Report on review of interim condensed consolidated financial statements

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3 Ernst & Young LLC Sadovnicheskaya Nab., 77, bld. 1 Moscow, , Russia Tel: +7 (495) (495) Fax: +7 (495) ООО «Эрнст энд Янг» Россия, , Москва Садовническая наб., 77, стр. 1 Тел.: +7 (495) (495) Факс: +7 (495) ОКПО: Report on review of interim condensed consolidated financial statements To the Shareholder of Open Joint Stock Company Russian Railways Introduction We have reviewed the accompanying interim condensed consolidated financial statements of OJSC Russian Railways and its subsidiaries ( the Group ) as at 30 June 2013, comprising the interim consolidated statement of financial position as at 30 June 2013 and the related interim consolidated statements of income, comprehensive income, changes in equity and cash flows for the six-month period then ended and explanatory notes. Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting. Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Basis for qualified conclusion In 2010 the Group changed its accounting policy for property plant and equipment from revaluation to historic cost model. In 2012, the Group has completed its property, plant and equipment registers as at 1 January 2012 in accordance with its new accounting policy and restated respective net book value of property, plant and equipment and related balances of other assets, liabilities and equity as at that date. As of the date of issuance of the accompanying interim condensed consolidated financial statements, the Group did not finalize its property, plant and equipment registers for the movements in its property, plant and equipment, including the effects of impairment and accounting for components, for 2012 and six-month period of The effects of these departures from IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets on the movements of property, plant and equipment presented in Note 8 for the six-month periods ended 30 June 2012 and 30 June 2013, as well as on the financial position as of 31 December 2012 and 30 June 2013 and results of operations for the six-month periods ended 30 June 2012 and 30 June 2013 have not been determined. A member firm of Ernst & Young Global Limited

4 Qualified conclusion Based on our review, except for the effects of the matters described in the Basis for Qualified Conclusion paragraph, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements are not prepared, in all material respects, in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting. 2 December 2013 A member firm of Ernst & Young Global Limited

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13 Consolidated Financial Statements As at 30 June 2013 and for the six months then ended 1. Description of Business and Operating Environment Corporate Information Open Joint Stock Company Russian Railways ( RZD or the Company ) was established on 1 October 2003 pursuant to Decree of the Russian Government No. 585 On Foundation of Open Joint Stock Company RZD dated 18 September 2003 and in connection with implementation of the Program of Railway Transportation Industry Restructuring ( the Program ). The Company is 100% owned by the Russian Federation. These interim condensed consolidated financial statements of RZD and its subsidiaries (the Group ) for the six months ended 30 June 2013 were authorized for issue by the management of RZD on 2 December Principal activities of the Group are described in Note 5. Operating Environment Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by the market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the Government. The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in uncertainty regarding further economic growth, availability of financing and cost of capital, and the Russian economy currently shows indicators of stagnation with expected GDP growth rates being reconsidered downwards both by the Russian Government and by international bodies. These effects could negatively affect the Group s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Group s business in the current circumstances. Currency Exchange The exchange rate of the Ruble to 1 US Dollar equated to and as at 30 June 2013 and 31 December 2012, respectively. The exchange rate of the Ruble to 1 EUR equated to and as at 30 June 2013 and 31 December 2012, respectively. The exchange rate of the Ruble to 1 Pound Sterling equated to and as at 30 June 2013 and 31 December 2012, respectively. The exchange rate of the Ruble to 1 Swiss Franc equated to and as at 30 June 2013 and 31 December 2012, respectively. As at 2 December 2013 the exchange rate was Rubles to 1 US Dollar, Rubles to 1 EUR, Rubles to 1 Pound Sterling and Rubles to 1 Swiss Franc. Liquidity As at 30 June 2013, the Group s current liabilities exceeded its current assets by Rbls 123,580 million (31 December 2012: Rbls 175,412 million). As a result, uncertainties exist as to the Group s liquidity. 11

14 1. Description of Business and Operating Environment (continued) Liquidity (continued) The Group is investing in expansion, modernization and maintenance of its property plant and equipment (PP&E). The Group financed investment activities through cash generated from operations and current and non-current borrowings and governmental financing received in the form of subsidies and contributions to the Company s share capital. Management is addressing the Group s liquidity needs by implementing the following measures: Continuous monitoring and management of credit portfolio structure aiming at extending its duration and maintaining even flows of borrowings repayment in future periods; Maintaining diversified sources of external borrowings, including local and international capital markets and commercial banks; Entering into long-term and medium-term agreements with local banks to ensure sufficient liquidity reserves for emergency cases; Using short-term bridge facilities to ensure smooth cash flows to finance investments and operations. Management believes that through twelve months after the date of authorization of these interim condensed consolidated financial statements, there will be sufficient funding from (a) existing cash balances, (b) cash generated from operations, and (c) debt financing. Also, the management is currently considering the Group s ability to curtail its investment projects and cut operating costs in order to address negative impact on its operating cash flows of insufficient tariffs indexation in 2014 and overall stagnation in Russian economy. 2. Basis of Preparation and Accounting Policies Basis of Preparation The interim condensed consolidated financial statements for the six months ended 30 June 2013 have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December The Group s interim condensed consolidated financial statements are presented in Russian Rubles ( Rbls ), unless otherwise indicated. 12

