AK BARS LUXEMBOURG S.A.

Transcription

1 Level: 3 From: 3 Monday, November 16, :11 Mac Intro U.S.$1,500,000,000 Programme for the Issuance of Loan Participation Notes to be issued by, but with limited recourse to, AK BARS LUXEMBOURG S.A. for the sole purpose of financing loans to AK BARS Bank Under the programme for the issuance of loan participation notes (the Programme ) described in this base prospectus (the Base Prospectus ), AK BARS Luxembourg S.A., a public limited company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg, having its registered office at 2, boulevard Konrad Adenauer, L 1115 Luxembourg and registered with the Luxembourg trade and companies register under number B (the Issuer ), subject to compliance with all relevant laws, regulations and directives, may from time to time issue loan participation notes (the Notes ) on the terms set out herein, as such terms are supplemented by final terms (each, a Final Terms ) setting out the specific terms of each issue or in a separate prospectus (the Drawdown Prospectus ) specific to a Series (as defined herein) as described under Final Terms and Drawdown Prospectuses below. In the case of a Series of Notes that is the subject of a Drawdown Prospectus, each reference in this Base Prospectus to information being specified or identified in the relevant Final Terms shall be read and construed as a reference to such information being specified or identified in the relevant Drawdown Prospectus unless the context requires otherwise. The aggregate principal amount of Notes outstanding will not at any time exceed U.S.$1,500,000,000 (or the equivalent in other currencies). Notes will be issued in Series and the sole purpose of issuing each Series will be to finance a loan (each, a Loan ) to AK BARS Bank (the Bank or AK BARS Bank ) as borrower (the Borrower ), on the terms of an amended and restated facility agreement (the Facility Agreement ) between the Issuer and the Bank dated 16 November 2009, as amended and supplemented by a loan supplement (each, a Loan Supplement ) to be entered into by the Issuer and the Bank in respect of each Loan on each applicable issue date (each, an Issue Date ) and the Facility Agreement, as supplemented by a Loan Supplement, will constitute a loan agreement (each, a Loan Agreement ). The Issuer will charge, in favour of Deutsche Trustee Company Limited as trustee (the Trustee ) for itself and for the benefit of noteholders of each Series of Notes (the Noteholders ), by way of a first fixed charge as security for its payment obligations in respect of each Series of Notes and under the Trust Deed (as defined in Description of the Transactions ), certain of its rights and interests under the relevant Loan Agreement and the relevant Account (as defined in the relevant Loan Supplement). In addition, the Issuer will assign certain of its administrative rights under the relevant Loan Agreement to the Trustee. In each case where amounts of principal, interest and additional amounts (if any) are stated to be payable in respect of a Series of Notes, the obligation of the Issuer to make any such payment shall constitute an obligation only to account to the Noteholders, on each date upon which such amounts of principal, interest and additional amounts (if any) are due in respect of such Series of Notes, for an amount equivalent to all principal, interest and additional amounts (if any) actually received from the Bank by or for the account of the Issuer pursuant to the relevant Loan Agreement excluding, however, any amounts paid in respect of Reserved Rights (as defined in the Terms and Conditions of the Notes). The Issuer will have no other financial obligation under the Notes. Noteholders will be deemed to have accepted and agreed that they will be relying solely and exclusively on the covenants of the Bank set out in the relevant Loan Agreement and the credit and financial standing of the Bank in respect of the payment obligations of the Issuer under the Notes. This document constitutes a base prospectus for the purposes of Directive 2003/71/EC (the Prospectus Directive ) as implemented in Ireland by the Prospectus (Directive 2003/71/EC) Regulations 2005 (the Prospectus Regulations ) and the Final Terms shall constitute Final Terms for the purpose of the Prospectus Directive. Any separate Drawdown Prospectus would constitute a prospectus for the purpose of the Prospectus Directive. The Base Prospectus has been approved by the Irish Financial Services Regulatory Authority (the Financial Regulator ), as competent authority under the Prospectus Directive. The Financial Regulator only approves this Base Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. Application has been made to the Irish Stock Exchange Limited (the Irish Stock Exchange ) for the Notes issued under the Programme during the period of 12 months from the date hereof to be admitted to the Official List (the Official List ) and trading on its regulated market (the Main Market ). Such approval relates only to the Notes which are to be admitted to trading on the regulated market of the Irish Stock Exchange or other regulated markets for the purpose of Directive 2004/39/EC or which are to be offered to the public in any Member State of the European Economic Area. References in this Base Prospectus to Notes being listed (and all related references) shall mean that such Notes have been admitted to the Official List and to trading on the Main Market. The Programme also permits Notes to be issued on an unlisted basis or to be admitted to listing, trading and/or quotation by such other or further listing authorities, stock exchanges and/or quotation systems as may be agreed with the Issuer and the Bank. Application may also be made to have Rule 144A Notes (as defined below) designated as eligible for trading in the Private Offering, Resales and Trading through Automated Linkages ( PORTAL ) System of the National Association of Securities Dealers, Inc., as specified in the applicable Final Terms. The Rule 144A Notes (as defined below), unless otherwise specified in the applicable Final Terms, will not be eligible for trading through PORTAL. The Financial Regulator has only approved this document in relation to Notes which are to be listed on the Irish Stock Exchange or another regulated market for the purposes of Directive 2009/39/EC, and the Financial Regulator has neither reviewed nor approved this document in relation to any unlisted Notes. AN INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 22 BEFORE INVESTING. THE NOTES AND THE CORRESPONDING LOANS (TOGETHER, THE SECURITIES ) HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ), AND, SUBJECT TO CERTAIN EXCEPTIONS, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT ( REGULATION S )). THE NOTES OF EACH SERIES MAY BE OFFERED AND SOLD (I) TO NON U.S. PERSONS IN OFFSHORE TRANSACTIONS IN RELIANCE ON REGULATION S (THE REGULATION S NOTES ) AND (II) IF THE NOTES ARE BEING OFFERED IN RELIANCE ON THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144A ( RULE 144A ) OF THE SECURITIES ACT ( RULE 144A NOTES ), WITHIN THE UNITED STATES TO QUALIFIED INSTITUTIONAL BUYERS ( QIBS ), AS DEFINED IN RULE 144A, THAT ARE ALSO QUALIFIED PURCHASERS ( QPS ), AS DEFINED IN SECTION 2(A)(51) OF THE U.S. INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT ), IN RELIANCE ON THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144A. THE ISSUER HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE INVESTMENT COMPANY ACT. PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT SELLERS OF THE NOTES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A. FOR A DESCRIPTION OF THESE AND CERTAIN FURTHER RESTRICTIONS, SEE SUBSCRIPTION AND SALE AND TRANSFER RESTRICTIONS. CREDIT SUISSE Arrangers and Dealers THE ROYAL BANK OF SCOTLAND The date of this Base Prospectus is 16 November 2009.

2 Level: 3 From: 3 Monday, November 16, :21 eprint Intro Regulation S Notes of each Series will initially be represented by interests in a global note in fully registered form (each a Regulation S Global Note ) without interest coupons, which will be deposited with a common depositary for, and registered in the name of a nominee of, Euroclear Bank SA/NV ( Euroclear ) and Clearstream Banking, société anonyme ( Clearstream, Luxembourg ) on its Issue Date. Beneficial interests in a Regulation S Global Note will be shown on, and transfers thereof will be effected only through, records maintained by, Euroclear or Clearstream, Luxembourg and their respective participants. Rule 144A Notes of each Series will initially be represented by interests in a global note in fully registered form (each a Rule 144A Global Note and, together with any Regulation S Global Note for the relevant Series of Notes, the Global Notes ) without interest coupons, which will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company ( DTC ) on its Issue Date. Beneficial interests in a Rule 144A Global Note will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants. See Summary of Provisions Relating to the Notes in Global Form. Individual definitive Notes in registered form will only be available in certain limited circumstances as described herein. The Notes will be in denominations in aggregate principal amount, for Rule 144A Notes, of at least U.S.$100,000 (or the equivalent in other currencies) and integral multiples of U.S.$1,000 (or the equivalent in other currencies) in excess thereof, and for Regulation S Notes, of at least 50,000 (or the equivalent in other currencies) and integral multiples of 1,000 (or the equivalent in other currencies) in excess thereof, save that unless otherwise permitted by then current laws and regulations, Notes which have a maturity of less than one year and in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise would constitute a contravention of section 19 of the Financial Services and Markets Act 2000 (the FSMA ) will have a minimum denomination of 100,000 (or its equivalent in other currencies). See Summary Overview of the Programme Form. Each Loan and all payment obligations expressed to be assumed by the Bank thereunder constitute direct, general, unconditional, unsecured and unsubordinated obligations of the Bank which will rank pari passu in right of payment with the Bank s other outstanding unsecured and unsubordinated indebtedness. Other than as described in this Base Prospectus and the Trust Deed, Noteholders have no proprietary or other direct interest in the Issuer s rights under or in respect of the relevant Loan Agreement or the relevant Loan. Subject to the terms of the Trust Deed, no Noteholder will have any rights to enforce any of the provisions in the relevant Loan Agreement or have direct recourse to the Bank except through action by the Trustee. The Bank, having made all reasonable enquiries, confirms that (i) this Base Prospectus contains all information with respect to the Bank, the Loan Agreements and the Notes that is material in the context of the issue and offering of the Notes; (ii) the statements contained in the Base Prospectus are in every material respect true and accurate and not misleading; (iii) the opinions, expectations and intentions expressed in this Base Prospectus are honestly held, have been reached after considering all relevant circumstances and are based on reasonable assumptions; (iv) there are no other facts with respect to the Bank, the Loan Agreement or the Notes the omission of which would, in the context of the issue and offering of the Notes, make any statement in this Base Prospectus misleading in any material respect; and (v) all reasonable enquiries have been made by the Bank to ascertain such facts and to verify the accuracy of all such information and statements. Each of the Bank and the Issuer accepts responsibility for all information in this Base Prospectus. To the best of the knowledge and belief of the Bank and the Issuer (which have taken all reasonable care to ensure that such is the case), the information contained in this Base Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information. No representation or warranty, express or implied, is made by Credit Suisse Securities (Europe) Limited and The Royal Bank of Scotland plc (the Arrangers ), any Dealer (as defined herein) or the Trustee or any of their respective affiliates or any person acting on their behalf as to the accuracy or completeness of the information contained in this Base Prospectus and neither the Dealers nor any of their respective affiliates have authorised the whole or any part of this Base Prospectus. The Arrangers, the Dealers and their respective affiliates have engaged in transactions with the Bank and other members of the Group (including, in some cases, credit agreements and credit lines) in the ordinary course of their banking business ii

3 Level: 3 From: 3 Monday, November 16, :21 eprint Intro and the Arrangers and the Dealers have performed various investment banking, financial advisory, and other services for the Bank and other members of the Group, for which they received customary fees, and the Arrangers, the Dealers and their respective affiliates may provide such services in the future. Certain information and data contained in this Base Prospectus relating to the Russian banking sector and the Bank s competitors (which may include estimates and approximations) was derived from publicly available information, including press releases and filings under various regulatory and securities laws. Each of the Bank and the Issuer accepts responsibility that such publicly available information and data has been accurately reproduced and, as far as the Bank and the Issuer are aware and are able to ascertain from information published by such third parties, no facts have been omitted which would render such information inaccurate or misleading. However, each of the Bank and the Issuer has relied on the accuracy of such publicly available information and data without carrying out an independent verification. In addition, the Bank has derived some of the information contained in this Base Prospectus from official data published by Russian government agencies, such as the Central Bank of the Russian Federation (the CBR ) and the government agencies of the Republic of Tatarstan. Each of the Bank and the Issuer accepts responsibility that such official data have been accurately reproduced and, as far as the Bank and the Issuer are aware and able to ascertain from information published by such Russian and Tatarstan government agencies, no data have been omitted which would render such information inaccurate or misleading. However, the official data published by Russian federal and Russian and Tatarstan regional and local governments are substantially less complete or researched than data published by governmental agencies of Western countries. Official statistics may also be compiled on different bases than those used in Western countries. Any discussion of matters relating to the Russian Federation or the Republic of Tatarstan in this Base Prospectus may, therefore, be subject to uncertainty due to concerns about the completeness or reliability of available official and public information. The veracity of some official data released by the Russian and Tatarstan governments may be questionable. See Risk Factors Risks related to the Russian Federation Lack of reliable official data. The language of the Base Prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law. This Base Prospectus does not constitute an offer of, or an invitation by or on behalf of the Issuer, the Bank, the Arrangers, the Trustee or the Dealers to subscribe for or purchase any Series of Notes. Any offer or invitation to subscribe for or purchase any Series of Notes shall only be made in conjunction with the Final Terms prepared in connection with such offer or invitation. Neither the Issuer nor the Bank intends to provide any post issuance transaction information regarding the Notes or the performance of any Loan. No person is authorised to provide any information or make any representation not contained in this Base Prospectus and any information or representation not contained in this Base Prospectus and any information or representation so contained must not be relied upon as having been authorised by or on behalf of the Issuer, the Bank, the Trustee, any of the Dealers or the Arrangers. The website of the Bank does not form any part of the contents of this Base Prospectus. Neither the delivery of this Base Prospectus or any Final Terms nor the offer, sale or delivery of any Note shall in any circumstances create any implication that the information contained in this Base Prospectus is true subsequent to the date hereof or the date upon which this Base Prospectus has been most recently amended or supplemented or that there has been no adverse change, or any event reasonably likely to involve any adverse change, in the condition (financial or otherwise) of the Issuer, or the Bank since the date of this Base Prospectus or, if later, the date upon which this Base Prospectus has been most recently amended or supplemented and does not imply that the information contained in it is correct as at any time subsequent to its date. Prospective purchasers must comply with all laws that apply to them in any place in which they buy, offer or sell any Notes or possess this Base Prospectus. Any consents or approvals that are needed in order to purchase any Notes must be obtained. The Issuer, the Bank, the Arrangers, the Trustee and the Dealers are not responsible for compliance with these legal requirements. The appropriate characterisation of any Notes under various legal and investment restrictions, and thus the ability of investors subject to these restrictions to purchase such Notes, is subject to significant interpretative uncertainties. None of the Issuer, the Bank, the iii

4 Level: 3 From: 3 Monday, November 16, :21 eprint Intro Trustee, the Dealers or the Arrangers or any of the respective representatives makes any representation or warranty to any offeree or purchaser of the Notes regarding the legality of an investment by such offeree or purchaser under relevant investment or similar laws. Investors should consult with their own advisers as to the legal, tax, business, financial and related aspects of purchase of the Notes. This Base Prospectus is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons ). The Notes are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Notes will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents. This Base Prospectus has been prepared on the basis that any offer of Notes in any Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of Notes. Accordingly any person making or intending to make an offer in that Relevant Member State of Notes which are the subject of an offering contemplated in this Base Prospectus as completed by any Final Terms in relation to the offer of those Notes may only do so in circumstances in which no obligation arises for the Issuer or the Borrower or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer. The Notes are securities of a foreign issuer under Russian law and are not eligible for initial offering and public circulation in the Russian Federation. Neither the issue of the Notes nor a securities prospectus in respect of the Notes has been, or is intended to be, registered with the Federal Service for Financial Markets of the Russian Federation. The information provided in this Base Prospectus is not an offer, or an invitation to make offers, to sell, exchange or otherwise transfer the Notes in the Russian Federation or to or for the benefit of any Russian person or entity. EACH PERSON CONTEMPLATING MAKING AN INVESTMENT IN ANY NOTES ISSUED UNDER THIS PROGRAMME FROM TIME TO TIME MUST MAKE ITS OWN INVESTIGATION AND ANALYSIS OF THE CREDITWORTHINESS OF THE ISSUER, THE BANK AND ITS OWN DETERMINATION OF THE SUITABILITY OF ANY SUCH INVESTMENT, WITH PARTICULAR REFERENCE TO ITS OWN INVESTMENT OBJECTIVES AND EXPERIENCE AND ANY OTHER FACTORS WHICH MAY BE RELEVANT TO IT IN CONNECTION WITH SUCH INVESTMENT. THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION IN THE UNITED STATES OR ANY OTHER U.S. REGULATORY AUTHORITY, NOT HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OF THE NOTES OR THE ACCURACY OR THE ADEQUACY OF THIS BASE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE IN THE UNITED STATES. The distribution of this Base Prospectus and any Final Terms and the offer, distribution or sale of Notes may be restricted by law in certain jurisdictions. Persons into whose possession this Base Prospectus comes are required by the Issuer, the Bank, the Arrangers, the Trustee and the Dealers to inform themselves about and to observe any such restrictions. In particular, the Notes have not been and will not be registered under the Securities Act. Subject to certain exceptions, the Notes may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons. For a description of certain further restrictions on offers and sales of the Notes and distribution of this Base Prospectus, see Subscription and Sale. The Issuer, the Bank, the Arrangers, the Trustee and the Dealers do not represent that this document may be lawfully distributed, or that the Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Issuer, the Bank, the Arrangers, the Trustee or the Dealers (save for the approval of this iv

5 Level: 3 From: 3 Monday, November 16, :21 eprint Intro document as a base prospectus by the Financial Regulator in accordance with the Prospectus Directive and the filing of this document with the financial regulator in accordance with the Prospectus Directive) which would permit a public offering of the Notes outside the European Economic Area or distribution of this document in any jurisdiction where action for that purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, and neither this Base Prospectus, nor any Final Terms, nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this Base Prospectus or any Notes come must inform themselves about, and observe, any such restrictions. v

6 Level: 3 From: 3 Monday, November 16, :21 eprint Intro NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421 B OF THE NEW HAMPSHIRE UNIFORM SECURITIES ACT ( RSA 421 B ) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421 B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. STABILISATION IN CONNECTION WITH THE ISSUE OF ANY SERIES OF NOTES, THE DEALER OR DEALERS (IF ANY) NAMED AS THE STABILISING MANAGER(S) (OR PERSONS ACTING ON BEHALF OF ANY STABILISING MANAGER(S)) IN THE APPLICABLE FINAL TERMS MAY OVER ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER(S) (OR PERSONS ACTING ON BEHALF OF A STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN AT ANY TIME AFTER THE ADEQUATE PUBLIC DISCLOSURE OF THE FINAL TERMS OF THE OFFER OF THE RELEVANT SERIES OF NOTES AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE RELEVANT SERIES OF NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE RELEVANT SERIES OF NOTES. ANY STABILISATION ACTION OR OVER ALLOTMENT MUST BE CONDUCTED BY THE RELEVANT STABILISING MANAGER(S) (OR PERSON(S) ACTING ON BEHALF OF ANY STABILISING MANAGER(S)) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES. vi

7 Level: 3 From: 3 Monday, November 16, :21 eprint Intro TABLE OF CONTENTS FORWARD LOOKING STATEMENTS... 1 ENFORCEABILITY OF JUDGMENTS... 3 SUPPLEMENTAL BASE PROSPECTUS... 4 PRESENTATION OF FINANCIAL AND OTHER INFORMATION... 5 ADDITIONAL INFORMATION OVERVIEW RISK FACTORS DESCRIPTION OF THE TRANSACTIONS FINAL TERMS AND DRAWDOWN PROSPECTUSES USE OF PROCEEDS SELECTED FINANCIAL AND OPERATING INFORMATION CAPITALISATION MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS MANAGEMENT PRINCIPAL SHAREHOLDERS RISK MANAGEMENT LENDING POLICIES AND PROCEDURES RELATED PARTY TRANSACTIONS THE ISSUER THE FACILITY AGREEMENT TERMS AND CONDITIONS OF THE NOTES FORM OF FINAL TERMS SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM TAXATION SUBSCRIPTION AND SALE TRANSFER RESTRICTIONS GENERAL INFORMATION INDEX TO FINANCIAL STATEMENTS... F-1 APPENDIX A OVERVIEW OF THE BANKING SECTOR AND BANKING REGULATION IN THE RUSSIAN FEDERATION... A-1 APPENDIX B REPUBLIC OF TATARSTAN... B-1 Page vii

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9 Level: 3 From: 3 Monday, November 16, :21 eprint Intro FORWARD LOOKING STATEMENTS Some statements in this Base Prospectus, as well as written and oral statements that the Bank and its officers make from time to time in reports, filings, news releases, conferences, teleconferences, web postings or otherwise, may be deemed to be forward looking statements. Forward looking statements include statements concerning the Bank s plans, objectives, goals, strategies and future operations and performance and the assumptions underlying these forward looking statements. The Bank uses the words estimates, expects, believes, intends, plans, may, will, should and other similar expressions to identify forward looking statements. These forward looking statements are contained in Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations, Business and other sections of this Base Prospectus. The Bank has based these forward looking statements on the current views of its management with respect to future events and financial performance. These views reflect the best judgment of the management of the Bank but involve uncertainties and are subject to certain risks, the occurrence of which could cause actual results to differ materially from those the Bank predicts in its forward looking statements and from its past results, performance or achievements. Although the Bank believes that the estimates and the projections reflected in its forward looking statements are reasonable, if one or more risks or uncertainties were to materialise or occur, including those which the Bank has identified in this Base Prospectus, or if any underlying assumptions prove to be incomplete or inaccurate, its results of operations may vary materially from those it expected, estimated or projected. Forward looking statements that may be made by the Bank from time to time (but that are not included in this document) may also include projections or expectations of interest income, net interest income, operating income (or loss), net profit (or loss) (including on a per share basis), dividends, capital structure or other financial items or ratios. By their very nature, forward looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward looking statements will not be achieved. You should be aware that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements. These factors include: inflation, interest rate fluctuations and exchange rate fluctuations in the Russian Federation; prices for securities issued by Russian and Tatarstan entities; the ability of the Bank to refinance its indebtedness on reasonable terms or at all; the health of the Russian and Tatarstan economy, including the Russian banking sector; the Bank s ability to maintain its liquidity levels; the effects of, and changes in, the policy of the federal government of the Russian Federation (the Russian Government ) and the government of the Republic of Tatarstan and regulations promulgated by the CBR and other government agencies; the effects of competition in the geographic and business areas in which the Bank conducts its operations; the effects of changes in laws, regulations and taxation or accounting standards or practices in the jurisdictions where the Bank conducts its operations; the Bank s ability to maintain or increase market share for its products and services and control expenses; acquisitions or divestitures; technological changes; and 1

10 Level: 3 From: 3 Monday, November 16, :21 eprint Intro the Bank s ability to manage the risks associated with the aforementioned factors. This list of important factors is not exhaustive. When reviewing forward looking statements, prospective purchasers of the Notes should carefully consider the foregoing factors and other uncertainties and events, especially in light of the political, economic, social and legal environment in which the Bank operates. Such forward looking statements speak only as of the date on which they are made. Accordingly, the Bank is not obliged to, and does not intend to, update or revise any forward looking statements made in this Base Prospectus whether as a result of new information, future events or otherwise except as otherwise required by applicable law or under the Prospectus Directive and the relevant implementing measures in Ireland. All subsequent written or oral forward looking statements attributable to the Bank, or persons acting on the Bank s behalf, are expressly qualified in their entirety by the cautionary statements contained throughout this Base Prospectus. As a result of these risks, uncertainties and assumptions, a prospective purchaser of the Notes should not place reliance on these forward looking statements. 2

11 Level: 3 From: 3 Monday, November 16, :21 eprint Intro ENFORCEABILITY OF JUDGMENTS The Bank is an open joint stock company organised under the laws of the Russian Federation. All of the Bank s directors and executive officers named in this Base Prospectus reside in the Russian Federation. Moreover, substantially all the assets of the Bank and of such persons are located in the Russian Federation. As a result, the Trustee, acting on behalf of the Noteholders, (or any other person) may not be able to effect service of process in the United Kingdom or the United States on the Bank or any of the Bank s directors or executive officers named in this Base Prospectus. Subject to the terms of the Trust Deed, no Noteholder will have any entitlement to enforce any provisions of the relevant Loan Agreement, or have direct recourse to the Bank, except through action by the Trustee. The Trustee will not be required to enter into proceedings to enforce payment from the Bank under the Loan Agreements, unless it has been indemnified and/or secured by the relevant Noteholders to its satisfaction against all liabilities, proceedings, claims and demands to which it may thereby become liable and all costs, charges and expenses, which it may incur in connection therewith. Similarly, the Trustee (or any other person) may not be able to obtain or enforce English or U.S. court judgments in the Russian Federation against the Bank or its directors or executive officers. Courts in the Russian Federation will only recognise judgments rendered by a court in any jurisdiction outside the Russian Federation if an international treaty providing for the recognition and enforcement of judgments in civil cases exists between the Russian Federation and the country where the judgment is rendered. No such treaty for the reciprocal enforcement of foreign court judgments in civil and commercial matters exists between the Russian Federation and most Western jurisdictions (including the United Kingdom and the United States), which may require new proceedings to be brought in the Russian Federation in respect of a judgment already obtained in any such jurisdiction against the Bank or its directors or executive officers. In addition, Russian courts have limited experience in the enforcement of foreign court judgments. The limitations described above, including the general procedural grounds set out in Russian legislation for the refusal to recognise and enforce foreign court judgments in the Russian Federation, may significantly delay the enforcement of any such judgment, or deprive the Noteholders or the Trustee of effective legal recourse for claims under the Notes relating to the relevant Loan. Each Loan Agreement will be governed by English law and will provide that if any dispute or proceeding arises from or in connection with such Loan Agreement it will be settled by arbitration in accordance with the Rules of the London Court of International Arbitration. The place of such arbitration shall be London, England. The Russian Federation and the United Kingdom are parties to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention ). Consequently, Russian courts should generally recognise and enforce in the Russian Federation an arbitral award from an arbitral tribunal in the United Kingdom, on the basis of the rules of the New York Convention (subject to qualifications provided for in the New York Convention and compliance with Russian procedural regulations and other procedures and requirements established by Russian legislation). However, it may be difficult to enforce arbitral awards in the Russian Federation due to: the inexperience of the Russian courts in international commercial transactions; the inability of Russian courts to enforce such awards; and official and unofficial political resistance to the enforcement of awards against Russian companies in favour of foreign investors. However, at its option, the Issuer may elect to settle a dispute in the English courts. The arbitrazh procedural code of the Russian Federation dated 24 July 2002, as amended (the Arbitrazh Procedural Code ) sets forth the procedure for Russian courts to refuse to recognise and enforce any such arbitral award. The Arbitrazh Procedural Code and other Russian procedural legislation could change; therefore, among other things, other grounds for Russian courts to refuse the recognition and enforcement of foreign courts judgments and foreign arbitral awards could arise in the future. In practice, reliance upon international treaties may meet with resistance or a lack of understanding on the part of a 3

12 Level: 3 From: 3 Monday, November 16, :21 eprint Intro Russian court or other officials, thereby introducing delay and unpredictability into the process of enforcing any foreign judgment or any foreign arbitral award in the Russian Federation. SUPPLEMENTAL BASE PROSPECTUS The Bank and the Issuer will each agree to comply with any undertakings given by it from time to time to the Irish Stock Exchange in connection with listed Notes and, without prejudice to the generality of the foregoing, the Bank and the Issuer will each, so long as any of its Notes remains outstanding and admitted to trading on the Irish Stock Exchange s regulated market, if required by the listing guidelines, the Prospectus Directive or applicable law, prepare and make available an appropriate amendment or supplement to this Base Prospectus or a further prospectus as may be required by the listing guidelines, the Prospectus Directive or by such law which in respect of any subsequent issue of Notes to be listed on and admitted to trading on the Irish Stock Exchange s regulated market constitutes a supplemental prospectus as required by such rules, directive or law. The Bank has given an undertaking to the Dealers that if at any time during the duration of the Programme there is a significant new factor, material mistake or inaccuracy relating to information contained in this Base Prospectus, which is capable of affecting the assessment by investors of any Notes and the corresponding Loan and the inclusion of which in this Base Prospectus (or removal or correction, as applicable) is necessary for the purpose of allowing an investor to make an informed assessment of the assets and liabilities, financial condition, profits and losses and prospects of the Issuer and the Bank and the rights attaching to such Notes and such Loan, the Bank shall prepare an amendment or supplement to this Base Prospectus or publish a replacement base prospectus for use in connection with any subsequent offering of the Notes and shall supply to each Dealer (copied to the Trustee) such number of copies of such supplement hereto or replacement base prospectus as such Dealer may reasonably request. The Issuer and the Bank may agree with any Dealer that a Series of Notes may be issued in a form not contemplated by the Terms and Conditions herein, in which event a supplement to this Base Prospectus, if appropriate, will be published which will describe the effect of the agreement reached in relation to such Notes. 4

13 Level: 3 From: 3 Monday, November 16, :21 eprint Intro PRESENTATION OF FINANCIAL AND OTHER INFORMATION Presentation of financial information The financial information set forth herein has, unless otherwise indicated, been extracted, without material adjustments, from the audited consolidated financial statements of Ak Bars Bank and its consolidated subsidiaries (together, the Group ) as of and for the years ended 31 December 2008 and 2007 (the Audited Financial Statements ) and its unaudited interim condensed consolidated financial information reviewed by its auditors, as of and for the six months ended 30 June 2009 (the Unaudited Interim Financial Information and together with the Audited Financial Statements, the Financial Statements ). The Audited Financial Statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ), issued by the International Accounting Standards Board. The Unaudited Interim Financial Information has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). The interim condensed consolidated financial information of the Group as of and for the six months ended 30 June 2009 is set out on pages F-27 through F-49 of this Base Prospectus. The annual consolidated financial statements of the Group as of and for the year ended 31 December 2008 are set out on pages F-50 through F-118 of this Base Prospectus. The annual consolidated financial statements of the Group as of and for the year ended 31 December 2007 are set out on pages F-119 through F-187 of this Base Prospectus. Each of the audit opinions for the Audited Financial Statements and the review report for the Unaudited Interim Financial Information referred to above had an emphasis of matter paragraph drawing attention to the fact that the Group has extensive transactions and relationships with related parties. The Russian rouble is the functional currency for the Financial Statements. Reclassifications As discussed in the Note 3 to the Group s audited consolidated financial statements as of and for the year ended 31 December 2008 and interim condensed consolidated financial information as of and for the six months ended 30 June 2009, certain balances and transactions reflected in the Group s audited consolidated financial statements as of and for the year ended 31 December 2008 and unaudited interim condensed consolidated financial information as of and for the six months ended 30 June 2009 have been reclassified and/or renamed to confirm with the presentation in the annual consolidated financial statements for the year ended 31 December 2008 and interim condensed consolidated financial information as of and for the six months ended 30 June The effect of reclassification on the interim condensed consolidated statement of comprehensive income is as follows: Six months ended In millions of Russian Roubles 30 June Increase in Losses net of gains from financial derivatives Decrease in Foreign exchange translation gains less losses / (losses net of gains)... (284.5) The effect of reclassification on the consolidated balance sheet is as follows: Year ended In millions of Russian Roubles 31 December Increase in Other financial assets Other financial liabilities Decrease in Other assets... ( ) Other liabilities... ( ) 5

14 Level: 3 From: 3 Monday, November 16, :21 eprint Intro Auditors ZAO PricewaterhouseCoopers Audit, independent auditors ( PwC ), have reviewed the Unaudited Interim Financial Information and audited the Audited Financial Statements, in each case included in this Base Prospectus, and expressed unqualified opinion on those financial statements, as stated in their reports appearing herein. The address of PwC is Kosmodamianskaya Naberezhnaya 52/5, Moscow , Russian Federation. Currency PwC is a member of the Audit Chamber of Russia ( Auditorskaya Palata Rossii ). In this Base Prospectus, the following currency terms are used: RUB or roubles means the lawful currency of the Russian Federation; U.S. dollars or U.S.$ means the lawful currency of the United States; and EUR, euro or means the lawful currency of the member states of the European Union that adopted the single currency in accordance with the Treaty of Rome establishing the European Economic Community, as amended by the Treaty on the European Union, signed at Maastricht on 7 February Exchange rates The table below sets forth the periods indicated, certain information regarding the exchange rate between the Russian Rouble and the U.S. dollar, based on the official exchange rate quoted by the CBR. Fluctuations in the exchange rate between the Russian Rouble and the U.S. dollar in the past are not necessarily indicative of fluctuations that may occur in the future. The Bank prepares its consolidated financial statements in accordance with IFRS in Russian Roubles. Solely for the convenience of the reader, and except as otherwise stated, this Base Prospectus contains translations of some Russian Rouble amounts into U.S. dollars at the official exchange rate quoted by the CBR on 30 June and on 31 December of the relevant year. For 2007, the translation rate was RUB to U.S.$1.00, which was the official exchange rate quoted by the CBR on 31 December For 2008, the translation rate was RUB to U.S.$1.00, which was the official exchange rate quoted by the CBR on 31 December For the six months ended 30 June 2009, the translation rate was RUB to U.S.$1.00, which was the official exchange rate quoted by the CBR on 30 June For the six months ended 30 June 2008, the translation rate was RUB to U.S.$1.00, which was the official exchange rate quoted by the CBR on 30 June The Bank does not make any representation that the Russian Rouble amounts referred to in this Base Prospectus could have been or could be exchanged into U.S. dollars at the above translation rate, at any other rate or at all. Rouble/U.S. Dollar Exchange Rate Year/Period High Low Average Period end Six months to 30 June Six months to 30 June (up to and including 31 October 2009) Source: Central Bank of Russian Federation. The official rouble/u.s. dollar exchange rate quoted by the CBR on 31 October 2009 was RUB = U.S. $

15 Level: 3 From: 3 Monday, November 16, :21 eprint Intro Rounding Many numerical figures included in this Base Prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that preceded them. Unless otherwise specified, all percentages have been rounded to the nearest one tenth of one per cent. Adoption of new or revised accountancy standards and interpretation Certain new or amended IFRS became effective for the Group from 1 January Those new or amended standards or interpretations which are or in the future could be relevant to the Group s operations and the nature of their impact on the Group s accounting policies are described in Notes 5 and 6 of the consolidated financial statements for the year ended 31 December 2008 and in Note 4 of the Unaudited Interim Financial Information. The new interpretations which became effective for the Group from 1 January 2008 were the following: IFRIC 11, IFRS 2 Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007); IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008); and IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). These interpretations did not have any significant effect on the Group s consolidated financial statements. Reclassification of Financial Assets Amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures and a subsequent amendment, Reclassification of Financial Assets: Effective Date and Transition. The amendments allow entities the options (a) to reclassify a financial asset out of the held to trading category if, in rare circumstances, the asset is no longer held for the purpose of selling or repurchasing it in the near term; and (b) to reclassify an available for sale asset or an asset held for trading to the loans and receivables category, if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity (subject to the asset otherwise meeting the definition of loans and receivables). The amendments may be applied with retrospective effect from 1 July 2008 for any reclassifications made before 1 November 2008; the reclassifications allowed by the amendments may not be applied before 1 July 2008 and retrospective reclassifications are only allowed if made prior to 1 November Any reclassification of a financial asset made on or after 1 November 2008 takes effect only from the date when the reclassification is made. The Group has not elected to make any of the optional reclassifications during the period. The new standards and interpretations, which became mandatory for the Group s accounting periods beginning on or after 1 January 2009 or later periods and which the Group has not early adopted, were the following: IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments and specifies how an entity should report such information. Puttable Financial Instruments and Obligations Arising on Liquidation IAS 32 and IAS 1 Amendment (effective from 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. 7

16 Level: 3 From: 3 Monday, November 16, :21 eprint Intro IAS 23, Borrowing Costs (revised March 2008; effective for annual periods beginning on or after 1 January 2009). The revised IAS 23 was issued in March The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January IAS 1, Presentation of Financial Statements (revised September 2008; effective for annual periods beginning on or after 1 January 2009). The main change in IAS is the replacement of the income statement by a statement of comprehensive income which will also include all non owner changes in equity, such as the revaluation of available for sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non controlling interests (previously minority interests ) even if this results in the non controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. Vesting Conditions and Cancellations Amendment to IFRS 2, Share based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non controlling interests using the existing IFRS 3 method (proportionate share of the acquiree s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to remeasure its previously held equity interest in the acquiree at its acquisition date fair value and recognise the resulting gain or loss, if any, in profit or loss. Acquisition related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. 8

17 Level: 3 From: 3 Monday, November 16, :21 eprint Intro IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. IFRIC 15 is not relevant to the Group s operations because it does not have any agreements for the construction of real estate. Improving Disclosures about Financial Instruments Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009). The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity will be required to disclose an analysis of financial instruments using a three level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a group except the foreign operation that itself is being hedged. The interpretation also clarifies how the gain or loss recycled from the currency translation reserve to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities will apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 is not relevant to the Group s operations because it does not apply hedge accounting. Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRS 1 and IAS 27 Amendment (revised May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre acquisition net assets of investees to be recognised in profit or loss rather than as a recovery of the investment. The amendments do not have an impact on the Group s consolidated financial statements. 9

18 Level: 3 From: 3 Monday, November 16, :21 eprint Intro Eligible Hedged Items Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009, with earlier application permitted). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment does not have an impact on the Group s consolidated financial statements as the Group does not apply hedge accounting. Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. IFRIC 17, Distribution of Non Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009, with earlier application permitted). The amendment clarifies when and how distribution of non cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non cash assets will be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Group s operations because it does not distribute non cash assets to owners. IFRS 1, First time Adoption of International Financial Reporting Standards (effective for the first IFRS financial statements for a period beginning on or after 1 July 2009). The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The Group concluded that the revised standard does not have any effect on its consolidated financial statements. Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for non current assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity s own equity instruments as non current; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired 10

19 Level: 3 From: 3 Monday, November 16, :21 eprint Intro in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. Group Cash settled Share based Payment Transactions Amendments to IFRS 2, Share based Payment (effective for annual periods beginning on or after 1 January 2010). The amendments provide a clear basis to determine the classification of share based payment awards in both consolidated and separate financial statements. The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the standard. The International Financial Reporting Standard for Small and Medium sized Entities (issued in July 2009) is a self contained standard, tailored to the needs and capabilities of smaller businesses. Many of the principles of full IFRS for recognising and measuring assets, liabilities, income and expense have been simplified, and the number of required disclosures have been simplified and significantly reduced. The IFRS for SMEs may be applied by entities which publish general purpose financial statements for external users and do not have public accountability. The Group is not eligible to apply the IFRS for SMEs due to the public accountability of its banking business. The Group has also not early adopted any of the new standards and interpretations disclosed in the New Accounting Pronouncements note in its last annual financial statements and effective for its annual periods beginning on or after 1 January

20 Level: 3 From: 3 Monday, November 16, :21 eprint Intro ADDITIONAL INFORMATION Neither the Issuer nor the Bank is required to file periodic reports under Section 13 or 15 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ). For so long as either the Issuer or the Bank is not a reporting company under Section 13 or 15(d) of the Exchange Act, or exempt from reporting pursuant to Rule 12g3 2(b) thereunder, the Issuer or the Bank will, upon request, furnish to each holder or beneficial owner of Notes that are restricted securities (within the meaning of Rule 144(a)(3) under the Securities Act) and to each prospective purchaser thereof designated by such holder or beneficial owner upon request of such holder, beneficial owner or prospective purchaser, in connection with a transfer or proposed transfer of any such Notes pursuant to Rule 144A under the Securities Act or otherwise, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. 12

21 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 OVERVIEW This summary may not contain all the information that may be important to prospective purchasers of the Notes and should be read in conjunction with, and is qualified in its entirety by, the more detailed information appearing elsewhere in this Base Prospectus. Prospective purchasers of the Notes should read this entire Base Prospectus, including the more detailed information regarding the Group s business and operations and the Financial Statements included elsewhere in this Base Prospectus, as well as the Final Terms relating to such Series of Notes. Investing in the Notes involves risks, and prospective purchasers of the Notes should carefully consider the information set forth under Risk Factors. Certain statements in this Base Prospectus include forward looking statements that also involve risks and uncertainties, as described under Forward Looking Statements. Overview of the bank AK BARS Bank was established in 1993 as an open joint stock company under the laws of the Russian Federation. AK BARS Bank is the largest bank headquartered in the Republic of Tatarstan in terms of both assets and capital. According to figures published by the National Bank of the Republic of Tatarstan, a local territorial department of the CBR, as at 30 June 2009 and 31 December 2008, the Bank accounted for 40.7 per cent. and 41.1 per cent., respectively, of the banking market in the Republic of Tatarstan in terms of assets, and 48.2 per cent. and 50.0 per cent., respectively, in terms of capital. The Bank is headquartered in Kazan and is an authorised agent of the government of the Republic of Tatarstan for servicing the budgetary accounts and payments of the government of the Republic of Tatarstan. As at 30 June 2009 and 31 December 2008, the Group s total consolidated equity was RUB 17,770.8 million and RUB 18,263.0 million, respectively, and total consolidated assets were RUB 206,881.1 million and RUB 202,531.1 million, respectively, calculated in accordance with IFRS. Until 2008, Russia had experienced several consecutive years of increasing domestic demand and benefited from relatively high market prices for key export commodities, particularly oil and gas and metals, which lead to sustained economic growth and an increase in foreign currency reserves. The global financial crisis had a significant adverse effect on the Russian economy, beginning in the third quarter of As of June 2009 as compared to June 2008, industrial production had decreased by 12.1 per cent., exports had decreased by 45.1 per cent., and the number of officially registered unemployed increased by 35.7 per cent. Russia s official reserves fell from a peak of U.S.$598.1 billion in August 2008 to U.S.$413.5 billion in October The stability of the rouble was also affected by the onset of the crisis. The nominal exchange rate of the rouble against the U.S. dollar as at 30 June 2009, as compared to 30 June 2008, decreased by 9.3 per cent., while the real exchange rate decreased by 5.0 per cent. during the same period. As of October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008 and the IFX CBonds bond index had declined about 13.8 per cent. from its highest levels, reached in June By the end of October 2009, the RTS stock index had recovered about per cent. from its lowest level and the IFX CBonds bond index had recovered about 30.8 per cent. from its lowest level. As a result of the deterioration in economic conditions, the Bank made a consolidated net loss for the six month ended 30 June 2009 of RUB million and for the year ended 31 December 2008 of RUB 6,507.1 million. The Bank services its customers through a network of 323 branches ( filialy ), representative offices ( dopolnitelnye offisy ), cash and credit offices and stand alone cash desks, as at 30 June This network is located primarily in the Republic of Tatarstan but also extends to Moscow and other regions of the Russian Federation. As at 30 June 2009, the Bank had 20 branches, 81 representative offices and 133 other offices (including cash and credit offices, stand alone cash desks and operational offices) in the Republic of Tatarstan and 23 branches and 51 representative offices and 15 other offices in other regions of Russia. In the first six months of 2009, the Bank closed four recently opened branches and 13 representative offices. The Bank s principal business focus is currently on retail and corporate banking. As at 30 June 2009, the Bank provided services to more than 41,400 corporate and 2,076,300 individual customers. The Bank offers more than 100 types of products and services to retail and corporate customers. It offers retail 13

22 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 customers a wide range of savings and deposit accounts, loan products, including mortgage loans and automobile loans, as well as investment products, custody services and debit cards issued by the Bank, or plastic cards. The Bank offers its corporate customers a range of current/settlement accounts, deposit facilities, loans and other credit facilities, confirmed letters of credit, brokerage services, foreign currency exchange services and derivative products. The Bank also conducts financial markets operations and offers investment banking services. As at 30 June 2009, 95.8 per cent. of the Bank s share capital was owned either by the Republic of Tatarstan (39.2 per cent.) or by entities owned by persons who are associated with the Republic (56.6 per cent.). The Republic has advised the Bank that through such holdings it controls the Bank. In March 2009, the Bank s shareholders approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this increase was approved by the CBR in November The new shares were issued to new and existing shareholders, all of whom are connected to the Republic of Tatarstan. See Principal Shareholders. The government of the Republic of Tatarstan exercises significant influence on the strategic development of the Bank but is generally not involved in the day to day management of the Bank. A significant amount of the Bank s business is connected with the Ministry of Finance of the Republic of Tatarstan, and the Bank has significant banking operations with other government related enterprises. The Republic of Tatarstan s government bodies and state organisations accounted for 32.8 per cent. and 13.2 per cent. of the Bank s total customer accounts as at 30 June 2009 and 31 December 2008, respectively. Competitive strengths AK BARS Bank believes that it has a number of competitive strengths: Extensive network. The Bank has a broad geographic footprint in the Republic of Tatarstan and in a number of other regions in Russia to the east of Moscow, in which there is currently less competition from other banks compared to other Russian regions. Until 2008, the Bank had rapidly expanded its network and had 351 branches, representative offices, cash and credit offices and stand-alone cash desks as at 31 December As a result of the economic crisis, the Bank has since scaled back its network, closing four recently opened branches and 13 representative offices. As at 30 June 2009, the Bank had 323 branches, representative offices, cash and credit offices and stand-alone cash desks. The Bank believes its network is appropriately sized and puts the Bank in a good position in the current market environment. Retail and corporate focus. The Bank generally focuses on small and medium sized corporate and retail customers, which represent markets in which it is already strong or in which it believes there may be significant medium-term or long-term growth prospects. The Bank utilises specialty software and technology that allows it to tailor products and services for these types of customers. In addition, the Bank employs relationship bankers with extensive experience and know how in order to develop and expand its relationships with small and medium sized corporate customers. The Bank had over 41,400, 38,700, and 34,600 corporate customers as at 30 June 2009, 31 December 2008 and 31 December 2007, respectively. Strong relationship with the Republic of Tatarstan. As at 30 June 2009, 95.8 per cent. of the Bank s share capital was owned either by the Republic of Tatarstan (39.2 per cent.) or by entities owned by persons associated with the Republic (56.6 per cent.). The Republic has advised the Bank that through such holdings it controls the Bank. The Bank benefits from a reputational advantage in the local communities it serves in Tatarstan through the strength of its relationship with the Republic of Tatarstan and further benefits from having the Republic of Tatarstan as a source of customer deposits and other business opportunities. Historically, government bodies and state organisations of the Republic of Tatarstan have provided the Bank with a significant amount of long term deposits which are essential to the Bank s ability to provide longer term loan products, such as mortgages, and for liquidity risk management purposes. The Bank believes that this relationship provides it with opportunities unavailable to many of its competitors. 14

23 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 Strategy Leading market position in the Republic of Tatarstan and brand name recognition. The Bank is the dominant bank in the Republic of Tatarstan, with approximately 40.7 per cent. of the total assets and 48.2 per cent. of the total capital in the banking sector as at 30 June The Bank believes that its leading market position has allowed it to build broad brand name recognition in the Republic of Tatarstan and to build strong relationships with its corporate and retail customers located there. The Bank s leading market position and strong brand name recognition put the Bank in a good position to benefit from potential opportunities in the Republic of Tatarstan. Implementation of a universal bank strategy. The development of the Bank s investment banking division and the introduction of other corporate products has permitted the Bank to provide its corporate customers with a wide range of financing facilities, including different complex bank products. As part of the strategic plan for the period from 2009 to 2012, adopted in 2008, the Bank s overall long-term strategy is to continue to develop and strengthen its market position by improving and diversifying its product and services offerings to corporate (in particular to small and medium sized enterprises) and retail customers. To achieve these goals and to continue to add value for its customers, employees and shareholders, the Bank has identified the following principal long term strategies: expand its banking operations organically outside the Republic of Tatarstan, in particular in the regional industrial centres of Russia; continue to focus on retail banking by developing an extensive range of retail products and services, including new debit card offerings and a new range of pre payment card schemes, expand banking through postal offices and provide a wide range of automated banking services; focus on increasing the number of small and medium sized corporate customers, a market in which the Bank believes there is currently less competition from other Russian and international banks; and develop and implement an advanced information technology support infrastructure to optimise internal budgeting and financial planning processes, support an integrated centre to process accounting information, banking and financial transactions and enhance the Bank s risk management systems. As a result of the economic crisis, since the third quarter of 2008 the Bank has not been able to effectively implement its long term strategy, as it has focused on other business issues, although the Bank intends to return to its strategic plan once economic conditions improve. In the short-term, the Bank is focused on the following strategies: maintain its leading market position in Tatarstan; improve its balance sheet and liquidity position through diversification of its funding base; implement conservative risk management and provisioning policies to support asset quality; and maintain a strong capital position. 15

24 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 OVERVIEW OF THE PROGRAMME Description:... Issuer:... Borrower:... Programme Limit:... Arrangers:... Dealers:... Trustee:... Principal Paying Agent:... Paying Agent:... Registrars:... Transfer Agents:... Calculation Agent:... Issue Price:... Maturities:... Interest Periods and Rates:... Fixed and Floating Rate Notes:... Programme for the issuance of Loan Participation Notes. AK BARS Luxembourg S.A. AK BARS Bank. Up to U.S.$1,500,000,000 (or its equivalent in other currencies at the date of issue) aggregate principal amount of Notes outstanding at any one time. The Bank may increase the amount of the Programme in accordance with the Dealer Agreement (as defined herein). In this respect, for the purpose of calculating the aggregate principal amount of Notes outstanding, Notes issued at a premium shall be treated as having been issued at the amount of their net proceeds received by the Issuer. Credit Suisse Securities (Europe) Limited and The Royal Bank of Scotland plc. Credit Suisse Securities (Europe) Limited, The Royal Bank of Scotland plc and any other Dealer appointed from time to time by the Issuer and the Bank either generally in respect of the Programme or in relation to a particular Series of Notes. Deutsche Trustee Company Limited. Deutsche Bank AG, London Branch. Deutsche Bank Trust Company Americas. Deutsche Bank Luxembourg S.A. in respect of Regulation S Notes and Deutsche Bank Trust Company Americas in respect of Rule 144A Notes. A register of the Notes shall also be kept at the registered office of the Issuer. Deutsche Bank Luxembourg S.A. and Deutsche Bank Trust Company Americas. Deutsche Bank AG, London Branch unless otherwise stated in the relevant Final Terms. Notes may be issued at their principal amount or at a discount or premium to their principal amount. Subject to compliance with all relevant laws, regulations and directives, any maturity as may be agreed between the Issuer, the Bank and the relevant Dealer(s). The length of the interest periods for the Notes and the applicable interest rate may differ from time to time or be constant for any Series. Notes may be issued on a fixed rate or floating rate basis (as further described below) and may have a maximum interest rate, a minimum interest rate, or both. Notes may also have a step up rate of interest. All such information will be set out in the relevant Final Terms. Each Fixed Rate Note and Floating Rate Note will bear interest on the outstanding principal amount from (and including) the Interest Commencement Date (as specified in the relevant Final Terms) and 16

25 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 thereafter from (and including) each Interest Payment Date (as defined in the Facility Agreement as set out herein), to (but excluding) the next Interest Payment Date at the rate(s) per annum (expressed as a percentage) equal to the Rate(s) of Interest specified on the Note, which shall be equal to the rate per annum at which interest under the relevant Loan accrues, such interest being payable in arrear on each Interest Payment Date. Method of Issue:... Limited Recourse:... Status of the Notes:... Security:... Form:... The Notes will be issued on a syndicated or non syndicated basis. The Notes will be issued in series (each a Series ) having one or more issue dates and on terms otherwise identical (or identical other than in respect of the first payment of interest) to the Notes; the Notes of each Series being intended to be fungible with all other Notes of that Series. Each Series of Notes may be issued either (i) pursuant to this Base Prospectus and associated Final Terms or (ii) pursuant to a Drawdown Prospectus. The terms and conditions applicable to any particular Series of Notes will be the Terms and Conditions of the Notes as supplemented, amended and/or replaced to the extent described in the relevant Final Terms or, as the case may be the relevant Drawdown Prospectus. The Notes are limited recourse secured obligations of the Issuer. The Notes will constitute the obligation of the Issuer to apply the proceeds from the issue of the Notes solely for the purpose of financing the relevant Loan to the Bank pursuant to the terms of the corresponding Loan Agreement. The Issuer will only account to the Noteholders for all amounts equivalent to those (if any) received from the Bank under such Loan Agreement or held on deposit in the Account (as defined in the relevant Loan Agreement) less amounts in respect of the Reserved Rights (as defined in the Trust Deed), all as more fully described under Terms and Conditions of the Notes. The Notes of each Series constitute limited recourse, secured and unsubordinated obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves, all as more fully described under Terms and Conditions of the Notes Status. Each Series of Notes will be secured by a first fixed charge in favour of the Trustee for the benefit of itself and the Noteholders of (i) certain of the Issuer s rights and interests as lender under the relevant Loan Agreement, and (ii) the Issuer s rights, title and interest in and all sums held on deposit in the Account (in each case, other than the Reserved Rights), all as more fully described under Terms and Conditions of the Notes. In addition, the Issuer with full title guarantee will assign absolutely its administrative rights under the relevant Loan Agreement (save for the rights charged or excluded as described above) to the Trustee for the benefit of itself and the Noteholders, as more fully described under Terms and Conditions of the Notes. Each Series of Notes will be issued in registered form. The Notes will be in denominations in aggregate principal amount, for Rule 144A Notes, of at least U.S.$100,000 (or its equivalent in other currencies) and integral multiples of U.S.$1,000 (or its equivalent in other currencies) in excess thereof and for Regulation S Notes, of at 17

26 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 least 50,000 (or the equivalent in other currencies), and integral multiples of 1,000 (or the equivalent in other currencies) in excess thereof, save that unless otherwise permitted by then current laws and regulations, Notes which have a maturity of less than one year and in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise would constitute a contravention of section 19 of the FSMA will have a minimum denomination of 100,000 (or its equivalent in other currencies). Notes of each Series will be represented by interests in one or more Global Notes. The Global Notes will only be exchangeable for definitive certificates in the limited circumstances described under Summary of Provisions Relating to the Notes in Global Form. Each series of Notes offered and sold outside the United States to non U.S. persons in offshore transactions in reliance on Regulation S under the Securities Act will be represented by interests in a Regulation S Global Note. Each Series of Notes offered and resold in the United States to QIBs that are also QPs in reliance on Rule 144A will be represented by interests in one or more Rule 144A Global Notes. Early Redemption at the Option of the Bank or the Issuer:... Each Series of Notes will be redeemed in whole, but not in part, at any time, upon notice having been given to the Noteholders, at their principal amount together with accrued and unpaid interest to the date of redemption and any additional amounts (if any) then due if the Bank elects to prepay the corresponding Loan for tax reasons or by reason of increased costs or, at the option of the Issuer, in the event that it becomes unlawful for the Issuer to fund such Loan or to allow it to remain outstanding under such Loan Agreement, all as more fully described in each Loan Agreement. See also Condition 6 (Redemption) of Terms and Conditions of the Notes. Redemption in the Event of a Change of Control:... Certain Covenants:... If a Change of Control (as defined in the Facility Agreement and pursuant to Condition 6 (Redemption)) shall occur while any Note is outstanding, the Noteholders will have the option to redeem the Notes on the Put Event Payment Date (as defined in Condition 6 (Redemption)) at their principal amount together with accrued interest to such date and any additional amounts, if any. As long as any of the Notes remains outstanding, the Issuer will not, without the prior written consent of the Trustee, agree to any amendment to or any modification or waiver of, or authorise any breach or proposed breach of, the terms of a Loan Agreement, except as otherwise expressly provided in the Trust Deed or such Loan Agreement. Clause 10.5 (Negative Pledge) of the Facility Agreement contains a negative pledge in relation to the creation of Security Interests (as defined in the Facility Agreement) (other than Permitted Security Interests (as defined in the Facility Agreement)) by the Bank or its Subsidiaries (as defined in the Facility Agreement). The Facility Agreement also contains in Clause 10 (Covenants), among other things, covenants limiting mergers and disposals by the Bank, 18

27 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 transactions between the Bank and its Affiliates (as defined in the Facility Agreement) (other than transactions made on an arm s length basis), the making of distributions by the Bank and its Subsidiaries and a covenant by the Bank to maintain its Capital Adequacy Ratio (as defined in the Facility Agreement) at certain levels specified in the Facility Agreement. Relevant Event/Event of Default:.. In the case of a Relevant Event that is continuing (as defined in the Trust Deed) the Trustee may, subject to the provisions of the Trust Deed, enforce the security created in the Trust Deed in favour of the Noteholders. Under the terms of each Loan Agreement, in the case of an Event of Default (as defined in the Facility Agreement) that is continuing, the Trustee may, subject to the provisions of the Trust Deed, declare all amounts payable by the Bank under such Loan Agreement to be due and payable. Upon repayment of such Loan following an Event of Default, the Notes will be redeemed or repaid at their principal amount together with interest accrued to the date fixed for redemption and any additional amounts then due (if any), and thereupon shall cease to be outstanding. Further Issues:... Rating:... The Issuer may from time to time issue further Notes of any Series on the same terms as existing Notes and such further Notes shall be consolidated and form a single Series with such existing Notes of the same Series. In the event of such further issuance the relevant Loan will be correspondingly increased. Series of Notes issued under this Programme may be rated or unrated. Where a Series of Notes is rated, such rating will not necessarily be the same as the rating assigned to the Programme. Credit ratings assigned to the Notes or the Programme do not necessarily mean that the Notes are a suitable investment. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Similar ratings on different types of notes do not necessarily mean the same thing. The ratings do not address the marketability of the Notes or any market price. Any change in the credit ratings of the Notes, the Programme or the Bank could adversely affect the price that a subsequent purchaser would be willing to pay for the Notes. The significance of each rating should be analysed independently from any other rating. Withholding Tax:... All payments of interest and principal to be made by the Bank under the relevant Loan Agreement will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges by any Taxing Authority (as defined in the Facility Agreement), save as required by law. All payments of interest and principal to be made by the Issuer under the Notes will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges by the Russian Federation or Luxembourg or any taxing authority thereof, save as required by law. 19

28 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 Where any deduction or withholding is required by law in relation to the Notes, the Issuer shall (subject to certain exceptions and to receipt of the relevant funds under the relevant Loan Agreement as described below) pay such additional amounts as will result in the receipt by the Noteholders of such amounts as would have been received had no such deduction or withholding been required. In such circumstances, the Bank will be required to increase the sum payable under the relevant Loan Agreement to the extent necessary to ensure that the Issuer receives and retains a net sum sufficient to pay to the Noteholders such additional amounts as will result in the receipt by the Noteholders of such amounts as would have been received had no such deduction or withholding been made or required to be made. The sole obligation of the Issuer in this respect will be to account to the Noteholders for the sums equivalent to the sums received from the Bank. See Terms and Conditions of the Notes. In the event that (i) the Bank is required to pay additional amounts under a Loan Agreement as a result of tax imposed by any Taxing Authority or (ii) the Issuer is required to pay additional amounts under the Notes as a result of tax imposed by any taxing authority in the Russian Federation or Luxembourg, the Bank will have the right to prepay the Loan made pursuant to such Loan Agreement, upon not less than 30 days notice to the Issuer, in whole (but not in part) at any time. In such circumstances, the Issuer will exercise its rights to redeem the corresponding Series of Notes. Use of Proceeds:... Admission to Trading:... Selling Restrictions:... The proceeds of each Series of Notes will be used by the Issuer for the sole purpose of financing the corresponding Loan to the Bank. In connection with the receipt of each Loan, the Bank will pay an arrangement fee, as reflected in the relevant Loan Supplement. Application has been made to the Financial Regulator, as competent authority under the Prospectus Directive for the Base Prospectus to be approved. Applications will be made, where specified in the applicable Final Terms, to the Irish Stock Exchange for a Series of Notes to be admitted to the Main Market and trading on its regulated market and/or such other competent authority, stock exchange and/or quotation system as specified in the relevant Final Terms or, as applicable, Drawdown Prospectus. Notes may be issued on the basis that the Notes will not be admitted to listing, trading and/or quotation by any competent authority, stock exchange and/or quotation system. Application may be made for trading of Rule 144A Notes in PORTAL, as specified in the applicable Final Terms. The Rule 144A Notes, unless otherwise specified in the applicable Final Terms, will not be eligible for trading through PORTAL. The Notes have not been, and will not be, registered under the Securities Act, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Terms used in this paragraph have the meaning ascribed to them by Regulation S under the Securities Act. 20

29 Level: 3 From: 3 Monday, November 16, :22 eprint Section 01 The Notes may be sold in other jurisdictions (including the United Kingdom, the Russian Federation, Hong Kong, Singapore and the Republic of Italy) only in compliance with applicable laws and regulations. See Subscription and Sale and Transfer Restrictions. Governing Law:... Initial Delivery of Notes:... Currencies:... The Notes, each Loan Agreement and the Trust Deed and any non contractual obligations arising out of or in connection with them will be governed by English law. The provisions of Articles 86 to 94-8 of the Luxembourg law on commercial companies dated 10 August 1915, as amended, are hereby excluded. On or before the Issue Date for each Series, the Rule 144A Global Note will be deposited with a custodian for DTC (if any Notes of such Series will be offered and sold in reliance on Rule 144A), and the Regulation S Global Note will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg. The Rule 144A Notes will be registered in the name of a nominee of DTC, and the Regulation S Notes will be registered in the name of a nominee of the common depository for Euroclear and Clearstream, Luxembourg. Global Notes may also be deposited with any other clearing system or may be delivered outside any clearing system, provided that the method of such delivery has been agreed in advance by the Issuer, the Bank, the Paying Agents, the Trustee and the relevant Dealer(s). Notes that are to be credited to one or more clearing systems on issue will be registered in the name of a nominee or nominees for such clearing systems. Subject to compliance with all relevant laws, regulations and directives, Notes may be issued in any currency agreed between the Issuer, the Bank and the relevant Dealer(s). Payments in respect of Notes may, subject to such compliance, be made in and/or linked to, any currency or currencies other than the currency in which such Notes are denominated. 21

30 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 RISK FACTORS An investment in the Notes involves a high degree of risk. Prospective investors should consider carefully, among other things, the risks set forth below and the other information contained in this document prior to making any investment decision with respect to the Notes. The risks highlighted below could have a material adverse effect on the Bank s business, financial condition, results of operations or prospects which, in turn, could have a material adverse effect on its ability to service its payment obligations under the Facility Agreement and, as a result, the ability of the Issuer to make payments under the Notes. In addition, the value of the Notes could decline due to any of these risks, and prospective investors may lose some or all of their investment. Prospective investors should note that the risks described below are not the only risks the Bank faces. These are the risks the Bank considers material. There may be additional risks that the Bank currently considers immaterial or of which it is currently unaware, and any of these risks could have similar effects to those described in this section. Risks related to the Bank s business and the banking industry Turmoil in global credit markets has already adversely affected, and may continue to adversely affect, the Russian economy, the Russian banking industry in general and the Bank in particular In large part due to the impact of the global financial and economic crisis on the Russian economy, in February 2009, Fitch Ratings Ltd ( Fitch ) downgraded its long term sovereign rating for the Russian Federation from BBB+ to BBB and downgraded Russia s country ceiling rating to BBB+ from A. On 8 December 2008, Standard & Poor s Rating Services, a division of McGraw Hill Companies Inc, ( Standard & Poor s ) downgraded its foreign currency sovereign credit rating on the Russian Federation from BBB+/A 2 to BBB/A 3, stating that the lowering of the ratings on Russia reflects risks associated with the sharp reversal in external portfolio and other investment flows, which has increased the cost and difficulty of meeting the country s external financing needs. As a result of the negative impact of the financial crisis on the Russian banking sector, Moody s Investors Services Limited ( Moody s) changed its outlook on the Russian banking sector from stable to negative in the third quarter of Russia is expected to have negative GDP growth in 2009, which will be the first year of negative GDP growth since The Russian Ministry of Economic Development estimated that Russian GDP fell by 10.0 per cent. in the third quarter of Forecasts for decreases in Russian GDP in 2009 include 6 per cent. as estimated by the International Monetary Fund and the World Bank and 6.0 to 7.4 per cent. as estimated by the Russian Ministry of Economic Development. Russia is also faced with a relatively high level of inflation. From mid 2008 to mid 2009, industrial production and exports decreased and the number of officially registered unemployed increased. Russia s official reserves fell from a peak of U.S.$598.1 billion in August 2008 to U.S.$413.5 billion in October Furthermore, there have been periodic suspensions of Russian stock market trading, extreme volatility in the Russian securities markets and sharp declines in the share prices of Russian financial institutions. As of October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008 and the IFX CBonds bond index had declined about 13.8 per cent. from its highest levels, reached in June However, by the end of October 2009, the RTS stock index had recovered about per cent. from its lowest level and the IFX CBonds bond index had recovered about 30.8 per cent. from its lowest level. There was a significant decrease in the price of oil following its peak in the summer of 2008, resulting in sharp decreases in government revenues, which in turn has had a significant negative impact on the economy of the Republic of Tatarstan. Oil prices have recovered somewhat in 2009, but still remain well below the highs reached in In addition, oil extraction in the Russian Federation declined by approximately one per cent. year on year in the first quarter of 2008 and there can be no assurance that production will remain at current levels. The disruptions in the global markets have had a severe impact on liquidity of Russian banks and other financial institutions, as well as the availability of credit and the terms and cost of funding in Russia. Russian banks, including the Bank, have experienced a reduction in available financing in both the interbank and 22

31 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 short term funding market, as well as in the longer term capital markets and through bank finance instruments. The Russian securitisation market has also been largely inaccessible as a result of the current financial crisis. The unavailability of funding to the banking sector in the Russian Federation has also negatively affected GDP growth in Russia. Although the Bank was able to access the domestic bond market in October and November 2008, it has not been able to access the Eurobond market or the syndicated loan market since the third quarter of Beginning in October 2008, the Russian Government and the CBR announced and implemented a number of measures intended to support the liquidity and solvency of Russian banks and to increase the availability of credit to businesses, which have been seen as critical for restoring investor confidence and supporting the medium term economic growth of the Russian economy. For a description of these measures, see Appendix A Overview of the Russian Banking Sector and Banking Regulation in the Russian Federation Measures to support the liquidity of the Russian banking system. See also Concentration of funding sources and liquidity risks exacerbated by the current instability of the global and Russian economies and banking sectors. Between October and December 2008, the Bank received unsecured loans in the amount of RUB 28,945.2 million from the CBR. Loans from the CBR, now all on a secured basis, still comprise the largest portion of the Bank s amounts due to other banks. There can be no assurance that the measures taken by the Russian Government and the CBR will succeed in materially improving the liquidity position and financial condition of Russian banks. As a result of current market conditions, accessing funding in the capital markets has become prohibitively expensive. The Bank may not be able to rely on the capital markets as a source of funding as it has in the past which could adversely affect the size and nature of its operations. If, despite the measures proposed and adopted by the Russian Government and the CBR, the Bank s liquidity position deteriorates or it is not able to obtain funding to support its funding base, this could have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. In April 2009, the Russian Minister of Finance warned of the possible second wave of the financial and economic crisis in Russia that could significantly affect Russian banks. The Ministry of Finance estimated that, by the end of 2009, the amount of overdue loans in Russia would reach approximately 10 per cent. (by value) of all loans. The increase of the volume of overdue loans will require Russian banks to increase loan impairment provisions. The Bank has significantly increased its loan provisioning for the six months ended 30 June 2009 and the year ended 31 December 2008, as compared to prior periods. The CBR has also recently decided to increase the reserve requirements for banks. See Russian regulation of banking and financial activity has been undergoing significant changes which may adversely affect the Bank. If the amount of the Bank s overdue loans were to continue to increase significantly, and especially if the Bank is not able to establish and maintain necessary reserves in response to any such increase, this could have a material adverse effect on the Bank s business, financial condition, results of operation or prospects. Furthermore, since 31 December 2008, the highly volatile economic environment created by the global credit crisis has also negatively affected the Bank s consolidated capitalisation and indebtedness, including as a result of the significant fluctuations in currency exchange rates over the period. See Mismatches in foreign currencies may expose the Bank to exchange rate risk. The Bank could be adversely affected by the deterioration of the soundness or the perceived soundness of other financial institutions Against the backdrop of the limited liquidity and high cost of funds in the international and Russian domestic interbank lending markets, the Bank is subject to the risk of deterioration of the soundness and/or perceived soundness of other financial institutions within and outside Russia. Financial institutions that transact with each other are interrelated as a result of trading, investment, clearing, counterparty and other relationships. This risk is sometimes referred to as systemic risk and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which the Bank interacts on a daily basis, all of which could have an adverse effect on the Bank. 23

32 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 The Bank routinely executes a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other financial institutions. As a result, the Bank is exposed to counterparty risk, and this counterparty risk is heightened due to the financial crisis. A default by, or concerns about the stability of, one or more financial institutions could lead to further significant systemic liquidity problems, or losses or defaults by other financial institutions, which could have a material adverse effect on the Bank s business, financial condition, result of operations and prospects. The Bank s loan portfolio had not previously been tested through a downturn in the economic cycle Until 2008 the Bank s loan portfolio expanded significantly, as did the Russian economy and Russian banking sector as a whole. The Bank is subject to risks regarding the credit quality of, and the recovery on loans to and amounts due from, customers and market counterparties, which are negatively affected by deterioration in general economic conditions. Until the onset of the global economic crisis, the Bank s loan portfolio had not been tested through a downturn in the economic cycle. Changes in the credit quality of the Bank s customers and counterparties, or in their behaviour, or arising from systemic risks in the Russian and global financial system, can negatively affect the value of the Bank s assets, and have led to increased write downs and provisions for loan impairment. Factors including increased unemployment in Russia, rising inflation, reduced corporate liquidity and profitability and increased number of corporate insolvencies and inability of individuals to service personal debt can reduce the Bank s customers and market counterparties ability to repay loans. In addition, changes in economic conditions may result in a deterioration in the value of security held against lending exposures and increase the risk of loss in the event of a default by borrowers or counterparties. The Bank s loan loss provisions increased to RUB 17,052.0 million or 9.9 per cent. of the Bank s gross loan portfolio as at 30 June 2009, compared with RUB 12,907.4 million, or 7.6 per cent. of the Bank s gross loan portfolio, as at 31 December 2008 and RUB 5,510.3 million, or 4.6 per cent. of the Bank s gross loan portfolio, as at 31 December Non performing loans amounted to 6.7 per cent. of the Group s total loan portfolio as at 30 June Moreover, a significant portion of the Bank s loan portfolio is devoted to higher risk financial services companies engaged in, among other things, securities trading. The Bank s loans to finance entities accounted for 24.3 per cent. of the Bank s loans and advances to customers as at 30 June 2009 as compared with 22.0 per cent. of the Bank s loans and advances to customers, as at 31 December 2008 and 20.4 per cent. of the Bank s loans and advances to customers, as at 31 December Although the Bank reviewed its risk management strategies and implemented an internal stress testing programme in light of the deteriorating economic conditions, its risk management strategies may not protect it from substantially increased levels of non performing loans in its portfolio. If the Bank s non performing loans increase significantly, this could have a material adverse effect on the Bank s business, financial condition and results of operations. The Bank may not be able to accurately assess credit risk It is difficult for the Bank to accurately assess credit risk. The Bank also cannot accurately predict potential loan impairment or provide assurance that its loan loss impairment and supporting collateral will be adequate in the future. The Bank s corporate clients do not typically have extensive or externally verified credit histories. Moreover, due to lack of frequent and reliable information on borrowers in Russia, the Bank has had to rely on statutory financial statements and public sources of information on its borrowers to evaluate their financial condition and monitor credit quality. Although the Bank requires regular disclosure of its corporate clients financial statements, such financial statements may not always present a complete and accurate picture of each client s financial condition. Therefore, despite the Bank s credit risk evaluation procedures, it may be unable to correctly evaluate the current financial condition of each prospective corporate borrower and to accurately determine the ability of such corporate borrower to repay loans from the Bank. See The absence of centralised credit information may expose the Bank to risks that it may not be able to assess and provide for accurately. 24

33 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Furthermore, the retail lending market in Russia continues to be relatively undeveloped and limited resources are available to Russian banks to ascertain the credit history of individual borrowers. As a result, the financial condition of individuals transacting business with the Bank is difficult to assess and predict. The Bank relies, in part, on real estate as collateral for loans in its portfolio. A sharp downturn in real estate values in its market could leave many of its loans under secured. If the Bank were required to liquidate the collateral to satisfy the debt securing a loan during a period of reduced real estate values, its results of operations could be materially adversely affected. The absence of centralised credit information may expose the Bank to risks In 2005 Russia commenced the implementation of a system of credit bureaus, which are yet to be fully functioning, and does not currently have significant credit history accumulated. Although all banks have access to credit bureau data, the Bank and its competitors do not share customer information. Therefore, the Bank is not always able to confirm independently information provided by credit applicants regarding the total credit extended to the applicant. As a result, customers may be overextended by virtue of other credit obligations of which the Bank is unaware and/or may complete applications for credit inaccurately or fraudulently. The Bank is therefore exposed to credit risks for which it may not be able to accurately assess and provide. A decline in the value of, or illiquidity of, the collateral securing the Bank s loans may adversely affect the Bank s loan portfolio A substantial proportion of the Bank s loans to legal entities and individuals in the Russian Federation is secured by collateral. The market in Russia for many types of collateral, especially real estate, has been severely affected by the recent volatility in global financial markets, resulting in a low level of liquidity for certain types of assets and, accordingly, an increased threat of a decline in the value of collateral securing loans to levels lower than the amounts of outstanding principal and accrued interest on such loans. If collateral values decline, they may not be sufficient to cover uncollectible amounts on the Bank s secured loans. The Group s loan agreements with legal entities usually provide for a right to request additional collateral if the value of the existing collateral declines. Nevertheless, a decline in the value of collateral securing the Bank s loans or its inability to obtain additional collateral may, in some cases, require the Bank to reclassify the relevant loans, establish additional provisions for loan impairment and increase provisions requirements. Also, failure to recover the expected value of collateral in the case of foreclosure may expose the Bank to losses that may adversely affect its business, financial condition, results of operations and prospects. The Bank has a close relationship with the Republic of Tatarstan As at 30 June 2009, 95.8 per cent. of the Bank s share capital was owned either by the Republic of Tatarstan (39.2 per cent.) or by entities owned by persons who are associated with the Republic (56.6 per cent.). The Republic has advised the Bank that, through such holdings, it controls the Bank. In March 2009 the Bank s shareholders approved an increase of the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, which was approved by the CBR in November Circumstances may arise in which the interests of the Bank s shareholders and the interests of the Noteholders may differ, especially with regard to potential transactions involving the Bank and the Republic of Tatarstan (including companies directly or indirectly controlled by it), and the Noteholders may be disadvantaged by the ability of the Bank s shareholders to take actions contrary to the Noteholders interests. The fact that the Republic of Tatarstan is the Bank s most significant shareholder may influence certain credit decisions. Although related party loans are typically on market terms, loans made to the Republic of Tatarstan government bodies and state organisations, to the Bank s affiliates, many of which are also ultimately controlled by the Republic of Tatarstan, and to other parties participating in government programmes may be extended from time to time on non market terms. In 2005, the Russian Government and the CBR issued a joint Strategy of Development of the Banking Sector in the Russian Federation Until 2008 (the 2005 Russian Banking Sector Strategy ), 25

34 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 which included a proposal for the Russian Federation to decrease its participation in the charter capital of credit organisations. The 2005 Russian Banking Sector Strategy has now expired and it has not been replaced. It is not clear whether this strategy would apply to the Bank, as it is not wholly owned by the federal government. Due to the fact that the Russian economy is in a transitional period and due to the instability of the Russian banking sector, the government may continue to retain its share in certain credit organisations. However, a divestiture of all or part of the Republic of Tatarstan s ownership interest in the Bank could have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. If the key ministers in the government were to change or if the government of the Republic of Tatarstan no longer held a controlling stake in the Bank, the Bank s business, financial condition, results of operations or prospects could be materially adversely affected. Additionally, the Republic of Tatarstan s ability to provide support to the Bank might be constrained by the relative size of the local budget and its relative liquidity in light of the ongoing financial downturn. See Related Party Transactions. Relationship with the Republic of Tatarstan may lead to corporate governance issues The ownership structure of AK BARS Bank is complex and not transparent as the Republic of Tatarstan exercises control over the Bank not by directly owning its shares but through agreements with the entities that own the Bank s shares or act as nominal holders of those shares. Corporate governance issues may also arise a result of the Bank being controlled by the Government which increases the chances of the Bank making politically driven rather than business driven decisions. The Bank s business is concentrated in the oil and gas, heavy machinery and petrochemical industries in the Republic of Tatarstan A significant part of the Bank s assets are loans to companies and individuals in the Republic of Tatarstan. Since the Bank s assets and liabilities are still significantly attributable to sources in the Republic of Tatarstan, its business is particularly sensitive to the condition of the Republic of Tatarstan economy. A deterioration in economic conditions in the Republic of Tatarstan may have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. The economy of the Republic of Tatarstan is dominated by the oil and gas, heavy machinery and petrochemical industries. In 2008, the oil and gas industry accounted for a majority of the tax revenue of the Republic of Tatarstan. There are many uncertainties inherent in the oil and gas industry, including estimating proven oil reserves, projecting future rates of production and the timing of future development expenditure. Estimating oil reserves is a subjective process and estimates made by different engineers may vary significantly. Accordingly, estimates of oil reserves may be materially different from the quantities of crude oil that are ultimately recovered and, if recovered, the reserves could be less than, and the costs related thereto could be greater than, estimated figures. In addition, fluctuations in international oil prices could adversely affect the level of the tax revenues and economy of the Republic of Tatarstan. There was a significant decrease in the price of oil following its peak in the summer of 2008, resulting in sharp decreases in government revenues, which in turn has had a significant negative impact on the economy of the Republic of Tatarstan. Oil prices have recovered somewhat in 2009, but still remain well below the highs reached in In addition, oil extraction in the Russian Federation declined by approximately one per cent. year on year in the first quarter of 2008 and there can be no assurance that production will remain at current levels. The reliance of the economy of the Republic of Tatarstan on the industrial sectors referred to above could adversely affect the Republic of Tatarstan if one or more of such sectors experienced a material decline. If a significant number of the Bank s corporate or individual borrowers and/or guarantors experience financial difficulties due to the current downturn in the economy of the Republic of Tatarstan and the Russian economy or volatility in certain sectors of the economy, or if their financial condition deteriorates significantly for any reason, the Bank could suffer material adverse consequences to its business, financial condition, results of operations and prospects. 26

35 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Substantial levels of concentration in the Bank s loan portfolio may affect its operations The concentration in the Bank s loan portfolio remains high. As at 30 June 2009, the aggregate amount of loans issued to the Bank s 23 largest borrowers was RUB 57,903.8 million, or 34 per cent. of the Bank s gross loan portfolio. According to Moody s, as at 31 December 2008, the Bank s exposure to its 20 largest groups of borrowers exceeded 390 per cent. of shareholders equity. Although the Bank has not experienced any defaults by its largest borrowers in the six months ended 30 June 2009 or the years ended 31 December 2008 or 2007, any impairment in the ability of any of the Bank s largest borrowers to service or repay their loans, which prospect has increased significantly in light of the ongoing global financial downturn, could have a material adverse effect on the Bank s financial condition and results of operations. The Bank s loan portfolio also has a relatively high level of industry concentration. As at 30 June 2009, loans to finance, trade and construction companies accounted for 24.3 per cent., 21.5 per cent. and 13.3 per cent., respectively, of the Group s total gross loan portfolio. The current economic downturn has negatively affected the financial condition of the companies operating in such sectors and has resulted, among other things, in defaults on, or a need for increased provisions in respect of, their obligations to the Bank. See The Bank may be unable to effectively manage its loan portfolio, which has not been tested through a downturn in the economic cycle. The CBR imposes a limit on all Russian banks exposure to a single borrower or group of related borrowers of 25 per cent. of such bank s regulatory capital, which must be monitored on a daily basis. See Appendix A Overview of the Banking Sector and Banking Regulation in the Russian Federation Regulation of the Russian banking sector Capital adequacy. As at the date of this Base Prospectus, the Bank is in compliance with the CBR s limit on exposure to a single borrower or a group of related borrowers. However, the Bank s exposure to a single borrower or a group of related borrowers could rise above this limit, either due to a change in the composition of the Bank s loan portfolio or changes in the CBR s limit level or interpretation of how the limit should be calculated. The sanctions for failure to comply with this requirement could include fines, temporary administration of the Bank by the CBR or revocation of the Bank s banking licence. If the Bank exceeded its exposure to a single borrower or a group of related borrowers and the CBR took such steps, the Bank s business, financial condition, results of operations or prospects could be materially adversely affected. Although the Bank continues to take measures to diversify its loan portfolio, there can be no assurance that it will be able to achieve or maintain a greater level of diversification in its loan portfolio. The Bank s failure to do so may have a material adverse effect on its business, financial condition, results of operations or prospects. Concentration of funding sources and liquidity risks exacerbated by the current instability of the global and Russian economies and banking sectors The Bank is also exposed to liquidity risk as a result of possible deposit outflows in light of the global financial crisis. Historically, the Bank s principal source of funds has been customer accounts, which represented 53.0 per cent. of total liabilities as at 30 June 2009 and 45.5 per cent. of total liabilities as at 31 December As at 30 June 2009, customer accounts held by individuals amounted to 25.6 per cent. of total customer accounts while customer accounts of Tatarstan Republic government bodies and state organisations amounted to 32.8 per cent. of total customer accounts. However, Russian companies have significant liquidity requirements, which have been further increased by the lack of liquidity available from financial markets as a result of the global financial crisis. As a result, customers may withdraw their deposits and may not be in a position to place significant funds with the Bank on a long term basis. The Russian Civil Code (the Civil Code ) entitles individuals to withdraw deposits, including term deposits, at any time. As a result, unanticipated decreases in corporate customer deposits and/or unexpected withdrawals of deposits of individuals may result in liquidity gaps that the Bank may not be able to cover. The Bank s high concentration of individual customer accounts renders it particularly vulnerable to individual customer confidence, particularly in light of the current global economic downturn. For instance, in October 2008, the Bank experienced a 13 per cent. outflow in individual customer deposits triggered by the onset of the 27

36 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 financial crisis however, customer deposits recovered and by 31 December 2008, were slightly higher than the level at 31 December The remainder of the Bank s funding is raised in the domestic and international capital, syndicated loan (although the Bank presently has no syndicated loans outstanding) and interbank markets and, accordingly, the Bank s liquidity has been adversely affected by the current lack of liquidity in such markets. The ongoing financial crisis has resulted in, among other things, significantly higher interbank lending rates and extremely limited opportunities for funding in the capital or syndicated markets, making financing more difficult and costly to obtain. Continued uncertainty and tightness in the international financial markets and credit conditions could continue to adversely impact the Bank s business and operating results as a result of decreases in the Bank s net interest income; defaults by affected customers; increases in borrowing costs and reduced access to capital markets due to unfavourable market conditions; and decreases in fee and commission income due to slowing of capital markets activity or significant declines in market values. The Bank also remains highly vulnerable to fluctuations in the liquidity of its customers caused by macroeconomic and political events. Additionally, in 2008 and to date in 2009, a substantial portion of the Bank s funding was provided by the CBR pursuant to Government programmes to provide liquidity in the Russian banking sector, resulting in a change in the Bank s funding mix. Between October and December 2008, the CBR provided the Bank with RUB 28,945.2 million in funding in the form of unsecured loans with annual interest rates of 7.5 per cent. to 12.9 per cent. and for durations ranging from three to six months. The use of more expensive funding sources or failure to recover the expected values of collateral on secured assets may expose the Bank to losses and may have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. If the measures put in place and proposed by the Government fail to ameliorate the Bank s liquidity position, or other sources of short and, in particular, long term funding, including from international capital markets or inter bank lending markets, are not available, the Bank s business, financial condition, results of operations, prospects and liquidity position, as well as the value of the Notes, could be materially adversely affected. Exposure to credit risk of Russian corporations and individuals Many businesses in Russia have considerably less operating experience in competitive market conditions than their Western counterparts. In addition, the Russian economy, as is the case with other economies, has been affected by the global financial and economic crisis. Accordingly, the financial performance of Russian companies is generally more volatile, and the credit quality of Russian companies has been less predictable, than similar companies doing business in more mature markets and economies. Furthermore, a relatively high proportion of Russian companies are largely dependent upon the oil and natural gas industry and other commodity related sectors, most of which have been adversely affected by the global financial and economic crisis. If the Bank s clients were to experience poor financial performance due to the current downturn in the Russian economy generally or volatility in certain sectors of Russian economy, this could have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. Competition in the financial services market in Russia The Russian market for financial services is highly competitive, with 1,083 banks and non banking credit organisations (including Russian banks and Russian subsidiaries of foreign banks) operating in Russia as at 30 June 2009 according to the CBR. In the corporate banking market, the Bank principally competes with a number of other national and regional banks, some of which have a broader geographic reach, more branches and greater capital resources than the Bank. In particular, many of the banks headquartered in Moscow are already exploiting their competitive advantages and brand recognition in regional markets. The Bank expects competition to increase in both deposit taking and lending activities, which could narrow spreads between deposit and loan rates, and have an adverse impact on the Bank s profitability. 28

37 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 In addition, in the retail banking market, in common with other Russian retail banks, the Bank competes with Sberbank that remains by far the largest retail bank in Russia measured by retail deposits and the number of branches. According to the information on Sberbank s website, as at 1 June 2009, Sberbank held more than 50 per cent. of total deposits in the Russian Federation. Outside of the Republic of Tatarstan, the Bank also competes with the subsidiaries of international banks and other major Russian banks, such as Rosbank, Russian Standard Bank, UralSib and Bank of Moscow, in the retail lending sector of the retail banking market. If the Bank is unable to continue to compete successfully in the corporate or retail banking sectors it could have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. Recent expansion of the Bank s operations expose it to increased credit risk Until 2008, the Bank experienced significant growth, particularly in the size of its overall loan portfolio, which increased by 36.4 per cent. (net of allowance for loan losses) from RUB 114,284.6 million as at 31 December 2007 to RUB 155,928.3 million as at 31 December 2008, and in the size of its branch network. However, the Bank s overall loan portfolio (net of allowance for loan losses) had decreased marginally as at 30 June 2009 to RUB 154,385.9 million, reflecting the Bank s decision in the fourth quarter of 2008 to curtail lending, coupled with an increase in loan impairment provisioning in light of the global financial downturn. As a result of the Bank s recent growth, the Bank s credit exposure has increased significantly, which has required continued and improved monitoring by management of credit quality and the adequacy of the Bank s provisioning levels, both of which have been adversely affected by the current financial downturn. See Risk Management. In particular, the growth of the Bank s lending to small and medium sized corporate customers and to retail customers has resulted in a higher level of impaired loans in light of the ongoing economic downturn, and, as a result, higher levels of provisioning, as retail customers are more likely to default on their loans. Continued growth of the Bank s loan portfolio could put additional pressure on the Bank s loan monitoring and control procedures. See The Bank may be unable to effectively manage its loan portfolio, which has not been tested through a downturn in the economic cycle. IT systems may be insufficient adequately to support the Bank s operations and the Bank has no offsite back up systems The Bank s financial performance, its ability to meet its strategic objectives and its ability to manage risks arising out of the current market environment and to manage the future growth of its branch and office network depend and will continue to depend to a significant extent upon the functionality of its information technology ( IT ) and its ability to increase systems capacity and functionality. Although the Bank does have back up systems, they are located in the same building as the head office. A disruption (even short term) to the functionality of the Bank s IT systems, or delays in increasing the capacity of the IT systems, would have a material adverse effect on the business, financial condition, results of operations and prospects of the Bank. Although the Bank has been upgrading its IT systems for a number of years, these systems are currently significantly less developed in certain respects than those of banks in more developed countries. Currently, Naratbank, the banking subsidiary of the Bank, has a separate IT system outside the Republic of Tatarstan, which is managed largely on an independent basis. In respect of operations in the Republic of Tatarstan, IT systems are centralised and maintained from the head office. See Business Strategy Improving technology. Lack of immediately available consolidated financial and operating data may hinder the ability of the Bank s management to make decisions, to react promptly to changes in market conditions and to detect fraud and non compliance with internal procedures. In addition, insufficient integration of the IT system increases the Bank s operational risks and the costs of further business development. The inability of the Bank s current IT systems to adequately support its operations may have a material adverse effect on its ability to monitor and manage its operations. 29

38 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 The Bank is required to comply with the Deposit(s) Insurance Law The Federal Law No. 177-FZ On Insuring Individuals Deposits in the Banks of the Russian Federation dated 23 December 2003, as amended (the Deposit(s) Insurance Law ) introduced rules regulating the insurance of individuals deposits placed with Russian banks. Russian retail banks are required to satisfy certain qualification tests to be able to participate in the deposits insurance system and, more generally, to attract individuals deposits. In November 2004, the Bank s application to participate in the deposits insurance system was approved by the CBR. As a member of the deposit insurance system, the Bank is required to comply with the relevant requirements on an on going basis. Should the Bank fail to comply with these requirements (including liquidity and financial reporting requirements), it would cease to be eligible to participate in the system and would as a result be precluded by the CBR from attracting deposits from, and opening accounts for, individuals. See Appendix A Overview of the Banking Sector and Banking Regulation in the Russian Federation. Although the implementation of a mandatory system of insuring deposits of individual customers may have the benefit of giving depositors more comfort that their money will be protected against default or a further banking crisis, the deposits insurance premiums may negatively impact net interest margins if the volume of additional deposits gained does not offset the additional expense of such premiums. The Bank is exposed to interest rate risk The Bank s revenues are dominated by net interest income and, accordingly, are highly sensitive to fluctuations in interest rates charged to its borrowers and interest expenses that it incurs vis à vis its customers. The Bank is exposed to interest rate risk principally as a result of lending and making advances to customers and other banks at fixed interest rates and in amounts and for periods which may differ from the Bank s funding sources (customer accounts, bank borrowings and securities offerings). While the Bank monitors interest rates with respect to its assets and liabilities and seeks to match its interest rate positions, the Bank is unable to predict changes in market interest rates, which are affected by many factors outside of its control, including inflation, money supply, domestic and international events and changes in Russian and global financial markets. Interest rate movements may adversely affect the Bank s business, financial condition, results of operations and prospects. Fluctuations in interest rates could adversely affect the Bank s operations and financial condition in a number of different ways. An increase in interest rates generally may decrease the value of the Bank s fixed rate loans and raise the Bank s funding costs. Such an increase could also generally decrease the value of fixed rate debt securities in the Bank s securities portfolio. In addition, an increase in interest rates may reduce overall demand for new loans and increase the risk of customer default, while general volatility in interest rates may result in a gap between the Bank s interest rate sensitive assets and liabilities. As a result, the Bank may incur additional costs and expose itself to other risks by adjusting such asset and liability positions through the use of derivative instruments. Interest rates are sensitive to many factors beyond the Bank s control, including the policies of central banks, including the CBR, domestic and international economic conditions and political factors. There can be no assurance that the Bank will be able to protect itself from the adverse effects of future interest rate fluctuations. Any fluctuations in market interest rates could lead to a reduction in net interest income and adversely affect the Bank s financial condition and results of operations. See Risk Management Market risk Interest rate risk. Mismatches in foreign currencies may expose the Bank to exchange rate risk The Bank aims to diversify its funding sources by accessing the domestic and international fixed income capital markets with a number of domestic promissory notes, international loan participation notes issues and by obtaining syndicated loans. A portion of this debt is denominated in U.S. dollars, and the Bank therefore maintains mismatches between the currency of its liabilities and the currency of its assets. These mismatches expose the Bank to exchange rate risk, which risk has increased significantly in light of the rouble s recent volatility against the U.S. dollar as a result of the global financial crisis. Upon a depreciation of the rouble against foreign currencies, the Bank becomes subject to higher interest payments on its foreign currency denominated liabilities when calculated in rouble terms. It is estimated that a 25 per cent. 30

39 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 appreciation of the U.S. dollar against the rouble in 2008 would have reduced the Bank s profit for the year ended 31 December 2008 by RUB million and, similarly, a 25 per cent. depreciation of the U.S. dollar against the rouble would have increased the Bank s profit by the same amount. As a result of the depreciation of the rouble against the U.S. dollar since the fourth quarter of 2008, the Bank has endured an increased burden as a result of its U.S. dollar denominated corporate debt which has mitigated as a result of appreciation of the rouble in The rouble has depreciated steadily against the U.S. dollar since October 2008, due in part to the recent significant fall in prices of oil and commodities that are the principal generators of Russia s export earnings. The rouble to U.S. dollar exchange rate rose above RUB 36 to U.S.$1.00 in February However, in January 2009, the CBR set the upper limit of the rouble s trading band against the U.S. dollar/euro basket at RUB 41 in order to help stabilise Russia s balance of foreign debt payments against its current reserves and to prevent a further decline of the rouble against the U.S. dollar. Although the Bank endeavours to manage this risk, there is no guarantee that it will be successful in avoiding the effects of exchange rate fluctuations. See Risks relating to the Russian Federation Economic Risks Exchange rates, exchange controls and repatriation restrictions could adversely affect the value of investments in the Russian Federation and Risk Management Market risk Currency risk. Significant off balance sheet credit related commitments may lead to potential losses As part of its business, the Bank issues guarantees and letters of credit. As at 31 December 2008, the Bank had issued guarantees amounting to RUB 8,629.1 million and import letters of credit amounting to RUB 1,578.1 million. As at that date, the Bank also had undrawn credit lines and commitments to extend credit amounting to RUB 13,164.1 million. As at 30 June 2009, the Bank had issued guarantees amounting to RUB 13,408.5 million and import letters of credit amounting to RUB million. As at that date, the Bank also had undrawn credit lines and commitments to extend credit amounting to RUB 6,896.2 million. All such credit related commitments are classified as off balance sheet items in the Bank s consolidated financial statements. Although the Bank has established allowances for its off balance sheet credit related commitments, there can be no assurance that these allowances will be sufficient to cover the actual losses that the Bank may potentially incur on its credit related commitments, particularly in light of current economic conditions. See Management s Discussion and Analysis of Financial Condition and Results of Operations Off balance sheet arrangements and Risk Management Credit risk. The Bank is sensitive to fluctuations in the market prices of the securities in its portfolio The Bank s financial condition and operating results are affected by changes in market values in the Bank s securities portfolio. The Group trades various financial instruments and other assets, including debt, equity, currency and related derivatives as both agent and principal. In recent years, the Bank has expanded the percentage of its non governmental securities in its proprietary portfolio. As at 30 June 2009, the Group s securities portfolio amounted to RUB 13,265.3 million, or 6.4 per cent. of its total assets, as compared to RUB 8,184.3, or 4.0 per cent. of its total assets, as at 31 December 2008 and RUB 6,737.3 million, or 4.2 per cent. of its total assets, as at 31 December The Bank is exposed to a number of risks related to the movement of market prices in the underlying instruments, including the risk of unfavourable market price movements relative to its long or short positions, a decline in the market liquidity of the related instruments, volatility in market prices, interest rates or foreign currency exchange rates relating to these positions and the risk that instruments the Bank chooses to hedge certain positions do not track the market value of those positions. The global financial crisis had a very significant adverse effect on the Russian stock market. As of October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008, although as of October 2009, it had recovered about per cent. from its lowest level. The prices of fixed income securities of Russian issuers also experienced major declines starting in the third quarter of As of October 2008, the IFX CBonds bond index had declined about 13.8 per cent. from its highest levels, reached in June 2008, although as of October 2009, it had recovered about 30.8 per cent. from its lowest level. For the year ended 31 December 2008, the Bank incurred a loss on securities at fair value of RUB 7,011.3 million, as compared to experiencing a gain for the year ended 31 December 2007 of RUB million, largely as a result of the significant market declines in the second half of However, the Bank s securities portfolio has recovered 31

