2010 annual report by AFI Development

AFI Development PLC Annual Report 2010 Contents Section 1: Executive Summary 6HFWLRQ &KDLUPDQ¶V 6WDWHPHQW Section 3: Executive Director¶V 6WDWHPHQW Section 4: Principal Risks and Uncertainties Affecting the Company Section 5: Operational Review Our Market Our Strategy Our Portfolio Section 6: Board of Directors and Corporate Governance Section 7: Financial Statements Management Discussion and Analysis Audited Report and Consolidated Financial Statements

1 Section One: Executive Summary MISSION STATEMENT

The mission of AFI Development is to be one of the leading property developers focused on Moscow, Russia. Our key priority is timely execution of existing projects to achieve the best return for our shareholders. AFI Development aims to achieve this objective through its long standing real estate investment experience, qualified local staff and flexible and structured approach to project management, coupled with the highest standards of design, construction and quality of customer service.

Developments during 2010 x

Significantly expanded portfolio of completed projects following completion of AFIMALL City (formerly Mall of Russia) with approximately 75% of the retail shops in the Mall let to a wide mix of tenants.

Aquamarine Hotel on Ozerkovskaya Embankment, which was opened at the end of 2009, started its operations in the beginning of 2010 and achieved high levels of occupancy by year end.

Completion of Paveletskaya I Office Complex with significant progress on pre-leasing.

Significant progress on development at the fully-financed Ozerkovskaya Embankment Phase III project which remains on track for completion in 2011.

Commencement of development of the Kalinina Hotel in Zheleznovodsk following completion of the tender for, and appointment of, WKH SURMHFWÂśV JHQHUDO FRQWUDFWRU DQG approval of the full development budget of US$20 million. Full financing for the project was secured through a Russian rouble loan from Sberbank.

Market landscape x

2010 was a turning point in the Moscow real estate sector as demand, rental levels and valuations returned to growth.

Prime rents in Moscow were among the highest in Europe following a 5% increase in 2010. Prime base rates are now the most expensive in Europe, at US$4,000 per sqm per year (around 10% higher than London).

Effective vacancy rate for the highest quality office space in Central Moscow is at a very low estimated level of 5% with take-up rates for modern office space up by 82% over 2009. The level of prime base rents is one of the highest in Europe, at US$ 900 per sqm per year, only exceeded by Paris and London, increasing by 29% in 2010.

Residential real estate remains in high demand, reflected in the return of elite residential segment volumes to pre-crisis levels (430 apartments per annum) and prices to 25% below pre-crisis levels.

Economic growth is creating demand for quality space that is currently lacking and supply is not yet coming forward in order to rebalance the market in the coming years. If recent positive economic trends are sustained, demand will expand at an even faster rate, leading to further upward pressure on values.

*LYHQ LWV SRVLWLRQ DV WKH FRXQWU\ÂśV ILQDQFLDO DQG FRPPHUFLDO FHQWUH 0RVFRZ LV H[SHFWHG WR benefit from the overall improvement in market conditions going forward, with higher growth in all real estate segments expected compared to other parts of the country.

Strategy

0DQDJHPHQWÂśV SULRULW\ LV WR JHQHUDWH D UHWXUQ IRU VKDUHKROGHUV WKURXJK WKH GHYHORSPHQW RI real estate projects with a current focus on Moscow. In 2010, we continued to focus on developing our fully-funded core projects including AFIMALL City, Ozerkovskaya Embankment (Phase III), Paveletskaya Office Complex and Kalinina Hotel. Â

2 x

Our success at bringing projects to completion in 2010 means that we have been able to realise value through sales, especially of residential properties, with seven apartments sold at the Four Winds and eighteen at the Ozerkovskaya Embankment Phase 2 developments. Our expectation in the medium-term is that the Moscow real estate market will continue to offer one of the highest development potentials in Europe due to its size and its position as the largest financial centre in Russia, with high volumes of business activity and one of the largest capital centres in Europe. We therefore plan to maintain our development focus on Moscow until market conditions improve further and at the same time continue to review our land bank outside Moscow and reactivate select projects based on availability of financing and strength of demand.

Premium listing on the London Stock Exchange

The Company obtained a Premium Listing of its B shares on the London Stock Exchange Âł/LVtLQJÂ´ ZKLFK commenced trading on 5 July 2010 under the ticker AFRB, the first company focused on Russian real estate to obtain such a listing. Â

7KH &RPSDQ\ÂśV commitment to corporate governance was reiterated through the appointment of a further two independent non-executive directors, Michael Sarris and Panayiotis Demetriou, to the Board of Directors in 2010.

2010 Financial highlights

Adjusted Net Asset Value per share of US$1.65, up by 7.1% from US$1.54 as at 30 June 2010 and 1.4% from US$1.62 as at 31 December 2009.

Net Asset Value of US$1.73 billion, up 1.4% from US$1.70 billion as at 31 December 2009 (based on the valuation of our projects portfolio independently verified by Jones Lang LaSalle LLC and project costs).

Investment portfolio valued at US$2.31 billion as at 31 December 2010, an increase of 20% since the last valuations carried out on 31 December 2009 and 31 May 2010 of US$1.92 billion.

Profit for the year of US$25.88 million in comparison to a loss of US$2.66 million in 2009.

US$93.92 million gain from revaluation of investment portfolio as opposed to a gain of US$38.92 million in 2009 driven mainly by revaluation of AFIMALL City (up by US$96.23 million), Ozerkovskaya phase III (up by US$66.65 million) and Four Winds (up by US$20.01). The Company decided to write-off the Kuntsevo project (US$79.89 million) due to project uncertainties.

Strong cash position retained at US$129.84 million and the Company continues to access debt financing for its development projects.

Forward--looking Statements 7KLV GRFXPHQW DQG WKH GRFXPHQWV IROORZLQJ PD\ FRQWDLQ FHUWDLQ ÂłIRUZDUG-ORRNLQJ VWDWHPHQWVÂ´ ZLWK respHFW WR WKH &RPSDQ\ÂśV ILQDQFLDO FRQGLWLRQ UHVXOWV RI RSHUDWLRQV DQG EXVLQHVV DQG FHUWDLQ RI WKH &RPSDQ\ÂśV SODQV DQG REMHFWLYHV ZLWK UHVSHFW WR WKHVH LWHPV Forward-looking statements are sometimes, but not always, identified by their use of a date in the IXWXUH RU VXFK ZRUGV DV ÂłDQWLFLSDWHVÂ´ ÂłDLPVÂ´ ÂłGXHÂ´ ÂłFRXOGÂ´ ÂłPD\Â´ ÂłVKRXOGÂ´ ÂłH[SHFWVÂ´ ÂłEHOLHYHVÂ´ ÂłLQWHQGVÂ´ ÂłSODQVÂ´ ÂłWDUJHWVÂ´ ÂłJRDOÂ´ RU ÂłHVWLPDWHV Â´ %\ WKHLU YHU\ QDWXUH IRUZDUG-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, changes in the economies and markets in which the Company operates; changes in the regulatory and competition frameworks in which the Company operates; changes in the markets from which the Company raises finance; the impact of legal or other proceedings against or which affect the Company; and changes in interest and exchange rates. Any written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to the Company or persons acting on their behalf are expressly qualified in

3 their entirety by the factors referred to above. The Company does not intend to update any forward-looking statements.

4 6HFWLRQ 7ZR &KDLUPDQ¶V 6WDWHPHQW

I am pleased to report that 2010 has been a year of significant achievements for AFI Development. Against the background of an improving real estate sector in Russia, we demonstrated our position as one of the strongest operators in the Russian property development sector through our ability to complete and progress projects across the breadth of our portfolio. In addition to bringing projects to completion, including our major AFIMALL City development, and advancing other developments to their final stages, we continued residential sales and opened a four star hotel. After two difficult years when Moscow property markets felt the impact of the global financial crisis, WKH PDUNHW¶V UHFRYHU\ JDWKHUHG SDFH LQ 7KH UHFRYHU\ RI WKH 5XVVLDQ HFRQRP\ KDV GLUHFWO\ influenced the Moscow property market as rental levels have started to rise again, increasing by up to 15% for retail properties in 2010. The vacancy rate for Moscow shopping centres averaged 7% through 2010. The office segment slowed considerably during the crisis, but we now see high demand for quality Class A space and rental levels have returned to growth. Base rates in Moscow continue to be among the highest in Europe. At the same time, we have observed increased interest in Moscow among domestic and international real estate investors. As our progress in 2010 and strong market position demonstrate, only developers with high quality projects in good locations and good relationships with lenders have been able to come through the last few years able to advance their developments effectively. Our projects are strongly positioned within the Moscow market. They consist of quality developments in well--chosen locations and thus benefit from the high levels of demand for such properties, which remain in short supply. On this basis, we are implementing our long-term strategy, focused on Moscow and differentiating between completed developments to hold and to sell. We intend to retain our high quality commercial properties, growing our commercial portfolio and generating cash flow, while we will sell our residential developments. The success of our projects has been reflected in our financial performance. The Company returned to profitability in 2010 and maintained a strong cash position with approximately US$130 million at year-end. Reflecting the recovery in the real estate sector. during 2010, Net Asset Value grew by 1.4% and total revenues increased by 19% to US$75 million. AFI Development is well placed among Russian developers, with its ability to realise major projects in the heart of Moscow. In 2010, we obtained a Premium Listing for the Company on the London Stock Exchange, becoming the only company focused on Russian real estate development to have such a Listing. As part of our commitment to strengthen our corporate governance, we have appointed a further two independent directors, Michael Sarris and Panayiotis Demetriou. Michael and Panayiotis bring to the Board a high level of experience from their backgrounds at the World Bank and the European Parliament, respectively. These appointments increased WKH QXPEHU RI LQGHSHQGHQW GLUHFWRUV RQ WKH &RPSDQ\¶V %RDUG WR five and consequently the majority of the members of the Board of Directors are independent non-executive directors. On behalf of the Board, we welcome their appointments and also wish to record the thanks of the Board to Nadav Grinshpon and Avraham Barzilay, who resigned as directors in 2010, having made a significant contribution to the growth of the Company in recent years. Following the debt restructuring performed by our parent company, Africa Israel Investments Ltd, and its bondholders, the free float of the company has increased to 36%, which is expected to benefit all our shareholders through the potential for increased liquidity in our stock. During our ten years of operating in Russia we have shown our capacity to deliver large--scale developments that are transformative of their local environments. AFI Development is proud to be a part of building Moscow as a leading global centre for the 21st Century and has already completed real estate projects with a combined total of over 400,000 sqm of commercial and residential space. Amongst these is AFIMALL City, our largest project, placing us at the heart of

5 0RVFRZÂśV QHZ ILQDQFLDO GLVtrict, which is less than half completed, but already attracts over 50,000 workers and visitors daily. We see many more years of growth ahead for Moscow and intend to be present in the market for the long-term, bringing forward major developments that meet the evolving needs of the city. We take our responsibilities as a developer very seriously and insist on the highest standards from our employees and contractors, so that AFI Development makes a positive contribution to the living and working environmenW RI 0RVFRZÂśV LQKDELWDQWV We look forward to 2011 as another year of growth in the Moscow property sector. We anticipate a significant level of rental revenue this year coming from our newly opened retail project AFIMALL City. We intend to continue the development of our core projects and selectively activate new projects within our pipeline, ready to meet demand at the right time. We believe we are well positioned within the Moscow real estate sector and on this basis we will create value for all our shareholders. In addition, we remain committed to further strengthening our corporate governance policies and enhancing our internal controls and disclosure procedures. We have an established track record as a developer of major projects but increasingly we will be positioned as the owner of completed high quality real estate developments in central Moscow. We intend to grow our portfolio of revenue generating properties in the coming years. On behalf of the Board of Directors of AFI Development I would like to thank all our shareholders, customers and employees for their support of the Company. As we look around Moscow we can see the results of our work and co-RSHUDWLRQ WDNLQJ VKDSH DV SDUW RI WKH FLW\ÂśV FRPPHUFLDO DQG residential landscape. AFI Development intends to EH SDUW RI 0RVFRZÂśV IXWXUH WR WKH EHQHILW RI DOO its stakeholders.

6 Section Three: Executive DirectorÂśV Statement The Company demonstrated in 2010 its position as one of the strongest operators in the Russian property development sector through an ability to complete and progress projects across the breadth of our portfolio. We have completed projects, continued residential sales and commenced operation of a four star hotel which opened at the end of 2009. Our projects are strongly positioned within the Moscow market, being quality developments in well--chosen locations and benefiting from the high levels of demand for such properties, which remain in short supply. With the passing of the global financial crisis, the Moscow real estate sector has started to grow again, interest rates are falling and banks are expanding their lending portfolios. However, recent \HDUV KDYH WHVWHG 0RVFRZÂśV GHYHORSHUV DQG RQO\ WKRVH FRPSDQLHV WKDW HPHUJHG VXFFHVVIXOO\ from the global financial crisis are able fully to take advantage of this new situation. AFI Development has managed its way through all these challenges and stands with its reputation and relationships enhanced. Now, as activity in the market revives, we are able to move ahead in a very competitive manner. On this basis we are implementing our long term strategy and differentiating between completed developments to hold and to sell. We intend to retain our high quality commercial properties, growing our commercial portfolio and generating cash flow, while we will sell our residential developments. Portfolio Highlights - 2010 AFIMALL City Our major accomplishment in 2010 was the completion of construction of AFIMALL City. With a total gross building area (GBA) of nearly 180,000 sqm, and gross leasable area (GLA) of 107,000 sqm, occupied by a shopping gallery of nearly 400 shops and a 11-screen movie theatre and with D QXPEHU RI DGGLWLRQDO RXWVWDQGLQJ OHLVXUH IDFLOLWLHV $),0$// &LW\ LV RQH RI (XURSHÂśV ODUJHVW DQG most ambitious retail developments in recent years. AFIMALL City introduces a new standard of quality to the Russian retailing sector and will offer visitors a combined shopping, food and entertainment experience unmatched by any one location in Moscow. On March 25, 2011, we reached a non--binding understanding with the Moscow City administration regarding the purchase from the City of Moscow of its 25% share in AFIMALL City and 2,700 parking lots adjacent to AFIMALL City, for a total consideration of approximately US$ 310 million. This is a substantial achievement which will allow us to not only complete the fit-out of the parking facility to make it fully available to customers, but also provide us with 100% of the rental income from this highly promising real estate development. Ozerkovskaya Embankment The Aquamarine Hotel officially opened on Ozerkovskaya Embankment in 2010. As a four star hotel in a key location, it has seen occupancy levels of up to 70% for its 159 rooms and is positioned in the upper mid scale segment, the fastest growing sector of the Moscow hotel market. Paveletskaya Construction at the Paveletskaya Business Park is now completed and is expected to open shortly. On March 22, 2011, we leased the Paveletskaya Office Complex to a single tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation ROSATOM. An 11-month lease agreement was signed with ZAO GREENATOM, which will roll over a 3-year period once the ownership certificate has been obtained, which is expected before the end of the year. The lease will yield annualised revenue of US$4.7 million, excluding VAT. Ozerkovskaya Embankment Phase III Our Ozerkovskaya Embankment Phase III project is expected to be completed this year on schedule. During 2010, the Company secured financing for the final stages of the project in the form of a loan from Sberbank of US$74 million. Negotiations with potential tenants are now intensively underway.

7 Tverskaya Zastava Shopping Centre On March 25, 2011, the Company announced that it had reached a non-binding understanding with the Moscow City administration to transfer its development rights in the Tverskaya Zastava Shopping Centre to the City of Moscow in exchange for being fully compensated for its development costs incurred in the project to date. Such compensation may take the form of the City of Moscow granting additional building rights for the Company's other projects. The City of Moscow intends to convert the retail space into an underground parking facility at its own expense. As part of the non-binding understanding reached with the City of Moscow, it is intended that AFI Development will remain the owner of the projects surrounding Tverskaya, equating to nearly 350,000 of commercial and residential space. It is also intended that such projects will retain their key development criteria and it is the Company's understanding that the current planning documentation will remain in place. Kossinskaya In August 2009, this completed project was sold to a third party for US$195 million, with the Company receiving approximately US$70 million by 31 December 2009. During 2010, the buyer served AFI Development with a warrant for indictment, submitted in the District Court of Nicosia, Cyprus, whereby the buyer has demanded, inter alia, repayment of approximately US$25 million and approximately US$47 million out of the purchase price, reimbursement in the amount of approximately US$17 million for damages and additional reimbursement of US$2.5 million per each month of delay in the aforementioned payments. As of the date of this statement, the buyer has submitted a statement of claim, but has not yet submitted any supporting documentation in relation to these claims. AFI Development intends to serve its response within the time frames set forth under the applicable law. According to the legal advisors of the Company, the chances of defending the claim are more than 50%. Nonetheless, AFI Development is currently negotiating with the buyer regarding possible settlement options. Kalina Hotel -Zheleznovodsk Inspired by the success of Plaza Spa in Kislovodsk, the Company started the development of DQRWKHU VLPLODU SURMHFW LQ WKH 5XVVLDÂśV VRXWKHUQ UHJLRQ LQ WKH FLW\ RI =KHOH]QRYRGVk: the Kalina Hotel. The project envisages renovation of an existing building to a 3--star hotel with sanatorium facilities. During $), 'HYHORSPHQW FRPSOHWHG D WHQGHU IRU DQG DSSRLQWHG WKH SURMHFWÂśV JHQHUDO contractor and approved the full development budget of US$20 million. Full financing for the project was secured through a Russian rouble loan from Sberbank. Valuation $V DW 'HFHPEHU -RQHV /DQJ /D6DOOH //& Âł-//Â´ RXU LQGHSHQGHQW DSSUDLVHUV YDOXHG our portfolio of yielding properties at US$161.65 million, our portfolio of commercial and residential projects under development at US$1,605.20 million, our portfolio of residential properties at US$58.10 million, our hotel portfolio at US$97.90 million and our land bank portfolio at US$385.85 million. Consequently, the total value of our investment portfolio, as valued by JLL, as at 31 December 2010, is US$2.31 billion. This figure represents a 20% increase in the value of our portfolio since the last valuations by JLL as at 31 December 2009 and 31 May 2010. Major drivers of the revaluation include the positive progress achieved on our major project AFIMALL City, which was fully constructed by the end of 2010 and 75% pre-leased, progress on Ozerkovskaya and Paveletskaya projects as well as increased prices for our remaining residential space for sale at Four Winds and Ozerkovskaya Embankment Phase II. Improving market conditions that we observed in Russia in 2010 also had a positive influence on our appraiserÂśs views of rent levels and property yields in Moscow. The aforementioned increase of the total value of our portfolio takes into account the write--off of the Kuntsevo project, along with several additional smaller projects. 0DQDJHPHQWÂśV SULRULW\ LV WR JHQHUDWH D UHWXUQ IRU VKDUHKROGHUV WKURXJK WKH GHYHORSPHQW RI Moscow real estate projects. Our success at bringing projects to completion in 2010 means that we have been able to realise values through sales, especially of residential properties. Sales of

8 premium class residential property continued, with seven apartments sold at the Four Winds and eighteen at the Ozerkovskaya Embankment Phase II developments. Throughout our existence we have maintained a conservative stance on valuations. After a period of declining valuations following the global financial crisis we now see signs of a sustained recovery enabling us to realise value for shareholders through growth in asset value in the coming years. Looking Forward We believe 2011 will represent new opportunities in the Moscow real estate sector and consequently, as property value and rental levels have improved we are reactivating projects from our extensive land bank, such as Bolshaya Pochtovaya. We intend to commence work on the residential project at the Paveletskaya development, on three new projects adjacent to Tverskaya Zastava and on Otradnoye, a residential development in the Moscow region. Our land bank represents a pipeline of potential projects into the future, with a focus on attractive Moscow locations. Our intentions for future developments as stated above are subject to market conditions at the relevant time, and our ability to obtain financing for these projects. :H ZHOFRPH WKH IRFXV RI WKH QHZ 0D\RU RI 0RVFRZ RQ XSJUDGLQJ WKH FLW\ÂśV LQIUDVWUXFWXUH ZKLFK will be positive for our existing and planned developments. This focus will benefit companies with existing portfolios of projects and track records of accomplishing complex district developments, so we believe this objective fits very well with $), 'HYHORSPHQWÂśV DSSURDFK. We have calibrated the implementation of our project portfolio against market demand and returns, so that it consists of different groups of developments, defined by their stage of completion. Construction work on developments such as AFIMALL and the Paveletskaya Business Park has finished and these projects will be income generating in 2011. Construction work is continuing at developments such as Ozerkovskaya Embankment and Tverskaya Zastava. AFI Development retains the financial strength and flexibility to adapt to market conditions as they evolve. Its leverage remains relatively low, with a debt to equity ratio of 25%. This is due to the &RPSDQ\ÂśV DELOLW\ WR EDODQFH OLTXLGLW\ IURP D QXPEHU RI VRXUFHV LQFOXGLQJ FDVK SURFHHGV IURP WKH IPO and sales of completed projects, as well as bank loans to projects with an outstanding balance of approximately US$453 million (at the Rouble/Dollar exchange rate as at 31 December 2010). All of our current projects are fully-funded to completion through secured credit facilities from a diverse range of Russian and international banks, while we retain strong liquidity with cash holdings of approximately US$130 million. Our ability to secure credit financing even in recent uncertain conditions is testimony to the degree of trust AFI Development has built up within the banking sector. Our strategy is bringing results, creating value and generating a return on our assets. With our resources and our understanding of the market, we will continue to realise the opportunities for value creation in 2011 and the coming years.

9 Section Four: Principal Risks and Uncertainties Affecting the Company 7KLV VHFWLRQ SUHVHQWV LQIRUPDWLRQ DERXW WKH &RPSDQ\ÂśV H[SRVXUH WR HDFK RI WKH ULVNV OLVWHG EHORZ and the &RPSDQ\ÂśV objectives, policies and processes for measuring and managing risks. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the &RPSDQ\ÂśV ULVN PDQDJHPHQW IUDPHZRUN DQG LV UHVSRQVLEOH IRU GHYHORSLQJ DQG PRQLWRULQJ WKH &RPSDQ\ÂśV ULVN PDQDJHPHQW SROLFLHV 7KH &RPSDQ\ÂśV ULVN PDQDJement policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market FRQGLWLRQV DQG WKH &RPSDQ\ÂśV DFWLYLWLHV 7KH &RPSDQ\ WKURXJK LWV WUDLQLQJ DQG PDQDJHPHQW standards and procedures, aims to develop a disciplined and constructive risk control environment in which all employees understand their roles and obligations. 7KH &RPSDQ\ÂśV $XGLW &RPPLWWHH RYHUVHDV KRZ PDQDJHPHQW PRQLWRUV FRPSOLDQFH ZLWK WKH &RPSDQ\ÂśV ULVN PDQDJHPHQW SROLFLHV DQG SURFHGXUHV DQG UHYLHZV WKH DGHTXDF\ RI WKH ULVN management framework in relation to the risks faced by the Company. The Compan\ÂśV $XGLW Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. Further information reODWLQJ WR WKH &RPSDQ\ÂśV 5LVN 0DQDJHPHQW 3URFHVVHV LV VHW RXW LQ Âł&RUSRUDWH *RYHUQDQFHÂ´ Credit risk Credit risk is the risk of financial loss to AFI Development if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the &RPSDQ\ÂśV UHFHLYDEOHV IURP FXVWRPHUV DQG LQYHVWPHQW VHFXULWLHV Trade and other receivables Financial assets that are potentially subject to credit risk consist principally of trade and other receivables. The carrying amount of trade and other receivables represents the maximum amount exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental customers, including outstanding receivables. The Company has policies in place to ensure that, where possible, rental contracts are made with customers with an appropriate credit history. Cash transactions are limited to high-credit-quality financial institutions. The utilisation of credit limits is regularly monitored. AFI Development has no other significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, the management team believes that there is no significant risk of loss to the Company. Investments The Company limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Company only has invested in securities with high credit ratings, management does not expect any existing counterparty to fail to meet its obligations, except as disclosed in note 33 to the Company's Audited Financial Statements for 2010.

10 Guarantees 7KH &RPSDQ\ÂśV SROLF\ LV WR SURYLGH ILQDQFLDO JXDUantees only to wholly-owned subsidiaries. As at 31 December 2010, there was one guarantee outstanding under the non-revolving credit line from VTB Bank for RUR 8,448 million and one under the Joint Stock Commercial Savings Bank of the 5XVVLDQ )HGHUDWLRQ Âł6EHUEDQNÂ´ ORDQ IRU 86 PLOOLRQ. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they IDOO GXH $), 'HYHORSPHQWÂśV DSSURDFK WR PDQDJLQJ OLTXLGLW\ LV WR HQVXUH DV IDU DV SRVVLEOH WKDW LW will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed FRQGLWLRQV ZLWKRXW LQFXUULQJ XQDFFHSWDEOH ORVVHV RU ULVNLQJ GDPDJH WR WKH &RPSDQ\ÂśV UHSXWDWLRQ Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available. $), 'HYHORSPHQWÂśV OLTXLGLW\ SRVLWLRQ LV PRQLWRUHG RQ D GDLO\ EDVLV E\ WKH PDQDJHPHQW ZKLFK WDNHV necessary actions if required. The Company structures its assets and liabilities in such a way that liquidity risk is minimised. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates DQG HTXLW\ SULFHV ZLOO DIIHFW WKH &RPSDQ\ÂśV LQFRPH RU WKH YDOXH RI LWV KROGLQJV RI ILQDQFLDO instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the available returns for shareholders. We are exposed to market risks from changes in both foreign currency exchange rates and interest rates. We do not use financial instruments, such as foreign exchange forward contracts, foreign currency options and forward rate agreements, to manage these market risks. To date, we have not utilised any derivative or other financial instruments for trading purposes. Interest rate risk We are subject to market risk deriving from changes in interest rates, which may affect the cost of our current floating rate indebtedness and future financing. As of 31 December 2010, 80% of our indebtedness was fixed rate. For more detail see note 23 to our consolidated financial statements. Currency risk The Company is exposed to currency risk on future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations that are denominated in a currency RWKHU WKDQ WKH UHVSHFWLYH IXQFWLRQDO FXUUHQFLHV RI $), 'HYHORSPHQWÂśV HQWLWLHV SULPDULO\ WKH 86 Dollar and Russian Rouble. The currency in which these transactions are primarily denominated is the Euro. Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated ZLWK WKH &RPSDQ\ÂśV SURFHVVHV SHUVRQQHO WHFKQRORJ\ DQG LQIUDVWUXFWXUH DQG IURP H[WHUQDO IDFWRUV other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the &RPSDQ\ÂśV operations. 7KH &RPSDQ\ÂśV REMHFWLYH LV WR PDQDJH RSHUDWLRQDO ULVN VR DV to balance the need to avoid financial losses and damage to the &RPSDQ\ÂśV reputation with overall cost effectiveness. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk. Compliance with Company standards is supported by a programme of periodic reviews undertaken by way of internal audits. The results of the internal audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Company. The company has also outsourced its

11 internal audit process to a certified accountant in Israel and such internal auditor is responsible for the recommendation of an auditing plan to the Audit Committee.

12 Section Five: Operational Review Our Market During 2010, real growth of the Russian economy outpaced the rates seen in 2009 by 4%1. The improving labour market, positive income growth and the increased volumes of consumer financing led to a 4.45% year-on-year increase in retail sales over the period2. Rising real disposable income has had a direct impact on all retailers and is expected to benefit non--food retailers in particular, as discretionary spending on items such as clothing, furniture and consumer electronics increases. In the context of these trends, Russian retailers are continuing with their accelerated store rollouts. In the commercial real estate sector 2010 represented a turning point in the market, across all segments, including hotels and warehouses. Investor interest is strongly focused on Moscow, our core market, which represented 94% of current Russian real estate investment. With the total volume of investment transactions standing at US$3.5 billion3, Moscow is the third largest real estate market in Europe, after London and Paris. The large majority of these transactions (more than 85%) took place within the office sector. However, the majority of international investors remained cautious in 2010 and, as a result, FDI rates remained well below those seen in 20084. Nevertheless, the return of foreign capital to the market is expected in 2011 driven by rising rental rates, shrinking vacancies and increasing availability of quality premises for sale. Throughout 2010, as activity grew, the estimated average capitalisation rates fell from 13% across the sector at the beginning of the year to 9% for offices, 10% for retail and 10.5% for the warehouse and industrial segment5. This trend is expected to continue in 2011. Given its position DV WKH FRXQWU\ÂśV ILQDQFLDO and commercial centre, Moscow in particular is expected to benefit from the overall improvement in market conditions going forward, with higher growth in all real estate segments expected compared to other parts of the country.

5XVVLDÂśV Pacro data annual and forecast

Nominal GDP Real GDP growth

2006

2007

2008

2009

2010

2011F

2012F

US$/bn

990

1 300

1 667

1 232

1 465

1 676

1 849

8.2

8.5

5.2

-7.9

4.0

4.3

4.5

13 295

14 879

16 059

14 925

15 624

16 562

17 731

9.0

11.9

13.3

8.8

8.3

7.0

GDP per capita

US$

CPI (end period)

Trade balance

US$/mln

139 269

130 915

179 742

111 585

149200

170042

154414

International reserves

US$/mln

303 732

478 762

426 283

439 447

466859

516101

543989

Exchange rate (average)

Rb/US$

27,19

25,58

24,85

31,74

30,38

30,31

30,19

10.4

10.0

12.2

15.3

11.5

12.0

11,7

Lending interest rates

units

Rosstat preliminary estimates For the period of January to November 2010, Russian Real Estate Investment Market Q4 2010, Jones Land LaSalle 3 Marketbeat: An overview of the Russian property market: Q4 2010, Cushman &Wakefield 4 Marketbeat: An overview of the Russian property market: Q4 2010, Cushman &Wakefield 5 Marketbeat: An overview of the Russian property market: Q4 2010, Cushman &Wakefield 2

Source: EIU, February 2011 Economic Growth Forecast Âą Russia units

2010

2011F

2012F

2013F

2014F

2015F

Real GDP growth

4.0

4.3

4.5

4.4

4.3

4.2

Industrial production growth

7.6

4.6

4.4

4.3

4.2

4.0

Gross fixed investment growth

3.5

7.0

7.8

8.5

9.4

10.0

Âś E G

10 090

10 290

10 500

10 730

10 970

11 003

ktoe

513 231

521 956

531 874

542 511

553 361

564 428

7.5

6.8

6.2

5.9

5.4

5.1

8.8

8.3

7.0

6.4

6.0

5.7

Crude oil & NGL production

Natural gas production Unemployment rate Consumer price inflation

Source: EIU, February 2011

The fundamentals of supply and demand in the Moscow real estate market are expected to continue to drive its long-term expansion. Economic growth is creating demand for quality space that is currently lacking and supply is not yet coming forward in order to rebalance the market in the coming years. This undersupply is apparent in all segments. In residential property, higher disposable incomes and the easier availability of mortgage finance have restored purchase and rental prices, which have returned to growth. The scale of the Moscow real estate sector is demonstrated by its population of over 13 million people, making it the largest city in Europe. Within the office segment both Russian and international companies are seeking more and better space, as the Russian economy expands and more international businesses seek a Moscow base. Moscow is already one of the five largest financial centres in Europe and the financial sector is likely to expand as capital markets develop. Retailing has been one of the best performing sectors of the Russian economy in recent years. The fundamental shift to modern shopping formats and the release of pent-up consumer demand through higher incomes has led to huge expansion of the sector. The Russian consumer has the highest per capita incomes in Eastern Europe (at US$ 1,600 per month) and has very active purchasing habits, spending an average of 68% of income on consumption6. These factors translate into high levels of income for retail landlords, who typically are able to charge not only monthly rents but also a percentage of turnover. In addition to the specific factors supporting the sector in each of its main segments, supply within Moscow will be further constrained in future by limitations on new urban development in Moscow. This is likely to mean that existing portfolios of properties within Central Moscow will become even more attractive in terms of demand and valuations, as new development is encouraged beyond the Third Ring Road in Moscow. The fundamental character of the market, where a limited pipeline of supply contrasts with economic growth pushing demand ever higher, creates significant opportunities for developers to realise value, especially in quality segments in Central Moscow.

Moscow Retail Market Q4 2010, Jones Lang LaSalle

14 Retail Real Estate During 2010, the retail market in Moscow stabilised with increased activity returning to the market during the second half of the year. Total shopping centre completions for 2010 were equivalent to 391,000 sqm7. Prime rents8 in Moscow remained among the highest in Europe with a 5% increase registered over the course of the year9. Following constant levels during the financial crisis, rental rates in the most successful shopping centres in Moscow started to increase again. Prime base rates are now the most expensive in Europe, standing at US$4,000 per sqm per year (around 10% higher than London) and are expected to increase by up to 7% in 2011. Average rents in high--quality shopping centres are estimated at US$1,200 per sqm per year10 Russian consumer spending has been sustained at high levels relative to total income for several years, even through the global financial crisis, and is expected to increase in real terms as the middle class grows. The catch-up of Russian living standards to those in Western Europe creates GHPDQG DFURVV DOO UHWDLO VHJPHQWV DQG LQFUHDVLQJO\ IRU GXUDEOH JRRGV DQG RWKHU ÂłELJ WLFNHWÂ´ LWHPV where Russian households are relatively under-equipped. Consequently, Moscow retail spending is growing faster than the increase in GDP for the economy and growing faster than retail spending in the rest of the economy. Despite the significant growth of recent years, the supply of retail space in Moscow remains modest relative to the size of the FLW\ 9DFDQF\ UDWHV DW 0RVFRZÂśV VKRSSLQJ FHQWUHV DYHUDJHG DURXQG DW WKH HQG RI DQG are expected to decline further in 2011 as a result of improving retailer demand and lack of new projects coming to the market. The global financial crisis created difficulties for many developers operating in the market, meaning that they lack the financing to complete or initiate retail projects, further constraining supply, while demand is bolstered by new international retailers looking to enter the market. 11 In 2011, based on the macroeconomic forecasts, this segment should see continued stable market conditions with no deterioration in consumer demand.

