jsc idgc holding - 2011 annual report...

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JSC IDGC Holding - 2011 Annual Report

Disclaimer

This document contains forward looking statements with respect to MRSK Holding’s financial condition, results of operation, strategy, plans and objectives. These statements include those that express forecasts, projections and expectations. Although MRSK Holding believes that the expectations reflected in forward looking statements are reasonable, these statements do not guarantee future performance, are subject to risks, uncertainties and other factors, some of which are beyond control of MRSK Holding and could cause actual results to differ materially from those expressed or implied. Information on significant risks and uncertainties associated with MRSK Holding’s business is presented in this document in “Risk management” section.

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Table of Contents

1. Business Overview ....................................................................................................................................................... 3

1.1. Principal Operations ............................................................................................................................................... 3

1.2. Mission and Strategy .............................................................................................................................................. 4

1.3. Structure ................................................................................................................................................................ 5

2. Corporate Governance Report ...................................................................................................................................... 9

2.1. Principles and Structure of the Corporate Governance System ................................................................................ 9

2.2. General Meeting of Shareholders.......................................................................................................................... 10

2.3. Board of Directors ................................................................................................................................................ 10

2.4. Committees of the Board of Directors .................................................................................................................... 19

2.5. Management Board .............................................................................................................................................. 24

2.6. Remuneration ...................................................................................................................................................... 29

2.7. Significant events after the end of reporting period ................................................................................................ 30

3. Operating Performance Review of 2011...................................................................................................................... 31

3.1. Major Operating Results ....................................................................................................................................... 31

3.2. Capital Investment................................................................................................................................................ 37

3.3. Research and Innovation ..................................................................................................................................... 48

3.4. Reliability and Safety ............................................................................................................................................ 49

3.5. Human Capital and Social Responsibility .............................................................................................................. 51

4. Financial Performance Review of 2011 ....................................................................................................................... 53

4.1. Profitability ........................................................................................................................................................... 53

4.2. Capital Structure and Off-Balance-Sheet Arrangements ........................................................................................ 60

4.3. Liquidity ............................................................................................................................................................... 64

4.4. Cash Flow ............................................................................................................................................................ 66

4.5. Dividends and Acquisition of Own Shares ............................................................................................................. 67

5. Risk Management ........................................................................................................................................................ 68

5.1. Internal Control and Risk Management System Overview ...................................................................................... 68

5.2. Risks Relating to the Company’s Business and Industry ........................................................................................ 68

5.3. Risks Relating to the Russian Federation .............................................................................................................. 89

5.4. Financial Risks ................................................................................................................................................... 109

6. Outlook for 2012 ........................................................................................................................................................ 111

7. Responsibility Statement .......................................................................................................................................... 114

8. Independent Auditor’s Report ................................................................................................................................... 115

9. Consolidated Financial Statements .......................................................................................................................... 116

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1. Business Overview

1.1. Principal Operations

JSC IDGC Holding (referred to as “MRSK Holding”, “the Company”, “the Group”) is one of the largest electricity distribution companies in the world by the number of customers and the length of its grid. The main task of MRSK Holding is management of interregional and regional distribution grid subsidiaries and dependent companies (referred to as “subsidiaries”) united by a common strategy and policies. The core business of the companies managed by MRSK Holding is to provide electricity distribution services in networks with voltages ranging from 0.4 to 110 kV.

MRSK structure comprises 97 branches rendering power distribution services in 69 of Russia’s 83 regions. Operations of MRSK Holding cover 7,761 km², which is 45% of Russia’s territory populated by more than 123 million people. The total length of electricity transmission lines operated by MRSK reached 2,066,000 km in 2011. The Company’s 465 thousand substations with the overall transformer capacity of 401 GVA are positioned in appropriate locations to serve MRSK Holding’s customers.

The table below represents the commitments that are at the heart of MRSK Holding’s business:

What is MRSK Holding?

For the investor community

An effective instrument for investment, ensuring the reliability and liquidity of invested capital, and striving to deliver competitive return

For customers A company striving to provide services of high quality: a high-grade and reliable electricity supply and timely and transparent electricity network connection at affordable prices

For FGC UES A reliable partner ensuring the coordinated development of the country’s electric grid sector and implementing a uniform technical policy

For the regions and local government authorities

A company working to satisfy the economy’s demand for distribution capacity, acting as a reliable partner of Russian regional executive authorities in planning and carrying out regional development programs, and being a bona fide taxpayer and employer

For its staff An efficiently organized company that has a transparent and comprehensible corporate governance system and offers opportunities for personnel to realize their full potential

In managing its electric grid subsidiaries, MRSK Holding pursues a uniform policy on electricity distribution services, including innovation, energy conservation and energy efficiency, and the formulation and implementation of the uniform development strategy for the whole electricity distribution grid sector of the Russian Federation.

Below are the key operating indicators of MRSK Holding’s electric grid companies:

Indicator Value % of Russia’s Market

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Serviced territory 7,761,000 square kilometers

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Population of the serviced territory 123,871,000 persons 85

Length of transmission lines 2,087,000 kilometers 70

Number of substations 453,000 units -

Transformer capacity of substations 395 GVA 50

Headcount 187,100 persons -

1.2. Mission and Strategy

MRSK Holding’s mission is to maintain leadership in managing the electricity distribution grid by satisfying the Company’s customers’ growing need in electric energy in a safe and efficient way, and at a reasonable price. The strategic development of MRSK Holding is aimed at creating an innovative and efficient electricity distribution grid sector that provides what is needed for Russia’s economic and social development. MRSK Holding achieves this by managing its business on a nationwide level with a well-established, clear and consistent strategy, and a single set of policies across all branches. This approach has underpinned the Company’s ability to overcome the challenges of the previous years and creates the preconditions for future growth.

MRSK Holding’s strategic goals are as follows:

To improve the reliability and quality of electricity distribution services for the benefit of MRSK Holding’s customers;

To maintain tariff revenue as the primary source of financing for investment in modernization and development of the grid;

To improve operational efficiency, as well as efficiency of the Company’s investment projects; To improve energy efficiency and promote technological innovation; To promote value-adding growth via international cooperation; To improve the Company’s interaction with customers, investors, and the society as a whole by

increasing transparency and promoting dialogue.

As the sector’s mainstay, MRSK Holding intends to achieve the above-mentioned goals not only as part of the activities of its subsidiaries, but also by establishing future operation standards for all of the Russian sector’s companies, ensuring that optimum mechanisms are created and promoted in relation to the industry’s regulation.

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1.3. Structure

Operating Structure

As of December 31, 2011, MRSK Holding had shareholdings in eleven interregional distribution grid companies (IDGCs), five distribution grid companies, seven sales companies, eight R&D and design companies, four service and construction organizations, and eight real estate owners. In addition, MRSK Holding owned 764 construction-in-progress facilities located in the Chechen Republic.

In 2011, the shareholdings owned by MRSK Holding changed as follows:

The Company completed the transaction to sell 8,672,632 ordinary shares (25% + 1 share of the authorized capital) in Siberian Energy Scientific and Technical Center at a profit;

The Company completed the transaction to sell 2,251 ordinary shares (25.01% of the authorized capital) in Bureyagesstroy at a profit;

The shareholding in IDGC of Siberia increased from 52.88% to 55.59%; The shareholding in Kubanenergo increased from 40.63% to 45.77%; Sibenergosetproekt, 1,301,370 shares in which (100% of the authorized capital) were held by MRSK

Holding, was liquidated pursuant to a bankruptcy ruling.

In order to sell non-core assets and reduce associated maintenance costs, the Company sold in 2011 on a competitive basis 13 real estate property items, including six properties located in Verkhny Tagil and seven construction-in-progress facilities located in the Republic of Ingushetia.

With the aim of consolidating electric grid assets in the Chechen Republic to be subsequently contributed to the authorized capital of Chechenenergo, the Company in 2011 purchased 306 construction-in-progress electricity distribution grid facilities located in the Republic.

MRSK Holding Property Structure as of December 31, 2011 is as follows:

Shares

Interregional distribution grid companies (11), including:

Company MRSK Holding’s stake

in the authorized capital, %

Tyumenenergo

IDGC of Volga

IDGC of Northern Caucasus

IDGC of Siberia

100.00

67.63

58.25

55.59

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IDGC of North-West

IDGC of South

IDGC of Urals

MOESK

IDGC of Center and Volga Region

IDGC of Centre

LENENERGO

55.38

51.66

51.52

50.90

50.40

50.23

45.71

Distribution grid companies (5)

Sales companies (7)

R&D and design companies (8)

Service and construction organizations (4)

Real estate owners (7)

Main property 764 electric grid facilities (construction-in-progress facilities) located in the Chechen Republic

Shareholding Structure

The authorized capital of MRSK Holding is RUB 45,039,216,465 and consists of 45,039,216,465 shares, each with a par value of RUB 1, including 42,964,067,081 ordinary shares and 2,075,149,384 preference shares. Pursuant to Decree of the Federal Financial Markets Service of the Russian Federation No. 08-1731/pz-i of July 29, 2008: state registration number 1-01-55385-E was assigned to the issue of registered ordinary shares, state registration number 2-01-55385-E was assigned to the issue of registered preference shares.

The quantity of MRSK Holding’s shares owned by the Government is as follows (the quantity of shares specified is exclusive of the shares of the additional issue registered on November 10, 2011. The end date for the placement of the additionally issued shares is April 18, 2012):

As of December 31, 2011 Quantity of Shares Percentage of

Authorized Capital, % Ordinary Shares Preference Shares

Federal Agency for State Property Management 24,037,588,383 145,523,224 53.69

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The structure of principal shareholders of MRSK Holding as of December 31, 2011 is presented in the table below:

Name Percentage of Authorized Capital, %

The Russian Federation represented by the Federal Agency for State Property Management 53.69

Depository Clearing Company (nominee shareholder) 13.91

Depository and Corporate Technologies (nominee shareholder) 14.14

National Settlement Depository (nominee shareholder) 9.07

Shareholders owning more than 5% of ordinary shares in MRSK Holding (as of December 31, 2011) are disclosed in the following table:

Name

Type: “NS” means a nominee

shareholder; “O” means an owner

Percentage of Registered Ordinary

Shares, %

The Russian Federation represented by the Federal Agency for State Property Management

55.95

Depository Clearing Company NS 12.64

Depository and Corporate Technologies

including: Gazprom Energoholding1 NS 13.89

National Settlement Depository NS 8.53

The following table demonstrates the structure of resident and nonresident shareholders of MRSK Holding as of October 25, 2011:

Type

Residents Nonresidents

Q-ty Percentage of

Authorized Capital, %

Q-ty

Percentage of

Authorized Capital, %

1 For the purpose of this table Gazprom Energoholding is an owner.

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Federal property 53.69

Corporate entities 1,835 19.13 532 22.66

Individuals 320,610 4.52 388 0.001

Shares in JSC IDGC Holding are included in the calculation of the main Russian stock market indices:

1. MICEX Index;

2. MICEX Power Index;

3. MICEX Mid Cap Index;

4. RTS Index;

5. RTS-2 Index;

6. RTS Electric Utilities Index.

MSCI Barra, a company developing and maintaining stock market indices, announced on November 16, 2011, its decision to include JSC IDGC Holding shares in the calculation of the MSCI Russia Indices (MSCI Russia Standard Index, MSCI Russia Mid Cap Index, and MSCI Russia IMI).

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2. Corporate Governance Report

2.1. Principles and Structure of the Corporate Governance System

To achieve its strategic objectives, MRSK Holding continues to maintain high standards of corporate governance in management of business operation. The management of the Company, guided by the Board of Directors, values a long-term prospective and positions itself as responsible to shareholders, as well as wider range of stakeholders (consumers, employees etc.).

MRSK Holding views corporate governance as a set of relationships aimed at developing the management and control processes related to the Company’s operations. The processes involve interactions among shareholders, the Board of Directors, and executive bodies of the Company for the benefit of its shareholders.

The existing corporate governance system enables shareholders to exercise their rights to participate in running the Company’s business, control its financial and economic activities, and receive dividends in proportion to their shares. MRSK Holding’s corporate governance conforms in compliance with applicable Russian legislation and the Company’s internal documents.

Corporate governance in MRSK Holding is based on the following principles, as outlined in the Company’s Corporate Governance Code:

Accountability. The Code provides for accountability of the Board of Directors to all shareholders in accordance with the applicable laws of the Russian Federation and serves as guidance for the Board of Directors in the strategy development and governance of and control over the activities of the executive bodies of the Company.

Justice. The Company shall protect shareholder rights and ensure equal opportunities to all shareholders. The Board of Directors shall provide all shareholders with efficient protection if their rights are infringed.

Transparency. The Company shall disclose reliable information on all material facts related to the activities of the Company, including on its financial standing, performance, ownership and governance structure of the Company, in due time and ensure free access to such information for all interested parties.

Responsibility. The Company shall recognize rights of all interested parties provided for in the applicable laws of the Russian Federation, and shall make efforts to cooperate with such persons for the purpose of the development and financial stability of the Company.

As specified in the Articles of Association of the Company, MRSK Holding’s corporate governance system includes the following management bodies:

The General Meeting of Shareholders – the superior management body of the Company, through which shareholders exercise their right to take part in the management of the Company;

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The Board of Directors – a management body responsible for the development of the Company’s strategy, general governance of its activities and control over the activities of the executive bodies;

The Management Board and the Director General – management bodies governing the day-to-day activities of the Company and implementing the strategy specified by the Board of Directors of the Company;

The Internal Audit Commission – a body controlling financial and economic activities of the Company, being accountable directly to the General Meeting of Shareholders of the Company.

2.2. General Meeting of Shareholders

Paragraph 10.1 of the Articles of Association of MRSK Holding specifies that the Company’s highest management body is the General Meeting of Shareholders. MRSK Holding did not hold any Extraordinary General Meetings of Shareholders in 2011. The Annual General Meeting (AGM) of Shareholders took place on June 22, 2011, to review the Company’s performance in 2010.

At the Annual General Meeting, the shareholders approved following:

1. The Annual Report of the Company; 2. The annual accounting statements of the Company, including the profit and loss statement; 3. The Company’s profit distribution based on performance results in 2010; 4. The restated version of the Article of Association of MRSK Holding; 5. The Regulations for the Preparation and Holding Procedure for the General Meeting of Shareholders

of MRSK Holding; 6. The Regulations for the Convening and Holding Procedure for Meetings of the Board of Directors of

MRSK Holding.

At the AGM new members of the Board of Directors and the Internal Audit Commission were elected. Also, FinExpertiza was approved as the Company’s Auditor for the purposes of auditing the Company’s annual accounting statements for 2011. Additionally, the AGM signed the agreement for the acquisition by MRSK Holding of additional ordinary shares in Kubanenergo.

The shareholders also resolved to pay remuneration for serving on the Board of Directors to members of the Board of Directors other than those who held public office. The amount of remuneration is in compliance with the Regulations for Remuneration and Compensation for Members of the Board of Directors of MRSK Holding approved by the decision adopted by the AGM of Shareholders of MRSK Holding on June 23, 2010.

2.3. Board of Directors

As of the end of 2011, the Board consisted of fifteen Directors, including seven independent Directors. Biographies set out below identifying the Directors who are independent in the view of the Board. The roles

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of the Chairman and Director General are separate and have been so since the Company’s shares were admitted to listing in 1994. The full schedule of matters reserved for decision making by the Board, can be found on the Company’s corporate website at http://www.holding-mrsk.ru/.

The Chairman is responsible for leading the Board, ensuring its effectiveness in all aspects of its role and setting its agenda. This includes ensuring, via the Company Secretary, that the Directors receive accurate, timely and clear information. The duties of the Chairman include the following:

To encourage and ensure effective communication with shareholders; and ensure that shareholders views are communicated to the Board as a whole;

To facilitate a structure allowing the effective contribution of all Directors, and of Non-executive Directors in particular;

To create constructive relations between executive and non-executive Directors; To organize the business of the Board so that it can be carried out effectively and efficiently; To lead the Board in discussions regarding the Company’s strategy and achievement of its

objectives; To ensure Board committees are properly established, composed and operated; To enhance the Company’s public standing and image overall.

The composition of the Board of Directors as of the end of 2011 was as follows:

# Information about a member of the Board of Directors 1 Andrey Bokarev

Member of the Board of Directors

Year of Birth: 1966

Member of the Board of Directors from 2011. President, Transmashholding. Member of the Board of Directors, Ural Mining and Metallurgical Company. Chairman of the Board of Directors, CC Kuzbassrazrezugol. Head of the Regional Office, RSPP Regional Office in the Kemerovo Region. Chairman of the Coordinating Board, RSPP Associations in the Siberian Federal District. Member of the Bureau of the Board of Directors, Russian Union of Industrialists and Entrepreneurs (RSPP). Member of the Bureau of the Board of Directors, Russian Union of Industrialists and Entrepreneurs Russian Association of Employers. Chairman, Kuzbass Union of Employers Regional Association of Employers. President, Association of Russian Public Organizations. President, Freestyle Federation of Russia.

Education: higher education

No stake/ordinary shares held in the authorized capital of the issuer.

Stakes held by the individual in the authorized (share) capital (unit trust) of the subsidiaries and dependent companies of the issuer: The individual does not hold such stakes.

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No transactions involving the acquisition or transfer of title to shares. 2 Sergey Borisov

Member of the Board of Directors, Independent Director

Year of Birth: 1953

Member of the Board of Directors from 2010. Member of the Supervisory Board, Russian Bank for Development. Member of the Supervisory Board, Rosbusinessbank. President, Association of Entrepreneurial Organizations of Russia (OPORA). President, OPORA RUSSIA All-Russian Public Organization of Small and Medium Business. Chief Executive Officer, Russian Fuel Union.

Education: higher education, Candidate of Science (Economics), Doctor of Philosophy



No transactions involving the acquisition or transfer of title to shares. 3 Pavel Borodin


Year of Birth: 1971

Member of the Board of Directors from 2011. Vice President, Operator Activity Support and Government Relations, VimpelCom. Member of the Board of Directors, All-Russian Exhibition Center. Member of the Presidium, Chairman of the International Cooperation Commission, Association of Lawyers of Russia. From 2008 to 2010, Deputy Director General, Russian Housing Development Foundation. From 2004 to 2008, Deputy Director of the Regional Monitoring Department and, then, Deputy Director of the Regional Development and Agriculture Department, Government of the Russian Federation. From 2008 to 2011, member of the Central Election Commission of the Russian Federation with a consultative voice on behalf of Dmitry Medvedev. From 2004 to 2008, member of the Central Election Commission of the Russian Federation with a consultative voice on behalf of Vladimir Putin.

Education: higher education, Candidate of Science (History)



No transactions involving the acquisition or transfer of title to shares.

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4 Valery Gulyaev


Year of Birth: 1957

Member of the Board of Directors from 2010. Deputy Director General for Procurement and Logistics, member of the Management Board, OGK-2. Deputy Director General for Procurement and Logistics, member of the Management Board, OGK-6.



Stakes held by the individual in the authorized (share) capital (unit trust) of the subsidiaries and dependent companies of the issuer:

Full corporate name: Interregional Distribution Grid Company of North-West, Joint Stock Company

INN (Taxpayer Identification Number): 7802312751

OGRN (Principal State Registration Number): 1047855175785

Stake held by the individual in the authorized capital of the entity (%): 0.0017

Percentage of ordinary shares in the entity owned by the individual (%): 0.0017

No transactions involving the acquisition or transfer of title to shares. 5 Vyacheslav Kravchenko


Year of Birth: 1967

Member of the Board of Directors from 2008. Chief Executive Officer United Energy Sales Company. Chief Executive Officer, RN-Energo. Member of the Boards of Directors: Petersburg Power Sales Company, Altaienergosbyt, Okha CHPP, Financial Settling Center, INTER RAO UES, ATS. From 2008, member of the Supervisory Board, Market Council. From 2009 to 2011, member of the Boards of Directors: Tomskelektrosetremont, Tomskenergoremont, Tomsk Transmission Networks, Tomskenergosbyt, Kuban Generation Company, Kuban Transmission Networks, Kubanenergosbyt. From 2010 to 2011, member of the Board of Directors, RRDB. At certain times from 2008 to 2011, member of the Board of Directors: TDC, Kubanenergo, TGK-11, Irkutskenergo, Rostopprom, Rosgazifikatsiya, Energosetproekt Institute.

From August 2008 to December 2008, Chairman of the Board of Directors, MRSK Holding.

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Before that, Deputy Director of the Department for Structural and Investment Policy and Energy and, then, Director of the Electricity Industry Department, Ministry of Industry and Energy of the Russian Federation.


No stake/ordinary shares held in the authorized capital of the issuer


No transactions involving the acquisition or transfer of title to shares. 6 Viktor Kudryavy


Year of Birth: 1937

Member of the Board of Directors from 2009. Member of the Board of Directors, RusHydro. Advisor to President, EUROCEMENT Group ZAO. From 2005 to 2008, Vice President, EUROCEMENT Group OAO. Chief Scientific Officer, Department of Automated Systems, Moscow Power Engineering Institute. From 1996 to 2004, Deputy Minister of Fuel and Energy of the Russian Federation (on May 17, 2000, transformed into the Ministry of Energy of the Russian Federation).

Education: higher education, Doctor of Science (Engineering)

Stake held by the individual in the authorized capital of the issuer (%): 0.0009

Percentage of the issuer’s ordinary shares owned by the individual (%): 0.001

Stakes held by the individual in the authorized (share) capital (unit trust) of the subsidiaries and dependent companies of the issuer:

Full corporate name: Interregional Distribution Grid Company of North-West, Joint Stock Company

INN (Taxpayer Identification Number): 7802312751

OGRN (Principal State Registration Number): 1047855175785



Full corporate name: Joint-Stock Company Moscow United Electric Grid Company

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As of December 31, 2011, as a result of a transaction involving the acquisition of ordinary shares in MRSK Holding, the stake held by member of the Board of Directors of MRSK Holding Viktor Kudryavy in the authorized capital of the Company increased from 0.00001% to 0.0009% and the percentage of ordinary shares in the Company owned by him increased from 0.00001% to 0.0010%.

7 Georgy Kutovoy


Year of Birth: 1937

Member of the Board of Directors from 2010. Director of the Expert Analysis Center, Energy Research Institute of the Russian Academy of Sciences. Advisor to President on Energy, OMK. From 2010 to 2011, member of the Board of Directors, FGC UES. From 2007 to 2009, Chairman of the Board of Directors, Ruse CHPP, Republic of Bulgaria. From 2004 to 2009, Advisor on Natural Monopolies, Mechel. Professor, Chair for State Regulation of Natural Monopolies, Advanced Training Institute for Civil Servants.

Education: higher education, Candidate of Science (Engineering), Doctor of Science (Economics), Professor



No transactions involving the acquisition or transfer of title to shares. 8 Sergey Maslov


Year of Birth: 1960

Member of the Board of Directors from 2008. President, member of the Board of Directors, Saint Petersburg International Mercantile Exchange. Member of the Boards of Directors: RAO Energy System of East, OZK, Financial Settling Center, ATS.

Formerly, member of the collegial management bodies: RDK, INTER RAO UES, RusHydro, FGC UES. From 2001 to 2008, President, TRANSNEFTEPRODUCT.


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No transactions involving the acquisition or transfer of title to shares. 9 Seppo Remes


Year of Birth: 1955

Member of the Board of Directors from 2008. Chairman of the Audit Committee, member of the Strategy Committee, member of the Valuation Committee. Director General, Kiuru. Chairman of the Board of Directors, EOS Russia. Member of the Boards of Directors: Energosetproekt Institute, LENENERGO, IDGC of North-West, SIBUR Holding, Sollers, OMZ. Member of the Investment Policy Committee of the Supervisory Board, Russian Corporation of Nanotechnologies (since March 2011, RUSNANO). In recent years, member of the Boards of Directors: FGC UES, IDGC of Volga, SO UPS, IDGC of Center and Volga Region, RusHydro, OGK-6, PONSSE, RAO UES of Russia.

Education: higher education, Ph.D. in Economics



No transactions involving the acquisition or transfer of title to shares. 10 Sergey Serebryannikov


Year of Birth: 1952

Member of the Board of Directors from 2008. Rector, Professor, Moscow Power Engineering Institute (Technical University). From 2008 to 2010, member of the Board of Directors, RusHydro.

Education: higher education, Doctor of Science (Engineering)



No transactions involving the acquisition or transfer of title to shares.

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11 Vladimir Tatsiy


Year of Birth: 1960

Member of the Board of Directors from 2008. Chairman of the Board of Directors, Saint Petersburg International Mercantile Exchange. Chairman of the Board of Directors, Depository Clearing Company. First Vice President, Gazprombank. Member of the Boards of Directors: RusHydro, MICEX Stock Exchange, Financial Settling Center, National Association of Securities Market Participants, ATS, Regional Investment Company. Member of the Board of Trustees, Moscow Power Engineering Institute (Technical University). Member of the Supervisory Board, National Settlement Depository (NSD) (formerly, NDC and MICEX SH). From 2009 to 2010, member of the Boards of Directors: United Energy Sales Company, RRDB. From 2008 to 2010, member of the Boards of Directors: FGC UES, RusHydro, RAO Energy System of East. For several years, Head of the Depository Center, Gazprombank. Formerly, member of the Boards of Directors: National Depository Center, INFINITUM Specialized Depository.

Education: higher education, Candidate of Science (Economics)



No transactions involving the acquisition or transfer of title to shares. 12 Thomas Hendel


Year of Birth: 1967

Member of the Board of Directors from 2011. Director General, Industrial Energy Company. Director General, RUDEA. From 2004 to 2010, Director General, THU Trading GmbH + Co. KG, Germany.




No transactions involving the acquisition or transfer of title to shares. 13 Igor Khvalin

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Year of Birth: 1974

Member of the Board of Directors from 2010. Chairman of the Board of Directors, Volga Engineering Group. Member of the Board of Directors, FGC UES. Member of the Working Group for Energy Efficiency, Ministry of Economic Development of the Russian Federation. Member of the Presidential Commission for Modernization of Russia’s Economy. From 2009 to 2010, Director General, Volga Engineering Group. From 2008 to 2009, Chairman of the Board of Directors, Volga Region Energy Engineering Center. Before that, Chairman of the Board of Directors, Krona Kholding. From 2007 to 2009, member of the Forestry Sector Development Council, Government of the Russian Federation.

Education: higher education, Candidate of Science (History)



No transactions involving the acquisition or transfer of title to shares. 14 Denis Fedorov


Year of Birth: 1978

Member of the Board of Directors from 2011. Chairman of the Boards of Directors: Mezhregionenergostroy, Tyumen Power Sales Company, Mosenergo Thermal Power Company, OGK-6, OGK-2. Director General, Tsentrenergokholding. Director General, Gazprom Energoholding. Division Manager, Gazprom. Member of the Management Boards: Kauno elektrine AB, Kaunas Thermofication Plant, Nadezhda Foundation for Education, Science and Engineering Development, Fortis Energy. Member of the Boards of Directors: FGC UES, INTER RAO UES, TGK-1, Mosenergo. Member of the Supervisory Board, Council of Power Producers. Formerly, member of the Boards of Directors: MTenergosbyt, RAO Energy System of East, Gazenergoprombank, IDGC of Volga, Tyumenenergo. From 2006 to 2008 almost simultaneously, Director General, Mezhregionenergosbyt; Advisor to Director General, Mezhregiongaz; Division Head, Gazenergoprom Corporation. From 2002 to 2006, Division Manager, EuroSibPower-Engineering.

Education: higher education, Candidate of Science (Economics)



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No transactions involving the acquisition or transfer of title to shares. 15 Nikolay Shvets

Member of the Board of Directors, Director General, Chairman of the Management Board

Year of Birth: 1956

Member of the Board of Directors, Director General from 2009. Chairman of the Boards of Directors: IDGC of Northern Caucasus, Kubanenergo, Yantarenergo, Tyumenenergo, LENENERGO, MOESK. Member of the Supervisory Board, Scientific and Technical Council of Unified Energy System. Vice President, member of the Management Board, member of the Management Board Bureau, Russian Engineering Union All-Russia Industry Association of Employers. From 2010 to 2011, Chairman of the Boards of Directors: IDGC of South, IDGC of Centre; member of the Boards of Directors: Energy Forecasting Agency, RRDB. From 2009 to 2010, Chairman of the Boards of Directors: IDGC of Urals, IDGC of North-West, IDGC of Center and Volga Region. Before joining MRSK Holding, Chairman of the Amur Region Legislative Assembly; Professor, Far East State Agrarian University. From 2007 to 2008, First Deputy Chairman of the Amur Region Government. From 2006 to 2008, member of the Board of Directors, Sarapul Electric Generators. From 2004 to 2007, Assistant to the Director General, Rosoboronexport State Corporation.

