OAO KOKS International Financial Reporting Standards ...OAO Koks Consolidated Statement of Income...

OAO KOKS International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor’s Report For the year ended 31 December 2008

OAO Koks Consolidated Statement of Income for the year ended 31 December 2008 (in thousand RR unless stated otherwise)

5 The accompanying notes on pages 9 to 58 are an integral part of these consolidated financial statements

* The comparative information in these financial statements was revised based on the final allocation of acquisition costs according to IFRS 3 (Note 31).

Note 2008 2007* Continuing operations:

Revenue 23 76,639,605 46,377,304 Cost of sales 24 (57,106,054) (30,888,997) Including (for information purposes):

Property, plant and equipment depreciation (2,960,925) (1,314,346) Intangible assets amortisation (548,910) (545,345)

Gross profit 19,533,551 15,488,307 Distribution costs 26 (2,412,629) (1,295,649) General and administrative expenses 27 (4,101,696) (2,547,506) Including (for information purposes):

Property, plant and equipment depreciation (393,569) (164,726) Intangible assets amortisation (3,314) (4,332)

Taxes other than income tax 25 (713,074) (371,882) Provision for tax claims (38,915) (47,040) Excess of fair value of net assets acquired over cost 1, 31 2,206,517 2,121,918 Other (expense)/income, net 28 (591,636) 186,415

Operating profit 13,882,118 13,534,563 Finance income 29 226,828 187,556 Change in value of commodity loan 739,406 (262,880) Interest expenses (2,497,747) (1,757,833) Share of result of associates 6,10 7,986 262,314 Exchange (loss)/gain, net (1,231,163) 36,725 Profit before income tax 11,127,428 12,000,445 Income tax expense 30 (2,035,378) (2,162,624)

Profit for the year from continuing operations 9,092,050 9,837,821

Discontinued operations:

Loss for the year from discontinued operations 32 - (30,958)

Gain on disposal of disposal group constituting the discontinued operations 32 - 1,877,684

Profit for the year from discontinued operations - 1,846,726

Profit for the year 9,092,050 11, 684,547 Profit is attributable to: Equity holders of the Company 8,207,726 10,639,727 Minority interest 884,324 1,044,820 Profit for the year 9,092,050 11,684,547

OAO Koks Consolidated Statement of Cash Flows for the year ended 31 December 2008 (in thousand RR unless stated otherwise)


Note 2008 2007*

Cash flows from operating activities Profit before income tax 11,127,428 12,000,445 Adjustments for: Depreciation of property, plant and equipment 24, 27 3,354,494 1,479,072 Amortisation of intangible assets 24, 27 552,224 549,677 Finance income 29 (226,828) (187,556) Change in value of commodity loan (739,406) 262,880 Interest expenses 2,497,747 1,757,833 Losses less gains on financial assets at fair value through profit and loss 28 121,220 (467,900) Provision for tax claims 38,915 47,040 Vacation accrual 48,274 27,728 Share of result of associates 6,10 (7,986) (262,314) Excess of fair value of the net assets acquired over investments’ cost 1, 31 (2,206,517) (2,121,918) Exchange loss/(gain), net 1,231,163 (36,725) Non-cash transactions 34 (458,465) (1,047,325) Other effects 489,378 (50,707) Operating cash flows before working capital changes 15,821,641 11,950,230 Changes in working capital (excluding the effects of acquisition) (Increase)/Decrease in trade and other receivables (2,099,735) 2,062,281 Decrease/(Increase) in inventories 275,060 (532,576) Increase/(Decrease) in trade and other payables 1,580,449 (996,629) Increase/(Decrease) in taxes other than income tax payable 208,050 (41,836) Decrease in other liabilities (25,799) (10,764) Cash from operating activities 15,759,666 12,430,706 Income tax paid (4,112,947) (2,052,786) Net cash from operating activities of continuing operations 11,646,719 10,377,920 Net cash from operating activities of discontinued operations - (283,547) Net cash from operating activities 11,646,719 10,094,373 Cash flows from investing activities Purchase of property, plant and equipment (5,484,265) (4,550,799) Proceeds from sale of property, plant and equipment 40,708 70,161 Net sale of financial assets at fair value through profit and loss 3,272 573,483 Acquisition of subsidiaries net of cash acquired 31 (182,976) (6,024,866) Purchase of minority interest in subsidiaries 1 (1,849,511) (3,879,219) Sale of subsidiaries, net of cash disposed 32 - 2,651,958 Sale of interest in subsidiaries 395,764 - Purchase of available-for-sale financial assets (44,604) (721,711) Changes in restricted cash (1,543) (65,643) Loans issued (2,645,457) (1,712,054) Repayment of loans issued 2,408,606 497,876 Interest received on loans issued 213,762 57,853 Dividend received 1,260 810

Acquisition of intangible assets and other non-current assets (55,251) (12,022) Net cash used in investing activities (7,200,235) (13,114,173)

OAO Koks Consolidated Statement of Cash Flows for the year ended 31 December 2008 (in thousand RR unless stated otherwise)



2008 2007*

Cash flows from financing activities

Proceeds from borrowings 28,025,791 38,969,346 Repayment of borrowings (29,871,657) (30,928,313) Interest paid on loans and borrowings (2,294,234) (1,287,980) Dividends paid (549,468) (1,137,440) Net cash (used in)/generated from financing activities (4,689,568) 5,615,613 Net (decrease)/increase in cash and cash equivalents (243,084) 2,595,813 Effects of exchange rate changes on cash and cash equivalents (10,450) 47,037 Net cash and cash equivalents at the beginning of the year, including

1,456,681 (1,186,169)

Cash and cash equivalents 2,922,889 166,836 Bank overdraft (1,466,208) (1,353,005) Net cash and cash equivalents at the end of the year, including

1,203,147 1,456,681 Cash and cash equivalents 1,935,895 2,922,889 Bank overdraft (732,748) (1,466,208)

OAO Koks Consolidated Statement of Changes in Equity for the year ended 31 December 2008 (in thousand RR unless stated otherwise)



Note Share capital

Currency translation

reserve Revaluation

reserve Retained earnings

Total attributable to equity holders of the Company

Minority interest Total equity

Balance at 31 December 2006 213,427 1,341 308,366 12,227,530 12,750,664 2,794,680 15,545,344 Profit from continuing operations for the year - - - 8,624,854 8,624,854 1,093,665 9,718,519 Profit from discontinued operations for the year - - - 1,814,001 1,814,001 32,725 1,846,726

Total profit for the year - - - 10,438,855 10,438,855 1,126,390 11,565,245 Currency translation differences - 80,454 (145) - 80,309 55,836 136,145 Revaluation of available-for-sale financial assets - - 9,679 - 9,679 - 9,679 Revaluation reserve written-off to retained earnings - - (14,041) 14,041 - - - Reserve for put option over minority interest 5.6, 31 - - - - - (1,704,184) (1,704,184) Business combinations 31 - - - 31,563 31,563 5,364,212 5,395,775 Sale of subsidiaries 32 - - - - - 133,474 133,474 Purchase of minority shares - - - - - (3,625,637) (3,625,637) Dividends declared 17 - - - (700,028) (700,028) (423,706) (1,123,734)

- 80,454 (4,507) (654,424) (578,477) (200,005) (778,482)

Balance at 31 December 2007 as originally presented 213,427 81,795 303,859 22,011,961 22,611,042 3,721,065 26,332,107 Business combination provisional values correction related to profit for the year - - - 200,872 200,872 (81,570) 119,302 Business combination provisional values correction related to other reserves 31 - - 1,556,831 (78,574) 1,478,257 1,831,261 3,309,518 Correction of purchase of minority shares - 8,610 - 8,610 (78,194) (69,584) Balance at 31 December 2007* 213,427 90,405 1,860,690 22,134,259 24,298,781 5,392,562 29,691,343 Profit for the year - - - 8,207,726 8,207,726 884,324 9,092,050

Total profit for the year - - - 8,207,726 8,207,726 884,324 9,092,050 Currency translation differences - 792,149 1,345 - 793,494 164,434 957,928 Revaluation of available-for-sale financial assets - - (987) - (987) - (987) Revaluation reserve written-off to retained earnings - - (330,788) 330,788 - - - Business combinations 31 - - - - - 51,851 51,851 Sale/Purchase of minority shares in subsidiaries, net - - - - - (3,186,031) (3,186,031) Effect of changes in income tax rate - - 364,040 - 364,040 26,056 390,096 Dividends declared 17 - - - (2,000,081) (2,000,081) (12,432) (2,012,513)

792,149 33,610 (1,669,293) (843,534) (2,956,122) (3,799,656) Balance at 31 December 2008 213,427 882,554 1,894,300 28,672,692 31,662,973 3,320,764 34,983,737

OAO Koks Notes to the Consolidated Financial Statements for the year ended 31 December 2008 (in thousand RR unless stated otherwise)

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1 General information about OAO Koks and its subsidiaries

OAO Koks (the “Company”) was established as state-owned enterprise Kemerovski Koksokhimicheski Kombinat in 1924. It was incorporated as an open joint stock company on 30 July 1993 as part of Russia’s privatisation programme. The Company’s registered office is located at 1st Stakhanovskaya ulitsa, 6, Kemerovo, Russian Federation, 650021. OAO Koks and its subsidiaries’ (together, the “Group”) principal activities include coal mining, production of coke and coal concentrate, production of nickel, iron-ore concentrate, cast iron, as well as metal powder production (high purity chrome products) and steel. The Group’s manufacturing facilities are primarily based in the city of Kemerovo, Kemerovo Region, in the city of Tula, Tula Region, and in Chelyabinsk Region, Russia, and in the Republic of Slovenia. Products are sold in Russia as well as in other countries. As at 31 December 2008, 93.7% of the Company (93.52% as at 31 December 2007) was ultimately owned by members of the Zubitskiy family: Mr B.D. Zubitskiy, Mr E.B. Zubitskiy and Mr A.B. Zubitskiy. The Group’s main subsidiaries are:

Name Country of

incorporation Type of activity

Percentage voting shares Note 31 December

2008 31 December

2007 OAO Mill Berezovskaya Russia Production of coal concentrate 98% 98% OOO Trade House Kemerovo-Koks Russia Sales activities 100% 100% OOO Uchastok Koksoviy Russia Coal mining 100% 100% OOO Gornyak Russia Coal mining 100% 100% ZAO Sibirskie Resursy Russia Coal mining 100% 100% ZAO Inertnik Russia Production of limestone dust 100% 100% OAO Polema Russia Production of chrome (1.1) 100% 94% OOO Consultinvest 2000 Russia Lease of property 100% 100% OOO Managing Company Industrial Metallurgical Holding

Russia Management services

100% 100%

ZАО PО Rezhnickel Russia Production of nickel shot 100% 100% ОАО Ufaleynickel Russia Production of nickel (1.2) 97% 84% ООО BKF Gorizont Russia Transactions with securities 100% 100% ООО Belyi Kamen Russia Production of marbleized

limestone 100% 100%

ZАО Krontif-Centre Russia Production of cast-iron ware 100% 100% ОАО Kombinat КМА Ruda Russia Mining and concentration of iron-

ore (1.3) 98% 95%

Polema S.A. Switzerland Sales (1.1) 100% 94% ОАО Tulachermet Russia Cast-iron production (1.4) 90% 63% Dilon Cooperatief U.A. the Netherlands Investment activity (1.5) 100% 79% Dilon d.o.o. Slovenia Investment activity (1.5) 100% 79% Acroni Jesenice Slovenia Steel production (1.5) 72% 61% Metal Ravne Slovenia Steel production (1.5) 72% 61% SIJ d.d. Slovenia Management services (1.5) 72% 61% Nozi Ravne Slovenia Steel goods production (1.5) 72% 61% Elektrode Jesenice Slovenia Steel goods production (1.5) 72% 61%

ODPAD Slovenia Collection and processing of scrap metal (1.6) 54% 0%


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1 General information about OAO Koks and its subsidiaries (continued)

1.1 In 2008 the Group purchased an additional 7% interest (6% of voting shares) in OAO Polema, increasing its share up to 100% (100% of voting shares) and also increasing its effective share in Polema S.A. up to 100%. The cost of these additional shares was RR 27,444 and resulted in goodwill of RR 13,668 and excess of net assets acquired over cost of investments of RR 7,383. 1.2 In 2008 the Group purchased an additional 13% interest (13% of voting shares) in OAO Ufaleynickel, increasing its share up to 97% (97% of voting shares). The cost of these additional shares was RR 633,429 and resulted in excess of net assets acquired over cost of investments of RR 192,381. 1.3 In 2008 the Group sold 8% interest (8% of voting shares) in OAO Kombinat KMA Ruda for a consideration of RR 705,505, the amount of goodwill disposed of was RR 265,100, recognised loss on disposal was RR 101,482. In 2008 the Group purchased an additional 11% interest (11% of voting shares) in OAO Kombinat KMA Ruda. The cost of these additional shares was RR 241,103 and resulted in excess of net assets acquired over cost of investments of RR 492,515. As a result of these transactions, the Group increased its share up to 98% (98% of voting shares). 1.4 In 2008 the Group purchased an additional 27% interest (27% of voting shares) in OAO Tulachermet, increasing its share up to 89% (90% of voting shares). The cost of these additional shares was RR 935,478 and resulted in goodwill of RR 330,637 and excess of net assets acquired over cost of investments of RR 1,182,246. 1.5 In 2007 the Group sold 20% interest in Dilon Cooperatief U.A. (the Netherlands) for a consideration of EUR 20,000, decreasing its interest in this company to 79% as of 31 December 2007, and additionally decreasing its effective ownership share in Dilon d.o.o. (Slovenia) to 79%. In 2008 the Group acquired 20% interest in Dilon Cooperatief U.A. (the Netherlands) for a consideration of EUR 25,000 and decided to contribute EUR 10,000,000 to the share capital of this company, of which EUR 8,000,000 were contributed as of 31 December 2008. Thus the Group increased its share in Dilon Cooperatief U.A. (the Netherlands) up to 99,99%. As a result of acquisition of 20% interest in Dilon Cooperatief U.A. (the Netherlands) the Group purchased an additional 11% interest in SIJ d.d. (Slovenia) and also Acroni, Metal Ravne, Nozi Ravne, Elektrode and other subsidiaries of SIJ – Slovenska industrija jekla, d.d. (Slovenia), increasing its interest in these companies up to 72%. The excess of net assets acquired over cost of investments of was RR 331,904. 1.6 As a result of its acquisition of ODPAD (Slovenia) through SIJ – Slovenska industrija jekla, d.d. (Slovenia) in 2008, the Group acquired an effective ownership share of 54% in ODPAD. The cost of acquisition amounted to EUR 4,980,850 and resulted in goodwill of RR 59,058. 2 Basis of preparation These consolidated financial statements (the “financial statements”) have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standards and Interpretations, approved by the IAS Board (“IFRS”). Each company of the Group registered in Russia maintains its own accounting records and prepares financial statements in accordance with the Russian accounting standards (“RAS”). The attached financial statements have been prepared using RAS records and reports that have been adjusted and re-classified to ensure accurate presentation in compliance with IFRS. Each company of the Group registered in Slovenia maintains its own accounting records and prepares financial statements in accordance with IFRS. As at 31 December 2008 the official exchange rate set by the Central Bank of the Russian Federation (the “Central Bank”) for transactions denominated in foreign currencies was RR 29.3804 per 1 US dollar (“USD”) (as at 31 December 2007: RR 24.5462) and RR 41.4411 per 1 euro (“EUR”) (as at 31 December 2007: RR 35.9332).


