5.3.5.33. Risk Management

Capital risk management

The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the return to the equity holder through the optimisation of the debt and equity balance and meet debt to equity ratio covenant of the loan agreement with Sberbank (Note 21). Management of the Group reviews the capital structure on a regular basis. Based on the results of this review, the Group takes steps to balance its overall capital structure through the payment of dividends as well as the issuance of new debt or the redemption of existing debt.

Major categories of financial instruments

The Group’s principle financial liabilities comprise loans and borrowings, trade and other payables. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various financial assets such as trade and other receivables, investments in securities and cash and cash equivalents.

31 December 2012 31 December 2011
Financial assets
Cash and cash equivalents 242,579 127,522
Investments and receivables carried at amortised cost
Deposits 512 18,976
Trade and other receivables including long-term 52,416 61,768
Loans issued 60,778 37,699
Total financial assets 356,285 245,965
Financial liabilities carried at amortised cost
Borrowings (2,261,962) (2,506,256)
Trade and other payables (9,683) (14,093)
Payables for property, plant and equipment (3,646) (7,022)
Finance lease (8,800)
(2,284,091) (2,527,371)
Financial liabilities at FVTPL
Cross currency and interest rate swap (4,602)
(4,602)
Total financial liabilities (2,288,693) (2,527,371)

The main risks arising from the Group’s financial instruments are foreign currency, interest rate, credit and liquidity risks.

Foreign currency risk

Foreign currency risk is the risk that the financial results of the Group will be adversely impacted by changes in exchange rates to which the Group is exposed. The Group undertakes certain transactions denominated in foreign currencies. During 2012 the Group entered into a cross-currency and interest rate swap agreement to mitigate foreign currency risk (Note 23). In addition, management mitigates such risk by obtaining loans and borrowings in the same currency as the Group’s major operating inflows.

The carrying amount of the Group’s US Dollar denominated monetary assets and liabilities as at the reporting date are as follows:

31 December 2012 31 December 2011
Assets
Cash and cash equivalents 114,074 78,338
Investments and receivables carried at amortised cost 76,389 72,769
Total assets 190,463 151,107
Liabilities
Borrowings (1,944,707) (2,246,017)
Trade payables (201) (303)
Total liabilities (1,944,908) (2,246,320)
Total net liability position (1,754,445) (2,095,213)

The table below details the sensitivity of the Group’s financial instruments to a 10% depreciation of the RUR against the US Dollar if all other variables are held constant. The analysis was applied to monetary items at the year end dates denominated in USD. 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. A 10% appreciation of the RUR against the US Dollar would have an opposite impact as seen below:

31 December 2012 31 December 2011
Loss (175,445) (209,521)

The carrying amount of the Group’s EURO denominated monetary assets and liabilities as at the reporting date are as follows:

31 December 2012 31 December 2011
Assets
Cash and cash equivalents 12 15
Investments and receivables carried at amortised cost 622 58
Total assets 634 73
Liabilities
Finance lease (8,800)
Trade payables (375) (125)
Total liabilities (9,175) (125)
Total net liability position (8,541) (52)

The table below details the Group’s sensitivity to a 10% depreciation of the RUR against the EURO if all other variables are held constant. The analysis was applied to monetary items at the year end dates denominated in the EURO. A 10% appreciation of the RUR against the EURO would have opposite impact as seen below:

31 December 2012 31 December 2011
Loss (854) (5)

Interest rate risk

The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings.

The Group maintains only one loan subject to a variable interest rate. On 21 January 2011,NCSP received a loan in the amount of 1,950,000 from Sberbank pursuant to a contract dated 19 January 2011 relating to a new credit line to be used for the acquisition of PTP. Floating interest rate of LIBOR 3M + 4.85% per annum is applied during the first 3 years of the loan, fixed interest rate of 7.48% is applied from 19 January 2014. The change in LIBOR rate by 1% would lead to an increase in interest expense on 19,500.

Credit risk

Credit risk is the risk that a customer may default or not meet its obligations to the Group on a timely basis, leading to financial losses for the Group.

The summary below shows the revenue and outstanding balances of the top five counterparties as at the respective balance sheet dates and for the year then ended:

Customer location Revenue for 2012 31 December 2012
BIG PORT SERVICE DMCC United Arab Emirates 142,668 15,460
ROSNEFT Russia 82,211 2,213
TRANSNEFT-SERVICE Russia 67,423 329
NLMK Russia 40,494 458
ROSMORAGENT Russia 36,678 522
Total 369,474 18,982
Customer location Revenue for 2011 31 December 2011
PORATH SERVICES LIMITED Marshall Islands 169,484
ROSNEFT Russia 90,422 5,895
TRANSNEFT-SERVICE Russia 72,346 21
Palmpoint International Inc. Panama 51,630 268
LUKOIL Russia 40,506 1,943
Total 424,388 8,127

The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk as no collateral or other credit enhancements are held.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to settle all liabilities as they become due. The Group’s liquidity position is carefully monitored and managed. The Group has in place a detailed budgeting and cash forecasting process to help ensure that it has adequate cash available to meet its payment obligations.

Maturity analyses of financial liabilities are presented in Notes 21 and 26.

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