15 2. Basis of Preparation and Accounting Policies (continued) Significant Accounting Policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2012, except for the adoption of new standards, amendments to the standards and interpretations effective as of 1 January The Group applies, for the first time, certain standards and amendments that require restatement of comparative information presented in these interim condensed consolidated financial statements and/or changes in the Group s accounting policies and disclosures. These include IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 13 Fair Value Measurement, IAS 19 (Revised 2011) Employee Benefits and amendments to IAS 1 Presentation of Financial Statements. As required by IAS 34, the nature and the effects of these changes are disclosed below. In addition, application of IFRS 12 Disclosure of Interest in Other Entities would result in additional disclosures in the annual consolidated financial statements. Several other new standards and amendments including amended IFRS 7 Financial Instruments: Disclosures, IAS 32 Financial Instruments: Presentation Offsetting Financial assets and Financial Liabilities, and amendments resulting from Annual Improvements (issued in May 2012) to IAS 16 Property, Plant and Equipment, IAS 32 Financial Instruments: Presentation Tax Effects of Distributions to Holders of Equity Instruments and IAS 34 Interim Financial Reporting, were applied for the first time in However, they do not impact the annual consolidated financial statements or the interim condensed consolidated financial statements of the Group. The nature and the impact of new standards/amendments affecting the accounting policies, disclosures, financial position or performance of the Group is described below: IAS 1 Presentation of Items of Other Comprehensive Income Amendments to IAS 1 The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income (OCI). Items that could be reclassified (or recycled) to profit or loss at a future point in time (e.g., net gain on hedge of net investment, exchange differences on translation of foreign operations, net movement on cash flow hedges and net loss or gain on available-for-sale financial assets) now have to be presented separately from items that will never be reclassified (e.g., actuarial gains and losses on defined benefit plans and revaluation of land and buildings). The amendment affected presentation only and had no impact on the Group s financial position or performance. IAS 1 Clarification of the requirement for comparative information (Amendment) An opening statement of financial position (known as the third balance sheet ) must be presented when an entity applies an accounting policy retrospectively, makes retrospective restatements, or reclassifies items in its financial statements, provided any of those changes has a material effect on the statement of financial position at the beginning of the preceding period. The amendment clarifies that a third balance sheet does not have to be accompanied by comparative information in the related notes. Under IAS 34, the minimum items required for interim condensed financial statements do not include a third balance sheet. 13

16 2. Basis of Preparation and Accounting Policies (continued) Significant Accounting Policies (continued) The amendment to IAS 1 clarifies the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional voluntarily comparative information does not need to be presented in a complete set of financial statements. IAS 19 Employee Benefits (Revised 2011) (IAS 19R) IAS 19R includes a number of amendments to the accounting for defined benefit plans, including actuarial gains and losses that are now recognised in OCI and permanently excluded from profit and loss; expected returns on plan assets that are no longer recognised in profit or loss, instead, there is a requirement to recognise interest on the net defined benefit liability (asset) in profit or loss, calculated using the discount rate used to measure the defined benefit obligation, and unvested past service costs are now recognised in profit or loss at the earlier of when the amendment occurs or when the related restructuring or termination costs are recognised. Other amendments include new disclosures, such as, quantitative sensitivity disclosures. In case of the Group, transition to IAS 19R had an impact on the comparative information presented in these interim condensed consolidated financial statements as explained in Note 3. IFRS 10 Consolidated Financial Statements and IAS 27 Separate Financial Statements IFRS 10 establishes a single control model that applies to all entities including special purpose entities. IFRS 10 replaces the parts of previously existing IAS 27 Consolidated and Separate Financial Statements that dealt with consolidated financial statements and SIC-12 Consolidation Special Purpose Entities. IFRS 10 changes the definition of control such that an investor controls an investee when it is exposed, 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. To meet the definition of control in IFRS 10, all three criteria must be met, including: (a) an investor has power over an investee; (b) the investor has exposure, or rights, to variable returns from its involvement with the investee; and (c) the investor has the ability to use its power over the investee to affect the amount of the investor s returns. The Group has changed its accounting policy accordingly; however, there is no material impact on the Group s perimeter of consolidation. IFRS 11 Joint Arrangements and IAS 28 Investments in Associates and Joint Ventures IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Nonmonetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. 14

17 2. Basis of Preparation and Accounting Policies (continued) Significant Accounting Policies (continued) The Group accounted for its interests in jointly controlled entities using equity method, thus there is no impact on the Group s accounting policy in this respect. However, the rest of changes introduced in IFRS 11, in particular, with regard to classification of joint arrangements into joint ventures and joint operations, resulted in the changes to the Group s accounting policy but had no material impact on the Group s financial position or performance. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 sets out the requirements for disclosures relating to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. None of these disclosure requirements are applicable for interim condensed consolidated financial statements, unless significant events and transactions in the interim period requires that they are provided. Accordingly, the Group has not made such disclosures. IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 had no material impact on the fair value measurements carried out by the Group. IFRS 13 also requires specific disclosures on fair values, some of which replace existing disclosure requirements in other standards. Some of these disclosures are specifically required for financial instruments by IAS 34.16A(j), including certain disclosures under IFRS 7 Financial Instruments: Disclosures, thereby affecting the interim condensed consolidated financial statements period. The Group provides these disclosures in Note 29. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. 3. Restatement of Comparative Information and Reclassifications Restatement as a result of application of IAS 19R The Group applied IAS 19 (Revised 2011) retrospectively in the current period in accordance with the transitional provisions set out in the revised standard and also corrected certain prior period errors restating appropriate balances of liabilities and equity as at 31 December 2012 and making adjustments to the comparative figures in the interim consolidated income statement and interim consolidated statement of comprehensive income for the six months ended 30 June 2012 as follows: 15

