Annual Report 2002

CONTENTS Photo by Dmitry Astakhov Statement by the Chairman of the Supervisory Board of Directors 2 Supervisory Board of Directors 4 ’s Corporate Centre 6 Alfa Group’s Investment Philosophy 8 Alfa Group Financial Highlights 10 Financial Review and Strategic Development of the Group 11 Alfa Group’s Principal Holdings 14 •Financial Services – Alfa Bank; AlfaInsurance Group 16 •Oil & Gas Production – Tyumen Oil Company; SIDANCO Oil Company 24 •Commodities Trading – Alfa-Eco Group 30 •Retail Trade – Trade House Perekriostok 36 •Telecommunications – , Inc.; VimpelCom 40 Serving Our Communities 46 Contact Information 50 Consolidated Financial Statements of the Group and Report of the Auditors 52

STRATEGIC PARTNERSHIP BETWEEN RUSSIAN INVESTORS AND BP Today Alfa Group and Access-Renova and the internation- al oil major ВР have announced the intention to combine their oil and gas operations in and . Strategic partnership

STRATEGIC PARTNERSHIP PUTIN INSPECTS TNK’S consolidated revenue rose 42% percent in 2002 to Acquisition of Sovintel Positions $198.7 million and consolidated net income was $29.8 BETWEEN RUSSIAN RYAZAN OIL REFINERY million. The excellent performance of the company Golden Telecom for Long Term INVESTORS AND BP 2 December 2002 was driven by important acquisitions during the year, Leadership in Russian 11 February 2003 TASS strong operating results in the various divisions, and COMPANY PRESS RELEASE President on Friday inspected the cost control at a corporate level. Telecommunications Industry Today Alfa Group and Access-Renova (jointly, Ryazan Oil Refinery, a subsidiary of Russian oil major 5 September 2002 “AAR”) and the international oil major ВР have Tyumen Oil Company (TNK). The refinery is in the COMPANY PRESS RELEASE announced the intention to combine their oil and gas city of Ryazan, 200 kilometers southeast of . TEMPLETON FUND Golden Telecom Inc. (NASDAQ: GLDN) operations in Russia and Ukraine. The new holding announced today that it has finalized the acquisition company will become the third-largest oil company in ANNOUNCES of the remaining 50% of Sovintel from the Russian Russia by reserves and production. Exploratory Seismic EQUITY PURCHASE national long distance operator, Rostelecom. The The new company will have 9,488 mm boe of proved purchase price is expected to be approximately 4 mil- reserves (according to the 2002 independent reserve Operations Start on Sakhalin-6 IN MOSCOW’S lion shares in Golden Telecom Inc. (equivalent to audit) and 1.21 mm boe of daily production. The new Oil and Gas Field LARGEST FOOD 15% of the outstanding common shares) and cash of company will own five refineries with the 1,000 mbd of 26 August 2002 $56 million. As a result of the acquisition, Golden total installed capacity and operate a retail network COMPANY PRESS RELEASE RETAILER Telecom will be able to fully consolidate the results of with over 2,100 outlets in Russia and Ukraine. The Petrosakh oil company has signed an agreement in Sovintel in its consolidated financial statements. Moscow with 's PGS on carrying out seismic PEREKRIOSTOK Rostelecom will become a shareholder of Golden research on the Sakhalin-6 block. 23 April 2003 Telecom and will be represented on the Golden COMPANY PRESS RELEASE Alfa Bank signs US $50 million The contact envisages the performing of seismic sea Telecom Board of Directors. The Templeton Strategic Emerging Markets Fund, surveys by PGS at the Sakhalin-6 block, on the conti- 364-day Trade-Related Term LDC announced that it has purchased a stake in nental shelf of the eastern coast of Sakhalin Island. Perekriostok, a privately-held company and Russia’s Syndicated Loan The Norwegian company will start operations at the 31 January 2003 largest food retailing chain. The private equity fund, VIMPELCOM, ALFA GROUP beginning of September and carry out seismic surveys COMPANY PRESS RELEASE managed by Templeton Asset Management Ltd on an area of 450 square kilometers. AND CLOSE Alfa Bank, Russia’s largest private bank, today signed a (“Templeton”) of Singapore, bought 7.7% of the com- Petrosakh, controlled by Alfa-Eco, performs oil explo- US $50 million 364-day Trade-Related Term Syndi- pany’s equity in a private placement. The investment $175.44 MILLION ration and production on Sakhalin Island. It also sup- cated Loan, the biggest unsecured financing for a pri- values Perekriostok at US$240 million. plies crude oil to international markets. The company INVESTMENT vate Russian bank successfully closed since the 1998 Said Mark Mobius, Managing Director of Templeton, has a sea terminal and an oil refinery. In January 2001, financial crisis. “This is an excellent investment into one of Russia’s IN VIMPELCOM-REGION Petrosakh received a license for developing oil and gas fastest growing retail companies. Perekriostok has a 12 November 2002 fields in the Sakhalin-6 zone. substantial and expanding market share in the Moscow COMPANY PRESS RELEASE BANKS SAY TNK PLACED region, clear regional development plans, and sound President Putin of Russia and Prime Minister $400 MLN EUROBONDS management. It should be in a position to take advan- Bondevik of Norway present at signing ceremony in STRONG GROWTH, Oslo – Moscow, Oslo and (November 12, AT 11% YIELD THURSDAY tage of Russia’s current strong economic growth. We STRONG PROFITS: GOLDEN are always looking for opportunities like this for our 2002) – Open Joint Stock Company “Vimpel- 1 November 2002 private equity fund, which is becoming an increasingly Communications” (“VimpelCom” or the TASS ENERGY NEWS SERVICE TELECOM REPORTS important part of our business.” “Company”) (NYSE: VIP) today announced the clos- Russia’s Tyumen Oil Company has placed US $400 RESULTS FOR 2002 Perekriostok’s General Director Alexander ing of a $175.44 million investment in its regional sub- million in Eurobonds, the issue’s organizers, Credit Kosiyanenko welcomed the transaction, saying “The sidiary, VimpelCom-Region. VimpelCom, affiliates of 6 March 2003 Suisse First Boston and Salomon Brothers, said in a interest of such an experienced investor as Templeton Alfa Group of Russia and Telenor each invested $58.48 statement. The five-year bonds were placed at an COMPANY PRESS RELEASE

Agey Tomesh Agey is a vote of confidence in the company’s future.” million in VimpelCom-Region. annualized yield of 11%. Golden Telecom, Inc.’s (NASDAQ: “GLDN”) design ALFA GROUP ANNUAL REPORT 2002 ACHIEVACHIEVACHIEV EMENTS EMENTS EMENTS As one of the leading financial-industrial groups in Russia, and as one of the largest investors into emerging markets in the world, Alfa Group, its com- We are leading... panies, and its people are recognised by presti- gious independent organisations and the media as leaders in their industries. Following is a selection of some of this recognition: by example

ALL RUSSIAN COMPETITION BUSINESS WEEK EXPERT MAGAZINE INSTITUTE OF ECONOMIC STRATEGY IZVESTIA NEWSPAPER NATIONAL TRADE ASSOCIATION “GOLDEN WEB-SITE” MAGAZINE (Awards for Best Annual Reports) AND ECONOMIC STRATEGY MAGAZINE Alfa Bank: 1st Place, “Best Bank Web-Sites” (2000) Perekriostok:“Best Trading Chain” (2001); Golden Telecom: 1st place, “Corporate Web-Site” (2002) VimpelCom: 1st Place, “Best Telecommunication Alfa Group: “Internet Presentation” Alfa Bank: 1st Place, “Leading Russian Companies” “Best Chain in Central Region” (2002) Company in the World (2001 - Nominee; 2002 - Winner), (2002) and Best IT Company in Russia” (2002) “Richness of Information” (2002 - Nominee), AlfaInsurance: 3rd Place, “Leading Russian Insurance KOMPANIYA MAGAZINE 3RD ALL RUSSIAN COMPETITION , Chairman “Classic Genre” (2002 - Nominee) Companies” (2002) TNK: “Best Fuel and Energy Company” (2000) OIL & GAS INVESTOR MAGAZINE “RUSSIAN ORGANIZATION of the Supervisory Board of Directors Alfa Bank: “Classic Genre” (2000 - Winner), Alfa Group Consortium: 1st Place, “100 Leading VimpelCom: “Best Telecommunications Company” (2001) TNK: “Prize for Great Achievements in Corporate WITH HIGH SOCIAL EFFICIENCY” of Alfa Group: “The Stars of – “Internet Presentation” (2000 - Winner; 2002 - Companies with the Highest Rating Status AAA Josef Bakaleinik, CFO of TNK: Governance” (2002) OAO “Volga” (managed by Alfa-Eco): “Best Company 25 Leaders” (2003) Nominee), Richness of Information” and Maximum Strategic Level 90.0” (2002) “Best Financial Manager” (2001) in Paper and Pulp Industry” (2002) (2000, 2001 - Winner; 2002 - Nominee), Alex Knaster, CEO of Alfa Bank: “Design and Printing” (2001 - Nominee) “Best Manager – Finance Sector” (2000) ROSBUSINESSCONSULTING ET AL CANNES LIONS Alfa-Eco: “Design and Printing” (2002 - Nominee) INTERNATIONAL ASSOCIATION Simon Kukes, President of TNK: VimpelCom: “Best Service Company” (1999) 3RD ANNUAL NATIONAL AWARD AlfaInsurance: 1st Place, “Best Creative Idea OF BUSINESS COMMUNICATIONS “Best Manager – Oil & Gas Sector” (2000, 2001) Lev Khasis, Chairman of the Board of Directors of IN MEDIA-BUSINESS “MEDIA-MANAGER for a Television Commercial” (2001) Perekriostok: 1st Place, “Golden Net – Foodstuffs” Jo Lunder, President and COO of VimpelCom: Perekriostok: National Award “Person of the Year - OF RUSSIA – 2003” EXPERT MAGAZINE (2002, 2003) “Best Manager – Retail and Distribution” (2000) Manager of Retail Business” (2002) Alexander Gafin, Director of Public Relations and Alfa Bank: “Best Reputation Among Financial TNK: 1st Place, “Golden Net – Petrol Stations” (2002) Stewart Reich, CEO of Golden Telecom Inc : Marketing of Alfa Bank: 1st Place,“PR–Industry” (2003) CAREER MAGAZINE Organisations” (2002) “Best Manager – Telecommunications” (2000) Joseph Bakaleinik, CFO of TNK: “Best CFO in STANDARD & POOR’S Russia” (2000) INTERNATIONAL BEVERAGE Alfa Bank: “Best Outlook of All Rated Banks in AMERICAN SOCIETY – ENERGY INDUSTRY FORUM MONEY MAGAZINE Russia” (1999) FOR COMPETITIVENESS TNK: “World’s Best Oil and Gas Company” (2000) Alfa-Eco: Gold Medal for 1700 Cognac; Bronze Medals “Top Managers in Russia”(2001) (No.19) Mikhail TNK: Philip B. Crosby Medallion for Entrepreneurial EFFIE AWARDS for Smirnov Vodka and Armina 5 Star Brandy (2001) Fridman, Chairman of the Supervisory Board of Directors Leadership (2001) VimpelCom: “Brand of the Year – GSM” of Alfa Group; (No.24) Alexander Fain, General Director STATE COMMITTEE ON STANDARDS (2000, 2002) INSTITUTE OF BUSINESS of Alfa-Eco Group; (No. 32) , Deputy OF THE RUSSIAN FEDERATION TNK: “Brand of the Year – TNK Petrol Stations” AND MANAGEMENT, GRM CONSULT INTERNATIONAL ACADEMY Chairman of Management Board and Executive Director TNK’s Ecologically Friendly High-Octane Gasoline: ASSOCIATION OF MANAGERS AND (2002) (),TECHNOMIC OF ACHIEVEMENT of TNK; (No.34 ) Simon Kukes, President of TNK; “Best Russian Products” (1998) KOMMERSANT PUBLISHING HOUSE CONSULTANTS AND RUSSIA-SWITZERLAND Mikhail Fridman, Chairman of the Supervisory Board (No.93) Jo Lunder, President and COO of VimpelCom “1000 Most Professional Managers in Russia” BUSINESS CLUB of Directors of Alfa Group: (2001-No.1; 2002-No.11) Mikhail Fridman, Chairman EMERGING MARKETS INVESTOR OAO “Volga” (Managed by Alfa-Eco): “Gold Medal “The Golden Plate Award” (2003) ST. PETERSBURG FAIR OF WINE & VODKA of the Supervisory Board of Directors of Alfa Group; MAGAZINE for Irreproachable Business Reputation” (2002) MOSCOW INTERNATIONAL Trade House of P.A. Smirnov’s Descendants (managed (2001-No.9) Pyotr Aven, President of Alfa Bank; Alfa Bank: “Best Domestic Bank” (2001) CURRENCY ASSOCIATION by Alfa-Eco): Gold Medal for Smirnov Vodka No.21, (2001-No.21; 2002-No.5 ) German Khan, INTERNATIONAL EXHIBITION Alfa Bank: Best Currency Dealing – Russia (2002) Liqueur “Sukharnichek” and “Brusnichnaya” Deputy Chairman of Management Board and Executive GLOBAL FINANCE MAGAZINE (ECOPRODEXPO) Alfa-Eco: Gyumri Cognac; Grand Gold Medal for Director of TNK EUROMONEY MAGAZINE Alfa Bank: “Best Russian Domestic Bank” (1999, 2000, Perekriostok: Grand Prix – “Supermarket Cognac “1700 years of Christianity in Armenia” (2002) “Industrial Leaders” (No.1) Financial Sector – Pyotr Alfa Bank: “Highly Recommended 2001, 2002, 2003) of 21st Century” (2003) MOSCOW INTERNATIONAL Aven, President of Alfa Bank; (No. 1) Inter-industrial Bank – Russia” (2000), Alfa Bank: “Best Russian Trade Finance Bank” (2001, ADVERTISING FESTIVAL Groups – Mikhail Fridman, Chairman of the Best Bank in Russia” (2002) 2002, 2003) Alfa Bank: 1st Place, “TV-Advertising” (2002) THE BANKER MAGAZINE Supervisory Board of Directors of Alfa Group (2002) Alfa Bank: “Best M&A Advisor” (2003) 10TH INTERNATIONAL EXHIBITION Alfa Bank: “Bank of the Year – Russia” (2000); “200 Most Professional Financial Officers” (No. 1) Teijo “PRODEXPO-2003” “1000 Best Banks in the World”(2002) Panko, Chief Financial Officer at Alfa Bank (2002) EUROMONEY’S CENTRAL Trade House of P.A. Smirnov’s Descendants (managed NATIONAL ASSOCIATION OF STOCK “200 Most Professional IT Directors” (No. 3) Martin EUROPEAN MAGAZINE INSTITUTE OF CORPORATE by Alfa-Eco): Gold Medal for Smirnov Vodka No. 21; MARKETS PARTICIPANTS (NAUFOR) Pilecky, Director of Information Technology at Alfa Alfa Bank: “Best Bank in Russia” GOVERNANCE Silver Medal for Liqueur “Mozzevelovaya” and STOCK MARKET ELITE AWARDS UNION OF ENTREPRENEURS Bank (2002) (1997, 1998, 1999, 2000, 2001) VimpelCom: Highest Overall Corporate Governance “Klyukvennaya”; Bronze Medal for Liqueur Alfa Bank: “Best Credit Institution” (2001, 2002), Alexander Fain, General Director of Alfa-Eco Group: “200 Most Professional HR Directors” (No.12) Marina Rating for a Russian Company (2000, 2001, 2002) “Limonnichek” and “Perzovaya” “Best Trading Institution” (2002); “Best Entrepreneur of the Decade – Malykhina, HR Director at Alfa Bank (2002) “Best Institution in Bond Market” (2002) Trading Activities” (2001) ALFA GROUP ANNUAL REPORT 2002 LEADERSHIPLEADERSHIP 2 ● CONTINUED STRONG PERFORMANCE ● NEW STRATEGIC INVESTMENTS ● PROFITABLE EXITS FROM INVESTMENTS ● CORPORATE RESPONSIBILITY & TRANSPARENCY 3 Statement by the Chairman of the Supervisory Board of Directors

