Contents

LETTER OF THE PRESIDENT 3

MAIN PERFORMANCE INDICATORS OF 2006 5

ABOUT THE COMPANY 6

MISSION, VISION AND STRATEGIC GOALS 7

MERGER OF COMPANIES 9

BEER MARKET 13

COMPANY’S POSITION IN RUSSIA 16

BALTIKA ON THE WORLD MARKET 18

CONSOLIDATED BRAND PORTFOLIO 21

IMAGE PROJECTS 30

KEY PROJECTS AND ACHIEVEMENTS 33

INVESTMENT ACTIVITY 37

FINANCIAL POSITION 39

CORPORATE SOCIAL RESPONSIBILITY 45

CORPORATE GOVERNANCE 51

SECURITIES 58

COMPANY’S BREWERIES 65

USEFUL INFORMATION 75

INFORMATION FOR SHAREHOLDERS AND INVESTORS 76 Brand Achievement in 2006 Extraordinary export volume: around 23 million liters in 33 countries Letter of the President

thank our management team and all our employees, who applied so much effort to ensure that the four companies would work together as a united entity. The year 2006 was a challenging one. Despite a certain market share decline at the start of the year, we were able to break the negative trend and for the full 12 months showed market share improvement up to 36.4%. We not only held our position on the Russian market but we also got excellent financial results and achieved significant synergy. This was made possible by use of best prac- tices, production of our brands closer to the regions of consumption, optimal use of production capacity, effect of economies of scale. The year 2007 will be the year of our Company’s main brand. The Baltika brand constitutes a major part of the value of our business and it is important for us to raise its share. We hope that the successful product launches of the previous year, Baltika Cooler and Baltika №3 in 1 liter PET, as well as the innovations of 2007 will enable us to achieve this purpose. We were able to successfully complete the merger pro- cess and to deliver excellent results thanks to intensive and well-coordinated work of all employees of the four companies. Last year we took the first steps to create a united team but most of this demanding and complex work still lies ahead. The mission, the vision and the values of the merged Baltika Breweries which were formulated in 2006 will help each employee to understand what our Company is striving for, to feel belonging to a large and cohesive team and to work still more effectively to achieve our common goals. I am confident that we can reach ambitious objectives only by means of constant improvement, search for ideas, and bold and innovative solutions in all spheres of activity. Dear readers, This is not simple, but I am certain the merged Baltika is ready to take on all tasks and we can build a company The history of Baltika Breweries’ development was always filled with the best brands, the best team and the best results with outstanding events. Nonetheless, the year 2006 was a turn- that will serve as an example for others not only in Russia ing point for us. The merger with Vena, Pikra and Yarpivo brew- but worldwide. eries which was successfully completed at the end of the year enabled Baltika to become the absolute leader on the Russian beer market with a market share of more than 36% and the larg- Yours sincerely, est and most valuable company in the consumer goods sector. Anton Artemiev It is essential to note that substantial restructuring of systems President of Baltika Breweries and processes which took place, as well as implementation of best practices of all four companies enabled Baltika to move on a qualitatively new level of development. The legal consolidation was successfully carried out in record time and was a unique experience in Russian corporate legal practice. I thank all our shareholders who believed in the future of the new company and voted for the merger. Separately I

3 Brand Achievement in 2006 Participants of promo-action “Gather Russia!” have drunk over 116 million liters Main performance indicators of 2006

• The merger of Baltika, Vena, Pikra and Yarpivo companies was completed. • Legal merger was executed in strict conformity with Russian legislation and became a unique corporate practice in Russia. • Economic effect of the merger at the end of 2006 amounted to around $80mln, of which one-quarter already influenced the 2005 results. • Beer sales volume increased by 10.6% and exceeded the growth of Russian beer market. • In the status of merger, the Company managed to avoid the loss of market share and kept its absolute leadership on the Russian beer market with a share of 36.4%. • Due to the enlarged portfolio of brands, the Company obtained additional opportunities for the promotion of its products. • Taking into account production under license, the total Company’s sales abroad increased by 27%. • The merger resulted in significant improvement of all of the Company’s main financial indicators – revenue, EBIT, EBIT margin, and assets. • The Company’s market capitalisation at the end of the year increased by 67% and exceeded $7 bln. • Investments in the Company’s development during 2006 increased by 37% and amounted to €204mln.

Key indicators of the merged Company

2006 2005 %, change Revenue*, €mln 1,739.5 1,440.4 + 20.8 EBIT, €mln 427.1 303.2 +40.8 Total assets*, €mln 1,873.0 1,621.3 + 15.5 Capital investments, €mln 204.0 149.0 + 36.9 Current and non-current liabilities*, €mln 329.8 347.2 - 5.0 Market capitalisation (at end of year), $bln 7.0 4.2 + 66.7 Total issued shares 175,083,259 130,703,680 Dividend per ordinary share, RUR ** 39.50** 24.33*** +62.4 Dividend per preference share, RUR ** 39.50** 24.33*** +62.4

Ratios, % 2006 2005 pts, change Current and non-current liabilities/Assets* 0.18 0.21 - 17.8 Current and non-current liabilities/revenue* 0.19 0.24 - 21.4 ROA 18.1 14.6 + 3.5 ROE 21.9 18.5 + 3.4

Operational indicators 2006 2005 %, change Number of employees 11,054 11,459 - 3.5 Sales volume, mln hl 37.16 33.69 + 10.3

* According to the Company’s financial reports prepared under IFRS. The financial reports for 2006, together with explanations and the Auditor’s conclusions, may be found in the Appendix to the Annual Report.

** Recommendation of the Board of Directors on the results of 2006.

*** Dividend per 1 share of Baltika Breweries on 2005 results before the merger.

5 About the Company

Success of 2006 - effect of synergy

The year 2006 was a turning point in the history of Baltika Brew- The companies were now able to produce their brands eries development. In the course of the year, Russia’s largest at other breweries. Vena, Pikra and Yarpivo received ac- FMCG company nearly doubled in size. In January, 2006 that cess to Baltika’s extensive distribution network. By con- was a company with 5 breweries and a 24% market share. solidating the brand portfolio, the Company strengthened At year’s end, Baltika Breweries comprised 10 breweries and its leadership position in four of five price segments of the amounted more than 36% of the Russian beer market. This was market and moved up from sixth to second position in the made possible by the successful merger of Baltika with Vena, license segment. Moreover, the brand portfolio became Pikra and Yarpivo. During 2006 the assets and resources of all more attractive for distributors. four companies were consolidated, leading to the creation of the merged Baltika that is the undisputed leader on the Russian beer market. Each company obtained new advantages from the merger. Additional resources were invested in developing the brewer- ies. The utilisation ratios of production lines were improved.

Baltika Breweries in the beginning of 2007 is: • The leader on the Russian beer market with a market share of more than 36%; one of the leading European producers of beer • Company with market capitalisation of more than $7bln; the largest consumer goods company in Russia • 10 breweries located all around the country, 2 own malt-houses • Annual production capacity of 40 mln hl of beer • More than 30 beer and 10 non-beer brands • The Baltika brand – Europe’s second largest in terms of sales and one of Russia’s top three valuable brands • Product available in 98% of the trade outlets around Russia • Exports to 38 countries worldwide • Over 11,000 employees

The majority shareholder of the Company since 1993 is Baltic Beverages Holding AB (BBH), which, in turn, is jointly owned by Carlsberg Breweries A/S (50%) and Scottish & Newcastle Plc. (50%). ВВН owns 85.6% of the shares of Baltika Breweries.

6 Mission, vision and strategic goals

Mission

We create a high-quality product which gives people pleasure in their get-togethers, making their lives brighter and more interesting

Vision

We strive to be the benchmark for the brewing industry, the company setting the standards and a reference point for brewing companies around the world

For us, being the benchmark means being the leader in 3 areas: The best brands, the best team and the best results

Strategic Objectives

To raise our market share on the Russian beer market keeping high profitability

To make Baltika the best selling brand in Europe

These objectives will be reached through

Power brands with focus on premium and innovations

Leadership in all price segments, regions and sales channels

Search for additional sources of profitable growth

Operational and commercial excellence

Creation and continuous development of the best team of professionals

Values

Responsibility

Cooperation

Innovation

Striving for perfection

7 Brand Achievement in 2006 Over 500 million liters of beer with a real man’s character were sold Merger of companies

2006 is the year of merger of four companies

On January 18, 2006, Baltika’s Board of Directors published the The merger consisted in the take-over of Vena, Pikra and plan for the merger, which was prepared in accordance with the Yarpivo by Baltika Breweries and proceeded in two phases. Merger Principles. In the first phase, Baltika shareholders voted for the merg- er. The shareholders of Vena, Pikra and Yarpivo were giv- Merger Principles: en the opportunity to exchange their shares for ordinary • fair treatment to all shareholders of Baltika, Vena, Pikra and shares of Baltika Breweries issued for this purpose or to Yarpivo companies; sell their shares to Baltika Breweries within the context of • granting all shareholders of Baltika the right to remain a voluntary offer of contractual purchase. Moreover, all shareholders and to receive the benefits of the merger or shareholders of Baltika Breweries were given an opportu- to sell the shares they owned; nity to sell their shares. • allowing all shareholders of Vena, Pikra and Yarpivo to exchange their shares for shares of Baltika or to sell them. In the second phase of the merger, following approval of the merger by shareholders of Vena, Pikra and Yar- On December 28, 2006, the merger of Baltika with Vena, Pikra pivo and by the regulatory authorities, the shares of the and Yarpivo was completed. Shares of these companies were merged companies were converted into shares of Baltika converted into shares of Baltika Breweries. The companies which Breweries of the new issue. joined Baltika ceased to exist as separate legal entities and they were removed from the Single State Register of legal entities.

Phase 1. Voluntary offer of exchange or purchase Phase 2. Reorganisation in the form of of shares a merger

Shareholders of Vena, Pikra and Yarpivo

Pikra sharescash shares shares

Baltika Vena Baltika

shares cash

Yarpivo

Shareholders of Baltika

9 Merger of companies

Valuations and financial terms of the merger Observing of the shareholders rights during the merger was guaranteed by outsourcing the authorized independent evaluators and consultants

In accordance with the Merger Principles, the audit company The basic method used to evaluate the companies was Deloitte & Touche was appointed to carry out an independent discounted cash flow. Evaluations were also made on the evaluation of Baltika Breweries, Pikra, Vena and Yarpivo and to basis of methods of comparable companies and transac- determine their fair market value. tions to confirm the results in the context of a profits-driven approach. The international investment bank Citigroup Global Markets Limited was brought in to issue the statement about the fairness The conversion rates per share of Baltika determined by of the proposed conversion rates and prices offered for shares Deloitte & Touche and based on the market price of shares purchase. of Baltika and the merged companies:

Companies Conversion rate for one share of Baltika

Pikra 0.1300949

Vena 0.3407861

Yarpivo 4.0734805

Key dates of the merger in 2006

March 7 At an extraordinary shareholders meeting of Baltika Breweries, the decision about merger pro- cess with Vena, Pikra and Yarpivo was approved by an overwhelming majority of votes.

March-May An additional share issue was carried out; redemption of Baltika shares was effected and shares in Vena, Pikra and Yarpivo were purchased on a voluntary basis by Baltika.

July Shareholders of the merged companies who expressed the wish to become shareholders of Balti- ka in advance of the merger exchanged their shares for newly issued shares of Baltika Breweries.

July 3 Baltika Breweries became the majority shareholder of the Vena, Pikra and Yarpivo companies.

August 21 Shareholders of Vena, Pikra and Yarpivo approved the merger with Baltika by an overwhelming majority of votes.

September Baltika Breweries received permission from the Federal Antimonopoly Service to merge with the three breweries.

October 3-4 Shareholders approved a provision on Baltika’s assuming the rights and obligations of the merged companies as their legal successor.

November 9 The Federal Service for the Financial Markets registered three additional issues of ordinary shares of Baltika Breweries for the conversion of remaining shares of Vena, Pikra and Yarpivo.

December 28 Conversion of the shares took place. An entry was made in the Single State Register of Legal Entities regarding the cessation of activity of the Vena, Pikra and Yarpivo companies.

10 Merger of companies

Baltika Breweries is the biggest consumer goods company in Russia

The merger marked an important stage in achieving Baltika’s Baltika Breweries strengthened its position as the lead- strategic goal of creating an industry leader with the resources ing brewing company in the country and became Russia’s and experience available to develop successfully in the long largest consumer goods producer. term outlook.

Benefits and advantages of the merger

Expansion of the brand portfolio: the merged Company has a Strengthened management team: the best managers portfolio of the leading beer brands which is unique in Russia by of Baltika, Vena, Pikra, and Yarpivo are working in the its coverage of the market. merged Company which is one more additional competi- Leadership in production volumes: as a result of the merger the tive advantage. Company has 10 breweries with total production capacity of Improved financial indicators: the merger made it possible 40 mln hl per year. The geographical location of the breweries to significantly improve the key financial indicators of the makes it possible to produce the products directly in the regions Company: revenue, EBIT, EBIT margin. of their consumption, providing an opportunity to cut down logis- Synergy effect: the merger has provided economies in tics and warehousing costs. the field of procurement and logistics due to increased Development of national distribution: strengthening the wide- scales of production as well as savings from higher ca- spread distribution network and consolidating of the sales stuff pacity utilisation. The exchange of best practices among ensures increased coverage of trade outlets and effective sales the merged companies had a significant influence. of the expanded brand portfolio. Enhanced possibilities for promotion on international markets: the merged Company can grow export volume by promoting an expanded brand portfolio on international markets.

