GAZPROMBANK GROUP. Consolidated Financial Statements. Year Ended 31 December 2017

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1 Consolidated Financial Statements Year Ended 2017

2 Shareholding of the Bank (based on voting rights) Gazprom Group* 46.02% 35.54% Non-State Pension Fund Gazfond ** 41.58% 49.65% State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank)* 8.53% 10.19% Treasury stock *** 3.86% 4.59% Individuals 0.01% 0.03% % % * - ultimate controlling party of Gazprom Group and State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank) is the Government of the Russian Federation ** - including 36.48% managed by CJSC Leader (an asset management company) on behalf of Non-State Pension Fund Gazfond *** - shares held by Novfintekh LLC (NFT), a subsidiary of the Bank; of those 0.30% managed by CJSC Leader on behalf of NFT Board of Directors Alexey B. Miller Chairman of the Board of Directors Chairman of PJSC Gazprom Management Board Andrey I. Akimov Deputy Chairman of the Board of Chairman of Gazprombank Management Board Directors Mikhail L. Sereda Deputy Chairman of the Board of Directors Deputy Chairman of PJSC Gazprom Management Board Yury N. Shamalov Deputy Chairman of the Board of President of Non-State Pension Fund Gazfond Directors Kirill A. Dmitriev Member of the Board of Directors Chief Executive Officer of JSC RDIF Management Company Vladimir A. Dmitriev Member of the Board of Directors Vice-President of Chamber of Commerce and Industry of the Russian Federation Iliya V. Eliseev Member of the Board of Directors Deputy Chairman of Gazprombank Management Board Anatoliy A. Member of the Board of Directors Chief Executive Officer of CJSC Leader Gavrilenko Sergey N. Gorkov Member of the Board of Directors Chairman of State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank) Sergey S. Ivanov Member of the Board of Directors President of PJSC "ALROSA" Andrey V. Kruglov Member of the Board of Directors Deputy Chairman of PJSC Gazprom Management Board Kirill G. Seleznev Member of the Board of Directors Member of PJSC Gazprom Management Board Elena A. Vasilieva Member of the Board of Directors Deputy Chairman of PJSC Gazprom Management Board Chief Accountant of PJSC Gazprom The composition of the Board of Directors is stated as at 29 March

3 Management Board Andrey I. Akimov Chairman of the Management Board Alexey P. Belous Deputy Chairman of the Project and structured finance, Public-private partnership Management Board Elena A. Borisenko Deputy Chairman of the Chief Legal Officer Management Board Yan V. Center Deputy Chairman of the Retail business, Regional network Management Board Iliya V. Eliseev Deputy Chairman of the Compliance, Media assets Management Board Viktor A. Komanov Deputy Chairman of the Merchant banking, M&A advisory, Direct investments Management Board Vadim V. Kulik Deputy Chairman of the Risk Management, IT, Back-office Management Board Aleksey A. Matveev Deputy Chairman of the Management Board Capital markets, Trading activity, Brokerage Alexander Y. Muranov Deputy Chairman of the Management Board Precious metals, Information security, Real estate development business Famil K. Sadygov Deputy Chairman of the Management Board Internal audit, Financial market operations control, Corporate deposits, Tax reporting, Heavy machinery assets Alexander I. Sobol Deputy Chairman of the Management Board Chief Financial Officer, Strategy Alexander M. Stepanov Deputy Chairman of the Strategic industrial assets Management Board Oleg M. Vaksman Deputy Chairman of the Corporate lending Management Board Dmitriy V. Zauers Deputy Chairman of the Management Board Administration, Human Resources, Public relations, Marketing Denis V. Kamyshev First Vice-President Corporate clients relations, International representative offices, Government relations Tigran G. Khachaturov Restructured Assets Manager Restructured assets management Igor V. Rusanov First Vice-President Assets & liabilities management, Wholesale funding and investor relations, Liquidity management Vladimir M. Ryskin First Vice-President Private banking, Asset management, Financial institutions and companies relations Valeriy A. Seregin First Vice-President Custody services Vladimir N. Vinokurov First Vice-President Corporate security The composition of the Management Board is stated as at 29 March Auditors JSC KPMG 3

4 TABLE OF CONTENTS Auditors Report 5 Consolidated Statement of Profit or Loss and Other Сomprehensive Income 12 Consolidated Statement of Financial Position 14 Consolidated Statement of Changes in Equity 15 Consolidated Statement of Cash Flows 17 Notes to the Consolidated Financial Statements: Note 1 Principal activities and organization Note 2 Basis of presentation Note 3 Principal accounting policies Note 4 Segment reporting Note 5 Net interest income Note 6 Provisions and impairment losses, other assets and other risks Note 7 Fees and commissions income and expense Note 8 Non-interest gain from financial assets and liabilities at fair value through profit or loss, net Note 9 Non-banking operating profits (losses) Note 10 Banking salaries, employment benefits and administrative expenses Note 11 Profit tax Note 12 Cash and cash equivalents, obligatory reserve with the Central Bank of the Russian Federation and due from financial institutions Note 13 Financial assets and liabilities at fair value through profit or loss Note 14 Derivative financial assets and liabilities held for trading and as cash flow hedge Note 15 Loans to customers Note 16 Investments available-for-sale and investments in associates Note 17 Receivables and prepayments Note 18 Investments held-to-maturity Note 19 Property, plant and equipment Note 20 Intangibles Note 21 Goodwill Note 22 Amounts owed to financial institutions Note 23 Amounts owed to customers Note 24 Bonds issued Note 25 Subordinated debts Note 26 Other liabilities Note 27 - Disclosures to Consolidated Statement of Cash Flows Note 28 Shareholders' equity Note 29 Perpetual debt issued Note 30 Financial commitments and contingencies Note 31 Corporate governance and internal controls Note 32 Risk management Note 33 Principal subsidiaries of the Group Note 34 Related parties Note 35 Fair value of financial instruments Note 36 Acquisition and disposal of interests in subsidiaries and associates Note 37 Subsequent events

5 lndeoendent Auditors Reoort To the Shareholders and Board of Directors of Gazprombank (Joint-Stock Company) Report on the Audit of the Consolidated Financial Statements Opinion We have audited the consolidated financial statements of Gazprombank (the "Bank") (and its subsidiaries (the "Group")), which comprise the consolidated statement of financial position as at 2017, the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the independence requirements that are relevant to our audit of the consolidated financial statements in the Russian Federation and with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the requirements in the Russian Federation and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Awaited en11ty Gazprombank uoint S1ock Company) Reg1stra1 on nurnoer,n the Unrf1ed Strit& Reg,stt:r of Legai Ent1Ms 102i7001S7110 Independent auditor JSC KPMG a company 1ncorpcra1ed unaer 1ne LJ.ws of the Rus sian Fedoration a member f1nn c.f the KPMG net,,,ofk of inaepen,:s~nl,narnber furns i3ffilintetj,.. th KPt/G lnlernat1ona1 Coopernhve CKPMG!ntemational'). a S'.t11Ss entity Regrstrauon number in!he Ur,1f1eo Stat-i: Reg1s1er of L 1;,ga1 Enfttes r-.~ember of me S~lf-regu1a1ect orgamsat,on of auditors Russian Union c,f aud11c.rs (A.ss.oc1ahon} The Pnn~rpal Regislral!On Number of tha Enuy,n the Reg:ster of Auditors and Audi! Organ1sa1tons No 1 i

6 Gazprombank (Joint Stock Company) Independent Auditors' Report Page 2 Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Impairment of loans to legal entities Please refer to the Notes 15, 32 (b) in the consolidated financial statements. The key audit matter How the matter was addressed in our audit The impairment of loans to legal entities is estimated by management of the Group through the application of judgement and use of highly subjective assumptions. Due to the significance of loans to legal entities (representing 58% of total assets) and the related estimation uncertainty, this is considered a key audit risk. We paid particular attention to assumptions and methodology used for calculation of specific impairment allowance for not overdue loans to legal entities with individual signs of impairment. We also focused on sufficiency of collective impairment allowances against level of historical losses. We assessed and tested the design and operating effectiveness of the controls over impairment identification for loans to corporate clients. For selected specific unimpaired loans we critically assessed the data used by the Group to calculate collective impairment allowances. We also compared observable level of historical losses on loans to legal entities with the amount of collective impairment allowance created. For a sample of impaired loans that were subject to an individual impairment assessment, and focusing on the cases where potential change of the impairment allowance may cause the most significant effect on the consolidated financial statements, we analyzed the Group's assumptions on the expected future cash flows, including the analysis of cash flows from operating activities and value of realizable collateral based on our own understanding of relevant industry-specific and other available market information. We also assessed whether the consolidated financial statement disclosures appropriately reflect the Group's exposure to credit risk.

7 I Gazprombank (Joint Stock Company) Independent Auditors' Report Page3 Goodwill Please refer to the Note 21 in the consolidated financial statements. The key audit matter How the matter was addressed in our audit Goodwill impairment testing of cash generating units (CGUs) relies on estimates of value-in-use based on estimated future cash flows. Impairment testing is complex, contains judgmental assumptions, and predicated on management's assessment of future profitability. Due to inherent uncertainty in projection of future cash flows, and the significance of recognised goodwill, this is considered a key audit risk. We focused on goodwill related to media segment of the Group representing 87% of the total goodwill balance. We paid the highest attention to CGUs that were the most sensitive and reliant on future cash flow projections and, as a result of recent historical performance, were expected to have reduced headroom. With the assistance of our own valuation specialists we assessed the reasonableness of cash flow projections and compared key inputs, such as the discount rates and growth rates, to externally available industry, economic and financial data and the Group's own historical data and performance. We also critically assessed the assumptions and methodologies used to forecast value-in-use. Additionally, we assessed whether the consolidated financial statement disclosures appropriately reflect key assumptions used for goodwill impairment testing of CGUs including discount rates and sensitivity to the assumptions.

8 Gazprombank (Joint Stock Company) Independent Auditors' Report Page 4 Valuation of derivatives Please refer to the Notes 13, 14 and 35 in the consolidated financial statements. The key audit matter How the matter was addressed in our audit The fair value of derivatives is determined through the application of valuation techniques which often involve the exercise of judgement by the management and the use of assumptions and estimates. Due to inherent uncertainty related to determination of fair value and complexity of calculations, this is considered a key audit risk. We paid particular attention to derivatives included in Level 3 of fair value hierarchy whose valuation require significant professional judgement. For the most significant derivatives or the ones contain in our view the most significant risk of valuation we performed our own independent calculation of the value with application of appropriate in our view alternative valuation techniques and obtained from external sources economic data. In certain cases we involved our own valuation specialists. For other selected derivatives we assessed relevance of methodology used, critically evaluated the assumptions used in calculation, compared it to data from external sources and calculated sensitivity of the value to alternatively possible assumptions. Additionally, we assessed whether the consolidated financial statement disclosures appropriately reflect the fair value of derivatives. Other Information Management is responsible for the other information. The other information comprises the information included in the annual report but does not include the consolidated financial statements and our auditors' report thereon. The annual report is expected to be made available to us after the date of this auditors' report. Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

9 Gazprombank (Joint Stock Company) Independent Auditors' Report Page 5 In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process. Auditors' Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the

10 Gazprombank (Joint Stock Company) Independent Auditors' Report Page6 consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report of findings from procedures performed in accordance with the requirements of Federal Law No 395-1, dated 2 December 1990, On Banks and Banking Activity Management is responsible for the Group's compliance with mandatory ratios and for maintaining internal controls and organizing risk management systems in accordance with the requirements established by the Bank of Russia. In accordance with Article 42 of Federal Law No 395-1, dated 2 December 1990 On Banks and Banking Activity (the "Federal Law"), we have performed procedures to examine: the Group's compliance with mandatory ratios as at 1 January 2018 established by the Bank of Russia; and whether the elements of the Group's internal control and organization of its risk management systems comply with the requirements established by the Bank of Russia. These procedures were selected based on our judgment, and were limited to the analysis, inspection of documents, comparison of the Bank's internal policies, procedures and methodologies with the applicable requirements established by the Bank of Russia, and recalculations, comparisons and reconciliations of numerical data and other information. Our findings from the procedures performed are reported below. Based on our procedures with respect to the Group's compliance with the mandatory ratios established by the Bank of Russia, we found that the Group's mandatory ratios, as at 1 January 2018, were within the limits established by the Bank of Russia. We have not performed any procedures on the accounting records maintained by the Group, other than those which we considered necessary to enable us to express an opinion as to whether the Group's consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards. Based on our procedures with respect to whether the elements of the Group's internal control and organization of its risk management systems comply with the requirements

11 Gazprombank (Joint Stock Company) Independent Auditors' Report Page 7 established by the Bank of Russia, we found that: as at 2017, the Bank's Internal Audit Department was subordinated to, and reported to, the Board of Directors, and the Risk Management Division was not subordinated to, and did not report to, divisions taking relevant risks in accordance with the regulations and recommendations issued by the Bank of Russia; the Bank's internal documentation, effective on 2017, establishing the procedures and methodologies for identifying and managing the Group's significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and for stress-testing, was approved by the authorised management bodies of the Bank in accordance with the regulations and recommendations issued by the Bank of Russia; as at 2017, the Bank maintained a system for reporting on the Group's significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and on the Group's capital; the frequency and consistency of reports prepared by the Bank's Risk Management Division and Internal Audit Department during 2017, which cover the Group's credit, operational, market, interest rate, legal, liquidity and reputational risk management, was in compliance with the Bank's internal documentation. The reports included observations made by the Bank's Risk Management Division and Internal Audit Department as to their assessment of the effectiveness of the Group's procedures and methodologies, and recommendations for improvement; as at 2017, the Board of Directors and Executive Management of the Bank had responsibility for monitoring the Group's compliance with the risk limits and capital adequacy ratios established in the Bank's internal documentation. In order to monitor the effectiveness of the Group's risk management procedures and their consistent application during 2017, the Board of Directors and Executive Management of the Bank periodically discussed the reports prepared by the Risk Management Division and Internal Audit Department, and considered the proposed corrective actions. Procedures with respect to elements of the Group's internal control and organization of its risk management systems were performed solely for the purpose of examining whether these elements, as prescribed in the Federal Law and as described above, comply with the requirements established by the Bank of Russia. The engagement partner on the audit resulting in this independent auditors' report is: Kolosov A.E. JSC "KPMG" Moscow, Russia 29 March 2018

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19 NOTE 1 PRINCIPAL ACTIVITIES AND ORGANIZATION The Gazprombank Group (the Group) primarily consists of: Gazprombank (Joint-stock Company), which is the parent company subsidiary banks and financial companies, including Gazprombank (Switzerland) Ltd., Bank GPB International S.A., Gazprombank Leasing JSC, and a number of other financial companies, that support the banking business several significant non-banking companies. Gazprombank (Joint-stock Company) (the Bank) was established in The Bank has a general banking license and a license for operations with precious metals from the Central Bank of the Russian Federation (the CBR), and licenses for securities operations and custody services from the Federal Financial Markets Service of the Russian Federation, which in 2013 became a part of the CBR. Its subsidiary banks and companies also have general banking licenses for operations in Switzerland and Luxembourg and investment, brokerage and asset management licenses for operations in Cyprus, Luxembourg and Hong Kong. The Bank is the third largest bank in the Russian Federation in terms of assets and equity, and it provides a broad range of commercial and investment banking services to many of Russia's leading corporations, including, among others, PJSC Gazprom and its related parties (the Gazprom Group). The principal corporate banking services include: commercial lending, project and acquisition finance, trade finance, financial and operating leasing, deposit taking, settlements and cash management, capital markets transactions, asset management, brokerage, corporate finance and mergers and acquisitions advisory, and depositary and custodian services. The Bank is also involved in private equity transactions, foreign exchange and securities trading, and operations with precious metals. The Bank provides a range of services to private individuals, including employees of its corporate clients. Retail services include: lending, deposit taking, debit and credit card services, brokerage, asset management and a range of other services. The Bank has controlling stakes in several non-banking investments, which are consolidated in these consolidated financial statements and are presented as separate segments (see Note 4), including: JSC Gazprom-Media Holding and its subsidiaries (the Media segment) is a Russian media group of companies, the principal activities of which are TV and radio broadcasting, advertising, publishing, film production and distribution primarily undertaken in the Russian Federation. OMZ and its subsidiaries (the OMZ Group) and a number of other industrial assets (together - the Machinery segment). OMZ Group produces nuclear power plant equipment, specialty steels, machinery equipment, manufacturing and mining equipment. The OMZ Group manufacturing facilities are based in the Russian Federation and the Czech Republic. The legal address of the Bank is: Bld.1, 16, Nametkina St., Moscow, , Russian Federation. The structure of the Bank s shareholders is disclosed on page 2. As at 2017, the Gazprom Group owns 46.02% of the outstanding ordinary shares of the Group. A substantial portion of the Group s funding is from the Gazprom Group. As such, the Group is economically dependent on the Gazprom Group (Note 34). These consolidated financial statements are published at the Bank's website These consolidated financial statements were authorised for issue by the Management Board of the Bank on 29 March

20 NOTE 2 BASIS OF PRESENTATION (a) General These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Management is responsible for the preparation of the consolidated financial statements in accordance with IFRS. The preparation of consolidated financial statements in accordance with IFRS requires management to make judgements and key estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the reporting date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. Key areas of judgements and key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, include: estimation of allowance for impairment on financial assets measured at amortised cost. These include mainly loans to customers, amounts due from financial institutions, receivables and other assets. The estimation of allowance for impairment involves professional judgement and is based on internal credit risk rating systems and statistical data. valuation of complex and illiquid financial instruments. This involves professional judgement, icnluding use of valuation models. In the absence of an active market, management has to make assumptions in respect of appropriate inputs used in valuation models, some of which may not be based on observable market data. estimation of fair values of identifiable assets and liabilities acquired in business combinations. This involves professional judgement, icnluding use of valuation models, which among others comprise assumptions about future business performance and cash flows and appropriate discount rates. estimation of allowance for impairment on non-financial assets (including goodwill). This involves professional judgement, including use of valuation models, which among others include assumptions about future business performance, estimation of cash flows from assets assessed for impairment and estimation of appropriate discount rates. assessment of whether the Group has control or significant influence over investments where control or significant influence is determined by contractual arrangements or other factors other than voting rights held by the Group. recognition of deferred tax assets. This involves the assessment of future taxable profits available to utilise tax losses carryforward. (b) Russian economic environment The Group s operations are primarily located in the Russian Federation. The Russian Federation displays certain characteristics of emerging markets. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. Management of the Group believes that it is taking all necessary efforts to support the economic stability of the Group in the current environment. In 2014, the United States OFAC and the European Council implemented coordinated sectoral sanctions against some of the Russian banks and corporations, including the Bank, and some of the Russian officials and businessmen. The sanctions prohibit the U.S. and EU citizens or entities operating on the territory of the U.S. and EU transacting in, providing financing for, or otherwise dealing in the debt instruments of the Group with a maturity of longer than 30 days issued after the date of the sanctions announcement. In August 2017, the President of the United States signed a new law, which reduced the term of allowed financing to the Group to 14 days. Also, this law introduced a number of new constraints, including restricting of financing of certain Russian oil projects and the defense industry. The European Council has not joined the new sanctions. During 2017 the economy of the Russian Federation resumed to grow, which was facilitated by favourable crude oil market conditions, dynamics of the world trade and completed adapting to external conditions. 20

21 Annual average price for Urals crude oil increased from 42 US dollars for barrel in 2016 to 53 US dollars for barrel in GDP in 2017 increased by 1.5% as compared to 2016, industrial production by 1%, output in agriculture by 2.4%, freight turnover by 5.4%. In 2017, the Central bank of the Russian Federation decreased the key rate from 10% to 7.75% and continued its work to strenghten the banking system stability. These consolidated financial statements reflect management s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from the management s assessment. The Group is not exposed to significant seasonal or cyclical variations in operating income during the financial year. (c) Basis of measurement These consolidated financial statements are prepared on the historical cost basis except for financial instruments at fair value through profit or loss and available-for-sale financial assets which are stated at fair value. (d) Functional and presentation currency The functional currency of the Bank and the majority of its subsidiaries is the Russian ruble (the RUB) as, being the national currency of the Russian Federation, it reflects the economic conditions of the majority of underlying events and circumstances relevant to them. Some of the Group's principal subsidiaries have functional currency different from the Russian ruble: Name Gazprombank (Switzerland) Ltd. Bank GPB International S.A. ŠKODA JS a.s. Centrex Europe Energy & Gas AG Functional currency Swiss franc Euro Czech crown Euro The consolidated financial statements are presented in millions of RUB, unless otherwise stated. NOTE 3 PRINCIPAL ACCOUNTING POLICIES (a) Principles of consolidation and accounting for associates (i) Business combinations and goodwill For acquisitions on or after 1 January 2010 the Group measures goodwill at the acquisition date as the fair value of the consideration transferred (including the fair value of any previously-held equity interest in the acquiree if the business combination is achieved in stages) and the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as at the acquisition date. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The Group elects on a transaction-by-transaction basis whether to measure non-controlling interests at fair value, or at their proportionate share of the identifiable net assets of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. 21