2002 will be remembered as one of the most Alfa Group Consortium participated fully in lar communications company, for US difficult for global economies in decades. Poor these positive developments, and ended the year $93.2 million; In November 2002 and in business models were exposed, large compa- stronger and in a better position to deliver share- August 2003, we funded a total of US $117 mil- nies filed for bankruptcy and corporate credi- holder value over the long-term. Thanks in large lion – representing the second and final bility was called into question. By contrast, part to oil-inspired earnings, 2002 marked Alfa tranches – to VimpelCom-R for the continued Russia was, to a large extent, insulated from Group’s fourth consecutive year of strong prof- aggressive Russian regional expansion of its global events and enjoyed robust economic itability with net profits of US $626 million in cellular network; In August 2003, we acquired growth, relative political stability, a continuing 2002 and US $3.11 billion in cumulative profits an effective 25.1% stake in MegaFon, the third strategic shift towards the West, controlled over the past four-year period ended 2002. In largest wireless telecommunications service inflation, a stable rouble exchange rate, slow 2002, we grew shareholders’ equity to its highest- company in Russia; In December 2002, TNK but steady legislative reform success, increas- ever level of US $2.52 billion at 31 December acquired, jointly with Sibneft, an approximate ing repatriation of offshore Russian capital, 2002. US $1 invested into the Group at 1 January 75% stake in Slavneft, for US $1.86 billion, the double-digit growth in average real wages 2000 would have grown to US $20.81 (a 1,981% second largest privatisation tender in Russia’s accompanied by healthy increases in con- return) over this three-year period ended 31 history. sumer spending, a shrinking and manageable December 2002. By comparison, US $1 invested foreign debt, sovereign credit rating upgrades in the RTS over the same three-year period At the end of 2002, we took a strategic decision to two notches away from investment grade, would have grown to US $2.05 (a 105% return). to exit two of our investments. We completed the and high world oil prices. Against this sale of United Food Company, selling UFC’s favourable backdrop, Russia’s debt and equity During 2002 and 2003, we made significant sugar and grain businesses to a private strategic markets were among the best performing in the further strategic investment into the telecom- investor for an attractive price. Also in December world for a second year running, with the munications and oil and gas sectors: In the lat- 2002, we sold our entire interest in our interna- benchmark RTS Index returning 39.9% (US ter half of 2002, we acquired an effective 20.1% tional commodities trading business, Crown Dollar terms) in 2002. stake in GSM, Ukraine’s largest cellu- Resources AG, in a management-led buyout. Despite the continuing problems which Russia Perekriostok to Templeton Strategic Emerging During 2002, a worldwide economic slowdown, paid out US $121.1 million (equivalent 4.6%) 14 years – will continue to play a central role in “BP entered Russia five years ago when faces in attracting foreign direct investment, Markets Fund LDC. accompanied by historically low global interest of three-year cumulative net profits as divi- the long-term success of Alfa Group. Alfa Group continues to attract sizeable equity we bought ten percent of SIDANCO. We rates, coupled with improving fundamentals in dends. In addition, we injected fresh capital investment from both foreign strategic and for- had a tough time initially, but after the In addition to new investment, for a number of our companies, helped us to attract longer, into our businesses during 2002-2003 – US On behalf of the Supervisory Board of eign portfolio investors. Effective 1 January present management and ownership years, foreign investors have invested successful- cheaper and more stable financing. Our compa- $104.4 million into Alfa Bank, US $30 million Directors, I wish to thank all of our clients and 2003, Alfa Group and Access/Renova together structure was established early in 2001 ly with us, including Telenor (into VimpelCom nies were among the first Russian companies to into Perekriostok and US $55.1 million into partners for their business and for their contin- with British Petroleum merged virtually all of we have gradually built an important, and VimpelCom-R) and the EBRD, Capital access capital through the Eurobond markets Alfa-Eco. ued confidence in 2002 and to restate our their Russian and Ukrainian oil and gas assets mutually beneficial relationship with the International Inc. and Baring Vostok Capital since the Russian economic crisis of 1998: commitment to them in 2003 and beyond. into TNK-BP, a new holding company, to form owners of AAR [Alfa Group and Access- Partners (into Golden Telecom). Since our ini- VimpelCom in April 2002 issued US $250 mil- There is an underlying strength to Russia which Also, I especially want to express my apprecia- Russia’s third largest (by production and Renova] and learned a great deal about tial investments into US-listed VimpelCom and lion in 3-year Eurobonds; Alfa Bank at the end is more compelling than simply undervalued tion to the thousands of Alfa Group employees reserves) oil company. Under the terms of the doing business in Russia...This is a major Golden Telecom in the second-half of 2001, of 2002 issued US $175 million in 3-year assets and oil. There are a handful of Russian for their continuing loyal and talented contri- deal, TNK-BP is owned 50% by BP, 25% by strategic step into a country with mas- VimpelCom’s share price has risen by 259% and Eurobonds; and TNK, at the end of 2002 float- companies which continue to make the right butions. Alfa Group and the remaining 25% by Golden Telecom’s share price has risen by 217% sive oil and gas reserves and immense ed US $400 million in 5-year Eurobonds, and moves by positioning themselves to fully avail Access/Renova. BP paid cash of US $2.6 billion through 31 August 2003. We have for a long an additional US $300 million offering of the themselves of the changes which are now taking potential for future growth.” – Lord John to Alfa Group and Access/Renova at the close time, considered our ability to invest successful- same Eurobond in Q1 2003. place in the Russian marketplace. We are confi- Mikhail Fridman of the deal and BP will pay three annual tranch- Browne, CEO of BP, on BP’s investment into ly alongside foreign investors as an important dent that the fundamentals by which we operate 15 September 2003 es of US $1.25 billion in BP shares from 2004- Russia, 11 February 2003. competitive advantage – one which enables us As has been the case in prior years, we contin- – fundamentals which embrace corporate 2006. Also, Alfa Group and Access/ Renova to fully develop our companies and one which ue to re-invest large portions of our profits back responsibility and transparency, and the invest- will receive an additional US $1.35 billion from largest single foreign direct investment in gives us a logical and attractive means of exiting into our businesses on the belief that this is the ment philosophy to which we adhere – a BP upon contribution of our approximate 50% Russian history. Also, in April 2003, we sold an our investments. Our history of co-operation best and highest use of our capital. In the three- straight forward and successful investment phi- stake in Slavneft to TNK-BP. The deal is the approximate 7.7% stake in Trade House with BP exemplifies this. year period ended 31 December 2002, we have losophy which has served us well for more than 4 Supervisory Board of Directors 5

he Supervisory Board of During 2002 Alexei Reznikovich and Lev Directors of Alfa Group Khasis joined the Supervisory Board. They add T is the Group’s supreme significant functional expertise, strategic insight consultative and oversight body into management issues and a deep and practi- that sets the general direction for cal understanding of the Russian consumer the strategic development of the markets. Group as a whole as well as of its individual companies. The The scope of activity of the Supervisory Board Supervisory Board comprises of Directors and of our companies’ Boards is 10 members who represent the regulated by the Group Statute and corporate main companies of the Group. regulations, which are periodically reviewed The majority of Supervisory and appended as the need arises. The year 2002 Board members are non-execu- has seen the continued strengthening of the tive directors. Boards of Directors of our Group companies due to improvements in their operating proce- The Supervisory Board meetings dures and appointment of new independent are held once every two weeks, directors. Still, the Supervisory Board reflects and serve as a forum to exchange on the important topics and shares its collective ideas and opinions about the insight and experience with the leadership of current developments in the our Group companies, to push the frontiers of world economic and political Mikhail Fridman German Khan Alexei Kuzmichov their businesses’ success. arenas. The Supervisory Board Chairman of the Executive Director Chairman of the Board also considers key strategic issues for the Group, including Supervisory Board of Alfa of TNK-BP of Directors of Alfa-Eco the review of major financial and Group Consortium Group investment transactions, the critical evaluation of company performance, and the develop- ■ Mr. Fridman is a principal founder ■ Mr. Khan, from August 2003 is an ■ Mr. Kuzmichov is responsible for ment of strong corporate gover- of Alfa Group Consortium. He graduat- Executive Director in the newly formed the strategic co-ordination and devel- Managerial power is highly devolved within the Alfa Group, nance and control mechanisms. ed from the Moscow Institute of Steel TNK-BP. Не is a former Deputy opment of commodity trading activi- and Alloys and two years later togeth- Chairman of the Management Board ties within the Alfa Group through the The Annual Meeting of the er with other investors, he founded and an Executive Director of TNK. Group’s domestic trading arm — Alfa- avoiding the centralisation more common in Russian business Group is held each April at Alfa-Eco, a trading company on which Under Mr. Khan’s management, a Eco. Mr. Kuzmichov is also a member which time the Supervisory he built Alfa Group Consortium. Mr. programme for the transformation of of the Board of Directors of Alfa groups and leaving him as its chairman, time to think about Board reviews the results of the Fridman was born in Lvov, Ukraine in TNK into a vertically integrated oil and Finance Holdings SA, the holding “ yearly performance, approves 1964. gas company was initiated and a company for the Group’s investments performance-related compensa- strategic alliance with British Petro- in banking, oil and gas, and certain strategy and philosophy - I am not a machine for making tion for top executives, ratifies leum was achieved. Mr. Khan is a telecommunications assets. Mr. forward-looking budgets, and graduate of the Moscow Institute of Kuzmichov is a graduate of the decisions... agrees on the overall strategy of Steel and Alloys. He was born in Kiev, Moscow Institute of Steel and Alloys. ” each of the Group’s companies. Ukraine in 1961. Не was born in Kirov, Russia in 1962. “Lunch with the FT: Mikhail Fridman”, Financial Times, 14 March 2003 Pyotr Aven Alexander Fain Lev Khasis Alexei Nigel Robinson Mikhail Gamzin Alexander President of General Director of Chairman of the Board Reznikovich Director for Corporate General Director of Kosiyanenko Alfa Bank Group Alfa-Eco Group of Directors of Trade Development, Russian Technologies Director of Group Chief Executive Officer House Perekriostok Finance and Control - Portfolio Management of Trade House and Control – Alfa Group Alfa Group Perekriostok

■ Mr. Aven is responsible for the Bank’s over- ■ Mr. Fain is the author of more than 70 scien- ■ Mr. Khasis graduated from the Kuibyshev ■ Mr. Reznikovich is responsible for manage- ■ Mr. Robinson is responsible for coordinating financial control and ■ From 1996 until 2001 Mr. Gamzin served as Member of the ■ Mr. Kosiyanenko is the founder of TH Perekriostok and serves all strategy and for relations with business and tific articles, manuals, books, monographs, and Aviation Institute and in 1995 from the Financial ment-audit as well as the application and control reporting of all Alfa Group companies and for corporate governance Board of Directors of Intec Group. In 2001 Intec Group merged as Chief Executive Officer. He is responsible for the overall strat- government leaders. Prior to joining the Bank, patents. Mr. Fain graduated from the Moscow Academy of the Government of the Russian over fulfillment of strategic recommendations for for the Group as a whole and control over the ultimate holding com- its business with Alfa Group’s sugar business, Kubansakhar, and egy and development of the Company. Prior to establishing Mr. Aven was Minister of Foreign Economic Institute of Chemical Engineering. He also holds Federation. In 2001 he graduated from the all companies in the Group. Mr. Reznikovich pany of the Group. Mr. Robinson is a British qualified Chartered created United Food Company to manage the combined busi- Perekriostok, Mr. Kosiyanenko served as Chairman of the Board Relations for the Russian Federation (1991- the title of full member of International Academy University of the Ministry for Internal Affairs, graduated from the Moscow State University, Accountant and a member of the Institute of Chartered Accountants nesses. UFC was sold to a Russian strategic investor at the end of Directors of the commercial bank Moskva-Centre. 1992). Currently, he is Chairman of the Board of Sustainable Development and a PhD in the Faculty of law. Mr. Khasis is a master of technical Economics Faculty and received his MBA from in England and Wales. He graduated from the Accounting Faculty of of 2002. In mid–2003 Mr. Gamzin was appointed General Mr. Kosiyanenko graduated from the Moscow State Institute of of Directors of Golden Telecom. He holds a field of applied mathematics. Mr. Fain was sciences and a master of law. From 2001 through both Georgetown University (USA) and INSEAD Norwich City Institute in the UK. Prior to joining Alfa Group, Mr. Director of Russian Technologies, a new Alfa Group company Steel and Alloys. He was born in Volgograd, Russia in 1964. PhD in Econometrics from Moscow State included in Profile magazine's annual list of the 2003, Mr. Khasis served as Chairman of the () in 1993. From 1993 to 2000 Robinson was a senior manager in the audit and business advisory focusing on investment into promising technologies. Mr. Gamzin University. Mr. Aven was born in Moscow, 50 most influential businessmen in Russia. He Board of Directors of Trade House TsUM. He was Mr. Reznikovich worked in McKinsey & Co. In group at PricewaterhouseCoopers. He was born in Corringham, graduated from the Moscow Commercial Institute. He was born Russia in 1955. was born in Moscow, Russia in 1936. born in Kuibyshev (now Samara), Russia in 1966. 2000 he and his partners established a new com- England in 1967. in Krasnodar, Russia in 1964. pany, EMAX, which develops Internet centers in Russia. He was born in Moscow, Russia in 1968.