Companies prior to the merger (as of the beginning of 2006)

OJSC Baltika Breweries is the largest producer of beer in Russia and in Eastern Europe. The Company was created in St. Petersburg in 1990 on the basis of the Leningrad Brewery Baltika and ever since 1996 was the undisputed leader of the Russian brewing industry. The five breweries making up Baltika were located in St. Petersburg, Rostov-on-Don, Tula, Samara and Khabarovsk. Together they had an overall annual production capacity of 24 mln hl. The Company’s main brands were Baltika, Arsenal- noye and Medovoye, the licensed brands Foster’s and Carlsberg, as well as the regional brands DV, Samara and Don. The Company’s products were sold throughout Russia and in 38 countries.

Pikra Plc. was created on the basis of the Krasnoyarsk Brewery, which was founded in 1875. The Company was the third largest producer of beer in Eastern Siberia. The brewery’s annual production capacity was 2 mln hl, including 1.5 mln hl of beer. The Company’s brands, including Kupecheskoye and Legenda, were sold mainly on the Siberian market; however the Company also had a noteworthy position in the Far East.

JSC Vena consisted of two breweries: in St.Petersburg and Chelyabinsk, founded in 1872 and in 1969, respectively. The overall production capacity amounted to 4 mln hl per year. The leading brands in the Company’s portfolio were the national brand Nevskoye and licensed Tuborg, as well as the regional brand Uralsky Master, all of which occupied leading positions in their segments. The Company’s prod- ucts were exported to 13 countries worldwide.

Yarpivo OJSC was created on the basis of a brewery founded in Yaroslavl in 1974. The Company was the fifth largest beer producer in Russia and consisted of two breweries, in Yaroslavl and Voronezh, with combined production capacity of 6 mln hl per year. Its main brands were Yarpivo, Volga, Slavnoye, Voronezhskoye, Zhigulevskoye and Irish Red.

11 Brand Achievement in 2006 Music and party-lovers have drunk 160 million liters Beer market

World market

Russia is well on its way to the third place ranking in the world rating of the largest beer markets The world beer market continues to grow. This is the result of Russia is the fourth ranking beer market in the world in changes in the developing markets, the active expansion of retail terms of beer consumption. With a 6% share of the world chains, as well as the dynamic introduction of innovations and a market, it follows China, the USA and Brazil. shift to consumption of more expensive products in the developed markets. According to Euromonitor data, worldwide beer sales grew by 3.9% in 2006 in volume terms, reaching 1.62 bln hl.

Beer markets by volumes in 2006 (mln hl)

318

242

104 97 91

63 58 61

China USA BrazilRussia Germany Japan UK Mexico

Sources: estimates of Euromonitor

Russian beer market

The Russian beer market remains one of the most dynamic, innovative and attractive segments of the consumer market

Beer producers continue to increase their volumes and product The volume of beer consumed in Russia during 2006 assortment, accelerating the pace innovations are introduced. amounted to 96 mln hl, which is 10% greater than the level The year 2006 demonstrated impressive sales growth of the of 2005. sector leaders and a trend towards completion of the consolida- tion of the Russian beer market.

Development trend of the beer market in Russia

Year 2000 2001 2002 2003 2004 2005 2006

Beer market, mln hl 52.4 63.5 68.8 74.0 82.2 87.2 96.0

Growth of beer market, % 19 21 8 8 11 6 10

Source: Company estimates

13 Beer market

The following key factors contributed to achieving the 2006 results: • growth in macroeconomic and consumer indicators, including disposable income of the population; • change in the structure of beverage consumption in favour of European and world standards; • consolidation of the brewing industry and growth of investments by the leading producers; • an active marketing policy of the market leaders, in conjunction with a significant expansion of the product assortment, innovation in packaging and brand development; • development of modern formats of retail; • temporary restrictions on the market of alcoholic beverages. Annual per capita beer consumption in Russia rose from 60 to 67 liters during 2006.

Growth of beer consumption in Russia per capita (liters)

Sources: Rosstat, Company estimates

Most of the worldwide beer leaders are present in Russia The Russian brewing industry is one of the most attractive fields Most of the worldwide beer leaders are present in Russia. for direct investment. During 2006, the position held by multina- During 2006, the 4 largest players made the main con- tional brewers in the Russian market strengthened once again tribution to the market’s growth – Baltika Breweries, Sun and their combined share of overall Russian domestic beer pro- InBev, Heineken and SABMiller. duction increased by 2%, amounting to 84%.

Shares of the Russian market held by the leading producers in 2006

16.0 % 36.4 % Baltika 5.7 % SUN InBev

Heineken

9.7 % Efes

SABMiller

Others 13.3 % 18.9 %

Sources: companies’ data, Business Analytica, Com- pany estimates

14 Beer market

The licensed segment continued to grow faster

The dynamic growth of the licensed segment is due to a change There was also continued growth of premium beer result- in the structure of consumption towards European and world- ing from innovations, development of the product assort- wide standards and a move by domestic consumers to more ment and accelerated growth of brand distribution. The premium products. It is caused by the development of image discount beer segment continued to develop as well, not- factors in consumption, growth in disposable income and ef- withstanding a certain slowdown in the rate of growth. This fective innovations by the producers. Sales of licensed brands is related to the fact that discount beer partially substitutes increased by more than 40%, and the share of this segment in consumption of strong alcoholic beverages in the regions, the overall Russian beer market amounted to 9.6% by volume as well as the launch of large size PET packaging. and 17% by value.

Market structure by price segments in the period 2004-2006

Imported 2006 9.6% 18.2% 23.3% 28.0% 20.6% Licensed Premium 2005 7.5% 17.7% 24.8% 28.2% 21.5% Mainstream Lower Maintream 2004 5.5% 18.5% 24.1% 30.3% 21.2% Discount

Source: Business Analytica Priorities in the selection of packaging have changed Innovation remains the key factor in the growth of the beer mar- The consumer’s priorities when choosing packaging ket. Exploring consumer preferences, breweries have been have changed somewhat: consumption of beer in cans devoting more and more attention to packaging, new product and draught beer has grown. Meanwhile, the segment of offers and the culture and organisation of sales. Often produc- bottled beer has continued to lose ground and its share ers not only research consumer preferences but try to actively compared to the year before declined by almost 2%. At shape these preferences by launching new products in an origi- the same time, the share of beer sold in PET package nal package. Moreover, this goes on in the premium segment of grew and exceeded 41%. the market as well as it does in the lower mainstream segment.

Market structure by packaging in 2004 – 2006

Kegs 2006 6.3% 12.7% 39.8% 41.2% Cans

2005 5.8% 12.5% 41.6% 40.1% Bottles

PET 2004 5.8% 12.6% 44.9% 36.8%

Source: Business Analytica

15 Company’s position in Russia

The merger strengthened Baltika’s leadership position on the Russian market

In 2006 Baltika strengthened its leadership position on the Rus- and accounted for nearly 40%. This was facilitated by the sian beer market. As a result of the merger, the Company had invariably high quality of the Company’s products, the nearly twice the market share of its nearest competitor. Under strengthened brand portfolio, including new varieties, by conditions of integration, the Company succeeded in increasing an effective system of distribution, innovations in packag- its share of the market somewhat to reach 36.4%. Meanwhile ing and marketing communications. Baltika’s contribution to the market’s growth was considerable

Growth in Baltika’s market share*

%

* data include market shares of Vena, Pikra and Yarpivo Source: Company estimates

16 Company’s position in Russia

The Company’s sales volume grew faster than the Russian beer market

The sales volume of the consolidated Company in 2006 amount- positively influenced by innovations in the sub-brands Bal- ed to 37.2 mln hl, including 36.6 mln hl of beer. Beer sales vol- tika №3 Classicheskoye and Baltika №9. ume growth in Russia in 2006 came to 10.6%, while the Russian In 2006 the Company strengthened its position in the most beer market grew by 10.1%. These results involved the develop- expensive and highly competitive segments of the market ment of the whole brand portfolio, but mainly were due to growth – licensed and premium. According to Business Analytica, of the main brand Baltika, whose sales volume increased by Baltika’s market share in the licensed segment rose by 10% due to the key innovation of the year – the launch of a new 2.6% to 22.5%, while its share of premium beer rose by brand variety, Baltika Cooler. Moreover, growth of the brand was 0.3% to 43.6%.

Beer market and the Company’s beer sales growth in Russia

45% Company’s beer sales Beer market

35% 42.7%

32.0% 25%

24.3% 15.3% 18.8% 21.4% 15% 12.3% 8.2% 10.6%

11.1% 8.3% 10.1% 5% 7.6% 6.0%

2000 2001 2002 2003 2004 2005 2006

Sources: Rosstat, Company estimates

Baltika Breweries brands occupy leading positions in all price segments

The Company’s main brand - Baltika - is the indisputable leader on The other brands Carlsberg, Foster’s and Baltika Cooler the Russian beer market and the most widely sold Russian beer serve as a good supplement to the leaders. They hold in Europe. The advantage of Baltika comes from the fact that it is strong positions and possess sufficient potential to take the only brand which, thanks to a thoroughly built portfolio strat- the second or third place in their segments. The brands egy and effective marketing communications, is successfully posi- Yarpivo and Nevskoye already are in third place in their tioned simultaneously in the mainstream and premium segments. respective segments. According to the international consulting company Interbrand Regional brands like Uralsky Master, Don and DV sup- Group’s estimate, Baltika is the most valuable Russian brand in port the national brands and compete successfully with the consumer goods sector, with a value approaching $2 bln. local players, often holding down more than 20-30% of The Company’s brands occupy leading positions in all price the local market. segments: Tuborg, in the licensed beer segment; Baltika №7, in the premium segment; Baltika №3, in the mainstream segment; and Arsenalnoye, in the lower mainstream segment.

17 Baltika on the world market

The Baltika brand is approaching first place in sales within Europe

The Company’s products have great popularity abroad, and its has set for itself the strategic goal of raising the Baltika sales in Europe are ahead of many European brands. For sev- brand to first place in sales within Europe and it is steadily eral years in a row, the Baltika brand has held the number 2 po- moving in this direction. sition with regard to sales in European countries. The Company

Leading European brands, 2005 (in terms of sales volume)

Sales Volume, 4 6 8 10 12 mln hl

Heineken 12

Baltika 2005 – 10.7 2006 – 11.6

Carlsberg 9.1

Carling 8.9

Amstel 8.3

Stella Artois 8.1

Kronenbourg 8

Foster’s 7.5

Efes 7.4

Tuborg 7

Sources: Plato Logic Ltd 2005, Company estimates

18 Baltika on the world market

The Company’s sales abroad grew by 27%

Export of Russian beer abroad is growing each year. The Com- in Kazakhstan, Belarus, Kirghizia, Moldova, Ukraine and pany accounts for more than 70% of all export shipments of Germany and there are also Company representations in Russian beer. China, Latvia and Uzbekistan (opened in 2006).

The Company’s products are exported to 38 countries: to all the One of the ways to increase sales of the Company’s countries of the CIS and the Baltic States, the USA, United King- brands outside Russia is to license production. In February dom, Canada, Germany, Israel, Greece, Spain, the United Arab 2006 production of Baltika beer was launched in Ukraine. Emirates, Iran and other countries. In order to support sales of By year’s end, a significant growth in sales of Baltika beer the Company’s brands abroad, subsidiaries have been opened in Ukraine was recorded (+37%). This is twice the growth rate of the Ukrainian beer market as a whole.

The Company’s overall sales abroad in 2006, taking into account licensed production, amounted to 1.8 mln hl, which is 27% more than in 2005. Export sales grew by 11% and amounted to 1.6 mln hl. More than 80% of the Company’s sales abroad are sales of the Baltika brand. Net export sales grew by 18% compared with 2005.

In 2006 the Company’s market share in the world grew from 2.0% to 2.2%, in Europe - from 6.1% to 6.5%.

For its contribution to the expansion of foreign economic relations and development of export, the Ministry of Eco- nomic Development and Trade of the Russian Federation awarded the Company with the title of “Best Russian Ex- porter” for the fifth time in a row.

Dynamics of the Company’s market share in Europe

% 6.5 6.5 6.1 5.5 5.5 4.9 4.6 4.5 3.8 3.0 3.5

2.5

1.5

0.5 2000 2001 2002 2003 2004 2005 2006 *

Source: Based on Euromonitor data * Forecast

19 Brand Achievement in 2006 Over 350 million glasses have been filled with this beer with a unique mild taste

20 Consolidated brand portfolio

As a result of the merger, Baltika Breweries became the owner sian breweries owned by BBH filled out the Company’s of a unique brand portfolio, which is the strongest on the Russian product line, adding such strong brands as Nevskoye and market and which can satisfy the most varied preferences of Tuborg, Kronenbourg 1664 and Yarpivo, as well as bever- consumers in terms of taste, packaging and price. The product ages in other categories, including both Russian brands assortment includes both national and regional brands, which (Indiana Juice, Morsberry) and licensed drinks (Sinebry- were created with a view to the specifics of the Russian market choff, Golden Cap, Battery) which have popularity among - the clearly expressed pride of Russians in their native region. consumers and are an additional source of profitable growth for the Company. Baltika’s strategy is built on developing strong beer brands with a focus on premium brands. The merger with the other Rus-

Licensed

Premium

Mainstream

Lower Mainstream

Discount

21 Consolidated brand portfolio

Licensed beer segment The Company’s portfolio of licensed beers includes Carlsberg, Foster’s, Kronenbourg 1664 and Tuborg, which is the steady leader of the licensed segment. In 2006 all the licensed brands delivered impressive growth and were notable for unusual innova- tions, several of which were first launched in Russia.