Moscow Retail Market Q4 2010, Jones Lang LaSalle Rents for a single unit of 100 sqm GLA located on the ground floor of retail gallery. Rents exclude VAT and OPEX 9 Moscow Retail Market Q4 2010, Jones Lang LaSalle 10 Moscow Retail Market Q4 2010, Jones Lang LaSalle 11 Moscow Retail Market Q4 2010, Jones Lang LaSalle 8

Office Real Estate 2010 saw a recovery in the office real estate market which registered the highest number of all investment transactions in the market. With the return of business confidence, average rental rates saw a positive trend whilst vacancy rates decreased further and the practice of pre--leasing returned. A significant change took place in the character in the market, as office tenants once more upgraded their quality requirements; whereas in 2009 the primary concern of tenants was cost, 2010 saw the revival of demand for quality space, from both Russian and international companies. Larger companies in particular have been seeking premises and this has been reflected in the shortage of large space (i.e. above 10,000 sqm). Total Class A office completions in 2010 represented 295,630 sqm, while vacancy rates for Moscow stood at 15.2%12. Nevertheless, the effective vacancy rate for the highest quality space in Central Moscow is very low at an estimated level of 5% and take-up rates for all Class A and B space in 2010 was very high. A total of 1,463,530 sqm of modern office space was taken up in 201013, the second largest amount in Europe, after Paris. This level of take-up was an increase of 82% as compared to 2009 and approached the pre-crisis record volume of over 1,400,000 sqm in 2007. Despite recent dynamic growth, the overall stock level remains relatively moderate compared to other major European cities. Taking Class A and B space together, on a per capita basis the supply of modern office stock in Moscow is one of the lowest in Europe, behind not only Western European capitals, but also Warsaw, Prague and Budapest. The level of prime base rents is thus one of the highest in Europe, at US$ 900 per sqm per year, only exceeded by Paris and London, increasing by 29% in 2010. 14 As the positive economic growth continues to drive demand for quality office space, the supply of which is not expected to increase in the short-term due to a continued lack of financing, rent levels are expected to rise further over the course of 2011. The total volume of new modern office space 12

Moscow Office Market Q4 2010, Jones Lang LaSalle

Moscow Office Market Q4 2010, Jones Lang LaSalle Moscow Office Market Q4 2010, Jones Lang LaSalle

16 created by project completions in 2010 was 45% lower than the volume of completions in 2009, as 15 new projects failed to start or conclude, constrained by more difficult financial conditions .

Residential Real Estate Residential real estate remains in high demand which is reflected in the return of elite residential segment volumes to pre-crisis levels (430 apartments per annum) and prices to 25% below precrisis levels16. At the same time, business class volumes in 2010 were 18% higher than in 2009 and prices in U.S. dollar terms were up by 8% year-on-year. Residential real estate has recovered strongly as consumer confidence returns and mortgage finance becomes more easily available. As in other property sectors, the financial crisis reduced the financing available to developers and the effects of this are now apparent in the reduced supply of new residential projects. Although new residential building grew rapidly in the pre-FULVLV SHULRG 5XVVLDÂśV DYHUDJH OLYLQJ VSDFH UHPDLQV -30% below the European average and requires significant refurbishment. An estimated additional 17 ELOOLRQ VTP RI KRXVLQJ VWRFN LV UHTXLUHG WR PHHW WKH SRSXODWLRQÂśV QHHGV . With limited supply of high and mid-end properties, low per capita footage and favourable macroeconomic conditions, a positive price trend is expected in 2011.

Moscow Office Market Q4 2010, Jones Lang LaSalle Moscow Residential Market H2 2010, Miel 17 Moscow Residential Real Estate Overview, Q4 2010: IntermarkSavills 16

Residential prices for newly built residential

18 Our Strategy We are focused on developing and redeveloping high quality, integrated large-scale, complex commercial and residential real estate assets including offices, shopping centres, hotels, mixed-use properties and residential projects. As part of our strategy, we aim to sell the residential units we develop and to lease the commercial properties, whilst not excluding opportunistic sales of select developments. We are committed to growing our high quality income generating real estate portfolio. In addition to being of a large scale and highly complex, our projects are regenerative for their local environments and involve significant improvements to infrastructure. As such, they increase the overall value for their neighbourhoods, creating more comfortable living and working conditions. Moscow is a rapidly expanding city in an economy that is undergoing a period of sustained growth. AFI Development has been part of this expansion for the last ten years and aims to develop projects that meet the needs of a growing, global city. We create new urban environments in the districts we develop, changing the everyday experience of Muscovites for the better. During our years of successful operations in Moscow, we have worked closely with the City authorities. Our complex, multi-use projects incorporate a major infrastructure component, meeting the needs of the City and the local community by, for example, providing traffic light free roads and intersections, and underground parking. $V VXFK 0RVFRZÂśV DXWKRULWLHV KDYH ORQJ UHFRJQLVHG WKH high value added of our projects and we have every confidence in our continued successful cooperation with the authorities going forward. Our experienced management team, with strong knowledge and a proven track record of operating in the Russian market, aims to maintain a diversified portfolio whilst using a flexible, phased development approach. This enhances our ability to leverage our development platform and complete our projects on a cost-efficient basis while making our projects cash-generative at the earliest possible opportunity. The high quality of our developments enables us to attract the most desirable international and local tenants on favourable terms. To ensure high retention rates, we aim to sign leases of increasing length with our tenants and place greater emphasis on on-going tenant relations. In 2010, we continued to focus on developing our fully-funded core projects including AFIMALL City (known during the construction phase as the Mall of Russia), Ozerkovskaya Embankment (Phase III), Paveletskaya Office Complex and Kalinina Hotel Construction of AFIMALL City and Paveltskaya Office Complex were completed at the end of 2010. In 2011, we plan to complete the development of Ozerkovskaya Embankment (Phase III) and Kalinina Hotel, continue development of the Tverskaya surroundings projects and initiate design and concept development of several projects in Moscow, starting with the multi-use complex on Bolshaya Pochtovaya residential complex on Paveletskaya and residential complex in Odintsovo (Otradnoye). )RU IXUWKHU LQIRUPDWLRQ UHODWLQJ WR WKHVH SURMHFWV VHH Âł2XU 3RUWIROLRÂ´ (subject to market conditions at the relevant time, and our ability to obtain financing for the projects Our expectation in the medium-term is that the Moscow real estate market will continue to offer high volume of business activity, a high development potential due to its size, position as the largest financial centre in Russia and one of the largest capital centres in Europe. As such, we plan to maintain our development focus on this market until market conditions improve further. At the same time, we will continue to review our land bank outside of Moscow and reactivate select projects based on availability of financing and strength of demand. Our Portfolio

Type

AFIMALL City

Retail

Ownership

75%

Completed (year)

2010

GLA/GSA unsold (sqm) for 100% 107,080

19 H2O Four Winds Office Berezhkovskaya Four Winds

Office Office Office Residential

100% 50% 74% 100%

2006 2008 2006 2008

Ozerkovskaya II

Residential

100%

2008

Aquamarine Plaza Spa Paveletskaya

Hotel Hotel Office

100% 50%

2009 2006 2010

8,996 22,043 10,136 956 unsold apartments space and 37 car parking spaces. (AFID share) 2,617 sqm of unsold apartments space, 87 sqm of commercial space and 193 car parking spaces. (AFID Share) 159 rooms 274 rooms 14,035

$), 'HYHORSPHQWÂśV VWUDWHJ\ LV VXSSRUWHG E\ WZR pillars. The Company both holds a portfolio of completed properties and develops new projects. Real Estate Portfolio (Completed Projects) AFI Development has acquired a portfolio of quality properties through its own development activity. In this way, it retains all the development gain from these projects for its shareholders, maximising current and future capital values of the portfolio. As the size of our portfolio of completed properties grows, the nature of AFI Development evolves and the Company has become a significant holder of Central Moscow property as well as an active developer. Our property holdings will provide us with a stable income stream and we aim to maximise our revenue through a rigorous focus on landlord-tenant relationships and marketing at each property. We aim to use effective marketing channels, not only working through international property consulting firms but also actively advertising through billboards and direct marketing. AFI Development understands the requirements of Russian and international businesses for their Moscow properties, both office and retail. We work with them to provide the quality space they need to realise the growth opportunities of the Russian market. Our retail tenants include global leaders such as Marks & Spencer, H&M, Uniqlo, American Eagle, Zara and GAP whilst our office tenants include Morgan Stanley, Barclays Capital, Navtaq, Gefest, Total and Evraz. While holding properties maximises our long-term capital gain, at the same time we are using the completed properties to generate cash-flow. We are gradually increasing the length of our leases, to secure visible cash flows for the coming years. In some cases we have retained unsold residential units in these properties which will be available for sale to maximise revenue, creating an income stream into the future. Where appropriate, we will crystallise capital gains through selective sales of projects. We constantly monitor the state of the market and judge when the trends in supply and demand are working to make sales the right strategic option for the Company. The AFI Development project portfolio produced a significant increase in income in 2010 as compared to 2009, reflecting the growth of our portfolio and the strengthening of the market. Rental levels improved across the market and tenants no longer sought rent reductions as had

20 been the case in the most difficult periods on 2009. Our office developments are fully occupied with only structural vacancies, reflecting the demand for quality developments, professionally managed in attractive locations. Our portfolio expanded with the completion during 2010 of AFIMALL City and the Paveletskaya Office Complex and the official February 2010 opening of the Aquamarine Hotel which had achieved a level of 70% occupancy by year end. The retail units at AFIMALL City have been let at attractive rates to new tenants and are expected to make a major contribution to cash flow in 2011. In addition, the Paveletskaya Office Complex was let to a single tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation ROSATOM, on 22 March 2011. We consequently expect further increases in revenue to result from the Real Estate Portfolio for this year. 1. AFIMALL City Use Gross building area (sqm) Ownership Leasable area (sqm) Number of stores Area of the site

Shopping centre

% of shops area leased*

75%

Valuation (75%)* (US$)

732,400,000

179,930 75% 107,080 c.400 4.4 ha

*as of December 31, 2010 About AFIMALL City Our major accomplishment in 2010 was the completion of construction of AFIMALL City. With a GBA of nearly 180,000 sqm, and GLA of 107,000 sqm, occupied by a shopping gallery of nearly 400 stores and an 11-screen movie theatre and with a number of additional outstanding leisure facilities, $),0$// &LW\ LV RQH RI (XURSHÂśV ODUJHVW DQG PRVW DPELWLRXV UHWDLO GHYHORSPHQWV LQ recent years. The mall introduces a new standard of quality to the Russian retail sector and will offer visitors a combined shopping, food and entertainment experience unmatched by any one location in Moscow. The shopping and entertainment centre is strategically located at the heart of the Moscow City GHYHORSPHQW SURMHFW WKH 5XVVLDQ FDSLWDOÂśV QHZHVW EXVLQHVV GLVWULFW ZKLFK LV WKH ILUVW RI LWV NLQG LQ Russia comprising innovative architectural approaches and multi-functional infrastructure. Moscow City forms part of an evolving upscale district, with a concentration of consumer spending power. AFIMALL City is expected to feature the first IMAX cinema in the Moscow city centre, the largest glass roof in a shopping centre in the world and the first fountain in a Russian mall, whose waters will reach a height of 30 metres. AFIMALL City has a high-quality tenant mix, with a wide range of high quality brands. Key tenants at AFIMALL City include Formula Kino Cinema, Marks & Spencer, H&M, L&G Department Store, UNIQLO, Snezhnaya Koroleva, Zara, Green Perekrestok Supermarket, Holding Centre, GAP, 1HZ <RUNHU 6SRUWPDVWHU DV ZHOO DV ; 5XVVLDÂśV ODUJHVW UHWDLO FRPSDQ\ DQG (OGRUDGR ElecWURQLFV WKH FRXQWU\ÂśV OHDGLQJ FRQVXPHU HOHFWURQLFV UHWDLOLQJ JURXS )RU D QXPEHU RI WKH international brands, including Banana Republic and American Eagle, their AFIMALL City outlets will represent their first stores in Russia, whilst certain retailers, such as Eldorado Electronics, have chosen AFIMALL City as their flagship location. About Moscow City (Source: 2-6& Âł&,7<Â´ 0RVFRZ JRYHUQPHQW company managing Moscow International Business &HQWUH Âł0RVFRZ-&LW\Â´

Moscow City is a unique development scheme set on 40 hectares of land intended to become the largest business district of Moscow to be built using the most advanced standards of modern design, energy efficiency and with high attention to the environment.

21 The development is intended to provide prime quality office and living space, an abundance of recreational facilities and easy transportation access by metro and train to Sheremetyevo airport to an estimated 350,000-500,000 residents and visitors. The complex nature of the project makes this a unique development, not only in Moscow but in the whole of Russia. The project will encompass 14 multifunctional complexes with approximately 4 million sqm of office, retail and residential space. Of this, approximately 1 million sqm of space is currently being completed with the area already attracting over 50,000 workers and visitors every day. The new exhibition and conference centre is expected to play host to 2.5 million visitors a year. Site

total area

Moscow Authority building

806 433

Capital City

288 680

Central Core (AFI Mall, hotel 6,7,8 and concert hall) Naberezhnaya Tower 10

530 000

180 000

265 602

Federation Tower

417 589

154 958

Eurasia Tower

208 264

Northern tower

139 323

City Palace

2,3

169 000

Multifunctional complex

430 000

Imperia Tower

281 245

Transport Terminal

228 000

Mercury City Tower

158 528

Tower 2000

n/a

61 057

City Exhibition Centre

179 612 4 163 333

Completed and operating

Under construction

Not started

806 433 350 000

262 631 208 264

139 323

281 245 228 000 158 528 61 057 179 612 1 089 620

1 260 668

1 813 045

Continued growth of this strategically placed business district will make AFIMALL City uniquely positioned to reap the benefits of the increasing population of and growing visitor numbers to the area. Progress in 2010 Construction of AFIMALL CITY was completed in early December 2010, following which the Company applied to the City authorities of Moscow for the final permit necessary to open the mall to the public. The Company has received all necessary approvals from the City of Moscow authorities and the technical opening of the mall took place on March 10th 2011. As a result of successful marketing efforts and the unique nature of the project, approximately 75% of retail shops in the Mall were leased during the year. Rental levels currently stand at up to US$6,000 per sqm for stores and up to US$12,000 per sqm for kiosks. At year-end, fit-out works for the retail units were underway with 160 stores due to open during the course of March-April 2011. Next Steps AFI Development is currently in advanced negotiations with potential tenants for the remaining retail and entertainment space in AFIMALL City. The Company is also responsible for in--house management of the mall with great emphasis being placed on tenant relations.

22 As development within Moscow City continues, direct access to the mall from the second metro VWDWLRQ Âł0H]KGXQDURGQD\DÂ´ LV H[SHFWHG WR EH FRPSOHWHG LQ On March 25, 2011, the Company announced that it had reached a non-binding understanding with the Moscow City administration regarding the purchase from the City of Moscow of its 25% share in AFIMALL City and 2,700 parking lots adjacent to AFIMALL City, for a total consideration of approximately US$ 310 million. 2. Four Winds Plaza Use

Mixed-use office complex

Ownership

50%

Gross building area (sqm)

31,000

Leasable area (sqm)

22,043

Valuation as at 31.12.2010 (US$)*

119,300,000

*AFI Development share only Four Winds Plaza is a modern class A office complex which consists of two 10-torey buildings with three independent entrances, reception areas and lift blocks. The full leased complex is extremely ZHOO SRVLWLRQHG LQ WKH KHDUW RI 0RVFRZÂśV EXVLQHVV FRPPHUFLDO DQG FXOWXUDO FHQWUH 3. Berezhkovskaya Âą Riverside Station Use

Business centre

Ownership

74%

Gross building area (sqm)

11,612

Leasable area (sqm)

10,259

Valuation as at 31.12.2010 (US$)*

24,600,000

*AFI Development share only This development consisting of four B+ office buildings is located in the centre of Moscow between the Garden Ring and the Third Transport Ring.

23 4. H20 Office Complex Use

Business centre

Ownership

100%

Gross building area (sqm)

10,698

Leasable area (sqm)

8,996

Valuation as at 31.12.2010 (US$)

15,200,000

H2O Office Complex is a Class B business centre located in a dynamically developing business area on the border of Moscow's Central and Southern Administrative Districts. The building was acquired in 2006. It was completely renovated and leased. Â 5. Paveletskaya Office Complex Use

Business park

Ownership

100%

Total area (sqm)

16,512

Leasable area (sqm)

14,035

Valuation as at 31.12.2010 (US$)

21,600,000

The overall Paveletskaya Embankment development comprises 10 centrally located commercial buildings which will be redeveloped into a Class B+ business park and residential complex. Paveletskaya Office Complex is the first phase of the overall development involving a reconstruction of a former printing house facility into an office centre. The complex is fully leased to ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation, ROSATOM, which lease will roll over a 3 year lease term. Â

Â 6. Aquamarine Hotel Use Ownership Total area (sqm) Number of rooms

Hotel 100% 11,130 159

Valuation as at 31.12.2010 (US$)

42,800,000

The four-star hotel, which offers a full range of business and leisure facilities, is located in the historical centre of MRVFRZ QHDU WKH .UHPOLQ DQG IRUPV SDUW RI $), 'HYHORSPHQWÂśV PDMRU Ozekovskaya Embankment development, comprising both office and residential property. The Aquamarine Hotel is operated by Africa Israel Hotels Ltd. Since it started operating in 2010, the hotel has achieved occupancy rates of up to 70%. Â

Â 7. Plaza Spa Hotel Use Ownership

Hotel 50%

24 Total area (sqm) Number of rooms

25,000 275

Valuation as at 31.12.2010 (US$)*

30,600,000

*AFI Development share only Plaza Spa Hotel in Kislovodsk is a four star hotel located on a 1.5 hectare plot of land. Operated by Africa Israel Hotels, it comprises two hotel buildings, a spa, a health and fitness centre, a swimming pool, saunas, restaurants and conference facilities. Located in the Caucasus mineral region, the Plaza Spa caters to guests seeking treatments for disturbances of the cardiovascular and nervous systems, as well as respiratory problems. 8. Aquamarine Residential Complex Use

Residential

Ownership

50%

Total area (sqm)

41,980

Residential sales area (sqm)

16,711

Number of apartments

114

Valuation as at 31.12.2010 (US$)*, 2,617 sqm left (AFID share) *AFI Development share only

30,000,000

The Aquamarine residential complex is located on the Moscow River embankment, not far from the Kremlin. The development is equipped with multi--level security systems with its own services and maintenance. The complex also has its own amenities including a courtyard with a playground, a recreational area, flower garden and lawns, and a 240 sqm pond which is serves as an ice skating rink in winter. 9. Four Winds Residential Complex Use

Mixed--use residential complex

Ownership Total area (sqm)

50% 41,364

Residential sales area (sqm)

18,272

Number of apartments

111

Fitness & Retail sellable area (sqm)

4,595 (sqm)

Valuation as at 31.12.2010 (US$)*

28,100,000

*AFI Development share only which as at the valuation date totals 956 sqm of unsold apartments space and 37 car parking spaces. Long term leases have been signed in regards to fitness centre and retail units. Four Winds is a centrally located luxury residential building in Moscow with 111 apartments surrounded by retail units, a fitness centre and underground parking.

25 Development Portfolio (Projects in Progress) The second major pillar of the &RPSDQ\ÂśV VWUDWHJ\ LV WKH GHYHORSPHQW RI QHZ SURMHFWV IURP ODQG bank to completion. At any one point in time the Company aims to balance its revenue generating portfolio of completed projects with a number of developments in progress, at various stages of construction, ready to be brought to the market at the right moment. Â 1. Ozerkovskaya Embankment (Phase III) Use

Office building

Ownership

50%

Total area (sqm)

78,647

Leasable area (sqm)

46,394

Valuation as at 31.12.2010*(US$)

140,450,000

*AFI Development share only The Ozerkovskaya Embankment development site comprises four individual development projects referred to as Phases I, II, III and IV. The high quality canal-side development in the centre of the city known as Phase III of the development includes a class A office building. The project is located in one of the most prestigious business areas in the capital within the Moscow Central Business District, which is served by two metro stations. Â Progress in 2010 Construction of the development continued throughout 2010 and is expected to be completed on schedule during 2011.During 2010, the Company secured financing for the final stages of the project in the form of a US$74 million loan from Sberbank and is currently in negotiations with potential tenants. Â Next Steps Ahead of planned project completion in 2011, works on facades, internal engineering systems and fit--out are underway. At the same time, the Company is actively engaged in pre-leasing initiatives to ensure a high occupancy rate at completion. 2. Tverskaya Zastava Use Multi-use Ownership 100% Total area (sqm) 308,687 Leasable area (sqm) 204,962 Valuation as at 31.12.2010* (US$) 323,700,000 *Excluding Tverskaya Zastava Shopping Centre Â Tverskaya Zastava projects include the development of an underground shopping mall beneath the Tverskaya Zastava square in the centre of Moscow, as well as multi-use commercial and residential real estate in the Tverskaya square surrounding areas (Tverskaya Plazas), namely Butirsky Val, Gruzinsky Val and Brestskaya streets. 7KH SURMHFWV DUH ORFDWHG LQ WKH 7YHUVNR\ 'LVWULFW RQH RI 0RVFRZÂśV PRVW FHQWUDO DUHDV ZLWK a good concentration of prime residential real estate and an established office submarket, home of 0RVFRZÂśV WRS ODQGPDUN SURMHFWV LQ RIILce real estate including Four Winds Plaza, Dukats and White Square. Progress in 2010 During 2010, construction of the Tverskaya Zastava Shopping Centre with a total area of 113,200 sqm and gross leasable area of 36,303 sqm continued with a focus on external walls and the UHORFDWLRQ RI XWLOLW\ OLQHV DORQJ ZLWK WKH &LW\ÂśV JHQHUDO FRQWUDFWRU

26 On March 25, 2011, the Company reached a non-binding understanding with the Moscow City administration to transfer its development rights in the Tverskaya Zastava Shopping Centre to the City of Moscow in exchange for being fully compensated for its development costs incurred in the project to date. Such compensation may take the form of the City of Moscow granting additional building rights for the Company's other projects. The City of Moscow intends to convert the retail space into an underground parking facility at its own expense. As part of the non--binding understanding reached with the City of Moscow, it is intended that AFI Development will remain the owner of the projects surrounding Tverskaya, equating to over 300,000 sqm of commercial and residential space. It is also intended that such projects will retain their key development criteria and it is the Company's understanding that the current planning documentation will remain in place. Next Steps Subject to signing the above agreement with the Moscow City, we plan to complete planning and design documentation for Tverskaya Plazas during 2011 and start construction in 2012. 3. Kalinina Hotel Use Ownership Total area (sqm) Number of rooms Valuation as at 31.12.2010 (US$)

Hotel 100% 12,665 175 7,600,000

Inspired by the success of Plaza Spa in Kislovodsk, the Company started the development of DQRWKHU VLPLODU SURMHFW LQ WKH 5XVVLD¶V VRXWKern region in the city of Zheleznovodsk. The project envisages the renovation of an existing building to a 3--star hotel with sanatorium facilities. The hotel is expected to occupy a site of approximately 0.1 hectares and will include 175 guest rooms, of which 14% are expected to be suites. A spa area will occupy approximately 1,100 sqm, which will include 45 treatment rooms, two saunas, a jacuzzi, an indoor swimming pool and extensive medical and diagnostic facilities. Progress in 2010 In 2010, AFI Development completed a tHQGHU IRU WKH SURMHFW¶V JHQHUDO FRQWUDFWRU DQG DSSURYHG the full development budget of US$20 million. Full financing for the project was secured through a Russian rouble loan from Sberbank. Next Steps Construction of the project has commenced and is expected to be completed by the end of 2011. Upon opening, it is planned that the hotel will be managed by Africa Israel Hotels. Land bank In addition to yielding assets and projects under development, AFI Development has an extensive land bank, or projects that the Company is currently not developing. Whilst retaining full flexibility regarding future development of these projects, the Company remains well placed to benefit from further recovery in the regional real estate markets. Given its strong track record in bringing projects to completion, this represents a significant competitive advantage for AFI Development. 7KH &RPSDQ\¶V VWUDWHJ\ ZLWK UHVSHFW WR LWV ODQG EDQN LV WR DFWLYDWH SURMHFWV XSRQ VHFXULQJ necessary financing and after fully evaluating the level of demand from prospective tenants or buyers.

27 In 2011, AFI Development intends to progress development of three of its land bank projects:Otradnoye (Odintsovo); the residential complex on Paveletskaya;18 and the office complex on Bolshaya Pochtovaya, which it feels offer the greatest current development potential at this time.

Project

Type

Kosinskaya* Ozerkovskaya IV** Botanic Garden* Odintsovo (Otradnoye)*

Office Office Residential Residential

8.07 0.04 3.2 31.75

111,770 1,864 192,555 703,317

144,250,000 2,550,000 68,841,949 105,962,436

212,852,008 2,550,000 491,368,578 1,371,234,786

Park Plaza Kislovodsk*** Versailles, Kislovodsk*** Ruza St. Petersburg Bolshaya Pochtovaya Boryspol Total

Hotel resort Hotel resort Mixed use Retail Office

5.3 0.6 387.0 3.07 4.5 130.7 635.6

40,000 11,762 n/a n/a 143,000 n/a 2,146,488

8,386,050 7,980,000 4,108,753 1,850,000 212,400,000 13,500,000 569,829,188

101,948,591 29,000,000 63,700,000 1,850,000 1,405,249,955 13,500,000 3,693,253,918

Residential

Land (ha)

GBA upon completion (sqm)

B/S value, 31 December 2010

MV upon 19 completion (US$)

Note: For valuation purposes and due to IFRS accounting rules, in the MD&A section projects are classed as: * Projects under development (Kossinskaya, Botanic Garden, Odintsovo/Otradnoye) **Income producing properties (Ozerkovskaya IV) ) ***Hotels (Park Plaza Kislovodsk, Versailles Kislovodsk Overview of Development Process in Moscow $), 'HYHORSPHQW KDV PDQ\ \HDUV¶ H[SHULHQFH RI WKH GHYHORSPHQW SURFHVV LQ 0RVFRw, from initial concept to operation or sale. The table below defines the development process and shows how the Company realises projects on the basis of its existing land bank.

This project represents the second phase of the Paveletskaya project where the Company built Paveletskaya Office Complex. This project does not have a separate balance sheet value.

Valuation by Jones Land LaSalle as at 31 December 2010.

Development stage Activity

Opportunity identification

x Search of land plot for development x Project parameters established x Analysis of possible use of selected land x Preliminary budget estimated EDVHG RQ &LW\ÂśV *HQHUDO 3ODQ ODQG WHQXUH x Preliminary timeline for construction & development regulations set x Highest and best use analysis x Feasibility studies x x x x

Initial permitting (pre project stage)

Project permitting (project stage)

Results

Concept development Architectural design Master planning work Dialogue with City authorities Âą 'HYHORSPHQW RI Âł5HJXODWLRQ $OEXPÂ´ IRU submission WR VSHFLDO Âł0RVFRZÂśV &LW\ $UFKLWHFWXUDO $JHQF\ÂśV 0RVFRPDUFKLWHNWXUD Âł7KH 3URMHFW $SSURYDOV &RPPLWWHHÂ´

x More detailed architectural design x Work on project documentation for VXEPLVVLRQ WR Âł7KH 0RVFRZ 6WDWH ([SHUWLVHÂ´ x Documentation is prepared in sections

x Preliminary concept prepared x Âł5HJXODWLRQ $OEXPÂ´ ZKLFK LQFOXGHV general development plan of real estate, height, footage, floor plans, traffic flows, visualisations, fitting in the surrounding community and project economics approved by the City. x 0RVFRPDUFKLWHNWXUD LVVXHV Âł7RZQ SODQQLQJ 3HUPLWÂ´ *3=8 RWKHU &LW\ÂśV agencies are involved in approvals of this permit) x Investment contract signed

x Each section of project documentations requires separate approvals. x Sections include legal, General plan, architecture, construction solutions, technological solutions, internal & external engineering, fire prevention, power efficiency, environmental protection and security x Upon approval, construction permit issued

Timeline

1-4 months

3 months

8 Âą 12 months

Construction

x Work with banks to secure debt financing x Work with general contractor to develop ÂłZRUNLQJ GRFXPHQWDWLRQÂ´ RU GHWDLOHG specifications for construction work x Monitoring construction progress and budget x Cost control x Preleasing/preselling/ advertising

x Real estate delivered and commissioned x Property rights received x Efficient legal structure in place

Operation

x x x x

x Fully operating income generating business Any, depending on x Sustainable value through high quality the strategy product and strong tenant mix

Disposal

x Marketing the property x Organising the tender process amongst willing buyers x Support in buyer due diligence

Leasing/preselling remainder space Property management (own or outsource) Rent collection Tenant relations

x Property sold x Funds reinvested in future development

2-3 years

6 Âą 12 months

29 Section 6: Board of Directors and Corporate Governance The members of the Board of Directors as at 31 December 2010 and at the date of this report are set out below. The term of each Director will expire on the date of the next annual general meeting of the shareholders but all of the directors are eligible for re-election. There were no significant changes in the assignment of responsibilities of the Board of Directors in 2010. As at the date of this report, the members of the Board and their positions are as follows: Lev Leviev, Chairman of the Board Mr Leviev has served as the Chairman of the Board of Directors since 1 January 2008. He holds a 47.23% stake in Africa Israel Investments Ltd and also serves as its Chairman. He is also the owner and the President of the LLD Diamonds Ltd Group and President of the Federation of Jewish Communities in Russia and CIS. Alexander Khaldey, Executive Director Mr Khaldey is one of the co-founders of the Company and serves as the Chairman of the Board of Directors of AFI RUS and of Stroyinkom-K. Mr. Khaldey has over 30 years of experience in the real estate industry including experience attained at the Zhiliiproekt Institute and the Ukrspetsstalkonstruktsia Construction Union. He graduated from Dneprepetrovsk Metallurgical Institute in 1973, with a degree in Industrial Heat Power Engineering. Izzy Cohen, Non--Executive Director Mr Cohen has been a director since 27 August 2008 and the CEO of Africa Israel Investments since 15 June 2008. Prior to his appointment at Africa Israel Investments Ltd, Mr Cohen was CEO of Migdal Insurance and Financial Holdings Ltd for ten years. He also worked as Head of Generali Group Innovation Lab. Mr Cohen holds a BA in Statistics and Computer Sciences from the Hebrew University of Jerusalem. Christakis Klerides, Independent Non-Executive Director; Chairman of the Audit Committee, Senior Independent Director Mr Klerides has served as an independent non-executive director and is the chairman of the Audit Committee. Mr Klerides was the Minister of Finance of Cyprus from March 1999Â˛to February 2003 and currently provides finance and business consultancy services through his family-owned company, CMK Eurofinance Consultants Limited. Mr Klerides is a Fellow of the Chartered Association of Certified Accountants. Moshe Amit, Independent Non-Executive Director; Chairman of the Remuneration Committee and the Nomination Committee Mr Amit has served as an independent director and is the chairman of the Remuneration Committee. He is the Chairman of the Board of Directors of Delek - the Israel Fuel Corporation Ltd and also holds board memberships in a number of companies including Blue Square Chain Properties & Investments Ltd. Mr Amit holds a banking diploma from the Israeli Banking Institute and a Bachelors degree in political science and sociology from Bar-Ilan University, Israel. John Porter, Independent Non-Executive Director Mr Porter has served as an independent non-executive director. Among other directorships, he is also the Chairman of Sinocare Group, which owns and operates hospitals in the PRC. Sinocare serves the broad community and aims to raise the standard of health care for the Chinese middle class. Mr Porter has had a history of involvement with the life sciences, helping to found Natus Medical and serving for 5 years as a director of Ivax Corpnow (now part of Teva). Mr Porter holds degrees from the Universities of Oxford, Paris and Stanford. He serves on the Board of Advisors to the Said Business School, Oxford and has served two terms on the Board of Advisors to Stanford Business School. Michael Sarris, Independent Non-Executive Director Mr Sarris has served an independent non-executive director. He is a former Minister of Finance of the Republic of Cyprus and previously held a senior position with the World Bank. In the course of his career, his work covered a broad range of sectors in Africa, Latin America and East Asia. During his tenure as Minister of Finance, Cyprus, Mr. Sarris prepared for and successfully introduced the Euro as its national currency. Mr Sarris received his B.Sc. in Economics at the

30 London School of Economics. He continued his studies in the United States where he obtained his Doctorate in Economics. Panayiotis Demetriou, Independent Non-Executive Director Mr Demetriou has served as an independent non-executive director. He is trained as a lawyer in both Cyprus and London (Barrister at Law). Mr Demetriou is a former Member of Cyprus Parliament and of the European Parliament, Honorary Member of Parliamentary Assembly of the Council of Europe. He currently provides legal services through the Law Office: Panayiotis Demetriou & Associates LLC. Corporate Governance Although the Company is incorporated in Cyprus, its shares are not listed on the Cyprus stock exchange, and therefore it is not required to comply with the corporate governance regime of Cyprus. However, pursuant to the Listing Rules, the Company is required to comply with section 1 RI WKH &RPELQHG &RGH RQ &RUSRUDWH *RYHUQDQFH DV XSGDWHG LQ -XQH WKH ÂłCodeÂ´ RU H[SODLQ its reasons for non-compliance. The Company's policy is to achieve best practice in our standards of business integrity in all our activities around the world. This includes a commitment to follow the highest standards of corporate governance throughout the Company's group. The Directors consider that, save as set out below, the Company has complied with the main principles of the Code and the provisions set out in section 1 of the Code throughout the year ended 31 December 2010. The Chairman is not independent (as required under section A2.2 of the Code) as he is a major shareholder of the Company. Mr. Leviev holds a controlling stake in Africa Israel Investments Ltd., the major shareholder of the Company. Nonetheless, the Directors consider Mr. Leviev is a key member of the Company's leadership and that his oversight, management role and business reputation are important factors to the Company's success. The Directors therefore consider that Mr. Leviev should remain the Chairman of the Company's board and that this will be beneficial for the Company. The Board in its current composition was only established shortly before Listing and therefore no performance evaluation of the Board, the Chairman, the Committees or the individual Directors took place in 2010 (as required under section A6.1 of the Code). The Chairman will be assessing informally how the Board is performing on an ongoing basis and it is intended that formal performance appraisal processes will be developed and implemented during 2011 and performance evaluations required under the Code will take place during 2011. 7KH 'LUHFWRUVÂś OHWWHUV RI DSSRLQWPHQW GR QRW VHW out the expected time commitment or a contract period (as required under section A4.4 of the Code). However, all of the Directors are expected to spend sufficient time to comply with their duties during the entire respective terms of their appointment. In addition, in accordance with the Company's Articles of Association, the Directors are appointed for terms of three years. The Company intends to include the expected time commitment and a contract period in new letters of appointment, which will be issued to each and any director appointed or re-elected since the beginning of 2011. There is no formal induction process in place for newly appointed Directors (as required under section A5.1 of the Code), however the Company intends to develop a comprehensive and tailored induction programme for new Directors during 2011. The Company has not designed a formal performance-related remuneration scheme for the Directors nor has a full remuneration policy been implemented (as required under sections B.1 and B.2 of the Code).The Remuneration Committee reviews the remuneration policies from time to time. The Company does not have in place a process to formally review the effectiveness of the system of internal control. The Company is currently working on establishing a process to formally review the effectiveness of the system of internal control and intends to finalise and implement such process during 2011. There is currently no formal whistle blowing policy in place. However the Company intends to introduce a formal whistle blowing policy during 2011.