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3 Summary of significant accounting policies 3.1 Consolidated financial statements (a) Subsidiaries Subsidiaries are those companies and other entities (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one-half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The date of exchange is the acquisition date where a business combination is achieved in a single transaction, and is the date of each share purchase where a business combination is achieved in stages by successive share purchases. The excess of the cost of acquisition over the fair value of the net assets of the acquired share at each exchange transaction represents goodwill. The excess of the acquirer’s interest in the net fair value of the net assets acquired over cost is recognised immediately in the income statement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at each acquisition date, irrespective of the extent of any minority interest. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies. (b) Associates Associates are entities over which the Group has significant influence, but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method and are initially recognised at cost. Investments in associates include goodwill (less accumulated impairment losses) identified on acquisition. The Group’s share of the post-acquisition profits or losses of associates is recorded in the income statement, and its share of post-acquisition movements in reserves is recognised in equity. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of the transferred asset’s impairment. (c) Transactions with minority shareholders The excess of the amount paid to acquire minority interest over its carrying amount is recorded as goodwill. The excess of the carrying amount of minority interest over the cost of an acquisition is recognised in the income statement. Any gain or loss on partial disposal of a subsidiary not resulting in loss of control is recorded in the income statement.


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3 Summary of significant accounting policies (continued)

3.2 Foreign currency transactions (a) Functional and presentation currency The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. The Company’s functional currency and the Group’s presentation currency is the national currency of Russia, the Russian rouble (“RR”). (b) Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translated into each entity’s functional currency at the official exchange rate of the Central Bank at the respective balance sheet dates. Foreign exchange gains and losses resulting from transaction settlements and from the translation of monetary assets and liabilities into each entity’s functional currency at the Central Bank’s official year-end exchange rates are recognised in the income statement. Translation at year-end rates does not apply for non-monetary items, including equity investments. (с) Foreign operations The assets, liabilities and financial results of Group companies (none of which operates in a hyperinflationary economy) whose functional currency differs from the Group’s presentation currency are translated into the presentation currency in the following way:

i. Assets and liabilities are translated into the presentation currency using the exchange rate as at the reporting date;

ii. Income and expenses are translated to the presentation currency using the average exchange rate for a reporting period; and

iii. Exchange differences calculated as a result of translations described in points (i) and (ii) shall be recognised initially

in a separate component of equity and subsequently recognised in profit or loss upon disposal of the net investment. Goodwill related to acquisitions in currencies other than the rouble is translated into roubles at the closing balance sheet exchange rate, with a corresponding adjustment to the currency translation reserve. 3.3 Property, plant and equipment The Group has adopted IFRS, effective 1 January 2004. The Group has elected to apply exemptions available for first-time adopters under IFRS 1 and has recorded property, plant and equipment at fair value in its transition balance sheet. The difference between the fair value of fixed assets and construction in progress and their cost under RAS as at 1 January 2004 is recorded as retained earnings at that date. Subsequent to 1 January 2004, additions to property, plant and equipment are recorded at historical cost. Historical cost includes expenditures that are directly attributable to an item’s acquisition. Subsequent costs, including overhaul expenses, are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that the future economic benefits associated with the item will flow to the Group and the value of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. At each reporting date management assess whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the income statement. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in the income statement.


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3 Summary of significant accounting policies (continued) Depreciation. Land is not depreciated. Depreciation on other items of property, plant and equipment is calculated using the straight-line method to allocate their depreciable amounts (cost less residual values) over their estimated useful lives:

Useful lives in years Buildings 60-80 Installations 20-60 Plant and equipment 10-30 Motor vehicles 10-20 Other 5-25

The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. Assets’ residual values and useful lives are reviewed, and adjusted if needed, at each balance sheet date. 3.4 Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the acquirer’s share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary or associate at the date of exchange. Goodwill on acquisitions of subsidiaries is presented separately in the consolidated balance sheet. Goodwill on acquisitions of associates is included in investment in associates. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination. Such units or group of units represent the lowest level at which the Group monitors goodwill and are not larger than a segment. Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the operation disposed of, generally measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit which is retained.

3.5 Other intangible assets All of the Group’s other intangible assets have definite useful lives and primarily include production licences. Acquired licences are capitalised on the basis of the costs incurred to acquire them. Intangible assets are amortised over the remaining lives of the production licences (see Notes 8 and 35). If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell. 3.6 Investments The Group classifies its investments into the following categories: a) financial assets at fair value through profit and loss, b) loans and receivables, c) held-to-maturity financial assets and d) available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date.


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3 Summary of significant accounting policies (continued) (b) Loans and accounts receivable Loans and accounts receivable are non-derivative financial assets with fixed or determinable payments which are not quoted at the organized market. They arise when the Group grants cash, goods or services to the borrower with no intention of selling the resulting accounts receivable. They are included in current assets unless their repayment period exceeds 12 months of the reporting date. If their repayment period exceeds 12 months of the reporting date, they are recorded as non-current assets. (c) Held-to-maturity financial assets Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the intention and ability to hold to maturity. There were no such financial assets during the year. (d) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of available-for-sale assets are initially measured at fair value and recognised at the settlement date, which is the date that the investment is delivered to customer. Cost of purchases includes transaction costs. Available-for-sale assets are carried at fair value. Unrealised gains and losses arising from changes in the fair value of these assets are included in the fair value reserve in equity in the period in which they arise. Gains and losses from the disposal of available-for-sale investments are included in the consolidated statement of income in the period in which they arise. Available-for-sale assets mainly include securities which are not quoted or traded on any exchange market. The fair value of these investments is determined using various methods, including the return on investment and discounted future cash flow methods. The Group’s management makes assumptions based on an analysis of the market situation at each reporting date to determine the fair value. Investments in the charter capital of unquoted companies for which fair value cannot be reliably determined using other techniques are stated at acquisition cost less impairment losses. 3.7 Inventor ies Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is assigned using the weighted average basis. The cost of finished goods and work in progress includes raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses. 3.8 Trade and other receivables Trade and other receivables are carried at amortised cost using the effective interest method. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect amounts due according to the original terms. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate corresponding to the initial financing conditions. The amount of the provision is recognised in the income statement. 3.9 Value added tax Value added tax (VAT) related to sales is payable to the federal tax authorities at the earlier of two dates: the date of dispatch (transfer) of goods (services, works, property rights), or the date of payment for the future supply of goods (works, services, property rights). VAT included in the cost of purchased goods (works, services, property rights) generally can be reclaimed by offsetting it against VAT on sales once the goods (works, services, property rights) have been accounted for, except for VAT on export sales, which is reclaimable once export transactions have been confirmed. Where provision has been made for impairment of receivables, an impairment loss is recorded for the gross amount of the debtor, including VAT.


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3 Summary of significant accounting policies (continued) 3.10 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term, highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortised cost using the effective interest method. Restricted balances are excluded from cash and cash equivalents for the purposes of the consolidated cash flow statement. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date are included in other non-current assets. Bank overdrafts are an integral part of the Group’s cash management and considered cash equivalents for the purposes of cash flow statement preparation. 3.11 Dividends Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they are declared before or on the balance sheet date. Dividends are disclosed when they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before the financial statements are authorised for issue. 3.12 Borrowings Borrowings are carried at amortised cost using the effective interest method. Borrowing costs are recognised as an expense proportionally to the time the borrowing was used using the effective interest method. The Group does not capitalise borrowing costs. Commodity loans are measured at their fair value based on the forward market prices of nickel and cobalt and discounted in accordance with their redemption schedule. 3.13 Income tax Income taxes have been provided for in the consolidated financial statements in accordance with Russian legislation enacted or substantively enacted by the balance sheet date. The income tax charge comprises current tax and deferred tax and is recognised in the consolidated income statement unless it relates to transactions that are recognised, in the same or in a different period, directly in equity. Current tax is the amount expected to be paid to or recovered from the tax authorities on taxable profits or losses for the current and prior periods. Taxes other than income taxes are recorded within operating expenses. Deferred income tax is accrued using the balance sheet liability method for tax loss carry forwards and for temporary differences arising between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred income tax is provided on post-acquisition retained earnings of subsidiaries, except where the Group controls the subsidiary’s dividend policy and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future. Recognition of deferred tax asset. The net deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded on the balance sheet. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. In determining future taxable profits and the amount of tax benefits that are probable in the future, management makes judgements and applies estimates based on taxable profits of the previous three years and expectations of future income that are believed to be reasonable under the circumstances.


16

3 Summary of significant accounting policies (continued) 3.14 Employee benefits Wages, salaries, contributions to state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (such as health services and kindergarten services) are accrued in the year in which the associated services are rendered by the employees of the Group. 3.15 Provisions for liabilities and charges Provisions for liabilities and charges are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. Provisions are reassessed annually and changes in provisions resulting from the passage of time are reflected in the income statement each year within interest expense. Other changes in provisions related to a change in the expected repayment plan, in the estimated amount of the obligation or in the discount rates, are treated as a change in an accounting estimate in the period of the change and, with the exception of provision for restoration liabilities, reflected in the income statement. Provisions for restoration liability are recognised when the Group has a present legal or constructive obligation to dismantle, remove and restore items of property, plant and equipment. The amount of the provision is the present value of the estimated expenditures expected to be required to settle the liability, determined using pre-tax risk free discount rates adjusted for risks specific to the liability. Changes in the provision resulting from the passage of time are recognised as interest expense. Changes in the provision, which is reassessed at each balance sheet date, related to a change in the expected pattern of settlement of the liability, or in the estimated amount of the provision or in the discount rates, are treated as a change in an accounting estimate in the period of change. Such changes are reflected as adjustments to the carrying value of property, plant and equipment and the corresponding liability. 3.16 Uncertain tax positions Uncertain tax positions of the Group are reassessed by management at every balance sheet date. Liabilities are recorded for income tax positions that are deemed by management to be unlikely to be sustained if challenged by the tax authorities, based on its interpretation of tax laws that have been enacted or substantively enacted at the balance sheet date. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the balance sheet date. 3.17 Revenue recognition Revenue from the sale of goods (primarily coke products, cast iron, nickel, steel, chrome and powder metallurgy products) are measured at the fair value of the consideration received or to be received, net of value-added tax, custom duties, rebates and discounts. Revenues are recognised at the point when the risks and rewards of ownership of the goods have been transferred to the buyer. 3.18 Written puts over minority share Written puts over minority interest are recognised as a liability at the present value of the expected redemption amount with a corresponding reduction in minority interest. 3.19 Discontinued operations A discontinued operation is a component of the Group that either has been disposed of or that is classified as held for sale and: (a) represents a separate major line of business or geographical area of operations; (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to resale. Earnings and cash flows of discontinued operations, if any, are disclosed separately from continuing operations, with comparatives being re-presented.


17

3 Summary of significant accounting policies (continued) 3.20 Share capital Ordinary shares and non-redeemable preference shares with discretionary dividends are both classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is presented in the notes as a share premium. 3.21 Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment) or in providing products or services within a particular economic environment (geographical segment) that is subject to risks and rewards that are different from those of other segments. Segments with a majority of revenue earned from sales to external customers and whose revenue, result or assets are ten percent or more of all the segments are reported separately. 4 New accounting pronouncements IFRS standards, and any amendments and changes in interpretations thereto, effective 1 January 2008 had no significant impact on the Group’s consolidated financial statements. The following new standards and amendments to standards are not yet effective and have not been applied in preparing these consolidated financial statements: - IFRS 8 Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 replaces IAS 14

and aligns segment reporting with the requirements of the US standard SFAS 131 Disclosures about Segments of an Enterprise and Related Information. The Group is currently assessing what impact the standard will have on disclosures in its consolidated financial statements;

- IAS 23 Borrowing Costs (revised March 2007; effective for annual periods beginning on or after 1 January 2009).

