Annual Report
consortium ALFA-GROUP
www.alfagroup.ru www.alfagroup.org
2001
CONTENTS
S C S B D ...... A G F H ...... F R S D G...... A G’ I P ...... S B D ...... A G’ C C ...... A G’ P H ......
F S – Alfa Bank Group, AlfaInsurance...... O P – Tyumen Oil Company, SIDANCO Oil Company...... C T – Crown Resources AG, Alfa-Eco Group ...... R T – Trade House Perekriostok ...... F P – United Food Company ...... T – Golden Telecom Inc, VimpelCom ...... S O C...... C I...... C F S G R A ...... Alfa Group Consortium
Founded in , Alfa Group Consortium is one of Russia’s largest privately owned financial-industrial conglomerates with interests in oil, commodities trad- ing, commercial and investment banking, insurance, retail trade, food processing, and telecommunications. The Group typically focuses on value-oriented, longer- term opportunities, primarily in Russia and the CIS, but also invests in other mar- kets which form part of the Group's strategic business objectives. We ArE leading...by example
As one of the leading financial-industrial groups in Russia, and as one of the largest
investors into emerging markets in the world, Alfa Group, its companies, and its people are
recognised by prestigious independent organisations and the media as leaders in their
industries. Following is a selection of some of this recognition:
A S C I
TNK: Philip B. Crosby Medallion for Entrepreneurial Leadership Alfa Bank: st Place, “Best Bank Web-sites” () A M K P H K
“ Most Professional Managers in Russia” () (No. ) Mikhail Fridman, Chairman of TNK: “Best Fuel and Energy Company” () the Supervisory Board of Directors of Alfa Group; (No. ) Pyotr Aven, President of Alfa Bank VimpelCom: “Best Telecommunications Company” () Group; (No. ) German Khan, Deputy Chairman of Management Board and Executive Josef Bakaleinik, CEO of TNK: “Best Financial Manager” () Director of TNK; (No. ) Leonard Vid, Chairman of the Executive Board of Alfa Bank Group Evgeny Bernshtam, First Deputy Chairman of the Management Board of Alfa C L Bank: “Best Manager – Finance Sector” () AlfaInsurance: st Place, “Best Creative Idea for a Television Commercial” () Alex Knaster, CEO of Alfa Bank: “Best Manager – Finance Sector” () C Simon Kukes, President of TNK: “Best Manager – Oil & Gas Sector” (, ) Joseph Bakaleinik, CFO of TNK: “Best CFO in Russia” () Jo Lunder, President and COO of VimpelCom: “Best Manager – Retail and E A Distribution” () VimpelCom’s “BeeLine GSM”: “Brand of the Year – Russia” () Stewart Reich, CEO of Golden Telecom Inc :“Best Manager – Telecommunications” () E M I M
Alfa Bank: “Best Domestic Bank” () “Top Managers in Russia” () (No. ) Mikhail Fridman, Chairman of the E Supervisory Board of Directors of Alfa Group; (No. ) Alexander Fain, General Alfa Bank: “Highly Commended Bank – Russia” (), “Best Bank in Russia” () Director of Alfa-Eco Group; (No. ) German Khan, Deputy Chairman of E’ C E Management Board and Executive Director of TNK; Alfa Bank: “Best Bank in Russia” (, , , ) (No. ) Simon Kukes, President of TNK; E (A B A R) (No. ) Jo Lunder, President and COO of VimpelCom Alfa Group: nd Place, “Internet Presentation” () N A S M P Alfa Bank: st Place, “Classic Genre” (), st Place, “Richness of Information” (), (NAUFOR) S M E A st Place, “Internet Presentation” (), st Place, “Richness of Information” (), Alfa Bank: “Best Credit Institution” () nd Place, “Design and Printing” () N T A F T - E Perekriostok:“Best Trading Chain” () TNK: “Worlds Best Oil and Gas Company” () P D P R G F F, V P
Alfa Bank: “Best Russian Domestic Bank” (, , , ) Leonard Vid, Chairman of the Executive Board of AlfaBank Group: “Order of Alfa Bank: “Best Russian Trade Finance Bank” (, ) Honour of Achievements, Contributions and Long-term Conscientious Work in the Area of I C G Promoting Friendship and Co-operation Between Nations” () VimpelCom: Highest Overall Corporate Governance Rating for a Russian Company RBC (, , ) VimpelCom: “Best Service Company” () I E S E S S & P’
Alfa Bank: st Place, “Leading Russian Companies” () Alfa Bank: “Best Outlook of All Rated Banks in Russia” () AlfaInsurance: rd Place, “Leading Russian Insurance Companies” () S C S R F I A TNK’s ecologically friendly high-octane gasoline : B C “ Best Russian Products” () Perekriostok: st Place, “Golden Net – Foodstuffs” () T B TNK: st Place, “Golden Net – Petrol Stations” () Alfa Bank: “Bank of the Year – Russia” () I B I F U E
Alfa-Eco: Gold Medal for Cognac; Bronze Medals for Smirnov vodka and Armina Alexander Fain, General Director of Alfa-Eco Group: Star Brandy () “Best Entrepreneur of the Decade – Trading Activities” ()
STATEMENT BY THE CHAIRMAN OF THE SUPERVISORY BOARD OF DIRECTORS
STATEMENT BY THE CHAIRMAN OF THE SUPERVISORY BOARD OF DIRECTORS O ver the past year, the inevitable trend of Russia’s integration into the world economy continued with increasing momentum. Russia and the west moved closer together, finding common ground on various important issues. International sov- ereign and corporate credit ratings continued to rise for well-run Russian compa- nies providing them with increasing access to international capital markets and pri- vate investment. In an uneven year for the world’s economies and stock markets, Russia’s economy expanded and its stock markets thrived - with the exception of the Chinese Shanghai B Index, Russia equities recorded the best US dollar return of all emerging markets during 2001.
Alfa Group Consortium participated fully in these positive developments, with 2001 marking our second most profitable year ever with consolidated Group net profits of US $797 million and correspondingly, our highest-ever consolidated Group sharehold- ers’ equity of US $1.74 billion at 31 December 2001.
In the second half of 2001 we made our first significant investments into the “new economy,” through the purchase of large stakes in US-listed Golden Telecom and VimpelCom, on our belief that certain telecommunications shares in Russia, having fallen in sympathy with battered world shares of technology and telecommunications companies, offered compelling value. Although it’s early, and we expect a great deal of value generation for the Group in the years to come, since making our initial invest- ment a little more than one year ago, Golden Telecom’s ADR share price has risen by 18% and VimpelCom’s ADR share price has risen by 58% from our entry prices, through the end of September 2002. In July 2002, we made further investment into telecommunications by purchasing 16.2% of Kyivstar, Ukraine’s largest cellular com- munication company, for US $66.5 million.
Despite tough world-wide credit conditions during the latter half of 2001 and through- out 2002, improving fundamentals in our companies have helped us to attract longer and more stable financing and investment. Notably, VimpelCom floated US $250 mil-
STATEMENT BY THE CHAIRMAN OF THE SUPERVISORY BOARD OF DIRECTORS
lion in three year Eurobonds. Additionally, TNK and Alfa Bank are actively considering possible medium-term Eurobond offerings.
Also, during 2002, we made two key sales of our investments – in September 2002 we entered into agreements to sell the full interest in our food processing business, United Food Company to a strategic investor for US $80 million and in April 2002 we further strengthened our co-operation with British Petroleum through the sale of a 15% stake in oil and gas company, SIDANCO for US $375 million.
On the belief that re-investment of our profits is the best and highest use of our capital, we continued to re-invest large portions of profit back into all of our companies, pay- ing out 12% of year 2000 net profits as dividends and a minimal amount of 2001 net profits as dividends. In addition, we injected fresh capital into three of our businesses during 2001 and 2002 – US $56.4 million into Alfa Bank, US $12.2 million into Alfa-Eco, and committed to funding of US $30 million for Perekriostok.
As we move beyond 2002 it is clear to us that the consolidation of assets in the Russian marketplace will continue with the increasing participation of foreign investors. It fol- lows, that the ability to co-operate successfully with foreign partners will become an increasingly critical factor in determining the future success of Russian financial-indus- trial conglomerates. We believe that the strength and depth of the management at our companies, our strong leadership position and reputation on the marketplace, our demonstrated commitment to the highest levels of transparency and governance prin- ciples, and our already extensive and successful co-operation with foreign partners place us in an advantageous position to fully avail ourselves of the most interesting opportunities which will present themselves.
I wish to express my personal appreciation to all of our clients and business partners whose continued confidence and support are key to our growth and profitability. Iwould also like to thank our employees whose professionalism, dedication and ability to meet the tough challenges we set for them, have made us all proud.
Mikhail Fridman
8 October 2002 ALFA GROUP FINANCIAL HIGHLIGHTS
(‘000 USD) 2001 2000 1999 1998 1997
Cash and Cash Equivalents 709,682 677,941 345,465 149,776 404,734
Trading Securities and Investments Available for Sale 324,104 269,973 161,742 114,778 956,329
Short-term Borrowings 650,122 642,337 407,934 324,416 608,109
Long-term Borrowings 66,511 78,551 129,731 279,151 316,061
Shareholders’ Equity/(Deficit) 1,742,049 930,707 120,950 (302,086) 223,800
Sales Revenue 3,375,546 5,747,239 3,268,153 2,162,602 2,009,143
Gross Profit 126,950 235,140 172,523 94,193 192,210
Gain/(Loss) from Trading Securities, Investments
Available for Sale and Other Investments 86,947 98,309 34,572 (159,293) 75,850
Operating Income/(Loss) 46,090 60,895 43,998 (289,028) 106,881
Net Profit/(Loss) 797,052 1,061,052 457,639 (518,857) 75,592
Source: Annual audited IAS financial statements FINANCIAL REVIEW AND STRATEGIC DEVELOPMENT OF THE GROUP
Overall Analysis of the Group’s Our financial services segment (comprising both Alfa Financial Results for 2001 Bank Group which enjoyed record net profits during 2001, and AlfaInsurance) contributed the next largest 2001 was another very strong year for Alfa amount to Group net profit, followed by the segment of Group. In fact, 2001, marked the second most prof- commodities trading in Russia, CIS and Southeast Asia itable year in our history. Net Profit for 2001 was US (Alfa-Eco Group). Retail trade (Trade House $797 million as compared with US $1.06 billion in 2000, Perekriostok), one of the faster growing sectors in the with the largest part of this decline attributable to a fall Group, while contributing a relatively small amount to in world oil and gas prices which directly impacted on Group net profit in 2001, nevertheless more than tripled the profitability of our oil and gas production assets. its net profits, as compared with 2000. The impact of At 31 December 2001, consolidated shareholders’ equi- telecommunications assets (Golden Telecom Inc, ty for the Group rose to an unprecedented high of VimpelCom and VimpelCom-R), the newest segment for US $1.74 billion, a year-on-year increase of 87%. Return the Group, also contributed positively, albeit modestly, on shareholders’ equity for 2001 was 60% while return to net profits during 2001 as these assets were acquired on assets was 18%. in the second half of 2001. Although Perekriostok, Golden Telecom and VimpelCom had relatively minor We continued to fortify our balance sheet with a year-on- contributions to net profits in 2001, we expect this con- year reduction in debt levels. The ratio of debt to share- tribution to increase on a relative basis as our relatively holders’ equity fell to 0.41 at the end of 2001 from 0.77 at large, recent capital investment into these companies the end of 2000, and the ratio of debt to assets fell to 0.14 begins to pay off. at the end of 2001 from 0.19 at the end of 2000. The two segments posting negative results for 2001 were The strengthening of our balance sheet gives us an even food processing (United Food Company), a growing busi- stronger financial flexibility to be opportunistic in pursu- ness, which registered a small loss in 2001 and interna- ing strategic acquisitions and internal investment oppor- tional commodities trading (Crown Resources AG). tunities. The loss in our international commodities trading seg- Analysis of the Group’s Financial Results ment was the result of a combination of several factors by Industry Segment for 2001 including unfavourable market conditions, price volatil- ity resulting from the tragic events in the United States Five of the Group’s seven different business segments on 11 September, pre-merger costs from the failed merg- contributed positively to the 2001 Group net profit of er with Marc Rich Investments, as well as significant US $797 million (see table on page 9). As was the case in investment costs relating to the expansion of the 2000, the major portion of the Group’s net profit was Company’s trading activities. After posting excellent derived from the Group’s investment in oil and gas assets, results in 2000, Crown’s 2001 results were quite disap- by virtue of our investment in TNK and SIDANCO. Last pointing to us, and we have quickly taken a series of year in these pages, we acknowledged our large invest- explicit measures to remedy the situation. Since early ment exposure to oil and gas. We continue to carry this 2002, the Company has undergone significant internal exposure and it is an exposure with which we continue to restructuring which includes a new senior management feel comfortable because of: 1) Our perception of the team and the reorganisation of trading activities to focus favourable risk-to-reward ratio of Russian oil and gas on core activities and overhead infrastructure costs. assets; 2) The diversification efforts which have been Whilst the impact of these measures will be marginal in undertaken by the Group in the past two years, primarily 2002, we expect that they will create a strong base for the into telecommunications; and 3) The continued and Company moving into 2003. To demonstrate its commit- growing strategic importance of other industry segments ment to Crown in the transition period, the Group took of the Group. a decision to increase the Company’s equity by capitalis-
FINANCIAL REVIEW AND STRATEGIC DEVELOPMENT OF THE GROUP
ing approximately USD $48 million of a subordinated United States and Netherlands; US $12.2 million into Alfa- loan from the ultimate parent Company of the Alfa Eco in order to partially fund various investment pro- Group. grams; and committed to an equity investment of US $30 million in order to fund Perekriostok’s aggressive super- Continued Development market expansion program. of Our Existing Core Businesses Throughout 2001 and H1 2002, TNK was been busy re- Given our confidence in the attractiveness of our exist- investing a large portion of its profits and debt financing ing core investments, we have taken the view that re-invest- into its business and infrastructure including: US $100 mil- ment of a significant portion of the Group’s earnings is the lion modernisation of the Ryazan refinery completed with highest and best use of our capital. Of the US $1.85 billion the assistance of ABB Lummus Global; contracting with
Percentage Breakdown of Alfa Group’s Net Profit/(Loss) By Industry Segment
2001 2000
Oil & Gas Production 86.6% 81.3%
Financial Services 8.1% 6.5%
Commodities Trading in Russia,
CIS and Southeast Asia 5.6% 6.1%
Retail Trade 2.7% 0.6%
Telecommunications 0.7% n/a
Food Processing (0.1)% 0.3%
International Commodities Trading (3.6)% 6.3%
Real Estate n/a (1.1%)
Total 100.0% 100.0%
Source: Derived from annual audited IAS financial statements in net profit earned over the past two years virtually all has Parker Drilling in order to improve the effectiveness and been re-invested into the Group’s companies. In fact, only overall efficiency of drilling; the consolidation of a key sub- US $133 million or 7% of the past two years’ combined net sidiary in Orenburg; and the hiring of several highly skilled profits has been paid out as dividends. professionals in the upstream side of their business. Other notable achievements and strategic initiatives included an During 2001 and 2002, we injected fresh capital into our agreement to sell significant tonnage of crude oil to a sub- core businesses including: US $56.4 million equity contri- sidiary of British Petroleum (“BP”) over a ten year period, bution into Alfa Bank Group in order to further strength- continued co-operation with Halliburton in order to en its balance sheet for expected continued growth in key improve the efficiency of upstream production, and meas- lines of business including lending, the development of its urable progress in further integrating of TNK’s US $1.08 bil- branch network, and the expansion of its presence into the lion investment in Onako Oil Company in 2000.
FINANCIAL REVIEW AND STRATEGIC DEVELOPMENT OF THE GROUP
In June 2001, AlfaInsurance expanded its presence in the In May 2001, Alfa-Eco Group completed a US $246.8 million insurance market by purchasing 98.1% of VESTA, one of transaction for a blocking voting stake (25% + 1 share) of the leading insurance companies in Russia, for US $6 mil- US-listed VimpelCom and VimpelCom-Region, leading lion. Additionally, over the past 1.5 years, AlfaInsurance providers of wireless telecommunications services in has undertaken an aggressive expansion program and Moscow and Russia’s regions. We invest alongside Telenor, a advertising campaign which successfully leverages the Norwegian telecommunications Group. Our investment is “Alfa” name. Importantly, we have recently created and specifically for the network build-out and infrastructure filled a number of key management positions in anticipa- development in Russia’s regions. Since May 2001, tion of the rapid growth in this industry. VimpelCom-R has made notable progress expanding active- ly into Russia’s regions, having secured licenses to operate Despite tough world-wide credit conditions VimpelCom in Siberia, Volga River area, Central Russia, and the was able to successfully access international debt markets Northern Caucuses, the rights to which cover 16 major in April 2002, raising US $250 million in a three year cities. VimpelCom’s ADR share price has risen by 58% since Eurobond issue (yield 10.45%). Also, TNK and Alfa Bank our initial investment through the end of September 2002. are actively considering possible medium-term Eurobond offerings in the second half of 2002. In July 2002, we made further investment into telecommu- nications by purchasing 16.2% of Kyivstar for US $66.5 mil- Disciplined InvestMENT Into New Businesses lion. Kyivstar, having a subscriber base of more than 2.6 mil- lion users, is one of the largest cellular communications During 2000 and 2001 the share prices of providers in Ukraine. We believe that the Ukraine market Russian/CIS telecommunications companies fell in sym- offers strong growth opportunities as the rate of mobile pathy with stock prices of world technology and telecom- penetration is relatively low at 5.3% and expect the pene- munications shares. Our belief that this fall in share prices tration rate to reach 16% by 2004. was not representative of the intrinsic value in these com- panies, coupled with our conviction that Russia/CIS Our three investments into Golden, VimpelCom and telecommunications assets would experience tremendous Kyivstar make Alfa Group one of the most significant pri- growth over the next several years, convinced us that vate investors into the telecommunications sector in assets in this sector represented a compelling value. Russia and CIS.
Our first investment into telecommunications was Apart from telecommunications, another major invest- completed in March 2001 when we invested US $110 ment in 2001 was made by Alfa-Eco Group, who together million for a 43.8% stake of US-listed Golden Telecom with an equal joint-venture partner, acquired just under Inc, an integrated telecommunications and Internet 93% of Volga, the largest manufacturer of newsprint in company operating throughout Russia and the CIS. We Russia, for US $68.1 million. invested alongside Baring Vostok Capital Partners, Capital International Inc, both investment managers Divestiture of Group Assets of international private equity funds, and the and Other Transactions European Bank for Reconstruction and Development. Since our investment, through the end of September From time to time, we take the decision to exit certain 2002, Golden’s ADR share price has risen by 18%. of our investments. As investors, divestiture allows us to Over the past 1.5 years, Golden has been busy pursuing focus our resources and management attention on invest- a shareholder value enhancing strategy of optimising ments of strategic relevance to the Group, and important- its ownership in key operating subsidiaries for the pur- ly, realise profits from our efforts. We make these deci- pose of consolidating tactical and strategic control. In sions, typically, for the following reasons: this regard, Golden concluded a key deal in March 2002 for the purchase of 50% of shares of Sovintel, a • We no longer view the investment as strategic to the leading Russian telecommunications company, from Group; Rostelecom, thereby raising Golden’s ownership inter- • We have identified higher-return opportunities in other est to 100%. industry segments;
FINANCIAL REVIEW AND STRATEGIC DEVELOPMENT OF THE GROUP
• We are able to exit our investment under terms which we UFC’s sugar and the grain businesses to a private strate- consider to be attractive gic investor for US $80 million.
In mid-2001, after undertaking a critical review of the cur- Looking AHEAD rent competitive position of Alfa-Development, we took a decision that real estate investment and development was Moving beyond 2002, we see further consolidation not strategic to the Group and should no longer form part of business in Russia and in the other emerging markets of the Group’s core activities. Accordingly, it was decided in which we operate. To be sure, a good deal of this con- to liquidate Alfa-Development and transfer two of the solidation will involve the participation of foreign uncompleted projects to Alfa Bank Group and sell the investors. We have anticipated the current re-emergence remaining project. of foreign interest in Russia and the CIS and view co- operation with foreign investors as essential to the In August 2001 we reached a final, amicable settlement development of our companies and as a logical and with BP and other parties in the matters with respect to attractive means of exiting our investments. It’s not acci- TNK-Nizhnevartovsk (formerly, Chernogorneft), dental that our companies have a long history of co- SIDANCO’s main production subsidiary. TNK- operating extensively, and successfully with both Nizhnevartovsk was returned to SIDANCO and BP was Russian and foreign partners. given day-to-day management control of SIDANCO for at least a three year period. In April 2002, we further There are three main factors which are responsible for strengthened our co-operation with BP through the sale our position on the marketplace today and we are certain of a 15% stake in SIDANCO for US $375 million, bringing that these same three factors will continue to play an influ- BP’s total stake to 25% + 1 share. Together with our equal ential role in our continued success: joint venture partner, we control an approximate 57% stake in SIDANCO. • We are unyielding in our commitment to hiring the best available professional talent; In April 2001, we merged our sugar business, • We steadfastly adhere to our investment philosophy Kubansakhar, with Intec Group’s sugar and grain busi- (page 12-13); ness, creating United Food Company in order to take • We have repeatedly demonstrated, through our actions, advantage of definite synergies between the companies. our strong commitment to the highest levels of trans- The merger gave us certain competitive advantages and parency and governance principles. unquestionably was a case where the whole was greater than the sum of the individual parts. In September 2002, Early indications suggest that 2002 promises to be another after receiving multiple attractive offers for UFC from excellent year. We remain confident in the long-term suc- strategic investors and competitors, we took a decision cess of the Group and are making extensive preparations to sell our entire stake in UFC, by selling separately, to secure an even more successful future for the Group.
ALFA GROUP’S INVESTMENT PHILOSOPHY
WE HAVE REMAINED FAITHFUL TO A BASIC, YET SUCCESSFUL INVESTMENT PHILOSOPHY WHICH HAS SERVED US WELL FOR MORE THAN YEARS. WE CONTINUE TO BELIEVE THAT MUCH OF OUR FUTURE SUC- CESS WILL BE ROOTED FIRMLY IN THIS INVESTMENT PHILOSOPHY:
WE ARE OPPORTUNISTIC INVESTORS.
SIMPLY STATED, WE ARE VALUE-ORIENTED INVESTORS. IN EVALUATING ANY INVESTMENT OPPORTUNITY, OUR INVESTMENT PHILOSOPHY IS DRIVEN BY THE OPPORTUNITY TO PUR- CHASE ASSETS THAT, DUE TO PERCEIVED RISK, LOW LIQUIDITY, DISINTEREST OR A LACK OF UNDERSTANDING ON THE PART OF MARKET PARTICIPANTS, ARE UNDERVALUED.
WE BELIEVE THE MOST ATTRACTIVE OPPORTUNITIES ARE IN WORLD EMERGING MARKETS.
MUCH OF OUR PAST SUCCESS HAS BEEN THE RESULT OF OUR INTIMATE KNOWLEDGE AND UNDERSTANDING OF THE RUSSIAN AND CIS MARKETS. WE BELIEVE THERE ARE STILL SUBSTAN- TIAL OPPORTUNITIES IN THESE EMERGING MARKETS AND THAT WE ARE WELL PLACED TO TAKE FULL ADVANTAGE OF THEM.
WE ARE INTERESTED IN INVESTMENTS OVER WHICH WE CAN EXERCISE CONTROL.
WE MAKE INVESTMENTS ON THE BASIS THAT WE WILL HAVE EITHER MAJORITY OR JOINT CON- TROL, THROUGH SHARE OWNERSHIP, BOARD REPRESENTATION, OR BOTH. NON-CONTROLLED INVESTMENTS ARE NOT ATTRACTIVE TO US BECAUSE THE LACK OF CONTROL MAKES IT DIFFI- CULT TO GUIDE THE DEVELOPMENT OF THESE COMPANIES AND MAXIMISE SHAREHOLDER VALUE. JOINT CONTROL IS ACCEPTABLE IN CASES WHERE THE JOINT VENTURE PARTNER IS RELI- ABLE AND BRINGS EXPERIENCE OR SKILLS THAT COMPLEMENT OUR OWN, OR SHARES FUNDING OBLIGATIONS AND RISKS, WHICH DUE TO THEIR SIZE OR NATURE, WE WISH TO SHARE.
WE TYPICALLY TAKE A LONGER-TERM VIEW, IN ORDER TO REALISE THE FULL POTENTIAL OF OUR INVESTMENTS.
THE LACK OF LIQUIDITY OF EMERGING MARKET ASSETS MAKES ANY EXIT STRATEGY TENU- OUS. IN RUSSIA AND THE CIS IN PARTICULAR, THE LACK OF LIQUIDITY IS PERVASIVE, WHICH
ALFA GROUP’S INVESTMENT PHILOSOPHY
PLACES IT OUTSIDE OUR DIRECT CONTROL. UNLESS WE WISH TO SELL OUR ASSETS AT EXTREMELY UNDERVALUED PRICES, WE MUST USE THIS TIME TO DEVELOP THESE ASSETS AND GUIDE THE COMPANY TO CLOSE THE VALUE GAP. WHILE WE DO NOT PARTICULARLY WEL- COME THE INFLEXIBILITY OF BEING WED TO AN INVESTMENT FOR THE LONGER TERM, WE LOWER OUR RISKS BY SEEKING UNDERVALUED INVESTMENTS THAT PROVIDE AMPLE DOWN SIDE PROTECTION AND, AS FAR AS POSSIBLE, INTERIM CASH FLOWS.
WE VIEW CO-OPERATION WITH FOREIGN INVESTORS AND THE ATTRACTION OF FOREIGN CAPITAL AS IMPORTANT TO THE DEVELOPMENT OF OUR COMPANIES.
THE NEED TO ATTRACT FOREIGN INVESTMENT IS BECOMING INCREASINGLY CRITICAL. FOREIGN INVESTORS PROVIDE NOT ONLY CAPITAL INVESTMENT, BUT ALSO THE EXPERTISE, CREDIBILITY AND ADVANCEMENT OF REPUTATION WHICH IS NEEDED TO SUCCESSFULLY DEVELOP AND REALISE THE FULL VALUE OF OUR INVESTMENTS. WE ARE FULLY AWARE THAT THE FAILURE TO ATTRACT LONGER-TERM FOREIGN INVESTMENT WILL RESULT IN UNDER- DEVELOPED ASSETS AND MISSED BUSINESS OPPORTUNITIES.
WE DO NOT CONSIDER OURSELVES EXPERTS IN MANAGING AND OPERATING THE COMPANIES THAT WE OWN.