18 3. Restatement of Comparative Information and Reclassifications (continued) Restatement as a result of application of IAS 19R (continued) As at 31 December 2012: Consolidated statement of financial position Deferred tax liabilities decreased by Retained earnings and other reserves decreased by Employee benefit obligations increased by Non-controlling interests decreased by Rbls 2,549 million Rbls 34,632 million Rbls 37,332 million Rbls 151 million For the six months ended 30 June 2012: Consolidated statement of comprehensive income Remeasurement of the net defined benefit obligations increased by Related income tax effects (gain) increased by Rbls 1,280 million Rbls 183 million Consolidated income statement Wages, salaries and related contributions increased by Deferred tax expense decreased by Rbls 1,310 million Rbls 64 million As at 1 January 2012, Retained earnings and other reserves were decreased by Rbls 36,669 million. Reclassifications and correction of misclassifications Certain comparative amounts have been reclassified to conform to the current period presentation and to correct certain misclassifications. The major reclassifications are described below: Certain raw materials, construction materials and other inventories previously included in the construction in process within the line Property, plant and equipment of consolidated statement of financial position were reclassified to the line Inventories in the interim consolidated statement of financial position. Revenue from logistics services previously reported within the line Other revenues of the interim consolidated income statement was separated into the line Logistics revenues line in the interim consolidated income statement. Cost of freight forwarding logistics services purchased from third parties previously reported within the line Other operating expenses of the interim consolidated income statement was presented as a separate line in the interim consolidated income statement. A part of passenger revenue previously reported within the line Other revenues of the interim consolidated income statement was reclassified to the line Passenger revenues of interim consolidated income statement. Revenue from locomotive traction previously reported within the line Cargo revenues of interim consolidated income statement was reclassified to the line Other revenues of interim consolidated income statement. 16

19 3. Restatement of Comparative Information and Reclassifications (continued) Reclassifications and correction of misclassifications (continued) Income from rent of other property previously reported within the line Other revenues of interim consolidated income statement was reclassified to the line Other income of interim consolidated income statement. Expenses on rent of cargo cars from third parties and related parties previously included in the line Other expenses of interim consolidated income statement were reclassified to the line Other operating expenses of interim consolidated income statement. Certain other operating expenses previously included in the line Materials, repairs and maintenance of interim consolidated income statement were reclassified to the line Other operating expenses of interim consolidated income statement. Certain maintenance services previously included in the line Other operating expenses of interim consolidated income statement were reclassified to the line Materials, repairs and maintenance of interim consolidated income statement. Certain expenses related to repairs previously included in the line Materials, repairs and maintenance of interim consolidated income statement were reallocated between the lines Wages, salaries and related contributions, Fuel and Electricity of interim consolidated income statement. Disclosures in related notes to these interim condensed consolidated financial statements were amended respectively. Such reclassifications had no impact on the Group s net income for the period. 4. Seasonality of Operations The Group s business is not significantly affected by seasonality. The Group s cargo revenues remain relatively stable during the year. However, due to seasonal nature of passenger transportation revenue, higher revenues are usually expected in the second half of the year than in the first six months. Higher passenger transportation revenue during the period from June to August is mainly attributed to the summer vacations season. 5. Segment Reporting For management purposes, the Group is organized into business units based on their services, and has five operating reportable segments as presented below. In 2013, the Group identified additional reportable segment Logistics services of Gefco Group comprising operations of Gefco S.A. and its subsidiaries (the Gefco Group ) acquired by the Company in December Logistics services provided by other Group companies are included in All other segments. 17

20 5. Segment Reporting (continued) The following tables present revenue and segment results information regarding the Group s reportable operating segments: Six months ended 30 June 2013 RZD cargo Longdistance passenger Auxiliary operations Subsidiaries cargo Logistics services of Gefco Group All other segments Eliminations (A) Adjustments (B) Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Sales to third parties 529,940 83,138 58,017 35,567 81,461 74,056 (20,364) 841,815 Inter-segment sales 17,675 3,528 68,065 9, ,355 (209,538) Total revenue 547,615 86, ,082 45,482 81, ,411 (209,538) (20,364) 841,815 Segment result 55,147 (14,128) (461) 5,327 1,639 10,708 (11,801) 5,852 52,283 Six months ended 30 June 2012 Long-distance Auxiliary Subsidiaries All other Eliminations Adjustments RZD cargo Total passenger operations cargo segments (A) (B) Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Sales to third parties 525,215 76,440 50,297 35,129 73,517 (18,128) 742,470 Inter-segment sales 26,935 3,157 70,600 17, ,465 (263,466) Total revenue 552,150 79, ,897 52, ,982 (263,466) (18,128) 742,470 Segment result 76,682 (15,951) (491) 16,908 6,603 (21,777) 44, ,876 Total (A) Inter-segment revenues and margins are eliminated on consolidation. 18

