Cultivo celular

(a) Share capital

Authorized share capital of the Bank comprises 29 997 777 ordinary shares and 39 954 000 preference shares. Issued share capital as of 31 December 2014 and 2013 comprises:

31 December 2014 31 December 2013 Number of shares Par value, RUB Nominal amount, RUB Number of shares Par value, RUB Nominal amount, RUB Ordinary shares 24 532 277 1 000 24 532 277 000 24 532 277 1 000 24 532 277 000 Preference shares 39 954 000 1 000 39 954 000 000 - - -

Total share capital 64 486 277 64 486 277 000 24 532 277 24 532 277 000

All issued shares are fully paid. Ordinary shares

The holders of ordinary shares are entitled to receive dividends as annually declared and are entitled to one vote per share at annual and other general meetings of the Bank’s shareholders.

As of 31 December 2014, 1 079 651 ordinary shares were held by the Group as treasury shares (31 December 2013: 1 036 483 ordinary shares).

Movements in the outstanding ordinary shares are presented below:

2014 2013

Opening balance as at 1 January 23 495 794 22 979 450

Shares purchased (56 127) (76 709)

Shares sold to employees 12 959 37 498

Shares sold to investor with significant influence - 555 555

Closing balance as at 31 December 23 452 626 23 495 794

In June 2012 the Bank purchased from Vnesheconombank an American-style call option on 2 500 000 of the Bank’s shares that matures in June 2020. The option premium is to be paid semi-annually by installments during the life of the option. The Group initially recognised a liability payable to Vnesheconombank for the option premium through 2020 of RUB 17 215 million. The amortisation of the liability of RUB 1 559 million is recognised as other interest expense in the statement of profit or loss and other comprehensive income for the year ended 31 December 2014 (2013: RUB 1 730 million). In case the option is exercised or otherwise cancelled before maturity the remaining portion of the liability is extinguished.

Preference shares

Following the adoption of amendments to the Federal Law dated 13 October 2008 #173-FZ "On additional measures to support the financial system of the Russian Federation" (the “Law”), in December 2014 the Ministry of Finance of the Russian Federation acquired 39 954 000 non-cumulative preference shares with the nominal value of RUB 1 000, which were issued by the Bank under the closed subscription, for RUB 39 954 million. According to the Law, the acquisition of shares was executed using the proceeds from early redemption of a subordinated deposit provided by the State Corporation “Bank for Development and Foreign Economic Affairs” (Vnesheconombank) to the Bank in 2009.

The terms of the preference shares (called “Type A” in the Bank’s charter) do not include a fixed or determinable dividend and set no fixed share in liquidation value of the Bank. A dividend payout (if any) is to be approved annually by the general shareholders meeting of the Bank. Holders of “Type A” preference shares do not have voting rights. The preference shares are not included in determining of the quorum at general shareholders meetings.

(b) Dividend payout

Dividends payable by the Bank are restricted to the maximum distributable reserves, which are determined by the amount of reserves as disclosed in the financial statements of the Bank prepared in accordance with the statutory legislation. As of 31 December 2014, the statutory financial statements of the Bank disclosed distributable reserves of RUB 151 375 million and non-distributable reserves of RUB 3 682 million (31 December 2013: distributable reserves of RUB 140 295 million and non-distributable reserves of RUB 3 682 million).

In June 2014 the General shareholders meeting of the Bank approved a dividend payout for the year 2013 of RUB 270 per one ordinary share (dividends declared in 2013 for the year 2012 were RUB 252 per one ordinary share).

NOTE 28–PERPETUAL DEBT ISSUED

In October 2012 the Group issued perpetual Eurobonds of USD 1 billion bearing interest of 7.875% per annum. The Group has the right to call the Eurobond in 2018 and at each interest payment date thereafter. The coupon is paid semi-annually and the coupon rate is fixed until the first call date after which it is reset every 5 years. The coupon payment is not cumulative and may be cancelled at the discretion of the Group. The coupon payment becomes mandatory in case the Group pays or declares dividends in the preceding 6 months.