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Importantly, the Corporate Centre, in cooperation ent directors for Perekriostok’s and Alfa Finance Corporate Centre at Work with our Group companies, also conducts standalone Holding SA’s Boards of Directors, facilitation of the projects to support their fundamental business process- major acquisition/divestiture transactions (GUM, The specific functions performed by the Corporate es, including strategy reviews, improvement of invest- Crown Resources AG and UFC), assistance in nego- Centre include, for example, the development of a ment, capital and operational budgeting systems, IT tiating and structuring Templeton’s equity invest- Group accounting and reporting policy; review of strategy development and implementation. The ment into Perekriostok, implementation of group- quarterly company IAS accounts; preparation of Alfa Group’s Corporate Centre continues to organise the work of wide standard investment planning regulations, criti- Group consolidated IAS accounts; provision of Alfa Group’s Information Technology Expert Council, cal review of proposed investments, facilitation of assistance to our companies in hiring qualified comprising CIOs of the major companies, to transfer strategy reviews in several of our companies, imple- accounting, finance and other personnel; and the best practices and share expert knowledge. We view IT mentation of Group consolidation software, and improvement of internal controls, including the cre- projects as an important and powerful tool to enhance advice to CEOs, CIOs and division heads of TNK, ation of and oversight over strong Internal Audit strategic and operational business processes within our Alfa Bank, Perekriostok and Vimpelcom on specific Departments in our major companies. companies, to emphasise organisational fit and aspects of IT strategy and IT organisation. Responsibilities also extend to development of an improve service levels of our IT departments and to Corporate Centre deliver significant savings from proper IT budgeting. In the pursuit of its mission, the experienced team of efficient Group-wide ownership structure and the Corporate Centre looks for ways to creatively enhancement of corporate governance within the Finally, the Corporate Centre issues the Group combine the advanced standards for corporate gover- Group by developing transparent decision-making Annual report for the fourth year running, and nance with the realities of the Russian environment. procedures. The Corporate Centre works to increase CTF Holdings Ltd (CTF), founded in 1996, is the ultimate holding company of maintains the Group web site. Alfa Group’s Annual Our on-going efforts aimed at dissemination of bet- effectiveness of the Boards of Directors, including report has been nominated during the past two ter corporate governance practices across the Group managing the recruitment of independent directors. the Alfa Group Consortium and also fulfils the functions of the Group Corporate years, and in 2003 has won the contest of annual companies serve the goal of increasing transparency As Board members, our professionals serve as reports organised by Expert magazine in the and attractiveness of the Group for investors, part- experts on strategy development and corporate gov- “Internet Presentation” category. ners and other counterparties. We are committed to Centre. The Corporate Centre reports directly to the Supervisory Board through ernance and assist in preparing the major decisions meeting all new challenges and tasks put forward by taken by the Boards. Within its investment planning the Supervisory Board and our shareholders in order the Director for Corporate Development, Finance and Control who heads CTF function, the Corporate Centre has developed and to help grow the shareholder value of Alfa Group implemented Group-wide standards for evaluating Commitment to Excellence Consortium and its companies. Holdings and serves as Secretary of the Supervisory Board, and through the and approving strategic and investment decisions and issued regulations and policy manuals current- Major initiatives of the Corporate Centre in 2002 Director of Group Portfolio Management and Control. ly in use at all Group companies. include, for example, the appointment of independ-

The mission of the Corporate Centre is to increase shareholder value by promoting transparency and developing and main- taining strong mechanisms of corporate governance and control within the Group, including:

1 Providing decision-making and implemen- tation support to the Supervisory Board and the representation and protection of shareholder interests;

2 Direct assistance to the companies forming the Group, in the areas of regular strategic and investment planning, IAS-based finan- cial and managerial accounting as well as on ad-hoc projects and key transactions;

3 Establishment of relations with interested third parties and involvement in certain public relations and marketing initiatives for the benefit of our companies and the Group as a whole. PHILO SOPHY

8 Annual report 2002 alfa group 9 alfa group’s inves tment philosophy WE RELY ON OUR INVESTMENT PHILOSOPHY TO GEN ERATE SUPERIOR RETURNS FOR OUR SHAREHOLDERS OVER THE LONG TERM, TO PROMOTE SOUND CORPOR ATE GOVERNANCE AND BUSINESS PRACTICIES, AND TO BENEFIT OUR PARTNERS, COUNTERPARTIES, EMPLOYE ES, THE RUSSIAN CONSUMER AND SOCIETY AT LARGE

Alfa has profited by buying assets, installing new man- agers, then selling to Western companies such as Groupe Danone SA. BP's investment, the biggest-ever in Russia, comes as President Vladimir Putin makes the country a safer place to invest and inter- national oil companies seek to reduce their dependence on the Middle East. We are opportunistic We believe the most We are interested in We typically take a We view co-opera- We do not consider We are guided by “I'm not an industrialist,” investors attractive investments over longer-term view, tion with foreign ourselves experts in the philosophy of Fridman said in a recent inter- opportunities are in which we can in order to realise investors and the managing and investing in only view. “I am an investor who looks at any company from the finan- world emerging exercise control the full potential attraction operating the those companies cial point of view. Some we buy markets of our investments of foreign capital companies that we that are leaders in and sell short-term, and with oth- own ers we have long-term involve- as important to their respective ment.” the development of fields of business our companies Alfa has sold a candy company to Danone, the world's largest cookie maker, a cement produc- uch of our past success has e make investments on the imply stated, we are value-ori- he lack of liquidity of emerging he need to attract foreign irst and foremost we are e require those in which we er to Switzerland's Holcim Ltd., been the result of our inti- basis that we will have either ented investors. In evaluating market assets makes any exit investment is becoming investors, not business man- invest to be one of the top the world's second-biggest mate knowledge and under- majority or joint control, any investment opportunity, M W strategy tenuous. In Russia and increasingly critical. Foreign agers – we leave the day-to-day three in their business field cement maker, and a glass com- S standing of the Russian and CIS mar- through share ownership, board repre- T T F W our investment philosophy is driven by the CIS in particular, the lack of liq- investors provide not only capital management and operating decisions or with a clear potential to become pany to Japan's Asahi Glass Co. kets. We believe there are still substan- sentation, or both. Non-controlled the opportunity to purchase assets uidity is pervasive, which places it out- investment, but also the expertise, cred- of our companies to professional, one of the top three within a reason- BP's investment came four years tial opportunities in these emerging investments are not attractive to us that, due to perceived risk, low liquid- side our direct control. Unless we wish ibility and advancement of reputation competent management with industry able period. Where we see that our after the company pondered markets and that we are well placed to because the lack of control makes it ity, disinterest or a lack of understand- to sell our assets at extremely underval- which is needed to successfully develop experience. Our companies are inde- investments are not meeting this cri- leaving Russia because of a dis- take full advantage of them. difficult to guide the development of ing on the part of market participants, ued prices, we must use this time to and realise the full value of our invest- pendent entities and are given fairly terion, we take active measures to pute with Alfa. these companies and maximise share- are undervalued. develop these assets and guide the ments. We are fully aware that the fail- wide latitude to conduct their affairs. divest and free up our financial and holder value. Joint control is accept- Fridman and his partners “are company to close the value gap. While ure to attract longer-term foreign However, we actively advise and take management resources for more able in cases where the joint venture shrewd investors who always are we do not particularly welcome the investment will result in underdevel- decisions on important strategic mat- effective investments. partner is reliable and brings experi- on the cutting edge of industrial inflexibility of being wed to an invest- oped assets and missed business oppor- ters that have an impact on the share- ence or skills that complement our consolidation,” said Coast ment for the longer term, we lower our tunities. holder value of our companies. We also own, or shares funding obligations and Sullenger, who manages the 65 risks by seeking undervalued invest- continually evaluate management and risks, which due to their size or nature, million euro (US $70 million) ments that provide ample down side measure the financial performance of we wish to share. Lombard Odier Invest East protection and, as far as possible, our investments. Europe Fund. “They manage to interim cash flows. create value in companies they buy...”

Bloomberg, 13 February 2003 We continue to believe that much of our future success will be rooted firmly in this investment philosophy ALFA GROUP ANNUAL REPORT 2002

10 MANAGEMENT DISCU SSION & ANALYSIS 11 Alfa Group Financial Highlights (‘000 USD) Financial Review and 2002(1) 2001(1) 2000(1) 1999(2)

Cash and Cash Equivalents 405,694 619,647 631,981 300,042 Trading Securities andInvestments Available for Sale 545,413 353,805 294,714 161,742 Strategic Development Short-term Borrowings 603,840 709,700 701,202 407,934

Long-term Borrowings 314,170 72,606 85,750 129,731

Shareholders’ Equity 2,517,175 1,901,693 1,015,998 120,950

Sales Revenue 2,900,561 3,684,886 6,273,924 3,268,153 of the Group

Gross Profit 113,590 138,584 256,689 172,523

Gain from Trading Securities, Investments Available for Sale and Other Investments 95,246 94,915 107,318 34,572

Operating Income / (Loss) (102,525) 47,821 66,476 43,998 the next largest amount to Group net profit, Analysis of the Group’s Analysis of the Group’s Financial Net Profit 625,765 870,095 1,158,288 457,639 followed by the food processing segment, large- Financial Results Results for 2002 By Industry ly owing to the gain on disposal of United Food Source: Annual audited IFRS/IAS financial statements. Company. The telecommunications segment (1) Expressed in terms of the purchasing power of the Russian Rouble at 31 December 2002; (2) As stated in the 2000 IAS financial statements (corresponding figures). for 2002 Segment (Golden Telecom Inc. and VimpelCom), one of the fastest growing segments of the Group, con- 2002 was an outstanding year for Alfa Group, Five of the Group’s seven different business tributed, in US dollar terms, three times more Alfa Bank President Pyotr Aven says marking the third most profitable year in our segments contributed positively to the 2002 profit than in the previous year. Both Golden, Russian economic growth is “sus- 14-year history. The Group ended the year Group net profit of US $626 million (see table through an aggressive acquisitions strategy, and tainable and underlying indicators stronger with resources and a financial flexi- on page 12). As has been the case for the past VimpelCom, despite the continued extensive are encouraging for the future.” bility which permits us to be even more oppor- three years, the largest portion of the Group’s build-out of its regional cellular network, con- tunistic in aggressively pursing attractive net profit was derived from the Group’s invest- tinued to achieve increasingly strong financial Speaking before the 6th Annual investment opportunities. Importantly, in ment in oil and gas assets, by virtue of our results in 2002. Retail trade (Trade House Russian Economic Forum in , 2002 and throughout 2003, we made signifi- investment in TNK and SIDANCO. Last year Perekriostok), contributed a relatively modest Peter Aven reviewed economic develop- cant progress in helping our companies to in these pages, we acknowledged our large amount to Group net profit in 2002, as it con- ments in Russian with a positive tone. manage down excess costs by focusing on for- investment exposure to oil and gas. We contin- tinued to fulfil its ambitious expansion plans. ward-looking budgets and key-performance ue to carry this exposure and it is an exposure Most encouraging, according to the for- indicators. Net profit for 2002 was US $626 with which we continue to feel comfortable The two segments posting negative results in 2002 mer Minister of Foreign Economic million as compared with US $870 million in because of: 1) Our belief in the favourable risk- were commodities trading in Russia, CIS and Relations, is the fact that much of 2001. At 31 December 2002, shareholders’ to-reward ratio of Russian oil and gas assets (a Southeast Asia (Alfa-Eco Group) and the seg- Russia’s GDP growth is now being driv- equity rose to an unprecedented high of belief which was validated in 2003 with the ment international commodities trading (Crown en by growth in the service sector — a US $2.52 billion, a year-on-year increase of merging of our Russian and Ukrainian oil assets Resources AG). The loss of US $29.4 million with BP’s Russian and Ukrainian oil assets – from commodities traiding in Russia, CIS and key sign of economic health and matu- 32.4%. Return on shareholders’ equity for 2002 was 28.3%, while return on assets was see page 13); 2) The diversification efforts Southeast Asia segment includes compensation rity. “An economy in which the services 9.8%. which have been undertaken by the Group into expense of US $30.4 million related to the sale of are a key driver of GDP growth is an Russian/CIS telecommunications assets; and shares of Alfa-Eco Group to a related party. The economy which has a bright future.” We continued to fortify our balance sheet with a 3) The continued and growing strategic impor- losses at Crown were the result of unfavourable Additional positive news cited by Aven year-on year reduction in relative debt levels. tance of other industry segments of the Group. market conditions including price volatility, and is the fact that capital flight is steadily The ratio of debt to shareholders’ equity fell to significant investment and overhead costs relating 0.36 at the end of 2002 from 0.41 at the end of After the oil and gas segment, our financial to the expansion of the Company’s trading activ- decreasing “as more and more Russian 2001, and the ratio of debt to assets fell to 0.13 services segment (comprising both Alfa Bank ities. We exited from Swiss-based Crown firms invest in a Russian future.” at the end of 2002 from 0.14 at the end of 2001. Group and AlfaInsurance Group) contributed Resources AG during 2002 (see page 13). Russian Economic Forum, London, 3 April 2003 lion. Kyivstar, Ukraine’s largest cellular billion to Alfa Group and Access/Renova at the petitors, and in December 2002, together with telecommunications company by subscribers close of the deal and BP is committed to paying our minority partner, completed the sale of the also has the highest profitability growth among three subsequent annual tranches equivalent of entire stake in UFC, by selling separately, UFC’s all of Ukraine’s mobile telephone operators. US $1.25 billion in BP shares from 2004-2006. sugar and the grain businesses to a private strate- We believe that the Ukraine market offers In addition BP will pay an additional US $1.35 gic investor for US $80 million. The Group strong growth opportunities as it has one of the billion in cash upon contribution of Alfa realised a gain of US $39.5 million on this sale. lowest mobile penetration rates and fastest sub- Group’s and Access/Renova’s approximate scriber growth rates in Eastern Europe. In 50% interest in Slavneft (expected closing at In August 2002, Alfa-Eco Group sold its control- August 2003, Alfa-Eco purchased an effective the end of 2003). The deal is by far the single ling stake of 42.2% in Tagmet, one of Russia’s 25.1% interest in MegaFon, the third largest largest foreign direct investment in Russian his- largest metal pipe producers, to a strategic wireless telecommunication service company tory and it creates the 3rd largest (by produc- investor for US $47 million, realizing a gain on in Russia. tion and reserves) oil and gas company in the transaction of US $20 million. Russia. The purchase price of the deal implies Our investments in Russian fixed-line and financial valuation multiples which are in line In December 2002, we exited completely from internet provider Golden Telecom, cellular with or are at a premium to other top Russian our international commodities trading business, communications service company VimpelCom, oil majors. We are delighted with the strength- Crown Resources AG, in a management led buy- VimpelCom-R and MegaFon, and our recent ening of our co-operation with BP in Russia. out. After undertaking a series of specific meas- investment into Kyivstar make us one of the TNK-BP is a powerful, well-financed, and ures in mid-2002 in order to restore profitability, largest private investors into the Russian/CIS well-managed new competitor in the Russian including the placement of a new senior manage- telecommunications markets. marketplace – a competitor which we believe ment team and the reorganisation of trading will alter the competitive landscape. activities to focus on core activities and overhead In November 2002, we also made further invest- infrastructure costs, we took a strategic decision ment into the retail / real estate sector by pur- In April 2003, we concluded a key deal with that our capital and our efforts were better chasing approximately 20% of GDR-listed portfolio investor, Templeton Strategic deployed elsewhere. GUM, for US $31.2 million, on our belief that Emerging Markets Fund LDC which purchased it was appreciably undervalued. GUM is the a 7.7% stake in Trade House Perekriostok. largest department store chain in Russia, with a The implied post-money equity value for Trade Looking Ahead network of stores and real estate sites through- House Perekristok was more than three times out Moscow and a number of affiliates in the combined amount of our aggregated invest- There are four main factors, which are responsi- Russia’s regions. ment. ble for our position on the marketplace today, and we are certain that these same factors will contin- In mid–2003 we formed a new Group compa- In addition to equity financing, our companies ue to play an influential role in our continued ny, Russian Technologies with an initial were also successful in tapping the international success: planned “seed money” investment of US $20 debt markets during 2002, attracting longer, • We are unyielding in our commitment to hiring million. This company will focus on the identi- cheaper and more stable financing. Our compa- the best available professional talent; fication and development of promising tech- nies were among the first Russian companies to • We steadfastly adhere to our investment philos- nologies. access capital through the Eurobond markets ophy (pages 8-9); since the Russian economic crisis of 1998 (see • We believe in making top management in our table below). The Alfa Bank and VimpelCom companies true owners - as such, they face the Co-operation Eurobond offerings were more than 2 times and 3 downside as well as the upside of their decisions; times oversubscribed, respectively. TNK’s • We have repeatedly demonstrated, through with Foreign Investors Eurobond offering was also well received our actions, our strong commitment to the 12 enabling TNK to offer an additional US $300 highest levels of transparency and governance 13 We view the attraction of foreign capital and million issue in Q1 2003. principles. From left to right: Robert Dudley of BP, Victor Vekselberg of and Mikhail Fridman of Alfa Group expertise as essential to the development of our at a press conference announcing the merger between BP’s, /Renova Group’s and Alfa Group’s oil assets in Russia and Ukraine. businesses. As investors, such co-operation forms an important part of our investment phi- Company: Date of Amount of Issue: Tenor of Issue: Priced to Yield losophy as it provides us with a logical and Eurobond Issue: at Time of Issue: attractive means of exiting our investments. VimpelCom-R for the continued aggressive for the purchase of 50% of shares of Sovintel, a Foreign investors have invested successfully Continued Development Russian regional expansion of its cellular net- leading Russian telecommunications company, alongside of us in the telecommunications sec- VimpelCom April 2002 US $250 million 3-year 10.45% of Our Core Businesses work; In the first half of 2002 we made a cap- from Rostelecom, thereby raising Golden tor – with Telenor into VimpelCom and Alfa Bank November 2002 US $175 million 3-year 10.95% ital contribution of US $12.2 million and an Telecom’s ownership interest to 100%. VimpelCom-R and with the EBRD, Capital For the past several years we have taken the additional US $42.9 million in April 2003 into International Inc. and Baring Vostok Capital TNK November 2002 US $400 million 5-year 11.00% Alfa-Eco in order to partially fund certain view that re-investment of a very significant Partners into Golden Telecom. Since our initial TNK February 2003 US $300 million* 5-year 9.46% portion of the Group’s earnings is the highest investment programs. Disciplined Investment investments into NYSE-listed VimpelCom in and best use of our capital. In the three-year May 2001 and into NASDAQ-listed Golden * Follow-on from the November 2002 offering. period ended 31 December 2002, virtually all Over the past two years, Golden Telecom has Into New Businesses Telecom in March 2001, the share prices of profits have been re-invested into the Group’s been busy pursuing a shareholder value enhanc- these companies have risen by 259% and 217% companies. In fact only US $121.1 million or ing strategy by optimising its ownership in key To arrive at our investment decisions, we make respectively as of 31 August 2003. We are pleased Increasing legislative reform success, the 4.6% of three-year cumulative net profits have operating subsidiaries for the purpose of consol- use of investment appraisal procedures that with this performance, especially considering Divestiture of Group Assets return of offshore Russian capital, the spread been paid as dividends. idating its control. In this regard, Golden have been standardised across the Group’s that the global telecommunications industry has of investment outside of the oil and gas sector, Telecom finalised a key deal in September 2002 major companies and that utilise modern finan- been in an extended downturn over the past two From time to time, we take the decision to exit the beginning of consumer credit, and the con- During 2002-2003 we, together with our cial modelling and risk analysis techniques, year period. certain of our investments. As investors, divesti- tinued development of Russia’s capital markets minorities, also injected fresh capital into our Percentage Breakdown of Alfa Group’s Net Profit/(Loss) which help identify sources of value creation. In ture allows us to focus our resources and manage- means that Russia will continue its integration businesses including: In March 2002, we By Industry Segment 2002 and 2003, we continued to make strategic During 2002 and 2003, we continued to attract ment attention on investments of strategic rele- into the world economy. We believe that only made an equity contribution of US $56.4 mil- investment into the oil and gas and the telecom- important equity investment from foreign portfo- vance to the Group, and importantly, realise those Russian companies that anticipate and lion to Alfa Bank Group and a further US $48 2002 2001 munications sectors, as well as investment into lio and foreign strategic investors. In April 2002, profits from our efforts. We make these decisions, embrace the coming changes and work effec- million in April 2003 in order to strengthen its retail and technology. we sold to British Petroleum a 15% stake in SID- typically, for the following reasons: (1) We no tively with foreign investors will be fully balance sheet for expected continued growth Oil & Gas Production 91.1% 79.6% ANCO for US $375 million, which at the time longer view the investment as strategic to the rewarded. in key lines of business including lending and Financial Services 12.2% 15.2% In December 2002, TNK acquired, jointly brought BP’s total stake to 25% + 1 share. Group; (2) We have identified higher-return the development of its branch network; with Sibneft, an approximate 75% stake in Effective 1 January 2003, we greatly expanded opportunities in other industry segments; (3) We We are confident that we are set to benefit by Food Processing 5.6% (0.1%) Throughout 2002 and in early 2003, an aggre- Slavneft, for US $1.86 billion, the second our co-operation with BP by merging virtually all are able to exit (or partially exit) our investment actively positioning ourselves to plug into the gate equity contribution of US $30 million Telecommunications 3.7% 0.7% largest privatisation tender in Russia’s history. of our Russian and Ukrainian oil interests (TNK under terms, which we consider to be attractive. coming Russian consumption boom through into Perekriostok in order to fund its aggres- Retail Trade 1.0% 2.7% The purchase of Slavneft was strategically International Ltd, SIDANCO, Rusia Petroleum, continued investments in banking, retail and sive supermarket expansion program, includ- important as it raised, immediately, our joint- Rospan and our Sakhalin IV and V exploration International Commodities Trading (8.9%) (3.6%) In April 2001, we merged our sugar business, telecommunications, and by having anticipated ing the launch of the Perekriostok’s first minority stake to a joint-controlling stake of licenses) with almost all of BP’s Russian and Kubansakhar, with Intec Group’s sugar and grain well in advance, the consolidation of Russian oil Commodities Trading in Russia, hypermarket in Moscow’s suburbs and the (4.7%) 5.5% 99%. Also, Slavneft’s oil assets complement Ukrainian oil interests (SIDANCO, Rusia business, and created UFC which gave the com- CIS and Southeast Asia and gas assets with the increasing participation by establishment of Perekriostok’s first super- well, TNK’s and Sibneft’s oil deposits and Petroleum, and its retail network) into TNK-BP, bined UFC considerable synergies and competi- major strategic foreign investors. market in St. Petersburg; In November 2002, refining facilities. a new holding company. Under the terms of the tive advantages. Shortly after the completion of we funded US $58.5 million (the second of Total 100.0% 100.0% deal TNK-BP is owned 50% by BP, 25% by Alfa this merger, Russian agribusiness began to quick- three tranches) and in August 2003, an addi- In the latter half of 2002, we acquired an effec- Group, and the remaining 25% by ly consolidate. We received multiple attractive tional US $58.5 million (the final tranche) to Source: Derived from annual audited IFRS/IAS financial statements tive 20.1% stake in Kyivstar for US $93.2 mil- Access/Renova. Also, BP paid cash of US $2.6 offers for UFC from strategic investors and com- ALFA GROUP ANNUAL REPORT 2002