21 5. Segment Reporting (continued) (B) The operating profit of each operating segment does not include the following adjustments representing differences between management accounts and these interim condensed consolidated financial statements prepared in accordance with IAS 34, for the six months ended 30 June: Rbls mln Rbls mln Reclassification of subsidies (13,847) (13,344) Income from rent of other property (4,121) (3,496) Other adjustments to revenue (2,396) (1,288) (20,364) (18,128) PP&E adjustments (C) 40,589 55,870 Adjustments to movements in bad debt expense (159) 464 Additional long-term employee benefit obligations 3,614 (5,663) Subsidies from federal and municipal budgets not included in segment results (Note 23) 30,586 34,359 Interest (expense)/income and similar items, net, not included in segment results (8,475) 1,621 Changes in fair value and gain on disposal of financial assets not included in segment results 77 1,480 Foreign exchange loss, net, not included in segment results (9,949) (4,664) Commercial expenses (1,576) (1,372) Bank charges (Note 24) (1,847) (2,567) Impairment loss of investments in associates (Note 24) (1,224) Payments under collective labour agreement (2,678) (2,568) Loss on impairment of property, plant and equipment (4,377) (708) Penalties charged to/(by) customers, net 42 (802) Contributions to trade union, membership in professional associations (Note 24) (1,751) (1,645) Social expenses (3,745) (3,269) Gain on disposal of controlling interest in subsidiaries, net (Note 6) 1,058 Equity (loss)/income from associates and joint ventures, net (625) 4,843 Change in provision for legal claims, net (Notes 17 and 24) (2,951) (4,874) Other adjustments (11,617) (6,251) Total adjustments to income before taxation 5,852 44,902 (C) PP&E adjustments represent the effect of different carrying values and useful lives of property, plant and equipment and accounting treatment of property, plant and equipment components for the purposes of management accounts and these interim condensed consolidated financial statements prepared in accordance with IAS

22 6. Acquisitions, Disposals and Changes in Ownership Interests in Subsidiaries Disposals During Six Months ended 30 June 2013 Disposal of OJSC Krasnoyarskiy elektrovagonoremontniy zavod In January 2013, the Group sold 100% less one share in OJSC Krasnoyarskiy elektrovagonoremontniy zavod for cash consideration of Rbls 1,560 million. As a result of the transaction, a gain of Rbls 1,058 million was recognized in the consolidated income statement. Acquisitions During Six Months ended 30 June 2012 Acquisition of controlling interest in CJSC Electro-com In February 2012, the Group through its subsidiary, CJSC Company TransTeleCom, acquired 100% of shares of CJSC Electro-com ( Electro-com ), a telecommunications operator, for a total consideration of Rbls 2,348 million, including cash consideration of Rbls 2,308 million. The management assessed that goodwill related to this transaction amounted to Rbls 1,205 million. Acquisition of control in OJSC AK Yakutia Railways In June 2012, the Group acquired 1 share of OJSC AK Yakutia Railways for cash consideration of 370 rubles. As a result, the Group s share in OJSC AK Yakutia Railways increased up to 50% plus one share and the Group obtained control over OJSC AK Yakutia Railways. The fair value of identifiable net assets of OJSC AK Yakutia Railways as at the date of acquisition amounted to Rbls 1,063 million. Assets Classified as Held for Sale and Related Liabilities Included in assets held for sale and related liabilities as at 30 June 2013 are assets and liabilities of OJSC Novosibirskiy strelochny zavod in the amount of Rbls 3,151 million and Rbls 882 million, respectively. 7. Investments in Associates and Joint Ventures Investments in associates and joint ventures as at 30 June 2013 and 31 December 2012 comprised the following: 30 June 31 December Rbls mln Rbls mln The Breakers Investments B.V. (CJSC Transmashholding ) 12,545 10,854 OJSC Moscow Rail Ring 2,656 2,611 OJSC Zeldorremmash 1,470 1,945 OJSC Central Exurban Passenger Company 1,224 1,581 Other 3,440 2,903 21,335 19,894 20

23 7. Investments in Associates and Joint Ventures (continued) OJSC Central Exurban Passenger Company In January 2013, the Group sold 72 shares of OJSC Central Exurban Passenger Company for cash consideration of Rbls 780 million. As a result, the Group s share in OJSC Central Exurban Passenger Company decreased to 25% plus one share. The Breakers Investments B.V. (CJSC Transmashholding ) The following table presents summarized financial information for The Breakers Investments B.V. as of 30 June 2013 and 31 December 2012 and for the six months ended 30 June 2013 and 30 June 2012: 30 June 31 December Rbls mln Rbls mln Share of the investee s: Non-current assets 10,711 10,280 Current assets 15,945 14,667 Non-current liabilities (4,612) (3,696) Current liabilities (9,406) (10,304) Net assets 12,638 10,947 Carrying amount of investment 12,545 10,854 Six months ended 30 June 2013 Rbls mln Six months ended 30 June 2012 Rbls mln Share of the investee s revenue 17,517 13,084 Share of the investee s net income 1,673 1,041 Share of the other comprehensive income