In December 2013 the Group amended the terms of the perpetual Eurobonds by introducing a write-down of principal and cancellation of accrued interest if either of the following events occurs: (a) the Common Equity Tier 1 Capital Ratio of the Bank (according to the CBR Regulation 395-P) is less than 2%, or (b) the Agency on Deposit Insurance implements bankruptcy prevention measures in relation to the Bank (according to the Federal Law No 175-FZ).

As the Group has discretion in relation to coupon and principal repayment, the Group classified this perpetual Eurobond as equity in the consolidated statement of changes in equity. The USD denominated perpetual Eurobonds are translated to their RUB equivalent at the period-end exchange rate with exchange differences recorded in retained earnings when incurred. Issuance costs are also recorded in retained earnings when incurred. While coupon payments are at the discretion of the Group, if and when dividends are paid or declared, the following coupon payment is accrued and recorded as a liability.

NOTE 29–FINANCIAL COMMITMENTS AND CONTINGENCIES

a) Credit related financial commitments

The credit related financial commitments as of 31 December 2014 and 2013 comprise:

31 December

2014

31 December 2013

Undrawn credit lines 1 243 925 988 216

Guarantees given 507 673 367 000

Letters of credit 82 430 76 266

1 834 028 1 431 482

Management evaluated the likelihood of probable losses arising from credit related commitments and concluded that a provision of RUB 5 713 million was necessary as of 31 December 2014 (31 December 2013: RUB 2 903 million).

As of 31 December 2014 RUB 917 million of letters of credit were secured by customer funds (31 December 2013: RUB 754 million).

b) Operating lease obligations

In the normal course of business the Group enters into operating lease agreements for office equipment and branch facilities. Future minimum payments under non-cancellable operating leases are as follows:

31 December

2014

31 December 2013

Not later than 1 year 5 511 4 243

Later than 1 year and not later than 5 years 11 305 7 199

Later than 5 years 5 459 5 136

22 275 16 578

c) Fiduciary activities

In the normal course of its business the Group enters into agreements with clients to manage their assets with certain limited rights on decision making in accordance with specific criteria established by the clients. The Group may be liable for losses or actions aimed at appropriation of the clients’ funds until such funds or securities are returned to the client. The maximum potential financial risk at any given moment is equal to the amount of the clients’ funds and securities plus (minus) any unrealised gain (loss) on the positions. As of 31 December 2014 the total amount of funds accepted by the Group on behalf of its clients does not exceed RUB 16 333 million (31 December 2013: RUB 15 505 million). As of 31 December 2014 the total amount of securities accepted by the Group on behalf of its clients does not exceed RUB 27 986 million (31 December 2013: RUB 61 015 million). Assets accepted and liabilities incurred under the trustee and depository activities are not included in the Group’s financial statements.

d) Capital commitments

In the normal course of business the Group enters into various contracts for purchase of programming rights, property and equipment, construction and repair of buildings, with suppliers of consulting services and other services.

As of 31 December 2014 and 2013 the future contracted liabilities with respect to these contracts are as follows:

31 December

2014

31 December 2013

Programming rights 36 288 18 961

Property, plant and equipment 8 460 4 064

Construction agreements 28 410 28 129

73 158 51 154

e) Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group companies in the machinery and other business segments periodically evaluate their 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 reasonably estimated. Under the current levels of enforcement of existing legislation, management believes that there are no probable liabilities for environmental damage which would have a materially adverse effect on the financial position or the operating results of the Group.

f) Legal

In the ordinary course of business the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial position or the operating results of the Group.

g) Insurance

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

The Group has obtained an international comprehensive banking risk insurance policy (“BBB” – Bankers Blanket Bond) covering professional activities and crimes, including electronic and computer crimes. The amount of total insurance indemnity is limited to USD 100 000 thousand.

h) Taxation

The Group operates in a number of tax jurisdictions. In the normal course of business, management must interpret and apply existing legislation to transactions with third parties and its own activities. Current Russian tax legislation is principally based on the legal form in which transactions are documented and the underlying accounting treatment is applied as prescribed by Russian tax legislation.

