Bank of Moscow CHF 350,000, per cent. Loan Participation Notes due issued by, but with limited recourse to,

Transcription

1 Issuer: Bank: Joint Lead Managers: Interest: Issue Price: Price for Placement: Form and Delivery: Denomination: Payment Date: Maturity Date: Early Redemption: Bank of Moscow CHF 350,000, per cent. Loan Participation Notes due 2013 issued by, but with limited recourse to, BOM Capital P.L.C. for the sole purpose of financing a loan to Joint stock commercial bank Bank of Moscow (open joint stock company) Issue Price: 100 per cent. BOM Capital P.L.C., a public limited liability company established under the laws of Ireland whose registered office is at 5 Harbourmaster Place, IFSC, Dublin 1, Ireland (the Issuer ). Joint stock commercial bank Bank of Moscow (open joint stock company), an open joint stock company registered under the laws of the Russian Federation, with its registered office and business headquarters at 8/15, bldg. 3, Rozhdestvenka Street, Moscow , Russian Federation (the Bank ). BNP Paribas (Suisse) SA, Place de Hollande 2, CH1204 Geneva, Switzerland; and UBS AG, Bahnhofstrasse 45, 8001 Zurich, Switzerland (together with BNP Paribas (Suisse) SA the Joint Lead Managers ) per cent., payable annually in arrear on 10 September in each year, commencing on 10 September per cent. Based on supply and demand. CHF 350,000, per cent., loan participation notes due 2013 (the Notes ) will be in bearer form and will be in the form of a permanent global note (the Permanent Global Note ), without interest coupons attached, which will be deposited with SIX SIS Ltd. ( SIS ) on or around the Payment Date (as defined below). The Permanent Global Note will be exchangeable in certain limited circumstances in whole, but not in part, for Notes in definitive form with interest coupons attached. Neither the holders of the Notes (the Noteholders ) nor the Issuer will have the right to request the printing and delivery of the definitive Notes. References herein to the Noteholders are, so long as the Notes are represented by the Permanent Global Note, to the beneficial owners of an interest in the Permanent Global Note to the amount of their investment therein, or to holders of the Note in definitive form. The Notes will be in denominations of CHF 5,000 each and multiples thereof. 10 September 2010 (the Payment Date ). 10 September 2013; redemption at par (the Maturity Date ). For tax reasons or change in circumstances or in other limited circumstances, each in accordance with the Conditions (as defined herein). See Form of Loan Agreement and Terms and Conditions of the Notes. Reopening: The Issuer reserves the right to reopen this series of Notes (for details see Condition 13 (Further Issues) of the Notes). Assurance: The obligations of the Issuer to make payments under the Notes constitute direct and general obligations of the Issuer which will at all times rank pari passu among themselves. The Notes will constitute the obligations of the Issuer to apply an amount equal to the gross proceeds of the issue of the Notes solely for the purpose of financing the Loan (as defined below) to the Bank. The Issuer will account to the Noteholders solely for amounts equivalent

2 Limited Recourse: Listing/Trading: Selling Restrictions: Law and Jurisdiction: Risk Factors: BNP PARIBAS (SUISSE) SA to those (if any) received by or for the account of the Issuer pursuant to the Loan Agreement (as defined, below) less amounts in respect of certain Reserved Rights (as defined in the terms and conditions of the Notes (the Conditions )). The sole purpose of issuing the Notes will be to finance a Swiss Franc denominated loan (the Loan ) to the Bank, on the terms of a loan agreement dated 8 September 2010 (the Loan Agreement ), between the Issuer, as Lender, and the Bank, as Borrower (each as defined in the Loan Agreement). Subject as provided in the Trust Deed (as defined herein) the Issuer will (i) charge by way of first fixed charge as security for its payment obligations in respect of the Notes and under the Trust Deed, its rights and interests as lender under the Loan Agreement to BNY Corporate Trustee Services Limited as trustee (the Trustee ), for the benefit of the Noteholders and will assign its administrative rights under the Loan Agreement to the Trustee for the benefit of such beneficiaries (the Assigned Rights ), and (ii) charge by way of first fixed charge as security for its payment obligations in respect of the Notes and under the Trust Deed to the Trustee, for the benefit of the Noteholders all as more particularly set out herein and in the Trust Deed. See Description of the Transaction. 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 amounts equivalent to sums of principal, interest and additional amounts (if any) actually received and retained (net of tax) by or for the account of the Issuer (as Lender) from the Borrower pursuant to the Loan Agreement less any amount in respect of the Reserved Rights. The Issuer will have no other financial obligation under the Notes. Accordingly. Noteholders are deemed to have agreed that they will rely solely and exclusively on the covenants, credit and financial standing of the Bank in respect of the financial servicing of the Notes. Application will be made for the listing of the Notes on the SIX Swiss Exchange. The Notes are expected to be provisionally admitted to trading on the SIX Swiss Exchange as of 8 September The last trading day of the Notes will be 5 September In particular, the United States of America, the United Kingdom, Ireland, the European Economic Area, and the Russian Federation. See Subscription and Sale. The Notes will be offered to the public in Switzerland. Notes in bearer form are subject to United States tax law requirements and, subject to certain exceptions, may not be offered, sold or delivered within the United States or to U.S. persons as defined in Section 7701(a)(30) of the United States Internal Revenue Code of 1986, as amended, including any successor or amendatory statutes. The Notes and all related contractual documentation and any non-contractual obligations arising out of, or in connection with them, will be governed by and construed in accordance with, the laws of England. The Issuer has submitted in the Trust Deed to the jurisdiction of the courts of England. For a discussion of certain issues that should be considered by prospective purchasers of the Notes, see Risk Factors. Joint Lead Managers UBS INVESTMENT BANK ISIN: CH Swiss Security Number: Common Code: The date of this Prospectus is 8 September 2010

3 TABLE OF CONTENTS GENERAL INFORMATION RESPONSIBILITY STATEMENT FORWARD-LOOKING STATEMENTS ENFORCEABILITY OF JUDGMENTS IN THE RUSSIAN FEDERATION PRESENTATION OF FINANCIAL AND OTHER INFORMATION Page ii v viii x xii SUMMARY OF THE GROUP 1 SUMMARY OF THE OFFERING 6 DESCRIPTION OF THE TRANSACTION 10 RISK FACTORS 12 USE OF PROCEEDS 49 CAPITALISATION OF THE GROUP 50 SELECTED CONSOLIDATED FINANCIAL INFORMATION 51 SELECTED CONSOLIDATED FINANCIAL RATIOS AND OTHER INFORMATION 59 OPERATING AND FINANCIAL REVIEW OF THE GROUP 60 BUSINESS 100 MANAGEMENT 156 SHAREHOLDING 167 RELATED PARTY TRANSACTIONS 169 THE ISSUER 170 FORM OF LOAN AGREEMENT 172 TERMS AND CONDITIONS OF THE NOTES 200 SUMMARY OF THE PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM 212 TAXATION 214 SUBSCRIPTION AND SALE 221 INDEX TO FINANCIAL STATEMENTS APPENDIX A OVERVIEW OF THE BANKING SECTOR AND BANKING REGULATION IN THE RUSSIAN FEDERATION F1 A1 i

4 GENERAL INFORMATION Annexes The Bank s consolidated financial statements for the years ended 31 December 2009, 2008 and 2007 were audited by Zakrytoe Aktsionernoe Obshchestvo BDO, independent auditors ( ZAO BDO ) and are included in this Prospectus and form, together with the other Annexes hereto, an integral part of this Prospectus. The Bank s Market Share Information The Bank has calculated its market share information presented in this Prospectus on the basis of market data regularly published by the Central Bank of the Russian Federation (the CBR ) and/or the various other sources of information, which are identified next to the statements in question. The Bank accepts responsibility for correctly copying such information from its sources and confirms that such information has been correctly copied from its sources. However, the Bank has relied on the accuracy of such information without carrying out an independent verification. In addition, some of the information contained in this Prospectus (where indicated) as been derived from official data published by the CBR or other authorities; the Bank does not accept responsibility for the accuracy of such information. Use of Proceeds For a discussion of use of proceeds of the issue of the Notes, see Use of Proceeds. Availability of Documents Copies (and English translations where the documents in question are not in English) of the following documents may be inspected at and are available from the offices of BNP Paribas (Suisse) SA at Place de Hollande 2, CH1204 Geneva, Switzerland, during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) so long as any of the Notes are listed on the SIX Swiss Exchange: a copy of this Prospectus; the Loan Agreement; the agency agreement dated 10 September 2010 between, inter alios, the Issuer, the Borrower, the Trustee and the Swiss Paying Agents, each as defined therein (the Agency Agreement ); the trust deed dated 10 September 2010 between, inter alios, the Issuer and the Trustee (the Trust Deed ), which includes the forms of the Permanent Global Note and the definitive Notes; the financial statements referred to in the first paragraph above together with the auditors reports thereon; the constitutive documents of each of the Issuer and the Bank; and copies of the authorisations listed below. Authorisations Both the Bank and the Issuer have obtained all necessary consents, approvals and authorisations in the Russian Federation and Ireland, respectively, in connection with its entry into, and performance of their respective obligations under, the Loan Agreement and the other documents to be entered into by the Bank and the Issuer in relation to the issue of the Notes. The issue of the Notes and the execution of the Loan Agreement and the other documents to be entered into by it in relation to the issue of the Notes was approved by a resolution the Board of Directors of the Issuer dated 7 September No consents, approvals, authorisations or orders of any regulatory authorities are required by the Issuer under the laws of Ireland for its entry into, and the performance of its obligations under, the Loan or for the issue of, and performance of its obligations under, the Notes. ii

5 No Material Change Save as disclosed in this Prospectus, since 31 December 2009 there has been no material adverse change or any development involving a prospective material adverse change in the condition (financial or otherwise), general affairs or prospects of the Bank nor has there been any significant change in the financial or trading position of the Bank that has occurred since 31 December Business Prospects The Bank s management expects that the current trends in the Bank s business will remain strong and continue to develop in Recent Developments Save as disclosed in this Prospectus, there has been no significant change in the Bank or in the Bank s business since 31 December Material Contracts There are no material contracts entered into other than in the ordinary course of the Bank s business, which could result in the Bank being under an obligation or entitlement that is material to the Bank s ability to meet its obligations under the Loan Agreement. Litigation Save as disclosed in this Prospectus, there is no litigation or other legal or administrative or arbitration proceedings against or affecting the Bank, current or pending or, to the best of the knowledge and belief of the Bank, threatened before any court, tribunal, arbitration panel or agency which have or have had in the 12 months preceding the date of this Prospectus, a significant effect on the financial position of the Bank or which might be material in the context of the issue of the Notes. Trustee The Trustee, will act as trustee for the Noteholders in accordance with the terms of English law governed Trust Deed. The Trust Deed may be inspected at the offices of BNP Paribas (Suisse) SA, see Availability of Documents above. For more detailed discussion of competence of the Trustee and conditions in which the Trustee may be replaced, see Description of the Transaction and Terms and Conditions of the Notes Condition 10 (Trustee and Agents). Paying Agents For the purpose of these Notes, the Issuer and the Bank have, under the Agency Agreement appointed BNP Paribas (Suisse) SA as principal paying agent in Switzerland (the Swiss Principal Paying Agent ), and UBS AG as paying agent in Switzerland (the Swiss Paying Agent, and together with the Swiss Principal Paying Agent, the Swiss Paying Agents ). Listing on SIX Swiss Exchange The listing of the Notes on the SIX Swiss Exchange will be applied for. Representative In accordance with Article 43 of the listing rules of the SIX Swiss Exchange, the Issuer has appointed BNP Paribas (Suisse) SA as representative to lodge the listing application with the regulatory board of the SIX Swiss Exchange. iii

6 Publication So long as the Notes are listed on the SIX Swiss Exchange and the rules of the SIX Swiss Exchange so require, all notices in respect of the Notes, the Issuer and/or the Bank (to the extent relevant to the Notes will be validly given through BNP Paribas (Suisse) SA by means of electronic publication on the following internet website of the SIX Swiss Exchange: iv

7 RESPONSIBILITY STATEMENT The Bank, having made all reasonable enquiries, confirms that this Prospectus contains all information which is material in the context of the issuance and offering of the Notes, that the information contained in this Prospectus is true and accurate in all material respects and is not misleading, that the opinions and intentions expressed in this Prospectus are honestly held and that there are no other facts the omission of which would make this Prospectus or any of such information or the expression of any such opinions or intentions misleading. In accordance with the provisions on loan participation notes set forth in the Additional Rules for the Listing of Bonds (the ARB ) of the SIX Swiss Exchange, the Bank assumes full responsibility for the information contained in this Prospectus, except as provided below, in its capacity as the ultimate financial issuer of the Notes. In reliance upon the ARB, the Issuer assumes full responsibility for the information contained in this Prospectus only in respect of itself in its capacity as a legal issuer of the Notes and the Bank accepts no responsibility for such information. The statistical information and other data contained in Appendix A to this Prospectus entitled Overview of the Banking Sector and Banking Regulation in the Russian Federation has been extracted from publicly available data (such as information contained on official websites and in publications of governmental agencies of the Russian Federation, including the CBR, and from other Russian government (the Government ) or mass media sources) and the Bank accepts responsibility for accurately extracting and reproducing such data but accepts no further responsibility in respect of such information. See Risk Factors Information that the Group has obtained from the Government and other sources may not be reliable. No person is authorised to provide any information or to make any representation not contained in this Prospectus. Any such representation or information should not be relied upon as having been authorised by the Bank, the Issuer, the Trustee or the Joint Lead Managers. Neither the delivery of this Prospectus nor the offering, sale or delivery of any Note shall in any circumstances create any implication that there has been no adverse change, or any event reasonably likely to involve an adverse change, in the condition (financial or otherwise) of the Bank since the date of this Prospectus. 8 September 2010 Signed by a duly authorised attorney of BOM Capital P.L.C. as Legal Issuer By: Title: Joint stock commercial bank Bank of Moscow (open joint stock company) as Economic Issuer By: Title: v

8 None of the Joint Lead Managers, their respective affiliates or the Trustee makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information in this Prospectus. Each person receiving this Prospectus acknowledges that such person has not relied on the Joint Lead Managers, their respective affiliates or the Trustee in connection with its investigation of the accuracy of such information or its investment decision. Each person contemplating making an investment in the Notes must make its own investigation and analysis of the creditworthiness of the Bank and its own determination of the suitability of such investment, with particular reference to its own investment objectives and experience, and any other factors that may be relevant to it in connection with such investment. The Notes have not been registered under the Securities Act or any state securities laws or the laws of any other jurisdiction, are subject to restrictions on transferability and resales, and unless so registered, may not be transferred or resold except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable securities laws. Each purchaser of the Notes should be aware that it may be required to bear the financial risks of this investment for an indefinite period of time. The Notes are subject to U.S. tax law requirements. The Notes may not be offered, sold or delivered within the United States or to U.S. persons. No person has been authorised in connection with the offering of the Notes to make or provide any representation or information regarding the Issuer, the Bank or the Notes other than as contained in this Prospectus. Any such representation or information should not be relied upon as having been authorised by the Issuer, the Bank, the Joint Lead Managers or the Trustee. Neither the delivery of this Prospectus nor the offering, sale or delivery of any Note shall in any circumstances create any implication 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 Bank or the Issuer since the date of this Prospectus. Unless otherwise stated, all information is given as at the date of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy, the Notes in any jurisdiction where it is unlawful to make such an offer or solicitation. The distribution of this Prospectus and the offering, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by the Joint Lead Managers, the Bank, the Issuer and the Trustee to inform themselves about and to observe any such restrictions. Any investment in the Notes does not have the status of a bank deposit and in not within the scope of the deposit protection scheme operated by the Irish Financial Services Regulatory Authority (the Financial Regulator ). The Issuer is not and will not be regulated by the Financial Regulator as a result of issuing the Notes. This Prospectus may not be used for, or in connection with, any offer to, or solicitation by, anyone in any jurisdiction or under any circumstances in which such offer or solicitation is not authorised or is unlawful. For a description of certain further restrictions on offers, sales and deliveries of the Notes and distribution of this Prospectus, see Subscription and Sale. None of the Bank, the Joint Lead Managers, the Issuer or the Trustee or any of their respective affiliates or agents makes any representation about the legality of the purchase of the Notes by an investor under applicable investment or similar laws. Each prospective investor is advised to consult its own counsel and business advisor as to legal, tax, business, financial and related matters concerning the purchase of the Notes. The contents of this Prospectus are not to be construed as legal, business or tax advice. Each prospective investor in the Notes must comply with all applicable laws and regulations in force in any jurisdiction in which it purchases, offers or sells the Notes and must obtain any consent, approval or permission required of it for the purchase, offer or sale by it of the Notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers or sales, and none of the Bank, the Joint Lead Managers, the Issuer or the Trustee or any of their respective affiliates or agents shall have any responsibility therefore. vi

9 This Prospectus contains summaries with respect to certain terms of the Trust Deed and the Loan Agreement, but reference should be made to the actual documents for complete information with respect thereto. All summaries are qualified in their entirety by such reference. These documents will be made available free of charge to prospective investors upon request to the Bank. The Joint Lead Managers reserve the right to reject any offer to purchase the Notes in whole or in part and to sell to any prospective investor less than the full amount of Notes sought by such investor. The Joint Lead Managers and certain related entities may acquire a portion of the Notes for their own accounts. vii

10 FORWARD-LOOKING STATEMENTS Some statements in this Prospectus as well as written and oral statements the Bank or its representatives 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 such as anticipates, estimates, expects, believes, intends, plan, may, will, should and any similar expressions to identify forward-looking statements. These forward-looking statements are contained in Summary of the Offering, Risk Factors, Business, Appendix A to this Prospectus entitled Overview of the Banking Sector and Banking Regulation in the Russian Federation and other sections of this Prospectus. The Bank has based these forward-looking statements on the current view of its management with respect to future events and financial performance. These views reflect the best judgment of the Bank s management but involve uncertainties and are subject to certain risks the occurrence of which could cause actual results to differ materially from those predicted in the Bank s forward-looking statements and from 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 of the risks or uncertainties materialise or occur, including those which the Bank has identified in this Prospectus, or if any of the Bank s underlying assumptions prove to be incomplete or incorrect, the Bank s actual results of operations may vary from those expected, estimated or projected. These forward-looking statements speak only as at the date of this Prospectus. The Bank is not obliged to, and does not intend to, update or revise any forward-looking statements made in this Prospectus whether as a result of new information, future events or otherwise. 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 Prospectus. As a result of these risks, uncertainties and assumptions, a prospective investor in the Notes should not place undue reliance on these forward-looking statements. 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. Prospective investors 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: fluctuations in inflation, interest rate, exchange rate and other economic conditions in the Russian Federation; the Bank s ability to refinance its indebtedness on reasonable terms or at all; the Bank s ability to maintain its collection rate on overdue loans; prices for securities issued by Russian entities; the health of the Russian 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 Government and regulations promulgated by the CBR; the effects of competition in the geographic and business areas in which the Group conducts its operations; the effects of changes in laws, regulations, taxation or accounting standards or practices in the jurisdictions where the Group conducts its operations; the Bank s or the Group s ability to maintain market share for its products and services and control expenses; viii

11 acquisitions or divestitures; technological changes; the Banks or the Group s success at managing the risks associated with the aforementioned factors; and international influence/liquidity. This list of important factors is not exhaustive. When relying on forward looking statements, prospective investors 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 and the Group operate. Such forward looking statements speak only as of the date on which they are made. Accordingly, the Bank and the Group do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise. The Bank and the Group do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario. ix

12 ENFORCEABILITY OF JUDGMENTS IN THE RUSSIAN FEDERATION The Bank is an open joint stock company incorporated under the laws of the Russian Federation and most of its assets and the assets of its subsidiaries and associates are currently located in the Russian Federation. In addition, as at the date of this Prospectus, many of the Bank s directors and executive officers are residents of the Russian Federation. As a result, it may not be possible for Noteholders to: effect service of process within the United Kingdom or the United States upon any of the Bank s directors or executive officers who are resident in the Russian Federation; or enforce against the Bank or any such persons judgments obtained in English or U.S. courts. Foreign court judgments may be recognised and enforced by Russian courts only if (i) an international treaty providing for the recognition and enforcement of judgments in civil cases exists between the Russian Federation and the country where the judgment is rendered, and/or (ii) a federal law of Russia provides for the recognition and enforcement of foreign court judgments. 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 Switzerland, 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. However, most recent case law suggests that recognition and enforcement may be possible even in the absence of an international treaty, bilateral or multilateral, on the grounds of international comity and reciprocity. It is not clear to what extent this case law can be applicable to the enforcement of Swiss, English or U.S. court judgments. In addition, Russian courts have limited experience in the enforcement of foreign court judgments. The limitations described above, including the general statutory 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 completely deprive the plaintiff of effective legal recourse. In September 2002, the new Arbitrazh Procedural Code of the Russian Federation entered into force, setting forth procedures for the recognition and enforcement of judgments and grounds for refusal of such recognition and enforcement in the event that such a treaty or federal law were adopted. However, Russian procedural law may change further, and other grounds for refusal of the recognition and enforcement of foreign court judgments could arise in the future. See Risk Factors Risks Related to the Russian Federation and the City of Moscow Foreign judgments and arbitral awards may not be recognised in the Russian Federation. The Loan Agreement will be governed by English law and will provide that all disputes, controversies and causes of action brought by any party thereto may be settled by arbitration in accordance with the Rules of the London Court of International Arbitration (the LCIA ) although the Issuer has the right to have disputes settled in the courts of England. The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention ). However, it may be difficult to enforce arbitral awards in the Russian Federation due to: the inexperience of the Russian courts in international commercial transactions; official and unofficial political resistance to the enforcement of awards against Russian companies in favour of foreign investors; the inability of Russian courts to enforce such awards; and corruption. In practice, reliance upon international treaties may meet with resistance or a lack of understanding on the part of a Russian court or other officials, thereby introducing delay and unpredictability to the process of enforcing any foreign court judgment or arbitral award in the Russian Federation. The possible need to x

13 re-litigate a judgment obtained in a foreign court on the merits may also significantly delay the enforcement of such judgment in the Russian Federation. Under Russian law, certain amounts may be payable by the claimant upon the initiation of any action or proceeding in any Russian court. These amounts in many instances depend on the amount of the relevant claim. Furthermore, any arbitral award pursuant to arbitration proceedings in accordance with the Rules of the LCIA and the application of English law to the Loan Agreement may be limited by the mandatory provisions of Russian laws relating to the exclusive jurisdiction of Russian courts and the application of Russian laws with respect to bankruptcy, winding-up or liquidation of Russian companies and credit organisations in particular. See Risk Factors Risks Related to the Russian Federation and the City of Moscow Foreign judgments and arbitral awards may not be recognised in the Russian Federation. xi

14 PRESENTATION OF FINANCIAL AND OTHER INFORMATION Presentation of Financial Information The Bank s financial information set forth herein has, unless otherwise indicated, been extracted, without material adjustments, from its audited financial statements (the IFRS Financial Statements ) as set forth on pages F-1 through F-180 of this document as at and for the years ended 31 December 2009 and 2008, in each case prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board ( IFRS ). The IFRS Financial Statements contain information about the Bank and its subsidiaries and associates, together, the Group. The rouble is the measurement currency for the IFRS Financial Statements. The IFRS Financial Statements and financial information included elsewhere in this document have, unless otherwise noted, been presented in roubles. Currency In this Prospectus, the following currency terms are used: RUB, Russian Roubles, Roubles or roubles means the lawful currency of the Russian Federation; USD, U.S. Dollars or U.S.$ means the lawful currency of the United States; CHF or Swiss Franc means the lawful currency of Switzerland; and EUR, EURO, 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. Rounding Some numerical figures included in this Prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that preceded them. Unless otherwise specified, all percentages have been rounded to the nearest tenth of one per cent. The Bank s Auditors The Bank s IFRS Financial Statements included in this document have been audited by ZAO BDO, independent auditors, who have expressed unqualified opinions on those statements, as stated in their report appearing herein. The address of ZAO BDO is 125/1, Warshavskoye shosse, Moscow , Russian Federation. ZAO BDO is a member of (i) the Audit Chamber of the Russian Federation (ii) the Association of Russian Banks, (iii) SRO the Russian valuation (appraisal) masters association, and (iv) the Public Company Oversight Board. In order to prevent any influence on the independence of the auditor, both the auditor and the Bank make efforts to eliminate any business relationship where the auditor would be involved in the promotion of the services of the Bank in the banking market. The auditor (or any official of the auditor) may not own any shares in the share capital of the Bank, the Bank may not lend money to the auditor or its officials and the officials of the auditor may not be members of the management bodies of the Bank. The Bank selects its auditor on the basis of a tender. The rules of a tender for the selection of an auditor to carry out an annual statutory audit of the Bank were developed pursuant to Federal Law No. 307-FZ On Auditing Activities, dated 30 December 2008 as amended, Resolution of the Government of the Russian Federation No. 409 On the Measures to Ensure Statutory Audit, dated 12 June 2002 and Recommended Methods of Organisation of the Work of Tender Commissions in Connection with Tenders for the Selection of Accounting Firms to carry out a Statutory Annual Audit of Entities in which the Government owns at least xii

15 25 per cent. in the Charter (Partnership) Capital No /858, issued by the Ministry of Finance of the Russian Federation on 24 April The tender is held on an annual basis as an open tender. The tender is organised by the Board of Directors of the Bank. Exchange Rates The table below sets forth, for the periods indicated, certain information regarding the exchange rate between Roubles and U.S. dollars, based on the official exchange rate quoted by the CBR. Fluctuations in the exchange rate between the 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, certain financial information as at and for the year ended 31 December 2009 has been translated into U.S. dollars at the conversion rate quoted by the CBR at 31 December 2009, which was RUB = USD The Bank does not make any representation that the Rouble amounts referred to in this Prospectus could have been or could be converted into U.S. dollars at the below exchange rates, at any other rate or at all. RUB / U.S. dollar Year ended 31 December High Low Average Period end (up to and including 31 July 2010) Source: (CBR) Adoption of New or Revised Accountancy Standards and Interpretation Listed below are those new or amended standards or interpretations which are or in the future could be relevant to the Group s operations: IAS 1 Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2010). IAS 7 Statement of Cash Flows (effective for annual periods beginning on or after 1 January 2010). IAS 17 Leases (effective for annual periods beginning on or after 1 January 2010). IAS 32 Financial Instruments: Presentation (effective for annual periods beginning on or after 1 February 2010). IAS 36 Impairment of Assets (effective for annual periods beginning on or after 1 January 2010). IAS 39 Financial Instruments: Recognition and Measurement (effective for annual periods beginning on or after 1 January 2010). IFRS 2 Share-based Payment (effective for annual periods beginning on or after 1 January 2010). IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (effective for annual periods beginning on or after 1 January 2010). IFRS 8 Operating Segments (effective for annual periods beginning on or after 1 January 2010). xiii

16 IFRSs and IFRIC interpretations not yet effective The Group has not applied the following IFRSs and Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) that have been issued but are not yet effective: IAS 1 Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2011). IAS 24 Related Party Disclosures (effective for annual periods beginning on or after 1 January 2011). IAS 27 Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2010). IAS 34 Interim Financial Reporting (effective for annual periods beginning on or after 1 January 2011). IFRS 3 Business Combinations (effective for annual periods beginning on or after 1 July 2010). IFRS 7 Financial Instruments: Disclosures (effective for annual periods beginning on or after 1 January 2011). IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013). IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). Average Balances, Average Interest Rates and Effective Interest Rates This Prospectus includes information on the average balances of interest earning assets and interest bearing liabilities of the Group as at and for the years ended 31 December 2009, 2007 and 2008 as well as the average rate of interest income or expense for such assets and liabilities. Unless otherwise expressly stated, the consolidated average balances of assets and liabilities presented in this Prospectus represent the average of the opening and closing balances for the applicable period. These average balances would likely be different if alternative or more frequent averaging methods were used and such differences could be material. The average interest rates disclosed in this Prospectus are calculated by dividing aggregate interest income or expense for the relevant line item by the average balance for the same item for the applicable period. Average interest rates are distinct from the effective interest rates presented in the consolidated financial statements of the Group. 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 discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest re-pricing 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 entire expected life of the instrument. The present value calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate. See Notes to the Consolidated Financial Statements Summary of Significant Accounting Policies in the 2009 Financial Statements. The Bank presents information on effective interest rates because IFRS requires that this rate be used in the preparation of its consolidated financial statements. Operationally, the Bank uses this information as well as average interest rates as both are considered useful business tools. xiv

17 SUMMARY OF THE GROUP This summary does not contain all information that may be important to prospective investors in the Notes. Prospective investors in the Notes should read this entire Prospectus, including more detailed information regarding the Bank s business and the IFRS Financial Statements included elsewhere in this Prospectus. Investing in the Notes involves risks, and prospective investors should carefully consider the information set forth under Risk Factors. Certain statements in this Prospectus include forward-looking statements that also involve risks and uncertainties as described under Forward-Looking Statements. The Bank s financial information set forth herein has, unless otherwise indicated, been extracted, without material adjustments, from the IFRS Financial Statements as set forth on pages F-1 through F-180 of this Prospectus. Overview The Bank is one of the largest commercial and retail banks in the Russian Federation, as measured by net assets, capital, loan portfolio and volume of retail client deposits. According to Kommersant Dengi magazine, a Russian business weekly, as at 1 January 2010, the Bank was the third largest Russian bank in terms of the volume of retail deposits and the fifth largest Russian bank in terms of net assets, capital and loan portfolio and, as at 30 August 2010, ranked 25th in terms of market capitalisation out of the top 100 Russian companies (compared to 26th in 2009 and 29th in 2009). The Bank offers a wide range of banking services, including corporate, SME and retail lending, deposit, payment and account services, foreign exchange and foreign trade operations, cash handling services, operations with precious metals, asset management and private banking, investment banking, securities trading, custody services and other ancillary services to retail clients and to commercial and governmental entities. In all areas of its business, the Bank is engaged in continually developing and launching new products and services in order to be able to offer a more diversified package of banking services to its current and potential customers. Over 90 per cent. of the Group s banking business is concentrated in the Russian Federation. The remaining business is currently conducted in Republic of Belarus, Republic of Estonia, Republic of Latvia, Republic of Ukraine and Republic of Serbia. The Group has a representative office in Frankfurt am Main, Germany. The primary business areas of the Group are: Corporate and Investment banking which comprises products and services including large corporate and SME lending, syndicated loan services, trade finance, foreign trade and exchange operations, guarantees and payment and account services, underwriting and arrangement of domestic and foreign debt issuances; Retail banking which comprises a broad range of products and services, including current (demand) and deposit (term) accounts in both Russian Roubles and foreign currencies, retail lending (including overdraft facilities, mortgage loans, consumer loans and car loans), credit and debit card services (as a member of VISA International, MasterCard Worldwide and the Russian payment system Union Card, and as a sub-licensee of Diner s Club International), money transfers, unit investment funds, payroll schemes and Internet and telephone banking; Asset management and Private banking which comprises private asset management services, fund management services, mutual and pension funds and private banking; and Treasury and proprietary securities trading activities which comprises securities trading, foreign exchange, money market transactions, operations with precious metals and custody services. As at 1 May 2010, the Bank operated 134 offices and sub-offices in all administrative districts of Moscow and in large towns of the Moscow region. In addition, the Group has 474 desks in post offices in Moscow and the Moscow region, which distribute the Group s retail products. As at 1 May 2010, the Group operated 68 regional branches, which supervised a further 69 full-service sub-branches, and 113 sub-branches providing retail services and 8 cash offices located in the territory of the Russian Federation. As at 1 May 2010, the Group had a presence in 60 regions of the Russian Federation, including major cities across the 1

18 Russian Federation from St. Petersburg and Kaliningrad in the North West to Vladivostok and Petropavlovsk-Kamchatsky in the Russian Far East. The regional presence of the Group is enhanced through co-operation with local banks, such as OAO AKB Zarechye (Kazan, Republic of Tatarstan), in which the Group holds a minority interest. See also Operating and Financial Review of the Group Overview Principal Activities. In addition, the Group owns controlling stakes in seven banks, five of them foreign: Open Joint Stock Company Commercial Bank MOSVODOKANALBANK in Moscow (65.87 per cent. owned), Bezhitsa Bank in Bryansk, Russia ( per cent. owned), Bank Moscow-Minsk in Minsk, Republic of Belarus ( per cent. owned), AS Latvijas Biznesa banka in Riga, Republic of Latvia (99.97 per cent. owned), AS Eesti Krediidipank in Tallinn, Republic of Estonia (92.00 per cent. owned), BM Bank LLC Ukraine, in Kiev, Republic of Ukraine ( per cent. owned) and Bank of Moscow j.s.c. Belgrade, in Belgrade, Republic of Serbia ( per cent. owned). The Group also has correspondent accounts for approximately 101 domestic banks and maintains correspondent relationships with approximately 950 foreign banks. The Bank is a member of the Association of Bill Market Participants (ABMP), the Forwards Section of MICEX, the Russian Trading System (RTS), the National Securities Market Participants Association (NAUFOR), the Securities Trading Section of MICEX, the Association of Russian Banks, the National Securities Association, the Moscow International Currency Association (MMVA), the National Currency Association (NVA), the Professional Association of Registrars, Transfer Agents and Depositaries (PARTAD), the Moscow Industrialists and Entrepreneurs Confederation, the Moscow Chamber of Commerce and Industry and the Russian Industrialists and Entrepreneurs (Employers) Union. Competitive Strengths The Bank believes its strong market position is attributable to a combination of the following competitive advantages: Strong brand recognition, enhanced through the relationship with the City of Moscow. According to Brand Finance, which recently ranked the top 500 global banking brands, in 2010 the Group s brand ranked 182nd among the most high-valued banking brands (compared to 217th in 2009 and 252nd in 2008), and ranked 4th in Russia. The Group s Brand Rating for 2010 according to Brand Finance is A, compared to BBB for The Bank believes that its affiliation with the City of Moscow is one of its major strengths. The City of Moscow has remained the principal shareholder of the Bank. In addition, the business that the Group derives from the City of Moscow (including deposits of funds and contracts to finance municipal works) has contributed to the Group s strong capital base from which it has been able to finance the expansion of the Group s business. Furthermore, the Group participates in joint projects initiated by the City of Moscow, such as the Muscovite Social Card project which the Group developed in partnership with VISA International and the City of Moscow. As a result of the relationship between the Group and the City of Moscow, the Group s brand has a strong association with the city and positive recognition in the markets in which it operates. This in turn serves as an important marketing channel through which the Group can develop and expand both its retail and its corporate customer base. Strong approach to risk management and risk analysis. The Bank believes that its conservative approach to risk management as applied to all of its businesses has been a core strength of its business. In the context of the global economic crisis and the corresponding effect on the global and Russian economies, the Group s risk management policies and procedures have permitted the Group to manage its exposure to riskier assets in such a way as to protect its business and continue to implement its core strategies. Strong client base. The Group has a large and diverse client base, servicing over 105,000 corporate and governmental clients and 9.7 million retail clients as at 1 May The Group lends to a wide range of industrial sectors and to a large client base of retail customers and many types of commercial and governmental entities. The Group is the third largest Russian bank in terms of the volume of retail deposits (see Overview above) and, as at 31 December 2009, had a presence in 60 regions of the Russian Federation. 2

19 Experienced management. The Group s senior management team has extensive experience in the banking industry and many of them have been working together for several years. Members of senior management have had experience working in the banking sector in the Russian Federation, other CIS countries and outside the CIS. For further information on the Group s management, see Management. Business Strategy The Bank s strategic objective is to strengthen its position among the largest Russian banks, as measured by key business indicators such as profit, return on assets, return on equity, net interest margin, market share and growth rates in core business sectors while also maintaining its stable capital and liquidity position and conservative approach to risk management. To achieve this, in April 2008, the Bank s management approved a new three year general strategy for the Group. However, in light of the impact of the global economic crisis on the global and Russian economies, the Bank decided to review its strategic and business planning on an annual basis. This approach will take effect in respect of the financial years ending 31 December 2009 and 31 December The strategy for 2010 was adopted in late 2009 and focuses on increased business efficiency, maintaining tighter controls on costs and expenses, maintaining growth rates in line with market trends, building customer relationships and increasing cross-selling. The Group s key strategic goals include: Maintaining its strong capital position and conservative approach to risk management. On 26 July 2010, the Bank completed the Fourteenth Issuance, having attracted RUB 21.7 billion, which resulted in an increase of 13.7 per cent. (RUB 2,163.2 million) in the Bank s share capital to RUB 18.0 billion as at 1 August The Bank believes that the Fourteenth Issuance, together with the Thirteenth Issuance and with internal capital generation, will allow the Group to maintain adequate capital ratios while also growing its business. As at 31 December 2009 and calculated in accordance with the Basel Accord, the Group had a Tier 1 capital ratio of 12.8 per cent. and a total capital ratio of 18.9 per cent. compared to 9.5 per cent. and 13.9 per cent. as at 31 December The Bank believes its risk management processes are effective and that maintaining its focus on vigorous risk management is essential to maintaining its strong capital position. The Group is focused on maintaining its capital ratios and developing its risk management processes in readiness for any future changes in regulation and continued challenges in the banking business, which may result from the CBR s further implementation of the Basel Accord, the global economic crisis and the CBR and Russian Government s response to the economic crisis, while it also aims to support the continued growth of the Group s assets. The Group takes a conservative approach to risk management (as to which see above Competitive Strengths Strong approach to risk management and risk analysis ) particularly as regards its provisions for impairment and requirements in relation to the amount, quality and type of collateral. The Bank intends to maintain its conservative approach to risk management in 2010 and See also Operating and Financial Review of the Group Factors affecting the Group s results of operations and financial condition Provisions for Impairment. Increasing the Group s profitability without prejudice to its conservative risk management policies. The Bank believes that one of its primary goals is to increase its profitability by focusing on revenue diversification, market oriented policies, controlling costs, diversification of its client base and the introduction of new business lines. The growth before the global economic crisis in the domestic retail banking market, SME sector, debt market and asset management market opened new opportunities for the Group. Notwithstanding the effects of the global economic crisis and higher risks associated with these opportunities, the Bank intends to continue its focus on increasing profitability in these areas while adhering to its conservative approach to risk management. Additionally, the Bank believes that public and business confidence in certain leading Russian banks is beginning to improve again, which it believes will enable the Group to attract new corporate and retail customers while maintaining its strong existing customer base and increasing cross-selling. Having grown significantly in recent years (the Group s total assets grew from RUB billion as at 31 December 2006 to RUB billion as at 31 December 2007, RUB billion as at 31 December 2008 and RUB billion as at 31 December 2009), the Group is focused on integrating and streamlining each area of its expanded business to achieve optimum levels of profitability and efficiency. 3

20 Attracting additional corporate business. The Group expects its corporate lending to continue to grow in the medium-term, with respect to both large corporates and SMEs. The Bank believes that the continued diversification of its customer base helps it to attain a more stable funding base. Although the risk of lending in the SME sector is higher than in the large corporate sector, the Bank believes that the SME sector offers strong potential for growth and that the increased risk of this sector can be managed through controls over the quality of the loan portfolio (see Asset, Liability and Risk Management and Lending Policies and Procedures ). One of the ways in which the Bank expects to grow its SME loan portfolio is through developing relationships with SMEs in the Russian regions, that previously borrowed from some of the smaller regional Russian banks which have faced difficulties in dealing with the effects of the global economic crisis and the CBR s and Russian Government s response to it. Attracting additional retail clients. Notwithstanding the effects of the global economic crisis, the development of the Russian retail banking market remains one of the key features of the present-day banking system in the Russian Federation and retail depositors remain a key source of funding for banks in the Russian Federation. Although the Bank expects its corporate loan portfolio to grow faster than its retail loan portfolio in the short-to-medium-term, the Group is seeking to increase the number of retail customers, including through the following initiatives: Expanding its retail deposit portfolio. A number of Russian banks experienced an outflow in retail deposits at the start of the global economic crisis. As the situation has stabilised, retail deposits are starting to grow again. As at 1 January 2010 the Group was the third largest Russian bank in terms of the volume of retail deposits taken according to Kommersant Dengi, and, as at 31 December 2009, the Group had 9.7 million retail customers and RUB billion of term deposits and current accounts, compared to 9.6 million and RUB billion as at 31 December The Group benefits from having traditionally viewed retail deposits as an important source of funding and therefore it already has a large retail client base and substantial retail deposits. As the real income of the Russian population has gradually increased, the Russian retail deposit market has also increased and the Group continues to seek to increase its market share of retail deposits and to further capitalise on this growing demand for retail deposit services. Leveraging its relationship with the City of Moscow. The Group s relationship with the City of Moscow has helped to ensure that the Group has a well recognised brand, not just in Moscow but also across the Russian regions. The Group continues to develop its relationship with the City of Moscow to attract more retail deposits, for example, by participating in the Muscovite Social Card project (as to which, see Competitive Strengths Strong brand recognition, enhanced through the relationship with the City of Moscow ). For a discussion of the Group s relationship with the City of Moscow, see also Risk Factors Risks Relating to the Group s Business and Industry The Group may lose some or all of the City of Moscow s business and Banking Services and Activities Corporate Banking The City of Moscow.) Enhancing private banking services. While the real income (as a general indicator of the standard of living) of the Russian population declined during the financial crisis in the wake of job cuts and pay cuts, the Bank now sees good potential for growth in the private banking sector as the situation stabilises, and that such stabilised environment will provide a platform for it to learn from its customer behaviour patterns and selectively develop its range of customer-tailored products for wealthy individual customers. Enhancing its retail lending product range. Since 2002, the real income of the Russian population has grown, and this increase has created significant demand for consumer finance products such as personal loans, mortgages, automobile loans and credit cards. While the retail market in the Russian banking sector has stagnated during the global economic crisis to date, the Group s aim is to capitalise on opportunities in this sector as this market returns. Developing its strong franchise and brand name in the Russian Federation. The Group has one of the most geographically diverse branch networks in the Russian Federation, where over 90 per cent. of the Group s operations were concentrated as at 31 December 2009, and is thus able to market itself widely in the Russian banking market. The Group, whose loans to borrowers in Moscow and the Moscow region represented 4

21 45.8 per cent. of the Group s aggregate loan portfolio as at 31 December 2009, compared with 46.1 per cent. as at 31 December 2008, is assisted by its affiliation with the City of Moscow. However, in addition, the Group aims to leverage its franchise and brand in growing its business in all regions of the Russian Federation. For example, the Group aims to expand its SME loan portfolio by establishing relationships with SMEs that formerly borrowed from smaller regional Russian banks which have been adversely affected by the global economic crisis and the additional regulatory controls on Russian banks. Credit Ratings On 4 February 2009 and in the context of the growing global economic crisis and its impact on the Russian economy, Fitch Ratings Ltd. ( Fitch ) downgraded the Bank s long term foreign currency and local currency issuer default ratings ( IDR ) from BBB+ to BBB, and the short-term IDR from F2 to F3. The outlook for the long-term rating was assigned as Negative. Concurrently, the long-term IDR of 14 Russian banks, including the Bank, were downgraded. Long-term foreign currency IDR of the Bank was set at BBB-, with outlook negative. On 24 February 2009, Moody s Investors Service ( Moody s ) downgraded long-term local currency deposit ratings, and foreign currency and local currency debt ratings of nine Russian credit organisations with state interest, including the Bank, to Russia s country ceiling of A2. Moody s confirmed the Bank s long-term foreign currency deposit rating at Baa1, short-term foreign currency deposit rating at P-2 and bank financial strength rating at D, with negative outlook for all ratings. On 26 January 2010, Fitch revised the Bank s rating Outlook to stable from negative while affirming the Bank s ratings, including its long-term foreign currency IDR at BBB-. This Outlook revision followed the revision on 25 January 2010 of the City of Moscow s Outlook to stable from negative. The change to the Outlook for the City of Moscow itself followed the revision on 22 January 2010 of Russia s sovereign rating Outlook to stable from negative. See also Operating and Financial Review of the Group Recent Developments. 5

22 SUMMARY OF THE OFFERING Notes Issued: CHF 350,000,000 aggregate principal amount of 4.50 per cent. Loan Participation Notes due Issue Date: 10 September Issuer: Bank: Joint Lead Managers: Trustee: Swiss Principal Paying Agent: Swiss Paying Agent: Issue Price: Use of Proceeds: Interest: Limited Recourse and Security: BOM Capital P.L.C. Joint stock commercial bank-bank of Moscow (open joint stock company), an open joint stock company registered under the laws of the Russian Federation, with its registered office and business headquarters at 8/15, bldg. 3, Rozhdestvenka Street, Moscow, , Russian Federation. BNP Paribas (Suisse) SA and UBS AG. BNY Corporate Trustee Services Limited. BNP Paribas (Suisse) SA. UBS AG. 100 per cent. of the principal amount of the Notes. The Issuer will use the gross proceeds of the issue of the Notes for the sole purpose of financing the Loan to the Bank. The proceeds of the Loan will be used by the Bank for general corporate purposes per cent. per annum payable annually in arrear on 10 September each year commencing on 10 September The Notes will constitute the obligation of the Issuer to apply an amount equal to the gross proceeds from the issue of the Notes solely for the purpose of financing the Loan to the Bank pursuant to the terms of the Loan Agreement. The Issuer will only account to the holders of the Notes for all amounts equivalent to those (if any) received and retained (net of tax) from the Bank in respect of principal, interest or any Additional Amounts and/or Tax Indemnity Amounts (as each such term is defined in the Loan Agreement) under the Loan Agreement or other amounts, less amounts in respect of the Reserved Rights (as defined under Terms and Conditions of the Notes ). The sole purpose of issuing the Notes will be to finance the Loan to the Bank, on the terms of the Loan Agreement, between the Issuer and the Bank. The obligations of the Issuer under the Notes shall be solely to make payments of amounts in aggregate equal to each sum actually received and retained (net of tax) by or for the account of the Issuer from the Bank in respect of principal, interest or, as the case may be, other amounts relating to the Loan pursuant to the Loan Agreement. Subject as provided in the Trust Deed (as defined herein) the Issuer will charge by way of first fixed charge as security for its payment obligations in respect of the Notes and under the Trust Deed, (i) its rights and interests as lender under the Loan Agreement to the Trustee, for the benefit of the Noteholders and will assign its administrative rights under the Loan Agreement to the Trustee for the benefit of such beneficiaries, and (ii) all the rights, title and interest in and to all sums of money now or in the Account (as defined in the Terms and Conditions of the Notes ) 6

23 and debts represented thereby (including interest from time to time earned on the Account, if any) to the Trustee, for the benefit of the Noteholders, all as more particularly set out herein and in the Trust Deed. See Description of the Transaction. Status of the Notes: Status of the Loan: Form: Redemption: Illegality: Certain Covenants: The Notes constitute limited recourse secured obligations of the Issuer and shall at all times rank pari passu and rateably without preference among themselves, all as more fully described under Terms and Conditions of the Notes Condition 2 (Status and Limited Recourse). The claims of the Issuer (as lender) under the Loan Agreement (excluding the Reserved Rights) constitute the direct, unconditional and unsecured unsubordinated obligations of the Bank and will rank at least equally with all other unsecured and unsubordinated obligations of the Bank (whether actual or contingent) (except for such obligations preferred by mandatory provisions of law). The Notes will be issued in bearer form and will be documented in the form of the Permanent Global Note, without interest coupons, which will be deposited with SIS on or around 10 September The Permanent Global Note will be exchangeable in certain limited circumstances in whole, but not in part, for Notes in definitive form with interest coupons attached. The Noteholders do not have the right to request the printing and delivery of the definitive Notes. Unless previously prepaid pursuant to Clauses 5.2 and 5.3 of the Loan Agreement, the Bank will be required to repay the Loan not later than one Business Day (as defined in the Loan Agreement) prior to the Maturity Date and, subject to such repayment, all the Notes remaining outstanding will be redeemed at their principal amount on the Maturity Date at 100 per cent. of the principal amount thereof. The Notes shall be redeemed by the Issuer in whole, but not in part, at the principal amount thereof, together with accrued and unpaid interest to the date of redemption and any additional amounts in respect thereof, in the event that the Bank gives the Issuer notice thereof in circumstances where the Bank is required to make any deduction or withholding for or on account of taxes or is required to pay any Additional Amounts and/or Tax Indemnity Amounts (as each such term is defined in the Loan Agreement) or other amounts under the Loan Agreement, or in the event that the Issuer gives the Bank notice that it becomes unlawful for the Issuer to allow the Loan or the Notes to remain outstanding or for it to maintain or give effect to any of its obligations under the Loan Agreement. If it becomes illegal for the Issuer to allow all or part of the Loan or the Notes to remain outstanding or for the Issuer to maintain or give effect to any of its obligations in connection with the Loan Agreement and/or to charge or receive or to be paid interest at the rate then applicable to the Loan, the Bank must, at the request of the Issuer, prepay the Loan, in whole but not in part. The Loan Agreement will, among other things, restrict, with certain exceptions, the ability of the Bank and its subsidiaries to: (a) create or incur liens which secure certain indebtedness; and 7

24 Events of Default/Relevant Event: Rating: Withholding Tax: Listing/Trading: (b) sell assets. In addition, the Loan Agreement requires the Bank to provide certain periodic financial information to the Issuer and requires the Bank and its subsidiaries to comply with any capital ratio requirements imposed by a relevant banking authority. Following the Loan Administration Transfer (as defined in Terms and Conditions of the Notes ), at any time following an Event of Default (as defined in the Loan Agreement), the Trustee may, subject as provided in the Trust Deed, declare all amounts payable under the Loan Agreement to be immediately due and payable. At any time following a Relevant Event (as defined in Terms and Conditions of the Notes ), the Trustee may, subject as provided in the Trust Deed, enforce the charge created in the Trust Deed in favour of the Noteholders. The Notes are expected to be assigned upon issue a rating of BBB- by Fitch and Baa1 by Moody s. Credit ratings assigned to the Notes do not necessarily mean that they are a suitable investment. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Similar ratings on different types of notes do not necessarily mean the same thing. The ratings do not address the likelihood that the principal of the Notes will be prepaid, paid on an expected final payment date or paid on any particular date before the legal final maturity date of the Notes. The ratings do not address the marketability of the Notes or any market price. Any change in the credit ratings of the Notes or the Bank could adversely affect the price that a subsequent purchaser will be willing to pay for the Notes. The significance of each rating should be analysed independently from any other rating. All payments of principal and interest under the Loan and in respect of the Notes will be made without deduction or withholding for or on account of all taxes, duties, imposts, assessments or governmental charges of Ireland or the Russian Federation save as required by law. If any taxes, duties, levies, imposts, assessments or governmental charges are payable in any of the above jurisdictions, the sum payable by the Bank will (subject to certain exceptions) be required to be increased to the extent necessary to ensure that the Issuer receives and retains (net of tax) a net sum which it would have received and retained 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 pay to the Noteholders and Couponholders (as defined in Terms and Conditions of the Notes ) sums equivalent to the sums received and retained (net of tax) from the Bank for this purpose. See Terms and Conditions of the Notes. Application will be made for listing of the Notes on the SIX Swiss Exchange. The Notes are expected to be provisionally admitted to trading on the SIX Swiss Exchange as of 8 September The last trading day of the Notes on the SIX Swiss Exchange will be 5 September

25 Selling Restrictions: Governing Law/Jurisdiction: Risk Factors: Security Codes: The Notes have not been and will not be registered under the Securities Act and, subject to certain exceptions, may not be offered or sold within the United States. The Notes may be sold in other jurisdictions (including, without limitation, the European Economic Area (including the United Kingdom, Ireland and the Russian Federation) only in compliance with applicable laws and regulations. See Subscription and Sale. The Notes, the Loan Agreement and the Trust Deed, including any non-contractual obligations arising out of or in connection with them, will be governed by, and construed in accordance with, English law. The Issuer has submitted in the Trust Deed to the jurisdiction of the courts of England. An investment in the Notes involves a high degree of risk. See Risk Factors. ISIN: CH Common Code: Swiss Security Number:

26 DESCRIPTION OF THE TRANSACTION The following summary contains basic information about the Notes and the Loan and should be read in conjunction with, and is qualified in its entirety by, the information set forth under Terms and Conditions of the Notes and Form of Loan Agreement appearing elsewhere in this Prospectus. The transaction will be structured as a loan to the Bank as borrower from the Issuer as lender. The Loan Agreement has characteristics that demonstrate capacity to produce funds to service any payments due and payable on the Notes. The following diagram illustrates the structure of the transaction: Principal and interest on the Notes Principal and interest on the Loan Noteholder Issuer Bank Proceeds of the Notes Proceeds of the Loan Benefit of security Security over the Loan Trustee The Issuer will issue the Notes for the sole purpose of funding the Loan to the Bank. The Notes will have the benefit of, be subject to, and be constituted by, the Trust Deed. The Issuer will not have any obligations to the Noteholders, other than the obligation to account to the Noteholders in respect of the payments of principal, interest and any Additional Amounts and/or Tax Indemnity Amounts (as each such term is defined in the Loan Agreement) and other amounts if, and only to the extent, received and retained (net of tax) from the Bank pursuant to the Loan Agreement, less any Reserved Rights (as defined in the Terms and Conditions of the Notes). As provided in the Trust Deed, the Issuer will: charge to the Trustee all its rights, title, interests and benefits in and to principal, interest and other amounts now or hereafter payable under the Loan Agreement and its right, title, interest and benefit in and to receive amounts which may be or become payable to it under any claim, award or judgment relating to the Loan Agreement (other than its right to amounts in respect of certain Reserved Rights); charge to the Trustee sums held on deposit from time to time, in an account in Geneva in the name of the Issuer with the Swiss Principal Paying Agent (as defined in the Loan Agreement), together with the debts represented thereby (other than interest, if any, from time to time earned thereon and the Reserved Rights) pursuant to the Trust Deed; and assign absolutely its rights under the Loan Agreement (save for those rights charged or excluded above) to the Trustee upon the closing of the offering of the Notes. The Bank will be obliged to make payments under the Loan to the Issuer s account in accordance with the terms of the Loan Agreement. The Issuer will agree in the Trust Deed not to agree to any amendments to, or any modification or waiver of, or authorise any breach or proposed breach of, the terms of the Loan Agreement unless the Trustee has given its prior written consent or unless authorised to do so by an Extraordinary Resolution (as defined in the Trust Deed) or Written Resolution (as defined in the Trust Deed) of the Noteholders (except in relation to Reserved Rights). The Issuer will further agree to act at all times in accordance with the instructions of the Trustee from time to time with respect to the Loan Agreement, other than as provided in the Trust Deed and except in relation to Reserved Rights. Any amendments, modifications, waivers or authorisations made with the Trustee s consent shall be notified to the Noteholders in accordance with Condition 14 (Notices) of the Terms and 10

27 Conditions of the Notes and shall be binding on the Noteholders. The Issuer will also agree in the Agency Agreement to require that all payments to be made by the Bank under the Loan Agreement be directed to the Issuer s account with the Swiss Principal Paying Agent. Formal notice of the security interests created by the Trust Deed will be given to the Bank, which will be required to acknowledge the same. The Issuer does not intend to provide post-issuance transaction information regarding the Notes or the performance of the Loan. In the event that the Trustee enforces the security interests granted to it, the Trustee will assume certain rights and obligations towards the Noteholders, as more fully set out in the Trust Deed. Payments in respect of the Notes will be made without any deduction or withholding for or on account of Russian or Irish taxes, except as required by law. See Terms and Conditions of the Notes Taxation. In the event that any deduction or withholding is required by law, the Issuer will be required, except in certain limited circumstances, to pay additional amounts to the extent that it receives corresponding amounts from the Bank under the Loan Agreement. In addition, payments under the Loan Agreement shall be made without deduction or withholding for or on account of Russian or Irish taxes, except as required by law. In the event that any deduction or withholding is required by law with respect to payments under the Notes or the Loan Agreement, the Bank will be obliged, except in certain limited circumstances, to increase the amounts payable under the Loan Agreement, by an amount equivalent to the required tax payment. See Risk Factors Risks Related to the Loan, the Notes and the Trading Market Interest payments on the Loan may be subject to withholding tax or other taxes, Tax might be withheld on dispositions of the Notes in the Russian Federation, reducing their value, and The Notes may be redeemed early if withholding tax becomes payable or the Issuer incurs certain increased costs or it becomes unlawful to allow the Loan or the Notes to remain outstanding. In certain circumstances, the Loan may be prepaid at its principal amount, together with accrued interest, at the Bank s option, upon the Bank being required to increase the amount payable or to pay additional amounts on account of Russian or Irish taxes under the Loan Agreement or required to pay additional amounts on account of certain costs incurred by the Issuer. The Issuer may, in its own discretion, require the Loan to be prepaid if it becomes unlawful for the Loan or the Notes to remain outstanding, as set out in the Loan Agreement. The Issuer will have no other financial obligations under the Notes and no other assets of the Issuer will be available to Noteholders. 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 and retained (net of tax) by or on behalf of the Issuer or the Trustee from the assets securing the Notes. 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 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 and retained (net of tax), 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. Neither the Loan nor the Notes have been guaranteed by the City of Moscow or any other shareholder of the Bank. 11

28 RISK FACTORS RISK FACTORS Prospective investors should consider carefully, among other things, the risks set forth below and other information contained in this Prospectus prior to making any investment decision with respect to the Notes. The Group notes that in a number of situations, which it cannot always control, these risks may materialise and may negatively affect the Group s ability to comply with its payment obligations under the Loan Agreement and, as a result, the debt service by the Issuer on the Notes. These risk factors, individually or together, could have a material adverse effect on the Group, the Issuer and/or their respective businesses, operations and financial conditions and/or the rights under the Notes of the holders of the Notes. In addition, the value of the Notes could decline due to any of these risks, and investors may lose some or all of their investment. Prospective investors should note that the risks described below are not the only risks each of the Group or the Issuer, as the case may be, faces. There may be additional risks of which the Group or the Issuer is not currently aware, and any of these risks could have a negative effect on the Group s ability to comply with its payment obligations under the Loan Agreement or the debt service by the Issuer on the Notes. Prospective investors are urged to consult with their own legal, financial and tax advisors before making an investment in the Notes. Risks Related to the Group s Business and 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 Group in particular Historically, the Russian economy has been adversely affected by market downturns and economic slowdowns elsewhere in the world, including the global economic crisis (which began with the sub-prime mortgage crisis in the United States and developed into a global economic crisis in 2008 (the global economic crisis )). The global economic crisis has had a material adverse effect on the Russian economy and reduced foreign investment in the Russian Federation. In February 2009, in large part due to the impact of the global economic crisis on the Russian economy, 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 22 January 2010, Fitch raised the Russian Federation s ratings outlook to stable from negative. 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 of the Russian Federation reflects risks associated with the sharp reversal in external portfolio and other investment flows, which increased the cost and difficulty of meeting the country s external financing needs. For a more detailed description of the impact of the global economic crisis on the Russian economy and the business activities of the Group, see Operating and Financial Review of the Group Factors Affecting the Group s Results of Operations and Financial Condition The Russian Federation s Economic Condition. As the Russian Federation produces and exports large volumes of oil and gas and other commodities (such as steel), the dramatic falls in the global prices of these commodities in the summer of 2008 resulted in sharp decreases in the revenues of the Russian federal budget and of Russian companies operating in these sectors, which, in turn, had a significant adverse impact on the Russian economy. While oil prices recovered to a degree in 2009, they still remain well below the levels reached in In addition, according to the Federal State Statistics Service ( Rosstat ) oil extraction in the Russian Federation declined by approximately 0.7 per cent. in 2008 and although it increased by 1.3 per cent. in 2009, there can be no assurance that production will remain at current levels. In the year ended 31 December 2009, according to Rosstat, the Russian Federation s real GDP showed a 7.9 per cent. decline compared to an increase of 5.6 per cent. in 2008 and 8.1 per cent. in According to the CBR, the Russian Federation s foreign currency reserves fell from a peak of USD billion in August 2008 to USD billion in May 2009, although they recovered to USD billion by August Rosstats figures for 2009 also show industrial production and exports declining by 9.3 per cent. and 35.7 per cent. respectively, and unemployment increasing by 48.9 per cent. 12

29 During the first quarter of 2010, according to Rosstat, industrial production grew by 5.8 per cent. as compared to the same period in According to Rosstat, exports in the first quarter of 2010 had increased by 61.1 per cent., compared to the same period in Russian Ministry of Economic Development estimates that the Russian Federation s real GDP will grow by not less than 4 per cent. in During the global economic crisis there were periodic suspensions of trading at the Russian stock market, extreme volatility in the Russian securities markets and sharp fluctuations in the share prices of Russian financial institutions. As of October 2008, the RTS stock index had declined by over 70 per cent. from its highest levels reached in May 2008 and the IFS-Cbonds bond index had declined by approximately 13.8 per cent. from its highest levels reached in June However, by the end of July 2010, the RTS stock index and the IFX-Cbonds bond index had recovered by per cent. and 47.0 per cent. respectively, from their lowest levels. The disruptions in the global markets have had a severe impact on the liquidity of Russian banks and other financial institutions, and have significantly affected the financial markets by reducing the availability of liquidity and increasing the cost of funding in the Russian Federation. Russian banks, including the Group, have experienced a reduction in the availability of funding at an affordable price from the debt markets. The majority of the Group s profit is generated in the Russian Federation and, therefore, the Group is particularly exposed to the economic conditions of the Russian Federation. The recent deterioration of economic conditions in the Russian Federation in general and the decline in growth rate of the Russian banking sector in particular, have had and may continue to have an adverse effect on the Group s results of operations and could continue to have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Continued uncertainty in the international financial markets and any deterioration in credit conditions could adversely impact the business, financial condition or results of operations of the Group due to: decreases in the Group s net interest income; decreases in the demand for the Group s credit products; assets or collateral impairment, significantly increased number of overdue loans and loan provision impairment amounts; decreases in the business activity of Russian companies and the credit-worthiness of Russian companies and individuals; increases in borrowing costs and reduced access of the Group to capital markets; constrained liquidity that limits the ability of the Group to grow its business; decreases in fee and commission income due to slowing of capital markets activity; and rising cost base due to high inflation. The Group believes that its funding from customer deposits, together with its other funding sources, its credit standing and its liquidity risk management policy allow it to meet its liquidity needs. Nevertheless, a decrease in the Group s ability to rely on its customer deposits as a source of funding or maturity mismatches between the Group s assets and liabilities, may have a material adverse effect on the business, financial condition, results of operations and/or prospects of the Group. The global economic crisis may lead to a further deterioration of the Group s loan portfolio The Group 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 affected by general economic conditions. Changes in the credit quality of the Group s customers and counterparties, or in their behaviour, or arising from systemic risks in the Russian and global financial system, could negatively affect the value of the Group s assets. Such changes have led to increased volumes of non-performing loans and, significantly 13

30 increased provisions for loan impairment within the Group. Various factors, including increased unemployment, reduced corporate liquidity and an increase in the number of corporate insolvencies and individual bankruptcies in the Russian Federation could reduce the ability of the Group s customers and counterparties to repay loans. In addition, changes in economic conditions might result in the deterioration in the value of collateral and increase the risk of loss in the event of counterparty default, which could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Although in April 2010, Sergey Ignatiev, Chairman of the CBR pointed to the stabilisation in the banking sector, supported by the availability of liquidity and the slow-down in the growth of non-performing loans, there is no guarantee that this stabilisation will continue. Any further instability and negative trends could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. The Group s provision for impairment of loans to customers increased to RUB 43,305.6 million or 7.49 per cent. of the Group s gross loan portfolio as at 31 December 2009, compared with RUB 12,889.6 million, or 2.43 per cent. of the Group s gross loan portfolio as at 31 December 2008, and RUB 4,525.1 million, or 1.27 per cent. of the Group s gross loan portfolio as at 31 December The proportion of the Group s gross loan portfolio that was over 90 days overdue as at 31 December 2009 was approximately 3.9 per cent., compared to 1.3 per cent. and 0.7 per cent., respectively, for the years ended 31 December 2008 and 31 December See Operating and Financial Review of the Group Factors Affecting the Group s results of Operations and Financial Condition Provisions for Impairment. While the Group has adapted its risk management strategies in the light of the global economic crisis, this has not protected it from substantially increased levels of non-performing loans in its portfolio, although the level is lower than the market average based on its analysis of CBR statistics. For more information, see Risk Management Loan Portfolio Provisions for Impairment. If the amount of the Group s overdue loans were to continue to increase significantly, whether or not the Group is required to increase its reserves in response to any such increase, this could have a material adverse effect on the Group s business, financial condition, results of operation and/or prospects. Russian Government measures of support of financial markets may be insufficient As early as October 2008, the CBR took action to improve liquidity in the Russian banking sector by, for example, temporarily reducing the mandatory reserve requirements for Russian banks. Beginning in October 2008, the Russian Government, acting through State Corporation Bank for Development and Foreign Economic Affairs ( Vnesheconombank ), 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. These measures have been seen as critical for restoring investor confidence and supporting medium-term economic growth in the Russian economy. For a description of these measures, see Overview of the Russian Banking Sector and Banking Regulation in the Russian Federation Measures to support the liquidity of the Russian banking system. If, despite such measures, the Group s liquidity position deteriorates or it is not able to obtain funding to run its business and satisfy its liabilities as they fall due, this could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Instability of the Russian and international banking sector, including a deterioration of the soundness or the perceived soundness of other financial institutions, may adversely affect the Group s operations In 2008, as a result of the negative impact of the global economic crisis on the Russian banking sector, Moody s changed its outlook on the Russian banking sector from stable to negative in the third quarter of Although the Group, like many other Russian banks, experienced some deposit withdrawals at that time and in the autumn of 2008 with the onset of the global economic crisis, such withdrawals did not have a material adverse effect on the Group s business. However, no assurance can be given that the Group will not, in the event of any future disruptions, face losses, early deposit withdrawals or other pressures as a result of the insolvency of other Russian banks or their corporate customers. Against a backdrop of limited liquidity and the higher cost of funds in the international and Russian domestic interbank lending markets, many Russian banks have been and remain subject to the risk of deterioration of 14

31 the soundness and/or perceived soundness of other financial institutions within and outside the Russian Federation. 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 and houses, banks, securities firms and exchanges with which the Group interacts, all of which could have an adverse effect on the Group. Although the Group s reliance on funding from domestic and international financial institutions is quite limited and customer deposits form the main source of funding of the Group, a default by, or concerns about the stability of, one or more financial institutions (whether or not a counterparty of the Group) could also lead to further significant systemic liquidity problems, or losses or defaults by other financial institutions, which could destabilise the banking sector and cause the Group s customers to withdraw their deposits prior to their stated maturity. This in turn could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. See A significant part of the Group s funding is based on deposits that can be withdrawn on demand. A significant part of the Group s funding is based on deposits that can be withdrawn on demand and the Group has liquidity risks which may be further exacerbated by the instability of the global and Russian economies and banking sectors The Group has liquidity risk management procedures and analyses its deposit flows on the basis of scenario analysis and stress testing. See Asset, Liability and Risk Management Credit, Market and Liquidity Risks Liquidity Risk. Nevertheless, the Group is exposed to liquidity risk as a result of possible deposit outflows linked to the global economic crisis. Historically, the Group s principal source of funds has been customer accounts, which represented 58.0 per cent. of total liabilities as at 31 December 2009 and 55.4 per cent. of total liabilities as at 31 December As at 31 December 2009, retail customer accounts held by individuals amounted to 41.5 per cent. of total customer accounts and corporate accounts, funds of federal and regional budgets, including the City of Moscow, and funds of state-owned organisations amounted to 32.5 per cent., 15.5 per cent. and 10.5 per cent., respectively, of total customer deposits. A significant part of the Group s funding base comprises retail customer deposits and deposits of municipal budget funds of the City of Moscow, and this source of funding is particularly important given current market conditions and the limited opportunities for market participants, including Russian borrowers such as the Group to access alternative sources of funding. See The Group may lose some or all of the City of Moscow s business. For a more detailed description of the Group s funding from the City of Moscow, see Operating and Financial Review of the Group Overview Affiliation with the City of Moscow and Operating and Financial Review of the Group Factors Affecting the Group s results of Operations and Financial Condition Liabilities Customer Accounts. The Group has previously experienced periods of over-liquidity caused by sharp increases of funds deposited by the City of Moscow with the Group (which have an element of seasonality which stem from the timing of the City of Moscow s receipt of tax payments and budget expenditure plans, although the effect of this has been reduced since 2004 after the City of Moscow adopted changes to its budgeting process) and it currently maintains a high liquidity buffer as a precaution against further deterioration in the market. See Operating and Financial Review of the Group Capital Adequacy. However, Russian companies have significant capital requirements, which have been further increased by the lack of liquidity in the financial markets as a result of the global economic crisis. These customers may withdraw their on-demand deposits from the Group immediately to satisfy any funding shortfalls and may not be in a position to replace such deposits. Further, the Civil Code of the Russian Federation (the Civil Code ) allows retail customers to withdraw any retail deposits, including term deposits, at any time and to safeguard against such withdrawals, the Group holds liquidity reserves in excess of the regulatory minimum. The Group s relatively high concentration of individual customer deposits renders it vulnerable to swings in retail customer confidence. Unscheduled decreases in its corporate or retail deposits may result in liquidity gaps that the Group may not be able to cover and may have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. A large of part of the remainder of the Group s funding is raised in the domestic and international capital markets, including through syndicated loans and interbank markets and the Group s liquidity has been adversely affected by the lack of liquidity in such markets, and the significantly higher interbank lending rates. 15

32 The Group also remains vulnerable to fluctuations in the liquidity of its customers caused by macroeconomic and political events. Companies located in emerging markets, such as the Russian Federation, may be particularly susceptible to disruptions and reductions in the liquidity, funding or increases in financing costs. In addition, 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, consequently, 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. Should the Group become unable to obtain alternative financing on reasonable terms, or at all, this could have a material adverse effect on its business, financial condition, results of operations and/or prospects. Additionally, in 2008 and 2009, a portion of the Group s funding was provided by the CBR within the framework of the CBR s policy to provide liquidity in the Russian banking sector. This funding was more expensive than certain sources of funding that were previously available and has resulted in a different composition in the Group s source of funding as of the date of this Prospectus. The use of more expensive funding sources or failure to achieve a commensurate increase in return on capital may expose the Group to losses and may have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. In addition, if the CBR funding is withdrawn and alternative sources of funding at reasonable cost are not available, the Group s business, financial condition, results of operations, prospects and liquidity position, as well as the value of the Notes, could be materially adversely affected. The Group s ability to generate cash and raise funding depends on many factors beyond its control, and the Group may not be able to generate the cash required to grow its business and satisfy its liabilities as they fall due The Group s ability to satisfy its liabilities as they fall due depends on the operating and financial performance of the Group, its ability to generate cash from its business, together with its ability to access domestic and international sources of funding. This ability may be adversely affected by any failure on the part of the Group to implement successfully its business strategy, as well as general economic, financial, competitive, regulatory and other factors beyond its control. If the Group cannot generate sufficient cash or access funding to grow its business and satisfy its liabilities, the Group may, among other things, need to delay capital expenditures or sell assets, and any failure to do so would be likely to have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Substantial levels of borrower and industry concentration in the Group s loan portfolio and customer accounts may affect its operations The borrower concentration in the Group s loan portfolio remains high. As at 31 December 2009, the Group s ten largest corporate borrowers accounted for 19.1 per cent. of the total loan portfolio of the Group and the 20 largest corporate borrowers accounted for 27.5 per cent. of the total loan portfolio of the Group (compared to 14.4 per cent. and 21.8 per cent. and 12.6 per cent. and 20.2 per cent., respectively, as at 31 December 2008 and 31 December 2007). If the Group loses the business of a significant borrower or if there is any significant impairment in the ability of any of the Group s largest borrowers to service or repay their loans, which prospect has increased significantly in light of the global economic crisis, this could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. The Group s loan portfolio also has a relatively high level of industry concentration. As at 31 December 2009, the financial services, construction, manufacturing, and trade sectors accounted for 21.8 per cent., 13.9 per cent., 12.5 per cent. and 10.9 per cent., respectively, of the Group s loan portfolio, compared to 20.4 per cent., 13.5 per cent., 11.8 per cent. and 10.3 per cent., respectively, as at 31 December 2008 and 18.7 per cent., 16.0 per cent., 17.7 per cent. and 13.4 per cent., respectively, as at 31 December The global economic crisis 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, the obligations of such companies to the Group. See The Group may not be able to accurately assess the credit risk of potential borrowers and the Group has unpredictable exposures to the credit risk of Russian corporations and individuals. 16

33 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 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 Prospectus, the Group is in compliance with the CBR s limit on exposure to a single borrower or a group of related borrowers. However, the Group 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 Group 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, the temporary administration of the Group by the CBR or the revocation of the Group s banking licence. If the Group exceeded its exposure to a single borrower or a group of related borrowers and the CBR took such steps, the Group s business, financial condition, results of operations or prospects could be materially adversely affected. The Group may not be able to accurately assess the credit risk of potential borrowers and the Group has unpredictable exposure to the credit risk of Russian corporations and individuals Although the Group focuses on accurately assessing its credit risk, there is no assurance that the Group will always assess its risk correctly due to a number of factors, including the unpredictable nature of economic conditions in the Russian Federation. Many businesses in the Russian Federation have considerably less operating experience in competitive market conditions than their Western counterparts. Accordingly, the financial performance of Russian companies is generally more volatile, and the credit quality of Russian companies has been less predictable, than those of similar companies doing business in more mature markets and economies. If a substantial part or all of the Group s clients were to experience poor financial performance due to a downturn in the Russian economy generally or volatility in certain sectors of the Russian economy and such performance were to negatively impact the capacity of such entities to satisfy their liabilities to the Group, this could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Many of the Group s corporate and retail customers do not typically have extensive or externally verified credit histories and there are limited third-party resources available to banks to ascertain the credit history of borrowers. The system of credit bureaus in the Russian Federation is incomplete and the credit history data held by such organisations is limited. Although banks have access to credit bureau data, the Group and its competitors only share all their customer information except on a bespoke basis and there is no single credit bureau with data on every corporate entity and individual in the Russian Federation. Moreover, due to the lack of frequent and reliable information on borrowers in the Russian Federation, the Group uses statutory financial statements and public sources of information on its corporate borrowers to evaluate their financial condition and monitor credit quality. The financial statements of many of the Group s corporate clients are not prepared in accordance with United States Generally Accepted Accounting Principles ( US GAAP ) or IFRS and are not audited in accordance with Statements on Auditing Standards ( SAS ) or International Standards on Auditing ( IAS ). Even though the Group requires its clients to regularly disclose their financial information to it, such financial information may not always present a complete picture of a client s financial condition. As a result, customers may become over-extended due to other credit obligations of which the Group is unaware and/or may complete applications for credit inaccurately or fraudulently. The Group s failure to assess correctly the credit risk of potential borrowers, or inability to attract customers that meet the Group s financial and credit requirements, may have a material adverse effect on its business, financial condition, results of operations and/or prospects. A decline in the value or illiquidity of the collateral securing the Group s loans may materially adversely affect the Group s corporate loan portfolio and it may be difficult for the Group to enforce collateral or other security under Russian law A substantial portion of the Group s loans to legal entities in the Russian Federation is secured by collateral over assets such as real estate, land leasing rights, production equipment, securities, precious metals, raw materials, inventory and/or guarantees. See Asset, Liability and Risk Management-Credit, Market and Liquidity Risks Credit Risks and Lending Policies and Procedures. Although the Group tends to take collateral in excess of the loan value and the proportion of the Group s loan portfolio that is collateralised 17