24 8. Property, Plant and Equipment Property, plant and equipment as at 30 June 2013 and 31 December 2012 comprised the following: 30 June unaudited Balance as at 1 January 2013, restated Additions Disposals Transfers Disposal of subsidiaries Effect of translation difference Balance as at 30 June 2013 Gross book value Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Land 11,965 1,821 (1,378) ,580 Buildings 297, (5,265) 17,178 (188) ,522 Constructions 1,023,999 2,705 (2,793) 16,400 (2) 1,040,309 Roadbed 428, (195) 3,524 (18) 432,490 Superstructure 745,209 9,831 (8,807) 23, ,461 Operating equipment 767,490 1,800 (3,983) 25,228 (409) ,425 Locomotives 383,902 2,134 (2,760) 34, ,798 Rolling stock, cargo 180,836 12,785 (10,743) 8, ,365 Rolling stock, passenger 390,533 4,378 (1,538) 4,780 (3) 398,150 Other fixed assets 144, (2,279) 17,153 (658) ,032 Construction-inprogress 567, ,204 (6,585) (150,743) ,905 Total 4,942, ,252 (46,326) (1,278) 2,315 5,157,037 Balance as at 1 January 2013 Depreciation charge for the period Accumulated depreciation on disposals Disposal of subsidiaries Effect of translation difference Balance as at 30 June 2013 Accumulated depreciation Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Land Buildings (85,385) (3,259) (345) (88,095) Constructions (480,824) (16,661) 2,947 3 (494,535) Roadbed (196,118) (3,131) (199,012) Superstructure (402,971) (23,498) 4,566 (421,903) Operating equipment (364,650) (26,928) 3, (239) (388,140) Locomotives (150,928) (8,400) 2,843 (156,485) Rolling stock, cargo (70,955) (4,964) 5,638 (439) (70,720) Rolling stock, passenger (188,554) (5,572) 1,248 1 (192,877) Other fixed assets (59,400) (5,552) 1, (199) (63,417) Impairment (4,134) (4,134) Total (2,003,919) (97,965) 23, (1,222) (2,079,318) 22

25 8. Property, Plant and Equipment (continued) 30 June 2012 unaudited Balance as at 1 January 2012 Additions Disposals Transfers Additions through business combinations Balance as at 30 June 2012 Gross book value Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Rbls mln Land 9, (197) 3 9,563 Buildings 253, (1,491) 11, ,031 Constructions 943,356 2,623 (2,986) 10, ,624 Roadbed 409, (74) 2, ,085 Superstructure 695,880 12,080 (13,659) 5, ,710 Operating equipment 703, (3,166) 26, ,283 Locomotives 327,632 1,739 (4,016) 26, ,622 Rolling stock, cargo 150,740 6,922 (6,902) 11, ,074 Rolling stock, passenger 371,862 4,250 (4,085) 9, ,319 Other fixed assets 142,330 1,038 (1,683) ,095 Construction-inprogress 465, ,890 (91) (103,685) ,058 Total 4,471, ,250 (38,350) 2,777 4,652,464 Balance as at 1 January 2012 Depreciation charge for the period Accumulated depreciation on disposals Balance as at 30 June 2012 Accumulated depreciation Rbls mln Rbls mln Rbls mln Rbls mln Land Buildings (80,512) (3,082) 601 (82,993) Constructions (453,803) (20,623) 2,668 (471,758) Roadbed (194,920) (1,929) (196,849) Superstructure (384,541) (22,807) 8,384 (398,964) Operating equipment (330,931) (18,182) 2,810 (346,303) Locomotives (140,436) (7,909) 2,642 (145,703) Rolling stock, cargo (84,957) (3,305) 5,612 (82,650) Rolling stock, passenger (179,844) (6,607) 3,436 (183,015) Other fixed assets (52,225) (3,971) 1,174 (55,022) Impairment (4,134) (4,134) Total (1,906,303) (88,415) 27,327 (1,967,391) 23

26 8. Property, Plant and Equipment (continued) Balance as of 30 June 2013 Balance as of 30 June 2012 Balance as at 31 December 2012, restated Net book value Rbls mln Rbls mln Rbls mln Land 12,580 9,563 11,965 Buildings 222, , ,460 Constructions 545, , ,175 Roadbed 233, , ,795 Superstructure 347, , ,238 Operating equipment 402, , ,840 Locomotives 261, , ,974 Rolling stock, cargo 121,645 79, ,881 Rolling stock, passenger 205, , ,979 Other fixed assets 95,615 87,073 84,966 Construction-in-progress 633, , ,016 Impairment (4,134) (4,134) (4,134) Total 3,077,719 2,685,073 2,938,155 Property, plant and equipment as at 30 June 2013 and 31 December 2012 include borrowing costs incurred in connection with the acquisition and construction of PP&E. Borrowing costs capitalized as PP&E during the six months ended 30 June 2013 using a capitalization rate of 6.5% amounted to Rbls 11,299 million (six months ended 30 June 2012: Rbls 12,513 million using capitalization rate of 8.0%). Leased assets as at 30 June 2013 and 31 December 2012 included above, where the Group is a lessee under a finance lease, comprised the following: 30 June 2013 Rbls mln 31 December 2012 Rbls mln Cost capitalized finance leases 38,244 29,474 Accumulated depreciation (3,817) (3,640) Net book value 34,427 25, Goodwill As at 30 June 2013 the Group performed impairment test of goodwill. As a result, no impairment was recognized. 24