31 The Company is working towards full compliance with the Code in 2011, save in respect of the independence of the Chairman, and a formal performance related remuneration scheme for the Directors for the reasons set out above Balance of Directors Throughout 2010, the Company had a strong non-executive representation on the Board, which currently consists of eight directors, six of whom are non-executive directors and five of whom are independent nonexecutive directors.. Christakis Klerides has been appointed Senior Independent Director. The Board is satisfied that no one individual or group of directors has unfettered powers of discretion and that an appropriate balance exists between the executive and non--executive members of the Board and that between them, the directors bring the range of skills, knowledge and expertise necessary to lead the Company. The roles of the Chairman and Executive Director are split and clearly defined. The Chairman is generally responsible for the overall leadership and governance of the Board, for facilitating the effective contribution of all Directors and for ensuring the Board members are aware of the views of major shareholders. In addition, the Chairman is a key member of the Company's leadership and has an oversight management role in the Company, and his business reputation contributes to the Company's success. The Executive Director is responsible for all aspects of the operation and management of the Company and its business. His role includes developing, for Board approval, an appropriate business strategy and ensuring that the agreed strategy is implemented in a timely and effective manner Board Practices 7KH &RPSDQ\ÂśV %RDUG RI 'LUHFWRUV QRUPDOO\ PHHWV RQ DW OHDVW IRur occasions during the course of the year to review trading performance and budgets, funding, to set and monitor strategy, examine acquisition opportunities and report to shareholders. The Board has a formal schedule of matters specifically reserved to it for decisions. which are available on its website: www.afidevelopment.ru. To enable the Board of Directors to perform its duties, each director had full access to all relevant LQIRUPDWLRQ ,W LV WKH &KDLUPDQÂśV UHVSRQVLELOLW\ WR HQVXUH WKDW WKH %RDUG is provided with accurate, timely and clear information in relation to the Company and its business. Attendance at Board Meetings in 2010 was as follows: Name

Board

Audit

Remuneration

Nomination

Committee

Lev Leviev

Alexander Khaldey

Izzy Cohen

Christakis Klerides

Moshe Amit

John Porter

Michael Sarris

Panayiotis

Demetriou Avinadav Grinshpon Avi Barzilay Dates held

18.1; 11.2; 7.3;

27.5; 18.8;

27.5; 18.8

20.5; 27.5;

32 22.3; 26.4; 20.5;

17.11; 20.12

18.11; 20.12

27.5; 15.6; 15.7; 18.8; 1.9; 17.11; 18.11; 20.12; 21.12

No.

meetings

held during 2010 *

Where '-' is shown, the director listed is not a member of the committee.

The matters discussed at the board meetings included: approval of financial statements, approval of business plans, approval of various transactions (including general contractor agreements with Denya Cebus PM),approval of matters related to the Listing, review of committee recommendations, appointment of directors and officers, and approval of audit reports and financial statements. All Directors, the Board and each of the Board Committees are authorised to obtain independent legal or other professional advice as necessary, to secure the attendance of external advisers at their meetings and to seek information from any employees of the Company in order to perform their duties. Terms of appointment Non-executive directors have been invited to join the Board for a three-year period, subject to reelection by shareholders as provided for in the Company's articles of association. The Board has adopted a policy and procedures for managing and, where appropriate, approving conflicts or potential conflicts of interest. At the Board meeting held on 11 February 2010 certain general contractor agreements with Danya Cebus PM, a related party, were approved. Only the independent non-executive directors attended the Board meeting. At the meeting held on 18 August 2010, the Remuneration Committee reviewed the summary of the employment terms of Mrs. Tzviya Leviev-Elazarov as the Head of Marketing and Administration and recommended the Board approve the remuneration package as proposed. The Board approved the appointment and remuneration package recommended by the Remuneration Committee. The Chairman, who had an interest in the subject matter of the Board meeting because of his family connection to Mrs. Leviev-Elazarov, did not attend. At the meeting held on 18 November 2010, the Nomination Committee recommended that Mr. Avinadav Grinshpon not be re-appointed as director at that time. The Board accepted said recommendation. The Chairman, who was deemed to have interest in the subject matter of the Board meeting did not attend thereat. At the Nomination Committee meeting held on 20 May 2010, Mr Christakis Klerides declared his interest regarding his appointment as the senior independent director and therefore was not involved in the discussions held in that regard. Insurance cover is in place to protect board members and officers against liability arising from legal actions taken against them in the course of their duties. The appointment and removal of the Company Secretary is a matter for the Board. All directors have access to the advice and services of the Company Secretary. Resignations from the Board Mr Nadav Grinshpon notified the Board of his decision to step down as a director with effect from 30 June 2010. Mr Avraham Barzilay resigned as a director of the Company with effect from 31 December 2010. Mr Barzilay served as the Chief Financial Officer of AFI Development until 27 July 2010.

33 Committees In accordance with the Code, the Company has established an Audit Committee, a Nomination Committee and a Remuneration Committee, each of which has defined terms of reference which are summarised below DQG DUH DYDLODEOH RQ WKH &RPSDQ\¶V ZHEVLWH ZZZ DIL-development.ru. The members of these committees are appointed principally from among the independent directors. Each committee and each Director has the authority to seek independent professional DGYLFH ZKHUH QHFHVVDU\ WR GLVFKDUJH WKHLU UHVSHFWLYH GXWLHV LQ HDFK FDVH DW WKH &RPSDQ\¶V expense.

Nomination Committee The Nomination Committee comprises Moshe Amit (Chairman) and Christakis Klerides. The Nomination Committee meets at least once a year and more frequently if required and is responsible for preparing selection criteria and appointment procedures for members of the Board of Directors and reviewing on a regular basis the structure, size and composition of the Board of Directors. In undertaking this role, the Committee refers to the skills, knowledge and experience UHTXLUHG RI WKH %RDUG RI 'LUHFWRUV JLYHQ WKH &RPSDQ\¶V VWDJH RI GHYHORSPHQW DQG PDNHV recommendations to the Board of Directors as to any changes. When considering candidates, the Committee used, and continues to use, objective criteria. All appointments are made on merit. The Nomination Committee also considers future appointments and makes recommendations regarding the membership of the Audit and Remuneration Committees. Between Listing and 31 December 2010, the Nomination Committee met on two occasions. The Nomination Committee has made recommendations to the Board regarding the appointment of two new independent directors, Michael Sarris and Demetriou Panayiotis, the current composition of the Audit and Remuneration Committees, and has also made a recommendation not to reappoint Avinadav Grinshpon as a director. All recommendations made by the Nomination Committee were adopted by the Board. The recommendations were made after considering the challenges and opportunities facing the Company, the balance of skills, knowledge and experience required for the position of directors, and the candidates background, experience and capabilities. Remuneration Committee The Remuneration Committee comprises Moshe Amit (Chairman), Christakis Klerides, John Porter and Panayiotis Demetriou. The Remuneration Committee is responsible for: x x

making recommendaWLRQV DQG SUHSDULQJ DQ DQQXDO UHSRUW WR WKH %RDUG RQ WKH &RPSDQ\¶V remuneration policies and reviewing and determining the remuneration of the executive directors; and reviewing the scale and structure of the remuneration packages of the executive directors and the terms of their service or employment contracts, including any share incentive plans, other employee incentive schemes adopted by the Company from time to time and pension contributions. No director or manager may be involved in any decisions as to his/her own remuneration.

The remuneration of the non-executive directors is determined by the Chairman and the other executive directors outside the framework of the Remuneration Committee. No director is involved in discussions or decisions relating to his own remuneration. The Remuneration Committee intends to undertake a comprehensive review of the existing executive remuneration structures in place. The aim of this review is to formulate a remuneration policy in the context of both the market in which we operate and good corporate governance SUDFWLFH 7KLV 5HPXQHUDWLRQ SROLF\ ZLOO EH IXOO\ H[SODLQHG LQ QH[W \HDU¶V $QQXDO 5HSRUW Between Listing and 31 December 2010, the Remuneration Committee met on one occasion. It is expected to meet on at least three occasions annually going forward. The Remuneration Committee did not appoint external consultant(s) during 2010. Long Term Incentive Plan As at 31 December .2010 there was no long term incentive plan available for the Directors.

34 Options held by Directors and Senior Managers Options over 1,089,295 GDRs and 1,089,295 class B shares were granted up to 31 December 2010 to Russian and Israeli employees and directors with an exercise price of US$14 vesting onethird on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. The contractual life is ten years. Pensions and benefits in kind No Pensions and contributions are currently payable to the Directors by the Company Employee Share option plan 7KH $), 'HYHORSPHQW 6KDUH 2SWLRQ 3ODQ WKH ÂłShare Option PlanÂ´ ZDV DGRSWHG E\ WKH %RDUG RQ 12 April 2007. The Remuneration Committee has responsibility for supervising the Share Option Plan, for granting options and administering the Share Option Plan. The Share Option Plan is discretionary and options will only be granted when the committee so determines. All employees and directors (except independent directors) of the Company, and those of the Company's holding company or its subsidiaries are eligible to participate in the Share Option Plan at the discretion of the Remuneration Committee. However, options are currently intended to be granted in the future WR WKH &RPSDQ\ÂśV VHQLRU PDQDJHPHQW GLUHFWRUV H[FHSW non-executive directors) and key SHUVRQQHO RQO\ DQG WR WKRVH RI WKH &RPSDQ\ÂśV VXEVLGLDULHV The price per A Ordinary share or GDR payable on the exercise of an option shall be derived from the closing middle market price for a GDR on the dealing day immediately preceding the date of grant, unless the Remuneration Committee determines in its discretion that a lower price is required, for example, in order to facilitate the recruitment or retention of a key executive. The exercise price of options already granted is US$14.00. In any 10 year period, not more than 10% RI WKH &RPSDQ\ÂśV LVVXHG RUGLQDU\ VKDUH FDSLWal may be issued or be issuable under the Share Option Plan and any other employee share plan the Company operates. Options that have been released or lapsed without being exercised are ignored for the purposes of this limit. Subject to the participant discharging any relevant tax liability, options will normally be exercisable at the following times: (a) as to one-third of the A Ordinary Shares or GDRs in respect of which it was granted from the second anniversary of grant, (b) as to a further one-third of the Ordinary Shares or GDRs from the third anniversary of grant, and (c) as to the remainder of the A Ordinary Shares or GDRs from the fourth anniversary of grant. A different vesting schedule may be determined by the Remuneration Committee at grant. The vesting of options already granted is not subject to any performance conditions. The Remuneration Committee may, however, determine that options granted in the future should be subject to performance conditions. If a participant dies, his options will be exercisable within a period of twelve months following his death. If a participant ceases to be an employee or director by reason of injury, disability, redundancy, the sale of the business for which he works to a third party or retirement, his options may generally be exercised within 6 months of cessation. If a participant ceases to be an employee or director for any other reason, his options will normally lapse unless and to the extent the committee decides otherwise. The Remuneration Committee may satisfy (generally with the consent of the participant) an option on exercise by paying to the participant in cash or other assets the gain (i.e. the difference between the market value of the relevant A Ordinary shares or GDRs on the date of exercise and the exercise price), as an alternative to issuing or transferring A Ordinary Shares or transferring or procuring the transfer of GDRs to the participant. The Remuneration Committee may amend the rules of the Share Option Plan at any time. The Share Option Plan will terminate upon the tenth anniversary of approval, if not terminated earlier by the committee. Termination of the Share Option Plan will not affect the subsisting rights of the participants. 'LUHFWRUVÂś (PROXPHQWV The aggregate emoluments of each of the Directors (including benefits in kind) for the financial accounting period ending 31 December 2010 were as follows:

35 Name

Salary/F ee

Lev Leviev ...................... US$0 Alexander Khaldey.......... US$$967,858 Avraham Barzilay ........... US$0 Izzy Cohen ...................... US$0 Avinadav Grinshpon........ US$0 Christakis Klerides .......... US$50,000 per year plus US$3,500 per meeting of the Board Moshe Amit .................... US$50,000 per year plus US$3,500 per meeting of the Board John Porter ...................... US$50,000 per year plus US$3,500 per meeting of the Board Michael Sarris ................. US$50,000 per year plus US$3,500 per meeting of the Board Panayiotis Demetriou ..... US$50,000 per year plus US$3,500 per meeting of the Board

Benefits in kind US$0 US$0 US$0 US$0 US$0 US$0

A nnual bonuses US$0 US$0 US$0 US$0 US$0 US$0

Pension

Total

US$0 US$0 US$0 US$0 US$0 US$0

US$0 US$0 US$0 US$0 US$0 Not to exceed ÂŁ100,000 per annum

US$0

Not to exceed ÂŁ100,000 per annum

US$0

Not to exceed ÂŁ100,000 per annum

US$0

Not to exceed ÂŁ100,000 per annum

US$0

Not to exceed ÂŁ100,000 per annum

The level of remuneration of each non-executive director is capped at US$100,000 per annum. Audit Committee The Audit Committee comprises four independent directors and meets at least four times each year at appropriate times in the reporting and audit cycle of the Company and more frequently if required. The Audit Committee comprises Christakis Klerides (Chairman), Moshe Amit, John Porter and Michael Sarris. The purpose of the Audit Committee is to assist the Board in fulfilling its responsibilities of oversight and supervision of, among other things: WKH LQWHJULW\ RI WKH &RPSDQ\ÂśV ILQDQFLDO VWDWHPHQWV LQFOXGLQJ LWV DQQXDO DQG LQWHULP accounts; tKH DGHTXDF\ DQG HIIHFWLYHQHVV RI WKH &RPSDQ\ÂśV LQWHUQDO FRQWUROV DFFRXQWDQF\ standards and risk management systems, assessing consistency and clarity of disclosure as well as the operating and financial review and corporate governance statement; and WKH WHUPV RI DSSRLQWPHQW DQG UHPXQHUDWLRQ RI WKH &RPSDQ\ÂśV H[WHUQDO DXGLWRU assessing independence and objectivity and ultimately reviewing the findings and assessing the standard and effectiveness of the external audit. The Audit Committee supervises and monitors, and advises the Board of Directors on, risk management and control systems and the implementation of codes of conduct. In addition, the Audit Committee supervises the submission by the Company of financial information and a number of other audit-related issues and also makes recommendations to the Board accordingly. The Committee held three meetings between Listing and 31 December 2010 . The Board is satisfied that at all stages during 2010 at least one member of the Committee had recent and relevant financial experience. During the period from Listing through to December 31, 2010, the matters reviewed and considered by the Audit Committee included: x x x

x The replacement of the internal auditor of the Company; The Audit Report on Non-Core Asset Management and Collections; The Audit Report on Remedial action implementation of recommendations regarding Marketing of rental space and engagement of tenants; and The Working Plan of the Audit Committee for the year of 2011.

36 Risk Management Processes Internal auditor Until 20 December 2010 tKH &RPSDQ\¶V LQWHUQDO DXGLW IXQFWLRQ was outsourced to a certified accountant in Israel, Grand Thornton (Fahn, Kanne & Co.) nominated from time to time by the Audit Committee, subject to the approval of the Board of Directors. On 20 December 2010 Mr. Shaul Dabby was appointed as the internal auditor of the Company in place of Grand Thornton (Fahn, Kanne & Co.). The internal auditor is responsible for the recommendation of an auditing plan to the Audit Committee. The internal auditor carries out auditing assignments in accordance with such plan and oversees and reports on WKH &RPSDQ\¶V FRPSOLDQFH ZLWK WKH SODQ¶V UHFRPPHQGDWLRQV 7KH internal auditor files an annual report with the Audit Committee and the Board of Directors and is available for any meetings of the Audit Committee or of the Board of Directors. Internal controls Principal aspects of WKH &RPSDQ\¶V Internal Control The Board has overall responsibility for maintaining the Company's system of internal control to VDIHJXDUG VKDUHKROGHUV¶ LQYHVWPHQW DQG WKH Company¶V DVVHWV DQG IRU PRQLWRULQJ the effectiveness of these systems. The Audit Committee supervises, monitors and advises the Board of Directors on risk management and control systems and the implementation of codes of conduct and the auditing plan recommended by Mr Shaul Dabby, the internal auditor. The Company implements its procedures according to the best practice on internal control provided in the Turnbull Guidance «Internal Control: Revised Guidance for Directors on the Combined Code». The Company¶V V\VWHP RI LQWHUQDO FRQWURO VXSSRUWV LGHQWLILFDWLon, evaluation and managing the risks affecting the Group and the business environment in which it operates. Internal Control Framework Structure and authority Authority is delegated from the Board through the senior management to the operating divisions and clear reporting lines and assigned responsibilities exist amongst different management levels within each division. Segregation of duties is applied through the Company. The Company has a clearly set out organisation structure with well-defined reporting lines between the Board and the heads of each operating division. The senior management has the ultimate power of decision over significant matters relating to the financial management of the Company such as: material changes in banking arrangements (including change of bankers facilities and signatory category limits), approval of project budgets and the Annual Business Plan, changes to the Company¶V capital structure and acquisitions and disposals of subsidiaries/projects; Budgeting and reporting The Company has comprehensive project-based budgeting and reporting processes as well as the Company's finance reporting process, monthly operational results and forecast.

Financial control procedures Senior management of the Company has implemented the appropriate controls IRU WKH &RPSDQ\¶V financial reporting processes.

37 Investment appraisal process In the course of investment appraisal process the following guidelines are followed by the Company¶V management: 1. When valuing current portfolio of assets an independent appraiser is used on an annual / semi--annual basis to confirm market value improvement or impairment in value of each of the Company¶V properties. The calculations are then examined by the Company team. 2. When making decisions on re-gearing pipeline / land bank projects internal investment models are prepared to evaluate economic effectiveness and reasonableness of the potential investments. An investment model template approved by the Company's financial department and is used to evaluate economics of potential and current developments. 3. Before disposals of material projects a market-value calculation is performed by an independent appraiser to justify the reasonableness of the contracted price or to analyze any discrepancies revealed. 4. When approving any significant change in the development budget of any of the Company¶V existing projects, internal investment modeling is performed to test potential influence on the project returns. 5. When acquiring new assets an independent appraiser is used to conduct a market survey and determine market value of the target property. Operation policies and procedures The Company has a clearly stated mission and has a well-defined strategy which is determined by the senior management and approved by the Board. The policies and procedures relating to the core business processes are formally documented and communicated to the relevant employees; Compliance with laws and regulations The Company retains legal counsel in all relevant jurisdictions in order to ensure on-going compliance with all applicable laws and regulations. Monitoring and review of activities

Assurances on compliance with the internal control systems are obtained through certain monitoring processes, including a formal annual confirmation of compliance provided by Mr. Khaldey. -Reports from the external auditors Deloitte has performed a review of the effectiveness of the controls operating over the preparation the Company¶V ILQDQFLDO VWDWHPHQWV DV SDUW RI D ZLGHU $), ,QYHVWPHQWV *URXS H[HUFLVH WR SUHSare it for new legislation in Israel Review of effectiveness

In 2011, the Company intends that the Board and the Audit Committee will review the effectiveness of the internal control system, including financial, operational and compliance controls and risk management. The results of such review are intended to be published in the annual report for 2011.

)LQDQFLDO UHSRUWLQJ DQG WKH µJRLQJ FRQFHUQ¶ EDVLV IRU DFFRXQWLQJ

38 The Board seeks to present a balanced and understandable assessment of the CompanyÂśV position and prospects, and details are given in the Report of the Directors. The Directors are responsible for the preparation of the Annual Report and financial statements of the Company. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Dividends During 2010, the Company did not pay dividends. In the future, the Company may consider making dividend payments on its ordinary shares, when and if commercially prudent, after taking into account profits, cash flow and capital investment requirements. No dividends will be paid otherwise than out of profits. Safety The Company takes its commitment to health and safety very seriously. It reviews its policies, procedures and standards on a regular basis to ensure that its properties and developments offer a safe environment for its employees, customers and suppliers, as well as for other visitors. The Company works with its suppliers and contractors to ensure that they meet the Company's high health and safety standards. Communication with shareholders The directors place considerable importance on maintaining open and clear communication with LQYHVWRUV 7KH &RPSDQ\ÂśV investor relations department is dedicated to facilitating communication with shareholders. The Company maintains an ongoing dialogue with its shareholders, discussing a wide range of relevant issues including strategy, performance, the market, management and governance within the constraints of the information already known to the market. The principal methods of communication with shareholders are our news announcements, interim report, annual review and financial statements, the annual general meeting and corporate website. In addition, the Company undertakes regular roadshows to the US, Europe and Israel and participates in sector conferences. During the course of a year, shareholders are kept informed of the progress of the Company through results statements and other announcements that are released through the London Stock Exchange and other news services. Company announcements are made available simultaneously on the CompanyÂśV ZHEVLWH DIIRUGLQJ DOO VKDUHKROGHUV IXOO DFFHVV WR PDWHULDO LQIRUPDWLRQ Shareholders can also raise questions directly with the Company at any time through a facility on the &RPSDQ\ÂśV website. The Company's annual general meeting affords individual shareholders the opportunity to question the Chairman and members of the Board. Notice of the annual general meeting is sent to shareholders at least 21 days before the meeting. At the meeting, after each resolution has been passed, details are given of the number of proxies lodged, together with details of votes cast for and against each resolution. . Principal Activity and status of Company The Company was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company became a public FRPSDQ\ DQG FKDQJHG LWV QDPH WR $), 'HYHORSPHQW 3/& 7KH DGGUHVV RI WKH &RPSDQ\ÂśV registered office is 25 Olympion Street, Omiros & Araouzos Tower, 3035 Limassol, Cyprus.

39 As at the date of this Report, 5% (31/12/2009: 71.20%) RI WKH &RPSDQ\ÂśV VKDUHV DUH KHOG E\ $IULFD ,VUDHO ,QYHVWPHQWV /WG Âł$IULFD-,VUDHOÂ´ ZKLFK LV OLVWHG LQ WKH 7HO $YLY 6WRFN ([FKDQJH Âł7$6(Â´ The decrease was a result of the debt restructuring of Africa-,VUDHOÂśV GHEW Wo the holders of its SUHYLRXVO\ LVVXHG ERQGV WKH Âł6HWWOHPHQWÂ´ SXUVXDQW WR ZKLFK $IULFD-Israel converted part of its GHEW LQWR $), 'HYHORSPHQWÂśV HTXLW\ DPRXQWLQJ WR VKDUHV UHSUHVHQWLQJ DSSUR[LPDWHO\ 17.7% of the Company's equity capital. In order to facilitate this part of the Settlement, Africa-Israel converted a corresponding amount of its shares in the Company into GDRs. Following the completion of the Settlement, Africa-,VUDHO UHPDLQHG $), 'HYHORSPHQWÂśV PDMRULW\ shareholder with approximately 57 RI WKH &RPSDQ\ÂśV VKDUHV ,Q DGGLWLRQ $IULFD-Israel has pledged 126,605,557 of its GDRs in the Company to the bond holders. 6.75 RI WKH &RPSDQ\ÂśV VKDUH FDSLWDO LV KHOG E\ 1LUUR *URXS 6 $ DQG WKH UHPDLQLQJ VKDUHKROGLQJ RI Âł$Â´ VKDUHV LV KHOG E\ a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange Âł/6(Â´ 2Q -XO\ , WKH &RPSDQ\ LVVXHG E\ ZD\ RI D ERQXV LVVXH Âł%Â´ VKDUHV which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of the LSE. On the same date, the ordinary shares of the Company ZHUH GHVLJQDWHG DV Âł$Â´ VKDUHV )XUWKHU GHWDLOV DUH FRQWDLQHG LQ QRWH WR WKH DQQXDO ILQDQFLDO statements. The principal activity of the Company is the holding of investments in subsidiaries and joint ventures.

40 Section Seven: Financial statements MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview As at 31 December 2010, AFI Development had a portfolio of 4 yielding properties, 9 active investment projects under development, 2 completed residential projects, 2 residential projects under development, 8 land bank projects and 5 hotel projects at various stages of development in Russia and Ukraine. These comprise commercial projects focused on offices, shopping centres, hotels and mixed-use properties, residential projects in prime locations in Moscow focused on upscale apartment buildings and residential districts in the Moscow Region aimed at the upper middle class segment of the market. As at 31 December 2010, JLL valued our beneficial interest in the projects in our current portfolio in their existing state of development, at approximately US$2.31 billion. In 2010, we had a profit of US$25.88 million, in comparison to a loss of US$2.66 million in 2009. Our profit derived primarily from the revaluation of our investment portfolio by JLL. In 2010, we recognised a US$93.92 million gain from revaluation of our investment property as opposed to a loss of US$38.92 million in 2009. Net revaluation gain from properties was US$75.77 as opposed to US$22.88 million in 2009. At the same time, our revenue from rental activity increased from US$36.15 million in 2009 to US$43.95 million in 2010. We also realised profits from sales of residential premises at Four Winds and Ozerkovskaya Embankment Phase II projects for a total amount of US$30.17 million as well as income from construction consulting and management services income of US$0.88 million. Key Factors Affecting our Financial Results Our results have been affected, and are expected to be affected in the future, by a variety of factors, including, but not limited to, the following: Macroeconomic Factors Our properties and projects are mainly located in Russia. As a result, Russian macroeconomic trends and country-specific risks significantly influence our performance. The following table sets out certain macroeconomic information for Russia as of and for the dates indicated:

Real Gross Domestic Product growth Consumer prices

Year ended 31 December 2010 4% 8.8%

Year ended 31 December 2009 -7.8% 8.8%

Source: International Monetary Fund Company Specific Factors The following factors affected our performance in 2010: x

The Company completed AFIMALL City with approximately 75% of the retail shops in the Mall let to a wide mix of tenants.

7KH &RPSDQ\ REWDLQHG D 3UHPLXP /LVWLQJ RQ WKH /RQGRQ 6WRFN ([FKDQJH ZLWK LWV Âľ%Âś shares commencing trading on 5 July 2010 under the ticker AFRB.

Aquamarine Hotel on Ozerkovskaya Embankment, which was opened at the end of 2009, started its operation at the beginning of 2010 and achieved high levels of occupancy by year end.

Paveletskaya I Office Complex was completed with significant progress on pre-leasing.

Significant progress on development at the fully-financed Ozerkovskaya Embankment Phase III project was achieved which remains on track for completion in 2011.

41 x

Commencement of development of the Kalinina Hotel in Zheleznovodsk.

Key Portfolio Updates The Company had the following updates in relation to its portfolio: Current projects AFIMALL City The Company completed construction of AFIMALL City with approximately 75% of the retail shops in the mall currently let to a wide mix of tenants. Ozerkovskaya Embankment The Aquamarine Hotel officially opened on Ozerkovskaya Embankment in 2010. As a four star hotel in a central location, it has seen occupancy levels of up to 70% for its 159 rooms and is positioned in the upper mid-scale segment, the fastest growing sector of the Moscow hotel market. The Ozerkovskaya Embankment Phase III project22 is expected to be completed on schedule during 2011. During 2010, the Company secured financing for the final stages of the project in the form of a loan from Sberbank of US$74 million. Consequently, negotiations with potential tenants are now intensively underway.23 Tverskaya Zastava Shopping Centre24 During 2010, construction of the Tverskaya Zastava Shopping Centre continued with focus on external walls and relocation of utility lines.25 Paveletskaya Business Park Construction at the Paveletskaya Business Park continued to progress during 2010. On 22 March 2011, AFI Development announced the lease of the Paveletskaya office complex to a single tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation, ROSATOM. An 11-month lease agreement was signed with ZAO GREENATOM, which will roll

The land lease with respect to Ozerkovskaya Embankment Phase III project initially provided that construction on the plot was to have been completed as of 31 December 2006. However, in April 2009, the City of Moscow adopted a resolution according to which Krown Investments, a 50% subsidiary of the Company had until 28 February 2011 to complete construction and until 30 September 2011 to put the facilities into operation. The supplement to the land lease envisages the same deadlines. As at the date of this preliminary statement, this project is under construction, and as the construction is almost completed, the Company does not expect that the City will take any negative actions in relation to the project or to the land lease under the project at this advanced stage. It is noted that the design documentation for Ozerkovskaya III has been amended to change the designation of the project to office use only. The Company aims to approve the amended design documentation with Mosgosekspertiza and other Moscow state and local authorities (if necessary) shortly.

In addition, the Company is negotiating a potential sale of its rights (or part thereof) in the Ozerkovskaya Embankment project (excluding the Aquamarine hotel and certain residential units) to a non-related third party.

It is noted that according to the resolutions of the City of Moscow, the Tverskaya Zastave Shopping Center is designed to be located on a land site of 33,500 sqm. The Company's group leased about 21,000 sqm of land for construction under three short-term land lease agreements, one lease agreement for the term of more than one year and two lease agreements for terms of less than one year. These lease agreements have expired. This does not impact the value of the project. It is noted that the Company's group continues to pay the lease fees in respect of the expired lease agreements in connection with this project and the City of Moscow (as landlord) has not objected. Therefore, the leases are automatically extended for an indefinite period of time. 7KH *URXSÂśV GHYHORSPHQW ULJKWV ZLWK UHVSHFW WR WKH 7YHUVND\D =DVWDYD 6KRSSLQJ &HQWHU VWHP IURP VHYHUDO resolutions of the City of Moscow, which refer to construction of the shopping center and the traffic arrangements in the project and which grant the Company's group the right to develop the area between the years 2004 and 2010. As a result of the delay to the original construction schedule for the Tverskaya Zastava Shopping Center, AFI Development will need to obtain a new resolution for this project and it has approached the Moscow authorities with a request to extend the project deadline.

On 5 June 2008, the holding company involved in this project, obtained a construction permit, which allows for the construction of the Tverskaya Zastava Shopping Centre and the traffic interchange and which is valid until December 2011. Subject to the understanding reached with the City of Moscow, the holding company is planning to extend the construction permit for the term of completion of the project.

