exchange rate - - (28) (28) At 31 December 2007 - - (261,942) (261,942) Amortisation charge - (1,252) (179,184) (180,436) Effect of movements in exchange rate - (63) (3) (66) At 31 December 2008 - (1,315) (441,129) (442,444)

Net book value At 1 January 2007 11,598,819 - 99,048 11,697,867 At 31 December 2007 11,598,819 - 138,145 11,736,964 At 31 December 2008 13,514,680 51,297 225,214 13,791,191

Amortisation expense of RUR 7,246 thousand has been included in cost of goods sold (2007: RUR 1,666 thousand), RUR 17,217 thousand in distribution expenses (2007: RUR 11,625 thousand) and RUR 155,973 thousand in administrative expense (2007: RUR 58,281 thousand).

CONSOLIDATED FINANCIAL STATEMENTS 2008 63 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

(a) Impairment testing of goodwill For the purposes of impairment testing, goodwill is considered at the Group level and has not been allocated to individual plants. This represents the lowest level within the Group at which the goodwill is monitored for internal management purposes. The recoverable amount of the Group’s plants represents value in use as determined by discounting the future cash flows generated from their continuing use. The following key assumptions were used in determining the recoverable amounts of the Group’s plants:

• Cash flows were projected based on actual operating results and the five-year business plan. • Total production at the plants was projected at about 45,688 thousand hectolitres units in the first year of the business plan. The antici- pated annual production growth included in the cash flow projections was between 1% and 3% for the years 2009 to 2013. Manage- ment plans to achieve production volume of 51,000 thousand hectolitres by the fifth year of the business plan. • Cash flows for a further five years were extrapolated assuming no further growth in production, and revenue and expenses increasing by 3% for revenue and 5% for expenses. • A discount rate of 19.2% was applied in determining the recoverable amount of the plants. The discount rate was estimated based on an industry average weighted average cost of capital, which was based on an average industry debt to total capital ratio of 20% at a market interest rate of 13.83%. • A terminal value was derived at the end of the ten year period.

The values assigned to the key assumptions represent management’s assessment of future trends in the beer production industry and are based on both external sources and internal sources. Although no impairment loss was recognised in respect of goodwill the determination of recoverable amount is sensitive to the rate at which the plant achieves its planned growth in production. If actual production were to be below estimated production by 20% in 2009 and subsequent years, the value in use would approximate the carrying amount of the plants.

15. EQUITY ACCOUNTED INVESTEES The Group has the following investments in equity accounted investees: Country Ownership/Voting Malterie Soufflet Saint Petersburg (“Soufflet”) Russia 30%

This company produces malt. The Group’s share of post-acquisition total recognised gains and losses in associates as of 31 December 2008 was RUR 279,108 thousand (31 December 2007: RUR 207,060 thousand).

16. OTHER INVESTMENTS 2008 2007 ’000 RUR ’000 RUR Non-current Available-for-sale investments: Stated at cost 9,796 9,796

Current Investments held-to-maturity: Promissory notes and deposits - 2,335,890

Available-for-sale investments stated at cost comprise unquoted equity securities in the brewery and banking industries. There is no active market for these investments and there have not been any recent transactions that provide evidence of fair value. However, management believes it unlikely that the fair value at the end of the reporting period would differ significantly from their carrying amount. Investments held-to-maturity represent bank promissory notes and deposits purchased from a range of Russian based banks. The maturity period on acquisition of these promissory notes is more than 90 days, and they are measured at amortised cost which approximates their fair value. The Group’s exposure to credit and market risks related to other investments are disclosed in note 26.

64 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

17. DEFERRED TAX ASSETS AND LIABILITIES

Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following:

’000 RUR Assets Liabilities Net 2008 2007 2008 2007 2008 2007 Property, plant and equipment - - (2,074,779) (1,989,837) (2,074,779) (1,989,837) Intangible assets 10,789 7,890 (11,285) - (496) 7,890 Investments - -(21,676)(15,192)(21,676)(15,192) Inventories 57,601 - - (14,759) 57,601 (14,759) Trade and other receivables 262,324 294,852 - - 262,324 294,852 Trade and other payables 323,372 202,498 - - 323,372 202,498 Net tax assets/(liabilities) 654,086 505,240 (2,107,740) (2,019,788) (1,453,654) (1,514,548)

During the year ended 31 December 2008 RUR 44,094 thousand (2007: RUR 156,508 thousand) of the movement in the net deferred tax liability was recognized in the income statement, RUR 15,970 thousand were acquired through business combination (2007: Nil) and RUR 830 thousand (2007: Nil), relating to foreign exchange differences, was recognized directly in equity.

18. INVENTORIES

2008 2007 ’000 RUR ’000 RUR Raw materials and consumables 6,117,333 5,967,723 Work in progress 553,718 560,136 Finished goods and goods for resale 1,012,415 1,269,531 7,683,466 7,797,39 0 Write-down of inventories in the current year 253,860 147,335

19. TRADE AND OTHER RECEIVABLES

2008 2007 ’000 RUR ’000 RUR Accounts receivable – trade 4,409,860 2,922,116 VAT receivable 321,637 288,496 Advances to suppliers 2,074,737 1,278,301 Other receivables 816,705 632,625 7,622,939 5,121,538 Accumulated impairment losses on receivables (111,898) (106,128) 7,511,041 5,015,410

The Group’s exposure to credit risk and currency risk related to trade and other receivables is disclosed in note 26.

CONSOLIDATED FINANCIAL STATEMENTS 2008 65 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

20. CASH AND CASH EQUIVALENTS

2008 2007 ’000 RUR ’000 RUR Bank balances 1,553,939 673,054 Bank deposits and bank promissory notes 137,655 1,535,077 Loans to banks -500,370 Cash and cash equivalents in the balance sheet and in the statement of cash flows 1,691,594 2,708,501

Loans to banks represent financial instruments purchased from one of the Russian banks under agreement to resell them at future dates (refer note 21). The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 26.

21. REPURCHASE AGREEMENTS The Group purchased financial instruments under agreements to resell them at future dates. The seller committed to repurchase the same or similar instruments at an agreed future date. Repurchase agreements were commonly used as a tool for short-term financing. As at 31 December 2008 the Group had no financial instruments purchased under agreements to resell them in future (as at 31 December 2007: RUR 500,370 thousand). Total interest income earned in connection with repurchase agreements for the year ended 31 December 2008 was RUR 1,107 thousand (2007: RUR 34,364 thousand).

