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SMP Bank (OJSC)

Consolidated Financial Statements

for the year ended 31 December 2011

SMP Bank (OJSC)

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Contents

Independent Auditors’ Report ...................................................................................................................... 3 Consolidated statement of comprehensive income ...................................................................................... 4 Consolidated statement of financial position ............................................................................................... 5 Consolidated statement of cash flows .......................................................................................................... 6 Consolidated statement of changes in equity ............................................................................................... 7 Notes to the consolidated financial statements ............................................................................................ 8 1 Background .......................................................................................................................................... 8 2 Basis of preparation.............................................................................................................................. 9 3 Significant accounting policies ...........................................................................................................10 4 Interest income and interest expense ...................................................................................................24 5 Fee and commission income ...............................................................................................................24 6 Fee and commission expense ..............................................................................................................24 7 Net (loss) gain on financial instruments at fair value through profit or loss .......................................24 8 Net foreign exchange income ..............................................................................................................24 9 Impairment allowance .........................................................................................................................25 10 Personnel expenses..............................................................................................................................25 11 Other general administrative expenses ................................................................................................25 12 Income tax expense .............................................................................................................................25 13 Cash and cash equivalents ...................................................................................................................27 14 Financial instruments at fair value through profit or loss ....................................................................28 15 Available-for-sale financial assets ......................................................................................................30 16 Loans and advances to banks ..............................................................................................................30 17 Loans to customers ..............................................................................................................................31 18 Investments in unconsolidated subsidiaries and associates .................................................................36 19 Property, equipment and intangible assets ..........................................................................................37 20 Other assets .........................................................................................................................................40 21 Deposits and balances from banks ......................................................................................................40 22 Current accounts and deposits from customers ...................................................................................41 23 Promissory notes issued ......................................................................................................................41 24 Other liabilities ....................................................................................................................................41 25 Share capital ........................................................................................................................................42 26 Risk management ................................................................................................................................42 27 Capital management ............................................................................................................................55 28 Commitments ......................................................................................................................................56 29 Operating leases ..................................................................................................................................56 30 Contingencies ......................................................................................................................................57 31 Custody activities ................................................................................................................................57 32 Related party transactions ...................................................................................................................57 33 Financial assets and liabilities: fair values and accounting classifications ..........................................59 34 Analysis by segment ...........................................................................................................................61

SMP Bank (OJSC) Consolidated Statement of Financial Position as at 31 December 2011

The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements.

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Notes 2011

2010

RUB’000 RUB’000 ASSETS Cash and cash equivalents 13 21,335,344 21,233,467 Mandatory reserve with the CBR 956,229 343,287 Financial instruments at fair value through profit or loss - unpledged 14 15,147,810 6,436,299 - pledged 14 12,764,809 9,801,468 Available-for-sale financial assets - unpledged 15 1,784,556 1,758,571 Loans and advances to banks 16 2,156,272 10,154,015 Loans to customers 17 54,046,293 23,817,606 Investments in unconsolidated subsidiaries and associates 18 638,278 638,278 Investment property 19 198,492 86,079 Property, equipment and intangible assets 19 3,780,757 2,098,778 Other assets 20 2,013,739 745,769 Total assets 114,822,579 77,113,617 LIABILITIES Financial instruments at fair value through profit or loss 14 - 23,049 Deposits and balances from banks 21 14,568,266 3,418,789 Current accounts and deposits from customers 22 85,562,521 59,979,250 Promissory notes issued 23 2,630,321 5,348,585 Subordinated borrowing 165,599 56,818 Deferred tax liability 12 420,911 404,172 Other liabilities 24 1,157,105 663,856 Total liabilities 104,504,723 69,894,519 Equity Share capital 25 3,674,041 3,174,041 Additional paid-in capital 427,969 250,785 Revaluation reserve for available-for-sale financial assets (182) - Cumulative translation reserve 26,392 3,840 Property revaluation reserve 19 2,269,356 986,366 Retained earnings 3,889,310 2,774,630 Total equity attributable to equity holders 10,286,886 7,189,662 Non-controlling interests 30,970 29,436 Total equity 10,317,856 7,219,098 Total liabilities and equity 114,822,579 77,113,617

SMP Bank (OJSC) Consolidated Statement of Cash Flows for the year ended 31 December 2011

The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements.

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Notes 2011

2010

RUB’000 RUB’000 CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts 4,738,307 3,053,755 Interest payments (3,692,524) (2,783,165) Fee and commission receipts 2,925,694 600,028 Fee and commission payments (195,939) (124,843) Net receipts from financial instruments at fair value through profit or

loss 297,352 139,067 Net receipts from available-for-sale financial assets 67 5,776 Net receipts from derivative financial instruments 607,534 148,215 Net receipts from foreign exchange transactions 1,698,080 535,815 Dividends received 2,844 - Other income received 358,424 105,724 Personnel expenses (1,813,261) (1,277,134) Other general administrative expenses payments (1,784,456) (1,123,151) (Increase) decrease in operating assets Mandatory reserve with the CBR (612,942) (144,474) Financial instruments at fair value through profit or loss (12,438,944) (8,484,374) Available-for-sale financial assets 329 344,774 Loans and advances to banks 7,483,792 (6,033,431) Loans to customers (30,220,576) (8,455,228) Other assets (1,451,408) (175,883) Increase (decrease) in operating liabilities Deposits and balances from banks 11,577,995 1,429,081 Current accounts and deposits from customers 25,020,722 22,124,039 Promissory notes issued (2,785,951) 2,314,256 Other liabilities (182,451) 270,797 Net cash (used in) provided from operating activities before

income tax paid (467,312) 2,469,644 Income tax paid (82,740) (88,695) Cash flows (used in) provided from operations (550,052) 2,380,949 CASH FLOWS FROM INVESTING ACTIVITIES Net purchase of investments in unconsolidated subsidiaries and

associates - (638,278) Net purchase of investment property (114,942) (29,374) Purchases of property, equipment and intangible assets (298,148) (218,081) Cash flows used in investing activities (413,090) (886,484) CASH FLOWS FROM FINANCING ACTIVITIES Shares issued 500,000 - Transactions with owners recorded directly in equity 221,480 - Receipts from subordinated borrowing 106,009 56,818 Cash flows provided from financing activities 827,489 56,818 Net (decrease) increase in cash and cash equivalents (135,653) 1,551,283 Effect of changes in exchange rates on cash and cash equivalents 237,530 (492,030) Cash and cash equivalents as at the beginning of the period 21,233,467 20,174,214 Cash and cash equivalents as at the end of the period 13 21,335,344 21,233,467

SMP Bank (OJSC) Consolidated Statement of Changes in Equity for the year ended 31 December 2011

The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements. 7

Attributable to equity holders of the Group

RUB’000 Share

Capital Additional

paid-in capital

Revaluation reserve for

available-for-sale assets

Cumulative translation

reserve

Property revaluation

reserve Retained earnings

Non-controlling interests

Total Balance as at 1 January 2010 3,174,041 250,785 - 1,365 918,541 2,358,513 29,186 6,732,431 Total comprehensive income Profit for the period - - - - - 416,117 250 416,367 Other comprehensive income Revaluation of property and equipment, net of income tax - - - - 67,825 - - 67,825 Cumulative translation reserve - - - 2,475 - - - 2,475 Total other comprehensive income - - - 2,475 67,825 416,117 250 486,667 Total comprehensive income for the period - - - 2,475 67,825 416,117 250 486,667 Balance at 31 December 2010 3,174,041 250,785 - 3,840 986,366 2,774,630 29,436 7,219,098 Balance as at 1 January 2011 3,174,041 250,785 - 3,840 986,366 2,774,630 29,436 7,219,098 Total comprehensive income Profit for the period - - - - - 1,114,680 1,534 1,116,214 Other comprehensive income Net change in fair value of available-for-sale financial assets, net of income tax - - (128) - - - - (128)

Net change in fair value of available-for-sale financial assets transferred to profit or loss, net of income tax - - (54) - - - - (54)

Revaluation of property and equipment, net of income tax - - - - 1,282,990 - - 1,282,990 Cumulative translation reserve - - - 22,552 - - - 22,552 Total other comprehensive income - - (182) 22,552 1,282,990 - - 1,305,360 Total comprehensive income for the period - - (182) 22,552 1,282,990 1,114,680 1,534 2,421,574 Transactions with owners, recorded directly in equity Shares issued 500,000 - - - - - - 500,000 Transactions with owners recorded directly in equity, net of income tax (note 25) - 177,184 - - - - - 177,184

Total transactions with owners 500,000 177,184 - - - - - 677,184 Balance at 31 December 2011 3,674,041 427,969 (182) 26,392 2,269,356 3,889,310 30,970 10,317,856

SMP Bank (OJSC) Notes to, and forming part of, the consolidated financial statements for the year ended 31 December 2011

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1 Background Organisation and operations These consolidated financial statements include the financial statements of Joint-Stock Commercial bank “SMP Bank” (the “Bank”) and its subsidiary AS “SMP Bank” (together referred to as the Group).

The Bank was established by the decision of the participants on 18 September 2000 in the Russian Federation as a Limited Liability Company and was granted a banking license in 2001. The Bank was granted a retail banking license in 2006. In accordance with the decision of the general meeting of participants of the Bank dated 25 February 2009, the legal structure was changed from a Limited Liability Company into an Open Joint Stock Company. The Bank conducts its business on the basis of general banking license № 3368 issued by the Central Bank of the Russian Federation (the “CBR”). The principal activities of the Bank are deposit taking and customer accounts maintenance, lending and issuing guarantees, cash and settlement operations and operations with securities and foreign exchange. The activities of the Bank are regulated by the CBR.

The Bank has 9 branches from which it conducts business throughout the Russian Federation. The registered address of the Bank’s head office is Russia, 123317, Moscow, Sadovnicheskaya, 71, build. 11. The majority of the Bank’s assets and liabilities are located in the Russian Federation.

The principal subsidiaries are as follows:

Ownership % Name Country of incorporation Principal activities 2011 2010

AS “SMP Bank” Latvia Banking 94.19% 94.19%

AS “SMP Bank” was established as AS “Multibanka” and registered in Latvia in April 1994 (the “Subsidiary bank”). The head office of the subsidiary bank is situated in Riga. The subsidiary bank has branches in Liepae, 16 settlement offices in Riga, 3 settlement offices in Daugavpils, 2 settlement offices in Ventspils and settlement offices in Olaine, Jelgava, Sigulda, Jurmala, a branch in Vilnius (Lithuania), branches in Klaipeda and Kaunas, and representative offices in the Russian Federation (Moscow and Yekaterinburg) and Ukraine (Kiev). The principal activities of the subsidiary bank is banking operations. The registered address of the subsidiary bank is 57 Elizabetes str., Riga, Latvia.

As at 31 December 2010 the shareholders of the Group are:

Name 2011, % 2010, % Rotenberg A.R. 37.27 36.84 Rotenberg B.R. 37.27 36.84 Kalantirsky D.Ya. 10.73 9.26 Others 14.73 17.06 100.00 100.00

Related party transactions are detailed in note 32.


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Russian business environment The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The normative legal and tax regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. In addition, the contraction in the capital and credit markets and its impact on the Russian economy have further increased the level of economic uncertainty in the environment. The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

2 Basis of preparation Statement of compliance The accompanying consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).

Basis of measurement The consolidated financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale financial assets are stated at fair value, and buildings are stated at revalued amounts.

Functional and presentation currency The national currency of the Russian Federation is the Russian Rouble (“RUB”). Management determined the Bank’s functional currency to be the RUB as it reflects the economic substance of the underlying events and circumstances of the Bank. The RUB is also the presentation currency for the purposes of these consolidated financial statements.

The functional currency of the subsidiary bank is Latvian Lat (“LVL”). In translating to the RUB, assets and liabilities that are included in the consolidated statement of financial position are translated at the foreign exchange rate ruling at the reporting date. All income and expense and equity items are translated at a rate approximating rates at the dates of the transactions. The resulting exchange difference is recorded in the cumulative translation reserve.

