OJSC Bank Petrocommerce

Transcription

1 IMPORTANT NOTICE THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE NON-US PERSONS OR ADDRESSEES OUTSIDE OF THE US IMPORTANT: You must read the following before continuing. The following disclaimer applies to the attached Prospectus accessed from this page or otherwise received as a result of such access and you are therefore advised to read this disclaimer page carefully before reading, accessing or making any other use of the attached Prospectus. In accessing the attached Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access. NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION, AND, THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE OR LOCAL SECURITIES LAWS. THE FOLLOWING PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER, AND IN PARTICULAR, MAY NOT BE FORWARDED TO ANY US PERSON OR TO ANY US ADDRESS. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. Confirmation of your Representation: You have been sent the attached Prospectus on the basis that you have confirmed to ING Bank N.V., London Branch or Merrill Lynch International being the sender of the attached, (i) that you are not (or, if you are acting for another person, such person is not) a U.S. person, (ii) that you are not (or, if you are acting on behalf of another person, such person is not) located in the United States of America, its territories and possessions, any State of the United States or the District of Columbia (where possessions include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands) and (iii) that you consent (and if you are acting on behalf of another person, such person consents) to this delivery by electronic transmission. You are reminded that the Prospectus has been delivered to you on the basis that you are a person into whose possession the Prospectus may be lawfully delivered in accordance with the laws of jurisdiction in which you are located and you may not, nor are you authorised to, deliver the Prospectus to any other person. The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the underwriters or any affiliate of the underwriters is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the underwriters or such affiliate on behalf of the Issuer in such jurisdiction. The Prospectus may only be communicated to persons in the United Kingdom in circumstances where section 21(1) of the Financial Services and Markets Act 2000 does not apply. The Prospectus has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of ING Bank N.V., London Branch or Merrill Lynch International or any person who controls it or any director, officer, employee or agent of it or affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the Prospectus distributed to you in electronic format and the hard copy version available to you on request from ING Bank N.V., London Branch or Merrill Lynch International.

2 U.S.$125,000, per cent. Loan Participation Notes due 2009 to be consolidated and form a single series with the U.S.$300,000, per cent. Loan Participation Notes due 2009 issued on 14 December 2006 issued by Petrocommerce Finance S.A. (incorporated under the laws of Luxembourg) on a limited recourse basis for the sole purpose of financing a U.S.$125,000,000 loan to OJSC Bank Petrocommerce (incorporated under the laws of the Russian Federation) Issue Price: 100 per cent. plus accrued interest from, and including 14 December 2006 to, but excluding, 12 March 2007 Petrocommerce Finance S.A. (incorporated under the laws of Luxembourg (the Issuer ) is issuing an aggregate principal amount U.S.$125,000, per cent. Loan Participation Notes due 2009 (the New Notes ) to be consolidated and form a single series with the U.S.$300,000, per cent. Loan Participation Notes due 2009 issued on 14 December 2006 (the Original Notes and, together with the New Notes, the Notes ) to be issued by but with limited recourse to the Issuer for the sole purpose of financing a further advance of U.S.$125,000,000 (the New Advance ) under a loan (the Loan ) to OJSC Bank Petrocommerce (the Bank or PKB ) pursuant to a loan agreement dated 12 December 2006 as amended and restated on 8 March 2007 (the Loan Agreement ) between the Issuer and PKB. The Notes will be constituted by, subject to, and have the benefit of, a trust deed dated 14 December 2006 (the Original Trust Deed ) between the Issuer and BNY Corporate Trustee Services Limited as trustee (the Trustee ) as amended and the restated on 12 March 2007 by virtue of a supplemental trust deed between the same parties (the Supplemental Trust Deed and, together with the Original Trust Deed, the Trust Deed ). Pursuant to the Trust Deed, the Issuer will charge in favour of the Trustee, for the benefit of the holders of the Notes (the Noteholders ) as security for its payment obligations in respect of the Notes and under the Trust Deed (a) its right as lender to all payments under the Loan Agreement and (b) amounts received pursuant to the Loan in an account of the Issuer, in each case other than in respect of the Reserved Rights (as defined herein). See Description of the Transaction. The Issuer will also assign its administrative rights under the Loan Agreement to the Trustee. The Notes are limited recourse secured obligations of the Issuer. In each case where amounts of principal, interest and additional amounts (if any) are stated to be payable in respect of the Notes, the obligation of the Issuer to make any such payment shall constitute an obligation only to account to the Noteholders, on each date upon which such amounts of principal, interest and additional amounts (if any) are due in respect of the Notes, for an amount equivalent to all principal, interest and additional amounts (if any) actually received and retained by or for the account of the Issuer pursuant to the Loan Agreement, excluding, however, amounts paid in relation to the Reserved Rights. The Issuer will have no other financial obligation under the Notes. Noteholders will be deemed to have accepted and agreed that they will be relying solely and exclusively on the credit and financial standing of PKB in respect of the financial servicing of the Notes. Interest on the Notes will be payable semi-annually in arrear in equal instalments on 17 June and 17 December in each year commencing on 17 June 2007 as described under Terms and Conditions of the Notes Interest. The Issuer shall account to Noteholders for an amount equivalent to amounts of interest actually received and retained by or for the account of the Issuer pursuant to the Loan Agreement, which interest under the Loan is equal to 8.75 per cent. per annum. The Issue Price of the New Notes is 100 per cent. of their principal amount plus accrued interest from, and including, 14 December 2006 to, but excluding 12 March In accordance with the terms and conditions of the New Notes set out herein, on the first Interest Payment Date applicable to the New Notes (being on or about 17 June 2007), the Issuer is obliged, pursuant to the terms of the Trust Deed, to pay to the holders of the New Notes, in addition to interest actually received from Petrocommerce by, or for the account of, the Issuer pursuant to the terms of the Loan Agreement, an amount representing accrued interest on the New Notes in respect of the period from, and including 14 December 2006 to, but excluding, 12 March Except as set forth herein (see Taxation ), payments in respect of the Notes will be made without any deduction or withholding or on account of taxes of the Russian Federation or Luxembourg (save as required by law). The Loan may be prepaid at its principal amount, together with accrued interest, at the option of PKB, upon PKB or the Issuer being required to deduct or withhold any such Russian or Luxembourg taxes from payments to be made by them in respect of the Notes or pursuant to the Loan Agreement, or, following enforcement of the security created in the Trust Deed, upon PKB or the Trustee being required to deduct or withhold any taxes of the Russian Federation or the jurisdiction in which the Trustee is then resident. The Loan may also be prepaid if it becomes unlawful for the Loan or the Notes to remain outstanding, as set out in the Loan Agreement, and thereupon (subject to the receipt of the relevant funds from PKB) the principal amount of all outstanding Notes will be prepaid by the Issuer together with accrued interest. Application has been made to the United Kingdom Financial Services Authority ( UK Listing Authority ), which is the United Kingdom competent authority for the purposes of Directive 2003/71/EC (the Prospectus Directive ) and relevant implementation measures in the United Kingdom, for this prospectus to be approved. Application has been made to the UK Listing Authority for the New Notes to be admitted to listing on the Official List of the UK Listing Authority and application has been made to the London Stock Exchange plc (the London Stock Exchange ) for the New Notes to be admitted to trading on the Gilt Edged and Fixed Income Market of the London Stock Exchange. This Prospectus constitutes a prospectus for the purposes of the Prospectus Directive and relevant implementing measures in the United Kingdom. References in this Prospectus to Notes being listed (and all related references) shall mean that such Notes have been admitted to trading on the Gilt Edged and Fixed Interest Market of the London Stock Exchange, which is a regulated market for the purposes of Directive 93/22/EEC. Investors should carefully consider the risk factors beginning on page 14 of this Prospectus before investing in the Notes. The Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act ) and, subject to certain exceptions, may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S ( Regulation S ) under the Securities Act). The Notes are being sold in reliance on the exemption from the provisions of Section 5 of the Securities Act provided by Regulation S. The New Notes will be issued in registered form in denominations of US$100,000 and integral multiples of US$1,000 in excess thereof. The New Notes will be represented by a new global registered note certificate (the Global New Certificate ) registered in the name of The Bank of New York (Depository) Nominees Limited as nominee for and deposited with a common depositary for Euroclear Bank S.A./N.V. as operator of the Euroclear System ( Euroclear ) and Clearstream Banking, société anonyme ( Clearstream, Luxembourg ) on or about 12 March 2007 (the Issue Date ). Definitive certificates ( Definitive Certificate ) evidencing holdings of Notes will be available only in certain circumstances described under Summary of Provisions Relating to the Notes in Global Form. ING Wholesale Banking Lead Managers Merrill Lynch International The date of this Prospectus is 8 March 2007

3 This Prospectus constitutes a prospectus for the purpose of Article 5 of the Prospectus Directive and for the purpose of giving information with regard to the Issuer, PKB and its subsidiaries and affiliates and the Notes which, according to the particular nature of the Issuer, PKB and the Notes, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Issuer and PKB and of the rights attaching to the Notes. Each of the Issuer and the PKB accepts responsibility for the information contained in this Prospectus. To the best of the knowledge of the Issuer and PKB (which have taken all reasonable care to ensure that such is the case), the information contained in this Prospectus is in accordance with the facts and contains no omission likely to affect the import of such information. Neither the Managers (as defined in Subscription and Sale ), the Trustee nor any of their affiliates has made an independent verification of the information contained in this Prospectus in connection with the issue or offering of the Notes and no representation or warranty, express or implied, is made by the Managers, the Trustee or any of their affiliates with respect to the accuracy or completeness of such information. Nothing contained in this Prospectus is, is to be construed as, or shall be relied upon as, a promise, a warranty or representation, whether to the past or the future, by the Managers, the Trustee or any of their respective directors, affiliates, advisers or agents in any respect. The contents of this Prospectus are not, are not to be construed as, and should not be relied on as, legal, business or tax advice and each prospective investor should consult its own legal and other advisers for any such advice relevant to it. No person is authorised to give any information or make any representation not contained in or not consistent with this Prospectus in connection with the issue and offering of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by any of the Issuer, PKB, the Trustee or any Manager. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Notes by any person in any jurisdiction where it is unlawful to make such an offer or solicitation. The distribution of this Prospectus and the offer or sale of the Notes in certain jurisdictions is restricted by law. This Prospectus may not be used for, or in connection with, and does not constitute, any offer to, or solicitation by, anyone in any jurisdiction or under any circumstance in which such offer or solicitation is not authorised or is unlawful. Persons into whose possession this Prospectus may come are required by the Issuer, PKB, the Trustee and the Managers to inform themselves about and to observe such restrictions. Further information with regard to restrictions on offer, sales and deliveries of the Notes and the distribution of this Prospectus and other offering material relating to the Notes is set out under Subscription and Sale and Summary of Provisions Relating to the Notes in Global Form. IN CONNECTION WITH THE ISSUE OF THE NOTES, MERRILL LYNCH INTERNATIONAL AS STABILISING MANAGER (THE STABILISING MANAGER ) (OR PERSONS ACTING ON ITS BEHALF) MAY OVER-ALLOT NOTES (PROVIDED THAT, THE AGGREGATE PRINCIPAL AMOUNT OF NOTES ALLOTTED DOES NOT EXCEED 105 PER CENT. OF THE AGGREGATE PRINCIPAL AMOUNT OF THE NOTES) OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON ITS BEHALF) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. The statistical information and other data contained in this Prospectus has been extracted from publicly available data (such as information contained on official websites and in publications of governmental agencies of the Russian Federation, including the Central Bank of the Russian Federation (the CBR ), and from other Government or mass media sources). The Issuer and PKB confirm that such information has been accurately reproduced and that, so far as they are aware and are able to ascertain from information published by such sources, no facts have been omitted which would render the reproduced information inaccurate or misleading. The veracity of some official data released by the Government, the CBR or other official agencies may be questionable. See Risk Factors-Other Risk-Lack of Reliable Official Data. 2

4 TABLE OF CONTENTS Enforceability of Judgments... 4 Forward-Looking Statements... 5 Presentation of Financial and Other Information... 6 Overview of the Offering... 9 Description of the Transaction Risk Factors Use of Proceeds The Issuer Description of the Bank Petrocommerce Group Recent Developments Financial Review for Six Months Ended 30 June Terms and Conditions of the Notes Summary of Provisions relating to the Notes in Global Form The Loan Agreement Taxation Subscription and Sale General Information Index to Financial Statements... F-1 Appendix A The Banking Sector and Banking Regulations in the Russian Federation... A-1 3

5 ENFORCEABILITY OF JUDGMENTS PKB is an open joint stock company incorporated under the laws of the Russian Federation and most of its assets and the assets of its subsidiaries and associates are currently located in the Russian Federation. In addition, all of PKB s directors and executive officers, are residents of the Russian Federation. As a result, it may not be possible for Noteholders to: * effect service of process within the United Kingdom upon any of the PKB s directors or executive officers named in this Prospectus; or * enforce against PKB or any such persons judgments obtained in English courts. Foreign court judgments may be recognised and enforced by Russian courts only if (i) an international treaty providing for the recognition and enforcement of judgments in civil cases exists between Russia and the country where the judgment is rendered, and/or (ii) a federal law of Russia provides for the recognition and enforcement of foreign court judgments. PKB is not aware of any treaty or convention directly providing for the recognition and enforcement of judgments in civil and commercial matters between most Western jurisdictions and the Russian Federation. However, PKB is aware of one instance in which Russian courts have recognised and enforced an English court judgment. The basis for this was a combination of the principle of reciprocity and the existence of a number of bilateral and multilateral treaties to which both the United Kingdom and the Russian Federation are parties. The Russian courts decided that such treaties constituted grounds for the recognition and enforcement of the relevant English court judgment in Russia. In the absence of established -court practice, however, it is difficult to predict whether a Russian court will be inclined in any particular instance to recognise and enforce an English court judgment on these grounds. The limitations described above, as well as the limited experience of Russian courts in enforcement of foreign judgments generally, may significantly delay the enforcement of such judgment, or completely deprive the plaintiff of effective legal recourse. In September 2002, the new Arbitrazh Procedural Code of the Russian Federation entered into force, setting forth procedures for the recognition and enforcement of judgments and grounds for refusal of such recognition and enforcement in the event that such a treaty or federal law were adopted. However, Russian procedural law may change further, and other grounds for refusal of the recognition and enforcement of foreign court judgments could arise in the future. See Risk Factors- Risks Relating to the Notes and the Trading Market-Foreign judgments and arbitral awards may not be enforceable against PKB. The Loan Agreement will be governed by English law and will provide the Lender with the sole option to elect that disputes, controversies and causes of action brought by any party thereto shall be settled by arbitration in accordance with the Rules of the London Court of International Arbitration (the LCIA ). The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention ). However, it may be difficult to enforce arbitral awards in the Russian Federation due to: * the inexperience of the Russian courts in international commercial transactions; * official and unofficial political resistance to the enforcement of awards against Russian companies in favour of foreign investors; and * the inability of Russian courts to enforce such awards. Furthermore, any arbitral award pursuant to arbitration proceedings in accordance with the Rules of the LCIA and the application of English law to the Loan Agreement may be limited by the mandatory provisions of Russian laws relating to the exclusive jurisdiction of Russian courts and the application of Russian laws with respect to bankruptcy, winding up or liquidation of Russian companies and credit organisations in particular. See Risk Factors-Risks Relating to the Notes and the Trading Market-Foreign judgments and arbitral awards may not be enforceable against PKB. 4

6 FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements which relate to, without limitation, PKB s plans, objectives, goals, strategies, future operations and performance. These forward-looking statements may be found in various locations, including, without limitation, under the headings Risk Factors and Description of the Bank Petrocommerce Group. These forward-looking statements are characterised by words such as anticipates, estimates, expects, believes, intends, plans, may, will, should and similar expressions, but these expressions are not the exclusive means of identifying such statements. Such forward-looking statements involve known or unknown risks, uncertainties and other important factors that could cause circumstances or PKB s actual results, performance or achievements to be materially different from any future circumstances, results, performance or achievements expressed or implied by such statements. Such forward-looking statements are inherently based on numerous assumptions regarding, among other things: * the performance of the Russian economy; * any expansion, divestiture or acquisition plans of PKB; * the impact of PKB s expansion on its revenue potential, cost basis and margins; * PKB s ability to remain competitive in the banking industry of the Russian Federation; * the effects of regulatory and fiscal developments and legal proceedings; * PKB s debt and the impact of exchange rate fluctuations; and * PKB s ability to meet its obligations and develop and maintain additional sources of financing. Accordingly, prospective purchasers of Notes should not place undue reliance on these forwardlooking statements. The important factors that could cause PKB s actual results, performance or achievements to differ materially from those in these forward-looking statements include, but are not limited to, those discussed in Risk Factors and Description of the Bank Petrocommerce Group. These forward-looking statements speak only as at the date of this Prospectus. The Issuer and PKB expressly disclaim any obligation or undertaking to disseminate after the date of this Prospectus any updates or revisions to any forward-looking statements contained herein, whether as a result of any change in its expectation with regard thereto, any change in events, conditions or circumstances on which any such forward-looking statement is based or otherwise. 5

7 PRESENTATION OF FINANCIAL AND OTHER INFORMATION Presentation of Financial Information The financial information set out herein has been extracted from the audited consolidated financial statements of the Bank and its consolidated subsidiaries taken as a whole (the Group ) as of and for the years ended 31 December 2005 and 31 December 2004 (the Audited Financial Statements ) and its unaudited interim condensed consolidated financial information for the six months ended 30 June 2006 (the Unaudited Interim Financial Information ). Audited financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ), issued by the International Accounting Standards Board. Unaudited Interim Financial Information has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). Currency In this Offering Circular, the following currency terms are used: * RUR, Russian Rouble, or rouble means the lawful currency of the Russian Federation; * U.S. dollar, USD or U.S.$ means the lawful currency of the United States; and * EUR, euro or C means the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Community, as amended. The Bank s Market Share Information The Group has calculated its market share information presented in this Prospectus on the basis of market data regularly published by the CBR and/or the various other sources of information, which are identified next to the statements in question. Rounding Some numerical figures included in this Prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that preceded them. Unless otherwise specified, all percentages have been rounded to the nearest one-tenth of a per cent. Auditors ZAO PricewaterhouseCoopers Audit ( PwC ), independent auditors, Kosmodamianskaya Nab. 52, Bld. 5, Moscow, Russian Federation, has audited the Group s consolidated financial statements as of and for the years ended 31 December 2005 and 31 December 2004 and provided unqualified audit opinions on those Audited Financial Statements. With respect to the unaudited interim condensed consolidated financial information of the Group for the six months ended 30 June 2006, included in this Prospectus, PwC reported that they have applied limited procedures in accordance with International Standard on Review Engagements 2400 Engagements to Review Financial Statements ( ISRE 2400 ). Their separate review report dated 28 September 2006 appearing herein states that they did not audit and they do not express an opinion on that Unaudited Interim Financial Information. Accordingly, the degree of reliance on their report on the Unaudited Interim Financial Information should be restricted in light of the limited nature of the review procedures applied. The review report has been qualified for the lack of comparative information for the condensed consolidated statements of income, of changes in equity and of cash flows and the related notes for the six month period ended 30 June PwC is a member of the Russian Chamber of Auditors (Auditorskaya Palata Rossii) and the Institute of Professional Accountants of Russia (Institut Professionalnih Buhgalterov Rossii). 6

8 Exchange Rates U.S. dollar/rouble Interbank Exchange Rate High Low Average Period End (Roubles per U.S. dollar) 2006 (up to and including 30 September 2006) Source: CBR Adoption of New or Revised Standards and Interpretations Certain new IFRS standards became effective for the Group from 1 January Listed below are those new or amended standards or interpretations which are or in the future could be relevant to the Group s operations and the nature of their impact on the Group s accounting policies. All changes in accounting policies were applied retrospectively as described below. IAS 1 (revised 2003), Presentation of Financial Statements. Minority interest is now presented as equity and the Group discloses on the face of the consolidated income statement profit for the period and the allocation of that amount between profit attributable to minority interest and profit attributable to equity holders of the Bank. Certain new disclosures and changes in presentation required by the revised standard were made in the Unaudited Interim Financial Information and in the consolidated financial statements as of and for the year ended 31 December IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and Errors. The Group now applies all voluntary changes in accounting policies retrospectively. Comparatives are amended in accordance with the new policies. All material errors are now corrected retrospectively in the first set of consolidated financial statements after their discovery. IAS 10 (revised 2003) Events after the Balance Sheet Date. The standard was amended to include a limited clarification that if an entity declares dividends after the balance sheet date, the entity should not recognise those dividends as a liability at the balance sheet date. This is consistent with the policies applied by the Group. IAS 16 (revised 2003) Property, Plant and Equipment. The residual value is now defined as the amount that the Group estimates it would receive currently for the asset if the asset were already of the age and in the condition expected at the end of its useful life. The Group s policy is now not to cease depreciating assets during temporary periods when the assets are idle. All changes to accounting policies as a result of the revised IAS 16 were accounted for retrospectively and did not result in a significant effect on the carrying amount of the Group s assets. IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates. The term functional currency replaced measurement currency. Only one translation method is now applied to all foreign operations namely that described in the previous version of IAS 21 as applying to foreign entities. Changes in provisions of this standard did not have any material effect on the Unaudited Interim Financial Information or on the consolidated financial statements as of and for the year ended 31 December IAS 24 (revised 2003) Related Party Disclosures. The definition of related parties was extended and additional disclosures required by the revised standard were made in the Unaudited Interim Financial Information and in the consolidated financial statements as of and for the year ended 31 December

9 IAS 27 (revised 2003) Consolidated and Separate Financial Statements. The Group s policies were changed to remove limited exceptions from consolidation. IAS 27 now requires consolidation of all subsidiaries of the Bank. Changes in provisions of this standard do not have any material effect on the Unaudited Interim Financial Information or on the consolidated financial statements as of and for the year ended 31 December IAS 39 (revised 2003) Financial Instruments: Recognition and Measurement. The definition of originated loans and receivables was amended to become loans and receivables. This category now comprises originated or purchased loans and receivables that are not quoted in an active market. The Group amended its policies for derecognition of financial assets. Under the original IAS 39, several concepts governed derecognition. The revised IAS 39 retains the two main concepts of risks and rewards and control, but clarifies that the evaluation of the transfer of risks and rewards precedes the evaluation of the transfer of control. The Group now applies the guidance added to IAS 39 on how to determine fair values using valuation techniques and how to evaluate impairment in a group of loans. In accordance with the standard s transitional provisions the revised accounting policies are applied retrospectively except for the clarified derecognition rules which are applied prospectively from 1 January Certain new standards and interpretations have been published that are mandatory for the Group s accounting periods beginning on or after 1 January 2006 and which the Group has not early adopted. They have not significantly affected the Unaudited Interim Financial information. IAS 39 (Amendment) The Fair Value Option (effective from 1 January 2006). IAS 39 (as revised in 2003) permitted entities to designate irrevocably on initial recognition any financial instrument as one to be measured at fair value with gains and losses recognised in profit or loss ( fair value through profit or loss ). The amendment restricts the ability to designate financial instruments as part of this category. The Group s policy is not to voluntarily designate assets and liabilities at fair value through profit and loss. IAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective from 1 January 2006). The amendment allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in the consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. IAS 39 (Amendment) Financial Guarantee Contracts (effective from 1 January 2006). Issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, will have to be initially recognised at their fair value, and subsequently measured at the higher of (i) the unamortised balance of the related fees received and deferred and (ii) the amount recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. 8

10 The Offer Issuer of the Notes and Lender under the Loan Agreement Borrower under the Loan Agreement Joint Lead Managers Trustee Principal Paying Agent and Transfer Agent Registrar Issue Price OVERVIEW OF THE OFFERING U.S.$125,000,000 aggregate principal amount of 8.75 per cent. Loan Participation Notes due 2009 to be consolidated and form a single series with the U.S.$300,000, per cent. Loan Participation Notes due 2009 of the Issuer issued on 14 December Petrocommerce Finance S.A., a société anonyme incorporated under the laws of Luxembourg with its registered office and business headquarters at 2, boulevard Konrad Adenauer, L-1115 Luxembourg, Grand-Duchy of Luxembourg. OJSC Bank Petrocommerce, an open joint stock company incorporated under the laws of the Russian Federation, with its registered office at 24, ul. Petrovka, Moscow , Russian Federation. ING Bank N.V., London Branch and Merrill Lynch International. BNY Corporate Trustee Services Limited The Bank of New York The Bank of New York (Luxembourg) S.A. 100 per cent. of the principal amount of the Notes plus accrued interest from and including 14 December 2007 to, but excluding 12 March Yield 8.75 per cent. Issue Date 12 March Maturity Date 17 December 2009 Interest The Notes will bear interest at a rate of 8.75 per cent. per cent. per annum from and including 14 December 2006 up to but excluding, the Repayment Date (as defined in the Loan Agreement) payable semi-annually in arrear on 17 June and 17 December, commencing on 17 June 2007, there will be a long first coupon. See Terms and Conditions of the Notes 5. Interest. Status of the Notes The New Notes will constitute the obligation of the Issuer to apply an amount equal to the gross proceeds from the issue of the Notes for financing the Loan and to account to the Noteholders for an amount equivalent to sums of principal, interest and any additional amounts, if any, actually received by, or for the account of, the Issuer pursuant to the Loan Agreement (less any amounts in respect of the Reserved Rights). See Terms and Conditions of the Notes 1. Status. Limited Recourse The New Notes will constitute the obligation of the Issuer to use the proceeds from the issue thereof solely to finance the Loan and to account to Noteholders for amounts equivalent to sums of principal, interest and additional amounts (if any) actually received by or for the account of the Issuer pursuant to the Loan Agreement, less any amount in respect of Reserved Rights. See Terms and Conditions of the Notes 1. Status. Security Pursuant to the Trust Deed, the Issuer will charge by way of first fixed charge as security for its payment obligations in respect of the New Notes to the Trustee for the benefit of the Noteholders: * certain of its rights, interests and benefits in and to principal, interest and other amounts now and in the future paid and payable under the Loan Agreement; 9

11 Assignment of Rights Form Withholding Tax or Increased Costs Negative Pledge and Other Covenants Tax Redemption Events of Default/Relevant Event * all its rights, interests and benefits in and to receipt of all sums which may be or become payable to it under any claim, award or judgment relating to the Loan Agreement; and * all its rights, title and interests in and to all sums of money held on deposit from time to time, in the Account, together with the respective debts represented thereby, pursuant to the Trust Deed, in each case, other than in respect of certain Reserved Rights (as defined in Terms and Conditions of the Notes ). The Issuer will also with full title guarantee assign absolutely to the Trustee its rights under the Loan Agreement (save for those rights charged or excluded above) upon the closing of the offering of the New Notes. See Description of the Transaction and Term and Conditions of the Notes. The New Notes will be in registered form in denominations of U.S.$100,000 and integral multiples of U.S.$1,000 in excess thereof. The New Notes will initially be represented by the Global New Certificate, which, on or before the issue of the New Notes will be registered in the name of a nominee of a common depositary for Euroclear and Clearstream, Luxembourg. The Global New Certificate will only be exchangeable for Notes in definitive form in limited circumstances. See Summary of Provisions Relating to the New Notes in Global Form. All payments of principal and interest under the Loan and in respect of the Notes will be made free and clear of all taxes, duties, assessments or governmental charges of Luxembourg or Russia except as required by law. If any taxes, duties, assessments or governmental charges are payable in either or both of the above jurisdictions, PKB must pay (subject to certain exceptions) an increased amount necessary to compensate the Issuer for the tax withheld or the increased cost to the Issuer. In this case, the sole obligation of the Issuer will be to pay to the Noteholders sums equivalent to the sums received from PKB. The Loan Agreement contains a negative pledge and certain other covenants, including covenants limiting disposals by PKB or its Subsidiaries and limiting the placement of restrictions on the ability of any of its Subsidiaries to pay dividends. In addition, the Loan Agreement requires PKB to provide certain periodic financial information to the Issuer and to comply with certain capital adequacy ratio requirements. See The Loan Agreement. In the event that PKB is required to pay additional amounts under the Loan Agreement as a result of tax imposed by any taxing authority in Luxembourg and/or the Russian Federation, PKB will have the right to prepay the Loan, upon not less than 10 days notice to the Issuer, in whole (but not in part) at any time. See The Loan Agreement. In such circumstances, the Issuer will exercise its right to redeem the Notes. See Terms and Conditions of the Notes. In the case of an Event of Default (as defined in the Loan Agreement) or a Relevant Event (as defined in the Terms and Conditions of the Notes Enforcement ), the Trustee may, as provided in the Trust Deed, (a) declare or require the Issuer to declare all amounts payable under the Loan Agreement by PKB to be due and payable (in the case of an Event of Default) or (b) enforce the security granted by the Issuer following the occurrence of a Relevant Event. Upon repayment of the Loan following an Event of Default, the Notes will be redeemed or repaid at the 10

12 Use of Proceeds Ratings Listing Selling Restrictions Governing Law Risk Factors Security Codes principal amount thereof, together with interest accrued to the date fixed for redemption and any additional amounts due, and thereupon shall cease to be outstanding. The Issuer will use the proceeds of the issue of the New Notes for the sole purpose of financing the Loan to PKB. The proceeds of the Loan will be used by PKB to satisfy its working capital and general corporate financing requirements. The New Notes are expected to be rated B+ by Standard and Poor s Rating Services, a division of the McGraw Hill Companies, Inc. ( Standard & Poor s ) and Ba3 by Moody s Investor Services, Inc. ( Moody s ). Application has been made to the UK Listing Authority for the New Notes to be admitted to listing on the Official List and to the London Stock Exchange for such New Notes to be admitted to trading on the London Stock Exchange s Gilt Edged and Fixed Interest Market. The New Notes have not been and will not be registered under the Securities Act and, subject to certain exceptions, may not be offered or sold within the United States. The New Notes may be sold in other jurisdictions (including, without limitation, the United Kingdom and the Russian Federation) only in compliance with applicable laws and regulations. See Subscription and Sale. The New Notes, the Trust Deed and the Loan Agreement will be governed by and construed in accordance with English law. An investment in the New Notes involves a high degree of risk. See Risk Factors beginning on page 14. ISIN: XS Common Code:

13 DESCRIPTION OF THE TRANSACTION The following summary contains basic information about the New Notes and the New Advance under the Loan and should be read in conjunction with, and is qualified in its entirety by, the information set forth under The Loan Agreement and Terms and Conditions of the Notes in this Prospectus. The transaction will be structured as a New Advance under the Loan to PKB, as borrower, from the Issuer, as lender. The Issuer will issue the New Notes for the sole purpose of funding the New Advance under the Loan to PKB. The New Advance will be made on the terms of the Loan Agreement and will have the characteristics that demonstrate capacity to produce funds to service any payments due and payable on the New Notes. The New Notes will be constituted by, be subject to, and have the benefit of the Trust Deed and will be consolidated and form a single series with Original Notes. PKB will be obliged to make payments under the Loan to the Issuer s account in accordance with the terms of the Loan Agreement. The Issuer will not have any obligations to the Noteholders, other than the obligation to account to the Noteholders in respect of the payments of principal, interest and any additional amounts and any tax indemnity amounts under the Loan if, and only to the extent, received from PKB. The transaction is structured as a loan to PKB to ensure that there is sufficiency of funds to service any payments due and payable on the Notes. Pursuant to the Trust Deed, the Issuer will charge by way of a first fixed charge as security for its payment obligations in respect of the New Notes and the Trust Deed to the Trustee for the benefit of the Trustee and the Noteholders: * certain of its rights, interests and benefits in and to principal, interest and other amounts now and in the future paid and payable under the Loan Agreement and its rights, interests and benefits in and to receive all sums which may be or become payable to it under any claim, award or judgment relating to the Loan Agreement (other than its right to amounts in respect of certain Reserved Rights); and * all its rights, title and interests in and to sums deposited in an account in London in the name of the Issuer with the Principal Paying Agent (the Account ) together with the respective debts represented thereby pursuant to the Trust Deed. The Issuer will also assign to the Trustee its administrative rights under the Loan Agreement (save for those rights charged or excluded above) upon the closing of the offering of the New Notes. See Terms and Conditions of the Notes. Formal notice of the security interests created by the Trust Deed will be given to PKB, which will be required to acknowledge the same. Payments in respect of the New Notes will be made without any deduction or withholding for or on account of Russian or Luxembourg taxes, except as required by law. See Terms and Conditions of the Notes 8. Taxation. In the event that any deduction or withholding is required by law, the Issuer will be required, except in certain limited circumstances, to pay additional amounts to the extent that it receives corresponding amounts from PKB under the Loan Agreement. In addition, payments under the Loan Agreement shall be made without deduction or withholding for or on account of Russian or Luxembourg taxes, except as required by law. In the event that any deduction or withholding is required by law with respect to payments under the Notes or the Loan Agreement, PKB will be obliged, except in certain limited circumstances, to increase the amounts payable under the Loan Agreement, by an amount equivalent to the required tax payment. See Risk Factors-Risks Relating to the Notes and the Trading Market-Russian Withholding Tax and Disposals of Notes in the Russian Federation. The Issuer will agree in the Trust Deed not to agree to any amendments to, or any modification or waiver of, or authorise any breach or proposed breach of, the terms of the Loan Agreement unless the Trustee has given its prior written consent or unless authorised to do so by an Extraordinary Resolution (as defined in the Trust Deed) or Written Resolution (as defined in the Trust Deed) of the Noteholders (except in relation to Reserved Rights). Any amendments, modifications, waivers or authorisations made with the Trustee s consent shall be notified to the Noteholders and shall be binding on the Noteholders. See Terms and Conditions of the Notes 14. Notices. 12

14 The following is a diagram setting forth the transaction structure: Principal and interest on the Notes (including the New Notes) The Issuer Proceeds of the Notes (including the New Notes) Principal and Interest on the loan (including the New Advance) Proceeds of the Loan (including the New Advance) PKB Noteholder r 13

15 RISK FACTORS Investment in the Notes involves a high degree of risk. Potential investors should carefully review this entire Prospectus and in particular should consider all the risks inherent in making such an investment including the risk factors set forth below, before making a decision to invest. These risk factors, individually or together, could have a material adverse effect on PKB s business, operations and financial condition and/or the rights under the Notes of the Noteholders. Risks Relating to the Bank s Business and Industry Risks Relating to the Bank Corporate Governance and Disclosure The corporate affairs of the Bank are governed by the laws governing companies incorporated in Russia and by the Bank s charter and internal regulations adopted pursuant to its charter and such laws. The rights of shareholders and the responsibilities of members of the Bank s Board of Directors (the Board ) and its Managing Board under Russian law are different from, and may be subject to certain requirements not generally applicable to, corporations organised in the United States, the United Kingdom and other jurisdictions. A principal objective of the securities laws of the United States, the United Kingdom and other countries is to promote full and fair disclosure of all material corporate information to the public. The Bank is subject to Russian law requirements, which oblige it to publish, among other things, annual financial statements, quarterly disclosure reports as a securities issuer, reports on affiliated entities and information on material events relating to the relevant company (such as major acquisitions and increases in charter capital). However, there is less publicly available information concerning the Group than there is for listed companies in the United States, the United Kingdom or certain other jurisdictions. Approximately per cent. of the Bank s total share capital is controlled by Reserve Invest Holding (Cyprus) Limited, a company having common management with Financial Group IFD Kapital ( IFD Kapital ). IFD Kapital will therefore be able to elect the majority of the members of the Board and determine the outcome of all matters requiring majority shareholder approval without recourse to the minority shareholders. In addition, as further disclosed herein, of the nine members of the Board of Directors of the Bank, three are also senior managers of OJSC LUKOIL ( LUKOIL, together with its subsidiaries, the LUKOIL Group ). IFD Kapital s and LUKOIL s interests may differ from the interests of Noteholders and from those of the Bank. Exposure to Russian Corporate Risk The Russian economy has, in general, only been liberalising since 1991 and as a result many businesses in Russia have limited experience in operating in competitive market conditions as compared to their Western counterparts. In addition, the Russian economy has experienced significant volatility since Accordingly, the financial performance of Russian corporations is generally more volatile, and the credit quality of Russian corporates on average is less predictable, than similar companies doing business in more mature markets and economies. If a significant number of the Group s corporate borrowers experience poor financial performance due to a general Russian or regional economic downturn or volatility in certain sectors of the Russian or regional economy, the Group could suffer material adverse consequences on its financial performance and results of operations. Interest rate, liquidity and exchange rate risks, which are inherent in the Bank s business, cannot be eliminated completely Like other Russian commercial banks, the Bank is exposed to risks resulting from mismatches during the repricing periods of its interest-bearing liabilities and interest-earning assets. While the Bank tries to minimise these risks by revising the interest rates on its loans and deposits, any material adverse interest rate movements may have a material adverse effect on the business, financial conditions, results of operations and prospects of the Bank. The Bank also tries to limit maturity mismatches between its assets and liabilities in order to minimise its liquidity risk. Although management believes that the Bank s access to domestic and international interbank markets will continue to allow it to meet any short-term liquidity needs, 14

16 maturity mismatches may have a material adverse effect on the business, financial condition, results of operations and prospects of the Bank. The Bank trades currency on behalf of its customers and for its own account and maintains open currency positions that result in foreign exchange risk. Although the Bank is subject to limits on its open positions pursuant to regulations of the CBR and the Bank s own internal policies, future changes in currency exchange rates and the volatility of the Rouble may have a material adverse effect on the business, financial condition, results of operations and prospects of the Bank. Any failure of the Bank to comply with capital adequacy or other ratios may result in the revocation of the Bank s licence and a breach of loan covenants in existing financings. According to CBR regulations, which apply a methodology based on Russian accounting standards, the Bank s shareholders equity as a percentage of risk weighted assets, or its capital adequacy ratio, must be at least 10 per cent. The Bank s capital adequacy ratio calculated in accordance with CBR requirements, as of 30 June 2006 was 13.9 per cent. (and thus in compliance with CBR requirements). If the Bank s capital adequacy ratio were to fall below the 10 per cent. threshold, the Bank would be in violation of the CBR mandatory ratio, and the CBR could impose various administrative fines or, in the event of repeated violations, revoke the Bank s banking licence. Certain of the Bank s loan agreements contain covenants that require the Bank s capital adequacy ratio, as calculated in accordance with the rules of the Bank for International Settlements, be at least 10 per cent. If the Bank s capital adequacy ratio were to fall below this threshold, the Bank would breach its covenants in such agreements and be in default under the terms of these agreements. The absence of centralised credit information may expose the Group to risks which it may not be able to assess and provide for accurately, which could have a material adverse effect on the Group s business financial condition and results of operations. Following recent changes to Russian legislation, credit bureaus have begun to operate in Russia; however, Russia does not currently have any developed central credit bureaus, and the Group and its competitors do not share customer information. Therefore, the Group is unable to confirm independently information provided by a credit applicant regarding the total credit extended or available to such applicant. As a result, customers may be overexposed by virtue of other credit obligations, of which the Group has no knowledge. The Group is therefore exposed to credit risks which it may not be able to assess and provide for accurately, which could have a material adverse effect on the Group s business financial condition and results of operations. Interest Rate Sensitivity The Group is exposed to interest rate risk principally as a result of lending and making advances to customers and other banks at fixed interest rates and in amounts and for periods which differ from the Group s funding sources (customer deposits, bank borrowings and securities offerings). The Group attempts to manage this risk by fixing lending rates only on a short term basis. The Bank also seeks to match its interest rate positions to minimise interest rate risk. Despite these efforts, there can be no assurance that significant adverse interest rate movements will not have an adverse effect on the Group s results of operations. Interest rates have continued to decline in Russia over the past few years. Further decreases are expected which will put increasing pressure on the Group s interest margins. While the Bank plans that growth in lending will continue to generate increased interest income offsetting any declines in interest margin, the pace of loan portfolio growth may be constrained by the ability of the Group to increase its lending to customers who meet the Group s credit quality standards and other business criteria. There can be no assurance that the rate of balance sheet growth or the financial performance of the Group may not be adversely affected by these constraints. Increasing competition The Russian market for financial services is becoming highly competitive. In the corporate banking market, the Group principally competes with a number of other national and regional banks, some of which have a broader geographic reach, more branches and greater capital resources than the Group. The Bank expects the Russian banking market to become increasingly competitive as a result of the continued deregulation of the banking industry. The Bank expects this trend to contribute to increased competition in both deposit-taking and lending activities, which could narrow spreads between deposit and loan rates, which could have an adverse impact on the Group s profitability. In addition, in the retail banking market, in common with other Russian retail banks, the Group competes with Sberbank, the former monopoly retail bank of the Soviet Union. According to 15

17 RosBusiness Consulting Agency, Sberbank held approximately 54.7 per cent., of total retail deposits as at 30 June The Group also competes with the subsidiaries of international banks in the retail lending sector of the retail banking market. If the Group is unable to continue to compete successfully in the corporate banking sector or to execute its focused strategy on VIP and middle level earners in the retail banking sector, it could have a material adverse effect on the Group s business and results of operations. Relationship with the LUKOIL Group In terms of both funding and revenues, the Group was historically reliant on LUKOIL and the LUKOIL Group. The Group has two types of exposure to the LUKOIL Group, namely, the loans it makes to members of the LUKOIL Group and the guarantees and other contingent liabilities it assumes on behalf of members of the LUKOIL Group. All credit extended to members of the LUKOIL Group is made on an arm s length basis and the credit and payment terms in respect of such credits are generally no more favourable than those offered to third parties. Whereas the Group intends to continue its close business relationship with the LUKOIL Group, in the medium term, the Group is continuing to develop its various banking businesses in areas and for customers, which are not related to the LUKOIL Group, which is expected to result in proportionally reduced exposure to members of the LUKOIL Group. The LUKOIL Group remains, however, a major customer of the Group and any material adverse effect on the operation and financial performance of the LUKOIL Group may have a material adverse effect on the Group s business and operations, see also Loan and Deposit Concentration below. Relationship with IFD Kapital The business of IFD Kapital is divided into four sectors: Insurance, Banking, Investment and Pension Funds. IFD Kapital is in the process of trying to increase its market penetration and develop its businesses in Russia. Part of this strategy is focused on exploring synergies with the Bank in the sphere such as cross selling of financial products, such as pension funds and investments. The extent to which this will be beneficial to the Bank will depend on the extent to which IFD Kapital is willing to make such cooperation financially attractive and to allow the Bank to maintain and develop its own business strengths as well as serving as a conduit for those of IFD Kapital. The level of success IFD Kapital s businesses achieve both in the market as a whole and through IFD Kapital s cooperation with the Bank may influence the extent to which IFD Kapital is able to allow the Bank to invest in its future development and the degree to which IFD Kapital values the Bank for its cross selling capacity. Changes in Customer Focus One of the key aspects of the Group s growth strategy is to expand its corporate customer base by drawing on its experience from business with the LUKOIL Group to provide the same full range services to other corporate clients. Many of Russia s corporates have established in-house banking entities through which they conduct substantially all of their banking. In the current environment, although the Group may compete for the banking business of these corporates, such corporates may not require or make use of the full range of banking services offered by the Group. Risks relating to Growth Strategy The growth of the Group following the financial crisis of 1998 was sustained under the close supervision of LUKOIL. Through a combination of organic growth and a series of strategic acquisitions, the Group achieved significant growth in recent years, particularly in the size of its overall loan portfolio, the amount of deposits taken from non-lukoil related entities and in its sales network, and intends to continue doing so to meet its strategic objectives. Expansion of the Group s sales network entails significant investment, as well as increased operating costs. Overall growth in the Group s business also resulted in an allocation of management resources away from daily operations. In addition, the management of such growth will require, among other things, continued development of the Group s financial and information management control systems, the ability to integrate new branches or newly acquired financial services businesses with existing operations, the ability to attract and retain sufficient numbers of qualified management and other personnel, the continued training of such personnel, the presence of adequate supervision and the maintenance of consistency of customer services. Failure to manage this growth, while at the same time maintaining adequate focus on the Group s existing business units, could have a material adverse effect on the business, financial condition, results of operations and prospects of the Group. 16

18 Strong continuous growth in independent lending and growth in the Bank s loan portfolio increase the Bank s profits, but at the same time heighten operational and credit risks of the Bank. As at 30 June 2006, the Group s total gross loan portfolio was RUR66,355,181 thousand as compared to RUR54,653,133 thousand as at 31 December A large part of the loan portfolio remains untested. Loan and Deposit Concentration The Group s loan portfolio shows relatively high industry concentration. As of 30 June 2006, the trade, manufacturing, agriculture and finance sectors accounted for 25.8, 18.2, 8.7 and 8.6 per cent. of the Group s total loan portfolio, respectively. In the event of an economic downturn in one or more of these segments, a substantial percentage of the Group s corporate borrowers could become unable to service or repay their loans, which could have a material adverse effect on the Group s financial condition and results of operations. In addition, as at 30 June 2006, the Group s 10 largest borrowers, or groups of related borrowers, accounted for 23.5 per cent. of the total loan portfolio (gross of provisions) at that date. While this represents a diversification of the Group s borrowers when compared to 25.6 per cent. as at 31 December 2005, an impairment in the ability of one or more of these borrowers to repay their loans could result in a material adverse effect on the Group s financial condition and results of operations. Furthermore, there is a significant concentration of deposits from a single customer, with the LUKOIL Group accounting for 27.7 per cent. of the total customer deposits as at 30 June If LUKOIL were to withdraw its funding for any reason this could result in a material adverse effect on the Bank s financial position and operating results. In addition, any economic difficulties which impact on the ability of the Group s depositors to meet liquidity needs from current operations could also cause such customers to withdraw their funds from the Group. If such withdrawals were to occur within a relatively short period of time, it could cause liquidity difficulties for the Group together with the loss of a significant source of funding, which could have a material adverse effect on the Group s financial condition and results of operations. Gains less losses from trading securities and losses net of gains from derecognition of investment securities available for sale In the six month period ended 30 June 2006, the Group achieved net gains of RUR2,300,994 thousand from trading securities and disposal of investment securities available for sale. Management considers this result to be exceptional and greatly fuelled by favourable market conditions. Although management will continue to focus on this area, there is no assurance that these strong results will be repeated. If the Bank fails to receive licences required for it to conduct its operations, or if any existing licences are revoked, the Bank will be adversely affected. All banking and various related operations in Russia require licences from the CBR and/or other regulatory agencies. Operations in securities require licences from the Federal Service for the Financial Markets. The Bank has current licences for its banking operations and operations with foreign currencies and securities. However, there is no assurance that it will be able to obtain such licences in the future. Applying for licences is a burdensome and time-consuming process. Regulatory agencies may impose additional requirements for a licence or deny the Bank s licence applications. The loss of a licence, a breach of the terms of any licence by the Bank or its failure to obtain required licences in the future may result in cash flow difficulties, which would, in turn, affect its ability to fulfil payment obligations and would have a material adverse effect on the Group s business, financial condition, results of operations or prospects. If the Bank loses its general banking licence, it will be unable to perform any banking operations. Dependence on Key Management The Bank is dependent on its senior management for the implementation of its strategy and the operation of its day to day activities. In addition, certain business relationships of members of senior management may be important to the conduct of the Bank s business. No assurance can be given that key members of senior management will remain at the Bank. The Group s banking business entails operational risks. The Group is exposed to many types of operational risk, including the risk of fraud by employees or outsiders, unauthorised transactions by employees and operational errors including clerical or record keeping errors or errors resulting from faulty computer or telecommunications 17

19 systems. The largest fraud case discovered by the Bank in the third quarter of 2004 resulted in a loss of RUR45,000 thousand. The most recent fraud case occurred in the third quarter of 2005 and entailed a loss of RUR1,669 thousand. Given the Group s high volume of transactions, the substantial delegation of credit authority to regional branches and additional offices and its current IT systems, errors and fraud attempts may be repeated or compounded before they are discovered and rectified. The Group is adopting a variety of measures to maintain the level of operational risk at a level that does not threaten the financial stability of the Bank and the interests of its lenders, investors, shareholders, employees and counterparties. In addition, the Group s ability to operate its business depends on its ability to protect the computer systems and databases which the Group operates and uses from the intrusion of third parties who may attempt to gain access through the Group s computer systems, networks, or databases through the internet or otherwise. Although the Group believes that its computer systems, networks and databases are well protected from unauthorised intrusion by a range of both physical and programming measures, given modern technical and financial resources of intruders, full assurance cannot be given that its computer systems, networks and databases will not suffer from such attacks in the future. The Group maintains a system of controls designed to keep operational risk at appropriate levels. However, there can be no assurance that it will not suffer losses from any failure of these control to detect or contain operational risk in the future. The Group s measures to prevent money laundering and/or terrorist financing may not be completely effective and may have a material adverse effect on its business, financial condition and prospects The existence of black and grey market economies in Russia, the presence of organised crime in the economy, loopholes in legislation and lack of administrative guidance on its interpretation give rise to an increased risk of Russian financial institutions being used as vehicles for money laundering and/or the financing of terrorist activities. The Group has implemented measures required by Russian law aimed at preventing it being used as a vehicle for money laundering and/or terrorist financing. However, there can be no assurance that the measures taken by the Group will be completely effective. If the Group is associated with money laundering and/or terrorist financing, its reputation and financial performance may be adversely affected. In addition, involvement in such activities may carry criminal or regulatory fines and sanctions. 18

20 Risks Relating to the Russian Federation The Bank is a Russian bank and the majority of its assets are located in the Russian Federation. There are certain risks associated with an investment in the Russian Federation. Political Risks Political conditions in the Russian Federation were highly volatile in the 1990s, as evidenced by the frequent conflicts amongst executive, legislative and judicial authorities, which negatively impacted Russia s business and investment climate. While Russia s current President, Vladimir Putin, re-elected for a second presidential term in March 2004, has maintained the stability of the Russian federal government (the Government ) and introduced policies generally oriented towards the continuation of economic reforms, there can be no assurances that there will be no material changes to Government policies or to economic or regulatory reforms. The State Duma (the lower chamber of the Russian parliament) elections in December 2003 resulted in an increase in the percentage of the aggregate vote received by the United Russia party and other members of the State Duma allied with the President. Furthermore, President Putin replaced the Prime Minister and changed the composition of the Government just prior to his re-election. Also, the next State Duma and presidential elections are due to be held in December 2007 and March 2008, respectively. There can be no assurance that any changes in the composition of the State Duma and election of the new President will not result in political instability in Russia. The Bank s business, financial condition, results of operations or prospects could be materially affected if political instability recurs or if reform policies are reversed or become ineffective. Actions of the Russian legislative, executive and judicial authorities can affect the Russian securities market. In particular, the events surrounding the tax claims brought against the Yukos Oil Company, as well as tax claims brought by the Russian tax authorities against several other major Russian companies, have led some commentators to question the progress of market and political reforms in Russia and have resulted in significant fluctuations in the market price of Russian securities and a negative impact on foreign direct and portfolio investment in the Russian economy. Any similar actions by the Russian authorities which result in a negative effect on investor confidence in Russia s business and legal environment could have a material adverse effect on the Russian securities market and prices of Russian securities or securities issued or backed by Russian entities, including the Notes. In addition, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict. Russian military and paramilitary forces have been engaged in the Chechen Republic in the recent past and continue to maintain a presence there. In addition, various acts of terrorism have been committed in population centres within the Russian Federation. Although the risks associated with these events or potential events are mitigated by the fact that the Group s principal activities are aimed at the provision of banking services to clients located in rural areas with low population density, they could materially and adversely affect the investment environment and overall consumer confidence in the Russian Federation, which in turn could have a material adverse effect on the Group s business, financial condition and results of operations. Expropriation and Nationalisation The Government has enacted legislation to protect property against expropriation and nationalisation. Furthermore, in the event that the Bank s property is expropriated or nationalised, legislation provides for fair compensation to be paid to the Bank. However, there can be no certainty that such protections will be enforced. This uncertainty is due to several factors, including the lack of state budgetary resources, the lack of an independent judicial system or sufficient mechanisms to enforce judgments and corruption among Russian state officials. The concept of property rights is not well developed in the Russian Federation and there is not a great deal of experience in enforcing legislation enacted to protect private property against nationalisation and expropriation. As a result, the Bank may not be able to obtain proper redress in the courts, and may not receive adequate compensation if in the future the Russian Government decides to nationalise or expropriate some or all of the Bank s assets. The expropriation or nationalisation of any of the Bank s or its subsidiaries assets without fair compensation may amount to an Event of Default under the Terms and Conditions of the Notes and may have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. 19

21 Economic Risks Since the dissolution of the former Soviet Union in the early 1990s, Russia s society and economy have been undergoing a rapid transformation from a one-party state with a centrally planned economy to a pluralist democracy with a market-oriented economy. This transformation has been marked by periods of significant instability and the Russian economy has experienced at various times: * significant declines in gross domestic product; * hyperinflation; * an unstable currency; * high levels of state debt relative to gross domestic product; * a weak banking system providing limited liquidity to Russian enterprises; * high levels of loss-making enterprises that continued to operate due to the lack of effective bankruptcy proceedings; * widespread tax evasion; * growth of a black and grey market economy; * pervasive capital flight; * high levels of corruption and the penetration of organised crime into the economy; * significant increases in unemployment; and * the impoverishment of a large portion of the Russian population. The Russian economy has been subject to abrupt downturns. In particular, the Government s decision to temporarily stop supporting the Rouble in August 1998 caused the currency to collapse. At the same time, the state defaulted on much of its short-term domestic debt and imposed a 90-day moratorium on foreign debt and other payments by Russian companies. These actions resulted in an immediate and severe devaluation of the Rouble, a near collapse of the Russian banking system, a sharp increase in the rate of inflation, a dramatic decline in the prices of Russian debt and equity securities and an inability of Russian issuers to raise funds in the international capital markets. There can be no assurance that recent positive trends in the Russian economy, such as an increase in the gross domestic product, a relatively stable Rouble and a reduced rate of inflation, will continue or will not be abruptly reversed. Moreover, the strengthening of the Rouble in real terms relative to the U.S. Dollar and the consequences of a relaxation in monetary policy, or other factors, could have an adverse effect on Russia s economy and/or the Bank s business, financial condition, results of operations or prospects in the future. Although economic conditions in the Russian Federation have been improving since 1999, there is a lack of consensus as to the scope, content and pace of economic and political reform. No assurance can be given that reform policies will continue to be implemented and, if implemented, will be successful, that the Russian Federation will remain receptive to foreign investment, or that the economy of the Russian Federation will continue to improve. Any failure or reversal of the current policies of economic reform and stabilisation could have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. Impact of Fluctuations in the Global or Russian Economies Russia s economy could be adversely affected by market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems outside the Russian Federation or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and adversely affect the Russian economy. Additionally, because the Russian Federation produces and exports large volumes of oil and gas, the Russian economy is particularly sensitive to the price of oil and gas on the world market, and a decline in the price of oil and gas could have a significant negative impact on the Russian economy. These developments could severely limit the Bank s access to capital and could adversely affect the Bank s business, financial condition, results of operations or prospects. Recent terrorist activity in the Russian Federation and the recent armed conflicts in the Middle East have had a significant effect on international and domestic finance and commodity markets. Any future acts of terrorism or armed conflicts in the Russian Federation or internationally could have an adverse effect on the financial and commodities markets and the global economy. As the Russian 20

