RUSSKY SLAVIANSKY BANK
Financial Statements and Auditors’ Report
31 December 2004

Notes to the Financial Statements

AUDITORS’ REPORT

To the Shareholders of Commercial Bank “Russky Slaviansky Bank” (Closed joint-stock company):

We have audited the accompanying balance sheet of Commercial Bank “Russky Slaviansky Bank” (Closed joint-stock company) (the “Bank”) as at 31 December 2004, and the related statements of income, of cash flows and of changes in shareholders’ equity for the year then ended. These financial statements are the responsibility of the Bank’s Management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2004 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Moscow, Russia
24 May 2005

Russky Slaviansky Bank
Balance Sheet as at 31 December 2004
(in thousands of Russian Roubles)

Approved for issue by the Board of Directors and signed on its behalf on 24 May 2005.

Commercial Bank “Russky Slaviansky Bank” (Closed joint-stock company) (the “Bank”) is a commercial bank owned by shareholders whose liability is limited. The Bank was established in 1990 in the form of a limited liability company. In 1999 the Bank changed its form of incorporation to a closed joint-stock company by converting participants’ units into shares.

The Bank’s shareholders mainly belong to the manufacturing and financial sector of the economy. The largest shareholders are top management of the Bank (31.3%), OOO FINPROM RSB (20.0%), OAO TANK Berieva (19.9%) and AOZT ASSET (19.5%).

The Bank’s principal business activity is commercial and retail banking operations within the Russian Federation. The Bank has operated under a full banking license issued by the Central Bank of the Russian Federation (“CBRF”) since 1990. In May 2004 the Bank applied for participation in the state deposit insurance scheme, which was introduced by the Federal Law № 177-FZ “Deposits of individuals insurance in Russian Federation” dated 23 December 2003. In June 2004 the Bank was inspected by the CBRF to assess its compliance with the criteria set for the state deposit insurance scheme and in accordance with the decision of the CBRF, the Bank was accepted to the state deposit insurance scheme in December 2004.

The Bank has three branches within the Russian Federation and four additional offices in Moscow. The Bank’s registered office is located at the following address: 119049, Moscow, Donskaya str., 14, build. 2.

The number of the Bank’s employees as at 31 December 2004 was 558 (2003: 475).

Whilst there have been improvements in economic trends in the country, the Russian Federation continues to display certain characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible in most countries outside of the Russian Federation, restrictive currency controls, and relatively high inflation. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations, and changes, which can occur frequently.

The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments.

The banking sector in the Russian Federation is particularly sensitive to adverse fluctuations in confidence and economic conditions. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the difficulties experienced by banks currently operating in the Russian Federation.

In 2004, following a general fall in confidence in the Russian banking system, the Russian banking sector experienced a reduction in liquidity. Management is unable to predict what effect, if any, any further significant deterioration in the liquidity or confidence in the Russian banking system could have on the financial position of the Bank.

Basis of Preparation

Basis of Preparation. These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Bank maintains its accounting records in accordance with Russian banking regulations. These financial statements have been prepared from those accounting records and adjusted as necessary in order to be in accordance with IFRS.

These financial statements have been measured and presented in the national currency of the Russian Federation, Russian Roubles (“RR”). As the characteristics of the economic environment of the Russian Federation indicate that hyperinflation has ceased, effective from 1 January 2003 the Bank no longer applies the provisions of IAS 29. Accounting for the effects of hyperinflation prior to 1 January 2003 is detailed in Note 4.

The preparation of these financial statements requires the use of estimates and assumptions that effect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Although these estimates are based on Management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.

3 Basis of Preparation (Continued)

International Financial Reporting Standard 1 “First-time Adoption of International Financial Reporting Standards” (“IFRS 1”) has been applied in preparation of these financial statements. These financial statements are the first Bank’s financial statements to be prepared in accordance with IFRS. The financial statements of the Bank as at 31 December 2002, which were issued by the Bank on 20 April 2003, were prepared in accordance with Russian banking accounting regulations (“RAR”). These were considered to be the previous GAAP as defined in IFRS 1 for the preparation of the preliminary opening IFRS balance sheet as at 1 January 2003. RAR differs in certain respects from IFRS. When preparing the financial statements, management has amended certain accounting and valuation methods applied in the RAR financial statements to comply with IFRS. The comparative figures in respect of 2003 were restated to reflect these adjustments.