40 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 somewhat in the first half of 2009, during which period the Bank experienced a gain on securities at fair value of RUB 2,196.5 million. If the Bank incurs substantial losses from these exposures, it could suffer losses, which could materially and adversely affect its business, financial condition, results of operations and prospects. See Risk Management Market risk Securities portfolio risks. The Bank is dependant on management and key personnel The Bank is dependent on its senior management for the implementation of its strategy and the management of its day to day activities. In addition, certain business relationships of members of senior management may be important to the conduct of the Bank s business. There can be no assurance that key members of senior management will remain at the Bank or that such business relationships will continue. The Bank s key employees may leave the Bank, which could disrupt the Bank s ability to successfully implement its strategy. The Bank is exposed to risks in relation to enforcement of security and/or guarantees under Russian law The Bank enters into security, suretyship or other third party credit support arrangements for loans made to individuals and legal entities in the context of its corporate lending and project financing procedures. See Lending policies and procedures Collateral. Under Russian law, security in the form of pledges, mortgages and suretyship is considered as secondary obligation, which automatically terminates if the secured obligation becomes void. A mortgage under Russian law is a pledge over real property such as land and buildings, and requires state registration to be valid. Such state registration may be difficult to obtain. Russian law has no pledge perfection system for collateral other than mortgages, which may lead to unexpected and/or conflicting claims of secured creditors upon the pledged property. In January 2009, a series of laws came into force significantly amending the rights of secured creditors under Russian law. The area that is most affected by these amendments concerns the rights related to enforcement of the security. The amendments: (a) confirmed the availability of an out of court enforcement procedure for pledges of movable property; (b) extended the right to use an out of court procedure to mortgages; and (c) provided a mechanism for securing compliance with the out of court enforcement procedure. The amendments also removed the requirement that the pledged property has to be sold at a public auction in all cases. Instead, the Civil Code now explicitly states that claims of a creditor secured by a pledge over property can be satisfied by the transfer of ownership in the pledged property to the secured creditor except where the mortgaged property is land. This is a fundamental development of the pledge concept under Russian law and creates a more creditor friendly enforcement mechanism. However, these provisions are new and still have not been tested in practice, therefore, there is no assurance that the above procedures will work as predicted. Thus, the Bank may have difficulty foreclosing on collateral or enforcing suretyships or other third party credit support arrangements when clients default on their loans. A failure to recover the expected value of collateral may expose the Bank to losses, which may materially adversely affect the Bank s business, financial position, results of operations and prospects. A substantial portion of the Bank s loans to its corporate and retail customers is secured with suretyship by individuals and other corporate customers. In addition, a substantial portion of the Bank s loans to corporate customers is assured by the borrower s agreement that a certain volume of its cash receivables will flow through accounts over which the Bank has direct debit rights. However, if the surety s financial condition deteriorates or if the borrower does not honour an assurance arrangement, the Bank may not be able to recover on suretyship or assurance arrangements which may lead to losses, materially adversely affecting its financial condition and results of operations. The Bank is required to maintain its licences in order to carry on business As in most Western jurisdictions, banking and related operations in Russia require licences from the CBR and other regulators. The Bank has obtained the licences required for its banking operations. Although the Bank has been successful in obtaining the CBR licences, there is no assurance that it will be able to obtain or (as applicable) maintain such licences in the future. The CBR may, in its discretion, impose additional 32

41 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 requirements or deny any request by the Bank for licences, which could adversely affect its business, financial condition, results of operations or prospects. In October 1998, the Bank s broker licence was revoked and subsequently reinstated without any fines or penalties. The loss of a CBR licence, a breach of the terms of a CBR licence by the Bank or its failure to obtain CBR licences in the future could result in the Bank being unable to continue some or all of its banking activities and in penalties such as fines imposed by the CBR on the Bank. Any such failures could, in turn, have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. The Bank may have insufficient insurance coverage The Bank currently does not insure its buildings, building contents or information systems. Accordingly, any event which would normally be covered as an insurable risk such as fire, theft, systems failure or other operational risk would expose the Bank to loss, which could, if significant, materially affect its business, financial condition, results of operations or prospects. The significant expansion of the Bank s branch network and consequent acquisition of, and investment in, new premises, combined with its increasing reliance on financial and information management control systems means that the Bank s exposure to such risks will increase significantly in the near future. In these circumstances, its inability to mitigate such risks through insurance could materially impact fulfilment of the Bank s strategy of branch network expansion and technological development. The Bank may fail to comply with applicable legal requirements The Bank has taken, at different times, a variety of actions relating to share issuances, share disposals and acquisitions, valuations of property, interested party transactions, major transactions, antimonopoly issues and other corporate matters that, if successfully challenged on the basis of non compliance with applicable legal requirements by competent state authorities, counterparties in such transactions or the Bank s shareholders, could result in the invalidation of such transactions or the imposition of other liabilities. As applicable provisions of Russian law are sometimes subject to inconsistent interpretations and application, there can be no assurance that the Bank would be able to successfully defend itself against any challenge brought against such transactions or corporate decisions, and the invalidation of any such transactions or decisions or the imposition of any such liability may, individually or in the aggregate, have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. In addition, regulatory authorities have the right to conduct periodic inspections of the Bank s operations and properties. Any such future inspections may determine that the Bank violated laws, decrees or regulations, and the Bank may be unable to refute such determination or remedy the violations. The Bank s failure to comply with existing or future laws and regulations, the terms and conditions of its licences and permits or the findings of governmental inspections may result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of the Bank s licences, permits, approvals and authorisations, or in requirements that the Bank cease certain of its business activities, or in criminal and administrative penalties applicable to its officers. Any such decisions, requirements or sanctions, or any increase in governmental regulation of the Bank s operations, could increase its costs and materially adversely affect its business, financial condition, results of operations and prospects. The Bank s employees may not adhere to compliance procedures The Bank runs the risk that its employees will not adhere to its compliance procedures and limits on risk related activities. The Bank takes various precautions to prevent and detect misconduct; however, these may not be effective in all cases. Misconduct by existing employees could include binding the Bank to transactions that exceed authorised limits or present unacceptable risks, or concealing unauthorised or unsuccessful activities, which, in either case, may result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use or disclosure of confidential information that could result in regulatory and legal sanctions and significant reputational or financial harm which could have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. 33

42 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 The Bank s banking business entails operational and fraud risks In common with other commercial banking groups, the Bank s business activities require accurate recording and processing of a very large number of transactions on a daily basis. The Bank s recording and processing of transactions are potentially subject to human and technological errors or a breakdown in its internal processes or systems controls relating to the due authorisation of transactions, either centrally or within the branch network. Given the Bank s high volume of transactions, errors may be repeated or compounded before they are discovered and rectified. Any failure or delay in recording or processing of transactions, or other material breakdown in internal controls, could subject the Bank to claims for losses and regulatory fines and penalties. If the Bank suffers reputational or financial harm, this could have a material adverse effect on its business, financial conditions, results of operations and prospects. The Bank maintains a system of controls designed to keep operational risk at appropriate levels. See Risk Management Operational risk. However, there can be no assurance that the Bank will not suffer losses from any failure of these controls to detect or contain operational risk in the future. Consequently, the inadequacy or a failure of the Bank s internal processes or systems may result in unauthorised transactions and errors which may not be detected. The Bank s insurance may not cover the Bank s losses from such transactions or errors, which may have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. The Bank has identified two cases involving fraudulent activity by employees during the period from 2006 to The activity related primarily to the areas of loan issue and customer accounts. The amounts were not significant to the Bank s overall operations and/or financial condition. The Bank has since revised its policies and procedures prevent fraud and money laundering activity and taken administrative and disciplinary actions in relation to staff involved in activity in breach of the Bank s policies. The Bank has also developed a number of internal reports and procedures to prevent or detect fraud events. Furthermore the Bank created a list of operations which are under tight monitoring and control within the Group, including operations with cash and transactions with deposits of clients. In addition, while the Bank has implemented comprehensive measures in accordance with applicable Russian legislation aimed at preventing the use of the Bank as a vehicle for money laundering and/or terrorist financing, there can be no assurance that attempts to launder money or finance terrorist activities through the Bank will not be made or that its anti money laundering and anti terrorist financing measures will be completely effective. If the Bank were associated with money laundering and/or terrorist financing, the Bank s reputation and financial performance could be materially adversely affected. The Bank is a highly regulated entity Regulatory authorities in Russia exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, permits, approvals and authorisations. The Bank is subject to strict regulation in the Russian Federation by governmental organisations, particularly the CBR. The requirements, including capital adequacy requirements, imposed by its regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties with whom the Bank deals. These requirements are not designed to protect holders of the Notes and may limit the Bank s activities and increase its costs of doing business. A breach of regulatory guidelines could expose the Bank to potential liability and other sanctions, including the loss of its general banking licence. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities and the regulatory structure governing the Bank s operations is continuously evolving. Existing laws and regulations could be amended, the manner in which laws and regulations are enforced or interpreted could change and new laws or regulations could be adopted. If the existing interpretation of the regulations changed or future regulations were imposed on the Bank, it could have an adverse effect on its business, financial condition, results of operations and prospects. 34

43 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 The Bank enters into transactions with interested parties or affiliated companies Russian law requires a joint stock company such as the Bank that enters into transactions with certain related persons that are referred to as interested party transactions to comply with special approval procedures. Under Russian law, an interested party means: (i) any member of the board of directors or the collegiate executive body of the company, (ii) the chief executive officer of the company (including managing organisation or hired manager), (iii) any person who, together with its affiliates, owns at least 20 per cent. of the company s voting shares or (iv) a person who on legal grounds has the right to give binding instructions to the company, if any of the above listed persons, or a close relative or affiliate of such person, is, in each case: a party to a transaction with the company, whether directly or as a representative or intermediary, or a beneficiary of the transaction; the owner of at least 20 per cent. of the shares in the company that is a party to a transaction with the company, whether directly or as a representative or intermediary, or a beneficiary of the transaction; the member of the Board of Directors or an officer of a company that is party to a transaction with the company, whether directly or as a representative or intermediary, or a beneficiary of the transaction or an officer of the manager organisation of such company; or in other cases stipulated by law or the company s charter. Under applicable Russian law, interested party transactions are required to be approved by a majority of the disinterested directors of the Bank or, where (i) all the directors are interested, (ii) the value of the transaction is equal to or exceeds 2 per cent. of the Bank s assets as determined under Russian accounting regulations according to its latest balance sheet, or (iii) in case of certain share placements, by a majority vote of the disinterested shareholders. Not having obtained the appropriate approval for a transaction may result in it being declared invalid upon a claim by the Bank or any of its shareholders. The Bank owns less than 100 per cent. of the equity interests in some of its subsidiaries. In addition, certain of its wholly owned subsidiaries have had other shareholders in the past. The Bank and its subsidiaries in the past have carried out, and continue to carry out, transactions with the Bank and others which may be considered to be interested party transactions under Russian law, requiring approval as described above. The provisions of Russian law defining which transactions must be approved as interested party transactions are subject to different interpretations. No assurance can be given that the Bank s and its subsidiaries application of these concepts will not be subject to challenge by former and current shareholders. Any such challenges, if successful, could result in the invalidation of transactions, which could have a material adverse effect on the Bank s business, financial condition, results of operations and prospects. Risks relating to the Russian Federation The Bank is a Russian credit institution and substantially all of its assets are located in the Russian Federation. Set out below is a description of some of the risks relevant to an investment linked to a business operating in the Russian Federation. Emerging markets such as Russia are subject to greater risks than more developed markets, and financial turmoil in any emerging market could have an adverse effect on the value of investments in Russia Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved in, and are familiar with, investing in emerging markets. It should also be noted that emerging markets such as Russia are subject to rapid change and that the information set out in this Base Prospectus may become outdated within a relatively short period. Moreover, financial turmoil in any emerging market country tends to adversely affect prices in stocks and prices for debt 35

44 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 securities for all emerging markets as investors move their money to more stable, developed markets. The Russian markets have been highly volatile during the global financial crisis beginning in Such volatility has caused market regulators to temporarily suspend trading on the MICEX and RTS stock exchanges multiple times beginning in September The MICEX and RTS stock exchanges have experienced significant overall declines since the beginning of the financial crisis in As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and adversely affect the Russian economy. Companies that operate in emerging or developing markets can face severe liquidity constraints as foreign funding sources are withdrawn as a result of this. Additionally, the availability of credit to entities operating within the emerging markets is significantly influenced by levels of investor confidence in such markets as a whole and so any factors that impact market confidence (for example, a decrease in credit ratings or state or central bank intervention in one market) could affect the price or availability of funding for entities within any of these markets. Financial turmoil in any emerging or developing market country could adversely affect the Bank s business, as well as result in a decrease in the price of the Notes. Political Risks Political and Governmental instability could adversely affect the value of investments in Russia and the value of the Notes Since 1991, Russia has sought to transform itself from a state with a centrally planned economy to a market oriented economy. Political conditions in the Russian Federation were highly volatile in the 1990s, as evidenced by the frequent conflicts amongst executive, legislative and judicial authorities, which negatively impacted Russia s business and investment climate. Former President Vladimir Putin generally increased governmental stability and continued the economic reform process, which made the political and economic situation in Russia more conducive to investment. The most recent State Duma elections, held in December 2007, and Moscow city Duma elections, held in October 2009, resulted in a further increase in the share of the aggregate vote received by the pro presidential party, United Russia, mainly due to the influence of Vladimir Putin. In March 2008, presidential elections were held in the Russian Federation, which resulted in Dmitry Medvedev being elected the President of the Russian Federation. In May 2008, Dmitry Medvedev appointed Vladimir Putin to the position of Prime Minister of the Russian Federation. While the Russian political system and the relationship between the President, the Russian Government and the Russian parliament currently appear to be stable, the potential for political instability resulting from the worsening economic situation in Russia and deteriorating standards of living should not be underestimated. Any such instability could negatively affect the economic and political environment, particularly in the short-term. Conflict between federal and regional authorities and other conflicts could create an uncertain operating environment that would hinder the Bank s long term planning ability and could adversely affect the value of investments in Russia, including the value of the Notes The Russian Federation is a federation of 83 subjects, which include 21 republics, nine provinces, 46 regions, one autonomous region, four autonomous districts and two cities of federal significance, Moscow and St. Petersburg, some of which have the right to manage their internal affairs pursuant to agreements with the federal government and in accordance with federal laws. In practice, the division of authority between federal and regional authorities remains uncertain and contested. Lack of consensus between the federal government and local or regional authorities often results in the enactment of conflicting legislation at various levels and may lead to further political instability. In particular, conflicting laws have been enacted in the areas of privatisation and licensing. Some of these laws and governmental and administrative decisions implementing them, as well as certain transactions consummated pursuant to them, have in the past been challenged in the Russian courts, and such challenges may occur in the future. This uncertainty could hinder the Bank s long term planning efforts and may create uncertainties in its operating environment, any of which may prevent it from effectively and efficiently carrying out its business strategy. However, the recent amendments to Russian legislation whereby heads of regions are nominated by the President of the Russian Federation and appointed by regional legislatures (instead of direct election by the population) are designed 36

45 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 to minimise conflict between federal and regional authorities and secure stability across the Russian Federation. In addition, ethnic, religious, historical and other divisions have, on occasion, given rise to tension and, in certain cases, military conflict and terrorist attacks in certain regions of Russia. Violence and attacks relating to regional conflicts have spread to other parts of Russia. Russian military and paramilitary forces have been engaged in the Chechen Republic in the recent past and continue to maintain a visible presence there. Moreover, in August 2008, Russia and Georgia were involved in an armed conflict. The conflict ended with Russian recognition of the independence of South Ossetia and Abkhazia. Russian stock exchanges experienced heightened volatility, significant overall price declines and capital outflow following these events. The further intensification of violence, including terrorist attacks and suicide bombings, or its continued spread to other parts of Russia, could have significant political consequences, including the imposition of a state of emergency in some or all regions of Russia and thus could adversely affect the Bank s business, financial condition, results of operations and prospects. Terrorist activity could adversely affect the Russian economy and the Bank s business Terrorist activity inside and outside Russia and the armed conflicts in the Middle East have had a significant effect on the international and domestic financial and commodity markets. Any future acts of terrorism or armed conflicts in the Russian Federation or internationally could have an adverse effect on the financial and commodities markets and the global economy. As the Russian Federation produces and exports large amounts of crude oil and gas, any acts of terrorism or armed conflicts causing disruptions of Russian oil and gas exports could negatively affect the Russian economy and, therefore, adversely affect the Bank s business, financial condition, results of operations or prospects. Arbitrary, selective or unlawful state action could have a material adverse effect on the Bank s business State authorities have a high degree of discretion in Russia and at times exercise their discretion arbitrarily, without conducting a hearing or giving prior notice, and sometimes in a manner that is contrary to law. Moreover, the state also has the power in certain circumstances, by regulation or act, to interfere with the performance of, nullify or terminate contracts. Unlawful or arbitrary state actions have included withdrawal of licences, sudden and unexpected tax audits, criminal prosecutions and civil actions. In the past, Russian authorities have prosecuted some Russian companies, their senior managers and their shareholders on tax evasion and related charges, in some cases for allegedly political reasons. Federal and local government entities have also used common defects in matters surrounding the documentation of financing activities as pretexts for court claims and other demands to invalidate such activities and/or to void transactions, often for political purposes. Standard & Poor s, a provider of independent credit ratings, has expressed concerns that Russian companies and their investors can be subject to government pressure through selective implementation of regulations and legislation that is either politically motivated or triggered by competing business groups. Such state action, unlawful or arbitrary, if directed at the Bank, could have a material adverse effect on its business, financial condition, results of operations or prospects. Economic Risks The continuation of turmoil in global credit markets may continue to adversely affect Russia s economy The credit markets, both globally and in Russia, have faced significant volatility and liquidity constraints since the summer of Global credit markets tightened initially as a result of concerns over the United States sub prime mortgages crisis and the valuation and liquidity of mortgage backed securities and other financial instruments, such as asset backed commercial paper. Significant mark to market write downs of asset values followed, initially in respect of mortgage backed securities, but such write downs then spread to other financial instruments, such as syndicated loans, and other classes of assets. These write downs have caused many financial institutions to seek additional capital, to merge with larger and stronger financial institutions and, in some cases, to fail, such as in the case of the U.S. investment bank Lehman 37

46 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Brothers. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. In response to the financial crisis affecting the global banking sector and financial markets and the threats to the ability of investment banks and other financial institutions to continue as going concerns, governments in the United States, in many of the largest countries in Europe and elsewhere have announced, and in many cases introduced, significant rescue packages, which include, among other things, the recapitalisation of banks through state purchases of common and preferred equity securities, the state guarantee of certain forms of bank debt, the purchase of distressed assets from banks and other financial institutions by the state and the provision of guarantees of distressed assets held by banks and other financial institutions by the state. Despite these measures, the volatility and market disruption in the global banking sector has continued. It is difficult to estimate what impact these measures will have on the financial markets, or whether further measures will be required in addition to those already implemented or announced. There can be no assurance that such measures will succeed in returning stability to the global banking sector and financial markets in the short term or beyond. The continuation of turmoil in global credit markets may continue to adversely affect Russia s economy. Economic instability in Russia could adversely affect the Bank s business Since the dissolution of the former Soviet Union in the early 1990s, Russia s society and economy have been undergoing a rapid transformation from a one party state with a centrally planned economy to a more democratic society with a market oriented economy. This transformation has been marked by periods of significant instability and the Russian economy has experienced at various times: significant declines in gross domestic product; hyperinflation; an unstable currency; high levels of state debt relative to gross domestic product; a weak banking system providing limited liquidity to Russian enterprises; large numbers of loss making enterprises that continued to operate due to the lack of effective bankruptcy proceedings; significant use of barter transactions and illiquid promissory notes to settle commercial transactions; widespread tax evasion; the growth of a black and grey market economies; pervasive capital outflows; high levels of corruption and the penetration of organised crime into the economy; significant increases in unemployment; and the impoverishment of a large portion of the Russian population. The Russian economy has been subject to abrupt downturns. In particular, the Russian Government s decision temporarily to stop supporting the rouble in August 1998 caused the currency to collapse. At the same time, the state defaulted on much of its short term domestic debt and imposed a 90 day moratorium on foreign debt and other payments by Russian companies. These actions resulted in an immediate and severe devaluation of the rouble, a near collapse of the Russian banking system, a sharp increase in the rate of inflation, a dramatic decline in the prices of Russian debt and equity securities and an inability of Russian issuers to raise funds in the international capital markets. 38

47 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 In 2004, several Russian banks experienced a sharp reduction in liquidity, and the licenses of certain of them were withdrawn. The resulting uncertainty in the Russian banking system led to the virtual collapse of the interbank lending market and to liquidity pressures for many Russian banks. The collapse of a number of Russian banks caused panic among depositors, and even reliable, larger banks experienced depositor withdrawals. In addition, Russia s financial market suffered a severe decline due to the global financial crisis in As Russia produces and exports large quantities of crude oil, natural gas and other commodities, the Russian economy is particularly vulnerable to fluctuations in the prices of crude oil, natural gas and other commodities on the world market, which reached record high levels in the first half of 2008 and have since experienced significant decreases, particularly in the price of crude oil which decreased by approximately 70 per cent. in the second half of Russian banks and the Russian economy generally, have been adversely affected by the global financial turmoil beginning in the second half of The Russian economy has recently been characterised by extreme volatility in debt and equity markets, reductions in foreign investment and sharp decreases in gross domestic product. In light of these recent developments, international rating agencies have downgraded Russia s sovereign credit rating, which reflects an assessment by such agencies that there is an increased credit risk that the Russian Government may default on its obligations. These assessments may lead to a further reduction in foreign investment and an increased cost of borrowing for the Russian Government. In late 2008, the Russian Government announced plans to institute more than U.S.$200 billion in emergency financial assistance measures in order to ease taxes, refinance foreign debt and encourage lending. Since the advent of the global financial crisis, the Russian Government has made approximately U.S.$75 billion available to the banking sector (by providing funds to financial institutions and directly to certain borrowers in the manufacturing and resource sector) in an effort to stimulate new lending and keep financial institutions afloat. Although lately, Russia s financial markets, the stock market and the rouble have shown signs of improvement, there can be no assurance that these or other measures will result in a short term recovery of the Russian economy. The positive trends in the Russian economy in recent years, such as increases in gross domestic product, a relatively stable currency and a reduced level of inflation, have begun to reverse as a consequence of the current global financial and economic crisis. Moreover, due to the Russian economy s reliance on revenue from oil and other commodities, there have been reductions in state spending and a reduction in the state budget revenues and expenditures as a result of the decrease in oil prices and prices of other commodities, which, along with other factors, have contributed to a significant devaluation of the rouble against the U.S. dollar and euro in the second half of 2008 and the beginning of Such devaluation of the rouble against the major currencies has had an adverse effect on the Russian economy and the Bank s business, financial condition, results of operations and prospects. Impact of fluctuations in the global or Russian economies Russia s economy could be adversely affected by market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems outside the Russian Federation or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and adversely affect the Russian economy. Additionally, because the Russian Federation produces and exports large volumes of oil and gas, the Russian economy is particularly sensitive to the price of oil and gas on the world market. There has been a dramatic decrease in the price of oil since it reached its peak in the summer of 2008, resulting in sharp decreases in the Russian Government revenues, which in turn has had a significant negative impact on the Russian economy. These developments, as well as adverse changes arising from systemic risks in global financial systems, including any tightening of the credit environment, decline in the oil and gas prices could slow or disrupt the Russian economy, severely limit the Bank s access to capital and could adversely affect the Bank s business, financial condition, results of operations or prospects. 39

48 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Russian physical infrastructure Russia s physical infrastructure is generally in poor condition, which could disrupt normal business activity. Russia s physical infrastructure largely dates back to Soviet times and has not been adequately funded and maintained over the past decade. Particularly affected are pipeline, rail and road networks, power generation and transmission, and communication systems. Furthermore, electricity and heating shortages in some regions of Russia have seriously disrupted the local economies. In May 2005, an electricity blackout affected much of Moscow and some other regions in the central part of Russia for one day, disrupting normal business activity. Other parts of the country face similar problems. Some areas within Russia, particularly those surrounding ageing nuclear power plants, are potentially hazardous. The Russian Government is actively considering plans to reorganise the nation s rail, electricity and telephone systems. Any such reorganisation may result in increased charges and tariffs while failing to generate the anticipated capital investment needed to repair, maintain and improve these systems. The continued deterioration of Russia s physical infrastructure may harm the national economy, disrupt the transportation of goods and supplies, add costs to doing business in the Russian Federation and interrupt business operations, any of which could have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. If the Russian Federation were to return to heavy and sustained inflation, the Bank s results of operations could be adversely affected According to the Russian Government estimates, the inflation rate (CPI) in the Russian Federation was approximately 19 per cent. in 2001, 15 per cent. in 2002, 13 per cent. in 2003, 12 per cent. in 2004, 11 per cent. in 2005, 9 per cent. in 2006, 11.9 per cent. in 2007, 13.3 per cent. in 2008 and 8.1 per cent. in the third quarter of Any return to heavy and sustained inflation could lead to market instability, new financial crises, reductions in consumer purchasing power and erosion of consumer confidence. Any one of these events could lead to decreased demand for the Bank s products and services. Exchange rates, exchange controls and repatriation restrictions could adversely affect the value of investments in the Russian Federation While the rouble appreciated against the U.S. dollar in real terms each year during the 2001 to 2007 period, it has experienced significant depreciation against the U.S. dollar in 2008 and in the beginning of 2009, largely as a result of the ongoing global financial and economic crisis and the significant fall in prices of oil and commodities that are principal generators of Russia s export earnings. The rouble to U.S. dollar exchange rate has fluctuated dramatically in 2008 and 2009, ranging from per U.S.$1.00 as at 16 July 2008 to per U.S.$1.00 as at 19 February 2009 and to per U.S.$1.00 as at 23 October The ability of the Russian Government and the CBR to prevent further depreciation of the rouble against the major currencies depends on many political and economic factors, including their ability to control inflation and the availability of foreign currency reserves. In the beginning of 2009, the Russian Government and the CBR allowed the rouble to gradually decline in value. On 22 January 2009, the CBR set the upper limit of the rouble s trading band against the U.S. dollar/euro basket at RUB 41 in order to help stabilise Russia s balance of foreign debt payments against its current reserves. Additionally, the CBR has stated that it may reset the upper limit of the rouble s trading band against the U.S. dollar/euro basket in the event of a significant and protracted decline in oil prices. While the value of the rouble stabilised in the immediate aftermath of this action of the CBR, it is uncertain whether this stability will be maintained in the medium term. A further depreciation of the rouble against the U.S. dollar and other major currencies could negatively affect the Bank in a number of ways, including, among other things, by increasing the actual cost to the Bank of financing its foreign currency denominated liabilities and by making it more difficult for Russian borrowers to service their foreign currency denominated loans. The rouble remains largely non convertible outside the Russian Federation. A market exists within the Russian Federation for the conversion of roubles into other currencies, but it is limited in size and is subject 40

49 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 to rules limiting such conversion. From August 2008 through October 2009, the Russian Federation s foreign currency and gold reserves have fallen from U.S.$583.0 billion to U.S.$418.7 billion, and may continue to decline going forward. Although Russia s current foreign currency and gold reserves may be sufficient to sustain the domestic currency market in the short term, there can be no assurance that the currency market will not further deteriorate in the medium or long term due to the lack of foreign currency funding available in the global markets. The lack of growth of the Russian currency market in the medium or long term may adversely affect the Bank s business, financial condition and results of operation. Expropriation and nationalisation The Russian Government has enacted legislation to protect property against expropriation and nationalisation. Furthermore, in the event that the Bank s property is expropriated or nationalised, legislation provides for fair compensation to be paid to the Bank. However, there can be no certainty that such protections will be enforced. This uncertainty is due to several factors, including the lack of an independent judicial system and of sufficient mechanisms to enforce judgments and due to corruption among Russian state officials. The concept of property rights is not well developed in the Russian Federation and there is not a great deal of experience in enforcing legislation enacted to protect private property against nationalisation and expropriation. As a result, the Bank may not be able to obtain proper redress in the courts and may not receive adequate compensation if, in the future, the Russian Government decides to nationalise or expropriate some or all of the Bank s assets. The expropriation or nationalisation of any of the Bank s or its subsidiaries assets without fair compensation may have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. There continues to be a lack of reliable official data Official statistics and other data published by the CBR, Russian federal, regional and local governments, and federal agencies may be substantially less complete or reliable than those published by comparable bodies in other jurisdictions. Accordingly, the Bank cannot assure prospective investors that the official sources from which the Bank has drawn some of the information set out herein are reliable or complete. Russian state entities may produce official statistics on bases different from those used by comparable bodies in other jurisdictions. Any discussion of matters relating to the Russian Federation or the Republic of Tatarstan herein may, therefore, be subject to uncertainty due to concerns about the completeness or reliability of available official and public information. Social Risks Crime and corruption could disrupt the Bank s ability to conduct business and could materially adversely affect its business, financial condition, results of operations or prospects The political and economic changes in the Russian Federation since the early 1990s have resulted in a reduced policing of society and increased lawlessness. The Russian and international press have reported high levels of organised criminal activity and corruption among officials in the Russian Federation. Press reports have also described instances in which state officials have engaged in selective investigations and prosecutions to further the commercial interests of select constituencies. Additionally, published reports indicate that a significant proportion of the Russian media regularly publishes biased articles in return for payment. Corruption and other illegal activities could disrupt the Bank s ability to conduct its business effectively, and claims that the Bank was involved in such corruption or illegal activities could generate negative publicity, either of which could harm the Bank s business, financial condition, results of operations and prospects. 41

50 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Social instability could renew support for a centralised authority, nationalism or violence, and thus materially adversely affect the Bank s ability to conduct its business effectively Social instability in the Russian Federation, coupled with difficult economic conditions and the failure of the Russian Government and many private enterprises to pay full salaries on a regular basis and the failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living, have led in the past, and could lead in the future, to labour and social unrest. For example, in early 2005, pensioners in cities across Russia protested against the replacement of certain in kind benefits with cash allowances, or in 2009, workers in the city of Pikalevo protested against non payment of salaries. These protests periodically blocked highways and streets. Such social unrest may have political, social and economic consequences, such as increased support for a renewal of centralised authority, increased nationalism, including restrictions on foreign involvement in the economy of Russia, and increased violence. Any of these could restrict the Bank s operations and materially adversely affect the Bank s business, financial condition, results of operations and prospects. Risks Relating to the Russian Legal System and Russian Legislation Weaknesses related to the Russian legal system and Russian legislation could have a material adverse effect on the Bank s business, financial condition, results of operations and prospects The Russian legal framework applicable to a market economy is still under development. Since 1991, Soviet law has been largely, but not entirely, replaced by a new legal regime as established by the 1993 Federal Constitution, the Civil Code, by other federal laws and by decrees, orders and regulations issued by the President, the Russian Government and federal ministries, which are, in turn, complemented by regional and local rules and regulations. These legal norms, at times, overlap or contradict one another. Several fundamental Russian laws have only recently become effective. The recent nature of much of Russian law and the rapid evolution of the Russian legal system places the enforceability and underlying constitutionality of laws in doubt and results in ambiguities, inconsistencies and anomalies. In addition, Russian law may be considered to leave gaps in the regulatory infrastructure. Among the risks of the current Russian legal system are: inconsistencies among federal laws, decrees, orders and regulations issued by the President, the Russian Government, federal ministries and regulatory authorities and regional and local laws, rules and regulations; limited judicial and administrative guidance on interpretations of Russian law; substantial gaps in the regulatory structure due to delay or absence of implementing legislation; the relative inexperience of certain judges in interpreting new principles of Russian law, particularly business and corporate law; the possibility that certain judges may be susceptible to economic, political or nationalistic influences; a high degree of discretion on the part of governmental authorities; and bankruptcy procedures that are still being developed. All of these factors make judicial decisions in the Russian Federation difficult to predict and effective redress uncertain. Additionally, court claims are often used to further political aims. The Bank may be subject to these claims and may not be able to receive a fair hearing. Additionally, court judgments are not always enforced or followed by law enforcement agencies. 42

51 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Disclosure and reporting requirements The rights of the Bank s shareholders, the Bank s public reporting requirements and the regulations to which the Bank is subject all differ significantly from those applicable to comparable financial institutions in other jurisdictions. The Bank s charter ( Charter ) and internal regulations, the regulations governing Russian banks and the laws governing companies incorporated in the Russian Federation collectively regulate the Bank s corporate affairs. See Appendix A Overview of the Banking Sector and Banking Regulation in the Russian Federation. The rights of shareholders and the responsibilities of members of the Bank s Board of Directors and the Bank s Management Board under Russian law are different from, and may be subject to, certain requirements not generally applicable to corporations organised in other jurisdictions. See Management. Accounting and reporting requirements in Russia are not comparable to those in other (especially Western) jurisdictions. Russian accounting legislation continues to develop and has been subject to change on a regular basis in recent years. As at 1 January 2004, all credit organisations in the Russian Federation have been required to prepare financial statements according to IFRS in addition to their Russian Accounting Standards ( RAS ) statutory accounting reports. Federal Law No. 395 I On Banks and Banking Activity dated 2 December 1990, as amended (the Banking Law ), contains certain periodic disclosure requirements, including the requirement to publish annual statutory accounting reports in accordance with RAS. In accordance with the Banking Law, the Bank is required to publish certain RAS accounting reports quarterly, including a balance sheet, income statement and information on its assets, capital reserves and allowances for non performing loans, which do not contain all of the information contained in the Bank s annual financial statements, and are not prepared in accordance with IFRS. The Bank has regularly published and filed such reports since its establishment in 1993 and has complied with the relevant reporting requirements. In accordance with Russian legislation applicable to securities issuers, the Bank is required to file quarterly reports with the federal governmental authority responsible for the supervision of the securities market of the Russian Federation (currently, the Federal Service for Financial Markets). These reports include certain information about the Bank, its management, subsidiaries, affiliates and selected financial and business information (such as litigation, quarterly statutory accounting reports prepared in accordance with RAS, etc.). Despite recent initiatives to improve corporate transparency in the Russian Federation, there is less publicly available information about the Bank than there is for comparable companies in other jurisdictions. Lack of independence and the inexperience of the judiciary, the difficulty of enforcing court decisions and governmental discretion in instigating, joining and enforcing claims could prevent us from obtaining effective redress in a court proceeding The independence of the judicial system and its immunity from economic, political and nationalistic influences in Russia remains largely untested. The court system is untested and under funded. Judges and courts are relatively inexperienced in the areas of business and corporate law. Russia is a civil law jurisdiction and judicial precedents generally have no binding effect on subsequent decisions. Not all Russian legislation and court decisions are readily available to the public or organised in a manner that facilitates understanding, and the Russian judicial system can be slow. All of these factors make judicial decisions in Russia difficult to predict and effective redress uncertain. Additionally, court claims are often reported to be used to further political claims. Furthermore, court decisions are not always enforced or followed by law enforcement agencies. There is no guarantee that the proposed judicial reform aimed at balancing the rights of private parties and governmental authorities in courts and reducing grounds for repeat litigation of previously decided cases will be implemented and succeeds in building a reliable and independent judicial system. 43

52 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Shareholder liability under Russian legislation could cause the Bank to become liable for the obligations of its Russian subsidiaries Under Russian law, the Bank may be jointly and severally liable for the obligations of its subsidiaries, together with such entities, if (i) the Bank, as a result of its ownership interest or subject to a contract between them or otherwise is able to determine the decisions made by such subsidiary, (ii) the Bank has the ability to issue mandatory instructions to such subsidiaries and that ability is provided for by the charter of the relevant subsidiary or in a binding contract and (iii) the relevant subsidiary concludes a transaction pursuant to the Bank s mandatory instructions. In addition, the Bank may have secondary liability for the obligations of its subsidiaries if the relevant subsidiary becomes insolvent due to the Bank s fault, in the event that the Bank exercised its right to issue mandatory instructions knowing that this would result in the bankruptcy of the relevant subsidiary. This type of liability could result in significant losses and could have a material adverse effect on the Bank s operating results and financial condition or on the value of the Notes. Russian tax law and practice are not fully developed and are subject to frequent changes The Bank is subject to a broad range of taxes and other compulsory payments imposed at federal, regional and local levels, including, but not limited to, profit tax, value added tax, property taxes, payroll related taxes and other taxes. Tax laws, such as the Tax Code of the Russian Federation (the Russian Tax Code ), have been in force for a short period relative to tax laws in more developed market economies, and the implementation of these tax laws is often unclear or inconsistent. Furthermore, the tax environment in Russia has been complicated by the fact that various authorities have often interpreted tax legislation inconsistently. Despite the Russian Government taking steps to reduce the overall tax burden in recent years in line with its objectives and the fact that the quality of Russian tax legislation has generally improved with the introduction of the first and second parts of the Russian Tax Code, Russia s largely ineffective tax collection system and continuing budgetary funding requirements increase the likelihood that the Russian Federation may impose arbitrary or onerous taxes and penalties in the future, which could have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. Additionally, tax has been utilised as a tool for significant state intervention in certain key industries. Since Russian federal, regional and local tax laws and regulations are subject to frequent change and some of the sections of the Russian Tax Code are comparatively new, interpretation of these laws and regulations is often unclear or non existent. Taxpayers and the Russian tax authorities often interpret tax laws differently. In some instances, Russian tax authorities have applied new interpretations of tax laws retroactively. Differing interpretations of tax regulations exist both among and within government ministries and organisations at the federal, regional and local levels, creating uncertainties and inconsistent enforcement. Furthermore, in the absence of binding precedent, court rulings on tax or other related matters by different courts relating to the same or similar circumstances may also be inconsistent or contradictory. Taxpayers often have to resort to court proceedings to defend their position against the tax authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their assessments and their interpretation of legislation, and it is possible that transactions and activities that have not been challenged in the past may now be challenged. The Russian tax system still relies heavily on the judgments of local tax officials and fails to address many of the existing problems, and local tax officials have recently made several material tax claims against major Russian companies. In its decision of 26 July 2001, the Constitutional Court of the Russian Federation (the Constitutional Court ) also introduced the concept of a taxpayer acting in bad faith without clearly stipulating the criteria for it. Similarly, this concept is not defined in Russian tax law. Nonetheless, this concept has been used by the tax authorities to deny, for instance, the taxpayer s right to rely on the literal interpretation of the tax legislation. The tax authorities and courts often exercise significant discretion in interpreting this concept in a manner that is unfavorable to taxpayers. These facts create tax risks in Russia that may be substantially more significant than typically found in countries with more developed tax systems. 44

53 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 On 12 October 2006, the Plenum of the Supreme Arbitration Court of the Russian Federation (the Supreme Arbitration Court ) issued Resolution No. 53, which introduced recommendations to courts to apply the concept of unjustified tax benefit for resolving tax disputes which is defined mainly by reference to specific examples of such tax benefits (e.g. absence of business purpose) which may be disallowed. While the tax authorities and courts have provided only limited guidance on the interpretation of this new concept, the tax authorities nonetheless have actively sought to apply this concept when challenging tax positions taken by taxpayers. Although the intention of this ruling was to combat abuse of tax law, the tax authorities have started applying the unjustified tax benefit concept in a broader sense than may have been intended by the Supreme Arbitration Court. To date, in the majority of cases where this concept has been applied, the courts have ruled in favor of taxpayers, but it is too early to determine whether the courts will follow these precedents in the future. Furthermore, Ruling No. 64 of the Plenum of the Supreme Court of the Russian Federation Concerning the Practical Application by Courts of Criminal Legislation Concerning Liability for Tax Crimes dated 28 December 2006 is indicative of the trend to broaden application of criminal liability for tax violations. Tax returns together with related documentation are subject to review and investigation by the tax authorities, which are enabled by Russian law to impose severe fines and interest charges. Generally, tax returns remain open and subject to inspection by the tax authorities for a period of three years immediately preceding the year in which the decision to conduct a tax audit is adopted. The fact that a year has been reviewed by the tax authorities does not close that year, or any tax returns applicable to that year, from further review during the three year period. In particular, a repeated tax audit may be conducted by a higher-level tax authority as a measure of control over the activities of lower-level tax authorities, or in connection with the reorganisation/liquidation of a taxpayer, or as a result of the filing by such taxpayer of an amended tax return decreasing the tax payable. However, on 17 March 2009, the Constitutional Court issued a decision that disallows the Russian tax authorities to issue decisions in the course of subsequent tax audits for the same tax period as an initial audit if the court decision which was taken in respect of the tax dispute between the relevant taxpayer and the relevant tax authority and covered taxation matters raised during the initial tax audit has not been revised or discharged. Currently, it is unclear how this decision will be applied and followed in practice by the Russian tax authorities. In accordance with the Constitution of the Russian Federation, laws which introduce new taxes or worsen a taxpayer s position cannot be applied retroactively. However, on several occasions such laws have been applied retroactively. The statue of limitations for tax penalties for the commission of a tax offence is three years from the date on which it was committed or from the next date following the date of the end of the tax period during which the tax offence was committed (depending of the nature of the tax offence). However, on 14 July 2005, the Constitutional Court issued a decision that allows the statute of limitations for tax penalties to be extended beyond the three-year term set forth in the Tax Code if a court determines that a taxpayer has obstructed or hindered a field tax audit. Moreover, amendments introduced to the first part of the Tax Code which came into effect on 1 January 2007, provide for the extension of the three year statute of limitations for tax penalties if the actions of a taxpayer create insurmountable obstacles for a tax audit. Because the term create insurmountable obstacles is not defined in Russian law, the tax authorities may attempt to interpret this term broadly, effectively linking any difficulty experienced in the course of their tax audit with obstruction by the taxpayer and use that as a basis to seek tax adjustments and penalties beyond the threeyear term. Therefore, the statute of limitations for tax penalties is not entirely effective. In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. For example, tax laws are unclear with respect to deductibility of certain expenses. This uncertainty could possibly expose the Bank to significant fines and penalties and to enforcement measures, despite the Bank s best efforts at compliance, and could result in a greater than expected tax burden. It should also be noted that Russian law does not provide for a possibility of group relief or fiscal unity. Consequently, financial results of any Russian companies belonging to the group are not consolidated for tax purposes (i.e. it is not possible to offset profit of one entity in the group against losses of another entity in the group). The Russian Government in its Main Directions of Russian Tax Policy for has 45

54 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 proposed the introduction of consolidated tax reporting to enable the consolidation of the financial results of Russian taxpayers which are part of one group for corporate income tax purposes. At this stage, it is impossible to predict whether, when or how such consolidated tax reporting principles will be enacted. Russian tax legislation does not contain a concept of corporate tax residency. Russian companies are taxed on their worldwide income whilst foreign entities are taxed in Russia on income attributable to a permanent establishment and on Russian source income. The Russian Government in its Main Directions of Russian Tax Policy for has proposed the introduction to the domestic tax law of a concept of tax residency for legal entities. According to the proposals, a company would be deemed a Russian tax resident based on the place of its effective management and control and/or based on the residence of its shareholders. No assurance can be currently given as to whether and when these amendments will be enacted, their exact nature, their potential interpretation by the tax authorities and the possible impact on the Bank. It is possible that, as a result of the introduction of these changes to the Russian tax legislation, certain companies of the Group might be deemed to be Russian tax residents, subject to all applicable Russian taxes that may have an adverse impact on the Bank. Current Russian tax legislation is, in general, based upon the formal manner in which transactions are documented. However the Russian tax authorities are increasingly (where it suits their interests) taking a substance over form approach. There can be no assurance that the Russian Tax Code will not be changed in the future in a manner adverse to the stability and predictability of the tax system. The Bank expects that Russian tax legislation may become more sophisticated, resulting in the introduction of additional revenue raising measures. These factors, plus the potential for state budget deficits, raise the risk of the imposition of additional taxes on the Bank. The introduction of new taxes or amendments to current taxation rules may affect the Bank s overall tax efficiency and may result in significant additional taxes becoming payable. The Bank cannot offer prospective investors any assurance that additional tax exposures which may affect the financial results of the Bank and other Group companies will not arise while the Notes are outstanding. In addition to creating a substantial tax burden, these risks and uncertainties complicate the Bank s tax planning and related business decisions, potentially exposing it and its subsidiaries to significant fines and penalties and enforcement measures, and could adversely affect the Bank s business, financial condition and results of operations. The Bank s activities may be subject to transfer pricing scrutiny Transfer pricing legislation in Russia allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controlled transactions (except for those conducted at state regulated prices and tariffs), sales and purchases, provided that the transaction price differs upwards or downwards from the market price by more than 20 per cent. Controlled transactions include transactions with related parties, barter transactions, foreign trade transactions and transactions with unrelated parties with significant price fluctuations (i.e., if the price of such transaction differs from prices applied under similar transactions carried out within a short period of time by more than 20 per cent.). Special transfer pricing rules apply to securities transactions and derivatives. The Russian Tax Code has no direct provisions on the application of transfer pricing rules to interest on loans, and differing interpretations have been given on this issue by the Russian tax authorities and courts. The transfer pricing rules are vaguely drafted, generally leaving wide scope for interpretation by the tax authorities and courts. Moreover, in the event that a transfer pricing adjustment is assessed by the tax authorities, the transfer pricing rules do not provide for an offsetting adjustment to the related counterparty in the transaction. There is a draft law introduced by Ministry of Finance of the Russian Federation which provides substantial changes to the Russian transfer pricing rules. It is expected that most provisions of this draft law will be enacted on 1 January Such amendments, if adopted, are expected to result in stricter transfer pricing rules. At this point it cannot be predicted if this law will be enacted and what the provisions or effect on taxpayers, including the Bank, may be. If the tax authorities were to impose significant additional tax liabilities as a result of transfer pricing adjustments, it could have a material adverse effect on the Bank s business, financial condition, results of operations or prospects. The foregoing factors raise the risk of the imposition of arbitrary or onerous taxes on the Bank, which could adversely affect the value of the Notes. 46

55 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Russian regulation of banking and financial activity has been undergoing significant changes which may adversely affect the Bank Like most of Russia s legislation on business activities, Russia s laws on banks and banking activity have only recently been adopted. In addition to Federal Law No. 86 FZ On the Central Bank of the Russian Federation (Bank of Russia) dated 10 July 2002, as amended (the CBR Law ), and the Banking Law, Russia has adopted and continues to develop new banking legislation. For example, the Deposit(s) Insurance Law adopted in December 2003, mandates protection of bank deposits of individuals. The Deposit(s) Insurance Law establishes a deposit insurance system in which all Russian banks must participate or lose their ability to accept retail deposits and open bank accounts for individuals. Federal Law No. 218 FZ On Credit Histories dated 30 December 2004 (the Credit Histories Law ), as amended, created a legal framework for operation of credit bureaus in the Russian Federation. See Risks related to the Bank s business and the banking industry Deposit(s) Insurance Law. The CBR has also been developing regulations on bank capital and bringing them into line with international standards. Currently, CBR regulations on bank regulatory capital are relatively new, rudimentary and untested, which could lead to uncertainty in their application and interpretation. From 15 October 2008 until 1 May 2009, mandatory reserves for banks obligations of all types (categorised into obligations to non resident banks in roubles or foreign currency; obligations to individuals in roubles; and other obligations in roubles or foreign currency) were set at 0.5 per cent. The CBR increased the reserve requirements for banks for all types of financial obligations to 1.0 per cent. starting from 1 May 2009 and implemented further monthly increases in the reserve requirements by 0.5 per cent. on each of 1 June 2009, 1 July 2009 and 1 August From 1 August 2009, mandatory reserves for banks obligations of each category (i.e. those to non resident banks in roubles or foreign currency; those to individuals in roubles; and other obligations in roubles and foreign currency) are set at 2.5 per cent. The recent changes in the Russian banking and financial regulation are aimed at bringing the regulatory regime more in line with that of more developed countries. However, due to the recent changes in the regulatory system, banks operate in a new and relatively unclear regulatory environment. It is difficult to forecast how the changes in the banking and financial regulation will affect the Russian banking system and no assurance can be given that the regulatory system will not change in a way that will impair the Bank s ability to provide a full range of banking services or to compete effectively, thus adversely affecting the Bank s business, financial condition, results of operations and prospects. The legislative framework governing bankruptcy in the Russian Federation differs substantially from that of the United States or Western European countries, which could adversely affect the value of the Notes in the event of the Bank s insolvency Russian bankruptcy laws are relatively new and are subject to varying interpretations. Federal Law No. 127 FZ On Insolvency (Bankruptcy) (the Insolvency Law ) entered into force in late Federal Law No. 40 FZ dated 25 February 1999 On Insolvency (Bankruptcy) of Credit Organisations (the Bank Insolvency Law ) largely came into force in 1999 and was subsequently amended. Furthermore, Russian bankruptcy legislation often differs from comparable law in the United States or Western European countries and is subject to varying interpretations. There is little precedent to predict how claims on behalf of the Noteholders against us would be resolved in case of the Bank s bankruptcy. Weaknesses relating to the Russian legal system and Russian legislation create an uncertain environment for investment and business activity and thus could have a material adverse effect on an investment in the Notes. In addition, under Russian bankruptcy legislation, the Bank s obligations under the Notes would be subordinated to the following obligations: Claims in respect of insolvency proceedings. Claims related to administration of insolvency proceedings, including salaries of personnel involved in insolvency proceedings, utilities bills, legal expenses and other payments after the revocation of the credit organisation s banking licence. 47

56 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 Claims under the first order of priority (i) claims in tort, (ii) claims of retail depositors and individuals holding current accounts with the bank, (iii) claims of the Agency for Insurance of Deposits, Russian regulator (the Deposit Insurance Agency ), in respect of bank deposits and bank accounts transferred to it pursuant to Federal Law No. 177 FZ On Insurance of Deposits Placed by Individuals with Banks in the Russian Federation dated 23 December 2003, as amended ( Deposit(s) Insurance Law ) and (iv) claims of the CBR transferred to it pursuant to applicable legislation in the event that the CBR was required to repay amounts of deposits by individuals with banks that were declared insolvent and did not participate in the Russian mandatory deposits insurance system. Claims under the second order of priority claims under employment contracts and other social benefits and copyright claims. Claims under the third order of priority claims of other creditors including claims of retail depositors with respect to lost profits and financial penalties. Claims of creditors secured by a pledge are satisfied from the sale proceeds of the pledged property prior to claims of all other creditors, save for claims of creditors of the first and second orders of priority. As a result of limited court practice, it is impossible to predict with certainty how claims by the Lender or the Trustee on behalf of the Noteholders against the Bank would be resolved in the event of the Bank s bankruptcy and whether the Lender, the Trustee or the Noteholders would be able to recover sums owed by the Bank under the Loan Agreement in the event of the Bank s insolvency. Specifically, in the course of the Bank s bankruptcy proceedings, the creditors claims (including claims by the Lender or the Trustee on behalf of the Noteholders under the relevant Loan Agreement) would need to be presented and satisfied only within the bankruptcy proceedings framework established by the mandatory provisions of bankruptcy legislation. In the event of the insolvency of the Bank, the existence of priority claims (subordination) and secured claims may substantially decrease the amount of funds and assets that may be available for making payments under the Loan and, as a result, the Notes. Risk relating to the Notes Credit rating 1 Outstanding Eurobonds of the Russian Federation are rated Baa2 by Moody s, BBB by Standard & Poor s and BBB by Fitch. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organisation. The Bank has a long term rating of BB assigned by Fitch and a long term rating of Ba3 assigned by Moody s. Any change in the credit rating of the Bank, of any member of the Group, of the Notes or of the Russian Federation could adversely affect the trading price for the Notes. A change in the credit rating of other Russian financial institutions could also adversely affect the trading price for the Notes. Limited recourse obligations of the Issuer The Issuer has an obligation under the Terms and Conditions of the Notes and the Trust Deed to pay such amounts of principal, interest and additional amounts (if any) as are due in respect of the Notes. However, the Issuer s obligation to pay is equal to the amount of principal, interest and additional amounts (if any) actually received by or for the account of the Issuer from the Bank pursuant to the Loan Agreement. Consequently, if AK BARS Bank fails to meet its payment obligations under the Loan Agreement in full, this will result in the Noteholders receiving less than the scheduled amount of principal and/or interest and/or other amounts (if any) payable on the Notes. 48

57 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 No direct recourse of the noteholders to AK BARS Bank Save as otherwise expressly provided in the Terms and Conditions of the Notes and in the Trust Deed, no proprietary or other direct interest in the Issuer s rights under, or in respect of, the Loan Agreement exists for the benefit of the Noteholders. Subject to terms of the Trust Deed, no Noteholder will have any entitlement to enforce any provision of the Loan Agreement or have direct recourse to AK BARS Bank as borrower except through action by the Trustee pursuant to the Assignment (as defined in the Trust Deed) granted to the Trustee in the Trust Deed. Under the Trust Deed, the Trustee shall not be required to take proceedings to enforce payment under the Loan Agreement, unless it has been indemnified and/or secured by the Noteholders to its satisfaction. The interests of the Bank s principal shareholder and other major shareholders may conflict with those of the Noteholders As the Bank s largest shareholder, the Republic of Tatarstan has been and will continue to be able to exercise significant influence over the Bank s activities and may from time to time influence credit decisions and/or take actions in relation to the business of the Bank, including with regard to the nature of proprietary investments, that may not be in the best interest of the Bank or the Noteholders. In addition, certain members of the Board of Directors and certain of our significant shareholders are also members of the board of directors of Bank Zenit, a competitor of AK BARS Bank, which could give rise to conflicts of interest. See Legal and regulatory risks and Management. There is no active trading market for the Notes The Notes are new securities which may not be widely distributed and for which there is currently no active trading market. If the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of AK BARS Bank. Although application has been made for the Notes to be admitted to listing on the Official List of the Irish Stock Exchange, there is no assurance that such application will be accepted or that an active trading market will develop. Accordingly, there is no assurance as to the development or liquidity of any trading market for the Notes. The Notes may be redeemed prior to maturity In the event that AK BARS Bank would be obliged to increase the amounts payable in respect of any Notes due to any withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Russian Federation or any political subdivision thereof or any authority therein or thereof having power to tax, AK BARS Bank may redeem all outstanding Notes in accordance with the Terms and Conditions of the Notes. Because the Global Notes are held by or on behalf of DTC, Euroclear and Clearstream, Luxembourg, as applicable, investors will have to rely on their procedures for transfer, payment and communication with AK BARS Bank. The Notes will be represented by the Global Notes except in certain limited circumstances described in the Global Note. The Global Notes will be deposited with a custodian of DTC or with a common depositary for Euroclear and Clearstream, Luxembourg, as applicable. Except in certain limited circumstances described in the Global Note, investors will not be entitled to receive definitive Notes. DTC, Euroclear and Clearstream, Luxembourg, as applicable, will maintain records of the beneficial interests in the Global Notes. While the Notes are represented by the Global Notes, investors will be able to trade their beneficial interests only through DTC, Euroclear and Clearstream, Luxembourg, as applicable. AK BARS Bank will discharge its payment obligations under the Notes by making payments to the custodian for DTC or to the common depositary for Euroclear and Clearstream, Luxembourg, as applicable, for distribution to their account holders. A holder of a beneficial interest in a Global Note must rely on the 49

58 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 procedures of DTC, Euroclear and Clearstream, Luxembourg, as applicable, to receive payments under the Notes. AK BARS Bank has no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Notes. Holders of beneficial interests in the Global Notes will not have a direct right to vote in respect of the Notes. Instead, such holders will be permitted to act only to the extent that they are enabled by DTC, Euroclear and Clearstream, Luxembourg, as applicable, to appoint appropriate proxies. Similarly, holders of beneficial interests in the Global Notes will not have a direct right under the Global Notes to take enforcement action against AK BARS Bank in the event of an event of default under the Notes but will have to rely upon their rights under the Trust Deed. Russian withholding tax In general, interest payments on borrowed funds made by a Russian entity to a non resident legal entity or organisation are subject to Russian withholding tax at a rate of 20 per cent., unless they are reduced or eliminated pursuant to the terms of an applicable double tax treaty. Based on professional advice it has received, the Bank believes that interest payments on the Loan made to the Issuer should not be subject to withholding under the terms of the double tax treaty between the Russian Federation and the Grand Duchy of Luxembourg. However, there can be no assurance that such an exemption will continue to be available in the future. Tax treaty procedures The Russian Tax Code does not require that a non resident issuer obtain tax treaty clearance from Russian tax authorities prior to receiving interest income at a reduced rate of withholding tax at source under an applicable tax treaty. However, in connection with a tax audit, the Russian tax authorities may still dispute the non resident s eligibility for double tax treaty relief. A non resident issuer seeking to obtain a reduced rate of Russian withholding tax at source under an income tax treaty must provide the Bank confirmation of the issuer s tax treaty residence that is certified by the competent authorities of the Grand Duchy of Luxembourg in advance of the Bank s payment of interest. The residence confirmation needs to be reviewed on an annual basis and certified by the relevant authority. The residence confirmation may need to bear an apostille. In the event the exemption from withholding tax ceases to be available, it is currently unclear whether the provisions obliging the Bank to gross up payments for such withholding tax would be enforceable in the Russian Federation. If a Russian court does not rule in favour of the Issuer or the Trustee and Noteholders, there is a risk that the gross up for withholding tax would not take place and that payment made by the Bank under the Loan Agreement would be reduced by Russian income tax withheld by the Bank at a rate of 20 per cent. (or potentially 30 per cent. in respect of individual Noteholders). See generally Taxation Russian Federation Taxation of the Notes. In such event the issuer may apply for a refund within three years from the end of the tax period in which the tax was withheld. To process a claim of a refund the Russian tax authorities require: An apostilled confirmation of the tax treaty residence of the non resident at the time the income was paid; An application for refund of the tax withheld in a format provided by the Russian tax authorities (Form 1012DT for interest); and Copies of the relevant contracts and payment documents confirming the payment of the tax withheld to the Russian Federation state budget. The refund of the tax withheld should be granted within one month of the filing of the application for the refund and the relevant documents with the Russian tax authorities. However, procedures for processing such claims have not been clearly established and there is significant uncertainty regarding the availability and timing of such refunds. The Russian tax authorities may, in practice, require a wide variety of 50

59 Level: 3 From: 3 Monday, November 16, :57 eprint Section 02 documentation confirming the right to benefits under a double tax treaty. Such documentation, in practice, may not be explicitly required by the Russian Tax Code. Luxembourg bankruptcy law A third party creditor may bring an action against the Issuer in furtherance of bankruptcy (faillite), insolvency, moratorium, controlled management (gestion contrôlée), suspension of payments (sursis de paiement), court ordered liquidation (liquidation judiciaire) or reorganisation or any similar proceedings affecting the rights of creditors generally under Luxembourg law. In the event of such action, the rights and obligations of the Issuer under the agreements entered into by the Issuer could be impaired and challenged in such proceedings, which could in turn affect the repayments due by the Issuer to the Noteholders. Disposals of the Notes in the Russian Federation According to the Russian Tax Code, proceeds from the sale of Notes received from Russian sources by non resident holders, which are legal entities or organisations, are tax exempt in Russia, provided that such proceeds do not relate to a permanent establishment of the non resident holder in Russia (if any). If a non resident Noteholder, which is a legal entity or organisation, sells Notes and receives proceeds from a source within the Russian Federation, there is a risk that any part of the payment that represents accrued interest may be subject to a 20 per cent. Russian withholding tax (even if a disposal results in a loss). A non resident Noteholder, which is a legal entity or organisation, may be exempt from Russian withholding tax on the accrued interest under the terms of a double tax treaty between Russia and the country of residence of the non resident Noteholder. When proceeds from a disposition of the Notes are received from a source within the Russian Federation by an individual non resident Noteholder, withholding tax would be charged at a rate of 30 per cent. on gross proceeds from such disposal of the Notes, less any available cost deduction. An individual non resident Noteholder may also be exempt from Russian withholding tax on the income from the disposal of the Notes under the terms of a double tax treaty between Russia and the country of residence of the non resident Noteholder. However, it is unlikely that an advance relief will be available in practice and obtaining a refund would be burdensome, if not impossible. The imposition or possibility of imposition of this withholding tax could adversely affect the value of the Notes. As Russian law related to taxation of income derived by non resident holders (including legal entities, organisations and individuals) on a sale, exchange or other disposition of the Notes is not entirely clear, non resident holders are strongly advised to consult their own tax advisors regarding the tax treatment of the purchase, ownership and disposition of the Notes considering applicable tax treaties with Russia (if any). 51

60 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 DESCRIPTION OF THE TRANSACTIONS The following summary description should be read in conjunction with, and is qualified in its entirety by, the information set out under Terms and Conditions of the Notes and The Facility Agreement, appearing elsewhere in this Base Prospectus. Issuer Principal and Interest on the Loan AK BARS Bank Proceeds of the Notes Principal and Interest on the Notes Noteholders Each transaction relating to a Series of Notes will be structured as a Loan to the Bank by the Issuer under the relevant Loan Agreement. The Issuer will issue a Series of Notes, which will be secured limited recourse loan participation notes issued for the sole purpose of funding the corresponding Loan to the Bank. Each Loan will be made on the terms of the Facility Agreement as amended and supplemented by the relevant Loan Supplement and will have characteristics that demonstrate capacity to produce funds to service any payments due and payable on the Notes. Each Series of Notes will be constituted by, subject to, and have the benefit of the amended and restated principal trust deed dated 16 November 2009 as supplemented and amended in respect of such Series of Notes by a Supplemental Trust Deed (together, the Trust Deed ), each entered into between the Issuer and the Trustee. The obligations of the Issuer to make payments under the Notes shall constitute an obligation only to account to the Noteholders for an amount equal to the sums of principal, interest and/or additional amounts (if any) the Issuer actually receives by or for its account from the Bank pursuant to the relevant Loan Agreement or that are deposited in the Account (as defined below), less any amounts in respect of the Reserved Rights. As provided in the Trust Deed, the Issuer will charge in favour of the Trustee for the benefit of itself and the Noteholders as security for its payment obligations in respect of a Series of Notes (a) its rights to all principal, interest and additional amounts (if any) payable by the Bank under the corresponding Loan Agreement, (b) its right to receive all sums which may be or become payable by the Bank under any claim, award or judgment relating to the corresponding Loan Agreement and (c) its rights, title and interest in and to all sums of money now or in the future deposited in an account with the Principal Paying Agent with respect to such Series of Notes in the name of the Issuer, together with the debt represented thereby (the Account ) (collectively, the Charged Property ), in each case other than the Reserved Rights and amounts relating thereto. The Issuer will assign absolutely certain administrative rights under the relevant Loan Agreement to the Trustee for the benefit of the Trustee and the Noteholders of the applicable Series. The Bank will be obliged to make payments under the relevant Loan to the Issuer in accordance with the terms of the relevant Loan Agreement to the Account or as otherwise instructed by the Trustee following a Relevant Event. The Issuer has covenanted not to agree to any amendments to or any modification or waiver of, or authorise any breach or potential breach of, the terms of the relevant Loan Agreement unless the Trustee has given its prior written consent (in each case except in relation to the Reserved Rights). The Issuer (save as expressly provided in the Trust Deed, the relevant Loan Agreement or with the written consent of the Trustee) shall not pledge, charge or otherwise deal with the relevant Loan or the relevant Charged Property or any right or benefit either present or future arising under or in respect of the relevant Loan Agreement or the Account or any part thereof or any interest therein or purport to do so (in each case except in relation to the Reserved Rights). Any amendments, modifications, waivers or authorisations made with the Trustee s prior written consent shall be notified by the Issuer to the Noteholders of the applicable Series in accordance with 52

61 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 Condition 14 (Notices) of the Terms and Conditions of the Notes and will be binding on the Noteholders of such Series. The Issuer will have no other financial obligations under the relevant Series of Notes and no other assets of the Issuer (including the Issuer s rights with respect to any Loan relating to any other Series of Notes) will be available to such Noteholders. Accordingly, all payments to be made by the Issuer under each Series of Notes will be made only from and to the extent of such sums received or recovered by or on behalf of the Issuer or the Trustee from the assets securing such Series. Noteholders shall look solely to such sums for payments to be made by the Issuer under such Notes, the obligation of the Issuer to make payments in respect of such Notes will be limited to such sums and Noteholders will have no further recourse to the Issuer or any of the Issuer s other assets in respect thereof. In the event that the amount due and payable by the Issuer under such Notes exceeds the sums so received or recovered, the right of any person to claim payment of any amount exceeding such sums shall be extinguished and Noteholders may take no further action to recover such amounts. The security under the Trust Deed will become enforceable upon the occurrence of a Relevant Event, as further described in Terms and Conditions of the Notes. Payments in respect of the Notes will be made without any deduction or withholding for, or on account of, taxes of Luxembourg or the Russian Federation except as required by law. See Terms and Conditions of the Notes Taxation. In the event of any such taxation, the Issuer will only be required to pay an additional amount to the extent it receives corresponding amounts from the Bank under the relevant Loan Agreement. Each Loan Agreement will provide for the Bank to pay such corresponding amounts in these circumstances. In addition, payments under the relevant Loan Agreement will be made without any deduction or withholding for, or on account of, any taxes imposed by any Taxing Authority (as defined in the relevant Loan Agreement), except as required by law, in which event the Bank will be obliged to increase the amounts payable under the relevant Loan Agreement. See Risk Factors Risk relating to the Notes. Under the terms of each Loan Agreement, in certain circumstances the Bank may, at its option, prepay the corresponding Loan at its principal amount, together with accrued interest and additional amounts (if any), in the event that the Bank is required to increase the amount payable or to pay additional amounts on account of taxes of a relevant Taxing Authority or required to pay additional amounts on account of certain costs incurred by the Issuer. The Issuer may require the Bank to prepay such Loan if it becomes unlawful for such Loan or the Notes to remain outstanding, as set out in the Facility Agreement. In each case (to the extent that the Issuer has actually received the relevant funds from the Bank), the Issuer will prepay the Notes together with accrued interest and additional amounts (if any) thereon. See The Facility Agreement Repayment and prepayment and Terms and Conditions of the Notes Redemption. 53

62 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 FINAL TERMS AND DRAWDOWN PROSPECTUSES In this section the expression necessary information means, in relation to any Series of Notes, the information necessary to enable investors to make an informed assessment of the assets and liabilities, financial condition, profits and losses and prospects of the Issuer and the Bank and of the rights attaching to the Notes. In relation to the several Series of Notes which may be issued under the Programme, the Issuer and the Bank have endeavoured to include in this Base Prospectus all of the necessary information except for information relating to the Notes which is not known at the date of this Base Prospectus and which can only be determined at the time of an individual issue of a Series of Notes. Any information relating to the Notes which is not included in this Base Prospectus and which is required in order to complete the necessary information in relation to a Series of Notes will be contained either in the relevant Final Terms or in a Drawdown Prospectus. Such information will be contained in the relevant Final Terms unless any of such information constitutes a significant new factor relating to the information contained in this Base Prospectus in which case such information, together with all of the other necessary information in relation to the relevant series of Notes, will be contained in a Drawdown Prospectus. For a Series of Notes which is the subject of Final Terms, those Final Terms will, for the purposes of that Series only, supplement this Base Prospectus and must be read in conjunction with this Base Prospectus. The terms and conditions applicable to any particular Series of Notes which is the subject of Final Terms are the Conditions as supplemented, amended and/or replaced to the extent described in the relevant Final Terms. The terms and conditions applicable to any particular Series of Notes which is the subject of a Drawdown Prospectus will be the Conditions as supplemented, amended and/or replaced to the extent described in the relevant Drawdown Prospectus. In the case of a Series of Notes which is the subject of a Drawdown Prospectus, each reference in this Base Prospectus to information being specified or identified in the relevant Final Terms shall be read and construed as a reference to such information being specified or identified in the relevant Drawdown Prospectus unless the context requires otherwise. Each Drawdown Prospectus will be constituted either (1) by a single document containing the necessary information relating to the Issuer and the Bank and the relevant Series of Notes or (2) by a registration document, (as such term is used in the Prospectus Directive) (the Registration Document ) containing the necessary information relating to the Issuer and the Bank, a securities note (the Securities Note ) containing the necessary information relating to the relevant Notes and, if necessary, a summary note. In addition, if the Drawdown Prospectus is constituted by a Registration Document and a Securities Note, any significant new factor, material mistake or inaccuracy relating to the information included in the Registration Document which arises or is noted between the date of the Registration Document and the date of the Securities Note which is capable of affecting the assessment of the relevant Notes will be included in the Securities Note. Neither the Base Prospectus nor any Final Terms constitutes an offer of, or an invitation by or on behalf of the Issuer, the Bank, the Arrangers, the Trustee or the Dealers to subscribe for or purchase any Series of Notes and should not be considered as a recommendation by the Issuer, the Bank, the Arrangers, the Trustee or the Dealers or any of them that any recipient of this Base Prospectus or any Final Terms should subscribe for or purchase any Notes. 54

63 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 USE OF PROCEEDS The Issuer will use the proceeds from the offering of each Series of Notes solely to finance the corresponding Loan to the Bank. The Bank will use the proceeds from such Loan to fund its lending activities and for general banking purposes (unless otherwise specified in the relevant Final Terms). In connection with the receipt of such Loan, the Bank will pay an arrangement fee, as reflected in the relevant Loan Supplement. Upon the receipt by the Bank of the net proceeds of any Loan which is denominated in U.S. dollars following the offering of the related Series of Notes under the Programme, the Bank expects to exchange a portion of such U.S. dollar net proceeds into roubles. 55

64 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 SELECTED FINANCIAL AND OPERATING INFORMATION The following tables present selected financial information as at and for the six months ended 30 June 2009 and as at and for the years ended 31 December 2008 and 2007 which has been derived from, and should be read in conjunction with, the Group s Financial Statements and the notes thereto included elsewhere in this Base Prospectus, as well as the sections entitled Capitalisation and Management s Discussion and Analysis of Financial Condition and Results of Operations. See also Presentation of Financial and Other Information. Income statement data Six months ended 30 June Year ended 31 December (unaudited) (unaudited) (millions of roubles) Interest income... 12, , , ,837.3 Interest expense... (9,657.7) (3,913.9) (9,979.5) (7,103.4) Net interest income... 2, , , , Provision for loan impairment... (4,145.2) (891.0) (7,576.0) (1,682.3) 2 Net interest income after provision for loan impairment... (1,505.2) 2, , , Fee and commission income , Fee and commission expense... (185.5) (46.7) (182.2) (98.8) (Losses less gains)/gains less losses from financial derivative instruments... (21.1) (53.6) 1,061.4 (489.5) Gains less losses/(losses less gains) from securities at fair value through profit or loss... 2,196.5 (3.7) (7,011.3) Gains less losses/(losses less gains) from trading in foreign currencies (152.5) 34.7 Foreign exchange translation (losses net of gains)/ gains less losses... (223.2) 13.9 (1,103.8) Dividend income Other operating income Administrative and other operating expenses... (1,871.3) (2,369.8) (5,118.9) (4,025.0) 2 (Loss)/profit before tax... (613.0) 1,118.8 (8,603.9) , Income tax credit/(expense) (266.2) 2, (583.7) 2 (Loss)/profit for the year or period... (492.2) (6,507.1) 2,

65 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 Balance sheet data As at 30 June As at 31 December (unaudited) (millions of roubles) Assets Cash and cash equivalents... 11, , ,568.3 Mandatory cash balances with the Central Bank of the Russian Federation... 1, ,948.3 Securities at fair value through profit or loss (1)... 13, , ,737.3 Due from other banks... 3, ,806.6 Loans and advances to customers , , ,284.6 Repurchase receivable... 2, , ,616.5 Investment property... 8, , ,559.4 Investment in associate Deferred tax asset... 2, ,036.7 Premises, equipment and intangible assets... 2, , ,711.1 Other financial assets... 4, , ,120.1 Other assets... 2, , , Total assets , , , Liabilities Due to other banks... 35, , ,712.9 Customer accounts , , ,581.3 Debt securities in issue... 28, , ,203.1 Syndicated loan... 5, ,976.4 Loan participation notes... 17, , ,453.5 Deferred tax liability Other financial liabilities... 1, , ,456.6 Other liabilities Subordinated debt... 6, , , Total liabilities , , , Equity Share capital... 25, , ,244.0 Additional paid in capital Accumulated deficit... (7,822.8) (7,330.6) (262.8) Total equity... 17, , , Total liabilities and equity , , ,

66 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 Selected financial ratios and other information As at or for the six months ended As at or for the year ended 30 June 31 December (unaudited) (%) Performance ratios: Net interest margin (1) Net non interest income/(loss) to operating income (2) (144.5) 22.0 Cost to income ratio (3) Return on average assets (4)... (0.5) (3.6) 2.0 Return on average equity (5)... (5.5) (29.9) 10.7 Balance sheet ratios (at the year end): Customer loans to customer deposits (6) Customer loans to total assets (7) Equity to total assets Customer accounts to total liabilities Capital adequacy ratios (at the year end): (8) Tier 1 capital adequacy ratio Total capital adequacy ratio Asset quality (at the year end): Impaired customer loans to total loans (gross) (9) Provisions to total customer loans (gross) (10) Provisions to impaired loans (11) (1) Net interest margin was calculated as net interest income before provision for loan impairment divided by average interest earning assets. (2) Net non interest income/(loss) to operating income was calculated as net non interest income (being net fee and commission income, losses net of gains/gains less losses from financial derivatives, (losses net of gains)/gains less losses from securities at fair value through profit or loss, gains less losses from trading in foreign currencies/ (losses net of gains), foreign exchange translation gains less losses/ (losses net of gains) and other operating income, divided by operating income before provision for loan impairment. (3) Cost to income ratio was calculated as administrative and other operating expenses divided by operating income being the sum of interest income, non interest income as defined in (2) above and other operating income before provision for loan impairment. (4) Return on average assets was calculated as (loss)/profit for the year/period divided by the simple average of total assets at the beginning and at the end of the year/period. (5) Return on average equity was calculated as (loss)/profit for the year/period divided by simple average of total equity at the beginning and at the end of the year/period. (6) Customer loans to customer deposits was calculated as total loans and advances to customers net of provision for loan impairment divided by total customer accounts. (7) Customer loans to total assets was calculated as total loans and advances to customers net of provision for loan impairment divided by total assets. (8) In March 2009, the Bank s shareholders approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this increase was approved by the CBR in November The capital increase will improve the Bank s capital adequacy ratios. (9) Impaired customer loans represent the amount of loans and advances to customers with sign of impairment. (10) Provisions to total customer loans (gross) was calculated as the provision for loan impairment for loans and advances to customers at the year end divided by total loans and advances to customers before provision for loan impairment. (11) Provisions to impaired loans was calculated as the provision for loan impairment for loans and advances to customers at the year end divided by the amount of impaired loans at the year end. 58

67 Level: 3 From: 3 Monday, November 16, :33 eprint Section 03 CAPITALISATION The following table sets out the Group s capitalisation and indebtedness as at 30 June Prospective investors should read this information in conjunction with Selected Financial and Operating Information, Management s Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements included elsewhere in this Base Prospectus. As at 30 June (unaudited) (in millions of roubles) Liabilities Due to other banks... 35,121.5 Customer accounts ,244.2 Debt securities in issue... 28,050.2 Loan participation notes... 17,178.2 Other financial liabilities... 1,390.5 Other liabilities Subordinated debt... 6, Total liabilities , Equity Share capital... 25,244.0 Additional paid in capital Accumulated deficit... (7,822.8) 123 Total equity... 17, Total liabilities and equity , In March 2009, the Bank s shareholders approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this increase was approved by the CBR in November Except as described above, there have been no material changes in the Group s capitalisation and indebtedness since 30 June

68 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investors should read the following discussion and analysis of the financial condition and results of operations of the Group as at 30 June 2009 and 2008 and as at and for the years ended 31 December 2008 and 2007 in conjunction with the Financial Statements included elsewhere in this Base Prospectus. Such financial statements and the related notes thereto have been prepared in accordance with IFRS. Financial statements prepared in accordance with IFRS differ significantly from accounting statements prepared in compliance with RAS, especially with respect to measurement of assets and capital, recognition of liabilities, and disclosures. See also Forward Looking Statements and Presentation of Financial and Other Information. The financial information included herein reflects certain reclassifications that are not reflected in the Financial Statements included elsewhere in this Base Prospectus. See Presentation of Financial and Other Information Presentation of Financial Information Reclassification. For a discussion of the Group s significant accounting policies, see Critical accounting policies below and Note 3 to the consolidated financial statements as at and for the year ended 31 December Overview AK BARS Bank was established in 1993 as an open joint stock company under the laws of the Russian Federation. AK BARS Bank is the largest bank headquartered in the Republic of Tatarstan in terms of both assets and capital. According to figures published by the National Bank of the Republic of Tatarstan, a local territorial department of the CBR, as at 30 June 2009 and 31 December 2008, the Bank accounted for 40.7 per cent. and 41.1 per cent., respectively, of the banking market in the Republic of Tatarstan in terms of assets, and 48.2 per cent. and 50.0 per cent., respectively, in terms of capital. The Bank is headquartered in Kazan and is an authorised agent of the government of the Republic of Tatarstan for servicing the budgetary accounts and payments of the government of the Republic of Tatarstan. As at 30 June 2009 and 31 December 2008, the Group s total consolidated equity was RUB 17,770.8 million and RUB 18,263.0 million, respectively, and total consolidated assets were RUB 206,881.1 million and RUB 202,531.1 million, respectively, calculated in accordance with IFRS. Until 2008, Russia had experienced several consecutive years of increasing domestic demand and benefited from relatively high market prices for key export commodities, particularly oil and gas and metals, which lead to sustained economic growth and an increase in foreign currency reserves. The global financial crisis had a significant adverse effect on the Russian economy, beginning in the third quarter of As of June 2009 as compared to June 2008, industrial production had decreased by 12.1 per cent., exports had decreased by 45.1 per cent., and the number of officially registered unemployed increased by 35.7 per cent. Russia s official reserves fell from a peak of U.S.$598.1 billion in August 2008 to U.S.$413.5 billion in October The stability of the rouble was also affected by the onset of the crisis. The nominal exchange rate of the rouble against the U.S. dollar as at 30 June 2009, as compared to 30 June 2008, decreased by 9.3 per cent., while the real exchange rate decreased by 5.0 per cent. during the same period. As of October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008 and the IFX CBonds bond index had declined about 13.8 per cent. from its highest levels, reached in June By the end of October 2009, the RTS stock index had recovered about per cent. from its lowest level and the IFX CBonds bond index had recovered about 30.8 per cent. from its lowest level. As a result of the deterioration in economic conditions, the Bank made a consolidated net loss for the six months ended 30 June 2009 of RUB million and for the year ended 31 December 2008 of RUB 6,507.1 million. The Bank services its customers through a network of 323 branches ( filialy ), representative offices ( dopolnitelnye offisy ), cash and credit offices and stand alone cash desks, as at 30 June This network is located primarily in the Republic of Tatarstan but also extends to Moscow and other regions of the Russian Federation. As at 30 June 2009, the Bank had 20 branches, 81 representative offices and 133 other offices (including cash and credit offices, stand alone cash desks and operational offices) in the Republic of Tatarstan and 23 branches, 51 representative offices and 15 other offices in other regions of Russia. In the six months ended 30 June 2009, the Bank closed four recently opened branches and 13 representative offices. 60

69 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The Bank s principal business focus is currently on retail and corporate banking. As at 30 June 2009, the Bank provided services to more than 41,400 corporate and 2,076,300 individual customers. The Bank offers more than 100 types of products and services to retail and corporate customers. It offers retail customers a wide range of savings and deposit accounts, loan products, including mortgage loans and automobile loans, as well as investment products, custody services and debit cards issued by the Bank, or plastic cards. The Bank offers its corporate customers a range of current/settlement accounts, deposit facilities, loans and other credit facilities, confirmed letters of credit, brokerage services, foreign currency exchange services and derivative products. The Bank also conducts financial markets operations and offers investment banking services. As at 30 June 2009, 95.8 per cent. of the Bank s share capital was owned either by the Republic of Tatarstan (39.2 per cent.) or by entities owned by persons who are associated with the Republic of Tatarstan (56.6 per cent.). The Republic of Tatarstan has advised the Bank that through such holdings it controls the Bank. In March 2009, the Bank s shareholders approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this increase was finally approved by the CBR in November The new shares were issued to new and existing shareholders, all of whom are connected to the Republic of Tatarstan. See Principal Shareholders. The government of the Republic of Tatarstan exercises significant influence on the strategic development of the Bank but is generally not involved in the day to day management of the Bank. A significant amount of the Bank s business is connected with the Ministry of Finance of the Republic of Tatarstan, and the Bank has significant banking operations with other government related enterprises. The Republic of Tatarstan s government bodies and state organisations accounted for 32.8 per cent. and 13.2 per cent. of the Bank s total customer accounts as at 30 June 2009 and 31 December 2008, respectively. General market conditions and operating environment Due to the substantial concentration of the assets of the Bank in Russia, the Bank is substantially affected by Russian macroeconomic conditions. While there had been improvements in economic trends in the country prior to the impact of the global economic crisis in the third quarter of 2008, the Russian Federation displays certain characteristics of an emerging market and can be severely affected by external shocks, such as the global economic crisis. The following table sets forth certain Russian economic indicators as at or for the six months ended 30 June 2009 and as at or for the years ended 31 December 2008 and As at or for the six months ended 30 June (4) As at or for the years ended 31 December Nominal gross domestic product ( GDP ) (in billions of roubles).. 38, , ,987.4 Deficit/surplus of consolidated budget of the Russian Federation (in billions of roubles)... (3,217.6) 1, ,004.9 Total gross gold and international currency reserves (in millions of U.S. dollars) , , ,391.0 Inflation(%) (1) Nominal appreciation of the rouble against the U.S. dollar(%) (2)... (8.7) Real appreciation of the rouble against the U.S. dollar(%) (3)... (4.0) Refinancing rate of the CBR(%) Source: Central Bank of the Russian Federation. (1) Inflation is measured as change in the consumer price index as a per cent. increase over the last month in the prior year or period. (2) Nominal appreciation constitutes the nominal exchange rate of roubles to U.S. dollars (average for the year or period) divided by the nominal exchange rate of roubles to U.S. dollars (average for the previous year or period). (3) Real appreciation is distinguished from nominal appreciation because the former also takes into account inflation in Russia and the United States, as well as taking into account certain other macroeconomic parameters that are calculated by the CBR. (4) Calculated on an annualised basis. 61

70 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Prior to mid 2008, the increase in domestic demand from relatively low levels following the August 1998 financial crisis, along with high market prices for key export commodities, particularly oil, gas and metals, and sustained economic growth had led to a significant increase in Russia s foreign currency reserves. The significant cash inflows resulting from exports of commodities contributed to the strengthening of the rouble against the U.S. dollar. Statistical data from the Russian Federal State Statistics Service show that each of nominal and real GDP has increased while the population itself has decreased every year during the 1999 to 2008 period. The following table sets forth historical year on year growth of real GDP in Russia for the last five years. The table below shows historical year on year growth of real GDP in Russia for each year in the five year period ended 31 December Year ended 31 December Real GDP growth (%) Sources: Russian Federal State Statistics Service. The global financial crisis has had a significant adverse effect on the Russian economy. As of June 2009 as compared to June 2008, industrial production had decreased by 12.1 per cent., Russia s exports had decreased by 45.1 per cent., and the number of officially registered unemployed increased by 35.7 per cent. Russia s official reserves fell from a peak of U.S.$598.1 billion in August 2008 to U.S.$413.5 billion as at 1 October The global financial and economic crisis has also affected the stability of the rouble that had been steadily appreciating against the U.S. dollar in both nominal and real terms prior to the onset of the crisis. The nominal exchange rate of the rouble against the U.S. dollar as at 30 June 2009, as compared to 30 June 2008, decreased by 9.3 per cent., while the real exchange rate decreased by 5.0 per cent. during the same period. In October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008, and recovered about 145 per cent. from its lowest level in 2009 by the end of October The Russian economy has, in the past, generated large amounts of excess liquidity, which, prior to the onset of the global credit crunch in 2008, resulted in significant competition among banks for borrowers. This competition, along with decreasing interest rates in Russia during the period prior to the summer of 2007, resulted in a declining net interest margin generated by banks operating in Russia, including the Bank. As the Russian banking sector is particularly sensitive to economic conditions in Russia and fluctuations in the value of the rouble, the global credit crunch, which began in the summer of 2007 and, in September 2008, developed into a full scale global financial crisis, has had a significant adverse effect on the liquidity and, in many cases, solvency of Russian banks and is likely to continue to adversely affect their operations throughout See Risk Factors Risks Related to the Bank s Business and the Banking Sector The continuation of turmoil in global credit markets may continue to adversely affect the Bank s business, financial condition, results of operations and prospects and Risk Factors Risks Related to the Bank s Business and the Banking Sector Turmoil in global credit markets has already adversely affected, and may continue to adversely affect, the Russian economy, the Russian banking industry in general and the Bank in particular. In addition, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of certain categories of collateral, and other legal and fiscal impediments also contribute to difficulties experienced by banks currently operating in Russia. The stability of the Russian economy will be significantly affected by the Government s continued implementation of administrative, legal and economic reforms. 62

71 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Factors affecting the Group s results of operations The Group s results are affected by a variety of factors, including the following: General market conditions Substantially all of the Group s revenues (comprising interest income, fee and commission income, dividend income, gains less losses from securities at fair value through profit and loss and other operating income) are derived from its operations in the Republic of Tatarstan and, to a lesser degree, other Russian regions. Accordingly, the general state of, and changes in, the Russian economy and, in particular, in the economy of the Republic of Tatarstan and changes in the levels of business activity, the levels of Russian consumer spending, the real estate market in Russia and, in particular, the Republic of Tatarstan and the performance of the Russian securities market, may have a material effect on the Group s operations. In 2007, the Russian economy and, in particular, the economy of the Republic of Tatarstan experienced significant growth, influenced in part by sustained high oil prices and a related increase in investment in the oil and oil services industries, as well as favourable export markets for other commodities. Since 2008, the financial crisis has caused general market conditions to deteriorate significantly. Industrial production and Russia s exports have decreased, unemployment has increased and Russia s official reserves have declined significantly. The financial crisis has also affected the stability of the rouble. The Group expects that the foregoing factors will continue to affect its consolidated results of operations. As a result, the economic downturn in Russia and, in particular, in the Republic of Tatarstan, may continue to have a negative impact on the Group s results of operations. Interest rates In 2007, 2008 and the first half of 2009, the Group generated a substantial majority of its interest income from loans and advances to customers. The average annual interest rate on loans and advances to customers decreased from 13.6 per cent. in 2007, to 12.4 per cent. in 2008, and increased to 14.7 per cent. in the six months ended 30 June 2009, with the decline from 2007 to 2008 driven primarily by competition among banks for borrowers and the increase to the six months ended 30 June 2009 resulting from the increasing interest rate environment in Russia. Any decrease in average interest rates on loans and advances to customers has a negative effect on the Group s net interest income, as do rapid increases, as interest rates paid on deposits can adjust more quickly than interest rates on the loan portfolio. During the same period, average interest rates on average balances on all interest earning assets were essentially unchanged at 13.4 per cent. in 2007 and 13.3 per cent. in 2008, but increased to 14.7 per cent. in the six months ended 30 June See Selected statistical information Average balance sheet and interest rate data. The average interest rate paid by the Group on customer accounts, which constitute the principal source of interest income, and consequently funding for the Group, increased from 6.0 per cent. in 2007, to 6.8 per cent. in 2008, and to 8.4 per cent. in the six months ended 30 June The increase from 2007 to 2008 was due largely to increased competition for customer deposits from other banks and an increase in the market interest rates in the third quarter of The average interest rates on all interest bearing liabilities of the Group decreased from 6.7 per cent. in 2007, to 6.3 per cent. in 2008, but increased significantly to 10.4 per cent. in the six months ended 30 June See Selected statistical information Average balance sheet and interest rate data. Relationship with the government of the Republic of Tatarstan As at 30 June 2009, 95.8 per cent. of the Bank s share capital was owned either by the Republic of Tatarstan (39.2 per cent.) or by entities owned by persons who are associated with the Republic (56.6 per cent.) The Republic has advised the Bank that through such holdings it controls the Bank. In March 2009, the Bank s shareholders approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this increase was finally approved by the CBR in November A substantial part of the Group s business is connected with the Ministry of Finance of the Republic of Tatarstan and other government bodies. As at 30 June 2009, 32.8 per cent. of total funds in the Group s 63

72 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 customer accounts comprised term deposits and current/settlement accounts of Republic of Tatarstan government bodies and state organisations, compared to 13.2 per cent. as at 31 December 2008 and 18.7 per cent. as at 31 December In addition, historically, capital contributions from its shareholders, including the Republic of Tatarstan, have been an important source the Group s funding. For instance, in 2006, the government of the Republic of Tatarstan, through its affiliates, subscribed for the Bank shares in the amount of RUB 11,200.0 million. In practice, actions taken by the government of the Republic of Tatarstan may have considerable influence on the management and operations of the Group. Basis of preparation of the consolidated financial statements The consolidated financial statements of the Group have been prepared in accordance with IFRS. The Group maintains accounting records in accordance with Russian banking and accounting regulations. The consolidated financial statements have been prepared from those accounting records and adjusted as necessary in order to comply, in all material respects, with IFRS. The preparation of the consolidated financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Critical accounting policies The Group s consolidated results of operations and consolidated financial condition presented in the Financial Statements and the notes thereto and in the selected statistical and other information appearing elsewhere in this Base Prospectus are, to a large degree, dependent upon the Group s accounting policies. The selection and application of the Group s accounting policies involve judgments, estimates and uncertainties that are susceptible to change. The Group s significant accounting policies are described in the notes to the Financial Statements, which begin on page F-1 of this Base Prospectus. The Group has identified the following accounting policies that it believes are most critical to an understanding of the consolidated results of operations and consolidated financial condition of the Group. These critical accounting policies require management s subjective and complex judgment about matters that are inherently uncertain. Management bases its judgments and estimates on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results likely will differ from estimates based upon management s assumptions and such differences could be material. Impairment losses on loans and advances The Group regularly reviews its loan portfolio to assess impairment. In determining whether an impairment loss should be recorded in the consolidated income statement, management makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with any individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experienced. Tax legislation Russian tax, currency and customs legislation is subject to varying interpretations. See Note 12 to the Unaudited Interim Financial Information and Note 31 to the consolidated financial statements of the Group for the year ended 31 December Deferred income tax asset recognition The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the balance sheet. Deferred income tax assets are recorded to the extent 64

73 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on a medium-term and long-term forecast of taxable profits of the Group prepared by management. The forecast of taxable profits is based on management expectations that are believed to be reasonable under the circumstances. Initial recognition of related party transactions In the normal course of business, the Group enters into transactions with related parties. IAS 39 Financial Instruments: Recognition and Measurement requires initial recognition of financial instruments based on their fair values where there is no active market for such transactions; judgement is applied in determining if transactions are priced at market or non market interest rates. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Disclosure of the fair value of investment properties The fair value of investment property is estimated based on the analysis of the market yields in Kazan. Due to the nature of the property and lack of comparable market data, management applies its judgement in assessing the available market information. See Note 12 to the consolidated financial statements of the Group for the year ended 31 December Going concern Management of the Group prepared the Unaudited Interim Financial Information and the Audited Financial Statements on a going concern basis. In making this judgment management considered the Group s financial position, current intentions, profitability of operations and access to financial resources and analysed the impact of the recent financial crisis on future operations of the Group. In particular, management considered the impact of economic deteriorations in the Russian Federation since fourth quarter 2008 on the financial position of the Group, its liquidity position and ability to meet its regulatory requirements. The Group reported a loss in the first half of 2009 and in 2008 of RUB million and RUB 6,507.1 million, respectively. Also, the provision for loan impairment increased during the year ended 31 December 2008 by RUB 7,576 million and during the six months ended 30 June 2009 by RUB 4,145 million. These were the main factors which lead management to consider going concern as a critical judgement. As a result of all the analyses made, management of the Group considers that the financial position, development and performance of the Group are satisfactory given a number of actions taken by the Group to ensure the Group will continue to be a going concern, in particular: requirements to the methods of placing liquidity reserves became more rigorous; methods of credit risk management were enhanced (procedures for loans issuance and monitoring became more rigorous, limits are revised on a regular basis depending on the changes on the market); there is regular stress testing of key financial indicators of the Group and the Bank to ensure they will be in compliance with external covenants and all regulatory requirements in relation to capital adequacy, liquidity and financial risk management procedures in case of negative events on the market; and on 30 March 2009 the extraordinary shareholders meeting approved an additional issue of ordinary shares with a total nominal value of RUB 9,000 million and this increase was finally approved by the CBR in November Management is of the opinion that the before-mentioned actions ensure the Group will continue as a going concern. 65