22. EQUITY

(a) Share capital and additional paid-in capital

Number of shares unless otherwise stated Ordinary shares Ordinary shares Preference shares Preference shares 2008 2007 2008 2007 Authorised shares Par value RUR 1 RUR 1 RUR 1 RUR 1

On issue at beginning of the year 151,721,708 161,543,144 12,394,003 13,540,115 Redemption (7,114) (9,821,436) (67,433) (1,146,112)

On issue at end of the year, fully paid 151,714,594 151,721,708 12,326,570 12,394,003

The extraordinary general meeting of shareholders of the Company held on 15 October 2007 approved a resolution to reduce the Com- pany’s charter capital by buying up to 9,894,230 common registered shares having a par value of 1 RUR each and up to 1,225,114 prefer- ence type “A” registered shares having a par value of 1 RUR. The purchase was executed from 9 December 2007 to 9 January 2008. As at 31 December 2008, as a result of the purchase of ordinary shares and preference shares, the Company’s charter capital reduced to 164,041,164 shares.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

Preference shares have no right of conversion or redemption, but are entitled to an annual dividend equal to the nominal value of the shares multiplied by the interest rate of the Savings Bank of the Russian Federation, plus 10%. If the dividend is not paid, preference shares carry the right to vote until the following Annual Shareholders’ Meeting. However, the dividend is not cumulative. The preference shares also carry the right to vote in respect of issues that influence the interests of preference shareholders, including reorganisation and liquidation.

In the event of liquidation, preference shareholders first receive any declared unpaid dividends and the par value of the preference shares (“liquidation value”). Thereafter all shareholders, ordinary and preference, participate equally in the distribution of the remaining assets.

66 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

(b) Dividends

In accordance with Russian legislation, distributable reserves are limited to the balance of accumulated retained earnings as recorded in the Company’s statutory financial statements, prepared in accordance with Russian Accounting Principles. As at 31 December 2008 the Company had retained earnings, including profit for the current year of approximately RUR 25,321,399 thousand (31 December 2007: RUR 18,592,377 thousand).

The following table details the dividends declared by the Company for the years ended 31 December 2008 and 31 December 2007:

RUR ’000 RUR per share Year ended 31 December 2007 Preference shares Dividends for 2006 39.5 534,834 Ordinary shares Dividends for 2006 39.5 6,377,596

Year ended 31 December 2008 Preference shares Dividends for 2007 52 640,981 Ordinary shares Dividends for 2007 52 7,889,159

The Shareholders’ meeting held on 29 April 2008 approved dividends amounting to RUR 8,530,140 thousand.

23. EARNINGS PER SHARE

The calculation of earnings per share is based upon the profit for the year attributable to ordinary shares and the weighted average number of ordinary shares outstanding during the year, calculated as shown below. The Company has no potentially dilutive securities.

Weighted average number of ordinary shares

Number of shares unless otherwise stated 2008 2007

Issued shares at 1 January 151,721,708 161,543,144

Effect of own shares held - (38,803)

Effect of redemption of shares (6,939) (53,427)

Weighted average number of shares for the year ended 31 December 151,714,769 161,450,914

Profit attributable to ordinary shareholders

2008 2007 ’000 RUR ’000 RUR Profit for the year attributable to shareholders of the Company 15,511,261 13,960,613

Preference dividends recognised during the year (640,981) (534,834)

Profit attributable to ordinary shares 14,870,280 13,425,779

CONSOLIDATED FINANCIAL STATEMENTS 2008 67 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

24. LOANS AND BORROWINGS This note provides information about the contractual terms of the Group’s loans and borrowings. For more information about the Group’s exposure to liquidity risk and market risk refer note 26.

2008 2007 ’000 RUR ’000 RUR Non-current Unsecured bank loans - 18,975 176,304 561,076 Secured bank loans 176,304 580,051 Current Unsecured bank loans 4,116,537 4,701,700 Unsecured loan from Carlsberg Breweries A/S 1,097,628 - Unsecured loans from other companies 1,852,639 - Current portion of secured bank loans 496,033 6,469,472 7,562,837 11,171,172

Terms and conditions of outstanding loans were as follows:

2008 2007 ’000 RUR Currency Nominal Year of Face value Carrying Face value Carrying interest rate maturity amount amount Secured bank loan USD LIBOR 2008-2010 672,337 672,337 976,978 976,978 +0.75% Secured bank loan USD LIBOR 2008 - - 4,915,667 4,915,667 +0.55% Secured bank loan EURO EURIBOR 2008 - - 1,137,903 1,137,903 +0.55% Unsecured bank loan USD LIBOR 2008-2009 22,714 22,714 56,935 56,935 +0.65% Unsecured bank loan RUR 7.30% 2008 - - 534,982 534,982 Unsecured bank loan RUR 8.65% 2008 - - 518,938 518,938 Unsecured bank loan USD LIBOR 2008-2009 1,777,439 1,777,439 2,529,761 2,529,761 +0.375% Unsecured bank loan EURO EURIBOR 2008-2009 2,316,384 2,316,384 1,080,059 1,080,059 +0.375% Unsecured loan from RUR 11.33% 2009 1,097,628 1,097,628 - - Carlsberg Breweries A/S Unsecured loans from EURO EURIBOR 2009 1,852,639 1,852,639 - - other companies +0,75% 7,739,141 7,739,141 11,751,223 11,751,223

Bank loans are fully secured by the guarantee of the Company’s parent company, Baltic Beverages Holding AB.

68 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

25. TRADE AND OTHER PAYABLES

2008 2007 Trade and other payables ’000 RUR ’000 RUR Accounts payable - trade 5,645,034 4,795,682 -1,451,516 Share buy back payable Taxes payable 3,326,583 1,180,692 Accrued salaries, wages and benefits 1,359,334 1,093,954 Dividends payable 134,503 214,081 Payables to equity accounted investees 106,718 80,631 Other payables and provisions 529,100 151,401 11,101,272 8,967,957

The Group’s exposure to liquidity risk and market risk related to trade and other payables is disclosed in note 26.

26. FINANCIAL INSTRUMENTS (a) Credit risk Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

Carrying amount 2008 2007 ’000 RUR ’000 RUR Trade and other receivables 5,436,304 3,737,109 Available-for-sale financial assets 9,796 9,796 Held-to-maturity investments - 2,335,890 Cash and cash equivalents 1,691,594 2,708,501 7,137,694 8,791,29 6

The maximum exposure to credit risk for trade receivables at the reporting date by type of customer was:

Carrying amount 2008 2007 ’000 RUR ’000 RUR Wholesale customers 4,387,111 2,898,616 Retail customers 22,749 23,500 4,409,860 2,922,116 Accumulated impairment losses on receivables (111,898) (106,128) 4,297,962 2,815,988

The Group's most significant customer, a domestic wholesaler, accounts for RUR 858,434 thousand of the trade receivables carrying amount as at 31 December 2008 (2007: RUR 75,202 thousand).