FIRST AND FOREMOST WE ARE INVESTORS, NOT BUSINESS MANAGERS –WE LEAVE THE DAY-TO- DAY MANAGEMENT AND OPERATING DECISIONS OF OUR COMPANIES TO PROFESSIONAL, COM- PETENT MANAGEMENT WITH INDUSTRY EXPERIENCE. OUR COMPANIES ARE INDEPENDENT ENTITIES AND ARE GIVEN FAIRLY WIDE LATITUDE TO CONDUCT THEIR AFFAIRS. HOWEVER, WE ACTIVELY ADVISE AND TAKE DECISIONS ON IMPORTANT STRATEGIC MATTERS THAT HAVE AN IMPACT ON THE SHAREHOLDER VALUE OF OUR COMPANIES. WE ALSO CONTINUALLY EVALUATE MANAGEMENT AND MEASURE THE FINANCIAL PERFORMANCE OF OUR INVESTMENTS.
WE ARE GUIDED BY THE PHILOSOPHY OF INVESTING IN ONLY THOSE COMPANIES THAT ARE LEADERS IN THEIR RESPECTIVE FIELDS OF BUSINESS.
WE REQUIRE THOSE IN WHICH WE INVEST TO BE ONE OF THE TOP THREE IN THEIR BUSINESS FIELD OR WITH A CLEAR POTENTIAL TO BECOME ONE OF THE TOP THREE WITHIN A REASON- ABLE PERIOD. WHERE WE SEE THAT OUR INVESTMENTS ARE NOT MEETING THIS CRITERION, WE TAKE ACTIVE MEASURES TO DIVEST AND FREE UP OUR FINANCIAL AND MANAGEMENT RESOURCES FOR MORE EFFECTIVE INVESTMENTS.
Seated (left to right): German Khan, Mikhail Fridman, Alexei Kuzmichov. Standing (left to right): Pyotr Aven, Leonard Vid, Alexander Fain, Nigel Robinson, Mikhail Gamzin, Alexander Kosyanenko, Vladimir Bernstein.
SUPERVISORY BOARD OF DIRECTORS
The Supervisory Board of Directors of Alfa Group guides and co-ordinates the strategic development of Alfa Group and its companies. The Board, which meets twice a month, consists of a total of 10 senior executive and senior non-executive directors who are primarily drawn from the main companies of the Group. These directors pro- vide different important insights into political, economic and industry developments in Russia and internationally.
The Supervisory Board considers the most important matters concerning the strategic development of the Group and the management of its businesses and serves as a con- duit for the senior management of the Group to share ideas and resolve issues in a co- ordinated manner. The most important issues include the clarification and develop- ment of the overall business strategy for the Group’s companies, the critical evaluation of company performance, the formal review of significant transactions before they are undertaken, and the establishment of strong mechanisms of corporate governance and controls.
German KHAN ...... Chairman of Management Board and Executive Director of TNK
Mikhail FRIDMAN ...... Chairman of the Supervisory Board of Alfa Group Consortium
Alexei KUZMICHOV ...... Chairman of the Board of Crown Resources AG
Pyotr AVEN ...... President of Alfa Bank Group
Leonard VID ...... Chairman of the Executive Board of Alfa Bank Group
Alexander FAIN ...... General Director of Alfa-Eco Group
Nigel ROBINSON . . . .Director of Corporate Development, Finance and Control - Alfa Group
Mikhail GAMZIN . . .Member of the Board and Chief Executive Officer of United Food Company
Alexander KOSYANENKO ...... Chief Executive Officer of Trade House Perekriostok
Vladimir BERNSTEIN ...... Director of Strategic and Investment Planning - Alfa Group
ALFA GROUP’S CORPORATE CENTRE
Since its establishment in May 1996, CTF Holdings Ltd corporate centre is also responsible for other initiatives (“CTF”), the ultimate holding company of the Alfa including the development of the Group’s corporate web- Group, has effectively served as the Group’s corporate site, the production of the Group annual report as well as centre. The corporate centre’s team of professional staff other public relations and marketing initiatives in co-oper- reports directly to the Supervisory Board of Directors ation with the Group’s companies. through the Director for Corporate Development, Finance & Control. At the end of 2001, we created several new functions in the corporate centre in the areas of business strategy, invest- The Supervisory Board of Directors has vested the ment planning, improvement of business processes, and Group’s corporate centre with wide-ranging responsibility the critical review and development of IT strategy for the and authority to carry out numerous holding company Group and its companies. Some of the specific undertak- and corporate centre functions – some of which are tradi- ings in these areas to date include the standardisation of tional and some of which have been specifically tailored to procedures for analysis, modeling and presentation of take into account the peculiarities of Russia and the investment projects across all Group companies, the requirements of the Group. Although the corporate cen- introduction of protocols and procedures for investment tre’s functions vary widely in scope, they can generally be committees, and the critical evaluation of our companies’ summarised as: strategies. Also, IT related projects have included the crit- ical review and development of an effective, sustainable • Decision-making and implementation support to the IT strategy at each company and for the Group as a whole, Supervisory Board of Directors; as well as the organisation and leading of the IT Expert • Direct assistance to the companies forming the Group; Committee which effectively transfers IT expertise and • Development and maintenance of strong formal mecha- knowledge between Group companies. nisms of corporate and strategy development, invest- ment planning and control for the benefit of the com- Well before it became fashionable, the Alfa Group recog- panies forming the Group and for the Group as a whole. nised the importance of adopting western standards of corporate development and controls. In taking the long More specifically, the primary functions of the Group’s view, it became very clear to us that future shareholder corporate centre include setting Group wide accounting value would be sacrificed if we did not act decisively and policy, the review and approval of quarterly company aggressively to develop strong governance mechanisms for accounts prepared under International Accounting the Group. Standards, preparation of Group annual consolidated IAS accounts, and providing assistance to our companies in We are proud of the progress that we have made since the recruiting qualified finance, accounting and other key per- formal establishment of our corporate centre, and are sonnel. Responsibilities also extend to control over the today reaping the benefits of our efforts. However we have development of an efficient Group-wide ownership struc- no illusions. We appreciate the realities and difficulties of ture, the maintenance and enforcement of the Group’s the Russian marketplace and realise that the development corporate statute which defines and regulates decision of strong governance mechanisms for our Group is an evo- making within the Group, and improving all aspects of lutionary process. We are determined to meet this chal- overall functioning of the effectiveness of our companies’ lenge and realise our ambition of staying ahead of the Boards of Directors including the recruitment of qualified requirements of the market and the expectations of our independent, non-executive directors. Additionally, the stakeholders.
Alfa Group’s Principal Holdings
FINANCIAL SERVICES
Alfa Bank
Founded in , Alfa Bank has developed rapidly to become Russia’s largest privately owned bank. It provides a full range of banking services — comercial banking, investment banking, asset management, securities trading, trade finance and leasing. The Bank has the second largest branch network in Russia over nine time zones in Russia, Ukraine and Kazakhstan, as well as subsidiaries in the United Kingdom, the United States and the Netherlands. www.alfabank.ru
2001 was the eleventh year of Alfa Bank’s suc- Domestic Bank” for the fourth consecutive year and cessful operation in the Russian and international finan- “Best Russian Trade Finance Bank” for the second con- cial markets. Although years is not a long period when secutive year. judged against the history of some international banks, it is nevertheless a noteworthy achievement in post-Soviet During the leading international credit rating agen- Russia. cies (Moody’s, Standard & Poor’s, and Fitch IBCA) increased the Bank’s rating, some of them up to a level During and , Alfa Bank continued to receive close to Russian sovereign ratings. accolades in the financial media both domestically and internationally. Alfa Bank was nominated for a Golden Financial Highlights Diploma of the Financial Press Club for informational openness. Also, in , Global Finance, an influential A lfa Bank’s net profits increased to US $. million US business journal, named Alfa Bank “Best Russian in , a .% increase on and total assets grew
FINANCIAL SERVICES: ALFA BANK GROUP by .% during , reaching US $, million at needs. Equipped with the latest technology, the Bank offers December . This increase in total assets came pri- an ever-growing array of financial and banking services. marily from the Bank’s expanding loan portfolio which rose by .% to US $, million. This increase would Retail Business. Alfa Bank pays a great deal of attention not have been possible without a corresponding increase to the servicing of customers and providing them with a
Net Profit/(Loss) (‘ USD) Source: Annual audited IAS standalone financial statements
in the Bank’s deposit base, which rose by US $ mil- whole range of banking services. The balance on indi- lion to US $, million (including bills of exchange) vidual rouble and foreign currency accounts grew by . by December . The Bank also registered a healthy times for the two years ended December and increase in its net interest margin, increasing it by more Alfa Bank currently ranks second among Russian banks than four times over to US $ million in . in retail deposits in Russia.
Commercial Banking By the end of , Alfa Bank had issued more than , plastic cards and became one of four major As a financial supermarket with a strong capital base Russian plastic card issuers on the market. Also, in and a substantial range of commercial banking services, Alfa Bank improved its position in the plastic card market, Alfa Bank maintains relations with a large number of enter- ranking second in two important categories - total revenue prises engaging in a variety of economic activities and charged and aggregate balances. The Bank also succeeded offers products which are tailored to individual client in winning a larger segment of the market as follows: num-
FINANCIAL SERVICES: ALFA BANK GROUP
Alfa Bank’s Branch Network
ber of international plastic cards (% market share); Pay commercial bank in Europe (Amsterdam Trade Bank Later cards (%); revenue on issued cards (%); trade or “ATB”), which holds a comprehensive banking outlets (%); acquisition turnover (%). Importantly, license. In , ATB intends to enlarge its product this growth in market position was accompanied by a % range, through the implementation of the Fontis increase in the profitability of Alfa Bank’s plastic card busi- Electronic Banking System, simultaneously with the ness during as compared to the year earlier period. installation of an additional Equation Clean Payments System. This will allow ATB to attract major corporate Significant attention to the retail segment of the banking clients and correspondent banks for settlement and industry is a main strategic focus of the Bank as it seeks to clearing services. win back tremendous cash resources accumulated by indi- vidual savers. Alfa Bank branches also operate in London and New York. Alfa Securities (London), created in June cur- Regional Network. In a number of Alfa Bank branch- rently holds all of the required licenses of the UK es were set up across Russia including in Izhevsk, Financial Services Authority (“FSA”) and was the first Voronezh, Yaroslavl and Sakhalin. Also, a representative Russian financial company to obtain a FSA license, after office was set up in Tatarstan, and eight new offices were the Russian financial crisis. saw the opening established in Moscow and other Russian regions. of an Alfa Bank representative office – Alfa Capital Currently, Alfa Bank’s branch network stretches from Markets (USA) Inc in New York. Alfa Capital Markets Sakhalin in the east to Kaliningrad in the west. (USA) Inc has a NASD license for carrying out brokerage and dealer operations and specialises in operations International Network. The Bank also has branches in involving brokerage and trading in shares issued by Kazakhstan and Ukraine as well as in the Netherlands, Russian companies as well as providing corporate the latter being the only % privately owned Russian finance services to its clients.
FINANCIAL SERVICES: ALFA BANK GROUP
% Contribution to Bank’s Net Profit by Business Segment Source: Company data
Co-operation with Financial Institutions and Inter-Bank facilities by newly opened branches and additional offices. Operations. During , the establishment of new and As such, in income derived from lending activity the consolidation of existing correspondent relations made the largest overall contribution to the Bank’s aggre- with major banks in Europe, the US, Japan, Asia, Africa gate income. By December the Bank’s loan portfo- and Latin America secured Alfa Bank the leading posi- lio reached US $, million, a .% increase over . tion among Russian non-government banks in clearing activity. An expanding and diversified client base has enabled the Bank to spread the risk of its loan portfolio across differ- In co-operation with its foreign partners Alfa Bank ren- ent sectors of the economy. Specifically, the Bank ders a highly diversified range of top-notch services in the increased significantly, lending to manufacturing, con- areas of project finance, syndicated lending related to struction, trade and commerce enterprises during . trade financing, export credit operations, clearing, for- Despite the large increase in the Bank’s lending base, the eign exchange and banknote services. credit process at Alfa Bank continues to be based on a strict lending and risk management culture. During , Alfa Bank obtained an unsecured syndicat- ed loan of US $ million from a consortium of leading Currency Markets. For several years, Alfa Bank has enjoyed European banks. This was the largest unsecured Russian a leading position on the domestic and international for- financial institution risk syndicated in the international eign exchange and money markets, including the markets loan market since Russia’s financial crisis. of the CIS. saw a further steady growth of the Bank’s revenues from currency operations in the Russian market Loans. In , the extension of loans, bank guarantees and caused by a sustainable increase in the volume of client other credit related products was considerably intensified operations, and by an increase in volume of Alfa Bank’s and enlarged due to a broader client base, and use of loan operations in the inter-bank market and MICEX. Today,
FINANCIAL SERVICES: ALFA BANK GROUP
Alfa Bank’s controls between % and % of the market ket in asset management services to a wide range of for RR/USD transactions. investors, including private individuals, pension funds, insurance companies and corporate treasury depart- Investment Banking ments. With over million unit holders, Alfa Bank man- ages the most widely-held open-end mutual fund in Equity Markets and Trading. In , Alfa Bank carried out Russia. In the Fund’s per unit rouble price its largest volume of equity operations on the RTS, increased by approximately %. In , the most MICEX and the international ADR markets. During , important strategic goals will be the attraction of pen- the total equity trading volume for the Bank increased by sion fund assets for management and the effective use of % as compared with and the Bank’s market share existing distribution channels in the Bank’s branch net- was .% of the total market at the end of . work to market and sell a range of newly created family of investment funds. Fixed Income Markets and Trading. In this segment of the market Alfa Bank enjoys many competitive advantages. Corporate Finance. In , the strategic co-operation and Importantly, Alfa Bank is a market maker in GKO and synergies between commercial and investment banking OFZ bonds as well as in corporate Russian and other sides of Alfa Bank ensured Alfa Bank’s success in the area Eurobonds. Also, the wide Alfa Bank branch network of corporate finance. A summary of some of the more sig- ensures access to regional issuers and creates possibili- nificant transactions which the Bank’s Corporate ties for an objective assessment of their creditworthiness. Finance team were involved in and early :
One of the highlights of in the area of fixed income • Purchase by Tyumen Oil Company of a controlling stake trading was that profits from REPO operations increased of shares in SIDANCO Oil Company; by three-fold as compared to the previous year. • Purchase of Golden Telecom, a US public company Asset Management. Alfa Bank, through its subsidiary Alfa whose shares are listed on NASDAQ, for Alfa Group and Capital is a trusted leader in the Russian financial mar- a consortium of western investors;
FINANCIAL SERVICES: ALFA BANK GROUP
• Financial consultant to Svyazinvest subsidiaries with gic objectives will be the further successful implemen- regard to the consolidation of the regional electronic tation of information systems and technologies which communication operators in Siberia and Far East; we have invested in heavily, over the past few years. During Alfa Bank launched a comprehensive • Purchase by Alfa-Eco Group of a controlling block of retail business program named Mercury Project, which shares in Volga Pulp and Paper Mill, a major Russian envisages an aggressive expansion of retail banking producer of newsprint paper; services in Russia and the CIS. The Project includes the rapid opening of branches, state-of-the-art technologies • Acquisition of AO Milk Plant and AO Kiev City Milk for the customer, the provision of timely and accurate Plant for Wimm-Bill-Dann, a large Russian dairy; financial and operating information for decision-mak- ing, and a strict control over expenses. Continued • Manager (with ING Barings acting as lead manager and growth in our commercial banking business will also be global co-ordinator) on the New York Stock Exchange enhanced by our commitment to maintain a capital US ADS issue of Wimm-Bill-Dann adequacy ratio above %.
Strategy On the investment banking side, we will continue to centre our attention on divesting ourselves of assets L ooking beyond , there are a number of strate- which were acquired during privatisation, which are not gic initiatives which are being undertaken at the Bank. strategic to the Bank and whose potential has been Some of the key elements on the commercial banking realised. After hiring several key managers in and side of our business include the aggressive expansion of , we are focused keenly on expanding our presence the Bank’s branch network into Russia’s regions, a in the area of asset management. We are also focused on relentless focus on the reduction of operating costs – increasing equity trading, brokerage and other services especially within the branch network, and the provision which we provide to foreign corporates and individuals of improved services, including the introduction of who wish to access the Russian public and private equi- new products to our clients. Underpinning these strate- ty markets.
AlfaInsurance
AlfaInsurance Group is one of Russia’s largest insurers and offers a diversified portfolio of insurance services including comprehensive business insurance protection as well as a wide range of products for individuals. AlfaInsurance is consistently ranked as one of the top five insurance companies and actively works across the whole of Russia and Ukraine. www.alfastrah.ru
In September 2000, a new insurance unit was launched including St. Petersburg, Tyumen, Yekaterinburg, within Alfa Group with the establishment of the market- Novorossiysk, and Western Siberia. oriented insurance company – Alfa Guaranty – whose aim was to provide a range of comprehensive financial serv- In 2001, the Company’s total turnover was US $683.5 mil- ices to its customers. Since then, development of the lion, which was 3.2 times more than in 2000. The share of insurance business has been considered a strategic pri- proceeds from insurance premiums soared by 2.2 times ority of the Alfa Group. The business of the Group over the same period last year and accounted for approxi- developed rapidly during 2001 when the holding mately 25% of the total increase of AlfaInsurance Group’s acquired the controlling interest of shares in East proceeds. At the end of 2001, the Company controlled European Insurance Agency (“VESTA”) and the Ukraine- 7.4% of the Russian insurance market (as measured by based Ostra Kiev. Beginning in September 2001, the insurance premiums collected), an increase in market entire insurance business of the Group was united under share of 4% as compared with end of 2000. a single trademark – AlfaInsurance Group. AlfaInsurance Group was the first Russian insurance com- At the end of 2001, over 25,000 companies and more than pany to increase its share capital above the threshold of 80,000 individual customers entrusted the Company with 1 billion roubles and the Company’s share capital reached protection of their financial interests, which helped the US $64 million in 2001. A substantial amount of share- Company secure its place as the second largest company holders’ equity as well as a reliable re-insurance program in the Russian voluntary insurance market (by insurance aimed at protecting the Company’s portfolio through premiums collected). leading trans-national companies, such as Munich Re, General Cologne Re, Swiss Re, SCOR, and Lloyd’s of Review of 2001 London, enable the Company to undertake large finan- cial risks of its customers, almost without limitation. During 2001, AlfaInsurance expanded its presence in Russia’s regions considerably: the number of affiliates Upon unification of three companies under one trade mark, rose from 38 to 43 and by the end of the year twelve affili- AlfaInsurance Group was faced with a challenge to re-launch ates gained leading positions on local regional markets, itself in the market as quickly as possible. Since September
FINANCIAL SERVICES: ALFAINSURANCE GROUP
% of Market Share Controlled by AlfaInsurance (by insurance premiums) Source: Company data, Company analysis of market data
2001, a full-scale promotion campaign that involved all avail- support the development of the Russian insurance mar- able media sources was launched. The opinion poll that fol- ket. One of the main strategic tasks of AlfaInsurance will lowed confirmed the high efficiency of the campaign with be to capture a substantial amount of new business and in brand recognition among the target audience reaching 85%. key segments of the corporate and individual markets as The AlfaInsurance trademark has solidly positioned itself well as further strengthen the Company’s positions as a within the top five insurance companies of the market. major national player of the insurance community. This development strategy will be based on the ability to effec- Looking Ahead tively utilise existing opportunities of the Company, regional expansion, optimization of business processes, We believe that in the next few years an “insurance reinforcement of the sales organisation and building on culture” in Russia will continue to steadily grow and will synergies with Alfa Bank.
Mix of Risk Based Insurance Policies Written by AlfaInsurance – End of Source: Company data
PROGRESSIVE THINKING
OR
SEEKING PIONEERING
SOLUTIONS.
SOMETIMES STRIKING
AND UNCONVENTIONAL,
BUT ALWAYS EFFECTIVE
AND TIMELY
OIL production
Tyumen Oil Company
Established in , Tyumen Oil Company (“TNK”) together with its subsidiaries, is today one of the largest vertically integrated oil and gas companies in Russia, ranking fourth in oil production and second in oil reserves. TNK’s primary operations include the production of crude oil and gas, refining, as well as the distribution and retail sale of refined oil products. www.tnk.ru
Tyumenskaya Neftianaya Kompaniya (“Tyumen Oil full control of the purchased shareholding, fully pri- Company” or “TNK”) was formed as an open-type joint vatising the company. stock company by a government decree in August 1995. At that time, the Russian government was the largest of During December 2001, TNK, completed a single share TNK's shareholders. swap whereby minority shareholders voluntarily swapped their ownership in TNK’s production sub- In July 1997, 40% of the Company's shares were put up for sidiaries for ownership in TNK and continuing through privatisation in an investment tender that was won by 2002, TNK purchased shares in its production sub- Novy Holdings (a company jointly owned and controlled sidiaries directly from existing shareholders. Currently, by Alfa Group and Access Industries/Renova Group). Alfa Group, together with Access Industries/Renova Early in 1998, the new shareholders together bought a fur- Group own approximately 97% of the outstanding ther 9% of TNK shares from private shareholders and an shares of TNK. additional 1.1% at a specialised auction, thus consolidat- ing a controlling block (50.1%) in TNK. Company Structure
In December 1999, when the Russian government (rep- TNK, together with its subsidiaries (including resented by the Federal Property Fund) put up the ONAKO Oil Company, 85% of which was purchased at remaining 49.8% of TNK for privatisation, Alfa Group end of 2000 for US $1.08 billion), is one of the largest ver- and Access Industries/Renova Group again, jointly won tically integrated oil companies in Russia, ranking second the tender, bringing their total ownership in TNK to in oil reserves and fourth in oil production. Its primary 99.9%. In February 2001, after the completion of an operations include the production and refining of crude investment program as per the terms of the tender, Alfa oil and gas, as well as distribution of oil and gas, premium Group and Access Industries/Renova Group gained oil products and motor oils.
OIL PRODUCTION: TYUMEN OIL COMPANY
TNK Volume of Crude Oil Production (' of barrels per day) Source: Company data
The Company includes four oil producers (Samotlor- sand tonnes of oil per day, 42% of which is exported, neftegas, Nizhnevartovsk Oil and Gas Production while the remaining oil is delivered to its own refineries Company, Tyumenneftegas, and TNK-Nyagan), five and goes for free sale on the domestic market. TNK is refineries (Ryazan NPZ, Nizhnevartovsk NPO, Krasno- one of the few national oil companies operating its pro- leninsky NPZ, Lisichansknefteorgsintez and Orsk- cessing facilities at full capacity. As of 1 January 2002, orgsintez); and five distribution and marketing enter- TNK's proven oil reserves based on international stan- prises (Kaluganefteproduct, Karelnefteproduct, Tula- dards were at 1.03 billion tonnes, and total reserves nefteproduct, Ryazannefteproduct and Kursknefte- including proven, probable and possible, were estimated product). at 2.17 billion tonnes.
Exploration and Production Refining and Distribution
TNK's primary oil fields are located in the Tyumen In 2001, the Company refined 20.9 million tonnes of region of western Siberia, the largest region of hydrocar- crude and produced 10.7 million tonnes of light oil. The bon reserves in Russia. The wells are highly productive, Ryazan Refinery is the primary refining unit for TNK’s with high quality sweet crude oil with good physicochem- upstream operations. The location of Ryazan, in close prox- ical properties. Sweet crude commands a higher price, imity to the largest sales markets in Central Russia (includes and is easier to manufacture into environmentally-friend- Moscow), provides TNK with a strategic competitive advan- ly oil products without requiring investment in expensive tage. TNK's management has been actively working to de-sulfurisation equipment. increase Ryazan Refinery's outputs and to improve the qual- ity of its refined products. In 2001, the Ryazan Refinery According to 2001 production results, TNK, together refined approximately 11.1 million tonnes, with 10.5 million with all its subsidiaries, currently produces 114.9 thou- tonnes of oils and 572 thousand tonnes of petrol.
OIL PRODUCTION: TYUMEN OIL COMPANY
TNK Presence in Russia and Ukraine
TNK owns and operates a network of retail petroleum sta- • Focusing corporate efforts on using vertical integration tions throughout Central Russia, in the Tyumen region, benefits and adding value by: Karelia, Orenburg region and Ukraine. In addition to – Optimisation of oil and gas production and quality; TNK-owned petroleum stations, from 1998, the Company – Higher technical and economic efficiency of refineries has been successfully developing Russia's first unique job- including increasing the share of production of light oils; ber network where jobbers, while being independent gas – Expansion and higher efficiency of retail sales in the station owners, have exclusive rights to sell TNK products most attractive fuel market segments; under franchises. At the end of 2001, the total number of – Greater capital efficiency in every part of the chain; TNK-owned and jobber gas stations was 969. • Continued international development through joint ven- Strategy tures, mergers, affiliations and other strategic partnerships including co-partnership in projects for the development The cornerstone of TNK's long-term corporate strategy of oil, oil products, and gas transportation infrastructure; is to increase its market value by maximising the economic benefits of vertical integration, improving production effi- • Improvement of efficient organisational and manage- ciency, lowering costs, and reorienting production and ment system based on encouraging “bottom-to-top” ini- sales towards competitive high value-added products. tiatives and improvement of “top-to-bottom” control to the international standards of corporate governance and The strategy developed to achieve this includes: operating and financial transparency;
OIL PRODUCTION: TYUMEN OIL COMPANY
• Improvement of management, information and safe • Launching a new catalytic cracking unit at the operation technologies Company’s Ryazan Refinery six months ahead of sched- ule. The unit improves the quality of refined products Key results for 2001 and H1 2002 and increases throughput and efficiency, increasing oil conversion from 59% to 68%. Additional planned con- In 2001, TNK highlights included: struction will further increase conversion rates to 75% by end of 2002 and 82% by end of 2003; • Strategic partnership with British Petroleum (“BP”), and amicable settlement of relations regarding SIDANCO Oil • The development of new and considerable expansion Company which regained its ownership of TNK- of existing oil products and distribution networks, Nizhnevartovsk (Chernogorneft) acquired by TNK in 1999 including positions on the highly profitable Moscow following bankruptcy proceedings. The Company increased market; to approximately 29% its interest in Rusia Petroleum, which has a license to develop a major Kovyktinskoye gas field. • TNK was the first Russian oil company to join the Additionally, in April 2002, we sold to BP, a 15% stake in oil Ecology and Energy Committee of the American and gas company, SIDANCO for US $375 million. Chamber of Commerce
SIDANCO Oil Company
Established in , SIDANCO Oil Company together with its subsidiaries, is one of Russia’s largest vertically integrated oil and gas companies, ranking among the top-ten in oil production and th in oil reserves. SIDANCO’s primary operations include oil and gas exploration, production and refining as well as oil and chemical products distribution. www.sidanco.ru
Company Structure
With 380,000 barrels per day production, SIDAN- SIDANCO has five main production companies which CO Oil Company ranks amongst the ten largest oil and gas comprise: TNK-Nizhnevartovsk (2001 production – 6.5 mil- producers in Russia, employing 29,000 people. lion tonnes) which also has a share in two joint ventures SIDANCO’s upstream subsidiaries are currently develop- adding over 1.5 million tonnes in 2001, UdmurtNeft ing over 120 fields located in Udmurtia, Saratov Oblast (2001 production – 4.98 million tonnes) VaryoganNefteGaz (Volga Region), the Khanty-Mansiysk Autonomous Area (2001 production – 2.99 million tonnes), SaratovNefteGaz (Tyumen Oblast), and Novosibirsk Oblast in western (2001 production – 1.43 million tonnes), and Siberia. NovosibirskNefteGaz (2001 production – 0.08 million tonnes). In addition the Company owns Saratov Refinery, The Alfa Group, together with its joint venture partners which in 2001 improved its depth of refining by 6.5%, pro- Access Industries / Renova Group, owns approximately duced 3 million tonnes of oil products and increased gaso- 57% of SIDANCO and invests alongside British line production by more than 50% as compared to Petroleum (“BP”), a 25% + 1 share shareholder, as well as 2000 levels. The Refinery is working on an investment other minority shareholders. Under the terms of the project to install a cracking unit to further boost the yield shareholders agreement, as a controlling shareholder, of light products. Alfa Group, Access Industries and Renova Group has majority Board representation, and BP has been granted SIDANCO’S retail network comprises 149 service stations, management control of the Company for at least the next located in the Saratov and Rostov regions, where they three years. dominate their respective markets.