22 For acquisitions before 1 January 2010 goodwill represents the excess of the cost of the acquisition over the Group s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalized as part of the cost of the acquisitions. The loss of control is, among other factors, evidenced by an arrangement that principally transfers the power to govern and the economic benefits related to activities of the subsidiary to a third party. In certain cases the exercise of judgement is required to determine whether an arrangement between Group and a third party results in a loss of control over a subsidiary before the Group legally transfers the ownership rights to a third party, in particular, where such transfers are subject to further regulatory approval. (ii) Subsidiaries Subsidiaries are investees controlled by the Group. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular the Group consolidates investees that it controls on the basis of de facto circumstances. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (iii) Structured entities A structured entity is an entity designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. In assessing whether the Group has power over such investees in which it has an interest, the Group considers factors such as the purpose and design of the investee; its practical ability to direct the relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee. (iv) Funds management The Group manages and administers assets held in unit trusts and other investment vehicles on behalf of investors. The financial statements of these entities are not included in these consolidated financial statements except when the Group controls the entity. (v) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group s interest in the entity. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except when there is no evidence of impairment. (vi) Non-controlling interests The portion of net assets and the post acquisition profit or loss of a subsidiary attributable to equity interests that are not owned, directly or indirectly, by the Group are presented as non-controlling interests in the consolidated financial statements. The difference, if any, between the consideration paid to acquire the non-controlling interests and its carrying amount is recorded in equity. Dividends paid to non-controlling shareholders decrease the carrying amount of non-controlling interests recorded in equity. (vii) Consolidation of limited liability companies domiciled in the Russian Federation In substance the partners' equity of certain limited liability companies domiciled in the Russian Federation meets the definition of a liability according to the statutory legislation. The stakeholders, should they decide to exit the limited liability company, are entitled to a payout equal to their share in net assets of the company as at the latest reporting date. The "buy-back" payout performed by the limited liability company is not subject to approval by the other stakeholders. Therefore the Group s non-controlling interests in such limited liability companies consolidated in the Group s financial statements are accounted for as liabilities. 22

23 (viii) Associates Investments in associated companies where the Group exercises significant influence are accounted for using the equity method. Goodwill arising on the acquisition is included in the carrying value of the investment (net of any accumulated impairment loss). When the investee incurs losses, the Group recognises its share of losses until the carrying amount of the investment is reduced to nil. Recognition of further losses is discontinued. (b) Foreign currency translation Income and expenses, and non-monetary items that are measured at historical cost included in the consolidated statement of financial position at period-end, denominated in currencies other than the functional currency, are recorded by applying the exchange rate effective at the date of the transaction. Foreign currency denominated monetary items and non-monetary items that are measured at fair value included in the consolidated statement of financial position are translated at the exchange rate prevailing at the period end. Foreign currency differences arising on retranslation are recognised in profit or loss as gain or loss from foreign exchange, except for differences arising on retranslation of available-for-sale equity instruments, recognised in other comprehensive income, and differences arising from perpetual debt issued, recorded in retained earnings. Net gain from trading in foreign currencies includes both the currency spread realised in the transaction and the built-in foreign exchange trading commission. If foreign subsidiaries or foreign associates have functional currencies that are different from the functional currency of the Bank (the Russian ruble), the resulting exchange differences arising from translation to Russian rubles of their financial statements (in the case of a subsidiary) or of their net assets (in the case of an associate) are included in other comprehensive income as part of the foreign currency translation reserve. The official USD/RUB and EUR/RUB exchange rates of the CBR were as follows (Russian rubles per 1 USD and rubles per 1 EUR): USD EUR Exchange rate as at Average rate for the year ended The Russian ruble is not a readily convertible currency outside of the Russian Federation and, accordingly, any conversion of Russian ruble to USD should not be construed as a representation that the Russian ruble amounts have been, could be, or will be in the future, convertible into USD at the exchange rates disclosed, or at any other exchange rates. (с) Income and expense recognition Interest income and expense are recognised on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or liability. All borrowing costs are recognised in profit or loss using the effective interest method, except for borrowing costs related to qualifying assets, which are recognised as part of the cost of such assets. Transaction costs and interest payments related to perpetual debt issued included in equity are recorded in retained earnings. The Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognised using the rate of interest used to discount future cash flows for the purpose of measuring the impairment loss. 23

24 Interest earned on assets at fair value is classified within interest income. Loan origination fees are deferred, together with the related direct costs, and recognised as an adjustment to the effective interest rate of the loan. Loan servicing fees and all other commissions are recognised as revenue as the services are provided. The Group recognises advertising revenue net of value added tax (VAT) and discounts when the broadcasting or publishing of the related advertisement occurs. Revenue from selling programming rights is recognised net of VAT and discounts when all of the following conditions are met: sale of the related rights can be confirmed; programs are complete and delivered to clients or are ready for delivering; the license agreement period has started and clients may use the airtime; and revenue can be reliably measured. Revenues from sales of goods in the Machinery segment are recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Sales of services in the Machinery segment are recognised in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts. Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or services sold. (d) Financial instruments (i) Classification Financial assets or liabilities at fair value through profit or loss include financial assets or liabilities held for trading that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking derivative financial instruments (except for derivative financial instruments that are effective hedging instruments). The Group may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Group: intends to sell immediately or in the near term upon initial recognition designates as at fair value through profit or loss upon initial recognition designates as available-for-sale or may not recover substantially all of its initial investment, other than because of credit deterioration. As part of its acquisition and equity-backed finance business the Group purchases or keeps certain assets, including equity investments, and simultaneously enters into derivative contracts linked to these assets that effectively transfer the risks and economic benefits associated with the assets to the counterparty of the 24

25 derivative contract. The pricing of derivatives is usually designed in such a way that the Group is earning a return representing compensation for the time value of money and the credit risk of the counterparty. To the extent that the substance of the transactions is that the Group provides the acquisition financing to the counterparty with the underlying assets used as collateral, the Group classifies such transactions as loans and receivables. Investments held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity, other than those that: the Group upon initial recognition designates as at fair value through profit or loss the Group designates as available-for-sale or meet the definition of loans and receivables. Investments available-for-sale are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, investments held-to-maturity or financial instruments at fair value through profit or loss. Management determines the appropriate classification of financial instruments at the time of the initial recognition. Derivative financial instruments are not reclassified out of the fair value through profit or loss category. Financial assets that would have met the definition of loans and receivables may be reclassified out of the fair value through profit or loss or available-for-sale categories if the entity has the intention and ability to hold them for the foreseeable future or until maturity. Other financial instruments may be reclassified out of the fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to re-occur in the near term. (ii) Recognition and derecognition of financial instruments Financial assets and liabilities are recognised in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are accounted for at the settlement date. The Group derecognises a financial asset when the contractual rights to receive cash flows from the asset expire, or when it transfers the rights to receive contractual cash flows from the financial asset in a transaction in which substantially all the risks and rewards of owning of the financial asset are transferred. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. The Group enters into transactions whereby it transfers assets recognised in its consolidated statement of financial position, but retains either all or a portion of the risks and rewards of the transferred assets. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. In transactions where the Group neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is not retained. The rights and obligations created or retained in the transfer are recognised separately as assets and liabilities as appropriate. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets. The Group also derecognises and writes off assets which are deemed to be uncollectible. 25

26 (iii) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred upon sale or other disposal, except for: loans and receivables which are measured at amortised cost using the effective interest method investments held-to-maturity that are measured at amortised cost using the effective interest method equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost. All financial liabilities, other than those at fair value through profit or loss and financial liabilities that arise when the transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost. Amortised cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or upon disposal of the asset or liability. (iv) Gain and loss on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognised as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in profit or loss a gain or loss on an investments available-for-sale is recognised as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. Interest in relation to investments available-for-sale is recognised as earned in profit or loss using the effective interest method. For financial assets and liabilities carried at amortised cost, a gain or loss is recognised in profit or loss when the financial asset or liability is derecognised or impaired, and through the amortisation process. (v) Repo agreements The Group, as an element of its treasury management and trading business, utilises repo agreements and reverse repo agreements with securities. Repo agreements are accounted for as financing transactions. The related payable is included as amounts owed to financial institutions or amounts owed to customers, as appropriate. Any related expense arising from the pricing spreads for the underlying securities is recognised as interest expense and accrued over the period that the related transactions are open using the effective interest method. Securities pledged as collateral under repo agreements are also included in the consolidated financial statements. Reverse repo agreements are accounted for as due from financial institutions or loans to customers, as appropriate. Any related income arising from the pricing spreads for the underlying securities is recognised as interest income over the period that the related transactions are open using the effective interest method. Securities received as collateral under reverse repo agreements are not recognised in the consolidated financial statements. If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. (vi) Securitisation and transfer of assets 26

27 For securitised financial assets, the Group considers both the degree of transfer of risks and rewards on assets transferred to another entity and the degree of control exercised by the Group over the other entity. When the Group, in substance, controls the entity to which financial assets have been transferred, the entity is included in these consolidated financial statements and the transferred assets are recognised in the consolidated statement of financial position. When the Group has transferred financial assets to another entity, but has retained substantially all the risks and rewards relating to the transferred assets, the transferred assets are recognised in the consolidated statement of financial position. When the Group transfers substantially all the risks and rewards relating to the transferred assets to an entity that it does not control, the assets are derecognised from the consolidated statement of financial position. If the Group neither transfers nor retains substantially all the risks and rewards relating to the transferred assets, the assets are derecognised if the Group has not retained control over the assets. (vii) Derivative financial instruments The Group enters into derivative contracts for trading purposes. Derivative financial instruments include swap, forward, futures, spot transactions and options in interest rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments. The Group classifies these financial instruments as financial assets or liabilities held for trading. Derivatives are initially recognised at fair value, which is normally the transaction price (i.e. the fair value of the consideration given or received for them), and subsequently are measured at their fair value. Fair values are obtained from quoted market prices (if available) or are estimated using appropriate valuation models and available market prices. The realised trading profits from derivatives and unrealised changes in the fair value of derivative contracts are recognised immediately in profit or loss. Derivatives may be embedded in another contractual arrangement (a host contract). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if, the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets and liabilities. Derivatives held for risk management purposes are measured at fair value in the consolidated statement of financial position. The Group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationships between the hedging instruments and hedged items, including the risk management objective and strategy in undertaking the hedge, along with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80%-125%. 27

28 (viii) Cash flow hedge When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount recognised in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the consolidated statement of profit or loss and other comprehensive income. If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. (ix) Due from financial institutions In the normal course of business, the Group lends or deposits funds for various periods with other financial institutions. Such amounts are categorised as loans originated by the Group and are carried at amortised cost. As these placements of funds are typically unsecured extensions of credit, some of the assets may be impaired. The principles used for allowance for impairment on amounts due from financial institutions are described below as for financial assets carried at amortised cost. (x) Promissory notes In the normal course of business the Group acquires promissory notes of third parties. These notes generally have short-term to medium-term maturity. Promissory notes are categorised as securities at fair value through profit or loss, investments available-for-sale or held-to-maturity, amounts due from financial institutions or loans to customers depending on their economic substance. Promissory notes are measured by the Group according to the appropriate accounting policies for the respective assets. (xi) Trade receivables (payables) Trade receivables (payables) are initially recognised at fair value, which is the fair value of the consideration given (received), and are subsequently measured at amortised cost. An allowance for impairment on trade receivables is provided if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is determined using the principles described below for financial assets carried at amortised cost. (xii) Amounts owed to financial institutions and to customers and subordinated debts Amounts owed to financial institutions and to customers and subordinated debts are initially recognised at fair value less transaction costs that are directly attributable to the acquisition or issue of the financial liability. Subsequently amounts due are stated at amortised cost and any difference between the carrying amount and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early redemption of debt. (xiii) Bonds issued Bonds issued represent bonds issued by the Group to domestic customers and eurobonds. Eurobonds represent mainly internationally traded Euro Medium Term Notes and Loan Participation Notes issued by the Group. Bonds issued are accounted for according to the same principles used for amounts owed to financial institutions and to customers. 28

29 (xiv) Offsetting Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (e) Impairment (i) Financial assets carried at amortised cost Financial assets carried at amortised cost consist principally of loans to customers, investments held-to-maturity and other receivables. The Group reviews its loans, investments held-to-maturity and receivables to assess impairment on a regular basis. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more event(s) that occurred after the initial recognition of the loan or receivable and that event(s) had an impact on the estimated future cash flows of the loan that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. The Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan's or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulty and there is little available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgement to estimate the amount of any impairment loss. The allowance for impairment covers losses where there is objective evidence that incurred losses are present in the loan portfolio at the reporting date. These have been estimated based upon historical patterns of losses in each component of the loan portfolio, the credit ratings allocated to borrowers and reflecting the current economic conditions in which the borrowers operate. All impairment losses in respect of loans and receivables are recognised in profit or loss and are only reversed if a subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Group writes off a loan balance (and any related allowance for impairment) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. 29

30 Loans are regarded as "non-performing" if the loan has been in default regarding payment of principal or interest for 90 days or more or in case of default of counterparty. Loans are considered "contractually overdue" when a borrower fails to make a scheduled payment of principal or interest for more than five days from the date stated in the loan agreement. If the amount of the impairment losses subsequently decreases due to an event occurring after the write-down, the recovery of the impairment is credited to the provision for impairment losses in profit or loss. (ii) Available-for-sale Impairment losses on available-for-sale financial assets are recognised by transferring the cumulative loss that is recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. For an investment in an equity security available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If, in a subsequent period, the fair value of an impaired available-for-sale debt security 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, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. (iii) Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in investments available-for-sale that are not carried at fair value because their fair value cannot be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognised in profit or loss and cannot be reversed. (iv) Non financial assets Non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. If any such indication exists, then the asset s recoverable amount is estimated. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amount. All impairment losses in respect of non financial assets are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 30

31 (f) Assets held for sale A non-current asset is classified as held for sale if it is highly probable that the asset s carrying amount will be recovered through a sale transaction rather than through continued use. Such sale transactions should be principally completed within one year from the date of classification of an asset as held for sale. Immediately before classification as held for sale, the assets are remeasured in accordance with the Group s accounting policies. Thereafter generally the assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell. If the fair value less costs to sell of an asset held for sale is lower than its carrying amount, an impairment loss is recognised in profit or loss. Any subsequent increase in an asset s fair value less costs to sell is recognised to the extent of the cumulative impairment loss that was previously recognised in relation to that specific asset. (g) Goodwill Goodwill on acquisitions of subsidiaries is separately presented in the consolidated statement of financial position. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Goodwill is tested for impairment annually at the reporting date or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (h) Property, plant, equipment and intangibles Property, plant and equipment and intangibles are recorded at historical cost less accumulated depreciation (amortisation) and any accumulated impairment losses. Furthermore, the historical cost of property, plant and equipment and intangibles of the subsidiaries that used the Russian ruble as the functional currency of their financial statements while the Russian Federation met the criteria for being a hyperinflationary economy, is restated to the equivalent purchasing power of the Russian rublas at 2002 for assets acquired prior to that date. Depreciation (amortisation) is provided to write off the cost on a straight-line basis over the estimated useful economic life of the asset. The economic lives are as follows: Years Buildings and facilities Machinery and vehicles 3-30 Office, computer equipment and other 3-25 Rights for audio-visual products 3-10 Programming rights include licenses for broadcasting films and TV programs owned by the Group. Programming rights are amortised depending on the number of contracted airings as follows. The amortisation rate for 1 airing is 100%. If the limitation to the number of airings is higher than two or there is no such limitation for a product, amortisation is calculated according to the category of broadcasting films and TV programs and the appropriate amortisation rate. Assets under construction are not depreciated. Depreciation of these assets will begin when the related assets are ready to be placed in service. Repairs and maintenance are charged to profit or loss at the date the services are provided. 31

32 (i) Construction contracts The Group also enters into construction contracts, which are generally long-term contracts to manufacture design-build equipment, including nuclear power plant equipment, continuous casting machines, handling machinery and equipment for cryogen products. Contract costs are recognised when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are probable of recovery. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. The Group uses the "percentage of completion method" to determine the appropriate amount of revenues to be recognised in a given period. The stage of completion is measured by reference to the contract costs incurred up to the reporting date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings. Progress billings not yet paid by customers are included within trade and other receivables. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). (j) Inventories The Group regards non financial assets (property) that are held for sale in the ordinary course of business as inventories. Inventories are measured at the lower of cost and net realisable value. The cost of inventories held by the Group comprises all purchase costs including purchase price, duties and other taxes, transportation and other costs directly attributable to acquisition. The Group recognises the amount of any write-down of inventories to net realisable value and all losses of inventories as an expense in the period the write-down or loss occurs. (k) Operating and finance leases The Group enters into operating lease agreements as a lessee. The total payments made under operating leases are charged to profit or loss on a straight-line basis over the period of the lease. The Group also enters into finance lease agreements as a lessor. Assets held under finance lease in the consolidated statement of financial position are presented as a loans to customers at an amount equal to the net investment in the lease. Under a finance lease substantially all the risks and rewards incidental to legal ownership are transferred by the lessor, and thus the lease payment receivable is treated by the lessor as repayment of principal and finance income to reimburse and reward the lessor for its investments and services. The recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the lessor s net investment in the finance lease. Lease payments relating to the period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and unearned finance income. (l) Fiduciary activities The Group provides trustee services to its customers. Also the Group provides depositary services to its customers, which include transactions with securities on their "depo" accounts. Assets and liabilities incurred under the trustee and depository activities are not included in the consolidated financial statements. The Group accepts the operational risk on these activities, and the customers bear the credit and market risks associated with such operations. 32

33 (m) Dividends, treasury shares and additional paid-in capital Dividends on ordinary shares are reflected as an appropriation of retained earnings in the period in which they are declared. Dividends for the year, which are declared after the reporting date, are treated as a subsequent event under IAS 10 Events After the Reporting Period. The Bank s shares that are reacquired by the Bank or its subsidiaries are referred to as treasury shares and are shown as a deduction from total equity. Gains and losses on sales of its own shares are charged or credited to equity. The amounts received on the issuance of the Bank s shares exceeding their par value are referred to as additional paid-in capital and are accounted as a part of equity. (n) Provisions Provisions are recognised in the consolidated statement of financial position 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. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced to those affected by it. Future operating costs are not provided for. (o) Taxation Profit tax comprises current and deferred tax. Profit tax is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised within other comprehensive income or directly in equity. The current taxation charge is calculated in accordance with the regulations of the Russian Federation and other jurisdictions in which the Bank has offices and branches or where its subsidiaries are located and is based on the results reported in the consolidated statement of profit or loss of the Bank and its subsidiaries prepared under statutory tax legislation. Deferred profit taxes are provided on temporary differences between the tax base of an asset or liability and its carrying amount in the consolidated statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Deferred profit tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset if the Group has a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. 33

34 In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In addition, the tax base is determined separately for each of the Group s main activities and, therefore, tax losses and taxable profits related to different activities cannot be offset. The Russian Federation also has various other taxes that are relevant to the Group s activities. These taxes (except recoverable value added tax) are included as a component of administrative expenses in profit or loss. (p) Value added tax VAT related to sales of products and services is payable to tax authorities at the earlier of (a) receipt of advances from customers or (b) delivery of the goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases, that have not been settled at the reporting date (VAT recoverable and deferred VAT payable), is recognised on a gross basis and disclosed separately as other assets and other liabilities. Where an allowance has been made for impairment of receivables, the impairment loss is recorded for the gross amount of the debtor, including VAT. The related VAT deferred liability is maintained until the receivable is written off for tax purposes. (q) Cash and cash equivalents Cash and cash equivalents comprise cash balances, current accounts with the CBR and amounts due from financial institutions with a maturity of three months or less when originated that are subject to insignificant risk of changes in their fair value. Cash balances with contractual limitations on immediate disposal and overdue amounts are excluded from cash and cash equivalents. (r) Credit-related commitments In the normal course of business, the Group enters into credit-related commitments, comprising undrawn credit lines, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees issued by the Group represent an obligation to pay a certain amount to a beneficiary as a compensation of loss, incurred as a result of the debtor s failure to make payment when due in accordance with the original or modified terms of the financial instrument. Such guarantees are initially recognised at fair value. Subsequently they are measured at the higher of the created provision and initial cost less, where applicable, the accumulated amortization of commission income, received under the financial guarantee. Provisions for losses under financial guarantees and other credit-related commitments are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities and provisions for other credit-related commitment are included within other liabilities. (s) Share capital (i) Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. (ii) Preference shares Non-cumulative preference shares that do not include fixed or determinable dividends are classified as equity. 34

35 (iii) Perpetual instruments Perpetual non-redeemable debt instruments issued by the Group which carry no mandatory interest payments are classified as equity. (t) Transactions with shareholders Transactions with the Group's shareholders may include various contributions by and distributions to shareholders other than investment in share capital or dividend payouts. Such transactions are accounted for in equity and are presented separately from other changes in equity in the consolidated statement of changes in equity for the reporting period. (u) Share-based payments As part of its remuneration policy the Group uses share-based payments (including share options) for the services of its employees and directors. The fair value of services received is measured indirectly, i.e. by reference to the fair value of the share-based instruments granted. The fair value of the instruments is measured (i) by use of a market quotation for the instruments that are traded on an active market or (ii) by use of valuation techniques that are commonly used for valuation of such instruments if the share-based instrument is not actively traded. Expenses related to the options are accrued starting from the grant date through to the vesting date regardless of the service period covered. Equity-settled share-based payments are measured at the fair value of the equity instrument at the grant date. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group s estimate of the number of shares that will eventually vest. For cash-settled share-based payments (share appreciation rights), a liability equal to the portion of the services received is recognised at the current fair value determined at each reporting date. Share-based payment transactions with a cash alternative are structured so that the employee has the right to choose whether the transaction is settled in equity instruments or in cash-settled share appreciation rights and at the day of settlement the fair value of one settlement alternative is the same as the other. As a result, such transactions are accounted for in the same way as cash-settled share-based payments. At the date of settlement the liability is re-measured to its fair value. If the employee chooses settlement in equity instruments, the liability is transferred directly to equity. (v) Segment reporting An operating segment is a component of the Group that: (i) engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same group); (ii) whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (iii) for which discrete financial information is available. Internal reports which are regularly reviewed by the chief operating decision maker are based on financial information prepared in accordance with IFRS as management believes that such information is the most relevant in evaluating segment results. Inter-segment balances and transactions are eliminated in the segment reporting reviewed by the chief operating decision maker. 35