This international trade mark with a rich history and nearly a century and a half Tuborg of beer brewing traditions first appeared in Copenhagen in 1873. Now it is pro- duced in 25 countries and is sold throughout the whole world. The brand is the leader on the Russian market of licensed beer, its market share in the segment in the 4th quarter of 2006 reached15%*. Four of Tuborg’s beer varieties are available in Russia – Tuborg Gold, the first variety in the portfolio, Tuborg Christmas Brew – a semi-dark beer put on sale in limited quantities especially for the New Year’s holidays, Tuborg Twist – an in- novation of 2006, and the most successful variety – Tuborg Green. Tuborg Green is a lager beer with light refreshing taste and convenient packaging – a bottle with a ring-pull cap. It especially suits the mood of happy and dynamic young people who want to have a good time together with their friends whenever the possibility arises. Tuborg Twist was created especially for Russia and presently is sold nowhere else in the world. It was brought to market in the spring of 2006. This beer is intended for lovers of active leisure time who are open to new sensations. The stylish twist-form clear bottle of Tuborg Twist says by its very appearance – “Put your own twist on things!” while the rich flavour of this lager beer and its lemon aroma are pleasantly refreshing when the days are hot. One additional innovation in 2006 was the launch of Tuborg Green in multi- packs of 4 half-liter cans, which helped increase the volume of beer sold with each purchase. The Tuborg brand significantly strengthened the Company’s position in the licensed segment. By the end of 2006, its sales had grown by 128%.

Carlsberg is one of the leading international beer brands. It first appeared in Carlsberg Denmark nearly 160 years ago and today has popularity in more than 140 coun- tries around the world. Consumers of Carlsberg are up-to-date people who take pleasure from an active life and like to travel. This is precisely why the Carlsberg brand is a traditional sponsor of various forms of sports: football, Alpine skiing and golf. It is already well established that Carlsberg intends to sponsor the EURO 2008 championships. In April 2006 new and innovative packaging appeared on the Russian market – a bottle with a unique opener on the bottom and a convenient twist-off cap. The product launch was supported by a massive multimedia advertising campaign with the slogan “Carlsberg. Probably, the best opening in the world!” Using simple and understandable language, this campaign gave consumers informa- tion about the functional advantages of the new packaging. The innovation enjoyed success and contributed to growth of the brand’s sales which, by the end of 2006, amounted to 50%. Moreover, this innovation was noted by the professional community as well: in the BRAND OF THE YEAR/EF- FIE 2006 competition Carlsberg was awarded the bronze medal in the category “For change of appearance.”

* here and further the data of Business Analytica

22 Consolidated brand portfolio

This beer, which symbolizes refinement and chic, was created in France in 1952 Kronenbоurg 1664 especially for the coronation of Queen Elizabeth II. Today Kronenbоurg 1664 is sold in more than 70 countries, enjoying greatest success in Europe. Kronen- bourg 1664 is a premium French beer which will satisfy the most refined taste. Throughout the world, Kronenbourg 1664 attracts successful and self-confident people who like beautiful things, prefer French style, know how to enjoy life and take pleasure in things. This brand has conquered the hearts of millions of people in the whole world thanks to its inimitable taste: it is produced using Strisselspalt, one of the best varieties of aromatic hops, resulting in a beverage with an elegant bitterness that is balanced by notes of grapefruit and the full aroma of hops. In 2006 Kronenbourg 1664 was put on sale in a bottle with a volume equal to one setier, or 0.4661 liter (1664 written backwards) – an ancient French measure of volume. The French brand is sold in such an unusual bottle only in Russia. Kronenbourg 1664 is one of the Company’s fastest growing brands. In 2006, its sales grew by 132%.

This Australian beer first appeared in 1886, and now it is one of the fastest growing Foster’s international brands. Foster’s is produced by 20 breweries in Australia, America, Europe, Asia and Russia. It is sold in more than 150 countries worldwide. People who drink the lager Foster’s with its refreshing taste have a positive view of the world, and therefore there is nothing impossible for them. Cheerfullness, a sense of humour, an active life style, an unusual way of thinking, and a personal style are the main rules on which “Foster’s Laws” are built. They were the basis for the brand’s Russian advertising campaign in 2006. Thanks to clear and memorable advertising, the brand received a number of prestigious awards in 2006: silver at the BRAND OF THE YEAR/EFFIE 2006 competition in the category of “Effective strategy for brand-building,” bronze in the “Integrated communications” category of the ADCR Awards professional competition of advertising and design, and gold in the “Advertising campaigns” category at the Kiev Advertising Festival. In 2006 Foster’s appeared on the Russian market in new packaging – a half-liter bottle with an easy to open ring-pull cap. By the end of 2006, sales of Foster’s beer had grown by 117%.

23 Consolidated brand portfolio

Premium beer segment The Company’s premium brands are developing successfully and enable Baltika Breweries to regularly occupy the first place in this segment. For several years now, Baltika №7 Exportnoye has been the leader of the segment. The Nevskoye brand is also developing successfully. Moreover, the Company’s premium portfolio includes Baltika №0 Nonalcoholic, Baltika №5 Zo- lotoye, Baltika №6 Porter and Baltika №8 Pshenichnoye.

This is a lager beer which meets the very high expectations of lovers of this Baltika №7 beverage. Baltika №7 is prepared from select malt and rare varieties of hops. Exportnoye It is notable for a special mildness and full-bodied flavour. Consumers of the brand are primarily city inhabitants who are open to human contact, value opportunities for self-improvement, and know that they can achieve more in life, so they don’t rest on their laurels. Baltika №7 is exported to 33 countries, including the CIS. The brand has been given more than 15 awards by professional and consumer competitions both domestically and at the international level. In 2006 Baltika №7 was launched in a multi-pack of 4 half-liter cans. Baltika №7 has been the leader of the premium segment for several years in a row. The results of the year 2006 show its market share in the segment amounted to 16%.

One of the first Russian premium brands, Nevskoye appeared on the market Nevskoye at the beginning of the 1990s. The successful development of the Nevskoye brand has always been accompanied by changes, innovations and invariably high quality. Consumers of Nevskoye beer are independent-minded, active young people. They take a lively interest in their future but without forgetting to enjoy them- selves. And one of their favourite pleasures is Nevskoye beer, because they are always sure they will get real enjoyment from its unique mild taste. The brand portfolio consists of four beer varieties: Nevskoye Classicheskoye, Nevskoye Svetloye, Nevskoye Originalnoye and Nevskoye ICE. During 2006 the packaging was restyled and the product was launched in a new, premium bottle. The design of labels and cans was also changed. At the end of 2006, the brand’s share of the segment amounted to 14%, which enabled Nevskoye to confidently hold onto third place in the Russian market of premium beer. The brand’s sales grew by 32%.

This youngest variety in the Nevskoye brand line-up has been in production Nevskoye ICE since the spring of 2005. Nevskoye ICE is noted for its lightness and a refresh- ing taste, which is brought to the fore by the absence of clearly expressed bit- ter notes seen in other beer varieties. It is produced according to a unique tech- nology based on chilling the beer to a very low temperature and eliminating the ice crystals. Nevskoye ICE is intended for young people who always find interesting and fresh ideas on how to amuse themselves. Since its launch, Nevskoye ICE has received a number of top awards at beer competitions in Moscow. Amidst other premium beer varieties sold in transpar- ent bottles, Nevskoye ICE is a sure leader.

24 Consolidated brand portfolio

Mainstream and lower mainstream beer segments In the mainstream and lower mainstream segments, the Company has bestsellers Baltika №3 Classicheskoye and Arsenalnoye. They are confident sales leaders in their segments and their market position strengthens from year to year. The portfolio of mainstream brands also includes Yarpivo, Baltika №2 Svetloye, Baltika №4 Originalnoye, Baltika №9 and the new entry of 2006, Baltika Cooler.

Ever since the mid-1990s, Baltika №3 Classicheskoye has traditionally been the Baltika №3 most popular beer among Russians. This beer is intended for people who value Classicheskoye patriotism and being part of contemporary Russia. They place importance on genuine feelings, family traditions, the possibility of working in a good team and, most important of all, honest human contact. Baltika №3 has won the prestigious Russian prize “Product of the Year” in the field of consumer goods eight times and is a five-time winner of the “People’s Brand” competition. Baltika №3 has won a total of more than 30 awards at in- ternational and domestic competitions, including the prize of the competition for BRAND OF THE YEAR/EFFIE 2005. In May, 2006 Baltika №3 was brought to market in fundamentally new packaging – a one-liter PET bottle which in its outward appearance cannot be distinguished from the half-liter glass bottle. This packaging at once set new standards for PET in Russia. In the same year, Baltika №3 was launched in convenient packs of 4 half-liter cans. Today Baltika №3 is the best selling beer in Russia. At the end of 2006, it was the leader of the mainstream segment with a 19% share.

Baltika Cooler is the youngest Baltika beer variety. It was brought to market in Baltika Cooler April, 2006 and is a lager beer with refreshing taste and low density. This is the first beer variety in the Baltika brand to be brewed especially for young adults who lead an active life style and are open to bold ideas and decisions. Despite the fact that Baltika Cooler is positioned in the mainstream segment, the packaging was created using the most innovative trends which till then were the property of more expensive beer brands. Baltika Cooler is available in half-liter glass bottles with a long neck, transparent self-adhesive label and a ring-pull cap. This new product entry also suited the taste of consumers abroad. Exported from the time of its launch, the brand now is sold in 13 countries worldwide. In October, 2006 Baltika Cooler was acknowledged to be the best “Innovation of the Year” and won the silver award of the BRAND OF THE YEAR/EFFIE 2006 com- petition. The newcomer also received the award for “Best Innovation, 2006” in a competition conducted among enterprises belonging to Scottish & Newcastle. The brand already showed very impressive results in the year of its launch. The sales volume in 2006 amounted to 1 mln hl and by the end of the year its share of the mainstream segment reached 5%.

25 Consolidated brand portfolio

Baltika №9 is remarkable for its profound rich taste and it is the Company’s Baltika №9 strongest beer variety. It is popularly known by the nickname Devyatka (Nine). The high quality of Devyatka is well known abroad. It is one of the leading varieties in terms of export volume. Devyatka is shipped to 27 countries around the world. In 2006 this beer was launch of a new 1.5-liter PET bottle with metallic label. Devyatka is the third largest selling variety of the Baltika brand and the Com- pany’s fastest growing strong beer variety. In 2006 its sales volume in Russia grew by 16%.

During the 6 years of its existence on the market, Arsenalnoye has changed Arsenalnoye from a regional brand into one of the most popular brands in Russia which is exported to 16 countries worldwide. Arsenalnoye is positioned as a high-quality beer at an affordable price for de- cisive people with an active position in life. It is promoted by the slogan “Ar- senalnoye – the beer with a manly character.” Today the brand is sold in the following varieties: Arsenalnoye Traditsionnoye, Arsenalnoye Classicheskoye, Arsenalnoye Krepkoye and Arsenalnoye Zakalennoye. Among the innovations introduced in 2006 were the launch of two varieties – Ar- senalnoye Traditsionnoye and Arsenalnoye Classicheskoye – in 2.5-liter PET packaging and the move of the entire line-up of the brand to metallic labels. The Arsenalnoye brand occupies second place on the Russian beer market in terms of sales volume and is the leader of the lower mainstream segment with a share of 19%.

A brand with a very optimistic communication, Yarpivo has existed on the Rus- Yarpivo sian market since 1998. Its consumers believe that if you look at everything with a sense of optimism, then you can find a great many good moments in life. You simply have to take genuine pleasure in success and good fortune and not be upset by trifles. At present, the portfolio of the Yarpivo brand consists of 5 sub-brands: Yantar- noye, Originalnoye, Krepkoye, Svetloye and Ledyanoye. In 2006 new packaging was introduced and now three of the varieties – Yantar- noye, Krepkoye and Originalnoye – are available in 1.5-liter PET bottles. The Yarpivo brand occupies third place in the mainstream segment with a share of 14% and ranks among the largest brands on the Russian market.

26 Consolidated brand portfolio

Regional beer brands The portfolio of regional brands is being actively developed and constitutes a significant part of the Company’s business. Their success is based on the clearly expressed pride of Russians in the region where they live and for that reason brands like Don, DV, Samara, Uralsky Master, Kupecheskoye and Volga are so well loved and popular in their regions. The key innovations of these brands in 2006 were the launch of new 2.5-liter PET packaging and the move to metallic labels.

Uralsky Master is the leading beer brand in the Urals. The brand is available in Uralsky Master three sorts: Uralsky Master Classicheskoye, Uralsky Master Svetloye and Ural- sky Master Krepkoye. During 2006 the two main varieties of Uralsky Master beer, Classicheskoye and Svetloye, were put on sale in new and economical 2.5-liter PET packaging. The brand has been the recipient of various professional awards for high quality and achievements, including the gold medal for its Uralsky Master Krepkoye variety and the silver medal for the Uralsky Master Classicheskoye variety at the 10th International Professional Competition of Beer, Soft Drinks and Mineral Water in 2006. Sales of the Uralsky Master brand grew by 20% during 2006.

Don is the beer brand of the South of Russia. Today three different varieties are Don on sale: Don Svetloye, Don Classicheskoye and Don Yuzhnoye. Since June, 2006 the Don sorts are available in large, “southern” size PET packaging containing 2.5-liters. Don invariably ranks among the “100 best goods of Russia” and the brand has won the gold prize of the BRAND OF THE YEAR/EFFIE 2005 competition, as well as the award for “Golden Brand of the Southern Region 2005.” The results of 2006 show that Don is the leader on the market of the Southern region with an 11% share and the leader of the lower mainstream segment of the region with a 31% share. Its sales grew by 19% last year.