34 remained stable in the years ended 31 December 2009 and 31 December 2008 at per cent., and per cent., respectively, compared to per cent. for the year ended 31 December 2007, continued fluctuations in the relevant markets or a further general deterioration in economic conditions in the Russian Federation may result in a decline in the value of collateral securing loans to levels below the outstanding principal balance and accrued interest on those loans. If collateral values decline, they may not be sufficient to cover uncollected amounts of the Group s secured loans. A decline in the value of collateral securing the Group s loans or its inability to obtain additional collateral may, in some cases, require the Group to reclassify the relevant loans, establish additional allowances for loan impairment and increase reserve requirements. For further information, see Lending Policies and Procedures Collateral. Under Russian law, security (which includes pledges and mortgages) and guarantees (other than bank guarantees) are considered secondary obligations, which automatically terminate if the underlying secured or guaranteed obligation becomes void. Foreclosure under Russian law may in certain cases require a court judgment but Russian law also provides for the possibility of realising a pledge through the sale of the assets at an auction pursuant to an out-of-court order. Upon the application of the pledgor, a court may delay such sale through a public auction for a period of up to a year. A mortgage under Russian law is a pledge over real estate, such as land and buildings, which requires state registration in order to be valid. Such state registration may be difficult to obtain, especially for real estate under construction. Russian law has no pledge perfection system for collateral other than mortgages or pledges of shares in joint stock companies, and the absence of this system may lead to unexpected and/or conflicting claims of secured creditors against the pledged property. While the Group considers that its procedures for determining credit risk are adequate, there can be no assurance that the Group will be able to enforce any security in the event of a borrower s default or that the relevant collateral will be sufficient to cover the value of the loan secured on it. Although in January 2009, a series of laws came into force significantly amending the rights of secured creditors under Russian law, these provisions are new and still have not been properly tested in practice. Therefore, there can be no assurance that they will in fact facilitate the enforcement by secured creditors of their security under Russian law. As a result, the Group may have difficulty foreclosing on collateral or enforcing suretyships or other third party credit support arrangements when clients default on their loans. Any failure to recover the expected value of collateral or expenditure of time and resources on a non-core asset acquired following foreclosure may expose the Group to losses, which may materially adversely affect the Group s business, financial position, results of operations and/or prospects. The City of Moscow may significantly influence the Group and take actions that conflict with the interests of Noteholders The City of Moscow is the Group s largest shareholder. As at 31 December 2009, the City of Moscow directly owned per cent. and, through OJSC Metropolitan Insurance Group (which in turn is controlled by the City of Moscow) together with its subsidiaries, indirectly held per cent. of the issued and outstanding share capital of the Group. Although the City of Moscow is not closely involved in the day-to-day management of the Group, as the largest shareholder it reviews and approves the Group s strategic and planning decisions. Out of 15 members of the Board of Directors of the Group, 7 (including the Chairman of the Board of Directors) have been nominated by the City of Moscow. As a result, the City of Moscow may exert significant influence over certain actions requiring shareholder approval, including, but not limited to, any proposed amendment to the Group s charter, any reorganisation of the Group, certain share issuances of the Group, the election of the majority of members of the Board of Directors, the declaration and payment of dividends, the appointment of management, the approval of certain major transactions and other policy decisions. The interests of the City of Moscow may conflict with the interests of the Noteholders and any decisions that the Group may take in pursuing the interests of the City of Moscow that conflicts with the interests of the Noteholders may have a material adverse effect on the value of the Notes. The Group may lose some or all of the City of Moscow s business The Group s relationship with the City of Moscow began in The Group is to a certain extent dependent on the business it derives from its affiliation with the City of Moscow. This business includes servicing municipal budget funds of the City of Moscow, financing projects of the City of Moscow, and extending 18

35 loans to and keeping accounts of enterprises affiliated with the City of Moscow, in each case on an arm s length basis. As at 31 December 2009, the City of Moscow deposited a significant portion of its budget funds with the Group. These budget funds accounted for 14.7 per cent. of the Group s total deposit portfolio and 8.5 per cent. of the Group s total liabilities as at 31 December 2009, compared with 22.6 per cent. and 12.5 per cent. and 26.2 per cent. or 19.2 per cent., as at 31 December 2008 and 31 December 2007, respectively. These deposits represent an important part of the Group s deposits. The City of Moscow generally selects the banks it uses by open tender and the Group competes for the City of Moscow s business on an arm s length basis. In December 2005, the Group was among three commercial banks selected by the City of Moscow through an open tender authorised to keep the budget funds of the City of Moscow. Subsequently, on 30 September 2008, the Group was again among the four commercial banks appointed by the City of Moscow for this purpose. This appointment will last for three years, whereupon another tender process will be held. It should be noted that the City of Moscow has total freedom of choice in allocating its budget funds between the four chosen banks and tends to allocate funds to the bank which gives the highest bid (interest rate). The Group has also been involved in the financing of certain City of Moscow projects, generally on a competitive tender basis, since Although the Group believes that it will continue to be selected by the City of Moscow to finance many projects of the City of Moscow, there can be no assurance that it will continue to be selected by the of Moscow to finance many projects of the City of Moscow or that other banks will not participate in the financing of such projects and reduce significantly the Group s business with the City of Moscow. The Bank returned deposits from the City of Moscow in the fourth quarter of 2009 (see Operating and Financial Review of the Group Recent Developments ). Loans to enterprises owned by the Government of the City of Moscow accounted for 2.4 per cent. of the Group s gross loan portfolio as at 31 December 2009, compared with 1.4 per cent. as at 31 December 2008 and 1.2 per cent. as at 31 December Some of the Group s transactions are conducted with related parties Some of the Group s liabilities are from related parties and a portion of the Group s earnings is derived from activities and transactions with related parties, including the City of Moscow and entities and individuals affiliated with the City of Moscow or over which the City of Moscow may be able, directly or indirectly, to exert a significant degree of influence. As at 31 December 2009, loans to the Group s related parties accounted for 2.5 per cent. of the Group s gross loan portfolio compared to 1.5 per cent. and 1.3 per cent. as at 31 December 2008 and 31 December 2007, respectively. As at 31 December 2009, the City of Moscow and a number of its municipal entities deposited a significant portion of their budget funds with the Group. See The Group may lose some or all of the City of Moscow s business. The Group has also made loans to ZAO Inteko ( Inteko ), a construction and manufacturing company which, although not a related party for IFRS purposes, is controlled by the wife of the Mayor of the City of Moscow. In addition, where the Group has granted loans to other borrowers engaged in construction activities linked to social or infrastructure projects initiated by the City of Moscow, such borrowings are effectively supported by performance guarantees from the City of Moscow. While transactions with such entities are carried out on an arm s length basis and are subject to the same approval procedures and lending limits as transactions with unrelated parties, such related parties demand for such products and services from the Group may decline if the City of Moscow were to cease to be the principal shareholder of the Group, which could have a material adverse effect on the Group s business, financial condition, results of operations or prospects. See also The Group may lose some or all of the City of Moscow s business. The Group faces significant competition in the Russian banking market The Russian market for financial and banking services is highly competitive. Although the industry is dominated by a few Moscow-based banks, according to the CBR, 1,160 banks and non banking credit organisations entitled to carry out banking operations were registered in the Russian Federation as at 1 August Due to the large number and variety of banks in the Russian Federation, the Group faces competition from different banks in each of the business sectors and regions in which it operates. 19

36 Moreover, although foreign banks are currently allowed to operate in the Russian Federation only through their locally licensed subsidiaries, the Group expects that access of foreign banks to the Russian market will be facilitated by the Russian Federation accession to the World Trade Organisation ( WTO ). However, as at the date of this Prospectus it is unclear if the Russian Federation will accede to the WTO, and on which terms. The Group considers its primary competitors among Russian banks in the overall corporate and retail financing sectors to be Sberbank (Savings Bank of the Russian Federation) ( Sberbank ), VTB Bank (open joint-stock company) ( VTB ), Gazprombank (Open Joint-stock Company) ( Gazprombank ), Joint Stock Commercial Bank ROSBANK (Open joint-stock company) ( Rosbank ), Open Joint-Stock Company Alfa-Bank ( Alfa-Bank ) and MDM Bank, Open Joint Stock Company ( MDM Bank ) and among foreign banks to be Closed Joint Stock Company International Moscow Bank ( Unicredit ), Closed joint stock company Raiffeisenbank ( Raiffeisenbank ) and Closed Joint Stock Company Commercial Bank Citibank ( Citibank ). The Group views Sberbank, VTB and Rosbank as major competitors in the retail loan sector. In the retail deposit sector, the Group considers its primary competitors to be Sberbank, VTB, Gazprombank, Rosbank, Alfa-Bank, Raiffeisenbank, MDM Bank and Open joint stock company BANK URALSIB ( Uralsib ). In the market for the provision of banking services to corporate clients, the Group competes directly with the largest Russian and international banks. The development of cross-border credit has resulted in intense competition in providing lending services to major Russian enterprises and exporters. Using comparatively inexpensive resources raised in the international financial markets and syndicated loans to finance large Russian enterprises, major international banks have expanded rapidly into this market segment. In the investment banking sector, the Group considers its primary competitors to be Sberbank, VTB, Rosbank, The Closed Joint-Stock Company Troika Dialog ( Troika Dialog ), Commercial Bank Renaissance Capital (limited Liability Company) ( Renaissance Capital ), Unicredit and Raiffeisenbank. The Group competes with other Russian banks for high-volume corporate clients with an interest in developing a long-term working relationship. Although the Group competes with the same group of Russian banks across its retail products as it does on the corporate side, it also faces competition from foreign banks such as Joint-Stock company Banque Societe Generale Vostok ( Société Generale ), HSBC Bank (RR) (Limited Liability Company) ( HSBC ), Citibank and Raiffeisenbank in respect of private banking products and services offered to high net worth retail customers. While the foreign banks have diminished their activity in the Russian Federation during the crisis, they are expected to re-launch their efforts as the economy stabilises. The Bank believes that the retail services market in 2010 has been influenced by a number of factors, including increased competition from the leading domestic retail market operators, primarily Sberbank and VTB. In addition, the Bank competes on a competitive tender basis with Sberbank, VTB and Russian Agricultural Bank ( Russian Agricultural Bank ) for funds from the City of Moscow. For a more detailed description of the Group s competitors, see Business Competition. If the Group is unable to continue to compete successfully in the sectors where it does business and if it is unable to respond to increased competition, it may have difficulty in maintaining its existing position and realising its strategy of diversifying its customer base, which may have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. In the second half of 2006, the CBR adopted a package of regulatory measures designed to liberalise the process by which Russian banks raise equity financing. Such measures include elimination of, or significant reductions in, restrictions applicable to foreign investors acquiring shares of Russian banks. Such measures facilitate the ability of the Group s current competitors to more easily access sources of capital both in and outside of the Russian Federation and, as a result, to compete more effectively with the Group. It may also lead to the entry into the market of new competitors, which could materially adversely affect the Group s business, financial condition, results of operations and prospects. For example, from 11 January 2007, the requirement to obtain prior permission of the CBR (i) by a Russian credit institution for participation by nonresidents in any increase in its share capital; and (ii) by a Russian resident for any sale by it of shares (interests) in a Russian credit institution to non-residents, was abolished. The standard rules applicable to notification to, and obtaining prior approval of, the CBR in case of acquisition of shares (interests) in Russian banks and credit institutions now apply to resident and non-resident buyers equally. See Overview of the Banking Sector and Banking Regulation in the Russian Federation. 20

37 In the second half of 2007, in response to the crisis in the international financial markets, the Group revised its approach to risk assessment. The Group reviewed its risk management strategies and implemented an internal stress testing programme in light of the deteriorating economic conditions. The Group set a strategic goal to apply a more conservative approach in evaluating the quality of the financial position of its borrowers, which included increased requirements in relation to the size and quality of collateral and stricter lending requirements. The Group introduced stricter provisioning requirements for borrowers not yet in default of their obligations. Since July 2010 the Group has relaxed certain of its anti-crisis restrictions by, for example, widening the range of industry sectors to which it extends corporate overdrafts and reducing the discount applied to collateral. See Business Lending Policies and Procedures Collateral for a more detailed description of the Group s collateral requirements. Although the Group considers this policy to be prudent in the context of the current crisis (and at the same time the Group has less liquidity than certain of its competitors), there is a risk that other competitors of the Group who employ less conservative liquidity risk management policies will be able to employ their funds more efficiently than the Group and improve their respective market positions to the detriment of the Group. This, in turn, may have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. The Group may lose some or all of its banking and lending business and some or all of its funding sources (deposits from commercial and governmental entities) to its competitors, which may have a material adverse effect on its business, financial condition, results of operations or prospects. Recent expansion of the Group s operations exposes it to increased credit risk and the Group may fail to manage this increased risk adequately Until the onset of the global economic crisis, the Group experienced significant growth, particularly in the size of its gross loan portfolio, which increased before taking into account provision for impairment by 9.1 per cent. to RUB 577,795.1 million as at 31 December 2009, compared to RUB 529,453.4 million as at 31 December 2008 and RUB 356,147.3 million as at 31 December For a more detailed discussion of the Group s loan portfolio and loan impairment provisioning, see Operating and Financial Review of the Group Combined Results of Operations for the Years 2009, 2008 and 2007 Provisions for impairment. and Operating and Financial Review of the Group Assets Loans to customers. The Group believes that notwithstanding the deterioration in its loan portfolio, its loan portfolio remains of good quality due to the Group s lending policies, procedures and risk management system. See Business Lending Policies and Procedures for a more detailed description of the Group s lending procedures. Historically, low default rates on loans extended by the Group to its customers enabled it to set relatively low provisions for impairment. However, as a result of the Group s growth, the onset of the global economic crisis and increased levels of overdue loans, the Group s has increased its levels of provisioning for impairment. In particular, the growth of the Group s lending to SMEs and to retail customers, particularly with respect to the Russian individuals and medium-sized enterprises in its portfolio, has resulted in an increased level of impaired loans. Lending to such clients in the context of the global economic crisis may carry a greater risk of default than lending to large corporate clients and may lead to an increase of overdue amounts and, consequently, to higher loan impairment provisions. See The Group may not be able to accurately assess the credit risk of potential borrowers and the Group has unpredictable exposure to credit risk of Russian corporations and individuals and Business Business Strategy Attracting additional corporate business. Future growth of the Group s loan portfolio could put additional pressure on the Group s loan monitoring and control procedures. The Group may fail to manage its growth adequately Overall growth in the Group s business requires greater allocation of management resources away from day-to-day operations, continued development of its financial and information management control system, continued training of management and other personnel, presence of adequate supervision and maintenance of consistency of client services across extended regions throughout the Russian Federation. The Group s failure to maintain its growth while at the same time maintaining adequate focus on existing business divisions may have a material adverse effect on its business, financial condition, results of operations and/or prospects. 21

38 The Group s strategy previously included a substantial expansion of its branch network and increase in the size of its overall loan portfolio in a relatively short period of time. Any further expansion of the Group s branch network may entail significant investment, as well as increased operating costs. There is no guarantee that the Group will achieve a positive return on any investment that it makes in the expansion of its branch network or that growth in the Group s loan portfolio would not, over time, result in an overall decline in the credit quality of the expanded loan portfolio. The Group is exposed to interest rate risk The global economic crisis has put upward pressure on interest rates in the Russian Federation and the official figures for inflation in the Russian Federation in 2009, 2008 and 2007 were 8.8 per cent., 13.3 per cent. and 11.9 per cent., respectively. As at the date of this Prospectus, the rate of inflation in the Russian economy is decreasing (the official projected figure for inflation in the Russian Federation in 2010 is approximately per cent. according to estimates of the Russian Ministry for Economic Development). The Group s revenues are mainly derived from 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 Group is exposed to interest rate risk principally as a result of lending and making advances to customers and other banks at fixed interest rates and in amounts and for periods which may differ from the Group s funding sources (customer accounts, bank borrowings and securities offerings). While the Group monitors interest rates with respect to its assets and liabilities and seeks to match its interest rate positions, the Group is unable to predict with any certainty changes in market interest rates, which are affected by many factors outside 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 Group s business, financial condition, results of operations and/or prospects. Fluctuations in interest rates could adversely affect the Group s operations and financial condition in a number of different ways. An increase in interest rates generally may decrease the value of the Group s fixed rate loans if the Group is unable to pass on such increase to its borrowers and raise the Group s funding costs. Such an increase could also generally decrease the value of fixed rate debt securities in the Group 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 Group s interest rate sensitive assets and liabilities. As a result, the Group 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 Group s control, including the policies of central banks, including the CBR, domestic and international economic conditions and political factors. The Group has sought to compensate for decreased lending margins through more effective use and diversification of its funding into lower cost funding sources and increasing fee income. Although the Group has implemented these measures as well as interest rate risk management procedures, there can be no assurance that these strategies will protect the Group from the negative effects of future interest rate fluctuations and that adverse interest rate movements will not affect its business, financial condition, results of operations or prospects. There can be no assurance that the Group 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 Group s financial condition, results of operations and/or prospects. See Asset, Liability and Risk Management Credit, Liquidity and Market Risk Market risk Interest rate risk. The Group s income from proprietary securities and currency operations is volatile The Group engages in proprietary securities operations. The Group s income from financial assets at fair value through profit or loss and available for sale for the year ended 31 December 2009 was RUB 10,530.9 million, compared to negative RUB 6,820.7 million and RUB million for the years ended 31 December 2008 and 31 December 2007, respectively. For a more detailed discussion of the Group s proprietary trading operations, see Operating and Financial Review of the Group Combined Results of Operations for the Years 2009, 2008 and 2007 Interest income from financial assets at fair value through profit or loss and Business Funding Proprietary Securities Activities. 22

39 The Group s income from securities operations depends on numerous factors beyond its control, such as overall market trading activity, interest rate levels, fluctuations in exchange rates and general market volatility. The Group has placed limits on its trading securities portfolio in respect of various types of securities and securities trading and single issuer limits, which are designed to maintain its securities portfolio risk at an acceptable level. In response to the current uncertainties in the global financial markets, the Group actively reviews these, and in 2008 the Group adopted a more conservative securities trading policy and streamlined its portfolio to reduce the volume of its securities portfolio, in particular in equity securities. In 2009 the Group began to increase the volume of debt securities in its securities portfolio. The increase in the securities portfolio also allowed the Group to increase its position to obtain secured funding from the CBR. As at 31 December 2009, the majority of the Group s securities were freely tradable debt securities in bonds issued by leading Russian companies and Russian federal and municipal debt securities. For a discussion of the Group s investments in financial assets, see Operating and Financial Review of the Group-Factors Affecting the Group s results of Operations and Financial Condition-Fluctuations in the value of financial assets and Operating and Financial Review of the Group Combined Results of Operations for the Years 2009, 2008 and 2007 Financial assets at fair value through profit or loss. These securities expose the Group to the risk that market price fluctuations may adversely affect the value of the Group s securities portfolio. For a discussion of the Group s trading and investment portfolio, see Selected Consolidated Financial Information Investment Portfolio and Asset, Liability and Risk Management Credit, Market and Liquidity Risks Market Risks. The Group 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 Group chooses to hedge certain positions do not track the market value of those positions. The global economic crisis had a very significant adverse effect on the Russian stock market, see 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 Group in particular. The Group also trades currency on behalf of its clients and for its own account and maintains open currency positions, which gives rise to exposure to currency risk. Although the Group has in place limits aimed at reducing currency risk and adheres to the CBR limits on open currency positions, currency exchange rates and the volatility of both the Rouble and the U.S. Dollar may materially adversely affect the Group s business, financial condition, results of operations and/or prospects. See Asset, Liability and Risk Management Market Risks Currency Risk. The Group s exposure to currency risk may increase, particularly as it returns to the international capital markets As at 31 December 2009, 66.7 per cent. of the Group s loans to customers (net of provisions for impairment) were denominated in Roubles, compared to 65.0 and 70.4 per cent. as at 31 December 2008 and 31 December 2007, respectively. The Group 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, Euros and Swiss Francs. Upon any depreciation of the Rouble against foreign currencies, the Group becomes subject to higher interest payments on its foreign currency denominated liabilities when calculated in Rouble terms. The Group plans to continue to access the international capital and syndicated loan markets, which subjects it to risks inherent in currency fluctuations and the uncertainty of these markets as a reliable funding source. Although the Group has procedures in place to manage this risk by setting limits and performing certain other measures aimed at reducing currency risk, including, but not limited to, entering into foreign exchange swap contracts, fluctuations in foreign currency exchange rates may adversely affect the Group s business, financial condition, results of operations and prospects. See Risks relating to the Russian Federation Exchange rates, exchange controls and repatriation restrictions could adversely affect the value of investments in the 23

40 Russian Federation and Asset, Liability and Risk Management Credit, Market and Liquidity Risk Market Risk and Currency Risk. Significant off-balance sheet credit related commitments may lead to potential losses As part of its business, the Group issues guarantees and letters of credit. As at 31 December 2009, the Group had issued guarantees amounting to RUB 53.7 million and letters of credit amounting to RUB 8.8 million, together with undrawn credit lines and commitments to extend credit amounting to RUB 31.4 million. As at 31 December 2008, the Group had issued guarantees amounting to RUB 48.1 million and letters of credit amounting to RUB 8.8 million, together with undrawn credit lines and commitments to extend credit amounting to RUB 23.7 million. All such credit related commitments are classified as off-balance sheet items in the Group s consolidated financial statements. Although the Group 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 Group may potentially incur on its credit related commitments, particularly in light of current economic conditions. See Operating and Financial Review of the Group Off-balance sheet arrangements and Asset, Liability and Risk Management Credit, Market and Liquidity Risk. The Group s risk management strategies and procedures may leave it exposed to unidentified and unanticipated risks Although the Group invests substantial time and effort in its risk management strategies and procedures, such strategies and procedures for risk management may nevertheless fail under certain circumstances, particularly when confronted with risks that it has not identified or anticipated. Some of the Group s risk management methods are based upon observations of historical market behaviour. The Group applies statistical techniques to these observations to arrive at quantifications of its market risk exposures. See Asset, Liability and Risk Management Credit, Market and Liquidity Risks. Even though publicly available information and historical data accumulated by the Group includes the behaviour of all market sectors during the 1998 crisis, it only covers a ten-year period, limiting the coverage of the Group s models. Moreover, in developing its statistical models, the Group may not identify or anticipate some circumstances and quantifications and may not take all risks into account. If the Group s measures to assess and mitigate risks prove insufficient, its losses may be greater than expected and this could have a material adverse effect on the Group s financial condition, results of operations and/or prospects. The Group s business entails operational risks and technological risks The Group is exposed to many types of operational risk, including the risk of fraud by employees or outsiders, unauthorised transactions by employees or operational errors, including clerical or record keeping errors or errors resulting from faulty computer or telecommunications systems. Although there have been no material fraud claims or litigation within the Group, the Group has in the past brought claims against for fraud. Given the Group s high volume of transactions, errors may be repeated or compounded before they are discovered and rectified. In addition, the Group s information technology systems do not fully support its operations and a number of transactions at the Group are processed manually, which may further increase the risk that human error or employee tampering or manipulation will result in losses that are difficult to detect. See The Group faces technological risks and Business Information Technology. The Group maintains a system of controls designed to keep operational risk at appropriate levels and has, in the context of the crisis, centralised to a large extent the powers of branch managers. See Asset, Liability and Risk Management Lending Policies and Procedures-Credit procedures. However, there can be no assurance that it will not suffer losses from failure of these controls to detect or contain operational risk in the future. The Group also manages its operational risk through obtaining outside insurance. See Asset, Liability and Risk Management Credit, Market and Liquidity Risks Operational Risks. However, the Group does not carry insurance coverage at levels comparable to those customary in other countries for a bank of its size and nature and, under some circumstances, its insurance coverage may prove insufficient. The same is true of many Russian banks and other companies, as the Russian insurance sector is not fully developed and insurance is not widely relied upon to manage operational risk. 24

41 The Group is also exposed to technological risks. The Group s banking business requires the development of sufficient communication channels and software, the creation of large automated systems and considerable computer capacity located throughout the Russian Federation. The Group positions itself as a full-service provider of commercial banking services that offers high quality services to clients in all Russian regions and it seeks to ensure the same technological capabilities for all of its business units. Matching the capacities of its information systems, network and technologies and the pace of its business development requires considerable expenditure. The Group s financial performance, its ability to meet its strategic objectives, to manage risks arising out of the current market environment, and 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. There is no assurance that the Group s back-up systems would be sufficient in the case of a disruption of the its IT systems. A disruption (even short term) to the functionality of the Group s IT systems, or delays in increasing the capacity of the IT systems, could have a material adverse effect on the business, financial condition, results of operations and/or prospects of the Group. Although the Group has upgraded its IT systems over a number of years, these systems are currently significantly less developed in certain respects than those of banks in more developed countries. Lack of immediately available consolidated financial and operating data may hinder the ability of the Group 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 Group s operational risks and the costs of further business development. If the Group s IT systems become unable to adequately support its operations and fail to allow it to effectively monitor and manage its operations, this could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. The expansion of operations and the introduction of new technologies result in correspondingly greater risks, as the financial consequences of any failure of equipment, networks or software become more severe. Taking into account international experience, the Group invests considerable time and money in order to keep its technology up-to-date, centralise its information systems, create appropriate reserves and duplicate capacities, develop internal audit functions and control the operation of its hardware and software. Nevertheless, the Group cannot eliminate the possibility of a banking system failure that may, for some time, impact its operational activities and lead to expenses that may materially adversely affect its financial performance or reputational damage that may affect the Group s ability to attract new customers. The Group s employees may not adhere to compliance procedures The Group runs the risk that its employees will not adhere to its compliance procedures and limits on risk related activities. The Group 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 Group 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 Group s business, financial condition, results of operations and/or prospects. The Group s measures to prevent money laundering may not be completely effective In 2006 and the first part of 2007, the CBR excluded several banks from the deposit insurance system based on suspicions of money laundering and revoked a number of banking licences for violations of reporting requirements under Federal Law No. 115-FZ On Combating of the Legalisation of Illegal Earnings (Money Laundering) and Terrorism Financing dated 7 August 2001 (as amended) (the Anti-Money Laundering Law ). Although the Group believes that it fully complies with the reporting requirements under the Anti-Money Laundering Law, there is no guarantee that it will not, due to technical or other reasons stemming from the complexity of the regulations or undetected fraudulent representations by customers, breach the Anti-Money Laundering Law. Any such breach could result in certain enforcement actions, which 25

42 could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects, either through an inability to operate or a reduction in interbank liquidity available to it. The Group s accounting systems may not be as sophisticated as those of companies organised in jurisdictions with a longer history of compliance with international accounting standards Accounting and reporting requirements in the Russian Federation are not comparable to those in other jurisdictions, such as the United States and the United Kingdom and Russian Accounting Standards ( RAS ) are not comparable to either IFRS or US GAAP. Russian accounting legislation continues to develop and has been subject to change on a regular basis in recent years. As of 1 January 2004, all credit organisations in the Russian Federation must prepare financial statements in accordance with IFRS in addition to the statutory accounting reports in accordance with RAS. 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. As its systems and processes are tailored to the requirements of RAS, it may take the Group longer than comparable companies in other jurisdictions to prepare its consolidated annual and interim financial statements, in accordance with IFRS. In accordance with the Banking Law, the Group 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 Group s IFRS consolidated financial statements and are not prepared in accordance with IFRS. The Group has regularly published and filed such reports since its establishment and has complied with the relevant reporting requirements. In accordance with Russian legislation applicable to securities issuers, the Group is required to file quarterly reports with the FSFM. These reports include certain information about the Group, its management, subsidiaries, affiliates and selected financial and business information (such as events of litigation and quarterly statutory accounting reports prepared in accordance with RAS). Despite recent initiatives to improve corporate transparency in the Russian Federation, there is less publicly available information about the Group than there is for comparable companies in other jurisdictions, such as the United States and the United Kingdom. As a result of the relatively recent introduction of international accounting standards in the Russian Federation, Russian companies and corporate groups, including the Group, may not have fully developed and implemented the required methodologies for the preparation of international financial statements, including the internal control frameworks, development methodologies or risk assessment activities on which the preparation of international financial statements depends. Historically, the financial information provided by the Group s subsidiaries has not always been consistently thorough and efficient to allow for the Group s accounting personnel to process and consolidate the information for the purposes of producing its financial statements. As the Group develops and implements accounting systems, the Group may identify further issues with the financial information provided by the Group s subsidiaries that may impact the Group s historical financial statements. The Group depends on its senior management and key personnel and it may have difficulty attracting and retaining qualified professionals Future operating results of the Group depend to a large extent upon the continued contributions of senior managers and key personnel. The Group could be adversely affected if any of the senior managers or key personnel of the Group cease to actively participate in the management of its business. In addition, the Group depends in large part on its ability to attract, train, retain and motivate highly skilled employees and management. There is significant competition for employees with experience in banking, technology and programming. In particular, competition within the Russian banking industry is intense for personnel with relevant experience, especially in regions outside Moscow where the number of potential qualified personnel is relatively limited. In the future, it may be increasingly difficult for the Group to hire and retain qualified personnel. In addition, the Group may lose some of its most qualified and experienced personnel to its competitors. In order to recruit qualified and experienced employees and to minimise the possibility of their departure to other banks, the Group provides compensation packages that it believes are consistent with the evolving standards of the Russian labour market, and as a result may encounter larger than expected operational costs. If the Group cannot attract, train, retain and motivate qualified personnel, then it may be 26

43 unable to compete effectively in the Russian banking industry and its growth strategies may be limited, which in each case could materially adversely affect the Group s business, financial condition, results of operations and/or prospects. For a more detailed discussion of the Group s management, see Management. The Russian deposit insurance system is relatively new and there can be no assurance that implementation of the system or other possible banking reform will not negatively impact on the businesses of Russian banks, including the Group As part of the Russian banking reform, the Federal Law No. 177-FZ On Insurance of Deposits of Individuals Placed with Banks of the Russian Federation dated 23 December 2003 (as amended) (the Deposit Law ) implemented a framework for credit organisations wishing to take retail customer deposits (the Deposit Insurance System ). The Deposit Law, together with the ensuring CBR regulations (the Deposit Regime ), has introduced new requirements for banks in the Russian Federation wishing to participate in the Russian Deposit Insurance System. In particular, under the Deposit Regime, banks are required to meet certain standards in relation to the accuracy of their financial reports and to comply with the CBR prudential requirements and financial stability requirements. The adequacy of a bank s financial stability is assessed on, inter alia, certain transparency criteria, such as the transparency of a bank s shareholding structure, the transparency of the parties exercising a material influence (direct or indirect) on the management of a bank and the significance of the influence of off-shore entities on the management of a bank. All banks wishing to continue to accept individuals deposits in the Russian Federation and participate in the Deposit Insurance System were required to apply to the CBR prior to 27 June 2004 for a certificate confirming compliance with the Deposit Regime. The Bank was accepted into the Deposit Insurance System on 28 October 2004 under number As a member of the Deposit Insurance System, the Bank is required to comply with its requirements on an ongoing basis. Failure to meet these requirements in certain instances may lead to the expulsion of the Bank from the Deposit Insurance System and revocation of its licence to accept deposits from individuals. This would cause the Group to lose its retail client base and would be likely to have a significant adverse effect on the business, financial condition, results of operations and/or prospects of the Group. See Overview of the Russian Banking Sector and Banking Regulation in the Russian Federation. The Group is a highly regulated entity and it may fail to comply with applicable legal requirements, which could lead to a licence required by the Group in connection with its operations being revoked or the Group failing to receive a licence that it requires Regulatory authorities in the Russian Federation exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licences, permits, approvals and authorisations. The Group is subject to strict regulation in the Russian Federation by governmental organisations, particularly the CBR and the FSFM. The requirements, including capital adequacy requirements, imposed by the Group s regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties with whom the Group deals. These requirements are not designed to protect holders of the Notes and may limit the Group s activities and increase its costs of doing business. A breach of regulatory guidelines could expose the Group to potential liability and other sanctions, including the loss of its banking licences. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities and the regulatory structure governing the Group 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 Group and the Group became unable to comply with such regulations, it could have a material adverse effect on its business, financial condition, results of operations and/or prospects. See Risks Related to the Russian Federation and the City of Moscow Selective, unlawful or arbitrary action by the regulatory authorities may have a material adverse affect on the Group s business and the value of an investment in the Notes. 27

44 The Group 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 Group 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 Group 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 Group s business, financial condition, results of operations and prospects. In addition, the regulatory authorities have the right to conduct periodic inspections of the Group s operations and properties. Any such future inspections may result in a determination that the Group has violated laws, decrees or regulations, and the Group may be unable to refute such determination or remedy the violations. The Group 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 Group s licences, permits, approvals and authorisations, or in requirements that the Group 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 Group s operations, could increase its costs and materially adversely affect its business, financial condition, results of operations and/or prospects. The Group has the licences that are required for it to perform its banking operations. Although the Group has been successful in obtaining CBR and the FSFM licences in the past, there can be no assurance that the Group will be able to obtain new licences or maintain its existing licences in the future. Each of the CBR and the FSFM may, in its discretion, impose additional requirements or deny the Group s request for licences. The loss of or breach of the terms of, or the failure to obtain, a CBR or a FSFM licence in the future could result in cash-flow difficulties and penalties such as the imposition of fines on the Group, which may, in turn, affect the Group s ability to satisfy its liabilities and run its business, and would be likely to have a material adverse effect on its business, financial condition, results of operations and/or prospects. The loss of the Group s general banking licence will result in its inability to perform any banking operations. In addition, the Group is exposed to the risk that the CBR may impose sanctions on the Group for noncompliance with certain mandatory economic ratios or other regulations. Such sanctions could include a fine, the initiation of temporary administration of the Group by the CBR or revocation of its banking licence. Under Russian law, the CBR may appoint a temporary administrator for a term of up to six months if a bank fails to comply with CBR orders to remedy breaches, or if those breaches have created an actual threat to the interests of its creditors (i.e. depositors). A bank s general banking licence may be revoked after the repeated imposition on the bank of other sanctions during the same calendar year. While the Group makes strenuous efforts to comply with the applicable regulations, there is no assurance that it will always be successful in doing so. Certain failures on the part of the Group to comply with such regulations could result in the withdrawal of a licence that the Group requires to run its business successfully, which would be likely to have a material adverse effect on its business, financial condition, results of operations and/or prospects. Certain covenants in the Group s debt agreements restrict its operations and failure of the Group to comply with such covenants may have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects The restrictions in the Group s international borrowings (see Business International Borrowings and see Operating and Financial Review of the Group Liquidity and Capital Resources Contractual Obligations ), the terms of which vary significantly, limit, among other things, the ability of the Bank and certain of its subsidiaries to create liens on assets, enter into business combinations or engage in certain activities with companies within the Group. A failure by the Group to comply with these restrictions would constitute a default under certain of its international borrowings and could result in a cross default under 28

45 other agreements to which the Group is a party. In the event of such a default, the Group s obligations under one or more of these agreements could, under certain circumstances, become immediately due and payable, which would have a material adverse effect on the Group s business, financial condition, results of operations or prospects. Such failure may not enable the Noteholders to accelerate the prepayment of the Loan by the Bank. The Group may require additional capital in the future in order to meet CBR capital adequacy requirements The Group is required to comply with the capital adequacy requirements of the CBR, which differ in some significant respects from the regulations applied in those countries that have adopted the guidelines regarding solvency and capitalisation adopted by the Basel Committee on Banking Supervision of the Bank for International Settlements as provided in such Committee s paper entitled International Convergence of Capital Measurement and Capital Standards dated July 1988, as updated (the BIS Guidelines ). Calculated under BIS Guidelines, the Bank had Tier I and total capital adequacy ratios of 12.8 per cent. and 18.9 per cent., respectively as at 31 December Under Russian law, the minimum capital adequacy ratio that the banks are required to maintain is calculated (on an unconsolidated basis) as the ratio of regulatory capital to the total amount of its risk weighted assets. The minimum capital adequacy ratio required by the CBR currently is 10 per cent. for banks whose capital is RUB 180 million (approximately EUR 4.6 million) or more and 11 per cent. for banks whose capital is less than RUB 180 million (approximately EUR 4.6 million). If the capital adequacy ratio of a bank drops below 2 per cent., then the CBR must revoke such bank s banking licence. The Group s ability to obtain additional capital may be restricted by a number of factors, including: the Group and the Group s future financial condition, results of operations and cash flows; any necessary government regulatory approvals; the ability of the Group s shareholders to provide additional capital; and general market conditions for capital-raising activities by banks and other financial institutions. If the Group requires additional capital in the future in order to meet CBR capital adequacy requirements, it cannot guarantee that it will be able to obtain this capital on favourable terms, in a timely manner or at all. The Bank s shareholders are under no obligation to inject additional capital into the Bank. For more information regarding a contemplated future capital raising, see Recent Developments Equity Issuance. If the Group is unable to raise further capital to support its growth or if its capital position otherwise declines, its ability to implement its business strategy may be materially adversely affected. In addition, certain of the Group s credit facilities contain covenants regarding capital adequacy, any breach of which could have a material adverse effect on the Group s business, financial performance, results of operations and/or prospects. Revisions to the capital adequacy standards under the Basel Accord could limit the use and amount of capital that the Group has available for its business The risk-adjusted capital guidelines promulgated by the Basel Committee on Banking Supervision (the Basel Accord ), form the basis for the capital adequacy guidelines of the CBR. The implementation of the Basel Accord in the Russian Federation is still underway. In November 2009, the CBR adopted a number of regulations aimed at the implementation of the Basel Accord, which took effect on 1 July The effect these revised guidelines will have on the Group s requirements for capital and its capital position is not currently known. If any future alterations to the capital adequacy standards under the Basel Accord with regard to limits on the deployment and use of capital require the Group to maintain higher capital levels or limit the use of significant portions of the Group s capital such that it is unable to execute its strategy of expanding its retail and SME lending business and maintain its traditionally strong position in corporate lending, there could be a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. 29

46 Changes in the Group s customer focus may have a material adverse effect on its business, financial condition, results of operations and/or prospects The Group s strategy is, among other things, to focus on growing its SME client base and to grow its retail customer base significantly. See Business Business Strategy Attracting additional retail clients and Business Business Strategy Attracting additional corporate business. In order to achieve this, the Group is seeking to offer new lines of products, leverage its large branch network within the Russian Federation, exploit cross-selling opportunities across its business segments, and continue its modernisation of the Group s information technology and management systems at all levels within its business divisions. There is a risk that the Group may not be successful in its aims to grow its SME and retail customer base and this could have a material adverse impact upon the business, financial condition, results of operations and/or prospects of the Group. In addition, although increased lending to SME clients and retail customers may diversify the Group s loan portfolio, it also may increase the credit risk exposure in the loan portfolio. In particular, SMEs and retail customers typically pose a greater credit risk than large companies and there is often less credit history available for such clients. Negative developments in the Russian economy have affected these borrowers more significantly than large corporates. As a result, lending to these segments represents a relatively higher degree of risk than lending to other groups and results in higher levels of overdue loans and losses. This, in turn, has resulted in higher levels of provisions for loan impairment. Operating and Financial Review of the Group Factors Affecting the Group s Results of Operations and Financial Condition Provisions for Impairment. It is uncertain whether the high interest rates paid by these customer segments will offset the higher cost to the Group of loans to the SME and retail loan segments. Further, lending to these target segments has required the implementation and application of credit policies and provisioning procedures that differ from those used for large corporate borrowers. The ability of the Group to grow its customer base and expand its loan portfolio will depend upon the implementation of its credit policies and provisioning procedures, as well as capital growth, in order to maintain its capital adequacy requirements and any failure to implement such policies and procedures or meet capital adequacy requirements, together with an accurate risk management policy, may have a negative effect on the Group s business, financial condition, results of operations and prospects. See Business Lending Policies and Procedures Credit approval process for a more detailed description of the Group s credit risk assessment procedure. Liability for the obligations of the Group s subsidiaries could materially affect its financial position and business in general The Civil Code and the Joint-Stock Companies Law generally provide that the shareholders in a Russian joint-stock company are not liable for the obligations of the joint-stock company and only bear the risk of loss of their investment. This may not be the case, however, when one company (the parent) is capable of determining decisions made by another company (the subsidiary). The parent company bears joint and several liability for transactions concluded by the subsidiary in carrying out these decisions if: (a) this decision-making capability arises from prevailing participation in the charter capital of the subsidiary or it is provided in a contract between the companies or arguably arises under other circumstances and (b) the parent company gives obligatory directions to the subsidiary. In addition, the parent company is liable secondarily for the debts of the subsidiary if the subsidiary becomes insolvent or bankrupt as a result of the action or inaction of the parent company. This is the case regardless of how the parent s capacity to influence or determine decisions of the subsidiary arises. If the Bank is held to be liable for the obligations and debts of its subsidiaries, such liability could materially and adversely affect its business financial condition, results of operations and/or prospects. Further, other shareholders of a subsidiary may claim compensation for the subsidiary s losses from the parent company if it caused the subsidiary to take action(s) knowing that such action(s) would result in losses. Such liability may apply to the Bank with respect to its subsidiaries. If the Group is found to be so liable, this could have a material adverse effect on its business financial condition, results of operations and/or prospects. 30

47 Risks Related to the Russian Federation Investors in emerging markets, such as the Russian Federation, are subject to greater risks than in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in the global economy Investors in emerging markets, such as the Russian Federation, should be aware that these markets are subject to greater risks than more developed markets, including in some cases, significant political, legal and economic risks. Generally, investment in emerging markets is only suitable for sophisticated investors who can bear losses and fully appreciate the significance of the risks involved. Emerging market governments and judiciaries often exercise broad, unchecked discretion and are susceptible to abuse and corruption. The economy of the Russian Federation, like other emerging economies, is particularly vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in the Russian Federation or other emerging economies could dampen foreign investment in the Russian Federation and adversely affect the Russian economy. These developments could severely limit the Group s access to capital and could adversely affect the purchasing power of its clients and, consequently, the Group s products and services. It should also be noted that emerging markets, such as the Russian Federation, are subject to rapid change and that the information set out in this 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 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 economic crisis beginning in Such volatility has caused market regulators to temporarily suspend trading on the Moscow Interbank Currency Exchange Group ( MICEX ) and RTS stock exchanges multiple times beginning in September The MICEX and RTS stock exchanges have experienced significant volatility since the beginning of the global economic crisis in 2008 (including significant increases during 2009 and 2010). 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 the Russian Federation 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 could adversely affect the Group s business, as well as result in a decrease in the price of the Notes. Accordingly, investors should exercise particular care when evaluating the risks involved and must decide for themselves whether, in light of these risks, their investment is appropriate. The continuation of turmoil in global credit markets may continue to adversely affect the Russian Federation s economy The credit markets, both globally and in the Russian Federation, 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 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. 31

48 In response to the global economic crisis affecting the global banking sector and financial markets and the threats to the ability of investment banks, other financial institutions and in some cases, countries, 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 government purchases of common and preferred equity securities, the government guarantee of certain forms of bank debt, the purchase of distressed assets from banks and other financial institutions by the Government 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 the Russian Federation s economy, which could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. 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. Although the price of oil and gas recovered in late 2009 and in 2010, there is no assurance that it will not decline again, which could restrict growth and liquidity in the Russian economy and this in turn could materially and adversely affect the Group s business, financial condition, results of operations and/or prospects. Economic instability in the Russian Federation could materially adversely affect the Group s business Since the dissolution of the Soviet Union in 1991, the Russian Federation s society and economy have been undergoing a rapid transformation in the context of the Russian Government s attempts to transform the Russian Federation from a one-party state with a centrally-planned economy to a pluralist democracy with a market-oriented economy. This transformation has been marked by periods of instability, and the Russian economy at various times has experienced: significant declines in GDP; hyperinflation; an unstable currency; high government debt relative to GDP; significant use of barter transactions and illiquid promissory notes to settle commercial transactions; widespread tax evasion; growth of black and grey market economies; high levels of capital flight; corruption and extensive penetration of organised crime into the economy; social and governmental instability; lack of consensus between federal and local governments; ethnic and religious tensions; significant increases in unemployment and underemployment; high poverty levels among the population; and 32

49 outdated and deteriorating physical infrastructure. The Russian economy has historically been subject to abrupt downturns. The events and aftermath of 17 August 1998 when the Russian Federation defaulted on its short-term Rouble-denominated treasury bills and other Rouble-denominated securities, the CBR abandoned the Rouble currency band and its efforts to maintain the Rouble/U.S. dollar rate within it and imposed a temporary moratorium on certain hard currency payments to foreign counterparties, led to an immediate and severe devaluation of the Rouble, a sharp increase in the rate of inflation, a significant deterioration in the Russian banking system, significant defaults on hard currency obligations, a dramatic decline in the prices of Russian debt and equity securities, and an inability to raise funds on the international capital markets by Russian borrowers. From May to July 2004, following a general fall in confidence in the Russian banking system, the Russian interbank lending market contracted significantly, resulting in a decrease in liquidity in the Russian Federation. In addition, the Russian Federation s financial markets and economy as a whole suffered a sharp decline due to the global economic crisis. The positive trends in the Russian economy in the years preceding the global economic crisis such as increases in GDP, a relatively stable currency and a reduced level of inflation have begun to reverse as a consequence of the global economic crisis. As the Russian Federation produces and exports large quantities of crude oil, natural gas and other commodities, the Russian economy is particularly vulnerable to fluctuations in the prices such commodities on the world market, which reached record high levels in the first half of 2008 and have since experienced significant decreases. The greatly reduced level of revenue generated for the Russian budget due to the decline in the price of key revenuegenerating commodities has led the Russian Government to cut spending. The global economic crisis in the Russian Federation has also seen significant volatility in the Rouble against the U.S. dollar and Euro between the second half of 2008 and the second half of In addition, the Russian Federation s financial markets suffered a severe decline due to the global economic crisis. Such volatility, together with the lack of liquidity in the Russian economy has had a destabilising and adverse effect on the Russian economy and could have a similar effect on the Group s business, financial condition, results of operations and/or prospects. The Russian economy has recently been characterised by high volatility in the debt and equity markets, and sharp reductions in foreign investment. In light of these recent developments, international rating agencies have downgraded the Russian Federation 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 USD 200 billion in emergency financial assistance measures in order to ease taxes, refinance foreign debt and encourage lending. Since the onset of the global economic crisis, the Russian Government made approximately USD 1 trillion available to the financial 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. See Overview of the Banking Sector and Banking Regulation in the Russian Federation Measures to support the liquidity of the Russian Banking system. Although during 2009 and 2010, the Russian Federation s financial markets, the stock market and the Rouble have generally shown signs of improvement, there can be no assurance that these or other measures will continue or will result in a sustained recovery of the Russian economy. In view of the above factors, the Group has carried out scenario analyses and stress tests with macroeconomic scenarios with adverse effects comparable to the 1998 crisis. The Group closely monitors the possible adverse effects of such events on the Group s business, financial condition and results of operations. See Asset, Liability and Risk Management Credit, Market and Liquidity Risks. However, there can be no assurance that, notwithstanding these risk management initiatives, the Group has appropriately prepared itself for all such possible crises and any failure to manage a crisis going forward could have a material adverse effect on the Group s financial condition, business, results of operations and/or prospects of the Group. 33

50 Emerging markets such as the Russian Federation are subject to greater risks than more developed markets, and turmoil in any emerging market could adversely affect the value of investments in the Russian Federation Emerging markets such as the Russian Federation are subject to greater risk than more developed markets, including, in some cases, increased political, economic and legal risks. 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. Emerging markets such as the Russian Federation are subject to rapid change, and the information set out herein may become quickly outdated. Moreover, financial turmoil in any emerging market country tends to affect adversely the value of investments in all emerging market countries as investors move their money to more stable, developed markets. 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 the Russian Federation and adversely affect the economies of such countries. In addition, during such times, companies in emerging markets can face severe liquidity constraints as foreign funding sources are withdrawn. Thus, even if the Russian economy remains relatively stable, financial turmoil in another emerging market country could seriously disrupt the business of companies operating in the Russian Federation, as well as result in a decrease in the price of the Notes. If the Russian Federation were to return to heavy and sustained inflation, the Group s results of operations could be adversely affected According to Rosstat s estimates, the consumer price index in the Russian Federation was approximately 19 per cent. in 2001, 15 per cent. in 2002, 12 per cent. in 2003 and 2004, 11 per cent. in 2005, 9 per cent. in 2006, 11.9 per cent. in 2007, 13.3 per cent. in 2008 and 8.8 per cent. in While the outlook for inflation in the Russian Federation in 2010 is for a further reduction, 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 Group s products and services that could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Russian political and Governmental instability could adversely affect the value of investments in the Russian Federation and the value of the Notes Since 1991, the Russian Federation 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 the Russian Federation s business and investment climate. Former President Vladimir Putin generally increased governmental stability and presided over a period of high oil prices, which made the political situation in the Russian Federation appear more stable while the large oil revenues enhanced the image of the Russian economy. The most recent State Duma elections, held in December 2007, and the City of Moscow Duma elections, held in October 2009, resulted in a further increase in the share of the aggregate vote received by the pro-governmental party, United Russia, mainly due to the influence of Mr. 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, Mr. Medvedev appointed Mr. 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 relatively stable, albeit with a recurrence of anti-government protests in the context of the global economic crisis, the potential for political instability resulting from the worsening economic situation in the Russian Federation and deteriorating standards of living should not be underestimated. Shifts in governmental policy and regulation in the Russian Federation are less predictable than in many Western democracies and could disrupt or reverse political, economic and regulatory reforms. Any significant change in the Russian Government s programme of reform and a continued increase in the level of insolvencies in the Russian Federation could lead to a further deterioration in the Russian Federation s 34

51 investment climate that might prevent the Group from obtain financing in the international capital markets or otherwise have a material adverse effect on its business, results of operations, financial condition and prospects. Further, actions of the Russian legislative, executive and judicial authorities can affect the Russian securities market. In particular, the events surrounding tax claims brought by the Russian authorities against several major Russian and foreign companies have led to questions being raised regarding the progress of market and political reforms in the Russian Federation and have resulted in significant fluctuations in the market price of Russian securities and a negative impact on foreign direct and portfolio investment in the Russian economy. Any further similar actions by Russian authorities that negatively effect investor confidence in the Russian Federation s business or legal environment could have a material adverse effect on the Russian securities market and prices of Russian securities or securities issued or backed by Russian entities, including the Notes. In addition, Mr. Yuri Luzhkov s appointment as Mayor of Moscow is due to end in July 2011 and it is not certain whether Mr. Luzhkov will remain as Mayor of Moscow after July Further, 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 the Russian Federation. Violence and attacks relating to regional conflicts have spread to other parts of the Russian Federation. Russian military and paramilitary forces have been engaged in the Chechen Republic in the recent past and continue to maintain a visible presence there. In August 2008, the Russian Federation and Georgia were involved in an armed conflict and the Russian stock exchanges experienced heightened volatility, significant overall declines in price and capital outflow following these events and the international capital markets temporarily closed to the Russian Federation. The growth of violence in the Russian Federation could have significant political consequences, including the imposition of a state of emergency in some or all regions of the Russian Federation and thus could adversely affect the Group s business, financial condition, results of operations and/or prospects. If reform policies in the Russian Federation are not pursued or are pursued at a slower rate than is currently planned, the Group s business and its ability to obtain financing could be harmed Under the previous President, Mr. Putin, the political and economic situation in the Russian Federation became more stable, thus creating better conditions for economic growth. While Mr. Putin s successor, Mr. Medvedev appears to be following Mr. Putin s lead in maintaining stability and promoting policies generally oriented towards the continuation of economic reforms, future changes in the Russian Government, major policy shifts or a lack of consensus among various influential political groups could disrupt or reverse economic and regulatory reforms. Any deterioration of the investment climate in the Russian Federation could restrict the Group s ability to obtain future financing in international capital markets thereby limiting its growth strategy and the Group s business, financial condition, results of operations and/or prospects could be harmed if Russian Governmental instability recurs or if reform policies are reversed. Conflict between federal and regional authorities and other conflicts could create an uncertain operating environment that would hinder the Group s long-term planning ability and could materially adversely affect the value of investments in the Russian Federation The Russian Federation consists of 83 regions (including the City of Moscow), some of which exercise considerable autonomy over their internal affairs. 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 Group s longterm planning efforts and may create uncertainties in its operating environment, which may prevent it from effectively and efficiently carrying out its business strategy. However, the recent amendments to Russian 35

52 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 to minimise conflict between federal and regional authorities and secure stability across the Russian Federation. Social instability could renew support for a centralised authority, nationalism or violence, and thus materially adversely affect the Group 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. 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 the Russian Federation, and increased violence. Any of these could restrict the Group s operations and materially adversely affect the Group s business, financial condition, results of operations and prospects. Terrorism, crime and corruption could affect the Russian economy and disrupt the Group s ability to conduct its business Terrorist activity inside and outside the Russian Federation has had a significant effect on the international and domestic financial and commodity markets. The most recent manifestation of terrorist acts in Moscow was the 29 March 2010 suicide bombings on the Moscow metro, which left 39 civilians dead and around 70 civilians wounded. Any future acts of terrorism 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 causing disruptions of Russian oil and gas exports could negatively affect the Russian economy and, therefore, materially and adversely affect the Group s business, financial condition, results of operations and/or prospects. Levels of organised criminal activity, particularly property crimes in large metropolitan centres, continue to be significant. In addition, the Russian and international press have reported high and increasing levels of official corruption in the Russian Federation and the former Soviet Union, including the bribing of officials for the purpose of initiating investigations by the Russian Government. Additionally, published reports indicate that a significant number of Russian media regularly publish biased articles in exchange for payment. Reportedly, in March 2005, a CBR database containing confidential information about all inter-bank cash transfers during the period from April 2003 to September 2004 was illegally offered for sale in the market by computer hackers. Such database included information on corporate and individual customers of various Russian banks and their transactions. The Group s business, and the value of the Notes, could be materially adversely affected by illegal activities, corruption or by claims implicating the Group in illegal activities. Further deterioration in the Russian Federation s physical infrastructure could have a material adverse effect on the Group s business The Russian Federation s physical infrastructure is generally in poor condition, which could disrupt normal business activity. The Russian Federation s physical infrastructure largely dates back to Soviet times and has not been adequately funded and maintained over the past decades. Particularly affected are pipeline, rail and road networks, power generation and transmission, and communication systems. Further, electricity and heating shortages in some regions of the Russian Federation have seriously disrupted the economy, as have the extreme forest fires during the summer of The Russian Government has launched a number of infrastructure modernisation programmes such as a large-scale reform of the electricity sector. However, there is uncertainty in the current economic environment as to the extent to which such programmes will be implemented successfully. Such reforms, if realised, are likely to result in increased charges and tariffs, but may fail to generate the anticipated capital investment needed to repair, maintain and improve these systems. 36

53 The Russian Government is actively considering plans to reorganise the Russian Federation s rail 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. Any failure to update and renew the Russian Federation 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 Group s business, financial condition, results of operations and/or prospects. Exchange rates, exchange controls and repatriation restrictions could adversely affect the value of investments in the Russian Federation and could materially adversely affect the Group s ability to make payments under the Loan While the Rouble appreciated against the U.S. dollar in real terms each year between the 2001 and 2007, it experienced significant depreciation against the U.S. dollar in 2008 and in the beginning of 2009, largely as a result of the global economic crisis and the significant fall in prices of oil, gas and other key commodities that are principal generators of the Russian Federation s export earnings. The Rouble to U.S. dollar exchange rate has fluctuated dramatically in 2008 and 2009, ranging from per USD 1.00 as at 16 July 2008 to per USD 1.00 as at 19 February 2009 and to per USD 1.00 as at 23 October 2009 and per USD 1.00 as at 1 August The ability of the Russian Government and the CBR to prevent further fluctuation 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 and other factors outside their control. Further fluctuation of the Rouble against the U.S. dollar and other major currencies could negatively affect the Group in a number of ways, including, among other things, by increasing the actual cost to the Group of financing its foreign currency denominated liabilities and by making it more difficult for Russian borrowers to service their foreign currency denominated loans. Between August 2008 and August 2010, the Russian Federation s foreign currency and gold reserves fell from USD billion to USD billion, although they have recovered to USD billion as at 27 August Although the Russian Federation 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 materially and adversely affect the Group s business, financial condition, results of operations and/or prospects. The Russian currency control regime could have an adverse effect on the Group s business Notwithstanding significant recent liberalisation of the Russian currency control regime, the current Russian currency control laws and regulations still impose a number of limitations on currency operations, including banking transactions. In particular, foreign currency operations between Russian residents are generally prohibited (except for certain specified operations, including transactions between Russian authorised banks listed in the CBR Regulation No U of 28 April 2004). Moreover, certain limitations not applicable to the Group apply to the Group s clients, such as the requirement to notify the Russian tax authorities regarding opening of a bank account abroad. These currency control restrictions may restrict the Group s and its clients operational flexibility, which could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. The Russian taxation system is relatively underdeveloped The Russian Government is continually reforming the tax system by redrafting the Russian Tax Code. To date, these changes have resulted in some improvement in the tax environment. As of 1 January 2009 the corporate profits tax rate was reduced to 20 per cent. For individuals who are tax residents in the Russian Federation the current personal income tax rate is 13 per cent. The general rate of value added tax ( VAT ) is 18 per cent. 37

54 Russian tax laws, regulations and court practice are subject to frequent change, varying interpretations and inconsistent and selective enforcement. For example, under certain circumstances, the current three-year statute of limitations for the assessment of taxes pursuant to a tax audit can be significantly extended. In accordance with the Constitution of the Russian Federation, laws that introduce new taxes or worsen a taxpayer s position cannot be applied retroactively. Nonetheless, there have been several instances when such laws have been introduced and applied retroactively. Despite the Russian Government having taken steps to reduce the overall tax burden in recent years in line with its objectives, there is a risk that the Russian Federation will impose arbitrary or onerous taxes and penalties in the future, which could have a material adverse effect on each or any of the Group s business, financial condition, results of operations, prospects and/or the trading price of the Notes. Additionally, taxes have been utilized as a tool for significant state intervention in certain key industries. In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. These uncertainties could expose the Group to significant fines and penalties and potentially severe enforcement measures despite the Group s best efforts at compliance, result in a greater than expected tax burden, and have a material adverse effect on the Group s business, financial condition, results of operations, prospects and/or the trading price of the Notes. In October 2006, the Plenum of the Supreme Arbitration Court of the Russian Federation (the Supreme Arbitration Court ) issued a ruling concerning judicial practice with respect to unjustified tax benefits. In this context, a tax benefit means a reduction in the amount of a tax liability resulting, in particular, from a reduction of the tax base, the receipt of a tax deduction or tax concession or the application of a lower tax rate, and the receipt of a right to a refund (offset) or reimbursement of tax. The ruling provides that where the true economic intent of operations is inconsistent with the manner in which they have been taken into account for tax purposes a tax benefit may be deemed to be unjustified. The same conclusion may apply when an operation lacks a reasonable economic or business rationale. As a result, a tax benefit cannot be regarded as a business objective in its own right. On the other hand, the fact that the same economic result might have been obtained with a lesser tax benefit accruing to the taxpayer does not constitute grounds for declaring a tax benefit to be unsubstantiated. Moreover, there are no rules for distinguishing between lawful tax optimisation and tax avoidance. The tax authorities have actively sought to apply this concept when challenging tax positions taken by taxpayers in court, and are anticipated to expand this trend in the future. Although the intention of this ruling was to combat tax law abuses, in practice there can be no assurance that the tax authorities will not seek to apply this concept in a broader sense than may have been intended by the Supreme Arbitration Court. Furthermore, Ruling No. 64 of the Plenum of the Supreme Court of the Russian Federation (the Supreme Court ) 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. Generally, taxpayers are subject to tax audits for a period of three calendar years immediately preceding the year in which the decision to conduct a tax audit is taken. The tax authorities are prohibited from carrying out repeat on-site tax audits in respect of the same taxes for a tax period which has already been audited (exceptions include where such audit is carried out in connection with the restructuring/liquidation of a taxpayer, or as a result of the filing by such taxpayer of an amended tax return decreasing the tax payable, or by a higher-level tax authority for the purpose of checking the activities of lower-level tax authorities). However, on 17 March 2009, the Constitutional Court of the Russian Federation issued a decision that precludes the Russian tax authorities from issuing a decision in the course of a subsequent tax audit for the same tax period as an initial audit if a court decision in respect of a tax dispute resulting from the initial tax audit has not been revised or discharged. However, currently, it is unclear how this decision will be applied and followed in practice by the Russian tax authorities. The statute of limitations for the commission of a civil (not criminal) tax offence is also limited to three years from the date on which it was committed or from the date following the end of the tax period during which the tax offence was committed (depending on the nature of the tax offence). Nevertheless, based on current 38

55 judicial interpretation, there may be cases where the statute of limitations may be extended beyond three years. Tax audits may result in additional costs to the Group if the relevant tax authorities conclude that the Group did not satisfy its tax obligations in any given year. Such audits may also impose additional burdens on the Group by diverting the attention of management resources. The outcome of these audits could have a material adverse effect on the Group s business, financial condition and results of operations or the trading price of the Notes. Russian law does not provide for the possibility of group relief or fiscal unity. Consequently, the financial results of any Russian companies belonging to the Group are not consolidated for tax purposes (i.e., no offset of profits of one entity against losses of another entity in the Group is possible). The Russian Government in its Main Directions of Russian Tax Policy for has 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. While the Group is aware that a draft law to consolidate groups of taxpayers has been submitted to the State Duma for consideration, there is no clarity as to whether or not the Group will fall within the criteria of such groups of taxpayers. Further, it is impossible to predict whether or when such draft law will be enacted. The above conditions create tax risks in the Russian Federation that are more significant than the tax risks typically found in countries with more developed taxation, legislative and judicial systems These tax risks impose additional burdens and costs on the Group s operations, including management resources. Further, these risks and uncertainties complicate the Group s tax planning and related business decisions, potentially exposing the Group to significant fines, penalties and enforcement measures, and could materially adversely affect the Group s business, financial condition, results of operations, and/or prospects. Vaguely drafted Russian transfer pricing rules and lack of reliable pricing information may result in the Group s prices being challenged by Russian tax authorities Transfer pricing legislation became effective in the Russian Federation on 1 January This legislation allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controlled transactions, provided that the transaction price differs from the market price by more than 20 per cent. Controlled transactions include transactions with related parties, barter transactions, foreign trade transactions and transactions with unrelated parties with significant price fluctuations (i.e., if the price of such transactions differs from the prices of similar transactions by more than 20 per cent. within a short period of time). Transfer pricing adjustments are also applicable to the trading of securities and derivatives. There has been no formal guidance (although some court practice is available) as to how these rules should be applied. Moreover, on 19 February 2010, the State Duma considered the draft law on transfer pricing at the first hearing. The draft law contemplates the introduction of substantial amendments to the transfer pricing legislation, which would result in stricter transfer pricing rules. If adopted in its current form, the draft law is expected to come into effect on 1 January If the tax authorities were to impose significant additional tax liabilities as a result of transfer pricing adjustments, it could have a material adverse impact on the Group s business, financial condition, results of operations and/or prospects. Russian tax legislation is becoming more sophisticated. It is possible that new additional revenue raising measures might be introduced. Although it is unclear how any new measures would operate, the introduction of such measures may affect the Group s overall tax efficiency and may result in significant additional taxes becoming payable. The Group cannot offer prospective investors any assurance that additional tax exposures will not arise. Additional tax exposures could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Weaknesses relating to the Russian legal system and Russian legislation could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects and could prevent investors from obtaining effective redress in court proceedings 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 39

56 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; the relative inexperience of certain judges in interpreting legislation in accordance with new principles in Russian law, particularly business and corporate law; substantial gaps exist in the legal framework due to the delay or absence of implementing regulations for certain legislation; 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 are not well 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 Group 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. Any failure of the Group to obtain effective redress in court proceedings could have a material adverse effect on the Group s business, financial condition, results of operations and/or prospects. Foreign judgments and arbitral awards may not be recognised in the Russian Federation Judgments rendered by a court in any jurisdiction outside the Russian Federation are likely to be recognised by courts in the Russian Federation only if: an international treaty providing for the recognition and enforcement of judgments in civil cases exists between the Russian Federation and the country in which the judgment is rendered; and a federal law of the Russian Federation provides for the recognition and enforcement of foreign court judgments. No such federal law has been passed and no such treaty exists between the Russian Federation and most Western jurisdictions for the reciprocal enforcement of foreign court judgments. Thus, enforcement of court judgments against the Group in the Russian Federation may be impossible. Also, the Loan provides that controversies, claims and causes of action brought by any party thereto against the Group may be settled by arbitration. The Russian Federation is a party to the New York Convention. However, it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the lack of experience of Russian courts in international commercial transactions and their limited experience in the enforcement of foreign arbitral awards. Furthermore, there is a risk that, as the submission to arbitration in the Loan is at the option of only one of the contracting parties, a competent court in the Russian Federation may not recognise such a submission to arbitration or any arbitral award that is given by any such arbitration proceedings. The possible need to re-litigate in the Russian Federation a judgment obtained in a foreign court or an arbitral award not so recognised on the merits may significantly delay the enforcement of such judgment. Under Russian law, certain amounts may be payable by the claimant upon the initiation of any 40

57 action or proceeding in any Russian court. These amounts in many instances depend on the amount of the relevant claim. See Enforceability of Judgments in the Russian Federation. Russian bankruptcy and insolvency law differs from comparable law in Western European countries and the United States and Russian bankruptcy law has been the object of limited court decisions and thus it is impossible to predict with certainty how claims by the Lender or the Trustee on behalf of the Noteholders against the Group would be resolved in the event of the Group s bankruptcy Russian bankruptcy and insolvency law often differs from comparable laws in Western European countries or the United States and may be subject to varying interpretations. There is little precedent to predict how claims on behalf of the Noteholders against the Group would be resolved in case of its bankruptcy or insolvency. In addition, under Russian law, the Group s obligations under the Loan Agreement may be subordinated to the following obligations: costs related to bankruptcy litigation; claims of retail depositors and of individuals who have other types of accounts with the Group; personal injury and moral damage obligations (claims in tort); severance pay, copyright royalty and employment-related obligations; secured obligations; and tax and other payment obligations to the Russian Government. In the event of the Bank s bankruptcy or insolvency, this subordination may substantially decrease the amounts available for repayment of the Loan and, as a result, the Notes. Federal Law No. 127-FZ On Insolvency (Bankruptcy) (the Insolvency Law ) entered into force in late The relevant amendments to Federal Law No. 40-FZ On Insolvency (Bankruptcy) of Credit Organisations dated 25 February 1999 (the Bank Insolvency Law ) came into force in late These laws set forth the priority in which claims rank in insolvency. See Overview of the Russian Banking Sector and Banking Regulation in the Russian Federation. 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 Loan Agreement) would need to be presented and satisfied only within the bankruptcy proceedings framework established by the mandatory provisions of bankruptcy legislation. The relevant provisions of bankruptcy legislation provide that the claims of the creditors of a bankrupt bank are fixed and satisfied (in the thus fixed amount) in Roubles (including claims denominated in foreign currency). For these purposes the foreign currency claims would be converted into Roubles at the rate established by the CBR as of the date of the revocation of the Bank s banking licence (which is a prerequisite to initiating bankruptcy proceedings with respect to a Russian bank). In the event of the insolvency of the Group, the existence of priority claims 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. Developing securities laws and regulations in the Russian Federation may limit the Group s ability to attract future investment and could subject the Group to fines or other enforcement measures despite its best efforts at compliance, which could cause the Group s financial results to suffer and harm its business The regulation and supervision of the securities market, financial intermediaries and issuers are considerably less developed in the Russian Federation than in the United States and Western Europe. Disclosure and reporting requirements, antifraud safeguards, insider trading restrictions and fiduciary duties are relatively 41

58 new to the Russian Federation and are unfamiliar to most Russian companies and managers. In addition, Russian securities rules and regulations can change rapidly, which may adversely affect the Group s ability to conduct securities-related transactions. While some important areas are subject to virtually no oversight, the regulatory requirements imposed on Russian issuers in other areas impose obligations on Russian issuers not found in other markets and result in delays in conducting securities offerings and in accessing the capital markets. It is often unclear whether certain regulations, decisions and letters issued by the various regulatory authorities apply to the Group. The Group may be subject to fines or other enforcement measures despite the Group s best efforts at compliance, which could cause its financial results to suffer and harm its business. Shareholder rights provisions under Russian law may impose additional costs on the Group, which could cause the Group s financial results to suffer Under Russian law, the Bank s shareholders who vote against or abstain from voting on some decisions have the right to sell their shares to the Group at market value. The obligation of the Bank to purchase shares in these circumstances, which is limited to 10 per cent. of the Group s net assets calculated at the time the decision is taken according to RAR, could have an adverse effect on the Group s cash flow and the Group s ability to service its indebtedness. The decisions that trigger this right to sell shares include: a reorganisation; the approval by shareholders of a transaction involving property worth more than 50 per cent. of the gross book value of the Group s assets calculated according to RAR, regardless of whether the transaction is actually consummated; and an amendment of the Group s Charter (the Charter ) in a manner that limits shareholder rights. The Joint Stock Companies Law provides that shareholders who vote against or abstain from voting on a decision to place shares or convertible securities through a closed subscription (or private placement) have a pre-emptive right to acquire additional shares or convertible securities pro rata to the number of shares they own. This requirement may lead to further delays in completing offerings of equity and convertible debt securities and may lead to uncertainty with respect to sales of newly issued shares to strategic investors and affect the Group s ability to raise funds in the equity capital markets in the future. Rights of the Group s shareholders and reporting and legal requirements The Group s corporate affairs are governed by its Charter, its internal regulations, including the corporate governance code, laws governing banks and companies registered in the Russian Federation. See Management and Overview of the Banking Sector and Banking Regulation in the Russian Federation. The rights of shareholders and the responsibilities of members of the Group s Board of Directors and the Group s Management Board under Russian law are different from, and may be subject to, certain requirements not generally applicable to companies organised in the United States, the United Kingdom or other jurisdictions. See Management. A principal objective of the securities laws of the United States and the United Kingdom and certain other countries is to promote the full and fair disclosure of all material corporate information to the public. The rights of the Group s shareholders, the responsibilities of the Group s management, the Group s public reporting and disclosure requirements and the regulations to which the Group is subject differ significantly from those applicable to comparable financial institutions in other jurisdictions. The Group s charter and internal regulations, the regulations governing Russian banks and the laws governing companies established in the Russian Federation collectively regulate the Group s corporate affairs. See Overview of the Banking Sector and Banking Regulation in the Russian Federation. However, there is less publicly available or other information about the Group than the information regularly published by or about listed companies in the United States, the United Kingdom or certain other jurisdictions. The rights of shareholders and the responsibilities of members of the Group s Board of Directors and the Group s Management Board under Russian law are different from those applicable to corporations organised in other jurisdictions, and the Group may be subject to, requirements not generally applicable to corporations organised in other jurisdictions. 42

59 The Banking Law contains certain regular disclosure requirements, including the requirement to publish annual financial statements in accordance with RAR. Due to the fact that the Group s systems and processes are tailored to Russian statutory requirements, it takes the Group longer than most Western companies to prepare its IFRS consolidated annual financial reports. In accordance with the Banking Law, the Group must publish quarterly reports in accordance with RAR within 29 days and file such quarterly reports with the CBR within 30 days of the end of the relevant quarter. Such reports prepared in accordance with RAR include certain financial information, including a balance sheet, income statement and information on its assets, capital reserves and allowances for problematic loans. The Group began publishing annual IFRS financial statements starting from the year ended 31 December In accordance with Russian legislation applicable to securities issuers, the Group must also file quarterly reports prepared in accordance with RAR with the FSFM within 30 days after the end of the relevant quarter. Such reports include information about the Group, its management, subsidiaries, affiliates, selected financial and business information (such as events of litigation and quarterly financial statements prepared in accordance with RAR) but do not contain all of the information contained in the Group Financial Statements. Some transactions between the Group and interested parties or affiliated companies require the approval of disinterested directors or shareholders and the failure to obtain these approvals could materially adversely affect the Group s business The Group is required by the Joint Stock Companies Law and the Charter to obtain the approval of disinterested directors or shareholders for transactions with interested parties. In general terms, interested parties include any of the Group s shareholders that, together with their affiliates, own at least 20 per cent. of the voting shares of the Group, members of the Board of Directors and Management Board of the Group, the President of the Group or any entities in which these entities or individuals own a specified interest or occupy specified positions. Due to the technical requirements of Russian law, these same parties may be deemed to be interested parties also with respect to certain transactions between entities within the Group. From time to time, the Group and its subsidiaries engage in various transactions that require special approvals under Russian law, and the Group s subsidiaries may engage in transactions that require interested party transaction approvals in accordance with Russian law. Failure to obtain the necessary interested party transaction approvals could have a material adverse effect on the Group s business results of operations, financial conditions and/or prospects. In addition, the concept of interested parties is defined by reference to the concepts of affiliated persons, beneficiaries and group of persons under Russian law, which are subject to different interpretations. Moreover, the provisions of Russian law defining which transactions must be approved as interested party transactions are subject to different interpretations. The Group cannot be certain that its application of these concepts will not be subject to challenge. Any such challenge could result in the invalidation of transactions that are important to the Group s business. Selective, unlawful or arbitrary action by the regulatory authorities may have a material adverse affect on the Group s business and the value of an investment in the Notes State authorities have a high degree of discretion in the Russian Federation and at times exercise their discretion arbitrarily, without hearing or 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 actions have included unscheduled inspections by regulators, suspension or withdrawal of licences and permissions, 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 43

60 transactions, often for political purposes. Such state action, unlawful or arbitrary, if directed at the Group, could have a material adverse effect on its business, financial condition, results of operations or prospects. Expropriation or nationalisation The Russian Government has enacted legislation to protect property against expropriation and nationalisation. Furthermore, in the event that the Group s property is expropriated or nationalised, legislation provides for fair compensation to be paid to the Group. 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 Government officials. The concept of property rights is not well developed in the Russian Federation and there is limited experience in enforcing legislation enacted to protect private property against nationalisation and expropriation. As a result, the Group 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 Group s assets. The expropriation or nationalisation of any of the Group s or its subsidiaries assets without fair compensation may have a material adverse effect on the Group s business, financial condition, results of operations or prospects. Information that the Bank has obtained from the Russian Government and other sources may be incomplete, unreliable or inaccurate The Bank has extracted substantially all of the information contained in this Prospectus concerning the Russian banking market and its competitors, which may include estimates or approximations, from publicly available information, including press releases and public filings made under various securities laws. The Bank has relied on the accuracy of such information without carrying out any independent verification. In addition, some of the information contained in this Prospectus has been extracted from official data published by Russian Government agencies and the CBR. The official data published by the Russian Government may be less complete and less reliable than similar data in the United States and Western Europe. Official statistics may also be compiled on a different basis than that used in Western countries. When reading this Prospectus, prospective investors should be aware that the Russian data and statistics that the Group has included could be incomplete or inaccurate. In addition, the Group has relied, without independent verification, on some publicly available information. This includes press releases and information from various private publications, some or all of which could be based on estimates or unreliable sources. Risks Related to the Loan and the Notes Interest payments on the Loan may be subject to withholding tax or other taxes Based on the professional advice it has received, the Bank believes that interest payments to the Issuer on the Loan will not be subject to withholding under the terms of the double tax treaty between the Russian Federation and Ireland. However, if the withholding tax is not reduced or eliminated pursuant to the terms of an applicable double tax treaty, interest payments on borrowed funds made by a Russian entity to a nonresident are subject to Russian withholding tax at a rate of 20 per cent. There can be no assurance that such an exemption from withholding tax based on the double tax treaty between the Russian Federation and Ireland will be available. In particular, there is a risk that the Russian tax authorities may disallow application of the double taxation treaty between the Russian Federation and Ireland if they do not view the Issuer as a beneficial owner, and, instead, look at the tax residence of the Noteholders (see Taxation Taxation of the Notes Non-resident Noteholders ) Moreover, in 2007 the Ministry of Finance of the Russian Federation expressed an opinion that for the purposes of recognising an entity or a person as actual recipient of income, this entity or person shall be the beneficial owner of such income and, following international double tax treaty practice, shall determine the economic fate of this income. Taking into account the above position of the Russian Ministry of Finance, the tax authorities may conclude that the Issuer does not determine the future economic fate of 44

61 the received income in terms of the Tax Treaty application, since it would be obliged to pass this income to meet its obligations in respect of the Notes and, consequently, would not be actual recipient of income. Moreover, it may be noted that the President of the Russian Federation in his budget message of 25 May 2009 expressed a goal of introducing legal mechanisms to resist the use of international double tax treaties for the purpose of minimizing taxes where the ultimate beneficiaries are not residents of the country being a party to the relevant double tax treaty. In December 2009, it was reported that the Ministry of Finance had proposed a draft law to amend the Tax Code. This draft law is proposed to limit the treaty benefits to actual recipients of income. The law does not define the term actual recipient of income and neither does the Tax Code. It is also unclear whether this restriction is supposed to target recipients who do not have beneficial ownership of income that they receive (e.g., agents, conduit companies, etc.) or also recipients whose ultimate shareholders are not tax residents in the relevant treaty country. The official website of the State Duma does not list this draft law among those currently scheduled for readings. If and when it is introduced, such changes could have a material impact on the tax treatment of the transactions structured as set forth in the Prospectus. Furthermore, the Resolution of the Government of the Russian Federation on entering into international double tax treaties and the prevention of tax evasion No. 84 dated 24 February 2010, have introduced the new Model Convention on avoidance of double taxation and prevention of tax evasion between the Russian Federation and the foreign states. It is intended that it will be used by the Russian authorities as a guideline when negotiating new double tax treaties and/or renegotiating existing treaties and it is indicative of a trend towards restricting the use of double tax treaties for the purpose of minimising taxes. In particular, the new Model Convention contains a new paragraph named Restriction of benefits that limits the use of treaty benefits by persons or entities (i) if, in the opinion of the competent authorities of the states parties (including the Russian tax authorities), such usage would constitute an abuse of the purposes of the treaty, or (ii) that are 50 per cent. or more owned by an entity that is not resident in either of the states party to the relevant treaty; and specifies the provisions concerning the assistance in tax collection. However, it is unclear at the moment whether the provisions of this Resolution will be implemented with existing treaty partners by protocols or by entering into new treaties, or whether the new initiative will be implemented at all though it was announced recently that relevant protocol to the Double Tax Treaty with the Republic of Cyprus initialled earlier is planned to be ratified in October Upon any enforcement by the Trustee of the security granted to it by the Issuer by way of the Security Interests in the Trust Deed, payments under the Loan (other than in respect of Reserved Rights) would be required to be made to, or to the order of, the Trustee. Under Russian tax law, payments of interest and other similar payments made by the Group to the Trustee will in general be subject to Russian withholding tax at a rate of 20 per cent. It is not expected that the Trustee will, or will be able to, claim a withholding tax exemption under any double tax treaty. The Group will be required to gross-up the amount of interest in such circumstances. It may be impossible for Noteholders to claim a refund of such tax withheld. It is currently unclear whether the relevant provisions of the Loan Agreement obliging the Group to grossup payments will be enforceable in the Russian Federation. If a Russian court does not rule in favour of the Issuer, the Trustee and Noteholders, there is a risk that gross-up for withholding tax will not take place and that payment made by the Group under the Loan will be reduced by Russian withholding tax withheld by the Group at the maximum rate of 20 per cent., (if relevant requirements of the double tax treaty between the Russian Federation and Ireland for tax exemptions or tax rate reductions are not met). Any failure by the Group to comply with gross up obligations under the Loan would constitute an Event of Default under the Loan Agreement. See Taxation. Tax might be withheld on dispositions of the Notes in the Russian Federation, reducing their value If a non-resident Noteholder sells Notes to a Russian resident, there is a risk that the proceeds from such disposal may be subject to Russian withholding tax on any gain realised, subject to any available treaty relief. There can be no assurances that advance treaty relief would be granted and obtaining a refund can be very difficult, if not impossible. Where proceeds from disposal of the Notes are received from a source within the Russian Federation by an individual non-resident Noteholder, personal income tax could be charged at a rate of 30 per cent., on the 45