36 (w) Changes in accounting policies New standards adopted Movement of liabilities as part of cash flows from financing activities (Amendments to IAS 7 Statement of Cash Flows) The Group has adopted amendments to IAS 7. The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. To satisfy the new disclosure requirements, the Group presented a reconciliation between the opening and closing balances for liabilities with changes arising from financing activities. Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12 Income Taxes). The Group has adopted amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses. The amendments clarify the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value. The amendments are effective for annual periods beginning on or after 1 January There is no effect on the Group's consolidated financial statements due to adoption of IAS 12 amendments. New standards and interpretations not yet adopted A number of new standards and amendments to the standards are effective for annual periods beginning after 1 January IFRS 9 Financial Instruments In July 2014, the International Accounting Standards Board issued the final version of IFRS 9. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. In October 2017, the IASB issued Prepayment Features with Negative Compensation (Amendments to IFRS 9). The amendments are effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. The Group applied IFRS 9 initially on 1 January Therefore, the first reporting period for the Group with the IFRS 9 adopted will be first quarter of As permitted by the transitional provisions of IFRS 9, the Group elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 will be recognised in retained earnings and reserves as at 1 January At the moment of these consolidated financial statements approval the Group is in the process of finalising the effect of IFRS 9 adoption and estimates that impact on capital adequacy ratio of the Group in accordance with Basel 1 will approximate a range from 0,5 to 0,6 basic percentage points (decrease of capital adequacy ratio). The above assessment is preliminary because not all transition work has been finalised. The actual impact of adopting IFRS 9 on the consolidated financial statements of the Group as at 1 January 2018 may change because: IFRS 9 will require the Group to revise its accounting processes and internal controls and these changes are not yet complete although parallel runs were carried out in the second half of 2017, the new systems and associated controls in place have not been operational for a more extended period the Group has not finalised the testing and assessment of controls over its new IT systems and changes to its governance framework the Group is refining and finalising its models for "expected credit loss" (ECL) calculations and the new accounting policies, assumptions, judgements and estimation techniques employed are subject to change until the Group finalises its first consolidated financial statements that include the date of initial application. 36

37 Classification Financial assets IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model used to manage these assets and their cash flow characteristics. IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The standard eliminates the existing IAS 39 Financial instruments: Recognition and Measurement categories of fair value through profit or loss (FVTPL), held to maturity, loans and receivables and available-for-sale. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding. A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. In addition, on initial recognition the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. A financial asset is classified into one of these categories on initial recognition. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification. Impairment IFRS 9 replaces the "incurred loss" model in IAS 39 with a forward-looking "expected credit loss" (ECL) model. The new impairment model is applicable to all debt instruments classified as hold-to-collect (HTC) or FVOCI. In addition, the ECL model applies to loan commitments and financial guarantees that are not measured at FVTPL. Expected Credit Loss Methodology The application of ECL will change the credit loss methodology and models of the Group. ECL allowances represent credit losses that reflect an unbiased and probability-weighted amount, which is determined by evaluating a range of possible outcomes, the time value of money and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. 37

38 ECL allowances will be measured at amounts equal to either: 12-month ECL or lifetime ECL for those financial instruments which have experienced a significant increase in credit risk (SICR) since initial recognition. Under ELC methodology financial instruments are divided into three stages: Stage 1 comprises all non-impaired financial instruments, which have not experienced a SICR since initial recognition. Entities are required to recognise 12 month ECL for stage 1 financial instruments. In assessing whether credit risk has increased significantly since initial recognition, entities are required to compare the risk of default occurring on the financial instrument as at the reporting date, with the risk of a default occurring on the financial instrument as at the date of initial recognition. Stage 2 comprises non-impaired financial instruments, which have experienced a significant increase in credit risk (SICR). Entities are required to recognise lifetime expected credit losses for the stage 2 financial instruments. In subsequent reporting periods, a financial instrument is reclassified to the stage 1 if the credit quality has improved and there is no SICR at the reporting date. In this case, entities are required to recognise 12 month ECL again. Stage 3 comprises of impaired financial instruments. Entities are required to recognise lifetime ECL for the stage 3 financial instruments. A credit loss will be the present value of the difference between the contractual cash flows under the contract and the cash flows an entity expects to receive. Interest income on such financial assets is calculated based on the carrying amount of the asset net of its allowance for impairment. In subsequent reporting periods, a financial instrument is reclassified to the stage 2 if the credit quality has improved at the reporting date. As a result of the implementation of IFRS 9, impaired loans recognised under IAS 39 will be recognised in stage 3, while the loans without individual signs of impairment under IAS 39 will be in stage 1 or stage 2. The Group has established a System of early warnings to identify whether the credit risk on a particular corporate borrower has increased significantly since initial recognition. The System of early warnings incorporates both quantitative and qualitative indicators for identifying negative trends in a current activity of borrowers. For other portfolios the Group applies mainly 30 days overdue criterion along with different qualitative factors to identify SICR. Definition of credit-impaired loans that are included into the stage 3 has not changed compared to definition of impaired loans used for IAS 39 purpose. Inputs into measurement of ECLs The key inputs into the measurement of ECLs are the following variables: probability of default (PD) loss given default (LGD) and exposure at default (EAD). These parameters will be derived from the internally developed statistical models and other historical data. They will be adjusted to reflect macro-economic factors and a forward-looking information. The Group uses a default definition, which is consistent with the one, used for internal risk management purposes. Classification - Financial liabilities IFRS 9 substantially retains the existing requirements in IAS 39 for the classification of financial liabilities. 38

39 However, under IAS 39 all fair value changes of liabilities designated as at FVTPL are recognised in profit or loss, whereas under IFRS 9 these fair value changes are generally presented as follows: the amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI and the remaining amount of change in the fair value is presented in profit or loss. Hedge accounting When initially applying IFRS 9, the Group may choose as its accounting policy to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements in IFRS 9. The Group decided to apply the new requirements of IFRS 9. IFRS 9 will require the Group to ensure that hedge accounting relationships are aligned with the Group s risk management objectives and strategy and to apply a more qualitative and forward looking approach to assessing hedge effectiveness. IFRS 9 also introduces new requirements regarding rebalancing of hedge relationships and prohibiting voluntary discontinuation of hedge accounting. Under the new model, it is possible that more risk management strategies, particularly those involving hedging a risk component (other than foreign currency risk) of a non-financial item, will be likely to qualify for hedge accounting. The Group currently does not undertake hedges of such risk components. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. The core principle of the new standard is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group applied IFRS 15 initially on 1 January Therefore, the first reporting period for the Group with the IFRS 15 adopted will be first quarter of Effect of IFRS 15 adoption is not significant for the Group's consolidated financial statements. IFRS 16 Leases IFRS 16 introduces a single, on-balance lease sheet accounting model for lessees. A lessee recognises a rightof-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard i.e. lessors continue to classify leases as finance or operating leases. IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective for annual periods beginning on or after 1 January Early adoption is permitted for entities that apply IFRS 15 at or before the date of initial application of IFRS 16. The Group is currently assessing potential effect of transition to IFRS 16. Other standards and amendments to standards are not expected to have a significant impact on the Group s consolidated financial statements. 39

40 NOTE 4 SEGMENT REPORTING (a) Operating segments Management determined that the Group operates in the following operating segments according to IFRS 8 Operating Segments: "Banking", "Media" and "Machinery", which are described in Note 1. Other operations include: real estate development, natural gas trading and oil loading terminal (the "Other" segment). For additional disclosures on types of products and services included in non-banking operating segments refer to Note 9. For additional information about companies forming each of the operating segments refer to Note 33. Assets of the banking segment include investments in subsidiaries representing other segments which are eliminated on consolidation. Information regarding the results of each operating segment is disclosed below. Performance is measured based on segment profit from operations after profit tax as included in the internal management reports that are reviewed by the Management Board. 40

41 Segment information for operating segments as at 2017 and 2016 and for the years then ended is as follows: Banking Media Machinery Other Eliminations Consolidated Profit and loss information Year ended 2017 Interest income External Interest income Inter-segment (16 945) - Interest expense External ( ) (262) (32) (580) - ( ) Interest expense Inter-segment (904) (5 699) (7 866) (2 476) Net interest income (expense) (2 699) (7 526) (751) (Impairment) recovery of impairment of interest earning assets (26 573) (34) (38) (26 488) Net interest income (expense) after impairment of interest earning assets (2 733) (7 564) (594) Fees and commissions income External Fees and commissions income Inter-segment (241) - Fees and commissions expense External (11 338) (26) (59) (61) - (11 484) Fees and commissions expense Inter-segment - (43) (163) (35) Non-interest gain (loss) from financial assets and liabilities at fair value through profit or loss, net External (35) Gain (loss) from investments available-for-sale, net External (13) Income (expense) from equity method investments in associates External (878) (Loss) gain from trading in foreign currencies, operations with foreign currency derivatives and foreign exchange translation, net External (10 857) 125 (193) (987) - (11 912) Other operating income, net External Other operating income, net Inter-segment (248) - Non-interest income (expense) (288) (1 505) (248) Non-banking operating revenues External Non-banking operating revenues Inter-segment (52) - Non-banking operating expenses External - (85 083) (64 724) (89 239) - ( ) Non-banking operating expenses Inter-segment - (33) (10) (37) 80 - Non-banking operating profits Banking salaries and employment benefits External (41 050) (41 050) Banking administrative expenses External (37 751) (37 751) Impairment of assets and provisions for other risks External (5 664) (24) (341) (279) - (6 308) Impairment of goodwill External - (4 332) (4 332) 41

42 Non-interest expense (84 465) (4 356) (341) (279) - (89 441) Banking Media Machinery Other Eliminations Consolidated Profit (loss) before profit tax (1 950) (5 343) (1 414) (220) Profit tax (expense) benefit (8 059) (1 520) (9 343) Profit (loss) for the year (3 470) (5 235) (1 286) (220) Profit (loss) for the year attributable to: Bank s shareholders (3 564) (2 525) (2 207) (220) Non-controlling interests (2 710) (1 671) Profit (loss) for the year (3 470) (5 235) (1 286) (220) Capital expenditure Depreciation and amortization expense

43 Banking Media Machinery Other Eliminations Consolidated Profit and loss information Year ended 2016 Interest income External Interest income Inter-segment (16 164) - Interest expense External ( ) (372) (15) (231) - ( ) Interest expense Inter-segment (1 058) (5 233) (7 001) (2 872) Net interest income (expense) (5 170) (6 607) (994) Impairment of interest earning assets (1 963) - (51) (30) - (2 044) Net interest income (expense) after impairment of interest earning assets (5 170) (6 658) (1 024) Fees and commissions income External Fees and commissions income Inter-segment (362) - Fees and commissions expense External (10 152) (29) (150) (71) - (10 402) Fees and commissions expense Inter-segment - (42) (241) (79) Non-interest gain (loss) from financial assets and External liabilities at fair value through profit or loss, net (23) Gain from investments available-for-sale External Income (expense) from equity method External investments in associates (25) 821 (743) Gain from disposal of subsidiaries External (Loss) gain from trading in foreign currencies, External operations with foreign currency derivatives and foreign exchange translation, net (10 356) (8 785) Other operating income (expense), net External Other operating income Inter-segment (417) - Non-interest income (expense) (141) (417) Non-banking operating revenues External Non-banking operating revenues Inter-segment (126) - Non-banking operating expenses External - (90 017) (57 941) (80 984) - ( ) Non-banking operating expenses Inter-segment - - (32) (145) Non-banking operating (losses) profits - (7 811) (2 434) (4 800) 51 (14 994) Banking salaries and employment benefits External (38 452) (38 452) Banking administrative expenses External (34 298) (34 298) (Impairment) recovery of impairment of assets and provisions for other risks External (11 853) (10 102) (639) (22 325) Impairment of goodwill External - (4 781) - (977) - (5 758) Non-interest expense (84 603) (14 883) (639) (708) - ( ) 43

44 Banking Media Machinery Other Eliminations Consolidated Profit (loss) before profit tax (26 841) (9 210) (6 673) (366) Profit tax (expense) benefit (22 416) (1 540) (1 476) - (24 403) Profit (loss) for the year (28 381) (8 181) (8 149) (366) Profit (loss) for the year attributable to: Bank s shareholders (28 468) (3 935) (6 647) (369) Non-controlling interests (4 246) (1 502) 3 (2 144) Profit (loss) for the year (28 381) (8 181) (8 149) (366) Capital expenditure Depreciation and amortization expense

45 Banking Media Machinery Other Eliminations Consolidated Statement of financial position 2017 Cash and cash equivalents due from the CBR and credit institutions (20 553) Financial assets at fair value through profit or loss (694) Loans to customers ( ) Investments available-for-sale ( ) Investments in associates Receivables and prepayments (8 065) Investments held-to-maturity Inventories Property, plant and equipment and intangibles Goodwill All other assets Total assets ( ) Financial liabilities at fair value through profit or loss Amounts owed to financial institutions ( ) Amounts owed to customers (36 181) Bonds issued Subordinated debts All other liabilities (7 533) Total liabilities ( ) Banking Media Machinery Other Eliminations Consolidated Statement of financial position 2016 Cash and cash equivalents due from the CBR and credit institutions (16 737) Financial assets at fair value through profit or loss (90) Loans to customers ( ) Investments available-for-sale ( ) Investments in associates Receivables and prepayments (7 714) Investments held-to-maturity Inventories Property, plant and equipment and intangibles Goodwill All other assets Total assets ( ) Financial liabilities at fair value through profit or loss Amounts owed to financial institutions ( ) Amounts owed to customers (23 307) Bonds issued Subordinated debts All other liabilities (7 085) Total liabilities ( )

46 (b) Geographical areas The Group primarily operates in the Russian Federation. The effect of operations of the Group's subsidiaries in other countries is presented below for 2017 and 2016 years: 2017 Russian Federation Other countries Adjustments Total consolidated Net interest income (35) Non-interest income (145) Non-banking operating profits Property, plant and equipment and intangibles Russian Federation Other countries Adjustments Total consolidated Net interest income (52) Non-interest income (expense) (6 211) (108) Non-banking operating (losses) profits (15 931) (14 994) Property, plant and equipment and intangibles The total amount of revenues from each single external customer or group of related external customers does not exceed 10% of revenues. Substantially all non-current assets are located in the Russian Federation. NOTE 5 NET INTEREST INCOME Net interest income for the years ended 2017 and 2016 comprises: Interest income Interest income on financial assets at amortised cost Loans to customers: loans to private companies loans to government-related entities loans to individuals Investments held-to-maturity Due from financial institutions Financial leasing Due from the CBR Interest income on financial assets at fair value through profit or loss and investments available-for-sale Debt securities Interest expense Interest expense on financial liabilities at amortised cost Amounts owed to customers: amounts owed to government-related entities (99 127) (90 334) amounts owed to private companies (60 298) (70 272) amounts owed to individuals (28 207) (30 422) promissory notes and certificates of deposit issued (1 514) (2 327) Bonds issued (20 325) (24 219) Subordinated debts (12 556) (15 176) Amounts owed to financial institutions (7 029) (11 470) Amounts owed to the CBR (3 484) (11 992) Other interest expense (906) (1 522) Interest expense on financial liabilities designated at fair value through profit or loss Amounts owed to individuals (372) (315) ( ) ( ) Net interest income

47 NOTE 6 PROVISIONS AND IMPAIRMENT LOSSES, OTHER ASSETS AND OTHER RISKS The impairment losses in the consolidated statement of profit or loss and other comprehensive income represents the charge required in the current period to provide the total allowance for impairment carried forward in accordance with IFRS. The movements in the allowance for impairment on interest earning assets during the years ended 2017 and 2016 were as follows: Due from credit institutions Loans to customers Investments held-tomaturity Total allowance for impairment (Recovery of impairment) impairment losses (133) (597) Recovery of loans previously written off Derecognition of restructured loans - (38 673) - (38 673) Disposal of subsidiaries - (3 913) - (3 913) Foreign exchange translation differences (168) (19 737) (109) (20 014) Effect of translation to presentation currency - (776) - (776) Amounts written off - (6 953) - (6 953) Impairment losses Recovery of loans previously written off Effect of consolidation of subsidiarie - (25 743) - (25 743) Derecognition of loans - (29 355) - (29 355) Foreign exchange translation differences (21) (578) (2) (601) Effect of translation to presentation currency Amounts written off - (37 611) - (37 611) The movements in the allowances for impairment on other assets and provisions for other risks during the years ended 2017 and 2016 were as follows: Receivables Inventories Other assets Other risks Total allowance for impairment Impairment losses Effect of translation to presentation currency (38) Amounts written off (1 283) (57) (787) (17) (2 144) Impairment (recovery of impairment) losses (1 066) Impairment losses recognised in nonbanking operating profits Derecognition of other assets - - (972) - (972) Effect of translation to presentation currency Amounts written off (255) (490) (89) - (834)

48 The allowance for impairment on assets is deducted from the related assets of the consolidated statement of financial position. Provisions for other risks are recorded in other liabilities. As at 2017, the Group estimated the fair value amounts of its assets held for sale, included in other assets, as a result, the Group recognised their impairment of RUB million as part of non-banking operating profits in the consolidated statement of profit or loss and other comprehensive income for the year ended 2017 (Note 9). The movements in the allowances for impairment of investments available-for-sale recognised for the years ended 2017 and 2016 were as follows: Investments Investments available-forsale accounted for available-for-sale accounted for at cost at fair value Investments accounted for under the equity method Total allowance for impairment Impairment losses Amounts written off - (265) - (265) Impairment losses Derecognition - (3 692) - (3 692) Amounts written off - (907) - (907) As at 2017, the Group estimated the recoverable amounts of its property, plant and equipment and intangible assets. As a result, their carrying values were impaired by RUB million, which was recognised as part of non-banking operating profits in the consolidated statement of profit or loss and other comprehensive income for the year ended 2017 (year ended 2016: RUB million) (Notes 9, 19, 20). NOTE 7 FEES AND COMMISSIONS INCOME AND EXPENSE Fees and commissions income and expense for the years ended 2017 and 2016 comprise: Debit and credit cards Commissions on cash-settlement transactions, credit related commitments issued Trade finance Brokerage Depository and custodian Arrangement fees and other financial services Asset management Other Fees and commissions income Debit and credit cards (7 390) (6 918) Commissions on cash-settlement transactions (1 467) (1 135) Arrangement fees and other financial services (1 103) (1 247) Brokerage (985) (716) Depository and custodian (203) (166) Other (336) (220) Fees and commissions expense (11 484) (10 402) 48

49 NOTE 8 NON-INTEREST GAIN FROM FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS, NET Net non-interest gain from financial assets and liabilities at fair value through profit or loss for the years ended 2017 and 2016 comprises: Financial assets and liabilities held for trading Trading securities Corporate bonds Sovereign and municipal bonds Corporate shares (732) Gain on trading securities Derivative contracts Securities contracts Interest rate contracts Commodity contracts (8) 107 Bullion contracts (526) (5) Gain on derivative contracts Gain on financial assets and liabilities held for trading Financial assets designated as at fair value through profit or loss Corporate shares and fund units Corporate bonds Credit-linked notes (43) (217) Equity-linked receivables (538) - Gain (loss) on financial assets designated as at fair value through profit or loss (145) Financial liabilities designated as at fair value through profit or loss (10 202) (199) Loss on financial liabilities designated as at fair value through profit or loss (10 202) (199) Non-interest gain from financial assets and liabilities at fair value through profit or loss, net Interest income from debt securities at fair value through profit or loss in the amount of RUB million is reported as part of interest income (2016: RUB million). 49

50 NOTE 9 NON-BANKING OPERATING PROFITS (LOSSES) The composition of non-banking operating profits (losses) for the years ended 2017 and 2016 is presented below. For more information on non-banking segments see Notes 1 and Media business operating profit (loss) (7 815) Machinery business operating profit (loss) (2 487) Other businesses operating profit (loss) 990 (4 692) Non-banking operating profits (losses) (14 994) The composition of non-banking revenues and expenses is as follows: Advertising services Sales of program and other rights Broadcasting services Publishing Other Media business operating revenues Depreciation and amortization (32 190) (34 791) Salaries and other employment benefits (17 097) (18 242) Selling and marketing costs (11 681) (6 864) Broadcasting costs (6 831) (6 938) Program rights acquired and used in the same period and royalties for use of film rights (6 495) (6 487) Administrative expenses (5 262) (5 921) Impairment of assets held for sale (3 000) - Goods and materials used (710) (1 020) Printing costs (547) (652) Impairment of property, plant and equipment and intangible assets (37) (9 039) Other (1 233) (63) Media business operating expenses (85 083) (90 017) Media business operating profit (loss) (7 815) Power plant equipment Machinery for chemical production Mining equipment Gas compressor units Speciality steels Equipment for cryogen products Machinery equipment manufacturing Engineering revenue Electrical equipment Thermal and other equipment Other equipment Machinery business operating revenues Materials (20 000) (21 017) Production services received (17 476) (10 432) Salaries and other employment benefits (15 287) (13 934) Other production expenses (3 921) (4 193) Depreciation and amortization (3 752) (3 787) Engineering expense (1 471) (1 649) Distribution costs (582) (489) Impairment of property, plant and equipment and intangible assets (45) (161) Other (2 190) (2 279) Machinery business operating expenses (64 724) (57 941) Machinery business operating profit (loss) (2 487) 50

