Before the middle of 2008 the positive tendency of increase of the international ratings of the Russian Federation is observed. According to the classification of Fitch, Moody’s and Standard and Poor’s international rating agencies, Russia received an investment rating according to which the economic and political situation in Russia is estimated as harmless in the short-term prospect. At the end of 2008, under conditions of the continuing world economic crisis sovereign rating has decreased and remains at the level «BBB» (Fitch, Standard & Poor’s) and «Baa1» (Moody's). Nevertheless, recently the positive tendencies can be observed – so, for instant, in December 2009 “Standard & Poor’s” reconsidered the level of forecast from “negative” to “stable” one. Upon final crisis end the favorable factors contributing to increase in the ratings of Russia must play their role, in opinion of agencies, are the economic growth observed in Russia within last several years, caused improvement of the majority of key performance indicators, including proficiency of the account of current operations, and also growth of gold and exchange currency reserves of Russia and reduction of external short-term obligations.
On the other hand, financial problems or aggravated perception of risks of investment in the countries with a developing economy can lower the volume of foreign investments into Russia and render negative influence on the Russian economy. Besides, as Russia makes and exports great volumes of natural gas and oil, the Russian economy is especially vulnerable to changes of the world prices for natural gas and oil, and falling of the price for natural gas and oil can slow down or shake development of the Russian economy. Besides, dynamics of growth of prices for consumer products in the country remains to be the problem. These events can limit access of the issuer to the capital and render adverse influence on purchasing capacity of consumers of the issuer’s products. Also at present the Government of the Russian Federation commenced to implement policy of containment of growth of tariffs for products and services of natural monopolies within the frameworks of anti-crisis program for 2009, this can result in shortage of financing of the issuer’s investment program.
Probability of these risks is estimated as high with consequences for the issuer’s activity varying from average to severe.
Within the frameworks of minimization of the foregoing risks the issuer performs work on reduction of internal costs and optimization of the investment program as well as implements factored policy in the field of attraction of borrowed funds.
The main political risks of the issuer’s activity (in terms of the country risks) are: probability of change of the current policy of the Government of the country. In case of above said events, the following consequences of the issuer’s activity are forecasted: establishing a level of tariff lower than the economically grounded level, nationalization of the issuer’s assets, radical change of the current model of management of distribution grids with possible decentralization / liquidation of IDGC.
At present probability of these risks is estimated as minimal with consequences for the issuer’s activity from average to severe.
Political risks are beyond the control of the issuer because of their scale, but within the frameworks of their minimization the issuer leads active work with superior and regulating organizations in common interests of the industry development.
The issuer was registered as a tax bearer on the territory of the Central Federal District of the Russian Federation being an economically developed region of the country, the center of financial and political activity.
According to the Investment Rating of Regions of Russia 2007-2008 (prepared by the "Expert RA" Rating Agency), the majority of regions (9 out of 11), with which the issuer’s activity is connected, are referred to the territories with moderate investment risks and in various investment potential, one of the regions (Lipetsk region) – to the regions with the minimal investment risks, and one of the regions (Tver region) – to the regions with high investment risks.
Regional risks in activity of the issuer amount to ignoring by the authorized state tariff establishment bodies of the part of economically proved charges declared by the issuer for inclusion in the corresponding tariff. Besides, under conditions of the economic crisis reduction of electric power consumption by large industrial enterprises of regions is possible. The given circumstance can have essential influence on realization of the scale investment program of the issuer, and their probability is high under conditions of the crisis. In order to decrease influence of regional risks on realization of the investment program, the issuer on a constant basis cooperates with the state bodies and other stakeholders (stakeholder relations) for the purpose of the control over and management of the choice of stakeholders concerning their actions in connection with investment projects of the issuer. The issuer performs as well measures on optimization of the investment program financing for the account of reduction of internal costs.
The main political riskof the issuer’s activity at the regional level is possible change of the government of regions with subsequent change of the existing model of relations with the issuer. The principle consequences for the issuer’s activity under these risks are: establishing a level of regional tariff lower than the economically grounded level, absence of support on the part of regional authorities for integration of municipal electric grid assets by the issuer.
At present probability of these risks is estimated as minimal with consequences for the issuer’s activity from insignificant up to medium.
Within the frameworks of minimizing of these risks the issuer conducts constant work on compliance of the long-term programs of development of regions, zones of activity of the issuer’s branches with regional and local authorities as well as interacts actively with superior organizations on the items of activity in regions.