CONSOLIDATED FINANCIAL STATEMENTS 2008 69 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

Impairment losses The ageing of trade receivables at the reporting date was: Gross Impairment Gross Impairment 2008 2008 2007 2007 ’000 RUR ’000 RUR ’000 RUR ’000 RUR Current 4,203,372 - 2,694,210 - Past due 0 – 180 days 114,726 20,136 121,778 - Past due more than 180 days 91,762 91,762 106,128 106,128 4,409,860 111,898 2,922,116 106,128

The movement in the allowance for impairment in respect of trade receivables during the year was as follows: 2008 2007 ’000 RUR ’000 RUR Balance 1 January 106,128 123,830 49,453 (4,500) Impairment loss recognised/(reversed) Impairment loss utilised (43,683) (13,202) Balance at the end of the year 111,898 106,128

Based on historic default rates the Group believes that no general impairment allowance is necessary in respect of trade receivables not past due and past due by up to 180 days. 89% of the balance, which includes the amount owed by the Group's most significant customer (see above), relates to customers that have a good track record with the Group. The allowance accounts in respect of trade receivables are used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount considered irrecoverable is written off against the financial asset directly. Of the total impairment loss as at 31 December 2008 of RUR 111,898 thousand, RUR 73,269 thousand relates to claims from the Group’s most significant customer. The remaining impairment losses in the amount of RUR 38,629 thousand as at 31 December 2008 represent collective impairments on the Group’s trade receivables (31 December 2007: RUR 106,128 thousand). At 31 December 2008 and 31 December 2007 there was no allowance for impairment of held-to-maturity investments.

(b) Liquidity risk The following are the contractual maturities of financial liabilities, including estimated interest payments:

31 December 2008 Carrying Contractual 6 months or 6-12 months 1-2 years 2-5 years More than ’000 RUR amount cash flows less 5 years Non-derivative financial liabilities Secured bank loans 672,337 690,334 257,541 253,889 178,904 - - Unsecured bank loans 4,116,537 4,174,388 4,174,388 - - - - Unsecured loan from Carlsberg Breweries A/S 1,097,628 1,194,029 61,683 1,132,346 - - - Unsecured loans from other companies 1,852,639 1,857,370 1,857,370 - - - - Trade and other payables 11,101,272 11,101,272 11,101,272 - - - - 18,840,413 19,017,393 17,452,254 1,386,235 178,904 - -

31 December 2007 Carrying Contractual 6 months or 6-12 months 1-2 years 2-5 years More than ’000 RUR amount cash flows less 5 years Non-derivative financial liabilities Secured bank loans 7,030,548 7,240,792 6,420,832 228,751 439,751 151,458 - Unsecured bank loans 4,720,675 4,799,742 4,760,251 20,015 19,476 - - Trade and other payables 8,967,957 8,967,957 8,967,957 - - - 20,719,180 21,008,491 20,149,040 248,766 459,227 151,458 -

70 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

(c) Currency risk Exposure to currency risk The Group's exposure to foreign currency risk was as follows based on notional amounts:

31 December 2008 31 December 2007 EURO USD EURO USD Current assets Cash and cash equivalents 267,362 429,560 12,145 1,349,256 Held-to-maturity investments - - - 2,279,135 Trade receivables 6,696 2,705 4,420 1,689 Current liabilities Secured bank loans - (496,033) (1,137,903) (5,331,569) Unsecured bank loans (2,316,384) (1,800,153) (1,080,059) (2,567,721) Unsecured loans from other companies (1,852,639) - - Trade payables (676,238) (93,556) (808,210) (1,728,459) Non-current liabilities Secured bank loans - (176,304) - (561,076) Unsecured bank loans - - - (18,975) Gross balance sheet exposure (4,571,203) (2,133,781) (3,009,607) (6,577,720) Net Group exposure from commitments and anticipated transactions (248,355) (2,262) (1,074,403) - Net exposure (4,819,558) (2,136,043) (4,084,010) (6,577,720)

The following exchange rates applied during the year and as at the end of the year:

RUR 1 equals Average rate Reporting date spot rate 2008 2007 2008 2007 USD 0.0402 0.0391 0.0340 0.0407 EURO 0.0275 0.0286 0.0241 0.0278

CONSOLIDATED FINANCIAL STATEMENTS 2008 71 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

Sensitivity analysis A 20% strengthening of the RUR against the EURO at 31 December 2008 would have increased profit and equity by RUR 963,911 thou- sand (2007: RUR 816,802 thousand). A 20% strengthening of the RUR against USD at 31 December 2008 would have increased profit and equity by RUR 427,209 thousand (2007: RUR 1,315,544 thousand). A 20% weakening of the RUR against EURO and USD would have had the equal, but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables, in particular interest rates, remain constant. (d) Interest rate risk Profile At the reporting date the interest rate profile of the Group's interest-bearing financial instruments was:

’000 RUR Carrying amount Fixed rate instruments 2008 2007 Financial assets 137,655 4,371,337 Financial liabilities (7,044,090) (10,717,310) (6,906,435) (6,345,973) Variable rate instruments Financial liabilities (695,051) (1,033,913)

Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased (decreased) profit and loss and equity by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2007.

Profit or loss and equity 31 December 2008 100 bp 100 bp ’000 RUR Increase Decrease Variable rate instruments (6,951) 6,951 Cash flow sensitivity (6,951) 6,951

31 December 2007 ’000 RUR

Variable rate instruments (10,339) 10,339 Cash flow sensitivity (10,339) 10,339

(e) Fair values The basis for determining fair value is disclosed in note 4. The fair value of unquoted equity instruments is discussed in note 16. In other cases management believes that the fair value of the Group’s financial assets and liabilities approximates their carrying amounts.