In the 3 years since its launch, the DV brand has won great popularity among DV consumers in the Far East. DV is “the choice of a real Far Easterner!” Its port- folio consists of three beer varieties: DV Classicheskoye, DV Svetloye and DV Krepkoye. Constant innovations support the image and promotion of the brand. In the spring of 2006 DV Classicheskoye was brought to market in a 2.5-liter PET bottle. In December, 2006, the packaging underwent restyling: the product got a new metallic label. The brand’s success has been confirmed by numerous awards won at large regional exhibitions and fairs. In particular, in 2006 DV was a winner of the In- terregional Amur Trade and Industry Fair and of the competition “The Ten Best Goods of the City of Khabarovsk.” DV is the leader on the beer market of the Far East with a 15.5% share and leader of the lower mainstream segment of the region with a share of 32%.

27 Consolidated brand portfolio

The Samara brand is positioned as a beer which helps people enjoy life and Samara makes an occasion festive for all residents of the Volga region. The assortment of the brand includes Samara Classicheskoye, Samara Leg- koye and Samara Krepkoye, the last of them was first launched in 2006. In May, 2006 the Samara Classicheskoye variety was put on sale in new eco- nomical 2.5-liter PET packaging. Already within a year after its launch, Samara was named the “Golden Brand” of the year in the Samara Oblast and became a winner of the BRAND OF THE YEAR/EFFIE 2003 competition in the Regional Project category. In 2006, Sa- mara Legkoye was awarded a medal at the Volga Region Agroindustrial Fair. Samara is the leading brand of Samara Oblast with a market share of 16% and it has won the hearts of the people as a democratic, high quality and “native” beer.

The Volga beer brand was launched by the brewery in Yaroslavl in the year Volga 2000. In the design of Volga beer packaging we can see the characteristic and recognisable features of the Yarpivo brand, all of which helped promote the brand by drawing on the image of a stronger brand without having to make additional investments. The Volga product line-up consists of three varieties: Yantarnoye Spetsialnoye, Khlebnoye and Khmelnoye. Volga beer is sold in several regions of Russia: the Central region, the North Western region, the Urals and Volga, and in Moscow as well. Volga is one of the leading brands of the lower mainstream segment in 1.5-liter PET packaging with a 4.5% share.

Kupecheskoye (Merchant’s) beer was named in honour of the merchant Florian Kupecheskoye Klepatsky, the founder of the Krasnoyarsk brewery. The brand’s product line-up consists of 3 beer varieties: Classicheskoye, Osoboye and Krepkoye. In the spring of 2006, two of the Kupecheskoye varieties, Classicheskoye and Krepkoye, were put on sale in 2.5-liter PET packaging with a new label. At the end of 2006, Kupecheskoye had 5.4% of the beer market in Eastern Sibe- ria and 13.9% of the beer market in Krasnoyarsk.

28 Consolidated brand portfolio

The Company remains the leader in the discount beer segment. Baltika’s share Discount beer at the end of 2006 grew by 4% compared to the same period of 2005 and segment reached 28%. Following the market trends, in 2006 the Company introduced a new 2.5-liter PET packaging for its portfolio of discount brands – Zhigulevs- koye and Leningradskoye. In addition, Baltika brought out a new product in this segment – the brand called Bolshaya Kruzhka. Two varieties of this beer were launched - Yantarnoye and Krepkoye - and they were made available in three versions of packaging: half- liter glass bottles and 1.5-liter and 2.5-liter PET bottles.

Low-alcohol and energy drinks are new products for the Company which en- Low-alcohol and tered the portfolio following the merger. They allow Baltika to occupy certain niches in the non-beer beverage market and also to offer alternative products energy drinks to those consumers who turn from beer to other drinks. In this way the Com- pany gets an additional source of profitable growth. The Company’s sales of low-alcohol drinks are made mainly in the North Western region. Towards the end of 2006, the Company’s share of the low-alcohol market in St. Petersburg reached 24%, which is 3% greater than during the same period of 2005. The portfolio of the Company’s non-beer products is represented mainly by the energy drinks Battery (produced under license) and Flash, the licensed low-al- cohol cocktails Golden Cap and Sinebrychoff, and the proprietary low-alcohol brands Indiana Juice and Morsberry. The sales volume of Battery and the Com- pany’s low-alcohol cocktails grew by 21% during 2006. The greatest growth was achieved by the brands Indiana Juice (+215%) and Morsberry (+ 56%). The popular Finnish brand Sinebrychoff continues to be the leader of the low- alcohol beverage market in St. Petersburg with a share of 12%. This low-alco- hol cocktail is sold in St. Petersburg and in other cities of the North Western region of Russia. In the future, the Company intends to develop this area of business and to strengthen its position in the market of low-alcohol beverages.

29 Image projects

The organisation and sponsorship of beer festivals, city anni- spend their leisure time in an interesting and memorable versaries, music festivals and other events is an important area way. Each year the Company supports around one hun- of activity for the Company. Such occasions help to broaden dred events across all of Russia as well as a number of the circle of loyal consumers. At the same time they facilitate events abroad by acting as organiser or as partner. raising the culture of sales and beer consumption, and they give residents of various cities around Russia a chance to

Company sponsors music festivals in Russia and abroad

In March, 2006 a concert by the cult group Depeche Mode was tators. In September, an enormous open-air festival was held in St. Petersburg at which more than 23,000 spectators organised in Ekaterinburg – the Baltika RokOt. Around gathered. In June an immense music festival called TUBORG 45,000 spectators were present. GREENFEST was put on in five Russian cities - Ekaterinburg, St. In addition, the Company and its brands provided support Petersburg, Rostov-on-Don, Novosibirsk and Moscow. Appear- to a number of very large Russian music festivals: Prostor ances by musicians occupying the top positions on worldwide (Vladivostok, Khabarovsk), Nashi v Gorode, Open Air of and Russian hit parades drew more than 27,000 spectators to the Year, Jazz Festival (St. Petersburg, Moscow), Castle the festival. In 2006 the Company was General Sponsor for the Dance (Vyborg), Morskoy Uzel (Novorossisk), the Ilmen second time of the Vivat, Russia! festival in Tallinn (Estonia), Festival of Bardic Song (Chelyabinsk Oblast), Vozdukh where 10,000 spectators took part. To support its brand image (Petrozavodsk), as well as large-scale international musi- in the Republic of Belarus, the Company took on the role of Of- cal projects such as Stereoleto-2006 and Who Ze Freaks ficial Partner of the 15th Slavyansky Bazaar International Music in St. Petersburg. Festival. During the summer, Baltika №3 was General Partner of the country’s main rock festival Nashestvie, at which more than 100 rock musicians played on three stages before 100,000 spec-

Baltika is an active participant of beer festivals

During the course of the 2006 beer season, the Company acted The Company also took part in well known beer festivals as organiser of beer festivals in St. Petersburg, Moscow, Che- abroad: Ollesummer-2006 in Tallinn, which is the largest lyabinsk, Samara, Yaroslavl, Toliatti and Voronezh which were annual beer festival in the Baltic States; the Beer Cup Fes- visited by more than 700,000 people. tival in Belarus; the Beer without Borders festival in Tash- kent; the International Beer Festival in the People’s Repub- The organizers of St. Petersburg Beer Festival fixed a new record lic China; the Berlin Beer Festival; and the 5th Annual Beer of mass drinking of beer. 5,200 people took part in the event. Festival in Athens. This achievement has become a new Russian record, which has a good chance to come into the Guiness Book of Records.

30 Image projects

City anniversary celebrations get support from the Company In order to make the life of Russians brighter and richer, the Company supports festivities marking the founding of Russian cities. In 2006 Baltika Breweries provided assistance to the fol- lowing cities for their celebration events: Volgograd, Vologda, Voronezh, Krasnoyarsk, Magnitogorsk, Rostov-on-Don, Tula and Chelyabinsk. Performances by popular Russian groups and so- loists were arranged.

Baltika participates in the development of Russia’s foreign trade ties As the largest exporter of beer in Russia, Baltika contributes to the development of Russia’s foreign trade ties and supports a variety of business events and socially important events abroad. In 2006, the Company sponsored the Forum Days of the Russian Economy in Finland, as well as the Days of the North Western Region of Russia in Belarus. During the course of the year, Baltika took part in major inter- national exhibitions in China, where it represented the Russian brewing industry. The Company’s products once again won the annual Choice of the Year competitions in Belarus and Kazakhstan. Baltika №0 Nonalcoholic took the silver medal at the World Beer Cup – 2006 competition in the USA and Baltika №6 Porter was silver prize winner at one of the most prestigious competitions in the beer brewing field, the European Beer Star Award – 2006.

All of the Company’s breweries are open to visitors Tours are regularly conducted at all of the Baltika breweries. The visitors have an opportunity to learn how beer is brewed in a modern brewery enterprise, as well as to taste various beer va- rieties. Around 53,000 people visited the Company’s breweries in 2006. At the Krasnoyarsk brewery, there is the Museum of the History of Brewing in Siberia which is the largest exhibition of its kind related to brewing in Russia. Questions about the brewery tours can be addressed to [email protected].

31 Brand Achievement in 2006 Phenomenal success – 100 million liters for 9 months of sales Key projects and achievements

Baltika improves the system of sales

During 2006 the sales departments of the four companies were consolidated, an expanded brand portfolio was formed and the distribution system was reorganised. On the basis of an all- around evaluation of the potential of partners, a new list of dis- tributors of packaged and draught products was put together, the terms of collaboration were unified and a single set of stan- dards and approaches to work was introduced. As a result of the open process of selection, the main criteria of which were the presence of logistics resources, financial stability and opportuni- ties for development, the club of distributors of packaged beer, consisted of 144 companies was formed. The creation of the consolidated sales team made it possible to increase coverage of the outlets and to improve the qualita- tive and quantitative results of work with them, such as taking greater space on the shelves and reducing internal competition between the brands. The implementation of a number of projects, including CRM (Customer Relationship Management), the move to direct ship- ments to distributors, arrangements for storage on consignment and customer orders via a WEB interface all had a positive impact on the work efficiency of Company employees and coopera- tion with distributors. In on-trade, Baltika Breweries increased its territorial coverage, raised the quality of equipment servicing and continued its long- term programme of implementing investment projects. Having strong brands that are leaders in all the price segments made it possible to put together an attractive portfolio for key re- tailers and to become at the same time an important supplier to chain stores of all formats across the entire territory of Russia. In 2006 Baltika Breweries became the leading brewer in terms of installed refrigeration equipment. It actively used a variety of programmes for the POS materials to raise the effectiveness of its work with retailers. Following the merger, the size of the sales department grew sig- nificantly. Since the employees coming from the various merged companies had different levels of preparation, during 2006 spe- cial attention was devoted to their training. Drawing on the ex- perience of all four companies, a united, corporate system of training was created and common standards were introduced for conducting training in the work place. The programmes used for basic training sessions – the Art of Selling, the Art of Leadership, the Negotiations Professional – were all reviewed and improved.

33 Key projects and achievements

Company raises its production capacity

Thanks to the merger, Baltika doubled the number of its brewer- • Expansion of capacity of the Chelyabinsk brewery by ies. However, active development of the market and a growing 2.5 mln dal/month. The project dates: July, 2005 -April, demand for the Company’s products made it necessary to in- 2006 crease production capacities in order to satisfy demand during • Expansion of capacity of the Samara brewery by 4.5 mln high season. During 2006, the Company implemented several dal/month. This is the first project in the Company’s his- projects for increasing production capacity which enabled it to tory to triple a brewery’s production capacity. The project eliminate shortage of capacity in the Volga region, the Urals and dates: June, 2006 – 2007 Siberia and as a consequence, to reduce expenses relating to transportation of the products to these regions: In addition, at the end of 2006 the Company announced the construction of a new brewery in Novosibirsk, where there was till then only a regional warehouse. • Expansion of capacity at the Krasnoyarsk brewery by 0.5 mln dal/month. The project dates: August, 2005 – April, 2006

The merger made it possible to develop production in the regions of consumption

A great benefit accruing from the merger was the possibility of pro- finished goods, to cut delivery time and to respond in a ducing brands coming from different breweries belonging to the more flexible manner to demand as it arises in one or an- merged Company at each other’s facilities (cross-production). other region. Overall, during 2006 the Company produced Bringing production closer to the regions of consumption allows around 6.3 mln hl of beer in new production locations, the Company to reduce costs of transporting and warehousing which made it possible to reduce costs significantly.

Baltika is actively implementing projects to reduce costs

In order to achieve its strategic goals, the Company must not ritory of its application is continually expanding. In 2005, only be able to meet growing demand but also control and reign the project made it possible to receive 26,500 tn of barley; in expenditures. Besides cross-production, the solution of this in 2006 - 84,000 tn. One additional important Company task has been facilitated by the implementation of a number of project aimed at cost-cutting is the construction of a malt- projects aimed as reducing raw material and operational costs. house in Yaroslavl with production capacity of 55,000 tn The agricultural project, aimed at obtaining European qual- of malt per year. The production of its own malt allows ity brewers’ barley under Russian conditions and at lower cost the Company to reduce exposure to market risks of sharp (on average 40% cheaper than similar quality imports) could be fluctuations in the supply of malt on offer and/or the price considered as the most important of these projects. The project of this resource. began in 2005 in a number of regions around Russia and the ter-

34 Key projects and achievements

Company specialists develop a new yeast culture

During 2006 employees in the Company’s Research Centre on base of a mini-brewery selected and cross-bred natural yeast varieties from various nature preserves of Kamchatka and the Kurile Islands to produce a unique culture for the production of Baltika Cooler.

Logistics is a source of further competitive advantage

Logistics is one of the most important potential areas where the Company can create additional competitive advantage in the coming three years. During 2006 the following projects in this field were either launched or completed: automation of ware- houses, shift to direct shipments to distributors and organisation of storage on consignment. In addition, active work was carried out to improve utilisation of vehicle capacity, the routing system and the system for planning production and shipments. In co- operation with JMAC, a project was begun to improve business processes and create the best supply chain in the industry.