42 over a 3-year period once the ownership certificate has been obtained, which is expected before the end of 2011. The lease will yield annualised revenue of US$4.7 million, excluding VAT. Kalinina Hotel ,Q WKH &RPSDQ\ VWDUWHG WKH GHYHORSPHQW RI WKH .DOLQLQD +RWHO SURMHFW LQ WKH 5XVVLDÂśV southern region in the city of Zheleznovodsk. In 2010, AFI Development cRPSOHWHG D WHQGHU IRU DQG DSSRLQWHG WKH SURMHFWÂśV JHQHUDO FRQWUDFWRU and approved the full development budget of US$20 million. Full financing for the project was secured through a Russian rouble loan from Sberbank. Kossinskaya In August 2009, this completed project was sold to a third party for US$195 million, with the Company receiving approximately US$70 million by 31 December 2009. During 2010, the buyer served AFI Development with a warrant for indictment, submitted in the District Court of Nicosia, Cyprus, whereby the buyer has demanded, inter alia, repayment of approximately US$25 million and approximately US$47 million out of the purchase price, reimbursement in the amount of approximately US$17 million for damages and additional reimbursement of US$2.5 million per each month of delay in the aforementioned payments. As of the date of this statement, the buyer has not yet submitted any supporting allegations or documentation in relation to these claims. AFI Development intends to serve its response within the time frames set forth under the applicable law. According to the legal advisors of the Company the chances of defending the claim are more than 50%. Nonetheless, AFI Development is currently negotiating with the buyer regarding possible settlement options. Land bank Due to risks of not being able to obtain and renew a full set of project documentation for the Kuntsevo project and therefore eliminate uncertainty over the project start date, the Company made a decision to write down the values of Kuntsevo to zero26. Due to uncertainty in demand levels and therefore absence of economic rationale to start the developments, the Company decided to also write-off the values of Volgograd, Zaporozhie and Old Lake projects. Key Events Subsequent to 31 December 2010 Following the yea-end, the following key events occurred:

2Q -DQXDU\ $), 'HYHORSPHQWÂśV PDMRU VKDUHKROGHU $IULFD ,VUDHO ,QYHVWPHQWV agreed to purchase approximately 9.7% of the aggregate equity and voting rights in AFI Development from a company wholly-owned by Mr. Alexander Khaldey, the Executive Director of AFI Development. The total consideration is approximately US$129 million or approximately US$1.27 per each share or GDR of AFI Development. Alexander Khaldey will continue to serve as the Executive Director on the Board of AFI Development and Chairman of OOO AFI Rus and of ZAO Stroyinkom-K.

Following receipt of the requisite regulatory approvals for the operation of AFIMALL City on 4 March 2011, the Company issued a notice to operators of the rented retail units in the mall requiring them to conclude all fit-out works and prepare for the opening of their shops by 10 March, 2011, when AFIMALL City opened to the public.

On 4 March 2011, the Board of AFI Rus accepted the resignation of Evgeny Luneev as Chief Financial Officer, who decided to leave the Company in order to pursue other business opportunities. Mr. Luneev will act as the CFO until 29 March 2011. His successor will be announced in due course.

On 23 March 2011, AFI Development leased the Paveletskaya Office Complex to a single tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation, ROSATOM. An 11-month lease agreement was signed with ZAO GREENATOM, which will roll over a 3-year period once the ownership certificate has been obtained, expected before year end The lease will yield annualized revenue of US$4.7 million, excluding VAT.

During 2010, AFI Development made progress in promoting its Kuntsevo project vis-Ă -vis the Moscow city authorities, including certain progress in obtaining necessary permits for the planning of this project. However, in light of the recent change in the Moscow city government, AFI Development estimates that there might be additional delays in promoting the project and obtaining the aforementioned permits. There is no certainty whether and when the necessary permits will be obtained, and therefore, the Company decided, for accounting purposes, to write-off this project from its balance sheet until more certainty is reached in relation to the development of the project.

43 x

On 25 March 2011, the Company announced that it had reached a non-binding understanding with the Moscow City administration regarding the purchase from the City of Moscow of its 25% share in AFIMALL City and 2,700 parking lots adjacent to AFIMALL City, for a total consideration of approximately US$ 310 million.

On 25 March 2011, the Company announced that it had reached a non-binding understanding with the Moscow City administration to transfer its development rights in the Tverskaya Zastava Shopping Centre to the City of Moscow in exchange for being fully compensated for its development costs incurred in the project to date. Such compensation may take the form of the City of Moscow granting additional building rights for the Company's other projects. As part of the non-binding understanding reached with the City of Moscow, it is intended that AFI Development will remain the owner of the projects surrounding Tverskaya, equating to nearly 350,000 sqm of commercial and residential space. It is also intended that such projects will retain their key development criteria and it is the Company's understanding that the current planning documentation will remain in place.

Disposals and Acquisitions There were no disposals or acquisitions made by the Company in 2010. Presentation of Financial Information Our consolidated financial statements were prepared in accordance with International Financial 5HSRUWLQJ 6WDQGDUGV Âł,)56Â´ DV DGRSWHG E\ WKH (XURSHDQ 8QLRQ Âł(8Â´ ZKLFK ZHUH LQ HIIHFW DW the time of preparing our consolidated financial statements. IFRS differs in various material respects from US GAAP and UK GAAP. Financial policies and practices Revenue Recognition The key elements of our revenue recognition policies are as follows: x

Rental income. We recognise rental income from investment properties leased out under operating leases in our income statement on a straight line basis over the term of the lease.

Construction consulting and construction management fees. We recognise revenues from construction consulting and construction management services in our income statement, in proportion to the stage of the project as at the relevant reporting date. We assess the stage of completion by reference to the amount of work performed.

Sales of trading properties. We recognise revenue from the sale of trading properties in our income statement when the risks and rewards of ownership of the property are transferred to the buyer. When we receive down payments in connection with the sale of trading property that is under construction, we record this figure in the current liabilities on our balance sheet at the time of sale.

Operating expenses Operating expenses consist mainly of employee wages, social benefits and property operating expenses, which are directly attributable to revenues. As substantially all of our activities to date have involved real estate development projects that are still in the pre-construction or construction phase, we have historically capitalized the great majority of our overall costs. We recognise as expenses in our income statement the costs of those employees who have provided construction consulting and construction management services to third parties or, with respect to a portion of such costs, to our 50-50 joint ventures. We also recognise property operating costs (including outsourced building maintenance), utilities, security and other tenant services related to our properties that generate rental income, as expenses on our income statement. Administrative expenses

44 Our administrative expenses comprise primarily of general and administrative expenses such as office rental costs, audit, marketing costs, travelling and entertainment, office equipment as well as depreciation expenses related to our office use motor vehicles. Profit on disposal of investment in subsidiaries We recognise profit or loss from the sale of interests in our subsidiaries when the risks and rewards of ownership are transferred to the buyer in the transaction. Revaluation of investment property An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in the location and categories of properties being valued, YDOXHV WKH &RPSDQ\ÂśV LQYHVWPHQW SURSHUW\ SRUWIROLR HYHU\ VL[ PRQWKV 7KH IDLU YDOXHV DUH EDVHG on market values, being the estimated amount for which a property could be exchanged on the date of the valuation in a transaction between a willing buyer and a willing seller after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. The difference between revalued fair value of investment property and its book value is recognised as revenue in the income statement. Operating profit before net finance costs Operating profit before net finance costs is calculated by adding revenue, other income, profit on disposal of investment in subsidiaries and valuation gains on investment property, and subtracting operating expenses, administrative expenses and other expenses. Finance income Our finance income comprises net foreign exchange gain, if any, and interest income. We recognise foreign exchange gains and losses, principally in connection with US Dollar denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Rouble. Our interest income is derived primarily from interest on our bank deposits which primarily include proceeds from our May 2007 IPO and interest on loans to our joint ventures, including Westec and Krown Investments. Finance expenses Our finance expense comprises net foreign exchange loss, if any, and interest expense on outstanding loans less interest capitalised. We recognise foreign exchange gains and losses principally in connection with US Dollar denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Rouble. We capitalise our interest expense with respect to our development projects that are under construction, for which amounts are not reflected as expenses in our income statement. When funds are borrowed specifically for a particular project, we capitalise all actual borrowing costs related to the project less income earned on the temporary investment of such borrowings and when funding for a project is obtained from our general funds, we capitalise only funding costs related to the particular project based on the weighted average of the borrowing costs applicable to our general funds. Income tax expense Income taxes are calculated based on tax legislation applicable to the country of residence of each of our subsidiaries and, as a company based and organised in Cyprus, we are subject to income tax in Cyprus. We and our Cypriot subsidiaries are currently subject to a statutory corporate income tax rate of 10% in Cyprus. Our Russian subsidiaries were subject to corporate income tax at a rate of 20%. Profits on revaluation gains of investment property in companies based in Russia, from which we have derived the vast majority of our profits to date, are subject to deferred income tax at a rate of 20%. Capitalisation of Costs for Properties under Development We capitalise all costs directly related to the purchase and construction of properties being developed as both investment properties and trading properties, including costs to acquire land rights and premises, design costs, permit costs, costs of general contractors, costs relating to the lease of the underlying land and the majority of our employee costs related to such projects. In addition, we capitalise financing costs related to development projects only during the period of construction of the projects. We do not, however, commence the capitalising of financing costs related to expenditures on a project until construction on each project begins. As the majority of our development projects are still in the pre-construction or construction phases, to date we have capitalised the great majority of the overall costs related to our business activities. In our consolidated financial statements, we capitalised expenses related to the development of our investment and trading properties in aggregate amounts of US$200.16 million and US$160.01

45 million in the years ended 2009 and 2010, UHVSHFWLYHO\ 6LQFH WKH &RPSDQ\¶V DGRSWLRQ RI ,$6 from 1 January 2009, upon completion of construction works, property classified as investment property under development (which are those properties that are being constructed or developed for future use to earn rental income or for capital appreciation) is appraised to market value and reclassified as an investment property and any gain or loss on appraisal is recognised in our income statement. Trading properties, which include those projects where we intend to sell the entire project as a whole or in part (this principally includes our residential development projects), are represented on our balance sheet at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and sale. Exchange Rates Our consolidated financial statements are presented in US Dollars, which is our functional currency. The functional currency of our Russian subsidiaries and joint ventures is the Rouble. The balance sheets of our Russian subsidiaries are translated into US Dollars in accordance with IAS 21, whereby assets and liabilities are translated into US Dollars at the rate of exchange prevailing at the balance sheet date and income and expense items are translated into US Dollars at the average exchange rate for the period. All resulting foreign currency exchange rate GLIIHUHQFHV DUH UHFRJQLVHG GLUHFWO\ LQ RXU VKDUHKROGHUV HTXLW\ XQGHU WKH OLQH LWHP ³WUDQVODWLRQ UHVHUYH ´ :KHQ D foreign operation is sold, the cumulative amount of the exchange differences deferred in the separate component of equity relating to that foreign operation is recognised in our income statement when the gain or loss on disposal of the foreign operation is recognised. The monetary assets and liabilities of our Russian subsidiaries that are denominated in currencies other than Roubles are initially recorded by our subsidiaries at the exchange rate between the Rouble and such foreign currency prevailing at such date. Such monetary assets and liabilities are then retranslated into Roubles at the exchange rate prevailing at each subsequent balance sheet date. We recognise the resulting exchange rate differences between the dates at which such assets or liabilities were originally recorded and at subsequent balance sheet dates as foreign exchange losses and gains in our income statement. In particular, during the period under review, we have recognised foreign exchange rate gains and losses in connection with US Dollar denominated payables and receivables of our Russian subsidiaries. As most of our projects are still in the preyield stage, our Russian subsidiaries have historically had higher levels of US Dollar denominated payables, including interest on loans and general contractor fees, than US Dollar denominated receivables, such as rental payments, with the result that we have historically recorded foreign exchange gains when the Rouble appreciates against the US Dollar, thus reducing the US Dollar denominated liabilities of our Russian subsidiaries when translated into Roubles and foreign exchange losses when the US Dollar appreciates against the Rouble. Recovery of VAT We pay VAT to the Russian authorities with respect to construction costs and expenses incurred in connection with our projects, which, according to Russian tax law, can be recovered upon completion of construction. We have accordingly included recoverable VAT as an asset on our balance sheet, the size of which we expect will increase as the development of our projects advances. Deferred Taxation As we continue to advance the development of our projects, we also expect to record higher deferred tax liabilities and assets. Under Russian tax law, we are not allowed to capitalise certain of the costs in relation to the design, construction and financing of projects that we capitalise for the purposes of our consolidated financial statements under IFRS. As a result, our tax bases in the related assets may be lower than our accounting bases for IFRS purposes, which would result in deferred tax liabilities. However, the recognition of such costs as expenses may result in accumulated tax losses for Russian tax purposes that we may be able to carry forward against estimated future profits, resulting in deferred tax assets. We expect these deferred tax liabilities and assets to grow as our major projects reach more advanced stages. However, such tax losses may only be carried forward to offset gains for a ten--year period under Russian tax law and they may only be utilised in the Russian subsidiary in which such tax losses were generated. Fair Value Calculation Our future results of operations may be affected by our measurement of the fair value of our investment properties and changes in the fair value of such properties. Upon completion of construction, the projects that we have classified as investment property under development are reassessed at fair value and reclassified as investment property, and any gain or loss as a result of reassessment is recognised in our income statement.

46 Any change in fair value of the investment property under development is thereafter recognised as a gain or loss in the income statement. Accordingly, fair value measurements of investment properties under development may significantly affect results of operations even if the Company does not dispose of such assets. Specifically, in May 2008 the International Accounting Standards %RDUG LVVXHG LWV ODWHVW VWDQGDUG WLWOHG ÂľImprovements to International Financial Reporting Standards, 2008 Âś $PHQGPHQWV WR ,$6 Âľ,QYHVWPHQW SURSHUW\Âś XQGHU WKLV VWDQGDUG KDG D VLJQLILFDQW LPSDFW RQ WKH &RPSDQ\ÂśV ILQDQFLDO VWDWHPHQWV LQ DQG ZLOO FRQWLQXH WR GR VR LQ 2010.

47 Results of Operations Description of Income Statement Line Items Summary of income statement for 2010 and 2009

USD 'thousands

For the year ended 31 December 2010

For the year ended 31 December 2009

876

906

(30)

-3%

43 946 30 170 74 992

36 153 25 900 62 958

7 793 4 271 12 034

22% 16% 19%

231 (18 660) (13 178) (20 173) (7 879)

3 361 (9 430) (10 944) (19 085) (693)

(3 130) (9 230) (2 234) (1 089) (7 185)

-93% 98% 20% 6% 1036%

(59 659)

(36 791)

(22 868)

62%

15 333

26 168 (97)

(10 835) 97

-41% -100%

(17 676)

N/A

93 917 (18 144)

38 923 (16 048)

54 991 (2 096)

1.41% 13%

75 773

22 875

52 898

231%

73 430 13 657 (8 816) (7 977) (3 136)

48 945 10 722 (3 723) 6 978 (18 411) (4 434)

24 485 2 935 (5093) (1999) 18 411 1 298

50% 27% 137% 14% -100% -29%

70 294 (44 416)

44 511 (47 166)

25 783 2 749

58% -6%

Profit from continuing operations

25 878

(2 655)

28 532

-1075%

Profit for the period

25 878

(2 655)

28 532

-1075%

Narrative Revenue Construction consulting/management services Rental income Sale of residential

Other income Operating expenses Administrative expenses Cost of sales of residential Other expenses

Gross profit Loss on disposal of investment in subsidiaries Impairment of prepayment for investments Valuation gains on investment property Impairment loss for trading property and PPE Net valuation gain on properties Results from operating activities Finance income Finance expense FX Gain/(Loss) Impairment of financial asset Net finance income/(costs) Profit before income tax Income tax expense

Change 2010/2009 USD 'thousands

Revenue Âą General Overview To date, we have derived revenues from three sources: construction consulting and construction management fees, rental income and sale of residential properties. During the period under review, we derived considerable amounts of revenue from such rental income and sale of residential properties, unlike in the previous reporting period. We expect that our revenue from rental income will increase further in the future once we have completed the construction of the commercial properties we are currently developing for lease. As we no longer provide construction consulting and construction management services to third parties, other than our joint ventures,

48 we do not expect construction consulting and construction management fees to contribute a significant amount to our revenue in the future. Construction consulting and construction management fees We derive construction consulting and construction management fees from project management services we provide to our joint ventures. We typically charge a fixed percentage of the total costs related to the projects for which we provide such services. We provide such services to (i) our 50% RZQHG MRLQW YHQWXUH :HVWHF )RXU :LQGV /WG Âł:HVWHFÂ´ ZKLFK RZQV WKH )RXU :LQGV SURMHFW DQG (ii) our 50% owned joint venture Krown Investments, which is developing the Ozerkovskaya Phase II and Phase III projects. Rental income We derive rental income from our core assets that we acquired or developed in the past and from non--core assets, i.e. existing real estate on land sites where we plan to develop new projects.

USD 'thousands

For the year ended 31 December 2010

Core assets 4 Winds office building 15 904 4 Winds street retail 543 H2O office building 2 454 Berezhkovskya office building 4 650 Aquamarine Hotel 6 054 Plaza Spa Hotel 4 316 Non-core assets Ozerkovskaya IV 520 Premises at Bolshaya Pochtovaya 5 019 Premises at Plaza II (Gruzinsky Val) 159 Premises at Tverskaya Zastava Square 1 162 Other land bank assets 3 165 Total 43 946

For the year ended 31 December 2009

Change 2010/2009 USD

13 648 1 936 2 375 4 342 52 3 721

2 257 (1 392) 79 308 6 002 595

17% -72% 3% 7% 11486% 16%

503 6 206 144 1 052 2 175 36 153

17 (1 187) 15 110 990 7 792

3% -19% 10% 10% 46% 22%

Sale of residential properties Revenue. Our revenue increased by US$12.03 million or 19%, from US$62.96 million in 2009 to US$74.99 million in 2010. This increase resulted mainly from an increase in rental income due to improving rent levels and occupancies, putting in operation of the Aquamarine hotel in February 2010 and higher sale prices for our remaining apartments in 4 Winds and Ozerkovskaya II residential complexes. Operating expenses. Our operating expenses increased by US$9.23 million, or 98%, from US$9.43 million in 2009 to US$18.66 million in 2010. This increase was primarily due to the following: x

Higher expenses resulting from an increase in the number of revenue producing properties we operated. In 2010, Aquamarine hotel operating costs were US$4.40 million.

At Four Winds, new premises were opened (fitness and retail) resulting in additional US$1.51 million utility costs.

Following a more conservative approach to financial reporting, expenses incurred in projects where development is not actively on-going were expensed rather than capitalized. This includes costs of land leases and costs of obtaining project documentation.

49 Administrative expenses. Our administrative expenses increased by US$2.23 million, or 20%, from US$10.94 million in 2009 to US$13.18 million in 2010. This is due to an increase in audit costs and legaO FRVWV WR VXSSRUW WKH &RPSDQ\ÂśV GD\-to-day activities. Other expenses. Other expenses increased by US$7.19 million, or 1036%, from US$0.69 million in 2009 to US$7.88 million in 2010. This increase primarily relates to costs incurred in obtaining Premium listing on LSE of US$2.19 million, writing off non--recoverable VAT (older than 3 years) of US$3.34 million. Net valuation gain/(losses) on investment property. Net result of investment property valuation increased by US$47.37 million, or 122%, from a gain of US$38.92 million in 2009 to a gain of US$93.92 million in 2010 and net valuation gain on properties increased by US$52.90 million, or 231% from US$22.88 million in 2009 to US$75.77 million in 2010, all mainly due to improved market conditions and capital expenditures spent on development projects during the year. In accordance with the revised IAS 40, which became effective on 1 January 2009, we disclosed investment property under development on a fair value basis. Net finance costs. Net finance costs are finance income less finance expense. Our net finance costs decreased by US$1.30 million, or 29%, from a US$4.44 million cost in 2009 to cost of US$3.14 million in 2010. Finance income Our finance income increased by US$2.94 million, or 27%, from US$10.72 million in 2009 to US$13.66 million in 2010. This increase was primarily due to higher interest income received from funds held on bank deposits. Net foreign exchange loss We recorded a net foreign exchange loss of US$7.98 million in 2010 compared to a net foreign exchange gain of US$6.98 million in 2009. Our foreign exchange loss in 2010 was primarily due to the weakening of the Rouble against the US Dollar in 2009 which resulted in US Dollar denominated bank loans payable by our Russian subsidiaries being increased when translated into Rouble and transferring from depreciating against US Dollar Eurobonds to USD based instruments. Finance expenses Finance expenses increased from US$3.73 million in 2009 to US$8.83 million in 2010. The increase in finance expenses from 2009 to 2010 primarily resulted from higher interest expenses accrued (rather than capitalised) on the loan granted by MDM Bank to Westec (Four Winds office), which increased from US$2.05 million to US$6.67 million. Current tax expense. Our current tax expense decreased in 2010 by US$2.74 million or by 6%, from US$47.2 million in 2009 to US$44.4 million in 2010. The reason for this increase is the higher levels of income generated from rental activity of income producing assets. The Cypriot rate of corporate income tax remained unchanged during 2009 and 2010 and profit on the disposal of investments in subsidiaries is not subject to income tax in Cyprus. Profit/Loss for the year. Due to the factors described above, we recorded a US$25.88 million profit for 2010 compared to a loss of US$2.66 million for 2009.

50 Liquidity and Capital Resources Cash flows Summary of cash flows for 2010 and 2009

USD 'thousands Net cash from / (used in) operating activities Net cash used in investing activities Net cash flows from financing activities Effect of exchange rate fluctuations Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December

For the year ended 31 December 2010 22 969

For the year ended 31 December 2009 (15 119)

(148 083) 2 854 2 024 (120 236) 210 830 129 839

(81 541) 76 513 1 438 (18 709) 272 498 210 830

Net cash used in operating activities Net cash from operating activities increased from a negative US$15.12 million in 2009 to a positive US$22.97 million in 2010. This increase was primarily attributable to an increase in profit after adding back all non--cash items in the amount of US$7.55 million, an increase in working capital changes of US$33.48 million from a negative US$14.92 million in 2009 to a positive US$18.56 million in 2010 less additional taxes paid in the amount of US$2.94 million. The increase in working capital changes was mainly due to an increase in cash receipts from the residential sales of Ozerkovskaya II residential complex. In addition, in 2009, a $23.48 million decrease in payables to the JV partner in Krown Investments was recorded as compared to a decrease of only US$5.64 million in 2010. Net cash used in investing activities Net cash used in investing activities increased from a negative US$81.54 million in 2009 to a negative US$148.08 million 2010. This increase was primarily attributable to advances received for the sale of the Kossinskaya project of US$70 million in 2009 whereas only US$3 million in 2010. Net cash used in financing activities Net cash used in financing activities decreased from US$76.52 million in 2009 to US$2.85 million in 2010. The Company borrowed US$130.82 million in 2010 as opposed to US$187.99 million in 2009. Of US$130.82 million, US$117.15 was used to finance AFIMALL City, US$10.40 million for 2]HUNRYVND\D ,,, SURMHFW WKURXJK .URZQ ,QYHVWPHQWV WKH &RPSDQ\ÂśV VXEVLGLDU\ DQG US$2.50 million for the Kalinina hotel project. Capital Resources Capital Requirements. We require capital to finance capital expenditures, consisting of cash outlays for capital investments in active real estate development projects; repayment of debt; changes in working capital; and general corporate activities. Real estate development is a capital -intensive business, and we expect to have significant ongoing liquidity and capital requirements in order to finance our active development projects. For the foreseeable future, we expect that we will continue to rely on our financing activities to support our investing and operating activities. We also expect that our capital expenditures in connection with the development of real estate properties will comprise the majority of our cash outflows for the foreseeable future. We completed 2010 with a strong liquidity position comprising US$129.84 million cash and cash equiYDOHQWV RQ RXU EDODQFH VKHHW DV DW 'HFHPEHU 7KLV LV GXH WR WKH &RPSDQ\ÂśV DELOLW\ WR balance liquidity from a number of sources, including cash proceeds from the IPO and sales of residential projects, as well as use project fenced debt financing to fund our projects.

51 Our financing strategy is to maximise the amount of debt financing for projects under construction while maintaining healthy loan-to-value levels. After delivery and commissioning, we refinance the properties at more favourable terms including longer amortization periods, lower interest rates and higher principal balloon payments. In general, collateral for this debt are property rights and shares of property holding companies. As of December 31, 2010 our debt portfolio was as follows: Project

Lending bank

/Corporate

Max debt limit (USD mln)

Current balance (USD mln)

Available (USD mln)

Nominal Interest rate

Currency

Maturity (dd.mm.yy)

AFIMALL CITY

VTB

279.0

13.25%

RUR

28.08.2013

Tverskaya Mall

Sberbank

280.0

77.8

6 month LIBOR +8%

USD

16.08.2014

Ozerkovskaya III

Sberbank

74.0

10.4*

53.2

13%

RUR

17.06.2015

Kalinina hotel

Sberbank

20.0

2.5

17.5

6.75%

RUR

20.12.2014

4 Winds

MDM Bank

75.0

73.8

10.5%

USD

25.12.2007

Corporate

Deutsche Bank

60.0

10.2

6 month LIBOR +2.4%

USD

12.02.2011

*recoded value on the balance sheet, Borrower is Krown Investments, in which the Company owns 50%.

Accrued Interest expenses of the total amount of loans outstanding are US$2.3 million. In addition, there are loans received by subsidiaries before being acquired by the Company in the amount of US$14.5 million. For more detail, see notes 5 and 25 to our consolidated financial statements. As at 31 December 2010, our loans and borrowings were payable as follows:

As at 31 December 2010

As at 31 December 2009

Less than one year

33,883

94,005

Between one and five years

380,352

263,046

More than five years

54,000

59,050

Total

468,235

416,101

USD 'million

Portfolio Valuation As at 31 December 2010, JLL, our independent appraisers, valued our portfolio of yielding properties at US$161.65 million, our portfolio of commercial and residential projects under development at US$1,605.20 million, our portfolio of residential properties at US$58.10 million, our hotel portfolio at US$97.90 million and our land bank portfolio at US$385.85.

52 Consequently, the total value of our investment portfolio, as valued by JLL, is US$2.31 billion. This figure represents a 20% increase since last valuations carried on 31 December 2009 and 31 May 2010 of US$1.92 billion. Major drivers of the portfolio revaluation were the following: x

Progressed construction works in the Company's projects which are currently under development. The progress had a positive effect on the valuations through a decrease in development risks.

Due to improving macroeconomic conditions in Russia in general and in real estate market in particular, yield compression and rent increases are observed due to which JLL FRQFOXGHG KLJKHU YDOXHV IRU PDQ\ RI WKH &RPSDQ\¶V SURMHFWV

In December 2010, we managed to complete AFIMALL City and achieve a rate of occupancy of 75%. Due to this progress in construction, capitalization of expenses, improvements in yields and letting, JLL appraised the property at 49% more than at 31 December 2009, at approximately US$490 million to US$732 million (in respect of the 75% of the project belonging to the Company). It should be noted that, out of the total value increase, the Company has recorded a revaluation gain of $US96.12 million.

Four Winds residential complex includes commercial premises. Accordingly, despite selling 7 apartments in 2010, resulting in a decrease of balance sheet value of 24%, JLL concluded a 25% increase in the overall value of the property.

Plaza IIa was revalued up by 86% to US$12,200,000 due to a decreased development budget and improved market conditions, resulting from removal of demolishing costs on the site, an expense now to be incurred by the municipal authorities.

Ozerkovskaya Phase III value has increased by 81% due to significant progress achieved LQ FRQVWUXFWLRQ DQG LPSURYLQJ \LHOGV IRU TXDOLW\ RIILFHV LQ 0RVFRZ¶V FHQWUDO EXVLQHVV district.

Ukraine was treated as a single project in the last valuation and as two separate projects being Borysol and Zaporozhie in the December 31, 2010 valuation.

Despite positive values for Kuntsevo, Volgograd, Zaporozhie and Old Lake, the Company made a decision to write down their values to zero. For Kuntsevo, this is due to risks of not being able to obtain and renew a full set of project documentation and therefore eliminate uncertainty over the project start date.

For the other projects ± this is due to uncertainty in demand levels given which there was no economic rationale for starting the developments.

Other changes in JLL valuation and balance sheet values of properties are due to different valuation dates. The last valuation was carried out for some properties as at May 31, 2010 and June 20, 2010 while the comparable balance sheet values are as at December 31, 2009.

53 #

Property

Date of last valuation

Last valuation

1 2

H2O Ozerkovskaya IV Four Winds Office Berezhkovskaya Total

31/12/2009 31/12/2009

14,850,000 2,380,000

31/12/2009

104,025,000

31/12/2009

AFI Mall City Tverskaya Zastava Plaza I Plaza II Plaza IIa Plaza IV

3 4

5 6 7 8 9 1 0 1 1 1 2 1 3

Balance sheet value 31/12/2009

Balance sheet value 31/12/2010

Change in Balance sheet value

11,150,000 1,980,000

15,200,000 2,550,000

36% 29%

100,150,000

119,300,000

19%

27,195,946 140,475,946

33,243,243 170,293,243

22% 21%

31/12/2009 31/12/2009

23,675,000 24,600,000 4% 144,930,000 161,650,000 12% Active Projects Under Development 490,305,334 732,400,000 49% 76,595,000 74,800,000 --2%

490,305,334 76,595,000

732,400,000 74,800,000

49% --2%

31/12/2009 31/12/2009 31/12/2009 31/12/2009

131,725,000 57,600,000 5,825,000 95,260,000

133,700,000 72,800,000 12,200,000 105,000,000

1% 26% 109% 10%

131,725,000 57,600,000 5,825,000 100,273,684

133,700,000 72,800,000 12,200,000 110,526,316

1% 26% 109% 10%

Paveletskaya

31/12/2009

12,750,000

21,600,000

69%

12,750,000

21,600,000

69%

Ozerkovskaya Phase III Kosinskaya

31/12/2009

66,700,000

140,450,000

111%

66,700,000

140,450,000

111%

31/05/2010

144,350,000

144,250,000

190,043,580

144,250,000

--24%

1,442,726,316

27%

Otradnoye

31/05/2010

1,081,110,334 1,437,200,000 33% 1,131,817,598 Residential Projects Under Development 98,500,000 104,000,000 6% 104,695,572

105,962,436

Botanic Garden

31/05/2010

60,400,000

66,533,637

68,841,949

171,229,209

174,804,385

31/05/2010

158,900,000 168,000,000 6% Completed Residential Properties 22,460,000 28,100,000 25%

35,375,609

26,723,248

--24%

31/05/2010

41,500,000

30,589,630

17,342,984

--43%

65,965,239

44,066,232

--33%

74,282,884

--100%

Total 1 4 1 5

Total 1 6 1 7

Four Winds Residential (incl. fitness & retail) Ozerkovskaya II Total

1 8 1 9 2 0 2 1 2 2 2 3 2 4 2 5

2 6 2 7 2 8 2 9 3 0

Valuation 31/12/2010

Change in value

Income yielding properties 15,200,000 2% 2,550,000 7%

63,960,000

119,300,000

64,000,000

30,000,000

15%

--28%

58,100,000 --9% Land Bank Properties 77,200,000 1%

Kuntsevo

31/05/2010

76,800,000

Ruza

31/05/2010

63,500,000

63,700,000

4,171,864

4,108,753

--2%

St. Petersburg

31/05/2010

1,810,000

1,850,000

3,862,524

1,850,000

--52%

Volgograd

31/05/2010

2,925,000

2,950,000

1,266,923

--100%

Bolshaya Pochtovaya Boryspol (Ukraine) Zaporozhie (Ukraine) Old Lake (Kislovodsk) Total

31/05/2010

205,660,000

212,400,000

203,290,490

212,400,000

31/05/2010

11,730,000

13,500,000

15%

13,500,000

n/a

31/05/2010

5,170,000

5,050,000

--2%

34,618,633

--100%

31/05/2010

9,060,000

9,200,000

3,009,187

--100%

376,655,000

324,502,505

231,858,753

--29%

Aquamarine Hotel Plaza Spa Hotel in Kislovodsk Kalinina Hotel in Zheleznovodsk Park Plaza hotel developments in Kislovodsk Versalles project in Kislovodsk Total Grand Total

31/05/2010

40,800,000

385,850,000 Hotels 42,800,000

34,729,389

35,584,021

31/05/2010

30,200,000

30,600,000

27,049,326

26,786,827

--1%

31/05/2010

7,385,000

7,600,000

12,582,000

8,200,000

--35%

31/05/2010

9,730,000

10,000,000

8,045,000

8,386,050

31/05/2010

6,670,000

6,900,000

19,146,000

7,980,000

--58%

94,785,000 1,920,340,334

97,900,000 2,308,700,000

3% 20%

101,551,715 1,935,542,211

86,936,898 2,150,685,826

--14% 11%

54 Critical Accounting Policies Critical accounting policies are those policies that require the application of our management's most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies are those described below. A detailed description of certain of the main accounting policies we use in preparing our consolidated financial statements is set forth in note 3 to our consolidated financial statements. Estimates regarding fair value We make estimates and assumptions regarding the fair value of our investment properties that have a significant risk of causing a material adjustment to the amounts of assets and liabilities on our balance sheet. In particular, our investment properties under development (which currently comprise the majority of our projects) are re-measured at fair value upon completion of construction and the gain or loss on re-measurement is recognised in our income statement, as appropriate. In forming an opinion on fair value, we consider information from a variety of sources including, among others, the current prices in an active market, third party valuations and internal management estimates. The principal assumptions underlying our estimates of fair value are those related to the receipt of contractual rentals, expected future market rentals, void/vacancy periods, maintenance requirements and discount rates that we deem appropriate. We regularly compare these valuations to our actual market yield data and actual transactions and those reported by the market. We determine expected future market rents on the basis of current market rents for similar properties in the same location and condition. Impairment of financial assets We recognise impairment losses with respect to financial assets, including loans receivable and trade and other receivables, in our income statement if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. We test significant financial assets for impairment on an individual basis and assess our remaining financial assets collectively in groups that share similar credit characteristics. Impairment losses with respect to financial assets are calculated as the difference between the asset's carrying amount and the present value of the estimated future cash flows of the asset discounted at the original effective interest rate of that asset. Estimating the discounted present value of the estimated future cash flows of a financial asset is inherently uncertain and requires us both to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Changes in one or more of these estimates can lead us to either recognizing or avoiding impairment charges. Impairment of non-financial assets We recognise impairment loss with respect to non--financial assets, including investment property under development and trading properties under construction, if the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, we discount estimated future cash flows of the asset to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The carrying amounts of impaired non-financial assets are reduced to their estimated recoverable amount either directly or through the use of an allowance account and we include the amount of such loss in our income statement for the period. We assess at each reporting date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, we then estimate the recoverable amount of the asset. Estimating the value in use requires us to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The development of the value in use amount requires us to estimate the life of the asset, its expected cash flows over that life and the appropriate discount rate, which is

55 primarily based on our weighted average cost of capital, itself subject to additional estimates and assumptions. Changes in one or all of these assumptions can lead to us either recognizing or avoiding impairment charges. Deferred income taxes We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves a jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of the temporary differences resulting from differing treatment of items, such as capitalization of expenses, among others, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must assess, in the course of our tax planning process, our ability and the ability of our subsidiaries to obtain the benefit of deferred tax assets based on expected future WD[DEOH SURILW DQG DYDLODEOH WD[ SODQQLQJ VWUDWHJLHV ,I LQ RXU PDQDJHPHQWÂśV MXGJment, the deferred tax assets recorded will not be recovered, a valuation allowance is recorded to reduce the deferred tax asset. Significant management judgment is required in determining our provision for income taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect the potential inability to fully recover deferred tax assets. In our consolidated financial statements the analysis is based on the estimates of taxable income in the jurisdictions in which we operate and the period over which the deferred tax assets and liabilities will be recoverable. If actual results differ from these estimates, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could adversely affect our financial position and results of operations. Share--based payment transactions The fair value of employee stock options is measured using a binomial lattice model. The fair value of share appreciation rights is measured using the Black-Scholes formula. Measurement inputs include share price on the measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historic experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). Service and nonmarket performance conditions attached to the transactions are not taken into account in determining fair value. Related Party transactions Other than he general contractor agreement between the Company and with Danya Cebus PM there were no related party transactions during the financial year 2010.