Financial information presented in RUB is rounded to the nearest thousand.

Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in the following notes:

• Loan impairment losses estimates - note 17


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• Building revaluation estimates - note 19.

Changes in accounting policies and presentation With effect from 1 January 2011, the Group changed its accounting policies in the following areas:

• With effect from 1 January 2011, the Group retrospectively applied a revised version of IAS 24 (issued in 2009) Related Party Disclosures. This change has not had a significant impact on the related party disclosures.

• With effect from 1 January 2011, the Group retrospectively applied limited amendments to IFRS 7 Financial Instruments: Disclosures issued as part of Improvements to IFRSs 2010. These amendments mainly relate to disclosures on collateral and other credit enhancements.

3 Significant accounting policies The accounting policies set out below are applied consistently to all periods presented in these consolidated financial statements, except as explained in note 2, which addresses changes in accounting policies.

Basis of consolidation

Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.

Acquisitions of entities under common control

Acquisitions of controlling interests in entities that are under the control of the same controlling shareholder of the Group are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date that common control was established; for this purpose comparatives are restated. The assets and liabilities acquired are recognised at their previous book values as recorded in the individual financial statements of the acquiree. The components of equity of the acquired entities are added to the same components within the Group equity except that any share capital of the acquired entities is recognised as part of additional paid in capital. Any cash paid for the acquisition is debited to equity.

Acquisitions and disposals of non-controlling interests

The Group accounts for the acquisitions and disposals of non-controlling interests as transactions with equity holders in their capacity as equity holders. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent.


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Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases. When the Group’s share of losses exceeds the Group’s interest (including long-term loans) in the associate, that interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.

Goodwill

Goodwill on acquisitions of subsidiaries is included in intangible assets. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate.

Goodwill is allocated to cash-generating units for impairment testing purposes and is stated at cost less impairment losses.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Non-controlling interests Non-controlling interests are the equity in a subsidiary not attributable, directly or indirectly, to the Bank.

Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity attributable to equity holders of the Group. Non-controlling interests in profit or loss and total comprehensive income are separately disclosed in the consolidated statement of comprehensive income.

Foreign currency Transactions in foreign currencies are translated to the respective functional currencies of the Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments or qualifying cash flow hedges, which are recognised in other comprehensive income.


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Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances (nostro accounts) held with the CBR, Bank of Latvia and other banks. The mandatory reserve deposit with the CBR is not considered to be a cash equivalent due to restrictions on its withdrawability. Cash and cash equivalents are carried at amortised cost in the consolidated statement of financial position.

Mandatory reserve with the CBR The mandatory reserve deposit is a non-interest bearing deposit calculated in accordance with regulations issued by the CBR and whose withdrawability is restricted.

Financial instruments

Classification

Financial instruments at fair value through profit or loss are financial assets or liabilities that are:

- acquired or incurred principally for the purpose of selling or repurchasing in the near term

- part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking

- derivative financial instruments (except for derivative financial instruments that are designated and effective hedging instruments) or,

- upon initial recognition, designated as at fair value through profit or loss.

The Group may designate financial assets and liabilities at fair value through profit or loss where either:

- the assets or liabilities are managed, evaluated and reported internally on a fair value basis

- the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or,

- the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract.

All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities.

Management determines the appropriate classification of financial instruments in this category at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loan and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the Group has an intention and ability to hold it for the foreseeble future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Group:

- intends to sell immediately or in the near term

- upon initial recognition designates as at fair value through profit or loss


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- upon initial recognition designates as available-for-sale or,

- may not recover substantially all of its initial investment, other than because of credit deterioration.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity, other than those that:

- the Group upon initial recognition designates as at fair value through profit or loss

- the Group designates as available-for-sale or,

- meet the definition of loans and receivables.

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss.

Recognition

Financial assets and liabilities are recognized in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date.

Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability.

Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for:

- loans and receivables which are measured at amortized cost using the effective interest method

- held-to-maturity investments that are measured at amortized cost using the effective interest method

- investments in equity instruments that do not have a quoted market price in an active market and whose fair value can not be reliably measured which are measured at cost. These instruments are recognized in the consolidated financial statements at cost.

All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost.

Amortised cost The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument.

Fair value measurement principles Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.


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When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out.

Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction.

Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows:

- a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in profit or loss

- a gain or loss on an available-for-sale financial asset is recognized as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in profit or loss. Interest in relation to an available-for-sale financial asset is recognized in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process.

For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process.


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Derecognition

The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership but it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the consolidated statement of financial position. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

The Group enters into transactions whereby it transfers assets recognised on its consolidated statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised.

In transactions where the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost.

In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in its value.

If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt.

The Group writes off assets deemed to be uncollectible.

Repurchase and reverse repurchase agreements

Securities sold under sale and repurchase (“repo”) agreements are accounted for as secured financing transactions, with the securities retained in the consolidated statement of financial position and the counterparty liability included in amounts payable under repo transactions within deposits and balances from banks or current accounts and deposits from customers, as appropriate. The difference between the sale and repurchase prices represents interest expense and is recognized in profit or loss over the term of the repo agreement using the effective interest method.

Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts receivable under reverse repo transactions within loans and advances to banks or loans to customers, as appropriate. The difference between the sale and repurchase prices represents interest expense and is recognized in profit or loss over the term of the reverse repo agreement using the effective interest method.

If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value.

Derivative financial instruments

Derivative financial instruments include swap, forward, futures, spot transactions and options in interest rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments.

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.

Changes in the fair value of derivatives are recognised immediately in profit or loss.


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Derivatives may be embedded in another contractual arrangement (a “host contract”). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated.

Although the Group trades in derivative instruments for risk hedging purposes, these instruments do not qualify for hedge accounting.

Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Precious metals Precious metals are stated at the lower of net realizable value and costs. The net realizable value of precious metals is estimated based on quoted market prices. The cost of precious metals is assigned using the first-in, first-out cost formula. Precious metals are recorded within other assets.

Property and equipment

Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for buildings, which are stated at revalued amounts as described below.

Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment.

Leased assets

Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.

Revaluation

Buildings are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the buildings being revalued. A revaluation increase on a building is recognised as other comprehensive income except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on a building is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised in other comprehensive income.


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Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Land is not depreciated. The estimated useful lives are as follows:

- buildings 50 years - equipment 4 years - fixtures and fittings 5 years - motor vehicles 5 years - computer software 4 years

Intangible assets Acquired intangible assets are stated at cost less accumulated amortisation and impairment losses.

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.

Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets.

Investment property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in normal course of business, or for the use in production or supply of goods or services or for administrative purposes.

When the use of a property changes such that it is reclassified as property and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting.

Investment property is initially measured at acquisition cost, including transaction costs. Subsequently investment property is measured at cost less depreciation. If there is any indication of impairment the Group measures its recoverable amount, which is calculated as the higher value in use and fair value less sales costs. Reductions in the carrying value to the recoverable amount are recognised in profit or loss. Subsequent expenditures are capitalised only when they increase future profit or loss economic benefits. All other repairs and maintenance costs are expensed as incurred.

Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Group’s accounting policies. Thereafter generally, the assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell.


18

Impairment

Financial assets carried at amortized cost

Financial assets carried at amortized cost consist principally of loans and other receivables (“loans and receivables”). The Group regularly reviews its loans and receivables to assess impairment. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated.

Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group.

The Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable’s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows.

In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgement to estimate the amount of any impairment loss.

All impairment losses in respect of loans and receivables are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Group writes off a loan balance (and any related allowances for loan impairment) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed.

Financial assets carried at cost

Financial assets carried at cost include unquoted equity instruments included in available-for-sale financial assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset.


19

All impairment losses in respect of these investments are recognized in profit or loss and can not be reversed.

Available-for-sale financial assets

Impairment losses on available-for-sale financial assets are recognised by transferring the cumulative loss that is recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment allowance attributable to time value are reflected as a component of interest income.

For an investment in an equity security available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income.

Non financial assets

Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of goodwill is estimated at each reporting date. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

All impairment losses in respect of non financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. An impairment loss in respect of goodwill is not reversed.

Provisions A provision is recognised in the consolidated statement of financial position when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for.


20

Credit related commitments In the normal course of business, the Group enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance.

Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably.

Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities.

Loan commitments are not recognised, except for the followings:

- the Group upon initial recognition designates as at fair value through profit or loss

- if the Group has a past practice of selling the assets resulting from its loan commitments shortly after origination, then the loan commitments in the same class are treated as derivative instruments;

- loan commitments that can be settled net in cash or by delivering or issuing another financial instrument

- commitments to provide a loan at a below-market interest rate.

Share capital

Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.

Dividends

The ability of the Group to declare and pay dividends is subject to the rules and regulations of the Russian legislation.

Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared.

Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity.

Current tax expense is the expected tax payable on the taxable profit for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.


21

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Income and expense recognition Interest income and expense are recognised in profit or loss using the effective interest method.

Net gain on financial instruments at fair value through profit or loss includes gains and losses arising from disposals and changes in the fair value of financial assets and liabilities at fair value through profit or loss.

Loan origination fees, loan servicing fees and other fees that are considered to be an integral part to the overall profitability of a loan, together with the related transaction costs, are deferred and amortized to interest income over the estimated life of the financial instrument using the effective interest method.

Other fees, commissions and other income and expense items are recognised in profit or loss when the corresponding service is provided.

Dividend income is recognised in profit or loss on the date that the dividend is declared.

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

Hyperinflation accounting The Russian Federation ceased to be hyperinflationary with effect from 1 January 2003 and, accordingly, no adjustments for hyperinflation are made for periods subsequent to this date. The hyperinflation-adjusted carrying amounts of equity items as at 31 December 2002 became their carrying amounts as at 1 January 2003 for the purpose of subsequent accounting.

Segment reporting An operating segment is a component of activity of the Group business that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of activity the Group); whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Management concluded that based on the above mentioned analysis the Group has one operating segment.


22

New standards and interpretations not yet adopted The following new standards, amendments to standards and interpretations are not yet effective as at 31 December 2011, and are not applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the financial position and performance. The Group has not analysed the likely impact of these pronouncements on its consolidated financial statements.

• IAS 27 (2011) Separate Financial Statements will become effective for annual periods beginning on or after 1 January 2013. The amended standard carries forward the existing accounting and disclosure requirements of IAS 27 (2008) for separate financial statements with some clarifications. The requirements of IAS 28 (2008) and IAS 31 for separate financial statements have been incorporated into IAS 27 (2011). Early adoption of IAS 27 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 28 (2011).

• IAS 28 (2011) Investments in Associates and Joint Ventures combines the requirements in IAS 28 (2008) and IAS 31 that were carried forward but not incorporated into IFRS 11 and IFRS 12. The amended standard will become effective for annual periods beginning of or after 1 January 2013 with retrospective application required. Early adoption of IAS 28 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 27 (2011).

• IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2015. The new standard is to be issued in phases and is intended ultimately to replace IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding classification and measurement of financial liabilities was published in October 2010. The remaining parts of the standard are expected to be issued during 2012. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group’s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued. The Group does not intend to adopt this standard early.

• IFRS 10 Consolidated Financial Statements will be effective for annual periods beginning on or after 1 January 2013. The new standard supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 introduces a single control model which includes entities that are currently within the scope of SIC-12. Under the new three-step control model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee, has the ability to affect those returns through its power over that investee and there is a link between power and returns. Consolidation procedures are carried forward from IAS 27 (2008). When the adoption of IFRS 10 does not result in a change in the previous consolidation or non-consolidation of an investee, no adjustments to accounting are required on initial application. When the adoption results in a change in the consolidation or non-consolidation of an investee, the new standard may be adopted with either full retrospective application from date that control was obtained or lost or, if not practicable, with limited retrospective application from the beginning of the earliest period for which the application is practicable, which may be the current period. Early adoption of IFRS 10 is permitted provided an entity also early-adopts IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011).