22 Federation produces and exports large amounts of crude oil and gas, any acts of terrorism or armed conflicts causing disruptions of Russian oil and gas exports could negatively affect the Russian economy and, thus, adversely affect the Bank s business, financial condition, results of operations or prospects. Exchange Rates and Currency Regulation There was significant instability in the Rouble exchange rate following the financial crisis of August 1998, although the Rouble has appreciated against the U.S. Dollar in real terms during 2001, 2002, 2003, 2004, 2005 and the first nine months of The ability of the Government and the CBR to limit any further volatility of the Rouble will depend on many political and economic factors, including the Government s ability to control inflation and the availability of foreign currency. According to Government estimates published by the RIA News Agency, inflation in the Russian Federation was 19 per cent. in 2001, 15 per cent. in 2002, 12 per cent. in 2003 and 2004, 11 per cent. in 2005 and will be 9 per cent. in Although the rate of inflation has been declining, any return to high and sustained inflation could lead to market instability, new financial crises, reductions in consumer purchasing power and erosion of consumer confidence. Any one of these events could lead to decreased demand for the Bank s products and services. A market exists within the Russian Federation for the conversion of Roubles into other currencies, but it is limited in size and is subject to rules limiting such conversion. There can be no assurance that a relatively stable market will continue indefinitely and a lack of growth of this currency market may hamper the development of the Bank s business and the businesses of its clients. Federal Law No. 173-FZ On Currency Regulation and Currency Control published on 17 December 2003 ( Currency Law ) is generally aimed at the gradual liberalisation of Russian currency control regulations. Pursuant to the Currency Law, the CBR had the power to regulate certain currency operations (including non-banking operations performed by Russian banks) by introducing a special account requirement. As of 1 January 2007, the major remaining restrictions envisaged in the Currency Law (including the special account requirement ) have been abolished. Any future change to the existing currency control regime may have a material adverse affect on the Bank s business, financial condition, results of operations or prospects. Lack of Reliable Official Data Official statistics and other data published by the CBR, Russian federal, regional and local governments, and federal agencies may be substantially less complete or researched and, consequently, less reliable than those published by comparable bodies in other jurisdictions. Accordingly, the Bank cannot assure prospective investors that the official sources from which the Bank derives the information set out herein are reliable or complete. Russian state entities may produce official statistics on bases different from those used by comparable bodies in other jurisdictions. Any discussion of matters relating to the Russian Federation herein may, therefore, be subject to uncertainty due to concerns about the completeness or reliability of available official and public information. Physical Infrastructure Russia s physical infrastructure is in very poor condition, which could disrupt normal business activity. Russia s physical infrastructure largely dates back to Soviet times and has not been adequately funded and maintained over the past decade. Particularly affected are pipeline, rail and road networks, power generation and transmission, and communication systems. The Government is actively considering plans to reorganise the nation s rail, electricity and telephone systems. Any such reorganisation may result in increased charges and tariffs while failing to generate the anticipated capital investment needed to repair, maintain and improve these systems. The continued deterioration of Russia s physical infrastructure may harm the national economy, disrupt the transportation of goods and supplies, add costs to doing business in the Russian Federation and may interrupt business operations, all of which could have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. Social Risks Crime and corruption could disrupt the Bank s ability to conduct business and could materially adversely affect its business, financial condition, results of operations or prospects. 21

23 The political and economic changes in the Russian Federation since the early 1990s have resulted in reduced policing of society and increased lawlessness. The Russian and international press have reported high levels of organised criminal activity and corruption of officials in the Russian Federation and other countries of the former Soviet Union, including the bribery of officials for the purpose of initiating investigations by state agencies. Press reports have also described instances in which state officials have engaged in selective investigations and prosecutions to further commercial interests of select constituencies. Additionally, published reports indicate that a significant proportion of the Russian media regularly publishes biased articles in return for payment. The Bank s business, financial condition, results of operations or prospects could be materially adversely affected by illegal activities, corruption or by claims alleging involvement in illegal activities. Social instability in the Russian Federation, coupled with difficult economic conditions, the failure of the state and main private enterprises to make full and timely payment of salaries on a regular basis and the failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living have led in the past, and could lead in the future, to labour and social unrest and increased support for a renewal of centralised authority, increased nationalism, restrictions on foreign involvement in the economy, and increased violence. Any of these could restrict the Bank s operations and lead to a loss of revenue. Legal and Regulatory Risks The Russian Federation is still developing an adequate legal framework required for the proper functioning of a market economy. Several fundamental Russian laws have only recently become effective. The recent nature of much of Russian legislation and the rapid evolution of the Russian legal system place the enforceability and underlying constitutionality of laws in doubt and result in ambiguities, inconsistencies and anomalies in their application. The following aspects of Russia s legal system create uncertainty with respect to many of the legal and business decisions that the Bank s management make. Many of these risks do not exist in countries with more developed legal systems: * since 1991, Soviet law has been largely, but not entirely, replaced by a new legal regime as established by the 1993 Federal Constitution, the Civil Code and by other federal laws, and by decrees, orders and regulations issued by the President, the Government and federal ministries which are, in turn, complemented by regional and local rules and regulations. There may be inconsistencies between such laws, presidential decrees, state resolutions and ministerial orders, and between local, regional and federal legislation and regulations; * decrees, resolutions and regulations may be adopted by state authorities and agencies in the absence of a sufficiently clear constitutional or legislative basis and with a high degree of discretion. There is a risk that the state may arbitrarily nullify or terminate contracts, withdraw licences, conduct sudden and unexpected tax audits, initiate criminal prosecutions and civil actions and use common defects in accounting or share issues and registration as pretexts for court claims and other demands to liquidate companies or invalidate such issues and registrations and/or transactions; * substantial gaps in the regulatory structure may be created by the delay or absence of regulations implementing certain legislation; * there is a lack of judicial and administrative guidance on interpreting applicable rules and limited precedential value of judicial decisions; * the Russian Federation has a judiciary with limited experience in interpreting and applying market-oriented legislation and which is vulnerable to economic and political influence; and * the Russian Federation has weak enforcement procedures for court judgments and there is no guarantee that a foreign investor will obtain effective redress in a Russian court. The independence of the judicial system and its immunity from economic, political and nationalistic influences in the Russian Federation remains largely untested. The court system is understaffed and underfunded. Judges and courts in the Russian Federation are generally inexperienced in the area of business and corporate law. In addition, most court decisions are not readily available to the public. Enforcement of court judgments can in practice be very difficult in the Russian Federation. All of these factors make judicial decisions in the Russian Federation difficult to predict and effective redress uncertain. Additionally, court claims are often used to further political 22

24 aims. The Bank may be subject to these claims and may not be able to receive a fair hearing. Additionally, court judgments are not always enforced or followed by law enforcement agencies. Compliance with Applicable Laws, Decrees and Regulations The application of the laws of any particular country is not always clear or consistent. This is particularly true for Russia where the pace of legislative drafting has not always kept pace with the demands of the marketplace. Russian commercial practices and legal and regulatory frameworks differ significantly from practices in other jurisdictions. As a result, it is often difficult to hire qualified management and accounting staff that can ensure compliance with changing regulatory requirements. Russian authorities have the right to, and do, conduct periodic inspections of the Bank s operations throughout the year. Any such future inspections may conclude that the Bank has violated laws, decrees or regulations, and the Bank may be unable to address such conclusions. Such findings could result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of the Bank s licences, any of which could increase costs or materially adversely affect the Bank s business, financial condition, results of operations or prospects. Unlawful or Arbitrary State Actions State authorities have a high degree of discretion in Russia and at times exercise their discretion arbitrarily, without conducting a hearing or giving prior notice, and sometimes in a manner that is contrary to law. Moreover, the state also has the power in certain circumstances, by regulation or act, to interfere with the performance of, nullify or terminate contracts. Unlawful or arbitrary state actions have included withdrawal of licences, sudden and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities have also used common defects in matters surrounding documentation of financing activities as pretexts for court claims and other demands to invalidate such activities and/or to void transactions, often for political purposes. Unlawful or arbitrary state action, if directed at the Bank, could have a material adverse effect on its business, financial condition, results of operations or prospects. Difficulty in Enforcing the Issuer s or Bank s Rights The current status of the Russian legal system makes it uncertain whether the Issuer or Bank would be able to enforce its rights in disputes with any of its contractual counterparties. Furthermore, the dispersion of regulatory power among a number of state agencies in the Russian Federation has resulted in inconsistent or contradictory regulations and unpredictable enforcement. The Government has rapidly introduced laws and regulations and has changed its legal structure in an effort to make the Russian economy more market-oriented, resulting in considerable legal confusion. No assurance can be given that local laws and regulations will become stable in the future. The Bank s ability to operate in the Russian Federation could be adversely affected by difficulties in protecting and enforcing its rights and by future changes to local laws and regulations. Further, its ability to protect and enforce such rights is dependent on the Russian courts, which are underdeveloped, inefficient and, in places, corrupt. Judicial precedents generally have no binding effect on subsequent decisions. Enforcement of court orders can in practice be very difficult in the Russian Federation. Additionally, court orders are not always enforced or followed by law enforcement agencies. It may be difficult for the Bank to enforce security for its loans under Russian law and a decline in the value of secured collateral may adversely affect the Bank s loan portfolio. Under Russian law, security arrangements (which include, inter alia, pledges and mortgages) and guarantees (other than bank guarantees) are considered secondary obligations, which automatically terminate if the relevant secured or guaranteed obligation becomes void. Furthermore, foreclosure under Russian law generally requires a court order and a public sale of the collateral. A court may delay such public sale for a period of up to one year upon a pledgor s application. A mortgage under Russian law is a pledge over real property, such as land and buildings, which requires state registration to be valid. Such state registration may be difficult to obtain, especially for real property under construction. Russian law has no pledge perfection system for collateral other than mortgage, which may lead to unexpected and/or conflicting claims of secured creditors upon the pledged property. Therefore, the Bank may have difficulty foreclosing on collateral or enforcing other security if and when its clients default on their loans. In addition, downturns in the relevant markets or general deterioration of economic conditions in Russia may result in a decline in the value of the collateral securing a number of the Bank s loans to levels below the outstanding principal balance on those loans. A decline in the value of the collateral securing the Bank s loans or the Bank s inability to obtain additional collateral may, in 23

25 some cases, require the Bank to reclassify the relevant loans, establish additional allowances for loan losses and increase reserve requirements. Also, failure to recover the expected value of collateral through foreclosure may expose the Bank to losses. Any such decline in collateral values or failure to recover the expected value of collateral in a foreclosure may materially and adversely affect the Bank s business, its financial condition, results of operations and prospects. Disclosure and Reporting Requirements The rights of the Bank s shareholders, the Bank s public reporting requirements as well as regulations to which the Bank is subject differ significantly from those applicable to comparable financial institutions in other jurisdictions. The Bank s charter ( Charter ), foundation agreement and internal regulations, the regulations governing Russian banks and the laws governing companies incorporated in the Russian Federation collectively regulate the Bank s corporate affairs. See Appendix A The Banking Sector and Banking Regulation in the Russian Federation. The rights of shareholders and the responsibilities of members of the Bank s Board of Directors and the Bank s Management Board under Russian law are different from, and may be subject to, certain requirements not generally applicable to corporations organised in other jurisdictions. See Description of the Bank Petrocommerce Group Management. The Federal Law No dated 2 December 1990 (as amended) On Banks and Banking Activities (the Banking Law ) contains certain periodic disclosure requirements, including the requirement to publish annual statutory accounting reports in accordance with Russian Accounting Standards ( RAS ). As its systems and processes are tailored to the requirements of RAS, it may take the Bank longer than comparable companies in other jurisdictions to prepare its consolidated annual and interim financial reports and its consolidated periodic internal accounts in accordance with IFRS as promulgated by the International Accounting Standards Board. In accordance with the Banking Law, the Bank is required to publish certain RAS accounting reports quarterly, including a balance sheet, income statement and information on its assets, capital reserves and allowances for non-performing loans, which do not contain all of the information contained in the Bank s consolidated financial statements, and is not prepared in accordance with IFRS. In accordance with Russian legislation applicable to securities issuers, the Bank is required to file quarterly reports with the federal governmental authority responsible for supervision of the securities market of the Russian Federation. These reports include certain information about the Bank, its management, subsidiaries, affiliates and selected financial and business information (such as events of litigation, quarterly statutory accounting reports prepared in accordance with RAS, etc.). Despite recent initiatives to improve corporate transparency in the Russian Federation, there is less publicly available information about the Bank than there is for comparable companies in other jurisdictions. Accounting and reporting requirements in Russia are not comparable to those in other (especially Western) jurisdictions. The Russian accounting legislation continues to develop and has been subject to change on a regular basis in recent years. As of 1 January 2005, all credit organisations in the Russian Federation must prepare RAS statutory accounting reports and, on annual basis, their financial statements according to IFRS. Russian Banking and Financial Regulation has been undergoing Significant Changes Like most of Russia s legislation on business activities, Russia s laws on banks and banking activity have only recently been adopted. In addition to the Federal Law of 10 July 2002 No. 86-FZ On the Central Bank of the Russian Federation (Bank of Russia), as amended (the CBR Law ) and the Banking Law, Russia has adopted and continues to develop new banking legislation. In December 2003, President Putin signed into law the Law on Insurance of Deposits of Individuals in Credit Organisations in the Russian Federation (the Deposit Insurance Law ), which mandates protection of bank deposits of individuals. The Deposit Insurance Law establishes a deposit insurance scheme in which all Russian banks must participate or lose their ability to accept retail deposits and open bank accounts for individuals. The enactment of the Deposit Insurance Law is expected to strengthen competition in the retail deposit market, as all Russian banks that choose to participate in the deposit insurance scheme will have the ability to offer protected deposits. As of April 2004, the CBR requires banks to comply with certain regulatory requirements on a daily basis. In April 2005, the CBR revised its system of mandatory economic ratios that Russian 24

26 banks are required to observe. One of these ratios currently liquidity ratio N3 requires that the liquid assets of a bank (including any financial assets realisable or receivable within 30 days) should be no less liquid than 50 per cent. of the aggregate amount of such bank s liabilities to customers on demand. Although this requirement is aimed at guarding against the lack of short term liquidity in the Russian banking market, it also restricts the income generating capacity of banks operating in Russia. Without a clear understanding of what legislative steps and structural changes are implemented as part of the CBR s banking reform package, it is difficult to identify or estimate how such reforms might adversely impact the Group and its business, financial condition, results of operations or prospects. The recent changes in the Russian banking and financial regulation are aimed at bringing the regime more in line with that of more developed countries. However, due to the recent changes in the regulatory system, banks operate in a new and relatively unclear regulatory environment. It is difficult to forecast how the changes in the banking and financial regulation will affect the Russian banking system. No assurance can be given that the regulatory system will not change in a way that will impair the Bank s ability to provide its banking services or to compete effectively, thus adversely affecting the Bank s business, financial condition, results of operations and prospects. Underdevelopment of the Russian Taxation System Taxes payable by Russian companies are substantial and include, among others, value added tax, profit tax, payroll-related taxes, property tax and other taxes. Russian Federal and local tax laws and regulations are subject to frequent change, varying interpretation and inconsistent enforcement. In addition, the Russian Federal and local tax collection systems increase the likelihood that Russia will propose arbitrary or onerous taxes and penalties in the future, which could adversely affect the Bank s business. In some instances, even though it may be viewed as contradictory to Russian constitutional laws, Russian tax authorities applied taxes retroactively, issued tax claims for periods for which the statute of limitations had expired and reviewed the same tax period multiple times. In addition, where tax laws are ambiguous, court practice may not rule in favour of taxpayers. In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. On July 14, 2005, the Russian Constitutional Court issued a decision that allows the statute of limitations for tax liabilities to be extended beyond the three-year term set forth in the tax laws if a court determines that the taxpayer has obstructed or hindered a tax inspection. As none of the relevant terms is defined, tax authorities may have broad discretion to argue that a taxpayer has obstucted or hindered an inspection and ultimately seek penalties beyond the three-year term. In addition, tax laws are unclear with respect to deductability of certain expenses. This uncertainty could possibly expose the Bank to significant fines and penalties and to enforcement measures, despite the Bank s best efforts at compliance, and could result in a greater than expected tax burden. In addition, transfer pricing legislation became effective in the Russian Federation on 1 January Despite the fact that Russian transfer pricing rules are not yet aggressively applied on a consistent basis by the Russian tax authorities, the scope of these rules is very broad. This legislation allows the tax authorities to make transfer pricing adjustments and impose additional lax liabilities in respect of all controlled transactions, provided that the transaction price differs from the market price by more than 20 per cent. Controlled transactions include transactions with related parties, barter transactions, foreign trade transactions and transactions with unrelated parties with significant price fluctuations (i.e. if the price of such transactions differs from the prices on similar transactions by more than 20 per cent. within a short period of time). Transfer pricing adjustments are also applicable to the trading of securities and derivatives. If the tax authorities were to impose significant additional tax liabilities as a result of transfer pricing adjustments, it could have a material adverse impact on the Bank s business, financial condition, results of operations or prospects. It is likely that Russian tax legislation will become more sophisticated in the future, resulting in the introduction of additional revenue raising measures. Although it is unclear how these measures would operate, the introduction of these measures may affect the Bank s overall tax efficiency and may result in significant additional taxes becoming payable. The Bank cannot offer prospective investors any assurance that additional tax exposures will not arise while the Notes are outstanding. Additional tax exposures could have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. 25

27 Risks Relating to the Notes and the Trading Market If PKB fails to meet its payment obligations under the Loan Agreement in full, this will result in the Noteholders receiving less than the scheduled amount of principal, interest or other amounts, if any. The Issuer has an obligation under the Terms and Conditions of the Notes and the Trust Deed to pay such amounts of principal, interest, and additional amounts (if any) as are due in respect of each Series of Notes. However, the Issuer s obligation to pay is limited to the amount of principal, interest, and additional amounts (if any) actually received by or for the account of the Issuer from PKB pursuant to the Loan Agreement. Consequently, if PKB fails to meet its payment obligations under the Loan Agreement in full, this will result in the Noteholders receiving less than the scheduled amount of principal, interest or other amounts, if any. Noteholders have no direct recourse to PKB. Except as otherwise expressly provided in the Terms and Conditions of the Notes and in the Trust Deed, no proprietary or other direct interest in the Issuer s rights under or in respect of the Loan Agreement exists for the benefit of the Noteholders. Subject to the terms of the Trust Deed, no Noteholder will have any entitlement to enforce any provision of the Loan Agreement or have direct recourse to PKB as borrower except through action by the Trustee pursuant to the rights granted to the Trustee in the Trust Deed. Under the Trust Deed and the Terms and Conditions of the Notes, the Trustee shall not be required to take proceedings to enforce payment under the Loan Agreement unless it has been indemnified or secured by the Noteholders to its satisfaction. See Terms and Conditions of the Notes. In addition, Noteholders should be aware that neither the Issuer nor the Trustee accepts any responsibility for the performance by PKB of its obligations under the Loan Agreement. Russian withholding tax may apply if the applicable double tax treaty is renounced and if a tax gross-up is not enforced by the Russian courts. In general, interest payments on borrowed funds made by a Russian entity to a non-resident legal entity or organisation are subject to Russian withholding tax at a rate of 20 per cent., absent reduction or elimination pursuant to the terms of an applicable double tax treaty. Based on professional advice it has received, PKB believes that interest payments on the Loan made to the Issuer should not be subject to withholding under the terms of the double tax treaty between the Russian Federation and the Grand Duchy of Luxembourg. However, there can be no assurance that such an exemption will continue to be available in the future. The Issuer has granted security over all principal, interest and other amounts payable under the Loan Agreement and the right to receive all sums payable under any claims or judgments relating to the Loan Agreement and all sums now or in the future deposited in the Account. Furthermore, under the terms of the Loan Agreement, the Issuer will agree that, upon the occurrence of a Relevant Event, it will assign all of its rights (except for any Reserved Rights) under the Loan Agreement to the Trustee. Rights under security granted to the Trustee in the Trust Deed will become exercisable upon the occurrence of a Relevant Event. In circumstances where payments under the Loan Agreement become payable to the Trustee pursuant to the security arrangements described herein, benefits of the Russia-Luxembourg double tax treaty will cease, and payments under the Loan Agreement to the Trustee may be required to be made subject to Russian income tax withholding at a rate of 20 per cent., or such other rate as may be in force at the time of payment. If the payments under the Loan Agreement are subject to any withholding taxes (as a result of which PKB would reduce payments under the Notes in the amount of such withholding taxes), PKB is obliged to pay such additional amounts as may be necessary so that the net payments received by the Issuer will not be less than the amount it would have received in the absence of such withholding taxes. In the event that the exemption from withholding tax ceases to be available, it is currently unclear whether the provisions in contracts obliging PKB to gross up payments for such withholding tax would be enforceable under Russian Law. If a Russian court does not rule in favour of the Issuer or the Trustee and Noteholders, there is a risk that the gross-up for withholding tax will not take place and that payment made by PKB under the Loan Agreement would be reduced by Russian income tax withheld by PKB at a rate of 20 per cent.. See generally Taxation-Russian Federation- Taxation of the Notes. PKB will not be entitled to prepay the Loan in the event that such withholding is required. 26

28 Disposals of the Notes in the Russian Federation may be subject to withholding tax which may adversely affect the value of the Notes. If a non-resident Noteholder that is a legal entity or organisation sells Notes and receives proceeds from a source within the Russian Federation, there is a risk that any part of the payment that represents accrued interest may be subject to a 20 per cent. Russian withholding tax. Where proceeds from a disposition of the Notes are received from a source within the Russian Federation by an individual non-resident Noteholder, withholding tax may be charged at a rate of 30 per cent. on gross proceeds from such disposal of the Notes, less any available cost deduction. The imposition or possibility of imposition of this withholding tax could adversely affect the value of the Notes. See Taxation-Russian Federation-Taxation of the Notes. Foreign judgments and arbitral awards may not be enforceable against PKB. Judgments rendered by a court in any jurisdiction outside Russia are likely to be recognised by courts in Russia only if (i) an international treaty providing for the recognition and enforcement of judgments in civil cases exists between Russia and the country where the judgment is rendered, and/or (ii) a federal law of Russia providing for the recognition and enforcement of foreign court judgments is adopted. No such federal law has been passed and no such treaty exists between the United Kingdom and Russia for the reciprocal enforcement of foreign court judgments. In the absence of an applicable treaty or convention providing for the recognition and enforcement of judgments in civil and commercial matters between the United Kingdom and the Russian Federation, a judgment of a court in England may be recognised and enforced in the Russian Federation only on the grounds of reciprocity. Although a number of Russian court decisions indicate this possibility, there has only been one instance in which a Russian court recognised and enforced an English court judgment on this basis. In each case, reciprocity must be established and, in the absence of a developed court practice, it is difficult to predict whether a Russian court will be inclined to recognise and enforce an English court judgment on the grounds of reciprocity in any particular instance. Also, the Loan Agreement will be governed by English law and will provide the Lender with the sole option to elect that disputes, controversies, claims and causes of action brought by any party thereto shall be settled by arbitration. The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the lack of experience of Russian courts in international commercial transactions, official and unofficial political resistance to enforcement of awards against Russian companies in favour of foreign investors, Russian courts inability to enforce such orders and corruption. Furthermore, any arbitral award pursuant to arbitration proceedings in accordance with the Rules of the London Court of International Arbitration and the application of English law to the Loan Agreement may be limited by the mandatory provisions of Russian laws relating to the exclusive jurisdiction of Russian courts and the application of Russian laws with respect to bankruptcy, winding up or liquidation of Russian companies and credit organisations in particular. Russian bankruptcy law has been the object of limited court decisions and thus it is impossible to predict with certainty how claims by the Lender or the Trustee on behalf of the Noteholders against PKB would be resolved in the event of PKB s bankruptcy. Russian bankruptcy law often differs from comparable laws in Western Europe countries and may be subject to varying interpretations. There is little precedent to predict how claims on behalf of the Noteholders against PKB would be resolved in case of its bankruptcy. In addition, under Russian law, PKB s obligations under the Loan Agreement would be subordinated to, among others, the following obligations: * costs related to bankruptcy litigation; * in tort to physical persons life or health, as well as moral damages; * claims of retail depositors and of individuals who have current accounts with PKB; * claims of the Agency for Deposit Insurance in respect of deposits and current accounts transferred to it pursuant to the Retail Deposit Insurance Law; * claims under the employment contracts and other social benefits and copyright claims; * claims secured by a pledge of PKB s assets; and 27

29 * claims of all other creditors except for claims of subordinated creditors. See Appendix A- Overview of the Russian Banking Sector and Regulation in Russia. In the event of PKB s insolvency, this subordination may substantially decrease the amounts available for repayment of the Loan, and as a result, the Notes. There is no existing market for the Notes. There is no existing market for the Notes. Application has been made for the Notes to be admitted to trading on the London Stock Exchange plc s Gilt Edged and Fixed Interest Market. However, there can be no assurance that an active trading market for the Notes will develop or be maintained. If an active trading market for the Notes does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. The market for securities issued by Russian issuers is influenced by economic and market conditions in other emerging markets. Although the Russian market has stabilised somewhat since the devaluation of the rouble in August 1998, there can be no assurance that events in Russia or other emerging markets will not cause a recurrence of such market volatility or that such volatility will not adversely affect the price of the Notes. The volatility in the Russian securities market is still very high. Credit ratings of the Russian Federation, PKB or the Notes could adversely affect the value of the Notes. Outstanding eurobonds of the Russian Federation are rated Baa2 (outlook stable) by Moody s, BBB (outlook stable) by Standard & Poor s and BBB (outlook stable) by Fitch Investor Rating Services ( Fitch ). PKB has a long-term deposit rating of Ba3 from Moody s and B+ by Standard & Poor s. The Notes are expected to be rated Ba3 by Moody s and B+ by Standard & Poor s. These credit ratings do not mean that the Notes are a suitable investment. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Similar ratings on different types of notes do not necessarily mean the same thing. The ratings do not address the likelihood that the principal on the Notes will be prepaid, paid on an expected final payment date or paid on any particular date before the legal final maturity date of the Notes. The ratings do not address the marketability of the Notes or any market price. The significance of each rating should be analysed independently from any other rating. Any changes in the credit ratings of the Russian Federation, PKB or the Notes could adversely affect the value of the Notes and the price that a subsequent purchaser will be willing to pay for the Notes. Luxembourg Insolvency Laws The Issuer is incorporated under the laws of Luxembourg. Insolvency laws in Luxembourg could negatively affect the ability of Noteholders to enforce their rights under the Notes by application of any applicable bankruptcy, insolvency, reprieve from payment (sursis de paiement), moratorium and other similar laws affecting creditors rights generally. Under the Trust Deed, the Issuer will charge and assign all its present and future rights and interests (other than the Reserved Rights) in respect of the Loan and the relevant account to the Trustee as security for the payment obligations of the Issuer under the Notes. Article 445 of the Luxembourg Commercial Code provides that the creation of a charge for pre-existing debts of the chargor is void and without effect if created during the suspect period (as defined in the Commercial Code) or up to 10 days before the suspect period. The suspect period is the period of time immediately preceding the date of the bankruptcy judgment. Its duration is fixed by the court at a maximum of six months. The provisions of Article 445 of the Luxembourg Commercial Code may affect the security granted by the Issuer pursuant to the Trust Deed. If the charge against the security were created during the suspect period, or up to 10 days before the suspect period for pre-existing obligations of the Issuer, the courts of Luxembourg would declare such charge void and invalid. In addition, if the Issuer is declared bankrupt (e.g., upon petition of a creditor of the Issuer or the public prosecutor in Luxembourg, or at the request of the Issuer itself), the Luxembourg courts will appoint a bankruptcy trustee (curateur) who shall be obliged to take such action as he deems to be in the best interest of the Issuer and of all creditors of the Issuer. Certain preferred creditors of the Issuer (including the Luxembourg tax authorities) may have a privilege that ranks senior to the rights of the holders of the Notes in such circumstances. To mitigate the risk of potential preferred 28

30 creditors, the Issuer will provide the Trustee with the benefit of covenants restricting its activities generally to those specified in the Trust Deed. 29

31 USE OF PROCEEDS The Issuer will use the proceeds of the issue of the New Notes expected to amount to U.S.$125,000,000 for the purpose of financing the New Advance to the Borrower and paying certain commission, fees and expenses in connection with the issue of the New Notes and to deposit in the Account an amount of U.S.$2,673, in respect of the accrued interest on the New Notes for the period from, and including 14 December 2006 to, but excluding, 12 March The proceeds from the Loan including the New Advance (expected to be U.S.$125,000,000 before taking into account commissions, fees and expenses) will be used by PKB for general corporate purposes. Total commissions, fees and expenses relating to the offering of the New Notes and the extension of the New Advance are expected to be approximately U.S.$1,000,

32 THE ISSUER Incorporation and Status Petrocommerce Finance S.A. was incorporated on 9 November 2006 as a Luxembourg société anonyme for an unlimited period of time under the laws of Luxembourg. The registered office of the Issuer is located at 2, boulevard Konrad Adenauer, L-1115 Luxembourg, Grand-Duchy of Luxembourg, and its telephone number is The Issuer is recorded with the Luxembourg Trade and Companies Register with the registration number B The Articles of Association of the Issuer will be published in the Official Gazette dated 24 November The Issuer has been established as a special purpose vehicle for the purpose of, among others, making loans to PKB and issuing notes and has no subsidiaries. Any person interested in inspecting the Articles of Incorporation may do so at the Luxembourg Trade and Companies Register. The constitutional documents of the Issuer are available for inspection during normal office hours on any weekday (Saturdays, Sundays and public holidays excepted) at the specified offices of the Principal Paying Agent and Transfer Agent. The Issuer has been in operation since 9 November Since the commencement of operations of the Issuer and as of the date of this Prospectus, no audited financial statements have been prepared. The Issuer intends to publish its first financial statements in respect of the period ending on 31 December Objects The objects of the Issuer, as set out in Article 4 of its articles of association, include: granting of loans or other forms of financing directly or indirectly in whatever means to PKB (e.g. including, but not limited to, by subscription of bonds, debentures, other debt instruments, advances, the granting of pledges or the issuing of other guarantees of any kind to secure the obligations of PKB). The Issuer may finance itself in whatever form including, without being limited to, through borrowing or through issuance of listed or unlisted notes and other debt instruments (e.g. including but not limited to bonds, notes, loan participation notes and subordinated notes) including under stand alone issues, medium term note and commercial paper programmes. Corporate Administration The corporate services provider to the Issuer is Deutsche Bank Luxembourg S.A., whose purpose is to act as a corporate services provider and as a domiciliation agent under a Domiciliation and Administrative Services Agreement between the Issuer, its shareholders and Deutsche Bank Luxembourg S.A., dated 11 December 2006 (the Domiciliation Agreement ). The registered office of Deutsche Bank Luxembourg S.A. is located at 2, boulevard Konrad Adenauer, L-1115 Luxembourg, Grand Duchy of Luxembourg, and its business activities are to provide corporate services and act as a domiciliation agent. The Domiciliation Agreement may be terminated at any time by either party upon giving not less than two months prior notice in writing to the other parties thereto provided that any termination by Deutsche Bank Luxembourg S.A. shall not be effective until a replacement acceptable to the Issuer has been suggested by Deutsche Bank Luxembourg S.A. The Domiciliation Agreement may also be terminated with immediate effect at any time by either party in the case of a serious breach (as defined therein). Upon termination of the Domiciliation Agreement (either by prior notice or with immediate effect in the case of a serious breach as defined therein) and upon filing of a termination notice with the Luxembourg Trade and Companies Register or upon the effectiveness of a new domiciliation agreement entered into with another corporate services provider, the obligations of Deutsche Bank Luxembourg S.A. set forth in the Domiciliation Agreement and in the law of 31 May, 1999 on the domiciliation of companies, as amended by the law of 19 December 2002 and the law of 2 August 2003 (the 1999 Law ) shall terminate. Upon complete settlement of sums due by the Issuer, the Administrator will hand over all the documents belonging to the Issuer. The Issuer will have to find a new corporate service provider and enter into a (new) domiciliation agreement with such corporate service provider (article 1 of the 1999 Law) in case the Domiciliation Agreement is terminated. 31

33 Share Capital The Issuer s share capital is EUR31,000 represented by 310 shares with a nominal value of EUR100 each, carrying one voting right in the general meeting of shareholders. All shares are in registered form and have been fully paid in cash. The sole shareholder of the Issuer is Stichting Petrocommerce Finance, a foundation (stichting) established under the laws of The Netherlands, registered with the Amsterdam Chamber of Commerce under number , having its statutory office in The Netherlands at 450 Herengracht, NL-1017 CA Amsterdam. A foundation can be a profit driven undertaking. However, the distribution of any earnings of the foundation must have a charitable or social purpose. Directors The Issuer has a Board of Directors, currently consisting of the following three directors: * Mr. Rolf Caspers, born on 12 March 1968 in Trier (Germany), * Mr. Vincent de Rycke, born on 22 March 1973 in Gent (Belgium), and * Mr. Tom Verheyden, born on 14 August 1974 in Diest (Belgium). There are no potential conflicts of interest between any duties owed by any member of the Board of Directors of the Issuer and their private interests and/or other duties. The business address of each member of the Issuer s Board of Directors is 450 Herengracht, NL-1017 CA Amsterdam. Auditors The Issuer has appointed Fiduciaire Patrick Sganzerla S.àr.l. with registered office at 17 rue des Jardiniers, L-1026 Luxembourg, as its statutory auditor (commissaire). The Issuer s statutory auditor is a member of the Luxembourg Institut des Reviseurs d Entreprises. Financial Year The Issuer s financial year is from 1 January to 31 December. Since the date of its incorporation, the Issuer has not published any audited or unaudited financial statements. The Issuer intends to publish its first financial statements in respect of the period ending on 31 December Any future published financial statements prepared by the Issuer (in respect of the period ending on 31 December in each year) will be available during normal office hours on any weekday (Saturdays, Sundays and public holidays excepted) from the offices of the Principal Paying Agent. Authorisation The issue of Notes and the granting of the Loan was authorised by resolutions of the board of directors of the Issuer dated 7 December 2006 and 8 March

34 DESCRIPTION OF THE BANK PETROCOMMERCE GROUP Introduction Bank Petrocommerce was founded on 22 April 1992 by, amongst others, the oil concern Langepas-Uray-Kogalymneft (which was subsequently reorganised and renamed as LUKOIL). Pursuant to Chapter 4 of its Charter, and according to the General Licence granted by the CBR, the Bank is able to provide any banking service permissible under the laws of the Russian Federation. The Group provides a wide range of banking services. One of the principal objectives of the Group includes the provision of banking and settlement services to LUKOIL and the LUKOIL Group, one of Russia s leading energy conglomerates. The per cent. interest in the Bank held by the LUKOIL Group as at 1 December 2005 was auctioned on 9 December 2005 to IFD Kapital. Following receipt of the requisite approvals, title to the per cent. interest passed to IFD Kapital by 2 June The Group provides a range of corporate and retail banking services (including the provision of loans, deposit-taking and bank card services), as well as undertaking securities and foreign exchange trading, fund management, trade and export credit agency finance and leasing. The Group expanded its investment banking activities in 2003 to include underwriting operations. As at 30 September 2006, the Bank s network in Russia comprised the Head Office and 11 additional offices in Moscow and the Moscow region, 18 regional branches, 40 additional offices in the Russian Federation, 1 foreign exchange office (which principally handles currency transactions) and 16 cash offices (which accept payment orders for customers and execute cash transactions), one electronic clearing house, 385 operational cash dispensers, and 115 POS (point of sale) terminals, which act like cash dispensers and 1,244 POS terminals in stores and service centres. In addition to the Bank, the Group comprises four operating companies: OJSC Komiregionbank Ukhtabank ( Ukhtabank ) (the Group currently controls per cent. of its voting shares); OJSC Stavropolpromstroybank ( Stavropolpromstroybank ) (the Group currently controls per cent. of its voting shares); BC Unibank S.A. ( Unibank ), a bank operating in Moldova (the Group acquired a 100 per cent. interest in 2002); and CJSC Bank Petrocommerce-Ukraine ( Petrocommerce-Ukraine ) (formerly Aviatekbank), a bank operating in Ukraine (the Group currently controls per cent. of its voting shares). As at 30 September 2006, the Group had 4,340 employees. The Head Office of the Bank is located at 24 Petrovka Street, Moscow , Russian Federation. The Bank is licensed and registered with the CBR under registration number 1776 and is recorded in the Unified State Register of Legal Entities with the Ministry of Taxes and Levies of the Russian Federation under registration number In 1993 the Bank was granted a general banking licence. The Bank is also licensed by the Federal Commission for Securities Market to act as a broker, dealer, trust manager and a depository in the Russian securities market. The Bank also holds a licence as a commodities exchange broker (number 628) issued by the Ministry for Antimonopoly Policy and Business Support of the Russian Federation. The Bank is a member of the Moscow Interbank Currency Exchange ( MICEX ); the Russian Trading System ( RTS ); and the Chamber for Commerce and Industry. The Bank participates in a number of associations, including the National Association of Securities Market Participants; the National Stock Exchange Association; the Association of Participants in the Promissory Notes Market; the Association of Russian Banks; the Union of Moscow Banks and the Association of Regional Banks of Russia. The Bank is authorised by the Federal Customs Service of the Russian Federation to act as a guarantor to the Russian customs authorities. The Bank is regulated and supervised by the CBR. It has been a member of SWIFT since 1999 and a full (principal) member of the VISA International payment system since Financial Overview The Group s consolidated profit for the year ended 31 December 2005 was RUR3,317,651 thousand compared to RUR1,367,061 thousand for the year ended 31 December Consolidated total assets as at 31 December 2005 of RUR90,578,916 thousand had increased by 46.6 per cent., as compared with consolidated total assets of RUR61,791,722 thousand as at 31 December This was principally attributable to the increase in loans and advances to customers (net of provisions) of 97.2 per cent. from RUR26,484,193 thousand as at 31 December 2004 to RUR52,232,554 thousand 33

35 as at 31 December 2005 and the increase in trading securities from RUR10,511,984 thousand as at 31 December 2004 to RUR17,509,232 thousand as at 31 December Consolidated total liabilities as at 31 December 2005 comprised RUR78,623,630 thousand, being an increase of 47.8 per cent., as compared with RUR53,199,073 thousand as at 31 December This was principally due to the increase in customer accounts from RUR43,141,465 thousand as at 31 December 2004 to RUR58,929,553 thousand as at 31 December 2005, in due to other banks from RUR1,369,245 thousand as at 31 December 2004 to RUR6,996,230 thousand as at 31 December 2005 and in other borrowed funds from RUR1,821,772 thousand as at 31 December 2004 to RUR3,745,138 thousand as at 31 December For financial information on the six months ended 30 June 2006, see Financial Review for Six Month Period Ended 30 June Ownership and Capital Structure As at 30 September 2006, the nominal share capital of the Bank totalled RUR5,000,000 thousand, comprising 450,000 thousand common stock shares of par value RUR10.00 each and 500 thousand preference stock shares of par value RUR1 thousand each. On 20 December 2005, an Extraordinary General Shareholders Meeting of the Bank approved amendments to the Charter allowing the Bank to convert its existing preference shares into common stock shares. In accordance with clarifications received from the CBR and the issuance standards approved by the Federal Service for the Financial Markets of the Russian Federation, the conversion is to be performed in two stages. Stage one is the conversion of the existing preference stock shares (500 thousand preference shares) into preference stock shares (50,000 thousand preference shares) with a lesser par value equal to the par value of the existing ordinary shares (RUR10.00 each). Stage two is the conversion of the new preference shares into common stock shares. On 27 October 2006 the Bank submitted to the CBR the documents for the state registration of the first stage. The Bank anticipates completing the conversion in full in the third quarter of As a result of the conversion the share capital of the Bank will consist of common stock shares only with a par value of RUR10.00 each. The amount of the Bank s share capital will remain unchanged, at RUR5,000,000 thousand. The table below shows the principal shareholders of the Bank as at 30 September Information on the Shareholders of Bank Petrocommerce Full name Number of common stock shares Percentage of Charter Capital 1 Open Joint Stock Company Kapital Insurance (indirect ownership of CJSC IFD Kapital ) ,969, Closed Joint Stock Company Kapital Reinsurance... 86,895, Limited Liability Company Management Company Kapital (indirect ownership of CJSC IFD Kapital )... 90,000, Limited Liability Company Investment Company Kapital (indirect ownership of CJSC IFD Kapital )... 24,500, Total IFD Kapital Group ,364, IFD Kapital was formed in early 2003 and has become one of the largest financial groups in Russia. In 2004 IFD Kapital acquired per cent. of the total share capital of the Bank from the LUKOIL Group and in 2006 acquired a further per cent. The majority of the share capital of IFD Kapital is beneficially owned by two individuals, Mr. Fedun and Mr. Alekperov, who are both members of the senior management team of LUKOIL. IFD Kapital is managed by a professional asset management company unaffiliated with IFD Kapital s ultimate beneficiaries. IFD Kapital is primarily focused on operations in Russia and participates in the following businesses: trading and brokerage activities, trust activities, investment advisory services, administration of pension funds and the provision of insurance services within the Russian 34

36 Federation. Currently IFD Kapital includes a number of large financial services providers in such areas as insurance, asset management, pension funds administration and brokerage. The following table shows the amount of loans (by maturity) and the total liabilities of the Bank (by term) which are attributable to IFD Kapital as at the dates shown: As at 30 June 2006 (unaudited) As at 31 December 2005 As at 31 December 2004 (RUR thousands) Loans to IFD Kapital Group Short-term loans/credits (1) ,507 27,712 Including overdrafts... Long-term loans/credits (1) ,400 Total , ,400 27,712 Liabilities to IFD Kapital Group Current accounts/settlement accounts , , ,875 Term deposits outstanding , , ,568 Debts securities issued... 8,471 Total... 1,098, ,122 1,144,443 (1) Short-term loans and credits are those due within one year at the date shown and long-term loans and creditors are those due after more than one year at such date. Source: accounting records of the Bank and its subsidiaries. The Group s principal business objectives remain the managing and optimising of the financial flows of LUKOIL Group companies and providing them with a full range of banking services, including corporate banking, retail services, payroll, card services and remittance services for employees. The Group is one of the main providers of treasury services to the LUKOIL Group and the Group has set up electronic banking stations in the majority of LUKOIL s offices. The LUKOIL Group has recently reviewed its providers of financial services in relation to LUKOIL s financial flows within Russia to satisfy its corporate governance requirements with the Bank being successful in the ensuing tender for prospective providers. On 18 August 2006, the LUKOIL Group announced a tender in relation to its export operations to select 3 financial services providers. The Bank submitted its application on 31 August The Bank s management remain confident that the Bank will continue to be the main provider of banking services to the LUKOIL Group as the Bank s physical presence in Russia has been tailored to respond to the needs of the LUKOIL Group and the Bank is highly experienced at responding to the cash management and other needs of the LUKOIL Group. The Group has developed a significant range of operational procedures and product lines in order to accommodate the needs of the LUKOIL Group, including real time monitoring of the budgetary control of the LUKOIL Group. Part of the Group s strategy is to have a presence through a branch of the Bank in each area where the LUKOIL Group has a material presence to allow it to service efficiently the financial needs of the LUKOIL Group. In addition, through the ongoing relationship with the LUKOIL Group, the Group has developed important and valuable experience in managing the LUKOIL Group s financial service requirements and tends to launch new products, such as car loans and mortgages, for example, on a pilot basis, within the LUKOIL Group before it rolls them out more widely. Rates to all the companies within the LUKOIL Group are charged at the same level and tend to be at the lower end of the range of market rates, which reflects the stability and lower risk accorded to the LUKOIL Group as a group of related borrowers by the Group. At the same time, the Bank s exposure to the LUKOIL Group has diminished over the last few years. The following table shows the amount of loans and the total liabilities of the Bank which are attributable to the LUKOIL Group as at the dates shown: 35

37 As at 30 June 2006 (unaudited) As at 31 December 2005 As at 31 December 2004 As at 30 June 2006 (unaudited) (RUR thousands) As at 31 December 2005 As at 31 December 2004 (RUR thousands) Loans to the LUKOIL Group Short-term loans/credits (1) , ,002 1,283,869 including overdrafts... 59,437 10, ,429 Long-term loans/credits (1)... 21,071 including overdrafts... Total , ,002 1,304,940 Liabilities to the LUKOIL Group Current accounts/settlement accounts... 11,797,701 4,472,745 8,799,638 Term deposits outstanding... 8,080,923 7,748,502 2,879,822 Debt securities issued , , ,814 Total... 20,282,191 12,701,417 12,590,274 (1) Short-term loans and credits are those due within one year at the date shown and long-term loans and creditors are those due after more than one year at such date. Source: accounting records of the Bank and its subsidiaries. Organisation The Group comprises the Bank, Ukhtabank, Stavropolpromstroybank, Unibank and Petrocommerce-Ukraine. As at 30 September 2006, the Bank conducted its operations from its Head Office and 11 additional offices in Moscow and the Moscow region, together with 18 regional branches, 40 additional offices in 15 regions of the Russian Federation (including the Perm region, the Republic of Komi, the Stavropol territory, the Tyumen region and the Yamalo-Nents autonomous district), 1 foreign exchange office (which principally handles currency transactions) and 16 cash offices (which accept payment orders for customers and execute cash transactions). The Bank s day to day activities are exercised by the Managing Board and the President of the Bank, with the activities of the Managing Board and the President being overseen by the Board of Directors. See Description of the Bank Petrocommerce Group Management. The principal operational committees are the Credit Committee of the Bank, the Small Credit Committee and the Financial Economic Committee. The principal business units of the Bank are (i) corporate banking (ii) retail banking and (iii) financial markets. Strategy Towards the end of 2005, the Bank s Board of Directors approved the new Operational Strategy for aimed at ensuring long-term and multi-layered customer relationships on the basis of a first-rate product range, which takes into account the needs of individual clients and ensuring an efficient partnership between the Bank and its customers. The principal components of the Bank s strategy are as follows: Customer Relationships The Bank will aim to build its business by focusing on corporate clients as: * the corporations themselves, their suppliers, contractors and partners; * their owners, managers and employees as individuals. 36

38 Multi-level contacts and servicing of all the participants represent the main instruments of successful customer acquisition and retention. For the purpose of building long-term investor relations, the Bank aims to ensure high transparency of its business and corporate governance. The Group intends to develop relationships with other major Russian corporates, such as Russian Railways and RAO UES, following the model of its relationship with LUKOIL. Product Offering On the basis of a multi-layered corporate customer relationship, the Bank has created services for companies and their employees, owners and managers, which are innovative in terms of complexity and quality. In 2006, the Bank has launched an investment banking service for its clients, expanded its leasing operations, implemented a cash management system for LUKOIL and started to develop a project finance expertise. Retail products are predominantly created for individuals, corporate clients employees, and take into consideration the economic and social objectives of such clients and their employees. Sales to other retail clients are targeted at high net worth individuals and middle class customers and the Bank takes a flexible and innovative approach to providing such customers with the services they require. Internal Structure In terms of its internal structure, the Bank aims to be an easily managed financial institution focused on the targeted execution of tasks in the separate areas of its activities (such as retail and corporate) within the scope of an overall strategy. The Bank aims to guard against excessive growth in the number of its employees and at the same time to increase the efficiency of its human resources by hiring and promoting its most qualified staff, developing their skills and responsibilities and ensuring their loyalty through the extensive delegation of authority. The Bank also aims to incentivise and motivate its staff through the establishment of a direct connection between their compensation and performance. Retail Banking The increasing intensity of the competition in the Russian retail banking market, especially from state and foreign banks, has led to downward pressure on margins in this market. The Bank has refocused its retail banking strategy and plans to limit the development of its retail banking business to specific client segments and to develop it in such a way as to minimise its expenditure on infrastructure and staff costs. Initially, the Bank plans to continue its focus on the employees of corporate clients, where its retail business is quite developed. Secondly, the Bank plans to develop joint projects with corporate clients, in which the Bank would contribute its know-how and product range and the corporate client would bear the main costs connected with the infrastructure and sales. Corporate banking The Bank has discontinued its lending to small and medium sized enterprises (SME) in Moscow and intends to continue to downsize its lending to SMEs in the regions outside of Moscow. An analysis of the structure of the Group s client portfolio and of its product range demonstrates, the Bank believes, that it possesses sufficient capacity to service corporate customers, including their employees (payroll services) and individual VIP clients. The development of these segments in the Bank s customer base stems from the Bank s historical focus on servicing the companies of the LUKOIL Group. The Bank has been able to harness the extensive expertise it has gained in this area to market itself as a provider of all round financial services to other corporate clients. The Bank intends to continue working with the LUKOIL Group and to provide it with a full range of services, including the most advanced banking services and technologies available, such as cash pooling and cash management. State Banking The Bank has gained valuable experience in servicing Russian state entities, including municipalities, regional administrations and pension funds. The Bank intends to continue its focus on this area as it believes that this strategy will ensure stable conditions for the Bank s operations in the regions, allow easier access to the Group s involvement in regional development projects and to 37

39 regional elites, which are usually influenced by local administrations. Management also believes that state borrowers represent a lower credit risk than certain corporate or individual borrowers. Regional Development Among financial and industrial centres in which the Bank is not yet present, the following regions have been identified as key priorities in which to establish a branch: * the Urals (the Sverdlovsk and Chelyabinsk regions); * Western Siberia (the Novosibirsk region, the Kemerovo region, the Altai region and the Tomsk region); and * Central Russia (the Lipetsk region). The Bank continues to monitor potential strategic acquisitions both within the Russian Federation and the CIS, primarily in those regions of the Russian Federation and countries of the CIS where members of the LUKOIL Group operate. The Bank does not plan any strategic acquisitions in the immediate future. The Bank closely monitors its existing subsidiaries and assesses their performance and strategy against the strategy of the whole Group. The Bank intends to revise the strategy of Ukhtabank and focus on retail banking as a more profitable business in that region. Competition According to the CBR s statistics for the first six months of 2006 published by the Prime-Tass business news agency, there were 1,221 credit organisations operating in Russia. A small number of Moscow based banks dominate the Russian banking industry. Management considers that there are three groups of the Bank s main competitors, both in corporate and retail banking: * Banks, directly or indirectly owned by the Russian state, such as Vneshtorgbank (Bank for Foreign Trade), Sberbank, Gazprombank and Bank of Moscow; * Subsidiaries of foreign banks, such as Raiffeissenbank, Citibank and International Moscow Bank; * Private Russian banks, such as Uralsib Bank, Alfa-Bank, Promsvyazbank and Bank Zenit. 38

40 Business Divisions of the Bank The following table depicts the Bank s internal business divisions as of 1 February 2007: Department for Strategic Planning Analytical Center Planning and Economics Office Budgetary and Administrative Office V.A. Vingogradov, First Vice President Administrative Department Human Resources Office Office of Business Affairs Facilities Administration Office Office for Banking Transaction Support Legal Department Division for Processing Claims and Complaints Office of Legal Support of Bank Transactions and Operations Legal Counsel s Office N.V. Kobobova, Vice President Risks Control Department Office for Control of Business Process Office for Control over Credit Risks Office for Control of Financial Risks Division for Control over Risks Relating to Project and Corporate Finance Financial Monitoring Division Treasury Department Liquidity Office Office of Assets and Liabilities Financial Monitoring Office E.V. Funtova, Chief Accountant Accounting and Reporting Department Division for Subsequent Monitoring Taxation Office Office for Consolidated Reporting Accounting Office V.N. Nikitenko, President Security Service Internal Control Service G.P. Tokmakova, Vice Resident VIP Clients Department Office of support for VIPclients operations Office for VIP Clients attraction and servicing Office for Sales Development Office for Methodology and Products Development Customer Services Department Division for Product Development Analysis and Control of Sales Corporate Clients Office Retail Customers Office Operations Management Office Payment and Settlement Center Currency Control Office Cash Services Office Yakimanka Branch Additional Office Kutuzovskoye Branch Additional Office Olympisky Prospect Branch Additional Office Prospect Mira Branch Additional Office Krasnopresnensjkoye Branch Additional Office Yamskova Pole Branch Additional Office Pokrovka Branch Additional Office Srelenka Branch Additional Office Elektrostal Branch Additional Office Kapital Branch Additional Office V.V. Oreshkin, Vice Resident Credit Department Credit Office Office for Support of Credit Operations Structural Finance Office Factoring Office A.A. Kutasin, Vice Resident Retail Loans Department Office for Granting Loans to Individuals Division for Multi-Component Projects and Programs Retail Business Department Office of Retail Banking Technologies Sales Office Business Support Office Office of Network Development Office for Interaction with Regional Structural Units Office for Public Relations Business Development Department Office for Compulsory Social Insurance D.K. Milovidov, First Vice President V.O. Zhidkov, Vice Resident IT Department Department for Financial Market Transactions Project Office Division of Customer Services in Respect of Financial Markets Office for IT assistance Division for New Products and maintenance Development Office for Development Financial Product Sales of Banking Technologies Division Office of Banking Systems Maintenance Portfolio Investment Division Office for Development of Management Accounting Forex Operations Division and Reporting Office for Support and Division for Transactions with Control of the Regional Promissory Notes and Bills of Network Operations Exchange Processing Center Analytical Office Trust Office Office for Money Markets Project and Corporate Finance Office Operational Support Office Depositary Operations Office 39