27 10. Other Current Financial Assets Other current financial assets as at 30 June 2013 and 31 December 2012 comprised the following: 30 June 2013 Rbls mln 31 December 2012 Rbls mln Bank deposits (A) 14,351 5,019 Loans issued to legal entities, net of impairment 6,461 6,493 Other 2,275 5,622 Total other current financial assets 23,087 17,134 (A) As at 30 June 2013 Group had current bank deposits placed with OJSC VTB Bank and OJSC TransCreditBank in the amount of Rbls 4,000 million and Rbls 7,250 million, respectively (31 December 2012: Rbls 300 million and Rbls 700 million, respectively). 11. Inventories Inventories as at 30 June 2013 and 31 December 2012 comprised the following: 31 December 30 June restated Rbls mln Rbls mln Raw materials 33,838 29,767 Spare parts and construction materials Fuel and lubricants 77,021 8,612 61,858 9,529 Merchandise inventories 2,166 1,570 Other 22,472 18,354 Total 144, ,078 Less: provision for obsolete and damaged inventory (7,158) (4,517) Total inventories, net 136, , Receivables Receivables as at 30 June 2013 and 31 December 2012 comprised the following: 30 June 2013 Rbls mln 31 December 2012 Rbls mln Receivables for logistics services, net (А) 37,540 24,246 Receivables for transportation services, net (B) 7,475 5,609 Other accounts receivable, net (C) 39,205 34,865 Total receivables 84,220 64,720 (A) Increase in receivables for logistics services, net is mainly represented by receivable from General Motors for the new fourth party logistics (4PL) services launched by Gefco Group in

28 12. Receivables (continued) (B) Receivables for transportation services, net as at 30 June 2013 and 31 December 2012 comprised the following: 30 June 2013 Rbls mln 31 December 2012 Rbls mln Receivables for transportation services 19,507 17,766 Less: allowance for impairment (12,032) (12,157) Total receivables for transportation services, net 7,475 5,609 (C) Other accounts receivable, net as at 30 June 2013 and 31 December 2012 comprised the following: 30 June 2013 Rbls mln 31 December 2012 Rbls mln Other accounts receivable 57,184 53,060 Less: allowance for impairment (17,979) (18,195) Total other accounts receivable, net 39,205 34,865 Receivables from Federal Agency on Railway Transport in the amount of Rbls 11,802 million as at 31 December 2012, previously reported as receivables for transportation services in 2012 consolidated financial statements, were reclassified to other accounts receivable. These receivables were fully provided for by the Group as at 31 December Cash and Cash Equivalents Cash and cash equivalents as of 30 June 2013 and 31 December 2012 comprised the following: 30 June December 2012 Rbls mln Rbls mln Bank deposits and other cash equivalents in Russian Rubles and foreign currencies 45, ,227 Cash in Russian Rubles 18,615 20,332 Cash in foreign currencies (primarily in US Dollars, Euro) 5,962 4,540 Total cash and cash equivalents presented in the statement of financial position 69, ,099 Cash and cash equivalents attributable to assets classified as held for sale 685 Bank overdrafts (3,495) Total cash and cash equivalents presented in the statement of cash flows 66, ,099 26

29 14. Taxes and Similar Charges Payable (other than income tax) Taxes and similar charges payable (other than income tax) as of 30 June 2013 and 31 December 2012 comprised the following: 30 June 31 December Rbls mln Rbls mln Settlement with social funds 21,654 19,992 VAT 7,556 5,346 Property tax 8,877 6,717 Personal income tax 4,376 4,012 Other taxes Total taxes and similar charges payable (other than income tax) 43,414 36, Long-Term and Short-Term Borrowings The outstanding balances of short-term and long-term borrowings as at 30 June 2013 and 31 December 2012 comprised the following: 30 June 2013 Original currency Principal amount in original currency Maturity of noncurrent Interest rate portion Current Non-current mln Rbls mln Rbls mln Short-term bank loans Fixed rates Other banks RUR 7, %-14% 7,106 Variable rates LIBOR+ US$ % 687 EONIA+ EUR 82 2% 3,495 Long-term bank loans Fixed rates Other banks (С) RUR 49, %-13.50% ,510 46,795 Deposit Insurance Agency RUR 14, % ,000 9,605 Variable rates MosPrime+ RUR 5, %-2.85% ,452 4,239 EURIBOR+ EUR %-3.6% ,167 13,981 Debt securities issued Loan participation notes (D) US$ 2, %-5.739% ,676 Loan participation notes (D) GBP % ,380 Loan participation notes (D) RUR 37, % ,424 23,335 Loan participation notes (D) CHF %-2.730% Loan participation notes (D) EUR 1, % ,720 Bonds CPI+ (E) RUR 60, %-2.1% ,738 Other(B) RUR 193, %-15% , ,326 Other borrowings Other Other 0%-12% ,347 1,231 Total 57, ,450 27

