3.2. Corporate Governance

NCSP Group corporate governance system

NCSP Group’s corporate governance system complies with Russian law, and meets Russian and international standards of best practice and business ethics, while taking into account the interests of all stakeholders. The Company complies with the requirements of the UK Listing Authority/Financial Services Authority (UKLA/FSA) for issuers of Global Depositary Receipts (GDRs).

The General Shareholder Meeting, Board of Directors, Chief Executive Officer and Management Board form the basis of NCSP Group’s corporate governance system.

NCSP Group corporate structure

PJSC NCSP corporate governance structure

PJSC NCSP subsidiaries are governed by the election of representatives of PJSC NCSP and its shareholders to the boards of directors of these companies. The main document specifying corporate governance mechanisms at PJSC NCSP is the company’s Charter. Amendments to the Charter fall within the authority of the General Shareholder Meeting, with the exception of amendments pertaining to the creation of branches, and the opening and liquidation of offices, which fall under the authority of the Board of Directors.

The Russian Federation (RF) has had a special right to participation in the management of PJSC NCSP through a “golden share” since April 2011. This right is exercised by the ability to appoint one representative of the government to both the Board of Directors and the Audit Commission. The RF representative on the Board of Directors has the right to veto decisions by the General Shareholder Meeting concerning amendments to the Charter or the approval of a new version of the Charter, the reorganization of the Company, liquidation, changes to charter capital, and execution of major transactions and related-party transactions.

The Company adopted a Corporate Governance Code in 2007 that takes into account the recommendations of the Organization for Economic Cooperation and Development and the Russian financial markets regulator. The Code is based on the Federal Law On Joint-stock Companies and the PJSC NCSP Charter. The Code does not apply to PJSC NCSP subsidiaries, which voluntarily comply with the Corporate Governance Code approved by the Russian Federal Financial Markets Service on April 5, 2002. The subsidiaries disclose this information in their annual reports.

The Internal Control Service (until June 14, 2012), Internal Audit Department (since June 14, 2012), as well as the Internal Audit Commission are responsible for internal control and auditing at NCSP Group and PJSC NCSP.

PJSC NCSP’s Charter, Corporate Governance Code, internal documents regulating management and control bodies, as well as information on the Company’s information policy, are available on the NCSP Group website:

http://www.nmtp.info/holding/investors/info_disclosure/uch_documents/.

Improvements to the corporate governance system in 2012

NCSP Group carried out a number of measures to improve corporate governance in 2012. The following organizational changes were made:

  • A new Regulation on Procurement of Goods and Services for PJSC NCSP was approved and is posted on the company’s website:http://www.nmtp.info/content/holding/downloads/2012/Zaycev/PZNCSP2.docx
  • The operations department was reorganized to reduce overlap among management personnel, increase efficiency and improve customer service, resulting in record efficiency of cargo handling
  • The Internal Control Service was reorganized into Internal Audit Department.

General Shareholder Meeting

The General Shareholder Meeting is PJSC NCSP’s highest management body. The Annual General Meeting is mandatory, and other general meetings of shareholders are extraordinary.

The following issues fall under the authority of the General Shareholder Meeting: amendments to the Charter or approval of a new Charter (other than cases specified in the Federal Law On Joint-stock Companies); restructuring (liquidation) of the Company; election and dismissal of members of the Board of Directors, Chief Executive Officer and members of the Audit Commission; confirmation of the auditor; and approval of annual reports, the annual financial statement and other issues. The General Shareholder Meeting is legitimate (has a quorum) if it has the participation of shareholders who together hold more than half of the votes of outstanding voting shares in PJSC NCSP.

The right to vote at the General Shareholder Meeting on issues submitted to a vote is held by shareholders who hold common shares in the company. Detailed information about the General Shareholder Meeting is contained in the Regulation on the General Shareholder Meeting of PJSC NCSP approved by the Board of Directors, which is available on the company’s website: http://www.nmtp.info/content/holding/downloads/2007/09/14/Polojeniye_ob_OSA.pdf.