OIL PRODUCTION: SIDANCO OIL COMPANY
Management focus on performance units of core production assets. These units will be supported by other services, but wher- In late 1999, BP seconded a team of six senior managers ever possible, the Company seeks to concentrate on its with vast experience in the petroleum industry to join the core competencies. Non-core activity, including oil-field SIDANCO management team. Since that time, SIDANCO’s services will be separated to eventually form a part of the management team has grown stronger and is now supple- oil service industry in Russia.
SIDANCO Volume of Crude Oil Production (in millions of tonnes) Note: TNK-Nizhnevartovsk and its two subsidiaries are included from December Source: Company data mented by additional BP and Russian resource, particularly Other initiatives supporting operational excellence in key operational positions. The management team has include changing the management information systems been very successful in driving the strategic objectives of the and processes to support greater transparency in the busi- Company, including the integration of advanced Western ness. In view of its strategy, the Company focuses on such practices in the context of best Russian experience. important issues as health, safety and environment (HSE). A major initiative has commenced to assess and improve Strategy SIDANCO’s safety perfomance to world-class standads using the assistance of DuPont, a recognized world leader The central aim of SIDANCO is to maximise share- in safety. In cooperation with IT Russia, a leader in envi- holder value. The Company has identified its core ronmental management, SIDANCO is implementing a strengths as hydrocarbon development and extraction monitoring and improvement system which is designed to and seeks to maximise its performance in every aspect of comply with ISO 14001. this activity. Necessarily, a cornerstone of this strategy is to focus on operational excellence. This obviously requires This change process obviously impacts people. In SIDAN- changing the way that SIDANCO does things and is cur- CO, the combination of key BP resources and Russian rently embarking on a major change initiative in order to expertise is blended to make the change process work achieve its goals. Operationally, the Company is in the from inside. This blend of expertise is working to improve process of changing its structure and processes with a processes and achieve operational excellence.
FORESIGHT
OR
THINKING
WHICH IS AHEAD OF ITS TIME.
THE OPENING OF NEW HORIZONS,
BY THOSE WHO TODAY THINK
ABOUT TOMORROW
COMMODITIES TRADING
Crown Resources AG
Founded in , Crown Resources AG is a major international commodities business trading Russian and internationally sourced commodities – primarily oil and oil prod- ucts and metals. Based in Zug, Switzerland, Crown has branches in London and Gibraltar and representative offices in Moscow, Baghdad, Havana, Caracas and Singapore. www.crownresourcesag.com
CROWN RESOURCES AG
Founded in 1992 and based in Zug, Switzerland, with markets and be able to conclude OTC deals as required for branches in London and Gibraltar and representative hedging. As a result, Crown’s access to international mar- offices in Moscow, Baghdad, Havana, Caracas and kets and its ability to use various hedging techniques allows Singapore, Crown has more than 100 employees in its significant flexibility in negotiating terms and conditions world-wide operations. Crown is actively involved in the with its suppliers. These include various pricing mecha- trading of physical goods with the territories of the nisms that add to Crown’s competitiveness in trading crude Caribbean basin and Latin America, the Middle and Far oil and oil products. This also allows Crown to realise, in East, Africa, and Russia as well as other CIS countries. full, the trading potential offered by a stable supply base and strong relationships with many customers world-wide. Crude Oil and Oil Products Among Crown’s customers are numerous state-owned and private companies, including: Somo, NIOC, PDVSA, BP, Through long-standing relationships with oil produc- To talFinaElf, Shell, ExxonMobil, Agip, and Cargill. ers, Crown’s crude oil and oil products department main- tained their significant presence as a major participant in Metals international oil markets in 2001. The main providers of oil are companies such as TNK and Bashneft (Russia), Having recently established offices in New York and Somo (Iraq), and TotalFinaElf (France). New Orleans, Crown initiated its metals trading business during the second half of 2001. Since that time the Crown trades a wide range of Russian and international- Company has been actively trading in Europe, CIS, Asia, ly sourced oil products, including gasoline, kerosene, Australia, South America and the Middle East. fuel oils, blend stocks and cycle oils, and for the last sev- eral years has placed particular emphasis on expanding Crown is determined to cultivate the natural progression its non-Russian oil products business. of the Company into metals trading and believes that the Company’s robust expertise and ability in the financial Crown has established trading and credit lines with a num- markets will allow for an acceleration of exponential ber of companies in order to participate in the derivative growth in the years to come. Already, Crown’s trading
COMMODITIES TRADING: CROWN RESOURCES AG
Contribution by Different Commodity Types to Company Turnover Source: Company data
team has extensive experience in international finance, Banque BNP Paribas, Natexis Banque, Societe Generale arbitrage, risk management, terminal markets, physical Banque and others. production and consumption. Also, the Company is inte- grally involved in the supply chain by means of trade, A Year of Changes investment and financial arrangements. The nature of the Company’s business changed during Crown’s current activities are focused on primary, second- 2001 in that much less reliance is being placed on sourcing ary, alloy, semi-fabricated products and scrap aluminum, deals through Alfa Group companies as Crown continues and are currently in the process of introducing a copper to develop its own independent base. These changes, com- department. It is anticipated that other non-ferrous base bined with extremely difficult trading conditions following metals will follow. 11 September 2001, have resulted in the Company review- ing all of its operations, with a view to restructuring. Financing In early 2002, a comprehensive reorganisation was initiat- ed in order to adjust the overhead levels to fit this new pro- Credit lines opened at major international banks, file. In addition, the Company wrote off one-time expens- which exceeded US $1 billion at the end of 2001, allow the es associated with the hiring of high level energy traders Company to engage in a variety of trading activities based who will be leading new initiatives through 2002 and sub- on trade financing, including the pre-financing of raw sequent years. Also a new management team was brought material suppliers, the financing of the production and into the Company. To demonstrate its commitment to processing of goods, the financing of the storage of com- Crown in this transition period, the Alfa Group decided to modity stocks, and hedging. Banks with which the increase Crown’s equity by capitalising approximately Company co-operates include Raiffeisen Zentralbank, US $48 million of an Alfa Group subordinated loan.
Alfa-Eco Group
Founded in as a trading company of the Alfa Group Consortium in Russia, Alfa-Eco has built a large and diversified business in producing and trading a wide range of com- modities and products both domestically and internationally including oil and oil prod- ucts, coal, grain, meat, alcoholic beverages, pulp and paper products and others. Also, Alfa-Eco has made a significant strategic investment into telecommunications assets. www.alfaeco.ru
ALFA-ECO GROUP In 2001, Alfa-Eco continued the management of its 95% owned stake of Sakhalin-based ZAO Petrosakh, a vertically-integrated complete cycle oil company In addition to being one of Russia’s leading trading involved in the exploration, production and export of companies, in recent years, Alfa-Eco Group’s (“Alfa-Eco” crude oil, as well as the refining and sale of oil prod- or the “Group”) key focus has been on large-scale invest- ucts. Petrosakh is currently carrying out an exploration ments in Russian industrial assets. Accordingly, one of and drilling programme which will allow for produc- the Group’s top priorities has been the acquisition of tion of more than 1 million tonnes of oil annually. The promising companies. Alfa-Eco places key management Company’s plans call for meeting fully Sakhalin’s personnel into these companies who introduce advanced demand for oil products, as well as supplying oil prod- management, operating, and marketing practices and ucts to other regions of Russia’s Far East. Additionally, also makes necessary capital investment in order to mod- Petrosakh has obtained a license from the Russian ernise the companies. The desired result is to raise the Federation’s Ministry of Natural Resources for the geo- value of the company by realising a significant increase in logical exploration of oil blocks in the Sakhalin-6 production output and strengthening of market position. coastal shelf zone, whose potential deposits are esti- mated at 200 million tonnes of oil (total potential Energy Sakhalin-6 coastal shelf zone reserves are approximate- ly 1 billion tonnes). In 2001, the Group delivered approximately 11.5 mil- lion tonnes of crude oil and oil products to international Other Alfa-Eco activities in the energy sector include: markets, including exports made under the UN Security Council’s Oil-For-Food Programme for Iraq. Export deliv- • Active participation in federally sponsored programmes eries of oil products from Russia in 2001 were more than for the delivery of oil products, including fuel to the 473 thousand tonnes, while Russian domestic-market Russian armed forces and to Russia’s Far North; sales were 485 thousand tonnes. In 2002, the Group’s plans call for exporting approximately 9 million tonnes of • In 2001, Alfa-Eco continued its activities in the coal mar- oil and oil products. ket delivering 497 thousand tonnes of coal to energy and
COMMODITIES TRADING: ALFA-ECO GROUP
metallurgical enterprises. Significant growth in coal lion. Alfa-Eco Group holds a 74.5% share of the voting sales is expected in 2002. stock in Amurmetal.
Metals Telecommunications
Alfa-Eco has established a significant presence in the In May 2001, Alfa-Eco acquired a blocking voting stake Russian metals industry and has developed an effective (25% + 1 share) in cellular communications provider management structure for the metallurgical enterprises Vimpel-Communications (“VimpelCom”), and in its that it owns and manages. Enterprises in which Alfa-Eco regional subsidiary VimpelCom-R, which provide has management participation produced 9.7 million mobile telephony services under the BeeLine trade- tonnes of iron ore, 3.5 million tonnes of iron-ore con- mark. The total amount of investment in this project by centrate, 448.4 thousand tonnes of steel and 503.8 thou- Alfa-Eco is US $246.8 million, making it the largest deal sand tonnes of steel pipe in 2001. in the Russian telecom market in recent years. In the period from May through December 2001, VimpelCom’s In 2001, Alfa-Eco’s portfolio of investments in the industry capitalisation increased from US $806.6 million to changed significantly as the Group finalised the sale of its US $1.4 billion. equity stake in Korshunovsky Mining and Enrichment Plant. In addition, the disposal of a 50% stake in Volgograd’s Alfa-Eco, together with other Alfa Group companies, also Krasny Oktyabr Metallurgical Plant was carried out, and the actively co-operates with international organisations such NOSTA (Orsko-Khalilovsky Integrated Metals Plant, as Intersputnik, which is one of the largest international Orenburg Region) and Vtormet (Krasnoyarsk) investment space organisations which carries out launches and run- programmes were brought to successful completion. ning of the largest group of civil sattelites and related equipment. The year 2001 also saw continued progress in the imple- mentation of a series of other investment programmes by Pulp and Paper and Forest Products Industry the Alfa-Eco Metallurgical Department. In particular, these included: In early 2001, the Group gained significant influence over Balakhninsky Pulp and Paper Mill (“Volga”), which • The Sibelectrostal investment programme, a produces one-third of all newsprint in Russia (2001 pro- Krasnoyarsk-based metallurgical plant, which is a duction was 542 thousand tonnes of paper). In 2001, unique manufacturer of special and high-alloy steels. Volga achieved year-on-year sales growth of 12%. The bankruptcy proceedings were halted, the plant’s order book was replenished and additional jobs were In the fourth quarter of 2001, Alfa-Eco increased its par- created, thus facilitating the hiring of highly qualified ticipation in the management of Kama Pulp and Paper management and staff specialists. Production volume Mill (Perm Region). In early 2002, the plant’s operations tripled in the period November 2000 through were stabilised, resulting in an increase in average month- December 2001; ly paper output from below 5 thousand tonnes to 7.5 thou- sand tonnes. In the near future, the plant should reach a • The Taganrog Metallurgical Works (“Tagmet”), one of monthly production level not less than 9 thousand tonnes Russia’s largest manufacturers of high-quality pipe of paper. with an annual production volume of 460 thousand tonnes and over 5,000 customers. By January 2002, The combined output of Volga and Kama Pulp and Paper Alfa-Eco’s equity interest in Tagmet increased from Mill accounts for approximately 40% of Russia’s 25.2% to 41.9%; newsprint production.
• The Amurmetal investment programme (Komsomolsk- Since 2001, Alfa-Eco has been implementing a lumber on-Amur based metallurgical works), with an annual out- trading programme and, in the reporting year, the put 360 thousand tonnes of metal products, 85% of Group’s share of round timber exports to Finland which are exported, and annual revenues of US $60 mil- reached 2% of the Finnish export market.
COMMODITIES TRADING: ALFA-ECO GROUP
Foodstuffs will focus in the lucrative area of production and process- ing of grain and oilseed. In the near future Alfa-Eco will become of the top ten grain traders in Russia. Over the past few years the Alcoholic Beverages Group’s sales in the domestic grain market have increased significantly, resulting in sales of 101.9 thou- Alfa-Eco has held a leading position in the Russian alco- sand tonnes for the reporting year. holic beverages market for many years. The Company manu- factures and sells vodka (including the world-renowned During 2001, the Group launched its oilseed programme, “Smirnov” brand managed by the Company) and Armenian which involves trading in sunflower seeds, derivative and cognac, and imports a considerable volume of Moldovan related products, and imports of vegetable oil. In 2001, and Georgian wines. the total volume of oilseed sales was approximately 1.2 thousand tonnes. The Group is one of the top three players in the Russian market for Armenian cognac, having developed its own in- Last year, Alfa-Eco continued its active operations in the house brand – Armina. Today, Alfa-Eco controls an 11% meat market. For the period from 2000 to 2001, the share of the Armenian cognac market. Group delivered and sold over 10.6 thousand tonnes of beef to trading and meat processing companies. A signifi- In 2001, the Group also sold 4 million bottles of wine. It is cant portion of these deliveries – about 4.5 thousand expected that in 2002 wine supplied by Alfa-Eco will tonnes – originated from Mongolia (including 3 thousand account for 7% of the Moldovan wine imports into Russia, tonnes under an initiative for settling Mongolia’s sover- and 6.4% of the market for Georgian wine imports into eign debt to Russia). In 2002, plans call for realising sales Russia. of 15 thousand tonnes of meat products. Over the next 2-3 years, Alfa-Eco plans to expand its cur- In recent years, the Group has enjoyed a highly visible pres- rent assortment of alcoholic beverages so as to optimise its ence in the Russian sugar market. product range, as well as to bring new brands of wine and vodka to market. The Group also plans to boost vodka Going forward, a top priority for Alfa-Eco’s Foodstuffs sales to 40 million bottles in 2002 and up to 80 million bot- Department will be the creation of a major agribusiness tles in 2004. Sales of cognac should increase to 2.2 million holding company within the structure of Alfa-Eco, which bottles in 2002 and up to 4.2 million bottles in 2004. Wine
COMMODITIES TRADING: ALFA-ECO GROUP
sales are expected to grow to 11 million bottles in 2002 Financing and 23 million bottles in 2004. Alfa-Eco is an active participant in the Russian securities Private Equity market. In 2001, the Group carried out placements of its own bills of exchange with maturities ranging from 3 to 14 months Over the years Alfa-Eco has gained unique investment worth a total of 820 million roubles (US $27 million). Alfa- experience by executing a number of large-scale invest- Eco’s securities correspond to the highest investor require- ment programs with very positive results. Alfa-Eco’s success ments. Numerous banks, investment firms, insurance com- is driven by the competitive advantage it has due to a strong panies and pension funds have included the Company’s team of trained investment managers, who efficiently run securities in their investment portfolios. businesses across a number of industries, command a solid understanding of the Russian regional specifics, who can In October 2001, Limited Liability Company Alfa-Eco M, react quickly and appropriately to the changing market- together with Russia’s largest companies and banks, was place and who can build mutually benificial relations with included in the National Association of Securities Market clients. This set of qualities allows the Company to identify Participants list of reliable issuers of bills of exchange. During the high-potential projects and orchestrate sophisticated 2001, the yield on Alfa-Eco’s bills of exchange declined by three transactions for the Company and its partners. percentage points, indicating growing investor confidence.
Over the past three years the total investment in Alfa-Eco In 2002, the Group intends to continue placing bills of deals has reached US $420 million while the average IRR exchange in the open financial market without any reduc- has exceeded 50%. The Company’s renewed strategy envi- tion in issue volume. Plans call for gradually decreasing the sions significant investment in industrial production and yield on bills of exchange, thus cutting loan servicing costs. service sectors as a top priority. The Group has thus started to actively raise funds for investment in promising Russian Alfa-Eco also intends to carry out a separate bond issue enterprises. A number of respected investors intend to run with a maturity of 1 to 2 years for a total amount of 1 bil- joint projects with Alfa-Eco. lion roubles (US $33.2 million).
DYNAMISM
OR
VITALITY. THE ENTHUSIASM
AND DETERMINATION
TO ACHIEVE ADVANTAGE
AND CONTINUOUSLY
PURSUE NEW GOALS
RETAIL TRADE
Trade House Perekriostok
Founded in , Perekriostok, with more than modern supermarkets and one hyper- market, is the largest supermarket chain in Moscow. Perekriostok’s , square metre distribution centre provides significant cost and logistical advantages over its competitors. As one of the first movers into the Russian retail sector, Perekriostok continues to expand and strengthen its position on the Russian market and, today, is rightfully considered one of the most competitive and efficient retail trade structures in Russia. www.perekriostok.ru
TRADE HOUSE PEREKRIOSTOK Company owns and operates more than 40 modern supermarkets and one hypermarket in Moscow and its immediate regions, operating under the trade names History “Perekriostok” and “Perekriostok-Mini.” In the summer of 1998 Perekriostok opened its own distribution centre Nowadays, it is impossible to imagine a modern city providing significant and unprecedented cost and logis- without well-developed retail trade, especially such a fast tical advantages. growing and densely populated city as Moscow. Yet, retail trade and its related infrastructure only started to devel- Today, Perekriostok is the largest supermarket chain in op in Moscow some seven years ago. Moscow, with most stores offering shoppers more than 18,000 products (SKUs) (more than 35,000 SKUs at the Alfa Group, with its origins in trading, was well positioned hypermarket) at competitive and affordable prices. to meet the demands for Western style shopping as a new middle class emerged from post-Soviet society eager and Concept & Strategy able to buy high quality goods. Alfa Group took a strategic decision in 1994 to establish Trade House Perekriostok The principal objective of Perekriostok is to provide (“Perekriostok”). In 1996, soon after the start of opera- middle-income customers with good quality groceries at tions, the Company received important support from reasonable prices in a pleasant modern shopping envi- world-wide credit and financial institutions and continues ronment where there is efficient and high-quality service. this co-operation today. From the very beginning Perekriostok has pursued a strat- Perekriostok opened the doors of its first supermarket in egy of building and leasing stores in the suburban areas of September 1995. Today, only seven years later, the Moscow (Mitino, Zhoulebino, Otradnoe, Novo-Peredel-
RETAIL TRADE: TRADE HOUSE PEREKRIOSTOK
Annual Revenues* (‘ USD) * Note: Figures are expressed in the purchasing power of the Russian rouble translated at the respective year-end exchange rate Source: Annual audited IAS standalone financial statements
kino, Tioply Stan, Butovo, Altufievo and other districts). range of ready-to-cook and ready-to-eat items, including This is where the vast majority of Muscovites live, but the more than 360 different kinds of meat and fish. infrastructure and amenities in the suburbs are typically Additionally, many of the supermarkets have an in-store much less advanced than in downtown areas. Since mini-bakery which provides a selection of more than Muscovites, like any other large city dwellers, prefer to 40 kinds of bread. shop close to home, there is an enormous captive market for Perekriostok stores. Pricing
Each Perekriostok is a modern, western type store with Perekriostok’s pricing policy is simple - to provide cus- many resembling a sort of a “shopping city,” where cus- tomers with value for money. This is possible through the tomers can purchase not only food products but also careful sourcing of local products and the very significant other goods ranging from magazines to fresh-cut flowers. competitive advantages provided by the Company’s distri- Additionally, many supermarkets offer dry-cleaning, beau- bution centre. Direct deliveries and large-volume pur- ty salons, and photographic processing. Each store has chases considerably cut product costs. This translates scanner check-outs, which save customers precious time. directly to affordable and very competitive price levels in all of the Company’s supermarkets. Product Consumers Perekriostok supermarkets provide customers with one of the widest selections of food and other products, The overall aim of the Perekriostok concept is the sourced both domestically and internationally. In addi- complete satisfaction of customers living in the commu- tion to stocking all the standard supermarket lines, nities adjacent to the supermarkets. At the same time the Perekriostok stores have delicatessen counters with a wide stores cater to the needs of “transit” shoppers – that is,
RETAIL TRADE: TRADE HOUSE PEREKRIOSTOK
Perekriostok Store Locations in Moscow and Moscow’s Regions
Personnel people who pass in their cars and decide to stop and pur- Personnel are the cornerstone of any retail business, chase something. To accommodate this important seg- and this is particularly true in Russia, where the hiring and ment of shoppers, convenient parking areas have been retaining of appropriate staff takes on an added signifi- created next to each store. cance. Since its inception, Perekriostok has sought to hire high-calibre personnel who not only have practical knowl- Regular market research helps to identify the needs and edge of the peculiarities of the Russian retail market but desires of customers and is used to define product and also possess Western management skills. As there is a short- pricing policies, and even store layout and design. age of specialists who measure up to these demanding cri-
teria, the Company has developed an efficient training sys- centre. Also, the Company’s first hypermarket was opened tem which provides for the quick mastering of essential in May of 2002 with trade area of 7,000 square meters. It is skills for new recruits. Perekriostok has its own training located in a high-traffic area in a new building with over centre, where new employees attend both theoretical and 130 boutiques, restaurants and a 6-screen cinema. practical courses. In addition, members of senior and mid- dle management regularly travel to relevant training cours- As one of the first movers into the Russian retail sector, es abroad. The Company also actively uses the services of Perekriostok continues to strengthen and expand its posi- Western consultants to introduce state-of-the-art operating tion on the Russian market. Creating a market leader in technologies and management practices. the retail trade sector in Moscow requires a long-term per- spective, solid sources of financing and reliable partners. Further Development Perekriostok is proud of its successful co-operation with its many different partners. The year 2000 marked the start of a development plan to establish at least 20 new stores through to the end of Today, Perekriostok is rightfully considered as one of the 2003. The plan also calls for continued attention to aggres- most competitive and efficient trade structures not only in sive growth in wholesale sales directly from the distribution Moscow but throughout the whole of Russia.
POWER
OR
STRENGTH,
NOT ALWAYS VISIBLE,
WHICH ENABLES ONE
TO ACHIEVE MORE
AND TO REALISE
ONE'S POTENTIAL
FOOD PROCESSING
United Food Company
Founded originally as a sugar processing business in , United Food Company (“UFC”) is today involved in the production, processing and wholesale trade of sugar and grain. UFC owns and operates sugar plants and grain silos in the Krasnodar, Orel and Belgorod regions of Russia and currently accounts for % of Russia’s total sugar production.
UNITED FOOD COMPANY 2001 production increased by approximately 4% as com- pared to 2000 and accounts for 10% of the market share of total sugar production in Russia. In August 2000, Alfa Group merged its sugar business, Kubansakhar, with the sugar and grain businesses of the UFC’s grain business engages in the procurement and Intec Group. In December 2000, ZAO “Obyedinennaya wholesale trade of grain (I, II and III grade wheat, corn, Prodovolstvennaya Kompaniya” was established to man- barley and sunflower seed) as well as the production of age the operations of the combined businesses of United flour, seed corn, mixed fodder and vegetable oils. In Food Company (collectively “UFC”). 2001, the Company procured 803,500 tonnes and distrib- uted 578,000 tonnes of grain. Today, the main activities of UFC are the production, processing and wholesale trade in sugar and grain. UFC One of the strategic tasks of the Company has been the estab- owns eight sugar plants, five of which are located in the lishment of long-term relationships with companies engaged Krasnodar region, two in the Orel region, and one in in sugar beet cultivation in the Krasnodar and Belgorod the Belgorod region of Russia, and 10 grain silos, all in regions. UFC has been very successful in this goal by assisting the Krasnodar region. Favourable climatic conditions farmers to purchase the seed and fertiliser they need by pay- and fertile soil make the Krasnodar, Belgorod and Orel ing in advance for the sugar beet that they will grow. UFC regions ideal for the development of the sugar and increased the volume of its processing of sugar beet into raw grain business. sugar by 26% over the past two years and is currently the sec- ond largest producer of sugar from sugar beet in the country. Key Results for 2001 With the introduction of sugar import quotas in 2001, In 2001, UFC’s sugar plants produced 675,300 tonnes UFC has managed to keep the capacity of overall raw of refined sugar of which 155,500 tonnes were produced sugar processing (from sugar beet and cane) at reasonably from sugar beet and 519,800 tonnes from raw cane sugar. high levels. Sugar is supplied to UFC’s plants under
FOOD PROCESSING: UNITED FOOD COMPANY
Sugar Production (‘ of tonnes) and Market Share (%) in Russia Source: Company data, Company analysis of market data tolling arrangements by well known foreign companies nesses in 2000, and the 2002 acquisition of sugar factories such as Louis Dreyfus, Glencore as well as large domestic in the Orel region, was the clear indication that competi- traders such as Euroservice, Oreltransneft and others. tive advantages would be achieved by operating at higher economies of scale. Most notably, these included manage- Since the formation of UFC, and as Russia’s agricultur- ment cost savings, improved negotiating power with sup- al industry has continued to consolidate, the Company pliers, improved efficiency through use of a centralised has actively sought investment into other regional sugar distribution system, and significant savings from effective and grain businesses. In 2002, UFC acquired two sugar crop rotation as sugar beets and grain complement each plants in the Orel region, in central Russia. This acqui- other in the crop cycle. sition allowed UFC to control approximately 75% of Orel region’s total sugar processing capacity. The Kubansakhar/Intec merger was one of the first of an increasing number of transactions which have result- During 2001, a modernisation programme was approved ed in continued consolidation of Russia’s agricultural and is currently underway in certain of the Company’s industry. During 2001 and early 2002, we weren’t the sugar processing factories which is projected to increase only ones busy consolidating the Russian agricultural sugar processing efficiency by an additional 1-1.5%.Also, industry. We received a number of offers from competi- importantly, during 2001 and H1 2002, key functional tors who were interested in purchasing UFC. After care- subdivisions of UFC were reinforced with highly qualified ful evaluation, we decided, along with our minority managerial personnel. investor, that the offer to sell was attractive and that it was in our best interests to sell the Company. As such, in DIVESTITURE OF UFC September 2002, we took the decision to sell 100% of our interest in UFC and its subsidiary companies, by sell- One of the main reasons for merging Kubansakhar ing separately, UFC’s sugar and grain businesses to a pri- sugar business with Intec Group’s sugar and grain busi- vate strategic investor for US $80 million cash.