23

• IFRS 12 Disclosure of Interests in Other Entities will be effective for annual periods beginning on or after 1 January 2013. The new standard contains disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Interests are widely defined as contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. The expanded and new disclosure requirements aim to provide information to enable the users to evaluate the nature of risks associated with an entity’s interests in other entities and the effects of those interests on the entity’s financial position, financial performance and cash flows. Entities may early present some of the IFRS 12 disclosures without a need to early-adopt the other new and amended standards. However, if IFRS 12 is early-adopted in full, then IFRS 10, IFRS 11, IAS 27 (2011) and IAS 28 (2011) must also be early-adopted.

• IFRS 13 Fair Value Measurement will be effective for annual periods beginning on or after 1 January 2013. The new standard replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It provides a revised definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurement that currently exist in certain standards. The standard is applied prospectively with early adoption permitted. Comparative disclosure information is not required for periods before the date of initial application.

• Amendment to IAS 1 Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income. The amendment requires that an entity present separately items of other comprehensive income that may be reclassified to profit or loss in the future from those that will never be reclassified to profit or loss. Additionally, the amendment changes the title of the statement of comprehensive income to statement of profit or loss and other comprehensive income. However, the use of other titles is permitted. The amendment shall be applied retrospectively from 1 July 2012 and early adoption is permitted.

• Amendment to IAS 12 Income Taxes – Deferred Tax: Recovery of Underlying Assets. The amendment introduces an exception to the current measurement principles for deferred tax assets and liabilities arising from investment property measured using the fair value model in accordance with IAS 40 Investment Property. The exception also applies to investment property acquired in a business combination accounted for in accordance with IFRS 3 Business Combinations provided the acquirer subsequently measures the assets using the fair value model. In these specified circumstances the measurement of deferred tax liabilities and deferred tax assets should reflect a rebuttable presumption that the carrying amount of the underlying asset will be recovered entirely by sale unless the asset is depreciated or the business model is to consume substantially all the asset. The amendment is effective for periods beginning on or after 1 January 2012 and is applied retrospectively.

• Amendment to IFRS 7 Disclosures – Transfers of Financial Assets introduces additional disclosure requirements for transfers of financial assets in situations where assets are not derecognised in their entirety or where the assets are derecognised in their entirety but a continuing involvement in the transferred assets is retained. The new disclosure requirements are designated to enable the users of financial statements to better understand the nature of the risks and rewards associated with these assets. The amendment is effective for annual periods beginning on or after 1 July 2011.

• Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January 2012. The Group has not yet analysed the likely impact of the improvements on its financial position or performance.


24

4 Interest income and interest expense

2011

2010

RUB’000 RUB’000 Interest income Loans to customers 3,346,254 2,737,449 Financial instruments at fair value through profit or loss 1,479,679 224,888 Loans and advances to banks 67,859 258,739 4,893,792 3,221,076 Interest expense Current accounts and deposits from customers (3,390,461) (2,468,684) Deposits and balances from banks (273,425) (226,324) Promissory notes issued (83,052) (20,176) (3,746,938) (2,715,184)

5 Fee and commission income

2011

2010

RUB’000 RUB’000 Settlement operations 2,517,908 270,601 Account maintenance fees 161,600 68,331 Guarantee and letter of credit issuance 130,003 172,243 Factoring operations 16,824 18,092 Brokerage operations 18,185 29,259 Other 78,404 44,950 2,922,924 603,476

Information on transactions with related parties is disclosed in note 32.

6 Fee and commission expense

2011 2010

RUB’000 RUB’000 Settlement operations (138,587) (73,452) Brokerage operations (26,282) (43,386) Other (30,213) (7,968) (195,082) (124,806)

7 Net (loss) gain on financial instruments at fair value through profit or loss

2011

2010

RUB’000 RUB’000 Debt instruments (703,747) 242,835 Derivative financial instruments 538,644 (165,886) (165,103) 76,949

8 Net foreign exchange income

2011

2010

RUB’000 RUB’000 Net realised gain from foreign exchange operations 1,698,080 535,815 Gain (loss) from revaluation of financial assets and liabilities in foreign

currencies 583,406 (234,125) 2,281,486 301,690

Information on transactions with related parties is disclosed in note 32.


25

9 Impairment allowance

2011

2010

RUB’000 RUB’000 Available-for-sale financial assets 26,314 3,457 Loans and advances to banks 1,047 (1,047) Loans to customers (708,521) 1,270,010 Guarantees (303) 175,630 Loss on sale of loans (201,310) (105,987) Other assets (261,134) 42,116 (1,143,907) 1,384,179

10 Personnel expenses 2011

2010

RUB’000 RUB’000 Employee compensation (1,586,370) (917,024) Payroll related taxes (289,296) (155,566) (1,875,666) (1,072,590)

11 Other general administrative expenses 2011

2010

RUB’000 RUB’000 Operating lease expenses (458,628) (357,619) Insurance (224,046) (84,526) Taxes other than on income (218,613) (134,217) Depreciation and amortization of property, equipment and intangible assets (201,565) (147,965) Advertising and marketing (188,248) (113,091) Repairs and maintenance (184,102) (82,631) Communications and information services (83,922) (40,962) Write-off materials (64,734) (64,599) Security (54,488) (49,351) Professional services (37,451) (26,696) Royalties (30,009) (23,662) Travel expenses (7,775) (4,920) Depreciation of investment property (2,529) (2,939) Other general administrative expenses (196,218) (120,996) (1,952,328) (1,254,174)

12 Income tax expense

2011

2010

RUB’000 RUB’000 Current year tax expense (568,326) (70,019) Deferred taxation movement due to origination and reversal of temporary

differences 304,027 (45,201) Total income tax expense (264,299) (115,220)

The applicable tax rate for current and deferred tax in 2011 is 20%, except for coupon income on government securities which is taxed at 15% (2010: 20% and 15%, respectively).


26

Reconciliation of effective tax rate 2011

% 2010

% RUB’000 RUB’000

1,380,513 531,587 Profit before tax

Income tax at the applicable tax rate 276,103 20.00 106,317 20.00

Non-deductible costs 6,103 0.44 9,953 0.20 Income tax at lower tax rates (17,907) (1.30) (1,050) (1.90) 264,299 19.14 115,220 21.70

Deferred tax asset and liability Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to deferred tax liability as at 31 December 2011 and 2010.

The above deductible temporary differences do not expire under current tax legislation.

Movements in temporary differences during the years ended 31 December 2011 and 2010 are presented as follows.

RUB’000

Balance 1 January

2011

Recognised in profit or

loss

Recognised in other

comprehensive income

Translation differences

Balance 31 December

2011 Financial instruments at fair value through profit or loss 19,136

37,351 - - 56 487

Available-for-sale financial assets - - 46 - 46 Loans to customers (147,222) 174,544 - - 27 322 Property and equipment (289,028) 27,950 (320,748) (64) (581 890) Other assets 828 49,391 - - 50 219 Promissory notes issued (616) 616 - - - Other liabilities 12,730 14,175 - - 26 905 (404,172) 304,027 (320,702) (64) (420 911)

RUB’000

Balance 1 January

2010

Recognised in profit or

loss

Recognised in other

comprehensive income

Translation differences

Balance 31 December

2010 Financial instruments at fair value through profit or loss (70,200) 89,336 - -

19,136

Loans to customers (93,189) (54,033) - - (147,222) Property and equipment (274,191) 1,978 (16,957) 142 (289,028) Other assets 9,662 (8,834) - - 828 Promissory notes issued 25,681 (26,297) - - (616) Other liabilities 54,384 (47,351) - 5,697 12,730 (347,853) (45,201) (16,957) 5,839 (404,172)


27

Income tax recognised in other comprehensive income The tax effects relating to components of other comprehensive income for the years ended 31 December 2011 and 2010 comprise the following:

2011 2010

RUB’000

Amount

Amount

before Income tax Amount before Income tax Amount

tax expense net-of-tax tax expense net-of-tax Revaluation of property

and equipment 1,603,738 (320,748) 1,282,990 84,782 (16,957) 67,825 Net change in fair value

of available-for-sale financial assets (161) 33 (128) - - -

Net change in fair value of available-for-sale financial assets transferred to profit or loss (67) 13 (54) - - -

Other comprehensive income 1,603,510 (320,702) 1,282,808 84,782 (16,957) 67,825

13 Cash and cash equivalents

2011

2010 RUB’000 RUB’000

Cash Cash on hand 3,367,145 3,212,791 Nostro accounts with the CBR 3,122,943 3,689,959 Nostro accounts with the Bank of Latvia 482,197 537,209 Nostro accounts with other financial institutions - rated AAA 9,177 4,432 - rated A- to A+ 1,530,049 1,257,595 - rated BBB 2,295,481 5,567,117 - rated from BB- to BB+ 39,411 92,526 - rated below B+ 91,084 86,004 - not rated 10,397,857 4,285,423 Total nostro accounts with other financial institutions 14,363,059 11,293,097 Total cash 21,335,344 18,733,056 Cash equivalents Term deposits with CBR - 2,500,411 Total cash equivalents - 2,500,411 Total cash and cash equivalents 21,335,344 21,233,467

Ratings of banks are defined in accordance with accepted standards of international rating agency Standard & Poor’s.

None of cash and cash equivalents are impaired or past due.

As at 31 December 2011 the Group has 3 banks (31 December 2010: 3 banks), whose balances individually exceed 10% of total cash and cash equivalents. The gross value of these balances as at 31 December 2011 is RUB 10,613,179 thousand (31 December 2010: RUB 10,922,739 thousand).


28

14 Financial instruments at fair value through profit or loss

2011

2010

RUB’000 RUB’000 ASSETS Unpledged Debt and other fixed-income instruments - Russian Government and municipal bonds Russian Government Federal bonds (OFZ) 1,112,845 261,556 Regional authorities and municipal bonds 1,748,680 176,305

Total Russian Government and municipal bonds 2,861,525 437,861

- Foreign governments eurobonds 986,454 2,439,763 - Corporate eurobonds and eurobonds of other financial institutions - rated BBB 2,789,962 1,696,276 - rated from BB- to BB+ 4,363,744 1,667,588 - not rated 195,061 -

Total corporate eurobonds and eurobonds of other financial institutions 7,348,767 3,363,864 - Corporate bonds - rated AAA 883,760 - rated BBB 1,057,080 - - rated from BB- to BB+ 906,195 - - rated below B+ 178,283 - - not rated 923,660 102,535 Total corporate bonds 3,948,978 102,535

- Corporate shares 2,086 1,136

Derivative financial instruments Foreign currency contracts - 91,140 Total unpledged financial instruments at fair value through profit or loss 15,147,810 6,436,299 Pledged Debt and other fixed-income instruments - Russian government and municipal bonds Russian Government Federal bonds (OFZ) 9,695,797 - Regional authorities and municipal bonds 439,919 -

Total Russian government and municipal bonds 10,135,716 -

- Foreign governments eurobonds - 9,801,468 - Corporate bonds - rated BBB 1,861,480 - - rated from BB- to BB+ 767,613 - Total corporate bonds 2,629,093 - Total pledged financial instruments at fair value through profit or loss 12,764,809 9,801,468 LIABILITIES Derivative financial instruments Foreign currency contracts - 23,049 - 23,049

Ratings of issuers are defined in accordance with accepted standards of international rating agency Standard & Poor’s.

As at 31 December 2011, the Group pledged certain securities in the amount of RUB 1,126,399 thousand as collateral for collateral loans from the CBR (refer to note 21). As at 31 December 2010, securities in the amount of 9,801,468 thousand were pledged as collateral for deposits received from MF Global included in current accounts and deposits from customers (refer to note 22).


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Financial instruments at fair value through profit or loss comprise financial instruments held for trading.

None of financial assets at fair value through profit or loss are past due or impaired.

The pledged trading assets presented in the table above are those financial assets that may be repledged or resold by counterparties. These transactions are conducted under terms that are usual and customary to standard lending, and securities borrowing and lending activities, as well as requirements determined by exchanges where the Group acts as intermediary.