62 gain from such disposal (the gain generally being calculated as the gross proceeds, from such disposal less any available cost deduction which includes the purchase price of the Notes, provided that all supporting documents are available). The tax law is unclear as to whether the tax should be withheld from proceeds or paid by an individual non-resident holder based on a personal tax return. The personal income tax may be reduced or eliminated pursuant to the provisions of any applicable tax treaty. However, advance relief is available and refunds may only be obtained following the submission of a personal income tax return. Proceeds from the sale of Notes received by non-resident Noteholders that are legal entities or organisations should not be subject to Russian taxation. However, it is not clear how the tax authorities will, in practice, tax a portion of proceeds allocable to accrued interest, which potentially may be subject to 20 per cent., withholding tax. Withholding tax on interest may be reduced or eliminated in accordance with the provisions of an applicable double taxation treaty. The imposition or potential imposition of this withholding tax could materially adversely affect the value of the Notes. See Taxation. Risks Relating to an Investment in the Notes 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 Group confirmation of the issuer s tax treaty residence that is certified by the competent authorities of Ireland in advance of the Group 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 and to be translated into Russian. In the event the exemption from withholding tax ceases to be available, it is currently unclear whether the provisions obliging the Group 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 Group under the Loan Agreement would be reduced by Russian income tax withheld by the Group at a rate of 20 per cent., (or potentially 30 per cent., in respect of individual Noteholders). See generally Taxation the 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 income was paid. 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 10I2DT 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 receipt of the application for the refund and the relevant documents by 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 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. 46

63 Risks Relating to the Issuer The Issuer is subject to risks, including the location of its centre of main interest ( COMI ), the appointment of examiners and the claims of preferred creditors under Irish law. COMI The Issuer has its registered office in Ireland. As a result, there is a rebuttable presumption that its COMI is in Ireland and consequently that any main insolvency proceedings applicable to it would be governed by Irish law. In the decision by the European Court of Justice ( ECJ ) in relation to Eurofood IFSC Limited, the ECJ restated the presumption in Council Regulation (EC) No. 1346/2000 of 29 May 2000 on Insolvency Proceedings that the place of a company s registered office is presumed to be the company s COMI and stated that the presumption can only be rebutted if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at the registered office is deemed to reflect. As the Issuer has its registered office in Ireland, has Irish directors, is registered for tax in Ireland and has an Irish corporate services provider, the Issuer does not believe that factors exist that would rebut this presumption, although this would ultimately be a matter for the relevant court to decide, based on the circumstances existing at the time when it is asked to make that decision. If the Issuer s COMI is not in Ireland, and is held to be in a different jurisdiction within the European Union, main insolvency proceedings may not be opened in Ireland. Examinership Examinership is a court procedure available under the Irish Companies (Amendment) Act 1990, as amended (the 1990 Act ) to facilitate the survival of Irish companies in financial difficulties. The Issuer, the directors of the Issuer, a contingent, prospective or actual creditor of the Issuer, or shareholders of the Issuer holding, at the date of presentation of the petition, not less than one-tenth of the voting share capital of the Issuer are each entitled to petition the court for the appointment of an examiner. The examiner, once appointed, has the power to halt, prevent or rectify acts or omissions, by or on behalf of the company after his appointment and, in certain circumstances a negative pledge given by the company prior to his appointment will not be binding on the company. Furthermore, where proposals for a scheme of arrangement are to be formulated, the company may, subject to the approval of the court, affirm or repudiate any contract under which some element of performance other than the payment remains to be rendered both by the company and the other contracting party or parties. During the period of protection, the examiner will compile proposals for a compromise or scheme of arrangement to assist in the survival of the company or the whole or any part of its undertaking as a going concern. A scheme of arrangement may be approved by the Irish High Court when a minimum of one class of creditors, whose interests are impaired under the proposals, has (i) voted in favour of the proposals and (ii) the Irish High Court is satisfied that such proposals are fair and equitable in relation to any class of members or creditors who have not accepted the proposals and (iii) whose interests would be impaired by implementation of the scheme of arrangement and the proposals are not unfairly prejudicial to any interested party. The fact that the Issuer is a special purpose entity and that all its liabilities are of a limited recourse nature means that it is unlikely that an examiner would be appointed to the Issuer. If, however, for any reason, an examiner were appointed while any amounts due by the Issuer under the Notes were unpaid, the primary risks to the holders of Notes would be as follows: (a) (b) the Trustee, acting on behalf of Noteholders, would not be able to enforce rights against the Issuer during the period of examinership; and a scheme of arrangement may be approved involving the writing down of the debt due by the Issuer to the Noteholders irrespective of the Noteholders views. 47

64 Preferred Creditors If the Issuer becomes subject to an insolvency proceeding and the Issuer has obligations to creditors that are treated under Irish law as creditors that are senior relative to the Noteholders, the Noteholders may suffer losses as a result of their subordinated status during such insolvency proceedings. In particular: (i) (ii) (iii) under the terms of the Trust Deed, the Notes will be secured in favour of the Trustee for the benefit of itself and the Noteholders by security over the Loan Agreement and sums held in the related account with the Principal Paying Agent. Under Irish law, the claims of creditors holding fixed charges may rank behind other creditors (namely fees, costs and expenses of any examiner appointed and certain capital gains tax liabilities) and, in the case of fixed charges over book debts, may rank behind claims of the Irish Revenue Commissioners for PAYE and VAT; under Irish law, for a charge to be characterised as a fixed charge, the charge holder is required to exercise the requisite level of control over the assets purported to be charged and the proceeds of such assets including any bank account into which such proceeds are paid. There is a risk therefore that even a charge which purports to be taken as a fixed charge, such as the Charge, may take effect as a floating charge if a court deems that the requisite level of control was not exercised; and in an insolvency of the Issuer, the claims of certain other creditors (including the Irish Revenue Commissioners for certain unpaid taxes), as well as those of creditors mentioned above, will rank in priority to claims of unsecured creditors and claims of creditors holding floating charges. 48

65 USE OF PROCEEDS An amount equal to the gross proceeds of the issue of the Notes will be used for the sole purpose of financing the Loan to the Bank. The proceeds of the Loan will be used by the Bank for general corporate purposes. 49

66 CAPITALISATION OF THE GROUP The following table sets forth the Group s capitalisation and indebtedness as at 31 December For further information regarding the Group s financial condition see Selected Consolidated Financial Information, Operating and Financial Review of the Group and the Group Financial Statements included elsewhere in this Prospectus. As at 31 December 2009 (audited) RUB millions Equity 18,313.5 Share premium 34,090.4 Treasury shares Fair value reserve for financial assets available for sale (5.0) Revaluation reserve for premises and equipment 3,882.5 Accumulated exchange differences (39.8) Retained earnings 30,109.2 Equity attributable to the shareholders of the parent Bank 86,350.8 Minority interest Total equity 86,596.0 Liabilities Due to other banks 225,714.7 Customer accounts 428,028.6 Debt securities issued 78,098.8 Financial liabilities at fair value through profit or loss 2,340.3 Other liabilities 2,774.8 Current tax liabilities 89.7 Deferred tax liabilities 1,500.8 Total liabilities 738,547.7 Total liabilities and equity 825,

67 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following tables present selected consolidated financial information as at 31 December 2009, 31 December 2008 and 31 December 2007, which has been derived, subject to reclassification and rounding, from, and should be read in conjunction with the Group Financial Statements as set out in this Prospectus, as well as the sections Capitalisation of the Group, Selected Consolidated Financial Ratios and Other Information, and Operating and Financial Review of the Group. Consolidated Statement of Income For the year ended 31 December (audited) RUB millions Interest income 82, , ,544.4 Interest expense (50,988.7) (33,215.6) (20,467.1) Net interest income 31, , ,077.3 Provisions for impairment of due from other banks and loans to customers (30,751.5) (8,966.8) (2,447.0) Net interest income after provision for impairment of due from other banks and loans to customers , ,630.3 Gains less losses arising from financial assets at fair value through profit or loss 9,595.6 (6,943.3) Gains less losses arising from financial liabilities at fair value through profit or loss (1,141.5) (46.1) Gains less losses arising from financial assets available for sale Gains less losses from dealing in foreign currency and precious metals ,908.4 Gains less losses from revaluation of foreign currency and precious metals (497.9) 1,485.6 (1,952.3) Fee and commission income 6, , ,217.7 Fee and commission expense (1,486.0) (1,515.0) (917.9) Dividends received Provision for impairment of financial assets available for sale (233.9) (113.9) Provision for impairment of other assets (600.2) (361.2) (1.0) Provision for impairment of investments held to maturity (4.2) (1.5) Provision for impairment of premises and equipment and intangible rights (205.2) Net income 14, , ,496.9 General and administrative expenses (14,317.8) (14,991.6) (11,491.4) Contributions to the Deposit Insurance Fund (633.5) (667.5) (586.0) Other operating income less expenses 1, , Operating income 1, , ,

68 For the year ended 31 December (audited) RUB millions Share in net profit of associates (129.4) Net share in other movements in equity of non-consolidated subsidiaries (1.5) (6.3) 4.3 Net (loss)/gain on acquisition and sale of subsidiaries and associates (32.0) ,791.8 Profit before taxation 1, , ,192.6 Income tax expense (535.1) (1,271.2) (3,146.4) Net profit , ,046.2 Net profit attributable to the shareholders of the parent Bank , ,883.6 Net profit/(loss) attributable to minority interest ,162.6 Basic earnings per share (EPS) (RUB per share)

69 Consolidated Statement of Income 31 December (audited) RUB millions Assets Cash and cash equivalents 75, , ,920.1 Mandatory cash balances with central banks 4, , ,294.8 Financial assets at fair value through profit or loss 118, , ,312.6 Due from other banks 50, , ,853.1 Loans to customers 534, , ,622.2 Financial assets available for sale 13, , ,771.2 Investments held to maturity Investments in associates and non-consolidated subsidiaries 3, , Premises and equipment and intangible assets 16, , ,800.1 Other assets 5, , ,227.3 Current tax assets Deferred tax assets Total assets 825, , ,086.2 Liabilities Due to other banks 225, , ,624.7 Customer accounts 428, , ,646.2 Financial liabilities at fair value through profit or loss 2, , Debt securities issued 78, , ,956.3 Other liabilities 2, , ,614.2 Current tax liabilities Deferred tax liabilities 1, , Total liabilities 738, , ,491.2 Equity Share capital 18, , ,476.8 Share premium 34, , ,642.2 Treasury shares (11.5) Fair value reserve for financial assets available for sale (5.0) Revaluation reserve for premises and equipment 3, , Accumulated exchange differences (39.8) (114.0) Retained earnings 30, , ,852.4 Equity attributable to the shareholders of the parent Bank 86, , ,165.9 Minority interest ,429.1 Total equity 86, , ,595.0 Total liabilities and equity 825, , ,

70 Average Balance Sheet and Interest Rate Data The following tables set forth the consolidated average balances of assets and liabilities of the Group for the periods indicated and, for interest earning assets and interest bearing liabilities, set forth the amount of interest income or expense and the average rate of such interest for such assets and liabilities. For the purposes of these tables, the consolidated average balances of assets and liabilities represent the average of the opening and closing balances for each period. The results of this analysis would likely be different if alternative averaging balance methods were used. 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. Average interest rates are distinct from the effective interest rates presented in the financial statements. For the year ended 31 December Average Income/ Interest Average Income/ Interest Average Income/ Interest Balance Expense Rate Balance Expense Rate Balance Expense Rate RUB million, except percentages Assets Interest earning assets Due from banks 1,2 62, % 57,402 5, % 35,013 3, % Loans to customers 1,2 548,576 71, % 440,435 51, % 306,738 31, % Securities 3 72, % 40,126 4, % 39,155 4, % Total interest-earning assets 683,671 82, % 537,963 61, % 380,907 39, % Non-interest earning assets Cash and cash equivalents 104,612 98,594 53,786 Mandatory cash balances with central banks 2,955 3,728 6,297 Provision for loan and other impairment (28,915) (8,975) (3,962) Investments in equity securities, associated companies and non-consolidated subsidiaries 19,344 12,443 7,299 Premises and equipment Accrued 18,075 13,528 7,190 interest income and other assets 12,867 7,204 3,478 Tax assets Total average assets 813,265 82, % 664,736 61, % 455,022 39, % Liabilities and Shareholder s Equity Due to other banks 4 219,081 11, % 141,160 6, % 53,477 3, % Customer accounts 413,775 31, % 375,768 21, % 303,472 13, % Debt securities issued 82,892 7, % 72,476 4, % 52,726 3, % Total interest bearing liabilities 715,749 50, % 589,404 33, % 409,674 20, % Accrued interest expense and other liabilities 18,767 15,630 3,903 Tax liabilities 1,626 1,579 1,162 Minority interest Shareholder s equity 76,838 57,245 39,356 Total average liabilities and shareholder s equity 813,265 50, % 664,736 33, % 455,022 20, % Net interest spread 5 4.9% 5.8% 5.4% Net interest income 31,275 28,382 19,077 Net interest margin 6 4.6% 5.3% 5.0% Notes: 1 Prior to deducting allowance for impairment and present value discounts. 2 Includes loans and placements on which contractual interest was not accrued. 3 Excludes equity securities and equity investments in non-subsidiary banks and companies, as these securities and investments are not interest-earning. 4 Includes CBR deposits. 54

71 5 The difference between the average annual interest rate on interest earning assets and the average annual 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. 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 respective period. 6 Net interest income before provision for loan impairment for the period expressed as a percentage of average interest-earning assets representing the average of the opening and closing balances for the respective period. Net Changes in Interest Income and Expense Volume and Rate Analysis The following tables provide a comparative analysis of net changes in interest earned and interest paid by reference to changes in average volume and rates for the periods indicated. Net changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for 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 rate, while rate change is the change in rate multiplied by the previous volume. The rate/volume change (change in rate multiplied by change in volume) is allocated between volume change and rate change at the ratio each component bears to the absolute value of their total. Average balances represent the average of the opening and closing balances for the respective period. For the year ended 31 December 2009/ / /2007 Increase/(decrease) Increase/(decrease) Increase/(decrease) due to changes in due to changes in due to changes in Net Net Net Volume Rate change Volume Rate change Volume Rate change Due from other banks 475 (3,387) (2,912) 2, ,026 1,211 (194) 1,017 Loans to customers 13,670 6,726 20,396 15,240 4,422 19,662 9,891 (541) 9,349 Securities 3,604 (421) 3, ,563 Total interest Income 17,749 2,918 20,667 17,360 4,693 22,053 11, ,930 Interest Expense Due to other banks 4,043 1,123 5,166 4,219 (812) 3,407 1, ,571 Customer accounts 2,389 7,624 10,013 3,680 4,612 8,292 4, ,237 Debt securities issued 751 1, ,312 (263) 1, ,126 Total interest expense 7,183 10,590 17,773 9,211 3,537 12,749 6, ,933 Net change in net interest income 10,566 (7,672) 2,894 8,149 1,156 9,304 5,421 (424) 4,997 55

72 Investment Portfolio The following table sets out information relating to the concentration of the Group s gross financial assets portfolio by investment category as at 31 December 2009, 2008 and As at 31 December % of % of % of shareholder s shareholder s shareholder s RUB million equity RUB million equity RUB million equity Financial assets at fair value through profit or loss Corporate bonds 37, % 20, % 25, % Corporate Eurobonds 27, % 9, % 1, % Bonds of RF subjects and local authorities 13, % 1, % 3, % Equity securities 4, % 1, % 5, % Bonds of foreign governments 3, % % 1, % Derivatives % % % Eurobonds of the Russian Federation 9, % % 5, % Corporate promissory notes % % 1, % The Russian Federation bonds (OFZ) 20, % % 4, % Federal currency bonds (OVGVZ) 1, % Total financial assets at fair value through profit or loss 118, % 35, % 51, % Financial assets available for sale Equity securities 13, % 10, % 3, % Bonds of foreign governments % % Corporate bonds % % % Bonds of RF subjects and local authorities % Corporate eurobonds % % Total financial assets available for sale 14, % 10, % 3, % Investments held to maturity Corporate eurobonds % % The Russian Federation bonds (OFZ) % Bonds of foreign governments % % Corporate bonds % Corporate promissory notes % Bonds of RF subjects and local authorities % Total investments held to maturity % % 56

73 As at 31 December % of % of % of shareholder s shareholder s shareholder s RUB million equity RUB million equity RUB million equity Investments in associates 3, % 3, % % Investments in non-consolidated subsidiaries % % Total investments in associates and non-consolidated subsidiaries 3, % 3, % % Total financial assets 136, % 51, % 55, % 57

74 The following table sets out information relating to the Group s net financial assets portfolio as at 31 December 2009, 2008 and As at 31 December RUB million % RUB million % RUB million Financial assets at fair value through profit and loss Corporate bonds 37, , ,343.1 Corporate Eurobonds 27, , ,990.7 Bonds of the RF subjects and local authorities 13, , ,677.5 Equity securities 4, , ,112.1 Bonds of foreign governments 3, ,334.6 Derivatives Eurobonds of the Russian Federation 9, ,626.0 Corporate promissory notes ,979.9 Bonds of the Russian Federation (OFZ) 20, ,489.1 Foreign currency bonds (OVGVZ) 1,649.8 Total financial assets at fair value through profit and loss 118, , ,312.6 Financial assets available for sale 13, , ,771.2 Investments held to maturity Total securities 132, , ,

75 SELECTED CONSOLIDATED FINANCIAL RATIOS AND OTHER INFORMATION The following tables present selected consolidated financial information as at and for the years ended 31 December 2009, 2008, and 2007, which has been derived, subject to reclassification and rounding, from, and should be read in conjunction with the Group Financial Statements as set out in this Prospectus, as well as the sections Capitalisation of the Group, Selected Consolidated Financial Information, and Operating and Financial Review of the Group. As at and for the year ended 31 December Profitability Ratios Return on shareholders equity 1 0.9% 11.81% 22.57% Return on total assets % 1.02% 0.80% Net Interest margin % 5.28% 5.01% Net Interest spread % 5.81% 5.39% Non-interest income as a percentage of net interest income before provisions for losses % 7.18% 30.64% Cost/Income 30.93% 49.29% 46.11% Loan Portfolio Quality Classified loans/gross loans 27.53% 40.90% 38.78% Non-performing loans/gross loans 3.94% 1.47% 0.68% Allowance for loan losses/gross loans 7.49% 2.43% 1.27% Allowance for loan losses/classified loans 27.22% 5.95% 3.28% Allowance for loan losses/non-performing loans % % % Balance Sheet and Capital Adequacy Ratios Customer accounts as a percentage of total assets 51.87% 50.73% 66.40% Tier 1 capital ratio (BIS) % 9.50% 10.40% Total shareholders equity as a percentage of total assets 10.49% 8.44% 9.20% Liquid assets as a percentage of total assets 31.37% 31.65% 30.27% Risk weighted capital adequacy ratio 18.9% 13.90% 14.80% Liquidity Ratios Net loans/total assets 64.78% 64.46% 66.58% Net loans/client deposits % % % Other information Change in CPI (period-end % year on year) 8.8% 13.3% 11.9% Notes: 1 Net profit attributable to the shareholders of the parent Bank divided by average equity attributable to the shareholders of the parent Bank. The average total shareholders equity was calculated as an arithmetic average of the Bank s shareholders equity as at December 31 of the preceding year and December 31 of the relevant year. 2 Net profit attributable to the shareholders of the parent Bank divided by average total assets. The average total assets were calculated as an arithmetic average of the Bank s total assets as at December 31 of the preceding year and December 31 of the relevant year. 3 Net interest income divided by income generating average assets. The average income generating assets were calculated as an arithmetic average of the Group s income generating assets as at December 31 of the preceding year and December 31 of the relevant year. 4 Interest income divided by income generating assets, less interest expense divided by interest liabilities. The average income generating assets and interest bearing liabilities were calculated as an arithmetic average of the Group s income generating assets and interest bearing liabilities as at December 31 of the preceding year and December 31 of the relevant year. 5 Net commission income and net dealing income (trading gains, including income/expense on foreign currency revaluation) and net other operating non-interest expense as a percentage of net interest income before provisions for losses. 6 Tier 1 capital calculated in accordance with the Bank for International Settlements methodology. See Business Capital Adequacy and Operating and Financial Review of the Group Capital Adequacy. 59

76 OPERATING AND FINANCIAL REVIEW OF THE GROUP Investors should read the following discussion and analysis of the Group s financial condition and results of operations as at 31 December 2009, 2008 and 2007 and for the years then ended in conjunction with the Group Financial Statements as set out in this Prospectus. For a discussion of the Group s critical accounting policies, see Critical Accounting Policies below and Note 4 to the Group Financial Statements. Investors should read the entire Accountants Reports and not merely rely on the information contained in this section. Some of the information in the following discussion and analysis and elsewhere in this Prospectus includes forward-looking statements that involve risks and uncertainties. See Forward Looking Statements and Risk Factors for a discussion of important factors which could cause actual results to differ materially from the figures described in the forward-looking statements contained in this Prospectus. OVERVIEW Principal activities The Group is one of the largest commercial and retail banks in the Russian Federation, as measured by net assets, capital, loan portfolio and volume of retail client deposits. The Group offers a wide range of banking services, including corporate, SME and retail lending, deposit, payment and account services, foreign exchange and foreign trade operations, cash handling services, operations with precious metals, asset management and private banking, investment banking, securities trading, custody services and other ancillary services to retail clients and to commercial and governmental entities. The Group s consolidated net profit for the year ended 31 December 2009 decreased by per cent. to RUB million from RUB 6,977.9 million for the year ended 31 December 2008, as a result of the deterioration in economic conditions described below (see Factors Affecting the Group s results of Operations and Financial Condition Russia s economic condition. ) and the Group s response to such deterioration (see Asset, Liability and Risk Management Loan Portfolio Provisions for Impairment. ). The Group has a large and diverse client base, servicing over 105,000 corporate and governmental clients and 9.7 million retail clients, as at 1 May As at 1 May 2010, the Bank operated 134 offices and sub-offices in all administrative districts of Moscow and in the Moscow region. In addition, the Group had 474 desks in post offices in Moscow and the Moscow region as at 31 December 2009, which distribute the Group s retail products. As at 1 May 2010, the Group operated 68 regional branches which supervised a further 69 full-service sub-branches and 113 sub-branches providing retail services and eight cash offices located in the territory of the Russian Federation. As at 1 May 2010, the Group had a presence in 60 regions of the Russian Federation, including major cities across the Russian Federation from St. Petersburg and Kaliningrad in the North West to Vladivostok and Petropavlovsk-Kamchatsky in the Far East. The regional presence of the Group is enhanced through co-operation with local banks, such as OAO AKB Zarechye (Kazan, Republic of Tatarstan) in which the Group holds a minority interest, and through its ownership of Bezhitsa Bank, in which the Group increased its shareholding to 100 per cent. on 29 January As at the same date, the Group owned controlling stakes in five foreign banks: Bank Moscow-Minsk in Minsk, Republic of Belarus, AS Latvijas Biznesa banka in Riga, Republic of Latvia, AS Eesti Krediidipank in Tallinn, Republic of Estonia, BM Bank LLC Ukraine in Kiev, Republic of Ukraine and Bank of Moscow j.s.c. Belgrade in Belgrade, Republic of Serbia. For a more detailed description of the business activities of the Group, see Business Overview. Affiliation with the City of Moscow The Group derives a portion of its business from its affiliation with the City of Moscow. Since the establishment of the Bank in 1995, the City of Moscow, directly through the City of Moscow Property Department (prior to 1998, represented by the Moscow Property Fund and the City of Moscow Property Management Committee) and later directly and indirectly through OJSC Metropolitan Insurance Group together with its subsidiaries, has remained the principal shareholder of the Group. The Group s business includes servicing municipal budget funds of the City of Moscow, financing some projects of the City of Moscow and lending to and maintaining accounts of companies affiliated with the City of Moscow. Loans to enterprises owned by the Government of the City of Moscow s related-party lending, as defined in the 60

77 Group Financial Statements, which includes lending to associated companies and municipal entities of the City of Moscow, accounted for 2.4 per cent. of the Group s gross loan portfolio as at 31 December 2009, compared with 1.4 per cent. and 1.2 per cent. as at 31 December 2008 and 2007, respectively. For a more detailed description of the Group s funding through the City of Moscow, see Factors Affecting the Group s results of Operations and Financial Condition Liabilities Customer Accounts. For a description of the Group s shareholding structure, see Shareholding. For a discussion of risks associated with the Group s affiliation with the City of Moscow, see Risk Factors Risks Related to the Group s Business and Industry. FACTORS AFFECTING THE GROUP S RESULTS OF OPERATIONS AND FINANCIAL CONDITION Russia s economic condition As at 31 December 2009, over 90 per cent. of the Group s assets are located in the Russian Federation. As a result, the Group is substantially affected by Russian economic conditions. Until 2008, the Russian Federation had experienced several consecutive years of increasing domestic demand and market prices for key export commodities, particularly oil, gas and metals, which led to 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 According to Rosstat, in 2009 as compared to 2008, industrial production had decreased by 9.3 per cent., exports had decreased by 35.7 per cent., and the number of officially registered unemployed individuals increased by 48.9 per cent. However, according to Rosstat, during the first quarter of 2010 industrial production grew by 5.8 per cent. as compared to the same period in According to Rosstat, exports in the first quarter of 2010 had increased by 61.1 per cent., compared to the same period in Russian Ministry of Economic Development estimates that the Russian Federation s real GDP will grow by not less than 4 per cent. in According to Rosstat, the number of officially registered unemployed individuals in the first quarter of 2010 had decreased by 13.4 per cent. and in the second quarter of 2010 had decreased by 8.9 per cent., compared to the same period in The stability of the Rouble was also affected by the onset of the crisis. According to CBR, the nominal exchange rate of the Rouble against the U.S. Dollar in December 2009 as compared to 2008, decreased by 21.7 per cent., while the real U.S. Dollar/Rouble exchange rate decreased by 12.2 per cent. during the same period. The devaluation of the Rouble at the start of 2009 led to significantly decreased demand for loans in foreign currencies for both corporate and retail clients. The nominal exchange rate of the Rouble against the U.S. Dollar in the first quarter of 2010 increased by 13.4 per cent., compared to the same period in 2009 and the real exchange rate of the Rouble against the U.S. Dollar in the first quarter of 2010 increased by 18.9 per cent., compared to the same period in 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 the RTS stock index and the IFX Cbonds bond index have recovered substantially since October By the end of July 2010, the RTS stock index and the IFX-Cbonds bond index had recovered by per cent. and 47.0 per cent., respectively, from their lowest levels. In the third and fourth quarter of 2008, GDP of the Russian Federation was negative 0.73 per cent. and 1.23 per cent. respectively. In an effort to stabilise the worsening economic situation and increasingly volatile market, the Russian Ministry of Finance and the CBR announced and implemented measures, including temporarily suspending stock and currency trading in the Russian Federation and decreasing mandatory reserves intended to support the liquidity and solvency of Russian banks and to increase the availability of credit to businesses, in order to restore investor confidence and support the medium-term economic growth of the Russian economy. For a description of these measures, see Overview of the Banking Sector and Banking Regulation in the Russian Federation-Measures to support the liquidity of the Russian banking system. See also Risk Factors A significant part of the Group s funding is based on deposits that can be withdrawn on demand and the Group has liquidity risks which may be exacerbated by the current instability of the global and Russian economies and banking sectors. On 7 November 2008, the Government approved an anti-crisis plan. In the second half of 2008, the Government took steps to buy out shares on the equity market and allocated funds to refinance foreign loans of large Russian enterprises and banks maturing in 61

78 2009. The Government support included price preferences granted to Russian companies under state and municipal procurement programs, expanded subsidising of interest rates on loans for technological modernisation of production and a program of state guarantees for loans to enterprises. These guarantees were to be issued in addition to the collateral that the enterprises provided or were to provide to the banks. In addition, a state program was developed to help those individuals with mortgage loans that have lost their jobs or a substantial part of income as a result of the crisis. During 2009, the CBR gradually increased mandatory reserve requirements, although these are still below pre-crisis levels. The CBR expanded the list of assets accepted as collateral on CBR loans, provided loans to commercial banks through collateral-free auctions, lowered the refinancing rate from 13 per cent. to 7.75 per cent. per annum as at 1 June 2010 and it is still at this level as of the date of this Prospectus and signed agreements on partial compensation of losses incurred on the interbank market with a number of major Russian banks, including the Bank of Moscow, to encourage the operations on the interbank market. See Overview of the Banking Sector and Banking Regulation in the Russian Federation. Furthermore, on 1 January 2009, the corporate income tax rate was cut from 24 per cent. to 20 per cent. and tax prepayment procedure was cancelled and income tax rates for small businesses using simplified taxation procedures were reduced from 15 per cent. to 5 per cent. of the profit amount. In April 2009, the Russian Minister of Finance warned of the possible second wave of the financial and economic crisis in the Russian Federation that could significantly affect Russian banks. On 1 December 2009 the CBR estimated that the amount of overdue loans would reach approximately 7 per cent. of all loans by the end of 2009 but estimated that, by the end of 2010, the amount of overdue loans in the Russian Federation would not exceed 15 per cent. of all loans. The Group has significantly increased its loan provisioning for the year ended 31 December 2009 and the year ended 31 December 2008, as compared to prior periods. See Provisions for Impairments below. Although the Group 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. For more information, see Asset, Liability and Risk Management Loan Portfolio Provisions for Impairment. See also Risk Factors Risks Related to the Bank s Business and Industry A decline in the value or illiquidity of the collateral securing the Group s loans may materially adversely affect the Group s loan portfolio and it may be difficult for the Group to enforce collateral or other security under Russian law. As the Russian banking sector is particularly sensitive to economic conditions in the Russian Federation and fluctuations in the value of the Rouble, the global financial crisis has had a significant adverse effect on the liquidity and, in many cases, solvency of Russian banks. See Impact of International Financial Markets. See Risk Factors Risks Related to the Group s Business and 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 Group in particular. Economic conditions in the Russian Federation continue to limit the volume of activity in the financial markets. Market quotations may not reflect the values of financial instruments, which would be determined in an active market, on transactions on an arm s-length basis between knowledgeable and willing counterparties. The Group has therefore used the best available information to adjust market quotations to reflect their best estimate of fair values, where considered necessary. It should be noted that the Bank s best estimate of fair values may differ significantly if the Group were actually to dispose of these financial instruments. See Combined Results of Operations for the years 2009, 2008 and 2007 Provision for impairment and Risk Factors Risks relating to the Russian Federation and the City of Moscow The continuation of turmoil in global credit markets may continue to adversely affect Russia s economy. 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 the Russian Federation. The Bank believes the stability of the Russian economy will be significantly affected by the Russian Government s continued implementation of administrative, legal and economic reforms. 62

79 Impact of international financial markets The recent negative conditions in the international financial markets have increased pressures on economies worldwide. The international financial crisis has resulted, among other things, in the global liquidity crisis which led to a contraction of the international and domestic capital markets, lower liquidity levels across the Russian banking sector and significant volatility in the domestic and foreign equity markets. The uncertainties in the global financial market have also led to bank failures and bank rescues in the United States of America, Western Europe, the Russian Federation and other countries. See Risk Factors Risks Related to the Group s Business and 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 Group in particular. See Recent Developments for more information on the Bank s ratings. While the majority of the Group s assets and customers are in the Russian Federation (see Russia s economic condition above), the Group is also impacted by the international financial markets. The global liquidity crisis resulted in significantly higher lending rates and had an impact on the Group s funding costs and its mix of funding. In addition, the decrease in liquidity both in the Russian Federation and globally has had a negative impact on the Group s ability to borrow funds at competitive or reasonable rates. Global market conditions and increased trading volatility have also had an impact on the Group s securities portfolio. See Fluctuations in the value of financial assets below. Certain borrowers and debtors of the Group have also been affected by the financial crisis, which has in turn impacted their ability to meet their financial obligations to the Group. To the extent that information is available, management has adequately reflected revised estimates of expected future cash flows in their impairment assessments. Interest rate environment and funding Changes in interest rates affect the Group s operations. For the years ended 31 December 2009, 2008 and 2007 (the periods under review ), movements in short and long-term interest rates have affected both the Group s interest income and interest expense, as well as the Group s level of gains and losses on its securities portfolio. For the periods under review, the Group generated a substantial majority of its interest income from loans to customers. The Group s interest income from loans to customers was 87.4 per cent. of the Group s total interest income for the year ended 31 December 2009 compared to 83.6 per cent. for the year ended 31 December For the periods under review, the Group generated a substantial majority of its interest expense from current accounts and term deposits of customers. The Group s interest expense from current accounts and term deposits to customers was 62.7 per cent. of the Group s total interest expense for the year ended 31 December 2009 compared to 66.0 per cent. for the year ended 31 December The average annual interest rate on loans to customers increased from 10.4 per cent. in 2007 to 11.7 per cent. in 2008, and increased to 13.1 per cent. in the year ended 31 December 2009, with the increase primarily resulting from the global decrease in liquidity and the increasing interest rate environment in the Russian Federation, and this allowed the Group and other Russian banks to charge higher interest on their loans to customers. During the same period, average interest rates on average balances on all interest earning assets increased from 10.4 per cent. in 2007 to 11.5 per cent. in 2008 and increased to 12.0 per cent. in the year ended 31 December See Selected Consolidated Financial Information Average Balance Sheet and Interest Rate Data. The average interest rate paid by the Group on customer accounts and term deposits of customers, which constituted the principal source of interest expense and funding for the Group, increased from 4.5 per cent. in 2007 to 5.8 per cent. in 2008, and to 7.7 per cent. in the year ended 31 December This increase for the year ended 31 December 2009 resulted primarily from the Group s need to charge higher interest rates in part due to the temporary withdrawal from the Russian market of international bank competitors, which led to decreases in liquidity in the market. 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 increased from 5.0 per cent. in 2007, to 5.6 per cent. in 2008, but increased significantly to 7.1 per cent. in the year ended 31 December See Selected Consolidated Financial Information Average Balance Sheet and Interest Rate Data. 63

80 Interest rates can be affected by factors such as rates set by the CBR, inflation, competition among banks and general macroeconomic conditions. Generally, interest rates paid on customer deposits can adjust more quickly than interest rates on the Group s loan portfolio, and as a result rapid increases in interest rates can negatively affect the Group s net interest income by reducing the net interest spreads. This is reflected in the decline in the Group s net interest spread (calculated as the difference between the average annual interest rate on interest earning assets and the average annual interest rate on interest bearing liabilities) to 4.9 per cent. for the year ended 31 December 2009 from 5.8 per cent. for the year ended 31 December 2008 and 5.4 per cent. for the year ended 31 December The following table below shows analysis of average effective interest rates by currency for main monetary financial instruments. The analysis was prepared on the basis of weighted average interest rates as at 31 December 2009, 2008 and See Presentation of Financial and Other Information Average Balances, Average Interest Rates and Effective Interest Rates. USD EUR RUB As at 31 December As at 31 December As at 31 December % % % % % % % % % Assets Due from other banks Loans to customers Financial assets at fair value through profit or loss Financial assets available for sale Investments held to maturity Liabilities Due to other banks Customer accounts Financial liabilities at fair value through profit or loss Debt securities issued Provisions for Impairment The Group s provision for impairment of loans increased to RUB 43,305.6 million or 7.49 per cent. of the Group s gross loan portfolio as at 31 December 2009, compared with RUB 12,889.6 million, or 2.43 per cent. of the Group s gross loan portfolio, as at 31 December 2008 and RUB 4,525.1 million, or 1.27 per cent. of the Group s gross loan portfolio as at 31 December See Combined Results of Operations for the Years 2009, 2008 and 2007 Provisions for impairment. The Bank believes that the Group has a high quality loan portfolio due to a system of checks and controls established for retail and corporate clients. With respect to retail loans, each decision to extend funding is based on a detailed security check and a score achieved by an applicant on the internal scoring test developed by the Group. For corporate clients, the Group has developed criteria of creditworthiness and assesses corporate loans on a monthly basis by placing each corporate loan in one of five categories depending on the probability of default. See Business Lending Policies and Procedures for a more detailed description of the Group s lending procedures. In the second half of 2007, in response to the crisis in the international financial markets, the Group revised its approach to risk assessment. The Group reviewed its risk management strategies and implemented an internal stress testing programme in light of the deteriorating economic conditions. The Group set a strategic goal to apply a more conservative approach in evaluating the quality of the financial position of its borrowers, which included increased requirements in relation to the size and quality of collateral, and stricter lending requirements, and in evaluating the amount of provisions necessary during a given period. The Group introduced stricter provisioning requirements for borrowers not yet in default of their obligations. Since July 2010 the Group has relaxed certain of its anti-crisis restrictions by, for example, widening the range of industry sectors to which it extends corporate overdrafts and reducing the discount applied to collateral. See Business Lending Policies and Procedures Collateral for a more detailed description of the Group s collateral requirements. As a result, the volume of current impaired loans increased as at 31 December 2007 as certain loans were categorised as impaired due to the tougher provisioning requirements and not due to 64

81 actual growth in the borrowers default on their obligations. In 2008 the Group for the first time applied a statistics-based approach to the quality analysis of loans provided to individuals based on the data of actual losses on loans for the last five years and recognised impairment in respect of some loans previously recorded as current. In addition, the average rate of provisioning (defined as the sum of provision for impairment of loans to legal entities and provision for impairment of loans to individuals as a percentage of total loans to customers (gross)), which was 7.49 per cent. as at 31 December 2009, 2.43 per cent. as at 31 December 2008 and 1.27 per cent. as at 31 December 2007, has increased as overdue loans have increased. Although the Bank believes that the quality of its loan portfolio is generally sound, the level of overdue loans increased from RUB 8,091.2 million as at 31 December 2007 to RUB 20,197.5 million as at December 2008 to RUB 35,381.8 million as at 31 December In addition, provisions generally increased in line with the increase in loans to customers. For further information on loans to customers. Combined Results of Operations for the years, 2009, 2009 and 2007 Assets Loans to Customers. The retail lending market and the lending market for medium-sized enterprises in the Russian Federation continues to be relatively underdeveloped and limited resources are available in Russian banks to ascertain the credit history of individual and medium-sized enterprise borrowers. As a result, the financial condition of individuals and medium-sized enterprises transacting business with the Group is difficult to assess and predict. The Group s loans to individuals accounted for 15.3 per cent. of the Group s loans to customers as at 31 December 2009 as compared with 21.4 per cent. of the Group s loans to customers as at 31 December 2008 and 21.0 per cent. of the Group s loans to customers as at 31 December The Group s loans to SMEs accounted for 6.6 per cent. of the Group s loans to customers as at 31 December 2009 as compared with 8.8 per cent. of the Group s loans to customers as at 31 December 2008 and 11.9 per cent. of the Group s loans to customers as at 31 December The market for SMEs in Russia suffered to a greater extent in the economic downturn partially because it did not receive the state funding received by larger corporations during this time. See Risk Factors Risks Related to the Group s Business and Industry Changes in the Group s customer focus may have a material adverse effect on its business, financial condition or results of operations. The Group had not written off any loans until 2007, when RUB 1,231.3 million was written off, with RUB million in express (scoring) loans written off as uncollectable during the period. In 2008, the amount of loans written off as uncollectable decreased to RUB million, with RUB million in express (scoring) loans written off as uncollectable during the period. In 2009, the amount of loans written off as uncollectable decreased to RUB million, with RUB 0.1 million in express (scoring) loans written off as uncollectable during the period. For further information regarding movements in the provision for impairment of loans, see Asset, Liability and Risk Management Loan Portfolio Provisions for Impairment and Provisions for Impairment. For more information regarding when a loan is written off, see Note 4 Significant Accounting Policies in the 2009 Financial Statements. The Group 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 a deterioration in general economic conditions (see Asset, Liability and Risk Management Credit Risk ). The Group has reviewed certain of its lending requirements in the light of recent improvements in Russia s macroeconomic conditions, however the Bank intends to maintain a conservative approach with regard to evaluating the quality and financial position of its borrowers. See Risk Factors Risks Related to the Group s Business and Industry The Group may fail to manage its growth adequately. Fluctuations in the value of financial assets As at 31 December 2009, the Group had RUB 132,199.7 million, or 16.0 per cent. of its assets, invested in financial assets at fair value through profit or loss and financial assets available for sale, as compared to 5.7 per cent. and 10.4 per cent. as at 31 December 2008 and 2007, respectively. In the wake of the recent turmoil in the global debt and equity capital markets, in 2008 the Group adopted a more conservative securities trading policy and streamlined its portfolio to reduce the volume of its securities portfolio, in particular in equity securities. During the economic downturn, the value of assets was also affected by lack of liquidity. In early 2009 the Group began to increase the volume of its securities portfolio in both equity and debt securities. The increase in the securities portfolio also allowed the Group to increase its secured 65

82 debt position to secure cheaper funding from the CBR. As of 31 December 2009, the majority of the Group s securities were freely tradable debt securities in bonds issued by leading Russian companies and Russian federal and municipal debt securities (most with put options exercisable after one year from respective issue dates). For a further discussion of the Group s investments in financial assets, see Combined Results of Operations for the Years 2009, 2008 and 2007 Financial assets at fair value through profit or loss and Combined Results of Operations for the Years 2009, 2008 and 2007 Financial assets available for sale. RECENT DEVELOPMENTS From 1 January 2010 to the date of this Prospectus, the Group has had several developments relating to its business and operations discussed below. Changes in the international capital markets The period from the beginning of 2010 has shown an increase in liquidity in the international capital markets, including increases in the issuance of international debt capital market instruments. The change in the international capital markets environment may help Russian debtors (including Russian banks such as the Group) borrow at more attractive interest rates and for longer tenors. The favourable changes in the international financial markets have boosted investor interest in debt instruments of the issuers of the emerging markets, including the Russian Federation. Repayment of international borrowings In March 2010 the Bank repaid the USD 105 million syndicated term loan facility raised in March 2007 for a term of three years. In May 2010 the Bank repaid the USD 600 million syndicated term loan facility raised in November 2007 for a term of two and a half years. Eurobond issue On 11 March 2010 the Bank finalised the eurobond issue in the amount of USD 750 million with interest of per cent., maturing in Equity Financing On July , the CBR registered the results of an additional issue of the Bank s shares in the amount of 21, 632,017 securities with the nominal value of RUB 100 each. The offering price (including the offering price for the persons with pre-emptive rights) was RUB 1,003 per share. The share capital of the Bank increased by 13.7 per cent. from RUB 15.8 billion to RUB 18.0 billion according to the Bank s unconsolidated RAS accounting reports. Results for the six month period ended 30 June 2010 and the balance sheet as at 1 July 2010 The following discussion and summary results are based on unconsolidated RAS accounting reports for the Bank for the six month period ended 30 June 2010 and the balance sheet as at 1 July 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 impaired loans. These reports have not been audited or reviewed by the Bank s external auditors. In addition, these reports are not prepared in accordance with IFRS. Accordingly, the trends reflected below should not be viewed as indicative of the performance or condition of the Bank or Group as reflected in future financial statements produced by the Bank or Group under IFRS. See Risk Factors Risks related to the Group s Business and Industry The Group s accounting systems may not be as sophisticated as those of companies organised in jurisdictions with a longer history of compliance with international accounting standards. In relation to the Bank s assets, as at 1 July 2010, the amount of net indebtedness (or customer loans and interbank loans) had increased compared to the amount of net indebtedness as at 1 January This was due to the growth of the loan book driven by an increase in loans to corporates. In relation to the Bank s liabilities, as at 1 July 2010, the amount of funds due to other banks and the amount of funds due to the CBR had decreased compared to the amount of funds due to other banks and the amount 66

83 of funds due to the CBR as at 1 January 2010 due in part to an increase in customer accounts, which allowed the Bank to repay amounts due to the CBR. As at 30 June 2010, the amount of customer accounts had increased compared to the amount of customer accounts as at 1 January This was due in part to the stabilisation of the economic situation in the Russian Federation and also the Bank s replacing amounts due to the CBR with customer accounts, as a cheaper source of funding. In relation to the Bank s results of operations, for the six-month period ended 30 June 2010 compared to the six-month period ended 30 June 2009, the Bank had increased its net profit mainly due to an increase in net interest income primarily due to the growth of the Bank s loan portfolio and a slowdown in provisioning due in part to the stabilisation of the Russian economy. COMBINED RESULTS OF OPERATIONS FOR THE YEARS 2009, 2008 AND 2007 The following table sets forth the principal components of the Group s net profit for the periods indicated. For the year ended 31 December (audited) (audited) (audited) RUB in 000 % RUB in 000 % RUB in 000 Interest income 82,264, ,597, ,544,375 Interest expense (50,988,739) 53.5 (33,215,599) 62.3 (20,467,081) Net interest income 31,275, ,381, ,077,294 Provisions for impairment of due from other banks and loans to customers (30,751,474) (8,966,815) (2,446,959) Net interest income after provision for impairment of due from other banks and loans to customers 523,965 (97.3) 19,414, ,630,335 Gains less losses arising from financial assets at fair value through profit or loss 9,595,572 (6,943,320) 615,310 Gains less losses arising from financial liabilities at fair value through profit or loss (1,141,514) 674,382 (46,080) Gains less losses arising from financial assets available for sale 935, ,640 37,029 Gains less losses from dealing in foreign currency and precious metals 638,493 (30.6) 919,389 (68.4) 2,908,423 Gains less losses from revaluation of foreign currency and precious metals (497,849) 1,485,642 (1,952,341) Fee and commission income 6,966,411 (4.5) 7,292, ,217,688 Fee and commission expense (1,486,008) (1.9) (1,515,031) 65.1 (917,902) Dividends 19,040 (64.4) 53, ,394 Provision for impairment of financial assets available for sale (233,888) (113,868) Provision for impairment of other assets (600,239) 66.2 (361,231) (1,001) 67

84 For the year ended 31 December (audited) (audited) (audited) RUB in 000 % RUB in 000 % RUB in 000 Provision for impairment of investments held to maturity (4,191) (1,484) Provision for impairment of premises and equipment and intangible assets (205,201) Net income 14,509, ,028,440 (6.5) 22,496,855 General and administrative expenses (14,317,805) (4.5) (14,991,552) 30.5 (11,491,444) Contributions to the Deposit Insurance Fund (633,476) (5.1) (667,540) 13.9 (585,986) Other operating income less expenses 1,856, ,344, ,993 Operating income 1,415,010 (78.9) 6,713,713 (41) 11,377,418 Share in net profit of associates (129,368) 842,538 19,113 Net share in other movements in equity of nonconsolidated subsidiaries (1,559) (75.3) (6,302) 4,285 Net (loss)/gain on acquisition and sale of subsidiaries and associates (31,962) 699,166 (61) 1,791,798 Profit before taxation 1,252,121 (84.8) 8,249,115 (37.5) 13,192,614 Income tax expense (535,118) (57.9) (1,271,185) (59.6) (3,146,384) Net profit 717,003 (89.7) 6,977,930 (30.5) 10,046,230 Net profit attributable to the shareholders of the parent Bank 711,263 (89.5) 6,762,236 (23.9) 8,883,603 Net profit/(loss) attributable to minority interest 5,740 (97.3) 215,694 (81.4) 1,162,627 Basic earnings per share (EPS) (RUB per share) 4.81 (90.5) (26.6) Net interest income The amount of net interest income before provisions is affected by a number of factors. It is primarily determined by the volume of and balances between interest-earning assets and interest earning liabilities, as well as the difference between interest rates earned on interest earning assets and interest rates paid on interest bearing liabilities. Interest income is made up of income from loans to customers, financial assets at fair value through profit and loss, due from other banks, financial assets at fair value available for sale and investments held to maturity. Interest income is derived primarily from loans to customers, which constituted 87.4 per cent. of interest income for the year ended 31 December Interest expense consists of expense from current accounts and term deposits of customers, debt securities issued and term deposits of banks. Interest expense is derived primarily from current accounts and term deposits of customers, which constituted 62.7 per cent. of interest expense for the year ended 31 December

85 The Group s net interest income before provisions for the year ended 31 December 2009 increased by 10.2 per cent. to RUB 31,275.4 million from net interest income before provisions of RUB 28,381.7 million for the year ended 31 December This increase resulted primarily from the general increase in interest rates charged in relation to loans to customers and the higher level of average balances of loans to customers during this year. See Interest expense below. The Group s net interest margin decreased from 5.3 per cent. for the year ended 31 December 2008 to 4.6 per cent. for the year ended 31 December 2009 mainly as a result of the increase of the Group s cost of funding. The Group s net interest income before provisions for the year ended 31 December 2008 increased by 48.8 per cent. to RUB 28,381.7 million from net interest income before provisions of RUB 19,077.3 million for the year ended 31 December This increase resulted primarily from an overall increase in the volume of loans to customers and offset a 62.3 per cent. increase in interest expense. See Interest expense below. The following table sets out the Group s interest income and interest expense for the periods indicated: For the year ended 31 December (audited) (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Interest income 82,264, ,597, ,544,375 Interest expense (50,988,739) 53.5 (33,215,599) 62.3 (20,467,081) Net interest income 31,275, ,381, ,077,294 Interest income The Group generates interest income from loans to customers, financial assets at fair value through profit or loss, amounts due from other banks, financial assets at fair value available for sale and investments held to maturity. The Group s interest income before provisions for the year ended 31 December 2009 increased by 33.6 per cent. to RUB 82,264.2 million from interest income before provisions of RUB 61,597.3 million for the year ended 31 December This increase resulted primarily from a 39.6 per cent. increase in interest income from loans to customers, which in turn resulted primarily from increases in interest rates charged in relation to loans to customers and the higher average balance of loans to customers asset for the year ended 31 December 2009 compared with the year ended 31 December The Group s interest income before provisions for the year ended 31 December 2008 increased by 55.8 per cent. to RUB 61,597.3 million from interest income before provisions of RUB 39,544.4 million for the year ended 31 December This increase resulted primarily from a 61.7 per cent. increase in interest income from loans to customers. This increase resulted primarily from the growth in the volume of the retail and corporate loan portfolios, as interest rates remained relatively stable during this time. For a more detailed description of the factors affecting the Group s interest income, see Interest income from loans to customers, Interest income from financial assets at fair value through profit or loss and available for sale and Interest income due from other banks below. 69

86 The following table sets forth the principal components of the Group s interest income for the periods indicated: For the year ended 31 December (audited) (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Loans to customers 71,901, ,505, ,843,735 Financial assets at fair value through profit or loss 7,970, ,747, ,488,862 Due from other banks 2,229,332 (56.6) 5,141, ,114,898 Financial assets available for sale 94,724 (50.1) 189, ,880 Investments held to maturity 68, ,290 Total interest income 82,264, ,597, ,544,375 Interest income from loans to customers The Group provides corporate banking products and services to a variety of commercial and governmental entities, including federal, regional and municipal authorities and entities partly- or wholly-owned by them. As at 1 May 2010, the Group had over 105,000 corporate and governmental clients. The Group s corporate customer base represents various sectors of the Russian economy, including financial services, construction, manufacturing, trade, fuel and energy. The Group offers a wide range of credit products to corporate clients, including loans, credit lines, overdrafts and bank guarantees. See Business Banking Services and Activities. As at 31 December 2009, 71.1 per cent. of the Group s total loan portfolio comprised loans to non-state entities and organisations (including SMEs) as compared to 70.9 per cent. and 72.4 per cent. as at 31 December 2008 and 2007 respectively. As at 31 December 2009, 13.6 per cent. of the Group s total loan portfolio comprised loans to governmental entities, including federal, regional and municipal entities, and loans to Russian regions as compared to 7.7 per cent. and 6.6 per cent. as at 31 December 2008 and 2007 respectively. Loan terms vary depending on each particular client s needs and risk limits. All corporate loans are evaluated and extended based on standard credit risk evaluation procedures and are approved by the Group s internal credit committees. Moreover, the power to additionally approve lending decisions made by internal credit committees in respect of loans to SMEs is granted to a number of authorised officers. From the second half of 2007 on, largely due to the international financial crisis, the Group modified its approach to risk assessment and began to apply a more conservative approach to evaluating quality of the borrower s financial position, including, for example, introducing additional requirements with respect to the size and quality of collateral. See Business Lending Policies and Procedures Collateral. As at 31 December 2009, loans to retail clients accounted for RUB 88,294.4 million, or 15.3 per cent. of the Group s loan portfolio, compared with RUB 113,069.0 million (21.4 per cent. of the Group s loan portfolio) as at 31 December 2008, RUB 74,625.9 million (21.0 per cent. of the Group s loan portfolio) as at 31 December The Group currently offers a wide range of loan products to its retail customers, including consumer loans, mortgage loans, car loans, express (scoring) loans, bank card overdrafts and credit cards. For a more detailed description of the Group s loan products offered to the Group s retail customers, see Business Banking Services and Activities. Since interest rates offered to retail customers are generally higher than those offered to corporate borrowers, the Bank intends to grow its portfolio of retail loans to 35 per cent. of its overall loan portfolio in the near future. The Group s interest income from loans to customers for the year ended 31 December 2009 increased by approximately 39.6 per cent. to RUB 71,901.6 million from interest income from loans to customers of RUB 51,505.6 million for the year ended 31 December This increase resulted primarily from the increase in volume of loans to customers as interest rates during this time remained relatively stable. In particular, the increase in volume of loans to customers resulted primarily from the growth of the Group s 70

87 regional branch network and continuing diversification of the Group s customer base. The Group s interest income from loans to customers for the year ended 31 December 2008 increased by 61.7 per cent. to RUB 51,505.6 million from interest income from loans to customers of RUB 31,843.7 million for the year ended 31 December This increase resulted primarily from the increase in volume of loans to customers as interest rates during this time remained relatively stable. Interest income from financial assets at fair value through profit or loss The Group s interest income from financial assets at fair value through profit or loss comprises interest income from corporate bonds, Russian Federation bonds, corporate Eurobonds, bonds of foreign governments and promissory notes. The Group s interest income from financial assets at fair value through profit or loss for the year ended 31 December 2009 increased by 67.9 per cent. to RUB 7,970.4 million from RUB 4,747.5 million for the year ended 31 December This increase resulted from an increase in the amount of and overall proportion of corporate debt securities in the Group s securities portfolio. The Group s interest income from financial assets at fair value through profit or loss for the year ended 31 December 2008 increased by 5.8 per cent. to RUB 4,747.5 million compared to RUB 4,488.9 million for the year ended 31 December Interest income from financial assets available for sale The Group s interest income from financial assets available for sale for the year ended 31 December 2009 decreased by 50.1 per cent. to RUB 94.7 million from RUB million for the year ended 31 December The Group s interest income from financial assets available for sale for the year ended 31 December 2008 increased by 95.9 per cent. to RUB million compared to RUB 96.9 million for the year ended 31 December The decrease in 2009 resulted from the redemption of the significant portion of the debt securities available for sale in the Group s portfolio in the first half of Interest income from due from other banks The Group s interest income from due from other banks for the year ended 31 December 2009 decreased by 56.6 per cent. to RUB 2,229.3 million from income from due from other banks of RUB 5,141.2 million for the year ended 31 December This decrease in interest income from due from other banks resulted mainly from the decrease in the interest rate payable on due from other banks in 2009 compared with The Group s interest income from due from other banks for the year ended 31 December 2008 increased by 65.1 per cent. to RUB 5,141.2 million from interest income from due from other banks of RUB 3,114.9 million for the year ended 31 December This increase resulted from an increase in the amount of loans and deposits by the Group with other banks in 2008 compared with 2007, while the average interest rates due from banks remained relatively stable during the period. Interest expense The Group s interest expense consists of interest expense from current accounts and term deposits of customers, debt securities issued and term deposits of banks. Following the impact of the economic crisis in the third quarter of 2008, the Group has relied on state funding, including borrowings from the CBR, as well as customer accounts to make up an increased proportion of its funding base, as the amount of funding from international capital markets has declined. The Group has experienced a growth of customer deposits, particularly as customers of smaller, more risky banks have migrated to larger, more secure banks since the beginning of The Group s interest expense for the year ended 31 December 2009 increased by 53.5 per cent. to RUB 50,988.7 million from interest expense of RUB 33,215.6 million for the year ended 31 December The Group s interest expense for the year ended 31 December 2008 increased by 62.3 per cent. to RUB 33,215.6 million from interest expense of RUB 20,467.1 million for the year ended 31 December The increases in interest expense in 2008 and 2007 resulted primarily from an increase in the volume of debt securities issued by the Group and term deposits of other banks, as well as the volume of customer accounts, in particular current accounts by non-governmental entities in 2007 and term deposits of customers in 2008 and 2007 and of non-governmental entities in For a more detailed description of interest expense, see 71

88 Interest expense related to current accounts and term deposits of customers, Interest expense related to debt securities issued and Interest expense related to term deposits of other banks below. The following table sets out the principal components of the Group s interest expense for the periods indicated: For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Current accounts and term deposits of customers 31,944, ,931, ,639,449 Debt securities issued 7,338, ,744, ,695,237 Term deposits of banks 11,705, ,539, ,132,395 Total interest expense 50,988, ,215, ,467,081 Interest expense related to current accounts and term deposits of customers The Group s interest expense related to customer accounts for the year ended 31 December 2009 increased by 45.7 per cent. to RUB 31,944.5 million from interest expense related to customer accounts of RUB 21,931.8 million for the year ended 31 December This increase resulted primarily from increases in interest rate paid in the Russian market, in the first half of 2009 which was driven in part by higher rates set by the CBR, as well as by limited liquidity available in the Russian market. Since April 2009, the CBR has gradually lowered its refinancing rate. The Group s interest expense related to current accounts and term deposits of customers for the year ended 31 December 2008 increased by 60.8 per cent. to RUB 21,931.8 million from interest expense related to current accounts and term deposits of customers of RUB 13,639.5 million for the year ended 31 December This increase resulted primarily from an increase in the volume of customer accounts while interest rates generally remained stable during the period. Interest expense related to debt securities issued The Group s interest expense related to debt securities issued for the year ended 31 December 2009 increased by 54.7 per cent. to RUB 7,338.5 million from interest expense related to debt securities issued of RUB 4,744.2 million for the year ended 31 December This increase resulted primarily from the increased amount of Rouble-denominated bonds issued by the Bank in 2008 and a decrease in the Rouble exchange rate. The Group s interest expense related to debt securities issued for the year ended 31 December 2008 increased by 28.4 per cent. to RUB 4,744.2 million from interest expense related to debt securities issued of RUB 3,695.2 million for the year ended 31 December This increase resulted primarily from the two new Rouble denominated bonds and the Eurobond issued by the Bank in The following table sets forth the total debt securities issued by the Group: For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Eurobonds 51,978,409 (18.7) 63,952, ,989,195 Promissory notes 8,302, ,196,136 (2.1) 7,351,781 Bonds 17,818,205 (13.4) 20,566,469 3, ,950 Certificates of deposit 3,365 Total debt securities issued 78,098,779 (14.8) 91,715, ,956,291 72

89 Interest expense related to term deposits of banks The Group s interest expense related to term deposits of banks for the year ended 31 December 2009 increased by 79.0 per cent. to RUB 11,705.8 million from interest expense related to term deposits of banks of RUB 6,539.7 million for the year ended 31 December This increase resulted primarily from increases in the average rate paid on amounts due to other banks, which relates in part to the higher rates payable on loans from the CBR in the first half of 2009 and also the higher average balances of amounts due to other banks in The Group s interest expense related to term deposits of banks for the year ended 31 December 2008 increased by per cent. to RUB 6,539.7 million from interest expense related to term deposits of Groups of RUB 3,132.4 million for the year ended 31 December This increase resulted primarily from a rise in interest rates and an increase in average amounts owed to banks. Provision for impairment Provision for impairment represents provisions made for loans to customers, including legal entities and individuals, and amounts due from other banks. For a more detailed description of provisions for impairment, see Factors Affecting the Group s results of Operations and Financial Condition Provisions for Impairment. In accordance with Federal Law No. 395-I On Banks and Banking Activity dated 2 December 1990, as amended, the Bank is required to publish certain RAS accounting reports quarterly, including allowances for impaired loans, which do not contain all of the information contained in the Group s annual financial statements, and are not prepared in accordance with IFRS. The Group s management assesses on each reporting date whether there is any objective evidence that the value of a financial asset item or group of items has been impaired. Impairment losses are recognised in the consolidated statement of income as they are incurred as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. For a detailed discussion of the Group s policy of recording of the Group s impairment losses, see Note 4 to the 2009 Financial Statements. See also Critical Accounting Policies. The Group s provisions for impairment for the year ended 31 December 2009 increased to RUB 30,751.5 million from provisions for impairment of RUB 8,966.8 million for the year ended 31 December This increase resulted primarily from a more conservative approach employed by the Group to safeguard against foreseeable economic deterioration and deterioration in the Group s loan portfolio, primarily in the medium sized enterprise and retail sectors as a result of the impact of the economic crisis. The Group already increased provisioning in the fourth quarter of 2008 to safeguard against foreseeable economic deterioration. The Group s provision for impairment for the year ended 31 December 2008 increased to RUB 8,966.8 million from provision for impairment of RUB 2,447.0 million for the year ended 31 December This increase resulted primarily from an increase of the total loan portfolio of the Group and an increased proportion of loans to individuals in the total loan portfolio of the Group. See Provision for impairment of due from loans to legal entities and Provision for impairment of due from loans to individuals below. In 2007 the Group set a strategic goal to apply a more conservative approach in evaluating the quality and financial position of its borrowers, which included increased requirements in relation to the size and quality of collateral and stricter lending requirements. The Group introduced stricter provisioning requirements for borrowers not yet in default of their obligations. Since July 2010 the Group has relaxed certain of its anti-crisis restrictions by, for example, widening the range of industry sectors to which it extends corporate overdrafts and reducing the discount applied to collateral. For a further discussion of the Group s investments in financial assets, see Factors Affecting the Group s results of Operations and Financial Condition Provisions for Impairment. See also Critical Accounting Policies Impairment of Financial Assets. 73

90 Provision for impairment of due from other banks Movements in the provision for impairment of due from other banks are as follows: Provision for impairment of due from other banks as at 1 January 3,146 28,476 9,278 (Recovery of provision)/provision for impairment of due from other banks during the year 1,568 (24,353) 20,029 Exchange difference (5) (977) (831) Provision for impairment of due from other banks as at 31 December 4,709 3,146 28,476 The Group s provision for impairment of due from other banks for the year ended 31 December 2009 was RUB 1.6 million compared with recovery of provision for impairment of due from other banks of RUB 24.4 million for the year ended 31 December This change resulted primarily from the Group changing the composition of its counterparties for operations in the market. The Group s recovery of provision for impairment of due from other banks for the year ended 31 December 2008 was RUB 24.4 million compared with provision for impairment of due from other banks of RUB 20.0 million for the year ended 31 December This change resulted primarily from a reduction of the Group s volume of trading in repurchase agreements. Provision for impairment of due from loans to legal entities The table below shows movements in the provision for impairment by classes of loans to legal entities for the year ended 31 December December 2009 Loans to Loans to small government Corporate and medium and municipal Loans business authorities Total RUB million Provision for impairment of loans to legal entities as at 1 January 3, , ,432.9 (Recovery of provision) / Provision for impairment during the year 18, , ,526.8 Exchange difference (52.2) (49.1) (101.3) Loans written off during the year as uncollectible (111.2) (27.3) (138.5) Provision for impairment of loans to legal entities as at 31 December 21, , ,719.9 The Group s provision for impairment of due from loans to legal entities for the year ended 31 December 2009 increased to RUB 23,526.8 million from provision for impairment of due from loans to legal entities of RUB 3,943.0 million for the year ended 31 December This increase resulted primarily from the impact of the global economic crisis on corporate loans and loans to SMEs. The table below shows movements in the provision for impairment by classes of loans to legal entities for the year ended 31 December

91 Loans to Loans to small government Corporate and medium and municipal Loans business authorities Total RUB million Provision for impairment of loans to legal entities as at 1 January 1, ,375.0 (Recovery of provision) / Provision for impairment during the year 1, ,105.8 (1.0) 3,943.0 Provision of the acquired subsidiary Exchange difference Loans written off during the year as uncollectible (17.9) (3.9) (22.0) Provision for impairment of loans to legal entities as at 31 December 3, , ,432.9 The Group s provision for impairment of due from loans to legal entities for the year ended 31 December 2008 increased to RUB 3,943.0 million from provision for impairment of due from loans to legal entities of RUB million for the year ended 31 December This increase resulted primarily from the impact of the economic crisis. The Group increased provisioning in the fourth quarter of 2008 to safeguard against foreseeable economic deterioration. For a more detailed description of provisions for impairment due to loans to legal entities, see Factors Affecting the Group s results of Operations and Financial Condition Provisions for Impairment. Provision for impairment of due from loans to individuals The table below shows movements in the provision for impairment by classes of loans to individuals for the year ended 31 December December 2009 Express Consumer Mortgage (scoring) Credit Over loans loans Car loan loans cards drafts Total RUB million Provision for impairment of loans to individuals as at 1 January 3, ,456.6 Provision for impairment during the year 4, , (21.6) ,223.1 Exchange difference (41.6) (5.2) (1.6) (0.1) (42.6) (0.2) (91.3) Loans written off during the nine months as uncollectable (2.4) (0.2) (0.1) (2.7) Provision for impairment of loans to individuals as at 31 December 8, , , , ,585.7 The Group s provision for impairment of due from loans to individuals for the year ended 31 December 2009 increased to RUB 7,223.1 million from provision for impairment of due from loans to individuals of RUB 5,048.1 million for the year ended 31 December This increase resulted primarily from the impact of the economic crisis, which resulted in a deterioration of the Group s loan portfolio to individuals who did not receive the same level of the Government support as large corporations. 75

92 The table below shows movements in the provision for impairment by classes of loans to individuals for the year ended 31 December December 2008 Express Consumer Mortgage (scoring) Credit Over loans loans Car loan loans cards drafts Total RUB million Provision for impairment of loans to individuals as at 1 January ,150.1 Provision for impairment during the year 3, ,048.1 Provision of the acquired subsidiary Exchange difference Loans written off during the year as uncollectible (120.6) (1.5) (570.7) (59.7) (752.4) Provision for impairment of loans to individuals as at 31 December 3, ,456.6 The Group s provision for impairment of due from loans to individuals for the year ended 31 December 2008 increased to RUB 5,048.1 million from provision for impairment of due from loans to individuals of RUB 1,981.7 million for the year ended 31 December This increase resulted primarily from the impact of the economic crisis. The Group increased provisioning in the fourth quarter of 2008 to safeguard against foreseeable economic deterioration. For a more detailed description of provisions for impairment due to loans to individuals, see Factors Affecting the Group s results of Operations and Financial Condition Provisions for Impairment. Net interest income after provision for impairment The Group s net interest income after provision for impairment for the year ended 31 December 2009 decreased by 97.3 per cent. to RUB million from net interest income after provision for impairment of RUB 19,414.9 million for the year ended 31 December This decrease resulted primarily from the significant increase in the Group s provision for impairment in accordance with the Bank s more conservative risk management procedures during the global economic crisis. The Group s net interest income after provision for impairment for the year ended 31 December 2008 increased by 16.7 per cent. to RUB 19,414.9 million from net interest income after provision for impairment of RUB 16,630.3 million for the year ended 31 December This increase resulted primarily from the growth of the Group s loan portfolio yet was partially offset by the effects of the economic crisis, which caused the Group to increase provisioning in the fourth quarter of 2008 to safeguard against foreseeable economic deterioration. 76

93 Non-interest income The following table sets out certain information regarding the Group s non-interest income for the periods under review: For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Gains less losses arising from financial assets at fair value through profit or loss 9,595,572 (6,943,320) 615,310 Gains less losses arising from financial liabilities at fair value through profit or loss (1,141,514) 674,382 (46,080) Gains less losses arising from financial assets available for sale 935, , ,029 Gains less losses from dealing in foreign currency and precious metals 638,493 (30.6) 919,389 (68.4) 2,908,423 Gains less losses from revaluation of foreign currency and precious metals (497,849) 1,485,642 (1,952,341) Fee and commission income 6,966,411 (4.5) 7,292, ,217,688 Fee and commission expense (1,486,008) (1.9) (1,515,031) 65.1 (917,902) Dividends received 19,040 (64.4) 53, ,394 Contributions to the Deposit Insurance Fund (633,476) (5.1) (667,540) 13.9 (585,986) Other operating income less expenses 1,856, ,344, ,993 Total non-interest income 16, ,766,919 (55.7) 6,239,528 The Group s non-interest income for the year ended 31 December 2009 increased by per cent. to RUB 16,252.4 million from non-interest income in this category of RUB 2,766.9 million for the year ended 31 December This increase resulted primarily from an increase in income from financial assets at fair value through profit or loss as the result of the growth of the Group s securities portfolio, and the increased volume of operations in securities market, which began to recover from the global economic crisis in The Group s non-interest income for the year ended 31 December 2008 decreased by 55.7 per cent. to RUB 2,766.9 million from non-interest income in this category of RUB 6,239.5 million for the year ended 31 December The decrease in non-interest income in 2008 resulted primarily from decreases in income from financial assets at fair value through profit or loss as a result of the mark to market of the securities portfolio and losses from trading operations in the content of the economic downturn and declining stock market, in particular in the last quarter of See Net income arising from gains less losses from financial assets at fair value through profit or loss, Net income arising from gains less losses from financial liabilities at fair value through profit or loss, Net income arising from gains less losses from financial assets available for sale, Fee and commission income and Fee and commission expense. Net income arising from gains less losses from financial assets at fair value through profit or loss Financial assets at fair value through profit or loss reflected in the consolidated balance sheet include trading securities and derivative financial instruments. The Group s income arising from gains less losses from financial assets at fair value through profit or loss for the year ended 31 December 2009 was RUB 9,595.6 million. The Group s income arising from gains less losses arising from financial assets at fair value through profit or loss and available for sale for the year ended 31 December 2008 was negative RUB 6,943.3 million. This increase resulted primarily from gains from 77

94 securities trading resulting from the growth of the Group s securities portfolio, increased volume of Group s operations in securities market which recovered from the crisis in 2009, and also from the appreciation in value of the Group s securities portfolio The Group s income arising from gains less losses from financial assets at fair value through profit or loss for the year ended 31 December 2008 was negative RUB 6,943.3 million compared to RUB million for the year ended 31 December This decrease resulted primarily from a negative revaluation of the Group s securities portfolio, primarily involving corporate equity and corporate debt securities. Net income arising from gains less losses from financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss reflected in the consolidated balance sheet include trading securities and derivative financial instruments. The Group s income arising from gains less losses from financial liabilities at fair value through profit or loss for the year ended 31 December 2009 was negative RUB 1,141.5 million compared to RUB million for the year ended 31 December This decrease resulted primarily from revaluation at fair value of financial liabilities under reverse repurchase agreements and revaluation at fair value of transactions with derivatives and swap transactions. The Group s income arising from gains less losses from financial liabilities at fair value through profit or loss for the year ended 31 December 2008 was RUB million compared to negative RUB 46.1 million for the year ended 31 December This increase resulted primarily from an increase in unrealised gains on trading securities from a revaluation at fair value of financial liabilities under reverse repurchase agreements. Net income arising from gains less losses from financial assets available for sale The Group s income arising from gains less losses from financial assets available for sale for the year ended 31 December 2009 increased by per cent. to RUB million from RUB million for the year ended 31 December This increase resulted primarily from an increase in volume of financial assets available for sale and gains generated by purchase and sale of securities. The Group s income arising from gains less losses from financial assets available for sale for the year ended 31 December 2008 increased by per cent. to RUB million from RUB 37.0 million for the year ended 31 December This increase resulted primarily from an increase in income generated by purchase and sale of securities in particular the sale of shares in Visa Inc. in the initial public offering of Visa Inc. Net income arising from gains less losses from dealing in foreign currency and precious metals The Group s portfolio of currencies is made up of a variety of currencies. As a result, appreciation or depreciation of currencies against the Rouble will have an impact on net income arising from dealing in foreign currency. The Group s net income arising from gains less losses from dealing in foreign currency and precious metals for the year ended 31 December 2009 decreased by 30.6 per cent. to RUB million from the Group s net income arising from gains less losses from dealing in foreign currency of RUB million for the year ended 31 December The decrease for the year ended 31 December 2009 was the result of swap transactions aimed at managing the Group s currency position where the Group paid higher interest rates on currencies it purchased compared to the rates on currencies the Group sold and this difference in interest rates was reflected in the foreign exchange rates. The Group s net income arising from gains less losses from dealing in foreign currency and precious metals for the year ended 31 December 2008 decreased by 68.4 per cent. to RUB million from net income in this category of RUB 2,908.4 million for the year ended 31 December This decrease resulted primarily from trading and higher volatility in the foreign exchange markets. In addition, Russian companies desiring loans only denominated in Roubles exacerbated a currency mismatch in the Group s portfolio. This decrease resulted primarily from a regulatory obligation to keep foreign currency assets with the CBR and within Russia in the fourth quarter of

95 Gains less losses from revaluation of foreign currency and precious metals The Group s gains less losses from revaluation of foreign currency and precious metals for the year ended 31 December 2009 was negative RUB million compared to the Group s gains less losses from revaluation of foreign currency of RUB 1,485.6 million for the year ended 31 December This decrease resulted primarily from exchange rate fluctuations. The Group s gains less losses from revaluation of foreign currency and precious metals for the year ended 31 December 2008 was RUB 1,485.6 million compared to negative RUB 1,952.3 million for the year ended 31 December This increase resulted primarily from exchange rate fluctuations. Fee and commission income Fee and commission income is the income from the Group s operations relating to settlement and cash transactions, operations with plastic cards, transactions with securities, guarantees issued, cash collections and fiduciary activities. The following tables set out fees and commission income of the Group for the periods under the review: For the years ended 31 December (audited) (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Commission on settlement and cash transactions 3,965, ,570, ,599,497 Commission on operations with plastic cards 1,582,289 (20.8) 1,997, ,420,650 Commission on transactions with securities 121,939 (45.2) 222,665 (0.3) 223,321 Commission on guarantees issued 778, , ,593 Commission on cash collection 232, , ,874 Commissions under fiduciary activities 228, ,369 (41.2) 361,253 Other 56,194 (86.5) 416, ,500 Total fee and commission income 6,966,411 (4.5) 7,292, ,217,688 The Group s fee and commission income for the year ended 31 December 2009 decreased by 4.5 per cent. to RUB 6,966,4 million from fee and commission income of RUB 7,292.9 million for the year ended 31 December This decrease resulted primarily from decreases in fee and commission expense from commission on operations with plastic cards and commission on transactions with securities, which resulted from the Group s customers performing a reduced number of operations with plastic cards and transactions with securities as a result of the global economic crisis. The Group s fee and commission income for the year ended 31 December 2008 increased by 39.8 per cent. to RUB 7,292.9 million from fee and commission income of RUB 5,217.7 million for the year ended 31 December These increases resulted primarily from increases in fee and commission income from commission on settlement and cash transactions, which resulted from growth in the number of corporate and retail clients and an increase in the number of transactions with those clients and growth of the Group s customer base, especially in the retail sector customer base, which led to the introduction of new products by the Group (such as plastic cards) and a related increase in the amount of fees and commissions received by the Group. Fee and commission expense Fee and commission expense consists of expense arising from the Group s operations relating to settlement and cash transactions, operations with plastic cards, transactions with securities, guarantees issued, cash collections and fiduciary activities. 79