72 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

27. COMMITMENTS As at 31 December 2008 the Group had the following commitments relating to property, plant and equipment (31 December 2007: RUR 2,730,923 thousand):

2008 Project ’000 RUR Baltika-St. Petersburg plant 408,690 Baltika-Yaroslavl plant 111,756 Baltika-Novosibirsk plant 100,145 Baltika-Samara plant 63,643 Baltika-Tula plant 59,051 Baltika-Pikra plant 41,610 Baltika-Rostov plant 35,546 Baltika-Voronezh plant 26,703 Baltika-Khabarovsk plant 20,685 Baltika-Chelyabinsk plant 11,745 Baltika-Baku plant - Total 879,574

28. CONTINGENCIES Taxation contingencies in the Russian Federation The taxation system in the Russian Federation is relatively new and is characterised by frequent changes in legislation, official pronounce- ments and court decisions, which are often unclear, contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Man- agement believes that it has provided adequately for all tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

29. RELATED PARTY TRANSACTIONS

(a) Control relationships The Company’s parent company is Baltic Beverages Holding AB (refer note 1(b)). The Company’s parent company does not produce financial statements that are available for public use. As at 31 December 2007 Baltic Beverages Holding AB was owned by Pripps Ringnes AB (50%) and Oy Hartwall AB (50%). The ultimate parent company of Pripps Ringnes AB was Carlsberg Breweries A/S. The ultimate parent company of Oy Hartwall AB was Scottish & Newcastle Plc. On 25 January 2008 the Boards of Sunrise Acquisitions Limited (a company jointly owned by Carlsberg Breweries A/S and Heineken N.V.), and Scottish & Newcastle Plc announced that they had reached agreement on the terms of a recommended acquisition of Scottish & Newcastle Plc. On 28 April 2008 the transaction became effective. According to the terms of the acquisition Scottish & Newcastle Plc’s share of Baltic Beverages Holding AB, as well as the French, Greek, Chinese and Vietnamese operations were transferred to Carlsberg Breweries A/S.

(b) Management remuneration Key management personnel received RUR 333,786 thousand as salaries and bonuses during the year ended 31 December 2008 (RUR 355,038 thousand during the year ended 31 December 2007), which is included in personnel costs. Defined contribution pension ex- pense for key management personnel amounted to RUR 7,360 thousand (2007: RUR 6,329 thousand).

CONSOLIDATED FINANCIAL STATEMENTS 2008 73 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

(c) Transactions with other related parties The Group’s other related party transactions are disclosed below. Transactions with Scottish & Newcastle Plc and its operations which were transferred to Heineken N.V. as a result of acquisition of Scottish & Newcastle Plc by Sunrise Acquisitions Limited are disclosed for the period from the beginning of the year to the date of acquisition.

2008 2007 ’000 RUR ’000 RUR Sale of goods: -1,690 Carlsberg Breweries A/S Scottish & Newcastle Plc 2,531 10,960 Fellow subsidiaries 23,074 67,453 Royalties received: Scottish & Newcastle Plc 177 471 Fellow subsidiaries 68,017 38,666 Services provided: Associate 78,372 68,903 172,171 188,143

2008 2007 ’000 RUR ’000 RUR Purchase of inventory: 962,130 688,468 Associate Carlsberg Breweries A/S 2,245 12,599 Scottish & Newcastle Plc 288 4,772 Fellow subsidiaries 17,058 - Services received: Associate -5,603 Carlsberg Breweries A/S 26,045 5,778 Scottish & Newcastle Plc 840 1,143 Fellow subsidiaries 276 - Royalties paid: Carlsberg Breweries A/S 610,331 303,077 Scottish & Newcastle Plc 26,212 55,768 Fellow subsidiaries 18,285 9,449 Finance expenses: Carlsberg Breweries A/S 29,931 - Parent company 10,372 - Fellow subsidiaries 8,510 - Other: Carlsberg Breweries A/S 20,681 - Parent company 64,533 - 1,797,737 1,086,657

Sales to and purchases from related parties are made on terms that prevail in arm’s length transactions. For the year ended 31 December 2008, the Group recognized no impairment of receivables owed by related parties (2007: Nil).

74 BALTIKA BREWERIES OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

Trade and other receivables due from related parties at the end of the year were as follows:

2008 2007 ’000 RUR ’000 RUR Receivables: 49,277 - Carlsberg Breweries A/S Scottish & Newcastle Plc -1,896 Associate 27,195 - Fellow subsidiaries 26,955 8,369 103,427 10,265

Trade and other payables due to related parties at the end of the year were as follows:

2008 2007 ’000 RUR ’000 RUR Trade payables: 23,617 8,039 Carlsberg Breweries A/S Scottish & Newcastle Plc -2,314 Associate 106,718 80,631 Fellow subsidiaries 1,908 - Royalties payable: Carlsberg Breweries A/S 252,061 50,891 Scottish & Newcastle Plc -27,036 Fellow subsidiaries 1,525 3,909 Financial liabilities Carlsberg Breweries A/S 1,097,628 4,440 Scottish & Newcastle Plc -7,509 Fellow subsidiaries 1,852,639 1,945 Other liabilities Carlsberg Breweries A/S 20,681 - Parent company 73,472 - 3,430,249 186,714

All outstanding balances with related parties are to be settled in cash within two months of the balance sheet date, except for financial liabilities to Carlsberg Breweries A/S and fellow subsidiaries which are to be settled as disclosed in note 26 (b). None of the balances are secured. During the year ended 31 December 2008 the Group’s purchases of malt from Soufflet, an associate of the Group, amounted to RUR 962,130 thousand (excluding VAT) or 14.7% of the total value of malt purchases and own production and 58,266 tons or 14% of the total volume of malt purchases and own production. During the year ended 31 December 2007 the Group’s malt purchases from Soufflet amounted to RUR 688,468 thousand (excluding VAT) or 8.9% of the total value of malt purchases and own production and 66,293 tons or 10.3% of the total volume of malt purchases and own production. The liability to Soufflet for malt purchases amounted to RUR 106,718 thousand and RUR 80,631 thousand as at 31 December 2008 and 2007, respectively. During the year ended 31 December 2008 and 2007 the Group provided various services to Soufflet and received various services from Soufflet for insignificant amounts.

CONSOLIDATED FINANCIAL STATEMENTS 2008 75 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2008

30. SUBSIDIARIES

Ownership/voting Ownership/voting Name Nature of business Country of incorporation 2008 2007 OOO Baltika-Moscow Distribution of Baltika beer Russia - 100% OOO Baltika-Ukraine Distribution of Baltika beer Ukraine 100% 100% Baltika S.R.L. Distribution of Baltika beer Moldova 100% 100% Baltika-Almaty LLP Distribution of Baltika beer Kazakhstan 100% 100% OsOO Baltika Distribution of Baltika beer Kirgizia 100% 100% OOO Baltika-Bel Distribution of Baltika beer Belorussia 100% 100% OOO Terminal Podolsk Warehouse Russia 100% 100% OOO Universalopttorg Warehouse Russia 100% 100% Baltika Deutschland GmbH Distribution of Baltika beer Germany 100% 100% Baku Castel LLC Beer Production Azerbaijan 100% - Baku Pivo JSC Beer Production Azerbaijan 91% -

31. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE On 13 February 2009, the Board of Directors recommended dividends of RUR 13,959,903 thousand, and the recommendation will be considered by the Company’s shareholders at the annual shareholders’ meeting. Dividend payments will be made between 1 July and 31 December 2009.