51 Revenue from sale of natural gas Revenue from sale of projects and premises Oil transshipment revenue Engineering revenue Other Other businesses operating revenues Cost of natural gas sold (70 272) (55 805) Cost of projects and premises sold (9 566) (6 338) Engineering expenses (1 859) (8 546) Impairment of property, plant and equipment and intangible assets (1 476) - Engineering expenses related to the closure of projects (1 287) (6 683) Depreciation and amortization (1 264) (996) Oil transshipment expenses (275) (516) Other (3 240) (2 100) Other businesses operating expenses (89 239) (80 984) Other businesses operating profit (loss) 990 (4 692) NOTE 10 BANKING SALARIES, EMPLOYMENT BENEFITS AND ADMINISTRATIVE EXPENSES Banking salaries, employment benefits and administrative expenses for the years ended 2017 and 2016 comprise: Salaries Social security costs Annual remuneration of the Board of Directors Defined contribution pension plan Banking salaries and employment benefits Repairs and maintenance Depreciation and amortization Charity and sponsorship Operating lease expenses Professional services Taxes other than income tax Charges to the State Deposit Insurance System Advertising and marketing Security expenses Сommunication and information services Business development expenses Other Banking administrative expenses Bonus payments to the Bank's management and the remuneration of the Board of Directors are linked to the Group's performance according to IFRS financial statements. In 2017, bonus to the members of the Management Board of the Bank was accrued in the amount of RUB 880 million (2016: RUB 515 million). Accrued bonus for the year 2017 includes deferred payment in the amount of RUB 360 million, which is due in equal parts in one, two and three years (deferred bonus payment for 2016 comprised RUB 227 million). The deferred bonus may be reduced in case of certain risk events realisation. The service period that is the basis for remuneration of the Board of Directors represents an annual period starting from the election (re-election) by the Аnnual General Shareholders' Meeting. The remuneration to the Board of Directors recognased in the periods ended 2017 and 2016 relates to the service period from 1 January to 30 June and from 1 July to. 51

52 The Group has pension arrangements under the state pension system of the Russian Federation. The Russian Federation's state pension system requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense, included in social security costs, is charged to profit or loss in the period the related compensation is earned by each employee. Also in 2005, the Bank set up a defined contribution pension plan for its employees. The Bank recognised RUB 686 million as an expense for the defined contribution pension plan attributable to services provided by employees in 2017 (2016: RUB 678 million). The liabilities under the defined contribution pension plan are included in other liabilities. Taxes other than income tax include property tax, VAT, transport tax and other minor taxes paid according to Russian tax legislation. NOTE 11 PROFIT TAX Profit tax expense for the years ended 2017 and 2016 comprises: Current tax expense Deferred tax (benefit) expense (361) Profit tax expense In 2017, the applicable profit tax rate for current and deferred tax in the Russian Federation is 20% (2016: 20%). The profit tax rates in foreign countries where some of the Group's subsidiaries operate differ from the profit tax rate in the Russian Federation. Also, each of the Group's subsidiaries is an independent profit tax-payer which manages its tax duties individually. The effective profit tax rate differs from the statutory profit tax rate. A reconciliation of the profit tax expense based on the statutory profit tax rate with the actual profit tax expense is as follows: Profit before taxation Statutory profit tax rate 20% 20% Theoretical profit tax expense at statutory rate Tax effect of permanent differences Unrecognised deferred tax asset Income and expenses taxed at different rates (4 022) (529) Profit tax expense As at 2017 and 2016, profit tax assets comprise: Current tax assets Deferred tax assets Profit tax assets The current profit tax assets arise from advance payments of profit tax and are usually realised either by offsetting with profit tax liabilities in subsequent periods or by reimbursement by the tax authorities. Deferred tax assets are the amounts of profit taxes recoverable in future periods in respect of: (i) deductible temporary differences; (ii) the carryforward of unused tax losses; and (iii) the carryforward of unused tax credits. The Group has not recognised deferred taxes in respect of investments in subsidiaries arising from the differencies between the Group's share of the net assets of subsidiaries and the tax base of the investments as at 2017 in the amount of deferred tax liability of RUB million and deferred tax asset of RUB million ( 2016: deferred tax liability of RUB million and deferred tax asset of RUB million), because the Group is able to control the timing of reversal of such temporary differences, and it is probable that they will not reverse in the foreseeable future. 52

53 As at 2017, the Group recognised RUB million of deferred tax assets in respect of the carryforward of unused tax losses ( 2016: RUB million). The utilisation of deferred tax assets is fully dependent on the Group s future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differencies. Management of the Group decided that deferred tax assets can be fully utilised in the reporting periods after 2017 considering the predicted levels of recovering profitability on a forecast time horizon. However, the decline in the predicted levels of profit may lead to partial impairment of the deferred tax assets in the future. As at 2017 and 2016, profit tax liabilities comprise: Current tax liabilities Deferred tax liabilities Profit tax liabilities Deferred tax liabilities are the amounts of profit taxes payable in future periods in respect of taxable temporary differences. The following represents an analysis of the deferred tax position as at 2017, 2016 and 2015: Tax loss carried forward Tax effect of deductible temporary differences Due from financial institutions Financial assets at fair value through profit or loss Loans to customers Investments available-for-sale and investments in associates Receivables and prepayments Inventories Property, plant and equipment Intangible assets All other assets Financial liabilities at fair value through profit or loss Amounts owed to financial institutions Amounts owed to customers Bonds issued All other liabilities Total tax effect of deductible temporary differences Deferred tax assets Offset with deferred tax liabilities (17 270) (24 544) (35 387) Deferred tax assets, net Tax effect of taxable temporary differences Due from financial institutions (198) (5) (6) Financial assets at fair value through profit or loss (7 251) (9 636) (15 113) Loans to customers (1 970) (1 769) (6 044) Investments available-for-sale and investments in associates (1 099) (3 539) (2 386) Receivables and prepayments (1 690) (1 707) (1 923) Inventories (1 282) (1 312) (1 321) Property, plant and equipment (3 638) (3 595) (3 801) Intangible assets (2 806) (2 367) (2 585) All other assets (176) (2 242) (7 689) Amounts owed to financial institutions (521) (439) (598) Amounts owed to customers (566) (1 611) (191) Bonds issued - - (20) Subordinated debts - (405) (126) All other liabilities (1 972) (2 294) (2 485) Deferred tax liabilities (23 169) (30 921) (44 288) Offset with deferred tax assets Deferred tax liabilities, net (5 899) (6 377) (8 901) Net deferred tax position

54 A reconciliation of changes in the net deferred tax position during the years ended 2017 and 2016 is as follows: Deferred tax position as at Recognised in profit or loss (15 503) Perpetual debt issued (1 380) Recognised in other comprehensive income (146) Effect of acquisition and disposal of subsidiaries (325) Effect of translation to presentation currency Deferred tax position as at Recognised in profit or loss 361 Perpetual debt issued 317 Recognised in other comprehensive income (105) Effect of acquisition and disposal of subsidiaries Effect of translation to presentation currency 685 Deferred tax position as at Profit tax recognised directly in equity for the year 2017 in the amount of RUB 317 million relates to unutilised tax loss carried forward on perpetual debt issued (2016: RUB (1 380) million). The tax effects relating to components of other comprehensive income comprise: Amount before tax Tax expense Amount Tax Amount before expense net of tax tax Amount net of tax Net change in the fair value reserve and cash flow hedge reserve transferred to profit and loss 83 (17) (90) 376 Movements in other comprehensive income of associates 492 (88) (56) 175 Total 575 (105) (146) 551 Since 1 January 2015 Federal Law dated 24 November 2014 No. 376-FZ On amendments being made to the first and second paragraphs of Tax Code of the Russian Federation (related to taxation of controlled foreign companies' profit and revenues of foreign companies) that introduced framework of "fiscal residence" of legal entities at the place of their "actual management" and framework of "beneficial owner of income". As at 2017, the management of the Group considered any legal and economic restrictions in relation to the distribution of profit to the taxpayer of the Russian Federation, took into account all facts and circumstances including intent and ability to distribute the profit to the taxpayer of the Russian Federation and didn t to recognise an additional tax liability as at 2017 in relation to subsidiaries' profit for

55 NOTE 12 CASH AND CASH EQUIVALENTS, OBLIGATORY RESERVE WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION AND DUE FROM FINANCIAL INSTITUTIONS Cash and cash equivalents as at 2017 and 2016 comprise: Cash on hand Current accounts with the CBR Term deposits with the CBR Due from financial institutions: current accounts term deposits with maturities of three months or less when originated reverse repo agreements Current accounts in Central Banks of foreign countries Total cash and cash equivalents No cash and cash equivalents are impaired or past due. The CBR requires credit institutions to maintain a non-interest-earning cash deposit (obligatory reserve) with the CBR, the amount of which depends on the level of funds attracted by a credit institution from its customers. The ability to withdraw such a deposit is significantly restricted by the statutory legislation. As at 2017, the Group maintained RUB million of obligatory reserve with the CBR ( 2016: RUB million). Due from financial institutions comprises: Term deposits with maturities of more than three months when originated Less allowance for impairment (1 176) (1 175) Total due from financial institutions As at 2017, RUB million of current accounts and term deposits due from financial institutions was placed with five credit institutions which are large Russian and international banks ( 2016: RUB million), included the amount of RUB million placed with JSC Bank National Clearing Centre ( 2016: RUB million). As at 2017 and 2016, the Group had the following securities received as collateral under reverse repo agreements: Fair value of securities received under reverse repo agreements Fair value of securities received under reverse repo agreements Sovereign and municipal bonds Corporate bonds Corporate shares Reverse repo transactions are conducted under terms that are usual and customary to standard lending, securities borrowing and lending activities, as well as requirements determined by exchanges where the Group acts as intermediary. 55

56 NOTE 13 FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets at fair value through profit or loss as at 2017 and 2016 comprise: Note Financial assets held for trading Trading securities Not pledged Corporate bonds Sovereign and municipal bonds Promissory notes Corporate shares Pledged under repo agreements Sovereign and municipal bonds Corporate shares Corporate bonds Total trading securities Derivative financial assets Foreign exchange contracts Securities contracts Interest rate contracts Commodity contracts Bullion contracts 1 - Total derivative financial assets Total financial assets held for trading Financial assets designated as at fair value through profit or loss Corporate shares and fund units Corporate bonds Equity-linked receivables Credit-linked notes Total financial assets designated as at fair value through profit or loss Total financial assets at fair value through profit or loss As at 2017, sovereign and municipal bonds comprise ruble foreign currency denominated securities issued and guaranteed by the Ministry of Finance of the Russian Federation and Moscow Government. As at 2017, corporate shares designated as at fair value through profit or loss in the amount RUB million are represented by highly liquid ordinary corporate blue chip shares of a Russian company. As at 2017, fund units designated as at fair value through profit or loss in the amount RUB million are represented by highly liquid preference corporate blue chip shares of a government-related entity. Shares, fund units and corporate bonds were designated as at fair value through profit or loss to significantly reduce an accounting mismatch with related liabilities which would otherwise arise. The Group designated equity-linked receivables as at fair value through profit or loss since they contain an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. Analysis by credit quality of debt securities at fair value through profit or loss as at 2017 is as follows: 56

57 Investment Non-investment Not rated Total rating rating Sovereign and municipal bonds Corporate bonds Promissory notes Total debt securities at fair value through profit or loss Analysis by credit quality of debt securities at fair value through profit or loss as at 2016 is as follows: Investment Non-investment Not rated Total rating rating Sovereign and municipal bonds Corporate bonds Promissory notes Credit-linked notes Total debt securities at fair value through profit or loss Credit-linked notes are tied to underlying assets major part of which have investment grade ratings. Investment rating includes "AAA" to "BBB" Standard & Poor's and Fitch Investor Services rating grades or "Aaa" to "Baa3" Moody's rating grades. If international rating agencies have different ratings for the same security, the securities of the issuer are reported using the higher rating. Financial liabilities at fair value through profit or loss as at 2017 and 2016 comprise: Note Financial liabilities held for trading Derivative financial liabilities Securities contracts Foreign exchange contracts Commodity contracts Bullion contracts Interest rate contracts Total derivative financial liabilities Other financial liabilities - Short position on repo agreements Total other financial liabilities Total financial liabilities held for trading Derivative financial liabilities held as cash flow hedge Foreign exchange contracts Total derivative financial liabilities held as cash flow hedge Financial liabilities designated as at fair value through profit or loss Total financial liabilities designated as at fair value through profit or loss Total financial liabilities at fair value through profit or loss

58 Reclassification of financial instruments The Group determined that a significant increase of the key interest rate by the CBR from 10.5% to 17.0% on 16 December 2014 constituted a rare circumstance that permitted the Group to reassess their intention to hold certain trading securities. As a result, the Group reclassified certain securities out of the held for trading category into investments held-to-maturity and investments available-for-sale. The table below sets out the carrying and fair values of those reclassified financial assets outstanding at 2017 and 2016: Carrying value Fair value Carrying value Fair value Fair value of assets owned by the Group as at 2017, as at the date of reclassification Тrading securities reclassified into investments held-to-maturity Тrading securities reclassified into investments available-for-sale The table below sets out actual amount of impairment loss recognised in the reporting periods ended 2017 and 2016 for reclassified financial assets as well as fair value gains (losses) that would have been recognised in the reporting period had the reclassification not been made: Non-interest gain that would have been recognised had the reclassifications not been made Impairment loss Non-interest gain Impairment loss recognised for (loss) that would recognised for reclassified have been reclassified assets following recognised had assets following the date of the the date of reclassification reclassifications reclassification not been made Тrading securities reclassified into investments held-to-maturity 6 (28) Тrading securities reclassified into investments available-for-sale - - (43) - 6 (28) The amount of interest income recognised on the reclassified securities is not affected by the reclassification. At the date of reclassification the effective interest rates on trading securities reclassified to held-to-maturity investments ranged from 5.02% to 21.76%. The present value of the estimated cash flows that the Group expected to recover equaled the fair value of the reclassified financial assets at the date of reclassification. 58

59 NOTE 14 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING AND AS CASH FLOW HEDGE The exposure to market risks on derivative positions and the fair value of derivative financial assets and liabilities as at 2017 and 2016 is as follows: Notional amount equivalent Derivative assets Fair value Notional amount equivalent 2017 Derivative liabilities Fair value Foreign exchange contracts Option contracts (3 413) (100) Forward contracts (24 568) (140) Swap contracts ( ) (2 564) Interest rate contracts Swap contracts (7 500) (55) Bullion contracts Option contracts Forward contracts - - (13 539) (308) Commodity contracts Forward contracts (3 990) (445) Swap contracts (279) (10) Securities contracts Option contracts (60 307) (8 876) Forward contracts 11 - (364) - Total derivative assets (liabilities) (12 498) Notional amount equivalent Derivative assets Fair value Notional amount equivalent 2016 Derivative liabilities Fair value Foreign exchange contracts Option contracts (2 349) (289) Forward contracts (6 343) (375) Swap contracts (29 667) (4 024) Interest rate contracts Swap contracts (33 996) (182) Bullion contracts Option contracts 43 - (52) - Forward contracts 6 - (802) (12) Commodity contracts Forward contracts (5 730) (1 203) Swap contracts (725) (76) Securities contracts Option contracts Forward contracts 82 - (23 624) (5 124) Total derivative assets (liabilities) (11 285) 59

60 The notional amount equivalents of certain types of financial instruments, e.g. derivative contracts, provide a basis for comparison with instruments recognised in the consolidated statement of financial position, but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate exposure to credit or price risks. The derivative instruments become favorable (positive fair value) or unfavorable (negative fair value) as a result of fluctuations in current market prices relative to their contract terms. The aggregate market exposure of derivative financial instruments on hand, the extent to which instruments are favorable or unfavorable and, thus, the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly over time. NOTE 15 LOANS TO CUSTOMERS Loans to customers by types of loan portfolios as at 2017 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Loans to legal entities ( ) Loans to individuals (11 657) Total loans to customers ( ) Loans to customers by types of loan portfolios as at 2016 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Loans to legal entities ( ) Loans to individuals (11 300) Total loans to customers ( ) As at 2017, loan exposures to the Gazprom Group accounted for 4.8% (RUB million) of the gross loan portfolio ( 2016: 3.2% or RUB million). Loan exposures to the Gazprom Group as at 2017 include reverse repo agreements (RUB million), which were secured by depositary receipts with fair value RUB million. Interest rates on loans to the Gazprom Group by maturity and currency as at 2017 and 2016 were as follows: Currency Original maturity Range of interest rates Original maturity Range of interest rates RUB 1 months-7 years 8.5%-11.8% 3 months-7 years 10.0%-13.5% Foreign currency 1 year-10 years 3.8%-9.5% 1 year-10 years 3.7%-9.5% As at 2017, the total amount of pledged loans to legal entities amounted to RUB million ( 2016: RUB million). The loans were pledged against the funds obtained from the CBR, which are presented as part of the amounts owed to credit institutions. As at 2017, the total amount of pledged loans to individuals amounted to RUB million (31 December 2016: RUB million). The loans were pledged against the RUB Mortgage Covered Bonds (Note 24). As at 2017, the ten largest loan exposures amounted to RUB million or 25% of the gross loan portfolio ( 2016: RUB million or 26%). As at 2017, RUB million of gross loans to customers were non-performing loans ( 2016: RUB million). 60

61 (a) Loans to legal entities Loans to legal entities by types of portfolios as at 2017 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Commercial lending ( ) Specialised lending (27 829) Total loans to legal entities ( ) Loans to legal entities by types of portfolios as at 2016 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Commercial lending ( ) Specialised lending (33 312) Total loans to legal entities ( ) The Group treats loans to legal entities as "Commercial lending" or "Specialised lending" based on definitions of Basel Committee on Banking Supervision. The breakdown of loans to legal entities by industries of the borrowers as at 2017 and 2016 is as follows: % % Metal manufacture Finance and insurance companies Oil extraction, transportation and sale enterprises Gas extraction, transportation and sale enterprises Construction and real estate Chemical and petrochemical industry Electric power industry Mining Transport Agriculture Food industry Trading enterprises Aerospace industry Mass media and telecommunications Machine building Shipbuilding Timber industry Nuclear industry Other Loans to legal entities, gross Less allowance for impairment ( ) ( ) Loans to legal entities, net As at 2017 and 2016, loans were issued to the following types of borrowers: Private companies, gross Less allowance for impairment ( ) ( ) Private companies, net Government-related entities, gross Less allowance for impairment (19 101) (8 971) Government-related entities, net Loans to legal entities, net

62 The ageing analysis of loans to legal entities as at 2017 and 2016 is presented below: Gross loans Allowance for impairment Net loans 2017 Impairment to gross loans, % Loans without individual signs of impairment (48 907) Impaired loans: - not overdue (52 658) overdue less than 30 days 8 (8) overdue days 4 (4) overdue days (6 731) overdue more than 180 days (72 587) Total impaired loans ( ) Total loans to legal entities ( ) Gross loans Allowance for impairment Net loans 2016 Impairment to gross loans, % Loans without individual signs of impairment (32 659) Impaired loans: - not overdue ( ) overdue less than 30 days (8 486) overdue days (1 625) overdue days (5 133) overdue more than 180 days (67 497) Total impaired loans ( ) Total loans to legal entities ( ) Included in gross loans to legal entities as at 2017 is a total of RUB million ( 2016: RUB million) of interest accrued on impaired loans. The Group estimates impairment for loans to legal entities based on an analysis of the expected future cash flows for impaired loans and based on incurred but not reported losses estimated using historical statistics adjusted by loss given default ratio for portfolios of loans for which no indications of individual signs of impairment have been identified. Changes in these estimates could effect the allowance for impairment. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus one percent, the allowance for impairment on loans to legal entities as at 2017 would be RUB million lower/higher (31 December 2016: RUB million lower/higher). The policy of the Group is to ensure existence of collateral for most of its exposures. Preferable collateral is in the form of a pledge of property, or a guarantee from a party with a sound credit standing. The value of the property or the amount of the guarantee should be sufficient to cover the principal amount of the loan and, in most cases, fees and interest for the entire term of the loan and any possible expenses and commissions involved in the foreclosure of the property, unless otherwise provided for by the decision of the relevant committee (Note 32 (b)). 62

63 An analysis of net loans to legal entities by type of collateral or guarantees as at 2017 and 2016 is as follows: 2017 Commercial Specialised Total lending lending Financial guarantees and sureties Securities Real estate Other collateral No collateral Total Commercial Specialised Total lending lending Financial guarantees and sureties Securities Real estate Cash Other collateral No collateral Total The amounts disclosed in the tables above represent the carrying value of loans to the extent the asset is covered by collateral or other credit enhancements, using the value of collateral determined at inception date, and do not necessarily represent the fair value of the collateral. If a loan is partially covered by collateral, the uncovered portion is disclosed under "No collateral". Financial guarantees and sureties provided by rated and not rated legal entities and by individuals. The recoverability of loans to legal entities that are neither past due nor impaired is primarily dependent on the creditworthiness of the borrowers; the value of the high-quality collateral is also taken into account during impairment assessment. The financial effect of collateral is most significant for impairment assessment of specialised lending. The components of net investment in finance lease included in loans to legal entities as at 2017 and 2016 are as follows: Minimum lease payments - not later than 1 year from 1 to 5 years over 5 years Less unearned finance income - not later than 1 year (7 047) (5 188) - from 1 to 5 years (19 542) (12 204) - over 5 years (13 474) (3 285) Net investment in finance lease Current portion not later than 1 year, net Long-term portion from 1 to 5 years, net Over 5 years, net Net investment in finance lease Less allowance for impairment (23) (3 635) Net investment in finance lease after allowance for impairment