Baltika Breweries received a unitied certificate for its Quality Assurance System

Against the background of the global changes going on in the Company, Quality Assurance, the system managing the inter- action of business processes, increases in importance. Over the course of 2006, Baltika was re-certified according to the State Standard R ISO 9001-2001 (ISO 9001:2000) to include all of the merged companies. A certified audit was made in the Company’s headquarters, at the breweries in Tula, Chelyabinsk, Krasnoyarsk, Yaroslavl and Voronezh, as well as at the Baltika - St. Petersburg brewery. Baltika received a single certificate for its system of Quality Assurance which confirms that all of the Company’s breweries meet all conditions to ensure high quality production. This document was delivered by the certifying body Test - St. Petersburg Ltd.

Information Technologies make it possible to create a unified business space

In connection with the merger, the Company faced a (Enterprise Resource Management) system with an integrated task of creation a common medium of information for data base and a large number of user terminals. Fast unification the interaction of the employees, located in various and integration of information systems of the companies became regions and time zones. During 2006, the most notable it possible the process of operational and legal merger. achievements in solving these tasks were the complete Key projects relating to the SCM (Supply Chain Management) In- unification of all automated Monolit SQL systems in formation System were implemented. Providing support of plan- the merged branches, as well as the integration of ning of cross-production, consignment trade and interaction with Information Systems into a single, centralised ERP

35 Key projects and achievements

customers via the WEB made it possible to reduce to a minimum the likelihood of shortages arising at any link in the supply chain. The project for developing CRM has made it possible to automate the work of more than 1,500 sales employees in the field located in 22 cities around Russia and to inte- grate their work with the Company’s Information Systems. Thanks to this, trade representatives now have access to continually updated information about customers, includ- ing order histories, data on equipment, bonus activities and marketing programmes.

Baltika has a commitment to developing its personnel

The Company is striving to create the most effective team of highly with the best Russian and foreign institutes and brewery professional employees who are motivated to achieve ambitious schools. The Company has put in place programmes for objectives. During 2006 the major accent was put on disseminat- management training, internal programmes of develop- ing through the entire Company the best practices of the various ment of business skills (time management, public speak- enterprises of the Company, unifying the system of compensation ing, work with Power Point), English language lessons, an and social protection and introducing new and modern tools for adaptation course for new employees, as well as other managing staff. programmes. It also developed a system for motivating internal trainers. This step is aimed at achieving one of the Baltika is committed to developing and promoting its employees most important goals: creating a company with a culture rather than going outside for resource. Thus, during 2006 it intro- of training. duced the practice of conducting internal competitions to fill job vacancies. A corporate model of skills and competences was de- veloped to assist in getting feedback from employees, planning careers and taking better informed personnel decisions. The Com- pany introduced annual performance evaluations, which are a very effective tool for managing and developing personnel. In order for employees to be able to raise the level of their know- ledge and for the team to meet the demands of the present day market, the Company gave serious attention to developing its Cor- porate Training Centre. For the preparation of future technical and production technology specialists, the Company continues to work

36 Investment activity

The consolidated Company’s investments in the business during 2006 amounted to €204mln

In 2006 Baltika Breweries continued to make investments di- The overall volume of the Company’s investments in 2006 rected at expanding production capacity and purchasing equip- came to €204mln, which is 36.9% more than the level of ment, developing the system of sales and distribution, develop- investments in 2005. The Company’s own funds were the ing Information Technologies and cutting costs. source of its investments.

Main areas of investment, mln EUR

5.9%

2.5% 48.0%

8.3%

26.5%

8.8%

Production capacity increase

Purchase of equipment

Development of sales and distribution

Reduction of expenditures

IT development

Miscellaneous

37 Brand Achievement in 2006 Russian fans drank over 80 million glasses of beer, enjoying the loved football Financial position

Company delivered excellent financial results

The year 2006 was one in which the operational and legal Baltika Breweries prepares its financial reports in accor- merger was completed. This was reflected in the key financial dance with several standards of accounting. For purpos- results of the consolidated Company. An extensive investment es of comparability and transparency of the terms, the program was an additional factor in the development and im- Company presents here financial data prepared on the provement of the Company’s business, carried out in the report- basis of of International Financial Reporting Standards. ing year. In the final analysis, the Company delivered excellent financial results in 2006, thereby confirming the effectiveness of the merger and its ability to dynamic development in a highly competitive market environment.

The Company’s key financial results in 2005-2006 (Data presented in accordance with reports prepared on the basis of IFRS)

2006 2005 Change 2006/2005

Sales, mln hl 37.16 33.69 + 10.3%

Revenue, €mln 1,739.5 1,440.4 + 20.8%

COGS, €mln (807.7) (717.8) + 12.5%

Gross profit, €mln 931.8 722.5 + 29.0%

Gross margin, % 53.6% 50.2% + 3.4 pts

Distribution expenses, €mln (442.2) (359.0) + 23.2%

Administrative expenses, €mln (62.4) (57.7) + 8.2%

Other operating expenses, net, €mln (0.2) (2.6)

EBITDA, €mln 555.7 405.4 + 37.1%

EBITDA Margin, % 31.9% 28.1% + 3.8 pts

EBIT, €mln 427.1 303.2 + 40.8%

EBIT Margin, % 24.6% 21.1% + 3.5 pts

Financial items, €mln 14.7 (2.1) + 598.7%

Profit before tax, €mln 441.8 301.1 + 46.7%

Income tax expenses, €mln (103.3) (65.1) + 58.62%

Profit for the year, €mln 338.4 236.0 + 43.4%

Net profit margin, % 19.5% 16.4% + 3.1 pts

ROA, % 18.1% 14.6% + 3.5 pts

ROE, % 21.9% 18.5% + 3.4 pts

EPS, € 2.03 1.50 + 35.3%

39 Financial position

In the past year the Company’s sales revenue grew by 20.8% compared to the preceding year. This was facilitated by the following factors: • growth in sales by volume (+10.3%); • growth of the average prices of the Company’s products (+5.9%); • change in the exchange rate of the Euro (+3.4%).

In 2006 Company was able to improve its EBIT margin

• gross margin increased by 3.4% compared to the preceding year, reaching 53.6%; • growth in unit costs for distribution (delivery, warehousing work) was substantially below the level of inflation and amounted around 5%; • administrative expenses in rubles practically did not change despite the additional expenditures relating to the merger. Increase in gross margin was made possible thanks to: • operational consolidation and synergy thereby achieved in the field of procurement and improved utilisation of production capacity; • favourable market conditions for raw ingredients (primarily malt); • temporary restrictions on the market of alcoholic beverages; • cost-cutting projects implemented in previous years (for example, increased share of malt coming from own malt-houses).

The improved assignment of production loads had an impact on them all caused expenditures to rise by more than 30%, transport logistics, which allowed to reduce the delivery costs the reduction of operational costs not only allowed to com- and delivery time. Reducing of delivery time had a positive effect pensate the objective growth of expenses for promotion as well on the quality of product reaching the final consumer. and advertising of the Company products, but to improve the financial results significantly as well. As a result, operat- Improving business processes in administrative functions made ing margin increased by 3.5% to 24.6% in 2006. it possible to reduce labour-intensive work and free up person- nel to implement other projects. Despite the fact that government-imposed restrictions on the use of advertising, media inflation running at more than 20%, the growth in the number of innovations and the need to advertise

40 Financial position

Growth of EBIT Margin in 2006

+ 1% - 1%

+ 3.5% 24.6%

21.1%

EBIT margin 2005 COGS Logistics and Expenses for EBIT margin 2006 Administrative promotion Expenses

The efficiency of use of Company assets is growing

In the course of the year the Company assets grew substan- To increase efficiency of use of the funds, involved into tially (more than 3pts), the return on assets amounted to 18.1% business development, the Company devotes steadfast at the end of the year. In 2006 the Company also demonstrated attention to managing its working capital, forms the flex- an increase in return on own equity, all of which confirms the ible structure of assets, analyzing their turnover and liquid- growing effectiveness of use of its own funds, invested by the ity. For instance, timely investment of its own funds in pro- shareholders in Company business. The ROE ratio in 2006 curement of raw ingredients and materials in conditions amounted to 21.9%. of unfavorable forecast on the market situation, led at the end of the year to increase of this item of the working capi- In year 2006 the growth of free cash flow continued: the Com- tal, however, provided significant aggregate effect on the pany earned €442.4mln in cash from its operations. These funds Company’s results. Switch to the consolidated system of exceeded the investment requirements of the Company, which sales, selective approach to the choice of partners pro- allowed to pay dividends, reduce borrowings and leasing debt. vided decrease of the share of the accounts receivable The Company’s surplus cash was used to make short-term in the structure of Company working capital, reduced the placements on the money market. risk of the non-recoverable debts.

41 Financial position

Structure of current assets (excluding cash and financial investments)

2005 40% 4% 11% 4% 21% 3% 12% 5%

2006 41% 4% 8% 2% 25% 11% 6% 3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Raw ingredients and basic materials Accounts receivable per profit tax Advances to suppliers

Work in process Trade accounts receivable Other accounts receivable

Finished goods VAT

Structure of current liabilities (excluding financial borrowings)

2005 66% 1% 13% 13% 7%

2006 46% 12% 15% 18% 9%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Accounts payable to the trade Other accounts payable Liability for wages

Taxes to be paid Liability for payment of dividends

Company increases capitalisation and pay-outs of dividends

Year after year, the Company has been pursuing a policy of increasing its market value. This is apparent of the implementing projects which make it possible to raise the value of brands, reduce the costs and increase the efficiency of assets, which results in the increase of capitalisation of the Company and the amount of the dividends.

42 Financial position

Pay-out of dividends, €mln

100.0 139.0 90.0 80,0 70.0 60.0 53.9 50.0 43.2 35.7 40.0 27.4 30.0 15.3 20.0 10.0 0.0

2001 2002 2003 2004 2005 2006

Ratio of profit and accrued dividends on the Company’s shares for 2000-2005 (in accordance with the Russian Standards of Accounting) mln. RUR Net Profit 8 000 Dividends 7 000

6 000

5 000

4 000

3 000 44.8% 2 000 46.2% 37.8% 1 000 32.2% 35.4% 18.4% 0 2000 2001 2002 2003 2004 2005

43 Brand Achievement in 2006 About 370 million liters of beer for optimists Corporate social responsibility

Effective and steady development of the business enables the Company to carry on external and internal social programmes, to invest funds in the development of the regions and associated sectors of business, as well as to provide support to socially impor- tant projects and events in the regions. Charity as a gesture of good will exerts a positive influence on the reputation of Baltika and facilitates a respectful attitude to its activity in the regions and loyalty of consumers to the Company’s products.

Baltika’s tax payments are growing from year to year

Full and timely payment of taxes and strict respect for the laws are not only an obligation for the Company but constitute an impor- tant component of social responsibility which is one of the basic corporate values of Baltika Breweries. The Company is one of the largest tax payers, accounting for a significant part of tax revenues not only in St. Petersburg, where the headquarters are situated, but also in a number of regions where subsidiaries are located.

The total amount of tax payments by the merged Company to the budgets at all levels of government and into non-state pension and other funds during 2006 amounted to 16.9 bln rubles, which are 3.7 bln rubles more than in 2005.

Partnerships are being developed with the regions

In 2006 the Company concluded agreements on social and eco- nomic partnership with the Administrations of the Khabarovsky Krai, Rostov Oblast and the City of Krasnoyarsk. In the frame- work of these agreements, Baltika will support cultural and sport- ing events and festivities of the cities and regions, ensure stable payment of taxes to the local budget, provide salaries and work- ing conditions to its workers at an appropriate level.

Baltika is also developing its agricultural project within the frame- work of regional partnerships. At present around 30 agricultural enterprises are working efficiently in the Voronezh, Lipetsk, Tula and Ryazan Oblasts. As a result, in 2006 these enterprises had revenues of more than 350 mln rubles coming from the sale of their products. The next step is to conclude agreements with agricultural enterprises in Tambov, Orel and Kursk Oblasts.

The Company is concerned about preserving the environment

Preserving the environment is an important area of the Com- pany’s activities. As the owner of modern production facili- ties across the territory of the whole country, Baltika devotes great attention to the ecological situation in the regions where its breweries are located and sets for itself the high- est requirements for ecologically safe production. Moreover,

45 Corporate social responsibility

the Company systematically carries out measures intended to improve the state of the environment. In 2006 ecological projects were implemented along three lines: measures to protect the air, to protect the water, and to improve waste treatment.

Considering the specifics of its production, the greatest efforts were concentrated in water protection projects. The most im- portant of these projects were continuation of the construction of primary level facilities for the treating waste water from the Baltika-St. Petersburg brewery; modernisation of the pumping station for moving manufacturing water to a neutralisation sta- tion at Baltika-Vena; start of construction of the 2nd phase of biological water purification facilities in Samara; modernisation of existing biological purification facilities in Khabarovsk to cre- ate a separate denitrification zone; and construction of water purification facilities at the Baltika children recreation complex in the village of Molodezhnoye in Leningrad Oblast.

Among measures directed at improving purification of the air, greatest attention was devoted to replacing dust elimination equipment at the elevator in Rostov (making it possible to re- move 99.9% of discharges into the atmosphere) and to install- ing new equipment in Voronezh to raise the effectiveness of the exhaust system for removing particles of malt.

The most important measures relating to waste treatment under- taken during 2006 were the improvement of the area for tempo- rary storage of waste in Tula and purchase of special containers for temporary storage of various kinds of waste in Khabarovsk and at Baltika-Vena.