76 BALTIKA BREWERIES INTERESTED PARTY TRANSACTIONS

List of interested party transactions carried out by the Company in 2008

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

1. Baltika Breweries (Customer) and Contract on services 1,770,000,000 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) for compensation including VAT Beverages Holding AB

2. Baltika Breweries (Customer) and Contract on services 98,049,504 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) for compensation including VAT Beverages Holding AB

3. Baltika Breweries (Customer) and Contract on services 195,294,720 Kazakh tenge Shareholder Baltic Baltika-Almaty Ltd (Contractor) for compensation including VAT Beverages Holding AB

4. Baltika Breweries (Customer) and Contract on services 17,456,278.08 Kazakh tenge Shareholder Baltic Baltika-Almaty Ltd (Contractor) for compensation including VAT Beverages Holding AB

5. Baltika Breweries (Customer) and Contract on services 6,907,340 rubles including VAT Shareholder Baltic ОsОО Baltika (Contractor) for compensation Beverages Holding AB

6. Baltika Breweries (Customer) and Contract on services 1,073,783.68 rubles including VAT Shareholder Baltic OsOO Baltika (Contractor) for compensation Beverages Holding AB

7. Baltika Breweries (Customer) and Contract on services 13,179,820 rubles including VAT Shareholder Baltic ICS Baltika Srl (Contractor) for compensation Beverages Holding AB

8. Baltika Breweries (Customer) and Contract on services 1,079,062.86 rubles including VAT Shareholder Baltic ICS Baltika Srl (Contractor) for compensation Beverages Holding AB

9. Baltika Breweries (Customer) and Contract on services 5,571,773 rubles including VAT Shareholder Baltic Baltika-Ukraine Ltd (Contractor) for compensation Beverages Holding AB

10. Baltika Breweries (Contractor) Contract on The amount of compensation is Shareholder Baltic and Baltic Beverages Holding AB Providing Consulting determined separately for each Beverages Holding AB, (Service provider) Services consulting service provided. The Members of the Board amount of total payments under of Directors J. Nicolson, the contract shall not exceed J.B. Rasmussen, €10,600,000 A. Stevenson

11. Baltika Breweries (Company) and Contract on The amount of compensation is Shareholder Baltic Scottish & Newcastle Plc Providing Consulting determined separately for each Beverages Holding AB (Service provider) Services consulting service. The amount of total payments under the contract shall not exceed €10,600,000

12. Baltika Breweries (Company) and Consulting on The amount of compensation is Shareholder Baltic Carlsberg Breweries A/S Providing Consulting determined separately for each Beverages Holding AB, (Service provider) Services consulting service. The amount of Member of the Board total payments under the contract of Directors shall not exceed €10,600,000 J.B. Rasmussen

13. Baltika Breweries (Supplier) and the Contract to Supply 4,028,000 rubles Shareholder Baltic Slavutich Beer and Non-alcoholic Beer Beverages Holding AB Beverages Enterprise OJSC (Buyer)

ANNUAL REPORT 2008 77 INTERESTED PARTY TRANSACTIONS

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

14. Baltika Breweries (Supplier) and Supplemental €1,000,000 Shareholder Baltic Scottish & Newcastle UK Limited agreement to the Beverages Holding AB (Distributor) Agreement on Exclusive Distribution of Baltika Beer in Great Britain №371 dated 07.07.03

15. Baltika Breweries (Recipient) and Contract on targeted 2007 – $205,000; 2008 – 70% of Shareholder Baltic Scottish & Newcastle UK Limited investment financing total marketed marketing expenses Beverages Holding AB (Investor) for the purpose agreed by the parties in an overall of promoting amount of up to $1,200,000 and Kronenbourg Blanc up to 4.5% of net sales revenue on beer Kronenbourg Blanc beer; 2009 70% of the total marketing expenses agreed by the parties for promotion of Kronenbourg Blanc beer in an overall amount of up to $1,800,000 and up to 4.5% of net sales revenue on Kronenbourg Blanc beer; 2010 – 70% of total marketing expenses agreed by the parties for promotion of Kronenbourg Blanc beer in an overall amount of up to $1,000,000 and up to 4.5% of net sales revenue on Kronenbourg Blanc beer

16. Baltika Breweries (Customer) Contract on The amount of compensation is Shareholder Baltic and Scottish & Newcastle Plc Providing Consulting determined separately for each Beverages Holding AB, (Contractor) Services consulting service. The amount of Member of the Board of total payments under the contract Directors J. Nicolson shall not exceed €60,000 (not including supplemental expenses for the sojourn of Customer representatives)

17. Baltika Breweries (Subscriber) and Supplemental The service is paid for each month Member of the Board of Vimpelcom OJSC (Operator) Agreement №2 according to the Operator’s rates; Directors A.V. Izosimov to Contract on the cost of licensed use of software Providing Beeline is included in the rates Communications Services №5 dated 01.08.07

18. Baltika Breweries (Lessor) and ICS Rental contract for 91,980 rubles Shareholder Baltic Baltika Srl (Lessee) transport equipment Beverages Holding AB without crew

19. Baltika Breweries (Customer) Contract on The cost of consulting services is Shareholder Baltic and Carlsberg Breweries A/S Providing Consulting €33,912 plus paid expenses for Beverages Holding AB, (Contractor) Services the sojourn of employees, not to Member of the Board exceed €6,000 of Directors J.B. Rasmussen

20. Baltika Breweries (Customer) and Contract on services $23,600 including VAT Shareholder Baltic Carlsberg Canada Inc (Contractor) for compensation Beverages Holding AB

21. Baltika Breweries (Principal) and Agency contract 815,810 rubles Shareholder Baltic ОsОО Baltika (Аgent) Beverages Holding AB

78 BALTIKA BREWERIES INTERESTED PARTY TRANSACTIONS

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

22. Carlsberg Breweries A/S (Licensor) Supplemental €1,000,000 Shareholder Baltic and Baltika Breweries (Licensee) agreement to the Beverages Holding AB, License Agreement Member of the Board for Use of the Trade of Directors Marks of Tuborg J.B. Rasmussen dated 01.10.2007

23. Oy Sinebrychoff Ab (Licensor) and Supplemental In accordance with the terms Shareholder Baltic Baltika Breweries (Licensee) Agreement to the of the License Contract Beverages Holding AB License Contract dated 01.09.1996