SAVVY
OR
THE COMBINATION OF INTELLECT,
SKILL, COMMON SENSE
AND CONFIDENCE.
BEING USED MOST EFFECTIVELY
TO BRING SUCCESS
TELECOMMUNICATIONS
Golden Telecom Inc
Founded in , Golden Telecom Inc is the largest independent provider of integrated telecommunications services including local exchange and access services, international and domestic long distance services and Internet access to businesses and other high- usage customers and telecommunications operators in Moscow, Kiev, St. Petersburg, and other major population centres in Russia and CIS countries. Its shares are traded in the U.S. on the NASDAQ under the trading symbol “GLDN.” www.goldentelecom.ru
GOLDEN TELECOM INC. Golden Telecom focuses on expansion of its main group of services, including:
Alfa Group, a 41% shareholder in Golden Telecom, • Voice Services for Businesses. Using its local access overlay invests alongside the European Bank for Reconstruction networks in Moscow, Kiev, St. Petersburg and Nizhny and Development (11%), Russian national long-distance Novgorod, Golden Telecom provides a range of services operator Rostelecom (15%), investment funds managed including local exchange and access services, interna- by Capital International Inc. (9%), and Baring Vostok tional and domestic long distance services; Capital Partners (10%) as well as other shareholders who hold approximately 14% of the Company’s stock. • Data and Internet Services for Businesses. Using its fiber optic and satellite-based networks, including 140 points Structure of presence in Russia, Ukraine and other countries of the CIS, Golden Telecom provides data communica- Golden Telecom consists of three major operating tions and dedicated Internet services; companies; TeleRoss, Sovintel and Golden Telecom Ukraine, and conducts its business in Russia and the • Dial-up Internet Services. Golden Telecon is the leading CIS through a network of affiliated or controlled struc- dial-up Internet services providor in Russia. The services tures, i.e. regional branches and joint ventures. The are provided under the Russia-on-line (ROL) brand in most significant branches are those in St. Petersburg, more than 50 cities of Russia as well as in the Ukraine, Khabarovsk, Irkutsk, Ufa, Arkhangelsk, and Kazakhstan and Uzbekistan. Novokuznetsk. The leading regional joint ventures are situated in Nizhny Novgorod, Novosibirsk, Vladivostok, Customers Tyumen, Krasnodar, Volgograd, Voronezh, and Samara. Through agents and distributors, the Company also Golden Telecom's customers include large, medium and operates in Azerbaijan, Belarus, Georgia and small Russian companies, large transnational compa- Uzbekistan, and through its subsidiary in Kazakhstan. nies, business centers, hotels, fixed line, mobile and pag-
TELECOMMUNICATIONS: GOLDEN TELECOM INC
Telephone Market Shares of Alternative Operators in Moscow – Source: Company analysis of market data
ing operators, banks, financial institutions, embassies from Moscow to Stockholm to connect to the interna- and representative offices of foreign companies. The tional World Wide Web in Europe and the United Company makes use of its own fiber optic network in States. Moscow, St. Petersburg, Nizhny Novgorod and Kiev which is accessed using optic, copper wire, microwave Key Events in 2001 and H2 2002 and fixed wireless lines. • In May 2001, GTS, the founder and majority sharehold- Market Position er of Golden Telecom sold the majority of its shares in Golden Telecom to Alfa Group and two of its then cur- G olden Telecom and its affiliates, including rent shareholders, investment funds managed by Capital Sovintel, provided US $241 million in telecommunica- International Inc. and Baring Vostok Capital Partners. tions services in Russia in 2001. This figure represents approximately 6% of the total fixed line telecommuni- • In June 2001, Golden Telecom purchased 100% of cations market spending in the country and 32% of the Cityline, a leading Moscow dialup ISP, together with alternative telephone operator market in Moscow 51% of Ekaterinburg-based Uralrelcom, a major (see figure above). provider of Internet Services.
Golden Telecom is the market leader in Russia for the • In September 2001, Golden Telecom acquired 51% of provision of dialup Internet access services with Agentstvo Delovoy Svyazi, a leading local, domestic long- approximately 15% of the market share. The Company distance and international telephone operator in has over 185,000 active subscribers with service provid- Nizhny Novgorod. ed in more than 50 Russian cities, Kazakhstan and Uzbekistan under the ROL trademark and in Ukraine • In September 2002, Golden Telecom purchased from under the trademark “Svit-on-Line.” ROL currently uti- Rostelecom the remaining 50% of Sovintel, the leading lizes Golden Telecom’s well-developed backbone net- voice, data and Internet provider in Moscow and work in Russia and a 2.4Gb/sec. fiber optic connection St. Petersburg.
TELECOMMUNICATIONS: GOLDEN TELECOM INC
2001 Financial Results "last mile", and TeleRoss has built a large carrier data net- work. The merger of these two companies into a single, Golden Telecom demonstrated strong financial more powerful and competitive structure will improve the results in 2001. Consolidated revenue was $140 million, efficiency of Golden Telecom’s business. Further, as a representing an increase of 24% over fiscal year 2000. result of the consolidation of Sovintel into Golden Revenue from data and Internet access services increased Telecom’s finances, the Company will improve its finan- by 52% to $63.2 million in 2001. Earnings before interest, cial performance considerably. tax and depreciation (EBITDA), an important indicator of the Company's financial health, grew by 64% against Golden Telecom intends to expand and strengthen its 2000 and reached $27.4 million in 2001. position as a leading independent voice and data service operator and Internet service provider in Russia and the Strategy and Future CIS. The Company believes that it is well positioned to continue this course. The acquisition of, and full control over Sovintel, a leader in provision of voice services opens a new page in In 2002, Golden Telecom intends to focus on its busi- Golden Telecom's business, paving the way for the ness priorities, i.e. telephone services, data communica- Company to become a leading operator in all types of tions, dedicated and dialup Internet access services, as telecommunications services. Sovintel and TeleRoss, com- well as on the promotion of new IP-based telecommuni- plement each other well. While Sovintel is mainly involved cations products. The Company plans to invest in in the provision of voice services, TeleRoss focuses on data Moscow, Kiev, St. Petersburg, Nizhny Novgorod and and Internet access services. Sovintel has created a other large cities of Russia and the CIS where the branched customer access infrastructure, the so-called demand for the Company’s services is especially high.
VimpelCom
Founded in , Vimpel-Communications (“VimpelCom”) is one of the largest wireless telecommunications service companies in Russia. It operates under the “Bee Line” family of brand names, which are among the most recognised brands in Russia. VimpelCom’s licence portfolio covers million people, approximately % of Russia’s population. VimpelCom-R, a subsidiary of VimpelCom, was established and is aggressively expanding to develop the Russian regional cellular telecommunications market. Its shares are traded in the US on the NYSE under the trading symbol “VIP.” www.beelinegsm.ru
VIMPELCOM cations industry. The Company introduced two digital cel- lular communications standards and built the first dual band GSM-900/1800 cellular network. VimpelCom also Vimpel-Communications (“VimpelCom”) is a leading led the development and emergence of the mass con- Russian wireless telecommunications service company sumer market for wireless communications in Russia by and is the market leader in offering its subscribers the lat- introducing a prepaid card solution. est in technology and data services, including wireless "infotainment" services, location-based services, mobile Today, the Company’s license portfolio covers approximate- portal and wireless Internet access through “BeeOnline.” ly 70% of Russia’s population (100 million people), includ- ing the city of Moscow, Moscow region, Siberia, Volga River In addition to being the first Russian company to list its shares area, Central Russia and the Northern Caucuses. on the New York Stock Exchange (“NYSE”) in November 1996, VimpelCom, in July 2000, was also the first Russian At the end of 2001, VimpelCom’s total subscriber base was company to sell US SEC-registered convertible notes which approximately 2.11 million. By the end of 2001, are also listed on the NYSE under the trading symbol “VIP 05”. VimpelCom reclaimed the lead in Moscow in gross sales and net subscriber additions and grew its subscriber base Alfa Group, invests into VimpelCom alongside Telenor, in the Moscow license area from 780 thousand at Norway’s leading telecommunications company as well as December 2000 to 1.91 million at December 2001. other shareholders. According to independent sources, the Company began the year with a market share in Moscow of 39.1% and Market Position ended 2001 with a market share of 46.5%.
Since its inception, VimpelCom has played a key role During 2001, Vimpelcom’s subscribers outside of Moscow in the development of the Russian wireless telecommuni- increased by almost 4 times during 2001 as the Company’s
TELECOMMUNICATIONS: VIMPELCOM
VimpelCom Subscriber Growth (# of customers) in Moscow Source: Company data
national expansion gained momentum. VimpelCom-R, of scale, efficient cost control, decreasing telecommuni- VimpelCom’s subsidiary dedicated to national develop- cations equipment costs, improved interconnect agree- ment, launched 15 networks between September 2001 ments with telephone line providers and lower acquisition and January 2002 in several key Russian cities such as costs per subscriber. Nizhniy Novgorod, Novosibirsk, Kemerovo, Novo- kuznetsk, Rostov and Saratov. The Company’s total capital expenditures for 2001 were approximately US $238 million, with US $163 million 2001 Financial Results spent in the Moscow and Moscow region license areas.
VimpelCom returned to profitability in the first quarter Strategy for 2002 and Beyond of 2001 and improved its financial performance throughout the year. For the year 2001, VimpelCom VimpelCom’s strategy aims at securing long-term prof- reported net revenues of US $422.6 million, a 54.2% itable growth for the Company. In 2002, VimpelCom increase from 2000; EBITDA reached US $148.5 mil- plans a further strengthening of its position in Moscow, lion, a 185.5% increase from 2000; EBITDA margin was which is the biggest and most important market in 35.1%, compared to EBITDA margin of 19.0% in 2000; Russia. VimpelCom is using a segmented market and net income was US $47.3 million, compared to a net approach with dedicated focus on service quality and loss of US $77.8 million in 2000. product innovation. Such an approach should enable the Company to increase its market share in the corpo- The significant improvements in VimpelCom’s financial rate and high-end user segments while maintaining its and operating results were achieved as a result of rapid leadership in the mass consumer segment. The subscriber growth with an increasing effect of economies Company is also focused on accelerating growth in the
TELECOMMUNICATIONS: VIMPELCOM area of non-voice and data services which are expected to ing geographically by building a unified integrated net- bring additional revenues. work with standard billing and product platforms, com- municated under one common national brand - BeeLine. In addition, VimpelCom plans to significantly intensify This approach will give VimpelCom economies of scale in national expansion, providing adequate coverage and building, operating, maintaining and upgrading its services to a substantial part of the 85 million people in its future national GSM operation. In order to build a licensed territories outside of Moscow. In order to nationwide GSM network the Company will work to increase operational synergies and accelerate the pace of obtain operational GSM licenses in the three remaining national expansion, in February 2002 the Company federal regions. The Company is also contemplating some approved a unified management structure for selective acquisitions, which can be smoothly integrated VimpelCom and VimpelCom-R. VimpelCom is expand- into its operations.
SERVING OUR COMMUNITIES
“Undoubtedly, participation in events which promote Russia’s national culture, positively influence the image of the Bank and its advertising campaign as a whole. More importantly, these projects are socially important for our country. Our Russian cultural inheritance is one of the most important things that we have and it demands promotion and development as many foundations of our socie- ty are based upon it. We consider it our civic duty to participate in such projects.”
Alexander Gafin Vice-President of Public Relations and Marketing at Alfa Bank
Beyond the bottom line, the worth of a corporation is reflected in its impact in the community. At Alfa Group, we believe in giving back to the communities where we operate to make them better places to live and work. We view this as an investment in the future of both the Alfa Group and the community and believe the continued well- being of one is directly linked to the continued well-being of the other.
Over the years, we have achieved a level of sponsorship and community service of which we are proud. Nevertheless, we have no intention of resting on our laurels. We will continue to seek out new ways of helping the people in the communities in which we operate of Russia and supporting the nation’s culture and heritage.
T R’ G. I , R’ , , .
• * Alfa Bank is one of the largest patrons of the fine and performing arts in Russia, with continuous sponsorship of numerous art and cultural exhibits, and Russian and Western pop concerts. Alfa Bank is recognised as a leading patron of Moscow's theatres and is Trustee of the Bolshoi Theatre;
• TNK sponsors a range of sports teams and events including the Russian Olympic team at the 2000 Sydney Olympic games, the Russian National Football Team, internation- al boxing tournaments, the Porsche TNK car racing team, and a range of sports pro- grams and competitions in the community;
• Golden Telecom, VimpelCom, UFC, and Alfa-Eco also have a long history of provid- ing material financial support for cultural events in Moscow and in Russia’s regions
I , .
• Alfa Bank, through the “Alfa-Chance” scholarship program provides gifted young people of limited means with the opportunity to pursue their education in Moscow’s top institutes;
• TNK, SIDANCO, Alfa-Eco, UFC and Perekriostok provide funding to a wide range of educational and not-for-profit organisations, including children and youth organisa- tions, orphanages, schools and children’s hospitals, veterans’ organisations, nursing homes, and cultural and civic centres. Alfa Bank, AlfaInsurance and Alfa-Eco, in par- ticular, respond to victims of natural disasters and other national tragedies;
• Golden Telecom and Crown Resources AG provide significant financial support to various educational initiatives in their communities
W .
• TNK and SIDANCO make wide use of new technologies that monitor, prevent and reduce to a minimum contamination and harmful emissions. Similar technologies are being used to clean-up and revitalise areas which were contaminated by earlier Soviet mismanagement of production and refining facilities;
• Recognising the business value of environmental stewardship TNK became the first Russian oil company to produce oil products to strict European standards;
• At the moment, TNK is introducing an extensive system of measures of environmen- tal protection consistent with ISO standards
CONTACT INFORMATION
ALFA BANK GROUP TRADE HOUSE PEREKRIOSTOK
Chairman of the Board: Mikhail Fridman Chief Executive Officer: Alexander Kosyanenko President: Pyotr Aven Address: O/S Paveltsevo, Mytishi District, Moscow region, , Address: Mashi Poryvaevoy Street, Moscow, , Russia Russia Tel.: + () , () Tel.: + () Fax: + () Fax: + () E-mail: [email protected] E-mail: [email protected]
ALFAINSURANCE UNITED FOOD COMPANY
Chief Executive Officer: Vladimir Skvortsov Member of the Board of Directors Address: Mashi Poryvaevoy Street, Moscow, , Russia and Chief Executive Officer: Mikhail Gamzin Tel.: + () Address: Ordzhonikidzye Street, Krasnodar, , Russia Fax: + () Tel.: + () E-mail: [email protected] Fax: + () E-mail: [email protected]
TYUMEN OIL COMPANY GOLDEN TELECOM
President: Simon Kukes President: Alexander Vinogradov Address: Schipok Street, Building , Moscow, , Russia Address: Krasnokazarmenaya Street, Moscow, , Russia Tel.: + () Tel.: + () Fax: + () Fax: + () E-mail: [email protected] E-mail: [email protected]
SIDANCO OIL COMPANY VIMPELCOM
President: Lawrence Smyth Chief Executive Officer: Jo Lunder Address: Schepkina Street, Building a, Moscow, , Russia Vice President of International and Investor Relations: Valery Goldin Tel.: + () Address: th Marta Street, Moscow, , Russia Fax.: + () Tel.: + () E-mail: [email protected] Fax: + () E-mail: [email protected]
CROWN RESOURCE AG CTF HOLDINGS LTD
Chief Executive Officer: Steven Rudofsky Director: Franz Wolf Address: Cavendish Square, th Floor, London, WM HF, UK Address: Irish Place, Suite , Gibraltar Tel.: + () Tel.: () Fax: + () Fax: () E-mail: [email protected] E-mail: [email protected]
MOSCOW CONTACT INFORMATION: ALFA-ECO GROUP Director of Corporate Development, Finance & Control–Alfa Group: Nigel Robinson General Director: Alexander Fain Deputy Director of Corporate Development, Finance Address: Novy Arbat Street, Moscow, , Russia & Control–Alfa Group: David Gould Tel.: + () Address: Smolenskaya Square, Floor , Moscow, , Russia Fax: + () Tel.: + () E-mail: [email protected] Fax: + () E-mail: [email protected] ALFA GROUP
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF THE AUDITORS
FOR THE YEAR ENDED 31 DECEMBER 2001 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES
TO THE SHAREHOLDERS OF ALFA GROUP
. International convention requires that Management prepare consolidated financial statements which give a true and fair view of the state of affairs of Alfa Group (“the Group”) at the end of each financial period and of the results, cash flows and changes in shareholders’ equity for each period. Management are responsible for ensuring that the Group keeps accounting records which disclose, with reasonable accuracy, the financial position of each entity and which enable it to ensure that the consoli- dated financial statements comply with International Accounting Standards and that their statutory accounting reports comply with the applicable country’s laws and regulations. Furthermore, appropriate adjustments were made to such statutory accounts to present the accompanying consolidated financial statements in accordance with International Accounting Standards. Management also have a general responsibility for taking such steps as are reasonably possible to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
. Management considers that, in preparing the consolidated financial statements set out on pages to , the Group has used appropriate and consistently applied accounting policies, which are supported by reasonable and prudent judgments and estimates and that appropriate International Accounting Standards have been followed.
For and on behalf of Management
Nigel J. Robinson October ZAO PricewaterhouseCoopers Audit
Kosmodamianskaya Nab. 52, Bld. 5 115054 Moscow Russia Telephone +7 (095) 967 6000 Facsimile +7 (095) 967 6001
REPORT OF THE AUDITORS
TO THE SHAREHOLDERS OF ALFA GROUP
. We have audited the accompanying consolidated balance sheet of Alfa Group (“the Group”), as defined in Note , at December and the related consolidated statements of income, of cash flows and of changes in shareholders’ equity for the year then ended. These consolidated financial statements are the responsibility of the Group’s Management. Our respon- sibility is to express an opinion on these consolidated financial statements based on our audit.
. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consoli- dated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial posi- tion of the Group as at December and the consolidated results of its operations and its cash flows for the year then ended in accordance with International Accounting Standards.
Moscow, Russia October ALFA GROUP Consolidated balance sheet at December (Expressed in thousand US dollars for presentational purposes only – see Note )
Note Restated
ASSETS
Non-current assets Property, plant and equipment ...... 4 268,355 195,650 Investments available for sale ...... 5 139,339 100,168 Investment in joint ventures ...... 6 1,653,192 1,069,187 Investment in associated companies ...... 7244,460 - Due from banks ...... 8 4,524 158 Loans and advances to customers ...... 9 98,329 172,116 Trade and other accounts receivable ...... 104,382 6,241 Deferred income tax ...... 19 2,094 383 Goodwill, net ...... 21 (613) (517) 2,414,062 1,543,386
Current assets Inventories ...... 11 98,774 104,546 Investments available for sale ...... 5 28,092 35,714 Trade and other accounts receivable ...... 10444,816 544,166 Income tax assets ...... 403 - Loans and advances to customers ...... 9 1,116,730 792,587 Trading securities ...... 12 156,673 134,091 Due from banks ...... 8 119,833 21,001 Cash and cash equivalents ...... 13 709,682 677,941 2,675,003 2,310,046
Total assets ...... 29 5,089,065 3,853,432
EQUITY AND LIABILITIES
Shareholders' equity Share capital ...... 14 17,872 17,872 Share premium ...... 14 10,102 10,102 Investments fair value reserve ...... 5 36,268 - Cumulative translation reserve ...... (888) 6,350 Retained earnings ...... 1,678,695 896,383 1,742,049 930,707
Minority interests ...... 26 386,232 196,584
Non-current liabilities Borrowings ...... 15 66,511 78,551 Amounts owed to depositors ...... 16 3,852 45,752 Due to banks ...... 17 9,581 3,806 Accounts payable ...... 22 17,531 42,401 Provisions ...... 18 23,737 67,574 Deferred income tax ...... 19 26,563 81,428 147,775 319,512
Current liabilities Borrowings ...... 15 650,122 642,337 Amounts owed to depositors ...... 16 1,317,125 876,386 Due to banks ...... 17 330,696 177,355 Accounts payable ...... 22 509,057 702,516 Income tax liabilities ...... 6,009 8,035 2,813,009 2,406,629
To tal liabilities ...... 29 2,960,784 2,726,141
Total equity and liabilities ...... 5,089,065 3,853,432
Approved on behalf of Management
Nigel J. Robinson 8 October 2002 Notes 1 to 37 form an integral part of these consolidated financial statements
ALFA GROUP Consolidated statement of income for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Note Restated
Sales ...... 29 3,375,546 5,747,239 Cost of goods sold ...... 29 (3,248,596) (5,512,099)
Gross profit ...... 126,950 235,140
Commission income on trading operations ...... 10,487 31,307 Net interest, fees and other income on banking activities ...... 23 296,884 90,465
Gains less losses arising from trading securities ...... 30,470 49,477 Gains less losses arising from investments available for sale ...... 5 56,477 48,832
Provisions on operating items ...... 20 (2,957) (26,415) Selling and distribution expenses ...... (33,611) (35,069) General and administrative expenses ...... 24(438,610) (332,842)
Operating income ...... 46,090 60,895
Share of results of joint ventures (net) ...... 6 803,961 1,083,239 Share of results of associated companies (net) ...... 7 6,256 - Gains on debt transactions ...... - 15,481 Interest expense (net) ...... 25 (9,828) (9,609) Net foreign exchange translation gains/(losses) ...... (12,186) 19,042 Monetary gains ...... 68,503 105,403 Other expenses (net) ...... (2,284) (3,054)
Profit before income tax and minority interests ...... 29 900,512 1,271,397
Income tax credit/(charge) ...... 19 61,142 (37,453)
Net profit after income tax and before minority interest ...... 961,654 1,233,944
Minority interests ...... 26 (164,602) (172,892)
Net profit ...... 29 797,052 1,061,052
Notes 1 to 37 form an integral part of these consolidated financial statements.
ALFA GROUP Consolidated statement of cash flows for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Note Restated Cash flows from operating activities ...... Profit before taxation and minority interests ...... 900,512 1,271,397 Depreciation of property, plant and equipment ...... 4 36,425 15,704 Loss on disposal of property, plant and equipment ...... 819 12,652 Profit on sale of investments available for sale ...... 5 (56,477) (48,832) Share of result of joint ventures and associated companies ...... 6, 7 (786,625) (1,060,594) Amortisation of goodwill – net ...... 6, 7, 21 (24,230) (23,568) Adjustment of negative goodwill ...... 6 15,076 - Movements in working capital balances ...... 27 26,483 (187,112) Net increase in CBRF reserves ...... 13 (43,039) (40,933) Movement in provisions ...... 20 2,957 26,415 Gain on debt transactions ...... - (15,481) Net interest income ...... 23,25 (89,566) (20,791) Net effect of inflation and foreign exchange differences on non-current capital ...... (168,973) (143,270) Net effect of inflation and foreign exchange differences on cash and cash equivalents . . . . . 38,908 44,120 Net cash outflow before interest and income tax ...... (147,730) (170,293)
Interest received ...... 220,886 124,130 Interest paid ...... (134,502) (116,941) Income tax paid ...... (14,375) (4,696) Net cash used in operating activities ...... (75,721) (167,800)
Cash flows from investing activities Capital expenditure ...... 4 (51,959) (67,178) Proceeds from sale of property, plant and equipment ...... 7,164 - Acquisition of investments available for sale ...... (19,247) (104,920) Sale of investments available for sale ...... 53,229 172,111 Dividends received from joint venture ...... 6 -43,599 Advances received from joint venture ...... 6218,603 491,388 Acquisition of additional interest in joint venture ...... 6 - (188,941) Acquisition of joint ventures ...... 6 (25,100) - Acquisition of associates ...... 7 (223,817) - Cash acquired on consolidation of subsidiaries ...... 28 382 - Net cash (used in)/from investing activities ...... (40,745) 346,059
Cash flow from financing activities Dividends paid ...... (7,274) (115,526) Net (decrease)/increase in short-term borrowings ...... (5,584) 120,720 Long-term borrowings repaid ...... (12,040) (87,333) Effect of inflation and foreign exchange differences on non-current capital ...... 168,973 143,270 Net cash from financing activities ...... 144,075 61,131
Net increase in cash and cash equivalents ...... 27,609 239,390
Movement in cash and cash equivalents
At start of year ...... 578,927 383,657 Net increase ...... 27,609 239,390 Effects of inflation on cash and cash equivalents ...... (59,373) (50,207) Effects of exchange rate changes on cash and cash equivalents ...... 20,466 6,087
At end of year ...... 13 567,629 578,927
Notes 1 to 37 form an integral part of these consolidated financial statements.