Education: higher education, Doctor of Science (Economics), Associate Professor, Associate Member of the Academy of Military Sciences



2.4. Committees of the Board of Directors

The Committees of the Board of Directors are established to consider preliminarily the most important issues falling within its competence and are accountable to the Board of Directors of the Company. Performance reports of the Committees are annually reviewed by meetings of the Board of Directors.

The Committees are composed of people with extensive experience and knowledge in the relevant areas, which raises the efficiency and quality of work of the Board of Directors. Each Committee has the sufficient number of members to comprehensively discuss the issues under consideration with due regard to different opinions. The Committees act in accordance with the Regulations for the Committees of the Board of Directors.

Therefore, the formation and work of the Committees of the Board of Directors follow global best practices in corporate governance, contribute to the higher quality of decisions, and make it possible to balance the

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interests of all shareholders of the Company in the course of decision making, improving the Company’s operating efficiency and appeal for investors.

In 2011 The Board of Directors had five Committees:

Audit Nomination and Remuneration Strategy Valuation Investment

Valuation Committee

The goal of the Valuation Committee is to assist the Board of Directors in developing the procedure of overseeing the value appraisal of assets and business for the Company, its subsidiaries and dependent companies, and new companies and other economic entities involved in transactions. In working toward with this goal, the Committee complies fully with the Federal Law “Appraisal Activities in the Russian Federation” and Federal Appraisal Standards.

The principal objectives of the Valuation Committee include:

Supervising activities related to the appraisal of assets for the Company and its subsidiaries and dependent companies;

Engaging independent expertise to advice on the issues falling within the competence of the Committee.

In 2011, the Valuation Committee held 16 meetings (four in-person and 12 absentee meetings), considering 39 agenda items. The most important of them are following:

Market value of 99.997% stake held by Tyumenenergo in Tyumenenergoavtotrans; Market value and investment appraisal of properties, including specialized property owned by

Mosenergo; Market value and investment appraisal of shares in Energotsentr; Market value of property that is electric grid facilities belonging to Saint Petersburg by virtue of

ownership; Market value of the electric boiler house located near Kodinsk, Krasnoyarsk Region, and owned by

MRSK of Siberia; Market value of construction-in-progress facilities of the 110/10-kV Universitetskaya substation

building with a plot of land in Nizhni Novgorod; Market value of real property in Kemerovo Region (Podgornoye Rural, Leninsk-Kuznetsky District); Market value appraisal of electric grid facilities in Rostov-on-Don and Serov, Sverdlovsk Region; Market value of the 110/10-kV Tagara substation.

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Audit Committee

The goal of the Committee is to ensure effective participation of the Board of Directors in controlling the financial and economic activities of the Company. The principal objective of the Audit Committee is to prepare and submit recommendations to the Board of Directors concerning control over:

Preparation process and procedures for financial (accounting) statements, including reviewing financial (accounting) statements;

Efficiency of the internal control and risk management systems; Selection of the independent external auditor and the evaluation of its performance; Activities of the Company’s internal control/audit function; Company’s compliance with Russian legislation, industry standards, and its internal regulatory

documents.

In the reporting year, the Audit Committee held nine meetings (six in-person and three absentee meetings), considering more than 20 agenda items. The most substantial of them are as follows:

Draft of the financial statements of MRSK Holding in accordance with Russian Accounting Standards for 2010;

Draft of the consolidated financial statements of the MRSK Holding Group for the year ended December 31, 2010, in accordance with International Financial Reporting Standards;

Review of the consolidated interim condensed financial statements of the MRSK Holding Group for the six months ended June 30, 2011, in accordance with International Financial Reporting Standards;

Assessment of the auditors’ report on the MRSK Holding accounting statements for the period from January 1, 2010, to and including December 31, 2010, by the Audit Committee;

Report submitted by the external auditors on the types and price of advisory services provided by the external auditors for the MRSK Holding Group’s entities;

Organization of the MRSK Holding Group’s bidding procedures in connection with selecting an auditor to audit the financial statements of MRSK Holding subsidiaries and dependent companies for 2011 in accordance with Russian Accounting Standards and International Financial Reporting Standards;

Review of the quarterly report of the Director General of MRSK Holding to the Board of Directors on the development of the Company’s approved local documents related to improving and developing internal control, risk management, and internal audit (including the Report on Risks Associated with Activities of Subsidiaries and Dependent Companies);

Review of the performance report of the Internal Audit and Risk Management Department of MRSK Holding for 2010 and the consolidated performance report of internal audit, internal control, and risk management divisions of MRSK Holding subsidiaries and dependent companies;

Review of the terms of reference of the project for MRSK Holding’s implementing activities aimed at preventing, identifying, and combating insider information misuse and/or market manipulation;

Review of a restated version of the Regulations for Insider Information of MRSK Holding;

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Approval of the report of the Audit Committee to the Board of Directors of MRSK Holding for the 2nd half of 2010 and 1st half of 2011.

Investment Committee

The goal of the Committee is to assist the Board of Directors in performing its functions related to ensuring the development of the Company’s investment policy.

The principal objectives of the Investment Committee include analyzing proposals and formulating recommendations for the Board of Directors with respect to the Company’s investment activities; monitoring the implementation of the Company’s consolidated investment program; and analyzing applicable regulatory documents and formulating proposals and recommendations with respect to their timely revision.

In the reporting year, the Investment Committee held six meetings (one in-person and five absentee meetings), considering more than 20 agenda items. The most substantial of them are:

Review of proposals to amend Resolution of the Government of the Russian Federation No. 977 of December 1, 2009 (adjusted to take into consideration the November 9, 2010, meeting at the Ministry of Energy of the Russian Federation);

Calculation methods and attainment evaluation for the KPI “Cost reduction ratio resulting from cost management program implementation to total investment costs” for the Director General of MRSK Holding and directors general of MRSK Holding subsidiaries and dependent companies;

Review of the action plan to develop the scenario conditions for formulating investment programs (including criteria and priorities for incorporating investees into the investment program for 2012 and the subsequent years) with a proposal regarding their consideration and approval by the Ministry of Energy of the Russian Federation;

Report on the capital construction status and proposals to improve MRSK Holding’s capital construction management processes;

Review of the reports on the implementation of the consolidated investment program of MRSK Holding for 2010 and for the 1st quarter, 2nd quarter, 1st half, and 9 months of 2011;

Review of the consolidated investment program of MRSK Holding for 2011–2015, including 2011; Review of the scenario conditions for formulating investment programs of MRSK Holding

subsidiaries and dependent companies; Preliminary review of the Regulations for the Procedure for Regulated Procurements of Goods,

Work, Services for the Needs of MRSK Holding and Subsidiaries and Dependent Companies.

Strategy Committee

The Committee analyzes and prepares for the Board of Directors recommendations and proposals concerning the Company’s strategic development and the formulation of development planning standards

23

for MRSK Holding subsidiaries and dependent companies and monitors the implementation of approved decisions. In accordance with the Regulations for the Strategy Committee its principal objectives include:

Reviewing proposals and formulating recommendations for the Board of Directors of the Company to prepare, change, supplement, and implement efforts aimed at the Company’s development in the key areas;

Monitoring the implementation of efforts aimed at the Company’s development in the key areas approved by the Board of Directors;

Reviewing proposals and formulating recommendations for the Board of Directors of the Company to prepare development planning standards for MRSK Holding subsidiaries and dependent companies.

The board of the Committee changed in 2011 due to the election of new members of the Board of Directors.

The most important issues addressed by the Committee in 2011 are the following:

Approval of the Strategy for Development of MRSK Holding until 2015 with Long-Term Plans until 2020;

Review of the plan for implementing the Strategy for Development of MRSK Holding until 2015 with Long-Term Plans until 2020;

MRSK Holding’s role in achieving the goals of providing retail consumers of electricity with modern metering instruments;

Increase in the authorized capital of MRSK Holding by placing additional shares; Changes to the KPI system of MRSK Holding and its subsidiaries and dependent companies; Acquisition by MRSK Holding of additional shares in Kubanenergo; Acquisition by MRSK Holding of additional uncertificated registered ordinary shares in IDGC of

Siberia which are not certificated; Acquisition by MRSK Holding of uncertificated registered ordinary shares in Kuban Power and

Electrification Open Joint Stock Company and Class A uncertificated registered preference shares in Joint-Stock Company Tomsk Distribution Company;

At least 10 percent annual reduction of per-unit purchase costs related to goods (work, services) within three years.

Nomination and Remuneration Committee

In accordance with the Regulations for the Nomination and Remuneration Committee, its principal objectives include:

Defining selection criteria for nominees for members of the Board of Directors, members of the Management Board, and the Director General of the Company and preliminarily evaluating such nominees;

24

Developing proposals to define material terms and conditions of employment contracts with members of Board of Directors, members of the Management Board, and the Director General of the Company;

Developing principles and criteria of remuneration for members of the Board of Directors, members of the Management Board, the Director General of the Company, and the management company or the manager;

Regularly evaluating the activities of the Director General (the management company or the manager) and members of the Management Board and preparing proposals to the Board of Directors as to whether they can be reappointed;

Developing principles and criteria related to remuneration for the Chairman and members of the Internal Audit Committee of the Company;

Formulating recommendations for the formation of the personnel reserve of the Company and its subsidiaries and dependent companies.

In 2011, the Nomination and Remuneration Committee held four meetings (one in-person and three absentee meetings). The most substantial issues addressed are as follows:

At least 10 percent annual reduction of per-unit purchase costs related to goods (work, services) within three years;

Organization of MRSK Holding’s corporate governance; Changes to the KPI system of MRSK Holding and its subsidiaries and dependent companies.

2.5. Management Board

The Director General is responsible for the daily operation of the Company and advancing long-term shareholder value, supported by the management team. He is accountable and responsible to the Board for the management and operation of the Company. He is also involved in management of social and environmental responsibilities of the Company. The duties of the Director General include the following:

To be responsible and accountable to the Board for the management and operation of the Holding; To prepare and implement plans and programs for the attainment of approved objectives and

recommendation to the Board as appropriate; To provide leadership in the Group’s commitment attaining high business standards generally; To create the conditions within the Group for the efficient operation of all business units; To establish and maintain relationships with shareholders and potential shareholders, and major

external bodies; To keep the Board informed on all matters of material importance; To chair meetings of the Executive Committee

The Management Board of MRSK Holding is a collegial executive body in charge of all of the Company’s day-to-day activities. The number of members of the Management Board is determined by and appointed by the Board of Directors.

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The composition of the Management Board of MRSK Holding as of the end of 2011 is as follows:

# Information about a member of the Management Board 1 Nikolay Shvets

Chairman of the Management Board, Director General, member of the Board of Directors

Year of Birth: 1956

Chairman of the Management Board from 2009. Chairman of the Boards of Directors: IDGC of Northern Caucasus, Kubanenergo, Yantarenergo, Tyumenenergo, LENENERGO, MOESK. Member of the Supervisory Board, Scientific and Technical Council of Unified Energy System. Vice President, member of the Management Board, member of the Management Board Bureau, Russian Engineering Union All-Russia Industry Association of Employers. From 2010 to 2011, Chairman of the Boards of Directors: IDGC of South, IDGC of Centre; member of the Boards of Directors: Energy Forecasting Agency, RRDB. From 2009 to 2010, Chairman of the Boards of Directors: IDGC of Urals, IDGC of North-West, IDGC of Center and Volga Region. Before joining MRSK Holding, Chairman of the Amur Region Legislative Assembly; Professor, Far East State Agrarian University. From 2007 to 2008, First Deputy Chairman of the Amur Region Government. From 2006 to 2008, member of the Board of Directors, Sarapul Electric Generators. From 2004 to 2007, Assistant to the Director General, Rosoboronexport State Corporation.

Education: higher education, Doctor of Science (Economics), Associate Professor, Associate Member of the Academy of Military Sciences



No transactions involving the acquisition or transfer of title to shares. 2 Aleksey Demidov

Member of the Management Board, Deputy Director General for Economic Affairs and Finance

Year of Birth: 1976

Member of the Management Board from 2009. Acting Director General, IDGC of Northern Caucasus. Chairman of the Boards of Directors: IDGC of North-West, IDGC of Siberia. Member of the Boards of Directors: Kubanenergo, LENENERGO, IDGC of Northern Caucasus. From 2010 to 2011, member of the Board of Directors, Center for UPS Settlements Optimization. From 2009 to 2010, member of the Boards of Directors: Tyumenenergo, MOESK, IDGC of Center and Volga Region, IDGC of North-West.

From 2009 to 2011, Chairman of the Board of Directors, IDGC of Urals. Before joining MRSK Holding from 2006 to 2009, First Deputy Chief Financial Officer, Rosneft. In 2006, Advisor to the Deputy

26

Chairman of the Management Board, Gazprom. From 2003 to 2006, First Deputy Director General, Sevmorneftegaz.



Stakes held by the individual in the authorized (share) capital (unit trust) of the subsidiaries and dependent companies of the issuer The individual does not hold such stakes.

No transactions involving the acquisition or transfer of title to shares. 3 Mikhail Kurbatov

Member of the Management Board, Deputy Director General

Year of Birth: 1981

Member of the Management Board from 2010. Chairman of the Boards of Directors: TDC, IDGC of Urals. Member of the Boards of Directors: SG-trans, Power Grid Optical Networks Engineering, Tyumenenergo, IDGC of Centre, IDGC of North-West, SO UPS. From 2010, member of the Management Board, Federal Tariff Service of the Russian Federation. From 2008, member of the Supervisory Board, Market Council. From 2008 to 2010, member of the Board of Directors, MRSK Holding. From 2009 to 2010, member of the Board of Directors, Energy Forecasting Agency. Before that, member of the Boards of Directors: TGK-5, Financial Settling Center, FGC UES, Irkutskenergo, RAO Energy System of East, Sangtudinskaya HPP-1, etc. From 2005 to 2010, Consultant, Administrative Assistant, Deputy Manager, Manager of the Unit for Restructuring of Energy Industry, Deputy Director of Department, Director of Department, Ministry of Economic Development of the Russian Federation.




No transactions involving the acquisition or transfer of title to shares. 4 Aleksey Perepyolkin

Member of the Management Board, Deputy Director General for Corporate Governance and Property

Year of Birth: 1970

Member of the Management Board from 2009. Chairman of the Boards of Directors: IDGC of South, IDGC of Volga, Power Grid Optical Networks Engineering (formerly, OAO Center for UPS Settlements

27

Optimization), IDGC of Centre, IDGC of Center and Volga Region. From 2010 to 2011, Chairman of the Board of Directors, IDGC of North-West. From 2009 to 2010, member of the Board of Directors, IDGC of South. In 2009, Director for Corporate Policy, MRSK Holding. From 2007 to 2009, Advisor to the Minister, Head of the Main Legal Department, Ministry of Defense of the Russian Federation. Before that, Head of the Consolidated Analytical Division, Federal Tax Service of the Russian Federation. From 2005 to 2006, Deputy Director General for Legal Matters, Gazoil.




No transactions involving the acquisition or transfer of title to shares. 5 Aleksey Sannikov

Member of the Management Board, Deputy Director General

Year of Birth: 1965

Member of the Management Board from 2009. President, member of the Partnership Board, ENERGOSTROY. Member of the Boards of Directors: Yantarenergo, Kubanenergo, Tyumenenergo. From 2010 to 2011, member of the Board of Directors, IDGC of North-West. From 2009 to 2011, Deputy Director General, MRSK Holding. From 2007 to 2008, Director of the Department for Generation and Electricity Market Being Restructured, Atomenergoprom. From 2007 to 2008, Head of the Division for Regulation and Control of Pricing in the Electricity Industry, Federal Tariff Service of the Russian Federation. From 1998 to 2005, Director General, Nizhnovenergo.




No transactions involving the acquisition or transfer of title to shares. 6 Sergey Vasilyev

Member of the Management Board, Director for Legal Affairs and Relations with Electricity Market Entities

Year of Birth: 1975

Member of the Management Board from 2009. Chairman of the Boards of Directors: Tyvaenergosbyt,

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Kalmenergosbyt, Karachaevo-Cherkesskenergo. Member of the Boards of Directors: Tyumenenergo, Yantarenergo, IDGC of Volga, Power Grid Optical Networks Engineering (formerly, OAO Center for UPS Settlements Optimization). From 2010 to 2011, member of the Board of Directors, IDGC of Urals. From 2009 to 2010, member of the Board of Directors, Tyumenenergo. From 2008 to 2010, member of the Board of Directors, IDGC of South. From 2009 to 2011, Chairman of the Board of Directors, TDC. From 2003 to 2008, Head of the Legal Department, RAO UES of Russia.


Stake held by the individual in the authorized capital of the issuer (%): 0.0013

Percentage of the issuer’s ordinary shares owned by the individual (%): 0.0014


In 2011, the Management Board of the Company held 71 meetings (19 in-person and 52 absentee meetings), considering 338 agenda items. The most important of them are following:

Progress in implementing the actual plan to formulate the innovative development programs of MRSK Holding and its subsidiaries and dependent companies for 2011–2016;

Capital construction status and proposals to improve capital construction management processes; Results of the development of the Program of the Construction of the Olympic Games Sites for 2010

and the action plan for 2011; Progress in approving the Model Standard of MRSK Holding subsidiaries and dependent companies

“System of Centralized Services Provided for Service Consumers”; Progress in implementing the program to develop the management system for distributed resources

for accident recovery work in emergency situations; Priorities established for the Company’s activities: work on obtaining the registration of title to real

property items and the registration/reregistration the rights to use plots of land; Approval of the Regulations for the Uniform Technical Policy of MRSK Holding in the Distribution

Grid Sector; Approval of the Innovative Development Program of MRSK Holding; Increase in the authorized capital of MRSK Holding by placing additional shares; Asset administration system introduction into MRSK Holding; Creation of unified system to monitor the implementation of all stages of the investment program; Strategy for Development of MRSK Holding until 2015 with Long-Term Plans until 2020 and the

action plan for its implementation; Implementation of the instructions issued by the Government of the Russian Federation to organize

the quarterly monitoring of changes in prime costs of producers holding monopolistic (dominant) positions in the markets of specific economic sectors in order to avoid (prevent) an unjustified increase in prices (tariffs) for consumers;

Development of the Model Terms of Reference for introducing an automated management system for the most important investment projects;

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Development of a uniform referenced data system of MRSK Holding and its subsidiaries and dependent companies for procurement and equipment maintenance and repair management;

Progress in launching the comprehensive program of measures to reduce above-standard electricity losses in distribution networks in the North Caucasus;

Approval of the Model Standard for the Technical Policy on Electricity Metering for Electricity Distribution Grid Facilities of MRSK Holding subsidiaries and dependent companies;

Improvement of grid companies’ performance as related to optimizing the ratio of financing sources for investment programs to accessible debt capital markets;

Strategy for Development of MRSK Holding and Its Subsidiaries and Dependent Companies in Information Technology, Automation and Telecommunications until 2016;

Progress in implementing the Program of the Construction of Olympic Games Sites and the Development of Sochi as a Mountain Climate Resort;

Review of a restated version of the Regulations for Insider Information of MRSK Holding as part of implementing measures aimed at preventing, identifying, and combating insider information misuse and/or market manipulation;

Implementation status of the planned level of electricity losses at MRSK Holding subsidiaries and dependent companies.

Internal Audit Commission

Members of the Internal Audit Commission of MRSK Holding were elected by the Annual General Meeting of Shareholders on June 22, 2011:

# Name Position (as of the time of nomination)

1. Alexander Kuryanov Division Head, Federal Agency for State Property Management of the Russian Federation

2. Aleksey Ozherelyev Division Head, Ministry of Energy of the Russian Federation

3. Oleg Oreshkin Division Head, Federal Agency of State Property Management of the Russian Federation

4. Sergey Pakhomov Division Head, Federal Agency of State Property Management of the Russian Federation

5. Pavel Shpilevoy Deputy Division Director, Ministry of Economic Development of the Russian Federation

In 2011, the members of the Internal Audit Commission other than the government officials received remuneration of RUB 110,425 in accordance with the applicable legislation.

2.6. Remuneration

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Total income of all members of the Board of Directors of MRSK Holding in 2011: RUB 7,785,621.

Total income of all members of the Management Board in 2011: RUB 175,849,949.

Salary: RUB 98,153,810.

Bonuses: RUB 77,696,139.

2.7. Significant events after the end of reporting period

New members of the Board of Directors were elected at the Extraordinary General Meeting of Shareholders on January 14, 2012. The new composition of the Board of Directors is presented in the table below:

# Name Position 1 Georgy Boos President, Managing company Boos Lighting Group 2 Nikolay Shvets Chairman of the Management Board, Director General, MRSK

Holding 3 Denis Fedorov Head of the Division for Energy Sector Development and Electric

Power Industry Marketing, Gazprom; Director General, Tsentrenergoholding; Director General, Gazprom energoholding.

4 Seppo Juha Remes Director General, Kiuru 5 Vladimir Kolmogorov Advisor to Director General, GMK Norilsky nikel 6 Vladimir Tatsiy First Vice President, Gazprombank 7 Thomas Hendel Director General, Rudea 8 Sergey Serebryannikov Rector, Moscow Power Engineering institute (Technical university) 9 Vyacheslav Kravchenko Director General, OEK 10 Andrey Bokarev Chairman of the management board, Kuzbassrazrezugol,

Transmasholding 11 Georgy Kutovoy Advisor to President, OMK 12 Viktor Kudryavy Advisor to President, Eurocement group ZAO 13 Pavel Borodin Vice President, Vympelkom 14 Sergey Borisov President, OPORA RUSSIA, Russian Non-Governmental

Organization for Small and Medium Entrepreneurship, and Non-profit Partnership The all-Russian Union of Business Associations OPORA

15 Igor Khvalin Chief Executive Officer, Volga engineering group

The Extraordinary General Meeting of Shareholders also brought about changes in the structure of the Committees. The Company’s Board of Directors established the Society, Customer, and Government Relations and Information Policy Committee, while the Investment Committee was reorganized as the Investment, Technical Policy, Reliability, Energy Efficiency, and Innovation Committee with its area of responsibility expanded accordingly.

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3. Operating Performance Review of 2011

3.1. Major Operating Results

Electricity Transmission

In 2011, subsidiaries of MRSK Holding delivered to the grid 589,870.9 million kWh of power, which is 0.3% less than in 2010 (591,480.6 million kWh). However, excluding the portion of electricity redistributed to FGC UES in 2011 and delivered to customers connected to electric grid facilities that are part of the Unified National Electric Grid (so-called last mile customers), electricity delivery experienced a 1.4% increase.

Operating performance in 2011 was as follows:

Company

Delivery to networks,

kWh million

Delivery from network to

customers and Allied TGO’s, kWh

million

Electricity losses

kWh million %

MRSK of the Center 62,914.7 56,667.4 6,247.2 9.93 MRSK of the Center and the Volga 59,652.5 54,298.8 5,353.7 8.97

MRSK of the Volga 61,830.3 57,622.8 4,207.5 6.80 MRSK of the Northwest 42,990.7 40,243.7 2,747.1 6.39 MRSK of Siberia 78,955.1 72,079.2 6,875.9 8.71 Tomsk Distribution Company 6,650.6 6,074.5 576.1 8.66 MRSK of the Urals 77,756.4 71,577.0 6,179.4 7.95 MRSK of the South 30,014.6 27,172.4 2,842.2 9.47 MRSK of the North Caucasus 11,067.4 9,477.8 1,589.6 14.36 Kubanenergo 19,981.7 17,198.0 2,783.7 13.93 MOESK 84,165.3 75,469.7 8,695.6 10.33 Lenenergo 33,460.4 29,913.9 3,546.4 10.60 Tyumenenergo 70,671.2 68,881.6 1,789.7 2.53 Yantarenergo 3,862.0 3,194.1 667.9 17.29 Total for MRSK Holding 643,972.9 589,870.9 54,102.0 8.40

Changes in electricity delivery from networks in 2010–2011 are represented in the table below (changes are calculated on a comparable basis, i.e. inclusive of electricity delivered to last mile customers in 2011):

IDGC/DGC

Electricity Delivery to Customers and Allied Territorial Grid Organizations, million kWh

2010 2011 Change* million kWh %

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IDGC of Centre 56,028.9 56,667.4 1,085.3 + 1.9

IDGC of Center and Volga Region 54,100.4 54,298.8 1,005.7 + 1.9

IDGC of Volga 56,367.8 57,622.8 1,776.4 + 3.2

IDGC of North-West 40,751.8 40,243.7 90.0 + 0.2

IDGC of Siberia 73,813.3 72,079.2 - 512.0 - 0.7

TDC 6,204.0 6,074.5 - 129.5 - 2.1

IDGC of Urals 72,048.4 71,577.0 2,499.5 + 3.5

IDGC of South 27,441.6 27,172.4 496.8 + 1.8

IDGC of Northern Caucasus 9,923.6 9,477.8 445.2 + 4.9

Kubanenergo 16,448.8 17,198.0 749.2 + 4.6

MOESK 74,207.6 75,469.7 1,262.1 + 1.7

LENENERGO 29,909.0 29,913.9 184.6 + 0.6

Tyumenenergo 71,067.0 68,881.6 - 575.0 - 0.8

Yantarenergo 3,168.4 3,194.1 25.7 + 0.8

Total 591,480.6 589,870.9 8,403.9 + 1.4

MRSK Holding’s total actual electricity losses were 54,102.0 million kWh, or 8.40% of electricity delivered to networks. With electricity delivery to networks increased by 1.12% on 2010 (on a basis comparable with 2011), electricity losses in 2011 fell by 1,884.7 million kWh or 0.29% against 2010 on a comparable basis. The reduction in electricity losses was due primarily to the measures implemented under the Consolidated Energy Conservation and Energy Efficiency Enhancement Program for MRSK Holding Subsidiaries and Dependent Companies for 2011–2015 approved by the Company’s Board of Directors.

Actual electricity losses in 2010-2011 were as follows:

Company

Electricity losses 2010 2011 Change

million kWh % %* million

kWh % million kWh %

MRSK of the Center 6,229.6 10.01 10.08 6,247.2 9.93 17.6 - 0.15 MRSK of the Center and the Volga Region

5,391.5 9.06 9.19 5,353.7 8.97 - 37.8 - 0.22

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MRSK of the Volga 4,176.0 6.90 6.92 4,207.5 6.80 31.5 - 0.12 MRSK of the Northwest

2,983.0 6.82 6.92 2,747.1 6.39 - 235.9 - 0.53

MRSK of Siberia 7,517.9 9.24 9.38 6,875.9 8.71 - 642.0 - 0.67 Tomsk Distribution Company

573.3 8.46 8.46 576.1 8.66 2.8 +0.20

MRSK of the Urals 6,333.2 8.08 8.40 6,179.4 7.95 - 153.8 - 0.45 MRSK of the South 2,818.2 9.31 9.56 2,842.2 9.47 24.0 - 0.09 MRSK of the North Caucasus

2,100.9 17.47 14.18 1,589.6 14.36 - 511.3 +0.18

Kubanenergo 2,431.0 12.88 12.88 2,783.7 13.93 352.7 +1.05 MOESK 9,314.5 11.15 11.15 8,695.6 10.33 - 618.9 - 0.82 Lenenergo 3,586.6 10.71 10.77 3,546.4 10.60 - 40.2 - 0.17 Tyumenenergo 1,841.1 2.53 2.58 1,789.7 2.53 - 51.4 - 0.05 Yantarenergo 689.9 17.88 17.88 667.9 17.29 - 22.0 - 0.59 Total for MRSK Holding

55,986.7 8.65 8.69 54,102.0 8.40 - 1,884.7 - 0.29

Network Connection Services

Network connection is comprehensive services designed to make it technically feasible to supply electricity to customers. These services include the actual connection of power-receiving equipment of electricity consumers, power generation facilities, and electric grid facilities owned by grid organizations and other persons to networks of grid organizations. Network connection services are provided for applicants in relation to power-receiving equipment that is put into operation for the first time or in relation to previously connected power-receiving equipment under rehabilitation if its connected capacity is increased and in the case of previously connected power-receiving equipment whose electricity supply reliability categories, connection points, or production operation type are changed without involving any revision of its connected capacity value but whose external electricity supply will be implemented in a different manner.