74 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Selected statistical information Average balance sheet and interest rate data The following table sets forth the average balances of interest earning assets and interest bearing liabilities of the Group, the amount of interest income and interest expense and the average interest rate for such assets and liabilities for the six months ended 30 June 2009 and 2008 and the years ended 31 December 2008 and For the purposes of this table, the average balances of assets and liabilities represent the average of the opening and closing balances for the applicable year or period. The results of the analysis would be different if alternative or more frequent averaging methods were used and differences could be material. For example, where the opening and closing balances for an interest earning asset are relatively low compared with the actual average daily balances for the period, the average interest rate will be higher than if the average was calculated on the basis of average daily balances. The average rates below are calculated by dividing aggregate interest income or expense for the relevant line item below by the average balance for the same item for the applicable year/period. Average interest rates are distinct from the effective interest rates presented in the financial statements. For instance, see Note 3 to the consolidated financial statements of the Group for the year ended 31 December Six months ended 30 June Year ended 31 December Interest Average Interest Average Interest Average Interest Average Average income/ rate (%) Average income/ rate (%) Average income/ rate (%) Average income/ rate (%) balance expense (Annual) balance expense (Annual) balance expense (Annual) balance expense (Annual) (unaudited) (in millions of roubles, except percentages) Interest earning assets: Due from other banks (1)... 2, , , , Loans and advances to customers , , , , , , , , Securities at fair value through profit or loss and repurchase receivables (2)... 10, , , , , Total interest earning assets , , , , , , , , Interest bearing liabilities: Due to other banks (3)... 38, , , , , , Customer accounts... 92, , , , , , , , Debt securities in issue (4)... 27, , , , , , , Syndicated loans and loan participation notes (5)... 19, , , , , , Subordinated debt (6)... 6, , , , Total interest bearing liabilities , , , , , , , , Net interest spread (7) (%) Net interest income... 2, , , ,733.9 Net interest margin (8) (%) (1) Includes current term placements with other banks, net of provision for impairment, and reverse sale and repurchase agreements with other banks. (2) Includes federal loan bonds (OFZ), municipal bonds, corporate Eurobonds and promissory notes. (3) Includes short term and overnight placements of other banks, sale and repurchase agreements with other banks and correspondent accounts. (4) Includes rouble and U.S. dollar denominated promissory notes and rouble denominated bonds issued by the Group. See Note 17 to the consolidated financial statements of the Group for the year ended 31 December (5) Includes syndicated loans received from a consortium of Russian and foreign banks and the Bank s loan participation notes. See Liquidity and capital resources Cash flow Financing activities. (6) Comprises subordinated debt denominated in roubles, and bearing interest at a rate linked to the U.S. dollar/rouble exchange rate, of an entity controlled by the Tatarstan government. (7) The difference between the average interest rate on interest earning assets and the average interest rate on interest bearing liabilities. Average rate on interest earning assets was calculated as total interest income divided by interest earning assets representing the average of the opening and closing balances for the respective year/period. Average rate on interest bearing liabilities was calculated as total interest expense divided by interest bearing liabilities representing the average of the opening and closing balances for the applicable year/period. (8) Net interest income before provision for loan impairment for the year/period expressed as a percentage of average interest earning assets representing the average of the opening and closing balances for the applicable year/period. 66

75 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Net changes in interest income and expense volume and rate analysis The following tables provide a comparative analysis of net changes in interest income and interest expense by reference to changes in average volume and average rates for the years ended 31 December 2007 and 2008 and for the six months ended 30 June 2008 and Net changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for interest earning assets and sources of funds on which interest is received or paid. Volume change is calculated as the change in volume multiplied by the previous average rate, while rate change is the change in average rate multiplied by the later year volume. Average balances used for calculating the information for the table below constitute the average of opening and closing balances for the applicable year or period. Six months ended 30 June Year ended 31 December compared to 2008 compared to Increase (decrease) due to changes in Increase (decrease) due to changes in Volume Rate Net change Volume Rate Net change (unaudited) (in millions of roubles) (in millions of roubles) Interest income Due from other banks... (19.6) (405.8) (425.4) (171.4) Loans and advances to customers... 3, , , ,037.1 (1,578.4) 4,458.7 Debt securities at fair value through profit or loss and repurchase receivables (396.4) (388.4) (67.5) Total interest income... 3, , , ,798.2 (251.2) 5,547.0 Interest expense Due to other banks... 2, , , ,356.5 (726.1) Customer accounts , , , ,699.0 Subordinated debt (129.7) (79.0) Debt securities in issue , , (116.2) Syndicated loans and loan participation notes... (114.9) (868.3) (983.2) (537.6) (89.7) Total interest expense... 2, , , ,587.7 (711.5) 2,876.2 Net change in net interest income (2,721.2) (2,422.2) 2, ,

76 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Results of operations Summary The following table summarises selected income statement data for the Group for the six months ended 30 June 2009 and 2008 and for the years ended 31 December 2008 and Six months ended 30 June 134 Years ended 31 December 134 Change from prior year/period 134 Six months / /2007 (unaudited (in millions of roubles) (%) (%) Interest income... 12, , , , Interest expense... (9,657.7) (3,913.9) (9,979.5) (7,103.4) Net interest income... 2, , , ,733.9 (31.4) 39.7 Loan impairment provision (4,145.2) (891.0) (7,576.0) (1,682.3) Net interest income after provision for loan impairment... (1,505.2) 2, , ,051.5 (150.8) (63.8) Fee and commission income , Fee and commission expense... (185.5) (46.7) (182.2) (98.8) Gains less losses/(loss net of gains) from securities at fair value through profit or loss... 2,196.5 (3.7) (7,011.3) , ,139.6 Gains less losses/(loss net of gains) from trading in foreign currencies (152.5) Losses net of gains/gains less losses from financial derivatives... (21.2) (53.6) 1,061.4 (489.5) (Loss net of gains)/gains less losses from foreign exchange translation... (223.2) 13.9 (1,103.8) , Dividend income (81.9) (6.7) Other operating income Administrative and other operating expenses... (1,871.3) (2,369.8) (5,118.9) (4,025.0) Loss/(profit) before tax.. (613.0) 1,118.8 (8,603.9) 3,188.3 (154.8) Income tax credit/(expense) (266.2) 2,096.8 (583.7) (145.4) (459.2) Loss/(profit) for year or period... (492.2) (6,507.1) 2,604.6 (157.7) (349.8) For the six months ended 30 June 2009, the Group recorded a loss of RUB million, compared to a profit of RUB million for the six months ended 30 June A significant increase in provisions for loan impairment in the six months ended 30 June 2009 was the main reason for the losses, but this was partially offset by gains from securities at fair value through profit or loss. Net interest margin also declined in the six months ended 30 June For the year ended 31 December 2008, the Group recorded a loss of RUB 6,507.1 million, compared to a profit of RUB 2,604.6 million for the year ended 31 December Significant increases in provisions 68

77 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 for loan impairment in 2008, losses from securities at fair value through profit or loss (primarily as a result of substantial declines in the market value of the securities in the Bank s trading portfolio) and losses net of gains on foreign exchange translation were the primary drivers of the losses in Six months ended 30 June 2009 compared to six months ended 30 June 2008 Interest income, interest expense, net interest income and loan impairment provision The amount of net interest income earned by the Group is affected by a number of factors. It is primarily determined by the balances of interest earning assets and interest bearing liabilities, as well as the difference between rates earned on interest earning assets and rates paid on interest bearing liabilities. Interest earning assets are composed primarily of the Group s loans and advances to customers, which constituted 91.4 per cent. of interest earning assets as at 30 June Interest bearing liabilities are composed primarily of customer accounts, which constituted 53.5 per cent. of interest bearing liabilities as at 30 June Interest income Interest income consists of (a) loans and advances to customers (which includes interest income paid to the Group by its corporate, government and individual customers that have borrowed funds from the Group as well as fees and commissions paid to the Group in connection with the establishment and service of loans), (b) securities at fair value through profit or loss (interest earned by the Group on debt securities held by the Group, mainly domestic bonds) and (c) balances due from other banks (interest paid by banks and other lending institutions that have borrowed funds from the Group). The following table sets out the principal components of the Group s interest income for the six months ended 30 June 2009 and Six months ended 30 June Change 134 from prior period (unaudited) (in millions of roubles) (%) Interest income Loans and advances to customers... 11, , Securities at fair value through profit or loss (24.0) Due from other banks (45.6) Total interest income... 12, , For the six months ended 30 June 2009, the Group s interest income was RUB 12,297.7 million, which represented an increase of RUB 4,532.5 million, or 58.4 per cent., compared with interest income of RUB 7,765.2 million for the six months ended 30 June This increase was principally due to the increase in interest income from the Bank s loans and advances to customers. The increase in interest income from loans and advances to customers in the six months ended 30 June 2009, as compared with the six months ended 30 June 2008, was primarily attributable to an increase in interest rates and, to a lesser extent, the average balance of loans and advances to customers (which increased by RUB 31,265.3 million, or 25.2 per cent., from RUB 123,891.8 million for the six months ended 30 June 2008 to RUB 155,157.1 million for the six months ended 30 June 2009). In order to manage its position in the financial crisis and focus on liquidity, the Bank took a decision to substantially restrict lending to new customers in the fourth quarter of 2008, although it continued lending to its existing customers. The Bank resumed new lending under most of its loan products, with more conservative credit policies, in the first quarter of

78 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Interest expense Interest expense consists principally of amounts paid by the Group as interest on (a) customer accounts (term deposits of legal entities, current/demand accounts and term deposits of individuals and current/settlement accounts of legal entities), (b) debt securities in issue, (c) syndicated loans and loan participation notes, (d) balances due to other banks and (e) subordinated debt. The following table sets out the principal components of the Group s interest expense for the six months ended 30 June 2009 and Six months ended 30 June Change 134 from prior period (unaudited) (in millions of roubles) (%) Interest expense Due to other banks... 3, Customer accounts... 3, , Debt securities in issue... 1, Syndicated loans and loan participation notes (88.5) Subordinated debt (11.2) Total interest expense... 9, , For the six months ended 30 June 2009, the Group recorded interest expense of RUB 9,657.7 million, which represented an increase of RUB 5,743.8 million, or per cent., compared with interest expense of RUB 3,913.9 million for the six months ended 30 June The increase for the six months ended 30 June 2009 resulted primarily from increases in the average rate paid on amounts due to other banks, which relates in part to the higher rates paid on the advances from the CBR (which made up the majority of amounts due to other banks as at 30 June 2009 and 31 December 2008) and the growth of the average balance of the Bank s customer accounts and higher rates paid on customer accounts. Following the impact of the economic crisis in the third quarter of 2008, the Bank has relied on borrowings from the CBR, customer accounts and domestic debt securities to make up an increased proportion of its funding base, as the amount of funding from international syndicated loans and loan participation notes has declined. Prior to the onset of the economic crisis, the Bank sought to grow customer deposits by offering attractive deposit rates, and the Bank has maintained this position which has contributed to growth of customer deposits, particularly as customers of smaller, more risky banks migrated to larger, more secure banks since the beginning of See Selected statistical information Net changes in interest income and expense volume and rate analysis, Funding and Liquidity and capital resources Cash Flow Financing activities. Net interest income before loan impairment provision Net interest income before loan impairment provision decreased by 31.4 per cent. to RUB 2,640.0 million for the six months ended 30 June 2009 from RUB 3,851.3 million for the six months ended 30 June The Group s net interest margin, defined as net interest income before loan impairment provision for the period expressed as a percentage of average interest earning assets representing the average of the opening and closing balances for the applicable period, was 3.2 per cent. for the six months ended 30 June 2009, compared to 6.4 per cent. for the year ended 31 December The Group s net interest spread, defined as the difference between the average interest rate on interest earning assets and the average interest rate on interest bearing liabilities, was 4.3 per cent. for the six months ended 30 June 2009, compared to 6.9 per cent. for the year ended 31 December See Selected statistical information Average balance sheet and interest rate data. The table below summarises the effective interest rates by currency for the Group s assets and liabilities for the six months ended 30 June 2009 and The analysis has been prepared based on period end effective rates used for amortisation of the respective assets/liabilities. 70

79 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 For the six months ended 30 June ) Roubles US dollars Other Roubles US dollars Other (unaudited) (%) Assets Correspondent accounts and overnight placements with other banks Debt securities at fair value through profit or loss and repurchase receivables Due from other banks Loans and advances to customers Liabilities Due to other banks Customer accounts Current and settlement accounts Term deposits of customers Debt securities in issue Syndicated loans and loan participation notes 9 7 Subordinated debt (1) In the table above indicates that there were no such assets or liabilities in the applicable year, while 0 indicates that the effective interest rate on such assets was below 0.5 per cent. or was 0.0 per cent. Loan impairment provision Loan impairment provision includes changes in the provision for impairment of loans and advances to customers, as well as changes in the loan impairment provision for amounts due from other banks. The following table sets out movements in the Group s provision for loan impairment relating to the Group s loans and advances to customers for the six months ended 30 June 2009 and (in millions of roubles) Loan impairment provision (loans and advances to customers) at 1 January 12, ,510.3 Loan impairment provision... 4, Loans and advances to customers written off during the year as uncollectible... (0.6) (35.2) Loan impairment provision (loans and advances to customers) at 30 June (unaudited)... 17, ,

80 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The following table sets out the Group s provisions for loan impairment by loan category for the six months ended 30 June 2009 and Six months ended 30 June Change 134 from prior period (unaudited) (in millions of roubles) (%) Provision for impairment Corporate loans... 7, , Loans to small and medium-sized entities... 7, , Consumer loans... 1, Mortgage loans Car loans Loans to state and public organisations Plastic cards ,850.0 Total provision for impairment... 17, , The Group recorded a loan impairment provision in respect of loans and advances to customers of RUB 4,145.2 million for the six months ended 30 June 2009, compared to a provision of RUB million for the six months ended 30 June The increase in the loan impairment provision in respect of loans and advances to customers for the six months ended 30 June 2009 reflects a deterioration in the loan portfolio, in conjunction with the deterioration in general economic conditions in Russia, along with an increase in the size of the loan portfolio. The most significant increases in provisions were with respect to corporate loans and loans to small and medium sized enterprises, with businesses in the construction, retail and financial sectors being most significantly affected by the economic crisis. Non interest income and expense Non interest income and expense consists of fee and commission income, fee and commission expense, gains less losses from securities at fair value through profit or loss, gains less losses from trading in foreign currencies, gains less losses from foreign exchange translation, loss net of gains from financial derivatives and other operating income. The following table sets out the principal components of the Group s non interest income and expense for the six months ended 30 June 2009 and Six months ended 30 June Change 134 from prior period (unaudited) (in millions of roubles) (%) Non interest income and expense Fee and commission income Fee and commission expense... (185.5) (46.7) Gains less losses/(loss net of gains) from securities at fair value through profit or loss... 2,196.5 (3.7) 59,464.9 Gains less losses from trading in foreign currencies (Loss net of gains)/gains less losses from foreign exchange translation... (223.2) ,705.0 Loss net of gains from financial derivatives... (21.1) (53.6) (60.6) Dividend income (81.4) Other operating income Total non interest income... 2,

81 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Net fee and commission income The following table sets out the principal components of the Group s net fee and commission income for the six months ended 30 June 2009 and Six months ended 30 June Change 134 from prior period (unaudited) (in millions of roubles) (%) Fee and commission income Settlement transactions (l) Issuance of financial guarantees Cash transactions (2) Operations with plastic cards Currency transactions Securities transactions (52.3) Cash collection Other (3) (66.1) Total fee and commission income Fee and commission expense Settlement transactions (4) Securities transactions Operations with plastic cards Cash transactions (10.2) Cash collection (89.4) Issuance of financial guarantees (91.5) Total fee and commission expense... (185.5) (46.7) Net fee and commission income (1) Comprises account maintenance and certain transaction fees charged to individual and corporate customer account holders. (2) Comprises fees charged to individual and corporate customer account holders in connection with cash withdrawals and commissions charged for the provision of other cash services. (3) Comprises principally commissions charged to customers in connection with issuing letters of credit. (4) Comprises principally commissions and bank transfer fees payable by the Group. Total fee and commission income increased to RUB million for the six months ended 30 June 2009, which represented an increase of 47.2 per cent., from RUB million for six months ended 30 June The increase was due principally to a 47.8 per cent. increase in settlement transactions. The Group incurred total fee and commission expenses of RUB million for the six months ended 30 June 2009, an increase of per cent., from RUB 46.7 million for the six months ended 30 June This increase in fee and commission expense was due principally to increases in settlement transactions, operations with plastic cards and securities transactions. Net fee and commission income comprises the difference between fee and commission income and expense relating to settlement transactions, cash transactions, currency transactions, securities transactions, cash collections, issuance of financial guarantees, operations with plastic cards and other transactions. For the six months ended 30 June 2009, the Group s net fee and commission income was RUB million, compared with total net fee and commission income of RUB million in the six months ended 30 June 2008, an increase of 19.3 per cent. 73

82 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Gains less losses from securities at fair value through profit or loss Gains less losses from securities at fair value through profit or loss comprises the net gain or loss from transactions by the Group in corporate shares, corporate bonds, Federal (OFZ) bonds, investments in mutual funds, municipal bonds, corporate Eurobonds and promissory notes. The following table sets out the values of the Group s securities at fair value through profit or loss as at 30 June 2009 and As at 30 June (unaudited) (in millions of roubles) Corporate bonds... 8, ,741.5 Federal loan bonds (OFZ)... 1, Corporate eurobonds Municipal bonds Promissory notes ,055.3 Total debt securities... 11, ,836.0 Corporate shares... 1, ,338.6 Global depository receipts Investments in mutual funds Total securities at fair value through profit or loss... 13, ,804.6 The Group recorded gains from securities at fair value through profit or loss in the amount of RUB 2,196.5 million for the six months ended 30 June 2009, which represented an increase of RUB 2,200.2 million, compared to a loss of RUB 3.7 million for the six months ended 30 June The substantial gains in the six months ended 30 June 2009 correspond with gains in markets prices for such securities over the period, which represent a recovery from the substantial declines which occurred in To illustrate the declines in the values of Russian securities, as of October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008 and the IFX CBonds bond index had declined about 13.8 per cent. from its highest levels, reached in June By the end of October 2009, the RTS stock index had recovered about per cent. from its lowest level and the IFX CBonds bond index had recovered about 30.8 per cent. from its lowest level. Gains less losses from foreign exchange translation The Group s losses net of gains from foreign exchange translation were RUB million for the six months ended 30 June 2009, compared to gains less losses of RUB 13.9 million for the six months ended 30 June 2008, which decrease reflects exchange rate changes. Loss net of gains from financial derivatives The Group recorded a loss net of gains from financial derivatives of RUB 21.1 million for the six months ended 30 June 2009, compared to RUB 53.6 million for the six months ended 30 June 2008, a decrease of 60.6 per cent., which reflects changes in fair value in financial derivatives. 74

83 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Administrative and other operating expenses Administrative and other operating expenses consists of staff costs, other costs of premises and equipment, depreciation of premises, equipment and intangible assets, advertising and marketing services and other expenses (including rent, taxes other than income, insurance expenses, security expenses, charity, telecommunication expenses and other expenses). The following table shows the principal components of administrative and operating expenses for the six months ended 30 June 2009 and Six months ended 30 June Change 134 between periods (unaudited) (in millions of roubles) (%) Administrative and other operating expenses Staff costs ,041.2 (33.9) Depreciation of premises, equipment and intangible assets Other costs of premises and equipment (44.9) Advertising and marketing services (47.1) Other (13.3) Total administrative and other operating expenses... 1, ,369.8 (21.0) Administrative and other operating expenses decreased to RUB 1,871.3 million for the six months ended 30 June 2009, which represented a decrease of 21.0 per cent., from RUB 2,369.8 million for the six months ended 30 June 2008, reflecting a decrease in staff costs over the period. Staff costs Staff costs consist principally of wages, staff bonuses and statutory social security and pension contributions. For the six months ended 30 June 2009, staff costs decreased to RUB million, which was a 33.9 per cent. decrease from RUB 1,041.2 million for the six months ended 30 June The decrease in staff costs resulted from a decrease in employee numbers, as well as reductions in the staff bonuses. The Group employed 5,027 persons at 30 June 2009, a decrease of 7.6 per cent. from 5,438 employees at 30 June The reduction in employee numbers resulted from the closure of four newly opened branches and a number of representative offices, along with an overall redundancy programme. The costs associated with the redundancy programme and branch closures were not material. Other expenses related to premises and equipment Other expenses related to premises and equipment consist principally of payments for utilities and renovation or repair expenses. For the six months ended 30 June 2009, other expenses related to premises and equipment decreased to RUB million, which was a 44.9 per cent. decrease from RUB million for the six months ended 30 June Profit before tax The Group reported a loss before tax of RUB million for the six months ended 30 June 2009, as compared to a profit before tax of RUB 1,118.8 million for the six months ended 30 June Income tax expense The income tax expense in the consolidated income statement comprises current tax and changes in deferred tax. Current tax is calculated on the basis of the taxable profit for the year using tax rates in force at the balance sheet date. Taxes other than on income are recorded as administrative and other operating expenses. The statutory income tax rate applicable to the majority of the Group s income was 20 and 24 per cent., in 2009 and 2008 respectively. The tax rate for interest income on Russian Government securities was 75

84 Level: 3 From: 3 Monday, November 16, :44 eprint Section per cent. in both 2009 and The Bank had an income tax credit of RUB million in the six months ended 30 June 2009, compared with an expense of RUB million for the six months ended 30 June The effective tax rate was 20 per cent. and 24 per cent., respectively, for the six months ended 30 June 2009 and Profit for the period As a result of the factors discussed above, for the six months ended 30 June 2009, the Group made a loss of RUB million, compared with a profit of RUB million for the six months ended 30 June Year ended 31 December 2008 compared to year ended 31 December 2007 Interest income, interest expense, net interest income and loan impairment provision The amount of net interest income earned by the Group is affected by a number of factors. It is primarily determined by the balances of interest earning assets and interest bearing liabilities, as well as the difference between rates earned on interest earning assets and rates paid on interest bearing liabilities. Interest earning assets are composed primarily of the Group s loans and advances to customers, which constituted 94.2 per cent. and 90.1 per cent., respectively, of interest earning assets as at 31 December 2008 and Interest bearing liabilities are composed primarily of customer accounts, which constituted 45.9 per cent. and 55.2 per cent., respectively, of interest bearing liabilities as at 31 December 2008 and For the year ended 31 December 2008, the Group s net interest income after provision for loan impairment was RUB 1,828.7 million, a decrease of 63.8 per cent. compared with net interest income after provision for loan impairment of RUB 5,051.5 million for the year ended 31 December Interest income The following table sets out the principal components of the Group s interest income for the years ended 31 December 2008 and Year ended 31 December Change 134 between years (in millions of roubles) (%) Interest income Loans and advances to customers, except on impaired loans... 16, , Debt securities at fair value through profit or loss... 1, Due from other banks Interest income on impaired financial assets (loans to customers) Total interest income... 19, , For the year ended 31 December 2008, the Group s interest income was RUB 19,384.3 million, an increase of RUB 5,547.0 million, or 40.1 per cent., compared with interest income of RUB 13,837.3 million for the year ended 31 December Substantially all of this increase was due to an increase in interest income from loans and advances to customers. The increase in interest income from loans and advances to customers was primarily attributable to an increase in the average balance of loans and advances to customers, which increased by RUB 44,388.4 million, or 48.9 per cent., from RUB 90,718.0 million for the year ended 31 December 2007 to RUB 135,106.4 million for the year ended 31 December The average interest rate on loans and advances to customer decreased slightly from 13.6 per cent. for the year ended 31 December 2007 to 12.4 per cent. for the year ended 31 December The increase in the average balance of loans and advances to customers in 2008, as compared with 2007, reflected a continuation in the trend in prior years of growth in the Bank s loan portfolio, which had ended in the third quarter of In order to manage its position in the financial crisis and focus on liquidity, the Bank took a decision to substantially restrict new lending in the fourth quarter of 2008, although it continued to lend to existing customers. The Bank resumed new lending under most of its loan products, with more conservative credit policies, in the first quarter of 2009.

85 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Interest expense Interest expense consists principally of amounts paid by the Group as interest on (a) customer accounts (term deposits of legal entities, current/demand accounts and term deposits of individuals and current/settlement accounts of legal entities), (b) debt securities in issue, (c) syndicated loans and loan participation notes, (d) balances due to other banks and (e) subordinated debt. The following table sets out the principal components of the Group s interest expense for the years ended 31 December 2008 and Year ended 31 December Change 134 between years (in millions of roubles) (%) Interest expense Term deposits of legal entities... 3, , Debt securities in issue... 1, , Term placement of other banks... 1, Current/demand accounts and term deposits of individuals... 1, ,540.4 (23.4) Syndicated loans and loan participation notes... 1, ,093.0 (8.2) Subordinated debt Current/settlement accounts of legal entities Total interest expense... 9, , For the year ended 31 December 2008, the Group recorded interest expense of RUB 9,979.5 million, an increase of RUB 2,876.1 million, or 40.5 per cent., compared with interest expense of RUB 7,103.4 million for the year ended 31 December This increase resulted primarily from the growth of the average balances of interest bearing liabilities utilised by the Group to fund its growing portfolio of loans and, which was offset slightly by a small decline in average interest rates on interest bearing liabilities. The increase in interest expense in 2008, as compared with 2007, was primarily attributable to increases in the average rate paid on amounts due to other banks, which relates in part to the higher rates paid on the advances from the CBR (which made up the majority of amounts due to other banks as at 31 December 2008) and the growth of the average balance of the Bank s customer accounts and higher rates paid on customer accounts. Following the impact of the economic crisis in the third quarter of 2008, the Bank has relied on borrowings from the CBR, customer accounts and domestic debt securities to make up an increased proportion of its funding base, as the amount of funding from international syndicated loans and loan participation notes has declined. Interest expense on customer accounts increased by RUB 1,699.0 million or 46.5 per cent., from RUB 3,650.8 million for the year ended 31 December 2007 to RUB 5,349.8 million for the year ended 31 December This was due principally to an increase in the average balance of customer accounts and, to a lesser degree, to an increase in the average interest rate payable on such accounts. The increase in the average balance of customer accounts was due to growth in the Group s customer base and growth in regional operations. Prior to the onset of the economic crisis, the Bank sought to grow customer deposits by offering attractive deposit rates, and the Bank has maintained this position which has contributed to growth of customer deposits. The increase in overall interest expense was also attributable to a substantial increase in the average balance of amounts due to other banks, from RUB 9,285.4 million in 2007 to RUB 28,972.1 million in 2008, an increase of per cent. This was primarily due to the Bank receiving short term unsecured loans in the amount of RUB 28,945.2 million from the CBR between October and December These funds carried a weighted average interest rate of 12 per cent. The loan was rolled over until the first quarter of 2009, when it was replaced with a smaller secured loan from the CBR bearing a lower interest rate. Interest on debt securities in issue increased by 52.2 per cent., to RUB 1,700.2 million for the year ended 31 December 2008, compared to RUB 1,116.8 million for the year ended 31 December The increase in interest expense on debt securities in issue was due to the increase in the average balance of debt 77

86 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 securities in issue, partially offset by a small decrease in the average interest rate paid on such securities. In October 2008, the Bank issued two series of RUB denominated domestic bonds, with one comprising an issue of RUB 3,000 million, with an effective interest rate of 11.7 per cent. due in October 2011 and the other comprising an issue of RUB 5,000 million, with an effective interest rate of 10.5 per cent. due in October Interest on syndicated loans and loan participation notes was largely unchanged, decreasing by 8.2 per cent., to RUB 1,003.3 million for the year ended 31 December 2008, compared to RUB 1,093.0 million for the year ended 31 December The average balance of syndicated loans and loan participation notes increased by 29.1 per cent. from RUB 14,005.2 million for the year ended 31 December 2007 to RUB 19,743.9 million for the year ended 31 December For further description of the Bank s funding base, see Funding and Liquidity and capital resources Cash Flow Financing activities. Net interest income before loan impairment provision Net interest income before loan impairment provision increased by 39.7 per cent., to RUB 9,404.8 million for the year ended 31 December 2008 from RUB 6,733.9 million for the year ended 31 December The Group s net interest margin, defined as net interest income before loan impairment provision for the year expressed as a percentage of average interest earning assets representing the average of the opening and closing balances for the applicable year, was 6.4 per cent., for the year ended 31 December 2008, and 6.5 per cent., for the year ended 31 December The Group s net interest spread, defined as the difference between the average interest rate on interest earning assets and the average interest rate on interest bearing liabilities, was 6.9 per cent., for the year ended 31 December 2008, compared to 6.7 per cent., for the year ended 31 December The slight decrease in 2008 in net interest margin and net interest spread was attributable to a decrease in the average interest rate on interest bearing liabilities. See Selected statistical information Average balance sheet and interest rate data. The table below summarises the effective interest rates by currency for the Group s assets and liabilities for the years ended 31 December 2008 and The analysis has been prepared based on period end effective rates used for amortisation of the respective assets/liabilities. For the year ended December (1) Roubles US dollars Other Roubles US dollars Other (%) Assets Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Subordinated debt (1) In the table above - indicates that there were no such assets or liabilities in the applicable year, while 0 indicates that the effective interest rate on such assets was either 0.0 per cent., or below 0.5 per cent. 78

87 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Loan impairment provision Loan impairment provision includes changes in the provision for impairment of loans and advances to customers, as well as changes in the provision for loan impairment for amounts due from other banks. The following table sets out movements in the Group s loan impairment provision relating to the Group s loans and advances to customers for the years ended 31 December 2008 and For the years ended 31 December (in millions of roubles) Loan impairment provision (loans and advances to customers) at 1 January 5, ,855.0 Loan impairment provision during the year... 7, ,689.2 Loans and advances to customers written off during the year as uncollectible... (178.9) (33.9) Loan impairment provision (loans and advances to customers) at 31 December... 12, ,510.3 The following table sets out movement of the Group s provisions for loan impairment by loan category for the years ended 31 December 2008 and Year ended 31 December Change 134 between years (in millions of roubles) (%) Corporate loans... 3, Loans to small and medium-sized entities... 3, Consumer loans Mortgage loans Car loans Loans to state and public organisations (30.6) Plastic cards Total provision for impairment... 7, , The Group recorded a loan impairment provision in respect of loans and advances to customers of RUB 7,576.0 million for the year ended 31 December 2008, compared to a provision of RUB 1,689.2 million for the year ended 31 December The loan impairment provision in respect of loans and advances to customers for the year ended 31 December 2008 was substantially higher than the provision for the year ended 31 December This resulted largely from the impact of the global financial crisis on general economic conditions in Russia, which has in turn caused a deterioration in the Bank s loan portfolio. The most significant increases in provisions were with respect to corporate loans and loans to small and medium sized enterprises, with businesses in the construction, retail and financial sectors being most significantly affected by the economic crisis. 79

88 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Non interest income and expense The following table sets out the principal components of the Group s non interest income and expense for the years ended 31 December 2008 and Year ended 31 December Change 134 between years (in millions of roubles) (%) Non interest income and expense Fee and commission income... 1, Fee and commission expense... (182.2) (98.8) 84.4 Losses net of gains from financial derivatives... 1,061.4 (489.5) (316.8) (Losses net of gains)/gains less losses from securities at fair value through profit or loss... (7,011.3) (1,139.6) (Losses net of gains)/gains less losses from trading in foreign currencies... (152.5) 34.7 (539.5) Foreign exchange translation (losses net of gains)/gains less losses (1,103.8) (276.9) Dividend income (6.7) Other operating income Total non interest income... (5,313.8) 2,161.8 (345.8) Net fee and commission income For the year ended 31 December 2008, the Group s net fee and commission income was RUB million, compared with total net fee and commission income of RUB million for the year ended 31 December 2007, an increase of 33.7 per cent. The following table sets out the principal components of the Group s net fee and commission income for the years ended 31 December 2008 and Year ended 31 December Change 134 between years (in millions of roubles) (%) Fee and commission income Settlement transactions Cash transactions Operation with plastic cards Issuance of financial guarantees Securities transactions Currency transactions (12.8) Cash collection Other Total fee and commission income... 1,039.1 aaaa aaaa 40.4 aaaa Fee and commission expense Securities transactions Operations with plastic cards Cash collection Settlement transactions ,522.0 Cash transactions Guarantees received (80.6) Other Total fee and commission expense Net fee and commission income

89 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Total fee and commission income increased to RUB 1,039.1 million for the year ended 31 December 2008, an increase of 40.4 per cent., from RUB million for the year ended 31 December The increase was due principally to an increase in the volume of settlement transactions and cash transactions. The Group incurred total fee and commission expenses of RUB million for the year ended 31 December 2008, an increase of 84.4 per cent., from RUB 98.8 million for the year ended 31 December The increase in fee and commission expense in 2008 was due principally to an increase in the volume of securities transactions and settlement transactions. Gains less losses from securities at fair value through profit or loss The Group recorded losses less gains from securities at fair value through profit or loss in the amount of RUB 7,011.3 million for the year ended 31 December 2008, compared to gains less losses of RUB million for the year ended 31 December This substantial decrease was due principally to a revaluation of the Group s securities portfolio reflecting significant declines in the market value of securities in the Bank s portfolio. The following table sets out the values of the Group s securities at fair value through profit or loss as at 31 December 2008 and As at 31 December (in millions of roubles) Corporate bonds... 3, ,739.6 Promissory notes... 1, Federal loan bonds (OFZ) ,086.5 Municipal bonds Corporate eurobonds Total debt securities... 6, ,368.3 Corporate shares... 1, ,742.2 Investments in mutual funds Global depository receipts Total securities at fair value through profit or loss... 8, ,737.3 To illustrate the declines in the values of Russian securities, as of October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008 and the IFX-CBonds bond index had declined about 13.8 per cent. from its highest levels, reached in June Both of these indexes have partially recovered in Foreign exchange translation gain less losses/ (losses net of gains) The Group recorded a net loss as a result of foreign exchange translation of RUB million for the year ended 31 December 2008, compared with a net gain of RUB 34.7 million for the year ended 31 December 2007, which reflects exchange rate changes. 81

90 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Administrative and other operating expenses The following table shows the principal components of operating expenses for the years ended 31 December 2008 and Year ended 31 December Change 134 between years (in millions of roubles) (%) Administrative and other operating expenses Staff costs... 2, , Other costs of premises and equipment Rent Depreciation of premises, equipment and tangible assets Advertising and marketing services Taxes and other than on income Insurance expenses Security expenses Telecommunications expenses Charity Other Total administrative and other operating expenses... 5, , Administrative and other operating expenses increased to RUB 5,118.9 million for the year ended 31 December 2008, an increase of 27.2 per cent., from RUB 4,025.0 million for the year ended 31 December Increases in staff costs and other expenses related to premises and equipment accounted for 48.3 per cent., and 49.0 per cent., respectively, of the total increase in administrative and other operating expenses for the years ended 31 December 2008 and Staff costs Staff costs consist principally of wages, staff bonuses and statutory social security and pension contributions. For the year ended 31 December 2008, staff costs increased to RUB 2,472.7 million, which was a 25.3 per cent. increase from RUB 1,973.2 million for the year ended 31 December The increase in staff costs resulted primarily from an increase in average employee numbers. The Bank had 5,531 employees as at 31 December 2008, an increase of 12.3 per cent. from 4,926 employees as at 31 December Other expenses related to premises and equipment Other expenses related to premises and equipment consist principally of payments for utilities and renovation or repair expenses. For the year ended 31 December 2008, other expenses related to premises and equipment increased to RUB million, which was a 23.0 per cent. increase from RUB million for the year ended 31 December This increase was primarily due to growth in fixed assets resulting from the expansion of the Group s branch network in the first half of Profit before tax The Group reported loss before tax of RUB 8,603.9 million for the year ended 31 December 2008, as compared to a profit of RUB 3,188.3 million for the year ended 31 December Income tax expense The income tax expense in the consolidated income statement comprises current tax and changes in deferred tax. Current tax is calculated on the basis of the taxable profit for the year using tax rates in force at the balance sheet date. Taxes other than on income are recorded as administrative and other operating expenses. 82

91 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The statutory income tax rate applicable to the majority of the Group s income was 24 per cent., in both 2008 and In November 2008, the standard corporate income tax rate was reduced from 24 per cent. to 20 per cent., with effect from 1 January The tax rate for interest income on Russian Government securities was 15 per cent., in 2008 and Income tax expense was RUB million for the year ended 31 December 2007 compared with a credit of RUB 2,096.8 million for the year ended 31 December The effective tax rate was 18.3 per cent. for the year ended 31 December 2007, a difference of 5.7 per cent. with the statutory rate. The Group had a tax credit for the year ended 31 December Profit for the year As a result of the factors discussed above, for the year ended 31 December 2008, the Group s loss for the year was RUB 6,507.1 million compared with a profit of RUB 2,604.6 million for the year ended 31 December Liquidity and capital resources Liquidity The Group manages its short term liquidity needs or surpluses through short term interbank borrowing and lending, purchases and sales of securities and intraday and overnight borrowing from the CBR. Medium and long term liquidity is managed by matching the currency and maturity of the Group s assets and liabilities. For additional information on the Group s liquidity management, see Risk Management Liquidity risk. Capital expenditures The total capital expenditure of the Group for the six months ended 30 June 2009 and 2008 amounted to RUB million and RUB million, respectively. The total capital expenditure of the Group for the years ended 31 December 2008 and 2007 amounted to RUB million and RUB million, respectively. The Group finances its capital expenditures from internal and external sources. Funding The principal sources of funding for the Group are customer accounts (balances in current/demand/settlement accounts and term deposits), debt securities in issue, balances due to other banks and other borrowed funds that include syndicated loans and proceeds of the issuance of loan participation notes. 83

92 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The following table sets out the Group s sources of funding, other than capital contributions, as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (in millions of roubles, except percentages) Due to other banks (1) Funds provided by the CBR 28, , Current term placements of other banks... 5, , , Sale and repurchase agreements with other banks , , Correspondent accounts and overnight placements of other banks Total due to other banks 35, , , Debt securities in issue Promissory notes... 19, , , Bonds... 8, , , Total debt securities in issue... 28, , , Customer accounts Term deposits... 30, , , Current/demand/settlement accounts... 68, , , Sale and repurchase agreements... 1, , , Total customer accounts 100, , , Syndicated loans and loan participation notes Syndicated loans... 5, , Loan participation notes... 17, , , Total syndicated loans and loan participation notes 17, , , Total subordinated debt.. 6, , , Total funding , , , (1) A significant proportion of short term borrowings from other banks is used by the Group for liquidity management purposes. As at 30 June 2009, the aggregate carrying amount of the Group s interest bearing liabilities that served as funding sources for the Group s operations was RUB 187,469.8 million as compared to RUB 182,749.9 million as at 31 December 2008 and RUB 133,326.4 million as at 31 December Following the impact of the economic crisis in the third quarter of 2008, the Bank has relied on borrowings from the CBR, customer accounts and domestic debt securities to make up an increased proportion of its funding base, as the amount of funding from international syndicated loans and loan participation notes has declined. In March 2009, the Bank s shareholders approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this increase was finally approved by the CBR in 84

93 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 November This capital increase will serve to buttress the Bank s capital position, following its losses for the year ended 31 December 2009 and the six months ended 30 June As at 30 June 2009, the proportion of the Group s interest bearing liabilities denominated in roubles was 81.1 per cent., compared to 79.7 per cent. as at 31 December 2008 and 80.7 per cent. as at 31 December As at 30 June 2009, the proportion of the Group s interest bearing liabilities denominated in U.S. dollars was 14.6 per cent., compared to 15.7 per cent. as at 31 December 2008 and 16.8 per cent. as at 31 December Due to other banks As at 30 June 2009, amounts due to other banks, which consist of short term placements with the CBR and other banks, sale and repurchase agreements with other banks and correspondent accounts and overnight placements with other banks, were RUB 35,121.5 million, or 18.7 per cent., of the Group s total liabilities, as compared to RUB 42,231.3 million, or 23.1 per cent., of the Group s total liabilities as at 31 December 2008 and RUB 15,712.9 million, or 11.8 per cent. of the Group s total liabilities as at 31 December The increase in 2008 was due principally to collateralised and non collateralised loans to the Bank from the CBR granted in October 2008 pursuant to Government programmes to provide liquidity in the Russian banking sector required as a result of the global economic downturn. As at 31 December 2008, loans due to the CBR amounted to RUB 28,945.2 million. The loans bore interest at rates of 7.5 per cent. to 12.9 per cent. per annum and had durations ranging from three to six months. These loans amount to 68.5 per cent. of the Bank s amounts due to other banks as at 31 December Promissory notes As at 30 June 2009, the Group had outstanding promissory notes in an aggregate amount of RUB 19,879.7 million, representing 10.6 per cent., of the Group s total interest bearing liabilities, as compared to RUB 18,115.6 million in promissory notes outstanding as at 31 December 2008, or 9.9 per cent., of total interest bearing liabilities as at that date, and RUB 18,650.5 million in promissory notes outstanding as at 31 December 2007, or 14.0 per cent., of total interest bearing liabilities as at that date. The Group s promissory notes were issued to a variety of banks and corporate entities. As at 30 June 2009, the Group s promissory notes had effective interest rates ranging from non interest bearing (for promissory notes payable on demand ) to 16.9 per cent., and with maturity dates from on demand to October All promissory notes issued prior to 2006 were denominated in roubles, while promissory notes issued since 2006 have been denominated in roubles and U.S. dollars. Bonds As at 30 June 2009, the Group had rouble denominated bonds outstanding in an aggregate carrying amount of RUB 8,170.4 million, representing 4.4 per cent. of the Group s total interest bearing liabilities as at that date, as compared to RUB 9,711.9 million in bonds issued as at 31 December 2008, or 5.3 per cent., of total interest bearing liabilities as at that date, and RUB 1,552.6 million in bonds issued as at 31 December 2007, or 1.2 per cent., of total interest bearing liabilities as at that date. A portion of the Group s bonds are issued to investors in the Russian Federation and are traded on the Moscow Interbank Currency Exchange ( MICEX ). Customer accounts Customer accounts continue to be the Group s principal source of funding. As at 30 June 2009, customer accounts amounted to RUB 100,244.2 million, which represented 53.5 per cent. of the Group s total interest bearing liabilities, as compared to RUB 83,859.0 million as at 31 December 2008, representing 45.9 per cent. of total interest liabilities, and RUB 73,581.3 million, representing 55.2 per cent. of the Group s liabilities, as at 31 December The Group has thus far been able to meet its overall funding requirements primarily from customer deposits. 85

94 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The increase in customer accounts in absolute terms in the six months ended 30 June 2009 as compared with 2008 and 2007 was primarily attributable to the Group s policy of offering attractive interest rates on customer accounts in order to grow customer accounts and, in 2008 as compared with 2007, the expansion of the Group s branch network. As a percentage of the Group s interest bearing liabilities customer accounts decreased in 2008, reflecting increases in funding obtained from other sources but has increased in the first half of The following table sets forth the Group s customer accounts by type of depositor and deposit as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (unaudited) (in millions of roubles, except percentages) State and public organisations Current/settlement accounts 2, , , Term deposits... 28, , , Other legal entities Current/settlement accounts 21, , , Term deposits... 20, , , Sale and repurchase agreements... 1, , , Individuals Current/demand accounts.. 6, , , Term deposits... 19, , , Total customer accounts 100, , , The following table describes the Group s customer accounts by sector as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (in millions of roubles, except percentages) State and public organizations... 31, , , Individuals... 25, , , Oil and gas... 10, , , Finance institutions (1)... 9, , , Construction and manufacturing... 7, , , Trade... 6, , Chemical industry... 2, , , Agriculture and food processing... 1, , , Other... 6, , , Total customer accounts 100, , , (1) Excludes banks. 86

95 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 As at 30 June 2009, 25.6 per cent. of the aggregate balance of all customer accounts of the Group were of individuals and 32.8 per cent. were of the Tartarstan Republic government bodies and state organisations, which comprise related parties of the Bank. As at 31 December 2008, 27.2 per cent. of the aggregate balance of all Group customer accounts was held by individuals, 23.9 per cent. was held by state and public organisations and 14.2 per cent. was held by entities in the chemical industry. The most significant increases in 2008 were in respect of (i) accounts held by entities in the chemical industry, which increased by RUB 10,350.0 million from RUB 1,564.0 million as at 31 December 2007, (ii) accounts held by state and public organisations, which increased by RUB 6,274.1 million from RUB 13,747.4 million as at 31 December 2007 and (iii) accounts held by entities in the oil and gas industry, which increased by RUB 2,111.3 million from RUB 6,990.5 million as at 31 December As a percentage of total customer accounts, customer accounts held by individuals decreased from 31.0 per cent. as at 31 December 2007 to 27.2 per cent. as at 31 December This decrease reflects, to a large extent, customer withdrawal of deposits in the fourth quarter of 2008 as a result of a loss of confidence in the wake of the onset of the current economic downturn. As at 30 June 2009, total related party customer accounts were RUB 42,848.0 million, or 42.7 per cent. of total customer accounts, as compared with RUB 18,105.6 million, or 21.6 per cent. of total customer accounts as at 31 December 2008 and RUB 26,477.4 million, or 36.0 per cent. of total customer accounts, as at 31 December Related party customer accounts included term deposits of the Tartarstan Republic government bodies and state organisations, amounting to RUB 30,421.0 million, or 30.3 per cent. of total customer accounts, as at 30 June 2009, as compared with RUB 8,142.5 million, or 9.7 per cent. of total customer accounts, as at 31 December 2008 and RUB 11,334.8 million, or 15.4 per cent. of total customer accounts, as at 31 December As at 30 June 2009, the Group had 9 customers, which represent Tatarstan Republic government bodies, oil and gas, and agriculture and food processing enterprises, with balances above RUB 1,200.0 million, as compared with nine customers as at 31 December 2008 and five customers as at 31 December The following table sets forth customer accounts of the Group by their remaining contractual maturity as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (unaudited) (in millions of roubles, except percentages) Demand and less than 1 month... 30, , , From 1 to 6 months... 4, , , From 6 to 12 months... 35, , , From 1 to 5 years... 28, , , More than 5 years Total , , , Total funds on deposit in customer accounts for less than one month as a percentage of all funds in customer accounts decreased to 30.7 per cent. as at 30 June 2009 from 38.8 per cent. as at 31 December 2008 which, in turn, had decreased from 39.1 per cent. as at 31 December 2007, while total funds on deposit with maturity of more than one year, but less than five years decreased to 28.9 per cent. as at 30 June 2009 from 31.0 per cent. as at 31 December 2008, which, in turn, had decreased from 38.3 per cent. as at 31 December Syndicated loans As at 30 June 2009, the Group had no outstanding syndicated loans, as compared to RUB 5,945.3 million in syndicated loans outstanding as at 31 December 2008, or 3.3 per cent. of total interest bearing 87

96 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 liabilities as at that date, and RUB 6,976.4 million outstanding as at 31 December 2007, or 5.2 per cent. of total interest bearing liabilities as at that date. Following are details of the Group s syndicated loans outstanding during 2007 and 2008: In April 2008, the Group received a syndicated loan of U.S.$200 million (RUB 5,876.1 million) from a consortium of Russian and foreign banks for which Banco Finantia, S.A., Commerzbank AG, ICICI Bank UK plc, Landesbank Berlin AG and WestLB AG, London branch acted as lead arrangers. The effective annual interest rate on this loan was 7.3 per cent. and the loan was repaid when due in April In September 2007, the Group received a syndicated loan of U.S.$100 million (RUB 2,454.6 million) from a group of Russian and foreign banks, for which Bank of Tokyo Mitsubishi UFJ, Ltd., and CALYON Bank acted as lead arrangers. The effective annual interest rate was 6.9 per cent. and the loan was repaid when due in September In December 2006, the Group received a syndicated loan of U.S.$140 million (RUB 3,436.5 million), which was originally due in December 2007, but which was then extended, with the principal amount reduced to U.S.$100 million (RUB 2,454.6 million), to December The loan was from a consortium of Russian and foreign banks for which Deutsche Bank AG and ABN AMRO Bank N.V. acted as lead arrangers. The effective annual interest rate on this loan was 8.0 per cent. and the loan was repaid in December In August 2006, the Group received a syndicated loan of U.S.$85.0 million (RUB 2,086.4 million) from a consortium of Russian and foreign banks for which Bank Austria Creditanstalt AG and WestLB AG acted as lead arrangers. The effective annual interest rate was 8.0 per cent. The loan was repaid when due in March There is presently very limited availability of international syndicated loans for Russian banks. Loan participation notes The Group s medium term loan participation notes are accounted for at an amortised cost of RUB 17,178.2 million, representing 9.2 per cent., of the Group s total interest bearing liabilities as at 30 June 2009, as compared to RUB 16,112.6 million (as amortised) as at 31 December 2008, representing 8.8 per cent., of the Group s total interest bearing liabilities, and RUB 10,453.5 million (as amortised) as at 31 December 2007, representing 7.8 per cent., of the Group s total interest bearing liabilities. The gross proceeds of the issuance of notes were, in each case, on lent to the Bank at the same interest rate. Following are details of the Group s loan participation notes outstanding during 2007, 2008 and the six months ended 30 June 2009: In June 2008, the Group issued U.S.$300 million (RUB 8, million) 9.3 per cent. loan participation notes due in June 2011, which have an effective annual interest rate of 9.9 per cent. per annum. In June 2007 the Group issued U.S.$250 million (RUB 7,345.1 million) 8.3 per cent. loan participation notes due in June 2010, which have an effective annual interest rate of 8.8 per cent. per annum. In October 2005, the Group issued U.S.$175 million (RUB 4,295.5 million) 8.0 per cent. loan participation notes due October 2008, which have an effective annual interest rate of 8.6 per cent. per annum. These loan participation notes were repaid in Subordinated debt The Group received subordinated loans denominated in roubles from a company controlled by the Tatarstan government in August These loans have a stated interest rate of 9.5 per cent., which is linked to the U.S. dollar/ rouble exchange rate. The loans mature in July As at 30 June 2009, the outstanding balance of subordinated debt was RUB 6,875.7 million, or 3.7 per cent. of the Group s total interest bearing liabilities, as compared to RUB 6,774.2 million, or 3.7 per cent. of total interest bearing liabilities, as at 31 88

97 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 December 2008 and RUB 6,399.2 million, or 4.8 per cent. of total interest bearing liabilities as at 31 December The effective interest rate on the subordinated debt as at 30 June 2009 was 9.7 per cent. See Related Party Transactions. Loan portfolio The following table summarises the Group s loans and advances to customers by sector as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (unaudited) (in millions of roubles, except percentages) Loans Finance... 41, , , Trade... 36, , , Individuals... 26, , , Construction... 22, , , Agriculture and food processing... 21, , , Manufacturing... 12, , , Other... 9, , , Total loans and advances to customers before provision for impairment 171,437, , , The proportion of loans to individuals to the Group s total loans and advances to customers increased from 16.6 per cent., as at 31 December 2007, to 17.0 per cent., as at 31 December 2008 and decreased to 15.3 per cent., as at 30 June The proportion of gross loans to construction companies in the Group s total loan gross portfolio increased from 11.3 per cent., as at 31 December 2007, to 13.4 per cent., as at 31 December 2008 and decreased marginally to 13.3 per cent., as at 30 June The proportion of loans to agricultural and food processing companies to the Group s total loans and advances to customers decreased from 16.9 per cent., as at 31 December 2007, to 12.6 per cent., as at 31 December 2008 and to 12.5 per cent., as at 30 June For more information on the Group s lending to companies and individuals in the agricultural sector, see Business Banking services and activities Other banking operations Role as agent for servicing budget accounts and payments of the government of the Republic of Tatarstan. The following table sets out the Group s loans and advances to customers, excluding interbank loans and off balance sheet credit related commitments, net of loan impairment provision by remaining contractual maturity as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (unaudited) (in millions of roubles, except percentages) Demand and less than 1 month... 21, , , From 1 to 6 months... 21, , , From 6 to 12 months... 26, , , From 1 year to 5 years... 68, , , More than 5 years... 17, , , Total , , ,

98 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Loans with a maturity exceeding one year have historically represented the largest proportion of the Group s loans and advances to customers and represented a majority of such loans and advances as at 30 June The proportion of loans and advances to customers with a maturity of between one and five years decreased from 56.2 per cent., of its loans and advances to customers, excluding interbank loans and off balance sheet credit related commitments, net of loan impairment provision, as at 31 December 2007, to 48.5 per cent., as at 31 December 2008, and to 44.3 per cent., of 30 June During the same period, the Group has increased the proportion of loans and advances to customers with a maturity of more than five years from 10.8 per cent., of its loans and advances to customers, excluding interbank loans and off balance sheet credit related commitments, net of loan impairment provision, as at 31 December 2007, to 11.2 per cent., as at 31 December 2008, and to 11.4 per cent., as at 30 June 2009, reflecting an increase in mortgage and longer term vehicle and equipment loan products offered by the Group. The following table shows the Group s loans and advances to customers, excluding interbank loans and off balance sheet credit related commitments, net of loan impairment provision, by currency as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (unaudited) (in millions of roubles, except percentages) Roubles , , , U.S. dollars... 20, , , Other currencies... 5, , , Total loans and advances to customers , , , As at 30 June 2009, 83.4 per cent., of the Group s loans and advances to customers, excluding interbank loans and off balance sheet credit related commitments, net of loan impairment provision, was denominated in roubles, 13.1 per cent., in U.S. dollars and 3.5 per cent., in other currencies. The share of loans denominated in roubles and U.S. dollars is primarily a consequence of the composition of the Group s customer base. In most cases, the Group s customers obtain proceeds and make payments in roubles and require rouble denominated loans. 90

99 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The following table sets out loans and advances to customers, including impaired loans and loan impairment provision, as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December 12 Change from prior date / /2007 (unaudited) (in millions of roubles, except percentages) % Current loans , , ,171.3 (3.9) 35.3 Reverse sale and repurchase agreements 6, , , Impaired loans (1)... 11, , , Gross loans and advances to customers , , , Less: loan impairment provision... (17,052.0) (12,907.4) (5,510.3) Net loans and advances to customers 154, , ,284.6 (1.0) 36.4 Loan impairment provision as a percentage of gross loans and advances to customers (%) Loan impairment provision as a percentage of impaired loans and advances (1) (in millions of roubles) (36.5) (8.5) Impaired loans as a percentage of gross loans and advances to customers (1) (%) (1) Impaired loans represent the amount of loans and advances to customers with sign of impairment. As at 30 June 2009, the loan impairment provision as a percentage of gross loans and advances to customers increased to 9.9 per cent., from 7.6 per cent., as at 31 December 2008, and 4.6 per cent., as at 31 December The increase in provisions as a percentage of gross loans and advances to customers was primarily a result of the decline in quality in the Group s loans and advances to customers as a direct result of the recent deterioration in global financial markets. Impaired loans as a percentage of gross loans and advances to customers increased to 6.7 per cent. as at 30 June 2009 from 3.3 per cent., as at 31 December 2008, and 1.8 per cent., as at 13 December The following table summarises the Group s loans due from other banks as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December (unaudited) (in millions of roubles) Due from other banks Current term placements with other banks... 3, ,501.3 Reverse sale and repurchase agreements with other banks Total due from other banks... 3, ,

100 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Securities at fair value through profit or loss The following table sets out information relating to the Group s securities portfolio as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December amount % of total amount % of total amount % of total (unaudited) (in millions of roubles, except percentages) Corporate bonds... 8, , , Corporate shares... 1, , , Federal loan bonds (OFZ) (1) 1, , Corporate Eurobonds Global depository receipts Municipal bonds Investments in mutual funds Promissory notes , Total securities at fair value though profit or loss... 13, , , (1) Includes amounts reclassified to comfort to the presentation adopted in the IFRS consolidated financial statements for the year ended 31 December See Presentation of Financial and other information Presentation of Financial Information Reclassification. Corporate shares are shares of Russian companies. The majority of corporate shares are freely tradable in Russia. Corporate bonds are rouble denominated debt securities issued by large Russian companies and banks. These bonds are traded on MICEX, other Russian stock exchanges or on the over the counter market. At 30 June 2009, corporate bonds had maturity dates from August 2009 to June 2018, coupon rates from 8.5 per cent., to 20.0 per cent., and yield to maturity from 9.0 per cent., to 17.0 per cent., depending on the type of bond issue. Russian federal (OFZ) bonds are rouble denominated government debt securities issued by the Ministry of Finance of the Russian Federation. These bonds are traded on MICEX. At 30 June 2009, OFZ bonds had maturity dates from January 2010 to February 2036, coupon rates of from approximately 5.8 per cent., to 11.9 per cent., and yield to maturity from 6.0 per cent., to 12.0 per cent., depending on the type of bond issue. Investments in mutual funds are rouble denominated investments without stated maturity. These funds invest principally in shares and bonds of large and medium sized Russian companies. Municipal bonds are rouble denominated debt securities issued by municipal administrations and regions of the Russian Federation. These bonds are traded on MICEX, other Russian stock exchanges or on the over the counter market. At 30 June 2009, these bonds had maturity dates from December 2009 to June 2017, coupon rates from approximately 8.0 per cent., to 14.0 per cent., and yield to maturity from 13.0 per cent., to 16.0 per cent., depending on the type of bond issue. Corporate Eurobonds are debt securities denominated in U.S. dollars issued by large Russian companies that are freely tradable, usually via a listing on a European securities exchange. As at 30 June 2009, corporate Eurobonds held by the Group had maturity dates from November 2009 to August 2015, coupon rate of 7.7 per cent. to 10.0 per cent. and yield to maturity from 11.0 per cent. to 12.0 per cent., depending on the type of bond issue. 92

101 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Promissory notes are rouble denominated debt securities issued by large Russian companies and banks that are tradable on the over the counter market. At 30 June 2009, the promissory notes held by the Group had maturity on demand and yield to maturity at 0.0 per cent. Capital adequacy The Bank s capital adequacy ratio (the CAR ) is calculated in accordance with the international framework for capital measurement and capital standards for banking institutions set by the Basel Committee on Banking Regulation and Supervisory Practices. The following table sets out the principal components of the Bank s CAR as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December (unaudited) (in millions of roubles) Tier I capital Share capital... 25, , ,244.0 Additional paid in capital Accumulated deficit... (7,822.8) (7,330.6) (262.8) Total Tier I capital... 17, , ,330.8 Tier II capital (1)... 6, , ,399.2 Total capital... 24, , ,730.0 Total risk weighted assets , , ,866.5 Capital adequacy ratios Tier I capital divided by risk weighted assets % Risk adjusted capital ratio (2) % (1) Tier II capital consists of subordinated debt. (2) Tier I capital plus Tier II capital divided by risk weighted assets. Despite significant growth in risk weighted assets, which increased by 23.3 per cent., or by RUB 37,901.2 million, from RUB 162,866.5 million as at 31 December 2007 to RUB 200,767.7 million as at 31 December 2008 before decreasing to RUB 190,114.7 million as at 30 June 2009, the Bank maintained CAR significantly above capital standards set by the Basel Committee on Banking Supervision. This level was achieved largely due increases in mortgaged and other real estate collateralised loans. The CBR requires banks to maintain a capital adequacy ratio of 10.0 per cent., of risk weighted assets, computed based on Russian Accounting Standards. As at 30 June 2009, the Bank s capital adequacy ratio calculated in accordance with Russian Accounting Standards was 12.5 per cent. and as at 31 December 2008, the Bank s capital adequacy ratio calculated in accordance with Russian accounting standards was 12.9 per cent. Segment analysis The chief operating decision maker, the Executive Board, reviews the Group s internal reporting in order to assess performance and allocate resources. On the basis of these reports, the Group has three business segments: retail banking (comprising the Group s private banking services, private customer current accounts, savings products, deposit accounts, investment savings products, custody operations, credit and debit cards, consumer loans and mortgage products), corporate banking (comprising the Group s direct debit facilities, current accounts, deposit accounts, overdraft facilities, loan and other credit facilities, foreign currency services and derivative products) and investment banking (comprising financial instruments trading, structured finance services, corporate leasing and merger and acquisitions advisory services). 93

102 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The Executive Board assesses the performance of the operating segments based on a measure of profit or loss before income tax prepared in accordance with RAS after elimination of intersegment revenue and/or expenses. Other information provided to the Executive Board is balance sheet assets prepared in accordance with RAS. The following table sets forth certain information for the Group s reportable business segments for the six months ended 30 June Retail Corporate Investment banking banking banking Total (in millions of roubles) Six months ended 30 June 2009 (unaudited) Total revenues... 1, , , ,549.3 Inter segment revenue... (2,107.7) (2,107.7) Revenue from external customers... 1, , , ,441.6 Other segment items Provision for loan impairment... (375.0) (1,979.2) (2,354.2) Operating expenses net of income... (911.8) (5,749.1) (1,828.3) (8,489.2) Administrative expenses... (882.6) (906.6) (87.5) (1,876.8) Adjusted (loss) / profit before income tax... (312.3) Total assets reported to the Executive Board (unaudited) 30 June , , , , December , , , ,793.3 The following table sets forth certain information for the Group s reportable business segments for the six months ended 30 June Retail Corporate Investment banking banking banking Total (in millions of roubles) Six months ended 30 June 2008 (unaudited) Total revenues... 2, , , ,440.6 Inter segment revenue... (266.3) (1,344.4) (1,610.8) Revenue from external customers... 2, , ,829.8 Provision for loan impairment... (330.3) (1,558.1) (1,888.4) Operating (expenses net of income)/income less expenses... (861.7) (3,456.6) (4,035.7) Administrative expenses... (1,583.0) (1,543.1) (148.6) (3,274.7) Adjusted (loss) / profit before income tax... (554.8) Total assets reported to the Executive Board (unaudited) June , , , , December , , , ,

103 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The following table sets forth certain information for the Group s reportable business segments for the year ended 31 December Retail Corporate Investment banking banking banking Total (in millions of roubles) Year ended 31 December 2008 Total revenues... 3, , , ,718.3 Inter segment revenue... (21.9) 0.0 (764.5) (786.4) Revenue from external customers... 3, , , ,931.9 Other segment items Provision for loan impairment... (717.7) (3,340.3) 0.0 (4,058.0) Operating expenses net of income... (2,194.3) (7,782.6) 38.4 (9,938.5) Administrative expenses... (2,270.7) (2,209.1) (210.2) (4,690.0) Adjusted (loss) / profit before income tax... (1,438.9) 1, , ,245.4 Total assets reported to the Executive Board 31 December , , , , December , , , ,427.8 The following table sets forth certain information for the Group s reportable business segments for the year ended 31 December Retail Corporate Investment banking banking banking Total (in millions of roubles) Year ended 31 December 2007 Total revenues... 3, , , ,750.4 Inter segment revenue... (674.8) 0.0 (658.2) (1,333.0) Revenue from external customers... 2, , , ,417.4 Other segment items Provision for loan impairment... (222.7) (1,036.5) 0.0 (1,259.2) Operating expenses net of income... (1,422.7) (4,572.3) (859.5) (6,854.5) Administrative expenses... (1,827.5) (1,815.3) (244.6) (3,887.4) Adjusted (loss) / profit before income tax... (1,117.6) 2, , ,416.3 Total assets reported to the Executive Board 31 December , , , , December , , , ,335.7 In each of the six months ended 30 June 2009 and 30 June 2008 and the years ended 31 December 2008 and 31 December 2007, the Group s corporate banking segment generated the greatest proportion of the Group s total external revenues (RUB 9,603.1 million, RUB 7,331.3 million, RUB 14,780.8 million and RUB 9,928.6 million, respectively, compared to RUB 1,857.1 million, RUB 2,220.2 million, RUB 3,743.8 million and RUB 2,355.3 million, respectively, for retail banking). The proportion of the Group s external revenues attributable to retail banking activities as a percentage of the Group s total external revenues increased from 16.3 per cent. in 2007, to 17.9 per cent. in 2008 before decreasing to 13.8 per cent. in the first six months of 2009, while the proportion of the Group s assets attributable to retail banking activities as a percentage of the Group s total assets remained relatively stable over the period, amounting to 47.0 per cent. as at 31 December 2007, 48.4 per cent. as at 31 December 2008 and 47.0 per cent. as at 30 June Contingencies and commitments Certain commitments and contingencies are anticipated by the Group: 95

104 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Legal proceedings From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and internal professional advice, management believes that no material losses will be incurred in respect of these claims and, accordingly, no provision has been made in the Financial Statements in respect of such claims. Tax legislation Russian tax and customs legislation is subject to varying interpretations and changes, which can occur frequently. The Group s management s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. Recent events suggest that Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. The Supreme Commercial Court introduced a new concept of unjustified tax benefit which is defined mainly by reference to specific examples of such tax benefits (e.g. absence of business purpose) which may be disallowed. While the tax authorities and courts have provided only limited guidance on the interpretation of this new concept, the tax authorities nonetheless have actively sought to apply this concept when challenging tax positions taken by taxpayers. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods (see Risk Factors Risks relating to the Russian Legal System and Russian Legislation Russian tax law and practice are not fully developed and are subject to frequent changes ). Russian transfer pricing legislation introduced on 1 January 1999 provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20 per cent. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20 per cent., from the price applied in similar transactions by the same taxpayer within a short period of time and barter transactions. The transfer pricing rules are vaguely drafted, generally leaving wide scope for interpretation by the tax authorities and courts. In the past, the arbitration court practice with this respect has been contradictory. There is a plan to introduce substantial amendments to the transfer pricing legislation. Such amendments, if adopted, are expected to result in stricter transfer pricing rules. Tax liabilities arising from intercompany transactions are determined using actual transaction prices, until proved otherwise. It is possible that with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the development of the approach of the Russian tax authorities the transfer prices could be more aggressively challenged in the future. Given the relatively brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity. In addition to the above transfer pricing matters, management estimates that the Group has other possible contingent obligations from exposure to other tax risks in the amount of RUB million as at 30 June However, management believes that its interpretations of the relevant legislation are appropriate and the Group s position on tax, currency legislation and customs issues related to this possible contingent obligation will be sustained. Therefore, as at 30 June 2009, the Group has not recorded any provision for potential tax liabilities. Contractual obligations The table below sets forth the Group s contractual obligations by maturity as at 30 June Payments due by period 96

105 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 Total amounts Less than One to five More than committed one year years five years (unaudited) (in million of roubles) Contractual obligations: Customer accounts , , , Debt securities in issue... 28, , , Syndicated loans and loan participation notes... 17, , ,544.2 Due to other banks... 35, , , Other financial liabilities... 1, , Subordinated debt... 6, ,211.4 Total contractual obligations , , , ,204.2 Off balance sheet arrangements The Group s off balance sheet commitments are credit related commitments that consist of import letters of credit and guarantees issued. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. The table below sets out the Group s outstanding credit related commitments as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December (unaudited) (in millions of roubles) Guarantees issued... 13, , ,352.0 Import letters of credit , ,085.7 Total credit related commitments... 13, , ,437.7 As at 30 June 2009, the Group had RUB 13,803.6 million in outstanding credit related commitments, compared to RUB 10,207.2 million as at 31 December 2008 and RUB 7, million as at 31 December 2007, reflecting primarily the increase of undrawn credit lines as a result of the increase in the Group s loans and advances to customers. Derivative financial instruments The Group uses derivative financial instruments to hedge against fluctuations in the U.S. dollar/rouble exchange rate by entering into foreign currency swaps and foreign exchange forward contracts. The Group sometimes retains U.S. dollar funding in U.S. dollars and does not therefore require hedges for these amounts. 97

106 Level: 3 From: 3 Monday, November 16, :44 eprint Section 04 The table below sets out fair values, as at 30 June 2009, of currencies receivable or payable under foreign exchange forward contracts and currency swaps entered into by the Group. The table reflects gross positions before the netting of any counterparty positions (and payments) and covers the contracts with settlement dates after the respective balance sheet date. The contracts are short term in nature. As at 30 June Derivatives with positive fair value Derivatives with negative fair value (unaudited) (in millions of roubles) Foreign exchange forwards: fair values, at the balance sheet date, of: U.S. dollars receivable on settlement (+) U.S. dollars payable on settlement ( )... (2190.3) (156.5) Roubles receivable on settlement (+) Roubles payable on settlement ( )... (249.7) Other currencies payable on settlement ( )... Net fair value of foreign exchange forwards (29.4) Precious metals forward contracts: fair value at the balance sheet date: U.S. dollars payable on settlement ( )... Gold receivable on settlement (+) Silver receivable on settlement (+) Roubles payable on settlement ( )... (231.8) Net fair value of precious metals forward contracts Currency swap: fair values, at the balance sheet date, of: U.S. dollars receivable on settlement (+)... Roubles payable on settlement ( )... Net fair value of currency swap... Total net fair value of derivative financial instruments (29.4) Foreign exchange derivative financial instruments used by the Group are generally traded in an over the counter market with professional market counterparties on standardised contractual terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign exchange rates or other variables relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. Risks arising from derivative financial instruments are managed by the treasury department of the Group, which establishes limits on derivatives trading. 98

107 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 BUSINESS Overview AK BARS Bank was established in 1993 as an open joint stock company under the laws of the Russian Federation. AK BARS Bank is the largest bank headquartered in the Republic of Tatarstan in terms of both assets and capital. According to figures published by the National Bank of the Republic of Tatarstan, a local territorial department of the CBR, as at 30 June 2009 and 31 December 2008, the Bank accounted for 40.7 per cent. and 41.1 per cent., respectively, of the banking market in the Republic of Tatarstan in terms of assets, and 48.2 per cent. and 50.0 per cent., respectively, in terms of capital. The Bank is headquartered in Kazan and is an authorised agent of the government of the Republic of Tatarstan for servicing the budgetary accounts and payments of the government of the Republic of Tatarstan. As at 30 June 2009 and 31 December 2008, the Group s total consolidated equity was RUB 17,770.8 million and RUB 18,263.0 million, respectively, and total consolidated assets were RUB 206,881.1 million and RUB 202,531.1 million, respectively, calculated in accordance with IFRS. Until 2008, Russia had experienced several consecutive years of increasing domestic demand and benefited from relatively high market prices for key export commodities, particularly oil and gas and metals, which lead to sustained economic growth and an increase in foreign currency reserves. The global financial crisis had a significant adverse effect on the Russian economy, beginning in the third quarter of As of June 2009 as compared to June 2008, industrial production had decreased by 12.1 per cent., exports had decreased by 45.1 per cent., and the number of officially registered unemployed increased by 35.7 per cent. Russia s official reserves fell from a peak of U.S.$598.1 billion in August 2008 to U.S.$413.5 billion in October The stability of the rouble was also affected by the onset of the crisis. The nominal exchange rate of the rouble against the U.S. dollar as at 30 June 2009, as compared to 30 June 2008, decreased by 9.3 per cent., while the real exchange rate decreased by 5.0 per cent. during the same period. As of October 2008, the RTS stock index had declined over 70.0 per cent. from its highest levels, reached in May 2008 and the IFX CBonds bond index had declined about 13.8 per cent. from its highest levels, reached in June By the end of October 2009, the RTS stock index had recovered about per cent. from its lowest level and the IFX CBonds bond index had recovered about 30.8 per cent. from its lowest level. As a result of the deterioration in economic conditions, the Bank made a consolidated net loss for the six months ended 30 June 2009 of RUB million and for the year ended 31 December 2008 of RUB 6,507.1 million. The Bank services its customers through a network of 323 branches ( filialy ), representative offices ( dopolnitelnye offisy ), cash and credit offices and stand alone cash desks, as at 30 June This network is located primarily in the Republic of Tatarstan but also extends to Moscow and other regions of the Russian Federation. As at 30 June 2009, the Bank had 20 branches, 81 representative offices and 133 other offices (including cash and credit offices, stand alone cash desks and operational offices) in the Republic of Tatarstan and 23 branches and 51 representative offices and 15 other offices in other regions of Russia. In the first six months of 2009, the Bank closed four recently opened branches and 13 representative offices. The Bank s principal business focus is currently on retail and corporate banking. As at 30 June 2009, the Bank provided services to more than 41,400 corporate and 2,076,300 individual customers. The Bank offers more than 100 types of products and services to retail and corporate customers. It offers retail customers a wide range of savings and deposit accounts, loan products, including mortgage loans and automobile loans, as well as investment products, custody services and debit cards issued by the Bank, or plastic cards. The Bank offers its corporate customers a range of current/settlement accounts, deposit facilities, loans and other credit facilities, confirmed letters of credit, brokerage services, foreign currency exchange services and derivative products. The Bank also conducts financial markets operations and offers investment banking services. As at 30 June 2009, 95.8 per cent. of the Bank s share capital was owned either by the Republic of Tatarstan (39.2 per cent.) or by entities owned by persons who are associated with the Republic (56.6 per cent.). The Republic has advised the Bank that through such holdings it controls the Bank. In March 2009, 99

108 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 the Bank s shareholders approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this increase was approved by the CBR in November The new shares were issued to new and existing shareholders, all of whom are connected to the Republic of Tatarstan. See Principal Shareholders. The government of the Republic of Tatarstan exercises significant influence on the strategic development of the Bank but is generally not involved in the day to day management of the Bank. A significant amount of the Bank s business is connected with the Ministry of Finance of the Republic of Tatarstan, and the Bank has significant banking operations with other government related enterprises. The Republic of Tatarstan s government bodies and state organisations accounted for 32.8 per cent. and 13.2 per cent. of the Bank s total customer accounts as at 30 June 2009 and 31 December 2008, respectively. The Bank has prepared its financial statements in accordance with IFRS since The Bank is organised as an open joint stock company under the laws of the Russian Federation with its registered office at Dekabristov Street 1, Kazan, Republic of Tatarstan, Russian Federation, telephone number +7 (843) The Bank has a general banking licence No from the Central Bank of Russia and is regulated and supervised by the CBR. The Bank is licensed by the Federal Service on Financial Markets of the Russian Federation to act as a broker, dealer, portfolio manager and custodian in the Russian securities market. The Bank also holds a licence from the CBR to perform banking operations with precious metals and permission of the State Customs Committee to be a guarantor before customs bodies. History and development AK BARS Bank was registered by the CBR on 29 November 1993 when it began its banking operations in the Republic of Tatarstan. The Bank was originally established to provide banking services to the Republic of Tatarstan and certain state entities. The Bank s founding shareholders were state authorities and state owned enterprises, including OAO Kazan Motor Building Production Association, Association of Motor Transport Enterprises of the Republic of Tatarstan Tatavtotrans, Tatar Industrial Association Sviyaga, OAO Chistopol Watch Factory Vostok, Poultry Production Enterprise Tatarskoe, Tatarstan International Communications Ltd Tatinkom, OAO Suvar, Kazan Scientific and Production Association Synthetic Rubber Plant, OAO Kazan Compressor Plant, Industrial Association Tatneft, Industrial Association Nizhnekamskneftekhim and Tatar Enterprise for Supply of Petrochemical Products Tatnefteproduct. Since 1994, the Bank has been an authorised bank for maintaining budgetary accounts of the Republic of Tatarstan and processing payments made by its government bodies and state organisations, such as subsidies paid to individuals and government financing programmes for small businesses. The Bank has also been a member of the system of mandatory insurance of individual deposits since 25 November 2004, which enables the Bank to accept retail customer deposits. See Banking services and activities Retail banking. The Bank began to issue debit cards in 1998 as part of the Golden Crown payment system in Russia. In 1999, the Bank became a member of the Union Card and MasterCard International payment systems. In 2001, the Bank also became a member of the Russian STB card payment system. In January 2004, the Bank became a Principal Member of MasterCard International and, in 2005, it became an associated member of the VISA International payment system. In March 2008, MasterCard Worldwide granted the Bank a license to approach commercial enterprises throughout the Russian Federation in order to arrange for their participation in the MasterCard network. In early 2008 the Bank was designated as an institution eligible to receive deposits under The Fiscal Code of the Russian Federation from the Russian Federal Treasury. Organisational structure AK BARS Bank conducts its banking operations through its network of branches, representative offices, cash and credit offices and stand alone cash desks in the Republic of Tatarstan and other regions of the Russian Federation. The Bank s day to day activities are overseen by the Management Board under the supervision of the Board of Directors. See Management. The principal operational committees within the Bank are the credit committees (comprising the Large Loans Committee and the Small Loans Committee), the Limit Committee, the Assets and Liabilities Committee, the Liquidity Committee and the Credit Indebtedness Committee. Activities of the committees are supported by the Legal Department, the Security 100

109 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 Department, the Internal Control Service, the Collateral Appraisal Department, the Treasury Department and the Risk Review Department. The Bank s principal business units are the Retail Business Department, the Corporate Business Development Department, the Project Finance Department, the Investment Business Department, the Treasury Department, the Precious Metals Department, the International Department, the Operations Department and the Loans Administration Department. Competition and competitive strengths According to the CBR, as at 30 June 2009, there were 1,083 banks and non banking credit organisations operating in the Russian Federation, including 26 in the Republic of Tatarstan. For a description of the Russian banking sector, see Appendix A Overview of the Banking Sector and Banking Regulation in the Russian Federation. According to the CBR, as at 31 December 2008, the Bank was ranked in the top 20 in terms of assets among Russian banks. Due to the large number of Russian banks and the market segments in which they operate, AK BARS Bank faces competition in substantially all of the areas and locations in which it operates, in many cases from institutions much larger than the Bank. The following table sets forth the Bank s principal competitors in each of the corporate credit, consumer credit, corporate loans and individual loans markets. Corporate credit 11 Consumer credit 1 Corporate loans 1 Individual loans 1 Sberbank* Sberbank* Sberbank* Sberbank* VTB* VTB 24* VTB* VTB 24* Gazprombank* Russkiy Standart Gazprombank* Bank of Moscow* Alfa Bank Rosbank Bank of Moscow* Raiffeisenbank Austria Rosselkhozbank* Bank of Moscow* Alfa Bank Gazprombank* Bank of Moscow* Raiffeisenbank Austria Rosbank Rosbank Raiffeisenbank Austria UralSib UniCredit Bank UralSib UniCredit Bank URSA Bank UralSib Vozrozhdenie Promsvyazbank UniCredit Bank Rosselkhozbank* URSA Bank UralSib Rosselkhozbank* Promsvyazbank Alfa Bank * Denotes a state owned institution. AK BARS Bank believes that it has a number of competitive strengths: Extensive network. The Bank has a broad geographic footprint in the Republic of Tatarstan and in a number of other regions in Russia to the east of Moscow, in which there is currently less competition from other banks compared to other Russian regions. Until 2008, the Bank had rapidly expanded its network and had 351 branches, representative offices, cash and credit offices and stand-alone cash desks as at 31 December As a result of the economic crisis, the Bank has since scaled back its network, closing four recently opened branches and 13 representative offices. As at 30 June 2009, the Bank had 323 branches, representative offices, cash and credit offices and stand-alone cash desks. The Bank believes its network is appropriately sized and puts the Bank in a good position in the current market environment. Retail and corporate focus. The Bank generally focuses on small and medium sized corporate and retail customers, which represent markets in which it is already strong or in which it believes there may be significant medium-term or long-term growth prospects. The Bank utilises specialty software and technology that allows it to tailor products and services for these types of customers. In addition, the Bank employs relationship bankers with extensive experience and know how in order to develop and expand its relationships with small and medium sized corporate customers. The Bank had over 41,400, 38,700, and 34,600 corporate customers as at 30 June 2009, 31 December 2008 and 31 December 2007, respectively. Strong relationship with the Republic of Tatarstan. As at 30 June 2009, 95.9 per cent. of the Bank s share capital was owned either by the Republic of Tatarstan (39.0 per cent.) or by 101

110 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 Strategy entities owned by persons associated with the Republic (56.9 per cent.). The Republic has advised the Bank that through such holdings it controls the Bank. The Bank benefits from a reputational advantage in the local communities it serves in Tatarstan through the strength of its relationship with the Republic of Tatarstan and further benefits from having the Republic of Tatarstan as a source of customer deposits and other business opportunities. Historically, government bodies and state organisations of the Republic of Tatarstan have provided the Bank with a significant amount of long term deposits which are essential to the Bank s ability to provide longer term loan products, such as mortgages, and for liquidity risk management purposes. The Bank believes that this relationship provides it with opportunities unavailable to many of its competitors. Leading market position in the Republic of Tatarstan and brand name recognition. The Bank is the dominant bank in the Republic of Tatarstan, with approximately 40.7 per cent. of the total assets and 48.2 per cent. of the total capital in the banking sector as at 30 June The Bank believes that its leading market position has allowed it to build broad brand name recognition in the Republic of Tatarstan and to build strong relationships with its corporate and retail customers located there. The Bank s leading market position and strong brand name recognition put the Bank in a good position to benefit from the potential opportunities in the Republic of Tatarstan. Implementation of a universal bank strategy. The development of the Bank s investment banking division and the introduction of other corporate products has permitted the Bank to provide its corporate customers with a wide range of financing facilities, including different complex bank products. As part of the strategic plan for the period from 2009 to 2012, adopted in 2008, the Bank s overall long-term strategy is to continue to develop and strengthen its market position by improving and diversifying its product and services offerings to corporate (in particular to small and medium sized enterprises) and retail customers. To achieve these goals and to continue to add value for its customers, employees and shareholders, the Bank has identified the following principal long term strategies: expand its banking operations organically outside the Republic of Tatarstan, in particular in the regional industrial centres of Russia; continue to focus on retail banking by developing an extensive range of retail products and services, including new debit card offerings and a new range of pre payment card schemes, expand banking through postal offices and provide a wide range of automated banking services; focus on increasing the number of small and medium sized corporate customers, a market in which the Bank believes there is currently less competition from other Russian and international banks; and develop and implement an advanced information technology support infrastructure to optimise internal budgeting and financial planning processes, support an integrated centre to process accounting information, banking and financial transactions and enhance the Bank s risk management systems. As a result of the economic crisis, since the third quarter of 2008 the Bank has not been able to effectively implement its long term strategy, as it has focused on other business issues, although the Bank intends to return to its strategic plan once economic conditions improve. In the short-term, the Bank is focused on the following strategies: maintain its leading market position in Tatarstan; improve its balance sheet and liquidity position through diversification of its funding base; 102

111 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 implement conservative risk management and provisioning policies to support asset quality; and maintain a strong capital position. Regional expansion As part of its regional expansion strategy, when the impact of the economic crisis has lessened and the Bank is able to deploy resources, it plans to open new branches, representative offices, cash and credit offices and stand alone cash desks in regional industrial centres and towns within the Russian Federation, thus reducing the Bank s overall risk exposure and its dependence on customers in the Republic of Tatarstan. The Bank is targeting principally regional Russian industrial centres for its regional expansion strategy in which management believes the Bank can operate profitably. As a result of the economic crisis, the Banks s regional expansion strategy is presently effectively on hold. From 1 January 2009 to 30 June 2009, the Bank closed four branches in Tomsk, Volgograd, Kurgan and Khabarovsk and closed 13 representative offices. Retail banking When the impact of the economic crisis has lessened and the Bank is able to deploy resources, the Bank plans to increase the share that retail banking contributes to its overall revenue. The Bank intends to expand its presence in the retail market by increasing the number, and improving the quality of the products and services offered to retail customers. The Bank has expanded its retail operations in recent years by adding products such as mortgages, multipurpose consumer loans, loans to holders of debit cards and automobile loans, including automobile loans offered to customers through agreements with certain auto dealerships. The Bank intends to offer enhanced debit card services and to initiate credit card services tailored to fit specific customer needs. The Bank also intends to expand its private client base and extend the range and volume of its retail products and services offerings, by implementing the CONTACT cash remittance system at certain of its branches (which is a money transfer system for individuals similar to the world wide Moneygram International system), providing an SMS based banking services (which allows all clients to request account balances and other information via mobile phone) and by offering other automated banking services, such as internet access, to attract and retain customers. Emphasis on small and medium sized corporate customers As part of its strategic plan adopted in 2008, a primary focus of the Bank will be to increase the number of small (defined as a business with annual turnover of up to RUB 400 million) and medium sized (defined as a business with annual turnover of between RUB 400 million and RUB 1 billion) corporate customers by expanding its offering of products and services to such companies. Although the Bank has needed to significantly increase provisioning for loans to small and medium sized corporate customers, the Bank believes that such customers can be attractive because there is typically less competition in this market and lending to such companies is generally at interest rates that are higher than those for large corporate customers. As small and medium sized customers grow, their banking needs may also expand, creating further growth opportunities for the Bank. Improving technology The Bank considers information technology to be an integral part of its operations and is committed to continuing investment in IT infrastructure to support the efficient growth of its operations and enhance its risk management systems. As part of this process, the Bank intends to invest in further automation of its banking processes to improve the quality of its services and reduce associated costs. In particular, the Bank has initiated a series of technological improvement projects to build upon the success of its Telephone Client remote banking service (which was implemented in 2004 and allows customers 24 hour telephone 103

112 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 access to their accounts) and the Client Bank remote banking service, which allows corporate customers to access their accounts via the internet. In May 2005, as part of the Bank s strategy to use technology to provide better service to its customers, the Bank launched a call centre to meet the informational needs of the customers. In 2006, the Bank introduced a new computer aided management, accounting and financial planning system. At the end of 2007, the Equation computerised bank system engineered by Misys plc was installed at the Bank s headquarters. In 2007, the Bank launched a remote internet access service for its private individual customers. Also in that year, changes were implemented that permit municipal and other payments to be made via the Bank s cash dispensers network. In 2008, the Bank proceeded with the further improvement of its information and technological systems and completed the establishment of a centralised IT infrastructure. The Bank introduced the Equation system to all of its branches in the Republic of Tatarstan in the end of 2008 and the Bank plans to roll out the remote banking service for a larger selection of its customers, based on mobile communication infrastructure. In the first half of 2009, the Bank completed the installation of a centralised IT system, which was rolled out throughout the whole branch network. In 2009, the Bank has been actively developing its online and mobile phone customer service systems. It improved its online banking services through the introduction of new features for managing accounts and expanding the range of operations available to private clients. In addition, the Bank began offering SMS messaging services to private clients, allowing clients to both monitor the status of their accounts and plastic card transactions and to make micropayments to mobile operators, internet providers, traffic police and fixed line operators, among others. The range of services and payment methods available through the Bank s ATM network was significantly expanded in the first half of In the first half of 2009, the Bank implemented, jointly with the Federal Service for Taxes and Duties, a project whereby tax payments are now made through the use of two dimensional bar coding. This decision has led to a significant reduction in the time and risks associated with servicing private customers with respect to such payments. Banking services and activities AK BARS Bank s principal business lines are corporate banking and retail banking. In addition, the Bank provides a full range of related banking products and services, including investment banking, settlement services, international structured financing, correspondent banking, precious metals operations, leasing and real estate project financing. Corporate banking The corporate banking business segment represented 70.3 per cent., of the Bank s assets, 63.4 per cent., of the Bank s total liabilities as at 31 December 2008 and 68.3 per cent., of the Bank s total external revenues for the year ended 31 December As at 30 June 2009, the Bank had more than 41,400 corporate customers. The Bank s corporate banking services include direct debit facilities, current/settlement accounts, deposit facilities, loans, overdraft services and confirmed letters of credit, as well as investment securities, brokerage services, foreign currency/exchange services, derivative products and settlement services. The Bank s corporate customer base includes state and public organisations as well as private corporate and other legal entities. AK BARS Bank provides support programs for small and medium sized enterprises at competitive rates, each of which have been awarded after competitive tender processes. The programmes are partially financed by the Government run non commercial Investment Venture Fund of the Tatarstan Republic. In 2007, the Bank granted 88 loans under these programmes amounting to a total RUB million, while in 104

113 Level: 3 From: 3 Monday, November 16, :44 eprint Section , the Bank granted 117 such loans amounting to a total RUB million. The loans under these programmes have durations of up to 3 years and carry interest rates ranging from 8 to 12 per cent. AK BARS Bank also partakes in a Government run program that provides financial support to small and medium sized enterprises through Russian Bank of Development OJSC. Deposits The Bank s corporate customer accounts represented 72.8 per cent., of total customer accounts as at 31 December 2008 (compared to 69.0 per cent., at 31 December 2007). As at 31 December 2008, the Bank s corporate customer accounts amounted to RUB 61,023.8 million, compared to RUB 50,786.2 million as at 31 December The Bank is seeking to increase the average term of deposits that it holds going forward by offering more longer term products that will improve the stability of its funding base. The government of the Republic of Tatarstan represents the second largest group of customers (after individuals) in terms of customer accounts maintained with AK BARS Bank (31.1 per cent. as at 30 June 2009, 23.9 per cent., as at 31 December 2008 and 18.6 per cent., as at 31 December 2007) and is followed by companies in the finance sector (7.1 per cent. at 30 June 2009, 7.2 per cent., as at 31 December 2008 and 11.7 per cent., as at 31 December 2007), the construction and manufacturing sectors (7.1 per cent. as at 30 June 2009, 8.5 per cent. as at 31 December 2008 and 10.7 per cent., as at 31 December 2007) and the oil and gas industry (10.1 per cent. as at 30 June 2009, 10.9 per cent. as at 31 December 2008 and 9.5 per cent. as at 31 December 2007). The following table provides a breakdown of AK BARS Bank s corporate customer accounts including Republic of Tatarstan government bodies, by principal type of account as at 30 June 2009 and 31 December 2008 and As at 30 June As at 31 December (unaudited) (in millions of roubles) Current/demand/settlement accounts... 23, , ,008.9 Term deposits... 49, , ,697.4 Sale and repurchase agreements... 1, , , Total... 74, , , The Bank s corporate customer accounts are primarily denominated in roubles and, to a lesser extent, in U.S. dollars and other currencies. The majority of the Bank s corporate customer accounts was denominated in roubles as at 30 June 2009 and 31 December 2008 (91.6 per cent. and 95.1 per cent., respectively). Lending AK BARS Bank s corporate lending activities involve the provision of loans for a variety of purposes including project financing, working capital and capital investments. The Bank provides its corporate customers with both term loans and credit lines under which a customer can borrow funds at any time within an agreed period. As part of its corporate lending activities, the Bank lends to small and medium sized companies, as well as to sole proprietorships. During 2008, the Bank issued loans to small businesses and sole proprietorships and the outstanding balance as at 31 December 2008 was RUB 55.7 billion. The majority of the loans were issued at fixed interest rates, with an average term of between one and five years. Since 2004, when the Bank piloted a project financing service for the real estate sector, the Bank has continued to expand its role as an active participant in the Russian real estate market, focusing both on 105

114 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 commercial and residential real estate opportunities. The Bank typically participates in consulting on the business plan, financial structuring, the management of the project and the loan approval process. Real estate projects are evaluated primarily on the basis of the financial strength of the developer, anticipated demand for the proposed real estate space and collateral to be provided as security under the loans. The total value of loans before provision for loan impairment outstanding to corporate customers, comprising principally small and medium sized and large sized companies, and loans to state and public organisations as at 30 June 2009 and 31 December 2008 amounted to RUB 145,287.9 million and RUB 140,161.1 million, respectively, an increase of 40.3 per cent., from RUB 99,931.9 million outstanding as at 31 December 2007, as compared to 31 December Loans to companies within the trade sector, agricultural and food processing sector, financial sector and construction and manufacturing sector accounted for approximately 77.4 per cent., of total gross corporate loans as at 31 December Based on nominal amounts, loans and advances to the Bank s 23 largest corporate borrowers before provision for loan impairment (including state owned companies and state and public organisations) amounted to RUB 57,903.8 million, or 34 per cent. of total loans and advances to customers, as at 30 June 2009, as compared with the 20 borrowers amounting to RUB 63,382.1 million, or 40 per cent. of total loans and advances to customers, as at 31 December 2008 and the 16 largest corporate borrowers amounting to RUB 33,111.5 million, or 28 per cent. of total loans and advances to customers, as at 31 December None of the Bank s loans to its 20 largest corporate borrowers has experienced any default in 2007, 2008 or Retail banking As at 30 June 2009, the Bank had approximately 2,076,300 individual customers. The total value of current/demand accounts and term deposits of individuals comprised 25.5 per cent. of total customer accounts as at 30 June 2009, 27.2 per cent. as at 31 December 2008 and 31.0 per cent. as at 31 December Until 2008, the Bank has been expanding its branch network and broadening its range of retail banking and related financial services offerings. The Bank offers a wide range of term deposit, savings and other current accounts (which include ten types of deposit arrangements or accounts for individuals), debit cards and consumer lending products. As at 30 June 2009, the Bank served its individual customers through a total of 323 branches, representative offices, cash and credit offices and stand alone cash desks. The Bank has a high proportion of low-income retail clients as a result of its participation in a number of government programmes. Deposits The Bank s retail customer accounts may be denominated in roubles, U.S. dollars, euro or other currencies. As at 30 June 2009, individuals held a total of RUB 6,158.6 million in current/demand accounts and RUB 19,481.0 million in term deposits, compared with RUB 6,208.4 million in current/demand accounts and RUB 16,624.1 million in term deposits as at 31 December 2008 and RUB 6,162.9 million in current/demand accounts and RUB 16,632.2 million in term deposits as at 31 December The majority of the Bank s customer deposits (91.6 per cent.) was denominated in roubles as at 30 June Lending AK BARS Bank provides a wide range of loans to its retail customers including mortgages, home improvement loans, multipurpose consumer loans, loans to holders of debit cards and automobile loans. These loans are categorised broadly as consumer loans and are distinguished within the Bank primarily by size, term and currency. Mortgage lending represented the largest portion of retail lending as at 30 June Applications for mortgages are accepted primarily at the branch level and are then processed and approved by the Bank s subsidiary AK BARS Ipoteka. The Bank is also the leading bank among Russian banks in the Volga Federal District in terms of the volume of automobile loans originated. These loans are a new product for the Bank in the Republic of Tatarstan and require no down payments as they are secured by way of an insurance scheme the premiums of which are paid for by the borrowers; the term of such loans may extend to up to seven years. 106