24. Carlsberg Breweries A/S Contract on services €194,455 Shareholder Baltic (Contractor) and Baltika Breweries for compensation Beverages Holding AB, (Customer) Member of the Board of Directors J.B. Rasmussen

25. Baltika-Almaty Ltd (Contactor) and Appendix to Contract 6,352,800 Kazakh tenge Shareholder Baltic Baltika Breweries (Customer) on services for Beverages Holding AB compensation №1-KZ dated 01.01.06

26. Baltika Breweries (Recipient) and Contract on targeted €67,110 Shareholder Baltic Oy Sinebrychoff Ab (Investor) investment financing Beverages Holding AB

27. Baltika Breweries (Recipient) and Contract on targeted €82,890 Shareholder Baltic Oy Sinebrychoff Ab (Investor) investment financing Beverages Holding AB

28. Baltika Breweries (Licensee) and Supplemental In accordance with the terms Shareholder Baltic Scottish & Newcastle International Agreement to Sub- of the Sub-License Agreement Beverages Holding AB Limited (Licensor) License Agreement on Production of Kronenbourg beer and agreement on import dated 01.11.2004

29. Baltika Breweries (Licensee) and Supplemental In accordance with the terms Shareholder Baltic S & NF Limited (Licensor) Agreement to Sub- of the Sub-License Agreement Beverages Holding AB License Contract on production of Foster’s beer dated 24.10.2007

30. Baltika Breweries (Service provider) Contract on The amount of compensation is Shareholder Baltic and Baltic Beverages Holding AB providing services determined separately for each Beverages Holding AB, (the Company) consulting service. The amount of Members of the Board total payments under the contract of Directors J. Nicolson, shall not exceed €100,000 per year J.B. Rasmussen, A. Stevenson

31. Baltika Breweries (Customer) and Appendix to 174,999,900 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) Contract on services Beverages Holding AB for compensation №03/08-BLR dated 30.01.2008

ANNUAL REPORT 2008 79 INTERESTED PARTY TRANSACTIONS

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

32. Baltika Breweries (Licensee) and Supplemental In accordance with the terms Shareholder Baltic Scottish & Newcastle International Agreement to Sub- of the Sub-License Agreement Beverages Holding AB Limited (Licensor) License Agreement on production of Kronenbourg beer and agreement on import dated 01.11.2004

33. Baltika Breweries (Licensor) License agreement License payments in the amount of Shareholder Baltic and Joint Venture Sarbast PLUS on production and 6% of net turnover of the licensed Beverages Holding AB (Licensee) sale of Baltika beer products produced and sold in accordance with the agreement

34. Baltika Breweries (Sub-licensee) Sub-License $5,085,420 Shareholder Baltic and Baltic Beverages Holding AB contract on Beverages Holding AB (Licensee) providing the rights to use Microsoft computer programmes

35. Baltika Breweries (Lessor) and Rental contract 5,694,682.74 rubles Shareholder Baltic OJSC Slavutich Beer and Non- Beverages Holding AB alcoholic Beverages Enterprise (Lessee)

36. Baltika Breweries (Licensee) and Supplemental 1,156,000 rubles Shareholder Baltic Oy Sinebrychoff Ab (Licensor) agreement to Beverages Holding AB License Contract for use of the trade mark Battery dated 08.01.2001

37. Baltika Breweries (Principal) and Agency contract 48,090,525 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Agent) Beverages Holding AB

38. Baltika Breweries (Principal) and Agency contract 1,124,200 rubles Shareholder Baltic ОsОО Baltika (Аgent) Beverages Holding AB

39. Baltika Breweries (Principal) and Agency contract $29,111.20 Shareholder Baltic ICS Baltika Srl (Аgent) Beverages Holding AB

40. Baltika Breweries (Customer) and Appendix №4 to 250,009,200 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) Contract Beverages Holding AB №03/08-BLR dated 30.01.08 on providing services for compensation

41. Baltika Breweries (Buyer) and Supply contract 144,212,712 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Supplier) Beverages Holding AB

42. Baltika Breweries (Supplier) and Contract for supply €500,000 Shareholder Baltic Carlsberg UK Limited (Buyer) and distribution of Beverages Holding AB, beer in Great Britain Member of the Board of Directors J.B. Rasmussen

80 BALTIKA BREWERIES INTERESTED PARTY TRANSACTIONS

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

43. Baltika Breweries (Licensor) and License Agreement €15,000 for each year in force Shareholder Baltic Carlsberg UK Limited (Licensee) on production of of the License Agreement Beverages Holding AB, beer in Great Britain (valid until 31.12.2011) Member of the Board of Directors J.B. Rasmussen

44. Baltika Breweries (Customer) and Appendix №3 10,012,200 Kazakh tenge Shareholder Baltic Baltika-Almaty Ltd (Contractor) to Contract on not including VAT Beverages Holding AB providing services for compensation №398/8-KZ dated 10.01.08

45. Baltika Breweries (Customer) and Supplemental 7,771,610 rubles including VAT Shareholder Baltic ОsОО Baltika (Contractor) Agreement №1 to Beverages Holding AB Contract 06/08-KG dated 30.01.2008

46. Baltika Breweries (Customer) and Supplemental 14,980,000 Kazakh tenge Shareholder Baltic Baltika-Almaty Ltd (Contractor) Agreement №1 to including VAT Beverages Holding AB Contract 398/8-KZ dated 10.01.2008

47. Baltika Breweries (Borrower) and Loan Agreement Amount of the loan – €30,000,000 Shareholder Baltic Carlsberg Breweries A/S (Lender) Beverages Holding AB, Member of the Board of Directors J.B. Rasmussen

48. Baltika Breweries (Licensee) and Agreement on Shareholder Baltic Scottish & Newcastle International replacement of a Beverages Holding AB, Limited (Licensor), Carlsberg party to an obligation Member of the Board Breweries A/S (New party) of Directors J.B. Rasmussen

49. Baltika Breweries (Supplier) and Supply Contract 3,375,000 rubles for the period up Shareholder Baltic JSC Olivaria Brewery (Buyer) to 30.09.08; the maximum price of Beverages Holding AB the transaction for the entire period of validity is 50,000,000 rubles

50. Baltika Breweries (Exporter) and Contract on sale of 2,462,264.58 rubles Shareholder Baltic Baltika-Almaty Ltd (Importer) equipment Beverages Holding AB

51. Carlsberg Breweries A/S (Licensor) Supplemental 1,597,455 rubles or 4.5% of the Shareholder Baltic and Baltika Breweries (Licensee) Agreement to amount of net revenue from sales Beverages Holding AB, License Agreement of licensed products produced and Member of the Board dated 01.10.07 on sold of Directors providing temporary J.B. Rasmussen rights to export licensed products – Tuborg beer – to Kyrgyzstan, Tajikistan and Turkmenistan