41 Corporate Banking Corporate lending is the principal activity of the Group. The Group offers a range of traditional banking services to corporate customers, including corporate loans, export financing, letters of credit and guarantees in both roubles and foreign currencies, as well as cash collection and management services and foreign exchange remittances. Short-term corporate lending is one of the Bank s main business activities. The Group also extends mid and long-term loans to customers for industrial and manufacturing investment purposes and project financing and issues guarantees, including stand-by letters of credit, bid bonds and customs guarantees. The Group provides its corporate banking services through its network of branches and additional offices. As at 31 December 2005, the Group had over 10,000 corporate clients. As at 31 December 2005, the Group had extended loans totalling RUR177,002 thousand to members of the LUKOIL Group, compared to RUR1,304,940 thousand as at 31 December As at 31 December 2005, the Group had extended loans to non-lukoil related customers totalling RUR54,476,131 thousand, compared to RUR26,823,956 thousand as at 31 December As at 31 December 2005, 0.3 per cent. of the Group s total loan portfolio was attributable to the LUKOIL Group as compared to 4.6 per cent. as at 31 December Management expects that, by the end of 2006, the percentage of its loan portfolio attributable to members of the LUKOIL Group will continue to have decreased. Loan facilities are provided mainly in roubles and U.S. dollars. As at 31 December 2005, the Group s net foreign currency loans to customers amounted to RUR18,111,984 thousand, compared to RUR11,528,025 thousand as at 31 December The Group extends longer term U.S. dollar loans to corporate customers in Russia for investment in industrial and manufacturing projects and project financing, subject to the availability to the Group of matching long-term U.S. dollar funding. The Group also makes available rouble and foreign currency non-cash facilities to its customers, principally comprising guarantees in relation to the importation of various goods and equipment, letters of credit in respect of trade financing activities and provides performance guarantees and bid bonds, in relation to project financing or construction transactions. The Group provides payroll services to the LUKOIL Group and other corporate customers. The Group also intends to extend to other corporate groups a range of cash management, payroll and remittance services similar to those which it currently supplies to the LUKOIL Group. The Group s trade financing activities principally involve pre-export financing, import financing and issuing and confirming letters of credit and the provision of letters of guarantee. The Group s trade finance activities are funded through correspondent bank facilities matched in terms of currency and maturity and through general term facilities. As at 31 December 2005, the Group had foreign currency loans outstanding which were utilised for the Group s trade financing activities (issuance of letters of credit confirmed by the foreign banks) of approximately RUR998,316 thousand. In addition to committed general term facilities, the Group also has correspondent banking lines which are generally on an uncommitted basis and require case-by-case approval, often by reference to overall country or region exposure of the relevant correspondent bank. The Group also utilises various export credit programmes provided by overseas export agencies such as HERMES (Germany), Eximbank USA, HBOR (Croatia), SACE (Italy) and ONDD (Belgium). In 2003, the Bank introduced new products and services for the benefit of major companies, including the Clients Settlement Centre, a system that makes it possible to make and control, in real time, payments of companies having extensive networks of affiliates and subsidiaries, and to carry out treasury functions. Based on the Group s estimates, as at 30 September 2006 more than 70 per cent. of account management, deposit drawing activities and basic cash management services have been conducted through electronic banking facilities. In the second quarter of 2006, corporate clients were granted the ability to use an Internet-based remote banking system. Also, as at 30 September 2006 more than 1000 clients use telephone banking services, which currently allow customers to obtain account information and make bank transfers over the phone. Customers Members of the LUKOIL Group have historically been the Group s main corporate customers. An increased focus on credit activities by each of the Bank s branches and an increased demand for credit in the regions has, however, allowed the Group to diversify its loan portfolio. Between

42 and 2005, the Group established banking relationships with a wide range of new corporate customers in various sectors of Russian industry. Retail Banking The Group s historical focus has been the provision of corporate banking services, principally to members of the LUKOIL Group. However, following the adoption of its development strategy in 2003, the Group started to extend a range of deposit and credit services to individuals and expanded its retail services, notably to include card services, mortgage lending and payroll and remittance services. The Group also provides general banking services to employees of members of the LUKOIL Group and has in the past introduced new products to this customer base before launching such products more widely. The Bank s retail banking services are provided through each of its 18 branches, rather than through its Head Office, as the branch network affords the best access to the regional Bank s retail customers. With the expansion in the variety of retail services offered by the Bank, the retail loan portfolio and deposit base has increased accordingly. Products offered in this sector include general purpose consumer loans and to a more limited extent, auto-loans, mortgages and cash management. The Bank intends to improve access to its retail banking facilities by updating its on-line interface to offer more sophisticated features. to: The Bank provides comprehensive set of on-line services for its retail clients. The clients are able * Request account statements on-line through the Banks web site; * Obtain information on all the operations with bank credit card account on the mobile phone via SMS-service or via IVR (Interactive Voice Response) system; * Conduct transactions using web-based bank-client system; * Use Internet trading facilities for brokerage services optimization. Deposits and Loans The Group provides deposit and secured lending facilities to LUKOIL employees and to other individuals. As at 31 December 2005, the Bank had deposits from individuals totalling RUR23,936,646 thousand, compared to RUR18,268,152 thousand as at 31 December As at 31 December 2005, loans to individuals outstanding amounted to RUR3,711,142 thousand, representing 6.8 per cent. of the Group s total gross loans (RUR54,653,133 thousand) as at the same date, compared to loans to individuals outstanding RUR1,521,393 thousand as at 31 December 2004, which represented 5.4 per cent. of total gross loans as at the same date. Debit Card Services In addition to having POS terminals and ATMs located in each of its branches and additional offices, the Bank is actively developing a network of ATMs and POS terminals using the VISA International system. The Bank currently offers a range of debit cards to its customers (including debit cards with an overdraft facility) from Visa and Mastercard. The number of VISA and Mastercard debit cards issued by the Bank as at 31 December 2005 was 407,515 compared to 312,817 as at 1 December 2004, representing an increase of 30.3 per cent. Most debit card holders are employees of the LUKOIL Group. The Bank intends to start issuing credit cards in the first quarter of Mortgages As at 31 December 2005, the Bank had advanced 517 mortgages in the amount of RUR457,642 thousand. Payroll and remittance services The Group offers payroll and remittance services to its major corporate customers, which include members of the LUKOIL Group, and has set up electronic banking stations in the majority of LUKOIL s offices for the benefit of employees of the LUKOIL Group. 41

43 Financial Markets Activities Securities Portfolio The Group trades and invests mainly in Russian Government bonds and Russian corporate stocks and bonds. Gains less losses from trading securities and gains less losses arising from investment securities available for sale comprised RUR3,723,538 thousand for the year ended 31 December 2005 compared to RUR930,849 thousand for the year ended 31 December Management takes a conservative approach to securities trading. As at 31 December 2005, 29.3 per cent. of the Group s securities trading portfolio represented investments in equities and 70.7 per cent. represented investments in debt obligations and notes, compared to 17.7 per cent., and 82.3 per cent., respectively, as at 31 December The Group s trading portfolio includes fixed income instruments, such as state debt securities, including OFZs and Russian Federation eurobonds, municipal bonds, corporate bonds and promissory notes. As at 31 December 2005 OFZ bonds in the Group s securities trading portfolio had maturity dates from July 2007 to November 2021, coupon rates of approximately 6.0 per cent. to 10.0 per cent. and yield to maturity from 5.6 per cent. to 6.8 per cent., depending on the type of bond issue. In addition to fixed income instruments, the portfolio also includes equity investments, such as highly liquid shares and depositary receipts of major Russian companies. The Group provides brokerage and depository services to its customers, which allow the Group s customers to access brokerage services provided by the Group: (i) in the Stock Market Section of MICEX, in RTS, as well as in the OTC market; (ii) for rouble-denominated state bonds, in the State Securities Section of MICEX; and (iii) for foreign currency denominated state and corporate debt securities in the OTC market. Through Internet Trading, the Bank enables its customers to manage their securities portfolios on-line, to monitor quotes and to transact on the MICEX trading floors. The following table sets out details of the Group s trading securities portfolio as at the dates indicated: As at 31 December 2005 As at 31 December 2004 (RUR thousands) Corporate shares... 5,126,558 1,864,406 Federal loan bonds (OFZ)... 4,710,428 3,695,316 Corporate bonds... 3,537,418 3,026,257 Corporate Eurobonds... 1,162,703 44,041 Credit-linked notes... 1,110,035 Russian Federation Eurobonds ,132 U.S. Treasury Strip securities ,790 1,264,965 Municipal bonds , ,017 Other ,634 64,982 Total trading securities... 17,509,232 10,511,984 (1) Dashes indicate that the Group did not hold the relevant securities in its securities portfolio as of the applicable date. 42

44 The following table sets out details of the Group s investment securities available for sale as at the dates indicated: As at 31 December 2005 As at 31 December 2004 (RUR thousands) Corporate bonds , ,287 Promissory notes , ,307 Municipal bonds and bonds of the Russian Federation s regions , ,930 Corporate shares... 27, ,972 Other... 87, ,689 Total investment securities available for sale... 1,436,310 1,689,185 The following table sets out details of the interest and net gains less losses earned by the Group in respect of its trading and available for sale securities activities: For the year ended 31 December 2005 For the year ended 31 December 2004 (RUR thousands) Interest income related to debt securities , ,331 Gains less losses from trading securities... 3,329, ,376 Gains less losses from disposal of investment securities available for sale , ,473 Total... 4,648,001 1,720,180 Foreign Exchange Trading In 2004 and 2005, the Group participated in the complete range of money market operations, including conversion and arbitrage operations, foreign exchange sales and purchases of currency for customers. The diversification of its money market operations enabled the Bank to manage its own liquidity and fulfil customer orders. Fund Management The Bank manages the assets of three funds: Petrocommerce-1, Petrocommerce-2 and Petrocommerce-3 (the Funds ), which allow investors to participate in a portfolio of securities managed by investment specialists at the Bank. The Funds are targeted at private individuals, many of whom are senior level managers within the LUKOIL Group. As at 30 June 2006, the total assets under management of the Funds were RUR5,449,897 thousand. Based on the Bank s strategy of accruing an acceptable risk/income ratio, the investments made by the Funds include Russian Federation eurobonds, corporate eurobonds of Russian companies, rouble denominated corporate bonds, shares of Russian companies, depositary receipts for shares of Russian companies as well as derivatives. The minimum investment requirements for each of the Funds are as follows: * Petrocommerce-1 RUR300,000 * Petrocommerce-2 RUR2,500,000 * Petrocommerce-3 RUR100,000 The Bank follows the same investment strategies for each of the Funds: per cent. of the funds under management is invested in fixed income instruments, such as state, sub-federal and municipal bonds and eurobonds, corporate bonds, eurobonds and promissory notes. Investments in equities, depositary receipts for shares of Russian companies as well as derivatives do not exceed 50 per cent. of the respective Fund s total asset value. Investments in securities of any particular corporate issuer (or related issuers) may not exceed 15 per cent. of the respective Fund s total assets value. 43

45 The return on investment of the Funds (profit per nominal share) as of 30 September 2006 as against 31 December 2005 was as follows: * Petrocommerce per cent. in RUR; * Petrocommerce per cent. in RUR; * Petrocommerce per cent. in RUR. According to the Association of Investor s Rights Protection, the Bank held the leading place in the Russian fund management market as at 30 September 2006 with cumulative net assets of the Petrocommerce Funds amounting to RUR5,969,010 thousand, which corresponds to a market share of more than 41.6 per cent. Underwriting The Bank has further developed its underwriting business and was ranked in seventh place as of 31 December 2005 in a league table of Russian bond underwriters published by CbondS, having underwritten 33 issues for the year ended 31 December 2005, compared with 21 issues for the year ended 31 December 2004, when the Bank was ranked in tenth place by CbondS. For the first six months of 2006, the Bank has underwritten 6 issues and was ranked in thirty-eighth place by CbondS. Leasing Business The Group believes that, by offering leasing products, it can offer a more comprehensive range of financial services to its customers, including, for example, mobile telecommunications and transportation companies. In providing its clients with leasing services, the Bank co-operates with several leasing companies. As of 1 January, 2006, CJSC Petroleasing-Management was one of the Bank s major borrowers. The company offers leasing services to enterprises in the spheres of telecommunications, freight and passenger transport and the mass media. In addition, the Bank lends to LLC Karkade, which is a retail company and leases its customers Russian and foreign-made cars. Branch Network Regional branches In addition to its Head Office and 11 additional offices in Moscow and the Moscow region, the Bank operates, as at 30 September 2006, a network of 18 branches, together with a further 40 additional offices, within 15 regions of the Russian Federation. The Group s reach extends to Northern Russia, Central Russia, Southern Russia, Western Siberia and the Kaliningrad enclave and the Groups is present in the following cities: * Arkhangelsk * Nizhny Novgorod * Astrakhan * Novorossiysk * Volgograd * Novocherkassk * Kaliningrad * Perm * Kirov * Rostov-on-Don * Kogalym * Samara * Krasnodar * Saratov * Langepas * St Petersburg * Murmansk * Naryan-Mar Subsidiaries Russian Federation Ukhtabank As at 30 September 2006, the Group controlled per cent. of Ukhtabank, which operates a wide banking network comprised of 6 branches in the Komi region of the Russian Federation. As at 31 December 2005, Ukhtabank had total shareholders equity of RUR754,106 thousand. For the year ended 31 December 2005, Ukhtabank earned net profit of RUR78,189 thousand compared to RUR123,720 thousand for the year ended 31 December

46 The Bank has announced a management restructuring and strategy overhaul for Ukhtabank in an attempt to return Ukhtabank to acceptable levels of net profit. Stavropolpromstroybank As at 30 September 2006, the Group controlled per cent. of Stavropolpromstroybank, which operates an extended banking network comprised of 7 branches (including 10 additional offices) in the Stavropol region of the Russian Federation. As at 31 December 2005, Stavropolpromstroybank had total shareholders equity of RUR178,734 thousand. In the year ended 31 December 2005 Stavropolpromstroybank earned net income of RUR98,709 thousand compared to RUR8,478 thousand for the year ended 31 December The Bank has announced that it wishes to sell its current shareholding in Unibank. Whilst there have been ongoing negotiations with various parties no final agreement has yet been reached with any one party. The CIS Unibank As at 30 September 2006, the Group owned 100 per cent. of Unibank, which operates a wide branch network comprised of 5 branches throughout Moldova. As at 31 December 2005, Unibank had total shareholders equity amounting to RUR224,418 thousand. For the year ended 31 December 2005, Unibank earned net income of RUR17,020 thousand compared to RUR17,840 thousand for the year ended 31 December Petrocommerce-Ukraine As at 30 September 2006, the Group controlled per cent. of Petrocommerce-Ukraine. As at 30 September 2006, Petrocommerce-Ukraine had 4 branches throughout the Ukraine. As at 31 December 2005, Petrocommerce-Ukraine had total shareholders equity amounting to RUR160,308 thousand. For the year ended 31 December 2005, Petrocommerce-Ukraine earned net income of RUR28,725 thousand compared to a net loss of RUR29,621 thousand for the year ended 31 December International Operations The expansion of its international operations remains one of the priority development areas of the Group. The international operations of the Group s customers have increased the demand for international settlement and documentary operations, export and import operations and trade and structure financing. The Group is committed to expanding the range of its services relating to international operations, improving their quality, mitigating relevant risks and increasing costefficiency of such operations. By 30 September 2006 the Group s overall correspondent network included 77 nostro accounts in 47 banks. This international correspondent network enables the Group to effect many types of payments to many parts of the world in a cost- and time-efficient way. The Group has established correspondent banking relationships with financial institutions in Europe, America and South-Eastern and Central Asia. The Group s principal correspondent banks are: The Bank of New York, New York; Bank of Tokyo-Mitsubishi UFG Ltd, Tokyo; JP Morgan AG, Frankfurt am Main; JP Morgan Chase Bank, New York; Commerzbank AG, Frankfurt am Main; Deutsche Bank AG, Frankfurt am Main; Bayerische-HypoVereinsbank AG, Munich; BHF- Bank AG, Frankfurt am Main; Banka Agricola Mantovana, Mantova; Credit Suisse, Zurich; UBS; ING Bank and Privredna Banka, Zagreb. Expansion of its correspondent bank relationships has contributed to the extensive development of the Group s documentary operations business. The Group is committed to increasing its existing lines and to establishing new documentary lines. The total limits opened in favour of the Group amount to USD260,000 thousand for documentary operations and USD1,120,000 thousand for conversion operations as at 30 September 2006, compared to USD183,000 thousand and USD823,000 thousand as at 31 December One of the Group s important strategies is to develop cooperation with major international banks in short-term trade finance and long-term financings guaranteed by export credit agencies. As of 30 September 2006, the Bank has entered into framework and individual agreements for short-term and long-term financings of imports of different goods (equipment, means of transport, 45

47 consumer goods, services, food, agricultural products). The financings have been provided to the Bank s customers. The Bank signed such agreements with Deutsche Bank AG; Bayerische Hypo und Vereins Bank, Munich; Commerzbank, AG; BHF Bank AG; KBC Bank N.V; Privredna Banka, Zagreb, UBS AG; Ost-West Handelsbank AG, F/M; Bank of Tokyo-Mitsubishi UFG Ltd. The Bank is in a process of signing framework agreements for long-term financings guaranteed by export credit agencies with Landesbank Berlin, ING Bank. N.V. and UBS Bank AG. Information Technology Technical support of its operations remains a major priority for the Bank. The Group looks for reliability, safety, quality and efficiency in its information and computer systems. All major computer systems used by the Group have back-up resources. Following its strategy of minimizing technological risks, in 2005 the Bank built a full-scale reserve Data Processing Centre. This Centre ensures uninterrupted processing of the Bank s transactions even in case of failure at the main servers. The Bank s most important system is IBSO (computer software designed by CFT-Centre of Financial Technologies the leading Russian banking information systems provider). The Bank is also using IBSO to make rouble transfers online in the CBR clearing system and to make foreign currency transfers in SWIFT. The Data Warehouse, also provided by CFT company, enables the Bank to have immediate access to information on the transactions of its branches and facilitates consolidated reporting. The Bank has installed REUTERS and Bloomberg systems to enter into transactions in financial markets, as well as providing remote access to the MICEX and the RTS trading floor, together with the Quick Broker system which enables the Bank s customers to enter into transactions with securities on MICEX. For the purpose of improving the services provided to clients, in 2006 the Bank acquired and is currently introducing a CRM-system produced by SAP, a German IT company. The Bank has also purchased the SAP Business Warehouse system for maintaining its management accounting and obtaining various analytical reports. In order to automate the investment banking front office, the Bank has installed the Resource Navigator produced by the Russian company SoftWell. This system has also allowed the Bank to reduce the risks on investment banking operations by improving procedures for control over interbank limits. General Administrative Expenses In the year ended 31 December 2005, the Group s total general administrative expenses in relation to its operations amounted to RUR3,078,696 thousand. Major items of expenditure during the year included expenses of RUR1,629,793 thousand in respect of employee remuneration, RUR339,989 thousand in respect of administrative expenses and RUR254,403 thousand in respect of depreciation of premises and equipment. The Group s total general administrative expenses in 2004 amounted to RUR2,135,334 thousand. Funding and Liquidity Sources of Funding The principal sources of funds for the Group are: * demand and term deposits from corporate borrowers, individuals and state and public organisations, which as at 31 December 2005 amounted to RUR58,929,553 thousand, compared to RUR43,141,465 thousand as at 31 December 2004; * borrowings in roubles and foreign currencies from domestic and foreign banks and institutions on both a bilateral and a syndicated basis; * debt securities in issue, rouble-denominated bonds, U.S. dollar-denominated Loan Participation Notes ( LPN ) and other securities including promissory notes and certificates of deposit. The Group s funding strategy is to increase its rouble and foreign currency deposit base through the expansion of its network and its corporate and retail customer base. This will allow for the expansion of its customer lending operations and will lead to a diversification of its sources of funding. The Group intends to continue to obtain short- and medium-term financing in the rouble bond market through the issue of rouble bonds and promissory notes and also intends to continue to 46

48 obtain medium-term financing through its correspondent banking relationships and through financings in the international markets (including in the syndicated loan and capital markets). In addition, following the implementation of the Government s proposed pension reform, the Group intends to develop its relationship with pension funds. The Group avoids financing credits with over 90 days until redemption date with demand deposits and places these funds into liquid securities or other short term instruments. The Group aims to create a funding base, which will secure a proper rate of return from proprietary active operations executed at competitive rates within established requirements for liquidity and interest rate risk. The Group accepts deposits denominated in roubles and foreign currency. As at 31 December 2005, 29.2 per cent. of the Group s total customer accounts were in foreign currency, principally U.S. dollars, with the remainder being in roubles. As at 31 December 2005, customer accounts provided 74.9 per cent. of the Group s total liabilities with inter bank deposits providing 8.9 per cent. of the Group s total liabilities. Debt securities in issue provided 9.9 per cent. of the Group s total liabilities. Deposits Demand Deposits Demand deposits are operated as current accounts. Interest is paid on balances at rates determined by the Group from time to time and customers are permitted to make an unlimited number of withdrawals. As at 31 December 2005, total demand deposits from customers amounted to RUR23,448,293 thousand or 29.8 per cent. of the total liabilities of the Group, as compared with RUR22,211,975 thousand or 41.8 per cent. of total liabilities of the Group as at 31 December Term Deposits In Russia, term deposits of legal entities have traditionally been placed for relatively short periods of time, due to the inflationary environment. As at 31 December 2005, total term deposits from customers amounted to RUR35,481,260 thousand or 45.1 per cent. of the total liabilities of the Group, as compared with RUR20,929,490 thousand or 39.3 per cent., of the total liabilities of the Group as at 31 December The Bank intends to increase the proportion which term deposits bear to the Group s deposit base and increase the share of long-term deposits. Due to other banks The Group lends and borrows amounts from the inter-bank money market in Russia, usually on an overnight basis. Although the Group uses the inter-bank money market in Russia for the purposes of managing its liquidity position, the general policy of the Bank is that inter-bank financing should not constitute a significant part of its general funding and should not be used to fund assets realisable within more than 30 days. The Bank has also arranged for an additional interest-bearing credit line to be made available to it by the CBR which the Bank uses for liquidity purposes on an intermittent basis. See Risk Management Liquidity Risk. The Group s due to other banks comprise loans in roubles and foreign currencies from local and foreign banks and institutions. As at 31 December 2005, the Group s outstanding loans included in deposits and balances from banks and other financial institutions amounted to RUR6,996,230 thousand, of which 38.7 per cent. was denominated in roubles, compared to RUR1,369,245 thousand as at 31 December 2004, of which 24.9 per cent. was denominated in roubles. Other Borrowed Funds The Group also obtains funds through syndicated facilities and term borrowings. 47

49 The table below sets out a breakdown of the Group s Other Borrowed Funds as at the dates indicated. As at 31 December 2005 As at 31 December 2004 (RUR thousands) Term borrowings... 1,903,916 1,821,772 Syndicated loans... 1,841,222 Total other borrowed funds... 3,745,138 1,821,772 (1) Dashes indicate the absence of the relevant liabilities as of the applicable date. Term borrowings represent the proceeds of the LPNs issued in the international financial markets and arranged through Standard Bank London Limited and ABN Amro. The LPNs had a nominal value of USD120,000 thousand and were issued in February 2004 at par value, a contractual interest rate of 9.0 per cent. per annum and a maturity date of February As at 30 September 2006 there was a nominal value of USD64,440 thousand that remained outstanding. In April 2005, the Bank entered into an unsecured credit facility for USD50,000 thousand, repayable after one year with an option to extend from a syndicate of international and Russian banks arranged by Raiffeisen Bank AG, Austria. The loan proceeds were used for the Bank s general purposes. The loan matured and was repaid in April On the repayment date of that loan, a new syndicated unsecured USD91,500 thousand term loan facility was arranged by Raiffeisen Bank AG, Austria. This loan is repayable in April In August 2006, the Bank issued RUR3,000,000 thousand 8.5 per cent. domestic bonds which are due to mature on 31 August In November 2006, the Bank entered into subordinated loan agreement, borrowing USD150,000 thousand at LIBOR + 4% with Reserve Invest (Cyprus) Limited, a company that is unaffiliated with the Bank but that has management common with the Bank s principal shareholder, IFD Kapital. The loan is repayable in May For details of the Group s indebtedness incurred in the first six months of 2006 see Financial Review for Six Month Period Ended 30 June Analysis of Loans As at 31 December 2005, loans and advances to customers amounted to RUR52,232,554 thousand, representing 57.7 per cent. of the Group s total assets. The Bank employs a number of categories to describe the types of loans advanced and contingent commitments made on behalf of its customers as follows: Category Corporate Loans... Municipal Loans... Individual Loans... Guarantees... Letters of Credit... Description Loans to corporate customers (including small- and medium-sized enterprises) to fund day to day operations Loans to local government entities Loans to individuals, including for the purchase of retail items Non-cash facility for guaranteeing commercial and financing requirements of corporate customers, including performance bonds Letters of Credit issued by the Bank in favour of its customers for the importing of goods and services by Russian businesses The Group has commitments and contingent liabilities in respect of, inter alia, guarantees and letters of credit on behalf of its customers. These instruments bear a credit risk similar to that of loans granted to customers. 48

50 The following table sets out details of the Group s guarantees and letters of credit commitments and contingent liabilities as at the dates indicated: As at 31 December 2005 As at 31 December 2004 (RUR thousands) Guarantees issued... 1,931,538 1,660,608 Import letters of credit ,316 1,716,269 Export letters of credit... 64,699 49,103 Letters of credit with settlements in the Russian Federation... 84,592 Total credit related commitments... 2,994,553 3,510,572 The outstanding contractual amount of any guarantee or letter of credit does not necessarily represent future cash requirements, as many of these commitments may expire or terminate without needing to be funded. Loans by economic sector The following table sets out a breakdown by economic sector of the Group s customer loan as at the dates indicated. As at 31 December 2005 As at 31 December 2004 Amount per cent. Amount per cent. (RUR thousands, except percentages) Trade... 15,002, ,493, Manufacturing... 12,050, ,433, Food industry... 5,170, ,104, Oil and energy... 4,292, ,457, Individuals... 3,711, ,521, Transportation... 3,483, ,315, Agriculture... 2,971, , Construction... 2,371, ,985, Finance sector... 1,459, ,088, Other... 4,140, ,155, Total loans and advances to customers (before impairment)... 54,653, ,128, Loans by maturity The following table sets out the maturity structure of the Group s loans to customers (net of provisions) as at the dates indicated: 49

51 As at 31 December 2005 As at 31 December 2004 Amount per cent. Amount per cent. (RUR thousands, except percentages) Demand and less than one month... 6,993, , From one to six months... 15,925, ,905, From six to twelve months... 11,029, ,999, From one to five years... 18,284, ,904, Total... 52,232, ,484, In common with most other Russian banks, the Group s loan portfolio is predominantly shortterm. As at 31 December 2005, loans due within one year or earlier represented 65.0 per cent. of the Group s customer loan portfolio, compared to 66.4 per cent. as at 31 December Top Ten Borrowers The Group s top 10 borrowers accounted for 25.6 per cent. (RUR14,011,700 thousand) of the Group s total loan portfolio as at 31 December The Group s Loan Portfolio The Group lends to corporate and retail customers. RUR denominated loans to Russian customers represent a significant proportion of the loan portfolio. Loans advanced are typically shortterm. The rate of interest charged on a loan depends on the credit risk classification and the maturity of the loan. As at 31 December 2005, effective average interest rates were 12.6 per cent. for U.S. dollar denominated loans to customers and 13.4 per cent. for RUR denominated loans to customers. The following table provides a breakdown of the Group s loan portfolio (net of provisions) as at 31 December 2005 and 31 December 2004: As at 31 December 2005 As at 31 December 2004 (RUR thousands) Current loans... 53,118,975 27,263,813 Overdue loans... 1,454, ,961 Reverse sale and repurchase agreements... 79,388 10,122 Less: Provision for loan impairment... (2,420,579) (1,644,703) Total loans and advances to customers... 52,232,554 26,484,193 50

52 Customer Concentration The following table shows a breakdown of the Group s ten principal corporate borrowers and their share in the Group s loan portfolio (gross of provisions) as at 31 December 2005: Customer Loan, RUR thousands Share in the gross loan portfolio, per cent. Gentor Group... 1,741, LLC METRONOM AG... 1,700, Yugtranzitservice Group... 1,640, RAO UES... 1,589, OJSC Akrilat... 1,389, Energomash UK Limited... 1,288, Novocherkassky elektrovozostroytelny zavod and CJSC Transholdleasing... 1,295, LLC Sonikvay... 1,237, Buket Group... 1,063, CJSC Petroleasing-Management... 1,066, Total... 14,011, Total loan portfolio... 54,653, Geographical analysis The structure of the Group s loan portfolio (net of provisions) by geographical region as at 31 December 2005 and 31 December 2004 is set out in the table below: As at 31 December 2005 As at 31 December 2004 (RUR thousands) Russia... 48,667,322 24,783,818 OECD... 43,060 Other... 3,522,172 1,700,375 Total... 52,232,554 26,484,193 Currency Analysis The loan portfolio comprises loans denominated in U.S. dollars, Roubles, Euro and other foreign currencies. The following table provides a breakdown of the Group s loan portfolio (net of provisions) by currency as at 31 December 2005 and 31 December 2004: As at 31 December 2005 As at 31 December 2004 Amount per cent. Amount per cent. (RUR thousands, except percentages) Russian Roubles... 34,120, ,956, U.S. dollars... 13,874, ,669, Euro... 3,106, , Other... 1,130, ,465, Total... 52,232, ,484,

53 Credit Approval Each of the Bank s branches is subject to its own particular limit on the amount of a loan which it may make to a particular customer or on the aggregate amount of loans that may be made at any particular time to a group of related companies. In setting lending limits for the Bank s branches, the Bank applies certain criteria including an analysis of amounts requested, the local customer base serviced by the relevant branch, an assessment of the quality of the current loan portfolio (including the particular branch s loan book) and the strategic need to diversify its loan portfolio. These limits are reviewed and calculated monthly by the Bank s Risk Control Department. In case of substantial amendments, the limits are also reviewed by the Bank s Credit Committee. Each of the Bank s branches operates within the requirements of a unified credit procedure promulgated by the Bank s Head Office and which is overseen by the relevant credit officer in the branch. This procedure allows for a review of each loan application on the basis of risk control, as well as taking into account any business advantage which may accrue to the Bank. When an application is made to a branch or additional office for a loan, the loan application, together with all necessary supporting documentation, is submitted for determination under the uniform credit procedure which applies to the branches. The supervising credit officer at the relevant branch or additional office then conducts a review of the loan application and analyses the supporting documentation and the underlying collateral to be provided, as well as conducting detailed research into the applicant s business, financial performance and prospects and the applicant s standing in the relevant industry sector and that sector s performance and prospects, together with any unusual factors to be considered, prior to the final determination of the loan application. The application is also reviewed by a risk manager and the relevant branch s Legal and Security Departments. Following a favourable analysis of the application by the three areas of the Bank, the loan is subject to approval by the relevant branch s credit committee. The internal credit committee within the branch will decide on the loan application within the credit limits which apply to that branch. In the event that an application is made for a loan which exceeds the relevant branch s limit for amounts of loans or does not fall within the prescribed parameters for the type of loan to be advanced, a further loan application, summarising the supporting documentation, is submitted by the relevant branch to the Credit Division at the Bank s Head Office which co-ordinates the involvement of the Risk Control Department, the Legal Department and the Security Department at the Bank s Head Office. Each of these three Departments then conducts its own review of the loan application and analyses the summary documentation and the underlying collateral to be provided. The Legal Department reviews the capacity of the potential borrower and the legal risks which may apply to the application. The Security Department assesses reputational risks associated with the counterparty and the Risk Control Department assesses credit risk on the basis of a thorough analysis of the application which includes a review of the borrower s financial condition, its position in its industry sector, a comprehensive analysis of the relevant industry and of the project concerned. As a result of the analysis, the borrower is assigned a rating and the amount of provision necessary to cover the risk is determined, should the loan be granted. A review of the collateral offered in respect of the loan is separately undertaken and includes a visual inspection or a documentary examination. Following their review, all of the Departments submit their findings as part of the submission of the loan application to the Bank s Small Credit Committee (for loans of up to RUR30,000 thousand and standard retail loan applications) or to the Bank s Credit Committee (for loans of more than RUR30,000 thousand or non-standard credit applications) for final discussion and determination of the loan application. When assessing the creditworthiness of an applicant, the Bank looks at factors such as the management of the borrower, the main business activities of the borrower, the geographical location of the borrower, its suppliers and customers, its position in the industry, information on previously received credits, the financial position of the borrower (including its financial stability and turnover) and an economic appraisal of the likely return on the loan. The Bank evaluates its customers in accordance with their credit history, the quality of collateral offered, their financial condition (taking into account such matters as indebtedness ratios and cash flows) and the Bank s own analysis of sector and regional risk. The rating which is assigned to the borrower reflects the probability of non-repayment of the loan. Any assessment of the risk of non-payment of a Russian customer s debt is hampered by the lack of reliable information in Russia on a credit applicant. The financial statements of most 52

54 customers are not prepared in accordance with International Accounting Standards or audited in accordance with International Standards on Auditing. Furthermore, while Russia now has a system of credit history bureaux to track credit information, the system is relatively recent and is still to be developed. Whether or not to extend the maturity of a loan is at the Credit Committee s discretion and any decision is reached only after a review of the customer s overall credit history and quality and the reasons for extending the loan. As a general rule, an extension of maturity is likely to be refused if the customer does not have credit balances in its accounts or if there is an obvious deterioration in the customer s financial condition or a material risk of the customer becoming insolvent. The Small Credit Committee has five members, is chaired by the Head of the Credit Department and also includes the Head of the Risk Control Department, the Deputy Head of the Retail Loans Department, the Head of Economic Security and, if necessary, a representative of the Legal Department. The Bank s Credit Committee has six members, is chaired by Denis Milovidov (First Vice-President) and also comprises two of the Bank s other Vice-Presidents, together with the Head of Security, the First Deputy Head of the Department for Strategic Planning and, if necessary, the Director of the Legal Department. The representatives of the Risk Control Department may veto decisions if they consider a risk to be too high. Decisions taken by the Bank s Credit Committee can be revised only by the Bank s Management Board. Following approval of a loan by the relevant Credit Committee, standard form loan documentation is prepared, the loan facility is made available to the customer and then monitoring of the loan commences. The Bank aims to arrange for determination by the relevant Credit Committee of a loan application within approximately one week after the original submission of the credit application to the Credit Division. The table below sets out the various thresholds of authorisation within the Bank in relation to credit operations: Type of officer/committee Limits Head of Customer Service Department and Vicepresident Customer Service Department... Authorises standard credit operations for amounts not greater than USD50 thousand. Credit Committees of Branches... Authorise standard credit operations within the loan limits set for each branch. Small Credit Committee of the Bank... Authorises standard credit operations the volume of which (including loans, promissory notes, guarantees and other liabilities of a borrower and any group related to such borrower) does not exceed RUR30,000 thousand. Financial Economic Committee... Approves indicative interest rates for loans. Credit Committee of the Bank Authorises credit operations the volume of which (including loans, promissory notes, guarantees and other liabilities of a borrower and any group related to such borrower) exceeds RUR30,000 thousand and any non standard credit operations; and 2. Reviews credit policy and other internal documents related to credits. President of the Bank If necessary, coordinates the decisions of the Credit Committees; and 2. Approves authorisation limits. Managing Board... Board of Directors... Makes decisions on the key credit lending decisions. Makes decisions on the credit operations in which the Bank is interested and on major loans according to current legislation. Monitoring Each branch of the Bank monitors each of its loans and its loan portfolio pursuant to welldefined prescribed procedures. As well as ensuring that the borrower fulfils its obligations under each loan, the Bank at branch or office level regularly monitors the value of the underlying collateral for each loan, as well as being able to make regular site visits to the borrower s premises. In relation to 53

55 its loan portfolio, the Bank also monitors the level of non-performing loans and the concentration and volume of loans to any particular borrower, group of borrowers or industry sector. Payments under each loan are made directly to the branch, which advanced the funds to the borrower. Daily reports of any overdue amounts are generated by each of the branches and are reviewed the next day at the Group s Head Office. During the monitoring process, extra collateral may be taken in relation to any loan obligation which may be regarded as liable to breach by the borrower. In addition, contractual arrangements may be made with the borrower for the setting-off of any amount(s) owed to the Bank against assets of the borrower held elsewhere (for example, in an account at another bank). Consequently, the Bank s exposure to any default is minimised. In the event that a payment is not made when due, the borrower is contacted by one of the Bank s credit inspectors to ascertain the reason for non-payment. During this time, the Bank revises its rating of the borrower, the risk-weighting accorded to such borrower and adjusts its provisioning accordingly. Default interest accrues until such payment is made. In the event that payment is not made within five days of becoming due, this may also cause the entire loan to become due. The Bank then commences legal proceedings for the recovery of the debt. Collateral The Bank usually takes collateral as security for all loans and credit facilities granted to its customers. Loans, even to related parties, are generally over-secured in terms of value of the security. However, borrowers regarded as prime by the Bank may be granted short-term treasury loans without collateral. The main types of collateral or credit support taken are guarantees, Russian Government securities, shares in blue-chip companies, liquid promissory notes, real estate, goods, wares and merchandise and similar monetary assets. Pledges of, amongst other things, equipment are a typical form of security taken by the Bank. According to the Bank s internal procedures, collateral should be provided (where it is required) to cover outstanding liabilities during the whole duration of a transaction. The Credit Division and Legal Department are responsible for monitoring and registering the collateral taken. The frequency of a collateral review will depend on the type of collateral taken. Collateral taken over shares, for example, is reviewed monthly. In normal circumstances, collateral is generally expected to be realised within three months. However, the enforcement and sale of certain collateral, such as real property and industrial equipment, may take longer owing to lengthy legal procedures and other factors, such as seasonal price fluctuations and demand. Provisioning The Risk Control Department of the Bank implements the credit review and provisioning policies of the Bank which it communicates to all units of the Loan Department and to the branch network. The Bank uses IFRS 39, Financial Instruments: Recognitions and Measurement, as guidance for evaluation of its provisions under IFRS. Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of Management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. The provisions under IFRS are analysed on a quarterly basis. 54

56 The Bank creates provisions for the loan portfolio under RAS as well. Most loans are evaluated on a case-by-case basis, taking into account the borrower s financial position and debt service quality. Considering various additional factors, provisions for loans range from 0.0 per cent. to per cent. The Bank evaluates non-material homogenous loans for the purpose of making provisions on an aggregate basis loans to individuals, loans to small and medium-sized businesses and factoring funding. In accordance with the requirements of the CBR, the Bank performs a credit appraisal of the loan portfolio and a review of its provisions under RAS on a daily basis. As at 31 December 2005, the Group made provisions under IFRS amounting to RUR2,420,579 thousand in respect of its loans to customers, compared to RUR1,644,703 thousand as at 31 December The Group s ratio of total customer loan provision to total customer loans amounted in accordance with IFRS to 4.4 per cent. as at 31 December 2005, as compared to 5.8 per cent. as at 31 December The Group does not expect to experience a significant increase in its risk position based on this ratio. This is due to the continued pre-dominance of the Group s core corporate lending business as a percentage of the Group s total customer loan portfolio and the application of its traditional conservative credit appraisal techniques to corporate lending. Insurance The Bank s premises, fixed assets, inventory, cash in ATMs and transit and transport vehicles are adequately insured against a range of risks (including damages from fire, lightning, explosions, water, third party liability, environmental damage arising from accidents on the Group s property or relating to the Group s operations). The subsidiaries do not have full insurance coverage for their premises and equipment or for third party liability in respect of property or environmental damage arising from accidents on the property of the subsidiaries or relating to the operations of the subsidiaries. Real estate which comprises security for loans provided by the Group is required to be covered by fire and asset protection insurance. The Group does not have any credit risk insurance in relation to defaults by its customers and does not have insurance coverage against fraud, business interruption and director and officer liability, as these are generally not available in Russia. Coverage for third party liabilities for property or environmental damage are limited. Litigation Neither the Bank nor any member of the Group is currently subject to any material litigation, arbitration or other disputes or proceedings, nor does the Bank believe that there are any material litigation or arbitration claims threatened or pending against it. Management Management Bodies The Bank is run, in accordance with its Charter, by the following management bodies: * the General Shareholders Meeting; * the Board of Directors; * the President; and * the Managing Board. The General Shareholders Meeting The General Shareholders Meeting is the supreme management body of the Bank. Its competence is determined by the Civil Code of the Russian Federation, the Federal Law on Joint Stock Companies and the Bank s Charter. The Bank s Charter provides that certain issues can only be resolved by the General Shareholders Meeting of the Bank. These issues include, inter alia, the approval of a new version of the Bank s Charter, any reorganisation of the Bank, the liquidation of the Bank, appointment of the liquidation commission and approval of the interim and final liquidation balance sheets. Similarly, the General Shareholders Meeting cannot consider or take decisions on issues which do not fall within its competence. 55

57 Board of Directors The Board of Directors carries out the general management of the Bank and takes decisions in relation to this, except for those areas of the Bank s activity which fall within the competence of the General Shareholders Meeting. Examples of its responsibilities include, inter alia, the outlining of priority directions of the Bank s activities, the calling of annual and extraordinary general meetings of shareholders of the Bank in compliance with applicable legislation, the approval of the agenda for general meetings of shareholders, and the placement of bonds and other securities. Issues which fall within the competence of the Board of Directors may not be resolved by any other executive body of the Bank. The Board of Directors comprises nine members, three of whom are senior managers of the LUKOIL Group. The business address of each member of the Board of Directors is 24 Petrovka Street, Moscow , Russian Federation. The following table sets out the members of the Board of Directors, as at 30 September 2006: Name Leonid Fedun... Alexander Zhirkov... Alexander Matytsin... Sergey Mikhailov... Vladimir Nikitenko... Stanislav Nikitin... Olga Plaksina... Yury Tskhovrebov... Igor Sherkunov... Principal activities outside the Board of Directors Chairman of the Board of Directors of CJSC IFD Kapital and Vice- President of OJSC LUKOIL Chairman of the Board of Directors of Limited Liability Company IFD Kapital Unified Sales Systems Vice-President of OJSC LUKOIL Chairman of the Board of Directors, CJSC Managing Company Management-Centre President of OJSC Bank Petrocommerce Deputy Head of Main Division for Treasury and Corporate Finance of OJSC LUKOIL Chairman of the Managing Board of CJSC IFD Kapital Chairman of the Board of Directors of CJSC Capital Reinsurance Chairman of the Board of Directors of CJSC Investment Group Kapital Managing Board The management of the Bank s current business activity is carried out by the President, Mr. Vladimir Nikitenko, and the Managing Board. These executive bodies take decisions on all issues related to the current business activity of the Bank, excluding those issues which fall within the competence of the General Shareholders Meeting or the Board of Directors. The President and the Managing Board report to the Board of Directors and the General Shareholders Meeting. They are responsible for the performance of the decisions made by the General Shareholders Meeting and the Board of Directors. Together with the President, the Managing Board comprises six Vice-Presidents and the Chief Accountant. The business address of each member of the Managing Board is 24 Petrovka Street, Moscow , Russian Federation. The following table sets out the members of the Managing Board as at 30 September 2006: Name Vladimir Nikitenko... Denis Milovidov... Vladimir Vinogradov... Natalia Kolobova... Viatcheslav Oreshkin... Andrei Kutasin... Galina Tokmakova... Victor Zhidkov... Ekaterina Funtova... Position President, Chairman of the Managing Board First Vice-President, Deputy Chairman of the Managing Board First Vice-President Vice-President Vice-President Vice-President Vice-President Vice-President Chief Accountant Vladimir Nikitenko, President and Chairman of the Managing Board Mr. Nikitenko joined the Bank in 1998 as its President and Chairman of the Managing Board. He has a university degree in finance and credit. In 1982, Mr. Nikitenko started his banking career in 56

58 the Surgut branch of the State Bank of the USSR, Tyumen Region and in two years was promoted to Deputy Head of the branch. From 1987 to 1992, he worked in regional governmental authorities of the Tyumen Region. In 1992, Mr. Nikitenko returned to the banking business and joined the Surgut Municipal Bank AKKOBANK as its Chairman. In the mid-1990s, the exploration of the Caspian oil region commenced and in 1996 he was invited to head Caspian Bank (Kazakhstan). Mr. Nikitenko is Deputy Head of the Council of the Association of Regional Banks of Russia and is a Member of the Board of the Association of the Russian Banks. Mr. Nikitenko exercises general management of the Bank and supervises the Security Department. Vladimir Vinogradov, First Vice-President Mr. Vinogradov was appointed First Vice-President of the Bank in Before joining the Bank, Mr. Vinogradov held management positions in the Moscow Commercial Bank APEX and the Commercial Bank APR-Bank. He has over eleven years experience in banking. He has a degree in aerodynamics and aircraft operations, and also holds a doctorate in systems analysis and operations research. Mr. Vinogradov coordinates the cooperation between the Bank s units for the purpose of implementing its strategic development programmes, current financial, administrative and economic activities. Mr. Vinogradov supervises Strategic Planning Department, Accounting and Reporting Department, Administrative Department, Legal Department, Risk Control Department, Treasury Department and Banking Operations Support Department. Denis Milovidov, First Vice President Mr. Milovidov started his banking career in June 1993 in Joint Stock Bank Kazdorbank. Up until August 2004 he worked in such banks as Kazcommerzbank, Albaraka Kazakhstan International Commercial bank in the positions of Director of the corporate finance department, Deputy Chairman of the Board and Chairman of the Board. From January 2002 to November 2003 he worked in OJSC Bank Petrocommerce as President s Counsel and in August 2004 he was appointed to the position of First Vice-President of the Bank. Mr. Milovidov graduated from the Kazakh State Academy of Management in He has a degree in International Economics. Mr. Milovidov coordinates the cooperation between the Bank units in the ordinary course of business and business development of the banking group as well as the decision-making process connected with the Bank s regional activity, management of its affiliated credit institutions and development of the Bank s regional business in the Russian Federation and the CIS. Mr. Milovidov supervises the IT Department, Credit Department, Department of Banking Products for Mandatory Social Insurance, Retail Business Department, Retail Lending Department, Financial Markets Department, Customer Service Department, Project and Corporate Finance Department and Public Relations Department. Natalia Kolobova, Vice-President Mrs. Kolobova supervises the Bank s Risk Control Department. Mrs. Kolobova was appointed as Vice-President in After joining the Bank in 1998, Mrs. Kolobova held the position of Chief Accountant. Before joining the Bank, Mrs. Kolobova worked as Deputy Chief Accountant within a branch of the Joint-Stock Commercial Bank Russian Industrial Bank. Mrs. Kolobova has a degree in applied mathematics and banking. Mrs. Kolobova supervises the Bank s internal control system, makes decisions on the matters connected with the Risk Control Department and Treasury Department, acts as a compliance controller and controls the Bank s activities on the securities market. Viacheslav Oreshkin, Vice-President Mr. Oreshkin has been Vice-President of the Bank since March Mr. Oreshkin started his career in banking in 1999 and between 1999 and 2002 he worked for OJSC Bank Caspian as Advisor to the Secretariat of the Chairman of the Managing Board and the Chairman of the Board of Directors. He was appointed Director of International Relations Department. Mr. Oreshkin has been working for the Bank since November Starting as Advisor to the President on International Relations. In November 2003 he became Head of the Credit Division, 57

59 Customer Service Department. In March 2004, Mr. Oreshkin was appointed as Director of the Credit Department. Professional education: Physics with English. Mr. Oreshkin has a certificate from the Association of Regional Banks of Russia. Mr. Oreshkin supervises the Credit Department of the Bank. Andrei Kutasin, Vice-President Mr. Kutasin has been Vice-President of the Bank since June He began his banking career in During the period from 1996 to 2004 inclusive, he worked at banks such as AKB Moskovskiy Delovoy Mir and CJSC Konversbank, including as Chairman of the Managing Board from October He moved to the Bank in February 2005 as a Deputy Director of the Retail Business Department and in March of the same year was appointed Director of the Retail Business Department. In 1996 Mr. Kutasin graduated from the International Independent Environmental and Political Science University, as a Bachelor of Economics. In 1993, he completed his studies at the Academy of the National Economy under the Government of the Russian Federation specialising as an enterprise manager. Galina Tokmakova, Vice-President Ms. Tokmakova has held the position of Vice-President of the Bank since From 1998 to 1999, Ms. Tokmakova worked with the Bank as Head of the Clearing Arrangement Department. Before joining the Bank, Ms. Tokmakova held various positions in the Commercial Bank Creditimpexbank including the position of Chairman of the Board Head of the Debit Operations Department. She has over nine years experience in the Russian banking sector. She has a degree and a doctorate in philosophy. Ms. Tokmakova makes decisions on the matters connected with the customer service of the Bank s Head Office, supervises the activities of the Bank s additional offices in Moscow and the Moscow region and makes decisions connected with the Customer Service Department. Victor Zhidkov, Vice-President Mr. Zhidkov has held the position of Vice-President of the Bank since October He began his banking career in MDM Bank in 1994 where he stayed until He moved to the Bank in July 2006 as a Council of the President of the Bank. Having been appointed Vice-President, Mr. Zhidkov supervises the activities of the Department for Financial Market Transactions. In 1996 Mr. Zhidkov graduated from the State Academy for Aerospace Instrument Production. In 2005 he completed his studies at the Academy of the National Economy under the Government of the Russian Federation. Ekaterina Funtova, Chief Accountant Ms. Funtova supervises the Bank s Accounting and Reporting Department. Ms. Funtova was appointed Chief Accountant in From 1998 to 2001, Ms. Funtova worked with the Bank as Deputy Chief Accountant. Before joining the Bank, Ms. Funtova worked as Deputy Chief Accountant and as Chief Accountant with various financial institutions, including International Joint Stock Commercial Bank Chasprombank and Commercial Bank Russian Industrial Bank. She has a degree in railway transport process control. Conflicts of interest There are no potential conflicts of interest between any duties of the members of the administrative management or supervisory bodies of the Issuer and/or the Bank towards the Issuer and/or the Bank and their private interests and/or other duties. Employees As at 30 September 2006, the Group had 4,340 employees. The Group places emphasis on ensuring that its employees have a sufficient level of training and experience for operational efficiency and effectiveness. The Group pursues a policy of consolidating its human resources, both through hiring specialists from major banks and through in-house staff training in those areas of the Group s business that the Group considers give it a competitive 58

60 advantage, in particular, leasing, factoring, risk management and customer relationship management. Training takes place at the branches and at the head office. Employees are incentivised through salaries and performance-related bonuses. There is no trade union representation for employees of the Group and the Group believes that its relations with its employees is good. Risk Management Introduction The purpose of the Group s risk management activities is to monitor and restrict the level and concentration of risk arising from the conduct of the Group s business. The principal forms of risk, which are relevant to the Group s business are credit risk, market risk (which includes interest rate risk and currency risk) and liquidity risk. See Description of the Bank Petrocommerce Group Credit Approval and Provisioning for a description of matters relating to credit risk and relevant credit approval procedures. The Group takes a conservative approach to risk management. The Bank s risk management procedures are designed to identify and analyse relevant risks to the Group s business, prescribe appropriate limits to various risk areas and to monitor the level and incidence of such risks on an on-going basis. The Bank regularly reviews its risk analysis processes in order to make improvements, which it deems necessary in view of the development and growth of its business and the changing nature of the risks which face the Group in its day to day business. Following such reviews, new internal regulations On management of operational risks and On management of legal risks were introduced by the Bank in April Organisation The core direction of the risk management policy is defined by the Bank s Board of Directors. The Bank s Management Board, Financial Economic Committee and Credit Committees make decisions that set out the risk management procedures that fall within their respective competences and establish limits, which reduce the risks related to particular operations and take decisions on operations within their competence. The Group s risk assessment procedures, along with the monitoring of established limits and procedures, are concentrated in the Risk Control Department. The Risk Control Department is directly responsible for the identification and analysis of different types of risk and reports to the Bank s senior management on a regular basis. The Risk Control Department has the power to initiate changes to internal documents, which regulate methods of calculation and management of risk. The Risk Control Department is staffed with professionals, experienced in the conduct of risk management and is organised so that specific areas of risk are managed by officers specialising in that risk area. The Bank s Risk Control Department is charged with the detailed review and management of the Bank s system of internal risk controls. The Department also monitors risk assumed by the Bank s regional operations, as well as compliance with legal and accounting standards. The Risk Control Department is staffed by 23 professionals. Both the Risk Control Department and the Treasury Department (see below Treasury Operations ) report to Vice President, Ms. Natalia Kolobova, who acts as a Compliance Controller and a member of the Management Board. Treasury Operations The Bank s Treasury Department is responsible for the day-to-day executive management of the Bank s asset and liability position and the Bank s exposure to liquidity, interest rate and exchange rate risks. The Treasury Department is located at the Bank s Head Office in Moscow and provides treasury services for the Bank s branch network A principal objective of the Treasury Department is to manage the cashflows available to the Bank to ensure sufficient liquidity for the Bank s operations and ensure the availability of funds for the Bank s branch network. The Risk Control Department exercises further control over fixed limits and any breaches of the limits made by any department are reported to the management of the Bank. Settlement procedures with regard to the Bank s trading activities are undertaken by the Treasury Department and positions from its dealing activities are reconciled on a daily basis. The Bank s Financial Economic Committee (the FEC ) is a coordinating body, which manages the Bank s assets and those of the Bank s customers. The FEC coordinates the management of interest rate, price and currency risks. The FEC may request the Treasury Department to take certain 59