115 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 The Bank s retail loans are primarily denominated in roubles, but may also be denominated in U.S. dollars or other currencies. As at 30 June 2009 gross loans and advances to individuals amounted to RUB 26,150.0 million, or 15.3 per cent., of total gross loans and advances to customers outstanding. Debit cards Currently, AK BARS offers debit cards through systems such as MasterCard Worldwide and Visa International, as well as STB, Union Card and Interkama (via the Nizhnekamsk branch of the Funchip system). As at 30 June 2009, the Bank had in issue approximately 1,090,000 debit cards. In addition to standard debit cards, the Bank issues debit cards with the benefit of bank overdraft facilities, which permit holders to make purchases on the basis of a pre arranged overdraft facility at the Bank. Depending on the type of debit card issued, credit extended by the Bank to its customers pursuant to such cards may be payable in whole on a monthly basis or may be payable on a rolling basis, i.e., in monthly instalments (10 per cent., of the outstanding principal amount each month), plus accrued interest. Certain customers may be afforded a 40 day grace period during which time no payment is required and (subject to the amount outstanding being paid off within this period) interest does not accrue. In 2006, the Bank opened its own certified card processing centre, which is part of the MasterCard Worldwide and Visa International payment systems. The processing centre allows the Bank to issue cards more quickly and to offer cards with more favourable terms to its clients. The Bank also recently began to offer cards with an authorised overdraft feature and a feature that permits customers to track card transactions via their mobile phones. In 2007, the Bank developed and introduced several card products. One of these, the Visa Unembossed Non personalized Card, is an immediately issued card, which means that it can be issued and activated while the client is in the Bank s offices and used immediately thereafter. The Bank has also expanded its activities in the premium segment of the debit card market. Presently, in addition to MasterCard Gold and Visa Gold branded cards, the Bank offers its clients a Visa Platinum card, the first bank in Tatarstan to offer this product. This is the Bank s most prestigious card, targeted at the Bank s premier clients. Visa Platinum holders have access to a range of additional benefits and services, such as 24 hour assistance, holiday medical insurance and legal services, a purchase protection plan and an extended warranty programme. On March 1, 2008, MasterCard Worldwide granted the Bank a license to approach commercial enterprises throughout the Russian Federation in order to arrange for their participation in the MasterCard network. The Bank also aims to extend the range of services offered to its clients who are debit card holders. In 2006, the Bank introduced the SMS information system, which allows clients to obtain data about account balances and statements and information on cash withdrawals and payments for goods and services via their mobile phones. One of the most significant projects for the Bank in 2006 was its participation, together with municipal authorities of Kazan, in the launch of a municipal transport card programme. Under this programme, municipal authorities of Kazan issued eligible residents of Kazan with a transport card that provides individuals with access to their personal allowance for transportation expenses. In connection with the programme, funds are allocated by the municipal authority for this programme and are held in an account at the Bank and the transport cards are provided to the municipal authority of Kazan by the Bank. In addition, the Bank is increasing the functionality of its customer s cash cards. In 2007, the Bank s clients were provided with access to mobile communication payment services via their cash cards. In 2008 the Bank increased additional functionality and allow the Bank s clients to open deposits, repay credits, perform transfer operations and replenish broker s accounts. For its clients convenience, the Bank plans to develop infrastructure to expand the number of self service features to which its customers have access and develop further retail chain banking opportunities, including increasing the number of self service terminals and mini branches. 107

116 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 The work on the Bank s conversion to the EMV standard and issue of chip cards has been initiated. The Bank believes that this will enable it to minimize risks of fraud with respect to debit cards and implement loyalty programmes and co brand projects. As at 1 October 2009, the Bank s multi branch cash advance network both in the Republic of Tatarstan and outside the Republic of Tatarstan consisted of more than 664 cash dispensers (ATM machines), 945 POS terminals (which are portable payment devices that permit the Bank s customers to made merchant payments via their debit cards) and more than 409 cash advance terminals (these are manned kiosks at which debit card holders can withdraw cash upon presentation of their debit card and photographic identification). The Bank opened an additional 222 cash dispensers, 161 POS terminals and 75 cash advance terminals in 2008 and an additional 74 cash dispensers, 50 POS terminals and 4 cash advance terminals in 2009 to 1 October Membership in the system of mandatory insurance of individuals deposits AK BARS Bank became a participant in the system of mandatory insurance of individuals deposits, which provides the insurance of individuals deposits placed with Russian banks to give individual customers more comfort that their monies will be protected against default or in case of a banking crisis, in November See Risk Factors Risks related to AK BARS Bank s business and the banking industry Deposit(s) Insurance law for more information regarding this system. In order to qualify for participation in this system, the Bank needed to meet the requirements set by the CBR to protect individuals deposits. As at 31 December 2008, the Bank held deposits of individuals totalling RUB 16,624.1 million. According to the Banking Bulletin published by the National Bank of the Republic of Tatarstan, as at 1 January 2009, the Bank ranked second to Sberbank in the Republic of Tatarstan in terms of deposits of individuals. Other banking operations Settlement services and foreign trade transactions AK BARS Bank provides a wide range of services relating to the management of rouble and foreign currency accounts used in foreign trade transactions and to settlement of such transactions. This includes arranging trade contract financing and import and export letters of credit. In connection with financing foreign trade contracts, the Bank issues confirmed letters of credit with deferred payment terms backed by credit lines set for the Bank by a number of foreign credit institutions. Through a network of correspondent accounts with Russian and foreign banks, the Bank aims to provide efficient and effective settlement of transactions for its customers. Role as agent for servicing budget accounts and payments of the government of the Republic of Tatarstan As a result of a competitive bidding process, the Bank currently acts as an authorised bank for servicing the budget and processing payments for the government of the Republic of Tatarstan. For example, the Bank makes payments of grants from the government of the Republic of Tatarstan to the population and also administers payments for various programmes of the government of the Republic of Tatarstan. The Bank carries out its duties on behalf of the Republic of Tatarstan through its network of branches, representative offices, cash and credit offices and stand alone cash desks. In addition, the Bank has the added capability of receiving information from the Republic of Tatarstan Treasury in electronic form through an internet connection between the Bank and the departments of the Republic of Tatarstan Treasury. Upon a request from the Republic of Tatarstan Treasury, the Bank can provide account balance and cash flow information regarding the budgetary accounts for any period using various criteria including area, ministry, department and type of payment. In addition, budgetary accounts statements are provided on a regular basis in electronic and paper form. The Republic of Tatarstan has a policy of providing housing subsidies to individuals and the Bank serves as one of the banks through which individuals in the Republic of Tatarstan can elect to obtain their housing subsidies. AK BARS Bank also acts as an agent for the Republic of Tatarstan in respect of certain government programmes and projects, for instance in connection with the provision of loans to persons engaging in part time farming and providing housing subsidies for young persons residing in rural locations with specialist skills, the distribution of travel vouchers and the allocation of government housing subsidies 108

117 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 as part of the Homes for Large Families program. The Bank in its capacity as agent for the government of the Republic of Tatarstan pays particular attention to programmes for the development of agriculture. Participation in the Auction on the Placement of the Budgetary Liquid Assets The Fiscal Code of the Russian Federation provides for the deposit, with effect from 1 January 2008, of certain cash assets of the Russian Federal Treasury with Russian commercial banks. At the beginning of 2008, the Russian Department of Treasury estimated the amount of funds intended for deposit with commercial banks to be not less than RUB 600 billion. The Russian Department of Treasury and the Federal Treasury designated 35 Russian banks to be eligible to receive such deposits, including AK BARS Bank. Management believes that such designation may provide the Bank with additional liquidity to the extent that Russian Federal Treasury are deposited with the Bank. International structured financing AK BARS Bank continues to develop strategic relationships with public and private foreign financial institutions in order to arrange long term financing for investment projects, construction projects modernisation programmes and other types of project financing. In 2007 and 2008, the list of services offered within the framework of international structured financing was extended. It includes raising syndicated loans in foreign currencies from foreign and Russian banks for implementation of clients projects, raising foreign financing for import contracts through loan arrangements with the buyers and providing post export and pre export financing through banker s acceptances and on the basis of signed master loan agreements. In the course of 2007, the Bank arranged two syndicated loans to provide funding for the implementation of export contracts for its clients, both of which have since been repaid. In September 2007 AK BARS Bank entered into a syndicated loan, the fifth in its history, in the amount of U.S.$100 million, arranged by The Bank of Tokyo Mitsubishi UFJ, Ltd., and CALYON Bank. Thirteen Russian and foreign banks from 11 countries participated in the loan. In December 2007 AK BARS Bank extended the maturity of a syndicated loan, originally obtained in December 2006, in the amount of U.S.$140 million, for an additional year. The amount drawn down was U.S.$100 million. The loan was arranged by the Deutsche Bank AG and ABN AMRO Bank N.V. In April 2008 AK BARS Bank entered into a U.S.$200,000, day syndicated term loan facility with a term of one year. Banco Finantia, S.A., Commerzbank AG, ICICI Bank UK plc, Landesbank Berlin AG and WestLB AG, London branch, acted as lead arrangers. The loan was repaid in April The Bank has business relations with the following export credit agencies: HERMES (Germany); EGAP (Czech Republic); OND (Belgium); ERG (Switzerland); EDC (Canada); and SACE (Italy). Correspondent network AK BARS Bank is focused on providing a broad range of international payment services. As at 31 December 2008, the Bank s correspondent network included more than 27 Russian banks and 17 leading European, U.S. and Asian banks allowing the Bank to settle transactions in the world s principal trading currencies, such as the U.S. dollar, euro and British pound sterling, on a worldwide basis. 109

118 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 Foreign exchange accounts are opened in several world s largest banks, including the following: HSBC Bank USA, Citibank N.A., American Express Bank Ltd (United States); Commerzbank AG, Dresdner Bank AG, Bayerische Hypo und Vereinsbank AG (Germany); Commerzbank International S.A. (Luxembourg); VTB (France) S.A. (France); Nordea Bank Plc. (Finland); BNP Paribas (Suisse) SA, UBS AG (Switzerland); Scandinaviska Enskilda Banken (Sweden); Komercni Banka (The Czech Republic); and The Bank of Tokyo and Mitsubishi UFJ, Ltd (Japan). Precious metals AK BARS Bank obtained a licence (No. 2590) to trade precious metals from the CBR on 9 March The licence was renewed on 2 September 2002 for an unspecified term. AK BARS Bank offers precious metals trading capability for bullion and coins at 26 branches within the Russian Federation. Most of the operations are carried out in Moscow, St. Petersburg, Nizhniy Novgorod, Naberezhnye Chelny, Nizhnekamsk, Yekaterinburg and Chelyabinsk. Recently, the amount of customer deposits in precious metals, particularly gold, has increased. Trading operations in previous metals in 2008 involved purchases and sales of more than five tons in gold and nine tons in silver. The Bank intends to increase the volume of such transactions by attracting large clients from other regions of the Russian Federation. The Bank has also been co operating with Commerzbank International (Luxembourg) which, in 2008, granted the Bank a loan of 933 kilograms of gold and significant credit lines for transactions in precious metals. Investment banking AK BARS Bank s principal investment banking activities include corporate finance consulting services and debt underwriting. Many of the Bank s investment banking activities are carried out via its subsidiary investment company ZAO AK BARS FINANCE. The Bank participated as arranger or underwriter in 28 bond issues by Russian companies in 2007, 16 issues in 2008 (including its own bond issues), but in the third quarter of 2008 the Bank ceased underwriting new bond issues. In 2008, the Bank was ranked 21st among arrangers and 29th among underwriters in the Russian Federation, in each case by its market share in respect of bond offerings by Russian companies, according to the Russian information agency Cbonds. Payroll services AK BARS Bank actively works with Russian companies to provide enhanced payroll services through its employee debit card offering. Payroll cards represent the majority of debit cards issued by the Bank. As at 30 June 2009, the Bank provided payroll and employee debit card services to approximately 600 companies and other legal entities including industrial companies, agricultural companies, trade companies and state organisations. Leasing AK BARS Bank provides leasing services to customers through OAO Leasing Company of the Bank Finansovaya Economicheskaya Gruppa, a wholly owned leasing subsidiary. The Bank s leasing contracts relate to a wide variety of assets including real estate, special equipment, industrial equipment for mechanical engineering and woodworking, gold mining equipment, medical equipment and automobiles. 110

119 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 Financial markets operations AK BARS Bank trades corporate and government securities on behalf of its customers on major stock exchanges in Russia and in the over the counter market. On behalf of its corporate customers, the Bank carries out a range of money market operations and foreign currency exchange trading. The Bank is also involved in proprietary trading in the financial markets as part of its liquidity management. The Bank has a substantial securities portfolio, comprised primarily of Russian Government and municipal debt securities, as well as corporate debt and equity securities issued by Russian companies. The Bank does not engage in proprietary trading of derivatives, except for foreign currency futures trading, which the Bank does not consider to be material to its operations. Subsidiaries Following is a description of the Bank s principal subsidiaries: OOO AK BARS Ipoteka - The Bank holds a per cent. interest in OOO AK BARS Ipoteka, a company incorporated in 2005, which offers mortgage financing to retail customers. ZAO AK BARS Finance - The Bank holds a per cent. interest in ZAO AK BARS Finance, a company incorporated in 2004, which is primarily engaged in operations with securities, brokerage operations and trust management. It has held a license for brokerage, dealing and trust management since 2005 and a depository operations license since OAO Leasing Company of AK BARS Bank Finansovaya Economicheskaya Gruppa - The Bank holds a per cent. interest in OAO Leasing Company of AK BARS Bank Finansovaya Economicheskaya Gruppa, a company incorporated in 2003, which provides leasing services. OOO CB Naratbank - The Bank holds an 88.4 per cent. interest in OOO CB Naratbank, a Russian bank incorporated in 1992, which provides banking products and services to small enterprises. The Bank acquired its interest in this subsidiary in order to diversify into banking targeting small companies. A complete list of subsidiaries, associates and joint ventures is included in Note 36 Principal Subsidiaries, Associates and Joint Ventures to the Bank s 2008 Audited Financial Statements. Distribution network Branches and other offices As at 30 June 2009, AK BARS Bank had 43 branches ( filialy ), 132 representative offices ( dopolnitelnye offisy ), two cash and credit offices, five operational offices and 141 stand alone cash desks ( operatsionnye kassy vne kassovogo uzla ) operating in 31 regions of the Russian Federation. In addition, the Bank s subsidiary OOO KB Naratbank has eight branches and one operational office. While branches and representative offices of a Russian bank may carry out the same range of operations as the head office, the services of cash and credit offices are limited to granting loans to small businesses and individuals, as well as carrying out cash services, whereas stand alone cash desks may provide only limited services to retail customers (principally for deposit taking and the withdrawal of cash). In 2008, the Bank opened 10 branches. From 1 January 2009 to 30 June 2009, the Bank closed four branches in Tomsk, Volgograd, Kurgan and Khabarovsk and closed 13 representative offices. Post bank programme In 2004, the Bank implemented the Post Bank Programme, pursuant to which a wide range of bank services, including cash deposits, cash disbursement and repayment of loans was made available to the Bank s existing customers at post offices. As at 30 June 2009, the system had been implemented in 256 post office branches in Kazan and various regional centres of the Republic of Tatarstan. The Bank intends to expand this programme by providing similar services at post offices outside the Republic of Tatarstan. 111

120 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 Remote banking services The Bank also services customers remotely by providing them with telephone access (from 8am to 7pm Monday to Saturday) to their accounts in order to confirm account balances and make payments over the telephone using an automated system. In 2005, the Bank established its call centre, which is staffed by personnel at the Bank s headquarters in Kazan. The call centre receives and processes incoming inquiries, advises clients and prospective clients on the Bank s products and services and provides other advice to customers from 8am to 7pm from Monday to Saturday. The call centre also has an interactive voice response system which is available to the customers at all times. Presently the Bank provides internet banking services to its individual customers. These services enable clients to manage, via the internet, their bank accounts using their debit cards. By connecting to the Bank via the internet, clients can easily and securely effect payments, review statements and check the cash balances of the their accounts. The Bank is actively working on developing further internet functionality and expanding the number of commercial participants with which their individual customers can transact business. Employees As at 30 June 2009, 31 December 2008 and 31 December 2007, the Bank had 5,027, 5,531 and 4,926 employees, respectively, the majority of whom are currently based in the Republic of Tatarstan. The reduction in employee numbers in 2009 resulted from the closure of four newly opened branches and a number of representative offices, along with an overall redundancy programme. In order to ensure the efficient operation of its human resources, the Bank makes extensive use of state of the art technologies and complies with a code of best practice. The Bank s personnel management policy is aimed at developing skilled, highly productive staff who are successful in conducting their business. In the selection and assignment of personnel, the Bank applies certain mandatory evaluation procedure to assess applicants professional skills and personal qualities. For instance, all applicants undergo an evaluation whereby their technical skills and aptitude are tested, they are interviewed and are subject to psychological screening. In filling vacant positions, the Bank looks at applicants both from the public and from among its most gifted and effective employees. The Bank continues to strive to create optimal conditions for personnel development and maximise its employees intellectual and professional potential. The Bank has developed an internal training programme for its employees aimed at professional growth, increased labour productivity and instilling corporate values its employees. Not only does this foster the development of employees skills, but also ensure that its employees master modern technologies and receive training tailored to their responsibilities. The Bank s training system covers all employees, including key personnel. There is no trade union within the Bank, but employees are permitted to belong to any independent trade union. The Bank has not, to date, experienced any strikes, work stoppages, labour disputes or actions that have had a material effect on its operations and it considers its relationship with its employees to be good. Litigation As at the date of this Base Prospectus, AK BARS Bank has no legal or arbitration proceedings pending or threatened that could have a material adverse effect on the Bank s financial condition, nor has the settlement of any such proceedings since 1993, when the Bank was established, had any such material adverse effect. The Bank and its subsidiaries are, however, involved in a number of legal proceedings that have arisen in the ordinary course of business. The Bank does not expect that these pending or threatened legal proceedings will have a material adverse effect on its consolidated financial statements or its business prospects. 112

121 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 Properties AK BARS Bank owns and leases property in the Republic of Tatarstan and at various locations throughout the Russian Federation. The Bank s material properties represent a total of 77,670 square metres under ownership and a total of 22, square metres which are held under lease. Insurance Russian banking or other legislation does not require banks to maintain insurance in respect of their material assets or liabilities (other than the mandatory insurance of deposits of individuals). Currently, AK BARS Bank does not maintain voluntary insurance on buildings or premises owned or leased by it and does not have business interruption insurance. The Bank does insure all the motor vehicles and armoured cars that it owns, as well as its cash dispensers. Since November 2004, the Bank has been a member of the system of the mandatory insurance of deposits of individuals. For additional information on this system, see Appendix A Overview of the Banking Sector and Banking Regulation in the Russian Federation Banking reform The deposits insurance legislation. 113

122 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 MANAGEMENT Management structure In line with other Russian banks, AK BARS Bank is managed through a multi tier system of governing bodies comprised of the General Shareholders Meeting, the Board of Directors, the Management Board, as well as the Chairman of the Management Board. The chart on the following page sets out AK BARS Bank s management and internal business divisions, as at 30 June The General Shareholders Meeting is the highest governing body of AK BARS Bank. The General Shareholders Meeting elects the Board of Directors, which is responsible for the general management of the Bank including coordination of its overall strategy and general supervision. The Board of Directors appoints the members of the Management Board, which is the collective executive body of the Bank, and the Chairman of the Management Board, who acts as the chief executive officer of the Bank. Day to day activities of the Bank are overseen by the Management Board and the Chairman of the Management Board. Certain powers are delegated by the Chairman of the Management Board to his deputies, members of the Management Board, department heads and various committees. A brief description of each of the General Shareholders Meeting, the Board of Directors, the Management Board and the Chairman of the Management Board is set out below. One of the members of the Board of Directors is also the Prime Minister of Republic of Tatarstan. In addition, certain other members of the Board of Directors work for, or are on the board of directors of, corporate entities in which the government of the Republic of Tatarstan is a direct or indirect beneficial owner. Through these contacts, the government could attempt to influence the Bank. See Principal Shareholders and Related Party Transactions. Five members of the Board of Directors are independent. General shareholders meeting The General Shareholders Meeting is the highest governing body of the Bank. The powers of the General Shareholders meeting are set forth in the Joint Stock Companies Law (the JSC Law ), the Bank s charter and the Regulations on the General Shareholders Meeting. General Shareholders Meetings are convened at least once a year pursuant to the JSC Law and the Bank s charter. Shareholders have the power to decide the following issues, among others: amendments to the Bank s charter and changes to the share capital; reorganisation or liquidation of the Bank, appointment of a commission to liquidate the Bank and approval of preliminary and final liquidation balances; determination of the number of members of the Board of Directors, election and removal of members of the Board of Directors; appointment and removal of the members of the Bank s audit committee and approval of the Bank s external auditor; approval of the Bank s annual reports and financial statements; approval of certain interested party transactions and large scale transactions; and approval of the Bank s investment in holding companies and participation in financial and industrial groups, associations and other groups of commercial organisations. Decisions of the General Shareholders Meeting are generally adopted by a simple majority of voting shareholders who are present at the meeting (subject to a minimum quorum requirement of more than 50 per cent., of the voting shareholders). However, pursuant to the JSC Law, items such as changes to the size of the charter capital, reorganisation and liquidation must be approved by a three quarters majority vote of the voting shares present at the General Shareholders Meeting of the Bank. 114

123 Level: 3 From: 3 Monday, November 16, :44 eprint Section 05 The annual General Shareholders Meeting must be convened by the Board of Directors between 1 March and 30 June each year and its agenda must include elections of the Board of Directors and approval of an external auditor, among other items. 115

124 Level: 3 From: 3 Monday, November 16, :45 eprint Section 05a THE MANAGEMENT REPORTING STRUCTURE Board of Directors Management Board Chairman of Management Board Internal Control Service Department for Internal and Compliance Control Director of Human Resources Capital Construction Department Client Service Department Investment Business Department Administration and General Services Legal Department Advertising & PR Department Security Department Settlement Operations Department Corporate Finance Department Customer Relations Department Trade Operations Department Analyst of Operational Activity Section Cash Payments and Monetary Turnover Department Sales Department First Deputy Chairman of the Management Board First Deputy Chairman of the Management Board Deputy Chairman of the Management Board Deputy Chairman of the Management Board Deputy Chairman of the Management Board Technologies and Computation Department Automation Department Secretion of Technical Support of Settlements Processing Centre Technological Development Department Strategic Development Department Analysis & Planning Department Bank Technologies Department Precious Metal Operations Department Sub-branch 7 Foreign Economic Operation Department Central Bank Office Chief Accountant Accounting Department Fiscal Accounting Department Collateral Appraisal Department Analytic Projects Department Risk Analysis Department Treasury Department Lending Department Corporation Business Development Republic Programs Development Department Project Finance Department Real Estates Project Department Analysis and Monitoring Department Investors Relations Department Industrial Projects Department Sections of Innovations & Venture Activities Retail Business Development Retail Marketing Department Retail Product Development Department Payment Systems Development Department Retail Product Support Department for Infrastructure Service & Support in Bank Cards Transactions Regional Business Department Regional Property Department Regional Business Establishment Department Regional Managers Section Branches Administration Management Information and Methodic Sections 116

125 Level: 3 From: 3 Monday, November 16, :46 eprint Section 05b Board of Directors The Board of Directors is responsible for the general management of the Bank, with the exception of those matters which are within the exclusive authority of the General Shareholders Meeting. The Board of Directors meets as often as necessary and not less than once every two months and exercises exclusive authority over certain matters including business priorities, convening annual meetings and approving the agenda and the placement of securities. Members of the Board of Directors are elected by the annual General Shareholders Meeting for a one year period and may be re elected an unlimited number of times. Currently, there are 12 members on the Bank s Board of Directors. The name, position and certain other information for each member of the Board of Directors of the Bank are set out below. Date of Name Age 2 Position 2 appointment 2 Igor Avanesyan Member 1999 Ruslan Ilyasov Member 2008 Juri Levin Member 2007 Robert Minnegaliev Member 1999 Rustam Minnikhanov Member 1998 Robert Musin Chairman 2002 Raisa Sakhieva Member 2008 Sergey Shibaev Member 2007 Valery Sorokin Member 2006 Evgeny Tikhturov Member 2001 Ruben Vardanian Member 2006 Andrey Vernikov Member 2007 Igor Avanesyan (born 1953) has served as a member of the Board of Directors since June Mr. Avanesian graduated from the Moscow Institute of Petrochemical and Gas Industry with a degree in petrochemical processing of oil and gas in Currently, Mr. Avanesian also serves as the General Director and a member of the Board of Directors of ZAO OLK Centr Kapital and as the General Director and a member of the Board of Directors of OAO Petrokam. Furthermore, Mr. Avanesian is a member of the Board of Directors of OAO Bank Zenit, ZAO Tatneft Moskva, ZAO Univest Holding, OOO TNGK, OAO Kamaz Leasing, OAO Technoform, ZAO UK Eurooil Management and ZAO Tatoilgas. Ruslan Ilyasov (born 1962) has served as a member of the Board of Directors since Mr. Ilyasov graduated from military holding the Order of the Red Banner institute in 1984, from the International Center of Management (Hungary) in 1992, and from Business School Weatherhead Case Western Reserve University (USA) in Before joining AK BARS Bank, Mr. Iyasov was HR Manager of Coca-cola in Russia, the United States and Finland ( ), HR Vice President of the company Sun Interbrew ( ), HR Director of OJSC Alfa Bank ( ), HR Director on Alkoa Russia ( ), and a member of the Board of Directors of OJSC Alkoa Metallurg Rus ( ). In addition, he is currently HR Director of Eldorado LLC (since 2008). Juri Levin (born 1953) was appointed as a member of the Board of Directors at the annual shareholders meeting held on 28 May 2007 with effect from that date. Mr. Levin has a Ph.D. in Economics from the Institute of the Global Economy and International Relations with the Academy of Sciences of the USSR (the present day Russian Academy of Sciences). From 1997 to the present, he was Managing Director and member of the Board of B.V Murray & Co. Inc., and he served as an adviser of the Head of the Management of Bank Winter & Go., AG. He is currently serving as a Head of the Board of BVM Capital Partners Ltd. Robert Minnegaliev (born 1972) has served as the Chairman of the Management Board since April Mr. Minnegaliev has a Ph.D in Economics from the Kazan Financial and Economic Institute. Before joining AK BARS Bank, he worked at the Ministry of Finance of the Republic of Tatarstan as the First Deputy Minister ( ) and the First Deputy Minister, Head of the Treasury Department ( ). 117

126 Level: 3 From: 3 Monday, November 16, :46 eprint Section 05b Currently, Mr. Minnegaliev also serves as the Chairman of the Board of Directors of OOO Naratbank and is Chairman of a number of other Boards. Rustam Minnekhanov (born 1957) has served as a member of the Board of Directors since July Mr. Minnikhanov graduated from the Kazan Agricultural Institute with a degree in mechanical engineering in 1978 and from the Kazan branch of the Moscow Institute of Soviet Trade with a degree in merchandise knowledge in In addition he holds a Ph.D in Economics. From 1996 to 1998, he was the Finance Minister of the Republic of Tatarstan. Since 1998, Mr. Minnikhanov has served as the Prime Minister of the Republic of Tatarstan. Currently, he also is the Chairman of the Board of Directors of OAO Tatneft, OAO Tatneftekhiminvest Holding and OAO Svyazinvestneftekhim and is a member of the Board of Directors of AK Tatneft Zorlu Petrol Yatirimlari Ve Ticaret Anonim Sirketi. In addition he is a member of two State non profit Trustee Councils. Robert Musin (born 1964) has served as the Chairman of the Board of Directors since Mr. Musin graduated from the Kazan Financial and Economic Institute with a degree in finance and credit in From 1998 to 2002, he was the Finance Minister of the Republic of Tatarstan. Currently, Mr. Musin also serves as the Chairman of the Board of Directors of OAO Nizhnekamskneftekhim, OAO Adonis and GNO Reserve Fund for Debt Servicing of the Republic of Tatarstan. In addition, he is a member of the Board of Directors of OAO Bank Zenit, OAO Finance Leasing Company, OAO Innovative Industrial Technological Park Idea, OAO Tatneftekhiminvest Holding, OAO Kazan Plant of Gas Fittings Vesna, OAO Shemordansky Meat Factory and OJSC Cherkersky Chemical Industrial Association n.a Z.S Tsakhilova. Raisa Sakhieva (born in 1951) has served as a member of the Board of Directors since Ms. Sakhieva graduated from Kazan State University n.a. Ulyanov Lenin in Ms. Sakhieva is currently Head of the State Legal administration of the President of the Republic of Tatarstan (since July 1991), member of the Board of Directors of CJSC Transnational financial industrial company Ukrtatnafta (since 2006), member of the Board of Directors of OJSC Svyazinvestneftekhim (since 2008), member of the Board of Directors of OJSC Network company (since 2008), member of the Board of Directors of OJSC International airport Kazan (since 2008) and member of the Trustee Council of non profit organisation State housing resources under the President of the Republic of Tatarstan (since 2008). Sergey Shibaev (born 1959) was appointed to the Board of Directors at the annual shareholders meeting dated 28 May 2007 with effect from that date. Mr. Shibaev graduated from the Moscow State Institute of International Relations with a degree in international relations. From 1981 to 1988, he served as a lecturer in the Moscow State Institute of International Relations. He currently serves as the Deputy Chairman of the representative office of Roland Berger Strategy Consultants, senior advisor in A.T. Carni and board member of OJSC EM Alliance, Kafa Capital, Satsgorbank and RESO Guarantee. Valery Sorokin (born 1964) has been a member of the Board of Directors since June Mr. Sorokin received a degree from the Kazan State University of V.I. Ulyanov Lenin in He currently serves as the General Director of OAO Svyazinvestneftekhim (since 2003) and a Director of OOO Investneftekhim (since 2006) and a number of other Boards. From 1996 to 2002, Mr. Sorokin served as the Director of the Agency for the Republic of Tatarstan s Sovereign Debt at the Ministry of Finance of the Republic of Tatarstan. Evgeny Tikhturov (born 1960) has served as a member of the Board of Directors since June Mr. Tikhturov graduated from the Moscow Institute of Management with a degree in planning engineering in Currently, he also serves as the Head of the Finance Department of OAO Tatneft. In addition, Mr. Tikhturov is a member of the Board of Directors of ZAO CK Chulpan, OAO Efremov Plant of Synthetic Rubber, OAO AB Devon Kredit, ZAO Univest Holding and OOO Tatneft Neftekhim amongst others. He also serves as the Chairman of the Board of Directors of ZAO Solid Management. Ruben Vardanian (born 1968) has been a member of the Board of Directors since June Mr. Vardanian received a degree from the Moscow State University of M.V. Lomonosov in 2000 and has also taken courses at Harvard Business School (2001). Since 1997, he has served as the Chairman of the Board of Directors of the Troika Dialog Group. In addition, from 2002 to 2004, Mr. Vardanian was the General Director of OAO Rosgosstrakh. He is currently a board member of CJSC GSS Sukhoi, OJSC Novatel, OJSC URSA Bank, CJSC RusSpetStal, Marsh & McLennan Companies, OJSC Insurance Company ZHASO OJSC 118

127 Level: 3 From: 3 Monday, November 16, :46 eprint Section 05b United Automobile Technologies, OJSC KamAZ, OJSC Autovaz and OJSC International Airport Sheremetjevo. Andrey Vernikov (born 1960) was appointed to the Board of Directors at the annual shareholder meeting dated 28 May 2007 with effect from that date. Mr. Vernikov graduated from the Moscow State Institute of International Relations with a degree in international economics. He holds a Ph.D in Economics. From 1998 to 2004, he served as the Deputy Chairman of the Management Board of ABN AMRO Bank and the Financial Director of Chernomorskiy Bank. From 2005 to 2006, he was the Chairman of the Board of Directors of MDM Bank. Currently, he is a Professor at the Banking Department of the Higher School of Economics (Moscow) and a member of the Board of Directors of Miel and the supervisory councils of CB Investbank and Banksnoras. Management Board and the Chairman of the Management Board The day to day management and administration of the Bank is carried out by the Management Board and the Chairman of the Management Board. The Chairman of the Management Board is elected by the Board of Directors for an indefinite period of time and can be removed by the Board of Directors. In April 2003, the Board of Directors elected Mr. Robert Minnegaliev as the Chairman of the Management Board of the Bank. The Management Board members are appointed by the Board of Directors for an indefinite period of time and can be removed by the Board of Directors. Its activities are coordinated by the Chairman of the Management Board and are regulated by applicable Russian law, the Bank s charter and Regulations of the Management Board. The Management Board meets as often as necessary and makes its decisions by a simple majority vote (subject to a minimum 50 per cent. quorum requirement). Pursuant to the Regulations of the Management Board, the members of the Management Board may not hold managerial positions in other organisations without the consent of the Board of Directors, if not otherwise provided by Russian law. Currently, there are ten members of the Management Board. The name, position and certain other information for each member of the Management Board are set out below. Date of Name Age 2 Position 2 appointment 2 Airat Bayazitov Member 1997 Gulnara Galiakberova Member 2006 Zufar Garaev Member 2003 Ilfan Gubaidullin Member 2004 Rustem Khadiullin Member 2000 Lyalya Kudermetova Member 2006 Robert Minnegaliev Chairman 2003 Radik Salyakhutdinov Member 2000 Marat Shagitov Member 2007 Bulat Davletshin Member 2009 Airat Bayazitov (born 1971) has served as a member of the Management Board since June Mr. Bayazitov graduated from the Kazan Financial and Economic Institute with a degree in enterprise accounting and control in Since 1993, Mr. Bayazitov has served as the Chief Accountant of AK BARS Bank. Gulnara Galiakberova (born 1966) has served as a member of the Management Board since August Ms. Galiakberova received a degree from the Kazan Finance and Economy Institute in Since 1999, she has served as the Head of the Operations Department of AK BARS Bank. Ms. Galiakberova has been employed by AK BARS Bank since 1994 and worked as Director of the Client Servicing Department, since June Prior to her employment with AK BARS Bank, Ms. Galiakberova worked in the State Institute of Applied Optics. 119

128 Level: 3 From: 3 Monday, November 16, :46 eprint Section 05b Zufar Garaev (born 1972) has served as a member of the Management Board since July Mr. Garaev graduated from the Kazan State University with a degree in jurisprudence in 1994 and from the International Marketing and Management Academy with a Master of Economics degree in finance and credit in From 1997 to 2003, he held various managerial positions in OOO Kamsky Commercial Bank, including the position of the Director of the Kazan branch. In 2003, Mr. Garaev was appointed the First Deputy Chairman of the Management Board of AK BARS Bank, responsible for foreign economic operations, corporate governance and analysis and planning. Ilfan Gubaidullin (born 1975) has been a member of the Management Board since February Mr. Gubaidullin graduated from the Kazan State University with a degree in jurisprudence in 1998, and from the Kazan Financial and Economic Institute with a degree in management in Since 1997, he held various positions at AK BARS Bank, including the positions of a member of the Legal Department and the Director of the Corporate Business Development Department. Currently, Mr. Gubaidullin is the Deputy Chairman of the Management Board of AK BARS Bank. Rustem Khadiullin (born 1964) has been a member of the Management Board since February Mr. Khadiullin graduated from the Kazan State University with a degree in physics in 1986 and from the Correspondence College of the Ministry of Finance of the Russian Federation with a degree in finance in From 1997 to 2000, he served as the Head of Foreign Trade Department of AK BARS Bank. Currently, Mr. Khadiullin is the Deputy Chairman of the Management Board of AK BARS Bank. Lyalya Kudermetova (born 1965) has been a member of the Management Board since August Ms. Kudermetova received a degree from the Kazan Financial and Economic Institute in Since 2004, she has served as Director of the Kazan branch of AK BARS Bank. In 2004, she became an advisor to the Chairman of the Management Board. From 2002 to 2004, Ms. Kudermetova was the Head of the Customer Service Department at the Bank of Foreign Trade. In addition, from 2002 to 2003, she was the Head of the International Settlements and Currency Control Group at the Bank of Foreign Trade. From 1998 to 2002, Ms. Kudermetova was the Head of the Foreign Economic Department at Kazansky Commercial Investment Trust Bank. Since July 2009 she has been deputy Chairman of the Management Board of OJSC AK BARS Bank and Director of the Kazan branch of AK BARS Bank. Robert Minnegaliev (born 1972) has served as the Chairman of the Management Board since April See Board of Directors for additional biographical information regarding Mr. Minnegaliev. Radik Salyakhutdinov (born 1971) has been a member of the Management Board since September Mr. Salyakhutdinov graduated from the Kazan State University with a degree in applied mathematics in 1993 and from the Kazan Sociology and Law Institute with a degree in jurisprudence in From 1998 to 2000, he served as the Chairman of the Management Board at OAO Volzhsko Kamsky Joint Stock Bank. In 2000, Mr. Salyakhutdinov was the Head of the Treasury Department of AK BARS Bank. Currently, he is the Deputy Chairman of the Management Board of AK BARS Bank and also serves as a member of the Board of Directors of OOO Naratbank. Marat Shagitov (born 1968) graduated from the Kazan Financial and Economic Institute in He began his work experience as the chief accountant at TOO Rummad. He was also the Head of the Fund Department and then the Financial Director at AO Gruppa Light. Since 1998, he was the Department Head, the Head of the Treasury Department, the First Deputy of the Minister of Finance of the Republic of Tatarstan. Since 2007, he has been the First Deputy of the Chairman of the Management Board of AK BARS Bank. Bulat Davletshin (born 1974) graduated from Moscow State University of Commerce in He started his work in 1996 as an engineer programmer of the information processing service of Almetyevneft Petroleum and gas extracting administration. In 1997 he worked as a regional representative, and in 1999 Director of CJSC Financial Leasing Company. He started out to work in OJSC AK BARS Bank in 2003 as the head of Project Finance Division. In October 2006 he captained the Department of Project Finance. Since August 2009 Deputy Chairman of the Management Board of OJSC AK BARS Bank. At present he is studying Euromanagement Master of 120

129 Level: 3 From: 3 Monday, November 16, :46 eprint Section 05b Business Administration for CEOs program in the Higher School of Corporate Management of the Academy of National Economy at the Russian Federation Government. In 2008 the total remuneration of key management, including discretionary compensation, amounted to approximately RUB million. Conflicts of interest There are no potential conflicts of interest between any duties of the members of the administrative, management or supervisory bodies of the Bank towards the Bank and their private interests and/or other duties. Corporate governance AK BARS Bank currently has five independent directors on the Board of Directors. They are Andrey Vernikov, Yury Levin, Sergey Shibaev, Ruslan Ilyasov and Ruben Vardanian. The Bank has hired consultants to review the Bank s corporate governance structure and recommend appropriate changes. 121

130 Level: 3 From: 3 Monday, November 16, :46 eprint Section 05b PRINCIPAL SHAREHOLDERS As at 31 December 2008, the share capital of the Bank was RUB 19,215,396,326. On 30 March 2009, an extraordinary shareholders meeting approved an increase to the Bank s share capital by RUB 9,000 million to RUB 28,215 million, in accordance with RAS, and this was finally approved by the CBR on 5 November As at 31 December 2008, the nominal amount of share capital was RUB 19,215.4 million. The Bank paid dividends in the amount of RUB million in 2007 and RUB million in The Bank intends to make further dividend payments only once the Bank has returned to profitability and as deemed appropriate by the Board of Directors. As at 6 November 2009, 95.9 per cent. of the Bank s share capital is owned either by the Republic of Tatarstan (65.6 per cent.) or by entities owned by persons who were and continue to be associated with the Republic (30.3 per cent.). The Republic has advised AK BARS Bank that through such holdings it controls the Bank. In 2007 the Bank s shareholding structure underwent certain changes, in particular the sale of the Bank s shares by one of its major shareholders OJSC Tatneft comprising 32.2 per cent. of the Bank s charter capital to Escape Enterprises Limited, Mebena Enterprises Limited, Senatir Enterprises Limited, Lennard Enterprises Limited and OAO Nizhnekamskneftekhim. Each of these entities is beneficially owned or controlled, directly or indirectly, by the Republic of Tatarstan. The government of the Republic of Tatarstan is able to exercise significant influence through its ownership interest in the Bank, its legislative, taxation and regulatory powers, its representation on the Board of Directors and informal influence. The following table sets forth shareholders with beneficial ownership of more than 1 per cent. of the Bank s shares as at 6 November Beneficial shareholder Percent of Share Capital 2 Stabilization Fund of the Republic of Tatarstan (1) OOO Iks-Ray (2) OOO Investments and Consulting (1) OSMAND HOLDINGS LIMITED (2) SINEK INVESTMENT&DEVELOPMENT LIMITED (1) OAO Svyazinvestneftekhim (1) OAO Holding Company AK BARS (1) ZAO Evrobest (2) LLC Delta investments OAO Nizhnekamskneftekhim (1) Private Joint Stock Company Brass Holdings Limited (2) OOO Planet Shareholders holding less than 1 per cent. of shares Total: (3) (1) Each of these entities is either directly or indirectly owned by the Republic of Tatarstan. (2) Each of these entities is beneficially-owned by a person associated with the Republic of Tatarstan. (3) Figures set forth in this table have been subject to rounding adjustments. Accordingly, numerical figures shown as totals may not be an arithmetic aggregation of the figures that preceded them. In addition to influence derived from the ownership or control of the Bank s shares, the government of the Republic of Tatarstan is able to exercise significant influence on the Bank through its legislative, taxation and regulatory powers, its representation on the Board of Directors and informal influence. See Related Party Transactions. 122

131 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 RISK MANAGEMENT Overview The principal categories of risk inherent in the Bank s business are credit risk, market risk (which consists of currency risk, interest rate risk and securities portfolio risk), liquidity risk and operational risk. The primary objective of financial risk management comprises the establishment of risk limits and subsequent monitoring procedures to ensure that such limits are complied with. As part of the risk management process, the Bank evaluates, monitors and manages the size and concentration of risks relating to the maturities of its assets and liabilities, its interest rate and exchange rate exposure and its counterparties creditworthiness, in order to minimise the effect of these risks on profitability. The Bank s system of risk control and risk management has been in place for several years, is reviewed frequently and is modified as necessary. The Bank s system of risk control and risk management has been fully integrated into the Bank s internal systems for planning, management and control. The Board of Directors, as advised by the Management Board, reviews risk management policies and procedures as necessary, and the Risk Review Department performs overall risk management oversight. The risk policies established by the Board of Directors are implemented through departments and committees charged with overseeing the specific risks that the Bank faces. The Bank aims to manage credit, market, liquidity and operational risk in a coordinated manner at all levels of operations. In respect of branch operations, the Bank delegates local decision making authority to local and regional branch directors within the framework of the centralised risk management policies and procedures and subject to set limits. In order to ensure efficient risk management, the Group has created a risk management system incorporating the following risk management methodologies: Increasing the share of risk free transactions: increasing the share of risk free commission transactions in the total volume of operating profit; Stop loss limits: making decisions on the practicability of carrying out transactions with mandatory consideration of inherent risks. Rejecting a transaction if the amount of possible losses exceeds the established limit or potential economic benefits; Diversification: decreasing the volume of possible losses through diversification of the Bank s assets and liabilities (limits on volumes of transactions with counterparties, economic entities; limits on types of financial instruments, positional value at risk ( VAR ) limits on instruments); Considering risk premiums in evaluating the comparative efficiency of the bank s transactions: evaluating the efficiency of the Bank s transactions with mandatory consideration of the volume of expected losses and the cost of coverage of inherent anticipated losses; and Compensation: limiting (hedging) risks using: insurance; derivatives for compensating possible losses on hedged assets; and incorporating financial instruments with differently directed sensitivity to homogenous risks into the trading portfolio. 123

132 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 Organisation AK BARS Bank s Board of Directors approves the general principles relating to risk control and management and the procedures applied in evaluating, monitoring and controlling risks, evaluates the effectiveness of the Bank s risk management policies and monitors the operations of the Bank s departments and committees involved in risk management. In determining the Bank s risk management policy, the Management Board is advised by collective bodies whose tasks are to set exposure limits for various types of risks and take decisions on the issuance of loans and the making of other investments. These collective bodies include the Assets and Liabilities Committee, the Liquidity Committee, the Limit Committee and the Credit Indebtedness Committee. Each of the collective bodies is appointed by the Management Board, is monitored by the Management Board and the Board of Directors and reports regularly to the Management Board on the risks for which it is responsible. These committees are supported by the Risk Review Department and the Treasury Department. Assets and Liabilities Committee The Assets and Liabilities Committee is comprised of eight members, including the Chairman of the Management Board who also serves as the Chairman of the Assets and Liabilities Committee. Members of the committee are appointed by the Management Board. The Assets and Liabilities Committee meets on a monthly basis and reports to the Chairman of the Management Board. The primary objective of the Bank s asset and liability management strategy is to satisfy the dual requirements of controlling exposure to liquidity and market risks while maximising profitability through effective asset and liability management. With this objective in mind, the Assets and Liabilities Committee aims to maintain a structure of assets and liabilities that optimises both long and short term financial income while minimising income volatility within the constraints of general market conditions. As part of its responsibilities, the Assets and Liabilities Committee establishes certain limits that are designed to decrease exposure to market and liquidity risks and approves methodologies used for risk assessment. Liquidity Committee The Liquidity Committee is comprised of eight members, including the First Vice Chairman of the Management Board, the Loans Vice Chairman of the Management Board and six department heads. The Committee meets daily and reports to the First Vice Chairman of the Management Board. The Liquidity Committee is responsible for making decisions regarding liquidity of the Bank s investments in order to support adequate liquidity levels. This committee monitors both immediate liquidity needs (intra day needs) and short term needs (needs for up to one month) in conformity with applicable laws, CBR regulations, internal Board of Directors decisions and the Bank s risk management policies and procedures. Limit Committee The Limit Committee has seven members, including the Chairman of the Management Board, the First Deputy Chairman of the Management Board and one of the Deputy Chairman of the Management Board. The Limit Committee meets on a weekly basis and reports to the Chairman of the Management Board. In respect of credit risk management, the Limit Committee is responsible for establishing limits on the amount of risk accepted in respect of individual borrowers and groups of related borrowers, lending limits for the Bank s regional branches. It also sets limits for maximum coverage provided by individual insurance companies in respect of collateral securing the Bank s loans. In respect of market risk management, the Limit Committee sets limits on the level of mismatch of interest rate repricing that may be undertaken and on open positions for specific types of instruments subject to securities portfolio risk. It also sets stop loss, cumulative loss and take profit limits in respect of the Bank s trading operations. Credit Indebtedness Committee The principal function of the Credit Indebtedness Committee is to monitor and determine what action, if any, should be taken in connection with non performing loans. The Credit Indebtedness Committee is 124

133 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 composed of seven members, including one of the Vice Chairmen of the Management Board and representatives from the Risk Review Department, the Legal Department and the Credit Committees. The Credit Indebtedness Committee meets on a weekly basis. Risk Review Department The principal function of the Risk Review Department is to develop methodologies for risk assessment, assess risks related to specific banking transactions and the Bank s overall exposure to risks by type, develop proposals for further improvement of the Bank s risk management system and monitor the financial condition of the Bank s counterparties. The Risk Review Department reports directly to the First Vice Chairman of the Management Board. Treasury Department The principal function of the Treasury Department is to facilitate efficient management of liquidity and market risk by using foreign exchange and money markets, to minimise funding costs and maximise investment returns. The Treasury Department calculates the Bank s cash position on a weekly basis and provides that report to the Chairman of the Management Board. The Treasury Department s operations consist largely of engaging in hedging transactions, principally spot, swap and forward transactions in roubles and foreign currencies, to reduce foreign exchange exposures. The Treasury Department also engages in transactions in Russian Government securities for risk management and other purposes. Credit risk AK BARS Bank is exposed to credit risk in a large portion of its banking transactions. Credit risk is the risk that a borrower or counterparty will be unable to pay amounts in full when due. Management believes that credit risk is the main risk for the Bank. The Bank strives to minimise its exposure to credit risk by placing limits on the amount of risk accepted in relation to any single borrower or group of related borrowers. Such risks are monitored on a continuous basis and risk managing policies are subject to a periodic review. Limits used in credit risk management are approved by the Limit Committee. Exposure to credit risk is managed through the regular analysis of borrowers and potential borrowers abilities to meet interest and principal repayment obligations and by modifying the lending limits in respect of such borrowers as appropriate. Exposure to credit risk is also managed, in part, by obtaining collateral and guarantees. See Lending Policies and Procedures. The Bank s maximum exposure to credit risk is primary reflected in the carrying amounts of financial assets on its balance sheet. Management believes that the impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. In order to reduce risk exposure to borrowers located in a particular region, the Bank sets aggregate limits for loans issued at the regional branch level, as well as limits for certain types of loans made at the regional branch level. The maximum limit for a single loan made by a branch is currently set for each individual branch, and the aggregate limit for all loans made by a branch also differs by branch. If the amount of a proposed loan exceeds the lending limit set for a regional branch, the loan application is transferred for review and approval by the Bank s head office. Lending limits are approved by the Management Board and are reviewed on a periodic basis. The Large Loans Committee considers applications for loans in excess of RUB 10 million. Applications for loans below RUB 10 million are considered by the Small Loans Committee. The Bank s territorial divisions also have their own credit committees authorised to make decisions within the autonomous credit limits set for this particular division. For the purpose of managing credit risk, the credit division staff review regularly (at least quarterly) customers business and financial results using the Bank s in house credit risk evaluation methodologies. Credit risk is evaluated on the basis of the internal credit rating system. Credit exposures to significant customers are also monitored by the Risk Review Department on the basis of monthly analytical memoranda on risks. Any significant exposures to customers with deteriorating creditworthiness are reported to, and reviewed by, the Bank s management. 125

134 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 The Group monitors exposure to banks using a system of limits set by the Limit Committee based on an evaluation of credit institutions financial position. The Bank s Risk Review Department monitors counterparties creditworthiness on a monthly basis by issuing recommendations for changing the existing limits. Credit exposure to other groups of borrowers (other than banks) is also monitored through setting limits on different types and terms of transactions for each individual counterparty and industry segment (economic entity), including regular monitoring of borrowers creditworthiness on the basis of evaluation and rating systems. The Group sets the following credit limits: limit on assets exposed to credit risk; limits on short term interbank transactions with counterparty banks; limits on investments in issuers debt securities; limits on investments in groups of interrelated counterparties; limits on investments by industries; and limit on economic entity s liabilities to the Group. Actual compliance with limits with regard to accepted risk is monitored on a daily basis. Management monitors concentration of credit risk with industry segments, groups of interrelated borrowers and types of assets on a monthly basis. Credit risk concentration is monitored on the basis of the above limits. The Group s maximum exposure to credit risk is generally reflected in the carrying amounts of financial assets on the consolidated balance sheet, plus loan commitments in the amount of RUB 13,164.1 million and financial guarantees and letters of credit issued in the nominal amount of RUB 10,207.2 million, as at 31 December For guarantees and letters of credit, the maximum exposure to credit risk is the amount of the commitment. Credit risk for off balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Bank uses the same credit policies in respect of conditional obligations as it does for on balance sheet assets through established credit approvals, risk control limits and monitoring procedures. The Bank also complies with exposure limits established by the CBR. As at 31 December 2008, the CBR exposure limit in respect of a single borrower or group of related borrowers was set at 25 per cent. of the Bank s capital calculated under RAS. Assessment of provision for loan impairment A provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect the amounts due according to original contractual terms. The amount of the provision is the difference between the carrying amount and estimated recoverable amount, calculated as the present value of expected cash flows, including amounts recoverable under related guarantees and collateral, discounted at the obligation s original effective interest rate. The provision for loan impairment also covers losses when there is objective evidence that losses may occur due to increased sector risk, seasonal risk or political risk. The credit ratings assigned to borrowers also reflect the current economic environment in which such borrowers operate. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the provision for loan impairment in the income statement. 126

135 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 If the amount of the provision for loan impairment subsequently decreases due to an event occurring after the write down, the reduction in the provision is credited to the provision for loan impairment in the income statement. The following table sets out certain information in respect of provision for loan impairment as at 30 June 2009 and 31 December 2008 and 2007: As at 30 June As at 31 December Effective Effective Effective Principal Provisioning Principal Provisioning Principal Provisioning Type of loans amount Provision rate (%) amount Provision rate (%) amount Provision rate (%) (unaudited) Category A (0% reserve requirements) , Category B (1) (1% 50% reserve requirements).. 161, , , , , , Category C (2) (51% 100% reserve requirements).. 9, , , , , , Total , , , , , , (1) Includes substandard loans (1 per cent. 20 per cent. reserve) and doubtful loans (21 per cent. 50 per cent. reserve). (2) Includes problem loans (51 per cent. 100 per cent. reserve) and bad loans (100 per cent. reserve). For further information of the Bank s provision for loan impairment, see Management s Discussion and Analysis of Financial Condition and Results of Operations Six months ended 30 June 2009 compared to six months ended 30 June 2008 Interest income, interest expense, net interest income and loan impairment provision Loan impairment provision and Year ended 31 December 2008 compared to year ended 31 December 2007 Interest income, interest expense, net interest income and loan impairment provision Loan impairment provision. Market risk AK BARS Bank is exposed to market risk arising from interest rate, currency and securities positions, all of which are exposed to market volatility. The Bank s market risk management policies and procedures are monitored by the Assets and Liabilities Committee, which reports to the Management Board on a monthly basis. The goal of the Bank s market risk management policy is to reduce the amount of losses that may be incurred by it in the context of its activities due to adverse changes in exchange rates, interest rates and performance of equity and debt markets. The Assets and Liabilities Committee and the Limit Committee manage market risk by establishing limits on maximum exposures in respect of particular financial products and losses for each type of operation in the open market, as well as through diversification of the financial instruments used by the Bank to hedge market risk and manage its short term liquidity. However, the use of this approach does not prevent losses made outside such limits in the event of more significant market movements. Market risk limits include: aggregate market risk limit; open currency position limit; 127

136 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 open position on investment operations for the security portfolio (exposed to equity risk); limits on transactions broken down by issuer; limits on transactions with debt securities broken down by issuer and type of transactions; limits on the security portfolio (by type of transactions investment, speculative, repo transactions); limits on losses from trading transactions (stop loss, take profit); and concentration limits on investments by industries. The Bank evaluates market risk both for individual financial instruments and the asset portfolio. The responsibility for market risk evaluation and the making of recommendations for managing this risk on a regular basis lies with the Risk Review Department, which provides the results of risk evaluation in the form of monthly memoranda to the Bank s management. Market risk evaluation is also done in other circumstances, for example, when there are significant changes in market conditions. To assess currency risk and securities portfolio risk and to minimise potential losses, the Bank uses a VAR analysis. The VAR analysis estimates the potential loss from adverse market movements assuming a specified time horizon before positions can be adjusted and measured to a specific level of confidence. The VAR analysis estimates are based on historical simulations that involve assessing the impact of historic market movements on current positions. Currency risk The Bank is subject to currency risk due to adverse movements in foreign exchange rates for currencies in which it maintains assets and liabilities. Open foreign currency positions arise as a result of mismatches between foreign currency denominated assets and liabilities. As a matter of policy, the Bank limits its overall open foreign currency position calculated in accordance with the CBR requirements from RAS accounting records to 10 per cent. of total RAS capital to mitigate any such currency risk. The Treasury Department is responsible for monitoring currency positions and managing currency risk. In order to mitigate currency risk, the Bank enters into foreign currency swaps, foreign exchange forward contracts, as well as arrangements with foreign banking institutions pursuant to which the Bank makes non rouble term deposits with foreign banks and accepts term deposits in roubles from foreign banks. Foreign exchange derivative financial instruments used by the Bank are generally traded in an over the counter market with professional market counterparties on standard contract terms and conditions. The Assets and Liabilities Committee sets limits on the level of exposure by currency and in total for both overnight and intra day positions that are monitored daily. There are separate sub limits on currency positions for each of the Bank s branches and additional offices. The table below summarises the Bank s exposure to currency risk as at 31 December Included in the table are the Bank s assets and liabilities at carrying amounts, categorised by currency. 128

137 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 Other Roubles US dollars currencies Total (in millions of roubles) Financial Assets Cash and cash equivalents... 9, , ,572.9 Securities at fair value through profit or loss... 4, , ,081.7 Due from other banks Loans and advances to customers , , , ,928.3 Repurchase receivable... 4, ,510.6 Other financial assets... 5, , ,895.2 Total financial assets , , , ,757.4 Financial liabilities Due to other banks... 33, , ,231.3 Customer accounts... 79, , ,859.0 Debt securities in issue... 27, ,827.5 Syndicated loans... 5, ,945.3 Loan participation notes... 16, ,112.6 Other financial liabilities... 1, ,165.4 Subordinated debt... 4, , ,774.2 Total financial liabilities , , , ,915.4 Net balance sheet position... 6,353.2 (3,315.1) (1,196.1) 1,842.0 Net of the fair value of currency derivative instruments Net balance sheet position less currency derivative instruments... 6,360.8 (3,066.2) (1,180.9) 2,113.7 Currency derivative instruments ,186.5 Net balance sheet position plus currency derivative instruments... 6,693.5 (2,695.9) (697.4) 3,300.2 Credit related commitments... 8, , ,207.2 As at 30 June 2009, the Bank had the following positions in currencies. Other Roubles US dollars currencies Total (unaudited) Net balance sheet position plus currency derivative instruments... (2,874.5) (617.9) (2,879.9) Credit related commitments... 12, ,803.6 Interest rate risk The Bank is exposed to interest rate risk principally as a result of lending at fixed interest rates in amounts and for periods which differ from those of term borrowings at fixed interest rates. Interest margins on assets and liabilities having different maturities may increase or decrease as a result of changes in market interest rates. In practice, interest rates are generally fixed on a short term basis. Also, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions. The principal objective of the Bank s interest rate risk management activities is to enhance profitability by limiting the effect of adverse interest rate movements and increasing interest income by managing interest rate exposure. AK BARS Bank monitors interest rate sensitivity by analysing the composition of assets and liabilities and off balance sheet financial instruments. 129

138 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 The Limit Committee sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily. In the absence of any available hedging instruments, the Bank normally seeks to match its interest rate positions. In carrying out the risk sensitivity analysis, the Bank assumes a 100 basis points change in base interest rates as the reasonably possible change (the difference between the minimum and the maximum annual values in LIBOR in 2008 was approximately 100 basis points). The key financial instrument that causes sensitivity of profit to market interest rate changes is the syndicated loan, for which the interest rate depends on LIBOR. The Bank monitors interest rates for its financial instruments. The table below summaries interest rates based on reports reviewed by key management personnel: For the year ended 31 December (1) Roubles US dollars Euro Roubles US dollars Other (%) (%) (%) (%) (%) (%) Assets Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Subordinated debt (1) In the table above indicates that there were no such assets or liabilities in the applicable year, while 0 indicates that the effective interest rate on such assets was either 0 per cent., or below 0.5 per cent. Securities portfolio risk Securities portfolio risk is the risk of changes in the value of securities as a result of interest rate or market price movements. Management believes that equity securities of Russian companies carry the greatest risk exposure in the Bank s securities portfolio. Investments in equity securities in the total amounted to RUB 1,344.4 million as at 31 December 2008 or 16.4 per cent. of the total securities at fair value through profit or loss portfolio. Other instruments in the Bank s securities portfolio consists of debt securities issued by Russian companies, investments in mutual funds, federal loan bonds (OFZ), municipal bonds, corporate Eurobonds and promissory notes. The Bank sets a number of limits on certain types of operations aimed at achieving a profit to risk balanced securities portfolio composition. The Bank s Assets and Liabilities Committee determines the limits for the Bank s business, including the maximum overall securities portfolio risk. The Bank s Limit Committee determines the limits on the amount of investment in certain types of securities that depend on their liquidity. There are also limits on the maximum losses that can be incurred on securities in the Bank s securities portfolio (stop loss limits). The Bank s securities portfolio limits are continuously monitored by an automated system. These limits are subject to ongoing review and adjustments and are monitored weekly by the Limit Committee. Ongoing adjustments of these limits are also undertaken in the event of negative changes in the quality of 130

139 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 the composition of the Bank s overall securities portfolio. A monthly detailed analysis of all the securities portfolio limits is presented to the Management Board. Liquidity risk Liquidity risk is the risk of mismatches between maturities of assets and liabilities, which may result in the Bank being unable to meet its obligations in a timely manner. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan drawdowns and guarantees. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The tables below shows assets and liabilities as at 31 December 2008 and 31 December 2007 by their remaining contractual maturity. Some of the assets, however, may be of a longer term nature; for example, loans are frequently renewed and, accordingly, short term loans can have a longer term duration. As at 31 December 2008: Demand and less than 1 From 1 to From 6 to From 1 to Over month 6 months 12 months 5 years 5 years Total (in millions of roubles) Financial Assets Cash and cash equivalents... 10, ,938.3 Mandatory cash reserves in CBR Securities at fair value through profit or loss... 2, , , ,184.3 Due from other banks Loans and advances to customers... 9, , , , , ,928.3 Repurchase receivables... 4, ,510.6 Other financial assets... 6, ,895.2 Total financial assets... 34, , , , , ,860.0 Financial Liabilities Due to other banks... 12, , , ,231.4 Customer accounts... 32, , , , ,859.0 Debt securities in issue... 1, , , , ,827.4 Syndicated loans... 5, ,945.3 Loan participation notes , ,112.6 Other financial liabilities ,165.5 Subordinated debt , ,774.2 Total financial liabilities.. 46, , , , , ,915.4 Net liquidity gap... (12,461.3) (26,598.2) 19, , , ,944.6 Cumulative liquidity gap (12,461.3) (39,059.5) (19,432.3) (12,736.0) 3,

140 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 As at 31 December 2007: Demand and less than 1 From 1 to From 6 to From 1 to Over month 6 months 12 months 5 years 5 years Total (in millions of roubles) Financial Assets Cash and cash equivalents... 9, ,568.3 Mandatory cash reserves in CBR... 2, ,948.3 Securities at fair value through profit or loss... 4, , ,737.3 Due from other banks... 1, ,806.7 Loans and advances to customers... 3, , , , , ,284.6 Repurchase receivables... 5, , ,616.5 Other financial assets... 2, ,120.1 Total financial assets... 30, , , , , ,081.7 Financial Liabilities Due to other banks... 12, , ,712.9 Customer accounts... 28, , , , ,581.3 Debt securities in issue , , ,203.1 Syndicated loans... 2, , ,976.4 Loan participation notes , , ,453.5 Other financial liabilities.. 2, ,456.6 Subordinated debt , ,399.2 Total financial liabilities 43, , , , ,783.0 Net liquidity gap... (13,273.3) (1,748.8) (7,306.1) 23, , ,298.8 Cumulative liquidity gap (13,273.3) (15,022.1) (22,328.3) 1, ,298.8 Overdue assets are fully provided against and thus have no impact on the above table. Mandatory cash balances with the CBR are included within the demand and less than one month category as the majority of liabilities to which these balances relate to are also included within this category. Management believes that despite a substantial portion of customer accounts and debt securities in issue being included in the on demand and less than one month category, diversification of these deposits by number and type of depositors, the nature of the Bank s historic relationship with the government of the Republic of Tatarstan and the Bank s past experience indicates that these customer accounts provide a long term and stable source of funding for the Bank. However, in accordance with the Civil Code, individuals have a right to withdraw their deposits prior to maturity at any time. See Risk Factors. Securities at fair value through profit or loss are classified according to their contractual maturity; however, the Bank s portfolio is rather liquid as the majority of these securities are freely tradable. Short term liquidity is managed through purchases and sales of securities, interbank borrowing and lending and intraday and overnight borrowing from the CBR. Medium and long term liquidity is managed by matching the currency and maturity of the Bank s assets and liabilities. Liquidity risk is also managed through forming and observing liquidity risk limits. Liquidity risk limits include the following structural limits: minimum amount of highly liquid assets; minimum amount of liquid assets (up to 30 days); maximum amount of liabilities payable on demand; 132

141 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 maximum amount of net loans in the interbank lending market; maximum amount of own issued notes; maximum amount of the loan portfolio (other than interbank lending); limit on accumulated liquidity imbalance (gap); maximum amount of investments in assets without fixed maturity date and assets of uncertain timing; and limit on mismatch between types of funding sources and types of investments. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Bank and its exposure to changes in interest and exchange rates. Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the actual commitment because the Bank does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements because many of these commitments will expire or terminate without being funded. The Bank s Treasury Department is responsible for monitoring of daily liquidity position, regular liquidity stress testing under a variety of scenarios, covering both normal and more severe market conditions, and also forming of payment schedules The Bank s day to day liquidity risk management is performed by the Liquidity Committee. The Liquidity Committee meets daily and is responsible for general liquidity risk management and setting limits and procedures in respect of risk assessment, as well as for ongoing monitoring and control. Liquidity risk is also monitored at the branch level by the Liquidity Committee, which sets limits for each branch. The Assets and Liabilities Committee determines the medium term and short term asset/liability management strategy for maintaining current and long term liquidity at an acceptable level. The Assets and Liabilities Committee is ultimately responsible for liquidity risk management and reports directly to the Executive Board. The Limit Committee sets and regulates the Bank s limit policy, including liquidity limits. Operational risk The Bank defines operational risk as the risk of loss resulting from inadequate or ineffective internal processes, people and systems or from external events. Examples of events that are included under this definition of operational risk are losses from, without limitation, fraud, computer systems failures, settlement errors, modelling errors and natural disasters. Management believes that an effective monitoring process is essential for adequately managing operational risk and that regular monitoring activities can offer the advantage of quickly detecting and correcting deficiencies in the policies and procedures for managing operational risk. Promptly detecting and addressing these deficiencies can substantially reduce the potential frequency and/or severity of a loss event. The Bank maintains two servers with back up systems in its head office and intends to move the back up server to a separate building in the near future. The Bank has internal control systems for managing operational risk which comply with CBR requirements in all material respects. The Internal Control Service, the Security Department and the Chief Accountant monitor operational risks and report to the Management Board. The Bank also prepares and submits internal controls reports to the CBR. The Bank s branches and subsidiaries are fully integrated within its internal control monitoring system. 133

142 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 LENDING POLICIES AND PROCEDURES General AK BARS Bank has established lending and loan monitoring procedures which comply with Russian law and CBR requirements. These procedures are set out in the credit policy (the Credit Policy ) approved by the Management Board. The Credit Policy sets forth guidelines for, in particular, the extension of loans (including inter bank loans), issuance of bank guarantees, use of certain limits designed to mitigate credit risk and carrying out factoring operations in roubles and other currencies. The primary goal for the Bank s lending business set forth in the Credit Policy is the effective utilisation of the Bank s resources to create the maximum return from a diversified loan portfolio, within established risk limits. In addition to the Credit Policy, the Management Board adopts general risk management principles and internal regulations in respect of the Bank s lending activities. The Management Board also has powers to re categorise certain types of loans to a lower risk category and supervises the operations of the Bank s divisions involved in the loan approval process, the Assets and Liabilities Committee and the Limit Committee. Loan approval The loan approval process in the Bank s head office involves the Bank s Lending Department, the Large Loans Committee and the Small Loans Committee (together referred to as the Credit Committees ), the Collateral Appraisal Department, the Legal Department, the Internal Control Service and the Security Department. Depending on the amount of the proposed loan, loan applications are submitted to the Chairman of the Management Board or the head of the relevant branch and are initially considered by the relevant Credit Committee or the credit committee of the relevant branch. If approved, the application is forwarded to the Lending Department for further review and preparation of loan documentation. The responsible loan officer, assisted by other relevant departments, typically interviews the prospective borrower, reviews the documents provided by such borrower and issues the credit rating in connection with the borrower s application. The main criteria in analysing an application include the financial condition of the borrower and adequacy of collateral. On the basis of these investigations, the loan officer prepares an opinion assessing the appropriateness of granting the potential loan. The loan application is then submitted, together with the opinion prepared by the Lending Department, for approval by the relevant Credit Committee or the credit committee of the relevant branch. If the loan application is approved, the responsible loan officer prepares and submits to the Legal Department for its review the standard loan agreement and all necessary auxiliary documentation. Thereafter, the loan agreement is signed by the customer and the loan is granted. Credit committees operating in the Bank s branches are authorised to approve loan applications submitted to them within their respective approval limits. The maximum limit for a single loan made by a branch is currently set at RUB 50 million per borrower or a group of related borrowers, while the aggregate limit for all loans made by a branch differs by branch, with the highest limit set at RUB 11,500 million as at the date of this Base Prospectus. Lending limits The Bank manages its credit risk concentration by placing limits on the maximum amount of loans to a single borrower or a group of related borrowers, on aggregate amount of loans made by a regional branch, on major loans (defined as loans exceeding 5.0 per cent., of the Bank s RAS capital), on loans to the bank s shareholders and on similar types of guarantees and similar types of collateral securing loans. The lending limits for the Credit Committees and branch credit committees are established by the Limit Committee. Lending limits are reviewed on a regular basis by the Limit Committee. 134

143 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 The Large Loans Committee is currently authorised to make loan decisions in respect of loans over RUB 10 million and the Small Loans Committee is currently authorised to make loan decisions in respect of loans up to RUB 10 million. Limits set for each of the branch offices are assessed individually based on various criteria including managerial experience, bad debt history, regional needs and number of customers. Risk rating system The Bank implements a system of risk ratings for its corporate borrowers. Such risk rating system serves the following purposes: creation of a uniform approach to evaluating credit risk; improvement of the loan portfolio management; and maintenance of loan loss reserves in accordance with IFRS. The Bank s risk management system does not envisage a fixed set of criteria for the assignment of risk ratings, but allows for a flexible approach towards each borrower. When assigning risk ratings, the Bank s professionals are generally expected to exercise their professional judgment and rely on their experience. They are also expected to take into account, among other things, the borrower s credit history, financial condition and income/turnover, the quality of the collateral provided and the relationship between the borrower and the Bank. The Bank does not have a separate credit quality internal rating system for loans to individuals, as each type of loan product to individuals has standard terms and credit risk analysis is performed based on the statistics collected by the Bank for each loan product. In line with CBR requirements, the Bank assigns the following risk categories to loans granted to its clients (except for banks and other lending institutions) based on the assessment of the relevant credit risk: standard loans (0 per cent. reserve), substandard loans (1 per cent. 20 per cent. reserve), doubtful loans (21 per cent. 50 per cent. reserve), problem loans (51 per cent. 100 per cent. reserve) and bad loans (100 per cent. reserve). As at 31 December 2008, standard loans, substandard loans, doubtful loans, problem loans and bad loans constituted (in accordance with RAS for the Bank s loan portfolio and not for the whole Group) 33 per cent., 56 per cent., 10 per cent., 1 per cent. and 0 per cent., respectively, of the Bank s total loan portfolio. If a prospective loan is assessed as falling within the bad loan category, the Bank does not grant such loan. If a prospective loan is assessed as falling within the problem loan category by the branch credit officer or the Risk Review Department pursuant to their weekly review, such loan is submitted for the consideration of the relevant Credit Committee subject to prior approval of the Management Board. The risk category assigned to each loan is periodically reviewed in accordance with the CBR requirements and may change subject to the Bank s assessment of the relevant credit risk. Collateral It is the Bank s policy to seek collateral for most of its loans to corporate customers, except for short term interbank loans (up to three days). The Bank does not generally require collateral from retail clients, except for mortgages and auto loans. Where collateral is taken, the Collateral Appraisal Department assesses its value, the legal rights of the borrower to such collateral, any possible enforceability issues and any costs associated with the potential sale of such collateral. The main types of collateral or credit support taken are guarantees from the governments of the Russian Federation or the Republic of Tatarstan, third party bank guarantees, liquid promissory notes, shares in other banks or industrial companies and liens over inventory, real property and other similar assets. As at 1 January 2009 part of the Bank s corporate loan portfolio was secured. Loan monitoring In accordance with CBR regulations, Russian banks must monitor their borrowers financial condition and related credit risk exposure on a quarterly basis. The Bank monitors the financial condition and related credit risk exposures in relation to each borrower on a monthly basis. The Lending Department, in conjunction with the individual loan officer responsible for the borrower, monitors the timely payment of 135

144 Level: 3 From: 3 Monday, November 16, :47 eprint Section 06 interest and other amounts payable by corporate borrowers. In addition, the Security Department monitors borrowers ongoing creditworthiness and the value of collateral. It produces monthly reports on each loan. A report on any credit risk exposure if repayment is doubtful is submitted to the respective Credit Committee and this exposure is monitored closely. The Bank continuously updates and refines the quality of loan monitoring in an effort to improve the speed of decision making and the quality of information available for identifying and assessing potential risks. Anti money laundering procedures The Bank s anti money laundering measures are based on the requirements set forth in Russian legislation. The Bank has policies and procedures aimed at preventing money laundering and terrorist financing, including a general anti money laundering policy and internal control procedures and rules on counteracting money laundering and financing of individuals and legal entities engaged in terrorist activities. Anti money laundering procedures include know your customer procedures that require clear identification of clients, verification of their identities and appraisal of the risk of their involvement in money laundering and/or terrorist financing. If the risk of particular clients being involved in money laundering and/or terrorist financing is determined to be significant, the activities of such clients are monitored regularly and reported to the Federal Service for Financial Monitory. The Financial Monitoring Division ( FMD ) of the Bank s Department for Internal and Compliance Control is part of the Bank s internal control system. The FMD is responsible for developing and applying the Bank s Rules of Internal Control ( RIC ), which are designed to counteract money laundering and the financing of individuals and legal entities engaged in terrorist activities. The RIC have been approved by the National Bank of the Republic of Tatarstan and are periodically modified to remain in line with current legislation. The FMD also liaises with and provides necessary information to the relevant governmental authorities responsible for such matters. The FMD appoints officers in each of the Bank s structural divisions to implement the anti money laundering and terrorist financing procedures. The Bank has also introduced a Compliance System, which provides oversight of the Bank s executed transactions. 136

145 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 RELATED PARTY TRANSACTIONS AK BARS Bank enters into a variety of banking transactions with various related parties, including its principal shareholder, the Republic of Tatarstan, its directors, companies with which the Bank has significant common shareholders and other related parties. Historically, the Bank s business has been closely connected with business operations of the Republic of Tatarstan. Initially, the pricing of services to the Republic of Tatarstan was determined in conjunction with the Republic of Tatarstan with the objective of achieving optimal pricing arrangements for the Republic of Tatarstan as a whole. Until the end of 2000, AK BARS Bank provided certain loans and other services at below market rates. These loans at below market rates were repaid in full prior to the end of Related party transactions include settlements services, loans, deposit facilities, guarantees, trade finance and foreign currency transactions. Related parties, as defined by IFRS, are those counterparties that represent: (a) (b) (c) (d) (e) enterprises that directly, or indirectly through one of more intermediaries, control, or are controlled by, or are under common control with, the Bank (this includes holding companies, subsidiaries and sister companies); associates enterprises in which the Bank has significant influence and which are neither subsidiaries nor joint ventures of the Bank; individuals owning, directly or indirectly, an interest in the Bank (including voting rights) that gives them significant influence over the Bank, and anyone expected to influence, or be influenced by, such individuals in their transactions with the Bank; key management personnel, that i.e. those persons having authority and responsibility for planning, directing and controlling the activities of the Bank including, directors and officers of the Bank and close members of the families of such individuals; and enterprises in which a substantial interest is owned (including voting rights), directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the Bank and enterprises that have a member of key management in common with the Bank. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. 137

146 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 The following table sets forth the outstanding balances with related parties as at 30 June 2009 and 31 December 2008 and June December December Tatarstan Russian Tatarstan Russian Tatarstan Russian Republic Federation Republic Federation Republic Federation Government Government Government Government Government Government bodies and bodies and Other bodies and bodies and Other bodies and bodies and Other state state Other related state state Other related state state Other related organisations organisations Shareholders parties organisations organisations Shareholders parties organisations organisations Shareholders parties (unaudited) (in millions of roubles) Cash and cash equivalents... 2, , ,360.3 Mandatory cash balances with the CBR... 1, ,948.3 Securities at fair value through profit or loss and repurchase receivables Corporate shares 1, , , Corporate bonds , , Federal loan bonds 1, , ,655.3 Municipal bonds Promissory notes , Investments in mutual funds Investment in associate Due from other banks Gross amount of loans and advances to customers... 21, , , , , , , , , , ,557.2 Impairment provision for loans and advances to customers... (1,825.3) (44.6) (268.7) (386.2) (1,529.1) (80.0) (250.0) (273.8) (59.3) (32.6) (111.0) (40.0) Other assets , Due to other banks... 26, , Customer accounts Current/settlement accounts... 2, , , , , , , ,663.4 Term deposits.. 30, , , , , , , Debt securities in issue... 20, , , Subordinated debt... 6, , ,399.2 Other liabilities

147 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 The following table sets forth the outstanding off balance sheet items with related parties as at 30 June 2009 and 31 December 2008 and June December December Tatarstan Russian Tatarstan Russian Tatarstan Russian Republic Federation Republic Federation Republic Federation Government Government Government Government Government Government bodies and bodies and Other bodies and bodies and Other bodies and bodies and Other state state Other related state state Other related state state Other related organisations organisations Shareholders parties organisations organisations Shareholders parties organisations organisations Shareholders parties (unaudited) (in millions of roubles) Letters of credit Guarantees issued , , , ,219.6 The following table sets forth the income statement items with related parties for the 6 months ended 30 June 2009 and years ended 31 December 2008 and June December December Tatarstan Russian Tatarstan Russian Tatarstan Russian Republic Federation Republic Federation Republic Federation Government Government Government Government Government Government bodies and bodies and Other bodies and bodies and Other bodies and bodies and Other state state Other related state state Other related state state Other related organisations organisations Shareholders parties organisations organisations Shareholders parties organisations organisations Shareholders parties (unaudited) (in millions of roubles) Interest income Due from other banks Loans and advances to customers.. 1, Securities at fair value through profit or loss Interest expense Due to others banks (1,915.0) (10.8) Customers accounts... (1,043.2) (99.7) (28.5) (1,371.0) (0.002) (148.4) (7.1) (1,302.2) (0.6) (221.0) (0.07) Debt securities in issue... (322.2) (227.7) (435.5) (51.3) Subordinated debt (314.4) (656.0) (602.9) Fee and commission income Gains less losses from securities at fair value through profit or loss.. 1,424.7 (4,358.6) (198.6) (0.1) (63.6) Administrative and other operating expenses... (21.4) (2.5) (1.3) (14.2) (4.6) (1.0) (0.4) (212.8) (2.2) (0.4) (4.2) 139

148 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 THE ISSUER Incorporation and status AK BARS Luxembourg S.A. was incorporated on 4 May 2007 as a Luxembourg société anonyme for an unlimited period of time under the laws of the Grand Duchy of Luxembourg. The registered office of the Issuer is at 2, boulevard Konrad Adenauer, L 1115 Luxembourg. The Issuer is registered with the Register of Commerce and Companies of Luxembourg, with the registration number B The Articles of Incorporation of the Issuer were published on 26 June 2007 in the Mémorial, Journal Officiel du Grand Duché de Luxembourg, Recueil des Sociétés et Associations, Mémorial C Nr and have been amended by extraordinary general meetings of shareholders respectively held on 14 May 2008 and 30 May These amendments were published respectively in the Mémorial, Journal Officiel du Grand Duché de Luxembourg, Recueil des Sociétés et Associations, Mémorial C Nr of 17 June 2008 and Nr of 20 June The Issuer has been established as a special purpose vehicle for the purpose of issuing the Notes and has no subsidiaries. The telephone number of the Issuer is Any person interested in inspecting the articles of incorporation may do so at the Luxembourg trade and companies register. In connection with the admission of the Notes to trading on the regulated market of the Irish Stock Exchange, the constitutional documents of the Issuer and a legal notice (notice légale) relating to the issue of the Notes are available for inspection at the registered office of the Issuer. The Issuer has been in operation since 4 May On 30 July 2009, an annual ordinary general meeting was held at the registered office of the Issuer whereby the balance sheet, profit and loss account and allocation of the results as per 31 December 2008 were approved. Objects The purpose of the Issuer is: (i) the acquisition, holding and disposal of rights and interests in, and obligations of, Luxembourg and foreign entities; (ii) the acquisition and transfer of various securities and financial instruments; (iii) the ownership and management of asset portfolios; (iv) the issue of notes and other debt and/or equity securities; (v) the lending of funds (including the proceeds of any borrowings and/or issues of notes and other debt securities but without, however, exercising at any time a professional banking or an activity of the financial sector); (vi) the provision of guarantees; and (vii) the creation of security interests over some or all of its assets. The Issuer may take all required actions and enter into and/or perform any obligation in the context of any of the foregoing and in particular (but without limitation) enter into any agreement or execute any document with any providers of services in the context of any of the foregoing. In general, the Issuer may take any controlling and supervisory measures and carry out any operation or transaction which it considers necessary or useful in the achievement and development of its purpose. Share capital The Issuer s share capital upon its incorporation was U.S.$50,000 represented by 500 ordinary shares with a nominal value of U.S.$100 each, carrying one voting right in the general assembly. By shareholder decision of 30 May 2008, the share capital was increased to U.S.$60,000 represented by 600 ordinary shares with a nominal value of U.S.$100 each, carrying one voting right in the general assembly. All shares are in registered form and have been fully paid. The shareholder of the Issuer is Stichting AK BARS Luxembourg, a foundation (Stichting) established under the laws of The Netherlands, registered with the Amsterdam Chamber of Commerce under number , having its statutory office in The Netherlands at Herengracht 450, 1017 CA Amsterdam, holding 600 shares. 140

149 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Directors Auditors The Issuer has a Board of Directors, currently consisting of three directors: Rachel Aguirre, having her business address at 2, boulevard Konrad Adenauer, L 1115 Luxembourg; Anja Lakoudi, private employee, having her business address at 2, boulevard Konrad Adenauer, L 1115 Luxembourg; and Heike Kubica, private employee, having her business address at 2, boulevard Konrad Adenauer, L 1115 Luxembourg. The Issuer has appointed Fiduciaire Patrick Sganzerla S.à r.l. with registered office at 17, rue des Jardiniers, L 1835 Luxembourg, Grand Duchy of Luxembourg, and registered with the Register of Commerce and Companies of Luxembourg under number B96848, as its independent auditor (réviseur d entreprises). Fiduciaire Patrick Sganzerla S.à r.l. is a member of the Institut des Réviseurs d Entreprises and of the Ordre des Experts Comptables. Financial year The Issuer s financial year corresponds to the calendar year. Since the date of its incorporation, the Issuer has deposited at the Register of Commerce and Companies of Luxembourg its audited financial statements for the financial year ended 31 December 2008 which have been approved in an annual general meeting of shareholders held at the registered office of the Issuer on 30 July 2009 (Journal Officiel du Grand Duché de Luxembourg, Recueil des Sociétés et Associations, Mémorial C Nr of 26 August 2009). Any future published financial statements prepared by the Issuer (in respect of the period ending on 31 December in each year) will be available from the registered office of the Issuer. 141

150 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 THE FACILITY AGREEMENT The following is the text of the Facility Agreement: THIS FACILITY AGREEMENT is made on 16 November 2009 between: (A) (B) AK BARS BANK, a commercial bank organised as an open joint stock company under the laws of the Russian Federation the registered address of which is Dekabristov Street 1, Kazan , Republic of Tatarstan, Russian Federation (the Borrower ); and AK BARS LUXEMBOURG S.A., a Luxembourg société anonyme the registered office of which is 2, boulevard Konrad Adenauer L 1115 Luxembourg and being registered with the Luxembourg trade and companies register (Registre de commerce et de sociétés, Luxembourg) under number B (the Lender, which expression, where the context so admits, includes any successor Lender pursuant to the terms of this Agreement and the Trust Deed). WHEREAS: (A) (B) (C) (D) The Lender has, at the request of the Borrower, agreed to make available to the Borrower loan facilities in the maximum amount of the Programme Limit (as defined below). The loan facilities are to be made available on the terms and subject to the conditions of this Agreement, as amended and supplemented in relation to each Loan (as defined below) by a Loan Supplement dated the relevant Closing Date substantially in the form set out in Schedule 1 hereto (each, a Loan Supplement ); On 11 June 2007 the Borrower and the Lender entered into a facility agreement (as amended and restated on 3 June 2008, the Original Facility Agreement ) relating to the US$1,500,000,000 Loan Participation Note Programme; The parties hereto wish to amend and restate the Original Facility Agreement in order to effect certain technical changes; and It is intended that, concurrently with the extension of any Loan under this loan facility, the Lender will issue certain loan participation notes in the same nominal amount and bearing the same rate of interest as such Loan. Now it is hereby agreed as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions In this Agreement (including the recitals), the following terms shall have the meanings indicated: Account means an account in the name of the Lender with the Principal Paying Agent as specified in the relevant Loan Supplement; Affiliate of any specified person means: (a) (b) any other person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified person; or any other person who is a director or officer: (i) (ii) (iii) of such specified person; or of any Subsidiary of such specified person; or of any person described in clause (a) above. For the purpose of this definition, control when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the 142

151 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 ownership of voting securities, by contract or otherwise and the terms controlling and controlled have meanings correlative to the foregoing; Agency means any agency, authority, central bank, department, government, legislature, minister, official or public statutory person (whether autonomous or not) of, or of the government of, any state or supra national body; Agency Agreement means the amended and restated paying agency agreement relating to the Programme dated 16 November 2009 between the Lender, the Borrower, the Trustee and the agents named therein, as may be further amended or supplemented from time to time; Agreement means this agreement as originally executed or as it may be amended from time to time; Arrangers means Credit Suisse Securities (Europe) Limited and The Royal Bank of Scotland plc or any additional or replacement arranger appointed, and excluding any Arranger whose appointment has terminated pursuant to the Dealer Agreement; Auditors means the auditors of the Borrower s IFRS financial statements (consolidated if the same are then prepared) or, if they are unable or unwilling to carry out any action requested of them under this Agreement, such other internationally recognised firm of accountants as may be appointed by the Borrower for this purpose; Banking Business means, in relation to the Borrower or any of its Subsidiaries, any type of banking business (including, without limitation, any short term inter bank operations with maturities of one (1) year or less, factoring, consumer credit, mortgages, issuance of banking guarantees and letters of credit (and related cash cover provision), bills of exchange and promissory notes and payments under such guarantees, letters of credit and promissory notes, trading of securities, fund management and professional securities market participation business) which it conducts or may conduct pursuant to its licence issued by the appropriate authorities and accepted market practice and any applicable law; Base Prospectus has the meaning ascribed to it in the Trust Deed; BIS Guidelines means the guidelines on capital adequacy standards (including the constituents of capital included in the capital base, the risk weights by category for on balance sheet assets, the credit conversion factors for off balance sheet items, and the target standard ratio) for international banks contained in the July 1998 text of the Basel Capital Accord, published by the Basel Committee on Banking Supervision (as amended, updated or supplemented from time to time), without any amendment or other modification by any other Agency; Board of Directors means, as to any person, the board of directors or equivalent competent governing body of such person, or any duly authorised committee thereof; Borrower Account means an account in the name of the Borrower as specified in the relevant Loan Supplement for receipt of Loan funds; Borrower Agreements means this Agreement, the Agency Agreement, the Fee Side Letter and the Dealer Agreement and, in relation to each Loan, the foregoing agreements together with the relevant Subscription Agreement and Loan Supplement; Business Day means (save in relation to Clause 4 (Interest)) a day (other than a Saturday or Sunday) on which (a) banks and foreign exchange markets are open for business generally in the relevant place of payment, and (b) if on that day a payment is to be made in a Specified Currency other than euro hereunder, where payment is to be made by transfer to an account maintained with a bank in the Specified Currency, foreign exchange transactions may be carried on in the Specified Currency in the principal financial centre of the country of such Specified Currency and (c) if on that day a payment is to be made in euro hereunder, a day on which TARGET2 is operating and (d) in relation to a Loan corresponding to a Series of Notes to be sold pursuant to Rule 144A under the Securities Act, banks and foreign exchange markets are open for business generally in New York City; 143

152 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Calculation Agent means, in relation to a Loan, Deutsche Bank AG, London Branch, or any person named as such in the relevant Loan Supplement or any successor thereto; Capital Adequacy Ratio means the capital adequacy ratio calculated in accordance with BIS Guidelines; Capital Stock means, with respect to any person, any and all shares, interests, participations, rights to purchase, warrants, options, or other equivalents (however designated) of capital stock of a corporation and any and all equivalent ownership interests in a person other than a corporation, in each case whether now outstanding or hereafter used; Central Bank means the Central Bank of the Russian Federation; a Change of Control shall be deemed to have occurred at any time (whether or not approved by the competent governing body of the Borrower) that the Republic of Tatarstan ceases to own or control (directly or indirectly) in excess of 50 per cent. in aggregate of the issued and allotted ordinary share capital carrying voting rights of the Borrower and where such event has resulted in a Rating Decline; Change of Control Payment Date means the date specified as such in the notice from the Borrower to the Lender pursuant to Clause 5.4 (Prepayment in the Event of a Change of Control); Closing Date means the date specified as such in the relevant Loan Supplement; Conditions has the meaning ascribed to it in the Trust Deed; Day Count Fraction has the meaning specified as such in the relevant Loan Supplement; Dealer Agreement means the amended and restated dealer agreement relating to the Programme dated 16 November 2009 between the Lender, the Borrower, the Arrangers and the other dealers appointed pursuant to it, as may be further amended or supplemented from time to time; Definitive Notes means the definitive notes in fully registered form representing the Notes to be issued in limited circumstances pursuant to the Trust Deed; Dollars, $, U.S. dollars and U.S.$ means the lawful currency of the United States of America; euro or means the lawful currency of the member states of the European Union that adopted the single currency in accordance with the Treaty of Rome, as amended; Event of Default has the meaning assigned to such term in Clause 11.1 (Events of Default) hereof; Fair Market Value means the price that would be paid in an arm s length transaction, as determined in good faith by the Board of Directors of the Borrower, whose determination shall be conclusive if evidenced by a resolution of such Board of Directors; Fee Side Letter means the letter specified as such in Clause 14.2 (Payment of Ongoing Expenses); Fiscal Period means any fiscal period for which the Borrower or the Group (if consolidated accounts are then prepared) has produced financial statements in accordance with IFRS which have either been audited or reviewed by the Auditors; Fixed Rate Loan means a Loan specified as such in relevant Loan Supplement; Floating Rate Loan means a Loan specified as such in the relevant Loan Supplement; Global Notes has the meaning assigned to it in the Trust Deed; Group means the Borrower and its Subsidiaries taken as a whole at any given time; Guarantee means, in relation to any Indebtedness of any person, any obligation of another person to pay such Indebtedness including (without limitation): 144

153 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 (a) (b) (c) (d) any obligation to purchase such Indebtedness; any obligation to lend money, to purchase or subscribe shares or other securities or to purchase assets or services in order to provide funds for the payment of such Indebtedness; any indemnity against the consequences of a default in the payment of such Indebtedness; and any other agreement to be responsible for such Indebtedness, and the term Guarantee used as a verb has a corresponding meaning; IFRS means the International Financial Reporting Standards (formerly International Accounting Standards) issued by the International Accounting Standards Board ( IASB ) and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (as amended, supplemented or re issued from time to time); incur means issue, assume, guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) or is merged into a Subsidiary will be deemed to be incurred or issued by such Subsidiary at the time it becomes or is so merged into a Subsidiary; Indebtedness means any indebtedness of any person for money borrowed or raised including (without limitation) any indebtedness for or in respect of: (a) (b) (c) (d) (e) amounts raised by acceptance under any acceptance credit facility; amounts raised under any note purchase facility or through the issue of bonds, debentures, loan stock or any similar instrument; the amount of any liability in respect of leases or hire purchase contracts which would, in accordance with applicable law and generally accepted accounting principles, be treated as finance or capital leases; the amount of any liability in respect of any purchase price for assets or services the payment of which is deferred for a period in excess of 60 days; and amounts raised under any other transaction (including, without limitation, any forward sale or purchase agreement) having the commercial effect of a borrowing; provided that, for the avoidance of doubt, such term shall not include any indebtedness owed to the state budget, local budgets and non budgetary funds on account of taxes which are not overdue; Independent Appraiser means an investment banking firm of international standing or any third party appraiser of international standing appointed by the Borrower pursuant to Clause (Appointment of Independent Appraiser), provided that such firm or third party appraiser is not an Affiliate of the Borrower; Interest Payment Date means the date(s) specified as such in the relevant Loan Supplement, or, in the event of a prepayment in whole (but not in part) in accordance with Clauses 5.2 (Prepayment in the Event of Taxes or Increased Costs), 5.3 (Prepayment in the Event of Illegality) or 5.4 (Prepayment in the Event of a Change of Control) the date set for such redemption in respect of the Loan; Interest Period means each period beginning on (and including) an Interest Payment Date or, in the case of the first Interest Period, the Interest Commencement Date, and ending on (but excluding) the next Interest Payment Date; Lead Manager(s) means the Relevant Dealer(s) specified as such in the relevant Subscription Agreement; 145