96 The following tables set out fees and commission expense and expenses of the Group for the periods under the review: For the year ended 31 December (audited) (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Fee and Commission Expense Commission on cash collection 559, , ,162 Commission on operations with plastic cards 515, , ,668 Commission on settlement and cash transactions 158,944 (35.2) 245, ,623 Commission on guarantees received 106, ,821 1,565 Commission on transactions with securities 68, ,549 4,862 Other 77,316 (27.0) 105,964 7,022 Total fee and commission expense 1,486,008 (1.91) 1,515, ,902 The Group s fee and commission expense for the year ended 31 December 2009 decreased by 1.91 per cent. to RUB 1,486.0 million from fee and commission expense of RUB 1,515.0 million for the year ended 31 December This decrease resulted primarily from decreases in fee and commission expense from commission on settlement and cash transactions, which resulted from decrease in the number of settlement and cash transactions in the context of the global economic crisis. The Group s fee and commission expense for the year ended 31 December 2008 increased by 65.1 per cent. to RUB 1,515.0 million from fee and commission expense of RUB million for the year ended 31 December The increases in fee and commission expense during 2008 and 2007 resulted from an increase in the number of clients and the volume of operations for the Group, a respective increase in fee and commission income discussed above, and from a gradual increase in the volume of plastic card operations performed by the Group primarily through an increase in the number ATMs and service points for plastic cards and from an increase in point of sale contacts. General and administrative expenses General and administrative costs include staff costs, professional services, rent, taxes other than income tax, depreciation and amortisation, administrative expenses, advertising and marketing, charity and expenses related to premises and equipment. The Group s general and administrative expenses for the year ended 31 December 2009 decreased by approximately 4.5 per cent. to RUB 14,317.8 million from general and administrative expenses of RUB 14,991.6 million for the year ended 31 December This decrease was caused by reductions in staff costs of 6.4 per cent., expenses relating to premises and equipment of 23.5 per cent., administrative expenses of 32.9 per cent. and advertising and marketing expenses of 53.9 per cent. The Group s general and administrative expenses for the year ended 31 December 2008 increased by approximately 30.5 per cent. to RUB 14,991.6 million from general and administrative expenses of RUB 11,491.4 million for the year ended 31 December This increase resulted from an increase in the number of branches at the end of 2007 and the beginning of 2008, which increased costs relating to rent, maintenance of the premises, as well as staff, including remuneration of employees. The increase in general and administrative expenses in 2007 resulted primarily from an increase in number of employees of the Group and a related increase in staff costs, including an approximately 20 per cent. increase in average employee salaries in

97 The following table sets out the major components of the Group s general and administrative expenses for the periods under review: For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Staff costs 7,430,049 (6.4) 7,938, ,400,878 Professional services (security, communications etc.) 1,220, , ,477 Rent 2,045, ,746, ,161,263 Taxes other than income tax 1,083, , ,878 Depreciation and amortisation 848, , ,337 Administrative expenses 484,626 (32.9) 722, ,304 Advertising and marketing 328,068 (53.9) 711, ,565 Charity 88,032 (35.6) 136, ,096 Expenses related to premises and equipment 612,705 (23.5) 801, ,860 Other 177,000 (42.3) 306,807 (44.4) 551,786 Total general and administrative expenses 14,317,805 (4.5) 14,991, ,491,444 Income tax expense The Group s income tax expense for the year ended 31 December 2009 decreased by 57.9 per cent. to RUB million from income tax expense of RUB 1,271.2 million for the year ended 31 December This decrease resulted primarily from a decrease in profit before taxation. The Group s income tax expense for the year ended 31 December 2008 decreased by approximately 59.6 per cent. to RUB 1,271.2 million from income tax expense of RUB 3,146.4 million for the year ended 31 December This decrease resulted primarily from a decrease in profit before taxation. Net profit The Group s net profit for the year ended 31 December 2009 decreased by approximately 89.7 per cent. to RUB million from net profit of RUB 6,977.9 million for the year ended 31 December This decrease resulted from factors indicated above, particularly the large provisions the Group made in 2009 to recognize the deterioration of the Group s loan portfolio and the impact of the economic crisis on the Group s loan portfolio. See Factors Affecting the Group s results of Operations and Financial Condition Provisions for Impairment. The Group s net profit attributable to non-controlling interest for the year ended 31 December 2009 decreased by 97.3 per cent. to RUB 5.7 million from net profit attributable to non-controlling interest of RUB million for the year ended 31 December This decrease resulted from a decrease of the Group s non-controlling interest as a result of the Group acquiring shareholdings in companies, where it previously had a non-controlling interest, as part of a deliberate strategy during the global economic crisis. 81

98 Assets The following table sets out the Group s total assets for the periods under review: As at 31 December (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Assets Cash and cash equivalents 75,955,760 (43.0) 133,268, ,920,118 Mandatory cash balances with central banks 4,748, ,162,092 (81.5) 6,294,827 Financial assets at fair value through profit and loss 118,461, ,411,892 (31.0) 51,312,593 Due from other banks 50,703,283 (31.8) 74,337, ,853,080 Loans to customers 534,489, ,563, ,622,231 Financial assets available for sale 13,738, ,644, ,771,181 Investments held to maturity 265,211 (72.4) 959,716 Investments in associates and non-consolidated subsidiaries 3,820,845 (3.7) 3,965, ,883 Premises and equipment, and intangible assets 16,895,277 (12.3) 19,255, ,800,053 Other assets 5,239,209 (1.8) 5,334, ,227,266 Tax assets 826, , ,966 Total Assets 825,143, ,385, ,086,198 The Group s total assets for the year ended 31 December 2009 increased by 3.0 per cent. to RUB 825,143.7 million from total assets of RUB 801,385.4 million for the year ended 31 December This increase resulted primarily from increased investment in Rouble-, Dollar- and Euro-denominated securities. This increase in the investment in securities has been used by the Group to increase its secured debt liabilities, particularly borrowings from the CBR, which are less costly in terms of interest rate expense than unsecured debt. In addition, there was an increase in loans to customers. The Group s total assets for the year ended 31 December 2008 increased by approximately 51.8 per cent. to RUB 801,385.4 million from total assets of RUB 528,086.2 million for the year ended 31 December This increase resulted primarily from an increase in cash and cash equivalents and an increase in loans to other customers; a 46.9 per cent. increase in net loans to customers, a per cent. increase in cash and cash equivalents, a 82.0 per cent. decrease in amounts due from other banks and a per cent. increase in premises and equipment, and intangible assets. For a more detailed description of the factors affecting the Group s assets, see Cash and cash equivalents, Financial assets at fair value through profit and loss, Due from other banks, Loans to customers, and Financial assets available for sale below. Cash and cash equivalents The Group s cash and cash equivalents for the year ended 31 December 2009 decreased by 43.0 per cent. to RUB 75,955.8 million from cash and cash equivalents of RUB 133,268.7 million for the year ended 31 December This decrease resulted primarily from a reduction in cash balances with the CBR and correspondent accounts with other banks due in part to an increase in investment by the Group in securities as the global securities markets recovered, as well as the lifting of currency exchange controls imposed on banks generally in the first six months of 2009 and a general decrease in liquidity held by the Group. The Group s cash and cash equivalents for the year ended 31 December 2008 increased by per cent. to RUB 133,268.7 million from cash and cash equivalents of RUB 63,920.1 million for the year ended 31 December The Group s cash and cash equivalents for the year ended 31 December 2007 increased 82

99 by 46.4 per cent. to RUB 63,920.1 million from cash and cash equivalents of RUB 43,652.6 million for the year ended 31 December The increase in cash and cash equivalents in 2008 and 2007 resulted primarily from an increase in cash on hand held on the Group s correspondent accounts with Russian and foreign banks, which reflected the Group s focus on increasing liquidity in 2008 at the beginning of the financial crisis. The increase in cash and cash equivalents in 2007 reflect the general increase in the Group s total assets and liabilities and the Group s obligation to support its liquidity to match the growth of its liabilities to its customers. Financial assets at fair value through profit and loss The Group s financial assets at fair value through profit and loss for the year ended 31 December 2009 increased by per cent. to RUB 118,461.7 million from financial assets at fair value through profit and loss of RUB 35,411.9 million for the year ended 31 December This increase resulted primarily from increased investment by the Group in Rouble-, Dollar- and Euro- denominated securities. This increase in the investment in securities was caused by the Bank s capitalising on the recovery of the global securities markets and its wish to be able to use such securities as collateral for its borrowings from the CBR (as secured borrowing from the CBR is less costly in terms of interest rate expense than unsecured borrowing). The Group s financial assets at fair value through profit and loss for the year ended 31 December 2008 decreased by 31 per cent. to RUB 35,411.9 million from RUB 51,312.6 for the year ended 31 December This decrease resulted primarily from a decrease of the trading portfolio and also from the depreciation of trading securities as a result of the falling stock market. Due from other banks The Group s due from other banks for the year ended 31 December 2009 decreased by 31.8 per cent. to RUB 50,703.3 million from due other banks of RUB 74,337.1 million for the year ended 31 December This decrease was caused by the fact that the Bank decided to lend less on the interbank market during the first half of 2009 in the context of the global economic crisis. The Group s due from other banks for the year ended 31 December 2008 increased by 82.0 per cent. to RUB 74,337.1 million from due from other banks of RUB 40,853.1 million for the year ended 31 December The Group s due from other banks for the year ended 31 December 2007 increased by 39.6 per cent. to RUB 40,853.1 million from due from other banks of RUB 29,268.4 million for the year ended 31 December The increases in due from other banks in 2008 and 2007 resulted primarily from the expansion of the Group s activities on the interbank market. See Contractual obligations below for a description of the Group s debt securities. Loans to customers The Group s net loans to customers for the year ended 31 December 2009 increased by 3.5 per cent. to RUB 534,489.5 million from net loans to customers of RUB 516,563.8 million for the year ended 31 December This increase resulted primarily from a deliberate increase in the Group s lending to corporate customers in line with its 2009 business plan to develop Bank s core lending business. The Group s net loans to customers for the year ended 31 December 2008 increased by approximately 46.9 per cent. to RUB 516,563.8 million from loans to customers of RUB 351,622.2 million for the year ended 31 December Financial assets available for sale The Group s financial assets available for sale for the year ended 31 December 2009 increased by 29.1 per cent. to RUB 13,738.0 million from financial assets available for sale of RUB 10,644.5 million for the year ended 31 December This increase resulted primarily from an increase in equity securities available for sale from RUB 9,883.0 million to RUB 12,982.4 million. The Group s financial assets available for sale for the year ended 31 December 2008 increased by per cent. to RUB 10,644.5 million from financial assets available for sale of RUB 3,771.2 million for the year ended 31 December These equity securities primarily represent shares and equity holdings of several Moscow enterprises as well as shares of JSCB Zarechiye and JSCB Bank of Khakasia. 83

100 Liabilities The following table sets out the Group s liabilities for the periods under review: As at 31 December (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Due to other banks 225,714, ,923, ,624,721 Customer accounts 428,028, ,540, ,646,223 Financial liabilities at fair value through profit or loss 2,340,289 (78.6) 10,922,808 6, ,010 Debt securities issued 78,098,779 (14.8) 91,715, ,956,291 Other liabilities 2,774,776 (65.2) 7,970, ,614,181 Tax liabilities 1,590,461 (4.3) 1,661, ,495,769 Total liabilities 738,547, ,734, ,491,195 The Group s liabilities for the year ended 31 December 2009 increased by 0.7 per cent. to RUB 738,547.6 million from liabilities of RUB 733,734.9 million for the year ended 31 December This increase resulted primarily from a 5.0 per cent. increase in due to other banks, a 5.3 per cent. increase in customer accounts and a 78.6 per cent. decrease in financial liabilities at fair value through profit and loss through growth of the Group s assets. See Assets. The Group s liabilities for the year ended 31 December 2008 increased by 53.0 per cent. to RUB 733,734.9 million from liabilities of RUB 479,491.2 million for the year ended 31 December This increase resulted primarily from an expansion of the Group s business operations including the growth of the loan portfolio and a significant increase in due to other banks. For a more detailed description of the factors affecting the Group s liabilities, see Due to Other Banks and Customer Accounts below. See Contractual Obligations. Due to other banks The Group engages in short-term interbank borrowings, mainly as part of its correspondent banking business and to regulate its liquidity, and medium-term borrowings, mainly in the form of syndicated loans. Due to other banks increased by 5.0 per cent. to RUB 225,714.7 million from RUB 214,923.6 million during the year period ended 31 December 2009 as compared to the year ended on 31 December This increase resulted primarily from an increase of 6.4 per cent. in term deposits and loans of other banks and the receipt of a subordinated loan in the amount of RUB 11.1 billion from Vnesheconombank. Due to other banks increased by per cent. for the year ended 31 December These increases in 2008 were a result of increasing borrowed funds for lending purposes. The following table sets out the Group s borrowings from other banks as at the periods under review: As at 31 December (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Loans and deposits of CBR 73,845,154 (7.0) 79,407,816 Syndicated loans of foreign banks 36,942,091 (7.2) 39,814,178 (0.8) 40,117,444 Term deposits and loans of other banks 91,660, ,112,317 24,565,374 Correspondent accounts of other banks 4,984, ,306, ,509,921 Subordinated loan 14,109, ,978, ,431,982 Repo agreements with other banks 4,173, ,304,225 Total due to other banks 225,714, ,923, ,624,721 84

101 Customer accounts Deposits from retail clients, which represented 41.5 per cent. of the Group s aggregate customer accounts as at 31 December 2009, were RUB 177,470.6 million compared to RUB 151,207.7 million, and RUB 126,656.5 million as at 31 December 2008 and 2007 respectively. The increase in the size of deposits by individuals is related to competitive interest rates for deposits and growth in ancillary services offered by the Group including but not limited to money transfers, trust management. Deposits from commercial and governmental entities represent the remaining balance of deposits. As at 31 December 2009, the shareholders and associates and other related parties deposited a portion of their funds with the Group. These funds accounted for 14.7 per cent. and 7.8 per cent., respectively, of the Group s total deposit portfolio (or 8.5 per cent. and 4.5 per cent., respectively, of the Group s total liabilities) as at 31 December As at 31 December 2008, these funds accounted for 22.6 per cent. and 4.4 per cent., respectively, of the Group s total deposit portfolio (or 12.5 per cent. and 2.5 per cent., respectively, of the Group s total liabilities) compared with 26.2 per cent. and 5.9 per cent., respectively (or 19.2 per cent. and 4.3 per cent., respectively), as at 31 December For a discussion of risks associated with the Group s affiliation with the City of Moscow, see Risk Factors Risks Related to the Group s Business and Industry. The following table sets out the composition of the Group s client customer accounts for the periods under review: As at 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Federal and regional budgets and funds Current/settlement accounts 18,698,735 (16.2) 22,312,864 (38.3) 36,169,613 Term deposits 47,589,240 (33.8) 71,881, ,400,000 State-owned organisations Current/settlement accounts 24,523, ,882, ,976,649 Term deposits 20,452, ,898, ,416 Other legal entities Current/settlement accounts 71,071,008 (14.5) 83,096,031 (0.4) 83,463,772 Term deposits 68,223, ,262, ,585,297 Individuals Current/settlement accounts 33,345, ,812, ,509,948 Term deposits 144,124, ,395, ,146,528 Total customer accounts 428,028, ,540, ,646,223 LIQUIDITY AND CAPITAL RESOURCES Liquidity The Group manages its short-term liquidity needs or surpluses through short-term interbank borrowing and lending, purchases and sale 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 Asset, Liability and Risk Management Liquidity Risk. Funding The Group requires funds to make loans to customers and to invest in securities. The Group s primary source of funds is and has been its corporate (including municipal) and retail deposit base, which consists primarily of demand and term deposits. The Group has a large and diverse funding base, servicing over 105,000 corporate and governmental clients and 9.7 million retail clients, as at 31 December Total deposits increased by 5.3 per cent. to RUB 428,028.6 million as at 31 December 2009, compared to, RUB 406,541.0 million and RUB 350,646.2 million as at 31 December 2008 and 2007, respectively. Highly liquid 85

102 assets (comprising cash and cash equivalents, due from other banks, financial assets at fair value through profit or loss, and financial assets available for sale) represented 31.4 per cent. of the Group s balance sheet assets as at 31 December 2009, compared to 31.7 per cent. and 30.3 per cent. as at 31 December 2008 and 2007, respectively. The Group also funds its operations through capital increases, medium-term loans from international banks and the placement of Eurobonds in the international capital markets. See Due to other banks above and Contractual Obligations below. The following table sets out customer deposits and certificated debts of the Group by maturity as at 31 December 2009, 2008 and 2007: As at 31 December RUB in 000 (1) % RUB in 000 (1) % RUB in 000 (1) On demand and less than one month 88,743,128 (45.5) 162,834,926 (17.5) 197,459,697 One to six-months 251,795, ,723, ,787,576 Six to 12 months 158,920, ,064, ,247,637 More than a year 280,890, ,175, ,527,491 Total 780,350, ,798, ,022,401 Notes: (1) Translated at the official CBR rate of RUB = USD 1.00 as at 31 December 2009, RUB = USD 1.00 as at 31 December 2008, RUB = USD 1.00 as at 31 December 2007 for information purposes only Contractual obligations The following table summarises the maturity analysis of the Group s financial liabilities as at 31 December 2009: On demand and less than From 1 to 6 From 6 to 12 More than 1 month months months 1 year Total RUB in 000 Due to other banks 15,989, ,720,972 53,038,442 58,796, ,545,792 Customer accounts 66,261, ,204,789 94,143, ,376, ,986,445 Financial liabilities at fair value through profit or loss 2,340,289 2,340,289 Debt securities issued 4,151,693 8,869,832 11,739,218 75,716, ,477,594 Total contractual obligations 88,743, ,795, ,920, ,890, ,350,120 86

103 The following table summarises Eurobonds issued by the Group as at 31 December 2009: Carrying Date of Maturity Nominal amount, Market Description Interest Rate issue date value, 000 RUB 000 price, % Senior $300,000 8,707, Subordinated 7.5% semi-annually $300,000 9,095, during the first five years, then the rate equals US Treasury plus 4.567% Senior 7.335% $500,000 15,166, semi-annually Subordinated 6.807% $400,000 12,141, semi-annually during the first five years, then the rate equals US Treasury plus 5.25% Senior 6.253% annually CHF 6,868, ,000 Total Eurobonds 51,978,409 The following table summarises bonds issued by the Group as at 31 December 2009: Type/code Carrying of state Date of Maturity Nominal amount, Market registration Interest Rate issue date value RUB 000 price, % % monthly BYR 322,260 30,000, % monthly BYR 754,553 70,000,000 Total bonds in a foreign currency 1,076, B 11.75%, RUB 10,468, semi-annually 10,000, B (1) 10.64%, RUB 6,272, semi-annually 6,105,994 Total bonds in RUB 16,741,392 Total Bonds 17,818,205 The following table summarises syndicated loans raised by the Group as at 31 December 2009: Carrying Payment Date of Maturity Nominal amount, Description Interest rate schedule origination date value, 000 RUB 000 I LIBOR+0.55% semi-annually $105,000 3,183,124 II LIBOR+0.55% monthly $600,000 18,130,338 III LIBOR+1.5% quarterly $30, ,071 87

104 Carrying Payment Date of Maturity Nominal amount, Description Interest rate schedule origination date value, 000 RUB 000 IV LIBOR+3.2% quarterly $350,000 10,268,518 Total syndicated loans in USD $1,085,000 32,472,051 I EURIBOR+1.5% quarterly ,000 4,470,000 Total syndicated loans in EUR 105,000 4,470,000 Total syndicated loans 36,942,091 Off-Balance Sheet Arrangements The primary purpose of the Group s off-balance sheet arrangements is to ensure that funds are available to a customer as required. For example, guarantees that 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. Import 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 cash deposits or collateral pledged to the Group and therefore carry less risk than direct borrowing. As at 31 December 2009, the Group had no significant off-balance sheet arrangements other than undrawn credit lines, guarantees and import letters of credit. The Group had total credit-related commitments for the year end 31 December 2009 of RUB 93,876.8 million compared with RUB 80,684.1 million, and RUB 77,641.2 million for the years ended 31 December 2008 and 2007 respectively. As 31 December 2009, the total amount of guarantees issued by the Group was RUB 53,662.7 million, compared to RUB 48,106.0 million, and RUB 36,187.7 million as at 31 December 2008 and 2007, respectively. The total amount of undrawn credit lines as at 31 December 2009 was RUB 31,387.2 million compared to RUB 23,737.2 million and RUB 32,534.8 million as at 31 December 2008 and 2007, respectively. The Group believes that its off-balance sheet obligations would not have a material impact on its financial condition if the Group were required to fulfil such obligations in full. The Group records its off-balance sheet guarantees and commitments to extend credit that represent contingent obligations on its balance sheet at the time of performance in accordance with the applicable accounting standards. The contractual amount of these commitments represents the value at risk should the contract be fully drawn upon, the client defaults, and the value of any existing collateral becomes worthless. The Group s management estimates possibility of losses in connection with credit related commitments as immaterial for each of the three years ended 31 December 2009, 2008 and 2007 and, as a result, has determined that it was not necessary to establish provisions for any such losses. See Note 32 to the 2009 Financial Statements set out elsewhere in this Prospectus, for a more detailed discussion of the Group s contingent liabilities. The Group has been involved in the financing of certain projects for the City of Moscow on a competitive tender basis since In addition, the Group provides financing on an arms-length basis (usually backed by performance guarantees) to companies that carry out contractual work for the City of Moscow. The major borrowers for these projects include leading companies in the Moscow construction industry, such as NPO Kosmos, Mosinzhstroy and Moscow Metrostroy. As more fully described elsewhere in this Prospectus, the Group has extended financing for a number of municipal projects, including the reconstruction of the national park museum Tsaritsyno, the modernisation of Leningradsky Prospect and, Volokolamskoye Highway, Dmitrovskoye and Varshavskoye Highways, construction of the Third Transportation Ring, the Vnukovo airport, the Lefortovo and Serebryanny Bor tunnels and reconstruction of networks and stations of the Moscow Underground system. The financing of municipal projects is conducted through short-term and medium-term lending, tenders and other guarantees granted to companies that carry out municipal contract work, letters of credit issued to customers and participation in investment projects. As 88

105 at 31 December 2009, loan products given by the Group to finance municipal construction projects totalled RUB62.6 billion compared with RUB 56.2 billion and RUB 34.7 as at the years ended 31 December 2008 and 2007 respectively. For a more detailed description of the Group s municipal projects, see Business Banking Services and Activities Corporate Banking The City of Moscow. Cash flows The following table sets out selected cash flow data from the Group s combined cash flow statements for the years ended 31 December 2009, 2008 and 2007, respectively. For the year ended 31 December (audited) (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Net cash flows from operating activities (72,239,817) 61,768, ,520,469 Net cash flows from investing activities (4,140,603) (73.6) (15,686,536) (2,180,601) Net cash flows from financing activities 18,290, ,839,969 (19) 17,078,286 Cash and cash equivalents at end of period 75,955,760 (43.0) 133,268, ,920,118 Cash flows from operating activities The Group s cash flows from operating activities for the year ended 31 December 2009 changed to negative RUB 72,239.8 million from cash flows from operating activities of RUB 61,768.2 million for the year ended 31 December This change resulted from an increase of the Group s financial assets at fair value through profit and loss. The Group s cash flows from operating activities for the year ended 31 December 2008 changed to RUB 61,768.2 million from cash flows from operating activities of RUB 5,520.5 million for the year ended 31 December This change resulted from an increase in cash flows from interest income received by the Group due to growth of its loan portfolio and increased interbank lending. Cash flows from investing activities The Group s cash flows from investing activities for the year ended 31 December 2009 changed to negative RUB 4,140.6 million from cash flows from investing activities of negative RUB 15,686.5 million for the year ended 31 December This change primarily resulted from the Bank s strategy of not investing heavily in such financial assets during the global economic crisis and its strategy of increasing its stakes in and acquiring subsidiaries and associates in 2009 as compared with previous periods. The Group s cash flows from investing activities for the year ended 31 December 2008 changed to negative RUB 15,686.5 million from cash flows from investing activities of negative RUB 2,180.6 million for the year ended 31 December This change resulted from an increase of stakes in and acquisition of subsidiaries and associates. Cash flows from financing activities The Group s cash flows from financing activities for the year ended 31 December 2009 increased by 32.2 per cent. to RUB 18,290.3 million from cash flows from financing activities of RUB 13,840.0 million for the year ended 31 December This change resulted primarily from the Bank s thirteenth share issuance (the Thirteenth Issuance ) and the receipt of a subordinated loan in the amount of RUB 11,108.0 million from Vnesheconombank. The Group s cash flows from financing activities for the year ended 31 December 2008 changed by 19 per cent. to RUB 13,840.0 million from cash flows from financing activities of RUB 17,078.3 million for the year ended 31 December This change resulted primarily from the decrease in the principal amount of Eurobonds issued to RUB 5,762.2 million for the year ended 31 December 2008 from RUB 10,259.9 million for the year ended 31 December

106 Capital Adequacy The CBR requires banks to maintain a capital adequacy ratio of at least 10.0 per cent. of risk weighted assets, computed on the basis of RAS. The minimum capital adequacy ratio of 8.0 per cent. was established pursuant to the Basel Accord. The Tier 1 capital and total capital of the Group calculated in accordance with the Basel Accord requirements increased by 33.5 per cent. and 33.7 per cent. to RUB 82,513.1 million and RUB 121,594.7 million as at 31 December 2009, respectively, from RUB 61,801.9 million and RUB 90,913.1 million as at 31 December 2008, respectively. The Tier 1 capital adequacy ratio was 12.8 per cent. and the total capital adequacy ratio was 18.9 per cent. as at 31 December 2009, compared with 9.5 per cent. and 13.9 per cent. as at 31 December 2008, respectively. These increases resulted primarily from the Bank issuing 21,008,403 ordinary shares with the nominal value of RUB 100 per share in the Thirteenth Issuance. The shares were offered at the price of RUB 952 per share both under a pre-emptive rights offer and under open subscription, amounting to RUB 19,999,999 thousand, including share premium of RUB 17,899,159 thousand. The shares were placed with existing shareholders of the Bank who elected to exercise their pre-emptive rights and the remainder of the shares were offered at the open subscription to the public. The Thirteenth Issuance was registered by the CBR on 28 July Based on the results of the Thirteenth Issuance, the total interest controlled by the Government of the City of Moscow in the Bank of Moscow share capital equalled per cent. (consisting of a direct shareholding of the Government of the City of Moscow of per cent., and an indirect shareholding through OJSC Metropolitan Insurance Group together with its subsidiaries of per cent.). The Bank registered its fourteenth issuance (the Fourteenth Issuance ) of further equity capital and submitted an application for registration with the CBR on 25 February See Recent Developments. As at 31 December 2008, the Tier 1 capital and total capital of the Group was RUB 61,801.9 million and RUB 90,913.1 million, respectively, compared to RUB 46,959.9 million and RUB 66,755.7 million as at 31 December 2007, respectively. As at 31 December 2008, the Group s Tier 1 capital adequacy ratio and total capital adequacy ratio decreased to 9.5 per cent. and 13.9 per cent., from 10.4 per cent. and 14.8 per cent., respectively, as at 31 December These decreases resulted primarily from significant growth in assets during the period. In August 2008, the Bank issued 7,358,648 ordinary shares with a nominal value of RUB 100 per share (the Twelfth Issuance ). The shares were placed with existing shareholders of the Bank who elected to exercise their pre-emptive rights and the remainder of the shares were offered at the open subscription to the public. The Twelfth Issuance was registered by the CBR on 28 August The following table sets out the Group s capitalisation as at 31 December 2009, 2008 and 2007 in accordance with IFRS and the Basel Accord, a paper entitled International Convergence of Capital Measurement and Capital Standards, dated July 1988 and prepared by the Basel Committee on Banking Regulation and Supervision, as amended. As at 31 December RUB million Tier 1 Capital Charter Capital 18, , ,476.8 Issuance income 30, , ,642.2 Retained earnings 34, , ,840.9 Total Tier 1 Capital 82, , ,959.9 Tier 2 Capital Premises revaluation reserves 3, , Subordinated Notes 35, , ,797.6 Others reserves (235.9) 6.6 (316.1) Total Tier 2 Capital 39, , ,

107 As at 31 December RUB million Total Capital 121, , ,755.7 Risk Weighted Assets With 20% risk 28, , ,898.3 With 50% risk 38, , ,744.0 With 100% risk 576, , ,171.6 Total risk weighted assets 643, , ,813.9 Capital Adequacy Ratios Tier 1 capital adequacy ratio 12.8% 9.50% 10.40% Total capital adequacy ratio % 13.90% 14.80% Notes: 1 Total capital divided by total risk weighted assets. SEGMENT OPERATIONS The Group uses information on business segments as its primary format for reporting segment information. The Group s main business segments are treasury, corporate and retail business. Transactions between business segments are based on commercial terms. In the ordinary course of business the Group s financial resources are reallocated between business segments. As a result, intersegment allocations are reflected within assets/liabilities of a business segment and the cost of reallocated financial resources is included in the business segment income/expenses. The following tables set forth certain of the Group s financial information by reporting segment for the periods indicated: Treasury business segment For the year ended 31 December RUB in 000 Change % RUB in 000 Change % RUB in 000 Interest income 8,636, ,480, ,350,438 Interest expense (6,563,961) (2,511,322) 68.9 (1,487,053) Gains less losses arising from financial assets and liabilities at fair value through profit or loss and available for sale 8,316,525 (6,451,790) 573,455 Gains less losses from dealing in foreign currency (680,101) 1,563, ,738 Net operating result on banking assets and liabilities 9,709, ,080,052 (82.3) 6,114,578 Income/(expense) on re-allocation of funds on demand, maturing in less than one month and part with no stated maturity 4,565,705 (1,404,263) (60.5) (3,552,026) 91

108 For the year ended 31 December RUB in 000 Change % RUB in 000 Change % RUB in 000 Income/(expense) on re-allocation of funds maturing in more than one month and part with no stated maturity Net operating result on banking assets and liabilities after intersegment re-allocations 5,143,608 (324,211) (112.7) 2,562,552 Fee and commission income 121,815 (44.9) 221,073 (1) 4,678 Fee and commission Expense (67,876) 29.7 (52,335) ,029 Provision for impairment of due from other banks and loans to customers (1,568) 24,353 General and administrative Expenses (509,905) (10.0) (566,817) 22.6 (462,480) Other income/(expense) Profit before taxation 4,686,074 (697,937) 2,298,686 Income tax expense Profit after taxation 4,686,074 (697,937) 2,298,686 Minority interest Net profit 4,686,074 (697,937) 2,298,686 Corporate business segment For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Interest income 60,352, ,536, ,361,115 Interest expense (31,992,782) 44.9 (22,079,134) 90.2 (11,607,840) Gains less losses arising from financial assets and liabilities at fair value through profit or loss and available for sale Gains less losses from dealing in foreign currency Net operating result on banking assets and liabilities 28,360, ,457, ,753,275 92

109 For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Income/(expense) on re-allocation of funds on demand, maturing in less than one month and part with no stated maturity 3,034, ,519 (62.5) 1,914,916 Income/(expense) on re-allocation of funds maturing in more than one month and part with no stated maturity (6,478,282) (1,316,085) (16.8) (1,582,539) Net operating result on banking assets and liabilities after intersegment re-allocations 24,916, ,859, ,085,652 Fee and commission income 4,323, ,186, ,214,314 Fee and commission Expense (899,995) (6.6) (963,478) 75.8 (548,014) Provision for impairment of due from other banks and loans to customers (23,515,949) (3,922,446) (443,107) General and administrative Expenses (4,206,268) (10.1) (4,676,702) 22.6 (3,815,460) Other income/(expense) 165, ,313 Profit before taxation 784,259 (92.6) 10,590, ,493,385 Income tax expense Profit after taxation 784,259 (92.6) 10,590, ,493,385 Minority interest Net profit 784,259 (92.6) 10,590, ,493,385 Retail business segment For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Interest income 12,899,336 (11.3) 14,535, ,771,835 Interest expense (12,156,830) 43.4 (8,479,319) 16.8 (7,259,901) Gains less losses arising from financial assets and liabilities at fair value through profit or loss and available for sale 107,058 Gains less losses from dealing in foreign currency 814,835 (3.3) 842, ,344 93

110 For the year ended 31 December (audited) RUB in 000 Change % RUB in 000 Change % RUB in 000 Net operating result on banking assets and liabilities 1,557,341 (77.8) 7,005, ,790,278 Income/(expense) on re-allocation of funds on demand, maturing in less than one month and part with no stated maturity 1,531, ,744 (58.1) 1,637,110 Income/(expense) on re-allocation of funds maturing in more than one month and part with no stated maturity 6,478, ,316,085 (27.4) 1,813,694 Net operating result on banking assets and liabilities after intersegment re-allocations 9,566, ,007, ,241,082 Fee and commission income 2,402,528 (12.2) 2,734, ,565,444 Fee and commission Expense (515,760) 3.5 (498,436) 36.6 (364,927) Provision for impairment of due from other banks and loans to customers (7,223,120) 43.1 (5,048,124) (1,982,321) General and administrative Expenses (4,671,128) (10.1) (5,194,271) 22.6 (4,237,983) Other income/(expense) 541, ,466 (585,986) Profit before taxation 100,985 (91.7) 1,211, ,309 Income tax expense Profit after taxation 100,985 (91.7) 1,211, ,309 Minority interest Net profit 100,985 (91.7) 1,211, ,309 Treasury The treasury business segment includes trading in financial instruments, transactions with securities and derivatives, including REPO deals, foreign currency transactions, raising and origination of loans on interbank loan markets and interest rate arbitrage on SWAP transactions. The treasury business operations also include the Group s short-term asset management and the Group s open positions in foreign currencies, i.e. currency risk management. The treasury business segment of the Group accounted for RUB 4,686.1 million in net profit for the year ended 31 December 2009, compared to RUB million loss in net profit for the year ended 31 December 2008 and RUB 2,298.7 million in net profit for the year ended 31 December Interest expense for the treasury business segment of the Group for the year ended 31 December 2009 was RUB 6,564.0 million compared to RUB 2,511.3 million for the year ended 31 December This increase 94

111 in interest expense in the Treasury business segment was caused by the increase in interest rates payable by the Group on the loans and deposits due to other banks resulting primarily from overall decreases in liquidity in the interbank market and the consequent rise in interest rates, and also by the increase in volume of unsecured loans due to the CBR in the first half of 2009 compared to the year ended 31 December Gains less losses arising from financial assets and liabilities at fair value through profit or loss and available for sale for the treasury business segment of the Group for the year ended 31 December 2009 was RUB 8,316.5 million compared to negative RUB 6,451.8 million for the year ended 31 December This increase was primarily the result of increased volume of investment in Rouble-, Dollarand Euro-denominated securities and gains received from trading in securities in the context of recovery of the Russian stock market in 2009 from the substantial declines which occurred in Gains less losses from dealing in foreign currency for the treasury business segment of the Group for the year ended 31 December 2009 was negative RUB million compared to RUB 1,563.1 million for the year ended 31 December This decrease was primarily the result of exchange rate market movements, (not fixed losses). Corporate The corporate business segment includes services associated with servicing settlement and current accounts of legal entities, acceptance of deposits from corporate clients, extension of credit lines in the form of overdrafts, issuance of loans and other types of financing, rendering of investment banking services, trade financing of corporate clients, rendering of structured financing, mergers and acquisitions consulting services. The corporate business segment has historically been the principal component of the Group s net profit. The corporate business segment of the Group accounted for RUB million in net profit for the year ended 31 December 2009, RUB 10,590.9 million in net profit for the year ended 31 December 2008 and RUB 10,493.4 million in net profit for the year ended 31 December Interest income for the corporate business segment of the Group for the year ended 31 December 2009 was RUB 60,353.0 million compared to RUB 38,536.5 million for the year ended 31 December This increase was primarily the result of the Group s ability to charge higher interest rates on corporate loans resulting primarily from decreases in liquidity in the market and the consequential increase in interest rates. Interest expense for the corporate business segment of the Group for the year ended 31 December 2009 was RUB 31,992.8 million compared to RUB 22,079.1 million for the year ended 31 December This increase was primarily the result of the increases in interest rates payable by the Group on the corporate accounts and deposits and also the result of the increase in volume of debt securities issued by the Group in 2008 as compared with previous periods. Provisioning for impairment of due from other banks and loans to customers for the corporate business segment of the Group for the year ended 31 December 2009 was RUB 23,515.9 million compared to RUB 3,922.4 million for the year ended 31 December This increase was primarily the result of the impact of the economic crisis and to the conservative approach employed by the Group to safeguard against foreseeable economic deterioration. Retail The retail business segment covers rendering of banking services to individuals, including servicing of accounts and deposits for individuals, fiduciary services, investment management, servicing debit and credit cards, consumer and mortgage lending. Although the Bank believes that the retail segment has a significant potential for growth, the retail segment has been generating modest net profits for periods under the review as compared to the corporate segment of the Group. The retail business segment accounted for RUB million in net profit or 14.1 per cent. of total net profit of the Group for the year ended 31 December 2009, RUB 1,211.9 million in net profit or 17.4 per cent. of total net profit of the Group for the year ended 31 December 2008, RUB million in net profit or 7.2 per cent. of total net profit of the Group for the year ended 31 December Interest income for the retail business segment of the Group for the year ended 31 December 2009 was RUB 12,899.3 million compared to RUB 14,535.2 million for the year ended 31 December This 95

112 decrease was primarily the result of the Group reducing the size of its retail loan portfolio as a safeguard against the anticipated weakening of this customer segment as a result of the global economic crisis. Interest expense for the retail business segment of the Group for the year ended 31 December 2009 was RUB 12,156.8 million compared to RUB 8,479.3 million for the year ended 31 December This increase was primarily the result of increases in interest rates resulting primarily from decreases in liquidity in the market. The Group s transactions not included in the above business segments are disclosed separately. CRITICAL ACCOUNTING POLICIES The accounting policies of the Group are integral to understanding its results of operations and financial condition. The Group s critical accounting policies are described in Note 4 to the Group Financial Statements for the years ended 31 December 2009, 2008 and The preparation of the Group Financial Statements requires the Group s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expense during the reporting period. On an ongoing basis, the Group s management evaluates its estimates and judgments, including those related to the reported amount of assets and liabilities, disclosure of contingent assets and liabilities as at the date of the preparation of the Group Financial Statements and the reported amount of revenues and expenses during the reporting period. 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. The Group bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results will differ from estimates under different assumptions and conditions and such differences may be material. Impairment of financial assets The Group assesses on each reporting date whether there is any objective evidence that the value of a financial asset item or group of items has been impaired. Impairment losses are recognised in the consolidated statement of income as they are incurred as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If an entity determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. (1) Impairment of due from other banks and loans to customers For due from other banks and loans to customers carried at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant or collectively for financial assets that are not individually significant. Objective evidence that due from other banks and loans to customers are impaired includes observable data that comes to the attention of the Group. More information about the observable data the Group uses can be found in Note 4 to the 2009 Financial Statements, the 2008 Financial Statements and the 2007 Financial Statements. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group s internal grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status, statistical information about actual 96

113 losses of the Group (loans written off against allowances for impairment) and other relevant factors. The characteristics chosen 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. The main criterion used for determining objective evidence of loss from impairment of due from other banks and loans to customers representing collectively measured financial assets is availability of observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group. Such information may include adverse changes in the payment status of borrowers in the group (for example, an increased number of delayed payments or an increased number of credit card borrowers who have reached their credit limit and are paying the minimum monthly amount), national or local economic conditions that correlate with defaults on the assets in the group (for example, an increase in the unemployment rate in the geographical area of the borrowers, a decrease in property prices for mortgages in the relevant area, a decrease in oil prices for loan assets to oil producers, or adverse changes in industry conditions that affect the borrowers in the group). If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced through the use of the provision account and the amount of the loss is recognized in the consolidated statement of income. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralized asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group or on the basis historical information on collections of overdue debts. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currency. Estimates of changes in the future cash flows reflect, and are discretionally consistent with, changes in related observable data from year to year (such as, changes in unemployment rate, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between estimated losses and actual loss experience. 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 recognized, the previously recognised impairment loss is reversed by adjusting the allowance account through the consolidated statement of income. Uncollectible assets are written off against the related allowance for impairment after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. The carrying value of impaired financial assets is not reduced directly. In accordance with the Russian legislation, in case of a write off of the uncollectible loan and relating interest, the Group shall take necessary and adequate steps, envisaged by law, custom of business turnover or agreement, to collect this outstanding loan. The write-off of uncollectible loan and relating interest is justified if there are documents to prove that the borrower failed to fulfil obligations to its creditors within the period not less than one year till the date when the decision was taken to write off the loan. 97

114 (2) Impairment of financial assets available for sale The Group assesses at each balance sheet date whether there is objective evidence that an asset or a group of assets available for sale is impaired. In case of investments in equity instruments classified as available for sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. This determination of what is significant or prolonged requires judgment. According to the Group, a 20 per cent. decrease in the fair value of the financial asset below its cost is a significant decline and decrease in the financial asset s value for over 6 months is a prolonged decline. In making this judgment, the Group evaluates among other factors, the volatility in share price. Cumulative loss is measured as a difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the statement of income transfer from equity to the statement of income. Impairment losses on equity instruments are not reversed through the consolidated statement of income: increases in the fair value after impairment are recognised directly in equity. If in subsequent periods the fair value of a debt instrument classified as available for sale increases, and such increase can be objectively rated to the event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the profit and loss accounts of the current period. In case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. Interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount future cash flows for the purpose for measuring the impairment loss. The interest income is recorded within interest income in the consolidated statement of income. Income and expense recognition Interest income and expense are recorded in the consolidated statement of income for all debt instruments on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group s management estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all commissions and fees paid or received by the parties to the contract that are an integral part of the effective interest rate, transaction costs, and other premiums or discounts. Interest income includes coupons earned on fixed-income financial assets and accrued discount and premium on promissory notes and other discounted instruments. When loans become doubtful of collection they are written down to their recoverable amounts and interest income is thereafter recognised based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount. Financial assets The Group classifies its financial assets in the following categories: (i) financial assets at fair value through profit or loss, (ii) loans and receivables (including due from other banks and loans to customers), (iii) financial assets available for sale, and (iv) investments held to maturity. As a matter of the Group s policy, the Group determines the classification of its financial assets at initial recognition. Classification of financial assets at initial recognition depends on the purpose for which they were acquired and their characteristics. 98

115 Reclassifications of financial assets The Group shall not reclassify a financial instrument into or out of the fair value through profit or loss category while it is held or issued, except rare circumstances when such reclassification is permitted for non-derivative financial instruments, other than those designated at fair value through profit or loss upon initial recognition, if there is no active market for such financial instrument. In this case debt financial instruments measured at fair value through progress or loss may be reclassified into financial assets available for sale, investments held to maturity and loans and receivables depending on the designated purpose. In exceptional circumstances, such as the absence of an active market, financial assets available for sale representing debt instruments may be reclassified into investments held to maturity or loans to customers, if the entity has the intention to hold that financial asset for the foreseeable future or until maturity. Financial assets at fair value through profit or loss Financial assets recorded at fair value through profit or loss include trading securities and derivative financial instruments. Trading securities represent securities acquired principally for the purpose of generating a profit from short-term fluctuations in price or trader s margin, or securities included in a portfolio where a pattern of short-term trading exists. The Group classifies securities as trading securities when it intends to sell them within a short period of time after purchase. Trading securities are recorded at fair value. Interest earned on trading securities is reflected in the consolidated statement of income using the effective interest method as interest income. Dividend income is recorded within. dividends received when the Group s right to receive dividends is established and dividends are likely to be received. All other elements of the changes in the fair value of trading securities and gains or losses on derecognition of trading securities are recorded in consolidated statement of income as gains less losses arising from financial assets at fair value through profit or loss in the period in which they arise. Loans to customers and due from other banks Loans to customers include non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (i) those that the Group intends to sell immediately or in the near term, which shall be classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; (ii) those that the Group upon initial recognition designates as available for sale, other than because of credit deterioration, which shall be classified as available for sale; and (iii) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available for sale. Loans to customers are initially recorded at cost, which is the fair value of the consideration given. Subsequently, they are carried at amortised cost using the effective interest method. The Group adopts accounting policies applicable to loans to customers and provision for loan impairment in respect of the Group s placements with other banks (due from other banks). Financial assets available for sale Financial assets available for sale are non-derivative financial assets that are classified as investment securities which the Group intends to hold for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The Group s management determines the appropriate classification of financial assets available for sale at the trade date. Financial assets available for sale are initially recognised at cost, which is the fair value of the consideration given. Interest earned on debt securities available for sale is determined using the effective interest method and reflected in the consolidated statement of income as interest income. 99

116 BUSINESS OVERVIEW The Bank is one of the largest commercial and retail banks in the Russian Federation, as measured by net assets, capital, loan portfolio and volume of retail client deposits. According to Kommersant Dengi magazine, a Russian business weekly, as at 1 January 2010, the Bank was the third largest Russian bank in terms of the volume of retail deposits and the fifth largest Russian bank in terms of net assets, capital and loan portfolio and, as at 30 August 2010, ranked 25th in terms of market capitalisation out of the top 100 Russian companies (compared to 26th in 2009 and 29th in 2009). The Bank offers a wide range of banking services, including corporate, SME and retail lending, deposit, payment and account services, foreign exchange and foreign trade operations, cash handling services, operations with precious metals, asset management and private banking, investment banking, securities trading, custody services and other ancillary services to retail clients and to commercial and governmental entities. In all areas of its business, the Bank is engaged in continually developing and launching new products and services in order to be able to offer a more diversified package of banking services to its current and potential customers. Over 90 per cent. of the Group s banking business is concentrated in the Russian Federation. The remaining business is currently conducted in Republic of Belarus, Republic of Estonia, Republic of Latvia, Republic of Ukraine and Republic of Serbia. The Group has a representative office in Frankfurt am Main, Germany. The primary business areas of the Group are: Corporate and Investment banking which comprises products and services including large corporate and SME lending, syndicated loan services, trade finance, foreign trade and exchange operations, guarantees and payment and account services, underwriting and arrangement of domestic and foreign debt issuances; Retail banking which comprises a broad range of products and services, including current (demand) and deposit (term) accounts in both Russian Roubles and foreign currencies, retail lending (including overdraft facilities, mortgage loans, consumer loans and car loans), credit and debit card services (as a member of VISA International, MasterCard Worldwide and the Russian payment system Union Card, and as a sub-licensee of Diner s Club International), money transfers, unit investment funds, payroll schemes and Internet and telephone banking; Asset management and Private banking which comprises private asset management services, fund management services, mutual and pension funds and private banking; and Treasury and proprietary securities trading activities which comprises securities trading, foreign exchange, money market transactions, operations with precious metals and custody services. As at 1 May 2010, the Bank operated 134 offices and sub-offices in all administrative districts of Moscow and in large towns of the Moscow region. In addition, the Group has 474 desks in post offices in Moscow and the Moscow region, which distribute the Group s retail products. As at 1 May 2010, the Group operated 68 regional branches, which supervised a further 69 full-service sub-branches, and 113 sub-branches providing retail services and 8 cash offices located in the territory of the Russian Federation. As at 1 May 2010, the Group had a presence in 60 regions of the Russian Federation, including major cities across the Russian Federation from St. Petersburg and Kaliningrad in the North West to Vladivostok and Petropavlovsk-Kamchatsky in the Russian Far East. The regional presence of the Group is enhanced through co-operation with local banks, such as OAO AKB Zarechye (Kazan, Republic of Tatarstan), in which the Group holds a minority interest. See also Operating and Financial Review of the Group Overview Principal Activities. In addition, the Group owns controlling stakes in seven banks, five of them foreign: Open Joint Stock Company Commercial Bank MOSVODOKANALBANK in Moscow (65.87 per cent. owned), Bezhitsa Bank in Bryansk, Russia ( per cent. owned), Bank Moscow-Minsk in Minsk, Republic of Belarus ( per cent. owned), AS Latvijas Biznesa banka in Riga, Republic of Latvia (99.97 per cent. owned), 100

117 AS Eesti Krediidipank in Tallinn, Republic of Estonia (92.00 per cent. owned), BM Bank LLC Ukraine, in Kiev, Republic of Ukraine ( per cent. owned) and Bank of Moscow j.s.c. Belgrade, in Belgrade, Republic of Serbia ( per cent. owned). The Group also has correspondent accounts for approximately 101 domestic banks and maintains correspondent relationships with approximately 950 foreign banks. The Bank is a member of the Association of Bill Market Participants (ABMP), the Forwards Section of MICEX, the Russian Trading System (RTS), the National Securities Market Participants Association (NAUFOR), the Securities Trading Section of MICEX, the Association of Russian Banks, the National Securities Association, the Moscow International Currency Association (MMVA), the National Currency Association (NVA), the Professional Association of Registrars, Transfer Agents and Depositaries (PARTAD), the Moscow Industrialists and Entrepreneurs Confederation, the Moscow Chamber of Commerce and Industry and the Russian Industrialists and Entrepreneurs (Employers) Union. COMPETITIVE STRENGTHS The Bank believes its strong market position is attributable to a combination of the following competitive advantages: Strong brand recognition, enhanced through the relationship with the City of Moscow. According to Brand Finance, which recently ranked the top 500 global banking brands, in 2010 the Group s brand ranked 182nd among the most high-valued banking brands (compared to 217th in 2009 and 252nd in 2008), and ranked 4th in Russia. The Group s Brand Rating for 2010 according to Brand Finance is A, compared to BBB for The Bank believes that its affiliation with the City of Moscow is one of its major strengths. The City of Moscow has remained the principal shareholder of the Bank. In addition, the business that the Group derives from the City of Moscow (including deposits of funds and contracts to finance municipal works) has contributed to the Group s strong capital base from which it has been able to finance the expansion of the Group s business. Furthermore, the Group participates in joint projects initiated by the City of Moscow, such as the Muscovite Social Card project which the Group developed in partnership with VISA International and the City of Moscow. As a result of the relationship between the Group and the City of Moscow, the Group s brand has a strong association with the city and positive recognition in the markets in which it operates. This in turn serves as an important marketing channel through which the Group can develop and expand both its retail and its corporate customer base. Strong approach to risk management and risk analysis. The Bank believes that its conservative approach to risk management as applied to all of its businesses has been a core strength of its business. In the context of the global economic crisis and the corresponding effect on the global and Russian economies, the Group s risk management policies and procedures have permitted the Group to manage its exposure to riskier assets in such a way as to protect its business and continue to implement its core strategies. Strong client base. The Group has a large and diverse client base, servicing over 105,000 corporate and governmental clients and 9.7 million retail clients as at 1 May The Group lends to a wide range of industrial sectors and to a large client base of retail customers and many types of commercial and governmental entities. The Group is the third largest Russian bank in terms of the volume of retail deposits (see Overview above) and, as at 31 December 2009, had a presence in 60 regions of the Russian Federation. Experienced management. The Group s senior management team has extensive experience in the banking industry and many of them have been working together for several years. Members of senior management have had experience working in the banking sector in the Russian Federation, other CIS countries and outside the CIS. For further information on the Group s management, see Management. 101

118 BUSINESS STRATEGY The Bank s strategic objective is to strengthen its position among the largest Russian banks, as measured by key business indicators such as profit, return on assets, return on equity, net interest margin, market share and growth rates in core business sectors while also maintaining its stable capital and liquidity position and conservative approach to risk management. To achieve this, in April 2008, the Bank s management approved a new three year general strategy for the Group. However, in light of the impact of the global economic crisis on the global and Russian economies, the Bank decided to review its strategic and business planning on an annual basis. This approach will take effect in respect of the financial years ending 31 December 2009 and 31 December The strategy for 2010 was adopted in late 2009 and focuses on increased business efficiency, maintaining tighter controls on costs and expenses, maintaining growth rates in line with market trends, building customer relationships and increasing cross-selling. The Group s key strategic goals include: Maintaining its strong capital position and conservative approach to risk management. On 26 July 2010, the Bank completed the Fourteenth Issuance, having attracted RUB 21.7 billion, which resulted in an increase of 13.7 per cent. (RUB 2,163.2 million) in the Bank s share capital to RUB 18.0 billion as at 1 August The Bank believes that the Fourteenth Issuance, together with the Thirteenth Issuance and with internal capital generation, will allow the Group to maintain adequate capital ratios while also growing its business. As at 31 December 2009 and calculated in accordance with the Basel Accord, the Group had a Tier 1 capital ratio of 12.8 per cent. and a total capital ratio of 18.9 per cent. compared to 9.5 per cent. and 13.9 per cent. as at 31 December The Bank believes its risk management processes are effective and that maintaining its focus on vigorous risk management is essential to maintaining its strong capital position. The Group is focused on maintaining its capital ratios and developing its risk management processes in readiness for any future changes in regulation and continued challenges in the banking business, which may result from the CBR s further implementation of the Basel Accord, the global economic crisis and the CBR and Russian Government s response to the economic crisis, while it also aims to support the continued growth of the Group s assets. The Group takes a conservative approach to risk management (as to which see above Competitive Strengths Strong approach to risk management and risk analysis ) particularly as regards its provisions for impairment and requirements in relation to the amount, quality and type of collateral. The Bank intends to maintain its conservative approach to risk management in 2010 and See also Operating and Financial Review of the Group Factors affecting the Group s results of operations and financial condition Provisions for Impairment. Increasing the Group s profitability without prejudice to its conservative risk management policies. The Bank believes that one of its primary goals is to increase its profitability by focusing on revenue diversification, market oriented policies, controlling costs, diversification of its client base and the introduction of new business lines. The growth before the global economic crisis in the domestic retail banking market, SME sector, debt market and asset management market opened new opportunities for the Group. Notwithstanding the effects of the global economic crisis and higher risks associated with these opportunities, the Bank intends to continue its focus on increasing profitability in these areas while adhering to its conservative approach to risk management. Additionally, the Bank believes that public and business confidence in certain leading Russian banks is beginning to improve again, which it believes will enable the Group to attract new corporate and retail customers while maintaining its strong existing customer base and increasing cross-selling. Having grown significantly in recent years (the Group s total assets grew from RUB billion as at 31 December 2006 to RUB billion as at 31 December 2007, RUB billion as at 31 December 2008 and RUB billion as at 31 December 2009), the Group is focused on integrating and streamlining each area of its expanded business to achieve optimum levels of profitability and efficiency. Attracting additional corporate business. The Group expects its corporate lending to continue to grow in the medium-term, with respect to both large corporates and SMEs. The Bank believes that the continued diversification of its customer base helps it to attain a more stable funding base. Although the risk of lending in the SME sector is higher than in the large corporate sector, the Bank believes that the SME sector offers strong potential for growth and that the increased risk of this sector can be managed through controls over the quality of the loan portfolio (see Asset, Liability and Risk Management and Lending Policies and 102

119 Procedures ). One of the ways in which the Bank expects to grow its SME loan portfolio is through developing relationships with SMEs in the Russian regions, that previously borrowed from some of the smaller regional Russian banks which have faced difficulties in dealing with the effects of the global economic crisis and the CBR s and Russian Government s response to it. Attracting additional retail clients. Notwithstanding the effects of the global economic crisis, the development of the Russian retail banking market remains one of the key features of the present-day banking system in the Russian Federation and retail depositors remain a key source of funding for banks in the Russian Federation. Although the Bank expects its corporate loan portfolio to grow faster than its retail loan portfolio in the short-to-medium-term, the Group is seeking to increase the number of retail customers, including through the following initiatives: Expanding its retail deposit portfolio. A number of Russian banks experienced an outflow in retail deposits at the start of the global economic crisis. As the situation has stabilised, retail deposits are starting to grow again. As at 1 January 2010 the Group was the third largest Russian bank in terms of the volume of retail deposits taken according to Kommersant Dengi, and, as at 31 December 2009, the Group had 9.7 million retail customers and RUB billion of term deposits and current accounts, compared to 9.6 million and RUB billion as at 31 December The Group benefits from having traditionally viewed retail deposits as an important source of funding and therefore it already has a large retail client base and substantial retail deposits. As the real income of the Russian population has gradually increased, the Russian retail deposit market has also increased and the Group continues to seek to increase its market share of retail deposits and to further capitalise on this growing demand for retail deposit services. Leveraging its relationship with the City of Moscow. The Group s relationship with the City of Moscow has helped to ensure that the Group has a well recognised brand, not just in Moscow but also across the Russian regions. The Group continues to develop its relationship with the City of Moscow to attract more retail deposits, for example, by participating in the Muscovite Social Card project (as to which, see Competitive Strengths Strong brand recognition, enhanced through the relationship with the City of Moscow ). For a discussion of the Group s relationship with the City of Moscow, see also Risk Factors Risks Relating to the Group s Business and Industry The Group may lose some or all of the City of Moscow s business and Banking Services and Activities Corporate Banking The City of Moscow.) Enhancing private banking services. While the real income (as a general indicator of the standard of living) of the Russian population declined during the financial crisis in the wake of job cuts and pay cuts, the Bank now sees good potential for growth in the private banking sector as the situation stabilises, and that such stabilised environment will provide a platform for it to learn from its customer behaviour patterns and selectively develop its range of customer-tailored products for wealthy individual customers. Enhancing its retail lending product range. Since 2002, the real income of the Russian population has grown, and this increase has created significant demand for consumer finance products such as personal loans, mortgages, automobile loans and credit cards. While the retail market in the Russian banking sector has stagnated during the global economic crisis to date, the Group s aim is to capitalise on opportunities in this sector as this market returns. Developing its strong franchise and brand name in the Russian Federation. The Group has one of the most geographically diverse branch networks in the Russian Federation, where over 90 per cent. of the Group s operations were concentrated as at 31 December 2009, and is thus able to market itself widely in the Russian banking market. The Group, whose loans to borrowers in Moscow and the Moscow region represented 45.8 per cent. of the Group s aggregate loan portfolio as at 31 December 2009, compared with 46.1 per cent. as at 31 December 2008, is assisted by its affiliation with the City of Moscow. However, in addition, the Group aims to leverage its franchise and brand in growing its business in all regions of the Russian Federation. For example, the Group aims to expand its SME loan portfolio by establishing relationships with SMEs that formerly borrowed from smaller regional Russian banks which have been adversely affected by the global economic crisis and the additional regulatory controls on Russian banks. 103

120 HISTORY OF THE BANK The Bank was originally registered under Russian legislation as Open Joint Stock Company Mosraschet Bank in March It received its initial banking licence on 15 March The Bank s name was changed to Moscow municipal bank Bank of Moscow (open joint stock company) on 22 March The annual general shareholders meeting held on 25 June 2004 approved a change of the Bank s name to Joint stock commercial bank Bank of Moscow (open joint stock company). This name change was registered by the CBR on 13 September The Bank currently operates on the basis of general banking licence No. 2748, issued by the CBR on 14 October The Bank also holds a professional securities market participant licence and a licence for trading in precious metals. The Bank s principal registration number recorded in the Unified State Register of Legal Entities is The current statutory and other documents of the Bank may be inspected at its registered office at 8/15, bldg. 3, Rozhdestvenka Street, Moscow , Russian Federation. The telephone number of the Bank is In March 1995, the Mayor of the City of Moscow issued an order for the City of Moscow to purchase shares in the Bank. Since 1995, the Government of the City of Moscow, represented directly by the City of Moscow Property Department (prior to 1998, represented by the Moscow Property Fund and the City of Moscow Property Management Committee), and indirectly by OJSC Metropolitan Insurance Group together with its subsidiaries, has been the majority shareholder of the Bank. As at the date of this Prospectus, the City of Moscow directly owned per cent., and OJSC Metropolitan Insurance Group held per cent. of the issued and outstanding share capital of the Bank. The Bank benefits from a written confirmation periodically re-issued by the City of Moscow (it was last re-issued in January 2007) confirming the City of Moscow s readiness to provide comprehensive assistance and support for the conclusion and subsequent performance of the agreements which the Bank has entered into or may enter into in the future with foreign governmental and non-governmental institutions. The written confirmation is not legally binding on the City of Moscow and does not constitute a guarantee by the City of Moscow of the Bank s payment obligations in respect of loans granted to the Bank or otherwise. In addition, no funds are specifically reserved in the City of Moscow s municipal budget for the payment of any financial obligations of the City of Moscow arising out of this confirmation. The Group competes on a competitive tender basis with Sberbank, VTB and Russian Agricultural Bank for funds from the City of Moscow. BRANCH NETWORK The Group s former focus in developing its branch network has been to make its banking services widely available throughout the Russian Federation and to optimise its branch network on the basis of economic and social factors. Now that the Group has increased its presence in Russia in areas where it has identified current or potential demand for banking products and locations with greater competition primarily large cities and regional centres it will concentrate on optimising the efficiency of its network to offer a wider range of banking products to a wider range of customers. It has also concentrated on increasing the number of branches and sub-branches that can offer a wider range of banking services and service a more diversified customer base. The Group has one of the most geographically diverse branch networks in the Russian Federation, stretching from St. Petersburg and Kaliningrad in the North West to Petropavlovsk-Kamchatsky in the Russian Far East. As at 1 May 2010, the Group operated 134 offices and sub-offices in all administrative districts of Moscow and in large towns of the Moscow region. In addition, the Group has 474 desks in post offices in Moscow and the Moscow region, which distribute the Group s retail products. As at 1 May 2010, the Group operated 68 regional branches, which supervised a further 69 full-service sub-branches, and 113 sub-branches providing retail services and 8 cash offices located in the territory of the Russian Federation. In addition to the Group s regional network, as at 31 December 2009 the Group s network also includes Open Joint Stock Company Commercial Bank MOSVODOKANALBANK (three sub-branches in Russia), Bezhitsa Bank (two branches in Russia), Bank Moscow-Minsk (five branches and 41 subbranches in the Republic of Belarus), AS Latvijas Biznesa banka in (one sub-branch in the Republic of 104

121 Latvia), AS Eesti Krediidipank (8 branches and 13 sub-branches in the Republic of Estonia), and BM Bank LLC Ukraine (46 sub-branches in the Republic of Ukraine). The Group intends that any further development of its sales platform will occur through organic growth, but the Group does not exclude the possibility that it may invest funds in the further acquisition of other banks or large branch networks or separate branches owned by other banks, if suitable investment opportunities arise. COMPETITION The Group faces competition from the leading domestic banks in each of the business areas and regions of the Russian Federation in which it operates, and also from a number of foreign banks in certain business areas and regions of the Russian Federation. According to the CBR, as at 1 August 2010, 1,160 banks and other non-bank credit organisations entitled to carry out banking operations were registered in the Russian Federation. The Russian banking industry is highly concentrated in Moscow and the Moscow region, where 57.6 per cent. of all Russian banks were based as at 1 August 2010, according to the CBR. The Russian banking sector is also characterised by a high level of concentration of capital. According to the CBR, as at 1 August 2010, the 200 largest Russian banks held 93.8 per cent. of the banking sector s total assets. In the corporate banking sector, the Group competes to attract corporate clients in order to develop substantial business volumes and to develop long-term working relationships. In this segment the Group competes with the leading Russian state-owned banks. On a regional level, the Group faces competition from other national Russian banks with strong branch networks. The Group also faces competition from foreign banks in the corporate lending market since they are often able to offer potential borrowers better lending terms, including lower interest rates as a result of being able to access a broader range of international finance sources. The Bank considers its primary competitors among Russian banks in the overall corporate and retail financing sectors to be Sberbank, VTB, Gazprombank, Rosbank, Alfa-Bank and MDM Bank and among foreign banks to be Unicredit, Raiffeisenbank and Citibank. The Bank views Sberbank, VTB and Rosbank as major competitors in the retail loan sector. In the retail deposit sector, the Bank considers its primary competitors to be Sberbank, VTB, Gazprombank, Rosbank, Alfa-Bank, Raiffeisenbank, MDM Bank and Uralsib. In the investment banking sector, the Bank considers its primary competitors to be Sberbank, VTB, Rosbank, Troika Dialog, Renaissance Capital, Unicredit and Raiffeisenbank. Although the Group competes with the same group of Russian banks across its retail products as it does on the corporate side, it also faces competition from foreign banks such as Société Generale, Raiffeisenbank, Citibank and HSBC in respect of private banking products and services offered to high net worth retail customers. While the foreign banks have diminished their activity in Russia during the crisis, they are expected to re-launch their efforts as the economy stabilises. The Bank believes that the retail services market in 2010 has been influenced by a number of factors, including increased competition from the leading domestic retail market operators, primarily Sberbank and VTB. The Bank believes that over the next few years the Russian banking environment will continue to be characterised by increased competition, decreasing profit margins and tightening of banking supervision, which is likely to result in further consolidation of the Russian banking sector. In addition, the Bank believes that to remain successful, leading Russian banks will have to increase their capitalisation, maintain their branch networks, and offer corporate and retail banking products that are competitive with those provided by foreign competitors. The Group intends to focus its strategy on the further development of its product range, on improving its recurring profitability, and on increasing the efficiency of its existing Moscow and regional network, which it considers to be one of its competitive advantages in the retail banking market. The Group also intends, to the extent market conditions permit, to maintain the interest rates it offers to its retail and corporate clients at a level comparable to other major banks operating in the Russian market. 105

122 FUNDING AND TREASURY International Borrowings In March 2007, the Bank entered into a syndicated loan agreement with ICICI Bank in the amount of USD 105 million for a term of three years at a rate of 6-month LIBOR plus 0.55 per cent. per annum. In May 2007, the Bank issued subordinated Eurobonds in an aggregate principal amount of USD 400 million due in 2017 with a five-year no-call period, a step up rate of 150 basis points and a coupon of per cent. In June 2007, the Bank entered into a Swiss Franc-denominated loan with Commerzbank AG in an amount of CHF million for the purposes of funding its Swiss Franc-denominated mortgage portfolio. In November 2007, the Bank entered into a syndicated loan agreement with Unicredit, BayernLB, Commerzbank AG, DEPFA Bank PLC, DZ Bank AG, Mizuho Corporate Bank, Sumitomo Mitsui Banking Corporation as arrangers for an amount of USD 600 million for a term of 2.5 years at an interest rate of LIBOR plus 0.55 per cent. per annum. In December 2007, the Bank entered into a loan agreement with Sumitomo Mitsui Banking Corporation for an amount of Japanese Yen 3,900,000,000 for a term of five years. In 2008 the Bank entered into a syndicated term loan facility with ABN AMRO Bank N.V., Deutsche Bank AG, London Branch, Emirates Bank International PJSC and Raiffeisen Österreich AG for an amount of USD 220 million for a term of 18 months at an interest rate of LIBOR plus 0.65 per cent. per annum. In February 2008, the Bank issued Eurobonds amounting to CHF 250 million with a maturity date of three years and a coupon of per cent. In July 2008, the Bank entered into a loan agreement with Sumitomo Mitsui Banking Corporation for an amount of Japanese Yen 5,500,000,000 for a term of three years. In December 2008 the Bank entered into a dual-tranche dual-currency syndicated term loan facility with Commerzbank Aktiengessellschaft, J. P. Morgan plc, Sumitomo Mitsui Banking Corporation and WestLB AG as mandated lead arrangers for an amount of EUR 105 million and USD 30 million for a term of 2.5 years at an interest rate of EURIBOR/LIBOR plus 1.5 per cent. per annum. In November 2009 the Bank entered into a loan agreement with Barclays Capital for an amount of USD 70 million for a term of 25 months. In December 2009 the Bank entered into a syndicated loan agreement with Calyon, Goldman Sachs International, ING Bank, WestLB AG, Barclays Capital and Credit Suisse AG as mandated lead arrangers for an amount of USD 350 million for a term of two years at an interest rate of LIBOR plus 3.20 per cent. per annum. In March 2010 the Bank issued Eurobonds amounting to USD 750 million with a maturity date of five years and a coupon per cent. The Group expects to continue raising additional funds in multiple currencies for the development of its business operations. See, however Risk Factors Risks Related to the Group s Business and Industry for a discussion of external factors outside the Group s control which may affect the Group s ability to do so. Domestic Borrowings The Group borrows funds on the Russian domestic market from time to time. In February 2008, the Bank issued RUB 10.0 billion bonds maturing in five years. In August 2008, the Bank placed a RUB 10 billion bond issue maturing in three years. In November and December 2009 the Group raised loans from OJSC Russian Development Bank in the amounts of RUB million and RUB 1,446.0 million maturing on 30 October 2012 and 30 November 2012, respectively. In October 2009 the Group raised a subordinated loan from state corporation The Bank for Development and Foreign Economic Affairs (Vnesheconombank) in the amount of RUB 11.1 billion at a rate of 8 per cent. per annum and matures on 18 December

123 Proprietary Securities Activities The Group engages in securities activities for its own account. It engages in trading operations on all the major Russian stock exchanges, the London Stock Exchange and the New York Stock Exchange, and participates in Government securities auctions conducted by the CBR and in sale and repurchase ( repo ) transactions with large Russian banks and foreign banks. The Group has conducted trading and investment activities in the following Russian Government securities: federal bonds ( OFZs ), regional bonds, federal currency bonds, bonds issued by municipal authorities and Russian Federation Eurobonds. In the wake of the volatility in the global capital markets, the Group implemented various measures in order to address the unfavourable developments in the global financial markets, including a rise in discounts for securities eligible for repo transactions, the introduction of more restrictive requirements for the acceptance of counterparties risks related to repo transactions, a reduction in the tenor of limits for repo operations, and the closure of limits for some issuers. The Group has also adopted a more conservative securities trading policy in the light of the continued global economic crisis and has sought to streamline its portfolio to reduce holdings in equity securities and to increase holdings in Russian federal and municipal debt securities and bonds issued by leading Russian companies. However, starting from summer 2009, in the context of the improvements in the global and local financial markets and stock markets in particular, the Group has been gradually enlarging its list of counterparties and issuers eligible for trading operations. As at 31 December 2009, Russian Government securities (including securities of the Russian Federation and its subjects and local authorities) accounted for 36.6 per cent. of the aggregate amount of the Group s securities portfolio (compared to 6.3 per cent. as at 31 December 2008 and 30.2 per cent. as at 31 December 2007), Rouble denominated Russian Government securities accounted for more than 76.0 per cent. of the Group s Russian Government securities portfolio (compared to 72.9 per cent. as at 31 December 2008, 52.9 per cent. as at 31 December 2007) and U.S. Dollar-denominated Russian Government securities accounted for 20.8 per cent. of the Group s Russian Government securities portfolio (compared to 27.1 per cent. as at 31 December 2008, 47.1 per cent. as at 31 December 2007) and Euro-denominated bonds of the Russian Federation s subjects and local authorities accounted for 3.2 per cent. of the Group s Russian Government securities portfolio. The Group did not have any Euro-denominated bonds of the Russian Federation s subjects and local authorities in the years ended 31 December 2008 and 31 December See Operating and Financial Review of the Group Financial assets at fair value through profit and loss. The Group also conducts trading and investment activities in foreign government securities and bonds issued by foreign governments and central banks. As at 31 December 2009, foreign government securities accounted for 3.3 per cent. of the aggregate amount of the Group s securities portfolio compared to 2.3 per cent. as at 31 December The Group conducts proprietary trading activities in corporate bonds (including Eurobonds) and equities. Corporate Rouble bonds and equities accounted for 38.5 per cent. and 3.3 per cent., respectively, of the aggregate amount of the Group s securities portfolio as at 31 December 2009, 83.0 per cent. and 2.7 per cent., respectively, as at 31 December 2008 and 49.5 per cent. and 9.3 per cent., respectively, as at 31 December See Operating and Financial Review of the Group Financial assets at fair value through profit and loss. Foreign currency corporate bonds constituted 17.1 per cent., 3.6 per cent. and 3.9 per cent. of the Group s securities portfolio as at 31 December 2009, 31 December 2008, and 31 December 2007, respectively. The value of the Group s securities portfolio was RUB billion as at 31 December 2009, compared to RUB 34.7 billion, and RUB 51.2 billion as at 31 December 2008, and 2007 respectively. See Operating and Financial Review of the Group Financial assets at fair value through profit and loss. Foreign Exchange and Money Market Activities The Group is one of the leading operators in the Russian foreign exchange and money markets and focuses on spot foreign exchange and short-term deposit operations on the inter-bank market. During the year ended 31 December 2009, the Group received total funds of USD 0.24 billion, EUR 3.7 billion, and RUB billion in borrowed funds, compared to USD 1.2 billion, EUR 1.9 billion and RUB billion for the year ended 31 December 2008 and USD 3.2 billion, EUR 0.6 billion and RUB billion for the year ended 31 December 2007 and it placed deposits of USD 65.3 billion, 107

124 EUR 68.1 billion, and RUB billion during the year ended 31 December 2009, compared with USD billion, EUR 80.2 billion and RUB 2,105.5 billion for the year ended 31 December 2008, and USD billion, EUR 24.5 billion and RUB 1,100.0 billion for the year ended 31 December The volume of the Group s foreign exchange transactions during the year ended 31 December 2009 was USD 371 billion, compared to USD 250 billion and USD 210 billion during the years ended 31 December 2008, and 2007, respectively. See also Operating and Financial Review of the Group Net income arising from gains less losses from dealing in foreign currency and precious metals. The Group s main counterparties in the Russian foreign exchange and money markets are Sberbank, VTB, Gazprombank and other domestic top-tier banks; its main counterparties among foreign banks are Standard Chartered, LBBW, RBS, BNP Paribas, Credit Suisse, Deutsche Bank AG, HSBC, JPMorgan Chase Bank, ING Group, Raiffeisenbank and other large international banks. BANKING SERVICES AND ACTIVITIES The Group offers a wide range of banking services, which are broadly divided into three key business areas: (i) retail banking, (ii) corporate and investment banking, and (iii) asset management. In 2004, the Bank joined the Mandatory Deposit Insurance System, which is managed by the State Corporation Deposit Insurance Agency. The activities of the Mandatory Deposit Insurance System are provided for by federal laws and regulations. The limit of coverage of the Group s liabilities to private customers is up to RUB 700,000 per depositor in the event of bankruptcy or withdrawal of the Bank s licence for banking operations by the CBR. Retail Banking The Group offers its retail banking clients a wide range of financial products and services. These include current (demand) and deposit (term) accounts both in Russian Roubles and foreign currencies, loan services, including overdraft facilities, mortgage loans, consumer loans, car loans, credit and debit card services (as a member of VISA International, MasterCard Worldwide and the Russian payment system Union Card and as a sub-licensee of Diner s Club International), money transfers, mutual fund management and internet and telephone banking. As at 31 December 2009, the Group was servicing over 9.7 million retail customers compared to 9.6 million and 8.2 million as at 31 December 2008 and 2007 respectively. Retail lending The Group provides a wide range of loan products to retail customers. As at 31 December 2009, loans to retail clients accounted for RUB 74.7 billion, or 14.0 per cent. of the Group s net loan portfolio, compared with RUB billion (20.6 per cent. of the Group s net loan portfolio) as at 31 December 2008 and 72.5 billion (20.6 per cent. of the Group s net loan portfolio) as at 31 December The Group s net retail loans decreased in the year ended 31 December 2009 by 29.9 per cent. in response to the global economic crisis and a decrease in demand for retail products and in line with the Group s conservative approach to risk management given the higher risks associated with retail customers. See Operating and Financial Review of the Group Interest income from loans to customers. The Group currently extends the following types of loan to retail customers: Consumer loans. The Group grants unsecured loans for consumer purposes. The loan amount available varies from RUB 70,000 to RUB 3,000,000 depending on the quality of the borrower and the term can be for up to five years. The borrowers are assessed primarily by a numerical score system and then by an authorised officer. When applying for a consumer loan, a borrower must submit to the Group confirmation of his monthly disposable income. Where a borrower provides the Bank with personal guarantees from two third parties, the interest rate charged to the borrower on the loan is decreased by three per cent. The interest rate is reduced by a further three per cent. if the borrower provides a life insurance policy. As of 31 December 2009, the total amount of the Group s consumer loan portfolio was RUB 43.2 billion, which constituted 48.9 per cent. of the Group s gross retail loan portfolio, compared to RUB 57.1 billion (50.5 per cent.) as at 31 December 2008 and RUB 35.6 billion (47.7 per cent.) as at 31 December

