Fiancial instruments

The Group’s principal financial instruments comprise cash and cash equivalents, investments, bank loans, bonds and promissory notes issued and finance leases liabilities. These instruments serve to finance the Group’s operations and capital expenditures; its corporate financial transactions such as share repurchase and acquisition strategy; place available funds in course of cash management. Other financial assets and liabilities such as trade receivables and trade payables arise directly from the Group’s operations. The following table presents the carrying amounts of financial assets and liabilities as at 31 December 2012, 2011 and 2010:


Classes Categories 31 December 2012 31 December 2011 31 December 2010
Cash and cash equivalents Loans and receivables 10,370 7,380 12,694
Trade and other receivables Loans and receivables 34,526 29,492 26,093
Available-for-sale financial assets at cost Available-for-sale 15 9 35
Available-for-sale financial assets at fair value Available-for-sale 2,371 3,549 1,025
Loans Loans and receivables 1,064 4,003 5,499
Total financial assets   48,346 44,433 45,346
         
Bank and corporate loans Liabilities at amortized cost 198,236 157,371 111,187
Bonds Liabilities at amortized cost 11,613 8,889 22,700
Promissory notes Liabilities at amortized cost 160 220 3,619
Vendor financing Liabilities at amortized cost 2,730 2,786 2,957
Finance lease liabilities Liabilities at amortized cost 943 2,784 5,632
Interest payable Liabilities at amortized cost 619 668 1,483
Other borrowings Liabilities at amortized cost 105 105 92
Trade and other payables Liabilities at amortized cost 55,192 31,774 31,894
Non-hedge derivative Financial liabilities at fair value through profit and loss - 24 70
Total financial liabilities   269,598 204,621 179,634

The fair value of cash and cash equivalents, current receivables, trade payables, other current financial assets and liabilities approximate their carrying amount largely due to the short-term maturity of these instruments.

The fair value of long-term debt investments, long-term accounts receivable and non-current accounts payable correspond to the present values of the payments related to the assets and liabilities, taking into account the current interest rate parameters that reflect market-based changes to terms and conditions and expectations.

Available for sale investments accounted for at cost include unquoted equity investments whose value cannot be measured reliably. Quoted prices are not available for these investments due to the absence of an active market. It is also impracticable to derive fair value using the similar transaction method. The discounting cash flow method cannot be applied to such investments as there are no reliably determinable cash flows related to them.

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
  • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

  2012 2011 2010
Available-for-sale financial assets      
Long-term equity investments at fair value      
Level 1 6 776 1,007
Level 2 2,365 2,773 18
Level 3 - - -
Total long-term equity investments at fair value 2,371 3,549 1,025
Financial liabilities at fair value through profit and loss      
Non-hedge derivatives      
Level 1 - - -
Level 2 - 24 70
Level 3 - - -
Total non-hedge derivatives - 24 70

Income and expenses on financial instruments


  Finance costs Other investing and financing gains and losses   Equity  
2012 Bad debt income/(expense) Interest expense Interest income Dividend income Gains/(losses) on asset disposal Fair value change Impairment loss (reversal of impairment) Other Foreign exchange gains/(losses) Fair value reclassification Fair value change Total
Cash and cash equivalents - - 281 - - - - - (24) - - 257
Trade and other receivables (1,318) 10 46 - - - - - 5 - - (1,257)
Available for sale financial instruments - - - 32 804 (9) 145 - - (740) (407) (175)
Loans - - 212 - - - - - (11) - - 201
Total financial assets (1,318) 10 539 32 804 (9) 145 - (30) (740) (407) (974)
Bank and corporate loans - (13,712) - - - - - - 215 - - (13,497)
Bonds - (531) - - - - - - - - - (531)
Promissory notes - (115) - - - - - - 9 - - (106)
Vendor financing - (125) - - - - - - 70 - - (55)
Finance lease liabilities - (388) - - - - - - - - - (388)
Interest payable - - - - - - - - - - - -
Trade and other payables and non-hedge derivatives - - - - - 24 - - 210 - - 234
Total financial liabilities - (14,871) - - - 24 - - 504 - - (14,343)

