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JSC RUSSIAN RAILWAYS' 2 3 JSC RUSSIAN RAILWAYS' ANNUAL REPORT 2006 Chairman’s message 4 Ladies and Gentlemen! ture and transportation management made it possible to achieve optimal growth in transportation costs. In 2006 we entered the third and most critical stage in our An analysis of the results shows that our reform has been reform of rail transport. successful: rapid progress in achieving goals of reform and I can say with satisfaction that in 2006 Company fully industry stability are ensured. Transportation safety is achieved goals and tasks set for the industry by the increasing, and there are ever more opportunities for attract- President and Government of the Russian Federation and ing private investments for the development of rail trans- met target indicators approved by Russian Railways’ portation. The greatly enhanced quality of transportation Board of Directors. services should also be mentioned. In 2006 we began large-scale projects and set complex A mechanism for eliminating losses resulting from passenger strategic tasks that the company is now pursuing successful- transportation by means of state subsidizing is envisioned. ly. The accomplishment of these tasks will bring us closer to Russian Railways, developing in conditions of growing com- our ultimate goal of building a highly efficient and competi- petition on the freight and passenger market, should find tive holding company. new ways of enhancing its efficiency during the period of The results of the third stage of reform have proved the cor- reform. rectness of an evolutionary path of reform aimed at stimu- Another distinctive feature of our reforms is that they are lating the country’s economic growth. A distinctive feature going forward under the sign of the individual and the col- of the Structural Reform of Russian Railways is that it is lective. Maintaining social stability for railway employees is being done without any state expenditure. Moreover, an important success factor of these transformations. Russian Railways is one of Russia’s biggest taxpayers, pay- I want to wish each and every participant of the reform ing over 20% of its earnings to budgets and off-budget process solid results in promoting our company’s develop- funds – upwards of RUR 179 bln. And integrated infrastruc- ment as well as sustained growth in the Russian economy. Chairman of the Board of Directors of JSC Russian Railways Alexander D. Zhukov JSC RUSSIAN RAILWAYS' ANNUAL REPORT 2006 President’s message 5 Dear Shareholders, Partners and Colleagues! The Company has made a transition to project-based prin- ciples of realizing investment programs and has in this way In the reporting year 2006, Russian Railways achieved achieved the goals set by the Government of the Russian excellent results in different business areas. Federation and the Board of Directors of Russian Railways The Structural Reform on the Railways delivers tangible with respect to optimizing the investment process. results. As we are on the final third and probably the most Overall, in 2006, taking leasing into account, the Company critical stage of the Reform, it is of great importance for us invested over 200 billion rubles in the development and the positive assessment of structural reform’s results, given modernization of the production base – almost 20% more by the President and the Government of the Russian in comparison with the previous year – enabling it to Federation. accomplish the critical tasks of developing and renovating The minimization of risks remains a priority principle at infrastructure – above all, in key transit and export-orient- the third stage: balancing and evolutionary approach to ed directions. the reform is sustained. In accordance with the Concept of Corporate Construction, I would like to emphasize that the stability and safety of rail the Company continued to form subsidiaries in 2006. transport have been maintained in the course of reform, and All subsidiaries fully met their goals. They are successfully national transportation costs have been considerably going through the stage of formation and developing their reduced. The rail industry has revealed the best results in market segments . the year 2006 during the last fifteen years. Russian Railways is actively entering international markets Last year the Company achieved a high level of key produc- and making a serious contribution to Russia’s global com- tion and financial/economic indicators. All parameters set petitiveness. Today, the task of developing interregional by the Government for the current year were met in full, and and transcontinental, including Eurasian, rail corridors is many of them were significantly above the planned level. growing in importance, and we still have