Three General Shareholder Meetings were held in 2012:

The following decisions were made at the Extraordinary General Meeting of PJSC NSCP shareholders held on March 5, 2012:

  • Early dismissal of members of the Company’s Board of Directors
  • Election of members of the Company’s Board of Directors

The following decisions were made at the Annual General Meeting of PJSC NSCP shareholders held on June 15, 2012:

  • Approval of the Company’s annual report
  • Approval of the Company’s annual financial statements, including the profit and loss statement
  • Approval of the distribution of the Company’s profit for 2011
  • Approval of the amount and form of payment of dividends for 2011
  • Election of members of the Company’s Board of Directors (supervisory board)
  • Election of members of the Company’s Audit Commission
  • Confirmation of the Company’s auditor
  • Payment of remuneration to nongovernment members of the Board of Directors and Audit Commission
  • Approval of a new version of the Company’s Charter

The following decisions were made at the Extraordinary General Meeting of PJSC NSCP shareholders held on July 9, 2012:

  • Early dismissal of PJSC NCSP’s Chief Executive Officer
  • Election of a new Chief Executive Officer of PJSC NCSP

Board of Directors

The Board of Directors, as the key element in the corporate governance system, is responsible for the successful development of PJSC NCSP. The Board of Directors acts in the interests of PJSC NCSP shareholders and the company as a whole.

The Board of Directors oversees the general management of PJSC NCSP’s business with the exception of issues that federal legislation and the PJSC NCSP Charter reserve for the purview of the General Shareholder Meeting.

The Board of Directors is responsible for determining PJSC NCSP’s strategic priorities, and for executing control over financial and business activities and the performance of the Company’s executive bodies. Board directors are elected by the General Shareholder Meeting for a term until the next annual general meeting, and can be reelected an unlimited number of times. Regular meetings of the Board of Directors are held at least once every six weeks. PJSC NCSP shareholders strive to appoint board directors who are highly qualified professionals, with the necessary knowledge, skills and experience. Independent directors are elected to the Board of Directors to increase the objectivity and soundness of decision-making and to maintain balance. Candidates for the Board of Directors can be nominated by shareholders with at least 2% of shares, or by the Board of Directors.

Major changes were made to the composition of the PJSC NCSP Board of Directors in 2012, giving new shareholders commensurate representation in this key management body. The new Board of Directors elected at an extraordinary general meeting on June 15, 2012, included Summa Group representatives Ziyavudin Magomedov and Alexander Vinokurov; PJSC NCSP representative Marat Shaydaev; Federal State Property Management Agency representative Yevgeny Gavrilin; OJSC Transneft representatives Mikhail Barkov and Maxim Grishanin; and government representative Viktor Olersky. This new Board of Directors enabled the Company to successfully meet the challenges of further modernizing and increasing the efficiency of its operations. The Board of Directors had seven members as of the end of 2012.

Members of PJSC NCSP Board of Directors in 2012

June 30, 2011 to March 5, 2012 March 5, 2012 to June 15, 2012 June 15, 2012 to Dec 31, 2012
Mikhail Arustamov *
Vitaly Kisenko *
Pavel Potapov *
Yury Soloviev *
Boris Tikhonenko *
Ziyavudin Magomedov * * *
Viktor Olersky * * *
Mikhail Barkov * *
Alexander Vinokurov * *
Yevgeny Gavrilin * *
Maxim Grishanin * *
Marat Shaydaev * *

Board of Directors (as of December 31, 2012)

Ziyavudin Magomedov

Mr. Magomedov has been Chairman of the Board of Directors of Summa Group (formerly Summa Capital) since 2007. He is a trustee of the nonprofit Russian Olympic Support Foundation, Chairman of the Board of Trustees of the Russian Tennis Federation, and a member of the boards of trustees of the Bolshoi Theater and Gerasimov Institute of Cinematography. He has been awarded the Order of Friendship.

In 2004-2005, he served on the Board of Directors of OJSC Trans Oil and then on the Board of Directors of OJSC First Mining Company. In 2002-2004 he was Chairman of the Board of Founders of the Dialog Program Support Foundation.

Born in 1968, Mr. Magomedov graduated from Moscow State University with a degree in international economics, and holds a PhD in economics.

Viktor Olersky

Mr. Olersky has been Deputy Minister of Transport of Russia since 2009.

