Open Joint Stock Company International Bank of Saint

Open Joint Stock

Company International

Bank of Saint-Petersburg

Financial Statements and

Independent auditors’ report for the Year Ended 31 December 2013

OPEN JOINT STOCK COMPANY

INTERNATIONAL BANK OF SAINT-PETERSBURG

CONTENTS

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND

APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013

INDEPENDENT AUDITORS’ REPORT

FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2013

Statement of Financial Position

Statement of comprehensive income

Statement of changes in equity

Statement of cash flows

Notes to the financial statements

Page

1

2-3

7-8

9-55

4

5

6



STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL

OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013

Management is responsible for the preparation of the financial statements that present fairly the financial position of Open Joint Stock Company International Bank of Saint-Petersburg (the “Bank”) as at 31 December 2013, the results of its operations, cash flows and changes in equity for the year then ended, in compliance with International Financial Reporting Standards (“IFRS”).

In preparing the financial statements, management is responsible for:

 Properly selecting and applying accounting policies;

 Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

 Providing additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Bank’s financial position and financial performance;

 Making an assessment of the Bank's ability to continue as a going concern.

Management is also responsible for:

 Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Bank;

 Maintaining adequate accounting records that are sufficient to show and explain the Bank’s transactions and disclose with reasonable accuracy at any time the financial position of the Bank, and which enable them to ensure that the financial statements of the Bank comply with IFRS;

 Maintaining statutory accounting records in compliance with the Russian legislation and accounting standards;

 Taking such steps as are reasonably available to them to safeguard the assets of the Bank; and

 Preventing and detecting fraud and other irregularities.

The financial statements for the year ended 31 December 2013 were approved by the Bank’s

Management Board on 27 June 2014.

On behalf of the Bank's Management Board:

___________________________

A. A. Fadeev

Chairman of the Management Board

27 June 2014

St. Petersburg

___________________________

M.P. Pitel

Deputy Chief Accountant

27 June 2014

St. Petersburg

1

ZAO Deloitte & Touche CIS

St. Petersburg Branch

“Gustaf” Business Center

Lit. K, 36/40 Sredniy prospect

Saint-Petersburg, 199004

Russia

Tel: +7 (812) 703 71 06

Fax: +7 (812) 703 71 07 www.deloitte.ru

INDEPENDENT AUDITORS' REPORT

To: Shareholders and Board of Directors of Open Joint Stock Company International Bank of

Saint-Petersburg

We have audited the accompanying financial statements of Open Joint Stock Company

International Bank of Saint-Petersburg (the “Bank”), which comprise the statement of financial position as at 31 December 2013, the statement of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management of the audited entity is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Russian Federal Auditing Standards and

International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control over preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to express an opinion on the fair presentation of these financial statements.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.

Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche

Tohmatsu Limited and its member firms. Please see www.deloitte.com/ru/about for a detailed description of the legal structure of Deloitte CIS.

© 2014 ZAO Deloitte & Touche CIS. All rights reserved.

Member of Deloitte Touche Tohmatsu Limited

Opinion

In our opinion, the financial statements present fairly, in all material respects the financial position of Open Joint Stock Company International Bank of Saint-Petersburg as at

31 December 2013, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

27 June 2014

Moscow, Russian Federation

Natalia Nikolaevna Tyagoun, Director

(Qualification certificate No. 01-000486 dated 13 February 2012)

ZAO Deloitte & Touche CIS

Audited entity: Open Joint Stock Company International Bank of

Saint-Petersburg

Registration number: 197. Date of entry in the State Register of Credit

Institutions is 01 November 1989.

Certificate of registration in the Unified State Register of Legal Entities

No. 1027800001547, issued by the Saint-Petersburg Department of the Russian Ministry of Taxes and Levies on 30 September 2002.

Location: 5 Krapivny pereulok, Saint-Petersburg, 194044

Independent Auditor: ZAO Deloitte & Touche CIS

State Registration Certificate No.018.482 issued by Moscow

Registration Chamber on 30 October 1992.

Certificate of registration in the Unified State Register of Legal Entities

No. 1027700425444 issued by Interregional Inspectorate of the

Russian Ministry of Taxation No.39 for Moscow on 13 November 2002.

Certificate of Membership in self-regulated organization

“Non-Commercial Partnership “Audit Chamber of Russia” No. 3026 dated 20 May 2009; main registration number 10201017407.

3



STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013

(in thousands of Russian Rubles)

31 December 31 December

ASSETS:

Cash and balances with the Central Bank of the Russian

Federation 5

Financial assets at fair value through profit or loss 6 3,785,499 2,152,132

Due from banks

Receivables on letters of credit

Financial assets available-for-sale 10

Loans to customers 9, 32 24,644,939 29,328,574

Property and equipment

Investment property

Current income tax asset

Deferred income tax asset

Other assets

7

8

12

11

27

13

6,652,816

4,109,091

79,602

438,618

12,098

310,222

651,550

5,923,204

-

33,594

438,586

23,763

335,371

257,122

TOTAL ASSETS 51,720,948 50,188,777

LIABILITIES:

Depository instruments with the Central Bank of the Russian

Federation 14

Due to banks

Customer accounts

Debt securities issued

Other provisions

15

16, 32 34,299,729

17, 32

18

2,725,474

2,226,249

103,827

2,852,508

35,109,369

2,400,041

145,775

Other liabilities

Subordinated debt

TOTAL LIABILITIES

18,32 184,284

19,32 1,964,051

46,940,211

118,524

1,901,839

45,702,655

EQUITY:

Equity attributable to shareholders of the Bank:

Share capital

Share premium

Additional paid-in capital

Available-for-sale reserve /(deficit)

Retained earnings

TOTAL EQUITY

TOTAL LIABILITIES AND EQUITY

20

20

20

1,827,776

2,251,589

16,987

(57,013)

741,398

4,780,737

51,720,948

1,827,776

2,251,589

16,987

14,712

375,058

4,486,122

50,188,777


___________________________

A. A. Fadeev


___________________________

M.P. Pitel


27 June 2014

St. Petersburg

27 June 2014

St. Petersburg

The notes on pages 9-55 form an integral part of these financial statements.

4



STATEMENT OF COMREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013


Notes

Interest income

Interest expense

Net interest income before recovery/(impairment losses) on interest bearing assets

Recovery of provision for impairment losses/(impairment losses) on interest bearing assets

Net interest income

Net (loss)/gain on financial assets and liabilities at fair value through profit or loss

Net gain on foreign exchange operations

Fee and commission income

Fee and commission expense

(Loss)/gain on revaluation of investment property

Loss on revaluation of property received in settlement of loan debts

Net (loss)/gain on financial assets available-for-sale

Recovery of provision/(provision) on other operations

Other income

Net non-interest income

Operating income

Operating expenses

Profit before income tax

Income tax expense

Net profit for the year

21,32

21,32

22,32

3,706,645 3,924,284

(2,531,569) (1,969,635)

1,175,076

119,060

1,294,136

1,954,649

(135,222)

1,819,427

23,32 (42,833) 115,360

24,32 216,936 64,323

25,32

25

275,590

(71,815)

(1,138)

(14,500)

292,894

(62,990)

91,899

-

18

(581)

41,942

26,958

430,559

116,326

(59,810)

5,114

563,116

26,32 (1,022,537) (1,527,510)

27

1,724,695

702,158

2,382,543

855,033

(164,164) (190,521)

537,994 664,512

Other comprehensive (loss)/income

Items that may be reclassified subsequently to profit or loss

Net (loss)/gain on revaluation of available for sale financial assets on their disposal, net of deferred income tax

Disposal of investments available-for-sale, net of deferred income tax

Other comprehensive (loss)/income for the period, net of income tax

Total comprehensive income for the year

(18,504)

(53,221)

(71,725)

466,269


___________________________

A. A. Fadeev


27 June 2014

___________________________

M.P. Pitel


St. Petersburg

27 June 2014

St. Petersburg


10,837

42,588

53,425

717,937

5



STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2013


Share capital

Share premium

Additional paid-in capital

(Deficit)/

Availablefor-sale

(Accumulated deficit)/ revaluation reserve

Retained earnings

1,594,247 2,251,589 16,987 (38,713) (289,564) 3,534,546 1 January 2012

Increase in share capital through issue of ordinary shares

Write-off of unclaimed dividends with expired limitation period

Comprehensive income for the year

31 December 2012

233,529

-

-

1,827,776

-

-

-

2,251,589

-

-

-

16,987

-

-

53,425

14,712

-

110

233,529

110

664,512 717,937

375,058 4,486,122

Dividends declared and paid

Write-off of unclaimed dividends with expired limitation period

Comprehensive (loss) /income

-

-

-

-

-

-

-

(171,807) (171,807)

153 153

-

31 December 2013 1,827,776 2,251,589 16,987 (57,013) 741,398 4,780,737


___________________________

A. A. Fadeev


27 June 2014

___________________________

M.P. Pitel


St. Petersburg

27 June 2014

St. Petersburg


6



STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013


Year ended Year ended


2013 2012

CASH FLOWS FROM OPERATING ACTIVITIES:

Profit before income tax

Adjustments for:

(Recovery of provision)/provision for impairment losses on interest bearing assets

(Recovery of provision)/provision for guarantees and

22

702,158

(119,060)

855,033

135,222 other contingencies

Provision on other assets

Revaluation of property received in settlement of loan debts

Realized (loss)/gain on investments available-for-sale

18

13

13

(41,948)

6

59,810

-

Unrealized foreign exchange difference 210,584 62,434

Revaluation of investment property 11

14,500

581

-

(116,326)

Amortization of discount on debt securities issued 18,185

Depreciation of property and equipment 12,

17,193

10,326

Change in interest accruals, net

Change in other accrued income/expenses, net

(128,881)

19,948

(483,952)

(87,661)

Cash inflow from operating activities before changes in operating assets and liabilities

Changes in operating assets and liabilities

Minimum reserve deposits with the Central Bank of the Russian Federation

Financial assets at fair value through profit or loss

Due from banks

Loans to customers

Financial assets available-for-sale, net


Other assets

Depository instruments with the Central Bank of the Russian Federation

Due to banks

Customer accounts

Debt securities repaid in the normal course of business

Other liabilities

Cash inflow/(outflow) from operating activities before taxation

Income tax paid

Net cash inflow/(outflow) from operating activities

685,688

77,342

(1,601,815) 1,274,043

5,601,728

5,456,386

(10,405)

(4,109,091)

83,798

(1,036,415)

(412,719) 85,368

2,261,998

(180,023)

(1,887,509)

(252,468)

360,180

200,082

(2,653,706)

-

468,183

41,485

5,670,597

(111,588)

5,559,009

3,174,599

(8,330,728)

(462,365)

13,981

(6,822,980)

(194,225)

(7,017,205)

7



STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013 (CONTINUED)


Year ended Year ended


2013 2012

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment

Sale of property and equipment

Withdrawal of residential property investments

Net cash (outflow)/inflow from investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Increase in share capital through issue of ordinary shares

Dividends paid

Net cash (outflow)/inflow from financing activities

Effect of foreign exchange rate fluctuations on cash and cash equivalents

NET INCREASE / (DECREASE) IN CASH AND

CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, beginning of year

CASH AND CASH EQUIVALENTS, end of year

5

5

(55,309)

824

-

(54,485)

-

(171,807)

(171,807)

5,004,526

2,878,706

7,883,232

(9,793)

1,321

182,156

173,684

233,529

-

233,529

(328,191) (9,923)

(6,619,915)

9,498,621

2,878,706

Interest paid and received during the year ended 31 December 2013 amounted to RUB 2,448,942 thousand and

RUB 3,495,135 thousand, respectively.

Interest paid and received during the year ended 31 December 2012 amounted to RUB 2,190,034 thousand and



___________________________

A. A. Fadeev


___________________________

M.P. Pitel


27 June 2014

St. Petersburg

27 June 2014

St. Petersburg


8



NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013

(in thousands of Russian Rubles, unless otherwise indicated)

1. ORGANISATION

Open Joint Stock Company International Bank of Saint-Petersburg (the “Bank”) is an open joint stock company, which was incorporated in the Russian Federation (the “RF”) in 1989. The Bank is regulated by the Central Bank of the Russian Federation (the “CBR”) and conducts its business under General

Banking License No.197. The Bank also holds license No.197 authorizing it to attract bank deposits and place precious metals as well as perform other transactions with precious metals (issued by the

CBR on 11 February 2004), licenses of a professional participant on the securities market issued by the Federal Commission for the Securities Market to carry out brokerage activities, dealer activities, securities management (issued on 9 November 2000), depositary activities (issued on 8 November

2000); and License of Qualified Exchange Intermediary for carrying out commodity futures and options trading transactions (issued on 5 March 2009). The Bank's primary business activities include commercial banking, originating loans and guarantees, trading with securities, foreign currencies and derivative instruments.

The registered office of the Bank is located at: 5, Krapivny pereulok, St. Petersburg, Russian Federation.

As at 31 December 2013 the Bank had 5 branches operating in the Russian Federation (Moscow,

Nizhniy Novgorod, Volgograd, Ulyanovsk and Novosibirsk) and a representative office in Moscow.