154 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Lender Agreements means the Dealer Agreement, this Agreement, the Agency Agreement, the Fee Side Letter, the Principal Trust Deed and together with, in relation to each Loan, the relevant Subscription Agreement, Loan Supplement and Supplemental Trust Deed; Loan means each loan to be made pursuant to, and on the terms specified in this Agreement and the relevant Loan Supplement, and includes each Fixed Rate Loan and Floating Rate Loan; Loan Agreement means this Facility Agreement as amended and supplemented by the relevant Loan Supplement; Luxembourg means the Grand Duchy of Luxembourg; Material Adverse Effect means a material adverse effect on (a) the business, operations, property, financial condition or business prospects of the Borrower; (b) the Borrower s ability to perform or comply with its obligations under the Borrower Agreements or (c) the validity or enforceability of the Borrower Agreements or the rights or remedies of the Lender thereunder; Material Subsidiary means, at any given time, any Subsidiary of the Borrower (a) whose total assets or gross revenues (or, where the Subsidiary in question prepares consolidated accounts, whose total consolidated assets or gross consolidated revenues, as the case may be) represent at least 10 per cent. of the consolidated total assets, or, as the case may be, consolidated total revenues of the Borrower and its Subsidiaries and, for these purposes (i) the total assets and gross revenues (or, where the Subsidiary in question prepares consolidated accounts, whose total consolidated assets or gross consolidated revenues, as the case may be) of such Subsidiary shall be determined by reference to its then most recent audited financial statements (or, if none, its then most recent management accounts); and (ii) the consolidated total assets and consolidated gross revenues of the Borrower shall be determined by reference to the Borrower s then most recent consolidated audited financial statements (or, if none, its then most recent management accounts), in each case prepared in accordance with IFRS or (b) to which is transferred the whole or substantially the whole of the undertaking and assets of a Subsidiary of the Borrower which immediately before the transfer is a Material Subsidiary of the Borrower. A certificate by the directors of the Borrower, that in their opinion, a Subsidiary of the Borrower is or is not a Material Subsidiary, accompanied by a report by the Auditors addressed to the directors of the Borrower as to proper extraction of the figures used by the directors of the Borrower in determining the Material Subsidiaries of the Borrower and mathematical accuracy of the calculations shall, in the absence of manifest error, be conclusive and binding on all parties; Noteholder means, in relation to a Note, the person in whose name such Note is registered from time to time in the register of the noteholders (or in the case of joint holders, the first named holder thereof); Notes means the loan participation notes that may be issued from time to time by the Lender under the Programme in Series, each Series corresponding to a Loan and as defined in the relevant Loan Supplement; Officers Certificate means a certificate signed on behalf of the Borrower by two (2) officers of the Borrower at least one (1) of whom shall be the principal executive officer, principal accounting officer or principal financial officer of the Borrower substantially, in the form set out in Schedule 2 hereto; Opinion of Counsel means a written opinion from international legal counsel who is acceptable to the Lender, and to the Trustee (after the Assignment, as defined in the Trust Deed); Permitted Security Interest means: (a) (b) Security Interests in existence on the date of this Agreement; Security Interests securing Indebtedness of a person existing at the time that such person is merged into or consolidated with the Borrower or becomes a Subsidiary of the Borrower; provided however, that such Security Interests were not created in contemplation of such 146

155 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 merger or consolidation and do not extend to any assets or property of the Borrower or any Subsidiary of the Borrower other than those of the surviving person and its Subsidiaries; (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) Security Interests on assets or property acquired by the Borrower or a Subsidiary of the Borrower; provided that such Security Interests were not created in contemplation of such acquisition and do not extend to any other assets or property (other than proceeds of such acquired assets or property); Security Interests arising from operation of law; Security Interests arising in the ordinary course of Banking Business; Security Interests for ad valorem, income or property taxes or assessments and similar charges or otherwise arising in the ordinary course of business which either are not delinquent or are being contested in good faith by appropriate proceedings for which the Borrower has set aside on its books reserves to the extent required by IFRS; Security Interests granted by third parties in favour of the Borrower or any of its Subsidiaries; Security Interests to secure the performance of tenders, statutory obligations, surety or appeal bonds, bids, leases, governmental contracts, performance and return of money bonds or other obligations of a like nature (not including obligations for the payment of borrowed money) incurred in the ordinary course of business; Security Interests granted or deposits made in the ordinary course of business in connection with workers compensation, unemployment insurance and other type of statutory obligations; Security Interests upon, or with respect to, any present or future assets or revenues or any part thereof which is created pursuant to any Repo transaction; easements, rights of way, restrictions (including zoning restrictions), reservations, permits, servitudes, minor defects or irregularities in title and other similar charges or encumbrances and Security Interests arising under leases or subleases granted to others, in each case not interfering in any material respect with the business of the Borrower and its Subsidiaries taken as a whole and existing, arising or incurring in the ordinary course of business; Security Interests arising from any judgment, decree or other order which does not constitute an Event of Default; any Security Interest securing Indebtedness created on any property or assets acquired by the Borrower or its Subsidiary (otherwise than from each other) securing Indebtedness of the Borrower or such Subsidiary incurred or assumed for the purpose of financing all or part of the cost of acquiring such property or assets, provided that such Security Interest shall not extend to any other property or assets and that such Security Interest attaches to such property or assets concurrently with or within 90 days after the acquisition thereof and further provided that the principal, capital or nominal amount secured by such Security Interest and outstanding at the time of acquisition may not increase except in accordance with its original terms; Security Interests granted by any Subsidiary of the Borrower in favour of the Borrower in connection with any intra group Indebtedness; any security interest upon or with respect to, any present or future assets or revenues or any part thereof which is created pursuant to any Securitisation Transaction; any other Security Interests not otherwise described in the preceding paragraphs from (a) to (and including) (m); provided that the aggregate value of assets subject to such Security Interests does not at any time exceed 15 per cent. of the Group s assets, determined by reference to the balance sheet for the Group s most recent IFRS Fiscal Period; or 147

156 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 (q) any renewal or substitution for any Security Interest permitted by any of the preceding paragraphs (a) to (and including) (p); provided that with respect to Security Interests incurred pursuant to Clause 10.5 (Negative Pledge) the principal amount secured has not increased and the Security Interests have not been extended to any additional property (other than proceeds of the property in question). person means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, company, firm, trust, organisation, government, or any agency or political subdivision thereof or any other entity, whether or not having a separate legal personality; Potential Event of Default means any event which is, or after notice or passage of time or after making any determinations under this Agreement (or any combination of the foregoing) would be, an Event of Default; Principal Trust Deed means the amended and restated principal trust deed dated 16 November 2009 between the Lender and the Trustee, as it may be further amended or supplemented from time to time; Programme means the programme for the issuance of loan participation notes of the Lender; Programme Limit means U.S.$1,500,000,000 or its equivalent in other currencies, being the maximum aggregate principal amount of Notes that may be issued and outstanding at any time under the Programme, as may be increased in accordance with the Dealer Agreement; Qualifying Jurisdiction means any jurisdiction which has a double taxation treaty with the Russian Federation under which the payment of interest by Russian borrowers to lenders in the jurisdiction in which the lender is incorporated is generally able to be made without deduction or withholding of Russian income tax upon completion of any necessary formalities required in relation thereto; Rate of Interest has the meaning assigned to such term in the relevant Loan Supplement; Rating Agency means Fitch Ratings Ltd ( Fitch ) or Moody s Investors Service Limited ( Moody s ) or, or any of their successors or any rating agency substituted for any of them (or any permitted substitute of them) by the Borrower, from time to time with the prior written approval of the Lender; Rating Categories means (1) with respect to Fitch, any of the following categories (any of which may or may not include a + or ): AAA, AA, A, BBB, BB, B, CCC, CC, C and D (or equivalent successor categories); (2) with respect to Moody s, any of the following categories (any of which may or may not include a 1, 2 or 3 ): Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor categories); and (3) the equivalent of any such categories of Fitch or Moody s used by another rating agency, if applicable; Rating Decline means that at any time within 60 days (which period shall be extended so long as the corporate credit rating of the Borrower or the credit rating in respect of the Notes is under publicly announced consideration for possible downgrade by any Rating Agency) after: (a) (b) (c) in the case of a Change of Control, the announcement or the occurrence of the Change of Control; or in the case of a merger in accordance with Clause 10.8 (Mergers), the announcement or occurrence of the relevant reorganisation or other type of corporate reconstruction; or in the case of a disposal in accordance with Clause 10.9 (Disposals), the announcement or occurrence of the relevant transaction or series of transactions, the corporate rating of the Borrower or the rating of the Notes is decreased or downgraded by a Rating Agency by one (1) or more Rating Categories below the corporate rating of the Borrower or the rating of the Notes as of the date hereof (or if a Rating Agency has not assigned any such rating as of the date hereof, below the first such rating assigned to the Borrower or the Notes by that Rating Agency 148

157 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 after the date hereof), and in each case the relevant Rating Agency has specified that such decrease or downgrade was a direct result of the events specified in (a), (b) or, as the case may be, (c) above and written notice thereof has been provided to the Lender (and copied to the Trustee); Registrar has the meaning assigned to it in the Agency Agreement; Relevant Event has the meaning assigned to it in the Trust Deed; Relevant Time means, in relation to a payment in a Specified Currency, the time in the principal financial centre of such Specified Currency and, in relation to a payment in euro, Brussels time; Repayment Date has the meaning assigned to such term in the relevant Loan Supplement; Repo means a securities repurchase or resale agreement or reverse repurchase or resale agreement, a securities lending or rental agreement or any agreement relating to securities which is similar in effect to any of the foregoing and for the purposes of this definition, the term securities means any capital stock, share, debenture or other debt or equity instrument, or derivative thereof, whether issued by any public or private company, any government or Agency or instrumentality thereof or any supranational, international or multinational organisation; Reserved Rights has the meaning assigned to such term in the Trust Deed; Roubles means the lawful currency of the Russian Federation; Same Day Funds means funds for payment, in the Specified Currency as the Lender may at any time determine to be customary for the settlement of international transactions in the principal financial centre of the country of the Specified Currency or, as the case may be, euro funds settled through TARGET2 or such other funds for payment in euro as the Lender may at any time reasonably determine to be customary for the settlement of international transactions in Brussels of the type contemplated hereby; Securities Act means the U.S. Securities Act of 1933, as amended; Securitisation Transaction means (i) any transaction by which an entity acquires or provides finance against the security of assets (financial or otherwise) or any rights arising from or by reference to such assets from the Borrower or any of its Subsidiaries and that entity funds such acquisition or financing from external funding sources (including, but not limited to, debt securities or banking facilities) on terms that such funding will be repaid primarily from the cashflows and/or values and/or rights attributable to such assets, or (ii) any asset backed financing, receiveables financing or comparable secured loan financing or similar arrangement pursuant to which, at any time, the aggregate principal amount of the funding raised does not at the initial funding thereof exceed 10 per cent. of the consolidated total assets of the Borrower as determined at any time by reference to the most recent consolidated balance sheet of the Borrower prepared in accordance with IFRS; Security Interest means any mortgage, charge, pledge, lien or other security interest (but excluding any lien arising by operation of law), including, without limitation, anything analogous to any of the foregoing under the laws of any jurisdiction; Series means a series of Notes that (except in respect of the first payment of interest and their issue price) have identical terms on issue and are expressed to have the same series number; Specified Currency means the currency specified as such in the relevant Loan Supplement; Subscription Agreement means the agreement specified as such in the relevant Loan Supplement; Subsidiary means a company or corporation (A): (a) (b) which is controlled, directly or indirectly, by another company or corporation (B); or more than half the issued share capital of which is beneficially owned, directly or indirectly, by B, 149

158 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 and, for these purposes, A shall be treated as being controlled by B if B is able to direct A s affairs and/or to control the composition of A s board of directors or equivalent body; Supplemental Trust Deed means a supplemental trust deed in respect of a Series of Notes which constitutes and secures, inter alia, such Series dated the relevant Closing Date and made between the Lender and the Trustee (substantially in the form set out in Schedule 9 of the Principal Trust Deed); TARGET2 means the Trans European Automated Real Time Gross Settlement Express Transfer payment system which utilises a single shared platform and which was launched on 19 November 2007; Taxes means any taxes (including interest or penalties thereon) which are now or at any time hereafter imposed, assessed, charged, levied, collected, demanded, withheld or claimed by the Russian Federation, Luxembourg or any tax authority thereof or therein or any other jurisdiction through which the Borrower is directed by the Lender to effect payments, provided that for the purposes of this definition the references to Luxembourg shall, upon the occurrence of a Relevant Event (as defined in the Trust Deed), be deemed to be references to the jurisdiction in which the Trustee is domiciled for tax purposes; and the term Taxation shall be construed accordingly; Taxing Authority means any body having authority to levy Taxes; Trust Deed means the Principal Trust Deed as supplemented by the relevant Supplemental Trust Deed and specified as such in the relevant Loan Supplement; Trustee means Deutsche Trustee Company Limited, as trustee under the Trust Deed and any other trustee or trustees thereunder; and Warranty Date means the date hereof, the date of each Loan Supplement, each Closing Date, each date on which the Base Prospectus is amended, supplemented or replaced and each date on which the Programme Limit is increased. 1.2 Other Definitions Unless the context otherwise requires, terms used in this Agreement which are not defined in this Agreement but which are defined in the Principal Trust Deed, the relevant Notes, the Agency Agreement, the Dealer Agreement or the relevant Loan Supplement shall have the meanings assigned to such terms therein. 1.3 Interpretation Unless the context or the express provisions of this Agreement otherwise require, the following shall govern the interpretation of this Agreement: all references to Clause or sub Clause are references to a Clause or sub Clause of this Agreement; the terms hereof, herein and hereunder and other words of similar import shall mean the relevant Loan Agreement as a whole and not any particular part hereof; words importing the singular number include the plural and vice versa; and the table of contents and the headings are for convenience only and shall not affect the construction hereof. 150

159 Level: 3 From: 3 Monday, November 16, :48 eprint Section LOANS 2.1 Loans On the terms and subject to the conditions set forth herein and, as the case may be, in each Loan Supplement, the Lender hereby agrees to make available to the Borrower Loans up to the total aggregate amount equal to the Programme Limit. 2.2 Purpose The proceeds of each Loan will be used to fund the Borrower s lending activities and for general banking purposes (unless otherwise specified in the relevant Loan Supplement) and, accordingly, the Borrower shall apply all amounts raised by it hereunder to fund such activities and purposes, but the Lender shall not be concerned with the application thereof. 2.3 Separate Loans It is agreed that with respect to each Loan, all the provisions of this Agreement and the relevant Loan Supplement shall apply mutatis mutandis separately and independently to each such Loan and the expressions Account, Arrangement Fee, Closing Date, Day Count Fraction, Interest Payment Date, Loan Agreement, Notes, Rate of Interest, Repayment Date, Specified Currency, Subscription Agreement and Trust Deed, together with all other terms that relate to such a Loan shall be construed as referring to those of the particular Loan in question and not of all Loans unless expressly so provided, so that each such Loan shall be made pursuant to this Agreement and the relevant Loan Supplement, together comprising the Loan Agreement in respect of such Loan, and that events affecting one (1) Loan shall not affect any other. 3. DRAWDOWN 3.1 Drawdown On the terms and subject to the conditions set forth herein and, as the case may be, in each Loan Supplement, on the Closing Date thereof the Lender shall make a Loan to the Borrower and the Borrower shall make a single drawing in the full amount of such Loan. 3.2 Loan Arrangement Fee In consideration of the Lender s undertaking to make a Loan available to the Borrower, the Borrower hereby agrees that it shall, one (1) Business Day before each Closing Date, pay to or to the order of the Lender, in Same Day Funds by 10 a.m. (Relevant Time) an Arrangement Fee (as defined in the relevant Loan Supplement) in connection with the financing of such Loan. The total amount of the Arrangement Fee, as increased by the front end commissions, fees and expenses, will be as specified in the relevant Loan Supplement. 3.3 Disbursement Subject to the conditions set forth herein and, as the case may be, in each Loan Supplement, on the Closing Date the Lender shall transfer the full amount of the relevant Loan to the Borrower Account specified in the relevant Loan Supplement. 3.4 Ongoing Fees and Expenses In consideration of the Lender establishing and maintaining the Programme and agreeing to make Loans to the Borrower, the Borrower shall pay on demand to the Lender as and when such payments are due an amount or amounts to reimburse the Lender for its expenses relating to its management and operation in servicing the Loans as set forth to the Borrower in an invoice from the Lender (including, for the avoidance of doubt and without limitation, the fees and expenses of the Lender s counsel, 151

160 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 auditors, corporate services providers and agents as well as any tax to be paid by the Lender as a result of establishing and maintaining the Programme). 4. INTEREST 4.1 Rate of Interest for Fixed Rate Loans Each Fixed Rate Loan bears interest on its outstanding principal amount from (and including) the Interest Commencement Date at the rate(s) per annum (expressed as a percentage) equal to the applicable Rate of Interest. If a Fixed Amount or a Broken Amount is specified in the relevant Loan Supplement, the amount of interest payable on each Interest Payment Date will amount to the Fixed Amount or, if applicable, the Broken Amount so specified and in the case of the Broken Amount, will be payable on the particular Interest Payment Date(s) specified in the relevant Loan Supplement. 4.2 Payment of Interest for Fixed Rate Loans Interest at the Rate of Interest shall accrue on each Fixed Rate Loan from day to day, starting from (and including) the Interest Commencement Date and thereafter from (and including) each Interest Payment Date, to (but excluding) the next Interest Payment Date and shall be paid by the Borrower to the Account not later than a.m. (Relevant Time) one (1) Business Day prior to each Interest Payment Date. 4.3 Interest for Floating Rate Loans Interest Payment Dates: Each Floating Rate Loan bears interest on its outstanding principal amount from (and including) the Interest Commencement Date and thereafter from (and including) each Interest Payment Date, to (but excluding) the next Interest Payment Date at the rate per annum (expressed as a percentage) equal to the applicable Rate of Interest, which interest shall be paid by the Borrower to the relevant Account not later than a.m. (Relevant Time) one (1) Business Day prior to each Interest Payment Date. Such Interest Payment Date(s) is/are either shown in the relevant Loan Supplement as Specified Interest Payment Date(s) or, if no Specified Interest Payment Date(s) is/are shown in the relevant Loan Supplement, Interest Payment Date shall mean each date which falls the number of months or other period shown in the relevant Loan Supplement as the Interest Period after the preceding Interest Payment Date or, in the case of the first Interest Payment Date, after the Interest Commencement Date Business Day Convention: If any date referred to in the relevant Loan Supplement that is specified to be subject to adjustment in accordance with a Business Day Convention would otherwise fall on a day that is not a Business Day, then, if the Business Day Convention specified is (A) the Floating Rate Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event (x) such date shall be brought forward to the immediately preceding Business Day and (y) each subsequent such date shall be the last Business Day of the month in which such date would have fallen had it not been subject to adjustment, (B) the Following Business Day Convention, such date shall be postponed to the next day that is a Business Day, (C) the Modified Following Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event such date shall be brought forward to the immediately preceding Business Day or (D) the Preceding Business Day Convention, such date shall be brought forward to the immediately preceding Business Day Rate of Interest for Floating Rate Loans: The Rate of Interest in respect of Floating Rate Loans for each Interest Accrual Period shall be determined in the manner specified in the relevant Loan Supplement and the provisions below relating to either ISDA Determination or Screen 152

161 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Rate Determination shall apply, depending upon which is specified in the relevant Loan Supplement. (a) ISDA Determination for Floating Rate Loans Where ISDA Determination is specified in the relevant Loan Supplement as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Accrual Period shall be determined by the Calculation Agent as a rate equal to the relevant ISDA Rate. For the purposes of this sub paragraph (a), ISDA Rate for an Interest Accrual Period means a rate equal to the Floating Rate that would be determined by the Calculation Agent under a Swap Transaction under the terms of an agreement incorporating the ISDA Definitions and under which: (i) (ii) (iii) the Floating Rate Option is as specified in the relevant Loan Supplement; the Designated Maturity is a period specified in the relevant Loan Supplement; and the relevant Reset Date is the first day of that Interest Accrual Period unless otherwise specified in the relevant Loan Supplement. For the purposes of this sub paragraph (a), Floating Rate, Calculation Agent, Floating Rate Option, Designated Maturity, Reset Date and Swap Transaction have the meanings given to those terms in the ISDA Definitions. (b) Screen Rate Determination for Floating Rate Loans Where Screen Rate Determination is specified in the relevant Loan Supplement as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Accrual Period shall be determined by the Calculation Agent at or about the Relevant Time on the Interest Determination Date in respect of such Interest Accrual Period in accordance with the following: (i) if the Primary Source for Floating Rate is a Page, subject as provided below, the Rate of Interest shall be: (1) the Relevant Rate (where such Relevant Rate on such Page is a composite quotation or is customarily supplied by one (1) entity); or (2) the arithmetic mean of the Relevant Rates of the persons whose Relevant Rates appear on that Page, in each case appearing on such Page at the Relevant Time on the Interest Determination Date; (ii) (iii) if the Primary Source for the Floating Rate is Reference Banks or if sub paragraph 4.3.3(b)(i)(1) above applies and no Relevant Rate appears on the Page at the Relevant Time on the Interest Determination Date or if sub paragraph 4.3.3(b)(i)(2) above applies and fewer than two (2) Relevant Rates appear on the Page at the Relevant Time on the Interest Determination Date, subject as provided below, the Rate of Interest shall be the arithmetic mean of the Relevant Rates that each of the Reference Banks is quoting to leading banks in the Relevant Financial Centre at the Relevant Time on the Interest Determination Date, as determined by the Calculation Agent; and if paragraph 4.3.3(b)(ii) above applies and the Calculation Agent determines that fewer than two (2) Reference Banks are so quoting Relevant Rates, subject as provided below, the Rate of Interest shall be the arithmetic mean of the rates per annum (expressed as a percentage) that the Calculation Agent determines to be the rates (being the nearest equivalent to the Benchmark) in respect of a Representative Amount of the Specified Currency that at least two (2) out of five (5) leading banks selected by the Calculation 153

162 Level: 3 From: 3 Monday, November 16, :48 eprint Section Accrual of Interest Agent in the Relevant Financial Centre of the country of the Specified Currency or, if the Specified Currency is euro, in Europe as selected by the Calculation Agent are quoting at or about the Relevant Time on the date on which such banks would customarily quote such rates for a period commencing on the Effective Date for a period equivalent to the Specified Duration (I) to leading banks carrying on business in Europe, or (if the Calculation Agent determines that fewer than two (2) of such banks are so quoting to leading banks in Europe) (II) to leading banks carrying on business in the Relevant Financial Centre; except that, if fewer than two (2) of such banks are so quoting to leading banks in the Relevant Financial Centre, the Rate of Interest shall be the Rate of Interest determined on the previous Interest Determination Date (after readjustment for any difference between any Margin, Rate Multiplier or Maximum or Minimum Rate of Interest applicable to the preceding Interest Accrual Period and to the relevant Interest Accrual Period). Interest shall cease to accrue on each Loan on the due date for repayment unless payment is improperly withheld or refused, in which event interest shall continue to accrue (before or after any judgment) at the applicable Rate of Interest to, but excluding, the date on which payment in full of the principal thereof is made. 4.5 Margin, Maximum/Minimum Rates of Interest, Rate Multipliers and Rounding If any Margin or Rate Multiplier is specified in the relevant Loan Supplement (either (x) generally, or (y) in relation to one (1) or more Interest Accrual Periods), an adjustment shall be made to all Rates of Interest, in the case of (x), or the Rates of Interest for the specified Interest Accrual Periods, in the case of (y), calculated in accordance with Clause 4.3 (Interest for Floating Rate Loans) above by adding (if a positive number) or subtracting the absolute value (if a negative number) of such Margin or multiplying by such Rate Multiplier, subject always to the next paragraph If any Maximum or Minimum Rate of Interest is specified in the relevant Loan Supplement, then any Rate of Interest shall be subject to such maximum or minimum, as the case may be For the purposes of any calculations required pursuant to a Loan Agreement (unless otherwise specified), (x) all percentages resulting from such calculations shall be rounded, if necessary, to the nearest one hundred thousandth of a percentage point (with halves being rounded up), (y) all figures shall be rounded to seven (7) significant figures (with halves being rounded up) and (z) all currency amounts that fall due and payable shall be rounded to the nearest unit of such currency (with halves being rounded up), save in the case of yen, which shall be rounded down to the nearest yen. For these purposes unit means the lowest amount of such currency that is available as legal tender in the country or countries of such currency. 4.6 Calculations The amount of interest payable in respect of any Loan for any period shall be calculated by applying the Rate of Interest for such Interest Accrual Period to the Calculation Amount and multiplying the product by the Day Count Fraction, rounding the resulting figure to the nearest sub unit of the Specified Currency (half a sub unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of the relevant Loan divided by the Calculation Amount. For this purpose, a sub unit means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent, provided that if an Interest Amount (or a formula for its calculation) is specified in the relevant Loan Supplement in respect of such period, the amount of interest payable in respect of such Loan for such period shall equal such Interest Amount (or be calculated in accordance with such formula). Where any Interest Period comprises two (2) or more Interest Accrual Periods, 154

163 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 the amount of interest payable in respect of such Interest Period shall be the sum of the amounts of interest payable in respect of each of those Interest Accrual Periods. 4.7 Determination and Notification of Rates of Interest and Interest Amounts As soon as practicable after the Relevant Time on each Interest Determination Date or such other time on such date as the Calculation Agent may be required to calculate any rate or amount, obtain any quotation or make any determination or calculation in accordance with the Loan Agreement, it shall determine such rate and calculate the Interest Amounts in respect of such Floating Rate Loan for the relevant Interest Accrual Period, obtain such quotation or make such determination or calculation, as the case may be, and cause the Rate of Interest and the Interest Amounts for each Interest Period and the relevant Interest Payment Date to be notified to the Borrower, the Trustee, the Lender, each of the Paying Agents and any other Calculation Agent appointed in respect of such Floating Rate Loan that is to make a further calculation upon receipt of such information. Where any Interest Payment Date or Interest Period Date is subject to adjustment pursuant to sub Clause of Clause 4.3 (Interest for Floating Rate Loans), the Interest Amounts and the Interest Payment Date so notified may subsequently be amended (or appropriate alternative arrangements made with the consent of the Borrower and the Lender by way of adjustment) without notice in the event of an extension or shortening of the Interest Period. If such Floating Rate Loan becomes due and payable under Clause 11 (Limited Acceleration Rights), the accrued interest and the Rate of Interest payable in respect of such Floating Rate Loan shall nevertheless continue to be calculated as previously in accordance with this Clause. The determination of any rate or amount, the obtaining of each quotation and the making of each determination or calculation by the Calculation Agent(s) shall (in the absence of manifest error) be final and binding upon all parties. 4.8 Determination or Calculation by Trustee If the Calculation Agent does not at any time for any reason determine or calculate the Rate of Interest for an Interest Period or any Interest Amount in relation to a Floating Rate Loan, the Lender and the Borrower shall request that such determination or calculation may be made by or at the direction of the Trustee. The Trustee shall incur no liability to any person in respect of any such determination or calculation it chooses (in its absolute discretion) to make. 4.9 Definitions In this Clause 4 (Interest), unless the context otherwise requires, the following defined terms shall have the meanings set out below: Benchmark has the meaning specified in the relevant Loan Supplement; Business Day means: (i) (ii) (iii) in the case of a Specified Currency other than euro, a day (other than a Saturday or Sunday) on which commercial banks and foreign exchange markets settle payments in the principal financial centre for such Specified Currency; and/or in the case of euro, a day on which TARGET2 is operating (a TARGET Business Day ); and/or in the case of a Specified Currency and/or one (1) or more Business Centres a day (other than a Saturday or a Sunday) on which commercial banks and foreign exchange markets settle payments in such currency in the Business Centre(s) or, if no currency is indicated, generally in each of the Business Centres; Calculation Amount has the meaning specified in the relevant Loan Supplement; Day Count Fraction means, in respect of the calculation of an amount of interest on any Loan for any period of time (from and including the first day of such period to but excluding the last) (whether or not constituting an Interest Period, the Calculation Period ); 155

164 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 (i) (ii) (iii) (iv) (v) (vi) if Actual/365 or Actual/Actual ISDA is specified in the relevant Loan Supplement, the actual number of days in the Calculation Period divided by 365 (or, if any portion of that Calculation Period falls in a leap year, the sum of (A) the actual number of days in that portion of the Calculation Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Calculation Period falling in a non leap year divided by 365); if Actual/365 (Fixed) is specified in the relevant Loan Supplement, the actual number of days in the Calculation Period divided by 365; if Actual/360 is specified in the relevant Loan Supplement, the actual number of days in the Calculation Period divided by 360; if 30/360, 360/360 or Bond Basis is specified in the relevant Loan Supplement, the number of days in the Calculation Period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with day months (unless (a) the last day of the Calculation Period is the 31st day of a month but the first day of the Calculation Period is a day other than the 30th or 31st day of a month, in which case the month that includes that last day shall not be considered to be shortened to a 30 day month, or (b) the last day of the Calculation Period is the last day of the month of February, in which case the month of February shall not be considered to be lengthened to a 30 day month)); if 30E/360 or Eurobond Basis is specified in the relevant Loan Supplement, the number of days in the Calculation Period divided by 360 (the number of days to be calculated on the basis of a year of 360 days with day months, without regard to the date of the first day or last day of the Calculation Period unless, in the case of a Calculation Period ending on the Repayment Date, the Repayment Date is the last day of the month of February, in which case the month of February shall not be considered to be lengthened to a 30 day month); and if Actual/Actual ICMA is specified in the relevant Loan Supplement: (a) (b) If the Calculation Period is equal to or shorter than the Determination Period during which it falls, the number of days in the Calculation Period divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Periods normally ending in any year; and if the Calculation Period is longer than one (1) Determination Period, the sum of: (i) (ii) the number of days in such Calculation Period falling in the Determination Period in which it begins divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year; and the number of days in such Calculation Period falling in the next Determination Period divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year where: Determination Period means the period from and including a Determination Date in any year to but excluding the next Determination Date; and Determination Date means the date specified in the relevant Loan Supplement or, if none is so specified, the Interest Payment Date; Effective Date means, with respect to any Floating Rate to be determined on an Interest Determination Date, the date specified as such in the relevant Loan Supplement or, if none is so specified, the first day of the Interest Accrual Period to which such Interest Determination Date relates; 156

165 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Interest Accrual Period means the period beginning on (and including) the Interest Commencement Date and ending on (but excluding) the first Interest Period Date and each successive period beginning on (and including) an Interest Period Date and ending on (but excluding) the next succeeding Interest Period Date; Interest Amount means the amount of interest payable, and in the case of Fixed Rate Loans, means the Fixed Amount or Broken Amount, as the case may be; Interest Commencement Date means the Closing Date or such other date as may be specified in the relevant Loan Supplement; Interest Determination Date means, with respect to a Rate of Interest and Interest Accrual Period, the date specified as such in the relevant Loan Supplement or, if none is so specified, (i) the first day of such Interest Accrual Period if the Specified Currency is Sterling or (ii) the day falling two (2) Business Days in London and for the Specified Currency prior to the first day of such Interest Accrual Period if the Specified Currency is neither Sterling nor euro or (iii) the day falling two (2) TARGET Business Days prior to the first day of such Interest Accrual Period if the Specified Currency is euro; Interest Period means the period beginning on (and including) the Interest Commencement Date and ending on (but excluding) the first Interest Payment Date and each successive period beginning on (and including) an Interest Payment Date and ending on (but excluding) the next succeeding Interest Payment Date; Interest Period Date means each Interest Payment Date unless otherwise specified herein; ISDA Definitions means the 2006 ISDA Definitions, as published by the International Swaps and Derivatives Association, Inc., unless otherwise specified in the relevant Loan Supplement; Page means such page, section, caption, column or other part of a particular information service (including, but not limited to, Reuters Markets 3000 ( Reuters )) as may be specified for the purpose of providing a Relevant Rate, or such other page, section, caption, column or other part as may replace it on that information service or on such other information service, in each case as may be nominated by the person or organisation providing or sponsoring the information appearing there for the purpose of displaying rates or prices comparable to that Relevant Rate; Reference Banks means the institutions specified as such in the relevant Loan Supplement or, if none, four (4) major banks selected by the Calculation Agent in the interbank market (or, if appropriate, money, swap or over the counter index options market) that are most closely connected with the Benchmark (which, if EURIBOR is the relevant Benchmark, shall be Europe); Relevant Financial Centre means, with respect to any Floating Rate to be determined in accordance with a Screen Rate Determination on an Interest Determination Date, the financial centre as may be specified as such in the relevant Loan Supplement or, if none is so specified, the financial centre with which the relevant Benchmark is most closely connected (which, in the case of EURIBOR, shall be Europe) or, if none is so connected, London; Relevant Rate means the Benchmark for a Representative Amount of the Specified Currency for a period (if applicable or appropriate to the Benchmark) equal to the Specified Duration commencing on the Effective Date; Relevant Time means, with respect to any Interest Determination Date or Repayment Date, the local time in the Relevant Financial Centre specified in the relevant Loan Supplement or, if no time is specified, the local time in the Relevant Financial Centre at which it is customary to determine bid and offered rates in respect of deposits in the Specified Currency in the interbank market in the Relevant Financial Centre and for this purpose local time means, with respect to Europe as a Relevant Financial Centre, hours, Brussels time; Representative Amount means, with respect to any Floating Rate to be determined in accordance with a Screen Rate Determination on an Interest Determination Date, the amount specified as such in 157

166 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 the relevant Loan Supplement or, if none is specified, an amount that is representative for a single transaction in the relevant market at the time; Specified Denomination has the meaning given in the relevant Loan Supplement; and Specified Duration means, with respect to any Floating Rate to be determined in accordance with a Screen Rate Determination on an Interest Determination Date, the duration specified in the relevant Loan Supplement or, if none is specified, a period of time equal to the relevant Interest Accrual Period, ignoring any adjustment pursuant to sub clause of Clause 4.3 (Interest for Floating Rate Loans) Calculation Agent and Reference Banks The Lender (failing which the Borrower) shall procure that there shall at all times be specified no less than four (4) Reference Banks (or such other number as may be required) with offices in the Relevant Financial Centre and appointed one (1) or more Calculation Agents if provision is made for them in a Loan Supplement and for so long as any amount remains outstanding under a Loan Agreement. If any Reference Bank (acting through its relevant office) is unable or unwilling to continue to act as a Reference Bank, then the Lender shall (with the prior approval of the Borrower) appoint another Reference Bank with an office in the Relevant Financial Centre to act as such in its place. Where more than one (1) Calculation Agent is appointed in respect of a Loan, references in the relevant Loan Agreement to the Calculation Agent shall be construed as each Calculation Agent performing its respective duties under the relevant Loan Agreement. If the Calculation Agent is unable or unwilling to act as such or if the Calculation Agent fails duly to establish the Rate of Interest for an Interest Period or Interest Accrual Period or to calculate any Interest Amount, or to comply with any other requirement pursuant to the Loan Agreement, the Lender shall (with the prior approval of the Borrower) appoint a leading bank or investment banking firm engaged in the interbank market (or, if appropriate, money, swap or over the counter index options market) that is most closely connected with the calculation or determination to be made by the Calculation Agent (acting through its principal London office or any other office actively involved in such market) to act as such in its place. The Calculation Agent may not resign its duties without a successor having been appointed as aforesaid. Both the Borrower and the Lender agree that such successor Calculation Agent will be appointed on the terms of the Agency Agreement in relation to the relevant Loan Agreement Dual Currency Provisions This Clause 4.11 (Dual Currency Provisions) is applicable only if the Dual Currency Provisions are specified in the relevant Loan Supplement as being applicable. If the rate or amount of interest applicable to any Loan falls to be determined by reference to an exchange rate, the rate or amount of interest payable shall be determined in the manner specified in the relevant Loan Supplement. 5. REPAYMENT AND PREPAYMENT 5.1 Repayment Except as otherwise provided herein and in the applicable Loan Supplement, the Borrower shall repay each Loan not later than a.m. (Relevant Time) one (1) Business Day prior to the Repayment Date therefor. 5.2 Prepayment in the Event of Taxes or Increased Costs If, (i) as a result of the application of or any amendments or clarification of, or change (including a change in interpretation or application) in, the double tax treaty between the Russian Federation and Luxembourg or the laws or regulations of the Russian Federation or Luxembourg or of any political sub division thereof or any Taxing Authority therein (including as a result of a judgment of a court of competent jurisdiction or a change in the application or official interpretation of such laws or regulations) or the enforcement of the security provided for in any Trust Deed, the Borrower would thereby be required to make or increase any payment due pursuant to a Loan Agreement as provided 158

167 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 in Clauses 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) or 6.3 (Withholding on Notes) or (ii) (for whatever reason) the Borrower would have to or has been required to pay additional amounts pursuant to Clause 8 (Change in Law or Increase in Cost), and in any such case, such obligation cannot be avoided by the Borrower taking reasonable measures available to it, then the Borrower may (without premium or penalty), upon not less than 20 days notice to the Lender copied to the Trustee (which notice shall be irrevocable), prepay the Loan relating to such Loan Agreement in whole (but not in part) on any Interest Payment Date, in the case of a Floating Rate Loan, or at any time, in the case of a Fixed Rate Loan. No such notice of prepayment shall be given earlier than 90 days prior to the earliest date on which the Borrower would be obliged to pay such additional amounts or increase such payment if a payment in respect of the Loan were then due. Prior to giving any such notice in the event of an increase in payment pursuant to Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up), the Borrower shall deliver to the Lender (copied to the Trustee) an Officers Certificate confirming that it would be required to increase the amount payable and that the obligation to make such payment cannot be avoided by the Borrower taking reasonable measures available to it, supported by an opinion of an independent tax adviser of recognised standing in the relevant tax jurisdiction addressed to the Lender (copied to the Trustee). 5.3 Prepayment in the Event of Illegality If, at any time after the date of the relevant Loan Supplement, by reason of the introduction of, or any change in, any applicable law or regulation or regulatory requirement or directive of any Agency, the Lender reasonably determines (such determination being accompanied by an Opinion of Counsel with the cost of such Opinion of Counsel being borne solely by the Borrower) that it is or would be unlawful or contrary to any applicable law, regulation, regulatory requirement or directive of any Agency of any state or otherwise for the Lender to make, fund or allow all or part of the Loan relating to such Loan Supplement or the corresponding Series of Notes to remain outstanding or for the Lender to maintain or give effect to any of its obligations in connection with the relevant Loan Agreement or in connection with the security it has granted to the Trustee in connection with the corresponding Series of Notes and/or to charge or receive or to be paid interest at the rate then applicable to such Loan (an Event of Illegality ) then the Lender shall, after becoming aware of the same, deliver to the Borrower a written notice, setting out in reasonable detail the nature and extent of the relevant circumstances, to that effect and: if any amount of such Loan has not then been made, the Lender shall not thereafter be obliged to make such amount of such Loan; and if such Loan is then outstanding, then upon notice by the Lender to the Borrower in writing, the Borrower and the Lender shall consult in good faith as to a basis that eliminates the application of such Event of Illegality. If a basis has not been agreed between the Borrower and the Lender by the earlier of the latest date permitted by the relevant law or 30 days after the date on which the Lender notified the Borrower of such illegality, then upon written notice by the Lender to the Borrower and the Trustee, the Borrower shall prepay (without premium or penalty) such Loan in whole (but not in part), on the next Interest Payment Date therefor, in the case of a Floating Rate Loan, or in the case of a Fixed Note Loan, on the next Interest Payment Date or on such earlier date as the Lender shall (acting reasonably) certify to be necessary to comply with such requirements. 5.4 Prepayment in the Event of a Change of Control In the event of a Change of Control, the Borrower shall on the Change of Control Payment Date be required to prepay the Loan corresponding to any Series of Notes together with (i) all accrued and unpaid interest and (ii) any other amounts outstanding under the relevant Loan Agreement, in either case to the extent and in the amount that the Lender is required to pay the holders of Notes of the relevant Series as a result thereof as set forth in a written notice by the Lender to the Borrower (with 159

168 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 a copy to the Trustee), including computation of such amount, given at least five (5) Business Days prior to the Change of Control Payment Date. Promptly, and in any event within fifteen (15) calendar days, after the date of any Change of Control the Borrower shall deliver to the Lender (and to the Trustee) a written notice in the form of an Officers Certificate: (i) (ii) stating that a Change of Control has occurred; and specifying the Change of Control Payment Date, which date shall be a Business Day falling not less than 30 calendar days nor more than 60 calendar days after the date such notice is delivered. 5.5 Reduction of a Loan Upon Cancellation of Corresponding Notes The Borrower may from time to time deliver to the Lender Definitive Notes held by it, having an aggregate principal value of at least U.S.$1,000,000 (or its equivalent in a Specified Currency), together with a request for the Lender to present such Definitive Notes to the Registrar for cancellation, and may also from time to time procure the delivery to the Registrar of the relevant Global Notes with instructions to cancel a specified aggregate principal amount of Notes (being at least U.S.$1,000,000 or its equivalent in a Specified Currency) represented thereby (which instructions shall be accompanied by evidence satisfactory to the Registrar that the Borrower is entitled to give such instructions), whereupon the Lender shall, pursuant to clause 8.1 (Redemption, Reduction and Cancellations) of the Agency Agreement, request the Registrar to cancel such Notes (or specified aggregate principal amount of Notes represented by the relevant Global Notes). Upon any such cancellation by or on behalf of the Registrar, the principal amount of the Loan corresponding to the principal amount of such Notes together with accrued interest and other amounts (if any) thereon shall be extinguished for all purposes as of the date of such cancellation. 5.6 Payment of Other Amounts If a Loan is to be prepaid by the Borrower pursuant to any of the provisions of Clauses 5.2 (Prepayment in the Event of Taxes or Increased Costs), 5.3 (Prepayment in the Event of Illegality), Clause 5.4 (Prepayment in the Event of a Change of Control) or pursuant to the terms of the relevant Loan Agreement, the Borrower shall, simultaneously with such prepayment, pay to the Lender accrued interest thereon to the date of actual payment and all other sums payable by the Borrower pursuant to the relevant Loan Agreement. For the avoidance of doubt, if the principal amount of such Loan is reduced pursuant to the provisions of Clause 5.5 (Reduction of a Loan Upon Cancellation of Corresponding Notes), then no interest shall accrue or be payable during the Interest Period in which such reduction takes place in respect of the amount by which such Loan is so reduced and the Borrower shall not be entitled to any interest in respect of the cancelled Notes. The Borrower shall indemnify the Lender on demand against any costs and expenses reasonably incurred and properly documented by the Lender on account of any prepayment made in accordance with this Clause 5 (Repayment and Prepayment). 5.7 Provisions Exclusive The Borrower shall not prepay or repay all or any part of any Loan except at the times and in the manner expressly provided for in accordance with the relevant Loan Agreement. Any amount prepaid or repaid may not be reborrowed under such Loan Agreement. 6. PAYMENTS 6.1 Making of Payments All payments of principal, interest and additional amounts (other than those in respect of Reserved Rights) to be made by the Borrower under each Loan Agreement shall be made unconditionally by 160

169 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 credit transfer to the Lender not later than a.m. (Relevant Time) one (1) Business Day prior to each Interest Payment Date, the Repayment Date or on the relevant prepayment date (as the case may be) in Same Day Funds to the relevant Account or as the Trustee may otherwise direct following the occurrence of a Relevant Event. The Borrower shall, before a.m. (Relevant Time) on the second Business Day prior to each Interest Payment Date, the Repayment Date or on the relevant prepayment date (as the case may be), procure that the bank effecting such payments on its behalf confirms to the Principal Paying Agent by tested telex or authenticated SWIFT the payment instructions relating to such payment. The Lender agrees with the Borrower that it will not deposit any other monies into such Account and that no withdrawals shall be made from such Account other than as provided for and in accordance with the relevant Trust Deed and the Agency Agreement. 6.2 No Set Off, Counterclaim or Withholding; Gross Up All payments to be made by the Borrower under each Loan Agreement shall be made in full without set off or counterclaim and (except to the extent required by law) free and clear of and without deduction for or on account of any Taxes imposed by any Taxing Authority. If the Borrower shall be required by applicable law to make any deduction or withholding from any payment under a Loan Agreement for or on account of any such Taxes, it shall, on the due date for such payment, increase any payment of principal, interest or any other payment due under such Loan Agreement to such amount as may be necessary to ensure that the Lender receives and retains (free from any liability in respect of such deduction, withholding or additional amount received) a net amount in the Specified Currency equal to the full amount which it would have received had payment not been made subject to such Taxes, shall promptly account to the relevant authorities for the relevant amount of such Taxes so withheld or deducted within the time allowed for such payment under the applicable law and shall deliver to the Lender without undue delay evidence reasonably satisfactory to the Lender of such deduction or withholding and of the accounting therefor to the relevant Taxing Authority. If the Lender pays any amount in respect of such Taxes (including penalties or interest, but excluding any amount referable to taxes payable by the Lender on its overall net income (except to the extent that the Lender is unable to obtain a deduction for tax purposes on payments to the Noteholders which offsets any tax liability on equivalent amounts received under this Agreement), the Borrower shall reimburse the Lender in the Specified Currency for such payment on demand, subject to the receipt of relevant supporting documentation. For the avoidance of doubt, this Clause is without prejudice to the obligations of the Lender pursuant to Clauses 6.6 (Mitigation), 6.7 (Tax Treaty Relief) and (Payment of Taxes). 6.3 Withholding on Notes Without prejudice to the provisions of Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up), if the Lender notifies the Borrower that it has become obliged to make any withholding or deduction for or on account of any Taxes of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Russian Federation, Luxembourg or any political subdivision or any authority thereof or therein having the power to tax from any payment which it is obliged to make under or in respect of a Series of Notes, the Borrower agrees to pay to the Lender, not later than a.m. (Relevant Time) one (1) Business Day prior to the date on which payment is due to the Noteholders of such Series in Same Day Funds to the relevant Account, such additional amounts as are equal to the additional amounts which the Lender would be required to pay in order that the net amounts received by the Noteholders, after such withholding or deduction, will equal the respective amounts which would have been received by the Noteholders in the absence of such withholding or deduction; provided, however, that the Lender shall procure that immediately upon receipt from any Paying Agent of any reimbursement of the sums paid pursuant to this provision, to the extent that any Noteholders of such Series, as the case may be, are not entitled to such additional amounts pursuant to the Conditions of such Series of Notes, pay such amounts received by way of such reimbursement to the Borrower (it being understood that neither the Lender, the Trustee, nor the Principal Paying 161

170 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Agent nor any Paying Agent shall have any obligation to determine whether any Noteholder of such Series or such other Party is entitled to any such additional amount). Any notification by the Lender to the Borrower in connection with this Clause 6.3 (Withholding on Notes) shall be given as soon as reasonably practicable after the Lender becomes aware of any obligation on it to make any such withholding or deduction and shall set out in reasonable detail the nature and extent of the obligation with such evidence as the Borrower may reasonably require and, upon the request of the Borrower, provide an Opinion of Counsel in respect of the existence of such obligations with the cost of such Opinion of Counsel to be borne solely by the Borrower. 6.4 Reimbursement To the extent that the Lender subsequently obtains or uses any tax credit or allowance or other reimbursements relating to a deduction or withholding with respect to which the Borrower has made a payment pursuant to this Clause 6 (Payments), it shall pay to the Borrower so much of the benefit it received as will leave the Lender in substantially the same position as it would have been in had no additional amount been required to be paid by the Borrower pursuant to this Clause 6 (Payments); provided, however, that the question of whether any such benefit has been received, and accordingly, whether any payment should be made to the Borrower, the amount of any such payment and the timing of any such payment, shall be determined in the reasonable judgement of the Lender, provided that the Lender shall notify the Borrower promptly upon determination that it has received any such benefit. Subject to Clauses 6.6 (Mitigation) and 6.7 (Tax Treaty Relief), the Lender shall decide, in its reasonable judgement, whether, and in what order and manner, it claims any credits or refunds available to it, and the Lender shall in no circumstances be obliged to disclose to the Borrower any information regarding its tax affairs or computations If as a result of a failure to obtain relief from deduction or withholding of any Taxes referred to in Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) imposed by a Taxing Authority (i) such Taxes are deducted or withheld by the Borrower and pursuant to Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) an increased amount is paid by the Borrower to the Lender in respect of such deduction or withholding and (ii) following the deduction or withholding of Taxes as referred to above the Lender (upon instructions by the Borrower) applies to the competent Taxing Authority for a Tax refund and such Tax is refunded or repaid by the relevant Taxing Authority, the Lender shall as soon as reasonably practicable notify the Borrower of the receipt of such withholding tax refund and promptly transfer the amount of Tax refund actually received in the currency actually received and less any applicable costs to a bank account of the Borrower specified for that purpose by the Borrower if and to the extent that the Lender determines in its reasonable opinion that to do so will leave it (after the payment and after the deduction of costs and expenses incurred in relation to the refund) in no worse an after Tax position than it would have been in had there been no failure to obtain relief from such withholding or deduction and if and to the extent the Lender is able to make such transfer under applicable laws and regulations. 6.5 Notification The Lender agrees upon becoming aware of such, promptly to notify the Borrower if it ceases to be resident in Luxembourg or a Qualifying Jurisdiction for taxation purposes or opens a permanent establishment in Russia, or if any of the representations set forth in Clause 9.2 (Lender s Representations and Warranties) are no longer true and correct If the Lender ceases, as a result of the Lender s actions, to be tax resident in a Qualifying Jurisdiction, and such cessation results in the Borrower being required to make payments pursuant to Clause 6.2, (No Set Off, Counterclaim or Withholding; Gross Up) then, except in circumstances where the Lender has ceased to be tax resident in such jurisdiction by reason of any change of law (as described in Clause 5.2 (Prepayment in the Event of Taxes or Increased 162

171 Level: 3 From: 3 Monday, November 16, :48 eprint Section Mitigation Costs) (including, without limitation, a change in a double taxation treaty or in such law or treaty s application or interpretation), the Borrower may require the Lender to seek the substitution of the Lender as issuer of the Notes and as lender under any Loan Agreement pursuant to and in accordance with the provisions of clause 17 (Substitution) of the Trust Deed. The Borrower shall bear all costs and expenses relating to or arising out of such substitution. If at any time either party hereto becomes aware of circumstances which would or might, then or thereafter, give rise to an obligation on the part of the Borrower or the Lender to make any deduction, withholding or payment as described in Clauses 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) or 6.3 (Withholding on Notes), then, without in any way limiting, reducing or otherwise qualifying the Lender s rights, or the Borrower s obligations, under such Clauses, such party shall, upon becoming aware of the same, notify the other party thereof and, in consultation with the Borrower and to the extent it can lawfully do so and without prejudice to its own position, the Lender shall take all reasonable steps to remove such circumstances or mitigate the effects of such circumstances; provided that the Lender shall be under no obligation to take any such action if, in its reasonable opinion, to do so might reasonably be expected to have any adverse effect upon its business, operations or financial condition or might be in breach of any provision of the Trust Deed, the Agency Agreement or the Notes. The Borrower agrees to reimburse the Lender for all properly incurred costs and expenses (including but not limited to legal fees) incurred by the Lender in connection with this Clause 6.6 (Mitigation) and in respect of which an itemised invoice (supported by copies of the relevant documents evidencing payment by the Lender) from the Lender has been provided to the Borrower. 6.7 Tax Treaty Relief The Lender shall, to the extent it is able to do so under applicable law including, without limitation, Russian laws, use its best endeavours to obtain and to deliver to the Borrower at the Borrower s expense: a certificate issued by the competent Luxembourg authorities confirming that the Lender is resident in Luxembourg for the purpose of the Treaty between the Russian Federation and Luxembourg on Avoidance of Double Taxation and Prevention of Fiscal Evasion in Respect of Income Taxes and Property Taxes dated 28 June 1993 (the Treaty ) no later than ten (10) Business Days before the first Interest Payment Date (and thereafter as soon as possible at the beginning of each calendar year but not later than ten (10) Business Days prior to the first Interest Payment Date in that year); and such other information or forms as may need to be duly completed and delivered by the Lender to enable the Borrower to obtain relief from deduction or withholding of Russian Taxes or, as the case may be, to apply to obtain a tax refund if a relief from deduction or withholding of Russian Taxes has not been obtained, provided that the Lender shall not be liable for any failure to provide, or any delays in providing, such residency certificate as a result of any action or inaction of the competent Luxembourg authorities, but shall notify the Borrower without delay about any such failure or delay with a written description of the actions taken by the Lender to obtain such residency certificate. Such a certificate and any other information or forms (as applicable) shall be appropriately apostilled. A certified translation shall be supplied at the expense of the Borrower if required by the Borrower. The Borrower and the Lender acknowledge that the Russian legislation regulating the procedure for obtaining access to Treaty benefits, as well as practical approach and technical interpretations of the Russian Taxing Authorities, may be subject to change. The Borrower and the Lender further acknowledge that any such change may result in access to Treaty benefits, and in particular to obtaining the reduced rate of withholding with respect to interest, becoming more difficult or impossible. In the event of any such change impacting adversely on the Borrower s ability to apply 163

172 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 the reduced rate of withholding tax on interest, the Borrower and the Lender shall use their best endeavours to amend the procedure described in this Clause 6.7 (Tax Treaty Relief) including, if required, provision regarding procurement of necessary documents and actions from any other parties, in order to ensure that the rate of withholding tax on interest as provided for in the Treaty can be successfully applied. 6.8 Russian Tax Payment If the Borrower makes a withholding or deduction for or on account of Taxes from a payment under or in respect of this Agreement or the Notes, the Borrower may apply on behalf of the Lender to the relevant Russian taxing authorities for a payment to be made by such authorities to the Lender with respect to such Tax, provided the Lender has delivered to the Borrower, at the expense of the Borrower, a duly executed, notarised and apostilled power of attorney in respect of making such an application and an executed application for such tax refund. If, whether following a claim made on its behalf by the Borrower or otherwise, the Lender receives such a payment ( Russian Tax Payment ) from the relevant Russian Taxing Authorities with respect to such Taxes, it will as soon as reasonably possible notify the Borrower that it has received that payment (and the amount of such payment); whereupon, provided that the Borrower has notified the Lender in writing of the details of an account to which a payment or transfer should be made, and that the Lender is able to make a payment or transfer under applicable laws and regulations, the Lender will pay or transfer an amount equal to the Russian Tax Payment to such account. 7. CONDITIONS PRECEDENT 7.1 Documents to be Delivered The obligation of the Lender to make each Loan shall be subject to the receipt by the Lender on or prior to the relevant Closing Date of evidence that the persons mentioned in Clause 18 (Law, Jurisdiction and Arbitration) hereof have agreed to receive process in the manner specified therein. 7.2 Further Conditions The obligation of the Lender to make each Loan shall be subject to the further conditions precedent that as of the date of the Relevant Agreement (as defined in the Dealer Agreement) and the relevant Closing Date (a) the representations and warranties made and given by the Borrower in Clause 9 (Representations and Warranties) shall be true and accurate as if made and given on the relevant Closing Date with respect to the facts and circumstances then existing, (b) there shall be no Event of Default or Potential Event of Default, (c) the Borrower shall not be in breach of any of the terms, conditions and provisions of the relevant Loan Agreement, (d) the relevant Subscription Agreement, Trust Deed, Fee Side Letter and the Agency Agreement shall have been executed and delivered, and the Lender shall have received the full amount of the proceeds of the issue of the corresponding Series of Notes pursuant to such Subscription Agreement and (e) the Lender shall have received in full the amount referred to in Clause 3.2 (Loan Arrangement Fee), if due and payable, above, as specified in the relevant Loan Supplement. 8. CHANGE IN LAW OR INCREASE IN COST 8.1 Compensation In the event that after the date of a Loan Agreement there is any change in or introduction of any Tax, law, regulation, regulatory requirement or official directive (whether or not having the force of law but, if not having the force of law, the observance of which is in accordance with the generally accepted financial practice of financial institutions in the country concerned) or in the interpretation or application thereof by any person charged with the administration thereof and/or any compliance by the Lender in respect of the Loan with any request, policy or guideline (whether or not having the force of law but, if not having the force of law, the observance of which is in accordance with the 164

173 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 generally accepted financial practice of financial institutions in the country concerned) from or of any central bank or other fiscal, monetary or other authority, agency or any official of any such authority (including, for the avoidance of doubt, but not limited to, any recommendations regarding capital adequacy standards published by the Basel Committee on Banking Regulations and Supervisory Practices at the Bank for International Settlements), which: subjects or will subject the Lender to any Taxes with respect to payments of principal of or interest on such Loan or any other amount payable under such Loan Agreement other than any Taxes referred to in Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) or any Taxes referred to in Clause 6.3 (Withholding on Notes), or increases or will increase the taxation of or changes or will change the basis of taxation of payments to the Lender of principal of or interest on such Loan or any other amount payable under such Loan Agreement (other than any such increase or change which arises as a result of any Taxes referred to in Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) or any Taxes referred to in Clause 6.3 (Withholding on Notes), or imposes or will impose on the Lender any other condition affecting such Loan Agreement or such Loan, and if as a result of any of the foregoing: (i) (ii) (iii) the cost to the Lender of making, funding or maintaining such Loan is increased; or the amount of principal, interest or additional amounts payable to or received by the Lender under such Loan Agreement is reduced; or the Lender makes any payment or foregoes any interest or other return on or calculated by reference to the gross amount of any sum receivable by it from the Borrower hereunder or makes any payment or foregoes any interest or other return on or calculated by reference to the gross amount of such Loan, then subject to the following, and in each such case: (A) the Lender shall, as soon as practicable after becoming aware of such increased cost, reduced amount or payment made or foregone, give written notice to the Borrower, together with a certificate describing in reasonable detail the introduction or change or request which has occurred and the country or jurisdiction concerned and the nature and date thereof and demonstrating the connection between such introduction, change or request and such increased cost, reduced amount or payment made or foregone and setting out in reasonable detail the basis on which such amount has been calculated, and providing all relevant supporting documents evidencing the matters set out in such certificate; provided that nothing herein shall require the Lender to disclose any confidential information relating to the organisation of its or any other person s affairs; and (B) the Borrower, in the case of sub Clauses (i) and (iii) above, shall, on demand, pay to the Lender such additional amount as shall be necessary to compensate the Lender for such increased cost, and, in the case of sub Clause (ii) above, at the time the amount so reduced would otherwise have been payable, pay to the Lender such additional amount as shall be necessary to compensate the Lender for such reduction, payment or foregone interest or other return; provided, however, that the amount of such increased cost, reduced amount or payment made or foregone shall be deemed not to exceed an amount equal to the proportion which is directly attributable to this Agreement, and provided, further, that the Lender will not be entitled to such additional amount where such reduction, payment or foregone interest or other return arises as a result of the gross negligence or wilful default of the Lender. 165

174 Level: 3 From: 3 Monday, November 16, :48 eprint Section Mitigation In the event that the Lender becomes entitled to make a claim pursuant to Clause 8.1 (Compensation), then, without in any way limiting, reducing or otherwise qualifying the rights of the Lender or the Borrower s obligations under the above mentioned provision, the Lender shall, upon becoming aware of the same, notify the Borrower thereof and, in consultation with the Borrower and to the extent it can lawfully do so and without prejudice to its own position, and subject to the Borrower reimbursing it for its full costs and expenses in relation thereto, take all reasonable steps to remove such circumstances or mitigate the effects of such circumstances; provided that the Lender shall be under no obligation to take any such action if, in its reasonable opinion, to do so might be expected to have any adverse effect upon its business, operations or financial condition or might be in breach of provision of the Trust Deed, the Agency Agreement or the Notes. 9. REPRESENTATIONS AND WARRANTIES 9.1 The Borrower s Representations and Warranties The Borrower does, and on each Warranty Date shall be deemed to, represent and warrant to the Lender, with the intent that such shall form the basis of each Loan Agreement, that: Due organisation, capacity and authorisation the Borrower is duly organised and incorporated and validly existing under the laws of the Russian Federation, is not in liquidation or receivership and has the power and legal right to own its property, to conduct its business as currently conducted and, to enter into and to perform its obligations under each Loan Agreement and to borrow Loans; the Borrower has (or, where applicable, will have taken prior to the date of the relevant Loan Supplement) taken all necessary corporate, legal and other action required to authorise the borrowing of Loans on the terms and subject to the conditions of each Loan Agreement and to authorise the execution and delivery of each Loan Agreement and all other documents to be executed and/or delivered by it in connection with each Loan Agreement, and the performance of each Loan Agreement in accordance with its respective terms; Valid and binding obligations the Loan Agreement, including each Loan Supplement in relation thereto, has been (or, where applicable, will have been prior to the date of the relevant Loan Supplement) duly executed by the Borrower and constitutes (or, where applicable, will upon execution constitute) a legal, valid and binding obligation of the Borrower enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors rights generally, and subject, as to enforceability, (i) to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or law), (ii) to the fact that the gross up provisions contained in Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) or Clause 6.3 (Withholding on Notes) may not be enforceable under Russian law and (iii) with respect to the enforceability of a judgment, to the laws of the relevant jurisdiction where such judgment must be enforced and whether there is a treaty in force relating to the mutual recognition of foreign judgments; No conflict the execution and performance of each Loan Agreement, including each Loan Supplement in relation thereto, by the Borrower will not conflict with or result in any breach or violation of (i) any law or regulation or any order of any governmental, judicial, arbitral or public body or authority in the Russian Federation, (ii) the constitutive documents, rules and regulations of the Borrower or the terms of the general banking licence granted to the Borrower by the Central Bank or (iii) any agreement or other undertaking or instrument to which the Borrower is a party or which is binding upon the Borrower or any of its respective assets, nor result in the creation 166

175 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 or imposition of any Security Interest on any of its assets pursuant to the provisions of any such agreement or other undertaking or instrument; Approvals all consents, licences, notifications, authorisations or approvals of, or filings with, any governmental, judicial or public bodies or authorities of the Russian Federation (including, without limitation, the Central Bank), if any, required in order to ensure (i) the due execution, delivery and performance by the Borrower of each Loan Agreement and (ii) the legality, validity, enforceability, and admissibility in evidence of each Loan Agreement have been obtained or effected and are and shall remain in full force and effect; No default no event has occurred that constitutes, a Potential Event of Default, an Event of Default or a default under any agreement or instrument evidencing any Indebtedness of the Borrower and no such event will occur upon the making of the relevant Loan; No proceedings there are no judicial, arbitral or administrative actions, proceedings or claims (including, but without limitation to, with respect to Taxes) which have been commenced or are pending or, to the knowledge of the Borrower, threatened, against the Borrower or any of its Subsidiaries, the adverse determination of which could singly or in the aggregate (a) prohibit the execution and delivery of this Agreement or (b) have a Material Adverse Effect; Clear title other than Permitted Security Interests, each of the Borrower and each of its Subsidiaries has clear title to its property necessary for the conduct of its business, duly registered, where applicable, in its name and free from adverse third party claims except where failure to do so would not individually or in aggregate have a Material Adverse Effect and the Borrower s obligations under the Loan Agreement rank at least pari passu with all its other unsecured and unsubordinated Indebtedness, except as otherwise provided by mandatory provisions of applicable law; Financial statements the latest audited IFRS financial statements of the Borrower: (a) (b) (c) were prepared in accordance with IFRS, as consistently applied; unless not required by IFRS, as consistently applied, disclose all liabilities (contingent or otherwise) and all unrealised or anticipated losses of the Borrower; and save as disclosed therein, present fairly in all material respects the assets and liabilities of the Borrower as at that date and the results of operations during the relevant financial year; No material adverse change save as disclosed in the Base Prospectus and since the last day of the financial period in respect of which the most recent annual or interim financial statements of the Borrower have been prepared, there has been no significant change in the financial or trading position of the Borrower and its Subsidiaries and, since the last day of the financial period in respect of which the most recent audited financial statements of the Borrower have been prepared, save as disclosed in the Base Prospectus, there has been no material adverse change in the prospects of the Borrower and its Subsidiaries; 167

176 Level: 3 From: 3 Monday, November 16, :48 eprint Section Deduction of Tax the execution, delivery and enforceability of each Loan Agreement is not subject to any tax, duty, fee or other charge, including, but without limitation to, any registration or transfer tax, stamp duty or similar levy, imposed by or within the Russian Federation or any constituent part or political subdivision or Taxing Authority thereof or therein (other than state duty paid on any claim, petition or other application filed with a Russian court); No immunity neither the Borrower nor its property has any right of immunity from suit, execution, attachment or other legal process on the grounds of sovereignty or otherwise in respect of any action or proceeding relating in any way to each Loan Agreement; Compliance with law the Borrower and its Subsidiaries are in compliance in all respects with all applicable provisions of law, except where the failure to be in so compliance would not have a Material Adverse Effect; No proceedings pending or threatened neither the Borrower, nor any of its Material Subsidiaries has taken any corporate action nor, to the best of the knowledge and belief of the Borrower, have any other steps been taken or legal proceedings been started or threatened in writing against the Borrower or any of its Material Subsidiaries for its bankruptcy, winding up, dissolution, external administration or reorganisation (whether by voluntary arrangement, scheme of arrangement or otherwise) or for the appointment of a receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer of its or of any or all of its assets or revenues; No strikes there are no labour strikes, disturbances, lockouts, slowdowns or stoppages of employees, or other employment disputes, of or against the Borrower or any of its Subsidiaries which exist, are pending or, to the Borrower s knowledge, threatened or imminent, except for those that would not have a Material Adverse Effect; Governing law save as disclosed in the Base Prospectus, in any proceedings taken in the Russian Federation in relation to each Loan Agreement, the choice of English law as the governing law of each Loan Agreement, a judgment rendered by an English court and any arbitration award obtained in England in relation to each Loan Agreement will be recognised and enforced in the Russian Federation after compliance with the applicable procedures and rules and all other legal requirements in Russia; Taxation under current laws and regulations of the Russian Federation and Luxembourg and any respective political subdivisions thereof, subject to compliance by the Lender with the provisions of Clause 6.7 (Tax Treaty Relief) and based upon the representations of the Lender set forth in Clause 9.2 (Lender s Representations and Warranties), all payments of principal and/or interest, and additional amounts pursuant to Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up), Clause 6.3 (Withholding on Notes) and Clause 8.1 (Compensation) or any other amounts payable on or in respect of each Loan Agreement may be paid by the Borrower to the Lender in the Specified Currency and will not be subject to Taxes under laws and regulations of the Russian Federation, or any political subdivision or taxing authority thereof or therein, respectively, and will otherwise be free and clear of any other Tax, duty, withholding or deduction in Luxembourg, the Russian Federation, or any political subdivision or taxing authority thereof or therein (provided that the Borrower makes no representation as to any income or similar tax of Luxembourg (or any Qualifying 168

177 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Jurisdiction) which may be assessed thereon) and there is no necessity to obtain any governmental authorisation in the Russian Federation or any political subdivision or taxing authority thereof or therein; Licences all licences, consents, examinations, clearances, filings, registrations and authorisations the absence of which could have a Material Adverse Effect and which are or may be necessary to enable the Borrower and any of its Material Subsidiaries to own its assets and carry on its business are in full force and effect, and the Borrower is conducting such business in accordance with such licences, consents, examinations, clearances, filings registrations and authorisations; Tax filing neither the Borrower nor any of its Subsidiaries is materially overdue in the filing of any tax returns, reports and other information required to be filed by it with any appropriate taxing authority, and each such tax return, report or other information was, when filed, accurate and complete in all material respects; and each of the Borrower and its Subsidiaries has duly paid, or has made adequate reserves for, all Taxes required to be paid by it and any other assessment, fine or penalty levied against it (other than those it is contesting in good faith), and to the best of the Borrower s knowledge, no Tax deficiency is currently asserted against the Borrower or any of its Subsidiaries except, in each case, where any such failure to do so would not have a Material Adverse Effect; and Banking Business the Borrower and each of its Subsidiaries which carry on a Banking Business in the Russian Federation are in compliance with the relevant mandatory ratios in relation to exposures to single borrowers or related borrowers contained in Instruction No. 110 I On Mandatory Ratios for Banks dated 16 January 2004 issued by the Central Bank, calculated and interpreted in accordance with the requirements of the Central Bank (as implemented, amended, supplemented, re enacted, replaced or superseded from time to time). 9.2 Lender s Representations and Warranties The Lender represents and warrants to the Borrower as follows: Due organisation, capacity and authorisation The Lender is duly incorporated under the laws of and is a resident for Luxembourg taxation purposes in Luxembourg and has full power and capacity to execute this Agreement, to issue the Notes and to undertake and perform the obligations expressed to be assumed by it herein and therein and the Lender has taken all necessary action to approve and authorise the same; No conflict The execution of the Lender Agreements, the issue of the Notes and the undertaking and performance by the Lender of the obligations expressed to be assumed by it herein and therein will not conflict with, or result in a breach of or default under, the laws of Luxembourg or the constitutive documents, rules or regulations of the Lender or any agreement or instrument to which it is a party or by which it is bound or in respect of indebtedness in relation to which it is a surety; Binding obligations The Lender Agreements and the Notes have been duly executed by and constitute legal, valid and binding obligations of the Lender enforceable in accordance with their terms; Approvals 169

178 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 All authorisations, consents and approvals required by the Lender for or in connection with the execution of the Lender Agreements, the performance by the Lender of the obligations expressed to be undertaken by it herein and therein have been obtained and are in full force and effect; and Taxation 10. COVENANTS The Lender (a) is a resident of Luxembourg, is subject to taxation in Luxembourg on the basis of its registration as a legal entity, location of its management body or another similar criteria and it is not subject to taxation in Luxembourg merely on income from sources in Luxembourg or connected with property located in Luxembourg, and (b) does not have a permanent establishment in the Russian Federation. So long as any amount remains outstanding under a Loan Agreement: 10.1 Maintenance of Legal Validity The Borrower shall obtain, comply with the terms of and do all that is necessary to ensure the continuance of its corporate existence, its business and intellectual property relating to its business and shall maintain in full force and effect all authorisations, approvals, licences and consents and make or cause to be made all registrations, recordings and filings required in or by the laws and regulations of the Russian Federation to enable it lawfully to enter into and perform its obligations under the Borrower Agreements and to ensure the legality, validity, enforceability or admissibility in evidence in the Russian Federation of the Borrower Agreements, including, but not limited to, complying with the requirements of the Central Bank. The Borrower shall promptly pay all amounts payable in respect of fees, expenses and payments under indemnities as required by the relevant Loan Agreement ( Relevant Payments ), provided that, in the event that the Borrower is prevented, hindered or limited from paying such amounts by virtue of any laws and regulations of the Russian Federation or any requirement of the Central Bank or any other relevant authority, the Borrower undertakes promptly to take all actions necessary to comply with such laws and regulations or requirements of the Central Bank in order to enable it to make the Relevant Payments and shall, as soon as such compliance is achieved, make all Relevant Payments under the relevant Loan Agreement Untrue Representations Before the making of the relevant Loan, the Borrower shall notify the Lender (copied to the Trustee) of the occurrence of any event which results in or may reasonably be expected to result in any of the representations contained in Clause 9.1 (The Borrower s Representations and Warranties) being untrue at or before the time of the making of such Loan Notification of Events of Default The Borrower shall promptly on becoming aware thereof inform the Lender (copied to the Trustee) of the occurrence of any Event of Default or Potential Event of Default and, upon receipt of a written request to that effect from the Lender, confirm to the Lender (copied to the Trustee) that, save as previously notified to the Lender or as notified in such confirmation, no Event of Default or Potential Event of Default has occurred Claims Pari Passu The Borrower shall ensure that at all times the claims of the Lender (or following the Assignment (as defined in the Trust Deed), the Trustee) against it under each Loan Agreement rank at least pari passu with the claims of all the other unsecured and unsubordinated creditors of the Borrower, except as 170

179 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 otherwise provided by mandatory provisions of applicable law, including, for the avoidance of doubt, those claims that are preferred by any bankruptcy, insolvency, liquidation or similar laws of general application Negative Pledge So long as any Loan or any part of any Loan has not been repaid in full, the Borrower shall not, and the Borrower shall procure that none of its Material Subsidiaries will, create or permit to subsist any Security Interest, other than Permitted Security Interests, upon the whole or any part of its present or future undertaking, assets or revenues (including uncalled capital) to secure any Indebtedness or any Guarantee of Indebtedness unless, at the same time or prior thereto, the Borrower s obligations hereunder (i) are secured equally and rateably therewith or (ii) have the benefit of such other security or other arrangement which is equivalent in all material respects to such Security Interest and which shall be approved by the Lender and the Trustee Stay, Extension and Usury Laws The Borrower covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of each Loan Agreement; and the Borrower (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Lender (or following the Assignment, the Trustee), but shall suffer and permit the execution of every such power as though no such law had been enacted Use of Proceeds of the Loan The Borrower shall use the net proceeds of each Loan to fund the Borrower s lending activities and for general banking purposes (unless otherwise specified in the relevant Loan Supplement) and, without affecting the obligations of the Borrower in any way the Lender shall not be obliged to concern itself with such application Mergers The Borrower shall not, and shall ensure that none of its Material Subsidiaries will, without the prior written consent of the Lender, enter into any reorganisation (whether by way of a merger, accession, division, separation or transformation, as these terms are construed by applicable Russian legislation, or participate in any event analogous under the legislation of the relevant jurisdiction to such event), or participate in any other type of corporate reconstruction, if any such reorganisation or other type of corporate reconstruction would (i) have a Material Adverse Effect or (ii) result in a Rating Decline Disposals Without prejudice to the provisions of Clause (Transactions with Affiliates), the Borrower shall not, and shall ensure that none of its Material Subsidiaries will, sell, lease, transfer or otherwise dispose of, to a Person other than the Borrower or a Subsidiary of the Borrower, as the case may be, by one (1) or more transactions or series of transactions (whether related or not), the whole or any part of its assets which in any 12 month period together constitute more than 10 per cent. of the gross assets of the Group on a consolidated basis determined by reference to the balance sheet for the Borrower s most recent IFRS Fiscal Period unless such transaction(s) (a) is/are on an arm s length basis and on commercially reasonable terms as determined by an Independent Appraiser in its sole discretion, (b) has/have been approved by a decision adopted by the competent governing body of the Borrower or, as the case may be, Material Subsidiary and (c) would not (i) have a Material Adverse Effect or (ii) result in a Rating Decline. 171

180 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 This Clause 10.9 (Disposals) shall not apply to any sale, lease, transfer or other disposition (i) of inventory, receivables or other current assets in the ordinary course of the Borrower s or, as the case may be, the relevant Material Subsidiary s business consistent with past practice Transactions with Affiliates The Borrower shall not, and shall ensure that none of its Subsidiaries, directly or indirectly, will, conduct any business, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, transfer, assignment, lease, conveyance or exchange of any property or the rendering of any service) with, or for the benefit of, any Affiliate (an Affiliate Transaction ) including intercompany loans, unless the terms of such Affiliate Transaction (a) are no less favourable to the Borrower or such Subsidiary, as the case may be, than those that could be obtained in a comparable arm s length transaction with a person that is not an Affiliate of the Borrower or any of its Subsidiaries, and (b) have been approved by a decision adopted by the competent governing body of the Borrower or, as the case may be, Subsidiary. With respect to an Affiliate Transaction involving aggregate payments or value in excess of U.S.$30,000,000 the Borrower shall deliver to the Lender (copied to the Trustee) a written opinion from an Independent Appraiser to the effect that such Affiliate Transaction is fair, from a financial point of view, to the Borrower. The foregoing requirements of this Clause (Transactions with Affiliates) shall not apply to any Affiliate Transaction made pursuant to a contract existing on the date of this Agreement (for the avoidance of doubt, such term excluding any Loan Supplement) (excluding any amendments or modifications thereof made after the date of this Agreement (for the avoidance of doubt, such term excluding any Loan Supplement)), provided that in no event shall the aggregate amount of all Affiliate Transactions (including, for the avoidance of doubt, any Affiliate Transactions made pursuant to a contract existing on the Closing Date) exceed 25 per cent. of the Group s assets, determined by reference to the balance sheet for the Group s most recent IFRS Fiscal Period. This Clause (Transactions with Affiliates) shall not apply to any transaction or series of transactions between or among all or any of the Borrower and/or its Subsidiaries Payment of Taxes The Borrower shall, and shall ensure that its Subsidiaries will, pay or discharge or cause to be paid or discharged, before the same shall become overdue all taxes, assessments and governmental charges levied or imposed upon, or upon the income, profits or property of, the Borrower and its Subsidiaries; provided that none of the Borrower nor any Subsidiary shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment or charge or claim (i) whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with IFRS or other appropriate provision has been made or (ii) whose amount, together with all such other unpaid or undischarged taxes, assessments, charges and claims, does not in the aggregate exceed U.S.$10,000,000 (or its equivalent in other currencies) Financial Information So long as any Loan or any part of it has not been repaid in full, the Borrower shall deliver to the Lender (copied to the Trustee): not later than 150 days after the end of each of its financial years, copies of the Borrower s audited consolidated financial statements for such financial year, prepared in accordance with IFRS; not later than 120 days after the end of the second quarter of each of its financial years, copies of the Borrower s unaudited consolidated financial statements for six (6) months, prepared in accordance with IFRS; and 172

181 Level: 3 From: 3 Monday, November 16, :48 eprint Section without undue delay, such additional information regarding the financial position or the business of the Borrower as the Lender may reasonably request including for the purposes of providing onward certification to the Trustee Maintenance of Capital Adequacy The Borrower shall not permit its Capital Adequacy Ratio to fall below 12 per cent Restricted Payments Subject to sub Clause , the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: (a) (b) declare or pay dividends, in cash or otherwise, or make any other distributions (whether by way of redemption, acquisition or otherwise) in respect of its share capital, in each case in accordance with applicable legislation (other than dividends or other distributions paid to the Borrower or any of its Subsidiaries); or voluntarily purchase, redeem or otherwise retire for value any Capital Stock or subordinated debt (other than Capital Stock or subordinated debt held by the Borrower or any of its Subsidiaries), any such action being referred to herein as a Restricted Payment The Borrower and any of its Subsidiaries may make a Restricted Payment if at the time of such payment no Event of Default has occurred or would result therefrom and the aggregate amount of all Restricted Payments of the Group for the most recent Fiscal Period does not exceed 50 per cent. of the Group s consolidated net profit (calculated in accordance with IFRS) for such period Limitations on Restrictions on Distributions from Material Subsidiaries Except as permitted under Clause (Restricted Payments) above, the Borrower shall not and shall not permit any of its Material Subsidiaries to create or otherwise cause or permit to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Material Subsidiary: (a) to pay dividends or make any other distributions on its share capital; (b) to make any loans or advances or pay any Indebtedness owed to the Borrower; or (c) to transfer any of its property or assets to the Borrower, other than encumbrances or restrictions existing under (i) applicable law, (ii) any Series of Notes and/or the Lender Agreements and (iii) any other agreement in effect prior to the date of this Agreement (such term not to include any Loan Supplement) and advised in writing to the Lender) Change of Control Upon the occurrence of a Change of Control, the Borrower shall prepay the relevant Loan, in whole or in part, pursuant to and subject to the conditions described in Clause 5.4 (Prepayment in the Event of a Change of Control) Officers Certificates On each Interest Payment Date (other than a final Interest Payment Date that falls on a Repayment Date) or promptly upon request by the Lender (and in any event within 10 Business Days after such request), the Borrower shall deliver to the Lender (copied to the Trustee), written notice in the form of an Officers Certificate stating whether any Potential Event of Default or Event of Default has occurred and, if it has occurred, what action the Borrower is taking or proposes to take with respect thereto. 173

182 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 On each Interest Payment Date (other than a final Interest Payment Date that falls on a Repayment Date) or promptly upon request by the Lender (and in any event within 10 Business Days after such request), the Borrower shall deliver to the Lender (copied to the Trustee) written notice in the form of an Officers Certificate listing its Material Subsidiaries, accompanied by a report by the Auditors addressed to the directors of the Borrower as to the proper extraction of the figures used in the Officers Certificate, as described in the definition of Officers Certificate in Clause 1.1 (Definitions) Appointment of Independent Appraiser The Borrower shall use its reasonable endeavours to appoint an Independent Appraiser without delay and in any event within thirty (30) days after becoming aware of the circumstance which gives rise to the need for such appointment. In the event that the Borrower fails to appoint an Independent Appraiser within such period the Borrower shall promptly notify the Lender and, following the assignment of the Transferred Rights, the Trustee of its failure to appoint in accordance with this Agreement Notes Held by the Borrower Upon being so requested in writing by the Lender, the Borrower shall deliver to the Lender (copied to the Trustee) an Officers Certificate of the Borrower setting out the total number of Notes which, at the date of such certificate, are held by the Borrower (or any Subsidiary of the Borrower) and have not been cancelled and are retained by it for its own account or for the account of any other company. 11. EVENTS OF DEFAULT 11.1 Events of Default If one (1) or more of the following events of default (each, an Event of Default ) shall occur, the Lender shall be entitled to the remedies set forth in Clause 11.3 (Default Remedies) Failure to Pay The Borrower fails to pay any amount payable under a Loan Agreement as and when such amount becomes payable in the currency and in the manner specified herein, provided such failure to pay continues for more than five (5) Business Days Obligations The Borrower defaults in the performance or observance of any of its obligations other than that set out in Clause (Failure to Pay) under or in respect of a Loan Agreement and such default (if capable of being remedied) is not remedied within 15 days after the Lender has given written notice thereof to the Borrower requiring the same to be remedied Representations, Warranties or Certificates Inaccurate Any representation or warranty of the Borrower or any statement deemed to be made by the Borrower in connection with a Loan Agreement or any other document, certificate or notice delivered by the Borrower in connection with the Lender Agreements or the issue of Notes proves to have been inaccurate, incomplete or misleading in any material respect in the opinion of the Lender at the time it was made or repeated or deemed to have been made or repeated Cross Default (a) Any Indebtedness of the Borrower or any of its Material Subsidiaries is not paid when due (after the expiry of any applicable grace period); or 174

183 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 (b) (c) any such Indebtedness becomes due and payable prior to its stated maturity otherwise than at the option of the Borrower or (as the case may be) the relevant Material Subsidiary or (provided that no event of default, howsoever described, has occurred) any person entitled to such Indebtedness; or the Borrower or any of its Subsidiaries fails to pay when due and payable upon any amount payable by it under any Guarantee of any Indebtedness after giving effect to any originally applicable grace period; provided that the amount of Indebtedness referred to in sub paragraph (a) and/or sub paragraph (b) above and/or the amount payable under any Guarantee referred to in sub paragraph (c) above, individually or in the aggregate, exceeds U.S.$10,000,000 (or its equivalent in any other currency or currencies) Unsatisfied judgment One (1) or more judgment(s) or order(s) for the payment of an amount in excess of U.S.$10,000,000 (or its equivalent in any other currency or currencies), whether individually or in aggregate, is rendered against the Borrower or any of its Subsidiaries and continue(s) unsatisfied and unstayed for a period of 60 days after the date(s) of the entry into force thereof or, if later, the date therein specified for payment Security Enforced A secured party takes possession, or a receiver, manager or other similar officer is appointed, of the whole or (in the opinion of the Trustee) a substantial part of the undertaking and assets of the Borrower or any of its Material Subsidiaries Insolvency, etc. The occurrence of any of the following events: (a) (b) (c) (d) (e) the Borrower or any of its Material Subsidiaries becomes insolvent or is unable to pay its debts as they fall due; any of the Borrower or any of its Material Subsidiaries seeking or consenting to, or acquiescing in, the introduction of proceedings for its liquidation or bankruptcy or the appointment of a liquidation commission (likvidatsionnaya komissiya) or similar officer of any of the Borrower or any of its Material Subsidiaries, as the case may be; the institution of the supervision (nablyudeniye), external management (vneshneye upravleniye), bankruptcy management (konkursnoye proizvodstvo) of any of the Borrower or any of its Material Subsidiaries, as such terms with Russian transliteration are defined in the Federal Law of the Russian Federation No. 127 FZ On Insolvency (Bankruptcy) of 26 October 2002 (as amended or replaced from time to time); the institution of financial rehabilitation (finansovoye ozdorovlenie), pursuant to the request of the Central Bank, temporary administration (vremennaya administratsiya) or reorganisation (reorganizatsiya) with respect to the Borrower or any of its Material Subsidiaries as such terms with Russian transliteration are defined in the Federal Law of the Russian Federation No. 40 FZ On Insolvency (Bankruptcy) of Credit Organisations dated 25 February 1999 (as amended or replaced from time to time); the Borrower or any of its Material Subsidiaries makes a general assignment or a general arrangement or general composition with or for the benefit of its creditors or declares a general moratorium in respect its Indebtedness or any Guarantee of Indebtedness given by it; 175

184 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 (f) (g) the Borrower ceases or threatens to cease to carry on all or any substantial part (in the opinion of the Trustee in accordance with the terms of the Lender Agreements) of the principal business it carried on at the date hereof; or the general banking licence of the Borrower or, if applicable, any of its Material Subsidiaries is revoked Winding Up, etc. An order is made or an effective resolution is passed for the winding up, liquidation or dissolution of the Borrower or any of its Material Subsidiaries (otherwise than, in the case of a Material Subsidiary of the Borrower, for the purposes of or pursuant to an amalgamation, reorganisation or restructuring whilst solvent) Analogous Event Any event occurs which under the laws of the Russian Federation has an analogous effect to any of the events referred to in Clauses (Unsatisfied judgment) to (Winding up, etc.) above, or any analogous procedure or event in any other relevant jurisdiction Validity and Illegality (a) (b) (c) The validity of any Borrower Agreement is contested by the Borrower or the Borrower shall deny any of the Borrower s obligations under any Borrower Agreement; or it is, or will become, unlawful for the Borrower to perform or comply with any of its obligations under any Borrower Agreement; or any of such obligations shall become unenforceable or cease to be legal, valid and binding in a manner which has a Material Adverse Effect on the rights or claims of the Lender under any Borrower Agreement Government Intervention (i) all or (in the opinion of the Trustee in accordance with the terms of the Lender Agreements) a substantial part of the undertaking and assets of the Borrower or any of its Material Subsidiaries is condemned, seized or otherwise appropriated by any person acting under the authority of any agency, national, regional or local government or (ii) the Borrower or any of its Material Subsidiaries is prevented by any such person from exercising normal control over all or (in the opinion of the Trustee in accordance with the terms of the Lender Agreements) a substantial part of its undertaking and assets Authorisations 11.2 Notice of Default Any regulation, decree, consent, approval, licence or other authority necessary to enable the Borrower to enter into or perform its obligations under any Borrower Agreement or for the validity or enforceability thereof shall expire or be withheld, revoked or terminated or otherwise cease to remain in full force and effect or shall be modified in a manner which has a material adverse effect upon the rights or claims of the Lender under any Borrower Agreement. The Borrower shall deliver to the Lender and copied to the Trustee within (i) 10 days of any written request by the Lender, or (ii) immediately upon becoming aware after the occurrence thereof, written notice in the form of an Officers Certificate, substantially in the form set out in Schedule 2 hereto, stating whether any Potential Event of Default or Event of Default has occurred, its status and what action the Borrower is taking or proposes to take with respect thereto. 176

185 Level: 3 From: 3 Monday, November 16, :48 eprint Section Default Remedies If any Event of Default shall occur and be continuing, the Lender may, by notice in writing to the Borrower, (a) declare the obligations of the Lender under the relevant Loan Agreement to be terminated, whereupon such obligations shall terminate, and (b) declare all amounts payable under such Loan Agreement by the Borrower that would otherwise be due after the date of such termination to be immediately due and payable, whereupon all such amounts shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by the Borrower; provided, however, that if any event of any kind referred to in sub Clauses (Security Enforced), (Insolvency, etc.), (Winding up, etc.) or, pursuant to sub Clause (Analogous Event) an event analogous to such events, occurs, the obligations of the Lender under such Loan Agreement shall immediately terminate, and all amounts payable under such Loan Agreement by the Borrower that would otherwise be due after the occurrence of such event shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by the Borrower Right of Set Off If any amount payable by the Borrower hereunder is not paid as and when due, the Borrower authorises the Lender to proceed, to the fullest extent permitted by applicable law, without prior notice, by right of set off, banker s lien, counterclaim or otherwise, against any assets of the Borrower in any currency that may at any time be in the possession of the Lender, at any branch or office, to the full extent of all amounts payable to the Lender hereunder Rights Not Exclusive The rights provided for in the relevant Loan Agreement are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law. 12. INDEMNITY 12.1 Indemnification The Borrower undertakes to the Lender that if the Lender, any director, affiliate or controlling person, officer, employee or agent of the Lender (each an Indemnified Party ) incurs any loss, damage, claim, demand, judgement, action, proceeding (including, without limitation, in respect of taxes, duties, levies, imposts and other charges) and including any value added tax or similar tax charged or chargeable in respect thereof and properly incurred out of pocket costs and expenses (including legal fees) on a full indemnity basis (a Loss ) in relation to the preparation and execution, or purported execution, or the exercise of its powers, authorities and discretions and the performance of its duties under, and in any other manner in relation to, the Loan, the Loan Agreement (or enforcement thereof), the Borrower shall pay to the Indemnified Party on demand an amount equal to such Loss (as evidenced by an invoice distributed to the Borrower by the Lender in accordance with Clause 16 (Notices) unless, in any such case, and to the extent that such Loss is determined by a final judgment of a competent court to have been caused by such Indemnified Parties gross negligence or wilful misconduct or such Loss arises out of a breach of the representations and warranties of the Lender contained herein Independent Obligation Clause 12.1 (Indemnification) constitutes a separate and independent obligation of the Borrower from its other obligations under or in connection with each Loan Agreement or any other obligations of the Borrower in connection with the issue of the Notes by the Lender and shall not affect, or be construed to affect, any other provision of any Loan Agreement or any such other obligations. 177

186 Level: 3 From: 3 Monday, November 16, :48 eprint Section Evidence of Loss If requested by the Borrower, the Lender shall use its reasonable endeavours to provide the Borrower with a certificate of the Lender setting forth the amount of losses, expenses and liabilities described in Clause 12.1 (Indemnification) and specifying in full detail the basis therefor. Any such certificate shall, in the absence of manifest error, be conclusive evidence of the amount of such losses, expenses and liabilities Currency Indemnity To the fullest extent permitted by law, the obligation of the Borrower under this Agreement and any Subscription Agreement in respect of any amount due in the currency (the first currency ) in which the same is payable shall, notwithstanding any payment in any other currency (the second currency ) (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in the first currency that the Relevant Dealer may, acting reasonably and in accordance with normal banking procedures, purchase with the sum paid in the second currency (after any premium and costs of exchange) on the Business Day immediately following the day on which the Relevant Dealer receives such payment. If the amount in the first currency that may be so purchased for any reason falls short of the amount originally due the Borrower hereby agrees to indemnify and hold harmless each Relevant Dealer against any deficiency in the first currency. Any obligation of the Borrower not discharged by payment in the first currency shall, to the fullest extent permitted by applicable law, be due as a separate and independent obligation and, until discharged as provided in this Agreement and any Subscription Agreement, shall continue in full force and effect. 13. SURVIVAL The obligations of the Borrower pursuant to Clauses 6.2 (No Set Off, Counterclaim or Withholding; Gross Up), 6.3 (Withholding on Notes), 12 (Indemnity) and 15.2 (Stamp Duties) shall survive the execution and delivery of each Loan Agreement and the drawdown and repayment of the relevant Loan, in each case by the Borrower. 14. EXPENSES 14.1 Reimbursement of Front end Expenses for the Extension of the Loan by the Lender The Borrower shall, pursuant to Clause 3.2 (Loan Arrangement Fee) hereof and the relevant Loan Supplement, reimburse the Lender in the Specified Currency for all reasonable costs and expenses incurred by the Lender in connection with the negotiation, preparation and execution of each Loan Agreement and all related documents and other expenses connected with the extension of each Loan, including, without limitation, the reasonable fees and expense of its counsel Payment of Ongoing Expenses In addition, the Borrower hereby agrees to pay to or to the order of the Lender on demand in the Specified Currency all ongoing commissions, costs, fees and expenses (including, without limitation, enforcement costs), payable by the Lender under or in respect of the Lender Agreements and the letter entered into between the Borrower, the Lender, the Trustee and the Agents dated 16 November 2009 in respect of the Programme (the Fee Side Letter ). The Borrower shall also pay the Lender for, or pay to the order of the Lender for, any indemnification or other payment obligations of the Lender under or in respect of the Agency Agreement, Trust Deed and/or the Fee Side Letter (other than the obligation of the Lender to make payments of principal, interest or additional amounts in respect of the corresponding Series of Notes). Payments to the Lender or to the order of the Lender referred to in this Clause 14.2 (Payment of Ongoing Expenses) shall be made by the Borrower at least one (1) Business Day before the relevant payment is to be made or expense incurred. 178