61 steps to ensure compliance with or establish a new policy in relation to the management of the Bank s assets and liabilities. The FEC meets weekly and may also convene meetings on an extraordinary basis to deal with risks that need urgent resolution. The Bank aims to maintain a liquid balance and to increase and widen the composition of its deposit base in order to allow it to react immediately to unplanned demand for cash and to minimise the risk of short term liquidity gaps. The Bank monitors and restricts any disbalance between assets and liabilities and the structure of payments. Interest Rate Risk An essential aspect of the management of the Group s assets and liabilities is its management of interest rate sensitivity. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the maturity or re-pricing characteristics of interest-earning assets and interest-bearing liabilities. For any given period, the pricing structure is matched when an equal amount of such assets or liabilities mature or are re-priced in that period. Any mismatch of interestearning assets and interest-bearing liabilities is referred to as a gap position. A positive gap denotes asset sensitivity and normally means that an increase in interest rates will have a positive effect on net interest income while a decrease in interest rates will have a negative effect on net interest income. A negative gap denotes liability sensitivity and would mean typically that an increase in interest rates would have a negative effect on net interest income, while a decrease in interest rates would have a positive effect on net interest income. The FEC establishes the base rates for loans to customers and the base rates for funds attracted, principally by way of deposit from customers. The Risk Control Department will apply a range of technical criteria for establishing appropriate interest rates taking into account the competitive environment and current and forecast situations with the structured liquidity. The FEC is the ultimate approval body in determining the basis of rates for attracting and placing funds. A principal concern for the Bank in the management of its assets and liabilities is that the rate of interest selected must be competitive within the market and the FEC has regard to a benchmark group of competitor banks when setting interest rates both for deposits and assets. In its consideration of the Bank s benchmark competitors, the FEC reviews not only the pricing of such banks, but also the range of such competitor products and the quality of their services. In particular, where interest rates are considered in the context of the Bank s regional network, the activities of Sberbank, the state-owned nationwide retail banking institution, which is a principal competitor in the regions where the Bank has branches, are an important factor. The objective of the FEC in determining interest rates is to seek to achieve a balance between satisfying the demands of the business units involved in selling deposit products or developing the Bank s lending business, the need to be competitive in comparison with its competitor banks in particular sectors and the need to take a conservative approach where appropriate. The FEC can instruct the Treasury Department and the Risk Control Department to determine and set new interest rates within 24 hours. The interest rates for loans and deposits are reviewed simultaneously. Any member of the FEC, as well as the Financial Market Department and the Risk Control Department, is authorised to assist in the determination as to a change in interest rates. The Group is exposed to interest rate risk, principally as a result of lending to customers and other banks at fixed interest rates in amounts and for periods which do not match those of term deposits at fixed interest rates. At present there is no developed market for interest-rate derivatives in Russia, mainly due to the absence of an adequate legal and regulatory framework. As a result, the Group manages its interest rate risk primarily through matching assets and liabilities in each maturity band. Exchange Rate Risk Exchange rate risk is the risk that the value of financial instruments will change owing to the movements in foreign exchange rates. The Group s major currency positions are in roubles, U.S. dollars and euros. 60

62 The following table sets forth the Group s exposure to foreign currency exchange rate risk as at 31 December 2005: RUR USD Euro Other currencies Total (RUR thousands) Assets Cash and cash equivalents... 11,457,935 1,186, , ,056 13,571,459 Mandatory cash balances with central banks... 1,527,581 30,600 4, ,494 1,687,934 Trading securities... 13,612,323 3,829,619 60,796 6,494 17,509,232 Due from other banks , , , , ,877 Loans and advances to customers... 34,120,570 13,874,715 3,106,717 1,130,552 52,232,554 Investment securities available for sale... 1,198,883 24,619 4, ,200 1,436,310 Deferred income tax asset... 1,295 14,572 15,867 Premises and equipment... 2,176, ,510 2,305,754 Other assets , ,388 5,104 58, ,929 Total assets... 64,886,467 19,258,408 4,066,390 2,367,651 90,578,916 Liabilities Due to other banks... 2,710,586 2,977, , ,528 6,996,230 Customer accounts... 41,709,856 12,650,146 3,260,221 1,309,330 58,929,553 Debt securities in issue... 6,906, ,120 7,808,471 Other borrowed funds... 3,745,138 3,745,138 Deferred income tax liability , ,402 Other liabilities ,595 33, , ,836 Total liabilities... 52,286,790 20,308,541 4,071,244 1,957,055 78,623,630 Net balance sheet position... 12,599,677 (1,050,133) (4,854) 410,596 11,955,286 Credit related commitments ,590 1,374,278 1,759,796 18,006 3,895,670 (1) Dashes indicate where the Group did not have an outstanding position in the corresponding currency. 61

63 At 31 December 2004, the Group had the following positions in currencies: RUR USD Euro Other currencies Total (RUR thousands) Assets Cash and cash equivalents... 15,843,797 1,847, , ,588 18,368,040 Mandatory cash balances with central banks... 1,106,659 83,232 1,189,891 Trading securities... 9,197,467 1,309,006 5,511 10,511,984 Due from other banks... 95, ,741 10, , ,420 Loans and advances to customers... 14,956,168 9,669, ,525 1,465,242 26,484,193 Investment securities available for sale... 1,080, ,481 89,905 1,689,185 Deferred income tax asset... 86,472 11,513 15, ,128 Premises and equipment... 1,849, ,705 1,977,448 Other assets ,820 14,056 30, ,433 Total assets... 44,963,464 13,525, ,855 2,491,072 61,791,722 Liabilities Due to other banks , ,069 1, ,635 1,369,245 Customer accounts... 31,183,612 9,216,194 1,593,229 1,148,430 43,141,465 Debt securities in issue... 5,794, ,516 6,570,789 Other borrowed funds... 1,821,772 1,821,772 Deferred income tax liability... 7,182 7,182 Other liabilities ,589 44,760 8, ,620 Total liabilities... 37,561,494 12,598,311 1,594,932 1,444,336 53,199,073 Net balance sheet position... 7,401, ,020 (783,077) 1,046,736 8,592,649 Credit related commitments ,962 1,981, , ,780 3,510,572 (1) Dashes indicate where the Group did not have an outstanding position in the corresponding currency. The Bank does not take open positions with regard to non-convertible currencies (other than the rouble) except where such positions are taken with regard to customer trading. The Bank believes that its internal control procedures for monitoring open currency positions are satisfactory, although it recognises that the methodology of forecasts and the determination of trends can benefit from improvement. The Bank is reviewing the performance of its technology software which it uses in framing such methodology and making such determinations and intends to upgrade this software into the Bank s overall software and reporting systems. The Bank was one of the founding members of the derivatives section of MICEX but owing to the lack of regulatory framework and the absence of significant development in the derivatives market, the Bank does not use derivative transactions as a means of hedging its risk exposure. The Bank is required to report to the CBR on a daily basis as to its open foreign currency positions so it monitors this position daily. All transactions are monitored on-line and are entered into and tracked by the internal reporting system of the Bank. This data is reviewed by the Risk Control Department which monitors the Bank s compliance with open currency positions. The Bank has extended its foreign currency risk procedures to its subsidiary operation, Ukhtabank. The Bank has internal rules for dealing in foreign currency which comprise group and individual transaction limits on each foreign currency, such as maximum loss limits and rules for timely booking of completed transactions. The Financial Markets Department supervises the Bank s compliance with its proprietary dealing and the compliance of customer operations within established limits and procedures. The Treasury Department, reports daily to the Risk Control Department on transactions executed and at the beginning of each day the Director informs the Risk Control Department of the 62

64 current net position at the end of the previous working day. The Bank s Dealing operations are subject to routine checks by the Internal Control Department. Market Risk The Bank is exposed to market risks arising from open positions in fixed income and equity securities and currencies, all of which are exposed to market movements. The FEC sets limits on the level of market risk which are monitored by the Risk Control Department on a daily basis. Depending on the instrument, the Bank uses different VAR (Value at Risk) calculations to assess the market risk on its various portfolios. Through various analyses, different possible prices of instruments are modelled and volatility is assessed. The Group takes a conservative position with regard to market inter-relationships. The Group has established different sets of limits to manage counterparty and market risks and control risk concentrations arising in trading activity. These include limits on counterparties and issuers, limits for each type of security and product, and also stop-out limits, limits on the currency position of each trader. The Bank also operates limits in its securities dealing operations distinguishing between arbitrage and trading activities. Trading limits are established by the FEC and are regularly reviewed according to the type of limit, positions liquidity and quality of the counterparty. Changes to existing limits are immediately notified to the Financial Markets Department and reflected in the dealing system. FEC decisions are based on submissions from the Risk Control Department on the financial and economic position of counterparties and issuers and the position of various market sectors. Such areas are constantly monitored by the Risk Control Department and reports are made immediately to the FEC on proposed modifications to existing limits. The Bank uses various methods of VAR calculations, along with stress testing methodology to evaluate potential losses in various scenarios, including crises. Liquidity Risk The Group aims to ensure that it has at all times sufficient liquidity to meet its commitment to its customers, both for loans and repayment of deposits, and to satisfy its own liquidity needs. The Group manages its liquidity risk through a number of policies, which include holding sufficient amounts of cash matching the maturity profile of assets and liabilities, investing in a portfolio of lowrisk assets that secure the repayment of current obligations and sourcing the inter-bank market. As a result of its well-managed liquidity risk positions, the Bank also has the benefit of a credit-line from the CBR which is granted on an interest-bearing basis and which also gives flexibility for the Bank in managing its liquidity position. Responsibility for liquidity risk management is shared between the Treasury Department (which manages current liquidity of terms up to 60 days) and the Risk Control Department, which is responsible for the analysis of structural liquidity. The Treasury Division maintains a liquid portfolio designed to provide support to the payment capacity of the Bank in the event that assets and liabilities fluctuate from internal forecasts. The Treasury Division constantly reviews and seeks to improve the methodology for calculating and structuring the liquidity portfolio. 63

65 The following table shows the Group s net liquidity position by maturity category on an IFRS basis as at 31 December 2005: Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years No stated maturity Total (RUR thousands) Assets Cash and cash equivalents... 13,571,459 13,571,459 Mandatory cash balances with central banks... 1,687,934 1,687,934 Trading securities... 17,509,232 17,509,232 Due from other banks ,670 66,767 7,500 7, ,877 Loans and advances to customers... 6,993,517 15,925,067 11,029,523 18,284,447 52,232,554 Investment securities available for sale... 24, , , ,205 27,614 1,436,310 Deferred income tax asset... 14,572 1,295 15,867 Premises and equipment... 2,305,754 2,305,754 Other assets , ,699 25, , ,929 Total assets... 41,063,920 16,427,833 11,384,722 19,369,073 2,333,368 90,578,916 Liabilities Due to other banks... 5,061, , , ,824 6,996,230 Customer accounts... 36,035,652 10,761,186 10,486,990 1,645,725 58,929,553 Debt securities in issue ,378 1,482,542 2,997,510 2,910,041 7,808,471 Other borrowed funds... 1,504,516 47,564 2,193,058 3,745,138 Deferred income tax liability 232, ,402 Other liabilities , , , ,836 Total liabilities... 42,072,896 14,741,691 14,558,160 7,250,883 78,623,630 Net liquidity gap... (1,008,976) 1,686,142 (3,173,438) 12,118,190 2,333,368 11,955,286 Cumulative liquidity gap at 31 December (1,008,976) 677,166 (2,496,272) 9,621,918 11,955,286 (1) Dashes indicate absence of a particular asset or liability. (2) The Group believes that in spite of the fact that the majority of its trading securities portfolio matures after one year in accordance with their terms, the majority of these securities are freely traded in the market and thus represent a hedge against potential liquidity risk and thus are included in the demand and less than one month category. (3) Investment securities available for sale are valued at market value and are available to meet the Group s short-term liquidity needs. (4) The Group believes that although a substantial portion of client deposits are on demand and less than one month can be withdrawn at any time in accordance with Russian law, diversification of these deposits by number and type of depositors and the Group s past experience indicate that these deposits provide a long-term and stable source of funding for the Group. 64

66 The following table shows the Group s net liquidity position by maturity category as at 31 December 2004: Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years No stated maturity Total (RUR thousands) Assets Cash and cash equivalents... 18,368,040 18,368,040 Mandatory cash balances with central banks... 1,189,891 1,189,891 Trading securities... 10,511,984 10,511,984 Due from other banks ,259 97,308 12, ,420 Loans and advances to customers ,592 8,905,975 7,999,919 8,904,707 26,484,193 Investment securities available for sale , , , , ,972 1,689,185 Deferred income tax asset , ,128 Premises and equipment... 1,977,448 1,977,448 Other assets ,209 6,205 2, , ,433 Total assets... 31,889,282 9,112,752 8,622,608 9,555,660 2,611,420 61,791,722 Liabilities Due to other banks , , ,134 57,522 1,369,245 Customer accounts... 21,448,491 12,463,610 5,917,580 3,311,784 43,141,465 Debt securities in issue... 1,099, ,168 3,310,724 1,389,332 6,570,789 Other borrowed funds... 1,821,772 1,821,772 Deferred income tax liability 7,182 7,182 Other liabilities ,176 8,228 42, ,620 Total liabilities... 23,496,360 13,535,467 9,586,836 6,580,410 53,199,073 Net liquidity gap... 8,392,922 (4,422,715) (964,228) 2,975,250 2,611,420 8,592,649 Cumulative liquidity gap at 31 December ,392,922 3,970,207 3,005,979 5,981,229 8,592,649 (1) Dashes indicate absence of a particular asset or liability. (2) The Group believes that in spite of the fact that the majority of its trading securities portfolio matures after one year in accordance with their terms, the majority of these securities are freely traded in the market and thus represent a hedge against potential liquidity risk and thus are included in the demand and less than one month category. (3) Investment securities available for sale are valued at market value and are available to meet the Group s short-term liquidity needs. (4) The Group believes that although a substantial portion of client deposits are on demand and less than one month can be withdrawn at any time in accordance with Russian law, diversification of these deposits by number and type of depositors and the Group s past experience indicate that these deposits provide a long-term and stable source of funding for the Group. The liquid assets in the Group essentially comprise primary liquid assets (cash, inter-bank deposits and CBR lines). The Group has consistently maintained a highly liquid position, has historically been able to act as a net lender in the inter-bank money market and has placed emphasis on matching the currency and maturity of its assets and liabilities. Inter-bank deposits in Russia are usually held on an overnight basis and the policy of the Group is not to rely on the inter-bank money market for funding purposes as overnight borrowing rates are relatively high. The Bank believes that the Group s customer deposits provide a stable funding base for its liquidity management. The Group s strategy is to increase its rouble deposit base through the expansion of deposit-taking activities in its branch network. The liquidity ratio measured by liquid assets (including demand and less than one month total assets excluding mandatory reserves and other assets) to total liabilities (including demand and less 65

67 than one month total liabilities) was 92.8 per cent. as at 31 December 2005, compared to per cent. as at 31 December The Group s liquid assets in foreign currency comprise deposits with very short-term maturity, placed with correspondent banks and the CBR to meet foreign reserve requirements. The Group focuses on analysing its immediate (daily) and short-term (up to 30 days) liquidity positions. Information to assist the analysis and to make relevant forecasts is submitted on an on-line basis so that anticipated inflows and outflows of cash can be determined. The Group uses its expected cash holdings arising from deposits and assets, as well as its dealing operations including dealing in its securities portfolios and repo transactions, its correspondent relationships with Russian and foreign banks and its line with the CBR as a source of liquidity. The Risk Control Department is responsible for the Bank s coordination of forecasts on its liquidity position which is then reviewed by the FEC with a view to deciding on the use of particular instruments to cover short liquidity positions. Capital Adequacy The Bank is required to comply with a number of mandatory economic ratios set by the CBR. In particular, the CBR establishes capital adequacy and risk diversification ratios. With effect from 1 April 2004, the CBR s system of mandatory economic ratios was replaced with new requirements, which include the following changes: * daily basis control (previously, banks compliance has been tested on a daily basis); * the elimination of eight ratios from the list of the generally applicable ratios; * changes in ratio limits, such as reducing the N2 and N3 limits from 20 per cent. and 70 per cent. to 15 per cent. and 50 per cent. respectively; and * the repeal of N8, N9, N10, N11, N11.1, N13 and N14 ratios. In April 2005, the CBR repealed the general liquidity ratio (N5). Capital adequacy ratio (N1) is calculated by the Bank in accordance with the requirements established by the CBR. This ratio regulates (limits) the risk of a bank s insolvency and determines requirements for a minimum amount of a bank s own capital which is necessary to cover credit and market risks. A detailed description of mandatory economic ratios is provided in The Banking Sector and Banking Regulation in the Russian Federation Regulation. The capital adequacy ratio is calculated in relation to the Bank s own capital and the assets weighted according to a risk level. The capital adequacy ratio calculation includes: * a value of credit risk related to assets weighted according to a risk level; * a value of credit risk related to credit-like conditional liabilities; * a credit risk related to forward deals; and * a value of a market risk. 66

68 The following table sets out the Bank s mandatory economic ratios calculated in accordance with the requirements of the CBR as of 31 December 2004 and 2005: As at 31 December Since April 2004 Mandatory economic ratios Capital adequacy ratio N Minimum level 10 Bank liquidity ratios N Minimum level 15 N Minimum level 50 N Maximum level 120 N Minimum level 20 Maximum amount of risk per borrower or group of borrowers N Maximum level 25 Maximum amount of large credit risks N Maximum level 800 N Maximum level 50 N Maximum level 3 N Maximum level 25 The Bank also meets international standards with respect to capital adequacy. Details of the Bank s capital adequacy as at 31 December 2005 and 31 December 2004, calculated in accordance with BIS Guidelines and based on IFRS financial statements, are set out below. Capital adequacy ratio As at 31 December 2005 As at 31 December 2004 (per cent.) Tier I capital adequacy ratio Total capital adequacy ratio

69 RECENT DEVELOPMENTS Organisation As at 31 December 2006, the Bank s network in Russia comprised the Head Office and 11 additional offices in Moscow and the Moscow region, 18 regional branches, 40 additional offices in Russian Federation, one foreign exchange office (which principally handles currency transactions and 16 cash offices (which accept payment orders for customers and execute cash transactions), two electronic clearing houses, 421 operational cash dispensers, and 116 POS (point of sale) terminals, which act like cash dispensers and 1,365 POS terminals in stores and service centres. As at 31 December 2006, the Group had 4,574 employees. See Description of the Bank Petrocommerce Group Introduction. Ownership and Capital Structure The Bank is in the process of completing the first stage of conversion of its existing preference stock shares into common stock shares. On 19 January 2007 the CBR approved this conversion and thus on 8 February 2007 the Bank submitted to the CBR the documents for the state registration of the corresponding changes to the Charter. Upon approval of these changes by the CBR, the Bank will be able to proceed to the second stage and effect the conversion of preference stock shares into common stock shares. On 28 December 2006 the IFD Kapital Group and certain other companies transferred their shareholdings in the Bank to Reserve Invest Holding (Cyprus) Limited. Reserve Invest Holding (Cyprus) Limited is a holding Company within the IFD Kapital Group and conducts common business activities and has common management with IFD Kapital Group. Following the transfer Reserve Invest Holding (Cyprus) Limited holds 446,251,099 common stock shares, comprising 89.25% of the Bank s charter capital. According to the IFD Kapital Group, the transfer of common stock shares was completed to streamline the Banks ownership structure. Since Reserve Invest Holding (Cyprus) Limited forms part of the IFD Kapital Group, the ultimate beneficial owners of the Bank remain the same. Borrowed funds On their maturity date in February 2007 the Bank repaid in full the remaining outstanding USD64,400 thousand of the borrowed funds representing the proceeds from the LPNs issued through Standard Bank (London) Limited and ABN Amro in See Description of the Bank Petrocommerce Group Deposits Other borrowed funds. Taxes The Bank has recently been inspected by the Russian tax authorities in respect of alleged deficiencies in payments of VAT and income tax in an aggregate amount of RUR 174,748 thousand. The Bank is disputing this claim (which could include interest and/or penalty charges) and, as at the date of this Prospectus, there is no final decision of the tax authorities and such claim may, therefore, be reduced or rejected in whole either by the tax authorities or by a court s decision (if any). The management of the Bank does not consider the amount of the claim to be material given the amount of the Bank s total assets. 68

70 FINANCIAL REVIEW FOR SIX MONTH PERIOD ENDED 30 JUNE 2006 The financial information in respect of the six month period ended 30 June 2006 contained in this Section Financial Review for Six Month Period Ended 30 June 2006 has been extracted from accounting records of the Bank as at and for the six months ended 30 June 2006 and the Unaudited Interim Financial Information. Summary The Group s operations grew in the first half of As at 30 June 2006, total assets amounted to RUR111,465,212 thousand, representing an increase of 23.1 per cent. from RUR90,578,916 thousand as at 31 December Such growth is primarily attributable to an increase in loans and advances to customers of 22.2 per cent. to RUR63,816,844 thousand as at 30 June 2006 from RUR52,232,554 thousand as at 31 December As at 30 June 2006, total liabilities amounted to RUR96,546,890 thousand, representing an increase of 22.8 per cent. from RUR78,623,630 thousand as at 31 December Such increase is primarily attributable to an issue of U.S. dollar-denominated Eurobonds in the amount of RUR6,151,129 thousand and an increase in the amount of syndicated loans to RUR3,214,997 thousand as at 30 June 2006 as compared to RUR1,841,222 thousand as at 31 December Customer accounts increased during the first six months of 2006 by 21.9 per cent. to RUR71,859,564 thousand as at 30 June Amounts due to other banks decreased during the first six months of 2006 to RUR3,049,374 thousand from RUR6,996,230 thousand as at 31 December As at 30 June 2006, total equity amounted to RUR14,918,322 thousand. Total equity as at 31 December 2005 amounted to RUR11,955,286 thousand as compared to RUR8,592,649 thousand at 31 December Results of Operations for the six months ended 30 June 2006 Interest Income, Interest Expense, Net Interest Income and Provision for Loan Impairment The following table sets out the principal components of the Group s net interest income after provision for loan impairment for the six months ended 30 June 2006: For the six months ended 30 June 2006 (unaudited) (RUR thousands) Interest income Loans and advances to customers... 3,683,496 Debt Trading Securities ,820 Correspondent accounts and due from other banks ,535 Debt investment securities available for sale... 69,280 Total interest income... 4,294,131 Total interest expense... (1,937,000) Net interest income... 2,357,131 Provision for loan impairment... (135,427) Net interest income after provision for loan impairment... 2,221,704 Provision for Loan Impairment Provision for loan impairment consists of provision for loan impairment for loans and advances to customers and provision for loan impairment due from other banks. As at 30 June 2006, the Group s provision for impairment of loans due from other banks amounted to RUR14,480 thousand, and the Group s provision for loan impairment of loans to customers amounted to RUR2,538,337 thousand. 69

71 Non-Interest Income Non-interest income comprises gains less losses from trading securities, losses net of gains from derecognition of investment securities available for sale, gains less losses from trading in foreign currencies, foreign exchange translation losses net of gains, fee and commission income and expense and other operating income. For the six months ended 30 June 2006, the Group s net non-interest income amounted to RUR3,414,942 thousand. Administrative and Other Operating Expenses Total administrative and other operating expenses for the six months ended 30 June 2006 were RUR1,736,485 thousand. Income Tax Income tax expense for the six months ended 30 June 2006 amounted to RUR895,528 thousand. Corporate Banking As at 30 June 2006, the Group had extended loans totalling RUR101,369 thousand or 0.2 per cent. of the total loan portfolio to members of the LUKOIL Group compared to RUR177,002 thousand or 0.3 per cent. as at 31 December As at 30 June 2006, the Group had extended loans to non-lukoil related customers totalling RUR66,253,812 thousand, compared to RUR54,476,131 thousand as at 31 December As at 30 June 2006, the Group s foreign currency loans and advances to customers amounted to RUR22,268,260 thousand, compared to RUR18,111,984 thousand as at 31 December As at 30 June 2006, the Group had foreign currency loans outstanding which were utilised for the Group s trade finance activities (issuance of letters of credit confirmed by the foreign banks) of approximately RUR1,086,962 thousand, as compared to RUR998,316 thousand as at 31 December Retail Banking The average maturity of consumer loans for the six month period ended 30 June 2006 was 2 years and 8 months for the rouble denominated loans and 2 years and 10 months for the U.S. dollars and euro denominated loans. Deposits and Loans As at 30 June 2006, the Group had deposits from individuals totalling RUR26,978,645 thousand, compared to RUR23,936,646 thousand as at 31 December As at 30 June 2006, loans to individuals outstanding amounted to RUR5,528,365 thousand or 8.3 per cent. of the Group s total gross loans, compared to RUR3,711,142 thousand or 6.8 per cent. of the Group s total gross loans as at 31 December Funding and Liquidity Funding The principal sources of funding for the Group are demand and term deposits from corporate borrowers, individuals and state and public organisations; interbank borrowings and other borrowed funds that include proceeds from the issuance of U.S. dollar-denominated Eurobonds. As at 30 June 2006, 27.7 per cent. of the Group s total customer accounts were in foreign currency, principally in U.S. dollars, compared to 29.2 per cent. as at 31 December The remainder of the current accounts and deposits were in roubles. As at 30 June 2006, customer accounts contributed 74.4 per cent. of the Group s total liabilities, compared to 74.9 per cent. as at 31 December Due to other banks contributed 3.2 per cent. of the Group s total liabilities as at 30 June 2006, compared to 8.9 per cent. as at 31 December Debt securities in issue contributed 9.8 per cent. of the Group s total liabilities as at 30 June 2006, compared to 9.9 per cent. as at 31 December

72 Deposits As at 30 June 2006, total demand deposits from customers amounted to RUR33,964,784 thousand or 35.2 per cent of the total liabilities of the Group, as compared with RUR23,448,293 thousand or 29.8 per cent. as at 31 December Total term deposits from customers amounted to RUR37,894,780 thousand as at 30 June 2006 or 39.2 per cent. of the total liabilities of the Group as compared to RUR35,481,260 thousand or 45.1 per cent. as at 31 December Due to other banks The Group s due to other banks comprise loans in roubles and foreign currencies from local and foreign banks and institutions. As at 30 June 2006, the Group s outstanding loans included in due to other banks amounted to RUR3,049,374 thousand, of which 32.6 per cent. was denominated in roubles, compared to RUR6,996,230 thousand as at 31 December 2005, of which 38.7 per cent. was denominated in roubles. Other Borrowed Funds The Bank also obtains funds through syndicated facilities and term borrowings. The table below sets out a breakdown of the Group s Other Borrowed Funds as at the dates indicated. As at 30 June 2006 (unaudited) As at 31 December 2005 (RUR thousands) Eurobonds... 6,151,129 Syndicated loans... 3,214,997 1,841,222 Term borrowings... 1,796,974 1,903,916 Total other borrowed funds... 11,163,100 3,745,138 (1) Dashes indicate the absence of the relevant liabilities as of the applicable date. On 21 March 2006, the Group established a USD750,000 thousand Euro Medium Term Note Programme for the issuance of notes by Petrocommerce Invest S.A., unconditionally and irrevocably guaranteed by the Bank. On 27 March 2006 the Group issued U.S. Dollar denominated Eurobonds in an aggregate principal amount of USD225,000 thousand. The bonds carry a fixed interest rate of 8.0 per cent. per annum and mature in March At 30 June 2006 the effective interest rate was 8.7 per cent. A syndicated loan in the amount of USD14,000 thousand was received by the Group in October 2005 from two Croatian banks. This loan has maturity date in October 2010 and interest rate of 6 month LIBOR plus 1.3 per cent. At 30 June 2006 the effective interest rate was 8.9 per cent. (31 December 2005: 8.2 per cent.). A syndicated loan in the amount of USD14,338 thousand was received by the Group in June 2006 from the same Croatian banks mentioned above. This loan has maturity date in June 2011 and interest rate of 6 month LIBOR plus 1.3 per cent. At 30 June 2006 the effective interest rate was 7.3 per cent. A syndicated loan in the amount of USD91,500 thousand was received by the Group in April 2006 from a consortium of foreign banks. This loan has maturity date in April 2007 and interest rate of 3 month LIBOR plus 1.9 per cent. At 30 June 2006 the effective interest rate was 8.7 per cent. In August 2006, the Bank issued RUR3,000,000 thousand 8.5 per cent. domestic bonds which are due to mature on 31 August In November 2006, the Bank entered into subordinated loan agreement, borrowing USD150,000 thousand at LIBOR + 4% with Reserve Invest (Cyprus) Limited, a company that is unaffiliated with the Bank but that has management common with the Bank s principal shareholder, IFD Kapital. The loan is repayable in May

73 Analysis of Loans As at 30 June 2006, loans and advances to customers (net of provisions) amounted to RUR63,816,844 thousand, representing 57.3 per cent. of the Group s total assets as compared to RUR52,232,554 thousand (net of provisions) or 57.7 per cent. of the Group s total assets as at 31 December The following table sets out details of the Group s guarantees and letters of credit commitments and contingent liabilities as at the dates indicated. As at As at 30 June December 2005 (unaudited) (RUR thousands) Guarantees issued... 2,282,804 1,931,538 Import letters of credit... 1,086, ,316 Letters of credit with settlements in the Russian Federation ,072 Export letters of credit... 61,879 64,999 Total credit related commitments... 3,661,717 2,994,553 The outstanding contractual amount of any guarantee or letter of credit does not necessarily represent future cash requirements, as many of these commitments may expire or terminate without needing to be funded. Loans by economic sector The following table sets out a breakdown by economic sector of the Group s customer loan portfolio (gross of provisions), as at the dates indicated. As at 30 June 2006 (unaudited) As at 31 December 2005 Amount per cent. Amount per cent. (RUR thousands, except percentages) Trade... 17,108, ,002, Manufacturing... 12,056, ,050, Agriculture... 5,754, ,971, Finance Sector... 5,733, ,459, Individuals... 5,528, ,711, Food industry... 4,965, ,170, Oil and energy... 4,178, ,292, Construction... 4,090, ,371, Transportation... 3,906, ,483, Other... 3,030, ,140, Total loans and advances to customers (before impairment)... 66,355, ,653,

74 Loans by maturity The following table sets out the maturity structure of the Group s loans and advances to customers (net of provisions) as at the dates indicated: As at 30 June 2006 (unaudited) As at 31 December 2005 Amount per cent. Amount per cent. (RUR thousands, except percentages) Demand and less than one month... 7,406, ,993, From one to six months... 18,060, ,925, From six to twelve months... 12,666, ,029, From one to five years... 25,683, ,284, Total... 63,816, ,232, As at 30 June 2006, loans due within one year or earlier represented 59.8 per cent. of the Group s customer loan portfolio, compared to 65.0 per cent. as at 31 December Top Ten Borrowers The Group s top 10 borrowers accounted for 23.5 per cent. (RUR15,620,103 thousand) of the Group s total loan gross portfolio as at 30 June 2006, compared to RUR14,011,700 thousand or 25.6 per cent. of the Group s total loan portfolio as at 31 December Customer Concentration The following table shows the Group s ten principal corporate borrowers as at 30 June 2006 (unaudited), which together accounted for 23.5 per cent. of the Group s loan portfolio (gross of provisions): Loan, RUR thousands Share in the gross loan portfolio, per cent Yugtranzitservice Group... 2,659, LLC METRONOM AG... 2,194, Gentor Group... 2,157, IHCC... 1,560, OJSC Akrilat... 1,328, Energomash UK Limited... 1,280, Buket Group... 1,226, PEKAO LIMITED... 1,205, Promtraktor Group... 1,008, Investpromsnab... 1,000, Total... 15,620, Total loan portfolio... 66,355,

75 The Group s Loan Portfolio The following table provides a breakdown of the Group s loan portfolio as at the dates indicated: As at 30 June 2006 (unaudited) As at 31 December 2005 (RUR thousands) Current loans... 62,557,739 53,118,975 Overdue loans... 1,387,395 1,454,770 Reverse sale and repurchase agreements... 2,410,047 79,388 Less: Provision for loan impairment... (2,538,337) (2,420,579) Total loans and advances to customers... 63,816,844 52,232,554 As at 30 June 2006, effective average interest rates were 12.2 per cent. for U.S. dollar denominated loans to customers and 12.5 per cent. for rouble denominated loans to customers. Financial Market Activities Securities Portfolio Gains less losses from trading securities and losses net of gains from derecognition of investment securities available for sale amounted to RUR2,300,994 thousand for the six months ended 30 June Gains less losses from trading securities and gains less losses arising from investment securities available for sale comprised RUR3,723,538 thousand for the year ended 31 December 2005 compared to RUR930,849 thousand for the year ended 31 December As at 30 June 2006, 37.2 per cent. of the Group s securities trading portfolio represented investments in equities and 62.8 per cent. represented investments in debt obligations and notes, compared to 29.3 per cent. and 70.7 per cent., respectively, as at 31 December The following table sets out details of the Group s trading securities portfolio as at the dates indicated: As at 30 June 2006 (unaudited) As at 31 December 2005 (RUR thousands) Corporate shares... 6,026,782 5,126,558 Federal loan bonds (OFZ)... 4,778,837 4,710,428 Corporate bonds... 1,174,470 3,537,418 Corporate Eurobonds ,829 1,162,703 U.S. Treasury Strip securities , ,790 Credit-linked notes ,355 1,110,035 Municipal bonds , ,534 Russian Federation Eurobonds , ,132 Other , ,634 Total trading securities... 16,205,595 17,509,232 (1) Dashes indicate that the Group did not hold the relevant securities in its securities portfolio as of the applicable date. 74

76 The following table sets out details of the Group s investment securities available for sale as at the dates indicated: As at 30 June 2006 (unaudited) As at 31 December 2005 (RUR thousands) Corporate bonds , ,426 Promissory notes , ,389 Municipal bonds and bonds of the Russian Federation s regions , ,510 Corporate shares... 40,013 27,614 Other ,989 87,371 Total investment securities available for sale... 1,688,404 1,436,310 The following tables set out details of the interest and net gains less losses earned by the Group in respect of its trading and available for sale securities activities: For the six months ended 30 June 2006 (unaudited) (RUR thousands) Interest income related to debt securities ,100 Gains less losses from trading securities... 2,308,545 Losses net of gains from derecognition of investment securities available for sale... (7,551) Total... 2,761,094 75

77 Exchange Rate Risk The following table sets forth the Group s exposure to foreign currency exchange rate risk as at 30 June 2006 (unaudited): RUR USD Euro Other currencies Total (RUR thousands) Assets Cash and cash equivalents... 12,224,693 7,941,195 1,820, ,979 22,694,645 Mandatory cash balances with central banks... 1,706,175 32,249 4, ,227 1,907,569 Trading securities... 13,356,224 2,794,199 46,618 8,554 16,205,595 Due from other banks... 1,585, ,582 13, ,558 2,229,094 Loans and advances to customers... 41,548,584 17,591,130 2,773,838 1,903,292 63,816,844 Investment securities available for sale... 1,528,995 22,457 4, ,344 1,688,404 Deferred income tax asset Premises and equipment... 2,149, ,255 2,263,965 Other assets ,725 38,277 3,729 61, ,256 Total assets... 74,654,883 28,940,089 4,667,666 3,202, ,465,212 Liabilities Due to other banks ,691 1,108, , ,049,374 Customer accounts... 51,968,926 13,826,379 3,629,370 2,434,889 71,859,564 Debt securities in issue... 8,430, , ,777 9,445,795 Other borrowed funds... 11,163,100 11,163,100 Deferred income tax liability 208, ,226 Other liabilities ,546 81,715 4,288 42, ,831 Total liabilities... 62,294,849 27,078,674 4,696,187 2,477,180 96,546,890 Net balance sheet position... 12,360,034 1,861,415 (28,521) 725,394 14,918,322 Credit related commitments ,918 1,836, ,551 13,381 3,661,717 (1) Dashes indicate where the Group did not have an outstanding position in the corresponding currency. Please see Description of the Bank Petrocommerce Group Risk Management Exchange Rate Risk for information on the Group s exposure to foreign currency exchange rate risk as at 31 December

78 Liquidity Risk The following table shows the Group s net liquidity position by maturity category on an IFRS basis as at 30 June 2006 (unaudited): Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years No stated maturity Total (RUR thousands) Assets Cash and cash equivalents... 22,694,645 22,694,645 Mandatory cash balances with central banks.. 1,907,569 1,907,569 Trading securities 16,205,595 16,205,595 Due from other banks... 2,100,375 32,277 96,442 2,229,094 Loans and advances to customers... 7,406,484 18,060,610 12,666,450 25,683,300 63,816,844 Investment securities available for sale... 72, , , ,757 40,013 1,688,404 Deferred income tax asset Premises and equipment... 2,263,965 2,263,965 Other assets ,018 28,278 21,011 23, ,256 Total assets... 50,971,745 18,406,608 13,109,875 26,673,006 2,303, ,465,212 Liabilities Due to other banks... 1,316,328 1,002, , ,956 3,049,374 Customer accounts... 47,201,426 12,329,805 10,556,586 1,771,747 71,859,564 Debt securities in issue ,019 3,108,656 3,276,097 2,772,023 9,445,795 Other borrowed funds... 83,318 4,378,697 6,701,085 11,163,100 Deferred income tax liability , ,226 Other liabilities , ,001 5, ,831 Total liabilities... 49,518,074 16,626,961 18,987,275 11,414,580 96,546,890 Net liquidity gap.. 1,453,671 1,779,647 (5,877,400) 15,258,426 2,303,978 14,918,322 Cumulative liquidity gap at 30 June ,453,671 3,233,318 (2,644,082) 12,614,344 14,918,322 (1) Dashes indicate absence of a particular asset or liability. (2) The Group believes that in spite of the fact that the majority of its trading securities portfolio matures after one year in accordance with their terms, the majority of these securities are freely traded in the market and thus represent a hedge against potential liquidity risk and thus are included in the demand and less than one month category. (3) Investment securities available for sale are valued at market value and are available to meet the Group s short-term liquidity needs. 77

79 (4) The Group believes that although a substantial portion of client deposits are on demand and less than one month can be withdrawn at any time in accordance with Russian law, diversification of these deposits by number and type of depositors and the Group s past experience indicate that these deposits provide a long-term and stable source of funding for the Group. Please see Description of the Bank Petrocommerce Group Risk Management Liquidity Risk for information on the Group s net liquidity position by maturity category on an IFRS basis as at 31 December Capital Adequacy The following table sets out the Bank s mandatory economic ratios based on Russian statutory financial statements, calculated in accordance with the requirements of the CBR as of 30 June 2006 and 31 December 2005: As at 30 June 2006 (unaudited) As at 31 December 2005 (unaudited) CBR Requirements Since April 2004 Mandatory economic ratios Capital adequacy ratio N Minimum level 10 Bank liquidity ratios N Minimum level 15 N Minimum level 50 N Maximum level 120 N5... Minimum level 20 Maximum amount of risk per borrower or group of borrowers N Maximum level 25 Maximum amount of large credit risks N Maximum level 800 N Maximum 50 N Maximum 3 N Maximum 25 The Bank also meets international standards with respect to capital adequacy. Details of the Bank s capital adequacy as at 30 June 2006 and 31 December 2005, calculated in accordance with BIS Guidelines and based on IFRS financial statements, are set out below. Capital adequacy ratio The following table sets out the Bank s capital adequacy ratio as at the dates indicated: As at 30 June 2006 (unaudited) As at 31 December 2005 (unaudited) (per cent.) Tier I capital adequacy ratio Total capital adequacy ratio

80 TERMS AND CONDITIONS OF THE NOTES The following is the text of the Terms and Conditions of the Notes which contain summaries of certain provisions of the Trust Deed, and which will be attached to the definitive certificates, if any, and (subject to the provisions thereof) apply to the Global Notes. The U.S.$125,000, per cent. Loan Participation Notes due 2009 (the New Notes ) will be consolidated and form a single series with the U.S.$300,000, per cent. Loan Participation Notes due 2009 issued on 14 December 2006 (the Original and, together with the New Notes, the Notes which expression includes, unless the context requires otherwise, any further Notes issued pursuant to Condition 15 (Further Issues) and forming a single series therewith) of Petrocommerce Finance S.A. (the Issuer, which expression shall include (unless the context requires otherwise) any entity substituted for the Issuer pursuant to Condition 10(C) (Substitution)) are constituted by, are subject to, and have the benefit of, a trust deed (the Original Trust Deed dated 14 December 2006 as amended and restated on 12 March 2007 by virtue of a supplemental trust deed (the Supplemental Trust Deed and, together the Original Trust Deed, the Trust Deed, which expression includes such trust deed as from time to time modified in accordance with the provisions therein contained and any deed or other document expressed to be supplemental thereto, as from time to time so modified) and made between the Issuer and BNY Corporate Trustee Services Limited (the Trustee, which expression shall include any trustees or trustee for the time being under the Trust Deed) as trustee for the Noteholders (as defined below). The Issuer has authorised the creation, issue and sale of the Notes for the sole purpose of financing a loan in an aggregate amount of U.S.$425,000,000 (the Loan ) to OJSC Bank Petrocommerce ( Petrocommerce ). The terms of the Loan are recorded in a loan agreement (the Loan Agreement ) dated 12 December 2006, as amended and restated on 8 March 2007, between the Issuer and Petrocommerce. In each case where amounts of principal, interest and additional amounts (if any) are stated herein or in the Trust Deed to be payable in respect of the Notes, the obligations of the Issuer to make any such payment shall constitute an obligation only to account to the Noteholders on each date upon which such amounts of principal, interest and additional amounts (if any) are due in respect of the Notes for an amount equivalent to sums of principal, interest, and additional amounts (if any) actually received by or for the account of the Issuer pursuant to the Loan Agreement, less any amounts in respect of the Reserved Rights (as defined in the Trust Deed). Noteholders must therefore rely solely and exclusively on Petrocommerce s covenant to pay under the Loan Agreement and the credit and financial standing of Petrocommerce. Noteholders shall have no recourse (direct or indirect) to any other asset of the Issuer. The principal amount of the Notes is U.S.$425,000,000 and the principal amount of the Loan is U.S.$425,000,000. Unless the context otherwise requires, references in these Conditions to payments of principal under the Notes and/or to the redemption of the Notes (and analogous expressions) shall be construed as references to the payment by the Issuer of the aggregate amount payable by Petrocommerce by virtue of the receipt by the Issuer of the relevant principal amount under the Loan Agreement. Under the Loan Agreement, the applicable rate of interest is 8.75 per cent. per annum (the Contract Rate ), which accrues on the outstanding principal amount of the Loan in accordance with the terms of the Loan Agreement. Accordingly, if Petrocommerce makes payment in full of interest at the Contract Rate on the outstanding principal amount of the Loan in accordance with the terms of the Loan Agreement (and otherwise complies with its obligations thereunder) the amount of interest payable by the Issuer under the Notes will be, subject to and in accordance with the terms hereof and satisfaction of all conditions to payment hereunder, equal to a rate of 8.75 per cent. per annum, based on the principal amount of the Notes. Unless the context otherwise requires, references in these Conditions to payments of interest shall be construed as references to the amounts (if any) payable by the Issuer as described in Condition 5 (Interest). The Issuer has charged by way of first fixed charge in favour of the Trustee for itself and on behalf of the Noteholders certain of its rights and interests as lender under the Loan Agreement as security for its payment obligations in respect of the Notes and under the Trust Deed (the Charge ) and has assigned absolutely certain other rights under the Loan Agreement to the Trustee (the Assigned Rights and, together with the Charge, the Security Interests ) in each case excluding the Reserved Rights (as defined in the Trust Deed). 79

81 In certain circumstances, the Trustee shall (subject to it being indemnified and/or secured to its satisfaction) be required by Noteholders holding at least one quarter of the principal amount of the Notes outstanding or by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders to exercise certain of its powers under the Trust Deed (including those arising under the Security Interests). Payments in respect of the Notes will be made (subject to the receipt of the relevant funds from Petrocommerce) pursuant to a paying agency agreement (the Original Agency Agreement ) dated 14 December 2006 and made between Petrocommerce, the Issuer, The Bank of New York (Luxembourg) S.A., as the registrar (the Registrar, which expressions shall include any successors), The Bank of New York, as the principal paying agent (the Principal Paying Agent, which expressions shall include any successors), and the transfer agents and paying agents named therein (the Transfer Agents and Paying Agents respectively together, the Agents, which expressions shall include any successors) and the Trustee as supplemented by the supplemental agency agreement dated 12 March 2007 between the same parties (the Supplemental Agency Agreement and, together with the Original Agency Agreement, the Agency Agreement ). Copies of the Trust Deed, the Loan Agreement and the Agency Agreement are available for inspection by Noteholders during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the principal office of the Trustee being, at the date hereof, One Canada Square, London E14 5AL and at the Specified Office (as defined in the Agency Agreement) of the Principal Paying Agent, the initial Specified Office of which is set out below. Certain provisions of these terms and conditions (the Conditions ) are summaries or restatements of, and are subject to, the detailed provisions of the Trust Deed, the Loan Agreement (the form of which is scheduled to and incorporated in the Trust Deed) and the Agency Agreement. Noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions thereof. 1. STATUS The sole purpose of the issue of the Notes is to provide the funds for the Issuer to finance the Loan. The Notes constitute the obligation of the Issuer to apply the proceeds from the issue of the Notes solely for financing the Loan and to account to the Noteholders for an amount equivalent to sums of principal, interest and additional amounts (if any) actually received by or for the account of the Issuer pursuant to the Loan Agreement, less any amount in respect of Reserved Rights (as defined in the Trust Deed). The Trust Deed provides that payments in respect of the Notes equivalent to the sums actually received by or for the account of the Issuer by way of principal, interest or additional amounts (if any) pursuant to the Loan Agreement, less any amount in respect of the Reserved Rights and subject to Condition 8 (Taxation), will be made pro rata among all Noteholders, on the date of, and in the currency of, and subject to the conditions attaching to, the equivalent payment pursuant to the Loan Agreement. The Issuer shall not be liable to make any payment in respect of the Notes other than as expressly provided herein and in the Trust Deed. As provided therein, the Issuer shall be under no obligation to exercise in favour of the Noteholders any rights of set-off or of banker s lien or to combine accounts or counterclaim that may arise out of other transactions between the Issuer and Petrocommerce. Noteholders are deemed to have notice of, and to have accepted, these Conditions and the contents of the Trust Deed, the Agency Agreement and the Loan Agreement. It is hereby expressly provided that, and Noteholders are deemed to have accepted that: (a) (b) neither the Issuer nor the Trustee makes any representation or warranty in respect of, or shall at any time have any responsibility for, or, save as otherwise expressly provided in the Trust Deed or in paragraph (f) below, liability or obligation in respect of the performance and observance by Petrocommerce of its obligations under the Loan Agreement or the recoverability of any sum of principal, or interest or any additional amounts (if any) due or to become due from Petrocommerce under the Loan Agreement; neither the Issuer nor the Trustee shall at any time have any responsibility for, or obligation or liability in respect of, the condition (financial or otherwise), creditworthiness, affairs, status, nature or prospects of Petrocommerce; 80

82 (c) (d) (e) (f) (g) neither the Issuer nor the Trustee shall at any time be liable for any representation or warranty or any act, default or omission of Petrocommerce under or in respect of the Loan Agreement; the Trustee shall not at any time have any responsibility for, or liability or obligation in respect of, the performance and observance by the Principal Paying Agent, the Paying Agent, the Registrar or the Transfer Agent of their respective obligations under the Agency Agreement; the financial servicing and performance of the terms of the Notes depends solely and exclusively upon performance by Petrocommerce of its obligations under the Loan Agreement and its covenant to make payments under the Loan Agreement and its credit and financial standing. Petrocommerce has represented and warranted to the Issuer in the Loan Agreement that the Loan Agreement constitutes a legal, valid and binding obligation of Petrocommerce; the Issuer and (following the creation of the Security Interests) the Trustee shall be entitled to rely on certificates of Petrocommerce (and, where applicable, certification by third parties) as a means of monitoring whether Petrocommerce is complying with its obligations under the Loan Agreement and shall not otherwise be responsible for investigating any aspect of Petrocommerce s performance in relation thereto and, subject as further provided in the Trust Deed, the Trustee will not be liable for any failure to make the usual or any investigations which might be made by a lender or a security holder (as applicable) in relation to the property which is the subject of the Trust Deed and held by way of security for the Notes, and shall not be bound to enquire into or be liable for any defect or failure in the right or title of the Issuer to the property which is subject to the Security Interests whether such defect or failure was known to the Trustee or might have been discovered upon examination or enquiry or whether capable of remedy or not, nor will it have any liability for the enforceability of the security created by the Security Interests whether as a result of any failure, omission or defect in registering or filing or otherwise protecting or perfecting such security and the Trustee has no responsibility for the value of such security; and the Issuer shall at no time be required to expend or risk its own funds or otherwise incur any financial liability in the performance of its obligations or duties or the exercise of any right, power, authority or discretion pursuant to these Conditions until it has received from Petrocommerce the funds that are necessary to cover the costs and expenses in connection with such performance or exercise, or has been (in its sole discretion) sufficiently assured that it will receive such funds. Under the Trust Deed, the obligations of the Issuer in respect of the Notes rank pari passu and rateably without any preference among themselves. In the event that the payments under the Loan Agreement are made by Petrocommerce to, or to the order of, the Trustee or (subject to the provisions of the Trust Deed) the Principal Paying Agent, they will pro tanto satisfy the obligations of the Issuer in respect of the Notes. Save as otherwise expressly provided herein and in the Trust Deed, no proprietary or other direct interest in the Issuer s right under or in respect of the Loan Agreement or the Loan exists for the benefit of the Noteholders. Subject to the terms of the Trust Deed, no Noteholder will have any entitlement to enforce the Loan Agreement or direct recourse to Petrocommerce except its rights against the Lender through action by the Trustee pursuant to the Charge and the assignment of the Assigned Rights granted to the Trustee in the Trust Deed. The Trustee shall not be required to take proceedings to enforce payment under the Trust Deed or, following the enforcement of the Security Interests created in the Trust Deed, the Loan Agreement unless it has been indemnified and/or secured by the Noteholders to its satisfaction. For the avoidance of doubt, the Issuer is obliged, pursuant to the terms of the Trust Deed, to deposit into the Account (as defined in the Trust Deed) on 12 March 2007 (the Issue Date ) an amount in respect of accrued interest on the New Notes for the period from, and including, 14 December 2006 to, but excluding, the Issue Date and to procure that such sum is paid from the Account to the Noteholders on the First Interest Payment Date. 81

83 2. FORM AND DENOMINATION The Notes are issued in registered form in the denominations of U.S.$100,000 and integral multiples of U.S.$1,000 in excess thereof (each a Specified Denomination ). 3. REGISTER, TITLE AND TRANSFERS (A) Register Without prejudice to the register in respect of the Notes maintained by the Issuer, the Registrar will maintain a register (the Register ) in respect of the Notes in accordance with the provisions of the Agency Agreement. In these Conditions the holder or Noteholder of a Note means the person in whose name such Note is for the time being registered in the Register (or, in the case of a joint holding, the first named thereof). A certificate (each a Certificate ) will be issued to each Noteholder in respect of its registered holding. Each Certificate will be serially numbered with an identifying number which will be recorded in the Register. (B) Title The holder of each Note as recorded in the Register, shall (except as otherwise required by law) be treated as the absolute owner of such Note for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any other interest therein, any writing on the Certificate relating thereto (other than the endorsed form of transfer) or any notice of any previous loss or theft of such Certificate) and no person shall be liable for so treating such holder. Notwithstanding anything to the contrary in this Condition 3(B), the Notes will be numbered serially with an identifying number which will be recorded in the Register and a copy of which in an all times up-to-date version is held at the registered office of the Issuer. In the case of discrepancy between the Register of the Noteholders maintained by the Registrar and the register maintained by the Issuer, the registrations in the Register maintained by the Issuer shall prevail for Luxembourg law purposes. (C) Transfers Subject to paragraphs (F) and (G) below, a Note may be transferred, subject to the transfer being duly recorded in the Register and upon surrender of the relevant Certificate, with the endorsed form of transfer duly completed, at the Specified Office of the Registrar or the Transfer Agent, together with such evidence as the Registrar or the Transfer Agent may reasonably require to prove the title of the transferor and the authority of the individuals who have executed the form of transfer provided, however, that a Note may not be transferred unless the principal amount of Notes transferred and (where not all of the Notes held by a holder are being transferred) the principal amount of the balance of Notes not transferred each amounts to a Specified Denomination or a multiple thereof. Where not all the Notes represented by the surrendered Certificate are the subject of the transfer, a new Certificate in respect of the balance of the Notes will be issued to the transferor. (D) Registration and Delivery of Certificates Within five business days of the surrender of a Certificate in accordance with paragraph (C) above, the Registrar will register the transfer in question and deliver a new Certificate of a like principal amount to the Notes transferred to each relevant holder for collection at its Specified Office or (at the request and risk of such relevant holder) by uninsured first class mail (airmail if overseas) to the address specified for the purpose by such relevant holder. In this paragraph, business day means a day on which commercial banks are open for business (including dealings in foreign currencies) in the city where the Registrar or the Transfer Agent has its Specified Office. (E) No Charge The transfer of a Note will be effected without charge by or on behalf of the Issuer, the Registrar or the relevant Transfer Agent but against such indemnity as the Registrar or (as the case may be) the Transfer Agent may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such transfer. (F) Closed Periods The Noteholders may not require transfers to be registered during the period of 15 days ending on the due date for any payment of principal or interest in respect of the Notes. 82