Foreign currency contracts The table below summarises, by major currencies, the contractual amounts of spot and forward exchange contracts outstanding at 31 December 2011 and 2010 with details of the contractual exchange rates and remaining periods to maturity. Foreign currency amounts presented below are translated at rates ruling at the reporting date. The resultant unrealised gains and losses on these unmatured contracts are recognised in profit or loss and in financial instruments at fair value through profit or loss, as appropriate.

Weighted average contractual

exchange rates Notional amount 2011

2010

2011 2010 RUB’000 RUB’000 Buy RUB sell USD Less than 3 months 12,482,350 1,111,719 32.17 30.50 Between 3 and 12 months - 9,567,500 - 30.96 Buy RUB sell Euros Less than 3 months 208,358 1,168,700 41.67 40.34 Buy RUB sell GBP Less than 3 months 1,255 - 50.19 - Buy EUR sell USD Less than 3 months 8,580,808 4,749,651 1.34 Total: 21,272,771 16,597,570

The following table provides information on the credit quality of foreign currency contracts, which are assets:

2011

2010

RUB’000 RUB’000 Foreign companies - 91,140 - 91,140 Option contracts

As at 31 December 2011, the Group issued option contracts on stock indices and foreign currencies with brokers on behalf and at cost of the companies related to the Group. For these option contracts issued to the brokers the Group has counter option contracts purchased from the clients with same terms and conditions. The option premiums received from the clients on the purchased option contracts are equal to the option premiums paid to the brokers on the issued option contracts less the Group’s commission.

The Group’s result comprises the commission for these contracts and results of related future contracts which are recognized in these consolidated financial statements as net gain on derivative financial instruments in amount of RUB 538,644 thousand (31 December 2010: RUB 49,354 thousand).


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The Group estimates the maximum credit risk exposure on these transactions to be equal to the options fair value as at 31 December 2011, which represents cost of closing the position at stock exchange prices. As at 31 December 2011 the credit risk is calculated as RUB 5,790,101 thousand (31 December 2010: RUB 482,575 thousand).

All option contracts have not been exercised and were sold in 2012.

15 Available-for-sale financial assets

2011

2010

RUB’000 RUB’000 Unpledged - Corporate shares 1,784,556 1,758,571 1,784,556 1,758,571

Analysis of movements in the impairment allowance

2011

2010 RUB’000 RUB’000

Balance at the beginning of the year 26,314 29,771 Net recovery (26,314) (3,457) Balance at the end of the year - 26,314

Investments comprise unquoted equity securities in the oil and gas, investment and real estate industries. Their fair value of these financial assets can not be reliably measured based on observable market data. The Group determined the fair value of these assets based on the results of an independent appraisal (refer to note 33).

16 Loans and advances to banks 2011

2010

RUB’000 RUB’000 Loans and advances to banks - rated A- to A+ 741,969 5,971,066 - rated BBB+ 1,335,392 - - rated BBB - 1,129,348 - rated below BB- to BB+ 33,430 - - rated below B+ 1,839,919 - not rated 45,481 1,214,729 Total loans and advances to banks 2,156,272 10,155,062 Impairment allowance - (1,047) Net loans and advances to banks 2,156,272 10,154,015

Ratings of banks are defined in accordance with accepted standards of international rating agency Standard & Poor’s.

Concentration of loans and advances to banks

As at 31 December 2011, the Group has 1 bank (31 December 2010: 1 bank), whose balances exceed 10% of loans and advances to banks. The gross value of these balances as at 31 December 2011 is RUB 1,600,182 thousand (31 December 2010: RUB 4,876,304 thousand).


31

Analysis of movements in the impairment allowance 2011

2010

RUB’000 RUB’000 Balance at the beginning of the year 1,047 - Net (recovery) charge (1,047) 1,047 Balance at the end of the year - 1,047

17 Loans to customers 2011

2010

RUB’000 RUB’000 Loans to corporate customers Loans to large corporates 35,466,155 18,122,611 Loans to small and medium size companies 7,469,764 4,984,862 Public sector customers 10,818,836 487,886 Factoring 254,834 238,508 Total loans to corporate customers 54,009,589 23,833,867 Loans to retail customers 2,965,171 2,242,640

Gross loans to customers 56,974,760 26,076,507 Impairment allowance (2,928,467) (2,258,901) Net loans to customers 54,046,293 23,817,606

As at 31 December 2011 included in the loan portfolio are corporate loans under “reverse repo” agreements in the amount of RUB 225,574 thousand (31 December 2010: nil).

Movements in the loan impairment allowance by classes of loans to customers for the year ended 31 December 2011 are as follows:

Loans to corporate customers RUB’000

Loans to retail

customers RUB’000

Total RUB’000

Balance at the beginning of the year 2,141,152 117,749 2,258,901 Net charge 659,882 48,639 708,521 Write-offs (38,205) (750) (38,955) Balance at the end of the year 2,762,829 165,638 2,928,467

Movements in the loan impairment allowance by classes of loans to customers for the year ended 31 December 2010 are as follows:

Loans to corporate customers RUB’000

Loans to retail

customers RUB’000

Total RUB’000

Balance at the beginning of the year 3,457,445 201,370 3,658,815 Net recovery (1,186,389) (83,621) (1,270,010) Write-offs (129,904) - (129,904) Balance at the end of the year 2,141,152 117,749 2,258,901


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Credit quality of loans to customers The following table provides information on the credit quality of loans to customers as at 31 December 2011:

Gross loans

RUB’000

Impairment allowance RUB’000

Net loans RUB’000

Impairment allowance to

gross loans (%) Loans to corporate customers Loans to large corporates Loans without individual signs of

impairment 32,373,320 (712,213) 31,661,107 2.2% Impaired loans: - not overdue 2,471,584 (534,089) 1,937,495 21.6% - overdue less than 90 days 26,605 (6,881) 19,724 25.9% - overdue more than 1 year 594,646 (438,748) 155,898 73.8% Total impaired loans 3,092,835 (979,718) 2,113,117 31.7% Total loans to large corporates 35,466,155 (1,691,931) 33,774,224 4.8%

Loans to small and medium size companies

Loans without individual signs of impairment 5,978,449 (72,989) 5,905,460 1.2%

Impaired loans: - not overdue 1,068,092 (263,594) 804,498 24.7% - overdue less than 90 days 1,716 (1,656) 60 96.5% - overdue more than 90 days and less

than 1 year 154,485 (15,225) 139,260 9.9% - overdue more than 1 year 267,022 (224,586) 42,436 84.1% Total impaired loans 1,491,315 (505,061) 986,254 33.9% Total loans to small and medium size

companies 7,469,764 (578,050) 6,891,714 7.7%

Loans to public sector customers Loans without individual signs of

impairment 10,818,836 (238,014) 10,580,822 2.2% Total loans to public sector customers 10,818,836 (238,014) 10,580,822 2.2% Factoring Impaired loans: - overdue more than 1 year 254,834 (254,834) - 100.0% Total impaired loans 254,834 (254,834) - 100.0% Total factoring 254,834 (254,834) - 100.0% Total loans to corporate customers 54,009,589 (2,762,829) 51,246,760 5.1% Loans to retail customers Loans without individual signs of

impairment 2,608,948 (36,854) 2,572,094 1.4% Impaired loans: - not overdue 164,216 (41,363) 122,853 25.2% - overdue less than 90 days 17,881 (5,822) 12,059 32.6% - overdue more than 90 days and less

than 1 year 63,575 (18,524) 45,051 29.1% - overdue more than 1 year 110,551 (63,075) 47,476 57.1% Total impaired loans 356,223 (128,784) 227,439 36.2% Total loans retail customers 2,965,171 (165,638) 2,799,533 5.6% Total loans to customers 56,974,760 (2,928,467) 54,046,293 5.1%


33

The following table provides information on the credit quality of loans to customers as at 31 December 2010:

Gross loans

RUB’000

Impairment allowance RUB’000

Net loans RUB’000

Impairment

allowance to gross loans (%)

Loans to corporate customers Loans to large corporates Loans without individual signs of

impairment 13,318,017 (466,674) 12,851,343 3.5% Impaired loans: - not overdue 2,198,823 (181,637) 2,017,186 8.3% - overdue less than 90 days 83,508 (36,907) 46,601 44.2% - overdue more than 90 days and less

than 1 year 1,161,276 (165,962) 995,314 14.3% - overdue more than 1 year 1,360,987 (488,543) 872,444 35.9% Total impaired loans 4,804,594 (873,049) 3,931,545 18.2% Total loans to large corporates 18,122,611 (1,339,723) 16,782,888 7.4% Loans to small and medium size

companies Loans without individual signs of

impairment 3,711,962 (55,196) 3,656,766 1.5% Impaired loans: - not overdue 693,127 (145,612) 547,515 21.0% - overdue less than 90 days 197,896 (32,500) 165,396 16.4% - overdue more than 90 days and less

than 1 year 209,797 (128,883) 80,914 61.4% - overdue more than 1 year 172,080 (99,733) 72,347 58.0% Total impaired loans 1,272,900 (406,728) 866,172 32.0% Total loans to small and medium size

companies 4,984,862 (461,924) 4,522,938 9.3% Loans to public sector customers Loans without individual signs of

impairment 15,773 (552) 15,221 3.5% Impaired loans: - not overdue 472,113 (100,924) 371,189 21.4% Total impaired loans 472,113 (100,924) 371,189 21.4% Total loans to public sector customers 487,886 (101,476) 386,410 20.8% Factoring Loans without individual signs of

impairment 496 (17) 479 3.4% Impaired loans: -overdue less than 90 days 11,948 (11,948) - 100.0% - overdue more than 1 year 226,064 (226,064) - 100.0% Total impaired loans 238,012 (238,012) - 100.0% Total factoring 238,508 (238,029) 479 99.8% Total loans to corporate customers 23,833,867 (2,141,152) 21,692,715 9.0% Loans to retail customers Loans without individual signs of

impairment 1,961,009 (34,159) 1,926,850 1.7% Impaired loans: - not overdue 13,842 (3,577) 10,265 25.8% - overdue less than 90 days 121,397 (119) 121,278 0.1% - overdue more than 90 days and less

than 1 year 109,685 (65,369) 44,316 59.6% - overdue more than 1 year 36,707 (14,525) 22,182 39.6% Total impaired loans 281,631 (83,590) 198,041 29.7% Total loans to retail customers 2,242,640 (117,749) 2,124,891 5.3% Total loans to customers 26,076,507 (2,258,901) 23,817,606 8.7%


34

During the years ended 31 December 2011 and 2010 the Group did not renegotiate commercial loans to corporate customers that would otherwise be impaired.

Key assumptions and judgments for estimating the loan impairment Loan impairment results from one or more events that occurred after the initial recognition of the loan and that have an impact on the estimated future cash flows associated with the loan, and that can be reliably estimated. Loans without individual signs of impairment do not have objective evidence of impairment that can be directly attributed to them.

The objective indicators of the loan impairment for loans to corporate customers include the following:

• overdue payments under the loan agreement

• significant difficulties in the financial conditions of the borrower

• deterioration in business environment, negative changes in the borrower’s markets.

The Group estimates the loan impairment allowance for loans to corporate customers based on an analysis of the future cash flows for impaired loans and based on its past loss experience for portfolios of loans for which no indications of impairment has been identified. In determining the impairment losses for the loan portfolio for which no impairment has been identified, management assumes loss rates derived from historic losses, adjusted for the current economic environment.

The Group estimates the loan impairment allowance for loans to retail customers based on its past loss experience, portfolio delinquencies and collection rates taking into account current economic conditions.

In determining the impairment allowance for loans to retail customers, management makes the following key assumptions:

• migration rates are constant and can be estimated based on historic loss migration pattern for the past 12 months

• a delay of 6 to 12 months in obtaining proceeds from the foreclosure of collateral.