He was Chairman of the Board at Northwest River Shipping from 2003 to 2009, and Chairman of the Board at Volga River Shipping from 2001 to 2003. He was director of Infotek Baltika from 1994 to 2009.

Born in 1965, Mr. Olersky graduated from the S.O. Makarov Higher Marine Engineering Academy and holds a PhD in engineering and a Medal for Distinguished Service in Maritime Activities.

Maxim Grishanin

Mr. Grishanin is vice president of OJSC Transneft.

He was director of corporate financing at OJSC Sukhoi Aviation Holding Company in 2010, and senior vice president for economics and finance at CJSC Sukhoi Civil Aircraft Company from 2006 to 2010. From 2002 to 2006, he headed the project finance department at OJSC Financial Leasing Company, and earlier he held various positions in the field of finance and economics.

Born in 1959, Mr. Grishanin graduated from the University of Kiel in Germany in 1995 with a degree as an economist.

Mikhail Barkov

Mr. Barkov is vice president of OJSC Transneft.

He worked for many years in various positions at foreign economic organizations, and headed the legal departments at a number of ministries and Russia’s trade mission in the United States.

Born in 1951, Mr. Barkov graduated from Moscow State University and the Order of International Friendship Academy of Foreign Trade.

Alexander Vinokurov

Mr. Vinokurov is President of Summa Group.

As manager of the Russian office of private equity firm TPG, he led projects to invest in LLC Lenta in 2009 and 2011, and in VTB Bank as anchor investor under the Russian government’s privatization program in February 2011. He also led the acquisition of commercial real estate assets from LLC Coalco in May 2011, and the company Ontex S.A. in July 2010.

Born in 1982, Mr. Vinokurov graduated from Cambridge University and holds a Bachelors and Masters degree.

Yevgeny Gavrilin

Mr. Gavrilin is Deputy Head of Russia’s Federal State Property Management Agency.

Mr. Gavrilin, who was born in 1959, graduated from Moscow State University and the Russian Presidential Academy of Civil Service. He holds a PhD in economics.

Marat Shaydaev

Mr. Shaydaev is First Deputy CEO of PJSC NCSP.

He was vice president and director of PJSC NCSP’s Moscow office in 2011.

Born in 1968, Mr. Shaydaev graduated from the Soviet Defense Ministry’s Military Krasnokazarmenny Institute in 1990, and the Russian Presidential Academy of Civil Service in 2007.

Share ownership

Members of PJSC NCSP’s Board of Directors do not hold shares in the company.

Report on Board of Directors meetings in 2012

The Board of Directors held 17 meetings by absentee voting in 2012 at which it considered 169 issues.

Participation by members of the Board of Directors in meetings in 2012

Number of meetings in which member participated Total number of meetings in which member has been eligible to participate since election
Mikhail Arustamov 15 16
Vitaly Kisenko 15 16
Ziyavudin Magomedov 30 30
Viktor Olersky 37 40
Pavel Potapov 5 13
Yury Solviev 16 16
Boris Tikhonenko 16 16
Mikhail Barkov 12 14
Alexander Vinokurov 14 14
Yevgeny Gavrilin 12 14
Maxim Grishanin 13 14
Marat Shaydaev 14 14

Board Committees

To ensure that the rights and interests of shareholders are observed, and to enhance the effectiveness of PJSC NCSP’s Board of Directors, both standing committees for the term of the Board of Directors and temporary committees to tackle specific issues can be created. The Board of Directors approves the regulations on committees and amends them if needed. The Board of Directors currently has two standing committees: the Audit Committee and the Human Resources and Remuneration Committee. Committee meetings are convened as needed.