During the year 2012 and until December 2013 the Bank was a parent company of the group which consisted of the Bank and LLC “Vekselnaya compania of JSC IBSP” (" Interveks LLC”). The financial statements of Interveks LLC for the year ended 31 December 2013 were not consolidated into the Bank’s financial statements as the consolidation would not have a material impact on the financial statements of the

Bank. In December 2013 the Bank entered into an agreement to sell an interest in the share capital of Interveks LLC and disposed of 100% of Bank's ownership interest.

As at 31 December 2013 and 2012, the following shareholders owned the issued shares of the Bank:

31 December

2013, %

31 December

2012, %

Shareholders of the Bank:

Bazhanov S.V.

Z АО Triumf

Zdor M.I.

Others

Total

89.03%

10.97%

-

-

100.00%

89.03%

0.83%

10.01%

0.13%

100.00%

Ultimate shareholders:

Bazhanov S.V.

Zdor M.I.

Others

Total

100.00%

-

-

100.00%

As at 31 December 2013 the Bank's Board of Directors comprised:

1. Sergey Viktorovich Bazhanov

2. Tatyana Vasilievna Bazhanova

3. Aleksandr Vasiliyevich Zuyev

4. Igor Dmitrievich Spassky

5. Maxim Ivanovich Zdor

These financial statements were authorized for issue by the Bank’s Management Board on

27 June 2014.

89.86%

10.01%

0.13%

100.00%

9

2. SIGNIFICANT ACCOUNTING POLICIES

Statement of compliance

These financial statements have been prepared in accordance with the International Financial

Reporting Standards (“IFRS”).

These financial statements have been prepared on the assumption that the Bank is a going concern and will continue to operate for the foreseeable future.

These financial statements are presented in thousands of Russian rubles (“RUB thousand”), unless otherwise indicated.

These financial statements have been prepared on the historical cost basis except for certain financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below.

Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. To measure fair value and/or disclose a fair value measurement, in these financial statements the fair value is determined as described above.

In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bank can access at the measurement date;

 Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

 Level 3 inputs are unobservable inputs for the asset or liability.

The Bank maintains its accounting records in accordance with Russian Accounting Standards

(“RAS”). These financial statements have been prepared from the statutory accounting records and have been adjusted to conform with IFRS.

The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non-current) is presented in Note 31.

Functional currency

The functional currency of the financial statements is the Russian ruble (RUB).

Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously.

Income and expense is not offset in the statement of profit or loss unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank.

The principal accounting policies are set out below.

10

Revenue recognition

Recognition of interest income and expense

Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Bank and the amount of income can be measured reliably. Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Interest earned on assets at fair value is classified within interest income.

Recognition of income on repurchase and reverse repurchase agreements

Gain/loss on the sale of the above instruments is recognized as interest income or expense in the statement of profit or loss based on the difference between the repurchase price accrued to date using the effective interest method and the sale price when such instruments are sold to third parties.

When the reverse repo/repo is fulfilled on its original terms, the effective yield/interest between the sale and repurchase price negotiated under the original contract is recognized using the effective interest method.

Recognition of fee and commission income

Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in profit or loss over the remaining period of the loan commitment.

Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in profit or loss on expiry. Loan servicing fees are recognized as revenue as the services are rendered. All other commissions are recognizedas services are rendered.

Financial instruments

The Bank recognizes financial assets and liabilities in its statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognizedusing settlement date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Financial assets

Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“FVTPL”), ‘available-for-sale’ (“AFS”) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

11

Financial assets at FVTPL

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading if:

 It has been acquired principally for the purpose of selling it in the near term; or

 On initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or

 It is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

 Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

 The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the

Bank’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

 It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial

Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ and ‘interest income’ line item, respectively. Fair value is determined in the manner described in Note 29.

Financial assets available-for-sale

Financial assets available-for-sale are non-derivatives that are either designated as available-forsale or are not classified as (a) loans and receivables, (b) held to maturity investments or (c) financial assets at fair value through profit or loss.

Listed shares and listed redeemable notes held by the Bank that are traded in an active market are classified as AFS and are stated at fair value. The Bank also has investments in unlisted shares that are not traded in an active market but that are also classified as AFS financial assets and stated at fair value. Gains and losses arising from changes in fair value are recognized in other comprehensive income and accumulated in the investment revaluation reserve, with the exception of other-thantemporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses on monetary assets, which are recognized in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investment revaluation reserve is reclassified to profit or loss.

The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are recognized in profit or loss are determined based on the amortized cost of the monetary asset. Other foreign exchange gains and losses are recognized in other comprehensive income.

AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period.

Loans and receivables

Loans, and other receivables that have fixed or determinable payments that are not quoted in an active market (including balances with the Central Bank of the Russian Federation, due from banks, loans to customers and other financial assets) are classified as ‘loans and receivables’. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment.

Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

12

Securities repurchase and reverse repurchase agreements and securities lending transactions

In the normal course of business, the Bank enters into financial assets sale and purchase back agreements (“repos”) and financial assets purchase and sale back agreements (“reverse repos”).

Repos and reverse repos are utilized by the Bank as an element of its treasury management.

A repo is an agreement to transfer a financial asset to another party in exchange for cash or other consideration and a concurrent obligation to reacquire the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest. These agreements are accounted for as financing transactions. Financial assets sold under repo are retained in the financial statements and consideration received under these agreements is recorded as collateralized deposit received within depositary instruments with banks.

Assets purchased under reverse repos are recorded in the financial statements as cash placed on deposit collateralized by securities and other assets and are classified within due from banks and/or loans to customers.

The Bank enters into securities repurchase agreements and securities lending transactions under which it receives or transfers collateral in accordance with normal market practice. Under standard terms for repurchase transactions in the RF, the recipient of collateral has the right to sell or repledge the collateral, subject to returning equivalent securities on settlement of the transaction.

The transfer of securities to counterparties is only reflected on the statement of financial position if the risks and rewards of ownership are also transferred.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment could include:

 Significant financial difficulty of the issuer or counterparty; or

 Breach of contract, such as default or delinquency in interest or principal payments; or

 Default or delinquency in interest or principal payments; or

 It becoming probable that the borrower will enter bankruptcy or financial re-organization

 Disappearance of an active market for that financial asset because of financial difficulties.

For certain categories of financial assets, such as loans and receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Bank’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is reduced through the use of a provision account. When a loan or a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss.

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When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period.

If, in a subsequent period, the amount of the impairment loss on financial assets carried at amortized cost decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through the profit or loss to the extent that the carrying amount of financial assets at the date the impairment is reversed cannot exceed what the carrying amount would have been had the impairment not been recognized.

In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve.

In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

Renegotiated loans

Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due.

Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.

Write off of loans and advances

Loans and advances are written off against the provision for impairment losses when deemed uncollectible. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Bank and after the Bank has sold all available collateral.

Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the statement of profit or loss.

Derecognition of financial assets

The Bank derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the

Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the

Bank continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

On derecognition of a financial asset other than in its entirety (e.g. when the Bank retains an option to repurchase part of a transferred asset), the Bank allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair values of those parts on the date of the transfer.

The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit or loss.

A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair values of those parts.

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Other financial liabilities

Other financial liabilities (including depository instruments with the Central Bank of the Russian

Federation, deposits by banks and customers, repurchase agreements, debt securities issued, other borrowed funds, subordinated debt and other financial liabilities) are initially measured at fair value, net of transaction costs.

Other financial liabilities are subsequently measured at amortized cost. Interest expense is calculated using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Financial guarantee contracts

A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument.

Financial guarantee contracts issued by the Bank are initially measured at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of:

 The amount of the obligation under the contract, as determined in accordance with IAS 37

Provisions, Contingent Liabilities and Contingent Assets ; and

 The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies.

Derecognition of financial liabilities

The Bank derecognizes financial liabilities when, and only when, the Bank’s obligations are discharged, cancelled or they expire. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the financial liability derecognized and the consideration paid or payable is recognized in profit or loss.

Derivative financial instruments

Forward contracts

Forward contracts are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customized contracts transacted in the over-thecounter market. The Bank has credit exposure to the counterparties of forward contracts.

The Bank enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk.

Derivatives are initially recognized at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is immediately recognized in profit or loss.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

15

The Bank as lessee

Operating lease agreement payments are recognized as an expense on a straight-line basis over the lease term. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, unrestricted balances on corresponded and term deposits with the Central Bank of the Russian Federation with original maturity of less or equal to 90 days and amounts due from credit institutions with original maturity of less or equal to 90 days and are free from contractual encumbrances.

Mandatory cash balances with the Central Bank of the Russian Federation

Mandatory cash balances with the Central Bank of the Russian Federation represent mandatory reserve deposits with the Central Bank of the Russian Federation, which are not available to finance the Bank’s day-to-day operations and hence are not considered as part of cash and cash equivalents for the purposes of the statement of cash flows.

Repossessed assets

In certain circumstances, assets are repossessed following the foreclosure on loans that are in default. Repossessed assets are measured at the lower of their carrying amount and fair value less costs to sell.

Property and equipment

Property and equipment acquired after 1 January 2003 are carried at historical cost less accumulated depreciation and recognized impairment losses, if any. Property and equipment acquired before

1 January 2003 are carried at historical cost restated for inflation less accumulated depreciation and any recognized impairment loss, if any.

Depreciation is charged on the carrying value of property and equipment and is designed to write off assets over their useful economic lives. It is calculated on a straight-line basis at the following annual prescribed rates:

Vehicles 20%

Leasehold improvements

Furniture and equipment

14%

10-25%

Leasehold improvements are amortized over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses in the statement of profit or loss unless they qualify for capitalization.

The carrying amounts of property and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The estimated recoverable amount is the higher of an asset’s fair value less cost to sell and its value in use. Where carrying amounts exceed the estimated recoverable amount, assets are written down to their recoverable amount. After the recognition of an impairment loss the depreciation charge for property and equipment is adjusted in future periods to allocate the assets’ revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life.

Investment property

Investment properties are properties held to earn rentals and/or for capital appreciation (including property under construction for such purposes). Investment property is initially measured at cost, including transaction costs. Subsequent to initial recognition, investment properties are measured at fair value. Gains and losses arising from changes in the fair value of investment properties are included in profit or loss in the period in which they arise.

An investment property is derecognized upon disposal or when an investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognized.

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Taxation

Income tax expense represents the sum of the current and deferred tax expense.

Current income tax

Current income tax is based on taxable profit for the year. Profit before tax differs from profit as reported in the profit or loss statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The liability for current income tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences.

Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from the initial recognition of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax for the year

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred taxes are also recognized in other comprehensive income or directly in equity respectively.

Operating taxes

The Russian Federation also has various other taxes, which are assessed on the Bank’s activities.

These taxes are included as a component of operating expenses in the statement of profit or loss.

Provisions

Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

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Contingencies

Contingent liabilities are not recognized in the statement of financial position but are disclosed in the financial statements unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the statement of financial position but disclosed in the financial statements when an inflow of economic benefits is probable.

Fiduciary activities

The Bank provides fiduciary services to its customers. The Bank also provides depositary services to its customers that include transactions with securities on their depositary accounts. Assets accepted and liabilities incurred under the fiduciary activities are not included in the Bank’s financial statements.

The Bank accepts the operational risk on these activities, but the Bank’s customers bear the credit and market risks associated with such operations. Revenue for provision of trustee services is recognized as services are provided.

Foreign currencies

In preparing the financial statements of the Bank, transactions in currencies other than the functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences on monetary items are recognized in profit or loss in the period in which they arise.

The exchange rates used by the Bank in the preparation of the financial statements as at year-end are as follows:

RUB/US Dollar

RUB/ EUR

31 December

2013

32.7292

44.9699

31 December

2012

30.3727

40.2286

Collateral.

The Bank obtains collateral in respect of customer liabilities where this is considered appropriate. The collateral normally takes the form of a lien over the customer’s assets and gives the

Bank a claim on these assets for both existing and future customer liabilities.

Equity funds

Equity (other comprehensive income) in the Bank's statement of financial position includes revaluation reserve for financial assets available-for-sale, which comprises changes in the fair value of investment available-for-sale.

3. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Bank’s accounting policies the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

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Critical judgements in applying accounting policies.

The following are the critical judgements, apart from those involving estimations, that the Bank's management has made in the process of applying the Bank’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements.

Key sources of estimation uncertainty.

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Impairment of loans and receivables.

The Bank regularly reviews its loans and receivables to assess for impairment. The Bank’s loan impairment provisions are established to recognize incurred impairment losses in its portfolio of loans and receivables. The Bank considers accounting estimates related to provision for impairment of loans and receivables a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Bank’s estimated losses and actual losses would require the Bank to record provisions which could have a material impact on its financial statements in future periods.

The Bank uses management’s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Bank uses management’s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data.

The provisions for impairment of financial assets in the financial statements have been determined on the basis of existing economic and political conditions. The Bank is not in a position to predict what changes in conditions will take place in the Russian Federation and what effect such changes might have on the adequacy of the provisions for impairment of financial assets in future periods.

As at 31 December 2013 and 2012 the loans and receivables totaled RUB 27,110,982 thousand and

RUB 32,010,607 thousand, respectively, and provisions amounted to RUB 2,466,043 thousand and


Valuation of financial instruments.

The Bank uses valuation techniques that include inputs that are not based on observable market date to estimate the fair value of certain types of financial instruments.

Note 29 provides detailed information about the key assumptions used in the determination of the fair value of financial instruments, as well as the detailed sensitivity analysis for these assumptions.

Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments.

Investment property carried at fair value.