64 In 2017, the Group changed estimation of losses in case of default (Loss Given Default - LGD) applied to allowance for impairment on loans without individual signs of impairment. As a result of the change, the Group recognised a recovery of impairment in the amount of RUB 5.5 billion, including a recovery of impairment on net investment in finance lease in the amount of RUB 2.5 billion. (b) Loans to individuals As at 2017 and 2016, loans to individuals within the Russian Federation comprise the following: Mortgage loans originated Mortgage loans acquired Consumer loans Car purchase loans Credit cards and overdrafts Loans to individuals, gross Less allowance for impairment (11 657) (11 300) Loans to individuals, net The ageing analysis of loans to individuals as at 2017 and 2016 is presented below: Mortgage loans Consumer loans Car purchase loans Credit cards and overdrafts 2017 Total Loans to individuals - not overdue overdue less than 30 days overdue days overdue days overdue more than 180 days Loans to individuals, gross Less allowance for impairment (4 782) (4 893) (1 372) (610) (11 657) Loans to individuals, net Allowance for impairment to gross loans (%) Mortgage loans Consumer loans Car purchase loans Credit cards and overdrafts 2016 Total Loans to individuals - not overdue overdue less than 30 days overdue days overdue days overdue more than 180 days Loans to individuals, gross Less allowance for impairment (4 759) (4 023) (1 857) (661) (11 300) Loans to individuals, net Allowance for impairment to gross loans (%) The significant assumptions used by management in determining the allowance for impairment on loans to individuals include the assumption that the loss migration rate can be estimated based on the loans migration statistics for the period from 2008 to 2017 years. 64

65 Changes in these estimates could effect the allowance for impairment. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus one percent, the allowance for impairment on loans to individuals as at 2017 would be RUB million lower/higher ( 2016: RUB million lower/higher). Mortgage loans are secured by underlying housing real estate. Car purchase loans are secured by underlying vehicles. For mortgage and car purchase loans the fair value of collateral was estimated at inception of the loans and was not adjusted for subsequent changes to the reporting date. The Group estimates that the average weighted ratio of the balance value of overdue or impaired mortgage loans to fair value of collateral for such loans is not less than 60%. Management believes that it is impracticable to estimate the fair value of collateral held in respect of other impaired or overdue loans to individuals. For further details on the credit risk profile of the loan portfolio see Note 32. NOTE 16 INVESTMENTS AVAILABLE-FOR-SALE AND INVESTMENTS IN ASSOCIATES Investments available-for-sale and investments in associates as at 2017 and 2016 comprise: Investments available-for-sale accounted for at fair value Not pledged - corporate shares corporate and municipal bonds Investments available-for-sale accounted for at cost - unconsolidated subsidiaries associates other investments Total investments available-for-sale Total investments in associates accounted for under the equity method (a) Investments available-for-sale accounted for at fair value As at 2017, investments available-for-sale accounted for at fair value are shown net of allowance for impairment of RUB million ( 2016: RUB million) (Note 6). As at 2017, corporate shares include RUB million of shares of Russian electric power and utility companies ( 2016: RUB million). 65

66 (b) Unconsolidated subsidiaries accounted for at cost As at 2017 and 2016, the Group had investments in the following unconsolidated subsidiaries: Name Principal activity Country of business Group s holding, % 2017 Carrying value of investment CJSC Gazprombank Asset Management D.U. Long-Term direct investments Closed-end mutual fund Gazprombank Strategic Finance and investment companies Russia 100.0% 405 Vinvest LLC Finance and investment companies Russia 100.0% 376 Elektronnaya Torgovaya Ploshadka GPB LLC Finance and investment companies Russia 100.0% 220 GPB Financial Services Hong Kong Limited Finance and investment companies Hong Kong 100.0% 180 GPB Africa Proprietary Limited Finance and investment companies South Africa 100.0% 158 3S Investments Ltd. Finance and investment companies Russia 100.0% 153 Other Total unconsolidated subsidiaries accounted for at cost Name Principal activity Country of business Group s holding, % 2016 Carrying value of investment Vinvest LLC Finance and investment companies Russia 100.0% 305 Elektronnaya Torgovaya Ploshadka GPB LLC Finance and investment companies Russia 100.0% 220 GPB Financial Services Hong Kong Limited Finance and investment companies Hong Kong 100.0% 180 GPB Africa Proprietary Limited Finance and investment companies South Africa 100.0% 175 3S Investments Ltd. Finance and investment companies Russia 100.0% 153 Other 516 Total unconsolidated subsidiaries accounted for at cost (c) Associates accounted for at cost As at 2017 and 2016, the Group has investments in the following associates accounted for at cost: Name Principal activity Country of business Group s holding, % 2017 Carrying value of investment Optic Fiber Systems JSC Telecommunications Russia 48.3% Other 72 Total associates accounted for at cost Name Principal activity Country of business Group s holding, % 2016 Carrying value of investment Optic Fiber Systems JSC Telecommunications Russia 48.3% Gorno-Rudnaya Kompaniya AMIKAN LLC Mining Russia 25.8% 96 Other 92 Total associates accounted for at cost

67 Unconsolidated subsidiaries and associates have neither been consolidated with the results of the Group nor accounted for under the equity method as the effect of consolidation or equity accounting would neither materially alter the financial position as at 2017 and 2016 nor the results of its operations or cash flows for the years ended 2017 and As at 2017, unconsolidated subsidiaries and associates accounted for at cost are shown net of accumulated impairment of RUB 799 million, including impairment relating to "Media" segment of the Group: RUB 57 million ( 2016: RUB million, including impairment relating to "Media" segment of the Group: 257 million). (d) Other investments accounted for at cost Other investments accounted for at cost represent various stakes in Russian and foreign companies, including also those investments in more than 20% of the companies stakes where the Group s power to participate in the financial and operating policy decisions are significantly limited due to arrangements with other stakeholders. The equity instruments available-for-sale are carried at cost as they do not have a quoted market price in an active market and other methods of reasonably estimating fair value are not applicable due to the lack of reliable information for discounted cash flow analysis and the absence of comparable quoted companies. It is also currently impracticable to calculate the range of estimates within which fair value of these equity investments is highly likely to lie. As at 2017, other investments accounted for at cost are shown net of accumulated impairment of RUB million, including impairment relating to "Media" segment of the Group: RUB million ( 2016: RUB million, including impairment relating to "Media" segment of the Group: RUB million). (e) Investments in associates accounted for under the equity method As at 2017 and 2016, investments in associates accounted for under the equity method comprise: Name Principal activity Country of business Elga coal complex Group s Carrying Group s Carrying holding, value holding, value % % Coal extraction, transportation and sale enterprises Russia 49.0% % Production and sale LLC Gazprom Gas-Engine Fuel of CNG and NGV Russia 50.0% % OJSC Belgazprombank Banking Belarus 49.7% % LLC Northern Capital Highway Other Russia 41.5% % Gas liquefaction, LLC Cryogas-Vysotsk (Note 36) transportation and sale enterprises Russia 49.0% % n/a Baltic Sea Transhipment PTE Ltd. Transport Russia 13.0% % LLC Penoplex SPb Polystirol insulating materials Russia 36.0% % Russia, Italy 50.0% % MIR Capital S.C.A., SICAR Investment fund Advertising companies group Consulting Russia 30.9% % 0 JSC AKB Eurofinance Mosnarbank Banking Russia 25.0% % 925 Implementation of EPC-projects Russia 49.0% % 379 LLC OMZ-DAELIM Yugorosgaz a.d. Beograd Gas trading Serbia 25.0% % 523 JSC SOGAZ (Note 36) Insurance Russia % Other Total investments in associates accounted for under the equity method

68 Summarised financial information As at 2017, summarised financial information on significant investments in associates accounted for under the equity method is as follows: Total assets Total liabilities and noncontrolling interests of associates Net assets Operating income (expense) Net profit (loss) Comprehensive income (loss) Name Elga coal complex (15 057) LLC Gazprom Gas-Engine Fuel (1 345) (2 302) (1 768) (1 768) OJSC Belgazprombank ( ) LLC Northern Capital Highway (90 121) LLC Cryogas-Vysotsk (21 090) (620) (107) (107) Baltic Sea Transhipment PTE Ltd (12 474) LLC Penoplex SPb (5 692) (4) MIR Capital S.C.A., SICAR (114) Advertising companies group (4 346) OAO AKB Eurofinance Mosnarbank (38 478) (1 795) (1 493) (1 999) LLC OMZ-DAELIM (5 603) Yugorosgaz a.d. Beograd (3 797) Share % Group's share in net assets Incl. Group's share in dividends declared Goodwill Intragroup transactions Allowance for impairment Carrying value Group's share in net profit (loss) Name Elga coal complex 49.0% LLC Gazprom Gas-Engine Fuel 50.0% (884) OJSC Belgazprombank 49.7% LLC Northern Capital Highway 41.5% (3 023) LLC Cryogas-Vysotsk 49.0% (783) (52) Baltic Sea Transhipment PTE Ltd. 13.0% LLC Penoplex SPb 36.0% (320) MIR Capital S.C.A., SICAR 50.0% Advertising companies group 30.9% OAO AKB Eurofinance Mosnarbank 25.0% (4 279) 853 (373) LLC OMZ-DAELIM 49.0% Yugorosgaz a.d. Beograd 25.0% Other Total investments in associates accounted for under the equity method

69 Net profit (loss) is disclosed for the year ended 2017 or from the date of acquisition or reclassification until 2017 (if acquired or reclassified in 2017). The Group's share in net profit (loss) includes consolidation adjustments. The Group's share in net profit (loss) of other companies for the year ended 2017 includes income from derecognised associate for the period from 1 January 2017 until the date of disposal in the amount of RUB 980 million (Note 36). As at 2016, summarised financial information on significant investments in associates accounted for under the equity method is as follows: Total assets Total liabilities and noncontrolling interests of associates Net assets Operating income (expense) Net profit (loss) Comprehensive income (loss) Name Elga coal complex (14 229) (204) (59) (161) LLC Gazprom Gas-Engine Fuel (1 220) (1 717) (1 373) (1 373) OJSC Belgazprombank (84 001) (752) LLC Northern Capital Highway (81 994) Baltic Sea Transhipment PTE Ltd (7 305) LLC Penoplex SPb (5 398) MIR Capital S.C.A., SICAR (68) OAO AKB Eurofinance Mosnarbank (34 005) Yugorosgaz a.d. Beograd (5 409) JSC SOGAZ ( ) Share % Group's share in net assets Incl. Group's share in dividends declared Goodwill Intragroup transactions Allowance for impairment Carrying value Group's share in net profit (loss) Name Elga coal complex 49.0% (29) LLC Gazprom Gas-Engine Fuel 50.0% (687) OJSC Belgazprombank 49.7% LLC Northern Capital Highway (ex. Ysmer Ltd.) 41.5% (3 023) Baltic Sea Transhipment PTE Ltd. 13.0% LLC Penoplex SPb 36.0% (320) MIR Capital S.C.A., SICAR 50.0% OAO AKB Eurofinance Mosnarbank 25.0% (4 279) Yugorosgaz a.d. Beograd 25.0% JSC SOGAZ 19.0% Other Total investments in associates accounted for under the equity method

70 Net profit (loss) is disclosed for the year ended 2016 or from the date of acquisition or reclassification until 2016 (if acquired or reclassified in 2016). The Group's share in net profit (loss) includes consolidation adjustments. The Group's share in net profit (loss) of other companies for the year ended 2016 includes income from derecognised associate for the period from 1 January 2016 until the date of disposal in the amount of RUB million. In 2016, the Group has changed its intention towards investment in its associate company Elga-road Co.Ltd. (The Group's share 49%) and classified it as an asset held for sale within other assets in the condensed consolidated statement of financial position as at 2017 and 2016 in the amount of RUB million. NOTE 17 RECEIVABLES AND PREPAYMENTS As at 2017 and 2016, receivables and prepayments comprise the following: Financial assets included in receivables and prepayments Trade receivables Accounts due from customers for contract work Advances to leasing equipment suppliers Claims on letters of credit Settlements and other receivables Total financial assets included in receivables and prepayments, gross Less allowance for impairment (4 993) (4 168) Total financial assets included in receivables and prepayments, net Non-financial assets included in receivables and prepayments Prepayments Tax prepayments Total non-financial assets included in receivables and prepayments Total receivables and prepayments As at 2017, non-financial assets included in receivables and prepayments are presented net of allowance for impairment of RUB million ( 2016: RUB 319 million). NOTE 18 INVESTMENTS HELD-TO-MATURITY As at 2017 and 2016, investments held-to-maturity comprise the following: Not pledged Corporate bonds Sovereign and municipal bonds Promissory notes Pledged under repo agreements Sovereign and municipal bonds Total investments held-to-maturity, gross Less allowance for impairment (1 416) (1 236) Total investments held-to-maturity, net

71 NOTE 19 PROPERTY, PLANT AND EQUIPMENT Land, buildings and facilities Used in banking business Office, computer Machinery equipment and and vehicles other Assets under construction Land, buildings and facilities Machinery and vehicles Used in non-banking business Office and computer equipment Assets under construction Other Total Cost of acquisition Reclassifications/transfers 84 (160) (108) (4 055) (841) Effect of disposal of subsidiaries (325) (45) (807) (9) (1 186) Additions Disposals (637) (111) (784) (872) (877) (1 580) (163) (722) (955) (6 701) Impairment (53) (102) (5) - (1) (161) Translation differences (12) (137) (10) 8 (1 105) (1 143) (60) (7) - (2 466) Reclassifications/transfers (880) (1 413) - (173) (25) (14 377) (9 661) Effect of acquisition (disposal) of subsidiaries (8 334) 331 Additions Disposals (786) (367) (1 230) - (951) (1 330) (200) (262) (2 717) (7 843) Impairment (45) (1 476) (1 521) Translation differences (11) (6) 5 (233) Accumulated depreciation Reclassifications/transfers (376) (376) Effect of disposal of subsidiaries (127) (15) (532) (674) Charge for the period Disposals (516) (109) (748) - (162) (1 147) (133) (4) - (2 819) Translation differences - (42) (4) - (533) (621) (23) - - (1 223) Reclassifications/transfers 291 (252) (1) Charge for the period Disposals (190) (8) (409) - (181) (506) (192) (40) - (1 526) Translation differences - (5) Net book value

72 The Group has changed its intention towards part of the assets under construction in the amount of RUB million and related advances in the amount of RUB million and classified them as assets held for sale within the other assets caption in the consolidated statement of financial position as at The allowance for impairment on these assets was recognised in the amount of RUB million (Note 6). NOTE 20 INTANGIBLES Intangible assets used in banking business Rights for audio-visual products Used in non-banking business Other Cost of acquisition Additions Disposals (1 833) (14 645) (3 600) (20 078) Reversal of impairment (impairment) - 69 (9 108) (9 039) Translation differences (46) (3) (535) (584) Effect of aquisition of subsidiaries Additions Disposals (53) (17 711) (1 162) (18 926) Impairment - (30) (7) (37) Translation differences 9 (1) Accumulated amortization Charge for the period Disposals (1 128) (14 363) (809) (16 300) Translation differences (22) (6) (210) (238) Charge for the period Disposals (49) (17 325) (560) (17 934) Translation differences 10 (2) Net book value Total NOTE 21 GOODWILL The movement of goodwill for the years ended 2017 and 2016 is as follows: Gross amount Accumulated Net amount impairment (20 502) Impairment losses for the period - (5 758) (5 758) Amounts written off (726) (25 534) Business combination Impairment losses for the period - (4 332) (4 332) (29 866)

73 Goodwill is allocated to cash-generating units (CGU). An operating segment-level summary of the goodwill allocation is presented below: CGU Activity Entertainment TV Group TV content production and distribution TV channel Super! TV channel broadcasting Telecompany NTV JSC TV channel broadcasting Central Partnership LLC Film production and distribution Seven Days CJSC Publishing Echo Moskvi CJSC Radio broadcasting - 32 Media PO UEM JSC Installation of engineering equipment Giprokislorod JSC Research and development projects Technopark Industrial zone 2 LLC Providing temporary use of property 7 7 Machinery Nevskaya Pipe Company LLC Oil loading terminal Other Total goodwill Entertainment TV Group (ETVG) includes TNT-Broadcasting Network JSC, TV3 Channel LLC, Television company FRIDAY LLC and Television and radio broadcasting company 2Х2 LLC. Since 2015 year ETVG is a separate operating segment with its own consolidated budget and management. The recoverable amounts of each of the cash-generating units (CGU) are determined based on "value-in-use" calculations. These calculations use pre-tax cash flow projections based on the financial budgets approved by the management for the next five years. The calculation of "value-in-use" for non-banking cash-generating units (CGUs) is most sensitive to the growth margin and discount rates. Management estimated the growth margins based on past performance and its expectations of market conditions relating to the relevant operating segments. Discount rates reflect management s estimate of return on capital employed in each CGU. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. The effective discount rate applied to cash flow projections is based on weighted average cost of capital: Media segment CGUs 12.6%-18.6% 14.0%-17.7% Machinery segment CGUs 7.9%-16.3% 8.5%-15.8% Other segment CGUs 14.5% 14.5% Media segment The "value-in-use" calculations use cash flow projections based on financial forecasts approved by management covering the next financial year and considering an implementation of long term forecasts. The market outlook up to 2023 was used. Management based the CGUs cash flow projections on key assumptions related to advertising market growth rate and discount rate specific to each cash generated unit (CGU). 73

74 Management estimated growth rates based on past performance for the last three years and its expectations for market development, taking into consideration the forecast based on the Russian communication agencies Association actuals and market expectations. Annual advertising growth rate is assumed to be floating around 6% in the forecasted period and slightly declining. The discount rates are pre-tax and reflect specific risks relating to the relevant CGUs. The key assumptions used for "value-in-use" calculations to test goodwill for impairment are as follows: Entertainment TV Group ETVG s share on TV advertising market, % Pre-tax discount rate, effective average, % Growth rate in the post-forecast period 4.0%. NTV Group NTV Group share on TV advertising market, % Pre-tax discount rate, effective, % Growth rate in the post-forecast period 3.5%. Sensitivity analysis For NVT Group: The recoverable amount of the NTV Group as at 2017 was lower than its carrying value by RUB million. Accordingly, the Group has recognised the impairment of goodwill in full. For ETVG: Management believes that any reasonably possible change in the key assumptions described above would not cause the carrying amount of goodwill related to the Entertainment TV Group to exceed their recoverable amounts. Other Management believes that as a result of goodwill testing for impairment, related to other CGUs, no impairment is identified. NOTE 22 AMOUNTS OWED TO FINANCIAL INSTITUTIONS Amounts owed to financial institutions as at 2017 and 2016 comprise the following: Amounts due to the CBR - term deposits Credit institutions other than the CBR - current accounts term deposits repo agreements Total amounts owed to financial institutions

75 As at 2017, the five largest exposures to credit institutions other than the CBR comprise RUB million or 53% of amounts owed to financial institutions ( 2016: RUB million or 48%). Term deposits due to the CBR in the amount of RUB million were received by the Group collaterised by loans to legal entities ( 2016: million) (Note 15). The securities pledged or sold under repo agreements are transferred to a third party and the Group receives cash in exchange. These financial assets may be re-pledged or re-sold by counterparties, but the counterparty has an obligation to return the securities at the maturity of the contract. The Group has determined that it retains substantially all the risks and rewards on these securities and therefore has not derecognised them (Notes 13 and 18). Repo transactions are conducted under terms that are usual and customary to standard lending, securities borrowing and lending activities, as well as in accordance with the requirements determined by the exchanges where the Group acts as an intermediary. NOTE 23 AMOUNTS OWED TO CUSTOMERS As at 2017 and 2016, amounts owed to customers comprise the following: Current accounts Term deposits Promissory notes issued Certificates of deposit issued 3 3 Total amounts owed to customers As at 2017 and 2016, concentration of amounts owed to customers is as follows: Private companies - current accounts term deposits Government-related entities - current accounts term deposits Individuals - current accounts term deposits Promissory notes issued Certificates of deposit issued 3 3 Total amounts owed to customers Promissory notes and certificates of deposit issued represent bearer "on call" or term interest notes. It is impracticable to identify the ultimate holders of these instruments as at the reporting dates as these instruments may be traded in the over-the-counter market or transferred by the initial holders; hence the Group does not disclose breakdowns of these notes by ownership. 75

76 As at 2017, current accounts and time deposits of Gazprom Group comprised 17% (RUB million) of the total amounts owed to customers ( 2016: 20% or RUB million). Current accounts and term deposits of Gazprom Group bear interest from 0.05% to 9% per annum. The majority of the Gazprom Group s deposits mature from "on demand" to 2 years. NOTE 24 BONDS ISSUED As at 2017 and 2016, bonds issued comprise the following: Issue Rates, p.a., % as at 2017 Final maturity date EUR Eurobonds 3.98%-4.00% USD Eurobonds 4.96% CNY Eurobonds 4.25% Total Eurobonds RUB Domestic Bonds 7.73%-9.95% RUB Mortgage Covered Bonds 3.00%-9.87% Total RUB Bonds Total bonds issued NOTE 25 SUBORDINATED DEBTS As at 2017 and 2016, subordinated debts comprise the following: Subordinated eurobonds Deposits from the Ministry of Finance of the Russian Federation Total subordinated debts As at 2017 and 2016, subordinated eurobonds comprise the following: Final maturity date Rates, p.a., % as at 2017 Currency Less than 1 year 5.75% USD to 5 years 6.5%-7.25% USD Over 5 years 5.13%-8.75% USD, CHF, RUB Total subordinated eurobonds As at 2017, included in subordinated debts are two deposits from the Ministry of Finance of the Russian Federation in the amount of RUB million and RUB million ( 2016: RUB million and RUB million) that were provided to the Group for the purpose of funding of one of the governmental infrastructure projects. These deposits bear interest of 8.15% and 6.4% per annum, respectively, and mature in December