Income and expenses on financial instruments


  Finance costs Other investing and financing gains and losses   Equity  
2011 Bad debt income/(expense) Interest expense Interest income Dividend income Gains/(losses) on asset disposal Fair value change Impairment loss (reversal of impairment) Other Foreign exchange gains/(losses) Fair value reclassification Fair value change Total
Cash and cash equivalents - -   332 - - - - - (154) - 178
Trade and other receivables (572) 21   77 - - - - - 141 - (333)
Available for sale financial instruments - -   - 27 - - - - - 15 42
Loans - -   428 - - - 76 - (88) - 416
Total financial assets (572) 21 837 27 - - 76 - (101) 15 303
Bank and corporate loans - (9,414)   - - - - - - (32) - (9,446)
Bonds - (1,589)   - - - - - - - - (1,589)
Promissory notes - (74)   - - - - - - - - (74)
Vendor financing - (148)   - - - - - - (125) - (273)
Finance lease liabilities - (680)   - - - - - - (2) - (682)
Interest payable - (10)   - - - - - - (7) - (17)
Trade and other payables and non-hedge derivatives - -   - - - 51 - (1) (110) - (60)
Total financial liabilities - (11,915) - - - 51 - (1) (276) - (12,141)

Income and expenses on financial instruments


  Finance costs Other investing and financing gains and losses   Equity  
2010 Bad debt income/(expense) Interest expense Interest income Dividend income Gains/(losses) on asset disposal Fair value change Impairment loss (reversal of impairment) Other Foreign exchange gains/(losses) Fair value reclassification Fair value change Total
Cash and cash equivalents - -   989 - - - - - 22 - 1,011
Trade and other receivables (736) -   19 - - - - - (21) - (738)
Available for sale financial instruments - -   - 27 74 - 4 - - 155 260
Loans - -   1,266 - - - 16 - (283) - 999
Total financial assets (736) - 2,274 27 74 - 20 - (282) 155 1,532
Bank and corporate loans - (5,612)   - - - - - (37) 168 - (5,481)
Bonds - (2,933)   - - - - - - - - (2,933)
Promissory notes - (399)   - - - - - - - - (399)
Vendor financing - (184)   - - - - - - 3 - (181)
Finance lease liabilities - (1,170)   - - - - - - (12) - (1,182)
Interest payable - (39)   - - - - - - 2 - (37)
Other borrowings and hedge derivatives - (64)   - - - - - (48) - - (112)
Trade and other payables and non-hedge derivatives - (53)   - - - 39 - - 27 - 13
Total financial liabilities - (10,454) - - - 39 - (85) 188 - (10,312)

(a) Credit risk

Each class of financial assets represented in the Group’s statement of financial position to some extent is exposed to credit risk. Management develops and implements policies and procedures aiming to minimize the exposure and impact on the Group’s financial position in case of risk realization.

Financial instruments that could expose the Group to concentrations of credit risk are mainly trade and other receivables. The credit risk associated with these assets is limited due to the Group’s large customer base and ongoing procedures to monitor the credit worthiness of customers and other debtors.

The Group’s accounts receivable are represented by receivables from the Government and other public organizations, businesses and individuals each of them bearing different credit risk. Collection of receivables from the Government and other public organizations is mainly influenced by political and economic factors and not always under full control of the Group. However, management undertakes all possible efforts to minimize the exposure to risk of receivable from this category of clients. In particular, creditworthiness of such subscribers is assessed based on financing limits set by the Government. Management believes there were no significant unprovided losses relating to these or other receivables as at 31 December 2012, 2011 and 2010.

To reduce risk of exposure on receivables from businesses and individuals the Group implements a range of procedures. Credit risk is determined based on a summary of probabilities of occurrences and possible impact of events negatively influencing the customer’s ability to discharge its obligation. A credit rating is attributed to a customer on initial stage of cooperation and, then, reassessed periodically based on credit history. As a part of its credit risk management policy, the Group arranges preventive procedures which are represented by but not limited to advance payments, request for collaterals and banks and third parties guarantees. For collection of receivables, which are past due, the Group takes a variety of actions from suspension of rendering of services to taking legal action.