The interpretation of Russian tax legislation by the tax authorities and court practice, which are constantly changing, in the future may focus less on the form and more on the substance of a transaction. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation. Tax years remain open to normal audit by the Russian tax authorities for three years; during such time any change in interpretation or practice, even if there is no change in Russian tax legislation, could be applied retroactively. The interpretation and practice in other jurisdictions in which the Group operates are also changing, sometimes with retroactive effect.

Such uncertainty could, in particular, be attributed to tax treatment of financial instruments/derivatives and determination of market prices for transactions for transfer pricing purposes. It could also lead to temporary taxable differences occurring due to loan impairment allowance and profit tax liabilities being treated by the tax authorities as understatement of the tax base. Management is confident that applicable taxes have all been accrued and, consequently, creation of respective provisions is not required.

In management’s opinion, the Group is in substantial compliance with the tax and other laws governing its operations in Russia and in other tax jurisdictions. However, a risk remains that the relevant authorities could take different positions with regard to interpretative issues or that court practice could develop adversely to positions taken by the Group and the effect on the financial position of the Group, should the authorities succeed in asserting their positions, could be significant.

Starting from 1 January 2012 new transfer pricing rules came into force in Russia. They provide the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions if their prices deviate from the market interval or profitability range. According to the provisions of transfer pricing rules, the taxpayer should sequentially apply five methods of market price determination prescribed by the Tax Code.

Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could be challenged.

NOTE 30–CORPORATE GOVERNANCE AND INTERNAL CONTROLS

The principal management bodies of the Bank are the General Shareholders’ Meeting, the Board of Directors, the Management Board and the Chairman of the Management Board. The Bank complies with corporate governance principles set forth in the September 1999 Basel Committee Recommendations on Enhancing Corporate Governance for Banking Organisations (recommended by the Central Bank of the Russian Federation for use by Russian lending organisations) and the Code of Corporate Governance (approved by the Russian Government in November 2001 and recommended for use by Russian joint-stock companies). In addition, the Bank has established a Corporate Governance and Remuneration Committee that is responsible for the

supervision of compliance with international and Russian corporate governance principles, including transparency and management responsibility and accountability.

The Bank has the following committees:

• Corporate Governance and Remuneration Committee • Strategy Committee

• Client Policy Committee

• Asset and Liability Management Committee • Technologies Committee

• Investment Committee • Credit Committee

• Risk Management Committee

The Board of Directors and the Management Board have responsibility for the development, implementation and maintenance of the Bank’s internal control system that is commensurate with the scale and nature of operations.

The purpose of internal control system is to ensure:

• proper and comprehensive risk assessment and management

• proper business, accounting and financial reporting functions, including proper authorization, processing and recording of transactions

• completeness, accuracy and timeliness of accounting records, managerial information, regulatory reports, etc.

• reliability of IT-systems, data and systems integrity and protection

• prevention of fraudulent or illegal activities, including misappropriation of assets • compliance with laws and regulations

Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness. Management monitors the effectiveness of the Bank’s internal controls and periodically implements additional controls or modifies existing controls in accordance with changes in external and internal environment.

The Bank developed a system of standards, policies and procedures to ensure effective operations and compliance with relevant legal and regulatory requirements, including the following areas:

• requirements for appropriate segregation of duties, including the independent authorization of transactions • requirements for the recording, reconciliation and monitoring of transactions

• compliance with regulatory and other legal requirements • documentation of controls and procedures

• requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified

• requirements for the reporting of operational losses and proposed remedial action • development of contingency plans

• training and professional development • ethical and business standards

• risk mitigation, including insurance where it is effective.