77 NOTE 26 OTHER LIABILITIES As at 2017 and 2016, other liabilities comprise: Other financial liabilities Trade payables related to non-banking activities Liabilities on clearing activity Provisions for credit related commitments (Note 6) Option premium payable to Vnesheconombank Payables on transactions with securities Advances received from lessees Liabilities on letters of credit Non-controlling interests in subsidiaries with limited liability Liabilities under the SPOT deals Other Total other financial liabilities Other non-financial liabilities Other liabilities related to non-banking activities Payable to employees Operating taxes payable Provision for other risks (Note 6) Deferred income Insurance liabilities Other Total other non-financial liabilities Total other liabilities NOTE 27 - DISCLOSURES TO CONSOLIDATED STATEMENT OF CASH FLOWS Reconciliation of movements of liabilities to cash flows arising from financing activities for the periods ended 2017 and 2016 years are presented as follows: Bonds issued Subordinated debts Syndicated loans Financing of non-banking activities Сash flows received Сash flows repaid ( ) (1 511) (27 258) (5 245) Interest (paid) accrued (2 940) Effect of changes in foreign exchange rates (57 927) (25 809) (4 278) (491) Сash flows received Сash flows repaid (69 343) (14 100) - (3 737) Interest accrued (paid) (284) Effect of changes in foreign exchange rates (4 741)

78 NOTE 28 SHAREHOLDERS' EQUITY (a) Share capital Issued share capital as at 2017 and 2016 comprises the following: Number of shares Par value, RUB Nominal Number of Par Nominal amount, RUB shares value, amount, RUB RUB Ordinary shares Preference shares "Type A" Preference shares "Type B" Total share capital All issued shares are fully paid. Ordinary shares The holders of ordinary shares are entitled to receive dividends as annually declared and are entitled to one vote per share at annual and other General Shareholders' Meetings of the Bank. As at 2017, ordinary shares were held by the Group as treasury shares ( 2016: ordinary shares). Movements in the outstanding ordinary shares are presented below: Opening balance as at 1 January Newly issued ordinary shares Shares purchased (86 500) (86 340) Closing balance as at In December 2016, following the decision of the General Shareholders' Meeting of the Bank the Board of Directors approved an issue of ordinary shares with the par value of RUB 50 each. The issue price is RUB 630 per share. The new share issue was registered by the CBR on 10 January The newly issued shares were fully paid by the Bank s existing shareholders. The report on results of additional issue of shares was registered by the CBR on 20 July The holders of new shares have the right to receive dividends and also the voting rights per share on the annual and other General shareholder's meetings of the Bank. In June 2012, the Bank purchased from Vnesheconombank an American-style call option on shares of the Bank that matures in June The option premium is paid semi-annually by installments during the life of the option. The Group initially recognised a liability of RUB million payable to Vnesheconombank for the option premium through The amortization of the liability of RUB 906 million is recognised as other interest expense in the consolidated statement of profit or loss and other comprehensive income for the year ended 2017 (2016: RUB million). In case the option is exercised or otherwise cancelled before maturity the remaining portion of the liability is extinguished. Preference shares Following the adoption of amendments to the Federal law dated 13 October 2008 #No. 173-FZ On additional measures to support the financial system of the Russian Federation, in December 2014, the Ministry of finance of the Russian Federation acquired non-cumulative preference shares with the nominal value of RUB 1 000, which were issued by the Bank under a closed subscription, for RUB million. According to the Law, the acquisition of shares was executed using the proceeds from early redemption of the subordinated deposit provided by Vnesheconombank to the Bank in

79 The terms of these preference shares (called "Type A" in the Bank s charter) do not include a fixed or determinable dividend and set no fixed share in the liquidation value of the Bank. A dividend payout (if any) is to be approved annually by the General Shareholders' Meeting of the Bank. Holders of "Type A" preference shares do not have voting rights. The preference shares are not included in determining the quorum at General Shareholders' Meetings of the Bank. In August 2015, the Bank issued preference shares ("Type B" shares in the Bank s charter) at par of RUB each, which were acquired at their nominal value by the State Corporation Deposit Insurance Agency (the DIA) under the State program of capitalisation of systemically important banks in the Russian Federation. The terms of the "Type B" preference shares do not include a fixed or determinable dividend. Holders of "Type B" preference shares do not have voting rights. The preference shares are not included in determining the quorum at the General Shareholders' Meetings of the Bank. The preference shares were fully paid by government bonds, which are classified as held-to-maturity investments, as the Bank intends to hold them until maturity. (b) Dividend payout Dividends payable by the Bank are restricted to the maximum distributable reserves, which are determined by the amount of reserves as disclosed in the financial statements of the Bank prepared in accordance with the statutory legislation. As at 2017, the statutory financial statements of the Bank disclosed distributable reserves of RUB million and non-distributable reserves of RUB million ( 2016: RUB million and RUB million respectively). In June 2017, the General Shareholders' Meeting of the Bank approved the decision to pay dividends for the year Holders of the ordinary shares were entitled for a total dividend payout of RUB million (2016: the General Shareholders' Meeting of the Bank approved the decision not to pay dividends for the year 2015 to the holders of the ordinary shares of the Bank). Holders of the preference "Type A" shares were entitled for a total dividend payout of RUB million (2016: RUB million ). Holders of the preference "Type B" shares were entitled for a total dividend payout of RUB million (2016: RUB million). In December 2016, the General Shareholders' Meeting of the Bank approved the decision to pay interim dividends for the year 2016 to the holders of the preference "Type B" shares in the total amount of RUB million. Earlier the Bank has not distributed interim dividends. NOTE 29 PERPETUAL DEBT ISSUED In October 2012, the Group issued perpetual Eurobonds of USD 1 billion bearing interest of 7.875% per annum. The Group has the right to call the Eurobonds in 2018 and at each interest payment date thereafter. The coupon is paid semi-annually and the coupon rate is fixed until the first call date after which it is reset every 5 years. The coupon payment is not cumulative and may be cancelled at the discretion of the Group. The coupon payment becomes mandatory in case the Group pays or declares dividends in the preceding 6 months. In December 2013, the Group amended the terms of the perpetual Eurobonds by introducing a write-down of principal and cancellation of accrued interest if either of the following events occurs: (a) the Common Equity Tier 1 Capital Ratio of the Bank (according to the CBR Regulation #No. 395-P) is less than 2%, or (b) the DIA implements bankruptcy prevention measures with regard to the Bank (according to the Federal Law #No FZ). As the Group has discretion in relation to coupon and principal repayment, the Group classified these perpetual Eurobonds as equity in the consolidated statement of changes in equity. The USD denominated perpetual Eurobonds are translated to their RUB equivalent at the period-end exchange rate with exchange differences recorded in retained earnings when incurred. Issuance costs are also recorded in retained earnings when incurred. While coupon payments are at the discretion of the Group, if and when dividends are paid or declared, the following coupon payment is accrued and recorded as a liability. In the second half of 2017 the Group received financing from Gazprom Group in the form of perpetual interestfree subordinated deposits in the total amount of RUB million. 79

80 As the deposits have no maturity and bear no interest, the Group classified them as an equity instrument in the consolidated statement of financial position and as a Tier I instrument for the purpose of Basel capital adequacy ratio calculation. The Central Bank of the Russian Federation approved the inclusion of such deposits in the statutory capital adequacy ratio (Note 32). NOTE 30 FINANCIAL COMMITMENTS AND CONTINGENCIES (a) Credit-related commitments The primary purpose of credit-related commitments is to ensure that funds are available to a customer when required. Guarantees given and letters of credit, which represent irrevocable assurance that the Group will make payments in the event that a customer can not meet the obligations to third parties, carry the same credit risk as loans. The credit-related commitments as at 2017 and 2016 comprise the following: Undrawn credit lines Guarantees given Letters of credit The total amount of irrevocable undrawn credit lines as at 2017 is RUB million ( 2016: is RUB million). The total outstanding contractual amount of irrevocable undrawn credit lines, letters of credit and guarantees given does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. Management evaluated the likelihood of probable losses arising from credit-related commitments and concluded that a provision of RUB million was necessary as at 2017 ( 2016: RUB million). As at 2017, RUB million of letters of credit were secured by customer funds ( 2016: RUB million). (b) Commitments related to associates As at 2017, the Group was a party to a financial commitment agreement to provide financing to one of its associates (investment fund) which invests in different projects. The total contractual amount is EUR 75 million (RUB million). The financing is to be provided for each project upon request. As at 2017, the timing and amount of the obligation to finance the investment fund cannot be estimated reliably. (c) Operating lease obligations In the normal course of business the Group enters into operating lease agreements for office equipment and branch facilities. Future minimum payments under non-cancellable operating leases are as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years

81 (d) Fiduciary activities In the normal course of business the Group enters into agreements with clients to manage their assets with certain limited rights on decision making in accordance with specific criteria established by the clients. The Group may be liable for losses or actions aimed at appropriation of the clients funds until such funds or securities are returned to the client. The maximum potential financial risk at any given moment is equal to the amount of the clients funds and securities plus (minus) any unrealised gain (loss) on the positions. As at 2017, the total amount of funds accepted by the Group on behalf of its clients does not exceed RUB million ( 2016: RUB million) and the total amount of securities accepted by the Group on behalf of its clients does not exceed RUB million ( 2016: RUB million). Assets accepted and liabilities incurred under the trustee and depository activities are not included in the Group s consolidated financial statements. (e) Capital commitments In the normal course of business the Group enters into various contracts for the purchase of rights to audiovisual products, property, plant and equipment, construction and repair of buildings, as well as contracts with suppliers of installation services and other services. As at 2017 and 2016, the future contracted liabilities with respect to these contracts are as follows: Construction agreements Programming rights Property, plant and equipment (f) Environmental matters The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group companies in the machinery and other business segments periodically evaluate their obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reasonably estimated. Under the current levels of enforcement of existing legislation, management believes that there are no probable liabilities for environmental damage which would have a materially adverse effect on the financial position or the operating results of the Group. (g) Legal In the ordinary course of business the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial position or the operating results of the Group. (h) Insurance The insurance industry in the Russian Federation is at the developing stage, therefore many forms of insurance protection used in other countries are not yet generally available. The Group does not have full coverage for its property, plant and equipment, business interruption, or third party liability for property or environmental damage accidents caused by the use of the Group s property or in other cases related to the Group's activities. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on its operations and financial position. The Group has obtained an international comprehensive banking risk insurance policy ("BBB" Bankers Blanket Bond), covering professional activities and crimes, including losses incurred as a result of the commission of electronic and computer crimes. The amount of insurance compensation is limited to RUB million. 81

82 (i) Taxation The Group operates in a number of tax jurisdictions. In the normal course of business, management must interpret and apply existing legislation to transactions with third parties and its own activities. Current Russian tax legislation is principally based on how the transactions are legally documented and how they are reflected in the accounting in accordance with Russian tax legislation. The interpretation of Russian tax legislation by the tax authorities and court practice, which are constantly changing, in the future may focus less on the form and more on the substance of a transaction. Current changes, such as more often use of OESD documents when treating the transactions, more often exchange of information between different countries, more detailed disclosures in the financial statements, disclosure of intra-group transactions in all jurisdictions of the Group, demonstrate the increasing government control. Considering all the facts stated above, it is possible to forecast that tax authorities will take a discrepant position in their interpretation of international deals and deals with the Group's related companies. The Group believes that tax authorities will take a more assertive position in their interpretation of tax legislation. Moreover they could also use a "business aim" doctrine and their interpretation of this doctrine could differ from the Group's one. Tax year remains open to normal audits by the Russian tax authorities for three years. During this period any change in interpretation or practice, even if there is no change in Russian tax legislation, could be applied retroactively. The interpretation and practice in other jurisdictions in which the Group operates are also changing, sometimes with retroactive effect. Such uncertainty could, in particular, be attributed to tax treatment of financial instruments/derivatives. Russian tax legislation contains special tax rules for "foreign controlled companies", rules for identifying the ultimate beneficiary of paid income and rules for identifying the tax residence of companies. Also, Russian Federation has joined the system of automatic exchange of information between countries regarding tax issues. Tax rules for "foreign controlled companies" prescribe paying profit tax in Russia Federation from the profit received by foreign companies of the Group. Such foreign companies must comply with certain criterias. Rules for identifying the ultimate beneficiary of paid income allow tax authorities to reject a company's right to use the rules of "Agreement to avoid the double taxation". Especially if the only business aim of the company is to receive tax preferences. Transfer pricing rules provide the possibility for tax authorities to make transfer pricing adjustments regarding intra-group transactions and transactions with off-shore jurisdictions and impose additional tax liabilities in respect of controllable transactions if their prices deviate from the market interval or profitability range. Considering the absence of wide court practice cases for financial transaction pricing, it is impossible to estimate the effect of such issues reliably. In management s opinion, the Group is in substantial compliance with the tax and other laws governing its operations in Russia and in other tax jurisdictions. However, a risk remains that the relevant authorities could take different positions with regard to interpretative issues or that court practice could develop adversely to positions taken by the Group and the effect on the financial position of the Group, should the authorities succeed in asserting their positions, could be significant. NOTE 31 CORPORATE GOVERNANCE AND INTERNAL CONTROLS Corporate governance in the Bank is performed according to the legislation of the Russian Federation and the Charter of the Bank. The management bodies of the Bank are the General Shareholders Meeting, the Board of Directors and the Executive bodies: collective (the Management Board) and individual (the Chairman of the Management Board). The Bank complies with the corporate governance principles recommended by the CBR and Basel Committee on Banking Supervision. The Bank has developed a Code of Corporate Governance and has established a Corporate Governance and Remuneration Committee that is responsible for the supervision of compliance with international and Russian corporate governance principles, including transparency and management responsibility and accountability. 82

83 The following Committees are in operations as part of the Board of Directors: Audit Committee Remuneration Committee. The Bank has the following committees: Corporate Governance and Remuneration Committee Strategy Committee Client Policy Committee Asset and Liability Management Committee Processes and technologies development Committee Investment Committee Credit Committee Financial markets Committee Bank's Assets Restructurisation Committee Transformation Committee Compliance Committee Retail business Committee. Internal control system of the Bank is an essential part of Corporate Governance system and one of main factors of effective operation of the Bank. The Board of Directors and the Management Board are responsible for the development, implementation and execution of internal control system that is commensurate with the scale and nature of the Bank s transactions. In accordance with generally accepted international practice the Bank adheres to an integrated approach to establishing a system of internal controls. The procedures of internal control and audit are incorporated in all management levels of the Bank, all types of its operations, branches and divisions of the Bank. The purpose of the internal control system is to ensure: efficiency and effectiveness of financial and economic activities in performing banking and other transactions, efficiency in asset and liabilities management, including safeguard assurance proper and comprehensive risk assessment and management proper business, accounting and financial reporting functions, including proper authorisation, processing and recording of transactions objectivity, completeness, accuracy and timeliness of accounting records, managerial information, regulatory reports, etc. reliability of IT-systems, data and systems integrity and protection prevention of fraudulent or illegal activities, including misappropriation of assets compliance with laws and regulations maintenance of appropriate level of reliability, safety, security and stability of the Bank. Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness. Management monitors the effectiveness of the Bank s internal controls and periodically implements additional controls or modifies existing controls in accordance with changes in external and internal environment. The Bank developed a system of standards, policies and procedures to ensure effective operations and compliance with relevant legal and regulatory requirements, including the following areas: requirements for appropriate segregation of duties, including the independent authorisation of transactions requirements for the recording, reconciliation and monitoring of transactions compliance with regulatory and other legal requirements documentation of controls and procedures 83

84 requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified requirements for the reporting of operational losses and proposed remedial action development of contingency plans training and professional development ethical and business standards risk mitigation, including insurance where it is effective. There is a hierarchy of requirements for authorisation of transactions depending on their size and complexity. A significant portion of operations is automated, a system of automated controls is implemented. The control for compliance with the Bank s standards is supported by periodic reviews undertaken by divisions of internal control system of the Bank. Internal control functions are performed by: the Board of Directors and its committees the Chairman of the Management Board and the Management Board the Revision Commission the Chief Accountant (and deputies) Heads (and deputies) and Chief Accountants (and deputies) of branches the Internal Audit Department and auditors of branches the Internal control Department (compliance-service) and controllers of branches (compliancecontrollers) other business units and employees responsible for internal control execution in accordance with the established internal standards, policies and procedures, including: the Risk management Division the security service, including IT-security the human resource service the legal service the designated employee and division responsible for compliance with anti-money laundering requirements and financing of terrorism other employees/business-units with control responsibilities. The requirements for the organization of internal control system in credit organisations are established in the Regulation of the CBR dated 16 December 2003 #No. 242-P On the organization of internal control in credit organisations and banking groups. In accordance with these requirements the Internal Audit Department is independent from management and reports directly to the Board of Directors. The results of Internal Audit Department reviews are discussed with relevant business department managers, with summaries submitted to the Board of Directors, including the Audit Committee, and senior management of the Bank. The main functions of the Internal Audit Department include the following: audit and efficiency assessment of the system of internal control as a whole, fulfillment of the decisions of key management structures audit of effectiveness of the methodology for assessing banking risks and risk management procedures, regulated by internal documents in credit organisation (methods, programs, rules and procedures for banking operations and transactions, and for the management of banking risks) audit of reliability of internal control system over automated information systems audit and testing of fairness, completeness and timeliness of accounting and reporting function and the reliability (including the trustworthiness, fullness and objectivity) of collection and submission of financial information audit of applicable methods of safekeeping the credit organisation's property assessment of economic reasonability and efficiency of operations and other transactions audit of internal control processes and procedures 84

85 audit of Internal Control Department (compliance service) and Risk Management Division. Internal Control Department (compliance service) conducts compliance activities focused primarily on regulatory risks faced by the Group. The main functions of the Internal Control Department (compliance service) include the following: internal control for Bank s compliance with requirements of rules, principles and standards monitoring of events related to compliance risk, including probability of occurrence and quantitative assessment of its consequences finding and prevention of interests conflicts in operations of the Bank and its employees development of common approaches to internal controls activity of Group's members execution of functions of controller of professional securities trader and controller of Bank s specialised depositary internal control over prevention of unlawful use of insider information and market s manipulation participation in development of internal documents on compliance-risk management and documents on prevention of commercial corrupt practice and conflicts of interest mini misation internal control over Bank s compliance with requirements of the USA law on taxation of foreign accounts (Foreign Account Тах Compliance Act, FАТСА), Common Reporting Standard requirements (CRS) and applicable Russian legislation. functional management of operations of branches controllers (compliance controllers) participation in interaction with authorities and self-regulated organisations of the financial market. As a Parent credit organisation of the banking group, the Bank ensures the unity of approaches (unification) to internal control management and holds responsibility for its effective maintenance in organisations which are participants of the Group. For this purpose, the Bank services and personnel performing functions of internal control: develop recommendations for the Group participants on drawing up internal documents and offer consultations on organisation and efficient functioning of Internal control system examine work plans for Internal audit and Internal control services (compliance services) of the Group participants examine reports of Internal audit and Internal control services (compliance services), professional securities market participant controller's reports, specialised depository controller's reports, reports of officials responsible for countering unlawful use of insiders' information and market manipulation of the Group participants. Russian legislation, including the Federal Law dated 2 December 1990 #No On banks and banking activity, and the Direction of the CBR dated 1 April 2014 #No U On requirements for the Head of risk management service, head of internal control service, head of internal audit service of the credit organisation to establish the professional qualifications, business reputation and other requirements for members of the Board of Directors, Management Board, Heads of Internal Audit Department, internal control (compliance) service and the Risk Management Division and other key management personnel. All members of the Bank s governing and management bodies meet these requirements. Management believes that the Bank complies with the CBR requirements related to risk management and internal control system and commensurate with the scale, nature and complexity of its operations. 85

86 NOTE 32 RISK MANAGEMENT Management of risk is fundamental to the banking business and is an essential element of the Group s operations. Management considers risk management and risk controls to be vitally important aspects of its business operations and management activities. Establishing and integrating risk management and control functions into the Group is a continuous process. The Group sets internal standards of risk transparency as the basis for controlling, limiting and managing risks. The Group s risk management and control system addresses the key banking risks: credit risk liquidity risk market risk interest rate risk operational risk. A risk appetite statement reviewed by the Board of Directors includes both quantitative and qualitative indicators designed to provide high level guidelines on type and amount of risk that the Group is willing to take in pursuit of its strategic goals. This risk appetite is further scaled to determine the level of limits for separate risks and business lines. (a) Internal Risk Reporting The Group s internal risk reporting and management process is based on the banking segment only. A reconciliation of the consolidated statement of financial position to the banking segment consolidated statement of financial position used for internal risk reporting and management as at 2017 is presented below: Consolidated statement of financial position (IFRS) Adjustments for investments in non-banking entities 2017 Consolidated statement of financial position (Banking segment) Assets Cash and cash equivalents (8 100) Obligatory reserve with the CBR Due from financial institutions (2 314) Securities at fair value through profit or loss and investments available-for sale accounted for at fair value (155) Loans to customers Investments available-for-sale accounted for at cost and investments in associates (15 917) Investments held-to-maturity Goodwill (29 840) - All other assets ( ) Total banking segment assets ( ) Net assets of non-banking investments (including related noncontrolling interests) Total assets (70 548) Liabilities Amounts owed to financial institutions (3 995) Amounts owed to customers Bonds issued Subordinated debts All other liabilities (87 018) Total banking segment liabilities (70 548) Total equity attributable to the Bank s shareholders Non-controlling interests (6 735) - (6 735) Total equity Total liabilities and equity (70 548) Guarantees and letters of credit issued