Changes in these estimates could effect the loan impairment allowance. For example, to the extent that the net present value of the estimated cash flows differs by one percent, the impairment allowance for loans to customers as at 31 December 2011 would be RUB 540,463 thousand lower/higher (31 December 2010: RUB 238,176 thousand lower/higher).

Analysis of collateral The following table provides the analysis of loans to customers, net of the impairment allowance, by types of collateral as at 31 December 2011 and at 31 December 2010: 2011 2010

Net loans to customers

% of the loan

portfolio

Net loans to customers

% of the loan

portfolio RUB’000 RUB’000 Guarantees 11,880,741 21.98 3,817,096 16.03 Real estate 6,875,818 12.72 8,818,971 37.03 Other securities 3,232,459 5.98 1,054,906 4.43 Securities issued by the Group 1,081,308 2.00 1,597,895 6.71 Motor vehicles 2,179 0.00 46,574 0.20 Other collateral 1,082,261 2.00 636,452 2.67 No collateral 29,891,527 55.32 7,845,712 32.93 54,046,293 100.0 23,817,606 100.0


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The amounts shown in the table above represent the carrying value of the loans, and do not necessarily represent the fair value of the collateral.

As at 31 December 2011, significant amount of loans not secured by collateral is represented by loans to public sector customers in the net amount of RUB 10,580,822 thousand (31 December 2010: RUB 386,409 thousand).

Loans to customers that are overdue or impaired

As at 31 December 2011 the impaired or overdue loans to customers with a gross value of RUB 2,795,897 thousand (31 December 2010: RUB 5,131,067 thousand) are secured by collateral with the fair value of RUB 1,689,662 thousand (31 December 2010: RUB 3,203,689 thousand). For the remaining impaired loans of RUB 2,399,309 thousand (31 December 2010: RUB 1,938,183 thousand) there is no collateral or it is impracticable to determine the fair value of collateral.

Loans to customers that are neither overdue nor impaired

As at 31 December 2011, for the loans to customers with a gross value of RUB 11,520,212 thousand (31 December 2010: RUB 10,388,329 thousand) management estimates that the fair value of collateral is at least equal to their carrying amounts. The Group does not take into account guarantees when assessing the impairment allowance for loans to customers The recoverability of these loans is primarily dependent on the creditworthiness of the borrowers rather than the value of collateral, and the current value of the collateral does not impact the loan impairment assessment.

Collateral obtained

Assets obtained by taking possession of collateral for loans to corporate customers are recorded in the consolidated financial statements of the Group as at the end of 2011. The carrying amount of these assets amounts to RUB 217,416 thousand (31 December 2010: RUB 171,866 thousand) (refer to note 20). The Group’s policy is to dispose these assets as soon as it is practicable.

Industry and geographical analysis of the loan portfolio Loans to customers were issued primarily to customers located within the Russian Federation who operate in the following economic sectors: 2011

2010

RUB’000 RUB’000 Investment activities 22,187,287 8,675,602 Public sector 10,818,836 487,886 Trade 6,058,564 6,121,058 Construction 3,223,025 926,481 Real estate 3,265,107 1,783,186 Retail customers 2,965,171 2,242,640 Food industry 2,188,690 2,406,417 Manufacturing 2,586,876 832,030 Publishing activities 1,860,077 236,192 Factoring 254,834 238,508 Service 247,070 1,171,634 Agriculture, forestry and timber 219,931 208,366 Insurance - 54,525 Individual entrepreneurs 39,488 29,061 Other 1,059,804 662,921 56,974,760 26,076,507 Impairment allowance (2,928,467) (2,258,901) 54,046,293 23,817,606


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Significant credit exposures As at 31 December 2011 and 2010, the Group has no borrowers or groups of related borrowers, whose loan balances individually exceed more than 10% of total loans to customers.

Loan maturities The maturity of the loan portfolio is presented in note 26, which shows the remaining period from the reporting date to the contractual maturity of the loans. Due to the short-term nature of the majority of loans issued by the Group, it is likely that many of the loans will be prolonged at maturity. Accordingly, the effective maturity of the loan portfolio may be significantly longer than the term based on contractual terms.

18 Investments in unconsolidated subsidiaries and associates Unconsolidated subsidiaries of the Group:

Name Country of

incorporation Main activity

2011 %

controlled

2010 %

controlled

2011 Carrying

value RUB’000

2010 Carrying

value RUB’000

LLC Doctor Sport Russia Trade 50.00% 50.00% 500 500 OJCS “Research institution of fur industry” Russia Research 63.72% 63.72% 54 54 554 554

Associates of the Group:

Name Country of

incorporation Main activity

2011 %

controlled

2010 %

controlled

2011 Carrying

value RUB’000

2010 Carrying

value RUB’000

LLC “Chernomorservice-stroy” Russia Construction 20.00% 20.00% 378,184 378,184 LLC “Decorativno-zvetochnye cultury” Russia Trade 20.00% 20.00% 259,540 259,540 637,724 637,724

Due to the limited size and activities of the unconsolidated subsidiaries and associates listed above, these investments are not accounted for using the equity method of accounting, and are shown at cost less management’s estimate for impairment allowance. The Group reviewed its investments in the unconsolidated subsidiaries and associates as at 31 December 2011 and 31 December 2010 and identified no investments that display indicators of impairment.


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19 Property, equipment and intangible assets

RUB’000 Land and buildings Equipment Fixtures and fittings Vehicles

Computer software

Construction in progress Total

Cost/Revalued amount Balance at 1 January 2011 1,456,660 380,180 88,020 156,218 82,171 278,766 2,442,015 Additions 5,584 104,868 13,815 83,047 90,834 - 298,148 Disposals (3,089) (18,490) (2,079) (4,792) (11,264) - (39,714) Transfers 245,300 17,842 - - - (263,142) - Elimination of depreciation of revalued buildings (32,562) - - - - - (32,562) Revaluation 1,603,738 - - - - - 1,603,738 Balance at 31 December 2011 3,275,631 484,400 99,756 234,473 161,741 15,624 4,271,625 Amortisation, depreciation and impairment

losses Balance at 1 January 2011 (12,531) (190,192) (40,301) (51,584) (48,629) - (343,237) Depreciation and amortisation charge for the year (37,022) (84,182) (7,745) (33,215) (39,401) - (201,565) Disposals 235 12,868 1,081 3,287 3,901 - 21,372 Elimination of depreciation of revalued buildings 32,562 - - - - - 32,562 Balance at 31 December 2011 (16,756) (261,506) (46,965) (81,512) (84,129) - (490,868) Carrying amount At 31 December 2011 3,258,875 222,894 52,791 152,961 77,612 15,624 3,780,757


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RUB’000 Land and buildings Equipment Fixtures and fittings Vehicles

Computer software

Construction in progress Total

Cost/Revalued amount Balance at 1 January 2010 1,387,898 317,719 83,456 82,920 61,484 254,242 2,187,719 Additions 10,249 82,185 4,747 87,447 23,994 24,524 233,146 Disposals (35) (19,724) (183) (14,149) (3,307) - (37,398) Elimination of depreciation of revalued buildings (26,234) - - - - - (26,234) Revaluation 84,782 - - - - - 84,782 Balance at 31 December 2010 1,456,660 380,180 88,020 156,218 82,171 278,766 2,442,015 Amortisation, depreciation and impairment

losses Balance at 1 January 2010 (8,678) (138,386) (33,025) (45,086) (18,890) - (244,065) Depreciation and amortisation charge for the year (30,843) (66,389) (7,369) (13,588) (29,776) - (147,965) Disposals 756 14,583 93 7,090 37 - 22,559 Elimination of depreciation of revalued buildings 26,234 - - - - - 26,234 Balance at 31 December 2010 (12,531) (190,192) (40,301) (51,584) (48,629) - (343,237) Carrying amount At 31 December 2010 1,444,129 189,988 47,719 104,634 33,542 278,766 2,098,778


39

Revaluated assets As at 31 December 2011 buildings were revalued by management based on the results of an independent appraisal.

The basis used for the appraisal is the market approach and the income capitalization approach. Both methods results were weighted with the weights of 0.3 and 0.7 applied for income capitalization and market approach. The market approach is based upon an analysis of the results of comparable sales of similar buildings, adjusted for the reconstruction expenses required for the buildings used in banking business. The capitalization rates used in the income capitalization approach range from 14.22% to 14.66% depending on the object.

Changes in the estimates above could affect the value of the buildings. For example, to the extent that the net present value of the estimated cash flows used in the income capitalisation approach differs by plus/minus ten percent, the buildings valuation as at 31 December 2011 would be RUB 325,888 thousand lower/higher (31 December 2010: RUB 144,219 thousand).

The carrying value of buildings as at 31 December 2011, if the buildings would not have been revalued, would be RUB 430,523 thousand (31 December 2010: RUB 209,233 thousand).

Investment property

During 2010-2011 the Group made purchase of land and buildings and recognized these objects as investment property at cost. Management intends to hold this investment property till it is increased in value and further sale. As at 31 December 2011 the investment property amounts to RUB 198,492 thousand (31 December 2010: RUB 86,079 thousand). Management estimates fair value of investment property as at 31 December 2011 in the amount of RUB 205,762 thousand (31 December 2010: RUB 95,460 thousand) based on comparable sales method.

Movements in the investment property during the years ended 31 December 2011 and 2010 are as follows:

Land

Buildings

Total

RUB’000 RUB’000 RUB’000 Historical cost Balance at 31 December 2009 20,544 44,580 65,124 Additions 26,845 - 26,845 Balance at 31 December 2010 47,389 44,580 91,969 Additions - 114,942 114,942 Balance at 31 December 2011 47,389 159,522 206,911 Accumulated depreciation Balance at 31 December 2009 - 2,951 2,951 Charge for the year - 2,939 2,939 Balance at 31 December 2010 - 5,890 5,890 Charge for the year - 2,529 2,529 Balance at 31 December 2011 - 8,419 8,419 Carrying amount At 31 December 2011 47,389 151,103 198,492

At 31 December 2010 47,389 38,690 86,079


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20 Other assets

2011

2010

RUB’000 RUB’000 Brokerage operations 930,733 - Settlements under transactions with coins 38,547 32,810 Other financial assets - 171,866 Impairment allowance (260,606) - Total other financial assets 708,674 204,676 Prepayments on property and equipment purchase 500,000 - Demand rights 283,393 283,393 Non-current assets held for sale 217,416 - Other prepayments 177,408 196,778 Current income tax receivable 71,903 11,526 Other taxes receivable 7,435 13,885 Other 62,513 49,986 Impairment allowance (15,003) (14,475) Total other non-financial assets 1,305,065 541,093 Total other assets 2,013,739 745,769 As at 31 December 2011, amounts on brokerages operations represent balances with MF Global. The Group created allowance for impairment for these balances based on the difference between the carrying amount of assets and expected collateral recoverable amount.

Analysis of movements in the impairment allowance Movements in the impairment allowance for the year ended 31 December 2011 are as follows:

Other financial

assets

Other non-financial

assets

Total RUB’000 RUB’000 RUB’000

Balance at the beginning of the year - 14,475 14,475 Net charge 260,606 528 261,134 Balance at the end of the year 260,606 15,003 275,609

Movements in the impairment allowance for the year ended 31 December 2010 are as follows: Other

Other

financial non-financial

assets assets Total RUB’000 RUB’000 RUB’000

Balance at the beginning of the year - 56,591 56,591 Net recovery - (42,116) (42,116) Balance at the end of the year - 14,475 14,475

21 Deposits and balances from banks

2011

2010

RUB’000 RUB’000 Collateral loans from the CBR 10,835,893 - Deposit and balances from other banks Vostro accounts 2,255,643 3,350,317 Term deposits 1,476,730 68,472 Total deposits and balances from banks 14,568,266 3,418,789


41

As at 31 December 2011, the Group has 2 banks (31 December 2010: 2 banks), whose balances individually exceed 10% of total deposits and balances from banks. The gross value of these balances as at 31 December 2011 is RUB 13,075,400 thousand (31 December 2010: RUB 3,343,032 thousand).

