Financial risks

When the Company purchases foreign equipment and other produce, a risk of foreign currency change (increase) may lead to the upsurge of purchase prices and our expenses. The risks are minimized by increased volume of equipment and materials purchased from Russian producers. At present the share of foreign equipment and materials are relatively low, therefore, the risk is minimal. Attracted credit resources are in Russian currency.

Instable financial markets, possible growth of the Russian Central Bank refinancing rate, changes in bank policies may determine risks related to interest rate increase that may lead to increasing debt-service expenses. Since the share of credits in our finance structure is insignificant, the risk is viewed as insignificant. To minimize the risk we negotiate with banks over the decrease of current interest rates, conclude agreements to the credit contracts that exclude the unilateral increase of interest rates.

Escalation of inflation has significant effects on our expenses and profitability and may subsequently lead to income decrease. According to official statistics, 2010 inflation totaled 8.8%. According to official forecast made by the Russian Ministry of Economic Development, 2011 inflation will total 7-8%, 2011 forecast (the Russian government used it in the federal budget), will be 6.5%. Still, it should be noted that a possible growth of consumer prices in the beginning of 2011 will lead to a risk of inflation increase in 2011 compared to the forecast. To reduce inflation impact we work out and implement an expense management program. If inflation increases, we will focus on the optimization of receivables and expense management as well as on the increase of current asset turnover.

Mala fide suppliers, specificity of purchased produce and tight working schedule may lead to risks related to defaults on commitments by suppliers and subsequent growth of receivables. Main measures to reduce the risks are aimed at the minimization of advanced payments to suppliers, keeping records of mala fide suppliers, incessant control of terms and cost during purchase planning and arrangement.

Risks, related to defaults to commission objects, are constituent parts of financial risks and may be caused by mistakes in the planning, delays in approval of investment programs by various authorities, long land plot registration and obtainment of a permit for construction as well as refusal of consumers from connection. We take all measures to minimize investment-related risks. The measures are aimed at the observation of investment program approval rules, rules of control over investment program implementation exercised by the Russian Ministry of Energy. We also have a working system of control over investment program implementation and financing, including weekly control. We have worked out local regulatory documents on capital construction and investment program planning. The company implements measures aimed at timely material and technical maintenance and observation of terms and quality of the works done by contractors.