87 A reconciliation of the consolidated statement of financial position to the banking segment consolidated statement of financial position used for internal risk reporting and management as at 2016 is presented below: Consolidated statement of financial position (IFRS) Adjustments for investments in non-banking entities 2016 Consolidated statement of financial position (Banking segment) Assets Cash and cash equivalents (8 841) Obligatory reserve with the CBR Due from financial institutions (2 727) Securities at fair value through profit or loss and investments available-for sale accounted for at fair value (143) Loans to customers Investments available-for-sale accounted for at cost and investments in associates (11 343) Investments held-to-maturity Goodwill (30 669) - All other assets ( ) Total banking segment assets ( ) Net assets of non-banking investments (including related non-controlling interests) Total assets (70 984) Liabilities Amounts owed to financial institutions (5 184) Amounts owed to customers Bonds issued Subordinated debts All other liabilities (81 347) Total banking segment liabilities (70 984) Total equity attributable to the Bank s shareholders Non-controlling interests (5 400) - (5 400) Total equity Total liabilities and equity (70 984) Guarantees and letters of credit issued Risk management principles and organisation The following key principles guide the approach to risk management: The Board of Directors approves the general risk management strategy and policy, as well as applicable levels of risk appetite, strategic objectives and priorities in the development of risk management policy and system; monitors the Group s compliance with risk limits and capital adequacy ratios; reviews risk management systems and policies on an annual basis. The Management Board provides overall risk management oversight for the Group s operations as a whole within the framework set by the Board of Directors. The Management Board monitors actual risk levels for the Bank and its banking subsidiaries on a monthly basis, for the Group - on a quarterly basis, including risk limits and capital adequacy ratios and periodically reviews risk management approaches. 87

88 The Group enforces a clear segregation between the business operations and risk management activities. The Chief Risk Officer of the Bank (the CRO) has primary responsibility for overseeing the development and implementation of the Group s risk management function. This includes the ongoing strengthening of staff skills and enhancements to risk management systems, policies, processes, quantitative models and reports which are necessary to ensure that the Group s risk management capabilities are sufficiently robust and effective to fully support its strategic objectives and all of its risk-taking activities. The CRO reports directly to the Chairman of the Management Board. With the objective of monitoring effectiveness of the Group s risk management procedures and their consistent application the Board of Directors and the Management Board periodically discuss the reports prepared by the Internal Audit Department and the Risk Management Division and consider proposed corrective actions. The Group manages its credit, market and interest rate risks, liquidity and operational risks in a coordinated manner at all levels of its operations. In branch operations the Group delegates local decision-making authority to local/decentralised risk management units within the framework of the centralised risk management policies. Internal documentation of the Bank establishing methodologies for identifying and managing the Group s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and implementation of stress-testing is approved by the authorised management bodies of the Bank in accordance with the regulations and recommendations issued by the CBR. The Bank maintains a system for reporting on the Group s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and on the Bank s and Group s capital. Reports on credit, operational, market, interest rate, legal, liquidity and reputational risk prepared by the Bank s risk management and Internal Audit Department on a frequency and consistency stipulated by internal documentation include observations as to assessment of the effectiveness of the Group s procedures and methodologies, and recommendations for improvement. The Group has an integrated risk management system which allows to unify risk management approaches and enhance control over risk management in separate organisations of the Group, as well as to align the overall Group s risk profile with its strategic objectives and to facilitate risk-based decision making at the Group level. The risk management system is based on advanced standards and practices of risk-based management of financial organisations. Decision-making on management and risk control issues is a function of authorised bodies, such as the Credit Committee, Investment Committee, Assets and Liabilities Management Committee and Market operations and operational risk Commission. The Credit Committee and the Investment Committee are responsible for approving operations that carry credit risk. The authority and responsibility of each committee in respect of a given transaction is determined by reference to the parameters of the transaction. The primary objective of the Assets and Liabilities Management (the ALM) Committee is to satisfy the dual requirements of controlling exposure to liquidity and market risks while maximising profitability through the appropriate structure of assets and liabilities. The Strategy Committee reviews results of the strategic business analysis, forecasts and conditions for strategic development of the Group; produces recommendations to the Management Board on the strategy of the Group with regard to the CBR's regulatory restrictions; reviews implementation plans for the main strategic initiatives and strategies for specific lines of businesses; assesses the results of implementation of the Group's development strategy and strategies of specific lines of businesses. The Market operations and operational risk Commission makes decisions on matters of day-to-day management of market and operational risks. The Commission is also responsible for operational risk management methodology development, market risk limiting, control and monitoring of market risks; oversight of system implementation models and procedures ensuring compliance with the regulatory requirements related to the implementation of Basel II and III standards in the Russian Federation. 88

89 In addition to these committees, the Risk Management Division is responsible for day-to-day management of risks based on the standards, models and procedures it develops. The Risk Management Division include several departments that are independent from business departments. Their day-to-day activities are coordinated by the Head of Risk Management Division, who is supervised by the Deputy Chairman of the Management Board directly. Risk management information systems, assessment tools, processes and procedures are adapted and supported depending on the growth in the Group s operations, structure and level of acceptable risk. Other divisions that exercise control functions in the Group use operational data on key risks from the Risk Management Division as part of the planning process for their activities. The Group continuously develops the risk management system in order to comply with the best practices, as well as in accordance with the recommendations of the regulatory bodies. Following adoption of the Basel II Pillar II regulation by the CBR the Bank continued improvement of the risk management system on an standalone and at the Group s level, to ensure regulatory compliance. (b) Credit risk The Group is exposed to risk of financial losses occurring due to the default by a borrower or counterparty on their obligation to the Group (credit risk). Credit risk is managed in accordance with the CBR regulations, Basel Committee principles and guidelines, and internal documents developed to incorporate such principles. The main objectives of credit risk management include: supporting of stable Group's growth supporting of compliance of loan portfolio's measures of quality and credit risk profile to Group's strategic targets supporting of balance between profitability and credit risk's level including capital restrictions and requirements to capital adequacy. Credit risk management is based on common methodological approaches and procedures as part of complex system analysis, management and control of risks. Credit risk management is carried out at all stages of the credit process beginning from review of the client's credit application to the full repayment of its obligations. The Group applies the following key principles of credit risk assessment and management: use of a comprehensive methodological approach that includes qualitative (expert) and quantitative (statistical) credit risk assessment application of credit risk assessment to each individual transaction and to the portfolio as a whole limiting credit risk by setting limits unified approach to credit risk assessment applied in the loan decision-making process, administration, credit risk monitoring and allowance for impairment provision minimisation of credit risk through the transactions structuring and receiving collateral allowance for impairment provision and estimation of expected losses forecasting the level of credit risk. Target level of credit risk is determined based on risk appetite and economic capital budget. Decision-making on acceptable credit risk levels is made by several authorised bodies, such as the Investment Committee, the Credit Committee and the Chairman of the Management Board. The Group determines portfolio risk limits for business sectors, as well as maximum risk limits for a single borrower or a group of borrowers. Compliance with such limits is monitored on an ongoing basis. All transactions which are considered by the Credit Committee or the Investment Committee are subject to an independent expert assessment by the Risk Management Division. 89

90 Qualitative assessment of credit risk involves an analysis of the quality of the counterparty's management and control, its ownership, transparency, the counterparty's credit history, business reputation, its size and market share, industry trends, and the business activities of the counterparty, its geographical location, suppliers and customers. Qualitative assessment focuses on debt capacity, profitability, liquidity, cash flows and asset quality. Qualitative credit risk assessment is undertaken in respect of the following business segments: corporates, project finance, transactions with financial institutions, sovereign and municipal bodies, and debt market transactions. The result of a credit risk assessment is an expert opinion used in the decision-making process and risk mitigation steps that are appropriate for a specific transaction. Quantitative assessment of credit risk allows quantification of the credit risk accepted for separate borrowers and/or corresponding to the portfolio in total. Quantitative assessment of credit risk is carried out in accordance with models for estimating the probability of default (the PD-models) developed by the Group for different types of counterparties: corporate clients (the largest, large, middle and other corporate clients, project finance and M&A) financial institutions retail banking applicative models of estimation of probability of default (the PD-models) by types of loan portfolios sovereign and municipal bodies. The quantitative credit risk assessment framework is being developed according to the recommendations issued by the Basel Committee on Banking Supervision, Regulation of the CBR dated 6 August 2015 #No. 483-P Procedure for computing of credit risk level based on internal ratings. Clients are rated by internal ratings based on a unified internal rating scale that has twenty grades (from "AAA" to "D"). Internal ratings are assigned in accordance with approved PD-models. For rating purposes all clients are divided into categories, for each of which a dedicated assessment methodology is applied. The assignment of internal ratings of counterparties and transactions is conducted using the Group s Rating system which is an industrial IT-solution. Internal credit ratings are used for setting of credit risk limits, calculations of expected losses, risk analysis of the loan portfolio and financial planning. Within the quantitative framework, the Group annually performs stress tests portfolio which includes assessment of the potential deterioration of the loan portfolio s quality in case of negative changes in the economy. Retail risk management is carried out by general ways: diversification of loan portfolio by types of loans, regions, clients' segments regulated conservative underwriting including information about clients from external sources (credit reference agency and others) scoring system of loan applications' assessment rating system of loan applications' assessment based on probability of default determining of credit limits per one borrower and per power of officer responsible for credit decisionmaking improvement the process of chasing overdue loans and the process of taking possession of collateral: essential approval of loan applications for large amounts by the Risk Management Division The Group pays attention to the system of credit risk monitoring and control. There is a bank-wide information resource that contains results of the monitoring process for all transactions exposed to credit risk to take early risk mitigation actions. In case of identification of any negative trends for a specific transaction as a result of the monitoring process, such a transaction (depending on the degree of the negative trends) is included into one of the "Watch List" categories with the appropriate approach for further control and monitoring. The credit risk exposure on derivatives is managed as part of the overall credit risk for counterparties, together with potential exposures from market movements. Credit-related commitments ensure that financing is provided as per contractual agreements. Guarantees and standby letters of credit represent 90

91 irrevocable commitments that the Group will honor customers obligations. Standby letters of credit are usually fully or partially covered by the funds deposited by customers and therefore bear lower credit risk. The Group s activities may give rise to a settlement risk at the time of settlement of transactions. Settlement risk is the risk of loss due to the failure of a counterparty to execute its obligations to deliver cash, securities or other assets as contractually agreed. For certain types of transactions the Group mitigates this risk by conducting settlement through clearing agents to ensure that a trade is settled only when both parties have fulfilled their contractual settlements obligations or executing trades on net basis. Acceptance of settlement risk on free of payment trades requires transaction specific and/or counterparty specific settlements limits that form part of credit risk limits In order to reduce credit risk resulting from OTC derivative transactions, where OTC clearing is not available, the Group regularly seeks the execution of standard master agreements (such as master agreements for derivatives published by the International Swaps and Derivatives Association, Inc. (the ISDA) with its clients. A master agreement allows the netting of rights and obligations arising under derivative transactions that have been entered into under such master agreement upon the counterparty s default, resulting in a single net claim owed by or to the counterparty (close-out netting). Master agreements are supplemented by the Credit Support Annexes (the CSA) to mitigate credit risk exposure. (i) Offsetting financial assets and financial liabilities The table below presents financial assets and financial liabilities that are subject to an enforceable master netting arrangements or similar arrangements as at 2017 and 2016: Types of financial assets/liabilities Gross amounts of recognised financial asset/ financial liability Related amounts not set off in the statement of financial position Net amount Gross amounts of recognised financial asset/ financial liability Related amounts not set off in the statement of financial position Net amount Derivative trading assets 885 (885) (3 312) 267 Reverse repo agreements ( ) (31 373) - Total financial assets ( ) (34 685) 267 Derivative trading liabilities (885) (3 312) 701 Repo agreements (2 101) (3 106) - Financial liabilities designated as at fair value through profit or loss (42 569) (9 118) - Total financial liabilities (45 555) (15 536)

92 (ii) Geographical concentration of credit risk Below is a breakdown of the Group's assets and liabilities by geographical concentration of credit risk based on country of incorporation as at 2017 and 2016: 2017 Russia OECD Other non- OECD Total Assets Cash and cash equivalents due from the CBR Obligatory reserve with the CBR Due from financial institutions Securities at fair value through profit or loss and investments available-for-sale accounted for at fair value Loans to customers Investments available-for-sale accounted for at cost and investments in associates Investments held-to-maturity All other assets Total banking segment assets Net assets of non-banking investments (including related non-controlling interests) (1 149) Total assets Liabilities Amounts owed to financial institutions Amounts owed to customers Bonds issued Subordinated debts All other liabilities Total banking segment liabilities Net position ( ) Russia OECD Other non- OECD Total Assets Cash and cash equivalents due from the CBR Obligatory reserve with the CBR Due from financial institutions Securities at fair value through profit or loss and investments available-for-sale accounted for at fair value Loans to customers Investments available-for-sale accounted for at cost and investments in associates Investments held-to-maturity All other assets Total banking segment assets Net assets of non-banking investments (including related non-controlling interests) Total assets Liabilities Amounts owed to financial institutions Amounts owed to customers Bonds issued Subordinated debts All other liabilities Total banking segment liabilities

93 Net position (iii) Maximum credit risk exposure for financial instruments For financial assets the maximum exposure to credit risk equals the carrying value of those assets. For guarantees and letters of credit issued the maximum exposure to credit risk is the maximum amount the Group would have to pay if the guarantee or letter of credit issued was called on (Note 30). (iv) Internal credit rating of financial assets, guarantees and letters of credit issued Internal rating grades are based on credit quality of the counterparties: Grades Credit quality Risk level AAA Highest credit quality Minimal credit risk АА+ - АА- Very high credit quality Very low credit risk A+ - A- High credit quality Low credit risk BBB+ - BBB- Good credit quality Adequate credit risk BB+ - BB- Average credit quality Average credit risk B+ - B- Low credit quality Substantial speculative credit risk CCC Speculative High credit risk CC Speculative Very high credit risk C Speculative Exceptionally high credit risk D Default Default The classification of major banking financial assets, guarantees and letters of credit issued according to the internal credit rating system as at 2017 and 2016 is represented below: 2017 AAA-A BBB-B CCC-C D Not rated Total Due from financial institutions, gross Allowance for impairment (141) (187) - (319) (519) (1 166) Loans to customers, gross Allowance for impairment (3 150) (70 240) (26 438) (76 640) (13 470) ( ) Investments held-tomaturity, gross Allowance for impairment (579) (692) (1 271) Guarantees and letters of credit issued, gross Provisions for losses (183) (4 338) (1 490) (1 474) (55) (7 540) AAA-A BBB-B CCC-C D Not rated Total Due from financial institutions, gross Allowance for impairment (161) (142) - (866) - (1 169) Loans to customers, gross Allowance for impairment (1 397) (86 427) (70 807) (82 880) (12 124) ( ) Investments held-tomaturity, gross Allowance for impairment (494) (585) (1 079) Guarantees and letters of credit issued, gross Provisions for losses (128) (3 793) (253) (2 982) (50) (7 206)

94 (c) Liquidity risk The Group manages its liquidity position to ensure that sufficient liquidity is available to meet its commitments to customers, creditors and note holders. Both qualitative and quantitative approaches to liquidity risk assessment are used to identify and measure actual and potential risks. The liquidity management system is an integrated solution of risk identification, evaluation and control across the banking segment. It is an essential part of the assets and liabilities management (the ALM) system at the Group level, including the head office and regional branches. The liquidity management system consists of two main components: short-term liquidity management conducted by the Department of short-term liquidity management on a regular basis medium-term and long-term liquidity management performed by the ALM Committee and the Internal Treasury Department (the ALM unit), as part of the ALM management, for the purpose of setting an effective risk-return ratio. The Internal Treasury Department reports to the ALM Committee on a regular basis. Liquidity risk appetite as part of Risk appetite declaration is set by the Board of Directors. The cascade of limitations and indicators are set in compliance with the liquidity risk management policy approved by the Management Board. At the executive level, liquidity risk is managed by the ALM Committee. The ALM Committee determines the policies for asset and liability management, aiming to provide effective diversification of funding sources and availability of sufficient funding in stressed conditions. The Risk Management Division conducts regular liquidity risk assessments and reports on the liquidity risk status to the Chief Risk Officer weekly, to the ALM Committee and to the Management Board - monthly. Risk reporting includes qualitative and quantitative risk estimations, stress-test results, and an evaluation of additional liquidity sources (liquidity buffer). (i) Liquidity risk management methods The system of liquidity risk management is integrated in the planning processes and assessment of one-off substantial operations, thus ensuring that liquidity risk management is an essential part of the decision-making process. The system of liquidity risk management includes planning of operations and immediate borrowing facilities, using a wide set of risk evaluation methods: static and dynamic gap analysis, scenario approach, including stress-testing, liquidity ratios and liquidity cost estimates. The Group uses a system of Liquidity Risk Indicators and Limits, including liquidity gaps, Liquidity coverage ratio and Net stable funding ratio, to control the liquidity risk exposure, and maintains a liquidity cushion (buffer) to ensure it is able to cover unexpected (stress) fund withdrawals. The Group performs an assessment of the adequacy of the applied models (back-testing) on a regular basis and revises parameters and methodological approaches to the liquidity risk evaluation if required. (ii) Gap analysis The gap analysis allows estimating the future liquidity position along with readily available sources of extra liquidity needed to cover possible shortages. Hereinafter "gap" stands for "cumulative gap" (i.e. sum of inflows net of sum of outflows in the given time stage and all time stages before it). The classic gap analysis is enhanced with incorporating subdivision of contractual, planned or probable cash flows into several tiers. These tiers comprise Tier 0 (highly probable cash flows) and Tiers 1-4 which form liquidity reserves. The Risk Management monitors liquidity reserves and borrowing facilities including the Liquidity Buffer for the case of a liquidity shortage. 94

95 The following table provides information on the liquidity tiers included in the gap analysis: Tier Facilities Description Tier 0 Contractual cash flows, new likely-to-happen operations (rollover, new business, etc.) Tier 1 Committed lending facilities provided by the CBR Borrowing facilities committed by the CBR and considered as the most stable funding sources. These financing sources form a liquidity cushion or "Liquidity buffer" and are available in stress conditions. Tier 2 Market funding facilities Borrowing facilities available on the market under normal conditions, but restricted in case of a stress scenario: money market, client deposits. Tiers 3-4 Medium-term funding facilities Additional borrowing facilities restricted by the longer arrangement period, relatively high cost of funding or by negative effect on the business plans' realisation: REPO market, bond issue, potentially available opportunities of secured borrowing from the CBR where availability confirmation is pending. Cumulative tier composition shows an estimate of the future liquidity position (for instance, when a liquidity shortage may occur) along with indications of readily available sources of liquidity to cover possible liquidity shortages. (iii) Scenario analysis and stress-testing The gap analysis is supported by the scenario analysis, which includes a realistic scenario (business as usual) and a liquidity stress scenario. The scenario analysis is performed as part of regular risk evaluation. Realistic scenario: demonstrates the average expected liquidity level. Stress scenario: demonstrates stress tolerance and the ability to maintain sufficient liquidity without applying restrictions on assets-related banking transactions. All scenario assumptions and parameters are approved by the ALM Committee. The basic scenario assumptions are as follows: Financial instrument/ portfolio Realistic scenario Stress scenario Loan portfolio According to the Assets and Liabilities plan Projected credit risk According to the Assets and Liabilities plan for 1 month, lending ceases in later periods, if needed Higher credit risk Securities No revaluation Stress repricing: equities -25%, fixed income -6% Current accounts and on demand Realistic (historical simulation based) Stress outflow: -100% of less stable, deposits* outflow -20% of stable Corporate and retail deposits According to the Assets and Liabilities Stress outflow: -25% plan Long term debt Contractual maturity, excl. rublenominated Contractual maturity debt Additional funding sources Secured (CBR collateralised facilities, REPOs) and unsecured (money market, capital market) sources Unsecured sources largely unavailable; Secured sources decay because of stress collateral repricing (fixed income -6%) * On demand deposits have a minimal stable volume that can be accounted for as having maturities: from 1 month to 12 months - "less stable"; over 12 months - "stable". This volume is estimated regularly on the basis of historical data. 95

96 (iv) Contingency planning In addition to the integrated liquidity risk management system, the Group has a contingency funding plan (the CFP) that sets out the strategies for addressing liquidity shortfalls in emergency situations. The CFP outlines policies to manage a range of stress scenarios and establishes lines of responsibilities, including escalation procedures. The CFP is updated on an annual basis. The daily monitoring of early warning indicators ensures that the CFP policies and escalation procedures would be executed promptly. (v) Quantitative liquidity risk analysis The analysis below is presented using the remaining contractual and expected maturities for assets and liabilities. Deposits on demand (customer current and settlement accounts) are assumed to be stable funding source for the Group. The assumption is supported by the diversification of these deposits by number and type of depositors and the past experience. For such deposits remaining expected maturities were used for the analysis. According to estimates based on the realistic scenario as at 2017 and 2016 withdrawals from payable on demand customer accounts will occur in the following periods: On demand and less than 1 month From 1 month to 12 months Over 12 months As at 2017, term deposits of legal entities included current accounts with minimum balance agreements in the amount of RUB million ( 2016: RUB million). These deposits included in liquidity risk assessment according to the expected maturity and represents short-term and stable resources of financing that evidenced by historical analysis of customer behavior. The following tables show the banking segment cash flows cumulative gap, which equals the sum of gross amounts to be received within or before each relevant time period according to maturities/redemptions of financial instruments (assets/claims) less gross amounts to be repaid within or before each time period according to maturities/redemptions of financial instruments (liabilities/obligations). The result of the banking segment liquidity gap analysis as at 2017 is as follows: Realistic scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier (72 273) Tiers Tiers Stress scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tiers Tiers

97 The following graphs illustrate the liquidity gap analysis as at 2017 and are presented in billions of Russian rubles: Realistic scenario Stress scenario In 2017 liquidity position and liquidity risk of the Group were maintained on desired levels. Interest rates structure and its dynamics encouraged further shortening tenors of liabilities. The Group funded its growth in 2017 mostly by short-term funds from corporate clients. The effects of shortening duration of the liabilities were partially mitigated by shifting to the more stable form of these liabilities without an option of earlier withdrawal. The Group successfully maintained chosen level of liquidity risk and the corresponding liquidity buffer volume on the level of RUB billion. Based on the results of the above analysis management assessed the liquidity of the Group as follows: Realistic scenario: current liquidity position is estimated slightly excessive, including readily available stock of liquidity reserves, with no significant probability of future cash shortage. Stress scenario: the Group is stress tolerant and able to maintain a sufficient liquidity level. Possible decrease of the assets is less than 10% of the credit portfolio within a one year period. The result of the banking liquidity gap analysis as at 2016 is as follows: Realistic scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier (44 744) (71 944) ( ) ( ) Tiers Tiers Stress scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier 0 (7 840) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tiers Tiers