ALFA GROUP Consolidated statement of changes in shareholders' equity for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Share Share Fair value Cumulative Retained Total Capital Premium reserve Translation Earnings Sharehol- Reserve ders’ Equity
Balance at 1 January 2000 (as previously reported in historical US dollars) ...... 26,807 15,152 - (27,454) 106,445 120,950
Effect of change in accounting policy with respect to implementation of SIC 19 (Note 3) ...... (8,935) (5,050) - 36,801 (177,674) (154,858)
At 1 January 2000 Restated ...... 17,872 10,102 - 9,347 (71,229) (33,908) Translation movement (net) ...... - - - (2,997) - (2,997)
Net gains and losses not recognised in the consolidated statement of income ...... ---(2,997) - (2,997) Net profit for the year ...... ----1,061,052 1,061,052 Share of other equity movements of joint ventures, net of minority interest and deferred tax (Notes 6, 26) ...... ----30,625 30,625 Dividends declared ...... ----(124,065) (124,065)
At 31 December 2000 Restated ...... 17,872 10,102 - 6,350 896,383 930,707
Effect of adopting IAS 39 on investments available for sale (Note 5) ...... - - 24,855 - - 24,855 Changes in fair value of investments available for sale (Note 5) . . . . - - 27,015 - - 27,015 Realised gains arising on investments available for sale, net of taxation (Note 5) ...... - - (8,345) - - (8,345) Minority interest applicable to changes in fair value of investments available for sale (Note 26) ...... - - (7,257) - - (7,257) Translation movement ...... - - - (6,236) - (6,236) Other movements ...... - - - (1,002) 1,002 -
Net gains and losses not recognised in the consolidated statement of income ...... - - 36,268 (7,238) 1,002 30,032 Net profit for the year ...... ----797,052 797,052 Share of other equity movements of joint ventures and associates, net of minority interest and deferred tax (Notes 6, 7, 26) ...... ----(6,369) (6,369) Dividends declared ...... ----(9,373) (9,373)
At 31 December 2001 ...... 17,872 10,102 36,268 (888) 1,678,695 1,742,049
* The distributable reserves of CTF Holdings Limited are USD 83,031 thousand (2000: USD 61,059 thousand), non-inflated US dollar.
Notes 1 to 37 form an integral part of these consolidated financial statements.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
1. PRINCIPAL ACTIVITIES OF THE ALFA GROUP
Alfa Group comprises the parent entity, CTF Holdings Limited, and its subsidiaries (the “CTFH Group”), together with entities in which the parent entity controls through shareholder agreements (hereinafter collectively – the “Alfa Group” or the “Group”).
The registered office of CTF Holdings Limited is Suite , Irish Place, Gibraltar.
The Group operates in the following business segments: financial services, international commodities, Russia, CIS and Southeast Asia commodities, retail trade, food processing, oil and gas and telecommunications (see Note ).
Alfa Finance Holdings S.A. is registered in Luxembourg and with effect from March succeeded AB Holdings Limited (registered in Gibraltar) as the parent entity of Alfa Bank Group. Alfa Finance Holdings S.A. has restructured its businesses to form a financial subholding (under Alfa Bank Holdings Limited – formerly Alfa Capital Holdings (BVI) Limited), an industrial subholding (under Alfa Petroleum Holdings Limited) and a telecommunications subholding (under Alfa Telecom Limited) that has brought the legal structure more closely in line with the way in which Management manages the business. Alfa Bank Holdings Limited, Alfa Petroleum Holdings Limited and Alfa Telecom Limited are wholly owned subsidiaries of Alfa Finance Holdings S.A.
Alfa Bank Holdings (BVI) Limited is the parent company of Alfa Bank, an open joint stock commercial bank. Alfa Bank is registered in the Russian Federation to carry out banking and foreign exchange activities and has operated under a full banking license issued by the Central Bank of the Russian Federation (“CBRF”) since . Alfa Bank operates in all sectors of the Russian financial markets including interbank and retail deposits, foreign exchange operations and debt and equity trading. In addition, a complete range of banking services is provided in Russian Roubles and foreign currencies to its clients. Alfa Bank had branches within the Russian Federation at December . The activities of other companies in the financial subholding include proprietary trading and brokerage activities, investment and merchant banking and asset management with a primary emphasis on securities within the Russian Federation and Ukraine.
Alfa Petroleum Holdings Limited, a BVI registered company, was established in May and replaced Medpoint Limited as the holding company for the industrial assets of Alfa Finance Holdings S.A. in September . The principal under- lying assets in this subholding are TNK International Limited (“TNK”) and OAO Sidanco (“Sidanco”) (Note ).
Alfa Telecom Limited, a BVI registered company was established in March to hold the telecommunication assets of Alfa Finance Holdings S.A. (Note ).
Crown Resources AG (“Crown Resources”) was registered in Zug, Switzerland on December . Its activities mainly involve the trading of oil, oil products and metal sourced mainly from Russia and sold on international markets. Crown Resources is the main company in the Group’s international commodities segment following a restructuring in June .
Eco Holdings Limited (“Alfa Eco” and together with its subsidiaries the “Alfa Eco Group”), is registered in Gibraltar. The Alfa Eco Group’s main activities include trading in raw materials (crude oil, oil products, metals, coal and industrial wood) and consumer goods (such as meat, rice, grain, wine, vodka and cognac), in the Russian Federation, the CIS and Southeast Asia as well as provision of agency services in the export of oil, oil products, newsprint and industrial wood. The Alfa Eco Group also holds the Group’s interest in Vimpel-Communications and VimpelCom-Region (Note ) via Eco Telecom Limited, a company registered in Gibraltar.
As opportunities arise the Alfa Eco Group also acquires interests in the equity, equity instruments or other securities of companies with a strategic interest for the Alfa Eco Group. Depending upon the circumstances, the Alfa Eco Group may acquire a certain interest for the purposes of managing and developing the business or holding the investment for resale.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
ZAO Trade House Perekriostok (“Perekriostok”), is registered in the Russian Federation. Perekriostok was established to develop and manage a chain of supermarkets in Moscow and operates (: ) supermarkets and a distribution centre. Perekriostok is the main company in the Group's retail trade segment.
AC United Food Company (“UFC”), is registered in Cyprus and was created in April as a holding company for the purpose of merging the Group's interest in Kubansakhar with Intec Group, a third party company with sugar factories and grain silos. UFC operates in the Krasnodar, Belgorod and Orel regions of Russia in the areas of sugar processing, trading and distribu- tion and grain trading and storage. Subsequent to year-end the Group has entered into agreements to dispose of this segment (Note ).
2. OPERATING ENVIRONMENT OF THE GROUP
The majority of the Group’s operations are tied to the Russian market and accordingly the operating environment present in the Russian Federation, including the fluctuation of the Russian Rouble to the US dollar, is important to the overall operations of the Group. The economy of the Russian Federation continues to display characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country; a low level of liquidity in the public and private debt and equity markets and relatively high inflation.
Additionally, the banking sector in the Russian Federation is particularly impacted by adverse currency fluctuations and economic conditions. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the difficulties experienced by banks currently operating in the Russian Federation. The political stabilization beginning in and continuing in has been a positive contributing factor for the further development of the political and legal environment.
The prospects for future economic stability in the Russian Federation are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory and political developments, which are beyond the Group’s control.
In addition, economic conditions continue to limit the volume of activity in the financial markets. Market quotations may not be reflective of the values for securities which would be determined in an efficient, active market involving willing buyers and willing sellers. Management has therefore used the best available information to determine their best estimate of fair values, where consid- ered necessary.
3. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. () Basis of preparation The consolidated financial statements of the Group are prepared in accordance with, and comply with, International Accounting Standards (“IAS”) issued by the International Accounting Standards Committee. Subsidiaries, registered on the territory of the Russian Federation, maintain their accounting records in accordance with the Regulations on Accounting and Reporting in the Russian Federation in the national currency of the Russian Federation, the Russian Rouble (“RR”). These consolidated financial statements have been prepared from those accounting records and adjusted as necessary in order to comply in all material respects with IAS, based on the accounting policies set out below. Subsidiaries and dependent companies that are registered under the legis- lation of countries outside of the Russian Federation maintain financial statements, which are based upon IAS principles.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
The consolidated financial statements have been prepared using the historical cost convention, restated for the effects of inflation. Certain financial instruments are shown at fair value as disclosed in the accounting policies below.
The financial statements have been measured in Russian Roubles and adjusted for inflation in accordance with IAS “Financial Reporting in Hyperinflationary Economies (“IAS ”) so that all Russian Rouble amounts, including corresponding figures, are expressed in terms of the purchasing power of the Russian Rouble at December . These financial statements have been presented in US dollars (“USD”) by translating the inflation adjusted Russian Rouble amounts as a matter of arithmetic computa- tion using the official rate of the Central Bank of the Russian Federation (the “CBRF”) at December of RR . to USD , for both the current year and corresponding figures. The United States Dollar has been selected as the presentation currency of the Group as USD is the currency which Management of the Group uses to manage business risks and exposures, and measure the performance of its businesses. The USD amounts should not be construed as a representation that the RR amounts have been or could have been converted to USD at this rate.
Change in accounting policy At January the Group changed its accounting policy with respect to the currency in which the consolidated financial state- ments are measured in order to comply with IASC Interpretation SIC , “Reporting Currency – Measurement and Presentation of Financial Statements under IAS and IAS ”. Previously, the Group used the USD for measuring certain subsidiaries in these consolidated financial statements, meaning that transactions in currencies other than USD were treated as transactions in foreign currencies. As mentioned above, the Group now uses Russian Roubles as its measurement currency for all subsidiaries where busi- ness activities are substantively located in the Russian Federation. In accordance with the benchmark treatment of IAS “Net Profit or Loss For the Period, Fundamental Errors and Changes in Accounting Policies”, the corresponding consolidated balance sheet, consolidated statement of income, consolidated statement of cash flows and consolidated statement of changes in shareholders’ equity and related notes as of December have been restated in order to reflect adoption of this new accounting policy. The application of this change in accounting policy resulted in a decrease in shareholders’ equity, as previously reported, at January in the amount of USD , thousand and at December in the amount of USD , thousand.
Management Estimates The preparation of consolidated financial statements require Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and operating costs during the reporting period. The most significant estimates relate to the realisability of investments, realisability and depreciable lives of property, plant and equipment, allowances for doubtful accounts and provisions for deferred and current taxation. Actual results could differ from these estimates.
IAS As at January , the Group adopted IAS “Financial Instruments: Recognition and Measurement” (“IAS ”). The financial effects of adopting IAS are reported in the consolidated statement of changes in shareholders’ equity. IAS has been applied prospectively in accordance with the requirements of the Standard and therefore corresponding financial information has not been restated. Further information relating to the effect of the adoption of IAS is presented in the relevant accounting policies and related disclosures. () Measurement currency The Russian Rouble has been selected as the measurement currency of the Group as a majority of the Group’s transactions and operations are carried out and measured in Russian Roubles.
The Group’s subsidiaries are considered foreign entities (operations not integral to those of the parent), as defined by IAS “The Effects of Changes in Foreign Exchange Rates” (“IAS ”), as each of the individual businesses operate independently of the Group. The measurement currency of the Group’s subsidiaries may be either RR or USD depending upon the location and nature of the activities of the particular business.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
In the case of subsidiaries, where the measurement currency is RR, the underlying balances and transactions have been adjusted for hyperinflation in accordance with IAS .
In the case of subsidiaries located in other territories, where the measurement currency is USD, the local currency financial state- ments have been measured in USD and translated into RR at the applicable exchange rates as required by IAS for inclusion in these consolidated financial statements. () Foreign currency translation Transactions denominated in currencies other than the respective entity’s measurement currency are recorded, on initial recog- nition in the relevant measurement currency of the entity (RR or USD), by applying the exchange rate at the date of the transac- tion. Outstanding foreign currency monetary items at the balance sheet date are translated at the exchange rate at the balance sheet date. Exchange rate differences arising on the settlement of monetary items or on translating monetary items at the balance sheet date are recognised as income or expenses of the period to which they relate.
At December , the official rate of exchange, as determined by the CBRF, was USD =RR . ( December : USD = RR .). Exchange restrictions and controls exist relating to converting the Russian Rouble into other currencies. The Russian Rouble is not a convertible currency outside of the Russian Federation. () Accounting for the effects of hyperinflation A significant proportion of the Group's activities are carried out in the Russian Federation which has in recent years been experi- encing high levels of inflation. The country remains a hyperinflationary economy on a cumulative basis over the last three years.
Accounting for hyperinflation in accordance with IAS is intended to reflect the effect of changes in the general purchasing power of the Russian Rouble on the financial capital employed through restating the financial statements from their historical amounts to amounts expressed in the equivalent purchasing power of the Russian Rouble at the current balance sheet date. The application of this principle results in an adjustment to the consolidated statement of income for the loss of the purchasing power of the Russian Rouble.
The adjustments and reclassifications made to the statutory records for the purpose of IAS presentation include the restatement of balances and transactions for the changes in the general purchasing power of the RR in accordance with IAS . IAS requires that the consolidated financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the meas- uring unit current at the balance sheet date. Corresponding figures, for the year ended December , have also been restated for the changes in the general purchasing power of the RR at December .
The restatement was calculated using the conversion factors derived from the Russian Federation Consumer Price Index (“CPI”), published by the Russian State Committee on Statistics (“Goscomstat”), and from indices obtained from other sources for years prior to .
The indices used to restate the consolidated financial statements, based on prices ( = ) for the five years ended December , and the respective conversion factors, are:
Year Index Conversion Factor 1997 ...... 659,403 3.6 1998 ...... 1,216,400 2.0 1999 ...... 1,661,481 1.4 2000 ...... 1,995,937 1.2 2001 ...... 2,371,572 1.0
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
These indices have been applied to the historical cost values of transactions and balances of subsidiaries, where the measurement currency is RR as follows:
• All comparative figures, including monetary assets and liabilities and other disclosures in respect of prior years, are restated by applying the change in the index during the current year.
• All items of the consolidated income statement are restated by applying the change in the index from the date of the transac- tion to the balance sheet date.
• Monetary assets and liabilities at the latest balance sheet date are not restated because they are already expressed in terms of the monetary unit current at the balance sheet date.
• Non-monetary assets and liabilities are restated by applying the change in the index from the date of the transaction, or if appli- cable from the date of their initial valuation, to the latest balance sheet date, and are reduced to net realisable value, estimated recoverable value, or market value as necessary.
• The gain or loss on net monetary position, which shows the effects of holding net monetary assets and liabilities, is shown as a separate item in the consolidated statement of income. () Subsidiary undertakings Subsidiary undertakings, which are those entities in which the Group has an interest of more than one half of the voting rights, or otherwise has power to exercise control over the operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. All intercompany trans- actions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also elimi- nated unless the cost cannot be recovered. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group.
Minority interest at the balance sheet date represents the minority shareholders' portion of the pre-acquisition fair values of the identifiable assets and liabilities of the subsidiary at the acquisition date, and the minorities' portion of movements in equity since the date of the combination. Minority interest is presented separately from liabilities and shareholders’ equity. () Investments in joint ventures and associates Investments in joint ventures and associates are accounted for by the equity method as described below.
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control.
Associates are undertakings over which the Group generally has between % and % of the voting rights, or otherwise the Group has significant influence, but which it does not control.
Equity accounting involves recognising the Group’s share of the joint venture’s and associate’s profit or loss for the year in the consolidated statement of income and other equity movements in the consolidated statement of equity. Unrealised gains on trans- actions between the Group and its joint ventures and associates are eliminated to the extent of the Group's interest in the joint ventures and associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, accounting policies for joint ventures and associates have been changed to ensure consistency with the policies adopted by the Group. The Group’s investment in joint ventures and associates is carried in the consolidated balance sheet at an amount that reflects its share of the net assets of the joint venture or associate and includes goodwill (net of accumu- lated amortisation) on acquisition.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Equity accounting is discontinued when the carrying amount of the investment in a joint venture or an associate reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the joint venture or the associates. () Property, plant and equipment Property, plant and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at December , less accumulated depreciation.
Depreciation is applied on a straight-line basis using the rates specified below, which approximate the estimated useful lives of the respective assets:
Buildings ...... 2-10 % Plant, machinery and other equipment ...... 9-20 % Office and computer equipment ...... 14-33 %
Land and construction in progress are not depreciable items. Improvement costs, when incurred, are added to the carrying value of the corresponding asset. Repairs and maintenance expenditure on property, plant and equipment incurred during the year is charged to the consolidated statement of income.
Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining operating income.
Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the property for its intended use, as part of the cost of the asset, and depreciated over the estimated useful life of the asset. No interest was capitalised during . () Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiary, joint venture or associated undertaking at the date of acquisition. Goodwill on the acquisition of joint venture and asso- ciated undertakings is included in investments in joint venture and associated undertakings. Goodwill is amortised using the straight-line method over its estimated useful life up to years.
Negative goodwill represents the excess of the fair value of the Group’s share of the net assets acquired over the cost of acquisition. Negative goodwill is presented in the same balance sheet classification as goodwill. To the extent that negative goodwill relates to expectations of future losses and expenses that are identified in the Group’s plan for the acquisition and can be measured reliably, but which do not represent identifiable liabilities, that portion of negative goodwill is recognised in the consolidated statement of income when the future losses and expenses are recognised. Any remaining negative goodwill, not exceeding the fair values of the non-monetary assets acquired, is recognised in the consolidated statement of income over the remaining weighted average useful life of depreciable and amortisable assets acquired; negative goodwill in excess of the fair values of those assets is recognised in the consolidated statement of income immediately.
In the case of TNK and Sidanco the amortisation of goodwill is based on the estimated life of oil reserves.
Impairment of intangible assets Where an indication of impairment exists, the carrying amount of any intangible asset, including goodwill, is assessed and, when impaired, the asset is written down immediately to its recoverable amount.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
() Trading securities At January the Group adopted IAS and classified all of its securities portfolio as “trading” securities. Trading securities are securities which were either acquired for generating a profit from short-term fluctuations in price or dealer’s margin, or are securities included in a portfolio in which a pattern of short-term holding exists.
Trading securities are initially recognised at cost (which includes transaction costs) and are subsequently re-measured at fair value based on their market value or after the application of various valuation methodologies, including Management's assessment as to the future realisability of these securities. In determining market value, all trading securities are valued at the last trade price if quoted on an exchange or, if traded over-the-counter, at the last bid price.
Changes in fair values are recorded within gains less losses arising from trading securities in the consolidated statement of income in the period in which the change occurs. Coupon and interest income earned on trading securities are reflected in the statement of income as net interest, fees and other income on banking activities. Any trading gains or losses on trading securities are recorded in gains less losses arising from trading securities.
Because of the inherent risk of the securities market, security purchases and sales are recorded when the security transaction is settled.
Prior to the adoption of IAS , all securities were treated by the Group as part of its trading portfolio. Government securities and corporate shares were carried at market value. The carrying values for other securities were derived either from market quotations or from Management’s assessment of the future realisability of these securities. Certain securities, for which there was no readily attainable market value or those securities for which Management had determined that the available quotation did not depict their true market value, were fair valued by Management. Changes in market values were recorded within gains less losses arising from trading securities in the consolidated statement of income in the period in which the change occurred. Coupon and interest income earned on trading securities was reflected in the consolidated statement of income as net interest, fees and other income on banking activities. The impact of adopting IAS was nil. () Investments available for sale At January the Group adopted IAS and classified all its investments, except for investments in joint ventures and associ- ates, as available for sale. This classification includes investments, which Management intends to hold for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates, or market prices. Management determines the appropriate classification of its investments at the time of purchase.
Investment securities available for sale are initially recognised at cost (which includes transaction costs) and subsequently remea- sured to fair value based on quoted bid prices. Certain investment securities available for sale for which there is no available external independent quotation have been fair valued by Management. Fair value has been determined after the application of various valuation methodologies, including Management's estimate of amounts to be realised on settlement. Unrealised gains and losses arising from changes in the fair value of investment securities available for sale are recognised in the consolidated statement of changes in shareholders’ equity. When the investment securities available for sale are disposed of or impaired, the related accu- mulated fair value adjustments are included in the consolidated statement of income as gains less losses arising from investment securities transactions. Coupon and interest earned on investment securities available for sale are reflected in the consolidated statement of income as net interest, fees and other income on banking activities.
Prior to adoption of IAS , all investments were carried at cost less provision for diminution in value, created in cases where the value of an investment had declined, and Management believed that the decline was not temporary in nature. Income derived from invest- ments was accounted for on a cash basis. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount was charged or credited to income. The impact of adopting IAS was a credit to equity of USD , thousand.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
() Sale and repurchase agreements and lending of securities Sale and repurchase agreements (“repos”) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are included into trading securities or investment securities available for sale as appropriate. The corresponding liability is presented within due to banks or borrowings. Securities purchased under agreements to resell (“reverse repo”) are recorded as loans and advances to banks or customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method.
Securities lent to counterparties are retained in the consolidated financial statements. Securities borrowed are not recognised in the consolidated financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded within gains less losses arising from trading securities in the consolidated statement of income. The obligation to return them is recorded at fair value as a trading liability. () Inventories Inventories are stated at the lower of cost or net realisable value. The cost of commodities is determined on a weighted average cost basis. Cost comprises raw materials, other direct costs and related production overheads, and excludes interest expense. () Accounts receivable Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. Such provision for impairment of trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. The amount of the provision is the difference between the carrying amount and the recover- able amount, being the present value of expected cash flows, discounted at the effective rate of interest. () Originated loans and advances to customers, provisions for loan impairment Loans and advances are originated by the Group by providing money directly to the borrower or to a sub-participation agent at draw down and are categorised as loans and advances originated by the Group and are carried at amortised cost less provision for loan impairment. All loans and advances are recognised when cash is advanced to borrowers.
Originated loans from customers are recognised initially “at cost” net of transactions cost incurred. Subsequently, these are restated at amortised cost and any difference between proceeds and a redemption value is recognised in consolidated statement of income over period of the borrowings using the effective yield method.
A credit risk provision for loan impairment is established if there is objective evidence that the Group will not be able to collect the amounts due. The amount of the provision is the difference between the carrying amount and estimated recoverable amount, calculated as the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the instrument’s interest rate at inception.
The provision for loan impairment also covers losses where there is objective evidence that probable losses are present in compo- nents of the loan portfolio at the balance sheet date. These have been estimated based upon historical patterns of losses in each component, the credit ratings assigned to the borrowers and reflects the current economic environment in which the borrowers operate.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary legal procedures have been completed and the amount of the loss has been determined. Recoveries of amounts previ- ously written off are treated as income.
If the amount of the provision for loan impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is credited to provision on operating items in the consolidated statement of income.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Prior to the adoption of IAS , loans and advances were stated at the principal amounts outstanding net of provisions for losses on loans and advances. The impact of adopting IAS was nil. () Cash and cash equivalents Cash and cash equivalents are items which can be converted into cash within a day. All short term interbank placements, beyond overnight deposits, are included in due from banks. Mandatory cash reserve balances with the CBRF have been excluded from cash and cash equivalents in the consolidated statement of cash flows, as these balances are not available to finance the Group’s day to day operations. () Other credit related commitments In the normal course of business, the Group enters into other credit related commitments including loan commitments, letters of credit and guarantees. Specific provisions are raised against other credit related commitments when losses are considered probable. () Derivative financial instruments Derivative financial instruments are used by the Group's companies (primarily by Alfa Bank Group and Crown Resources AG) for both economic hedging and non-hedging (trading) purposes. Although derivative financial instruments are often used for economic hedging purposes, the Group does not make use of the elective hedge accounting rules under IAS .
Derivative financial instruments are initially recognised in the consolidated balance sheet at cost (including transaction costs) and subsequently, are re-measured at fair value with the resulting gains or losses recognised immediately in the consolidated statement of income. Fair values are obtained from quoted market prices and if necessary from discounted cash flow or other models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. When the Group has contracts to both buy and sell derivative financial instruments with the same counterparty, gains and losses have been offset. The impact of adopting IAS was nil.
Executory contracts, which represent open forward fixed price commodity purchase or sale contracts, are settled by delivery of commodities to meet the Group’s expected purchase and sales requirements and are therefore outside the scope of IAS . Unrealized losses on executory contracts resulting from adverse market price movements are provided for in the consolidated statement of income. Unrealized gains on executory contracts are not recognized in the consolidated state- ment of income.
Alfa Bank uses derivative financial instruments, which include forward and spot transactions in foreign exchange markets, forwards, futures and options on securities and precious metals. All related gains and losses, including changes in fair value, are reflected in the consolidated statement of income in net interest, fees and other income on banking activities.
The August economic crisis and the subsequent legal uncertainty over derivative contracts have necessitated the Group to modify its accounting policy with regards to domestic index forwards. Gains and losses on domestic index forwards have been calculated applying the exchange rate on the contractual maturity date. Where settlements have been negotiated with counter- parties, the gain or loss has been recognised based on the settlement amounts. For contracts which have not been settled, Management has recognised the gain or loss at the amount at which they believe the contract could be settled. When the Group had contracts to both buy and sell foreign currencies with the same counterparty, the gains and losses have been offset.
Crown Resources uses derivative financial instruments which include commodities swap and futures contracts and firm commit- ments to fixed price forward purchases of oil, oil products, metals and other commodities. All related gains and losses, including changes in fair value, are reflected in the consolidated statement of income in cost of goods sold. The impact of adopting IAS was nil.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
() Income and expense recognition The Group operates across a variety of business segments, which generate different types of income and expenses. Income and expenses are recognised on an accrual basis as earned or incurred. The following are the principal types of income and expenses and how they are recognised:
- Sales are recognised upon transfer of title for goods in accordance with the terms of contracts or as services are provided as this is the date that the risks and rewards of ownership are transferred to the customers. Sales are shown net of VAT, sales tax and discounts, and after eliminating sales within the Group. Commission income is recognised as earned, generally upon the performance of commissionable activities or the agreement on its calculation by the customer, whichever is the latest.
- Cost of goods sold comprises the purchase price, transportation costs, financing costs, commissions relating to supply agree- ments and other related expenses;
- Interest income and expense are recognised in the consolidated statement of income on an accrual basis using the effective yield method. Interest income is not recognised when it is overdue or in situations when Management believes that it is not collectible.
- Dividend income is recognised when the right to receive payment is established, usually on ex-dividend date;
- The income / expense resulting from the accretion / amortisation of the discount / premium resulting from bills of exchange issued or held by the Group is accounted for as described in Note ().
- Operating expenses, including selling and distribution expenses and general and administrative expenses are recognised on an accrual basis as incurred.
- Gains and losses arising as a result of Group's management of investments available for sale and entities over which Group exer- cises management control are included in the consolidated statement of income under gain on investments transactions when realised. () Accounting for operating leases – where the Group is the lessee Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Lease expenses are charged to the consolidated statement of income on a straight-line basis over the period of the lease. () Income taxes Income taxes payable are provided for on the basis of estimates of the tax liability for the year, taking into consideration applicable tax rates and tax exemptions.
Deferred income tax assets and liabilities are calculated, using the liability method, in respect of temporary differences arising between the tax base of assets and liabilities and their carrying values for financial reporting purposes. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differ- ences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period in which the asset is realised or the liability is settled, based on tax rates which are enacted or substantially enacted at the balance sheet date.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary differ- ence will not reverse in the foreseeable future.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Deferred taxation, relating to the fair value remeasurement of investments available for sale which is charged or credited directly to equity, is also charged or credited directly to equity and is subsequently recognised in the consolidated statement of income when the gain or loss on the investments are realised.