A F I D E V E L O PM E N T PL C CONSOLIDATED AND PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010

A FI D E V E L OPM E N T PL C CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 CONT ENTS Page Board of Directors and Professional Advisers %RDUG RI 'LUHFWRUV¶ 5HSRUW 'LUHFWRUV¶ 5HVSRQVLELOLW\ 6WDWHPHQW

58 59-61 62

,QGHSHQGHQW $XGLWRUV¶ 5HSRUW

63-64

Consolidated Financial Statements

65-116

Parent Company Separate Financial Statements

117-138

A F I D E V E L O PM E N T PL C BOARD OF DIRECTORS AND PROFESSIONAL ADVISERS

Board of Directors

Lev Leviev - Chairman Izzy Cohen Alexander Khaldey Avraham Barzilay (resigned on 31 December 2010) Avinadav Grinshpon (resigned on 30 June 2010) Moshe Amit Christakis Klerides John Robert Camber Porter Panayiotis Demetriou (appointed on 20 May 2010) Michalakis Sarris (appointed on 20 May 2010)

Secretary

Emerald Secretarial Limited

Independent Auditors

KPMG Limited

Bankers

Joint Stock Commercial Savings Bank of the Russian Federation Joint Stock Company VTB Bank Bank Leumi (UK) plc Deutsche Bank AG London Morgan Stanley Smith Barney LLC Citibank N.A.

Registered Office

Olympion, 25 Omiros & Araouzos Tower, 3035 Limassol, Cyprus

A F I D E V E L O PM E N T PL C

%2$5' 2) ',5(&7256Âś 5(3257 7KH %RDUG RI 'LUHFWRUV RI $), 'HYHORSPHQW 3OF WKH Âł&RPSDQ\Â´ SUHVHQWV WR WKH PHPEHUV LWV annual report together with the audited consolidated financial statements of the Company for the year ended 31 December 2010. PR I N C I PA L A C T I V I T I ES The principal activities of the Group, which remained unchanged from last year, are real estate investment and development. The principal activity of the Company is the holding of investments in subsidiaries. E X A M I N A T I O N O F T H E D E V E L O PM E N T , POSI T I O N A N D PE R F O R M A N C E O F T H E A C T I V I T I ES O F T H E G R O UP AFI Development is one of the leading real estate development companies operating in Russia and other CIS countries. The Company focuses on developing and redeveloping high quality commercial and residential real estate assets in Moscow, the Moscow Region and other major Russian cities such as Kislovodsk, St. Petersburg and Volgograd, as well as Ukraine. The &RPSDQ\ÂśV VWUDWHJ\ LV WR VHOO WKH UHVLGHQWLDO SURSHUWLHV LW GHYHORSV DQG WR Hither lease the commercial properties it develops or sell them if it is able to achieve a favourable return. As at 31 December 2010 the Group has a portfolio of 4 yielding properties, 11 investment projects under development, 2 trading properties, 8 land bank projects and 5 hotel projects at various stages of development in 17 locations in Russia and Ukraine. These comprise commercial projects focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime locations in Moscow focused on upscale apartment buildings and residential districts in the Moscow Region aimed at the upper middle class segment of the market. F I N A N C I A L R ESU L TS 7KH *URXSÂśV UHVXOWV DUH VHW RXW LQ WKH FRQVROLGDWHG LQFRPH VWDWHPHQW RQ SDJH 66. The profit of the Group for the year before taxation amounted to US$70,294 thousand (2009: US$44,511 thousand). 7KH SURILW DIWHU WD[DWLRQ DWWULEXWDEOH WR WKH *URXSÂśV VKDUHKROGHUV DPRXQWHG WR 86 WKRXVDQG (2009: loss US$3,691 thousand), which the Board of Directors recommends to be transferred to the retained earnings.

A F I D E V E L O PM E N T PL C

%2$5' 2) ',5(&7256Âś 5(3257 D I V I D E N DS The Board of Directors does not recommend the payment of a dividend and the net profit for the year is transferred to retained earnings. M A I N R IS KS A N D U N C E R T A I N T I ES The most significant risks faced by the Group and the steps taken to manage these risks are described in note 5 of the consolidated financial statements. F U T U R E D E V E L O PM E N TS The Group is one of the leading real estate development companies operating in Russia. It focuses on developing and redeveloping high quality commercial and residential real estate assets in Moscow and the Moscow Region. The strategy during the reporting period and for the future periods is to sell the residential properties that the Group develops and to either lease the commercial properties that the Group develops or sell them if the Group is able to achieve a favourable return. SH A R E C A PI T A L 3XUVXDQW WR WKH UHVROXWLRQV RI WKH &RPSDQ\ÂśV $*0 RQ 0D\ WKH Company: x increased its authorized share capital from 1,000,000,000 shares of US$0.001 each to 2,000,000,000 shares of US$0.001 each by creation of 1,000,000,000 new shares of nominal value of US$0.001 each to rank pari passu with the existing shares in the capital of the Company, x GHVLJQDWHG WKH KHOG E\ WKH H[LVWLQJ VKDUHKROGHUV DV Âł$Â´ RUGLQDU\ VKDUHV together with 100,000,000 unissued shares forming the part of the authorised share FDSLWDO RI WKH &RPSDQ\ WR EH GHVLJQDWHG DV Âł$Â´ RUGLQDU\ VKDUHV and the remaining XQLVVXHG VKDUHV ZHUH GHVLJQDWHG DV Âł%Â´ RUGLQDU\ VKDUHV x capitalised out of the share premium account an amount of US$523,847 against the LVVXDQFH RI Âł%Â´ RUGLQDU\ VKDUHV RI 86 HDFK IXOO\ SDLG XS ZKLFK were allotted and distributed as bonus shares to and amongst the shareholders of &RPSDQ\ RI -XO\ RQ WKH EDVLV RI RQH Âł%Â´ VKDUH IRU HYHU\ RQH H[LVWLQJ RUGLQDU\ share. 2Q -XO\ WKH &RPSDQ\ÂśV Âł%Â´ VKDUHV LVVXHG DV D ERQXV LVVXH WR WKH existing shareholders, were admitted to a premium listing on the Official List of the UK /LVWLQJ $XWKRULW\ DQG WR WUDGLQJ RQ WKH PDLQ PDUNHW RI /RQGRQ 6WRFN ([FKDQJH Âł/6(Â´ The Company retained its GDR listing as well. Since then each GDR represents one Âł$Â´ ordinary share on deposit with BNY (Nominees) Limited, as custodian. B R A N C H ES The Group operates seven branches and/or representative offices of Cypriot and BVI entities in the Russian Federation. These are Bellgate Construction Ltd branch, which operates AFIMALL City (ex Mall of Russia) project. The Dulverton Ltd branch and the Westec Four Winds Ltd branch, which operate Four Winds I and II projects respectively. Amerone Ltd branch and Bugis Finance branch operating investment properties and Bastet Estates Ltd branch and Falgaro Investments Ltd branch acting as sale agents for residential properties.

A F I D E V E L O PM E N T PL C

%2$5' 2) ',5(&7256Âś 5(3257 B O A R D O F D I R E C T O RS The members of the Board of Directors as at 31 December 2010 and at the date of this report are shown on page 58 7KH GLUHFWRUVÂś GDWH RI DSSRLQWPHQW DQG UHVLJQDWLRQ LI DSSOLFDEOH LV LQGLFDWHG on page 58. The term of those that have not resigned will expire on the date of the next annual general meeting of the shareholders but all of them are eligible for re-election. There were no significant changes in the assignment of responsibilities of the Board of Directors. POST B A L A N C E SH E E T E V E N TS Events which took place after the reporting date and which have a bearing on the understanding of the financial statements are described in note 37 of the consolidated financial statements. I N D E PE N D E N T A U D I T O RS The independent auditors, KPMG Limited, have expressed their willingness to continue offering their services. A resolution reappointing the auditors and giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting. By order of the Board Emerald Secretarial Services Secretary Nicosia, 28 March 2011

A F I D E V E L O PM E N T PL C

',5(&7256¶ 5(63216,%,/,7< 67$7(0(17 Each of the directors, whose names are listed below confirm that, to the best of their knowledge: x

the consolidated and the parent company separate financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and

the adoption of a going concern basis for the preparation of the financial statements continues to be appropriate based on the foregoing and having reviewed the forecast financial position of the Group; and

WKH %RDUG RI 'LUHFWRUV¶ UHSRUWV LQFOXGH D IDLU UHYLHZ RI WKH GHYHORSPHQW DQG SHUIRUPDQFH of the business and the position of the Company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that they face.

The Directors of the Company as at the date of this announcement are as set out below: T he Board of Directors

Executive directors Lev Leviev ± Chairman

.............................................................

Alexander Khaldey

.............................................................

Izzy Cohen

.............................................................

Non-executive directors Moshe Amit

.............................................................

Christakis Klerides

.............................................................

John Robert Camber Porter

.............................................................

Panayiotis Demetriou

.............................................................

Michalakis Sarris

.............................................................

,QGHSHQGHQW $XGLWRUVÂś 5HSRUW To the M embers of A F I Development Plc Report on the Consolidated F inancial Statements We have audited the accompanying consolidated financial statements and the parent company separate financial statements of AFI Development Plc and its subsidiaries, which comprise the consolidated statement of financial position and the parent company separate statement of financial position as at 31 December 2010, and the consolidated statements of income statement, comprehensive income, changes in equity and cash flows and the parent company separate statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. %RDUG RI 'LUHFWRUVÂś 5HVSRQVLELOLW\ IRU WKH FRQVROLGDWHG )LQDQFLDO 6WDWHPHQWV 7KH &RPSDQ\ÂśV %RDUG RI 'LUHFWRUV LV UHVSRQVLEOH IRU WKH SUHSDUDWLRQ RI ILQDQFLDO VWDWHPHQWV WKDW give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap. 113. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. $XGLWRUVÂś 5HVSRQVLELOLW\ Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and GLVFORVXUHV LQ WKH ILQDQFLDO VWDWHPHQWV 7KH SURFHGXUHV VHOHFWHG GHSHQG RQ WKH DXGLWRUÂśV MXGJPHQW including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated and parent company separate financial statements give a true and fair view of the financial position of AFI Development Plc and its subsidiaries as at 31 December 2010, and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and the requirements of the Cyprus Companies Law, Cap. 113. Report on O ther L egal and Regulatory Requirements Pursuant to the requirements of the Companies Law, Cap. 113, we report the following: x We have obtained all the information and explanations we considered necessary for the purposes of our audit. x In our opinion, proper books of account have been kept by the Company. x 7KH &RPSDQ\ÂśV FRQVROLGDWHG DQG SDUHQW FRPSDQ\ VHSDUDWH ILQDQFLDO VWDWHPHQWV DUH in agreement with the books of account. x In our opinion and to the best of the information available to us and according to the explanations given to us, the consolidated and the parent company separate financial statements give the information required by the Companies Law, Cap. 113, in the manner so required. x In our opinion, the information given in the report of the Board of Directors is consistent with the consolidated and parent company separate financial statements. We have nothing to report in respect of the Listing Rules, where we are required to review the part RI &RUSRUDWH *RYHUQDQFH VWDWHPHQW UHODWLQJ WR WKH FRPSDQ\ÂśV FRPSOLDQFH ZLWK WKH QLQH SURYLVLRQV of the June 2008 Combine Code specified for our review. O ther M atter This report, including tKH RSLQLRQ KDV EHHQ SUHSDUHG IRU DQG RQO\ IRU WKH &RPSDQ\ÂśV PHPEHUV DV a body in accordance with Section 156 of the Companies Law, Cap.113 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to.

KPMG Limited Chartered Accountants Nicosia, 28 March 2011

A F I D E V E L O PM E N T PL C

CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 CONT ENTS Page Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Consolidated Statement of Financial Position

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements

71 Âą 116

A F I D E V E L O PM E N T PL C CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2010

Note Revenue Rental income Construction consulting/management fees

2010 86 Âś

2009 86 Âś

43,946 876 44,822

36,153 906 37,059

231 (18,660) (13,178) (7,879) 5,336

3,361 (9,430) (10,944) (693) 19,353

Other income Operating expenses Administrative expenses Other expenses

Loss on disposal of investment in subsidiaries Impairment of prepayment for investments

29 21

(17,676) (17,676)

(97) (97)

13,14 19,20 15

93,917 (1,251) (16,893) 75,773

38,923 (16,048) 22,875

30,170 (20,173) 9,997

25,900 (19,085) 6,815

73,430

48,946 17,699 (22,134) (4,435)

Valuation gain on investment property Impairment loss on trading properties Impairment loss on property, plant and equipment Net valuation gain on properties Proceeds from sale of trading properties Carrying value of trading properties sold Profit on disposal of trading properties

19, 20

Results from operating activities Finance income Finance costs Net finance costs

13,657 (16,793) (3,136)

Profit before income tax Income tax expense

70,294 (44,416)

44,511 (47,166)

Profit/(loss) for the period

25,878

(2,655)

Profit/(loss) attributable to: Owners of the Company Non-controlling interest Profit/(loss) for the period

25,516 362 25,878

(3,691) 1,036 (2,655)

2.44

(0.35)

Profit/(loss) per share Basic and diluted profit/(loss) per share (cent)

The notes on pages 71 to 116 are an integral part of these consolidated financial statements.

A F I D E V E L O PM E N T PL C CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2010

Profit/(loss) for the period O ther comprehensive income: Foreign currency translation differences for foreign operations Total comprehensive income for the period Total comprehensive income attributable to: Owners of the parent Non-controlling interest

2010 86 Âś

2009 86 Âś

25,878

(2,655)

109

(20,623)

25,987

(23,278)

25,629 358 25,987

(24,279) 1,001 (23,278)

The notes on pages 71 to 116 are an integral part of these consolidated financial statements.

A F I D E V E L O PM E N T PL C CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2010

Noncontrolling interest

Total

Total US$ ¶000

US$ ¶000

1,727,515

1,866

1,729,381

Attributable to the owners of the Company Share Share Capital Premium US$ ¶000 US$ ¶000

Translation Retained Reserve Earnings US$ ¶000 US$ ¶000

524 1,763,933 (122,157) Balance at 1 January 2009 Total comprehensive income for the year Profit or loss O ther comprehensive income Foreign currency translation differences (20,588) Total comprehensive income for the year (20,588) T ransactions with owners, recorded directly in equity Contributions by and distributions to owners Share option expense 524 1,763,933 (142,745) Balance at 31 December 2009

85,215

524 1,763,933 (142,745) Balance at 1 January 2010 Total comprehensive income for the year Profit or loss O ther comprehensive income Foreign currency translation differences 113 Total comprehensive income for the year 113 T ransactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of bonus shares 524 (524) Share option expense Total transactions with owners, recorded directly in 524 (524) equity 1,048 1,763,409 (142,632) Balance at 31 December 2010

(3,691) (3,691)

(3,691) (20,588)

1,036 (35)

(2,655) (20,623)

(24,279)

1,001

(23,278)

(575) (575) 80,949 1,702,661

2,867

(575) 1,705,528

80,949

1,702,661

2,867

1,705,528

25,516

362

25,878

113

25,516

25,629

358

25,987

106

106 106,571

106 1,728,396

3,225

106 1,731,621

The notes on pages 71 to 116 are an integral part of these consolidated financial statements.

(4)

109

A F I D E V E L O PM E N T PL C

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010

Assets Investment property Investment property under development Property, plant and equipment Other investments Long-term loans receivable VAT recoverable Goodwill Total non-cur rent assets Trading properties Trading properties under construction Inventory Short-term loans receivable Trade and other receivables Income tax receivable Cash and cash equivalents Assets classified as held for sale Total cur rent assets

2010 US$ Âś000

2009 US$ Âś000

13 14 15 16 17 18

192,973 1,674,585 88,402 38 8,893 153 1,965,044

140,476 1,290,191 102,749 42,959 38 29,780 150 1,606,343

19 20

21,386 174,804 576 79 136,706 689 129,839 464,079

42,050 171,229 324 73 126,748 210,830 190,044 741,298

2,429,123

2,347,641

1,048 1,763,409 (142,632) 106,571

524 1,763,933 (142,745) 80,949

1,728,396 3,225 1,731,621

1,702,661 2,867 1,705,528

25 26

434,352 81,194 515,546

322,096 44,592 366,688

25 27 11 28

33,883 119,834 28,239 181,956

94,005 151,702 1,892 27,826 275,425

697,502

642,113

2,429,123

2,347,641

Note

17 21 11 22 23

Total assets E quity Share capital Share premium Translation reserve Retained earnings Total equity attributable to owners of the Company Non-controlling interest Total equity L iabilities Long-term loans and borrowings Deferred tax liabilities Total non-cur rent liabilities Short-term loans and borrowings Trade and other payables Income tax payable Deferred income Total cur rent liabilities Total liabilities Total equity and liabilities

The consolidated financial statements were approved by the Board of Directors on 28 March 2011. Lev Leviev Chairman

Alexander Khaldey Director

The notes on pages 71 to 116 are an integral part of these consolidated financial statements.

A F I D E V E L O PM E N T PL C CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2010

C ash flows from operating activities Profit/(loss) for the period Adjustments for: Depreciation Interest income Interest expense Share option expense Fair value adjustments Impairment of prepayments for investments Loss on disposal of investment in subsidiaries Profit from sale of property, plant and equipment Change in fair value of other investments Unrealised loss/(gain) on foreign exchange Income tax expense Change in trade and other receivables Change in amounts receivable from related companies Change in inventories Change in trading properties under construction Change in trade and other payables Change in down payments received for construction Change in amounts payable to related companies Change in deferred income

Note

2010 86 Âś

2009 86 Âś

25,878

(2,655)

1,274 (7,084) 7,029 106 (75,773) 17,676 (36) (6,315) 7,977 44,416 15,148 5,618 (3,749) (252) 17,027 1,234 (1,484) (249) 413 33,706 (10,737) 22,969

898 (10,449) 3,038 (575) (22,875) 97 (66) (6,978) 47,166 7,601 12,454 (966) 233 (8,382) (21,885) (1,448) 1,529 3,544 (7,320) (7,799) (15,119)

2,506 (1,950) 98 2,429 10,237 (208) 224 (154,322) (2,360) (4,734) (3) (148,083)

70,311 423 (31,894) 10,100 66,898 (185,342) (7,540) (4,497) (81,541)

130,820 (78,163) (49,803) 2,854

(64) 187,985 (71,668) (39,740) 76,513

15 10 10 23 21 29 10 10 11 21 20 27 27 27 28

Income taxes paid Net cash from/(used in) operating activities C ash flows from investing activities Receipts in advance for the sale of an investment Payment of expenses associated to the disposal of investments Proceeds from sale of property, plant and equipment Net cash outflow for the acquisition of investments Interest received Cash received from investment portfolio Acquisition of other investments Change in advances to builders Payments for investment property under development Change in VAT recoverable Payments for acquisition of property, plant and equipment Acquisition of intangible assets Net cash used in investing activities

21 13, 14 15

C ash flows from financing activities Payments for loan receivable Proceeds from loans and borrowings Repayment of loans and borrowings Interest paid Net cash from financing activities Effect of exchange rate fluctuations Net decrease in cash and cash equivalents Reclassification to cash and cash equivalents/other investments Cash and cash equivalents at 1 January C ash and cash equivalents at 31 December

2,024

(120,236) 39,245 210,830 129,839

The notes on pages 71 to 116 are an integral part of these consolidated financial statements.

1,438 (18,709) (42,959) 272,498 210,830

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 1. INCORPORATION AND PRINCIPAL ACTIVITY $), 'HYHORSPHQW 3/& WKH Âł&RPSDQ\Â´ ZDV Lncorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC. 7KH DGGUHVV RI WKH &RPSDQ\ÂśV UHgistered office is 25 Olympion Street, Omiros & Araouzos Tower, 3035 Limassol, Cyprus. The Company is a 54% (31/12/2009: 71.20%) subsidiary of $IULFD ,VUDHO ,QYHVWPHQWV /WG Âł$IULFD-,VUDHOÂ´ ZKLFK LV OLVWHG LQ WKH 7HO $YLY 6WRFN ([FKDQJH Âł7$6(Â´ 7KH GHcrease was a result of the debt restructuring of Africa-,VUDHOÂśV GHEW WR WKH KROGHUV RI LWV SUHYLRXVO\ LVVXHG ERQGV WKH Âł6HWWOHPHQWÂ´ SXUVXDQW WR ZKLFK $IULFD-Israel FRQYHUWHG SDUW RI LWV GHEW LQWR $), 'HYHORSPHQWÂśV equity amounting to 92,720,923 shares, representing approximately 17.7% of the Company's equity capital. In order to facilitate this part of the Settlement, Africa-Israel converted a corresponding amount of its shares in the Company into GDRs. Following the completion of the Settlement, Africa-Israel remained AFI 'HYHORSPHQWÂśV PDMRULW\ VKDUHKROGHU ZLWK RI WKH &RPSDQ\ÂśV VKDUHV In addition, AfricaIsrael has pledged 126,605,557 of its GDRs in the Company to the bond holders. A 9.7% of the &RPSDQ\ÂśV VKDUH FDSLWDO LV KHOG E\ 1LUUR *URXS 6 $ DQG WKH UHPDLQLQJ VKDUHKROGLQJ RI Âł$Â´ shares is held by a custodian bank in exchange for the GDRs issued and listed in the London 6WRFN ([FKDQJH Âł/6(Â´ 2Q -XO\ WKH &RPSDQ\ LVVXHG E\ ZD\ RI D ERQXV LVVXH Âł%Â´ VKDUHV ZKLFK ZHUH DGPLWWed to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary VKDUHV RI WKH &RPSDQ\ ZHUH GHVLJQDWHG DV Âł$Â´ VKDUHV )XUWKHU GHWDLOV LQ QRWH The consolidated financial statements of the Company as at and for the year ended 31 December FRPSULVH RI WKH &RPSDQ\ DQG LWV VXEVLGLDULHV WRJHWKHU UHIHUUHG WR DV WKH Âł*URXSÂ´ DQG WKH *URXSÂśV LQWHUHVW LQ MRLQWO\ FRQWUROOHG HQWLWLHV 7KH SULQFLSDO DFWLYLW\ RI WKH *URXS LV UHDO estate investment and development. The principal activity of the Company is the holding of investments in subsidiaries and joint YHQWXUHV DV SUHVHQWHG LQ QRWH Âł*URXS (QWLWLHVÂ´ 2. BASIS OF PREPARATION Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the requirements of the Companies Law of Cyprus, Cap. 113. The consolidated financial statements were authorised for issue by the Board of Directors on 28 March 2011. Basis of measurement The consolidated financial statements have been prepared on the historical cost basis as PRGLILHG XS WR 'HFHPEHU E\ WKH SURYLVLRQV RI ,$6 Âł5HSRUWLQJ LQ +\SHULQIODWionary (FRQRPLHVÂ´ ZKLFK SURYLGHV IRU WKH UHVWDWHPHQW RI QRQ-monetary assets and liabilities to account for the inflation. The historical cost basis is also modified in regard to investment properties, investment property under development and other investments which are presented at fair value and trading properties, trading properties under construction which are presented net of any impairment to their value.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 2. BASIS OF PREPARATION (continued) Functional and presentation currency These consolidated financial statements are presented in United States Dollars which is the &RPSDQ\¶V IXQFWLRQDO FXUUHQF\ $OO ILQDQFLDO LQIRUPDWLRQ SUHVHQWHG LQ 8QLWHG 6WDWHV 'ROODUV KDV been rounded to the nearest thousand except when otherwise indicated. Use of estimates and judgements The preparation of the consolidated financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about assumptions and estimation uncertainties and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes: x x x x x x x x x x x x

Note 7 ± business combinations Note 11 ± provision for tax liabilities Note 13 ± valuation of investment property Note 14 ± valuation of investment property under development Note 15 ± valuation of land and buildings and buildings under construction Note 16 ± valuation of other investments Note 19 ± valuation of trading properties Note 20 ± valuation of trading properties under construction Note 21 ± recoverability of receivables Note 26 ± utilisation of tax losses Note 29 ± estimated cost of disposed assets and liabilities Note 34 ± contingencies

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by Group entities, except as explained in the note above which addresses changes in accounting policies. &HUWDLQ FRPSDUDWLYH DPRXQWV KDYH EHHQ UHFODVVLILHG WR FRQIRUP WR WKH FXUUHQW \HDUÂśV presentation. Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.

Acquisitions from entities under common control Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Group are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date that common control was established; for this purpose comparatives are restated. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Group controlling VKDUHKROGHUÂśV FRQVolidated financial statements. The components of equity of the acquired entities are added to the same components within Group equity and any gain/loss arising is recognised directly in equity. Jointly controlled entities A jointly controlled operation is a joint venture carried on by each venturer using its own assets in pursuit of the joint operations. The consolidated financial statements include the assets that the Group controls and the liabilities that it incurs in the course of pursuing the joint operation and the expenses that the Group incurs and its share of the income that it earns from the joint operation. Transactions eli minated on consolidation Intra-group balances and transactions and any unrealised income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year.

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currency (continued) Foreign currency transactions (continued) Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. 7UDQVODWLRQ RI IRUHLJQ HQWLW\¶V ILQDQFLDO VWDWHPHQWV Each entity of the Group determines its own functional currency and items included in the financial statements of each entity are measured using its functional currency. Where the functional currency of an entity of the Group is other than US Dollars, which is the presentation currency of the Group, then the financial statements of the entity are translated in accordance ZLWK ,$6 µ7KH HIIHFWV RI FKDQJHV LQ IRUHLJQ H[FKDQJH UDWHV¶ $VVHWV DQG OLDELOLWLHV RI IRUHLJQ operations, both monetary and non-monetary are translated to US Dollars at exchange rates at the reporting date. Income and expense items are translated to US Dollars using the transaction dates or average rate for the year for practical reasons. All resulting exchange differences are recognised in other comprehensive income and presented in the translation reserve in equity, until the foreign entity is disposed of (in part or in full) in which case the relevant amount is transferred to the profit or loss as part of the profit or loss on disposal. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity in the translation reserve. The table below shows the exchange rates of Russian Roubles which is the functional currency of the Russian subsidiaries of the Group:

As of: 31 December 2010 31 December 2009 Average rate during: Year ended 31 December 2010 Year ended 31 December 2009

Exchange rate Russian Roubles for US$1 30.4769 30.2442

% Change 0.8 2.9

30.3785 31.9333

(4.9) 27.8

Financial Instruments

Non derivative financial instruments Non-derivative financial instruments comprise of financial assets at fair value through profit or loss, loans receivable, trade and other receivables, cash and cash equivalents, loans and borrowings and trade and other payables. The Group recognises loans and receivables and deposits on the date that they are originated. All other non-derivative financial instruments are recognised initially at the trade date at which the Group become party to the contractual provisions of the instrument.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Financial Instruments (continued)

Non derivative financial instruments (continued) They are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Financial liabilities are derecognisHG LI WKH *URXS¶V REOLJDWLRQV specified in the contact expire or are discharged or cancelled. Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale GHFLVLRQV EDVHG RQ WKHLU IDLU YDOXH LQ DFFRUGDQFH ZLWK WKH *URXS¶V Gocumented risk management or investment strategy. Attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein are recognised in profit or loss. Loans and receivables Loan and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest rate method, less any impairment losses. Cash and cash equivalents Cash and cash equivalents comprise of cash in hand, cash at banks and short-term highly liquid investments with original maturities of three months or less. Share capital

Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Investment Property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administration purposes. Investment property is measured at fair value. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation betweHQ D ZLOOLQJ EX\HU DQG D ZLOOLQJ VHOOHU LQ DQ DUP¶V length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. Any gain or loss arising from a change in fair value is recognised in profit or loss.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Investment Property (continued) When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Any gain arising on remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in other comprehensive income and presented in the revaluation reserve in equity. Any loss is recognised immediately in profit or loss. When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting. When the Group begins to redevelop an existing property for continued use as investment property, the property remains an investment property, which is measured based on fair value model, and is not reclassified as property plant and equipment during the redevelopment. Investment property under development Property that is being constructed or developed for future use as investment property is classified as investment property under development and accounted for at fair value until construction or development is complete, at which time it is reclassified as investment property. &HUWDLQ GHYHORSPHQW DVVHWV ZLWKLQ WKH *URXS¶V SRUWIROLR WKDW DUH LQ YHU\ HDUO\ VWDJHV RI developmeQW SURFHVV ZHUH FDWHJRULVHG DV ³ODQG EDQN´ ZLWKRXW DVFULELQJ FXUUHQW PDUNHW YDOXH WR them. Any value ascribed to such land bank projects other that their cost, would result in a gain or loss to be recognised in profit or loss. This approach was adopted due to abnormal market volatility and will be reviewed in the future once market conditions are more stable. All costs directly related with the purchase and construction of a property, land lease payments, and all subsequent capital expenditure for the development qualifying as acquisition costs are capitalised.

Capitalisation of financing costs Financing costs are capitalised if they are directly attributable to the acquisition or production of a qualifying asset. Capitalisation of financing costs commences when the activities to prepare the asset are in process and expenditures and financing costs are being incurred. Capitalisation of financing costs may continue until the assets are substantially ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognised. The capitalisation rate is arrived at by reference to the actual rate payable on borrowings for development purposes or, with regard to that part of the development cost financed out of general funds, to the average rate. The capitalised financing cost is limited to the amount of borrowing cost actually incurred.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalise borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. All hotels are treated as property, plant and equipment due to our significant influence on their management. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and is recognised net within other income/other expenses in profit or loss.

Subsequent costs The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant and equipment. The annual depreciation rates for the current and comparative years are as follows: Buildings Office equipment Motor vehicles

1-2% 10- Ńż Ńż

Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Intangible assets Goodwill Goodwill (negative goodwill) arises upon the acquisition of subsidiaries, associates and joint ventures. Goodwill arising on acquisition represents the excess of the cost of acquisition over the *URXSÂśV LQWHUHVW LQ WKH QHW IDLU YDOXH RI WKH LGHQWLILDEOH DVVHWV OLDELOLWLHV DQG FRQWLQJHQW OLDELOLWLHV of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible assets (continued) Acquisitions of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with equity holders in their capacity as equity holders and therefore no goodwill is recognised as a result of such transactions.

Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity-accounted investee. Trading Properties Trading Properties are measured at the lower of cost and net realisable value. Cost includes expenditure incurred in acquiring the properties and bringing them to their existing condition. In the case of constructed trading properties, cost includes an appropriate share of direct and financing costs. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.

Trading properties under construction Trading properties are defined as projects in which the Group participates as a contractor or as a promoter, and which include construction work with the intention to sell the entire building as a whole or parts thereof. Each project represents one building or a group of buildings. A group of buildings is considered one project when the buildings at the same building site are being constructed according to one building plan and under one building license, and are offered for sale at the same time. Trading properties include cost of land or of rights to the land that constitutes the relative portion of the area, on which the construction work on projects is performed, plus the cost of the work executed on the projects as well as other costs allocated thereto, less the cumulative amounts recognised in profit or loss as cost of trading properties sold up to the end of the reported period. Direct costs and expenses are charged to projects on a specific basis, whereas borrowing costs are allocated among the projects based on the relative proportion of the costs. NonÂąspecific borrowing costs are capitalised to such qualifying asset, or portion thereof which was not financed with specific credit, by weightedÂąaverage rate of the borrowing cost up to the amount of borrowing cost actually incurred. Where the estimated expenses for a building project indicate that a loss is expected, an appropriate provision is set up. Buildings that are under construction are classified as trading properties under construction on the face of the balance sheet. Deferred income Income received in advance is classified under current liabilities as deferred income and comprise rental income received for future periods and amounts received in advance for the sale of trading properties, for which recognition of revenue has not yet commenced.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment Non-derivative financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows GLVFRXQWHG DW WKH DVVHW¶V RULJLQDO HIIective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit characteristics. All impairment losses are recognised in profit or loss.

Non-financial assets 7KH FDUU\LQJ DPRXQWV RI WKH *URXS¶V QRQ-financial assets, other than investment property, investment property under development, VAT recoverable, inventory and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If DQ\ VXFK LQGLFDWLRQ H[LVWV WKHQ WKH DVVHW¶V UHFRYHUDEOH DPRXQW LV HVWLPDWHG )RU JRRGZLOO DQG intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only WR WKH H[WHQW WKDW WKH DVVHW¶V FDUU\LQJ DPRXQW GRHV QRW H[ceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

3. SIGNIFICANT ACCOUNTING POLICIES (continued) Non-current assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal JURXS DUH UHPHDVXUHG LQ DFFRUGDQFH ZLWK WKH *URXSÂśV DFFRXQWLQJ SROLFLHV 7KHUHDIWHU JHQHUDOO\ the assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property and biological assets, ZKLFK FRQWLQXH WR EH PHDVXUHG LQ DFFRUGDQFH ZLWK WKH *URXSÂśV DFFRXQWLQJ SROLFLHV ,PSDLUPHQW losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Employee benefits Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Share-based payment transactions The grant-date fair value of share-based payment options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognised as an expense, with a corresponding increase in liabilities, over the period that the employees unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as personnel expenses in profit or loss. Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Sale of trading properties Revenue from sale of trading properties is recognised in profit or loss when the significant risks and rewards of ownership are transferred to the buyer.

Construction Management fee Revenue from construction management is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed. Rental income Rental income from investment property leased out under operating leases is recognised in profit or loss on a straight line basis over the term of the lease. Finance income and finance costs Finance income comprises interest income on funds invested, fair value gains on financial assets at fair value through profit or loss and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, fair value losses on financial assets at fair value through profit or loss and impairment losses recognised on financial assets. Borrowing costs are recognised in profit or loss using the effective interest method, net of interest capitalised. Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position. Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for temporary differences on the initial recognition of assets or liabilities that affects neither accounting nor taxable profit or loss. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Income tax (continued) Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The provision for taxation either current or deferred is based on the tax rates applicable to the country of residence of each subsidiary. Discontinued operations $ GLVFRQWLQXHG RSHUDWLRQ LV D FRPSRQHQW RI WKH *URXS¶V EXVLQHVV WKDW Uepresents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees. Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to WUDQVDFWLRQV ZLWK DQ\ RI WKH *URXS¶V RWKHU FRPSRQHQWV $OO RSHUDWLQJ VHJPHQWV¶ RSHUDWLQJ UHVXOWV DUH UHYLHZHG UHJXODUO\ E\ WKH *URXS¶V PDQDJHPHQW WR PDNH GHFLVLRQV DERXW UHVRXUFHV WR EH allocated to the segment and assess its performance, and for which discrete financial information is available.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 3. SIGNIFICANT ACCOUNTING POLICIES (continued) Adoption of new and revised International Financial Reporting Standards and Interpretations As from 1 January 2010, the Company adopted all of the IFRSs and International Accounting Standards (IAS), which are relevant to its operations. The adoption of these Standards did not have a significant effect on the financial statements of the Company except for the adoption of ,)56 ³%XVLQHVV &RPELQDWLRQV´ 8QGHU WKH SURYLVLRQV RI WKH UHYLVHG ,)56 HQWLWLHV KDYH D choice to measure non-controlling interest in the acquiree either at its fair value or at its SURSRUWLRQDWH LQWHUHVW LQ WKH DFTXLUHH¶V QHW DVVHWV ,Q DGGLWLRQ FRQWLQJHQW FRQVLGHUDWLRQ LV measured at fair value at the date of acquisition with subsequent changes in the fair value being recognised in profit or loss. Also, acquisition-related costs are expensed through profit or loss at the time the services are received. The Group has applied the revised IFRS 3 in its financial statements prospectively. The following Standards, Amendments to Standards and Interpretations had been issued but are not yet effective for the year ended 31 December 2010:

Standards and Interpretations adopted by the E U x Improvements to IFRSs issued in May 2010 (effective for annual periods beginning on or after 1 July 2010 and 1 January 2010 as applicable). x IFRS 1 (amendment): Limited exemption from comparative IFRS 7 disclosures for first time adopters (effective for annual periods beginning on or after 1 July 2010) x IAS 24 ''Related Party Disclosures'' (revised) (effective for annual periods beginning on or after 1 January 2011). x IAS 32 ''Classification of rights issues'' (amendments) (effective for annual periods beginning on or after 1 February 2010). x IFRIC 14: Prepayments of a Minimum Funding Requirement (amendments) (effective for annual periods beginning on or after 1 January 2011). x IFRIC 19: ''Extinguishing Financial Liabilities with Equity Instruments'' (effective for annual periods beginning on or after 1 July 2010). Standards and Interpretations not adopted by the E U x IFRS 1 ± Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters (amendments) (effective for annual periods beginning on or after 1 July 2011). x ,)56 ³)LQDQFLDO ,QVWUXPHQWV- 'LVFORVXUHV´ DPHQGPHQWV 7UDQVIHUV RI )LQDQFLDO $VVHWV (effective for annual periods beginning on or after 1 July 2011). x IFRS 9 ''Financial Instruments'' (effective for annual periods beginning on or after 1 January 2013). x IAS 12 - ''Deferred tax'': Recovery of Underlying Assets (amendments) (effective for annual periods beginning on or after 1 January 2012). The Board of Directors expects that the adoption of the above financial reporting standards in future periods will not have a significant effect on the financial statements of the Company except for: x

The adoption of IFRS 9 could change the classification and measurement of financial assets. The extent of the impact has not been determined.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 4. DETERMINATION OF FAIR VALUES A QXPEHU RI WKH *URXS¶V DFFRXQWLQJ SRlicies and disclosures require the determination of fair value for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The market value of items of property, plant and equipment is the estimated amount for which they could be exchanged on the date of valuation between a willing EX\HU DQG D ZLOOLQJ VHOOHU LQ DQ DUP¶V OHQJWK WUDQVDFWLRQ DIWHU SURper marketing wherein the parties had each acted knowledgeably. The market value of land and building and buildings under development is based on the quoted market prices for similar items when available and replacement cost when appropriate. Investment property An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in the location and category of property being valued, values WKH *URXS¶V LQYHVWPHQW SURSHUW\ SRUWIROLR $V IDLU YDOXHV KDYH to be reported quarterly, commencing 2009, instead of performing a full revaluation of the property portfolio twice a year, a two-step approach to the valuation of the investment property portfolio and of the investment property under development portfolio has been adopted: first, at the end of every quarter, the independent valuation company reviews the investment property portfolio to determine whether WKHUH KDV EHHQ D VLJQLILFDQW PRYHPHQW LQ WKH SURSHUWLHV¶ YDOXHV FRPSDUHG ZLWK WKHLU current book value. Should the independent valuation company determine that there has indeed been a material change in the values of certain properties, these properties are revalued and their book values are adjusted accordingly. Where there has been no such change in the values, no revaluation is ordered and the corresponding book values remain intact. The aggregate portfolio will be, however, revalued once a year with the resulting valuation to be published with the annual results. The fair values are based on market values, being the estimated amount, for which a property could be exchanged on the date of the valuation between D ZLOOLQJ EX\HU DQG D ZLOOLQJ VHOOHU LQ DQ DUP¶V OHQJWK WUDQVDFWLRQ DIWHU SURSHU PDUNHWLQJ ZKHUHLQ the parties had each acted knowledgeably and willingly. In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A yield that reflects the specific risks inherent in the net cash flows is then applied to the net annual cash flows to arrive at the property valuation. Valuations reflect, where appropriate, the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting vacant accommodation, DQG WKH PDUNHW¶V JHQHUDO SHUFHSWLRQ RI WKHLU FUHGLWZRUWKLQHVV WKH DOORFDWLRQ RI PDLQWHQDQFH DQG insurance responsibilities between the Group and the lessee; and the remaining economic life of the property. When rent reviews or lease renewals are pending with anticipated reversionary increases, it is assumed that all notices and when appropriate counter-notices have been served validly and within the appropriate time.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 4. DETERMINATION OF FAIR VALUES (continued) Share-based payment transactions The fair value of the employee share options is measured using a binomial lattice model. The fair value of share appreciation rights is measured using the Black-Scholes formula. Measurement inputs include the share price on measurement date, the exercise price of the instrument, H[SHFWHG YRODWLOLW\ EDVHG RQ DQ HYDOXDWLRQ RI WKH FRPSDQ\ÂśV KLVWRULF YRODWLOLW\ SDUWLFXODUO\ RYHU the historic period commensurate with the expected term), expected term of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. 5.

FINANCIAL RISK MANAGEMENT O verview The Group has exposure to the following risks from its use of financial instruments: x credit risk x liquidity risk x market risk. 7KLV QRWH SUHVHQWV LQIRUPDWLRQ DERXW WKH *URXSÂśV H[SRVXUH WR HDFK RI WKH DERYH ULVNV WKH *URXSÂśV REMHFWLYHV SROLFLHV DQG SURFHVVHV IRU PHDVXULQJ DQG PDQDJLQJ ULVN DQG WKH *URXSÂśV management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. Risk management framewor k The Board of Directors has overall responsibility for the establishment and oversight of the *URXSÂśV ULVN PDQDJHPHQW IUDPHZRUN DQG LV UHVSRQVLEOH IRU GHYHORSLQJ DQG PRQLWoring the *URXSÂśV ULVN PDQDJHPHQW SROLFLHV 7KH *URXSÂśV ULVN PDQDJHPHQW SROLFLHV DUH HVWDEOLVKHG WR LGHQWLI\ DQG DQDO\VH WKH ULVNV IDFHG E\ the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in PDUNHW FRQGLWLRQV DQG WKH *URXSÂśV DFWLYLWLHV 7KH *URXS WKURXJK LWV WUDLQLQJ DQG PDQDJHPHQW standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. 7KH &RPSDQ\ÂśV $XGLW &RPPLWWHH RYHUVHDV KRZ PDQDJHPHQW PRQLWRUV FRPSOLDQFH ZLWK WKH *URXSÂśV ULVN PDQDJHPHQW SROLFLHV DQG SURFHGXUHV DQG UHYLHZV WKH DGHTXDF\ RI WKH ULVN management framework in UHODWLRQ WR WKH ULVNV IDFHG E\ WKH *URXS 7KH &RPSDQ\ÂśV $XGLW Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. C redit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial LQVWUXPHQW IDLOV WR PHHW LWV FRQWUDFWXDO REOLJDWLRQV DQG DULVHV SULQFLSDOO\ IURP WKH *URXSÂśV receivables from customers and investment securities.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 5.

FINANCIAL RISK MANAGEMENT (continued) C redit risk (continued) Trade and other receivables Financial assets which are potentially subject to credit risk consist principally of trade and other receivables. The carrying amount of trade and other receivable represents the maximum amount exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental customers and buyers of residential including outstanding UHFHLYDEOHV $SSUR[LPDWHO\ SHUFHQW RI WKH *URXS¶V UHQWDO UHYHQXH LV DWWULEXWDEOH WR UHYHQXH from a single customer. However, geographically there is no concentration of credit risk. The Group has policies in place to ensure that, where possible rental contracts are made with customers with an appropriate credit history. Cash transactions are limited to high-credit-quality financial institutions. The utilisation of credit limits is regularly monitored. The Group has no other significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group.

Investments The Group limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any counterparty to fail to meet its obligations, except as disclosed in note 33. Guarantees 7KH *URXS¶V SROLF\ LV WR SURYLGH ILQDQFLDO JXDUDQWHHV RQO\ WR ZKROO\-owned subsidiaries. At 31 December 2010 there was one guarantee outstanding under the non-revolving credit line from VTB Bank for RUR 8,488 million and one under the Joint Stock Commercial Savings Bank of WKH 5XVVLDQ )HGHUDWLRQ ³6EHUEDQN´ ORDQ IRU 86 PLOOLRQ $W 'HFHPEHU WKHUH ZDV only one guarantee outstanding under the non-revolving credit line from VTB Bank for RUR 8,488 million L iquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial REOLJDWLRQV DV WKH\ IDOO GXH 7KH *URXS¶V DSSUoach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the *URXS¶V Ueputation. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available. 7KH *URXS¶V OLTXLGLW\ SRVLWLRQ LV PRQLWRUHG RQ D GDLO\ EDVLV E\ WKH PDQDJHPHQW ZKLFK WDNH necessary actions if required. The Group structures its assets and liabilities in such a way that liquidity risk is minimised.

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 5.

FINANCIAL RISK MANAGEMENT (continued) L iquidity risk (continued) The Group maintains the following lines of credit as at 31 December 2010: x A US$60,000 thousand term loan facility agreement with Quasar Capital Ltd as original lender and Deutsche Bank AG, London Branch, as facility agent. This loan is intended for the financing of the Ozerkovskaya Embankment project. x A non-revolving credit line from the Joint Stock Commercial Savings Bank of the Russian )HGHUDWLRQ Âł6EHUEDQNÂ´ IRU 86 WKRXVDQG 7KH IXQGV GUDZQ XQGHU WKH FUHGLW OLQH are required to be used to finance the construction of the Tverskaya Zastava Shopping Centre project. x A non-revolving credit line from VTB Bank for RUR 8,448 million. The funds drawn under this credit line are being used to finance the construction of the Moscow-City Mall project. x A US$150 PLOOLRQ WHUP ORDQ IDFLOLW\ WKH *URXSÂśV VKDUH LV 86 IURP -RLQW6WRFN &RPPHUFLDO %DQN Âł0RVFRZ %XVLQHVV :RUOGÂ´ 0'0 %DQN x A five year US$74 million loan from Sberbank, obtained during the period by the 50% owned subsidiary Krown Investments LLC. The loan will be used to complete construction works at the Ozerkovskaya Embankment project, Phase III. x An additional four year US$20 million loan from Sberbank was obtained during the period. The loan is denominated in Russian Rouble and will be used for the reconstruction of Kalinina project. M ar ket risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest UDWHV DQG HTXLW\ SULFHV ZLOO DIIHFW WKH *URXSÂśV LQFRPH RU WKH YDOXH RI LWV KROGLQJV RI ILQDQFLDO instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Since the beginning of 2010, the Russian economy showed signs of improvements form the global recession in 2008 and 2009. The improving labour market, positive income growth, and the increased volumes of consumer financing were observed in 2010. In the commercial real estate sector, 2010 represented a turning point in the market, across all segments, including hotels and warehouses. Investor interest in real estate is returning with major focus to Moscow, currently the third largest real estate market in Europe, after London and Paris.

Currency risk The Group is exposed to currency risk on future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations that are denominated in a currency other than the respective functional currencies of Group entities, primarily the United States Dollars and Russian Roubles. The currencies in which these transactions primarily are denominated are Russian Roubles, United States Dollars, Euro and Ukrainian Hryvnia. O perational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes DVVRFLDWHG ZLWK WKH *URXSÂśV SURFHVVHV SHUVRQQHO WHFKQRORJ\ DQG LQIUDVWUXFWXUH DQG IURP external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational ULVNV DULVH IURP DOO RI WKH *URXSÂśV RSHUDWLRQV

A F I D E V E L O PM E N T PL C

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 5.

FINANCIAL RISK MANAGEMENT (continued) O perational risk (continued) 7KH *URXSÂśV REMHFWive is to manage operational risk so as to balance the avoidance of financial ORVVHV DQG GDPDJH WR WKH *URXSÂśV UHSXWDWLRQ ZLWK RYHUDOO FRVW HIIHFWLYHQHVV DQG WR DYRLG FRQWURO procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Group standards for the management of operational risk in the following areas: x x x x x x x x x x

requirements for appropriate segregation of duties, including the independent authorisation of transactions requirements for the reconciliation and monitoring of transactions compliance with regulatory and other legal requirements documentation of controls and procedures requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified requirements for the reporting of operational losses and proposed remedial action development of contingency plans training and professional development ethical and business standards risk mitigation, including insurance where this is effective

Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Group. C apital management The BoaUGÂśV SROLF\ LV WR PDLQWDLQ D VWURQJ FDSLWDO EDVH VR DV WR PDLQWDLQ LQYHVWRU FUHGLWRU DQG market confidence and to sustain future development of the business. 7KHUH ZHUH QR FKDQJHV LQ WKH *URXSÂśV DSSURDFK WR FDSLWDO PDQDJHPHQW GXULQJ WKH \HDU 1HLWKHU the Company nor any of its subsidiaries are subject to externally imposed capital requirements. The Company is committed to delivering the highest standards in boardroom practice and financial transparency through: x clear and open communication with investors; x maintaining accurate quarterly financial records which transparently and honestly reflect the financial position of its business; and x endeavouring to maximise shareholder returns. A full programme of investor relations activity ensures appropriate contact with institutional and private shareholders, with regular meetings, presentations and disclosure of important LQIRUPDWLRQ *UHDW FDUH LV WDNHQ WR SURYLGH VXLWDEO\ GHWDLOHG LQIRUPDWLRQ RQ WKH *URXSÂśV activities and results to enable various stakeholders to understand the performance and prospects of the Group.

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 6.

OPERATING SEGMENT 7KH *URXS KDV UHSRUWDEOH VHJPHQWV DV GHVFULEHG EHORZ ZKLFK DUH WKH *URXSÂśV VWUDWegic business units. The strategic business units offer different types of real estate products and services and are managed separately because they require different marketing strategies as they address different types of clients. For each strategic businHVV XQLW WKH *URXSÂśV PDQDJHPHQW UHYLHZV LQWHUQDO PDQDJHPHQW UHSRUWV RQ DW OHDVW D PRQWKO\ EDVLV 7KH IROORZLQJ VXPPDU\ GHVFULEHV WKH RSHUDWLRQ LQ HDFK RI WKH *URXSÂśV UHSRUWDEOH segments. x x x x

Development Projects Âą Commercial projects: Include construction of property for future lease. Development Projects Âą Residential projects: Include construction and selling of residential properties. Asset Management: Includes the operation of investment property for lease. Other Âą Land bank: Includes the investment and holding of property for future development.

Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed E\ WKH *URXSÂśV PDQDJHPHQW WHDP 6HJPHQW SURILW LV XVHG WR PHDVXUH SHUIRUPDQFH DV management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined RQ DQ DUPÂśV OHQJWK EDVLV Development projects Commercial projects Residential projects

2010 2009 86 Âś 86 Âś External revenues Inter-segment revenue

Asset management

O ther - land ban k Total

2010 2009 2010 2009 2010 2009 2010 86 Âś US$Âś 86 Âś 86 Âś 86 Âś 86 Âś 86 Âś

2009 86 Âś

898 6

380 7

30,183 5

25,923 7

43,041 370

35,767 281

870 290

889 524

74,992 671

62,959 819

Interest revenue

4,641

6,073

246

391

2,173

4,250

7,084

10,722

Interest expense

(6,750)

(2,662)

(30)

(7)

(146)

(119)

(18)

Depreciation Reportable segment profit before income tax Other material non-cash items: Net valuation gains/(losses) on properties Reportable segment assets Reportable segment liabilities

(6,179)

15,012

4,609

133,900

8,974

6,266

66,651 (16,048)

1,476,158 1,150,065 226,086 301,763 662,614

636,308

11,917

12,021

(1,635)

(604)

(412)

(450)

(8,827)

(3,723)

(896)

(318)

(214)

(461)

(1,274)

(898)

11,640

37,239

58,097

22,875

47,632 221,742 2,222,871

2,097,139

23,610

10,725

26,341

(50,531) (34,291) (44,446)

472,995 423,569 12,991

(14,765)

(2,356)

3,459

1,312

690,981

Note: Development projects: investment projects under construction, including construction of residential properties. Asset management: yielding property management (all commercial properties).

647,285

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 6.

OPERATING SEGMENT (continued) Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items. 2010 86 ¶

Revenues Total revenue for reportable segments Other revenue Elimination of inter-segment revenue Consolidated revenue Consolidated revenue comprises of the following items in income statement: Rental income Construction consulting/management fees Proceeds from sale of trading properties Profit or loss Total profit or loss for reportable segments Other profit or loss Valuation gain on investment property Impairment loss on property, plant and equipment Impairment of prepayment for investments Impairment loss on trading properties Impairment loss on financial assets Consolidated profit before income tax Assets Total assets for reportable segments Other assets Other unallocated amounts Consolidated total assets

62,872 906 (819) 62,959

43,946 876 30,170 74,992

36,153 906 25,900 62,959

11,640 557 93,917 (16,893) (17,676) (1,251) 70,294

37,239 2,808 38,923 (16,048) (18,411) 44,511

690,981 6,521 697,502 Reportable segment totals 86 ¶

O ther material items 2010 Interest revenue Interest expense Net valuation losses on properties

74,787 876 (671) 74,992

2,221,871 207,252 2,429,123

L iabilities Total liabilities for reportable segments Other unallocated amounts Consolidated total liabilities

7,084 8,827 58,097

2009 86 ¶

A djustments 86 ¶ (1,798) -

2,097,139 42,959 207,543 2,347,641 647,285 (5,172) 642,113 Consolidated totals 86 ¶ 7,084 7,029 58,097

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 6.

OPERATING SEGMENT (continued) Reportable segment totals 86 ¶

A djustments 86 ¶

Consolidated totals 86 ¶

(1,239) -

10,722 2,484 22,875

O ther material items 2009 Interest revenue Interest expense Net valuation losses on properties

10,722 3,723 22,875

G eographical segments Geographically the segments operate in Russia and Ukraine. In presenting information on the basis of geographical segments, segment revenue and segment assets are based on the geographical location of the properties. Revenues 2010 86 ¶ Russia U kraine

74,985 7 74,992

Non-cur rent Assets 2010 86 ¶ 1,951,525 13,519 1,965,044

Revenues 2009 86 ¶

Non-cur rent Assets 2009 86 ¶

62,952 7 62,959

1,571,699 34,644 1,606,343

M ajor customer Revenues from one customer of the asset management segment, represents approximately 15% of WKH *URXS¶V WRWDO UHQWDO UHYenue. 7.

ACQUISITION OF SUBSIDIARIES During 2010 the Group did not acquire any subsidiaries. During 2009 the Group acquired the following subsidiaries: 100% of Ropler Engineering Inc, a British Virgin Islands company, which owns 100% shareholding of OOO Centr Dosuga Molodegi, registered in Russia. OOO Centr Dosuga Molodegi LLC holds land rights in Kunstevo project. 100% of Amakri Management Limited and 100% of Jaquetta Investments Limited, Cypriot companies, owning cumulatively 100% shareholding of ABG Sozidatel, which holds land rights in Zaporozhie project in Ukraine. 60% of OOO Stroycapital, registered in the Russian Federation. OOO Stroycapital holds the land rights in Volgograd project.

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 7.

ACQUISITION OF SUBSIDIARIES (continued) 7KH DERYH DFTXLVLWLRQV KDG WKH IROORZLQJ HIIHFW RQ WKH *URXS¶V DVVHWV DQG OLDELOLWLHV 2010 2009 US$ ¶000 US$ ¶000

Investment property under development VAT recoverable Trade and other receivables Cash and cash equivalents Long-term loans and borrowings Short-term loans and borrowings Trade and other payables Income tax payable Net identifiable assets

45,156 50 425 20 (26,142) (224) (119) (2) 19,164

Net identifiable assets acquired by the Group based on % of acquisition of each subsidiary Amount paid in previous periods Less cash acquired Net cash outflow from the acquisition of subsidiaries

19,164 12,750 (20) 31,894

OTHER INCOME Other income consist of: 3URILW RQ SULRU \HDUV¶ VDOHV RI LQYHVWPHQW Profit on sale of property, plant and equipment Sundries

2010 US$ ¶000 36 195 231

2009 US$ ¶000 3,239 66 56 3,361

OTHER EXPENSES 2010 US$ ¶000 3ULRU \HDUV¶ VAT non recoverable (note18) Land lease expense Listing expenses Sundries

3,344 2,197 2,079 259 7,879

2009 US$ ¶000 693 693

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 10. FINANCE INCOME AND FINANCE COSTS

Interest income on loans receivable Interest/investment income on bank deposits and cash equivalents Change in fair value of other investments Net foreign exchange gain Finance income Interest expense on loans and borrowings Interest expense on bank loans Interest capitalised Net change in fair value of financial assets Other finance costs Net foreign exchange loss Finance costs Net finance costs

2010 US$ Âś000

2009 US$ Âś000

4,655 2,429 6,573 13,657

6,283 4,439 6,977 17,699

(684) (49,807) 43,462 (1,463) (324) (7,977) (16,793)

(1,630) (29,013) 28,159 (18,935) (715) (22,134)

(3,136)

(4,435)

6XEMHFW WR WKH SURYLVLRQV RI ,$6 Âł%RUURZLQJ FRVWVÂ´ WKH *URXS FDSLWDOLVHG 86 WKRXVDQG (2009: US$28,159 thousand) financing costs to the project that are in construction phase. These were added to the cost of the Investment property under development, US$42,809 thousand (2009: 25,997 thousand) see note 14, and to the cost of Trading properties under construction US$653 thousand (2009: US$2,162 thousand). 11. INCOME TAX EXPENSE C ur rent tax expense Current year Adjustment for prior years Defer red tax expense Origination and reversal of temporary differences Utilisation of previously unrecognised tax losses Total income tax expense

2010 US$ Âś000 7,226 930 8,156

2009 US$ Âś000 7,090 (102) 6,988

36,260 36,260

40,172 6 40,178

44,416

47,166

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 11. INCOME TAX EXPENSE (continued)

The provision for taxation either current or deferred is based on the tax rates applicable to the country of residence of each Group entity. Cypriot entities are subject to 10% corporate rate whereas Russian subsidiaries are subject to 20% corporate rates. % Profit/(loss) for the period after tax Total income tax expense Profit before income tax ,QFRPH WD[ XVLQJ WKH &RPSDQ\¶V GRPHVWLF WD[ UDWH Effect of tax rates in foreign jurisdictions Tax exempt income Non deductible expenses Over provided in prior years Utilisation of previously unrecognised tax losses Tax losses carried forward

2010 86 ¶

2009 86 ¶

25,878 44,416 70,294 10.00 (3.70) (20.09) 76.52 0.46 63.19

(2,655) 47,166 44,511

7,029 10.00 (2,602) (9.28) (14,122) (15.24) 53,786 119.61 325 0.64 0.01 0.22 44,416 105.96

4,451 (4,131) (6,782) 53,239 287 6 96 47,166

The current tax receivable of US$689 thousand for the year ended 31 December 2010 (2009: current tax liability of US$1,892 thousand) represents the amount of income tax receivable/payable in respect of current and prior periods net of payments made up to the year end. 12. EARNINGS PER SHARE Basic earnings per share Profit/(loss) attributable to ordinary shareholders Weighted average number of shares Issued ordinary shares at 1 January Effect of bonus issued on 2 July 2010 Weighted average number of shares Profit/(loss) per share (cent)

2010 86 ¶ 25,516

2009 86 ¶ (3,691)

Shares in thousands

523,847 523,847 1,047,694

2.44

(0.35)

Diluted earnings per share are not presented as their assumed conversion would have an antidilutive effect i.e. increase in earnings per share.

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 13. INVESTMENT PROPERTY 2010 US$ ¶000 Balance 1 January Transfer from investment property under development Renovations/additional cost Fair value adjustment Effect of movement in foreign exchange rates Balance 31 December

140,476 23,592 1,371 29,506 (1,972) 192,973

2009 US$ ¶000 186,275 6,434 (50,531) (1,702) 140,476

The carrying amount of investment property is the fair value of the property as determined by a registered independent appraiser having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Fair values were determined having regard to recent market transactions for similar properties in the same location as WKH *URXS¶V LQYHVWPHQW SURSHUW\ 7KH VDPH DSSOLHV IRU LQYHVWPHQW SURSHUW\ XQGHU GHYHORSPHQW LQ note 14 below. The last valuation took place on 31 December 2010. During the year the commercial area and fitness centre of the second building of Four Winds project was completed and was reclassified as Investment property. 14. INVESTMENT PROPERTY UNDER DEVELOPMENT

Balance 1 January Additions due to acquisitions of subsidiaries Construction costs Capitalised interest Transfer from trading properties under construction (note 20) Transfer to investment property Transfer to trading properties Transfer from/(to) assets classified as held for sale (note 23) Transfer to VAT recoverable Fair value adjustment Disposal Effect of movements in foreign exchange rates Balance 31 December

2010 US$ ¶000

2009 US$ ¶000

1,290,191 152,951 42,809 (23,592) (301) 144,035 (13,724) 85,100 (2,884) 1,674,585

1,112,003 45,156 185,342 25,997 25,773 (190,044) 89,454 (75) (3,415) 1,290,191

The fair value adjustment is presented net of a write-off of the cost of Kuntsevo project. During 2010 the Company made a progress in promoting its Kuntsevo project vis-à-vis the Moscow city authorities, including certain progress in obtaining necessary permits for the planning of this project. However, in light of the recent change in the Moscow city government, AFI Development Plc estimates that there might be additional delays in promoting the project and obtaining the aforementioned permits. There is no certainty whether and when the necessary permits will be obtained, and therefore, the Company decided, for accounting purposes, to write-off this project until more certainty is reached in relation to the development of the project.

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 15. PROPERTY, PLANT AND EQUIPMENT Buildings under construction 86 ¶

Land & Buildings 86 ¶

Office Equipment 86 ¶

Motor Vehicles 86 ¶

39,536 2,090 (16,893) (28) (211) 24,494

61,735 1,695 (59) (635) 62,736

2,509 763 (209) (19) 3,044

2,007 186 (27) (14) 2,152

105,787 4,734 (16,893) (323) (879) 92,426

248 502 (53) (4) 693

1,669 435 (201) (14) 1,889

1,121 337 (7) (9) 1,442

3,038 1,274 (261) (27) 4,024

C ar rying amount At 31 December 2010

24,494

62,043

1,155

710

88,402

Cost Balance at 1 January 2009 Additions Disposals Effect of movement in foreign exchange rates Balance at 31 December 2009

39,038 995 (497) 39,536

58,963 2,901 (129) 61,735

5,254 320 (156) (2,909) 2,509

1,968 281 (499) 257 2,007

105,223 4,497 (655) (3,278) 105,787

Accumulated depreciation Balance at 1 January 2009 Charge for the year Disposals Effect of movement in foreign exchange rates Balance at 31 December 2009

147 101 248

1,450 365 (68) (78) 1,669

940 386 (230) 25 1,121

2,390 898 (298) 48 3,038

39,536

61,487

840

886

Cost Balance at 1 January 2010 Additions Impairment Disposals Effect of movement in foreign exchange rates Balance at 31 December 2010 Accumulated depreciation Balance at 1 January 2010 Charge for the year Disposals Effect of movement in foreign exchange rates Balance at 31 December 2010

C ar rying amount At 31 December 2009

Total 86 ¶

102,749

The impairment charge during the year represents the decrease in fair value of the Kislovodsk area hotels ³.DOLQLQD´ DQG ³9HUVDLOOHV´

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 16. OTHER INVESTMENTS

The amount as of 31 December 2009 represented interest bearing bonds classified at fair value through profit or loss. Initially, these bonds were treated as cash and cash equivalents and reclassified on 30 June 2009 as other investments. On 31 December 2009 the fair value decreased and an amount of $18,411 thousand was recognised in the Income statement as an impairment loss in finance expenses. On 31 December 2010 the investment was reclassified back to cash and cash equivalent after the disposal of the bonds and which is now available cash in brokerage account with the portfolio manager. The money were withdrawn early 2011 to be used in the operations of the Group. At reclassification the fair value of the portfolio was reassessed and a gain of US$6,573 thousand was recognised in the Income Statement as fair value gain in finance income. 17. LOANS RECEIVABLE 2010 US$ ¶000

Long-term loans Loans to non-related companies Short-term loans Loans to non-related companies

2009 US$ ¶000

T erms and loan repayment schedule Terms and conditions of outstanding loans were as follows: Currency

Loans to non-related companies

RUR

Loans to non-related companies

RUR

Nominal interest rate 11%-CBR rate*1.1 11%

Year of maturity 2014 On demand

2010 US$ ¶000

2009 US$ ¶000

79 117

73 111

The above loans are unsecured. 18. VAT RECOVERABLE Represents VAT paid on construction costs and expenses which according to the Russian VAT law can be recovered upon completion of the construction. This VAT is expected to be recovered after more than 12 months from the balance sheet date. Due to the uncertainties in the Russian tax and VAT law, the management has assessed the recoverability of this VAT and has provided for any amounts that their recoverability was deemed doubtful or questionable (see note 9). Under a revised Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities. The Group was successful in recovering VAT during the year, and it is estimated that the major part of the VAT recoverable as at the year-end will be recovered within the next 12 months, which is included in trade and other receivables, note 21.