14 ■ PROGRESSIVE THINKING ■ FORESIGHT ■ DYNAMISM ■ TRANSPARENCY ■ SAVVY 15 Alfa Group Consortium Founded in 1989, Alfa Group Consortium is one of Russia’s largest privately owned financial-industrial conglomerates with interests in oil, commodities trading, commercial and investment banking, ins urance, retail trade and telecommunications. The Group typically focuses on value-oriented, longer-term opportunities, primarily in R ussia and the CIS, but also invests in other markets which form part of the Group’s strategic business objectives. ALFA GROUP ’S MAIN HOLDINGS ■ FINANCIAL SERVICES Alfa Bank Group ■ Largest private bank in Russia. Wide range of financial services, including OIL & GAS PRODUCTION commercial and investment banking, trade finance, and asset management. ■ COMMODITIES TRADING AlfaInsurance Group ■ RETAIL TRADE Leading issuer of non-obligatory insurance in Russia. ■ TELECOMMUNICATIONS Tyumen Oil Company 4th largest (by production), 3rd largest (by reserves), vertically integrated oil and gas company in Russia.

SIDANCO Oil Company Top-ten (by production), 5th largest (by reserves) vertically integrated oil and gas company in Russia.

Alfa-Eco Group Commodities trading and distribution in Russia, CIS and Southeast Asia. Strategic invest- ment into telecommunications. Large-scale investment into industrial assets.

Trade House Perekriostok Leading chain of supermarkets and one hypermarket in Moscow and other population centres in Russia.

Golden Telecom, Inc. Leading facilities-based provider of integrated telecommunications and Internet services in major population centres in Russia and CIS.

VimpelCom Leading wireless telecommunications service company in Russia.

– From 1 January 2003, TNK and SIDANCO along with British Petroleum’s Russian and Ukrainian oil assets are united under a single holding company, TNK-BP. TNK-BP is the 3rd largest (by oil production and reserves) oil and gas company in Russia. ALFA GROUP ANNUAL REPORT INANCIAL ERVICES 2002 INANCIAL ERVICES 17 F16FFINANCIAL SSSERVICES Commercial Banking Alfa Bank Also, twelve new offices were established Founded in 1990, Alfa Bank has developed rapidly to become Russia’s largest privately owned bank. It provides a full range As a financial supermarket with a strong capital base and a Retail Business in Moscow and other Russian regions. of banking products and services in commercial and investment banking, asset management and leasing. Spread over nine Alfa Bank pays a great deal of attention to substantial range of commercial banking services, Alfa Bank Currently, Alfa Bank’s branch network time zones, the Bank has the second largest branch network in Russia and the CIS and fully licensed banking subsidiaries in the servicing of customers and providing maintains relations with a large number of enterprises stretches from Sakhalin in the east to them with a full range of banking services. Kaliningrad in the west. Ukraine, and the as well as brokerage operations in the and the . The balance on individual rouble and for- engaging in a variety of economic activities and offers prod- www.alfabank.com eign currency accounts rose by 62% during ucts which are tailored to individual client needs. Equipped 2002 to US $788 million placing Alfa Bank International Network with the latest technology, the Bank offers an ever-growing second among Russian banks in retail The Bank also has subsidiary banks in deposits in Russia. Also, by the end of array of financial and banking services. Kazakhstan and Ukraine as well as in the 2002, Alfa Bank had issued 350,000 plastic Netherlands, the latter being the only cards, making it one of the top four 100% privately owned Russian commer- Russian plastic card issuers on the market. transparent, and enjoyable. Alfa Bank range of products and functionalities cial bank ( Trade Bank or Express has a simple and easily under- available to customers. A regional expan- “ATB”) with a comprehensive banking Financial Highlights In April 2003, Alfa Bank officially standable multi-channel product offer- sion strategy for Alfa Bank Express is also license in the European Union. Alfa Bank launched its innovative retail business ing, 24-hour service, a fully operational planned for the nearest future. History operates brokerages in London and New model, operating under the “Alfa Bank call centre, and a field sales force, which York to service the international client 2002 was the twelfth year of Alfa Bank’s Express” brand name, with eleven is supported by effective business n 2002, Alfa Bank’s net profits increased to US $105 million, a 22% increase on 2001, while total assets grew by 51% branches in downtown Moscow, and processes, an advanced IT-platform, and base of the Bank’s securities divisions. successful operation in the Russian and Regional Network during 2002, reaching US $4.12 billion at year-end 2002. This increase in total assets came primarily from the Bank’s plans for a further nine to fifteen branch- a strong branding campaign. There are Alfa Securities in London was founded in international financial markets. Although expanding customer loan portfolio, which rose by 69% to US $2.4 billion. This increase would not have been possi- es by the end of 2003. The new branch- plans to convert existing Alfa Bank In 2002 a number of Alfa Bank branches June 2000 and is licensed by UK’s 12 years is not a long period when judged es aim to bring the retail business closer branches into a new format, introduce an were set-up across Russia including Financial Services Authority (“FSA”). Alfa Ible without a corresponding increase in the Bank’s deposit base, which rose by 39% to US $2.62 billion (including bills of against the history of some international to the customer by making it accessible, on-line banking facility, and increase the Murmansk, Ulianovsk, and Kemerovo. Securities was the first Russian company banks, it is nevertheless a noteworthy exchange) by year-end 2002. The Bank also registered a healthy increase in its net interest margin, increasing it by 71% achievement in post-Soviet Russia. over 2001 to US $190 million in 2002.

During 2002 and 2003, Alfa Bank contin- Net Operational Income by Segment Net Profit / Loss (‘ooo USD) Alfa Bank’s Presence in Russia and Other Countries ued to receive accolades from the inter- national financial media. In 2002, Alfa Bank was recognised by Euromoney as “Best Bank in Russia”. In early 2003, 5% Global Finance, an influential US business 8% journal, named Alfa Bank “Best Bank in Russia” for the fifth consecutive year, “Best Trade Finance Bank in Russia” for 16% the third consecutive year and “Best M&A 48% Adviser”.

Alfa Bank’s long-term current ratings are Fitch (B, with positive outlook), Moody’s (B1, with stable outlook) and Standard & 23% Poor’s (B, with stable outlook). In 2002 and 2003 Alfa Bank’s ratings were affirmed by all three international rating Corporate Finance agencies. FX, MM