Reconciliations and descriptions of the adjustments from the RAR 2002 and 2003 financial statements to the opening IFRS balance sheet as at 1 January 2003, the IFRS balance sheet as at 31 December 2003 and net profit for 2003 are provided below.

Reconciliation of equity between RAR 2002 financial statements and the opening IFRS balance sheet as at 1 January 2003

3 Basis of presentation (Continued)

Reconciliation of equity between RAR 2003 financial statements and the IFRS balance sheet as at 31 December 2003

Reconciliation from RAR 2003 financial statements to the IFRS statement of income for 2003

3 Basis of presentation (Continued)

The major part of the adjustments presented above relate to the differences between RAR and IFRS in valuation and accounting for provision for loan impairment and in classification of trading securities, other assets and amounts due to other banks.

Provision for loan impairment under RAR is calculated following a formalised procedure, a certain prescribed percentage of provision is applied depending on credit history and financial performance of a borrower and certain other relevant factors. Under IFRS the amount of the provision is calculated as the difference between the carrying amount and estimated recoverable amount, calculated as the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted at the instrument’s original effective interest rate.

Under IFRS promissory notes purchased are included in trading securities or in due from other banks or in loans and advances to customers, depending on their substance. Accordingly a majority of the promissory notes purchased were reclassified from trading securities and other assets to loans and advances to customers. Under RAR promissory notes are included in trading securities.

Under IFRS subordinated deposits are classified under a separate category.

Interest income and expense are recognised on a cash basis under RAR and on an accrual basis under IFRS.

Under IAS 29 cost of the premises and equipment has been restated to the equivalent purchasing power of the Russian Rouble as at 31 December 2002 for assets acquired prior to 1 January 2003. Share capital has also been adjusted for hyperinflation for the period through to 31 December 2002, as a result of the adjustment RAR retained earnings both in 2003 and 2002 were decreased by RR 179 535 thousand. RAR does not require hyperinflationary adjustments.

Deferred tax has been recognised under IFRS. RAR does not require recognition of the deferred tax.

Where necessary, corresponding figures have been adjusted to conform with changes in the presentation of the current year.

Cash and cash equivalents.Cash and cash equivalents are items which can be converted into cash within a day. All short term interbank placements, beyond overnight placements, are included in due from other banks. Amounts, which relate to funds that are of a restricted nature, are excluded from cash and cash equivalents.

Mandatory cash balances with the CBRF. Mandatory cash balances with the CBRF represent mandatory reserve deposits 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 cash flow statement.

Trading securities. Trading securities are securities, which are either acquired for generating a profit from short-term fluctuations in price or trader’s margin, or are securities included in a portfolio in which a pattern of short-term trading exists. The Bank classifies securities into trading securities if it has an intention to sell them within a short period after purchase, i.e. within 6 to 12 months.

Trading securities are initially recorded at cost (which includes transaction costs) and subsequently remeasured at fair value based on their market value or after the application of various valuation methodologies, including assumptions as to the future realisability of these securities. In determining market value, all trading securities are valued at the last bid price.

All related realised and unrealised gains and losses are recorded within gains less losses arising from trading securities in the statement of income in the period in which the change occurs. Interest earned on trading securities is reflected in the statement of income as interest income on trading securities. Dividends received are included in dividend income within other operating income.

All purchases and sales of trading securities that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Bank commits to purchase or sell the asset. Otherwise such transactions are treated as derivative instruments until settlement occurs.

Sale and repurchase agreements and lending of securities. Sale and repurchase agreements (“repo agreements”) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are included into trading securities, investment securities available for sale or held to maturity as appropriate. The corresponding liability is presented within due to other banks or other borrowed funds. Securities purchased under agreements to resell (“reverse repo agreements”) are recorded as due from other banks or loans and advances to customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method.

Securities lent to counterparties are retained in the financial statements. Securities borrowed are not recorded in the financial statements, unless they are sold to third parties, in which case the purchase and sale are recorded within gains less losses arising from trading securities in the statement of income. The obligation to return them is recorded at fair value as a trading liability.

Loans and advances to customers and provisions for loan impairment. Loans originated by the Bank by providing money directly to the borrower, other than those that are originated with the intent of being sold immediately or in the short-term which are recorded as trading assets, are categorised as loans and advances to customers.