Audit Committee HR   and Remuneration Committee
  • Analyzes financial statements, conducts external and internal audits and presents relevant recommendations to the Board of Directors
  • Monitors:
  1. quality and completeness of financial statements
  2. qualifications and independence of external auditor
  3. activities of the Internal Control Service
  • Works closely with the external auditor, Audit Commission and Internal Control Service
  • Determines criteria for selection of candidates for the Board of Directors, Management Board and CEO
  • Makes recommendations on specific candidates
  • Develops the terms of contracts with the CEO and members of the Management Board
  • Evaluates the performance of the CEO and members of the Management Board
  • Develops corporate policy on remuneration for company management

Committee Members in 2012

January 1, 2012 to April 10, 2012 April 10, 2012 to December 31, 2012
Audit Committee
Vitaly Kisenko, Chairman Alexander Vinokurov
Ziyavudin Magomedov Maxim Grishanin, Chairman
Mikhail Arustamov Ziyavudin Magomedov
HR and Remuneration Committee
Mikhail Arustamov Mikhail Barkov
Ziyavudin Magomedov Maxim Grishanin
Boris Tikhonenko, Chairman Marat Shaydaev, Chairman (April 4-Aug 6, 2012) Ziyavudin Magomedov, Chairman (Aug 6-Dec 31, 2012)

The Audit Committee held two meetings in 2012, and the HR and Remuneration Committee held four meetings. At the meetings, the committees made decisions on issues including the following:

Audit Committee HR and Remuneration Committee
  • Approval of the PJSC NCSP Audit Committee’s schedule for 2012
  • Review of the PJSC NCSP Internal Control Service’s (ICS) report for 2011
  • Approval of the PJSC NCSP ICS’ schedule for 2012
  • Appointment of the PJSC NCSP Audit Committee secretary
  • Review of the PJSC NCSP auditor’s report for 2011; development of recommendations on determining and evaluating candidates for independent auditor, appointment or reappointment of the auditor
  • Review of the Audit Commission’s report on an audit of the Company’s financial and operating results for 2011; development of recommendations on this report
  • Reorganization of the PJSC NCSP ICS; approval of the draft Regulation on the Internal Audit Department of the PJSC NCSP office in Moscow
  • Approval of the draft Regulation on the Financial Control Department of PJSC NCSP
  • Approval of the PJSC NCSP HR and Remuneration Committee schedule for the first half of 2012
  • Appointment of the PJSC NCSP HR and Remuneration Committee secretary
  • Approval of candidates for the positions of deputy CEO for Legal, technical director, and chief financial officer

Chief Executive Officer

The Chief Executive Officer is the individual executive body of PJSC NCSP, and by virtue of his/her position is the chairman of the collegial executive body, the Management Board. The CEO is elected by the General Shareholder Meeting for a term of five years and reports to the Board of Directors and the General Shareholder Meeting. Detailed information about the responsibilities of the CEO is contained in the Regulation on the Chief Executive Officer of PJSC NCSP, which is available on the company’s website:

http://www.nmtp.info/content/holding/downloads/2007/09/14/Polojeniye_o_GD.pdf.

PJSC NCSP’s CEO as of December 31, 2012, was Rado Antolovic. On March 19, 2013, the Board of Directors decided to appoint PJSC NCSP Chief Operating Officer Yury Matvienko as Acting CEO of PJSC NCSP.

Management Board

The Management Board is the collegial executive body of PJSC NCSP. Members are approved by the Board of Directors. The Management Board carries out the day-to-day management of PJSC NCSP’s business according to the Charter, the Regulation on the Management Board and decisions of the General Shareholder Meeting and Board of Directors. The Management Board acts in the interests of NCSP Group and reports to the General Shareholder Meeting and the Board of Directors of PJSC NCSP. Members of the Management Board are appointed and dismissed by the Board of Directors, which determines the number of members of the Management Board when electing the Management Board.

Meetings of the Management Board are held according to a schedule and as needed, but at least once a month. Detailed information about the responsibilities of the Management Board is contained in the Regulation on the Management Board, which is available on the company’s website:

http://www.nmtp.info/content/holding/downloads/2007/09/14/Polojeniye_o_Pravleniyi.pdf

Management Board of PJSC NCSP as of December 31, 2012

  • Rado Antolovic, Chief Executive Officer, PJSC NCSP
  • Marat Shaydaev, First Deputy CEO, PJSC NCSP
  • Yury Matvienko, Chief Operating Officer, PJSC NCSP

On 19 March, 2013, the Board of Directors PJSC NCSP determined the composition of PJSC NCSP’s Management Board in the amount of five members and elected the following members of the Executive Board:

  • Yuriy Matvienko, Acting CEO;
  • Marat Shaydaev, First Deputy CEO;
  • Igor Terentyev, Executive Director;
  • Denis Afanasof, Deputy CEO for Legal and Corporate;
  • German Kachan, Deputy CEO for Economics and Finance

Compensation of key management personnel

For the year ended 31 December 2012 and 31 December 2011, the remuneration of the directors and other members of key management was 20,767 (including termination benefits in the amount of 1,079) and 11,622 (including termination benefits in the amount of 512), respectively, which represented short-term employee benefits and social security contributions.