Investment properties are measured at fair value. The date of the latest appraisal was 31 December 2013. The next revaluation is preliminary scheduled for

31 December 2014. As at 31 December 2013 and 2012 the revalued amount of the investment property totaled to RUB 438,618 thousand and RUB 438,586 thousand, respectively.

Recoverability of deferred tax assets The management of the Bank is confident that no valuation provision against deferred tax assets at the reporting date is necessary, because it is more likely than not that the deferred tax assets will be fully realised. As at 31 December 2013 and 2012 the carrying value of deferred tax assets amounted to RUB 310,222 thousand and RUB 335,371 thousand, respectively.

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4. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

(IFRSS)

New and revised Standards on consolidation, joint arrangements, associates and disclosures

In May 2011, a package of five standards on consolidation, joint arrangements, associates and disclosures was issued comprising IFRS 10 Consolidated Financial Statements , IFRS 11 Joint

Arrangements , IFRS 12 Disclosure of Interests in Other Entities , IAS 27 (as revised in 2011) Separate

Financial Statements and IAS 28 (as revised in 2011) Investments in Associates and Joint Ventures .

Subsequent to the issue of these standards, amendments to IFRS 10, IFRS 11 and IFRS 12 were issued to clarify certain transitional guidance on the first-time application of the standards.

In the current year, the Bank has not applied IFRS 10, IFRS 11, IFRS 12 and IAS 28 (as revised in

2011) together with the amendments to IFRS 10, IFRS 11 and IFRS 12 regarding the transitional guidance, as the Bank has no subsidiaries or associates.

The impact of the application of these standards is set out below.

Impact of the application of IFRS 10.

IFRS 10 replaces the parts of IAS 27 Consolidated and

Separate Financial Statements that deal with consolidated financial statements and SIC-12

Consolidation – Special Purpose Entities . IFRS 10 changes the definition of control such that an investor has control over an investee when a) it has power over the investee, b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. Previously, control was defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Additional guidance has been included in IFRS 10 to explain when an investor has control over an investee.

Important guidance was also added to IFRS 10, which makes it possible to determine, whether an investor, who owns less than 50% of voting rights, has control over an investee. Application of IFRS

10 did not change the approach to the preparation of statements. The Bank is not a group and does not have subsidiaries.


IFRS 11 replaces IAS 31 Interests in Joint Ventures , and the guidance contained in a related interpretation, SIC-13 Jointly Controlled Entities – Non-Monetary

Contributions by Venturers , has been incorporated in IAS 28 (as revised in 2011). IFRS 11 deals with how a joint arrangement of which two or more parties have joint control should be classified and accounted for. Under IFRS 11, there are only two types of joint arrangements – joint operations and joint ventures. The classification of joint arrangements under IFRS 11 is determined based on the rights and obligations of parties to the joint arrangements by considering the structure, the legal form of the arrangements, the contractual terms agreed by the parties to the arrangement, and, when relevant, other facts and circumstances. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement.

Previously, IAS 31 contemplated three types of joint arrangements: jointly controlled entities, jointly controlled operations and jointly controlled assets. The classification of joint arrangements under IAS 31 was primarily determined based on the legal form of the arrangement (e.g. a joint arrangement that was established through a separate entity was accounted for as a jointly controlled entity).

The initial and subsequent accounting of joint ventures and joint operations is different. Investments in joint ventures are accounted for using the equity method (proportionate consolidation is no longer allowed). Investments in joint operations are accounted for such that each joint operator recognizes its assets (including its share of any assets jointly held), its liabilities (including its share of any liabilities incurred jointly), its revenue (including its share of revenue from the sale of the output by the joint operation) and its expenses (including its share of any expenses incurred jointly). Each joint operator accounts for the assets and liabilities, as well as revenues and expenses, relating to its interest in the joint operation in accordance with the applicable Standards.

Application of IFRS 11 did not have a material impact on the Bank's financial statements, as the bank does not participate in joint ventures.

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IFRS 12 is a new disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. Generally, the application of IFRS 12 did not lead to a more detailed disclosure of information in the financial statements, as the Bank does not have shares of interest in subsidiaries or associates or in joint ventures or unconsolidated structured entities.

Amendments to IFRS 7 Financial instruments: Disclosure.

The amendments to IFRS 7 Financial

Instruments: Disclosures require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement. The amendments have been applied retrospectively.

The adoption did not have any impact on the amounts or disclosures in the financial statements as the

Bank does not have any offset arrangements.

Amendments to IAS 1 Presentation of Financial Statements (amended June 2011).

The Bank has applied the amendments to IAS 1 Presentation of Items of Other Comprehensive Income in advance of their effective date (annual periods beginning on or after 1 July 2012). The amendments increase the required level of disclosure within the statement of comprehensive income.

The amendments require items of other comprehensive income to be grouped into two categories:

(a) items that will not be reclassified subsequently to profit or loss and (b) items that will be reclassified subsequently to profit or loss in accordance with the respective IFRS standard to which the item relates.

Amendments to IAS 1 Presentation of Financial Statements (as part of the Annual improvements to IFRSs 2009-2011 Cycle issued in May 2012).

The Annual Improvements to IFRSs 2009-2011 Cycle include a number of amendments to various IFRSs as follows: The amendments that are relevant to the

Bank are the amendments to IAS 1 regarding when a statement of financial position as at the beginning of the preceding period (third statement of financial position) and the related notes are required to be presented. The amendments specify that a third statement of financial position is required when a) an entity applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items in its financial statements, and b) the retrospective application, restatement or reclassification has a material effect on the information in the third statement of financial position.

The amendments specify that related notes are not required to accompany the third statement of financial position.

The application of the amendments to IAS 1 had no material effect on these financial statements.

IAS 19 Employee Benefits (as revised in June 2011).

The amendments to IAS 19 change the accounting for defined benefit schemes and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments establish a requirement according to which changes in liabilities on established benefit plans as well as changes in their fair value must be recognized as these changes occur. The introduction of this requirement eliminates the so-called 'corridor approach' active under the previous version of IAS 19.

Thus, the new requirement makes it possible to accelerate the recognition of costs for the payment of services from previous periods. All actuarial gains and losses are recognized immediately through other comprehensive income in order for the net pension asset or liability recognizedin the consolidated balance sheet to reflect the full value of the scheme deficit or surplus. Furthermore, the interest cost and expected return on scheme assets used in the previous version of IAS 19 are replaced with a ‘net-interest’ amount under IAS 19 (as revised in June 2011), which is calculated by applying a discount rate to the net defined benefit liability or asset. IAS 19 (as revised in June 2011) also introduces more extensive disclosures in the presentation of the defined benefit cost. As the Bank has no pension programmes with established payments, the application of amendments did not have an impact on the scope of information disclosed or on the amounts reported in the financial statements.

IFRS 13 Fair Value Measurement In the current year, the Bank has applied IFRS 13 for the first time. IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other

IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment , leasing transactions that are within the scope of IAS 17 Leases , and measurements that have some similarities to fair value but are not fair value (e.g. net realizable value for the purposes of measuring inventories or value in use for impairment assessment purposes).

21

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements.

IFRS 13 requires prospective application from 1 January 2013. In addition, specific transitional provisions were given to entities such that they need not apply the disclosure requirements set out in the Standard in comparative information provided for periods before the initial application of the Standard.

In accordance with these transitional provisions, the Bank has not made any new disclosures required by IFRS 13 for the 2012 comparative period (see Note 29 for the 2013 disclosures). Other than the additional disclosures, the application of IFRS 13 has not had any material impact on the amounts recognized in the financial statements.

New and revised IFRSs in issue but not yet effective

The Bank has not applied the following new and revised IFRSs that have been issued but are not yet effective:

 IFRS ;

 Amendments to IFRS 9 and IFRS 7 IFRS 9: Mandatory Effective Date of IFRS 9 and Transition

Disclosures

2

;

 Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities

1

;

 Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities

1

;

 Amendments to IAS 36 Impairment of Assets 1 ;

 Amendments to IAS 39 Financial Instruments: Recognition and Measurement

1

;

 IFRIC Levies

1

.

1 Effective for annual periods beginning on or after 1 January 2014, with earlier application permitted.

2 Effective for annual periods beginning on or after 1 January 2015, with earlier application permitted.

IFRS 9 Financial Instruments.

IFRS 9, issued in November 2009, introduced new requirements for the classification and measurement of financial assets. IFRS 9 was amended in October 2010 to include new requirements for the classification and measurement of financial liabilities and for derecognition.

Key requirements of IFRS 9:

 all recognized financial assets that are within the scope of IAS 39 Financial Instruments:

Recognition and Measurement to be subsequently measured at amortized cost or fair value.

Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequent accounting periods. In addition, under

IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss.

 with regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss.

Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as at fair value through profit or loss is presented in profit or loss.

Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities.

The amendments to IFRS 10 define an investment entity and require a reporting entity that meets the definition of an investment entity not to consolidate its subsidiaries but instead to measure its subsidiaries at fair value through profit or loss in its consolidated and separate financial statements.

22

To qualify as an investment entity, a reporting entity is required to:

 obtain funds from one or more investors for the purpose of providing them with professional investment management services;

 commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and

 measure and evaluate performance of substantially all of its investments on a fair value basis.

Consequential amendments have been made to IFRS 12 and IAS 27 to introduce new disclosure requirements for investment entities.

The management of the Bank does not anticipate that the investment entities amendments will have any effect on the Bank's financial statements as the Bank is not an investment entity.

Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities.

The amendments to

IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities.

Specifically, the amendments clarify the meaning of “currently has a legally enforceable right of setoff” and “simultaneous realization and settlement.”

Management anticipates that the application of these amendments to IAS 32 will not have a significant impact on the Bank's financial statements as the Bank has no financial assets or liabilities subject to offset.

5. CASH AND BALANCES WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION


2012

Cash on hand

Balances with the Central Bank of the Russian Federation

Minimum reserve deposits with the Central Bank of the Russian Federation

Deposits with the Central Bank of the Russian Federation

2013

575,944

1,069,871

847,220

300,000

636,334

2,024,931

860,140

-

Total cash and balances with the Central Bank of the Russian Federation 2,793,035 3,521,405

Cash and cash equivalents for the purposes of the statement of cash flows comprise the following:


2013 2012

Cash at the Central Bank of the Russian Federation 2,793,035 3,521,405

228,908

Due from banks with original maturity within 90 days

Less minimum reserve deposits with the CBR

Less margin deposit at securities exchange

Less guarantee deposits on operations with plastic cards

Total cash and cash equivalents

5,051,390

(847,220)

(12,618)

(45,821)

7,883,232

8,788,891

58,151

3,808,464

(860,140)

(27,096)

(42,522)

2,878,706

23

6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

Financial assets at fair value through profit or loss comprise:

Financial assets designated at fair value through profit or loss:

Debt securities

Total financial assets designated at fair value through profit or loss

31 December

2013

3,785,499

3,785,499

Debt securities:

Promissory notes of banks

Total debt securities

3,785,499

3,785,499

7. DUE

Due from banks comprise:

Term deposits

Correspondent accounts with other banks

Total due from banks

31 December

2013

5,708,350

944,466

6,652,816

31 December

2012

2,152,132

2,152,132

2,152,132

2,152,132

31 December

2012

5,694,296

228,908

5,923,204

As at 31 December 2013 and 2012 the Bank had due from 4 and 3 banks totaling RUB 6,114,387 thousand and RUB 5,445,641 thousand, respectively, which individually exceeded 10% of the Bank’s equity.

As at 31 December 2013 and 2012, due from banks included security deposits of RUB 45,821 thousand and RUB 42,522 thousand, respectively, placed by the Bank for its bank card operations.

As at 31 December 2013 and 2012 included in balances due from banks were guarantee deposits placed by the Bank to provide for settlements on time deals on stock exchange totaling RUB 12,618 thousand and RUB 27,096 thousand, respectively.

8. RECEIVABLES ON LETTERS OF CREDIT

As at 31 December 2013 the Bank issued uncovered letters of credit with deferred payment term for a year totaling RUB 4,109,091 thousand on trading operations on behalf of major global agro-industrial corporations. As at 31 December 2013 counterparty agro -industrial corporations have high credit ratings and are listed on global stock exchanges. The Bank's management estimates these uncovered letters of credit as low risk operations.

All the receivables under the letters of credit were claimed on behalf of three clients, which represents significant concentration.

24

Loans to customers comprise:

31 December

2013

31 December

2012

Loans to customers 27,110,982 32,010,607

Less provision for impairment losses (2,466,043) (2,682,033)

Total loans to customers 24,644,939 29,328,574

As of 31 December 2013 and 2012 the Bank had loans to 13 and 17 customers, totaling

RUB 14,523,118 thousand and RUB 15,438,504 thousand, respectively, which individually exceeded

10% of the Bank’s equity.