52. Baltika Breweries(Customer) Contract on 391,920 rubles not including VAT Shareholder Baltic and Carlsberg Breweries A/S providing services Beverages Holding AB, (Consultant) Member of the Board of Directors J.B. Rasmussen

ANNUAL REPORT 2008 81 INTERESTED PARTY TRANSACTIONS

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

53. Baltika Breweries (Consultant) and Contract on The amount of total payments Shareholder Baltic Baku-Castel LLP (Customer) consulting services under the contract must not exceed Beverages Holding AB 50,000,000 rubles

54. Baltika Breweries (Customer) and Agreement on The amount of total payments Shareholder Baltic Baltika-Ukraine Ltd (Consultant) consulting services under the contract must not exceed Beverages Holding AB 3,000,000 rubles

55. Baltika Breweries (Agent) and Agency contract €77,715.11 Shareholder Baltic Oy Sinebrychoff Ab (Principal) Beverages Holding AB

56. Baltika Breweries (Borrower) and Contract on Amount of credit $43,500,000 Shareholder Baltic Carlsberg Finans A/S (Creditor) providing a long- Beverages Holding AB term credit line

57. Baltika Breweries (Borrower) and Loan contract Amount of loan 1,200,000,000 Shareholder Baltic Carlsberg Breweries A/S (Lender) rubles Beverages Holding AB, Member of the Board of Directors J.B. Rasmussen

58. Baltika Breweries (Lender) and Loan contract Amount of loan 700,000,000 rubles Shareholder Baltic Baku-Castel LLP (Borrower) Beverages Holding AB

59. Baltika Breweries (Lender) and Loan Contract 300,000,000 rubles Shareholder Baltic Baku-Castel LLP (Borrower) Beverages Holding AB

60. Baltika Breweries (Exporter) and Supplemental Up to €300,000 Shareholder Baltic Carlsberg Canada Inc (Importer) Agreement №3 to Beverages Holding AB Contract №648 dated 01.01.08

61. Baltika Breweries (Customer) Contract on 2,564,162.78 rubles Shareholder Baltic and Carlsberg Breweries A/S providing services Beverages Holding AB, (Contractor) for compensation Member of the Board of Directors J.B. Rasmussen

62. Baltika Breweries (Borrower) and Supplemental In accordance with the basic Shareholder Baltic Carlsberg Breweries A/S (Creditor) Agreement №1 to Credit Agreement Beverages Holding AB, the credit agreement Member of the Board dated 13.11.08 of Directors J.B. Rasmussen

63. Baltika Breweries (Borrower) and Contract on The amount of the credit Shareholder Baltic Carlsberg Breweries A/S (Creditor) providing a multi- €35,000,000 Beverages Holding AB, currency revolving Member of the Board credit line of Directors J.B. Rasmussen

64. Baltika Breweries (Customer) Contract on £93,005 not including VAT Shareholder Baltic and Carlsberg Breweries A/S providing services Beverages Holding AB, (Contractor) Member of the Board of Directors J.B. Rasmussen

82 BALTIKA BREWERIES INTERESTED PARTY TRANSACTIONS

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

65. Baltika Breweries (the Company) Agreement on €55,000 Shareholder Baltic and Carlsberg Breweries A/S paying for issuance Beverages Holding AB, (the Guarantor) of a guarantee Member of the Board of Directors J.B. Rasmussen

66. Baltika Breweries (Lessee) and Rental Contract for 120,000 rubles Shareholder Baltic Malt Plant Soufflet St. Petersburg advertising site Beverages Holding AB, CJSC (Lessor) Member of the Board of Directors, President А.О. Аrtemiev

67. Baltika Breweries (Exporter) Supplemental - Shareholder Baltic and Baltika Deutschland GmbH Agreement to Beverages Holding AB (Importer) Contract №656 dated 26.12.2007 (extension of the validity date of the Contract to 31.12.2009)

68. Baltika Breweries (Lessor) and Rental Contract for 193,290 rubles Shareholder Baltic Baltic Beverages Holding AB office premises Beverages Holding AB, (Lessee) Members of the Board of Directors J.B. Rasmussen, B. Sondenskov

69. Baltika Breweries (Exporter) and Supplemental - Shareholder Baltic Carlsberg UK Limited (Importer) Agreement to Beverages Holding AB Contract for Delivery and Distribution №704 dated 27.08.08

70. Baltika Breweries (Recipient) and Contract on €260,100 Shareholder Baltic Oy Sinebrychoff Ab (Investor) providing Beverages Holding AB investments without compensation

71. Baltika Breweries (Customer) Contract on €31,712 not including VAT Shareholder Baltic and Carlsberg Breweries A/S providing consulting Beverages Holding AB, (Contractor) services Member of the Board of Directors J.B. Rasmussen

72. Baltika Breweries (Seller) and Contract on sale of 101,240,000 rubles Shareholder Baltic Baku-Castel LLP (Buyer) equipment Beverages Holding AB

73. Baltika Breweries (Seller) and Contract on sale of 12,630,265.58 rubles Shareholder Baltic Baku-Castel LLP (Buyer) equipment Beverages Holding AB

74. Baltika Breweries (Acquirer) and Contract on 4,848,369.20 rubles Shareholder Baltic Carlsberg Breweries A/S alienation of an Beverages Holding AB, (Owner of rights) exclusive right Member of the Board of Directors J.B. Rasmussen

ANNUAL REPORT 2008 83 INTERESTED PARTY TRANSACTIONS

№ Parties to the contract Type of contract Value of the contract Information about the interested person (persons) in the transaction

75. Baltika Breweries (Customer) and Contract on 31,426,039 rubles including VAT Shareholder Baltic Baltika-Bel Ltd (Contractor) providing services Beverages Holding AB for compensation

76. Baltika Breweries (Customer) and Contract on 50,912,383 rubles including VAT Shareholder Baltic Baltika-Almaty Ltd (Contractor) providing services Beverages Holding AB for compensation

77. Baltika Breweries (Customer) and Contract on 9,584,507.52 rubles including VAT Shareholder Baltic ОsОО Baltika (Contractor) providing services Beverages Holding AB for compensation

78. Baltika Breweries (Customer) and Contract on 17,063,529 rubles including VAT Shareholder Baltic ICS Baltika Srl (Contractor) providing services Beverages Holding AB for compensation

79. Baltika Breweries (Supplier) and Contract to supply Up to 50,000,000 rubles Shareholder Baltic Baku-Castel LLP (Buyer) beer Beverages Holding AB