Loans and advances are recorded when cash is advanced to borrowers. Initially, loans and advances are recorded at cost, which is the fair value of the consideration given, and subsequently are carried at amortised cost less provision for loan impairment. Amortised cost is based on the fair value of cash consideration given to originate those loans determinable by reference to market prices at origination date. Third party expenses, such as legal fees incurred in securing a loan are treated as part of the cost of the transaction.

Loans originated at interest rates different from market rates are remeasured at origination to their fair value, being future interest payments and principal repayment(s) discounted at market interest rates for similar loans. The difference between the fair value and the nominal value at origination is credited or charged to the statement of income as gains on origination of assets at rates above market or losses on origination of assets at rates below market. Subsequently, the carrying amount of such loans is adjusted for amortisation of the gains/losses on origination and the related income is recorded as interest income within the statement of income using the effective yield method.

A credit risk provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect the amounts due according to original contractual terms. The amount of the provision is the difference between the carrying amount and estimated recoverable amount, calculated as the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted at the instrument’s original effective interest rate.

The provision for loan impairment also covers losses where there is objective evidence that probable losses are present in components of the loan portfolio at the balance sheet date. These have been estimated based upon historical patterns of losses in each component, the credit ratings assigned to the borrowers and reflect the current economic environment in which the borrowers operate.

When a loan is uncollectable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the provision for loan impairment in the statement of income.

If the amount of the provision for loan impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is credited to the provision for loan impairment in the statement of income.

The Bank does not enter into transactions for purchases of loans with third parties.

Other credit related commitments. In the normal course of business, the Bank enters into other credit related commitments including letters of credit and guarantees. Specific provisions are recorded against other credit related commitments when losses are considered probable.

Promissory notes purchased. Promissory notes purchased are included in trading securities, or in due from other banks or in loans and advances to customers, depending on their substance and are recorded and subsequently remeasured and accounted in accordance with the accounting policies for these categories of assets.

Premises and equipment. Premises and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble as at 31 December 2002 for assets acquired prior to 1 January 2003, less accumulated depreciation and provision for impairment, where required.

At each reporting date the Bank assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, the Bank estimates the recoverable amount, which is determined as the higher of an asset’s net selling price or its value in use. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount and the difference is charged to the statement of income. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the assets recoverable amount.

Gains and losses on disposal of premises and equipment are determined by reference to the carrying amount and are taken into account in determining profit/(loss). Repairs and maintenance are charged to the statement of income when the expenditure is incurred.

Depreciation. Depreciation is applied on a straight line basis over the estimated useful lives of the assets using the following rates:

Premises - 2% per annum;

Leasehold improvements - 10% per annum;

Office and computer equipment - 17% per annum; and

Transport vehicles - 20% per annum.

Operating leases. Where the Bank is the lessee, the total lease payments, including those on expected termination, are charged by the lessee to the statement of income on a straight-line basis over the period of the lease.

Finance leases. Where the Bank is the lessor, upon inception of a finance lease, the present value of the lease payments (“net investment in leases”) is recorded within other assets. Lease income is recorded over the term of the lease using the net effective yield method.

The inception of a lease is considered to be the date of the lease agreement, or commitment if earlier. For the purpose of this definition, a commitment should be in writing, signed by the parties with an interest in the transaction, and should specifically set forth the principal terms of the transaction.

Any advance payments made by the lessee prior to commencement of the lease reduce the net investment in leases.

Finance income from leases is recorded within interest income in the statement of income.

When impaired, provisions against net investment in leases are created. A financial lease is impaired if its carrying amount is greater than its estimated recoverable amount. The amount of the impairment loss is calculated as the difference between the asset’s carrying amount and the present value of expected future cash flows discounted at the original effective interest rate of the financial lease receivable.

Subordinated deposits. Subordinated deposits are recorded initially at cost, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Subsequently, subordinated deposits are stated at amortised cost and any difference between net proceeds and the redemption value is recorded in the statement of income over the period of the subordinated deposits using the effective yield method.

Promissory notes issued. Promissory notes issued include promissory notes, issued by the Bank. Promissory notes issued are recorded initially at cost, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Subsequently, promissory notes issued are stated at amortised cost and any difference between net proceeds and the redemption value is recorded in the statement of income over the period of the security issue using the effective yield method.

Accrued interest income and accrued interest expense. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount, are included in the carrying values of related balance sheet items.