The Group is currently assessing what impact the amendment will have on its consolidated financial statements; - IAS 1 Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or

after 1 January 2009). The standard introduces amendments to the titles and presentation of financial statements. The Group is currently assessing what impact the amendment will have on disclosures in its consolidated financial statements; and

- IFRS 3 Business Combinations (revised January 2008; effective for business combinations for which the acquisition

date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009) and IAS 27 Consolidated Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). These standards provide two options for valuation of goodwill and minority interest, and new accounting procedures for acquisition-related costs, contingent consideration, purchase price allocation, stage-by-stage acquisition, and purchase and sale of minority interest. The Group is currently assessing what impact the amendments will have on disclosures in its consolidated financial statements.

- Vesting Conditions and Cancellations—Amendment to IFRS 2 Share-based Payment (issued in January 2008; effective

for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions; other features of a share-based payment are not. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group does not expect the amendment to affect its consolidated financial statements.

- Puttable financial instruments and obligations arising on liquidation—Amendments to IAS 32 and IAS 1 (effective for

annual reports beginning on or after 1 January 2009). The amendment requires that certain financial instruments that meet the definition of a financial liability be classified as equity. The Group does not expect the amendment to affect its consolidated financial statements.


18

4 New accounting pronouncements (continued) The following new standards and amendments to standards (not effective and/or not applicable for preparation of these financial statements) are not expected to significantly affect the Group’s consolidated financial statements: – IFRIC 11 IFRS 2—Group and Treasury Share Transactions; – IFRIC 12 Service Concession Agreements; – IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction; – IFRIC 13 Customer Loyalty Programmes;

– IFRIC 15 Agreements to the Construction of Real Estate;

– IFRIC 16 Hedges of a Net Investment in a Foreign Operation;

– IFRS 1 and IAS 27 Amendment - Cost of an Investment in Subsidiary, Jointly Controlled Entity or Associate;

– Amendment to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items;

– Improvements to International Financial Reporting Standards;

– IFRIC 17 Distribution of Non-Cash Assets to Owners;

– IFRS 1 First Time Adoption to of International Financial Reporting Standards;

– IFRIC 18 Transfers of Assets from Customers;

– Improving Disclosures about Financial Instruments – Amendment to IFRS 7 Financial Instruments: Disclosures; – Embedded Derivatives – Amendments to IFRIC 9 and IAS 39. 5 Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that could cause a significant adjustment to the carrying amount of assets and liabilities within the next financial period include the following: 5.1 Estimated useful lives of property, plant and equipment The Group applies a range of useful lives to buildings, installations, plant and equipment, transport vehicles and other assets classified as property, plant and equipment. Significant judgement is required in estimating the useful life of such assets. If management’s estimates of useful lives were to decrease by 10%, profit before tax for the reporting year would decrease by RR 376,299. An increase in useful lives by 10% would result in an increase of profit before tax for the reporting year by RR 307,881. 5.2 Provision for tax claims and recoverability of input VAT Based on its judgement and experience, the Group’s management recognised certain provisions for tax claims. Provisions mostly related to the tax deductibility of certain types of expenses, recovery of outstanding amounts of value-added tax for purchased inventory and fines for failure to perform the duties of a tax agent with regard to withholding tax. Significant estimates and judgement are required in determining the probability of future outflows for each case, as Russian tax legislation is subject to varying interpretations (see Notes 30 and 35).


19

5 Critical accounting estimates, and judgements in applying accounting policies (continued) Increases in management’s estimates of the Group’s provision for tax claims as at 31 December 2008 by 10% would reduce profit for the year by RR 14,271. A decrease in those estimates by 10% would increase profit for the year by the same amount. 5.3 Estimated impairment of goodwill The Group tests goodwill for impairment at least annually. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require estimates as detailed in Note 9. 5.4 Restoration liability The Group reviews the restoration liability annually. In Russia this liability relates to obligations under a licence for coal extraction at Vakhrusheva coal mine. The amount of the provision is the present value of the estimated expenditures expected to be required to settle the liability, determined using pre-tax risk free discount rates adjusted for risks specific to the liability. Management has estimated the restoration liability through 2020 (the date the licence expires) based upon their interpretation of the licence agreement and environmental legislation and in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Restoration liabilities also include a provision recorded for an obligation to restore land near the Sava River and land polluted with white slag, as well as noise insulation restoration works in Slovenia. The amount of the provision is the present value of the estimated expenditures expected to be required to settle the liability, determined using pre-tax risk free discount rates adjusted for risks specific to the liability. 5.5 Commodity loan The Group currently has a commodity loan arrangement with the Russian Government. The Group has estimated the fair value of this liability using forward commodity prices and discounted it to its present value. 5.6 Written puts over minority share The Group potentially is committed through a put option to acquire an additional 25% interest in SIJ – Slovenska industrija jekla, d.d. by April 2012 at a minimum price of EUR 190.7319 per share. The Group has assessed the obligation to equal RR 1,965,404 (as of 31 December 2007: RR 1,704,184) based on this minimum price. The Group has treated this obligation as current, as it does not have an unconditional right to defer payment. Consequently, this obligation has not been discounted. IFRS currently does not comprehensively address accounting for written put options over minority share. The Group has recorded a reduction in minority interest of RR 1,965,404 (as of 31 December 2007: RR 1,704,184). Consequently, minority interest reflects the respective share of net assets of subsidiaries that are not owned, either directly or indirectly, by the parent, less the initial estimate of the obligation recognised for the put option over minority share. Management believes that this approach best reflects the substance of the transaction.

6 Segment information The Group’s primary reporting format is business segments and its secondary format is geographical segments. The operating businesses are organised and managed separately according to the nature of the products, with each segment representing a strategic business unit that offers different products. The Group operates as a vertically integrated business. According to the IAS 14 Segment Information, the following business segments can be identified within the Group’s vertically integrated business:

• Coal mining and coke production; • Nickel production; • Production of powder metallurgy articles (chrome articles); • Production of steel;


20

6 Segment information (continued)

• Production of iron ore concentrate; • Production of cast iron; and • Other.

The above segments were reflected in the Group’s organisational structure and its internal reporting framework. Substantially all of the Group’s operating assets are located in Russia and Slovenia. Analyses of revenue generated from sales in Russia and to other countries are included in Note 23. The Group’s geographical segments are determined by the location of the Group’s assets and operations. These are concentrated in Russia and Western Europe. The other geographical segment represents Asia, the USA and other locations. Segment revenue and segment results include transfers between business segments. These transfers are made at prices agreed on by the parties, on an arm’s length basis.


21


Coal mining and coke production Nickel production

Production of powder

metallurgy articles (chrome)

Production of iron ore

concentrate Production of

cast- iron Production of steel Other Total Year ended 31 December 2008 Segment revenue

Intersegment sales revenue 15,458,218 11,416 12,513 3,275,937 258,455 102 667,006 19,683,647 External sales revenue 8,999,192 5,923,120 1,199,364 38,556 33,270,750 25,604,133 1,604,490 76,639,605

Segment revenue, total 24,457,410 5,934,536 1,211,877 3,314,493 33,529,205 25,604,235 2,271,496 96,323,252 Segment expenses Intersegment expenses (184,841) (3,125,809) (46,640) (106,530) (15,909,569) - (310,258) (19,683,647) External expenses (19,009,452) (3,492,773) (1,083,667) (1,985,349) (11,945,201) (23,558,856) (1,682,189) (62,757,487) Segment expenses, total (19,194,293) (6,618,582) (1,130,307) (2,091,879) (27,854,770) (23,558,856) (1,992,447) (82,441,134)

Segment results 5,263,117 (684,046) 81,570 1,222,614 5,674,435 2,045,379 279,049 13,882,118

Operating profit 13,882,118

Share of net results of associates - - - - - 7,986 - 7,986


22


Coal mining and coke production

Nickel production




concentrate

Production of steel Other

Total continued operations

Discontinued operations Total

Year ended 31 December 2007

Segment revenue

Intersegment sales revenue 3,463,971 5 1,419 - - 614,204 4,079,599 5,119 4,084,718 External sales revenue 12,274,391 12,999,076 1,222,914 3,521,886 14,766,405 1,592,632 46,377,304 4,398,893 50,776,197

Segment revenue, total 15,738,362 12,999,081 1,224,333 3,521,886 14,766,405 2,206,836 50,456,903 4,404,012 54,860,915 Segment expenses Intersegment expenses (152,563) (3,719,012) (25,230) (111,864) - (16,187) (4,024,856) (59,862) (4,084,718) External expenses (11,724,543) (4,739,028) (1,223,437) (2,187,137) (11,233,804) (1,734,792) (32,842,741) (4,216,197) (37,058,938) Segment expenses, total (11,877,106) (8,458,040) (1,248,667) (2,299,001) (11,233,804) (1,750,979) (36,867,597) (4,276,059) (41,143,656)

Segment results 3,861,256 4,541,041 ,(24,334) 1,222,885 3,532,601 455,857 13,589,306 127,953 13,717,259

Discontinued operation Intercompany elimination - - - - - (54,743) (54,743) 54,743 -

Operating profit 13,534,563 182,696 13,717,259

Share of net results of associates 262,439 - - - - (125) 262,314 - 262,314


23

6 Segment information (continued) Segment non-cash income and expenses in the income statement for the year ended 31 December 2008 include the following:

Coal mining and coke production

Production of nickel

Production of powder metallurgy

articles (chrome)


concentrate Production of cast

iron Production of steel Other Total Depreciation of property, plant and equipment (Notes 24, 27) (1,006,218) (133,156) (51,993) (163,563) (992,418) (960,648) (46,498) (3,354,494) Amortisation of intangible assets (Notes 24, 27) (6,057) (263,481) - (274,655) (68) (7,963) - (552,224) (Increase)/decrease in obsolete stock provision (Note 28) (11,965) (12,883) (2,319) 170 2,721 (64,136) (331) (88,743) (Increase)/decrease in bad debt provision(Note 28) (216) (3,972) (1,959) 30 (2,250) (18,257) (7,349) (33,973) (Increase)/decrease in provision for tax claims (48,224) 9,309 - - - - - (38,915) (Increase)/decrease in vacation accrual (16,303) 1,309 (6,670) (10,151) (4,008) 17,973 (30,424) (48,274) (Increase)/decrease in other provisions (Note 28) - - - - - 52,505 - 52,505


24

6 Segment information (continued) Segment non-cash income and expenses in the income statement for the year ended 31 December 2007 include the following:

Coal mining and coke

production Production of

nickel


metallurgy articles

(chrome)


concentrate

Production of steel Other

Total continued

operations Discontinued

operations Total Depreciation of property, plant and equipment (Notes 24, 27) (486,992) (136,007) (33,627) (141,823) (650,930) (29,693) (1,479,072) (40,827) (1,519,899) Amortisation of intangible assets (Notes 24, 27) (6,055) (262,761) - (273,905) (6,956) - (549,677) - (549,677) (Increase)/decrease in obsolete stock provision (Note 28) (8,492) 56,030 (5,211) 358 (7,013) 367 36,039 4,143 40,182 (Increase)/decrease in bad debt provision (Note 28) (5,117) 38,068 8 70 53,640 (192) 86,477 240 86,717 (Increase)/decrease in provision for tax claims - (19,311) (27,729) - - - (47,040) 168,134 121,094 (Increase)/decrease in vacation accrual (23,184) (882) (3,173) (15,410) (1,342) 16,263 (27,728) (1,635) (29,363) (Increase)/decrease in other provisions (Note 28) - 1,037 - - (58,761) - (57,724) - (57,724)


25

6 Segment information (continued) Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, receivables and cash. Unallocated assets include VAT recoverable, interest receivable and deferred tax assets. Segment liabilities include accounts payable arising during operating activities. Unallocated liabilities include borrowings, interest payable, profit tax and VAT and deferred tax liabilities. Capital expenditures comprise additions to property, plant and equipment and intangible assets, including acquisitions resulting from business combinations. Segment assets and liabilities at 31 December 2008 and capital expenditures for the year ended 31 December 2008 include the following:

Coal mining and coke production Nickel production





cast iron Production of

steel Other Total Segment assets 16,491,371 9,242,471 2,248,909 11,312,147 17,208,050 26,071,802 1,411,543 83,986,293 Investments in associates - - - - - 30,519 - 30,519 Sub-total assets 16,491,371 9,242,471 2,248,909 11,312,147 17,208,050 26,102,321 1,411,543 84,016,812 Unallocated assets 4,011,384 Elimination of intersegment balances (5,266,741) Total assets 82,761,455 Segment liabilities 6,633,835 494,829 172,030 258,873 1,841,996 8,197,660 301,595 17,900,818 Sub-total liabilities 6,633,835 494,829 172,030 258,873 1,841,996 8,197,660 301,595 17,900,818 Unallocated liabilities 35,143,641 Elimination of intersegment balances (5,266,741) Total liabilities 47,777,718 Capital expenditures (Notes 7, 8, 31) 1,807,463 111,853 81,044 961,496 731,027 2,198,714 161,935 6,053,532 Goodwill acquired (Notes 9, 31) - - 13,668 - 330,637 59,058 - 403,363 Goodwill written off at the sale of an interest in a subsidiary (Notes 9) - - - (265,100) - - - (265,100)


26

6 Segment information (continued) Segment assets and liabilities at 31 December 2007 and capital expenditures for the year ended 31 December 2007 include the following:

Coal mining and coke

production Production of

nickel


metallurgy articles

(chrome)



cast iron

Production of steel Other Total

Segment assets 16,433,712 13,347,288 2,261,686 11,458,985 14,980,760 20,109,264 1,202,751 79,794,446 Investments in associates - - - - - 18,586 - 18,586 Sub-total assets 16,433,712 13,347,288 2,261,686 11,458,985 14,980,760 20,127,850 1,202,751 79,813,032 Unallocated assets 3,163,490 Elimination of intersegment balances (6,771,123) Total assets 76,205,399 Segment liabilities 5,521,323 417,285 403,061 126,562 1,032,282 7,934,087 278,197 15,712,797 Sub-total liabilities 5,521,323 417,285 403,061 126,562 1,032,282 7,934,087 278,197 15,712,797 Unallocated liabilities 37,572,382 Elimination of intersegment balances (6,771,123) Total liabilities 46,514,056 Capital expenditures (Notes 7, 8, 31) 2,233,246 309,108 79,860 371,972 10,359,602 9,353,560 275,176 22,982,524 Capital expenditures related to discontinued operations 99,960 Goodwill acquired (Notes 9, 31) - 70 - 911,593 1,886,990 - 45,562 2,844,215 Goodwill acquired related to discontinued operations (Note 9) 14,997 Goodwill written off at the sale of a subsidiary (Notes 9, 32) (882,983)


27

6 Segment information (continued) Segment revenue from external customers by customers’ geographical location:

For the year ended 31 December 2008 For the year ended 31 December 2007

Continuing operations Total

Continuing operations


Russia 15,210,347 15,210,347 22,054,028 665,971 22,719,999 Western and Central Europe 56,465,345 56,465,345 21,544,376 3,483,712 25,028,088 Other 4,963,913 4,963,913 2,778,900 249,210 3,028,110 Total 76,639,605 76,639,605 46,377,304 4,398,893 50,776,197

The total carrying amount of segment assets by geographical location:

31 December 2008 31 December 2007 Russia 51,247,862 51,332,340 Western and Central Europe 30,888,371 24,388,385 Other 625,222 484,674 Total 82,761,455 76,205,399

The total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant and equipment, intangible assets):

For the year ended 31 December 2008 For the year ended 31 December 2007

Continuing operations Total Continuing operations


Russia 3,846,585 3,846,585 13,614,991 99,960 13,714,951 Western and Central Europe 2,198,322 2,198,322 9,367,533 - 9,367,533 Other 8,625 8,625 - - - Total 6,053,532 6,053,532 22,982,524 99,960 23,082,484


28

7 Property, plant and equipment

Land Buildings Installations Plant and

equipment Transport

vehicles Construction

in progress Other Total Cost at 31 December 2007 1,644,224 7,138,253 10,346,097 9,543,072 1,433,359 6,235,359 351,880 36,692,244

Additions through acquisitions of subsidiaries (Note 31) 17,270 59,457 - 29,671 10,074 16,813 1,814 135,099 Additions 2,203 32,937 368,526 334,909 104,306 5,035,062 22,115 5,900,058 Transfers 2,939 1,163,171 871,422 2,129,843 398,087 (4,621,743) 56,281 - Disposals - (162,527) (115,806) (167,350) (60,041) (29,113) (13,582) (548,419) Effect of changes in exchange rates 186,005 475,130 146,827 564,534 39,404 304,297 33,134 1,749,331 Cost at 31 December 2008 1,852,641 8,706,421 11,617,066 12,434,679 1,925,189 6,940,675 451,642 43,928,313 Accumulated depreciation Accumulated depreciation at 31 December 2007 - (722,474) (865,920) (2,360,755) (255,507) - (88,435) (4,293,091) Depreciation charges - (440,293) (1,164,236) (1,524,834) (218,660) - (72,881) (3,420,904) Accumulated depreciation related to disposals - 53,658 13,068 98,383 46,144 - 8,633 219,886 Effect of changes in exchange rates - (64,203) (31,622) (113,873) (10,214) - (9,145) (229,057) Accumulated depreciation at 31 December 2008 - (1,173,312) (2,048,710) (3,901,079) (438,237) - (161,828) (7,723,166) Net book value at 31 December 2007 1,644,224 6,415,779 9,480,177 7,182,317 1,177,852 6,235,359 263,445 32,399,153 Net book value at 31 December 2008 1,852,641 7,533,109 9,568,356 8,533,600 1,486,952 6,940,675 289,814 36,205,147


29

7 Property, plant and equipment (continued)

Land Buildings Installations Plant and

equipment Transport

vehicles Construction

in progress Other Total Cost at 31 December 2006 374,862 2,426,639 2,278,997 4,434,004 630,098 4,053,315 137,163 14,335,078

Additions through acquisitions of subsidiaries (Note 31) 1,227,913 4,019,959 5,393,262 3,437,122 600,781 2,934,581 141,582 17,755,200 Additions 134 26,257 511,799 599,163 133,763 3,792,229 79,328 5,142,673 Transfers 13,072 823,380 2,226,391 1,334,842 113,703 (4,524,841) 13,453 - Disposals (664) (73,051) (46,425) (146,365) (41,339) (35,136) (5,084) (348,064) Disposals through sale of subsidiaries (Note 32) - (149,149) (33,715) (174,171) (8,860) (33,738) (18,079) (417,712) Effect of changes in exchange rates 28,907 64,218 15,788 58,477 5,213 48,949 3,517 225,069 Cost at 31 December 2007 1,644,224 7,138,253 10,346,097 9,543,072 1,433,359 6,235,359 351,880 36,692,244 Accumulated depreciation Accumulated depreciation at 31 December 2006 - (496,275) (552,101) (1,721,823) (165,955) - (50,412) (2,986,566)

Depreciation charges

- (262,621) (355,512) (814,458) (119,761) - (58,978) (1,611,330) Accumulated depreciation related to disposals - 26,215 29,254 105,733 26,445 - 8,207 195,854 Accumulated depreciation related to disposals of subsidiaries (Note 32)

-

14,025 14,639 76,551 4,418 - 13,454 123,087 Effect of changes in exchange rates - (3,818) (2,200) (6,758) (654) - (706) (14,136) Accumulated depreciation at 31 December 2007 - (722,474) (865,920) (2,360,755) (255,507) - (88,435) (4,293,091) Net book value at 31 December 2006 374,862 1,930,364 1,726,896 2,712,181 464,143 4,053,315 86,751 11,348,512 Net book value at 31 December 2007 1,644,224 6,415,779 9,480,177 7,182,317 1,177,852 6,235,359 263,445 32,399,153 During the year ended 31 December 2008 a depreciation expense of RR 2,960,925 (2007: RR 1,314,346) was included in the cost of products sold, a depreciation expense of RR 393,569 (2007: RR 164,726) was included in general and administrative expenses and depreciation expense of RR 66,410 (2007: RR 132,258) was capitalised.


30

8 Other intangible assets Reconciliation of other intangible assets is provided below:

Year ended

31 December 2008 Year ended

31 December 2007 Cost as at the beginning of the year 13,254,789 13,070,178 Accumulated amortisation and impairment (754,273) (328,354) Net book value as at the beginning of the year 12,500,516 12,741,824 Acquisitions through business combinations (Note 31) 1,901 149,238 Additions 16,474 35,373 Amortization charge (552,224) (549,677) Loss on disposal (5) (14) Effect of changes in exchange rates 7,694 1,018 Other (24) 122,754 Net book value at the end of the year 11,974,332 12,500,516 Cost as at the end of the year 13,280,834 13,254,789 Accumulated amortisation and impairment (1,306,502) (754,273)

Information on the carrying amount of each significant individual intangible asset and the remaining amortisation period is provided below:

Remaining amortisation

period

Carrying amount



Licence for underground coal mining at Abramovsky area of Glushinsky coal field (Romanovskaya-1 mine) 14 80,169 86,180 Coal mining licence at Nikitinsky coal area-2 17 2,041,418 2,041,418 Licence to produce silicate cobalt nickel ore 20 4,989,848 5,259,341 Licence to produce ferruginous quartzite from Korobkovsky mine 17 4,660,130 4,934,786 Customer lists 137,173 137,173 Computer software 64,935 41,033 Other 659 585 Total 11,974,332 12,500,516

The coal mining licence at Nikitinsky coal area-2 is not being amortised as mining at the area has not commenced.


31

9 Goodwill Movement of goodwill arising on acquisition of subsidiaries is provided below:

Note Year ended


31 December 2007 Net book value as at the beginning of the year 7,240,152 5,263,923 Acquisition of OAO Tulachermet 31 - 1,886,990 Acquisition of additional shares of ОАО Ufaleynickel from minority shareholders - 70 Acquisition of additional shares of ОАО Tulachermet from minority shareholders 1 330,637 - Acquisition of additional shares of OAO Polema and increase of effective ownership in Polema S.A. 1 13,668 - Acquisition of ODPAD 1 59,058 - Sale of an interest in OAO Kombinat KMA Ruda 1 (265,100) - Acquisition of additional shares of OAO Kombinat KMA Ruda from minority shareholders - 911,593 Acquisition of additional shares of OAO Vanadiy-Tula from minority shareholders -

14,997

Acquisition of additional shares of ZAO Krontif-Centre from minority shareholders - 45,562 Sale of OAO Vanadiy-Tula 32 - (882,983) Net book value at the end of the year 7,378,415 7,240,152 Gross book value at the end of the year 7,378,415 7,240,152

Testing goodwill for impairment Goodwill is allocated to the following cash-generating units (CGUs), which represent the lowest level within the Group at which the goodwill is monitored by management and which are not larger than a segment:

31 December 2008 31 December 2007 OAO Polema and Polema S.A. 994,082 980,414 ZAP PO Rezhnickel and OOO Belyi Kamen 449,879 449,879

OAO Ufaleynickel 645,921 645,921 OAO Kombinat KMA Ruda 2,876,701 3,141,801 ZАО Sibirskie Resursy 89,585 89,585 ZAO Krontif-Center 45,562 45,562 OAO Tulachermet 2,217,627 1,886,990 ODPAD 59,058 - Total net book value of goodwill 7,378,415 7,240,152

The recoverable amount of each CGU was determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a four to five-year period through 2012 or 2013 inclusive. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rates do not exceed the long-term average growth rate for the business sector of the economy in which the CGU operates. Assumptions used for value-in-use calculations for which the recoverable amount is most sensitive were: 31 December 2008 31 December 2007 Growth rate beyond five years 3% p.a. 3% p.a. Pre-tax discount rate 9-21% p.a. 20-22% p.a.

Management determined budgeted gross margin based on past performance and its market expectations. The weighted average growth rates used are consistent with forecasts in industry reports. Value-in-use calculated on the basis of the above assumptions for all CGUs exceeds the book value of assets (including allocated goodwill). Consequently, there are no grounds to recognise any goodwill impairment. Management believes that a reasonable change in the pre-tax discount rate would not impair goodwill.


32

10 Investments in associates



Balance as at the beginning of the year 18,586 1,578,982 Share of net result of associates for the year 7,986 262,314 Acquisition of associates through acquisition of subsidiaries - 18,402 Reclassification to subsidiaries - (1,841,421) Effect of changes in exchange rates 3,947 309 Balance as at the end of the year 30,519 18,586

In 2007 control was obtained over OAO Tulachermet, which resulted in the reclassification of investments amounting to RR 1,841,421 from associates to subsidiaries (see Note 31). 11 Inventories

31 December 2008 31 December 2007 Raw materials, materials and supplies held for production purposes 5,367,727 4,789,535 Work in progress 1,651,339 2,008,484 Finished goods 2,705,050 2,547,230 Total inventories 9,724,116 9,345,249 Materials and supplies held for production purposes are recorded at net realisable value less provision for impairment and amounted to RR 280,984 as at 31 December 2008 (31 December 2007: RR 325,833). 12 Current loans issued

31 December 2008

Effective interest rate 31 December 2007

Effective interest rate

Loans issued to related parties and denominated in roubles (Note 33) 703,000 6% - 10% 1,358,100 8%-9.5% Other loans issued in roubles 3,140 8% 1,618 8% Loans issued to related parties and denominated in euros (Note 33) 1,036,028 6.75% - 7% - - Other loans issued in euros 1,663 3.6% 5,155 4% Total current loans issued 1,743,831 - 1,364,873 -

13 Non-current loans issued

31 December 2008

Effective interest rate 31 December 2007


Loans issued to related parties and denominated in roubles (Note 33) 76,000 7.7%- 9.5% 94,900 9.5% Total non-current loans issued 76,000 - 94,900 - 14 Trade and other receivables and advances issued

31 December 2008 31 December 2007 Trade receivables (net of impairment amounting to RR 76,851 as at 31 December 2008; RR 77,583 as at 31 December 2007) 6,432,474 4,645,428 Trade receivables from related parties (net of impairment amounting to RR 72 as at 31 December 2008; RR 72 as at 31 December 2007) 242,421 301,169 Other accounts receivable (net of impairment amounting to RR 56,229 as at 31 December 2008; RR 99,946 as at 31 December 2007) 941,549 354,379 Other accounts receivable from related parties 1,252 5,005 Interest on loans issued (net of impairment amounting to RR 20,827 as at 31 December 2008; RR 17,643 as at 31 December 2007) 75,235 70,764 Total trade and other receivables 7,692,931 5,376,745 Advances issued 1,322,194 1,201,627 Less impairment (2,560) (2,514) Total advances issued 1,319,634 1,199,113


33

15 Cash and cash equivalents

16 Share capital As of 31 December 2008 and 2007 share capital authorised, issued and paid in totalled RR 213,427. As a result of share conversion following a share split the share capital consisted of 330,046,400 ordinary shares (31 December 2007: 1,650,232 ordinary shares). Nominal value per share is RR 0.1 (31 December: RR 20). 17 Retained earnings Russian statutory financial statements are the basis for the Company’s profit distribution and other appropriations. The basis of distribution is defined by Russian legislation as a company’s net profit. The net profit recognised in the Company’s published Russian statutory financial statements for the year ended 31 December 2008 was RR 3,265,953 (2007: RR 4,091,910) and the accumulated profit after dividends as at 31 December 2008 was equal to RR 12,512,589 (31 December 2007: RR 11,246,716). However, legislation and other statutory laws and regulations dealing with profit distribution are open to legal interpretation and, accordingly, management believes that at present it would not be appropriate to disclose the amount for distributable reserves in these consolidated financial statements. During 2008 dividends were declared in the amount of RR 2,000,081 (RR 1212.00 per share). Dividends in the amount of RR 537,036 were paid during 2008. During 2007 dividends were declared in the amount of RR 700,028 (RR 424.00 per share). Dividends in the amount of RR 713,734 were paid during 2007. 18 Provision for restoration liability The table below summarises movements in the provision for restoration liability:

A provision for restoration liability in the amount of RR 19,800 as at 31 December 2008 was recorded for the net present value of the estimated future obligation to restore land around the Vakhrusheva coal mine. On 31 August 2002 the Group received a licence (No. KEM00943 PP) to restore the Vakhrusheva coal mine. The licence holder has the right to extract coal of up to 670 thousand tonnes annually. The licence was extended through 2020. Management has estimated the restoration liability through 2020 based on their interpretation of the licence agreement and environmental legislation and in accordance with IAS 37 Provisions, Contingent Liabilities And Contingent Assets. The real rate used to calculate the net present value of the restoration liability at 31 December 2008 was 17% (31 December 2007: 7%), which is a pre-tax real rate and considered appropriate for the Group given the economic environment in Russia at the balance sheet date. The related asset of RR 61,642 at 31 December 2008 (31 December 2007: RR 85,933) was recorded as installations within property, plant and equipment at the net book value.