187 Level: 3 From: 3 Monday, November 16, :48 eprint Section GENERAL 15.1 Evidence of Debt The entries made in the relevant Account shall, in the absence of manifest error, constitute prima facie evidence of the existence and amounts of the Borrower s obligations recorded therein Stamp Duties The Borrower shall pay all stamp, registration and documentary Taxes or similar charges (if any) imposed on the Borrower by any person in the United Kingdom, the Russian Federation, Luxembourg or the United States of America which may be payable or determined to be payable in connection with the execution, delivery, performance, enforcement, or admissibility into evidence of any Loan Agreement and shall indemnify the Lender against any and all costs and expenses which may be incurred or suffered by the Lender with respect to, or resulting from, delay or failure by the Borrower to pay such Taxes or similar charges upon presentation by the Lender to the Borrowers of documentary evidence of such costs and expenses The Borrower agrees that if the Lender incurs a liability to pay any stamp, registration and documentary Taxes or similar charges (if any) imposed by any person in the United Kingdom, the Russian Federation, Luxembourg or the United States of America which may be payable or determined to be payable in connection with the execution, delivery, performance, enforcement, or admissibility into evidence of any Loan Agreement and any documents related thereto, the Borrower shall repay the Lender on demand an amount equal to such stamp or other documentary taxes or duties and shall indemnify the Lender against any and all costs and expenses which may be incurred or suffered by the Lender with respect to, or resulting from, delay or failure by the Borrower to procure the payment of such Taxes or similar charges Waivers No failure to exercise and no delay in exercising, on the part of the Lender or the Borrower, any right, power to privilege under any Loan Agreement, and no course of dealing between the Borrower and the Lender shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies provided in each Loan Agreement are cumulative and not exclusive of any rights, or remedies provided by applicable law Prescription Subject to the Lender having received the principal amount thereof or interest thereon from the Borrower, the Lender shall forthwith repay to the Borrower the principal amount or the interest amount thereon, respectively, of any Series of Notes upon such Series of Notes becoming void pursuant to Condition 11 (Prescription) of such Notes. 179

188 Level: 3 From: 3 Monday, November 16, :48 eprint Section NOTICES All notices, requests, demands or other communication to or upon the respective parties to each Loan Agreement shall be given or made in the English language in writing and shall be deemed to have been duly given or made at the time of delivery, if delivered by hand or courier, or if sent by facsimile, at the time of transmission (in each case, if given during normal business hours of the recipient, and on the Business Day during which such normal business hours next occur if not given during such hours on any day), to the party to which such notice, request, demand or other communication is required or permitted to be given or made under this Agreement addressed as follows: if to the Borrower: AK BARS Bank Dekabristov Street 1 Kazan Republic of Tatarstan Russian Federation Fax: Attention: Oleg Karpeev if to the Lender: AK BARS Luxembourg S.A. 2, boulevard Konrad Adenauer L 1115 Luxembourg Grand Duchy of Luxembourg Fax: Attention: The Directors if to the Trustee: 17. ASSIGNMENT 17.1 General Deutsche Trustee Company Limited Winchester House 1 Great Winchester Street London EC2N 2DB United Kingdom Fax: Attention: Trust & Securities Services or to such other address or fax number as any party may hereafter specify in writing to the other. Each Loan Agreement shall inure to the benefit of and be binding upon the parties, their respective successors and any permitted assignee or transferee of some or all of a party s rights or obligations under such Loan Agreement. Any reference in a Loan Agreement to any party shall be construed accordingly and, in particular, references to the exercise of rights and discretions by the Lender, following the enforcement of the security and/or assignment referred to in Clause 17.3 (By the Lender) below, shall be references to the exercise of such rights or discretions by the Trustee (as Trustee). Notwithstanding the foregoing, the Trustee shall not be entitled to participate in any determinations by the Lender, or any discussions between the Lender and the Borrower or any agreements of the Lender or the Borrower pursuant to Clauses 6.4 (Reimbursement) or 6.5 (Notification) or Clause 8 (Change in Law or Increase in Cost). 180

189 Level: 3 From: 3 Monday, November 16, :48 eprint Section By the Borrower The Borrower shall not to be entitled to assign or transfer all or any part of its rights or obligations hereunder to any other person By the Lender Subject to clause 22 (Assignment) of the Trust Deed, the Lender may not assign or transfer, in whole or in part, any of its rights and benefits or obligations under any Loan Agreement (other than the Reserved Rights) except (i) the charge by way of first fixed charge granted by the Lender in favour of the Trustee (as Trustee) of certain of the Lender s rights and benefits under such Loan Agreement and (ii) the absolute assignment by the Lender to the Trustee of certain rights, interests and benefits under such Loan Agreement, in each case, pursuant to clause 6.2 (The Assignment) of the relevant Supplemental Trust Deed. 18. LAW, JURISDICTION AND ARBITRATION 18.1 Governing Law Each Loan Agreement and all non contractual obligations arising out of or in connection with it are governed by, and shall be construed in accordance with, English law Jurisdiction The parties irrevocably agree that any dispute (a Dispute ) arising out of or connected with any Loan Agreement, including a Dispute regarding the existence, validity or termination of this Agreement or the consequences of its nullity and/or this Clause 18.2, shall be resolved: subject to clause below, by arbitration in accordance with the Rules of the LCIA (formerly the London Court of International Arbitration) (the LCIA ), which rules are deemed to be incorporated by reference into this Clause 18.2 (Jurisdiction). The place of arbitration shall be London, England and the language of the arbitration shall be English. The number of arbitrators shall be three (3), each of whom shall have no interest in the Disputes or the proceedings relating to a Dispute ( Proceedings ), shall have no connection with any party thereto and shall be an attorney experienced in international securities transactions. Each party shall nominate an arbitrator, who, in turn, shall nominate the Chairman of the Tribunal. If Proceedings or Disputes shall involve more than two parties, the parties thereto shall attempt to align themselves in two sides (i.e. claimant and respondent) each of which shall appoint an arbitrator as if there were only two sides to such Proceedings or Disputes. If such alignment and appointment shall not have occurred within twenty (20) calendar days after the initiating party serves the arbitration demand or if a Chairman has not been selected within thirty (30) calendar days of the selection of the second arbitrator, the Arbitration Court of the LCIA shall appoint the three (3) arbitrators or the Chairman, as the case may be. The parties and the Arbitration Court may appoint arbitrators from among the nationals of any country, whether or not a party is a national of that country. The arbitrators shall have no authority to award punitive or other punitive type damages and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. Costs of the arbitration (excluding each party s preparation, travel, attorneys fees and similar costs) shall be borne in accordance with the decision of the arbitrators. The decision of the arbitrators shall be final, binding and enforceable upon the parties and judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that the failure of a party to comply with the decision of the arbitrators requires any other party to apply to any court for enforcement of such award, the non complying party shall be liable to the other for all costs of such litigation, including reasonable attorneys fees. The parties exclude the jurisdiction of the courts under Sections 45 and 69 of the Arbitration Act 1996; or 181

190 Level: 3 From: 3 Monday, November 16, :48 eprint Section at the sole option of the Lender, by proceedings brought in the courts of England, which courts are to have exclusive jurisdiction. If the Lender is in the position of a Respondent (as defined in the LCIA Rules) and wishes to exercise this option, it must do so by notice to the other parties to the Dispute within 30 days of service on it of the Request for Arbitration (as defined in the LCIA Rules). For the avoidance of doubt, sub Clause is for the benefit of the Lender only. As a result nothing in this Clause 18 (Law, Jurisdiction and Arbitration) prevents the Lender from taking proceedings relating to a Dispute ( Proceedings ) in any other courts with jurisdiction. To the extent allowed by law, the Lender may take concurrent Proceedings in any number of jurisdictions Appropriate Forum Each of the parties irrevocably waives any objection which it might now or hereafter have to the courts of England being nominated as the forum to hear and determine any Dispute, and agrees not to claim that any such court is not a convenient or appropriate forum Consent to enforcement etc. The Borrower consents generally in respect of any Proceedings to the giving of any relief or the issue of any process in connection with such Proceedings including (without limitation) the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment which is made or given in such Proceedings Waiver of immunity To the extent that the Borrower may in any jurisdiction claim for itself or its assets or revenues immunity from suit, execution, attachment (whether in aid of execution, before judgement or otherwise) or other legal process and to the extent that such immunity (whether or not claimed) may be attributed in any such jurisdiction to the Borrower or its assets or revenues, the Borrower agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction. This waiver of immunity constitutes a limited and specific waiver for the purposes of the Loan and this Agreement Process Agents Lender s Process Agent: the Lender agrees that the process by which any Proceedings in England are begun may be served on it by being delivered to Law Debenture Corporate Services Limited at its registered office, currently at Fifth Floor, 100 Wood Street, London EC2V 7EX. If such person is not or ceases to be effectively appointed to accept service of process on the Lender s behalf, the Lender shall, on the written demand of the Borrower, appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, the Borrower shall be entitled to appoint such a person by written notice to the Lender. Nothing in this sub Clause shall affect the right of the Borrower to serve process in any other manner permitted by law; and The Borrower s Process Agent: the Borrower agrees that the process by which any Proceedings in England are begun may be served on it by being delivered to Law Debenture Corporate Services Limited at its registered office, currently at Fifth Floor, 100 Wood Street, London EC2V 7EX. If such person is not or ceases to be effectively appointed to accept service of process on the Borrower s behalf, the Borrower shall, on the written demand of the Lender, appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, the Lender shall be entitled to appoint such a person by written notice to the Borrower. Nothing in this Clause shall affect the right of the Lender to serve process in any other manner permitted by law. 182

191 Level: 3 From: 3 Monday, November 16, :48 eprint Section CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 A person who is not a party to a Loan Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of such Loan Agreement. 20. COUNTERPARTS Each Loan Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same agreement. 21. LANGUAGE The language which governs the interpretation of each Loan Agreement is the English language. 22. AMENDMENTS Except as otherwise provided by its terms, each Loan Agreement may not be varied except by an agreement in writing signed by the parties hereto. 23. PARTIAL INVALIDITY The illegality, invalidity or unenforceability to any extent of any provision of each Loan Agreement under the law of any jurisdiction shall affect its legality, validity or enforceability in such jurisdiction to such extent only and shall not affect its legality, validity or enforceability under the law of any other jurisdiction, nor the legality, validity or enforceability of any other provision. 24. SEVERABILITY In case any provision in or obligation under any Loan Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 25. LIMITED RECOURSE AND NON PETITION Neither the Borrower nor any other person acting on its behalf shall be entitled at any time to institute against the Lender, or join in any institution against the Lender of, any bankruptcy, administration, moratorium, reorganisation, controlled management, arrangement, insolvency, examinership, winding up or liquidation proceedings or similar insolvency proceedings under any applicable bankruptcy or similar law in connection with any obligation of the Lender under this Agreement, save for lodging a claim in the liquidation of the Lender which is initiated by another party or taking proceedings to obtain a declaration or judgment as to the obligations of the Lender. The Borrower hereby agrees that it shall have recourse in respect of any claim against the Lender only to sums in respect of principal, interest or other amounts (if any), as the case may be, received by or for the account of the Lender pursuant to this Loan Agreement (the Lender Assets ), subject always (1) to the Security Interests (as defined in the Trust Deed) and (2) to the fact that any claims of the Dealers (as defined in the Dealer Agreement) pursuant to the Dealer Agreement shall rank in priority to any claims of the Borrower hereunder, any such claim by any and all such Dealers or the Borrower shall be reduced pro rata so that the total of all such claims does not exceed the aggregate value of the Lender Assets after meeting claims secured on them. The Trustee having realised the same, neither the Borrower nor any person acting on its behalf shall be entitled to take any further steps against the Lender to recover any further sums and no debt shall be owed by the Lender to such person in respect of any such further sum. In particular, the Borrower shall not be entitled to institute, or join with any other person in bringing, instituting or joining, insolvency proceedings (whether court based or otherwise) in relation to the Lender. 183

192 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 The Borrower shall have no recourse against any director, shareholder, or officer of the Lender in respect of any obligations, covenants or agreement entered into or made by the Lender in respect of this Agreement, except to the extent that any such person acts in bad faith or is negligent in the context of its obligations. 184

193 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 SCHEDULE 1 FORM OF LOAN SUPPLEMENT THIS LOAN SUPPLEMENT is made on [SIGNING DATE], BETWEEN: (1) AK BARS BANK, a commercial bank organised as an open joint stock company under the laws of the Russian Federation the registered address of which is Dekabristov Street 1, Kazan , Republic of Tatarstan, Russian Federation (the Borrower ); and (2) AK BARS LUXEMBOURG S.A., a Luxembourg société anonyme the registered office of which is 2, Boulevard Konrad Adenauer L 1115 Luxembourg and being registered with the Luxembourg trade and companies register (Registre de commerce et des sociétés, Luxembourg) under number B (the Lender, which expression, where the context so admits, includes any successor Lender pursuant to the terms of this Agreement and the Trust Deed). WHEREAS: (A) The Borrower has entered into an amended and restated facility agreement dated 16 November 2009 (the Facility Agreement ) with the Lender in respect of the Borrower s U.S.$1,500,000,000 Programme for the issuance of Loan Participation Notes (the Programme ). (B) the Borrower proposes to borrow [ ] (the Loan ) and the Lender wishes to make such Loan on the terms set out in the Facility Agreement and this Loan Supplement. IT IS AGREED as follows: 1. Definitions Capitalised terms used but not defined in this Loan Supplement shall have the meaning given to them in the Facility Agreement save to the extent supplemented or modified herein. 2. Additional Definitions For the purpose of this Loan Supplement, the following expressions used in the Facility Agreement shall have the following meanings: Account means the account in the name of the Lender with the Principal Paying Agent (account number [ ], [ ]) or such other account as may from time to time be agreed between the Lender and the Trustee pursuant to the Trust Deed and notified to the Borrower in writing at least 5 Business Days in advance of such change; Borrower Account means the account in the name of the Borrower (account number [ ] [insert further details]); Calculation Agent means [Deutsche Bank AG, London Branch]; Closing Date means [ ]; Loan Agreement means the Facility Agreement as amended and supplemented by this Loan Supplement; Notes means [ ] [[ ] per cent.][fixed Rate][Floating Rate] Loan Participation Notes due [ ] issued by the Lender as Series [ ] under the Programme; Repayment Date means [ ] [amend as required for Floating Rate Notes]; Specified Currency means [ ]; 185

194 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Subscription Agreement means an agreement between the Lender, the Borrower and [insert names of managers] dated [ ] relating to the Notes; and Trust Deed means the Principal Trust Deed between the Lender and the Trustee dated 16 November 2009 as amended and supplemented by a Supplemental Trust Deed dated [ ] constituting and securing the Notes. 3. Incorporation by Reference Except as otherwise provided, the terms of the Facility Agreement shall apply to this Loan Supplement as if they were set out herein and the Facility Agreement shall be read and construed, only in relation to the Loan constituted hereby, as one document with this Loan Supplement. 4. The Loan 4.1 Drawdown Subject to the terms and conditions of the Loan Agreement, the Lender agrees to make the Loan on the Closing Date to the Borrower and the Borrower shall make a single drawing in the full amount of the Loan. 4.2 Interest The Loan is a [Fixed Rate][Floating Rate] Loan. Interest shall be calculated, and the following terms used in the Facility Agreement shall have the meanings, as set out below: Fixed Rate Loan Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub paragraphs of this paragraph) (i) Interest Commencement Date: [ ] (ii) Rate[(s)] of Interest: [ ] per cent. per annum [payable [annually/semi annually] in arrear] (iii) Interest Payment Date(s): [ ] in each year [adjusted in accordance with [specify Business Day Convention and any applicable Business Centre(s) for the definition of Business Day ]/not adjusted] (iv) Calculation Amount: [ ] (v) Specified Denomination: [ ] (vi) Fixed Amount[(s)]: [ ] per Calculation Amount (vii) Broken Amount: [ ] per Calculation Amount, payable on the Interest Payment Date falling [in/on] [ ] (viii) (ix) Day Count Fraction (Clause 4.9 (Definitions)): Determination Date(s) (Clause 4.9 (Definitions)): [ ] (Day count fraction should be Actual/Actual ICMA for all fixed rate loans other than those denominated in U.S. dollars, unless specified) [ ] in each year. [Insert regular interest payment dates, ignoring issue date or maturity date in the case of a long or short first or last interest period] 5 5 Only to be completed for a Loan where Day Count Fraction is Actual/Actual-ICMA 186

195 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 (x) Other terms relating to the method of calculating interest for Fixed Rate Loans: [Not Applicable/give details] Floating Rate Loan Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub paragraphs of this paragraph) (i) Interest Commencement Date: [ ] (ii) Interest Period(s): [ ] (iii) Specified Interest Payment Dates: [ ] (iv) Business Day Convention: [Floating Rate Business Day Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (v) (vi) Business Centre(s) (Clause 4.9 (Definitions)): Manner in which the Rate(s) of Interest is/are to be determined: [ ] [Screen Rate Determination/ISDA Determination/ other (give details)] (vii) Interest Period Date(s): [Not Applicable/specify dates] (viii) (ix) Party responsible for calculating the Rate(s) of Interest and Interest Amount(s) (if not the Calculation Agent): Screen Rate Determination (sub Clause of Clause 4.3 (Interest for Floating Rate Notes)): [ ] Relevant Time: [ ] Interest Determination Date: [[ ] [TARGET] Business Days in [specify city] for [specify currency] prior to [the first day in each Interest Accrual Period/each Interest Payment Date]] Primary Source for [Specify relevant screen page and rate or Reference Floating Rate: Banks ] Reference Banks (if [Specify four] Primary Source is Reference Banks ): Relevant Financial Centre: [The financial centre most closely connected to the Benchmark specify if not London] Benchmark: [LIBOR, LIBID, LIMEAN, EURIBOR or other benchmark] 187

196 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 Representative Amount: [Specify if screen or Reference Bank quotations are to be given in respect of a transaction of a specified notional amount] Effective Date: [Specify if quotations are not to be obtained with effect from commencement of Interest Accrual Period] Specified Duration: [Specify period for quotation if not duration of Interest Accrual Period] (x) ISDA Determination (Clause 4.3 (Interest for Floating Rate Loans): Floating Rate Option: [ ] Designated Maturity: [ ] Reset Date: [ ] ISDA Definitions: (if [ ] different from those set out in the Conditions): (xi) Margin(s): [+/ ][ ] per cent. per annum (xii) Minimum Rate of Interest: [ ] per cent. per annum (xiii) Maximum Rate of Interest: [ ] per cent. per annum (xiv) Day Count Fraction (Clause 4.9 (Definitions)): [ ] (xv) Rate Multiplier: [ ] (xvi) Fall back provisions, rounding provisions, denominator and any other terms relating to the method of calculating interest on Floating Rate Loans, if different from those set out in the Facility Agreement: [ ]] Step Up of Interest Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub paragraphs of this paragraph) (i) Initial Rate of Interest: [ ] (ii) Initial Interest Term: [ ] (iii) Step Up Date: [ ] (iv) Step Up Rate of Interest: The rate which is a rate per annum (as reported in writing to the Lender and the Borrower by the Calculation Agent (and rounded, if necessary, to the third decimal place ( being rounded upwards)) which is the aggregate of (a) [ ] basis points above the Treasury Rate (b) the Step Up Related Margin (v) Step Up Interest Term: [ ] 188

197 Level: 3 From: 3 Monday, November 16, :48 eprint Section 07 (vi) Step Up Related Margin: [ ] basis points (vii) Treasury Rate: [A rate equal to the yield, as published by the Board Of Governors Of The Federal Reserve System, on the Benchmark Treasury. If there is no such publication of this yield during the week preceding the relevant calculation date, the Treasury Rate will be calculated by reference to quotations from selected primary U.S. Treasury securities dealers in New York City selected by the Calculation Agent. The Treasury Rate will be calculated on the third business day in New York (being a day, other than a Saturday or Sunday, on which banks and foreign exchange markets are open for business generally in New York) preceding the Step Up Date/specify other] Dual Currency Provisions [Applicable/Not Applicable] (If not applicable, delete the remaining sub paragraphs of this paragraph) (i) (ii) (iii) (iv) Rate of Exchange/ method of calculating Rate of Exchange: Calculation Agent, if any, responsible for calculating the principal and/or interest due: Provisions applicable where calculation by reference to Rate of Exchange impossible or impracticable: Person at whose option Specified Currency(ies) is/are payable: [Give details] [ ] [ ] [ ] 5. Fees and Expenses Pursuant to Clause 3.2 (Loan Arrangement Fee) of the Facility Agreement and in consideration of the Lender making the Loan to the Borrower, the Borrower hereby agrees that it shall, one (1) Business Day before the Closing Date, pay to or to the order of the Lender, in Same Day Funds, the total amount of [ ], being the Arrangement Fee in respect of the Loan, representing the costs and expenses incurred by the Lender in connection with such Loan, increased by front end fees, commissions and expenses, which shall include the amount of all of the commissions, fees, costs and expenses as set forth in clause 5 [(Fees and Expenses)] of the Subscription Agreement, the Fee Side Letter and Clauses 3.2 (Loan Arrangement Fee) and 14.1 (Reimbursement of Front end Expenses) of the Facility Agreement pursuant to an invoice submitted by, or at the request of, the Lender to the Borrower in the total amount. 6. Governing Law This Loan Supplement and all non contractual obligations arising out of or in connection with it are governed by, and shall be construed in accordance with, English law and the courts of England have exclusive jurisdiction to settle any dispute arising from or connected with this Loan Supplement. 189

198 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 TERMS AND CONDITIONS OF THE NOTES The following is the text of the Terms and Conditions of the Notes, which contain summaries of certain provisions of the Trust Deed, and which (subject to completion and amendment in accordance with the provisions of the relevant Final Terms) will be attached to the Notes in definitive form, if issued, and (subject to the provisions thereof) apply to the Global Notes representing each Series. Either (i) the full text of these terms and conditions together with the relevant provisions of the relevant Final Terms or (ii) these terms and conditions as so completed, amended, supplemented or varied (and subject to simplification by the deletion of non applicable provisions), shall be endorsed on such definitive Notes. The terms and conditions applicable to any Note in global form will differ from those terms and conditions which would apply to the Note were it in definitive form to the extent described under Summary of Provisions Relating to the Notes in Global Form below. All capitalised terms that are not defined in these Conditions will have the meanings given to them in the Trust Deed and the relevant Final Terms. Those definitions will be endorsed on the definitive Notes. References in the Conditions to Notes are to the Notes of one Series only, not to all Notes that may be issued under the Programme. The Notes are constituted by, are subject to, and have the benefit of, a supplemental trust deed dated the Issue Date specified hereon (the Supplemental Trust Deed ) supplemental to the amended and restated trust deed (as amended or supplemented as at the Issue Date, the Principal Trust Deed ) dated 16 November 2009, each made between AK BARS Luxembourg S.A. (the Issuer ) and Deutsche Trustee Company Limited (the Trustee, which expression shall include any trustee or trustees for the time being under the Trust Deed) as trustee for the holders of the Notes (the Noteholders ). The Principal Trust Deed and the Supplemental Trust Deed as modified from time to time in accordance with the provisions therein contained and any deed or other document expressed to be supplemental thereto, as from time to time so modified, are together referred to as the Trust Deed. The Issuer has authorised the creation, issue and sale of the Notes for the sole purpose of financing a loan (the Loan ) as specified hereon to AK BARS Bank (the Borrower ), on the terms of an amended and restated facility agreement (the Facility Agreement ) dated 16 November 2009, as supplemented on the Issue Date specified hereon by a loan supplement (the Loan Supplement and, together with the Facility Agreement, the Loan Agreement ) each between the Issuer and the Borrower. In respect of each Series of Notes, the Issuer and the Borrower will be deemed to enter into a separate Loan Agreement and references herein to the Loan Agreement shall be to the Loan Agreement as it relates to such Series of Notes only. In each case where amounts of principal, interest and additional amounts (if any) are stated herein or in the Trust Deed to be payable in respect of the Notes, the obligations of the Issuer to make any such payment shall constitute an obligation only to account to the Noteholders on each date upon which such amounts of principal, interest and additional amounts (if any) are due in respect of the Notes, for an amount equivalent to sums of principal, interest and additional amounts (if any) actually received by or for the account of the Issuer pursuant to the Loan Agreement, less any amounts in respect of the Reserved Rights (as defined below). Noteholders must therefore rely solely and exclusively on the Borrower s covenant to pay under the Loan Agreement and the credit and financial standing of the Borrower. Noteholders shall have no recourse (direct or indirect) to any other assets of the Issuer. None of the Noteholders, the Trustee or the other creditors (nor any other person acting on behalf of any of them) shall be entitled at any time to institute against the Issuer, or join in any institution against the Issuer of, any bankruptcy, administration, examinership, moratorium, reorganisation, controlled management, arrangement, insolvency, winding up or liquidation proceedings or similar insolvency proceedings under any applicable bankruptcy or similar law in connection with any obligation of the Issuer relating to the Notes or otherwise owed to the creditors or the Trustee for so long as the Notes are outstanding, save for lodging a claim in the liquidation of the Issuer which is initiated by another party or taking proceedings to obtain a declaration or judgment as to the obligations of the Issuer. The Issuer has charged by way of first fixed charge in favour of the Trustee for itself and on behalf of the Noteholders certain of its rights and interests as lender under the Loan Agreement (other than any rights and benefits constituting Reserved Rights) as security for its payment obligations in respect of the Notes and under the Trust Deed (the Charge ) and has assigned absolutely certain other rights under the Loan 190

199 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 Agreement to the Trustee (together with the Charge, the Security Interests ). Reserved Rights are the rights excluded from the Security Interests, being all and any rights, interests and benefits of the Issuer in respect of the obligations of the Borrower under Clause 3.4 (Ongoing Fees and Expenses), Clause 5.3 (Prepayment in the Event of Illegality) (other than the right to receive any amount payable under such Clause), Clause 6.2 (No Set Off, Counterclaim or Withholding; Gross Up) (to the extent that the Borrower shall reimburse the Issuer on demand for any amount paid by the Issuer in respect of taxes, penalties or interest), Clause 6.3 (Withholding on Notes) (to the extent that the Issuer has received amounts to which the Noteholders are not entitled), Clause 6.4 (Reimbursement), Clause 6.5 (Notification), Clause 6.6 (Mitigation), Clause 8 (Change in Law or Increase in Cost), Clause 12 (Indemnity), Clause 14.1 (Reimbursement of Front end Expenses for the Extension of the Loan by the Lender) and Clause 15.2 (Stamp Duties) of the Facility Agreement. In certain circumstances, the Trustee shall (subject to it being indemnified and/or secured to its satisfaction) be required by Noteholders holding at least 25 per cent. of the principal amount of the Notes outstanding or by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders to exercise certain of its powers under the Trust Deed (including those arising under the Security Interests). The Notes have the benefit of, and payments in respect of the Notes will be made (subject to the receipt of funds in relation to the Loan from the Borrower) pursuant to, an amended and restated paying agency agreement (the Agency Agreement ) dated 16 November 2009 and made between the Issuer, the Borrower, Deutsche Bank AG, London Branch, the Trustee, Deutsche Bank Luxembourg S.A. and Deutsche Bank Trust Company Americas. Deutsche Bank AG, London Branch will act as principal paying agent (the Principal Paying Agent and a Paying Agent ), a transfer agent (a Transfer Agent ) and calculation agent (the Calculation Agent ). Deutsche Bank Trust Company Americas will act as United States paying agent (the U.S. Paying Agent and a Paying Agent ), a transfer agent (a Transfer Agent ) and registrar in respect of the Rule 144A Notes (the U.S. Registrar ). Deutsche Bank Luxembourg S.A. will be acting as the registrar in respect of Regulation S Notes (the Luxembourg Registrar ) and a paying agent (a Paying Agent ) and a transfer agent (a Transfer Agent ). The U.S. Registrar and the Luxembourg Registrar are together the Registrars. Hard copies of the Trust Deed, the Loan Agreements, the Agency Agreement and the Final Terms are available for inspection by Noteholders during normal business hours on any weekday (Saturdays and Sundays and public holidays excepted) at the principal office of the Trustee being, at the date hereof, at Winchester House, 1 Great Winchester Street, London EC1N 2DB, United Kingdom and at the specified office of the Principal Paying Agent. Certain provisions of these terms and conditions (the Conditions ) include summaries or restatements of, and are subject to, the detailed provisions of the Trust Deed, the Final Terms, the Loan Agreement (the form of which is scheduled to and incorporated in the Trust Deed) and the Agency Agreement. Noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions thereof. 1. STATUS 1.1 The sole purpose of the issue of the Notes is to provide the funds for the Issuer to finance the Loan. The Notes constitute the obligation of the Issuer to apply the proceeds from the issue of the Notes solely for financing the Loan and to account to the Noteholders for an amount equivalent to sums of principal, interest and additional amounts (if any) actually received by or for the account of the Issuer pursuant to the Loan Agreement, less any amount in respect of Reserved Rights. The Trust Deed provides that payments in respect of the Notes equivalent to the sums actually received by or for the account of the Issuer by way of principal, interest or additional amounts (if any) pursuant to the Loan Agreement, less any amounts in respect of the Reserved Rights and subject to Condition 8 (Taxation), will be made pro rata among all Noteholders, on the date of, and in the currency of, and subject to the conditions attaching to, the equivalent payment pursuant to the Loan Agreement. The Issuer shall not be liable to make any payment in respect 191

200 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 of the Notes other than as expressly provided herein and in the Trust Deed. As provided therein, neither the Issuer nor the Trustee shall be under any obligation to exercise in favour of the Noteholders any rights of setoff or of banker s lien or to combine accounts or counterclaim that may arise out of other transactions between the Issuer and the Borrower. Noteholders have notice of, and are deemed to have accepted, these Terms and Conditions, the Final Terms and the contents of the Trust Deed, the Agency Agreement and the Loan Agreement. It is hereby expressly provided that, and Noteholders are deemed to have accepted that: (a) (b) (c) (d) (e) (f) neither the Issuer nor the Trustee makes any representation or warranty in respect of, or shall at any time have any responsibility for, or, (in the case of only the Issuer) save as otherwise expressly provided in the Trust Deed, liability or obligation in respect of the performance and observance by the Borrower of its obligations under the Loan Agreement or the recoverability of any sum of principal or interest (or any additional amounts if any) due or to become due from the Borrower under the Loan Agreement; the Trustee shall not at any time have any responsibility for, or liability or obligation in respect of, the performance and observance by the Principal Paying Agent, the Paying Agents, the Transfer Agents, the Registrars and the Calculation Agent of their respective obligations; neither the Issuer nor the Trustee shall at any time have any responsibility for, or obligation or liability in respect of, the financial condition, creditworthiness, affairs, status or nature of the Borrower; neither the Issuer nor the Trustee shall at any time be liable for any representation or warranty or any act, default or omission of the Borrower under or in respect of the Loan Agreement; the financial servicing of the terms of the Notes depends solely and exclusively upon performance by the Borrower of its obligations under the Loan Agreement and its covenant to make payments under the Loan Agreement and its credit and financial standing; the Issuer and (following the creation of the Security Interests) the Trustee shall be entitled to rely on certificates of the Borrower (and, where applicable, certification by third parties) as a means of monitoring whether the Borrower is complying with its obligations under the Loan Agreement and shall not otherwise be responsible for investigating any aspect of the Borrower s performance in relation thereto and, subject as further provided in the Trust Deed, the Trustee will not be liable for any failure to make the usual or any investigations which might be made by a security holder in relation to the property which is the subject of the Trust Deed and held by way of security for the Notes, and shall not be bound to enquire into or be liable for any defect or failure in the right or title of the Issuer to the assigned property which is subject to the Security Interests whether such defect or failure was known to the Trustee or might have been discovered upon examination or enquiry or whether capable of remedy or not, nor will it have any liability for the enforceability of the security created by the Security Interests whether as a result of any failure, omission or defect in registering or filing or otherwise protecting or perfecting such security and the Trustee has no responsibility for the value of such security. 1.2 The Trustee shall not at any time be required to expend or risk its own funds or otherwise incur any financial liability in the performance of its obligations or duties or the exercise of any right, power, authority or discretion pursuant to these Conditions and/or the Trust Deed until it has received from the Borrower the funds that are necessary to cover the costs, expenses and all 192

201 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 other liabilities in connection with such performance or exercise, or has been (in its sole discretion) sufficiently assured that it will receive such funds. Under the Trust Deed, the obligations of the Issuer in respect of the Notes constitute secured and limited recourse obligations of the Issuer and rank pari passu and rateably without any preference among themselves. In the event that the payments under the Loan Agreement are made by the Borrower to, or to the order of, the Trustee or (subject to the provisions of the Trust Deed) the Principal Paying Agent, they will pro tanto satisfy the obligations of the Issuer in respect of the Notes. Save as otherwise expressly provided herein and in the Trust Deed, no proprietary or other direct interest in the Issuer s rights under or in respect of the Loan Agreement or the Loan exists for the benefit of the Noteholders. Subject to the terms of the Trust Deed, no Noteholder will have any entitlement to enforce the Loan Agreement or direct recourse to the Borrower except through action by the Trustee pursuant to the relevant Security Interests granted to the Trustee in the Trust Deed. The Trustee shall not be required to take enforcement proceedings under the Trust Deed, following the enforcement of the Security Interests created in the Trust Deed, or the Loan Agreement unless it has been indemnified and/or secured by the Noteholders to its satisfaction. The obligations of the Issuer under the Notes shall be solely to make payments of amounts in aggregate equivalent to each sum actually received by or for the account of the Issuer from the Borrower in respect of principal, interest or, as the case may be, other amounts relating to the Loan (less any amounts in respect of the Reserved Rights), the right to receive which will, inter alia, be assigned to the Trustee as security for the Issuer s payment obligations in respect of the Notes. Accordingly, all payments to be made by the Issuer under the Notes will be made only from and to the extent of such sums received or recovered by or on behalf of the Issuer or the Trustee. Noteholders shall look solely to such sums for payments to be made by the Issuer under the Notes, the obligation of the Issuer to make payments in respect of the Notes will be limited to such sums and Noteholders will have no further recourse to the Issuer or any of the Issuer s other assets (including the Issuer s rights with respect to any Loan relating to any other Series of Notes) in respect thereof. In the event that the amount due and payable by the Issuer under the Notes exceeds the sums so received or recovered, the right of any person to claim payment of any amount exceeding such sums shall be extinguished, and Noteholders may take no further action to recover such amounts. No Noteholder shall have any recourse against any director, shareholder, or officer of the Issuer in respect of any obligations, covenants or agreement entered into or made by the Issuer in respect of the Notes, except to the extent that such person acts in bad faith or is negligent in the context of its obligation. 2. FORM, DENOMINATION AND TITLE The Notes will be issued in fully registered form, and in the Specified Denomination(s) shown hereon (which shall be not less than EUR 50,000 or its equivalent in other currencies), and which may include a minimum denomination and higher integral multiples of a smaller amount, without interest coupons, provided that (i) interests in the Rule 144A Notes shall be held in amounts of not less than U.S.$100,000 and (ii) Notes with a maturity of less than 365 days shall be held in amounts not less than 100,000 (or its equivalent in other currencies). A Note issued under the Principal Trust Deed may be a Fixed Rate Note, a Floating Rate Note, a combination of the foregoing or any other kind of Note, depending upon the Interest and Redemption/ Payment Basis specified hereon. 193

202 Level: 3 From: 3 Monday, November 16, :49 eprint Section REGISTER, TITLE AND TRANSFERS 3.1 Registers The Luxembourg Registrar will maintain a register in respect of the Regulation S Notes (the Regulation S Registrar ) and, the U.S. Registrar will maintain a register in respect of the Rule 144A Notes (the Rule 144A Register and, together with the Regulation S Register, the Registers ), all in accordance with the provisions of the Agency Agreement. In these Conditions the holder of a Note means the person in whose name such Note is for the time being registered in the relevant Register (or, in the case of a joint holding, the first named thereof) and Noteholder shall be construed accordingly. A Note will be issued to each Noteholder in respect of its registered holding. The Issuer will also maintain an up to date copy of the Registers (the Issuer s Registers ) at its registered office which, for Luxembourg law purposes, shall prevail. Under the terms of the Agency Agreement, the Registrars will provide to the Issuer such information about changes in the Registers as shall enable the Issuer to maintain the Issuer s Registers up to date. 3.2 Title The holder of each Note shall (except as otherwise required by law) be treated as the absolute owner of such Note for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any other interest therein, any writing on the Note relating thereto (other than the endorsed form of transfer) or any notice of any previous loss or theft of such Note) and no person shall be liable for so treating such holder. 3.3 Transfers Subject to Conditions 3.6 (Closed Periods) and 3.7 (Regulations Concerning Transfers and Registration), a Note may be transferred upon surrender of the relevant Note, with the endorsed form of transfer duly completed, at the specified office of the relevant Registrar or at the specified office of a Transfer Agent, together with such evidence as the relevant Registrar or such Transfer Agent may reasonably require to prove the title of the transferor and the authority of the individuals who have executed the form of transfer; provided, however, that a Note may not be transferred unless the principal amount of Notes transferred and (where not all the Notes held by a holder are being transferred) the principal amount of the balance of the Notes not transferred are Specified Denominations. Where not all the Notes represented by the surrendered Note are the subject of the transfer, a new Note in respect of the balance of the Note will be issued to the transferor. 3.4 Registration and Delivery of Notes Within five Business days of the surrender of a Note in accordance with Condition 3.3 (Transfers), the relevant Registrar will register the transfer in question and deliver a new Note of a like principal amount to the Notes transferred to each relevant holder for collection at its specified office or (at the request and risk of such relevant holder) by uninsured first class mail (airmail if overseas) to the address specified for the purpose by such relevant holder. In this paragraph, Business Day means a day on which commercial banks are open for business (including dealings in foreign currencies) in the city where the relevant Registrar has its specified office. 3.5 No Charge The transfer of a Note will be effected without charge but against such indemnity as the relevant Registrar may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such transfer. 3.6 Closed Periods Noteholders may not require transfers to be registered during the period of 15 days ending on the due date for any payment of principal or interest in respect of the Notes. 194

203 Level: 3 From: 3 Monday, November 16, :49 eprint Section Regulations Concerning Transfers and Registration All transfers of Notes and entries on the Registers are subject to the detailed regulations concerning the transfer of Notes scheduled to the Agency Agreement. The regulations may be changed by the Lender with the prior written approval of the Trustee and the Registrars. A copy of the current regulations will be mailed (free of charge) by either Registrar to any Noteholder who requests in writing a copy of such regulations. 4. RESTRICTIVE COVENANT As provided in the Trust Deed, so long as any of the Notes remains outstanding (as defined in the Trust Deed), the Issuer will not, without the prior written consent of the Trustee or an Extraordinary Resolution or Written Resolution (as defined in the Trust Deed), agree to any amendments to or any modification or waiver of, or authorise any breach or proposed breach of, the terms of the Loan Agreement and will act at all times in accordance with any instructions of the Trustee from time to time with respect to the Loan Agreement, except as otherwise expressly provided in the Trust Deed or the Loan Agreement. Any such amendment, modification, waiver or authorisation made with the consent of the Trustee shall be binding on the Noteholders and, unless the Trustee agrees otherwise, any such amendment or modification shall be notified by the Issuer to the Noteholders in accordance with Condition 14 (Notices). Save as provided above, so long as any Note remains outstanding, the Issuer, without the prior written consent of the Trustee, shall not, inter alia, incur any indebtedness for borrowed moneys (other than issuing further Notes in accordance with the Conditions, engage in any business (other than entering into the Programme, issuing Notes thereunder from time to time for the sole purpose of financing Loans to the Borrower in accordance with the Facility Agreement and each Loan Supplement, entering into related agreements and transactions and performing any act incidental or necessary in connection with any of the foregoing), declare any dividends, have any subsidiaries or employees, purchase, own, lease or otherwise acquire any real property (including office premises or like facilities), consolidate or merge with any other person or convey or transfer its properties or assets substantially as an entity to any person (otherwise than as contemplated in these Conditions and the Trust Deed), issue any shares (other than such shares as are in issue at the date of the Principal Trust Deed), give any guarantee or assume any other liability, or subject to the laws of Luxembourg, petition for any bankruptcy. 5. INTEREST 5.1 Interest on Fixed Rate Notes Each Fixed Rate Note bears interest on its outstanding principal amount from (and including) the Interest Commencement Date and thereafter from (and including) each Interest Payment Date, to (but excluding) the next Interest Payment Date at the rate(s) per annum (expressed as a percentage) equal to the Rate(s) of Interest specified hereon which shall be equal to the rate per annum at which interest under the relevant Loan accrues. Accordingly, on each Interest Payment Date or as soon thereafter as the same is received the Issuer shall account to the Noteholders for an amount equivalent to amounts of interest under the relevant Loan received by or for the account of the Issuer pursuant to the Loan Agreement. If a Fixed Coupon Amount or a Broken Amount is specified hereon, the amount of interest payable on each Interest Payment Date will be an amount equal to the Fixed Coupon Amount or, if applicable, the Broken Amount so specified and in the case of the Broken Amount will be payable on the particular Interest Payment Date(s) specified hereon or as soon as thereafter as the same is received. 5.2 Interest on Floating Rate Notes (a) Interest Payment Dates: Each Floating Rate Note bears interest on its outstanding principal amount from (and including) the Interest Commencement Date and thereafter from (and including) each Interest Payment Date, to (but excluding) the next Interest Payment Date at the rate per annum (expressed as a percentage) equal to the Rate of Interest specified hereon, which shall be equal to the rate per annum at which interest under the Loan accrues, such interest 195

204 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 being payable in arrears on each Interest Payment Date or as soon thereafter as the same is received. Such Interest Payment Date(s) is/are either shown hereon as Specified Interest Payment Dates or, if no Specified Interest Payment Date(s) is/are shown hereon, Interest Payment Date shall mean each date which falls the number of months or other period shown hereon as the Interest Period after the preceding Interest Payment Date or, in the case of the first Interest Payment Date, after the Interest Commencement Date. Accordingly, on each such date, the Issuer shall account to the Noteholders for an amount equivalent to amounts of interest under the Loan received by or for the account of the Issuer pursuant to the Loan Agreement. (b) (c) Business Day Convention: If any date referred to in these Conditions that is specified to be subject to adjustment in accordance with a Business Day Convention would otherwise fall on a day that is not a Business Day, then, if the Business Day Convention specified is (A) the Floating Rate Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event (x) such date shall be brought forward to the immediately preceding Business Day and (y) each subsequent such date shall be the last Business Day of the month in which such date would have fallen had it not been subject to adjustment, (B) the Following Business Day Convention, such date shall be postponed to the next day that is a Business Day, (C) the Modified Following Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event such date shall be brought forward to the immediately preceding Business Day or (D) the Preceding Business Day Convention, such date shall be brought forward to the immediately preceding Business Day. Rate of Interest for Floating Rate Notes: The Rate of Interest in respect of Floating Rate Notes for each Interest Accrual Period (as defined in the Loan Agreement) shall be determined in the manner specified hereon and as set out in the Loan Agreement. 5.3 Accrual of Interest Interest shall cease to accrue on each Note on the due date for redemption unless, upon due presentation, payment is improperly withheld or refused, in which event interest shall continue to accrue (as well after as before judgment) at the Rate of Interest in the manner provided in this Condition 5 (Interest) to the Relevant Date (as defined in Condition 8 (Taxation). 5.4 Calculations The amount of interest payable in respect of any Note for any period shall be calculated by applying the Rate of Interest for such Interest Period to the Calculation Amount and multiplying the product by the Day Count Fraction, as specified hereon and in the Loan Agreement, rounding the resulting figure to the nearest sub unit of the Specified Currency (half a sub unit being rounded upwards) and multiplying such rounded figure by a fraction equal to the Specified Denomination of the relevant Note divided by the Calculation Amount. For this purpose, a sub unit means, in the case of any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, in the case of euro, means one cent, provided that if an Interest Amount (or a formula for its calculation) is specified in respect of such period, the amount of interest payable in respect of such Note for such period shall equal such Interest Amount (or be calculated in accordance with such formula). Where any Interest Period comprises two or more Interest Accrual Periods, the amount of interest payable in respect of such Interest Period shall be the sum of the amounts of interest payable in respect of each of those Interest Accrual Periods. 5.5 Publication of Rates of Interest and Interest Amounts As soon as practicable after calculating or determining the Rate of Interest and the Interest Amounts for each Interest Period and the relevant Interest Payment Date as set out in the Loan Agreement, the 196

205 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 Calculation Agent shall cause such Rate of Interest and Interest Amounts to be notified to the Trustee, the Issuer, the Borrower, each of the Paying Agents, the Noteholders, any other Calculation Agent appointed in respect of the Notes that is to make a further calculation upon receipt of such information and, if the Notes are listed on a stock exchange and the rules of such exchange or other relevant authority so require, such exchange or other relevant authority as soon as possible after their determination, but in no event later than (i) the commencement of the relevant Interest Period, if determined prior to such time, in the case of notification to such exchange of a Rate of Interest and Interest Amount, or (ii) in all other cases, the fourth Business Day after such determination. Where any Interest Payment Date or Interest Period Date is subject to adjustment pursuant to Condition 5.2(b), the Interest Amounts and the Interest Payment Date so published may subsequently be amended (or appropriate alternative arrangements made with the consent of the Trustee by way of adjustment) without notice in the event of an extension or shortening of the Interest Period. If a Loan becomes due and payable under Clause 11 (Events of Default) of the Facility Agreement, the accrued interest and the Rate of Interest payable in respect of the Notes shall nevertheless continue to be calculated as previously in accordance with this Condition but no publication of the Rate of Interest or the Interest Amount so calculated need be made unless the Trustee otherwise requires. The determination of any rate or amount, the obtaining of each quotation and the making of each determination or calculation by the Calculation Agent(s) shall (in the absence of manifest error) be final and binding upon all parties. If the Calculation Amount is less than the minimum Specified Denomination the Calculation Agent shall not be obliged to publish each Interest Amount but instead may publish only the Calculation Amount and the Interest Amount in respect of a Note having the minimum Specified Denomination. 5.6 Determination or Calculation by Trustee If the Calculation Agent does not at any time for any reason determine or calculate the Rate of Interest for an Interest Period or any Interest Amount pursuant to the Loan Agreement, the Trustee may do so (without any responsibility or liability to any person in relation thereto) (or may appoint an agent on its behalf to do so) and such determination or calculation shall be deemed to have been made by the Calculation Agent. In doing so, the Trustee shall apply the foregoing provisions of this Condition, with any necessary consequential amendments, to the extent that, in its opinion, it can do so, and, in all other respects it shall do so in such manner as it shall deem fair and reasonable in all the circumstances. 5.7 Step Up Rate of Interest If a Step Up Rate of Interest is specified hereon, each Fixed Rate Note or Floating Rate Note, as applicable, will bear interest on its outstanding principal amount at the Initial Rate of Interest during the Initial Interest Term and at the Step Up Rate of Interest during the Step Up Interest Term, each as specified hereon. 5.8 Dual Currency Note Provisions (a) Application This Condition 5.8 (Dual Currency Note Provisions) is applicable to the Notes only if the Dual Currency Note Provisions are specified in the relevant Final Terms as being applicable. (b) Rate of Interest 6. REDEMPTION If the rate or amount of interest falls to be determined by reference to an exchange rate, the rate or amount of interest payable shall be determined in the manner specified in the relevant Final Terms. 6.1 Scheduled redemption Unless the Loan is previously prepaid or repaid, the Borrower will be required to repay the Loan one Business Day (as defined in the Facility Agreement) before its Repayment Date (as defined in the Facility 197

206 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 Agreement) and, subject to such repayment, as set forth in the Loan Agreement, all the Notes then remaining outstanding will be redeemed or repaid by the Issuer in the relevant Specified Currency on the Maturity Date specified hereon at their Final Redemption Amount (which, unless otherwise specified hereon, is 100 per cent. of the principal amount thereof). 6.2 Early redemption If the Loan should become repayable (and be repaid) or be prepaid pursuant to the Loan Agreement prior to its scheduled repayment date, all Notes then remaining outstanding will thereupon become due and redeemable or repayable at their principal amount, or at such other Early Redemption Amount specified hereon (together with interest accrued to the date of redemption) and shall be redeemed by the Issuer. The Issuer shall provide not less than twenty five days nor more than sixty days notice thereof to the Trustee and the Noteholders in accordance with Condition 14 (Notices) which notice shall be irrevocable and shall specify a date for redemption. To the extent that the Issuer receives amounts of principal, interest and/or additional amounts if any (other than amounts in respect of the Reserved Rights) following acceleration of the Loan pursuant to Clause 11 (Events of Default) of the Loan Agreement, the Issuer shall pay an amount equal to and in the same currency as such amounts on the Business Day following receipt of such amounts, subject as provided in Condition 7 (Payments and Agents). 6.3 Redemption at the option of the Noteholders upon a Change of Control (a) Upon the occurrence of a Change of Control (as defined in the Loan Agreement) the Issuer will make an offer to Noteholders in accordance with Condition 14 (Notices) to purchase all or any part of the Notes at a price per Note in cash (the Put Redemption Amount ) equal to the principal amount thereof plus accrued and unpaid interest thereon to the date of repurchase, plus any additional amounts, if any, to the date of repurchase. Pursuant to Clause 5.4 (Prepayment in the Event of a Change of Control) of the Loan Agreement, the Borrower is required to give notice to the Lender, the Issuer, the Principal Paying Agent and the Trustee promptly and in any event within 15 calendar days after the date of any Change of Control (the Put Event Notice ) and thereafter, having been given a Put Event Redemption Notice (as defined below) by or on behalf of the Lender pursuant to Clause 5.4 (Prepayment in the Event of a Change of Control) of the Loan Agreement, to prepay the Loan to the extent of the aggregate principal amount of the Notes plus accrued and unpaid interest thereon to the date of prepayment, plus any additional amounts thereon corresponding to the aggregate principal amount plus accrued and unpaid interest and any additional amounts, if any, on the Notes to be repurchased in accordance with this Condition 6.3 (Redemption at the option of the Noteholders upon a Change of Control). The Issuer, upon receipt of the Put Event Notice, shall give notice thereof to the Noteholders in accordance with Condition 14 (Notices) with a copy to the Lender, the Agents and the Trustee, with the following information: (A) that a Change of Control pursuant to this Condition 6.3 (Redemption at the option of the Noteholders upon a Change of Control) has occurred and all Notes properly tendered pursuant to such Change of Control and this Condition 6.3 (Redemption at the option of the Noteholders upon a Change of Control) will be accepted for payment; (B) the purchase price and the purchase date, which will be (i) a Business Day (as defined in the Loan Agreement) falling not less than 30 nor more than 60 calendar days after the date of delivery to the Lender of the Put Event Notice and (ii) two Business Days after the Change of Control Payment Date as set out (and defined) in the Put Event Notice (the Put Event Payment Date ); (C) that any Note not properly tendered or not tendered at all will remain outstanding and continue to accrue interest and additional amounts, if any; (D) that unless the Issuer defaults in the payment of the Put Redemption Amount, all Notes accepted for payment pursuant to the Change of Control will cease to accrue interest and additional amounts, if any, on the Put Event Payment Date; (E) that Noteholders electing to have any Notes repurchased pursuant to the Change of Control and this Condition

207 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 (Redemption at the option of the Noteholders upon a Change of Control) will be required to surrender the Notes, with the form entitled Put Option Notice set out in a schedule to the Agency Agreement completed, to the Paying Agent and at the address specified in the notice prior to the close of business on the eighth Business Day preceding the Put Event Payment Date; and (F) that Noteholders will be entitled to withdraw their tendered Notes and their election to require the Issuer to repurchase such Notes provided that all of the Paying Agents receive prior to the close of business on the seventh Business Day preceding the Put Event Payment Date, a facsimile transmission or letter setting out the name of the Noteholder, the principal amount of Notes tendered for repurchase, and a statement that such Noteholder is withdrawing his tendered Notes and his election to have such Notes repurchased. (b) (c) (d) (e) At least five (5) Business Days prior to the Put Event Payment Date, the Lender will provide a notice (the Put Event Redemption Notice ) to the Trustee and the Borrower setting out the Put Redemption Amount (including the computation thereof) required to be made by the Issuer for such Notes on the Put Event Payment Date. On the second Business Day prior to the Put Event Payment Date, the Borrower will, pursuant to Clause 5.4 (Prepayment in the Event of a Change of Control) of the Loan Agreement, prepay the loan (together with all accrued interest and any other amounts outstanding thereunder) in an amount equal to the aggregate Put Redemption Amount in respect of all Notes properly tendered and not properly withdrawn as set out in the Put Event Redemption Notice. On the Put Event Payment Date, the Issuer will, to the extent permitted by law and subject to such prepayment, (i) accept for payment all Notes properly tendered and not properly withdrawn pursuant to the Change of Control and this Condition 6.3 (Redemption at the option of the Noteholders upon a Change of Control) and (ii) deliver, or cause to be delivered, to the Registrar for cancellation on behalf of the Issuer the Notes so accepted together with a certificate of two directors of the Issuer stating that such Notes have been tendered to and purchased by the Issuer. In accordance with the instructions of the Noteholder set out in the Put Option Notice, the Paying Agent will promptly pay to the Noteholder the Put Redemption Amount for such Notes. The Issuer will publicly announce, and will provide notice to Noteholders in accordance with Condition 14 (Notices), the results of the redemption at the option of the Noteholders pursuant to the Change of Control and this Condition 6.3 (Redemption at the option of the Noteholders upon a Change of Control) on or as soon as practicable after the Put Event Payment Date. Redemption by the Issuer shall be subject to receipt of the relevant monies from the Borrower under the Loan Agreement. To the extent that such payment is received by the Issuer under the Loan Agreement, the Issuer shall be required to redeem each Note held be the relevant Noteholder on the Put Event Payment Date at its principal amount together with accrued interest (if any) to (but excluding) the Put Event Payment Date. 6.4 Rule 144A Notes The Issuer may compel any beneficial owner of an interest in the Rule 144A Notes to sell its interest in such Notes, or may sell such interest on behalf of such holder, if such holder is a U.S. person that is not a qualified institutional buyer (as defined in Rule 144A under the Securities Act) and a qualified purchaser (as defined in Section 2(a)(51) of the U.S. Investment Company Act of 1940). 6.5 Purchase of Notes The Issuer or any of its subsidiaries or the Borrower or any of its subsidiaries may at any time purchase Notes in the open market or otherwise and at any price. Any Notes so purchased, whilst held by or on behalf of the Issuer or the Borrower or, in either case, any of its subsidiaries shall not entitle the holder to vote at any meeting of the Noteholders and shall not be deemed to be outstanding, including, without limitation, for the purpose of calculating quorums at meetings. 199

208 Level: 3 From: 3 Monday, November 16, :49 eprint Section Cancellation The Facility Agreement provides that the Borrower may, from time to time deliver Notes held by it to the Issuer, having an aggregate principal value of at least U.S.$1,000,000, together with a request for the Issuer to present such Notes to the relevant Registrar for cancellation, whereupon the Issuer shall, pursuant to the Agency Agreement, request the relevant Registrar to cancel such Notes. Notes acquired or held by the Issuer will also be presented to the relevant Registrar for cancellation. Upon any such cancellation by or on behalf of the relevant Registrar, the principal amount of the Loan corresponding to the principal amount of such Notes surrendered for cancellation shall be extinguished as of the date of such cancellation and no further payment shall be made or required to be made by the Issuer in respect of such Notes. 7. PAYMENTS AND AGENTS 7.1 Principal Payments of principal shall be made against presentation and surrender of the relevant Notes at the specified office of the Principal Paying Agent. 7.2 Interest Interest shall be paid to the person shown on the relevant Register at the opening of business on the fifteenth day before the due date for payment thereof (the Record Date ). Payments of interest shall be made in the Specified Currency by cheque drawn on a bank in the principal financial centre for the Specified Currency or, in the case of euro, in a city in which banks have access to TARGET2 or any successor thereof (a Bank ) and mailed to the Noteholder (or to the first named of joint Noteholders) of such Note at its address appearing in the relevant Register. Upon application by the holder to the specified office of the relevant Registrar or any Transfer Agent before the Record Date, such payment of interest may be made by transfer to an account in the relevant currency maintained by the payee with a Bank, or by transfer to an account in the Specified Currency maintained by the payee with, a Bank in the principal financial centre of such Specified Currency or in the case of euro, a Bank specified by the payee or at the option of the payee, by a euro cheque and (in the case of interest payable on redemption) upon surrender of the relevant Notes at the specified office of the Principal Paying Agent or at the specified office of any Transfer Agent. 7.3 Payments subject to fiscal laws All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 8 (Taxation). No commissions or expenses shall be charged to the Noteholders in respect of such payments. 7.4 Payments on Business Days If the due date for payments of interest or principal is not a Business Day, a Noteholder shall not be entitled to payment of the amount due until the next following Business Day and shall not be entitled to any further interest or other payment in respect of any such delay. In this paragraph, Business Day means a day (other than a Saturday or a Sunday) on which banks and foreign exchange markets are open for business in the relevant place of presentation, in such jurisdictions as shall be specified as Financial Centres hereon, and (i) (in the case of a payment in a currency other than euro) where payment is to be made by transfer to an account maintained with a bank in the relevant currency, on which foreign exchange transactions may be carried on in the relevant currency in the principal financial centre of the country of such currency or (ii) (in the case of payment in euro) which is a TARGET Business Day (as defined in the Loan Agreement). 7.5 Initial Paying Agents The names of the initial Paying Agents and their initial specified offices are set out on the Notes. The Agency Agreement provides that the Issuer may at any time, with the prior written approval of the Trustee, vary or terminate the appointment of the Principal Paying Agent or any of the Paying Agents, and appoint 200

209 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 additional or other paying agents provided that (i) so long as the Notes are listed on any stock exchange or admitted to listing by any other relevant authority, there will be a paying agent and transfer agent with a specified office in such place as may be required by the rules and regulations of the relevant stock exchange or other relevant authority and (ii) there will be a Paying Agent with a specified office in a European Union member state that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other European Union Directive implementing the conclusions of the ECOFIN Council meeting of November 2000 on the taxation of savings income or any law implementing or complying with or introduced in order to conform to such Directive. Any such variation, termination or appointment shall only take effect (other than in the case of insolvency, when it shall be of immediate effect) after not more than 45 days and not less than 30 days notice thereof shall have been given to the Noteholders in accordance with Condition 14 (Notices). 7.6 Accrued Interest In addition, if the due date for redemption or repayment of a Note is not an Interest Payment Date, interest accrued from the preceding Interest Payment Date or, as the case may be, from the Issue Date as specified hereon shall be payable only as and when actually received by or for the account of the Issuer pursuant to the Loan Agreement. 7.7 Payments by the Borrower Save as otherwise directed by the Trustee at any time after any of the Security Interests created in the Trust Deed becomes enforceable, the Issuer will, pursuant to Clause 6 (Payments to Noteholders) of the Agency Agreement require the Borrower to make all payments of principal and interest and any additional amounts to be made pursuant to the Loan Agreement to the Principal Paying Agent to an account in the name of the Issuer (the Account ). Under the Charge, the Issuer will charge by way of first fixed charge all the rights, title and interest in and to all sums of money then or in the future deposited in the Account in favour of the Trustee for the benefit of itself and of the Noteholders. 8. TAXATION 8.1 All payments in respect of the Notes by or on behalf of the Issuer will be made without deduction or withholding for or on account of any present or future taxes, duties or assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Russian Federation or Luxembourg or any political subdivision or any authority thereof or therein having the power to tax, unless the deduction or withholding of such taxes, duties, assessments or governmental charges is required by law. Where any such deduction or withholding is required by law, the Issuer shall make such additional payments as shall result in the receipt by the Noteholders of such amount as would have been received by them if no such withholding or deduction had been required but only to the extent and only at such time as the Issuer receives and retains an equivalent amount from the Borrower under the Loan Agreement. To the extent that the Issuer receives and retains any such equivalent sum from the Borrower, the Issuer will account to each Noteholder for an additional amount equivalent to a pro rata proportion of such additional amount (if any) as is actually received and retained by, or for the account of, the Issuer pursuant to the Loan Agreement on the date of, in the currency of, and subject to any conditions attaching to the payment of such additional amount to the Issuer, provided that no such additional amount will be payable in respect of any Note: (a) to a Noteholder who (a) is able to avoid such deduction or withholding by satisfying any statutory requirements or by making a declaration of non residence or other claim for exemption to the relevant tax authority; (b) is liable for such taxes or duties by reason of his having some connection with the Russian Federation or Luxembourg other than the mere holding of such Note or the receipt of payment in respect thereof; 201

210 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 (b) (c) (d) presented such Note for payment of principal more than 30 days after the Relevant Date (as defined below) except to the extent that such additional payment would have been payable if such Note had been presented for payment on such 30th day; where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to (i) European Council Directive 2003/48/EC or any other European Union Directive implementing the conclusions of the ECOFIN Council meeting of November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive or (ii) the law of 23 December 2005 introducing a 10 per cent. final withholding tax as regards Luxembourg resident individuals or (iii) the agreements on savings income concluded by the State of Luxembourg with several dependent or associated territories of the EU (being Jersey, Guernsey, the Isle of Man, the British Virgin Islands, Montserrat, the Dutch Antilles and Aruba); or presented for payment by or on behalf of a Noteholder who would have been able to avoid such withholding or deduction by presenting the relevant Note to another Paying Agent in a Member State of the European Union. As used herein, Relevant Date (i) means the date on which any payment under the Loan Agreement first becomes due but (ii) if the full amount payable by the Borrower has not been received and retained by, or for the account of, the Issuer pursuant to the Loan Agreement on or prior to such date, it means the date on which such moneys shall have been so received and retained and notice to that effect shall have been duly given to the Noteholders by or on behalf of the Issuer in accordance with Condition 14 (Notices). Any reference herein or in the Trust Deed to payments in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable in accordance with the Trust Deed and this Condition 8 (Taxation) or any undertaking given in addition thereto or in substitution therefor pursuant to the Trust Deed. 9. ENFORCEMENT The Trust Deed provides that only the Trustee may pursue the remedies under the general law, the Trust Deed or the Notes to enforce the rights of the Noteholders and no Noteholder will be entitled to pursue such remedies unless the Trustee (having become bound to do so in accordance with the terms of the Trust Deed) fails or neglects to do so within a reasonable time and such failure or neglect is continuing. At any time after an Event of Default (as defined in the Facility Agreement) or if a Relevant Event (as defined in the Trust Deed) shall have occurred and be continuing, the Trustee may, at its discretion and without notice and shall, if requested in writing to do so by Noteholders holding 25 per cent. in aggregate principal amount of the Notes outstanding, or if directed to do so by an Extraordinary Resolution and, in either case, subject to it being secured and/or indemnified to its satisfaction, declare all amounts payable under the Loan Agreement by the Borrower to be immediately due and payable (in the case of an Event of Default), or enforce the security created in the Trust Deed in favour of the Trustee (in the case of a Relevant Event). Upon repayment of the Loan following an Event of Default and a declaration as provided herein, the Notes will be redeemed or repaid at their principal amount outstanding together with interest accrued to the date fixed for redemption and thereupon shall cease to be outstanding. 10. MEETINGS OF NOTEHOLDERS; MODIFICATION OF NOTES, TRUST DEED AND LOAN AGREEMENT; WAIVER; SUBSTITUTION OF THE ISSUER; APPOINTMENT/REMOVAL OF TRUSTEE 10.1 Meetings of Noteholders The Trust Deed contains provisions for convening meetings of Noteholders to consider any matter affecting their interests, including any modification of, or any arrangement in respect of, the Notes, these 202

211 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 Conditions, the Loan Agreement or the Trust Deed. Noteholders will vote pro rata according to the principal amount of their Notes. Special quorum provisions apply for meetings of Noteholders convened for the purpose of amending certain terms concerning, inter alia, the amounts payable on, and the currency of payment in respect of, the Notes and the amounts payable and currency of payment under the Loan Agreement. Any resolution duly passed at a meeting of Noteholders will be binding on all the Noteholders, whether present or not Modification and Waiver The Trustee may agree, without the consent of the Noteholders, to any modification of the Notes, these Conditions, the Trust Deed or the Loan Agreement which in the opinion of the Trustee (i) is of a formal, minor or technical nature, is made to correct a manifest error or (ii) (other than in respect of Reserved Matters) is not materially prejudicial to the interests of the Noteholders (as a class). The Trustee may also waive or authorise or agree to the waiving or authorising of any breach or proposed breach by the Issuer of the Conditions or the Trust Deed or by the Borrower of the terms of the Loan Agreement, or determine that any event which would or might otherwise give rise to a right of acceleration under the Loan Agreement shall not be treated as such, if, in the opinion of the Trustee, to do so would not be materially prejudicial to the interests of the Noteholders (as a class) (other than in respect of Reserved Matters); provided always that (subject to certain exceptions) the Trustee may not exercise such power of waiver in contravention of any express direction by an Extraordinary Resolution or Written Resolution or a request of 25 per cent. in aggregate principal amount of Notes outstanding of the Noteholders. Any such modification, waiver or authorisation shall be binding on the Noteholders and, unless the Trustee agrees otherwise, any such modification shall be notified to the Noteholders as soon as practicable thereafter in accordance with Condition 14 (Notices) Substitution The Trust Deed and the Loan Agreement contain provisions to the effect that the Issuer may, and at the request of the Borrower shall, having obtained the consent of the Borrower and the Trustee (which latter consent may be given without the consent of the Noteholders) and having complied with such certain requirements as the Trustee may direct in the interests of the Noteholders, substitute any entity in place of the Issuer as creditor under the Loan Agreement, as issuer and principal obligor in respect of the Notes and as principal obligor under the Trust Deed, subject to the relevant provisions of the Trust Deed and the substitute s rights under the Loan Agreement being charged and assigned, respectively, to the Trustee as security for the payment obligations of the substitute obligor under the Trust Deed and the Notes. Not later than 14 days after compliance with the aforementioned requirements, notice thereof shall be given by the Issuer to the Noteholders in accordance with Condition 14 (Notices). For so long as the Notes are admitted to trading on the Irish Stock Exchange and the Irish Stock Exchange so requires, a supplement will be prepared and submitted to the Irish Stock Exchange or any other document required by the Irish Stock Exchange in respect of any such substitution Exercise of Powers In connection with the exercise of any of its powers, trusts, authorities or discretions, the Trustee shall have regard to the interests of the Noteholders as a class of each Series of Notes and, in particular, shall not have regard to the consequences of such exercise for individual Noteholders resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory. No Noteholder is entitled to claim from the Issuer, the Borrower or the Trustee any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders Appointment and Removal of Trustee The Trust Deed contains provisions for the appointment or removal of a Trustee by a meeting of Noteholders passing an Extraordinary Resolution, provided that, in the case of removal of a Trustee, at all times there remains a trustee in office after such removal. Any appointment or removal of a Trustee shall be 203

212 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 notified to the Noteholders by the Issuer in accordance with Condition 14 (Notices). The Trustee may also resign such appointment giving not less than three months notice to the Noteholders provided that such resignation shall not become effective unless there remains a trustee in office after such resignation. 11. PRESCRIPTION Notes will become void unless presented for payment within 10 years (in the case of principal) or five years (in the case of interest) from the due date for payment in respect thereof. 12. INDEMNIFICATION OF TRUSTEE The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility in certain circumstances, including provisions relieving it from taking proceedings to enforce payment unless indemnified and/or secured to its satisfaction and to be paid its costs and expenses in priority to the claims of Noteholders. The Trustee is entitled to enter into contracts or transactions with the Issuer and/or the Borrower and any entity related to the Issuer and/or the Borrower without accounting for any profit, fees, corresponding interest, discounts or share of brokerage earned, arising or resulting from any such contract or transactions. The Trustee s responsibilities are solely those of trustee for the Noteholders on the terms of the Trust Deed. Accordingly, the Trustee makes no representations and assumes no responsibility for the validity or enforceability of the Loan Agreement or the security created in respect thereof or for the performance by the Issuer of its obligations under or in respect of the Notes and the Trust Deed or by the Borrower in respect of the Loan Agreement. The Trustee has no liability to Noteholders for any shortfall arising from the Trustee being subject to tax as a result of the Trustee holding or realising the Security Interests. 13. REPLACEMENT OF NOTES If any Note shall become mutilated, defaced, lost, stolen or destroyed it may, subject to all applicable laws and regulations and stock exchange requirements, be replaced at the specified office of either Registrar or at the specified office of the Principal Paying Agent in London on payment of such costs, expenses, taxes and duties as may be incurred in connection therewith and on such terms as to evidence, security and indemnity and otherwise as may reasonably be required by or on behalf of the Issuer or the Trustee. Mutilated or defaced Notes must be surrendered before replacements will be issued. 14. NOTICES All notices to the Noteholders shall be deemed to have been duly given if (i) posted to such Noteholders at their respective addresses as shown on the relevant Register and (ii) so long as the Notes are listed and/or admitted to trading on the Irish Stock Exchange and the rules of that exchange so require, published in a daily newspaper of general circulation in Ireland approved by the Trustee, currently expected to be the Irish Times. Any such notice shall be deemed to have been given on the first date on which both conditions (if applicable) shall have been met. In case by reason of any other cause it shall be impracticable to publish any notice to holders of Notes as provided above, then such notification to such holders as shall be given with the approval of the Trustee and shall constitute sufficient notice to such holders for every purpose hereunder. 15. FURTHER ISSUES The Issuer may from time to time, without the consent of the Noteholders, create and issue further Notes having the same terms and conditions as the Notes in all respects (or in all respects except for the amount and the date of the first payment of interest) so as to be consolidated and form a single series with the Notes. Such further Notes shall be constituted by a deed supplemental to the Trust Deed between the Issuer and the Trustee. The Trust Deed contains provisions for convening a single meeting of Noteholders and the 204

213 Level: 3 From: 3 Monday, November 16, :49 eprint Section 08 holders of Notes of other series in certain circumstances where the Trustee so decides. In relation to such further issue, the Issuer will enter into a loan agreement supplemental to the Loan Agreement with the Borrower on substantially the same terms as the Loan Agreement (or in all respects except for the amount and the date of the first payment of interest on the further Notes). The Issuer will provide a further fixed charge in favour of the Trustee and amend the existing Security Interests in respect of certain of its rights and interests under such loan agreement and will assign absolutely certain of its rights under such loan agreement which will secure both the Notes and such further Notes and which will amend and supplement the Security Interests in relation to the existing Notes of such Series and the Trustee is entitled to assume without enquiry that this arrangement as regards security for the Notes will not be materially prejudicial to the interests of the Noteholders. 16. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act GOVERNING LAW The Notes, the Agency Agreement and the Trust Deed and any non contractual obligations arising out of or in connection with them are governed by, and shall be construed in accordance with, English law. The Issuer has submitted in the Trust Deed to the exclusive jurisdiction of the courts of England and has waived any objections to the courts of England on the grounds that they are an inconvenient or inappropriate forum and has appointed an agent for the service of process in England. For the avoidance of doubt, the provisions of Articles 86 to 94-8 of the Luxembourg law on commercial companies, as amended, are hereby excluded. 205

214 Level: 3 From: 3 Monday, November 16, :50 eprint Section 09 FORM OF FINAL TERMS FINAL TERMS dated [ ] AK BARS BANK Issue of [Aggregate Principal Amount of Series] [Title of Loan Participation Notes] by AK BARS Luxembourg S.A. for the purpose of financing a loan to AK BARS Bank under a U.S.$1,500,000,000 Programme for the Issuance of Loan Participation Notes Part A Contractual Terms Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Base Prospectus dated 16 November 2009 [and the supplemental Base Prospectus dated 1 [ ]] which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive ). This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive and must be read in conjunction with such Base Prospectus [as so supplemented]. Full information on the Issuer, AK BARS Bank and the offer of the Notes described herein is only available on the basis of the combination of these Final Terms and the Base Prospectus. [The Base Prospectus [and the supplemental Base Prospectus] [is] [are] available for viewing at [address] [and] [website] and copies may be obtained from [address] during normal business hours.] 2 The following alternative language applies if the first tranche of an issue which is being increased was issued under a Base Prospectus with an earlier date. Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the Conditions ) set forth in the Base Prospectus dated [original date] [and the supplemental Base Prospectus dated [ ]]. This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive ) and must be read in conjunction with the Base Prospectus dated [current date] [and the supplemental Base Prospectus dated [ ]], which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive, save in respect of the Conditions which are extracted from the Base Prospectus dated [original date] [and the supplemental Base Prospectus dated [ ]] and are attached hereto. Full information on the Issuer, AK BARS Bank and the offer of the Notes described herein is only available on the basis of the combination of these Final Terms and the Base Prospectuses dated [original date] and [current date] [and the supplemental Base Prospectuses dated [ ] and [ ]]. [The Base Prospectuses [and the supplemental Prospectuses] are available for viewing at [address] [and] [website] and copies may be obtained from [address] during normal business hours.] [Include whichever of the following apply or specify as Not Applicable. Note that the numbering should remain as set out below, even if Not Applicable is indicated for individual paragraphs or subparagraphs. Italics denote directions for completing the Final Terms.] [When completing final terms or adding any other final terms or information, consideration should be given as to whether such terms or information constitute significant new factors and consequently trigger the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.] 1. Issuer: AK BARS Luxembourg S.A. 2. Borrower: AK BARS Bank 1 Only include details of a supplemental Prospectus in which the Conditions have been amended for the purposes of all future issues under the Programme. 2 Article 14.2 of the Prospectus Directive provides that a Prospectus is deemed available to the public when, inter alia, made available (i) in printed form free of charge at the offices of the market on which securities are being admitted to trading; OR (ii) at the registered office of the Issuer and at the offices of the Paying Agents; OR (iii) in an electronic form on the Issuer s website. Article 16 of the Prospectus Directive requires that the same arrangements are applied to supplemental Prospectuses. 206

215 Level: 3 From: 3 Monday, November 16, :50 eprint Section [(i)] Series Number: [ ] [(ii)] Tranche Number: [ ] (if fungible with an existing Series, details of that Series, including the date on which the Notes become fungible). 4. Specified Currency or Currencies: [ ] 5. Aggregate Nominal Amount of Notes [ ] admitted to trading: (i) [Series:] [ ] (ii) [Tranche:] [ ] 6. Issue Price: [ ] per cent. of the Aggregate Nominal Amount [plus accrued interest from [insert date]] 7. (i) Specified Denominations: [ ] 3 (ii) Calculation Amount: [ ] 8. (i) Issue Date: [ ] (ii) Interest Commencement Date: [Specify / Issue Date] 9. Maturity Date: [specify date or (for Floating Rate Notes) Interest Payment Date falling in or nearest to the relevant month and year] 10. Interest Basis: [[ ] per cent. Fixed Rate] [[specify reference rate] +/ [ ]per cent. Floating Rate] [Other (specify)] (further particulars specified below) 11. Redemption/Payment Basis: [Redemption at par/other (specify)] [Dual Currency] 12. Change of Interest or Redemption/ [Specify details of any provision for convertibility of Payment Basis: Notes into another interest or redemption/payment basis] 13. Put/Call Options: Investor Put (Condition 6.3 (Redemption at the option of the Noteholders upon a Change of Control)) 14. (i) [Status of the Notes:] Senior 3 Section 7: The issue of Notes with a maturity of less than one year by the Issuer, where the issue proceeds are to be accepted in the United Kingdom, will be subject to s.19 FSMA unless their denomination is 100,000 or more (or its equivalent in other currencies) and they are only issued to professionals within Article 9(2) of the Financial Services and Markets Act (Regulated Activities) Order 2001: Notes (including Notes denominated in Sterling) in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise constitutes a contravention of $.19 FSMA and which have a maturity of less than one year must have a minimum redemption value of 100,000 (or its equivalent in other currencies). 207

216 Level: 3 From: 3 Monday, November 16, :50 eprint Section 09 (ii) (iii) [[Date [Board] approval by the Issuer [for issuance of Notes obtained:] [Date Board approval by the Borrower for the borrowings under the Loan obtained:] [ ] (N.B. Only relevant where Board (or similar) authorisation is required for the particular Series of Notes) 15. Method of distribution: [Syndicated/Non syndicated] [ ] 16. Financial Centres (Condition 7 [ ] (Payments and Agents)): 17. Loan: [Specify details of Loan] Provisions Relating To Interest Payable Under The Notes 18. Fixed Rate Note Provisions: [Applicable/Not Applicable] (if not applicable, delete the remaining sub paragraphs of this paragraph) (i) Rate [(s)] of Interest: [ ] per cent. per annum payable [annually/semi annually] in arrear (ii) Interest Payment Date(s): [ ] in each year [adjusted in accordance with [specify Business Day Convention and any applicable Business Centre(s) for the definition of Business Day ] not adjusted] (iii) Fixed Coupon Amount [(s)]: [ ] per Calculation Amount (iv) Broken Amount(s): [[ ] per Calculation Amount, payable on the Interest Payment Date falling [in/on] [ ]] (v) (vi) Day Count Fraction (Condition 5 (Interest)): Determination Date(s) (Condition 5 (Interest)): [30/360 /Actual/Actual (ICMA/ISDA) / other] [ ] in each year. [Insert regular interest payment dates, ignoring issue date or maturity date in the case of a long or short first or last coupon. N.B. only relevant where Day Count Fraction is Actual/Actual (ICMA/ISDA)] (vii) Other terms relating to the method of calculating interest for Fixed Rate Notes: [Not Applicable/give details] 19. Floating Rate Note Provisions: [Applicable/Not Applicable] (If not applicable, delete the remaining sub paragraphs of this paragraph) (i) Interest Period(s): [ ] (ii) Specified Interest Payment Dates: [ ] (iii) Business Day Convention: [Floating Rate Business Day Convention /Following Business Day Convention/Modified Following Business Day Convention/ Preceding Business Day Convention/other (give details)] (iv) Additional Business Centre(s): [ ] (v) Manner in which the Rate(s) of Interest is/ are to be determined: [Screen Rate Determination/ ISDA Determination/ other (give details)] 208

217 Level: 3 From: 3 Monday, November 16, :50 eprint Section 09 (vi) Interest Period Date(s): [Not Applicable/specify dates] (vii) Party responsible for calculating the [ ] Rate(s) of Interest and Interest Amount(s) (if not the Calculation Agent): [ ] (viii) Screen Rate Determination: As set out in the attached Loan Supplement (ix) ISDA Determination: As set out in the attached Loan Supplement (x) Margin(s): [+/ ] [ ] per cent. per annum (xi) Minimum Rate of Interest: [ ] per cent. per annum (xii) Maximum Rate of Interest: [ ] per cent. per annum (xiii) Day Count Fraction (Condition 5 (Interest)): [ ] (xiv) Rate Multiplier: [ ] (xv) Fall back provisions, rounding provisions, denominator and any other terms relating to the method of calculating interest on Floating Rate Notes, if different from those set out in the Conditions: [ ] 20. Step Up Rate of Interest Provisions: [Applicable/Not Applicable] (If not applicable, delete the remaining sub paragraphs of this paragraph). (i) Initial Rate of Interest: [ ] (ii) Initial Interest Term: [ ] (iii) Step Up Date: [ ] (iv) Step Up Rate of Interest: The rate which is a rate per annum (as reported in writing to the Lender and the Borrower by the Calculation Agent (and rounded, if necessary, to the third decimal place ( being rounded upwards)) which is the aggregate of (a) [ ] basis points above the Treasury Rate and (b) the Step Up Related Margin. (v) Step Up Interest Term: [ ] (vi) Step Up Related Margin: [ ] basis points (vii) Treasury Rate: [A rate equal to the yield, as published by the Board Of Governors Of The Federal Reserve System, on the Benchmark Treasury. If there is no such publication of this yield during the week preceding the relevant calculation date, the Treasury Rate will be calculated by reference to quotations from selected primary U.S. Treasury securities dealers in New York City selected by the Calculation Agent. The Treasury Rate will be calculated on the third business day in New York City (being a day, other than a Saturday or Sunday, on which banks and foreign exchange markets are open 209

218 Level: 3 From: 3 Monday, November 16, :50 eprint Section 09 for business generally in New York City) preceding the Step Up Date/ specify other] 21. Dual Currency Note Provisions: [Applicable/Not Applicable] (If not applicable, delete the remaining sub paragraphs of this paragraph) (i) (ii) (iii) (iv) Rate of Exchange/method of calculating Rate of Exchange: Calculation Agent, if any, responsible for calculating the principal and/or interest due: Provisions applicable where calculation by reference to Rate of Exchange impossible or impracticable: Person at whose option Specified Currency(ies) is/are payable: [Give details] [ ] [ ] [ ] Provisions Relating To Redemption 22. Final Redemption Amount of each Note: [[ ] per Calculation Amount/Other] 23. Early Redemption Amount(s) of each [Principal amount/other] Note payable if the Loan should become repayable under the Loan Agreement prior to the Maturity Date: General Provisions Applicable To The Notes 24. Form of the Notes: Registered Notes 25. New Global Note: No 26. Other final terms: [Not Applicable/give details](when adding any other final terms consideration should be given as to whether such terms constitute a significant new factor and consequently trigger the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.) Distribution 27. (i) If syndicated, names of Managers: [Not Applicable/give names] (Include names and addresses of entities agreeing to underwrite the issue on a firm commitment basis and names and addresses of entities agreeing to place the issue without a firm commitment or on a best efforts basis if such entities are not the same as the Arrangers.) (ii) Stabilising Manager(s) (if any): [Not Applicable/give name] 28. U.S. Selling Restrictions: [Reg. S Compliance Category; Rule 144a] 29. If non syndicated, name of Dealer: [Not Applicable/give name] 30. Additional selling restrictions: [Not Applicable/give details] 210

219 Level: 3 From: 3 Monday, November 16, :50 eprint Section 09 General 31. Additional steps that may only be taken [Not Applicable/give details] following approval by an Extraordinary Resolution in accordance with Condition 10 (Meetings of Noteholders; Modification of Notes, Trust Deed and Loan Agreement; Waiver; Substitution of the Issuer; Appointment/Removal of Trustee): 32. The aggregate principal amount of Notes [Not Applicable/U.S. $[ ]] issued has been translated into U.S. dollars at the rate of [insert rate] producing a sum of (for Notes not denominated in U.S. dollars): 33. Loan to value ratio: [ ] Add appropriate provisions to terms and conditions if included. [Purpose of Final Terms These Final Terms comprise the final terms required for issue and admission to trading on the Irish Stock Exchange of the Notes described herein pursuant to the U.S.$1,500,000,000 Programme for the Issuance of Loan Participation Notes of AK BARS Luxembourg S.A..] Responsibility The Issuer and AK BARS Bank accept responsibility for the information contained in these Final Terms. [[ ] has been extracted from [ ]. Each of the Issuer and AK BARS Bank confirms that such information has been accurately reproduced and that, so far as it is aware, and is able to ascertain from information published by [ ], no facts have been omitted which would render the reproduced inaccurate or misleading.] AK BARS LUXEMBOURG S.A. Signed on behalf of AK BARS Bank By: 11 By: 11 Director Duly authorised By: 11 By: 11 Director Duly authorised 211

220 Level: 3 From: 3 Monday, November 16, :50 eprint Section 09 FORM OF FINAL TERMS 1. Listing Part B Other Information (i) Listing: [Irish Stock Exchange/other (specify)/none] (Where documenting a fungible issue, need to indicate that original Notes are already admitted to trading.) (ii) Admission to trading: ([Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and to trading on its regulated market with effect from [ ].] [Not Applicable.] 2. Ratings Ratings: The Notes to be issued have been rated: [Standard & Poors: [ ]] [Moody s: [ ]] [[Other]: [ ]] (The above disclosure should reflect the rating allocated to Notes of the type being issued under the Programme generally or, where the issue has been specifically rated, that rating.) 3. [Notification The [include name of competent authority in EEA home Member State] [has been requested to provide/has provided] [include first alternative for an issue which is contemporaneous with the establishment or update of the Programme and the second alternative for subsequent issues] the [include names of competent authorities of host Member States] with a certificate of approval attesting that the Base Prospectus has been drawn up in accordance with the Prospectus Directive.] 4. [Interests Of Natural And Legal Persons Involved In The [Issue/Offer] If applicable a description of any interest, including conflicting ones, that is material to the issue/offer, detailing the persons involved and the nature of the interest is to be included. This may be satisfied by the inclusion of the following statement: Save as discussed in [ Subscription and Sale ], so far as the Issuer is aware, no person involved in the offer of the Notes has an interest material to the offer.] 4 [(When adding any other description, consideration should be given as to whether such matters described constitute significant new factors and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.)] 3 If there are material interests, but they are not discussed in Subscription and Sale, insert the section name where they are discussed instead. If there are no material interests, delete the whole of paragraph

221 Level: 3 From: 3 Monday, November 16, :50 eprint Section Reasons For The Offer, Estimated Net Proceeds And Total Expenses [(i) Reasons for the offer: [ ] [(ii)] Estimated net proceeds: [ ] (See [ Use of Proceeds ] wording in the Base Prospectus if reasons for offer are different from making profit and/or hedging certain risks, will need to include those reasons here.)] (If proceeds are intended for more than one use will need to split out and present in order of priority. If proceeds insufficient to fund all proposed uses state amount and sources of other funding.) [(iii)] Estimated total expenses: [ ] [Include breakdown of expenses] (If the Notes are derivative securities to which Annex XII of the Prospectus Directive Regulation applies it is only necessary to include disclosure of net proceeds and total expenses at (ii) and (iii) above where disclosure is included at (i) above.) 6. [Fixed Rate Notes only Yield Indication of yield: [ ] 7. [Floating Rate Notes only Historic Interest Rates Calculated as [include details of method of calculation in summary form] on the Issue Date. As set out above, the yield is calculated at the Issue Date on the basis of the Issue Price. It is not an indication of future yield.] Details of historic [LIBOR/EURIBOR/other] rates can be obtained from [Reuters].] 8. [Dual Currency Notes only Performance Of Rate[s] Of Exchange And Explanation Of Effect On Value Of Investment Need to include details of where past and future performance and volatility of the relevant rate[s] can be obtained and a clear and comprehensive explanation of how the value of the investment is affected by the underlying and the circumstances when the risks are most evident.] [(When completing this paragraph, consideration should be given as to whether such matters described constitute significant new factors and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.)] 9. Operational Information ISIN Code (Reg S Notes): ISIN Code (Rule 144A Notes): Common Code (Reg S Notes): Common Code (Rule 144A Notes): [ ] [ ] [ ] [ ] 213

222 Level: 3 From: 3 Monday, November 16, :50 eprint Section 09 Rule 144A CUSIP number: Any clearing system(s) other than Euroclear Bank SA/NV and Clearstream Banking société anonyme [or DTC] and the relevant identification number(s): Delivery: Name(s) and addresse(s) of additional Paying Agent(s) (if any) [ ] [Not Applicable/give name(s) and number(s) [and addresses]] Delivery [against/free of] payment [ ] [THE FINAL FORM OF THE LOAN SUPPLEMENT WILL BE ATTACHED] 214

223 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM For the purposes of this summary, references to the relevant Registrar shall be to Deutsche Bank Luxembourg S.A. in respect of Regulation S Notes and to Deutsche Bank Trust Company Americas in respect of Rule 144A Notes. The Global Notes Each Series will be represented on issue by (i) in the case of Regulation S Notes, interests in a Regulation S Global Note deposited with, and registered in the name of a nominee for, a common depositary for Euroclear and Clearstream, Luxembourg and (ii) in the case of Rule 144A Notes, interests in one or more Rule 144A Global Notes deposited with a custodian for, and registered in the name of Cede & Co. as nominee of, DTC. Beneficial interests in a Regulation S Global Note may be held only through Euroclear or Clearstream, Luxembourg at any time. See Book entry procedures for the Global Notes. By acquisition of a beneficial interest in a Regulation S Global Note, the purchaser thereof will be deemed to represent, among other things, that it is not a U.S. person and that, prior to the expiration of 40 days after completion of the distribution of the Series of which such Notes are a part as determined and certified to the Principal Paying Agent by the relevant Dealer (or in the case of a Series of Notes sold to or through more than one relevant Dealer, by the Lead Manager on behalf of the relevant Dealers (the distribution compliance period ), it will not offer, sell, pledge or otherwise transfer such interest except to a person whom the seller reasonably believes to be (a) a non U.S. person in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (b) a QIB that is also a QP that is eligible to take delivery in the form of an interest in the Rule 144A Global Note. See Transfer Restrictions. Rule 144A Global Notes may only be held through DTC at any time. See Book entry procedures for the Global Notes. By acquisition of a beneficial interest in a Rule 144A Global Note, the purchaser thereof will be deemed to represent, among other things, that if it is a U.S. person (within the meaning of Regulation S), it is a QIB that is also a QP and that, if in the future it determines to transfer such beneficial interest, it will transfer such interest in accordance with the procedures and restrictions contained in the Agency Agreement. See Transfer Restrictions. Beneficial interests in each Global Note will be subject to certain restrictions on transfer set forth therein and in the Agency Agreement, and with respect to Rule 144A Global Note, as set forth in Rule 144A, and the Rule 144A Notes will bear the legends set forth thereon regarding such restrictions set forth under Transfer Restrictions. Any beneficial interest in a Regulation S Global Note that is transferred to a person who takes delivery in the form of an interest in a Rule 144A Global Note will, upon transfer, cease to have an interest in the Regulation S Global Note and have an interest in the Rule 144A Global Note, and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in the Rule 144A Global Note for as long as it remains such an interest. Any beneficial interest in a Rule 144A Global Note that is transferred to a person who takes delivery in the form of an interest in a Regulation S Global Note will, upon transfer, cease to have an interest in the Rule 144A Global Note and have an interest in the Regulation S Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in the Regulation S Global Note for so long as it remains such an interest. No service charge will be made for any registration of transfer or exchange of Notes, but the relevant Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Except in the limited circumstances described below, owners of beneficial interests in Global Notes will not be entitled to receive physical delivery of Notes in definitive form (the Definitive Notes ). The Notes are not issuable in bearer form. Amendments to Conditions Each Global Note contains provisions that apply to the Notes that they represent, some of which modify the effect of the above Terms and Conditions of the Notes. The following is a summary of those provisions: 215

224 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Payments. Payments of principal and interest in respect of Notes evidenced by a Global Note will be made against presentation for endorsement by the Principal Paying Agent and, if no further payment falls to be made in respect of the relevant Notes, surrender of such Global Note to or to the order of the Principal Paying Agent or such other Paying Agent as shall have been notified to the relevant Noteholders for such purpose. A record of each payment so made will be endorsed in the appropriate schedule to the relevant Global Note, which endorsement will be prima facie evidence that such payment has been made in respect of the relevant Notes. Notices. So long as any Notes are evidenced by a Global Note and such Global Note is held by or on behalf of a clearing system, notices to Noteholders may be given by delivery of the relevant notice to that clearing system for communication by it to entitled account holders in substitution for delivery thereof as required by the Terms and Conditions of such Notes provided that for so long as the Notes are listed on the Irish Stock Exchange and the rules of the Irish Stock Exchange so require, notices will also be published in a leading newspaper having general circulation in Dublin (which is expected to be the Irish Times). Meetings. The holder of each Global Note will be treated as being one person for the purposes of any quorum requirements of, or the right to demand a poll at, a meeting of Noteholders and in any such meeting as having one vote in respect of Notes for which the relevant Global Note may be exchangeable. Trustee s Powers. In considering the interests of Noteholders while the relevant Global Note is held on behalf of a clearing system, the Trustee, to the extent it considers it appropriate to do so in the circumstances, may have regard to any information provided to it by such clearing system or its operator as to the identity (either individually or by category) of its accountholders with entitlements to such Global Note and may consider such interests as if such accountholders were the holders of such Global Note. Cancellation. Cancellation of any Note required by the Terms and Conditions of the Notes to be cancelled will be effected by reduction in the principal amount of the applicable Global Note. The Issuer undertakes to inform promptly the Irish Stock Exchange (as long as the Notes are admitted to trading on the Irish Stock Exchange) of any such cancellation. Exercise of put option: In order to exercise the option contained in Condition 6.3 (Redemption at the Option of the Noteholders Upon a Change of Control) the holder of the Global Note must, within the period specified in the Conditions for the deposit of evidence satisfactory to the Paying Agent of that holder s entitlement to such Note and put notice, given written notice of such exercise to any Paying Agent specifying the principal amount of Notes in respect of which such option is being exercised. Any such notice will be irrevocable and may not be withdrawn. Exchange for Definitive Notes Exchange Each Global Note will be exchangeable, free of charge to the holder, in whole but not in part, for Notes in definitive, registered form if: (i) a Global Note is held by or on behalf of (A) DTC, and DTC notifies the Issuer that it is no longer willing or able to discharge properly its responsibilities as depositary with respect to the Global Note or ceases to be a clearing agency registered under the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ) or if at any time it is no longer eligible to act as such, and the Issuer is unable to locate a qualified successor within 90 days of receiving notice or becoming aware of such ineligibility on the part of DTC or (B) Euroclear or Clearstream, Luxembourg, and Euroclear or Clearstream, Luxembourg, as the case may be, is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so, by the holder giving notice to the relevant Registrar or any Transfer Agent or (ii) the Issuer would suffer a material disadvantage in respect of the Notes as a result of a change in the laws or regulations (taxation or otherwise) of any jurisdiction referred to in Condition 8 (Taxation) which would 216