The principal temporary differences arise on inventories, bad debt provisions, accruals and fair value adjustments caused by IAS . () Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. () Dividends Dividends declared by the Group are recognised as a liability and as a corresponding charge to equity in the year in which they are proposed and declared. () Bills of exchange Bills of exchange issued by the Group to its customers, more commonly known as “veksels”, carry a fixed date of repayment. These may be issued against cash deposits or as a payment instrument which the customer can discount in the over-the-counter secondary market. Bills of exchange issued by the Group are recognised initially at cost being their issue proceeds net of transaction costs incurred. Subsequently, bills of exchange issued are stated at amortised cost and any difference between net proceeds and the redemption value is recognised in the consolidated statement of income over the period of issuance using the effective yield method.
Prior to adoption of IAS , bills of exchange issued by the Group were recorded at nominal value with the corresponding discount recorded within other assets and amortised to the consolidated statement of income over the period of maturity of the bills of exchange. The impact of adopting IAS was nil.
The Group also purchases bills of exchange from its customers or in the market. These bills of exchange are included in trading securities, investments available for sale, originated loans and advances to customers, or in due from banks, depending on their substance, and are subsequently re-measured and are accounted for in accordance with the accounting policies described above for those categories of assets. () Borrowings Borrowings are recognised initially at ‘cost’, being their issue proceeds net of transaction costs incurred. Subsequently, borrowings are stated at amortised cost and any difference between net proceeds and the redemption value is recognised in the consolidated statement of income over the period of the borrowings using the effective yield method. () Pension costs The Group’s subsidiaries that are registered on the territory of the Russian Federation contribute to the Russian Federation’s state pension scheme in respect of its employees.
Crown Resources contributes to defined contribution plans to provide pension benefits for employees. Crown Resources contributes to these plans based upon a fixed percentage of employee compensation.
These contributions are expensed as incurred. The Group’s commitment ends with the payment of these contributions.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
() Share options Share options are granted to certain directors and managers of certain of the Group's companies.
To the extent that options are granted and are used as a mechanism for additional cash compensation, i.e. where put options are issued against call options, a compensation cost is recognized in the consolidated statement of income at the date of the grant and remeasured at each financial statement date.
To the extent that options are granted and are used as a mechanism for promoting longer-term ownership by directors and managers, i.e. where only call options are issued, no compensation cost is recognized. Instead, when the call options are exercised, the proceeds received net of any transaction costs are recorded as an adjustment to minority interest. () Impairment The Group makes an assessment whether there is any indication that an asset may be impaired at each balance sheet date. If any such indication exists, an estimate of the recoverable amount of the asset is made.
If the recoverable amount of an asset is less than its carrying amount the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss. () Fiduciary assets Assets and liabilities held by the Group in its own name, but for the account of third parties, are not reported in the consolidated balance sheet. Commissions received from such business are included in net interest, fees and other income on banking activities in the consolidated statement of income. () Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. () Segment reporting The consolidated financial statements disclose information relating to the Group’s business and geographic segments. The Group’s primary reporting format comprises the business segments, whilst the secondary reporting format comprises the geographical segments. Division into segments depends on such factors as the nature of items, types of activities performed by this segment and relative independence of this segment. With regards to the secondary geographical segments, sales are based on the country in which the customer is located, while total assets and capital expenditures are based on where the assets are located.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
4. PROPERTY, PLANT AND EQUIPMENT
Land Plant, Office Construc- Other Total and Machinery and tion in Fixed Buildings and Computer progress Assets Other Equipment Equipment Cost
At 31 December 2000 (Restated) ...... 158,492 106,070 66,203 11,248 16,367 358,380 Additions ...... 19,023 8,091 20,406 (6,555) 10,994 51,959 Acquired on purchase of subsidiary ...... 30,599 33,525 281 2,175 2,809 69,389 Disposals ...... (6,490) (5,607) (3,615) - (222) (15,934) Translation movement ...... (26) (67) (1,916) (304) (940) (3,253)
At 31 December 2001 ...... 201,598 142,012 81,359 6,564 29,008 460,541
Accumulated depreciation
At 31 December 2000 (Restated) ...... (55,335) (73,162) (30,239) - (3,994) (162,730) Charge for 2001 ...... (9,385) (15,560) (7,262) - (4,218) (36,425) Accumulated depreciation released on disposals ...... 499 4,094 2,393 - 158 7,144 Translation movement ...... (277) 13 1,132 - 133 1,001
At 31 December 2001 ...... (64,498) (84,615) (33,976) - (7,921) (191,010)
Provision for impairment (Note 20) ...... (1,176) ----(1,176)
At 31 December 2001 (net) ...... 135,924 57,397 47,383 6,564 21, 087 268,355
At 31 December 2000 (Restated) ...... 103,157 32,908 35,964 11,248 12,373 195,650
Property, plant and equipment totalling USD , thousand (: USD , thousand) have been pledged to third parties as collateral (Note ).
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
5. INVESTMENTS AVAILABLE FOR SALE
Restated
Investments measured at fair value – current ...... 28,092 - Investments measured at cost – current ...... - 38,040 Less: Provision for permanent diminution in value – current (Note 20) ...... - (2,326)
Total investments available for sale – current ...... 28,092 35,714
Investments measured at fair value – non-current ...... 139,408 - Investments measured at cost – non-current ...... - 158,283 Less: Provision for permanent diminution in value – non-current (Note 20) ...... (69) (58,115)
Total investments available for sale – non-current ...... 139,339 100,168
Total investments available for sale ...... 167,431 135,882
Investments available for sale comprise principally non-marketable equity securities, which are not publicly traded or listed on the Russian stock exchange and, due to the nature of the local financial markets, it is not possible to obtain current market values for these investments. For these investments, fair value is estimated by reference to the discounted cash flows of the investment.
Investments available for sale are classified as non-current assets unless they are expected to be realized within twelve months of the balance sheet date.
As described in Note , the Group adopted IAS as at January . Prior to adoption of IAS , investments were carried at cost less provision for diminution in value. The provision for diminution in value of USD , thousand at December now constitutes a part of the carrying value of investments available for sale.
Upon adoption of IAS , the Group recognised an adjustment of USD , thousand to its opening carrying value of invest- ments available for sale. This amount related to investments for which the fair value at January exceeded the carrying value of such investments as of that date.
A roll forward of the investments available for sale is as follows:
Carrying value at 1 January 2001 (Restated) ...... 135,882 Effect of adopting IAS 39 ...... 24,855 Movement in investments fair value during the period ...... 27,015 Realised gain on investments available for sale ...... (8,345) Acquisition of investments available for sale ...... 23,382 Sale of investments available for sale ...... (60,544) Net gain on sale of investments available for sale ...... 56,477 Decrease in impairment of investments available for sale (Note 20) ...... (1,840) Arising from change in accounting treatment of subsidiary (Note 28) ...... (25,228) Translation ...... (4,223)
Total investments available for sale ...... 167,431
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
External independent market quotations were not available for investments available for sale. As such, the fair values of these assets were determined by Management on the certain basis of current negotiations for disposal of these investments to third parties, results of recent sales of equity interests in the investees between unrelated third parties, consideration of other relevant factors such as discounted cash flows and financial information of the investees, and application of other valuation methodologies.
Investments available for sale with a fair value of USD , thousand (: carrying value of USD , thousand) have been pledged to third parties as collateral with respect to borrowings (Note ).
6. INVESTMENT IN JOINT VENTURES
Included in the investments in joint ventures are the Group’s investments in the oil and gas sector as well as its investment in a newsprint manufacturer, OAO Volga. Restated Investments in the oil and gas sector ...... 1,611,632 1,069,187 OAO Volga ...... 41,560 -
Total investments in joint ventures ...... 1,653,192 1,069,187
The Group’s oil and gas assets are held by TNK Industrial Holdings Limited (“TNK Industrial”), an entity jointly controlled by the Group and its joint venture partner, Access-Renova. The Group owns a % economic and voting interest in TNK Industrial.
TNK Industrial is an investment holding company that has two wholly owned subsidiaries:
- TNK International Limited (“TNK International”), which owns .% of OAO TNK; and
- Sborsare Management Limited (“Sborsare”), which owns an economic interest of .% of Sidanco as at December .
The Group accounts for its interest in TNK Industrial and its subsidiaries using the equity method. The table below summarises the movements in the Group’s net investment in its oil and gas interests. Restated At 1 January ...... 1,069,187 292,678
Group’s share of net assets acquired (at fair value) ...... - 375,900 Goodwill arising from acquisitions ...... - (186,959) Advances received from joint venture ...... (218,603) (491,388) Dividends received from joint venture ...... - (43,599) Net share of results of joint venture ...... 759,551 1,060,594 Net share of other equity movements of joint venture ...... (7,077) 39,316 Amortisation of goodwill ...... 23,650 22,645 Effect of change in the applicable tax rate ...... (15,076) -
At 31 December ...... 1,611,632 1,069,187
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
The table below summarises the movements in negative goodwill with respect to the Group’s investment in TNK Industrial. Restated At 1 January ...... 339,680 175,366 Arising from acquisitions ...... - 186,959 Amortisation ...... (23,650) (22,645) Effect of change in the applicable tax rates ...... 15,076 -
At 31 December ...... 331,106 339,680
The net share of results of joint venture includes the Group’s portion of TNK Industrial’s net profit after tax and minority interest. The Group’s share of TNK Industrial’s tax credit amounts to USD , thousand for (: income tax charge amounts to USD , thousand). As at December a provision for deferred tax using a rate of zero percent has been estimated with respect to the carrying value of the investment in TNK Industrial as the investment is held in a company domiciled in the British Virgin Islands, and thus, is in a tax exempt region. As at December a provision for deferred tax using a rate of . % had been estimated.
The details about the acquisitions of TNK and Sidanco, as well as their summarised financial information are provided below. TNK International Limited TNK International Limited and its subsidiaries conduct exploration activities and produce oil and gas in the Russian Federation and operate petroleum refineries and market petroleum products under the “TNK” brand name and to unbranded wholesale customers primarily in the Russian Federation and the Ukraine.
The Group, together with its % joint venture partner, acquired % of TNK in a Government privatisation auction in July . In February , the joint venture acquired a further . % in TNK in private transactions. The remaining . % of TNK was acquired in a second Government privatisation auction in December . In addition, joint venture acquired the assets of OAO Chernogorneft (renamed TNK-Nizhnevartovsk) in a bankruptcy auction in December .
In , following the acquisition of .% of OAO TNK the joint venture partners commenced a corporate restructuring reor- ganisation program. Through a series of transactions the partners subsequently transferred their ownership interests in OAO TNK and other subsidiaries to TNK International Limited, a company formed in September . Under the reorganisation, OAO TNK offered its shares, or a cash alternative, to the minority shareholders in several subsidiaries. Following this transaction, OAO TNK’s interest in these subsidiaries was increased to %, while TNK International Limited’s interest in OAO TNK was reduced to .%. The formation of TNK International Limited was accounted for as a reorganisation of entities under common control.
The consolidated (combined for ) financial information of TNK International Limited is summarised as follows:
Condensed Balance Sheet Current assets ...... 2,342,825 2,990,709 Non-current assets ...... 7,614,585 7,385,637 Current liabilities ...... (3,239,345) (3,574,252) Non-current liabilities ...... (2,091,954) (2,299,283) Minority interest ...... (1,234,831) (1,585,908) Shareholders' equity ...... (3,391,280) (2,916,903)
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Condensed Statement of Income Sales ...... 5,492,827 5,567,596 Costs and other deductions ...... (3,642,172) (2,643,909) Net profit before tax and minority interest ...... 1,697,290 2,682,131 Net profit after tax and minority interest ...... 1,450,564 2,120,601 Sidanco Sidanco and its subsidiaries are engaged in the exploration, development, production, refining and sale of oil and petroleum prod- ucts.
.% of the outstanding ordinary shares of Sidanco were acquired on May for USD , thousand (non-inflated historic amount) and a further .% of outstanding ordinary shares of Sidanco were acquired on August for USD , thousand (non-inflated historic amount). Thus, in total Sborsare acquired .% of the outstanding ordinary shares representing an effective economic interest in Sidanco of approximately .%. Sborsare has consolidated Sidanco since June as it is a relative midpoint and the most practical date from an accounting perspective with respect to the aforementioned step acquisi- tion.
On October , the Group, Access-Renova, its joint venture partner, BP Russia, a minority shareholder of Sidanco, and Sidanco reached a shareholders agreement whereby the joint venture partners agreed to sell TNK-Nizhnevartovsk to Sidanco for USD , thousand (non-inflated historic amount) and Sidanco agreed to acquire % of its own shares from Sborsare for USD , thousand (non-inflated historic amount). This reduced Sborsare’s effective economic interest in Sidanco from .% to .%. The relevant dilutive result of these transactions has been recorded at the level of TNK Industrial. In addition, the agree- ment ensured that BP Russia receives %+ voting rights in Sidanco and BP Russia, under certain conditions, will provide management services to Sidanco pursuant to a three year strategic business plan. Refer to Note with respect to a further acqui- sition of shares by BP Russia during .
An additional effective economic interest in Sidanco of approximately .% is held directly by TNK International Limited.
The consolidated financial information of Sidanco is summarised as follows: Condensed Balance Sheet Current assets ...... 423,650 Non-current assets ...... 2,358,063 Current liabilities ...... (244,229) Non-current liabilities ...... (374,600) Minority interest ...... (575,017) Shareholders' equity ...... (1,587,867) ...... months ended December
Condensed Statement of Income Sales ...... 730,311 Costs and other deductions ...... (608,915) Net profit before tax and minority interest ...... 168,663 Net profit after tax and minority interest ...... 196,837
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
OAO Volga In May , the Group acquired a .% interest in OAO Volga, a newsprint manufacturer, for a consideration of USD , thousand. A joint venture partner acquired a similar interest.
At 1 January ...... -
Group’s share of net assets acquired (at fair value) ...... 34,877 Goodwill arising from acquisitions ...... (9,777) Net share of results of joint venture ...... 18,805 Amortisation of goodwill ...... 1,955 Distribution to shareholders ...... (4,300)
At 31 December ...... 41,560
The consolidated financial information on OAO Volga is summarised below (disclosed at %): December Total assets ...... 210,123 Shareholders equity ...... (98,767) Minority Interest ...... (9,962)
months ended December
Sales ...... 158,943 Profit before tax ...... 34,430
7. INVESTMENT IN ASSOCIATED COMPANIES
The Group’s investments in associated companies include investments in the telecommunications sector. VimpelCom Golden Group Telecom Total Opening net amount ...... - - - Group’s share of net assets acquired (at fair value) ...... 90,402 96,548 186,950 Goodwill acquired ...... 34,527 17,287 51,814 Share of results of associates ...... 3,226 5,043 8,269 Net share of other equity movements ...... - (560) (560) Amortisation of goodwill ...... (288) (1,725) (2,013)
Closing net amount ...... 127,867 116,593 244,460 VimpelCom Group In November , a company controlled by the Group purchased a %+ voting stock in OAO Vimpel-Communications and ZAO VimpelCom-Region (collectively referred to as VimpelCom Group) for a consideration of USD , thousand. The Group purchased ,, common shares (equivalent of ,, American Depositary Shares (“ADS”) at a purchase price of USD (original) . per share (USD (original) . per ADS) representing .% of common stock and convertible voting preferred
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
shares of OAO Vimpel-Communications. ZAO VimpelCom-Region has been fully consolidated in OAO Vimpel-Communications. A portion of the consideration payable for this investment of USD , thousand is to be paid to a third party in and an amount of the discount, USD , thousand, was recorded as a reduction in cost (Note ).
OAO Vimpel-Communications is one of the largest telecommunication companies in Russia. ZAO VimpelCom-Region was created as an operator for the purposes of regional development of the “Bee Line GSM” network. OAO Vimpel-Communications is the first Russian company which listed its shares on the NYSE through ADSs Level (the highest level).
Part of the common shares of OAO Vimpel-Communications are pledged as security for liabilities (Note ). Golden Telecom On April the Group entered into an agreement to purchase shares representing a .% interest in Golden Telecom, an internet and telecommunications provider, for USD , thousand. Purchase consideration in the amount of USD , thou- sand was paid on May and a further USD , thousand was paid on May .
Goodwill on acquisition is amortised over a period of years, which was determined by Management as the useful life of this partic- ular asset in accordance with the business plan forecast.
8. DUE FROM BANKS
Restated
Current Due in 1 month or less ...... 118,168 17,415 Due in 1-6 months ...... 2,295 3,198 Due in 6-12 months ...... - 2,076 Less: Provision for impairment of loans and advances (Note 20) ...... (630) (1,688)
119,833 21,001 Non-current Due in more than 12 months ...... 4,524 161 Less: Provision for impairment of loans and advances (Note 20) ...... - (3) 4,524 158
As at December balances due from banks amounting to USD , thousand (: nil) were of a restricted nature.
For information about the effective interest rates and currency analysis of amounts due from banks outstanding as at December , refer to Note .
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
9. LOANS AND ADVANCES TO CUSTOMERS
Restated
Current Due in 1 month or less ...... 149,673 222,420 Due in 1-6 months ...... 560,253 221,474 Due in 6-12 months ...... 497,172 391,648 Less: Provision for impairment of loans and advances (Note 20) ...... (90,368) (42,955)
1,116,730 792,587 Non-current Due in more than 12 months ...... 103,890 205,835 Less: Provision for impairment of loans and advances (Note 20) ...... (5,561) (33,719)
98,329 172,116
The Group has borrowers with aggregated loan amounts above USD , thousand. The aggregate amount of these loans is USD , thousand or % of the gross loan portfolio.
For information about the effective interest rates of loans and advances to customers outstanding as at December , refer to Note . Relevant information on related party loans is disclosed in Note .
Loans totalling USD , thousand (: USD , thousand) have been pledged to third parties as collateral (Note ).
Economic sector risk concentrations within the customer loan portfolio are as follows: Restated Amount % Amount %
Energy, oil and gas ...... 557,947 43 576,542 55 Manufacturing and construction ...... 368,856 28 171,912 17 Trade and commerce ...... 309,069 24 149,685 14 Agriculture ...... 12,253 1 59,543 6 Individuals ...... 3,880 - 11,977 1 Other ...... 58,983 4 71,718 7
Total loans and advances to customers (aggregate amount) ...... 1,310,988 100 1,041,377 100
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
10. TRADE AND OTHER ACCOUNTS RECEIVABLE
Restated
Trade receivables and advances to suppliers ...... 222,069 402,292 Other receivables on banking operations ...... 81,210 53,676 Receivables relating to securities transactions ...... 27,999 33,561 Taxes receivable ...... 27,021 27,033 Interest receivable ...... 10,229 9,157 Originated loans ...... 9,376 9,757 Other receivables and prepayments ...... 87,387 52, 831 Less: provision for impairment (Note 20) ...... (16,093) (37,900)
Total trade and other accounts receivable (net) ...... 449,198 550,407 Less non–current portion (net) ...... (4,382) (6,241) Current trade and other accounts receivable (net) ...... 444,816 544,166
Included in the above amount are receivables from related parties of USD , thousand (: USD , thousand). See Note .
11. INVENTORIES
Restated
Crude oil and Oil products ...... 52,550 74,244 Retail grocery ...... 11,031 7,900 Prepaid expenses ...... 8,929 - Metal ...... 8,327 - Spirits ...... 5,791 6,495 Other goods ...... 5,160 5,714 Tea ...... 2,725 2,724 Sugar ...... 999 5,814 Other ...... 4,713 2,826 Less: provision for obsolete and damaged inventory (Note 20) ...... (1,451) (1,171) 98,774 104,546
Prepaid expenses includes a payment of USD , thousand to the Ministry of Economic Development and Trade of the Russian Federation for the right to import thousand tons of raw cane sugar, which was imported in the first half of fiscal .
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
12. TRADING SECURITIES
Restated
Russian Federation Eurobonds and Corporate Eurobonds ...... 72,818 64,198 Corporate bonds ...... 29,401 - Bills of exchange of Russian banks and enterprises ...... 22,339 13,035 Corporate shares ...... 20,645 17,823 Other securities ...... 7,572 7,718 VneshEconomBank 3% coupon bonds (VEB) ...... 3,790 - Federal Loan Bonds (OFZ) ...... 108 26,263 Local government bonds ...... - 5,054
156,673 134,091
Russian Federation Eurobonds are securities issued by the Ministry of Finance of the Russian Federation and are freely tradable internationally. The Bank’s portfolio of Russian Federation Eurobonds consists of tranches with maturity dates ranging from to . The annual coupon rates on these bonds range from % to %, and interest is payable semi-annually.
Corporate Eurobonds are interest bearing securities denominated in USD and issued by large Russian companies and are freely tradable internationally. The annual coupon rates on these bonds range from % to %, yields to maturity of % to % and maturity dates range from through .
Corporate bonds are interest bearing securities denominated in Russian Roubles, are issued by large Russian companies and are freely tradable in the Russian Federation. The bonds have maturity dates ranging from to and yields to maturity of % to %. The annual coupon rates of these bonds range from % to %.
Bills of exchange are interest bearing securities denominated in Russian Roubles, issued by large Russian companies, and are freely tradable in the Russian Federation. They have maturity dates from January to April and yields to maturity from % to %. The annual coupon rates range from % to %.
Corporate shares are shares of Russian and Ukrainian companies.
Corporate Eurobonds with a fair value of USD , thousand (: nil) have been pledged to third parties as collateral with respect to term placements of other banks.
Alfa Bank is licensed by the CBRF as a primary dealer at MICEX for dealing and trading in government securities.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
13. CASH AND CASH EQUIVALENTS
Restated
Cash in hand and in bank current, correspondent and deposit accounts ...... 351,100 468,308 Cash and balances with Central Bank of the Russian Federation ...... 350,673 206,363 Other liquid assets ...... 7,909 3,270 709,682 677,941 Less: mandatory reserves with CBRF ...... (142,053) (99,014)
Net cash and cash equivalents ...... 567,629 578,927
The balances with the Central Bank of the Russian Federation include USD , thousand (: USD , thousand) of mandatory reserves for Alfa Bank. These amounts have been excluded from cash and cash equivalents in the consolidated state- ment of cash flows.
Included in the amounts above are USD , thousand (: USD , thousand) of cash held as collateral and not avail- able for use by the Group.
Interest rates on cash and cash equivalents are disclosed in Note .
14. SHARE CAPITAL AND SHARE PREMIUM
The authorised, issued and fully paid share capital of CTF Holdings Limited consists of , ordinary shares of GBP . each.
In accordance with the statutes of CTF Holdings Limited, the share premium represents GBP (USD .) for each of the , new shares issued in .
The carrying value of issued share capital and share premium, after giving effect to IAS , are USD , thousand and USD , thousand, respectively.
In the Group declared dividends of USD , thousand (: USD , thousand).
As at December certain members of Management of the Group are the holders of call options which expire on January and October . Under the terms of the call option agreements, the holders may purchase .% and .% of the outstanding shares of Alfa Finance Holdings S.A. for USD , thousand and USD , thousand, respectively. At the same time the members of Management are also holders of put options which expire on January (.%) and January (.%). Under the terms of the put option agreements, the holders may require Alfa Finance Holdings S.A. to repurchase .% of Alfa Finance Holdings S.A. shares acquired by exercising the aforementioned call options for a consideration equal to % of the pro-rata amount of the audited consolidated shareholders’ equity of Alfa Finance Holdings S.A. as at December .
For the call option covered by corresponding put options the estimated difference between the price of the call option and the proceeds to be received under the put option has been treated as compensation expense and is included in the consolidated state- ment of income within general and administrative expenses (refer to Note ).
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
In addition, as at December a member of Management of the Group is the holder of a call option which was issued in December and which expires on December . Under the terms of the option agreement, the holder may purchase such a number of the outstanding shares of Alfa Finance Holdings S.A. which when valued on the basis of the audited consolidated shareholders’ equity of Alfa Finance Holdings S.A. as at December would be equal to % of the audited consolidated share- holders’ equity of TNK Industrial Holdings Limited as at December . The purchase price per share is to be based upon the audited consolidated shareholders’ equity of Alfa Finance Holdings S.A. as at December .
For the call options above that are not covered by put options, there has been no charge to the consolidated statement of income.
15. BORROWINGS
Restated
Bills of exchange ...... 439,396 325,002 Loans from financial institutions ...... 212,710 313,846 Loans from non-financial institutions ...... 11,887 842 Other borrowings ...... 52,640 81,198
Total borrowings ...... 716,633 720,888 Less non-current portion ...... (66,511) (78,551)
Total current borrowings ...... 650,122 642,337
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
The principal borrowings for particular business segments at December are: Restated Financial Services Bills of exchange ...... 429,408 322,282 Loan and promissory notes owed to the Agency for Restructuring of Credit Organisations ...... 30,571 39,422 US Commercial Paper ...... 20,644 32,156 Sale and repurchase agreements ...... - 7,216
International Commodities Short-term borrowings ...... 107,017 230,298 Bank overdraft ...... 53,505 43,306
Russia, CIS and Southeast Asia Commodities Loans from financial institutions ...... 15,530 - Loans from non-financial institutions ...... 11,838 - Bills of exchange ...... 9,988 2,720 Finance lease liability ...... 1,095 -
Retail Trade Loan from IFI ...... 32,766 38,937 Moscow government loan ...... 39 288
Oil and Gas Loans ...... - 2,346
Other segments borrowings Other borrowings ...... 4,232 1,917
716,633 720,888 Financial Services Bills of exchange of USD , thousand (: USD , thousand) represent borrowings by Alfa Bank. The weighted average interest rate on bills of exchange outstanding at December was .% on Russian Rouble notes and .% on bills of exchange issued in foreign currency.
In , Alfa Bank obtained financing from the Agency for Restructuring of Credit Organisations (“ARKO”). The total amount outstanding as at December was USD , thousand (: USD , thousand). The loan bears a nominal annual interest rate of % of the financing rate set by the CBRF. Initially, the loan was due to mature during the second half of the . During , the loan was rescheduled on the same terms and currently is to be repaid by September . With respect to the loan as at December , Alfa Bank pledged customer loans with a total nominal amount of USD , thousand, invest- ments available for sale with a fair value of USD , thousand (: USD , thousand) and property, plant and equipment with a carrying value of USD , thousand (: USD , thousand) as collateral (Notes , and ).
Also, % of Alfa Bank’s shares were pledged as collateral which gave ARKO voting rights, but not an economic interest in Alfa Bank. No minority interest is included in Note in respect of these shares.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Alfa Bank obtained a term loan in the form of US Commercial Paper Notes in the amount of USD , thousand with a matu- rity date of October . Alfa Bank was unable to comply with its obligation to reimburse the issuing banks in a timely manner. In July , Alfa Bank and the issuing banks signed a Reimbursement Agreement whereby Alfa Bank paid USD , thousand of principal and USD , thousand of accrued interest on the date of signing the Reimbursement Agreement. The remaining principal amount is to be paid via scheduled repayments until December . The first repayment took place on September .