As at 31 December 2011, loans from the CBR of RUB 10,835,893 (31 December 2010: nil) are collateralized by financial instruments at fair value through profit or loss (refer to note 14).

22 Current accounts and deposits from customers

2011

2010

RUB’000 RUB’000 Current accounts and demand deposits - Retail 4,322,255 2,206,829 - Corporate clients 22,715,440 17,336,851 Term deposits - Retail 49,997,980 28,388,986 - Corporate clients 8,526,846 12,046,584 85,562,521 59,979,250 As of 31 December 2011, there are no customers (31 December 2010: 1 customer) whose balances individually exceed 10% of total deposits and balances from customers. The gross value of these balances as of 31 December 2010 is RUB 8,801,351 thousand. As at 31 December 2010, deposits from MF Global of RUB 8 801 351 thousand are collateralized by financial instruments at fair value through profit or loss (refer to note 14).

23 Promissory notes issued

2011

2010

RUB’000 RUB’000 Promissory notes 2,630,321 5,348,585 2,630,321 5,348,585

As at 31 December 2011 the Group has promissory notes issued in amount of RUB 2,630,321 thousand (31 December 2010: RUB 5,348,585 thousand) with average effective interest rates of 2.40% p.a. on promissory notes issued in Russian Roubles and 0.98% p.a. on promissory notes issued in foreign currencies. (31 December 2010: 4.48% and 1.06%).

24 Other liabilities 2011

2010

RUB’000 RUB’000 Unsettled transactions 59,589 281,076 Suspense account 103,924 274,599 Settlements under “reverse repo” agreements 199,308 - Other financial liabilities 19,887 - Total other financial liabilities 382,708 555,675 Current income tax payable 590,476 217 Other taxes payable 23,006 14,537 Unused vacations liability 63,005 - Provision for guarantees and letters of credit issued 56,452 56,149 Other non-financial liabilities 41,458 37,278 Total other non-financial liabilities 774,397 108,181 Total other liabilities 1,157,105 663,856


42

Analysis of movements in the provision for guarantees and letters of credit issued: 2011

2010

RUB’000 RUB’000 Balance at the beginning of the year 56,149 231,779 Net charge (recovery) 303 (175,630) Balance at the end of the year 56,452 56,149

25 Share capital

Issued capital The share capital as at 31 December 2011 is RUB 3,661,000 thousand and computed of 3,661,000 thousand ordinary shares with a nominal value of 1 RUB (as at 31 December 2010 is RUB 3,161,000 thousand and computed of 3,161,000 thousand ordinary shares with a nominal value of 1 RUB).

The share capital was increased in 2010 by 500,000 ordinary shares as a result of additional issue.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at annual and general meetings of the Bank.

During 2011 the Group received contributions from its shareholders which were recognized as additional paid-in capital in the form of premiums received on non-market derivative transactions of RUB 177,184 thousand net of current income tax of RUB 44,296 thousand.

Dividends

Dividends payable are restricted to the maximum retained earnings of the Bank, which are determined according to legislation of the Russian Federation. In accordance with the legislation of the Russian Federation, as at the reporting date, reserves available for distribution amounted to RUB 3,371,254 thousand (2010: RUB 1,131,112 thousand).

In 2011 and 2010 no dividends were declared.

26 Risk management Management of risk is fundamental to the business of banking and is an essential element of the Group’s operations. The major risks faced by the Group are those related to market risk, credit risk and liquidity risk.

Risk management policies and procedures The Group’s risk management policies aim to identify, analyze and manage the risks faced by the Group, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice.


43

The Board of Directors has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing its risk management policies and procedures as well as approving significantly large exposures.

The Management Board is responsible for monitoring and implementation of risk mitigation measures and making sure that the Group operates within the established risk parameters. The Head of the Risk Department is responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. He reports directly to the President and indirectly to the Board of Directors.

Credit, market and liquidity risks both at the portfolio and transactional levels are managed and controlled through a system of Credit Committees and an Asset and Liability Management Committee (the “ALCO”). In order to facilitate efficient decision-making, the Group has established a hierarchy of credit committees depending on the type and amount of the exposure.

Both external and internal risk factors are identified and managed throughout the organisation. Particular attention is given to identifying the full range of risk factors and determination of the level of assurance over the current risk mitigation procedures. Apart from the standard credit and market risk analysis, the Risk Department monitors financial and non-financial risks by holding regular meetings with operational units in order to obtain expert judgments in their areas of expertise.

Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk and other price risks. Market risk arises from open positions in interest rate, currency and equity financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimizing the return on risk.

Overall authority for market risk is vested in the ALCO, which is chaired by the President. Market risk limits are approved by the ALCO based on recommendations of the Risk Department.

The Group manages its market risk by setting open position limits in relation to financial instrument, interest rate maturity and currency positions and stop-loss limits which are monitored on a regular basis and reviewed and approved by the Management Board.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may also reduce or create losses in the event that unexpected movements arise.


44

Average interest rates

The table below displays average effective interest rates for interest bearing assets and liabilities as at 31 December 2011 and 2010. These interest rates are an approximation of the yields to maturity of these assets and liabilities.

2011 2010 Average effective interest rate, % Average effective interest rate, %

RUB USD EUR Other

currencies

RUB USD EUR Other

currencies Interest bearing

assets Nostro accounts

with other financial institutions - - 1.30% - 0.32% - - 0.50%

Financial instruments at fair value through profit or loss 9.44% 7.48% 3.67% 2.67% 6.79% 2.96% 2.70% 3.18%

Loans and advances to banks 2.77% 0.07% - 0.39% 3.16% 0.25% 0.16% 0.77%

Loans to customers 10.24% 5.29% 4.66% 4.20% 14.46% 10.10% 12.59% 4.17%

Interest bearing

liabilities Deposits and

balances from banks

- Vostro accounts 7.55% 3.66% 0.25% - 7.42% 4.10% 8.68% - - Term deposits 5.93% 1.10% - - 1.78% 7.42% - 1.20% Current accounts

and deposits from customers

- Current accounts and demand deposits 0.46% 0.58% 1.53% - - - - 4.19%

- Term deposits 8.28% 5.08% 4.81% 4.09% 11.44% 3.23% 5.95% 1.57% Promissory notes

issued 2.40% 0.17% 1.30% 2.00% 4.48% 0.03% 1.18% 1.57% Subordinated

borrowing - - 3.50% 4.00% - - - 4.00%


45

Interest rate sensitivity analysis

The management of interest rate risk based on interest rate gap analysis is suplemented by monitoring the sensitivity of financial assets and liabilities. An analysis of sensitivity of profit or loss and equity (net of taxes) to changes in interest rates (repricing risk) based on a simplified scenario of a 100 basis point (bp) symmetrical fall or rise in all yield curves and positions of interest bearing assets and liabilities existing as at 31 December 2011 and 2010 is as follows: 2011 2010

Net profit Equity Net profit Equity RUB’000 RUB’000 RUB’000 RUB’000

100 bp parallel fall (15,117) (15,117) 145,603 145,603 100 bp parallel rise 15,117 15,117 (145,603) (145,603)

An analysis of sensitivity of profit or loss and equity as a result of changes in the fair value of financial instruments at fair value though profit or loss due to changes in the interest rates based on positions existing as at 31 December 2011 and 2010 and a simplified scenario of a 100 bp symmetrical fall or rise in all yield curves is as follows: 2011 2010

Net profit Equity Net profit Equity RUB’000 RUB’000 RUB’000 RUB’000

100 bp parallel fall 875,855 875,855 411,886 411,886 100 bp parallel rise (875,855) (875,855) (411,886) (411,886)

Currency risk

The Group has assets and liabilities denominated in several foreign currencies.

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. Although the Group hedges its exposure to currency risk, such activities do not qualify as hedging relationships in accordance with IFRS.


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The following table shows the currency structure of financial assets and liabilities as at 31 December 2011:

RUB

RUB’000 USD

RUB’000 EUR

RUB’000 LVL

RUB’000

Other currencies

RUB’000 Total

RUB’000 Financial assets: Cash and cash equivalents 5,358,770 11,329,813 3,042,194 1,090,197 514,370 21,335,344 Mandatory reserve with the CBR 956,229 - - - - 956,229 Financial instruments at fair value through profit or loss 17,297,502 9,759,264 677,681 178,172 - 27,912,619 Available-for-sale financial assets 1,782,906 - 1,650 - - 1,784,556 Loans and advances to banks 1,380,965 519,013 - - 256,294 2,156,272 Loans to customers 36,424,080 14,368,310 2,673,503 580,400 - 54,046,293 Other financial assets 12,804 614,039 43,285 38,547 - 708,674 Total financial assets 63,213,256 36,590,439 6,438,313 1,887,316 770,664 108,899,988 Financial liabilities: Deposits and balances from banks 13,751,591 499,915 314,555 2,205 - 14,568,266 Current accounts and deposits from customers 54,457,656 14,978,706 13,950,260 1,402,970 772,929 85,562,521 Promissory notes issued 1,327,417 621,942 267,873 - 413,089 2,630,321 Subordinated borrowing - - 88,133 77,466 - 165,599 Other financial liabilities 5,625 374,567 2,516 - - 382,708 Total financial liabilities 69,542,289 16,475,130 14,623,337 1,482,641 1,186,018 103,309,415 Net balance sheet position (6,329,033) 20,115,309 (8,185,024) 404,675 (415,354) 5,590,573 Net off-balance sheet position 12,691,963 (21,063,158) 8,372,450 - (1,255) - Net balance and off-balance sheet position 6,362,930 (947,849) 187,426 404,675 (416,609) 5,590,573


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The following table shows the currency structure of financial assets and liabilities as at 31 December 2010:

RUB

RUB’000 USD

RUB’000 EUR

RUB’000 LVL

RUB’000

Other currencies RUB’000

Total RUB’000

Financial assets: Cash and cash equivalents 7,687,786 9,619,501 3,164,431 576,470 185,279 21,233,467 Mandatory reserve with the CBR 343,287 - - - - 343,287 Financial instruments at fair value through profit or loss 449,217 15,211,140 399,969 177,441 - 16,237,767 Available-for-sale financial assets 1,758,571 - - - - 1,758,571 Loans and advances to banks 4,384,654 5,668,566 - 56,818 43,977 10,154,015 Loans to customers 17,452,032 3,238,589 2,926,590 200,395 - 23,817,606 Other financial assets 204,676 - - - - 204,676 Total financial assets 32,280,223 33,737,796 6,490,990 1,011,124 229,256 73,749,389 Financial liabilities: Financial instruments at fair value through profit or loss 23,023 - 26 - - 23,049 Deposits and balances from banks 3,323,086 64,075 28,943 2,685 - 3,418,789 Current accounts and deposits from customers 31,817,784 18,670,072 8,792,445 644,879 54,070 59,979,250 Promissory notes issued 4,489,104 222,719 250,268 386,494 - 5,348,585 Subordinated borrowing - - - 56,818 - 56,818 Other financial liabilities 555,675 - - - - - 555,675 Total financial liabilities 40,208,672 18,956,866 9,071,682 1,090,876 54,070 69,382,166 Net balance sheet position (7,928,449) 14,780,930 (2,580,692) (79,752) 175,186 4,367,223 Net off-balance sheet position 11,847,919 (15,428,870) 3,580,951 - - - Net balance and off-balance sheet position 3,919,470 (647,940) 1,000,259 (79,752) 175,186 4,367,223


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A weakening of the RUB, as indicated below, against the following currencies at 31 December 2011 and 2010 would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis is on net of tax basis and is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant.

2011

2010

RUB’000 RUB’000 5% depreciation of RUB against USD (37,914) (25,918) 5% depreciation of RUB against EUR 7,497 40,010 5% depreciation of RUB against LVL 16,187 (3,190) A strengthening of the RUB against the above currencies at 31 December 2011 and 2010 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. Other price risk arises when the Group takes a long or short position in a financial instrument.