The connection fee amount is determined by executive authorities of constituent entities of the Russian Federation in charge of government regulation of tariffs in accordance with the Guidelines approved by the Federal Tariff Service’s Order No. 365-e/5 of November 30, 2010.

The connection fee should offset economically reasonable expenses associated with the operations for connecting a facility to electricity networks through the calculation of the minimum regulated revenue from network connection.

In 2011, MRSK Holding subsidiaries and dependent companies received 331,570 network connection requests for total capacity of 21,274 MW and entered into 272,587 network connection contracts for total capacity of 8,737 MW. The number of actually signed network connection certificates was 168,499 for total capacity of 4,576 MW.

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Details on network connections in 2011 (including Tyvaenergo, NURENERGO, and Dagenergoset) are presented below:

IDGC/DGC

Number of Network Connection Requests

Signed Network Connection Contracts

Number of Connections

requests MW contracts MW connections MW

IDGC of Centre 56,528 2,481 48,457 1,296 37,499 708

LENENERGO 19,869 1,856 14,561 485 6,302 321

MOESK 33,538 4,920 22,890 1,778 14,700 917

IDGC of Volga 16,524 1,125 15,376 482 10,063 214

Yantarenergo 4,631 197 4,203 81 1,995 48

IDGC of South 19,797 1,366 12,642 352 6,802 201

Kubanenergo 25,243 1,407 20,098 400 15,793 310

IDGC of Northern Caucasus 10,457 285 9,613 275 7,345 119

Tyumenenergo 4,940 690 4,616 242 2,078 381

IDGC of Siberia 33,617 1,778 28,801 691 14,735 369

TDC 2,771 78 2,744 77 2,266 34

IDGC of North-West 25,476 952 20,062 450 12,745 238

IDGC of Urals 27,935 2,420 24,474 981 16,336 352

IDGC of Center and Volga Region 50,244 1,719 44,050 1,147 19,840 364

MRSK Holding 331,570 21,274 272,587 8,737 168,499 4,576

The share of completed connections in total network connection demand in 2011 is 22% in capacity terms (MW) and 51% in quantitative terms (the number of connections). The share of signed network connection contracts in total network connection demand is 41% in capacity terms (MW) and 82% in quantitative terms (the number of connections).

MRSK Holding’s changes in capacity demand and capacity connections for 2009–2011 are shown in the following tables:

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Year Number of Submitted Network Connection Requests (Changes are given against the previous year’s figures)

requests CHG, % MW CHG, % 2009 199,643 16,346 2010 278,429 39 20,144 23 2011 331,570 19 21,274 6

Year Number of Signed Contracts

contracts CHG, % MW CHG, % 2009 159,762 5,790 2010 227,802 43 7,624 32 2011 272,587 20 8,737 15

Year Number of Connections

connections CHG, % MW CHG, % 2009 107,636 3,261 2010 134,471 25 4,199 29 2011 168,499 25 4,576 9

The number of submitted network connection requests and signed network connection contracts for the 12 months of 2011 grew by 19% and 20% respectively in quantitative terms (the number of requests and contracts) and by 6% and 15% in physical terms (MW) respectively as compared with the 12 months of 2010. The number of completed network connection contracts rose by 25% in quantitative terms (the number of contracts) and by 9% in physical terms (MW). The increase in completed network connection contracts in quantitative terms (the number of contracts) outstripped the growth in physical terms (MW) due to the fact that network connection contracts for power-receiving equipment of up to 100 kW account for a fairly large share in the total number.

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Details on Network Connections in 2011 for Power Generation Facilities are given in the table below (Including Tyvaenergo, NURENERGO, and Dagenergoset).

0

50 000

100 000

150 000

200 000

250 000

300 000

350 000

12 months of 2009 12 months of 2010 12 months of 2011

199 643

278 422

331 570

159 672

227 802

272 587

107 636134 471

168 499

pcs.

MRSK Holding’s Changes in the Number of Submitted Network Connection Requests and Signed Network Connection Certificates for 2009–2011 (pcs.)

Number of network connection requests Number of signed network connection contractsNumer of completed network connection contracts

0

5 000

10 000

15 000

20 000

25 000

12 months of 2009 12 months of 2010 12 months of 2011

16 346

20 144 21 274

5 7907 626 8 737

3 2614 199 4 576

MW

MRSK Holding’s Changes in the Total Capacity Covered by Submitted Network Connection Requests and Signed Network Connection Certificates for 2009–

2011 (MW)

Capacity covered by network connection requestsCapacity covered by signed network connection contractsCapacity covered by completed network connection contracts

37

IDGC/DGC

Number of Network Connection Requests

Signed Network Connection Contracts

Number of Connections

(Signed Network Connection Certificates)

requests MW contracts MW connections MW

IDGC of Centre 5 13,353 1 2,400 1 238,600

LENENERGO 1 450,000 0 0 0 0

MOESK 5 740,000 0 0 0 0

IDGC of Volga 0 0 0 0 0 0

Yantarenergo 0 0 0 0 1 450,000

IDGC of South 9 299,365 0 0 1 10,000

Kubanenergo 2 146,190 0 0 0 0

IDGC of Northern Caucasus 10 124,404 0 0 1 14,200

Tyumenenergo 4 339,800 4 322,220 3 124,000

IDGC of Siberia 5 199,200 0 0 1 27,000

TDC 0 0 0 0 0 0

IDGC of North-West 3 222,340 3 18,048 0 0

IDGC of Urals 5 663,600 3 240,100 1 124,000

IDGC of Center and Volga Region

5 107,000 0 0 0 0 MRSK Holding 54 3,305,252 11 582,768 9 987,800

This work includes the network connection services performed in 2011 by MRSK Holding subsidiaries and dependent companies for four large power generation facilities constructed under capacity provision contracts:

IDGC of Centre: 115-MW CCGT, Voronezh CHPP-2, Kvadra; IDGC of Centre: 115-MW CCGT, Kursk Northwest Boiler House, Kvadra; IDGC of South: 110-MW CCGT, Astrakhan TPP, LUKOIL-Astrakhanenergo; IDGC of Urals: 124-MW CCGT, Perm CHPP-6, TGK-9.

3.2. Capital Investment

38

An ongoing commitment to invest through all points of the economic cycle is what drives the development of MRSK Holding’s electricity distribution grid. With a view to promoting efficient implementation of investment programs of subsidiaries of MRSK Holding, the Consolidated investment program for 2011 was developed. It took account of the investment programs of the subsidiaries that had been approved by Resolution of the Government of the Russian Federation No. 977 of December 1, 2009, including the facilities necessary for power supply of the Olympic objects in Sochi.

The investment programs of MRSK Holding subsidiaries take into consideration the following principal requirements:

Compliance of investment projects with the programs of electricity industry development of Russia’s regions and the programs of 0.38–20 kV electric grid facility development (if available);

Inclusion of the facilities initiated in the previous years; Inclusion of the facilities intended for preventing (reducing) long-lasting power outages that affect

socially important objects and vital infrastructure; Inclusion of the facilities in an unsatisfactory technical condition, whose routine maintenance and

repair are economically and technically unfeasible; Inclusion of the facilities from target-oriented programs; Ensuring that metering instruments close boundaries with large customers, including the 100%

closing of boundaries with consumers of over 750 kVA and allied grid organizations (TGOs); Implementation of measures to build/modernize the Automated Information System of Electricity

Billing Metering of the Retail Electricity Market at metering points; Inclusion of the facilities necessary to perform obligations under network connection agreements;

inclusion of the facilities ensuring that generators deliver the necessary capacity under capacity supply agreements.

Furthermore, pursuant to Resolution of the Government of the Russian Federation No. 977 of December 1, 2009, the consolidated investment program contains the projects ensuring the implementation of the following programs:

Energy conservation and energy efficiency enhancement; Creation of the system of automated emergency and process control equipment; Implementation of programs for creating the telecontrol and communication system; Installation of voltage regulators and reactive power compensators.

MRSK Holding’s capital investment includes cash outflows related to the following types of projects:

New construction; Rehabilitation, expansion, and technical upgrading of production and non-production facilities; Acquisition of buildings, structures, equipment, land, and facilities intended for the natural resources; Acquisition and creation of intangible assets; equity investments in electric grid companies, etc.

In 2011, the amount of invested funds was RUB 130,156 million (exclusive of VAT), with financing of RUB 148,089 million (inclusive of VAT), while commissioned fixed assets totaled RUB 116,340 million. Commissioned capacity in 2011 reached 9,304 MVA and 20,848 kilometers.

39

Key indicators of investing activities in 2011 are presented below:

Company Capital Investment

(RUB mln, exclusive of VAT)

Financing

(RUB mln, inclusive of VAT)

Commissioned Fixed Assets

(RUB mln, exclusive of VAT)


(MVA)


(kilometers)

IDGC of Siberia 7,090 7,574 5,025 349 1,548 TDC 468 392 313 5 43 Tyumenenergo 11,974 15,285 6,615 624 166 IDGC of Urals 6,412 7,038 6,484 424 1,169 IDGC of Volga 7,568 8,242 6,986 700 1,544 IDGC of South 4,107 5,039 2,847 408 1,185 Kubanenergo 4,543 6,884 2,543 258 240 IDGC of Northern Caucasus 5,589 7,208 4,023 316 845

NURENERGO 359 247 186 41 200 IDGC of Center and Volga Region 13,569 15,914 14,384 1264 3,086

IDGC of North-West 5,170 5,706 4,754 540 1,485 LENENERGO 15,061 15,547 16,323 996 1,713 Yantarenergo 695 744 942 118 154 IDGC of Centre 15,195 17,782 13,900 1,490 4,630 MOESK 29,527 31,680 30,118 1,597 2,726 Tyvaenergo 57 53 116 9 61 ENCE 2,772 2,757 780 166 52 Total for MRSK Holding 130,156 148,089 116,340 9,304 20,848

The following table and diagrams show changes in commissioned capacity under the MRSK Holding Consolidated investment program for 2009–2011:

Company 2009 2010 2011 MVA kilometers MVA kilometers MVA kilometers

IDGC of Siberia 639 1,294 424 1,060 349 1,548 TDC 81 39 85 627 5 43 Tyumenenergo 2,043 269 741 256 624 166 IDGC of Urals 491 951 669 1,670 424 1,169 IDGC of Volga 396 448 520 1,144 700 1,544 IDGC of South 288 628 296 467 408 1,185

40

Company 2009 2010 2011

MVA kilometers MVA kilometers MVA kilometers Kubanenergo 250 109 265 166 258 240 IDGC of Northern Caucasus 109 192 216 600 316 845

NURENERGO 6 49 64 49 41 200 IDGC of Center and Volga Region 930 665 711 2,226 1,264 3,086

IDGC of North-West 276 620 299 897 540 1,485 LENENERGO 832 669 932 1,508 996 1,713 Yantarenergo 81 29 126 64 118 154 IDGC of Centre 877 2,414 1,050 4,155 1,490 4,630 MOESK 2,268 2,014 2,276 2,005 1,597 2,726 Tyvaenergo 2 6 0 0 9 61 ENCE 175 22 95 22 166 52 Total for MRSK Holding 9,744 10,418 8,770 16,916 9,304 20,848

76 850 87 023

130 156

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

2009 2010 2011

Changes in Capital Investment Under the MRSK Holding Consolidated Investment Program for 2009–2011

(RUB million, exclusive of VAT)

41

In 2011, the great majority of branches of MRSK Holding’s subsidiaries began to employ a new tariff regulation method, the return on invested capital (RAB). This enabled subsidiaries to substantially increase the scope of their investment programs. Capital investment in 2011 grew by 49.6% on 2010.

A rise in borrowings was the main contributor to increased capital investment. Tariff-based revenues and borrowed funds in 2011 grew by 69.8% and 113.0% on 2010 respectively.

Breakdown of financing sources for MRSK Holding’s investment program in 2009–2011 is presented in the table below:

Source 2009 2010 2011

RUB mln, excl VAT % RUB mln,

excl VAT % RUB mln, excl VAT %

Tariff-based revenues 33,231 43.2% 37,362 42.9% 63,448 48.7%

Borrowed funds 12,013 15.6% 16,066 18.5% 34,224 26.3%

Connection fees and other sources 31,606 41.1%

32,226 37.0% 29,194 22.4%

Additionally issued shares 1,369 1.6% 3,289 2.5%

Spending (RUB million, excl. VAT) 76,850 100% 87,023 100% 130,156 100%

9 744 8 769 9 304

10 418

16 916

20 848

0

5 000

10 000

15 000

20 000

25 000

2009 2010 2011

Changes in Commissioned Capacity Under the MRSK Holding Consolidated Investment Program for 2009–2011

(MVA and kilometers)

MVA Km

42

The principal financing sources for the 2011 investment program were tariff-based revenues (48.7%), borrowed funds (26.34%), additionally issued shares (2.5%), connection fees and other sources (22.4%).

The areas and structure of capital investment can be analyzed as follows:

Areas of Capital Investment

2009 2010 2011

RUB million,

excl. VAT %

RUB million,

excl. VAT %

RUB million,

excl. VAT %

1. Technical upgrading and rehabilitation 34,428 44.8% 44,947 51.6% 76,015 58.4%

2. New construction 38,800 50.5% 37,162 42.7% 50,664 38.9%

3. Intangible assets 8 0.0% 132 0.2% 166 0.1%

4. Long-term financial investments 425 0.6% 2,778 3.2% 6 0.0%

5. Acquisition of fixed assets 3,189 4.1% 1,969 2.3% 3,303 2.5%

6. Other 0 0.0% 36 0.0% 1 0.0%

Total for MRSK Holding 76,850 100% 87,023 100% 130,156 100%

76 015

50 664

3 476

Breakdown of MRSK Holding’s Capital Investment in 2011

Technical upgrading andrehabilitationNew construction

Other

43

In 2011, the principal areas of capital investment were technical upgrading and rehabilitation (58.4%) and new construction (38.9%). An upward trend in the share of technical upgrading and rehabilitation in the MRSK Holding investment program is the evidence of the Company’s efforts to renew capital assets, reduce the physical deterioration rate, and enhance the electricity supply reliability.

Results of Investing Activities

The commissioning of new capacity under the investment projects of MRSK Holding subsidiaries is a priority of their investing activities as part of implementing the investment program. Large and top priority facilities commissioned in 2011 are presented in the following table:

44

MOESK Yantarenergo Tyumenenergo IDGC of North-West IDGC of Center and Volga Region IDGC of South

Construction

SS 110 kV MGU (160 MVA) OL 110 kV Severnaya–Pionerskaya (32 km)

OL 220 kV to SS Vandmtor (2x22.2 km) SS 110 kV Soyuznaya (80

MVA) SS 110 kV Kirovskaya

(Yubileynaya) (40 MVA; 3.5 km)

220 kV addition to SS 110 kV Vandmtor (400 MVA) SS 110 kV Vishnyovaya

SS 110 kV KNS-4 expansion (80 MVA)

Rehabilitation

OL 110 kV Noginsk–Borovoye (11.7 km)

SS 110 kV Pravoberezhnaya (63

MVA) SS 110 kV Iskra (80 MVA) SS 110 kV Yasnogorsk (126

MVA)

OL 110 kV Sysoevo–Chertkovo, OL section

moved from Ukraine (36 km)

Rehabilitation of 110 kV

Vyshesteblievskaya (4.6

OL 110 kV Luch–Pernatovo Yadroshino (11 km)

SS 110 kV Guryevsk (25 MVA)

SS 110 kV Sozvezdie (Phase 1) (switched over to

220 kV) (250 MVA)

LENENERGO IDGC of Centre ENCE IDGC of Volga IDGC of Urals IDGC of Northern Caucasus

Construction

SS 110 kV Raspadskaya

SS 110 kV Mega-Parnas (25 MVA + 63 MVA)

SS 110 kV Manezhnaya (Phase 2) (40 MVA)

SS 220 kV Ryabina (500 MVA; 2x6.1 km) with CL

110 kV Ryabina–SS 110 kV Yubileynaya (50

MVA) SS 110 kV Plekhanova (50

MVA) SS 110 kV Raspadskaya

45

Petrishchevskaya

OL 110 kV Kiembay–Priisk–Kumak–Svetly (24.5 km)

SS 110 kV Iva (50 MVA; 1 km) SS 110 kV Raspadskaya

Raspadskaya

Raspadskaya

Rehabilitation

SS No. 185 Pushkin-Yuzhnaya (80 MVA)

SS 110 kV Belgorod-110 (80 MVA) SS 110 kV Zhilrayon (40

MVA) OL 110 kV Shagol–

Sosnovskaya–Isakovo (25 km)

OL 110 kV Voskhod–Blagodarnaya (34 km)

SS 110 kV Sovetskaya (40 MVA) OL 110 kV L-53 Ipatovo–

N. Balki (31 km)

SS 110 kV Bugor (126 MVA)

SS 110 kV Tsementnaya (63 MVA)

- Facilities commissioned in 1H2011 * Construction is complete. Obtaining the permission for commissioning is underway due to the delayed commissioning of FGC UES’s SS 220 kV Krymskaya

- Facilities commissioned in 3Q2011

- Facilities commissioned in 4Q2011

- Facilities carried over and commissioned in 1Q2012 (in accordance with the minutes of the December 8, 2011, meeting at the Governor of the Kemerovo Region

46

In 2011, the Company implemented certain measures that were of substantial importance to passing the 2011/12 heat deficit period. 24 such projects were included in the 2011 investment program:

64.6 MVA 200.56 kilometers

Major facilities:

Rehabilitation of OL 110 kV Noginsk–Borovoye (11.4 km), MOESK; Rehabilitation of SS 110 kV Perekop (63 MVA), IDGC of Center and Volga Region; Rehabilitation of OL 110 kV Luzhnoye–Malakhovo (24.1 km), IDGC of Center and Volga Region; Rehabilitation of OL 110 kV CHPP-14–Overyata (11.9 km), IDGC of Urals; Rehabilitation of OL 110 kV No. 177 Mikun–Yedva (Vozhskaya–Yedva section) (33.8 km), IDGC of

North-West; Rehabilitation of OL 110 kV L-31 SS HPP 3–SS Vodorazdel (17.17 km), IDGC of Northern Caucasus.

The investment programs of MRSK Holding subsidiaries and dependent companies for 2011 included the investment projects aimed at the commissioning of capacity at 10 electricity generators:

Generation Company Power Plant Capacity Planned for Commissioning (MW)

MRSK Holding Subsidiaries and

Dependent Companies OGK-1 Urengoy TPP 450 MW Tyumenenergo OGK-1 Sochi TPP 80 MW Kubanenergo TGK-2 Vologda CHPP 110 MW IDGC of North-West

Gazprom Energoholding Adler TPP 360 MW Kubanenergo

TGK -7 Syzran CHPP (Unit 9) 235 MW IDGC of Volga

SGC TGK-8 Astrakhan TPP, CCGT-110 110 MW IDGC of South

TGK-7 Novokuybyshevsk CHPP-1 (Units 13, 14, and 15) 3x80 MW IDGC of Volga

TGK-9 Perm CHPP-9 165 MW IDGC of Urals

Fortum Tyumen CHPP-1 230 MW Tyumenenergo

Fortum Nyagan TPP (Unit 2) 418 MW Tyumenenergo

The following facilities were completed in 2011: Astrakhan TPP, Syzran CHPP, and Nyagan TPP (Unit 2). Work on the other facilities was performed in accordance with the 2011 investment program.

47

Federal Target-oriented Programs

Responsibility for carrying out federal target-oriented programs to construct and rehabilitate electric grid facilities that are fully or partly financed from federal budget funds lies with the Department for Implementation of Federal Target-oriented Program Projects. The main objectives of the Department include:

Coordinating the activities of the Company’s divisions and MRSK Holding’s SDCs in relation to the preparation, implementation, and management of federal program projects to construct and rehabilitate electric grid facilities, including projects under the Program of the Construction of Olympic Games Sites and the Development of Sochi as a Mountain Climate Resort (“Federal Programs”);

Ensuring that the Company receives from subsidiaries and properly handles current information and reports on projects carried out under the Federal Programs, and preparing the Company’s consolidated reports;

Coordinating the activities of the Company’s divisions and subsidiaries in relation to the justification of implementation budgets for the Federal Programs, including the justification of financing from federal budget funds;

Organizing the Company’s interaction with Russian governmental authorities and other institutions of the Russian Federation that participate in carrying out projects under the Federal Programs.

The following projects are underway at subsidiaries:

Kubanenergo

Program of the Construction of Olympic Games Sites and the Development of Sochi as a Mountain Climate Resort, approved by Resolution of the Government of the Russian Federation No. 991 of December 29, 2007, “On the Program of the Construction of Olympic Games Sites and the Development of Sochi as a Mountain Climate Resort”;

LENENERGO

Program of High Priority Measures to Renew Cable Lines of 6–110 kV in Saint Petersburg, aimed at enhancing the operating reliability of the cable network and securing an uninterrupted electricity supply for the city’s districts. The program is formulated pursuant to Instructions of the Government of the Russian Federation No. VP-P9-5804 of October 6, 2009;

IDGC of Siberia

Investment Project of Implementing the External Electricity Supply to the Raspadskaya Mine and Enhancing the Reliability of Electricity Supply to the Mezhdurechensk District, Kemerovo Region,” approved by Instructions of Prime Minister of the Russian Federation Vladimir Putin No. VP-P9-3234 and No. VP-P9-3235 of May 18, 2010 and paragraph 7 of Minutes of the Meeting at the Prime Minister of the Russian Federation No. VP-P9-35pr of June 24, 2010, and reaffirmed by Minutes of the Meeting at Deputy Minister of Energy of the Russian Federation Anatoly Yanovsky No. AYa-173pr of June 23, 2010;

48

Work on Providing Network Connection to Electric Power Supply Centers for Mobile Radio and Telephone Communications Facilities of the Amur Automobile Road (Chita–Khabarovsk), approved by Minutes of the Meeting at Prime Minister of the Russian Federation Vladimir Putin No. VP-P9-46pr of August 30, 2010;

IDGC of Northern Caucasus

Comprehensive Program of Measures to Reduce Above-standard Electricity Losses for 2010–2012 in Distribution Networks in the Chechen Republic, the Republic of Dagestan, and the Republic of Ingushetia, formulated pursuant to Instructions of Prime Minister of the Russian Federation Vladimir Putin No. VP-P9-7 of June 8, 2008.

3.3. Research and Innovation

The Company’s R&D activities are aimed at developing effective organizational and economic mechanisms that will facilitate MRSK Holding entities’ innovation efforts and create favorable conditions for the design and promotion of high-technology equipment on a constant basis.

In June 2011, the Board of Directors approved the Innovative Development Program of MRSK Holding covering the period until 2016 (“Program”). The Program received approval from the Working Group on Public-Private Partnership Development in Innovation under the Governmental Commission on High Technologies and Innovations.

MRSK Holding defined the main areas of innovative development listed below:

Introducing high-technology equipment and advanced techniques; Improving business processes and the innovation process management system; Enhancing energy conservation and energy efficiency; Raising environmental friendliness; Improving the quality control system; Developing and implementing innovative services and products to be promoted in existing and new

markets; Cooperating with higher education institutions and scientific organizations; Cooperating with innovative small and medium-sized businesses.

The first phase of the Program includes developing and approving the necessary regulatory framework to ensure the innovative development of MRSK Holding and its subsidiaries and dependent companies, building up an innovation project management system, and creating an environment for the implementation of the R&D plan. A total of RUB 11,221 million was actually spent on the Program in 2011.

The following documents were prepared in the first phase of the Program:

Regulations for Innovation Project Selection; Regulations for Innovation Activities of MRSK Holding;

49

Action Plan to Implement the Innovative Development Program of MRSK Holding; Forms of progress reports on implementing the Innovative Development Programs of MRSK Holding

SDCs and R&D procurement procedures; Action Plan to Form the Fund Intended for the Financing of Innovation Projects and Research of

MRSK Holding. The Company formed the 2011 innovation project portfolio consisting of 123 projects in research and development (“R&D”) and 37 projects to develop technical standard documents (“TSD”). The decision to develop TSD was made in order to keep updated the regulatory framework of the technical regulation system governing activities of electricity distribution grid companies under subsidiaries’ innovative development programs. Procurement commissions were established to conduct public competitive negotiation procedures with prequalification to award R&D contracts. Representatives of MRSK Holding are among members of these commissions.

Based on competitive bidding procedures for selecting R&D contractors in 2011, contracts were awarded for 74 R&D projects worth RUB 729 million. 21 R&D projects were completed in 2011, resulting in submitting several patent applications.

Cooperation between MRSK Holding and higher educational institutions includes providing personnel with continuous training, target-oriented training, advanced training, and retraining. Additionally, the Company’s employees take an active part in carrying out educational programs. In 2011, this work involved more than 80 Russian higher education institutions. 16 R&D projects worth RUB 36 million in total were underway at higher educational institutions as of the end of 2011 as part of implementing the R&D plan.

Details on target-oriented training, advanced training, and retraining of MRSK Holding Personnel in 2011 are presented in the table below:

Target-Oriented Training of Students

Advanced Training of the Company’s Personnel at

Higher Education Institutions

Retraining of the Company’s Personnel at

Higher Education Institutions

Number of the Company’s Employees

Participating in Educational Programs

number of students

amount of financing

(RUB million)

number of employees

amount of financing

(RUB million)

number of employees

amount of financing

(RUB million) 727 20 2,563 288.93 176 11 3,070

3.4. Reliability and Safety

A major part of ensuring the reliability and safety of the Company’s operations is the system of technical audit. The objective of technical audits in the general system of the inspection of and supervision over the operation of subsidiaries’ equipment is to reduce the risks of process failures and occupational injuries. The Technical Audit Department is in charge of arranging and conducting technical audits. This process also involves executives and employees of the Company’s technical arm, technical inspection units, and production supervision and occupational safety divisions of subsidiaries.

50

In 2011, subsidiaries carried out 1,345 scheduled inspections. These included 34 comprehensive inspections, 512 inspections on specific subjects, and 799 purpose-oriented inspections. The measures prescribed for the inspections were implemented according to schedule.

Beyond the technical audit system, MRSK Holding operates a system of preventing and remedying emergency situations (serious process failures) in compliance with federal laws and resolutions of the Russian Government. The system is a vital component of Russia’s Single State System of Emergency Prevention and Relief.

Each of MRSK Holding’s subsidiaries and their branches has a detailed schedule of preventing potential emergencies (serious process failures) and eliminating their consequences. The following work was done in 69 constituent entities of the Russian Federation in the reporting year to improve the efficiency of preventive measures in this area and ensure the uninterrupted and stable operation of electricity distribution grid facilities:

Preventive measures were developed to secure the reliable operation of electricity distribution grid facilities and included in branches’ repair programs for electric grid equipment;

Integrated engineering measures were implemented in accordance with electrical equipment repair plans;

Emergency drills were conducted and measures were taken to prevent accidents;

Sufficient reserves of financial and material resources were established for the purposes of promptly eliminating the consequences of emergency situations (serious process failures);

Preparedness was ensured to respond to emergency situations (serious process failures), the emergency prediction system was improved, and an information support system was created and developed;

Local regulatory documents were developed for MRSK Holding, subsidiaries, and branches with respect to preventing and remedying emergency situations (serious process failures);

Interactions were enhanced between grid companies’ management bodies and their divisions responsible for preventing and remedying emergency situations (serious process failures) and other entities that are part of the Russian Ministry of Energy’s functional subsystem and 69 Russian constituent entities’ territorial subsystems of the Single State System of Emergency Prevention and Relief, including its regional management bodies, local government authorities, and territorial divisions of the Ministry of Civil Defense, Emergencies and Disaster Relief of the Russian Federation (EMERCOM); information and control systems supporting their work were integrated and developed;

550 operational mobile crews were set up and equipped with off-road vehicles (1,716 vehicles were purchased);

A pool of backup power sources was formed (314 generators rated over 30 kW were purchased);

The Management System for Distributed Resources and Accident Recovery Work was created to raise the efficiency of managerial decision making related to remedying emergency situations (serious process failures) and make accident recovery work more efficient at MRSK Holding’s

51

electricity distribution grid facilities, including by means of the visualization of graphic, operational, and reference information.

The focus of efforts in 2011 was on preparing subsidiaries’ electricity distribution grid facilities for spring flooding, the fire season, and the coming heating season.

As ordered by the Ministry of Energy, MRSK Holding set up all necessary emergency supplies of equipment and materials. The Company conducted exercises and emergency drills to train personnel to deal with emergency situations (serious process failures), especially under conditions of low temperatures, floods, and fires. In addition, checks were done on vital electric grid facilities that are of substantial significance to operation during heating, flooding, and fire seasons. Most of this work involved close and constructive cooperation with regional executive authorities, local governments, and territorial divisions of EMERCOM.