In addition, from the date of the Reimbursement Agreement until December , Alfa Bank capitalised additional accrued interest. From January , interest is to be paid on a quarterly basis at a rate of LIBOR plus .%. As at December , the outstanding principal balance of US Commercial Paper Notes was USD , thousand (: USD , thousand) and capi- talised interest amounted to USD , thousand (: USD , thousand).
During , the Alfa Bank Group purchased USD , thousand carrying value of its US Commercial Paper Notes for a consid- eration of USD , thousand. As Alfa Bank has the intention to retire this portion of the US Commercial Paper Notes, Alfa Bank has recognised a gain of USD , thousand as at December , which is reflected in gains on debt transactions.
During Alfa Bank purchased certain of its Euro Medium Term Notes which has been accounted for as a retirement of debt with a gain of USD thousand during also included within gains on debt transactions. International Commodities As at December , Crown Resources had facilities of USD ,, thousand (: USD ,, thousand) with major western banks, which can be used in either the form of letters of credit, guarantees or pre-financing loans for the purchase of crude oil, oil products and sugar. The facilities require Crown Resources to provide appropriate security as and when they are used. Security is provided in the form of various liquid assets of Crown Resources. USD , thousand (: USD , thousand) of the facilities were used at December by way of bank credit as noted above and letters of credit issued (Note ). Interest rates on these borrowings are from LIBOR plus .% to plus .% (: LIBOR plus .% to plus .%). Russia, CIS and Southeast Asia Commodities Loans from financial institutions are denominated in USD are secured by provisions of the rights on export of crude oil to Crown Resources in accordance with an agreement and rights on purchase of crude oil from ZAO Petrosakh. The loans bear interest LIBOR plus % per annum.
Loans from non-financial institutions are denominated in USD, unsecured and bear interest at rates from % to %.
Bills of exchange were issued by the Alfa Eco Group pursuant to a program to raise funds for operational purposes. The notes are unsecured, Russian Rouble denominated, and bear interest at the rate of % to % per annum and mature in to months. Retail Trade An International Financing Institution (“IFI”) holds a fixed charge over certain property, plant and equipment of Perekriostok as a security over a loan facility provided to Perekriostok. The net book value of property, plant and equipment, over which the secu- rity is held, is USD , thousand (: USD , thousand). As at December , the amount of the loan outstanding is USD , thousand (: USD , thousand). The IFI loan carries an interest rate of LIBOR plus %.
In August , Perekriostok signed an agreement to restructure the loan with the IFI following default on the loan repayment in April . Under the agreement, the loan repayment has been extended to January . Perekriostok is required to extend the period for security provided to conform to the extended loan term. As at the date of this report Perekriostok has not completed
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
extension of certain security and is accordingly in a technical default of the IFI loan agreement. The IFI has confirmed that they will not initiate a default as long as Perekriostok complies with all other terms and conditions of the IFI loan agreement.
Restated
Maturity of non-current borrowings 2002 ...... - 21,363 2003 ...... 42,580 24,743 2004 ...... 8,414 9,355 2005 ...... 8,289 9,216 2006 ...... 7,228 8,294 Thereafter ...... - 5,580 Total non-current borrowings ...... 66,511 78,551
16. AMOUNTS OWED TO DEPOSITORS
Restated
Demand deposits ...... 1,067,799 767,749 Due in 1-6 months ...... 196,270 71,749 Due in 6-12 months ...... 53,056 36,888 Due in more than 12 months ...... 3,852 45,752
Total amount owed to depositors ...... 1,320,977 922,138 Less non-current portion ...... (3,852) (45,752) Total amount owed to depositors – current portion ...... 1,317,125 876,386
For information about the effective rates and currency analysis of amounts owed to depositors outstanding at December , refer to Note . Refer to Note for information on related parties.
Included in amounts owed to depositors are deposits of USD , thousand (: USD , thousand) held as collateral for irrevocable commitments under import letters of credit and deposits of USD thousand (: nil) held as collateral for irrev- ocable commitments under export letters of credit (Note ).
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Economic sector concentrations within amounts owed to depositors are as follows: Restated
Amount % Amount %
Individuals ...... 484,559 37 200,004 22 Energy, oil and gas ...... 271,405 21 208,864 23 Manufacturing and construction ...... 183,576 14 148,228 16 Finance and investment companies ...... 143,437 11 132,033 14 Government bodies and municipals ...... 67,183 5 45,665 5 Trade and commerce ...... 46,736 3 141,818 15 Agriculture ...... 23,292 2 6,956 1 Other ...... 100,789 7 38,570 4
1,320,977 100 922,138 100
17. DUE TO BANKS
Restated
Demand deposits ...... 293,119 167,340 Due in 1-6 months ...... 6,185 9,944 Due in 6-12 months ...... 31,392 71 Due in more than12 months ...... 9,581 3,806 Total due to banks ...... 340,277 181,161 Less non-current portion ...... (9,581) (3,806)
Total due to banks – current portion ...... 330,696 177,355
For information about the effective interest rates and currency analysis of amounts due to banks outstanding at December , refer to Note .
18. PROVISIONS
Restated
Obligations under derivative financial instruments (Note 32) ...... - 36,765 Provision for credit related commitments (Note 32) ...... 3,937 9,929 Other provisions ...... 19,800 20,880
23,737 67,574
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
19. INCOME TAX
Restated
Current tax charge ...... 9,915 8,742 Withholding tax on dividends ...... - 6,422 Deferred taxation movement due to: • Origination and reversal of temporary differences ...... (11,748) 9,145 • Effect of (reduction)/increase in tax rate ...... (59,309) 13,144
Income tax (credit)/charge ...... (61,142) 37,453
Net profit before taxation for financial reporting purposes is reconciled to tax expense as follows: Restated
Profit before taxation ...... 900,512 1,271,397
Theoretical tax at applicable statutory rate ...... 58,208 92,384 Tax effect of items which are not deductible or assessable for taxation purposes: • Income taxed at different tax rates ...... (14,047) (27,990) • Statutory tax concessions ...... (38,033) (84,499) • Non-deductible expenses ...... 37,713 70,496 • Movement in loss carry forward ...... 3,325 2,558 • Non-temporary elements of monetary loss ...... (5,766) (1,681) • Inflation effect on deferred tax balance at the beginning of year ...... (16,005) (5,983) Effect of change in statutory tax rate on deferred tax balances ...... (59,309) 12,567 Non-recognized net deferred tax asset movement ...... (4,728) (6,608) Withholding tax on dividends ...... - 6,422 Other IAS adjustments that have a non-temporary nature ...... (22,500) (20,213)
Income tax (credit)/charge for the year ...... (61,142) 37,453 Deferred income tax Differences between IAS and statutory taxation and reporting regulations give rise to certain temporary differences between the carrying value of certain assets and liabilities for financial reporting purposes and for income tax purposes.
An analysis of the temporary differences and calculations of deferred income tax was performed individually for each company included in the consolidated financial statements. To determine the tax effect, tax rates effective on the date of the financial state- ments were used, taking into consideration the type of activity and each company’s status (% for trading activity; % for agency activities; % for banking activities; and %-% for oil and gas sector and other offshore companies). For companies engaged in several types of activities, the tax was calculated on the basis of the main type of activities. Thus, the theoretical tax at the applicable statutory rates calculated above is an aggregation of the aforementioned tax rate. The difference between the tax charge calculated at the standard profit tax rate for main activities and the weighted average rate is shown as “Income taxed at different tax rates” in the reconciliation above.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
A % income tax rate has been enacted in August for trading, agency and banking activities, which becomes effective starting from January . As this tax rate was not enacted or substantively enacted at December , the effect of the change in tax rate on net deferred tax liabilities is recognised in these consolidated financial statements for the year ended December .
In the consolidated balance sheet, deferred tax assets and deferred tax liabilities are disclosed on a net basis (deferred tax assets are offset against deferred tax liabilities of the same taxable entities). As the Group does not have a legally enforceable right to set- off current tax assets against current tax liabilities, deferred tax assets and deferred tax liabilities relating to income taxes levied by the same taxation authorities are presented separately in this note.
Tax losses can generally be used to offset future taxable profits over the subsequent years. The maximum offset in any one year is limited to % of the total taxable profit of the year. Based on Management’s estimates, tax losses have been recognised to the extent they will reverse against the temporary deferred tax liabilities.
At December , a net deferred tax asset in the amount of USD thousand (: USD , thousand) was not recorded as Management believed it was not probable that sufficient taxable profit would be available to allow the benefit of the deferred tax asset to be utilised.
Investments available for sale are held and disposed of, primarily by consolidated subsidiaries of the Group operating in tax-free jurisdictions. Therefore, the net fair value gains arising on investments available for sale recognised directly in the consolidated statement of changes in shareholders' equity had no impact on the deferred tax position of the Group.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Deferred tax assets and liabilities and the deferred tax credit in the consolidated statement of income are attributable to the following items:
December Effect December Effect of changes of changes December (Restated) Movement in tax rate (Restated) Acquisition Movement in tax rate
Tax effect of future tax deductible items:
Investments available for sale ...... -----684(215) 469 Accounts payable ...... 15,825 (15,642) 30 213 - 1,664 (590) 1,287 Accounts receivable (net) ...... 12,282 (6,118) 1,027 7,191 - (4,186) (945) 2,060 Property, plant and equipment ...... 7,577 (1,332) 1,041 7,286 - 3,736 (4,854) 6,168 Inventory ...... 666 (585) 14 95 - 1,441 (483) 1,053 Taxable losses carried forward from prior year ...... 13,442 (2,575) 1,811 12,678 - (3,325) (3,627) 5,726 Other ...... 1,600 6,606 1,368 9,574 - 2,214 (5,182) 6,606 Total deferred tax asset ...... 51,392 (19,646) 5,291 37,037 - 2,228 (15,896) 23,369 Less non-recognised deferred tax asset ...... (10,771) 6,608 (694) (4,857) - 4,728 41 (88)
Net deferred tax asset ...... 40,621 (13,038) 4,597 32,180 - 6,956 (15,855) 23,281
Tax effect of future tax liability items:
Accounts payable ...... (288) (155) (74) (517) - (1,975) 783 (1,709) Accounts receivable (net) ...... (39,793) 19,676 (3,734) (23,851) - 4,420 8,268 (11,163) Property, plant and equipment ...... (28,886) (1,207) (3,899) (33,992) - (10,916) 17,045 (27,863) Inventories ...... (478) (63) (90) (631) - (319) 299 (651) Investments available for sale ...... - (1,377) (229) (1,606) - 1,416 60 (130) Investment in joint ventures ...... (27,417) (8,673) (8,578) (44,668) - - 44,668 - Gain from fair value adjustments ...... -----(28) 9 (19) Other ...... (2,515) (4,308) (1,137) (7,960) - (2,287) 4,032 (6,215) Gross deferred tax liability ...... (99,377) 3,893 (17,741) (113,225) - (9,689) 75,164 (47,750) Net deferred tax payable on subsidiaries acquired/ disposed ...... ----(14,481) 14,481 - -
Deferred tax liability (net) ...... (58,756) (9,145) (13,144) (81,045) (14,481) 11,748 59,309 (24,469) ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
20. PROVISION MOVEMENTS
Investments Provision Doubtful available on loans and debt provision Provision for for sale – advances on account impairment of Provision impairment to customers receivables and Inventory property, plant for index Other provision and banks originated loans provision and equipment forwards provisions Total (Note ) (Note ,) (Note ) (Note ) (Note ) (Note , ) (Note ) provisions
Balance at 31.12.99 (Restated) ...... 60,699 59,192 98,403 6,018 - 38,345 26,461 289,118
Provisions created in the year ...... 12,160 34,338 13,150 274 1,683 - 10,000 71,605 Provisions released in the year ...... - - (43,689) (532) - - (969) (45,190) Net effect on financial result ...... 12,160 34,338 (30,539) (258) 1,683 - 9,031 26,415
Effect of inflation and translation ...... 93 - (31) 100 - (1,580) - (1,418)
Use of provisions in the year ...... (12,511) (15,165) (29,933) (4,689) (1,683) - (4,683) (68,664)
Balance at 31.12.00 ...... 60,441 78,365 37,900 1,171 - 36,765 30,809 245,451
Provisions created in the year ...... 1,840 30,647 7,612 897 1,176 - - 42,172 Provisions released in the year ...... - (801) (2,164) (536) - (31,294) (4,420) (39,215) Net effect on financial result ...... 1,840 29,846 5,448 361 1,176 (31,294) (4,420) 2,957
Effect of inflation and translation ...... (270) (11,084) (5,947) 127 - (5,471) (2,652) (25,297)
Use of provisions in the year ...... (61,942) (568) (21,308) (208)---(84,026)
Balance at 31.12.01 ...... 69 96,559 16,093 1,451 1,176 - 23,737 139,085 ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
21. GOODWILL
Restated
Negative goodwill At 1 January ...... 903 3,920 Arising from acquisition/ disposal of subsidiaries ...... 546 (1,704) Change in percentage of ownership ...... 5,853 - Amortisation ...... (1,567) (1,313)
At 31 December ...... 5,735 903
Positive goodwill At 1 January ...... 386 1,559 Arising from acquisition/ disposal of subsidiaries (Note 28) ...... 6,028 (783) Change in percentage of ownership ...... (363) - Amortisation ...... (929) (390)
At 31 December ...... 5,122 386
22 ACCOUNTS PAYABLE
Restated
Trade payables and advances from customers ...... 145,527 364,558 Accrued compensation expense ...... 160,568 91,875 Accounts payable relating to securities transactions ...... 34,955 38,902 Amounts owed to customers ...... 34,883 74,878 Other taxes ...... 13,661 15,281 Settlements on foreign operations ...... 8,782 7,021 Accrued interest expense ...... 2,216 10,927 Deferred income ...... 807 1,758 Other payables and accrued expenses ...... 125,189 139,717 Total accounts payable ...... 526,588 744,917
Less non-current portion ...... (17,531) (42,401)
Total accounts payable – current portion ...... 509,057 702,516
Included in the above amount are payables to related parties amounting to USD , thousand (: USD , thousand) (Note ).
Included in non-current accounts payable is an amount of USD , thousand representing part of the consideration paid for the acquisition of shares in OAO Vimpel-Communications, payable to a third party. The amount is denominated in USD, secured by . million of common shares of OAO Vimpel-Communications, non interest bearing and is payable not earlier than . The
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
amortised cost of this payable is based on discounted cash flows using an effective discount rate of %. The amount of the discount, USD , thousand, was recorded as a reduction in the corresponding asset – investments in OAO Vimpel- Communications (Note ).
23. NET INTEREST, FEES AND OTHER INCOME ON BANKING ACTIVITIES
Restated
Interest income ...... 199,295 109,684 Interest expense ...... (99,901) (79,284) Net interest income ...... 99,394 30,400
Fee and commission income ...... 177,379 66,656 Fee and commission expense ...... (29,636) (22,211) Net fees and commission income ...... 147,743 44,445
Net gains from dealing in foreign currency ...... 4,065 4,034 Net gains from dealing in precious metals ...... 648 8,370 Other operating income on banking activities (net) ...... 45,034 3,216
Net interest, fees and other income on banking activities ...... 296,884 90,465
Refer to Note for relevant information on related party amounts.
24. GENERAL AND ADMINISTRATIVE EXPENSES
Restated
Staff costs ...... 265,110 222,307 Rent and utilities ...... 35,403 27,254 Telecommunication ...... 25,257 13,090 Consulting, legal and other professional services ...... 24,702 11,559 Depreciation ...... 16,643 12,554 Taxes ...... 13,254 21,098 Other operating expenses (net) ...... 58,241 24,980
438,610 332,842
The average number of employees employed by the Group during the year was , (: ,). Included in staff costs are amounts accrued in relation to employee stock based compensation plans (Notes , ). Further depreciation charges in the amount of USD , thousand (: , thousand) are included in the consolidated statement of income within cost of sales.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
25. INTEREST EXPENSE (NET)
Restated
Interest income ...... 22,672 21,327 Interest expense ...... (32,500) (30,936)
(9,828) (9,609)
These amounts relate to non-banking activities.
26. MINORITY INTERESTS
Restated
At 1 January ...... 196,584 23,842 Effect of restructuring, subsidiaries disposal and change in percentage ownership ...... 10,412 (8,878) Arising on consolidation ...... 8,645 1,707 Minority interest applicable to net share of other equity movements of joint ventures and associates ...... (1,268) 7,021 Minority interest applicable to fair value reserve ...... 7,257 - Share of net profit for the year ...... 164,602 172,892
At 31 December ...... 386,232 196,584
27. MOVEMENTS IN WORKING CAPITAL BALANCES
Movements in working capital balances comprise:
Restated
Increase in loans and advances to customers and banks ...... (383,400) (594,134) Decrease in receivables ...... 114,597 93,875 Decrease/(increase) in inventories ...... 10,887 (77,404) Increase in securities ...... (22,582) (64,781) Increase in amounts owed to depositors ...... 557,955 311,941 (Decrease)/increase in payables ...... (250,974) 143,391
26,483 (187,112)
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
28. ACQUISITIONS/FORMATION AND DISPOSAL OF SUBSIDIARIES
Petrosakh In August , the Group acquired a % interest in Nimir Petroleum Petrosakh Limited, which owns % of ZAO Petrosakh for a consideration of USD , thousand. Subsequently, through negotiations, total consideration was reduced to USD , thousand. In , this investment was accounted for as a short-term investment available for sale (Note ). In , Management’s intentions with respect to this investment changed due to improved business opportunities. Accordingly, the results of the company are consolidated in the Group’s consolidated financial statements. The Group has also recognised in its consoli- dated financial statements the profits of the company acquired in the amount of USD , thousand for the period from September to December and the respective goodwill which was calculated as a difference between the acquisition cost and the fair value of net assets acquired. Goodwill is amortised over a period of years, which has been determined by Management as the useful life of this asset.
As a result of this acquisition USD , thousand of revenues and USD , thousand of net profits are recognised in the consol- idated financial statements for the period from September to December . As at December , assets and liabil- ities of the company acquired amounted to USD , thousand and USD , thousand, respectively.
Details of net assets acquired and goodwill are as follows:
Total purchase consideration ...... 20,062 Fair value of assets and liabilities at acquisition date ...... (17,063)
Goodwill (Note 21) ...... 2,999
The assets and liabilities arising from the acquisition are as follows:
Cash and cash equivalents ...... 246 Property, plant and equipment ...... 32,138 Inventories ...... 4,194 Receivables ...... 10,323 Payables ...... (3,352) Borrowings ...... (13,369) Net deferred tax liability ...... (7,951) Fair value of net assets acquired ...... 22,229
Effect of consolidation of non-consolidated subsidiary ...... (5,166) Goodwill ...... 2,999 Total purchase consideration ...... 20,062
Less: Cash and cash equivalents in subsidiary acquired ...... (246)
Cash outflow on acquisition ...... 19,816
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Intec Holdings Limited With effect from January , the Group acquired the sugar and grain business of Intec Holdings Limited (“Intec”) and combined it with the Group’s existing sugar business under a new holding company “AC United Food Company” (“UFC”). Through a share reorganization, % of the share capital of UFC was given as consideration for the assets and business of Intec. Under a separate share purchase agreement CTF Holdings purchased % of Intec Holdings Ltd. Shares in UFC leaving Intec Holdings with % + share.
Details of the net assets acquired and the goodwill are as follows:
Purchase consideration: Fair value of shares issued ...... 16,505 Fair value of net assets acquired ...... (13,476)
Goodwill (Note 21) ...... 3,029
As at December , assets and liabilities of the companies acquired amounted to USD , thousand and USD , thou- sand, respectively.
The assets and liabilities arising from the acquisition are as follows:
Cash and cash equivalents ...... 136 Property, plant and equipment ...... 22,788 Other long-term and short-term investments ...... 27 Inventories (net) ...... 873 Accounts receivable ...... 1,969 Borrowings ...... (12,317)
Fair value of net assets acquired ...... 13,476 Goodwill ...... 3,029 Purchase consideration ...... 16,505
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
29. ANALYSIS BY SEGMENT
Analysis by business segment (primary) Russia, CIS and South- Interna- east Asia Financial tional Com- Commo- Retail Food Telecom- Elimi- Consoli- Year ended December Services modities dities Trade Processing Oil & Gas munication Other nations dated SEGMENT REVENUE: - external sales ...... - 2,956,160 149,047 217,189 53,150 ----3,375,546 - inter-segment sales ...... - 212 30,000 ----630(30,842) - Total sales ...... - 2,956,372 179,047 217,189 53,150 - - 630 (30,842) 3,375,546
SEGMENT COSTS: Cost of goods sold ...... - (2,932,470) (137,606) (159,028) (50,149)---30,657 (3,248,596)
SEGMENT GROSS PROFIT: ...... -23,902 41,441 58,161 3,001 - - 630 (185) 126,950
Commission income received on trading operations - external ...... - - 10,487 ------10,487 - inter-segment ...... - - 5,127 -----(5,127) -
Net gain from dealing in foreign currencies ...... 4,065 ------4,065 Interest, commissions received on banking activities - external ...... 444,280 ------444,280 - inter-segment ...... 20,644 ------(20,644) - Interest, commissions paid on banking activities ...... (152,150) ------689(151,461) Net interest, fees and other income received on banking activities ...... 316,839 ------(19,955) 296,884 Income from trading securities and investment transactions ...... 25,228 - 39,328 - 1 - - 426 21,964 86,947 Provisions on operating items ...... 1,347 (158) (3,572) 19 (593) ----(2,957) Operating expenses ...... (317,391) (46,429) (63,829) (41,538) (13,892) - - (5,341) 16,199 (472,221)
OPERATING INCOME/(LOSS) ...... 26,023 (22,685) 28,982 16,642 (11,483) - - (4,285) 12,896 46,090 ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Russia, CIS and South- Interna- east Asia Financial tional Com- Commo- Retail Food Telecom- Elimi- Consoli- Year ended December Services modities dities Trade Processing Oil & Gas munication Other nations dated
Share of result of joint venture and associates (net) ...... - - 20,760 - - 783,201 6,256 - - 810,217 Interest expense (net) ...... (7,626) (4,047) (7,919) (3,533) (1,138) - - 6,914 7,521 (9,828) Net foreign exchange translation and monetary gain/(loss) ...... 53,340 (425) (2,571) 4,511 2,158 - - (822) 126 56,317 Other income / (expense) (net) ...... - (21) 688 5,000 1,151 - - 19,853 (28,955) (2,284) Net profit/(loss) before income tax ...... 71,737 (27,178) 39,940 22,620 (9,312) 783,201 6,256 21,660 (8,412) 900,512 Income tax credit/(charge) ...... 5,011 (1,163) 3,594 2,163 6,869 44,668 - - - 61,142 Net profit/(loss) after income tax ...... 76,748 (28,341) 43,534 24,783 (2,443) 827,869 6,256 21,660 (8,412) 961,654 Minority interest ...... (13,092) - - (3,519) 1,349 (148,722) (618) - - (164,602) Net profit/(loss) ...... 63,656 (28,341) 43,534 21,264 (1,094) 679,147 5,638 21,660 (8,412) 797,052
OTHER INFORMATION Segment assets ...... 2,592,886 368,928 135,190 116,799 122,522 - - 236,839 (381,139) 3,192,025 Investment in joint ventures and associates ...... - - 48,730 - - 1,611,632 244,460 - (7,170) 1,897,652 Unallocated Group's assets ...... - - 2,698 - 1,877 - - - (5,187) (612)
Consolidated total assets ...... 2,592,886 368,928 186,618 116,799 124,399 1,611,632 244,460 236,839 (393,496) 5,089,065
Segment liabilities ...... 2,452,194 320,630 198,804 57,839 54,428 - - 3,987 (127,098) 2,960,784 Unallocated Group's liabilities ...... ------
Consolidated total liabilities ...... 2,452,194 320,630 198,804 57,839 54,428 - - 3,987 (127,098) 2,960,784
Capital expenditure ...... 34,569 3,395 2,520 9,682 1,730 - - 63 - 51,959 Depreciation ...... (10,058) (1,262) (10,458) (4,343) (10,239) - - (65) - (36,425) Non-cash expenses other than depreciation (Provisions – net effect) ...... 1,347 (158) (3,572) 19 (593) ----(2,957) ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Russia, CIS and South- Interna- east Asia Year ended December Financial tional Com- Commo- Retail Food Real Elimi- Consoli- Restated Services modities dities Trade Processing Oil & Gas Estate Other nations dated
SEGMENT REVENUE: - external sales ...... - 5,278,592 239,554 148,176 75,326 - 5,596 - (5) 5,747,239 - inter-segment sales ...... - 16,365 82,661 - 1,077 - - - (100,103) - Total sales ...... - 5,294,957 322,215 148,176 76,403 - 5,596 - (100,108) 5,747,239
SEGMENT COSTS: Cost of goods sold ...... - (5,177,955) (266,595) (110,209) (56,474) - (3,075) - 102,209 (5,512,099)
SEGMENT GROSS PROFIT: ...... - 117,002 55,620 37,967 19,929 - 2,521 - 2,101 235,140
Commission income received on trading operations - external ...... - - 31,106 - 201 ----31,307 - inter-segment ...... - - 10,194 -----(10,194) -
Net gain /(loss) from dealing in foreign currencies ...... 7,237 - - - - (481) - - (2,721) 4,035 Interest, commissions and other income received on banking activities - external ...... 204,028 - - - - 11,415 - - - 215,443 - inter-segment ...... 11,266 ------(11,266) - Interest, commissions paid on banking activities ...... (112,563) - ---(18,426) - - 1,976 (129,013) Net interest, fees and other income received on banking activities ...... 109,968 - - - - (7,492) - - (12,011) 90,465 Income/(loss) from trading securities and investment transactions ...... 72,889 - 34,230 78 (333) (1,961) (11) (13,829) 7,246 98,309 Provisions on operating items ...... (34,858) (11,032) 20,454 62 589 (6,217) (130) - 4,717 (26,415) Operating expenses ...... (155,377) (31,469) (81,774) (28,644) (16,059) 17,839 (3,632) (8,394) (60,401) (367,911)
OPERATING INCOME/(LOSS) ...... (7,378) 74,501 69,830 9,463 4,327 2,169 (1,252) (22,223) (68,542) 60,895 ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Russia, CIS and South- Interna- east Asia Year ended December Financial tional Com- Commo- Retail Food Real Elimi- Consoli- Restated Services modities dities Trade Processing Oil & Gas Estate Other nations dated
Share of result of joint venture (net) ...... - ----1,083,239---1,083,239 Gain on debt transactions ...... 15,481 ------15,481 Interest expense (net) ...... (7,617) 304 1,162 (5,316) (953) - (85) 4,555 (1,659) (9,609) Net foreign exchange translation and monetary gain/(loss) ...... 87,135 (540) (1,576) 7,180 (1,815) 18,577 (11,246) (33) 26,763 124,445 Other income / (expense) (net) ...... - (554) (80) (2,258) 4,169 1,059 221 4,705 (10,316) (3,054) Net profit/(loss) before income tax ...... 87,621 73,711 69,336 9,069 5,728 1,105,044 (12,362) (12,996) (53,754) 1,271,397 Income tax charge ...... (1,848) (2,205) (208) (2,661) (1,813) (28,428) (290) - - (37,453) Net profit/(loss) after income tax ...... 85,773 71,506 69,128 6,408 3,915 1,076,616 (12,652) (12,996) (53,754) 1,233,944 Minority interest ...... (12,820) - - - - (160,920) - - 848 (172,892) Net profit/(loss) ...... 72,953 71,506 69,128 6,408 3,915 915,696 (12,652) (12,996) (52,906) 1,061,052
OTHER INFORMATION Segment assets ...... 2,102,658 660,663 233,275 97,529 76,252 36,399 36,849 347,182 (806,045) 2,784,762 Investment in joint ventures ...... - - – - - 1,069,187 - - - 1,069,187 Unallocated Group's assets ...... ------(517) (517)
Consolidated total assets ...... 2,102,658 660,663 233,275 97,529 76,252 1,105,586 36,849 347,182 (806,562) 3,853,432
Segment liabilities ...... 2,145,571 584,025 168,680 68,398 31,483 38,543 40,582 15,307 (366,448) 2,726,141 Unallocated Group's liabilities ...... ------
Consolidated total liabilities ...... 2,145,571 584,025 168,680 68,398 31,483 38,543 40,582 15,307 (366,448) 2,726,141
Capital expenditure ...... 49,817 4,020 1,241 5,420 5,897 - 262 80 - 66,737 Depreciation ...... (7,540) (209) (812) (3,498) (3,420) - (24) (177) - (15,680) Non-cash expenses other than depreciation (Provisions – net effect) ...... (34,858) (11,032) 20,454 62 589 (6,217) (130) - 4,717 (26,415) ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Analysis by geographical segment The majority of the Group’s assets are located in the Russian Federation. However, % of total revenue, mainly related to the inter- national commodities business, is located outside the Russian Federation. Revenue can be broken down as follows: The Netherlands ...... 847,201 Germany ...... 752,798 Russian Federation ...... 532,062 Italy ...... 350,561 Baltic Sea countries ...... 261,618 Other countries of EU ...... 161,184 South-East Asia ...... 149,350 Other regions ...... 133,566 The rest of Europe ...... 76,190 Ukraine ...... 56,302 Other Eastern European countries ...... 34,948 USA ...... 19,766
3,375,546
30. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price.