31 December 2008 31 December 2007 RR bank deposits 392,531 1,209,503 Bank deposits in foreign currencies 23,481 1,099,073 RR denominated cash in hand and bank balances 71,293 237,477 Bank balances denominated in foreign currencies 1,447,440 376,836 Other cash 1,150 - Total cash and cash equivalents 1,935,895 2,922,889



Balance as at 1 January 296,812 51,004

Acquisition of restoration liability through business combination - 214,482

Restoration costs during the year (1,188) (2,882)

Increase in the provision 6,070 6,892

Change in provision for restoration liabiliy due to change of estimates (74,167) 22,787 Exchange difference 32,639 4,529 Total 260,166 296,812 Less current part of the provision (3,062) (7,692) Long-term provision for restoration liability as at 31 December 257,104 289,120


34

18 Provision for restoration liability (continued) A provision for restoration liability of RR 240,366 as at 31 December 2008 was recorded for the net present value of the estimated future obligation to restore land near the Sava River and land polluted with white slag as well as noise insulation restoration works in Slovenia. The real rate used to calculate the net present values of the restoration liability as at 31 December 2008 was 3.2% (31 December 2007: 3.2%), which is a pre-tax real rate and considered appropriate for the Group given the economic environment in Slovenia at the balance sheet date. As at 31 December 2008 the provision significantly decreased due to changes in estimates made by the Group’s management as a result of changes in Slovenian legislation. 19 Borrowings Short-term borrowings and current portion of long-term borrowings Loans and borrowings by type may be analysed as follows:

31 December 2008


31 December 2007


RR denominated bank loans, fixed 3,210,999 10.3%-18.0%

4,446,537

7.0%-11%

RR denominated bank loans, variable - -

740,000

8.65%-9.68%

RR denominated bank overdraft, fixed 299,815 12.0%-13.7%

1,198,263

7.0%-10.0%

RR denominated bank overdraft, variable - -

189,204

6.8%

Other RR denominated borrowings, fixed 38,892 9.8%-10.0%

120,750

8.2%-9.8%

EUR denominated bank loans, fixed 470,897 1.5-11.3%

170,837

1.5-5%

EUR denominated bank loans, variable 3,995,467 3.3%-6.4%

1,822,115

4.1%-6.7%

EUR denominated bank overdraft, variable 432,933 3.7%-4.6%

78,741

4.1%-4.8%

USD denominated bank loans, fixed 3,926,156 3.82%-13.50%

759,344

6.8%-9.2%

USD denominated bank loans, variable 419,798 4.5%-5.8%

1,084,221

6.3%-8.64%

Other USD denominated borrowings, fixed - -

115,367

3%

Short-term borrowings and current portion of long-term borrowings 12,794,957

10,725,379

Current portion of the financial lease liabilities, RR 120 323 Current portion of the financial lease liabilities, EUR 74,740 51,134

Total short term borrowings and current portion of long-term borrowings 12,869,817 10,776,836 10,776,836

As at 31 December 2008 short-term borrowings of RR 8,193,394 (as at 31 December 2007: RR 3,994,659) were secured by assets of the Group. As separate loan agreements do not specify individual pledged assets, the carrying amount of pledged assets is not disclosed in these consolidated financial statements.


35

19 Borrowings (continued)



Short-term borrowings as at the beginning of the year 10,776,836 5,649,913 Acquired through business combination 27,654 5,273,705 Reclassification of current portion of long-term borrowings 7,498,761 2,046,015 Loans received 21,894,100 19,256,921 Loans repaid (28,326,837) (20,760,960) Non-cash repayment of loans - (723,282) Exchange differences 1,846,643 (23,033) Overdraft received 24,408,638 15,814,697 Overdraft repaid (25,195,545) (15,757,094) Short-term financial lease liablilities received 1,466 347 Short-term financial lease liabilities repaid (61,899) (393)

Total short-term borrowings and current portion of long-term borrowings as at the end of the year 12,869,817 10,776,836

The amount of borrowings acquired through business combination excludes amounts that were granted to newly acquired subsidiaries prior to their consolidation. These amounts have been eliminated on consolidation of these subsidiaries. Long-term borrowings

31 December 2008


31 December 2007


RR denominated bank loans, fixed 2,068,000 15.0%-18.0% 1,832,811

9.75%-10.0%

Other RR denominated borrowings, fixed 40,000 9.8% 76,000

7.8%-9.8% EUR denominated bank loans, fixed 184 3.6% 62,591 1.5%-8.5% EUR denominated bank loans, variable 6,291,570 4.5%-7.1% 5,763,717 5.5%-6.7%

USD denominated bank loans, fixed - - 126,413

8.8%

USD denominated bank loans, variable - - 2,331,889

6.5%-8.6%

Other USD denominated borrowings, fixed 240,919 3.0% 85,912

3.0%

Total long-term borrowings 8,640,673 10,279,333

Long-term financial lease liabilities, RR -

120

Long-term financial lease liabilities, euros 287,693

187,682

Total long-term borrowings 8,928,366 10,467,135


36

19 Bor rowings (continued)



Long-term borrowings as at the beginning of the year 10,467,135 3,127,342 Acquired through business combinations 6,321 4,530,777 Long-term loans received 6,131,691 14,712,425 Long-term loans repaid (1,315,146) (10,024,438) Reclassification of current portion of long-term borrowings (7,498,761) (2,046,015) Exchange difference 1,000,009 156,278 Amortisation of discount - 2,559 Long-term financial liabilities received 137,117 67,770 Long-term financial lease liabilities repaid - (59,563)

Long-term borrowings as at the end of the year 8,928,366 10,467,135 Borrowings of the Group are due for repayment as follows: 31 December 2008 31 December 2007

Borrowings to be repaid - within one year 12,869,817 10,776,836 - between one and five years 5,122,052 7,439,870 - after five years 3,806,314 3,027,265 Total borrowings 21,798,183 21,243,971

As at 31 December 2008 long-term borrowings of RR 8,083,673 (as at 31 December 2007: RR 6,901,432) were secured by assets of the Group.



Commodity loan as at the beginning of the year 2,002,639 2,479,914 Interest on discounting commodity loan 186,410 255,900 Fair value adjustment of commodity loan (739,406) 262,880 Cash repayment of commodity loan (167,775) (82,958) Non-cash repayment of long-term part of commodity loan (350,664) (913,097)

Commodity loan as at the end of the year 931,204 2,002,639

Less current portion of commodity loan (241,630) (362,931)

Long-term portion of commodity loan as at the end of the year 689,574 1,639,708 The commodity loan of the Group is due for repayment as follows: 31 December 2008 31 December 2007

Commodity loan to be repaid - within one year 241,630 362,931 - between one and five years 689,574 1,525,681 - after five years - 114,027 Total commodity loan 931,204 2,002,639

The commodity loan relates to an arrangement in which one of the Group’s subsidiaries owes the Russian government 3,194 tonnes of nickel and 154 tonnes of cobalt or the cash equivalent. According to the agreed schedule, this is repayable from 2009 to 2013. The Group has estimated the liability using forward commodity prices and discounted this obligation to its present value at the rate of 17% (10% as at 31 December 2007).


37

20 Trade and other payables

31 December 2008 31 December 2007 Financial liabilities Trade payables 6,479,141 4,366,662 Accounts payable – related parties 39,189 229,506 Bank interest payable 341,615 314,539 Dividends payable 1,514,200 51,155 Other accounts payable 348,392 134,993 Total financial liabilities 8,722,537 5,096,855 Non-financial liabilities Wages and salaries payable 703,902 797,663 Advances received 362,087 299,298 Total non-financial liabilities 1,065,989 1,096,961 Total trade and other payables 9,788,526 6,193,816 21 Other taxes payable

31 December 2008 31 December 2007 VAT 272,031 180,531 Individual income tax 171,060 181,268 Unified Social Tax 104,301 162,050 Property tax 58,643 45,604 Other taxes 36,457 47,329 Total taxes other than income tax payable 642,492 616,782 22 Bond loans On 22 March 2007 the Group issued bonds with a value of RR 5 billion. These bonds are repayable in five years. These bonds have an annual interest rate of 8.7%, payable every six months. The bonds were issued at nominal value. On 20 July 2006 the Group issued bonds with a value of RR 3 billion. These bonds are repayable in three years. These bonds have an effective annual interest rate of 8.95%, payable every six months. The bonds were issued at nominal value.


38

23 Revenue

Year ended


31 December 2007 Sales in Russia: Sales of coke 4,746,171 8,593,208 Sales of coal and coal concentrate 2,886,118 2,233,117 Sales of nickel 2,460,936 5,277,839 Sales of cast iron 1,926,822 - Sales of cast-iron ware 1,406,951 1,148,689 Sales of powder metallurgy products 461,835 449,283 Sales of granulated cast iron 381,968 - Sales of services 381,712 312,913 Sales of metallurgy products 79,562 - Sales of iron ore concentrate 5,413 3,493,570 Sales of coal reprocessing services 671 826 Sales of cobalt concentrate reprocessing services - 232,569

Sales of chrome processing services - 3,704 Other sales 472,188 308,310 Total sales in Russia 15,210,347 22,054,028 Sales to other countries: Sales of cast iron 30,476,834 - Sales of metallurgy products 25,524,571 14,766,405 Sales of nickel 3,352,844 7,397,752 Sales of coke 1,141,638 780,634 Sales of chrome 352,683 360,918 Sales of powder metallurgy products 306,890 332,071 Sales of cast-iron ware 184,486 171,816 Sales of granulated cast iron 62,687 - Sales of coal concentrate 9,217 494,054 Other sales 17,408 19,626 Total sales to other countries 61,429,258 24,323,276

Total sales revenues 76,639,605 46,377,304 24 Cost of sales

Year ended


31 December 2007 Raw materials and supplies 41,522,476 20,107,417 Wages and salaries including associated taxes 6,130,501 4,185,636 Energy 3,023,383 2,048,070 Depreciation of property, plant and equipment 2,960,925 1,314,346 Other expenses 1,487,022 2,375,141 Other services 802,414 358,602 Changes in finished goods 630,423 (45,560) Amortisation of intangible assets 548,910 545,345 Total of cost of sales 57,106,054 30,888,997


39

25 Taxes other than income tax

Year ended


31 December 2007 Property tax 214,624 117,311 Mineral resources extraction tax 212,449 123,931 Land tax 175,322 72,132 Penalties and fines (6,375) 5,947 Other taxes 117,054 52,561 Total taxes other than income tax 713,074 371,882

26 Distribution costs

Year ended


31 December 2007 Transportation services 1,060,281 539,833 Other selling expenses 1,352,348 755,816 Total distribution costs 2,412,629 1,295,649

27 General and administrative expenses Year ended


31 December 2007 Wages and salaries including associated taxes 2,610,247 1,634,131 Other purchased services 479,407 316,590 Depreciation of property, plant and equipment 393,569 164,726 Materials 160,855 90,653 Amortisation of intangible assets 3,314 4,332 Other 454,304 337,074 Total general and administrative expenses 4,101,696 2,547,506

28 Other (expense)/income, net

Year ended


31 December 2007 (Loss)/Gain on financial assets at fair value through profit and loss (121,220) 467,900 Social payments and charity (281,933) (263,545) (Increase)/Decrease of bad debt provision (33,973) 86,477 (Increase)/Decrease of obsolete stock provision (88,743) 36,039 Decrease/(Increase) of other provisions 52,505 (57,724) Loss on disposal of property, plant and equipment (245,682) (30,872) Loss on disposal of intangible assets (5) (14) Dividend income 1,260 742 Other operating income/(expense) 126,155 (52,588) Total other (expense)/income, net (591,636) 186,415

29 Finance income

Year ended


31 December 2007 Interest income 226,619 180,430 Other finance income 209 7,126

Total finance income 226,828 187,556


40

30 Income tax expense Income tax expense recorded in the income statement comprises the following:

Year ended


31 December 2007 Current income tax expense 2,867,578 2,700,795 Withholding tax 62,706 10,150 Accrual/(reversal) of income tax provision 78,675 13,224 Effect of income tax rate change (322,344) - Deferred income tax benefit (651,237) (561,545)

Income tax expense 2,035,378 2,162,624 The income tax rate applicable to the Group’s subsidiaries registered in Russia income is 24% (2007: 24%). The income tax rate applicable to the subsidiaries registered in Slovenia ranges from 20% to 22% (2007: from 20% to 22%). A reconciliation between the expected and the actual taxation charge is provided below.