Fixed Income Alfa Bank became the first private Russian bank to sign the official Memorandum on Investments Available For Sale Commercial Bank co-operation with the Overseas Private Investment Corporation of the US (OPIC) during the visit by Alfa Bank’s management team to the United States in June 2002. Source: Company data Source: Annual audited IFRS/IAS standalone financial statements to obtain a FSA license after the 1998 deal size was increased from an initially spread the risk of its loan portfolio across volume of Alfa Bank’s operations on the Russian financial crisis. Alfa Bank also has planned amount of US $150 million and different sectors of the economy. Moscow Interbank Currency Exchange NASD registered Alfa Capital Markets was still more than two times oversub- Specifically, the Bank significantly (“MICEX”). Today, Alfa Bank has between (USA) Inc in New York to facilitate bro- scribed. increased lending to manufacturing, con- 9% and 11% share of the RR/USD market. kerage and dealer operations in the US. struction, trade and commerce enterprises Total daily turnover in RR/US dollar trans- In January 2003, Alfa Bank obtained a two- beginning in 2001 and continuing actions grew by more than 30% during year US $50 million unsecured syndicated through 2002. Despite the large increase 2002 – from US $150 million in Financial Institutions loan from a consortium of leading interna- in the Bank’s lending base, the credit December 2001 to US $200 million in In cooperation with its foreign partners, tional banks arranged by ING and ABN process at Alfa Bank continues to be based December 2002. Alfa Bank provides a refined and diversi- AMRO. This was the largest unsecured on a strict lending and risk management fied range of services in the areas of trade facility received by a private Russian finan- culture, which is exemplified by the out- Throughout 2002 Alfa Bank consolidated and project finance, clearing, foreign cial institution in the international loan standing quality of the loan portfolio. its position as one of the key market mak- exchange and banknote services. During market since Russia’s 1998 financial crisis. ers on the interbank markets. This 2002, Alfa Bank expanded its already process was facilitated by the Bank’s flex- extensive relations with major banks in Currency and Interbank ible and forward looking approach to Europe, , Asia, Africa and Lending dealing with customer requirements, the . This activity was in part In 2002, the extension of loans, bank guar- Markets creation of new products and the use of facilitated by Alfa Bank’s leading position antees and other credit related products For several years, Alfa Bank has enjoyed a different forms of collateral such as secu- among Russian non-government banks in were considerably intensified and en- leading position on the domestic and rities, deposits and other liquid instru- providing global clearing services. larged due to a broader client base, and international foreign exchange markets, ments. Alfa Bank’s annual turnover in the the use of loan facilities by newly opened including the markets of the CIS. 2002 interbank market grew to approximately In November 2002, Alfa Bank launched branches. As such, in 2002 income derived saw the further steady growth of the 15 billion roubles, which represents about and priced a three-year, US $175 million from lending activity made the largest Bank’s revenues from currency opera- 10-15% share of the total market volume. Eurobond, the first Russian Eurobond overall contribution to the Bank’s aggre- tions in the Russian market caused by a Total daily turnover in US Dollar inter- issued by a privately owned financial gate income. An expanding and diversi- sustainable increase in the volume of bank transactions grew to US $50-150 institution since the crisis of 1998. The fied client base has enabled the Bank to client operations, and by an increase in million. 18 19 Investment Banking In 2002, Alfa Bank further developed its corporate finance. A summary of some of Equity Markets and capital markets business and was the only Asset Management the more significant transactions which Trading financial institution to act as co-lead man- Alfa Bank, through its subsidiary Alfa the Bank’s Corporate Finance team were ager in the primary placements of both Capital, is a trusted leader in the Russian involved in 2002 and early 2003: Wimm-Bill-Dann on the NYSE and According to a survey conducted by the financial markets in asset management • Acquisition of a blocking stake in South- RosBusinessConsulting on the local market. Federal Securities Commission in 2002, services to a wide range of investors, Ural Cellular Telephone Company Ltd. Alfa Bank was the leading bank in terms including private individuals, pension (YUST) by Svyazinvest; of volumes of equity transactions on the Fixed Income Trading and funds, insurance companies and corporate • Acquisition of a 50% stake in Sovintel by MICEX. At the same time, Alfa Bank’s treasury departments. With over 1 million Golden Telecom, Inc.; position also strengthened on both the Capital Markets unit holders, Alfa Capital manages the most • US $175 million Eurobond issue for Alfa RTS Stock Exchange and ADR markets. widely held mutual fund in Russia. In 2002 Bank; Overall, the Bank ranks among the top Alfa Bank is the leader in many segments the Fund’s per unit rouble price increased • Sale of Solikamsk power station (Perme- three most active Russian market partici- of this market. Importantly, Alfa Bank is a by approximately 35%. In 2003, the most nergo) to Solikamskbumprom; pants, with an overall trading volume in market maker in local bonds as well as in important strategic goals will be the attrac- • Strategic advisory to RAO UES on struc- excess of US $5 billion per annum. corporate and sovereign Eurobonds. Also, tion of pension fund assets for manage- tural reform issues; Through the implementation of new Alfa Bank’s extensive branch network ment and the effective use of existing dis- • Acquisition of a blocking stake in technology and financial services, the ensures access to regional issuers and cre- tribution channels in the Bank’s branch Kyivstar GSM by Alfa Bank; Bank has been able to integrate its securi- ates possibilities for an objective assess- network to market and sell a range of • Merger of Far East and Sibir telecommu- ties business into a broader range of ment of their creditworthiness. newly created family of investment funds. nication companies as part of the overall banking services offered to clients. restructuring of Svyazinvest; Internet trading system “Alfa-Direct,” One of the highlights of 2002 in the area Corporate Finance • Private placement of Wimm-Bill-Dann; launched in 2001, continues to success- of fixed income trading was that profits • Initial public offering of Wimm-Bill-Dann; fully attract investors with the number of from REPO operations increased seven- In 2002, the strategic co-operation and • Acquisition of a super majority stake in resident accounts increasing by 100% in fold as compared to the previous year. synergies between commercial and Kharkov Milk Plant by Wimm-Bill-Dann; 2002 and with volumes exceeding US $3 Income from Capital Markets and com- investment banking sides of Alfa Bank • Acquisition of a super majority stake in billion per annum. missions increased three-fold. ensured the Bank’s success in the area of SIDANCO by TNK.

STRATEGY

eeping in line with Alfa Bank’s main strategic objective of maintaining the The Bank’s investment banking business will be developed around the expansion of its leading position in the Russian financial services industry, in 2002 the Bank core client base both in Russia and abroad and continued divestment of assets, which focused its efforts on diversifying its client portfolio, extending the maturity were acquired during early privatisation. Focal points for 2003 and beyond are the Kprofile of its funding base and reducing bank-wide operational costs. These key man- delivery of Alfa Bank’s investment products and brokerage services to the retail market agement initiatives will be further implemented in 2003 with the development of the though the use of the expanding branch network and information technologies under existing regional network and the opening of the new retail “Alfa Bank Express” the existing Internet brokerage Alfa-Direct. These efforts will be enhanced by the branches in Moscow and other large cities, successful capital raising in the international introduction of new products for futures and options trading which will allow clients capital markets and the implementation of new IT platforms which will allow the Bank to expand their exposure to the growing domestic securities market. In addition, for- Advertisement of Alfa Bank safety deposit boxes, stressing trustworthiness and focus on customer needs. to reduce and control costs in years to come. All of these steps will allow Alfa Bank to eign clients will be offered new means of accessing the Russian market through the increase its market share among the growing segment of small and medium-sized introduction of the Alfa Bank family of private equity funds, which are scheduled for enterprises and retail customers, provide clients with longer-term competitively priced launch in 2003. credit products and allow the Bank’s management to prudently mitigate any future operational uncertainty presented by the developing Russian economic landscape. 20 21 AlfaInsurance Group AlfaInsurance Group of Companies is one of Russia’s largest AlfaInsurance in 2002 insurers and is consistently ranked amongst the top five In 2002, the Group enjoyed cooperation with a number of large-calibre clients such as following: ■ IBS Group Holding Ltd. ■ ICN ■ TD TsUM ■ Samsung Electronics insurance companies on the market. The Group offers a ■ IBM ■ Transnefteproduct ■ Wild Orchid (representative office) ■ Golden Telecom ■ Udmurtneft ■ TsENKI ■ Daimler Chrysler AG diversified portfolio of services including comprehensive ■ SIDANCO ■ Pulkovo-2 Airport ■ NTV+ (representative office) business insurance programs and an extensive product ■ Emergency Ministry ■ Volga Motor Works ■ DON-Stroi ■ Russian Trading System of the Russian Federation ■ Petrovskiy Passazh ■ MIAN ■ Serebryanyi Dozhd range for individuals. AlfaInsurance actively operates across ■ Culture State TV ■ Alfa-Eco Group ■ Partiya Radio Station and Radio Channel ■ Kommersant Publishers ■ Tekhnosila ■ Udarnitsa Confectionary ■ ■ ■ the whole of Russia and Ukraine. www.alfastrah.ru VimpelCom Volgotanker Bayersdorf (representative office) Factory More Reliability Group reached 1.115 billion roubles (US criteria used in selecting re-insurance part- Last year the Group was accredited by the $35.08 million) making AlfaInsurance one ners are dependability, financial stability Transportation Ministry, the Energy lfaInsurance Group’s reputation is of the market leaders in terms of size of and high professionalism. The leading Ministry, the State Construction based on the strict performance net assets. global companies, including Munich Re, Committee of the Russian Federation, the of its obligations to its clients. As Swiss Re, SCOR, Hannover Re and Lloyd’s Russian Munitions Agency, the Moscow Asuch, the Group places special emphasis A reliable portfolio-hedging re-insurance of London as well as blue-chip Russian Chamber of Certified Public Accountants on its financial stability. At the end of program enables the Group to insure large companies are reliable and long-standing and other government and non-govern- 2002, the aggregate share capital of the financial risks of its clients. The principal partners of AlfaInsurance. ment organizations.

To meet consumer expectations, in Mix of Risk Based Insurance Policies (Excluding More Quality More Simplicity Life Insurance) Written by AlfaInsurance – autumn 2002, the Group’s 3rd party liabil- End of 2002 he Group’s key priorities for the ew products offered to the ity automobile insurance became available next two years will be to establish Group’s individual clients in at TNK petrol stations. In addition, a full 6% 16 % comprehensive risk management 2002, in most cases could be range of auto insurance products can be Tprograms for industrial enterprises (so- issuedN in a few minutes by choosing a purchased when buying a car in a number called Umbrella Coverage programs) and required set of services and price levels. At of Moscow-based automotive salons. to develop customized plans for insuring the end of last summer, new property Additionally, when acquiring a plastic card 78 % clients’ businesses. insurance products ‘U Dachi’ and ‘AC- from Alfa Bank, a customer can opt for Universal’ were designed along with a insurance protecting against loss of the Within the last year new insurance pro- series of new personal insurance products. card or unauthorized money withdrawal. grams were offered to Tyumen Oil Personal accident and travel insurance Company, Alfa Bank, Volga OJSC, Aeroflot, A significant advantage of standard retail products are also available in retail outlets Liability Insurance of Alfa Bank. ‘AlfaMobile’ is another multi- the Bosco di Chilieggi shopping chain as insurance products is that they can be Property Insurance Personal Insurance well as to a number of other long-stand- offered to prospective customers in places purpose programme jointly realized by ing customers of the Group. where they find it convenient to purchase. Alfa Bank and AlfaInsurance. Source: Company data

Regional Network Growth - Number of Branch Offices at and of 1992-2002 More Focus on Clients will ensure a high standard of service deli- vered to customers throughout Russia. uring 2002 AlfaInsurance has con- tinued its geographical expansion Market research suggests that nearly one- into Russia’s regions opening 7 half of potential customers of insurance Daffiliates and 34 branches in Moscow services do not receive adequate product region, Cheboksary, , Kurgan, information. The continued development Nizhnevartovsk and several other areas. of the Group’s new retail network, which The Group’s products and services are now started in 2002, and careful shaping of the available in 52 of Russia’s regions. In 2002, Group’s new communications strategy, the traditionally strong regional business of will address this problem. The marketing the Group increased by more than 60% and unit is working out the details of an now accounts for 25% of the corporate appropriately targeted campaign and is portfolio. Additionally, the Group has star- helping to create new products on the ted massive IT infrastructure upgrades in a basis of full-fledged research of the mar- number of key regional branches, which ket and consumer needs. Source: Company data

More Technology This service is now available to all the More Professionalism houseCoopers helped us to finalize a clients insured under voluntary health motivation system that covers most o maintain a high quality of serv- and vehicle programmes. he booming insurance market has employees across the Group. Also, the ice while intensively expanding created additional challenges for first full-scale organisational appraisal the business has become one of Installation of SalesLogix, a customer rela- people engaged in this business. was conducted, which has enabled us to Tthe Group’s top priorities. Significant tions management system, and develop- TLast year a number of top professionals make a correct assessment of available funds have been invested in the automa- ment of specialised data processing sys- from leading insurance companies and human resources and to support the cri- tion of business processes, upgrading the tems in voluntary health insurance (AVIS) banks as well as from global FMCG com- tical business areas. infrastructure, shaping a unified informa- and life insurance (Life Office) have con- panies joined our management team. tion space and providing its information tributed significantly to further develop- security. ment of customer relations. Similar tech- The Group’s well-balanced HR policy is nological improvements are being imple- based not only on the recruitment of Round-the-clock support delivered by mented on the corporate side, including leading experts in the industry but, firstly, our corporate call centres is an absolute improvements in the integrated account- on personal development of existing staff. prerequisite for customer satisfaction. ing and financial management systems. In 2002, a team from Pricewater-

More Confidence gram covering the period through 2006. bution channels, active expansion into This program was approved by the Group’s regions, optimisation of business processes, lfaInsurance Group’s long-term shareholders in 2002. The market develop- continued strengthening of the sales organ- development plans are reinforced ment strategy of AlfaInsurance combines isation and further cooperation with Alfa with a strategic investment pro- further development of products and distri- Bank and the companies of Alfa Group. Advertisement of AlfaInsurance’s simple solutions. A

22 \ ALFA GROUP ANNUAL REPORT 2002 FINANCIAL SERVICES \ 23 ALFA GROUP ANNUAL REPORT 2002 OILOIL pro pro duction duction

24 25 TyumenOil Company

In December 1999, when the Russian gover- In 2001, TNK International Ltd, (“TNKI”) nment, through privatisation tender, placed a was established as a holding company for pur- Established in 1995, Tyumen Oil Company (“TNK”) is today, HISTORY further 49.8% of TNK shares, AAR again poses of consolidating ownership interest in won the tender, bringing total joint owner- OAO TNK and ONAKO Oil Company (an 85% one of the largest vertically integrated oil and gas companies Tyumen Oil Company (“TNK”) was formed as an ship in TNK to 99.9%. In February 2001, stake was purchased at the end of 2000 for US open-type joint stock company, by a government after completion of the terms of an invest- $1.08 billion in a privatisation tender). In mid- in Russia, ranking fourth in terms of production and third in decree in 1995. At that time, the Russian govern- ment programme per the terms of the privati- 2002, TNK International Ltd established an ment was the largest of TNK’s shareholders. sation tender, AAR established full control Advisory Council, chaired by Sir Peter Walters, proved oil reserves. TNK’s core businesses are oil and gas over TNK. former Chairman of British Petroleum plc, In July 1997, 40% of the Company was placed whose mission is to oversee TNK Interna- production, refining, and the marketing of crude and high in a privatization tender, which was won by By the end of 2001, TNK completed a single tional’s business and corporate affairs, advise Novy Holdings (a company jointly owned by share swap whereby minority shareholders TNK International’s shareholders on corporate quality oil products. Alfa Group and Access Industries / Renova voluntarily swapped their ownership in TNK’s governance, strategic planning, investment and Group (“AAR”)). Early in 1998, AAR share- production subsidiaries for ownership in OAO finance activity, environment and security www.tnk.ru, www.tnk.com holders’ stake increased to 50.1% following the TNK. Following the share swap, AAR owned issues. www.tnk-.com* purchase of 9% of TNK shares from private approximately 97% of OAO TNK. holders and 1.1% in a specialised tender. * From 1 September 2003 access to new information on TNK-BP appears on this web site.

TNK Presence in Russia and Ukraine Company Structure & Operations Downstream TNKI is one of Russia’s largest producers of high quality oil products, ranking third in Russia by vo- TNK International Ltd comprises the following: TNK Volume of Crude Oil Production (‘ooo of barrels per day): lume of processed primary products, refining Upstream 21.9 million tonnes of oil annually.