The Group deposits excess cash available with several Russian banks and makes investments in bills of exchange. To manage the credit risk related to deposit of cash available with banks, management of the Group implements procedures to periodically assess the creditworthiness of the banks. To facilitate this assessment, deposits are mainly placed with banks where the Group has already had current settlement account and can easily monitor activity of such banks. Prior to investing in bills of exchange, management of the Group performs an analysis of financial position of the issuer and monitors its creditworthiness over periods up to maturity.

Maximum exposures to credit risk are limited to the net carrying amounts of respective financial assets. Such exposure is mitigated by collaterals held by the Group.

(b) Liquidity risk

The Group monitors its risk of a shortage of funds by preparing and monitoring compliance with cash flow budgets. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, bonds and finance leases. Cash flow budgets consider the maturity of both cash inflows and outflows from the Group’s operations. Based on projected cash flows the decision is taken on either investment of free cash or attracting financing required. Realization of liquidity risk management policy provides the Group with sufficient cash to discharge its obligation on a timely basis. However, since the companies comprising the Group were managed on individual basis in 2010-2012 no financing was provided within the Group introducing the need for certain companies to raise financing from third parties rather than from fellow subsidiaries with excess liquidity.

Maturity analysis as at 31 December 2012, 2011 and 2010 represented below shows undiscounted cash flows, including estimated interest payments:


  2013 2014 2015 2016 2017 and later Total
31 December 2012            
Bank and corporate loans 74,322 47,489 60,693 47,324 8,172 238,000
Bonds 2,680 855 855 855 10,731 15,976
Promissory notes 151 33 5 11 - 200
Vendor financing 2,665 9 9 9 38 2,730
Finance lease liabilities 903 46 18 18 218 1,203
Other borrowings and hedge derivatives 71 30 1 4 - 106
Trade and other payables and non-hedge derivatives 53,192 - - - 1 53,193
Total financial liabilities 133,984 48,462 61,581 48,221 19,160 311,408

  2012 2013 2014 2015 2016 and later Total
31 December 2011            
Bank and corporate loans 81,328 51,005 13,496 16,018 14,647 176,494
Bonds 5,085 2,022 351 351 4,250 12,059
Promissory notes 185 30 17 - 8 240
Vendor financing 2,780 8 8 8 47 2,851
Finance lease liabilities 2,205 847 44 18 218 3,332
Other borrowings and hedge derivatives 77 13 10 9 12 121
Trade and other payables and non-hedge derivatives 31,798 43 1 1 1 31,844
Total financial liabilities 123,458 53,968 13,927 16,405 19,183 226,941

  2011 2012 2013 2014 2015 and later Total
31 December 2010            
Bank and corporate loans 37,121 49,164 33,993 4,303 2,487 127,068
Bonds 20,091 4,018 721 - - 24,830
Promissory notes 2,156 464 - 1,115 8 3,743
Vendor financing 3,127 52 - - - 3,179
Finance lease liabilities 3,498 2,034 758 44 256 6,590
Other borrowings and hedge derivatives 207 23 28 13 13 284
Trade and other payables and non-hedge derivatives 31,835 103 36 18 - 31,992
Total financial liabilities 98,035 55,858 35,536 5,493 2,764 197,686

(c)  Market risks

Significant market risk exposures are interest rate risk, exchange rate risk and other price risk. Exposure to other price risk arises from available for sale investments quoted on active markets.

Interest rate risk

Interest rate risk mainly relates to floating rate debt primary denominated in US dollars, Russian Roubles and euros and financial instruments denominated in Russian Roubles. To manage this risk, the Group entered into interest rate swaps to hedge significant amounts of its floating rate debt. Other borrowings do not materially influence the exposure to interest risk.