125 Mortgage loans. The Group s mortgage loan programme was launched in 2002 and has developed further as a result of mortgage loan legislation adopted at the end of Mortgage loans are extended for terms of between three and 30 years for the purchase of real estate existing on the secondary market or that is under construction. Mortgage loans are offered in Roubles, U.S. Dollars or Euros. As at 31 December 2009, the amount of the Group s mortgage portfolio was RUB 27.5 billion which constituted 31.1 per cent. of the Group s gross retail loan portfolio, compared to RUB 30.9 billion (27.4 per cent.) and, RUB 17.3 billion (23.2 per cent.) as at 31 December 2008 and Car loans. The Group s car loan programme was launched in Car loans are provided for terms of between six months and seven years, up to a maximum of RUB 5.0 million (or its equivalent in USD or EUR) and the borrower is required to pay up-front 15 per cent. of the purchase price of the car. Such loans are secured by a pledge of the purchased cars. As of 31 December 2009, the total amount of the Group s car loan portfolio was RUB 10.4 billion, compared to RUB 15.7 billion as at 31 December 2008, and RUB 13.8 billion as at 31 December As at 31 December 2009, the Group s car loan portfolio represented 11.8 per cent. of the Group s gross retail loan portfolio, compared to 13.9 per cent. and 18.5 per cent. as at 31 December 2008 and 31 December 2007, respectively. In March 2009 the Russian Government started a car-purchasing programme for purchasers of certain new Russian-made cars. The programme offers purchasers of such cars with a Government-subsidised loan for such cars. The Group started accepting applications under this programme in March The terms of such loans are generally similar to those of loans under the Group s standard car loan programme. Express (scoring) loans. In 2003, the Group introduced express loans, also known as scoring loans, for which the borrower s creditworthiness is assessed by a numerical score. Before the onset of the global economic crisis, it typically took 30 to 40 minutes to extend a scoring loan. However, since October 2008, due to the impact of the global economic crisis which led to a significant proportion of scoring loans being written off as uncollectible in 2007 and the first nine months of 2008 (as to which see Operating and Financial Review of the Group Factors affecting the Group s financial condition and results of operations Provisions for impairment ), the verification period was extended to one day to disburse a scoring loan. These loans are unsecured. The loan amounts range from RUB 20,000 to RUB 100,000 in Moscow or RUB 70,000 in other regions, and can be extended for a term of up to 24 months. As at 31 December 2009, the amount of the Group s scoring loan portfolio was RUB 1.2 billion, which constituted 1.4 per cent. of the Group s gross retail loan portfolio. As at 31 December 2008, the amount of the Group s scoring loan portfolio was RUB 3.4 billion compared to RUB 4.2 billion as at 31 December Bank card overdrafts. Overdrafts are available to holders of salary cards and to holders of Muscovite Social Cards and cards issued under payroll direct deposit plans. These overdrafts are unsecured. An overdraft may not exceed 50 per cent. (to holders of salary cards) or 98 per cent. (to holders of Muscovite Social Cards) of the average monthly income amount deposited during the three most recent months. The uninterrupted debt period for overdrafts is 65 days to holders of salary cards and 80 days to holders of Muscovite Social Cards. The term of contract is equal to the effective period of the relevant card. Credit cards. The Group introduced credit card loans in Similar to express (scoring) loans and overdrafts, these loans are unsecured. The loan amounts range from RUB 20,000 to RUB 350,000 (or its equivalent in US Dollars or Euros) depending on the type of credit card. The credit limit of a credit card may not exceed 300 per cent. of the average monthly disposable income of the cardholder. A grace period of 50 days is established for all holders of credit cards. As at 31 December 2009, the amount of the Group s credit card loan portfolio was RUB 5.9 billion, which constituted 6.6 per cent. of the Group s gross retail loan portfolio. As at 31 December 2008, the amount of the Group s credit card loan portfolio was RUB 5.8 billion compared to RUB 3.6 billion as at 31 December In the context of the global economic crisis, since 2008 the Group has introduced a system of centralised underwriting in respect of consumer loans, express (scoring) loans and, in Moscow and the Moscow region, in respect of credit cards. 109

126 With demand for retail lending products starting to develop again, the Group is reviewing its lending policies to take account of the profiling experience it has acquired during the financial crisis, factoring in increased yield to cover the higher risk of lending in this sector at the present time. Retail deposits The Group offers a variety of interest-bearing bank accounts designed for different categories of retail customers, including high income earners, working individuals and pensioners. The Group s deposit accounts include current and term accounts and are denominated in Russian Roubles, U.S. Dollars and Euros. Account terms vary from demand deposits to term deposits of up to three years, which may be extended, once or multiple times, depending on the type of account. The Bank believes that it is wellpositioned in the retail deposit market. According to Kommersant Dengi magazine, as at 1 January 2010, the Group was the third largest bank in the Russian Federation after Sberbank and VTB Group in terms of the volume of deposits from retail clients. As at 31 December 2009, the Group had RUB billion in retail deposits (representing 41.5 per cent. of overall deposits), including RUB 33.3 billion (representing 7.8 per cent. of customer accounts) in demand deposits and RUB billion (representing 33.7 per cent. of customer accounts) in term deposits. As at 31 December 2008, the Group had RUB billion in retail deposits (representing 37.2 per cent. of customer accounts), including RUB 29.8 billion in demand deposits (representing 7.3 per cent. of customer accounts) and RUB billion in term deposits (representing 29.9 per cent. of customer accounts). As at 31 December 2007, the Group had RUB billion in retail deposits (representing 36.1 per cent. of customer accounts), including RUB 27.5 billion (representing 7.8 per cent. of customer accounts) in demand deposits and RUB 99.1 billion (representing 28.3 per cent. of customer accounts) in term deposits. See Operating and Financial Review of the Group Liquidity and Capital Resources. The aggregate amount of deposits from retail clients constituted 24.0 per cent. of the Group s total liabilities as at 31 December 2009, compared with 20.6 per cent. as at 31 December 2008, and 26.4 per cent. as at 31 December As at 31 December 2009, 47.0 per cent. of the Group s total retail deposits was in Russian Roubles compared with 42.9 per cent. as at 31 December 2008 and 69.4 per cent. as at 31 December See Risk Factors Risks Related to the Group s Business and Industry A significant part of the Group s funding is based on deposits that can be withdrawn on demand and the Group has liquidity risks which may be further exacerbated by the current instability of the global and Russian economies and banking sectors. Banking cards The Group issues both debit and credit cards, including those with Chip-and-PIN technology, to its retail customers. The Bank is a member of VISA International, MasterCard Worldwide, the Russian payment system Union Card and a sub-licensee of Diner s Club International, and accordingly issues and services VISA, MasterCard, Union Card and Diner s Club International cards. The Group has its own processing centre which is certified by VISA and MasterCard. The Group also issues virtual cards known as VISA Virtuon designed for those customers of the Group who purchase goods and services via the Internet. For its wealthier customers, the Group also issues Visa Infinite cards, the most prestigious card available via the International Payment System, Visa International, with a minimum credit limit of USD 20,000. The number of plastic cards issued by the Group (including Muscovite Social Cards) as at 31 December 2009 was approximately 13.3 million, compared with approximately 11.0 million as at 31 December 2008, and 8.7 million as at 31 December The Group expects its business in this segment to continue to grow in line with the market. Through the Group s automatic teller machines ( ATMs ), it is possible for retail customers to make utilities payments and certain other payments, including payments for mobile communications services. In addition, the Group offers its customers direct debit services related to utility and other payments. In 2003, the Group launched payroll direct deposit/debit card projects and operates a large number of such projects for employees of its corporate clients. The Group has a network of commercial and servicing entities that have entered into card acquiring services agreements with the Group. These are agreements that the Group has 110

127 entered into with merchants (point-of-sale) to perform collection and settlement services in relation to payments made by plastic cards. As at 31 December 2009, the Group had 5,880 card acquiring services agreements, compared with 4,871 card acquiring services agreements as at 31 December The Bank has an exclusive agreement to issue Muscovite Social Cards in partnership with VISA International. The Muscovite Social Card is a Visa Electron integrated plastic card that is a combination of a bank debit card, an identification card, an insurance identification card and Moscow public transportation travel card. It is only available to persons who have opened a bank account with the Bank. The number of Muscovite Social Cards issued by the Bank has increased by 20.5 per cent. to 8.8 million as at 31 December 2009 from 7.3 million as at 31 December As at 31 December 2007, the Bank had issued 5.5 million Muscovite Social Cards compared with 4.5 million as at 31 December ATMs and Internet banking The Group seeks to provide its retail banking clients with easy access to their accounts. Retail customers can conduct their banking through the Group s branches, at ATMs, over the internet and through the Group s call centre. The Group is continuing to expand its ATM network and, as at 31 December 2009, it had 1,804 ATMs in operation (including 690 ATMs in Moscow and 1,114 ATMs in the regions), compared to 1,794 ATMs in operation (including 679 ATMs in Moscow and 1,115 ATMs in the regions) as at 31 December 2008 and 1,588 ATMs in operation (including 650 ATMs in Moscow and 938 ATMs in the regions) as at 31 December The Group continues to develop its internet banking services for those customers, particularly among younger customers who want the ability to utilise internet banking services and the Group currently offers these customers the ability to make online bill payments, access their account information and conduct certain banking operations online. The Group s call centre offers remote sales of the Group s products, cardholder services, consulting (advisory) services, and general information on the Group, including in respect of its services and products, its tariffs, its foreign exchange rates, the CBR s rates, and contact information. The call centre is open 24 hours per day and operates seven days a week. During the year ended 31 December 2009, the call centre received in excess of 2,488 thousand telephone and internet enquiries and made approximately 963 thousand sales calls. Private Banking The Group offers its products and services to high net worth retail customers on a Private Client basis. The Group currently offers three tiers of individual asset management services for wealthy clients and high net worth individuals: Privilege, which is for clients depositing at least USD 1,000,000 in assets with the Group; Private, which is for clients depositing at least USD 200,000 in assets with the Group; and Premium, which is for clients depositing at least USD 50,000 in assets with the Group. These services offer tailored asset management products, different fee scales and varying ranges of customer benefits. While private banking is an emerging segment in the Russian Federation, the Bank believes this business area has good growth potential and expects to continue to diversify and increase the amount of assets under the Group s management. The Bank believes that retail deposits held via private banking products generally represent a stable and reliable source of funding and income for the Group. As at 31 December 2009, the total amount of private assets held in trust by the Group was RUB 60.6 billion as compared to RUB 51.8 billion and RUB 37.3 billion as at 31 December 2008 and 2007, respectively. Asset Management Since 2003, the Group has developed its asset management business in three key areas: individual asset management for high net worth clients, mutual fund management and pension fund management (in association with its strategic partner, OOO Pension Reserve ). When the Group began providing asset 111

128 management services in early 2003, the asset management business in the Russian Federation was underdeveloped. As at 31 December 2009, the Group had a total asset management portfolio of RUB 15.9 billion, compared to RUB 13.3 billion as at 31 December 2008, and RUB 16.9 billion as at 31 December The increase in the Group s total asset management portfolio between 31 December 2008 and 30 September 2009 resulted primarily from the growth in the Russian stock market which began in the second quarter of The Bank believes that, while the market for asset management services is growing following a steep decline during the height of the global economic crisis, such market has not yet achieved the levels of its pre-crisis height. Strategic asset management decisions are taken by the Bank s Investment Committee, which consists of representatives from the Management Board, the Treasury Department, the Asset Management Department and the Internal Audit Department. The Group s major competitors in the personal banking market are Alfa Bank, Troika Dialog, UralSib, Raiffeisen Capital, Capital Group and UFG Invest. Individual Asset Management The Group offers individual (portfolio) asset management products to high net worth customers depositing at least USD 100,000 in assets with the Group. The Group invests customers funds in the securities market. The Group offers asset management services on the basis of a professional securities market participant s licence for portfolio management operations issued by the FSFM. The Group invests its customers funds in various financial instruments on the stock market and in other segments of the financial markets (state treasury bills, federal loan bonds, shares, Russian Eurobonds, municipal bonds, corporate bonds, etc.). Customers choose any of the strategies offered by the Group or they can opt to develop an individual strategy for investing their capital with a personal manager. The Group offers the following special investment strategies, which permit customers to choose the most suitable risk/profit balance depending on the amount of investment and the customer s appetite for risk. The following basic investment strategies are targeted at investors with assets of at least USD 100,000 or more, and over investment terms starting with a minimum of six months. Key investment areas are shares and bonds of Russian issuers: Conservative strategy. Funds are mostly invested in fixed-income low-risk high-quality instruments. The basis of the investment portfolio is municipal and corporate bonds. Balanced strategy. Medium risk strategy where funds are invested in both fixed-income instruments and equities. Equities may not exceed 50 per cent. of the assets under management. Aggressive strategy. Higher risk strategy where funds are invested in equities and the aim is to beat average stock market returns. Investments may be made both in blue chip companies and in higher risk companies. The following special investment strategies are targeted at investors with assets in excess of USD 200,000: Small Cap strategy. High risk strategy providing for investment in shares of smaller companies (capitalisation under USD 500 million), concentrating on fast growing companies operating in promising areas, given the potentially lower liquidity of such assets. The minimum investment is USD 200,000. Investment in high-yield bonds. Medium risk strategy (lower market risk but higher credit risk) providing for investment in high yield corporate bonds. The minimum investment is USD 200,000. Maintenance of capital strategy. This is targeted at conservative long-term investors and the initial value of invested funds is guaranteed. Funds are mostly invested in low-risk bonds (such as federal loan bonds, and bonds of state companies such as Gazprom, AHML and Russian Railways). A small element of the funds is invested in high yield instruments such as equities, the return on which will determine the total return on the portfolio. If the equity positions are not successful, customers will not achieve any return but will also be protected from any loss. The minimum investment is USD 200,000 and the recommended minimum term is between two and five years. 112

129 Mutual Fund Management The Group s mutual fund activities are undertaken via its 100 per cent. subsidiary ZAO Asset Management Company of Bank of Moscow ( BMMC ). According to Cbonds.ru Ltd ( Cbonds ), as at 29 January 2010, BMMC ranked number four among management companies in Russia in terms of net funds under management. The Group expects investments in its mutual funds to continue to grow as it expands its regional sales network and utilises other marketing channels. As at 31 December 2009, the Group s asset management products consisted of 16 unit investment funds ( UIFs ) (including one UIF managed by OOO Pension Reserve ), the assets of which are primarily invested in various classes of equity and debt securities and deposits in the electricity and precious metal sectors. UIFs are a convenient investment vehicle for customers with minimal funds available for financial market investments. In April 2009, a new UIF was created, the assets of which are invested in precious metals, and was the first UIF of precious metals in Russia. This UIF provides investors wishing to invest in precious metals and alternatives to avoid the risks of investing in securities. The minimum investment for a customer is RUB 1, The asset management company of the Group offers its clients an opportunity to invest in interval UIFs and open-end UIFs. As at 31 December 2009, the Group s retail network for the sales of UIF units included 457 outlets in 169 Russian towns, and mutual funds managed by BMMC amounted to RUB 6.3 billion, compared to 441 outlets in 154 Russian towns and RUB 3.2 billion, respectively, as at 31 December 2008, 354 outlets in 95 Russian towns and RUB 11.2 billion, respectively, as at 31 December The Group provides various services to its mutual fund customers, including allowing payments for investment units to be made through the Group s ATM s and since December 2009, customers have been provided with SMS services. In March 2010 the Group introduced a service called the Personal Information Cabinet to allow customers to make on-line payments for investment units in mutual funds, access their accounts though the internet and monitor the performance of their mutual funds. Pension fund management The Group s pension fund activities are undertaken via OOO Pension Reserve (a management company of the Group). OOO Pension Reserve also manages pension funds under the Pension Reform of the Russian Federation. According to Investfunds rankings (a project supported by Cbonds, a Russian news agency), as at 31 December 2009, OOO Pension Reserve was the leading entity among the private management companies in Russia in terms of volume of pension funds held in trust. The volume of pension funds under management as at 31 December 2009 were RUB 2.3 billion, compared to RUB 1.4 billion as at 31 December 2008, and RUB 1.5 billion as at 31 December Other retail services The Group buys, sells and exchanges all major foreign currencies for retail customers. It also exchanges and purchases foreign payment instruments, sells American Express travellers cheques and cashes Visa, American Express, Thomas Cook, Citicorp and Euro-cheque travellers cheques. Retail customers may buy or sell coins or ingots made of precious metals and precious metals in physical or unallocated form. Retail customers may rent safe deposit boxes to store valuables. The Group s custody services to retail customers include providing securities accounts, known as depo accounts, securities custody operations, recording collateral operations with securities and coupon payments. As at 31 December 2009, the Group also offers foreign currency (US Dollar) and Rouble transfers over the Western Union system at 170 service outlets at certain branches of the Group, both in Moscow and within its regional network. Since 1997, the Group, in cooperation with the Moscow Central Post Office, has provided its customers with access to certain banking services on the premises of local post offices. As at 31 December 2009 and 31 December 2008, the Group provided such services through 474 and 471 local post offices in Moscow and the Moscow region respectively. The banking services offered by the Group through such locations include current and deposit accounts in Roubles, payment of pensions and allowances, remittances in Roubles, 113

130 acceptance of communal service payments, as well as cash payments from bank cards. The Group has no current plans to market its products to retail customers through points of sale in retail shops. Corporate Banking The Group s products and services to commercial and governmental entities include corporate lending, syndicated loan services, investment banking services, trade finance, foreign trade and exchange operations, guarantees and payment and account services. The Group is committed to increasing the range and volume of its services to commercial and governmental entities and developing long-term relationships with them. The Group strives to anticipate the needs of its clients and the new trends developing in the Russian banking sector. See Business Strategy. Customer Base The Group provides corporate banking products and services to a variety of commercial and governmental entities, including federal, regional and municipal authorities and entities partly- or wholly-owned by them. As at 1 May 2010, the Group had over 105,000 corporate and governmental clients. A number of the Group s customers are subject to the influence of the City of Moscow although they are not necessarily classified as related parties for IFRS purposes (see Risk Factors Risks Related to the Group s Business and Industry The Group may lose some or all of the City of Moscow s business and Related Party Transactions ). The Group s corporate customer base represents various sectors of the Russian economy, including manufacturing, construction, financial services, trade and fuel and energy. See Asset, Liability and Risk Management Client Concentration. The Group s corporate clients include JSC TATNEFT, JOINT STOCK COMPANY FAR-EASTERN GENERATING COMPANY, Open Joint Stock Company TNK-BP Holding, Open Joint Stock Company INTER RAO UES, JOINT STOCK COMPANY FAR-EASTERN ENERGY COMPANY, Oil Transporting Joint Stock Company Transneft, Open Joint Stock Company Siberian Coal Energy Company and MOSENERGO in the fuel and energy sectors, companies of Joint Stock Company Holding Company METALLOINVEST, Joint stock company LEBEDINSKY MINING AND PROCESSING PLANT, Joint stock company Oskol elektrometallurgical plant, Joint Stock Company Ural Steel, public stock company VSMPO-AVISMA Corporation, Open Joint Stock Company Chelyabinsk Tube Rolling Plant, OAO JOINT STOCK COMPANY TULACHEREMET and Mechel OAO in the metallurgical sector; OPEN JOINT STOCK COMPANY RESEARCH AND PRODUCTION CORPORATION URALVAGONZAVOD and Public Joint Stock Company Kazan Helicopters, ALROSA Company Limited one of the world s largest diamond producers, Joint Stock Company Russian Railways in the transportation sector; retail companies such as Metro Cash and Carry and X5 Retail Group N.V.; Open Joint Stock Company Insurance Group MSK in the insurance sector; Joint Stock Company SITRONICS in the telecommunications and IT sector; Troika Dialog and Moscow Interbank Currency Exchange in the financial sectors. The Group is also expanding its corporate loan portfolio to include clients in the chemical and petrochemical, machine building and metal working, food, ferrous and non-ferrous metallurgy, petroleum production, coal mining, light industry and communications sectors. The City of Moscow The City of Moscow is a significant client for the Group s corporate banking business. The budget funds accounted for 14.7 per cent., of the Group s total deposit portfolio or 8.5 per cent., of the Group s total liabilities as at 31 December 2009, compared with 22.6 per cent. or 12.5 per cent., respectively, as at 31 December 2008 and 26.2 per cent., of the Group s total deposit portfolio or 19.2 per cent. of the Group s total liabilities as at 31 December Loans to enterprises owned by the Government of the City of Moscow, accounted for 2.4 per cent. of the Group s gross loan portfolio as at 31 December 2009, compared with 1.4 per cent. as at 31 December 2008 and 1.2 per cent. as at 31 December See also Related Party Transactions and Risk Factors A significant portion of the Group s transactions is conducted with related parties. The Group has been involved in the financing of certain City of Moscow projects on a competitive tender basis since In addition, the Group finances, on commercial terms (usually backed by performance 114

131 guarantees), companies that carry out contractual work for the City of Moscow. The Group conducts business with the City of Moscow on an arm s length basis and on market terms. The Group has extended loans to major Moscow construction companies that operate in large Moscow development areas, including Butovo, Maryinsky Park and Kurkino. The Group s participation in financing residential property construction in Moscow since 2000 has facilitated the construction of over two million square metres of housing. The Group also lends funds to construction companies involved in social projects such as the construction of schools and hospitals. The construction of infrastructure projects, such as the Third Transportation Ring, Vnukovo airport, the Lefortovo Tunnels and several Moscow Metro stations, was financed by the Group. In cooperation with the City of Moscow, the Group also implements major social projects launched by the City of Moscow (for example, the Muscovite Social Card described under Banking cards above). As at the date of this Prospectus, the Group is involved in financing the construction of a road interchange modernisation of Leningradsky Prospect and Volokolamskoe Highway, construction of a part of the tunnels and overpasses on the Krasnopresnenskoye Highway (from Moscow Automobile Ring Road (MKAD) to the Marshall Zhukov Highway), the renewal of the national park-museum Tsaritsyno, the reconstruction of the Dmitrovskoye and Varshavskoye Highways and the reconstruction of networks and stations of the Moscow Underground system. The major borrowers for these projects include leading companies in the Moscow construction industry, such as NPO Kosmos, Mosinzhstroy and Moscow Metrostroy. The financing of municipal projects is conducted through short-term and medium-term lending, tenders and other guarantees granted to companies that carry out municipal contract work, letters of credit issued to customers and participation in investment projects. As at 31 December 2009, loan products given by the Group to finance municipal construction projects totalled RUB 62.6 billion compared with RUB 56.2 billion as at 31 December 2008 and RUB 34.7 billion as at 31 December In January 2007, the City of Moscow re-confirmed in writing its readiness to provide comprehensive assistance and support for the conclusion and subsequent performance of the agreements which the Group has entered into or may enter into in the future with foreign government and non-government institutions. The written confirmation is not legally binding on the City of Moscow and does not constitute a guarantee by the City of Moscow of the Bank s payment obligations in respect of loans granted to the Bank or otherwise. In addition, no funds are specifically reserved in the City of Moscow s municipal budget for the payment of any financial obligations of the City of Moscow arising out of this confirmation. See Risk Factors Risks Related to the Group s Business and Industry The City of Moscow may significantly influence the Group and take actions that conflict with the interests of Noteholders. Corporate lending The Group offers a wide range of lending products to corporate clients, including loans, credit lines, overdrafts and bank guarantees. As at 31 December 2009, 92.0 per cent. of the Group s gross loans to legal entities comprised loans to corporates and to governmental and municipal entities compared to 87.8 per cent. as at 31 December 2008, and 79.0 per cent. as at 31 December As at 31 December 2009, 7.8 per cent. of the Group s gross loans to legal entities comprised loans to SMEs, compared to 11.2 per cent. and 15.0 per cent. as at 31 December 2008 and 31 December 2007, respectively. Loan terms vary depending on each particular client s needs and risk limits. All corporate loans are evaluated and extended based on standard credit risk evaluation procedures and are approved by the Group s internal credit committees. Moreover, the power to additionally approve lending pre-decisions made by internal credit committees in respect of loans to SMEs is granted to a number of authorised officers of the Group. See Lending Policies and Procedures Collateral. As at 31 December 2009, the gross loans to legal entities of the Group had increased by 17.6 per cent. to RUB billion from RUB billion, as at 31 December 2008 and RUB billion as at 31 December As at 31 December 2009, 30.5 per cent. of the Group s gross loans to legal entities had a maturity profile of less than six months and 75.4 per cent. was due within one year, compared with 27.5 per cent. and 65.5 per cent., as at 31 December 2008, and 28.2 per cent. and 50.2 per cent. as at 31 December Lending is 115

132 predominantly Rouble-denominated: 68.3 per cent. of the Group s gross loans to legal entities was Roubledenominated as at 31 December 2009, compared with 65.3 per cent. of the Group s gross loans to legal entities as at 31 December 2008 and 70.4 per cent. as at 31 December Loans denominated in foreign currencies are generally extended to corporate clients with revenues denominated in foreign currencies. The SME sector is considered by the Group to be an increasingly important business sector and the Bank intends to focus on expanding its SME loan portfolio in the short to medium-term, especially in the Russian regions (see Business Strategy Attracting additional corporate business ). In 2006, the Group launched a range of loan products targeted specifically at SME borrowers, which it has continued to develop and refine. As at 31 December 2009, loans outstanding to SMEs represented 7.8 per cent. of the Group s gross loans to legal entities, compared with 11.2 per cent. as at 31 December 2008 and 15.0 per cent. as at 31 December 2007 respectively. As at 31 December 2009, the ten largest corporate borrowers accounted for 19.1 per cent. of the Group s total loans to customers, compared with 14.4 per cent. as at 31 December 2008 and 12.6 per cent. as at 31 December 2007, respectively. As at 31 December 2009, eight corporate borrowers each held loans with a value in excess of 10 per cent. of the Group s total equity (aggregate value of RUB 96,542.9 million), compared with seven borrowers who held loans with a value in excess of 10 per cent. of the Group s capital (aggregate value of RUB 65,170.3 million) as at 31 December The Group lends to organisations across a variety of industries. The most significant increase in corporate lending between 2007 and the year ended 31 December 2009, was in lending to the financial services, manufacturing, construction, trade and metallurgy sectors. See Asset, Liability and Risk Management Loan Portfolio Client concentration, Banking Services and Activities Corporate Banking Customer base and Risk Factors Risks Related to the Group s Business and Industry The Group may lose some or all of the City of Moscow s business. Payment and account services The Group provides payment services to corporates and governmental entities through its branches and its correspondent banking network. Companies operating nationwide receive banking services through the Group s branch network. The amount held in the Group s current (demand) accounts by federal and regional budgets and funds, state-owned organisations and other legal entities decreased by 9.5 per cent. to RUB billion (26.7 per cent. of the Group s total deposits) as at 31 December 2009 compared to RUB billion (31.1 per cent. of the Group s total deposits) as at 31 December 2008 and RUB billion (39.8 per cent. of the Group s total deposits) as at 31 December As at 31 December 2009, 81.4 per cent. of the Group s current accounts of federal and regional budgets and funds, state-owned organisations and other legal entities (including City of Moscow budget funds) were in Russian Roubles and 18.6 per cent. in foreign currencies, compared with 86.9 per cent. and 13.1 per cent. as at 31 December 2008 and 88.0 per cent. and 12.0 per cent. as at 31 December The Group assists commercial and municipal entities with opening bank accounts and advises them on the use of various banking products in their business. See Risk Factors Risks Related to the Group s Business and Industry The Group may lose some or all of the City of Moscow s business. Trade finance The Bank s trade finance product range includes import financing (through issuance of letters of credit and payment guarantees and through the buyer s credit scheme offered by export credit agencies), pre-export and post-export financing, and various forms of guarantees and ancillary services. In the year ended 31 December 2009, the Bank s trade finance portfolio grew by 22.6 per cent. to RUB 65.7 billion from RUB 53.5 billion as at 31 December 2008 and RUB 46.2 billion as at 31 December As at 31 December 2009 guarantees accounted for 65 per cent. and letters of credit, 35 per cent. of the total trade finance portfolio, compared with 57 per cent. and 43 as at 31 December This growth in the share 116

133 of guarantees was primarily due to the increased use by the Bank s customers of advance payment guarantees, customs guarantees and guarantees in share purchase transactions. In the context of the global economic crisis and the acute lack of medium and long-term liquidity in the market, the Bank satisfied its customers demand for medium and long-term trade finance products by utilising its existing agreements with partner banks in relation to cooperation with and the participation of export credit agencies. In 2004, the Bank began to develop its trade financing infrastructure, focusing on the development of relationships with foreign and local banks. In addition to its existing agreements with major foreign banks and export credit agencies, such as HERMES (Germany), EGAP (State Insurance Corporation of the Czech Republic), MEHIB (Hungarian Export Development Corporation), EDC (Export-Development Corporation of Canada), Hungarian Export-Import Bank and Czech Export Bank, the Bank established new business relations with the US EXIM Bank, Swiss export credit agency ERG, Eximbanka Slovakia, the Export-Import Bank of India and IFTRIC from Israel. During 2008 and 2009, the Bank significantly expanded the geographical coverage of its trade finance business. The Bank has experienced a significant increase in the volume of letter of credit transactions with developing countries where the principal foreign trade partners of the Bank s customers are based, and the Bank continues to participate in inter-governmental commissions of the Russian Federation with China, India, Vietnam and other countries. In 2009 and 2010 the Bank was one of the leading Russian financial institutions in terms of servicing Russian foreign trade. As at 31 December 2009, Russian and CIS counterparties accounted for per cent. of the Group s total portfolio of trade finance instruments, European counterparties for per cent., and other counterparties for 0.63 per cent., respectively. The Bank continues to participate in the financing of import of capital goods from, inter alia, Germany, Finland, Italy and other European countries, China, and Canada. In particular, the Bank also continues to finance imports of machinery and equipment for urban development projects in Moscow and other Russian cities. The Bank demonstrates a successful track record in trade-related projects in the energy, timber, wood processing, construction, food, chemicals, pharmaceutical and transport sectors. The Bank also supports its corporate customers by issuing a wide range of guarantee products. The Bank has recently increased the proportion of its trade finance portfolio that consists of financings backed by export credit agencies and export-import banks. The Bank believes this is consistent with the requirements of its customers which are engaged in middle- and long-term projects in the Russian Federation and abroad. Securities trading and other services The Group offers its corporate clients brokerage services for transactions on all of the major Russian stock exchanges. Corporate clients may also invest in the Group s proprietary promissory notes. In addition to the investment banking services described below, the Group also engages in market-making, payment agency services and investment advisory and brokerage services in government, municipal and various corporate securities. The Group is active in the Russian secondary bond market. Operations with precious metals and coins The Group sells coins made of precious metals, and buys and sells precious metals in physical and bookentry forms. The Group actively trades gold and other precious metals. The Group purchases gold from a variety of counterparties and sells it on the Russian and foreign markets. Custody services The Group provides a wide range of custody services, including securities custody and accounting, securities transfers in depo accounts maintained by a depository, receipt and transfer of the coupon on securities and receipt from an issuer or registrar of information relating to securities that are held in a depo account, and prompt delivery thereof to a depositor. The Group services federal and municipal securities, corporate equity and debt securities and other securities, such as bills of exchange. 117

134 As at 31 December 2009 the Group maintained 1,771 depo accounts for resident clients (1,580 as at 31 December 2008), 106 accounts for non-resident customers (83 as at 31 December 2008) and 17 LORO accounts for other depositaries (11 as at 31 December 2008), and provided registrar services for 2,407 securities of 2,123 issuers (1,564 of 918 as at 31 December 2008). Investment banking The Bank offers a variety of investment banking services, including issues of bonds, underwriting, corporate finance and asset management in both the domestic and international capital markets and research in the local market. The Bank seeks to leverage its relationships with its large corporate clients to build up this part of its business. The Bank offers its clients a number of products, including but not limited to loan participation notes, Eurobonds, securitisations, and equity-linked instruments. For example, in May 2007, the Bank acted as a sole lead manager of the debut USD 100 million Credit- Linked Note issue of ZAO AKB Gazbank, which was the first bank in the Samara Region to access the international debt capital markets; in July 2007, the Bank acted as a sole lead arranger of a RUB 8.3 billion leasing payment securitisation for ZAO Business Alliance (leasing company of Joint-Stock Company Moscow United Electric Grid Company ) (the MOESK Transaction ); in November 2009, the Bank acted as sole lead arranger of a USD 230 million LPN issue for Joint Stock Company SITRONICS guaranteed by JSFC Sistema. In March 2010, the Bank was co-manager of a USD 350 million Eurobond issue for ALLIANCE OIL COMPANY LTD and in June 2010 the Bank acted as sole lead arranger of the USD 56 million loan participation note issue for VAO INTOURIST. In May 2008, the Bank won Euromoney magazine s award for Best Deal of the Year in recognition of its role as sole lead arranger for the MOESK Transaction, which was hailed as an innovative alternative to traditional securitisation structures. According to Cbonds, the Russian news agency: for the year ended 31 December 2009, the Bank ranked first in terms of the total volume and number of CLNs arranged for Russian issuers and 23rd by international capital markets issues among domestic and international banks for the corporate sector in the emerging markets (excluding the Middle East); and for the year ended 31 December 2007, the Bank was ranked second in terms of securitisations and Rouble-denominated Eurobonds among Russian and international bank arrangers. According to Cbonds, in terms of total volume of domestic corporate and municipal bonds arranged by Russian investment banks for Russian issuers: for the year ended 31 December 2009, the Bank ranked 14th, placing RUB 16.6 billion (14 issues) in bonds for eight issuers; for the year ended 31 December 2008, the Bank was ranked fifth, placing RUB 39.4 billion in bonds for nine issuers; for the year ended 31 December 2007, the Bank was ranked ninth, placing RUB 15,267 million in bonds for 13 issuers. Since 2000, the Bank has offered a wide range of services in connection with domestic bond issuances. Acting as a lead manager and underwriter, the Bank participated in the placement of RUB 120 billion in bonds issued by 48 issuers as at 31 December 2006, RUB billion in bonds issued by 34 issuers as at 31 December RUB 82.0 billion in bonds issued by 14 issuers as at 31 December 2008 and RUB 84.0 billion in bonds issued by 14 issuers as at 31 December For example, in February 2007, the Bank acted as a joint lead arranger of the bond offering of OAO SU- 155 in the amount of RUB 3 billion; in March 2007, the Bank acted as a joint lead arranger of the bond offering of OAO Moscow Region Investment and Trust Company in the amount of RUB 4 billion; in April 2007, the Bank acted as a joint lead arranger of the bond offering of the Moscow Region in the amount of 118

135 RUB 16 billion; in May 2007, the Bank acted as sole lead manager of the domestic bond offering of OJSC Avtovazbank in the amount of RUB 800 million; in July 2007, the Bank acted as co-lead manager of the domestic bond offering of Joint Stock Commercial Bank Spurt (Open Joint Stock Company) in the amount of RUB 1 billion; in August 2007, the Bank acted as lead manager of the domestic bond offering of OJSC Sibir Airlines in the amount of RUB 2.3 billion; in March 2008, the Bank acted as lead manager of the RUB 2 billion domestic bond offering of Closed Joint Stock Company Mikoyanovsky Meat Processing Plant ; in April 2008, the Bank acted as a joint lead arranger of the RUB 8 billion domestic bond offering of Open Joint Stock Company Chelyabinsk Tube Rolling Plant ; in May 2008, the Bank acted as lead manager of the RUB 800 million domestic bond offering of the Republic of Karelia; in July 2008, the Bank acted as lead manager of a RUB 6 billion domestic bond offering by OJSC Moscow United Energy Company ; in July 2008, the Bank acted as lead manager of a RUB 2.5 billion domestic bond offering by Limited Liability Company LECstroy in June 2008 and August 2008, the Bank acted as joint lead manager of two domestic bond offerings of the Moscow Region with a total value of RUB 19 billion. During the first half of 2009, the majority of primary placements of securities typically represented fullunderwritten issues by state-owned banks benefiting from support from the Russian Government. However, by the middle of 2009, the state of the domestic bond market started to change and issues of securities by other market participants resumed, aimed at a wider investor base. For the year ended 31 December 2009, the Bank arranged 14 local bond issues, including loan securities of the state mortgage agency, Open Joint Stock Company Chelyabinsk Tube Rolling Plant and four municipal borrowers. Two transactions in particular were highlights for the Bank: the issue by Magnitogorsky Mettallurgic Plant of RUB 5.0 billion debt securities, which was five-times oversubscribed, and by the Krasnoyarskiy region of RUB 10.2 billion debt securities, which was two-times oversubscribed. In April 2010, the Bank acted as lead manager of the domestic bond offering of Open Joint Stock Company Magnitogorsk Iron & Steel Works in the amount of RUB 8.0 billion; in May 2010, the Bank arranged the domestic bond issue of VAO INTOURIST in the amount of RUB 2.0 billion and the RUB 3.0 billion bond issue of Yaroslavl region. In June 2010, the Bank acted as the sole lead manager of the RUB 2.0 billion domestic bond issue of Joint Stock Company SITRONICS and the RUB 2.0 billion domestic bond offering of the Republic of Karelia. In August 2010, the Bank acted as lead manager of the RUB 5.0 billion domestic bond offering of Open Joint Stock Company Oil Company Alliance. Syndicated loans The Bank believes that there are substantial business opportunities in the syndicated loan sector in the Russian Federation. Notwithstanding the recent and ongoing uncertainty in the international capital markets, the Group has seen substantial demand for financing from Russian and foreign borrowers. In April 2008, the Bank also participated in a RUB 10.5 billion syndicated loan to OAO Mezhregionalnaya Raspredelitelnaya Setevaya Kompaniya Tsentra ( MRSK Tsentra ). In May 2008, the Bank, via its 100 per cent. owned Ukrainian subsidiary BM Bank LLC Ukraine, participated for the first time in a syndicated loan organised by the European Bank for Reconstruction and Development ( EBRD ), in this instance a USD 150 million syndicated loan granted to finance the construction of a new General Motors automobile-manufacturing plant in St. Petersburg. In October 2009 the Bank participated in a USD 1.5 billion pre-export syndicated loan for JSC TATNEFT as mandated lead arranger. In June 2010, the Bank was mandated lead arranger of a USD 2.0 billion pre-export syndicated loan for JSC TATNEFT. According to Cbonds, the Bank ranked first among Russian investment banks and 11th amongst international and domestic investment banks in terms of the total volume of domestic syndications in the year ended 31 December In addition to the investment banking activities described above, in 2008 and 2009 the Bank was actively involved in trading loans on the interbank market. International and Correspondent Banking The Bank has relationships with financial institutions both within the Russian Federation and abroad. The Bank sets up correspondent banking relationships by exchanging SWIFT authenticator keys, opening LORO and NOSTRO correspondent accounts and entering into various inter-bank agreements. As at 1 August 2010, 119

136 the Group had correspondent relationships with approximately 1,562 financial institutions in more than 105 countries around the world. The Bank believes that its position as one of the leading banks in the Russian banking system combined with the steady growth of its loan portfolio, stable capital position, case-by-case approach to structuring correspondent relationships and flexible fees policy make it an attractive partner for both Russian and foreign banks. The Bank contracted with 62 new correspondent banks during the year ended 31 December 2009, 90 and 95 correspondent banks during the years ended 31 December 2008 and 2007, respectively. The Group believes that the availability to it of credit facilities from foreign banks enables it to improve the financial terms of foreign trade transactions for its customers and offer them more efficient international payment instruments. LENDING POLICIES AND PROCEDURES One of the Group s fundamental operating policies is to have established parameters that aim to support the expansion of the Group s operations while preserving the quality of its loan portfolio. In structuring and implementing its lending policy, the Group is guided by the following rules: Diversification of lending across industry and economic sectors. The Group s main areas of focus are loans to customers in key sectors of the economy such as manufacturing, fuel and energy, metals, mining, trade and construction. See Operating and Financial Review of the Group Interest income from loans to customers ; Regional diversification. The Group aims to expand business operations in the Russian regions where existing branches of the Group are based; Creditworthiness of customers. While the Group prefers to limit its loan portfolio to high profile, reliable customers and focuses its analysis primarily on the creditworthiness of potential borrowers, it accepts that it will need to slightly relax its requirements to lend in the current environment in order to acquire a greater market share and in recognition of the consequences of the global economic crisis; and Quality of collateral to secure the loan. The Group seeks to protect its position through securing loans with collateral that has been carefully assessed for its value and enforceability. In particular, the Group is constantly re-evaluating the type of security to be taken in view of its practical experience of the value of such security. CBR guidelines The Bank is subject to strict guidelines for credit approval which are set by the CBR and designed to ensure both the good financial standing of Russian banks and due protection of their creditors. In particular, the Bank is required to maintain certain mandatory economic ratios represented by a set of limitations relating to the maximum amount of exposure in the credit portfolio, as well as a minimum capital adequacy and liquidity of the Bank. For example, one of these ratios limits the Bank s exposure to a single borrower or a group of related borrowers to 25 per cent. of the capital of the Bank. The Bank believes that its procedures for the approval and monitoring of loans and collateral currently comply with the CBR guidelines and are set out in a clearly defined credit policy. In common with all other Russian banks, the Bank reports to the CBR on a regular basis regarding its compliance with the CBR s mandatory economic ratios, and its compliance is monitored by the CBR. If the mandatory economic ratios are not met, the CBR has the power to impose sanctions on a bank for such noncompliance. Such sanctions could include a fine, placing the bank into temporary administration by the CBR or the revocation of its banking licence. Under Russian law, the CBR may appoint a temporary administrator for a term of up to six months if a bank has failed to comply with the CBR s orders to remedy breaches or if breaches by a bank have created an actual threat to the interests of its creditors (depositors). A bank s banking licence may be revoked after repeated imposition of sanctions on that bank during a calendar year. To date, the Bank has not breached any of the CBR s mandatory economic ratios and no 120

137 sanctions have been imposed on the Group by the CBR for breach of such ratios. See also Overview of the Banking Sector and Banking Regulation in the Russian Federation and Capital Adequacy. Credit procedures The Group applies a number of internal guidelines in its credit procedures, including various regulations applicable to certain departments and business lines. Depending on the terms of the proposed loan, the credit policy provides for approaches and procedures to be used by the Group when determining the level of interest rates, limits and tariffs applicable to particular clients. The risk management department ( RMD ) carries out an independent expert evaluation of each large scale or non-standard credit facility. Standard loans that the Group has identified as involving minimum risks are issued in accordance with a strictly regulated automated procedure that does not require the direct involvement of the RMD. The authority to make independent lending decisions lies primarily with the credit committee of the head office (the Credit Committee ), the small credit committee of the head office (the Small Credit Committee ) and the mortgage committee of the head office (the Mortgage Committee ). The Credit Committee and the Small Credit Committee consist of members from the Management Board, as well as representatives from various departments of the Group, and each committee meets, generally, once a week. Any proposed loan exceeding RUB 150 million (or RUB 300 million for loans with a minimum of 100 per cent. high-quality collateral (which includes promissory notes, certificates of deposit issued by the Group and deposits with the Group)) is subject to approval by the Credit Committee. Typically, 12 people sit on the Small Credit Committee while the Credit Committee has 14 members and the Mortgage Committee has 6 members. The Mortgage Committee has responsibility for approving mortgage loans with values of between RUB 6 million and RUB 40 million, and is headed by the Deputy Director of the Market, Operational and Retail Risks Department. Apart from the committees described above, the power to make independent lending decisions is granted to the President of the Bank, a number of other authorised officers in the Bank s head office and to individual credit committees at branch and office level. Each individual credit committee consists of the director of the branch, the heads of the departments or divisions responsible for lending, securities, funding, accounting, legal and security matters, as well as an independent risk manager who holds a power of veto in respect of credit decisions. The procedures for setting, using and monitoring the application of the limits by the branches and offices are prescribed by internal regulations of the Group and are monitored and controlled by the RMD. The Bank believes that all its branches and offices currently comply with the requirements of the CBR. In addition to the Group s internal regulations, the Group has developed an internal system of limits applicable to credit transactions which sets forth the maximum credit limit that can be extended to a client or group of related clients by a branch or office without authorisation from the head office. This limit is determined by a set of formal parameters reflecting the expertise of each branch or office and the track record of its lending business. The track record is assessed based on factors including the repayment record of the loan portfolio, the volume of the loan portfolio and the volume of overdue loans. The regulation also lists transactions that the branch is not allowed to execute independently (for example, granting loans to a customer with an existing overdue liability). When a loan proposal exceeds the authority of a particular department or office, it is referred to the head office of the Bank. All loans are evaluated and extended based on standard credit risk evaluation procedures. As a result of the global economic crisis, in 2009 certain decision-making capabilities that were previously vested in each branch office have been centralised with credit committees or the Bank s head office, for example with respect to express (scoring) loans, consumer loans and (in Moscow and the Moscow region) credit cards, and the centralisation of the Bank s underwriting process for SME loans. This transfer reflects the Group s attempts to counterbalance the higher incidences of fraud and default in the context of the global economic crisis. Also, the Group has decreased the maximum credit limit that can be extended to a client or group of related clients by a branch or office without authorisation from the head offices. Further, the lending decision centre for loans to SMEs has been centralized at the Bank s head office to help achieve a higher quality of loan application assessment and subsequent loan portfolio. The Group has introduced a system of centralised underwriting in respect of consumer loans, express (scoring) loans and, in Moscow and the Moscow region, in respect of credit cards. 121

138 Corporate loans The Group s lending policies for commercial and municipal entities focus on the improvement of the credit quality and income level of its loan portfolio and minimisation and diversification of credit risks. The Group has developed specific loan application management processes for reviewing an application, conducting initial negotiations with the potential borrower and monitoring the loan s performance and timely repayment. The credit transaction review process has a number of stages. Initially, the Group reviews non-financial information on the potential borrower. These procedures include an analysis of the applicant s incorporation documents, management quality, reputation, organisational structure and credit history. This information is obtained from a number of sources, including the Group s Corporate Interests Protection Service. The following stage is to assess the general business environment in the sector to which the applicant belongs. All such information collected on the borrower, including its financial status, is summarised by software developed by the Group and is analysed in accordance with the Group s existing risk evaluation methods and an internal rating is assigned to such loan. The materials are then submitted to the credit committee of the branch or department, which decides either to grant or to deny the loan. In the event a loan exceeds in any respect the authority granted to such branch or department, the documents related to such loan are submitted to the Credit Committee or Small Credit Committee. On 5 December 2009, the Group introduced stricter requirements in respect of borrowers who have a high level of indebtedness. Public borrowings, leasing payments and bonds with put options have been added to the list of payment obligations which are used to determine a level of indebtedness in order to establish risk limits. On 6 July 2010, the Group relaxed some anti-crisis restrictions that it had introduced in 2009, it broadened the range of industry sectors to which it extended corporate overdrafts and reduced the discount applied to collateral. In relation to each loan submitted to the Credit Committee, the Bank s head office makes an assessment of the borrower while the RMD carries out an independent expert evaluation of the proposed loan and all related risks using internal methods and borrower exposure assessment technologies developed by the Group, which take into account various information on the borrower and the proposed loan. Special attention is given to the borrower s affiliates and group risks. The Group conducts an assessment of financial forecasts of the potential borrower s performance over the credit period to assess whether the loan is serviceable and recoverable. Based on the credit risk monitoring methodologies developed by the Group in consultation with specialist external advisors, the credit officers decide which credit risk group the borrower falls into and set specific risk limits for the borrower. These risk assessment methodologies are based on the financial standing of the borrower, maturity of the credit product, collateral offered for the credit product, size and frequency of cash inflow in the borrower s bank account, history of the Group s relationship with the borrower, external factors affecting the borrower (such as economic and political factors) and internal factors affecting the borrower (such as ownership structure, management, transparency and production capacity). The maximum amount of the loan is calculated based on the forecasted cash flow generated by the potential borrower. The forecasted cash flow is calculated based on the financial statements of the borrower for the four most recent quarterly accounting periods. The resulting value is adjusted by a number of specific factors. These factors take into account the probability of the forecasted value and depend on: the ratio of the net profit divided by the forecasted cash flow of the potential borrower; for borrowers other than trading companies, the liquidity ratio (liquid assets divided by current liabilities) of the potential borrower; for trading companies, turnover of goods; and the industry sector. The final maximum amount of the loan is the difference between the values calculated on the basis of the forecasted cash flow and the sum of amounts that are repayable during the term of the loan under consideration. Loans to borrowers related to or affiliated with the Group may not exceed the total limit of credit risk for related borrowers as a group. 122

139 Retail loans All loans to retail customers are extended on a repayment basis for a set period of time. Loans to retail customers, other than credit cards, express (scoring) loans and consumer loans (which are all not secured) are approved only on a secured basis and for a specific purpose. With the exception of mortgage loans issued by the Group which may be extended for a period of up to thirty years, the Group s portfolio of retail loans consists primarily of short-term loans (maturing within 1.5 years) and medium-term loans (with maturities of between 1.5 year and seven years). Retail loans are extended both at the Bank s local offices or regional branches. In the context of the economic downturn since 2008, the Bank has introduced a system of centralised underwriting. As at the date of this Prospectus, the introduction of centralised underwriting has been completed in respect of express loans (May 2009), consumer loans (September 2009) and credit cards (April 2010). Specific rules regulate the analysis of the borrower s creditworthiness, the extension of credit and the management of the loan during its lifetime. The exact underwriting procedures depend on the particular type of retail loan product. As a general rule, the borrower s creditworthiness is established on the basis of an employer s certificate indicating the borrower s gross income during the previous six months and is calculated based on a formula, which takes into account the borrower s net average monthly income (less appropriate deductions). Once the borrower s creditworthiness has been established, the Group calculates the maximum amount which it is prepared to lend. The interest on the loan is accrued on a daily basis and is paid on a monthly basis. Currently, all retail loan applications, irrespective of amount, are verified in a specialised verification department. The verification procedure provides for the confirmation of all information and data provided by potential borrowers, with special attention given to a borrower s place of work and an official confirmation of a borrower s income. Depending on the particular type of retail loan product the borrower is seeking, the lending decision will rest with one of the following: in respect of express loans, consumer loans and credit cards, the lending decisions are made by the Underwriting service of the head office; in respect of mortgage loans, the lending decisions are made by the Underwriting service of the head office; and in respect of credit cards and car loans, the lending decisions are made by authorised officers at an office or branch level based on the delegated lending powers. Monitoring of the limits established for each authorised officer is exercised by the RMD, the Retail Banking Department and the Audit Department. The introduction of the centralised lending decision system described above is designed to mitigate defaults under loans extended by the Group and reduce operational risks. The introduction of centralised underwriting in respect of express loans was completed in May 2009, in respect of consumer loans, in September 2009, and in respect of credit cards in April Based on this positive experience the Group is considering applying this approach in other lending programmes, such as car loans and, in the corporate segment, to SME lending. To reduce credit risk, the Group encourages customers applying for consumer loans to provide third parties sureties by offering a lower interest rate should a potential borrower provide sureties of creditworthy guarantors. Collateral A fundamental principle of the Group s lending business is that the Group s interests are protected by requiring the borrower to provide adequate collateral to secure the performance of its obligations. Other than express (scoring) loans, overdrafts, consumer loans and credit card products, which are unsecured loan products, the Group only extends unsecured loans in exceptional circumstances and where approved by the President or the Credit Committee. The Group has a Collateral Management Division ( CMD ) which is responsible for valuing and monitoring collateral. The CMD assesses both the value and enforceability of the 123

140 collateral. The Group s credit policy contains a description of preferred and unacceptable types of collateral and sets out criteria for determining the value of the proposed collateral. The principal stages of the Group s collateral management process are the following: preliminary examination and appraisal of property offered as collateral; execution of a collateral agreement, insuring the collateral and compiling the collateral file; monitoring collateral assets; and termination and possible liquidation/forfeiture of collateral. The CBR does not regulate the type of collateral required, although the amount of provisioning under CBR guidelines depends in part on the collateral received. The frequency of a collateral review will depend on the type of collateral taken. Collateral with a market quotation, such as securities, is monitored on a daily basis. All other collateral is generally reviewed either on a ten-day, monthly or quarterly basis. The frequency of a collateral review depends on the type of collateral taken and risks associated with such collateral. For example, real estate and immovable equipment is reviewed at least on a quarterly basis, and goods, cars, rolling stock and movable equipment are reviewed at least on a monthly basis given the higher risks of theft or damage associated with such assets. The Group s monitoring practices include verification of the physical presence and state of the collateral, control over the collateral value and confirmation of the property rights of the pledgor over the assets. The Group can usually foreclose on and then dispose of liquid collateral, such as shares, promissory notes and bonds, within a few days but it may require up to 180 days to foreclose on, and then sell, other types of collateral. The enforcement of certain collateral, such as state owned property, may require a longer period of time. Under Russian law, foreclosure generally requires a court order and a public sale of the collateral. A court may delay such public sale for a period of up to a year upon a pledgor s application. In addition, 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. See Risk Factors Risks Related to the Bank s Business and Industry A decline in the value or illiquidity of the collateral securing the Group s loans may materially adversely affect the Group s loan portfolio and it may be difficult for the Group to enforce collateral or other security under Russian law. Retail and corporate loans are extended against the following types of collateral: mortgages and pledges of assets, including real estate, goods and inventory (applicable to corporate and SME loans), stocks, bills, certificates, bonds, governmental and other securities trading at stable prices; unconditional and irrevocable payment guarantees issued by reputable foreign banks and reliable Russian banks; sureties and commitments issued by solvent commercial and governmental entities possessing funds or reliable sources of funds which are sufficient to meet loan repayment and interest payment obligations; pledges of the right to claim under investment contracts (for example, pledges of rights to apartments in buildings under construction); individual guarantees; pledges of rights (claims) to monetary funds maintained on deposit with the Group; insurance of business risk; and other forms of security. An opinion on such collateral is usually prepared by the CMD. Where an independent appraisal of the market value of the collateral is required by law or agreed between the Group and the pledgor, a third party appraiser 124

141 will be engaged. Irrespective of whether a third party appraiser is engaged or not, the Group always produces its own collateral opinion. As at 31 December 2009, the Group had RUB 1,074.2 billion of collateral security over net loans to customers of RUB billion, compared to RUB billion over RUB billion, RUB billion over RUB billion, as at 31 December 2008, and 31 December 2007, respectively. This made the Group s net loan portfolio 2.0 times over-collateralised as at 31 December 2009 (compared to 1.9 times as at 31 December 2008 and 1.8 times as at 31 December 2007). The breakdown of such collateral as at 31 December 2009 is as follows: 51.8 per cent. guarantees and securities, 37.6 per cent. property and 10.6 per cent. securities (37 per cent., 55 per cent. and 8 per cent., respectively, as at 31 December 2008, and 38 per cent., 52 per cent. and 10 per cent., respectively, as at 31 December In November 2008 the Group increased the discounts applied to the market value of certain types of collateral. Discounts are determined on the basis of various factors which can potentially influence the disposal of collateral, with the aim of discharging the payment obligations of a pledgor towards the Group, including the probability of a decrease in the market value of the collateral, expenses that may be incurred in connection with the disposal process, and fines and penalties. In September 2009 the discounts were decreased to pre-global economic crisis levels. In addition, the Group s requirements in relation to the quality and the amount of collateral have been tightened (illiquid and matured property has been excluded from the list of eligible collateral). Real estate and equipment are considered by the Group to be the most preferred types of collateral. In June 2010, the Group introduced a collateral assessment system for the SME sector, based on an internal rating system to allow it to centralise the underwriting of its SME loan products by the end of The following table shows the percentage of collateral held by the Group which consists of property, guarantees and sureties and securities as at the dates set out therein: 31 December % % % Property Guarantees and sureties Securities Total TAXATION The Bank is subject to nine types of taxes either as a taxpayer or a tax agent on behalf of its clients (income tax (profit tax), VAT, tax on the profit received by companies from foreign companies income nonconnected to any business activity in the Russian Federation, tax on the profit of Russian companies received by Russian companies from income in the form of dividends, tax on the profit of Russian companies received by foreign companies from income in the form of dividends, tax on the profit of companies received from income in the form of interest on non-governmental and municipal securities, tax on the assets of companies (corporate property tax), transport tax imposed on companies, and land tax). The Bank believes it currently performs its tax obligations in compliance with applicable legislation. In 2007, the Group was audited by the tax authorities for the years 2004 and As a result, the tax authorities claimed RUB million of unpaid taxes and penalties. The Group has successfully challenged almost all of these claims in court. For further details, see Litigation. In 2009 the Bank was audited by the tax authorities for the years 2006, 2007 and As a result, the tax authorities claimed RUB 13.3 million of unpaid taxes and penalties, which the Bank paid. There are currently no audits underway or requests for future audits of the Group by the tax authorities, and no material disputes or controversies with the tax authorities that may have material adverse effect on the Group s business. INFORMATION TECHNOLOGY The Bank s policies with respect to information technology ( IT ) are targeted at the development and application of advanced banking technologies in order to provide its customers with access to an integrated and modern package of banking services. Decisions on technology policy and the Group s IT requirements 125

142 are made by the Technology Committee. The Technology Committee has 16 voting members representing the Bank s front- and back offices and five non-voting members representing the IT department, and is chaired by a member of the Management Board appointed by the President. The IT department has several sub-divisions, including a technical support centre, an IT systems engineering department, a service centre, a department responsible for infrastructure development and a control centre. The Bank is constantly seeking to improve and refine the unified information and technological environment that connects the Bank s head office, divisions, branches, subsidiaries and customers of the Bank, and the Bank is seeking to implement global best practices regarding the development of software and technology. For example, the Bank s system of IT security has been constructed in accordance with the requirements of the CBR, ISO and the provisions of the Basel Accord prepared by the Basel Committee on Banking Supervision. The Bank s computer systems are upgraded and replaced regularly, and are based on an automatic banking system ( ABC ) which is an in-house development of an Oracle platform and uses equipment sourced from leading world manufacturers such as IBM, Hewlett Packard and Cisco Systems. The ABC has been in place for more than 10 years and it is regularly modified to take account of developments in banking processes. The Bank also makes use of other IT solutions such as Hyperion, Reuters and OpenWay. The Bank installed its first IBM server in April 2003 and subsequently upgraded its IT system by installing a second IBM server in December The servers are linked to the Bank s branches and regional systems, and the Bank has its own fibre-optic network in Moscow. This IT platform is also utilised to help facilitate the expansion of the Bank s internet banking services. In 2005, the Group introduced a system for the receipt and processing of payments for utility services on the basis of Oracle Real Application Clusters. This information system services the clearing centre that distributes payments for housing and utility services in Moscow. An audit regarding compliance to the requirements of standard PCI DSS is held on a regular basis. The Group also uses standard banking programs and solutions in its retail, treasury and banking cards operations. In the year ended 31 December 2009, the Bank spent RUB billion on the development and maintenance of its IT systems and the Bank s total capital expenditure on IT during the year ended 31 December 2008 was RUB million and RUB 1,085 million during the year ended 31 December The Bank s investment in IT is expected to increase proportionally to the expansion of the Bank s business. The Bank has also established a remote Reserve Business Centre ( RBC ) and Reserve Data Centre ( RDC ) to ensure the safe and continuous operation of the Bank s information systems. The RBC and RDC are connected with the Bank by two different fibre-optic cables owned by the Bank. They contain all of the facilities needed to run the essential business functions of the Bank and replicate the basic information systems of the Bank, including services, printing services and file services. The RBC and RDC are equipped with a two-level system of diesel generators to provide an uninterrupted power supply and can be activated at any time with a delay of less than one hour. Test switches between the Bank s head office and the RBC, as well as training of technical personnel, are performed on a daily basis to try to ensure efficient continuity of business. In 2006, the Bank installed new IBM servers in the RBC and in 2008 installed an HP XP12000 Storage system. The RBC and RDC are protected by Lampertz technology that significantly increases the safety and security of the Bank s IT-system. The Bank also owns a Reserve Telecommunications Centre (the RTC ), which ensures permanent connection between the Bank s offices. The RTC is independently linked to all telecommunication operators working with the Bank. In 2008 the Bank s telecommunications network started to use up-to-date protocols, namely, MPLS in Moscow and IP-VPN in the other regions, which allowed the Bank to substantially upgrade its controls, reliability and network capacity and to decrease its cost of ownership. In 2009 compensatory measures against DDOS-attacks were taken, and AVAYA Contact-Center came into service, which allowed the Bank to substantially increase the quality of its services provided to clients and to develop the system of remote sales and work with overdue indebtedness. In 2009 centralised system of back up was adopted on the basis of tape library IBM. In 2009 industrial methods of software technology on the basis of technologies IBM Rational were implemented in accordance with recommendations of an ITaudit conducted by Deloitte, IBM and KPMG. 126

143 At the end of 2009, the Bank finalised the introduction of a new ALM (Asset Liability Management) system called Kamakura Risk Manager calculating and analysing interest rate risk on the basis of global best practices, Monte Carlo simulation methodologies, non-parallel shift simulation and stress testing. EMPLOYEES As at 31 December 2009 the Bank had 7,943 employees, compared to 8,918 employees as at 31 December 2008 and 9,523 employees as at 31 December As at 31 December 2009, 3,448 employees worked in Moscow and the Moscow region (compared to 3,724 employees as at 31 December 2008 and 3,883 employees as at 31 December 2007 and 4,495 employees worked in other regions of the Russian Federation (compared to 5,194 as at 31 December 2008 and 5,639 as at 31 December 2007). The total number of the Bank s employees decreased by 10.9 per cent. in the year ended 31 December 2009 and by 6.3 per cent. in the year ended 31 December 2008 and increased by 21.5 per cent. in the year ended 31 December Personnel turnover rate was 34.3 per cent. in the year ended 31 December 2009, 52.7 per cent. in 2008 and 63.7 per cent. in In August 2008, the Bank implemented an efficiency drive, which involved cutting the number of personnel employed by its retail banking business in regional branches. This included an employee redundancy programme, as a result of which the total number of employees of the Bank fell by approximately 16.6 per cent. between 31 December 2007 and 31 December The Russian market for qualified financial institution personnel, especially for junior and middle management, is highly competitive. The Bank has established a system for selecting and employing highly qualified graduates from the leading Russian schools and universities. Notwithstanding the reduction in the number of the Bank s total employees during the period 31 December 2007 to 31 December 2009, the Bank still seeks to recruit experienced managers and specialists from other financial institutions, with an emphasis on sales managers experienced in working with companies, service managers, experts in marketing and banking technologies and tax and financial advisors. See Risk Factors Risks Related to the Bank s Business and Industry The Group depends on its senior management and key personnel and it may have difficulty attracting and retaining qualified professionals. The Bank believes that its salary structure and benefits package are commensurate with that of other leading Russian banks. The Group has also developed a system of performance-based financial rewards. The Group s staff costs were RUB 7.4 billion for the year ended 31 December 2009 and accounted for 51.9 per cent. of the Group s total general and administrative expenses, compared with RUB 7.9 billion (53.0 per cent.) and RUB 6.4 billion (55.7 per cent.) for the years ended 31 December 2008 and 31 December 2007, respectively. See Operating and Financial Review of the Group General and Administrative Expenses. The Group has never experienced any strikes, work stoppages, significant labour disputes or actions that have affected the operation of its business and the Group considers its relationship with its employees to be good. The Group s personnel have not established any trade unions or entered into any collective bargaining agreements. LITIGATION On 7 July 2010 CJSC Oktaedr ( Oktaedr ), a creditor of one of the Bank s clients, OJSC Mosobltrastinvest ( Mosobltrastinvest ), filed a claim against Mosobltrastinvest, the Moscow regional government and the Bank as co-defendants. Oktaedr sought to invalidate a guarantee (the Guarantee ) issued by the Moscow regional government in December 2008 in favour of the Bank to secure the obligations of Mosobltrastinvest under a loan agreement between Mosobltrastinvest and the Bank. Oktaedr claims that the Guarantee was issued in breach of the budget code of the Russian Federation and the civil code of the Russian Federation. The Bank successfully claimed approximately USD 56.0 million under the Guarantee after insolvency proceedings were initiated against Mosobltrastinvest in September

144 The Group is, from time to time, involved in criminal proceedings, including those initiated by the Bank against current or former employees. The Group, is from time to time, subject to legal proceedings and other investigations (including regulatory) in the ordinary course of the Group s business. On the basis of its own estimates and both internal and professional advice, the management of the Group is of the opinion that no such claims (whether satisfied or not) are likely to have a material adverse effect on the business of the Group or on the results of its operations or financial condition. SUBSIDIARIES AND ASSOCIATES The following table sets out information on the companies as at 31 December 2009, whose financial results are included in the consolidated financial statements of the Group for the year ended 31 December 2009, including the Bank s level of ownership therein: Percentage of Year of Name Location Business activity ownership, % acquisition CJSC Imagine Russia Financial services CJSC Altruist Russia Financial services CJSC Press Magnate Russia Publishing CJSC Vechernyaya Moskva Russia Publishing BM Holding LTD Switzerland Financial services Bank Moscow-Minsk Republic of Banking services Belarus CJSC DOSSOM Russia Public catering CJSC Bank of Moscow Russia Financial services management company BM Bank LLC Ukraine Republic of Banking services Ukraine CJSC Stroiportinvest Russia Financial services BoM Finance Ltd. Brittish Virgin Financial services Islands BoM Asset Management Ltd. Cyprus Financial services Crossplanet Ltd. Cyprus Financial services LLC Mos-Broker Russia Brokerage, dealer and depository services CJSC Lespromprocessing Russia Financial services CJSC Spetsstroy-2 Russia Construction Bank of Moscow j.s.c. Republic of Banking services Belgrade Serbia AS Latvijas Biznesa banka Republic of Banking services Latvia CJSC Financial Assistant Russia Financial services LLC Selkhozstroi Russia Machine-building and equipment LLC PO Montazh Russia Machine-building and equipment Bezhitsa Bank Russia Banking services SIA LBB IPAŠUMI Republic of Real estate Latvia AS Eesti Krediidipank Republic of Banking services Estonia AS Martinoza Republic of Real estate management Estonia AS Krediidipanga Liising Republic of Leasing Estonia 128

145 Percentage of Year of Name Location Business activity ownership, % acquisition Open Joint Stock Company Russia Banking services Commercial Bank MOSVODOKANALBANK CJSC Concern Russia Publishing Vechernyaya Moskva OJSC International Asset Russia Financial services Management Company Companies in which the Bank and its subsidiaries hold a majority share but whose financial results do not have a significant influence on the consolidated financial statements of the Group, are not consolidated in the Group Financial Statements. These companies are reflected in Investments in associates and nonconsolidated subsidiaries and recorded at the value of their net assets. The following table contains a list of these companies as at 31 December 2009: Percentage of Name Location Business activity ownership ZAO Monolit Russia Trade CJSC Stolichnaya Neftyanaya Kompania Russia Production LLC VM-Open City Russia Publishing OOO Editorial office of MK-Boulevard magazine Russia Publishing As at 31 December 2009, the following companies were associates of the Bank: Percentage of Name Location Business activity ownership Aigrumae Kinnisvara AS Republic of Financial services Estonia JSCB Russian National Commercial Bank Russia Banking services CJSC Automated Banking Technologies Russia Information technologies Open Joint Stock Company Metropolitan Insurance Group Russia Insurance LLC Pensionnyi Reserv Russia Financial services Associates are entities in which the Bank directly or indirectly owns between 20 per cent. and 50 per cent. of the voting rights, or is otherwise able to exercise significant influence (for example through representation in management bodies) but which it does not control. PROPERTY As at 31 December 2009, the Group owned real estate in Moscow (31 premises with an aggregate area of approximately 39,776 square metres) and other regions in the Russian Federation (31 premises in 20 regions in the Russian Federation with an aggregate area of approximately 42,971 square metres). As at 31 December 2009, the Group owned 3.4 hectares of land in five regions of the Russian Federation, including approximately 2.5 hectares of land in the Tula region. As at 31 December 2009, the Group also leased 104 premises in Moscow and the Moscow region with an aggregate area of approximately 72,100 square metres and 241 premises (excluding offices with areas of less than 10 square metres, and land leased for garages and ATMs) with an aggregate area of approximately 68,410 square metres in other Russian regions. See also Operating and Financial Review of the Group General and administrative expenses. 129

146 OFF-BALANCE SHEET ARRANGEMENTS The primary purpose of the Group s off-balance sheet arrangements is to ensure that funds are available to a customer as required. For example, guarantees that 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. Import 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 cash deposits or collateral pledged to the Group and therefore carry less risk than direct borrowing. As at 31 December 2009, the Group had no significant off-balance sheet arrangements other than undrawn credit lines, guarantees and import letters of credit. The following table shows the Group s credit-related commitments for the years ended 31 December 2009, 2008 and Year ended 31 December RUB millions Guarantees 53, , ,187.7 Commitments to extend credit 31, , ,534.8 Letters of credit 8, , ,918.7 Total credit-related commitments 93, , ,641.2 The Group believes that its off balance sheet obligations would not have a material impact on its financial condition if the Group were required to fulfil such obligations in full. The Group records its off-balance sheet guarantees and commitments to extend credit that represent contingent obligations on its balance sheet at the time of performance in accordance with the applicable accounting standards. See Note 32 to the 2009 Financial Statements and Note 31 to the 2008 Financial Statements and the 2007 Financial Statements, set out elsewhere in this Prospectus, for a more detailed discussion of the Group s contingent liabilities. The contractual amount of these commitments represents the value at risk should the contract be fully drawn upon, the client defaults, and the value of any existing collateral becomes worthless. The Group s management regularly assesses the risk of losses in connection with these instruments and each of the three years ended 31 December 2009, 2008 and 2007 has determined that it was not necessary to establish provisions for any such losses. Guarantee amounts and maturities The following tables set out the Group s guarantees by amounts as at 31 December 2009, 2008 and 2007: As at 31 December RUB RUB RUB million 1 % million 1 % million 1 % Less than USD 1 million 1, , , Greater than USD 1 million but less than USD 10 million 4, , , Greater than USD 10 million 47, , , Total guarantees 53, , , Translated at the official CBR rate of RUB = USD 1.00 as at 31 December 2009, RUB = USD 1.00 as at 31 December 2008 and RUB = USD 1.00 as at 31 December 2007 for information purposes only. 130

147 The following tables set out the Group s guarantees by maturity as at 31 December 2009, 2008 and 2007: As at 31 December RUB RUB RUB million 1 % million 1 % million 1 % One month or less , , One to six months 3, , , Six months to one year 42, , , More than one year 6, , , Total guarantees 53, , , Translated at the official CBR rate of RUB = USD 1.00 as at 31 December 2009, RUB = USD 1.00 as at 31 December 2008 and RUB = USD 1.00 as at 31 December 2007 for information purposes only. ASSET, LIABILITY AND RISK MANAGEMENT OVERVIEW The Group s asset and liability management strategy aims to optimise the Group s profitability over time subject to specific risk parameters and business needs, using an integrated approach to its capital, balance sheet (assets and liabilities), and liquidity and interest rate risk management. Asset and liability management consists of balance sheet funding, control and evaluation and management of liquidity, foreign currency and interest rate risks. The Group manages the composition of its assets and liabilities based on the results of scenario analysis and stress testing which takes into account historical data about Russian economic crisis and the possibility of future crisis in the Russian economy. The Group s Planning and Economy Department cooperates with the Group s Liquidity Department to develop recommendations for structuring the Group s assets and liabilities to produce desirable levels of profitability whilst maintaining an acceptable level of risk and adhering to the Group s strategic goals. The Group has designed its risk management strategy with the aim of minimising uncertainties that result in losses and enabling the Group to function in a stable manner despite changing conditions and fluctuations in the domestic and global financial markets, such as those experienced in the global financial markets during the global economic crisis. The Bank aims to have sufficient liquidity to match its assets and liabilities by maturity and currency, and to diversify its assets and liabilities by clients, regions, industry sectors and amounts. The Group continues to refine its risk management, monitoring and control systems in light of the continuing development of the Russian banking system and domestic financial markets. The Group s risk management functions are overseen by the RMD. Day-to-day control of active transactions by stand-alone business departments or offices is carried out by the relevant branch directors and division managers on the basis of the Group s general risk management policy. Each department and office delivers daily information on their credit and market transactions, and related risks, to the RMD. This data then undergoes independent assessment and subsequently forms the basis for the fundamental analysis of the relevant portfolio. The results of such analyses are summarised in regular risk reports that are submitted to the Bank s President, Management Board and Credit Committee. These risk reports contain suggestions and recommendations for eliminating or reducing any risks identified in the report, and these are then considered and discussed by the Bank s President, Management Board and Credit Committee. The decisions taken in relation thereto will be recorded in writing in the minutes of the relevant body, which minutes are then distributed back to the relevant parties, who will then act upon the decisions contained therein. The Group has an internal risk control system which consists of a formal set of procedures applied by the personnel of each department and/or office at various levels in the course of transaction processing to identify potential human errors, or hardware/software errors. In addition, the Group has an external risk control system, consisting of a formal set of control techniques applied at various levels by the Internal Audit Commission and the Group s external auditors, as well as by third party assessors engaged by the Group on an ad hoc basis where the need for the same has been identified. 131

148 During the global economic crisis, the Group s risk management processes became increasingly centralised. For example, in respect of retail loans, certain decision-making capabilities that were previously vested in each branch office are now centralised with credit committees or the Bank s head office. The Group intends to extend this further to SME lending. The Group has transferred a large proportion of individual decisionmaking powers to committee level. CREDIT, MARKET AND LIQUIDITY RISKS The Group s results of operations are influenced by credit and market risks related to financial investments. To manage such risks and in an effort to neutralise events that can potentially have a negative effect on the Group or its operations, the Group established a three-level risk control system, which can be summarised as follows: each individual department and office exercises preliminary and operational control in relation to compliance with the Group s established risk limits by transactions for which such department or office has primary responsibility; the back office of the Bank s head office monitors each department and office for compliance with the Group s established limits in respect of the transactions for which such department or office has primary responsibility; and the following departments of the Group carry out preliminary control and independent follow-up on risks to the extent of their competence on an ongoing basis: the RMD, the Internal Audit Department (whose competence spans an internal but independent audit function reporting to President), the Planning and Economy Department (which is responsible for analysing and controlling efficiency, and ensuring that the Group s exposure to risk is efficient), the Legal Department (which has responsibility for control of the legal risks the Group is exposed to, including in the content of contracts with clients and partners, and as a result of claims against the Group), the Financial Control Service (which is responsible for the Group s anti-money laundering controls see Money Laundering Risk ), the Corporate Interests Protection Service and the Security Service (both of which share responsibility for performing security checks and verifications on existing and potential customers, and liaising with government security services). In addition, the Group s risk management system regulates the following: the identification and selection of reliable borrowers and low-risk financial investment instruments by the Group though the application of formalised credit and risk measurement methods and detailed analysis of each new product the Bank considers introducing; limitations on the Group s investments in individual industry sectors in order to avoid excessive concentrations in, and consequent risk exposures to, any one industry sector; the risk monitoring procedures with respect to the Group s portfolio as a whole and to certain materially significant loans, in order to enable the Bank to take preventive measures in the event that the Group identifies any negative trends; and the measures the Group has in place to hedge individual risk types. Credit risk As a result of its credit operations, the Group is exposed to credit risk, which is the risk that a counterparty will be unable to repay its obligations in full when due. The RMD has designed the Group s know your client procedures and credit risk management system based on CBR requirements, the recommendations of the Basel Committee on Banking Supervision, international auditing standards and the experience of the leading Russian and international financial institutions. The Group has an internal rating system that places legal entities, private entrepreneurs, administrations of regions of the Russian Federation, domestic and foreign banks, and foreign governments into various risk categories. Risks related to individual borrowers are evaluated on the basis of a scoring method originally 132

149 developed by the Group with the support of a number of foreign consulting companies. The Group regularly consults with external consulting companies over its rating systems and scoring methodologies to ensure that they are up-to-date and appropriate. All scoring cards used by the Group in retail business were updated in 2009 to take account of changes in borrowers behaviour resulting from the changed economic environment. From June to August 2009, the Group had a series of consultations with external consulting companies in respect of the loan collection issues. In general, the Group uses the following mechanisms to manage its overall loan portfolio exposure: limits on the Group s exposure to different industry sectors (differentiated by factors such as customer type, industry type and geographical location); and limits on the authority of the Group s personnel with respect to loans. Among the portfolio limits, one of the most important is the risk limit that determines the maximum loss for each department and office involved in active transactions. The amount of such risk is established by the RMD on the basis of the risk tolerance and is subject to quarterly review on the basis of the risk status of the existing loan portfolio. The RMD updates the existing limits on a regular basis in accordance with the current loan risk level as well as the macro- and micro-economic situation. The RMD regularly reviews the risks it has identified in relation to existing products and the compliance with the established limits on such risks by the relevant departments and offices of the Group in order to identify factors that could increase the levels of such risks with a view towards developing strategies to mitigate them. To the extent that such reviews identify any violations of existing limits on identified risks, the RMD then reports these to the relevant departments or offices of the Group, and based on the results of its analysis of the loan portfolio, the RMD formulates suggestions to help prevent the future reoccurrence of such violations. In addition to the traditional groups of factors (such as the financial status, security and settlement account turnover), the loan risk level can be affected by geographic and industry sector risks. The Group has a system of limitations on active transactions that are designed to restrict the risks associated with any specific transaction and with the Group s loan portfolio exposure in general. To manage specific transaction risks, the Group uses: term limits that are dependent on the risk levels associated with the Group s various loan products, their types and their specific terms; amount limits with respect to each specific counterparty or group of related counterparties; limits with respect to each of the Bank s loan products calculated in accordance with internal methods of loan risk evaluation; and specific bank transactions limits. A decision to assign a credit risk category and a risk limit to a particular borrower will be made either by the Credit Committee, the Small Credit Committee or by the credit committee of the relevant branch, depending on the size and type of the loan involved. See Business Lending Policies and Procedures Credit Procedures. Credit risk limits for borrowers As at 31 December 2009, the Group had established credit risk limits for approximately 385,244 borrowers or groups of borrowers (including individuals) compared with approximately 506,000 as at 31 December This reduction is principally due to the Group implementing stricter credit limits in the context of the global economic crisis, which resulted in a reduction in the number of eligible customers. As at 31 December 2009, the Group had set overall lending limits for more than 4,813 companies (31 December 2008: 6,200), 33 domestic banks (31 December 2008: 30), 71 foreign banks (31 December 2008: 74), 29 Russian subsidiaries of foreign banks (31 December 2008: 26) and 21 Russian sub-federal entities (31 December 2008: 18). As at 31 December 2009, the Bank s offices and branches had lending limits for approximately 4,359 companies and 19 municipalities, compared with 5,900 and 17, respectively, as at 31 December