During the reporting year, SDCs conducted 1,670 emergency drills to train their operating personnel to use schedules of restricted or temporarily stopped electricity supply and 362 drills jointly with territorial divisions of EMERCOM and regional executive authorities. As at the end of the year, SDCs had 1,389 existing (or renewed) framework agreements to remedy emergency situations (serious process failures).

Therefore, the Company’s management bodies, resources, and funds tasked with and channeled into preventing emergencies (serious process failures) and eliminating their consequences ensured in 2011 that electricity distribution grid facilities could be restored to a serviceable and operational state in the shortest time possible.

3.5. Human Capital and Social Responsibility

MRSK Holding is the largest employer in the industry of electricity distribution. In 2011, the total number of employees of MRSK Holding was around 190 thousand people, a 4.63% increase compared to 2010. The headcount of the managing entity at the end of 2011 was 353 people. 96.4 % of employees have higher education degrees and 10% of them are holders of Master and PhD degrees.

MRSK Holding encourages employees to get higher qualifications. In 2011 MRSK Holding continued to carry out target-oriented Master and MBA programs. Training is provided for employees of regional distribution grid companies, bachelor degree holders, and young specialists who will be employed in the future.

The key direction of the MRSK Holding employment policy is to retain, replenish and develop the personnel potential in accordance with the Strategy of Development of MRSK Holding until 2015 with Long-Term Plans until 2020 and with due regard to the particularities of regions and socio-economic development of Russia. The program of personnel reserve was launched within the strategy of young specialists’ development. 14,413 people were registered in personnel reserve in 2011.

MRSK Holding established high standards of social responsibility with regard to its employees. All entities of the Holding are members of the All Russian Industrial Association of Electricity Industry Employers (RaEl Association), which together with All Russian Electric trade union, is a party to social partnership in industry.

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Collective agreements developed under the Industrial tariff agreement in electricity industry in Russia for 2009-2011, which is the main document regulating social and employment relations in electricity distribution grid sector.

MRSK Holding pays great attention to sports development and health protection of employees. In 2011, third All-Russian summer and winter competition was held among employees of electricity distribution grid sector.

MRSK Holding’s environmental efforts are strictly in compliance with applicable principles and environment safety requirements. One of the key areas that affect both the Company’s bottom line and the environment is energy conservation and energy efficiency enhancement.

All of MRSK Holding’s SDCs formulated their energy conservation and energy efficiency enhancement programs in 2011. Based on SDCs’ programs, the Company’s Consolidated Energy Conservation and Energy Efficiency Enhancement Program was prepared and approved by the Board of Directors of MRSK Holding.

The following targets of energy conservation and energy efficiency enhancement were approved in accordance with the programs of energy conservation of MRSK Holding SDCs:

Decrease in per-unit consumption of energy resources for production and business needs; Reduction of electricity losses; Implementation of the long-term development programs for electricity metering systems in the retail

markets.

In 2011, the effect of electricity loss reduction measures was 2,024.2 million kWh (RUB 4,952.7 million).

Another important environmental program of MRSK Holding is the All-Russian Communication program “Save wood energy” that promotes tree planting and saving wood health of Russia. The basic idea of the promotion campaign is “the rule of 3 Ps” (people-planet-profit). The purpose is not only preventing wood damages but also attracting attention of governing parties and the general public to environmental problems. About the third of the whole electricity distribution grid of MRSK Holding is located in forests. Therefore, for ensuring reliable power consumer supply MRSK Holding gives particular attention to clearing of glades of high-voltage line in compliance with legal regulations.

Events under the motto “Keep energy of the wood” started on March 4, 2011 — the International day of the wood as recognized by the United Nations. Tree planting was organized on two days: the All-Russian tree planting day on April 23, 2011, and the National day of wood planting on May 14, 2011. Within the All-Russian competition of media coverage of electricity industry, the special nomination “Keep energy of the wood” was founded. As the result, more than 750 publications appeared in the media about the environmental promotion campaign. Within the III annual competition of Ministry of Energy of Russian Federation in the nomination “The best environment protection project”, MRSK Holding was awarded in the field of environment protection activity.

MRSK Holding is also the organizer of social and environment promotion campaign “The electricity power supply is being environmentally friendly”. The promotion campaign covered 69 regions of Russia, and thousands of people took part in it.

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4. Financial Performance Review of 2011

4.1. Profitability

Tariffs

The core business of the companies managed by MRSK Holding, electricity distribution, is a regulated type of activity. The goal of the 2011 tariff campaign as specified in Ordinance of the Government of the Russian Federation No. 30-r of January 19, 2010, was to have all of MRSK Holding’s subsidiaries and dependent companies make the transition to long-term tariff regulation, including using the return on invested capital method (Regulatory Asset Base, RAB).

These efforts resulted in 36 MRSK Holding subsidiaries and dependent companies’ branches switching over to RAB-based long-term tariff regulation for the period from 2011 to 2015. As of January 1, 2012, RAB regulation was applied by 85% of the branches.

The long-term indexation method remains in use in only eight regions of MRSK Holding’s operations: Komi Republic, Republic of Buryatia, Republic of Karelia, Arkhangelsk Region, Murmansk Region, Volgograd Region, Kemerovo Region, and Kaliningrad Region. Due to a difficult sociopolitical situation, the transition of MRSK Holding branches based in the Republic of Dagestan and the Chechen Republic to long-term tariff regulation was put off.

A stable growth in electricity distribution tariffs facilitates the implementation of programs to secure a more reliable power supply and develop the distribution grid sector.

3%

74%88%85%

26%12%12%

2011 2010 2009

Evolution of the Implementation of Long-Term Tariff Regulation

Cost-plus pricing RAB regulation Long-term indexation

54

The tariff of electricity distribution is an aggregate of expenses related to payments for services provided by FGC UES, expenses related to electricity purchased to compensate for electricity network losses, expenses related to payments for services provided by other local grid organizations, and revenues received by MRSK Holding-managed companies. The breakdown of the electricity distribution tariff existing as of January 1, 2011, was as follows:

Revenues received by MRSK Holding subsidiaries and dependent companies, 42.5%; Electricity purchased to compensate for electricity losses, 16.8%; Payments for services provided by FGC UES, 21.6%; Payments for services provided by territorial grid organizations, 19.1%.

3544

5567

86

105

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011

kope

cks/k

Wh

Changes in the Weighted Average Tariff of Electricity Distribution Services as of January 1, 2011

Weighted average tariff of electricity distribution services

162 216 231 26962

77 102137

51

7192

121

67

7279

106

2008 2009 2010 2011

billi

on ru

bles

Distribution of Costs in the Distribution Tariff

SDCs' Minimum Regulated Revenue FGC UES Territorial grid organizations Losses

343

436504

632

+27%

+8%+38%+24%

+33%

+15%

+9%

+31%

+32%

+7%

+25%

+35%

+30%

+34%

+17%

55

However, pursuant to Resolution of the Government of the Russian Federation No. 1172 of December 27, 2010, (published on April 4, 2011) most regions of MRSK Holding’s operations decided to revise pool tariffs of electricity distribution services downward.

Revenue

MRSK Holding’s revenue is principally derived from electricity distribution services that account for more than 87% of total reported revenue in 2011. Other major revenue sources include connection services and electricity sales. Government subsidies come in the form of compensation for low electricity tariffs in some of the regions where the Company operates, and represent a very small portion of total reported revenue (0.04% in 2011). For 2011, revenue can be analysed as follows:

Component 2011 2010

RUB million % of total RUB million % of total

Electricity transmission 552,634 87.08% 476,360 85.14%

Connection services 40,099 6.32% 42,890 7.67%

Electricity sales 31,794 5.01% 30,281 5.41%

Other revenues 9,838 1.55% 8,779 1.57%

Subtotal 634,365 99.96% 558,330 99.79%

Government subsidies 243 0.04% 1,166 0.21%

35

4455

67

86

99

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011

kope

cks/k

Wh

Changes in the Weighted Average Tariff of Electricity Distribution Services as of July 1, 2011

Weighted average tariff of electricity distribution sevices

105

56

Total revenue and government subsidies 634,608 100.00% 559,496 100.00%

The strategy MRSK Holding has pursued, the investment choices it made, and tariff policy developments have set the Company’s business to produce attractive rates of revenue growth in the medium term. Electricity transmission revenue is up by 16.01% in 2011 compared to 2010, and total reported revenue and government subsidies increased by 13.42%. The increase in revenue is mainly attributable to tariff growth. A major customer of MRSK Holding is INTER RAO UES Group (Primary electricity sales companies within INTER RAO EUS Group) that brought revenue of RUB 130,393 million in 2011, which represents 20.55% of total revenue and government subsidies.

Operating results

MRSK Holding’s operating expenses arise primarily from expenses on electricity transmission, electricity purchase for compensation of technological losses, personnel costs, and depreciation and amortization costs. The share of costs of electricity transmission and personnel costs slightly increased as a proportion of total operating expenses in 2011, while purchased electricity for compensation of technological losses decreased in 2011 in both absolute terms and as a percentage share of total operating expenses on the back of improved technological efficiency.

Operating expenses can be analyzed as follows:

Component 2011 2010

RUB million

% of total

RUB million

% of total

Electricity transmission 215,128 37.27% 175,385 34.59%

Personnel costs 104,615 18.12% 87,825 17.32%

Purchased electricity for compensation of technological losses 100,906 17.48% 101,115 19.94%

Depreciation and amortization and impairment of non-current assets 54,075 9.37% 46,025 9.08%

Purchased electricity for resale 18,691 3.24% 18,898 3.73%

Raw materials and supplies 15,905 2.76% 14,860 2.93%

Repairs, maintenance and installation services 14,817 2.57% 13,948 2.75%

Impairment of trade and other receivables 7,668 1.33% 8,581 1.69%

Rent 6,087 1.05% 7,107 1.40%

Consulting, legal and audit services 4,712 0.82% 5,251 1.04%

57

Utilities 3,104 0.54% 3,035 0.60%

Taxes other than income tax 2,683 0.46% 2,544 0.50%

Other expenses 28,823 4.99% 22,506 4.44%

Total 577,214 100.00% 507,080 100.00%

Electricity transmission costs increased by 22.66% in 2011 compared to 2010. This increase is higher than the increase in revenue reported in the corresponding segment (16.01%) due to the effects of surpassing growth in tariff for the services of FGC UES for electricity distribution through the Unified National Electric Grid. Another factor that influenced electricity transmission costs dynamics is a surpassing increase in the cost of services rendered by territorial grid companies. Both these factors are outside of MRSK Holding management’s control.

Depreciation and amortization costs increased by 17.49%, from RUB 46,025 million in 2010 to RUB 54,075 million in 2011. This increase was heavily influenced by an 11.82% increase in depreciation charge for transmission networks (represents 42.09% of total depreciation charge in 2011), 24.37% increase in depreciation charge for land and buildings (represents 10.89% of total depreciation charge in 2011), and a 31.22% increase in Other PP&E (represents 25.85% of total depreciation charge in 2011 and includes transport, furniture, computer equipment and other items).

Personnel costs are up by 19.12%. The increase is largely driven by growth in wages in salaries (up by 13.67%) in line with revenue growth, and a hike in social security contributions that represented 20.29% of total personnel costs in 2011 and increased by 47.11% compared to the previous year.

Total operating expenses increased by 13.83%, which is roughly in line with the total revenue growth trend.

In discussing the operating results of MRSK Holding business, the Company focuses on financial measures referred to as EBIT and EBITDA. EBIT represents “Results from operating activities” in the statement of comprehensive income. EBITDA is the key measure that MRSK Holding uses to assess the performance of the business and operational management, and excludes operational expenses such as depreciation and amortization that management has no operational control over. EBITDA enhances the comparability of the measure from period to period and provides clarity into the underlying performance of the Company’s operations.

In 2011, EBIT increased by 9.29%, from RUB 54,219 million in 2010 to RUB 59,254 million in 2011. EBIT margin decreased from 9.69% in 2010 to 9.34% in 2011, primarily due to the increase in depreciation and amortization expenses (17.49%) and electricity transmission costs surpassing revenue growth. However, these effects were partly offset by cost efficiencies in MRSK Holding’s other operating expenditure.

EBITDA for 2011 was RUB 116,507 million, compared to RUB 102,482 million in previous year, which represents an increase of 13.68%. EBITDA margin remained stable at 18.35%.

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Finance costs and EBT

Net finance costs decreased to RUB 5,843 million in 2011 from RUB 8,037 million in the corresponding period. This was primarily driven by a 40.09% decrease in financial leasing costs, smaller effect of a 13.07% increase in total finance income, mostly represented by interest income on loans, bank deposits, and promissory notes.

As a result, profit before income tax also referred as EBT grew in 2011 at a higher rate than EBIT. EBT increased by 15.30%, from RUB 46,537 million in 2010 to RUB 53,655 million in 2011. Pretax margin in 2011 changed only slightly compared to the previous year (an increase from 8.32% to 8.45%) underlining the offsetting effect that the lower finance costs had on profitability in 2011.

9,34% 9,69%

18,35% 18,32%

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

2011 2010

EBIT margin,% EBITDA margin,%

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Taxation

The total income tax expense for 2011 of RUB 14,689 million comprises current tax expense of RUB 10,309 million and a deferred tax expense of RUB 4,380 million. The total income tax expense increased by 18.46% compared to 2010. Effective tax rate of MRSK Holding in 2011 remained at 27%, largely unchanged compared to 2010.

Profit for the year and earnings per share

In 2011, net profit for the year increased by 14.15% to RUB 38,966 million in 2011 compared to RUB 34,137 million in 2010. Net profit margin in 2011 was 6.14%, largely on the same level as in 2010 (6.10%).

Profit attributable to ordinary shareholders slightly increased in 2011 to RUB 23,438 million from RUB 22,168 million in 2010 (an increase of 5.73%). Basic earnings per share (EPS) are based on the profit attributable to ordinary shareholders and a weighted average number of shares outstanding, that increased from RUB 41,044 million in 2010 to RUB 42,528 million in 2011 (an increase of 3.62%). As a result, basic

8,45% 8,32%

0,00%2,00%4,00%6,00%8,00%

10,00%12,00%14,00%

2011 2010

EBT margin

6,14% 6,10%

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

2011 2010

Net profit margin

60

EPS increased by 3.92% from RUB 0.51 in 2010 to RUB 0.53 in 2011. The company has no dilutive instruments, so basic EPS and diluted EPS are equal.

ROA, ROE and its components (DuPont analysis)

Return on assets (ROA) in 2011 was 4.73%, slightly more than in 2010 (4.59%). Return on equity (ROE) also experienced an increase in 2011 and amounted to 9.28% compared to 9.08% in 2010. Below are the results of 5-step DuPont analysis that decomposes ROE and allows examining its main drivers separately.

ROE Components 2011 2010 ROE = 9,28% 9,08% Tax burden (= Net profit/EBT) 0,73 0,73 x Interest burden (= EBT/EBIT) 0,91 0,86 x EBIT margin (= EBIT/Revenue) 9,34% 9,69% x Total asset turnover (= Revenue/Average assets) 0,77 0,75 x Leverage (= Average assets/Average equity) 1,96 1,98

As DuPont analysis shows, a decrease in EBIT margin was offset by an increase in interest burden metrics that represents lower finance costs in 2011 and a higher total asset turnover, which is an activity indicator showing the effectiveness of the Company’s use of its assets. Tax burden and leverage were largely neutral for ROE dynamics.

4.2. Capital Structure and Off-Balance-Sheet Arrangements

MRSK Holding pursues a centralized policy aimed at controlling external financing of its subsidiaries. In the area of financial solvency management there exists a system of limits on the amount of borrowed capital.

The current debt financing policy is based on the following fundamental principles:

Companies should attain the reasonable diversification of debt; Currency risks should be minimized; The ratios specified in financial covenants under loan agreements should be maintained; The debt portfolio should be optimized in terms of the ratio between short-term and long-term debts; Companies should obtain unsecured loans; Credit histories should be maintained in an impeccable condition.

During the year, total assets increased by 14.49% from RUB 767,806 million in 2010 to RUB 879,077 million in 2011. This was primarily due to the increase in non-current assets by 13.59% from RUB 635,951 million in 2010 to RUB 722,391 million in 2011. This increase was primarily represented by the growth in the Company’s PP&E base.

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The diagram below represents percentage shares of distribution grid subsidiaries non-current assets in the Company’s aggregate non-current assets.

78,21%

1,91%1,12%

1,47%

0,99%

9,29%

5,56%

1,45%

Structure of Assets, %

Property, plant and equipment

Non-current accountsreceivable Other investments and financialassets Inventories

Other investments and financialassets Trade and other receivables

Cash and cash equivalents

3,3

11,5

25,4

6,62,9 4,6 5,3 4,8

8,8 8,1

3,75 0,3

14,55

0,450

2,55

7,510

12,515

17,520

22,525

27,530

Kuba

nene

rgo

LENE

NERG

O

MOES

K

IDGC

of V

olga

IDGC

of N

orthe

rn C

auca

sus

IDGC

of N

orth-

Wes

t

IDGC

of S

iberia

IDGC

of U

rals

IDGC

of C

entre

IDGC

of C

enter

and V

olga

Regio

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IDGC

of S

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TDC

Tyum

enen

ergo

Yanta

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Share of Distribution Grid Subsidiaries’ Non-Current Assets, %

value of non-current assets, 2009



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The Company’s total equity increased by 12.14%, from RUB 395,841 million in 2010 to RUB 443,877 million in 2011, primarily on the back of total comprehensive income for the year in the amount of RUB 38,575 million, and proceeds from the share issue in the amount of RUB 9,382 million. The issuance of 5,444,391,292 additional ordinary shares with a par value of RUB 1 was authorized by the Board of Directors on 30 September 2011 at the offering price of 3.08 per share.

Total liabilities increased by 17.00% from RUB 371,965 million in 2010 to RUB 435,200 million in 2011. Percentage share of non-current liabilities in total liability structure experienced a significant increase from 46.99% in 2010 to 55.39% in 2011 in a trend that represents the management’s efforts to change the Company’s liability structure towards higher levels of longer-term debt. In absolute terms, non-current liabilities were RUB 241,050 million in 2011, a 37.92% increase compared to RUB 174,773 million in 2010.

Financial leverage remained stable over 2011. When measured as the ratio of average total assets for the year to average total equity (used in ROE decomposition above), it decreased to 1.96 in 2011 from 1.98 in 2010. When measured as of year end, there was a slight increase from 1.94 in 2010 to 1.98 in 2011. Other measures of long-term financial solvency as of year end are presented below and also illustrate MRSK Holding’s financial stability:

Ratio 2011 2010 Change Total debt to total assets 0,22 0,19 16% Long term debt (LTD) to total equity 0,38 0,30 25% Total debt to total equity 0,44 0,37 18%

The maturity profile and currency profile of the Company’s debt obligations are set forth in the diagrams below:

50,49%27,42%

22,09%

Structure of Equity and Liabilities, %

EquityNon-current liabilitiesCurrent liabilities

63

The Company’s ability to repay debt obligations as measured by coverage rations remains strong. Interest coverage ratio, calculated as EBIT to annual interest payments, increased from 8.16 in 2010 to 8.69 in 2011. Fixed charge coverage ratio that includes the effect of financial and operating lease payments and is calculated as

, experienced an even greater increase, from

3.60 in 2010 to 4.40 in 2011.

At 31 December 2011, the Company did not have any undisclosed off-balance sheet arrangements that require disclosure as defined under the applicable rules of IFRS.

17% 14%

46%

77% 79%

54%

6% 7% 0%

0%

20%

40%

60%

80%

100%

2011 2010 2009

Debt breakdown by maturity, %

Less than 1 year 1 to 5 years More than 5 years

0% 0%10%

100% 100% 90%

0%10%20%30%40%50%60%70%80%90%

100%

2011 2010 2009

Debt breakdown by currency, %

USD RUB

64

4.3. Liquidity

Total current assets represented 17.82% of total assets in 2011, a slight increase compared to the 17.17% share of current assets in the total asset base in 2010. In absolute terms, current assets increased from RUB 131,855 million in 2010 to RUB 156,686 million in 2011, an 18.83% increase.

Current assets structure can be analyzed as follows:

Component 2011 2010


Inventories 12,907 8.24% 11,219 8.51% Other investments and financial assets 8,728 5.57% 9,649 7.32% Current tax assets 4,516 2.88% 3,051 2.31% Trade and other receivables 81,682 52.13% 83,046 62.98% Cash and cash equivalents 48,853 31.18% 24,890 18.88% Total current assets 156,686 100.00% 131,855 100.00%

A major trend in current asset structure is an almost two-fold increase in cash and cash equivalents. The increase is primarily due to cash inflow from credit line agreements that were signed on beneficial terms in pre-crisis years, and due to the growth of cash from operating activities.

Changes in percentage shares of each distribution grid subsidiary’s contribution to the aggregate amount of accounts receivable is represented in the diagram below:

65

The percentage share of current liabilities in total liabilities structure decreased from 53.01% in 2010 to 44.61% in 2011. A decrease of 1.54% was observed in absolute terms, from RUB 197,192 million in 2010 to RUB 194,150 million in 2011, and it was primarily due to a 3.13% decrease in trade payables. The 2011 current liabilities dynamics is partly explained by changes in tariff treatment of technological connection services. Previously, a direct payment was required from customers in addition to technological connection charges that represented a capital investment component. In 2011, this capital investment component was included in the tariff for electricity transmission services, which resulted in lower advance payments from customers for technological connection services.

Current liabilities structure can be analyzed as follows:

Component 2011 2010


Loans and borrowings 26,954 13.88% 27,139 13.76% Trade and other payables 161,920 83.40% 167,145 84.76% Provisions 4,757 2.45% 1,977 1.00%

0,0%

2,5%

5,0%

7,5%

10,0%

12,5%

15,0%

17,5%

20,0%

Kuba

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rgo

LENE

NERG

O

MOES

K

IDGC

of V

olga

IDGC

of N

orthe

rn C

auca

sus

IDGC

of N

orth-

Wes

t

IDGC

of S

iberia

IDGC

of U

rals

IDGC

of C

entre

IDGC

of C

enter

and V

olga R

egion

IDGC

of S

outh

TDC

Tyum

enen

ergo

Yanta

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rgo

Changes in % Shares of Distribution Grid Companies’ Accounts Receivable in the Company's Aggregate Accounts Receivable

Accounts receivable in 2009



MOESK accounts for 25.0% in 2009, 37.6% in 2010, and 36.2% in 2011

66

Current tax liabilities 519 0.27% 931 0.47% Total current liabilities 194,150 100.00% 197,192 100.00%

As demonstrated in the table above, current liabilities structure remained stable in 2011.

Due to the increase in current assets and a decrease in current liabilities, the Company demonstrated a much healthier working capital in 2011 than in 2010, even though it remained negative. The decrease in negative working capital from -65,337 to -37,464 is mainly attributable to the increase in cash balance and a decrease in current liabilities for the reasons outlined above. Significant improvement in 2011 compared to 2010 is observable in key liquidity metrics, as shown below:

Ratio 2011 2010 Current ratio = Current assets / Current liabilities 0.81 0.67 Quick ratio = (Current assets - Inventories)/ Current liabilities 0.74 0.61 Cash ratio = Cash & equivalents / Current liabilities 0.25 0.13

4.4. Cash Flow

Net cash flow from operating activities increased by 16.90%, from RUB 76,423 million in 2010 to RUB 89,338 million in 2011.

Net cash flow used in investing activities is up from RUB 83,215 million in 2010 to RUB 121,818 million in 2011. This 46.39% increase is mainly attributable to continuing investment in the development of the electricity transmission grid (please refer to the “Capital Investment” section of this report). For instance, acquisition of property, plant and equipment, and intangible assets increase by 64.95%, from RUB 75,681 million to RUB 124,836 million. The proceeds from sale of investments in 2011 were RUB 10,076 million almost three times as much as in 2010, which had as small offsetting effect on the cash flow used in investing activities. The main cash proceeds from disposal of investments in 2011 came from the following transactions:

Repayment of deposits – 8,000 (Holding MRSK); Repayment of interest-bearing notes of Sberbank – 1,400 (Tyumenenergo); Sale of subsidiaries’ shares: JSC «Siberian Energy Scientific and Technical Center» and JSC

«Bureyagesstroy» - 516,3 (MRSK).

2011 saw a major cash inflow from financing activities. Net cash flow from financing activities increased from RUB 2,465 million in 2010 to RUB 56,443 million in 2011. After a large repayment of loans and borrowings in 2010, cash flow used for the repayment of debt principal decreased by 32.63%, from RUB 129,148 million in 2010 to RUB 87,002 million in 2011, while the cash proceeds from loans and borrowings experienced an increase of 5.72%, from RUB 132,166 million in 2010 to RUB 139,724 million in 2011.

67

The increase in net cash flow from operating activities and financing activities in 2011 more than offset the increase in net cash flow used in investing activities. As a result, the company demonstrated strong positive total cash flow of RUB 23,963 million (net increase in cash and cash equivalents), compared to total negative cash flow of RUB 4,327 million in 2010 (net decrease in cash and cash equivalents).

4.5. Dividends and Acquisition of Own Shares

The Company’s distributable reserves are limited to the balance of retained earnings as recorded in the Company’s statutory financial statements prepared in accordance with Russian Accounting Principles. The decision with regard to 2011 dividends will be made at the Annual General Meeting of Shareholders that is expected to take place in June 2012. At the Annual General Meeting of Shareholders held on 22 June 2011 the decision was made not to declare dividends for the year 2010 for ordinary shares and to declare dividends in the amount of RUB 0.05 per share for preference shares.

In 2011, the Company did not implement acquisitions of own shares.

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5. Risk Management

5.1. Internal Control and Risk Management System Overview

In the rapidly developing economy and complex market within which MRSK Holding operates, the Company realizes the importance of identifying, assessing and managing risks in a timely manner. This section describes the principal risks and uncertainties that could have a material adverse effect on the MRSK Holding’s business. These should be read in conjunction with the Company’s long-term strategic objectives. Additional risks and uncertainties that we are not aware of or that we currently believe are immaterial may also adversely affect our business, financial condition, prospects, or results of operations.

MRSK Holding has a formal Internal Control and Risk Management system (IC&RM) that is used by the Company to identify, monitor, and manage risks. It is designed to make the Company’s operations sustainable and efficient by ensuring that line managers have a clear understanding of the opportunities and risks faced in delivering their business objectives, as well as the status of the key controls in place to manage these risks.

IC&RM’s primary goals are as follows:

To improve the Company’s corporate governance system in order to maintain shareholders’ and investors’ reasonable confidence that their rights and interests are protected with respect to efficient use of the Company’s assets, compliance with the laws and internal regulations, and accuracy and objectivity of management reporting.

To ensure the efficient implementation of the Strategy for Development of MRSK Holding Until 2015 with Long-Term Plans Until 2020 (approved by the Board of Directors on November 22, 2011), by improving risk management processes and implementing efficient control procedures.

To help the Company adapt to both externally and internally-driven change in a timely manner.

The Board of Directors provides guidance for IC&RM development and practical application. Responsibility for the effectiveness of IC&RM in day-to-day operations lies with the Management Board and the Director General. Each business division coordinates regular line management assessment and reporting of that business unit’s risk profile. The data is consolidated and used for risk management planning purposes by the Internal Audit and Risk Management Department.

MRSK Holding intends to continue enhancement of IC&RM by further integrating risk management processes into the medium- and short-term business planning, and ensuring the assessment and monitoring of risks that can prevent the Company and its subsidiaries from achieving their strategic goals.

5.2. Risks Relating to the Company’s Business and Industry Our revenue and profitability depend on tariffs regulated by governmental authorities.

69

The Distribution grid companies (DGCs) are mainly engaged in the provision of services of electricity distribution and technological connection to the 0.4-110kV electricity distribution grids in Russia. According to the Russian Federal Law “On Natural Monopolies” No. 147-FZ dated 17 August 1995 (the Natural Monopoly Law); provision of such services is considered a monopolistic activity and is subject to certain mandatory requirements. Each DGC is regulated by the state through the regional energy commissions (RECs). In particular, the federal and regional authorities establish and regulate tariffs that the DGCs charge for electricity distribution through, and the connection of customers to, the DGCs’ electricity distribution grids. Although the end customer’s final electricity bill includes not only the distribution charge, but also transmission, generation and supply charges, regulation of tariffs for electricity distribution is often used by the governmental authorities as an instrument for controlling the final tariff growth in the regions. This is because the electricity generating segment has been almost fully liberalised which makes it difficult for governmental authorities to intervene in the market-based pricing. Electricity generation and supply charges contribute on average approximately 66 per cent to customer’s final electricity bill while distribution and transmission charges contribute on average approximately 34% to it, of which approximately 7 % relate to transmission charges charged by FGC UES and approximately 15 % relate to distribution charges charged by us. Therefore, our tariffs become an efficient instrument to influence the total electricity price for end customers.

