Financial risk

Within its model the Company encounters factors that may lead to scarcity of funds required to finance investment and operating activities. The most important risk factors are related to the imperfect retail market mechanisms and are disclosed in Regulatory risks (Industry risks). Nevertheless, there are risks that may potentially influence financial and operating results.

Negative influence of the inflation on our financial and operating activities may be related to the loss of real value of receivables, increased interest rates and increased construction expenses. The present inflation level does not have a significant influence on our financial status. According to the plans of the Russian Central Bank to control inflation and its forecast values, the inflation will not have a significant influence on financial operations of the Company.

Adverse changes of exchange rates can influence operating and investment efficiency indicators of the Company. Currency risks do not have much influence on us, since all payments are done in RUR. Nevertheless, taking into account that several items purchased by the Company contain imported parts, a considerable growth of the currency rate may lead to appreciation of purchased goods. In this respect the Company adheres to the policy aimed at import substitution and conclusion of long-term agreements with no price boosts on purchased goods.

Changes of the refinancing rate of the Russian Central Bank shows macro-economical situation and influences the cost of credit resources. Increased credit rates may lead to unplanned increase of expenses on corporate debt.

To decrease interest risk we adhere to a well-balanced credit policy aimed at the optimization of credit portfolio structure and minimization of expenses on debt servicing.

Our operations are influenced by risks that may lead to reduction of liquidity and financial stability of the Company. The most important factors are cross-subsidization of consumers and low payment discipline on retail market.

The most important component of cross-subsidization is conclusion of last mile contracts. The legislation does not stipulate relations between grid companies and FSK in terms of last mile contracts. Despite the right stipulated by the legislation to conclude contracts on FSK facilities rental in 2012 large consumers were transferred to transmission contracts with FSK according to judicial decisions.