150 The Group has also imposed credit risk limits on domestic banks with respect to certain banking operations (such as precious metals and foreign exchange operations) and limits or sub-limits on particular banking operations and credit risk limits for loans to employees guaranteed by companies. Certain banking operations, such as repo transactions, are not subject to credit risk limits. The Group monitors its credit exposure limits on a monthly basis, and these limits are reviewed at least annually. The Group also manages its credit risk by obtaining collateral as well as corporate and personal guarantees. Other than the retail express scoring loans, overdrafts, consumer loans and credit card products, which are unsecured loan products, the Group only extends unsecured loans in exceptional circumstances approved by the President or the Credit Committee. The Group s CMD values and monitors the Group s collateral. The CMD assesses both the value and enforceability of the collateral. The Group s credit policy contains a description of preferred and unacceptable types of collateral and sets out criteria for determining the value of the proposed collateral. See Business Lending Policies and Procedures Collateral. Geographic risk The Group is exposed to geographic risk due to a high degree of concentration of financial investments in certain regions where the Group s borrowers operate. Regional exposure reflects the potential for the full or partial default of businesses operating in various regions on their obligations to the Group in the event of unfavourable changes in the current economic status of the particular region that may have a critical impact on their operations. Regional limits are assessed in accordance with the principles of regional credit risk assessment adopted by the Group and the Group has carried out evaluations of the risk inherent in investing in each of the 83 regions within the Russian Federation to establish the regional credit risk ratio for each region and then uses this to formulated indicative loan investment risk limits for each region. Each region is classified into one of six groups, depending on the level of risk, ranging from minimum to impermissible. Based on these values, the Group invests primarily in regions where the risk level is indicated to be acceptable or higher but close to moderate. Industry sector risk The Group is exposed to industry sector risk due to a high degree of concentration of financial investments in certain industry sectors in which the Group s borrowers operate, including the manufacturing, construction, financial and other services, and trade sectors. Industry sector-related exposure reflects the potential for full or partial defaults on their obligations to the Group by businesses operating in various industry sectors in the event of unfavourable sector-related changes that may have a material impact on their operations. The Group s RMD evaluates industry sector risk in accordance with the Group s internal regulations, which assess risk based on a range of quantitative factors as well as a classification in accordance with one of six risk groups ranging from minimum to high, and the Group primarily invests only in those industries where such risk has been assessed to be acceptable to the Group. The quantitative evaluation of the industry sector risk includes the determination of the maximum permissible exposure to each relevant industry sector, which is used to set limits on the ability of individual departments and offices to transact with borrowers within each industry sector. Operational Risk The Group s operational risk management system (i.e. identification, assessment, monitoring, control and mitigation of operational risks) complies with the international approaches including those defined in the documents of the Basel Committee on Banking Supervision, the Committee of Sponsoring Organisations (COSO) and International Organisation for Standardisation (ISO), as well as with the recommendations of the CBR. The Bank s Operational Risk Policy is the principal instrument used to manage operational risks. All the Group s activities are well-documented: the Group s internal regulations describe business processes, decision making procedures and operational risk assessment methodology, including the requirements for hardware, software and telecommunication systems, information security and compliance with the applicable Law and Supervisor s requirements. To identify and assess operational risks the Group applies Risk Self Assessment. 134

151 To be able to quantify the exposure to operational risk the Group has been collecting data on operational losses since 2003, from which the Group has established a framework for systematically tracking and recording the frequency, severity and other relevant information on individual loss events, and this, combined with external loss data, scenario analyses and risk assessment factors allows the Group to assess operational risk exposure. Risk Mapping (a technique used by the Group to identify the operational risks, their concentration and to determine what actions need to be taken in order to mitigate such risks and their concentration) is exercised to reveal the areas of weakness and develop subsequent actions to mitigate/control the risk. The Group has implemented a multilevel system of limits on authorities of executive management and collective bodies, identified responsibility and interchangeability of employees in all segments of work. The internal audit system complies with the requirements of the CBR. The internal audit function is to supervise that all units and employees of the bank observe the procedures prescribed by internal regulations. The Group has several insurance programmes to mitigate the financial impact of those operational risks that can not be controlled. Among them are property insurance, Bankers Blanket Bond ( BBB ) and Directors and Officers Liability Policy ( D&O ) policies. Property insurance provides the coverage for damage to physical assets. The adequacy of property insurance program is re-estimated on a yearly basis. BBB consists of three sections: Crime Policy, Electronic & Computer Crime Policy and Professional Indemnity Policy. The BBB Policy total limit of liability is USD 30 million. D&O provides coverage of the losses resulting from claims for alleged wrongful acts while acting in their capacity as directors and officers and coverage of losses from securities claim by a third party against the Group. The D&O Policy total limit of liability is USD 25 million. To provide business contingency, the Group has developed a special disaster recovery program that includes the establishment of a remote Reserve Business Centre ( RBC ). See Business Information Technology. In addition to the contingency computer facilities there is a system of reserve communications with payment systems Visa and Europay, SWIFT and CB in existence. Money Laundering Risk The Bank of Moscow anti-money laundering and combating the financing of terrorism ( AML/CFT ) policies and procedures are based on Russian AML/CFT legislation and designed to identify and prevent money laundering and terrorist financing. To implement AML/CFT policies and procedures within the Group, the Financial Control Service ( FCS ) was established on 25 January The FCS is responsible for: the functioning of a proper and effective AML/CFT system within the Group; the coordination and control of each part of the Group s observance of the internal AML/CFT rules and procedures; and the submission of reports to the Federal Service for Financial Monitoring. The Group s core standards in relation to AML/CFT compliance are set out in The Bank of Moscow Group AML/CFT Policy dated 28 August The Compliance Office of the Bank is responsible for supervising and realisation of the Policy. The Policy sets out the standards expected of the Group in relation to: identification of customers and ultimate beneficiaries; proper management of money laundering risk and financing of terrorism risk; compliance with applicable laws and regulations; protection of good name and business reputation of the Group and of its customers; and promotion of the Know Your Customer ( KYC ) principle as a key principal for the Group. 135

152 The Compliance Office and FCS apply a risk-based approach in relation to AML/CFT that follows the recommendations of the Financial Action Task Force on Money Laundering ( FATF ). Since October 2007, the Compliance Office has developed, agreed and adopted the following regulatory compliance documents: Provision on establishment of the Compliance function in the Bank of Moscow, which was adopted in October 2007; Methodology for compliance risk assessment in the Bank of Moscow, which was adopted in June 2008; Order on intra-departmental exchange of information for the purpose of Compliance Risk; Management, which was passed in July 2008; and Compliance Risk Management Policy of the Bank of Moscow, which was approved by the Board of Directors in August The Compliance Office and FCS also monitors and ensures the Group s compliance with all applicable Russian legislation in relation to AML/CFT, including: Federal Law dated 28 May 2001 No. 62-FZ On Ratification of Convention regarding Laundering, Revelation, Forfeiture and Confiscation of Proceeds of Crime Activities ; The Anti-Money Laundering Law; Decree of the President dated 1 November 2001 No On the Authorised Body on Combating the Legalisation of Illegal Earnings (Money Laundering) and Terrorism Financing ; and CBR Regulation dated 19 August 2004 No. 262-P On Identification by Credit Organisations of Customers and Beneficiaries for the Purposes of Combating the Legalisation of Illegal Earnings (Money Laundering) and Terrorism Financing. In order to implement the measures and procedures provided in the Anti-Money Laundering Law, the FCS formulated the Rules on Internal Control for the Purpose of the AML/CFT Laws, which were adopted by the Bank on 14 August 2009, (the Rules ). The Rules define the process and procedures of internal control carried out by the head office, affiliates and branches of the Group and deal with the Group s: KYC program (collection of documents, internal review, decision taking); risk management; risk reporting system; and risk awareness/compliance training. Market Risk Market risk means a loss that can be suffered as a result of the devaluation of the Group s positions in the event of an unfavourable development in market conditions and/or financial instruments (such as prices, interest or exchange rates). For the purposes of risk management, the Group distinguishes between interest, currency and securities market risks. The Group s market risk management is governed by the Market Risk Management Policy of the Group adopted by the President of the Bank on 15 May Responsibility for developing and monitoring the Group s risk management policies for interest rate risk, foreign currency risk and securities market risk lies with the RMD, which acts on the basis of a common set of rules, limits and restrictions set by the Financial Committee and the Credit Committee, and the RMD regularly reviews the Group s compliance with such policies. The managers of each department and office individually have responsibility for managing risks in accordance with the policies set by the RMD but overall responsibility for coordinating the management of the Group s interest rate risk, foreign currency risk, and securities market risk management through consolidating risks in all market sectors lies with the ALM Department. In an attempt to mitigate potential 136

153 losses caused by significant market shifts, the Financial Committee sets positions and stop-loss limits for use by the Treasury Department. These limits are established on the basis of probability methodologies and regular stress testing, the frequency of which depends on the Group s assessment of prevailing market conditions (for example, as of January 2010, stress testing is to be carried out on a monthly basis). The RMD reviews trading and investment limits for government and corporate securities, stop-loss limits and open position limits in foreign currencies and precious metals at least annually. On the basis of recommendations from the Financial Department and subject to the RMD s limits, the Financial Committee sets limits on currency operations in the domestic and foreign markets and securities trading and precious metals. The Treasury Department and the RMD monitor compliance daily, identifying violations and the reasons behind them. The Group s Executive Vice President and senior managers are immediately notified of limit violations and, upon such notification, take measures aimed at mitigating the violations, which may include the closing-out of positions or temporarily halting transactions in particular financial instruments. Control over operations in the securities market is carried out on a daily basis through automated systems (Reuters Condor System) that register, conduct and record such operations. Interest rate risk The Group is exposed to interest rate risk, principally as a result of lending to customers and other banks at fixed interest rates in amounts and for periods that differ from those of term deposits and other borrowed funds at fixed interest rates. The majority of the Group s assets and liabilities bear fixed interest rates. Due to changes in interest rates, the Group s liabilities may have disproportionately high interest rates compared to those of its assets and vice versa. Interest margins on assets and liabilities having different maturities may increase as a result of changes in market interest rates. In practice, interest rates are often set on a short-term basis and contractually fixed interest rates on both assets and liabilities (other than retail customer deposits) are often reset based on current market conditions and mutual agreement. Interest rate risk depends primarily on changes to the refinancing rate by the CBR and changes to rates on the interbank market. The procedures to measure interest rate risk adopted by the Group include two approaches to the evaluation of the interest rate risk: the interest rate sensitivity model and the gap model. Interest rate sensitivity model. The Group evaluates its interest rate risk on the basis of analysis of sensitivity of financial results to changes in key financial market indicators, stress testing and scenario analysis, which take into account possible changes in the structure of its assets and liabilities. The results of these analyses are used in the preparation of long and short-term business plans and for establishing interest rates and limits for every type of financial instrument and business line. The Group also controls its interest rate risk by managing the structure of its assets and liabilities. The Group uses different instruments for hedging interest rate risk, including cross-currency and interest rate swaps. For the purposes of assessing interest rate risk, assets and liabilities are grouped by maturity, currency, interest rate type and core business lines. Gap model. The Group calculates the difference or gap between assets and liabilities and conducts a sensitivity analysis to estimate unfavourable changes in interest rates that may happen over one year and 18 month periods. The Group s model calculation is based on an assumption that all interest rate ranges applicable to assets and liabilities increase or decrease simultaneously by 1 percentage point on the subsequent date of calculation. From 2004 to 2007, the CBR decreased its refinancing rate by six per cent., from 16 per cent. in January 2004 to 10 per cent. in June However, in 2008, the refinancing rate steadily increased. Between April 2009 and June 2010, the CBR decreased its refinancing rate by 5.25 per cent. from 13 per cent. to 7.75 per cent. At the end of 2009, the Bank finalised the introduction of a new ALM (Asset Liability Management) system called Kamakura Risk Manager with the assistance of external consultants. The ALM system is produced by the Kamakura Corporation and distributed by Fiserv, Inc. This system will calculate and analyse interest rate risk on the basis of global best practices, Monte Carlo simulation methodologies, non-parallel shift simulation and stress testing. As at 31 December 2009, the aggregate interest sensitivity of Rouble-denominated assets and liabilities of the Group was positive and amounted to RUB 412 million (that is, in the event all interest rates on Roubledenominated assets and liabilities decrease by 1 percentage point, the Group s income growth in the next 18 months would total RUB 412 million). As at 31 December 2009, aggregate interest sensitivity of Dollar- 137

154 denominated assets and liabilities amounted to positive USD 10 million. As at 27 December 2009, aggregate interest sensitivity of Euro-denominated assets and liabilities amounted to negative EUR 0.9 million. As at 31 December 2008, the aggregate interest sensitivity of Rouble-denominated assets and liabilities of the Group was positive and amounted to RUB 39 million (that is, in the event all interest rates on Roubledenominated assets and liabilities decrease by 1 per cent., the Group s income growth in the next 18 months would total RUB 39 million.) As at 31 December 2008, aggregate interest sensitivity of Dollar-denominated assets and liabilities amounted to negative USD 0.6 million. As at 31 December 2008, aggregate interest sensitivity of Eurodenominated assets and liabilities amounted to negative EUR 5.3 million, compared to the aggregate interest sensitivity of Rouble-denominated assets and liabilities was positive and amounted to RUB million compared to RUB million as at 31 December As at 31 December 2007, aggregate interest sensitivity of Euro-denominated assets and liabilities amounted to positive EUR 2.0 million. Traditionally, the Group used limited number of interest rate hedging instruments such as interest rate swaps and forward rate agreements ( FRAs ). However, the Group has recently broadened a set of interest rate management tools at its disposal, including: attempting to avoid significant gaps between assets and liabilities through setting medium-term criteria with respect to maturities and types of funds that are taken on deposit; managing its treasury and investment portfolios; and attempting to mitigate the risks of an unfavourable change in interest rates primarily through setting limits on the potential changes of interest negotiated in contracts. As at 31 December 2009, 2008 and 2007, the average effective interest rates on the main financial instruments in the major currencies were as follows: USD Euro RUB Assets Due from other banks 5.76% 5.43% 5.54% 0.62% 2.24% 4.02% 14.00% 17.05% 6.53% Loans to customers 9.19% 10.46% 9.72% 6.67% 9.79% 8.54% 12.09% 14.44% 10.97% Financial instruments at fair value through profit and loss 7.04% 8.4% 6.4% 5.33% 5.26% 3.58% % 8.67% Financial instruments available for sale 9.10% 9.75% % Investments held to maturity 7.50% 5.63% 5.63% % Liabilities Due to banks 2.14% 5.16% 5.78% 1.96% 4.97% 4.85% 8.59% 11.09% 5.55% Customer accounts 5.17% 7.52% 5.22% 4.27% 7.33% 6.10% 6.55% 6.56% 4.63% Debt securities issued 6.93% 7.26% 7.33% 4.42% 6.97% 4.96% 9.64% 8.19% 6.92% Financial liabilities at fair value through profit or loss 5.21% 5.14% 8.00% Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Group is exposed to currency risk from holding open positions in Russian Roubles and other currencies, primarily US Dollars and Euros. The Group manages its currency risk principally by setting open foreign currency position limits, stop loss limits, country and borrower limits for each relevant department and office, matching assets and liabilities in foreign currencies through TOM and SWAP transactions with the Group s counterparties, providing for an opportunity to sell/buy funds denominated in foreign currencies, and by maintaining centralised control over exchange rates in currency operations and over the Group s correspondent accounts in foreign currencies. The Bank s exposure to currency risk is measured on the basis of its open currency position, the limit of which is set by the CBR under RAS and may not exceed 20 per cent. of the Bank s equity in all currencies 138

155 and 10 per cent. of capital denominated in certain currencies, including the balancing Rouble-denominated position. As at 31 December 2009, the Group s position in US Dollars, net, was 2.4 per cent. of the Group s equity and the Group s position in Euros, net, was 12.1 per cent. of the Group s equity. By comparison, as at 31 December 2008, the Group s position in US Dollars, net, was 7.5 per cent. of the Group s equity and the Group s position in Euros, net, was 1.8 per cent. of the Group s equity. The Group s open currency position is monitored by the CBR on a daily basis and the Group believes it currently meets the requirements of the CBR with respect to control of its open currency position. The Group is exposed to potentially significant risk from sudden fluctuations in the exchange rates of currencies in which the Group has significant open currency positions. The Group s major open currency positions are concentrated in US Dollars and Euros. However, the Group s open currency positions in Euros are substantially lower than its US Dollar positions. The structure of the Group s assets and liabilities denominated in various currencies and translated into Russian Roubles as at 31 December 2009 was as follows: Other RUB USD Euros currencies Total RUB million Cash and cash equivalents 49, , , , ,955.8 Mandatory cash balances with central bank 4, ,748.5 Financial assets at fair value through profit and loss 82, , , , ,461.7 Due from other banks 1, , , , ,703.3 Loans to customers 356, , , , ,489.5 Financial assets available for sale 13, ,738.0 Investments held to maturity Investments in associates and non-consolidated subsidiaries 3, ,820.8 Premises and equipment and intangible assets 14, , ,895.3 Other assets 4, ,239.2 Current tax assets Deferred tax assets Total assets 531, , , , ,143.7 Due to other banks 97, , , , ,714.7 Customer accounts 296, , , , ,028.6 Financial liabilities at fair value through profit or loss , ,340.3 Debt securities issued 23, , , ,098.8 Other liabilities 1, ,774.8 Current tax liabilities Deferred tax liabilities 1, ,500.8 Total liabilities 420, , , , ,547.7 Net balance sheet position as at 31 December , ,183.3 (46,212.0) 9, ,596.0 Off-balance sheet position (22,368.7) (10,096.8) 35,780.0 (5,184.1) (1,869.6) Net balance and off-balance sheet position as at 31 December , ,086.5 (10,432.0) 3, ,

156 The structure of the Group s assets and liabilities denominated in various currencies and translated into Russian Roubles as at 31 December 2008 was as follows: Other RUB USD Euros currencies Total RUB million Cash and cash equivalents 57, , , , ,268.7 Mandatory cash balances with central bank ,162.1 Due from other banks 8, , , , ,337.1 Financial assets at fair value through profit and loss 31, , , ,411.9 Loans to customers 335, , , , ,563.8 Financial assets available for sale 9, ,644.5 Investments held to maturity Investments in associates and non-consolidated subsidiaries 3, ,965.6 Premises and equipment and intangible assets 17, , ,255.6 Other assets 4, ,334.3 Current tax assets Deferred tax assets Total assets 471, , , , ,385.3 Due to other banks 81, , , , ,923.6 Customer accounts 287, , , , ,541.0 Financial liabilities at fair value through profit or loss , ,922.8 Debt securities issued 30, , , ,715.2 Other liabilities 7, ,971.0 Current tax liabilities Deferred tax liabilities 1, ,633.3 Total liabilities 409, , , , ,734.9 Net balance sheet position as at 31 December ,246.7 (4,179.5) 1, , ,650.4 The following table sets forth the Bank s net open foreign currency position as reported to the CBR as at 31 December 2009, 2008 and : 31 December Net open foreign currency position (millions of USD) As a % of foreign currency liabilities As a % of shareholders equity As a % of total assets = long open currency position; = short open position. 140

157 Securities market risk Securities market risk is the risk of changes in the value of debt obligations and equity as a result of interest rate or price movements. The Group s main source of securities market risk exposure is its OFZ trading portfolio, as well as domestic corporate bonds, and corporate eurobonds. The maturity profile of its government securities portfolio and its sensitivity to market rates has increased due to higher volatility on the domestic and global capital markets. However, the Group s portfolio of foreign currency-denominated debt of the Russian Federation was RUB 9, million as at 31 December 2009, compared to RUB million as at 31 December The Group has set portfolio limits on various types and terms of debt securities, which it believes enable it to maintain its securities market risk at acceptable levels. The percentage of equities in the Group s securities portfolio is not substantial: as at 31 December 2009, equities made up 4.2 per cent. of the Group s total securities portfolio, compared with 4.1 per cent. as at 31 December Liquidity Risk Liquidity risk is the risk resulting from a difference in the maturities of assets and liabilities, which may result in the Group being unable to meet its obligations in a timely manner. The Group is subject to liquidity requirements set by the CBR. The Financial Committee of the Group reviews and approves the liquidity management policy of the Group on an annual basis, or more frequently if the circumstances are deemed to merit it. See Overview of the Banking Sector and Banking Regulation in the Russian Federation. To manage its liquidity risk the Group uses various methods of scenario analysis and simulative, optimising and predictive modelling. The CBR exercises strict control over liquidity risk by establishing instant (N2) and current (N3) liquidity statutory ratios. The risks related to sources of funding are controlled by the CBR in accordance with the capital adequacy (N1) standard and long-term (N4) liquidity standard. The CBR requires that such ratios are complied with on a daily basis and the Group is required to provide a monthly statement demonstrating that it has complied with such ratios on a daily basis for the relevant statement period. The Group was in compliance with all four standards according the CBR rules as at each monthly statement date during the financial period under review (being the years ended 31 December 2009, 2008 and 2007). The basic technique of management and control of the Group s liquidity is a gap management and duration matching of the Group s assets and liabilities (GAP analysis). This technique allows assessing the Group s position in the short, medium and long term with regard for planned changes in cash accounting and writeoff. To manage instant liquidity, the Group applies the principle of anticipatory receipt and use in calculations of the information about its calendar transactions, customer deposits/write-offs on the basis of forecast and insider information. Instant liquidity is monitored and managed daily using an automated payment accounting system. To manage its current and mid-term liquidity, the Group assesses liquidity on the basis of its payment calendar, which it generates regularly, as well as the effects on liquidity of major transactions which the Bank intends to enter into. Statistical analysis of current and long-term liquidity is based on a weekly computation of economic ratios as required by the CBR. This analysis looks at the change in the ratios over the preceding three months as well as any underlying factors (such as asset and liability changes) leading to such change. Statistical analysis of instant, current and long-term liquidity is carried out by calculating economic ratios required by the CBR. If there are significant changes (in excess of 20 per cent.) in the values of ratios for the preceding three months, especially in the last month of the period, reasons (or movements in assets and liabilities), then the Group will undertake an analysis of the factors and/or changes in levels of assets and/or liabilities which may have caused the material changes in these ratios. The main risk of an asset/liability mismatch arises largely due to the composition in the Group s resource base, including budget funds owned by the City of Moscow and other on-demand liabilities, including retail term deposits that can be withdrawn immediately. 141

158 The Group divides its proprietary securities portfolio into the following three securities categories with the aim of achieving the appropriate liquidity/earnings ratio and ensuring the optimal management of assets and liabilities: Trading portfolio decisions affecting the structure of this portfolio are taken by the traders within established limits; the securities in this portfolio are traded on a day-to-day basis; Liquidity management portfolio decisions affecting the structure of this portfolio are taken by the Treasury Department of the Group; this portfolio includes liquid governmental securities that are traded by the Group to manage its liquidity risk; and Investment portfolio decisions affecting the structure of this portfolio are taken by the Financial Committee of the Group; the securities in this portfolio are held for a period usually exceeding one year. The scenario analysis performed by the Group looks at several different options of modelling payment flows that take into account planned, probable and strategic indicators of the Group s performance. Within the framework of each scenario modelled, significant positive and negative fluctuations of liquidity are considered over the entire projected period taking into account information on current market conditions and levels of demand. Based on the scenario analysis, the Group s liquidity indicators are assessed and tested for compliance with internal and external standard requirements. In addition, the Group manages its liquidity risk by setting certain liquidity reserves which must be adopted upon the occurrence of various negative scenarios which the Group has identified. The amounts of these liquidity reserves are reviewed on a daily basis by reference to changes in customer deposit levels (which fluctuate on a seasonal basis) and then-current economic and developmental forecasts. If a liquidity shortfall occurs, liquidity needs may have to be met from various sources, including: disposition of a portion of its most liquid assets; entering into repo transaction with the CBR and using other re-financing instruments offered by the CBR; adjusting interest rates and fees; limiting the growth of assets in a specific line of business; securing more long-term and short-term funding from its major clients, other banks and counterparties; and/or financial support provided by the Russian Government by attracting, on a tender basis, funds from the Ministry of Finance and state-owned corporations. 142

159 The following table shows the Group s assets and liabilities by residual maturity as at 31 December The table also contains information regarding the Group s liquidity exposure and the maturity profile of its balance sheet. The table below shows the expected maturity analysis of assets and liabilities as at 31 December 2009: On demand From From and less than 1 to 6 6 to 12 More than No stated 1 month months months 1 year maturity Total Assets Cash and cash equivalents 75, ,955.8 Mandatory cash balances with central banks 4, ,748.4 Financial assets at fair value through profit or loss 118, ,461.7 Due from other banks 43, , ,703.3 Loans to customers 28, , , , ,489.5 Financial assets available for sale , ,738.1 Investments held to maturity Investments in associates and non-consolidated subsidiaries 3, ,820.8 Premises and equipment and intangible assets 16, ,895.3 Other assets 5, ,239.2 Current tax asset Deferred tax asset Total assets 272, , , , , ,143.7 Liabilities Due to other banks 14, , , , ,714.7 Customer accounts 64, , , , ,028.6 Financial liabilities at fair value through profit or loss 2, ,340.3 Debt securities issued 2, , , , ,098.8 Other liabilities 2, ,774.8 Current tax liability Deferred tax liability 1, ,500.8 Total liabilities 86, , , , , ,547.7 Net liquidity gap as at 31 December ,763.6 (134,112.4) (18,290.47) 16, , ,596.0 Cumulative liquidity gap as at 31 December , , , , ,

160 Mandatory cash balances with central banks are included within the no stated maturity category as the Group is unable to use them for operational management of its liquidity position. As the above analysis is based on expected maturity, the entire portfolio of financial assets at fair value through profit or loss is categorised as on demand and less than 1 month in accordance with the portfolio liquidity assessment by the management. On demand and less than 6 months No stated one month 1 to 6 months to 1 year Over 1 year maturity Total RUB million Cash and cash equivalents 133, , ,268.7 Mandatory cash balances with central banks 1,162.1 Due from other banks 73, ,337.1 Financial assets at fair value through profit or loss 35, ,411.9 Loans to customers 17, , , , ,563.8 Financial assets available for sale , ,644.5 Investments held to maturity Investments in associates and non-consolidated subsidiaries 3, ,965.6 Premises and equipment and intangible assets 19, ,255.6 Other assets 5, ,334.3 Current tax assets Deferred tax assets Total assets 264, , , , , ,385.3 Due to other banks 71, , , , ,923.6 Customer accounts 73, , , , ,541.0 Financial liabilities at fair value through profit or loss 10, ,922.8 Debt securities issued 4, , , ,715.2 Other liabilities 7, ,971.0 Current tax liabilities Deferred tax liabilities 1, ,633.3 Total liabilities 169, , , , , ,734.9 Net interest rate gap as at 31 December ,816.6 (67,703.1) 42,368.1 (35,745.7) 32, ,650.4 Cumulative interest rate gap as at 31 December , , , , ,

161 The following table shows the Group s assets and liabilities by residual maturity as at 31 December The table also contains information regarding the Group s liquidity exposure and the maturity profile of its balance sheet. On demand and less than 6 months No stated one month 1 to 6 months to 1 year Over 1 year maturity Total RUB million Cash and cash equivalents 63, ,920.1 Mandatory cash balances with central banks 6, ,294.8 Due from other banks 34, , , ,853.1 Financial assets at fair value through profit or loss 51, ,312.6 Loans to customers 16, , , , ,622.2 Financial assets available for sale , ,771.2 Investments in associated companies and non-consolidated subsidiaries Premises and equipment and intangible assets 7, ,800.1 Other assets 2, ,227.3 Current tax assets Deferred tax assets Total assets 167, , , , , ,086.2 Due to other banks 1, , , , ,624.7 Customer accounts 111, , , , ,646.2 Financial liabilities at fair value through profit or loss Debt securities issued 2, , , , ,956.3 Other liabilities 1, ,614.2 Current tax liability Deferred tax liabilities Total liabilities 117, , , , , ,491.2 Net interest rate gap as at 31 December ,740.3 (13,512.6) 10,457.1 (15,285.3) 16, ,595.0 Cumulative interest rate gap as at 31 December , , , , ,595.0 LOAN PORTFOLIO Loan classification and allowances For IFRS financial reporting purposes, the Group estimates of loan impairment allowances involve the following steps: Identifying individually significant loans and determining whether an individually significant loan shows objective evidence of impairment. Special emphasis is placed on the timing of the contractual cash flows from interest payments and principal repayments. If the Group expects to collect all interest and principal due in full, but it is probable that those cash flows will be received later than the date agreed in the original contract, an impairment exercise is performed. Other impairment indicators include, but are not limited to: any significant financial difficulty of the borrower, an actual breach of loan contract, a high probability of bankruptcy or other financial reorganisation of the borrower or a historical pattern of collections of loans indicating that the entire principal and interest amount of a loan portfolio will not be collected. Reviewing for impairment of individually significant loans that show objective evidence of impairment. An impairment review requires an estimate of the expected timing and amount of cash flows from interest and principal repayments and other cash flows, including amounts recoverable from guarantees and collateral, and discounting them at the loan s original effective interest rate. The loan is impaired if its carrying amount 145

162 exceeds the estimated recoverable amount as defined above. A separate impairment loss on an impaired individually significant loan is recorded. All remaining loans that have not been identified as individually significant are assessed on a portfolio basis if, and only if, there are signs that impairment is present in those portfolios. For the purpose of such a review, the portfolio of loans is grouped in pools, based on similar credit risk characteristics. Additionally, separate pools of loans could be identified that, for example, by virtue of belonging to a particular industry, had a greater probability of being impaired than other categories of loans. See also Operating and Financial Review Critical Accounting Policies and Operating and Financial Review Provisions for Impairment. The following table sets out details of changes in the allowance for loans to customers that are not banks: As at 31 December RUB (millions) Allowance (provisions) for loan impairment (beginning of the year) 12, , ,336.4 Charge (recovery) of allowance for loan impairment 30, , Decrease of allowance on sale of a subsidiary Increase of allowance on acquisition of a subsidiary 97.7 Loans to customers written off during the period as uncollectible (141.2) (774.4) (1,231.3) Currency exchange difference (192.7) 50.0 (6.9) Allowance (provisions) for loan impairment (end of the period) 43, , ,525.1 The following table sets out details of changes in the allowance for loans to banks: As at 31 December RUB (millions) Allowance (provisions) for loan impairment (beginning of the year) Provision for/(recovery of) allowance for loan impairment 1.6 (24.4) 20.0 Exchange Difference (1.0) (0.8) Allowance (provisions) for loan impairment (end of the period) The following table sets out certain ratios in respect of the Group s loan portfolio: As at 31 December Loans to customers 1 as % of total assets 64.8% 64.5% 66.6% Loans to customers 1 as % of customer accounts 124.9% 127.1% 100.3% Loans to customers 1 as % of total equity 617.2% 763.6% 723.6% Note: 1 Net of allowances (provisions) for loan impairment. 146

163 Loan portfolio by product The Group has a portfolio of loans and other credit risk bearing products that is widely diversified by the structure of products. The Group s loan products include: loans and credit facilities; Eurobonds and bonds issued by Russian companies and governmental authorities; domestic bonds issued by Russian companies and governmental authorities; off-balance sheet transactions (guarantees, letters of credit and sureties); inter-bank loans; discounted bills; overdrafts; and acceptance credits. There were no material changes in the composition of major groups of products or in the share of each group of products (on a year-on-year basis) during each of the three years ended 31 December 2009, 2008 and Loans and credit facilities accounted for the largest share of the Group s loan products during these periods followed by transactions with bonds issued by Russian companies and governmental authorities and then by off balance sheet transactions and inter-bank loans. Client concentration The Group lends predominantly to non-state related businesses with approximately 15.3 per cent. of the gross loan portfolio relating to loans to retail clients as at 31 December Lending to federally-owned entities represented 7.8 per cent. of the total gross loan portfolio as at 31 December 2009, compared to 2.7 per cent. as at 31 December 2008 and 3.6 as at 31 December As at 31 December 2009, the 10 largest corporate borrowers accounted for 19.1 per cent. of the Group s gross loans to customers and the 20 largest borrowers accounted for 27.5 per cent. of the Group s gross loans to customers (compared to 14.4 per cent. and 21.8 per cent., respectively, as at 31 December 2008 and 12.6 per cent. and 20.2 per cent. as at 31 December 2007). A significant portion of the Group s liabilities are from related parties and a portion of the Group s earnings is derived from activities and transactions with related parties, including the City of Moscow and entities affiliated with the City of Moscow or over which the City of Moscow may be able, directly or indirectly, to exert a significant degree of influence. As at 31 December 2009, loans to the Group s related parties accounted for 2.4 per cent. of the Group s gross loan portfolio compared to 1.5 per cent. and 1.3 per cent. as at 31 December 2008 and 31 December 2007, respectively. See Risk Factors Risks Related to the Group s Business and Industry The City of Moscow may significantly influence the Group and take actions that conflict with the interests of Noteholders and Risk Factors The Group may lose some or all of the City of Moscow s business. As at 31 December Gross loans % Gross loans % Financial services 126, , Individuals 88, , Construction 80, , Manufacturing 72, , Trade 62, , Fuel and energy sector 36, , Transport and communications 22, , Metallurgy 22, , State agencies 18, , Food industry 14, , Agriculture and fishing 3, , Other 29, , Total loans to customers (gross) 577, ,

164 As at 31 December 2007 Gross loans % Financial services and other services 66, Individuals 74, Construction 57, Manufacturing 63, Trade 47, Fuel and energy sector 4, Transport and communications 7, Metallurgy 7, State agencies 5, Food industry 6, Agriculture and fishing 1, Science 2, Other 11, Total loans to customers (gross) 356, Credit quality classification The following tables depict the Group s gross loan portfolio by credit quality classification: As at 31 December RUB RUB RUB million % million % million % Performing loans 542, , , Overdue loans 35, , , Total loans, gross 577, , , Geographical area The following table shows the Group s net loan portfolio by geographic area as at 31 December 2009, 2008 and 2007: As at 31 December RUB RUB RUB million % million % million % Russia 448, , , OECD countries Non OECD countries 86, , , Total loans to customers, net 1 534, , , Net allowances for loan impairment. The Group s loan investments are still more concentrated in the Moscow region than any other area where the Group operates, with loan investments in the Moscow region representing 45.8 per cent. of the Group s total loan portfolio as at 31 December 2009 compared to 46.1 per cent. and 46.7 per cent. as at 31 December 2008 and 31 December 2007, respectively. This concentration is due in part to the fact that the City of Moscow is the majority shareholder in the Bank as well as the fact that Moscow and the Moscow region are the most attractive areas in the Russian Federation in terms of investments with the lowest level of risk measured in accordance with the principles for regional credit risk assessment adopted by the Group. 148

165 As at 31 December 2009, the Group had extended loans to customers operating in 82 of the 83 regions of the Russian Federation (compared to 82 and 79 as at 31 December 2008 and 2007, respectively). See also Geographic Risk. Maturity The following table sets out the Group s net loan portfolio by maturity as at 31 December 2009, 2008 and 2007: As at 31 December RUB RUB RUB million % million % million % On demand and less than one month 28, , , One to six months 102, , , Six to 12 months 134, , , More than one year 269, , , No stated maturity/ interest free Total loans to customers, net 1 534, , , Net of allowances (provisions) for loan impairment. Loan amounts The following table sets out the Group s net loan portfolio by the value of loans: As at 31 December RUB RUB RUB million % million % million % Less than USD 1 million 103, , , Greater than USD 1 million but not greater than USD 10 million 142, , , Greater than USD 10 million 287, , , Total loans to customers, net 1,2 534, , , Notes: 1 Translated at the official CBR rate of RUB = USD 1.00 as at 31 December 2009, RUB = USD 1.00 as at 31 December 2008, RUB = USD 1.00 as at 31 December 2007, RUB = USD 1.00 as at 31 December 2006 for information purposes only. 2 Net of allowances (provisions) for loan impairment. 149

166 Currency The following tables shows the Group s net loan portfolio by currency as at 31 December 2009, 2008 and The Group s foreign currency-denominated loans are primarily in US Dollars and Euros. As a result, the Group groups together all loans in foreign currencies other than these two currencies. As at 31 December RUB RUB RUB million % million % million % Russian Roubles 356, , , US Dollars 137, , , Euros 19, , , Other currencies 20, , , Total loans to customers, net 1 534, , , Net of allowances (provisions) for loan impairment per cent. of the Group s net loan portfolio was denominated in Roubles as at 31 December 2009, compared to 65.0 per cent. and 70.3 per cent. as at 31 December 2008 and This concentration is primarily the result of the composition of the Group s customer base, which mostly comprises legal and commercial entities targeting the domestic market. In most cases, such customers obtain proceeds and make payments in Roubles and require Rouble-denominated loans. The Group raised funding in Japanese Yen and Swiss Francs to minimise the foreign currency risk to the Group in offering such products. Apart from mortgage borrowers, the majority of customers requiring foreign currency-denominated banking products and services are often active in the export or international trade markets. Provisions for impairment The Group adapted its procedure and methods for creating and calculating provisions in accordance with IAS 1, IAS 37 and IAS 39. Provisions can be created either for individual loans or for a group of similar loans. An estimated provision for loan losses with respect to a single loan product is determined by taking the loan product amount (that is, the principal amount of the loan reflected in the Group s accounts of loanrelated borrowings and borrowings equated thereto) and multiplying it by the provisioning ratio (determined as a percentage in accordance with an opinion of the division of the Group that is responsible for such loan products within a set range) and dividing the product by 100 per cent. The division that is responsible for the loan product creates a provision based on its estimation of: that product s credit risk in accordance with the Group s internal methods; the transaction structure; and the quality of loan product servicing and other information that can affect the repayment of such loan. In certain circumstances, the Financial Department may establish a provisioning ratio that is outside the set range. In accordance with IFRS, provisions are computed in the process of preparing the Group s financial statements under IFRS as at the reporting date. If the quality of loan servicing or the borrower s financial condition changes materially as at the date of preparation of financial statements under IFRS, or if such a loan is repaid after the reporting date, such information may be taken into consideration in the process of provisioning. The crisis in the international financial markets has caused the Group to revise its approach to risk assessment and provisioning. The Group set a strategic goal to apply a more conservative approach in evaluating the quality and financial position of its borrowers, which included increased requirements in relation to the amount, quality and type of collateral. For a further discussion of the Group s review of its 150

167 risk management strategies, see Operating and Financial Review of the Group Factors affecting the Group s results of operations and financial condition Provisions for Impairment. The following table demonstrates analysis of the credit quality of loans to customers as at 31 December 2009 (where impaired means provisioned rather than necessarily defaulted): As at 31 December 2009 Current loans Overdue loans Total RUB million Corporate loans 421, , ,683.0 Loans to small and medium business 30, , ,340.4 Loans to government and municipal authorities 18, ,577.9 Reverse repo agreements Less: provision for impairment of loans to legal entities (17,305.6) (12,414.3) (29,719.9) Total loans to legal entities 454, , ,780.8 Consumer loans 33, , ,194.7 Mortgage loans 24, , ,477.2 Car loans 8, , ,426.0 Credit cards 4, , ,864.1 Express (scoring) loans ,230.5 Overdrafts Less: provision for impairment of loans to individuals (826.6) (12,759.0) (13,585.6) Total loans to individuals 70, , ,708.7 Total loans to customers 524, , ,489.5 The following tables show the impairment analysis for customer loans as at 31 December 2009 and 31 December 2008: As at 31 December 2009 Overdue Less than From 1 to 6 More than Total Current 1 month months 6 months RUB million Corporate loans 421, , , , ,683.0 Loans to small and medium business 30, , , , ,340.4 Loans to government and municipal authorities 18, ,577.9 Reverse repo agreements Less: provision for impairment of loans to legal entities (17,305.6) (3,655.4) (3,086.6) (5,672.3) (29,719.9) Total loans to legal entities 454, , , , ,780.8 Consumer loans 33, , , , ,194.7 Mortgage loans 24, , ,477.2 Car loans 8, , ,426.0 Credit cards 4, , ,864.1 Express (scoring) loans ,230.5 Overdrafts Less: provision for impairment of loans to individuals (826.6) (575.4) (2,628.9) (9,554.7) (13,585.6) Total loans to individuals 70, , , ,708.7 Total loans to customers 524, , , , ,

168 As at 31 December 2008 Current loans Overdue loans Total RUB million Corporate loans 347, , ,322.4 Loans to small and medium business 44, , ,519.1 Loans to government and municipal authorities 16, ,077.1 Reverse repo agreements 4, ,465.8 Less: provision for impairment of loans to legal entities (4,545.3) (1,887.7) (6,433.0) Total loans to legal entities 408, , ,951.4 Consumer loans 43, , ,144.1 Mortgage loans 29, , ,937.4 Car loans 14, , ,714.3 Credit cards 4, , ,759.4 Express (scoring) loans 2, ,425.0 Overdrafts ,8 Less: provision for impairment of loans to individuals (364.1) (6,092.5) (6,456.6) Total loans to individuals 93, , ,612.4 Total loans to customers 502, , ,563.8 As at 31 December 2008 Overdue Less than From 1 to 6 More than Current 1 month months 6 months Total RUB million Corporate loans 347, ,322.4 Loans to small and medium business 44, , ,519.1 Loans to government and municipal authorities 16, ,077.1 Reverse repo agreements 4, ,465.8 Less: provision for impairment of loans to legal entities (4,545.3) (1,159.1) (348.4) (380.2) (6,433.0) Total loans to legal entities ,951.4 Consumer loans 43, , , , ,144.1 Mortgage loans 29, ,937.4 Car loans 14, ,714.3 Credit cards 4, ,759.4 Express (scoring) loans 2, ,425.0 Overdrafts Less: provision for impairment of loans to individuals (364.1) (98.6) (1,316.0) (4,677.9) (6,456.6) Total loans to individuals 93, , , ,612.4 Total loans to customers 502, , , ,

169 The below table shows movements in the provision for impairment of loans to individuals for the year ended 31 December 2009 and the year ended 31 December 2008: For the year ended 31 December 2009 Consumer Mortgage Car Scoring Credit Overloans loans loans loans cards drafts Total Provision for impairment of loans to individuals as at 1 January 3, ,456.6 Provision for impairment/(recovery of provision) during the year 4, , (21.6) ,223.2 Exchange difference (41.6) (5.2) (1.6) (0.2) (42.6) (0.2) (91.4) Loans written off during the year as uncollectible (2.4) (0.2) (0.1) (2.7) Provision for impairment of loans to individuals as at 31 December 8, , , , ,585.7 For the year ended 31 December 2008 Express Consumer Mortgage Car (scoring) Credit Overloans loans loans loans cards drafts Total Provision for impairment of loans to individuals as at 1 January ,150.1 Provision for impairment during the year 3, ,048.1 Provision of the acquired subsidiary Exchange difference Loans written off during the year as uncollectible (120.5) (1.5) (570.7) (59.7) (752.4) Provision for impairment of loans to individuals as at 31 December 3, ,456.6 The below table shows movements in the provision for impairment of loans to legal entities for the year ended 31 December 2009 and the year ended 31 December 2008: For the year ended 31 December 2009 Loans to Loans to small government Corporate and medium and municipal loans business authorities Total RUB million Provision for impairment of loans to legal entities as at 1 January 3, , ,433.0 (Recovery of provision)/provision for impairment during the six months 18, , ,526.8 Exchange difference (52.2) (49.1) (101.3) Loans written off during the six months as uncollectible (111.2) (27.3) (138.5) Provision for impairment of loans to legal entities as at 30 September 21, , ,

170 For the year ended 31 December 2008 Loans to Loans to small government Corporate and medium and municipal loans business authorities Total RUB million Provision for impairment of loans to legal entities as at 1 January 1, ,375.0 (Recovery of provision)/provision for impairment during the year 1, ,105.8 (1.0) 3,943.0 Provision of the acquired subsidiary Exchange difference Loans written off during the year as uncollectible (17.9) (4.0) (21.9) Provision for impairment of loans to legal entities as at 31 December 3, , ,433.0 Movements in the provision for impairment of loans to legal entities in the year ended 31 December 2007 are as follows: For the year ended 31 December 2007 Loans to Loans to small government Corporate and medium and municipal loans business authorities Total RUB million Provision for impairment of loans to legal entities as at 1 January 1, ,943.5 Provision for impairment during the year Exchange difference 1.0 (8.5) (7.5) Loans written off during the year as Uncollectible (4.8) (1.4) (6.2) Provision for impairment of loans to legal entities as at 31 December 1, ,375.0 Movements in the provision for impairment of loans to individuals in the year ended 31 December 2007 are as follows: Express Consumer Mortgage Car (scoring) Credit Overloans loans loans loans cards drafts Total Provision for impairment of loans to individuals as at 1 January ,393.0 (Recovery of provision)/provision for impairment during the year (1.7) 1,981.7 Exchange difference Loans written off during the year as uncollectible (87.0) (891.3) (246.9) (1,225.2) Provision for impairment of loans to individuals as at 31 December ,

171 DIVIDEND POLICY Following the Russian economic crisis in August 1998, the Group has experienced considerable growth. Russian law does not permit the Bank to pay dividends, unless such dividends are approved by the Bank s shareholders. In 2006, the Bank paid in full dividends for 2005 in the amount of RUB million (or 3.0 per cent. of the Bank s statutory profit after taxation in 2005). In 2007, the Bank declared and paid in full dividends for 2006 in the amount of RUB million (or 2.94 per cent. of the Bank s statutory profit after taxation in 2006). In 2008, the Bank declared and paid in full dividends for 2007 in the amount of RUB million (or 3.0 per cent. of the Bank s statutory profit after taxation in 2007). The shareholders of the Bank decided not to pay dividends in 2010 and in 2009 for the year ended 31 December 2009 and for the year ended 31 December 2008 to allow the Bank to retain the funds that would otherwise have been paid to shareholders, with the intention that such funds would be best left at the disposal of the Bank during the global economic crisis. Although the Bank currently plans to capitalise the majority of its profits, the Bank also intends to adhere to its current dividend policy (to pay not more than 7.0 per cent. of the Bank s statutory profit after taxation as dividends for each financial year) for the foreseeable future. 155

172 MANAGEMENT ORGANISATIONAL STRUCTURE The following chart outlines the organisational structure of the management of the Bank as at 1 September First Executive Vice- President Dmitry Akulinin Investment Assets Department Executive Vice- President Andrei Lapko Loan Monitoring Department Collateral Department Managing Director Dmitri Breytenbikher The office of the President of the Bank Compliance Department First Executive Vice- President, Chief Accountant Liudmila Davydova Bookkeeping, Accounting and Debit Department Banking Transactions Maintainance Legal Department Finance& Planning Department Retail Business Audit Department HR First Executive Vice- President Elena Volkova Network Department GR Bank's branches and additional offices in Moscow and Moscow region Regional branches of the Bank Security Service Executive Vice- President Irina Nikitenko Small and Medium Business Department Research General Shareholders Meeting Board of Directors (15 members) President (Chairman of the Management Board) Andrei Borodin Members of the Management Board (13 members) Executive Vice- President Sergei Yermolayev Executive Vice- President Vladimir Fedorov Executive Vice- President Andrei Germanov Executive Vice- President Pavel Gorbatsevich Corporate and Investment Business International Business Processing Department Operations FI subsidiaries Executive Office * Executive Vice- President Alexei Sytnikov Executive Vice- President Yury Maksutov Managing Director Anastasia Belyanina* Chief Risk Officer Liudmila Markina Treasury IT Funding and IR Risk Management Asset Liquidity Management Asset Management PR Marketing Private Banking Ms Belyanina is on maternity leave as at the date of this Prospectus. Mr Sytnikov is responsible for covering Ms Belyanina s role until Ms Belyanina returns from maternity leave 156

173 Management Bodies In accordance with the Joint Stock Companies Law, the principal Russian legislation governing joint stock companies, and the Charter, the Bank s management bodies are the general shareholders meeting, the board of directors (the Board of Directors ), the management board (the Management Board ) and the President Chairman of the Management Board (the President ). General Shareholders Meeting The general shareholders meeting is the supreme management body of the Bank, which is held at least once a year. The following matters are in the exclusive authority of the general shareholders meeting and may not be delegated to other management bodies of the Bank: amendments to the Charter and increase or decrease of the Bank s share capital; increase or decrease in the number of the members of the Board of Directors, election and early termination of the powers of its members; appointment of the Bank s statutory and IFRS auditors, approval of annual reports and financial statements; distribution of the Bank s profits and coverage of the Bank s losses; approval of the manner of communication of information to shareholders; reorganisation or liquidation of the Bank; appointment and termination of the powers of the Internal Audit Commission; appointment and termination of the powers of the President; approval of certain major transactions and interested party transactions; approval of the Bank s participation in holding companies, industry groups and associations and other commercial associations; approval of internal documents regulating the Bank s management bodies; payment of dividends; and certain other matters provided for in the Joint Stock Companies Law and the Charter. Decisions of the Bank s general shareholders meeting are generally made by a simple majority of votes. Amendments to the Charter, transactions involving assets with a balance sheet value exceeding 50 per cent. of the Bank s total assets and the reorganisation or liquidation of the Bank require approval by a three-quarters majority of votes of shareholders present at the general shareholders meeting. Board of Directors The Board of Directors is responsible for general management matters, with the exception of those matters that are designated by law as being within the exclusive authority of the general shareholders meeting. Members of the Board of Directors are elected by the shareholders for a one-year term by cumulative voting. Under cumulative voting, each shareholder may cast an aggregate number of votes equal to the number of shares held by such shareholder multiplied by the number of members on the Board of Directors, and the shareholder may give all such votes to one candidate or spread them between two or more candidates. Under the Joint Stock Companies Law the number of the members of the Board of Directors may not be less than 5. The Charter provides that the Board of Directors may not have fewer than five or more than 15 members. The particular number of the members of the Board of Directors is determined by a resolution of a general shareholders meeting. The current Board of Directors of the Bank consists of 15 members: seven members of the Board of Directors represent the City of Moscow, the majority shareholder of the Bank; two members of the Board of Directors, Mukhadin A. Eskindarov and Mikhail V. Tsarev were elected as independent directors. The members of the Board of Directors may be re-elected an unlimited number of times. 157

174 Management Board The Management Board is the executive management body of the Bank and is elected by the Board of Directors, except for the Chairman of the Management Board (the President) who is elected by the shareholders. The Board of Directors determines the number of Management Board members, which cannot exceed 15. As at the date of this Prospectus, the Management Board consists of 13 members, including the President of the Bank. The Management Board meets monthly and on an ad hoc basis and makes its decisions by simple majority, provided that at least half of its members are present. The Management Board is responsible for the day-to-day management and administration of the Bank. President of the Bank The President of the Bank is elected by the general shareholders meeting for a term of four years. The President reports to the Board of Directors and the general shareholders meeting. The President represents and acts in the name of the Bank and is ultimately responsible for all operational matters of the Bank. Internal Audit Commission The Group is required under Russian law and the Charter to maintain an internal audit commission (the Internal Audit Commission ). The Internal Audit Commission assists the Group with oversight responsibility and reviews its systems of internal controls and its auditing, accounting and financial reporting processes. Under Russian law and the Charter, a member of the Internal Audit Commission must be independent and may not simultaneously serve as a member of the Board of Directors or hold a management position in the Group, such as the President. Members of the Internal Audit Commission are elected by a general meeting of the Bank s shareholders for a one year term. Directors and Senior Management As at the date of this Prospectus, the Board of Directors consists of the following members: Name Year of birth Title Oleg M Tolkachev 1948 Chairman of the Board of Directors Member of the Board of Directors Dmitry V Akulinin 1966 First Executive Vice President Member of the Board of Directors Lev F Alaluev 1933 Member of the Board of Directors Valeri Y Anuprienko 1959 Member of the Board of Directors Andrei F Borodin 1967 Member of the Board of Directors, President, Chairman of the Management Board Yelena N Volkova 1964 Member of the Board of Directors, First Executive Vice President Victor N Damurchiev 1953 Member of the Board of Directors Alexander V Zelenov 1955 Member of the Board of Directors Viktor A Korobchenko 1947 Member of the Board of Directors Yuri V Korostelev 1945 Member of the Board of Directors Yuri V Roslyak 1954 Member of the Board of Directors Pyotr V Saprykin 1936 Member of the Board of Directors Mikhail V Tsarev 1967 Member of the Board of Directors Nikolay D Shchokotov 1948 Member of the Board of Directors 158

175 Mukhadin A Eskindarov 1951 Member of the Board of Directors As at the date of this Prospectus, the Management Board consists of the following members: Name Year of birth Title Andrei F Borodin 1967 Member of the Board of Directors, President, Chairman of the Management Board Member of the Board of Directors Dmitry V Akulinin 1966 First Executive Vice President Anastasia E Belyanina* 1976 Managing Director Yelena N Volkova 1964 Member of the Board of Directors, First Executive Vice President Lyudmila N Davydova 1964 First Executive Vice President, Chief Accountant Pavel I Gorbatsevich 1958 Executive Vice President Andrey A Germanov 1973 Executive Vice President Sergei V Ermolaev 1956 Executive Vice President Yuri G Maksutov 1967 Executive Vice President Lyudmila A Markina 1957 Chief Risk Officer Irina R Nikitenko 1955 Executive Vice President Alexei V Sytnikov 1967 Executive Vice President Vladimir V Fedorov 1961 Executive Vice President * Ms Belyanina is on maternity leave as at the date of this Prospectus. Mr. Sytnikov is responsible for covering Ms Belyanina s role until Ms Belyanina returns from maternity leave. As at the date of this Prospectus, the Internal Audit Commission consisted of the following members: Name Year of birth Title Olina N Safina 1973 Member of the Internal Audit Commission Konstantin O Popov 1966 Member of the Internal Audit Commission Lyudmila V Dontsova 1956 Member of the Internal Audit Commission Board of Directors, Management Board and Internal Audit Commission The name, year of birth, qualifications and certain other information for each member of the Board of Directors, the Management Board and the Internal Audit Commission of the Bank are set out below: Board of Directors Oleg M Tolkachev (1948), Chairman of the Board of Directors. Mr. Tolkachev has been Chairman of the Board of Directors of the Bank since March On 14 January 2004, Mr. Tolkachev was appointed as a member of the Council of Federation (the Upper Chamber of the Russian Parliament) as the Representative of the City of Moscow. Before his appointment to the Council of Federation, Mr. Tolkachev held various senior positions in the City of Moscow. Recently he served as the First Deputy Mayor of the City of Moscow and the Head of the Property Department of the City of Moscow. Mr. Tolkachev also serves as the Chairman of the Board of Directors of OAO Moscow Committee for Science and Technology. Mr. Tolkachev graduated from the Moscow Engineering and Physics Institute with a diploma in Theoretical Physics in

176 Dmitry V Akulinin (1966), First Executive Vice President. Mr. Akulinin was appointed as First Executive Vice President of the Bank in July 2001 and served as a Member of the Board of Directors between June 2003 and 24 June 2009 and returned to the Board of Directors on 24 June Mr. Akulinin is the Chairman of the Board of Directors of ZAO Automated Banking Technologies, the Chairman of the Supervisory Board of BM Bank LLC Ukraine, a member of the Supervisory Board of AS Latvijas Biznesa banka, a member of the Supervisory Board of Bank Moscow-Minsk, a member of the Board of Directors of OAO Insurance Group Moscow Insurance Company, a member of the Board of Directors of OJSC Metropolitan Insurance Group, a member of the Board of Directors of ZAO Concern Vechernaya Moskva and a number of other companies. Between 2004 and 2009 Mr. Akulinin was the Chairman of Open Joint Stock Company Commercial Bank MOSVODOKANALBANK. From 2002 until 2005 he served as the Chairman of the Board of Directors of OAO AKB Izhkombank and a number of other companies. He joined the Bank in July 1995 as the Head of Special and Project Finance Department. From 1996 until June 1998 he was the Head of Credit and Investment Department. Before re-joining the Bank as a Vice President in January 2000, Mr. Akulinin served as the Chairman of the Executive Board of Mosbusinessbank from September 1998 until January From 1991 to 1993, Mr. Akulinin was chief expert of Vnesheconombank. From 1993 to 1995, he worked at Izhkombank as a Management Board expert and at AOZT Euro Siberian Oil Financial Company as a financial expert, and was an accountant in the Moscow office of Fleming Russia Investment Corporation. He graduated from the State Financial Academy in 1991 specialising in International Economic Relations. Lev F Alaluev (1933), member of the Board of Directors. Mr. Alaluev has been a member of the Board of Directors since June Mr. Alaluev serves as an Advisor to the President of the Bank since Between June 2003 and June 2008 Mr. Alaluev was a member of the Board of Directors of OAO Moscow Insurance Company. Mr. Alaluev graduated from the Moscow Institute of Chemical Machine Building in Valeri Y Anuprienko (1959), member of the Board of Directors. Mr. Anuprienko was elected as a member of the Board of Directors in June Mr. Anuprienko was appointed as a member of the Management Board in June Since October 2010 Mr. Anuprienko has served as First Deputy Head of the City of Moscow Property Department. He was appointed as a member of the Board of Directors in OAO BPO Pechatniki in July Since December 2002 he has served as a member of the Board of Directors in OAO Electronic Moscow. From 1996 through 2000, he served as the Head of the City of Moscow Division for the Analysis and Control for Realisation of Economic Policy. Mr. Anuprienko graduated from the Moscow Management Institute of Ordzhonikidze in He also graduated from the Russian Academy of Public Administration under the President of the Russian Federation in1999. Andrei F Borodin (1967), President, Chairman of the Management Board, member of the Board of Directors. Mr. Borodin has been the President of the Bank since April He became Chairman of the Management Board of the Bank in April Mr. Borodin is the Chairman of the Supervisory Board of Bank of Moscow j.s.c. Belgrade, and the Chairman of the Board of Directors of ZAO Concern Vechernyaya Moskva. He also serves as a member of the Board of Directors of OJSC Metropolitan Insurance Group and a member of the Supervisory Board of OAO Moscow Oil Company. Mr. Borodin is the Executive Vice President of the Board of the Association of Russian Banks, a member of the Board of Directors of the Moscow Banking Union and a member of the Board of Trustees of the Financial Academy under the Government of the Russian Federation. From 2007 until 2009 Mr Borodin served as Chairman of the Board of Directors of OJSC Metropolitan Insurance Group. From 2000 until 2009 Mr. Borodin served as the Chairman of the Board of Directors of OAO Moscow Insurance Company. Before joining the Bank, Mr. Borodin served as Advisor to the Mayor of the City of Moscow on financial and economic issues. From 1991 until 1993 Mr. Borodin worked at Dresdner Bank AG in Frankfurt. In 2000 and 2001 Mr Borodin was named Best Banker of the year in Russia by The Banker magazine; in 2001 Best Manager of the Year in Russia by The Company magazine; in 2002 Donator of the year in Russia by Sovershenno Sekretno holding; and in 2003 Best Manager in Financial Sector in Russia by The Company magazine. He graduated from the State Financial Academy in 1991 specialising in International Economic Relations. Yelena N Volkova (1964), First Executive Vice President, member of the Board of Directors. Ms. Volkova has been a member of the Board of Directors and a member of the Management Board since June 160

177 2002. Ms. Volkova was appointed as the First Executive Vice President in October From August 2002 until October 2007 Ms. Volkova was Executive Vice President, General Director of the Corporate Division. Between December 2002 and March 2010 Ms. Volkova was a member of the Supervisory Board of AS Latvijas Biznesa banka. She has served as General Director of the Corporate and Investment Business Department of the Bank since January From February 1998 until January 2002 she was a Director and then the General Director of the Bank's Client Servicing Department. Before joining the Bank in August 1995, Ms. Volkova worked as a corporate customer branch manager of Sberbank in Moscow. Ms. Volkova graduated from the Moscow Plekhanov Institute of National Economy in 1985, specialising in Business Accounting. Victor N Damurchiev (1953), member of the Board of Directors. Mr. Damurchiev was elected as the member of the Board of Directors in June Since 2004 he has served as the Minister of the City of Moscow Government and Head of the Land Resources Department of the City of Moscow. From 1978 to 1986 Mr. Damurchiev worked as engineer with RSU-1 of the Moskvoretsk Repair and Construction Trust of the City of Moscow. From 1986 until 1991 Mr. Damurchiev was the Head of the Directorate of the Sole Customer, engineer, chief engineer and Head of the Production and Repair Association of Moskvoretsk District of the City of Moscow. During he served as the Director of the Territorial Agency of the City of Moscow Property Management Committee for the Southern Administrative Region of the City of Moscow. Since 1994 until 1997 Mr. Damurchiev was the Deputy and then First Deputy Chairman of the City of Moscow Property Management Committee. From 1997 to 2004 he served as the First Deputy Chairman, Chairman and Head of the City of Moscow Land Committee. Mr. Damurchiev graduated from the Moscow Engineering and Construction Institute of Kuybyshev in Alexander V Zelenov (1955), member of the Board of Directors. Mr. Zelenov has been a member of the Board of Directors of the Bank since June Mr. Zelenov is the Director of the Financial Institutions Department of Vnesheconombank. Mr. Zelenov holds this position since Mr. Zelenov joined Vnesheconombank in In 2010 Mr. Zelenov became a member of the Board of Directors of the Russian Standard Bank. Mr. Zelenov is a Vice Chairman of the Commission on Banking Techniques and Practice of the International Chamber of Commerce (Paris) and the Chairman of the Banking Commission of the International Chamber of Commerce (Moscow). In 2009 Mr. Zelenov was elected as a member of the Board of Directors of Globex Bank, a member of the Supervisory Board of Nomos-Bank, a member of the Supervisory Board of Prominvestbank (Republic of Ukraine), a member of the Supervisory Board of Belvnesheconombank (Republic of Belarus). From 1977 to 1988 Mr. Zelenov was employed with Vneshtorgbank of the USSR.) Mr. Zelenov graduated from the Moscow Financial Institute with a diploma in International Economic Relations in Viktor A Korobchenko (1947), member of the Board of Directors. Mr. Korobchenko has been a member of the Board of Directors of the Bank since June In January 2004, Mr. Korobchenko was appointed as the Head of the Moscow Mayoral and Governmental Administration as the First Deputy Mayor of Moscow with the City of Moscow. From 2001 through 2003, he was the Head of the City of Moscow Governmental Administration, ranking as the First Deputy Mayor of Moscow with the City of Moscow. From January 1997 until August 2001, Mr. Korobchenko served as the administrator of the Moscow Mayor s Office. In 1996, he was appointed as Deputy Prime Minister of the City of Moscow for social issues. In 1992, he was appointed as the First Deputy Prime Minister of the City of Moscow and Head of the Social Protection Complex. Mr. Korobchenko has been employed with executive authorities since 1979, serving first as a secretary, then as the chairman, of the executive committee of the Baumansky District Council, the First Deputy Chairman of the Planning Commission of the Moscow City Executive Committee and finally as the First Deputy Chairman of the Executive Committee of the Moscow Council. He started his career at the Bauman Moscow Higher Technical School and has acted as a Komsomol and Communist party leader for more than 10 years. Mr. Korobchenko graduated from the Bauman Moscow Higher Technical School in Yuri V Korostelev (1945), member of the Board of Directors. Mr. Korostelev has been a member of the Board of Directors of the Bank since March Mr. Korostelev has been the Head of the Finance Department of the City of Moscow s Government since 1990; he was appointed Minister of the City of Moscow in Mr. Korostelev has been employed with the municipal executive authorities since For eight years, he supervised the industrial and transportation aspects of activities of enterprises as a party 161

178 functionary. After completing military service, Mr. Korostelev graduated from university and worked as a senior teacher. Mr. Korostelev started his career as a mechanic at the Schekino Power Plant. He graduated from the Moscow Patrice Lumumba University of International Friendship in 1972 with a degree in Economics. Yuri V Roslyak (1954), member of the Board of Directors. Mr. Roslyak has been a member of the Board of Directors of the Bank since March Mr. Roslyak was appointed as the First Deputy Mayor of Moscow with the City of Moscow and Head of the Department of Economic Policies and Development of Moscow in December 2003, following the election of Yuri Luzhkov as the Mayor of Moscow. In 1995 Mr. Roslyak was appointed as the Deputy Prime Minister with the City of Moscow and Head of the Department of Economic Policies and Development of Moscow and re-appointed in January 2000 and held this position until August Mr Roslyak has been employed with municipal executive authorities since 1986, initially as deputy head of the Executive Committee of the Krasnogvardeysky District Council and later as the head of the Moscow Prospective Development Department. He started his career as a mechanic with a construction department, later was employed as a designer with the USSR Energy Ministry and as an engineer with the Supply Department of the Moscow City Executive Committee. Mr. Roslyak graduated from the Moscow Kuybyshev Civil Engineers Institute in Pyotr V Saprykin (1936), member of the Board of Directors. Mr. Saprykin has been a member of the Board of Directors of the Bank since June Mr. Saprykin is the Head of the Municipal Housing and Housing Policies Department of the City of Moscow. He also serves as a member of the Board of Directors of Commercial Bank Moscow Mortgage Agency. Mr. Saprykin graduated from the All Union Distance Learning Energy Institute with a diploma in Radio Technology in Mikhail V Tsarev (1967), member of the Board of Directors. Mr. Tsarev became a member of the Board of Directors in June Since January 2006 Mr Tsarev has been a professor at the Financial Academy under the Government of the Russian Federation. Since June 2009 Mr. Tsarev has been a member of the Board of Directors of OAO Moscow RE and a member of the Board of Directors of OAO Insurance Group MSK. From May 2008 Mr. Tsarev has been a member of the Board of Directors of OAO Leasing company Leasingbusiness and ZAO Orgtechprom. In March 2009 Mr. Tsarev became Executive Director of ZAO Mint Yard Capital. From 2001 until 2008 Mr. Tsarev was a Director of ZAO KPMG. Mr. Tsarev graduated from the State Financial Academy in 1991, specialising in International Economic Relations. Nikolay D Shchokotov (1948), member of the Board of Directors. Mr. Shchokotov was elected a member of the Board of Directors of the Bank in June Mr. Shchokotov is currently Deputy Director for finance of OOO Electro-Contact. From 2003 until 2007 he was employed as Deputy General Director for economic issues of OOO MMVZ Finance. Mr. Shchokotov is the Chairman of the Board of ZAO Benom-M and ZAO Trust Reserve. Mr. Shchokotov graduated from the Moscow Financial Institute (Department of economics and finance of the military) in Mukhadin A Eskindarov (1951), member of the Board of Directors. Mr. Eskindarov has been a member of the Board of Directors of the Bank since June After having served between 1992 and 2006, as the First Deputy Rector of the Financial Academy under the Government of the Russian Federation, Mr. Eskindarov was appointed as Rector of this Academy. Mr. Eskindarov is also a General Director of the Supervisory Council of the Financial Academy under the Government of the Russian Federation. In June 2009 he became a member of the Supervisory Board of VTB Bank, a member of the Board of Directors of OAO Moscow Industrial Bank and a member of the Board of Directors of OAO Trubnaya Metallurgicheskaya Kompaniya (OAO TMK ). Mr. Eskindarov graduated from the Moscow Financial Institute in 1971 specialising in Finance and Credit. Management Board Andrei F Borodin (1967) (please see Board of Directors above). Dmitry V Akulinin (1966) (please see Board of Directors above). 162

179 Anastasia E Belyanina (1976), Managing Director. Ms. Belyanina joined the Bank in July From 2001 to 2006, she worked as Head of the HR Department. In October 2006, she was appointed Head of Funding and IR Department. In June 2009, Ms. Belyanina was appointed Managing Director responsible for Fund Raising, IR, PR and Marketing. Ms. Belyanina graduated from the Financial Academy under the Government of the Russian Federation in 1998 with a diploma in International Economic Relations. Yelena N Volkova (1964) (please see Board of Directors above). Pavel I Gorbatsevich (1958), Executive Vice President. Mr. Gorbatsevich was appointed as Executive Vice President of the Bank in September From July until September 2004 he served as Acting Executive Vice President. He also serves as Chairman of the Supervisory Board of Bank Moscow-Minsk, Chairman of the Supervisory Board of AS Latvijas Biznesa banka, Chairman of the Board of Directors of AS Eesti Krediidipank, Chairman of the Board of Directors of Open Joint Stock Company Commercial Bank MOSVODOKANALBANK, Chairman of the Board of Directors of Bezhitsa Bank, a member of the Supervisory Board of BM Bank LLC Ukraine and a member of the Supervisory Board of Bank of Moscow j.s.c. - Belgrade. Between February 1995 and March 2004 he was the Deputy Chairman of the Executive Board of Alfa Bank. From September 1992 until January 1995 Mr. Gorbatsevich served as regional manager of BHF Bank (Germany), responsible for Eastern Europe and the CIS. From 1980 to 1992 he held a number of positions in Vnesheconombank and VTB. Mr. Gorbatsevich graduated from the Moscow Financial Institute in 1980 specialising in Finance and Credit. Andrey A Germanov (1973), Executive Vice President. Mr. Germanov joined the Bank in July 2001 and was appointed as Executive Vice President of the Bank in October He became a member of the Management Board in January He has served as a member of the Management Board of ZAO Management Company of the Bank of Moscow since October Mr. Germanov has also served as a member of the Board of Directors in OAO International Managing Company since October From 1998 until 2001, he worked as a banker in Gazprombank. From 1995 until 1998, he worked in ZAO Niko and Avtotransgaz. Mr. Germanov graduated from the State Academy of Oil and Gas with a diploma in Economics and Governance in Lyudmila N Davydova (1964), First Executive Vice President, Chief Accountant. Ms. Davydova has been Executive Vice President of the Bank since December 2002, the chief accountant since December 2000 and the Director of the Accounting, Reporting and Settlements Department since November In March 2005, Ms. Davydova was appointed as First Executive Vice President. In 2000 Ms. Davydova was a deputy general director of the Federal Agency for the Restructuring of Credit Institutions. Before that she served as chief accountant and deputy chief accountant of Mosbusinessbank and Neftekhimbank. Ms. Davydova graduated from the All-Union Distance Learning Finance and Economics Institute specialising in Finance and Credit in Sergei V Ermolaev (1956), Executive Vice President. Mr. Ermolaev has been Executive Vice President since March 2005 and a member of the Management Board since June Mr. Ermolaev is a member of the Board of Directors of OAO AKB Zarechye since June From October 1998 until 2002 he served in the Client Servicing Department of the Bank as the Head of Client Base Development, Deputy General Director and General Director of this Department. Mr. Ermolaev was Deputy Chief and then Chief of Client Operations of Avtobank. Before that he worked in the Maritime Bank and in the Ministry of Transport of the Russian Federation and the Ministry of Marine Transport of the USSR. Mr. Ermolaev graduated from the Odessa Higher Sea School in 1978 and from the State Financial Academy in 1991 with a diploma in international economic relations. He received additional training at the Higher Courses of Banking and Finance of the Russia American Forum in Yuri G Maksutov (1967), Executive Vice President. Mr. Maksutov has been Executive Vice President since April He has also been a member of the Bank's Management Board since June From 2001 until 2008 he served as the Financial Director and Director of the Planning and Economic Department of the Bank. In 1997 and 2000 he held various positions in the Controlling Department, including Head of the Controlling Department from 1999 to From 1994 to 1997 Mr. Maksutov worked as Deputy Chairman of the Management Board of Evromet Bank and from 1993 to 1994 as Deputy Director of a branch of President Bank. Mr. Maksutov graduated from the Moscow Physics and Technical Institute with a diploma 163

180 in radio electronics devices in 1989, has a diploma from the Zhukovsky Air-Force Academy and a diploma in finance and credit from the All-Russian Distance Learning Finance and Economics Institute in Lyudmila A Markina (1957), Chief Risk Officer Department. Ms. Markina joined the Bank in July 1999, and was appointed a Director of Risk Management Department in October Ms. Markina was appointed as a member of the Management Board in January Ms. Markina is a member of the Supervisory Board of BM Bank LLC Ukraine and a member of the Board of Directors of Bezhitsa Bank. From 1991 until 1999, she worked as an Acting Director of Credit Department in OAO Mosbusinessbank. From 1976 until 1991 Ms. Markina worked in various Russian banks as an economist. Ms. Markina graduated from the Moscow Finance Institute with a diploma in Credit and Finance. Irina R Nikitenko (1955), Executive Vice President. Ms. Nikitenko has been Executive Vice President of the Bank in charge of regional business since December From March 2001 until March 2010 Ms. Nikitenko served as a member of the Supervisory Board of Bank Moscow-Minsk. From 2001 to 2003, she served as General Director of the Corporate and Investment Business Department of the Bank. Ms. Nikitenko served as Director of Regional Network Department and General Director of Client Servicing Department. From 1997 to 1998, she served as a member of the Management Board and Deputy Chairman of the Management Board of Mosbusinessbank. From 1989 until 1997, she worked as a branch manager of Zhilsotzbank. Ms. Nikitenko graduated from the Moscow Financial Institute with a diploma in Finance and Credit in Ms. Nikitenko received additional training at the American Institute of Banking in Alexei V Sytnikov (1967), Executive Vice President. Mr. Sytnikov has been Executive Vice President of the Bank since October In June 2002 Mr. Sytnikov was appointed as a member of the Management Board. Mr. Sytnikov is the Chairman of the Board of Directors of ZAO Management Company of the Bank of Moscow. He also serves as a member of the Supervisory Board of AS Latvijas Biznesa banka, a member of the Supervisory Board of Bank Moscow-Minsk, a member of the Supervisory Board of Bank of Moscow j.s.c. Belgrade and a member of the Supervisory Board of AS Eesti Krediidipank. From October 2000 until October 2001 he was Director of the Treasury Department at the Bank. From 1997 to 2000 Mr. Sytnikov served as a Deputy General Director in OOO Sberinvest and as a Deputy General Director of OOO MFK Moscow Partners. From 1994 to 1997 he worked as Head of Commercial Department at Stolichny Bank International N.V. From 1991 to 1994 Mr. Sytnikov also worked in Debt Instruments and Securities Department at BfG Bank AG. Mr. Sytnikov graduated with honours from the State Financial Academy with a diploma in International Economic Relations in Vladimir V Fedorov (1961), Executive Vice President. Mr. Fedorov joined the Bank in March Mr. Fedorov has been Executive Vice President and a member of the Management Board since March From 1998 until 2005, he worked as a banker with the European Bank for Reconstruction and Development ( EBRD ); he also was a Senior Banker in the Russian Team of Banking Department of the EBRD prior to his departure. From 1994 until 1998, Mr. Fedorov worked as Counsel at the Office of General Counsel of the EBRD in London. In 1994 Mr. Fedorov was seconded to Allen & Overy in London. From 1984 until 1994 he worked in the Ministry of Foreign Affairs of the USSR and the Russian Federation. Mr. Fedorov graduated with honours from the Moscow State Institute of International Relations with a diploma in International Public and Private Law in Internal Audit Commission Olina N Safina (1973), member of the Internal Audit Commission. Ms. Safina has been a member of the Internal Audit Commission since June She is a member of the Management Board and the chief accountant of OAO Russian National Commercial Bank since From August 1999 until April 2003 Ms. Safina was Head of the banking audit segment of ZAO Ami. Ms. Safina graduated from the Moscow Plekhanov Institute of National Economy with diploma in Economics in Konstantin O Popov (1966), member of the Internal Audit Commission. Mr. Popov became a member of the Internal Audit Commission in June Since April 2001 he has been the Chairman of the Board of Directors of ZAO Corporation Incom-Real Estate. From September 1991 until April 2001 he was Chairman of the Board of Directors of the Moscow Central Real Estate Exchange. Mr. Popov graduated from the Moscow Institute of Radiotechnics, Electronics and Automatics with diploma in Radiotechnics in

181 Luydmila V Dontsova (1956), member of the Internal Audit Commission. Ms. Dontsova was elected to the Internal Audit Commission in June Since 2005 Ms. Dontsova has served as Deputy Head of the Economic Division of the City of Moscow Property Department. From 2000 through 2003 she served as the professor of international accounting and audit department at the State University Higher School of Economy. From 2003 to 2004 Ms. Dontsova worked as the Head of the Division with the Ministry of Natural Resources of the Russian Federation. Ms. Dontsova graduated from the Moscow Institute of People s Business of Plekhanov with diploma in Accounting in The business address of each member of the Board of Directors, the Management Board and the Internal Audit Commission is 8/15, bldg. 3, Rozhdestvenka Street, Moscow , Russian Federation. There are no current or potential conflicts of interest between the official capacity and the private interests of members of the Board of Directors and the Management Board. Compensation The total compensation of the members of the Management Board for the years ended 31 December 2009, 2008 and 2007 was RUB million, RUB million and RUB million, respectively. The Bank did not pay any compensation to the members of the Board of Directors and the Internal Audit Commission in the years ended 31 December 2009, 2008 and As at 31 December 2009, the Bank has extended Rouble-denominated loans to members of the senior management with a total outstanding balance of RUB 95.6 million, total outstanding balance of US Dollar denominated loans to members of the senior management of the Bank was RUB million, and the total outstanding balance of Euro-denominated loans to members of the senior management was RUB million. Most of the loans to senior management bear an annual interest rate of between 3.5 per cent. and 9.0 per cent. and are not secured by any collateral. Such loans to senior management are related party transactions for the purposes of the Group Financial Statements. As at 31 December 2008 the total outstanding balance of Rouble-denominated loans to members of the senior management of the Bank was RUB million, the total outstanding balance of US Dollar denominated loans to members of the senior management of the Bank was RUB million, and the total outstanding balance of Euro-denominated loans to members of the senior management was RUB 27.8 million. In 2008 most of the loans to senior management bore an annual interest rate of between 6.0 per cent. and 9.75 per cent. and were not secured by any collateral. See Business Employees. The Group does not have any stock option, bonus plans or similar programs for directors, officers or employees. Board Practices All current members of the Board of Directors were elected at the 2010 annual general shareholders meeting of the Bank held on 24 June 2010 for a one year term. The Bank has not entered into any service contracts with any of its current directors providing for benefits upon termination of service. Share Ownership As at 31 December 2009, the following directors and officers of the Bank directly held the following stakes in the Bank s share capital: Name, position within the Bank % of total share capital Andrei F Borodin President of the Bank, Chairman of the Management Board, Member of the Board of Directors Dmitry V Akulinin First Executive Vice President of the Bank, Member of the Management Board, Member of the Board of Directors Lev F Alaluev Advisor to the President of the Bank, Member of the Board of Directors 165