Under the RAB tariff system, the tariffs that the DGCs are permitted to charge are established for long-term regulatory periods of no less than three years (in practice, either three or five years) and are based on a guaranteed return on invested capital, applicable to initial and new investments, thereby stimulating additional capital expenditure into the electricity distribution grid system.

The decision of the 7 regions to transition to the long-term indexation tariffs or, in case of the Republic of Karelia, the Republic of Dagestan and the Republic of Chechnya, to continue to be regulated under the cost-based tariff system, was mainly due to social and economic considerations in some of these regions; inability of the regional authorities to forecast the development needs of the relevant electricity grids for a long period of time; local authorities’ concerns over tariff increases; and difficulties in enforcement of the legislation enacted at the federal level. Neither the long-term indexation method, nor the cost-based tariff system takes into account the value of the Company’s assets nor ensures a guaranteed return on capital invested.

This makes our return on any investment we make in the electricity distribution infrastructures less certain and subject to more risk, which negatively impacts on our ability to attract investment. The fact that these 10 regions have not yet transitioned to the RAB tariff system, may, therefore, negatively affect our ability to attract equity and debt financing and have a negative impact on our revenues and on our business, financial condition, results of operations and prospects. For further information on tariffs, see “Electricity Industry in the Russian Federation – Regulations and Pricing in Electricity Transmission and Distribution Sector” and “Information about the Group – Tariffs – Electricity Distribution Grids”.

Regulation of prices and tariffs for the services provided by the natural monopolies, including the DGCs remains subject to decisions of governmental authorities. Governmental authorities regulate the setting of tariffs in order to control electricity tariff increases. For instance, governmental authorities are “smoothing out” large hikes in tariffs by shifting some of the revenue derived from tariffs from the early years of the regulatory periods into later years with the goal of reducing electricity tariff increases in the first years following introduction of the RAB tariff system. For further information on “smoothing”, see “Electricity

70

Industry in the Russian Federation – Regulations and Pricing in Electricity Transmission and Distribution Sector” and “Information about the Group – Tariffs – Electricity Distribution Grids”. As a consequence of such smoothing, the Group’s revenues for a particular regulatory 9 period may be redistributed from one year to another within such period which may potentially result in the future in liquidity and financing of investment activities shortfalls. As the rules regulating the “smoothing mechanism” are not well developed or tested, governmental authorities are left with discretion for its implementation. Russian senior ranking government officials have repeatedly expressed concerns regarding the growth in electricity prices for end customers and requested that governmental authorities seek ways to further lower the growth in the mid-term. In 2011 our tariffs have been revised twice.

According to amendments recently introduced to the RAB tariff system by the Government, the growth of tariffs in 2011 cannot exceed 15 %. There has also been press speculation in press that the current 15 % limit of the growth of tariffs in any year will be revised and changed further by the Government. Moreover, the Government announced its decision to postpone the annual review and change of tariffs from the beginning to the middle of 2012 and its intention to limit tariff increases by the anticipated rate of inflation. There is no certainty as to when the Government may approve new tariff levels and what such levels would be. If regulated tariffs are reduced or tariff increases become more limited as compared with the current level, our revenues will be significantly less than currently contemplated by the current tariffs and currently imposed limitation on tariff increases. There is also a general lack of certainty about the future regulation of electricity distribution tariffs in Russia and we cannot guarantee that the current approach to, parameters and methods of regulation of tariffs (including through the RAB tariff system) will remain the same. Changes to the tariff system could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, if tariffs set for electricity transmission and supply are increased, or if tariffs of the TGCs increase disproportionally to our tariffs, due to the limits imposed on the overall increase in tariffs for end customers, this could have a negative impact on our business, financial condition, results of operations and prospects.

There are also proposals to introduce new rules which would recognise the utilisation rate of new and existing assets so that the customers are required to pay only to the extent that any given asset is utilised. This is intended to stimulate careful planning and estimation of new capacity. There is also press speculation that the Government proposes to amend the calculation of tariffs so that capital expenditure is not taken into account until the relevant facilities are operational, as opposed to the current position which recognises capital expenditure from the point when it is incurred. Such new rules and any future restrictions in relation to the calculation of the asset base could result in a lower tariff income, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Under the applicable legislation, our investment programmes and proposed tariffs are required to be approved by the federal and regional authorities. While most DGCs have had their investment programmes approved in the process of transfer to the RAB tariff system, in future we may not be able to come to an agreement on the value of the regulatory asset base, the rate of return and other parameters of tariff regulation with the governmental authorities. This risk is particularly relevant to those regions that may in the future transfer to the RAB tariff system. To reduce these risks, we interact with the federal and regional authorities and provide them with our justification for the tariffs, but we cannot guarantee that our justification for tariffs will be taken into consideration and that tariffs will provide us with revenues sufficient

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to cover our expenses and provide adequate rate of return. The operating costs which are included in the tariffs, either under the long-term indexation method or the RAB tariff system, are indexed by the anticipated rate of inflation over the regulated period or are structured to increase to compensate us for the effects of inflation. The Government may revisit the level of tariffs if the actual rate of inflation in a given year is lower or higher than expected or if the forecast of the rate of inflation changes.

As tariffs are generally fixed for a certain period of time, should the rate of inflation not be forecasted correctly or should the Government limit the growth of tariffs by the level of inflation, this could have a material adverse effect on our business, financial condition, results of operations and prospects. See “– Risks Relating to the Russian Federation – Economic Risks Relating to the Russian Federation – Inflation could have a material adverse effect on our results of operations”.

The regions of the Russian Federation have not yet developed precise economic development plans specifying the projected figures of electricity consumption. This makes it difficult to accurately forecast the amount of required investment and capacity of the electricity distribution grids. To improve this situation, we participate in the preparation of medium- and long-term regional development plans and estimation of impact on distribution tariffs together with the regional authorities. Failure to correctly forecast electricity demand, resulting in over- or underinvestment or too much or little capacity, could have a material adverse effect on our business, financial condition, results of operations and prospects.

The Russian Federation exercises control over the Company and has a substantial degree of influence over the Company’s operations.

The Russian Federation owns 53.69 % of the Company’s voting shares, and manages this stake through Rusproperty, the Federal Agency for the Management of State Property (Rusproperty). As the Company’smajor shareholder, the Russian Federation is in a position to control decision making on most matters submitted to the general shareholders’ meeting, with the exception of the issues requiring a supermajority vote. See “Description of Charter Capital and Certain Requirements of Russian Legislation” for details.

Further, the Russian Federation exercises significant influence over the Company’s business strategy and operations through its effective control of the Board of Directors and participation in some of its committees. This concentrated control limits the ability of the other shareholders, including the holders of the GDRs, to influence corporate matters and, as a result, the Company may have to take actions that minority shareholders do not view as beneficial. The interests of the Russian Federation as the Company’s major shareholder could conflict with the interests of other shareholders, including the holders of the GDRs, and the Russian Federation may make decisions that could have a material adverse effect on our business, financial condition, results of operations and prospects. Some of these decisions may not be driven by purely commercial considerations or aimed at our growth but rather motivated by economic, social or political goals of the Russian Federation or regions of the Russian Federation in which we operate.

We may be required to implement investment projects with low economic returns.

Our stated mission is to ensure the provision of adequate electricity distribution in the regions of Russia in which we operate and, accordingly, we may be required to construct and manage certain electricity distribution facilities and provide technical connection services which may not deliver adequate economic

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returns to us. In these cases, we anticipate that the expenses for implementation of such projects would be accounted for in tariffs or the Russian Federation would participate in financing of such projects, including by way of equity financing, but the latter would dilute shareholdings of the minority shareholders in the Company, and, if our expenses are not compensated for, our business, financial condition, results of operations and prospects could be materially adversely affected.

Status of the DGCs as natural monopolies may result in adverse regulatory interference in their operations and impose additional restrictions.

Each DGC (other than Nurenergo and Chechenenergo) is included in a list of natural monopolies, which are heavily regulated under Russian law, and Nurenergo, as a guaranteeing supplier, is also subject to tariff regulation. The Russian Federal Antimonopoly Service (the FAS) and the regional antimonopoly authorities require non-discriminatory provision of services to all market participants and exercise control over certain transactions or investments of the DGCs, including those valued at more than 10 % of the DGC’s equity capital. As natural monopolies, the DGCs are also required to use open tenders in selecting certain service providers, which could restrict their commercial flexibility and reaction time and adversely affect the Group’s business. As the relevant public procurement rules are vague and subject to different interpretations, there is a risk that certain transactions may be challenged and/or declared invalid by a Russian court on the basis that the DGCs did not fully comply with the relevant rules, which may also have a material adverse effect on our business, operating results, financial position, prospects and the value of the Shares and the GDRs.

Additionally, the FAS may investigate activities of the DGCs, at the request of any market participant, in order to determine if any of them is dominant and/or is abusing its dominant position in a relevant market. If the FAS determine that any such DGC is dominant and that an abuse has occurred, it may impose fines or binding orders on the relevant DGC. Such binding orders may require the relevant DGC to enter into service agreements with prescribed terms which may be contrary to the Group’s best interests or ordinary course of business and which may negatively impact its operations or profitability. There can be no assurance that in future the courts will support the Group’s position and that the Group will not be subject to fines or other sanctions imposed by the FAS, which may have a material adverse effect on our business, operating results, financial position, prospects and the value of the Shares and the GDRs.

The Russian Federal Law “On the Procedure for Foreign Investment in Companies with Strategic Impact on the National Defence and Security of the Russian Federation” No. 57-FZ dated 29 April 2008 (the Strategic Industries Law) provides a list of strategic activities, including provision of data encryption services, engagement in which makes a company incorporated in the Russian Federation subject to its restrictions (a strategic company).

Currently, Kubanenergo is licensed to carry out activities and provide services related to the use of cryptographic equipment. This licence will expire in March 2013. Even though Kubanenergo does not provide data encryption services, there is a risk that because it holds such a licence it may be considered to be a strategic company for the purposes of the Strategic Industries Law. The Strategic Industries Law is unclear whether merely holding a licence for provision of such services makes a company subject to its restrictions.

The Strategic Industries Law regulates foreign investments in the strategic companies and, among other matters, requires foreign investors to receive a prior clearance from the special government commission

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before acquiring control over strategic companies. For more information on the Strategic Industries Law, see “Regulatory Environment – Strategic Industries Law and Foreign Investments Law”.

The Company does not own 100 % of all of the DGCs.

The Company owns more than 50 % of each DGC, except for Nurenergo, Kubanenergo and Lenenergo, of which the Company owns 23 %, 45.77 % and 45.71 %, respectively. There is no guarantee that the Company will always be able to influence decisions taken by the DGCs in which the Company is not a majority or sole shareholder. For instance, there are other shareholders who own a blocking interest of 25% plus one share in certain of the DGCs (for instance, in Lenenergo, Kubanenergo, IDGC of Siberia, TDC and Chechenenergo) or have a strong representation on the boards of certain DGCs. The Company may not be able to influence decisions of such DGCs requiring at least a three-quarters majority vote at a general shareholders’ meeting or an anonymous vote of directors at the board of directors meetings of the DGCs. For further details, see “Description of Charter Capital and Certain Requirements of Russian Legislation – General Shareholders’ Meetings – Competence and procedure” and “– Board of Directors”.

As a large shareholder of the DGCs, the Company may take actions that minority shareholders of the DGCs do not view as beneficial and try to challenge. Russian corporate law allows minority shareholders holding as little as one share in a company to bring claims against the company by challenging decisions of its governing bodies. This right is often abused by minority shareholders in Russia, and, whilst we are not currently subject to any challenges by minority shareholders, we may become unable to take certain decisions regarding the DGCs, or such decisions may be challenged, due to conflicts with the minority shareholders.

For instance, in 2008, before MRSK Holding was incorporated, a shareholder owning approximately 26% in Kubanenergo successfully challenged a contemplated merger of Kubanenergo to IDGC of South on the basis of formal incompliance with certain requirements of Russian corporate law. Any such action by minority shareholders, if resolved against us, could have a material adverse effect on our business, financial condition, results of operations and prospects. See also “– In the event our past transactions, or future transactions that require approval in accordance with Russian law, are successfully challenged, they could be invalidated and unwound”.

The DGCs may be privatised by the Government.

On 1 January 2011, the restriction previously imposed on the sale of shares in the DGCs expired, and President Medvedev raised the question of future privatisation of the DGCs. According to media reports, President Medvedev referred to the importance of privatising the DGCs and requested that the Government develops rules and regulations for their possible privatisation.

At the request of the Government, we have commenced research and analysis into the manner in which the privatisation may occur and the mechanics of effecting privatisation. In order to assess whether privatisation will result in anticipated economic and management benefits, we intend to launch two pilot projects in the beginning of 2012. Such projects will involve the transfer of the operational management of TDC and Moscow United Electric Grid Company (MOESK) to independent private companies, ERDF and Gazprombank, respectively. For more information on privatisation of the DGCs see “Information about the Group – Potential Privatisation of the DGCs”.

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We then intend to submit the results of such projects to the Government to assist it in deciding whether, when and how to privatise the DGCs. We expect that participation of such independent private companies in the operational management of TDC and MOESK would increase these DGCs’ efficiency as such private companies have valuable management experience, aligned business processes and production technologies.

Therefore, failure to pilot these projects could have an adverse effect on the Company’s and these DGC’s prospects and the value of the Shares and the GDRs. It may also delay or otherwise impact on any future decisions to privatise other DGCs. As such transfers require governmental approvals, as described further in “Information about the Group – Potential Privatisation of the DGCs”, there is a risk that such approvals would not be obtained, and these pilot projects not launched. In particular, in August 2011 FAS refused to clear the transfer of MOESK to Gazprombank and Gazprombank is in discussions with FAS regarding the terms and conditions upon which FAS would approve the transfer.

Privatisation of the DGCs could potentially lead to a higher valuation and efficiency of the DGCs and could result in the receipt of the proceeds of privatisation by the Company. We cannot, however, guarantee that the Company will receive full value in any privatisation or that the Company will be able to distribute the proceeds it receives from any privatisation to its shareholders, including the holders of the GDRs, as the government may require it to reinvest such proceeds in the DGCs. Privatisation of the DGCs may, depending on how it is conducted, result in a loss of central management and operational control over the DGCs which are privatised which may make it more difficult for us to operate the Group as an integrated business, to achieve our strategies and/or to set and enforce unified standards and policies.

Privatisation may also result in reduction in the Company’s shareholding in the DGCs (following which we may become unable to consolidate the DGCs in our financial statements) and may result in our receiving a smaller percentage of future profits from the DGCs. We also cannot exclude the possibility that the more profitable and attractive assets will be privatised, while the less efficient assets will be retained by us. One or more of these consequences could have a material adverse effect on our business, financial condition, results of operations and the value of the Shares and the GDRs.

In addition, while we intend to continue to operate as an integrated business, if a listing of shares on an overseas stock exchange in respect of any DGC takes place, changes to the management structure of such DGC and/or the assets consolidated within it made in preparation for such listing, may result in decision-making by the directors and management of such DGCs, including with respect to payment of dividends, that may not be consistent with the Company’s current integrated business model. Such changes in connection with an overseas listing may materially adversely affect our business, financial condition, results of operations and prospects.

Our electricity distribution assets and Russian electricity infrastructure are ageing.

As at 31 December 2010, 52% of our electricity distribution assets exceeded their expected useful life, and 7.4% exceeded such period twice. The continued usage of the aged assets is one of the main reasons for a high level of electricity losses (approximately 8.65% for the year ended 31 December 2010) and interruptions in the supply of electricity, resulting in higher operating expenses. To compensate electricity losses, we have to purchase additional volumes of electricity at market prices. An increase in the price of

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electricity or failure to purchase the required amount of electricity to cover such losses could have a material adverse effect on our business, financial condition and results of operations.

To mitigate future electricity losses and interruptions in electricity supply, we are renovating and modernising the electricity distribution grid infrastructure as part of our investment programmes. However, there is no guarantee that we will be successful in reducing such losses and interruptions, and failure to do so may have a material adverse effect on our business, financial condition and results of operations. A number of our electricity distribution assets may no longer ensure uninterrupted and reliable supply of electricity to our customers. Ageing electricity distribution assets become particularly susceptible to weather conditions, technical failures and industrial accidents. The ageing condition of our electricity distribution assets and the Russian electricity infrastructure in general greatly increase the risk of interruptions in supply of electricity to our customers.

Technological interruptions in supply of electricity lead to the electricity losses, the incurrence of additional expenses for remediation measures and other expenses, including due to claims from the customers, that may not be covered by insurance and can cause a deterioration in the DGCs’ operating performance and may have a material adverse effect on our business, revenues, financial condition and results of operations. See “– Insurance may not be adequate, affordable or available to protect us against operational risks” and “– Risks Relating to the Russian Federation – Economic Risks Relating to the Russian Federation – The physical infrastructure in Russia is in poor condition, which may lead to interruptions in financial and economic activity”.

Our systems of automated control over business processes are at an early stage of development.

To improve efficiency and reliability of our grids, we intend to enhance our automated operational process control systems. For instance, we are developing an automated operational dispatch management control system for the electricity grid complex, the Automated Process Control System (APCS), to receive, exchange and process information from a number of network control centres (NCCs) and operational situation centres (OSCs) that were created in our DGCs. We have introduced system average interruption frequency (SAIFI) and system average interruption duration (SAIDI) indices for the purposes of controlling the safety and quality of the supply of electricity to our end customers and an automated system for the centralised collection and analysis of network and management reports (ASSO) which we intend to develop and expand.

Since 2011, we have been developing and implementing an automated system of control over distribution resources for the performance of emergency and recovery works. We also plan to implement an automated document management system, a corporate information web portal and improved internal control and risk management systems. For more information, see “Information about the Group – Key Strategies”, “Information about the Group – Research and Development” and “Information about the Group – Information Technology and Automation”. Our failure to establish or develop such systems or maintain the required level of control over operational decisions could have a material adverse effect on our business, revenues, financial condition and results of operations, and negatively affect our ability to achieve anticipated cost savings and synergies within the Group.

We require significant resources, including borrowings, to finance our investment programmes.

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Pursuant to our consolidated investment programme, the total amount to be invested between 2011 and 2015 is estimated by the Company to be approximately RUB 910 billion, with RUB 130 billion, RUB 178 billion, RUB 199 billion, RUB 204 billion and RUB 199 billion expected to be spent in 2011, 2012, 2013, 2014 and 2015, respectively. For more information on our investment programme, see “Information about the Group – Investment Programmes”.

The principal expected sources of funding of the investment programme for the period of 2011-2015 are tariffs based revenues, borrowings and funds allocated from the Russian federal budget. The financing of the Consolidated Investment Programme for 2011 is expected to consist of approximately RUB 57.0 billion from tariffs, approximately RUB 43.0 billion from borrowings, approximately RUB 7.0 billion from additional Share issues and approximately RUB 23.0 billion from technological connection services and other sources, principally revenue from tariffs received in the prior periods.

Part of our funding requirements met through the allocation of funds to us from the federal budget. In 2010, we received RUB 6.1 billion through the federal budget, in the form of a capital contribution to the Company’s share capital, which was used to finance investment projects of high priority for the government, including, for instance, the Raspadskaya mine external power supply model and the building of the electricity distribution infrastructure for the Winter Olympic games in Sochi in 2014 (the Sochi Olympics).

The federal budget for 2011 and the planned federal budgets for 2012 and 2013 envisage funding to finance our consolidated investment programme of approximately RUB 9.5 billion, RUB 12.8 billion and RUB 0.5 billion, respectively, in the form of capital contributions to the Company’s charter capital. Failure by the government to provide funding in the form of capital injections may preclude us from implementing our consolidated investment programmes and completing some projects that are socially and politically important for the government and may have a material adverse effect on our business, revenues, financial condition and results of operations. Capital raising through the share issuances could result in a dilution of shareholdings of the minority shareholders, including the GDR holders. See also “– The Russian Federation exercises control over the Company and has a substantial degree of influence over the Company’s operations”.

In accordance with the Russian regulations, certain Russian regions, such as the Republic of Dagestan, the

Karachayevo-Cherkessian Republic and the Kaliningrad Region, receive subsidies from the federal budget to be allocated to the DGCs in those regions to compensate for lower tariffs being applied in such regions. For the years ended 31 December 2010, 2009 and 2008, the DGCs in such regions received state subsidies in the amount of RUB 1,166 million, RUB 2,612 million, and RUB 3,167 million, respectively. However, there is no guarantee that we will get the government subsidies in the future. Notwithstanding the direct investments from the Government into the Group’s capital, we believe that tariffs based revenues and debt will be the largest source of funding for our investment programmes in the period of 2011- 2015.

The transfer of most of the DGCs to the RAB tariff system in 2009-2011 is expected to provide the DGCs with a stable revenue stream and a secure financing source for the entire regulatory period of the approved investment programmes. However, under the RAB tariff system, the governmental authorities generally approve an allowed rate of return on the asset base which is below the actual cost of the invested capital.

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Moreover, there is a risk of further reduction of the regulated rate of return by the Government, see “– Our revenue and profitability depend on tariffs regulated by governmental authorities”.

Low rates of return approved by the governmental authorities restrict our ability to attract financing, and we may need to revisit and correct the investment programmes in order to decrease the size of future investments. If the cost to funding of our future investments (such as borrowings, expected rate of return on equity financing and other sources of financing) is more than the rate of return under the RAB tariff system, our future investments could negatively impact on our value. The Group’s ability to attract additional debt financing could also be adversely affected by many factors beyond our control, including economic conditions in the Russian Federation and the general condition of the capital markets, including the downgrading of credit ratings assigned to the Russian Federation. For the risks concerned with borrowings, see “– The Group may not be able to comply with the financial and other restrictive covenants contained in some of the loan agreements the Group is a party to”. Failure to obtain funding for our investment programmes at the right cost could have a material adverse effect on our business, financial condition and results of operations, including the adequate and reliable supply of electricity to our customers.

We may fail to complete our investment programmes approved by governmental authorities.

Our investment programmes specify the investment projects of the DGCs in compliance with the long-term regional development programmes and the scope and sources of financing thereof. Our investment programmes are subject to review by and approval of the regional authorities and the Ministry of Energy. Should the DGC fail to comply with its investment programme in a particular year (or should the projects be excluded from the investment programme), the DGC’s revenues to be received from tariffs during such year will not increase as planned. Tariffs that we can charge from the next year onward will also be decreased by the amount of costs of the projects that the DGC fails to complete (or the projects that were excluded from the investment programme). If the DGC does not exclude a project which it failed to complete from the investment programme and completes it during the next year or regulatory period, its costs are not accounted for in the tariffs and are not, therefore, compensated. If the DGC commences the project but fails to complete it during a prescribed period of time, the tariffs for the next regulatory period are adjusted by the cost of such project. This mechanism allows the governmental authorities to correct the investment programmes, should the DGCs fail to achieve any of the set objectives.

Kubanenergo is engaged in a project for the construction and renovation of 16 power supply facilities and development of 6-10 kV and 110 kV electricity distribution grids as a part of the infrastructure for the Sochi Olympics which is one of the top-priorities of our investment programme. The Sochi Olympics project is carried out on the basis of a governmental decree and, as this project is important for the image of the Russian Federation, it is subject to intensive control by the government and attracts significant public attention. Failure of Kubanenergo to fulfil its obligations in this respect could have a material adverse effect on our business, financial condition, results of operations and reputation.

Our investment programmes require significant capital expenditure to modernise the DGCs’ existing electricity distribution assets as well as to construct new facilities. See “Information about the Group – Investment Programmes” and “– We require significant resources, including borrowings, to finance our investment programmes”.

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Even if we are able to attract sufficient financing for our capital requirements, there is no assurance that we will be able to construct new facilities or modernise our existing facilities in time, as it depends on many factors beyond our control, including failures and delays by our contractors and suppliers. Under Russian law, the DGCs are required to comply with the certain levels of safety (determined by length of interruptions of electricity transmission to end customers) and quality (based on such criteria as customers’ awareness of services provided, operational efficiency and customers’ feed-back) set forth by the Federal Tariff Service of the Russian Federation (the FTS) and the regional authorities.

Revenue under the DGCs’ investment programmes is expected to ensure compliance with such levels. The governmental authorities annually review the DGCs’ compliance with the prescribed levels of safety and quality and correct level of tariffs and the amount of revenues under the investment programmes by applying an increasing rate if a DGC complies with the prescribed levels or a decreasing rate if a DGC fails to comply with such levels. The DGCs are required to annually report on the achieved levels of safety and quality to the respective governmental authorities. To assess the DGCs’ compliance with the prescribed levels, in addition to the DGCs’ reports, the governmental authorities are also required to take into account information on safety and quality of electricity distribution services provided by the designated Russian federal services.

The results of gathering information on safety and quality of electricity distribution services and assessment by the governmental authorities of compliance with the prescribed levels may be inaccurate, which creates an additional uncertainty for our investment programmes. Our failure to comply with the investment programmes could also increase the risk of technical failures and industrial accidents and result in interruptions to the adequate and reliable supply of electricity to our customers and, generally, could have a material adverse effect on our business, financial condition and results of operations.

Our business depends on our relationship with FGC.

We enter into contracts with FGC for transmission of electricity which we then distribute to our customers.

Our business depends on our ability to contract with FGC, and if we fail to enter into such contracts or enter into contracts under conditions that are not favourable to us, this could have a material adverse effect on our business, financial condition and results of operations.

We are also reliant on FGC’s cooperation in resolving the “last mile” issue. Some of the large industrial companies are directly connected to the high-voltage grids which are part of the transmission grid operated by FGC, the United National Electricity Grid (the UNEG). However, they have to pay a distribution tariff charged by the DGCs, because the DGCs leased out from FGC those parts of the UNEG to which such customers were connected (so-called “last mile” grids). This system was established at the time of RAO UES Restructuring and represents a mechanism for cross-subsidising by the large industrial companies of other categories of our customers, such as small and medium enterprises (SMEs) and residents. Given the absence of legislation regulating agreements for lease of the “last mile” grids, some of the large industrial consumers sought to switch to a “direct agreement” with FGC and filed successful claims with courts in this respect.

The Company estimates that the termination of such “last mile” agreements and transfer of such large industrial consumers to direct agreement with FGC resulted in lost revenues of approximately RUB 11.8

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billion in 2011 and may result in lost revenues from approximately RUB 2.7 billion to RUB 7.6 billion in 2012. We may also suffer further losses if other consumers seek to terminate their contracts with us or if those large industrial customers are able to successfully claim in courts the amounts of distribution tariffs they paid to the DGCs as unjust enrichment. For more information, see “Information about the Group — Litigation”.

In May 2011, the Government approved a regulation in relation to the “last mile” agreements which established a procedure for conclusion of the “last mile” lease agreements. These agreements and the parts of the UNEG that can be leased out by FGC are subject to approval by the federal and regional authorities. In accordance with this regulation, the Ministry of Energy approved the lists of the UNEG parts to be leased to the DGCs in 2011 and 2012. Based on these lists, FGC and the DGCs entered into a number of the lease agreements for 2011 and 2012 approved by the Ministry of Energy. Such agreements are still subject to termination of the direct agreements between FGC and the respective customers and a written consent to each such new lease of a head of the respective regional authority.

Under the new regulation, governmental authorities have a wide discretion over the approval of the “last mile” agreements and the parts of the UNEG that can be leased out by FGC. Given the novelty and uncertainty of the regulation, there is no assurance that the large industrial customers that entered into direct contracts with FGC at their own will switch to contracting with our DGCs. This can lead to the risk of litigations to which the DGCs will be a pary to compel such customers to enter into contracts with the DGCs. In the regions in which the governmental authorities include electricity distribution to such customers into the tariff base, such customers’ refusal to contract with our DGCs could result in a shortfall in the revenues of the DGCs and have a material adverse effect on our business, financial condition and results of operations.

Our electricity distribution assets may not be able to address daily, seasonal or yearly fluctuations in demand for electricity and may be negatively affected in some regions of the Russian Federation.

