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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 Groups 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 Groups 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 Companys financial results. The interest rate is sensitive to changes in a number of factors outside of the Groups 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 rubles exchange rate against the US dollar. Since the Companys rates are primarily set in US dollars, a strengthening of the rubles exchange rate against the dollar could reduce revenue, profit and margins. Most of the Groups 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 Groups 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 Companys 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 Groups 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.