The remuneration of directors and key executives is determined by the Board of Directors with regard to the performance of individuals and market trends.

Internal Control and Audit

Internal control is a key element of NCSP Group’s corporate governance system. It is intended to ensure prompt identification and analysis of risks arising in the course of the Group’s activities; implementation of the Group’s financial and business plans; compliance with legislation and the company’s internal procedures; and the accuracy and reliability of all types of reporting. The main structural units of the internal control system are the Internal Control Service (until June 14, 2012), and the Internal Audit Department (from June 14, 2012), and the Audit Commission of PJSC NCSP. The management bodies and certain divisions of the Group are also involved in the internal control process according to the responsibilities assigned to them by founding and internal documents. The effectiveness of the internal control system is evaluated by the Audit Committee of the PJSC NCSP Board of Directors.

Audit Commission

The Audit Commission monitors the financial and business activities of PJSC NCSP, its divisions, services, branches and representative offices. It reports to the General Shareholder Meeting of PJSC NCSP, and its five members are elected by the General Shareholder Meeting for a term until the next annual general meeting. The authority of the Audit Commission is defined by the Federal Law On Joint-Stock Companies, the PJSC NCSP Charter, and the Regulation on the Audit Commission of PJSC NCSP. The Audit Commission is responsible for auditing the financial and business activities and documentation of the company; analyzing the company’s financial condition; and verifying the competence of decisions made by the company’s management bodies, among other things. The Audit Commission conducts one mandatory audit of financial and business activities for the year, as well as unscheduled audits. Based on the results of these audits, the Audit Commission prepares a report stating its conclusions on compliance with or breaches of legislation, regulations, the charter and internal documents, as well as its evaluation of the accuracy of data in reports and other financial documents. At each stage in the preparation of financial statements — first according to Russian standards and then according to international standards — the Audit Commission and other internal control bodies check the quality of accounting, recommending changes if needed. Detailed information about the responsibilities of the Audit Commission is contained in the Regulation on the Audit Commission, which is available on the company’s website: http://www.nmtp.info/content/holding/downloads/2007/09/14/Polojeniye_o_RC.pdf.

Audit Commission Members as of December 31, 2012

  • Ekaterina Vlasova, Head of the representative office of Baronetta Investments Limited
  • Tatyana Nesmeyanova, Head of Finance and Economics at LLC Transneft Service
  • Margarita Russkikh, General Director of LLC Transneft Finance, Director of Festina Alliance LTD (B.V.I.)
  • Veronika Makeyeva, Deputy Director of Property Management and Regional Planning at the Russian Transport Ministry
  • Artur Shamkut, Director of Internal Audit at the Moscow office of Baronetta Investments Limited

Internal Audit Department

The Board of Directors decided on June 14, 2012 (Protocol No. 18-SD NCSP) to reorganize the Internal Control Service into the Internal Audit Department (IAD).

Key goals of the IAD, are to:

  • Identify and analyze risks to company’s operations in a timely manner;
  • ensure integrity and accuracy of company’s financial and management accounts;
  • implement company’s financial and operational plans;
  • preserve company’s assets and ensure efficient use of company’s resources;
  • support the development of optimal organizational structure ;
  • ensure compliance with applicable laws and regulations, and company’s internal by-laws.