Year ended


31 December 2007 Profit before tax 11,127,428 12,000,445 Theoretical tax charge at statutory rate of 24% 2,670,583 2,880,107 Tax effect of items which are not tax deductible/exempt:

Provision for income tax and other taxes 78,675 13,224 Loss on financial assets at fair value through profit and loss 20,874 - Provision for other taxes 9,340 11,290 Charity payments 67,664 63,251 Excess of fair value of net assets acquired over cost of investments (529,564) (509,260) Changes in fair value of commodity loan (177,457) 63,091 Other non-deductible expenses, net 101,144 (91,640)

Derecognition of deferred tax liability related to associates over which control was achieved - (223,664)

Foreign entitities taxation at lower income tax rate (29,773) (53,925) Foreign entitities losses carried forward 83,530 - Withholding tax 62,706 10,150 Effect of income tax rate change (322,344) -

Total income tax expense 2,035,378 2,162,624


41

30 Income tax expense (continued) In November 2008, the Russian Federation reduced the standard corporate income tax rate from 24% to 20% with effect from 1 January 2009. The impact of the change in tax rate presented above represents the effect of applying the reduced 20% tax rate to deferred tax balances at 31 December 2008.

31 December

2007

Charged to statement of

income Charged to

equity

Business

combinations

Exchange difference

(capital) 31 December

2008

Deferred income tax liabilities

Property, plant and equipment 2,743,047 (457,949) (184,766) - 5,593 2,105,925

Capital repair tax provision 221,212 (5,966) - - - 215,246

Investments in associates 1,170

(195) - - -

975

Intangible assets 2,479,570 (248,870) (205,330) - - 2,025,370

Inventories 50,537 (4,595) - - - 45,942 Available-for-sale financial assets - - 3,740 - 515 4,255

Other 2,508 (1,718) - - 89 879

Gross deferred income tax liabilities 5,498,044 (719,293)

(386,356)

-

6,197 4,398,592

Provision for restoration liability (25,364)

5,210

-

-

(2,482)

(22,636)

Property, plant and equipment (49,883) (7,213) - - - (57,096)

Losses carried forward (291,272) (236,341) - - (1,549) (529,162)

Inventories (13,596) (22,872) - - (527) (36,995)

Accounts receivable (89,468) (28,333) - - (1,434) (119,235)

Long-term investments (32,370) 32,370 - - - -

Accounts payable (54,008) (340) - - - (54,348)

Pension liability (52,199) (5,129) - (239) (8,736) (66,303)

Available-for-sale financial assets (7,774) 1,296 - - - (6,478)

Other (31,912) 7,064 - - (2,119) (26,967) Gross deferred income tax assets (647,846) (254,288)

- (239)

(16,847) (919,220)

Net deferred income tax liabilities 4,850,198 (973,581)

(386,356)

(239)

(10,650) 3,479,372


42

30 Income tax expense (continued) Comparative information

31 December

2006

Charged to

statement of income

Discontinued operations

Disposal of subsidiary

Business

combinations

Exchange difference

(capital) 31 December

2007

Deferred income tax liabilities

Property, plant and equipment 822,174 54,176 10,504 (24,889) 1,881,082 - 2,743,047

Capital repair tax provision - - - - 221,212 - 221,212 Available-for-sale financial assets 37,233 (37,233) - - -

- -

-

Investements in associates 179,830 (178,660) - -

-

- 1,170

Intangible assets 2,591,958 (145,369) - - 32,981 - 2,479,570

Accounts receivable 5,617 (5,617) - - -

- -

Inventories 14,782 12,147 - - 23,608 - 50,537

Other 3,871 (1,382) - - 19 - 2,508

Gross deferred income tax liabilities 3,655,465 (301,938) 10,504 (24,889)

2,158,902

- 5,498,044

Deferred income tax assets

Provision for restoration liability (12,580) 3,019 - -

(15,803)

- (25,364)

Property, plant and equipment (22,357) (27,526) - - - - (49,883)

Intangible assets (16,569) 16,569 - - - - -

Losses carried forward (71,836) (215,827) - -

(3,609)

- (291,272)

Inventories (22,573) 19,539 (871) 498 (10,189) - (13,596)

Accounts receivable (55,829) (17,104) (195) 2,472

(18,812)

- (89,468)

Long-term investments (12,205) (20,165) - - - - (32,370)

Accounts payable (44,141) (139) 862 1,689

(12,279)

- (54,008)

Pension liability - (4,885) - - (47,314) - (52,199) Available-for-sale financial assets - (7,774) (7,774)

Other (16,949) (5,314) - 1,290 (7,131) (3,808) (31,912) Gross deferred income tax assets (275,039) (259,607) (204) 5,949

(115,137)

(3,808) (647,846)

Net deferred income tax liabilities 3,380,426 (561,545) 10,300 (18,940)

2,043,765

(3,808) 4,850,198

31 December 2008 31 December 2007 Long-term deferred income tax asset (196,561) (195,663) Long-term deferred income tax liability 3,675,933 5,045,861 Net deferred income tax liability 3,479,372 4,850,198

At 31 December 2008 the Group did not record deferred tax liabilities for taxable temporary differences of RR 11,193,631 (31 December 2007: RR 4,338,951) related to investments in subsidiaries, as the Company is able to control the reversal of temporary differences and does not intend to realise them in foreseeable future. At 31 December 2008 the Group has a non-recognised potential deferred tax assets of EUR 16,413,875 (31 December 2007: EUR 16,786,114) in respect of unused tax loss carry forwards of EUR 82,069,374 (31 December 2007: EUR


43

30 Income tax expense (continued) 83,930,570). The tax loss carry forward is related to SIJ – Slovenska industrija jekla, d.d. and may be carried forward indefinitely. 31 Business combinations In 2008 the Group obtained control over ODPAD (Slovenia) by acquiring a 75% ownership interest in ODPAD (Slovenia) through SIJ – Slovenska industrija jekla, d.d. (Slovenia). Therefore, the Group’s effective ownership interest in ODPAD amounted to 54%. The total cost of this transaction on the date of transferring control amounted to EUR 4,980,850 and was paid in 2008. Control was gained on 28 April 2008; therefore, the acquisition method of accounting was used to account for the acquisition since that date. From the date of acquisition through 31 December 2008, the acquired entity contributed RR 284,598 to the Group’s revenue and RR 2,361 to net profit. If the acquisition had occurred on 1 January 2008, the Group’s revenue for 2008 would have been RR 77,077,504 and net profit from continuing operations would have been RR 9,112,281. Below is the information about the acquired assets and liabilities as well as goodwill arising on the acquisition of ODPAD.

Fair value Cash and cash equivalents 765 Trade and other receivables 87,920 Intangible assets 1,901 Inventories 58,364 Property, plant and equipment 135,099 Deferred tax asset 239 Borrowings (33,975) Trade and other payables (56,071) Taxes payable (8,723) Pension liability (1,136) Government subsidy (7,849) Fair value of net assets of the subsidiaries 176,534 Less: minority interest (51,851) Fair value of the acquired share in net assets of the subsidiary 124,683 Goodwill related to acquisition 59,058 Total purchase consideration 183,741 Less: cash and cash equivalents held by the acquired subsidiary (765) Outflow of cash and cash equivalents on acquisition 182,976

Comparative information During the year ended 31 December 2008 the Group’s management finalised the allocation of the cost of acquisition of SIJ – Slovenska industrija jekla, d.d. (Slovenia) and OAO Tulachermet. Comparative information has been revised as if accounting for the acquisition of these companies had been finalised on the date of acquisition. SIJ – Slovenska industrija jekla, d.d. (Slovenia) In 2007 the Group obtained control over SIJ – Slovenska industrija jekla, d.d. that controls a number of entities and has one associate, all of which are engaged in the production of steel and various downstream activities. Control was obtained on 23 April 2007 through acquisition of a 55.35% interest in SIJ – Slovenska industrija jekla, d.d. by Dilon d.o.o. (a Group subsidiary located in Slovenia, with an effective ownership of 79%), resulting in an effective ownership of 44% in SIJ - Solvenska industrija jekla, d.d. Dilon d.o.o. acquired this initial 55.35% interest through an open international tender organised by the government of Slovenia in accordance with its privatisation plan. Total cost of this acquisition on the date of the transfer of control was EUR 105,000,000. The acquisition method of accounting has been applied as of that date. The Group is potentially committed through a put option to acquire an additional 25% interest in SIJ – Slovenska industrija jekla, d.d. within five years at the minimum price of EUR 190.7319 per share. The Group has assessed the obligation to be equal to EUR 47,426,000 and has consequently recorded an obligation for this amount within current liabilities. A corresponding reduction in minority interest has also been recorded. Consequently, minority interest reflects


44

31 Business combinations (continued) the aggregation of the portion of profit or loss and net assets of subsidiaries that are not owned, either directly or indirectly, by the parent less the initial estimate of this obligation. For the period from the acquisition date through 31 December 2007, the acquired entity contributed RR 14,766,405 to the Group’s revenue and RR 1,090,321 to net profit. If the acquisition had occurred on 1 January 2007, the Group’s revenue for 2007 would have been RR 55,384,596 and net profit from continuing operations would have been RR 10,640,848. The table below contains fair values of assets and liabilities acquired through business combinations and the resulting excess of fair value of net assets acquired over cost of investments.

Provisional fair value

estimates Adjustments Fair value Cash and cash equivalents 1,339,565 - 1,339,565 Restricted cash 5,516 - 5,516 Financial instruments 17,333 - 17,333 Loans issued 31,812 - 31,812 Trade and other receivables 6,761,313 - 6,761,313 Inventories 4,540,729 - 4,540,729 Investments an associates 18,402 - 18,402 Investments in other entities 23,790 - 23,790 Property, plant and equipment 6,992,081 541,001 7,533,082 Investment property 34,931 29,130 64,061 Intangible assets 11,754 - 11,754 Non-current assets held for sale 163,096 114,174 277,270 Deferred tax asset 96,096 - 96,096 Trade and other payables (4,533,229) - (4,533,229) Taxes payable (352,317) - (352,317) Borrowings (5,443,409) - (5,443,409) Deferred tax liability (19) (143,753) (143,772) Other liabilities (580,174) - (580,174) Fair value of net assets of the subsidiary 9,127,270 540,552 9,667,822 Less: minority interest (4,378,735) (304,191) (4,682,926) Fair value of the acquired share in net assets of the subsidiary 4,748,535 236,361 4,984,896 Excess of fair value of net assets acquired over cost of investments (1,066,679) (236,361) (1,303,040) Total purchase consideration 3,681,856 - 3,681,856 Less: cash and cash equivalents held by the acquired subsidiary (1,339,565) - (1,339,565) Outflow of cash and cash equivalents on acquisition 2,342,291 - 2,342,291

The excess of the fair value of net assets over the purchase consideration of the acquired subsidiaries is recognised directly in the consolidated statement of income. OAO Tulachermet In 2007 the Group, through a series of transactions, purchased an additional 26% interest (27% of voting shares) in ОАО Tulachermet, increasing an ownership interest from 36% interest (36% of voting shares) to 62% interest (63% of voting shares). The acquisition cost of this additional 26% share amounted to RR 3,714,922, all of which was paid during 2007. Control was obtained on 26 December 2007, and, accordingly, the purchase method of accounting has been applied as of this date. If the acquisition had occurred on 1 January 2007 the Group’s revenue for 2007 would have been RR 68,969,698 and net profit from continuing operations would have been RR 10,568,016. Below is the information about the acquired assets and liabilities as well as goodwill arising on the acquisition of ОАО Tulachermet.


45

31 Business combinations (continued)

Provisional fair value estimates Adjustments Fair value

Cash and cash equivalents 37,351 (5,004) 32,347 Trade and other receivables 2,788,640 (41,762) 2,746,878 Investments 758 7,063 7,821 Inventories 1,870,932 - 1,870,932 Property, plant and equipment 4,718,658 5,503,460 10,222,118 Intangible assets - 137,484 137,484 Deferred tax asset 19,057 (16) 19,041 Borrowings (4,298,267) - (4,298,267) Trade and other payables (956,919) (673) (957,592) Taxes payable (73,284) (1,404) (74,688) Deferred tax liability (443,559) (1,571,571) (2,015,130) Fair value of net assets of the subsidiaries 3,663,367 4,027,577 7,690,944 Less: minority interest (984,702) (1,527,070) (2,511,772) Less: post acquisition income of associate (625,704) 10,679 (615,025) Less: revaluation reserve - (1,556,831) (1,556,831) Less: pre share of (gain)/loss before acquisition of significant influence (31,562) 78,574 47,012 Fair value of the acquired share in net assets of the subsidiary 2,021,399 1,032,929 3,054,328 Goodwill arising on acquisition 2,919,919 (1,032,929) 1,886,990 Total purchase consideration 4,941,318 - 4,941,318 Less: acquisition cost of the acquired entity prior to obtaining control (1,226,396) - (1,226,396) Less: cash and cash equivalents held by the acquired subsidiary (37,351) 5,004 (32,347) Outflow of cash and cash equivalents on acquisition 3,677,571 5,004 3,682,575

Goodwill is the result of high profitability of the acquired company, expectations of significant synergies and reduction in costs. 32 Discontinued operations On 27 December 2007 the Group sold a 79% interest (92% of voting shares) in OAO Vanadiy-Tula. The table below includes information on assets and liabilities sold and the amount of the compensation due: Cash and cash equivalents 28,997 Property, plant and equipment 294,625 Inventories 337,863 Loans issued 105,000 Trade and other receivables 383,194 Deferred tax asset 5,949 Trade and other payables (874,211) Taxes payable (51,799) Tax provision (349,567) Current income tax (425,598) Deferred tax liability (24,889) Net assets of the subsidiary (570,436) Less: minority interest 133,474 Goodwill 882,983 Total book value of net assets disposed of 446,021 Gain on disposal of assets constituting discontinued operations 2,234,934 Total compensation for the assets disposed of 2,680,955 Less: cash and cash equivalents held by the subsidiary disposed of (28,997) Proceeds from disposal 2,651,958

The Group recognised a gain of RR 2,234,934 on the disposal of the subsidiary in the consolidated statement of income.