225 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 not be suffered were the Notes in definitive form and a notice to such effect signed by two directors of the Issuer is delivered to the Trustee, by the Issuer giving notice to the relevant Registrar or any Transfer Agent and the Noteholders, of its intention to exchange the relevant Global Note for Definitive Notes on or after the Exchange Date (as defined below) specified in the notice. On or after the Exchange Date, the holder of the relevant Global Note may surrender such Global Note to or to the order of the relevant Registrar or any Transfer Agent. In exchange for the relevant Global Note, as provided in the Paying Agency Agreement, the relevant Registrar will deliver, or procure the delivery of, an equal aggregate amount of duly executed and authenticated Definitive Notes in or substantially in the form set out in the relevant schedule to the Trust Deed. On exchange of the Global Note, the Issuer will procure that it is cancelled and, if the holder so requests, returned to the holder together with any relevant definitive Notes. The Issuer undertakes to inform promptly the Irish Stock Exchange (as long as the Notes are admitted to trading on the Irish Stock Exchange) of any such cancellation. The relevant Registrar will not register the transfer of, or exchange of interests in, a Global Note for definitive Notes for a period of 15 calendar days ending on the date for any payment of principal or interest or on the date of optional redemption in respect of the Notes. Exchange Date means a day falling not later than 90 days after that on which the notice requiring exchange is given and on which banks are open for business in the city in which the specified office of the relevant Registrar or the Transfer Agent is located. Delivery In such circumstances, the relevant Global Note shall be exchanged in full for Definitive Notes and the Issuer will, at the cost of the Bank (but against such indemnity as the relevant Registrar or any relevant Transfer Agent may require in respect of any tax or other duty of whatever nature which may be levied or imposed in connection with such exchange), cause sufficient Definitive Notes to be executed and delivered to the Registrar for completion, authentication and dispatch to the relevant Noteholders. A person having an interest in a Global Note must provide the relevant Registrar with (a) a written order containing instructions and such other information as the Issuer and the relevant Registrar may require to complete, execute and deliver such Notes and (b) in the case of a Rule 144A Global Note only, a fully completed, signed certification substantially to the effect that the exchanging holder is not transferring its interest at the time of such exchange or, in the case of simultaneous sale pursuant to Rule 144A, a certification that the transfer is being made in compliance with the provisions of Rule 144A to a QIB that is also a QP. Definitive Notes issued in exchange for a beneficial interest in a Rule 144A Global Note shall bear the legend applicable to transfers pursuant to Rule 144A, as set out under Transfer Restrictions. Legends The holder of a Definitive Note may transfer the Notes evidenced thereby in whole or in part in the applicable minimum denomination by surrendering it at the specified office of the relevant Registrar or any Transfer Agent, together with the completed form of transfer thereon. Upon the transfer, exchange or replacement of a Rule 144A Note in definitive form ( Rule 144A Definitive Note ) bearing the legend referred to under Transfer Restrictions, or upon specific request for removal of the legend on a Rule 144A Definitive Note, the Issuer will deliver only Rule 144A Definitive Notes that bear such legend, or will refuse to remove such legend, as the case may be, unless there is delivered to the Issuer and the relevant Registrar such satisfactory evidence, which may include an opinion of counsel, as may reasonably be required by the Issuer that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act and the Investment Company Act. Book entry procedures for the Global Notes For each Series of Notes represented by interests in both Regulation S Global Note and a Rule 144A Global Note, custodial and depository links are to be established between DTC, Euroclear and Clearstream, Luxembourg to facilitate the initial issue of the Notes and cross market transfers of the Notes associated with secondary market trading. See Book Entry Ownership Settlement and Transfer of Notes. 217

226 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Euroclear and Clearstream, Luxembourg Euroclear and Clearstream, Luxembourg each hold securities for their customers and facilitate the clearance and settlement of securities transactions through electronic book entry transfer between their respective accountholders. Indirect access to Euroclear and Clearstream, Luxembourg is available to other institutions which clear through or maintain a custodial relationship with an accountholder of either system. Euroclear and Clearstream, Luxembourg provide various services including safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream, Luxembourg also deal with domestic securities markets in several countries through established depository and custodial relationships. Euroclear and Clearstream, Luxembourg have established an electronic bridge between their two systems across which their respective customers may settle trades with each other. Their customers are worldwide financial institutions including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Investors may hold their interests in such Global Notes directly through Euroclear or Clearstream, Luxembourg if they are accountholders ( Direct Participants ) or indirectly ( Indirect Participants and together with Direct Participants, Participants ) through organisations which are accountholders therein. DTC DTC has advised the Issuer as follows: DTC is a limited purpose trust company organised under the laws of the State of New York, a banking organisation under the laws of the State of New York, a member of the U.S. Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial code and a clearing agency registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its Participants and facilitate the clearance and settlement of securities transactions between Participants through electronic computerised book entry changes in accounts of its Participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organisations. Indirect access to DTC is available to others, such as banks, securities brokers, dealers and trust companies, that clear through or maintain a custodial relationship with a DTC Direct Participant, either directly or indirectly. Investors may hold their interests in Rule 144A Global Notes directly through DTC if they are Direct Participants in the DTC system, or as Indirect Participants through organisations which are Direct Participants in such system. DTC has advised the Issuer that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more Direct Participants and only in respect of such portion of the aggregate principal amount of the relevant Rule 144A Global Notes as to which such Participant or Participants has or have given such direction. However, in the circumstances described under Exchange for Definitive Notes, DTC will surrender the relevant Rule 144A Global Notes for exchange for individual Rule 144A Definitive Notes (which will bear the legend applicable to transfers pursuant to Rule 144A). Book entry ownership Euroclear and Clearstream, Luxembourg The Regulation S Global Note representing Regulation S Notes of any Series will have an ISIN and a Common Code and will be registered in the name of a nominee for, and deposited with a common depositary on behalf of, Euroclear and Clearstream, Luxembourg. DTC The Rule 144A Global Note representing interests in Rule 144A Notes of any Series will have a CUSIP number and will be deposited with a custodian for, and registered in the name of Cede & Co. as nominee of, DTC. The Custodian and DTC will electronically record the principal amount of the Notes held within the DTC System. 218

227 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Relationship of Participants with clearing systems Each of the persons shown in the records of Euroclear, Clearstream, Luxembourg or DTC as the owner of an interest in a Global Note must look solely to Euroclear, Clearstream, Luxembourg or DTC (as the case may be) for his share of each payment made by the Issuer to the holder of such Global Note and in relation to all other rights arising under the Global Note, subject to and in accordance with the respective rules and procedures of Euroclear, Clearstream, Luxembourg or DTC (as the case may be). The Issuer expects that, upon receipt of any payment in respect of Notes evidenced by a Global Note, the common depositary by whom such Note is held, or nominee in whose name it is registered, will immediately credit the relevant participants or accountholders accounts in the relevant clearing system with payments in amounts proportionate to their respective beneficial interests in the principal amount of the relevant Global Note as shown on the records of the relevant clearing system or its nominee. The Issuer also expects that payments by Direct Participants in any clearing system to owners of beneficial interests in any Global Note held through such Direct Participants in any clearing system will be governed by standing instructions and customary practices. Save as aforesaid, such persons shall have no claim directly against the Issuer in respect of payments due on the Notes for so long as beneficial interests in a Global Note are evidenced by the relevant Global Note and the obligations of the Issuer will be discharged by payment to the registered holder, as the case may be, of such Global Note in respect of each amount so paid. None of the Issuer, the Trustee or any Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of ownership interests in any Global Note or for maintaining, supervising or reviewing any records relating to such ownership interests. Settlement and transfer of Notes Subject to the rules and procedures of each applicable clearing system, purchases of Notes held within a clearing system must be made by or through Direct Participants, which will receive a credit for such Notes on the clearing system s records. The ownership interest of each actual purchaser of each such Note (the Beneficial Owner ) will in turn be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from any clearing system of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which such Beneficial Owner entered into the transaction. Transfers of ownership interests in Notes held within the clearing system will be affected by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in such Notes, unless and until interests in any Global Note held within a clearing system are exchanged for Definitive Notes. No clearing system has knowledge of the actual Beneficial Owners of the Notes held within such clearing system and their records will reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by the clearing systems to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. The laws of some jurisdictions may require that certain persons take physical delivery in definitive form of securities. Consequently, the ability to transfer interests in a Global Note to such persons may be limited. Because DTC can only act on behalf of Direct Participants, who in turn act on behalf of Indirect Participants, the ability of a person having an interest in a Rule 144A Global Note to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect of such interest, may be affected by a lack of physical certificate in respect of such interest. 219

228 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Trading between Euroclear and/or Clearstream, Luxembourg Participants Secondary market sales of book entry interests in the Notes held through Euroclear or Clearstream, Luxembourg to purchasers of book entry interests in the Notes held through Euroclear or Clearstream, Luxembourg will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream, Luxembourg and will be settled using the procedures applicable to conventional eurobonds. Trading between DTC Participants Secondary market sales of book entry interests in the Notes between DTC participants will occur in the ordinary way in accordance with DTC rules and will be settled using the procedures applicable to United States corporate debt obligations in DTC s Same Day Funds Settlement ( SDFS ) system in same day funds, if payment is effected in U.S. dollars, or free of payment, if payment is not effected in U.S. dollars. Where payment is not effected in U.S. dollars, separate payment arrangements outside DTC are required to be made between the DTC participants. Trading between DTC seller and Euroclear/Clearstream, Luxembourg purchaser When book entry interests in Notes are to be transferred from the account of a DTC participant holding a beneficial interest in a Rule 144A Global Note to the account of a Euroclear or Clearstream, Luxembourg accountholder wishing to purchase a beneficial interest in a Regulation S Global Note (subject to the certification procedures provided in the Agency Agreement), the DTC participant will deliver instructions for delivery to the relevant Euroclear or Clearstream, Luxembourg accountholder to DTC by 12 noon, New York time, on the settlement date. Separate payment arrangements are required to be made between the DTC participant and the relevant Euroclear or Clearstream, Luxembourg participant. On the settlement date, the custodian of the Rule 144A Global Notes will instruct the Registrar to (i) decrease the amount of Notes registered in the name of Cede & Co. and (ii) increase the amount of Notes registered in the name of the nominee of the common depositary for Euroclear and Clearstream, Luxembourg. Book entry interests will be delivered free of payment to Euroclear or Clearstream, Luxembourg, as the case may be, for credit to the relevant accountholder on the first business day following the settlement date. Trading between Euroclear/Clearstream, Luxembourg seller and DTC purchaser When book entry interests in the Notes are to be transferred from the account of a Euroclear or Clearstream, Luxembourg accountholder to the account of a DTC participant wishing to purchase a beneficial interest in a Rule 144A Global Note (subject to the certification procedures provided in the Agency Agreement), the Euroclear or Clearstream, Luxembourg participant must send to Euroclear or Clearstream, Luxembourg delivery free of payment instructions by 7:45 p.m., Brussels or Luxembourg time, one business day prior to the settlement date. Euroclear or Clearstream, Luxembourg, as the case may be, will in turn transmit appropriate instructions to the common depositary for Euroclear and Clearstream, Luxembourg and the Registrar to arrange delivery to the DTC participant on the settlement date. Separate payment arrangements are required to be made between the DTC participant and the relevant Euroclear or Clearstream, Luxembourg accountholder, as the case may be. On the settlement date, the common depositary for Euroclear and Clearstream, Luxembourg will (a) transmit appropriate instructions to the custodian of the Rule 144A Global Notes who will in turn deliver such book entry interests in the Notes free of payment to the relevant account of the DTC participant and (b) instruct the relevant Registrar to (i) decrease the amount of Notes registered in the name of the nominee of the common depositary for Euroclear and Clearstream, Luxembourg and evidenced by a Regulation S Global Note; and (ii) increase the amount of Notes registered in the name of Cede & Co. and evidenced by one or more Rule 144A Global Notes. Although Euroclear, Clearstream, Luxembourg and DTC have agreed to the foregoing procedures in order to facilitate transfers of beneficial interest in Global Notes among participants and accountholders of Euroclear, Clearstream, Luxembourg and DTC, they are under no obligation to perform or continue to perform such procedure, and such procedures may be discontinued at any time. None of the Issuer, the Trustee or any Agent will have the responsibility for the performance by Euroclear, Clearstream, 220

229 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Luxembourg or DTC or their respective Direct or Indirect Participants of their respective obligations under the rules and procedures governing their operations. Pre issue trades settlement It is expected that delivery of Notes will be made against payment therefor on the closing date thereof, which could be more than three business days following the date of pricing. Under Rule 15c6 1 under the Exchange Act, trades in the United States secondary market generally are required to settle within three business days (T+3), unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade Notes in the United States on the date of pricing or the next succeeding business days until three days prior to the relevant Closing Date will be required, by virtue of the fact the Notes initially will settle beyond T+3, to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Settlement procedures in other countries will vary. Purchasers of Notes may be affected by such local settlement practices, and purchasers of Notes between the relevant date of pricing and the relevant Closing Date should consult their own advisers. 221

230 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 TAXATION The following is a general description of certain Russian and Luxembourg tax considerations relating to the Notes and the Loan. It does not purport to be a complete analysis of all tax considerations relating to each Series of the Notes, whether in those countries or elsewhere. Prospective purchasers of any Series of the Notes should consult their own tax advisers as to which countries tax laws could be relevant to acquiring, holding and disposing of any Series of the Notes and receiving payments of interest, principal and /or other amounts under any Series of the Notes and the consequences of such actions under the tax laws of those countries. This summary is based upon the law as in effect on the date of this Base Prospectus. The information and analysis contained within this section are limited to taxation issues, and prospective investors should not apply any information or analysis set out below to other areas, including (but not limited to) the legality of transactions involving any Series of the Notes. Russian Federation Taxation of the Notes General The following is a general summary of certain Russian tax considerations relevant to the purchase, ownership and disposal of the Notes, as well as the taxation of interest on the Loan. The summary is based on the laws of Russia in effect at the date of this Base Prospectus, which are subject to change (possibly with retrospective effect). The summary does not seek to address the applicability of, and procedures in relation to, taxes levied by constituent entities or municipalities of the Russian Federation. Nor does the summary seek to address the availability of double tax treaty relief in respect of the Notes, and it should be noted that there may be practical difficulties, including satisfying certain documentation requirements, involved in claiming double tax treaty relief. Prospective investors should consult their own advisers regarding the tax consequences of investing in the Notes. No representations with respect to the Russian tax consequences to any particular Noteholder are made hereby. The provisions of the Russian Tax Code applicable to Noteholders, and transactions with the Notes are quite uncertain and lack interpretive guidance. Both the substantive provisions of the Russian Tax Code applicable to financial instruments and the interpretation and application of those provisions by the Russian tax authorities and the Russian courts may be subject to more rapid and unpredictable change and inconsistency than in jurisdictions with more developed capital markets or more developed taxation systems. In particular, the interpretation and application of such provisions will in practice rest substantially with local tax inspectorates. In practice, interpretation by different tax inspectorates may be inconsistent or contradictory and may constitute the imposition of conditions, requirements or restrictions not stated by the law. Similarly, in the absence of binding precedents court rulings on taxation or related matters by different courts relating to the same or similar circumstances may also be inconsistent or contradictory. For the purposes of this summary, a Non Resident Holder means: a legal entity or organisation in each case not organised under Russian law which purchases, holds and/or disposes of the Notes otherwise than through its permanent establishment in Russia; or an individual actually present in Russia for an aggregate period of less than 183 calendar days within 12 successive months (including days of arrival into Russia and days of departure from Russia) ( Non Resident Holder-Individual ). For the purpose of determining tax residence status of an individual in Russia, the period of stay in Russia is not reduced for short-term departures (less than 6 months) for medical treatment or education, in any 12 month rolling period. While the current version of the law specifies that an individual present in Russia for an aggregate period of 183 days in any consecutive 12-month period will be considered to be a tax resident, the precise application of the 12-month rule is subject of debate and is not 222

231 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 entirely clear. The Ministry of Finance of the Russian Federation has issued several letters implying that the final tax status of an individual taxpayer shall be defined for the whole calendar year by counting the days spent in Russia within the relevant calendar year. A Resident Holder means any Noteholder (including any individual and any legal entity) not qualifying as a Non Resident Holder. The residency rules may be affected by an applicable double tax treaty. Based on published comment of the Russian authorities, it is anticipated that the Russian tax residency rules applicable to legal entities may change in the future. The Russian tax treatment of interest payments made by the Bank to the Issuer under a Loan Agreement may affect the holders of the Notes. See Taxation of Interest on the Loan below. Taxation of the Notes Non Resident Holders A Non Resident Holder of a Note should not be subject to any Russian taxes on receipt from the Issuer of amounts payable in respect of principal or interest on the Notes. A Non Resident Holder generally should not be subject to any Russian taxes in respect of gains or other income realised on redemption, sale or other disposition of the Notes outside of Russia, provided that the proceeds of such sale, redemption or other disposition of Notes are not received from a source within Russia, subject to what is stated in Taxation of Interest on the Loan below. If proceeds from a sale, redemption or other disposal of Notes are received from a source within Russia (subject to applicable Russian securities legislation), a Non Resident Holder that is a legal entity or organisation should not be subject to withholding tax in Russia in respect of such proceeds, provided that no portion thereof is attributable to accrued interest. Any portion of such proceeds attributable to accrued interest may be subject to Russian withholding tax at 20 per cent. The separate taxation of the interest accrued may create a tax liability in relation to interest even in a situation of a capital loss on the disposal of the Notes. The withholding tax on any part of the payment relating to interest may potentially be reduced or eliminated under the terms of an applicable double taxation treaty depending on the tax residence of the Non Resident Holder. Proceeds on a disposition of the Notes in Russia by a Non Resident Holder Individual are likely to be treated as Russian source income that will be subject to Russian personal income tax, subject to any available tax treaty relief, at a rate of 30 per cent. on the gross proceeds received including accrued interest less any available qualifying cost deduction (including the original acquisition value). Proceeds attributable to accrued interest, if received from a source within Russia by a Non Resident Holder-Individual may be subject to withholding tax at a rate of 30 per cent., even if the disposal results in a capital loss subject to reduction or elimination under provisions of the applicable tax treaties. There is also a risk that the amount of taxable gain may be affected by changes in the exchange rate between the currency of acquisition of the Notes, the currency of disposition and roubles. In certain circumstances if the disposal proceeds are payable to the Non Resident Holder-Individual by a Russian broker, asset manager, management company, which performs asset management of a unit investment fund property, or another person that meets the definition of a tax agent under Russian tax laws, the payer may be required to withhold the tax. If tax is not withheld at source or a sale is made to other parties and withholding is not required the Non Resident Holder-Individual may be liable to file a tax return, reporting income received and pay tax on the basis of the tax return. Resident Holders A resident holder of a Note is subject to all applicable Russian taxes in respect of gains from disposal of the Notes and interest received on the Notes. 223

232 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Tax Treaty Relief Advance Treaty Relief The Russian Federation has concluded double tax treaties with a number of countries and honours some double tax treaties concluded by the former Union of Soviet Socialist Republics. These tax treaties may contain provisions that reduce or eliminate Russian tax due with respect to income received from a source within Russia by a Non Resident Holder on a disposition of the Notes. To obtain the benefit of such tax treaty provisions, the Holder must comply with the certification and information requirements in force in Russia. Currently a Non Resident Holder would need to provide the payer of income with the original or a notarised copy of a duly legalised (apostilled) and translated certificate of tax residence issued by the competent tax authority of the relevant treaty country. The tax residency confirmation needs to be renewed on an annual basis, and provided to the payer of income before the first payment of income in each calendar year. In order to enjoy the treaty benefits a Non Resident Holder Individual is required to submit to the tax authorities a confirmation that he or she is a resident of a country having a double taxation treaty with the Russian Federation. As noted above such confirmation should be apostilled and translated into Russian. The laws specified that an individual should provide a tax return on application together with documents substantiating the treaty relief, which include, in particular, documents that foreign tax on income, with respect to which treaty benefit is claimed, was paid by the individual. Because of uncertainties regarding the form and procedures for providing such documentary proof, Non Resident Holder Individuals in practice would be unlikely to be able to obtain advance treaty relief on receipt of proceeds from a source within Russia, while obtaining a refund of the taxes withheld can be extremely difficult, if not impossible. Non Resident Holders should consult their own tax advisors regarding possible tax treaty relief and procedures for obtaining such relief with respect to any Russian taxes imposed in respect of proceeds received on a disposition of Notes. Refund of Tax Withheld If Russian withholding tax on income was withheld by the payer of income from payment to a Non Resident Holder that is a legal entity or organisation for which double tax treaty relief is available, a claim for refund of such tax can be filed within three years from the end of the tax period in which the tax was withheld. For a Non Resident Holder Individual for whom double tax treaty relief is available, if Russian tax on income was withheld by the payer of income, a claim and supporting documentation for treaty relief should be filed within one year after the end of the year to which the treaty benefit relates. In order to obtain a refund, the Non Resident Holder would need to file with the Russian tax authorities a certificate of tax residence issued by the competent tax authority of the relevant double tax treaty country as well as documents confirming receipt of income and withholding of Russian tax. In addition, a Non Resident Holder who is an individual would need to provide appropriate documentary proof of tax payments made outside of Russia on income with respect to which tax refund is claimed. The Russian tax authorities may, in practice, require a wide variety of documentation confirming the right to benefits under a double tax treaty. Such documentation, in practice, may not be explicitly required by the Russian Tax Code. Obtaining a refund of Russian tax withheld may be a time consuming process and can involve very substantial practicable difficulties. Holders should consult their own tax advisers should they need to obtain treaty relief on any payments from the Notes. Taxation of Interest on the Loan In general, payments of interest on borrowed funds by a Russian legal entity are subject to Russian withholding tax at a rate of (i) 30 per cent. where the recipient of interest is a non resident individual or (ii) 20 per cent. where the recipient of interest is a non resident legal entity or organisation, subject to reduction or elimination pursuant to the terms of an applicable double tax treaty. 224

233 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Based on professional advice it has received, the Bank believes that payments of interest on the Loan should not be subject to withholding under the terms of the double taxation treaty between Russia and Luxembourg, provided the Russian tax documentation requirements are satisfied (annual advance confirmation of the Lender s tax residence). However, there can be no assurance that such double tax treaty relief will continue to be available in future. In particular, there is a risk that the Russian tax authorities may disallow application of the double taxation treaty between Russia and Luxembourg if they do not view the Issuer as a beneficial owner, and, instead, look at the tax residence of the Holders for withholding tax purposes. In the Russian President s budget message of 25 May, 2009 he expressed a goal of introducing legal mechanisms to resist the use of international double tax treaties for the purpose of minimising taxes where the ultimate beneficiaries are not residents of the country that is party to the relevant double tax treaty. It is unclear what form such legal mechanisms will take, how they may be applied or when they may be introduced. If and when introduced, such changes could have an impact on the tax treatment of the transactions structured as set forth in the Base Prospectus. In addition, if, as a result of the enforcement by the Trustee of the security granted to it by the Issuer by way of the security interests in the Trust Deed, interest under the Loan becomes payable to the Trustee, the benefit of the double tax treaty between Russia and Luxembourg may cease (if the Trustee is not then resident in Luxembourg) and payments of interest may be subject to Russian withholding tax at the rate of 20 per cent. (or, potentially, at a rate of 30 per cent. in respect of Non Resident Holders Individuals). In such cases, there can be no assurance that Non Resident Holders will be able to obtain reduction of withholding tax under double taxation treaties entered into between their countries of residence and Russia, where such treaties exist and to the extent they are applicable. Furthermore, it is not expected that the Trustee will, or will be able to, claim a withholding tax exemption under any double tax treaty under such circumstances. If the payments under a Loan Agreement are subject to any withholding of Russian tax (as a result of which the Issuer would reduce payments under the corresponding Series of Notes in the amount of such withholding taxes), the Bank is obliged, subject to certain conditions, to gross-up, or increase its payments as may be necessary so that the net payments received by the Issuer will not be less than the amount it would have received in the absence of such withholding taxes. It should be noted, however, that tax gross-up provisions in contracts may not be enforceable under Russian law. In the event that the Bank fails to pay such additional amounts where it is obliged to do so, such failure would constitute an Event of Default under such Loan Agreement. If the Bank is obliged to increase payments, it may, without premium or penalty but subject to certain conditions, prepay the Loan in full. In such case, all outstanding Notes would be redeemable at par with accrued interest and additional amounts, if any, to the date of redemption. Russian VAT is not applied to the rendering of financial services involving the provision of a loan in monetary form. Therefore, no VAT will be payable in Russia on any payment of interest or principal payments under each Loan. Luxembourg The following is a discussion of the material Luxembourg tax consequences with respect to the Notes. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular Noteholder, including tax considerations that arise from rules of general application or that are generally assumed to be known to Noteholders. It is not intended to be, nor should it be construed to be, legal or tax advice. This information is based on Luxembourg law as it stands on the date of this Prospectus and is subject to any change in law that may take effect after such date. Prospective investors in the Notes should therefore consult their own professional advisers as to the effects of state, local or foreign laws, including Luxembourg tax law, to which they may be subject. Withholding tax Since 1 July 2008, Luxembourg levies withholding tax of 20 per cent. (which will increase to 35 per cent. from 1 July 2011) on interest payments made by a Luxembourg paying agent to individual beneficial owners who are resident of (i) another EU Member State, pursuant to the Council Directive 2003/48/EC of 225

234 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 3 June 2003 (implemented in Luxembourg by the law of 21 June 2005) on taxation of savings income in the form of interest payments, or (ii) certain non EU countries and territories which have agreed to adopt similar measures to those provided for under the Council Directive 2003/48/EC (see Taxation EU Directive on the Taxation of Savings below). Since the coming into force on 1 January 2006 of the law of 23 December 2005 on the introduction of a discharging withholding tax on certain interest generated by savings, a withholding tax of 10 per cent. on interest payments made by a Luxembourg paying agent to individual beneficial owners who are tax residents in Luxembourg will be applied. Responsibility for the withholding of such tax will be assumed by the Luxembourg paying agent and not by the Issuer. Furthermore, and pursuant to the Luxembourg law of 17 July 2008 amending the law of December 23, 2005, Luxembourg individuals acting in the context of their private wealth can opt for a 10 per cent. flat taxation on certain interest accrued from 1 July 2005 and paid as of January 2008 and received from a paying agent located in a Member State other than Luxembourg, in a country that is part of the European Economic Area or in certain dependant or associated territories of Member States. Taxes on income and capital gains Noteholders will not become residents, or be deemed to be resident in Luxembourg by reason only of the holding of the Notes. Noteholders who are non residents of Luxembourg and who do not hold the Notes through a permanent establishment in Luxembourg are not liable to Luxembourg income tax on (i) payments of principal or interest, (ii) accrued but unpaid interest, (iii) payments received upon redemption, repurchase or the exchange of the Notes, or (iv) capital gains on the sale of any Notes. Noteholders resident in Luxembourg who are fully taxable, or non resident Noteholders who have a permanent establishment in Luxembourg with which the holding of the Notes is connected, must for income tax purposes include any interest received or accrued in their taxable income. They will not be liable for any Luxembourg income tax on repayment of principal to the extent the Notes have not been acquired at a discount price. Individual Luxembourg resident Noteholders are not subject to taxation on capital gains upon the disposal of the Notes, unless the disposal of the Notes precedes the acquisition of the Notes, or the Notes are disposed of within six months of the date of acquisition of such Notes. Upon a repurchase, redemption or exchange of the Notes, individual Luxembourg resident Noteholders must, however, include the portion of the repurchase, redemption or exchange price corresponding to accrued but unpaid interest in their taxable income. A Luxembourg resident Noteholder that is governed by any of the following: (i) the law of 31 July 1929 on pure holding companies; (ii) the laws of 30 March 1988 and of 20 December 2002 on investment funds; (iii) the law of 22 March 2004 on securitisation; and (iv) the law of 15 June 2004 on the investment company in risk capital, will, under certain circumstances, not be subject to any Luxembourg income tax in respect of interest received or accrued on the Notes, or on gains realised on the sale or disposal of Notes. A corporate entity, or société de capitaux, which is a Luxembourg resident Noteholder, or a foreign entity of the same type which has a Luxembourg permanent establishment, will need to include in its taxable income the difference between the sale, repurchase, redemption or exchange price (including accrued but unpaid interest) and the lower of cost or book value of the Notes sold, repurchased, redeemed or exchanged. These Noteholders should not be liable for any Luxembourg income tax on repayment of principal upon repurchase, redemption or exchange of the Notes. 226

235 Level: 3 From: 3 Monday, November 16, :51 eprint Section 10 Other taxes There is no Luxembourg registration tax, stamp duty or any other similar tax or duty payable in Luxembourg by a Noteholder as a consequence of the issuance of the Notes, nor will any of these taxes be payable as a consequence of a subsequent transfer or redemption or repurchase of the Notes, except that in case of court proceedings in a Luxembourg court (including but not limited to a Luxembourg insolvency proceeding), registration of the Notes may be ordered by the court, in which case the Notes will be respectively subject to a fixed duty of 12 euro or an ad valorem duty. Registration would in principle further be ordered, and the same registration duties could be due, when the Notes are produced, either directly or by way of reference, before an official authority ( autorité constituée ) in Luxembourg. No estate or inheritance taxes are levied on the transfer of the Notes upon the death of the Noteholder in cases where the deceased was not a resident of Luxembourg for inheritance tax purposes. Where a Noteholder is a resident for tax purposes of Luxembourg at the time of his death, the Notes are included in his taxable estate, for inheritance tax or estate tax purposes. Gift tax may be due on a gift or donation of Notes, if the gift is recorded in a deed passed in front of a Luxembourg notary or registered in Luxembourg. Luxembourg net wealth tax will not be levied on a corporate Noteholder, unless (i) such Noteholder is a resident in Luxembourg for the purpose of the relevant legal provisions; or (ii) the Notes are attributable to an enterprise or part thereof which is carried on through a permanent establishment or a permanent representative in Luxembourg. In such a case, the Noteholder must take the Notes into account for the purposes of Luxembourg wealth tax, except, under certain circumstances, if the Noteholder is governed by any of the following: (i) the law of 31 July 1929 on pure holding companies; (ii) the laws of 30 March 1988 and of 20 December 2002 on investment funds; (iii) the law of 22 March 2004 on securitisation; and (iv) the law of 15 June 2004 on the investment company in risk capital. As regards to individuals, the Luxembourg law of 23 December 2005 has abrogated the net wealth tax starting with the year There is no Luxembourg value added tax payable in respect of payments in consideration for the issuance of the Notes or in respect of the payment of interest or principal under the Notes or the transfer of the Notes, provided that Luxembourg value added tax may, however, be payable in respect of fees charged for certain services rendered to the Issuer, if for Luxembourg value added tax purposes such services are rendered, or are deemed to be rendered, in Luxembourg and an exemption from value added tax does not apply with respect to such services. EU Savings Tax Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in that other Member State; however, for a transitional period, Austria, Belgium and Luxembourg may instead apply a withholding system in relation to such payments, deducting tax at rates rising over time to 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non EU countries to the exchange of information relating to such payments. A number of non EU countries, and certain dependent or associated territories of certain Member States, have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or certain limited types of entity established in one of those territories. 227

236 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 SUBSCRIPTION AND SALE Summary of Dealer Agreement Subject to the terms and on the conditions contained in an amended and restated dealer agreement dated 16 November 2009 (the Dealer Agreement ) between the Issuer, the Bank, the Dealers and the Arrangers, the Notes will be offered from time to time by the Issuer to the Dealers or such other Dealers as may be appointed from time to time in respect of any Series of Notes pursuant to the Dealer Agreement. Any agreement for the sale of Notes will, inter alia, make provision for the form and terms and conditions of the relevant Notes, whether the placement of the Notes is underwritten or sold on an agency basis only, the price at which such Notes will be purchased by the Dealers and the commissions or other agreed deductibles (if any) which are payable or allowable by the Issuer in respect of such purchase and the form of any indemnity to the Dealers against certain liabilities in connection with the offer and sale of the relevant Notes. The Notes may be resold at prevailing market prices, or at prices related thereto, at the time of such resale, as determined by the relevant Dealer. The Dealer Agreement also provides for Notes to be issued in syndicated Series that may be jointly and severally underwritten by two or more Dealers. Each of the Issuer and the Bank has agreed to indemnify the Dealers against certain losses, as set out in the Dealer Agreement. The Dealer Agreement entitles the Dealers to terminate any agreement that they make to subscribe for the Notes in certain circumstances prior to payment for such Notes being made to the Issuer. Selling restrictions United States The Notes and the corresponding Loans have not been and will not be registered under the Securities Act or the securities laws of any state or other jurisdiction of the United States, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Each Dealer has agreed that it will not offer or sell the Notes of a Series (i) as part of its distribution at any time and (ii) otherwise until 40 days after the completion of the distribution of the Series of which such Notes are a part, as determined and certified by the relevant Dealer (or, in the case of a sale of a Series of Notes through more than one Dealer by the Lead Manager on behalf of the relevant Dealers) only in accordance with Rule 903 of Regulation S or Rule 144A (if the Notes of a Series are being offered in reliance on the exemption from registration provided by Rule 144A), and, at or prior to confirmation of a sale of Notes (other than a sale pursuant to Rule 144A), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons. In addition, until 40 days after the commencement of the offering of each Series of Notes, an offer or sale of Notes of such Series within the United States by a dealer that is participating in the offering may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A when the Notes are being offered in reliance on the exemption from registration provided by Rule 144A. Terms used in the preceding three paragraphs have the meanings given to them by Regulation S under the Securities Act. Notes offered and sold outside the United States will be sold in reliance on Regulation S. The Dealer Agreement provides that the Dealer(s) may, if Notes are being offered in reliance on the exemption from registration provided by Rule 144A, directly or through their respective U.S. registered broker dealer affiliates arrange for the offer and resale of Notes within the United States only to persons whom they reasonably believe are QIBs that are also QPs which can represent that (a) they are QIBs that are also QPs, (b) they are not broker dealers who own and invest on a discretionary basis less than U.S.$25 million in 228

237 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 securities of unaffiliated issuers, (c) they are not a participant directed employee plan, such as a 401(k) plan, (d) they are acting for their own account, or the account of one or more QIBs each of which is also a QP, (e) they were not formed for the purpose of investing in the Issuer or the Notes, (f) each account for which they are purchasing will hold and transfer at least U.S.$100,000 in principal amount of Notes at any time, (g) they understand that the Issuer may receive a list of participants holding positions in its securities from one or more book entry depositories and (h) they will provide notice of these transfer restrictions to any subsequent transferees. This Base Prospectus has been prepared by the Issuer and the Bank for use in connection with the offer and sale of the Notes outside the United States and, if Notes are being offered in reliance on Rule 144A, the resale of the Notes in the United States and for the listing of Notes on the Irish Stock Exchange. The Issuer and the Dealers reserve the right to reject any offer to purchase the Notes, in whole or in part, for any reason. The Base Prospectus does not constitute an offer to any person in the United States or to any U.S. person other than any QIB that is also a QP to whom an offer has been made directly by one of the Dealers or its U.S. registered broker dealer affiliates. Distribution of this Base Prospectus by any non U.S. person outside the United States or by any QIB that is also a QP within the United States to any U.S. person or to any other person within the United States, other than to a QIB that is a QP and to those persons, if any, retained to advise such non U.S. person or such QIB that is also QP with respect thereto, is unauthorised and any disclosure without the prior written consent of the Issuer of any of its contents to any such U.S. person or other person within the United States, other than any QIB that is also QP and those persons, if any, retained to advise such non U.S. person or QIB that is also a QP, is prohibited. European Economic Area In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State ), each Dealer has represented, warranted and agreed, and each further Dealer appointed under the Programme will be required to represent, warrant and agree, that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date ) it has not made and will not make an offer of Notes which are the subject of the offering contemplated by this Base Prospectus as completed by the Final Terms in relation thereto (or are the subject of the offering contemplated by a Drawdown Prospectus, as the case may be) to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of such Notes to the public in that Relevant Member State: (a) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; (b) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000; and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; (c) (d) at any time to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by the Issuer for any such offer; or at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes referred to in (a) to (d) above shall require the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive. For the purposes of this provision, the expression an offer of Notes to the public in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure 229

238 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State. United Kingdom Each Dealer has represented, warranted and agreed that: (i) (ii) (iii) No deposit taking: in relation to any Notes which have a maturity of less than one year, (a) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (b) it has not offered or sold and will not offer or sell any such Notes other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of such Notes would otherwise constitute a contravention of section 19 of the FSMA by the Issuer; Financial promotion: it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and General compliance: it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom. Russian Federation Each Dealer has represented, warranted and undertaken with the Issuer, the Bank, the Arrangers and each other Dealer that it has not offered or sold and will not offer or sell or otherwise transfer as part of its initial distribution or at any time thereafter any Notes to or for the benefit of any person (including legal entities) resident, incorporated, established or having their usual residence in the Russian Federation or to any person located within the territory of the Russian Federation unless and to the extent otherwise permitted under Russian law. Information provided in this Base Prospectus is not an offer, or an invitation to make offers, to sell, exchange or otherwise transfer the Notes in the Russian Federation or to or for the benefit of any Russian person or entity. Since no Russian issue prospectus has been registered or is intended to be registered with the Federal Service for Financial Markets of the Russian Federation with respect to the Notes, no person should at any time carry out any activities in breach of the restrictions set out above. Hong Kong Each Dealer has represented to and agreed that: (i) (ii) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Notes other than (a) to professional investors as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a prospectus as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to any Notes, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if 230

239 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 Singapore permitted to do so under the securities laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors as defined in the Securities and Futures Ordinance and any rules made under that Ordinance. This Base Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore under the Securities and Futures Act, Cap. 289 of Singapore (the SFA ). Accordingly, the Base Prospectus or any Prospectus and any other document or material in connection with the offer or sale of Notes may not be circulated or distributed, nor may Notes be offered or sold, whether directly or indirectly, to persons in Singapore other than under exemptions provided in the SFA for offers made (i) to an institutional investor (as defined in Section 4A of the SFA) pursuant to Section 274 of the SFA, (ii) to a relevant person (as defined in Section 275(2) of the SFA) or any person pursuant to an offer referred to in Section 275(1A) of the SFA, and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. Each Noteholder should note that any subsequent sale of the Notes acquired pursuant to an offer in this document made under exemptions (a) or (b) above within a period of six months from the date of initial acquisition is restricted to (i) institutional investors (as defined in Section 4A of the SFA), (ii) relevant persons as defined in Section 275(2) of the SFA, and (iii) persons pursuant to an offer referred to in Section 275(1A) of the SFA. Where Notes are acquired by persons who are relevant persons specified in Section 276 of the SFA: (a) (b) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, the shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest (howsoever described) in that trust shall not be transferred within 6 months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except: (i) (ii) (iii) to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person as defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275(1A) of the SFA; where no consideration is or will be given for the transfer; or by operation of law. Republic of Italy The offering of the Notes has not been registered pursuant to Italian securities legislation and, accordingly, each Dealer has represented and agreed that it has not offered or sold, and will not offer or sell, any Notes in the Republic of Italy in a solicitation to the public, and that sales of the Notes in the Republic of Italy shall be effected in accordance with all Italian securities, tax and exchange control and other applicable laws and regulations. 231

240 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 Any offer, sale or delivery of the Notes or distribution of copies of this Base Prospectus or any other document relating to the Notes in the Republic of Italy must be: (a) (b) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993, Legislative Decree No. 58 of 24 February 1998 and CONSOB Regulation No of 29 October 2007 (in each case, as amended) and any other applicable laws and regulations; and in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy. Luxembourg These Notes may not be offered or sold within the territory of the Grand Duchy of Luxembourg, unless: (a) (b) (c) a prospectus has been duly approved by the Commission de Surveillance du Secteur Financier (the CSSF ) if Luxembourg is the Home Member State (as defined in the Law of 10 July 2005 on prospectuses for securities and implementing Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (the Law ); or if Luxembourg is not the Home Member State, the CSSF has been notified by the competent authority in the Home Member State that the prospectus has been duly approved; or the offer benefits from an exemption to or constitutes a transaction not subject to the requirement to publish a prospectus. General Each Dealer has represented, warranted and agreed that it has complied and will comply with all applicable laws and regulations in each country or jurisdiction in or from which it purchases, offers, sells or delivers Notes or possesses, distributes or publishes this Base Prospectus or any Final Terms or any related offering material, in all cases at its own expense. Other persons into whose hands this Base Prospectus or any Final Terms comes are required by the Issuer, the Bank, the Arrangers and the Dealers to comply with all applicable laws and regulations in each country or jurisdiction in or from which they purchase, offer, sell or deliver Notes or possess, distribute or publish this Base Prospectus or any Final Terms or any related offering material, in all cases at their own expense. The Dealer Agreement provides that the Dealers shall not be bound by any of the restrictions relating to any specific jurisdiction (set out above) to the extent that such restrictions shall, as a result of change(s) or change(s) in official interpretation, after the date hereof, of applicable laws and regulations, no longer be applicable but without prejudice to the obligations of the Dealers described in the paragraph headed General above. Selling restrictions may be supplemented or modified with the agreement of the Issuer. Any such supplement or modification may be set out in the relevant Final Terms (in the case of a supplement or modification relevant only to a particular Series of Notes) or in a supplement to this Base Prospectus. 232

241 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 TRANSFER RESTRICTIONS Because of the following restrictions, you are advised to consult legal counsel prior to making any offer, resale or other transfer offered hereby. Rule 144A Notes Each purchaser of a beneficial interest in a Rule 144A Global Note, if the Notes are being offered in reliance on Rule 144A by accepting delivery of this Base Prospectus and the interest in such Rule 144A Global Note, will be deemed to have represented, agreed and acknowledged that: 1. If it is a U.S. person within the meaning of Regulation S, it is (a) a QIB that is also a QP, (b) not a broker dealer which owns and invests on a discretionary basis less than U.S.$25 million in securities of unaffiliated issuers, (c) not a participant directed employee plan, such as a 401(k) plan, (d) acquiring such Notes for its own account, or for the account of one or more QIBs each of which is also a QP, (e) not formed for the purpose of investing in the Notes or the Issuer, and (f) aware, and each beneficial owner of such Notes has been advised, that the seller of such Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. 2. It is (a) purchasing not less than U.S.$100,000 principal amount of such Notes and (b) will provide notice of the transfer restrictions set forth herein to any subsequent transferees. In addition, it understands that the Issuer may receive a list of participants holding positions in the Issuer s securities from one or more book entry depositories. 3. It understands that the Rule 144A Notes have not been and will not be registered under the Securities Act and may not be offered, sold, pledged or otherwise transferred except (a) in accordance with Rule 144A to a person that it and any person acting on its behalf reasonably believe is a QIB and that is also a QP purchasing for its own account or for the account of one or more QIBs that are also QPs, each of which is purchasing not less than U.S.$100,000 principal amount of the Notes or (b) to a non U.S. person within the meaning of Regulation S in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act, in each case in accordance with any applicable securities laws of any state or other jurisdiction of the United States. 4. It understands that the Issuer has the power to compel any beneficial owner of Rule 144A Notes that is a U.S. person and is not a QIB and a QP to sell its interest in the Rule 144A Notes to the Issuer or an affiliate of the Issuer or transfer its interest in Rule 144A Notes to a person designated by or acceptable to the Issuer at the price described in the legend below. The Issuer has the right to refuse to honour the transfer of an interest in the Rule 144A Notes to a U.S. person who is not a QIB and a QP. 5. It understands that the Rule 144A Global Note and any Rule 144A Definitive Notes issued in respect thereof, unless otherwise agreed between the Issuer and the Trustee in accordance with applicable law, will bear a legend to the following effect: THIS NOTE AND THE LOAN IN RESPECT THEREOF HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES, AND THIS NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN AN OFFSHORE TRANSACTION TO A PERSON WHO IS NOT A U.S. PERSON WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT ( REGULATION S ) IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S OR (2) IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT ( RULE 144A ) TO A PERSON WHOM THE HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A (A QIB ) AND THAT IS A QUALIFIED PURCHASER ( QP ) WITHIN THE MEANING OF SECTION 2(A)(51) OF THE U.S. INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT 233

242 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 COMPANY ACT ), PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ONE OR MORE QIBS EACH OF WHICH IS A QP WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, AND IN AN AMOUNT FOR EACH ACCOUNT OF NOT LESS THAN U.S.$100,000 PRINCIPAL AMOUNT OF NOTES, AND, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE NOTES IN RESPECT HEREOF OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. TRANSFER IN VIOLATION OF THE FOREGOING WILL BE OF NO FORCE OR EFFECT, WILL BE VOID AB INITIO, AND WILL NOT OPERATE TO TRANSFER ANY RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTIONS TO THE CONTRARY TO THE ISSUER OF THIS NOTE, THE TRUSTEE OR ANY INTERMEDIARY. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF ANY EXEMPTION UNDER THE SECURITIES ACT FOR RESALES OF THIS NOTE. IF THE BENEFICIAL OWNER HEREOF IS A U.S. PERSON WITHIN THE MEANING OF REGULATION S, SUCH BENEFICIAL OWNER REPRESENTS THAT (1) IT IS A QIB THAT IS ALSO A QP; (2) IT IS NOT A BROKER DEALER WHICH OWNS AND INVESTS ON A DISCRETIONARY BASIS LESS THAN U.S.$25,000,000 IN SECURITIES OF UNAFFILIATED ISSUERS; (3) IT IS NOT A PARTICIPANT DIRECTED EMPLOYEE PLAN, SUCH AS A 401(K) PLAN; (4) IT IS HOLDING AN INTEREST IN THIS NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ONE OR MORE QIBS, EACH OF WHICH IS A QP; (5) IT WAS NOT FORMED FOR THE PURPOSE OF INVESTING IN THE ISSUER OR THIS NOTE; (6) IT, AND EACH ACCOUNT FOR WHICH IT HOLDS NOTES, WILL HOLD AND TRANSFER AT LEAST U.S.$100,000 IN PRINCIPAL AMOUNT OF NOTES; (7) IT UNDERSTANDS THAT THE ISSUER MAY RECEIVE A LIST OF PARTICIPANTS HOLDING POSITIONS IN ITS SECURITIES FROM ONE OR MORE BOOK ENTRY DEPOSITARIES AND (8) IT WILL PROVIDE NOTICE OF THE FOREGOING TRANSFER RESTRICTIONS TO ITS SUBSEQUENT TRANSFEREES. THE BENEFICIAL OWNER HEREOF HEREBY ACKNOWLEDGES THAT IF AT ANY TIME WHILE IT HOLDS AN INTEREST IN THIS NOTE IT IS A U.S. PERSON WITHIN THE MEANING OF REGULATION S THAT IS NOT A QIB AND A QP, THE ISSUER MAY (A) COMPEL IT TO SELL ITS INTEREST IN THIS NOTE TO A PERSON WHO IS (I) A U.S. PERSON WHO IS A QIB AND A QP THAT IS, IN EACH CASE, OTHERWISE QUALIFIED TO PURCHASE AN INTEREST IN THIS NOTE IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OR (II) NOT A U.S. PERSON WITHIN THE MEANING OF REGULATION S OR (B) COMPEL THE BENEFICIAL OWNER TO SELL ITS INTEREST IN THIS NOTE TO THE ISSUER OR AN AFFILIATE OF THE ISSUER OR TRANSFER ITS INTEREST IN THIS NOTE TO A PERSON DESIGNATED BY OR ACCEPTABLE TO THE ISSUER AT A PRICE EQUAL TO THE LEAST OF (X) THE PURCHASE PRICE THEREFOR PAID BY THE BENEFICIAL OWNER, (Y) 100 PER CENT. OF THE PRINCIPAL AMOUNT THEREOF OR (Z) THE FAIR MARKET VALUE THEREOF. THE ISSUER HAS THE RIGHT TO REFUSE TO HONOUR A TRANSFER OF AN INTEREST IN THIS NOTE TO A U.S. PERSON WHO IS NOT A QIB AND A QP. THE ISSUER HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE INVESTMENT COMPANY ACT. THE ISSUER MAY COMPEL EACH BENEFICIAL OWNER OF THIS NOTE THAT IS A U.S. PERSON WITHIN THE MEANING OF REGULATIONS TO CERTIFY PERIODICALLY THAT SUCH BENEFICIAL OWNER IS A QIB AND A QP. 1. It acknowledges that the Issuer, the Bank, the Registrar, the Dealers and their respective affiliates, and others, will rely upon the truth and accuracy of the above acknowledgements, representations and agreements and agrees that, if any of the acknowledgements, representations or agreements deemed to have been made by it by its purchase of Rule 144A Notes is no longer accurate, it shall promptly notify the Issuer, the Bank and the applicable Dealer(s). If it is acquiring any Notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect 234

243 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 to each such account and that it has full power to make the above acknowledgements, representations and agreements on behalf of each account. 2. It understands that Rule 144A Notes of a Series will be represented by interests in one or more Rule 144A Global Notes. Before any interest in a Rule 144A Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in a Regulation S Global Note, it will be required to provide a Transfer Agent with a written certification (in the form provided in the Agency Agreement) as to compliance with applicable securities laws. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. Regulation S Notes Each purchaser of a beneficial interest in the Regulation S Notes, by accepting delivery of this Base Prospectus and the Regulation S Notes, will be deemed to have represented, agreed and acknowledged that: 1. It is, or at the time Regulation S Notes are purchased it will be, the beneficial owner of such Regulation S Notes and (a) it is not a U.S. person and it is located outside the United States (within the meaning of Regulation S) and (b) it is not an affiliate of the Issuer, the Bank or a person acting on behalf of the Issuer, the Bank or such an affiliate. 2. It understands that the Regulation S Notes have not been and will not be registered under the Securities Act and, prior to the expiration of the applicable distribution compliance period for such Notes, it will not offer, sell, pledge or otherwise transfer such Notes except (a) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, or (b) to a QIB that is also a QP that is eligible to take delivery in the form of an interest in the Rule 144A Global Note. 3. It understands that Regulation S Notes of a Series will be evidenced by a Regulation S Global Note. Before any interest in a Regulation S Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in a Rule 144A Global Note, it will be required to provide a Transfer Agent with a written certification (in the form provided in the Agency Agreement) as to compliance with applicable securities laws. 4. It acknowledges that the Issuer, the Bank, the Registrar, the Dealer(s) and their respective affiliates, and others, will rely upon the truth and accuracy of the above acknowledgements, representations and agreements and agrees that, if any of the acknowledgements, representations or agreements deemed to have been made by it by its purchase of Regulation S Notes is no longer accurate, it shall promptly notify the Issuer, the Bank and the applicable Dealer(s). If it is acquiring any Notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the above acknowledgements, representations and agreements on behalf of each account. 235

244 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 GENERAL INFORMATION 1. The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg and DTC. The Common Code and the International Securities Identification Number (ISIN) and (where applicable) the CUSIP number and the identification number for any other relevant clearing system for each Series of Notes will be set out in the relevant Final Terms. 2. The Base Prospectus has been approved by the Financial Regulator as competent authority under the Prospectus Directive. The Financial Regulator only approves this Base Prospectus as meeting the requirements imposed under Irish and EU law pursuant to the Prospectus Directive. Application has been made to the Irish Stock Exchange for the Notes issued under the Programme during the period of 12 months from the date of this Base Prospectus to be admitted to the Official List and to trading on the Main Market. Deutsche Bank Luxembourg S.A. is acting solely in its capacity as listing agent for the Issuer in connection with the Notes and is not itself seeking admission of the Notes to the main market of the Irish Stock Exchange or to trading on the Irish Stock Exchange for the purposes of the Prospectus Directive. Notes may be issued pursuant to the Programme which will not be admitted to listing, trading and/or quotation by the Irish Stock Exchange or any other listing authority, stock exchange and/or quotation system or which will be admitted to listing, trading and/or quotation by such listing authority, stock exchange and/or quotation system as the Issuer and the relevant Dealer(s) may agree. 3. The Bank and the Issuer have obtained or will obtain all necessary consents, approvals and authorisations in Russia and Luxembourg in connection with any Loan, and the issue and performance of the corresponding Series of Notes. The update of the Programme was authorised by the Board of Directors of the Issuer on 16 November The update of the Programme was authorised by the Board of Directors of the Bank on 12 November No consents, approvals or orders of any regulatory authorities are required by the Issuer under the laws of Luxembourg for the maintenance of the relevant Loan and for the issue of the corresponding Series of Notes. 5. Save as disclosed in this Base Prospectus, there has been no significant change in the financial or trading position of the Bank or the Group which has occurred since 30 June 2009 and there has been no material adverse change in the prospects of the Bank or the Group since 31 December There has been no significant change in the financial or trading position of the Issuer and no material adverse change in the prospects of the Issuer since 31 December There are no and have not been any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Bank is aware) which may have or have had during the 12 months prior to the date of this Base Prospectus a significant effect on the financial position or profitability of the Bank. 7. There are no and have not been any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Issuer is aware) which may have or have had since incorporation, a significant effect on the financial position or profitability of the Issuer. 8. PwC have audited, and rendered unqualified audit reports on, the Financial Statements of the Bank for the years ended 31 December 2008 and Each of these reports had an emphasis of matter paragraph drawing attention to the fact that the Group had extensive transactions and relationships with the related parties. 9. For the life of this document, hard copies (and certified English translations where documents at issue are not in English) of the following documents may be inspected at the offices of the Principal Paying Agent in London during usual business hours on any weekday (Saturdays and public holidays excepted): (a) a copy of this Base Prospectus along with any supplement to this Base Prospectus; 236

245 Level: 3 From: 3 Monday, November 16, :51 eprint Section 11 (b) Articles of Incorporation of the Issuer and the Bank; (c) the audited Financial Statements of the Group as at and for the years ended 31 December 2008 and 31 December 2007; (d) (e) (f) (g) the unaudited Financial Statements of the Group as at and for the six months ended 30 June 2009; the reports of PwC in respect of the audited Financial Statements of the Bank as at and for the financial years ended 31 December 2008 and 31 December 2007; the Facility Agreement; and the Trust Deed and the Agency Agreement. 10. Deutsche Bank Luxembourg S.A. will act as Registrar in relation to the Notes. A register of the Notes will also be kept at the Issuer s registered office. 11. The total expenses related to the admission to trading of the Programme will be approximately EUR 2,

246 Level: 3 From: 3 Monday, November 16, :52 eprint Section 12 INDEX TO FINANCIAL STATEMENTS AK BARS LUXEMBOURG S.A. Financial Statements as at 31 December F-2 Annual Report of the Directors... F-4 Report of the Independent Auditor... F-5 Balance Sheet... F-7 Profit and Loss Account... F-8 Notes to the Annual Accounts... F-9 Financial Statements as at 31 December F-15 Annual Report of the Directors... F-17 Report of the Independent Auditor... F-18 Balance Sheet... F-20 Profit and Loss Account... F-21 Notes to the Annual Accounts... F-22 AK BARS BANK Interim Condensed Consolidated Financial Statements of the Bank for the six months ended 30 June F-27 Report on Review of Interim Financial Information... F-29 Interim Condensed Consolidated Balance Sheet... F-30 Interim Condensed Consolidated Statement of Comprehensive Income... F-31 Interim Condensed Consolidated Statement of Changes in Equity... F-32 Interim Condensed Consolidated Statement of Cash Flows... F-33 Notes to the Interim Condensed Consolidated Financial Statements... F-34 Consolidated Financial Statements of the Bank for the year ended 31 December F-50 Independent Auditors Report... F-52 Consolidated Balance Sheet... F-53 Consolidated Income Statement... F-54 Consolidated Statement of Changes in Equity... F-55 Consolidated Statement of Cash Flows... F-56 Notes to the Consolidated Financial Statement... F-57 Consolidated Financial Statements of the Bank for the year ended 31 December F-119 Independent Auditors Report... F-121 Consolidated Balance Sheet... F-122 Consolidated Income Statement... F-123 Consolidated Statement of Changes in Equity... F-124 Consolidated Statement of Cash Flows... F-125 Notes to the Consolidated Financial Statement... F-126 F-1

247 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-2

248 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-3

249 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-4

250 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-5

251 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-6

252 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-7

253 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-8

254 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-9

255 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-10

256 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-11

257 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-12

258 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-13

259 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-14

260 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-2 F-15

261 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-3 F-16

262 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-4 F-17

263 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-5 F-18

264 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-6 F-19

265 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-7 F-20

266 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-8 F-21

267 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-9 F-22

268 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-10 F-23

269 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-11 F-24

270 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-12 F-25

271 Level: 0 From: 0 Tuesday, November 10, :15 eprint Section 12a F-13 F-26

272 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b AK BARS BANK GROUP International Financial Reporting Standards Interim Condensed Consolidated Financial Information (Unaudited) 30 June 2009 F-27

273 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group CONTENTS Review Report Interim Condensed Consolidated Financial Information Interim Condensed Consolidated Balance Sheet... 1 Interim Condensed Consolidated Statement of Comprehensive Income... 2 Interim Condensed Consolidated Statement of Changes in Equity... 3 Interim Condensed Consolidated Statement of Cash Flows... 4 SELECTED NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION 1 Introduction Operating Environment of the Group Summary of Significant Accounting Policies New Accounting Pronouncements Critical Accounting Estimates, and Judgements in Applying Accounting Policies Loans and Advances to Customers Debt Securities in Issue Syndicated Loan and Loan Participation Notes Subordinated Debt Dividends Segment Analysis Contingencies and Commitments Related Party Transactions F-28

274 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b ZAO PricewaterhouseCoopers Audit Kosmodamianskaya nab. 52/ Moscow Russian Federation Telephone +7 (495) Facsimile +7 (495) REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION To the Shareholders and Board of Directors of Ak Bars Bank: Introduction 1 We have reviewed the accompanying interim condensed consolidated balance sheet of Ak Bars Bank and its subsidiaries (hereinafter the Group ) as of 30 June 2009, and the related interim condensed consolidated statement of comprehensive income, changes in equity and cash flows for the six-month period then ended. Management is responsible for the preparation and presentation of this interim condensed consolidated financial information in accordance with International Accounting Standard 34 Interim Financial Reporting. Our responsibility is to express a conclusion on this interim condensed consolidated financial information based on our review. Scope of Review 2 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. Conclusion 3 Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial information is not prepared, in all material respects, in accordance with International Accounting Standard 34 Interim Financial Reporting. Emphasis of Matter 4 Without qualifying our opinion, we draw attention to Notes 1 and 13 to the accompanying interim condensed consolidated financial information. The Group has extensive transactions and relationships with related parties. 28 September 2009 Moscow, Russian Federation F-29

275 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Interim Condensed Consolidated Balance Sheet In thousands of Russian Roubles Note 30 June 2009 (unaudited) 31 December 2008 ASSETS Cash and cash equivalents Mandatory cash balances with the Central Bank of the Russian Federation Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Investment properties Investment in associate Deferred tax asset Premises, equipment and intangible assets Other financial assets Other assets TOTAL ASSETS LIABILITIES Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Other financial liabilities Other liabilities Subordinated debt TOTAL LIABILITIES EQUITY Share capital Additional paid-in capital Accumulated deficit ( ) ( ) TOTAL EQUITY TOTAL LIABILITIES AND EQUITY Approved for issue and signed on behalf of the Executive Board on 28 September R.K. Minnegaliev Chairman of the Executive Board A.K. Bayazitov Chief Accountant The notes set out on pages 5 to 20 form an integral part of these interim condensed consolidated financial information. 1 F-30

276 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Interim Condensed Consolidated Statement of Comprehensive Income In thousands of Russian Roubles Note Six months ended 30 June 2009 (unaudited) Six months ended 30 June 2008 (unaudited) Interest income Interest expense ( ) ( ) Net interest income Provision for loan impairment 6 ( ) ( ) Net interest (expense)/income after provision for loan impairment ( ) Fee and commission income Fee and commission expense ( ) (46 738) Gains less losses/(losses net of gains) from securities at fair value through profit or loss (3 719) Gains less losses from trading in foreign currencies Losses net of gains from financial derivatives (21 147) (53 623) Foreign exchange translation (losses net of gains)/gains less losses ( ) Dividend income Other operating income Administrative and other operating expenses ( ) ( ) (Loss)/profit before tax ( ) Income tax credit/(expense) ( ) (Loss)/profit for the period ( ) Other comprehensive income for the period - - Total comprehensive (expense)/income for the period ( ) The notes set out on pages 5 to 20 form an integral part of these interim condensed consolidated financial information. 2 F-31

277 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Interim Condensed Consolidated Statement of Changes in Equity In thousands of Russian Roubles Note Share Capital Additional paid-in capital Accumulated deficit Total equity Balance at 1 January ( ) Profit for the period Dividends declared ( ) ( ) Balance at 30 June 2008 (unaudited) Balance at 31 December ( ) Loss for the period - - ( ) ( ) Balance at 30 June 2009 (unaudited) ( ) The notes set out on pages 5 to 20 form an integral part of these interim condensed consolidated financial information. 3 F-32

278 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Interim Condensed Consolidated Statement of Cash Flows In thousands of Russian Roubles Six months ended 30 June 2009 (unaudited) Six months ended 30 June 2008 (unaudited) Cash flows from operating activities Interest received Interest paid ( ) ( ) Fees and commissions received Fees and commissions paid ( ) (46 738) Expenses paid from securities at fair value through profit or loss (70 120) (92 372) Income received/(expenses paid) from trading in foreign currencies ( ) Other operating income received Administrative and other operating expenses paid ( ) ( ) Income tax paid (12 237) ( ) Cash flows from operating activities before changes in operating assets and liabilities Net increase in mandatory cash balances with the Central Bank of the Russian Federation ( ) ( ) Net increase in securities at fair value through profit or loss ( ) ( ) Net decrease in repurchase receivable Net increase in due from other banks ( ) ( ) Net increase in loans and advances to customers ( ) ( ) Net decrease in other financial assets Net increase in other assets ( ) ( ) Net (decrease)/increase in due to other banks ( ) Net increase in customer accounts Net increase/(decrease) in debt securities in issue ( ) Net increase/(decrease) in other financial liabilities ( ) Net (decrease)/increase in other liabilities ( ) Net cash from/(used in) operating activities ( ) Cash flows from investing activities Acquisition of investment properties ( ) - Proceeds from disposal of investment properties Acquisition of premises and equipment ( ) ( ) Proceeds from disposal of premises and equipment Dividend income received Net cash used in investing activities ( ) ( ) Cash flows from financing activities Issue of loan participation notes Proceeds from syndicated loans Repayment of syndicated loans ( ) ( ) Net cash (used in)/from financing activities ( ) Effect of exchange rate changes on cash and cash equivalents (66 603) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period (unaudited) The notes set out on pages 5 to 20 form an integral part of these interim condensed consolidated financial information. 4 F-33

279 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Introduction This interim condensed consolidated financial information has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" ( IAS 34 ) for the six months ended 30 June 2009 for Ak Bars Bank (the Bank ) and its subsidiaries (together referred to as the Group or Ak Bars Bank Group ). The Bank was incorporated and is domiciled in the Russian Federation. The Bank is a joint stock company limited by shares and was set up in accordance with Russian regulations. The Bank is an official agent of the Government of the Tatarstan Republic. At 30 June 2009, the Tatarstan Republic through ministries, government agencies and related companies ultimately controlled 96% of the Bank s share capital (31 December 2008: 96%). A substantial part of the Bank s business is connected with the Ministry of Finance of the Tatarstan Republic. If the Tatarstan Republic was to choose another bank as its official agent, the Bank s business, financial condition or results of operations could be materially adversely affected. The Bank also has significant operations with other government related entities. Refer to Note 13. Principal activity. The Group s principal business activity is commercial and retail banking operations within the Russian Federation. The Bank has operated under a full banking licence issued by the Central Bank of the Russian Federation ( CBRF ) since The Bank participates in the state deposit insurance scheme, which was introduced by the Federal Law #177-FZ Deposits of individuals insurance in Russian Federation dated 23 December The State Deposit Insurance Agency guarantees repayment of individual deposits up to RR 700 thousand per individual in case of the withdrawal of a licence of a bank or a CBRF-imposed moratorium on payments. At 30 June 2009 the Bank had 43 branches (31 December 2008: 47 branches) and 132 representative offices (31 December 2008: 145 representative offices) within the Tatarstan Republic and other regions of the Russian Federation. The number of Bank employees at 30 June 2009 was (31 December 2008: 5 531). Registered address and place of business. The Bank s registered office is located at the following address: Dekabristov Street, bld.1, Kazan, Tatarstan Republic, Russia. Below is the description of the main operations of the principal subsidiaries: OOO Ak Bars Ipoteka (hereinafter, Ak Bars Ipoteka ) is a company wholly owned by the Bank. The Company s principal business activity is mortgage financing. The Company operates under the Russian Federation Legislation. The head office of Ak Bars Ipoteka is located at the following address: , Dekabristov St. 2, Kazan, Tatarstan Republic, Russia. The Company was established in ZAO Ak Bars Finance (hereinafter, Ak Bars Finance ) is a company wholly owned by the Bank. The Company s principal business activities are operations with securities, broker operations and trust management. The Company operates under a brokerage, dealing and trust management license since 2005 and depository operations license since The head office of Ak Bars Finance is located at the following address: , Timura Frunze St. 11, bld. 15, Moscow, Russia. The Company was established in OAO Leasing Company of Ak Bars Bank Finansovaya Economicheskaya Gruppa (hereinafter, Ak Bars Leasing ) is a company wholly owned by the Bank. The Company s principal business activity is leasing operations. The Company operates under the Russian Federation Legislation. The head office of Ak Bars Leasing is located at the following address: , Dekabristov St. 1, Kazan, Tatarstan Republic, Russia. The Company was established in OOO CB Naratbank (hereinafter, Naratbank ) is a limited liability commercial bank. Its principal business activity is corporate and retail lending operations within the Russian Federation. Naratbank operates under a banking license issued by the CBRF since The head office of Naratbank is located at the following address: , Moskovskaya St. 75, Saratov, Russia. The entity was established in Presentation currency. These interim condensed consolidated financial statements are presented in thousands of Russian Roubles ("RR thousands"), unless otherwise stated. F-34 5 F-34

280 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Operating Environment of the Group Russian Federation. The effects of the global financial crisis continued to have a severe effect on the Russian economy in 2009: - Low commodity prices have resulted in lower income from exports and thus lower domestic demand. Russia s economy contracted by 11 percent year-on-year in the second quarter of 2009 and, according to the Russian Economic Development Ministry, Russia s gross domestic product is expected to decrease by 8.5 percent in The rise in Russian and emerging market risk premia resulted in a steep increase in financing costs. - The depreciation of the Russian Rouble against hard currencies increased the burden of foreign currency corporate debt, which has risen considerably in recent years. - As part of preventive steps to ease the effects of the situation in financial markets on the economy, the Government is likely to run a large fiscal deficit in Management is unable to predict all developments which could have an impact on the banking sector and the wider economy and consequently what effect, if any, they could have on the future financial position of the Group. The amount of provision for impaired loans is based on management's appraisals of these assets at the interim balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in Russia for many types of collateral, especially real estate, has been severely affected by the recent volatility in global financial markets, resulting in a low level of liquidity for certain types of assets. As a result, the actual realizable value on future foreclosure may differ from the value ascribed in estimating allowances for impairment at the interim balance sheet date. Under International Financial Reporting Standards (IFRS), impairment losses on financial assets expected as a result of future events, no matter how likely, cannot be recognized until such events arise. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the challenges faced by banks currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. 3 Summary of Significant Accounting Policies Basis of preparation. This consolidated condensed interim financial information has been prepared in accordance with IAS 34 Interim Financial Reporting and should be read in conjunction with the annual financial statements for the year ended 31 December 2008, which have been prepared in accordance with International Financial Reporting Standards (IFRS). Except as described below, the same accounting policies and methods of computation were followed in the preparation of this consolidated condensed interim financial information as compared with the annual consolidated financial statements for the year ended 31 December Certain new standards, interpretations and amendments to the existing standards, as disclosed in the consolidated financial statements for the year ended 31 December 2008, became effective for the Group from 1 January These have not significantly affected the consolidated condensed interim financial information of the Group. Interim period measurement: Income tax expense is recognised in this interim condensed consolidated financial information based on management s best estimates of the weighted average effective annual income tax rate expected for the full financial year. Costs that incur unevenly during the financial year are anticipated or deferred in the interim report only if it would also be appropriate to anticipate or defer such costs at the end of the financial year. F-35 6 F-35

281 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Summary of Significant Accounting Policies (Continued) Adoption of IFRS 8, Operating Segments. The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis to that used for internal reporting purposes. The adoption of IFRS 8 (and applying the condensed IAS 34 disclosures based on IFRS 8) did not have any impact on reporting format segment. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, which has been identified as the Executive Board. Adoption of IAS 23, Borrowing Costs, revised in March The main change is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The following revised accounting policy for borrowing costs is applied prospectively from 1 January 2009: Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that is not carried at fair value and that necessarily takes a substantial period of time to get ready for its intended use or sale (a qualifying asset) form part of the cost of that asset, if the commencement date for capitalisation is on or after 1 January Other borrowing costs are recognised as an expense using the effective interest method. The Group capitalises borrowing costs that would have been avoided if it had not made capital expenditure on qualifying assets. The commencement date for capitalisation is when (a) the Group incurs expenditures for the qualifying asset; (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. Capitalisation ceases when all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Interest or other investment income is not deducted in arriving at the amount of borrowing costs available for capitalisation, except where the Group obtains specific borrowings for the purpose of acquiring a qualifying asset and has investment income on the temporary investment of funds obtained through such specific borrowings. Adoption of IAS 1, Presentation of Financial Statements, revised in September 2008 and effective for annual periods beginning on or after 1 January The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which includes all nonowner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities are allowed to present two statements: a separate income statement and a statement of comprehensive income. The Group has elected to present a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The revised IAS 1 had no impact on the presentation of the Group s financial statements and on the recognition or measurement of specific transactions and balances. Adoption of Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009). The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The Group has included the maximum amount of financial guarantees in the contractual maturity analysis and will present the additional disclosures in its next complete annual financial statements for the year ended 31 December Adoption of Improvements to International Financial Reporting Standards (issued in May 2008). The amendment to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, requires benefits arising from government loans at below-market interest rates to be accounted for as government grants, with the benefit calculated as the difference between the proceeds and the initial fair value of the loan, net of transaction costs. The amendment applies prospectively to government loans received in periods beginning on or after 1 January F-36 7 F-36

282 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Summary of Significant Accounting Policies (Continued) The amendment to IAS 40, Investment Property (and consequential amendments to IAS 16), requires that property that is under construction or development for future use as investment property is brought within the scope of the revised IAS 40. Such property is measured at fair value. Where the fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed or the date at which the fair value becomes reliably measurable. The Group amended its accounting policies accordingly and applies the amended policy prospectively from 1 January Changes in presentation. During the preparation of these interim condensed consolidated financial information the Group s management identified that in the six month period ended 30 June 2008 a part of gain from financial derivatives has been recorded within foreign exchange translation gains less losses. Accordingly, comparative information in the interim condensed consolidated statement of comprehensive income has been adjusted as follows: In thousands of Russian Roubles Previously reported balances Adjustment Restated balances Losses net of gains from financial derivatives ( ) (53 623) Foreign exchange translation gains less losses / (losses net of gains) ( ) Any further changes to this interim condensed consolidated financial information require approval of the Group s management who authorised this interim condensed consolidated financial information for issue. 4 New Accounting Pronouncements Since the Group published its last annual financial statements, certain new standards and interpretations have been issued that are mandatory for the Group s annual accounting periods beginning on or after 1 January 2010 or later and which the Group has not early adopted: Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for noncurrent assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity s own equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. The Group does not expect the amendments to have any material effect on its financial statements. F-37 8 F-37

283 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June New Accounting Pronouncements (Continued) Group Cash-settled Share-based Payment Transactions - Amendments to IFRS 2, Share-based Payment (effective for annual periods beginning on or after 1 January 2010). The amendments provide a clear basis to determine the classification of share-based payment awards in both consolidated and separate financial statements. The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the standard. The Group does not expect the amendments to have any material effect on its financial statements. The International Financial Reporting Standard for Small and Medium-sized Entities (issued in July 2009) is a self-contained standard, tailored to the needs and capabilities of smaller businesses. Many of the principles of full IFRS for recognising and measuring assets, liabilities, income and expense have been simplified, and the number of required disclosures have been simplified and significantly reduced. The IFRS for SMEs may be applied by entities which publish general purpose financial statements for external users and do not have public accountability. The Group is not eligible to apply the IFRS for SMEs due to the public accountability of its banking business. The Group has also not early adopted any of the new standards and interpretations disclosed in the New Accounting Pronouncements note in its last annual financial statements and effective for its annual periods beginning on or after 1 January Critical Accounting Estimates, and Judgements in Applying Accounting Policies Estimates and judgements that have the most significant effect on the amounts recognised in the interim financial information are: Impairment losses on loans and advances. The Group regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in the consolidated income statement, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations. Refer to Note 12 Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the balance sheet. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on a medium- and long-term forecast of taxable profits of the Group prepared by management. The forecast of taxable profits is based on management expectations that are believed to be reasonable under the circumstances. In accordance with this forecast the cumulative taxable profit of the Group for the next 5 years is estimated in the amount of RR 12.3 billion and for the next 10 years RR 31.6 billion. Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 Financial Instruments: Recognition and Measurement requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 13. F-38 9 F-38

284 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued) Going concern. Management prepared these interim condensed consolidated financial statements on a going concern basis. In making this judgement management considered the Group s financial position, current intentions, profitability of operations and access to financial resources, and analysed the impact of the recent financial crisis on future operations of the Group. Management is also taking a number of actions to ensure the Group will continue to be a going concern, in particular: Requirements to the methods of placing liquidity reserves became more rigorous; Methods of credit risk management were enhanced (procedures for loans issuance and monitoring became more rigorous, limits are revised on a regular basis depending on the changes on the market); There is regular stress testing of key financial indicators of the Group and the Bank to ensure they will be in compliance with external covenants and all regulatory requirements in relation to capital adequacy, liquidity and financial risk management procedures in case of negative events on the market. On 30 March 2009 the extraordinary shareholders meeting approved an additional issue of ordinary shares with a total nominal value of RR 9 billion. Management is of the opinion that the before-mentioned actions ensure the Group will continue as a going concern. 6 Loans and Advances to Customers In thousands of Russian Roubles 30 June 2009 (unaudited) 31 December 2008 Loans to legal entities Corporate loans Loans to small and medium-sized companies Loans to state and public organisations Reverse sale and repurchase agreements Loans to individuals Consumer loans Mortgage loans Car loans Plastic cards Less: Provision for loan impairment ( ) ( ) Total loans and advances to customers At 30 June 2009, the Group had 23 borrowers (31 December 2008: 20 borrowers) with aggregated loan amounts equal or above RR The total aggregate amount of these loans was RR thousand (31 December 2008: RR thousand) or 34% of the gross loan portfolio (31 December 2008: 40%). At 30 June 2009 included in loans to legal entities are loans to 4 companies under common control (2008: 7 companies under common control) with the total amount of RR thousand (31 December 2008: RR thousand) which are related parties of the Group. These loans do not have any collateral and bear annual interest rates in the range of 8% to 16% p.a (31 December 2008:10% to 13% p.a). Refer to Note 13. At 30 June 2009 loans and advances to customers of RR thousand (31 December 2008: RR thousand) were effectively collateralised by securities purchased under reverse sale and repurchase agreements at a fair value of RR thousand (31 December 2008: RR thousand). At 30 June 2009 the estimated fair value of loans and advances to customers was RR thousand (31 December 2008: RR thousand). F F-39

285 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Loans and Advances to Customers (Continued) Movements in provisions for loan impairment are as follows: In thousands of Russian Roubles Provision for loan impairment at 1 January Provision for loan impairment during the period Loans and advances to customers written off during the period as uncollectible (600) (35 199) Provision for loan impairment at 30 June (unaudited) Information on related party balances is disclosed in Note Debt Securities in Issue In thousands of Russian Roubles 30 June 2009 (unaudited) 31 December 2008 Promissory notes Bonds Total debt securities in issue Promissory notes are Russian Rouble and US Dollar denominated debt securities. At 30 June 2009 these promissory notes had maturity date from on demand to October 2013 (31 December 2008: from on demand to October 2014). Effective interest rate for promissory notes on demand was 0% p.a. (31 December 2008: 0% p.a.). Effective interest rate for term promissory notes was 0% % p.a. (31 December 2008: 0% - 8% p.a.). Bonds are Russian Rouble denominated debt securities freely traded at Russian stock exchange. At 30 June 2009 the Group had two tranches of bonds: bonds with nominal amount of RR thousand issued by the Bank in October 2008 with maturity in October 2011; and bonds with nominal amount of RR thousand issued by the Bank in October 2008 with maturity in October At 30 June 2009 the effective interest rate on these bonds was 9.9% and 9.7% p.a. respectively. At 30 June 2009 debt securities in issue were accounted for at amortised cost of RR thousand (31 December 2008: RR thousand). At 30 June 2009 the estimated fair value of debt securities in issue was RR thousand (31 December 2008: RR thousand). At 30 June 2009 bonds issued by the Group in October-November 2008 with the total nominal amount of RR thousand were held by related parties (31 December 2008: RR thousand). Information on debt securities in issue held by related parties is disclosed in Note 13. F F-40

286 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Syndicated Loan and Loan Participation Notes In thousands of Russian Roubles 30 June 2009 (unaudited) 31 December 2008 Loan Participation Notes Syndicated loan Total syndicated loans and loan participation notes On 8 April 2009, the Group repaid the syndicated loan with nominal amount of USD thousand received by the Group in April 2008 from a consortium of foreign banks. At 30 June 2009 the Group had medium term notes with a nominal amount of USD thousand (31 December 2008: USD thousand) or RR thousand (31 December 2008: RR thousand) issued in June 2008 with maturity date in June 2011 with an effective interest rate of 9.9% p.a. (31 December 2008: 9.9% p.a.) (the transaction was structured as an issue of notes by Ak Bars Finance S.A.), and medium term notes with a nominal amount of USD thousand (31 December 2008: USD thousand) or RR thousand (31 December 2008: RR thousand) issued in June 2007 with maturity date in June 2010 with an effective interest rate of 8.8% p.a.( 31 December 2008: 8.8% p.a.) (the transaction was structured as an issue of notes by Ak Bars Finance S.A.). These notes carry semi-annual coupon of 8.3% p.a. and 9.3% p.a. respectively. At 30 June 2009 the estimated fair value of syndicated loan and loan participation notes was RR thousand (31 December 2008: RR thousand). 9 Subordinated Debt Subordinated debt of RR thousand (31 December 2008: RR thousand) bears a fixed interest rate of 9.5% p.a. and matures in The debt ranks after all other creditors in case of liquidation. The subordinated debt is due in 2012 and represents subordinated loans received in Russian Roubles from a company controlled by the Tatarstan government in August These loans have interest rate linked to the USD/RR exchange rate. This embedded foreign currency derivative provides a stream of interest payments that are denominated in USD but settled in Russian Roubles. The derivative is not separated because it is closely related to the host contract. The foreign currency gains and losses on the USD denominated element of the debt are recognised in profit or loss. Effective interest rate of subordinated debt at 30 June 2009 was 9.7% p.a. (31 December 2008: 9.7% p.a.). Information on related party balances is disclosed in Note Dividends Six months ended 30 June 2009 (unaudited) Six months ended 30 June 2008 (unaudited) In thousands of Russian Roubles Ordinary Ordinary Dividends payable at 1 January Dividends declared during the period Dividends payable at 30 June (unaudited) Dividends per share declared during the period (expressed in RR per share) All dividends are declared and paid in Russian Roubles. F F-41

287 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Segment Analysis The chief operating decision maker, (the Executive Board), reviews the Group s internal reporting in order to assess performance and allocate resources. The operating segments have been determined based on these reports as follows: Retail banking representing private banking services, private customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages. Corporate banking representing direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products. Investment banking representing financial instruments trading, structured financing, corporate leasing, merger and acquisitions advice. The Executive Board assesses the performance of the operating segments based on a measure of profit /loss before income tax prepared in accordance with Russian Accounting Standards (RAS) after elimination of intersegment revenue and/or expenses. Other information provided to the Executive Board is balance sheet assets prepared in accordance with Russian Accounting Standards. Segment information for the reportable segments of the Group for the six month periods ended 30 June 2009 and 30 June 2008 accordingly is set out below: In thousands of Russian Roubles Retail banking Corporate banking Investment banking Total Six months ended 30 June 2009 (unaudited) Total revenues Inter - segment revenue - - ( ) ( ) Revenue from external customers Other segment items Provision for loan impairment ( ) ( ) - ( ) Operating expenses net of income ( ) ( ) ( ) ( ) Administrative expenses ( ) ( ) (87 585) ( ) Adjusted (loss) / profit before income tax ( ) Total assets reported to the Executive Board (unaudited) 30 June December F F-42

288 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Segment Analysis (Continued) In thousands of Russian Roubles Retail banking Corporate banking Investment banking Total Six months ended 30 June 2008 (unaudited) Total revenues Inter - segment revenue ( ) - ( ) ( ) Revenue from external customers Provision for loan impairment ( ) ( ) - ( ) Operating (expenses net of income)/income less expenses ( ) ( ) ( ) Administrative expenses ( ) ( ) ( ) ( ) Adjusted (loss) / profit before income tax ( ) Total assets reported to the Executive Board (unaudited) 30 June December A reconciliation of adjusted profit before income tax for reportable segments to total profit before income tax is provided below: In thousands of Russian Roubles Six months ended 30 June 2009 (unaudited) Six months ended 30 June 2008 (unaudited) Adjusted profit before income tax for reportable segments Provision for loan impairment ( ) Revaluation of securities at fair value through profit or loss ( ) Accruals of income/expenses ( ) Other adjustments ( ) (Loss)/ profit before income tax ( ) Reportable segments assets are reconciled to total assets as follows: In thousands of Russian Roubles 30 June 2009 (unaudited) 31 December 2008 Total segment assets Provision for loan impairment ( ) ( ) Revaluation of securities at fair value through profit or loss ( ) ( ) Accruals of income/expenses ( ) Intersegment elimination Deferred income tax assets Other adjustments ( ) ( ) Total assets F F-43

289 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Segment Analysis (Continued) The adjustments are attributable to the following: Provision for loan impairment (PLI) adjustment arises due to differences in methodology of PLI calculations for IFRS and for management accounting purposes, which are based on RAS. Revaluation of securities at fair value through profit or loss adjustment arises due to differences in methodology of securities revaluation for IFRS and for management accounting purposes, which are based on RAS. Accruals of income/expenses adjustment arises mainly as the Group applies nominal interest rate for accruals in management accounts and effective interest rate for IFRS purposes. Deferred income tax position is not calculated for the purpose of management accounting. 12 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Group may be received. On the basis of its own estimates and internal professional advice management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in these consolidated financial statements. Tax legislation. Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. The Russian tax authorities may be taking a more assertive and sophisticated approach in their interpretation of the legislation and tax examinations. This includes them following guidance from the Supreme Arbitration Court for anti-avoidance claims based on reviewing the substance and business purpose of transactions. Combined with a possible increase in tax collection efforts to respond to budget pressures, the above may lead to an increase in the level and frequency of scrutiny by the tax authorities. In particular, it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Russian transfer pricing legislation introduced 1 January 1999 provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. In the past, the arbitration court practice in this respect has been contradictory. Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could potentially be challenged. Given the brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity. In addition to the above transfer pricing matters, Management estimates that the Group has possible obligations from exposure to other than remote tax risks of RR thousand (31 December 2008: RR thousand). The Management of the Group believes that its interpretation of the relevant legislation is appropriate and the Group s tax, currency and customs positions will be sustained Therefore, the Group did not create any provision for potential tax liabilities as of 30 June 2009 (31 December 2008: no provision for potential tax liabilities). F F-44

290 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Contingencies and Commitments (Continued) Capital expenditure commitments. At 30 June 2009, the Group had no contractual capital expenditure commitments in respect of premises and equipment and in respect of software and other intangible assets. (31 December 2008: no capital expenditure commitments). Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows: In thousands of Russian Roubles 30 June 2009 (unaudited) 31 December 2008 Not later than 1 year Later than 1years not later than 5 years Later than 5 years Total operating lease commitments Compliance with covenants. The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with such covenants may result in penalty sanctions for the Group. The most significant covenants include: To comply with the CBRF s ratios and requirements; To maintain a ratio of regulatory capital to risk weighted assets, calculated in accordance with the Basel Accord, of at least 12%. Management believes the Group is in compliance with the above covenants. Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments, if the unused amounts were to be drawn down. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows: In thousands of Russian Roubles 30 June 2009 (unaudited) 31 December 2008 Guarantees issued Import letters of credit Total credit related commitments As at 30 June 2009, the Group also had commitments in relation to unused credit lines totalling RR thousand (31 December 2008: RR thousand). The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. F F-45

291 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Contingencies and Commitments (Continued) Fiduciary assets. These include assets that are held on behalf of the customers of the Group and other companies of the Group and are not assets of the Group. Nominal values disclosed below are normally different from the fair values of respective securities. The fiduciary assets fall into the following categories: In thousands of Russian Roubles Nominal value at 30 June 2009 (unaudited) Nominal value at 31 December 2008 Clients securities held in custody of other depositories Clients securities held in custody of the Group Assets pledged and restricted. The Group had assets pledged as collateral with the following carrying value: In thousands of Russian Roubles 30 June 2009 (unaudited) 31 December 2008 Asset Related Asset Related pledged liability pledged liability Securities at fair value through profit or loss pledged as collateral under the CBRF s credit line Securities pledged as collateral under sale and repurchase agreements Securities purchased under reverse sale and repurchase agreements and pledged under sale and repurchase agreements As at 30 June 2009 mandatory cash balances with the CBRF in the amount of RR thousand (31 December 2008: RR thousand) represent mandatory reserve deposits which are not available to finance the Group s day to day operations. F F-46

292 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Related Party Transactions Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. In thousands of Russian Roubles Tatarstan Republic Government bodies and state organisations 30 June 2009 (unaudited) 31 December 2008 Russian Other Other Tatarstan Russian Other Federation shareholders related Republic Federation share- Governmenmenment parties Govern- Governholders bodies and bodies and bodies and state state state organisationsations organi- organisations Other related parties Cash and cash equivalents (contractual interest rate: 2009: 0%-6% 2008: 0%-5.5%) Mandatory cash balances with the CBRF Securities at fair value through profit or loss and repurchase receivable Corporate shares Corporate bonds (contractual interest rate: 2009: 9%-20%; 2008: 8%-16%) Federal loan bonds (OFZ) (contractual interest rate: 2009: 6%-12%; 2008: 6%- 11%) Municipal bonds (contractual interest rate: 2009: 8%-14%; 2008: 7%-14%) Promissory notes (contractual interest rate: 2009: 0%, 2008: 0%-11%) Investments in mutual funds Investment in associate Due from other banks (contractual interest rate: 2009: 0%-8%; 2008:5%) Gross amount of loans and advances to customers (contractual interest rate: 2009: 7%-25%; 2008: 5%-18%) Provision for impairment of loans and advances to customers ( ) (44 611) ( ) ( ) ( ) (80 041) ( ) ( ) Other assets F F-47

293 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Related Party Transactions (Continued) In thousands of Russian Roubles Tatarstan Republic Government bodies and state organisations 30 June 2009 (unaudited) 31 December 2008 Russian Other Other Tatarstan Russian Other Federation shareholders related Republic Federation share- Governmenmenment parties Govern- Governholders bodies and bodies and bodies and state state state organisationsations organi- organisations Other related parties Due to other banks (contractual interest rate: 2009: 2-15%, 2008: 5%) Customer accounts Current/settlement accounts (contractual interest rate: 2009: 0%, 2008: 0%) Term deposits (contractual interest rate: 2009: 1%- 16%; 2008: 1%-9%) Debt securities in issue (contractual interest rate: 2009: 0%- 13%; 2008: 0%- 12%) Subordinated debt (contractual interest rate: 2009: 9%, 2008: 9%) Other liabilties In thousands of Russian Roubles Tatarstan Republic Government bodies and state organisations 30 June 2009 (unaudited) 31 December 2008 Russian Other Other Tatarstan Russian Other Federatio shareholders related Republic Federatio share- n Governmenmenment parties Govern- n Governholders bodies bodies bodies and state and state and state organisationsations organi- organisations Other related parties Letters of credit Guarantees issued F F-48

294 Level: 2 From: 2 Friday, November 13, :21 Mac Section 12b Ak Bars Bank Group Selected Notes to the Interim Condensed Consolidated Financial Information 30 June Related Party Transactions (Continued) The income and expense items for the periods of 6 months ended 30 June 2009 and 30 June 2008 were as follows: In thousands of Russian Roubles Tatarstan Republic Government bodies and state organisations 6 months ended 30 June 2009 (unaudited) Russian Other Federation shareholders Government bodies and state organisations Other related parties Tatarstan Republic Government bodies and state organisations 6 months ended 30 June 2008 Russian Federation Government bodies and state organisations Other shareholders Other related parties Interest income Due from other banks Loans and advances to customers Securities at fair value through profit or loss Interest expense Due to other banks - ( ) ( ) - - Customer accounts ( ) - (99 713) (28 539) ( ) (1) ( ) (51 429) Debt securities in issue ( ) (7 306) (47 064) - - Subordinated debt - - ( ) ( ) - Gains less losses arising from securities Administrative and other operating expenses (21 424) (2 496) (1 337) (14 249) (65 803) (723) (822) (36) Other related parties in the tables above are represented mainly by entities with which the Group has significant shareholders in common. For six months ended 30 June 2009 the total remuneration of key management, including discretionary compensation amounted to RR thousand (six month ended 30 June 2008: RR thousand). F F-49

295 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c AK BARS BANK GROUP International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report 31 December 2008 F-50

296 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group CONTENTS INDEPENDENT AUDITOR S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet...1 Consolidated Income Statement...2 Consolidated Statement of Changes in Equity...3 Consolidated Statement of Cash Flows...4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Introduction Operating Environment of the Group Summary of Significant Accounting Policies Critical Accounting Estimates, and Judgements in Applying Accounting Policies Adoption of New or Revised Standards and Interpretations New Accounting Pronouncements Cash and Cash Equivalents Securities at Fair Value Through Profit or Loss Due from Other Banks Loans and Advances to Customers Repurchase Receivable Investment Property Premises, Equipment and Intangible Assets Other Financial Assets and Other Assets Due to Other Banks Customer Accounts Debt Securities in Issue Syndicated Loans and Loan Participation Notes Other Financial Liabilities Subordinated Debt Share Capital and Additional Paid-In Capital Accumulated Deficit Interest Income and Expense Fee and Commission Income and Expense Administrative and Other Operating Expenses Income Taxes Dividends Segment Analysis Financial Risk Management Management of Capital Contingencies and Commitments Fair Value of Financial Instruments Presentation of Financial Instruments by Measurement Category Derivative Financial Instruments Related Party Transactions Principal Subsidiaries, Associates and Joint Ventures Subsequent Events...66 F-51

297 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c ZAO PricewaterhouseCoopers Audit Kosmodamianskaya Nab. 52/ Moscow Russia Telephone +7 (495) Facsimile +7 (495) INDEPENDENT AUDITOR S REPORT To the Shareholders and the Board of Directors of Ak Bars Bank: 1 We have audited the accompanying consolidated financial statements of Ak Bars Bank and its subsidiaries (the Group ), which comprise the consolidated balance sheet as at 31 December 2008 and the consolidated income statement, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Consolidated Financial Statements 2 Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility 3 Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. 4 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 5 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion 6 In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2008, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Emphasis of Matter 7 Without qualifying our opinion, we draw attention to Notes 1 and 35 to the accompanying consolidated financial statements. The Group has extensive transactions and relationships with related parties. Moscow, Russian Federation 30 June 2009 F-52

298 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Consolidated Balance Sheet In thousands of Russian Roubles Note 31 December December 2007 ASSETS Cash and cash equivalents Mandatory cash balances with the Central Bank of the Russian Federation Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Investment property Investment in associate Deferred tax asset Premises, equipment and intangible assets Other financial assets Other assets TOTAL ASSETS LIABILITIES Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Deferred tax liability Other financial liabilities Other liabilities Subordinated debt TOTAL LIABILITIES EQUITY Share capital Additional paid-in capital Accumulated deficit 22 ( ) ( ) TOTAL EQUITY TOTAL LIABILITIES AND EQUITY Approved for issue and signed on behalf of the Executive Board on 30 June R.K. Minnegaliev Chairman of the Board A.K. Bayazitov Chief Accountant The notes set out on pages 5 to 66 form an integral part of these consolidated financial statements. 1 F-53

299 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Consolidated Income Statement In thousands of Russian Roubles Note Interest income Interest expense 23 ( ) ( ) Net interest income Provision for loan impairment 9, 10 ( ) ( ) Net interest income after provision for loan impairment Fee and commission income Fee and commission expense 24 ( ) (98 785) Gains less losses / (losses less gains) from financial derivative instruments ( ) (Losses less gains) / gains less losses from securities at fair value through profit or loss ( ) (Losses less gains) / gains less losses from trading in foreign currencies ( ) Foreign exchange translation (losses net of gains) / gains less losses ( ) Dividend income Other operating income Administrative and other operating expenses 25 ( ) ( ) (Loss) / profit before tax ( ) Income tax credit / (expense) ( ) (Loss) / profit for the year ( ) The notes set out on pages 5 to 66 form an integral part of these consolidated financial statements. 2 F-54