Dividends. Dividends are recorded in equity in the period in which they are declared. Dividends declared after the balance sheet date are disclosed in the subsequent events note. The statutory accounting reports of the Bank are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the current year net profit.

Income taxes. Taxation has been provided for in the financial statements in accordance with Russian legislation currently in force. The income tax charge in the statement of income for the year comprises current tax and changes in deferred tax. Current tax is calculated on the basis of the expected taxable profit for the year, using the tax rates enacted at the balance sheet date. Taxes, other than on income, are recorded within operating expenses.

Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recorded to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are netted only within the individual companies of the Bank.

Income and expense recognition. Interest income and expense are recorded in the statement of income for all interest bearing instruments on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability 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 payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment option) but does not consider future credit losses. The calculation includes all fees and points paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. When loans become doubtful of collection, they are written down to their recoverable amounts and interest income is thereafter recorded based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount.

Fees, commissions and other income and expense items are generally recorded on an accrual basis when the service has been provided. Loan commitment fees for loans which are probable of being drawn down, are deferred (together with related direct costs) and recorded as an adjustment to the effective interest on the loan. Fees on custody services that are continuously provided over an extended period of time are recorded ratably over the period the service is provided.

Foreign currency translation. Transactions denominated in foreign currency are recorded at the exchange rate ruling on the transaction date. Exchange differences resulting from the settlement of transactions denominated in foreign currency are included in the statement of income using the exchange rate ruling on that date.

Monetary assets and liabilities denominated in foreign currency are translated into Russian Roubles at the official exchange rate of the CBRF at the balance sheet date. Translation differences on debt securities and other monetary financial assets measured at fair value are included in foreign exchange translation gains and losses. Translation differences on non-monetary items such as equity securities held for trading are recorded as part of the fair value gain or loss.

As at 31 December 2004 the principal rate of exchange used for translating foreign currency balances was USD 1 = RR 27.7487 (2003: USD 1 = RR 29.4545 ). Exchange restrictions and controls exist relating to converting Russian Roubles into other currencies. At present, the Russian Rouble is not a freely convertible currency in most countries outside of the Russian Federation.

Derivative financial instruments. Derivative financial instruments including foreign exchange contracts and other derivative financial instruments are initially recorded in the balance sheet at cost (including transaction costs) and subsequently are remeasured at their fair value. Fair values are obtained from quoted market prices or calculated using the forward or spot rates at the year end as the basis as appropriate. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative.

Changes in the fair value of derivative instruments are included in gains less losses arising from trading in foreign currency and other operating income depending on the related contracts.

The Bank does not apply hedge accounting.

Fiduciary assets. Assets and liabilities held by the Bank in its own name, but on the account of third parties, are not reported on the balance sheet. Commissions received from such business are shown in fee and commission income within the statement of income.

Offsetting. Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

Accounting for the effects of hyperinflation. The Russian Federation has previously experienced relatively high levels of inflation and was considered to be hyperinflationary as defined by IAS 29 “Financial Reporting in Hyperinflationary Economies” (“IAS 29”). Accordingly, prior to 1 January 2003 the adjustments and reclassifications made to the statutory records for the purpose of IFRS presentation included the restatement of balances and transactions for the changes in the general purchasing power of the Russian Rouble in accordance with IAS 29.

IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. IFRS indicates that reporting operating results and financial position in the local currency without restatement is not useful because money loses purchasing power at such a rate that the comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.

As the characteristics of the economic environment of the Russian Federation indicate that hyperinflation has ceased, effective from 1 January 2003 the Bank no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at as 31 December 2002 are treated as the basis for the carrying amounts in these financial statements.

The restatement was calculated using the conversion factors derived from the Russian Federation Consumer Price Index (“CPI”), published by the Russian Statistics Agency, and from indices obtained from other sources for years prior to 1992. The CPI used to restate the financial statements is based on 1988 prices using 100 as the base index. The CPI for the five years ended 31 December 2002 and the respective conversion factors are the following:

Provisions. Provisions are recorded when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

Staff costs and related contributions. The Bank’s contributions to the Russian Federation state pension and social insurance funds in respect of its employees are expensed as incurred and included into staff costs.

Geographical, currency and interest rate analyses of cash and cash equivalents are disclosed in Note 21.

Corporate shares are shares of large Russian companies.