84 (G) Regulations Concerning Transfers and Registration All transfers of Notes and entries on the Register are subject to the detailed regulations concerning the transfer of Notes scheduled to the Agency Agreement. The regulations may be changed by the Issuer with the prior written approval of the Trustee and the Registrar. A copy of the current regulations will be mailed (free of charge) by the Registrar to any Noteholder who requests in writing a copy of such regulations. 4. RESTRICTIVE COVENANT As provided in the Trust Deed, so long as any of the Notes remain outstanding (as defined in the Trust Deed), the Issuer will not, without the prior written consent of the Trustee or an Extraordinary Resolution or Written Resolution (as defined in the Trust Deed), agree to any amendments to or any modification of, or waiver of, or authorise any breach or proposed breach of, the terms of the Loan Agreement and will act at all times in accordance with any instructions of the Trustee from time to time with respect to the Loan Agreement, except as otherwise expressly provided in the Trust Deed or the Loan Agreement. Any such amendment, modification, waiver or authorisation made with the consent of the Trustee shall be binding on the Noteholders and, unless the Trustee agrees otherwise, any such amendment or modification shall be notified by the Issuer to the Noteholders in accordance with Condition 14 (Notices). Save as provided above and except that the Issuer may, without the consent of the Trustee, make one issue of loan participation notes on a limited recourse basis (provided that the proceeds of such issue are used by the Issuer for the sole purpose of making a loan to Petrocommerce), so long as any Note remains outstanding, the Issuer, without the prior written consent of the Trustee, shall not, inter alia, incur any other indebtedness for borrowed moneys, engage in any other business (other than acquiring and holding the Security Interests in respect of the Notes, making the Loan to Petrocommerce pursuant to the Loan Agreement and performing any act incidental to or necessary in connection with the foregoing), declare any dividends, have any subsidiaries or employees, purchase, own, lease or otherwise acquire any real property (including office premises or like facilities), consolidate or merge with any other person or convey or transfer its properties or assets substantially as an entity to any person (otherwise than as contemplated in these Conditions, the Trust Deed and the Loan Agreement), issue any shares, give any guarantee or assume any other liability, or, subject to the laws of Luxembourg, petition for any winding-up or bankruptcy. 5. INTEREST On 17 June and 17 December of each year, commencing on 17 June 2007 and ending on 17 December 2009 (each an Interest Payment Date ), or as soon thereafter as the same is received, the Issuer shall account to the Noteholders for an amount equivalent to amounts of interest actually received by or for the account of the Issuer pursuant to the Loan Agreement. Under the Loan Agreement, the applicable rate of interest is the Contract Rate, which accrues on the outstanding principal amount of the Loan in accordance with the terms of the Loan Agreement. Accordingly, if Petrocommerce makes payment in full of interest at the Contract Rate on the outstanding principal amount of the Loan in accordance with the terms of the Loan Agreement (and otherwise complies with its obligations thereunder) the amount of interest payable by the Issuer under the Notes will be, subject to and in accordance with the Conditions, equal to a rate of 8.75 per cent. per annum, based on the principal amount of the Notes. 6. REDEMPTION (A) Scheduled Redemption Unless previously prepaid or repaid pursuant to Clauses 5.2 (Special Prepayment), 5.3 (Illegality) or Clause 11 (Events of Default) of the Loan Agreement, Petrocommerce will be required to repay the Loan on the day which is one Business Day (as defined in the Loan Agreement) prior to the Repayment Date (the Loan Repayment Date ) and, subject to such repayment, as set forth in the Loan Agreement, all Notes then outstanding will, on the Repayment Date or as soon thereafter as such repayment of the Loan is actually received, be redeemed or repaid by the Issuer at 100 per cent. of the principal amount thereof. (B) Early Redemption If the Loan should become repayable (and be repaid) pursuant to the terms and conditions of the Loan Agreement prior to the Loan Repayment Date, as set forth in the Loan Agreement, all 83

85 Notes then remaining outstanding will thereupon become due and redeemable or repayable at par together with interest accrued to the date of redemption, and the Issuer will give not less than 25 nor more than 60 days notice thereof to the Trustee and the Noteholders in accordance with Condition 14 (Notices). Under the Loan Agreement: (i) Petrocommerce may prepay the Loan in whole (but not in part) in the circumstances set out in Clause 5.2 (Special Prepayment) of the Loan Agreement; and (ii) the Issuer may require Petrocommerce to prepay the Loan in whole (but not in part) in the circumstances set out in Clause 5.3 (Illegality) of the Loan Agreement. To the extent that the Issuer receives amounts of principal, interest or other amounts (other than amounts in respect of the Reserved Rights (as defined in the Trust Deed)) from Petrocommerce following acceleration of the Loan, the Issuer shall pay an amount equal to such amounts on the business day (as defined in Condition 7 (Payments)) following receipt of such amounts, subject as provided in Condition 7 (Payments). 7. PAYMENTS (A) Principal Payments of principal shall be made by U.S. dollar cheque drawn on, or upon application by a holder of a Note to the Specified Office of the Principal Paying Agent not later than the fifteenth day before the due date for any such payment, by transfer to a U.S. dollar account maintained by the payee with, a bank in New York City upon surrender (or, in the case of part payment only, endorsement) of the relevant Certificates at the Specified Office of any Paying Agent. (B) Interest Payments of interest shall be made by U.S. dollar cheque drawn on, or upon application by a holder of a Note to the Specified Office of the Principal Paying Agent not later than the fifteenth day before the due date for any such payment, by transfer to a U.S. dollar account maintained by the payee with, a bank in New York City and (in the case of interest payable on redemption) upon surrender (or, in the case of part payment only, endorsement) of the relevant Certificates at the Specified Office of any Paying Agent. (C) Payments Subject to Fiscal Laws All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 8, no commissions or expenses shall be charged to the Noteholders in respect of such payments. (D) Payments on Business Days If the due date for payments of interest or principal is not a business day, the holder of a Note shall not be entitled to payment of the amount due until the next following business day and shall not be entitled to any further interest or other payment in respect of any such delay. In this Condition, business day means a day on which (a) the London Interbank Market is open for dealings between banks generally, and (b) if on that day a payment is to be made hereunder, commercial banks generally are open for business in Luxembourg, New York City, Moscow and in the city where the Specified Office of the Principal Paying Agent is located. (E) Record Date Each payment in respect of a Note will be made to the person shown as the holder in the Register at the opening of business (in the place of the Registrar s Specified Office) on the fifteenth day before the due date for such payment (the Record Date ). Where payment in respect of a Note is to be made by cheque, the cheque will be mailed to the address shown as the address of the holder in the Register at the opening of business on the relevant Record Date. (F) Accrued Interest In addition, if the due date for redemption or repayment of a Note is not an Interest Payment Date, interest accrued from the preceding Interest Payment Date or, as the case may be, from the date of issuance of the Notes, shall be payable only as and when actually received by or for the account of the Issuer pursuant to the Loan Agreement. 84

86 (G) Payments by Petrocommerce Save as directed by the Trustee at any time after the security created in the Trust Deed becomes enforceable, the Issuer will require Petrocommerce to make all payments of principal, interest and any additional amounts to be made pursuant to the Loan Agreement to the Principal Paying Agent to an account in the name of the Issuer. Pursuant to the Charge, the Issuer will charge by way of first fixed charge all its rights, title and interest in and to all sums of money then or in the future deposited in such account in favour of the Trustee for the benefit of the Noteholders. (H) Currency Other Than U.S. Dollars In respect of the Issuer s obligations under Conditions 5 (Interest), 6 (Redemption) and 8 (Taxation), and subject to the following sentence, if the Issuer receives any amount under the Loan Agreement in a currency other than U.S. Dollars, the Issuer s obligation under the relevant Condition shall be fully satisfied by paying such sum (after deducting any costs of exchange) as the Issuer receives upon conversion of such sum into U.S. Dollars in accordance with customary banking practice in the spot market on the business day immediately following the day on which such sum is received by the Issuer. If the Issuer receives any payment from Petrocommerce pursuant to Clause 12.5 (Currency Indemnity) of the Loan Agreement with respect to amounts due under the Notes, the Issuer shall pay such sum to the Noteholders in accordance with this Condition 7 (Payments). 8. TAXATION All payments in respect of the Notes by or on behalf of the Issuer shall be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Grand Duchy of Luxembourg, the Russian Federation or any political subdivision or any authority thereof or therein having the power to tax, unless the deduction or withholding of such taxes or duties is required by law. In such event, the Issuer shall make such additional payments as shall result in the receipt by the Noteholders of such amount as would have been received by them if no such withholding or deduction had been required. However, the Issuer shall only make such additional payments to the extent and at such time as it shall receive equivalent sums from Petrocommerce under the Loan Agreement. To the extent that the Issuer does not receive any such equivalent sum, the Issuer shall account to the relevant Noteholder for an additional amount equivalent to a pro rata proportion of such additional amount (if any) as is actually received by, or for the account of, the Issuer pursuant to the provisions of the Loan Agreement on the date of, in the currency of, and subject to any conditions attaching to the payment of such additional amount to the Issuer provided that no such additional amount will be payable: (i) to a Noteholder who (i) is able to avoid such deduction or withholding by satisfying any statutory requirements or by making a declaration of non-residence or other claim for exemption to the relevant tax authority; or (ii) is liable for such taxes or duties by reason of his having some connection with the Grand Duchy of Luxembourg other than the mere holding of such Notes or the receipt of payments in respect thereof; (ii) in respect of a Certificate presented for payment of principal more than 30 days after the Relevant Date (as defined below) except to the extent that such additional payment would have been payable if such Certificate had been presented for payment on such thirtieth day; (iii) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other European Union Directive implementing the conclusions of the ECOFIN Council meeting of November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or (iv) in respect of a Note held by or on behalf of a Noteholder who would have been able to avoid such withholding or deduction by arranging to receive the relevant payment through another Paying Agent in a Member State of the European Union. As used herein, Relevant Date means (i) the date on which the equivalent payment under the Loan Agreement first becomes due but (ii) if the full amount payable by Petrocommerce has not been received by, or for the account of, the Issuer pursuant to the Loan Agreement on or prior to such date, means the date on which such full amount shall have been so received and notice to that effect 85

87 shall have been duly given to the Noteholders by or on behalf of the Issuer in accordance with Condition 14 (Notices). Any reference herein or in the Trust Deed to payments in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable in accordance with the Trust Deed and this Condition 8 or any undertaking given in addition thereto or in substitution therefor pursuant to the Loan Agreement or the Trust Deed. 9. ENFORCEMENT The Trust Deed provides that only the Trustee may pursue the remedies under the general law, the Trust Deed or the Notes to enforce the rights of the Noteholders and no Noteholder will be entitled to pursue such remedies unless the Trustee (having become bound to do so in accordance with the terms of the Trust Deed) fails or neglects to do so within a reasonable period and such failure or neglect is continuing. At any time after an Event of Default (as defined in the Loan Agreement), or a Relevant Event (as defined in the Trust Deed) shall have occurred and be continuing, the Trustee may, at its discretion, and shall, if requested to do so by Noteholders whose Notes constitute at least 25 per cent. in aggregate principal amount of the Notes outstanding, or if directed to do so by an Extraordinary Resolution and, in either case, subject to it being secured and/or indemnified to its satisfaction, take the action permitted to be taken by the Issuer as lender under the Loan Agreement (in the case of an Event of Default), or exercise any rights under the Security Interests created in the Trust Deed in favour of the Trustee (in the case of a Relevant Event). Upon the repayment of the Loan or the receipt in full of all principal, and interest accrued under the Loan pursuant to a winding-up or liquidation of Petrocommerce following an Event of Default and a declaration as provided herein, the Notes will be redeemed or repaid at their principal amount together with interest accrued to the date fixed for redemption and thereupon shall cease to be outstanding. 10. MEETINGS OF NOTEHOLDERS; MODIFICATION; WAIVER; SUBSTITUTION OF THE LENDER (A) Meetings of Noteholders The Trust Deed contains provisions for convening meetings of Noteholders to consider matters affecting their interests, including the modification or abrogation by Extraordinary Resolution of any provision of the Loan Agreement, these Conditions or the Trust Deed. Such a meeting may be convened by the Issuer or the Trustee and shall be convened by the Trustee, subject to its being indemnified and/or secured to its satisfaction, upon the request in writing of Noteholders holding not less than one tenth of the aggregate principal amount of the outstanding Notes. The quorum at any meeting convened to vote on an Extraordinary Resolution will be at least two persons present holding or representing more than 50 per cent. of the aggregate principal amount of the outstanding Notes or, at any adjourned meeting, at least two persons present being or representing Noteholders whatever the outstanding principal amount of the Notes held or represented; provided, however, that Reserved Matters (as defined in the Trust Deed) may only be sanctioned by an Extraordinary Resolution passed at a meeting of Noteholders at which at least two persons present holding or representing not less than three-quarters or, at any adjourned meeting, one-quarter of the aggregate principal amount of the outstanding Notes form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Noteholders, whether present or not. The provisions of articles 86 to 94-8 of the Luxembourg act dated 10 August 1915 on corporate companies, as amended, shall not apply. In addition, a resolution in writing signed by or on behalf of all Noteholders who for the time being are entitled to receive notice of a meeting of Noteholders under the Trust Deed will take effect as if it were an Extraordinary Resolution. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders. (B) Modification and Waiver The Trustee may agree, without the consent of the Noteholders, to any modification of the Notes, these Conditions and the Trust Deed or, following the creation of the Security Interests, the Loan Agreement (other than, in each case, in respect of the Reserved Matters) which in the opinion of the Trustee is of a formal, minor or technical nature, is made to correct a manifest error or is not materially prejudicial to the interests of the Noteholders. The Trustee may also waive or authorise or 86

88 agree to the waiving or authorising of any breach or proposed breach by the Issuer of the Conditions, or the Trust Deed or, following the creation of the Security Interests, by Petrocommerce of the terms of the Loan Agreement, or determine that any event which would or might otherwise give rise to a right of acceleration under the Loan Agreement shall not be treated as such, if in the sole opinion of the Trustee, to do so would not be materially prejudicial to the interests of the Noteholders (other than, in each case, in respect of the Reserved Matters) and provided always that the Trustee may not exercise such power of waiver in contravention of a request given by the holders of one quarter in aggregate principal amount of the Notes then outstanding or of any express direction by an Extraordinary Resolution or written Resolution of the Noteholders. Any such modification, waiver or authorisation shall be binding on the Noteholders and, unless the Trustee agrees otherwise, shall be notified to the Noteholders as soon as practicable thereafter in accordance with Condition 14 (Notices). (C) Substitution The Trust Deed and the Loan Agreement contain provisions to the effect that the Issuer may, having obtained the consent of Petrocommerce and the Trustee (which latter consent may be given without the consent of the Noteholders) and subject to having complied with certain requirements as set out therein including the substitute obligor s rights under the Loan Agreement being charged and assigned, respectively, to the Trustee as security for the payment obligations of the substitute obligor under the Trust Deed and the Notes and its rights as Lender under the Loan Agreement, substitute any entity in place of the Issuer as creditor under the Loan Agreement, as issuer and principal obligor in respect of the Notes and as obligor under the Trust Deed. Not later than 14 days after compliance with the aforementioned requirements, notice thereof shall be given by the Issuer to the Noteholders in accordance with Condition 14 (Notices) or the Issuer shall use its best endeavours to ensure that the substitute obligor does so. (D) Exercise of Powers In connection with the exercise of any of its powers, trusts, authorities or discretions, the Trustee shall have regard to the interests of the Noteholders as a class and, in particular, shall not have regard to the consequences of such exercise for individual Noteholders resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory. No Noteholder is entitled to claim from the Issuer, Petrocommerce or the Trustee any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders. 11. PRESCRIPTION Notes will become void unless presented for payment within ten years (in the case of principal) or five years (in the case of interest) from the Relevant Date in respect thereof. 12. TRUSTEE AND AGENTS The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility in certain circumstances, including provisions relieving it from taking proceedings to enforce payment unless indemnified and/or secured to its satisfaction, and to be paid its costs and expenses in priority to the claims of Noteholders. In addition, the Trustee is entitled to enter into business transactions with the Issuer and Petrocommerce and any entity relating to the Issuer and Petrocommerce without accounting for any profit. The Trustee s responsibilities are solely those of trustee for the Noteholders on the terms of the Trust Deed. Accordingly, the Trustee makes no representations and assumes no responsibility for the validity or enforceability of the Loan Agreement or the security created in respect thereof or for the performance by the Issuer of its obligations under or in respect of the Notes and the Trust Deed or by Petrocommerce in respect of the Loan Agreement. In acting under the Agency Agreement and in connection with the Notes, the Agents act solely as agents of the Issuer and (to the extent provided therein) the Trustee and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders. The initial Agents and their initial Specified Offices are listed below. The Issuer reserves the right (with the prior written approval of the Trustee) at any time to vary or terminate the appointment of any Agent and to appoint a successor principal paying agent or registrar and additional or successor paying agents and transfer agents; provided, however, that the Issuer shall at 87

89 all times maintain (a) a principal paying agent and a registrar, (b) a paying agent and transfer agent having Specified Offices in at least two major European cities approved by the Trustee (including London, so long as the Notes are admitted to listing on the Official List of the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets Act 2000 and admitted to trading on the Gilt-Edged and Fixed Interest Market of the London Stock Exchange plc), and (c), a paying agent in a member state of the European Union that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other European Union Directive implementing the conclusions of the ECOFIN Council meeting of November 2000 on the taxation of savings income or any law implementing or complying with, or introduced to conform to, such Directive. Notice of any change in any of the Agents or in their Specified Offices shall promptly be given to the Noteholders. 13. REPLACEMENT OF CERTIFICATES If a Certificate shall become mutilated, defaced, lost, stolen or destroyed it may, subject to all applicable laws and regulations and requirements of the Stock Exchange (as defined in the Trust Deed), be replaced at the Specified Office of the Registrar or the Transfer Agent having its Specified Office in London on payment of such costs, expenses, taxes and duties as may be incurred in connection therewith and on such terms as to evidence, security and indemnity and otherwise as may reasonably be required by or on behalf of the Issuer or the Trustee. Mutilated or defaced Certificates must be surrendered before replacements will be issued. 14. NOTICES Notices to the Noteholders will be sent to them by first class mail (or its equivalent) or (if posted to an overseas address) by airmail at their respective addresses on the Register. Any such notice shall be deemed to have been given on the fourth day after the date of mailing. Notices will be valid if published in a leading newspaper having general circulation in London (which is expected to be the Financial Times) or if such publication shall not be practicable, in an English language newspaper of general circulation in Europe or as otherwise required by any exchange on which the Notes are listed. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in all required newspapers. In case by reason of any other cause it shall be impracticable to publish any notice to holders of Notes as provided above, then such notification to such holders as shall be given with the approval of the Trustee in accordance with the rules of the Stock Exchange shall constitute sufficient notice to such holders for every purpose hereunder. 15. FURTHER ISSUES The Issuer may from time to time, without the consent of the Noteholders, create and issue further Notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes. In relation to any further issue which is to form a single series with the Notes (i) the Issuer will enter into a loan agreement with Petrocommerce on the same terms as the Loan Agreement (or on the same terms except for the first payment of interest) subject to any modifications which, in the sole opinion of the Trustee, only relate to the Reserved Rights and would not materially prejudice the interests of the Noteholders and (ii) the Security Interests granted in respect of the Notes will be amended or supplemented so as to secure amounts due in respect of such further Notes also and/or new security will be granted over any further loan agreement or the Loan Agreement as so amended or supplemented to secure amounts due on the Notes and such further Notes and the Trustee is entitled to assume without enquiry that this arrangement as regards security for the Notes will not be materially prejudicial to the interests of the Noteholders. Such further Notes shall be issued under a deed supplemental to the Trust Deed. 16. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act

90 17. GOVERNING LAW The Notes and the Trust Deed are governed by and shall be construed in accordance with, English law. The Issuer has submitted in the Trust Deed to the jurisdiction of the courts of England and has appointed an agent for the service of process in England. 89

91 SUMMARY OF PROVISIONS RELATING TO THE NEW NOTES IN GLOBAL FORM Global New Certificate The New Notes will be represented by a Global New Certificate which will be registered in the name of The Bank of New York (Depository) Nominees Limited as nominee for, and deposited with, a common depositary for Euroclear and Clearstream, Luxembourg. For so long as all of the New Notes are represented by a Global New Certificate and such Global New Certificate is held on behalf of Euroclear and/or Clearstream, Luxembourg, the Trustee shall, for the purposes of performing the functions under the Trust Deed be entitled to deem, treat and have regard to the interests of each person (other than Euroclear or Clearstream, Luxembourg) who is for the time being shown in the records of Euroclear or Clearstream, Luxembourg as the holder of a particular principal amount of such New Notes (each an Accountholder ) (in which regard any certificate or other document issued by Euroclear or Clearstream, Luxembourg as to the principal amount of such New Notes standing to the account of such person shall be conclusive and binding for all purposes) as the holder of such principal amount of such New Notes for all purposes in place of the holder of the Global New Certificate (the Holder ) to the extent of the principal amount of New Notes in respect of which such person is an Accountholder. Exchange The Global New Certificate will become exchangeable in whole, but not in part, for definitive certificates ( Definitive Certificates ) if: (a) Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business; or (b) the Issuer fails to pay an amount in respect of the Notes within five days of the date on which such amount became due and payable under the Conditions; or (c) the Issuer would suffer a material disadvantage in respect of the Notes as a result of a change in the laws or regulations (taxation or otherwise) which would not be suffered were the Notes evidenced by Definitive Certificates and a certificate to such effect signed by two authorised signatories of the Issuer is delivered to the Trustee. Thereupon (in the case of (a) and (b) above) the Holder may give notice to the Issuer, and (in the case of (c) above) the Issuer may give notice to the Trustee and the Noteholders of its intention to exchange the Global New Certificate for Definitive Certificates. Whenever the Global New Certificate is to be exchanged for Definitive Certificates, such Definitive Certificates will be issued in an aggregate principal amount equal to the principal amount of the Global New Certificate within five business days of the delivery, by or on behalf of the registered Holder of the Global New Certificate, Euroclear and/or Clearstream, Luxembourg, to the Registrar of such information as is required to complete and deliver such Definitive Certificates (including, without limitation, the names and addresses of the persons in whose names the Definitive Certificates are to be registered and the principal amount of each such person s holding) against the surrender of the Global New Certificate at the Specified Office of the Registrar. Such exchange will be effected in accordance with the provisions of the Agency Agreement and the regulations concerning the transfer and registration of Notes scheduled thereto and, in particular, shall be effected without charge to any Holder or the Trustee, but against such indemnity as the Registrar may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such exchange. Amendments to Conditions In addition, the Global New Certificate will contain provisions which modify the Terms and Conditions of the Notes as they apply to the Notes evidenced by the Global New Certificate. The following is a summary of certain of those provisions: Notices: Notwithstanding Condition 14 (Notices), so long as the Global New Certificate is held on behalf of Euroclear, Clearstream, Luxembourg or any other clearing system (an Alternative Clearing System ), notices to Holders of Notes represented by the Global New Certificate may be given by delivery of the relevant notice to Euroclear, Clearstream, Luxembourg or (as the case may be) such Alternative Clearing System for communication to the relative Accountholders rather than by publication as required by Condition 14 (Notices), provided that, so long as the Notes are listed on the London Stock Exchange and the rules of the London Stock Exchange so require, notice will also be given by publication in a leading newspaper having general circulation in London (which is 90

92 expected to be the Financial Times) or, if such publication is not practicable, in a leading language daily newspaper having general circulation in Europe. Any such notice shall be deemed to have been given to the Noteholders on the second day after the day on which such notice is delivered to Euroclear and/or Clearstream, Luxembourg or (as the case may be) such Alternative Clearing System as aforesaid. Payment: To the extent that the Issuer has actually received the relevant funds from PKB, payments in respect of Notes represented by a Global New Certificate will be made against presentation for endorsement and, if no further payment of principal or interest is to be made in respect of the Notes, against presentation and surrender of such Global New Certificate to or to the order of the Registrar. Upon payment of any principal, the amount so paid shall be endorsed by or on behalf of the Registrar on behalf of the Issuer on the schedule to the Global New Certificate. Payment while Notes are represented by a Global New Certificate will be made in accordance with the procedures of Euroclear and Clearstream, Luxembourg or any alternative clearing system as appropriate. Meetings: The Holder of the Global New Certificate will be treated as being two persons for the purposes of any quorum requirements of, or the right to demand a poll at, a meeting of Noteholders. Trustee Powers: In considering the interests of Noteholders while the Global New Certificate is held on behalf of a clearing system, the Trustee may have regard to any information provided to it by such clearing system or its operator as to the identity (either individually or by category) of its Accountholders with entitlements to the Global New Certificate and may consider such interests as if such Accountholders were the holders of the Global New Certificate. Prescription: Claims against the Issuer in respect of principal and interest on the Notes while the Notes are represented by the Global New Certificate will become void unless it is presented for payment within a period of 10 years (in the case of principal) and five years (in the case of interest) from the appropriate Relevant Date (as defined in Condition 8 (Taxation)). Purchase and Cancellation: Cancellation of any Note required by the Conditions to be cancelled following its purchase will be effected by reduction in the principal amount of the Global New Certificate. Euroclear and Clearstream, Luxembourg References in the Global New Certificate and this summary to Euroclear and/or Clearstream, Luxembourg shall be deemed to include references to any other clearing system approved by the Trustee. The address of Euroclear is 1 Boulevard du Roi Albert II, B-1210 Brussels, Belgium. The address of Clearstream, Luxembourg is L-2967 Luxembourg. 91

93 THE LOAN AGREEMENT The following is the text of the Loan Agreement which has been entered into between the Bank and Petrocommerce Finance S.A. LOAN AGREEMENT, dated 12 December 2006 and amended and restated on 8 March 2007 BETWEEN: (1) OJSC BANK PETROCOMMERCE, incorporated as an open joint stock company established under the laws of the Russian Federation whose registered office is at 24, ul. Petrovka, Moscow , Russian Federation, as borrower ( Petrocommerce and the Borrower ); and (2) PETROCOMMERCE FINANCE S.A., a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg whose registered office is at 2, Boulevard Konrad Adenauer, L-1115 Luxembourg and registered with the Luxembourg Trade and Companies Register under number B as lender (the Lender, which expression, where the context so admits, includes any successor Lender pursuant to the terms of this Agreement and the Trust Deed). WHEREAS, (A) (B) (C) (D) the Lender has, at the request of Petrocommerce, agreed to make available to Petrocommerce a loan facility in the amount of U.S.$300,000,000 on the terms and subject to the conditions of a loan agreement between the parties hereto dated 12 December 2006 (the Original Loan Agreement ); pursuant to the terms of the Original Loan Agreement the Lender made the Original Advance to Petrocommerce and such advance remains outstanding; the Lender has, at the request of Petrocommerce, agreed to increase such loan facility by an amount of U.S.$125,000,000 on the terms and subject to the conditions of this Agreement; and the Lender and Petrocommerce have agreed to amend and restate the Original Loan Agreement on the terms of this Agreement to give effect to the availability of the loan facility in an aggregate amount of U.S.$425,000,000. NOW IT IS HEREBY AGREED as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions In this Agreement (including the recitals), the following terms shall have the meanings indicated: Account means the account with account number of the Lender with the Principal Paying Agent; Advance means the aggregate of the Original Advance and the New Advance made or to be made by the Lender under Clause 3 (Drawdown) of the sum equal to the amount of the Facility, as from time to time reduced by prepayment; Affiliate of any specified Person means (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect control with such specified Person or (ii) any other Person who is a director or officer (a) of such specified Person, (b) of any Subsidiary of such specified Person or (c) of any Person described in (i) above. For the purposes of this definition, control when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing; Agency means any agency, authority, central bank, department, government, legislature, minister, official or public statutory Person (whether autonomous or not) of, or of the government of, any state or supra-national body; Agency Agreement means the Original Agency Agreement as amended, varied or supplemented by the Supplemental Agency Agreement and as may be further amended, varied or supplemented from time to time; 92

94 Agreed Form means that the form of the document in question has been agreed between the proposed parties thereto, subject to any amendments that the parties may agree upon prior to the New Closing Date or the Original Closing Date, as applicable; Agreement means this Agreement as originally executed or as it may be amended or supplemented from time to time; Auditors means the auditors of Petrocommerce s IFRS consolidated financial statements for the time being or, if they are unable or unwilling to carry out any action requested of them under this Agreement, such other internationally recognised firm of accountants as may be approved in writing by the Lender for this purpose; Authorised Signatory means, in relation to Petrocommerce, any Person who is duly authorised (in such manner as may be reasonably acceptable to the Lender) and in respect of whom the Lender has received a certificate signed by the president or another Authorised Signatory of Petrocommerce setting out the name and signature of such Person and confirming such Person s authority to act; Banking Business means in relation to Petrocommerce or any Material Subsidiary, any type of banking business (including, without limitation, any factoring, consumer credit, mortgages, issuance of banking guarantees and letters of credit (and related cash cover provision), bills of exchange and promissory notes, and payments under such guarantees, letters of credit and promissory notes, trading of securities, fund management and professional securities market participation business) which it conducts or may conduct pursuant to its licences issued by the appropriate authorities and accepted market practice and any applicable law; Business Day means a day (other than a Saturday or Sunday) on which commercial banks generally are open for business in Luxembourg, Moscow, New York City and in the city where the Specified Office (as defined in the Agency Agreement) of the Principal Paying Agent is located; Capital Stock means, with respect to any Person, any and all shares, interests, participations, rights to purchase, warrants, options, or other equivalents (however designated) of capital stock of a corporation and any and all equivalent ownership interests in a Person other than a corporation, in each case whether now outstanding or hereafter issued; Central Bank means the Central Bank of the Russian Federation; Conditions means the terms and conditions of the Notes, as set out in Part 2 of Schedule 1 to the Trust Deed and all references to a numbered Condition are to the corresponding provision thereof; Event of Default has the meaning assigned to such term in Clause 11.1 (Events of Default); Facility means the U.S.$425,000,000 facility granted by the Lender to Petrocommerce, as specified in Clause 2 (Facility); Group means Petrocommerce and its Subsidiaries taken as a whole; Guarantee means, in relation to any Indebtedness of any Person, any obligation of another Person to pay such Indebtedness including (without limitation): (i) any obligation to purchase such Indebtedness; (ii) any obligation to lend money, to purchase or subscribe shares or other securities or to purchase assets or services in order to provide funds for the payment of such Indebtedness; (iii) any indemnity against the consequences of a default in the payment of such Indebtedness; and (iv) any other agreement to be responsible for such Indebtedness; IFRS means International Financial Reporting Standards (formerly International Accounting Standards) issued by the International Accounting Standards Board ( IASB ) and interpretations issued by the International Financial Reporting Interpretations Committee of IASB (as amended, supplemented or re-issued from time to time);. incur means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) or is merged into a 93

95 Subsidiary will be deemed to be incurred or issued by such Subsidiary at the time it becomes or is so merged into a Subsidiary; Indebtedness means any indebtedness, in respect of any Person for, or in respect of, moneys borrowed or deposits received; any amount raised by acceptance under any acceptance credit facility; any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; the amount of any liability in respect of any lease or hire purchase contract which would, in accordance with IFRS, be treated as a finance or capital lease; receivables sold or discounted (other than any receivables to the extent they are sold on a non-recourse basis); any amount raised pursuant to any issue of shares which are expressed to be redeemable; any amount raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of a borrowing; any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price (and, when calculating the value of any derivative transaction, only the marked to market value shall be taken into account); any counter-indemnity obligation in respect of a guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution; and the amount of any liability in respect of any Guarantee or indemnity for any of the items referred to above; Interest Payment Date means 17 June and 17 December of each year, commencing on 17 June 2007 and ending on 17 December 2009; Lien means any mortgage, pledge, encumbrance, easement, restriction, covenant, right-of-way, servitude, lien, charge or other security interest or adverse claim of any kind (including, without limitation, anything analogous to any of the foregoing under the laws of any jurisdiction and any conditional sale or other title retention agreement or lease in the nature thereof); Loan means, at any time, an amount equal to the aggregate principal amount of the Facility granted by the Lender pursuant to this Agreement and outstanding at such time; Loan Security means the security granted by the Lender to the Trustee under the Trust Deed over the rights of the Lender under this Agreement, including an assignment of such rights in favour of the Trustee; Luxembourg means the Grand Duchy of Luxembourg; Material Adverse Effect means a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or business prospects of Group taken as a whole; (b) Petrocommerce s ability to perform or comply with its obligations under this Agreement, the Agency Agreement, the Original Subscription Agreement or the New Subscription Agreement or (c) the validity or enforceability of this Agreement, the Agency Agreement, the Original Subscription Agreement or the New Subscription Agreement or the rights or remedies of the Lender thereunder; Material Subsidiary means at any time: (a) each of OJSC Komiregionbank Ukhtabank, CJSC Bank Petrocommerce-Ukraine, OJSC Stavropolpromstroybank and BC Unitbank S.A. to the extent that each is from time to time a Subsidiary of Petrocommerce; and/or (b) each Subsidiary of Petrocommerce which has (together with its Subsidiaries, if any, on a consolidated basis if required to consolidate) total assets which amount to not less than 10 per cent. of the total assets of Petrocommerce; Moody s means Moody s Investors Service, Inc.; New Advance has the meaning assigned to it in Clause 3.1 (Drawdown); New Closing Date means 12 March 2007 in respect of the New Advance; New Facility has the meaning assigned to it in Clause 2.1 (Facility); New Notes means the U.S.$125,000, per cent. loan participation notes due 2009 proposed to be issued by the Lender in its capacity as issuer, to be consolidated and form a single series with the Original Notes and constituted by the Trust Deed; New Subscription Agreement means the agreement dated the date hereof providing for the issuance of the New Notes; 94

96 New Upfront Fee Side Letter means the upfront fee side letter dated 8 March 2007 between the Lender, Petrocommerce and the other parties named therein relating to the issuance of the New Notes; Noteholder means, in relation to a Note, the person in whose name such Note is for the time being registered in the register of Noteholders (or, in the case of joint holders, the first named holder thereof) and Noteholders shall be construed accordingly; Notes means the Original Notes and the New Notes; Officers Certificate means a certificate signed by two authorised officers of Petrocommerce at least one of whom shall be the principal executive officer or principal accounting officer of Petrocommerce; Opinion of Counsel means a written opinion from international legal counsel who is acceptable to the Lender and the Trustee; Original Advance has the meaning assigned to it in Clause 3.1 (Drawdown); Original Agency Agreement means the agency agreement dated 14 December 2006 between the Borrower, the Lender, the Bank of New York, the Bank of New York (Luxembourg) S.A. and BNY Corporate Trustee Services Limited; Original Closing Date means 14 December 2006 in respect of the Original Advance; Original Facility has the meaning assigned to it in Clause 2.1 (Facility); Original Notes means the U.S.$300,000, per cent. loan participation notes due 2009 issued by the Lender on 14 December 2006 and constituted by the Trust Deed; Original Subscription Agreement means the subscription agreement relating to the Original Notes dated 12 December 2006 between the Lender, Petrocommerce, ING Bank N.V., London Branch, Merrill Lynch International and the managers named therein; Original Trust Deed means the trust deed relating to the Original Notes dated the Original Closing Date between the Lender and the Trustee; Original Upfront Fee Side Letter means the upfront fee side letter dated 12 December 2006 between the Lender, Petrocommerce and the other parties named therein; Permitted Liens means: (a) Security granted by the Petrocommerce or a Material Subsidiary which is existing as at the date hereof; (b) any netting or set-off arrangement entered into by Petrocommerce or any Material Subsidiary in the ordinary course of its business for the purpose of netting debit and credit balances; (c) any lien arising by operation of law or in the ordinary course of business and not as a result of a Potential Event of Default, including any rights of set-off arising as a matter of law; (d) any Security upon, or with respect to, any present or future assets or revenues or any part thereof which is created pursuant to any Securitisation Transaction or like arrangement and whereby all payment obligations secured by such Security or having the benefit of such Security, are to be discharged solely from such assets or revenues; (e) any Security over any assets acquired after the date hereof and in existence at the date of such acquisition provided that such Security was not created in contemplation of the acquisition and provided further that no such Security shall extend to any other assets; (f) any Security securing Indebtedness of a Person existing at the time such Person is merged into or amalgamated with Petrocommerce or any of its Subsidiaries provided that such Security shall not be created in contemplation of such merger or amalgamation and does not extend to any other assets, income or property of Petrocommerce or any of its Subsidiaries other than the surviving person and its Subsidiaries; (g) Security created or arising in the ordinary course of Banking Business; (h) any Security over debt securities issued by a sovereign, state or government which is created to secure indebtedness owed to a national central bank under credit advanced by 95

97 such national central bank to Petrocommerce or any of its Material Subsidiaries in the ordinary course of its Banking Business; (i) Security incurred, or pledges and deposits in connection with workers compensation, unemployment insurance and other social security benefits, and leases, appeal bonds and other obligations of like nature in the ordinary course of business; (j) Security for ad valorem income or property taxes or assessments and similar charges which either are not delinquent or are being contested in good faith by appropriate proceedings for which Petrocommerce has set aside reserves on its books to the extent required by IFRS; (k) (i) bankers liens in respect of deposit accounts, (ii) statutory landlords liens, (iii) Security created to secure the performance of bids, trade contracts, government contracts, leases, statutory obligations, surety and appeal bonds, performance and return-of-money bonds or liabilities to insurance carriers under insurance or self-insurance arrangements or other obligations of like nature (so long as, in each case with respect to the items described in paragraphs (i), (ii) and (iii) above of this paragraph (k), such Security does not secure obligations constituting Indebtedness for borrowed money and is incurred in the ordinary course of business), and (iv) Security arising from any legal proceeding, judgment, decree or other order which does not constitute an Event of Default; (l) any Security granted by any member of the Group in favour of Petrocommerce; (m) Security upon, or with respect to, any present or future assets or revenues or any part thereof which is created pursuant to any repo transaction; (n) Security in respect of any funds deposited by a member of the Group as collateral for the Indebtedness of any other member of the Group; (o) any Security securing indebtedness incurred to refinance other Indebtedness permitted to be secured by any Security permitted under paragraphs (a) to (q) (inclusive) provided that the replacement Security does not cover any assets other than the original assets subject to the original Security and that the principal amounts secured thereby is not increased; (p) any Security over a minority shareholding interest of 25 per cent. or less held directly or indirectly on an aggregate basis by Petrocommerce or any of its Subsidiaries in a company or corporation where such Security is part of a security arrangement which includes the granting of security over all or substantially all of the shares of such company or corporation which is required by the lenders providing financing for such company or corporation, provided that the aggregate value of Security granted by Petrocommerce and its Subsidiaries in respect of one transaction or a series of transactions and permitted by this paragraph does not, at any time, exceed 20 per cent. of the total shareholders funds of Petrocommerce; (q) liens created in connection with interest rate hedging operations and foreign currency hedging operations; and (r) any Security (other than any such Security as is referred to in paragraphs (a) to (q) where the aggregate value of assets or revenues subject to such Security does not exceed USD 100,000,000; Person means any individual corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organisation, government, or any agency or political subdivision thereof or any other entity; Potential Event of Default means any event which is, or after notice or passage of time or after making any determination under this Agreement (or any combination of the foregoing) would be, an Event of Default; Principal Paying Agent means The Bank of New York; Prospectus means the Prospectus dated 8 March 2007 relating to the New Notes; Rate of Interest has the meaning assigned to such term in Clause 4.1 (Rate of Interest); Related Party means, with respect to any Person, (a) an Affiliate of such Person or (b) any of its Affiliates or (c) a group of its Affiliates; Repayment Date means 17 December 2009; 96

98 Rouble means the lawful currency of the Russian Federation; Sale/Leaseback Transaction means an arrangement relating to property now owned or hereafter acquired whereby Petrocommerce or any Subsidiary of Petrocommerce transfers such property to a Person and Petrocommerce or such Subsidiary leases it from such Person; Same-Day Funds means Dollar funds settled through the New York Clearing House Interbank Payments System or such other funds for payment in immediately available, freely transferable and cleared Dollars as the Lender may at any time determine to be customary for the settlement of international transactions in New York City of the type contemplated hereby; Securitisation Transaction means any transaction or series of related transactions (in each case, including, but not limited to, securitisation transactions and other forms of structured finance transactions) involving the incurrence of indebtedness directly or indirectly backed by all or any portion of the Group s current or future assets or property (and revenues or rights arising therefrom) (including, but not limited to, (a) credit card receivables, debit card receivables, cheque receivables, cash remittance receivables, workers remittances receivables, trade receivables and/or payment rights receivables (including, but not limited to, under and/or in relation to SWIFT MT100-Series and SWIFT MT200-Series payment orders (and any successors thereto) and any other similar payment orders (such as any delivered via telex, the internet or any other manner)), (b) any other class of receivables whatsoever (whether payment rights, remittances, claims or otherwise), (c) loan assets and/or (d) assets which have the benefit of collateral (including, but not limited to, mortgage-backed assets) and/or (e) the rights of any member of the Group to receive and/or retain any or all payments (and related proceeds) made in a connection with any of (a) to (d) above (including, but not limited to, any claims against any banks, financial institutions or credit institutions obliged to make, receive or collect such payments or involved with the making, collection or reception of such payments)) whatsoever (including, but not limited to, where such backing is achieved by means of the grant of security over any such assets or the sale of any such assets) and any such transaction or series of related transactions may include and make provision for rights of recourse (in addition to and distinct from any rights relating to the assets which are subject to the relevant transaction and which arise from any grant of security or sale, as aforementioned) against any member of the Group which (i) arise upon any failure to perform or default by underlying obligors under any assets which are subject to the relevant transaction or (ii) are triggered by any breach of any provision of or failure to satisfy any condition or test contained in the transaction documentation, where such provision, condition or test relates to any assets which are subject to the relevant transaction) provided that the aggregate outstanding principal amount of such indebtedness does not at the time of its incurrence exceed 15 per cent. of the consolidated total assets of the Group (as determined by reference to the latest audited consolidated IFRS financial statements of the Group), save that where the outstanding principal amount of indebtedness under any existing Securitisation Transaction is to be fully or partially repaid or refinanced with the proceeds of a transaction or series of transactions which itself or themselves will constitute a Securitisation Transaction then the existing outstanding principal amount of indebtedness to be repaid will not be taken into account for the purpose of the foregoing determination; Security means any mortgage, pledge, security interest, encumbrance, easement, restriction, covenant, right-of-way, servitude, lien, charge or adverse claim of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof, including a Sale/Leaseback Transaction); Standard & Poor s means Standard and Poor s Rating Services, a division of the McGraw Hill Companies, Inc.; Subsidiary of any specified Person means any corporation, partnership, joint venture, association or other business or entity, whether now existing or hereafter organised or acquired, (a) in the case of a corporation, of which at least 50 per cent. of the total voting power is held by such first-named Person and/or any of its Subsidiaries and such first-named Person or any of its Subsidiaries has the power to direct the management, policies and affairs thereof; or (b) in the case of a partnership, joint venture, association, or other business or entity, with respect to which such first-named Person or any of its Subsidiaries has the power to direct or cause the direction of the management and policies of such entity by contract or otherwise if (in each case) in accordance with IFRS, as consistently applied, such entity would be consolidated with the first-named Person for financial statement purposes; 97

99 Supplemental Agency Agreement means the supplemental agency agreement relating to the New Notes to be dated the New Closing Date between the Lender, Petrocommerce, the Trustee and the agents named therein; Supplemental Trust Deed means the supplemental trust deed amending and restating the provisions of the Original Trust Deed to constitute the New Notes for the equal and rateable benefit of the Noteholders to be dated the New Closing Date; Taxes means any taxes (including interest or penalties thereon) which are now or at any time hereafter imposed, assessed, charged, levied, collected, demanded, withheld or claimed by the Russian Federation, Luxembourg or any tax authority thereof or therein or any other jurisdiction through which the Borrower is directed by the Lender to effect payments, provided, however, that for the purposes of this definition the references to Luxembourg shall, upon the occurrence of a Relevant Event (as defined in the Trust Deed), be deemed to be references to the jurisdiction in which the Trustee is domiciled for tax purposes; and the term Taxation shall be construed accordingly; Trust Deed means the Original Trust Deed as amended and restated by the Supplemental Trust Deed; Trustee means BNY Corporate Trustee Services Limited, as trustee under the Trust Deed and any successor thereto as provided thereunder; U.S. dollars, Dollars, and U.S.$ mean the lawful currency of the United States of America. 1.2 Other Definitions Unless the context otherwise requires, terms used in this Agreement which are not defined in this Agreement but which are defined in the Trust Deed, the Notes, the Agency Agreement, Original Subscription Agreement or the New Subscription Agreement shall have the meanings assigned to such terms therein. 1.3 Interpretation Unless the context or the express provisions of this Agreement otherwise require, the following shall govern the interpretation of this Agreement: All references to Clause or sub-clause are references to a Clause or sub-clause of this Agreement The terms hereof, herein and hereunder and other words of similar import shall mean this Agreement as a whole and not any particular part hereof Words importing the singular number include the plural and vice versa All references to taxes include all present or future taxes, levies, imposts charges, withholdings and duties of any nature and the terms tax and taxation shall be construed accordingly The table of contents and the headings are for convenience only and shall not affect the construction hereof. 1.4 Amendment and Restatement The Original Loan Agreement shall be amended and restated on the terms of this Agreement. Subject to such amendment and restatement, the Original Loan Agreement shall continue in full force and effect. 2. FACILITY 2.1 Facility Petrocommerce has borrowed from the Lender, on the terms of the Original Loan Agreement, an amount of U.S.$300,000,000 (the Original Facility ) and on the terms and subject to the conditions set forth herein and subject to the terms and conditions in the New Subscription Agreement, the Lender hereby agrees to make available to Petrocommerce, and Petrocommerce hereby agrees to borrow from the Lender, a further amount of U.S.$125,000,000 (the New Facility ) so that a loan facility in an aggregate amount of U.S.$425,000,000 (the Facility ) is made available to Petrocommerce under this Agreement. 98

100 2.2 Purpose The proceeds of the Advance (less any amount to be deducted (if any) in accordance with Clause 3.2 (Facility Fee)) will be used by Petrocommerce for general banking purposes but the Lender shall not be concerned with the application thereof. 3. DRAWDOWN 3.1 Drawdown On the terms and subject to the conditions set forth herein, (a) the Lender made the original advance of U.S.$300,000,000 (the Original Advance ) to Petrocommerce and Petrocommerce made a single drawing in the full amount of the Original Advance on the Original Closing Date and (b) on the New Closing Date, the Lender shall make a further advance of U.S.$125,000,000 (the New Advance ) to Petrocommerce and Petrocommerce shall make a single drawing in the full amount of the New Advance (less any amount to be deducted (if any) in accordance with Clause 3.2 (Facility Fee)). 3.2 Facility Fee Original Facility The fees, costs and expenses payable in connection with the provision by the Lender of the Original Facility to Petrocommerce (the Original Facility Fee ) together with other commissions, fees, costs and expenses in relation to the Original Facility and the issue of the Original Notes were as set out in the Original Upfront Fee Side Letter, pursuant to which Petrocommerce paid the Original Facility Fee to the Lender New Facility Petrocommerce agrees to pay (a) a fee of U.S.$935, to the Lender in connection with the provision of the New Facility (the New Facility Fee ) to the Lender in Same- Day Funds by a.m. (London time) one Business Day prior to the New Closing Date and (b) certain costs and expenses set out in, and in the manner described in, the New Upfront Fee Side Letter. In the event that the Lender has not received from Petrocommerce by a.m. (London time) one Business Day prior to the New Closing Date an amount in respect of the New Facility Fee, Petrocommerce agrees that an amount equal to the New Facility Fee shall be deducted from the amount of the New Advance. 3.3 Disbursement Original Advance Subject to the conditions set forth herein, on the Original Closing Date the Lender transferred the amount of the Original Advance to Petrocommerce s account designated: Bank: Bank of New York, Swift: IRVTUS3N, Account Number: for further credit to: Petrocommerce, Swift: PTRBRUMM New Advance Subject to the conditions set forth herein, on the New Closing Date the Lender shall transfer the amount of the New Advance (less any amount to be deducted (if any) in accordance with Clause 3.2 above (New Facility Fee) above) to Petrocommerce s account designated: Bank: Bank of New York, Swift: IRVTUS3N, Account Number: , for further credit to: Petrocommerce, Swift: PTRBRUMM in Same-Day Funds. 3.4 Ongoing Fees and Expenses In consideration of the Lender agreeing to make the Loan to Petrocommerce, Petrocommerce shall pay on demand to the Lender all ongoing commissions and costs, as set forth to Petrocommerce in an invoice or invoices from the Lender. 99

101 4. INTEREST 4.1 Rate of Interest Petrocommerce will pay interest in Dollars to the Lender on the outstanding principal amount of the Loan from time to time hereunder at the rate of 8.75 per cent. per annum (the Rate of Interest ). 4.2 Payment Interest at the Rate of Interest shall accrue from day to day, starting from (and including) the Original Closing Date (in respect of the Original Advance) and the New Closing Date (in respect of the New Advance) and shall be paid in arrear not later than a.m. (London time) one Business Day prior to each Interest Payment Date. Interest on the Loan will cease to accrue from the Repayment Date (or any date upon which the Loan is prepaid pursuant to Clause 5.2 (Special Prepayment) or Clause 5.3 (Illegality) or repaid pursuant to Clause 11 (Events of Default)) unless payment of principal is withheld or refused by Petrocommerce in breach of its obligations under this Agreement, in which event interest will continue to accrue (before or after any judgment) at the Rate of Interest to, but excluding, the date on which payment in full of the principal thereof. The amount of interest payable in respect of the Loan for any Interest Period (other than the First Interest Period) shall be calculated by applying the Rate of Interest to the amount of the Loan, dividing the product by two and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). In the case of the First Interest Period the aggregate amount of interest payable shall be an amount equal to U.S.$16,230, If interest is otherwise required to be calculated for any period other than a full Interest Period, it will be calculated on the basis of a 360-day year consisting of twelve months of 30 days each and, in the case of an incomplete month the number of days elapsed on the basis of a month of 30 days, where: First Interest Period means (i) in respect of the Original Advance, the period from (and including) the Original Closing Date to (but excluding) the first Interest Payment Date and (ii) in respect of the New Advance, the period from (and including) the New Closing Date to (but excluding) the first Interest Payment Date; and Interest Period means the First Interest Period and each period beginning on (and including) any Interest Payment Date and ending on (but excluding) the next Interest Payment Date. 5. REPAYMENT AND PREPAYMENT 5.1 Repayment Except as otherwise provided herein, Petrocommerce shall repay the Loan, all accrued but unpaid interest and any additional amounts) not later than a.m. (London time) one Business Day prior to the Repayment Date. 5.2 Special Prepayment If, (a) as a result of the application of, or any amendments to or change in, the double tax treaty between the Russian Federation and Luxembourg or the laws or regulations of the Russian Federation or Luxembourg or of any constituent part or political sub-division thereof or any authority having power to tax therein (including as a result of a judgment of a court of competent jurisdiction) or a change in, or clarification of, the application or official interpretation of such laws or regulations) which change or amendment becomes effective on or after the date of this Agreement, (b) as a result of the enforcement of the Loan Security, Petrocommerce would thereby be required to make or increase any payment due hereunder as provided in Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) or 6.3 (Withholding on the Notes) (unless the increase in payment is in respect of any amounts due or paid pursuant to Clause 3 (Drawdown))or (c) if (for whatever reason) Petrocommerce would have to or has been required to pay additional amounts pursuant to Clause 8 (Change in Law or Banking Practices; Increase in Cost) and, in any such case, such additional amounts cannot be avoided by Petrocommerce taking reasonable measures available to it, then Petrocommerce may (without premium or penalty), upon not less than 10 days notice to the Lender (copied to the Trustee) specifying the date of payment and attaching an Officer s Certificate confirming that the Borrower would be required to increase the amount payable or to pay additional amounts 100

102 supported by an opinion of an independent tax adviser of recognised standing in the relevant tax jurisdiction (which notice shall be irrevocable), prepay the Loan in whole (but not in part). 5.3 Illegality If, at any time, by reason of the introduction of any change after the date of this Agreement in any applicable law or regulation or regulatory requirement or directive of any Agency of any state or otherwise the Lender reasonably determines (such determination being supported, if so requested by Petrocommerce, by an Opinion of Counsel with the cost of such Opinion of Counsel being borne solely by Petrocommerce) that it is or would be unlawful or contrary to such applicable law, regulation, regulatory requirement or directive for the Lender to allow all or part of the Loan or the Notes to remain outstanding or for the Lender to maintain or give effect to any of its obligations in connection with this Agreement, the Loan Security or the Notes and/or to charge or receive or to be paid interest at the rate then applicable to the Loan or the Notes, then upon notice by the Lender to Petrocommerce in writing (copied to the Trustee) (setting out in reasonable detail the nature and extent of the relevant circumstances), Petrocommerce and the Lender shall consult in good faith as to a basis which eliminates the application of such circumstances; provided, however, that the Lender shall be under no obligation to continue such consultation if a basis has not been determined within 45 days of the date on which it was so notified by Petrocommerce. If such a basis has not been determined within the 45 days, then upon notice by the Lender to Petrocommerce in writing, Petrocommerce shall prepay the Loan in whole (but not in part) on the next Interest Payment Date or on such earlier date as the Lender shall certify to be necessary to comply with such requirements. 5.4 Reduction of Loan Upon Redemption and Cancellation of Notes Petrocommerce or any Subsidiary of Petrocommerce may from time to time, in accordance with the Conditions and to the extent permitted by applicable law, purchase Notes in the open market or by tender or by a private agreement at any price. In the event that an amount of Notes has been surrendered to the Lender for cancellation by Petrocommerce or any of Petrocommerce s Subsidiaries and cancelled, the Loan shall be deemed to have been prepaid by Petrocommerce in an amount equal to the principal amount of the Notes surrendered to the Lender for cancellation, together with accrued interest (if any) thereon and no further payment shall be made or required to be made by Petrocommerce in respect of such amounts. 5.5 Payment of Other Amounts If the Loan is to be prepaid by Petrocommerce pursuant to any of the provisions of Clause 5.2 (Special Prepayment) or Clause 5.3 (Illegality), Petrocommerce shall, simultaneously with such prepayment, pay to the Lender interest thereon accrued to the date of actual receipt by the Lender of payment of principal and all other sums payable by Petrocommerce pursuant to this Agreement with respect to the prepaid amount. For the avoidance of doubt, if the principal amount of the Loan is reduced pursuant to the provisions of Clause 5.4 (Reduction of Loan upon Redemption and Cancellation of Notes), then no interest shall accrue or be payable during the period from the preceding Interest Payment Date up to the date upon which such reduction takes place in respect of the amount by which the Loan is so reduced and Petrocommerce or the relevant Subsidiary of Petrocommerce, as the case may be, shall not be entitled to any interest in respect of the cancelled Notes. 5.6 Provisions Exclusive Petrocommerce may not voluntarily prepay the Loan except in accordance with the express terms of this Agreement. Any amount prepaid may not be reborrowed. 6. PAYMENTS 6.1 Making of Payments All payments to be made by Petrocommerce under this Agreement shall be made unconditionally by credit transfer to the Lender not later than a.m. (London time) one Business Day prior to each Interest Payment Date or the Repayment Date (as the case may be) in Same-Day Funds to the Account. The Lender agrees with Petrocommerce that the Lender 101