182 Yelena N Volkova First Executive Vice President of the Bank, Member of the Management Board, Member of the Board of Directors Pavel I Gorbatsevich Executive Vice President of the Bank, Member of the Management Board In addition, Mr. Borodin and Mr. Alaluev control companies that in aggregate hold per cent. of the Bank s share capital as at the date of this Prospectus. It is possible that beneficial ownership of the Bank s senior management in the Bank s share capital will be increased in the future. Code of Corporate Governance Pursuant to the FSFM Order No 421/r On Recommendations for Application of Corporate Governance Code dated 4 April 2002, the Board of Directors adopted the Corporate Governance Code (the Corporate Governance Code ) on 25 October 2006 to unify and develop a corporate governance practice. The Corporate Governance Code was developed in accordance with applicable laws and focuses on corporate governance provisions of the Charter and internal regulations. The Corporate Governance Code provides for a number of basic principles of corporate governance, sets out rules for implementation of these principles and disclosure of information. These basic principles, among others, include: equal treatment of all the Bank s shareholders; proper protection of their rights; procedure for the election of directors; qualification criteria for the directors; and procedures aimed at prevention and effective settlement of corporate conflicts. The Corporate Governance Code establishes certain procedures aimed at prevention and effective settlement of corporate conflicts that may arise between the Bank and its shareholders or between the Bank s shareholders. The Corporate Governance Code sets forth a number of corporate management rules and requirements and develops the relevant provisions of the Charter and internal regulations to ensure proper performance by the Bank s Board of Directors of its duties. These rules and requirements, among others, include the procedure for the election of directors designed to take into account all the shareholder votes and certain qualification criteria for the directors. The principles of information disclosure include regularity, flexibility, availability, accuracy and completeness achieving a reasonable balance between the Bank s level of transparency and the protection of its commercial interests. The adoption of the Corporate Governance Code is generally aimed at increasing the level of the Bank s transparency and protection of shareholders and investors rights and interests. 166

183 SHAREHOLDING The following table lists the Bank s shareholders of record holding one per cent., or more of the Bank s outstanding ordinary shares as at 31 December 2009, such date being the most recent practicable date as of which this information is available. On 26 July 2010, the results of the Bank s completed the Fourteenth Issuance were approved and registered by the CBR. On 28 July 2009, the results of the Bank s Thirteenth Issuance of shares, were approved and registered by the CBR. For more information regarding the Bank s recent share issuances, see Operating and Financial Review of the Group Capital Adequacy and Operating and Financial Review of the Group Recent Developments Equity Issuance. Executive officers and directors as a group directly owned less than 1 per cent. of the total share capital of the Bank as at such date. However, as illustrated in the table below, Mr. Borodin and Mr. Alaluev controlled companies that in aggregate hold per cent. of the Bank s share capital as at the date of this Prospectus. It is possible that beneficial ownership of the Bank s senior management in the Bank s share capital will be increased in the future. As at 31 December 2009, the shareholding in the Bank was as follows: % of total share capital The Property Department of the Government of the City of Moscow Group of subsidiaries of O.J.S.C. Metropolitan Insurance Group, including: OJSC Moscow Insurance Company JSC MSK Standard 2.12 LLC TBIH Russian Funds LLC Plastoinstrument LLC NPO PHarmatsevtika LLC Stroyelectromontazh LLC Gazdorstroy LLC Khimpromexport LLC Centrotransport Other Shareholders with less than 5 per cent. in the share capital Total Notes: 1 A company ultimately controlled by Mr. Andrey Borodin and Mr. Lev Alaluev. 167

184 As of the date of this Prospectus, the shareholding in the Bank was as follows: % of total share capital The Property Department of the Government of the City of Moscow Group of subsidiaries of OJSC Metropolitan Insurance Group, including: OJSC Insurance Group MSK OJSC Metropolitan Insurance Group 0.21 LLC TBIH Russian Funds LLC NPO Farmatsevtika LLC Stroyelectromontazh LLC Gazdorstroy LLC Plastoinstrument LLC Khimpromexport LLC Centrotransport Other Shareholders with less than 5 per cent. in the share capital Total Notes: 1 In February 2010 OJSC Moscow Insurance Company and JSC MSK Standard were integrated into OJSC Insurance Group MSK. 2 A company ultimately controlled by Mr. Andrey Borodin and Mr. Lev Alaluev. 3 Goldman Sachs International and Credit Suisse International participated in the Fourteenth Share Issue and acquired 3.88 per cent. and 2.77 per cent. stakes, respectively in the Bank s share capital. Admission to Trading of Ordinary Shares of the Bank On 10 December 2004, the ordinary shares of the Bank were admitted to trading on the OTC market of MICEX under the trade code MMBM. A number of ordinary shares of the Bank are held by nominees in order to allow the ordinary shares to be traded on MICEX. 168

185 RELATED PARTY TRANSACTIONS The Group enters into banking transactions in the normal course of business with shareholders (including the City of Moscow), directors, subsidiaries and companies with which it has significant shareholders in common. These transactions include settlements, loans, deposit taking, trade financing and foreign currency transactions and are priced at market rates. In the normal course of business the Group enters into transactions with its main shareholders, directors and other related parties. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 Related Party Disclosures. See 2009 Financial Statements Footnote 34 Related Party Transactions. As at 31 December 2009, the City of Moscow deposited a significant portion of its budget funds with the Group. These budget funds accounted for 14.7 per cent. of the Group s total deposit portfolio or 8.5 per cent. of the Group s total liabilities as at 31 December 2009, compared with 22.6 per cent. or 12.5 per cent., respectively and 26.2 per cent. or 19.2 per cent., respectively as at 31 December 2008 and 31 December Loans to related parties, as defined in the Group Financial Statements, including loans to companies controlled by the Government of the City of Moscow, accounted for 2.4 per cent. of the Group s gross loan portfolio as at 31 December 2009, compared with 1.4 per cent. and 1.2 per cent. as at 31 December 2008 and 31 December The Group has been involved in the financing of certain City of Moscow projects on a competitive tender basis since In addition, the Group finances, on commercial terms (usually backed by performance guarantees), companies that carry out contractual work for the City of Moscow. The Group conducts business with the City of Moscow on an arm s length basis and on market terms. See Business Corporate Banking The City of Moscow. The table below sets out the outstanding balances as at 31 December 2009, 2008 and 2007 and interest expense and income as well as other transactions for the years then ended with related parties in accordance with IAS 24: As at and for the year period ended 31 December RUB millions Financial assets at fair value through profit or loss Trading securities 11, , ,918.0 Due from other banks Placements with banks Interest income 1.1 Loans to customers Loans outstanding 14, , ,579.1 Allowance for loan impairment 1, Loans outstanding, net 12, , ,489.6 Interest income 1, Due to other banks Due to other banks Interest expense 0.1 Customer accounts Current accounts and term deposits 97, , ,157.5 Interest expense 10, , ,

186 THE ISSUER Description of the Issuer The Issuer is a special purpose vehicle established for the purpose of issuing loan participation notes and was incorporated in Ireland as a public limited company with limited liability, registered number under the name BOM Capital P.L.C., under the Companies Acts 1963 to 2005 as amended (the Companies Acts ) on 28 August The registered office of the Issuer is 5 Harbourmaster Place, IFSC, Dublin 1, Ireland and telephone number The authorised share capital of the Issuer is EUR 40,000 divided into 40,000 ordinary shares of par value EUR 1 each (the Shares ). The Issuer has issued 40,000 Shares, all of which are fully paid and are held on trust by Deutsche International Finance (Ireland) Limited (the Share Trustee ) under the terms of a declaration of trust (the Declaration of Trust ) dated 18 February 2010, under which the Share Trustee holds the Shares on trust for charity. The Share Trustee has no beneficial interest in and derives no benefit (other than any fees for acting as Share Trustee) from its holding of the Shares. The Share Trustee will apply any income derived from the Issuer solely for the above purposes. Deutsche International Corporate Services (Ireland) Limited (the Corporate Services Provider ), an Irish company, acts as the corporate services provider for the Issuer. The office of the Corporate Services Provider serves as the general business office of the Issuer. Through the office and pursuant to the terms of the corporate services agreement entered into on 18 February 2010 between the Issuer and the Corporate Services Provider (the Corporate Services Agreement ), the Corporate Services Provider performs various management functions on behalf of the Issuer, including the provision of certain clerical, reporting, accounting, administrative and other services until termination of the Corporate Services Agreement. In consideration of the foregoing, the Corporate Services Provider receives various fees and other charges payable by the Issuer at rates agreed upon from time to time plus expenses. The terms of the Corporate Services Agreement provide that either party may terminate the Corporate Services Agreement upon the occurrence of certain stated events, including any material breach by the other party of its obligations under the Corporate Services Agreement which is either incapable of remedy or which is not cured within 30 days from the date on which it was notified of such breach. In addition, either party may terminate the Corporate Services Agreement at any time by giving at least 90 days written notice to the other party. The Corporate Services Provider s principal office is 5 Harbourmaster Place, IFSC, Dublin 1, Ireland. Business The principal objects of the Issuer are set forth in clause 3 of its Memorandum of Association (as currently in effect) and permit the Issuer, inter to lend money and give credit, secured or unsecured, to issue debentures, enter into derivatives and otherwise to borrow or raise money and to grant security over its property for the performance of its obligations or the payment of money. The Issuer is organised as a special purpose company. The Issuer was established to raise capital by the issue of debt securities and to use an amount equal to the proceeds of each such issuance to advance loans to the Bank. Since its incorporation, other than the establishment of a USD 5,000,000,000 programme for the issue of loan participation notes for the sole purpose of financing loans to the Bank and the issue thereunder of USD 750,000, per cent. Loan participation notes due 2015 and the issue of the Notes, the Issuer has not engaged in material activities. The Issuer has no employees. 170

187 Directors and Company Secretary The Issuer s Articles of Association provide that the Board of Directors of the Issuer will consist of at least two Directors. The Directors of the Issuer and their business addresses are as follows: Jennifer Coyne 5 Harbourmaster Place, IFSC, Dublin I, Ireland Margaret Kennedy 5 Harbourmaster Place, IFSC, Dublin 1, Ireland The Company Secretary is Deutsche International Corporate Services (Ireland) Limited. Financial Statements Since its date of incorporation, no financial statements of the Issuer have been prepared as at the date of the Prospectus. The Issuer intends to publish its first financial statements in respect of the period ending on 31 December The Issuer will not prepare interim financial statements. The financial year of the Issuer ends on 31 December in each year. The profit and loss account and balance sheet can be obtained free of charge from the registered office of the Issuer. The Issuer must hold an annual general meeting no more than 9 months after the financial year end and the gap between its annual general meetings must not exceed 15 months. One annual general meeting must be held in each calendar year. The auditors of the Issuer are BDO, of Beaux Lane House, Mercer Street Lower, Dublin 2, Ireland who are Registered Auditors regulated by the Institute of Chartered Accountants in Ireland. 171

188 The following is the text of the Loan Agreement: FORM OF LOAN AGREEMENT THIS LOAN AGREEMENT is made on 8 September 2010 between: (1) JOINT STOCK COMMERCIAL BANK BANK OF MOSCOW (OPEN JOINT STOCK COMPANY), an open joint stock company incorporated under the laws of Russia whose registered office is at 8/15, bldg. 3, Rozhdestvenka Street., Moscow , Russia (the Borrower ); and (2) BOM CAPITAL P.L.C., a public limited liability company established under the laws of Ireland whose registered office is at 5 Harbourmaster Place, IFSC, Dublin 1, Ireland (the Lender ). WHEREAS: (A) (B) The Lender has at the request of the Borrower made available to the Borrower a loan facility in the amount of CHF 350,000,000 on the terms and subject to the conditions of this Agreement. It is intended that, concurrently with the extension of the Loan under this Agreement, 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 the account denominated in Swiss Francs in the name of the Lender with the Swiss Principal Paying Agent, with payment being made to BNP Paribas (Suisse) SA, SWIFT: BPPBCHGG, Account Name: BOM Capital P.L.C., Account Number: /1H; Additional Amounts has the meaning set forth in Clause 7.1 (Additional Amounts); Advance has the meaning set out in Clause 3.1 (Drawdown); Affiliate of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. 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 ownership of voting securities, by contract or otherwise, provided that beneficial ownership of 10 per cent. or more of the Voting Stock of a Person shall be deemed to be control; 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; Agreed Funding shall mean the Indebtedness (including in the form of securities), incurred to the Agreed Funding Source; Agreed Funding Source means any Person (including a designated representative of such Person) to whom the Lender owes any Indebtedness (including indebtedness in respect of securities), which Indebtedness was incurred solely and expressly to fund the Loan; Agreement means this loan agreement as originally executed or as it may be amended from time to time; 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; 172

189 Borrower Account has the meaning set out in Clause 7.3 (Tax Credits and Refunds); Business Day means a day on which (a) the London interbank market is open for dealings between banks generally, and (b) if on that day a payment is to be made hereunder, commercial banks generally are open for business in Geneva, Moscow and in the city where the specified office of the Swiss Principal Paying Agent is located; Capital Stock means, with respect to any Person, any and all shares, interests, participations, rights to purchase, warrants, options, or other equivalents (however designated) of capital stock of a corporation and any and all equivalent ownership interests in a Person other than a corporation, in each case whether now outstanding or hereafter issued; Central Bank or CBR means the Central Bank of the Russian Federation or such other governmental or other authority as shall from time to time carry out functions in relation to the supervision of banks in the Russian Federation as are, on the date hereof, carried out by the CBR; Closing Date means 10 September 2010; Compliance Certificate means a certificate in the form attached as the Schedule to this Agreement; Default means any event which is, or after notice given hereunder or passage of time or both would be, an Event of Default; Dispute has the meaning assigned to it in Clause 20 (Governing Law and Jurisdiction); Event of Default has the meaning assigned to such term in Clause 12.1 (Events of Default); Event of Illegality has the meaning set out in Clause 5.3 (Prepayment in the Event of Illegality); Facility means the term loan facility granted by the Lender to the Borrower as specified in Clause 2 (Facility); Facility Fee has the meaning set out in Clause 2 (Facility); Fair Market Value means the price that would be paid in an arm s length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, 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; Finance Documents means this Agreement and the other agreements and deeds relating to the Loan and/or issuance of the Agreed Funding, including any subscription agreement related to such Agreed Funding to which the Lender is a party; Fitch means Fitch Ratings Ltd. (or its successors); Group means the Borrower and its Subsidiaries from time to time taken as a whole, and a member of the Group means any of the Borrower or any of its Subsidiaries from time to time; 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); IFRS Fiscal Period means any fiscal period for which the Group has produced financial statements in accordance with IFRS which have either been audited or reviewed by independent accountants of recognised international standing; incur means issue, assume, guarantee, incur or otherwise become liable for; Indebtedness means any indebtedness, in respect of any Person for, or in respect of, monies borrowed or raised, including, without limitation, any amount raised by acceptance under any 173

190 acceptance credit facility; any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any other similar instrument; any amount raised under any other transaction (including any forward sale or purchase agreement) having the economic effect of a borrowing; and the amount of any liability in respect of any guarantee or indemnity for any of the items referred to above; Indemnified Party has the meaning set out in Clause 13.4 (Indemnification); Independent Appraiser means, with respect to any sale or disposal of capital assets to which the provisions of Clause 11.2 (Disposals) apply: (i) where the relevant sale or disposal involves aggregate payments or value in excess of 10 per cent. of the gross assets of the Borrower and its Subsidiaries on a consolidated basis (determined by reference to the balance sheet date for the Borrower s most recent IFRS Fiscal Period) and the assets being sold or disposed of are located in Russia, a Russian investment bank of good repute; and (ii) in any case, any third party expert of international standing whose business it is to value and appraise companies or other relevant assets; provided, however, in each case, that such Independent Appraiser is not an Affiliate of any member of the Group; Interest Payment Date means 10 September of each year in which the Loan remains outstanding, being the last day of the corresponding Interest Period, commencing on 10 September 2011 and the last such date being the Repayment Date; Interest Period means each period beginning on (and including) an Interest Payment Date (or, in the case of the first Interest Period, the Closing Date) and ending on (but excluding) the next Interest Payment Date (or, in the case of the first Interest Period, the first Interest Payment Date); Lien means any mortgage, pledge, encumbrance, lien, charge or other security interest (including, without limitation, anything analogous to any of the foregoing under the laws of any jurisdiction) and any title retention agreement having a similar effect; Loan means, at any time, an amount equal to the aggregate principal amount of the Facility advanced by the Lender pursuant to this Agreement and outstanding at such time; Loss has the meaning set out in Clause 13.4 (Indemnification) of this Agreement; Joint Lead Managers means BNP Paribas (Suisse) SA and UBS AG; Material Adverse Effect means a material adverse effect on: (i) the business, operations, property or condition (financial or otherwise) of the Group taken as a whole; or (ii) the Borrower s ability to perform or comply with its obligations under this Agreement; or (iii) the validity or enforceability of this Agreement or the rights or remedies of the Lender hereunder; Material Subsidiary means any Subsidiary of the Borrower: (i) (ii) which, for the most recent IFRS Fiscal Period, accounted for more than 10 per cent. of the consolidated revenues of the Borrower or more than 10 per cent. of the consolidated net income of the Borrower or which, as of the end of the most recent IFRS Fiscal Period, was the owner of more than 10 per cent. of the consolidated assets of the Borrower, all as set forth in the most recent available consolidated financial statements of the Borrower for such IFRS Fiscal Period; or to which are transferred substantially all of the assets and undertaking of a Subsidiary of the Borrower which immediately prior to such transfer was a Material Subsidiary; Moody s means Moody s Investors Service Limited (or its successors); Notes means the CHF 350,000, per cent. Loan Participation Notes due 2013; Officers Certificate means a certificate signed on behalf of the Borrower by two officers of the Borrower, at least one of whom shall be the principal executive officer, principal accounting officer or principal financial officer of the Borrower; 174

191 Opinion of Counsel means a written opinion from recognised international legal counsel as reasonably selected by the Borrower and approved in writing by the Trustee (and, following the execution of any other agreements entered into in connection with the Agreed Funding Source, to the party designated by such agreement); Paying Agent means the Swiss Paying Agents, and any paying agent as may be appointed from time to time in connection with the Agreed Funding; Person means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organisation, government, or any Agency or political subdivision thereof or any other entity, whether or not having a separate legal personality; Proceedings has the meaning assigned to it in Clause 19.3 (Governing Law and Jurisdiction); Prospectus means the prospectus dated 8 September 2010 in respect of the Agreed Funding; Qualifying Jurisdiction means any jurisdiction which has a double taxation treaty with Russia 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 Clause 4.1 (Rate of Interest); Related Person of any Person means any other Person directly or indirectly owning: (i) (ii) 5 per cent. or more of the outstanding Voting Stock of such Person (or, in the case of a Person that is not a corporation, 5 per cent. of the equity interest in such Person); or 5 per cent. or more of the voting power over Voting Stock of such Person. Relevant Indebtedness means any Indebtedness which: (i) (ii) (a) is in the form of or represented by any bond, note, debenture stock, loan stock, certificate or other debt instrument which is listed or quoted on any stock exchange; (b) is denominated, payable or optionally payable in a currency other than Roubles; and (c) was initially offered and distributed (as to more than 50 per cent. of the original principal amount of such debt) outside Russia; or is in the form of a borrowing funded by any bond, note, debenture stock, loan stock, certificate or other debt instrument referred to in paragraph (i) above which is issued expressly for the primary purpose of funding sums advanced in respect of such borrowing; Repayment Date means 10 September 2013; Rouble means the lawful currency from time to time of Russia; Russia shall mean the Russian Federation and any province or political subdivision or Agency thereof or therein, and Russian shall be construed accordingly; Russian Tax Payment has the meaning set out in Clause 7.3 (Tax Credits and Refunds); Same-Day Funds means same day, freely transferable, clearly identifiable cleared Swiss Francs funds or such other funds for payment in Swiss Francs as the Lender may at any time reasonably determine to be customary for the settlement of international transactions in London of the type contemplated hereby; Security means the security granted by the Lender to the Trustee over rights of the Lender under this Agreement, including an assignment of such rights in favour of the Trustee; Subsidiary means, in relation to any Person (the first Person ) at any particular time, any other Person (the second Person ): (i) whose affairs and policies the first Person controls or has the power 175

192 to control, whether by ownership of share capital, contract, the power to appoint or remove members of the governing body of the second Person or otherwise; or (ii) whose financial statements are, in accordance with applicable law and international accounting standards, consolidated with those of the first Person; Swiss Francs or CHF means the lawful currency of Switzerland; Swiss Paying Agents means BNP Paribas (Suisse) SA and UBS AG or any other Swiss paying agent appointed from time to time in connection with the Agreed Funding. Swiss Principal Paying Agent means BNP Paribas (Suisse) SA or any other Swiss principal paying agent appointed from time to time in connection with the Agreed Funding; Tax Indemnity Amounts has the meaning set out in Clause 7.2 (Tax Indemnity); Taxes means any present and future tax, duty, levy, impost, assessment or other governmental charge or withholding of any nature (including penalties, interest and other liabilities related thereto); Taxing Authority has the meaning set out in Clause 7.1 (Additional Amounts); TARGET means the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET or TARGET 2) System and any successor thereof; Trustee means BNY Corporate Trustee Services Limited or any other Person appointed as trustee under the Trust Deed and any successor thereto as provided thereunder for the Agreed Funding Source from time to time; Voting Stock means, in relation to any Person, Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof; 1.2 Interpretation Unless the context or the express provisions of this Agreement otherwise require, the following shall govern the interpretation of this Agreement: (a) (b) (c) (d) (e) (f) all references to Clause, Sub-clause or paragraph are references to a clause, sub-clause or paragraph of this Agreement; the terms hereof, herein and hereunder and other words of similar import shall mean this Agreement as a whole and not any particular part hereof; words importing the singular number include the plural and vice versa; the headings are for convenience only and shall not affect the construction hereof; the equivalent on any given date in one currency (the first currency ) of an amount denominated in another currency (the second currency ) is a reference to the amount of the first currency which could be purchased with the amount of the second currency at the spot rate of exchange quoted on the relevant Reuters page or, where the first currency is Roubles and the second currency is Swiss Francs (or vice versa), by the Central Bank at or about a.m. (Zurich time or, as the case may be, Moscow time) on such date for the purchase of the first currency with the second currency; a month is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that, where any such period would otherwise end on a day which is not a Business Day, it shall end on the next succeeding Business Day, unless that day falls in the next calendar month, in which case it shall end on the immediately preceding Business Day, provided that, if a period starts on the last Business Day in a calendar month or if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last Business Day in that later month (and references to months shall be construed accordingly); 176

193 (g) (h) the Lender or the Borrower shall be construed so as to include it and any of its subsequent successors, assignees and chargees in accordance with their respective interests; and all references to this Agreement or any other document are to this Agreement or that document as amended, restated, supplemented or replaced from time to time. 2. FACILITY On the terms and subject to the conditions set forth herein, the Lender hereby grants to the Borrower a single disbursement term loan facility in an aggregate amount of CHF 350,000,000. The Borrower shall pay a fee (the Facility Fee ) to the Lender in connection with the arrangement of the facility and certain costs and expenses as set out in a facility fee side letter between the Lender and the Borrower dated on or around the date of this Agreement. 3. DRAWDOWN 3.1 Drawdown On the terms and subject to the conditions of this Agreement, on the Closing Date the Lender shall make an advance of CHF 350,000,000 (the Advance ) to the Borrower and the Borrower shall make a single drawing in the full amount of the Advance. 3.2 Purpose The proceeds of the Loan will be used for general corporate purposes and the Lender shall not be concerned with the application thereof. 3.3 Disbursement Subject to the conditions set forth herein, on the Closing Date the Lender shall transfer the full amount of the Advance to the Borrower s account number: with Credit Suisse, Zurich, SWIFT: CRESCHZZ80A in Same-Day Funds. 4. INTEREST 4.1 Rate of Interest The Borrower will pay interest in Swiss Francs to the Lender on the outstanding principal amount of the Loan from time to time at the rate of 4.50 per cent. per annum (the Rate of Interest ). 4.2 Payment of Interest Interest at the Rate of Interest shall accrue from day to day, starting from (and including) the Closing Date, and shall be paid annually in arrear not later than noon. (Zurich time) one Business Day prior to each Interest Payment Date. Interest on the Loan will cease to accrue from the due date for repayment thereof unless payment of principal is withheld, refused or not made, in which event interest will continue to accrue (before or after any judgment) at the Rate of Interest to but excluding the date on which payment in full of the principal thereof is made. For the avoidance of doubt, the amount of interest payable in respect of each Interest Period shall be CHF 15,750, Calculation of Interest The amount of interest payable in respect of the Loan for any Interest Period shall be calculated by applying the Rate of Interest to the Loan and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). If interest on the Loan is required to be calculated for any period other than an Interest Period, it shall be calculated by applying the Interest Rate to the principal amount of the Loan then outstanding and multiplying the product by the actual number of days in the relevant period, from (and including) the first day in such period to (but excluding) the last day in such period, divided by the number of days in the Interest Period in which the relevant period falls (including the first such day but excluding the last), and rounding the resulting figure to the nearest cent (half cent being rounded upwards). 177

194 5. REPAYMENT AND PREPAYMENT 5.1 Repayment Except as otherwise provided herein, the Borrower shall repay the Loan, including accrued interest thereon, not later than a.m. (Zurich time) one Business Day prior to the Repayment Date. 5.2 Prepayment in the event of Taxes or Increased Costs If the Borrower is required to pay any Additional Amount as provided by Clause 7.1 (Additional Amounts) or any Tax Indemnity Amount as provided by Clause 7.2 (Tax Indemnity), or if (for whatever reason) the Borrower would have to or has been required to pay additional amounts pursuant to Clause 9 (Change in Law; Increase in Cost), and in any such case such obligation cannot or could not be avoided by the Borrower taking reasonable measures available to it, then the Borrower may (without premium or penalty), upon not less than 30 days nor more than 60 days prior notice to the Lender and the Trustee (which notice shall be irrevocable), prepay the Loan in whole (but not in part) on the date specified in the notice, together with any amounts then payable under Clauses 7.1 (Additional Amounts), 7.2 (Tax Indemnity) or 9 (Change in Law; Increase in Cost) and any other amounts payable under this Agreement and pay the accrued and unpaid interest on such outstanding principal amount up to and excluding such prepayment date. Prior to giving any such notice in the event of the Borrower being obliged to make an additional payment as referred to in this Clause 5.2, the Borrower shall address and deliver to the Lender and the Trustee an Officers Certificate confirming that the Borrower would be required to make such payment and that the obligation to make such payment cannot or could not 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. 5.3 Prepayment in the Event of Illegality If, at any time, by reason of the introduction of any change in any applicable law, regulation, regulatory requirement or directive of an Agency (having applicable jurisdiction) after the date of this Agreement the Lender reasonably determines (such determination being accompanied and verified, if so requested by the Borrower, 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 such applicable law, regulation, regulatory requirement or directive for the Lender to allow all or part of the Loan or the Agreed Funding to remain outstanding or for the Lender to maintain or give effect to any of its obligations in connection with this Agreement or the Security and/or to charge or receive or to be paid interest at the rate then applicable to the Loan (an Event of Illegality ), then upon notice by the Lender to the Borrower in writing (setting out in reasonable detail the nature and extent of the relevant circumstances), the Borrower and the Lender shall consult in good faith as to a basis which eliminates the application of such Event of Illegality; provided, however, that the Lender shall be under no obligation to continue such consultation if a basis has not been determined within 30 days of the date on which the Lender so notified the Borrower. If such a basis has not been determined within such 30 days (or on such earlier date as the Lender shall certify to be necessary to comply with such regulation, regulatory requirement or directive), then upon written notice by the Lender to the Borrower the Borrower shall prepay the Loan (without penalty or premium) in whole (but not in part) in an amount equal to the outstanding principal amount of the Loan together with interest accrued to the date of prepayment and all other amounts payable by the Borrower pursuant to this Agreement, on the next Interest Payment Date or on such earlier date as the Lender shall certify to be necessary to comply with such regulation, regulatory requirement or directive. 5.4 Reduction of Loan upon Cancellation of Agreed Funding The Borrower or any other member of the Group may from time to time purchase Agreed Funding in the open market or by tender or by a private agreement at any price. If such Agreed Funding so purchased by the Borrower or any other member of the Group is delivered by the Borrower to the Lender (as issuer of such Agreed Funding) for surrender and cancellation, the Loan shall be deemed to have been prepaid in an amount corresponding to the aggregate principal amount of such Agreed 178

195 Funding so surrendered and cancelled, together with accrued interest and other amounts (if any) thereon and no further payment shall be made or required to be made by the Borrower in respect of such amounts. 5.5 Payment of Other Amounts and Costs of Prepayment If the Loan is to be prepaid by the Borrower pursuant to any of the provisions of this Clause 5 (other than clause 5.4), 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 this Agreement. 5.6 Provisions Exclusive The Borrower shall not prepay or repay all or any part of the amount of the Loan except at the times and in the manner expressly provided for in this Agreement. The Borrower shall not be permitted to re-borrow any amounts prepaid or repaid. 6. PAYMENTS 6.1 Making of Payments All payments of principal and interest to be made by the Borrower under this Agreement shall be made unconditionally by credit transfer to the Lender not later than noon (Zurich time) one Business Day prior to each Interest Payment Date or the Repayment Date (as the case may be), and in the case of any payments made in connection with Clause 5 (Repayment and Prepayment) one Business Day prior to the date on which such prepayment or repayment is made, and in each case, in Same-Day Funds to the Account. The Borrower shall, before noon (Zurich time) on the Business Day prior to each Interest Payment Date or the Repayment Date (as the case may be), and in the case of any payments made in connection with Clause 5 (Repayment and Prepayment) one Business Day prior to the date on which such prepayment or repayment is made, procure that the bank effecting such payments on its behalf confirms to the Swiss Principal Paying Agent by authenticated SWIFT the irrevocable payment instructions relating to such payment. The Lender agrees with the Borrower that the Lender will not deposit any other monies into the Account and that no withdrawals shall be made from the Account other than for payments to be made in accordance with this Agreement and the Finance Documents. 6.2 No Set-Off or Counterclaim All payments to be made by the Borrower under this Agreement shall be made in full without set-off or counterclaim and shall be made free and clear of and without deduction for or on account of any set-off or counterclaim. 6.3 Alternative Payment Arrangements If, at any time, it shall become impracticable, by reason of any action of any governmental authority or any change of law, exchange control regulations or any similar event, for the Borrower to make any payments hereunder in the manner specified in Clause 6.1 (Making of Payments), then the Borrower may agree with the Lender alternative arrangements for such payments to be made; provided that, in the absence of any such agreement, the Borrower shall be obliged to make all payments due to the Lender in the manner specified herein. 7. TAXES 7.1 Additional Amounts All payments made by the Borrower under or in respect of this Agreement shall be made (except to the extent required by law) free and clear of and without deduction or withholding for or on account of any present or future Taxes imposed, collected, withheld, assessed or levied on behalf of any 179

196 government or political subdivision or territory or possession of any government or authority or Agency therein having the power to tax (each a Taxing Authority ) within Russia or Ireland. If the Lender or Borrower becomes subject at any time to any taxing jurisdiction other than or in addition to Russia or Ireland, as the case may be, references to jurisdiction in this Clause 7.1 shall be construed as references to Russia and/or Ireland and/or such other jurisdiction and in addition, upon enforcement of the fixed charge in the Finance Documents over certain rights, benefits and/or obligations under this Agreement, references in this Clause 7.1 to Ireland shall be construed as references to the jurisdiction which the Trustee is a resident of and acting through for tax purposes. If the Borrower is required by applicable law to make any deduction or withholding from any payment under or in respect of this Agreement for or on account of any such Taxes referred to in the preceding paragraph of this Clause 7.1, it shall, on the date such payment is made, pay to the Lender such additional amounts ( Additional Amounts ) as may be necessary to ensure that the Lender receives and retains (net of tax) a net amount in Swiss Francs equal to the full amount which it would have received and retained (net of tax) had payment not been made subject to such Taxes, shall promptly account to the relevant Taxing Authority (within the time specified by legislation or assessment) for the relevant amount of such Taxes so withheld or deducted and shall deliver to the Lender without undue delay evidence satisfactory to the Lender of such deduction or withholding and of the accounting therefore to the relevant Taxing Authority. If the Lender is or will be subject to any liability or required to make any payment for or on account of Taxes in relation to a sum received or receivable (or any sum deemed for the purposes of Taxes to be received or receivable) under or in respect of any Agreed Funding, the Borrower shall on demand pay to the Lender an amount in Swiss Francs as applicable equal to the loss, liability or cost which the Lender, or as the case may be, Trustee has or will have (directly or indirectly) suffered for or on account of Tax. 7.2 Tax Indemnity Without prejudice to the provisions of Clause 7.1 (Additional Amounts), if the Lender notifies the Borrower (setting out in reasonable detail the nature and extent of the obligation with such evidence as the Borrower may reasonably require) that it is obliged (or would be but for the limited recourse nature of the Agreed Funding) to make any withholding or deduction for or on account of any Taxes from any payment that is due, or would otherwise be due but for the imposition of any such withholding or deduction for or on account of any such Taxes, pursuant to any Agreed Funding, and the Lender is required to pay additional amounts to the Agreed Funding Source in connection therewith, the Borrower agrees to pay to the Lender, no later than one Business Day prior to the date on which payment is due to the Agreed Funding Source, an additional amount equal to such additional amount as is required to be paid in order that the net amount received by the Agreed Funding Source after such deduction or withholding will equal the respective amounts which would have been received by the Agreed Funding Source in the absence of such withholding or deduction; provided, however, that the Lender shall immediately upon receipt from any Paying Agent of any sums paid pursuant to this provision, to the extent that the Agreed Funding Source is not entitled to such additional amounts pursuant to the terms and conditions of the Agreed Funding, repay such additional amounts to the Borrower as are recovered (it being understood that none of the Lender, or any Paying Agent shall have any obligation to determine whether any Agreed Funding Source is entitled to such additional amount). Without prejudice to, and without duplication of the provisions of Clause 7.1 (Additional Amounts), if at any time the Lender makes or is required to make any payment to a Person (other than to or for the account of the Agreed Funding Source) on account of Tax (other than Taxes on income or capital gains payable by the Lender) in respect of this Agreement or the Loan or in respect of the Agreed Funding imposed by any Taxing Authority in the jurisdiction in which the Lender is resident for tax purposes, or any liability in respect of any such payment is asserted, imposed, levied or assessed against the Lender, the Borrower shall, as soon as reasonably practicable following, and in any event within 30 calendar days of, written demand (setting out in reasonable detail the nature and extent of the obligation with such evidence as the Borrower may reasonably require) made by the Lender, pay to the Lender an amount equating to any such payment or liability, or any claim, demand, action, 180

197 damages or loss in respect thereof, together with any interest, penalties, costs and expenses (including without limitation, legal fees and any applicable value added tax) payable or incurred in connection therewith. Any payments required to be made by the Borrower under this Clause 7.2 are collectively referred to as Tax Indemnity Amounts. For the avoidance of doubt, the provisions of this Clause 7.2 shall not apply to any withholding or deductions of Taxes with respect to the Loan which are subject to payment of Additional Amounts under Clause 7.1 (Additional Amounts). If the Lender intends to make a claim for any Tax Indemnity Amounts, it shall promptly notify the Borrower thereof. 7.3 Tax Credits and Refunds If an Additional Amount is paid under Clause 7.1 (Additional Amounts) or a Tax Indemnity Amount is paid under Clause 7.2 (Tax Indemnity) by the Borrower and the Lender, in its absolute discretion, determines that it has received or been granted a credit against, a relief from, remission for, or a repayment of any Taxes, then if and to the extent that the Lender determines that such credit, relief, remission or repayment is in respect of or calculated with reference to the deduction or withholding giving rise to such increased payment, or, as the case may be, in respect of an additional payment with reference to the loss, liability or cost giving rise to the additional payment, the Lender shall, to the extent that it determines in its absolute discretion that it can do so without prejudice to its right to the amount of such credit, relief, remission or repayment, and without worsening the position it would have been in had such Additional Amount or Tax Indemnity Amount not been required to be repaid, repay to the Borrower an amount equal to such amount as is attributable to such deduction or withholding or, as the case may be, such loss, liability or cost. Nothing contained in this Clause 7.3 shall interfere with the right of the Lender to arrange its tax affairs in whatever manner it thinks fit nor oblige the Lender to disclose any confidential information or any information relating to its tax affairs, any computations in respect thereof, or its business or any part of its business. If the Borrower makes a withholding or deduction for or on account of Taxes from a payment under or in respect of this Agreement, and if an Additional Amount is paid under Clause 7.1 (Additional Amounts) or a Tax Indemnity Amount is paid under Clause 7.2 (Tax Indemnity) by the Borrower, the Borrower may apply on behalf of the Lender to the relevant Russian Taxing Authority for a payment to be made by such authorities to the Lender with respect to such Tax. 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 Russian Taxing Authority 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 (the Borrower 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 and without worsening the position it would have been in had such Additional Amount or Tax Indemnity Amount not been required to be paid, the Lender will pay or transfer an amount equal to the Russian Tax Payment to the Borrower Account. 7.4 Tax Treaty Relief The Lender, at the cost of the Borrower, shall make reasonable and timely efforts to assist the Borrower to obtain relief from withholding of Russian income tax pursuant to the double taxation treaty between Russia and the jurisdiction in which the Lender is incorporated, including its obligations under Clause 7.5 (Delivery of Forms). 7.5 Delivery of Forms The Lender shall, within 30 days of the request of the Borrower, use its best endeavours to deliver to the Borrower a certificate issued by the Revenue Commissioners in Ireland (or by the competent 181

198 Agency in such Qualifying Jurisdiction in which the Lender or any successor thereto is resident for tax purposes) confirming the status of the Lender as a resident of Ireland for tax purposes for the appropriate year (or such Qualifying Jurisdiction in which the Lender or any successor thereto is resident for tax purposes) and (to the extent it is able to do so under applicable law including Russian laws) from time to time, deliver to the Borrower (at the specific request of the Borrower) such duly completed application form and, if required, any other documents, together with a power of attorney authorising the Borrower to make the relevant filings with the Russian tax authorities and such other information as may need to be duly completed and delivered by the Lender to enable the Borrower to apply to obtain relief from deduction or withholding of Russian tax after the date of this Agreement or, as the case may be, to apply to obtain a tax refund if a relief from deduction or withholding of Russian tax has not been obtained. The application form and, if required, other documents issued by the Lender referred to in this Clause 7.5 shall be duly signed by the Lender and stamped or otherwise approved by the Revenue Commissioners in Ireland and the power of attorney shall be duly signed and apostilled or otherwise legalised. If a relief from deduction or withholding of Russian tax or a tax refund under this Clause 7.5 has not been obtained and further to an application of the Borrower to the relevant Russian tax authorities the latter requests the Lender s Rouble bank account details, the Lender shall at the request of the Borrower (a) use reasonable efforts to procure that such Rouble bank account of the Lender is duly opened and maintained, and (b) thereafter furnish the Borrower with the details of such Rouble bank account. The Borrower shall pay for all costs associated, if any, with opening and maintaining such Rouble bank account and shall use its reasonable efforts to assist the Lender with all required information in order to obtain the certificate mentioned above. 7.6 Tax Treatment The Borrower and the Lender hereby agree to treat the Loan as a debt obligation of the Borrower payable to the Lender, as the beneficial owner of such debt obligation, for Russian and Irish tax purposes. 7.7 Mitigation If at any time either party hereto becomes aware of circumstances which would or might, then or thereafter, give rise to an obligation on the part of the Borrower to make any deduction, withholding or payment as described in Clause 5.3 (Prepayment in the Event of Illegality), 7.1 (Additional Amounts) or 7.2 (Tax Indemnity), 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 promptly upon becoming aware of such circumstances notify the other party in writing, and, thereupon the parties shall consider and consult with each other in good faith with a view to finding, agreeing upon and implementing a method or methods by which any such obligation may be avoided or mitigated and, to the extent that the parties can do so without taking any action which in the reasonable opinion of such party is prejudicial to its own position, take such reasonable steps as may be reasonably available to it to avoid such obligation or mitigate the effect of such circumstance, including in the case of the Lender (without limitation) by transfer of its rights or obligations under this Agreement (but only in accordance with the terms and conditions of the other Finance Documents); provided, however, that the Lender shall, in no circumstances, be required to undertake any expense prior to being ensured to its satisfaction that it will be reimbursed therefore. 7.8 Lender Notification The Lender agrees promptly, upon becoming aware thereof, to notify the Borrower if it ceases to be resident in Ireland or a Qualifying Jurisdiction or if any of the representations set forth in Clause 10.2 (Lender s Representations and Warranties) are no longer true and correct. 8. CONDITIONS PRECEDENT The obligation of the Lender to make the Advance shall be subject to the conditions precedent that as at the Closing Date (a) the representations and warranties set out in Clause 10.1 (Borrower s Representations and Warranties) are true and accurate as if made and given on the Closing Date with respect to the facts and 182

199 circumstances then existing, (b) no Default or an Event of Default shall have occurred and is continuing, and (c) the Lender shall have received the full funding of the Advance from the Agreed Funding Source and that funding shall be and remain available in full to be on-lent to the Borrower. 9. CHANGE IN LAW; INCREASE IN COST 9.1 Compensation In the event that after the date of this Agreement there is any change in or introduction of any tax, law, regulation, regulatory requirement or official directive (whether or not having the force of law but, if not having the force of law, the observance of which is in accordance with the generally accepted financial practice of financial institutions in the country concerned) or in the interpretation or application thereof by any person charged with the administration thereof and/or any compliance by the Lender in respect of the Loan or the Facility with any request, policy or guideline (whether or not having the force of law but, if not having the force of law, the observance of which is in accordance with the generally accepted financial practice of financial institutions in the country concerned) from or of any central or other fiscal, monetary or other authority, Agency or any official of any such authority which: (a) (b) (c) subjects or will subject the Lender to any Taxes with respect to payments of principal of or interest on the Loan or any other amount payable under this Agreement (other than any Taxes payable by the Lender on its overall net income, capital gains or any Taxes referred to in Clause 7.1 (Additional Amounts)); or increases or will increase the taxation of or changes or will change the basis of taxation of payments to the Lender of principal of or interest on the Loan or any other amount payable under this Agreement (other than any such increase or change which arises by reason of any increase in the rate of tax payable by the Lender on its overall net income, capital gains or as a result of any Taxes referred to in Clause 7.1 (Additional Amounts)); or imposes or will impose on the Lender any other condition affecting this Agreement, the Facility or the Loan, and if as a result of any of the foregoing: (i) (ii) (iii) the cost to the Lender of making, funding or maintaining the Loan or the Facility is increased; or the amount of principal, interest or other amount payable to or received by the Lender hereunder 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 the Loan, then subject to the following, and in each such case: (a) (b) 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 signed by an authorised signatory of the Lender describing in reasonable detail the introduction, change or request which has occurred and the country or jurisdiction concerned and the nature and date thereof and demonstrating the connection between such introduction, change or request and such increased cost, reduced amount or payment made or foregone, and setting out in reasonable detail the basis on which such amount has been calculated, and all relevant supporting documents evidencing the matters set out in such certificate; and the Borrower, in the case of paragraphs (i) and (iii) above, shall on demand by the Lender, pay to the Lender such additional amount as shall be necessary to compensate the Lender for such 183

200 increased cost, and, in the case of paragraph (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, the amount of such increased cost shall be deemed not to exceed an amount equal to the proportion thereof which is directly attributable to this Agreement, and further provided, however, that this Clause 9.1 will not apply to or in respect of any matter for which the Lender has already been compensated under Clause 7.1 (Additional Amounts) or Clause 7.2 (Tax Indemnity). 9.2 Lender Tax Event If, as a result of a change in the law, practice or interpretation of the law, the Lender is unable to obtain relief in computing its Irish tax liability for some or all of the interest payable on the Agreed Funding (having duly and timely claimed such relief and notwithstanding receipt of confirmation from the relevant tax authorities that such relief is available), the Borrower agrees to pay such additional amount to the Lender that the Lender reasonably determines will leave it in the same after tax position as if it were able to obtain tax relief for all of the interest payable on the Agreed Funding. The Borrower s obligation to pay such additional amounts shall survive the termination of this Agreement. 9.3 Mitigation In the event that the Lender becomes entitled to make a claim pursuant to Clause 9.1 (Compensation) or 9.2 (Lender Tax Event) the Lender shall consult in good faith with the Borrower and shall use reasonable efforts (based on the Lender s reasonable interpretation of any tax, law, regulation, requirement, official directive, request, policy or guideline) to reduce, in whole or in part, the Borrower s obligations to pay any additional amount pursuant to such Clause, except that nothing in this Clause 9.3 shall obligate the Lender to incur any costs or expenses in taking any action hereunder unless the Borrower agrees to reimburse the Lender such costs or expenses. 10. REPRESENTATIONS AND WARRANTIES 10.1 Borrower s Representations and Warranties The Borrower makes the representations and warranties to the Lender set out in this Clause 10.1 with the intent that such shall form the basis of this Agreement and acknowledges that the Lender has entered into this Agreement in reliance on these representations and warranties. Each of the representations and warranties in this Clause 10.1 shall be deemed to be repeated by the Borrower on the date of the Advance. (a) (b) It is duly organised and incorporated and validly existing under the laws of Russia, is not in liquidation or receivership and has the power and legal right to enter into and to perform its obligations under this Agreement and to borrow the Advance; that it has taken all necessary corporate, legal and other action required to authorise the borrowing of the Advance on the terms and subject to the conditions of this Agreement and to authorise the execution and delivery of this Agreement and all other documents to be executed and delivered by it in connection with this Agreement, and the performance of this Agreement in accordance with its terms and, except where a failure to do so would not have a Material Adverse Effect, has the corporate power and legal right to own its property and to conduct its business as currently conducted. This Agreement has been or will be duly executed and delivered by it and constitutes legal, valid and binding obligations of the Borrower enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors rights generally, and as to enforceability, (i) to general principles of equity, (ii) with respect to the enforceability of a judgment whether there is a treaty in force relating to the mutual recognition of foreign judgments, and (iii) to the fact that certain gross-up provisions may not be enforceable under Russian law. 184

201 (c) (d) (e) (f) (g) (h) The execution, delivery and performance by the Borrower of this Agreement will not conflict with or result in any breach or violation of (i) any law or regulation or any order of any governmental, judicial or public body or authority in Russia, (ii) the constitutive documents, rules and regulations of the Borrower, or (iii) to the extent such conflict, breach or violation might have a Material Adverse Effect, 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 assets, nor result in the creation or imposition of any Liens on any of its assets pursuant to the provisions of any such agreement or other undertaking or instrument. All consents, licences, notifications, authorisations or approvals of, or filings with, any governmental, judicial and public bodies and authorities of Russia (including, without limitation, the Central Bank, where applicable), if any, in connection with the execution, delivery, performance, legality, validity, enforceability, and admissibility in evidence of this Agreement (subject to a Russian legal requirement to provide to a Russian court a duly certified translation thereof into Russian) have been obtained or effected and are and shall remain in full force and effect, other than in each case, any such consent, licence, notification, authorisation, approval or filing required in relation to exchange control regulations which may only be obtained after the date of this Agreement. No event has occurred and is continuing that constitutes, or that, with the giving of notice or the lapse of time, or both, would constitute, 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 Loan. There are no judicial, arbitral or administrative actions, proceedings or claims (including, without limitation, with respect to Taxes) current or pending or, to the knowledge of the Borrower, threatened, against the Borrower or any of its Material Subsidiaries, which are reasonably likely to be adversely determined against the Borrower or such Material Subsidiary and the adverse determination of which would singly or in the aggregate (a) prohibit the execution and delivery of this Agreement or the Borrower s compliance with its obligations hereunder, or (b) have a Material Adverse Effect. Other than Liens which are not prohibited under Clause 11.1 (Negative Pledge), each of the Borrower and each of its Material Subsidiaries has good title to the property necessary for the conduct of its business, duly registered, where applicable, in its name and free from adverse third party claims that are likely to have a Material Adverse Effect and the Borrower s obligations under the Loan rank at least pari passu with all its other unsecured and unsubordinated Indebtedness except for those whose claims are preferred by any bankruptcy, insolvency, liquidation, moratorium or similar laws of general application. The most recent audited consolidated financial statements of the Borrower: (i) (ii) (iii) were prepared in accordance with IFRS, as consistently applied; disclose all liabilities (contingent or otherwise) and all unrealised or unanticipated losses of the Group as at the date thereof in accordance with IFRS; and save as disclosed therein, present fairly, in all material respects, the financial condition and the results of operations of the Group as at the dates and in respect of the periods for which they were prepared. (i) Except as disclosed in the Prospectus, there have not been any changes in share capital or any increase in non-current liabilities or any material decreases in current assets, total assets or shareholders equity of the Group as compared with amounts shown in the consolidated balance sheet of the Borrower as at the date of the most recent interim financial statements and (ii) since the most recent interim consolidated financial statements, there have not been any material decreases, in revenue, gross profit or result for the period, in each case except as set forth in the Prospectus. 185

202 (j) (k) (l) (m) (n) (o) (p) Under the laws of Russia in force at the date of this Agreement, the execution, delivery and enforceability of this Agreement is not subject to any tax, duty, fee or other charge, including, without limitation, any registration or transfer tax, stamp duty or similar levy, imposed by or within Russia or any 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). Neither the Borrower nor its property has any right of immunity from suit, execution, attachment or other legal process in respect of any action or proceeding relating in any way to this Agreement. Except as disclosed in the Prospectus, the Borrower and its Subsidiaries are in compliance in all material respects with all applicable provisions of law except where failure to be so in compliance would not have a Material Adverse Effect. 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 Material Subsidiaries which exist or, to the Borrower s knowledge, threatened, imminent or pending, except for those that would not have a Material Adverse Effect. Under current laws and regulations of Russia and Ireland and any respective political subdivisions thereof, and based upon the representations of the Lender set forth in Clause 10.2 (Lender s Representations and Warranties) and compliance by the Lender with Clause 7.5 (Delivery of Forms), all payments of principal and/or interest, Additional Amounts, Tax Indemnity Amounts or any other amounts payable on or in respect of the Loan may be paid by the Borrower to the Lender in Swiss Francs and will not be subject to Taxes under laws and regulations of Russia, 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 Ireland, Russia, or any political subdivision or Taxing Authority thereof or therein (provided, however, that the Borrower makes no representation as to any income or similar tax of Ireland (or any Qualifying Jurisdiction) which may be assessed thereon) and without the necessity of obtaining any governmental authorisation in Russia or any political subdivision or Taxing Authority thereof or therein. All licences, consents, examinations, clearances, filings, registrations and authorisations which are necessary to enable the Borrower or any of its Subsidiaries to own its assets and carry on its business are in full force and effect. Neither the Borrower nor any of its Material 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 Material 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 Material Subsidiaries and no judicial, arbitral or administrative actions, proceedings or claims with respect to Taxes are current or, to the knowledge of the Borrower, threatened or pending against the Borrower or any of its Material Subsidiaries, the adverse determination of which would singly or in the aggregate (i) prohibit the execution and delivery of this Agreement or the Borrower s compliance with its obligations under this Agreement or (ii) have a Material Adverse Effect Lender s Representations and Warranties The Lender represents and warrants to the Borrower as follows: (a) the Lender is duly incorporated under the laws of Ireland and has full power and capacity to execute this Agreement and to undertake and perform the obligations expressed to be assumed by it herein and the Lender has taken all necessary action to approve and authorise the same; 186

203 (b) (c) (d) (e) (f) the execution of this Agreement and the documents or deeds evidencing or relating to the Agreed Funding 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 Ireland or the constitutive documents, rules and 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; this Agreement has been or will be duly authorised, executed and delivered and constitutes legal, valid and binding obligations of the Lender enforceable against the Lender in accordance with their respective terms (subject to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors rights generally and subject, as to enforceability, to general principles of equity); all Irish authorisations, consents and approvals required by the Lender for or in connection with the execution of this Agreement and the performance by the Lender of the obligations expressed to be undertaken by it herein, have been obtained and are in full force and effect; the Lender is a company duly incorporated under Irish law as a public limited company, registered under number in Ireland and having its registered office at 5 Harbourmaster Place, IFSC, Dublin 1, Ireland. As such it will be considered as an Irish resident company fully subject to the Irish tax legislation. The Lender will thus be liable to Irish taxes on its income, wherever sourced. The Lender may also benefit from the network of tax treaties signed by Ireland, including the double tax treaty concluded on 29 April 1994 between Ireland and Russia. Save for any that may be created as a result of entering into this Agreement or any other loan agreements with the Borrower and the transactions contemplated therein at the date hereof, it does not have a permanent establishment in Russia; and the Lender will book the Loan on the asset side of its balance sheet and any arrangements with the Agreed Funding Source as a liability. 11. COVENANTS For so long as any amount remains outstanding under this Loan Agreement: 11.1 Negative Pledge Neither the Borrower nor any of its Material Subsidiaries will create or permit to subsist any Lien (other than any Lien upon, or with respect to, any present or future assets or revenues or any part thereof which is created pursuant to any securitisation, asset-backed financing or like arrangement and whereby all payment obligations secured by such Lien, or having the benefit of such Lien, are to be discharged solely from such assets or revenues, provided that such Liens shall not be incurred if that would result in the principal amount of such encumbered Relevant Indebtedness exceeding 20 per cent. of the total assets of the Borrower and its Subsidiaries on a consolidated basis (determined by reference to the balance sheet date for the Borrower s most recent IFRS Fiscal Period)) upon or in respect of any of its undertakings, property, income, assets or revenues, present or future, to secure any Relevant Indebtedness unless, at the same time or prior thereto, the Borrower s obligations hereunder are to the satisfaction of the Trustee secured equally and rateably therewith or benefit from such other security or other arrangements, as the case may be, to the satisfaction of the Trustee Disposals The Borrower shall not and shall ensure that none of its Subsidiaries shall sell, lease, transfer or otherwise dispose of by one or more transactions or series of transactions (whether related or not), the whole or any part of its revenues or its assets (except for sales or other disposals of current assets in the ordinary course of its trading and payments of cash) unless the terms of such transactions are substantially no less favourable to the Borrower, or the relevant Subsidiary, as the case may be, than those which would be obtained in a comparable arm s length transaction. This Clause 11.2 does not 187

204 apply to any transaction between the Borrower and any of its Subsidiaries, or between any Subsidiaries of the Borrower, or to any sale or disposal of current assets in the ordinary course of its trading. With respect to a sale or disposal of capital assets involving aggregate payments or value in excess of 20 per cent. of the gross assets of the Borrower and its Subsidiaries on a consolidated basis determined by reference to the balance sheet date for the Borrower s most recent IFRS Fiscal Period, the Borrower shall deliver to the Lender a written opinion from an Independent Appraiser to the effect that such sale is fair, from a financial point of view, to the Borrower or the relevant Subsidiary, as the case may be, and such written opinion shall be conclusive and binding on the parties Maintenance of Authorisations The Borrower shall take all necessary action to obtain, and do or cause to be done all things reasonably necessary to maintain in full force and effect all consents, licences, approvals and authorisations, and make or cause to be made all registrations, recordings and filings, which may at any time be required to be obtained or made in Russia for the execution, delivery or performance of this Agreement or for the legality, validity, enforceability or admissibility in evidence in Russia thereof Financial Information (a) The Borrower hereby undertakes that so long as the Loan or any other sum owing hereunder remains outstanding it shall deliver to the Lender and the Trustee (i) within six months after the end of each of the Group s financial years, copies of the Group s audited consolidated financial statements for such financial year, and (ii) within four months after the end of the first half of each of the Group s financial years, copies of the Group s unaudited consolidated financial statements for such period, in each case prepared in accordance with IFRS consistently applied with the corresponding financial statements for the preceding period. (b) (c) The Borrower hereby undertakes that it shall deliver to the Lender and the Trustee, without undue delay, such additional information regarding the financial position or the business of the Borrower and its Material Subsidiaries, taken as a whole, as the Lender may reasonably request, including providing certificates to the Trustee as contemplated in the Finance Documents. The Borrower undertakes to furnish to the Lender and the Trustee such information as the SIX Swiss Exchange (or any other or further stock exchange or stock exchanges or any relevant authority or authorities on which the Agreed Funding may, from time to time, be listed or admitted to trading) may require in connection with the listing or admission to trading on such stock exchange or relevant authority of such Agreed Funding Ranking of Claims The Borrower shall ensure that at all times the claims of the Lender against it under this Agreement rank at least pari passu with the claims of all the Borrower s other unsecured creditors save those whose claims are preferred by any bankruptcy, insolvency, liquidation or similar laws of general application Financial Covenant The Borrower shall not, and the Borrower shall ensure that each other Material Subsidiary which carries on a banking business shall not, permit its total capital ratio to fall below the minimum total capital ratio required by the CBR, in the case of the Borrower, and, in the case of each Material Subsidiary, each relevant banking authority responsible for setting and/or supervising capital adequacy requirements for financial institutions in the jurisdictions in which it carries on its banking business, such calculation to be made by reference to, in the case of a Material Subsidiary, the latest annual non-consolidated audited financial statements of such Material Subsidiary or, if such Material Subsidiary does not prepare audited financial statements, the latest annual non-consolidated unaudited financial statements of such Material Subsidiary, provided, however, that, should the Borrower or any 188

205 other Material Subsidiary carry on a banking business in more than one jurisdiction, it shall not permit its total capital ratio to fall below the minimum ratio required by the relevant banking authorities responsible for setting and/or supervising capital adequacy requirements for financial institutions in each such jurisdiction Compliance Certificate (a) The Borrower shall deliver to the Lender (with a copy delivered to the Trustee) (i) upon the occurrence of a Default or an Event of Default, and (ii) on 10 September and 10 of March of each year, written notice in the form of a Compliance Certificate stating that to the best of the relevant officers knowledge (A) the Borrower has kept, observed, performed and fulfilled each and every covenant, and complied with the covenants and conditions contained in this Agreement, and (B) the Borrower is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which the Borrower may have knowledge). (b) With each set of financial statements delivered pursuant to Clause 11.4 (Financial Information), the Borrower shall deliver to the Lender (with a copy delivered to the Trustee) a certificate of its auditors stating that it is in compliance with Clause 11.6 (Financial Covenant), taking into account that such certificate might be based on unaudited financial statements if a Material Subsidiary does not prepare audited financial statements Notification of Events of Default and Defaults The Borrower shall promptly on becoming aware thereof inform the Lender and the Trustee of the occurrence of a Default or any Event of Default and, upon receipt of a written request to that effect from the Lender or the Trustee, confirm to the Lender and the Trustee that, save as previously notified to the Lender or as notified in such confirmation, no Default or Event of Default has occurred Notes Held by the Borrower or any of its Subsidiaries At any time after the Borrower or any of its Subsidiaries shall have purchased any Notes and retained such Notes for its own account, the Borrower shall notify the Trustee and the Lender to that effect and thereafter deliver to the Trustee and the Lender as soon as practicable after being so requested in writing by the Trustee a certificate of the Borrower signed by an authorised signatory of the Borrower setting out the total number of Notes which, at the date of such certification, are held by the Borrower or any of its Subsidiaries. 12. EVENTS OF DEFAULT 12.1 Events of Default If one 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 12.3 (Default Remedies). (a) (b) (c) The Borrower fails to pay any amount of principal or interest payable hereunder within five Business Days of the due date for payment thereof in the currency and in the manner specified herein. The Borrower fails to perform or observe any covenant or agreement contained herein to be performed or observed by it and such failure is not remedied within 30 days of notice in writing by the Lender to the Borrower requesting the same to be remedied. Any representation or warranty of the Borrower or any statement deemed to be made by the Borrower in this Agreement or in any other certificate or notice delivered by the Borrower in connection with this Agreement proves to have been inaccurate, incomplete or misleading in any material respect at the time it was made or repeated or deemed to have been made or 189

206 repeated if not remedied (if capable of remedy) within 30 days of notice in writing by the Lender to the Borrower requesting the same to be remedied. (d) (e) (f) (g) (h) (i) Any Indebtedness of the Borrower or any of its Material Subsidiaries shall become due and payable prior to the stated maturity thereof other than at the option of the debtor following a default of the Borrower or any of its Material Subsidiaries, or the Borrower or any of its Material Subsidiaries shall fail to make any payment of principal in respect of any Indebtedness of the Borrower or any of its Material Subsidiaries on the date on which such payment is due and payable or at the expiration of any grace period originally applicable thereto, provided, however, that the aggregate amount of the relevant Indebtedness in respect of which one or more of the events mentioned in this Sub-clause 12.1(d) shall have occurred equals or exceeds U.S.$100,000,000 (or its equivalent in any other currency or currencies). Any governmental authorisation necessary for the performance of any obligation of the Borrower under this Agreement fails to be in full force and effect. The occurrence of any of the following events: (i) the Borrower or any of its Material Subsidiaries fails or is unable to pay its debts generally as they become due; (ii) revocation, suspension or other loss of the general banking licence of the Borrower or, if applicable, of any of its Material Subsidiaries, or any prohibition on the conduct by the Borrower or, if applicable, any of its Material Subsidiaries, of any banking operation envisaged in its general banking licence; (iii) the Borrower or any of its Material Subsidiaries seeking or consenting to the introduction of proceedings for its liquidation or the appointment of a liquidation commission (likvidatsionnaya komissiya) or similar officer of the Borrower or any of its Material Subsidiaries, as the case may be, or any analogous procedure or event in any other relevant jurisdiction; (iv) the institution of financial rehabilitation (finansovoye ozdorovlenie), temporary administration (vremennaya administratsiya), reorganisation (reorganizatsiya) or bankruptcy management (konkursnoye proizvodstvo) with respect to the Borrower or, if applicable, 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), or any analogous procedure or event in any other relevant jurisdiction; (v) any analogous procedure or event to those mentioned herein prescribed by the Federal Law of the Russian Federation No. 127-FZ On Insolvency (Bankruptcy) dated 26 October 2002 (as amended or replaced from time to time), including, but not limited to, supervision (nablyudeniye), external management (vneshneye upravleniye) or amicable settlement (mirovoe soglashenie), in respect of any Material Subsidiary recognized as a corporate entity in accordance with applicable Russian legislation, or any analogous procedure or event in any other relevant jurisdiction; (vi) any judicial liquidation, dissolution, administration or winding-up of the Borrower or any of its Material Subsidiaries; or (vii) the shareholders of the Borrower or any Material Subsidiary shall have approved any plan of liquidation, dissolution, administration or winding-up of the Borrower or such Material Subsidiaries. The Borrower or any Material Subsidiary commences negotiations with its creditors generally with a view to the general readjustment or rescheduling of its Indebtedness or makes a general assignment for the benefit of or a composition with its creditors generally. Any government, Agency or court takes any action against the Borrower that has a Material Adverse Effect. A secured party takes possession, or a receiver, manager or other similar officer is appointed, of the whole or any part of the undertaking, assets and revenues of the Borrower or any of its Material Subsidiaries having a Fair Market Value in excess of U.S.$100,000,000 (or its equivalent in any other currency or currencies). 190

207 (j) (k) (l) (m) (n) There is a seizure, compulsory acquisition, expropriation or nationalisation, in each case without appropriate compensation, by or under state authority of all or substantially all of the assets of the Borrower or any Material Subsidiary. The aggregate amount of unsatisfied final judgments, decrees or orders of courts or other appropriate law enforcement bodies for the payment of money (including, without limitation, payments in respect of Taxes) against the Borrower or any Subsidiary in the aggregate exceeds U.S.$100,000,000, or the equivalent thereof in any other currency or currencies and there is a period of 60 days following the entry thereof during which such judgment, decree or order is not discharged, waived or the execution thereof stayed and such default continues for 10 days after the notice specified in Clause 12.2 (Notice of Default). At any time it is or becomes unlawful for the Borrower to perform or comply with any or all of its obligations under this Agreement or any of such obligations are not, or cease to be, legal, valid, binding and enforceable, subject, in the case of enforceability, as provided in Sub-clause 10.1(l)(b). The Group ceases to carry on the principal business which it carried on at the date of this Agreement, being the conduct of banking business as described in the Prospectus. Any event occurs which under the laws of any relevant jurisdiction has an analogous effect to any of the events referred to in any of the foregoing sub clauses Notice of Default The Borrower shall deliver to the Lender and the Trustee, immediately upon becoming aware of the same, written notice in the form of an Officers Certificate of any event which is a Default or an Event of Default, its status and what action the Borrower or the relevant Subsidiary, as the case may be, is taking or proposes to take with respect thereto Default Remedies If any Event of Default shall occur and be continuing, the Lender may, by notice to the Borrower, (a) declare the Facility and the obligation of the Lender to make the Advance to the Borrower in accordance with Clause 3 (Drawdown) to be terminated, whereupon the Facility and such obligation shall terminate, and (b) declare all amounts payable hereunder 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-clause 12.1(f) occurs, the Facility and such obligation of the Lender shall immediately terminate, and all amounts payable hereunder 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 Rights Not Exclusive The rights provided for herein are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law. 13. DEFAULT INTEREST AND INDEMNITY 13.1 Default Interest Periods If any sum due and payable by the Borrower hereunder is not paid on the due date therefore in accordance with the provisions of Clause 6 (Payments) or if any sum due and payable by the Borrower under any judgment of any court in connection herewith is not paid on the date of such judgment, the period beginning on such due date or, as the case may be, the date of such judgment and ending on the date upon which the obligation of the Borrower to pay such sum (the balance thereof for the time 191

208 being unpaid being herein referred to as an unpaid sum ) is discharged shall be divided into successive periods, each of which (other than the first, which shall commence on and shall include the day on which such unpaid sum is initially due and payable and unpaid) shall start on the last day of the preceding such period and the duration of each of which shall (except as otherwise provided in this Clause 13) be selected by the Lender (but shall in any event not be longer than one month) Default Interest During each such period relating thereto as is mentioned in Clause 13.1 (Default Interest Periods) an unpaid sum shall accrue interest for each day it remains unpaid at a rate per annum equal to the Rate of Interest Payment of Default Interest Any interest which shall have accrued under Clause 13.2 (Default Interest) in respect of an unpaid sum shall be due and payable and shall be paid by the Borrower at the end of the period by reference to which it is calculated or on such other dates as the Lender may specify by written notice to the Borrower Indemnification The Borrower undertakes to the Lender that if the Lender or any director, officer or employee of the Lender (each an Indemnified Party ) incurs any properly incurred out of pocket loss, liability, cost, claim, charge, expense (including, without limitation, Taxes, legal fees and expenses and any applicable stamp duties, capital duties and other similar duties payable, including any interest and penalties thereon or in connection therewith), demand, action and damages (a Loss ) as a result of or in connection with the Loan, this Agreement (or enforcement thereof), and/or the issue, constitution, sale, listing and/or enforcement of the Agreed Funding and/or such Agreed Funding being outstanding, the Borrower shall pay to the Lender on demand an amount equal to such Loss and all properly incurred out-of-pocket costs, charges and expenses which may be incurred as a result of or arising out of or in relation to any failure to pay by the Borrower or delay by the Borrower in paying the same, unless such Loss was either caused by such Indemnified Party s negligence or wilful misconduct or arises out of a breach of the representations and warranties of the Lender contained in this Agreement Independent Obligation Clause 13.4 (Indemnification) constitutes a separate and independent obligation of the Borrower from its other obligations under or in connection with this Agreement and the other Finance Documents to which it is a party or any other obligations of the Borrower in connection with the issue of the Agreed Funding by the Lender and shall not affect, or be construed to affect, any other provision of this Agreement or any such other obligations Evidence of Loss A certificate of the Lender setting forth the amount of the Loss described in Clause 13.4 (Indemnification) and specifying in full detail the basis therefore and calculations thereof shall, in the absence of manifest error, be conclusive evidence of the amount of such loss, cost, charges and expenses Currency Indemnity Each reference in this Agreement to Swiss Francs is of the essence. To the fullest extent permitted by law, the obligation of the Borrower in respect of any amount due in Swiss Francs under this Agreement shall, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in Swiss Francs that the party entitled to receive such payment may, in accordance with normal banking procedures, purchase with the sum paid in such other currency (after any costs of exchange) on the Business Day immediately following the day on which such party receives such payment. If the amount in Swiss Francs that may be so 192

209 purchased for any reason falls short of the amount originally due, the Borrower hereby agrees to indemnify and hold harmless the Lender against any deficiency in Swiss Francs. Any obligation of the Borrower not discharged by payment in Swiss Francs shall, to the fullest extent permitted by applicable law, be due as a separate and independent obligation and, until discharged as provided herein, shall continue in full force and effect. If the amount of Swiss Francs that may be so purchased exceeds the amount originally due, the Lender shall promptly pay the amount of the excess to the Borrower. 14. SURVIVAL The obligations of the Borrower and the Lender pursuant to Clauses 7 (Taxes), 13.4 (Indemnification) and 13.7 (Currency Indemnity) shall survive the execution and delivery of this Agreement, the drawdown of the Facility and the repayment of the Loan. 15. GENERAL 15.1 Evidence of Debt The entries made in the Account referred to in Clause 6.1 (Making of Payments) shall, in the absence of manifest error, constitute conclusive evidence of the existence and amounts of the Borrower s obligations recorded therein Stamp Duties (a) The Borrower shall pay all stamp, registration and documentary taxes or similar charges (if any) imposed by any person in Russia, Switzerland or Ireland which may be payable or determined to be payable in connection with the execution, delivery, performance, enforcement, or admissibility into evidence of this Agreement and shall indemnify the Lender against any and all costs and expenses properly documented 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. (b) 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 Russia, Switzerland or Ireland which may be payable or determined to be payable in connection with the execution, delivery, performance, enforcement, or admissibility into evidence of this Agreement, the Borrower shall reimburse 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 properly documented 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 or privilege hereunder 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 herein provided are cumulative and not exclusive of any rights, or remedies provided by applicable law Prescription Subject to the Lender having previously received from the Borrower the relevant principal amount or interest amount, the Lender shall repay to the Borrower the principal amount or the interest amount in respect of any Agreed Funding upon the relevant certificates pertaining thereto becoming void pursuant to their terms and conditions (as confirmed to the Lender by the Trustee). 193

210 16. FEES, COSTS AND EXPENSES 16.1 Costs Relating to Preservation of Rights The Borrower shall, from time to time on demand of the Lender, reimburse the Lender for all properly documented out-of-pocket costs and expenses (including legal fees) together with any VAT incurred in or in connection with the preservation or the enforcement of any of the rights of the Lender under this Agreement Lender s Costs The Borrower shall, from time to time on demand of the Lender (and without prejudice to the provisions of Clause 16.1 (Costs Relating to Preservation of Rights)) compensate the Lender for all properly documented out-of-pocket costs and expenses (including telephone, fax, copying and travel costs) it may incur in connection with the Lender taking such action as it may consider appropriate in connection with: (a) (b) (c) the granting or proposed granting of any waiver or consent requested under this Agreement by the Borrower; the occurrence of any event which is a Default or an Event of Default; or any amendment or proposed amendment to this Agreement requested by the Borrower. In consideration of the Lender (i) making available the Loan to the Borrower and (ii) supporting such a continuing facility, the Borrower shall pay in one or more instalments on demand to the Lender each year an additional fee equating to all ongoing, fees, taxes and properly incurred and documented expenses of the Lender (including, without limitation any corporate service provider fees, stock exchange fees, listing fees, audit fees, legal fees and the anticipated winding-up expenses of the Lender) as set forth in an invoice from the Lender to the Borrower. 17. NOTICES All notices, requests, demands or other communications to or upon the respective parties hereto shall be given in writing (in English) by facsimile, by hand or by courier addressed as follows: 17.1 if to the Borrower: JOINT STOCK COMMERCIAL BANK BANK OF MOSCOW (OPEN JOINT STOCK COMPANY) 8/15, bldg. 3, Rozhdestvenka Street, Moscow Russia Tel: , ext. 2874, 4755, 4582, Fax number: / / Attention: Alla Averina, Head of Loan Administration Tatiana Priymak/Leonid Voronin. Funding and IR 17.2 if to the Lender: BOM CAPITAL P.L.C. 5 Harbourmaster Place IFSC, Dublin 1 Ireland Tel: Fax: Attention: The Directors 194

211 17.3 if to the Trustee: BNY CORPORATE TRUSTEE SERVICES LIMITED One Canada Square London E14 5AL United Kingdom Fax: Attention: Corporate Trust Services or to such other address or fax number as any party may hereafter specify in writing to the other. Every notice or other communication sent in accordance with this Clause 17 shall be effective upon receipt by the addressee on a business day (being a day on which commercial banks and foreign exchange markets that settle payments are open for business) in the city of the recipient, provided however, that any such notice or other communication which would otherwise take effect after 4.00 p.m. on any particular day shall not take effect until a.m. on the immediately succeeding business day (being a day on which commercial banks and foreign exchange markets that settle payments are open for business) in the city of the addressee. 18. ASSIGNMENT 18.1 This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective successors and any permitted assignee or transferee of some or all of such party s rights or obligations under this Agreement. Any reference in this Agreement to any party shall be construed accordingly and, in particular, references to the exercise of rights and discretions by the Lender, following the assignment pursuant to the grant of the Security referred to in Clause 18.3 below, shall be references to the exercise of such rights or discretions by the Trustee (as Trustee). Notwithstanding the foregoing, the Trustee shall not be entitled to participate in any discussions between the Lender and the Borrower or any agreements of the Lender or the Borrower pursuant to Clause 7.3 (Tax Credits and Refunds) or Clause 9 (Change in Law; Increase in Cost) unless specifically required by the terms of this Agreement The Borrower shall not be entitled to assign or transfer all or any part of its rights or obligations hereunder to any other party The Lender may not assign or transfer, in whole or in part, any of its rights and benefits or obligations under this Agreement except to the Trustee by granting the Security. 19. GOVERNING LAW AND JURISDICTION 19.1 Governing Law This Agreement, including any non-contractual obligations arising out of or in connection with this Agreement, shall be governed by, and construed in accordance with, the laws of England Lender s Option At any time before the Lender has nominated an arbitrator to resolve any Dispute or Disputes pursuant to Clause 20 (Arbitration) the Lender may elect, at its sole option, by notice in writing to the Borrower that such Dispute(s) shall instead be heard by the courts of England or by any other court of competent jurisdiction, as more particularly described in Clause 19.3 (Jurisdiction). Following any such election, no arbitral tribunal shall have jurisdiction in respect of such Dispute(s) Jurisdiction In the event that the Lender serves a written notice of election in respect of any Dispute(s) pursuant to Clause 19.2 (Lender s Option), the Borrower agrees for the benefit of the Lender that the courts of England shall have jurisdiction to hear and determine any such Dispute(s) and, for such purposes, irrevocably submits to the jurisdiction of such courts. Subject to Clause 20 (Arbitration), nothing in this clause shall (or shall be construed so as to) limit the right of the Lender to bring proceedings 195

212 ( Proceedings ) for the determination of any Dispute(s) in any other court of competent jurisdiction, nor shall the bringing of such Proceedings in any one or more jurisdictions preclude the bringing of Proceedings by the Lender in any other jurisdiction (whether concurrently or not) if and to the extent permitted by law Appropriate Forum Each of the parties to this Agreement irrevocably waives any objection which it may now or hereafter have to the courts of England being nominated as the forum to hear and determine any Proceedings and to settle any Disputes, and agrees not to claim that any such court is not a convenient or appropriate forum and further irrevocably agrees that a final and conclusive judgment in any Proceedings brought in the English courts with competent jurisdiction shall be conclusive and binding and may be enforced in the courts of any other jurisdiction (to the extent permitted by law) Non-exclusivity The submission to the jurisdiction of the courts of England shall not (and shall not be construed so as to) limit the right of the Lender or the Trustee to take Proceedings against another party in any other court of competent jurisdiction to the extent permitted by any applicable law, nor shall the taking of Proceedings in connection with this Agreement in any one or more jurisdictions preclude the taking of Proceedings by the Lender or the Trustee in any other jurisdiction (whether concurrently or not) or in any other court of competent jurisdiction to the extent permitted by any applicable law Service of Process (Borrower) The Borrower hereby 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 Fifth Floor, 100 Wood Street, London EC2V 7EX or its other principal place of business in England for the time being. 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 written demand from 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 19.6 shall affect the right of the Lender to serve process in any other manner permitted by law Service of Process (Lender) The Lender hereby 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 Fifth Floor, 100 Wood Street, London EC2V 7EX or, if different, its registered office for the time being. 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 written demand from 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 Clause 19.7 shall affect the right of the Borrower to serve process in any other manner permitted by law 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 making of a judgment or award or otherwise) or other legal process, including in relation to enforcement of an arbitration award, 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. 20. ARBITRATION In the case of any dispute which may arise out of or in connection with this Agreement (a Dispute ) the Lender may elect, by notice in writing to the Borrower, to finally resolve such claim by arbitration in accordance with the following provisions. The Borrower hereby agrees that (regardless of the nature of the 196