TNKI’s main production assets are located in west- ■ Eight production units: Samotlorneftegaz, A key aspect of TNKI’s operating strategy is the con- ern ’s Tyumen region where Russia’s major Nizhnevartovsk NP, Tyumenneftegaz, TNK- tinued expansion in key oil products markets. In the hydrocarbon deposits are concentrated. The fields domestic market, TNKI aims to maximise sales vo- Nyagan, Yugraneft, TNK-Uvat, Orenburgneft, are highly productive and the crude has excellent lume, increase profitability and enhance its compet- and Orenburggeologiya; physiochemical properties, which makes for easier itive position. This is being achieved by broadening manufacturing into environment-friendly oil pro- the refined products range, raising the proportion of ■ Four refineries: Ryazan, Nizhnevartovsk, ducts without requiring costly additional investment upgraded refined products, improving the products Lisichansknefteorgsintez (Ukraine), and in desulphurisation equipment. offered to consumers, and by bringing quality into Orsknefteorgsintez; conformity with the highest environmental stan- In 2002, TNKI units produced 37.9 million tonnes dards. Also, the infrastructure and sales networks are ■ Ten marketing and sales units: of oil and 3.7 billion cubic metres of natural gas. being expanded by entering new market segments Kaluganefteproduct, Karelnefteproduct, Also, during 2002, 248 new production wells were and by consolidating positions in new regions. brought on-stream while oil production costs were Tulanefteproduct, Ryazannefteproduct, reduced from US $2.90 per barrel in 2001 to US Kurskoblnefteproduct, Urals Oil Company, Gasoline and diesel, produced at TNKI’s refineries, $2.40 per barrel in 2002. Megapolis, TNK-Stolitsa, Zapsibnefteproduct, are sold both through a branded network of retail fil- ling stations and through the Company’s jobber net- and Orenburgnefteproduct; TNKI’s proved oil reserves are estimated at 1.15 bil- work. In recent years, TNKI has managed to lion tonnes and proved natural gas reserves at 114 strengthen markedly its positions in new regions, and ■ 1 Joint Venture: TNK-Texaco Lubricant Company. billion cubic metres. today operates 1,400 filling stations across 16 of Source: Company data Russia’s regions and in the Ukraine. Strategy Principal Developments in 2002 and Q1 2003

TNKI’s long-term corporate objective is to boost the ■ In February 2003, Alfa Group, Access Industries / Renova United States. Of the 140,000 tonnes delivered, 40,000 tonnes Group and BP enter strategic partnership and announce their are used to replenish the U.S. Strategic Petroleum Reserve; Company’s value by driving the maximum economic bene- intention to consolidate their Russian and Ukrainian oil assets; fit from vertical integration, by improving production effi- ■ In June 2002, TNKI established the Advisory Council ■ In January 2003, TNK wins the tender to act as Rospan emphasising the intention to meet the highest international ciency, reducing costs, and focusing production and marke- International’s management company; standards in corporate governance and financial manage- ment. The Advisory Council is chaired by Sir Peter Walters, ting on competitive, value-added products. To deliver on ■ In December 2002, TNK and Sibneft jointly participated formerly of BP. in the largest ever privatisation tender in Russia purchasing this challenge, a strategy has been developed which com- 74.95% of Slavneft for US $1.86 billion. Sibneft and TNK subsequently enter into a preliminary agreement to split prises implementation of the following objectives: Slavneft’s assets. The transaction also envisages addressing the issue of Sibneft’s stake in Orenburgneft (a subsidiary of Corporate Structure Downstream Management ONAKO Oil Company); • To improve the Company’s structure by intro- • To increase the proportion of exported oil and to • To develop and implement long-term environ- ■ ducing an optimum management system and by In November 2002, the Company placed 5-year enter promising Asian, Pacific and U.S. markets; ment, industrial safety, and labour protection pro- enhancing corporate governance. • To maintain refining competitiveness by cutting grammes aimed at the continual integration of best Eurobonds worth US $400 million (and an additional US unit costs and upgrading capacity in order to boost international standards; $300 million in February 2003); production of light products and to continue to • To upgrade management, information and busi- Upstream bring the quality of exported products into con- ness safety technologies. formity with European standards; ■ In November 2002, TNK wins the prestigious award for • To enhance reserve quality and productivity by • To improve the efficiency of oil product sales optimising the asset portfolio, increasing output by increasing the proportion sold direct to the Outstanding Achievement in Corporate Governance growth, and restricting operating and capital costs end consumer through extending and enhanc- conferred by international energy journal Oil & Gas to a level not exceeding the industry average; ing the network of retail filling stations, enter- • To ensure conditions which promote realisation ing new regional markets, and supporting the Investor; of the full value of natural gas assets. brand image. ■ In October 2002, TNK makes its first oil delivery to the Advertisement stressing TNK’s commitment to product quality

26 27 SIDANCOOil Company Established in 1994, SIDANCO Oil Company together with its 5th in oil reserves. SIDANCO’s primary operations include oil and subsidiaries is one of Russia’s largest vertically integrated oil and gas exploration, production and refining as well as oil and chemi-

gas companies, ranking among the top-ten in oil production and cal products distribution. www.sidanco.ru www.tnk-bp.com* * From 1 September 2003 access to new information on TNK-BP appears on this web site. 28 29 Company Structure and Performance Management Strategy

SIDANCO has five main production companies cost control and enhanced performance, overall lift- In late 1999, BP seconded a team of six senior The central aim of SIDANCO is to maximize performance units of core production assets. These DuPont, a recognized world leader in safety. In which comprise: TNK-Nizhnevartovsk (formerly ing costs were below 2002 plan at US $2.88 per barrel managers with vast experience in the petroleum shareholder value. The Company has identified its units will be supported by other services, but wher- cooperation with IT Russia Services, a leader in Chernogorneft, 2002 production – 6.8 million (plan US $3.10 per barrel). industry to join the SIDANCO management core strengths as hydrocarbon development and ever possible, the Company seeks to concentrate on environmental management, SIDANCO is imple- tonnes) which also has a 50% share in two joint ven- team. Since that time, SIDANCO’s manage- extraction and seeks to maximize its performance in its core competencies. menting a monitoring and improvement system, tures adding almost 1.6 million tonnes in 2002, The reflection of the Company’s 2002 progress is a ment team has grown stronger and is now sup- every aspect of this activity. Necessarily, a corner- which is designed to comply with ISO 14001. UdmurtNeft (2002 production – 5.05 million 2003 performance plan, which targets an 11% oil stone of this strategy is to focus on operational Other initiatives supporting operational excellence plemented by additional BP and Russian tonnes), VaryoganNefteGaz (2002 production – production growth rate. The plan provides growth excellence. This obviously requires changing the include changing the management information sys- This change process obviously impacts people. In 2.65 million tonnes), SaratovNefteGaz (2002 pro- through performance rather than acquisition. resource, particularly in key operational posi- way that SIDANCO does things and is currently tems and processes to support greater transparency SIDANCO, the combination of key BP resources duction – 1.53 million tonnes), and Novosi- tions. The management team has been very suc- embarking on a major change initiative in order to in the business. In view of its strategy, the Company and Russian expertise is blended to make the birskNefteGaz (2002 production – 0.24 million cessful in driving the strategic objectives of the achieve its goals. focuses on such important issues as health, safety change process work from inside. This blend of tonnes). In addition the Company owns Saratov SIDANCO Volume of Crude Oil Production (in millions of tonnes) Company, including the integration of advanced and environment. A major initiative has commenced expertise is working to improve processes and Refinery, which in 2002 increased its oil products Western practices in the context of best Russian Operationally, the Company is in the process of to assess and improve SIDANCO’s safety perform- achieve operational excellence. output by 13% up to 4.4 million tonnes as compared experience. changing its structure and processes with a focus on ance to world-class standards using the assistance of to 2001 levels while improving its refining technolo- gy. The Saratov Refinery is working on an invest- ment project to install a visbreaking unit to further boost the yield of light products.

SIDANCO’s retail network comprises 150 service stations, located in the Saratov region, where it With approximately 400,000 barrels per day production, SIDANCO ranks dominates the local market and in Rostov region, At 31 December 2002, Alfa Group, where it has good market position. together with its joint venture partners amongst the ten largest oil and gas producers in Russia, employing 29,000 people. In 2002 SIDANCO’s net revenues increased by 77% Access Industries / Renova Group over 2001, to US $2.26 billion, which was a result of increased volumes due to return of TNK- (“AAR”) owned approximately 57% SIDANCO’s upstream subsidiaries are currently developing over 120 fields located Nizhnevartovsk into the Company’s structure. of SIDANCO alongside British in Udmurtia, Saratov Oblast (Volga Region), the Khanty-Mansiysk Autonomous On a per barrel basis, total operating expenses Petroleum (“BP”), which held a 25% decreased from US $4.20 per barrel in 2001 to US Note: TNK-Nizhnevartovsk and two joint ventures included from + 1 share. $3.40 per barrel in 2002. Due to Upstream’s focus on 1 October 2001 and 1 January 2001, respectively Area (Tyumen Oblast), and Novosibirsk Oblast in Western Siberia. COMMODITICOMMODITI ES ES TRADINGTRADING 30 31 Alfa-Eco Group Since its founding in 1989 as a trading company within Alfa Group markets. These include oil and oil products, coal, metallurgical Consortium, Alfa-Eco Group has established a large-scale, diversi- products, pulp and paper products, agricultural and food products, fied business engaged in the production and trade of a wide range alcoholic beverages, and others. In addition, the Group has made a of finished goods and raw materials in domestic and international significant strategic investment in telecommunications.

www.alfaeco.ru

Alfa-Eco Group Investment Activity

s one of the leaders in he Group has unmatched experi- ture of the Alfa Group Consortium, tion of qualities makes it possible to A Russian business, the T ence in the field of investment Tyumen Oil Company, the Perekrios- precisely identify the most promising Alfa-Eco Group (“Alfa-Eco” or projects, having implemented a wide tok supermarket chain, and United projects and carry out transactions of a series of well-publicised investment Food Company. highly complex nature. the “Group”) has recently programmes with extremely positive begun implementing a refined results. Just in the past several years, Alfa-Eco’s success is rooted in a clear Over the past three years, invest- strategy based on large-scale Alfa-Eco has successfully completed competitive advantage. The Group has ments in completed transactions investment in growing sectors management and investment proj- created a team of highly professional amounted to over US $400 million, ects at such leading Russian enter- investment managers, who are capa- while their average internal rate of of the Russian economy and prises as the Achinsk Aluminium ble of efficiently running enterprises in return was around 450%. management of industrial as- Refinery, the West Siberian Metallur- various industries, have in-depth sets. Accordingly, one of the gical Complex, the Taganrog Metal- knowledge of the specifics of Russia’s Currently, the Group’s principal Group’s top priorities in recent lurgical Plant, the Korshunovsky Ore regional markets and the ability to investment projects are being devel- Mining and Enrichment Plant and react quickly and appropriately to oped in telecommunications, pulp years has been the acquisition others. Several of the early projects changes in these markets, and are and paper, fuel and energy, agricul- of promising companies. Upon were later spun-off as separate busi- able to build mutually beneficial rela- ture and food processing, metallurgy acquiring a company, Alfa-Eco ness units, including within the struc- tionships with clients. This combina- and alcoholic beverages industries. brings in highly-experienced managers who introduce ad- Investments in Some of the Alfa-Eco Group’s Internal Rate of Return (IRR)* for Selected Recent Exits of Investment vanced management, market- Current Projects (USD mln) Projects Completed by Alfa-Eco Group ing and operating practices, and carry out restructuring and modernization program- mes aimed at increasing the company’s production, bol- stering its market position and, ultimately, enhancing its investment attractiveness and *Note: Calculation performed using a method developed by the European Association (EVCA) and based on audited accounts (unless otherwise noted) value. **Note: Calculation based on unaudited data. Telecommunications Pulp and Paper and Forestry Products

he Group manages a blocking vot- was intensively engaged in building increased from US $806.8 million (Level 3 ADR) was trading on the n 2002, Alfa-Eco continued to The volume of Alfa-Eco’s aggregate Ting stake in cellular communica- new networks. Starting in 2003, the (May 2001) to US $1.4 billion at the at US I manage the Balakhna Pulp and investment in this project amounts to tions provider VimpelCom (brand company has begun penetrating two beginning of 2002 and to US $1.7 bil- $15 per share, whereas by 31 Paper Mill (OAO Volga). The Group US $54 million. names: BeeLine, Bee+) and its sub- more major Russian regions: the lion at the end of 2002. In April 2003, December 2002 the stock price gained management control when sidiary VimpelCom-Region. Overall, the Northwestern and Urals Federal the company’s capitalization stood at had more than doubled to US the enterprise was in technical During the reporting year, following a Group has invested US $250 million in Districts. The priority strategic goal is US $1.9 billion. $32.01 and has since grown even default on debt payments. A team of sale at auction, Alfa-Eco became the this project, making it the largest deal to extend the network’s license zone further, reaching over US $36 by Alfa-Eco managers has since opti- 100% owner of the Kamsk Pulp and in the industry. to cover the entire country. When Alfa-Eco initially invested in early April 2003. mised the plant’s financial position. Paper Mill (OAO TsBK “Kama”, Perm In 2002, the plant enjoyed stable Region). Only a few months after Alfa- the project, VimpelCom’s stock operations and is now an industry Eco managers took control of the Alfa-Eco plays an active role in the Since Alfa-Eco began participating in leader. Volga manufactures over 30% enterprise, the Kamsk Mill signifi- management of both companies. the management of VimpelCom and Growth in VimpelCom Performance Indicators Since Alfa-Eco Group Began Investing in May 2001 of all newsprint in Russia. In 2002 it cantly increased the volume of pro- Thanks in no small part to the efforts VimpelCom-Region, the BeeLine net- produced 530,000 tonnes of goods. duction. The company is now devel- of Alfa-Eco managers, VimpelCom work’s subscriber base has grown May 2001 December 2002 Around 70% of the plant’s paper is oping a technical upgrade pro- has succeeded in considerably from 1.11 million in May 2001 to exported to 52 countries around the gramme for the plant. expanding its presence in Russia’s 2.11 million by the beginning of 2002 Number of subscribers (mln) 1,114 5,153 world, with the bulk of exports going regions. At the end of 2002, the and to 5.15 million at the end of Market capitalization (USD mln) $806.800 $1,669.3 to the European Union. Leading publi- The aggregate output of the Balakhna BeeLine network operated in 40 2002. In March 2003, the number of cations in Great Britain, France, and Kamsk pulp and paper mills gives regions of the Russian Federation (in subscribers reached 6.15 million. Share price of Level 3 ADR Germany, Italy and other countries Alfa-Eco control over approximately $15.000 $32.01 43 regions as of March 2003), and VimpelCom’s market capitalization on the New York Stock Exchange (USD) are printed on paper from Balakhna. 40% of Russia’s newsprint production.

32 33

n 2002 the Group had export contracts for the delivery of approximately 7 million tonnes of oil and oil products to international markets, includ- I ing shipments of around 1.3 million tonnes of oil under the UN Security Council’s Oil-for-Food program for .

During the reporting year, Alfa-Eco continued to manage ZAO Petrosakh, a vertically integrated oil company on Sakhalin (the Group manages a 97% equity stake in the company). Petrosakh delivers its output to countries in the Asia-Pacific region and also to Sakhalin’s energy needs.

In the fall of 2002, a marine seismic survey was conducted, jointly with the Norwegian firm PGS, of the Sakhalin-6 oil-and-gas field located on the island’s continental shelf. Petrosakh holds a license for the geological exploration of the field, which boasts potential reserves of around 1 billion tonnes. Alfa-Eco is now working on creating an international pool of investors to develop the field. The size of the investment is estimated at US $1.5 billion.