The main objectives of the IAD, according to the Regulation approved by the Board of Directors, are to:

  • Create a system of follow-up control over financial and business activities at NCSP Group companies, divisions and offices
  • Conduct studies, comprehensive audits, issue-specific and special inspections, evaluations and internal investigations according to the schedule for the current year approved by the Audit Committee
  • Verify NCSP Group companies’ compliance with legislation in the area of economic relations (control over compliance with legislation, regulations and internal procedures)
  • Verify the legality of financial and business operations conducted by NCSP Group companies (control over the conformity of internal documents and draft decisions of management bodies to NCSP Group’s financial and business interests)
  • Monitor protection of assets (control over the principles of store accounting and holding of tangible assets, control over compliance with NCSP Group companies’ standards for expenditure of funds and tangible assets)
  • Conduct random inspections of budget execution by NCSP Group companies
  • Verify cost estimates for the investment expenditures of NCSP Group companies (expert review of the cost of engineering and design, construction and installation work, equipment and materials, and other expenditures)
  • Identify untapped potential for increasing the economic efficiency of NCSP Group companies
  • Report to corporate bodies and management of NCSP Group companies on the results of control activities and the condition of systems and processes
  • Develop remedial measures, draft corporate decisions based on control activities
  • Control over other issues specified by the Board of Directors and Audit Committee

The IAD with a staff of 9 people became part of PJSC NCSP’s organizational structure on June 15, 2012 by order of the Company’s Chief Executive Officer dated June 21, 2012 (No. 803).

The IAD operated in the second half of 2012 based on an approved schedule for field audits and document inspections, and in accordance with the responsibilities specified in the Regulation on the IAD of the PJSC NCSP Office in Moscow. IAD staff conducted ten random audits of Group assets, including six field audits, in July-December 2012.

IFRS Risk Management

In preparing consolidated financial statements to International Financial Reporting Standards, NCSP Group currently uses an approach based on transformation of financial statements prepared to Russian Accounting Standards (RAS) into statements to IFRS. However, there are also elements of parallel accounting, such as for noncurrent assets.

At the stage of preparation for transformation, bookkeeping in RAS is checked for completeness and method. Then, based on an assessment of the differences between IFRS and RAS requirements, adjusting entries are made and a control balance sheet is compiled with a breakdown of the key modules of the financial statement. All substantive aspects are analyzed for agreement of reporting forms and each note.

Every quarter, prior to the approval of statements, the financial department and Internal Control Service compare IFRS data with management reporting. All discrepancies are analyzed. Comparing consolidated planning data with actual data and describing the reasons for discrepancies also increases the reliability of information presented in statements.

The financial department also analyzes major differences between accounts for the current period and the two previous periods, and prepares detailed explanations for all discrepancies, both for consolidated statements and individual IFRS transformations of subsidiaries. To control working capital, a comparison is made of the accounts for cash flow prepared on the basis of management reporting data and accounts prepared by indirect method to IFRS.

Completeness of information disclosure is verified using a checklist of information that must be disclosed according to IFRS requirements. The checklist summarizes the compliance of recognitions, valuations, representations and disclosure of information with requirements set out in IFRS. If there are mandatory disclosure items for which requirements have not been met, explanations are made (for example, the amount is deemed insignificant) or the necessary corrections are made to the Group’s consolidated IFRS statements. In addition, educational seminars are held with consultants from the Big Four accountancy firms to clarify the application of new and amended standards.

Implementing these key procedures gives NCSP Group management confidence that the prepared consolidated statements are accurate and fully reflect the actual business performance of the Group as a whole.

The prepared statements are approved by PJSC NCSP’s Chief Executive Officer. The reliability of data and completeness of the consolidated financial statements are also confirmed by an independent auditor.

External Audit

To ensure maximum objectivity and assurance of financial results, PJSC NCSP invites an independent qualified auditor to verify and confirm annual accounts for financial statements.

Auditors can be nominated by shareholders with at least 2% of shares and by the Board of Directors. The candidate for auditor is confirmed by the General Shareholder Meeting. PJSC NCSP shareholders voted at the annual general meeting to confirm ZAO Deloitte & Touche CIS as the independent auditor of the company’s accounts for 2012. This firm has been PJSC NCSP’s independent auditor since 2007 for statements prepared to IFRS.

Risk Management

The management of NCSP Group pursues a focused policy to minimize the impact of external factors on the Company’s business, enhancing its operational and technical potential, expanding its presence on the stevedoring services market and strengthening relationships with counterparties and suppliers of related services.

One of the key principles of NCSP Group’s risk management system is the distribution of responsibilities in the area of risk management and internal control between the Board of Directors, Audit Committee, Audit Commission, Chief Executive Officer and the Group’s executive management bodies.