Corporate bonds are interest-bearing securities denominated in Russian Roubles, issued by large Russian companies and freely tradable in the Russian Federation. These bonds have maturity dates in August 2007, coupon rate of 10.0% in 2004 and yield to maturity of 11.7% as at 31 December 2004, depending on the type of bond issue (2003: maturity dates ranging from September 2005 to September 2009, coupon rates from 10.0% to 14.0% and yields to maturity from 15.1% to 17.6%, depending on the type of bond issue).

VEB bonds are interest-bearing securities denominated in US dollars and issued by the Ministry of Finance of the Russian Federation. The bonds are purchased at a discount to nominal value and carry an annual coupon of 3%. The bonds have maturity dates in November 2007 and yield to maturity of 4.7% as at 31 December 2004 (2003: maturity dates in November 2007 and yield to maturity of 5.1%).

Geographical, currency, maturity and interest rate analyses of trading securities are disclosed in Note 21.

The Bank is licensed by the Federal Commission on Securities Markets for trading in securities.

As at 31 December 2004 no securities were purchased under reverse sale and repurchase agreements.

As at 31 December 2003 securities purchased under reverse sale and repurchase agreements are RR 164 065 thousand with a fair value of approximately RR 164 144 thousand.

Movements in the provision for impairment of due from other banks are as follows:

As at 31 December 2004 the estimated fair value of due from other banks was RR 209 886 thousand (2003: RR 277 746 thousand). Refer to Note 23.

Geographical, currency, maturity and interest rate analyses of due from other banks are disclosed in Note 21.

As at 31 December 2004 the Bank has 4 borrowers with an aggregated amount due above RR 21 000 thousand. The aggregate amount of these borrowings is RR 130 000 thousand, or 61.9% of the gross amount due from other banks.

As at 31 December 2003 the Bank had 3 borrowers with an aggregated amount due above RR 27 000 thousand. The aggregate amount of these borrowings is RR 230 348 thousand, or 82.8% of the gross amount due from other banks.

Movements in the provision for loan impairment are as follows:

Economic sector risk concentrations within the customer loan portfolio are as follows:

The vast majority of loans to individuals represent consumer finance loans. All of these loans have monthly principal and interest repayments.

As at 31 December 2004 the estimated fair value of loans and advances to customers was RR 1 487 903 thousand (2003: RR 1 271 927 thousand). Refer to Note 23.

Geographical, currency, maturity and interest rate analyses of loans and advances to customers are disclosed in Note 21. The information on related party balances is disclosed in Note 24.

Geographical, currency and maturity analyses of other assets are disclosed in Note 21.

As at 31 December 2004 the estimated fair value of due to other banks was RR 550 182 thousand (2003: RR 959 386 thousand). Refer to Note 23.

Geographical, currency, maturity and interest rate analyses of due to other banks are disclosed in Note 21.

Economic sector concentrations within customer accounts are as follows:

As at 31 December 2004 the estimated fair value of customer accounts was RR 1 427 103 thousand (2003: RR 1 376 574 thousand). Refer to Note 23.

Geographical, currency, maturity and interest rate analyses of customer accounts are disclosed in Note 21. The information on related party balances is disclosed in Note 24.

Geographical, currency and maturity analyses of other liabilities are disclosed in Note 21.

All ordinary shares have a nominal value of RR 0.001 thousand per share, rank equally and carry one vote.

In accordance with Russian legislation, the Bank distributes profits as dividends or transfers them to reserves (fund accounts) on the basis of financial statements prepared in accordance with Russian Accounting Rules. The Bank’s reserves under Russian Accounting Rules as at 31 December 2004 are RR 254 171 thousand (2003: RR 140 160 thousand).

Income tax expense comprises the following:

The income tax rate applicable to the majority of the Bank’s income is 24% (2003: 24%). A reconciliation between the expected and the actual taxation charge is provided below.

Differences between IFRS and Russian statutory taxation regulations give rise to certain temporary differences between the carrying amount of certain assets and liabilities for financial reporting purposes and for income tax purposes. The tax effect of the movement on these temporary differences is recorded at the rate of 24% (2003: 24%), except for income on state securities that is taxed at 15% (2003: 15%).

The risk management function within the Bank is carried out in respect of financial risks (credit, market, geographical, currency, liquidity and interest rate), operational risks and legal risks. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks.