30 15. Long-Term and Short-Term Borrowings (continued) 31 December 2012 Original currency Principal amount in original currency Maturity of noncurrent Interest rate portion Current Non-current mln Rbls mln Rbls mln Short-term bank loans Fixed rates Other banks RUR 8,131 8%-13.5% 8,131 Variable rates LIBOR+ CHF % 19,985 Long-term bank loans Fixed rates Other banks (C) RUR 50, %-13.50% ,821 46,521 Deposit Insurance Agency RUR 14, % ,000 9,177 Other banks US$ % 7,587 Variable rates MosPrime+ RUR 5, %-2.85% ,318 EURIBOR+ EUR %-0.8% ,491 7,400 LIBOR+ (A) US$ %-3.5% 5,145 Debt securities issued Loan participation notes (D) US$ 2, %-5.739% ,872 Loan participation notes (D) GBP % ,759 Loan participation notes (D) RUR 37, % ,418 Bonds CPI+ RUR 10, % ,000 Other (B) RUR 170, %-15% , ,639 Other borrowings Variable rates EURIBOR+ EUR 320 6% 12,873 Other Other 0%-12% ,786 1,573 Total 100, ,677 (A) (B) In 2008, the Group obtained a US Dollar denominated unsecured loan from a consortium of international banks led by West LB, subsequently renamed to Portigon AG. The loan bears interest calculated as LIBOR plus 0.75%. The Company signed cross-currency and interest rate SWAP agreements with LLC J.P. Morgan Bank International and Morgan Stanley banks for the full amount of the loan. The loan was fully repaid in March 2013 and the related SWAP agreements were fully settled as at 30 June Bonds, outstanding as at 30 June 2013, comprised series of bonds with face value of Rbls 1 thousand each. Coupon rate is paid semi-annually. The terms of certain bonds issued by the Group provide their bondholders with the right for early redemption within twelve months subsequent to 30 June Respectively, bonds of Rbls 21 million were classified as current as at 30 June 2013 (31 December 2012: Rbls 14,929 million). In February and April 2013, the Group placed bonds at the domestic market with the aggregate nominal values of Rbls 5,000 million and Rbls 20,000 million with the maturity of 5 and 15 years and coupon rates of 8.35% and 8.20%, respectively. 28

31 15. Long-Term and Short-Term Borrowings (continued) (C) (D) Other Ruble denominated long-term loans as at 30 June 2013 primarily comprised loans obtained from OJSC VTB Bank in the amount of Rbls 36,527 million, OJSC Sberbank of Russia in the amount of Rbls 5,740 million, OJSC Sviaz-Bank in the amount of Rbls 4,997 million, OJSC Gazprombank in the amount of Rbls 1,656 million and OJSC TransCreditBank in the amount of Rbls 366 million. In April 2010, the Group placed Loan Participation Notes at Irish Stock Exchange with an aggregate nominal value of US$ 1.5 billion (Rbls 49,065 million at the exchange rate as at 30 June 2013) with the maturity of 7 years and initial coupon rate 5.739%. The Group signed cross currency (US dollar to Swiss franc) and interest rate SWAP agreements with CJSC BNP Paribas, LLC J.P. Morgan Bank International, OJSC VTB Bank and LLC Goldman Sachs Bank for the full amount of Loan Participation Notes. In March (initial issue) and in June 2011 (additional issue) the Group placed Loan Participation Notes at the Irish Stock Exchange with an aggregate nominal value of GBP 650 million (Rbls 32,442 million at exchange rate as at 30 June 2013) with the maturity of 20 years and coupon rate 7.487%. The Group has signed cross currency (Pound Sterling to Swiss franc) and interest rate SWAP agreements with OJSC Rosbank, LLC J.P.Morgan Bank International and OJSC VTB Bank for the full amount of Loan Participation Notes. In March (initial issue) and in October 2012 (additional issue) the Group placed Loan Participation Notes at Irish Stock Exchange with an aggregate nominal value of Rbls 37,500 million with the maturity of 7 years and coupon rate 8.3%. In April (initial issue) and in October 2012 (additional issue) the Group placed Loan Participation Notes at Irish Stock Exchange with an aggregate nominal value of US$ 1,400 million (Rbls 45,794 million at exchange rate as at 30 June 2013) with the maturity of 10 years and coupon rate 5.7%. The Group has signed cross currency (US Dollar to Swiss Franc) SWAP agreements with OJSC Sberbank of Russia, LLC J.P.Morgan Bank International and OJSC VTB Bank for the full amount of Loan Participation Notes. In February 2013 the Group placed two tranches of Loan Participation Notes at the Irish Stock Exchange with nominal values of Swiss Francs 525 million (Rbls 18,149 million at exchange rate as at 30 June 2013) and 150 million (Rbls 5,186 million at exchange rate as at 30 June 2013) with the maturity of 5 and 8 years and coupon rates 2.177% and 2.730%, respectively. In April 2013 the Group placed Loan Participation Notes at the Irish Stock Exchange with an aggregate nominal value of EUR 1 billion (Rbls 42,720 million at exchange rate as at 30 June 2013) with the maturity of 8 years and coupon rate 3.374%. (E) In June 2013, the Company placed, at domestic market, 30 year bonds, series BO-18, with the nominal value of Rbls 25,000 million and 15 year bonds, series BO-09, with the nominal value of Rbls 25,000 million with CPI 1 +1% coupon rate each. At the initial recognition the bonds were measured at fair value determined based on market rates of 10.12% and 9.79%, respectively (Note 16). 1 Consumer price index 29