The analysis by credit quality of loans outstanding as at 31 December 2013 is as follows:

Provision for impairment

Provision for impairment to

At 31 December 2013 Gross loans gross loans

Not past due

Past due including: up to 30 days

31 to 60 days

61 to 90 days

91 to 180 days over 180 days

Total loans to customers

26,031,733

1,079,249

13,293

-

70

34,489

1,031,397

27,110,982

(1,521,973)

(944,070)

(13,293)

-

(70)

(34,489)

(896,218)

(2,466,043)

24,509,760

135,179

-

-

-

-

135,179

24,644,939

5.85%

87.47%

100.00%

-

100.00%

100.00%

86.89%

9.10%

The analysis by credit quality of loans outstanding as at 31 December 2012 is as follows:

At 31 December 2012 Gross loans

Provision for impairment losses Net

Provision for impairment to gross loans

Not past due

Past due including: up to 30 days

31 to 60 days

61 to 90 days

91 to 180 days over 180 days

Total loans to customers

30,775,492

1,235,115

-

180,000

437,832

57,495

559,788

32,010,607

(1,698,122)

(983,911)

-

(143,391)

(348,784)

(45,801)

(445,935)

(2,682,033)

29,077,370

251,204

-

36,609

89,048

11,694

113,853

29,328,574

5.52%

79.66%

-

79.66%

79.66%

79.66%

79.66%

8.38%

The table below summarizes carrying value of loans to customers analyzed by type of collateral obtained by the Bank:

31 December

2013

31 December

2012

Loans collateralized by pledge of property and equipment 9,182,503 1,770,938

Loans collateralized by pledge of real estate or rights thereto 6,820,169

Loans collateralized by corporate guarantees 6,251,019 17,213,728

Loans collateralized by pledge of corporate shares and ownership interests 1,346,256

Loans collateralized by pledge of inventories and goods in turnover 438,390 293,578

Loans collateralized by promissory notes of the Bank

Loans collateralized by borrowers’ accounts receivable

Loans collateralized by other assets

Loans collateralized by cash

209,904

129,263

-

124,880

714,526

1,524,615

123,580

65,332

Unsecured loans 2,608,598

27,110,982

5,537,227

32,010,607



25

Analysis by sector:

Construction and real estate operations

Trade

Petrochemical trading

31 December

2013

31 December

2012

12,543,323 11,997,946

5,146,520 5,716,723

2,824,634 3,327,571

Manufacturing 2,509,290

Investments and finance 928,113 806,090

Individuals 838,905

Transport and communication 795,845 1,243,775

Finance lease

Food industry

524,295

92,919

518,635

123,879

Other 907,138

27,110,982

393,867

32,010,607



During the years ended 31 December 2013 and 2012 the Bank received other assets by taking possession of collateral it held as security. As at 31 December 2013 and 2012 such assets in the amount of RUB 543,964 thousand and RUB 161,235 thousand, respectively, were included in other assets.

As at 31 December 2013 and 2012 loans to customers included loans totaling RUB 8,377,944 thousand and RUB 7,136,545 thousand, respectively, whose terms were renegotiated. Otherwise these loans would be past due or impaired.

The table below summarizes an analysis of loans to customers by type of impairment:

31 December 2013 31 December 2012

Carrying value before provision

Provision for impairment

Carrying value

Carrying value Provision before provision for impairment

Carrying value

Loans to customers individually determined to be impaired

Loans to customers collectively determined to be impaired

Unimpaired loans

10,124,602 (1,288,472) 8,836,130 14,117,979 (1,744,075) 12,373,904

4,668,260 (1,177,571) 3,490,689 9,602,503 (937,958) 8,664,545

12,318,120 - 12,318,120 8,290,125 - 8,290,125

Total 27,110,982 (2,466,043) 24,644,939 32,010,607 (2,682,033) 29,328,574

When classifying a loan as individually determined to be impaired , the Bank took into consideration general financial and economic parameters of the RF, borrowers' industry performance, their financial position and debt service quality.

10. FINANCIAL

Investments available for sale comprise:

31 December

2013

31 December

2012

Corporate bonds

RF Eurobonds

Corporate Eurobonds

Municipal bonds

Other

Total investments available-for-sale

6,108,461

813,981

766,013

554,137

886

8,243,478

6,475,173

1,262,082

286,093

150,782

896

8,175,026

As at 31 December 2013 included in investments available-for-sale were state, municipal and corporate bonds pledged under repurchase agreements with other banks with the fair value of RUB 7,067,925 thousand. As at 31 December 2013 the fair values by types of securities are presented in Notes 14 and

15. All the agreements outstanding as at 31 December 2013 were settled in January 2014.

26

As at 31 December 2012 included in investments available-for-sale were state, municipal and corporate bonds pledged under repurchase agreements with other banks with the fair value of RUB 4,226,753 thousand. As at 31 December 2012 the fair values by types of securities are presented in Notes 14 and 15. All the agreements outstanding as at 31 December 2012 were settled in January 2013.

11. INVESTMENT

Investment property includes a hotel complex, received by the Bank through repossession of collateral held as security for the loan granted. Initially these assets were recognized as non-current assets held for sale. In 2011 the assets were reclassified from non-current assets held for sale to investment property.

In 2011 in order to maintain the aforementioned property in working condition the Bank transferred it into trust management.

In 2012 the investment property was revalued by an independent appraiser and its fair value amounted to RUB 438,586 thousand. The gain from the revaluation was recognized in profit or loss in the amount of RUB 91,899 thousand. The income approach was used for the evaluation of the investment property.

In 2013 the investment property was revalued by an independent appraiser and its fair value amounted to RUB 438,618 thousand. The gain from the revaluation was recognized in profit or loss in the amount of RUB 1,138 thousand. The income approach was used for the evaluation of the investment property.

12. PROPERTY

Capital investments in premises

Furniture and equipment Total

17,922

-

-

61,268 132,139

9,792

At initial/ indexed cost

31 December 2011 52,949

Additions 682

Disposals -

31 December 2012 53,631

Additions -

Disposals (919)


Accumulated depreciation

31 December 2011

Charge for the year

Eliminated on disposal


Charge for the year

Eliminated on disposal


Net carrying value


52,712

45,688

4,054

(3,241)

46,501

2,302

(919)

47,884

7,130

17,922

53,121

-

71,043

3,522

1,182

-

4,704

1,182

-

5,886

13,218

65,800

64,837

47,480

5,090

(16)

52,554

4,993

(2,327)

55,220

13,246

137,353

188,592

96,690

10,326

(3,257)

103,759

8,477

(3,246)

108,990

33,594

31 December 2013 4,828 65,157 9,617

As at 31 December 2013 and 2012 included in property and equipment was fully depreciated equipment totaling RUB 85,465 thousand and RUB 65,062 thousand, respectively.

79,602

27

Other assets comprise:

Other financial assets:

Counter-guarantee cover

Receivables on other transactions

Less provision for impairment losses

Total other financial assets

Other non-financial assets:

Property taken into possession when settling overdue loans

Advances paid

Taxes other than income tax

Other

Total other non-financial assets

Total other assets

31 December

2013

67,455

17,372

(8,146)

76,681

543,964

6,333

2,313

22,259

574,869

651,550

31 December

2012

60,343

15,331

(8,140)

67,534

161,235

7,221

2,837

18,295

189,588

257,122

In 2013 and 2012, based on the amicable settlement with a borrower the Bank received several properties as repayment of the loan (land plots, residential and commercial properties). As at 31 December 2013 and 2012, the assets were included in other non-financial assets as property taken into possession when settling overdue loans totaling to RUB 397,229 thousand and RUB 161,235 thousand, respectively. The Bank is currently involved in negotiations with third parties to sell these assets.

The fair value measurements of the Bank’s properties received as a result of the amicable settlement with a borrower were performed by independent appraisers not related to the Bank as at 31 December

2013 and 2012. Independent appraisers are members of the Society of Appraisers, and they have appropriate qualifications and recent experience in the valuation of properties in the relevant locations.

The fair value was determined based on the comparable approach that reflects recent transaction prices for similar properties. For the purposes of fair valuation, the best and the most effective use of the properties is their current use. There has been no change to the valuation technique during the year.

In 2013 the Bank entered into a sale agreement to dispose of one of the properties (with the carrying amount totaling RUB 119,500 thousand) at the price of RUB 105,000 thousand. The price of

RUB 105,000 thousand was recognized to be fair and the impairment charge amounted to

RUB 14,500 thousand.

The movements in provision for impairment losses on other financial assets were as follows:

2013 2012

At 1 January

Provisions/(recovery of provisions)

8,140

6

8,140

-

28

14. DEPOSITORY INSTRUMENTS WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION

Depositary instruments with the Central Bank of the Russian Federation were as follows:


2013 2012

Total depository instruments with the Central Bank of the Russian Federation 5,436,597 3,174,599

As at 31 December 2013 and 2012 included in depositary instruments with the Central Bank of the

Russian Federation were loans under repurchase agreements amounting to RUB 5,436,597 thousand and RUB 3,174,599 thousand that were repaid in January 2014 and January 2013, respectively.

Fair value of assets pledged and carrying amount of loans under repurchase agreements as at

31 December 2013 and 2012 comprise:


Fair value of collateral


Carrying amount of loans

Corporate bonds 1,500,412

Bonds issued by credit institutions 2,669,017

Bonds of Russian regional and municipal institutions

RF debt securities

495,991

771,177

Total 5,436,597

1,801,938

3,226,022

553,922

813,981

6,395,863

Carrying amount of loans

603,358

2,571,241

-

-

3,174,599

722,375

3,017,748

-

-

3,740,123

15. DUE

Due to banks comprise:

Loans and term deposits from banks

Loans under repurchase agreements

Correspondent accounts of other banks

Total due to banks

31 December

2013

2,150,623

552,224

22,627

2,725,474

31 December

2012

2,408,198

438,056

6,254

2,852,508

As at 31 December 2013 due to banks of RUB 702,987 thousand (25,79% of total due to banks) were due to one bank, which represents a significant concentration. As at 31 December 2012 there was no concentration of placements with banks.

Fair value of assets pledged and carrying value of loans under repurchase agreements as at

31 December 2013 and 2012 comprise:


Carrying value of loans

Bonds credit institutions

Corporate bonds

552,224

-

Total 552,224


672,062

-

672,062

Carrying value of loans

104,673

333,383

438,056


153,247

333,383

486,630

29

16. CUSTOMER

Customer accounts comprise:

State and public organisations

Current/settlement accounts

Term deposits

Other legal entities

Term deposits


Individuals

Term deposits


31 December

2013

1,031,733

-

17,057,032

31 December

2012

449,147

100,815

16,072,007

10,637,401 8,044,424

6,113,381

2,053,159

7,333,980

516,019

Total customer accounts 34,299,729 35,109,369

As at 31 December 2013 and 2012 deposits by customers totaling RUB 1,451,555 thousand and

RUB 774,837 thousand, respectively, were used as security against letters of credit issued by the

Bank. As at 31 December 2013 and 2012 deposits by customers totaling RUB 193,566 thousand and RUB 150,725 thousand, respectively, were held as security against guarantees issued by the

Bank.

As at 31 December 2013 and 2012 deposits by customers totaling RUB 18,366,234 thousand and

RUB 18,810,770 thousand (53,55% and 53,58% of total customer accounts), respectively, were due to 18 and 14 customers, which individually exceeded 10% of the Bank's equity.


Analysis by sector: 2013 2012

Financial services, leasing, retirement insurance 5,502,102 2,328,296

4,896,788

Manufacturing 4,332,727

Trade 4,028,475 3,101,018

Research and development, education 2,197,836

Machinery construction 1,163,688 1,570,843

Charity funds

Fuel-producing industry, energy

917,240

808,515

2,200,829

664,203

Real estate 676,278 685,336

-

Transport and communication

Finance lease

Hotel business, tourism

Culture and mass media

Chemical and pharmaceutical industries, medicine

373,608

104,084

97,003

88,883

67,004

843,481

-

190,875

180,736

100,706

Food processing industry

Petrochemical trading

Other

Total customer accounts

29,108

13,097

957,492

34,299,729

451,148

35,109,369

-

-

17. DEBT SECURITIES ISSUED

Debt securities issued comprise:

Term month/year

Annual coupon/ interest rate, %

31 December

2013

31 December

2012

Discount-bearing promissory notes 1 month-3 years

Discount/interest free promissory notes

On demand-

5 years

Interest-bearing promissory notes

Deposit certificates

3 months-

1,5 year

-

Total debt securities issued

1,7%-13,7%

-

5%-13%

-

1,288,259

495,082

442,908

-

2,226,249

1,204,770

621,651

532,203

41,417

2,400,041

30

Other liabilities comprise:

Other financial liabilities

Deferred income on letters of credit

Spot deal settlements

Other payables

Deferred fees for guarantees issued

Other financial liabilities

Unused vacation provision

Wages and salaries

Taxes payable, other than income tax

Other

Total other liabilities

31 December

2013

51,202

15,606

12,581

11,067

8,457

98,913

31 December

2012

-

1,799

15,764

6,248

7,524

31,335

38,989

33,710

11,707

965

85,371

184,284

26,407

40,596

12,514

7,672

87,189

118,524

The movements in provisions for guarantees issued were as follows:

1 January 2012

Provisions

Provisions


Provisions

Recovery of provisions


Guarantees

85,965

59,810

145,775

(41,948)

103,827

19. SUBORDINATED

Subordinated debt is presented as follows:

Subordinated debt from the Bank

Subordinated debt from companies

Interest

31 December

2013

(RUB ‘000)

31 December

2012

(RUB ‘000)

USD 25/05/2013 8.27%

22/01/2024 303,727

27/08/2018 194,385

03/09/2017 300,000

01/03/2018 300,000

29/04/2018 500,000

1,964,051 1,598,112

In the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to the repayment of the Bank’s liabilities to all other creditors.