An analysis of sensitivity of profit or loss and equity (net of tax) to changes in securities prices based on positions existing as at 31 December 2011 and 2010 and a simplified scenario of a 5% change in all securities prices is as follows: 2011 2010

Profit

Profit

or loss Equity or loss Equity

RUB’000 RUB’000 RUB’000 RUB’000 5% increase in securities prices 1,094,445 1,094,445 645,865 645,865 5% decrease in securities prices (1,094,445) (1,094,445) (645,865) (645,865

Credit risk Credit risk is the risk of financial loss occurring as a result of default by a borrower or counterparty on their obligation to the Group. The Group has policies and procedures for the management of credit exposures (both for recognised financial assets and unrecognised contractual commitments), including guidelines to limit portfolio concentration and the establishment of a Credit Committee, which actively monitors credit risk. The credit policy is reviewed and approved by the Management Board.

The credit policy establishes:

• procedures for review and approval of loan applications

• methodology for the credit assessment of borrowers (corporate and retail)

• methodology for the credit assessment of counterparties, issuers and insurance companies

• methodology for the evaluation of collateral

• credit documentation requirements


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• procedures for the ongoing monitoring of loans and other credit exposures.

Corporate loan applications are originated by the relevant client managers and are then passed on to the related Loan Department, which are responsible for the corporate loan portfolio. Analysis reports are based on a structured analysis focusing on the borrower’s business and financial performance. The loan application and the report are then independently reviewed by the Risk Department and a second opinion is given accompanied by a verification that credit policy requirements are met. The Credit Committee reviews the loan application on the basis of submissions by the Loan Departments and the Risk Department. Individual transactions are also reviewed by the Legal, Accounting and Tax departments depending on the specific risks and pending final approval of the Credit Committee.

The Group continuously monitors the performance of individual credit exposures and regularly reassesses the creditworthiness of its borrowers. The review is based on the customer’s most recent financial statements and other information submitted by the borrower, or otherwise obtained by the Group.

Retail loan applications are reviewed by the Retail Lending Department through the use of scoring models and application data verification procedures developed together with the Risk Department.

Apart from individual borrower analysis, the credit portfolio is assessed by the Risk Department with regard to credit concentration and market risks.

The maximum exposure to credit risk is generally reflected in the carrying amounts of financial assets in the consolidated statement of financial position and unrecognised contractual commitment amounts. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant

The maximum exposure to credit risk from financial assets at the reporting date is as follows:

2011

2010

RUB’000 RUB’000 ASSETS Cash and cash equivalents 17,968,199 18,020,676 Financial instruments at fair value through profit or loss 27,910,533 16,236,631 Loans and advances to banks 2,156,272 10,154,015 Loans to customers 54,046,293 23,817,606 Other financial assets 708,674 204,676 Total maximum exposure 102,789,971 68,433,604 The Group holds collateral against loans and advances to customers in the form of real estate pledge, other assets pledge, and guarantees. Estimates of value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held against claims under derivative financial instruments, investments in securities, and loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activities.

For the analysis of collateral held against loans to customers and concentration of credit risk in respect of loans to customers refer to note 17.

The maximum exposure to credit risk from unrecognised contractual commitments at the reporting date is presented in note 28.

As at 31 December 2011 the Group has no debtors or groups of connected debtors (2010: no debtors), credit risk exposure to whom individually exceeds 10% of maximum credit risk exposure.


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Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet its commitments. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to liquidity management. It is unusual for financial institutions ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses.

The Group maintains liquidity management with the objective of ensuring that funds will be available at all times to honor all cash flow obligations as they become due. The liquidity policy is reviewed and approved by the Management Board.

The Group seeks to actively support a diversified and stable funding base comprising debt securities in issue, long-term and short-term loans from other banks, core corporate and retail customer deposits, accompanied by diversified portfolios of highly liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements.

The liquidity management policy requires:

• projecting cash flows by major currencies and considering the level of liquid assets necessary in relation thereto

• maintaining a diverse range of funding sources

• managing the concentration and profile of debts

• maintaining debt financing plans

• maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any interruption to cash flow

• maintaining liquidity and funding contingency plans

• monitoring liquidity ratios against regulatory requirements.

The Treasury Department receives information from business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. The Treasury Department then provides for an adequate portfolio of short-term liquid assets to be maintained, largely made up of short-term liquid trading securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.

The daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by the Treasury Department. Under the normal market conditions, liquidity reports covering the liquidity position are presented to senior management on a weekly basis. Decisions on liquidity management are made by the ALCO and implemented by the Treasury Department.

The following tables show the undiscounted cash flows on financial assets and liabilities and credit-related commitments on the basis of their earliest possible contractual maturity. The total gross inflow and outflow disclosed in the tables is the contractual, undiscounted cash flow on the financial asset, liability or commitment. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee can be called.


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The maturity analysis for financial liabilities as at 31 December 2011 is as follows:

RUB’000

Demand and less than 1

month From 1 to 3

months From 3 to 6

months From 6 to 12

months More than

1 year Total gross amount

outflow Carrying

amount Non-derivative financial liabilities Deposits and balances from banks (14,306,338) (265,494) - (653) - (14,572,485) (14,568,266) Current accounts and deposits from customers (80,311,766) (1,409,197) (1,573,249) (1,486,274) (1,001,048) (85,781,534) (85,562,521) Promissory notes issued (902,251) (619,772) (142,148) (129,858) (901,028) (2,695,057) (2,630,321) Subordinated borrowing - - - - (171,871) (171,871) (165,599) Other financial liabilities (24,131) (358,577) - - - (382,708) (382,708) Total financial liabilities (95,544,486) (2,653,040) (1,715,397) (1,616,785) (2,073,947) (103,603,655) (103,309,415) Credit related commitments (9,425,055) - - - - - (9,425,055)

The maturity analysis for financial liabilities as at 31 December 2010 is as follows:

RUB’000 Demand and less

than 1 month From 1 to 3

months From 3 to 6

months From 6 to 12

months More than

1 year Total gross amount

(outflow) inflow Carrying amount Non-derivative financial liabilities Deposits and balances from banks (3,385,400) (22,811) (53,367) (18,444) (611) (3,480,633) (3,418,789) Current accounts and deposits from customers (32,400,950) (6,305,657) (9,376,437) (10,892,259) (2,316,207) (61,291,510) (59,979,250) Promissory notes issued (1,673,906) (2,979,478) (240,197) (72,049) (488,819) (5,454,449) (5,348,585) Subordinated borrowing (59,090) - - - - (59,090) (56,818) Other financial liabilities (555,675) - - - - (555,675) (555,675) Derivative financial liabilities - Inflow 2,260,100 409,894 - - - 2,669,994 - Outflow (2,283,122) (409,921) - - - (2,693,043) (23,049) Total financial liabilities (38,098,043) (9,307,973) (9,670,001) (10,982,752) (2,805,637) (70,864,406) (69,382,166) Credit related commitments (4,550,842) - - - - - (4,550,842)


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In accordance with Russian and Latvian legislation, individuals can withdraw their term deposits at any time, losing in most of the cases the accrued interest. Accordingly, these deposits, excluding accrued interest, are shown in the table above in the category of “Demand and less than 1 month”.

The table below shows information on contractual maturity of these deposits:

2011 2010

RUB’000 RUB’000 Less than 1 month 1,154,843 748,517 From 1 to 3 months 12,035,946 5,712,111 From 3 to 12 months 30,013,423 20,926,074 More than 1 year 6,793,768 1,002,284 49,997,980 28,388,986

The gross nominal inflow (outflow) disclosed in the tables above represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes. The disclosure shows a net amount for derivatives that are net settled, but a gross inflow and outflow amount for derivatives that have simultaneous gross settlement (e.g., forward exchange contracts and currency swaps).

The following tables provide an analysis, by expected maturities, of amounts recognised in the consolidated statement of financial position.

Management expects that the cash flows from certain financial assets and liabilities will be different from their contractual terms either because management has the discretionary ability to manage the cash flows or because past experience indicates that cash flows will differ from contractual terms. In the tables below the following financial assets and liabilities are presented on a discounted basis and are based on their expected cash flows:

• Securities held for trading: management holds for trading a portfolio of securities that are readily marketable and can be used to meet outflows of financial liabilities. Cash flows from these securities held for trading are included in the demand and less than 1 month category.

Contractual maturities of securities held for trading are as follows:

2011 2010

RUB’000 RUB’000 Less than 1 month 2,085 2,448,002 From 1 to 3 months 10,786 - From 3 to 12 months 1,431,610 169,203 From 1 to 5 years 17,214,398 12,237,123 More than 5 years 9,253,740 1,292,299 27,912,619 16,146,627


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The table below shows an analysis, by expected maturities, of the amounts of non-derivative financial assets and liabilities recognised in the consolidated statement of financial position as at 31 December 2011:



months From 3 to 12

months From 1

to 5 years More than

5 years No stated maturity

Overdue

Total Non-derivative financial assets Cash and cash equivalents 21,335,344 - - - - - - 21,335,344 Mandatory reserve with the CBR - - - - - 956,229 - 956,229 Financial instruments at fair value through

profit or loss 27,912,619 - - - - - - 27,912,619 Available-for-sale financial assets - - 1,784,556 - - - - 1,784,556 Loans and advances to banks 1,997,365 - 158,907 - - - - 2,156,272 Loans to customers 6,445,941 6,699,339 25,515,178 11,630,132 3,293,739 - 461,964 54,046,293 Other financial assets 657,324 - - 38,547 - - 12,803 708,674 Total financial assets 58,348,593 6,699,339 27,458,641 11,668,679 3,293,739 956,229 474,767 108,899,987 Non-derivative financial liabilities Deposits and balances from banks (14,303,044) (264,668) (554) - - - - (14,568,266) Current accounts and deposits from

customers (32,014,534) (13,298,125) (32,651,563) (7,598,289) (10) - - (85,562,521) Promissory notes issued (902,158) (619,297) (266,140) (429,637) (413,089) - - (2,630,321) Subordinated borrowing - - - - (165,599) - - (165,599) Other financial liabilities (24,131) (358,577) - - - - - (382,708) Total financial liabilities (47,243,867) (14,540,667) (32,918,257) (8,027,926) (578,698) - - (103,309,415) Net position 11,104,726 (7,841,328) (5,459,616) 3,640,753 2,715,041 956,229 474,767 5,590,572 Net liquidity cumulative gap 11,104,726 3,263,398 (2,196,218) 1,444,535 4,159,576 5,115,805 5,590,572 -


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The table below shows an analysis, by expected maturities, of the amounts of financial assets and liabilities recognised in the consolidated statement of financial position as at 31 December 2010:



months From 3 to 12

months From 1

to 5 years More than

5 years No stated maturity

Overdue

Total

Non-derivative financial assets Cash and cash equivalents 21,335,344 - - - - - - 21,335,344 Mandatory reserve with the CBR - - - - - 343,287 - 343,287 Financial instruments at fair value through

profit or loss (net of foreign currency derivatives) 16,146,627 - - - - - - 16,146,627

Available-for-sale financial assets - - 1,758,571 - - - - 1,758,571 Loans and advances to banks 9,524,667 609,538 - 19,810 - - - 10,154,015 Loans to customers 4,222,245 5,349,392 4,209,887 6,905,223 1,058,358 - 2,072,501 23,817,606 Other financial assets 204,676 - - - - - - 204,676 Derivative assets 123 8,381 82,636 - - - - 91,140 Total financial assets 51,433,682 5,967,311 6,051,094 6,925,033 1,058,358 343,287 2,072,501 73,851,266

Financial liabilities

Deposits and balances from banks (3,385,205) (22,310) (11,274 ) - - (3,418,789) Current accounts and deposits from customers (31,974,603) (6,012,588) (20,224,775) (1,767,284) - - - (59,979,250) Promissory notes issued (1,656,960) (2,996,610) (239,316) (69,205) (386,494) - - (5,348,585) Subordinated borrowing - - - - (56,818) - - (56,818) Other financial liabilities (555,675) - - - - - - (555,675) Derivative liabilities (23,022) (27) - - - - - (23,049) Total financial liabilities (37,595,465) (9,031,535) (20,475,365) (1,836,489) (443,312) - - (69,382,166) Net position 13,838,217 (3,064,224) (14,424,271) 5,088,544 615,046 343,287 2,072,501 4,469,100 Net liquidity cumulative gap 13,838,217 10,773,993 (3,650,278) 1,438,266 2,053,312 2,396,599 4,469,100 -


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The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirement of the CBR. These ratios include:

• instant liquidity ratio (N2), which is calculated as the ratio of highly liquid assets to liabilities payable on demand

• current liquidity ratio (N3), which is calculated as the ratio of liquid assets to liabilities maturing within 30 calendar days

• long-term liquidity ratio (N4), which is calculated as the ratio of assets maturing after 1 year to the shareholders’ equity and liabilities maturing after 1 year.