much to do in that First of all, high traffic volumes have been achieved. Freight direction. handling increased by 2.9%, freight turnover by 4.3% and A number of investment projects of the Program for the passenger turnover by 3%. Development of Express and High-Speed Rail Traffic up Labor productivity grew by 7.5% – among the best results to the year 2020 have gained the support of the Government in the country. Our Company is in fact the only company of the Russian Federation. This is a new step in the develop- among the country’s major companies and industries, ment of passenger service in the Russian Federation. which continuously ensures an economically sound corre- The year 2007 has become a year of working on strategic lation between labor productivity growth and actual labor development of rail transport in Russia up to the year 2030. compensation growth. Arriving at such a strategy and realizing its relevance is one The productivity of rolling stock has improved considerably. of the reform’s results. Net profit and profitability exceed the previous year’s In the final stage of reform, we have set the bar high. I am figures. confident that our combined efforts will lead to success. President of JSC Russian Railways Vladimir I. Yakunin Contents 6 GENERAL INFORMATION ABOUT THE JOINT STOCK COMPANY AND HOLDING STRUCTURE 7 General Information about the Company 8 The Company's Strategy and Mission 9 Corporate Structure 10 Subsidiaries and Associates 11 Share Capital 12 2006 HIGHLIGHTS 13 GOVERNING AND CONTROL BODIES 17 General Shareholders’ Meeting 18 Board of Directors 18 Meetings of the Board of Directors of JSC Russian Railways 20 Management Board 23 INFORMATION ON COMPANY REFORM IN 2006 29 SUMMARY OF COMPANY OPERATIONS OVER THREE YEARS 33 OVERVIEW OF JSC RUSSIAN RAILWAYS’ INTERNATIONAL ACTIVITIES AND THE IMPLEMENTATION OF THE PRINCIPAL INTERNATIONAL PROJECTS 37 KEY OPERATIONAL RESULTS 41 The Company's position within the industry 42 Passenger service 48 Development of JSC Russian Railways infrastructure 50 Acquisition, renewal and update of rolling stock 51 Acquisition and update of traction rolling stock in 2006 52 The Company's innovative development in 2006 53 JSC Russian Railways' policy in transportation safety and environmental protection and key initiatives undertaken in this areas 58 KEY FINANCIAL INDICATORS 59 Distribution of profits for 2005 and 2006, payment of dividends to the shareholder 60 Key financial indicators 62 Improvement of financial planning system 71 Enhancing the efficiency of the planning and budgeting system. Development of a new remuneration system. Cost optimization 73 Main results of investment activities 78 Measures on drawing construction in progress into business turnover in 2006 80 Long-term and short-term financial investments 81 Payment of Taxes and Levies 82 RISK MANAGEMENT 83 SOCIAL POLICY 85 The Staff and Social Development 86 Sponsorship and Charity 88 Work Safety 88 INFORMATION ON THE COMPANY’S LARGE-SCALE TRANSACTIONS AND TRANSACTIONS INVOLVING INTERESTED PARTIES IN THE REPORTING YEAR 89 ATTACHMENTS TO THE JSC RUSSIAN RAILWAYS' ANNUAL REPORT FOR 2006 91 GENERAL INFORMATION ABOUT THE JOINT STOCK COMPANY AND HOLDING STRUCTURE General Information about the Company 8 GENERAL INFORMATION ABOUT THE JOINT STOCK COMPANY AND HOLDING STRUCTURE General JSC Russian Railways engages in Information the following types of activity: about ■ freight transportation services; the Company ■ long-distance passenger transportation services; The Company's full name: ■ suburban passenger transportation services; ■ maintenance and operation of rail Joint Stock Company infrastructure; Russian Railways. Registration certificate of the legal entity ■ provision of locomotive traction services Joint Stock Company Russian Railways (short (for passenger and freight transportation); name JSC Russian Railways) was established Moscow Interdistrict Inspectorate No. 39 of ■ rolling stock repairs; by Decision No. 585 of the Government of the the Russian Ministry for Taxes and Levies has ■ construction of infrastructure facilities; Russian Federation dated September 18, 2003 issued to Joint Stock Company Russian ■ research and development; in accordance with the Civil Code of the Railways (JSC Russian Railways) a certificate ■ social infrastructure maintenance; Russian Federation, Federal Laws Concerning (series 77 No. 007105126) of its state registra- ■ other types of activities Joint Stock Companies, Concerning tion as a legal entity and entered it into the Privatization of Public and Municipal Uniform State Register of Legal Entities. JSC Russian Railways' core activity: Property, and Concerning Particulars of On September 23, 2003, JSC Russian Railways Managing and Administering Railway was assigned State Registration Number