46

32 Discontinued operations (continued) The table below presents an analysis of results and information on net cash flows in respect of discontinued operations:

Year ended

31 December 2007 Revenue 4,398,893 Expenses (4,246,847)

Profit/(loss) on discontinued operations before income tax

152,046 Income tax expense (183,004)

Loss on discontinued operations for the year (30,958)

Year ended

31 December 2007 Gain on disposal of assets constituting discontinued operations 2,234,934 Income tax expense (357,250) Gain on disposal of assets constituting discontinued operations 1,877,684

Year ended

31 December 2007

Cash flow from operating activities

(283,547)

Cash flow from investment activities (including proceeds from sale of the subsidiary – RR 2,651,958)

4,916,431

Cash flow from financial activities

(2,121,004) Net increase/(decrease) in cash 2,511,880

33 Balances and transactions with related par ties Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Information about the parties who ultimately own and control the Company is disclosed in Note 1. Accounts receivable and accounts payable – related parties, as at 31 December 2008

Companies under

common control Associates

Shareholders Total Trade and other receivables: Trade and other receivables 147,941 94,480 - 242,421 Advances issued 69,798 - - 69,798 Other accounts receivable 1,252 - - 1,252 Loans issued 1,753,028 - 62,000 1,815,028 Interest on loans issued 76,230 - 2,464 78,694 Loans received (78,892) - - (78,892) Current accounts payable: Trade and other payables (37,904) (1,285) - (39,189) Interest on loans received (32) - - (32)


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33 Balances and transactions with related par ties (continued) Comparative information Accounts receivable and accounts payable – related parties, as at 31 December 2007:

Companies under

common control Associates Total Trade and other receivables: Trade receivables 254,610 46,559 301,169 Advances issued 8,666 - 8,666 Other accounts receivable 5,005 - 5,005 Loans issued 1,453,000 - 1,453,000 Interest on loans issued 71,140 - 71,140 Other non-current assets 49,169 - 49,169 Loans received (196,750) - (196,750) Current accounts payable: Trade and other payables (229,506) - (229,506) Interest on loans received (3,487) - (3,487)

Related party transactions for the year ended 31 December 2008

Companies under common

control

Associates Shareholders Total Sales in Russia: Sales of granulated cast iron 12,012 - - 12,012 Services 164,682 - - 164,682 Other sales 3,492 - - 3,492 Sales to other countries: Sales of nickel 3,128,698 - - 3,128,698 Sales of cast iron 29,712,439 - - 29,712,439 Sales of granulated cast iron 61,955 - - 61,955 Sales of metallurgy products - 217,331 - 217,331 Other income: Interest income 98,450 - 18,524 116,974 Purchase of goods and services: Purchase of raw materials and supplies (2,027,792) (4,862) - (2,032,654) Purchase of property, plant and equipment (22,640) - - (22,640) Purchase of other services (343) (67) - (410) Other general and administrative expenses (14,618) - - (14,618) Interest expense (14,012) - - (14,012) Other operating income/expense, net 125,492 - 408 125,900


48

33 Balances and transactions with related par ties (continued) Related party transactions for the year ended 31 December 2007

Companies under

common control Associates Total Sales in Russia: Sales of coke - 6,115,859 6,115,859 Chrome reprocessing services - 3,704 3,704 Sales of powder metallurgy products - 4,961 4,961 Sales of iron-ore concentrate - 3,493,570 3,493,570 Other sales 924 263,637 264,561 Sales by OAO Vanadiy-Tula (discontinued operations) 5,246 58,854 64,100 Sales to other countries: Sales of nickel 6,932,363 - 6,932,363 Sales of metallurgy products - 40,743 40,743 Sales by OAO Vanadiy-Tula (discontinued operations) 3,483,712 - 3,483,712 Other income: Interest income 71,232 - 71,232 Purchases of goods and services: Purchase of raw materials and supplies (108,874) (197,778) (306,652) Other general and administrative expenses (9,195) (48) (9,243) Interest expense (6,427) (6,352) (12,779) Other operating income/(expenses), net 49 6 55 Purchase by OAO Vanadiy-Tula (discontinued operations) (1,441,208) (198,542) (1,639,750)

Payments to key management personnel Payments to key management personnel included in general and administrative expenses in the income statement amounted to RR 292,017 for the year ended 31 December 2008 and RR 302,370 for the year ended 31 December 2007. The number of people to whom this compensation relates is 49 for the year ended 31 December 2008 and 24 for the year ended 31 December 2007. 34 Significant non-cash transactions Investing and financing transactions that did not require the use of cash or cash equivalents and were excluded from the cash flow statement are as follows:

Non-cash transactions Year ended


31 December 2007 Acquisition of property, plant and equipment in the form of mutual settlements

(105,884) (116,282)

Redemption of commodity loan (350,664) (913,097) Other (1,917) (17,946) Non-cash transactions (458,465) (1,047,325)

35 Contingencies, commitments and operating r isks Capital commitment In 2007 the Group committed to make capital investments of EUR 249,112 thousand over the next three years. As at 31 December 2008 the Group’s unfulfilled capital commitments in accordance with the plan is equal to EUR 111,533 thousand (31 December 2007: EUR 177,991 thousand).


49

35 Contingencies, commitments and operating r isks (continued) Taxes Russian tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events in Russia suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, it is possible that significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the tax authorities for three calendar years preceding the year of the tax audit. Under certain circumstances audits may cover longer periods. As at 31 December 2008 management of the Group believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group’s tax, currency and customs positions will be sustained. Where management believes it is probable that a position cannot be sustained, an appropriate amount has been accrued in these financial statements. The accrual for these matters as at 31 December 2008 and 31 December 2007 is RR 142,707 and RR 60,264 respectively, and is included in provision for tax claims and current income tax payable. Insurance policies At 31 December 2008 the Group held limited insurance policies on its assets and operations, or in respect of public liability or other insurable risks. Environmental matters The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities which might arise as a result of changes in existing regulations, civil litigation or legislation cannot be estimated but could be material. In the current enforcement climate under the existing legislation, management believes that there are no significant liabilities for environmental damage in addition to those already reflected in the consolidated financial statements. Legal proceedings During the year the Group was involved in a number of court proceedings (both as a plaintiff and as a defendant) arising in the ordinary course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding that could have a material effect on the result of operations or financial position of the Group and which have not been accrued or disclosed in these consolidated financial statements. Licences The Group is subject to periodic reviews of its activities by government authorities with respect to compliance with the requirements of its mining licences. The Group’s management responds promptly, provides reports based on the reviews results and, if necessary, cooperates with the government authorities to agree on remedial actions necessary to resolve any findings resulting from these reviews. Failure to comply with the terms of a licence could result in fines, penalties or licence limitation, suspension or revocation. The Group’s management believes any issues of non-compliance, including changes in the work plan or financial measures, will be resolved by negotiations, eliminating weaknesses or corrective actions. Management believes that these issues will be resolved without any adverse effect on the Group’s financial position, results of operations or cash flows. The Group’s coal fields are situated on land belonging to the Kemerovo Regional Administration; the silicate cobalt nickel ore field is located in the territory of the Chelyabinsk Regional Administration; and ferruginous quartzite fields are in the territory of the Belgorod Regional Administration. Licences are issued by the Russian Ministry of Natural Resources, and the Group pays mineral resources extraction tax to explore and mine mineral resources from these fields.


50

35 Contingencies, commitments and operating r isks (continued)

Licence holder Field Expiry date Reserves: ABC1C2 (in mln. tones)

OOO Gornyak Abramovsky area of Glushinsky coal field (Romanovskaya-1 mine) April 2022

25

OOO Butovskaya mine Butovskoe-Zapadnoe and Chesnokovskoe areas of Kemerovo coal field (Butovskaya mine) January 2014 111

ZAO Sibirskie resursy Kedrovsko-Krohalevskoe coal field (Vladimirskaya mine) March 2021

5

OOO Uchastok Koksoviy Koksoviy area (Vakhrusheva coal mine) December 2020 5.5

OAO Koks Nikitinsky coal area-2 September 2025 109

OAO Ufaleynickel and ZAO PO Rezhnickel Licence to produce silicate cobalt nickel ore December 2027 28

OAO Kombinat КМА Ruda Licence to produce ferruginous quartzite from Korobkovsky mine January 2026

54.5 Management believes that the Group has the right to extend its licences beyond the original expiration date and intends to exercise this right. Operating environment of the Group The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation. Despite strong economic growth in recent years, the financial situation in the Russian market significantly deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the Russian stock market since mid-2008. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes, and other legal and fiscal impediments contribute to the challenges faced by entities currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. Recent volatility in global financial markets The ongoing global financial and economic crisis that emerged out of the severe reduction in global liquidity which commenced in the middle of 2007 (often referred to as the “Credit Crunch”) has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial markets have also led to failures of banks and other corporates, and to bank rescues in the United States of America, Western Europe, Russia and elsewhere. The full extent of the impact of the ongoing financial crisis is proving to be difficult to anticipate or completely guard against. The availability of external funding in financial markets has significantly reduced since August 2007. Such circumstances may affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions.


51

35 Contingencies, commitments and operating r isks (continued) Debtors of the Group may be adversely affected by the financial and economic environment, which could in turn impact their ability to repay the amounts owed. Deteriorating economic conditions for customers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available management have properly reflected revised estimates of expected future cash flows in their impairment assessments, however management is unable to reliably estimate the effects on the Group's financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets and other impacts arising from the Group's operating environment. Management believes it is taking all the necessary measures to support the sustainability and growth of the Group’s business in the current circumstances. 36 Financial instruments and financial risk factors The Group financial instruments are presented below:

31 December 2008 31 December 2007 Assets Non-current: Loans issued 76,000 94,900 Available-for-sale financial assets 104,765 63,592 Other non-current accounts receivable 98,429 123,883 Current: Financial assets at fair value through profit or loss 20,321 31,035 Trade and other accounts receivable 7,692,931 5,376,745 Loans issued 1,743,831 1,364,873 Restricted cash 7,003 76,256 Cash and cash equivalents 1,935,895 2,922,889

Total carrying value 11,679,175 10,054,173

Liabilities Long-term:

Long-term borrowings 8,928,366 10,467,135 Long-term bond loan 5,000,000 8,000,000 Long-term bank interest payable 24,333 38,757 Long-term accounts payable 26,796 4,664 Short-term:

Trade accounts payable 6,479,141 4,366,662 Accounts payable to related parties 39,189 229,506 Bank interest payable 341,615 314,539 Dividends payable 1,514,200 51,155 Other accounts payable 348,392 134,993 Liability for put option over minority interest 1,965,404 1,704,184 Short-term borrowings and current portion of long-term borrowings 12,869,817 10,776,836 Short-term bond loan 3,000,000 -

Total carrying value 40,537,253 36,088,431 The Group’s risk management is based on determining risks to which the Group is exposed in the course of ordinary operations. The Group is exposed to the following major risks: (а) credit risk, (b) market risk, and (с) liquidity risk. Management works proactively to control and manage all opportunities, threats and risks arising in connection with the objectives of the Company’s operations. (a) Credit risk Financial assets which subject Group companies to potential credit risk consist principally of trade receivables, loans issued, cash and cash equivalents and other non-current accounts receivable. The maximum exposure to credit risk is represented by the book value of the aforementioned balances net of impairment provisions.


52

36 Financial instruments and financial risk factors (continued) The Group does the following to minimise credit risk:

• interaction between the Group’s structural divisions (commercial, legal, accounting, economic security divisions, etc.) is regulated to ensure that credit risks are minimised;

• sales of products are made to customers with an appropriate credit history;

• the Group mostly sells products to buyers and customers that are major market players;

• accounts receivable are insured in the amount of 70% of total accounts receivable;

• when expanding its presence in the sales markets, the Group performs stringent legal and financial reviews of potential customers.

The Group’s financial assets are partly unsecured, but the above procedures help minimise credit risk. The credit quality of fully performing financial assets was assessed using historical data on counterparties’ failure to pay and the length of the business relationship. The following categories are used by the Group:

• Group 1 – the length of business relationship with the counterparty is over a year, and the counterparty has never defaulted on its liabilities;

• Group 2 – the length of business relationship with the counterparty is over a year, and the counterparty has delayed payment but still fulfilled its liability;

• Group 3 – the length of business relationship with the counterparty is less than a year

Credit risk related to fully realisable financial assets (expected to be realised in full) as at 31 December 2008:

Group 1 Group 2 Group 3 Total

Trade and other receivables 2,084,730 3,437,361 774,380 6,296,471 Loans issued 1,819,831 - - 1,819,831 Other non-current accounts receivable 85,056 13,373 - 98,429 Restricted cash 7,003 - - 7,003 Cash and cash equivalents 1,935,895 - - 1,935,895 Total 5,932,515 3,450,734 774,380 10,157,629

Comparative data on credit risk related to fully realisable financial assets as at 31 December 2007:

Group 1 Group 2 Group 3 Total

Trade and other receivables 936,752 3,586,683 373,297 4,896,732 Loans issued 1,459,773 - - 1,459,773 Other non-current accounts receivable 102,367 21,516 - 123,883 Restricted cash 76,256 - - 76,256

Cash and cash equivalents 2,922,889 - - 2,922,889 Total 5,498,037 3,608,199 373,297 9,479,533

In accordance with the Group’s credit risk management policies, loans are usually issued to related parties (Notes 12, 13 and 33). In addition, the Group assesses the credit risk for financial assets which are overdue but not impaired (past-due financial assets for which the counterparty’s payment is expected). The Group reviews past-due financial assets, and as a result an impairment provision is created, or terms and conditions of agreements with the specific counterparty are revised.