213 Dispute) any Dispute may be settled by arbitration in accordance with the Rules of the London Court of International Arbitration (the Rules ) which are deemed to be incorporated by reference into this Clause 20. The seat of arbitration shall be London, England, and the language of the arbitration shall be English. The number of arbitrators shall be three, each of whom shall not be interested in the dispute or controversy, shall have no connection with any party thereto and shall be a lawyer, an attorney or barrister experienced in international securities transactions. The claimant and respondent shall each nominate an arbitrator and the two arbitrators so nominated, jointly, shall nominate a third arbitrator to serve as the Chairman of the Tribunal. If a Dispute shall involve more than two parties, the parties thereto shall attempt to align themselves in two sides (i.e., claimant and respondent) each of which shall appoint an arbitrator as if there were only two sides to such dispute, claim controversy or cause of action. If such alignment and appointment shall not have occurred within 20 calendar days after the initiating party serves the arbitration demand or if a Chairman has not been selected within 30 calendar days of the selection of the second arbitrator, the Arbitration Court of the London Court of International Arbitration shall appoint an arbitrator on behalf of the respondent or claimant parties 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. Sections 45 and 69 of the Arbitration Act 1996 shall not apply. The arbitrators shall have no authority to award punitive or other punitive type damages. The fact that an arbitration award has been made, the content of that award and the arbitration proceedings contemplated by this Clause 20 shall be kept confidential by the parties (other than for purposes of enforcement of the award) and may not be disclosed save as required by law or regulatory authority. 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 enforcement proceedings, including reasonable legal fees and costs. This Clause 20 is without prejudice to the role of Independent Appraiser under Clause 11.2 (Disposals). 21. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 Apart from the Trustee, a person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement. 22. COUNTERPARTS This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when so executed shall constitute one and the same binding agreement between the parties. 23. SCHEDULE The Schedule to this Agreement constitutes an integral part hereof. 24. SEVERABILITY In case any provision in or obligation under this 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. LANGUAGE The language which governs the interpretation of this Agreement is the English language. 26. AMENDMENTS Except as otherwise provided, this Agreement may not be varied except by an agreement in writing by all parties. 197

214 27. LIMITED RECOURSE AND NON-PETITION 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, actually received and retained (net of tax) from the Borrower pursuant to this Agreement (the Lender Assets ), subject always to (i) the Security Interests (as defined in the Trust Deed) and (ii) to the fact that any claims of the Joint Lead Managers shall rank in priority to any claims of the Borrower, and that any such claim by any and all such Joint Lead Managers 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 Lender Assets, neither any of the Joint Lead Managers or 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, neither any Joint Lead Manager nor the Borrower (nor any other person acting on behalf of any of them) 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 relating to the Notes or otherwise owed to the creditors, 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. No parties to this Agreement shall have any 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. The provisions of this Clause 27 shall survive the termination of this Agreement. 198

215 SCHEDULE FORM OF COMPLIANCE CERTIFICATE To: BOM Capital P.L.C. BNY Corporate Trustee Services Limited From: Borrower Dated:[ ] Dear Sirs Joint stock commercial bank Bank of Moscow (open joint stock company) (the Borrower ) CHF 350,000,000 Loan Agreement with BOM Capital P.L.C. dated 8 September 2010 (the Loan Agreement ) 1. We refer to the Loan Agreement. This is a Compliance Certificate for the purposes of Clause 11.7 (Compliance Certificate) of the Loan Agreement. 2. We confirm that (i) the Borrower has kept, observed, performed and fulfilled each and every covenant, and complied with the covenants and conditions contained in the Loan Agreement, (ii) the Borrower is not in breach or default in the performance or observance of any of the terms, conditions and provisions of the Loan Agreement, and (iii) no Default or Event of Default (as each such term is defined in the Loan Agreement) has occurred and is continuing in respect of the Borrower. Signed: [principal executive officer/ principal accounting officer/ principal financial officer] of the Borrower Chief Accountant of the Borrower 199

216 TERMS AND CONDITIONS OF THE NOTES The following is the text of the Terms and Conditions of the Notes that will be endorsed on each Definitive Note (if issued). All capitalised terms that are not defined in these Conditions will have the meanings given to them in the Trust Deed. The CHF 350,000, per cent. Loan Participation Notes due 2013 (the Notes, which expression includes any further notes issued pursuant to Condition 13 (Further Issues) and forming a single series therewith) of BOM Capital P.L.C. (the Issuer, which expression shall include any successor to the Issuer from time to time) are constituted by, are subject to and have the benefit of, a trust deed (as amended or supplemented from time to time, the Trust Deed ) dated 10 September 2010 between the Issuer and BNY Corporate Trustee Services Limited as trustee (the Trustee, which expression includes all persons from time to time appointed as trustee or trustees under the Trust Deed for the holders of the Notes). The Issuer has authorised the creation, issue and sale of the Notes for the sole purpose of financing the CHF 350,000,000 loan by the Issuer (the Loan ) to Joint stock commercial bank Bank of Moscow (open joint stock company) (the Borrower ). The Issuer and the Borrower have recorded the terms of the Loan in an agreement (as amended or supplemented from time to time, the Loan Agreement ) dated 8 September 2010 between the Issuer (in its capacity as lender thereunder) and the Borrower. In each case where Swiss Franc amounts of principal, interest and additional amounts, if any, due pursuant to Condition 7 (Taxation) are stated herein or in the Trust Deed to be payable in respect of the Notes, the obligation of the Issuer to make any such payment shall constitute an obligation only to account to the Noteholders (as defined below) on each date upon which such Swiss Franc amounts of principal, interest and additional amounts, if any, are due in respect of the Notes, for an amount equivalent to the sums of principal, interest, Additional Amounts (as defined in the Loan Agreement) and Tax Indemnity Amounts (as defined in the Loan Agreement), if any, actually received and retained (net of tax) by, or for the account of, the Issuer pursuant to the Loan Agreement, less any amount in respect of the Reserved Rights (as defined below). Noteholders must therefore rely solely and exclusively upon the covenant to pay under the Loan Agreement, the benefit of the Security Interests (as defined below) and the credit and financial standing of the Borrower. Noteholders shall have no recourse (direct or indirect) to any other assets of the Issuer. References herein to the holders of the Notes (the Noteholders ) are to the persons entitled to quotal co-ownership interests in the permanent global note representing the Notes (the Permanent Global Note ) and to the holders of the Notes, if definitive Notes have been printed in accordance with Condition 1 (Form, Denomination, Title, Ownership, Definitive Notes). References herein to Couponholders are to the Noteholders, as long as the Notes are represented by the Permanent Global Note, and to the holders of Coupons if definitive Notes have been printed in accordance with Condition 1 (Form, Denomination, Title, Ownership, Definitive Notes). Security The Issuer (as lender) has under the Trust Deed: (A) charged by way of a first fixed charge to the Trustee (i) all its rights, title and interests and benefits in and to principal, interest and other amounts paid and payable now or at any time to it under the Loan Agreement and (ii) all of its rights, title, interest and benefit in and to receive amounts paid and payable now or at any time to it under any claim, award or judgment relating to the Loan Agreement (other than its right to amounts in respect of any rights, title and interests and benefits of the Issuer under the following clauses of the Loan Agreement: Clause 7.2 (Tax Indemnity) (excluding Tax Indemnity Amounts), Clause 9 (Change in Law; Increase in Cost), Clause 13 (Default Interest and Indemnity) (limited in the case of Clause 13.2 (Default Interest) and Clause 13.7 (Indemnification) to the extent that the Issuer s claim is in respect of sums due under one of the aforementioned clauses of the Loan Agreement) Clause 15.2 (Stamp Duties) and Clause 16 (Fees, Costs and Expenses) (to the extent that the Issuer s claim is in respect of one of the aforementioned clauses of the Loan Agreement) (such rights referred to herein as the Reserved Rights )); 200

217 (B) (C) charged by way of a first fixed charge to the Trustee all of the Issuer s rights, title and interests and benefits in and to all sums held on deposit from time to time, in an account in Geneva in the name of the Issuer with BNP Paribas (Suisse) SA (the Swiss Principal Paying Agent ) together with the debts represented thereby (other than interest from time to time earned thereon and the Reserved Rights) (the Account ) pursuant to the Trust Deed; and assigned absolutely to the Trustee all of the Issuer s rights, title and interests and benefits whatsoever, both present and future, whether proprietary, contractual or otherwise under or arising out of, evidenced by or pursuant to the Loan Agreement (including, without limitation, the right to declare the Loan immediately due and payable and to take proceedings to enforce the obligations of the Borrower thereunder) (save for those rights expressed to be charged or excluded in (A) above) (the Loan Administration Transfer ), together, the Security Interests. In certain circumstances, the Trustee (subject to it being indemnified and/or secured to its satisfaction) may be required by Noteholders holding at least one-quarter of the principal amount of the Notes outstanding or by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders to exercise certain of its powers under the Trust Deed (including those arising in connection with the Security Interests). The Notes are also subject to the provisions of an agency agreement dated 10 September 2010 (as amended or supplemented from time to time, the Agency Agreement ) among the Issuer, the Borrower, BNP Paribas (Suisse) SA as Swiss Principal Paying Agent, and the other agents named therein (together with the Swiss Principal Paying Agent, the Agents, which expression includes any additional or successor paying agent appointed from time to time in connection with the Notes), and the Trustee. Certain provisions of these Conditions are summaries of the Trust Deed, the Loan Agreement and the Agency Agreement and are subject to their detailed provisions. The Noteholders are bound by, and are deemed to have notice of, all the provisions of the Trust Deed, the Loan Agreement and the Agency Agreement applicable to them. Copies of the Trust Deed, the Loan Agreement and the Agency Agreement are available for inspection during normal business hours at the registered office for the time being of the Swiss Principal Paying Agent, being at the date hereof 2, place de Hollande, 1204 Geneva, Switzerland and at the registered office of the Trustee, being at the date hereof One Canada Square, London, E14 5AL, United Kingdom. 1. Form, Denomination, Title, Ownership, Definitive Notes (a) Form and Denomination: The Notes are in bearer form and are represented by the Permanent Global Note, which shall be deposited by the Swiss Principal Paying Agent with SIX SIS Ltd or any other intermediary in Switzerland recognised for such purposes by SIX Swiss Exchange Ltd (SIX SIS Ltd or any such other intermediary, the Intermediary ). Once the Permanent Global Note is deposited with the Intermediary and entered into the accounts of one or more participants of the Intermediary, the Notes will constitute intermediated securities (Bucheffekten) in accordance with the provisions of the Swiss Federal Intermediated Securities Act (Bucheffektengesetz). The Notes will be in denominations of CHF 5,000 each and multiples thereof. (b) (c) Title and Ownership: Each Holder (as defined below) shall have a quotal co-ownership interest (Miteigentumsanteil) in the Permanent Global Note to the extent of his claim against the Issuer, provided that for so long as the Permanent Global Note remains deposited with the Intermediary, the co-ownership interest shall be suspended and the Notes may only be transferred by the entry of the transferred Notes in a securities account of the transferee. The records of the Intermediary will determine the number of Notes held through each participant in that Intermediary. In respect of the Notes held in the form of Intermediated Securities, the holders of the Notes (the Holders ) will be the persons holding the Notes in a securities account (Effektenkonto) which is in their name, or in the case of intermediaries (Verwahrungsstellen) holding the Notes for their own account in a securities account (Effektenkonto) which is in their name. Exchange for Definitive Notes: The Permanent Global Note is exchangeable in whole but not in part (free of charge to the Holder) for the definitive Notes if the Swiss Principal Paying Agent determines that (1) SIX SIS Ltd ( SIS ) 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 201

218 cease business or does in fact do so and no alternative clearing system satisfactory to the Trustee is available, or (2) the printing of definitive Notes is necessary or (3) if, under Swiss or any applicable foreign laws, the enforcement of obligations under the Notes can only be ensured by means of effective bearer definitive Notes. Neither the Issuer nor the Noteholders shall at any time have the right to effect or demand the conversion of the Permanent Global Note into, or the delivery of, uncertificated securities (Wertrechte) or Definitive Notes (Wertpapiere) and Coupons. 2. Status and Limited Recourse The Notes are limited recourse secured obligations of the Issuer. The sole purpose of the issue of the Notes is to provide the funds for the Issuer to finance the Loan to the Borrower. The Notes constitute the obligation of the Issuer to apply an amount equal to the gross proceeds from the issue of the Notes solely for financing the Loan and to account to the Noteholders for a Swiss Franc amount equivalent to sums of principal, interest, Additional Amounts and Tax Indemnity Amounts or other amounts, if any, actually received and retained (net of tax) by, or for the account of, the Issuer pursuant to the Loan Agreement (less any amounts in respect of the Reserved Rights). The rights of the Issuer to receive such sums is being charged by way of security to the Trustee by virtue of the Security Interests as security for the Issuer s payment obligations under the Trust Deed and in respect of the Notes. Payments in respect of the Notes and the Coupons equivalent to the sums actually received by, or for the account of, the Issuer by way of principal, interest, Additional Amounts or Tax Indemnity Amounts or other amounts, if any, under the Loan Agreement (less any amounts in respect of the Reserved Rights) will be made pro rata among all Noteholders and the Couponholders (subject to Condition 7 (Taxation)) on the payment dates on which such payments are due in respect of the Notes subject to the conditions attaching to, and in the currency of, the corresponding payment made in accordance with the Loan Agreement. The Issuer shall not be liable to make any payment in respect of the Notes or the Coupons other than as expressly provided herein and in the Trust Deed. Neither the Issuer nor the Trustee shall be under any obligation to exercise in favour of the Noteholders any rights of set off or of banker s lien or to combine accounts or counterclaim that may arise out of other transactions between the Issuer and the Borrower. Noteholders have notice of, and have accepted, these Conditions and the contents of the Trust Deed, the Agency Agreement and the Loan Agreement. It is hereby expressly provided that, and Noteholders are deemed to have accepted that: (i) (ii) (iii) (iv) (v) neither the Issuer nor the Trustee makes any representation or warranty in respect of, and shall at no time have any responsibility for, or liability, or obligation in respect of the performance and observance by the Borrower of its obligations under the Loan Agreement or (save as otherwise expressly provided in the Trust Deed and paragraph (vii) below) the recoverability of any sum of principal, interest, Additional Amounts, Tax Indemnity Amounts or other amounts, if any, due or to become due from the Borrower under the Loan Agreement; neither the Issuer nor the Trustee shall at any time have any responsibility for, or obligation or liability in respect of, the condition (financial, operational or otherwise), creditworthiness, affairs, status, nature or prospects of the Borrower; neither the Issuer nor the Trustee shall at any time have any responsibility for, or obligation or liability in respect of, any misrepresentation or breach of warranty or any act, default or omission of the Borrower under or in respect of the Loan Agreement; neither the Issuer nor the Trustee shall at any time have any responsibility for, or liability or obligation in respect of, the performance and observance by the Swiss Principal Paying Agent or any other Agents of their respective obligations under the Agency Agreement; the financial servicing and performance of the terms of the Notes depend solely and exclusively upon the performance by the Borrower of its obligations under the Loan Agreement, its covenant to pay under the Loan Agreement and its credit and financial standing; 202

219 (vi) (vii) the Issuer (and, pursuant to the Loan Administration Transfer, the Trustee) will be entitled to rely on self-certification by the Borrower and 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 any investigations which might be made by a security holder in relation to the property which is expressed to be the subject of the Security Interests 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 secured property 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 expressed to be 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 will have no responsibility for the value of such security; and the Issuer will not be responsible for any withholding or deduction or for any payment on account of Taxes (as defined in the Loan Agreement) required to be made by the Issuer on or in relation to any sum received by it under the Loan Agreement which will or may affect payments made or to be made by the Borrower under the Loan Agreement save to the extent that it has actually received Additional Amounts, Tax Indemnity Amounts or other amounts under the Loan Agreement in respect of such withholding or deduction and then only to the extent of those amounts actually received; the Issuer shall, furthermore, not be obliged to take any actions or measures as regards such deductions or withholdings other than those set out in this context in Clause 7 (Taxes) and Clause 9 (Change in Law; Increase in Cost) of the Loan Agreement and the Trust Deed. 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 Account, exists for the benefit of the Noteholders. Subject to the terms of the Trust Deed, no Noteholder or Couponholder will have any entitlement to enforce any of the provisions in the Loan Agreement or have direct recourse to the Borrower except through action by the Trustee under the Security Interests. Neither the Issuer nor the Trustee pursuant to the Loan Administration Transfer shall be required to take proceedings to enforce payment under the Loan Agreement unless, in the case of the Trustee, it has been indemnified and/or secured by the Noteholders or Couponholders to its satisfaction against all liabilities, proceedings, claims and demands to which it may thereby become liable and all costs, charges and expenses which may be incurred by it in connection therewith. The obligations of the Issuer under the Notes shall be solely to make payments of amounts in aggregate equal to each sum actually received and retained (net of tax) by or for the account of the Issuer (as Lender) from the Borrower in respect of principal, interest or, as the case may be, other amounts relating to the Loan pursuant to the Loan Agreement the right to receive 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 and retained (net of tax) by or on behalf of the Issuer or the Trustee (following a Relevant Event or (if applicable) an Event of Default). Noteholders shall look solely to such sums for payment 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 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. None of the Noteholders 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, 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 Issuer relating to the Notes or otherwise owed to the creditors, 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. 203

220 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. The obligations of the Issuer to make payments as stated in the previous paragraphs constitute direct and limited recourse obligations of the Issuer which will at all times rank pari passu among themselves. Payments made by the Borrower under the Loan Agreement to, or to the order of, the Trustee or (before such time that the Issuer has been required by the Trustee, pursuant to the terms of the Trust Deed, to pay to or to the order of the Trustee) the Swiss Principal Paying Agent will satisfy pro tanto the obligations of the Issuer in respect of the Notes, except to the extent that there is a subsequent failure to make payment to the Noteholders or Couponholders. 3. Issuer s Covenant As provided in the Trust Deed, so long as any of the Notes remain outstanding (as defined in the Trust Deed), the Issuer will not, without the prior written consent of the Trustee or an Extraordinary Resolution or Written Resolution (each 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 or the Trust Deed 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 and the Loan Agreement. Any such amendment, modification, waiver or authorisation made with the consent of the Trustee shall be binding on the Noteholders and the Couponholders and, unless the Trustee agrees otherwise, any such amendment or modification shall be notified by the Issuer to the Noteholders and the Couponholders in accordance with Condition 14 (Notices). 4. Interest (a) Accrual of Interest: On each Interest Payment Date (as defined below) or as soon after the same is received, the Issuer shall account to the Noteholders for an amount equivalent to amounts of interest actually received by or for the account of the Issuer pursuant to the Loan Agreement (with respect to the corresponding interest payment date thereunder), pursuant to which interest accrues on the Loan at a rate of 4.50 per cent. per annum (the Interest Rate ). The amount of interest payable in respect of the Loan for any Interest Period shall be calculated by applying the Rate of Interest to the Loan and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). If interest on the Loan is required to be calculated for any period other than an Interest Period, it shall be calculated by applying the Interest Rate to the principal amount of the Loan then outstanding and multiplying the product by the actual number of days in the relevant period, from (and including) the first day in such period to (but excluding) the last day in such period, divided by the number of days in the Interest Period in which the relevant period falls (including the first such day but excluding the last), and rounding the resulting figure to the nearest cent (half cent being rounded upwards). In this Condition 4, Interest Payment Date and Interest Period shall have the meaning given to them in the Loan Agreement. For the avoidance of doubt the amount of interest payable on each Interest Payment Date shall be CHF 15,750,000. (b) Overdue Interest: In the event that, and to the extent that, the Issuer actually receives any amounts in respect of interest on overdue interest from the Borrower, under the Loan Agreement (less any amount in respect of the Reserved Rights), the Issuer shall account to the Noteholders for an amount equivalent to the amounts in respect of interest on overdue interest actually so received. 5. Redemption and Purchase (a) Final redemption: Unless the Loan is previously prepaid pursuant to Clause 5 (Repayment and Prepayment) of the Loan Agreement, the Borrower will be required to repay the Loan (in full and not in part) on its due date as provided in the Loan Agreement and, subject to such repayment, all the 204

221 Notes will be redeemed at their principal amount on 10 September 2013 subject to Condition 6 (Payments). (b) Redemption by the Issuer: The Notes shall be redeemed by the Issuer in whole, but not in part, at any time, on giving not less than 30 and not more than 60 days prior notice to the Noteholders, the Trustee, the Swiss Principal Paying Agent and the Borrower (which notice shall be irrevocable and shall specify a date for redemption, being the same date as that set out in the notice of prepayment) in accordance with Condition 14 (Notices) at the outstanding principal amount thereof, together with interest accrued and unpaid to the date fixed for redemption and any additional amounts in respect thereof pursuant to Condition 7 (Taxation), if, immediately before giving such notice, the Issuer satisfies the Trustee that the Issuer has received a notice of prepayment from the Borrower pursuant to Clause 5.2 (Prepayment in the event of Taxes or Increased Costs) of the Loan Agreement or that the Issuer has issued a notice of prepayment to the Borrower pursuant to Clause 5.3 (Prepayment in the event of Illegality) of the Loan Agreement. Prior to the publication of any notice of redemption referred to in this Condition 5(b), the Issuer shall deliver to the Trustee a certificate signed by two directors of the Issuer stating that the Issuer is entitled to effect such redemption in accordance with this Condition 5(b). A copy of the Borrower s notice of prepayment or details of the circumstances contemplated by Clause 5.2 (Prepayment in the event of Taxes and Increased Costs) or Clause 5.3 (Prepayment in the event of Illegality) of the Loan Agreement (as the case may be) and the date fixed for redemption shall be set out in the notice. The Trustee shall be entitled to accept any notice or certificate delivered by the Issuer in accordance with this Condition 5(b) as sufficient evidence of the satisfaction of the applicable circumstances in which event they shall be conclusive and binding on the Noteholders. Upon the expiry of any such notice given by the Issuer to the Trustee on behalf of the Noteholders as is referred to in this Condition 5(b), the Issuer shall be bound to redeem the Notes in accordance with this Condition 5(b), subject to Condition 6 (Payments). (c) (d) No other redemption: Except where the Loan is accelerated pursuant to Clause 12.3 (Default Remedies) of the Loan Agreement, the Issuer shall not be entitled to redeem the Notes otherwise than as provided in Condition 5(b) (Redemption by the Issuer) above. Purchase: The Borrower or any of its subsidiaries may at any time purchase Notes in the open market or otherwise and at any price. Such Notes may be held, reissued, resold or delivered to the Issuer for surrender and cancellation. The Loan shall be deemed to have been prepaid in an amount corresponding to the aggregate principal amount of the Notes so surrendered and cancelled. Notes held by or on behalf of the Borrower or any Subsidiary of the Borrower, will cease to carry the right to attend and vote at meetings of Noteholders and will not be taken into account, inter alia, for the purposes of Conditions 11 (Meetings of Noteholders; Modification and Waiver; Substitution) and 12 (Enforcement). (e) Cancellation: All Notes purchased by the Borrower or any of its Subsidiaries and surrendered to the Issuer pursuant to Clause 5.4 (Reduction of Loan upon Cancellation of Agreed Funding) of the Loan Agreement shall be cancelled in accordance with the Agency Agreement. 6. Payments (a) Payments of Principal: Payments of principal shall be made in Swiss Francs only against presentation and (provided that payment is made in full) surrender (or, in the case of part payment only, endorsement) of the relevant Notes at an office of the Swiss Principal Paying Agent outside the United States or by way of the Swiss Interbank Clearing System in accordance with usual Swiss market practice. (b) Payments of Interest: Payments of interest shall be made only against presentation and (provided that payment is made in full) surrender (or, in the case of part payment only, endorsement) of the relevant 205

222 Coupon at an office of the Swiss Principal Paying Agent outside the United States or by way of the Swiss Interbank Clearing System in accordance with usual Swiss market practice. (c) (d) (e) (f) (g) (h) Payments subject to Applicable Law: Payments in respect of the Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 7 (Taxation). No commission or expenses shall be charged to the Noteholders or Couponholders in respect of such payments. Deduction for unmatured Coupons: If a Note is presented without all unmatured Coupons relating thereto, a sum equal to the aggregate amount of the missing Coupons will be deducted from the amount of principal due for payment; provided, however, that, if the gross amount available for payment is less than the principal amount of such Note, the sum deducted will be that proportion of the aggregate amount of such missing Coupons which the gross amount actually available for payment bears to the principal amount of such Note. Each sum of principal so deducted shall be paid in the manner provided in Condition 6(a) above against presentation and (provided that payment is made in full) surrender of the relevant missing Coupons. Payments on business days: If the due date for payment of any amount in respect of any Note or Coupon is not a business day in the place of presentation, the holder thereof shall not be entitled to payment of the amount due until the next following business day in such place 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 on which a payment is to be made hereunder and commercial banks are open for presentation and payment of bearer debt securities and for dealings in foreign currencies in such place of presentation and, in the case of a transfer to a Swiss Franc account as referred to above, which is also a day on which dealings in foreign currencies may be carried on in Switzerland. 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, in respect of the first Interest Payment Date only, from the date of issuance of the Notes, shall be payable only as and when actually received by or for the account of the Issuer pursuant to the Loan Agreement. Payment other than in respect of matured Coupons: Payments of interest other than in respect of matured Coupons shall be made only against presentation of the relevant Notes at an office of the Swiss Principal Paying Agent. Partial payment: If the Swiss Principal Paying Agent makes a partial payment in respect of any Note or Coupon presented to it for payment, the Swiss Principal Paying Agent will endorse thereon a statement indicating the amount and date of such payment. (i) Payment obligations limited: The obligations of the Issuer to make payments under Condition 5 (Redemption and Purchase) and Condition 6 (Payments) shall constitute an obligation only to account to the Noteholders or Couponholders, as the case may be, on each Interest Payment Date or such other date upon which a payment is due in respect of the Notes or Coupons, for an amount equivalent to sums of principal, interest, Additional Amounts, Tax Indemnity Amounts or other amounts, if any, actually received and retained (net of tax) by or for the account of the Issuer pursuant to the Loan Agreement less any amount in respect of the Reserved Rights. 7. Taxation All payments by, or on behalf of, the Issuer in respect of the Notes and Coupons shall be made free and clear of, and without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatsoever nature ( Taxes ) imposed or levied by the Russian Federation, Ireland or any governmental or political subdivision or territory or possession of any government or any authority thereof or agency therein or thereof having power to tax, unless such withholding or deduction is required by law. In that event, the Issuer shall, subject as provided below, pay such additional amounts as will result in the receipt by the Noteholders and Couponholders of such amounts as would have 206

223 been received by them if no such withholding or deduction had been made or required to be made. No such additional amounts shall be payable in respect of any Note or Coupon: (a) (b) (c) (d) (e) held by a holder which is liable for such Taxes in respect of such Note or Coupon by reason of its having some connection with the Russian Federation or Ireland other than the mere holding of such Note or Coupon (including being a citizen or resident or national of, or carrying on a business or maintaining a permanent establishment in, or being physically present in the Russian Federation or Ireland); or to a holder in respect of Taxes that are imposed or withheld by reason of the failure of the holder to comply with a request of, or on behalf of, the Issuer addressed to the holder to provide information concerning the nationality, residence or identity of such holder or to make any declaration or similar claim or satisfy any information or reporting requirement, which is required or imposed by a statute, treaty, regulation, protocol or administrative practice as a precondition to exemption from all or part of such Taxes; or where the relevant Note or Coupon is presented for payment of principal or interest on redemption more than 30 days after a Relevant Date except to the extent that such additional payment would have been payable if such Note or Coupon had been presented for payment on the last day of such period of 30 days; or where such withholding or deduction is imposed or levied on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive or any agreement on the taxation of savings income entered into by non-eu-member States (including Switzerland) with a view to implementing such Directive; or in respect of a Note or Coupon presented for payment by or on behalf of a holder who would be able to avoid such withholding or deduction by arranging to receive the relevant payment through another Agent in a Member State of the European Union. Notwithstanding the foregoing provisions, the Issuer shall only make payments of additional amounts to the Noteholders and Couponholders pursuant to this Condition 7 to the extent and at such time as it shall have actually received and retained (net of tax) an equivalent amount for such purposes from the Borrower under the Loan Agreement, by way of Additional Amounts or Tax Indemnity Amounts or otherwise. To the extent that the Issuer receives and retains (net of tax) a lesser sum, in respect of an additional amount from the Borrower for the account of the Noteholders or Couponholders, the Issuer shall account to each Noteholder or Couponholder for such additional amount pursuant to this Condition 7 for an additional amount equivalent to a pro rata portion of such additional amount (if any) as is actually received and retained (net of tax) by, or for the account of, the Issuer pursuant to the provisions of the Loan Agreement on the date of, in the currency of, and subject to any conditions attaching to the payment of such additional amount to the Issuer. In these Conditions, Relevant Date means whichever is the later of (a) the date on which the payment in question first becomes due and (b) if the full amount payable has not been received by the Swiss Principal Paying Agent or the Trustee on or prior to such due date, the date on which (the full amount having been so received) notice to that effect has been given to the Noteholders and Couponholders in accordance with Condition 14 (Notices). Any reference in these Conditions to principal or interest or other amounts shall be deemed to include any additional amounts in respect of principal or interest or other amounts (as the case may be) which may be payable under this Condition 7 or any undertaking given in addition to or in substitution of this Condition 7 pursuant to the Trust Deed or the Loan Agreement. If the Issuer becomes subject at any time to any taxing jurisdiction other than Ireland, references in these Conditions to Ireland shall be construed as references to Ireland and/or such other jurisdiction. 207

224 8. Prescription Claims for principal shall be prescribed and become void unless the relevant Notes are presented for payment within ten years of the Relevant Date. Claims for interest will be prescribed and become void unless the relevant Coupons are presented for payment within five years of the Relevant Date. 9. Replacement of Notes and Coupons If any Note or Coupon is lost, stolen, mutilated, defaced or destroyed, it may be replaced, subject to applicable laws and stock exchange requirements, at the offices of the Swiss Principal Paying Agent upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes must be surrendered before replacements will be issued. 10. Trustee and Agents Under (i) a separate agreement between the Borrower and the Trustee (the Trustee Indemnification and Compensation Agreement ) and (ii) a separate agreement among the Borrower and the Agents (the Agency Indemnification and Compensation Agreement ), each of the Trustee and the Agents is entitled to be indemnified and relieved from responsibility in certain circumstances. The Trustee is also entitled pursuant to the Trustee Indemnification and Compensation Agreement to be paid its costs and expenses in priority to the claims of the Noteholders. In addition, the Trustee is entitled to enter into business transactions with the Issuer, the Borrower and any entity related to the Issuer or the Borrower without accounting for any profit, fees, commissions, interest, discounts or share of brokerage earned, arising or resulting from any such contracts or transactions or trusteeships and the Trustee shall also be at liberty to retain the same for its benefit. In acting under the Agency Agreement and in connection with the Notes and Coupons, the Agents act solely as agents of the Issuer and (to the extent provided therein) the Trustee and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders or Couponholders. The Trust Deed provides for the Trustee to take action on behalf of the Noteholders in certain circumstances, but only if the Trustee is indemnified and/or secured to its satisfaction. It may not be possible for the Trustee to take certain actions in relation to the Notes or Coupons and, accordingly, in such circumstances the Trustee will be unable to take action, notwithstanding the provision of an indemnity and/or security to it, and it will be for Noteholders and Couponholders to take action directly. As provided in the Trust Deed, any Trustee for the time being may retire at any time upon giving not less than three months notice in writing to the Issuer and the Borrower without assigning any reason therefor and without being responsible for any costs occasioned by such retirement. The retirement of any Trustee shall not become effective unless there remains a trustee (being a trust corporation) in office after such retirement. In the event of a Trustee giving such notice, the Issuer shall use its reasonable endeavours to procure a new trustee to be appointed. The Noteholders shall together have the power, exercisable by Extraordinary Resolution, to remove any trustee or trustees for the time being hereof. The removal of any trustee shall not become effective unless the Borrower has given its prior written consent thereto and there remains a trustee hereof (being a trust corporation) in office after such removal. Notice of any change in the Trustee or any of the Agents shall promptly be given to the Noteholders in accordance with Condition 14 (Notices). 11. Meetings of Noteholders; Modification and Waiver; Substitution (a) Meetings of Noteholders: The Trust Deed contains provisions for convening meetings of Noteholders to consider matters relating to the Notes, including the modification of any provision of the Loan Agreement or any provision of these Conditions or the Trust Deed. Any such modification may be made if sanctioned by an Extraordinary Resolution (as defined below) or a Written Resolution (as defined below). Such a meeting will be convened on not less than 14 days prior written notice by the Trustee, the Borrower or the Issuer or by the Trustee at the request in writing of Noteholders holding not less than one-tenth of the aggregate principal amount of the outstanding Notes. The quorum at any 208

225 meeting convened to vote on an Extraordinary Resolution will be one or more persons present in person holding or representing more than half of the aggregate principal amount of the outstanding Notes or, at any adjourned meeting, one or more persons present in person holding Notes in definitive form or voting certificates or being proxies (whatever the principal amount of the Notes so held or represented); provided however, that certain proposals (including but not limited to any proposal to alter the terms and conditions relating to the maturity, redemption and repayment of the Notes, to change any date fixed for payment of principal or interest in respect of the Notes, to reduce the amount of principal or interest payable on any date in respect of the Notes, to alter the method of calculating the amount of any payment in respect of the Notes or the date for any such payment, to change the currency of payments under the Notes, to change any date fixed for payment of principal or interest under the Loan Agreement to reduce the amount of principal or interest payable under the Loan Agreement to alter the method of calculating the amount of any payment under the Loan Agreement to change the currency of payment under the Loan Agreement to change the quorum requirements relating to meetings or the majority required to pass an Extraordinary Resolution, to alter the governing law of the Conditions, the Trust Deed, or the Loan Agreement or to change the Events of Default under the Loan Agreement (each, a Reserved Matter )) may only be sanctioned by an Extraordinary Resolution passed at a meeting of Noteholders at which one or more persons present holding or representing not less than three-quarters or, at any adjourned meeting, one-quarter of the aggregate principal amount of the outstanding Notes form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Noteholders and Couponholders whether present or not. In addition, a resolution in writing (a Written Resolution ) signed by or on behalf of the holders of not less than 90 per cent. in principal amount of all Notes outstanding who for the time being are entitled to receive notice of a meeting of Noteholders under the Trust Deed will take effect as if it were an Extraordinary Resolution. Such a Written Resolution may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders. Neither the Borrower nor any subsidiary of the Borrower nor any holding company of the Borrower nor any subsidiary of any such holding company who is or are also Noteholders shall be allowed to vote at a meeting or be included in a quorum. The expression Extraordinary Resolution means a resolution passed at a meeting of the Noteholders duly convened and held by a majority consisting of more than 50 per cent. of the persons voting thereat upon a show of hands or if a poll is duly demanded by a majority consisting of more than 50 per cent. of the votes cast on such poll. (b) Modification and waiver: The Trustee may, without the consent of the Noteholders or Couponholders but with the consent of the Borrower, agree to any modification of these Conditions, the Trust Deed or, pursuant to the Loan Administration Transfer, the Loan Agreement (other than in respect of a Reserved Matter) which is, in the opinion of the Trustee, proper to make if, in the opinion of the Trustee, such modification will not be materially prejudicial to the interests of Noteholders or which is of a formal, minor or technical nature or is to correct a manifest error. In addition, the Trustee may, without the consent of the Noteholders, and without prejudice to its rights in respect of any subsequent or other breach, condition, event or act, in writing and on such terms and conditions (if any) as shall seem expedient to it, authorise or waive any breach or proposed breach of the Notes or the Trust Deed by the Issuer or, pursuant to the Loan Administration Transfer, the Loan Agreement by the Borrower 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 (other than a proposed breach or breach relating to a Reserved Matter) if, in the opinion of the Trustee, the interests of the Noteholders will not be materially prejudiced thereby. Any such amendments, modification, authorisation or waiver made with the consent of the Trustee pursuant to the Trust Deed shall be binding on the Noteholders and, unless the Trustee agrees otherwise, any such authorisation, waiver or modification shall be notified to the Noteholders and Couponholders in accordance with Condition 14 (Notices) as soon as practicable thereafter. 209

226 (c) Substitution: The Trust Deed contains provisions under which the Issuer may, without the consent of the Noteholders or Couponholders, but with the prior written consent of the Borrower, transfer the obligations of the Issuer as principal debtor under the Trust Deed and the Notes to a third party provided that certain conditions specified in the Trust Deed are fulfilled. So long as any of the Notes are listed on the SIX Swiss Exchange, in the event of such substitution, the SIX Swiss Exchange will be informed of such substitution and such substitution shall be notified to the Noteholders as soon as practicable thereafter and in accordance with Condition 14 (Notices). 12. Enforcement At any time after an Event of Default (as defined in the Loan Agreement) or Relevant Event (as defined in the Trust Deed) shall have occurred and be continuing, the Trustee may, in accordance with applicable laws, at its discretion and without notice, institute such proceedings as it thinks fit to enforce the rights of the Noteholders under the Trust Deed in respect of the Notes and Coupons, but it shall not be bound to do so unless: (a) (b) it has been so requested in writing by the holders of at least one-quarter in principal amount of the outstanding Notes or has been so directed by an Extraordinary Resolution or a Written Resolution; and it has been indemnified and/or provided with security to its satisfaction against all liabilities, proceedings, actions, claims and demands to which it may thereby become liable and all costs, charges and expenses which may be incurred by it in connection therewith. No Noteholder or Couponholder may proceed directly against the Issuer unless the Trustee, having become bound to do so, fails to do so within a reasonable time and such failure is continuing, provided that any judgment or amount obtained as a result of such action or exercise of rights must be entered or held or, as the case may be, registered in the name of the Trustee and shall be held or dealt with by or on behalf of the Trustee in accordance with the Trust Deed. The Trust Deed also provides that, in the case of an Event of Default or a Relevant Event, the Trustee may, and shall if requested to do so in writing by Noteholders holding at least one-quarter in principal amount of the Notes outstanding or if directed to do so by an Extraordinary Resolution or a Written Resolution and, in either case, subject to it being secured and/or indemnified to its satisfaction, (1) require the Issuer to declare all amounts payable under the Loan Agreement by the Borrower to be due and payable (in the case of an Event of Default) or (2) enforce the security created in the Trust Deed in favour of the Noteholders (in the case of a Relevant Event). Upon repayment of the Loan following an Event of Default, the Notes will be redeemed or repaid at the principal amount thereof together with interest accrued but unpaid up to the date fixed for redemption together with any additional amounts due in respect thereof pursuant to Condition 7 (Taxation) and thereupon shall cease to be outstanding. For the purposes of these Conditions, Relevant Event means any of the following events pertaining to the Issuer: (i) the failure by the Issuer to make any payment of principal or interest on the Notes on the due date for payment thereof; (ii) pre-insolvency composition, moratorium, controlled management, suspension of payments, general settlement with creditors, liquidation, reorganization, examinership, administration, dissolution and any other similar legal proceedings affecting the Issuer or any similar officer is appointed as a consequence of the financial difficulties affecting the Issuer; or (iii) the taking of any action in furtherance of dissolution of the Issuer. 13. Further Issues The Issuer may from time to time, with the consent of the Borrower, but without the consent of the Noteholders or Couponholders and in accordance with the Trust Deed, 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, the issue date and/or the date of the first payment of interest on such further notes) and so that such further issue is consolidated and forms a single series with the Notes. Such further Notes will be constituted by a deed supplemental to the Trust Deed. In relation to such further issue, the Issuer will enter into a loan agreement 210

227 supplemental to the Loan Agreement with the Borrower on the same terms as the original Loan Agreement (or in all respects except for the amount, the issue date and/or the date of the first payment of interest) subject to any modifications which, in the sole opinion of the Trustee, would not materially prejudice the interests of the Noteholders subject to any modifications which, in the sole opinion of the Trustee, only relate to Reserved Rights and would not materially prejudice the interests of Noteholders. The Issuer will provide a further fixed charge and absolute assignment in favour of the Trustee of its rights under such supplemental loan agreement equivalent to the rights charged and assigned as security in relation to the Issuer s rights under the original Loan Agreement which will, together with the security referred to in the Conditions, secure both the Notes and such further Notes. The purpose of the creation and issue of further notes shall be to finance and increase the principal amount of the Loan or a further loan to the Borrower. 14. Notices So long as the Notes are listed on the SIX Swiss Exchange and so long as the rules of the SIX Swiss Exchange so require, all notices in respect of the Notes will be validly given through BNP Paribas (Suisse) SA by means of electronic publication on the following internet website of the SIX Swiss Exchange: Couponholders shall be deemed for all purposes to have notice of the contents of any notice given to the Noteholders. In case by reason of any other cause it shall be impracticable to publish any notice to Noteholders as provided above, then such notification to such Noteholders as shall be given with the prior written approval of the Trustee shall constitute sufficient notice to such Noteholders for every purpose hereunder. 15. Governing Law and Jurisdiction (a) Governing law: The Trust Deed, the Agency Agreement, the Notes, the Loan Agreement, and all other agreements entered into in connection therewith, including any non-contractual obligations arising out of or in connection with them, are governed by, and shall be construed in accordance with, English law. (b) Jurisdiction: The Issuer has in the Trust Deed (i) submitted irrevocably to the non exclusive jurisdiction of the courts of England for the purposes of hearing any determination and suit, action or proceedings or settling any disputes arising out of or in connection with the Trust Deed and the Notes; (ii) waived any objection which it might have to such courts being nominated as the forum to hear and determine any such suit, action or proceedings or to settle any such disputes and agreed not to claim that any such court is not a convenient or appropriate forum; (iii) designated a person in England to accept service of any process on its behalf; and (iv) consented to the enforcement of any judgment. 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 1999, but this does not affect any right or remedy of any person which exists or is available apart from that Act. 211

228 SUMMARY OF THE PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM The following is a summary of the provisions to be contained in the Trust Deed to constitute the Notes and in the Permanent Global Note, which will apply to, and in some cases modify, the Terms and Conditions of the Notes while the Notes are represented by the Permanent Global Note. 1. Exchange and Notices The Notes which will be offered and sold in reliance on Regulations S and which will be sold to non-u.s. persons outside the United States, will initially be represented by a Permanent Global Note in bearer form, without coupons, which will be deposited with SIS. Prior to expiry of the distribution compliance period (as defined in Regulation S), beneficial interests in the Permanent Global Note may not be offered or sold to, or for the account or benefit of, a U.S. person save as otherwise provided pursuant to an available exemption from U.S. securities laws and may not be held otherwise than through SIS and the Permanent Global Note will bear a legend regarding such restrictions on transfer. The Permanent Global Note will be exchangeable in whole but not in part (free of charge to the holder) for definitive Notes if the Swiss Principal Paying Agent determines that: SIS is closed for a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so and no alternative clearing system satisfactory to the Trustee is available; or the printing of definitive Notes is necessary; or under Swiss or applicable foreign laws, the enforcement of obligations under the Notes can only be ensured by means of effective bearer definitive Notes, by, in each case, the Swiss Principal Paying Agent giving notice to the Issuer, the Trustee and the Holders (as defined below) of its intention to exchange the Permanent Global Note for definitive Notes on or after the Exchange Date (as defined below). Neither the Issuer nor the Noteholders shall at any time have the right to effect or demand the conversion of the Permanent Global Note into, or the delivery of, uncertificated securities (Wertrechte) or definitive Notes (Wertpapiere) and Coupons. In all cases the Issuer shall procure the delivery of the definitive Notes outside of the United States. So long as the Notes are listed on the SIX Swiss Exchange and its rules so require, notices will be published by means of electronic publication on the internet website of the SIX Swiss Exchange or otherwise in accordance with the regulations of the SIX Swiss Exchange. For these purposes, Exchange Date means a day specified in the notice requiring exchange falling not less than 60 days after that on which such notice is given and on which banks are open for business in the place in which the specified office of the Swiss Principal Paying Agent is located. 2. Payments Payments of principal, interest and any other amount in respect of the Permanent Global Note will be made to SIS as holder of the Permanent Global Note. None of the Issuer, the Trustee, any Paying Agent or the Bank will have any responsibility or liability for any aspect of the records relating to or payments or deliveries made on account of beneficial ownership interests in the Permanent Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Interest payments in respect of the Notes cannot be collected without certification of non-u.s. beneficial ownership. 3. Noteholders Each Holder (as defined below) shall have a quotal co-ownership interest (Miteigentumsanteil) in the Permanent Global Note to the extent of its claim against the Issuer, provided that for so long as the Permanent Global Note remains deposited with the Intermediary, the co-ownership interest shall be 212

229 suspended and the Notes may only be transferred by the entry of the transferred Notes in a securities account of the transferee. The records of the Intermediary will determine the number of Notes held through each participant in that Intermediary. In respect of the Notes held in the form of Intermediated Securities, the holders of the Notes (the Holders ) will be the persons holding the Notes in a securities account (Effektenkonto) which is in their name, or in the case of intermediaries (Verwahrungsstellen) holding the Notes for their own account in a securities account (Effektenkonto) which is in their name. 4. Prescription Claims against the Issuer in respect of principal and interest on the Notes represented by the Permanent Global Note will be prescribed after 10 years (in the case of principal) and 5 years (in the case of interest) from the Relevant Date (as defined in Condition 7 (Taxation)). 5. Cancellation Cancellation of any Note represented by the Permanent Global Note and required by the Terms and Conditions of the Notes to be cancelled following its redemption or purchase will be effected by endorsement by or on behalf of the Swiss Principal Paying Agent of the reduction in the principal amount of the Permanent Global Note on the relevant part of the schedule thereto. 6. Publication So long as the Notes are listed on the SIX Swiss Exchange and the rules of the SIX Swiss Exchange so require, all notices in respect of the Notes, the Issuer and/or the Bank (to the extent relevant to the Notes) will be validly given through BNP Paribas (Suisse) SA by means of electronic publication on the following internet website of the SIX Swiss Exchange: 7. Legends The following legend, substantially to the following effect, will appear on all Notes and on all receipts and all coupons relating to such Notes to reflect TEFRA D selling restrictions: ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE. The sections referred to above provide that U.S. Noteholders, with certain exceptions, will not be entitled to deduct any loss on Notes, receipts or coupons and will not be entitled to capital gains treatment of any gain on any sale, disposition, redemption or payment of principal or interest in respect of Notes. 213

230 TAXATION The following is a general description of certain tax laws relating to the Notes and interest on the Loan and does not purport to be a comprehensive discussion of the tax treatment of the Notes and interest on the Loan. Prospective investors in the Notes should consult their own tax advisors as to the tax consequences of the purchase, ownership and disposition of the Notes in light of their particular circumstances, including but not limited to the consequences of receipt of interest and sale or redemption of the Notes. The Russian Federation Taxation of the Notes General The following is a summary of certain Russian tax considerations relevant to the purchase, ownership and disposition of the Notes as well as taxation of payments of interest on the Loan. The summary is based on the laws of Russia in effect on the date of this Prospectus. The summary does not seek to address the applicability of, and procedures in relation to, taxes levied by regions, municipalities or other non-federal authorities of 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 involved in claiming double tax treaty relief. Prospective investors should consult their own advisors regarding the tax consequences of investing in the Notes. No representation with respect to Russian tax consequences to any particular Noteholder is made hereby. Many aspects of Russian tax law are subject to significant uncertainty. Further, the substantive provisions of Russian tax law applicable to financial instruments as well as the relative practice of Russian authorities may be subject to more rapid and unpredictable change and inconsistency than in jurisdictions with more developed capital markets and tax systems. For the purposes of this summary, a non-resident Noteholder means: an individual Noteholder that is not considered a Russian tax resident under Russian law when they earn income from the Notes. By inference this means an individual not actually present in the Russian Federation for an aggregate period of 183 days or more (including days of arrival into the Russian Federation and days of departure from the Russian Federation) in any period comprising 12 consecutive months. Presence in the Russian Federation for tax residency purposes is not considered interrupted if an individual departs for short periods (less than six months) for medical treatment or education; or a legal entity or organisation, in each case not organised under Russian law, that purchases, holds and disposes of the Notes otherwise than through a permanent establishment in Russia. A resident Noteholder means any Noteholder (including any individual and any legal entity or organisation) not qualifying as a non-resident Noteholder. The residency rules may be affected by an applicable double tax treaty. It is anticipated that the Russian tax residency rules applicable to legal entities or organisations may change in the future. The Russian tax treatment of interest payments made by Bank of Moscow to the Issuer under the Loan Agreement may affect the Noteholders. See Taxation of Interest on the Loan below. Non-Resident Noteholders A non-resident Noteholder that is a legal entity or corporate body should not be subject to Russian withholding tax on any gain on sale or other disposition of the Notes even if payment is received from a source within the Russian Federation, although there is some residual uncertainty regarding the treatment of any part of such gain which is attributable to accrued interest on the Notes. If the payment upon sale or other disposal of the Notes is received from a Russian source, accrued interest may be distinguished from the total gain and taxed at a rate of 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. Withholding tax on 214

231 interest may be reduced or eliminated in accordance with the provisions of an applicable double tax treaty. However, there is no assurance that advance treaty relief would be granted and obtaining a refund can be difficult, if not impossible. Non-resident holders that are commercial and governmental entities should consult their own tax advisors with respect to this possibility. If proceeds from a disposal of Notes are received from a source within Russia by a non-resident Noteholder who is an individual, the gain on such disposal will generally be subject to tax at a rate of 30 per cent., (the gain generally being calculated as the gross proceeds from such disposal less any available cost deduction (which includes the purchase price of the Notes)), subject to any available double taxation treaty relief. In this regard, if Notes are disposed of within Russia, the gains on such disposition are to be regarded as received for personal income tax purposes as income from a Russian source. The tax should be withheld at source if the disposal proceeds are paid by a broker or a trust manager that is a Russian legal entity or organization, or any other person, who carries out operations under an agency agreement, a commission agreement or another similar agreement in favour of the non-resident Noteholder who is an individual, or, if the tax is not withheld, then the non-resident Noteholder who is an individual should file a tax return and pay tax in Russia. There is some uncertainty regarding treatment of the portion of proceeds (if any) attributable to accrued interest received by the non-resident Noteholder who is an individual. Proceeds attributable to accrued interest may be taxed at a rate of 30 per cent., irrespective of any capital gain or loss on the disposal of the Notes. In addition, there is a risk that the taxable base may be affected by changes in the exchange rates between the currency of acquisition of the Notes, the currency of sale of the Notes and Russian Roubles. Non-resident Noteholders who are individuals should consult their own advisers with respect to the tax consequences of the receipt of proceeds from a source within Russia in respect of a disposition of the Notes. Tax Treaty Relief Where proceeds from the disposition of Notes are received from a Russian source, in order to enjoy the benefits of an applicable double tax treaty, the non-resident Noteholder, whether an individual, legal entity or organisation, must comply with the certification, information and reporting requirements in force in the Russian Federation. Currently, a non-resident Noteholder that is a legal entity or organisation would need to provide the payer of income with a certificate of tax residence issued by the competent authority of the relevant treaty country. This certificate should be legalised or apostilled by a respective competent authority. The Russian translation of the certificate should be provided. 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. A non-resident Noteholder who is an individual must provide to the tax authorities with a certificate of tax residence issued by the competent authority of the relevant treaty country and appropriate documentary proof of income received and the tax payment made outside the Russian Federation on income with respect to which the treaty benefits are claimed. This documentary proof must be confirmed by the tax authority of the relevant treaty country Because of uncertainties regarding the form and the procedures for providing such documentary proof, individuals in practice may not be able to obtain advance treaty relief on the receipt of proceeds from a source within the Russian Federation and obtaining a refund of the taxes withheld can be extremely difficult and time-consuming, if not impossible. Refund of Tax Withheld Where double tax treaty relief is available but Russian income tax has nevertheless been withheld at source by the payer of the proceeds, an application for the refund of the taxes withheld may be filed within three years from the end of the tax period in which the tax was withheld for non-resident Noteholders which are legal entities or organisations, and within one year after the year to which the treaty benefit relates for non-resident Noteholders who are individuals. To process a claim for a refund, a non-resident Noteholder that is a legal organisation should provide to the Russian tax authorities: (1) an apostilled or legalised confirmation of the foreign tax residency of the 215

232 non-resident Noteholder at the time the income was paid, as required by an applicable tax treaty; (2) an application for a refund of the tax withheld; and (3) copies of the relevant contracts or other documents based on which the income was paid, as well as payment documents confirming the payment of the tax that was paid to the Russian budget system on the relevant account of the Federal Treasury (Form 1012DT for dividends and interest and 1011DT for other income are intended to combine (1) and (2) for foreign legal entities and organisations). Non-resident Noteholders who are individuals should present to the tax authorities a tax residency certificate issued by the competent authorities in their country of residence for tax purposes and a document issued or approved by the tax authorities in the country in which they are resident for tax purposes, confirming the amount of income received and taxed in that country and amount of the tax paid in respect of this income. The Russian tax authorities may require a Russian translation of some documents. Procedures for processing such claims have not been clearly established and there is significant uncertainty regarding the availability and timing of such refunds. Resident Noteholders A resident Noteholder is subject to all applicable Russian taxes in respect of gains from a disposal of the Notes and interest received on the Notes. Resident Noteholders should consult their own tax advisers with respect to their tax position regarding the Notes. Taxation of Interest on the Loan The Russian tax treatment of interest payments made by the Bank to the Issuer under the Loan Agreement may affect the Noteholders. In general, payments of interest on borrowed funds by a Russian entity to a non-resident legal entity are subject to Russian withholding tax at a rate of 20 per cent. subject to reduction or elimination pursuant to the terms of an applicable double tax treaty. Based on professional advice the Bank has received, it believes that payments of interest on the Loan should not be subject to withholding tax under the terms of the double tax treaty between the Russian Federation and Ireland. However, there can be no assurance that such relief will be obtained. Preliminary approval from the Russian tax authorities for the purposes of obtaining treaty relief from Russian withholding tax is neither required nor possible. However, the Russian tax authorities may subsequently scrutinise the Issuer s eligibility for treaty relief during tax audits in respect of each payment under the Loan Agreement. The Issuer has granted security by way of charge in favor of the Trustee over certain of its rights and interests as lender under the Loan Agreement (other than any rights over and benefits constituting Reserved Rights as defined in the Trust Deed) as security for the Issuer s payment obligations in respect of the Notes and under the Trust Deed and has assigned absolutely certain administrative rights under the Loan Agreement. Upon any enforcement by the Trustee of the security granted to it by the Issuer by way of the security interests in the Trust Deed, payments under the Loan Agreement (other than in respect of Reserved Rights) would be required to be made to, or to the order of, the Trustee. Under Russian tax law, payments of interest and other payments made by the Bank to the Trustee will in general be subject to Russian income tax withholding at a rate of 20 per cent. It is not expected that the Trustee will, or will be able to, claim a withholding tax exemption under any double tax treaty. It may be impossible for Noteholders to claim a refund of such tax withheld. If payments under the Loan are subject to any withholding tax (as a result of which the Issuer would reduce the payments under the corresponding series of Notes by the amount of such withholding),, the Bank will be obliged (except in limited circumstances) to increase the amounts payable as may be necessary to ensure that the Issuer receives a net amount that will not be less than the amount it would have received in the absence of such withholding. As provided in the Irish taxation section below, payments in respect of the Notes will be made without deduction or withholding for or on account of Irish taxes save as required by law. In that event, the Issuer will be required to pay Additional Amounts and/or Tax Indemnity Amounts (as each such term is defined in the Loan Agreement) and other amounts only to the extent that the Issuer receives corresponding amounts from the Bank under the Loan Agreement. The Loan Agreement provides for the 216

233 Bank to pay such corresponding additional amounts in these circumstances. There is some doubt as to whether the gross-up provisions contained in the Loan Agreement are valid and enforceable under Russian law. Due to the limited recourse nature of the Notes, if the Bank were to fail to pay any such gross-up amounts (e.g., by reason of such gross-up amounts payable to the Issuer under the Loan Agreement being held to be invalid under Russian law), the amounts payable by the Issuer under the Notes would be correspondingly reduced. Also, subject to certain conditions (including the consent of the CBR), the Bank may repay the Loan in full, in which case all outstanding Notes would be redeemable at par with accrued interest. VAT is not applied to interest and principal payments under the Loan, since rendering of financial services involving the provision of the Loan in monetary form is not subject to Russian VAT. Ireland Introduction The following is a summary of the principal Irish tax consequences for individuals and companies of ownership of the Notes based on the laws and practice of the Irish Revenue Commissioners currently in force in Ireland and may be subject to change. It deals with Noteholders who beneficially own their Notes thereon as an investment. Particular rules not discussed below may apply to certain classes of taxpayers holding Notes, such as dealers in securities, trusts etc. The summary does not constitute tax or legal advice and the comments below are of a general nature only. Prospective investors in the Notes should consult their professional advisers on the tax implications of the purchase, holding, redemption or sale of the Notes and the receipt of interest thereon under the laws of their country of residence, citizenship or domicile. TAXATION OF NOTEHOLDERS Withholding Tax In general, tax at the standard rate of income tax (currently 20 per cent.), is required to be withheld from payments of Irish source interest which should include interest payable on the Notes. The Issuer will not be obliged to make a withholding or deduction for or on account of Irish income tax from a payment of interest on a Note where certain exemptions apply, in particular, so long as the interest paid on the relevant Note falls within one of the following categories: (a) Interest Paid on a Quoted Eurobond: A quoted Eurobond is a security which is issued by a company (such as the Issuer), is listed on a recognised stock exchange (such as the Irish or Luxembourg Stock Exchanges) and carries a right to interest. Provided that the Notes are interest bearing and are listed on a recognised stock exchange, interest paid on them can be paid free of withholding tax provided: (i) (ii) the person by or through whom the payment is made is not in Ireland; or the payment is made by or through a person in Ireland and either: (A) (B) the Note is held in a clearing system recognised by the Irish Revenue Commissioners; (Euroclear and Clearstream, Luxembourg are, amongst others, so recognised but SIS is not so recognised); or the person who is the beneficial owner of the quoted Eurobond and who is beneficially entitled to the interest is not resident in Ireland and has made a declaration to a relevant person (such as a paying agent located in Ireland) in the prescribed form. Thus, so long as the Notes continue to be quoted on a recognised stock exchange, interest on the Notes may be paid without any withholding or deduction for or on account of Irish income tax provided such payment is made through a Paying Agent outside Ireland. The Irish Revenue has not produced a list of which stock exchanges will be regarded as recognized stock exchanges for the purposes of the quoted Eurobond exemption from interest withholding tax. 217

234 The Irish Revenue will not confirm or deny that any particular stock exchanges (other than London, Luxembourg and Dublin) are recognised for this purpose. Irish stamp duty legislation contains a practice on the meaning of recognised stock exchange that the Irish Revenue confirms applies to the quoted Eurobond exemption. This practice states that a recognised stock exchange is any stock exchange operating in another country which: (i) (ii) is recognised by the appropriate regulatory authorities in that other country; and has substantially the same level of regulations in that country as the Irish stock exchange has in Ireland. It is understood that the Irish Revenue does not assert that the SIX Swiss Exchange is not a recognised stock exchange. No assurance can be given however that the SIX Swiss Exchange is a recognised stock exchange given that it would be necessary to undertake a full legal comparison of the regulatory regimes applicable in Switzerland and in Ireland. (b) Interest paid to a person resident in a relevant territory: If, for any reason, the Quoted Eurobond exemption referred to above ceases to apply, interest payments may still be made free of withholding tax provided that: (i) (ii) the Issuer remains a qualifying company as defined in section 110 of the TCA and the Noteholder is a person which is resident in a relevant territory at the time of the payment. A relevant territory is a Member State of the European Union (other than Ireland) or a country with which Ireland has a double taxation agreement in force by virtue of section 826 (1) of the Taxes Consolidation Act, 1997 ( TCA ) or that is signed and which will come into force once all ratification procedures set out in section 826 (1) TCA have been completed ( Relevant Territory ), or the interest is paid in the ordinary course of the Issuer s business and the Noteholder is a company which is either (A) resident in a Relevant Territory which imposes a tax that generally applies to interest receivable in that Relevant Territory by companies from sources outside that Relevant Territory or (B) in respect of the interest, exempted from the charge to Irish income tax under the terms of a double tax agreement which is either in force or which will come into force once all ratification procedures have been completed, and the recipient is not a company which receives the interest in connection with a trade or business carried on by it through a branch or agency in Ireland. The Issuer must be satisfied that the respective terms of the exemptions are satisfied. The test of residence in each case is determined by reference to the law of the Relevant Territory in which the Noteholder claims to be resident. For other holders of Notes, interest may be paid free of withholding tax if the Noteholder is resident in a double tax treaty country and under the provisions of the relevant treaty with Ireland such Noteholder is exempt from Irish tax on the interest and clearance in the prescribed form has been received by the Issuer before the interest is paid. Encashment Tax Irish tax will be required to be withheld at the standard rate of income tax (currently 20 per cent.) from interest on any Note, where such interest is collected or realised by a bank or encashment agent in Ireland on behalf of any Noteholder. There is an exemption from encashment tax where the beneficial owner of the interest is not resident in Ireland and has made a declaration to this effect in the prescribed form to the encashment agent or bank. Income Tax and Levies Notwithstanding that a Noteholder may receive interest on the Notes free of withholding tax, the Noteholder may still be liable to pay Irish tax with respect to such interest. Noteholders resident or ordinarily resident 218

235 in Ireland who are individuals may be liable to pay Irish income tax, social insurance (PRSI) contributions, the health levy and the income levy in respect of interest they receive on the Notes. Interest paid on the Notes may have an Irish source and therefore may be within the charge to Irish income tax. In the case of Noteholders who are non-resident individuals such Noteholders may also be liable to pay the health levy and the income levy in respect of interest they receive on the Notes. Ireland operates a self-assessment system in respect of tax and any person, including a person who is neither resident nor ordinarily resident in Ireland, with Irish source income comes within its scope. There are a number of exemptions from Irish income tax available to certain non-residents. Firstly, interest payments made by the Issuer are exempt from income tax so long as the Issuer is a qualifying company for the purposes of section 110 of the TCA, the recipient is not resident in Ireland and is resident in a Relevant Territory and, the interest is paid out of the assets of the Issuer. Secondly, interest payments made by the Issuer in the ordinary course of its business are exempt from income tax provided the recipient is not resident in Ireland and is a company which is either resident in a Relevant Territory which imposes a tax that generally applies to interest receivable in that Relevant Territory by companies from sources outside that Relevant Territory or, in respect of the interest is exempted from the charge to Irish income tax under the terms of a double tax agreement which is either in force or which will come into force once all ratification procedures have been completed.) Thirdly, interest paid by the Issuer free of withholding tax under the quoted Eurobond exemption is exempt from income tax, where the recipient is a person not resident in Ireland and resident in a Relevant Territory. For these purposes, residence is determined under the terms of the relevant double taxation agreement or in any other case, the law of the country in which the recipient claims to be resident. Interest falling within the above exemptions is also exempt from the health levy and the income levy. Notwithstanding these exemptions from income tax, a corporate recipient that carries on a trade in Ireland through a branch or agency in respect of which the Notes are held or attributed, may have a liability to Irish corporation tax on the interest. Relief from Irish income tax may also be available under the specific provisions of a double tax treaty between Ireland and the country of residence of the recipient. Interest on the Notes which does not fall within the above exemptions is within the charge to income tax, and, in the case of Noteholders who are individuals, the charge to the health levy and the income levy. In the past the Irish Revenue Commissioners have not pursued liability to tax in respect of persons who are not regarded as being resident in Ireland except where such persons have a taxable presence of some sort in Ireland or seek to claim any relief or repayment in respect of Irish tax. However, there can be no assurance that the Irish Revenue Commissioners will apply this treatment in the case of any Noteholder. Capital Gains Tax A holder of Notes will not be subject to Irish tax on capital gains on a disposal of Notes unless such holder is either resident or ordinarily resident in Ireland or carries on a trade or business in Ireland through a branch or agency in respect of which the Notes were used or held. Capital Acquisitions Tax A gift or inheritance comprising of Notes will be within the charge to capital acquisitions tax (which subject to available exemptions and reliefs, will be levied at 25 per cent. if either (i) the disponer or the donee/successor in relation to the gift or inheritance is resident or ordinarily resident in Ireland (or, in certain circumstances, if the disponer is domiciled in Ireland irrespective of his residence or that of the donee/successor) on the relevant date or (ii) if the Notes are regarded as property situate in Ireland (i.e. if the Notes are physically located in Ireland or if the register of the Notes is maintained in Ireland). 219

236 Stamp Duty No stamp duty or similar tax is imposed in Ireland (on the basis of an exemption provided for in Section 85(2)(c) to the Irish Stamp Duties Consolidation Act, 1999 assuming the proceeds of the Notes are used in the course of the Issuer s business), on the issue, transfer or redemption of the Notes. EU Directive on the Taxation of Savings Income The Council of the European Union has adopted a directive regarding the taxation of interest income known as the European Union Directive on the Taxation of Savings Income (Directive 2003/48/EC). Ireland has implemented the directive into national law. Accordingly, any Irish paying agent making an interest payment on behalf of the Issuer to an individual or certain residual entities resident in another Member State of the European Union or certain associated and dependent territories of a Member State will have to provide details of the payment and certain details relating to the Noteholder (including the Noteholder s name and address) to the Irish Revenue Commissioners who in turn will provide such information to the competent authorities of the state or territory of residence of the individual or residual entity concerned. The Issuer, or certain other persons shall be entitled to require Noteholders to provide any information regarding their tax status, identity or residency in order to satisfy the disclosure requirements in Directive 2003/48/EC and Noteholders will be deemed by their subscription for Notes to have authorised the automatic disclosure of such information by the Issuer, or any other person to the relevant tax authorities. 220

237 SUBSCRIPTION AND SALE BNP Paribas (Suisse) SA and UBS AG (the Joint Lead Managers ) have agreed, subject to the satisfaction of the terms and conditions of an agreement dated 8 September 2010 (the Subscription Agreement ) by and among the Issuer, the Joint Lead Managers and the Bank as borrower, to subscribe and pay for the Notes at the issue price of 100 per cent. of the principal amount of the Notes. The Joint Lead Managers are entitled to be released and discharged from their obligations under the Subscription Agreement in certain circumstances prior to the closing of the issue of the Notes. The Subscription Agreement provides that the obligations of the Joint Lead Managers to purchase the Notes are subject to the satisfaction of certain conditions. In connection with this offering, the Issuer has agreed to pay a combined management, underwriting and selling commission to the Joint Lead Managers and to reimburse certain of their expenses related to this offering. Such payment by the Issuer will be funded by the payment by the Bank to the Issuer of a fee of a corresponding amount under the Loan Agreement. The Bank and the Issuer have each agreed to severally indemnify the Joint Lead Managers against certain liabilities incurred in connection with the issue of the Notes. The Bank has agreed that during a period of one month from the date of the Subscription Agreement, it will not, without the prior written consent of the Joint Lead Managers, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, any debt securities of the Bank which are substantially similar to the Notes (including, without limitation, direct issues of debt securities by the Bank or by any other company and guaranteed by the Bank) or that are convertible into, or exchangeable for, the Notes or such other debt securities and, in each case, which are (a) denominated in a currency other than Russian roubles, (b) are listed, quoted or traded on any stock exchange or traded in any securities market, and (c) were initially offered and distributed outside the Russian Federation. The Joint Lead Managers and their respective affiliates have engaged in, and may in the future engage in, banking and other commercial dealings in the ordinary course of business with the Bank. They have received customary fees and commissions for these transactions and services. The United States The Notes and the Loan have not been and will not be registered under the Securities Act and the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons. The Issuer is not registered under the Investment Company Act and therefore investors will not be afforded the protections of the Investment Company Act. Each of the Joint Lead Managers has represented to the Issuer and the Bank that it has offered or sold the Notes, and agrees that it will offer and sell the Notes (i) as part of its distribution at any time and (ii) otherwise until 40 days after completion of the distribution of the Notes, as determined and certified to the Swiss Principal Paying Agent by each Joint Lead Manager as to the Notes sold by or through it, in which case the Swiss Principal Paying Agent shall notify each Joint Lead Manager when all relevant Joint Lead Managers so certified, only in accordance with Rule 903 of Regulation S. Accordingly, neither it, its affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts with respect to the Notes and it and they have complied with and will comply with the offering restrictions requirement of Regulation S. Each Joint Lead Manager has agreed that, at or prior to confirmation of sale of the Notes, 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 notice to substantially the following effect: The securities covered hereby have not been registered under the U.S. Securities Act of 1933 (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 (i) as part of their distribution at any time or (ii) otherwise until 40 days after completion of the distribution of the Notes as determined and certified to the Swiss Principal Paying Agent by the relevant Joint Lead Manager as to the Notes sold by or through it, in which case the Swiss Principal Paying Agent shall notify each such relevant Joint Lead Manager when all such relevant Joint Lead Managers have so 221

238 certified of the offering, except in either case in accordance with Regulation S under the Securities Act. Terms used above have the meanings given to them by Regulation S under the Securities Act. Terms used in this paragraph and not otherwise defined herein have the meanings given to them by Regulation S. In addition: (1) except to the extent permitted under U.S. Treas. Reg (c)(2)(i)(D) (the D Rules ), (a) each Joint Lead Manager has represented that it has not offered or sold, and has agreed that during a 40-day restricted period it will not offer or sell, the Notes to a person who is within the United States or its possessions or to a United States person, and (b) has represented that it has not delivered and has agreed that it will not deliver within the United States or its possessions definitive Notes that are sold during the restricted period; (2) each Joint Lead Manager has represented that it has and has agreed that throughout the restricted period it will have in effect procedures reasonably designed to ensure that its employees or agents who are directly engaged in selling the Notes are aware that such Notes may not be offered or sold during the restricted period to a person who is within the United States or its possessions or to a United States person, except as permitted by the D Rules; (3) if it is a United States person, each Joint Lead Manager has represented that it is acquiring the Notes for purposes of resale in connection with their original issue and if it retains Notes for its own account, it will only do so in accordance with the requirements of U.S. Treas. Reg (c)(2)(i)(D)(6); (4) in accordance with the requirements of U.S. Treasury regulations, the Joint Lead Managers represent and agree, as applicable, among other things, that: (i) any payment of interest or principal with respect to any Note made by them shall be made within Switzerland and denominated in Swiss Francs; (ii) the Notes will be offered and sold in accordance with local laws and customary practices and documentation of Switzerland; (iii) they will use reasonable efforts to sell the Notes within Switzerland and in accordance with procedures reasonably designed to preclude distribution or redistribution of the Notes, or any interest in them, directly or indirectly, into the United States or its possessions; (iv) they have not applied and will not apply for listing of the Notes on an exchange outside Switzerland; (v) they will cause more than 80 per cent. by value of the Notes allotted to them to be offered and sold to non distributors by distributors (within the meaning of U.S. Treasury Regulation Sections (c)(2)(i)(D)(4)) maintaining an office located in Switzerland; (vi) and the issuance of the Notes is subject to guidelines or restrictions imposed by governmental, banking or securities authorities in Switzerland, if any; and (5) with respect to each affiliate that acquires from it Notes for the purpose of offering or selling such Notes during the restricted period, each Joint Lead Manager either (a) has repeated and confirmed the representations and agreements contained in clauses (1), (2), (3) and (4) above on its behalf or (b) has agreed that it will obtain from such affiliate for the benefit of the Issuer the representations and agreements contained in clauses (1), (2), (3) and (4) above. Unless defined herein, terms used in clauses (1), (2), (3), (4)and (5) above have the meaning given to them by the U.S. Internal Revenue Code of 1986 and regulations thereunder, including the D Rules. The Issuer and the Joint Lead Managers reserve the right to reject any offer to purchase the Notes, in whole or in part, for any reason. The Notes, whether in global or definitive form, will bear the following legend: ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE 222

239 The 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 ), the Joint Lead Managers have represented, warranted and agreed 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 to the public in that Relevant Member State prior to the publication of a prospectus in relation to such offer which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of Notes to the public in that Relevant Member State 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; to any legal entity which has two or more of (i) an average of at least 250 employees during the last financial year; (ii) a total balance sheet of more than 43,000,000 and (iii) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes shall result in a requirement for the publication by the Issuer or any Manager of a prospectus pursuant to Article 3 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 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. The United Kingdom Each of the Joint Lead Managers has represented, warranted and undertaken that: 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 or the Bank; and 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. The Russian Federation Each Joint Lead Manager has represented and agreed that it has not offered or sold or transferred or otherwise disposed of, and will not offer or sell or transfer or otherwise dispose of, any Notes (as part of their initial distribution or at any time thereafter) to, or for the benefit of, any persons (including legal entities) resident, incorporated, established or having their usual residence in the Russian Federation, or to any person located within the territory of the Russian Federation, unless and to the extent otherwise permitted under Russian law. 223

240 Ireland Each Joint Lead Manager has agreed that: it will not underwrite the issue of, or place the Notes, otherwise than in conformity with the provisions of the European Communities (Markets in Financial Instruments) Regulations 2007 (Nos. 1 to 3), including, without limitation, Regulations 7 and 152 thereof or any codes of conduct used in connection therewith and the provisions of the Investor Compensation Act 1998; and it will not underwrite the issue of, or place, the Notes, otherwise than in conformity with the provisions of the Central Bank Acts (as amended) and any codes of conduct rules made under Section 117(1) of the Central Bank Act General No action has been or will be taken in any jurisdiction by the Issuer or the Bank or the Joint Lead Managers that would, or is intended to, permit a public offering of the Notes, or possession or distribution of any offering material in relation thereto, in any country or jurisdiction where action for that purpose is required. Accordingly, the Joint Lead Managers has undertaken that it will comply, to the best of its knowledge and belief, with all applicable laws and regulations in each country or jurisdiction in which it purchases, offers, sells or delivers Notes or has in its possession or distributes such offering material, in all cases at its own expense. 224

241 INDEX TO FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS OF JOINT STOCK COMMERCIAL BANK THE BANK OF MOSCOW (OPEN JOINT STOCK COMPANY) Consolidated Financial Statements for the years ended 31 December 2009 and Independent Auditor s Report F-2 Consolidated Financial Statements for the years ended 31 December 2008 and Independent Auditor s Report F-96 F-1

242 F-2

243 F-3

244 F-4

245 F-5

246 F-6

247 F-7

248 F-8

249 F-9

250 F-10

251 F-11

252 F-12

253 F-13

254 F-14

255 F-15

256 F-16

257 F-17

258 F-18

259 F-19

260 F-20

261 F-21

262 F-22

263 F-23

264 F-24

265 F-25

266 F-26

267 F-27

268 F-28

269 F-29

270 F-30

271 F-31

272 F-32

273 F-33

274 F-34

275 F-35

276 F-36

277 F-37

278 F-38

279 F-39

280 F-40

281 F-41

282 F-42

283 F-43

284 F-44

285 F-45

286 F-46

287 F-47

288 F-48

289 F-49

290 F-50

291 F-51

292 F-52

293 F-53

294 F-54

295 F-55

296 F-56

297 F-57

298 F-58

299 F-59

300 F-60

301 F-61

302 F-62

303 F-63

304 F-64

305 F-65

306 F-66

307 F-67

308 F-68

309 F-69

310 F-70

311 F-71

312 F-72

313 F-73

314 F-74

315 F-75

316 F-76

317 F-77

318 F-78

319 F-79

320 F-80

321 F-81

322 F-82

323 F-83

324 F-84

325 F-85

326 F-86

327 F-87

328 F-88

329 F-89

330 F-90

331 F-91

332 F-92

333 F-93

334 F-94

335 F-95

336 F-96

337 F-97

338 F-98

339 F-99

340 F-100

341 F-101

342 F-102

343 F-103

344 F-104

345 F-105

346 F-106

347 F-107

348 F-108

349 F-109

350 F-110

351 F-111

352 F-112

353 F-113

354 F-114

355 F-115

356 F-116

357 F-117

358 F-118

359 F-119

360 F-120

361 F-121

362 F-122

363 F-123

364 F-124

365 F-125

366 F-126

367 F-127

368 F-128

369 F-129

370 F-130

371 F-131

372 F-132

373 F-133

374 F-134

375 F-135

376 F-136

377 F-137

378 F-138

379 F-139

380 F-140

381 F-141

382 F-142

383 F-143

384 F-144

385 F-145

386 F-146

387 F-147

388 F-148

389 F-149

390 F-150

391 F-151

392 F-152

393 F-153

394 F-154

395 F-155

396 F-156

397 F-157

398 F-158

399 F-159

400 F-160

401 F-161

402 F-162

403 F-163

404 F-164

405 F-165

406 F-166

407 F-167

408 F-168

409 F-169

410 F-170

411 F-171

412 F-172

413 F-173

414 F-174

415 F-175

416 F-176

417 F-177

418 F-178

419 F-179

420 F-180