Strategic risks

Exports of resource commodities from Russia, including crude oil and refined oil products, nonferrous and ferrous metal products, grain and other agricultural commodities constitute the bulk of the Group’s cargo traffic. Changes in global commodity markets or to foreign trade regulation in Russia could have a significant impact on the volume of Russian exports and the Group’s business.

Construction of new cargo transfer facilities and greater competition among seaports in regions where the Group operates could have a considerable impact on the future performance of the Group’s business.

The expansion of the Group’s business requires substantial capital expenditure that the Group might not carry out, or might be constrained in its ability to carry out, due to obligations assumed under loan and other financial agreements.

Expanding and maintaining the Group’s operations might depend on the construction of new docks, dredging and other hydraulic engineering work that is beyond the control of the Group as it falls under the authority of port administrations and other government agencies.

The growth of the Group’s cargo turnover depends on the condition and development of railway lines, roads and pipeline infrastructure leading to ports.

The Group’s competitive advantages and prospects for growth depend on the competence and experience of key managers and their ability to recruit, retain and motivate skilled employees.

Changes in the international and national regulatory regime for shipping in the straits could have a substantial impact on the Group’s performance and prospects for growth.

Operating risks

The following factors could affect the Group’s business and performance in the medium and short term:

  • concentration of substantial cargo volume within the context of cooperation with a limited number of shipping lines or exporters/importers;
  • disruptions or delays to the operation of Russian railways, roads and pipeline infrastructure;
  • adverse weather conditions (including storms), which may limit the ability to carry out loading and unloading operations at ports;
  • changes to the tariff policy of companies in the transport sector and/or the introduction of new regulations in this area, particularly changes in the tariffs and regulations for Russian Railways (RZD);
  • changes in the situation on the global shipping market;
  • increases in the cost of energy resources;
  • seasonal fluctuations in demand or restrictions on exports of certain types of cargo handled by the Group;
  • changes in leasing rates for offshore infrastructure and land leased from the Russian Federation;
  • emergency situations and accidents, including manmade and natural incidents, as well as environmental pollution resulting in obligations to make reparation for damages;
  • disruptions in the operation of information support systems, including technological systems, as well as recordkeeping and document flow systems at Group companies.

Country risks

Russia has seen positive changes in all areas of public and economic life in recent years, including economic growth and political stability. Nonetheless, Russia is still a country with a developing and changing political, economic and financial system. There are still risks of adverse economic developments such as negative changes in currency rates, among others, that could have a negative impact on the Group’s business.

Financial risks

Interest rate risks

A considerable share of the Group’s debt portfolio consists of loans with a floating interest rate, changes in which directly affect the Company’s financial results. The interest rate is sensitive to changes in a number of factors outside of the Group’s control, including domestic and international economic conditions, the policies of central banks and so on. An increase in the interest rate will lead to an increase in expenditures on external financing. As part of its efforts to manage interest rate risk, the Company monitors current and forward market rates and the interest position on assets and liabilities, and works to manage the interest rate.

Currency risks

NCSP Group’s main currency risk is related to fluctuations in the Russian ruble’s exchange rate against the US dollar. Since the Company’s rates are primarily set in US dollars, a strengthening of the ruble’s exchange rate against the dollar could reduce revenue, profit and margins. Most of the Group’s debt is denominated in US dollars which is matched by a major portion of revenue received in US dollars. This creates a «natural hedge» against currency risk by the fact that revenue is received and payments on debt service are made in the same currency. Changes in foreign currency exchange rates against the ruble could lead to changes in balance sheet items that reflect debt on loans and credits denominated in foreign currency. Weaker foreign currency exchange rates against the ruble will increase positive exchange rate differences on revaluation of loans and increase profit tax liability. Conversely, stronger foreign currency exchange rates against the ruble will reduce positive exchange rate differences on revaluation of loans and reduce profit tax liability.

Inflationary risks

Inflationary processes that result in higher prices for supplies and raw materials could affect the growth of the balance sheet total, as well as have a significant impact on the Company’s net profit, because the Group’s ability to set rates for cargo transfer services is constrained by government regulation, while expenditures, which are primarily denominated in rubles, change according to the inflation rate. Changes in the consumer price index have a certain impact on the Company’s profitability, and consequently on its financial position and ability to meet obligations, but this influence is not a factor of direct dependence.