80. Baltika Breweries (Owner of rights) Contract on In accordance with the License Shareholder Baltic and Carlsberg Breweries (Acquirer) alienation of rights Agreement on use of Tuborg trade Beverages Holding AB, to the domain name marks dated 01.10.2007 Member of the Board tuborggreenfest.com of Directors J.B. Rasmussen

84 BALTIKA BREWERIES INFORMATION FOR SHAREHOLDERS AND INVESTORS

Baltika Breweries JSC

Company Headquarters +7 (812) 325 9 325 6th Verkhny Pereulok, 3 194292, St. Petersburg www.baltika.ru

Shareholders relations +7 (812) 329 91 09 [email protected] [email protected]

Registrar

Natsionalnaya Registratsionnaya +7 (812) 251 81 38 Izmailovsky Prospekt, 4-A, office 314 Kompaniya CJSC +7 (812) 346 74 07 190005, St. Petersburg St. Petersburg Branch Office www.nrcreg.ru

Independent Auditors

ZAO KMPG +7 (812) 313 73 00 69-71 A, Marata Street, St. Petersburg Branch Office Business centre 'Renaissance Plaza' 191119, St. Petersburg [email protected]

A&P Audit CJSC +7 (812) 251 69 23 Rizhsky Prospekt, 26 198103, St. Petersburg [email protected]

Ernst & Young Ltd +7 (812) 703 78 00 Malaya Morskaya Street, 23, letter A St. Petersburg Branch Office 190000, St. Petersburg

Official print medium for disclosure of Newspaper Izvestiya information

ANNUAL REPORT 2008 85 CONTACT INFORMATION

Company Breweries

Baltika-St. Petersburg Brewery +7 (812) 325 9 325 6th Verkhny Pereulok, 3 194292, St. Petersburg Baltika-Vena Brewery +7 (812) 326 21 00 Farforovskaya Street, 1 192171, St. Petersburg Baltika-Voronezh Branch +7 (4732) 61 98 00 9th Yanvarya Street, 109 +7 (4732) 37 89 86 394027, Voronezh Baltika-Novosibirsk Branch +7 (383) 230 14 02 2nd Stantsionnaya Street, 34 630041, Novosibirsk Baltika-Pikra Branch +7 (3912) 59 12 00 60 Let Oktyabrya, 90 660079, Krasnoyarsk Baltika-Rostov Branch +7 (863) 222 27 90 Dovatora Street, 146-A +7 (863) 250 52 78 344090, Rostov-on-Don Baltika-Samara Branch +7 (8462) 76 43 66 Baltiisky Proezd, 1 Kinelsky District, Kinelsky Village 446110, Samara Oblast Baltika-Tula Branch +7 (4872) 39 55 35 Odoevskoye Shosse, 85 300036, Tula Baltika-Khabarovsk Branch +7 (4212) 41 15 51 Voronezhskoye Shosse, 142 680042, Khabarovsk Baltika-Chelyabinsk Branch +7 (351) 239 16 00 Ryleeva Street, 16 +7 (351) 239 16 06 454087, Chelyabinsk Baltika-Yaroslavl Branch +7 (4852) 58 32 03 Pozharskogo Street, 63 150066, Yaroslavl Baltika-Baku Brewery +994 12 442 12 80 Shamakhinskoye Shosse, 2/2 +994 12 442 20 10 Absheronsky District, Hyrdalan AZ0100, Republic of Azerbaijan

Company subsidiaries abroad

Baltika-Bel Ltd +375 17 28 9 54 69 Storozhevskaya Street, 15, office 302 220002, Minsk, Belarus

ICS BALTIKA SRL +3732 223 84 60 Mitropolita G. Benulescu-Bodoni Street, 57/1, office 418 MD 2005, Kishinev, Moldova

ТОО Baltika-Almaty +7272 58 59 40 Dzhandosova Street, 96 050009, Almaty, Republic of Kazakhstan

Baltika-Ukraina Ltd +380 44 494 18 41 Krasnoznamennaya Street, 94/98, office 4 03026, Kiev, Republic of Ukraine

Baltika Ltd +996 312 30 60 82 Shopokov Street, 121/1 +996 312 30 60 83 720075, Bishkek, Kyrgyz Republic

Baltika Deutschland GmbH +49 40 728 13 928 Glockengiesserwall 26, 20095 Hamburg, Germany

Representations in foreign states

Representation in Latvia +371 737 46 22 Brivibas Street,144 Riga, LV1012 Republic of Latvia

Representation in China +86 1065129728 Tsziangomenvai, 19 (Citic Building, Tower A), office 15-B Beijing, 100004 People’s Republic of China

Representation in Uzbekistan +99871 238 30 08 Amira Temura Street, 15, office 308 Yunusabadsky District, Tashkent 100000, Republic of Uzbekistan

86 BALTIKA BREWERIES CONTACT INFORMATION

Appointments for tours of Company breweries Baltika Breweries conducts regular free tours during which visitors can learn about the main events in the Company’s history and about the Company’s activities, as well as acquaint themselves with the technologies of beer production and sample the Company’s products. Group tours are held daily at all of the Company’s breweries in the Russian Federation. Sampling of beer can be included in the tour upon request.

Tours can be ordered in advance by telephone:

Chelyabinsk +7 (3512) 39 16 00 Khabarovsk +7 (4212) 41 15 91 Krasnoyarsk +7 (3912) 59 13 41 Novosibirsk +7 (383) 230 14 11 Rostov +7 (863) 250 51 46 Samara +7 (846) 276 43 33 St. Petersburg +7 (812) 329 91 39 Tula +7 (4872) 32 99 10 Voronezh +7 (4732) 61 98 00 Yaroslavl +7 (4852) 58 32 29

Baltika invites its guests to visit the Museum of the History of Brewing in Siberia located on the grounds of the Baltika-Pikra Brewery in Kras- noyarsk. The museum was created in 2005 to coincide with the 130th anniversary of the Krasnoyarsk Brewery and the 15th anniversary of the company Pikra. The Museum has a unique exhibition on beer brewing. In 2008, the number of visitors to the Company breweries amounted to 60,000 persons.

PARTICIPATION IN ASSOCIATIONS Baltika is a member of the following public organisations: Russian Union of Industrialists and Entrepreneurs (RUIE), a public association of employers; Union of Russian Brewers; St. Petersburg International Business Association for North-Western Russia (SPIBA); RusBrand, non-profit partnership Association of Branded Goods Manufacturers in Russia.

Design, print ARTGROOVE

ANNUAL REPORT 2008 87

ANNUAL REPORT 2008 BALTIKA BREWERIES