103 will not deposit any other monies into the Account and that no withdrawals shall be made from such account other than for payments to be made in accordance with the Conditions. 6.2 No Set-Off, Counterclaim or Withholding; Gross-Up All payments to be made by Petrocommerce under this Agreement shall be made in full without set-off or counterclaim and (except to the extent required by law) free and clear of, and without deduction for or on account of, any Taxes. If Petrocommerce shall be required by applicable law to make any deduction or withholding from any payment under this Agreement for or on account of any Taxes, it shall increase any payment due hereunder to such amount as may be necessary to ensure that the Lender receives a net amount in Dollars equal to the full amount which it would have received had payment not been made subject to such Taxes, shall account to the relevant authorities for the relevant amount of such Taxes so withheld or deducted within the time allowed for such payment under the applicable law and shall deliver to the Lender without undue delay evidence satisfactory to the Lender of such deduction or withholding and of the accounting therefor to the relevant taxing authority. If the Lender pays any amount in respect of such Taxes, Petrocommerce shall reimburse the Lender in Dollars for such payment on demand. For the avoidance of doubt, this Clause 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) is without prejudice to any obligations of the Lender contained in Clause 6.8 (Tax Treaty Relief). 6.3 Withholding on the Notes If the Lender notifies Petrocommerce (setting out in reasonable detail the nature and extent of the obligation with such evidence as Petrocommerce may reasonably require) that it is obliged to make any withholding or deduction for or on account of any Taxes from any payment which it is obliged to make under or in respect of the Notes in circumstances where the Lender is required to pay additional amounts pursuant to Condition 8 (Taxation), Petrocommerce agrees to pay to the Lender, not later than a.m. (New York City time) two Business Days prior to the date on which payment is due to the Noteholders in Same-Day Funds to the Lender, such additional amounts as are equal to the said additional amounts which the Lender must pay pursuant to Condition 8 (Taxation); provided, however, that the Lender shall immediately, upon receipt from any Paying Agent of any sums paid in respect of the Lender s obligations under Condition 8 (Taxation) and to the extent that the Noteholders, as the case may be, are not entitled to such additional amounts pursuant to the Conditions of the Notes, pay such additional amounts to Petrocommerce (it being understood that neither the Lender, nor the Principal Paying Agent nor any Paying Agent shall have any obligation to determine whether any Noteholder is entitled to such additional amount). 6.4 Tax Indemnity Without prejudice to, and without duplication of the provisions of Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) or 6.3 (Withholding on the Notes), if at any time the Lender makes or is required to make any payment to a Person (other than to or for the account of the Noteholders) on account of any Taxes in respect of the Loan or the Notes imposed by Luxembourg or any taxing authority of Luxembourg, or any liability in respect of any such payment is asserted, imposed, levied or assessed against the Lender, Petrocommerce shall, as soon as reasonably practicable, and in any event within 30 calendar days of, written demand (setting out in reasonable detail the nature and extent of the obligation with such evidence as Petrocommerce may reasonably require) made by the Lender, indemnify the Lender against any such payment or liability, or any claim, demand, action, damages or loss in respect thereof, together with any interest, penalties, costs and expenses (including without limitation, legal fees and any applicable value added tax) payable or incurred in connection therewith. Any payment required to be made by Petrocommerce under this Clause 6.4 (Tax Indemnity) is a Tax Indemnity Amount. For the avoidance of doubt, the provisions of this Clause 6.4 (Tax Indemnity) shall not apply to any withholding or deductions of Taxes with respect to the Loan or Notes in respect of which any additional amount is payable under Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) and 6.3 (Withholding on the Notes). If the Lender intends to make a claim for any Tax Indemnity Amount, it shall promptly notify Petrocommerce thereof. 102

104 6.5 Reimbursement To the extent that the Lender subsequently obtains or uses any tax credit or allowance or other reimbursements relating to a deduction or withholding or to any Tax Indemnity Amount with respect to which Petrocommerce has made a payment pursuant to this Clause 6 (Payments) in respect of amounts received by it, the Lender shall promptly pay to Petrocommerce so much of (but in any event no amount greater than) the benefit it received and retained as will leave the Lender in substantially the same position as it would have been in had no additional amount been required to be paid by Petrocommerce pursuant to this Clause 6 (Payments); provided, however, that the question of whether any such benefit has been received, and accordingly, whether any payment should be made to Petrocommerce, the amount of any such payment and the timing of any such payment, shall be determined solely by the Lender. Subject to Clauses 6.7 (Mitigation) and 6.8 (Tax Treaty Relief) the Lender shall have the absolute discretion whether, and in what order and manner, it claims any credits or refunds available to it, and the Lender shall in no circumstances be obliged to disclose to Petrocommerce any information regarding its tax affairs or computations, provided that the Lender shall notify Petrocommerce of any tax Credit or allowance or other reimbursement it receives in respect of any Tax Indemnity Amount with respect to which Petrocommerce has made a payment pursuant to this Clause 6.4 (Tax Indemnity). If as a result of a failure to obtain relief from deduction or withholding of any taxes referred to in Clause 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) or Clause 6.3 (Withholding on the Notes): (a) such taxes are deducted or withheld by Petrocommerce and pursuant to Clause 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) or Clause 6.3 (Withholding on the Notes) an increased amount is paid by Petrocommerce to the Lender in respect of such deduction or withholding, and (b) following the deduction or withholding of taxes as referred to above, Petrocommerce applies on behalf of the Lender (subject to the Lender issuing a power of attorney to the Borrower, or such other documents required under Russian Law, to enable the Borrower to act on behalf of the Lender) to the competent taxing authority for a withholding tax refund (Petrocommerce having notified the Lender of such application) and such withholding tax is refunded or repaid by the relevant taxing authority to the Lender, the Lender shall as soon as reasonably practicable notify Petrocommerce of the receipt of such withholding tax refund and promptly transfer the actually received amount of the withholding tax refund in the currency actually received and less any applicable costs to a bank account of Petrocommerce specified for that purpose by Petrocommerce. 6.6 Representations of the Lender The Lender represents that, at the date hereof, (a) it is resident in Luxembourg, is subject to taxation in Luxembourg on the basis of its registration as a legal entity, location of its management body or another similar criterion and it is not subject to taxation in Luxembourg merely on income from sources in Luxembourg or connected with property located in Luxembourg and it will be able to receive certification to this effect from the Luxembourg taxing authorities; (b) it does not have a permanent establishment in the Russian Federation and (c) does not have any current intentions to effect, during the term of the Loan, any corporate action or reorganisation or change of taxing jurisdiction that would result in the Lender ceasing to be a resident of Luxembourg and subject to taxation in Luxembourg. 6.7 Mitigation If at any time either party hereto becomes aware of circumstances which would or might, then or thereafter, give rise to an obligation on the part of Petrocommerce to make any deduction, withholding or payment as described in Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-up) or 6.3 (Withholding on the Notes) or, then, without in any way limiting, reducing or otherwise qualifying the Lender s rights, or Petrocommerce s obligations, under such Clauses, such party shall promptly upon becoming aware of such circumstances notify the other party, and, thereupon the parties shall consider and consult with each other in good faith with a view to finding, agreeing upon and implementing a method or methods by which any such obligation may be avoided or mitigated and, to the extent that both parties can do so without taking any action which in the reasonable opinion of such party is prejudicial to its own position, take such reasonable steps as may be reasonably available to it to avoid such obligation or mitigate the effect of such circumstances. Petrocommerce agrees to reimburse the Lender for all properly 103

105 incurred costs and expenses (including but not limited to legal fees) incurred by the Lender in connection with this Clause 6.7 (Mitigation). 6.8 Tax Treaty Relief The Lender shall, to the extent it is able to do so under applicable law including, without limitation, Russian laws, use its best endeavours to obtain and to deliver to the Borrower at the Borrower s expense: a certificate issued by the competent Luxembourg authorities confirming that the Lender is resident in Luxembourg for the purpose of the Treaty between the Russian Federation and Luxembourg on Avoidance of Double Taxation and Prevention of Fiscal Evasion in Respect of Income Taxes and Property Taxes dated 28 June 1993 (the Treaty ) no later than ten Business Days before the first Interest Payment Date (and thereafter as soon as possible at the beginning of each calendar year but not later than ten Business Days prior to the first Interest Payment Date in that year); and such other information or forms as may need to be duly completed and delivered by the Lender to enable the Borrower to obtain relief from deduction or withholding of Russian taxes or, as the case may be, to apply to obtain a tax refund if a relief from deduction or withholding of Russian taxes has not been obtained, provided that the Lender shall not be liable for any failure to provide, or any delays in providing, such residency certificate as a result of any action or inaction of the competent Luxembourg authorities, but shall promptly notify the Borrower about any such failure or delay with a written description of the actions taken by the Lender to obtain such residency certificate. Such a certificate and any other information or forms (as applicable) shall be appropriately apostilled and a certified translation shall be supplied at the expense of the Borrower. 7. CONDITIONS PRECEDENT 7.1 Documents Delivered prior to the Original Closing Date The obligation of the Lender to make the Original Advance was subject to the receipt by the Lender on or prior to the Original Closing Date of a signed copy of each of the following documents, each (other than the documents referred to in sub-clauses to below) dated the Original Closing Date and in the Agreed Form: an opinion of White & Case regarding issues of Russian law; an opinion of Clifford Chance CIS Limited regarding issues of Russian law; an opinion of Clifford Chance LLP regarding issues of English law; opinions of Arendt & Medernach regarding issues of Luxembourg law and certain Luxembourg tax matters; letters from an internationally recognised firm of accountants regarding certain Russian tax matters; the Ongoing Fee Side Letter (as defined in the Original Subscription Agreement); evidence that the persons mentioned in Clause 13.6 (Petrocommerce s Process Agent) of the Original Loan Agreement have agreed to receive process in the manner specified therein; and evidence that Petrocommerce has been granted ratings from Standard & Poor s and Moody s. 7.2 Further Conditions prior to the Original Closing Date The obligation of the Lender to make the Original Advance was subject to the further conditions precedent that as of the Original Closing Date (a) the representations and warranties made and given by Petrocommerce in Clause 9.1 (Petrocommerce s Representation and Warranties) of the Original Loan Agreement were true and accurate as if made and given on the Original Closing Date with respect to the facts and circumstances then existing, (b) no event shall have occurred and be continuing that constitutes a Potential Event of Default or an Event of Default, (c) Petrocommerce shall not be in breach of any of the terms, conditions and provisions of the Original Loan Agreement, (d) the Original Subscription Agreement, the 104

106 Original Trust Deed and the Original Agency Agreement shall have been executed and delivered and (e) the Lender shall have received in full the amounts referred to in Clause (Original Facility). 7.3 Documents to be Delivered prior to the New Closing Date The obligation of the Lender to make the New Advance shall be subject to the receipt by the Lender on or prior to the New Closing Date of a signed copy of each of the following documents, each dated the New Closing Date and in the Agreed Form: an opinion of White & Case LLP regarding issues of Russian law; an opinion of Clifford Chance CIS Limited regarding issues of Russian law; an opinion of Clifford Chance LLP regarding issues of English law; opinions of Arendt & Medernach regarding issues of Luxembourg law and certain Luxembourg tax matters; letters from an internationally recognised firm of accountants regarding certain Russian tax matters; the New Ongoing Fee Side Letter (as defined in the New Subscription Agreement); evidence that the persons mentioned in Clause 13.6 (Petrocommerce s Process Agent) have agreed to receive process in the manner specified herein; and evidence that Petrocommerce has been granted ratings from Standard & Poor s and Moody s. 7.4 Further Conditions prior to the New Closing Date The obligation of the Lender to make the New Advance (less any deduction (if any) in accordance with Clause 3.2 (Facility Fee)) shall be subject to the further conditions precedent that as of the Closing Date (a) the representations and warranties made and given by Petrocommerce in Clause 9.1 (Petrocommerce s Representation and Warranties) shall be true and accurate as if made and given on the New Closing Date with respect to the facts and circumstances then existing, (b) no event shall have occurred and be continuing that constitutes a Potential Event of Default or an Event of Default, (c) Petrocommerce shall not be in breach of any of the terms, conditions and provisions of this Agreement, (d) the New Subscription Agreement, the Supplemental Trust Deed and the Supplemental Agency Agreement shall have been executed and delivered and (e) the Lender shall have received in full the amounts referred to in Clause (New Facility). 8. CHANGE IN LAW OR BANKING PRACTICES; INCREASE IN COST 8.1 Compensation In the event that after the date of this Agreement there is any change in or introduction of any tax, law, regulation, regulatory requirement or official directive (whether or not having the force of law but, if not having the force of law, the observance of which is in accordance with the generally accepted financial practice of financial institutions in the country concerned) or in the interpretation or application thereof by any person charged with the administration thereof and/ or any compliance by the Lender in respect of the Loan or the Facility with any request, policy or guideline (whether or not having the force of law but, if not having the force of law, the observance of which is in accordance with the generally accepted financial practice of financial institutions in the country concerned) from or of any central bank or other fiscal, monetary or other authority, Agency or any official of any such authority, which: subjects or will subject the Lender to any Taxes with respect to payments of principal of or interest on the Loan or any other amount payable under this Agreement (other than any Taxes payable by the Lender on its overall net income or any Taxes referred to in Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) or 6.3 (Withholding on the Notes)); or increases or will increase the taxation of or changes or will change the basis of taxation of payments to the Lender of principal of or interest on the Loan or any other amount payable under this Agreement (other than any such increase or change which arises by reason of any increase in the rate of tax payable by the Lender on its overall net income 105

107 or as a result of any Taxes referred to in Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) or 6.3 (Withholding on the Notes)); or imposes, modifies, or deems applicable any capital adequacy, reserve or deposit requirements attributable to this Agreement or to a class of business or transaction which, in the reasonable opinion of the Lender, includes this Agreement, against assets held by, or deposits in or for the amount of, or credit extended by an office of the Lender; provided, however, that the foregoing shall not include any increase in the rate of tax payable on the overall net income of the Lender as a result of any change in the manner in which the Lender is required to allocate resources to this Agreement; or imposes or will impose on the Lender any other condition affecting this Agreement, the Facility or the Loan, and if as a result of any of the foregoing: (a) the cost to the Lender of making, funding or maintaining the Loan or the Facility is increased; or (b) the amount of principal, interest or other amount payable to or received by the Lender hereunder is reduced; or (c) the Lender makes any payment or foregoes any interest or other return on or calculated by reference to the gross amount of any sum receivable by it from Petrocommerce hereunder or makes any payment or foregoes any interest or other return on or calculated by reference to the gross amount of the Loan, then subject to the following, and in each such case: (i) the Lender shall, as soon as practicable after becoming aware of such increased cost, reduced amount or payment made or foregone, give written notice to Petrocommerce, together with a certificate signed by two authorised officials of the Lender describing in reasonable detail the introduction or change or request which has occurred and the country or jurisdiction concerned and the nature and date thereof and demonstrating the connection between such introduction, change or request and such increased cost, reduced amount or payment made or foregone, and setting out in reasonable detail the basis on which such amount has been calculated, and all relevant supporting documents evidencing the matters set out in such notes; and (ii) Petrocommerce, in the case of clauses (i) and (iii) above, shall on demand by the Lender, pay to the Lender such additional amount as shall be necessary to compensate the Lender for such increased cost, and, in the case of clause (ii) above, at the time the amount so reduced would otherwise have been payable, pay to the Lender such additional amount as shall be necessary to compensate the Lender for such reduction, payment or foregone interest or other return; provided, however, that in the case of sub-clause above (relating to a class of business or transaction which, in the reasonable opinion of the Lender, includes this Agreement), the amount of such increased cost shall be deemed not to exceed an amount equal to the proportion thereof which is directly attributable to this Agreement and provided that the Lender shall not be entitled to such additional amount where such increased cost arises as a result of the negligence or wilful default of the Lender, provided that this Clause 8.1 (Compensation) will not apply to or in respect of any matter for which the Lender has already been compensated under Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up) or 6.3 (Withholding on the Notes) or 6.4 (Tax Indemnity). 8.2 Mitigation In the event that the Lender becomes entitled to make a claim pursuant to sub-clause 8.1 (Compensation), the Lender shall consult in good faith with Petrocommerce and shall use reasonable efforts (based on the Lender s reasonable interpretation of any relevant tax, law, regulation, requirement, official directive, request, policy or guideline) to reduce, in whole or in part, Petrocommerce s obligations to pay any additional amount pursuant to such Clause, except 106

108 that nothing in this Clause 8.2 (Mitigation) shall obligate the Lender to incur any costs or expenses in taking any action which, in the reasonable opinion of the Lender, is prejudicial to its interests. 9. REPRESENTATIONS AND WARRANTIES 9.1 Petrocommerce s Representations and Warranties Petrocommerce represents and warrants to the Lender, with the intent that such shall form the basis of this Agreement, that the representation and warranties given by Petrocommerce to the Lender in Clause 9.1 (Petrocommerce s Representations and Warranties) of the Original Loan Agreement were true and accurate on the date of the Original Loan Agreement and the Original Closing Date. Petrocommerce represents and warrants to the Lender, with the intent that such shall form the basis of this Agreement and shall remain in full force and effect, at the date hereof and shall be deemed to be repeated by Petrocommerce on the New Closing Date, that: Incorporation, capacity and authorisation: Petrocommerce is duly incorporated, validly existing, resident for tax purposes and in good standing under the laws of Russia with full power and capacity to own or lease its property and assets and to conduct its business as currently conducted and as described in the Prospectus and is lawfully qualified to do business in those jurisdictions in which business is conducted by it; Capacity and authorisation: Petrocommerce has full power and capacity to execute this Agreement, to undertake and perform the obligations expressed to be assumed by it herein, and Petrocommerce has taken all necessary action to approve and authorise the same; No breach: the execution of this Agreement, and the undertaking and performance by Petrocommerce of the obligations expressed to be assumed by Petrocommerce herein will not conflict with, or result in a breach or violation of or default under (i) any law or regulation or any order of any governmental, judicial, arbitral or public body or authority of its jurisdiction of incorporation, (ii) the constitutive documents, rules and regulations of Petrocommerce, (iii) the terms of any consent, approval or authorisation referred to in sub-clause (Approvals) below, (iv) the terms of the general banking licence granted to Petrocommerce by the Central Bank, or (v) any agreement or instrument to which Petrocommerce or any Material Subsidiary is a party or by which any of them is bound or in respect of Indebtedness in relation to which any of them is a surety; Legal, valid, binding and enforceable: this Agreement constitutes legal, valid, binding and enforceable obligations of Petrocommerce; Liens: except for Liens of the types referred to in the definition of Permitted Liens, Petrocommerce has good title to its property free and clear of all Liens; Approvals: all authorisations, consents, notifications, filings and approvals required in respect of Petrocommerce for or in connection with the execution of this Agreement, the performance by Petrocommerce of the obligations expressed to be undertaken by Petrocommerce herein and their admissibility in evidence have been obtained or made and are in full force and effect; Winding-up: no corporate action or any other steps have been taken for the winding-up, dissolution, administration, reconstruction or amalgamation of Petrocommerce or any of its Material Subsidiaries or for the appointment of a receiver, administrator, administrative receiver, trustee or similar officer of Petrocommerce or any of its Material Subsidiaries or of any or all of the assets or revenues of Petrocommerce or any of its Material Subsidiaries Taxation: all payments of principal and interest in respect of the Loan under this Agreement may be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected, withheld or assessed by the Russian Federation or any political subdivision or authority thereof or therein having power to tax; Financial statements: the most recently prepared consolidated audited financial statements and the most recently prepared consolidated reviewed financial statements of the Group 107

109 and any financial statements (in each case, including the notes thereto) published subsequently thereto were prepared in accordance with IFRS and consistently applied, disclose all liabilities (contingent or otherwise) and give (in conjunction with the notes thereto) a true and fair view of Petrocommerce s and its Subsidiaries financial condition as at the date(s) as of which they were prepared and the results of the Petrocommerce s and its Subsidiaries operations (taken as a whole) during the periods then ended; No material litigation: save as disclosed in the Prospectus, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which Petrocommerce is aware) during a period covering the previous 12 months which may have, or have had in the recent past, significant effects on the financial position or profitability of Petrocommerce and its Subsidiaries; No significant change: save as disclosed in the Prospectus, and since the last day of the financial period in respect of which the most recent audited financial statements of Petrocommerce have been prepared, there has been no significant change in the financial or trading position of Petrocommerce or the Group and, since such date, save as disclosed in the Prospectus there has been no material adverse change in the financial position or prospects of Petrocommerce or the Group; No Event of Default: there exists no event or circumstance which is or would (with the passing of time, the giving of notice or the making of any determination) become an Event of Default in relation to the Notes; No taxes: the execution, delivery and enforceability of this Agreement, is not subject to any tax, duty, fee or other charge, including, but without limitation to, any registration or transfer tax, stamp duty or similar levy, imposed by or within the Russian Federation of any political subdivision or taxing authority thereof or therein; No immunity: Petrocommerce has no right of immunity from suit, execution, attachment or other legal process on the grounds of sovereignty or otherwise in respect of any action or proceeding relating in any way to this Agreement; Compliance: Petrocommerce and each Material Subsidiary is in compliance in all material respects with all applicable provisions of law; Industrial action: there are no material strikes or other employment disputes against the Petrocommerce or any Material Subsidiary which have been started or are pending or, to its knowledge, threatened; Internal controls: Petrocommerce and each of its Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with Petrocommerce s and each Subsidiaries management s general or specific authorisation and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with IFRS and to maintain accountability of assets; English law: the choice of English law as the governing law of this Agreement will be recognised and enforced in the Russian Federation after compliance with the applicable procedures and rules and all other legal requirements in the Russian Federation; Licences: all material licences, consents, examinations, clearances, filings, registrations and authorisations which are or may be necessary to enable the Petrocommerce or any of its Material Subsidiaries to own its assets and carry on its business are in full force and effect and Petrocommerce and its Material Subsidiaries are conducting such business in accordance with such licences, consents, examinations, clearances, filings, registrations and authorisations; Commercial acts: Petrocommerce is subject, without reservation, to civil and commercial law with respect to its obligations under this Agreement; Tax liabilities: neither Petrocommerce nor any Material Subsidiary has any material overdue tax liabilities other than those which have been disclosed in the Prospectus; and Anti-money laundering: save as disclosed in the Prospectus, Petrocommerce and its Subsidiaries are in compliance with all applicable anti-money laundering laws and regulations in the jurisdictions in which it or they conduct their operations. 108

110 9.2 Lender s Representations and Warranties The Lender represents and warrants to Petrocommerce as follows: the Lender is duly incorporated under the laws of, and is a resident for Luxembourg taxation purposes in, Luxembourg and has full power and capacity to execute this Agreement and to undertake and perform the obligations expressed to be assumed by it herein and the Lender has taken all necessary action to approve and authorise the same; the execution of this Agreement and the undertaking and performance by the Lender of the obligations expressed to be assumed by it herein will not conflict with, or result in a breach of or default under, the laws of Luxembourg or any agreement or instrument to which the Lender is a party or by which it is bound or the constitutive documents of the Lender; this Agreement has been duly executed by and constitute legal, valid and binding obligations of the Lender enforceable in accordance with their terms; and all authorisations, consents and approvals required by the Lender for or in connection with the execution of this Agreement and the performance by the Lender of the obligations expressed to be undertaken by it herein have been obtained and are in full force and effect. 10. COVENANTS So long as any amount remains outstanding hereunder: 10.1 Negative Pledge Petrocommerce shall not (and shall ensure that none of its Material Subsidiaries shall) create or permit to subsist any Security, other than Permitted Liens, over any of its present or future assets, unless the Loan is secured equally and rateably with such Security or such other security for the Loan as may be approved by the Trustee is provided Petrocommerce shall not, except in the ordinary course of its Banking Business, (and shall ensure that none of its Material Subsidiaries shall): (a) sell, transfer or otherwise dispose of to any Person, except another member of the Group, any of its assets on terms whereby such assets are or may be leased to or reacquired by Petrocommerce or any other member of the Group; (b) enter into any arrangement under which money or the benefit of a bank or other account may be applied, set-off or made subject to a combination of accounts; or (c) enter into any other preferential arrangement having a similar effect, in circumstances where the arrangement or transaction is entered into primarily as a method of raising Indebtedness or of financing the acquisition of an asset. The provisions of this Clause 10.1 do not apply to Permitted Liens Mergers Petrocommerce shall not, without the prior written consent of the Trustee and the Lender, (i) either into any reorganisation (whether by way of a merger, accession, division, separation or transformation, as these terms are construed by Russian legislation), or (ii) participate in any other type of corporate construction other than any solvent reorganisation which: (a) involve solely a merger or amalgamation of one or more Subsidiaries of Petrocommerce with Petrocommerce and where Petrocommerce is the surviving entity of such merger or amalgamation; or (b) involves a solvent reorganisation with the aim of increasing the efficiency of Petrocommerce, provided that such reorganisation does not have a Material Adverse Effect Petrocommerce shall ensure that, except as mentioned in Clause , no Material Subsidiary (A) enters into any reorganisation (whether by way of a merger, accession, division, separation or transformation as these terms are construed by applicable Russian 109

111 legislation), or (B) participates in any other type of corporate reconstruction if any such reorganisation or corporate reconstruction has a Material Adverse Effect Disposals Petrocommerce shall not, and Petrocommerce shall ensure that no member of the Group shall, sell, lease, transfer or otherwise dispose of, to a Person that is not a member of the Group, by one or more transactions or series of transactions (whether related or not), the whole or any part of its revenues or its assets if such sale, lease, transfer or disposal has a Material Adverse Effect Transactions with Affiliates Petrocommerce shall not, and shall not permit any of its Subsidiaries, directly or indirectly, to conduct any business, enter into or permit to exist any transaction or series of related transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any property or the rendering of any service) with, or for the benefit of, any Affiliate (an Affiliate Transaction ) including intercompany loans unless (a) the terms of such Affiliate Transaction(s) taken either individually or in aggregate are not materially less favourable to Petrocommerce or such Subsidiary, as the case may be, than those that could be obtained in a comparable arm s length transaction with a Person that is not an Affiliate of Petrocommerce or such Subsidiary; or (b) such Affiliate Transaction is made pursuant to a contract existing on the Original Closing Date (excluding any amendments or modifications thereof). This Clause 10.4 does not apply (a) compensation or employee benefit arrangements with any officer or director of Petrocommerce or such Subsidiary, as the case may be, arising as a result of their employment contract, or (b) transactions between Petrocommerce and any of its Subsidiaries or between such Subsidiaries of Petrocommerce Maintenance of Authorisations Petrocommerce shall take all necessary action to obtain and do or cause to be done all things reasonably necessary to ensure the continuance of, all consents, licences, approvals and authorisations, and make or cause to be made all registrations, recordings and filings, which may at any time be required to be obtained or made in the Russian Federation for the conduct of its Banking Business and the execution, delivery or performance of this Agreement or for the validity or enforceability thereof Maintenance of Property Petrocommerce shall, and shall ensure that its Material Subsidiaries will, cause all property that is used in the conduct of its or their business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as, in the judgement of Petrocommerce or such Material Subsidiary, may be reasonably necessary so that the business carried on in connection therewith may be properly conducted at all times Payment of Taxes and Other Claims Petrocommerce shall, and shall ensure that its Subsidiaries shall, pay or discharge or cause to be paid or discharged, before the same shall become overdue and without incurring penalties, (a) all taxes, assessments and governmental charges levied or imposed upon the income, profits or property of Petrocommerce or any Subsidiaries and (b) all lawful claims for labour, materials and supplies which, if unpaid, would by law become a Security (other than a Permitted Lien) upon the property of Petrocommerce or any of its Subsidiaries; provided, however, that none of Petrocommerce nor any Subsidiary shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim (a) whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with IFRS or other appropriate provision has been made or (b) whose amount, together with all such other unpaid or undischarged taxes, assessments, charges and claims, does not in the aggregate exceed U.S.$40,000,

112 10.8 Maintenance of Insurance So long as any amount remains outstanding under this Agreement, Petrocommerce shall and shall ensure that any Material Subsidiaries will, keep those of their properties which are of an insurable nature insured with insurers, reasonably believed by Petrocommerce, or such Material Subsidiary to be of good standing, against loss or damage to the extent that property of similar character is usually so insured by corporations in the same jurisdictions similarly situated and owning like properties in the same jurisdictions Financial Information Petrocommerce shall deliver to the Lender and the Trustee, within six months after the end of each of its financial years, copies of its audited consolidated financial statements for such financial year, prepared in accordance with IFRS consistently applied with the corresponding financial statements for the preceding period Petrocommerce shall deliver to the Lender and the Trustee within three months after the end of the first half-year of each of its financial years, copies of its unaudited consolidated (i) balance sheet, (ii) income statement, and (iii) statement of changes in shareholder equity for that half-year, prepared on an IFRS basis consistently applied with the corresponding financial statements for the preceding period Petrocommerce shall deliver to the Lender and the Trustee, without undue delay, such additional information regarding the financial position or the business of Petrocommerce and its Subsidiaries as the Lender may reasonably request including: (a) (b) providing certification to the Trustee pursuant to sub-clauses 12.5, and of the Trust Deed; and providing to the Trustee all documents dispatched by Petrocommerce to its respective shareholders (or any class of them) generally or their respective creditors generally (but, with respect to creditors, other than in the normal course of business) at the same time as they are dispatched Financial Covenants Petrocommerce shall maintain (i) a minimum capital adequacy ratio of 10 per cent., such ratio being calculated in accordance with (a) the regulations and guidelines established from time to time by the Bank for International Settlements and (b) without prejudice to the foregoing, any additional regulations and guidelines established from time to time by the Central Bank pursuant thereto or in connection therewith; or, if higher, (ii) the minimum capital adequacy ratio required by the Central Bank Compliance Certificates On each Interest Payment Date (other than the final Interest Payment Date that falls on the Payment Date) or promptly upon request by the Lender (and in any event within 15 Business Days after such request), Petrocommerce shall deliver to the Lender and the Trustee, written notice in the form of an Officer s Certificate stating whether any Potential Event of Default or Event of Default has occurred and, if it has occurred, what action Petrocommerce is taking or proposes to take with respect thereto Restricted Payments, etc. Petrocommerce shall not reduce its share capital or make a distribution of assets if such reduction or distribution is reasonably likely to result in a Material Adverse Effect Change of business Petrocommerce shall procure that no material change is made to the general nature of the business of Petrocommerce or any of the Material Subsidiaries from that carried on at the date of this Agreement Books and Records Petrocommerce will, and will cause each of its Material Subsidiaries to, keep books and records which accurately reflect all of its business affairs and transactions and, while any amount is outstanding under the Loan, permit the Lender or any of its respective representatives, at 111

113 reasonable times and intervals during normal business hours, to visit all of its offices, to discuss its financial matters with its officers Accounting Matters; Financial Year Petrocommerce will not make or permit, or permit any of its Material Subsidiaries to make or permit, any change in its accounting policies, reporting practices or its financial year, except as required or permitted by applicable law Compliance with laws Petrocommerce shall comply in all material respects with all laws to which it may be subject, if failure so to comply would impair its ability to perform its obligations under this Agreement and the Agency Agreement Ranking of Claims Petrocommerce shall ensure that at all times the claims of the Lender against it under this Agreement rank at least pari passu with the claims of all its other unsecured creditors save those whose claims are preferred by any bankruptcy, insolvency, liquidation or similar laws of general application Notes Held by Petrocommerce Upon being so requested in writing by the Lender, Petrocommerce shall deliver to the Lender copied to the Trustee an Officers Certificate of Petrocommerce setting out the total principal amount of Notes which, at the date of such certificate, are held by Petrocommerce (or any Subsidiary of Petrocommerce) and have not been cancelled and are retained by it for its own account or for the account of any other company. 11. EVENTS OF DEFAULT 11.1 Events of Default If any of the following events (each, an Event of Default ) occurs and is continuing, the Lender shall be entitled to the remedies set forth in Clause 11.3 (Default Remedies): Non-payment: Petrocommerce fails to pay any amount payable hereunder as and when such amount becomes payable in the currency and in the manner specified herein provided such failure to pay continues for more than five Business Days (or within seven Business Days of the date on which such payment is due in the case where such failure is solely due to a technical or administrative difficulty which is beyond Petrocommerce s control); Breach of obligations: Petrocommerce fails to perform or observe any covenant or agreement or obligation contained herein to be performed or observed by it and such failure, if capable of being remedied, is not remedied within fifteen days; Cross-default: any Indebtedness of Petrocommerce or any Material Subsidiary is not paid when due, or any such Indebtedness of Petrocommerce and/or any Material Subsidiary is declared to be or otherwise becomes due and payable prior to its specified maturity otherwise than at the option of Petrocommerce and/or any Material Subsidiary or (provided that no event of default, howsoever described, has occurred) any Person entitled to such Indebtedness; provided however, that the total amount of such Indebtedness which is not paid when due or becomes due and payable prior to its specified maturity is equal to or greater than US$10,000,000 (or its equivalent in another currency) Insolvency: the occurrence of any of the following events: (i) any of Petrocommerce or any Material Subsidiary seeking or consenting to the introduction of proceedings for its liquidation or the appointment of a liquidation commissioner (likvidatsionnaya komissiya) or a similar officer of any of Petrocommerce or any Material Subsidiary as the case may be; (ii) the presentation or filing of a petition in respect of any of Petrocommerce or any Material Subsidiary in any court, arbitration court or before any agency alleging, or for, the bankruptcy, insolvency, dissolution, liquidation (or any analogous proceedings) of any of Petrocommerce or any Material Subsidiary, unless such petition is demonstrated to the reasonable satisfaction of the Lender to be vexatious or frivolous; (iii) the institution of the financial rehabilitation (finansovoye ozdorovlenie kreditnoy organizatsii), 112

114 bankruptcy management (konkursnoye proizvodstvo), temporary administration (vremennaya administratsiya) or reorganisation (reorganizatsiya) with respect to Petrocommerce or any Material Subsidiary as such terms are defined in the Federal Law of the Russian Federation No- 40-FZ On Insolvency (Bankruptcy) of Credit Organisations dated 25 February 1999 (as amended or replaced from time to time); (vi) any judicial liquidation in respect of Petrocommerce or any Material Subsidiary; and/or (vii) revocation of the general banking licence of Petrocommerce or, if applicable, of any Material Subsidiary or any which results in Petrocommerce requiring a special or additional licence or being unable to make payments in the specified currency Inability to pay debts: Petrocommerce or any Material Subsidiary is unable or admits inability to pay its debts as they fall due, suspends making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness; the value of the assets of any Petrocommerce or any Material Subsidiary is less than its liabilities; and/or a moratorium is declared in respect of any indebtedness of any of Petrocommerce or any Material Subsidiary Security Enforced: any expropriation, attachment, sequestration, execution or distress is levied against, or an encumbrancer takes possession of or sells, the whole or any part of, the property, undertaking, revenues or assets of Petrocommerce or any Material Subsidiary and the same would have a Material Adverse Effect unless the same is being contested in good faith by Petrocommerce or the relevant Material Subsidiary and is not removed, paid out, stayed or discharged within 30 days after the same occurs; Government Authorisation not in force: any governmental authorisation (if applicable) necessary for the performance of any obligation of Petrocommerce under this Agreement fails to be in full force and effect and, except where such failure has a Material Adverse Effect, such failure is not remedied within 30 days after its occurrence; Government Intervention or Legal Action: Any government authority or court takes any action that, in the opinion of the Lender and the Trustee, materially and adversely affects the condition of Petrocommerce or the ability of Petrocommerce to perform its obligations under this Agreement or the Agency Agreement or adversely affects the validity or enforceability of this Agreement or the Agency Agreement or the rights or remedies of the Lender or Trustee hereunder Liquidation: the shareholders of Petrocommerce shall have approved any plan of liquidation or dissolution of Petrocommerce; Unsatisfied judgements: the aggregate amount of unsatisfied judgments, decrees or orders of courts or other appropriate law-enforcement bodies for the payment of money against Petrocommerce and other Subsidiaries in the aggregate exceeds U.S.$15,000,000, or the equivalent thereof in any other currency or currencies unless such judgment, decree or order is being contested in good faith by Petrocommerce or any Subsidiary, as the case may be and there is a period of 30 days (or such longer period as the Lender and Trustee may agree) following the entry thereof during which such judgment, decree or order is not discharged, waived or the execution thereof stayed; Unlawfulness: at any time it is or becomes unlawful for Petrocommerce to perform or comply with any or all of its obligations under this Agreement or any of such obligations are not, or cease to be, legal, valid, binding and enforceable; Principal Business: Petrocommerce ceases to carry on the principal business it carried on at the date of the Original Loan Agreement and this Agreement; Repudiation: Petrocommerce repudiates this Agreement or the Agency Agreement or evidences an intention to repudiate this Agreement or the Agency Agreement; Analogous events: Any event occurs which under the laws of any relevant jurisdiction has an analogous effect to any of the events referred to in any of the foregoing sub-clauses Notice of Default Petrocommerce shall deliver to the Lender and the Trustee, immediately upon becoming aware thereof, written notice in the form of an Officers Certificate of any event which is a Potential 113

115 Event of Default or an Event of Default, its status and what action Petrocommerce or the relevant Subsidiary, as the case may be, is taking or proposes to take with respect thereto Default Remedies Acceleration: If any Event of Default shall occur and be continuing, the Lender and/or the Trustee as applicable in accordance with the Trust Deed may, by notice in writing to Petrocommerce, (a) declare the Facility and the obligations of the Lender hereunder to be immediately terminated, whereupon the Facility and such obligations shall terminate, and (b) declare all amounts payable hereunder by Petrocommerce that would otherwise be due after the date of such termination to be immediately due and payable, whereupon all such amounts shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by Petrocommerce; provided, however, that if any event of any kind referred to in sub-clauses (Insolvency) and (Inability to pay debts) occurs, the Facility and obligations of the Lender hereunder shall immediately terminate, and all amounts payable hereunder by Petrocommerce that would otherwise be due after the occurrence of such event shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by Petrocommerce Amounts due on demand: If, pursuant to sub-clause (Acceleration), the Lender and/ or the Trustee declares the outstanding principal amount of the Facility to be due and payable on demand of the Lender and/or the Trustee, then, and at any time thereafter, the Lender and/or the Trustee, may, by written notice to Petrocommerce, require repayment of the outstanding principal amount of the Facility on such date as it may specify in such notice (whereupon the same shall become due and payable on such date together with accrued interest thereon and any other sums then owed by Petrocommerce hereunder) or withdraw its declaration with effect from such date as it may specify in such notice Rights Not Exclusive The rights provided for herein are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law. 12. INDEMNITY 12.1 Indemnification Petrocommerce undertakes to the Lender, that if the Lender or any of its Affiliates, each director, officer, employee or agent of the Lender and each Person controlling the Lender within the meaning of the United States securities laws (each an indemnified party ) incurs any loss, liability, cost, claim, charge, expense (including without limitation Taxes, any value added tax, legal fees, costs and expenses), demand or damage (a Loss ) as a result of or in connection with the Loan, this Agreement (or enforcement thereof), and/or the issue, constitution, sale, listing and/or enforcement of the Notes and/or the Notes being outstanding, Petrocommerce shall pay to the Lender on demand an amount equal to such Loss and all costs, charges and expenses which it or any indemnified party may pay or incur in connection with investigating, disputing or defending any such action or claim as such costs, charges and expenses are incurred unless such Loss was caused either by such indemnified party s negligence or wilful misconduct or arises out of a breach of the representations and warranties of the Lender contained in the Original Loan Agreement or this Agreement. The Lender shall not have any duty or obligation, whether as fiduciary or trustee for any indemnified party or otherwise, to recover any such payment or to account to any other Person for any amounts paid to it under this Clause 12.1 (Indemnification) Independent Obligation Clause 12.1 (Indemnification) constitutes a separate and independent obligation of Petrocommerce from its other obligations under or in connection with this Agreement or any other obligations of Petrocommerce in connection with the issue of the Notes by the Lender and shall not affect, or be construed to affect, any other provision of this Agreement or any such other obligations. 114

116 12.3 Evidence of Loss A certificate of the Lender setting forth the amount of losses, expenses and liabilities described in Clause 12.1 (Indemnification) and specifying in full detail the basis therefor shall, in the absence of manifest error, be conclusive evidence of the amount of such losses, expenses and liabilities Survival The obligations of Petrocommerce pursuant to Clauses 6.2 (No Set-Off, Counterclaim or Withholding; Gross-Up), 6.3 (Withholding on the Notes), 6.4 (Tax Indemnity), 6.5 (Reimbursement) and 12.1 (Indemnification) shall survive the execution and delivery of this Agreement and the drawdown and repayment of the Loan by Petrocommerce Currency Indemnity Each reference in this Agreement to Dollars is of the essence. To the fullest extent permitted by law, the obligation of Petrocommerce in respect of any amount due in Dollars under this Agreement shall, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in Dollars that the Lender may, in accordance with normal banking procedures, purchase with the sum paid in such other currency (after any premium and costs of exchange) on the Business Day immediately following the day on which such party receives such payment. If the amount in Dollars that may be so purchased for any reason falls short of the amount originally due, Petrocommerce hereby agrees to indemnify the Lender against any such deficiency in Dollars. Any obligation of Petrocommerce not discharged by payment in Dollars shall, to the fullest extent permitted by applicable law, be due as a separate and independent obligation and, until discharged as provided herein, shall continue in full force and effect. 13. LAW AND JURISDICTION 13.1 Governing law This Agreement and all matters arising from or connected with it are governed by, and shall be construed in accordance with, English law English courts Subject to Clause 13.7 (Arbitration) below, the courts of England have exclusive jurisdiction to settle any dispute (a Dispute ), arising from or connected with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) or the consequences of its nullity Appropriate forum The parties agree that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that they will not argue to the contrary Rights of Lender to take proceedings outside England Clause 13.2 (English courts) is for the benefit of the Lender only. As a result, nothing in this Clause 13 (Law and Jurisdiction) prevents the Lender from taking proceedings relating to a Dispute ( Proceedings ) in any other courts with jurisdiction. To the extent allowed by law, the Lender may take concurrent Proceedings in any number of jurisdictions Lender s Process agent The Lender agrees that the documents which start any Proceedings and any other documents required to be served in relation to those Proceedings may be served on it by being delivered to Law Debenture Corporate Services Limited at Fifth Floor, 100 Wood Street, London EC2V 7EX or, if different, its registered office for the time being or at any address of the Lender in Great Britain at which process may be served on it in accordance with Part XXIII of the Companies Act If such person is not or ceases to be effectively appointed to accept service of process on behalf of the Lender, the Lender shall, on the written demand of Petrocommerce addressed and delivered to the Lender appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, Petrocommerce shall be entitled to appoint such a person by written notice addressed to the Lender and delivered to the 115

117 Lender. Nothing in this paragraph shall affect the right of Petrocommerce to serve process in any other manner permitted by law. This Clause applies to Proceedings in England and to Proceedings elsewhere Petrocommerce s Process agent Petrocommerce agrees that the documents which start any Proceedings and any other documents required to be served in relation to those Proceedings may be served on it by being delivered to Law Debenture Corporate Services Limited at Fifth Floor, 100 Wood Street, London EC2V 7EX or, if different, its registered office for the time being or at any address of Petrocommerce in Great Britain at which process may be served on it in accordance with Part XXIII of the Companies Act If such person is not or ceases to be effectively appointed to accept service of process on behalf of Petrocommerce, Petrocommerce shall, on the written demand of the Lender addressed and delivered to Petrocommerce appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, the Lender shall be entitled to appoint such a person by written notice addressed to Petrocommerce and delivered to Petrocommerce. Nothing in this paragraph shall affect the right of the Lender to serve process in any other manner permitted by law. This Clause applies to Proceedings in England and to Proceedings elsewhere Arbitration Arbitration Subject to Clause (Lender s Option) any dispute (a Dispute ) arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement or the consequences of its nullity) shall be referred to arbitration under the Arbitration Rules of the London Court of International Arbitration (LCIA), which rules are deemed to be incorporated by reference into this Clause Formation of arbitral tribunal, seat and language of arbitration (a) Formation of arbitration tribunal: The arbitral tribunal shall consist of three arbitrators, each of whom shall be disinterested in the dispute or controversy, shall have no connection with any party thereto and shall be an attorney experienced in international securities transactions. Each party shall nominate an arbitrator, who, in turn, shall nominate the Chairman of the Tribunal. If a dispute, claim controversy or cause of action shall involve more than two parties, the parties thereto shall attempt to align themselves in two sides (i.e. claimant and respondent) each of which shall appoint an arbitrator as if there were only two sides to such dispute, claim controversy or cause of action. If such alignment and appointment shall not have occurred within twenty (20) calendar days after the initiating party serves the arbitration demand or if a Chairman has not been selected within thirty (30) calendar days of the selection of the second arbitrator, the Arbitration Court of the London Court of International Arbitration shall appoint the three arbitrators or the Chairman, as the case may be. The parties and the Arbitration Court may appoint arbitrators from among the nationals of any country, whether or not a party is a national of that country. The arbitrators shall have no authority to award punitive or other punitive type damages and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. (b) Seat of arbitration: The seat of arbitration shall be London, England. (c) Language of arbitration: The language of the arbitration shall be English Fees Fees of the arbitration (excluding each party s preparation, travel, attorneys fees and similar costs) shall be borne in accordance with the decision of the arbitrators. The decision of the arbitrators shall be final, binding and enforceable upon the parties and judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that the failure of a party to comply with the decision of the arbitrators requires any other party to apply to any court for enforcement of such award, the non-complying party shall be liable to the other for all costs of such litigation, including reasonable attorneys fees. 116

118 Recourse to Courts For the purposes of arbitration pursuant to this Clause 13.7 (Arbitration), the parties hereto exclude the jurisdiction of the Courts under Sections 45 and 69 of the Arbitration Act Lender s Option The Lender may, at any time, by notice in writing to the Borrower, require that all Disputes or a specific Dispute be heard by a court of law. If the Lender gives such notice, the Dispute to which such notice refers shall be determined in accordance with Clause 13.2 (English Courts). 14. NOTICES 14.1 Addresses for Notices All notices and other communications hereunder shall be made in writing and in English (by letter or fax) and shall be sent as follows: Lender: if to the Lender, to it at: Petrocommerce Finance S.A. 2, Boulevard Konrad Adenauer, L-1115 Luxembourg Fax: Attention: Rolf Caspers Petrocommerce: if to Petrocommerce, to it at: OJSC Bank Petrocommerce 24, ul Petrovka Moscow Russian Federation Fax: Attention: Dmitry Romaev, Head of Capital Markets 14.2 Effectiveness Every notice or other communication sent in accordance with Clause 14.1 (Addresses for Notices) shall be effective upon receipt by the addressee; provided, however, that any such notice or other communication which would otherwise take effect after 4.00 p.m. on any particular day shall not take effect until a.m. on the immediately succeeding business day in the place of the addressee. 15. ASSIGNMENT 15.1 This Agreement shall inure to the benefit of and be binding upon the parties, their respective successors and any permitted assignee or transferee of some or all of a party s rights or obligations under this Agreement. Any reference in this Agreement to any party shall be construed accordingly and, in particular, references to the exercise of rights and discretions by the Lender, following the enforcement of the security and/or assignment referred to in Clause 15.3 below, shall be references to the exercise of such rights or discretions by the Trustee (as Trustee). Notwithstanding the foregoing, the Trustee shall not be entitled to participate in any discussions between the Lender and Petrocommerce or any agreements of the Lender or Petrocommerce pursuant to Clauses 6.5 (Reimbursement) or 6.6 (Representations of the Lender) or Clause 8 (Change in Law or Banking Practices; Increase in Cost) Petrocommerce shall not assign, dispose of, novate or transfer all or any part of its rights or obligations hereunder to any other party Subject to Clause 15 (Substitution) of the Trust Deed, the Lender may not assign or transfer, in whole or in part, any of its rights (other than Reserved Rights (as defined in the Trust Deed)) and benefits or obligations under this Agreement except to the Trustee by granting the Loan Security. In the event a successor Lender is appointed to act as lender, the Lender shall deliver to the successor Lender sufficient information to allow the Successor Lender to perform its 117

119 obligations under this Agreement and the successor Lender shall accede to this Agreement and at such time give the same representations, warranties and undertakings as set out herein. 16. GENERAL 16.1 Evidence of Debt The entries made in the Account shall, in the absence of manifest error, constitute prima facie evidence of the existence and amounts of Petrocommerce s obligations recorded therein Stamp Duties Petrocommerce shall pay all stamp, registration and documentary taxes, duties or similar charges (if any) imposed on Petrocommerce by any Person in the United Kingdom, the Russian Federation or Luxembourg which may be payable or determined to be payable in connection with the execution, delivery, performance, enforcement, or admissibility into evidence of this Agreement and all related documents and shall indemnify the Lender against any and all costs, penalties and expenses which may be incurred or suffered by the Lender with respect to, or resulting from, delay or failure by Petrocommerce to pay such taxes or similar charges upon presentation by the Lender to Petrocommerce of documentary evidence of such costs and expenses Petrocommerce agrees that if the Lender incurs a liability to pay any stamp, registration and documentary taxes, duties or similar charges (if any) imposed by any Person in the United Kingdom, the Russian Federation or Luxembourg which may be payable or determined to be payable in connection with the execution, delivery, performance, enforcement, or admissibility into evidence of this Agreement and all related documents, Petrocommerce shall reimburse the Lender on demand an amount equal to such stamp or other documentary taxes, duties or similar charges and shall indemnify the Lender against any and all costs and expenses which may be incurred or suffered by the Lender with respect to, or resulting from, delay or failure by Petrocommerce to procure the payment of such taxes, duties or similar charges Waivers No failure to exercise and no delay in exercising, on the part of the Lender or Petrocommerce, any right, power to privilege hereunder and no course of dealing between Petrocommerce and the Lender shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by applicable law Prescription Subject to the Lender having received the principal amount thereof or interest thereon from Petrocommerce, the Lender shall forthwith repay to Petrocommerce the principal amount or the interest amount thereon, respectively, of any Notes upon such Notes becoming void pursuant to Condition 11 (Prescription) of the Notes Contracts (Rights of Third Parties) Act 1999 A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement Counterparts This Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same agreement Language The language which governs the interpretation of this Agreement is the English language Amendments Except as otherwise provided by its terms, this Agreement may not be varied except by an agreement in writing signed by the parties. 118

120 16.9 Partial Invalidity The illegality, invalidity or unenforceability to any extent of any provision of this Agreement under the law of any jurisdiction shall affect its legality, validity or enforceability in such jurisdiction to such extent only and shall not affect its legality, validity or enforceability under the law of any other jurisdiction, nor the legality, validity or enforceability of any other provision. 119

121 TAXATION Russian Taxation The following is a general description of certain Russian tax considerations relating to the Notes and the Loan. It does not purport to be a complete analysis of all tax considerations relating to the Notes, whether in those countries or elsewhere. Prospective purchasers of the Notes should consult their own tax advisers as to which countries tax laws could be relevant to acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes and the consequences of such actions under the tax laws of those countries. This summary is based upon the law as in effect on the date of this offering memorandum and is subject to any change in law that may take effect after such date. The information and analysis contained within this section are limited to taxation issues, and prospective investors should not apply any information or analysis set out below to other areas, including (but not limited to) the legality of transactions involving the Notes. Taxation of the Notes The following is a summary of certain Russian tax considerations relevant to the purchase, ownership and disposition of the Notes as well as the taxation of payments of interest on the Loan. The summary is based on the laws of Russia and the interpretations thereof by the Federal Tax Service (and its predecessor, the Russian Ministry of Taxes and Levies) in effect at the date of this Prospectus, and is subject to changes that may come into effect after that date. The summary does not seek to address the applicability of, and procedures in relation to, taxes levied by regions, municipalities or other non-federal authorities of Russia. Nor does the summary seek to address the availability of double tax treaty relief, and it should be noted that there may be practical difficulties, including satisfying certain documentation requirements, involved in claiming double tax treaty relief. Prospective investors should consult their own advisers regarding the tax consequences of investing in the Notes. No representations with respect to the Russian tax consequences to any particular holder are made hereby. The provisions of the Russian Tax Code applicable to Noteholders, and transactions with the Notes are uncertain and lack interpretive guidance. Both the substantive provisions of the Russian Tax Code applicable to financial instruments and the interpretation and application of those provisions by the Russian tax authorities may be subject to more rapid and unpredictable change and inconsistency than in jurisdictions with more developed capital markets. In particular, the interpretation and application of such provisions will in practice rest substantially with local tax inspectorates. In practice, interpretation by different tax inspectorates may be inconsistent or contradictory and may result in the imposition of conditions, requirements or restrictions not stated by the law. Similarly, in the absence of binding precedents court rulings on tax or related matters by different courts relating to the same or similar circumstances may also be inconsistent or contradictory. For the purposes of this summary, a non-resident holder means (i) a physical person, physically present in Russia for an aggregate period of less than 183 days in any 12 consecutive months excluding days of arrival into Russia, but including days of departure from Russia; or (ii) a legal entity or organisation in each case not organised under Russian law that holds and disposes of the Notes otherwise than through a permanent establishment in Russia. The Russian tax treatment of interest payments made by PKB to the Issuer under the Loan Agreement may affect the Noteholders. See Taxation of Interest on the Loan below. Non-Resident Holders A non-resident holder of the Notes will not be subject to any Russian taxes on receipt from the Issuer of amounts payable in respect of principal, premium or interest on the Notes. A non-resident holder generally should not be subject to any Russian taxes in respect of gain or other income realised on a redemption, sale or other disposal of the Notes, provided that the proceeds of such sale, redemption, or disposal are not received from a source within Russia, subject to what is stated in Taxation of Interest on the Loan below. In the event that proceeds from a sale, redemption or disposal of Notes are received from a source within Russia, a non-resident holder that is a legal entity or organisation should not be subject to Russian tax in respect of such proceeds, although there is some residual uncertainty regarding the treatment of any part of such gain realised on sale or other disposal of the Notes which is attributable to accrued interest. If the payment upon sale or other disposal of the Notes is received 120