The Bank was in compliance with these ratios during the years ended 31 December 2011 and 2010. The following table shows the mandatory liquidity ratios calculated as at 31 December 2011 and 2010.

Requirement 2011, % 2010, % Instant liquidity ratio (N2) Not less than 15% 43.0 78.6 Current liquidity ratio (N3) Not less than 50% 125.0 143.9 Long-term liquidity ratio (N4) Not more than 120% 68.3 118.4

27 Capital management The Group also monitors its capital adequacy levels calculated in accordance with the requirements of the Basle Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2007), commonly known as Basel I.

The following table shows the composition of the capital position calculated in accordance with the requirements of the Basle Accord, as at 31 December 2011 and 2010:

2011

2010

RUB’000 RUB’000 Tier 1 capital Share capital 3,674,041 3,174,041 Additional paid-in capital 427,969 250,785 Cumulative translation reserve 26,392 3,840 Retained earnings 3,889,310 2,774,630 Total tier 1 capital 8,017,712 6,203,296 Tier 2 capital Property revaluation reserve 2,269,356 986,366 Subordinated debt (unamortized portion) 165,599 56,818 Total tier 2 capital 2,434,955 1,043,184 Total capital 10,452,667 7,246,480 Risk weighted assets 92,655,617 45,537,877 Total capital expressed as a percentage of risk-weighted assets

(total capital ratio) 11.28% 15,91% Total tier 1 capital expressed as a percentage of risk-weighted

assets (tier 1 capital ratio) 8.65% 13,62%


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The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the nature of – and reflecting an estimate of credit, market and other risks associated with – each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for unrecognised contractual commitments, with some adjustments to reflect the more contingent nature of the potential losses.

28 Commitments The Group has outstanding commitments to extend loans. These commitments take the form of approved loans and credit card limits and overdraft facilities.

The Group provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to five years.

The Group applies the same credit risk management policies and procedures when granting credit commitments, financial guarantees and letters of credit as it does for granting loans to customers.

The contractual amounts of commitments are set out in the following table by category. The amounts reflected in the table for commitments assume that amounts are fully advanced. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the reporting date if counterparties failed completely to perform as contracted.

2011

2010

RUB’000 RUB’000 Contracted amount Loan and credit line commitments 4,665,209 1,857,916 Guarantees and letters of credit 4,759,846 2,706,334 9,425,055 4,564,250

The total outstanding contractual commitments above do not necessarily represent future cash requirements, as these commitments may expire or terminate without being funded. The majority of loan and credit line commitments do not represent an unconditional commitment by the Group.

The Group created a provision for losses relating to guarantees of RUB 56,452 thousand (2010: RUB 56,149 thousand).

29 Operating leases

Leases as lessee Non-cancelable operating lease rentals as at 31 December are payable as follows:

2011

2010

RUB’000 RUB’000 Less than 1 year 413,110 376,555 Between 1 and 5 years 859,600 713,009 More than 5 years 473,504 140,102 1,746,214 1,229,666

The Group leases a number of premises and equipment under operating leases. The leases typically run for an initial period of five to ten years, with an option to renew the lease after that date. Lease payments are usually increased annually to reflect market rentals. None of the leases includes contingent rentals.


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30 Contingencies

Insurance The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Group does not have full coverage for its premises and equipment, business interruption, or third party liability in respect of property or environmental damage arising from accidents on its property or relating to operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on operations and financial position.

Litigation Management is unaware of any significant actual, pending or threatened claims against the Group.

Taxation contingencies The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities who have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on the financial position, if the authorities were successful in enforcing their interpretations, could be significant.

31 Custody activities The Group provides custody services to its customers, whereby it holds securities on behalf of customers and receives fee income for providing these services. These securities are not assets of the Group and are not recognised in the consolidated statement of financial position.

32 Related party transactions

Transactions with the members of the Board of Directors and the Management Board As at 31 December 2011 members of the Board of Directors and the Management Board of the Group and their immediate relatives control 91.24% (31 December 2010: 89.23%) of the share capital of the Group.

Total remuneration of members of the Board of Directors and the Management Board of the Group included in employee compensation for the years ended 31 December 2011 and 2010 (refer to note 10) is:


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2011 2010

RUB’000 RUB’000 Members of the Board of Directors 7,358 - Members of the Management Board 91,557 25,040 98,915 25,040

The outstanding balances and average effective interest rates as at 31 December 2011 and 2010 for transactions with the members of the Board of Directors and the Management Board are as follows:

2011

Average effective

interest rate, 2010

Average effective interest

rate, RUB’000 RUB’000 Consolidated statement of financial position Assets Loans to customers 2,457 11.44% - 0.00% Impairment allowance - - - -

Liabilities Current accounts and deposits from customers: - Current accounts and demand deposits 92,537 0.97% 43,078 0.00% - Term deposits 15,801,491 6.65% 5,178,436 8.76% Promissory notes 1,736,085 0.60% 1,619,865 0.58%

Other amounts included in the consolidated statement of comprehensive income in relation to transactions with members of the Board of Directors and the Management Board for the years ended 31 December 2011 and 2010 are as follows:

2011 2010 RUB’000 RUB’000

Profit or loss Interest income 12 1,436 Interest expense (9,247) (472,960)

Transactions with other related parties

The outstanding balances and average effective interest rates as at 31 December 2011 and 2010 for transactions with other related parties are as follows:

Average effective

interest rate

Average effective

interest rate 2011

RUB’000 2010

RUB’000 Consolidated statement of financial

position Assets Loans to customers 2,537,069 11.02% 901,269 13.00% Impairment allowance (87,556) (31,334) Liabilities Deposits and balances from banks 2,239,508 7.48% 2,746,216 8.90% Current accounts and deposits from

customers: - Current accounts and demand deposits 1,752,628 0.05% 489,516 0.00% - Term deposits 344,422 5.62% 40,000 8.50%


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Amounts included in the consolidated statement of comprehensive income in relation to transactions with other related parties for the years ended 31 December 2011 and 2010 are as follows: 2011

2010

RUB’000 RUB’000 Profit or loss Interest income 299,541 666,116 Interest expense (4,715) (219,141) Impairment losses recovery (56,222) - Fee and commission income 2,109,664 - Net gain on financial instruments at fair value through profit or loss - 49,354 Net realised gain from foreign exchange operations 1,540,276 78,825 The major part of fee and commission income and gain from foreign exchange operations in 2011, was received by the Group as the result of measures undertaken to maintain high liquidity in the interest of related parties. Loans and guarantees issued to related parties are in Russian Roubles with maturities from 2012 to 2017. Loans and guarantees are collateralized by securities issued by the Group and real estate.

33 Financial assets and liabilities: fair values and accounting classifications

Accounting classifications and fair values The estimated fair values of financial instruments at fair value through profit or loss, available-for-sale and promissory notes issued are based on quoted market prices at the reporting date without any deduction for transaction costs. The estimated fair values of all other financial assets and liabilities are calculated using discounted cash flow techniques based on estimated future cash flows and discount rates for similar instruments at the reporting date. The estimates of fair value are intended to approximate the amount for which a financial instrument could be exchanged between knowledgeable, willing parties in an arm’s length transaction. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or settlement of liabilities. The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as at 31 December 2011 and 2010:

2011

2011 2010 2010 RUB’000 RUB’000 RUB’000 RUB’000

Carrying

amount Fair value Carrying

amount Fair value Loans to customers 54,046,293 53,925,133 23,817,606 23,438,396 Promissory notes issued 2,630,321 2,633,853 5,348,585 5,184,799


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Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm’s length. For more complex instruments, the Bank uses own valuation models and/or estimation is based on models of independent appraisal companies. Some or all of the significant inputs into these models may not be observable in the market, and are derived from market prices or rates or are estimated based on assumptions. As disclosed in note 15, as at 31 December 2011 the fair value of unquoted equity securities available-for-sale with a carrying value of RUB 1,784,556 thousand (31 December 2010: RUB 1,758,571 thousand) can not be determined based on observable market data. The following assumptions are used by management to estimate the fair values of financial instruments: - the fair value of the investment in real estate and construction company totaling RUB 799,460 thousand (2010: RUB 644,410 thousand) was determined based on market approach and income capitalization approach. The market approach is based on the analysis of transactions with similar real estate objects and sales of land plots. The income capitalization approach was based on future cash flows discounting at rate of 9.88% (2010: 10.39%); - the fair value of the oil and gas company totaling RUB 1,502,701 thousand (2010: RUB 1,114,161 thousand) was determined based on discounted cash flows method. Management used discount rate of 13.35% (2010: 12.45%).

Fair value hierarchy The Group measures fair values for financial instruments recorded on the consolidated statement of financial position using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

• Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.

• Level 2: Valuation techniques based on observable inputs, either directly (i.e, as prices) or indirectly (i.e, derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

• Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.


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The table below analyses financial instruments measured at fair value at 31 December 2011, by the level in the fair value hierarchy into which the fair value measurement is categorized: RUB’000 Level 1 Level 2 Level 3 Total Financial assets Financial instruments at fair value through

profit or loss - Debt and other fixed-income instruments 27,912,619 - - 27,912,619 - Equity investments - - 1,784,556 1,784,556 27,912,619 - 1,784,556 29,697,175

The table below analyses financial instruments measured at fair value at 31 December 2010, by the level in the fair value hierarchy into which the fair value measurement is categorised:

RUB’000 Level 1 Level 2 Level 3 Total Financial assets Financial instruments at fair value through

profit or loss - Debt and other fixed-income instruments 16,237,067 700 - 16,237,767 - Equity investments - - 1,758,571 1,758,571 16,237,067 700 1,758,571 17,996,338 Financial liabilities Financial instruments at fair value through

profit or loss (26) (23,023) - (23,049) (26) (23,023) - (23,049)

The following table shows reconciliation for the year ended 31 December 2011 for fair value measurements in Level 3 of the fair value hierarchy:

Equity instruments RUB’000 Balance at the beginning of the year 1,758,571 Total gains or losses: in profit or loss 26,314 in other comprehensive income (228) Purchases 1,883 Sales (1,984) Balance at the end of the year 1,784,556

The following table shows reconciliation for the year ended 31 December 2010 for fair value measurements in Level 3 of the fair value hierarchy:

Equity instruments RUB’000 Balance at the beginning of the year 2,094,113 Total gains or losses: in profit or loss 9,233 in other comprehensive income - Purchases - Sales (344,775) Balance at the end of the year 1,758,571

34 Analysis by segment The Group has one reportable segment which includes all the business units. The business units offering different products and services are managed collectively and unified technologies are


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applied. The person responsible for making key management decisions is the President of the Bank. The President of the Bank reviews internal management reports on the Group’s results at least on a monthly basis.

The single reportable segment of the Group includes corporate and retail banking transactions, which includes deposit taking and commercial lending, documentary transactions, settlements and cash transactions, transactions on foreign exchange, debt and equity capital markets.

Information about major customers

During 2011 and 2010 the Group did not have customers with revenues individually exceeding 10% of total revenues from external customers.

Information about products and services

Information about revenues for the core products and services is provided in notes 4 and 5.

Information about geographical areas

Substantially all revenues are attributable to, and non-current assets are located in, the Russian Federation.

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