In 2002 Alfa-Eco continued its activities on the coal market. The company supplied coal from Siberian and Far Eastern coal basins primarily to Energy Resources housing authorities and public utilities in a number of regions as well as under the programme to deliver supplies to Far Northern territories. Metallurgy Alcoholic Beverages

he Alfa-Eco Group has had an consolidated a 42.2% equity stake). the Group’s equity stake in the plant having been established originally as or nearly a decade, Alfa-Eco has sales are expected to increase up to 31 T active presence in the metallurgi- Tagmet, in which the Group has was sold to the MDM Group. a scientific pilot enterprise, the plant F held a leading position in the Rus- million bottles, including up to 27 mil- cal sector for many years. In recent recently played a management role, is was unable to compete under market sian alcoholic beverages market. lion bottles under the franchising pro- years, Alfa-Eco has successfully the country’s top producer of high- The Group continued to develop the conditions. Alfa-Eco managers have gram and up to 4 million bottles of the implemented an entire series of pro- quality rolled pipe. Tagmet has an Sibelectrostal program (a succeeded in bringing the enterprise Alfa-Eco manages the Trading House Group’s own output. jects at some of the country’s largest annual production volume of 460,000 metallurgical plant; Alfa-Eco, jointly out of its long-standing crisis by termi- for Reviving the Traditions of P.A. metallurgical enterprises. tonnes and posted a net profit of with the regional administration, is the nating bankruptcy proceedings, reach- Smirnov, Purveyors to the Court of His The Armenian cognacs marketed by approximately US $50 million on sales principal owner of OAO Sibelectrostal ing an amicable agreement with credi- Imperial Highness, which holds the Alfa-Eco are also renowned for their During the reporting year, the Tagmet of around US $170 million. Alfa-Eco’s Metallurgical Plant). This unique pro- tors, replenishing the plant’s order rights to the internationally acclaimed high quality. At the St. Petersburg Wine Smirnov brand of vodka. At the St. and Vodka Fair-2002, the Grand Gold project was completed (Taganrog investment in the project amounted to duction facility manufactures special- book, and more fully utilizing its pro- Petersburg Wine and Vodka Fair-2002, Medal was awarded to “1700” Cognac, Metallurgical Plant, in which Alfa-Eco US $27.5 million. In the fall of 2002, ized and high-alloy steels. However, duction capacity. Smirnov was awarded gold medals in a special brand bottled in honour of the three nomination categories, and in 1,700-year anniversary of Christianity early 2003, won a gold medal, two sil- in Armenia, and the gold medal went to ver medals and two bronze medals at “Gyumri” Cognac, both in Alfa-Eco’s the 10th international exhibition portfolio of brands. In 2002, on the Prodexpo-2003 in Moscow. strength of its own “Armina” brand, the Group was rated as one of the top three Alfa-Eco is intensifying its program to leading companies in the Russian mar- promote the Smirnov brand, having sig- ket for Armenian cognac with a 10% nificantly increased the product range market share. and sales volume of its own production and also under a franchising program. In 2002, Alfa-Eco delivered 2.5 million Many distillers, particularly in the bottles of wine and cognac from regions, have expressed great interest Moldova, and Armenia. in the Smirnov brand. In 2003, overall

The Securities Market

lfa-Eco has been an active par- A ticipant in the Russian securi- ties market since 2001, when it placed an issue of its own promis- sory notes (the issuer was one of the principal companies in the Group, OOO Alfa-Eco M). This issue represented one of the first suc- cessful financial instruments issued by a Russian industrial-and- trade concern.

In 2002, OOO Alfa-Eco M continued to successfully place promissory notes in the open financial market. In October of the reporting year, it issued a rouble-denominated bond. The volume of the first bond issue amounted to RUR 800 mil- lion. Alfa-Eco M has been ranked among the most reliable promis- sory note issuers by NAUFOR, along with major Russian corporations and banks. FoodFood ProductsProducts Alfa-Eco’s securities fully meet the expectations of the most authorita- tive investors in the market and n 2002, Alfa-Eco increased the baked goods plant (one of the coun- During 2002, Alfa-Eco maintained Alfa-Eco is well positioned in the provide an excellent vehicle for I volume of grain sales and trans- try’s best producers of top-quality the volume of meat deliveries and food market for the year 2003, part- diversifying sources of financing. shipments to nearly 250,000 flour, with an export transshipment sales at a level exceeding 10,000 ly owing to framework agreements Many banks, investment houses, tonnes, or 2.5 times more than in volume of 1 million tonnes) as well tonnes, thus preserving its position with the Moscow City government to insurance companies and pension 2001. Since last year, the Group has as other processing plants in the in the market as one of the leading supply grain and meat for city funds have included these securi- participated in the management of Rostov region. The Group intends to suppliers of meat from Mongolia. needs. ties in their investment portfolios. several grain silos in Siberia and, acquire several similar plants in the The Group also supplied meat for since early 2003, in a Rostov-on-Don south of Russia. Russia’s federal reserves in 2002.

34 / ALFA GROUP ANNUAL REPORT 2002 COMMODITIES TRADING / 35 36 RetailRetailRetailALFA GROUP ANNUAL REPORT 2002 Trade Trade Trade 37 Trade House Perek riostok

Founded in 1995, Perekriostok, with approximately 50 modern supermarkets and one hypermarket, is today a leading supermarket chain in Russia. Perekriostok’s more than 10,000 square metre distribution centre pro- vides significant cost and logistical advantages over its competitors. As one of the first movers into the Russian retail sector, Perekriostok continues to expand and strengthen its position in the Russian market and, today, is rightfully considered one of the most competitive and efficient retail trade structures in Russia. www.perekriostok.ru Trade House Perekriostok History Products Personnel Perekriostok Store Locations in Moscow and Moscow’s Regions (June 2003) Alfa Group took a strategic decision bution centre providing significant Perekriostok supermarkets provide store mini-bakery which provides a Personnel are the corner- in 1994 to establish Trade House and unprecedented cost and logisti- customers with one of the widest selection of more than 40 kinds of stone of any retail business, Perekriostok (“Perekriostok”). cal advantages. In April 2003, the selections of food and other products, bread. The Company also has its Company attracted its first outside sourced both domestically and inter- own private-label branded line of and this is particularly true With its origins in trading, Alfa investment – a 7.7% stake in the nationally. In addition to stocking all high-quality goods, which it offers to in Russia, where the hiring Group was well positioned to meet Company was sold to portfolio the standard supermarket lines, consumers. Recently, the Company and retaining of appropriate the demands for Western style shop- investor Templeton Strategic Emer- Perekriostok stores have delicatessen launched a “Healthy Meals” pro- staff takes on an added sig- ping, as a new middle class emerged ging Markets Fund LDC. counters with a wide range of ready- gram, which it developed in connec- from post-Soviet society eager and to-cook and ready-to-eat items, tion with the Russian Academy of nificance. Since its incep- able to buy high quality goods. Today, the Company owns and opera- including more than 360 different Medical Sciences, which is aimed at tion, Perekriostok has Perekriostok opened the doors of its tes approximately 50 modern super- kinds of meat and fish. Additionally, promoting healthy eating habits sought to hire high-calibre first supermarket in September 1995. markets and one hypermarket in Mos- many of the supermarkets have an in- among its customers. personnel who not only In 1996, soon after the start of oper- cow, St. Petersburg and its immediate ations, the Company received regions, operating under the trade have practical knowledge important support from worldwide names “Perekriostok” and “Perekrios- of the peculiarities of the credit and financial institutions, tok-Mini.” It is the largest supermar- Pricing Russian retail market but including the European Bank for ket chain in Moscow, with most stores also possess Western man- Reconstruction and Development, offering shoppers more than 18,000 Perekriostok’s pricing policy is sim- purchases considerably cut product and continues this co-operation high-quality products (more than ple - to provide customers with costs. This translates directly to agement skills. As there is a today. In the summer of 1998 35,000 products at the hypermarket) value for money. This is possible affordable and very competitive shortage of specialists who Perekriostok opened its own distri- at competitive and affordable prices. through the careful sourcing of local price levels in all of the Company’s measure up to these products and the very significant supermarkets. Also, the Company competitive advantages provided by makes use of a well-developed dis- demanding criteria, the the Company’s distribution centre. count program to attract customers Company has developed an Concept & Strategy Direct deliveries and large-volume and retain their loyalty. efficient training system, which provides for the The principal objective of Perekrios- city dwellers, prefer to shop close to tok is to provide middle-income cus- home, there is an enormous captive quick mastering of essential tomers with a wide range of high- market for Perekriostok stores. Consumers skills for new recruits. quality groceries at reasonable Perekriostok has its own The overall aim of the Perekriostok tant segment of shoppers, conven- prices in a pleasant modern shop- Each Perekriostok is a modern, west- training centre, where new ping environment with efficient and ern type store with many resembling concept is the complete satisfaction ient parking areas have been creat- high-quality service. a kind of “shopping city,” where cus- of customers living in the communi- ed at each store. employees attend both the- tomers can purchase not only food ties adjacent to the supermarkets. At oretical and practical From the very beginning Perekriostok products but also other goods rang- the same time the stores cater to the Regular market research helps to courses. In addition, mem- needs of “transit” shoppers – that is, identify the needs and desires of cus- has pursued a strategy of building and ing from magazines to fresh-cut bers of senior and middle leasing stores in the suburban areas of flowers. Additionally, many super- people who pass in their cars and tomers and is used to define product Moscow. This is where the vast markets offer dry-cleaning, beauty decide to stop and make a pur- and pricing policies, elements of ser- management regularly trav- majority of Muscovites live, but the salons, and photographic process- chase. To accommodate this impor- vice and even store layout and design. el to relevant training infrastructure and amenities in the ing, and even major appliances at courses abroad. The suburbs are typically much less the hypermarket. Each store has Company also actively uses advanced than in downtown areas. scanner check-outs, which save cus- Since Muscovites, like any other large tomers precious time. the services of Western consultants to introduce Growth in Number of Perekriostok Stores (at year end) state-of-the-art operating technolo- gies and manage- ment Further Development practices.

ay of 2002 marked the opening of the Company’s first hypermarket. Located in a high-traffic area in a new building with over 130 boutiques, restaurants and a 6-screen cinema, it has a trade area of 7,000 square meters. October 2002 marked the opening of the Company’s first supermarket out- side of Moscow, in St. Petersburg, with plans for further development in St. Petersburg. The MCompany is in process of aggressively expanding into Southern Russia and Russia’s Volga region where there is Source: Company data a rapidly growing demand for western-style supermarkets. The Company, during 2003, will also introduce a new convenience-store format in suburban, and later in central Moscow and will also continue further expansion of supermarket and hypermarket format shops in the Moscow region.

As one of the first movers into the Russian retail sector, Perekriostok continues to strengthen and expand its posi- tion on the Russian market. Creating a market leader in the retail trade sector in Russia requires a long-term per- spective, solid sources of financing and reliable partners. Perekriostok is proud of its successful co-operation with its many different partners. Today, Perekriostok is rightfully considered as one of the most competitive and effi- cient trade structures not only in Moscow but throughout the whole of Russia.

38 ALFA GROUP ANNUAL REPORT 2002 RETAIL TRADE 39 Telecomm u nications ALFA GROUP ANNUAL REPORT 2002

Golden Telecom, Inc. Golden Telecom, Inc. (“Golden Telecom” or the “Company”) is the largest inde- pendent facilities-based provider of integrated telecommunications and Internet services to businesses and other high-usage customers and telecommunications oper- ators in major population centres throughout Russia and other countries of the Commonwealth of Independent States (CIS). www.goldentelecom.ru Customers Shareholders

Golden Telecom’s customers Golden Telecom was incorporated Current Shareholders as at 30 May 2003 include large, medium and small as a Delaware corporation on 10 Alfa Group 39% Russian companies, large transna- June 1999 and is listed on NASDAQ tional companies, business centres, under the symbol “GLDN.” Current Capital International 8% hotels, fixed line, mobile and paging shareholders of Golden Telecom Barings Vostok 9% operators, banks, financial institu- represent a balanced mixture of tions, embassies and representa- strategic and financial, both EBRD 11% tive offices of foreign companies. Russian and international investors. Management 3% The Company makes use of its own Free float 15% backbone fibre optic network in Moscow, St. Petersburg, Nizhny Rostelecom 15% Novgorod and Kiev which is accessed using fibre optic, copper wire, and microwave and fixed wire- less lines.

Structure

Golden Telecom consists of two major operating compa- Sovintel putation for customer service. GTS’ holding in Sovintel was transferred to EDN Sovintel LLC was established in nies, Sovintel and Golden Telecom (Ukraine), and con- Golden Telecom, Inc. as part of the 1990 as a competitive local Golden Telecom IPO in 1999. In ducts its business in Russia and the CIS through a net- exchange carrier in Moscow in the September 2002, Golden Telecom work of affiliated or controlled structures. Other than in form of a 50/50 joint venture bought the remaining 50% of Sovintel between Global TeleSystems, Inc. Moscow, the most significant branches are those in St. from Rostelecom. (GTS) and The Main Centre for Petersburg, Arkhangelsk, Khabarovsk, Irkutsk and Ufa. Management of Long-Distance Golden Telecom (Ukraine) The leading regional joint ventures are situated in Nizhny Communications of USSR (GTsUMS). GTsUMS subsequently became part LLC Golden Telecom (Ukraine) com- Novgorod, Novosibirsk, Vladivostok, Ekaterinburg, of Rostelecom - the Russian national menced service in 1997 as a com- Krasnodar, Volgograd and Samara. The Company also long distance carrier. From its early petitive local exchange carrier in Kiev operates in Azerbaijan, Belarus, Georgia and days, Sovintel was positioned as a and as a provider of mobile services. superior voice service provider with a Today, Golden Telecom (Ukraine) is through agents and distributors, and has presence in focus on the high-end of the corpo- the leading provider to corporate cus- Kazakhstan through its wholly owned subsidiary. rate market. Sovintel expanded tomers in Kiev and has a substantial quickly and established a strong blue presence in all major regional cen- chip customer base and a stellar re- tres of Ukraine.

40 Alfa Group Annual Report 2002 Telecommunications 41 Voice Services Over an work access points in its network to the growing demand for data and Services 2002 Financial Results Strategy Integrated Network facilitate the growing demand for data Internet services. Wherever pos- and Internet communications. sible, the Company targets cus- The Company’s objective is to Corporate customers increasingly Golden Telecom surpasses all competitors in its CIS coverage for advanced Golden Telecom demonstrated strong financial results in 2002. demand integrated telecommuni- tomers and products to fully data services and provides a fully integrated telecom solution to business be the leading independent Consolidated revenue was US $198.7 million, an increase of 42% over cations solutions from one-stop • Reduce Operating Costs utilise existing fixed cost network customers throughout Russia and the CIS. Golden Telecom has built its 2001. Revenue from data and Internet access services increased by 25% voice, data and Internet serv- providers that are able to deliver a and Satisfy Capacity Needs infrastructure. business services strategy around a simple philosophy: to consistently to US $78.9 million in 2002. Earnings before interest, tax depreciation and ices provider in Russia and the full service offering in the geo- through Network Planning enhance and expand the range of service offerings to the existing cus- amortization (EBITDA), an important indicator of the Company’s financial CIS. To achieve this objective, graphical areas in which these and Optimisation •Focus Operating Activities tomer base. health, grew by 124% against 2001 and reached US $61.4 million in 2002. Golden Telecom intends to: corporate customers operate. As and Capital Investments in The network strategy of the Major Metropolitan Areas Golden Telecom’s solutions typically include: Consolidated Revenue (in USD mln) a result, the Company plans to Company includes building and •Pursue Consolidation continue to develop and combine To business customers: To international carriers: owning its local exchange and The Company plans to deploy its Opportunities its businesses to create a unified customer access networks. The service platform for local access, capital investments primarily in • Local numbers and lines, local, • Voice traffic termination in Russia The Company intends to pursue Company has entered into long- Moscow, Kiev, St. Petersburg, domestic long-distance and inter- and the CIS; consolidation opportunities local exchange, domestic and term leases for long-distance and international long distance, data, and other national digital voice services; • Capacity resale through acquisitions that will international fibre optic cable sys- major population centres in the • Private lines; allow the Company to improve Internet access and services with tems to provide its regional and turn-key solution. CIS, where demand for the serv- • Dedicated Internet access; To smaller fixed-line operators: and expand its service offerings global connectivity, supplement- ices is most heavily concentrat- • Design, installation and manage- and maintain operational con- ing these leased land-based ed. The Company also intends to ment of private data networks; • Local, domestic long-distance •Extend Our Leading Position and international traffic carrier trol. The Company will target channels with satellite circuits for expand its operations in regional • Call centre services complementary opportunities in High Growth Data and redundancy and remote connec- services; Internet Markets cities with sufficiently strong that will enable the achievement tivity. Golden Telecom intends to local economies and where To cellular operators: • Voice over Internet Protocol (VoIP) traffic termination; of synergies and economies of The Company plans to build on its incrementally expand the fibre potential exists to grow busi- • Local numbers and connection • Broadband IP connectivity scale. position as a leading provider of data optic capacity along its heavy traf- nesses, which complement its lines to the Public Switched and Internet communication services fic and high cost routes to reduce current operations. •Increase Market Share by its unit transmission costs and Telecommunications Network To consumers: Source: Annual audited US GAAP standalone financial statements in Russia and other countries of the (PSTN), local, domestic long-dis- Offering Bundled Data and CIS by increasing the number of net- ensure sufficient capacity to meet tance and international traffic • Dial-up Internet access; Consolidated Revenue (% contribution by each segment) carrier services • Pre-paid calling cards