300 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Consolidated Statement of Changes in Equity In thousands of Russian Roubles Note Share capital Additional paid-in capital Accumulated deficit Total equity Balance at 1 January ( ) Profit for the year Total recognized income for Dividends declared ( ) ( ) Balance at 31 December ( ) Loss for the year - - ( ) ( ) Total recognized expense for ( ) ( ) Dividends declared ( ) ( ) Balance at 31 December ( ) The notes set out on pages 5 to 66 form an integral part of these consolidated financial statements. 3 F-55

301 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Consolidated Statement of Cash Flows In thousands of Russian Roubles Note Cash flows from operating activities Interest received Interest paid ( ) ( ) Fees and commissions received Fees and commissions paid ( ) ( ) Income received from securities at fair value through profit or loss (Expenses paid)/income received from trading in foreign currencies ( ) Other operating income received Administrative and other operating expenses paid ( ) ( ) Income tax paid ( ) ( ) Cash flows from operating activities before changes in operating assets and liabilities Net decrease / (increase) in mandatory cash balances with the Central Bank of the Russian Federation ( ) Net (increase) / decrease in securities at fair value through profit or loss ( ) Net decrease / (increase) in repurchase receivables ( ) Net decrease / (increase) in due from other banks (64 393) Net increase in loans and advances to customers ( ) ( ) Net increase in other financial assets ( ) ( ) Net (increase) / decrease in other assets ( ) Net increase in due to other banks Net increase in customer accounts Net increase in debt securities in issue Net (decrease) / increase in other financial liabilities ( ) Net decrease in other liabilities ( ) ( ) Net cash from operating activities Cash flows from investing activities Acquisition of investment property 12 ( ) ( ) Proceeds from disposal of investment property Acquisition of premises and equipment ( ) ( ) Proceeds from disposal of premises and equipment Dividend income received Net cash used in investing activities ( ) ( ) Cash flows from financing activities Issue of loan participation notes Repayment of loan participations notes ( ) - Proceeds from syndicated loans Repayment of syndicated loans ( ) ( ) Dividends paid 27 ( ) ( ) Net cash (used in) / from financing activities ( ) Effect of exchange rate changes on cash and cash equivalents (1 887) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes set out on pages 5 to 66 form an integral part of these consolidated financial statements. 4 F-56

302 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Introduction These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2008 for Ak Bars Bank (the Bank ) and its subsidiaries (together referred to as the Group or Ak Bars Bank Group ). Refer to Note 36 for the principal subsidiaries of the Bank. The Bank was incorporated and is domiciled in the Russian Federation. The Bank is a joint stock company limited by shares and was set up in accordance with Russian regulations. The Bank is an official agent of the Government of the Tatarstan Republic. At 31 December 2008, the Tatarstan Republic through ministries, government agencies and related companies ultimately controlled 96% of the Bank s share capital (2007: 96%). A substantial part of the Bank s business is connected with the Ministry of Finance of the Tatarstan Republic. If the Tatarstan Republic was to choose another bank as its official agent, the Bank s business, financial condition or results of operations could be materially adversely affected. The Bank also has significant operations with other government related entities. Refer to Note 35. Principal activity. The Group s principal business activity is commercial and retail banking operations within the Russian Federation. The Bank has operated under a full banking license issued by the Central Bank of the Russian Federation ( CBRF ) since The Bank participates in the State deposit insurance scheme, which was introduced by the Federal Law #177-FZ Deposits of individuals insurance in Russian Federation dated 23 December According to Federal Law No. 174-FZ Amendments to Clause 11 of the Federal Law Deposits of individuals insurance in Russian Federation" and some other regulations of the Russian Federation", the State Deposit Insurance Agency guarantees repayment of 100% of individual deposits up to RUB 700 thousand. At 31 December 2008 the Bank had 47 branches (2007: 37 branches) and 145 representative offices (2007: 137 representative offices) within the Tatarstan Republic and other regions of the Russian Federation. The number of Bank employees as at 31 December 2008 was (2007: 4 926). Registered address and place of business. The Bank s registered office is located at the following address: Dekabristov Street, bld.1, Kazan, Tatarstan Republic, the Russian Federation. Below is the description of the main operations of the principal subsidiaries: OOO Ak Bars Ipoteka (hereinafter, Ak Bars Ipoteka ) is a company wholly owned by the Bank. The Company s principal business activity is mortgage financing. The Company operates under the Russian Federation legislation. The head office of Ak Bars Ipoteka is located at the following address: , Dekabristov St. 2, Kazan, Tatarstan Republic, Russia. The Company was established in ZAO Ak Bars Finance (hereinafter, Ak Bars Finance ) is a company wholly owned by the Bank. The Company s principal business activities are operations with securities, broker operations and trust management. The Company operates under a brokerage, dealing and trust management license since 2005 and depository operations license since The head office of Ak Bars Finance is located at the following address: , Timura Frunze St. 11, bld. 15, Moscow, Russia. The Company was established in OAO Leasing Company of Ak Bars Bank Finansovaya Economicheskaya Gruppa (hereinafter, Ak Bars Leasing ) is a company wholly owned by the Bank. The Company s principal business activity is leasing operations. The Company operates under the Russian Federation legislation. The head office of Ak Bars Leasing is located at the following address: , Dekabristov St. 1, Kazan, Tatarstan Republic, Russia. The Company was established in OOO CB Naratbank (hereinafter, Naratbank ) is a limited liability commercial bank. Its principal business activity is corporate and retail lending operations within the Russian Federation. OOO CB Naratbank operates under a banking license issued by the CBRF since The head office of Naratbank is located at the following address: , Moskovskaya St. 75, Saratov, Russia. Naratbank was established in Presentation currency. These consolidated financial statements are presented in thousands of Russian Roubles ("RR thousands"), unless otherwise stated. F-57 5 F-57

303 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Operating Environment of the Group Russian Federation. The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation. Despite strong economic growth in recent years, the financial situation in the Russian market significantly deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the Russian stock market since mid Since September 2008, there has been increased volatility in currency markets and the Russian Rouble (RR) has depreciated significantly against some major currencies. The official US Dollar (USD) exchange rate of the Central Bank of the Russian Federation increased from RR at 1 October 2008 to RR at 31 December 2008 and RR at 7 May Due to increased market volatility, one-day MosPrime rate fluctuated between 8.00% p.a. and 10.28% p.a. during the period from 1 October 2008 to 30 March International reserves of the Russian Federation decreased from USD thousand at 30 September 2008 to USD thousand at 31 December 2008 and to USD thousand at 1 April The commodities market was also impacted by the latest events on the financial markets. The spot Free On Board price of Urals oil decreased from USD at 29 September 2008 to USD at 31 December 2008 and USD at 1 May A number of measures have been undertaken to support the Russian financial markets, including the following: In October 2008 the CBRF reduced the mandatory reserves ratio to 0.5% and raised the guarantee repayment of individual deposits under the state deposit insurance scheme to RR 700 thousand per individual in case of the withdrawal of a licence of a bank or a CBRF-imposed moratorium on payments. The list of assets which can be pledged under repurchase agreements with the CBRF was significantly extended. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the challenges faced by banks currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. Management is unable to predict all developments which could have an impact on the banking sector and the wider economy and consequently what effect, if any, they could have on the future financial position of the Group. Recent volatility in global and Russian financial markets. The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial markets have also led to bank failures and bank rescues in the United States of America, Western Europe, Russia and elsewhere. The full extent of the impact of the ongoing financial crisis is proving to be difficult to anticipate or completely guard against. The volume of wholesale financing has significantly reduced since August Such circumstances may affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. The Group s borrowers may be affected by the lower liquidity situation which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions of the clients may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and nonfinancial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments. F-58 6 F-58

304 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Operating Environment of the Group (Continued) The amount of provision for impaired loans is based on management's appraisals of these assets at the balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in Russia for many types of collateral, especially real estate, has been severely affected by the recent volatility in global financial markets resulting in there being a low level of liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. The fair values of quoted investments in active markets are based on current bid prices (financial assets) or offer prices (financial liabilities). If there is no active market for a financial instrument, the Group establishes fair value using valuation techniques. These include the use of recent arm s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The valuation models reflect current market conditions at the measurement date which may not be representative of market conditions either before or after the measurement date. As at the balance sheet date management has reviewed its models to ensure they appropriately reflect current market conditions, including the relative liquidity of the market and credit spreads. Management is unable to reliably determine the effects on the Group's future financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and growth of the Group s business in the current circumstances. 3 Summary of Significant Accounting Policies Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) under the rules for accounting of financial instruments categorised as at fair value through profit or loss. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. Consolidated financial statements. Subsidiaries are those companies and other entities (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The date of exchange is the acquisition date where a business combination is achieved in a single transaction, and is the date of each share purchase where a business combination is achieved in stages by successive share purchases. The excess of the cost of acquisition over the acquirer s share of the fair value of the net assets of the acquiree at each exchange transaction is recorded as goodwill. The excess of the acquirer s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over cost ( negative goodwill ) is recognised immediately in profit or loss. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any minority interest, except for contingent income tax liabilities, which are measured in accordance with IAS 12 Income Taxes. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Group and all of its subsidiaries use uniform accounting policies consistent with the Group s policies. F-59 7 F-59

305 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Minority interest is that part of the net results and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Group. Minority interest forms a separate component of the Group s equity. Associates. Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The carrying amount of associates includes goodwill identified on acquisition less accumulated impairment losses, if any. The Group s share of the post-acquisition profits or losses of associates is recorded in the consolidated income statement, and its share of post-acquisition movements in reserves is recognised in reserves. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Financial instruments key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Group may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm s length basis. Valuation techniques such as discounted cash flows models or models based on recent arm s length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related balance sheet items. F-60 8 F-60

306 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest reprising date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. Initial recognition of financial instruments. Derivatives and securities at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention ( regular way purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. Derecognising of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which can be converted into cash within one business day. All short term interbank placements, beyond overnight placements, are included in due from other banks. Amounts which relate to funds that are of a restricted nature are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. Mandatory cash balances with the CBRF. Mandatory cash balances with the CBRF are carried at amortised cost and represent non-interest bearing mandatory reserve deposits which are not available to finance the Group s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated cash flow statement. Securities at fair value through profit or loss. Securities at fair value through profit or loss are financial assets designated irrevocably, at initial recognition, into this category. Management designates securities into this category only if (a) such classification eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or (b) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information on that basis is regularly provided to and reviewed by the Group s key management personnel. Recognition and measurement of this category of financial assets is consistent with the above policy for trading securities. Securities at fair value through profit or loss are carried at fair value. Interest earned on securities at fair value through profit or loss calculated using the effective interest method is presented in the consolidated income statement as interest income. Dividends are included in income when the Group s right to receive the dividend payment is established and inflow of economic benefits is probable. All other elements of the changes in the fair value and gains or losses on derecognising are recorded in profit or loss as gains less losses from securities at fair value through profit or loss in the period in which they arise. F-61 9 F-61

307 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Due from other banks. Amounts due from other banks are recorded when the Group advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. Loans and advances to customers. Loans and advances to customers are recorded when the Group advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; the borrower experiences a significant financial difficulty as evidenced by the borrower s financial information that the Group obtains; the borrower considers bankruptcy or a financial reorganisation; there is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or the value of collateral significantly decreases as a result of deteriorating market conditions. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognised through an allowance account to write down the asset s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss. F F-62

308 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in the income statement. Credit related commitments. The Group enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At each balance sheet date, the commitments are measured at the higher of (i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required settling the commitment at the balance sheet date. Sale and repurchase agreements and lending of securities. Sale and repurchase agreements ( repo agreements ) which effectively provide a lender s return to the counterparty are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. The securities are not reclassified in the balance sheet unless the transferee has the right by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchase receivables. The corresponding liability is presented within amounts due to other banks or customer accounts. Securities purchased under agreements to resell ( reverse repo agreements ) which effectively provide a lender s return to the Group are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between the sale and repurchase price is treated as interest income and accrued over the life of repo agreements using the effective interest method. Securities lent to counterparties for a fixed fee are retained in the consolidated financial statements in their original balance sheet category unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified and presented separately. Securities borrowed for a fixed fee are not recorded in the consolidated financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded in profit or loss within gains less losses arising from trading securities. The obligation to return the securities is recorded at fair value in customer accounts and due to other banks. Promissory notes purchased. Promissory notes purchased are included in securities at fair value through profit or loss, or in due from other banks or in loans and advances to customers, depending on their substance and are recorded, subsequently remeasured and accounted for in accordance with the accounting policies for these categories of assets. Investment property. Investment property is property held by the Group to earn rental income or for capital appreciation and which is not occupied by the Group. Investment properties are stated at cost less accumulated depreciation and provision for impairment, where required. If any indication exists that investment properties may be impaired, the Group estimates the recoverable amount as the higher of value in use and fair value less costs to sell. The carrying amount of an investment property is written down to its recoverable amount through profit or loss. An impairment loss recognised in prior years is reversed if there has been a subsequent change in the estimates used to determine the asset s recoverable amount. In certain circumstances the Group may dispose of a property other than at fair value, such as when there are special terms or circumstances allowing the parties to the transaction to obtain a benefit which would not generally be available to other market participants. In such circumstances the carrying value immediately prior to the sale is adjusted to the estimated fair value at the disposal date, and any difference between proceeds and the carrying amount is recorded separately in the income statement within realised gains or losses on disposal of investment property. F F-63

309 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Subsequent expenditure is capitalised only when it is probable that future economic benefits associated with it will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to premises and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated. Premises and equipment. Premises and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 31 December 2002 for assets acquired prior to 1 January 2003 less accumulated depreciation and provision for impairment, where required. Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised and the replaced part is retired. At each reporting date management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset s fair value less costs to sell and its value in use. The carrying amount of an asset is written down to its recoverable amount, and the impairment loss is charged to profit or loss. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. Depreciation. Land is not depreciated. Depreciation on other items of premises and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives at the following annual rates: Premises 2%; Equipment 20%. The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Intangible assets. Intangible assets of the Group have definite useful life and primarily include capitalised computer software. Acquired computer software licences, patents and trademarks are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Development costs that are directly associated with identifiable and unique software controlled by the Group are recorded as intangible assets if an inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 5 years. Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lesser to the Group, the total lease payments are charged to profit or loss on a straight-line basis over the period of the lease. Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and (b) the arrangement conveys a right to use the asset. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. F F-64

310 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Finance lease receivables. Where the Group is a lesser in a lease which transfers substantially all the risks and rewards incidental to ownership to the lessee, the assets leased out are presented as a finance lease receivable and carried at the present value of the future lease payments. Finance lease receivables are initially recognised at commencement (when the lease term begins) using a discount rate determined at inception (the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease). The difference between the gross receivable and the present value represents unearned finance income. This income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Incremental costs directly attributable to negotiating and arranging the lease are included in the initial measurement of the finance lease receivable and reduce the amount of income recognised over the lease term. Finance income from leases is recorded within other operating income in the consolidated income statement. Impairment losses are recognised in profit or loss when incurred as a result of one or more events ( loss events ) that occurred after the initial recognition of finance lease receivables. The Group uses the same principal criteria to determine whether there is objective evidence that an impairment loss has occurred as for loans carried at amortised cost. Impairment losses are recognised through an allowance account to write down the receivables net carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the interest rates implicit in the finance leases. The estimated future cash flows reflect the cash flows that may result from obtaining and selling the assets subject to the lease. Due to other banks. Amounts due to other banks are recorded when money or other assets are advanced to the Group by counterparty banks. The non-derivative liability is carried at amortised cost. If the Group purchases its own debt, the liability is removed from the consolidated balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. Debt securities in issue. Debt securities in issue include promissory notes and bonds issued by the Group. Debt securities are stated at amortised cost. If the Group purchases its own debt securities in issue, they are removed from the consolidated balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in gains arising from early retirement of debt. Syndicated loans and loan participation notes. Syndicated loans and loan participation notes represent medium and long-term funds attracted by the Group on the international financial markets. They are carried at amortised cost. If the Group purchases its syndicated loans or loan participation notes, they are removed from the consolidated balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. Subordinated debt. Subordinated debt represents long-term funds attracted by the Group from Russian counterparties and carried at amortised cost. Derivative financial instruments. Derivative financial instruments, including foreign exchange contracts, precious metals forward contracts, currency swaps and forwards are carried at their fair value. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss. The Group does not apply hedge accounting. Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with legislation enacted or substantively enacted by the balance sheet date. The income tax charge comprises current tax and deferred tax and is recognised in the consolidated income statement except if it is recognised directly in equity because it relates to transactions that are also recognised, in the same or a different period, directly in equity. F F-65

311 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within administrative and other operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Deferred income tax is provided on post acquisition retained earnings and other post acquisition movements in reserves of subsidiaries, except where the Group controls the subsidiary s dividend policy and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future. Uncertain tax positions. The Group's uncertain tax positions are reassessed by management at every balance sheet date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the balance sheet date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management s best estimate of the expenditure required to settle the obligations at the balance sheet date. Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Trade and other payables. Trade payables are accrued when the counterparty has performed its obligations under the contract and are carried at amortised cost. Additional paid-in capital. Additional paid-in capital represents equity contributions from shareholders that do not increase share capital and do not give additional voting rights to the contributors. Additional paid-in capital is recorded as a movement in equity in the period it is received from the shareholders. Dividends. Dividends are recorded in equity in the period in which they are declared. Any dividends declared after the balance sheet date and before the financial statements are authorised for issue are disclosed in the subsequent events note. The statutory accounting reports of the Group are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the current year net profit. Income and expense recognition. Interest income and expense are recorded in the consolidated income statement for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. F F-66

312 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan commitments as financial liabilities at fair value through profit or loss. When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Foreign currency translation. The functional currency of each of the Group s consolidated entities is the currency of the primary economic environment in which the entity operates. The functional currency of the Bank and its subsidiaries, and the Group s presentation currency, is the national currency of the Russian Federation, Russian Roubles ( RR ). Monetary assets and liabilities are translated into each entity s functional currency at the official exchange rate of the CBRF at the respective balance sheet dates. Foreign exchange gains and losses resulting from the settlement of transactions and from the translation of monetary assets and liabilities into each entity s functional currency at year-end official exchange rates of the CBRF are recognised in profit or loss. Translation at year-end rates does not apply to non-monetary items, including equity investments. Effects of exchange rate changes on the fair value of equity securities are recorded as part of the fair value gain or loss. At 31 December 2008 the principal rate of exchange used for translating foreign currency balances was USD 1 = RR (2007: USD 1 = RR ). Fiduciary assets. Assets held by the Group in its own name, but on the account of third parties, are not reported on the consolidated balance sheet. Commissions received from fiduciary activities are shown in fee and commission income. Offsetting. Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Staff costs and related contributions. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group. Segment reporting. A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), and which is subject to risks and rewards that are different from those of other segments. Segments with a majority of revenue earned from sales to external customers and whose revenue, result or assets are ten percent or more of all the segments are reported separately. Geographical segments of the Group have been reported separately within these consolidated financial statements based on the ultimate domicile of the counterparty, e.g. based on economic risk rather than legal risk of the counterparty. F F-67

313 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Summary of Significant Accounting Policies (Continued) Accounting for the effects of hyperinflation. The Russian Federation has previously experienced relatively high levels of inflation and was considered to be hyperinflationary as defined by IAS 29 Financial Reporting in Hyperinflationary Economies ( IAS 29 ). IAS 29 requires that the consolidated financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. It states that reporting operating results and financial position in the local currency without restatement is not useful because money loses purchasing power at such a rate that the comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading. The characteristics of the economic environment of the Russian Federation indicated that hyperinflation had ceased effective from 1 January Restatement procedures of IAS 29 are therefore only applied to assets acquired or revalued and liabilities incurred or assumed prior to that date. For these balances, the amounts expressed in the measuring unit current at as 31 December 2002 are the basis for the carrying amounts in these consolidated financial statements. The restatement was calculated using the conversion factors derived from the Russian Federation Consumer Price Index ( CPI ), published by the Russian Statistics Agency, and from indices obtained from other sources for years prior to Changes in presentation. Where necessary, corresponding figures have been adjusted to conform to the presentation of the current year amounts. The effect of reclassifications is as follows: In thousands of Russian Roubles As originally presented Adjustment As adjusted Assets Other financial assets Other assets ( ) Liabilities Other financial liabilities Other liabilities ( ) The following changes have been made to the classification of loans and advances to customers in Note 10. In thousands of Russian Roubles As originally presented Adjustment As adjusted Loans to legal entities Corporate loans Loans to small and medium-sized companies ( ) The rest of disclosures on loans and advances to customers in Note 10 were reclassified in accordance with data in table above. Any further changes to these consolidated financial statements require approval of the Group s Management who authorised these consolidated financial statements for issue. F F-68

314 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Critical Accounting Estimates, and Judgments in Applying Accounting Policies The Group makes estimates and assumptions that affect the amounts recognised in the financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances. The Group regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in the consolidated income statement, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the assessed probability of default differs by +/-5% (2007:+/-1%) of the total loans and advances to customers, the provision would be approximately RR thousand (2007: RR thousand) higher or lower. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations. Refer to Note 26. Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the balance sheet. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on a medium- and long-term forecast of taxable profits of the Group prepared by management. The forecast of taxable profits is based on management expectations that are believed to be reasonable under the circumstances. In accordance with this forecast the cumulative taxable profit of the Group for the next 5 years is estimated in the amount of RR 9.2 billion and for the next 10 years RR 29.0 billion. Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 Financial Instruments: Recognition and Measurement requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 35. Going concern. Management prepared these consolidated financial statements on a going concern basis. In making this judgement management considered the Group s financial position, current intentions, profitability of operations and access to financial resources, and analysed the impact of the recent financial crisis on future operations of the Group. Management is also taking a number of actions to ensure the Group will continue to be a going concern, in particular: Requirements to the methods of placing liquidity reserves became more rigorous; Methods of credit risk management were enhanced (procedures for loans issuance and monitoring became more rigorous, limits are revised on a regular basis depending on the changes on the market); There is regular stress testing of key financial indicators of the Group and the Bank to ensure they will be in compliance with external covenants and all regulatory requirements in relation to capital adequacy, liquidity and financial risk management procedures in case of negative events on the market. RefertoNote29; On 30 March 2009 the extraordinary shareholders meeting approved an additional issue of ordinary shares with a total nominal value of RR 9 billion. Refer to Note 37. Management is of the opinion that the afore-mentioned actions ensure the Group will continue as a going concern. F F-69

315 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Adoption of New or Revised Standards and Interpretations Certain new interpretations became effective for the Group from 1 January 2008: IFRIC 11, IFRS 2 Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007); IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008); and IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). These interpretations did not have any significant effect on the Group s consolidated financial statements. Reclassification of Financial Assets Amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures and a subsequent amendment, Reclassification of Financial Assets: Effective Date and Transition. The amendments allow entities the options (a) to reclassify a financial asset out of the held to trading category if, in rare circumstances, the asset is no longer held for the purpose of selling or repurchasing it in the near term; and (b) to reclassify an available-for-sale asset or an asset held for trading to the loans and receivables category, if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity (subject to the asset otherwise meeting the definition of loans and receivables). The amendments may be applied with retrospective effect from 1 July 2008 for any reclassifications made before 1 November 2008; the reclassifications allowed by the amendments may not be applied before 1 July 2008 and retrospective reclassifications are only allowed if made prior to 1 November Any reclassification of a financial asset made on or after 1 November 2008 takes effect only from the date when the reclassification is made. The Group has not elected to make any of the optional reclassifications during the period. 6 New Accounting Pronouncements Certain new standards and interpretations have been published that are mandatory for the Group s accounting periods beginning on or after 1 January 2009 or later periods and which the Group has not early adopted: IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments and specifies how an entity should report such information. Management is currently assessing what impact the standard will have on segment disclosures in the Group s consolidated financial statements. Puttable Financial Instruments and Obligations Arising on Liquidation IAS 32 and IAS 1 Amendment (effective from 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. The Group is currently assessing the impact of the amendment on its consolidated financial statements. IAS 23, Borrowing Costs (revised March 2008; effective for annual periods beginning on or after 1 January 2009). The revised IAS 23 was issued in March The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January The Group is currently assessing the impact of the amended standard on its consolidated financial statements. F F-70

316 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December New Accounting Pronouncements (Continued) IAS 1, Presentation of Financial Statements (revised September 2008; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances. IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously minority interests ) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group is currently assessing the impact of the amended standard on its consolidated financial statements. Vesting Conditions and Cancellations Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group does not expect the amendments to have any material effect on its consolidated financial statements. IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure noncontrolling interests using the existing IFRS 3 method (proportionate share of the acquiree s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, n a business combination achieved in stages, the acquirer will have to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Group is currently assessing the impact of the amended standard on its financial statements. IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Group does not operate any loyalty programmes. IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. IFRIC 15 is not relevant to the Group s operations because it does not have any agreements for the construction of real estate. F F-71

317 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December New Accounting Pronouncements (Continued) Improving Disclosures about Financial Instruments - Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009). The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity will be required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a group except the foreign operation that itself is being hedged. The interpretation also clarifies how the gain or loss recycled from the currency translation reserve to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities will apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 is not relevant to the Group s operations because it does not apply hedge accounting. Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRS 1 and IAS 27 Amendment (revised May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognised in profit or loss rather than as a recovery of the investment. The amendments will not have an impact on the Group s consolidated financial statements. Eligible Hedged Items Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009, with earlier application permitted). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment is not expected to have an impact on the Group's consolidated financial statements as the Group does not apply hedge accounting. Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group does not expect the amendments to have any material effect on its consolidated financial statements. F F-72

318 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December New Accounting Pronouncements (Continued) IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009, with earlier application permitted). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Group s operations because it does not distribute non-cash assets to owners. IFRS 1, First-time Adoption of International Financial Reporting Standards (effective for the first IFRS financial statements for a period beginning on or after 1 July 2009). The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The Group concluded that the revised standard does not have any effect on its consolidated financial statements. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Group s consolidated financial statements. 7 Cash and Cash Equivalents In thousands of Russian Roubles 31 December December 2007 Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Settlement accounts with trading systems Correspondent accounts and overnight placements with other banks - Russian Federation other countries Total cash and cash equivalents At 31 December 2008 correspondent accounts and overnight placements with other banks included balances with one bank (2007: one bank) in the total amount of RR thousand (2007: RR thousand), which represents 64% of the total correspondent accounts and overnight placements with other banks (2007: 40%). Interest rate analysis of cash and cash equivalents is disclosed in Note 29. Information on related party balances is disclosed in Note 35. Credit quality of cash and cash equivalents balances may be summarised as follows at 31 December 2008: In thousands of Russian Roubles Cash balances with the CBRF, including mandatory reserves Settlements with trading systems Correspondent accounts and overnight placements Neither past due nor impaired - Central Bank of the Russian Federation AAA rated AA- to AA+ rated A- to A+ rated Lower than A- rated Unrated Total cash and cash equivalents Total F F-73

319 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Cash and Cash equivalents (Continued) Credit quality of cash and cash equivalents balances may be summarised as follows at 31 December 2007: In thousands of Russian Roubles Cash balances with the CBRF, including mandatory reserves Settlements with trading systems Correspondent accounts and overnight placements Neither past due nor impaired - Central Bank of the Russian Federation AAA rated AA- to AA+ rated A- to A+ rated Lower than A- rated Unrated Total cash and cash equivalents Total 8 Securities at Fair Value through Profit or Loss In thousands of Russian Roubles 31 December December 2007 Corporate bonds Promissory notes Federal loan bonds (OFZ) Municipal bonds Corporate Eurobonds Total debt securities Corporate shares Investments in mutual funds Global depository receipts Total securities at fair value through profit or loss Corporate bonds are Russian Rouble denominated debt securities issued by large Russian companies and banks. These bonds are traded on Moscow Interbank Currency Exchange (MICEX), other Russian stock exchanges or on the over-the-counter market. As at 31 December 2008 corporate bonds had maturity dates from February 2009 to August 2013 (2007: from April 2008 to May 2012), coupon rates from 8% to 16% p.a. (2007: from 7% to 15% p.a.), and yield to maturity from 9% to 17% p.a. (2007: from 7% to 17% p.a.), depending on the type of bond issue. Promissory notes are Russian Rouble denominated debt securities issued by large Russian companies and banks and are tradable on the over-the-counter market. At 31 December 2008 these securities have maturity dates from February 2009 to August 2013 (2007: on demand) and yield to maturity from 0% to 11% p.a. (2007: 0%). OFZ bonds are Russian Rouble denominated government debt securities issued by the Ministry of Finance of the Russian Federation. These bonds are traded on MICEX. At 31 December 2008 OFZ bonds have maturity dates from April 2009 to February 2036 (2007: from April 2008 to February 2036), coupon rates of approximately from 5% to 10% p.a. (2007: from 6% to 10% p.a.) and yield to maturity from 6% to 12% p.a. (2007: from 5% to 8% p.a.), depending on the type of bond issue. Municipal bonds are Russian Rouble denominated debt securities issued by municipal administrations and regions of the Russian Federation. These bonds are traded on Moscow Interbank Currency Exchange (MICEX), other Russian stock exchanges or on the over-the-counter market. At 31 December 2008 these bonds have maturity dates from March 2009 to June 2013 (2007: from April 2008 to June 2012), coupon rates of approximately from 8% to 14% p.a. (2007: from 7% to 14% p.a.) and yield to maturity from 13% to 16% p.a. (2007: from 7% to 12% p.a.), depending on the type of bond issue. F F-74

320 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Securities at Fair Value Through Profit or Loss (Continued) Corporate Eurobonds are debt securities denominated in USD, issued by large Russian companies and are freely tradable internationally. At 31 December 2008 these bonds have maturity dates from June 2011 to July 2013 (2007: April 2010), coupon rates 9% p.a. (2007: 10% p.a.) and yield to maturity from 11% to 12% p.a. (2007: 9% p.a.), depending on the type of bond issue. Corporate shares are shares of Russian companies. The majority of corporate shares are freely tradable in Russia. Investments in mutual funds are Russian Rouble denominated investments without stated maturity. These funds invest into shares and debentures of large and medium Russian companies. The Group applies the following internal ratings to assess the credit risk for debt securities classified as repurchase receivable is as follows: Investment rating represents internal rating from A to B+, which is the highest rating indicating the lowest credit risk levels; Speculative rating represents internal rating bands from CCC+ to B-; Non-standard rating represents internal rating from CCC to D, which indicates the highest credit risk level. Analysis by credit quality of debt securities designated at fair value through profit or loss outstanding at 31 December 2008 is as follows: In thousands of Russian Roubles Corporate bonds and Eurobonds Promissory notes Federal loan bonds Municipal bonds Total Investment rating Speculative rating Non-standard rating Securities without internal rating Total debt trading securities Analysis by credit quality of debt securities at fair value through profit or loss outstanding at 31 December 2007 is as follows: In thousands of Russian Roubles Corporate bonds and Eurobonds Promissory notes Federal loan bonds Municipal bonds Total Investment rating Speculative rating Non-standard rating Securities without internal rating Total debt trading securities Securities at fair value through profit or loss as at 31 December 2008 and 31 December 2007 are neither past due nor impaired. Geographical, currency and interest rate analyses of securities at fair value through profit or loss are disclosed in Note 29. Information on securities at fair value through profit or loss issued by related parties is disclosed in Note 35. F F-75

321 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Due from Other Banks In thousands of Russian Roubles 31 December December 2007 Current term placements with other banks Reverse sale and repurchase agreements with other banks Total due from other banks At 31 December 2007 amounts due from other banks of RR thousand were effectively collateralised by securities purchased under reverse sale and repurchase agreements with the fair value of RR thousand. For the purpose of credit quality analysis of due from other banks the Group applies an internal rating system based on the nature of the counterparty. This internal rating system has five risk levels from A to E, where A is assigned to largest international banks and has the lowest credit risk level, and E is assigned to loans to Russian local commercial banks with the highest risk level assessment. Amounts due from other banks are not collateralised. Analysis by credit quality of amounts due from other banks outstanding at 31 December 2008 is as follows: In thousands of Russian Roubles Current term placements Reverse sale and repurchase agreements with other banks Total due from other banks C - Loans to Russian universal commercial banks E - Loans to Russian local commercial banks Total due from other banks Analysis by credit quality of amounts due from other banks outstanding at 31 December 2007 is as follows: In thousands of Russian Roubles Current term placements Reverse sale and repurchase agreements with other banks Total due from other banks A- Loans to largest international banks B- Loans to subsidiaries of largest international banks C - Loans to Russian universal commercial banks D - Loans to Russian banks, which are part of financial industrial groups E - Loans to Russian local commercial banks Total due from other banks The primary factor that the Group considers in determining whether a deposit is impaired is its overdue status. At 31 December 2008 and 31 December 2007, the Group did not have overdue amounts in due from other banks. F F-76

322 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Due from Other Banks (Continued) Movements in the provision for impairment of due from other banks are as follows: In thousands of Russian Roubles 31 December December 2007 Reverse Placements repurchase with other agreements banks Placements with other banks Reverse repurchase agreements Provision for impairment at 1 January Recovery of provision for impairment during the year - - (6 876) - Provision for impairment at 31 December The information on the estimated fair value of due to other banks is disclosed in Note 32. Geographical, currency, maturity and interest rate analyses of due from other banks are disclosed in Note 29. Information on related party balances is disclosed in Note Loans and Advances to Customers In thousands of Russian Roubles 31 December December 2007 Loans to legal entities Corporate loans Loans to small and medium-sized entities Loans to state and public organisations Reverse sale and repurchase agreements Loans to individuals Consumer loans Mortgage loans Car loans Plastic cards Total gross amount of loans and advances to customers Less: Provision for loan impairment ( ) ( ) Total loans and advances to customers At 31 December 2008, the Group had 20 borrowers (2007: 16 borrowers) with aggregated loan amounts above RR thousand. The total aggregate amount of these loans was RR thousand (2007: RR thousand), or 40% of the gross loan portfolio (2007: 28%). At 31 December 2008 included in loans to legal entities are loans to 7 companies under common control (2007: 3 companies under common control) with the total amount of RR thousand (2007: RR thousand) which are related parties of the Group. These loans do not have any collateral and bear annual interest rates in the range of 10% to 13% (2007:10% to 13%). Refer to Note 35. The Group uses the following classification of loans by classes: Loans to legal entities: Corporate loans - loans, issued to clients with annual revenue more than RR thousand; Loans to state and public organisations - loans, issued to state, municipal and budget organizations; F F-77

323 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers (Continued) Loans to medium-sized entities - loans, issued to clients with annual revenue from RR 300 thousand to RR thousand; Loans to small-sized entities - loans, issued to clients with annual revenue less than RR 300 thousand. Loans to individuals: Mortgage loans; Car loans; Plastic cards; Consumer loans. At 31 December 2008 loans and advances to customers of RR thousand (2007: RR thousand) are effectively collateralised by securities purchased under reverse sale and repurchase agreements at a fair value of RR thousand (2007: RR thousand). Movements in the provision for loan impairment during 2008 are as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage Consumer loans loans Car loans Plastic cards Total Provision for loan impairment at 1 January Provision for impairment during the year Amounts written off during the year as uncollectible - - ( ) - (5 653) - - ( ) Provision for loan impairment at 31 December F F-78

324 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers (Continued) Movements in the provision for loan impairment during 2007 are as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage Consumer loans loans Car loans Plastic card s Total Provision for loan impairment at 1 January Provision for impairment during the year Amounts written off during the year as uncollectible - - (28 560) - (5 344) - - (33 904) Provision for loan impairment at 31 December Economic sector risk concentrations within the customer loan portfolio are as follows: 31 December December 2007 In thousands of Russian Roubles Amount % Amount % Financial services Trade Agriculture and food processing Individuals Construction Manufacturing Chemical Government authorities and organisations Telecommunication Oil and gas Other Total loans and advances to customers (before impairment) State and public organisations exclude government owned profit oriented businesses. F F-79

325 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers (Continued) Information about loans and advances to customers by classes of collateral at 31 December 2008 is as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage loans Consumer loans Car loans Plastic cards Reverse sale and repurchase agreements Unsecured loans Loans collateralised by: - guarantee of state residential real estate other real estate tradable securities transport vehicles production equipment goods in stock and other property guarantees of third parties other assets Total loans and advances to customers Total Information about loans and advances to customers by classes of collateral at 31 December 2007 is as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage loans Consumer loans Car loans Plastic cards Reverse sale and repurchase agreements Unsecured loans Loans collateralised by: - guarantee of state residential real estate other real estate tradable securities transport vehicles production equipment goods in stock and other property guarantees of third parties other assets Total loans and advances to customers Total F F-80

326 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers (Continued) The Group applies the following internal ratings to assess the credit risk of its loans to legal entities: Investment rating represents internal rating from A to B+, which is the highest rating indicating the lowest credit risk levels; Speculative rating represents internal rating bands from CCC+ to B-; Non-standard rating represents CCC internal rating; High-risk represents internal rating below CC+; The Group does not have a separate credit quality internal rating system for loans to individuals, as each type of loan product to individuals has standard terms (e.g., mortgage loans, plastic cards overdrafts, car loans, etc.), and credit risk analysis is performed based on the statistics collected by the Group for each loan product. Analysis by credit quality of loans outstanding at 31 December 2008 is as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage loans Consumer loans Car loans Plastic cards Reverse sale and repurchase agreements Total Neither past due nor impaired Investment Speculative Non-standard High risk Loans without internal rating Total neither past due nor impaired Impaired loans Less than 180 days overdue Over 180 days overdue Loans to borrowers with overdue loans Total impaired loans Less impairment provisions ( ) (91 300) ( ) ( ) ( ) ( ) (465) - ( ) Total loans and advances to customers F F-81

327 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers (Continued) Analysis by credit quality of loans outstanding at 31 December 2007 is as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage loans Consumer loans Car loans Plastic cards Reverse sale and repurchase agreements Total Neither past due nor impaired Investment Speculative Non-standard High risk Loans without internal rating Total neither past due nor impaired Impaired loans Less than 180 days overdue Over 180 days overdue Loans to borrowers with overdue loans Other Total impaired loans Less impairment provisions ( ) (69 968) ( ) (96 197) ( ) ( ) (1) - ( ) Total loans and advances to customers F F-82

328 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers (Continued) The fair value of collateral in respect of loans impaired and at 31 December 2008 was as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage loans Consume r loans Car loans Plastic cards Total Fair value of collateral - impaired loans - state guarantees residential real estate other real estate tradeable securities vehicles equipments inventory third party guarantees other assets Total The fair value of collateral in respect of loans impaired and at 31 December 2007 was as follows: In thousands of Russian Roubles Corporate loans Loans to state and public organisations Loans to small and mediumsized entities Mortgage loans Consume r loans Car loans Plastic cards Total Fair value of collateral - impaired loans - residential real estate other real estate tradeable securities vehicles equipments inventory third party guarantees other assets Total The estimated fair value of each class of loans and advances to customers is disclosed in Note 32. Geographical, maturity, currency and interest rate analysis of loans and advances to customers is disclosed in Note 29. Information on related party balances is disclosed in Note 35. F F-83

329 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Repurchase Receivable Repurchase receivable represents securities sold under sale and repurchase agreements, which the counterparty has the right, by contract or custom, to sell or repledge. The repurchase agreements are short-term in nature and mature by 11 January In thousands of Russian Roubles 31 December December 2007 Corporate bonds Corporate shares Federal loan bonds (OFZ) Municipal bonds Global depository receipts Total repurchase receivable Corporate bonds are Russian Rouble denominated debt securities issued by large Russian companies and banks. These bonds are traded on Moscow Interbank Currency Exchange (MICEX), other Russian stock exchanges or on the over-the-counter market. As at 31 December 2008 corporate bonds had maturity dates from February 2009 to August 2013 (2007: from June 2008 to October 2011), coupon rates from 8% to 16% p.a. (2007: from 7% to 13% p.a.), and yield to maturity from 7% to 18% p.a. (2007: from 7% to 20% p.a.), depending on the type of bond issue. Corporate shares are shares of Russian companies. The majority of corporate shares are freely tradable in Russia. Federal loan bonds (OFZ) are Russian Rouble denominated government debt securities issued by the Ministry of Finance of the Russian Federation. These bonds are traded on MICEX. At 31 December 2008 OFZ bonds have maturity dates from April 2009 to February 2036 (2007: from April 2008 to February 2036), coupon rates of approximately from 6% to 12% p.a. (2007: from 6% p.a. to 10% p.a.) and yield to maturity from 7% to 11% p.a. (2007: from 5% to 7% p.a.), depending on the type of bond issue. Municipal bonds are Russian Rouble denominated debt securities issued by municipal administrations and regions of the Russian Federation. These bonds are traded on Moscow Interbank Currency Exchange (MICEX), other Russian stock exchanges or on the over-the-counter market. At 31 December 2008 these bonds have maturity dates from March 2009 to June 2013 (2007: from May 2010 to June 2015), coupon rates of approximately from 9% to 14% p.a. (2007: from 8% to 13% p.a.) and yield to maturity from 9% -11% p.a. (2007: from 7% to 13% p.a.), depending on the type of bond issue. The Group applies the following internal ratings to assess the credit risk for debt securities classified as repurchase receivable is as follows: Investment rating represents internal rating from A to B+, which is the highest rating indicating the lowest credit risk levels; Speculative rating represents internal rating bands from CCC+ to B-; Non-standard rating represents internal rating from CCC to D, which indicates the highest credit risk level. Analysis by credit quality of debt securities classified as repurchase receivable outstanding at 31 December 2008 is as follows: In thousands of Russian Roubles Corporate bonds Federal loan bonds (OFZ) Municipal bonds Total Investment rating Speculative rating Non-standard rating Total debt securities F F-84

330 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Repurchase Receivable (Continued) Analysis by credit quality of debt securities classified as repurchase receivable outstanding at 31 December 2007 is as follows: In thousands of Russian Roubles Corporate bonds Federal loan bonds (OFZ) Municipal bonds Total Investment rating Speculative rating Non-standard rating Total debt securities classified as repurchase receivable The primary factor that the Group considers in determining whether a debt security is impaired is its overdue status. Securities disclosed as repurchase receivable as at 31 December 2008 and 31 December 2007 are neither past due nor impaired. Geographical, maturity, currency and interest rate analysis of repurchase receivable is disclosed in Note 29. The information on repurchase receivable from related parties is disclosed in Note Investment Property In thousands of Russian Roubles Investment property at cost as at 1 January Additions Disposals ( ) ( ) Investment property at cost as at 31 December The Group did not classify any operating leases as investment property. At 31 December 2008 the investment property is mainly represented by a plot of land in the amount of RR thousand (2007: RR thousand) located in the centre of Kazan. This plot of land was acquired in August 2007 from a related party and is owned and controlled by the Group through its investment in Mutual Investment Fund Ak Bars Prespectiva. During the year 2008 a part of the land with cost of RR thousand was sold to a related party for the price of RR thousand. Income on sale of this investment property in the amount of RR thousand has been recognised in the line of Other operating income in the income statement. As per Management s estimates, at 31 December 2008 the fair value of the investment property could be within the approximate range of RR thousand to RR thousand (2007: from RR thousand to RR thousand) Geographical analyses of investment property are disclosed in Note 29. Information on related party balances is disclosed in Note 35. F F-85

331 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Premises, Equipment and Intangible Assets In thousands of Russian Roubles Premises Land Office and computer equipment Software licenses Construction in progress Total Cost at 1 January Accumulated depreciation ( ) - ( ) (25 541) - ( ) Carrying amount at 1 January Additions Transfer (84 232) - Disposals (carrying amount) (13 896) - (25 394) - - (39 290) Disposals (depreciation) Depreciation charge (Note 25) (49 061) - ( ) (20 438) - ( ) Carrying amount at 31 December Cost at 31 December Accumulated depreciation ( ) - ( ) (45 979) - ( ) Carrying amount at 31 December Additions Transfer ( ) - Disposals (carrying amount) (440) - (23 625) - - (24 065) Disposals (depreciation) Depreciation charge (Note 25) (48 044) - ( ) (20 450) - ( ) Cost at 31 December Accumulated depreciation ( ) - ( ) (66 428) - ( ) Carrying amount at 31 December Construction in progress consists of construction and refurbishment of branch premises. Upon completion, assets are transferred to premises and equipment. F F-86

332 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Other Financial Assets and Other Assets In thousands of Russian Roubles Note 31 December December 2007 Other financial assets Receivables and advance payments Fair value of financial derivative instruments Settlements on conversion operations Financial lease receivables Total other financial assets Other assets Apartments held for sale under the Group s mortgage programme Prepaid income tax Precious metals Other Total other assets The primary factor that the Group considers in determining whether other financial assets are impaired is their overdue status. At 31 December 2008 and 31 December 2007, the Group did not have overdue amounts in other financial assets. Information on related party balances is disclosed in Note 35. Refer to Note 32 for the disclosure of the fair value of each class of other financial assets. Receivables and advance payments mainly include outstanding trade debtors in the Russian Federation from day-to-day business activities of the Group. Also, included in the receivables and advance payments is receivable from a related party in the amount of RR thousand on investment property sale. Refer to Note 12. Information on related party balances and transactions is disclosed in Note Due to Other Banks In thousands of Russian Roubles 31 December December 2007 Funds provided by the CBRF Current term placements of other banks Sale and repurchase agreements with other banks Correspondent accounts and overnight placements of other banks Total due to other banks Funds in amount of RR have provided by the CBRF in October December 2008 for a period from 3 to 6 months bearing an weighted average annual interest rate of 12%. The Bank has the right to roll-over the terms of the agreements for a period of half a year. At 31 December 2008, the fair value of securities transferred to other banks under sale and repurchase agreements of RR thousand (2007: RR thousand) was RR thousand (2007: RR thousand). As at 31 December 2008 these securities are presented as repurchase receivable. Refer to Notes 11 and 31. As at 31 December 2007 a part of securities with the fair value of RR thousand was obtained by the Group under reverse sale and repurchase agreements. The rest of these securities with the fair value of RR thousand are presented as repurchase receivable. Refer to Notes 11 and 31. Refer to Note 32 for the disclosure of the fair value of each class of amounts due to other banks. Geographical, maturity, liquidity and interest rate analyses of due to other banks are disclosed in Note 29. Information on related party balances and transactions is disclosed in Note 35. F F-87

333 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Customer Accounts In thousands of Russian Roubles 31 December December 2007 State and public organisations - Current/settlement accounts Term deposits Other legal entities - Current/settlement accounts Term deposits Sale and repurchase agreements Individuals - Current/demand accounts Term deposits Sale and repurchase agreements Total customer accounts Economic sector concentrations within customer accounts are as follows: 31 December December 2007 In thousands of Russian Roubles Amount % Amount % Individuals Government authorities and state organisations Chemical industry Oil and gas Construction and manufacturing Financial services Agriculture and food processing Trade Other Total customer accounts At 31 December 2008 the Group had 9 customers (2007: 5 customers) with balances above RR thousand. The aggregate balance of these customers was RR thousand (2007: RR thousand), or 43% (2007: 27%) of total customer accounts. At 31 December 2008, the fair value of securities transferred to customers under sale and repurchase agreements of RR thousand (2007: RR thousand) was RR thousand (2007: RR thousand). Part of these securities with the fair value of thousand (2007: RR thousand) was obtained by the Group under reverse sale and repurchase agreements. The rest of these securities with the fair value of RR thousand (2007: RR thousand) are presented as repurchase receivable. Refer to Note 11. Geographical, currency, liquidity and interest rate analyses of analyses of customer accounts are disclosed in Note 29. Refer to Note 32 for the disclosure of the fair value of each class of customer accounts. Information on related party balances is disclosed in Note 35. F F-88

334 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Debt Securities in Issue In thousands of Russian Roubles 31 December December 2007 Promissory notes Bonds Total debt securities in issue Promissory notes are Russian Rouble and US Dollar denominated debt securities. At 31 December 2008 these promissory notes had maturity date from on demand to October 2014 (2007: from on demand to October 2014). Effective interest rate for promissory notes with on demand maturity was 0% p.a. (2007: 0% p.a.). Effective interest rate for term promissory notes was from 0% to 8% p.a. (2007: from 0% to 12% p.a.). Bonds are Russian Rouble denominated debt securities freely traded at Russian stock exchange. At 31 December 2008 the Group has 3 bonds: (i) bonds with the nominal value of RR thousand issued by the Bank in January 2006 with maturity date in January 2009 (these bonds have been repaid at maturity); (ii) bonds with the nominal value of RR thousand issued by the Bank in October 2008 with maturity date in October 2011; and (iii) bonds with the nominal value of RR thousand issued by the Bank in October 2008 with maturity date in October At 31 December 2008 the effective interest rates on these bonds were 8.4% p.a., 11.7% p.a. and 10.5% p.a., respectively. As at 31 December 2008 bonds issued by the Group in October-November 2008 with the total nominal amount of RR thousand were held by related parties (2007: nil). Refer to Note 35. Refer to Note 32 for the disclosure of the fair value of each class of debt securities in issue. Geographical, currency and interest rate analyses of debt securities in issue is disclosed in Note 29. Information on debt securities in issue held by related parties is disclosed in Note Syndicated Loans and Loan Participation Notes In thousands of Russian Roubles 31 December December 2007 Syndicated loan Loan participation notes Total syndicated loans and loan participation notes At 31 December 2008 the Group had a syndicated loan of USD thousand (RR thousand) received by the Group in April 2008 with maturity date in April This syndicated loan was received from a consortium of Russian and foreign banks. At 31 December 2008 the effective interest rate on this loan was 7.3% p.a. At 31 December 2007 the Group had three syndicated loans: (i) a syndicated loan of USD thousand (RR thousand) received by the Group in August 2006 with maturity date in March 2008, (ii) a syndicated loan of USD thousand (RR thousand) received by the Group in September 2007 with maturity date in September 2008, and (iii) a syndicated loan initially received by the Group in December 2006 in the amount of USD thousand (RR thousand) with original maturity in December 2007 and afterwards prolonged until December 2008 and reduced up to USD thousand (RR thousand). These syndicated loans were received from a consortium of Russian and foreign banks. At 31 December 2007 the effective interest rates on these loans were 8% p.a., 6.9% p.a. and 8% p.a. respectively. The syndicated loans outstanding as at 31 December 2007 were repaid at maturity in F F-89

335 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Syndicated Loans and Loan Participation Notes (Continued) At 31 December 2008 the syndicated loan was accounted for at amortised cost of RR thousand (2007: RR thousand). At 31 December 2008 the Group had medium term loan participation notes with nominal amount of USD thousand (RR thousand) issued in June 2007 maturing in June 2010, with an effective interest rate 8.8% p.a. (the transaction was structured as an issue of notes by Ak Bars Finance S.A.) and medium term loan participation notes with nominal amount of USD thousand (RR thousand) issued in June 2008 maturing in June 2011, with an effective interest rate 9.9% p.a. (the transaction was structured as an issue of notes by Ak Bars Finance S.A.) These notes carry semi-annual coupon of 8.3% p.a. and 9.3% p.a. respectively. At 31 December 2007 the Group had loan participation notes with nominal amount of USD thousand (RR thousand) issued in October 2005, maturing in October 2008, with an effective interest rate of 8.6% p.a. (the transaction was structured as an issue of notes by Ak Bars Finance S.A.) and medium term notes with a par value of USD thousand (RR thousand) issued in June 2007 maturing in June 2010 with an effective interest rate of 8.8% p.a. (the transaction was structured as an issue of notes by Ak Bars Finance S.A.) These notes carry semi-annual coupon of 8% p.a. and 8.3% p.a. respectively. At 31 December 2008 the loan participation notes were accounted for at amortised cost of RR thousand (2007: RR thousand). Refer to Note 32 for disclosure of the fair value of syndicated loans and loan participation notes. Geographical, currency and interest rate analyses of syndicated loans and loan participation notes is disclosed in Note Other Financial Liabilities Other financial liabilities comprise the following: In thousands of Russian Roubles Note 31 December December 2007 Trade payables Fair value of derivative financial instruments Total other financial liabilities Geographical, currency and interest rate analyses of other financial liabilities is disclosed in Note 29. Refer to Note 32 for disclosure of the fair value of each class of other financial liabilities. 20 Subordinated Debt Subordinated debt of RR thousand (2007: RR thousand) carries a fixed interest rate of 9.5% p.a. and matures in The debt ranks after all other creditors in case of liquidation. Subordinated debt is due in 2012 and represents subordinated loans received in Russian Roubles from a company controlled by the Tatarstan government in August These loans have interest rate linked to USD/RR exchange rate. This embedded foreign currency derivative provides a stream of interest payments that are denominated in USD but settled in Russian Roubles. The derivative is not separated because it is closely related to the host contract. The foreign currency gains and losses on the USD denominated element of the debt are recognised in profit or loss. Effective interest rate of subordinated debt at 31 December 2008 was 9.7% p.a. (2007: 9.7% p.a.). Refer to Note 32 for the disclosure of the fair value of subordinated debt. Geographical, maturity and interest rate analysis of subordinated debt is disclosed in Note 29. Information on related party balances is disclosed in Note 35. F F-90

336 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Share Capital and Additional Paid-In Capital In thousands of Russian Roubles except for number of shares Number of shares 31 December December 2007 Nominal Number of Nominal amount shares amount Inflation adjusted amount Inflation adjusted amount Ordinary shares Total share capital At 31 December 2008, all of the Group s outstanding shares were authorised, issued and fully paid in. All ordinary shares have a nominal value of RR 1 per share, rank equally and each share carries one vote. At 31 December 2008, the Tatarstan Republic through ministries, government agencies and related companies ultimately controlled 96% (2007: 96%) of the Group s share capital. Additional paid-in capital in the amount of RR thousand (2007: RR thousand) represents additional contributions from the shareholders received in February 2004, when shares issued but not previously paid have been paid in by the shareholders, and recognised by the Group within issued and fully paid share capital. 22 Accumulated Deficit In accordance with Russian legislation, the Group distributes profits as dividends or transfers them to reserves (fund accounts) on the basis of financial statements prepared in accordance with Russian Accounting Rules. The Bank s reserves under Russian Accounting Rules at 31 December 2008 are RR thousand (2007: RR thousand). 23 Interest Income and Expense In thousands of Russian Roubles Interest income Loans and advances to customers, except on impaired loans Debt securities at fair value through profit or loss Due from other banks Interest income on impaired financial assets (loans to customers) Total interest income Interest expense Term deposits of legal entities Debt securities in issue Term placements of other banks Current/demand accounts and term deposits of individuals Syndicated loans and loan participation notes Subordinated debt Current/settlement accounts of legal entities Total interest expense Net interest income F F-91

337 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Fee and Commission Income and Expense In thousands of Russian Roubles Fee and commission income Settlement transactions Cash transactions Operation with plastic cards Issuance of financial guarantees Securities transactions Currency transactions Cash collection Other Total fee and commission income Fee and commission expense Securities transactions Operation with plastic cards Settlement transactions Cash collection Cash transactions Guarantees received Other Total fee and commission expense Net fee and commission income Administrative and Other Operating Expenses In thousands of Russian Roubles Note Staff costs Other costs of premises and equipment Rent Depreciation of premises, equipment and intangible assets Advertising and marketing services Taxes other than on income Insurance expenses Security expenses Telecommunication expenses Charity Other Total administrative and other operating expenses Included in staff costs are statutory social security contributions of RR thousand (2007: RR thousand). F F-92

338 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Income Taxes Income tax credit / (expense) comprise the following: In thousands of Russian Roubles Current tax (55 469) ( ) Deferred tax (52 017) Income tax credit / (expense) for the year ( ) The income tax rate applicable to the majority of the Group s 2008 income is 24% (2007: 24%). In thousands of Russian Roubles (Loss) / profit before tax ( ) Theoretical tax credit / (expense) at statutory rate (2008: 24%; 2007: 24%) ( ) Tax effect of items which are not deductible or assessable for taxation purposes: - Income on government securities taxed at different rates Income which is exempt from taxation Non-operational activity expenses of the Group Impact of change in tax rate to 20% effective from 1 January 2009 ( ) - - Other non temporary differences Income tax credit / (expense) for the year ( ) On 26 November 2008, the Russian Federation reduced the standard corporate income tax rate from 24% to 20% with effect from 1 January The impact of the change in tax rate presented above represents the effect of applying the reduced 20% tax rate to deferred tax balances at 31 December Differences between IFRS and statutory taxation regulations in Russia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20% (2007: 24%), except for income on state securities, which is taxed at 15% (2007: 15%). In thousands of Russian Roubles 31 December 2007 Deferred tax charged/credited to profit or loss 31 December 2008 Tax effect of deductible/(taxable) temporary differences Fair valuation of securities at fair value through profit or loss and repurchase receivables ( ) Loan loss provision Tax loss carry forward Subordinated debt (64 994) Accruals (20 521) ( ) ( ) Premises and equipment (95 784) (72 576) Other differences reduces tax base ( ) ( ) Net deferred tax (liability)/asset ( ) F F-93

339 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Income Taxes (Continued) In thousands Russian Roubles 31 December 2006 Deferred tax charged/credited to profit or loss 31 December 2007 Tax effect of deductible/(taxable) temporary differences Loan loss provision Other differences reduces tax base Other differences increases tax base (14 680) Fair valuation of securities at fair value through profit or loss and repurchase receivables ( ) ( ) ( ) Premises and equipment ( ) (95 784) Subordinated debt (34 406) (30 588) (64 994) Accruals (17 962) (2 559) (20 521) Net deferred tax liability (63 525) (52 017) ( ) In the context of the Group s current structure and Russian tax legislation, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and the same taxation authority. As at 31 December 2008 deferred tax asset in amount of RR thousand (2007: nil) has been recognized in the consolidated balance sheet as the management believes that it is probable that future taxable profit will be available against which this recognized deferred tax asset can be utilized. In accordance with the management s estimates, the forecast of cumulative taxable profit of the Group for the next 5 years is RR 9.2 billion and for the next 10 years RR 29.0 billion, which should be sufficient to utilize RR thousand of deferred tax asset recognized as at 31 December Refer also to Note Dividends In thousands of Russian Roubles Ordinary Ordinary Dividends payable at 1 January Dividends declared during the year Dividends paid during the year ( ) ( ) Dividends payable at 31 December Dividends per share declared during the year (expressed in RR per share) All dividends are declared and paid in Russian Roubles. 28 Segment Analysis The Group s primary format for reporting segment information is business segments and the secondary format is geographical segments. Business segments. The Group is organised on the basis of three main business segments: Retail banking representing private banking services, private customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages. Corporate banking representing direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products. Investment banking representing financial instruments trading, structured financing, corporate leasing, merger and acquisitions advice. F F-94

340 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Segment Analysis (Continued) Segment information for the main reportable business segments of the Group for the years ended 31 December 2008 and 2007 is set out below: In thousands of Russian Roubles Retail banking Corporate banking Investment banking Eliminations Total 2008 External revenue Revenues from other segments ( ) - Total segment revenue ( ) Loss before tax / segment results ( ) ( ) ( ) - ( ) Income tax credit for the year Loss for the year ( ) Other segment items Provision for loan impairment ( ) ( ) - - ( ) Capital expenditure ( ) ( ) (30 661) - ( ) Depreciation and amortisation expense ( ) ( ) (13 037) - ( ) At 31 December 2008 Total segment assets ( ) Deferred tax assets Total assets Total segment liabilities ( ) ( ) ( ) ( ) Total liabilities ( ) F F-95

341 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Segment Analysis (Continued) In thousands of Russian Roubles Retail banking Corporate banking Investment banking Eliminations Total 2007 External revenues Intersegment revenue ( ) - Total segment revenue ( ) Profit before tax / segment results ( ) Income tax expense ( ) Profit for the year Other segment items Provision for loan impairment ( ) ( ) - - ( ) Capital expenditure ( ) ( ) (43 030) - ( ) Depreciation and amortisation expense ( ) ( ) (16 140) - ( ) At 31 December 2007 Total segment assets ( ) Total assets Total segment liabilities ( ) ( ) ( ) ( ) Deferred tax liabilities ( ) Total liabilities ( ) Geographical segments. Segment information for the main geographical segments of the Group is set out below for the years ended 31 December 2008 and In thousands of Russian Roubles Tatarstan Republic Other Russian regions Other countries Total 2008 External revenues Capital expenditure ( ) ( ) - ( ) 31 December 2008 Assets Liabilities Credit related commitments F F-96

342 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Segment Analysis (Continued) In thousands of Russian Roubles Tatarstan Republic Other Russian regions Other countries Total 2007 External revenues Capital expenditure ( ) ( ) - ( ) 31 December 2007 Assets Liabilities Credit related commitments External revenues and assets and credit related commitments have generally been allocated based on domicile of the counterparty. Cash on hand, premises and equipment and capital expenditure have been allocated based on the country in which they are physically held. 29 Financial Risk Management To ensure efficient risk management, the Group has created a risk management system incorporating the following risk management methodologies: Increasing the share of risk-free transactions. The Group sees its main economic priority in increasing the share of risk-free commission transactions in the total volume of operating profit. Stop-loss limits. Making decisions on the practicability of carrying out transactions with mandatory consideration of inherent risks. Rejecting a transaction if the amount of possible losses exceeds the established limit or potential economic benefits. Diversification. Decreasing the volume of possible losses through diversification of the Group s assets and liabilities (limits on volumes of transactions with counterparties, economic entities; limits on types of financial instruments, positional VaR limits on instruments); Considering risk premiums in evaluating the comparative efficiency of the Group s transactions. The efficiency of the Group s transactions is evaluated with mandatory consideration of the volume of expected losses and the cost of coverage of inherent anticipated losses. Compensation. Limiting (hedging) risks using: Insurance; Derivatives for compensating possible losses on hedged assets; Incorporating financial instruments with differently directed sensitivity to homogenous risks into the trading portfolio. The Group s risk management policy covers credit, market (equity, currency, interest rate), liquidity and operational (including legal and reputational) risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. Operational, legal and reputational risk management ensures proper functioning of all systems and structures of the Group and enables to minimise the impact of negative events of an operational nature on the Group s activity and financial results. Credit risk. Given the specific nature of the Group s activity, exposure to credit risk, which is the risk that a counterparty will be unable to pay all amounts in full when due, is the main type of risk inherent in the Group s operations. Credit risk management covers evaluation and control of credit risk associated both with individual borrowers and groups of interrelated borrowers. The risk evaluation and decision making processes are strictly regulated. The Group has collegial bodies (committees) responsible for setting limits on counterparties and making credit and investment decisions. F F-97

343 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The Big Credit Committee of the Bank s Head Office considers applications for loans in excess of RR 10 million. Applications for loans below RR 10 million are considered by the Small Credit Committee. The Bank s territorial divisions also have own credit committees authorised to make decisions within the autonomous credit limits set for this particular division. For the purpose of credit risk management staff of credit divisions regularly (at least quarterly) review client s business and financial results using the Group s in-house credit risk evaluation methodologies. Credit risk is evaluated on the basis of the internal credit rating system. Credit exposures to significant customers are also monitored by the Risk Review Department through issuing monthly analytical memoranda on risks to the Group s management. Any significant exposures to customers with deteriorating creditworthiness are reported to, and reviewed by, the Group s management. The Group monitors exposure to banks using a system of limits set by the Bank s Limit Committee on the basis of the developed original methodology of evaluating credit institutions financial position. The Bank s Risk Review Department monitors counterparties creditworthiness on a monthly basis by issuing recommendations for changing the existing limits. Credit exposure to other groups of borrowers (other than banks) is also monitored through setting limits on different types and terms of transactions for each individual counterparty and industry segment (economic entity), including regular monitoring of borrowers creditworthiness on the basis of evaluation and rating systems. The Group sets the following credit limits: Limit on assets exposed to credit risk; Limits on short-term interbank transactions with counterparty banks; Limits on investments in issuers debt securities; Limits on investments in groups of interrelated counterparties; Limits on investments by industries; and Limit on economic entity s liabilities to the Group. Actual compliance with limits with regard to accepted risk is monitored on a daily basis. The management monitors concentration of credit risk with industry segments, groups of interrelated borrowers and types of assets on a monthly basis. Credit risk concentration is monitored on the basis of the above limits. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Group uses the same credit policies in making conditional obligations as it does for onbalance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures. Market risk. The Group takes on exposure to market risks arising from open positions in interest rate, currency, equity and debt instruments, all of which are exposed to general and specific market movements. The Group manages market risk using a system of limits on possible losses from unfavourable market fluctuations. Limits are set by the Limit Committee and adjusted with consideration of aggregate VaR evaluation of price risk inherent in equity portfolio, currency risk and interest rate risk components. Under credit crunch conditions, the market risk estimation based on statistics of real losses taken within the crisis time interval was added to traditional VAR evaluation. The given approach has allowed estimate possible losses more adequately from unusual changes of market indicators and limited affect of market risks on the Group s indicators. F F-98

344 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) Market risks are managed through forming and observing market risk limits. Market risk limits include: Aggregate market risk limit; Open currency position limit; Open position on investment operations for the security portfolio (exposed to equity risk); Limits on transactions broken down by issuer; Limits on transactions with debt securities broken down by issuer and type of transactions; Limits on the security portfolio (by type of transactions investment, speculative, repo transactions); Limits on losses from trading transactions (stop-loss, take-profit); and Concentration limits on investments by industries. The Group evaluates market risk both for individual financial instruments and the asset portfolio. The responsibility for market risk evaluation and issue of recommendations for managing this risk on a regular basis lies with the Risk Review Department, which provides the results of risk evaluation in the form of monthly memoranda to the Group s management. Market risk evaluation can also be done in other cases, for example, when there are dramatic changes in market conditions. Given the established investment policy of the Group (a relatively small amount of assets exposed to market risk, predominance of bonds in the equity portfolio), the level of market risk is relatively low and insignificant against the level of credit risk. In these circumstances managing market risk on a monthly basis is sufficient in terms of manageability of this type of risk. Currency risk. The Group takes on exposure to the effects of movements in foreign exchange rates on its financial position and cash flows. The Assets and Liability Committee sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group s exposure to foreign currency exchange rate risk at the balance sheet date: In thousands of Russian Roubles Monetary financial assets Monetary Derivatives Net balance Monetary Monetary Derivatives financial sheet financial financial liabilities position assets liabilities Net balance sheet position Russian Roubles (83 778) US Dollars ( ) ( ) ( ) Other ( ) Total ( ) The following table presents sensitivities of profit or loss and equity to reasonably possible changes in exchange rates applied at the balance sheet date relative to the functional currency of the Group, with all other variables held constant: In thousands of Russian Roubles Impact on profit or loss Impact on equity Impact on profit or loss Impact on equity US Dollar strengthening by 25% (2007: 10%) ( ) ( ) (56 634) (56 634) US Dollar weakening by 25% (2007: 10%) F F-99

345 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The exposure was calculated only for monetary balances denominated in currencies other than the functional currency of the respective entity of the Group. Interest rate risk. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Group is exposed to interest rate risk, principally through fixed rate loans, the amounts and terms of which differ from the amounts and terms of fixed rate borrowings. In practice, interest rates are set for a short period of time. In practice, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions. The Bank s Limit Committee monitors on a daily basis and sets limits on the level of mismatch of interest rate reprising that may be undertaken. In the absence of any available hedging instruments, the Group normally seeks to match its interest rate positions. The Group is exposed to cash flow interest rate risk, principally through assets and liabilities, for which interest rates are reset as market rates change. The Group is exposed to fair value interest rate risk as a result of assets and liabilities at fixed interest rates. In practice, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions. In carrying out the risk sensitivity analysis, the Group assumed a 100 basis points change in base interest rates as the reasonably possible change (the difference between the minimum and the maximum annual values in LIBOR in 2008 was approximately 100 basis points). The key financial instrument that causes sensitivity of profit to market interest rate changes is the syndicated loan, for which the interest rate depends on LIBOR. At 31 December 2008, if interest rates at that date had been 100 basis points lower with all other variables held constant, profit for the year would have been RR thousand (2007: RR thousand) higher, mainly as a result of lower interest expense on floating rate liabilities. If interest rates at that date had been 100 basis points higher with all other variables held constant, profit for the year would have been RR thousand (2007: RR thousand) lower, mainly as a result of higher interest expense on floating rate liabilities. The table below summarises the Group s exposure to interest rate risks. The table presents the aggregated amounts of the Group s financial assets and liabilities at carrying amounts, categorised by the earlier of contractual interest reprising or maturity dates. In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months More than 1 year Total 31 December 2008 Total financial assets Total financial liabilities Net interest sensitivity gap at 31 December 2008 ( ) ( ) December 2007 Total financial assets Total financial liabilities Net interest sensitivity gap at 31 December 2007 ( ) ( ) ( ) F F-100

346 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The Group monitors interest rates for its financial instruments. The table below summarises interest rates based on reports reviewed by key management personnel: In % p.a. RR USD Euro RR USD Euro Assets Securities at fair value through profit or loss 11% 10% - 10% 9% - Due from other banks 11% 5% - 11% 5% 5% Loans and advances to customers 14% 13% 8% 13% 12% 6% Repurchase receivable 10% - - 9% - - Liabilities Due to other banks 11% 6% 5% 6% 6% 5% Customer accounts 9% 6% - 9% 8% - Debt securities in issue 9% 8% - 9% 8% - Syndicated loans - 8% - - 8% - Loan participation notes - 9% - - 9% - Subordinated debt 10% % - - The sign - in the table above means that the Group does not have the respective assets or liabilities in the corresponding currency. Other price risk. The Group has exposure to equity price risk. Transactions in equity products are monitored and authorised by the Group treasury. At 31 December 2008, if equity prices at that date had been 30% (2007: 30%) lower or higher with all other variables held constant, profit for the year and equity would have been RR thousand (2007: RR thousand) lower or higher, mainly as a result of revaluation of corporate shares at fair value through profit or loss. Geographical risk concentrations. The geographical concentration of the Group s assets and liabilities at 31 December 2008 is set out below: In thousands of Russian Roubles Tatarstan Republic Other Russian regions Other countries Assets Cash and cash equivalents Mandatory cash reserves in CBRF Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Investment property Investment in associate Deferred tax asset Premises, equipment and intangible assets Other financial assets Other assets Total assets Liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Deferred tax liability Other financial liabilities Other liabilities Subordinated debt Total liabilities Net balance sheet position ( ) Credit related commitments (Note 31) Total F F-101

347 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The geographical concentration of the Group s assets and liabilities at 31 December 2007 is set out below: In thousands of Russian Roubles Tatarstan Republic Other Russian regions Other countries Assets Cash and cash equivalents Mandatory cash balances with the Central Bank of the Russian Federation Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Investment property Investment in associate Premises, equipment and intangible assets Other financial assets Other assets Total assets Total Liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Deferred tax liabilities Other financial liabilities Other liabilities Subordinated debt Total liabilities Net balance sheet position ( ) Credit related commitments (Note 31) Liquidity risk. Liquidity risk is defined as the risk when the maturity of assets and liabilities does not match. The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits, loan draw downs and guarantees. The Group does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Group determines day trading instant liquidity, current term liquidity and structural liquidity risk. Liquidity risk is also managed through forming and observing liquidity risk limits. include the following structural limits: Liquidity risk limits Minimum amount of highly liquid assets; Minimum amount of liquid assets (up to 30 days); Maximum amount of liabilities payable on demand; Maximum amount of net loans in the interbank lending market; Maximum amount of own issued notes; Maximum amount of the loan portfolio (other than interbank lending); Limit on accumulated liquidity imbalance (gap); Maximum amount of investments in assets without fixed maturity date and assets of uncertain timing; and Limit on mismatch between types of funding sources and types of investments. F F-102

348 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The responsibility for liquidity risk management rests with the Bank s Treasury, Risk Review Department, Review and Planning Department, Operational Liquidity Management Committee ( OLMC ), Assets and Liability Committee ( ALC ) and Limit Committee ( LC ). The Treasury Department is responsible for monitoring of daily liquidity position, regular liquidity stress testing under a variety of scenarios, covering both normal and more severe market conditions, and also forming of payment schedules. The OLMC operates on a daily basis and regulates liquidity risk using internal and external ratios, based on the assets-to-liabilities ratio by maturity and payment schedule. The main purpose of the Committee is maintaining the share of liquid assets at a level sufficient for meeting obligations to customers notwithstanding any changes in external environment. In case of a decrease in liquidity as a result of emergency, the Group has a contingency plan for restoring and maintaining a sufficient and acceptable liquidity level. The ALC determines the medium-term and short-term asset/liability management strategy for maintaining current and long-term liquidity at an acceptable level. ALC is ultimately responsible for liquidity risk management and reports directly to the Executive Board. The Limit Committee sets and regulates the Group s limit policy, including liquidity limits. Liquidity requirements for guarantees and standby letters of credit are considerably less than the amount of the commitment because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded. The table below shows liabilities at 31 December 2008 by their remaining contractual maturity. The amounts disclosed in the maturity table are the contractual undiscounted cash flows, including gross finance lease obligations (before deducting future finance charges), prices specified in deliverable forward agreements to purchase financial assets for cash, contractual amounts to be exchanged under a gross settled currency swaps, and gross loan commitments. Such undiscounted cash flows differ from the amount included in the balance sheet because the balance sheet amount is based on discounted cash flows. Net settled derivatives are included at the net amounts expected to be paid. The maturity analysis of undiscounted financial liabilities at 31 December 2008 is as follows: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 12 months to 5 years Over 5 years Total Financial liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Other financial liabilities Subordinated debt Gross settled financial derivatives (outflows) Gross loan commitments Total potential future payments for financial obligations F F-103

349 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The maturity analysis of undiscounted financial liabilities at 31 December 2007 is as follows: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 12 months to 5 years Over 5 years Total Financial liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Other financial liabilities Subordinated debt Gross settled financial derivatives (outflows) Gross loan commitments Total potential future payments for financial obligations The Group does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Group monitors expected maturities, which may be summarised as follows at 31 December 2008: In thousands of Russian Roubles Demand and less than 1month From 1 to 6 months From 6 to 12 months From 12 months to 5 years Over 5 years Total Financial assets Cash and cash equivalents Mandatory cash reserves in CBRF Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Other financial assets Total financial assets Financial liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Other financial liabilities Subordinated debt Total financial liabilities Net liquidity gap at 31 December 2008 ( ) ( ) Cumulative liquidity gap at 31 December 2008 ( ) ( ) ( ) ( ) F F-104

350 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Financial Risk Management (Continued) The analysis by expected maturities may be summarised as follows at 31 December 2007: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 12 months to 5 years Over 5 years Total Financial assets Cash and cash equivalents Mandatory cash reserves in CBRF Securities at fair value through profit or loss Due from other banks Loans and advances to customers Repurchase receivable Other financial assets Total financial assets Financial liabilities Due to other banks Customer accounts Debt securities in issue Syndicated loans Loan participation notes Other financial liabilities Subordinated debt Total financial liabilities Net liquidity gap at 31 December 2007 ( ) ( ) ( ) Cumulative liquidity gap at 31 December 2007 ( ) ( ) ( ) Customer accounts are shown in the above table on the basis of their contractual maturity. However, in accordance with Russian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to accrued interest. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. The Group s management believes, that in spite of a substantial portion of customers accounts being on demand and less than one month, diversification of these funds by number and type of depositors (including a significant portion of funds attracted from related parties), the Group s relations with the Government of the Republic of Tatarstan, and the past experience of the Group would indicate that these accounts provide a long-term and stable source of funding for the Group. As at 31 December 2008 approximately 32% (2007: 35%) of customer accounts and debt securities in issue on demand and with maturity up to 6 months were with related parties. Refer to Note 35 for more detailed information on balances with related parties. Liquidity requirements for guarantees and standby letters of credit are considerably less than the amount of the commitment because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded. F F-105

351 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Management of Capital The Group s objectives when managing capital are (i) to comply with the capital requirements set by the Central Bank of the Russian Federation, (ii) to safeguard the Group s ability to continue as a going concern and (iii) to maintain a sufficient capital base to achieve a capital adequacy ratio based on the Basel Accord of at least 8%. Compliance with capital adequacy ratios set by the Central Bank of the Russian Federation is monitored monthly with reports outlining their calculation reviewed and signed by the Chief Executive Officer and Chief Accountant. Other objectives of capital management are evaluated annually. Under the current capital requirements set by the CBRF, banks have to maintain a ratio of regulatory capital to risk weighted assets ( statutory capital ratio ) above the prescribed minimum level. The minimum ratio at 31 December 2008 was 10% (2007: 10%). Regulatory capital is based on the Group s reports prepared under Russian accounting standards and comprised RR thousand at 31 December 2008 (2006: RR thousand). The Group is also subject to minimum capital requirements established by covenants stated in loan agreements, including capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2005), commonly known as Basel I. 31 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Group may be received. On the basis of its own estimates and internal professional advice management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in these consolidated financial statements. Tax legislation. Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. In October 2006, the Supreme Arbitration Court issued guidance to lower courts on reviewing tax cases providing a systemic roadmap for anti-avoidance claims, and it is possible that this will significantly increase the level and frequency of scrutiny by tax authorities. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Russian transfer pricing legislation introduced 1 January 1999 provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. In the past, the arbitration court practice in this respect has been contradictory. Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could potentially be challenged. Given the brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial condition and/or the overall operations of the entity. F F-106

352 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Contingencies and Commitments (Continued) In addition to the above transfer pricing matters, the management estimates that the Group has possible obligations from exposure to other than remote tax risks of RR thousand (2007: RR thousand). The Management of the Group believes that its interpretation of the relevant legislation is appropriate and the Group s tax, currency and customs positions will be sustained. Therefore, the Group did not create any provision for potential tax liabilities as of 31 December 2008 (2007: no provision for potential tax liabilities). Capital expenditure commitments. At 31 December 2008, the Group had no contractual capital expenditure commitments in respect of premises and equipment and in respect of software and other intangible assets. (31 December 2007: no capital expenditure commitments). Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows: In thousands of Russian Roubles Not later than 1 year Later than 1years not later than 5 years Later than 5 years Total operating lease commitments Compliance with covenants. The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with such covenants may result in penalty sanctions for the Group. The most significant covenants include: To comply with the CBRF s ratios and requirements; To maintain a ratio of regulatory capital to risk weighted assets, calculated in accordance with the Basel Accord, of at least 12%. Management believes the Group is in compliance with the above covenants. Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments, if the unused amounts were to be drawn down. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows: In thousands of Russian Roubles 31 December December 2007 Guarantees issued Import letters of credit Total credit related commitments As at 31 December 2008, the Group also had commitments in relation to unused credit lines totalling RR thousand (2007: RR thousand). F F-107

353 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Contingencies and Commitments (Continued) The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. Credit related commitments are denominated in currencies as follows: In thousands of Russian Roubles 31 December December 2007 Russian Roubles US Dollars Other Total Fiduciary assets. These include assets that are held on behalf of the customers of the Group and other companies of the Group and are not assets of the Group. Nominal values disclosed below are normally different from the fair values of respective securities. The fiduciary assets fall into the following categories: In thousands of Russian Roubles Nominal value at 31 December 2008 Nominal value at 31 December 2007 Clients securities held in custody of other depositories Clients securities held in custody of the Group Assets pledged and restricted. The Group had assets pledged as collateral with the following carrying value: In thousands of Russian Roubles Note Asset Related Asset pledged liability pledged Related liability Securities at fair value through profit or loss pledged as collateral under the CBRF s credit line Securities pledged as collateral under sale and repurchase agreements Securities purchased under reverse sale and repurchase agreements and pledged under sale and repurchase agreements 15, Mandatory cash balances with the CBRF in the amount of RR thousand (2007: RR thousand) represent mandatory reserve deposits which are not available to finance the Group s day to day operations. F F-108

354 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Fair Value of Financial Instruments Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Financial instruments carried at fair value. Securities at fair value through profit or loss, repurchase agreements and financial derivatives are carried at fair value. Fair values were determined based on quoted market prices, except for certain securities at fair value through profit or loss for which there were no available external independent market price quotations. These securities have been fair valued by the Group on the basis of consideration of other relevant information such as discounted cash flows and financial data of the investees and application of other valuation methodologies. Cash and cash equivalents are carried at amortised cost which approximates current fair value. Loans and other financial assets carried at amortised cost. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on classes of financial instruments, currency, maturity of the instrument and credit risk of the counterparty and were as follows: In percents Due from other banks 10 % to 16 % p.a. 4 % to 9 % p.a. Loans and advances to customers Loans to legal entities 12 % to 24 % p.a. 11 % to 12 % p.a. Loans to individuals 13 % to 29 % p.a. 14 % to 15 % p.a. Liabilities carried at amortised cost. The fair value of floating rate instruments is based on quoted market prices. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period ( demandable liabilities ) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. In percents Due to other banks 4.5% to 13 % p.a. 4 % to 9 % p.a. Customer accounts 5 % to 15 % p.a. 4 % to 10 % p.a. Syndicated loans 6 % p.a. 5 % to 6 % p.a. Subordinated loan 15 % p.a. 4 % to 10 % p.a. Derivative financial instruments. All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. Their fair values are based on observable market prices. Refer to Notes 4 and 34. F F-109

355 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Fair value of Financial Instruments (Continued) Fair values of financial instruments are as follows at 31 December 2008: In thousands of Russian Roubles 31 December December 2007 Carrying Fair value Carrying Fair value value value FINANCIAL ASSETS CARRIED AT AMORTISED COST Cash and cash equivalents Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Settlement accounts with trading systems Correspondent accounts and overnight placements with other banks Mandatory cash balances with the Central Bank of Russian Federation Due from other banks Current term placements of other banks Reverse sale and repurchase agreements with other banks Loans and advances to customers Corporate loans Loans to state and public organisations Loans to small and medium-sized companies Consumer loans Mortgage loans Car loans Plastic cards Reverse sale and repurchase agreements Receivables and advance payments Settlements on conversion operations Financial lease receivables FINANCIAL ASSETS CARRIED AT FAIR VALUE Securities at fair value through profit or loss Corporate shares Global depository receipts Corporate bonds Federal loan bonds Investments in mutual funds Municipal bonds Corporate Eurobonds Promissory notes Repurchase receivable Corporate shares Corporate bonds Federal loan bonds Global depository receipts Municipal bonds Other financial assets Fair value of derivative financial instruments Total financial assets F F-110

356 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Fair Value of Financial Instruments (Continued) In thousands of Russian Roubles 31 December December 2007 Carrying Fair value Carrying Fair value value value FINANCIAL LIABILITIES CARRIED AT AMORTISED COST Due to other banks Current term placements of other banks Sale and repurchase agreements with other banks Correspondent accounts and overnight placements of other banks Funds provided by the Bank of Russia Customer accounts - Current/settlement accounts of state and public organisations Term deposits of state and public organisations Current/settlement accounts of other legal entities Term deposits of other legal entities Sale and repurchase agreements Current/demand accounts of individuals Term deposits of individuals Debt securities in issue - Promissory notes Debentures Loan participation notes - Loan participation notes Syndicated loans - Syndicated loans Other financial liabilities - Trade payables Fair value of derivative financial instruments Subordinated debt - Subordinated debt Total financial liabilities F F-111

357 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Presentation of Financial Instruments by Measurement Category For the purposes of measurement, IAS 39, Financial Instruments: Recognition and Measurement, classifies financial assets into the following categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit or loss ( FVTPL ). Financial assets at fair value through profit or loss have two subcategories: (i) assets designated as such upon initial recognition, and (ii) those classified as held for trading. The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2008: In thousands of Russian Roubles Loans and receivables Trading assets Assets designated at FVTPL ASSETS Cash and cash equivalents Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Settlement accounts with trading systems Correspondent accounts and overnight placements with other banks Mandatory cash balances with the Central Bank of Russian Federation Securities at fair value through profit or loss Corporate shares Global depository receipts Corporate bonds Investments in mutual funds Municipal bonds Federal loan bonds Corporate Eurobonds Promissory notes Total Due from other banks Current term placements of other banks Loans and advances to customers Corporate loans Loans to state and public organisations Loans to small and medium-sized companies Consumer loans Mortgage loans Car loans Plastic cards Reverse sale and repurchase agreements Repurchase receivable Corporate shares Global depository receipts Corporate bonds Municipal bonds Federal loan bonds Other financial assets Receivables and advance payments Fair value of derivative financial instruments Settlements on conversion operations Financial lease receivables Total financial assets Non-financial assets Total assets F F-112

358 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Presentation of Financial Instruments by Measurement Category (Continued) The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2007: In thousands of Russian Roubles Loans and receivables Trading assets Assets designated at FVTPL ASSETS Cash and cash equivalents Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Settlement accounts with trading systems Correspondent accounts and overnight placements with other banks Mandatory cash balances with the Central Bank of Russian Federation Securities at fair value through profit or loss Corporate shares Corporate bonds Investments in mutual funds Municipal bonds Federal loan bonds Corporate Eurobonds Promissory notes Due from other banks Current term placements of other banks Reverse sale and repurchase agreements with other banks Loans and advances to customers Corporate loans Loans to state and public organisations Loans to small and medium-sized companies Consumer loans Mortgage loans Car loans Plastic cards Reverse sale and repurchase agreements Repurchase receivable Corporate shares Global depository receipts Corporate bonds Municipal bonds Federal loan bonds Other financial assets Receivables and advance payments Fair value of derivative financial instruments Settlements on conversion operations Financial lease receivables Total financial assets Total Non-financial assets Total assets As of 31 December 2008 and 31 December 2007 all of the Group s financial liabilities except for derivatives were carried at amortised cost. Derivatives belong to the fair value through profit or loss measurement category. F F-113

359 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Derivative Financial Instruments Foreign exchange and other derivative financial instruments entered into by the Group are generally traded in an over-the-counter market with professional market counterparties on standardised contractual terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign exchange rates or other variables relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The table below sets out fair values, at the balance sheet date, of currencies receivable or payable under foreign exchange forward contracts entered into by the Group. The table reflects gross positions before the netting of any counterparty positions (and payments) and covers the contracts with settlement dates after the respective balance sheet date. The contracts are short term in nature. In thousands of Russian Roubles Contracts with positive fair value Contracts Contracts with with negative positive fair fair value value Contracts with negative fair value Foreign exchange forwards: fair values, at the balance sheet date, of - USD receivable on settlement (+) USD payable on settlement (-) ( ) ( ) ( ) - - Euros receivable on settlement (+) Euros payable on settlement (-) RR receivable on settlement (+) RR payable on settlement (-) ( ) - - ( ) - Other currencies payable on settlement (-) - - (49 011) - Net fair value of foreign exchange forwards (69 238) ( ) Precious metals forward contracts: fair value at the balance sheet date: - USD payable on settlement (-) - - ( ) - - Gold receivable on settlement (+) Silver receivable on settlement (+) RR payable on settlement (-) ( ) - ( ) - Net fair value of precious metals forward contracts Currency swaps: fair values, at the balance sheet date, of - USD receivable on settlement (+) RR payable on settlement (-) ( ) - - ( ) Net fair value of currency swaps ( ) Total net fair value of derivative financial instruments (69 238) ( ) F F-114

360 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Related Party Transactions Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. In thousands of Russian Roubles Tatarstan Republic Government bodies and state organisations Russian Federation Government bodies and state organisations Other Other Shareholders related parties Tatarstan Republic Government bodies and state organisations Russian Federation Government bodies and state organisations Other Shareholders Other related parties Cash and cash equivalents (contractual interest rate: 2008: 0%-5.5%; 2007: 0%-4.9%) Mandatory cash balances with the CBRF Securities at fair value through profit or loss and repurchase receivables Corporate shares Corporate bonds (contractual interest rate: 2008: 8%-16%; 2007: 7%-10% Federal loan bonds (OFZ) (contractual interest rate: 2008: 6%-11%; 2007: 6%-10%) Municipal bonds (contractual interest rate: 2008: 7%-14%; 2007: 7%-14%) Promissory notes (contractual interest rate: 2008: 0%-11%; 2007: 0%) Investments in mutual funds Investment in associate F F-115

361 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Related Party Transactions (Continued) In thousands of Russian Roubles (Continued) Tatarstan Russian Other Shareholders Other Tatarstan Russian Republic Federation related Republic Federation Govern- Govern- parties Govern- Govern- ment bodies and state organisations ment bodies and state organisations ment bodies and state organisations ment bodies and state organisations Other Shareholders Other related parties Gross amount of loans and advances to customers (contractual interest rate: 2008: 5.0%- 18%; 2007: 5%-14%) Impairment provisions for loans and advances to customers ( ) (80 041) ( ) ( ) (59 325) (32 582) ( ) (40 004) Other assets Due to other banks (contractual interest rate: 2008: 5%) Customer accounts Current/settlement accounts (contractual interest rate: 2008: 0%; 2007: 0%) Term deposits (contractual interest rate: 2008: 1%-9%; 2007: 2%-11%) Debt securities in issue (contractual interest rate: 2008: 0%-12%; 2007: 0%-11%) Subordinated debt (contractual interest rate: 2008: 9%, 2007: 9%) Other liabilities F F-116

362 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Related Party Transactions (Continued) Off-balance sheet items for the years ended 31 December 2008 and 31 December 2007 are as follows: In thousands of Russian Roubles Tatarstan Republic Government bodies and state organisations Russian Federation Government bodies and state organisations Other Other Tatarstan Russian Shareholders related Republic Federation parties Govern- Govern- ment bodies and state organisations ment bodies and state organisations Other Shareholders Other related parties Letters of credit Guarantees issued The income and expense items for the years ended 31 December 2008 and 31 December 2007 were as follows: In thousands of Russian Roubles Tatarstan Republic Government bodies and state organisations Russian Federation Government bodies and state organisations Other Other Shareholders related parties Tatarstan Republic Government bodies and state organisations Russian Federation Government bodies and state organisations Other Shareholders Other related parties Interest income Due from other banks Loans and advances to customers Securities at fair value through profit or loss Interest expense Duetoother banks (10 835) - - Customer accounts ( ) (2) ( ) (7 145) ( ) (610) ( ) (71) Debt securities in issue ( ) ( ) (51 259) - - Subordinated debt - - ( ) ( ) - Fee and commission income Gainslesslosses from securities at fair value through profit or loss ( ) ( ) (98) (63 583) - - Administrative and other operating expenses (4 563) (1 012) - (388) ( ) (2 172) (351) (4 225) Other related parties in the tables above are represented mainly by entities with which the Group has significant shareholders in common. In 2008 the total remuneration of key management comprised only short-term benefits and amounted to RR thousand (2007: RR thousand). F F-117

363 Level: 2 From: 2 Wednesday, November 11, :10 eprint Section 12c Ak Bars Bank Group Notes to the Consolidated Financial Statements 31 December Principal Subsidiaries, Associates and Joint Ventures Company Nature of business Percentage of ownership Country of incorporation Location OAO Leasing Company of Ak Bars Bank Finansovaya Economicheskaya Gruppa Leasing 100 Russia Kazan OOO Ak Bars Ipoteka Real estate 100 Russia Kazan Investment 100 Russia Moscow OOO CB Naratbank Banking 88 Russia Saratov Mutual Investment Fund Ak Bars Prespectiva Real estate 100 Russia Kazan Mutual Investment Fund Ak Bars Zemelniy Fond Real estate, Investments 56 Russia Kazan Mutual Investment Fund Ak Bars Nedvizhimost Real estate 100 Russia Kazan Mutual Investment Fund Ak Bars Stolitsa Real estate 100 Russia Kazan AkBars Kapital Investment 20 Russia Kazan 37 Subsequent Events On 30 March 2009 an extraordinary shareholders meeting approved an additional issue of 9 billion ordinary shares with nominal value of RR 1 per share, ranked equally and carrying one vote each. On 8 April 2009 the Group repaid the syndicated loan in amount of USD 200 million, received in April 2008 from a consortium of international banks. F F-118

364 Level: 0 From: 0 Tuesday, November 10, :17 eprint Section 12d AK BARS BANK GROUP International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report 31 December 2007 F-119

365 Level: 0 From: 0 Tuesday, November 10, :17 eprint Section 12d Ak Bars Bank Group Consolidated Financial Statements and Independent Auditor s Report CONTENTS INDEPENDENT AUDITOR S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet... 1 Consolidated Income Statement... 2 Consolidated Statement of Changes in Equity... 3 Consolidated Statement of Cash Flows... 4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Introduction Operating Environment of the Group Summary of Significant Accounting Policies Critical Accounting Estimates, and Judgements in Applying Accounting Policies Adoption of New or Revised Standards and Interpretations New Accounting Pronouncements Cash and Cash Equivalents Securities at Fair Value Through Profit or Loss Due from Other Banks Loans and Advances to Customers Repurchase Receivable Investment Properties Premises, Equipment and Intangible Assets Other Assets Due to Other Banks Customer Accounts Debt Securities in Issue Syndicated Loans and Loan Participation Notes Other Liabilities Subordinated Debt Share Capital and Additional Paid-In Capital Accumulated deficit Interest Income and Expense Fee and Commission Income and Expense Administrative and Other Operating Expenses Income Taxes Dividends Segment Analysis Financial Risk Management Capital Management Contingencies and Commitments Derivative Financial Instruments Fair Value of Financial Instruments Reconciliation of Classes of Financial Instruments with Measurement Categories Related Party Transactions Principal Subsidiaries F-120

366 Level: 0 From: 0 Tuesday, November 10, :17 eprint Section 12d F-121