122 from within Russia, accrued interest may be distinguished from the total gain and taxed at a rate of 20 per cent. Withholding tax on interest may be reduced or eliminated in accordance with the provisions of an applicable double taxation treaty. The separate taxation of the interest accrued may create a tax liability in relation to interest even where there is a capital loss on the disposal of the Notes. Non-resident holders that are legal entities or organisations should consult their own tax advisers with respect to the tax consequences of the receipt of proceeds from a source within Russia in respect of a disposal of the Notes. In the event that proceeds from a sale, redemption or disposal of the Notes are received from a source within Russia, a non-resident holder that is an individual may be subject to Russian tax in respect of such proceeds at a rate of 30 per cent. of the gain (gross proceeds less any available cost deduction, including the original purchase price), because such payments are likely to be treated as Russian source income for Russian personal income tax purposes. The tax may be withheld at source of payment or if the tax is not withheld, then the non-resident individual may be liable to pay the tax. Personal income tax on disposal of the Notes may be reduced or eliminated in accordance with the provisions of an applicable double taxation treaty. There is some uncertainty regarding the treatment of the portion of proceeds attributable to accrued interest. Subject to reduction or elimination under provisions of an applicable tax treaty related to interest income, proceeds attributable to accured interest may be taxed at a rate of 30 per cent., even if the disposal results in a capital loss. Non-resident holders who are individuals should consult their own tax advisers with respect to the tax consequences of the receipt of proceeds from a source within Russia in respect of a disposition of the Notes. There is a risk that the taxable base may be affected by changes in the exchange rates between the currency of acquisition of the Notes, the currency of sale of the Notes and Roubles. Where proceeds from the disposition of the Notes are received from a Russian source, in order for the non-resident holder, whether an individual, legal entity or organisation, to enjoy the benefits of an applicable double tax treaty, documentary evidence is required to confirm the applicability of the double tax treaty for which benefits are claimed. Currently, a holder would need to provide to the payer a certificate of tax residence issued by the competent tax authority of the relevant treaty country. In addition, an individual must provide appropriate documentary proof of tax payments outside of Russia on income with respect to which treaty benefits are claimed. Because of uncertainties regarding the form and procedures for providing such documentary proof, individuals in practice may not be able to obtain treaty benefits on receipt of proceeds from a source within Russia. Resident Holders A Noteholder who is an individual resident in Russia or a legal person or organisation who is not a non-resident in Russia is subject to all applicable Russian taxes in respect of gains from a disposal of the Notes and interest received on the Notes. Resident Noteholders should consult their own tax advisers with respect to their tax position regarding the Notes. Refund of Tax Withheld For a Noteholder who is not an individual and for who double tax treaty relief is available, advance treaty relief may be available, subject to the requirements and conditions of the laws of the Russian Federation. If double tax treaty relief is available, and Russian withholding tax on income was withheld by the source of payment, a claim for refund of such tax can be filed within three years from the end of the tax period in which the tax was withheld. For an individual Noteholder for which double tax treaty relief is available, if Russian withholding tax on income was withheld by the source of payment, a claim for refund of such tax may be filed within one year after the end of the year in which the tax was withheld. The Russian tax authorities may, in practice, require a wide variety of documentation confirming the right to benefits under a double tax treaty. Such documentation, in practice, may not be explicitly required by the Russian Tax Code. Obtaining a refund of Russian tax withheld may be a time consuming process and can involve considerable practicable difficulties. Taxation of Interest on the Loan In general, payments of interest on borrowed funds by a Russian entity to a non-resident individual or legal entity are subject to Russian withholding tax at a rate of 20 per cent., subject to reduction or elimination pursuant to the terms of an applicable double tax treaty. Based on the 121

123 professional advice it has received, PKB believes that payments of interest on the Loan should not be subject to withholding taxes under the terms of the double taxation treaty between Russia and the Grand Duchy of Luxembourg. However, there can be no assurance that such relief will be obtained. In addition if, as a result of the enforcement by the Trustee of the security granted to it by the Issuer by way of, security interest in the Trust Deed, interest under the Loan becomes payable to the Trustee, the benefit of the double tax treaty between Russia and Luxembourg may cease and payment of interest may be subject to Russian withholding tax. Prior to 1 January 2002, a claim for treaty relief from Russian withholding tax was subject to preliminary approval by the Russian tax authorities after review of relevant contracts. As of 1 January 2002, such preliminary approval from and contract disclosure to the Russian tax authorities is no longer required. As a result of this new procedure, the Russian tax authorities may review PKB s eligibility for treaty relief in greater detail during tax audits. If the payments under the Loan Agreement are subject to any withholding taxes (as a result of which PKB would reduce payments under the Notes in the amount of such withholding taxes), PKB is obliged to pay such additional amounts as may be necessary so that the net payments received by the Issuer will not be less than the amount it would have received in the absence of such withholding taxes. It should be noted, however, that gross-up provisions in contracts might not be enforceable under Russian law. In the event that PKB fails to pay such additional amounts where it is obliged to do so, such failure would constitute a Bankruptcy Event under the Loan Agreement. VAT is not applied to the rendering of financial services involving the provision of a Loan in monetary form. Therefore, no VAT will be payable in Russia on any payment of interest or principal in respect of the Loan. Luxembourg Taxation The following is a general description of certain Luxembourg tax considerations relating to the Notes. It does not purport to be a complete analysis of all tax considerations relating to the Notes, whether in Luxembourg or elsewhere. Prospective purchasers of the Notes should consult their own tax advisers as to which countries tax laws could be relevant to acquiring, holding and disposing of the Notes and receiving payments of interest, principal and/or other amounts under the Notes and the consequences of such actions under the tax laws of Luxembourg. This summary is based upon the law as in effect on the date of this Prospectus. The information contained within this section is limited to taxation issues, and prospective investors should not apply any information set out below to other areas, including (but not limited to) the legality of transactions involving the Notes. All payments of interest and principal by the Issuer under the Notes will be made free of withholding or deduction for or on account of any taxes of whatsoever nature imposed, levied, withheld, or assessed by Luxembourg or any political subdivision or taxing authority thereof or therein to the extent that such interest has been negotiated at arm s length and is not profit participating. However, the European Savings Directive (2003/48/EC) passed on 3 June 2003 and published on 26 June 2003 is fully implemented and in force in Luxembourg since 1 July See EU Savings Directive on the Taxation of Savings Income in the Form of Interest Payments (Directive 2003/48/EC) below. Furthermore, the Luxembourg law of 23 December 2005 has introduced a 10 per cent. final withholding tax on savings income (i.e. with certain exemptions, savings income within the meaning of the Luxembourg law of 21 June 2005 implementing the European Union Savings Directive), to the extent such income is paid or allocated by a Luxembourg paying agent within the meaning of this law (this law should apply to savings income accrued as from 1 July 2005 and paid as from 1 January 2006). (a) A Noteholder who derives income from a Note or who realises a gain on the disposal or redemption of a Note will not be subject to Luxembourg taxation on income or capital gains unless: (i) (ii) the Noteholder is, or is deemed to be, resident in Luxembourg for Luxembourg tax purposes or for the purpose of the relevant provisions; or such income or gain is attributable to an enterprise or part thereof which is carried on through a permanent establishment, a permanent representative or a fixed base of business in Luxembourg; 122

124 (b) Luxembourg net wealth tax will not be levied on a Noteholder unless: (i) the Noteholder is, or is deemed to be, resident in Luxembourg for the purpose of the relevant provisions; or (ii) such Note is attributable to an enterprise or part thereof which is carried on through a permanent establishment, a permanent representative or a fixed base of business in Luxembourg. As regards individuals, the Luxembourg law of 23 December 2005 has abrogated the net wealth tax starting with the year Where the Notes are transferred for no consideration, note in particular: (i) No Luxembourg inheritance tax is levied on the transfer of the Notes upon death of a holder of a Note in cases where the deceased holder was not a resident of Luxembourg for inheritance tax purposes; or (ii) Luxembourg gift tax will be levied in the event that the gift is made pursuant to a notarial deed signed before a Luxembourg notary. There is no Luxembourg registration tax, capital tax, stamp duty or any other similar tax or duty (other than nominal court fees and contributions for the registration with the Chamber of Commerce) payable in Luxembourg in respect of or in connection with the execution, delivery and enforcement by legal proceedings (including any foreign judgment in the courts of Luxembourg) of the Notes or the performance of the Issuer s obligations under the Notes, except that in the case of court proceedings in a Luxembourg court or the presentation of the documents relating to the Notes, other than the Notes, to an autorite constituee, such court or autorite constituee may require registration thereof, in which case the documents will be subject to registration duties depending on the nature of the documents and, in particular, a loan agreement, not represented by the Notes, will be subject to an ad valorem registration duty of 0.24 per cent. calculated on the amounts mentioned therein; There is no Luxembourg value added tax payable in respect of payments in consideration for the issue of the Notes or in respect of the payment of interest or principal under the Notes or the transfer of a Note, provided that Luxembourg value added tax may, however, be payable in respect of fees charged for certain services rendered to the Issuer, if for Luxembourg value added tax purposes such services are rendered, or are deemed to be rendered, in Luxembourg and an exemption from value added tax does not apply with respect to such services; and A Noteholder will not become resident, or deemed to be resident, in Luxembourg by reason only of the holding of a Note or the execution, performance, delivery and/or enforcement of the Note. EU Savings Directive on the Taxation of Savings Income in the Form of Interest Payments (Directive 2003/48/EC) On 3 June 2003, the EU Council of Economic and Finance Ministers adopted a new directive regarding the taxation of savings income. The directive is, in principle, applied by Member States as from 1 July 2005 and has been implemented in Luxembourg by the Law of 21 June Under the directive, each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a paying agent within the meaning of the EU Savings Directive to an individual or certain types of entities called residual entities resident(s) in that other Member State (or certain dependant and associated territories). For a transitional period, however, Austria, Belgium and Luxembourg are permitted to apply an optional information reporting system whereby if a beneficial owner does not comply with one of two procedures for information reporting, the Member State will levy a withholding tax on payments to such beneficial owner. The withholding tax system will apply for a transitional period during which the rate of withholding will be of 15 per cent. from 1 July 2005 to 30 June 2008, 20 per cent. from 1 July 2008 to 30 June 2011 and 35 per cent. as from 1 July The transitional period is to commence on the date from which the directive is to be applied by Member States and to terminate at the end of the first fiscal year following agreement by certain non-eu countries (Switzerland, Liechtenstein, San Marino, Monaco and Andorra) to exchange information and to introduce a withholding tax. Also with effect from 1 July 2005, a number of non-eu countries (Switzerland, Andorra, Liechtenstein, Monaco and San Marino), and certain dependent or associated territories of certain 123

125 Member States, have agreed to adopt similar measures (either provision of information or transitional withholding) in relation to payments made by a paying agent within its jurisdiction to, or collected by such a paying agent for, an individual or a residual entity in a Member State. In addition, the Member States have entered into reciprocal provision of information or transitional withholding arrangements with certain of those dependent or associated territories (Jersey, Guernsey, Isle of Man, Montserrat, British Virgin Islands, Netherlands Antilles and Aruba) in relation to payments made by a paying agent in a Member State to, or collected by such a paying agent for, an individual or a residual entity resident in one of those territories. 124

126 SUBSCRIPTION AND SALE Summary of Subscription Agreement Pursuant to the terms and conditions set forth in a subscription agreement dated 8 March 2007 (the Subscription Agreement ), ING Bank N.V., London Branch ( ING ) and Merrill Lynch International ( MLI, together with ING the Lead Managers and together with the co-managers named therein, the Managers ), have, agreed with the Issuer, subject to the satisfaction of certain conditions set forth therein, to subscribe and pay for the New Notes at the issue price of 100 per cent. of the principal amount of the New Notes plus accrued interest from, and including 14 December 2006 to but excluding 12 March 2007 (the ( Accrued Interest ). The Issuer has agreed, under the Trust Deed, to deposit the Accrued Interest in the Account where it will be retained until the first Interest Payment Date (being on or about 17 June 2006), at which time it will be applied by the Issuer towards the payment of interest on the Notes. Petrocommerce has agreed to pay certain commissions, fees, costs and expenses in connection with the Loan and the offering of the Notes (including a management and underwriting commission of 0.35 per cent. of the aggregate principal amount of the New Notes) and to reimburse the Lead Managers, the Issuer and the Trustee for certain of their expenses in connection with the offering of the New Notes. The Lead Managers are entitled to be released and discharged from their obligations under the Subscription Agreement in certain circumstances prior to payment being made to the Issuer. For investors in the New Notes, the yield to maturity is 8.75 per cent. per annum. This calculation is based on the coupon rate, length of time to maturity and market price. It assumes that the interest paid over the life of the New Notes is reinvested at the same rate. Selling Restrictions United States The Notes and the Loan have not been and will not be registered under the Securities Act or the securities laws of any State or other jurisdiction of the United States, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Each Manager has agreed that it will not offer or sell the Notes (i) as part of their distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date (the Distribution Compliance Period ), within the United States or to, or for the account or benefit of, U.S. persons, and they will have sent to each other dealer to which it sells Notes during the Distribution Compliance Period a confirmation or other notice setting forth the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S. The Notes are being offered and sold only outside of the United States to non-u.s. persons in reliance upon Regulation S. United Kingdom Each Manager has represented, warranted and agreed that: Financial promotion: it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and General compliance: it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom. Russian Federation Each Manager has represented, and agreed that it has not offered or sold or otherwise transferred and will not offer or sell or otherwise transfer as part of their initial distribution or at any time thereafter any Notes to or for the benefit of any persons (including legal entities) resident, incorporated, established or having their usual residence in the Russian Federation or to any person located within the territory of the Russian Federation except in compliance with Russian law. The Notes may not be sold or offered to or for the benefit of any person (including legal entities) that are 125

127 resident, incorporated, established or their usual residence in the Russian Federation or to any person located within the territory of the Russian Federation except in compliance with Russian law. Switzerland Each Manager represents, warrants and undertakes to the Issuer and Petrocommerce that the Notes will not be offered, directly or indirectly, to the public in Switzerland and that the Prospectus does not constitute a public offering prospectus as that term is understood pursuant to article 652a or art of the Swiss Federal Code of Obligations. The Issuer has not applied for a listing of the Notes pursuant to this Prospectus on the SWX Swiss Exchange or any other regulated securities market in Switzerland, and consequently, the information presented in the Prospectus does not necessarily comply with the information standards set out in the listing rules of the SWX Swiss Exchange. Hong Kong Each Manager has represented and agreed that: (a) (b) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Notes other than (a) to professional investors as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a prospectus as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Notes, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance. Singapore Each Manager represents, warrants and undertakes to the Issuer and Petrocommerce that the Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Manager represents, warrants and undertakes to the Issuer and Petrocommerce that it has not circulated or distributed nor will it circulate or distribute the Prospectus and any other document or material in connection with the offer or sale or invitation for subscription or purchase, of any Notes, nor has it offered or sold or caused such Notes to be made the subject of an invitation for subscription or purchase and will not offer or sell such Notes or cause such Notes to be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor specified in Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the Securities and Futures Act ), (ii) to a sophisticated investor and in accordance with the conditions specified in Section 275 of the Securities and Futures Act or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provisions of the Securities and Futures Act. Italy The offering of the Notes has not been registered pursuant to Italian securities legislation and, accordingly, each of the Managers represents and agrees that it has not offered or sold, and will not offer or sell, any Notes in Italy in a solicitation to the public, and that sales of the Notes in Italy shall be effected in accordance with all Italian securities, tax, exchange control and other applicable laws and regulations. Each of the Managers represents that it will not offer, sell or deliver any Notes or distribute copies of the Prospectus or any other document relating to the Notes in Italy except to professional investors, as defined in Article 31.2 of CONSOB Regulation No of 1 July 1998 ( Regulation No ), as amended, pursuant to Articles 30.2 and 100 of Legislative Decree No. 58 of 24 February 1998 ( Decree No. 58 ), or in any other circumstances where an express exemption from compliance with the solicitation restrictions applies under Decree No. 58 or CONSOB Regulation No of 14 May

128 Any such offer, sale or delivery of Notes or distribution of copies of the Prospectus or any other document relating to the Notes in Italy must be: (a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 ( Decree No. 385 ), Decree No. 58, Regulation No and any other applicable laws and regulations; and (b) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy. General Each Manager has agreed that it has (to the best of its knowledge and belief) complied and will comply with all applicable laws and regulations in each jurisdiction in which it offers, sells or delivers Notes or distributes this Prospectus (and any amendments thereof and supplements thereto) or any other offering or publicity material relating to the Notes, the Issuer or Petrocommerce. No action has been taken or will be taken in any jurisdiction by the Issuer, Petrocommerce or any of the Managers that would, or is intended to, permit a public offer of the Notes or possession or distribution of any offering material in relation thereto, in any country or jurisdiction where action for that purpose is required. Accordingly, each has undertaken to the Issuer and Petrocommerce that it will not, directly or indirectly, offer or sell any Notes or distribute or publish any prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will (to the best of its knowledge and belief) result in compliance with any applicable laws and regulations and all offers and sales of Notes by it will be made on the same terms. The Managers and their respective affiliates have engaged in transactions with Petrocommerce and other members of the Group (including, in some cases, credit agreements and credit lines) in the ordinary course of their banking business and the Managers have performed various investment banking, financial advisory, and other services for Petrocommerce and other members of the Group, for which they received customary fees, and the Managers and their respective affiliates may provide such services in the future. 127

129 GENERAL INFORMATION 1. The New Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg with Common Code of The International Securities Identification Number for the New Notes is XS The listing of the New Notes on the Official List will be expressed as a percentage of their principal amount (exclusive of accrued interest). Application has been made to the UK Listing Authority for the New Notes to be admitted to the Official List and to the London Stock Exchange plc for such New Notes to be admitted to trading on the London Stock Exchange plc s Gilt Edged and Fixed Interest Market. 3. So long as any of the Notes remains listed on the Official List, copies in English of the following documents will, when published, be available from the specified office of the Principal Paying and Transfer Agent during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted): (a) the Charter of the Bank; (b) the constitutional documents of the Issuer; (c) the Agency Agreement; (d) the Trust Deed which constitutes the Notes and which includes the form of the Global Note and the definitive Notes; (e) the Subscription Agreement; (f) the Loan Agreement; (g) copies of the authorisations listed below; (h) the annual consolidated financial statements of the Bank in respect of each of the financial years ended 31 December 2005 and The Bank currently prepares consolidated accounts on an annual basis which are audited; and (i) the unaudited consolidated financial statements of the Bank in respect of the six months ended 30 June The Issuer does not intend to provide any post-issuance transaction information regarding the Notes. 5. PKB and the Issuer have obtained all necessary consents, approvals and authorisations required in connection with the Loan and the issue and performance of the Notes. 6. The issuance of the New Notes and the granting of the Loan and the other documents to be entered into by the Issuer and Petrocommerce in relation to the issue of the New Notes were authorised by the Issuer by a resolution of the board of directors of the Issuer passed on 8 March There has been no material adverse change in the prospects of PKB and its subsidiaries since 31 December 2005 or in the case of the Issuer, since the Issuer s date of incorporation nor has there been any significant change in the financial or trading position of PKB and its subsidiaries, taken as a whole, which has occurred since 30 June 2006 or in the case of the Issuer, since the Issuer s date of incorporation. 8. There have been no recent events particular to PKB and its subsidiaries since 31 December 2005 or in the case of the Issuer, since the Issuer s date of incorporation, which are to a material extent relevant to the evaluation of the Company s or the Issuer s solvency. 9. The Bank s IFRS Audited Financial Statements as at and for the years ended 31 December 2005 and 2004 included in this document have been audited by ZAO PricewaterhouseCoopers Audit who have expressed an opinion on those statements, as stated in their report appearing herein. 10. PKB, its subsidiaries or the Issuer neither are, nor have been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which PKB, its subsidiaries or the Issuer are aware) during the 12 months before the date of this Prospectus which may have, or have had in the recent past, significant effects on PKB s, its subsidiaries or the Issuer s financial position or profitability. 128

130 11. Neither PKB nor the Issuer has entered into any material contracts outside the ordinary course of its business which could result in any group member being under an obligation or entitlement that is material to PKB s ability to meet its obligations under the Loan Agreement or the Issuer s ability to make payments under the Notes, as the case may be. 12. The Trust Deed will provide, inter alia, that the Trustee may act on the opinion or advice of or a certificate or any information obtained from any lawyer, banker, valuer, surveyor, broker, auctioneer, accountant, auditor or other expert, notwithstanding that such opinion or advice contains a limitation on liability or, in the case of the Auditors, disclaims all liability. The Notes provide for the Trustee to take action on behalf of the Noteholders in certain situations, but only if the Trustee is indemnified to its satisfaction. It may not be possible for the Trustee to take certain actions in relation to the Notes and accordingly in such circumstances the Trustee will be unable to take action, notwithstanding the provision of any indemnity to it, and it will be for the Noteholders to take action directly. 13. The Bank of New York (Luxembourg) S.A. will act as Registrar in relation to the Notes. A register of the Notes shall also be kept at the registered office of the Issuer. In case of inconsistency between the register kept by the Registrar and the one kept by the Issuer at its registered office, the register kept by the Issuer at its registered office shall prevail. 14. The total fees and expenses in connection with the admission of the New Notes to trading on the London Stock Exchange plc s Gilt Edged and Fixed Interest Market are expected to be approximately U.S.$1,000,

131 INDEX TO FINANCIAL STATEMENTS Financial Statements Interim Condensed Consolidated Financial Information and Auditors Review Report for the period ended 30 June F-2 Consolidated Financial Statements and Auditors Report for the year ended 31 December F-21 Consolidated Financial Statements and Auditors Report for the year ended 31 December F-72 F-1

132 Bank Petrocommerce Group Interim Condensed Consolidated Financial Information and Review Report 30 June 2006 F-2

133 CONTENTS Review Report Interim Condensed Consolidated Financial Information Interim Condensed Consolidated Balance Sheet...1 Interim Condensed Consolidated Income Statement...2 Interim Condensed Consolidated Statement of Changes in Equity...3 Interim Condensed Consolidated Statement of Cash Flows...4 Selected Notes to the Interim Condensed Consolidated Financial Information 1 Introduction Operating Environment of the Group Basis of Preparation Accounting Policies and Critical Accounting Estimates and Judgements Due from Other Banks Loans and Advances to Customers Other Borrowed Funds Segment Analysis Contingencies and Commitments Related Party Transactions Principal Subsidiaries...16 F-3

134 F-4

135 F-5

136 Bank Petrocommerce Group Interim Condensed Consolidated Income Statement In thousands of Russian Roubles Note Six months ended 30 June 2006 (unaudited) Interest income Interest expense ( ) Net interest income Provision for loan impairment 5, 6 ( ) Net interest income after provision for loan impairment Gains less losses from trading securities Losses net of gains from derecognition of investment securities available for sale (7 551) Gains less losses from trading in foreign currencies Foreign exchange translation losses net of gains (22 498) Fee and commission income Fee and commission expense ( ) Other operating income Operating income Administrative and other operating expenses ( ) Profit before tax Income tax expense ( ) Profit for the period Profit is attributable to: Equity holders of the Bank Minority interest Profit for the period The selected notes set out on pages 5 to 16 form an integral part of this interim condensed consolidated financial information. 2 F-6

137 Bank Petrocommerce Group Interim Condensed Consolidated Statement of Changes in Equity In thousands of Russian Roubles Share capital Attributable to equity holders of the Bank Fair value reserve for investment securities available for sale Retained earnings Total Minority interest Total equity Balance at 1 January (9 691) Investment securities available for sale: - Fair value losses net of gains - (18 546) - (18 546) (237) (18 783) - Disposals Income tax recorded directly in equity Other movements (30 126) (29 419) (3 463) (32 882) Net loss recognised directly in equity - (8 160) (30 126) (38 286) (3 311) (41 597) Profit for the period Total recognised income for the period - (8 160) Balance at 30 June 2006 (unaudited) (17 851) The selected notes set out on pages 5 to 16 form an integral part of this interim condensed consolidated financial information. 3 F-7

138 Bank Petrocommerce Group Interim Condensed Consolidated Statement of Cash Flows In thousands of Russian Roubles Six months ended 30 June 2006 (unaudited) Cash flows from operating activities Interest received Interest paid ( ) Income received from trading in trading securities Income received from trading in foreign currencies Fees and commissions received Fees and commissions paid ( ) Other operating income received Administrative and other operating expenses paid ( ) Income tax paid ( ) Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities Net increase in mandatory cash balances with central banks ( ) Net decrease in trading securities Net increase in due from other banks ( ) Net increase in loans and advances to customers ( ) Net decrease in other assets Net decrease in due to other banks ( ) Net increase in customer accounts Net increase in debt securities in issue Net decrease in other liabilities ( ) Net cash provided from operating activities Cash flows from investing activities Acquisition of investment securities available for sale ( ) Proceeds from disposal of investment securities available for sale Acquisition of premises and equipment ( ) Proceeds from disposal of premises and equipment Dividend income received Net cash used in investing activities ( ) Cash flows from financing activities Proceeds from other borrowed funds Repayment of other borrowed funds ( ) Net cash from financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period The selected notes set out on pages 5 to 16 form an integral part of this interim condensed consolidated financial information. 4 F-8

139 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Introduction This interim condensed consolidated financial information for the six months ended 30 June 2006 has been prepared for OAO Bank Petrocommerce (the Bank ) and its subsidiaries (together referred to as the Group or Bank Petrocommerce Group ) in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). The Group has prepared interim condensed consolidated financial information for the first time for the six months ended 30 June Therefore the accompanying interim condensed consolidated statements of income, changes in equity and cash flows do not include information for the comparative six month period ended 30 June Refer to Note 3. The activities of the Group are regulated by the Central Bank of the Russian Federation (the CBRF ), legislation of the Russian Federation and countries in which the subsidiaries are registered. The Bank is an open joint-stock commercial bank owned by shareholders whose liability is limited. The Bank was established in the Russian Federation as a partnership in 1992 and was granted its general banking licence on 6 September In March 2000, the Bank changed its legal status from a partnership to an open joint stock company. The principal activities of the Bank include deposit taking and commercial lending, support of clients export/import transactions, foreign exchange, securities trading and trading in derivative financial instruments. The Bank s operations are conducted in both Russian and international markets. The Bank is a participant in the State deposit insurance programme. The State deposit insurance scheme implies that the State Deposit Insurance Agency will guarantee repayment of individual deposits up to RR 190 thousand (approximately US Dollars 7 thousand) per individual in case of the withdrawal of a license of a bank or a CBRF imposed moratorium on payments. The Bank s office is registered at the following address: Petrovka 24, Moscow, Russia As at 30 June 2006 the Bank had 18 branches (31 December 2005: 18 branches) in the Russian Federation. The average number of the Bank s employees during the period was In 2004 the Bank s main shareholder changed. OAO LUKOIL, a major Russian oil company, which was the Bank s main shareholder, sold a controlling block of ordinary shares ( ordinary shares), accounting for 78.07% of the Bank s voting shares, to the financial group IFD Capital. IFD Capital is primarily focused on operations in Russia and participates in the following businesses: trading and brokerage activities, trust activities, investment advisory services, administration of pension funds and the provision of insurance services within the Russian Federation. IFD Capital and OAO LUKOIL also concluded a preliminary agreement on the sale and purchase of an additional ordinary shares of the Bank before 1 July In October 2005 this preliminary agreement was cancelled. In December 2005 an open tender for the right to purchase ordinary shares of the Bank was announced. Based on the results of the tender, IFD Capital obtained the right to purchase these shares. In May 2006 sale-purchase agreements have been signed by the parties and during 15 May-2 June 2006 ownership rights of ordinary shares of the Bank have been transferred to IFD Capital. The main subsidiaries of Bank Petrocommerce Group are the following: OAO Komi Regional Bank Ukhtabank, ZAO Bank Petrocommerce-Ukraine, OAO Stavropolpromstroybank and ACB UNIBANK S.A. Refer to Note 11. Below is a description of the main activity of the principal subsidiaries. Joined-Stock Company Komi Regional Bank Ukhtabank ( Ukhtabank ) is a commercial bank owned by shareholders whose liability is limited. The Bank s principal business activity is commercial and retail banking operations, operations with securities and foreign exchange within the Russian Federation. The Bank has operated under a banking license issued by the CBRF since The head office of Ukhtabank is located at the following address: Russia, , Komi Republic, Ukhta, Oktyabrskaya str., 14. At 30 June 2006 Ukhtabank had six branches within the Russian Federation (31 December 2005: six branches). The average number of employees of Ukhtabank during the period was 540. The controlling block of shares of Ukhtabank was acquired by the Group in F-9 5

140 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Introduction (Continued) ZAO Bank Petrocommerce-Ukraine ( Petrocommerce-Ukraine ) was registered on 26 September 1996 in Ukraine by the National Bank of Ukraine as a joint-stock company under the name Aviatekbank. In January 2002, Aviatekbank was acquired by the Group and in February 2002 it was renamed as ZAO Bank Petrocommerce- Ukraine. The current banking licence #108-1 was received by Petrocommerce-Ukraine on 9 April Petrocommerce-Ukraine s main activities include provision of banking services to companies representing various economic sectors, state bodies and individuals. These services include deposit taking, loans, investments in securities and execution of payments in Ukraine and abroad. Petrocommerce-Ukraine s head office is located in Kiev. At 30 June 2006 Petrocommerce-Ukraine also had four branches in Ukraine (31 December 2005: four branches). The average number of employees of Petrocommerce-Ukraine during the period was 498. Joint-Stock Investment Commercial Industrial and Construction Bank Stavropolie, an open joint-stock company (hereinafter, Stavropolpromstroybank ), was created in December 1991 as the Commercial Bank Stavropolie as a result of restructuring of commercial bank Stavropolye previously founded on 26 December In March 1996 the Bank changed its legal form and became an open joined-stock company. In May 2002, Stavropolpromstroybank was aquired by the Group. Stavropolpromstroybank has banking licence #1288. Stavropolpromstroybank s main activities include deposit taking, loans, cash and settlement services to clients and transactions with securities and foreign currencies. Stavropolpromstroybank s head office is located in Stavropol. As at 30 June 2006 Stavropolpromstroybank had seven branches in the Russian Federation (31 December 2005: seven branches). The average number of employees of Stavropolpromstroybank during the period was 598. Commercial Bank Unibank S.A. ( Unibank ) was established in the Republic of Moldova in August In December 2002 it became a subsidiary of the Bank. Unibank has a type B licence for all types of banking activities excluding trust activities. Unibank s main activities include deposit taking, loans, cash and settlement services to clients and transactions with securities. The head office of Unibank is located in Kishinev. As at 30 June 2006 Unibank had five branches in the Republic of Moldova (31 December 2005: five branches). The average number of employees of Unibank during the period was 240. In the normal course of business the Group enters into transactions with its related parties. These transactions include, but are not limited to, settlements, loans, deposit taking, guarantees, trade finance and foreign currency transactions. As at 30 June 2006, a substantial portion of the Group s liabilities (28% of total liabilities) (31 December 2005: 24% of total liabilities) are due to related parties. Refer to Note Operating Environment of the Group The Russian Federation displays certain characteristics of an emerging market, including the existence of a currency that is not freely convertible in most countries outside of the Russian Federation, relatively high inflation and economic growth. The banking sector in the Russian Federation is sensitive to adverse fluctuations in confidence and economic conditions. The Russian economy occasionally experiences falls in confidence in the banking sector accompanied by reductions in liquidity. Management is unable to predict economic trends and developments in the banking sector and what effect, if any, a deterioration in the liquidity of or confidence in the Russian banking system could have on the financial position of the Group. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations, and changes, which can occur frequently. 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 future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. Operating environment in Ukraine and the Republic of Moldova where the Group operates is broadly comparable to that of the Russian Federation described above. F-10 6

141 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Basis of Preparation This interim condensed consolidated financial information has been prepared in accordance with IAS 34. The Group has prepared interim condensed consolidated financial information for the first time for the six months ended 30 June 2006.The Group did not prepare interim condensed consolidated financial information in accordance with IAS 34 for the six months ended 30 June Consequently, this interim condensed consolidated financial information does not include corresponding information in the interim condensed consolidated statements of income, of changes in equity, of cash flows and in the related notes for the six months ended 30 June This interim condensed consolidated financial information should be read in conjunction with the annual consolidated financial statements of Bank Petrocommerce Group for the year ended 31 December This interim condensed consolidated financial information is presented in thousands of Russian Roubles ( RR thousands ). 4 Accounting Policies and Critical Accounting Estimates and Judgements The accounting policies and methods of computation applied in the preparation of this interim condensed consolidated financial information are consistent with the accounting policies and methods applied and disclosed in the annual consolidated financial statements of the Group for the year ended 31 December Judgements made by management in the process of applying the accounting policies were consistent the judgements disclosed in the annual consolidated financial statements for the year ended 31 December Management has not identified new areas of judgement. Critical estimates, as disclosed in the most recent annual financial statements, have not resulted in a material adjustment to the Group s assets, income or profit during the interim period ended 30 June Interim period measurement: Income tax expense is recognised in this interim condensed consolidated financial information based on management s best estimates of the weighted average annual income tax rate expected for the full financial year. Costs that incur unevenly during the financial year are anticipated or deferred in the interim report only if it would also be appropriate to anticipate or defer such costs at the end of the financial year. At 30 June 2006 the principal rate of exchange used for translating foreign currency monetary balances was USD 1 = RR (31 December 2005: USD 1 = RR ). Certain new standards, interpretations and amendments to the existing standards, as disclosed in the consolidated financial statements for the year ended 31 December 2005, became effective for the Group from 1 January They have not significantly affected this interim condensed consolidated financial information. The following new standards, amendments to standards and interpretations have been issued but are not effective for 2006 and have not been early adopted: IFRIC 7, Applying the Restatement Approach under IAS 29, effective for annual periods beginning on or after 1 March This interpretation is not relevant for the Group; IFRIC 8, Scope of IFRS 2, effective for annual periods beginning on or after 1 May Management do not expect the interpretation to be relevant for the Group; IFRIC 9, Reassessment of Embedded Derivatives, effective for annual periods beginning on or after 1 June Management do not expect the interpretation to be relevant for the Group; IFRIC 10, Interim Financial Reporting and Impairment, effective for annual periods beginning on or after 1 November The Interpretation states that an entity should not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. Management do not expect the interpretation to be relevant for the Group; and F-11 7

142 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Accounting Policies and Critical Accounting Estimates and Judgements (Continued) IFRS 7, Financial instruments: Disclosures, and a complementary Amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures, both effective for annual periods beginning on or after 1 January The Group currently is assessing the impact of IFRS 7 and the amendment to IAS 1 on its consolidated financial statements. The Group will apply IFRS 7 and the amendment to IAS 1 from annual periods beginning 1 January Due from Other Banks In thousands of Russian Roubles 30 June 2006 (unaudited) 31 December 2005 Reverse sale and repurchase agreements with other banks Term placements with other banks Overdue placements with other banks Less: Provision for impairment of due from other banks (14 480) (7 970) Total due from other banks Movements in the provision for impairment of due from other banks are as follows: In thousands of Russian Roubles 30 June 2006 (unaudited) Provision for impairment of due from other banks at 1 January Provision for impairment of due from other banks during the period Effect of translation to presentation currency (420) Provision for impairment of due from other banks at 30 June (unaudited) At 30 June 2006 term placements with other banks totalling RR thousand (31 December 2005: RR thousand) have been pledged to third parties as collateral with respect to term placements of other banks. Refer to Note 9. At 30 June 2006 the estimated fair value of due from other banks was RR thousand (31 December 2005: RR thousand). F-12 8

143 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Loans and Advances to Customers In thousands of Russian Roubles 30 June 2006 (unaudited) 31 December 2005 Current loans Reverse sale and repurchase agreements Overdue loans Less: Provision for loan impairment ( ) ( ) Total loans and advances to customers Movements in the provision for loan impairment are as follows: In thousands of Russian Roubles 30 June 2006 (unaudited) Provision for loan impairment at 1 January Provision for loan impairment during the period Loans and advances to customers written off during the period as uncollectible (1 760) Effect of translation to presentation currency (8 979) Provision for loan impairment at 30 June (unaudited) At 30 June 2006 the estimated fair value of loans and advances to customers was RR thousand (31 December 2005: RR thousand). 7 Other Borrowed Funds In thousands of Russian Roubles 30 June 2006 (unaudited) 31 December 2005 Eurobonds Syndicated loans Term borrowings Total other borrowed funds In March 2006 the Group issued US Dollar denominated Eurobonds with a nominal value of USD thousand. The bonds carry a fixed nominal interest rate of 8.0% per annum and mature in March At 30 June 2006 the effective interest rate was 8.7%. A syndicated loan in the amount of USD thousand was received by the Group in October 2005 from two Croatian banks. This loan has maturity date in October 2010 and interest rate of 6 month LIBOR plus 1.3%. At 30 June 2006 the effective interest rate was 8.9% (31 December 2005: 8.2%). A syndicated loan in the amount of USD thousand was received by the Group in June 2006 from the same Croatian banks mentioned above. This loan has maturity date in June 2011 and interest rate of 6 month LIBOR plus 1.3%. At 30 June 2006 the effective interest rate was 7.3%. A syndicated loan in the amount of USD thousand was received by the Group in April 2006 from a consortium of foreign banks. This loan has maturity date in April 2007 and interest rate of 3 month LIBOR plus 1.9%. At 30 June 2006 the effective interest rate was 8.7%. F-13 9

144 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Other Borrowed Funds (Continued) At 31 December 2005 a syndicated loan in the amount of USD thousand was received by the Bank in April 2005 from a consortium of foreign banks. This loan had maturity date in April 2006 and interest rate of 6 month LIBOR plus 2.9%. At 31 December 2005 the effective interest rate was 8.6%. The loan was repaid at maturity date. Term borrowings represent funds attracted on the international financial markets by issuance of bonds arranged through a large foreign bank. The bonds had a nominal value of USD thousand and were issued by the Group in February 2004 at par value, contractual interest rate of 9.0% and maturity date of February In November 2004 part of the securities with a nominal value of USD thousand were claimed by holders for early redemption and were repaid by the Group in connection with notification of bond holders on changes in the shareholding structure of the Bank. Refer to Note 1. At 30 June 2006 the effective interest rate was 10.1% (31 December 2005: 10.1%). At 30 June 2006 the estimated fair value of other borrowed funds was RR thousand (31 December 2005: RR thousand). 8 Segment Analysis The Group s primary format for reporting segment information is business segments. The Group is organised on a basis of three main business segments: Retail banking representing private banking services, private customer current accounts, savings, deposits, custody, plastic cards, consumer loans and mortgages. Corporate banking representing current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products. Other this segment includes other operations not included in the above categories. The Group does not have an internal management accounting system for reallocation of funds and/or operating expenses between the segments. Funds are allocated between segments free of charge. Segment information for the main reportable business segments of the Group for the six months ended 30 June 2006 and at 31 December 2005 is set out below: F-14 10

145 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Segment Analysis (Continued) In thousands of Russian Roubles Retail banking Corporate banking Other Total Six months ended 30 June 2006 (unaudited) External revenues Segment results ( ) Unallocated costs ( ) Profit before tax Income tax expense ( ) Profit for the period Other segment items Capital expenditure Depreciation charge (12 705) ( ) (426) ( ) At 30 June 2006 (unaudited) Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities At 31 December 2005 Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities External revenues comprise interest income, gains less losses from trading securities, losses net of gains from derecognition of investment securities available for sale, gains less losses from trading in foreign currencies, fee and commission income and other operating income. Unallocated costs in the tables above totalling RR thousand for the six months ended 30 June 2006 represent administrative and other operating expenses and foreign exchange translation results of the Group. F-15 11

146 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and internal professional advice the Management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in this interim condensed consolidated financial information. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Russian transfer pricing legislation introduced 1 January 1999 provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, and all cross-border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. The arbitration court practice with this respect is contradictory. The Group s Management believes that its interpretation of the relevant legislation is appropriate and the Group s tax, currency legislation and customs positions will be sustained. Accordingly, at 30 June 2006 no provision for potential tax liabilities had been recorded (31 December 2005: no provision). Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under noncancellable operating leases are as follows: In thousands of Russian Roubles 30 June 2006 (unaudited) 31 December 2005 Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total operating lease commitments Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. F-16 12

147 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Contingencies and Commitments (Continued) The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows: In thousands of Russian Roubles 30 June 2006 (unaudited) 31 December 2005 Guarantees issued Import letters of credit Letters of credit with settlements in the Russian Federation Export letters of credit Total credit related commitments Import letters of credit include only import letters of credit without collateral. In addition, the Group had outstanding collateralised import letters of credit in the amount of RR thousand (31 December 2005: RR thousand). Deposits of the same amount are held as collateral for these import letters of credit and are recorded in customer accounts. As at 30 June 2006 the Group also had commitments in relation to unused credit lines totalling RR thousand (31 December 2005: RR thousand), which includes non-cancellable commitments on overdrafts totalling RR thousand (31 December 2005: RR thousand). The total outstanding contractual amount of guarantees and letters of credit does not necessarily represent future cash requirements, as these undrawn credit lines may expire or terminate without being funded. Trust activities. The Group provides asset management services to its customers. Managed assets held by the funds are not included in the Group s interim condensed consolidated balance sheet as they are not assets of the Group. The assets managed by the Group are disclosed at their fair value and fall into the following categories: In thousands of Russian Roubles 30 June 2006 (unaudited) 31 December 2005 Corporate shares Federal loan bonds (OFZ) Corporate bonds Municipal bonds Credit-linked notes Eurobonds of Russian Federation Cash Other Total assets in trust Fiduciary assets. These assets are held in the name of the Bank or other group companies on behalf of customers and are not assets of the Group. Nominal values disclosed below are normally different from the fair values of the respective securities. The fiduciary assets fall into the following categories: In thousands of Russian Roubles 30 June 2006 (unaudited) Nominal value 31 December 2005 Nominal value Corporate shares State securities of foreign countries Promissory notes Corporate bonds OFZ Municipal bonds and Bonds of Russian Federation regions F-17 13

148 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Contingencies and Commitments (Continued) Assets pledged and restricted. At 30 June 2006 the Group has the following assets pledged as collateral: In thousands of Russian Roubles 30 June 2006 (unaudited) 31 December 2005 Asset pledged Note Asset pledged Related liability Related liability Trading securities pledged for the credit limit of CBRF Trading securities under sale and repurchase agreements Term placements of other banks Total At 30 June 2006 OFZ securities with the fair value of RR thousand (31 December 2005: RR thousand) have been pledged to the Central Bank of the Russian Federation for the credit limit opened by the CBRF to the Bank. At 30 June 2006 the Group had no deposits from the Central Bank of the Russian Federation attracted within this credit limit (31 December 2005: nil). Mandatory cash balances with central banks in the amount of RR thousand (31 December 2005: RR thousand) represent mandatory reserve deposits which are not available to finance the Group s day to-day operations. 10 Related Party Transactions Parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. As set out in Note 1, the main shareholder of the Group is the financial group IFD Capital. A majority stake in IFD Capital Group is beneficially owned by Mr. Alekperov and Mr. Fedun (the ultimate beneficiaries ) and is managed by a professional asset management company, which is not owned by the ultimate beneficiaries. Transactions with related parties are entered into in the normal course of business with significant shareholders of the Bank, ultimate beneficiaries, directors and companies with which the Bank has significant shareholders in common. These transactions include settlements, loans, deposit taking, guarantees, trade finance and foreign currency transactions. F-18 14

149 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Related Party Transactions (Continued) At 30 June 2006 and 31 December 2005, the outstanding balances with related parties were as follows: 30 June 2006 (unaudited) 31 December 2005 In thousands of Russian Roubles Shareholders Other Shareholders Other Correspondent accounts and overnight placements with other banks Correspondent accounts and overnight placements with other banks (contractual interest rate: 30 June 2006: 0.0%; 31 December 2005: 0.0%) Trading securities Loans and advances to customers Loans and advances (contractual interest rate: 30 June 2006: 9.0%-16.5%; 31 December 2005: 7.0%- 13.0%) Provision for loan impairment (1 353) (12 049) (1 728) (10 292) Debt investment securities available for sale Debt investment securities available for sale (contractual interest rate: 30 June 2006: 0.0%- 14.0%; 31 December 2005: 0.0%-14.0%) Equity investment securities available for sale Due to other banks Correspondent accounts and overnight placements of other banks (contractual interest rate:30 June 2006: 0.1%; 31 December 2005: 0.1%) Term placements of other banks (contractual interest rate: 31 December 2005: 9.6%) Customer accounts Current/settlement accounts (contractual interest rate: 30 June 2006: 0.0%; 31 December 2005: 0.0%) Term deposits outstanding (contractual interest rate: 30 June 2006: 0.0%-10.0%; 31 December 2005: 2.0%-9.3%) Debt securities issued Debt securities issued (contractual interest rate: 30 June 2006: 0.0%-11.0%; 31 December 2005: 0.0%-10.4%) At 30 June 2006 and 31 December 2005, other rights and obligations with related parties were as follows: 30 June 2006 (unaudited) 31 December 2005 In thousands of Russian Roubles Shareholders Other Shareholders Other Guarantees issued by the Group Guarantees received by the Group Letters of credit with settlements in the Russian Federation Assets in trust The income and expense items with related parties for the six-months period ended 30 June 2006 were as follows: F-19 15

150 Bank Petrocommerce Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Related Party Transactions (Continued) 30 June 2006 (unaudited) In thousands of Russian Roubles Shareholders Other Interest income: - Loans to customers Debt investment securities available for sale Interest expense: - Due to other banks - (12) - Customer accounts ( ) ( ) - Debt securities issued (123) (3 968) Gains less losses from trading securities Gains less losses from derecognition of investment securities available for sale Gains less losses from trading in foreign currencies Fee and commission income Fee and commission expense (9) (51) Aggregate amounts lent to and repaid by related parties during six months ended 30 June 2006: 30 June 2006 (unaudited) In thousands of Russian Roubles Shareholders Other Amounts lent to related parties during the period Amounts repaid by related parties during the period The Shareholders column in the table mainly represents IFD Capital and its ultimate beneficiaries and companies which are controlled by IFD Capital Group and have direct ownership in the Bank. The Other column in the table mainly represents companies that are not shareholders of the Bank, but are controlled by Lukoil Group or IFD Capital Group. As at 30 June 2006 included in customer accounts are amounts of RR thousand (31 December 2005: RR thousand) belonging to the ultimate beneficiaries of IFD Capital Group. Interest expense for the period on these customer accounts comprised RR thousand. In the six-month period ended 30 June 2006, the remuneration of the Management Board members comprised salaries, discretionary bonuses and other short-term benefits totalling RR thousand. 11 Principal Subsidiaries Name Nature of business Percentage of the Bank s direct ownership Percentage of Group s control Country of incorporation Komi Regional Bank UKHTABANK Banking Russia Petrocommerce-Ukraine Bank Banking Ukraine Stavropolpromstroybank Banking Russia UNIBANK Banking Moldova In March 2006 the Group increased its control over Petrocommerce-Ukraine Bank from 90.83% to 95.30%. F-20 16

151 Bank Petrocommerce Group Consolidated Financial Statements and Auditors Report 31 December 2005 F-21

152 CONTENTS Auditors Report Consolidated Financial Statements Consolidated Balance Sheet...1 Consolidated Income Statement...2 Consolidated Statement of Changes in Equity...3 Consolidated Statement of Cash Flows...4 Notes to the Consolidated Financial Statements 1 Introduction Operating Environment of the Group Basis of Preparation and Significant Accounting Policies Critical Accounting Estimates and Judgements in Applying Accounting Policies Adoption of New or Revised Standards and Interpretations New Accounting Pronouncements Cash and Cash Equivalents Trading Securities Due from Other Banks Loans and Advances to Customers Investment Securities Available for Sale Premises and Equipment Other Assets Due to Other Banks Customer Accounts Debt Securities in Issue Other Borrowed Funds Other Liabilities Share Capital Retained Earnings Interest Income and Expense Fee and Commission Income and Expense Administrative and Other Operating Expenses Income Taxes Dividends Segment Analysis Financial Risk Management Contingencies and Commitments Derivative Financial Instruments Fair Value of Financial Instruments Related Party Transactions Principal Subsidiaries...48 F-22

153 F-23

154 F-24

155 Bank Petrocommerce Group Consolidated Income Statement In thousands of Russian Roubles Note Interest income Interest expense 21 ( ) ( ) Net interest income Provision for loan impairment 9, 10 ( ) ( ) Net interest income after provision for loan impairment Gains less losses from trading securities Gains less losses arising from investment securities available for sale Gains less losses from trading in foreign currencies Foreign exchange translation losses net of gains ( ) (56 957) Fee and commission income Fee and commission expense 22 ( ) ( ) Losses arising from early retirement of debt 17 - (25 839) Other operating income Operating income Administrative and other operating expenses 23 ( ) ( ) Profit before tax Income tax expense 24 ( ) ( ) Profit for the year Profit is attributable to: Equity holders of the Bank Minority interest Profit for the year The notes set out on pages 5 to 48 form an integral part of these consolidated financial statements. 2 F-25

156 Bank Petrocommerce Group Consolidated Statement of Changes in Equity In thousands of Russian Roubles Note Share capital Attributable to equity holders of the Bank Treasury Fair value Retained shares reserve for earnings investment securities available for sale Total Minority interest Total equity Balance at 1 January ( ) Available for sale investments: - Fair value gains less losses (80) Disposals - - ( ) - ( ) (340) ( ) Income tax recorded directly in equity Other movements (8 085) (8 085) (818) (8 903) Net loss recognised directly in equity - - (8 553) (8 085) (16 638) (818) (17 456) Profit for the year Total recognised income - - (8 553) Acquisition of treasury shares 19 - (3 664) (2 647) - (2 647) Dividends declared: - Ordinary shares ( ) ( ) - ( ) - Preference shares ( ) ( ) - ( ) Balance at 31 December ( ) Available for sale investments: - Fair value gains less losses (1 935) Disposals - - ( ) - ( ) ( ) Income tax recorded directly in equity (133) Other movements - - (1 711) Net loss recognised directly in equity - - (80 800) (75 838) 198 (75 640) Profit for the year Total recognised income - - (80 800) Disposal of treasury shares (32 888) Dividends declared: - Ordinary shares ( ) ( ) - ( ) - Preference shares ( ) ( ) - ( ) Balance at 31 December (9 691) The notes set out on pages 5 to 48 form an integral part of these consolidated financial statements. 3 F-26

157 Bank Petrocommerce Group Consolidated Statement of Cash Flows In thousands of Russian Roubles Note Cash flows from operating activities Interest received Interest paid ( ) ( ) Income received from trading in trading securities Income received from trading in foreign currencies Fees and commissions received Fees and commissions paid ( ) ( ) Other operating income received Administrative and other operating expenses paid ( ) ( ) Income tax paid ( ) ( ) Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities Net (increase)/decrease in mandatory cash balances with central banks ( ) Net increase in trading securities ( ) ( ) Net (increase)/decrease in due from other banks ( ) Net increase in loans and advances to customers ( ) ( ) Net decrease in other assets Net increase in due to other banks Net increase in customer accounts Net increase/(decrease) in debt securities in issue ( ) Net increase/(decrease) in other liabilities (94 195) Net cash (used in)/provided from operating activities ( ) Cash flows from investing activities Acquisition of investment securities available for sale ( ) ( ) Proceeds from disposal of investment securities available for sale Acquisition of premises and equipment 12 ( ) ( ) Proceeds from disposal of premises and equipment Dividend income received Net cash used in investing activities (45 432) ( ) Cash flows from financing activities Proceeds from other borrowed funds Repayment of other borrowed funds - ( ) Acquisition of treasury shares 19 - (2 647) Disposal of treasury shares Dividends paid 25 ( ) ( ) Net cash from financing activities Effect of exchange rate changes on cash and cash equivalents (16 407) ( ) Net (decrease)/increase in cash and cash equivalents ( ) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes set out on pages 5 to 48 form an integral part of these consolidated financial statements. F-27 4

158 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Introduction These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2005 for OAO Bank Petrocommerce (the Bank ) and its subsidiaries (together referred to as the Group or Bank Petrocommerce Group ). The activities of the Group are regulated by the Central Bank of the Russian Federation (the CBRF ), legislation of the Russian Federation and countries in which the subsidiaries are registered. The Bank is an open joint-stock commercial bank owned by shareholders whose liability is limited. The Bank was established in the Russian Federation as a partnership in 1992 and was granted its general banking licence on 6 September In March 2000, the Bank changed its legal status from a partnership to an open joint stock company. The principal activities of the Bank include deposit taking and commercial lending, support of clients export/import transactions, foreign exchange, securities trading and trading in derivative financial instruments. The Bank s operations are conducted in both Russian and international markets. On 24 May 2004, the Bank applied for participation in the State deposit insurance scheme, which was introduced by Federal Law No. 177-FZ On Insurance of Individuals Deposits with Banks of the Russian Federation dated 23 December In July-August 2004, the CBRF reviewed the Bank s compliance with requirements of the State deposit insurance programme. On the basis of the CBRF s decision, on 11 January 2005 the Bank became a participant in the State deposit insurance programme. The State deposit insurance scheme implies that the State Deposit Insurance Agency will guarantee repayment of individual deposits up to RR 100 thousand (approximately US Dollars 3 thousand) per individual in case of the withdrawal of a license of a bank or a CBRF imposed moratorium on payments. The Bank s office is registered at the following address: Petrovka 24, Moscow, Russia As at 31 December 2005 the Bank had 18 branches (2004: 19 branches) in the Russian Federation. The average number of the Bank s employees during the year was (2004: 1 905). In 2004 the Bank s main shareholder changed. OAO LUKOIL, a major Russian oil company, which was the Bank s main shareholder, sold a controlling block of ordinary shares ( ordinary shares), accounting for 78.07% of the Bank s voting shares, to the financial group IFD Capital. IFD Capital is primarily focused on operations in Russia and participates in the following businesses: trading and brokerage activities, trust activities, investment advisory services, administration of pension funds and the provision of insurance services within the Russian Federation. IFD Capital and OAO LUKOIL also concluded a preliminary agreement on the sale and purchase of an additional ordinary shares of the Bank before 1 July 2007 for certain consideration. In October 2005 this preliminary agreement was cancelled. In December 2005 an open tender for the right to purchase ordinary shares of the Bank was announced. Based on the results of the tender, IFD Capital obtained the right to purchase these shares. In May 2006 sale-purchase agreements have been signed by the parties and May 2006 owneship rights on ordinary shares of the Bank have been transferred to IFD Capital. The main subsidiaries of Bank Petrocommerce Group are the following: OAO Komi Regional Bank Ukhtabank, ZAO Bank Petrocommerce-Ukraine, Stavropolpromstroybank - OAF and ACB UNIBANK S.A. Refer to Note 32. Below is a description of the main activity of the principal subsidiaries. Joined-Stock Company Komi Regional Bank Ukhtabank ( Ukhtabank ) is a commercial bank owned by shareholders whose liability is limited. The Bank s principal business activity is commercial and retail banking operations, operations with securities and foreign exchange within the Russian Federation. The Bank has operated under a banking license issued by the CBRF since The head office of Ukhtabank is located at the following address: Russia, , Komi Republic, Ukhta, Oktyabrskaya str., 14. At 31 December 2005 Ukhtabank had six branches within the Russian Federation (2004: six branches). The average number of employees of Ukhtabank during the year was 498 (2004: 455). The controlling block of shares of Ukhtabank was acquired by the Group in F-28 5