98 The following graphs illustrate the liquidity gap analysis as at 2016 and are presented in billions of Russian rubles: Realistic scenario Stress scenario The tables below show the consolidated undiscounted cash flows on the financial liabilities on the basis of their contractual maturity (including financial liabilities of the non-banking segment). The total amount of outflows disclosed is the contractual, undiscounted cash flows on financial liabilities, which is therefore different from the carrying amount of the corresponding financial instrument. The expected cash flows on these financial liabilities may significantly vary from this analysis. Less than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years 2017 Total Amounts owed to financial institutions Amounts owed to customers Bonds issued Subordinated debts Other financial liabilities Total liabilities Guarantees and letters of credit issued, gross Less than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years 2016 Total Amounts owed to financial institutions Amounts owed to customers Bonds issued Subordinated debts Other financial liabilities Total liabilities Guarantees and letters of credit issued, gross

99 (d) Market Risks Market risk arises from exposure to changes in the value of certain market variables, such as interest rates or foreign exchange rates, equity or commodity prices, or the correlations among them and their levels of volatility. The Group is exposed to market risk in both trading and non-trading activities. Market risk arises from taking positions in debt, equity, foreign exchange and commodities, as well as in interest rate, equity, foreign exchange and commodity derivatives. The Group s strategy for managing market risk includes identification, measurement and monitoring of market risks that affect its banking business. The market risk management function is centralised and is run by the Risk Management Division. To estimate currency risk and other price risks the Group uses a value-at-risk (VaR) methodology. Sensitivity analysis is used for interest rate risk exposure assessment. Value-at-risk is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given confidence level. 10-day VaR is used for reporting with 98.1 percent confidence level. In the 2017 year the level of the confidence level was equal 98.8%. The reason of the revision the confidence level is the decreasing the international credit rating for Russia last years. This leads to the revision of the Probability of Default (PD) for Bank. Because of the inverse dependence the degree of the increasing the PD is equal to the degree of the decreasing the confidence level. A single factor model based on market quotes is used to calculate VaR for equity. 1-day VaR for equities is calculated by a volatility-weighted historical simulation method with five years of history. To consider volatility clusterisation, volatility-weighted historical returns are used to construct a historical sample and exponential weights are then applied to calculate VaR for equities. To construct a sample of historical returns for equities with a short history of quotes, beta coefficients estimations and market returns are used. A single factor model based on a yield to maturity or to put (offer) is used to calculate VaR for bonds. The modified historical simulation method is applied for calculation the VaR of bonds. Missing quotes are generated using Monte-Carlo simulations. In order to take into account current market conditions, the relevant historical time series are scaled by the ratio between the current and historical volatility Historical simulation method is used to calculate 10-day VaR for FX positions. Derivatives are taken into account in positions using delta-equivalent values. Although VaR is a valuable tool for measuring market risk exposures, it has a number of limitations, especially in less liquid markets: the use of historical data as a basis for determining future events may not encompass all possible scenarios, particularly those that are of an extreme nature the use of a 10-day holding period assumes that all positions can be liquidated or hedged within that period. This is considered to be a realistic assumption in almost all cases, but may not be the case in situations of severe market illiquidity for a prolonged period VaR is only calculated on the end-of-day balances and does not necessarily reflect exposures that may arise on positions during the trading day the VaR measure is dependent upon the position, correlation and the volatility of market prices. The VaR of an unchanged position reduces if market volatility declines and vice versa the use of a 98.1 percent confidence level does not take into account losses that may occur beyond this level. There is about a two percent probability that the loss could exceed the VaR estimate on a holding period. The Bank recognises all above mentioned VaR limitations and takes them into account in its market risk measurement by supplementing VaR limits with other position and sensitivity limits, including limits to address potential concentration risks within each trading portfolio. The verification of the portfolio VaR model is supported by back-testing based on the Basel standards. Regularly performed back-testing shows a good quality of the Bank's models. 99

100 In addition to a VaR assessment, the Bank also uses portfolio stress testing to supplement market risk exposure analysis. Stress testing provides senior management with an assessment of the impact of extreme scenarios on market risk exposure. A set of market variables (risk factors) for a stress scenario is estimated via a macroeconomic model with an input of adverse market conditions including a decrease in the oil and other commodities prices, GDP decline and others. Currently, the stress scenario is based on the overall economy recession with a GDP decline, unemployment increase, emerging market currencies depreciation and market indexes decline. The final stress exposure assessment takes into account expected management actions including position hedging, changes in the size of positions and others. Ease of stressed economic conditions in the Russian financial market during the 2017 year decreased the risk of the substantial negative financial result of the securities portfolios as well as open currency positions. As a result market risk level went lower despite relatively small changes in open positions. As at 2017, the Group did not breach any internal market risk limitations. Overall level of taken market risk did not exceed chosen risk-appetite. (i) Interest rate risk The Group is exposed to the effects of fluctuations in the levels of market interest rates on its financial position and cash flows. Interest rate risk is measured by the extent to which changes in market interest rates impact the fair value of the debt securities portfolio (bonds and derivatives in the trading book), net present (economic) value of interest related instruments (classified to the banking book), margins and net income and include: the risk of a parallel shift, change in the slope and shape of the yield curve resulting from the maturities (repricing) mismatch of assets and liabilities sensitive to interest rate changes basis risk, which results from a mismatch in the degree of interest rate sensitivity of assets and liabilities with similar maturity (repricing term) risk of repricing of interest rate sensitive assets and liabilities. Increasing interest rates can drive the cost of borrowed funds up faster and at a higher growth rate than return on investments, thus worsening financial results and interest rate margin. An increase in interest rates will also cause a negative revaluation of the bond portfolio. The objective of managing interest rate risk is to control the impact of possible changes in market interest rates on net interest income and potential decreases in security values. Interest rate risk is assessed using scenario analysis for both trading and banking books and the VaR approach for positions in trading bonds. Estimating the effect of possible changes in interest rates is carried out separately for Russian ruble positions and positions in foreign currencies. The Bank s interest rate policy is reviewed regularly. The Risk Management Division reports on a regular basis to the ALM and the Market operations and operational risk Commission on the levels of interest rate gaps, dynamics of net interest income sensitivity to the interest rates shift and dynamics of net present value sensitivity. The ALM Committee sets limits on all levels of interest rate risk exposure in accordance with the risk appetite. The limits include: net present value sensitivity limits for all assets and liabilities structural limits (i.e. limits on the gap in assets and liabilities volume for each time bucket) net interest income sensitivity limits for all assets and liabilities. The limits are set separately for the russian ruble part of the balance sheet and all other currencies. The Bank also has the following limits for trading bonds and derivatives: 100

101 net present value sensitivity limits for trading bonds net present value sensitivity limits for derivatives for time buckets limits on total nominal amount limits on terms of the deals with derivatives. Sensitivity analysis for interest-earning assets and interest-bearing liabilities A sensitivity analysis shows how profit and loss for the reporting periods would have been effected by changes in the relevant interest rates as at 2017 and The table below presents the analysis of net interest income sensitivity to interest rate repricing risk based on a 100 basis points (b.p.) symmetrical fall or rise in all yield curves. The interest rate sensitivity analysis is performed for positions of banking interest-earning assets and interest-bearing liabilities existing as at 2017 and Effect on net interest income Currency Interest rate increase, b.p RUB 100 (6 791) (3 837) USD EUR 100 (54) 65 GBP Other Total (6 088) (2 211) The table above shows an estimate based on yield curve shift of +100 b.p. A shift of the yield curve of 100 b.p. will have a positive effect on net interest income of approximately the same scale (+RUB million). Russian ruble (RUB) interest income sensitivity in 2017 increased while being maintained within limits. The main reason of the stated increase is the widening gap between assets and liabilities durations as the Group in the current economic environment funded its growth mostly by short-term client funds. Interest income sensitivity in currencies except ruble during 2017 decreased due to decrease of short-term liquidity. In the stress scenario the effect on net interest income assuming relevant management actions could be approximately RUB (11 050) million (a 200 b.p. increase in the RUB interest yield curve and a 100 b.p. increase in the USD and EUR yield curves). (ii) Currency risk The Group has assets and liabilities denominated in foreign currencies. The financial positions and cash flows are exposed to the effects of fluctuations in the foreign currency exchange and precious metal rates. The currency risk does not arise from financial instruments that are non-monetary items or from financial instruments denominated in the functional currency. The Risk Committee sets limits on the level of currency risk exposure for each foreign currency (including different types of limits on derivatives) and each portfolio (trading, investment, the Group, the Bank, subsidiaries). These limits comply with the minimum requirements of the CBR. 101

102 The exposure of the banking segment to foreign currency exchange rate risk as at 2017 and 2016 is as follows: 2017 RUB USD EUR Other Total Monetary items Assets Cash and cash equivalents Obligatory reserve with the CBR Due from financial institutions Securities at fair value through profit or loss and investments available-forsale accounted for at fair value Loans to customers Investments held-to-maturity All other monetary assets (excluding derivatives) Total monetary banking segment financial assets Liabilities Amounts owed to financial institutions Amounts owed to customers Bonds issued Subordinated debts All other monetary liabilities (excluding derivatives) Total monetary banking segment financial liabilities Non-monetary items Investments available-for-sale accounted for at cost and investments in associates Net assets of non-banking subsidiaries (including related noncontrolling interests) All other non-monetary assets and liabilities, net Net recognised position (excluding derivatives) ( ) Derivatives position - forwards (6 841) (26 772) - options (365) (635) 12 - swaps (48 650) (16 940) - spot deals (5 776) (4 804) Net derivatives position (61 902) (48 504) Net foreign currency position

103 2016 RUB USD EUR Other Total Monetary items Assets Cash and cash equivalents Obligatory reserve with the CBR Due from financial institutions Securities at fair value through profit or loss and investments available-forsale accounted for at fair value Loans to customers Investments held-to-maturity All other monetary assets (excluding derivatives) Total monetary banking segment financial assets Liabilities Amounts owed to financial institutions Amounts owed to customers Bonds issued Subordinated debts All other monetary liabilities (excluding derivatives) Total monetary banking segment financial liabilities Non-monetary items Investments available-for-sale accounted for at cost and investments in associates Net assets of non-banking subsidiaries (including related noncontrolling interests) All other non-monetary assets and liabilities, net Net recognised position (excluding derivatives) ( ) Derivatives position - forwards (6 100) (9 713) - options (96) swaps (95 709) (27 630) - spot deals Net derivatives position ( ) (37 236) Net foreign currency position The calculation of sensitivity of net profit to foreign exchange rate changes (VaR) is based on the net foreign currency position excluding non-monetary items Total foreign exchange VaR (10 days) The main reason for the decrease in the foreign exchange VaR during 2017 was: the reduce in volatility of USD/RUB, EUR/RUB and other exchange rates. 103

104 The Group also assesses the sensitivity of net profit to adverse foreign exchange rate changes as a part of a systemic stress scenario, where stress levels of USD, EUR and other exchange rates are assumed as follows: about 10% reduction in USD, EUR and precious metals. In case of realisation the above adverse stress scenario the Group can incur losses at about RUB 5.2 bln before income tax expenses. (iii) Price risks The Group has significant investments in quoted securities, which consist of both short-term trading positions and medium or long-term strategic investments. The Group also enters into derivatives for hedging purposes. Financial positions and cash flows are exposed to the effects of fluctuations in the securities market prices. The restrictions of the value of the position (notional and structural limits), market risk value (VaR limit), the sensitivities values, the maximum negative financial result (Stop loss limit), as well as concentration restrictions (issuer position limit and issue position limit) are set by the Risk Committee. The credit risk limits of the issuers are set by the Investment Committee and Credit Committee of the Bank. The Group measures financial instruments at fair value based on positions as at 2017 and 2016 for VaR analysis purposes as follows: Position VaR Position VaR Debt instruments Equities Effect of covariance for equities - (259) - (563) Despite the 15% increase of the value of bond position during the 2017 year the VaR moderately decreased, that stipulated by corresponding volatility decreasing of the bonds in the Russian financial market. Also there is essential decrease in the volatility of the individual instruments of the equity portfolio that brought to doubly decrease of the equity VaR. The VaR methodology is applied only to quoted (Level I) instruments. Non-quoted instruments are excluded from the VaR calculation. Forwards and option positions (delta equivalent) are also included in the VaR calculations. The position of the Group in non-quoted instruments is represented by investments in non-banking segments (strategic and private equity investments). These instruments are not included into the traditional VaR model and a separate model is used to calculate the economic capital value for these instruments. These instruments are not liquid and will not be effected by market volatility, thus using VaR is not relevant. The main tool for managing this risk is capital allocation to cover the risk of depreciation over the horizon of financial planning (one year) and strategic planning (five years). Potential risk exposure for non-quoted financial instruments is restrained by the position limits set by the ALM Committee and the Market operations and operational risk Commission. The Group also assesses the sensitivity of its net profit to price changes in securities as a part of a systemic stress scenario, assuming a 25% decrease in quotes for equities and a 2% increase in yield to maturity for debt securities. The total loss in the stress scenario is estimated at RUB 3.0 bln as at 2017, assuming appropriate management responses. (e) Operational risk Operational risk is defined as the risk of a loss resulting from inadequate or ineffective internal processes, personnel and systems or external events. Losses from staff errors, internal or external fraud, computer system failures, settlement errors, model errors or natural disaster are considered losses due to operational risk. By their nature these risks are more difficult to quantify compared to other types of risk and therefore an integrated operational risk management system is vital for effective management of operational risk. 104

105 Today the Bank s operational risk framework consists of the following key elements: risk identification and escalation process qualitative and quantitative risk assessment risk level monitoring system (including key risk indicators system); operational risk limitation system scenario analysis and stress-testing business continuity and disaster recovery planning (BCP&DRP improvement is in progress) operational risk reporting. Together these components provide the advantage of quick detection and correction of deficiencies in the policies, processes and procedures for adequate operational risk management. Promptly detecting, assessing and addressing these deficiencies with the risk owners at the corresponding management level can substantially reduce the potential frequency and (or) severity of operational risk and (or) an event. The Bank is focused on implementing a systematic approach to regular monitoring and reporting on its operational risk profiles and material exposures to operational losses. In order to ensure effective operational risk management the Bank uses principles, methods and approaches based on best practices of operational risk governance and control such as the following: An acceptable level of corporate culture for risk management is supported in the Bank by means of dissemination of values and objectives of risk management to all bank employees, as well as determination of and control over abidance by norms and standards of risk management. Risk appetite is approved at the bank level as a whole and as principles for setting limits for operational risks to be taken. The Bank develops internal documents regulating: employees' job descriptions banking operations processes business continuity and disaster recovery plans information disclosure policies. There are processes for monitoring and escalation of information on operational risks at all management levels in the Bank for supporting proactive operational risk management. The Bank implements principles for segregation of duties and conflict of interest policies. The Bank implements new products and processes only after proper documentation of relevant procedures and controls. Internal regulatory documents are accepted only after the approval of the Risk management, Internal Audit, Compliance and Security departments. The Bank organises procurement of goods and services on a competitive basis. As part of operational risk management, the Bank performs the following procedures on legal risk management: provides legal expertise for internal documents and contracts and other relevant correspondence with counterparties monitors changes in the regulatory base for timely changes in contracts and the Bank's processes. Furthermore, in order to reduce the negative effects from specific types of operational risks the Bank has a complex insurance program which includes: Comprehensive Crime & Professional Indemnity Insurance (Bankers' Blanket Bond, Electronic and Computer Crime and Professional Indemnity) Voluntary medical insurance for employees Property insurance, including ATM insurance. 105

106 Risk management of non-banking segments Each of the principal non-banking subsidiaries the Gazprom Media Group, OMZ Group and other subsidiaries in the machinery segment and other Group subsidiaries independently manage their financial risks, within the requirements and limitations prescribed by applicable corporate procedures. For example, the risk management of Gazprom Media Group is carried out by the company's central finance function. The company s Treasury Department identifies, evaluates and hedges market risks in accordance with the policies approved by the governing body of the company. The Treasury Department also manages credit risks in relation to transactions with financial institutions. Credit and liquidity risks in relation to the operating transactions are managed by business units in accordance with the relevant risk management policies established by the company. (f) Capital adequacy Capital adequacy according to statutory requirements The Bank calculates capital adequacy ratios in accordance with the Basel III-compliant CBR requirements on a stand-alone basis and at the consolidated Group's level. For the purposes of the statutory capital adequacy ratios calculation, the composition of the Group, as well as accounting treatment of certain transactions and methods applied for valuation of assets and liabilities may be different from these consolidated financial statements. The Bank and the Group were in compliance with the statutory ratios, including statutory capital adequacy ratios, as at 2017 and The CBR minimum requirements and the Bank's statutory capital adequacy ratios as at 2017 and 2016 were as follows: CBR minimum requirement Bank's ratios Bank's ratios Common equity (N1.1 ratio) 4.5% 8.7% 8.3% Tier 1 Capital (N1.2 ratio) 6.0% 9.0% 8.4% Total Capital (N1.0 ratio) 8.0% 12.5% 13.0% The consolidated CBR requirements and the Group s consolidated capital adequacy ratios as at 2017 and 2016 were as follows: CBR minimum requirement CBR minimum requirement incl. buffers* 2017 CBR minimum requirement incl. buffers* 2016 Group's ratios Group's ratios 2017 and Common equity (N20.1 ratio) 4.5% 6.1% 5.275% 8.5% 8.1% Tier 1 Capital (N20.2 ratio) 6.0% 7.6% 6.775% 8.9% 8.5% Total Capital (N20.0 ratio) 8.0% 9.6% 8.775% 12.6% 12.7% * Buffer for maintaining capital level (0.625%) and systemically important institution buffer (0.15%) were applied on 1 January 2016 according to the CBR requirements based on Basel III. Since 1 January 2017 the buffers have increased to 1.25% and 0.35% respectively. As the Bank is the parent company of the Group, the buffers are only applicable to the Group s ratios. Failure to maintain the Group's minimum required regulatory capital adequacy ratio, increased on the buffers, will lead to restriction on profit distribution and on bonus payments to the Management of the Bank and remuneration to the Board of Directors. Capital adequacy according to Basel I In addition, for the purpose of comparability with other Russian and international financial institutions, the Group discloses capital adequacy ratios based on amounts recognised in these consolidated financial statements. 106

107 The Group uses Basel Accord guidelines issued in 1988, with subsequent amendments including the amendment to incorporate market risks. As at 2017 and 2016, the composition of the Group s capital in accordance with Basel I was as follows: Share capital Additional paid-in capital Treasury shares (9 756) (9 695) Applicable reserves Perpetual debt* Goodwill (3 971) (4 804) Non-controlling interests (6 735) (5 400) Tier I Capital Fair value reserve for securities available-for sale and cash flow hedge reserve Subordinated debts Hybrid capital instruments Tier II Capital Total Capital Adjustments to Tier II Capital (12 982) (29 946) Net available capital Risk weighted assets Banking book Market risks Total risk weighted assets Capital adequacy ratios Tier I ratio 10.3% 10.0% Total capital ratio 13.1% 13.5% * The instruments with similar characteristics were not described as a part of capital in Basel I, while later in Basel III release the criteria for inclusion of such instrument in Tier 1 capital were clearly set. The Group assesses that the USD denominated perpetual debt have a loss absorption capacity equal to its historic cost of RUB million. Therefore, the Group recognises the effect of foreign exchange differences related to perpetual debt in the amount of RUB million ( 2016: RUB million) as part of retained earnings for the purpose of Tier 1 applicable reserves calculation. The Group is also subject to covenants stated in various agreements, including capital adequacy calculated in accordance with the Basel requirements. Management confirms that the Group complied with all capital adequacy requirements as at 2017 and Internal capital adequacy Since 2010, the Group has been using an economic capital allocation framework, for the purpose of ensuring sufficient capital adequacy, increased transparency of risk-taking and governance of the internal limits framework, as well as optimizing the balance of risk and return. Internal capital adequacy is one of the elements of the risk appetite statement. The Group regularly monitors its actual risk profile against the risk appetite approved by the Bank's Board of Directors and corrective actions are taken if necessary. The capital allocation framework is used to assess the overall solvency of the Group by comparison economic capital requirements to available internal capital (available financial resources). 107

108 Economic capital requirements are defined as the maximum possible losses over a one-year period at a confidence level relevant for the Bank s credit rating, that the Group could incur on its open risk positions and portfolios as at the reporting date, and the relevant risk factors as captured by the internal models. The economic capital requirements model captures all significant quantifiable risks to which the Group is exposed as at the reporting date, as well as diversification of risk across the portfolio types, business lines and risk types. The model is calibrated based on history of risk factor data, which is long enough for the amount of required capital to be assessed on a through-the-cycle basis, and potential losses to be captured irrespective of the current phase of the business cycle. During the reporting period, internal capital adequacy of the Group has been maintained at the level higher than the limitation introduced. The risk profile according to management reporting, in terms of the size of internal capital, is presented by the diagram below (unaudited): Investments in non-banking subsidiaries (presented above as part of direct investments) are a part of the private equity activities of the Group. As a result, management estimates integrated risk on direct investments that includes both the risk that a company may default on its obligation to the Bank (credit risk) and the risk that its market value may deteriorate (market risk). Consequently, for the purposes of risk management analysis nonbanking investments are presented based on their net asset values (including related non-controlling interests). 108