There is a hierarchy of requirements for authorization of transactions depending on their size and complexity. A significant portion of operations are automated and the Bank has put in place a system of automated controls. Compliance with the Bank’s standards is supported by a program of periodic reviews undertaken by the Internal Audit Department. The Internal Audit Department is independent from management and reports directly to the Board of Directors. The results of Internal Audit Department reviews are discussed with relevant business process managers, with summaries submitted to the Audit Committee, the Board of Directors and senior

Internal control functions are performed by:

• the Board of Directors and its committees, including the Audit committee • the Chairman of the Management Board and the Management Board • the Revision Commission

• the Chief Accountant (and deputies)

• Heads (and deputies) and Chief Accountants (and deputies) of branches • the Internal Audit Department

• other business units and employees responsible for internal control execution in accordance with the established internal standards, policies and procedures, including:

• the internal control (compliance service) • the risk management function

• the security function, including IT-security • the human resource function

• the legal function

• the compliance officer and the compliance function

• the designated employee and division responsible for compliance with anti-money laundering requirements

• the control officers of branches

• professional securities market participant controller

• other employees/business-units with control responsibilities.

In 2014 new requirements for the organisation of internal control system in credit organisations came into force. The new version of the Regulations of the Central Bank of the Russian Federation dated 16 December 2003 No 242-P On the organisation of internal control in credit organisations and banking groups sets out the specific requirements for the internal audit service and the internal control service (the compliance service).

The main functions of the Internal Audit Department include the following:

• audit and efficiency assessment of the system of internal control as a whole, fulfillment of the decisions of key management structures

• audit of efficiency of methodology of assessment of banking risks and risk management procedures, regulated by internal documents in credit organisation (methods, programmes, rules and procedures for banking operations and transactions, and for the management of banking risks)

• audit of reliability of internal control system over automated information systems

• audit and testing of fairness, completeness and timeliness of accounting and reporting function and the reliability (including the trustworthiness, fullness and objectivity) of the collection and submission of financial information

• audit of applicable methods of safekeeping the credit organisation's property • assessment of economic reasonability and efficiency of operations and other deals • audit of internal control processes and procedures

• audit of internal control (compliance) service and risk management function.

Internal control (compliance) service conducts compliance activities focused primarily on regulatory risks faced by the Group.

The main functions of the internal control (compliance) service include the following: • identification of compliance risks and regulatory risks

• monitoring of events related to regulatory risk, including probability of occurrence and quantitative assessment of its’ consequences

• monitoring of regulatory risk

• preparation of recommendations on regulatory risk management

• coordination and participation of design of measures to decrease regulatory risk • monitoring of efficiency of regulatory risk management

• participation in preparation of internal documents on regulatory risk management, anti-corruption, compliance with corporate behaviour rules, code of professional ethics and minimisation of conflicts of interest

• analysis of dynamics of clients’ complaints

• analysis of economic reasonableness of agreements with suppliers

• participation in interaction with authorities, self-organized organisations, associations and financial market participants.

Russian legislation, including the Federal Law dated 2 December 1990 No 395-1 On banks and banking activity, Direction of the CBR dated 1 April 2014 No 3223-U On requirement to head of risk management service, head of internal control service, head of internal audit service of the credit organisation establish the professional qualifications, business reputation and other requirements for members of the Board of Directors, Management Board, Heads of Internal Audit Department, internal control (compliance) service and risk management function and other key management personnel. All members of the Bank’s governing and management bodies meet with these requirements.

Management believes that the Bank complies with the CBR requirements related to risk and capital management systems and internal control system, including requirements related to the internal control function, and that risk and capital management systems and internal control system are appropriate for the scale, nature and complexity of operations.

NOTE 31–RISK MANAGEMENT

Management of risk is fundamental to the banking business and is an essential element of the Group’s operations. Management considers risk management and risk controls to be vitally important aspects of its business operations and management activities. Establishing and integrating risk management and control functions into