46 Corporate social responsibility

The social package offered by Baltika is one of the best in the industry

In April, 2006 a Social Policy was adopted in the merged Com- pany aimed at raising the level of motivation of employees, creat- ing conditions for their social protection and maintaining a stable and pleasant psychological atmosphere among staff. Under the terms of this policy, Baltika provides employees with an exten- sive package of benefits and compensation.

In several of the companies which were merged with Baltika, the previous compensation packages did not include options like free meals or material assistance relating to personal and family events. The introduction of a consolidated social policy made it possible to unify the practices that existed in the companies prior to the merger and to introduce new ones. In particular, a great deal of work was done to introduce voluntary private medical in- surance for employees. Besides such insurance, employees are insured against accidents on the job and receive supplemental payment above the levels set by law for sick leave and maternity leave. The Company also provides employees with the possibil- ity of visiting its sports complexes free of charge and gives out free passes to health camps for their children. Baltika gives New Year’s gifts to employees and their children as well as providing other benefits.

Within the framework of the social programme, during 2006 a new leisure complex was constructed and put into operation at the Baltika children recreation facility in the village of Molodezh- noye near St. Petersburg. The new facility includes a swimming pool, sports and training halls, a dining hall with seating capac- ity for 200 people, 2 saunas and a mini-pool. In July a dining room with seating capacity for 120 was opened at the brewery in Krasnoyarsk.

In 2006 the Company spent 100 mln rubles on socially important projects and charity

The Company strives to participate actively in many socially important events and in social projects of national and regional scale. In accordance with the policy on charity and corporate sponsorship which the Company adopted in 2006, Baltika Brew- eries targets help to state and noncommercial institutions of med- ical treatment and preventive measures, supports projects in the sphere of health care, culture and education, sponsors sports organisations and competitions, as well as funding programmes aimed at helping socially unprotected strata of the population. In total, during 2006 the Company set aside around 100 mln rubles for socially important projects and charitable work.

47 Corporate social responsibility

One of the main areas of the Company’s charitable activity is helping to implement the “Health” national project. Among the noncommercial institutions of medical treatment to have received support from the Company were Children’s home №8, the Turner Research Institute of Child Orthopedics, the Children’s Polyclinic №63, the children’s hospice in St. Petersburg, the “House of Hope on the Hill” Centre for Rehabilitation of Alcoholics in Len- ingrad Oblast, a Children’s sanatorium and the Accident ward of the City hospital for first aid in Rostov-on-Don, the Children’s cardiological sanatorium in Tula and the Clinical hospital in Vo- ronezh. In 2006 Baltika provided material assistance to families of handicapped children and of children suffering from cancer in Khabarovsk.

Despite new legislative restrictions on sponsoring sporting events, during 2006 Baltika provided support to international ten- nis tournaments in the ATP series – the Kremlin Cup in Moscow and the St. Petersburg Open, as well as show jumping competi- tions in both St. Petersburg and Moscow. Within the framework of its programme for supporting sports, the Company also pro- vides material assistance to local sports clubs in the various cit- ies of Russia where its breweries are located.

48 Corporate social responsibility

Baltika participates actively in the Union of Russian Brewers

In 2006 the Company took an active part in the work of the Union of Russian Brewers. The activity of this organisation concentrat- ed on solving very topical issues for the sector, in particular im- proving the excise tax policy, adjusting the legislation on adver- tising and anti-monopoly regulations and defending the interests of brewers in the CIS countries, as well as developing a draft set of technical regulations for beer products and production.

On March 17, 2006, the third festive awards ceremony was held to honour the best specialists and enterprises in the beer sector during 2005. Baltika received the highest award of the Union “for developing the beer and soft-drinks branch of indus- try in Russia” - Amber Star – in the category “Social Responsi- bility in Business”.

In 2006 Baltika played a leading role in implementing the social policy of the beer sector. On February 6 the presentation of the first Social Report of the brewing sector and a campaign to re- strict access of minors to beer, an initiative of the Union of Rus- sian Brewers, took place. In the context of this campaign, Baltika Breweries distributed some 200,000 stickers with the message “Sale of beer to minors is prohibited” at 37,000 off-trade outlets in the North Western and Southern federal districts in the period from February to June, 2006. In addition, Baltika was the first of the members companies in the Union to include the sign “Sale of beer to minors is prohibited” in its outdoor and television ad- vertising.

49 Brand Achievement in 2006 Around 3.6 million people in Russia live according to the Foster’s laws (data of www.fosterslaw.ru) Corporate governance

Principles of corporate governance

Building on the best traditions of Russian and world practice in corporate governance, Baltika seeks to grow the value of the Company while pursuing the following principles: • defend the rights and legal interests of shareholders and investors; • keep transparency and openness with information; • monitor and evaluate the quality of business management.

When improving the system of corporate governance, the Company is guided by the priorities set down in the Code of Corporate Behaviour approved by the Federal Commission for the Securities Market of the Russian Federation:

• The practice of corporate governance adopted the Company ensures that all shareholders owning an equal number of shares of the same share category are treated equally. All shareholders can receive effective defence in case their rights are violated; • Company shareholders are provided with reliable and effective means of registering ownership of shares; • Shareholders have the right to participate in the Company’s management by means of voting on the most important issues of its activity at the General Shareholders Meetings; • Shareholders have the right to receive complete and reliable information about the Company on a regular and timely basis; • Shareholders do not abuse the rights granted to them; • Within the Company there is effective control over the use of confidential and official information.

Company’s Management Bodies

General Shareholders Meeting

The General Shareholders Meeting is the Company’s highest For purposes of effecting the merger of the companies Bal- management body. tika Breweries, JSC Vena, Pikra Plc. and Yarpivo OJSC, dur- In 2006, the Company held 8 General Shareholders Meetings: ing the course of the year extraordinary shareholders meet- the traditional Annual Meeting, 4 extraordinary meetings and 3 ings and joint general shareholders meetings were held in joint shareholders meetings. the form of absentee voting. At these meetings, sharehold- ers examined and approved the following resolutions: On May 30, 2006, the Annual General Shareholders Meeting was held. • issue of additional shares and increase of charter capital; The Annual General Shareholders Meeting of the Company ap- • reorganisation of Baltika Breweries in the form of the ad- proved the annual report, the report on profit and loss for the dition of JSC Vena, Pikra Plc. and Yarpivo OJSC to Bal- financial year, the distribution of profit for 2005 and dividend tika and approval of contracts relating to the merger; payments in the amount of 24.33 rubles per ordinary share and • reduction of charter capital in connection with redemp- 24.33 rubles per preference share. tion of shares; The General Shareholders Meeting elected the Board of Direc- • introducing alterations to the Company Articles of Associ- tors and the Internal Auditing Committee. It confirmed the Com- ation as a result of the merger and succession of rights. pany’s outside auditors – A&P Audit JSC and ZAO KPMG. The General Shareholders Meeting also approved a new edition All resolutions were approved by an overwhelming majority of the Company Articles of Association and the “Regulation on of shareholders votes. the Management and Control Bodies.”

51 Corporate governance

Chairman of the board of directors Jorgen Buhl Rasmussen Date of birth: 1955 Educational level: higher education Executive Vice President, Carlsberg Breweries A/S Member of the Board of Directors of Baltic Beverages Holding AB Member of the Company’s Board of Directors since 2006

Members of the board of directors

Anton Artemiev Alexander Izosimov Date of birth: 1960 Independent Director Educational level: higher education Date of birth: 1964 President of Baltika Breweries Level of education: higher education Member of the Board of Directors General Director of Vympelcom of the Malt Plant Soufflet St. OJSC Petersburg CJSC General Director of RTI Servis-Svyaz Member of the Company’s Board CJSC of Directors since 2001 General Director of Impuls-KB CJSC General Director of Sakhalin- Telekom Mobile CJSC John Nicolson Member of the Board of Directors of Date of birth: 1953 United Confectioneries B.V. Educational level: higher education Member of the Board of Directors of Director of Scottish & Newcastle Plc. Limnotex Development Ltd Member of the Board of Directors of Member of the Company’s Board of Oy Hartwall Ab Directors since 2005 Member of the Board of Directors of Baltic Beverages Holding AB Member of the Company’s Board of Alexander Ikonnikov Directors since 2005 Independent Director Date of birth: 1971 Bjorn Sondenskov Educational level: higher education Date of birth: 1962 Member of the Board of Directors of Educational level: higher education North-West Telecom JSC Vice President, Carlsberg Chairman of the Board of Directors of Breweries A/S the Independent Directors Association Member of the Company’s Board General Director of Board Solutions of Directors since 2006 CJSC Member of the Board of Directors of Ruselprom OJSC Andrew Stevenson Member of the Company’s Board of Date of birth: 1957 Directors since 2005 Educational level: higher education Development Director, Scottish & Newcastle Plc. Member of the Board of Directors of Baltic Beverages Holding AB Member of the Company’s Board of Directors since 2006

52 Corporate governance

Board of Directors The activity of the Board of Directors aims at adopting effec- The Board of Directors of Baltika Breweries consists of 7 tive management decisions and ensuring adherence to the best members. Two members of the Board are independent norms of corporate governance. directors.

During 2006 the following changes were made to the composition of the Company’s Board of Directors

The following individuals who were members of the Board of Di- The following individuals joined the Board of Directors of rectors in 2005 were not re-elected to the Board of Directors of Baltika Breweries in 2006: Baltika Breweries: 1. Jorgen Buhl Rasmussen 1. Christian Ramm-Schmidt 2. Bjorn Sondenskov 2. Paul Bergqvist 3. Andrew Stevenson 3. Tomas Kuсinskas

In 2006 the Board of Directors approved the Regulation on the Committee of Audit

The Regulation on the Committee of Audit is the basic document the scope of its competence, the Committee of Audit con- governing the activity of the Committee of Audit being estab- ducts a preliminary review and prepares recommenda- lished under the Company’s Board of Directors. It defines the tions to the Board of Directors on the following issues: issues over which it is competent, as well as the method of shap- • risks associated with the Company’s activity; ing its composition and how it functions. • management reporting; The objective of creating a Committee of Audit is to raise the • financial reporting; Board of Director’s efficiency level and the quality of its work to ensure open communications with the auditors, the Internal • external independent audit and internal audit; Auditing Committee, the structural subdivisions of the account- • procedures for internal monitoring and control. ing department and the finance and economics group. Within

Executive body

The President is the sole executive body of the Company. He Since 2005, Anton Artemiev is the President of the Com- directs the ongoing activities of the Company. pany.

Criteria for determining the amount of compensation (reimbursement of expenses) of the Board of Directors and Executive body of the Company

In accordance with paragraph 2, article 64 of the law “On Joint In accordance with paragraph 3, article 69 of the law “On Stock Companies,” the Annual Shareholders Meeting of May Joint Stock Companies,” the rights and obligations of the 30, 2006 established the upper limit of compensation which may Company President are governed by the said law, and be paid to the independent members of the Board of Directors by the contract concluded between the President and the at $130,000, the same level as in the previous year. The up- Company. The amount of compensation paid for carry- per limit on reimbursement of expenses incurred by members ing out the duties of the Executive body, as well as the of the Company’s Board of Directors when carrying out their du- working conditions are determined by the labour contract ties was established at an amount equivalent to $7,000. During signed between the President and the Company. 2006, from the date of election of the new Company’s Board of Directors, a total of 2,157,964 rubles was paid to the indepen- dent members of the Board of Directors.

53 Corporate governance

Company Management

Alexander Dedegkaev Daniil Briman Viktor Semak Oleg Burkhanov Vice-President, Supply Chain Vice-President, Corporate Affairs Vice-President, Sales (West) Vice-President, Sales (East)

Ekaterina Azimina Anton Artemiev Marcho Kuyumdzhiev Vice-President, Finance and Economics President of Baltika Breweries Vice-President, Marketing

54 Corporate governance

Internal Auditing Committee The Internal Auditing Committee was elected at the Annual General Shareholders Meeting on May 30, 2006 and has the fol- lowing composition:

Name/ date of birth/ educational level Occupies the following position

Andrei Aleynik Head of Treasury Date of birth: 1968 Baltic Beverages Holding AB Educational level: higher education

Olga Bukhonina Head of the Department of Internal Control and Audit Date of birth: 1958 Baltika Breweries Educational level: higher education

Charles Eriksson Finance Director Date of birth: 1948 Baltic Beverages Holding AB Educational level: higher education

Disclosure of information The Company’s information policy is founded on the principles of transparency and openness

Official information about the Company’s business is published This section published documents relating to the reorgani- in the newspaper Izvestiya. This information also is published by sation, the commentaries of analysts, and the Company’s the news agencies АК & M and Interfax. Complete information explanations given in the process of the merger. about the Company’s activities is disclosed on the Company’s During 2006, the Company fulfilled all legal requirements official internet site www.baltika.ru. on disclosure of information. The Company also publishes For the sake of providing maximum coverage of the Company’s on a quarterly basis its reports on financial and economic process of reorganisation, at the beginning of 2006 the corpo- activity compiled in accordance with IFRS. rate internet site www.baltika.ru opened a special new section devoted to the Company’s merger with Vena, Pikra and Yarpivo.

Interested party transactions

In the course of 2006 Baltika Breweries completed 68 interested party transactions. A complete list of the transactions is given in the Appendix to the Annual Report.

55 Corporate governance

The main risk factors and risk management

During 2006, the steady propitious change in the general mac- legislation all enable one to say that the money investors roeconomic situation in Russia continued. The stable political put into the Company is becoming less exposed to the system, a reasonable monetary and financial policy, reform of risk of unpredictable change arising from state regulations the taxation system in the country and liberalization of currency governing private business activity.