31

As at 31 December 2013 and 2012 the Bank’s share capital comprises the following number of shares with par value of 1 per share:

Ordinary shares

Preference shares

Total shares

Authorized share capital, number of shares

4,477,647,252

880,000,000

5,357,647,252

Total share capital issued, number of shares

1,100,000,000

121,026,494

1,221,026,494

Authorized share capital, number of

Total share capital issued, number of shares shares

4,477,647,252 1,100,000,000

880,000,000 121,026,494

5,357,647,252 1,221,026,494

As at 31 December 2013 and 2012 the Bank's share capital was issued and fully paid.

The below table provides a reconciliation of the number of shares outstanding as at 31 December 2013 and 31 December 2012:

Preference shares, number of shares

Ordinary shares, number of shares

1 January 2012

Issue of shares


Issue of shares


121,026,494 866,470,878

- 233,529,122

121,026,494 1,100,000,000

- -

121,026,494 1,100,000,000

In 2013, the Bank paid dividends in the amount of RUB 171,807 thousand. In 2012 no dividends were paid.

The Bank’s reserves distributable among shareholders are limited to the amount of its reserves as disclosed in its statutory accounts. Non-distributable reserves are represented by a reserve fund, which was created as required by the statutory regulations to cover general risks, including future losses and other unforeseen risks or contingencies. The reserve has been created in accordance with the Bank’s Charter that provides for the creation of a reserve for these purposes of not less than

5% of the Bank’s net profit reported in statutory books.

21. NET INTEREST INCOME

2013 2012

Interest income:

Interest income on assets recorded at amortized cost:

Interest income on impaired assets

Interest on unimpaired assets

Interest on assets at fair value

Total interest income

Interest income on financial assets recorded at amortized cost comprises:

Interest on loans to customers

Interest on balances due from banks

Total interest income on financial assets recorded at amortized cost

1,865,950

962,765

877,930

3,706,645

2,797,994

30,721

2,828,715

2,760,514

412,267

751,503

3,924,284

3,063,191

109,590

3,172,781

32

Interest income on financial assets at fair value comprises:

Interest income on trading financial assets at fair value through profit or loss

Interest income on financial assets available-for-sale

Total interest income on financial assets at fair value

Interest expense:

Interest on financial liabilities recorded at amortized cost

Total interest expense

Interest expense on financial liabilities recorded at amortized cost:

Interest on customer accounts

Interest on subordinated debt

Interest on due to banks

Interest on debt securities issued

Interest on balance due to the CBR

Total interest expense on financial liabilities recorded at amortized cost

Net interest income before impairment losses/(recovery) on interest bearing assets

2013 2012

242,243

635,687

877,930

2,531,569

2,531,569

1,838,091

156,065

159,680

141,697

236,036

2,531,569

1,175,076

260,317

491,186

751,503

1,969,635

1,969,635

1,414,468

188,775

184,552

108,373

73,467

1,969,635

1,954,649

22. PROVISION FOR IMPAIRMENT LOSSES

The movements in provisions for impairment losses on interest bearing assets were as follows:

Loans to customers


Write-offs against provision

Provisions


Write-offs against provision

Recovery of provisions


2,550,889

(4,078)

135,222

2,682,033

(96,930)

(119,060)

2,466,043

23. NET (LOSS)/GAIN ON FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH

PROFIT OR LOSS

Net (loss)/gain on financial assets and liabilities at fair value through profit or loss comprises:

Derivative financial instruments

Debt securities

Total net (loss)/gain on financial assets at fair value through profit or loss

2013 2012

(23,625) 130,928

(19,208) (15,568)

(42,833) 115,360

24. NET GAIN ON FOREIGN EXCHANGE OPERATIONS

Net gain on foreign exchange operations comprises:

Translation differences, net

Trading, net

Total net gain on foreign exchange operations

Theyear ended Theyear ended


2013 2012

117,607

99,329

216,936

62,434

1,889

64,323

33

25. FEE AND COMMISSION INCOME AND EXPENSE

Fee and commission income and expense comprise:

2013 2012

Fee and commission income:

155,163

Cash operations

Foreign currency control

Foreign exchange operations

Plastic card operations

Securities operations

Other

Total fee and commission income

25,229

17,380

12,087

9,423

63

4,366

275,590

28,925

16,002

10,967

13,668

-

4,631

292,894

Fee and commission expense:

Transactions with letters of credit

Foreign exchange operations

28,046

15,540

22,805

13,850

Settlements 10,159

Plastic card operations 3,337 4,833

Securities operations

Financial risk insurance

2,065

1,263

2,730

2,616

Other

Total fee and commission expense

11,405

71,815

6,043

62,990

EXPENSES

Operating expenses comprise:

2013 2012

Payroll and bonuses

Insurance contributions

Operating lease

676,823

105,726

94,791

1,138,410

153,340

93,903

Payments to the Deposit Insurance Fund

Taxes (other than income tax)

31,500

31,372

29,140

29,209

Telecommunications 12,401

Security expenses 8,782 7,194

Depreciation of property and equipment 8,477 10,326

11,086

Professional services

Other expenses

6,874

38,618

8,868

33,240

Total operating expenses 1,022,537 1,527,510

The Bank provides for income taxes based on the tax accounts maintained and prepared in accordance with the tax regulations of the RF, which may differ from IFRS.

The Bank is subject to certain permanent tax differences due to the non-tax deductibility of certain expenses and certain income being treated as non-taxable for tax purposes.

Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at 31 December 2013 and 2012 relate mostly to different methods of income and expense recognition as well as to recorded values of certain assets.

The tax rate used for the reconciliations below is the corporate tax rate of 20% payable by corporate entities in the RF on taxable profits (as defined) under tax law in the Russian Federation for 2013 and 2012.

34

Temporary differences as at 31 December 2013 and 2012 comprise:

31 December

2013

Deductible temporary differences:

Loans to customers

Investments in investment property

Investments available-for-sale


Property and equipment

Other assets

Other liabilities

Total deductible temporary differences

1,067,413

144,839

136,486

21,204

3,980

9,446

180,776

1,564,144

Taxable temporary differences:


Total taxable temporary differences

13,035

13,035

31 December

2012

1,179,400

170,074

97,328

3,914

1,517

7,914

227,576

1,687,723

10,869

10,869

Net deferred income tax asset at the statutory rate (20%)

Current income tax expense

Changes in deferred income tax balances

Income tax expense

310,222

123,253

40,911

164,164

335,371

Relationships between income tax expenses and accounting profit for the years ended 31 December

2013 and 2012 are explained below:

Theyear ended Theyear ended


2013 2012

Profit before income tax

Tax at the statutory tax rate (20%)

Effect of tax rate, different from the prime rate of 20%

Tax effect of permanent differences

Income tax expense

702,158

140,432

(4,752)

28,484

164,164

855,033

171,007

(3,777)

23,291

190,521

163,447

27,074

190,521

Deferred income tax assets

At 1 January

Change in deferred income tax balances recognized in other comprehensive income

Change in deferred income tax balances recognized in profit or loss

The year ended

31 December

The year ended

31 December

2013 2012

335,371 361,167

15,762

(40,911)

13,356

(39,152)

28. COMMITMENTS

In the normal course of business, the Bank becomes a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the statement of financial position.

The Bank applies the same credit policy to off-balance sheet commitments as it does to the balance sheet financial instruments.

Provision for losses on contingent liabilities totaled RUB 103,827 thousand and RUB 145,775 thousand as at 31 December 2013 and 2012, respectively.

35

As at 31 December 2013 and 2012 contingent liabilities comprise:

31 December

2013

31 December

2012

10,232,739

Commitments on loans and unused credit lines 6,212,736 9,032,216

Total contingent liabilities and credit commitments 14,977,988 20,059,471

Extension of loans to customers within credit line limits is approved by the Bank on a case-by-case basis and depends on borrowers’ financial performance, debt service and other conditions.

As at 31 December 2013 and 2012, such unused credit lines come to RUB 6,212,736 thousand and RUB 9,032,216 thousand, respectively.

Operating lease commitments

Where the Bank is the lessee, the future minimum lease payments under operating leases of premises are as follows:

31 December

2013

31 December

2012

Less than 1 year

Later than 1 year and no later than 5 years

Later than five years

Total operating lease commitments

90,419

89,582

2,025

182,026

39,307

48,221

1,705

89,233

Fiduciary activities

The Bank also provides depositary services to its customers. As at 31 December 2013 and 2012, the Bank had customer securities totaling 763,128 items and 493,551,942 items, respectively, in its nominal holder accounts.

Litigations

From time to time and in the normal course of business, claims against the Bank are received from customers and counterparties. Management is of the opinion that no material losses will be incurred and, accordingly, no provision has been made in these financial statements.

Taxation

Provisions of the RF tax legislation are sometimes inconsistent and may have more than one interpretation, which allows the RF tax authorities to take decisions based on their own arbitrary interpretation of these provisions. In practice, the RF tax authorities often interpret the tax legislation not in favor of the taxpayers, who have to resort to court proceeding to defend their position against the tax authorities. It should be noted that the RF tax authorities can use the clarifications issued by the judicial bodies that have introduced the concept of “unjustified tax benefit”, “primary commercial goal of transaction” and the criteria of “commercial purpose (substance) of transaction”.

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

Generally, taxpayers are subject to tax audits with respect to three calendar years preceding the year of the audit. However, completed audits do not exclude the possibility of subsequent additional tax audits performed by upper-level tax inspectorates reviewing the results of tax audits of their subordinate tax inspectorates. Also according to the clarification of the RF Constitutional Court the statute of limitation for tax liabilities may be extended beyond the three year term set forth in the tax legislation, if a court determines that the taxpayers has obstructed or hindered a tax inspection.

36

Russia’s transfer pricing (TP) legislation was amended with the effect from 1 January 2012. The above amendments introduce additional requirements with respect to the accounting for and documenting transactions. The new legislation allows the tax authorities to impose additional tax liabilities in respect of certain transactions, including but not limited to transactions with related parties, if they consider transaction to be priced not at arm’s length. In view of the absence of application practice for the new transfer pricing rules and the uncertainty of wording of a number of their provisions, the likelihood of challenge by tax authorities of the Banks position with respect to application of those rules cannot be assessed reliably.

The amount of transaction income and expense (the sum of transaction prices) with one counterparty doesn't exceed RUB 2 billion for the reporting period, that's why the Bank has no controlled transactions in compliance with Russian legislation for transfer pricing.

Operating environment

Emerging markets such as the Russian Federation are subject to diverse risks that differ from those of more developed markets, including economic, political, social, legal and legislative risks. Laws and regulations affecting businesses in the RF may change rapidly and may be subject to arbitrary interpretations. The future economic direction of the RF is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment.

Because the Russian Federation produces and exports large volumes of oil and gas, the country’s economy is particularly sensitive to the prices of oil and gas on the world market.

In March 2014, the USA and the EU imposed sanctions on a number of Russian officials, businessmen, and organizations. These sanctions, especially in the event of their further extension, may restrict access to international capital and export markets for Russian businesses, which might provoke capital flight, weakening of the Ruble, and other negative economic consequences. The impact of these events on the Bank's future performance and financial position is currently difficult to estimate.

29. FAIR VALUE OF FINANCIAL INSTRUMENTS

IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price can be determined by direct observation or by using another valuation technique.

Valuation techniques

The Bank uses a number of techniques to determine fair values of financial instruments for which observable prices in active markets for identical instruments are not available.

These techniques include: relative value measurement techniques based on similar instruments for which market observable prices exist, current value measurement methods allowing to assess future cash flows from assets and liabilities then discounted at an interest rate adjusted for risk.

Input information on the above valuation techniques is presented below. When utilizing valuation techniques, the fair value can be significantly affected by the choice of valuation model and by underlying assumptions concerning factors such as the amounts and timing of cash flows, discount rates and credit risk.

Interest rates – these are principally benchmark interest rates effective as at reporting date.

Foreign currency exchange rates – these are observable markets both for forward contracts and futures in major currencies.

In order to determine a reliable fair value, where appropriate, management applies valuation adjustments to the pricing information gathered from the above sources. Furthermore, on an ongoing basis, the Bank assesses the appropriateness of any model used.

37

Financial assets and liabilities

The following methods and significant assumptions have been applied to estimate the fair value of the Bank’s financial instruments:

 For cash, balances and mandatory reserve deposits with the CBRF, due to the short term environment and availability restriction of these types of assets, the carrying amount is assumed to be reasonable estimate of their fair value.

 The fair value of loans to customers is estimated by application of market interest rates when the loans were originated with the year-end market rates offered on similar loans with the deduction of the provision for loan impairment from the calculated fair value amounts.

 For financial assets and liabilities that have a short term maturity (less than 1 year), it is assumed that the fair value approximate to their carrying amount. This assumption is also applied to other financial assets and liabilities without a maturity.

 The estimated fair value of quoted trading securities and derivative financial instruments, comprising financial assets at fair value through profit or loss category and financial assets available-for-sale, is determined based on quoted active market prices at the reporting date.

 The fair value of overdraft loans to customers is assumed to be the amount of their carrying amount. The fair value of the other loans is estimated by application of market interest rates less impairment losses.

 The fair value of the term deposits (included in customer accounts and due to banks) is estimated by application of market interest rates. The carrying amount of demand deposits, current/settlement customer accounts is assumed to be reasonable estimate of their fair value due to the short-term environment and availability requirements of these types of liability.

 The fair value of issued debt securities and subordinated debt is based on expected cash flows discounted using market interest rates for similar financial instruments.