The demand for electricity may vary significantly on a daily, seasonal and yearly basis due to weather conditions and other factors. Demand for electricity is usually higher during the period from October to March due to longer nights and colder weather, and it is generally lower in the period from April to September due to longer days and warmer weather. In addition, demand for electricity is usually higher during normal business hours. Demand may also fluctuate from year to year due to changes in weather patterns.

Therefore, the DGCs’ electricity distribution assets may be fully utilised during certain periods, and underutilised during other periods. Accordingly, the DGCs’ expenses and profitability may fluctuate based on the above electricity demand and weather patterns. Further, due to daily and seasonal fluctuations in electricity demand, in certain regions of Russia, in particular in the large developing cities such as Moscow and St. Petersburg, the DGCs’ electricity distribution assets may occasionally be over-utilised.

Climate and weather conditions in certain regions in which we operate can create emergencies that may damage our electricity distribution assets and lead to failure to provide electricity. Some of our electricity distribution assets are located in remote areas with harsh climates, including Siberia and the North-West region. In the past, we have experienced a number of industrial accidents due to abnormal weather conditions and natural hazards.

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For instance, our electricity distribution lines were damaged by falling trees in October 2011 caused by continuing rain and strong winds in the Arkhangelsk Region, in December 2010 and in January 2011 caused by ice storms in the Moscow, the Nizhny Novgorod and the Pskov regions and in August 2010 caused by abnormal heat and a series of fires in the Central Federal District of Russia and storms in the North-West regions. In each instance this led to a large scale temporary shutdown of the supply of electricity in these regions. To avoid such damages and the possible negative impact of weather conditions on our electricity distribution assets in the future, we have started to develop and implement a system to manage the allocation of resources in case of large accidents and emergency situations.

Despite these measures, there can be no assurance that we will be able to overcome the technical challenges related to harsh weather and climate in, and the accessibility of, the locations in which we operate at a commercially reasonable cost, which could have a material adverse effect on our business, financial condition and results of operations. Certain of our electricity distribution assets are located in regions of the Russian Federation that are subject to social unrest and heightened risks of terrorism or other attacks. Such acts may have a severe impact and could have a material adverse effect on our business, financial condition, results of operations and prospects.

The Group may not be able to comply with the financial and other restrictive covenants contained in some of the loan agreements the Group is a party to.

As at 30 June 2011, our total short-term and long-term borrowings amounted to RUB 138.6 million. As at 30June 2011, loan agreements and promissory notes comprised 81% of the total debt of the Group, bond issues comprised 14% of the total debt of the Group with the remainder of debt being attributed to financial lease. Under the terms of the loan agreements, we are subject to certain financial and other restrictive covenants that limit our ability to, among other things, make acquisitions or investments, sell, transfer or otherwise dispose of assets or receivables, or engage in mergers, acquisitions or consolidations.

The terms of the most of our loan agreements also require us to comply with certain specified financial ratios. For example, some of the loan agreements require us to maintain a ratio of consolidated debt to EBITDA, financial leverage, current liquidity and value of the net assets. We maintain a system of monitoring of the DGCs’ debt position and have established procedures for the DGCs’ corporate approvals, budgeting and determination of parameters of the borrowings. However, given our size, we cannot guarantee that our debt system of monitoring will always be effective and that we will always be able to accurately monitor and control our debt. For example, Kubanenergo and IDGC of Siberia breached applicable debt to EBITDA financial ratios during the fourth financial quarter of 2010. The breach occurred due to seasonal fluctuations in EBITDA and the financial ratio was achieved the first quarter of 2011. No enforcement action was taken by the relevant banks and, in addition, the covenants have been subsequently amended so that they are only breached if the debt to EBITDA ratio is not achieved for two successive quarters. Even though we currently comply with the financial and other covenants set forth in our loan agreements, in the future we may fail to comply with such covenants, in particular given the anticipated future increases in our indebtedness to fund our investment programmes. If our future revenues do not increase as anticipated, for example through lower than expected increases in the tariffs we are able to charge, then such lower revenues, together with greater level of indebtedness, may result in our breaching such covenants, which could have a material adverse effect on our business, revenues, financial condition, results of operations and prospects.

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Although a large part of our borrowed facilities are issued on favourable terms, we cannot guarantee that we will be able to obtain financing on such terms in future. The need to observe financial covenants and other restrictions could hinder our ability to achieve our strategic goals. Any breach of these terms could result in an event of default under the terms of our financial arrangements, causing some or all of our indebtedness to become immediately due and payable. This could have a material adverse effect on our business, revenues, financial condition, results of operations and prospects. For further information on our debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources”.

As at 31 December 2010, IDGC of Siberia, IDGC of South, MOESK, Lenenergo and IDGC of Center had a negative working capital as their short-term debt exceeded current assets by RUB 73,295.9 million in total. More than 54.4% of such DGCs’ short-term debt consisted of advance payments received from customers, including advance payments received for technological connection services in the amount of RUB 70,617.2 million. When these advance payments are excluded from the amount of these DGCs’ short-term debt, the DGCs have positive working capital (i.e. the amount of each such DGC’s current assets (cash, accounts receivable and inventories) exceeds their short-term liabilities). They are, therefore, able to, and the Company is not aware of any reason why in the future they would not be able to, meet their short-term liabilities regardless of the negative working capital. Electricity distribution companies often have negative working capital as they operate on the advance payment basis which affects their balance sheets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital requirements” for further details.

We depend on payments from customers.

Our primary operating income comprises payments for electricity distribution and technological connection services. Under Russian law, we are obligated to enter into contracts for technological connection services with all customers applying to us for such services if we have technical capability to provide such services. We do not have the right to unilaterally terminate a contract for technological connection services with a customer because of non-payment. If a customer does not make timely payment for the electricity distribution or technological connection services, we can suspend provision of the services to such customer if permitted by the terms of the respective contract. We can also only claim overdue electricity distribution and technological connection payments in court.

Historically, we have initiated a large number of lawsuits against non-paying customers, and have to bear the costs of such proceedings. As at 30 June 2011, we had total receivables of approximately RUB 100.5 billion, comprising receivables of approximately RUB 52.9 billion - under the DGCs’ contracts for electricity distribution, and approximately RUB 2.1 billion - for provision of technological connection services. As at 31 December 2010, we had total receivables of approximately RUB 98.8 billion, comprising receivables of approximately RUB 51.0 billion - under the DGCs’ contracts for electricity distribution, and approximately RUB 2.4 billion - for provision of technological connection services. The amount of receivables from such customers increased from RUB 22 billion in January 2009 to RUB 64 billion in March 2011. Since beginning of 2011, the amount of non-payments has stabilised.

Nevertheless, non-payments and delays in payment could continue to increase in the future, including due to our inability to terminate provision of technological connection services to customers. Non-payments and payment delays for a protracted period of time may have a material adverse effect on our business,

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financial condition and results of operations. We also face a problem of unbilled electricity due to the age or absence of metering equipment and electricity theft. Our billing metering system suffers from a high level of physical deterioration.

As at 1 January 2011, our metering equipment installed at approximately 82.7 per cent of the total number of our electricity delivery points failed to conform to the applicable Russian regulation. In accordance with the Federal Law “On Energy Saving and Improvement of Energy Efficiency and on Amendments to Certain Legislative Acts of the Russian Federation” No. 261-FZ dated 23 November 2009, in 2010 the Company developed a programme for 2011-2015 to develop and modernise its billing metering system to reduce electricity losses and increase revenues by ensuring the collection of accurate data on the volume of services provided.

We expect that the implementation of this programme, excluding works for which financing has not yet been secured, will allow us to reduce electricity losses by approximately 8% of the current level of electricity losses, equivalent to approximately 4.6 billion kWh per annum (or, if including works for which financing has not yet been secured, by approximately 18%, equivalent to approximately 10.2 billion kWh per annum). In 2011-2015, we expect to install and update metering equipment at more than 15 million electricity delivery points which will cost us approximately RUB 139 billion, of which approximately RUB 40 billion is covered by the funding already provided for in our five year investment programme and is spread over the five year period. Whilst approximately RUB 99 billion is currently not funded, the Company expects, and has no reason to believe that it will not be able to, to raise the necessary funding to finance its programme of development and modernisation of its billing metering system through funds from the federal budget, borrowings and/or operating revenues.

There is, however, a risk that the Company may not be able to obtain the necessary funding, in particular, through funds from the federal budget, as obtaining such funds depends on the macroeconomic, economic and political situation in Russia. If the Company becomes unable to obtain funds from the federal budget, it expects to attract additional funding through borrowings.

In addition, the programme may be partially covered by the funding to be provided for the investment programme after 2015. If we fail to implement the programme of development and modernisation of our billing metering system and continue to face a high level of electricity losses for a protracted period of time or become unable to raise the necessary funding to finance this programme, our business, financial condition and results of operations could be materially adversely affected.

We use a portion of land on which our electricity distribution assets are located and certain other real property without valid legal title.

We own, lease or occupy under the right of perpetual use most of the land plots on which our electricity distribution assets are located. However, we do not have a valid legal title to some of the land plots we occupy. Of approximately 27,179 hectares of land we use and effectively control, we currently do not hold a registered ownership title or valid leasehold interest or other formalised rights with regard to approximately 32% of such land and we are currently in the process of registration and/or formalisation of such rights.

The process of registration and/or formalisation of the rights to such land have not yet been completed. In most cases, those land plots to which we do not hold any registered title we believe to be property of either

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the Russian Federation, the respective region of the Russian Federation or a municipality. However, as the land legislation in Russia has been in a state of flux for a long period of time, a significant amount of land in Russia has not been properly assigned into federal, regional or municipal ownership. If the ownership of a particular land plot has not been determined and registered, we cannot validly enter into a lease agreement with its owner. We may face claims for penalties, unjust enrichment or damages in connection with such use of land without legal title, which, if successful, may make us repay all profits we have received from our operations on these land plots.

Also, Russian law requires companies to change the right of perpetual use to either ownership or leasehold rights by 1 January 2012, except for companies occupying land plots on which overhead electricity transmission lines, pipelines, railways and other transportation, communications and utilities lines are located, including our DGCs. For such companies, the law provides for the extended deadline, until 1 January 2015. A change of the rights of perpetual use can only be carried out if the respective land plot has been registered in the land cadastre or there is a valid reason for the absence of such registration which causes delays and uncertainty of the registration of rights.

We are currently working on changing title of our land plots before 1 January 2015. However, there is no assurance that we will be able to finalise this process in time. Rising real estate prices could increase the likelihood of challenges to our land lease arrangements by governmental officials and/or legal owners. Such legal actions brought against us could have a material adverse effect on our business, results of operations and financial condition. If we fail to obtain leasehold interests with regard to or the right to occupy this land, or properly register ownership of any structures located thereon, we may be forced to reduce our operations and may lose any investments already made in respect thereof, which may materially adversely affect our business, results of operations and financial condition. See also “— Risks Relating to the Russian Federation — Legal Risks and Uncertainties in the Russian Federation — Difficulties exist in ascertaining the validity and enforceability of title to land or other real property in the Russian Federation and the extent to which it is encumbered” and “Regulatory Environment — Land Use Rights in Russia”.

We are subject to significant health, safety and environmental regulation.

We operate in an industry that uses electricity assets, including high-voltage substations, which may involve health and safety risks or pollution of the environment. In the past, a number of our employees have been injured and there have been a number of fatalities at the DGC’s facilities. For further details on our safety and environmental record, see “Information about the Group – Health and Safety”. As a result, our activities are subject to various federal, regional and local health, safety and environmental protection laws and regulations. In the future, federal, regional or local authorities may impose stricter health, safety and environmental standards than those currently in effect or enforce or interpret the existing environmental laws, regulations or licences in a different or more stringent manner than they are currently enforced or interpreted.

For instance, between 2008 and 2010, the Ministry of Natural Resources and Ecology prepared significant amendments to the Russian Federal Law “On Environmental Protection” No. 7-FZ dated 10 January 2002 (the Environmental Protection Law) and other regulations. The proposed amendments contemplate increasing companies’ liability for non-compliance with environmental laws and regulations. In particular, pursuant to the proposed amendments, the penalties for environmental impact thresholds (norms) being

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exceeded may be increased by up to 25 times the current amounts from 1 January 2012, and by 100 times from 1 January 2016. Furthermore, fines for violation of environmental legislation may be increased by up to 20 times the current amounts. In such circumstances, we may be required to undertake further expenditure to modify our operations, ensure better work conditions, install pollution control equipment, introduce measures to reduce the impact of our activities on the environment, curtail or cease certain of our operations, or to pay fees or fines for breaches of health, safety or environmental standards. There can be no assurance that we would be able to recover any such increased costs through tariffs or that our business, financial condition and results of operations would not be materially adversely affected by health, safety and environmental laws and regulations.

To the extent that our electricity distribution assets become obsolete, we may face an increase in expenditure to install modern, more environmentally friendly equipment and to replace the obsolete technology in order to comply with applicable environmental regulations. Any such increase in expenditure or any related failure to comply with applicable environmental regulations could have a material adverse effect on our business, financial condition, results of operations and prospects.

Insurance may not be adequate, affordable or available to protect us against operational risks.

The insurance industry is not yet well-developed in the Russian Federation and some forms of insurance protection are either unavailable or unavailable on commercially reasonable terms. We maintain insurance against some of the most probable, but not all potential, risks and losses which may affect our operations. We have insured our property against fire, flood and other natural disasters as we conduct our business in various geographical and climate zones of Russia and our operations may suffer from such disasters. See “– Our electricity distribution assets may not be able to address daily, seasonal or yearly fluctuations in demand for electricity and may be negatively affected in some regions of the Russian Federation”. We also provide accident and voluntary medical insurance to our personnel. For further details on the type and amount of coverage we carry, see “Information about the Group – Insurance”.

We do not have any coverage for business interruption or liability to our customers and have limited coverage for third party liability. Even though our electricity distribution assets are spread over a large territory and the electricity distribution lines do not have a substantial impact on the environment, we cannot guarantee that our insurance will be adequate to cover all of our potential future losses or liabilities nor that our existing insurance coverage will continue to be available to us on economically reasonable terms. Until we are able to obtain adequate insurance coverage, there is a risk that losses and liabilities arising from events that are typically insurable in more developed markets could significantly increase our costs and materially adversely affect our business, financial condition and results of operations.

We are competing with the independent TGCs for tariffs from end customers.

We face an increasing competition for tariffs from end customers from a growing number of the independent TGCs in the regions in which such TGCs operate along with our DGCs. As a result, our market share in the regions in which we operate decreased from 76% in 2008 to 69% in 2011. At present, there are more than 2,000 TGCs operating in Russia (for comparison, there are approximately 800 TGCs in Germany, approximately 150 TGCs in Sweden, Italy, Austria and Norway, approximately 100 in Finland and Denmark and less than 20 in the United Kingdom, Poland and the Netherlands), and new TGCs may also enter the market in the future. This competition between electricity distribution companies for tariffs

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from end customers is expected to become even more intense as the electricity market becomes more liberalised. In addition, it is possible that some TGCs may merge in the future, potentially creating large competitors both for the particular DGCs or the Group as a whole. A growing number of the TGCs with significant investment programmes caused increases in tariffs in the respective regions. Such increases were perceived by customers as an increase of our tariffs due to the lack of information on split in tariffs between the TGCs and the DGCs. For instance, the Company’s estimates that for the past four years revenues of the TGCs with which the DGCs share tariffs for end customers increased by approximately 2.4 times while the DGCs’ revenues increased approximately twice. If we are unable to effectively compete with such increasing competition, it could materially adversely affect our business, revenues, financial condition, results of operations or prospects.

The large number of TGCs operating in particular regions makes it difficult to set and enforce unified standards of safety and quality, establish unified technical and operational policies, implement management and control systems and centralise responsibility for the stable electricity distribution to customers and decisions in case of accidents which overall negatively affects reliability of energy supply in such regions of Russia. An increasing number of TGCs also leads to risks relating to the operation of electricity grids, in particular, unequal distribution of resources and capital expenditure for its use, maintenance and development. In addition, the Group faces the risk that its customers, in particular large industrial companies, may construct their own alternative electricity distribution infrastructure to meet their electricity distribution needs and contract with FGC for transmission of electricity directly. See “– Our business depends on our relationship with FGC”.

Our business strategy contemplates introduction of new services and further geographical expansion, and our future growth depends on the execution of this strategy.

The DGCs are mainly engaged in provision of services of electricity distribution and technological connection in Russia. In order to develop our business further, we are looking to expand our operations. Such areas of expansion include diversification of the services we provide into related businesses, such as building the “smart grids” and development of new grids, creating IT- and business control systems to service electricity grids, ensuring relay protection of grids, provision of utilisation of aged equipment and billing metering services, development of the advanced telecommunication grids in cooperation with the telecommunication operators, and geographical expansion in Russia and, possibly, to other countries, particularly the European and the Commonwealth of Independent States (CIS) countries. To accomplish these goals, we are establishing a special coordinating committee and working groups responsible for development and growth programmes. Our failure to identify suitable opportunities for expansion and/or acquire new electricity distribution assets on acceptable terms or at all or failure to successfully develop and introduce new services may limit our growth and could have a material adverse effect on our business, financial condition and results of operations. In connection with our international expansion, future transactions, such as acquisitions, could be subject to review or approvals of foreign national or regional antitrust and other authorities, which could result in delays in implementation of our growth strategy and completion of our transactions, fines or other sanctions. If we are unable to implement our growth strategy, it could materially adversely affect our business, revenues, financial condition, results of operations or prospects.

Many of our employees are represented by trade unions.

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Most of the DGCs are members of the All-Russia Trade Association of Employers in the Power Industry (RaEI Association), which, together with the All-Russian Electrounion (AREU), are parties to the social partnership and participate in the execution of the Sectorial Wage Rate Agreement (SWRA) for the Russian electricity industry. SWRA sets out the main principles of regulation of economic relations, labour conditions, guarantees, compensations and benefits for the employees and liability of the employers to the employees and have to be adopted by our DGCs. The collective bargaining agreements, to which the DGCs are a party, have to comply with SWRA and should not worsen the employees’ rights as compared to SWRA and Russian labour law. As at 31 December 2010, approximately 76% of the Group’s employees were unionised and represented by AREU.

We have not experienced any business interruption as a result of labour disputes at any of our businesses in the past, and we consider our relations with employees to be good. Nonetheless, union representation subjects the Group’s businesses to the risk of interruptions through strikes or delays in renegotiating labour contracts. The DGCs may not be able to renew existing arrangements with the trade union on favourable terms. This could have a material adverse effect on our business, financial condition and results of operations.

There is a shortage of personnel with the qualifications and skills that we require.

More than 60% of our employees are workers, specialists and managers engaged in technical operations. Therefore, our business depends on our ability to retain such workers, specialists and managers. Our business requires that our personnel have qualifications and skills not only in the area of their specialisation, such as engineering, sales and marketing or finance and accounting, but also knowledge of specific features of our industry. Because of the ageing Russian population, the unpopularity of blue-colour occupations and the small number of graduates from the technical sciences departments of colleges and universities, in particular specialists in the energy and electricity industry, there is currently a lack of personnel with the qualifications and skills that we require for the operation of our business, which is likely to grow in the future.

We are also facing increased competition for qualified staff from independent TGCs. In light of a general shortage of qualified personnel, we may need to increase the level of employee compensation more rapidly than in the past to remain competitive. If we increase employee compensation, there can be no assurance that we will be able to ensure a similar increase in our productivity to justify the extra costs or to pass on the extra costs to customers through increases in prices. If we become unable to recruit and retain a skilled workforce, including due to failure to raise wages, it could hinder our ability to maintain our market position or execute our strategic goals. Any or all of these scenarios could have a material adverse effect on our business, financial condition, results of operations and future prospects.

Preparation of our consolidated IFRS financial statements is a difficult task requiring us to involve experienced external and internal accountants.

The preparation of our consolidated IFRS financial statements is a difficult task requiring IFRS-experienced accounting personnel. We prepare our IFRS financial statements by transforming financial information prepared under the RAS into IFRS-compliant statements. We have adopted and implemented transformation procedures and implemented them for the IFRS financial statements for the last three years. This process is complicated and time-consuming and requires significant attention from our accountants

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together with the involvement of external accounting personnel. We have set up an internal division in our accounting department fully responsible for preparation of the IFRS financial statements of the Group. Nevertheless, while we strive to employ and retain the best personnel, a shortage of accounting and financial personnel experienced in internationally accepted accounting standards would substantially increase both the difficulty in preparing our consolidated IFRS financial statements and the risk that such financial statements would not be reported in a timely and reliable manner. Notwithstanding the above, we believe that our financial systems and processes are sufficient to ensure compliance with the requirements of the UKLA Disclosure and Transparency Rules as a listed entity.

Our business depends on our ability to protect our electricity distribution lines and our automated systems against damage.

Our electricity distribution lines, in particular the overhead lines, are not physically protected and may become a target for vandalism and theft. Also, our automated operational dispatch management control system and automated electricity metering system may become the victim of attacks by third parties. For further details on our automated systems, see “Information about the Group – Information Technology and Telecommunications”. Our ability to operate our business depends, therefore, on our ability to ensure physical and informational protection of our distribution lines and other electricity distribution assets and our automated systems from damage by third parties. There can be no assurance that we will be able to ensure full protection from such actions by third parties. If such actions occur, they may result in theft, damage, interruptions to our operations and supply of electricity to our customers or destruction of our distribution lines or, in case of damage to the automated systems, our data, including our wholesale electricity market system models. In addition, disgruntled employees may cause similar damage to, or take similar actions with respect to, our distribution lines or automated systems and data to which they have access or to which they gain unauthorised access. Should such damage, theft or interruptions occur, it could have an adverse effect on our business, financial condition, results of operations and prospects.

In the event that our past transactions or future transactions that require approval in accordance with Russian law are successfully challenged, they could be invalidated and unwound.

Under Russian law, certain transactions defined as “interested party transactions” require approval by disinterested directors or disinterested shareholders. We engage in numerous transactions that require approval as an “interested party transaction”. However, the provisions of Russian law defining “interested party transactions” are subject to different interpretations and some transactions which we do not consider or approve as “interested party transactions” may be determined to be such by a court. Therefore, there can be no assurance that our application of these concepts will not be subject to challenge.

The Company’s minority shareholders may vote against transactions with “interested parties”, which require shareholders’ approval, or there may be an insufficient number of disinterested shareholders to constitute a quorum required for the approval of such transactions. In the event that the Company’s minority shareholders do not approve transactions with “interested parties” or successfully challenge them, we could be limited in our operational flexibility in connection with such transactions.

While we generally endeavour to obtain all corporate approvals required under Russian law prior t consummating transactions, there can be no assurance that all such corporate approvals have been duly obtained or will be obtained in the future. If such transactions are not properly approved, they may be

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declared null and avoid, and unwound to the extent possible. There can be no assurance that transactions that are important for our business will always be approved in the future by new minority shareholders.

Under Russian law, a company must obtain the prior approval of its board of directors to acquire or dispose of assets, the value of which amounts to or exceeds 25% of the balance sheet value of the assets of a company as determined under RAS as at the latest reporting date preceding the transaction, or the approval of its shareholders if the value of the assets to be acquired or disposed of exceeds 50% of the balance sheet value of the assets of a company. Shareholders voting against or not voting on such disposal or acquisition are entitled to have the company buy out their shares at the price set by an independent appraiser.

Whilst we have not been and are not currently subject to any challenges due to failure to approve such transactions, any such challenge could result in the invalidation of transactions that are important to our business. If any of such transactions are not properly approved, then these transactions may be declared null and void and, if possible, unwound, which could have a material adverse effect on our business, financial condition, results of operations and the trading price of the Shares and the GDRs.

We may face liabilities arising from the reform of the Russian electricity industry.

In 2001, the Government took the decision to restructure the Russian electricity industry significantly by, among other things, breaking up almost all of the vertically-integrated power companies and forming new companies to operate in separate electricity industry segments, such as generation, sales, transmission and distribution. For further information on the RAO UES Restructuring, see “Electricity Industry in the Russian Federation – Industry Restructuring”.

MRSK Holding was incorporated on 1 July 2008 during the RAO UES Restructuring for the purpose of Holding interests in, and centrally monitoring and managing of operational activities of, the interregional and regional electricity distribution grid companies owned by RAO UES. At the date of its incorporation, MRSK Holding received shares in the DGCs, as further described in “Information about the Group – History and Development”. Most of the companies that became a part of the Group in 2008 were also formed as a result of various corporate reorganisations, including mergers and spin-offs. Many of the transactions which took place as part of the RAO UES Restructuring were complex and, in many cases, relied on newly-adopted regulations which were not widely tested in practice and, therefore, were and are subject to varying interpretations. Certain of the companies involved in the restructuring took a variety of actions relating to share issuances, share disposals and acquisitions, valuation of property, interested party transactions, major transactions, meetings of their governing bodies and antimonopoly issues that, if successfully challenged on the basis of non-compliance with applicable legal requirements by governmental authorities, counterparties or shareholders of the relevant group members or their predecessors-in-interest, could result in the invalidation of such transactions or the imposition of other liabilities.

We may not be able to defend successfully every challenge brought against us on the basis of such actions or transactions, and the invalidation of any of these actions or transactions or the imposition of any related liability could, individually or in the aggregate, have a material adverse effect on our business, financial condition and results of operations.

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In addition, in accordance with Russian law, the Company may be legally responsible for liabilities of companies whose assets it received as part of the RAO UES Restructuring, including liabilities of RAO UES. The Company could bear these liabilities as a legal successor of RAO UES and other companies whose assets it received as part of, and under the terms of, the reorganisation. Should the Company be held liable for such liabilities, our business, financial condition, results of operations and prospects may be materially adversely affected. In the course of the RAO UES Restructuring, the Company received stakes in certain electricity supply companies which are not used for the electricity distribution and stakes in non-core companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. In accordance with certain regulations adopted in the course of the RAO UES Restructuring, we may not own electricity supply assets and, therefore, may have to sell, or otherwise dispose of, such assets. See “Information about the Group – Property” and “Regulatory Environment – Electricity Industry Regulation”. Even though we will seek a market value price for our stakes in electricity supply companies, there is no guarantee that we will able to dispose of our stakes in such companies at a price equivalent to their market value.

Due to the Company’s short operational and financial history, it may not be possible to review and accurately assess the Group’s historical trends, results of operations and value of its assets.

MRSK Holding, the holding company of the Group, was established in July 2008 as an open joint stock company by way of spin-off from RAO UES. As a result, the Group has a short operational and financial history in its current form, and, consequently, it may not be possible to review and accurately assess the Group’s historical trends, results of operations and value of its assets. In addition, the legal framework of the Russian electricity market in which we operate has been amended several times in the past three years, therefore a comparative analysis of the financial reporting periods in the Group’s consolidated financial statements may not provide an accurate comparison of financial results, or a true indication of trends and value, of the Group’s business, particularly in light of further reforms and changes in the electricity industry.

We have used certain information in this document that has been sourced from third parties.

We have sourced certain information contained in this document from independent third parties, including private companies, government agencies and other publicly available sources. We believe these sources of information are reliable and that the information fairly and reasonably characterises the industry in which we operate. However, although we take responsibility for compiling and extracting the data, we have not independently verified this information. In addition, the official data published by the federal, regional and local authorities may be substantially less complete or accurate than those of Western countries. Official statistics may also be produced on different bases than those used in Western countries.

5.3. Risks Relating to the Russian Federation

Emerging markets, such as Russia, are subject to greater risks than more developed markets, including significant legal, economic and political risks.

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Investors in emerging markets, such as Russia, should be aware that these markets are subject to greater risk than more developed markets, including in some cases significant legal, economic and political risks. Investors should also note that emerging economies are subject to rapid change and that the information set out herein may become outdated relatively quickly. Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, an investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal and financial advisers before making an investment in the Shares and the GDRs.

Political and Social Risks in the Russian Federation

Political or social instability in Russia could recur.

Since 1991, Russia has sought to transform itself from a one-party state with a centrally-planned economy to a democracy with a market economy. As a result of the sweeping nature of these reforms, the Russian political system could face demands for more social programmes and governmental involvement in the economy and economic and political reforms.

Complicity of such reforms and difficulties in their implementation or the failure of salaries and benefits generally to keep pace with the increasing cost of living could lead to labour and social unrest, increased support for centralised authority and a rise in nationalism. Such labour and social unrest could disrupt normal business operations, which also could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of the Shares and the GDRs.