Financial risks

For the economy of Russia, 2006 was the most successful year As formerly, diversification of credit risk remains one of out of the past several years. In the course of the year, a favour- the Company’s most important tasks in the framework of able economic situation took hold on the Russian financial mar- managing financial risk. For this purpose, Baltika Brewer- ket. The basic signs of this development were an improvement ies works together with the largest Russian and Western in the country’s macroeconomic indicators, including reduced banks, uses credit lines which allow it to choose the cur- prime rates from the Bank of Russia, a strengthened exchange rency and repayment date of each separate borrowing, rate of the ruble relative to major currencies – the Euro and the and combines in its credit portfolio both fixed and floating dollar – and a reduction in the rate of inflation. interest rates. The Company’s customers and most impor- tant suppliers are stable organisations which have earned At the same time, despite the positive trends in the Russian econ- a good reputation on the market and have a solid material omy, the Company continues to pay close attention to managing and technical base. financial risks: interest rates, currency, credit and liquidity. For the sake of managing financial risk, the Company regu- In order to reduce currency risks, Baltika Breweries constantly larly performs both short-term and long-term forecasting increases the share of contracts concluded in the national cur- and develop its system for budgeting and forecasting. It is rency. The Company tries to cover currency risk which arises improving the principles of managing working capital. when concluding foreign contracts to purchase raw ingredients and equipment by the constantly rising level of its export sales denominated in foreign currency.

56 Corporate governance

Industrial and Country risks

The main risk factors which can have a negative influence on the brewing industry are:

• tougher government policies towards the industry (tax policy, changes to legislation, etc.). Changes in legislation resulting in limitations on beer advertising in the mass media, the prohibition of beer consumption in public places, and a rise in excise tax on beer all exert a negative influence on the rate of growth of the brewing industry;

• growth in the market of substitute products such as low-alcohol cocktails and wine;

• consumption levels approach their upper limit, leading to a slowdown in the market’s rate of growth. One may speak of the approaching the average European levels of beer consumption in major Russian cities, where most beer produced in Russia is consumed;

• an increase in the cost of energy and railway freight charges;

• a decline in consumers’ ability to pay;

• shortages of raw ingredients or rising prices for raw ingredients used;

• an increase in the competitive struggle on the market as a whole and in its separate segments.

The Company undertakes a whole range of measures to strengthen its position in the industry and also to reduce the impact of risk related to the given industrial sector. The following measures deserve special mention: improving the system of cor- porate governance; integration; improving profit margins and reducing production expenses; implementing a new market- ing strategy of the Company; developing and bringing to market new product varieties; developing the distribution system, active advertising support for the brands; and further extending the geographic scope of sales.

Operational risks

Risk related to the Company’s operations is covered by the ex- The processes of risk management put in place by the Com- isting procedures for documentation flow and finances. These pany ensure regular monitoring of existing risks to its busi- are periodically updated in order to reflect changes occurring ness, forecasting potential risks and adopting correspond- since they were first approved. ing decisions aimed at reducing the risks so revealed.

57 Securities

Shares

Charter Capital After completion of the merger, the Company’s Charter Capital amounts to 175,083,259 rubles.

Authorised and issued shares

Type of shares Number of shares, pcs Par value, rubles

1. Issued shares Ordinary shares 161,543,144 1 Preference shares, А - type 13,540,115 1 2. Authorised shares Ordinary shares 3,808,291 1 Preference shares, А - type 440,450 1

Emissions of shares The following share emissions are in circulation:

Registration Code Type of shares Number of shares Par value amount Par value per share, issued, pcs of the emission, rubles rubles 1-04-00265-А Ordinary 159,170,667 159,170,667 1

2-04-00265-А Preference shares, A 13,540,115 13,540,115 1 - type

For purposes of completing the Company’s merger with JSC Vena, Pikra Plc. and Yarpivo OJSC in 2006, OJSC Baltika Breweries made the following additional emissions of shares:

Registration Code Type of shares Number of shares Par value amount Par value per share, issued, pcs of the emission, rubles rubles 1-04-00265-А-005-D* Ordinary 1,584,013 1,584,013 1

1-04-00265-А-006-D* Ordinary 211,139 211,139 1

1-04-00265-А-007-D* Ordinary 577,325 577,325 1

*Reports on the results of the additional emission of securities have been registered in 2007.

58 Securities

Structure of Charter Capital After completion of the merger and conversion of the shares of the merged companies into shares of the Company’s ad- ditional emissions, Baltic Beverages Holding AB retained its strategic controlling shareholding.

Structure of the merged Company’s Charter Capital as of 31.12.2006

Individuals Resident Companies Non-resident Companies Baltic Beverages Holding AB

Capitalisation

The Company’s market capitalisation at the beginning of 2006 fore, the growth of capitalisation in 2006 amounted was approximately $4bln. With the addition of the merged com- to 67%. As a result, Baltika is the biggest consumer panies, by the end of the year it was in excess of $7bln. There- goods company in Russia in terms of capitalisation.

Information about the stock exchanges on which the Company’s shares traded during 2006

Stock Exchanges Type of shares Type of market Ticker symbol RTS, Classical market Ordinary shares Classical market PKBA Quotation list B Preference shares Classical market PKBAP Off-list RTS, Stock Exchange Ordinary shares Stock exchange PKBAG

Preference shares Stock exchange PKBAPG MICEX Ordinary shares Quotation list А2 until December, RU14BALT5003; 2006 PKBA Off-list Preference shares Off-list RU14BALT4014; PKBAP

59 Securities

Trading in shares in 2006

From the beginning of 2006 when the terms and conditions of the with the second half of 2005 through February, 2006. merger between OJSC Baltika Breweries, Yarpivo OJSC, JSC Vena Despite the small number of the Company’s shares in cir- and Pikra Plc. were announced, the market value of shares showed culation, the number of transactions on the MICEX involving a positive growth trend, reflecting the favourable attitude of inves- the Company’s ordinary shares nearly doubled compared tors to the merger and substantial interest in the merged Company to preceding year and rose nearly 11 times with respect to as the unconditional leader of the domestic beer market. preference shares. The volume of trades in the Company’s The observed decline in the share price in May and June is ex- shares also grew significantly: for ordinary shares, tripling plained by the general fall of the Russian stock market due to institu- and for preference shares, rising by 81 times. tional investors’ fixation with profit in developing markets, including Russia, after the sharp growth in the market in the period beginning

Movement in the price of shares traded on the MICEX, rubles

ordinary shares preference shares

Growth in the price of shares traded during 2006 on the MICEX, the main trading platform:

Q1 H1 9 monthsyear

Ordinary shares +24.8% +7.9% +15.7% +31.1% Preference shares +25.4% -3.2% +7.4% +5.2%

The data shown in the tables reflect statistics on trading in the Company’s shares during 2006:

RTS: classical market

Type of shares Price per share during Price of the last Volume of trades, Number of trades 2006 trade, $ $ (min./ max.), $ Ordinary shares 32.0/44.25 44.25 5,954,606 141 Preference shares 27.0/33.75 29.4 6,166,551 81

60 Securities

RTS: stock exchange

Type of shares Price per share during Price of the last Volume of trades, Number of trades 2006 trade, rubles rubles (min./max.), rubles Ordinary shares 955.0/1,200.0 1,166 19,021,880 35

MICEX

Type of shares Price per share during Price of the last Volume of trades, Number of trades 2006 trade, rubles rubles (min./max.), rubles Ordinary shares 899.0/1,178.3 1,174.99 465,767,758.47 8,942 Preference shares 700.0/1,000.0 777.00 111,361,146.30 981

Bonds In order to create a public credit history on the debt market, the Company carried out its first emission of corporate bonds in 2004, which will be paid off in 2007. Basic parameters of the bond issue

Nominal value of the emission 1 bln rubles Date of the primary placement 26.10.2004 Date of the secondary placement 23.11.2004 Repayment date 20.11.2007 Method of placement Closed subscription Organisers Organiser – Raiffeisen Bank Co-organisers: ABN AMRO Bank, Eurofinance-Mosnar Bank, Industrial-Construction Bank of St. Petersburg, Troika Dialog Number of coupons 7 Interest rate of coupons, annual % Coupon 1 - 4% p.a. Coupons 2 - 7 – 8.75% p.a. Periodicity of interest payments Twice a year Date of repayment 20.11.2007

Trading in Baltika bonds during 2006 The Company’s bonds are included in Quotation List А2 of the MICEX. The securities code is RU000A0DEVY6.

Total turnover 1,713,354,895 rubles Total number of trades 258 Minimum price 100% of nominal value Maximum price 105.05% of nominal value Maximum effective rate of return to repayment 8.92% Minimum effective rate of return to repayment 5.84%

Payment of interest on the first bond issue during 2006

Coupon number Rate of interest on the coupon, annual % Date of payment Coupon 4 8.75 23.05.2006 Coupon 5 8.75 21.11.2006

61 Securities

Volume of trading and rate of return of the primary emission of bonds on the MICEX

Volume of trading, rubles Rate of return, annual %

Volume of trading in bonds during 2006 (data on volume shown based on par value)

Month Stock exchange Outside the stock exchange Total

Turnover, mln Number of Turnover, mln Number of Turnover, mln Number of rubles trades rubles trades rubles trades January 152 19 0 0 152 19

February 3 18 340 3 343 21

March 33 25 302 4 335 29

April 187 24 300 2 487 26

May 80 29 406 4 486 33

June 234 57 403 7 637 64

July 456 44 195 4 651 48

August 279 18 5 1 284 19

September 247 10 150 3 397 13

October 384 24 20 1 404 25

November 351 10 235 3 586 13

December 362 9 - - 362 9

Average turnover per 231 24 214 3 427 27 month

62 Securities

Company policy on dividends

The Company’s policy on dividends is based on the principle Over recent years the amount of dividends paid out to of equitable distribution of profit among all its shareholders shareholders has been growing constantly. Thus, the proportionate to the number of shares they own in each share dividend per ordinary and preference share paid out for category, with attention to the reasonable correlation between 2005 increased 7.7 and 6 times respectively compared to payment of dividends and retained earnings needed to imple- the dividend for 2000. ment the Company’s strategic plans for development. Baltika Breweries strives to steadily raise the amount of resourc- es available to pay dividends to shareholders. The amount of dividend paid on preference shares can not be lower than as established in the Company Articles of Association.

Dividends paid on the Company’s shares

Period for which Size of the dividend per Size of the dividend Growth in size of Growth in size of dividends are paid ordinary share, rubles per preference share, dividend per ordinary dividend per preference rubles share share (% in relation to 2000) (% in relation to 2000) 2000* 3.16 4.11 100 100 2001* 8.50 11.00 269 268 2002 9.32 12.12 295 295 2003 11.64 15.13 368 368 2004 13.94 18.12 441 441 2005 24.33 24.33 770 592 2006 39.50** 39.50** 1250 961

* The size of the dividend per share is entered with adjustment for the stock splits, which resulted in each ordinary and prefer- ence share having a par value of 80 rubles being converted into 80 shares of the same category (type) having a par value of 1 ruble each.

** Recommendation of the Board of Directors.

Report on the payment of declared (accrued) dividends on the Company’s shares

The total amount of dividends available for payment in 2006 amounted to 3,180,020,534.40 rubles, of which more than 98% was paid out to shareholders in the reporting year.

63 Brand Achievement in 2006 Consumers have been tempted by its refined taste and drunk 17 million bottles

64 Company’s breweries

Baltika-St. Petersburg Brewery

The Company’s history began with the brewery in St. Petersburg. The brewery grounds are also home to the Company headquarters. Baltika–St. Petersburg Brewery was opened in 1990. Three years later BBH became the Company’s largest shareholder. With the arrival of a Western investor, a large scale investment programme was elab- orated for reconstruction and development of the enterprise, in the course of which new imported equipment was installed in all areas of the plant and production was computerised. The programme was completed towards the end of 1996 and enabled Baltika–St. Peters- burg Brewery to become the first producer of European quality beer in Russia. In 1999 a very large finished goods warehouse notable for its high degree of automation was built on the brewery grounds. The brewery also accommodates a mini-brewery where work is carried out to create new beer varieties, to adjust the production processes and to evaluate raw ingredients and finished product. Yuri Chentyrev Brewery Director Baltika–St. Petersburg is the largest brewery not only in Russia but in all of Eastern Europe. Its capacity amounts to 10.5 mln hl of beer per year. After the merger, the product assortment broadened, and today nearly all the main varieties of beer in the integrated portfolio are made here and sold throughout Russia. More than 1,600 employees work in the enterprise.

65 Company’s breweries

Baltika–Vena Brewery

Baltika-Vena is the oldest brewery in the Company. It was founded in 1872. The history of contemporary Vena started in 1994. From this point on, a number of Western companies became shareholders in the company: Sinebrychoff, the European Bank for Reconstruction and Development and Carlsberg A/S. They actively invested in the devel- opment of production. In 2001 BBH purchased the controlling block of Vena’s shares. In 2004 a major investment project to modernise Vena and expand construction capacity was completed. In total, in the period between 1994 and 2006 more than $190mln was invested in development of the brewery. Now it has a production capacity of 1.8 mln hl per year. In 2005 JSC Vena was merged with Zolotoy Ural Brewery OJSC in Chelyabinsk, and in 2006 it became part of Baltika Breweries. Baltika-Vena produces the premium and licensed brands Nevskoye, Boris Rykunov Tuborg, Carlsberg and Kronenbourg 1664. The brewery is the only production site in the Company for low-alcohol cocktails - Sinebry- Brewery Director choff, Golden Cap, Morsberry and Indiana Juice, as well as for the energy drink Battery. Products made here are sold throughout Russia. Around 600 people are employed in the enterprise.