The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to deter- mine the estimated fair value. As described in more detail in Note , the Russian Federation has shown signs of an emerging market and has experienced a significant decline in the volume of activity in its financial markets. While Management has used available market information in estimating the fair value of financial instruments, the market information may not be fully reflec- tive of the value that could be realised in the current circumstances.
Management has estimated that the fair value of certain balance sheet instruments is not materially different than their recorded values. These balance sheet instruments include cash, nostros and term deposits, placements with banks and other financial insti- tutions, trading securities, investments available for sale, loans and advances to customers, due from and due to banks, trade and other accounts receivable, deposits from customers, bills of exchange, and other short-term assets and liabilities which are of a contractual nature. Management believes that the carrying amount of these particular financial assets and liabilities approximates their fair value; partially due to the fact that it is practice to renegotiate interest rates to reflect current market conditions (refer to Note ). The fair value of derivative contracts is shown in Note .
As set out in Note , external independent market quotations were not available for certain investments available for sale. The fair values of these assets were determined by Management on the basis of current negotiations for disposal of these investments to third parties, results of recent sales of equity interest in the investees between unrelated third parties, consideration of other relevant factors such as discounted cash flows and financial information of the investees and application of other valuation methodologies.
The fair values of investments in joint ventures and associated companies, share capital, premises and equipment, and other assets and liabilities which are not of a contractual nature are not calculated as they are not considered financial instruments under IAS , “Financial Instruments: Disclosure and Presentation”.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
31. RISK MANAGEMENT Financial risk factors. The Group's activities expose it to a variety of financial risks including changes in market prices for financial instruments, fluctuations in interest rates, fluctuating exchange rates, and credit risk. The Group's companies’ individual risk management programmes focus on the unpredictable nature of financial markets and seek to minimise potential adverse effects on financial performance. Certain of the Group's companies use financial instruments, derivatives and other means to economically hedge certain exposures.
Interest rate risk. The Group is exposed to interest rate price risk, principally through Alfa Bank, as a result of lending and advances to customers and banks at fixed interest rates, in amounts and for periods which differ from those of deposits and other borrowings at fixed interest rates. In practice, interest rates are generally fixed on a short-term basis normally at three-month inter- vals. Also, interest rates, which are contractually fixed on both assets and liabilities, are often renegotiated to reflect current market conditions.
Other parts of the Group have a modest exposure to interest rate risk, principally as a result of borrowings and other credit related commitments which are largely at floating interest rates with relatively short maturities or interest reset dates.
The table below summarises the effective average interest rates, by major currencies, for monetary financial instruments outstanding at the respective year end. The analyses have been prepared for the various financial instruments using year end contractual rates.
Other RUR USD EURO currencies
Due from banks ...... 13% 2% 8% 6.8% Loans and advances to customers ...... 21.1% 15.2% 12.5% 14% Trading securities ...... 22.7% 10.8% - - Cash and cash equivalents ...... 23% 4-6% 7% 6.8% Borrowings ...... 11.6% 5-10.5% 5.8% - Amount owed to depositors ...... 13.2% 9.5% - 10% Due to banks ...... 9.6% 6% 5.2% 7.3%
Liquidity risk. Liquidity risk is defined as risk when maturity of assets and liabilities does not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the liquidity of the Group. It is unusual, at any given time, to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
The liquidity position of the Group at December is set out below:
Demand and less From From More than to to than No stated month months months year maturity Total
Property, plant and equipment ...... ----268,355 268,355 Investments available for sale ...... - 73 28,019 1,968 137,371 167,431 Investments in joint ventures ...... ----1,653,192 1,653,192 Investments in associates ...... ----244,460 244,460 Due from banks ...... 117,538 2,295 - 279 4,245 124,357 Loans and advances to customers ...... 146,717 445,682 524,331 66,514 31,815 1,215,059 Income tax ...... 13 189 201 2,094 - 2,497 Goodwill, net ...... ----(613) (613) Inventories ...... 41,289 25,355 32,130 - - 98,774 Trading securities ...... 156,673 ----156,673 Trade and other receivables ...... 188,538 113,242 143,036 4,382 - 449,198 Cash and cash equivalents ...... 706,536 3,146 - - - 709,682 Total assets ...... 1,357,304 589,982 727,717 75,237 2,338,825 5,089,065
Borrowings ...... 349,562 235,670 64,890 66,511 - 716,633 Amount owed to depositors ...... 1,068,534 195,534 53,057 3,852 - 1,320,977 Due to banks ...... 293,119 6,185 31,392 9,581 - 340,277 Accounts payable and provisions ...... 166,241 194,236 148,580 24,491 16,777 550,325 Income tax ...... 94 5,915 - 7,316 19,247 32,572 To tal liabilities ...... 1,877,550 637,540 297,919 111,751 36,024 2,960,784
Net liquidity gap ...... (520,246) (47,558) 429,798 (36,514) 2,302,801 2,128,281 Cumulative liquidity gap at 31 December 2001 ...... (520,246) (567,804) (138,006) (174,520) 2,128,281 -
At December , the Group has negative working capital in the amount of USD , thousand (: USD , thou- sand). This is mainly due to borrowings and amounts owed to depositors. Management believes that in spite of a substantial portion of deposits from customers being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these deposits provide a long-term and stable source of funding for the Group.
The Group is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes, but also may reduce or create losses in the event that unexpected movements arise. The Group’s interest rate sensitivity analysis based on the re-pricing of the Group’s assets and liabilities does not differ significantly from the maturity analysis disclosed in the table above.
Market risk. The Group takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The Board of Directors of each company in the Group sets limits on the value of risk that may be accepted, which is monitored on a daily basis. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Credit risk. The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. The two principal types of credit risk result from lending to banks and other customers and from sale of products and serv- ices on credit.
Alfa Bank is the principal company in the Group, which is engaged in lending. In order to manage credit risk, Alfa Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a continual basis and subject to an annual or more frequent review. Limits on the level of credit risk by product, borrower and industry sector are approved quarterly by Alfa Bank’s Board of Directors. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed, in part, by obtaining collateral and corporate and personal guarantees.
Through credit sales, all of the Group's companies are exposed to credit risk, which is managed accordingly. Each of the Group's companies has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high credit quality financial institutions and counterparties.
The Group’s maximum exposure to credit risk is primarily reflected in the carrying amounts of financial assets on the consolidated balance sheet. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant.
Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss because any other party to a financial instrument fails to perform in accordance with the term of the contract. The Group uses the same credit policies in making conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures.
Currency risk. The Group operates internationally, and is exposed to currency risk, the risk that the value of financial and other assets and income and expense items will fluctuate due to changes in foreign exchange rates. Whenever possible, the Group, through its companies, tries to limit its currency exposure by matching balance sheet, and revenue and expense items in the relevant currency.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
At period end, the Group had balances in US dollars, Russian Roubles, EURO and other currencies as follows:
Other RUR USD EURO currencies Total
Property, plant and equipment ...... 252,432 - - 15,923 268,355 Investments available for sale ...... 46,741 119,862 - 828 167,431 Investments in joint ventures ...... 1,653,192---1,653,192 Investments in associates ...... 244,460 - - - 244,460 Due from banks ...... 11,685 98,653 12,527 1,492 124,357 Loans and advances to customers ...... 395,994 781,687 27,674 9,704 1,215,059 Income tax ...... 2,497---2,497 Goodwill, net ...... (613)---(613) Inventories ...... 28,441 66,309 - 4,024 98,774 Trading securities ...... 51,523 103,173 - 1,977 156,673 Trade and other receivables ...... 67,375 339,116 7,329 35,378 449,198 Cash and cash equivalents ...... 401,014 246,226 39,076 23,366 709,682
Total assets ...... 3,154,741 1,755,026 86,606 92,692 5,089,065
Borrowings ...... 168,959 536,200 6,902 4,572 716,633 Amount owed to depositors ...... 614,551 665,464 24,378 16,584 1,320,977 Due to banks ...... 141,958 182,452 13,418 2,449 340,277 Accounts payable and provisions ...... 98,796 414,116 23,264 14,149 550,325 Income tax ...... 17,530 506 - 14,536 32,572
To tal liabilities ...... 1,041,794 1,798,738 67,962 52,290 2,960,784
Net currency position at 31 December 2001 ...... 2,112,947 (43,712) 18,644 40,402 2,128,281
32. COMMITMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
Capital commitments As at December the Group had capital commitments in respect of new computer systems totalling USD , thousand (: USD , thousand). Contractual commitments Under the terms of the transaction with Vimpel-Communications, the Group has a commitment to invest an amount of USD , thousand of equity directly into ZAO VimpelCom-Region in two equal tranches, in November and November .
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Credit related commitments Restated
Letters of credit ...... 263,577 243,269 Letters of indemnity ...... 213,322 416,462 Guarantees issued ...... 739,477 249,239
1,216,376 908,970
The total outstanding contractual amount of guarantees, letters of credit, and letters of indemnity does not necessarily represent future cash requirements, as they may expire or terminate without being funded.
Management evaluated the likelihood of possible losses arising from credit related commitments and concluded that a provision of USD , thousand (Note ) was necessary as at December (: USD , thousand).
Letters of Credit Commitments under letters of credit at December in the amount of USD , thousand (: USD , thousand) mainly relate to the purchase of crude oil, oil products and metals from major international commodity companies and additional standby letters of credit and letters of guarantee opened in favour of counterparties providing derivatives (refer to Note ). Also included in letters of credit are export letters of credit in the amount of USD , thousand (: USD , thousand) in which the Group bears no risk. Import letters of credit in the amount of USD , thousand (: USD , thousand) are usually fully collateralised and accordingly the Group assumes minimal risk.
Letters of Indemnity Letters of indemnity in the amount of USD , thousand (: USD , thousand) have been issued with respect to sales of crude oil, oil products and metals, and also to the pre-financing of crude oil, oil products and metal purchases. Management does not consider that any losses will be incurred in respect of these indemnities and accordingly no provision has been established against the contingencies as at December .
Guarantees Issued In May Alfa Bank entered into a performance guarantee in which it partially guaranteed TNK's payment of USD , thousand in respect of TNK's acquisition of .% of Sidanco. In August Alfa Bank entered into an additional performance guarantee in which it partially guaranteed TNK's payment of USD , thousand in respect of TNK's acquisition of % of Sidanco (Refer to Note ). Both performance guarantees are made jointly and severally with other related parties and the maximum liability of the Group is limited to an aggregate calculated RR amount equivalent to % of Alfa Bank's statutory capital (two separate guarantees, each equivalent to % of Alfa Bank's statutory capital on each transaction). At December , % of Alfa Bank's statutory capital amounted to approximately USD , thousand and this amount is included within guarantees issued at December . All payments in respect of the acquisition of % of Sidanco were completed by TNK by the end of February and the guarantee related to this transaction was terminated.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Operating Lease Commitments At December the Group had annual commitments under non-cancellable operating leases for land and buildings as set out below: Restated Amounts payable: Within 1 year ...... 14,253 2,587 Within 1 to 2 years ...... 5,245 2,651 Within 2 to 5 years ...... 15,075 7,649 More than 5 years ...... 9,652 6,059
44,225 18,946
Derivative Financial Instruments At December Alfa Bank had outstanding forward foreign exchange contracts with Russian and foreign banks whereby it had agreed to buy or sell Russian Roubles in exchange for another currency at an exchange rate agreed to at the date of the contract. A majority of these contracts were entered into prior to August and matured during , and early , but have not yet been settled. Alfa Bank was able to settle outstanding contracts with a few counterparties and any resultant gains or losses have been recorded in the consolidated statement of income.
Management has calculated the exposure on outstanding contracts using the exchange rates ruling on the maturity dates of the contracts as the Group has historically settled domestic derivatives in Russian Roubles. Principal or agreed amount of contracts for which the date of maturity is past due and no settlement had been completed as of December amounted to USD , thou- sand for purchase of foreign currency and USD , thousand for sale of foreign currency. The Group’s net loss after fully providing for receivables as at December with respect of contracts entered into during is equal to USD , thousand.
The Civil Code of the Russian Federation stipulates a three year period for commencing action to enforce contracts. This period expired during . On the basis of independent external legal advice regarding the enforceability of these contracts under Russian law, market practices and the activities of other participants in the derivatives market in Russia, as well as a significant passage of time, Management is of the opinion that these contracts with domestic banks are no longer legally enforceable, and that therefore, no losses will arise for the Group as a result of these contracts.
Management of the Group has therefore derecognized the provision for such expected losses which was originally recorded in , and for the year ended December has recorded a gain for the reversal of such provisions of USD , thousand.
Other Derivative Financial Instruments Alfa Bank also engages in transactions with other derivative financial instruments. Foreign exchange and other derivative financial instruments are generally traded in an over-the-counter market with professional market counterparties on standardised contrac- tual terms and conditions.
The following table provides an analysis of the principal or agreed amounts of contracts outstanding at the year end and loss or gain arising. This table reflects gross position before the netting of any counterparty position by type of instrument.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
The table below includes contracts with a maturity date subsequent to December . These contracts were entered into in and are short term in nature.
Domestic Foreign Principal or Unrealised Principal or Unrealised agreed amount gains/(losses) agreed amount gains/(losses)
Deliverable forwards Foreign currency - sale of foreign currency ...... (18,862) 130 (153,552) (124) - purchase of foreign currency ...... 50,541 - 153,427 -
Precious metals - sale of precious metals ...... (8,400) (868) (21,653) 1,403 - purchase of precious metals ...... 94,294 4,100 - -
Securities - sale of securities ...... (492) - - - - purchase of securities ...... ----
Spot Foreign currency - sale of foreign currency ...... (15,000) 189 (218)- - purchase of foreign currency ...... 520 - 15,000 (189)
Precious metals - purchase of precious metals ...... - - 199 (20)
Securities - sale of securities ...... (4,050) ---
Total ...... 3,551 1,070
For these deals the Group has recorded a net gain of USD , thousand which is included within net interest, fees and other income on banking activities in the consolidated statement of income.
Crown Resources enters into futures contracts and other financial instruments for the purpose of economic hedging of physical commodity contracts.
As at December , Crown Resources had the following open positions at their fair values:
Positive fair value as at Negative fair value as at Notional amount December December Metric tonnes’ USD’ USD’
Derivatives Commodity Swaps ...... 2,003 8,709 (9,367) Commodity Futures ...... 2,475 11,465 (12,907)
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
All of the above derivative contracts have maturities ranging from January to January .
33. CONTINGENT LIABILITIES
Legal proceedings From time to time and in the normal course of business, claims against the Group are received from customers and other parties. Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these consolidated financial statements.
In February Norex Petroleum Limited, a Cypriot company, filed a lawsuit against various entities of Alfa Group and certain other defendants in the United States District Court for the Southern District of New York over the ownership of a company which is currently owned within the TNK Industrial structure. The Group believes that it has substantial defenses to jurisdiction and venue in the United States, and it intends to file a comprehensive motion to dismiss the complaint. Management believes that the allegations in the complaint are without merit and intends to vigorously defend this action. Taxation Russian tax legislation is subject to varying interpretations and constant changes, which may be retroactive. Further, the interpre- tation of tax legislation by tax authorities as applied to the transactions and activity of the Group may not coincide with that of Management. As a result, transactions may be challenged by tax authorities and the Group may be assessed additional taxes, penal- ties and interest, which can be significant.
Current Russian tax legislation is principally based on the formal manner in which transactions are documented and the under- lying accounting treatment as prescribed by Russian Accounting Rules. Accordingly, there are opportunities for companies to structure transactions so as to take advantage of opportunities in the Russian tax legislation to restructure income and expenses in order to reduce the overall effective tax rate. The consolidated statement of income as presented in these consolidated financial statements includes reclassifications to reflect the underlying economic substance of those transactions. The effect of these reclas- sifications does not have an effect on the Group’s profit before taxation or the tax charge recognised in these consolidated finan- cial statements.
In addition, transfer pricing legislation, which was introduced from January in Russia, provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect to all controlled transactions, provided that the transaction price differs from the market price by more than %. Controlled transactions include transactions with related parties, and transactions with unrelated parties if the price differs on similar transactions with two different counter- parties by more than %. There is currently no formal guidance as to how these rules should be applied in practice.
Management regularly reviews the Group’s taxation compliance with applicable legislation, laws and decrees and current inter- pretations published by the authorities in the various jurisdictions in which the Group has operations. From time to time poten- tial exposures are identified and at any point in time a number of open matters may exist. Management believes that adequate provision has been made for all material liabilities. Tax years remain open to review by the Russian tax authorities for three years and up to six years in other jurisdictions. Insurance The Group is subject to political, legislative, fiscal and regulatory developments and risks, which are not covered by insurance. No provisions for self-insurance are included in these consolidated financial statements and the occurrence of significant losses and impairments associated with facilities could have a material effect on the Group’s operations.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Assets pledged At December , the Group had assets in the total amount of USD , thousand (: USD , thousand) pledged. Refer to Notes , and . Also, the Group has pledged % of the Alfa Bank’s shares as collateral against financing obtained from ARKO (Note ).
34. FIDUCIARY ASSETS These assets are not included in the Group’s balance sheet as they are not assets of the Group. Nominal values disclosed below may be different from the fair values of certain securities. The fiduciary assets fall into the following categories: Nominal value Nominal value Shares in companies held in custody ...... 98,768 120,426 Client OVGVZ held on account with Vneshtorgbank ...... 50,988 30,659 Client OFZ securities held on an account with NDC ...... 28,091 30,379 Eurobonds in Euroclear ...... 14,700 5,275
35. RELATED PARTY TRANSACTIONS For the purposes of these consolidated financial statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions as defined by IAS “Related Party Disclosures”. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
The consolidated financial statements of the Group include the following significant transactions and balances with companies forming part of the Group and other related parties; all related party deals were transacted on an arm’s length basis using market prices. Restated
Investments available for sale (net) (Note 5) Short-term loan to ZAO “Petrosakh” ...... - 1,703
- 1,703
Loans and advances to customers (Note 9) TNK ...... 90,000 5,259 Hayard Investments ...... 50,365 - Orenburgneft ...... 11,000 - Bashneft-TNK ...... - 11,101 Other ...... 17,217 2,748
168,582 19,108
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Restated Trade and other accounts receivable (Note 10) Management* ...... 20,000 - TNK ...... 17,236 6,757 Bashneft-TNK ...... 15,598 11,588 Other ...... 3,494 8,420
56,328 26,765
Bills of exchange (Note 15) TNK ...... 2,349 -
2,349 -
Amounts owed to depositors (Note 16) TNK affiliated companies ...... 32,090 34,300 ZAO VimpelCom-Region ...... 19,605 - Akrikhin ...... 3,104 - Redwood ...... - 9,236 Other ...... 6,259 2,454
61,058 45,990
Accounts payable (Note 22) Accrued compensation expense to Management ...... 132,150 79,262 TNK ...... 33,090 220,348 Other ...... 3,966 722
169,206 300,332
Sales TNK ...... 603 315
603 315
Cost of sales TNK ...... 1,695,092 2,303,733 TNK Ukraine ...... 80,119 - Bashneft-TNK ...... 45,728 62,235 Onako ...... 1,069 862 ZAO Petrosakh ...... - 3,372 LT Enterprises** ...... - 39,859
1,822,008 2,410,061
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Restated Commission income TNK ...... - 2,743 ZAO Petrosakh ...... - 34
- 2,777
Fee and commission expenses Other ...... 2,372 -
2,372 -
Fee and other income on banking activities (Note 23) TNK ...... 104,024 4,885 Other ...... 3,685 1,110
107,709 5,995
Interest Income (Note 23) TNK ...... 10,312 - Hayard Investments ...... 3,761 - Other ...... 3,736 1,992
17,809 1,992
Interest expense (Note 23) TNK ...... - 3,565 Other ...... 6,522 917
6,522 4,482
Other operating income Akrikhin ...... 3,968 - Other ...... 1,217 -
5,185 -
Other operating expenses OOO 11 Etazh ...... 55 - TNK ...... - 10,636
55 10,636
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Restated Letters of credit issued TNK ...... 1,226 455 TNK Nizhnevartovsk ...... - 3,936
1,226 4,391
Guarantees Alfa-Leasing ...... - 2,148 TNK ...... 369,696 517 Hayard Investments ...... 41,880 - Siracuse ...... 8,525 - Akrikhin ...... 248 -
420,349 2,665
*A short-term loan bearing interest at % was granted in to key management personnel of Alfa Bank.
** In , as part of the oil purchases from TNK, the Group was required to pay a fixed rate per ton commission to related par- ties of the Group. This amount is included within cost of sales in the consolidated statement of income.
The remuneration of Directors and key management personnel, including pension contributions, and discretionary compensa- tion amounts to USD , thousand (: USD , thousand) and is included in general and administrative expenses. In addition, during an amount of USD , thousand (: USD , thousand) has been accrued in respect of manage- ment option compensation plans (refer to Notes and ).
36. PRINCIPAL SUBSIDIARY, ASSOCIATE AND JOINT VENTURE UNDERTAKINGS
Country of incorporation Share Financial Services Alfa Finance Holdings S.A...... Luxemburg 81.36% Alfa Bank Holdings Ltd...... BVI 81.36% OAO Alfa Bank ...... Russia 81.36% Alfa Capital Investments Ltd...... BVI 81.36%
International Commodities Crown Resources AG...... Switzerland 100% Crown Commodities Ltd...... UK 100% Crown Trade Ltd...... Isle of Man 100%
Russia, CIS and Southeast Asia Commodities Eco Holdings Ltd...... Gibraltar 100% OOO Alfa Eco ...... Russia 99.99% OOO Alfa Eco M ...... Russia 100% Westvector Ltd...... BVI 100%
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
ZAO Petrosakh ...... Russia 95% OAO Volga ...... Russia 46.49%
Retail Trade ZAO TD Perekriostok ...... Russia 82.82% OOO Perekriostok 2000 ...... Russia 82.82% Perekriostok Holdings Ltd...... Gibraltar 82.82%
Food Processing AC United Food Company Limited ...... Cyprus 75% Kubansugar Holdings Ltd...... Gibraltar 100% Agrosugar Holdings Ltd...... Gibraltar 100% ZAO Ob’yedenyonnaya Prodovolstvennaya Kompania ...... Russia 75% Crown Tea Holdings Ltd...... Gibraltar 100% Vinorum Holdings Ltd...... Gibraltar 100%
Oil and Gas TNK Industrial Holdings Ltd.* ...... BVI 50%
Telecommunications Alfa Telecom Ltd...... BVI 100% Golden Telecom Inc.* ...... United States of America 43.8% Eco Telecom Ltd...... Gibraltar 100% OAO Vimpel-Communications** ...... Russia 13.05%
Other CTF Holdings Ltd...... Gibraltar 100% Estate Project Holdings Ltd...... Gibraltar 100% CTF Consultancy Ltd...... Gibraltar 100%
* The effective interest that is consolidated is less due to minority interest at the level of Alfa Finance Holdings S.A.
** The interest is equal to ownership in common shares (Note ).
37. SUBSEQUENT EVENTS
Eco Holdings Limited As at January Management of the Alfa Eco Group acquired ordinary shares of Eco Holdings Limited (representing % of the outstanding shares) for an amount of USD , thousand.
In July , the shareholders of Alfa Eco Group contributed USD , thousand into the share capital of Eco Holdings.
In July , the Alfa Eco Group acquired a % interest in OAO TsBK Kama, a pulp and paper factory, for consideration of USD , thousand.
ALFA GROUP Notes to the consolidated financial statements for the year ended December (Expressed in thousand US dollars for presentational purposes only – see Note )
Sidanco In April , British Petroleum Plc acquired from Sborsare % of the shares of Sidanco for USD , thousand.
In February , two wholly owned subsidiaries of Sidanco purchased .% of the shares of Sidanco from Sborsare for cash con- sideration of USD , thousand. Kievstar In July , the Group acquired a .% interest in Kievstar, a Ukrainian wireless telecommunications service company and in August the Group concluded an agreement for acquisition of an additional .% interest in Kievstar. AC United Food Company Limited In September the Group entered into two agreements with a third party for the sale of its grain business and its sugar busi- ness for approximately USD , thousand and USD , thousand, respectively.
Design Agey Tomesh