Other negative changes of situation in the regions of the issuer’s activity, which can influence negatively on its activity and economic condition, are not forecasted in the nearest time.
The risks connected with possible military conflicts, introduction of state of emergency and strikes in the country and regions in which the issuer is registered as the tax bearer and/or carries out primary activity.
The probability of military conflicts and introductions of state of emergency in the country and in regions of presence of the issuer is insignificant. In case of occurrence of possible military conflicts, the issuer bears risks of its fixed assets decommissioning.
The risks connected with geographical features of the country and region, in which the issuer is registered as the tax bearer and/or carries out primary activity, including the raised danger of acts of nature, the possible interruption of transport communication due to remoteness and/or inaccessibility, etc.
Geographic features of the region, in which the issuer performs its activity, suppose risk of natural disasters within the autumn and winter period (AWP).These risksare valued by the Company as medium. The issuer implements complex of measures on preparing of the grid complex for autumn and winter period, each branch of the issuer is certified for readiness to AWP. At the constant basis works on reduction of time period, which is necessary for operative rectification of consequences of natural disasters within autumn and winter period, are carried out.
2.5.3. Financial risks
In case of one or several risks listed below, IDGC of Centre, JSC will undertake all possible measures on minimization of negative consequences. To neutralize a part of risks possible measures on the issuer’s actions, following this or that risk described below, are developed. However, it is necessary to remark that preliminary development of appropriate measures, which correspond to the events, is handicapped by uncertainty of the situation development, and parameters of conducted measures will to the great extent depend on particularities of the situation in each certain case. The issuer cannot guarantee that actions directed to overcoming of arisen negative changes will be able to remedy the situation because described factors are beyond the control of the Company.
Risks connected with exchange rates change
Companies conducting foreign economic activity are subject to this risk. It reveals in the terms of shortage of receiving of provided income as a result of direct impact of change of foreign exchange used in foreign economic transaction on expected cash flows from these transactions.
The issuer sells serves carrying out settlements in rubles (currency of the Russian Federation) in the internal market of the Russian Federation, in this connection it is not subject to risks of exchange rate change. In this case it is necessary to underline that the issuer can purchase products from foreign suppliers, value of services of which depends on currency fluctuation, when performing investment activity. In this connection it can be said that exchange risk is minimal for the issuer.
Risks connected with interest rate change
Taking into account absence of definiteness in understanding of terms of attainment of “the bottom” and terms of end of the financial crisis interest rate change is estimated by the issuer as medium.
For the purposes of leveling of credit interest rate growth risk the issuer performs work on interaction with credit organizations, which deal with the budgetary funds (state, constituent entities of the Federation, municipal) as well as with the international financial organizations.
In this case the issuer, being the entity of own monopoly, performs selection of financial organizations for rendering of services by means of open one-stage contest or open auction in accordance with the procedures established by the law of the Russian Federation (the Federal Law No. 135-FZ dated 26.07.2006 “On competitiveness protection”, the Federal Law No. 94-FZ dated 21.07.2005 “On placement of orders for goods supplies, work performance, service rendering for state and municipal needs”). In compliance with the part 4.1 of the Art. 9 of the Law on placement of orders, price of the state order or municipal contract is fixed and cannot change in the course of its fulfillment. Thus, the risk of interest rate change on valid credit contracts decreases.
It has a series of attributes: probability of new types of taxes and duties for performance of individual aspects of business activity, possibility of increase of rate level of the existing taxes and duties, change of terms and conditions of effecting of separate tax payments; probability of cancellation of the tax privileges existing in the field of business activity of the enterprise. Being unpredictable for the enterprise (this is proved by the contemporary domestic fiscal policy) it affects essentially on the results of its financial activity.
Taking into consideration the measures of the Government of the Russian Federation conducted for stimulation of the national economy under the risk conditions, this risk is estimated as minimal.
Risks connected with inflation influence
Change of consumer prices index has certain influence on the profitability level of the issuer and as the consequence on financial situation and possibility of fulfillment of obligations, however, this influence is not the direct dependence factor.
Notwithstanding that the issuer saved activity profitability even at considerable increase if consumer prices level, there are no firm guarantees that possible increase or decrease of consumer prices will result in fall of profitability level of the issuer in future. It is impossible to forecast critical inflation level of the issuer, because except consumer prices level it is necessary to take into account change of actual ruble purchasing power, conjuncture in the regional sales markets and the further policy of the state in relation to tariffs for electric power transmission.
Influence of financial risks on financial statements indicators
change of prices on electric power transmission will impact on the volume of sales income of the issuer and essentially influence on the net profit of the issuer.