The management of the Bank believes that the fair values of financial assets and liabilities approximate their carrying values as at 31 December 2013 and 2012.

Valuation hierarchy

Financial instruments are broken down for disclosure purposes into a three level fair value hierarchy based on the observability of inputs as follows:

 Quoted prices in an active market (Level 1) – Valuations based on quoted prices in active markets that the Bank has the ability to access for identical assets or liabilities. Valuation adjustments and block discounts are not applied to these financial instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuations of these products do not entail a significant amount of judgment.

 Valuation techniques using observable inputs (Level 2) – Valuations based on inputs for which all significant inputs are observable, either directly or indirectly and valuations based on one or more observable quoted prices for orderly transactions in markets that are not considered active.

 Valuation techniques incorporating information other than observable market data (Level 3) –

Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value.

Valuation techniques

Quoted prices in an active market

(Level 1)

Valuation techniques based on observable market data

(Level 2) incorporating information other than observable market data

(Level 3)



Financial investments available for sale



Financial investments available for sale

-

8,242,592

-

8,174,130

3,785,499

-

2,152,132

-

-

886

-

896

38

The fair values of the financial assets and financial liabilities included in the level 2 and level 3 categories above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties.

There were no transfers between Levels 1, 2 and 3 in 2013 and 2012.

30. CAPITAL RISK MANAGEMENT

The Bank manages capital to ensure continuous operations of the Bank by maximizing the shareholders’ profit through optimization of the debt/equity ratio with minimum risk.

The capital structure of the Bank consists of capital paid by shareholders, paid-in capital, reserve fund, retained earnings and subordinated debts. Subordinated debts are disclosed in Note 19.

The adequacy of the Bank’s capital is monitored using, among other measures, the ratios established by the Basel Capital Accord and the ratios established by the CBR in supervising the Bank.

During 2013, the Bank complied with all its externally imposed capital requirements.

Legislation of the Russian Federation requires banks to maintain a capital adequacy ratio of 10% of risk-weighted assets.

As at 31 December 2013 and 2012, the Bank’s capital adequacy ratio calculated in accordance with legislation of the Russian Federation was 11.9% и 11.7%, respectively.

31. RISK MANAGEMENT POLICIES

The risk management system of OJSC International Bank of Saint-Petersburg is an integrated part of the Bank’s management system and is aimed at the adequate assessment of risks inherent in the banking business. The risk management system basically relies on the methodology and techniques, the existing best practices of risk management in Russia (requirements and recommendations of the Bank of Russia) and abroad (documents of the Basel Committee on Banking Supervision, risk assessment practices applied in the USA and European Union countries), internal approaches and risk management models in the banking business, enabling the Bank to evaluate its ability to compensate for potential losses in case of risk occurrence and determine a set of measures, which must be taken to mitigate the level of risks, ensure financial stability, maintain and increase the Bank's capital.

The underlying documents regulating the Bank's risk management system are the Bank risk management policies and a complex of Regulations describing the mechanisms to manage each of the risks assumed.

The major goals of the risk management system are as follows:

 Forming a well-balanced structure of assets and liabilities in terms of risk/reward as part of the Bank's development strategy and risk appetite;

 Ensuring an adequate current profitability and maintaining its capital adequacy at an acceptable level;

 A timely and comprehensive assessment of the Bank's risk level and reduction of the Bank’s losses caused by realized risks.

To achieve those goals the Bank tackles a number of specific issues related to risk management:

 Preventive development of the Bank's own risk management methodologies for new or significantly changing business lines, products or operations of the Bank on financial market;

 Ongoing improvement of the existing risk management methodologies to ensure continuous enhancement of their efficiency and comprehensive improvement of the Bank's activities with a special emphasis placed on the application of advanced approaches in risk management in terms of priorities and deadlines set by the Board of Directions and the Bank of Russia;

39

 A timely detection of bank risks, assessment of their materiality and correlation with the Bank’s risk appetite based on the necessity to implement the strategy, financial plans and ensure profitability, taking into account the need to minimize the possibility of incurring losses and prevent significant decrease in capital adequacy (lower than the established indicators) in negative market conditions;

 Identification of specific risk criteria and their assessment based on scenario analysis and stress-testing methods to ensure an appropriate response of the Bank to negative market conditions.

 Update of the risk limit system to limit losses on the Bank's operations and applied instruments.

The ongoing monitoring of the Bank's transactions enables the Bank to carry out control functions to ensure compliance with the regulatory requirements and risk appetite limits;

 Ongoing maintenance of an extensive system of reports for both internal and external users to ensure transparent, complete and efficient control of the Bank's risk management process.

Structure and administration of divisions involved in risk management

The Bank has a multilevel system of responsibility of collective bodies and divisions that perform risk management. The Board of Directors carries out strategic management of the Bank. The Bank’s day-to day activities are managed by the sole executive body, Chairman of the Management Board, and the collective executive body, Management Board. Risk management is carried out by separate collective management bodies and divisions in accordance with the competencies specified by the Bank.

Identification, analysis and evaluation of risk factors are carried out by the Bank's structural units, which directly perform risk-bearing transactions, and the divisions that carry out risk analysis and evaluation: Bank risk department and department of credit risks of corporate clients. These divisions manage risks independently from the divisions that assume risks, perform an ongoing risk evaluation and control, and timely diagnosis of the risk realization process. Further control of the risk management system is regularly carried out by the Internal Control Department.

Committees

To ensure a continuous and effective risk management the Bank has the following collective management bodies: Risk Management Committee, Asset and Liability Management Committee and

Technological committee which perform a collective assessment of risks inherent in the Bank’s activities and take respective decisions.

Risk Management Committee implements principles and standards of the Bank’s credit risk management and Credit Policies, takes decisions on loan transactions, on changes in terms of loans, loan classification (reclassification), approves risk limits for one borrower (group of related borrowers), selects methodologies for the evaluation of the Bank’s credit risks, pledges and other types of collateral, and prescribes a procedure of credit risk monitoring.

The competence of the Asset and Liability Management Committee includes: analysis of the methodologies of liquidity and market risk management, approval of reports on these risks, taking decisions on borrowing operations, general issues of asset and liability management including setting market and liquidity risk management objectives, assessing trends on the foreign currency market, deciding on liability allocation across the Bank’s business activities and financing of certain operations and pricing of banking products.

The Technological committee assists in the development of the Bank's information technologies (IT),

IT infrastructure and creates conditions for the implementation of advanced IT-systems, business processes and state-of-the-art technological solutions.

Structural units

Bank Risk Department and Department of Credit Risks of Corporate Clients are the Bank's divisions carrying out risk management irrespective of the activity types of the Bank's divisions that take part in assuming risks. The Departments focus on organizing an effective risk management system, that reduces potential financial losses of the Bank and ensures an appropriate level of reliability corresponding to the complexity and scope of the Bank's operations.

In general, in line with their competences the departments carry out management of systems of corporate credit, market, operational, reputation risks, risks of counterparty and issuer banks, national and local risks including independent identification, analysis, evaluation, monitoring and control of the indicated risks.

40

The Finance and Economics Department and the Department of trading operations of the Treasury are jointly responsible for ensuring an optimal structure of assets and liabilities, efficient use of available resources, the required liquidity level of the Bank, timely monitoring and regulation of interest risk and open currency position management.

The Legal Department focuses on defense of the Bank's interests and management of legal risks arising in the course of its operations.

The Security Department.

The main objective of the Security Department is to ensure economic security of the Bank's operations, defend its legal interests from wrongful misappropriation and threats to the Bank's property, to detect irregularities or wrongful acts of the Bank's employees and third parties and to take measures to minimize them.

The Internal Control Department performs internal control and helps the Bank's management bodies make sure the Bank's internal controls function effectively.

To implement subsequent control procedures over risk management systems the Internal Control

Department carries out the following actions:

 checks whether the bank risk assessment methodology and banking risk management procedures are applied in full and evaluates their efficiency;

 monitors risk management system using financial statements' data, the Bank's analytical and other divisions' information.

Risks inherent in the Bank’s operations are as follows:

Risks inherent in the Bank's operations consist of financial and functional risks.

According to the risk management policies, the main financial risks inherent in the Bank’s operations are those related to:

 risk;

 Liquidity

 Stock market risk;

 Currency risk and

 Interest rate risk.

Concentration and country risks are not separated from the above mentioned risks and treated as part of them, primarily, of the credit risk.

Apart from the financial risks, the Bank's operations relate to material functional risks - operational and reputation risks. Legal risk is treated within operational risk. The Strategic Risk Department is integrated in strategic business-planning processes.

A list of material risk types can be adjusted in case of significant change of risk level by areas, scope and/or structure of operations, development of new business directions etc.

Credit Risk

Credit risk is the risk of financial losses of the Bank occurring as a result of a failure by counterparties to discharge obligations or deterioration of counterparties' financial position causing deterioration in the value of their liabilities. Credit risk is considered as a major risk as it is present practically in all the Bank’s principal instruments (loan granting, discounting of promissory notes, investment in securities, etc.).

The process of credit risk management includes analysis of borrowers based on the financial statements and non-financial data, business plans of financed investment projects and provided collateral. The analysis implies an examination of the key data reported on the balance sheet and profit or loss statement of the borrower in absolute amounts, in dynamics during the reviewed period and in comparison with the indicators of other similar companies. Non-financial factors are taken into account in the same way – counterparty’s shareholder structure, its position in the industry and country risk level.

41

The country risk is considered in assessing the risks of operations with non-resident counterparties, counterparties related to non-residents (though a shareholder structure, specific nature of financial and operating activity, etc.) or operations with the currencies not typical for the Bank’s operations

(different from RUB, USD, EUR). Based on the assessment of political, economic and legal frameworks as well as respective indicators of the countries, it is concluded if it is possible and necessary to resort to technologies and limits on transactions as part of management of the material types of risks.

In order to minimize the country risk, the Bank sets tougher limits and restrictions for transactions with residents of the countries with unstable economical and political situation and low sovereign ratings assigned by international rating agencies or without any such rating.

Borrower’s credit risk level estimated based on the results of the analysis is reflected in the Bank’s interest rate policy – depending on the risk level, the approaches to counterparties are differentiated by scope, maturity and profitability of investment.

The Bank adopts a conservative credit policy aimed at maintaining acceptable risk level. When granting a loan, all options of credit risk mitigation are considered, including the possibility of obtaining collateral or guarantee from business owners and main operating companies (in the case of lending to a company that is part of a group of companies).

The decisions approving loans and collateral are taken by the Credit Risk Committee collectively in order to limit credit risks and eliminate a conflict of interests. The Committee also establishes risk limits for counterparties and issuers of securities. The credit risk is assessed across all the assets exposed to it.

Continuous monitoring of credit risk level by borrowers allows taking prompt decisions aimed at prevention of deterioration in the quality of the loan portfolio. The established risk limits are reviewed by the Credit Risk Committee on a regular basis.

When developing the Bank's lending business strategy the focus was on lending to the real sector of the economy in regions geographically covered by the Bank's major branches (Moscow, Nizhniy

Novgorod, Volgograd, Ulyanovsk and Novosibirsk).

When executing transactions on the securities market, the Bank relies on a conservative strategy i.e. investments in the instruments of reliable issuers. The Bank's portfolio of discounted promissory notes continues to be based on promissory notes of financially stable Russian banks maturing within a year; the portfolio of bonds is made of bonds of first-class Russian issuers included in the Lombard list of the CBR or List of securities accepted by the Bank of Russia under over-the -counter market repurchase agreements in the over-the-counter market.

A similar prudence is typical for the interbank market operations as well: direct risk limits are established only for the most reliable large banks rated by international rating agencies; operations with other counterparties are carried out using techniques that allow to minimize credit risks (on prepayment terms; placement of funds against an interbank loan received from the counterparty, deposit swaps, etc.)

Concentration risk is also taken into account. Concentration on specific instruments of financial markets and currency types is covered by the respective sections of market risks. Concentration on related (though the shareholder structure, specific nature of financial and operating activity, etc.) counterparties is considered and limited when taking decisions on transactions and setting the limits.

The Bank's management bodies use a special decision making procedure for transactions resulting in a significant concentration. When conducting scenario analysis and stress testing a special emphasis is placed on the concentration risk (on the related counterparties, sectors).

42

Maximum credit risk exposure

The Bank's maximum exposure to credit risk varies significantly and is dependent on both individual risks inherent in certain assets and general market economy risks.

The following table presents the maximum exposure to credit risk of balance sheet and off balance sheet financial assets. For financial assets in the balance sheet, the maximum exposure is equal to the carrying amount of those assets prior to any offset or collateral. The Bank’s maximum exposure to credit risk under contingent financial liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments.