While the Russian political system and the relationship between the Russian President, the Government and the State Duma currently appear to be stable, future political instability could result from declines in the overall economic situation, including any deterioration in standards of living, and political situation in future may become affected by the results of elections of the State Duma and the Russian President in 2011-2012. Shifts in governmental policy and regulation in Russia may be less predictable than in many Western democracies and could disrupt or reverse political, economic and regulatory reforms. Current and future changes in the Russian government, major policy shifts or lack of consensus between the Russian President, the Russian government, the State Duma and powerful economic groups could lead to political instability, which could have a material adverse effect on the value of investments relating to Russia and as such on our business, financial condition, results of operations, future prospects and the trading price of the Shares and the GDRs.

Deterioration of Russia’s relations with other countries could negatively affect the Russian economy and economies in neighbouring regions which could result in a significant decrease in demand for securities of Russian companies.

Over the past several years, Russia has been involved in disputes and conflicts, both economic and military, including those that involved other members of the CIS. On several occasions this has resulted in the increasing tension in Russia’s relations with other members of the international community, including the United States and various countries in Europe. Many of these jurisdictions are home to financial

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institutions and corporations that are significant investors in Russia and whose investment strategies and decisions may be affected by such disputes and conflicts.

For example, in August 2008, Russia was involved in a military conflict with Georgia. As a result of such conflict, RTS and MICEX experienced heightened volatility. Moreover, Russia’s relationships with Ukraine and Belarus have recently been strained over a variety of issues. The emergence of new or escalated tensions between Russia and other CIS members or other countries, or the imposition of international sanctions in response to these tensions, could negatively affect economies in the region, including the Russian economy. This, in turn, may result in a general lack of confidence among international investors in the economic and political stability of the region and in investment in Russia in general. Such lack of confidence may result in reduced liquidity, increased trading volatility and significant decreases in the price of the Shares and the GDRs and in the Company’s ability to raise debt or equity capital in the international capital markets.

Lack of investor confidence in Russia may have an adverse effect on the Company’s ability to attract future capital, as well as on our financial condition and prospects.

The availability of credit to entities operating within the emerging markets is significantly influenced by levels of investor confidence in such markets as a whole. Any factors that affect market confidence (for example, a decrease in credit ratings or state or central bank intervention in one market) could adversely affect the price or availability of funding for entities within any of these markets, including us. In addition, future acts of terrorism or armed conflicts in the Russian Federation or internationally could have an adverse effect on the financial and commodities markets and the global economy and could negatively affect the Russian economy and thereby adversely affect our business, financial condition, results of operations or prospects.

Lack of coordination and agreement between federal and regional authorities and internal conflicts in Russia create an uncertain operating environment.

The Russian Federation is a federation of 83 sub-federal political units, consisting of republics, territories, regions, cities of federal importance and autonomous regions and districts. The unclear delineation of authority and jurisdiction among the members of the Russian Federation and the government and lack of coordination and agreement between federal and regional authorities often becomes an obstacle for the efficient management of the electricity grid complex. This lack of consensus hinders our long-term planning efforts and creates uncertainties in our operating environment, both of which may prevent us from implementing our business strategy.

Additionally, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military operations, such as the military operations in Chechnya. Violence and attacks have spread to other parts of Russia and several terrorist attacks have been carried out, including in Moscow. Terrorist attacks and the resulting heightened security measures cause disruptions and difficulties to domestic commerce and exports from Russia. These factors could have a material adverse effect on our business and the value of the Shares and the GDRs.

Negative or speculative publicity could harm our business.

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There is a tendency among the local and international press to generate speculative reports that contain allegations of illegal conduct or corruption on the part of Russian companies or individuals within Russian companies or the Government. Also, the Russian press and media are suspected of publishing biased articles and reports in return for payment. Such biased or speculative publicity could have a material adverse effect on our business and the value of the Shares and the GDRs.

Crime and corruption could create a difficult business climate in Russia.

The level of organised criminal activity and corruption in Russia has reportedly remained high. Press reports have also described instances in which governmental officials have engaged in selective investigations and prosecutions to further the interests of the government and individual officials. The Government has pursued a campaign against corruption, the results of which have not been yet achieved.

Russia’s declining population could have a material adverse effect on our business, financial condition, results of operations and prospects.

The Russian Federal State Statistics Service (Rosstat) estimated Russia’s population at 142.9 million as at 1 January 2011, a decline of approximately 5.4 million from 1991. The US Census Bureau estimates that Russia’s population will decline by 14 million people between 2000 and 2025, while the United Nations Population Division’s medium-term projection suggests a drop of over 21 million over the same period. Although the birth rate recently reached its highest rate in 15 years, the population continues to decline due to a relatively low birth rate, an ageing population and low life expectancy. If the present trend continues without a migration inflow to Russia, the decreasing working population will become a barrier to economic growth around 2015, according to the Economic Forecasting Institute of the Russian Academy of Sciences. A shortage of skilled Russian workers combined with restrictive immigration policies could have a material adverse effect on our business, financial condition, results of operations and prospects.

Economic Risks Relating to the Russian Federation

Fluctuations in the global economy may have an immediate impact on the Russian economy.

The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world as evidenced by the recent global financial crisis (the financial crisis), the effects of which have continued to impact the Russian capital market and banking sector in 2010 and 2011. Financial problems or an increase in the perceived risks associated with investing in emerging economies dampen foreign investment in Russia. In the financial crisis, Russian businesses faced severe liquidity constraints because of their dependence on foreign capital, which further negatively impacted the Russian economy. The financial crisis has resulted in capital markets instability, significant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia. In response to the financial crisis and the threats to the ability of investment banks and other financial institutions to continue as going concerns, governments in the United States and in many of the largest countries in Europe have implemented significant rescue packages. The Russian Government has also introduced a range of stabilisation measures aimed at providing liquidity and supporting debt refinancing for Russian banks and companies. Despite these actions, the volatility and market disruption in the global banking sector has continued throughout 2010 and 2011.

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In 2010 and 2011, concerns about sovereign debt, in particular sovereign debt of the United States and sovereign debt of certain member states of the European Union, including Greece, Ireland, Spain and Portugal, has further disrupted the global capital markets. In large part due to the impact of the global financial and economic crisis on the Russian economy, the leading rating agencies downgraded sovereign credit rating of the Russian Federation and their outlook on the Russian banking sector. The global financial and economic crisis has also resulted in periodic suspensions of Russian stock market trading, extreme volatility in the Russian equity markets and sharp declines in the share prices of Russian financial institutions, in particular in the fourth quarter of 2008 and early 2009. Although the Russian stock market showed some signs of recovery since 2009, the financial markets remain highly volatile and unpredictable.

In addition, since Russia produces and exports large quantities of crude oil, natural gas and other commodities, its economy is particularly vulnerable to fluctuations in the prices of crude oil, natural gas and other commodities on the world market, which reached record high levels in mid-2008 and subsequently fell dramatically by the end of 2008 and in early 2009 as a result of the financial crisis. Oil prices have since substantially rebounded but remain extremely volatile. Further price volatility may continue to influence the Russian economy negatively.

Moreover, the value of the rouble generally moves in line with the price of crude oil. In the financial crisis, the rouble experienced a significant decline in value as crude oil prices plummeted and the Government used a significant portion of its foreign exchange reserves to support the value of the rouble. The Government may not be able to avert a similar significant decline in the value of the rouble in the future and may also be forced to introduce restrictive currency regulations.

We are exposed to the risks stemming from a deteriorating macroeconomic situation in Russia. The financial crisis has negatively affected foreign investments in Russia and led to capital outflow and caused a substantial decrease in investment activity in and investment attractiveness of Russia which had an adverse effect on the Russian economy. Even though in 2010 the total consumption of electricity in Russia grew by 4.9% as compared to 2009, which increased net electricity supply by us, given the economic instability in Russia, the consumption of energy resources could be reduced in future and this could have a material adverse effect on our business, financial condition, results of operations and prospects.

The macroeconomic situation and the financial crisis increased the cost of our borrowings. Nevertheless, the interest rates under our loan agreements, even during the global recession, were lower than those available for other large Russian companies, and we were able to refinance our borrowings at favourable interest rates. However, fluctuations in the global economy leading to disruption in the Russian economy and a decline in the value of the rouble in the future could negatively affect our ability to obtain borrowed financing, including long-term fixed-rate loans, on favourable conditions and have a material adverse effect on our business, financial condition, results of operations and prospects and the value of the Shares and the GDRs.

Russia is subject to significant economic downturns.

The Russian economy has been subject to abrupt downturns in the past. In particular, in August 1998, in the face of a rapidly deteriorating economic situation (the 1998 financial crisis), the Government defaulted on its rouble-denominated securities, the CBR ceased its support of the rouble and a temporary moratorium was imposed on certain foreign currency payments. These actions resulted in an immediate and severe

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devaluation of the rouble and a sharp increase in the rate of inflation, a substantial decline in the prices of Russian debt and equity securities, and an inability of Russian issuers to raise funds in the international capital markets. These problems were aggravated by the near collapse of the Russian banking sector after the 1998 financial crisis, as evidenced by the termination of the banking licences of a number of major Russian banks. This further impaired the ability of the banking sector to act as a reliable source of liquidity to Russian companies and resulted in the losses of bank deposits in some cases.

From 2000 to 2008, the Russian economy experienced positive trends, such as annual increases in the gross domestic product, a relatively stable rouble, strong domestic demand, rising real wages and reduced rates of inflation. However, these trends were interrupted by the financial crisis, which led to a significant decrease in the gross domestic product and industrial production, a crisis of bank liquidity, a significant depreciation of the rouble against the US dollar and euro, a rise in unemployment and an increase in the inflation rate. The Government used a significant portion of its stabilisation fund and foreign exchange reserves, increased governmental spending and took other measures to stabilise the Russian economy.

Any deterioration in the general economic conditions in Russia could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of the Shares and the GDRs.

The Russian banking system remains underdeveloped.

The Russian banking system is becoming more mature but is still not well-developed, and Russian legislation relating to banks and bank accounts may be subject to varying interpretations and inconsistent applications. The transparency of the Russian banking sector still lags behind internationally accepted norms in certain respects.

Banking supervision is also often imperfect and, as a result, many Russian banks, especially medium-sized and small banks, do not always follow the existing CBR regulations with respect to lending criteria, loan loss reserves, diversification of exposure or other requirements. The imposition of more stringent regulations or interpretations could lead to determinations of inadequate capital and the insolvency of some banks.

The financial crisis has resulted in the collapse of some of the medium-sized and small Russian banks and in significant liquidity constraints for others. The largest Russian banks survived the crisis without any significant losses, in part because of help from the Government. Profitability levels of most Russian banks have been adversely affected. The Group generally conducts its banking relationships with, and maintains accounts in, a relatively small number of the large Russian banks, with a large state participation, including Sberbank, Gazprombank, Bank VTB and Vnesheconombank, with which the Group concluded long-term framework agreements on cooperation and investment financing. The Group has also entered into loan agreements with the large banks with foreign investor participation, such as Rosbank, UnicreditBank, Nordea and Alfa-Bank. While we mitigate our risks by diversifying our loan and deposit portfolios, the bankruptcy or insolvency of one of these banks is unlikely and the latest banking crisis appears to have been moderated, any bankruptcy or insolvency of the banks in which we hold funds or from which we borrow funds could prevent us from accessing our funds for a period of time or affect our ability to complete banking transactions in Russia, or may result in the loss of our deposits altogether, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

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Inflation could have a material adverse effect on our results of operations.

Our operational activities are carried out in the Russian Federation, the majority of our direct costs are incurred in the Russian Federation and we incur almost all of our direct costs in roubles. The Russian Federation has experienced high levels of inflation since the early 1990s. Inflation increased significantly after the 1998 financial crisis, reaching a rate of 84.4% that year. According to Rosstat, the inflation rate was 13.3% in 2008, 8.8% in 2009 and 8.8% in 2010. The Ministry of Economic Development of Russia has recently decreased the anticipated rate of inflation for 2011 from 6.5-7.5% to 6-7%; the anticipated rate of inflation for 2012 and 2013 remained unchanged (5-6% and 4.5-5.5%, respectively). High rates of inflation in the Russian Federation could increase our costs and decrease our operating margins, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

The lack of availability and reliability of statistical information in Russia makes business planning inherently uncertain and may impair our ability to effectively plan our strategies.

Statistical data, including official data, published in Russia is substantially less complete and reliable and may be produced on different bases than those published in countries with more developed market economies. Due to the lack of availability of alternative reliable sources of country-specific data, Russian companies necessarily rely to some extent on this statistical data in their business planning. As a result, assumptions made by Russian companies in their business plans may prove to be incorrect. The lack of accurate statistical data for use in business planning may contribute to the overall volatility of the Russian economy, which would have a material adverse effect on its business, financial condition, results of operations and prospects.

The physical infrastructure in Russia is in poor condition, which may lead to interruptions in financial and economic activity.

The physical infrastructure in Russia is largely outdated and has not been adequately funded and maintained over the past two decades. The poor physical infrastructure in Russia disrupts the transportation of goods and supplies as well as communications and adds costs to doing business in Russia. The rail and road networks, power-generation and transmission networks, communication systems and building stock are particularly affected. Road conditions throughout Russia are poor, with many roads not meeting minimum requirements for use and safety. The poor condition of the infrastructure has led to several occurrences of large power disruptions and accidents in Russia in the past. For example, in August 2009, an accident occurred at the Sayano-Shushenskaya Hydroelectric Power Plant in southern Siberia mainly due to its poor condition. The Government is actively seeking to reorganise the nation’s rail, electricity and telephone systems. Such initiatives may result in increased charges and tariffs while failing to generate the anticipated capital investment needed to repair, maintain and improve these systems. See also “– Risks Relating to Our Business and Industry – Our revenue and profitability depend on tariffs regulated by the governmental authorities” and “– Risks Relating to Our Business and Industry – Our electricity distribution assets and Russian electricity infrastructure are ageing”.

The poor condition or further deterioration of Russia’s physical infrastructure may harm the national economy, disrupt the transportation of goods and supplies, add to the cost of doing business in Russia and interrupt our business operations, including, among others, our ability to deliver building materials or other supplies to our project sites and ultimately, our ability to complete our projects on time and without cost

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overruns, each of which could have a material adverse effect on the our business, results of operations, financial condition or prospects and the trading price of the Shares and the GDRs.

Legal Risks and Uncertainties in the Russian Federation

Weaknesses relating to the Russian legal system create an uncertain environment for investment and business activity.

Russia is still developing the legal framework required to support a market economy. The following risk factors relating to the Russian legal system create uncertainty with respect to the legal and business decisions that we make, many of which uncertainties do not exist in countries with more developed market economies:

Inconsistencies between and among the Russian constitution, federal law, presidential and governmental and ministerial decrees, and conflicts between federal, regional and local legislation;

Recent enactment of many laws and regulations and ambiguities and inconsistencies in laws and regulations;

Lack of fully developed corporate and securities laws; Lack of sufficient judicial and administrative guidance on interpreting legislation; Substantial gaps in the regulatory structure; The relative inexperience of judges and courts in interpreting legislation on certain matters; Alleged lack of an independent judiciary and alleged corruption within the judiciary; Difficulty in enforcing court orders; A high degree of discretion on the part of governmental authorities which could result in arbitrary

actions; Poorly developed bankruptcy procedures that are subject to abuse.

These weaknesses hinder our business and the businesses of other companies operating in the Russian Federation and may negatively affect our ability to protect our rights and interests, which could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of the Shares and the GDRs.

The judiciary’s lack of independence and governmental discretion could prevent you or us from obtaining effective redress through the court system.

The independence of the Russian judicial system and its immunity from economic and political influences remains imperfect. The judicial systems can be slow or unjustifiably swift. Additionally, court claims are often used in furtherance of political and commercial aims and, in the past, private property has been effectively expropriated without fair compensation. Judicial decisions in Russia can be unpredictable and may not guarantee or provide effective redress. An inability to obtain adequate relief and effective remedies through the court system could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of the Shares and the GDRs.

Investors could have difficulty enforcing their rights against the Company.

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Russia is the Company’s place of incorporation and its principal place of business, all of the Group’s assets are located in Russia and all the executive officers and directors of the Company reside in Russia. As a result, investors may not be able to effect service of process within the investors’ jurisdiction on the Company or its officers and directors. Due to certain legal limitations, it may not be possible for investors to enforce in Russia a judgment of a foreign court or arbitral award obtained against the Company. To enforce a decision of a foreign court or arbitral award in Russia, it has to be recognised by a Russian court. Under Russian law, judgments rendered by a court or an arbitral award obtained in any jurisdiction outside Russia will be recognised and enforced in Russia only if there is an international treaty providing for the recognition and enforcement of judgments between the Russian Federation and the respective country in which the decision was rendered, and if there is a respective federal law. The Russian Federation is not party to such multilateral or bilateral treaties with most Western countries, including the United Kingdom. Even if such treaty was in place, Russian courts could still refuse to recognise and enforce a foreign court judgment or an arbitral award on the grounds set forth in the treaty and in Russian law. Consequently, should a judgment be obtained in any jurisdiction other than the Russian Federation, it may not be given effect in Russia.

Difficulties exist in ascertaining the validity and enforceability of title to land or other real property in the Russian Federation and the extent to which it is encumbered.

After the Soviet Union’s collapse, land reform commenced in the Russian Federation. Over the years that followed, real estate legislation changed substantially; more than 100 federal laws, presidential decrees and governmental resolutions were issued. In addition, almost all the Russian regions enacted their own real estate legislation. Until recently, the real estate legislative regime in the Russian Federation was unsystematic and contradictory. In many instances, there was no certainty regarding which federal, regional or local authority had the power to sell, lease, or otherwise dispose of, land.

In 2001, the Russian Civil Code (the Civil Code) was amended and a new Land Code of the Russian Federation and a number of other federal laws regulating land use and ownership were enacted. Nevertheless, the legal framework relating to the ownership and use of land and other real property in the Russian Federation is not yet sufficiently developed to support private ownership of land and other real property to the same extent as is common in countries with more developed market economies. As a result, it is often difficult to ascertain the validity and enforceability of title to land or other real property in the Russian Federation and the extent to which it is encumbered. These uncertainties could have a material adverse effect on our business, financial condition, results of operations and prospects.

Selective or arbitrary governmental action could harm our business and result in a deterioration of the investment climate in Russia.

Governmental authorities in Russia have a high degree of discretion and can act selectively or arbitrarily, without hearing or prior notice, and sometimes act in a manner that is inconsistent with legislation or influenced by political or commercial considerations. Standard & Poor’s, a provider of independent credit ratings, has expressed concerns that “Russian companies and their investors can be subjected to governmental pressure through selective implementation of regulations and legislation that is either politically motivated or triggered by competing business groups”. Selective and arbitrary governmental actions, if taken or threatened against us or our shareholders or other companies in Russia, could have a

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material adverse effect on our business, results of operations and financial condition and the investment climate which may result in a decline in the trading price of the Shares and the GDRs.

There are weaknesses in legal protections for minority shareholders and in corporate governance and disclosure standards under Russian law.

In general, minority shareholder protection under Russian law derives from supermajority shareholder approval requirements for certain corporate actions, as well as from the ability of a shareholder to demand an exercise of the pre-emptive rights to purchase shares of the company or that the company purchase the shares held by that shareholder if that shareholder voted against or did not participate in voting on certain types of actions.

Russian law also requires companies to obtain the approval of disinterested shareholders for certain transactions with interested parties. While these protections are similar to the types of protections available to minority shareholders in certain other jurisdictions, in practice, corporate governance standards in Russia are not as developed as corporate governance standards in most Western countries, such as the UK and the US, and generally provide less protection for investors, and minority shareholders in Russian companies have suffered losses due to abusive share dilutions, asset transfers and transfer pricing practices. Some companies have conducted shareholder meetings in an irregular manner, shareholder resolutions have not always been respected by the company’s executive bodies and/or members of the board of directors and shareholders of some companies also suffered as a result of fraudulent bankruptcy proceedings initiated by hostile creditors. In addition, the supermajority shareholder approval requirement is satisfied by a vote of 75% of all voting shares that are present at a shareholders’ meeting. Thus, controlling shareholders owning less than 75% of the outstanding shares of a company may have 75% or more voting power if certain minority shareholders are not registered at the relevant shareholders’ meeting. In situations where controlling shareholders effectively have 50% or more of the voting power at a shareholders’ meeting, they are in a position to approve matters requiring a majority shareholder approval, which could be prejudicial to the interest of minority shareholders. Any such actions by our executive bodies and/or members of the Board of Directors could materially and adversely affect the value of the Shares and the GDRs.

The Federal Law “On Joint-Stock Companies” No. 208-FZ dated 26 December 1995 (the JSC Law) provides that a shareholder or shareholders owning not less than 1% of a company’s issued ordinary shares may bring an action against the company’s executive bodies and/or members of the board of directors for losses suffered by the company. Further, the JSC Law provides that a company or any shareholder thereof may bring an action against the company’s executive bodies and/or members of the board of directors for losses suffered by the company or such shareholder as a result of a breach by the company’s executive bodies and/or members of the board of directors of certain anti-takeover provisions of the JSC Law. However, to date the Russian courts have had limited experience with such actions and the related practice and procedure remains unclear and subject to change or inconsistent application. Moreover, Russian law has only recently been amended to allow for class action litigations, and the relevant procedures and practices remain untested to date. Accordingly, the ability of investors to pursue legal redress against us may be limited.

Disclosure and reporting requirements, insider trading and anti-fraud legislation have only recently been enacted and are still being developed in Russia. Most Russian companies and managers are not

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accustomed to restrictions on their activities arising from these requirements. The concept of fiduciary duties being owed by a company’s executive bodies and/or members of the board of directors to their companies or shareholders is relatively new and is not well developed. Violations of disclosure and reporting requirements or breaches of fiduciary duties, including due to various interpretation of legal requirements and absence of the law enforcement practice in relation to these issues, could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of the Shares and the GDRs.

Russian corporate and securities market regulations contain certain disclosure requirements, including the requirement to prepare periodic financial statements in accordance with RAS and publish most of such financial information. Material differences exist between financial information prepared under RAS and IFRS.

Therefore, prospective investors should be careful when relying on such information for evaluation of the financial performance of the Group. In addition, despite recent initiatives to improve corporate transparency in Russia, there is still less publicly available information about the Company than there would be for comparable companies in Western countries.

Shareholder rights provisions under Russian law could impose additional obligations and costs on us.

Russian law provides that shareholders that vote against or do not participate in voting on certain matters have the right to sell their shares to the company at market value in accordance with Russian law. The decisions that trigger this right to sell shares include:

Decisions with respect to a reorganisation; The approval by shareholders of a “major transaction”, which, in general terms, is a transaction

involving property worth more than 50% of the gross book value of our assets calculated according to RAS, regardless of whether the transaction is actually consummated;

The amendment of the charter of the Company (the Charter) in a manner that limits shareholder rights.

Our obligation to purchase shares in these circumstances, which is limited to 10% of the company’s net assets calculated in accordance with RAS at the time the matter at issue is voted upon, could have a material adverse effect on our business, financial condition, results of operations and prospects.

Shareholder liability under Russian law could cause the Company to be liable for the obligations of the DGCs.

The Civil Code, the JSC Law and the Russian Federal Law “On Limited Liability Companies” No. 14-FZ dated 8 February 1998 provide that shareholders in a Russian joint-stock company or members of a Russian limited liability company are generally not liable for the company’s obligations and bear only the risk of loss of their investment in such company. Shareholder’s liability may arise, however, if one person (the effective parent) can give binding instructions to another person (the effective subsidiary). For more information, see “Description of Charter Capital and Certain Requirements of Russian Legislation – Description of Charter Capital – Liability of shareholders”. In addition, an effective parent or a controlling

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shareholder of an effective subsidiary is secondarily liable for the effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt resulting from the fault of an effective parent or such shareholder if the effective parent or the shareholder has used the right to give binding instructions, knowing that the consequence of carrying out this action would be insolvency of the effective subsidiary. Shareholders of the effective subsidiary may claim compensation for the effective subsidiary’s losses from the effective parent that caused the effective subsidiary to take any action or fail to take any action knowing that such action or failure to take action would result in losses. If the effective parent is held secondarily liable, shareholders (other than the effective parent) of the effective subsidiary have the right to demand compensation for the effective subsidiary’s losses from the effective parent. Therefore, shareholder liability under Russian law could cause the Company, as an effective parent of the DGCs, to be liable for the DGCs’ obligations.

Developing corporate and securities laws and regulations in Russia could limit our ability to attract future investment.

The regulation and supervision of the securities market, financial intermediaries and issuers are less developed in Russia than, for example, in the United States and Western Europe. Securities laws, including those relating to corporate governance, disclosure and reporting requirements, are relatively new, while other laws concerning anti-fraud, insider trading and fiduciary duties of directors and officers remain underdeveloped. Notwithstanding certain improvements in the Russian securities laws, Russian issuers and the Russian securities market are regulated by several different authorities and various regulations, which often contradict with each other, which are:

The Federal Service for Financial Markets (the FSFM); The FAS; The CBR; Various professional self-regulating organisations.

The regulations of these various authorities are not always coordinated and may be contradictory.

In addition, Russian corporate and securities rules and regulations can change rapidly, which may materially adversely affect our ability to conduct capital markets transactions. While some important areas are subject to virtually no oversight, the regulatory requirements imposed on Russian issuers in other areas result in delays in conducting securities offerings and in accessing the capital markets. Sometimes it is unclear whether or how regulations, decisions and letters issued by the various regulatory authorities apply to us. As a result, we may be subject to fines and/or other enforcement measures despite our best efforts at compliance, which could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of the Shares and the GDRs.

The Russian taxation system is relatively underdeveloped

The Government is constantly reforming the tax system by redrafting parts of the Tax Code of the Russian Federation (the Russian Tax Code). These changes have resulted in some improvement in the tax climate. As at 1 January 2009, the corporate profits tax rate was reduced to 20% For individuals who are tax residents in Russia the current personal income tax rate is 13% The general rate of value added tax (VAT) is 18% As at 1 January 2010, the unified social tax was replaced by social security charges to the Russian

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pension, social security and medical insurance funds. As at 1 January 2011, the total security charge equalled 34%.

Russian tax laws, regulations and court practice are subject to frequent change, varying interpretations and inconsistent and selective enforcement. For example, under certain circumstances, the current three-year statute of limitations for the assessment of taxes pursuant to a tax audit can be significantly extended. In accordance with the Russian constitution, laws that introduce new taxes or worsen a taxpayer’s position cannot be applied retroactively.

Nonetheless, there have been several instances when such laws have been introduced and applied retroactively. Despite the Government’s taking steps to reduce the overall tax burden in recent years in line with its objectives, there is a likelihood that the Russian Federation will impose arbitrary or onerous taxes and penalties in the future. Generally, taxpayers are subject to tax audits for a period of three calendar years immediately preceding the year in which the audit commences. The tax authorities are prohibited from carrying out repeat on-site tax audits in respect of the same taxes for a tax period which has already been audited (exceptions include where such audit is carried out in connection with the restructuring/liquidation of a taxpayer, or as a result of the filing by such taxpayer of an amended tax return decreasing the tax payable, or by a higher-level tax authority for the purpose of checking the activities of lower-level tax authorities). The statute of limitations for the commission of a tax offence is limited to three years from the date on which it was committed or from the date following the end of the tax period during which the tax offence was committed (depending on the nature of the tax offence). Nevertheless, based on current judicial interpretation, there may be cases where the statute of limitations may be extended beyond three years.

Tax audits or inspections may result in additional costs to the Company, in particular if the relevant tax authorities conclude that the Company did not satisfy its tax obligations in any given year. Such audits or inspections may also impose additional burdens on the Company by diverting the attention of management resources.

In October 2006, the Plenum of the Supreme Arbitration Court of the Russian Federation issued a ruling concerning judicial practice with respect to unjustified tax benefits. In this context, a tax benefit means a reduction in the amount of a tax liability resulting, in particular, from a reduction of the tax base, the receipt of a tax deduction or tax concession or the application of a lower tax rate, and the receipt of a right to a refund (offset). The ruling provides that where the true economic intent of operations is inconsistent with the manner in which they have been taken into account for tax purposes a tax benefit may be deemed to be unjustified. The same conclusion may apply when an operation lacks a reasonable economic or business rationale. As a result, a tax benefit cannot be regarded as a business objective in its own right. On the other hand, the fact that the same economic result might have been obtained with a lesser tax benefit accruing to the taxpayer does not constitute grounds for declaring a tax benefit to be unjustified. Moreover, there are no rules and little practice for distinguishing between lawful tax optimisation and tax avoidance or evasion. The tax authorities have actively sought to apply this concept when challenging tax positions taken by taxpayers in court, and are anticipated expanding this trend in the future. Although the intention of this ruling was to combat tax law abuses, in practice there can be no assurance that the tax authorities will not seek to apply this concept in a broader sense than may have been intended by the Supreme Arbitration Court.