Inflation processes resulting in appreciation of materials and raw materials used in production can essentially influence on balance currency increase taking into consideration growth of accounts receivable and devaluation of accounts payable.
Also inflation processes in the economy of the Russian Federation can essentially influence on the net profit of the Company in connection with that opportunities of the issuer relating to increase of prices on electric power transmission are limited by the annual state regulation, that is they cannot be changed by the issuer depending on inflation rate changes, and at the same time the issuer’s expenses expressed primarily in rubles are changes in accordance with inflation rates.
The issuer implements a series of measures intended to decrease of consequences of influence of inflation processes on the activity:
- increase of operating efficiency by means of reduction of production costs;
- performance of works on increase of stake of long-term service contracts for electric power transmission in the total volume of concluded contracts;
- implementation of weighed financial policy.
Political and economic risks
In accordance with the changes of political and economic conjuncture and for the purposes of improvement of bank, judicial, tax, administrative and legislative systems the Government of the Russian Federation performs a series of consequent reforms intended to stabilization of the contemporary Russian economy and its integration to the world system. During the process of reforming of business and legislative infrastructure the risks, such as low liquidity level in the long-term crediting and investment markets as well as inflation level exceeding inflation of the developed countries.
Risks connected with globalization process
Globalization of economic activity is one of principle development trends of the present-day world. Globalization consequences are reflected on economic development practically of all countries of the world, including Russia, which is at the stage of active integration to the world economy.
Globalization factors, included formation of the unified energetic space, enhancement of the international cooperation, establishment of consortiums for implementation of large investment projects, result in increase of competitiveness, enhancement of competitive positions of certain companies and growth of dependence of partners in the consequence of necessity to implement joint projects.
However, in whole, at present time the probability of risks connected with globalization is insignificant for the issuer.
Risks connected with development of crisis signs in the world economy
The world economy is in the state of the global economic crisis accompanied by reduction of consumption, investments as a result recession of industrial production. Financial and economic situation in the world reflected to the great extent at the economy of the Russian Federation.
At the same time under conditions of increasing crisis signs in the world economy there are no guarantees that measures undertaken by the leading economies of the world will allow to compensate negative development of the events. Thus, there is a threat of the further aggravation of the situation, including bankruptcy of significant entities of economic relations, growth of unemployment and social tension, either in developed so in developing countries.
Up to now it is probability of the issuer’s financial risks. Remaining or aggravation of unfavorable conditions in the world financial markets can influence negatively on capability of the issuer to attract new loans and refinance the current part of the debt under former conditions. General decrease of liquidity level typical for the current market situation can affect solvency of counterparts and their capacity to ensure timely redemption of debts before the issuer. Uncertainty of development of the situation the capital markets can require to review forecasts of the issuer in relation to future money flows and reserves for devaluation of financial and non-financial assets.
Under the current conditions the issuer undertakes necessary measures on ensuring of stable activity development, including but not limiting: - reduction of volumes and forming of the investment program with maximum positive combined effectiveness and complying with the requirements related to reliability and quality;
- working out of the item relating to possibility of listing of system forming enterprises;
-conclusion of agreement with credit institution relating to saving of risk limits for the issuer, this implies their obligations on debt refinancing.
The issuer developed strategic model of activity planning under conditions of the global economic crisis, which takes into account different scenarios of development of raw material and finance markets, and in the opinion of the management of the issuer, will allow adequately react to possible aggravation of the situation. In this case taking into account high uncertainty in relation to the further development of crisis signs there are no absolute guarantees that implementation of this strategy make possible to achieve desired results.
2.5.4. Legal risks
Legal risks, in particular, connected with ambiguous treatment of norms of the legislation can lead to incorrect calculation and payment of taxes. For their decrease, the Accounts Department of the issuer constantly works on legitimate improvement of methods of calculation of tax base under various taxes and the control over their conformity with the current legislation.
Besides, there are risks of the losses connected with change of the laws, and also incorrect legal official registration of papers and support of activity of the issuer. For minimization of such risks, practically all operations of the issuer pass obligatory preliminary legal examination.
The issuer (as well as for all joint-stock companies which carry out the activity on the territory of the Russian Federation) runs the risk of change of the laws (federal laws and by-law statutory acts) regulating joint-stock and corporate mutual relations.
The issuer is subject to risks of the appeal by shareholders of the corresponding DGC of large transactions and interested-party transactions (at fulfillment of such transactions without appropriate preliminary approval by the Board of Directors or the General Shareholders Meeting, and also approved with infringement of the established order).