Maximum credit


Balances with the CBR

Financial assets at fair value risk exposure

2,793,035 through profit or loss 3,785,499

Due from banks 6,652,816

Loans to customers

Financial assets available-for-sale


Other financial assets

24,644,939

8,243,478

4,109,091

76,681

Guarantees issued and similar commitments 7,181,990

Letters of credit and other transaction related contingent liabilities 1,479,435

Commitments on loans and unused

6,212,736 credit lines


Balances with the CBR

Financial assets at fair value

3,521,405 through profit or loss 2,152,132

Due from banks 5,923,204

Loans to customers

Financial assets available-for-sale

Investments held to maturity

29,328,574

8,175,026


Guarantees issued and similar

67,534 commitments 10,232,739

Letters of credit and other transaction related contingent liabilities 794,516

Commitments on loans and unused credit lines 9,032,216

Offset

-

-

-

(334,784)

-

-

-

(1,158,492)

(1,479,435)

-

-

-

(779,858)

-

-

-

(1,181,086)

(311,640)

Collateral Net exposure

- 2,793,035

- 6,652,816

(22,126,655) 2,183,500

- 8,243,478

-

-

4,109,091

76,681

(3,027,387) 2,996,111

(4,732,358) 1,480,378

- 3,521,405

- 5,923,204

(23,475,430) 5,073,286

-

-

8,175,026

67,534

(4,661,671) 4,389,982

(7,464,277) 1,567,939

Financial assets are graded according to the current credit rating they have been issued by an internationally regarded agency such as Fitch, Standard & Poor’s and Moody’s. The highest possible rating is AAA. Investment grade financial assets have ratings from AAA to BBB. Financial assets which have ratings lower than BBB are classed as speculative grade.

As at 31 December 2013 and 2012 balances with the CBR totaled RUB 2,793,035 thousand and RUB 3,521,405 thousand, respectively. The credit rating of the Russian Federation according to the international rating agencies in 2013 corresponded to investments level BBB. At the date of the financial statements, the credit rating was downgraded to ВВВ -.

43

The following table details the credit ratings of financial assets held by the Bank as at 31 December 2013:



Due from banks

Loans to customers

Financial investments available-for-


АА sale -


-

-

А

-

1,645,195 4,178,425

-

ВВВ < ВВВ rated Total

709,871 3,075,628

73,663 58,947

- 3,785,499

696,586 6,652,816

- 24,644,939 24,644,939

2,651,188

1,598,800 1,499,238

5,516,734 75,556 8,243,478

- 1,011,053 4,109,091

67,455 - 9,226 76,681

The following table details the credit ratings of financial assets held by the Bank as at 31 December 2012:

31 December 2012 АА А ВВВ < ВВВ rated Total


Due from banks

956,319

26,980 1,649,203 4,207,441

Loans to customers

Financial investments available-forsale -

Other financial assets -

-

-

-

60,343

-

5,079,571

-

990,193

38,485

3,094,559

-

205,620 2,152,132

1,095 5,923,204

- 29,328,574 29,328,574

896 8,175,026

7,191 67,534

Off-balance sheet risk

The Bank applies fundamentally the same risk management policies for off-balance sheet risks as it does for its on-balance sheet risks. In the case of commitments to lend, customers and counterparties will be subject to the same credit management policies as for loans and advances. Collateral may be sought depending on the strength of the counterparty and the nature of the transaction.

The following table details the ageing of financial assets that are past due but not impaired:

As at 31 December 2013

Up to

0-3 months

Financial assets past due but not impaired

3–6 months 6 months-1 year Over 1 year

Loans to customers

In 2012 all the past due loans were impaired.

- 135,179

Geographical concentration

The Assets and Liabilities Management Committee (ALMC) exercises control over the risk in the legislation and regulatory arena and assesses its influence on the Bank’s activity. This approach allows the Bank to minimize potential losses from the investment climate fluctuations in the RF.

44

The geographical concentration of assets and liabilities is based on the counterparty's country of origin and is set out below:

31 December 2013 RF OECD countries

Non-OECD countries Total

FINANCIAL ASSETS:

Cash and balances with the Central

Bank of the Russian Federation 2,793,035

Financial assets at fair value through profit or loss 3,785,499

Due from banks 783,389

Loans to customers


24,644,774 sale 8,178,585

Receivables on letters of credit -

Other financial assets 9,226

TOTAL FINANCIAL ASSETS 40,194,508

-

5,869,427

-

165

-

4,109,091

67,455

10,046,138

-

-

-

-

64,893

6,652,816

24,644,939

4,109,091

76,681

50,305,539

FINANCIAL LIABILITIES:

Depository instruments with the

Central Bank of the Russian

Federation 5,436,597

Due to banks

Customer accounts

2,591,453

30,049,706


Subordinated debt


TOTAL FINANCIAL LIABILITIES

2,226,249

1,309,467

43,435

41,656,907

-

134,021

1,317,048

-

-

55,478

1,506,547

-

2,932,975

-

654,584

-

3,587,559

2,725,474

34,299,729

2,226,249

1,964,051

98,913

46,751,013

OECD countries

Non-OECD countries Total 31 December 2012 RF


Cash and balances with the Central

Bank of the Russian Federation 3,521,405

Financial assets at fair value through profit or loss 2,152,132

Due from banks

Loans to customers

100,055

29,328,574

Financial investments available-forsale 8,175,026







Due to banks 2,387,573

Customer accounts 33,060,414


Subordinated debt


2,400,041

1,294,385

31,335

TOTAL FINANCIAL LIABILITIES 42,348,347

-

-

5,823,149

-

-

60,343

5,883,492

-

464,935

797,176

-

303,727

-

1,565,838

-

-

-

1,251,779

-

303,727

-

1,555,506

-

-

5,923,204

29,328,574

67,534

49,167,875

2,852,508

35,109,369

2,400,041

1,901,839

31,335

45,469,691

45

Renegotiated loans

Loans to customers can be renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case, renegotiation can result in an renegotiation of the due date of payment or repayment plans under which the Bank offers a concessionary rate of interest to genuinely distressed borrowers.

Carrying amounts of loans to customers that were renegotiated are disclosed in Note 9.

The banking industry is generally exposed to credit risk through its loans to customers and inter bank deposits. With regard to loans to customers, the Bank’s credit risk is concentrated within the RF.

The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Bank’s risk management policy are not breached.

Liquidity risk

Liquidity risk management

Liquidity risk refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments as they actually fall due.

The Bank's liquidity issues are regularly reviewed at the meetings of the ALMC. To assess liquidity, the following is carried out: assessment of GAP (maturity analysis of funds), assessment of surplus/deficit of liquidity in the near term, forecast liquidity in the medium and long term.

To manage liquidity, limits of liquidity deficit ratios are established due to assets and liabilities maturity gap. These ratios characterize the amount of liquid assets to cover liquidity shortage at minimal cost.

The Bank reviews the structure of the raised funds and large customers’ accounts on a regular basis. With large clients maintaining considerable balances on demand accounts, the Bank negotiates on the provision of information about planned inflows and writes-off and concludes agreements on the minimum balance of the account.

To minimize liquidity risk, the Bank maintains amounts of liquid assets sufficient to fulfill obligations on time and in full. A significant source of liquidity support is the Bank’s securities portfolio.

The review of liquidity and interest rate risks is provided below:

( а ) Term to maturity of financial liabilities, that are not derivatives, calculated for discounted cash flows on financial liabilities (principal and interest) on the earliest date, when the Bank will be liable to settle the obligation;

( б ) Term to maturity of financial liabilities, that are derivatives, calculated for discounted cash flows on financial liabilities on the earliest date, when the Bank will be liable to redeem the liabilities; and

( в ) Estimated term to maturity of financial assets, that are not derivatives, calculated for discounted cash flows on financial assets (including interest), which will be received on these assets based on contractual terms of maturity, unless the Bank expects that cash flows will be received at the different time.

46

An analysis of liquidity and interest rate risk is presented in the following table.The presentation below is based upon the information provided internally to key management personnel of the Bank.


Weighted average effective interest rate, %

Up to

1 month

1 month to

3 months

3 months to 1 year

1 year to

5 years

Over

5 years Overdue

Maturity undefined Total

- - 300,000

FINANCIAL ASSETS

Cash and balances with the CBR 4.5% 300,000 -


Due from banks


6.22% 436,327 3,349,172

0.74% 4,662,567 330,215

-

328,543

-

328,404 sale 6.53%

Loans to customers

-

10.23% 687,053 6,024,987 10,960,068 5,878,447

Total interest-bearing financial assets

Cash and balances with the CBR

Due from banks

Financial investments available-forsale



Total financial assets

6,085,947 9,818,162 19,417,415 6,206,851

1,645,815

944,648

-

-

9,226

-

-

-

-

-

- 4,109,091

67,455

-

-

-

-

-

-

-

8,685,636 9,885,617 23,526,506 6,206,851

- 58,439 5,708,168

959,206 135,178 - 24,644,939

959,206 135,178 58,439 42,681,198

-

-

- 847,220 2,493,035

- 944,648

-

886

- 4,109,091

- - 76,681

959,206 135,178 906,545 50,305,539

FINANCIAL LIABILITIES

Total interest-bearing financial liabilities

Due to banks

Customer accounts



Federation 5.57%

Due to banks

Customer accounts


Subordinated debt

6.95% 2,020,951 382,957

5.52% 7,366,811 9,349,561 12,406,808

7.51% 378,103

8.97% -

-

790,404

-

-

251,673

521,753

-

47,266

959,530

40,907

- 1,309,467

15,202,462 10,522,922 13,180,234 2,357,170

22,627

4,216,390

-

-

-

-

-

-



Total financial liabilities

188,394

24,092

155,870

14,224

150,700

56,249

118

4,348

19,653,965 10,693,016 13,387,183 2,361,636

Liquidity gap on financial assets and liabilities

Cumulative liquidity gap for financial assets and liabilities

Interest sensitivity gap on financial assets and liabilities

Cumulative interest sensitivity gap

(10,968,329) (807,399) 10,139,323 3,845,215

655,213 -

(10,968,329) (11,775,728) (1,636,405) 2,208,810 2,512,803 2,647,981

(9,116,515) (704,760) 6,237,181 3,849,681

(9,116,515) (9,821,275) (3,584,094) 265,587

655,213

-

-

-

-

-

303,993 135,178

303,993 135,178

569,580 704,758

- 41,918,001

22,627

- 4,216,390

495,082

98,913

- 46,751,013

47



Up to

1 month

1 month to

3 months


1 year to

5 years

FINANCIAL ASSETS


Due from banks


Loans to customers

8.19% 212,849 1,939,283

0.41% 4,784,292 911,181

-

-

-

31,491 8,142,639 -

10.09% 1,771,589 5,227,732 12,625,291 8,891,014

-

-

Total interest-bearing financial assets

Cash and balances with the CBR

Due from banks

Financial investments available-forsale


Total financial assets

6,768,730 8,109,687 20,767,930 8,891,014

2,661,265

225,301

-

1,460

-

-

-

66,074

-

-

-

-

-

-

-

-

9,656,756 8,175,761 20,767,930 8,891,014

FINANCIAL LIABILITIES



Federation 5.72%

Due to banks

Customer accounts


Subordinated debt

6.85% 2,175,539

-

81,070

6.05% 7,269,611 4,042,875 16,542,029

5.84% 899,829

9.88% -

505,970

-

-

524,269

778,943

303,727


Due to banks

Customer accounts securities



Liquidity gap on financial assets and liabilities

Cumulative liquidity gap for financial assets and liabilities

Interest sensitivity gap on financial assets and liabilities

Cumulative interest sensitivity gap

-

65,376

452,201

153,621

(6,750,848) 3,479,772 2,618,962 8,219,816

Over

5 years

812,948

-

-

-

812,948

671,198 1,598,230

-

-

-

12

(10,746,501) 3,543,354 2,603,343 8,219,804

-

-

-

671,210 1,598,230

(10,746,501) (7,203,147) (4,599,804) 3,620,000 2,834,718

(6,750,848) (3,271,076) (652,114) 7,567,702 6,782,420

Overdue

-

-

-

- 45,350,309

- 860,140 3,521,405

- 2,430 227,731

-

-

-

-

-

-

Maturity undefined

- 863,466 49,167,875

(785,282) -

(785,282) -

-

896

67,534

- 38,567,889

-

-

Total

6,254

- 6,802,653

61,560

31,335

- 45,469,691

In the table above, the terms to maturity correspond to the contractual terms. However, individuals are entitled to terminate the deposit agreement ahead of schedule according to effective laws.

As at 31 December 2013 and 2012 the Bank has a liquidity gap from one to three months after the reporting date. The Bank's liquidity depends on the Bank’s ability to maintain balances on customer accounts. According to the management's estimates based on the past experience and current situation analysis, this ability is improving and will remain at the same or an improved level. A significant portion of balances on customer accounts (deposits of entities and individuals) is considered by the Bank’s management and customers as minimum balances and therefore is included in the equivalent of medium-term deposits.

48

The following tables detail the Bank’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Bank can be required to pay.

The tables include both interest and principal cash flows. The contractual maturity is based on the earliest date on which the Bank may be required to pay.