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Recently the Government approved a new Model Treaty between the Russian Federation and foreign countries for the avoidance of double taxation and the prevention of tax evasion on income and property (the Russian Model Treaty). This Russian Model Treaty was adopted as the basis for negotiating new treaties with the competent authorities of foreign countries. The most substantial changes that have been introduced by the Russian Model Treaty are the following:

(i) A competent authority may refuse to grant concessions established by a treaty, inter alia, if: (a) More than 50% of the equity interests in the foreign company belong, directly or indirectly, to parties that are not resident in the state in which the company operates (however, this provision does not apply if the owner of the equity interests engages in significant business activity in the country in which the foreign company is located, save where such business solely consists of the mere ownership of assets and/or the performance of auxiliary operations); or (b) if the receipt of a concession applicable to the payment of dividends, interest or royalties is one of the main reasons for seeking to apply the treaty;

(ii) The Government has effectively incorporated the right to apply the thin capitalisation rules in accordance with the requirements of Russian tax legislation to interest income payable abroad with respect to “controlled debt” (defined below).

Under the thin capitalisation rules established by the Russian tax legislation “controlled debt” includes loans and other debts which are provided by any foreign corporate shareholder of the Company owning directly or indirectly more than a 20% share in the Company’s charter capital and, potentially, loans and other debts from affiliates of the Company (each 20% direct or indirect shareholder, or affiliate to be defined herewith as a Related Party) and, potentially, loans and other debts secured by such Related Parties.

The above changes to the Russian Model Treaty evidence the Russian tax authorities’ interest in challenging the availability of the tax reliefs provided by double tax treaties and insisting on application of the Russian thin capitalisation rules to interest payments.

Furthermore, Russian tax legislation is consistently becoming more sophisticated. It is possible that new additional revenue raising measures might be introduced. As far as it is unclear how any new measures would operate, we cannot offer prospective investors any assurance that additional tax exposures will not arise.

Vaguely drafted Russian transfer pricing rules and lack of reliable pricing information may subject the Company’s transfer prices to challenge by Russian tax authorities

Currently applicable Russian transfer pricing legislation allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controlled transactions, provided that the transaction price differs from the market price by more than 20%. Controlled transactions include transactions with related parties, barter transactions, foreign trade transactions and transactions with unrelated parties with significant price fluctuations (i.e. if the price of such transactions differs from the prices of similar transactions by more than 20% within a short period of time). Transfer pricing adjustments are also applicable to the trading of securities and derivatives. There has been no formal guidance (although some court practice is already available) as to how these rules should be applied.

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On 18 July 2011, the Russian President adopted proposed amendments to Russian transfer pricing legislation.

The amended Russian transfer pricing law will come into force from 1 January 2012.

In summary, these amendments are expected to result in stricter transfer pricing rules, in particular:

(i) The methods for monitoring the prices of controlled transactions will be expanded; and

(ii) The list of controlled transactions will expand to include:

(a) cross-border transactions with certain types of commodities where the amount of income attributable to one counterparty exceeds RUB 60 million;

(b) Russian domestic transactions between related entities if the total annual turnover of such transactions exceeds RUB 1 billion (RUB 3 billion for 2012 and RUB 2 billion for 2013);

(c) Transactions with residents of offshore jurisdictions included in the list established by the Russian Ministry of Finance where the amount of income attributable to one counterparty exceeds RUB 60 million; and

(d) Transactions between Russian legal entities and related foreign legal entities.

The amended transfer pricing law will require taxpayers to notify the Russian tax authorities as to all controlled transactions (for 2012 and 2013 the notification should be made in case the income attributable to one counterparty exceeds RUB 100 million and RUB 80 million, respectively). Taxpayers must also be required to present to the Russian tax authorities transfer pricing documentation upon their request.

Risks Relating to the Shares, the GDRs and the Trading Market

Under certain circumstances, shareholders may not be able to deposit additional Shares in the GDR programme and may be forced to exchange the GDRs into the Shares.

Whenever the Depositary believes that it exceeds, or would upon accepting additional Shares for deposit exceed, any threshold or limit established by any applicable law, regulation or permit, or satisfies, or would upon accepting additional Shares for deposit satisfy, any condition for making any filing or obtaining any approval under any applicable law or regulation, it may: (i) close its books to deposits of additional Shares in order to prevent such thresholds or limits being exceeded or conditions being satisfied; or (ii) take other steps to remedy the consequences of such thresholds or limits being exceeded or conditions being satisfied, including causing pro rata cancellation of GDRs and the withdrawal of the underlying Shares from the GDR programme. See “Terms and Conditions of the GDRs – Withdrawal of Deposited Property and Further Issues of GDRs”.

Pursuant to Russian securities laws, Russian companies are limited in their ability to place shares in circulation outside Russia, including in the form of depositary receipts such as GDRs. Current regulations provide that no more than 25, 15 or 5% of the total number of outstanding shares of a certain class may be placed or circulated outside the Russian

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Federation depending on the company’s listing status on a Russian stock exchange (“A”, “B” or “V” and “I”). The Shares currently have an “A” listing status on MICEX and a “B” listing status on RTS. There can be no assurance that the Company will be able to obtain approval for a deposit of a greater number of Shares in the GDR programme than we currently have approval for. Following President Medvedev’s instruction to make overseas capital markets more accessible to Russian companies, the FSFM is currently considering increasing the permitted percentage of shares of Russian companies that can be placed or circulated outside Russia to up to 100% (except for companies of strategic importance). However, there can be no assurance that the Russian authorities will not reduce the permitted percentage of trading in GDRs or impose additional restrictions in future.

The Depositary may decide to close its books to deposits of additional Shares or take other steps, including causing pro rata cancellation of the GDRs and the withdrawal of the underlying Shares from the GDR programme, should the size of the GDR programme reach any of the prescribed thresholds. See also “Risk Factors – Risks Relating to the Shares, GDRs and the Trading Market – As the Depositary may be considered the owner of the Shares underlying the GDRs, these Shares may be arrested or seized in legal proceedings against the Depositary in Russia”.

An inability to deposit Shares in the GDR programme in exchange for GDRs or an obligation to withdraw

Shares from the GDR programme may have a material adverse effect on the liquidity and the price of the Shares and the GDRs.

Voting rights with respect to the Shares represented by the GDRs are limited by the terms of the Deposit Agreements for the GDRs and the relevant requirements of Russian law.

The GDR holders have no direct voting rights with respect to the Shares represented by the GDRs. The GDR holders are able to exercise voting rights with respect to the Shares represented by the GDRs only in accordance with the provisions of the Deposit Agreements and the relevant requirements of Russian law. Therefore, there are practical limitations upon the ability of the GDR holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. With respect to other rights of shareholders, the ability to exercise these rights depends on the terms of the Deposit Agreements.

Registered holders of the Shares receive notice directly from the Company and are able to exercise their voting rights either personally or by proxy. The GDR holders, by comparison, do not receive notice directly from the Company. Rather, in accordance with the Deposit Agreements, the Company provides notice to the Depositary. The Depositary has agreed that it will, upon timely written request by the Company, distribute to the GDR holders notices of meetings, copies of voting materials (if and as received by the Depositary from the Company) and a statement as to the manner in which the GDR holders may give instructions.

In order to exercise their voting rights, the GDR holders must then provide the Depositary with timely instructions on exercised voting rights attached to the Shares represented by the GDRs they hold. As a result of this additional procedural step involving the Depositary, the process for exercising voting rights may take longer for the GDR holders than for holders of the Shares, and there can be no assurance that the GDR holders will receive voting materials in time to enable them to return voting instructions to the Depositary in a timely manner. If the Depositary does not receive timely voting instructions, or if the voting

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instructions fail to specify the manner in which the Depositary is to vote, or if the Depositary determines that it is not permissible under Russian, US, UK or other applicable laws or the provisions of the Deposit Agreements, the Charter and the deposited securities, or it is reasonably impracticable to exercise voting rights attached to the Shares or cause the Shares to be voted, the Shares will not be voted.

For further details, see “Terms and Conditions of the GDRs – Voting Rights”. Concerns by the GDR holders

regarding these limits on voting rights in respect of the Shares represented by the GDRs could have a material adverse effect on the trading price of the GDRs.

Future equity capital raisings by us may affect the market price of the Shares and the GDRs.

Future equity capital raisings by us in the public or private markets, or a perception that these sales may occur, could have a material adverse effect on the market price of the Shares and the GDRs. Currently, the Company has 31,637,965,771 authorised but unissued shares. According to the Charter, the Board of Directors has full discretion, if such decision is approved by a unanimous vote of the directors; to issue these shares in the amount of up to 25% of the Company’s issued shares of the same category without shareholders’ approval. An increase in the Company’s authorised charter capital requires shareholder approval to be obtained at the general shareholders’ meeting. See “Description of Charter Capital and Certain Requirements of Russian Legislation” for details. The federal budget for 2011 and the planned federal budgets for 2012 and 2013 envisage funding to finance our consolidated investment programme in the form of capital contributions to the Company’s charter capital. Capital raising through the share issuances could also result in a dilution of shareholdings of the minority shareholders, including the GDR holders. See also “– The Russian Federation exercises control over the Company and has a substantial degree of influence over the Company’s operations”.

The GDR holders in certain jurisdictions (including the United States) may not be able to exercise their pre-emptive rights in relation to future issues of ordinary shares.

The GDR holders have no direct pre-emptive rights with respect to the newly-allotted ordinary shares of the Company. They are able to exercise their pre-emptive rights only in accordance with the provisions of the Deposit Agreements and the relevant requirements of Russian Law.

Moreover, the GDR holders in certain jurisdictions (including the United States) may not be able to exercise pre-emptive rights for Shares represented by the GDRs unless the applicable securities law requirements in such jurisdictions (including, in the United States, in some circumstances the filing of a registration statement under the Securities Act) are adhered to or an exemption from such requirements is available. We are unlikely to adhere to such requirements and an exemption may not be available. Accordingly, such GDR holders may not be able to exercise their pre-emptive rights on future issuances of ordinary shares, and, as a result, their percentage ownership interest would be decreased, which could have a material adverse effect on the price of the Shares and the GDRs.

The Shares may be delisted from RTS or MICEX.

The Shares are listed on both RTS and MICEX and, we believe that the Company and the Shares are in compliance with all applicable listing requirements for such exchanges. However, in accordance with the

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current rules enacted by the Decree of the FSFM No. 10-78/pz-n dated 28 December 2010, the Shares may be delisted if, inter alia, they cease to comply with the applicable listing requirements for RTS or MICEX, or if the Company fails to comply with applicable securities laws. In the event of the delisting of the Shares, the liquidity and/or trading price of the Shares and the GDRs represented by the Shares may be materially adversely affected.

The lack of a central and rigorously regulated share registration system in Russia may result in the improper recording of ownership of the Shares.

Ownership interests in shares in a Russian joint stock company must be registered by a registrar in a share register for such company. Such ownership interests are then evidenced by the production of extracts from that register. Under Russian law, the Depositary is registered as the legal owner of all Shares underlying the GDRs in the shareholders’ register of the Company. Currently, there is no central registration system in the Russian Federation. The Company’s share register has been held by JSC Registrar Society STATUS (Status) since 1 July 2008, the date of the Company’s incorporation. However, Status does not hold share registers of all of the DGCs. Although the FSFM and its predecessor, the Federal Commission on the Securities Market, have issued regulations regarding licensing conditions and procedures to be adhered to by such registrars when performing their functions, in practice, these regulations have not been strictly enforced. Registrars generally have relatively low levels of capitalisation, inadequate insurance coverage and are not always subject to effective supervision. Due to the lack of a rigorously regulated share registration system in the Russian Federation, transactions in respect of the Shares could be improperly or inaccurately recorded and evidence of share registration could be lost through fraud, negligence or mere oversight by registrars, who may be unable to compensate shareholders for their misconduct, or a registrar may lose its licence and the Company would have to change its registrar which increases the risk of loss of the data on the Company’s Shares and shareholders. Any future misconduct or loss of the licence by our registrar as a result of such lack of regulation or otherwise may adversely affect our shareholders or otherwise cause them to suffer loss, for which the registrar may be unable to compensate them adequately. A joint stock company and its registrar are jointly and severally liable for certain losses of a shareholder arising in connection with the improper maintenance of the shareholders’ register and accordingly we may become liable for our registrar’s mistakes or misconduct.

Investors may be unable to repatriate their earnings from distributions made on the Shares and the GDRs.

Russian currency control legislation pertaining to the payment of dividends currently permits the payment of dividends in foreign currency on shares to non-Russian residents, but there can be no assurance that this will not be reversed in the future. The ability of non-Russian shareholders to convert roubles into hard currencies is subject to the availability of hard currency in Russia’s currency markets. Although there is an existing market within the Russian Federation for the conversion of roubles into hard currencies, including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain. At present, there is no active market for the conversion of roubles into foreign currencies outside the Russian Federation and certain CIS countries and no viable market in which to hedge rouble-denominated investments.

As the Depositary may be considered the owner of the Shares underlying the GDRs, these Shares may be arrested or seized in legal proceedings against the Depositary in Russia.

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A number of North American and Western European jurisdictions recognise a distinction between the legal owners of securities, such as the Depositary, and the beneficial owners of securities, such as the GDR holders. In these jurisdictions, the ordinary shares held by the Depositary on behalf of the GDR holders would not be subject to seizure in connection with legal proceedings against the Depositary that are unconnected with the ordinary shares.

Russian law does not, however, recognise a distinction between legal and beneficial ownership of securities. Russian law generally treats a depositary as the owner of the Shares underlying the GDRs and, accordingly, may not recognise the GDR holders’ beneficial ownership therein. Thus, in proceedings brought against the Depositary, whether or not related to Shares underlying the GDRs, Russian courts may treat those underlying Shares as the assets of the Depositary, open to seizure or arrest. If the Shares are seized or arrested by a Russian court, the GDR holders may lose all or part of their investment in the GDRs.

Capital gains from the sale of the Shares or the GDRs may be subject to Russian income tax.

In accordance with recent amendments to the Tax Code which has come into force in 2011, if a non-resident holder which is a legal entity or an organisation disposes of the Shares which are recognised as marketable securities under the Russian Tax Code requirements (other than through a permanent establishment in Russia) the proceeds from such disposal should not be subject to withholding tax in Russia.

A non-resident holder which is a legal entity or an organisation should generally not be subject to Russian withholding tax in respect of disposal of the GDRs in case such disposal is conducted via a foreign stock exchange (providing such disposal is conducted other than through a permanent establishment of such entity or organisation in Russia).

If a non-resident holder which is a legal entity or organisation disposes of the GDRs over-the-counter (other than through a permanent establishment in Russia) and the proceeds from such disposal are deemed to be received from a Russian source, the gross proceeds from such disposal may be subject to withholding tax in Russia at a rate of 20%. Alternatively, the capital gains from the sale may be subject to a 20% withholding tax.

Capital gain is the excess, if any, of the sales price over the sum of the acquisition and disposal costs (which need to be evidenced by proper supporting documents) of the GDRs. Russian withholding tax would apply if more than 50% of the Company’s assets consist of immovable property located in Russia. Where the proceeds from a disposal of the Shares or the GDRs are received from a source within the Russian Federation by a non-resident investor that is an individual, there is a risk that Russian withholding tax would be charged at a rate of 30% on the gross proceeds from such disposal less any available cost deduction.

A resident investor which is a legal entity or an organisation should generally be subject to Russian profits tax at a rate of 20% of the capital gain. A resident investor who is an individual should generally be subject to income tax at a rate of 13% on the gross proceeds from a disposal of the Shares or the GDRs less any available cost deduction. The imposition or risk of imposition of the above tax liabilities in Russia could adversely affect the value of the Shares and the GDRs. See “Taxation – Taxation in the Russian Federation.”

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Payments of dividends on the Shares or the GDRs (if any) may be subject to Russian withholding tax.

In general, payments of dividends by a Russian entity to non-resident legal persons, organisations and non-resident individuals are subject to Russian withholding tax at a rate of 15%. Such Russian withholding tax may generally be subject to reduction pursuant to the terms of an applicable double tax treaty between Russia and the country of tax residence of non-resident investors to the extent such non-resident investors are entitled to benefit from this double tax treaty and the corresponding tax treaty relief provided by such treaty. The Company believes that payments of dividends on the Shares or the GDRs made by the Company to non-resident investors may be subject to withholding taxation at a reduced rate if such reduction is provided for by an applicable double tax treaty, provided the Russian tax documentation requirements are satisfied. For a non-resident legal person or organisation, such documentation would include an annual advance confirmation of the investor’s tax residency to be presented to the Russian tax resident acting as a tax agent prior to payment of such income. Please see below the comments regarding applicability of the advance treaty reliefs to non-resident individual holders.

Payments of dividends by a Russian entity to a Russian resident investor who is an individual or a legal entity resident in Russia for tax purposes should generally be subject to Russian withholding income tax and such tax should not exceed 9% from the gross dividend amount payable to each Russian resident investor.

With respect to dividends payable under the GDRs, there is a low risk that investors that are Russian corporate tax residents may be required to pay additional Russian corporate income tax from such dividend amount received at the rate of 9% or 20% (the higher rate applies if the income received is not recognised as dividends for Russian profits tax purposes). Similarly, there is a low risk that the Russian individual tax resident investors may be required to pay additional personal income tax from the dividends received under the GDRs at the rate of 9%or 13% (the higher rate applies if the income received is not recognised as dividends for Russian personal income tax purposes). There is also no established procedure providing for the refund or credit of the tax withheld from dividends payable through the Depositary to the Russian resident investors holding the GDRs.

However, Russian tax rules applicable to the investors that hold GDRs are characterised by significant uncertainties and, until recently, an absence of interpretative guidance. The Ministry of Finance of the Russian Federation has expressed its opinion that non-resident investors in depositary receipts should be treated as the beneficial owners of the dividends paid on the underlying shares for the purposes of double tax treaty provisions applicable to Russian withholding tax on dividend income from the underlying shares, provided that the respective tax residence of such investors of the depositary receipts is duly confirmed.

However, the Russian tax authorities have not provided official guidance addressing how an investor that holds the GDRs should demonstrate its beneficial ownership to the dividend income payable under the underlying shares. In the absence of any specific provisions in the tax legislation with respect to the concept of beneficial ownership and the taxation of the income of beneficial owners, it is unclear how the Russian tax authorities will ultimately treat investors that hold the GDRs in this regard.

In such circumstances, there can be no assurance that a non-resident investor that holds the GDRs will be in a position to benefit from a reduced Russian withholding tax rate on dividend income from the underlying

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shares provided by a respective applicable double tax treaty. Consequently, in the absence of any interpretative tax guidance on the beneficial ownership concept in Russia and due to the fact that the Depositary (and not the investors that hold the GDRs) is the legal owner of the shares of the Company represented by the GDRs under Russian law, there is a risk that the Company is likely to withhold tax from the dividends payable under the GDRs at a rate of 15% subject to possible reduction pursuant to the terms of any applicable double tax treaty.

Moreover, procedures for advance treaty clearance are not provided for by current Russian legislation with respect to non-resident individual investors. Therefore, technically, for non-resident individual investors a reduction of withholding income tax provided by a respective double tax treaty between Russia and the country of the tax residence of such non-resident individual investors could not be obtained. If non-resident individual investors do not obtain double tax treaty relief at the time the dividend income under the Shares or the GDRs is paid to such non-resident individual investors and income tax is withheld by a Russian payer of the income, such non-resident individual investors may apply for a refund within one year from the end of the tax period in which the tax was withheld. The documentation requirements to obtain such a refund would include a confirmation of the income received and the taxes paid in the country of tax residence of the non-resident individual investors as confirmed by the relevant tax authorities of such countries. However, there can be no assurance that such double tax treaty relief (or refund of any taxes withheld) will be available for such non-resident individual investor.

Based on the above, if tax authorities view dividends under the GDRs as Russian-source income, there is a low risk that this income derived by non-resident individual holders of GDRs may be subject to tax in Russia twice, resulting in the gross tax rate of up to 45% (i.e. 15% income tax withheld by the Company from dividend payments plus 30% Russian personal income tax payable by a non-resident individual on a self-assessed basis from on the subsequent payment made by the Depository to such individual GDR-holders). The imposition or risk of imposition of the above tax liabilities in Russia could adversely affect the value of the Shares and the GDRs.

5.4. Financial Risks

In the normal course of business, the financial position of the Company is routinely subject to a variety of risks.

The Company and subsidiaries are exposed to factors that may result in a shortage of funds to finance their investing and operating activities and hinder their ability to fulfill their obligations to lenders and investors.

The Company has insignificant financial investments in the equity of other companies and granted loans. Generally, the Company has short-term money deposits at banks, with fixed deposit rates taking account of the current inflation rate. Deposit nonrepayment risks are assessed as low because the Company deposits funds mainly with Russia’s largest banks controlled by the government. The Company does not use any derivatives.

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Most of the Company’s loans (over 97.8% as at December 31, 2011), whether long- or short-term, have fixed interest rates. Some long-term loans have floating interest rates, including the rates using the “cap.”

Although most of the Company’s loans are granted on favorable terms, we cannot guarantee that we will be able to borrow on similar conditions. This risk is assessed as medium. To mitigate this risk, the Company’s policy is aimed at “lengthening” our debt by taking out loans for 5 to 15 years. Additionally, management works on the diversification of borrowing sources and tools (loans, bonds, promissory notes).

The risk that debtors fail to fulfill their obligations is of special importance to the Company. Under Russian law, we are obligated to enter into electricity distribution and network connection contracts with all customers that meet certain criteria. MRSK Holding may not terminate unilaterally any contracts with nonpayers. If any customer delays paying for electricity distribution or network connection services, then we can suspend these services if permitted under the contract. The Company is able to collect debts only by recourse to court action. We have filed many lawsuits against nonpayers.

The Company’s management monitors any changes and causes of receivables and any measures to have receivables paid. In some cases, the Company influences debtors through the Ministry of Energy and regional authorities.

All of the Company’s loan obligations are denominated in rubles; all of the Company’s incomes and the great majority (over 99%) of its expenses are also denominated in rubles. The Company is exposed to hardly any foreign exchange risks. Nevertheless, we understand that a deteriorating macroeconomic situation (for example, lower global crude and gas prices) may have an indirect adverse effect on the Company through a rise in inflation and, consequently, through a growth in ruble prices of purchased services and materials.

With regard to liquidity risk management, the Company has a developed and rigid budgeting system, including with respect to cash flow planning. The current and predictable financial performance indicators of each of the Company’s companies are constantly monitored.

MRSK Holding uses an internal borrowing control system based on certain limits set on loan values and costs. When the Company’s management sees any sharp deterioration in the situation with any of the MRSK Holding’s companies, the management of the affected company should prepare and submit for approval by the board of directors a financial recovery plan. As a rule, the plan contains special measures to reduce costs, restructure payables, use factoring services, etc.

The Company has open credit limits at banks substantially in excess of its current debt. MRSK Holding has sufficient financial resources to help its subsidiaries in emergency situations. Overall, we assess this risk as medium.

The risk associated with the Company’s cash flow stability is determined by the situation with tariff regulation. The instability of the Russian tariff system, the dependence of governmental tariff policy on sociopolitical factors expose the Group’s operations to a substantial risk.

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Solvency risk arises from the possibility that The Company’s SDCs may find themselves incapable of fulfilling financial and other restrictive conditions (covenants) contained in loan agreements, specifically total debt to EBITDA, debt to equity, current ratio, and net asset value. In order to minimize this factor, the Company monitors SDCs’ capital structure and defines the parameters for borrowings.

Further details on financial risk management, including the discussion of credit risk, liquidity risk, market risk, currency risk, interest rate risk, and price sensitivity of financial instruments are provided in the Notes to the Consolidated Financial Statements (Note 24).

MRSK Holding and its subsidiaries do not use any derivatives to hedge their financial risks. The reasons are as follows:

All of the Company’s loan obligations are denominated in rubles; all of the Company’s incomes and the great majority (over 99%) of its expenses are also denominated in rubles. Consequently, MRSK Holding is not exposed to foreign exchange risks.

Almost all of the Company’s loans (over 97.8% as at December 31, 2011), whether long- or short-term, have fixed interest rates. Some long-term loans (4 billion rubles in total) have floating interest rates. The floating rates are linked to the MosPrime (Moscow Prime Offered Rate), a reference rate published on a daily basis and used for ruble-denominated loans (deposits) in the Moscow money market. In relation to these loans, any rise in MosPrime acceptable to the borrower is limited to a certain level (“cap”). The cost of this hedging is included in the bank’s margin.

All of the Company’s loans are free of collateral. Therefore, it is not necessary to hedge any collateral against depreciation.

It is difficult to hedge an increase in interest rates for new loans or the Company’s future incomes in Russia because the derivatives market is immature and the development of the tariff system involves a high level of risks.

6. Outlook for 2012

MRSK Holding adheres to a long-term development prospective. According to the consolidated investment program for 2012, the following projects are slated for completion:

Olympic project “Bytkha”; Capital investment project in Kubanenergo (RUB 8,296,382 million); High-voltage line Saint Petersburg–Kronstad (18,7 km); Capital investment project in Lenenergo (RUB 2,936 million).

Key figures of consolidated investment program of IDGC Holing grid companies in 2011-2015 (Without considering additional version of the Russian Federation social and economic development forecast for 2012 and 2013-2014 planning period) are presented below:

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Year Assimilation,

RUB million (without VAT)

Financing,

RUB million

(including VAT)

New fixed assets

Transformer capacity,

MVA

Transmission lines,

km

2011 129 602 154 967 7 894 17 273

2012 178 306 199 075 13 138 21 188

2013 198 558 227 358 13 041 22 434

2014 203 967 238 631 17 089 22 496

2015 199 454 237 140 13 623 25 384

Total 2011-2015 909 887 1 057 171 64 784 108 775

The other major trends of 2012 are expected to be:

Approval of final tariffs and the “re-launch” of RAB; Prospects of privatization of Distribution grid companies.

To inform the investor community and minority shareholders about the details of the Strategy for Development of MRSK Holding until 2015 with Long-Term Plans Until 2020 approved in November 2011, the IR department held a Strategy Day in February 2012. The event was attended by investors and minority shareholders. Analysts of major investment banks noted once again that MRSK Holding management was willing to keep in contact with the investor community.

A full list of anticipated investor events involving the Company for 2012 is presented below:

2011 Investor Calendar

Date Event/ Organizer Venue

January Annual one-on-one conference/ Deutsche Bank Group London

February The Russia Forum 2011/ Troika Dialog Moscow

March Group meeting with investors/ Alfa Bank Moscow

May On-site meeting between investors and IDGC of Northern Caucasus management Pyatigorsk

May Group meeting with investors/ Wermuth AM Moscow

May II Investfunds Forum – 2nd Annual Institutional Investor Conference/ Cbonds

Saint Petersburg

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June Investor Conference/ Renaissance Capital Moscow

June RUSSIA CALLING! Investment Forum: London Session/ VTB Capital London

June Group meeting with investors/ Goldman Sachs London

August MRSK Holding’s Investor Day Moscow

September Annual investor forum/ HSBC London

September Annual conference for Western investors/ Morgan Stanley London

September Annual one-on-one conference/ Deutsche Bank Group New York

October On-site meeting between investors and IDGC of Urals management Yekaterinburg

October GO RUSSIA! Investment Forum/ VTB Capital Moscow

October One-on-one investor conference/ URALSIB Capital London

November Group meeting with investors/ Alfa Bank London

November One-on-one investor conference/ Merrill Lynch London

November Annual IR seminar for subsidiaries and dependent companies on the improvement of the shareholder/investor relations policy of distribution grid companies

Moscow

November 2nd Annual Emerging Markets Investor Conference/ Renaissance Capital Hong Kong

December Group meeting with investors at the London Stock Exchange/ VTB London

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7. Responsibility Statement

The Management Board confirms that to the best of their knowledge:

1. The financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

2. The management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that it faces.

By order of the Board of Directors,

Nikolay Shvets

Chairman of the Management Board, Director General, member of the Board of Directors

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8. Independent Auditor’s Report

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9. Consolidated Financial Statements

jsc idgc holding - 2011 annual report...

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