For minimization of the given risks at realization of contractual work, the issuer without fail carries out the preliminary legal analysis of concluded transactions for presence of the bases of carrying out of the preliminary corporate procedures stipulated by the current legislation and/or the Charter. In case of need the corresponding transactions are submitted for consideration by the competent governance bodies of the issuer.
For minimization of the risks connected with mutual relations with shareholders of the companies attached to the issuer (in particular: the risks connected with accounting of the rights to DGC shares; risk of "corporate blackmailing" by shareholders; risk of realization by unfriendly shareholders of the actions directed to failure of general meetings of shareholders of the issuer in the future), keeping the register of shareholders of the issuer and operated companies are performed by the professional registrar - JSC Central Moscow Depositary which has a significant operational experience in the Russian share market. The issuer and companies operated by it carry out a complex of the measures directed to information interaction with shareholders and full observance of legitimate rights and interests of the latter (disclosing of the information in accordance with the procedure stipulated by normative legal acts, and carrying out of regular meetings of management of the companies with the shareholders, the main purpose of which is clarification of pressing issues of the current activity, and also prospects of reforming of power sector; observance of corporate procedures and internal documents).
Considering that the issuer does not carry out and does not plan to carry out the activity outside the Russian Federation, there are no legal risks connected with activity of the issuer on the foreign markets.
The risks connected with change of the currency legislation
The risks connected with change of the currency legislation actually cannot affect the issuer’s activity as the issuer does not plan to carry out the activity outside the Russian Federation, and volume of currency transactions is insignificant and is not able essentially influence on the issuer’s activity.
The risks connected with change of the tax laws
Now tax legal relationship in the Russian Federation is regulated by the Tax Code of the Russian Federation, a number of the federal laws accepted according to the Tax Code of the Russian Federation, laws of entities of the Russian Federation, and also normative legal acts of institutions of local government. The system of lawfully established taxes and tax collections includes, in particular, the value added tax, the profit tax, the property tax, the uniform social tax and other obligatory payments. The corresponding statutory acts quite often contain indistinct formulations, or operate with the terms which do not having specific legal definition. Also official explanations of the Tax Code of Ministry of Finance of the Russian Federation and Federal Tax Service of the Russian Federation are not always available in the necessary volume.
It is taking into account as well that formation of rules and mechanisms of preparation and granting of the tax reporting together with other elements of the system of regulation of tax legal relations are in the competence, first of all, of the tax bodies having the right to make additional tax charges and tax collections charges, to charge the sums of fines, to impose significant penalties resulting in significant increase of tax risks. The management of the issuer thinks that the issuer in full observes the tax laws concerning its activity that, nevertheless, does not eliminate potential risks of its bringing to the tax responsibility in case of changes in the state fiscal policy concerning separate taxes and tax collections, and also change (not in favor of the tax bearer) of judiciary practice on separate categories of tax affairs. In connection with foregoing this risk is estimated as insignificant.
In case of amending the operating order and conditions of the taxation, the issuer is going to plan the financial and economic activity in view of these changes.
The risks connected with change of rules of the customs control and duties
Change of rules of the customs control and duties does not bear any risks since the issuer does not carry out and does not plan to carry out export of services outside the limits of the Russian Federation.
The risks connected with change of requirements to licensing of primary activity of the issuer or licensing of rights to use objects, which availability in its turn is limited (including natural resources)
Possible change of requirements on licensing the primary activity of the issuer can lead to increase in the term of preparation of the documents necessary for reception or prolongation of validity of the license, and also necessity of conformity of the issuer with the requirements set forth. However, as a whole, it is necessary to consider the given risk as insignificant, except for those cases when for reception or prolongations of the license or for realization of the activity which is subject to licensing will be stipulated requirements which cannot be met by the issuer, or conformity which will be connected with excessive expenses.
In case of change of requirements on licensing activity of the issuer or licensing of rights to use of facilities which circulation is limited, the issuer will take necessary measures for reception of the corresponding licenses and sanctions.
The risks connected with change of judiciary practice on the issues connected with the issuer’s activity (including concerning licensing) which can negatively affect results of its activity, and also results of the current litigations in which the issuer participates
The possibility of change of the judiciary practice connected with the issuer’s activity (including concerning licensing) is considered as insignificant and will not have essential influence on its activity.
In case of amending the judiciary practice concerning the issues connected with activity of the issuer, the latter is going to plan its financial and economic activity in view of these changes.