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 19. TRADING PROPERTIES 2010 US$ ¶000 Balance 1 January Transfer from investment property under development Transfer from trading properties under construction Fair value adjustment Disposals Effect of movements in exchange rates Balance 31 December

42,050 301 (1,251) (19,785) 71 21,386

2009 US$ ¶000 58,236 (3,407) (13,622) 843 42,050

Trading properties comprise of Four Winds II complex and Ozerkovskaya emb. 26 residential building complex. The Group has sold during the period a number of the remaining residential flats. 20. TRADING PROPERTIES UNDER CONSTRUCTION 2010 US$ ¶000 Balance 1 January Construction costs Fair value adjustment Transfer to trading properties Transfer to investment properties under development (note 14) Capitalised interest Disposals Effect of movements in exchange rates Balance 31 December

171,229 3,758 653 (836) 174,804

2009 US$ ¶000 271,035 8,382 (12,641) (58,236) (25,773) 2,162 (5,463) (8,237) 171,229

Trading properties under construction comprise of Botanic Garden and Otradnoye projects. Both projects involve primarily the construction of residential properties. 21. TRADE AND OTHER RECEIVABLES

Advances to builders Amounts receivable from related companies Prepayments for acquisition of investments Trade receivables Other receivables VAT recoverable Tax receivables

2010 US$ ¶000

2009 US$ ¶000

36,206 9,007 19,411 15,176 55,796 1,110 136,706

38,763 5,258 10,000 8,915 39,909 22,850 1,053 126,748

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 21. TRADE AND OTHER RECEIVABLES (continued)

A dvances to builders Include an amount of US$5,803 thousand (31/12/2009: US$NIL) prepaid to Danya Cebus Rus LLC, related party of the Group, for the construction of the Moscow City mall. O ther receivables On 31 December 2009 other receivables included an amount of US$21,473 thousand, reclassified from prepayment for acquisition of investments. This amount represented a prepayment to Straitline B.V. for the acquisition of 100% shareholding in Pinkerton Limited owning 100% of the share capital of JSC WTIC Mercury, registered in the Russian Federation with regard to the Moscow City Hotel project. On 5 May 2010 the Company received an amount of EUR 14,010 thousand, equivalent to US$18,353 thousand in full settlement of the above. The remaining balance of US$3,120 thousand together with additional payments for expenses and construction costs in relation to the same project of US$4,391 thousand, were recognised as impairment of prepayment for investment on 31 March 2010. Prepayments for acquisition of investments On 31 December 2009 the amount of US$10,000 thousand represented a prepayment for the acquisition of 100% shareholding of OOO Avtograd. In 2010 the Company decided not to proceed with the acquisition, and the amount of prepayment was impaired as its recoverability was considered doubtful. 22. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of: Cash at banks Cash in hand

2010 US$ ¶000

2009 US$ ¶000

129,829 10 129,839

210,822 8 210,830

23. NON-CURRENT ASSETS HELD FOR SALE On 6th of August 2009, the Company entered into a sale and purchase agreement for the project Kosinskaya, through the sale of subsidiary Rognerstar Finance Limited which holds 100% of OOO Titon. All assets included in both companies where presented as held for sale following the agreement to sell. A fair value gain of US$13,921 thousand was recognised on the measurement of the investment property under development to adjust its current amount to its fair value less cost to sell, i.e. net present value of the selling price. On 30 June 2010 the Company decided to reclassify .RVLQVND\D SURMHFW IURP ³DVVHWV KHOG IRU VDOH´ EDFN WR LQYHVWPHQW SURSHUW\ XQGHU development due to the uncertainty of fulfilment of the agreement and future date of closing. Pursuant to the reclassification and according to valuation made by professional appraisers the Company recorded an impairment of US$20,689 thousand on 30 June 2010. See note 27 for further details.

Assets classified as held for sale Investment property under development

2010 US$ ¶000 -

2009 US$ ¶000 190,044

100

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 24. SHARE CAPITAL AND RESERVES Share capital Authorised 2,000,000,000 shares of US$0.001 each 1,000,000,000 shares of US$0.001 each Issued and fully paid 523,847,027 A ordinary shares of US$0.001 each 523,847,027 B ordinary shares of US$0.001 each

2010 US$ Âś000

2009 US$ Âś000

2,000 1,000 524 524 1,048

524 524

3XUVXDQW WR WKH UHVROXWLRQV RI WKH &RPSDQ\ÂśV $*0 RQ 0D\ 2010 the Company: x increased its authorized share capital from 1,000,000,000 shares of US$0.001 each to 2,000,000,000 shares of US$0.001 each by creation of 1,000,000,000 new shares of nominal value of US$0.001 each to rank pari passu with the existing shares in the capital of the Company, x GHVLJQDWHG WKH KHOG E\ WKH H[LVWLQJ VKDUHKROGHUV DV Âł$Â´ RUGLQDU\ VKDUHV WRJHWKHU with 100,000,000 unissued shares forming the part of the authorised share capital of the &RPSDQ\ WR EH GHVLJQDWHG DV Âł$Â´ RUGLQDry shares and the remaining 1,376,152,973 unissued VKDUHV ZHUH GHVLJQDWHG DV Âł%Â´ RUGLQDU\ VKDUHV x capitalised out of the share premium account an amount of US$523,847 against the issuance of Âł%Â´ RUGLQDU\ VKDUHV RI 86 HDFK IXOO\ SDLG XS which were allotted and distributed as bonus shares to and amongst the shareholders of Company of 2 July 2010, on the EDVLV RI RQH Âł%Â´ VKDUH IRU HYHU\ RQH H[LVWLQJ RUGLQDU\ VKDUH 2Q -XO\ WKH &RPSDQ\ÂśV Âł%Â´ VKDUHV LVVXHG DV D ERQXV LVVXe to the existing shareholders, were admitted to a premium listing on the Official List of the UK Listing Authority DQG WR WUDGLQJ RQ WKH PDLQ PDUNHW RI /RQGRQ 6WRFN ([FKDQJH Âł/6(Â´ The Company retained its GDR listing as well. Since then each GDR reprHVHQWV RQH Âł$Â´ RUGLQDU\ share on deposit with BNY (Nominees) Limited, as custodian. Share premium It represents the share premium on the issued shares on 31 December 2006 for the conversion of the VKDUHKROGHUVÂś ORDQV WR FDSLWDO 86 WKRXVDQG ,W DOVo includes the share premium on the issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the difference between the offering price, US$14, and the nominal value of the shares, US$0.001, after deduction of all listing expenses. An amount of US$1,399,900 thousand less US$57,292 thousand transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US$524 thousand was capitalised as a result of bonus issued as described in share capital note above.

A F I D E V E L O PM E N T PL C

101

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 24. SHARE CAPITAL AND RESERVES (continued) E mployee Share option plan The company has established an employee share option plan operated by the Board of Directors, which is responsible for granting options and administrating the employee share option plan. Eligible are employees and directors, excluding independent directors, of the Company and employees and directors of the ultimate holding company, Africa Israel Investments Ltd and its subsidiaries. The employees share option plan is discretionary and options will be granted only when the Board so determines at an exercise price derived from the closing middle market price preceding the date of grant. No payment will be required for the grant of the options. In any 10 year period not more that 10 per cent of the issued ordinary share capital may be issued or be issuable under the employee share option plan. Options over 1,089,295 GDRs and 1,089,295 class B shares were granted up to 31 December 2010 to Russian and Israeli employees and directors with an exercise price of US$14 vesting one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. The contractual life is ten years. If a participant ceases to be employed his options will normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options may be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will rank equally with all other shares at the time of issue. The Board of Directors may satisfy (with the consent of the participant) an option by paying the participant in cash or other assets the gain as an alternative of issuing and transferring the shares/GDRs. The Board of Directors may amend the rules of the plan at any time. T ranslation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations to the Group presentation currency and the foreign exchange differences on loans designated as loans to an investee company which are accounted for DV SDUW RI WKH LQYHVWRUÂśV LQYHVWPHQW ,$6 DV WKHLU UHSD\PHQW LV QRW SODQQHG RU OLNHO\ WR RFFXU in the foreseeable future. These foreign exchange differences are recognised directly to Translation Reserve. Retained earnings The amount at each reporting date is available for distribution. No dividends were proposed, declared or paid during the year ended 31 December 2010.

102

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 25. LOANS AND BORROWINGS Non-cur rent liabilities Secured bank loans Secured loan from non-related company C ur rent liabilities Secured bank loans Unsecured bank loans Secured loan from non-related company Unsecured loans from other non-related companies

2010 US$ ¶000

2009 US$ ¶000

434,352 434,352

312,096 10,000 322,096

9,112 10,161 14,610 33,883

10,087 49,566 20,345 14,007 94,005

The loans comprise of the following: (i)

A non-revolving credit line which was obtained from VTB Bank for RUR 8,448 million on 28 August 2008. Up to 31 December 2010 RUR 8,448 million (2009: RUR 4,888 million) where drawn. This credit line initially carried interest of 14.25% (ruble terms) which increased to 16% (rouble terms) on April 2009. The funds drawn under the credit line are being used to finance the construction of the Moscow-City Mall project. The credit line is secured by a pledge over 100% of the shares of Bellgate Constructions Limited, a lien over 75% of the development rights regarding the project, and a mortgage of commercial spaces when completed. AFI 'HYHORSPHQW¶V JXDUDQWHH LV RQH RI WKH HOHPHQWV RI FROODWHUDO IRU WKLV FUHGLW OLQH 2Q July 2010 the Company reached an agreement with VTB Bank extending the repayment period by two years to August 2013 and lowering the interest rate to 13.25% (rouble terms).

(ii) A non-revolving credit line which was obtained from Sberbank for US$280 million during the year ended 31 December 2007. Up to 31 December 2010 US$77,565 thousand (2009: US$77,531 thousand) were drawn. The funds drawn under the credit line are being used to finance the construction of the Tverskaya Zastava Shopping Centre project. This credit line carries interest of 8% above 6-month libor. The credit line is secured by a pledge over 51% of the shares in the asset company, a lien over the development rights regarding the Tverskaya Zastava shopping mall project, and a mortgage over the shopping mall and its parking when completed. (iii) The secured loan from non-related party is from Quasar Capital Limited with Deutsche Bank London Branch acting as facility agent. According to the loan agreement dated 13 February 2006 the total amount of the loan granted was US$60 million, it carries interest at an annual rate of 2.4% above 6 months US$ LIBOR and will be paid in fixed instalments with the last being on 13 February 2011. The current balance as at 31 December 2010 is US$10,161 thousand payable within one year. The full amount of the loan is guaranteed by Africa Israel Investments Ltd, registered in Israel, which is the shareholder of the Company.

103

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 25. LOANS AND BORROWINGS (continued)

(iv) A credit line from MDM Bank which was obtained by the 50% owned subsidiary Dulverton Limited on 9 October 2009 for US$150 million. The loan bears an annual interest of 10.5% and is to be repaid in 31 accelerating quarterly instalments commencing with a first instalment of US$0.6 million, paid in the second quarter of 2010, and increasing to the thirtieth instalment to US$3.5 million payable in the third quarter of 2017 with a subsequent bullet repayment of US$86 million in the fourth quarter of 2017. The credit line was used to pay the two previous existing loans of Westec Four Winds Limited and for financing operating activities. (v) A five year US$74 million loan from Sberbank which was obtained during the year by the 50% owned subsidiary Krown Investments LLC. The loan is denominated in Russian Rouble and is being used to complete construction works at the Ozerkovskaya Embankment project, Phase III. It carries an initial interest rate of 13% which will be reduced to 11.75% at date when mortgage agreement will be presented to Sberbank. Up to 31 December 2010 the subsidiary withdrew RUR 629 million. (vi) A four year US$20 million loan from Sberbank which was obtained during the period by the 100% owned subsidiary Eitan K LLC. The loan is denominated in Russian Rouble and will be used for the reconstruction of Kalinina project. The loan carries an annual interest rate of 16.25%. Since 6th of October 2010 interest rate was decreased to 13.5%. Up to 31 December 2010 the subsidiary withdrew RUR 76 million. The following loans were repaid in full during the year: (i) A non-revolving credit line which was obtained from VTB Bank for RUR 1,488 million on 1 August 2008 and carried interest of 16% (rouble terms) was redeemed on 1 March 2010. (ii) An express credit line which was obtained from Smith Barney Bank for US$20,095 thousand on June 2008 and carried an interest of 3.072% p.a. was redeemed during the year. The loans and borrowings are payable as follows: Less than one year Between one and five years More than five years

2010 US$ Âś000

2009 US$ Âś000

33,883 380,352 54,000 468,235

94,005 263,046 59,050 416,101

104

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 25. LOANS AND BORROWINGS (continued) T erms and debt repayment schedule Terms and conditions of outstanding loans were as follows: Currency Secured loan from Quasar Capital Limited

USD

Secured loan from Sberbank

USD

Secured loan from MDM Bank Secured loan from Smith Barney Secured loan from VTB Bank Unsecured loan from VTB Bank Unsecured loans from non-related companies

USD USD USD USD USD USD USD USD RUR RUR USD RUR RUR RUR RUR

Nominal Year of interest rate maturity 6m USD LIBOR + 2.4% 6m USD LIBOR + 8% 9.5% 16.25% 16.25% 13% 13% 10.5% 13% 3.07% 13.25% 16% 12% 18.5% 0% 12% 0.1% - 5%

2010 US$ ¶000

2009 US$ ¶000

2011

10,161

30,345

2014

72,492

76,946

2011 2014 2011 2015 2011 2017 2011

5,290 2,302 206 9,325 1,031 71,250 2,585 278,983 1,466 5,499 6,852 78 715 468,235

707 73,750 1,651 7,730 161,400 49,566 1,452 4,899 6,904 51 700 416,101

2010 US$ ¶000

2009 US$ ¶000

17,468 46,458 38,763 (4,150) (1,026) (319) (197) 2,776 1,583 (20,162) 81,194

3,102 57,304 (1,525) 72 70 5 (538) 202 (34) (14,066) 44,592

2013 2011 2011 2011 2011 2011

26. DEFERRED TAX ASSETS AND LIABILITIES Deferred tax (assets) and liabilities are attributable to the following:

Investment property Investment property under development Property, plant and equipment Trading properties under construction Trade and other receivables Cash and cash equivalents Long term loans and borrowings Short term loans and borrowing Trade and other payables Other items Tax losses carried forward Deferred tax liability

105

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 27. TRADE AND OTHER PAYABLES

Trade payables Payables to related parties Amount payable to builders VAT and other taxes payable Down payments received for construction projects Provisions for construction costs Receipts in advance from sale of investment Other payables

2010 US$ ¶000

2009 US$ ¶000

1,845 1,751 10,650 2,299 45,867 57,422 119,834

234 2,000 12,983 1,416 1,484 625 70,311 62,649 151,702

The above are payable within one year and bear no interest. Receipts in advance from sale of investment On 6th August 2009, the Company has entered into a sale and purchase agreement for the Kosinskaya project, through the sale of subsidiary Rognerstar Finance Limited at which date it was reclassified as asset held for sale. Under the original terms, sale proceeds of US$195 million were expected to be received within one year, by August 2010. Up to 31 December 2010 the Company received US$73 million (2009: US$70 million) less expenses incurred in relation to the sale. As of the expected dated of receipt the buyer has not paid the full amount and the title of the assets was still under the ownership of the Company. Due to the uncertainty of fulfilment the agreement and future date of closing, the company had decided to reclassify Kosinskaya project from assets classified as held for sale to investment property under development on 30 June 2010. Pursuant to the reclassification and according to valuation made by independent appraisers the Company recorded an impairment of US$20,689 thousand. In addition, the Company also decided to GHUHFRJQLVH 86 PLOOLRQ IURP ³UHFHLSWV LQ DGYDQFH IURP VDOH RI LQYHVWPHQW´ DV WKLV DPRXQW represents the minimum amount that is not refundable according to the contract. Other payables Include an amount of US$51,869 thousand (2009: US$57,508 thousand) payable to the 50% partner of the joint venture Krown Investments LLC. 28. DEFERRED INCOME Represents rental income received in advance, which corresponds to periods after the reporting date. 29. DISPOSAL OF SUBSIDIARIES T he profit on disposal of subsidiaries consists of: Loss on disposal of investment in subsidiaries

2010 US$ ¶000

2009 US$ ¶000

(97)

106

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 29. DISPOSAL OF SUBSIDIARIES (continued) 7KH DERYH GLVSRVDOV KDG WKH IROORZLQJ HIIHFW RQ WKH *URXS¶V DVVHWV DQG OLDELOLWLHV

2010 US$ ¶000

2009 US$ ¶000 Sundry Subsidiaries*

Investment property under development Trade and other receivables Cash and cash equivalents Long term loans and borrowings Short term loans and borrowings Trade and other payables Net identifiable assets

(75) (14) (8) 68 3 98 72

Consideration received in cash Cash disposed of Net cash inflow from the disposal of subsidiaries

8 (8) -

* Comprises of a number of subsidiaries which are individually insignificant, namely Temalis Limited, Sewaka Limited, Guzela Limited, OOO Ko Development, OOO Rostranconsult and OOO StroyInkom Realt.

30. JOINTLY CONTROLLED ENTITIES Included in the consolidated financial statements are the following items that rHSUHVHQW WKH *URXS¶V interests in the assets and liabilities, income and expenses of the joint ventures: Ownership

Current Non-current Current Non-current Profit / assets assets liabilities liabilities Income Expenses (loss) US$ ¶000 US$ ¶000 US$ ¶000 US$ ¶000 US$ ¶000 US$ ¶000 US$ ¶000

2010: Nouana Limited OOO Tirel ZAO Kama Gate OOO Krown Investments Westec Four Winds Limited Dulverton Limited

50% 50% 50% 50% 50% 50%

163 2,098 31,508 8,025 10,488 52,282

4,016 13,072 141,283 144,046 212,351 514,768

50 597 11,844 12,062 7,606 32,159

9,932 10,758 93,702 52,359 90,490 257,241

4,352 79,329 8,414 45,318 137,413

2009: Nouana Limited OOO Tirel ZAO Kama Gate OOO Krown Investments Westec Four Winds Limited Dulverton Limited

50% 50% 50% 50% 50% 50%

146 1,476 31,255 12,251 130,071 175,199

4,640 13,210 61,902 150,774 223,689 454,215

96 980 15,192 17,293 18,495 52,056

6,745 11,307 67,111 44,927 135,114 265,204

370 (873) (503) 3,739 (3,045) 694 46 (524) (478) 23,737 (16,203) 7,534 35,405 (26,375) 9,030 55,921 (59,269) (3,348) 119,218 (106,289) 12,929

(3,776) (2,913) (22,919) (17,919) (18,922) (66,449)

(3,776) 1,439 56,410 (9,505) 26,396 70,964

107

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 31. FINANCIAL INSTRUMENTS C redit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Carrying amount Note Other investments Long term loans receivable Short term loans receivable Cash and cash equivalents Trade and other receivables

16 17 17 22 21

2010 86 ¶

2009 86 ¶

38 79 129,839 100,500 230,456

42,959 38 73 210,830 77,985 331,885

L iquidity risk The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

Secured bank loans Secured loans Unsecured loans Trade and other payables

Carrying Amount 86 ¶

Contractual Cash flow 86 ¶

6 months or less 86 ¶

6-12 months 86 ¶

1-2 years 86 ¶

2-5 years 86 ¶

More than 5 years 86 ¶

443,464 10,161 14,610 73,967

(615,943) (10,188) (14,610) (73,967)

(29,310) (10,188) (14,468) (73,967)

(32,554) (142) -

(63,994) -

(425,555) -

(64,530) -

C ur rency risk

Sensitivity analysis The following shows the magnitude of changes in respect of a number of major factors influencing the GroXS¶V SURILW EHIRUH WD[HV 7KH DVVHVVPHQW KDV EHHQ PDGH on the year-end figures. A 10% strengthening of the United States Dollar against the following currencies at 31 December 2010 would have increased/ (decreased) equity and profit for the year by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2009.

108

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 31. FINANCIAL INSTRUMENTS (continued) C ur rency risk (continued)

Sensitivity analysis (continued)

31 December 2010 Russian Roubles Ukrainian Hryvnia 31 December 2009 Russian Roubles Ukrainian Hryvnia

Equity US$ ¶000

Profit for the year US$ ¶000

(24,265) 3,057

181 125

(21,123) 2,924

320 657

A 10% weakening of the United States Dollar against the above currencies at 31 December 2010 would have the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. Interest rate risk

Profile $W WKH UHSRUWLQJ GDWH WKH LQWHUHVW UDWH SURILOH RI WKH *URXS¶V LQWHUHVW-bearing financial instruments was: Carrying amount 2010 2009 US$ ¶000 US$ ¶000 F ixed rate instruments Financial assets 111,932 43,952 Financial liabilities (380,292) (300,373) (268,360) (256,421) V ariable rate instruments Financial assets 18,023 123,705 Financial liabilities (87,943) (115,728) (69,920) 7,977

109

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 31. FINANCIAL INSTRUMENTS (continued) Interest rate risk (continued)

Cash flow sensitivity analysis for variable rate instruments An increase of 100 basis points in interest rates at the reporting date would have increased/ (decreased) equity and profit for the year by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2009.

31 December 2010 Variable rate instruments 31 December 2009 Variable rate instruments

Equity US$ Âś000

Profit for the year US$ Âś000

(699)

A decrease of 100 basis points in interest rates at the reporting date would have the equal but opposite effect on the above instruments to the amounts shown above, on the basis that all other variables remain constant. F air values Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However judgement is required to interpret market data to determine the estimated fair value. The fair values of financial assets and liabilities are not materially different than their carrying amount shown in the balance sheet. Russian B usiness E nvironment The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments.

110

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 32. OPERATING LEASES L eases as lessee Non-cancellable operating lease rentals are payable as follows:

Less than a year Between one and five years More than five years Amount recognised as an expense during the year

2010 US$ ¶000

2009 US$ ¶000

4,629 11,129 23,625 39,383

5,632 14,749 22,223 42,604

3,261

2,054

The ownership of land in the Russian Federation is rare and especially within Moscow region, in which all of the property with only a few exceptions, is owned by the City of Moscow. The majority of land is occupied by private entities pursuant to lease agreements between occupants, of the building located on the land, and the City of Moscow. The Group has several long-term operating leases for land. These leases are entered into with the intention and right to develop the land and carry out construction. Typically they run for an initial period of one to five years which is the period of development and upon completion of development the developer has the right to renew for a long term period of usually up to 49 years. Under both leases the lessee is required to make periodic lease payments, generally on a quarterly basis to the City of Moscow. There is also the option of long term land lease prior to commencement of construction which the developer can acquire with a lump sum payment that is determined from time to time by the City of Moscow and is based on the size of the land, its location and the proximity to amenities. The Group has two such land rights and they run for period of 49 years. L eases as lessor The Group leases out investment property under operating leases. The future minimum lease payments under non-cancellable leases are as follows: 2010 2009 US$ ¶000 US$ ¶000 Less than a year Between one and five years More than five years Amount recognised as income during the year

99,186 391,835 71,422 562,443

39,483 289,683 81,139 410,305

43,946

36,153

111

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 33. CAPITAL COMMITMENTS

Up to 31 December 2010 the Group has entered into a number of contracts for the construction of investment or trading properties: Project name

AFIMALL City (ex Mall of Russia) Otradnoye Ozerkovskaya Embankment - Phase II Four Winds II

Commitment 2010 2009 86 ¶ 86 ¶ 22,224 29,256 753 52,233

15,985 143,260 3,164 7,396 169,805

The following is a summary of the most significant contracts giving rise to future capital commitments: $),0$// &LW\ SURMHFW LQFOXGHV D FRQWUDFW ZLWK (QND ,QVDDW 9H 6DQD\L $QRQLP 6LUNHWL ³(QND¶ and Danya Cebus Rus LLC who are acting as the general constructors of the project. The amount of future capital commitment according to the contract is US$22,224 thousand. Ozerkovskaya Embankment ± Phase II project includes a contract with Danya Cebus Rus LLC who is acting as the general constructor of the project. The amount of future capital commitment according to the contract is US$29,256 thousand. Four Winds II project includes a contract with Rasen Construction Ltd who is acting as the general constructor of the project. The amount of future capital commitments according to the contract is US$753 thousand. Otradnoye project development is postponed until the revised concept is finalised. 34. CONTINGENCIES

On 6th of August 2009, the Group has entered into a sale and purchase agreement for the sale of Kosinskaya project, through the sale of OOO Titon, the subsidiary of Rognerstar Finance Limited, which is the subsidiary of AFI Development Plc. Under the original terms, sale proceeds of US$195 million were expected to be received within one year, by August 2010. By the expected date of receipt the Group had received US$72.5 million and was negotiating with the buyer an amended payment schedule, in order to extend the receipt of the total proceeds to the end of 2010. The buyer has served AFI Development Plc a warrant for indictment, submitted in the District Court of Nicosia, Cyprus, whereby the buyer demands, inter alia repayment of the amount of approximately US$47 million out of the purchase price, reimbursement in the amount of approximately US$17 million for damages and additional reimbursement of US$2.5 million per each month of delay in the aforementioned payments. As of the date of these financial statements, the buyer has not yet submitted any supporting documentation in relation to these claims. AFI Development Plc intends to serve its answer in the time frames set forth under the applicable law.

112

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 35. RELATED PARTIES O utstanding balances with related parties

2010 US$ ¶000

2009 US$ ¶000

Assets Amounts receivable from ultimate holding company Amounts receivable from joint ventures Advances issued to other related companies Amounts receivable from other related companies

4,388 5,803 4,619

503 4,384 302 372

Liabilities Amounts payable to ultimate holding company Amounts payable to other related companies

157 1,594

266 1,735

$OO RXWVWDQGLQJ EDODQFHV ZLWK WKHVH SDUWLHV DUH SULFHG DW DQ DUP¶V length basis and are to be settled in cash. For repayment dates, securities and interest rates of the loans see notes 17 and 25. None of the other balances is secured. T ransactions with the key management personnel Key management personnel compensation comprised: Short-term employee benefits

2010 US$ ¶000 2,370

2009 US$ ¶000 2,137

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The person is a member of the key management personnel of the entity or its parent (includes the immediate, intermediate or ultimate parent). Key management is not limited to directors; other members of the management team also may be key management. O ther related party transactions Revenue Ultimate holding company ± other income Joint venture ± consulting services Joint venture ± interest income Other related companies ± consulting services Other related companies ± other income Key management personnel ± interest income E xpenses Ultimate holding company ± administrative expenses

2010 US$ ¶000

2009 US$ ¶000

863 4,592 -

503 775 5,924 8 523 31

303

266

113

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 36. GROUP ENTITIES Ultimate controlling party:

Lev Leviev

Israel

Ultimate holding company:

Africa Israel Investments Limited

Israel

Holding company:

Africa Israel Investments Limited

Israel

Significant Subsidiaries

O wnership interest 2010 2009

1. OOO Avtostoyanka Tverskaya Zastava 100 2. OOO MayStroy 100 3. OOO InzhStroy AG 100 4. OOO IncomStroy 100 5. OOO Tain Investments 100 6. OOO AFI Development 100 7. OOO Ozerkovka 100 8. OOO Corin Development 100 9. OOO LessyProf 100 10. OAO Moskovskiy Kartonazhno-poligraphiche skiy Kombinat (MKPK) 99.1 11. Bellgate Construction Limited 100 12. Moscow City Centre PLC 100 13. Slytherin Development Limited 100 14. OOO Ultrastroy 100 15. OOO Ultrainvest 100 16. OOO Regionalnoe AgroProizvodstvennoe Objedinenie (RAPO) 100 17. Severus Trading Limited 100 18. OOO Aristeya 100 19. Talena Development Limited 100 20. Buildola Properties Limited 100 21. Bugis Finance Limited 100 22. Borenco Enterprises Limited 100 23. OOO StroyInkom-K 100 24. OOO PSO Dorokhovo 100 25. Scotson Limited 100 26. ZAO Armand 100 27. OOO Project+ 100 28. OOO Volga StroyInkom Development 100 29. OOO Volga Land Development 100 30. Krusto Enterprises Limited 100 31. Keyri Trading & Investments Ltd 100 32. OOO Favorit 100 33. OOO KO Proekt 100

Country of incorporation

100 100 100 100 100 100 100 100 100

Russian Federation Russian Federation Russian Federation Russian Federation Russian Federation Russian Federation Russian Federation Russian Federation Russian Federation

99.1 100 100 100 100 100

Russian Federation Cyprus United Kingdom Cyprus Russian Federation Russian Federation

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Russian Federation Cyprus Russian Federation Cyprus Cyprus British Virgin Islands Cyprus Russian Federation Russian Federation Cyprus Russian Federation Russian Federation Russian Federation Russian Federation Cyprus Cyprus Russian Federation Russian Federation

114

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 36. GROUP ENTITIES (continued) Significant Subsidiaries 34. ZAO Nedra Publishing 35. OOO Titon 36. ZAO UMM Stroyenergomekhani zatsiya 37. Rognerstar Finance Limited 38. Hermielson Investments Ltd 39. ZAO Firm Gloria 40. Bundle Trading Limited 41. ZAO MTOK 42. Bioka Investments Limited 43. OOO Nordservis 44. AFI Development Hotels Limited 45. Eitan (Cyprus) Limited 46. OOO Eitan 47. OOO Eitan K 48. Sherzinger Limited 49. Rubiosa Management Limited 50. OOO Stroycapital 51. Bastet Estates Limited 52. OOO Semprex 53. Beslaville Management Limited 54. OOO Zheldoruslugi 55. OOO RealProject 56. Amerone Development Limited 57. Hegemony Limited 58. OOO Extra Plus 59. Inscribe Limited 60. OOO AFI RUS Parking Management 61. OOO Cristall Development 62. OOO North Investments 63. OOO Region-K 64. Grifasi Investments Limited 65. Occuper Holdings Limited 66. OOO Adnera 67. OOO AFI RUS 68. LL Avia Management SA 69. OOO AFI Region 70. OOO AFI RUS Management 71. OOO Bizar 72. OOO Sever Region K 73. AFI Ukraine Limited 74. OOO AFI-DS 1

O wnership interest 2010 2009

Country of incorporation

90.17 100

Russian Federation Russian Federation

100 100 100 100 100 99.38 90 90 100 100 100 100 100 100 60 100 100 95 95 95 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 74 100 100 100

Russian Federation Cyprus Cyprus Russian Federation Cyprus Russian Federation Cyprus Russian Federation Cyprus Cyprus Russian Federation Russian Federation Cyprus Cyprus Russian Federation Cyprus Russian Federation Cyprus Russian Federation Russian Federation Cyprus Cyprus Russian Federation Cyprus Russian Federation Russian Federation Russian Federation Russian Federation Cyprus Cyprus Russian Federation Russian Federation British Virgin Islands Russian Federation Russian Federation Russian Federation Russian Federation Cyprus Ukraine

115

A F I D E V E L O PM E N T PL C NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010 36. GROUP ENTITIES (continued) Significant Subsidiaries

O wnership interest 2010 2009

Country of incorporation

75. OOO AFI-DS 2 100 100 Ukraine 76. OOO AFI-DS 3 100 100 Ukraine 77. OOO Budinkom-Ukraine 100 100 Ukraine 78. Jaquetta Investments Limited 100 100 Cyprus 79. Amakri Management Limited 100 100 Cyprus 80. OOO OR-Avner 100 100 Ukraine 81. OOO ABG-Sozidatel 100 100 Ukraine 82. AFI D Finance SA 100 100 British Virgin Islands 83. Falgaro Investments Limited 100 100 Cyprus 84. Ropler Engineering Limited 100 100 British Virgin Islands 85. OOO CDM 100 100 Russian Federation Jointly controlled entities 1. OOO Krown Investments 50 50 Russian Federation 2. Westec Four Winds Limited 50 50 Cyprus 3. Dulverton Limited 50 50 Cyprus 4. Nouana Limited 50 50 Cyprus 5. OOO Tirel 50 50 Russian Federation 6. ZAO Kama Gate 50 50 Russian Federation Â During the year ended 31 December 2010 the Group did not acquire any subsidiaries. 37. SUBSEQUENT EVENTS Subsequent to 31 December 2010 there were no events that took place which have a bearing on the understanding of these financial statements except of the following: AFIMALL City shopping centre On 24 January 2011, AFI Development received a certificate of completion from the City of Moscow authorities for the operation of the AFIMALL City shopping centre. In accordance with the planned development schedule, the final works requested by the municipal authorities regarding VDIHW\ DQG ILUH KD]DUGV ZHUH FDUULHG RXW LQ RUGHU WR UHFHLYH DXWKRULVDWLRQ WR SURFHHG ZLWK D ÂłVRIW RSHQLQJÂ´ RI WKH 0DOO WR WKH JHQHUDO SXEOLF 'XULQJ WKLV SURFHVV ILW-out works for the retail units continued. Following receipt of the requisite regulatory approvals for the operation of the Mall on 4 March 2011, the Company issued operators of the rented retail units in the Mall a notice requiring them to conclude all fit-out works and prepare for the opening of their shops by 10 March, 2011, when AFIMALL City opened to the public.