Up to

1 month

1 month to

3 months


1 year to

5 years

Over

5 years Total

LIABILITIES:



Due to banks

Customer accounts


Subordinated debt


6.95%

5.52%

7.51%

8.97%

2,025,092

7,378,811

387,281

13,850

393,269

-

263,267

9,438,998 12,884,907

800,201

30,214

551,050

49,345

1,056,468

43,915

2,730,973

1,103 30,760,287

1,782,447

132,193 1,903,593 873,437 2,953,287

15,253,452 10,662,682 13,831,417 3,053,321 874,540 43,675,412

Due to banks

Customer accounts



Liabilities on financial guarantees and letters of credit

Commitments on loans and unused credit lines


22,627

4,216,390

188,395

24,092

-

-

155,870

14,224

-

150,700

-

56,249

-

-

118

4,348

389,185 1,302,676 4,680,428 2,392,372

22,627

4,216,390

495,083

98,913

591 8,765,252

754,481 1,485,668 3,006,981 861,351 104,255 6,212,736

20,848,622 13,621,120 21,725,775 6,311,510 979,386 63,486,413


LIABILITIES:



3,174,599

Due to banks

Customer accounts


Subordinated debt

6.85% 2,178,332 84,980 819,034

6.05% 6,916,688 3,925,427 17,730,252

5.84%

9.88%

899,829

14,957

505,970

29,913

778,943

421,235

Total interest-bearing financial liabilities 13,184,405 4,546,290 19,749,464

69,542

489,419

153,621

-

3,174,599

3,151,888

- 29,061,786

118 2,338,481

617,403 1,710,564 2,794,072

1,329,985 1,710,682 40,520,826

Due to banks

Customer accounts



Liabilities on financial guarantees and letters of credit



6,254

6,802,653

61,560

13,212

1,626,743

-

2,492

-

-

-

15,619

-

-

-

-

12

683,913 7,393,419 1,349,104

-

-

6,254

6,802,653

61,560

31,335

- 11,053,179

762,786 1,991,492 4,707,667 1,285,591 284,680 9,032,216

22,457,613 7,224,187 31,866,169 3,964,692 1,995,362 67,508,023

The amounts included above for financial guarantee contracts are the maximum amounts the Bank could be forced to settle under the arrangement for the full guaranteed amount if that amount is claimed by the counterparty to the guarantee. Based on expectations at the end of the reporting period, the Bank considers that it is more likely than not that no amount will be payable under the arrangement. However, this estimate is subject to change depending on the probability of the counterparty claiming under the guarantee which is a function of the likelihood that the financial receivables held by the counterparty which are guaranteed suffer credit losses.

49

Market risk

Market risk is associated with changes in market-based parameters of financial assets (rates, quotes, interest rates) that are traded by the Bank. The concept of market risk includes foreign exchange risk, stock market and interest rate risks.

Market risks are managed by establishing limits on investments, open position limits and stop-loss limits for the aggregated portfolio and on individual instruments. Revaluation of positions based on projected changes in risk factors (interest rates, exchange rates or prices of equity instruments) allows to determine the value of possible losses. Positions are managed by limiting or, vice versa, developing the policy of taking responsibility on the respective risk and diversification of risky investments.

As part of market risk management, scenario analysis is carried out periodically (including stress scenarios) to assess the impact of possible changes in risk factors on the activities of the Bank. If necessary, action plans in the case of an adverse situation aimed at ensuring continuity of the Bank’s activity and minimizing losses. The results of evaluation and management of market risks are reviewed by the Committees of the Bank, accompanied by the development of management decisions (setting open positions limits, stop-loss limits on trading, approval of plans).

Interest rate risk

Interest rate risk occurs due to the mismatch between interest rate sensitive assets and liabilities in case of an adverse change in interest rate.

To estimate the level of interest rate risk, the Bank performs an analysis of the asset and liability structure using the GAP method.

As part of the interest rate risk management the Bank does the following:

 Determines priorities depending on the maturity of assets and liabilities;

 Approves standard and individual rates of raising and placing funds depending on maturity;

 Sets limits for certain types of operations or large transactions which impact the risk level;

 Envisages a possibility to review interest rates in the agreements concluded with the Bank’s customers;

 Enters into agreements with clients for keeping non-reducing balances on their accounts in order to increase the maturity term of accounts “repayable on demand”.

Interest rate sensitivity

Cash flow interest rate risk is the risk that the future cash flows of financial instruments will fluctuate because of changes in market interest rates.

The majority of the Bank’s loan agreements and other interest bearing financial assets and liabilities are at fixed rates of interest. The Bank management monitors its interest rate margin and consequently does not consider itself exposed to significant interest rate risk or consequential cash flow risk.

Derivative financial instruments and spot transactions

Transactions using the derivative financial instruments (“derivatives”), include interest rate, cross currency, equity, residential property and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures and equity index options. Derivatives are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which require no or little initial net investment and are settled at a future date.

50

Currency risk

Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Bank’s financial position and cash flows are exposed to foreign currency exchange rate fluctuations.

The level of currency risk is determined based on the analysis of statistical data on changes in foreign exchange rates. Limits of open positions by types of currency and limits of losses from trading operations in the foreign currency market are determined by comparing the level of stock market risk with profit and possible open positions on securities with the Bank’s equity. Loss limits are set both for a period (for example, a quarter) and a day at the level which is immaterial in terms of the

Bank’s profitability.

Risk limits are revised on a regular basis and in case of significant changes in the currency rate. Due to nearly absolute liquidity of the currency market, the establishment of loss limits allows reducing the currency risk to the value immaterial for the Bank.

The Asset and Liability Management Committee manages the currency risk by defining an open currency position using projections of changes in Ruble exchange rates and other macroeconomic indicators, enabling the Bank to minimize losses from significant currency rates fluctuations toward its national currency. The Treasury Department performs daily monitoring of the Bank’s open currency position with the aim to match the requirements of the CBR.

The Bank manages the currency risk by defining an open currency position using projections of changes in Ruble exchange rates and other macroeconomic indicators, enabling the Bank to minimize losses from significant currency rates fluctuations toward its national currency. The Treasury Department performs daily monitoring of the Bank’s open currency position with the aim to match the requirements of the CBR.

The Bank's exposure to foreign currency exchange rate risk is presented in the table below:

31 December 2013 RUB

USD

USD 1 =

RUB 32.7292

EUR

EUR 1 =

RUB 44.9699

Other currency Total


Cash and balances with the




Due from banks

2,239,992

153,393

Loans to customers

Financial investments available-

19,292,878 for-sale 6,663,484

Receivables on letters of credit -



228,973

1,545,507

6,356,268

2,715,441

1,579,994

4,109,091

237

16,535,511

94,380

123,143

2,636,620

-

67,555

2,921,698

339 2,793,035

20,012 6,652,816

- 24,644,939

- 4,109,091

- 76,681

20,351 50,305,539





Due to banks

Customer accounts

2,569,570

19,592,938


Subordinated debt


1,697,802

1,100,000

42,919


OPEN BALANCE SHEET

POSITION 388,153

97,084

10,512,152

460,992

864,051

51,456

11,985,735

4,549,776

58,742

4,194,520

4,520

78 2,725,474

119 34,299,729

67,455 - 2,226,249

1,964,051

18 98,913

4,325,237 215 46,751,013

(1,403,539) 20,136

51

Fair values of derivative financial instruments and spot contracts are included in the currency analysis presented above. The following table presents further analysis of currency risk by types of derivative financial instruments and spot deals:

USD EUR


USD 1 =

RUB 32.7292

EUR 1 =

RUB 44.9699


Accounts payable on spot contracts -

Accounts receivable on spot contracts 3,586,683

NET SPOT FINANCIAL

INSTRUMENTS POSITION 3,586,683

3,974,836 TOTAL NET POSITION

(4,877,319)

(4,877,319)

(327,543)

USD

USD 1 =

RUB 30.3727

-

(13,491)

1,304,127

1,290,636

(112,903)

EUR

EUR 1 =

RUB 40.2286

- (4,890,810)

- 4,890,810

-

20,136

Other currency Total 31 December 2012 RUB


Cash and balances with the




Due from banks

2,152,132

73,891

Loans to customers

Financial investments available-

25,286,344 for-sale 6,548,848



346,145

5,706,801

2,502,015

1,626,178

309

10,181,448

141,050

128,594

1,540,215

60,342

1,870,201

238 3,521,405

13,918 5,923,204

- 29,328,574

- 67,534

14,156 49,167,875


Depository instruments with the Central Bank of the Russian Federation

Due to banks

Customer accounts


Subordinated debt


3,174,599

2,204,143

23,887,593

2,269,148

1,100,000

20,184


238,282

7,450,657

41,531

801,839

5,742

8,538,051

410,012

3,770,608

71 2,852,508

511 35,109,369

89,362 - 2,400,041

1,901,839

5,409 - 31,335

4,275,391 582 45,469,691

OPEN BALANCE SHEET

POSITION 4,446,403

TOTAL NET POSITION 5,475,737

1,643,397 (2,405,190)

(415,789) (1,375,338)

13,574

Fair values of derivative financial instruments and spot contracts are included in the currency analysis presented above. The following table presents further analysis of currency risk by types of derivative financial instruments and spot deals:

USD EUR


USD 1

RUB 30.3727

EUR 1 =

RUB 40.2286


Accounts payable on spot contracts (173,290)

Accounts receivable on spot contracts 1,202,624

NET SPOT FINANCIAL

INSTRUMENTS POSITION 1,029,334

(3,157,688) (1,062,035)

1,098,502

(2,059,186)

2,091,887

1,029,852

- (4,393,013)

- 4,393,013

-

13,574

52

Currency risk sensitivity

The following table details the Bank's sensitivity to a 10% increase and decrease in the RUB against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. A positive number below indicates an increase in profit and other equity where the RUB strengthens 10% against the relevant currency. For a 10% weakening of the

RUB against the relevant currency, there would be a comparable impact on the profit and other equity, and the balances below would be negative.

USD impact EUR impact

2013 2012

Profit before tax

Sensitivity analysis limitations

308,662 177,689 129,855 220,203

The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors.

It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analysis does not take into consideration that the Bank’s assets and liabilities are actively managed. Additionally, the financial position of the Bank may vary at the time that any actual market movement occurs. For example, the Bank’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective actions. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value in the statement of financial position. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in stockholder equity.

Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Bank’s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion.

Price risk own products

The Bank is exposed to price risks of its products which are subject to general and specific market fluctuations.

The Bank manages price risk through periodic estimation of potential losses that could arise from adverse changes in market conditions and establishing and maintaining appropriate stop-loss limits and margin and collateral requirements. With respect to undrawn loan commitments the Bank is potentially exposed to a loss of an amount equal to the total amount of such commitments. However, the likely amount of a loss is less than that, since most commitments are contingent upon certain conditions set out in the loan agreements.

Operational risk

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events.

When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavors to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes.

53

32. RELATED PARTY TRANSACTIONS

Details of transactions between the Bank and related parties are disclosed below:


Related party transactions

Total category as per the financial statements caption



Loans to customers

Shareholders of the Bank

Key management personnel

502,256

27

23,231

Parties controlled by shareholders of the Bank and other related parties 478,998

Provision for impairment of loans to customers (178,779)


Parties controlled by shareholders

(109) and other related parties (178,670)

Customer accounts


Key management personnel and members of the Board of

2,323,296

715,344

Directors. 361,122

Parties controlled by shareholders and other related parties 1,246,830

Debt obligations issued (first holder) 73,693

Parties controlled by shareholders and other related parties 73,693

Other liabilities shareholders of the Bank


20,498

4,255

16,243

654,584 Subordinated debt

Parties controlled by shareholders and other related parties



Key management personnel of the Bank


654,584

11,339

7,944

3,395

-

27,110,982

(2,466,043)

34,299,729

2,226,249

184,284

1,964,051

6,212,736

1,230,960

8

32,866

(398,895)

1,233,038

496,827

416,390

100,880

100,880

41,117

9,317

31,800

118,524

303,727 1,901,839

43,220

7,515

32,010,607

1,198,086

(398,895) (2,682,033)

-

35,109,369

319,821

303,727

4,495

31,210

Guarantees issued and other commitments 4,029


Key management personnel of

4,029 the Bank

Parties controlled by shareholders and other related parties -

7,285,817 4,088

3,686

402

-

The remuneration of directors and other members of key management was as follows:

2,400,041

9,032,216

10,232,739


Key management personnel compensation:

Short-term employee benefits 355,149

Total 355,149


676,823

676,823



704,589

704,589

1,138,410

1,138,410

54

The amount of compensation to employees was reduced in 2013 as a result of changes in approaches to employee motivation following the trends observed in the banking sector, and due to a staff decrease as a result of the Bank's optimization of its organizational structure.

Included in the profit or loss statement for the years ended 31 December 2013 and 2012 are the following amounts, which were recognized in transactions with related parties:

Year ended


Year ended






Interest income



10,376

772

3,381


Interest expense

6,223 the Bank

Parties controlled by shareholders

(163,931)

Shareholders of the Bank (50,916)

Key management personnel of

(24,955)

(88,060) and other related parties

Recovery of provision/(provision) for impairment losses on interest-

220,116

(109) bearing assets



Net gain/(loss) on financial assets and liabilities at fair value through

220,225 profit or loss

Parties controlled by shareholders and other related parties -

-

Net gain on foreign exchange operations 259



13

234


Fees and commission income




Operating expenses

(operating lease)


12

316

45

105

166

(51,059)

(51,059)

3,706,645

(2,531,569)

119,060

(42,833)

216,936

275,590

(94,791)

48,919

119

5,874

42,926

(89,105) (1,969,635)

(25,722)

(21,043)

(42,340)

29,530

-

29,530

(50)

(50)

187

3,215

2,392

617

38

298

281

(51,064)

3,924,284

(135,222)

115,360

292,894

(51,064) (93,903)

33. SUBSEQUENT

On 3 June 2014, the annual general meeting of the Bank’s shareholders decided to pay dividends based on the results of the Bank’s performance in the year 2013 in the amount of RUB 160,807 thousand.

55

Open Joint Stock Company International Bank of Saint

Open Joint Stock

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Bank of Saint-Petersburg

OPEN JOINT STOCK COMPANY

INTERNATIONAL BANK OF SAINT-PETERSBURG

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