In the event of a rapid acceleration of inflation, the Group plans to focus on accelerating turnover of current assets, particularly by reducing inventories, as well as review existing contractual relations with customers to reduce receivables.

Credit risk

Credit risk lies in the possibility that a buyer might not meet obligations to the Group on time, which would result in financial losses. Before beginning to work with new clients the Group uses its own system to assess the creditworthiness of the potential client. The Group does not have restrictions on credit limits for clients. To minimize credit risks, the Group works with its clients on prepayment terms and only departs from this policy in exceptional cases warranted by business considerations.

Liquidity risk

Liquidity risk lies in the possibility of the Group not being able to meet its obligations when they fall due. The Group carefully manages and controls liquidity. The Group has processes in place for detailed budget preparation and forecasting of cash flow, ensuring that the Group has the necessary funds to meet its payment obligations. The Company compiles a cash flow forecast on a monthly basis.

Legal risks

General legal risks

Since the Russian legal system is still rapidly evolving, resulting in contradictions between local, regional and federal laws, rules and regulations, as well as industry standards that apply to the Company’s business, there is a risk in the uncertainty of the legal status of legal and business decisions made by the Company.

Shareholder risk

The Group’s controlling shareholders (beneficiaries) might pursue a policy that does not fully serve the interests of minority shareholders, including the holders of GDRs representing PJSC NCSP shares.

The Group might carry other shareholder risks as part of involvement in joint ventures and strategic partnerships.

Risks related to changes in currency regulation

Currency regulation is currently based on Federal Law No. 173-FZ of December 10, 2003 On Currency Regulation and Currency Control, with the exception of certain provisions with a different effective date. The Law is largely a framework and sets general rules within which the Russian government and Central Bank are authorized to introduce various measures of current regulation. As a result, there could be some uncertainty regarding the Company’s currency operations. Changes in currency regulation could have a negative impact on the fulfillment of obligations on contracts previously signed with Russian and foreign counterparties and providers of capital that require payment in foreign currency, and could require additional expenditures to bring the Group’s activities in line with the new requirements, including the signing of additional agreements to the relevant contracts.

Risks related to changes in tax legislation

Domestic market:

Russia currently has a Tax Code and a number of laws regulating various taxes and fees set at the federal, regional and local levels. Applicable taxes include value-added tax, profit tax, advertising tax, property tax, excise duties, the social security contributions, and other taxes and fees.

Regulations in the area of taxes and fees often contain unclear formulations and gaps in regulation. Furthermore, various government agencies and their officials often give contradictory interpretations of given tax regulations, resulting in certain inconsistencies and ambiguities. NCSP Group fully complies with current tax legislation, but this does not eliminate potential risk of disagreements with regulatory agencies on issues subject to ambiguous interpretation. In general, the tax risks related to the Group’s business are typical for most businesses operating in the Russian Federation and can be considered as country risks.

Foreign market:

NCSP Group considers risks related to changes in tax legislation on the external market to be minimal, although when raising financing on foreign markets the Company is exposed to the risk of changes in the tax legislation of foreign countries. However, Russia now has an extensive list of double taxation treaties, which makes it possible to minimize the negative impact of changes in foreign legislation. In any case, the Group takes all necessary measures to act in full compliance with new legislation.

Risks related to changes in requirements for licensing of core activities or licensing of rights to use assets with limited transferability (including natural resources)

Given the specifics of its business, NCSP Group is subject to many environmental regulations and standards at both the federal and regional levels. The introduction of new or changes to existing regulations could have a negative impact on the operations of Group companies.

The Group sees the possibility of such risks arising as low, since Russian legislation is tending toward reducing the scope of activities that require licensing. The Group currently fully meets the requirements of Russian legislation in this area. Nonetheless, the Group does not rule out the possibility that regulation might be tightened in various areas, or the possibility of legal claims from the government and third parties that could result in additional costs to bring the Group’s activities in line with new requirements, address infractions and make reparation of damages.

  © PJSC «Novorossiysk Commercial Sea port» 2013