  31 December 2012 31 December 2011 31 December 2010
Fixed rate instruments      
Financial assets 11,440 14,806 19,253
Financial liabilities (167,014) (166,743) (126,523)
  (155,574) (145,737) (107,270)
Variable rate instruments      
Financial assets - 135 -
Financial liabilities (47,391) (6,200) (21,147)
  (47,391) (6,065) (21,147)

Fair value sensitivity analysis for fixed rate instruments

The Group does not account for any fixed rate financial instruments as fair value through profit or loss.

Cash flow sensitivity analysis for variable rate instruments

The table below demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax.


  2012 2011 2010
LIBOR (+0.1%) (1) (6) (10)
LIBOR (-0.1%) 1 6 10
Euribor (+0.1%) (1) - (1)
Euribor (-0.1%) 1 - 1
MosPrime (+0.1%) (119) (2) (9)
MosPrime (-0.1%) 119 2 9
CB refinancing (+0.1%) (2) - (3)
CB refinancing (-0.1%) 2 - 3

Foreign exchange risk

Currency risk is the risk that fluctuations in exchange rates will adversely affect the Group’s cash flows. As a result, these fluctuations in exchange rates will be reflected in respective items of the Group’s consolidated statement of comprehensive income, statement of financial position and/or statement of cash flows. The Group is exposed to currency risk in relation to its assets and liabilities denominated in foreign currencies, mostly from accounts receivable and payable from operations with international telecom operators, accounts payable for equipment, borrowings issued in foreign currencies. The Group does not have formal procedures to reduce its currency risks.

Financial assets and liabilities of the Group presented by currency as at 31 December 2012, 2011 and 2010 were as follows:


  31 December 2012 31 December 2011 31 December 2010
  USD EUR USD EUR USD EUR
Cash and cash equivalents 719 17 272 32 568 16
Trade receivables 1,252 670 1,283 310 690 300
Loans and receivables 477 - 259 - 1,586 -
Bank and corporate loans (2,232) (487) (4,364) (770) (9,494) (1,520)
Vendor financing (2,553) - (2,204) - (1,969) -
Promissory notes (151) - - - - -
Finance lease liabilities - - - - (1) -
Trade and other payables and non-hedge derivatives (4,499) (249) (2,269) (242) (2,537) (416)
Net exposure (6,987) (49) (7,023) (670) (11,157) (1,620)

The table below demonstrates the sensitivity to a reasonably possible change in exchange rates, with all other variables held constant, of the Group’s profit before tax:


  31 December 2012 31 December 2011 31 December 2010
  USD EUR USD EUR USD EUR
Strengthening of the currency (+10%) (699) (5) (702) (67) (1,116) (162)
Weakening of the currency (-10%) 699 5 702 67 1,116 162

The analysis was applied to monetary items denominated in relevant currencies at the reporting date.

Other price risk

As at 31 December 2012, the Group’s assets include investments in quoted securities subject to other price risk. To mitigate this risk, the Group regularly analyzes market securities trends and makes a decision to sell a security, when necessary.

The table below demonstrates the sensitivity to a reasonably possible change in market indexes for securities, with all other variables held constant, of the Group in terms of the result of fair value revaluation recognized in other comprehensive income.


  Increase/decrease
in percentage point
Effect on revaluation result
recognized in other comprehensive
income
2012
MICEX + 30.0% 2
MICEX -  30.0% (2)
2011    
MICEX + 30.0% 233
MICEX -  30.0% (233)
2010    
MICEX + 30.0% 387
MICEX -  30.0% (497)

(d) Capital management policy

Capital management policy of the companies comprising the Group is primarily focused on increasing credit ratings, improving financial independence and liquidity ratios, improving the structure of payables, and reducing cost of borrowings. Among the main methods of capital management are profit maximization, investment program management, sale of assets to reduce debt, debt portfolio management and restructuring, use of different classes of borrowings. In addition, the companies of the Group are subject to externally imposed capital requirements, which are used for capital monitoring. There were no changes in the objectives, policies and processes of capital management during 2010-2012.

The Boards of directors of the companies comprising the Group review their performance and establish a variety of key performance indicators which are based on Russian statutory accounts. The companies comprising the Group monitor and manage their debt using financial independence ratio and net debt/equity, net debt/OIBDA ratios.

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