32 16. Other Non-Current Liabilities Other non-current liabilities as at 30 June 2013 and 31 December 2012 comprised: 30 June December 2012 Rbls mln Rbls mln Advances received for real-estate projects 2,045 1,643 Liabilities under service concession agreement 1,121 1,140 Government grants (A) 7,262 Other (B) 3,687 4,511 Total other non-current liabilities 14,115 7,294 (A) (B) Government grants are represented by a deferred income from bonds issued at a below-market interest rate (Note 15) measured as the difference between the fair value of these bonds at initial recognition of Rbls 42,738 million and the cash proceeds of Rbls 50,000 million. Included in other non-current liabilities as at 30 June 2013 is Rbls 2,109 million of noncurrent portion of the payable to non-state pension fund Blagosostoyanie (hereafter also the Fund ) under the agreement concluded by the Company and the Fund in 2012 (31 December 2012: Rbls 2,956 million). 17. Provisions and Other Current Liabilities Provisions and other current liabilities as at 30 June 2013 and 31 December 2012 comprised the following: 30 June December 2012 Rbls mln Rbls mln Settlements with employees 57,661 57,492 Provision for tax liabilities 15,133 13,911 Current liabilities under construction contracts 15,366 14,515 Accrued interest on loans 9,121 8,046 Provision for legal claims 8,165 6,565 Provision for guarantees 3,473 3,273 Other liabilities 11,509 7,889 Total provisions and other current liabilities 120, ,691 The movements of provisions and current liabilities under construction contract for the six months ended 30 June 2013 were as follows: Liabilities under Tax liabilities Legal claims Provision for guarantees construction contract Rbls mln Rbls mln Rbls mln Rbls mln As at 1 January ,911 6,565 3,273 14,515 Arising during the reporting period 1,227 3,864 2 Utilised (5) (1,400) Unused amounts reversed (913) Effect of foreign currencies translation As at 30 June ,133 8,165 3,473 15,366 30

33 18. Finance Lease Obligations The Group entered into several finance lease agreements for cargo and passenger transport, locomotives and other operating equipment. The lease agreements are for periods from 2 to 16 years with the effective interest rate varying from 11% to 28% p.a (31 December 2012: 10% to 28%). Future minimum lease payments together with the present value of the net minimum lease payments as at 30 June 2013 and 31 December 2012 are as follows: 30 June December 2012 Present Present Minimum lease payments value of lease payments Minimum lease payments value of lease payments Rbls mln Rbls mln Rbls mln Rbls mln Total minimum lease payments 57,065 32,630 33,378 20,572 Less: interest (24,435) (12,806) Present value of minimum lease payments 32,630 32,630 20,572 20,572 Representing lease liabilities 30 June 2013 Rbls mln 31 December 2012 Rbls mln Current 8,060 5,696 Non-current 24,570 14,876 Finance charges for the six months ended 30 June 2013 amounted to Rbls 1,873 million (six months ended 30 June 2012: Rbls 1,224 million) and are included in Interest expense and similar items in the interim consolidated income statement. In 2013 the Group entered into several finance lease agreements for gondola cars. These lease agreements are for the period of 16 years with the effective interest rate of 11-12% p.a. 19. Logistics Revenue and Purchased Freight Forwarding Logistics Services Revenue from logistics services for the six months ended 30 June 2013 mainly comprised revenues of Gefco Group. Freight forwarding logistics services included in Operating expenses comprised logistics services purchased from third parties. For the six months ended 30 June 2013, these expenses mainly related to purchases of Gefco Group. 31

34 20. Other Revenues Other revenues for the six months ended 30 June 2013 and 2012 comprised the following: Rbls mln Rbls mln Repair of rolling stock 25,559 21,527 Healthcare services 13,013 11,538 Sale of goods 12,847 18,367 Telecommunication services 10,233 9,401 Transit and sale of electrical and heat energy 5,542 5,447 Locomotive traction 5,538 5,873 Rent of locomotive crew 4,488 4,683 Infrastructure services 4,143 3,196 Construction services 3,892 3,115 Utility services 3,352 3,360 Rent of rolling stock and railway infrastructure objects 3,254 4,441 Information and IT services 1,234 1,146 Other 12,164 7,031 Total other revenues 105,259 99, Taxes Other than Income Tax Taxes other than income tax for the six months ended 30 June 2013 and 2012 comprised: Rbls mln Rbls mln Property tax (A) 17,068 11,964 Non-refundable VAT 2,253 1,727 Land tax Other taxes Total taxes other than income tax 21,066 15,073 (A) Increase in property tax resulted from the new property taxation rules enacted in Russia starting These rules gradually decrease down to nil certain tax concessions, previously available to the Group with regard to its infrastructure assets, over the period

35 22. Other Operating Expenses Other operating expenses for the six months ended 30 June 2013 and 2012 comprised the following: Rbls mln Rbls mln Security costs 8,408 8,060 Business trips and personnel education 6,793 5,383 Services related to construction 6,505 5,669 Foreign railroads services 6,032 6,100 Rolling stock servicing and handling 3,858 3,927 Operating rent of rolling stock, including cargo cars 3,384 3,945 Telecommunication fees 2,919 2,504 Bedding and servicing expenses 2,826 2,662 Railtrack and right-of-way maintenance expenses 2,219 2,469 Consulting services 2, Information and IT services 1,830 1,216 Fire safety maintenance 1,594 1,476 Cost of premises sold 1,419 2,119 Insurance costs 1, Other 11,509 4,991 Total other operating expenses 62,711 52, Subsidies from Federal and Municipal Budgets Subsidies from federal and municipal budgets for the six months ended 30 June 2013 and 2012 comprised the following: Rbls mln Rbls mln Subsidies received from federal budget for compensation of the effects of tariffs regulation long distance passenger transportation 14,628 18,907 Subsidies received from federal budget for compensation of the effects of tariffs regulation suburban transportation 13,847 13,344 Subsidies received from federal budget for compensation of the effects of tariffs regulation cargo transportation 325 Subsidies received from regional and municipal budgets and other subsidies 2,111 1,783 Total subsidies from federal and municipal budgets 30,586 34,359 33