Market Position

Golden Telecom occupies a leading native service provider commands position in Russian and CIS telecom- such a strong presence in all of these munications. The Company is the markets simultaneously. largest alternative operator in Russia, with an approximate 25% Golden Telecom is the number two share of the corporate market. provider in St. Petersburg’s corpo- Moscow is the primary base of rate market and number one among Golden Telecom operations with alternative network providers in 75% of the Company’s revenues Nizhny Novgorod. generated in Moscow and St. Peter- sburg. Golden Telecom also occu- In Ukraine, LLC Golden Telecom pies a leading position in the Dial-Up (Ukraine) is the largest independent Internet Access consumer market, fixed-line operator and operates in throughout Russia. No other alter- all major Ukrainian cities. Source: Annual audited US GAAP standalone financial statements

VimpelCom Company Profile VimpelCom is a leading provider of wireless telecommunications VimpelCom has always been a approximately 3.71 million sub- pioneer in wireless telecommu- scribers in the Moscow license services in Russia, operating under the “Bee Line” brand, which nications in Russia and is a mar- area and 1.44 million sub- ket leader in offering the latest in scribers in the regions outside of is one of the most recognized brand names in Russia. The voice communications technolo- Moscow. gy and data services, including Group’s license portfolio covers approximately 92% of Russia’s wireless “infotainment” services, VimpelCom was the first Russian location-based services, mobile company to list its shares on the population (134 million people), including Moscow and St. portal and wireless Internet New York Sock Exchange Petersburg. access through “BeeOnLine.” (“NYSE”) in November 1996. The Company provides GPRS VimpelCom’s ADSs are listed on www.vimpelcom.com (General Packet Radio Services) the NYSE under the symbol “VIP.” with per byte billing and GPRS VimpelCom was also the first roaming capabilities. Russian company to issue US SEC-registered convertible notes At the end of 2002, VimpelCom’s in July 2000. VimpelCom’s con- total subscriber base was vertible notes are listed on the approximately 5.15 million, with NYSE under the symbol “VIP 05.”

42 Alfa Group Annual Report 2002 Telecommunications 43 2002 Financial Highlights

2002 was, in every respect, the most rewarding year for VimpelCom. On the wave of its success in 2001, the Company continued intensive growth and expansion, exceeding market expectations. For the year 2002, VimpelCom reported net operating revenues of US $768.5 million, an 82% increase from 2001; operating income of US $224.8 million, a 158% increase from 2001; and net income of US $129.6 million, a 174% increase from 2001. In 2002, the Company generated approximately US $221.7 million operating cash flows, and the balance sheet was strong.

Subscriber Growth (# of customers) in Moscow Consolidated Total Operating Revenue (in USD mln)

Source: Company data Source: Annual audited US GAAP standalone financial statements

The Strategy for 2003 and Beyond

VimpelCom’s objective is to become Moscow operations, to secure the tial part of the 117 million people in primarily organic “greenfield” growth Russia’s leading telecommunications loyalty of its existing subscribers as its licensed territories outside of augmented by selective acquisi- company, providing mobile voice and well as to continue to grow its cus- Moscow. tions. data services. VimpelCom’s strategy tomer base. aims at securing long-term profitable The two basic premises of VimpelCom sees this approach as growth for the Company with a dedi- At the same time, further growth in VimpelCom’s national expansion the most cost-efficient way of build- cated focus on service quality and cellular business will primarily come strategy are (i) to build a unified net- ing its business nationwide, with product innovation. from the regions. Accordingly, work across Russia with the same maximum utilization of economies VimpelCom, in its drive to become a business processes and solutions of scale. As Moscow gradually approaches full-fledged national operator, will for network operation and control, IT, saturation, VimpelCom will strive to continue its expansion, providing marketing, distribution, customer further improve the profitability of its coverage and services to a substan- service and billing; and (ii) to employ Advertisement of “SuperGSM” tariff plan targeting business users.

44 Alfa Group Annual Report 2002 Telecommunications 45 Companies that When corpora- are good corpo- tions are good rate citizens are citizens, more likely to be our business risk better financial decreases – for performers* both large and SOCIETYSOCIETYSOCIETY small firms* 46 ANNUAL REPORT 2002 ALFA GROUP 47

■ Alfa Bank has launched the second phase of its Alfa Chance programme that provides scholarships to talented high school graduates from the Russian regions to study in the top universities Serving Our of Moscow and St.Petersburg. ■ Since 2002, Alfa Bank has supported a 12-year old World and European Chess champion Yan Nepomnyaschy from Bryansk: the Bank is assisting Yan in preparing for championships and has Communities presented him with a computer. Alfa Group and its companies strive to achieve leadership as trusted partners and good corpo- ■ Trade House Perekriostok acts as the general sponsor of the “Mosaica” chil- rate citizens. We seek to realise our business objectives, but we strive not to lose sight of the dren’s dancing troupe. importance of giving back to the society and communities in which we do business. ■ Alfa-Eco Group sponsors schools and special needs boarding schools in Over the years, our efforts have focused on sponsoring educational programs, cultural initiatives, Sakhalin and Perm region. sporting events, providing humanitarian aid, donating to the Russian Orthodox Church and invest- ■ TNK funds creative workshops in secondary schools as well as anti-drug ing in the regions where our employees reside. During 2002, our companies donated over US $7.4 educational programmes, including million worth of funds, goods and services to worthwhile causes. We are committed to both an subsidising school supplies purchases active involvement in large-scale events and projects, and to targeted smaller contributions to with anti-drug messages. enhance individual opportunity. We help to open the doors to people in our communities to vari- ■ SIDANCO’s regional funds finance setting up of computer classes with ous educational pursuits, and support diverse cultural and art institutions in order to promote an Internet access in Saratov, Udmurtia overall better quality of life. We conduct our business in ways that protect and preserve the envi- and Tyumen areas; support ethnic edu- cation of local indigenous nations in ronment and meet or exceed health and safety standards. Khanty-Mansiisk area and donate Education money to Saratov University to pur- chase scientific equipment. SIDANCO We take our moral obligations to society seriously and are proud of the level of sponsorship and has also sponsored an educational community service that we have achieved. Nevertheless, we do not intend to rest on our laurels. Support event for Moscow schoolchildren at the Darwin Natural History Museum. We will continue to seek out new ways of helping the people of Russia, supporting Russia’s national culture and heritage, improving the lives of our employees and their families. In doing and Talent this, we create a better future for both the Alfa Group and our communities. Development * Dr.Marc Orlitzky. Corporate social responsibility and financial performance: A meta-analysis. Organization Studies, 24:3, pp. 403-442. Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Support of Culture and National Heritage

■ During its 12 years of operation, Alfa Bank Russian suprematist artist, Kazimir Malevich in the Humanitarian Activities has been an active patron of large scale projects Solomon R. Guggenheim Museum in New York. ■ Alfa Bank could not remain indifferent to the victims of the ■ Monthly monetary assistance is provided by Alfa-Eco Group, aimed at preserving national historic, cultural ●Alfa Bank also offers generous support to public charities and associations that develop creative Nord-Ost hostage crisis. The Bank contributed to the charita- Perekriostok, TNK and SIDANCO to municipal departments of monuments and art treasures. Among the major ble donations alongside other members of the Russian Union social services, orphanages, hospitals and clinics, veterans’ projects of 2002 are the following: photo artists and hold annual photography contests. ●Alfa Bank’s regional branches sponsor an art festival of Industrialists and Entrepreneurs, and Perekriostok donat- organisations, military units, families of victims of military ● As a Trustee of Bolshoi Theatre, Alfa Bank has con- and a children’s talent music festival in Nizhny ed food supplies to the anti-terrorist squad. conflicts in Moscow and other towns across Russia. tributed to major performances, including Boris Novgorod, international Nordic Holiday in Godunov and the Magic Flute; organised regional Murmansk. ■ Perekriostok provides food and financial assistance to vari- ■ Perekriostok operates donation points for the Moscow concerts of the Bolshoi Theatre and donated pro- ous charity foundations, flood victims, children’s hospitals, Patriarchate and the Red Cross at its supermarkets; Alfa-Eco ceeds to the local municipalities, and provided funds ■ In 2002, SIDANCO sponsored international schools and orphanages. Group donates to the Moscow Patriarchate and contributes to for Western pop-star concerts and art exhibits across music festival “Music Kremlin” in Moscow, the construction of a chapel in Pravdinsk; SIDANCO finances Russia and organised the tour of La Scala in Moscow. inter-regional film festival in Khanty-Mansiisk, ■ Perekriostok and TNK collect Christmas presents and hold reconstruction and renovation of Russian Orthodox churches ●Alfa Bank provided financial assistance to the and construction of a circus building in Izhevsk. new year parties for children at schools and boarding in Izhevsk. Moscow performances of Toska by Rome Opera, schools. St.Petersburg Philharmonic Orchestra conducted ■ Under Golden Telecom’s support “Vanity by Yuriy Temirkanov, Boris Eifman’s Ballet theatre, Case” exhibitions and master-class of the All-Russia theatre festival Golden Mask, concerts famous designer Philip Stark were held in of Spivakov’s Moscow Virtuosy in London’s Royal Moscow in 2002. Festival Hall, December Evenings by Svyatoslav Richter in Russia, Paul McCartney’s performance ■ VimpelCom and Alfa-Eco Group have a long in Moscow’s Red Square as part of his European history of providing financial support to various Environment,Health and Safety Tour “Back in the World 2003” and exhibition of cultural events in Moscow and Russian regions.

48 49 SportingSportingInitiatives

■ TNK's commitment to environmental ■ Since 2002, TNK is developing ecological ■ In March 2002, Alfa Bank made a donation conservation principles is reflected in large- performance criteria for its subsidiaries in to Moscow’s North-East Administrative scale projects for the development of the accordance with ISO 14000, and structuring district for nature conservation purposes. Samotlor oil field and upgrade of the Ryazan an implementation programme planned to be ■ In compliance with the Montreal Treaty, refinery. TNK is the first Russian company to completed by June 2005. Perekriostok refrigerators supplied to its stores make products in compliance with strict ■ Alfa-Eco Group’s managed companies in in 2002, all use environmentally-friendly European ecological standards, such as fully pulp and paper, metal and oil industries, have freon-R404A which in case of leakage does not non-ethyl petrol with high oxygen percentage significantly improved emission levels, waste harm the earth’s ozone layer. In addition, and low-sulphur diesel fuel. utilization and are in compliance with envi- Perekriostok are increasingly using energy con- ■ TNK and Alfa-Eco Group are in the ronmental regulations. serving lighting throughout its supermarkets. process of ISO quality certification for prod- ■ As a member of World Wildlife Fund, Alfa ■ All of Perekriostok’s food production facilities uct quality, environmental management and Bank regularly contributes to nature conser- and its output are in full compliance with state management systems. vation initiatives. technical specifications, standards and norms.

■ Alfa-Eco Group sponsors the Premier ● Swimming tournament League fooball club Rostov, the ● TNK employees’ family contests Russian Kickboxing Federation, and ● Rhythmic gymnastics championship among schoolchildren All Alfa Group companies provide to their employees organises international Chess festival ● All-Russian Energy Industry sports competition “Alfa-Eco Voronezh Cup”. ■ SIDANCO supports Saratov municipali- safe working conditions, have implemented procedures ■ TNK finances a number of children’s ties in holding sporting events under the sports clubs, TNK open championships, slogan “Youth Against Drugs”, and tradi- and enforce rules that meet or exceed labor regulations various tournaments and sporting events: tionally gives donations to Western Siberian authorities to organise interna- ● TNK Open skiing, mini-football and basketball championships tional biathlon championship. norms and respective industry standards ALFA GROUP ANNUAL REPORT 2002 CONTACTCONTACTCONTACT INFORMATION INFORMATION INFORMATION 50 ALFA GROUP MAIN COMPANIES 51

ALFA BANK ALFAINSURANCE GROUP ALFA-ECO GROUP TRADE HOUSE PEREKRIOSTOK

Chairman of the Board: Mikhail Fridman Chief Executive Officer: Vladimir Chief Executive Officer: Chief Executive Officer: President: Pyotr Aven Skvortsov Alexander Savin Alexander Kosiyanenko Address: 9 Mashi Poryvaevoy Street, Address: 9 Mashi Poryvaevoy Street, General Director: Alexander Fain Address: 89 Dmitrovskoye shosse, Moscow, 107078, Russia Moscow, 107078, Russia Address: 21 Novy Arbat Street, Moscow, Moscow, 127486, Russia 119992, Russia Tel.: + 7 (095) 788 6400 , Tel.: + 7 (095) 788 0999 Tel.: + 7 (095) 232 5924 (095) 929 9191 Fax: +7 (095) 785 0888 Tel.: + 7 (095) 201 5914 Fax: + 7 (095) 956 3525 Fax: + 7 (095) 974 6474 E-mail: [email protected] Fax: +7 (095) 201 5914 E-mail: [email protected] E-mail: [email protected] www.alfastrah.ru E-mail: [email protected] www.perekriostok.ru www.alfabank.com www.alfaeco.ru

TYUMEN OIL COMPANY SIDANCO OIL COMPANY GOLDEN TELECOM, INC. VIMPELCOM

CEO and President (of TNK-BP): President: Lawrence Smyth President: Alexander Vinogradov Chief Executive Officer: Robert Dudley Address: 42 Schepkina Street, Address: 1 Kozhevnichesky Proezd, Alexander Izosimov Address: 18 Schipok Street, Building Building 2a, Moscow, 129110, Russia Moscow, 115114, Russia Vice President of International and 2, Moscow, 115093, Russia Investor Relations: Valery Goldin Tel.: + 7 (095) 777 7707 Tel.: + 7 (095) 797 9300 Address: 10 8th Marta Street, Moscow, Tel.: + 7 (095) 787 8950 Fax: + 7 (095) 777 7708 Fax: + 7 (095) 797 9332 127083, Russia Fax: + 7 (095) 787 9668 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] www.sidanco.ru www.goldentelecom.ru Tel.: + 7 (095) 725 0700 www.tnk.ru, www.tnk.com www.tnk-bp.com* Fax: + 7 (095) 721 0017 www.tnk-bp.com* E-mail: [email protected] www.vimpelcom.com * From 1 September 2003 access to new information on TNK-BP appears on this web site.

CTF HOLDINGS LTD MOSCOW CONTACT INFORMATION: Director: Franz Wolf Director for Corporate Development, Address: Suite 2, 4 Irish Place, Finance & Control–Alfa Group: Nigel Robinson Deputy Director for Corporate Development, Tel.: (350) 41 977 Finance & Control–Alfa Group: David Gould Fax: (350) 41 988 Address: 6 Sechenovskiy Pereulok, Building 3, E-mail: [email protected] www.alfagroup.org Floor 3, Moscow, 119034, Russia

Tel.: + 7 (095) 787 0077 Fax: + 7 (095) 201 3600 E-mail: [email protected]