53

36 Financial instruments and financial risk factors (continued) The amount of financial assets which are overdue but not impaired as of 31 December 2008:

Overdue for the period:

Total Less than 3 months Between 3 months and 1 year Between 1 and 3

years More than 3

years Trade and other accounts receivable 1,308,276 56,834 27,659 3,691 1,396,460 Total 1,308,276 56,834 27,659 3,691 1,396,460 Comparative information for financial assets which are overdue but not impairment as of 31 December 2007 is given below:

Overdue for the period:

Total Less than 3 months Between 3 months and 1 year Between 1 and 3

years More than 3

years Trade and other accounts receivable 401,879 34,597 38,333 5,204 480,013 Total 401,879 34,597 38,333 5,204 480,013 The Group sets up an impairment provision for impaired financial assets (overdue and unlikely to be realized). Although collectability of balances can be influenced by economic factors, the Group’s management believes that there is no significant risk of loss to the Group beyond the provisions for impairment already recorded. Movements in the bad debt provision for 2008 are given below:

Trade accounts receivable

Loans issued and accounts

receivable on interest income

Other accounts receivable Total

As at 31 December 2007 77,655 91,147 107,153 275,955 Purchased within business 800 - - 800 Charged to income statement 44,903 15,835 605 61,343 Reversed through income statement (17,811) (10,012) (265) (28,088) Used (36,099) (46,032) (47,312) (129,443) Effects of changes in exchange rates 7,475 8,048 4,359 19,882 As at 31 December 2008 76,923 58,986 64,540 200,449

Comparative data for 2007 The table below presents movements in the bad debt provision for 2007:

Trade accounts receivable

Loans issued and accounts

receivable on interest income

Other accounts receivable Total

As at 31 December 2006 44,551 2,204 7,499 54,254 Purchased within business 122,591 84,386 105,945 312,922 Charged to income statement 5,823 14,065 4,820 24,708 Reversed through income statement (98,229) (5,130) (6,098) (109,457) Used (3,706) (6,628) - (10,334) Effects of changes in exchange rates 1,270 2,250 1,645 5,165 Transfers 5,355 - (5,704) (349) Disposal within a subsidiary sale - - (920) (920) Reversed on discontinued operations - - (34) (34) As at 31 December 2007 77,655 91,147 107,153 275,955


54

36 Financial instruments and financial risk factors (continued) (b) Market risk Foreign currency risk The Group has international operations and, therefore, is exposed to foreign currency risk arising due to changes in euro and US dollar rates against the rouble. Weakening of these currencies against the rouble has a negative effect on revenue and operating profit, while their strengthening has a positive effect. Foreign currency risk is managed by making operating decisions depending on the current market situation. The amounts of the Group’s assets and liabilities denominated in a currency other than the functional currency of the Group as at 31 December 2008 are provided below:

in thousands of USD in thousands of EUR Loans issued to the Group’s foreign subsidiary, including interest receivable - 39,186

Trade receivables 7,044 510 Other accounts receivable - - Cash 1,873 285 Trade accounts payable (19,872) (2,527) Other accounts payable (225) - Credits and loans received (146,050) (23,625) Total, in foreign currency (157,230) 13,829 Total as at 31 December 2008, in RR thousand at the exchange rate as at the reporting date (4,619,480) 573,089

The analysis of the effect of foreign currency risk on the Group’s revenue and profit as at 31 December 2008 is given below: The exchange rate of the US dollar as at 31 December 2008 was RR 29.3804 to USD 1. A 15% decrease/(increase) in the dollar exchange rate would have resulted in higher/(reduced) profit for the Group of RR 692,922. The exchange rate of the euro as at 31 December 2008 was RR 41.4411 to EUR 1. A 15% decrease/(increase) in the euro exchange rate would have resulted in reduced/(higher) profit for the Group of RR 85,963. Interest rate risks as at 31 December 2008 The Group has no significant assets generating interest income. The Group is exposed to interest rate risk on short-term and long-term loans. Loans issued at fixed interest rates expose the Group to fair value fluctuations due to changing interest rates. The Group does the following to minimise interest rate risk:

• monitoring trends in the domestic RR and global USD/EUR currency markets;

• monitoring of analyst reviews and comments made by leading financial institutions and major global information agencies; and

• making decisions based on analyses of the interdependence of such parameters as currency, term, amount and interest rate type.

As at 31 December 2008, the following interest rates have significant influence on the interest expense on loans with variable rates:

1M EURIBOR 2.603 3M EURIBOR 2.892 6M EURIBOR 2.971

1M LIBOR 0.436 3M LIBOR 1.425


55

36 Financial instruments and financial risk factors (continued) As at 31 December 2008, a 100 basis point decrease/(increase) in these rates, assuming all other variables remain constant, would have resulted in higher/(reduced) profit after tax of RR 111,398. Commodity price risk The Group does the following to minimise commodity price risk:

• settlement of 12 months agreements on purchase of raw materials and sales of finished goods at fixed prices or agreed index-linked prices;

• cost of production regulation by inventory management during raw materials market volatility; and

• modelling of contract options, etc.

Comparative data for 2007 Foreign currency risk The amounts of the Group’s assets and liabilities denominated in a currency other than the functional currency of the Group companies as at 31 December 2007 are provided below:

in thousand USD in thousand Euro Loans issued to the Group’s foreign subsidiary, including interest receivable

- 36,771

Trade receivables 11,253 119 Other accounts receivable 142 - Cash 647 268 Trade accounts payable (937) (150) Other accounts payable (306) (12) Credit and loans received (171,085) (38,268) Total, in foreign currency (160,286) (1,272) Total as at 31 December 2007, in RR thousand at the exchange rate as at the reporting date

(3,934,412)

(45,707)

The exchange rate of the US dollar as at 31 December 2007 was RR 24.5462 to USD 1. A 15% decrease/(increase) in the dollar exchange rate would have resulted in higher/(reduced) profit for the Group of RR 590,162. The exchange rate of the euro as at 31 December 2007 was RR 35.9332 to EUR 1. A 15% decrease/(increase) in the euro rate would have resulted in higher/(reduced) profit for the Group of RR 6,856. Interest rate risks as at 31 December 2007 As at 31 December 2007, the following interest rates have significant influence on interest expense on loans with variable rates:

1M EURIBOR 4.294 3M EURIBOR 4.690 6M EURIBOR 4.709

3M LIBOR 4.703

As at 31 December 2007, a 100 basis point decrease/(increase) in these rates, assuming all other variables remain the same, would have resulted in higher/(reduced) profit after tax of RR 92,592. (c) Liquidity risk In order to minimise liquidity risks, the Group maintains committed credit facilities in major domestic and overseas banks. The Group determines the necessary credit limit on the basis of five year, annual and monthly financial plans for each entity of the Group and the Group as a whole.


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36 Financial instruments and financial risk factors (continued) The Group distinguishes between funds needed depending on what they will be used for. Working capital needs are mainly financed through unsecured short-term credit facilities at the minimal interest rate offered in the financial markets under the existing market situation. Investment programmes to acquire new high-cost equipment, construct new production facilities, rebuild and modernise are financed through mid-term and long-term credit facilities (mainly special purpose ones). The Group uses its available cash and borrowings under private deals with major global and domestic financial institutions to finance acquisition activities. The Group has raised a number of public and syndicated borrowings in the past and intends to further pursue these endeavours depending on the market conditions. The Group’s management monitors the correspondence of repayment periods for debts with the pay-back period for the respective assets on the strategic and operating levels. The Group uses both general ratios (EBITDA, EBITDA/Revenue, net debt/EBITDA, bank loans/equity, etc.) and a number of special debt (liquidity) ratios in its decision making. The Group’s management allocates available cash surpluses, based on the issuance of intra-group loans approved by the general shareholders’ meeting, between the Group’s entities to attain optimal and balanced availability of funds for each entity. Such allocation may be used to replenish working capital in each entity without the need to raise third-party borrowings and, when necessary, to refinance more costly bank facilities and other borrowings. Intra-group loans are issued at market rates. The table below provides the analysis of non-discounted cash flows related to the Group’s contract obligations as at 31 December 2008:

Payable in the period

Total Within 3 months 3-12 months 1-5 years Beyond 5 years

Trade accounts payable 4,775,894 1,742,436 - - 6,518,330 Bank interest payable 215,875 125,740 24,333 - 365,948 Other accounts payable 1,833, 162 29,430 26,796 - 1,889,388 Borrowings 4,571,221 8,298,596 6,572,491 2,355,875 21,798,183 Bonds - 3,000,000 5,000,000 - 8,000,000 Liability for put option over minority interest 1,965,404 - - - 1,965,404 Total 13,361,556 13,196,202 11,623,620 2,355,875 40,537,253

The liabilities due within 12 months are to be paid by cash received from operating activities and external financing received subsequent to the reporting date (Note 38). Comparative data for 2007 Comparative data on financial liabilities as at 31 December 2007:

Payable in the period

Total Within 3 months 3-12 months 1-5 years Beyond 5 years

Trade accounts payable 4,529,168 67,000 - - 4,596,168 Bank interest payable 276,731 37,808 38,757 - 353,296 Other accounts payable 103,899 82,249 4,664 - 190,812 Borrowings 2,500,276 8,276,560 7,400,344 3,066,791 21,243,971 Bonds - - 8,000,000 - 8,000,000 Liability for put option over minority interest 1,704,184 - - - 1,704,184 Total 9,114,258 8,463,617 15,443,765 3,066,791 36,088,431

Fair values Management believes that the fair value of its financial assets and liabilities substantially approximates their carrying amounts.


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36 Financial instruments and financial risk factors (continued) Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a current market quote in an active market. The fair values of financial instruments have been determined by the Group using available information on current market quotations, where it exists, and appropriate valuation methodologies. However, judgement is required to interpret market data. Russia continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Financial instruments at fair value. Available-for-sale and held-for-trading investments are carried on the balance sheet at their fair value. Cash and cash equivalents are recorded at amortised cost, which approximates their current market value. The fair value is based on the prices of publicly quoted financial instruments, except for certain investment securities available for sale for which no external independent market quotes are available. The fair values for these securities were determined by the Group’s management based on the results of a recent sale of interest in investee companies to unrelated third parties, review of other information (such as discounted cash flows), financial information about the investees, as well as other valuation methods. Application of valuation methods required certain assumptions which were not based on data available in the market. Changes resulting from applying these assumptions to any potential and reasonable alternative will not have a significant effect on the amounts of profit, assets or liabilities. Financial assets are measured at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on the credit risk of the counterparty. Carrying amounts of trade receivables approximate fair values. Liabilities carried at amortised cost. The fair value is measured based on market quotations, if any. The estimated fair value of fixed interest rate instruments with stated maturity for which a quoted market price is not available was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period (“demandable liabilities”) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. 37 Management of capital In early 2008 the Group approved a pilot concept of capital management which is based on planned consolidated net profit of the Group’s entities. The purpose of this concept is to maintain a high technical and technological level of the Group’s property, plant and equipment, avoid business interruptions, maintain high life and health standards, preserve environment as well as introduce new production facilities that ensure the Group’s profitability in the future. Proceeds from net income attributable to the Company’s equity holders are prioritized to maintain the operating activities of the Group’s entities and to their development and modernization. In accordance with the management’s plans, half of the net income attributable to the Company’s equity holders earned is to be allocated to implement investment projects, 5-6% was allocated to charity and other welfare aid. The remainder of income was used to create funds which may be allocated to dividend payments or contingencies. In the nine months ended 30 September 2008 a decision was made to suspend all investment projects for the current and subsequent years. The cash released as a result of suspended investment projects was used to reduce the Group’s indebtedness. Therefore, the Group currently specifies new requirements (payback period, revenue rate, NPV and other indicators) for both the suspended and new investment projects under consideration. In 2008 the Group’s net income was RR 9,092,050, with dividend payments amounting to RR 549,468. Cash outflow in respect of investment activities (purchases of shares in subsidiaries, purchases of new equipment, loan issues, etc.) was RR 7,200,235, of which RR 2,032,487 was allocated to buy shares. This evidences the Group’s commitment to diversify its business and to strengthen it both vertically and horizontally.


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38 Events after the balance sheet date Borrowings Subsequent to 31 December 2008, the Group signed several loan refinancing agreements and raised new loans. According to the refinancing agreements, the reimbursement of loans amounting to RR 1,243,602, recognized in these financial statements within current borrowings, was deferred for one year from their maturity dates. There is a loan committee decision of one of the major Russian banks on extension of RR 1,600,000 loan maturity till December 2011 (to be paid by agreed installments). Several new loans were received in 2009: one year loans in amount of RR 4,164,520 and five years loan in amount of RR 1,240,000. The Group is currently assessing the impact of the refinancing agreements, specifically whether these new financial liabilities need to be recognised at fair value. Acquisition of subsidiaries As a result of acquisition of 55% additional interest in Ravne Steel Center d.o.o. through Metal Ravne, d.o.o. (Slovenia) in April 2009, the Group increased its effective ownership in this company from 32% to 72%. The cost of acquisition amounted to EUR 1,800,000. The Group’s management is now considering fair values of acquired assets and liabilities as of the date of acquisition of control over Ravne Steel Center d.o.o. Dividends declared During the annual general meeting held on 28 April 2009 the Company’s shareholders declared dividends for 2008 in the amount of RR 1,510,711 thousand or RR 4.55 per share.

OAO KOKS International Financial Reporting Standards ...OAO Koks Consolidated Statement of Income...

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