66 Company’s breweries

Baltika–Tula Brewery

The Tula brewery was built in 1974. In 1999 Baltika Breweries bought a controlling interest in the brewery and two years later the enterprise was renamed Baltika-Tula. Beginning in 1999, considerable invest- ments were made to modernise and expand production. The overall amount invested in developing the branch was in excess of $200mln. Today the production capacity of the brewery amounts to 6.3 mln hl per year. In 2004 a malt plant with capacity of 115,000 tn of malt per year was brought on line. This is one of the Company’s two proprietary malt- houses. The merger made it possible to produce in Tula not only the enterprise’s traditional brands including Baltika, Arsenalnoye and Zhigulevskoye, but also such new brands as Yarpivo, Volga, Nevskoye, Tuborg and Bolshaya Kruzhka. Modernisation of the bottling line allowed the brew- Roman Firsanov ery to become the first one in the Company to bring the new beer vari- ety Baltika Cooler to market in a glass bottle. Brewery Director In 2006 Baltika–Tula Branch received a certification of conformity to state standards relating to labour safety and was thereby recognised to be one of the best enterprises of the region in the sphere of labour safety. More than 1,000 people work at the Tula brewery.

67 Company’s breweries

Baltika–Yaroslavl Brewery

The brewery was opened in 1975 and two years later production of its own malt began here. In 1996 BBH became the strategic investor in the enterprise. In the following year a step by step reconstruction of the brewery began and production capacity was increased. In the period from 1996 through 2006, around $278mln was invested in development of the brewery. The production capacity of Baltika–Yaroslavl Brewery amounts to 6.3 mln hl of beer per year. In 2005 Yarpivo OJSC was merged with the Voronezh brewery. In 2006 it became part of Baltika Breweries. In 2006 Baltika–Yaroslavl Brewery brought on line one of the most mod- ern complexes for water treatment in Russia and Europe. Construction work continued on a new boiler and a new malt-house with capacity of 55,000 tn of malt per year was prepared for start-up. Thanks to the merger, the line-up of brands produced at the brewery Adam Tlekhurai increased substantially. Besides its traditional beer Yarpivo, the brew- Brewery Director ery began to produce various varieties of Baltika and Arsenalnoye. The brewery’s products are sold mainly in Moscow and nearby regions. More than 1,000 people are employed in the enterprise.

68 Company’s breweries

Baltika–Voronezh Brewery

The brewery in Voronezh was founded in 1936. In 2001 BBH became the main shareholder in the Voronezh brewery and from this time on a large scale reconstruction programme began in the course of which production capacity was increased, the latest equipment was installed and a new finished goods warehouse was opened. The overall amount invested in the project came to €27mln. In 2003 Yarpivo OJSC became the main shareholder in the brewery, and in 2005 the Voronezh brewery officially became a Branch of the Company. The production capacity of the brewery is 0.7 mln hl of beer per year. In 2006 the regional beer varieties Voronezhskoye and Slavnoye, na- tional brand Yarpivo were produced by Baltika–Voronezh Brewery. In 2007 there are plans for a large-scale modernisation of production: the investments will go for purchase of the latest equipment, devel- Dmitry Vizir opment of the logistics system, raising product quality, building new production premises and installing new lines. As a result, the brewery Brewery Director will begin to produce the national brands Bolshaya Kruzhka, Yarpivo in PET and Zhigulevskoye. The overall volume of investment will be in excess of $9mln. More than 350 people work at the Baltika–Voronezh Branch.

69 Company’s breweries

Baltika–Rostov Brewery

The brewery at the base of today’s Baltika–Rostov Branch was built in 1974. In 1997 Baltika Breweries purchased a controlling block of shares in the enterprise and almost immediately thereafter work began on a large-scale reconstruction of production. In the years from 1997 through 2004, the overall amount invested in the brewery’s develop- ment was $140mln. Production capacity grew in five times. The brew- ery’s production capacity amounts to 4.5 mln hl of beer per year. The merger gave a new impetus to development of the enterprise. In 2006 the filling operation for bottles, kegs and two PET-lines was mod- ernised, an installation was made for producing nonalcoholic beer, modern labelling apparatus was brought on line and the elevator was reconstructed. All of this made it possible to broaden the assortment of products made in the plant to around fifteen beer varieties today, including the regional brand Don and national brands like Baltika and Arsenalnoye. Baltika–Rostov Brewery was the first one in the Company Oleg Chistyakov to begin production of Baltika №3 in an innovative 1 liter PET bottle. Brewery Director Baltika–Rostov is the Company’s only brewery in the Southern region. Products made here are sold throughout all of Russia. Around 800 people work at the enterprise.

70 Company’s breweries

Baltika–Samara Brewery

Baltika–Samara Brewery was a “green field” project built in just 14 months. The Company invested around $55mln in its construction. The first shipment of beer was sent to market in January 2003. The brewery has a production capacity of 1.8 mln hl of beer per year. Around 500 people work at the Branch. In September 2006 the brewery embarked on the first project to triple production capacity in the history of Baltika Breweries. After its comple- tion the brewery will be able to produce as much as 6.5 mln hl of beer per year. The enterprise will install two new PET lines and a line for pro- ducing beer in cans. The finished goods warehouse will be practically doubled in size. The number of employees will grow to 800 people. The amount being invested to expand production will be more than $125mln. The brewery produces the regional brand Samara as well as the na- Yuri Makariev tional brands Baltika №3, Baltika №7, Baltika Devyatka, and the entire line-up of the brands Arsenalnoye, Zhigulevskoye, Bolshaya Kruzhka Brewery Director and Volga. Baltika-Samara is the Company’s only facility in the Volga region and the products made here are sold throughout the region.

71 Company’s breweries

Baltika–Chelyabinsk Brewery

The Chelyabinsk brewery brought its first shipment of products to mar- ket in 1970. In 1998 Baltic Beverages Holding became the strategic investor and soon afterwards the enterprise embarked on a general reconstruction and modernisation of production which cost $50mln. In 2005 the enterprise (at the time the Zolotoy Ural Brewery OJSC) was merged with JSC Vena in St. Petersburg. Thanks to its favourable geographic position, Baltika-Chelyabinsk became the first one in consolidated Baltika Breweries to begin and complete in 2006 a large-scale project for raising production capac- ity. The cost of the project was $38mln. Today the production capac- ity of the enterprise amounts to 4.5 mln hl of product per year. As a whole, for previous 6 years amount of investment in the brewery amounted more that $100mln. Expansion of the production capacities and implementation of new Vladislav Gusev equipment allowed the brewery in Chelyabinsk began to produce new national brands Baltika №0 Nonalcoholic, Baltika №3 Classicheskoye, Brewery Director Baltika №5 Zolotoye, Arsenalnoye, Zhigulevskoye and Yarpivo. They also are continuing to produce the regional brands Chelyabinskoye and Uralsky Master, which is the leader in the lower mainstream seg- ment in the Urals. Baltika–Chelyabinsk is the Company’s only brewery in the Urals re- gion. The products made here are sold on the territory from Kola Pen- insula to Krasnoyarsk. Around 700 people work at the brewery.

72 Company’s breweries

Baltika–Pikra Brewery

The brewery in Krasnoyarsk is one of the oldest in the Company. First mention of it dates back to 1875. In 1999 the brewery became part of BBH, and in the course of the following six years a large-scale re- construction of all production was carried out, with more than $70mln invested. In 2006 the capacity of the brewery in Krasnoyarsk was ex- panded and today it amounts to 2 mln hl per year. Baltika-Krasnoyarsk is presently the Company’s only production facil- ity in the Siberian region. Here they produce the regional brands Ku- pecheskoye and DV, as well as the national brands Baltika Devyatka, Arsenalnoye, Bolshaya Kruzhka, Leningradskoye and Zhigulevskoye. Moreover, the Krasnoyarsk brewery also produces the mineral water Nanzhul, carbonated drinking water Aquajuice, Crazy Cola, Crazy- Lemon, energy drink Flash-Energy and lemonades. The products are sold in Siberia and the Far East.

Elena Krivolapova In June 2005 the Museum of the History of Brewing in Siberia opened at the Krasnoyarsk brewery. Its inauguration was timed to mark the 130th Brewery Director anniversary of the brewery’s founding and the exhibits reflect the his- tory of the enterprise’s development and the setting up of the brewery industry of the whole region. More than 500 people work at Baltika-Krasnoyarsk Branch.

73 Company’s breweries

Baltika–Khabarovsk Brewery

Baltika–Khabarovsk is the most modern brewery in the Far East. It was built “from scratch” in record time and brought on line in 2003. Some $54mln was invested in the construction. The production capacity of the brewery amounts to 1.6 mln hl of beer per year. Considering the specifics of the ecological situation in the region, at the Khabarovsk brewery special attention is devoted to water quality. Water is drawn from artesian wells and undergoes a multi-stage purification and thorough quality control. Baltika–Khabarovsk Brewery has a unique system of waste water treatment – a biological purification installation supplied by the German company ENVIRO CHEMIE costing $3.6mln. Baltika–Khabarovsk is the only enterprise in the Far East having this level of water treatment. Nonetheless, a further $50,000 was spent in 2006 on improvements to the purification installation. The Khabarovsk brewery produces brands DV, Kupecheskoye, Baltika, Alexey Ilyin Arsenalnoye, Zhigulevskoye and Leningradskoye. The brewery’s prod- ucts are sold throughout the entire Far Eastern region. More than 450 Brewery Director people work at Baltika-Khabarovsk branch.

74 Useful information

Headquarters of the Company Baltika Breweries OJSC Tel: +7 (812) 325 9 325 6 Verkhniy pereulok, 3 e-mail: [email protected] 194292 St. Petersburg, Russian Federation Corporate website: www.baltika.ru Branches:

Baltika-Vena Brewery +7(812) 326 21 00 Farforovskaya Str., 1, 192171 St.Petersburg

Baltika-Voronezh Branch +7(4732) 21 58 42 9go Yanvarya Str., 109, 394027 Voronezh

Baltika-Pikra Branch +7(3912) 59 12 00 60 let Oktyabrya Str., 90, 660079 Krasnoyarsk

Baltika-Rostov Branch +7(863) 222 27 90 Dovatora Str., 146-A, 344090 Rostov-on-Don

Baltika-Samara Branch +7(8462) 76 43 76 Baltiisky proezd, 1, Poselok Kinelsky, Kinelsky Raion 446110 Samarskaya Oblast

Baltika-Tula Branch +7(4872) 39 55 35 Odoevskoye shosse, 85, 300036 Tula

Baltika-Khabarovsk Branch +7(4212) 41 15 51 Voronezhskoye shosse, 142, 680042 Khabarovsk

Baltika-Chelyabinsk Branch +7(3512) 39 16 00 Ryleeva Str., 16, 454087 Chelyabinsk

Baltika-Yarpivo Branch +7(4852) 44 25 08 Pozharskogo Str., 63, 150066 Yaroslavl

Company subsidiaries abroad

Baltika-Bel Ltd Storozhevskaya Str., 15, office 302 220002 Minsk, Belarus, Tel. (375) 17 28 9 54 69

ICS “BALTIKA” SRL Mitropolita G. Benulescu-Bodoni Str., 1, office 418 Kishinev MD 2005, Moldova, Tel. (373) 22 2 38 460

Baltika-Almaty Ltd Abaya Str., 153, office 24 Almaty, 050009 Kazakhstan, Tel. (327) 258 59 40

Baltika-Ukraina Ltd Krasnoznamennaya Str., 94/96 03026 Kiev, Ukraine, Tel. (380) 44 49 4 18 42

Baltika Ltd Gorkogo Str., 27/1, Business Centre Vefa, office 301 Bishkek, Kirghizstan, Tel. (996) 312 59 65 23

Baltika Deutschland GmbH Glockengiesserwall 26, 20095 Hamburg, Germany Tel. (49) 40 72 81 39 28

Representations abroad

Representation in Latvia Brivibas Str., 144, LV-1012 Riga, Republic of Latvia Tel. (371) 737 46 22

Representation in China 2815-C CITIC Building, 19 Jianguomenwai , Beijing, 100004 People’s Republic of China Tel. (86) 1065129728

Representation in Uzbekistan Musakhanova Str., 45, Mirzo-Ulugbeksky raion, Tashkent, Republic of Uzbekistan Tel. (99871) 113 11 20

75 Information for shareholders and investors

Baltika Breweries OJSC 6 Verkhniy pereulok, 3, 194292 St. Petersburg, Russian Federation Tel. +7 (812) 325 9 325 www.baltika.ru

Corporate Relations with Shareholders: Tel. +7(812) 329 91 09 [email protected] [email protected] Investor Relations: Tel. +7(812) 326 90 46 [email protected] Registrar* Natsionalnaya Registratsionnaya Kompaniya Ltd Izmailovsky Prospekt, 4-A, 190005 St. Petersburg, Russian Federation Tel. +7(812) 251 81 38, fax +7(812) 346 74 07 www.nrcreg.ru Depository of Company Bonds National Depository Center Sredny Kislovsky per., 1/13, 4, 103009 Moscow, Russian Federation Tel. +7(495) 956 27 90, fax: +7(495) 956 27 92 Independent Auditors ZAO KPMG Moskovsky Prospekt, 19 198005 St. Petersburg, Russian Federation Tel +7(812) 325 83 48 [email protected] A & P Audit Ltd Rizhsky Prospekt, 26, 198103 St. Petersburg, Russian Federation Tel. +7(812) 251 69 23 [email protected] Official newspapers for publishing information: Izvestiya newspaper Supplement to Vestnik, Federal Service for the Financial Markets of Russia

* Till 7 March, 2007 Company Registrar was JSC “Ediny Registrar” Belovodsky per., 6 194044 St. Petersburg, Russian Federation Tel. +7(812) 591 78 38, fax +7(812) 591 78 39

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