Credit risk. The Bank takes on exposure to credit risk which is the risk that a counterparty will be unable to pay all amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by product, borrower and industry sector are approved regularly by the Executive Board.

The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed, in part, by obtaining collateral and corporate and personal guarantees.

The Bank’s maximum exposure to credit risk is primary reflected in the carrying amounts of financial assets on the balance sheet. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant.

Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures.

Market risk. The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The Executive Board sets limits on the value of risk that may be accepted, which is monitored on a daily basis. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements.

Geographical risk. The geographical concentration of the Bank’s assets and liabilities as at 31 December 2004 is set out below:

*OECD - the Organisation for Economic Co-Operation and Development.

Assets, liabilities and credit related commitments have generally been based on the country in which the counterparty is located. Balances with Russian counterparties actually outstanding to/from foreign companies of these Russian counterparties are allocated to the caption “Russia”. Cash on hand, precious metals and premises and equipment have been allocated based on the country in which they are physically held.

The geographical concentration of the Bank’s assets and liabilities as at 31 December 2003 is set out below:

Currency risk. The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Executive Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank’s exposure to foreign currency exchange rate risk as at 31 December 2004. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by currency. The off-balance sheet gap represents the difference between the notional amounts of foreign currency derivative financial instruments, which are principally used to reduce the Bank’s exposure to currency movements, and their fair values. As at 31 December 2004, the Bank has the following positions in currencies:

At 31 December 2003, the Bank had the following positions in currency

The Bank has extended loans and advances denominated in foreign currencies. Depending on the revenue stream of the borrower, the appreciation of the currencies against the Russian Rouble may adversely affect the borrowers’ repayment ability and therefore increases the likelihood of future loan losses.

Liquidity risk. Liquidity risk is defined as the risk when the maturity of assets and liabilities does not match. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees and from margin and other calls on cash settled derivative instruments. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. Liquidity risk is managed by the Executive Board of the Bank.

The table below shows assets and liabilities as at 31 December 2004 by their remaining contractual maturity, unless there is evidence that any of these assets are impaired and will be settled after their contractual maturity dates, in which case the expected date of settlement is used. Some of the assets, however, may be of a longer term nature; for example, loans are frequently renewed and accordingly short term loans can have a longer term duration.

The liquidity position of the Bank as at 31 December 2004 is set out below.

The entire portfolio of trading securities is classified within demand and less than one month as the portfolio is of a trading nature and Management believe this is a fairer portrayal of the Bank's liquidity position. Mandatory cash balances with the CBRF are included within demand and less than one month as the majority of liabilities to which this balance relates to are also included within this category.

The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the Management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest and exchange rates.

Management believes that in spite of a substantial portion of customers accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Bank would indicate that these customers accounts provide a long-term and stable source of funding for the Bank. However, in accordance with Russian Civil Code, individuals have a right to withdraw their deposits prior to maturity.

Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Bank does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded.

Interest rate risk. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise.

The Bank is exposed to interest rate risk, principally as a result of lending at fixed interest rates, in amounts and for periods, which differ from those of term borrowings at fixed interest rates. In practice, interest rates are generally fixed on a short-term basis. Also, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions.

The Executive Board sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily. In the absence of any available hedging instruments, the Bank normally seeks to match its interest rate positions.

The table below summarises the Bank’s exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates.

The table below summarises the effective interest rates by major currencies for major monetary financial instruments. The analysis has been prepared based on period-end effective rates used for amortisation of the respective assets/liabilities.

The sign “-“ in the table above means that the Bank does not have the respective assets or liabilities in corresponding currency.

Legal proceedings. In the normal course of business the Bank may take part in the legal proceedings. On the basis of its own estimates and both internal and external professional advice the Management of the Bank is of the opinion that obligations if incurred in respect of legal proceedings will not have a significant negative impact on the financial position and results of the future operation activities of the Bank.

Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.

Transfer pricing legislation, which was introduced from 1 January 1999, provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect to all controlled transactions, provided that the transaction price differs from the market price by more than 20%. Controlled transactions include transactions with related parties, and transactions with unrelated parties if the price differs on similar transactions with two different counterparties by more than 20%. There is no formal guidance as to how these rules should be applied in practice.