159 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Introduction (Continued) ZAO Bank Petrocommerce-Ukraine ( Petrocommerce-Ukraine ) was registered on 26 September 1996 in Ukraine by the National Bank of Ukraine as a joint-stock company under the name Aviatekbank. In January 2002, Aviatekbank was acquired by the Group and in February 2002 it was renamed as ZAO Bank Petrocommerce- Ukraine. The current banking licence #108-1 was received by Petrocommerce-Ukraine on 9 April Petrocommerce-Ukraine s main activities include provision of banking services to companies representing various economic sectors, state bodies and individuals. These services include deposit taking, loans, investments in securities and execution of payments in Ukraine and abroad. Petrocommerce-Ukraine s head office is located in Kiev. At 31 December 2005 Petrocommerce-Ukraine also had four branches in Ukraine (2004: four branches). The average number of employees of Petrocommerce-Ukraine during the year was 482 (2004: 480). Joint-Stock Investment Commercial Industrial and Construction Bank Stavropolie, an open joint-stock company (hereinafter, Stavropolpromstroybank ), was created in December 1991 as the Commercial Bank Stavropolie as a result of restructuring of commercial bank Stavropolye previously founded on 26 December In March 1996 the Bank changed its legal form and became an open joined-stock company. In May 2002, Stavropolpromstroybank was aquired by the Group. Stavropolpromstroybank has banking licence #1288. Stavropolpromstroybank s main activities include deposit taking, loans, cash and settlement services to clients and transactions with securities and foreign currencies. Stavropolpromstroybank s head office is located in Stavropol. As at 31 December 2005 Stavropolpromstroybank had seven branches in the Russian Federation (2004: seven branches). The average number of employees of Stavropolpromstroybank during the year was 558 (2004: 513). Commercial Bank Unibank S.A. ( Unibank ) was established in the Republic of Moldova on August In December 2002 it became a subsidiary of the Bank. Unibank has a type B licence for all types of banking activities excluding trust activities. Unibank s main activities include deposit taking, loans, cash and settlement services to clients and transactions with securities. The head office of Unibank is located in Kishinev. As at 31 December 2005 Unibank had five branches in the Republic of Moldova (2004: five branches). The average number of employees of Unibank during the year was 222 (2004: 201). Presentation currency. These consolidated financial statements are presented in thousands of Russian Roubles ("RR thousands"). In the normal course of business the Group enters into transactions with its related parties. These transactions include, but are not limited to, settlements, loans, deposit taking, guarantees, trade finance and foreign currency transactions. As at 31 December 2005, a substantial portion of the Group s liabilities (24% of total liabilities) (2004: 33% of total liabilities) are due to related parties and a significant component of the Group s income and expense are derived from activities with related parties. Refer to Note Operating Environment of the Group The Russian Federation displays certain characteristics of an emerging market, including the existence of a currency that is not freely convertible in most countries outside of the Russian Federation, restrictive currency controls, relatively high inflation and economic growth. The banking sector in the Russian Federation is sensitive to adverse fluctuations in confidence and economic conditions. The Russian economy occasionally experiences falls in confidence in the banking sector accompanied by reductions in liquidity. Management is unable to predict economic trends and developments in the banking sector and what effect, if any, a deterioration in the liquidity of or confidence in the Russian banking system could have on the financial position of the Group. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations, and changes, which can occur frequently. 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 future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. Operating environment in Ukraine and the Republic of Moldova where the Group operates is broadly comparable to that of the Russian Federation described above. F-29 6

160 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies Basis of Preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) under the historical cost convention, as modified by revaluation of investment securities available for sale, trading securities and derivatives. The Bank maintains its accounting records in accordance with Russian banking regulations. Subsidiaries maintain their accounting records in accordance with Russian accounting regulations or applicable companies law in respective jurisdictions. These consolidated financial statements have been prepared from the accounting records of the constituent entities of the Group and adjusted as necessary in order to be in accordance with IFRS. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. Refer to Note 5. Consolidated financial statements. Subsidiaries are those companies and other entities (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The date of exchange is the acquisition date where a business combination is achieved in a single transaction, and is the date of each share purchase where a business combination is achieved in stages by successive share purchases. The excess of the cost of acquisition over the acquirer s share of the fair value of the net assets of the acquiree at each exchange transaction is recorded as goodwill. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any minority interest. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Bank and all of its subsidiaries use uniform accounting policies consistent with the Group s policies. Minority interest is that part of the net results and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Bank. Minority interest forms a separate component of the Group s equity. Other movements in the consolidated statement of changes in equity include the result of net assets revaluation arising on the consolidation of the Group s subsidiaries whose functional currency differs from the Group s functional currency (Russian Rouble). Cumulative balance of currency translation differences recorded in equity at 31 December 2005 amounted to a loss of RR thousand. Special Purpose Entities. Judgement is required to determine whether the substance of the relationship between the Group and a special purpose entity indicates that the special purpose entity is controlled by the Group. In assessing ability of the Group to control the special purpose entities management takes into consideration the factors presented in SIC 12 Consolidation - Special Purpose Entities, such as the SPE conducting activities on behalf of the Group and whether the Group obtains majority of the benefits of the SPE s operations. Key measurement terms. Depending on their classification financial instruments are carried at cost, fair value, or amortised cost as described below. F-30 7

161 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies (Continued) Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm s length basis. In other than active markets, the most recent arms length transactions are the basis of current fair values. Recent transaction prices are appropriately adjusted if they do not reflect current fair values, for example because the transaction was a distress sale. Fair value is not the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount, are not presented separately and are included in the carrying values of related balance sheet items. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate (refer to income and expense recognition policy). Initial recognition of financial assets. Trading securities and derivatives are initially recorded at fair value. All other financial assets are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial instruments that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a financial instrument. All other purchases and sales are recognised when the entity becomes a party to the contractual provisions of the instrument. 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 placements, are included in due from other banks. Amounts, which relate to funds that are of a restricted nature, are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. Mandatory cash balances with central banks. Mandatory cash balances with the Central Bank of the Russian Federation and other central banks are carried at amortised cost and represent non-interest bearing mandatory reserve deposits which are not available to finance the Group s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated cash flow statement. F-31 8

162 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies (Continued) Trading securities. Trading securities are securities, which are either acquired for generating a profit from shortterm fluctuations in price or trader s margin, or are securities included in a portfolio in which a pattern of short-term trading exists. The Group classifies securities into trading securities if it has an intention to sell them within a short period after purchase, i.e. within twelve months. Trading securities are not reclassified out of this category even when the Group s intentions subsequently change. Trading securities are carried at fair value. Interest earned on trading securities calculated using the effective interest method is presented in the consolidated income statement as interest income. Dividends are included in operating income when the Group s right to receive the dividend payment is established. All other elements of the changes in the fair value and gains or losses on derecognition are recorded in profit or loss as gains less losses from trading securities in the period in which they arise. Due from other banks. Amounts due from other banks are recorded when the Group advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. Loans and advances to customers. Loans and advances to customers are recorded when the Group advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of Management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. Impairment losses are recognised through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. After a loan has been written down as a result of impairment, interest income is then recognised using the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss. Uncollectable assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. F-32 9

163 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies (Continued) Credit related commitments. In the normal course of business, the Group enters into credit related commitments, including letters of credit, guarantees and undrawn credit lines. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Premiums received for the financial guarantees are amortised on a straight line basis during the life of the guarantee. In determining the amount of provision for financial guarantees Management uses best estimates of the expenditures required to settle the obligations arising at the reporting date. The estimates of outcome and financial effect are determined based on experience of similar transactions and history of past losses supplemented by the judgement of Management. Investment securities available for sale. This classification includes investment securities which the Group intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The Group classifies investments as available for sale at the time of purchase and reassesses that classification at each subsequent balance sheet date. Investment securities available for sale are carried at fair value. Interest income on available for sale debt securities is calculated using the effective interest method and recognised in profit or loss. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Group s right to receive payment is established. All other elements of changes in the fair value are deferred in equity until the investment is derecognised or impaired, at which time the cumulative gain or loss is removed from equity to profit or loss. Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of investment securities available for sale. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss is removed from equity and recognised in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through current period s profit or loss. Sale and repurchase agreements and lending of securities. Sale and repurchase agreements ( repo agreements ) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are not derecognised. The corresponding liability is presented within amounts due to other banks. Securities purchased under agreements to resell ( reverse repo agreements ) are recorded as due from other banks. The difference between the sale and repurchase price is treated as interest income and accrued over the life of repo agreements using the effective interest method. Promissory notes purchased. Promissory notes purchased are included in trading securities, in due from other banks or in loans and advances to customers, depending on their substance and are recorded, subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets. Derecognition of financial assets. The Group derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (ii) the Group has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Group has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. F-33 10

164 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies (Continued) Premises and equipment. Premises and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 31 December 2002 for assets acquired prior to 1 January 2003, less accumulated depreciation and provision for impairment, where required. Construction in progress is carried at cost less provision for impairment where required. Upon completion, assets are transferred to premises and equipment at their carrying amount. Construction in progress is not depreciated until the asset is available for use. Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of premises and equipment items are capitalised and the replaced part is retired. If impaired, premises and equipment are written down to the higher of their value in use and fair value less costs to sell. The decrease in carrying amount is charged to profit or loss. An impairment loss recognised for an asset in prior periods is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. Depreciation. Land is not depreciated. Depreciation on other items of premises and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives at the following annual rates: Premises Office and computer equipment 2% per annum; and 20-33% per annum. The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments, including those on expected termination, are charged to profit or loss on a straight-line basis over the period of the lease. Due to other banks. Amounts due to other banks are recorded when money or other assets are advanced to the Group by counterparty banks. The non-derivative liability is carried at amortised cost. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. Debt securities in issue. Debt securities in issue include promissory notes, deposit and savings certificates and bonds issued by the Group. Debt securities are stated at amortised cost. Other borrowed funds. Other borrowed funds represent medium and long-term funds attracted by the Group on the international financial markets. Other borrowed funds are carried at amortised cost. If the Group purchases its other borrowed funds, they are removed from the consolidated balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. Derivative financial instruments. Derivative financial instruments, including foreign exchange contracts, are carried at their fair value. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss as either gains less losses arising from trading in foreign currency or gains less losses arising from trading securities depending on the related contracts. The Group does not apply hedge accounting. F-34 11

165 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies (Continued) Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with applicable legislation enacted or substantively enacted by the balance sheet date. The income tax charge comprises current tax and deferred tax and is recognised in the consolidated income statement except if it is recognised directly in equity because it relates to transactions that are also recognised, in the same or a different period, directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorised prior to filing relevant tax returns. Taxes, other than on income, are recorded within administrative and other operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded in the consolidated balance sheet only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Deferred income tax is provided on post acquisition retained earnings of subsidiaries, except where the Group controls the subsidiary s dividend policy and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future. Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued 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. Trade and other payables. Trade payables are accrued when the counterparty performed its obligations under the contract and are carried at amortised cost. Preference shares. Preference shares are classified as equity as they are not redeemable and with discretionary dividends. Treasury shares. Where the Bank or its subsidiaries purchase the Bank s equity instruments, the consideration paid including any attributable incremental costs net of income taxes is deducted from equity attributable to the equity holders of the Bank until they are cancelled or disposed of. Where such shares are subsequently disposed or reissued, any consideration received is included in equity. Dividends. Dividends are recorded in equity in the period in which they are declared. Dividends declared after the balance sheet date and before the financial statements are authorised for issue are disclosed in the subsequent events note. The statutory accounting reports of the Bank are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the current year net profit. Income and expense recognition. Interest income and expense are recorded in the consolidated income statement for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. F-35 12

166 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies (Continued) Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan commitments as financial liabilities at fair value through profit or loss. When loans and other debt instruments become doubtful of collection, they are written down to present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, which are earned on execution of the underlying transaction are recorded on its completion. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-proportion basis. Foreign currency translation. Functional currency of each of the Group s consolidated entities is the currency of the primary economic environment in which the entity operates. The Bank s functional currency and the Group s presentation currency is the national currency of the Russian Federation, Russian Roubles ( RR ). Monetary assets and liabilities are translated into each entity s functional currency at the official exchange rate at the respective balance sheet dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into each entity s functional currency at year-end official exchange rates are recognised in profit or loss. Translation at year-end rates does not apply to non-monetary items. Effects of exchange rate changes on the fair value of equity securities are recorded as part of the fair value gain or loss. The results and financial position of each group entity (functional currency of none of which is a currency of a hyperinflationary economy) are translated into the presentation currency as follows: (I) (II) (III) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised in equity. When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the exchange differences deferred in equity are reclassified to profit or loss. At 31 December 2005 the principal rate of exchange used for translating foreign currency balances was USD 1 = RR (2004: USD 1 = RR ). Exchange restrictions and controls exist relating to converting Russian Roubles into other currencies. At present, the Russian Rouble is not a freely convertible currency in most countries outside of the Russian Federation. F-36 13

167 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Basis of Preparation and Significant Accounting Policies (Continued) Fiduciary assets and trust activities. Assets and liabilities held by the Group in its own name, but on the account of third parties, are not reported on the consolidated balance sheet. The extent of such balances and transactions is indicated in Note 28. For the purposes of disclosure, fiduciary activities do not encompass safe custody functions. Commissions received from fiduciary or trust activities are presented in fee and commission 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. Accounting for the effects of hyperinflation. The Russian Federation has previously experienced relatively high levels of inflation and was considered to be hyperinflationary as defined by IAS 29 Financial Reporting in Hyperinflationary Economies ( IAS 29 ). IAS 29 requires that the consolidated financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. It states that reporting operating results and financial position in the local currency without restatement is not useful because money loses purchasing power at such a rate that the comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading. The characteristics of the economic environment of the Russian Federation indicate that hyperinflation has ceased effective from 1 January Restatement procedures of IAS 29 are therefore only applied to assets acquired or revalued and liabilities incurred or assumed prior to that date. For these balances, the amounts expressed in the measuring unit current at as 31 December 2002 are the basis for the carrying amounts in these consolidated financial statements. The restatement was calculated using the conversion factors derived from the Russian Federation Consumer Price Index ( CPI ), published by the Russian Statistics Agency, and from indices obtained from other sources for years prior to Staff costs and related contributions. Wages, salaries, contributions to state pension and social insurance funds, paid annual leave and sick leave and bonuses are accrued in the year in which the associated services are rendered by the employees of the Group. Segment reporting. A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. Segments with a majority of revenue earned from sales to external customers and whose revenue, result or assets are ten percent or more of all the segments are reported separately. Geographical segments of the Group have been reported separately within the consolidated financial statements based on the geographical location of customers, assets and liabilities of the counterparty, i.e. based on economic risk rather than legal risk of the counterparty. Changes in presentation. Where necessary, corresponding figures have been adjusted to conform with changes in the presentation of the current year. These consolidated financial statements were approved for issue on 24 May 2006 and further changes require approval of the body that gave that authorisation. 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: F-37 14

168 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued) Impairment of available for-sale equity investments. The Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgement, the Group evaluates among other factors, the volatility in share price. In addition, impairment may be appropriate when there is evidence of a deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational or financing cash flows. Had all the declines in fair value below cost been considered significant or prolonged, the Group would suffer an additional loss of RR thousand at 31 December Impairment losses on loans and advances. The Group regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in the consolidated income statement, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations. Refer to Note 28. 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 an active 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 determine the estimated fair value. The Group s operating environment continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair value. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analyses. 5 Adoption of New or Revised Standards and Interpretations Certain new IFRSs became effective for the Group from 1 January Listed below are those new or amended standards or interpretations which are or in the future could be relevant to the Group s operations and the nature of their impact on the Group s accounting policies. All changes in accounting policies were applied retrospectively described below. IAS 1 (revised 2003) Presentation of Consolidated Financial Statements. Minority interest is now presented as equity and the Group discloses on the face of the consolidated income statement profit for the period and the allocation of that amount between profit attributable to minority interest and profit attributable to equity holders of the Bank. Certain new disclosures and changes in presentation required by the revised standard were made in these consolidated financial statements. IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and Errors. The Group now applies all voluntary changes in accounting policies retrospectively. Comparatives are amended in accordance with the new policies. All material errors are now corrected retrospectively in the first set of consolidated financial statements after their discovery. F-38 15

169 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Adoption of New or Revised Standards and Interpretations (Continued) IAS 10 (revised 2003) Events after the Balance Sheet Date. The standard was amended to include a limited clarification that if an entity declares dividends after the balance sheet date, the entity should not recognise those dividends as a liability at the balance sheet date. This is consistent with the policies applied by the Group. IAS 16 (revised 2003) Property, Plant and Equipment. The residual value is now defined as the amount that the Group estimates it would receive currently for the asset if the asset were already of the age and in the condition expected at the end of its useful life. The Group s policy is now not to cease depreciating assets during temporary periods when the assets are idle. All changes to accounting policies as a result of the revised IAS 16 were accounted for retrospectively and did not result in a significant effect on the carrying amount of the Group s assets. IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates. The term functional currency replaced measurement currency. Only one translation method is now applied to all foreign operations - namely that described in the previous version of IAS 21 as applying to foreign entities. Changes in provisions of this standard did not have any material effect on these consolidated financial statements. IAS 24 (revised 2003) Related Party Disclosures. The definition of related parties was extended and additional disclosures required by the revised standard were made in these consolidated financial statements. IAS 27 (revised 2003) Consolidated and Separate Financial Statements. The Group s policies were changed to remove limited exceptions from consolidation. IAS 27 now requires consolidation of all subsidiaries of the Bank. Changes in provisions of this standard did not have any material effect on these consolidated financial statements. IAS 39 (revised 2003) Financial Instruments: Recognition and Measurement. The definition of originated loans and receivables was amended to become loans and receivables. This category now comprises originated or purchased loans and receivables that are not quoted in an active market. The Group amended its policies for derecognition of financial assets. Under the original IAS 39, several concepts governed derecognition. The revised IAS 39 retains the two main concepts of risks and rewards and control, but clarifies that the evaluation of the transfer of risks and rewards precedes the evaluation of the transfer of control. The Group now applies the guidance added to IAS 39 on how to determine fair values using valuation techniques and how to evaluate impairment in a group of loans. In accordance with the standard s transitional provisions the revised accounting policies are applied retrospectively except for the clarified derecognition rules which are applied prospectively from 1 January Effect of Adoption of New or Revised Standards. The effect of adoption of the above new or revised standards and interpretations on the Group s financial position at 31 December 2005 and 31 December 2004 and on the results of its operations for the years then ended was not significant. 6 New Accounting Pronouncements Certain new standards and interpretations have been published that are mandatory for the Group s accounting periods beginning on or after 1 January 2006 or later periods and which the Group has not early adopted: IAS 39 (Amendment) The Fair Value Option (effective from 1 January 2006). IAS 39 (as revised in 2003) permitted entities to designate irrevocably on initial recognition any financial instrument as one to be measured at fair value with gains and losses recognised in profit or loss ( fair value through profit or loss ). The amendment restricts the ability to designate financial instruments as part of this category. The Group s policy is not to voluntarily designate assets and liabilities at fair value through profit and loss. IAS 39 (Amendment) - Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective from 1 January 2006). The amendment allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in the consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated profit or loss. F-39 16

170 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December New Accounting Pronouncements (Continued) IAS 39 (Amendment) Financial Guarantee Contracts (effective from 1 January 2006). Issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, will have to be initially recognised at their fair value, and subsequently measured at the higher of (i) the unamortised balance of the related fees received and deferred and (ii) the amount recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IFRS 7 Financial Instruments: Disclosures and a complementary Amendment to IAS 1 Presentation of Financial Statements - Capital Disclosures (effective from 1 January 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and some of the requirements in IAS 32, Financial Instruments: Disclosure and Presentation. The Amendment to IAS 1 introduces disclosures about level of an entity s capital and how it manages capital. The Group is currently assessing what impact the new IFRS and the amendment to IAS 1 will have on disclosures in its consolidated financial statements. Other new standards or interpretations. The Group has also not early adopted amendments to IAS 19 (Actuarial Gains and Losses, Group Plans and Disclosures), IAS 21 (Net Investment in a Foreign Operation), the new IFRIC interpretations 4 to 9 (Determining whether an Arrangement contains a Lease; Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds; Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment; Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies; Scope of IFRS 2; Reassesment of Embedded Derivatives), IFRS 6, Exploration for and Evaluation of Mineral Resources and IFRS 1 (Amendment) - First-time Adoption of International Financial Reporting Standards. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Group s consolidated financial statements. 7 Cash and Cash Equivalents In thousands of Russian Roubles Cash on hand Cash balances with central banks (other than mandatory cash balanses) Correspondent accounts and overnight placements with other banks - Russian Federation Other countries Settlement accounts with trading systems Total cash and cash equivalents Geographical, currency and interest rate analyses of cash and cash equivalents are disclosed in Note 27. The information on related party balances is disclosed in Note 31. F-40 17

171 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Trading Securities In thousands of Russian Roubles Corporate shares Federal loan bonds (OFZ) Corporate bonds Corporate Eurobonds Credit-linked notes Russian Federation Eurobonds US Treasury Strip securities Other Total trading securities Corporate shares are quoted shares of large Russian and foreign companies in oil, gas, energy, metallurgical, banking and other sectors. These shares are freely tradable in Russia. OFZ bonds are Russian Rouble denominated government securities issued by the Ministry of Finance of the Russian Federation. OFZ bonds have maturity dates from July 2007 to November 2021 (2004: from July 2005 to July 2010), coupon rates from 6.0% to 10.0% (2004: from 7.5% to 10.0%) and yield to maturity from 5.6% to 6.8% (2004: from 4.6% to 7.3%), depending on the type of bond issue. Corporate bonds are debt securities denominated in Russian Roubles issued by large Russian companies in transport, trading and banking sectors. These bonds have maturity dates from October 2006 to May 2015 (2004: from April 2005 to February 2010), coupon rates from 6.2% to 11.6% (2004: from 7.8% to 16.0%) and yield to maturity from 7.1% to 9.9% (2004: from 6.0% to 19.3%) depending on the type of bond issue. Corporate Eurobonds are debt securities denominated in USD, issued by large Russian companies, and are freely tradable internationally. These bonds have maturity dates from June 2007 to October 2010 (2004: January 2011), coupon rates from 6.9% to 10.9% (2004: 8.9%) and yield to maturity from 6.2% to 10.8% (2004: 8.0%), depending on the type of bond issue. Credit-linked notes are debt securities denominated in USD. These notes are linked to the Russian Federation performance of its payment obligations under the Sovereign Debt Agreements and are freely tradable internationally. These securities have maturity date in October 2014, coupon rate of 9.6% and yield to maturity of 5.4%. Russian Federation Eurobonds are debt securities denominated in USD, issued by the Ministry of Finance of the Russian Federation, and are freely tradable internationally. These bonds have maturity dates from June 2028 to March 2030, coupon rates from 5.0% to12.8% and yield to maturity from 5.6% to 6.0%, depending on the type of bond issue. US Treasury Strip securities represent debt securities issued in the United States of America under Separate Trading of Registered Interest and Principal securities (STRIP) program, and are freely tradable internationally. These bonds mature in February 2011 (2004: February 2011) and have yield to maturity of 4.4% (2004: 4.0%). As at 31 December 2005 included in trading securities are securities pledged under sale and repurchase agreements with the fair value of RR thousand (2004: nil). Refer to Notes 14 and 28. As at 31 December 2005 trading securities with a fair value of RR thousand (2004: RR thousand) have been pledged to the CBRF for the credit limit opened by the CBRF to the Bank. At 31 December 2005 the Group had no deposits from the CBFR attracted within this credit limit (2004: nil). Refer to Note 28. The Bank is licensed by the Federal Commission on Securities Markets for trading in securities. Geographical, currency, maturity and interest rate analyses of trading securities are disclosed in Note 27. The information on trading securities issued by related parties is disclosed in Note Due from Other Banks F-41 18

172 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December 2005 In thousands of Russian Roubles Term placements with other banks Reverse sale and repurchase agreements with other banks Overdue placements with other banks Less: Provision for impairment of due from other banks (7 970) - Total due from other banks Movements in the provision for impairment of due from other banks are as follows: In thousands of Russian Roubles Provision for impairment of due from other banks at 1 January - - Provision for impairment of due from other banks during the year Provision for impairment of due from other banks at 31 December At 31 December 2005 term placements with other banks totalling RR thousand (2004: RR thousand) have been pledged to third parties as collateral with respect to term placements of other banks. Refer to Notes 14 and 28. At 31 December 2004 amounts due from other banks of RR thousand were effectively collateralised by securities purchased under reverse sale and repurchase agreements at a fair value of RR thousand. At 31 December 2005 the estimated fair value of due from other banks was RR thousand (2004: RR thousand). Refer to Note 30. Geographical, currency, maturity and interest rate analyses of due from other banks are disclosed in Note 27. F-42 19

173 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers In thousands of Russian Roubles Current loans Overdue loans Reverse sale and repurchase agreements Less: Provision for loan impairment ( ) ( ) Total loans and advances to customers At 31 December 2005 loans and advances to customers of RR thousand (2004: RR thousand) were effectively collateralised by securities purchased under reverse sale and repurchase agreements with a fair value of RR thousand (2004: RR thousand). Movements in the provision for loan impairment are as follows: In thousands of Russian Roubles Provision for loan impairment at 1 January Provision for loan impairment during the year Loans and advances to customers written off during the year as uncollectible (13 381) (617) Effect of translation to presentation currency (453) Provision for loan impairment at 31 December Economic sector risk concentrations within the customer loan portfolio are as follows: In thousands of Russian Roubles Amount % Amount % Trade Construction and manufacturing Food industry Oil and energy Individuals Transportation Finance sector Other Total loans and advances to customers (before impairment) At 31 December 2005 the estimated fair value of loans and advances to customers was RR thousand (2004: RR thousand). Refer to Note 30. Geographical, currency, maturity and interest rate analyses of loans and advances to customers are disclosed in Note 27. The information on related party balances is disclosed in Note 31. F-43 20

174 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Investment Securities Available for Sale In thousands of Russian Roubles Corporate bonds Promissory notes Municipal bonds and bonds of the Russian Federation s regions Corporate shares Other Total investment securities available for sale Corporate bonds are debt securities mainly denominated in Russian Roubles issued by large Russian companies and banks. At 31 December 2005 these bonds had maturity dates from February 2006 to December 2010 (2004: from April 2005 to December 2009), coupon rates from 8.0% to 18.0% (2004: 5.4% to 16.0% ), and yield to maturity from 4.5% to 19.1% (2004: from 5.9% to 18.7%), depending on the type of bond issue. These bonds are freely tradable in Russia. Promissory notes are debt securities denominated in Russian Roubles issued by large Russian companies and banks. These securities are traded on over-the-counter market. At 31 December 2005 these promissory notes had maturity dates from January 2006 to March 2010 (2004: from January 2005 to December 2005) and yield to maturity from 7.0% to 10.7% (2004: from 10.1% to 15.4%), depending on the type of issue. Municipal bonds and bonds of Russian Federation s regions represent interest bearing securities denominated in Russian Roubles and are tradable on Moscow Interbank Currency Exchange (MICEX), other Russian stock exchanges or on the over-the-counter market. As at 31 December 2005 these securities had maturity dates from July 2006 to December 2010 (2004: August 2005 to December 2014), coupon rates from 9.5% to 14.0% (2004: 2.5% to 16.9%), and yield to maturity from 3.2% to 8.1% (2004: 2.9% to 14.4%), depending on the type of bond issue. Corporate shares mainly represent shares of large Russian companies in energy, mining and financial sectors. These shares are freely tradable in Russia. Geographical, currency, maturity and interest rate analyses of investment securities available for sale are disclosed in Note 27. The information on related party investment securities available for sale is disclosed in Note 31. F-44 21

175 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Premises and Equipment In thousands of Russian Roubles Land and premises Office and computer equipment Construction in progress Total Carrying amount at 1 January Book amount at cost Opening balance Additions Transfers ( ) - Disposals - (96 254) - (96 254) Closing balance Accumulated depreciation Opening balance Depreciation charge (Note 23) Disposals - (91 435) - (91 435) Closing balance Carrying amount at 31 December Book amount at cost Opening balance Additions Transfers ( ) - Disposals (25 413) (93 632) (30 242) ( ) Effect of translation to presentation currency Closing balance Accumulated depreciation Opening balance Depreciation charge (Note 23) Disposals (172) (55 878) - (56 050) Transfers (11 378) - - Effect of translation to presentation currency Closing balance Carrying amount at 31 December Construction in progress consists of construction and refurbishment of premises and equipment not yet in operation. Upon completion, assets are transferred to the appropriate category of fixed assets. F-45 22

176 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Other Assets In thousands of Russian Roubles Trade debtors and other prepayments Settlements on other operations Settlements on non-banking operations Prepaid taxes Total other assets Geographical, currency and maturity analyses of other assets are disclosed in Note Due to Other Banks In thousands of Russian Roubles Term placements of other banks Correspondent accounts and overnight placements of other banks Sale and repurchase agreements with other banks Total due to other banks At 31 December 2005, included in due to other banks are liabilities in the amount of RR thousand related to trading securities sold under sale and repurchase agreements with a fair value of RR thousand (2004: nil). Refer to Notes 8 and 28. As at 31 December 2005 term placements of other banks of RR thousand (2004: RR thousand) have been collaterised by term placements with other banks of RR thousand (2004: RR thousand). Refer to Notes 9 and 28. At 31 December 2005 the estimated fair value of due to other banks was RR thousand (2004: RR thousand). Refer to Note 30. Geographical, currency, maturity and interest rate analyses of due to other banks are disclosed in Note 27. The information on related party balances is disclosed in Note Customer Accounts In thousands of Russian Roubles State and public organisations - Current/settlement accounts Term deposits Other legal entities - Current/settlement accounts Term deposits Individuals - Current/demand accounts Term deposits Total customer accounts F-46 23

177 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Customer Accounts (Continued) Economic sector concentrations within customer accounts are as follows: In thousands of Russian Roubles Amount % Amount % Individuals Oil production and refining Trade Government bodies Finance sector Services Manufacturing Other Total customer accounts At 31 December 2005 included in customer accounts are deposits of RR thousand (2004: RR thousand) held as collateral for irrevocable commitments under import letters of credit. Refer to Note 28. At 31 December 2005 the estimated fair value of customer accounts was RR thousand (2004: RR thousand). Refer to Note 30. Geographical, currency, maturity and interest rate analyses of customer accounts are disclosed in Note 27. The information on related party balances is disclosed in Note Debt Securities in Issue In thousands of Russian Roubles Promissory notes Debentures Deposits and saving certificates Total debt securities in issue Promissory notes are debt securities denominated in RR and USD with maturity dates from on demand to December 2020 (2004: from on demand to December 2019) and effective intrest rates from 0.0% to 14.0% (2004: from 0.0% to 15.9%). At 31 December 2005 the estimated fair value of debt securities in issue was RR thousand (2004: RR thousand). Refer to Note 30. Geographical, currency, maturity and interest rate analyses of debt securities in issue are disclosed in Note 27. The information on related parties balances is disclosed in Note 31. F-47 24

178 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Other Borrowed Funds In thousands of Russian Roubles Term borrowings Syndicated loans Total other borrowed funds Term borrowings represent funds attracted on the international financial markets by issuance of bonds arranged through a large foreign bank. The bonds had a nominal value of USD and were issued by the Group in February 2004 at par value, contractual interest rate of 9.0% and maturity date of February At 31 December 2005 the effective interest rate was 10.1% (2004: 10.1%). In November 2004 part of the securities with a nominal value of USD were claimed by holders for early redemption and were repaid by the Group in connection with notification of bond holders on changes in the shareholding structure of the Bank (Refer to Note 1). Losses on early redemption of part of the bonds amounted to RR thousand. A syndicated loan in the amount of USD was received by the Group in April 2005 from a consortium of foreign banks. This loan had maturity date in April 2006 and interest rate of 6 month LIBOR plus 2.85%. At 31 December 2005 the effective interest rate was 8.6%. A syndicated loan in the amount of USD was received by the Group in October 2005 from two Croatian banks. This loan has maturity date in October 2010 and interest rate of 5.5%. At 31 December 2005 the effective interest rate was 8.2%. At 31 December 2005 the estimated fair value of other borrowed funds was RR thousand (2004: RR thousand). Refer to Note 30. Geographical, currency, maturity and interest rate analyses of other borrowed funds are disclosed in Note Other Liabilities In thousands of Russian Roubles Settlements on bank operations Taxes payable Accrued staff costs Other Total other liabilities Geographical, currency and maturity analyses of other liabilities are disclosed in Note 27. F-48 25

179 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Share Capital In thousands of Russian Roubles Number of shares, in thousand units Nominal amount Inflation adjusted amount Number of shares, in thousand units Nominal amount Inflation adjusted amount Ordinary shares Preference shares Less: treasury shares (34 887) ( ) ( ) Total share capital All ordinary shares have a nominal value of RR 10 per share and rank equally. Each share carries one vote. The preference shares have a nominal value of RR and carry no voting rights but rank ahead of the ordinary shares in the event of liquidation of the Bank. The minimum dividend to be received by holders of preference shares is not stipulated by the Charter of the Bank. The amount of dividend is determined and approved at the Bank s general shareholders meeting. During 2004 the Group acquired ordinary shares of the Bank at par value with total nominal value RR thousand. The difference of RR thousand between nominal value of shares and amount adjusted on inflation of RR thousand was credited directly to equity. As at 31 December 2004 the total carrying amount of the treasure shares adjusted for inflation was RR 482,887 thousand. In October 2005, treasury shares ( thousand ordinary shares of the Bank) with a nominal value of RR thousand and inflation adjusted amount of RR thousand have been sold by the Group to non-state pension fund Lukoil-Garant" and non-state pension fund "Pension Capital". The difference of RR thousand between sale price of shares and amount adjusted on inflation has been debited directly to equity. 20 Retained Earnings In accordance with Russian legislation, the Group distributes profits as dividends or transfers them to reserves (fund accounts) on the basis of financial statements prepared in accordance with Russian Accounting Rules. The Group s reserves under Russian Accounting Rules at 31 December 2005 are RR thousand (2004: RR thousand). F-49 26

180 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Interest Income and Expense In thousands of Russian Roubles Interest income Loans and advances to customers Debt trading securities Correspondent accounts and due from other banks Debt investment securities available for sale Total interest income Interest expense Deposits of individuals Debt securities in issue Term deposits of legal entities Other borrowed funds Due to other banks Current accounts of legal entities Other Total interest expense Net interest income Fee and Commission Income and Expense In thousands of Russian Roubles Fee and commission income Settlement transactions Cash transactions Trust operations Guarantees issued Cash collection Other Total fee and commission income Fee and commission expense Settlement transactions Cash collection Cash transaction Other Total fee and commission expense Net fee and commission income F-50 27

181 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Administrative and Other Operating Expenses In thousands of Russian Roubles Note Staff costs Administrative expenses Depreciation of premises and equipment Rent State deposit insurance system membership fee Advertising and marketing services Other expenses related to premises and equipment Taxes other than on income Other Total administrative and other operating expenses Included in staff costs are statutory staff costs related taxes and contributions in the amount of RR thousand (2004: RR thousand). 24 Income Taxes Income tax expense comprises the following: In thousands of Russian Roubles Current tax Deferred tax ( ) Income tax expense for the year The income tax rate applicable to the majority of the Group s income is 24% (2004: 24%). A reconciliation between the expected and the actual taxation charge is provided below. In thousands of Russian Roubles IFRS profit before tax Theoretical tax charge at statutory rate (2005: 24%; 2004: 24%) Tax effect of items which are not deductible or assessable for taxation purposes: - Non deductible expenses Income on government securities taxed at different rates (44 497) (62 709) - Other non-temporary differences ( ) Income tax expense for the year F-51 28

182 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Income Taxes (Continued) Differences between IFRS and Russian and between IFRS and statutory taxation regulations of subsidiary nonresident banks comprising the Group give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 24% (2004: 24%), except for income on state securities of the Russian Federation that is taxed at 15% (2004: 15%). In thousands of Russian Roubles 31 December 2004 Charged/ (credited) to profit or loss Credited directly to equity 31 December 2005 Tax effect of deductible temporary differences Loan impairment provision Debt securities in issue (40 524) Fair valuation of investment securities available for sale Other Gross deferred income tax asset Tax effect of taxable temporary differences Fair valuation of trading securities (16 691) ( ) - ( ) Premises and equipment (71 908) (28 144) - ( ) Fair valuation of investment securities available for sale (22 540) (286) Other (14 146) (8 916) Gross deferred income tax liability ( ) ( ) ( ) Total net deferred tax asset/(liability) ( ) ( ) F-52 29

183 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Income Taxes (Continued) In thousands of Russian Roubles 1 January 2004 Charged/ (credited) to profit or loss Credited directly to equity 31 December 2004 Tax effect of deductible temporary differences Loan impairment provision (8 715) Debt securities in issue Other Gross deferred income tax asset Tax effect of taxable temporary differences Premises and equipment (75 050) (71 908) Fair valuation of investment securities available for sale (25 241) (22 540) Fair valuation of trading securities ( ) (16 691) Other (10 037) (4 109) - (14 146) Gross deferred income tax liability ( ) ( ) Total net deferred tax asset/(liability) (68 216) In the context of the Group s current structure, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity. A deferred tax asset in the amount of RR thousand (2004: RR thousand) and a deferred tax liability in the amount of RR thousand (2004: RR thousand) have been recorded in the consolidated balance sheet after offsetting of the gross amounts presented above. 25 Dividends In thousands of Russian Roubles Ordinary Preference Ordinary Preference Dividends payable at 1 January Dividends declared during the year Dividends paid during the year Dividends payable at 31 December On 20 May 2005 the Annual General Meeting of Shareholders, based on the financial results of 2004 year, declared a dividend on ordinary shares in amount of RR thousand and a dividend on preference shares in amount of RR thousand. F-53 30

184 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Segment Analysis The Group s primary format for reporting segment information is business segments and the secondary format is geographical segments. Business Segments. The Group is organised on a basis of three main business segments: Retail banking representing private banking services, private customer current accounts, savings, deposits, custody, plastic cards, consumer loans and mortgages. Corporate banking representing current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products. Other this segment includes other operations not included in the above categories. The Group does not have an internal management accounting system for reallocation of funds and/or operating expenses between the segments. Funds are allocated between segments free of charge. Segment information for the main reportable business segments of the Group for the years ended 31 December 2005 and 2004 is set out below: 2005 In thousands of Russian Roubles Retail banking Corporate banking Other Total External revenues Segment results ( ) Unallocated costs ( ) Profit before tax Income tax expense ( ) Profit for the year Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment items Capital expenditure Depreciation charge (19 081) ( ) (505) ( ) F-54 31

185 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Segment Analysis (Continued) 2004 In thousands of Russian Roubles Retail banking Corporate banking Other Total External revenues Segment results ( ) Unallocated costs ( ) Profit before tax Income tax expense ( ) Profit for the year Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment items Capital expenditure Depreciation charge (7 660) ( ) (2 924) ( ) External revenues comprise interest income, gains less losses from trading securities, gains less losses arising from investment securities available for sale, gains less losses from trading in foreign currencies, fee and commission income and other operating income. Unallocated costs in the tables above totalling RR thousand for the year ended 31 December 2005 (2004: RR thousand) represent administrative and other operating expenses and foreign exchange translation results of the Group. F-55 32

186 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Segment Analysis (Continued) Geographical segments. Segment information for the main geographical segments of the Group is set out below for the years ended 31 December 2005 and In thousands of Russian Roubles Russia OECD Other Total 2005 Segment assets Segment liabilities External revenue Credit related commitments Capital expenditure Segment assets Segment liabilities External revenue Credit related commitments Capital expenditure External revenues, assets, liabilities and credit related commitments have generally been allocated based on the ultimate domicile of the counterparty, i.e. based on their respective geographical locations. F-56 33

187 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management The risk management function within the Group is carried out in respect of major types of risks: credit, market, geographical, currency, liquidity, interest rate, operational and legal risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks. Credit risk. The Group takes on exposure to credit risk which is the risk that a counterparty will be unable to pay all amounts in full when due. The Group 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 revolving 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 regularly by the Credit Committee of the Bank. The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal 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. 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 as a result of another party to a financial instrument failing to perform in accordance with the terms 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. 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 Financial- Economic Committee sets limits on the value of risk that may be accepted, which is monitored on a regular basis. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements. F-57 34

188 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) Geographical risk. The geographical concentration of the Group s assets and liabilities at 31 December 2005 is set out below: In thousands of Russian Roubles Russia OECD Other Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred income tax asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred income tax liability Other liabilities Total liabilities Net balance sheet position ( ) Credit related commitments (Note 28) Assets, liabilities and credit related commitments have been based on the country in which the counterparty is located. The column OECD countries in the table above includes mainly balances with counterparties from USA, Germany and United Kingdom. Balances with Russian counterparties actually outstanding to/from off-shore companies of these Russian counterparties are allocated to the caption Russia. Cash on hand and premises and equipment have been allocated based on the country in which they are physically held. F-58 35

189 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The geographical concentration of the Group s assets and liabilities at 31 December 2004 is set out below: In thousands of Russian Roubles Russia OECD Other Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred income tax asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred income tax liability Other liabilities Total liabilities Net balance sheet position ( ) ( ) Credit related commitments (Note 28) F-59 36

190 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) Currency risk. The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Financial-Economic Committee sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group s exposure to foreign currency exchange rate risk at 31 December 2005: In thousands of Russian Roubles RR USD Euro Other Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred income tax asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred income tax liability Other liabilities Total liabilities Net balance sheet position ( ) (4 854) Credit related commitments (Note 28) F-60 37

191 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) At 31 December 2004, the Group had the following positions in currencies: In thousands of Russian Roubles RR USD Euro Other Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred tax income asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred tax income liability Other liabilities Total liabilities Net balance sheet position ( ) Credit related commitments (Note 28) The Group has extended loans and advances denominated in foreign currencies. Movements in foreign exchange rates affect the borrowers repayment ability and incurrance of loan losses. Liquidity risk. Liquidity risk is defined as the risk when the maturity of assets and liabilities does not match. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees and from margin and other calls on cash settled derivative instruments. The Group does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. Liquidity risk is managed by Financial-Economic Committee of the Bank. The table below shows assets and liabilities at 31 December 2005 by their remaining contractual maturity, unless there is evidence that any of the assets are impaired and will be settled after their contractual maturity dates, in which case the expected date of settlement of the assets is used. Some of the assets and liabilities, however, may be of a longer term nature; for example, loans are frequently renewed and accordingly short term loans can have a longer term duration. F-61 38

192 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The entire portfolio of trading securities is classified within demand and less then one month as the portfolio is of a trading nature and Management believes this is a fairer portrayal of its liquidity position. The liquidity position of the Group at 31 December 2005 is set out below. In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years No stated maturity Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred income tax asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred income tax liability Other liabilities Total liabilities Net liquidity gap ( ) ( ) Cumulative liquidity gap at 31 December 2005 ( ) ( ) F-62 39

193 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The liquidity position of the Group at 31 December 2004 is set out below. In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years No stated maturity Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred income tax asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred income tax liability Other liabilities Total liabilities Net liquidity gap ( ) ( ) Cumulative liquidity gap at 31 December The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks ever 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. Management believes that in spite of a substantial portion of customers accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these customers accounts provide a long-term and stable source of funding for the Group. Customer accounts are classified in the above analysis based on contractual maturities. However, in accordance with Russian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to accrued interest. F-63 40

194 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) Interest rate risk. The Group takes on exposure 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 may reduce or create losses in the event that unexpected movements arise. The table below summarises the Group s exposure to interest rate risks at 31 December Included in the table are the Group s assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years Noninterest bearing Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred income tax asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred income tax liability Other liabilities Total liabilities Net sensitivity gap ( ) ( ) Cumulative sensitivity gap at 31 December 2005 ( ) ( ) ( ) F-64 41

195 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The following table summarises the Group s exposure to interest rate risks at 31 December 2004 by showing assets and liabilities in categories based on the earlier of contractual repricing or maturity dates. In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years Noninterest bearing Total Assets Cash and cash equivalents Mandatory cash balances with central banks Trading securities Due from other banks Loans and advances to customers Investment securities available for sale Deferred income tax asset Premises and equipment Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Other borrowed funds Deferred income tax liability Other liabilities Total liabilities Net sensitivity gap ( ) ( ) Cumulative sensitivity gap at 31 December The Group is exposed to cash flow interest rate risk, principally through assets and liabilities for which interest rates are reset as market rates change. Such assets and liabilities are primarily presented in the above table as being repriced in the short-term. The Group is exposed to fair value interest rate risk as a result of assets and liabilities at fixed interest rates; these are primarily presented in the above table as being repriced in the long-term. In practice, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions. The Group monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken. In the absence of any available hedging instruments, the Group normally seeks to match its interest rate positions. F-65 42

196 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The table below summarises the effective interest rates by major currencies for major debt instruments. The analysis has been prepared based on period-end effective rates used for amortisation of the respective assets/liabilities In % p.a. RR USD Euro Other RR USD Euro Other Assets Correspondent accounts and overnight placements with other banks Cash balances with central banks other than mandatory reserves Mandatory cash balances with central banks Debt trading securities Due from other banks Loans and advances to customers Debt investment securities available for sale Liabilities Due to other banks Customer accounts - current and settlement accounts term deposits Debt securities in issue Other borrowed funds The sign - in the table above means that the Group does not have the respective assets or liabilities in corresponding currency. 28 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and internal professional advice the Management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in these consolidated financial statements. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Transfer pricing legislation, which was introduced from 1 January 1999, 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 20%. Controlled transactions include transactions with related parties, and transactions with unrelated parties if the price differs on similar transactions with two different counterparties by more than 20%. There is no formal guidance as to how these rules should be applied in practice. The Group s Management believes that its interpretation of the relevant legislation is appropriate and the Group s tax, currency legislation and customs positions will be sustained. Accordingly, at 31 December 2005 no provision for potential tax liabilities had been recorded (2004: no provision). F-66 43

197 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Contingencies and Commitments (Continued) Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under noncancellable operating leases are as follows: In thousands of Russian Roubles Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total operating lease commitments Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows: In thousands of Russian Roubles Guarantees issued Import letters of credit Export letters of credit Total credit related commitments Import letters of credit include only import letters of credit without collateral. Deposits in the amount of RR thousand (2004: RR thousand) held as collateral or irrevocable commitments under import letters of credit are recorded in customer accounts (Refer to Note 15). As at 31 December 2005 the Group also had commitments in relation to unused credit lines totalling RR thousand (2004: thousand), which includes non-cancellable commitments on overdrafts totalling RR thousand (2004: thousand). The total outstanding contractual amount of guarantees and letters of credit does not necessarily represent future cash requirements, as these undrawn credit lines may expire or terminate without being funded. F-67 44

198 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Contingencies and Commitments (Continued) Trust activities. The Group provides asset management services to its customers. The assets of these funds are not included in the Group s balance sheet as they are not assets of the Group. The assets managed by the Group are disclosed at their fair value and fall into the following categories: In thousands of Russian Roubles Cash Corporate shares Credit-linked notes Eurobonds of Russian Federation Corporate bonds Other Total assets in trust Fiduciary assets. These assets are not included in the Group s consolidated balance sheet as they are not assets of the Group. Nominal values disclosed below are normally different from the fair values of respective securities. The fiduciary assets fall into the following categories: In thousands of Russian Roubles 2005 Nominal value 2004 Nominal value Corporate shares Municipal bonds and Bonds of Russian Federation regions Promissory notes Corporate bonds OFZ Assets pledged and restricted. At 31 December 2005 the Group has the following assets pledged as collateral: In thousands of Russian Roubles Note Asset pledged Related Asset pledged liability Related liability Trading securities pledged for the credit limit of CBRF Trading securities under sale and repurchase agreements 8, Term placements of other banks 9, Total At 31 December 2005 OFZ securities with the fair value of RR thousand (2004: RR thousand) have been pledged to the Central Bank of the Russian Federation for the credit limit opened by the CBRF to the Bank. At 31 December 2005 the Group had no deposits from the Central Bank of the Russian Federation attracted within this credit limit (2004: nil). Refer to Note 8. Mandatory cash balances with central banks in the amount of RR thousand (2004: RR thousand) represent mandatory reserve deposits which are not available to finance the Group s day to-day operations. F-68 45

199 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Derivative Financial Instruments Foreign exchange derivative financial instruments entered into by the Group are generally traded in an over-thecounter market with professional market counterparties on standardised contractual terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign exchange rates or other variables relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. At 31 December 2005 the Group did not have outstanding derivative contracts (2004: nil). 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 an active 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 determine the estimated fair value. Despite the Russian Federation is assigned investment grade ratings, the Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Financial instruments carried at fair value. Trading securities and investment securities available for sale are carried on the consolidated balance sheet at their fair value. All securities are traded and have market quotations. Loans and receivables carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Refer to Notes 9 and 10 for the estimated fair values of due from other banks and loans and advances to customers, respectively. Liabilities carried at amortised cost. The fair value is based on quoted market prices, if available. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period ( demandable liabilities ) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. Refer to Notes 14, 15, 16 and 17 for the estimated fair values of due to other banks, customer accounts, debt securities in issue and other borrowed funds, respectively. Derivative financial instruments. All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. Refer to Notes 4 and 29. F-69 46

200 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December 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, is under common control, or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. As set out in Note 1, the main shareholder of the Group is the financial group IFD Capital. The majority stake of its share capital is beneficially owned by Mr. Alekperov and Mr. Fedun (the ultimate beneficiaries ) and is managed by a professional asset management company, which is not owned by the ultimate beneficiaries. Transactions with related parties are entered into in the normal course of business with significant shareholders of the Bank, ultimate beneficiaries, directors and companies with which the Bank has significant shareholders in common. These transactions include settlements, loans, deposit taking, guarantees, trade finance and foreign currency transactions. These transactions are priced at market rates. At 31 December 2005 and 2004, the outstanding balances and other rights and obligations with related parties were as follows: In thousands of Russian Roubles Shareholders Other Shareholders Other Correspondent accounts and overnight placements with other banks Trading securities Loans and advances to customers Loans and advances (contractual interest rate: 2005: 7.0%-13.0; 2004: 7. 0%-17.0%) Debt investment securities available for sale Equity investment securities available for sale Due to other banks Correspondent accounts and overnight placements of other banks Term placements of other banks (contractual interest rate: 2005: 9.6%) Customer accounts Current/settlement accounts Term deposits outstanding (contractual interest rate: 2005: 2.0%-9.3%; 2004: 2.0%-9.0%) Debt securities issued Debt securities issued (contractual interest rate: 2005: 0.0%-10.4% 2004: 0.0%-8.4%) Guarantees issued by the Group Guarantees received by the Group Import letters of credit Assets in trust F-70 47

201 Bank Petrocommerce Group Notes to the Consolidated Financial Statements 31 December Related Party Transactions (Continued) The income and expense items with related parties for the year 2005 and 2004 were as follows: In thousands of Russian Roubles Shareholders Other Shareholders Other Interest income: - Loans to customers Interest expense: - Due to other banks - (2 354) - (7) - Customer accounts ( ) ( ) ( ) ( ) - Debt securities issued (5 406) (3 441) (17 912) (3 734) Gains less losses from trading securities Gains less losses from trading in foreign currencies Fee and commission income Fee and commission expense - ( ) (169) (10 868) Aggregate amounts lent to and repaid by related parties during 2005 and 2004 were: In thousands of Russian Roubles Shareholders Other Shareholders Other Amounts lent to related parties during the year Amounts repaid by related parties during the year The Shareholders column in the table mainly represents IFD Capital and its ultimate beneficiaries and companies which are controlled by Lukoil Group and have direct ownership in the Bank. The Other column in the table mainly represents companies that are not shareholders of the Bank, but are controlled by Lukoil Group or IFD Capital Group. As at 31 December 2005 included in customer accounts are amounts of RR thousand (2004: RR thousand) belonging to the ultimate beneficiaries of IFD Capital Group. Interest expense on these customer accounts comprised RR thousand (2004: RR thousand). In 2005, the remuneration of the Executive Board members comprised salaries, discretionary bonuses and other short-term benefits totalling to RR thousand (2004: RR thousand). 32 Principal Subsidiaries Name Nature of business Percentage of the Bank s direct ownership Percentage of Group s control Country of incorporation Komi Regional Bank UKHTABANK Banking Russia Petrocommerce-Ukraine Bank Banking Ukraine Stavropolpromstroybank Banking Russia UNIBANK Banking Moldova F-71 48

202 Bank Petrocommerce Group Consolidated Financial Statements and Auditors Report 31 December 2004 F-72

203 Bank Petrocommerce Group Consolidated Financial Statements and Auditors Report Contents Auditors Report Consolidated Balance Sheets...1 Consolidated Statements of Income...2 Consolidated Statements of Cash Flows...3 Consolidated Statements of Changes in Shareholders Equity...4 Notes to the consolidated financial statements 1 Principal Activities Operating Environment of the Group Basis of Presentation Significant Accounting Policies Cash and Cash Equivalents Trading Securities Due From Other Banks Loans and Advances to Customers Investment Securities Available for Sale Other Assets Premises and Equipment Due to Other Banks Customer Accounts Debt Securities in Issue Other Borrowed Funds Other liabilities Minority Interest Share Capital Retained Earnings Interest Income and Expense Fee and Commission Income and Expense Operating Expenses Profits Taxes Earnings per Share Dividends Description of Adjustments to the Consolidated Accounts Prepared in Accordance with Russian GAAP Analysis by Segment Financial Risk Management Contingencies, Commitments and Derivative Financial Instruments Fair Value of Financial Instruments Related Party Transactions Principal Consolidated Subsidiaries Subsequent Events...42 F-73

204 ZAO PricewaterhouseCoopers Audit Kosmodamianskaya Nab. 52, Bld Moscow Russia Telephone +7 (095) Facsimile +7 (095) AUDITORS REPORT To the Shareholders and the Board of Directors of Bank Petrocommerce: We have audited the accompanying consolidated balance sheet of Bank Petrocommerce and its subsidiaries (the Group as defined in Note 1 to the consolidated financial statements) as at 31 December 2004, 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 responsibility 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 consolidated 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 statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2004 and the consolidated results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Moscow, Russian Federation 21 June 2005 The firm is an authorized licensee of the tradename and logo of PricewaterhouseCoopers. F-74

205 F-75