A F I D E V E L O PM E N T PL C

116

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2010

37. SUBSEQUENT EVENTS (continued) On March 25 2011 the Company announced and confirmed that it had reached a non binding understanding with the Moscow City administration regarding the purchase from the City of Moscow of its 25% share in AFI MALL City and 2,700 parking lots adjacent to AFI MALL City, for a total consideration of approximately US$ 310 million. So as to ensure sufficient parking space is available for customers of the Mall while the main parking area is being completed, the Company rented the required amount of parking space from the owners of adjacent buildings . Paveletskaya office complex On 23 March 2011, AFI Development leased the Paveletskaya office complex to a single tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation ROSATOM. An 11month lease agreement was signed with ZAO GREENATOM, which will roll over a 3-year period once the ownership certificate is obtained, expected before year end. The average annual lease rate is RUB 11,331, equivalent to US$400 per square meter, including VAT and OPEX but excluding electricity. The 126 parking spaces have been let at an average monthly rate of RUR 4,000, equating to US$141 including VAT, per parking space. The aforementioned lease is expected to yield an annualised income of approximately US$5.4 million in the first year. The lease payments are linked to a fixed index rate of 8.5% per annum, commencing from the second year of the lease. Tverskaya Zastava Shopping Center On March 25, 2011, the Company announced and confirmed that it has reached a non-binding understanding with the Moscow City administration to transfer its development rights in the Tverskaya Zastava shopping centre to the City of Moscow in exchange for being fully compensated for its development costs incurred in the project to date. Such compensation may take the form of the City of Moscow granting additional building rights for the Company's other projects. As part of the non-binding understanding reached with the City of Moscow it is intended that AFI Development will remain the owner of the projects surrounding Tverskaya, equating to nearly 350,000 of commercial and residential space. It is also intended that such projects will retain their key development criteria and it is the Company's understanding that the current planning documentation will remain in place. Changes in ownership On 26 January 2011, AFI DevelopmenWÂśV PDMRU VKDUHKROGHU $IULFD ,VUDHO ,QYHVWPHQWV DJUHHG WR purchase approximately 9.7% of the aggregate equity and voting rights in AFI Development Plc from a company wholly-owned by Mr. Alexander Khaldey, the Executive Director of AFI Development. The transaction is being carried out in two stages, with 2.96% of the equity and voting rights in AFI Development Plc transferred upon execution of the agreement on 28 January 2011 and the remainder of the holdings being transferred in May 2011. The completion of the transactions is subject to the fulfilment of a number of conditions. Once these have been met, Africa Israel Investments will hold approximately 64% of the equity and voting rights in AFI Development. Alexander Khaldey will continue to serve as General Director of AFI Development. Following completion of both stages of the transaction, Africa Israel Investments will have purchased the holdings for a total consideration of approximately USD 129 million or approximately USD 1.27 per each share or GDR of AFI Development. Changes in senior management On 4 March 2011, the Board of AFI Development accepted the resignation of Evgeny Luneev as Chief Financial Officer, who decided to leave the Company in order to pursue other business opportunities. Mr. Luneev will act as the CFO until 29 March 2011. His successor will be announced in due course.

AFI DEVELOPMENT PLC PARENT COMPANY SEPARATE FINANCIAL STATEMENTS CONT ENTS

Page Parent Company Separate Statement of Comprehensive Income

118

Parent Company Separate Statement of Changes in Equity

119

Parent Company Separate Statement of Financial Position

120

Parent Company Separate Statement of Cash Flows

121

Notes to the Parent Company Separate Financial Statements

122-138

118

A F I D E V E L O PM E N T PL C PARENT COMPANY SEPARATE STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2010

Note Loss on disposal of investment in subsidiaries Impairment of prepayment for investments Administrative expenses Other expenses O perating loss

7 10

Tax Profit/(loss) for the year O ther comprehensive income Total comprehensive income / (expense) for the year

2009 US$ '000

(4,560) (8,626) (2,079)

(43) (6,254) (7,864) -

(15,265)

(14,161)

44,619 (13,053)

40,137 (33,951)

31,566

6,186

16,301 (1,259)

(7,975) (2,092)

15,042

(10,067)

15,042

(10,067)

Finance income Finance costs Net finance income Profit/(loss) before tax

2010 US$ '000

The notes on pages 122 to 138 are an integral part of these parent company separate financial statements.

119

A F I D E V E L O PM E N T PL C PARENT COMPANY SEPARATE STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2010

Share capital US$ '000 Balance at 1 January 2009

Share premium US$ '000

Retained earnings US$ '000

Total US$ '000

524

1,763,933

128,620

(10,067)

(575)

Balance at 31 December 2009

524

1,763,933

117,978

1,882,435

Balance at 1 January 2010

524

1,763,933

117,978

1,882,435

15,042

Total comprehensive expense for the year T ransactions with owners, recognized directly in equity Share option expense

Total comprehensive income for the year T ransactions with owners, recognized directly in equity Issue of bonus shares Share option expense Balance at 31 December 2010

524 1,048

(524) 1,763,409

1,893,077

106

133,126

1,897,583

The notes on pages 122 to 138 are an integral part of these parent company separate financial statements.

120

A F I D E V E L O PM E N T PL C PARENT COMPANY SEPARATE STATEMENT OF FINANCIAL POSITION As at 31 December 2010

Note Assets Property, plant and equipment Investment in subsidiaries Investment in jointly controlled entities Loans receivable Total non-cur rent assets

2010 US$ '000

2009 US$ '000

896,163 15,529 1,040,839 1,952,531

87 904,927 15,150 974,577 1,894,741

16,218 600 2,215 106,737 125,770

38,696 3,410 42,959 2,215 178,235 265,515

Total assets

2,078,301

2,160,256

E quity Share capital Share premium Retained earnings Total equity

1,048 1,763,409 133,126 1,897,583

524 1,763,933 117,978 1,882,435

40,177 40,177

50,170 50,170

13 14

10,161 130,380 140,541

69,911 157,740 227,651

180,718

277,821

2,078,301

2,160,256

Trade and other receivables Loans receivable Other investments Refundable tax Cash and cash equivalents Total cur rent assets

L iabilities Loans and borrowings Total non-cur rent liabilities Short term portion of long-term loans Trade and other payables Total cur rent liabilities Total liabilities Total equity and liabilities

7 8 9 10 9 11 15

7KH ILQDQFLDO VWDWHPHQWV ZHUH DSSURYHG E\ WKH %RDUG RI 'LUHFWRUV Č Q 0DUFK

Lev Leviev - Chairman

Alexander Khaldey - Director

The notes on pages 122 to 138 are an integral part of these parent company separate financial statements.

121

A F I D E V E L O PM E N T PL C PARENT COMPANY SEPARATE STATEMENT OF CASH FLOWS For the year ended 31 December 2010 Note C ash flows from operating activities Profit/(loss) for the year Adjustments for: Depreciation of property, plant and equipment Unrealised exchange loss Loss from the sale of property, plant and equipment Loss from the sale of investment in subsidiaries Impairment of prepayment for investment Change in fair value of other investments Dividend income Interest income Interest expense Income tax expense Share option expense Change in trade and other receivables Change in trade and other payables C ash flows from operations Tax paid Net cash flows from/(used in) operating activities C ash flows from investing activities Receipts in advance for the sale of an investment Payment of expenses associated to the disposal of an investment Payment for acquisition of property, plant and equipment Additional contribution of capital to existing subsidiaries and jointly controlled entities Acquisition of other investments Cash received from investment portfolio Proceeds from disposal of property, plant and equipment Interest received Net cash flows (used in)/from investing activities C ash flows from financing activities Payments for loans receivable Proceeds from repayment of loans receivable Repayment of loans and borrowings Proceeds from loans and borrowings Interest paid Net cash flows used in financing activities Effect of exchange rate fluctuations on cash held

7 5 5 5 5 6

2010 US$ '000

2009 US$ '000

15,042

(10,067)

5,325 81 4,560 (6,315) (8,013) (30,290) 6,183 1,259 106 17,859 (2,916) 2,881 (1,259) 1,622

68 5,484 37 43 6,254 (2,900) (37,236) 9,776 2,092 (575) 12,068 (12,349) (27,305) (4,307) (31,612)

2,506 (1,950) -

70,311 (87)

(14,800) (208) 10,237 6 2,174 (2,035)

1,275 182 4,142 75,823

(51,631) 18,237 (77,485) 3,748 (2,678) (109,809)

(95,372) 33,489 (45,000) 44,005 (9,318) (72,196)

(521)

(796)

(110,743) 178,235 39,245

(28,781) 249,975 (42,959)

106,737

178,235

Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Reclassification to cash and cash equivalents/(other investments) C ash and cash equivalents at the end of the year

The notes on pages 122 to 138 are an integral part of these parent company separate financial statements.

A F I D E V E L O PM E N T PL C

122

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 1. I N C O RPO R A T I O N A N D PR I N C IPA L A C T I V I T I ES AFI Development Plc (the ''Company'') was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC. The address of the Company's registered office is 25 Olympion street, Omiros & Araouzos Tower, 3035 Limassol, Cyprus. The Company is a 54% (31/12/2009: 71.20%) subsidiary of Africa Israel Investments Ltd ("Africa-Israel"), which is listed in the Tel Aviv Stock Exchange ("TASE"). The decrease was a result of the debt restructuring of Africa-Israel's debt to the holders of its previously issued bonds (the "Settlement"), pursuant to which Africa-Israel converted part of its debt into AFI Development's equity amounting to 92,720,923 shares, representing approximately 17,7% of the Company's equity capital. In order to facilitate this part of the Settlement, Africa-Israel converted a corresponding amount of its shares in the Company into GDRs. Following the completion of the Settlement, Africa-Israel remained AFI Development's majority shareholder with 54% of the Company's shares. In addition, Africa-Israel has pledged 126,605,557 of its GDRs in the Company to the bond holders. A 9.7% of the Company's share capital is held by Nirro Group S.A. and the remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of a bonus issue, 523,847,027 "B" shares, which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary shares of the Company were designated as "A" shares. Further details in note 12. The principal activity of the Company is the holding of investments in subsidiaries. In addition the Company provides financing to its subsidiaries and jointly controlled entities. 2. B ASIS O F PR E PA R A T I O N (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap.113. Users of these parent's separate financial statements should read them together with the Group's consolidated financial statements as at and for the year ended 31 December 2010 in order to obtain a proper understanding of the financial position, the financial performance and the cash flows of the Company and the Group. (b) Basis of measurement The financial statements have been prepared under the historical cost convention, except in the case of investments, which are stated at cost less provision for impairment in value. (c) A doption of new and revised I nternational F inancial Reporting Standards and Interpretations As from 1 January 2010, the Company adopted all of the IFRSs and International Accounting Standards (IAS), which are relevant to its operations. The adoption of these Standards did not have a material effect on the financial statements of the Company.

A F I D E V E L O PM E N T PL C

123

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 2. B ASIS O F PR E PA R A T I O N (continued)

(c) A doption of new and revised International F inancial Reporting Standards and Interp retations (continued) The following Standards, Amendments to Standards and Interpretations had been issued but are not yet effective for the year ended 31 December 2010: (i) Standards and Interpretations adopted by the EU x Improvements to IFRSs issued in May 2010 (Effective for annual periods beginning on or after 1 July 2010 and 1 January 2010 as applicable). x IFRS1 (amendment): Limited exemption from comparative IFRS7 disclosures for first time adopters (effective for annual periods beginning on or after 1 July 2010). x IAS 24 (revised): ''Related Party Disclosures'' (effective for annual periods beginning on or after 1 January 2011). x Amendments to IAS 32 ''Classification of rights issues'' (effective for annual periods beginning on or after 1 February 2010). x Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011). x IFRIC 19: ''Extinguishing Financial Liabilities with Equity Instruments'' (effective from 1 July 2010). (ii) Standards and Interpretations not adopted by the EU x IFRS 1 Âą Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters (amendments) (effective for annual periods beginning on or after 1 July 2011). x IFRS 7 Financial Instruments (amendments): Disclosures - Transfers of Financial Assets (effective for annual periods beginning on or after 1 July 2011). x IFRS 9 ''Financial Instruments'' (effective for annual periods beginning on or after 1 January 2013). x IAS 12 - ''Deferred tax'': Recovery of Underlying Assets (amendments)(effective for annual periods beginning on or after 1 January 2012). (d) Use of estimates and judgements The preparation of financial statements in accordance with IFRSs requires from management the exercise of judgment, to make estimates and assumptions that influence the application of accounting principles and the related amounts of assets and liabilities, income and expenses. The estimates and underlying assumptions are based on historical experience and various other factors that are deemed to be reasonable based on knowledge available at that time. Actual results may deviate from such estimates. The estimates and underlying assumptions are revised on a continuous basis. Revisions in accounting estimates are recognised in the period during which the estimate is revised, if the estimate affects only that period, or in the period of the revision and future periods, if the revision affects the present as well as future periods.

A F I D E V E L O PM E N T PL C

124

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 2. B ASIS O F PR E PA R A T I O N (continued) In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below: x

Income taxes Significant judgement is required in determining the provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Impairment of investments in subsidiaries/associates The Company periodically evaluates the recoverability of investments in subsidiaries/associates whenever indicators of impairment are present. Indicators of impairment include such items as declines in revenues, earnings or cash flows or material adverse changes in the economic or political stability of a particular country, which may indicate that the carrying amount of an asset is not recoverable. If facts and circumstances indicate that investment in subsidiaries/associates may be impaired, the estimated future undiscounted cash flows associated with these subsidiaries/associates would be compared to their carrying amounts to determine if a write-down to fair value is necessary.

Valuation of non-listed investments The Company uses various valuation methods to value non-listed investments. These methods are based on assumptions made by the Board of Directors which are based on market information at the reporting date.

(e) F unctional and presentation cur rency The financial statements are presented in United States Dollars, rounded to the nearest thousand which is the functional currency of the Company. 3. SI G N I F I C A N T A C C O U N T I N G PO L I C I ES The following accounting policies have been applied consistently for all the years presented in these financial statements and in stating the financial position of the Company. Subsidiary companies Investments in subsidiary companies are stated at cost less provision for impairment in value, which is recognised as an expense in the period in which the impairment is identified. Interests in jointly controlled entities The Company's share in a jointly controlled entity is recorded at cost less provision for impairment in value, which is recognised as an expense in the period in which the impairment is identified.

A F I D E V E L O PM E N T PL C

125

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SI G N I F I C A N T A C C O U N T I N G PO L I C I ES (continued) Finance income and finance cost Finance income comprises interest income on funds invested and loans offered to related parties, fair value gains on financial assets at fair value through profit or loss and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, fair value losses on financial assets at fair value through profit or loss and impairment losses recognised on financial assets. Borrowing costs are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position. Foreign currency translation (i) Functional and presentation currency Items included in the Company's financial statements are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The financial statements are presented in United States Dollars, rounded to the nearest thousand, which is the Company's functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Tax Tax liabilities and assets for the current and prior periods are measured at the amount expected to be paid to or recovered from the taxation authorities, using the tax rates and laws that have been enacted, or substantively enacted, by the reporting date. Current tax includes any adjustments to tax payable in respect of previous periods. Dividends Dividend distribution to the Company's shareholders is recognised in the Company's financial statements in the year in which they are approved by the Company's shareholders. Financial instruments Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument.

A F I D E V E L O PM E N T PL C

126

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SI G N I F I C A N T A C C O U N T I N G PO L I C I ES (continued) (i)

Loans granted Loans originated by the Company by providing money directly to the borrower are categorised as loans and are carried at amortised cost. This is defined as the fair value of cash consideration given to originate those loans as is determined by reference to market prices at origination date. All loans are recognised when cash is advanced to the borrower. An allowance for loan impairment is established if there is objective evidence that the Company will not be able to collect all amounts due according to the original contractual terms of loans. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate of loans.

(ii) Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading loss or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the company manages such investments and makes purchase and sale decisions because on their fair YDOXH LQ DFFRUGDQFH ZLWK WKH FRPSDQ\ÂśV documented risk management or investment strategy. Attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein are recognized in profit or loss. (iii) Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at bank and short term highly liquid investments with original maturity of three months or less. (iv) Borrowings Borrowings are recorded initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method.

A F I D E V E L O PM E N T PL C

127

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 3.

SI G N I F I C A N T A C C O U N T I N G PO L I C I ES (continued) Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: x the rights to receive cash flows from the asset have expired; x the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass through' arrangement; or x the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. Share capital Ordinary shares are classified as equity. The difference between the fair value of the consideration received by the Company and the nominal value of the share capital being issued is taken to the share premium account. Non-current liabilities Non-current liabilities represent amounts that are due more than twelve months from the reporting date. Comparatives Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year.

128

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 4.

O T H E R E X PE NSES 2010 US$ '000 Listing expenses

2,079

F I N A N C E I N C O M E A N D C OSTS 2010 US$ '000 Interest income on loans receivable Interest / investment income on bank deposits and cash equivalents Change in fair value of other investments Dividend income Finance income Net foreign exchange loss Interest expense on loans and borrowings Interest expense on bank loan Net change in fair value of financial assets Other finance costs Finance costs Net finance income

2009 US$ '000

28,117 2,174 6,315 8,013

33,095 4,142

44,619

40,137

(6,822) (4,876) (1,307) (48)

(5,219) (3,198) (6,578) (18,935) (21)

(13,053)

(33,951)

31,566

6,186

2,900

TAX ATION 2010 US$ '000

2009 US$ '000

Current tax- charge for the year 1,259 The corporation tax rate is 10%.

2,092

129

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 7.

I N V EST M E N T I N SU BSI D I A R I ES 2010 US$ '000 Balance at 1 January Additional contribution of capital in existing subsidiaries Acquisition of new subsidiaries Disposals Impairment Balance at 31 December

2009 US$ '000

904,927 16,236 (25,000)

653,892 251,078 20,289 (43) -

896,163

904,927

During 2010 the Company has decided to derecognise US$25 million from its investment in subsidiary Rognerstar Finance Limited as this amount represents the minimum amount that is not refundable according to its sale contract. For further details see note 14. During 2009 the Company has decided to excuse all loans to its subsidiary Rognerstar Finance Limited and contributed those as additional paid in capital. In addition, during 2009 the Company disposed its investments in Temalis Limited, Sewaka Limited and Guzela Limited and acquired 100% shareholding of Ropler Engineering Limited registered in British Virgin Islands. The details of the subsidiaries are as follows: Name

Investment in Cypriot companies Investment in Russian companies Investment in BVI companies

Country of incorporation

Cyprus Russian Federation BVI

Principal activities

Holding of investments/Financing Real estate Holding of investments

2010 US$ '000

2009 US$ '000

700,250

684,283

175,624

170,355

20,289

896,163

874,927

130

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 8.

I N V EST M E N T I N J O I N T L Y C O N T R O L L E D E N T I T I ES 2010 US$ '000 Balance at 1 January Additional contribution of capital to existing jointly controlled entities Balance at 31 December

2009 US$ '000

15,150 379

14,765 385

15,529

15,150

The details of the jointly controlled entities are as follows:

Name

Country of incorporation

Investment in Cypriot companies Investment in Russian companies

Cyprus Russian Federation

Principal activities Real estate Real estate

2010 US$ '000

2009 US$ '000

6,108 9,421

6,108 9,042

15,529

15,150

L O A NS R E C E I V A B L E 2010 US$ '000 Loans to subsidiaries (Note 16) Loans to jointly controlled entities (Note 16) Less current portion Non-current portion The loans are repayable as follows: Within one year Between one and five years

2009 US$ '000

1,040,839 600

974,577 3,410

1,041,439 (600)

977,987 (3,410)

1,040,839

974,577

600 1,040,839

3,410 974,577

1,041,439

977,987

The fair values of non-current receivables approximate to their carrying amounts as presented above.

131

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 10. T R A D E A N D O T H E R R E C E I V A B L ES 2010 US$ '000 Receivables from related parties (Note 16) Other receivables

2009 US$ '000

14,809 1,409

12,593 26,103

16,218

38,696

O ther receivables On 31 December 2009 other receivables included an amount of US$21,473 thousand representing a prepayment to Straitline B.V for the acquisition of 100% shareholding in Pinkerton Limited owning 100% of the share capital of JSC WTIC Mercury, registered in the Russian Federation with regard to the Moscow City Hotel project. On 5 May 2010 the Company received an amount of EUR 14,010 thousand, equivalent to US$18,353 thousand in full settlement of the above. The remaining balance of US$3,120 thousand together with additional payments for expenses of US$1,440 thousand, were recognised as impairment of prepayment for investment on 31 March 2010. The fair values of trade and other receivables due within one year approximate to their carrying amounts as presented above. The exposure of the Company to credit risk and impairment losses in relation to trade and other receivables is reported in note 17 of the financial statements. 11. O T H E R I N V EST M E N TS The amount as of 31 December 2009 represented interest bearing bonds classified at fair value through profit or loss. Initially, these bonds were treated as cash and cash equivalents and reclassified on 30 June 2009 as other investments. On 31 December 2009 the fair value decreased and an amount of $18,411 thousand was recognised in the Income statement as an impairment loss in finance expenses. On 31 December 2010 the investment was reclassified back to cash and cash equivalents after the disposal of the bonds and which are now available cash in brokerage account with the portfolio manager. The money were withdrawn early 2011 to be used in the operations of the Company. At reclassification the fair value of the portfolio was reassessed and a gain of US$6,573 thousand was recognised in the Income Statement as fair value gain in finance income.

132

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 12. SH A R E C A PI T A L A N D R ESE R V ES Share capital A uthorised 2,000,000,000 shares of US$0.001 each 1,000,000,000 shares of US$0.001 each Issued and fully paid 523,847,027 A ordinary shares of US$0.001 each 523,847,027 B ordinary shares of US$0.001 each

2010 US$ '000

2009 US$ '000

2,000 1,000 524 524 1,048

Pursuant to the resolutions of the Company's AGM on 21 May 2010 the Company: Â&#x2021; LQFUHDVHG LWV DXWKRUL]HG VKDUH FDSLWDO IURP VKDUHV RI 86 HDFK WR 2,000,000,000 shares of US$0.001 each by creation of 1,000,000,000 new shares of nominal value of US$0.001 each to rank ''pari passu'' with the existing shares in the capital of the Company. Â&#x2021; GHVLJQDWHG WKH KHOG E\ WKH H[LVWLQJ VKDUHKROGHUV DV $ RUGLQDU\ VKDUHV WRJHWKHU with 100,000,000 unissued shares forming the part of the authorised share capital of the Company to be designated as "A" ordinary shares and the remaining 1,376,152,973 unissued shares were designated as "B" ordinary shares. Â&#x2021; FDSLWDOLVHG RXW RI WKH VKDUH SUHPLXP DFFRXQW DQ DPRXQW RI 86 DJDLQVW WKH LVVXDQFH RI 523,847,027 "B" ordinary shares of US$0.00l each, fully paid up, which were allotted and distributed as bonus shares to and amongst the shareholders of Company of 2 July 2010, on the basis of one "B" share for every one existing ordinary share. On 5 July 2010 the Company's 523,847,027 "B" shares, issued as a bonus issue to the existing shareholders, were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of London Stock Exchange ("LSE"). The Company retained its GDR listing as well. Since then each GDR represents one "A" ordinary share on deposit with BNY (Nominees) Limited, as custodian. Share premium It represents the share premium on the issued shares on 31 December 2006 for the conversion of the shareholders' loans to capital US$421,325 thousand. It also includes the share premium on the issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the difference between the offering price, US$14, and the nominal value of the shares, US$0.001, after deduction of all listing expenses. An amount of US$1,399,900 thousand less US$57,292 thousand transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US$524 thousand was capitalised as a result of bonus issued as described in share capital note above. Retained earnings The amount at each reporting date is available for distribution. No dividends were proposed, declared or paid during the year ended 31 December 2010.

524 524

133

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 12. SH A R E C A PI T A L A N D R ESE R V ES (continued)

E mployee share option expense The company has established an employee share option plan operated by the Board of Directors, which is responsible for granting options and administrating the employee share option plan. Eligible are employees and directors, excluding independent directors, of the Company and employees and directors of the ultimate holding company, Africa Israel Investments Ltd and its subsidiaries. The employees share option plan is discretionary and options will be granted only when the Board so determines at an exercise price derived from the closing middle market price preceding the date of grant. No payment will be required for the grant of the options. In any 10 year period not more that 10 per cent of the issued ordinary share capital may be issued or be issuable under the employee share option plan. Options over 1,089,295 GDRs and 1,089,295 class B shares were granted up to 31 December 2010 to Russian and Israeli employees and directors with an exercise price of US$14 vesting one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. The contractual life is ten years. If a participant ceases to be employed his options will normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options may be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will rank equally with all other shares at the time of issue. The Board of Directors may satisfy (with the consent of the participant) an option by paying the participant in cash or other assets the gain as an alternative of issuing and transferring the shares/GDRs. The Board of Directors may amend the rules of the plan at any time. 13. L O A NS A N D B O R R O W I N GS Long term liabilities Loans from related parties (Note 16) Secured loan from non related company Short term liabilities Secured bank loan Secured loan from non related company Maturity of non-current borrowings: Within one year Between one and five years After five years

2010 US$ '000

2009 US$ '000

40,177 -

40,170 10,000

40,177

50,170

10,161

49,566 20,345

10,161

69,911

10,161 40,177

69,911 14,096 36,074

50,338

120,081

The exposure of the Company to interest rate risk in relation to financial instruments is reported in note 17 of the financial statements.

134

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 14. T R A D E A N D O T H E R PA Y A B L ES 2010 US$ '000 Receipts in advance from sale of investment Other payables Payables to related parties (Note 16)

2009 US$ '000

45,867 82,578 1,935

70,311 85,681 1,748

130,380

157,740

Receipts in advance from sale of investment On 6th August 2009, the Company has entered into a sale and purchase agreement for the Kosinskaya project, through the sale of subsidiary Rognerstar Finance Limited. Under the original terms, sale proceeds of US$195 million were expected to be received within one year, by August 2010. Up to 31 December 2010 the Company received US$73 million (2009: US$70 million) less expenses incurred in relation to the sale. As of the expected dated of receipt the buyer has not paid the full amount and the title of the assets was still under the ownership of the Company. The Company decided to derecognise US$25 million from "receipts in advance for sale of investment" as this amount represents the minimum amount that is not refundable according to the contract. Other payables Include an amount of US$82,247 thousand (2009: US$85,373 thousand) payable to the jointly controlled entity, Krown Investments LLC. 15. R E F U N D A B L E T A X 2010 US$ '000 Corporation tax

(2,215)

2009 US$ '000 (2,215)

135

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 16. R E L A T E D PA R T Y T R A NSA C T I O NS The transactions with related parties are as follows: 2010 US$ '000 Interest income charged to subsidiaries Interest income charged to jointly controlled entities Interest expense charged from subsidiaries Interest expense charged from jointly controlled entities Management fees charged from subsidiaries

28,027 90 189 4,103 424

2009 US$ '000 33,065 30 517 1,075 160

The balances with related parties are as follows: (i) Receivables from related parties (Note 10) 2010 US$ '000 Receivables from subsidiaries Receivables from jointly controlled entities (ii) Loans to related parties (Note 9)

2,489 12,320

273 12,320

14,809

12,593

2010 US$ '000 Loans to subsidiaries Loans to jointly controlled entities

2009 US$ '000

1,040,839 600

974,577 3,410

1,041,439

977,987

The loans to related parties were provided on interest ranging from 6% p.a. to 8.5% p.a., and their repayment date is on 31 December 2014. All loans to group companies are unsecured. (iii) Payables to related parties (Note 14) 2010 US$ '000

2009 US$ '000

Name Payables to subsidiaries Payable to related company

1,786 149

1,482 266

1,935

1,748

136

A F I D E V E L O PM E N T PL C NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 16. R E L A T E D PA R T Y T R A NSA C T I O NS (continued) (iv) Loans from related parties (Note 13)

Loan from jointly controlled entity Loan from subsidiary

2010 US$ '000

2009 US$ '000

40,177 -

36,074 4,096

40,177

40,170

The loan from jointly controlled entity, Dulverton Limited, was provided at 10.55% p.a. interest, and repayment date is on 31 December 2017. The loan from subsidiary, AFID Finance SA was repaid in full during the year. 17. F I N A N C I A L I NST R U M E N TS A N D R IS K M A N A G E M E N T Financial risk factors The Company is exposed to the following risks from its use of financial instruments: x Credit risk x Liquidity risk x Market risk The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Company's risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company's activities.

Credit risk Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. The Company has no significant concentration of credit risk. Cash balances are held with high credit quality financial institutions and the Company has policies to limit the amount of credit exposure to any financial institution. (i) Credit risk (continued)

(i)

Trade and other receivables The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified.

A F I D E V E L O PM E N T PL C

137

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 17. F I N A N C I A L I NST R U M E N TS A N D R IS K M A N A G E M E N T (continued) (ii) Liquidity risk Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Company has procedures with the object of minimising such losses such as maintaining sufficient cash and other highly liquid current assets and by having available an adequate amount of committed credit facilities.

(iii) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments. Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company's management monitors the interest rate fluctuations on a continuous basis and acts accordingly. Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company's measurement currency. The Company is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Euro and the Russian Rouble. The Company's management monitors the exchange rate fluctuations on a continuous basis and acts accordingly. Capital management The Company manages its capital to ensure that it will be able to continue as a going concern while increasing the return to shareholders through the strive to improve the debt equity ratio. The Company's overall strategy remains unchanged from last year.

A F I D E V E L O PM E N T PL C

138

NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS For the year ended 31 December 2010 18. F A I R V A L U ES The fair values of the Company's financial assets and liabilities approximate their carrying amounts at the reporting date. 19. C O N T I N G E N T L I A B I L I T I ES On 6th of August 2009, the Company has entered into a sale and purchase agreement for the sale of Kosinskaya project, through the sale of OOO Titon, the subsidiary of Rognerstar Finance Limited, which is the subsidiary of the Company. Under the original terms, sale proceeds of US$195 million were expected to be received within one year, by August 2010. By the expected date of receipt the Company received US$72.5 million and was negotiating with the buyer an amended payment schedule, in order to extend the receipt of the total proceeds to the end of 2010. The buyer has served AFI Development Plc a warrant for indictment, submitted in the District Court of Nicosia, Cyprus, whereby the buyer demands, inter alia repayment of the amount of approximately US$47 million out of the purchase price, reimbursement in the amount of approximately US$17 million for damages and additional reimbursement ofUS$2.5 million per each month of delay in the aforementioned payments. As of the date of these financial statements, the buyer has not yet submitted any supporting documentation in relation to these claims. AFI Development Plc intends to serve its answer in the time frames set forth under the applicable law. 20. E V E N TS A F T E R T H E R E PO R T I N G PE R I O D Subsequent to 31 December 2010 there were no events that took place which have a bearing on the understanding of these financial statements except of the following: Changes in ownership On 26 January 2011, AFI Development's major shareholder, Africa Israel Investments, agreed to purchase approximately 9.7% of the aggregate equity and voting rights in AFI Development Plc from a company wholly-owned by Mr. Alexander Khaldey, the Executive Director of AFI Development Plc. The transaction is being carried out in two stages, with 2.96% of the equity and voting rights in AFI Development Plc transferred upon execution of the agreement on 28 January 2011 and the remainder of the holdings being transferred in May 2011. The completion of the transactions is subject to the fulfillment of a number of conditions. Once these have been met, Africa Israel Investments will hold approximately 64% of the equity and voting rights in AFI Development Plc. Alexander Khaldey will continue to serve as General Director of AFI Development Plc. Following completion of both stages of the transaction, Africa Israel Investments will have purchased the holdings for a total consideration of approximately USD 129 million or approximately USD 1.27 per each share or GDR of AFI Development Plc.