The tax consequence of transactions for Russian taxation purposes is frequently determined by the form in which transactions are documented and the underlying accounting treatment prescribed by Russian Accounting Rules. Accordingly, the Bank structures certain transactions so as to take advantage of such form driven determinations to reduce the overall effective tax rate of the Bank. The statement of income as presented in these financial statements includes reclassifications to reflect the underlying economic substance of those transactions. These reclassifications do not have an effect on the Bank’s profit before taxation or the tax charge recorded in these financial statements.

The Bank’s Management believes that its interpretation of the relevant legislation is appropriate and the Bank’s tax, currency and customs positions will be sustained. Accordingly, as at 31 December 2004 no provision for potential tax liabilities had been recorded (2003: no provision).

Operating lease commitments. Where the Bank is the lessee, the future minimum lease payments under non cancellable operating leases are as follows:

Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing.

Commitments to make loans at a specific rate of interest during a fixed period of time are accounted for as derivative instruments unless these commitments do not extend beyond the period expected to be needed to perform appropriate underwriting, in which case they considered to be “regular way” transactions. Outstanding credit related commitments are as follows:

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded.

Fiduciary assets. These assets are not included in the Bank’s balance sheet as they are not assets of the Bank. Nominal values disclosed below are normally different from the fair values of respective securities. The fiduciary assets fall into the following categories:

Assets pledged and restricted. As at 31 December 2004 the Bank had no assets pledged as collateral (2003: nil).

Mandatory cash balances with the CBRF in the amount of RR 49 152 thousand (2003: RR 131 835 thousand) represent mandatory reserve deposit which is not available to finance the Bank’s day to day operations.

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price.

The estimated fair values of financial instruments have been determined by the Bank using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may not be reflective of the values for financial instruments, which would be determined in an efficient, active market involving willing buyers and willing sellers. While Management has used available market information in estimating the fair value of financial instruments, the market information may not be fully reflective of the value that could be realised in the current circumstances.

Financial instruments carried at fair value. Cash and cash equivalents and trading securities are carried on the balance sheet at their fair value.

Loans originated carried at amortised cost less provision for impairment. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Refer to Notes 7 and 8 for the estimated fair values of due from other banks and loans and advances to customers, respectively.

Liabilities carried at amortised cost. The fair value of instruments with a quoted market price is based on quoted market prices. The estimated fair value of instruments with no stated maturity is the amount repayable on demand. The estimated fair value of fixed interest rate instruments without a quoted market price is based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Refer to Notes 11, 12 and 14 for the estimated fair values of due to other banks, customer accounts and subordinated deposits, respectively. The estimated fair value of promissory notes issued approximates their carrying amount.

For the purposes of these financial statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 “Related Party Disclosures”. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

Banking transactions are entered into in the normal course of business with significant shareholders, directors and companies with which the Bank has significant shareholders in common and other related parties. These transactions include settlements, loans, deposit taking and guarantees. These transactions are priced predominantly at market rates. The outstanding balances at the year end and income and expense items as well as other transactions for the year with related parties are as follows:

In 2004 the total remuneration of members of the Executive Board and Board of Directors, including pension contributions, and discretionary compensation amounted to RR 24 655 thousand (2003: RR 14 490 thousand).

In 2000 the Bank set up a CONTACT system: the international network of correspondent banks and foreign companies, which represents technology for US dollar and Euro money transfers as well as domestic Russian Rouble money transfers for individuals without opening of individuals’ accounts. As at 31 December 2004 162 Russian banks and more than 720 of their branches in 314 cities participate in the system. The CONTACT system is also present in all CIS and Baltic states where the network covers 48 banks represented by their 1 700 affiliates in more than 600 cities.

The Bank acts as a clearing center for a network of correspondent banks and partner companies and earns a fee for its services which is included under commission income. The Bank also pays commission to correspondent banks and partner companies – originators of money transfers which is included under commission expense. Debtors and creditors on incomplete money transfers for the day are disclosed as debtors or creditors on settlements through CONTACT system in other assets and other liabilities respectively.

On the general shareholders meeting of the Bank held on 21 January 2005 it was decided to increase the share capital of the Bank to RR 200 000 000 by means of placing 140 339 080 shares with a nominal value of RR 1 per share through a private offering. On 11 May 2005 the CB RF registered the share issue (the state registration number is 10101073 В 002D). It is planned that the completion of the issuance process and registration of the report on the issue results will take place before 1 June 2005.