Page 1

Annual Report JSCo «RZD»

2007


Annual Report JSCo «RZD»

2007


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Table of Contents


3

Annual Report JSC «RZD» 2007

Table of Contents 2-5 Disclosures and Projections 6-11 Welcoming Speech by A.D. Zhukov, Chairman of the Board of JSCo «Russian Railways» 8-9 Welcoming Speech by V.I. Yakunin, President of JSCo «Russian Railways» 10-11

General Information on JSCo «Russian Railways» 12-17 General legal information 13-15 Structure of the holding company 15-17

Activities of the Management and Control Bodies of JSCo 18-37 «Russian Railways» General Shareholders’ Meeting Board of Directors Management Board Audit Committee

19 19-32 32-36 37

The Company's Strategy and Mission 38-39 Overview of the Main Corporate Events in 2007 40-41 The Company's current position in the industry 42-53 Share of JSCo «Russian Railways» of the transportation services market Freight transportation services Passenger service Maintenance and repair Description of the Company’s infrastructure Description of rolling stock Summary performance information on railways

43 43-46 46-48 48-49 49-50 50-52 52-53


4

Table of Contents

Business Priorities 54-81 Principal results of investment activities Innovation-based development of JSCo ÂŤRussian RailwaysÂť International operations Reform and Participation in Subsidiaries and Affiliates Human Resources Social sphere Transportation Safety Safety in operation Labor Safety Environmental Protection

55-61 61-63 63-66 66-72 73-74 74-77 77-78 78 78-79 79-81

Financial and economic results 82-103 (Board of Directors report) The Company's financial and economic achievements Financial results Key macroeconomic factors Revenue from all types of activity Expenses related to all types of activity Other types of activity Other income and expenses Assets and liabilities Changes in fixed assets Financial investments Working capital management Leasing Ratings Financial Risk Management Mortgage

83 84 84-88 88-89 89-92 92 93 94-95 95 96 96-101 102 102 102-103 103

Information about Interested party transactions 104-107 Information about Large Transactions 108-109 Statement on Dividends Paid 110-111


5

Annual Report JSC «RZD» 2007

Draft Distribution of the Company's Net Profits Earned 112-115 in 2007 Description of the Main Risk Factors Associated 116-117 with Company's Operations Information about pending judicial procedures whereby the Company is a respondent 117 to debt collection claims with the specification of aggregate claimed amounts Information about pending judicial procedures whereby the Company is a claimant in 117 debt collection claims with the specification of aggregate claimed amounts

Development Prospects 118-123 Development subject to accessing the promising markets 119 Possible Development Directions, subject to Market Trends and Company’s Potential 119-120 Planned Investment Projects 120-122

Reference 124


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Disclosures and Projections


7

The Annual Report of Russian Railways for 2007 discloses information to provide the shareholders represented by the Government of the Russian Federation, government agencies, potential and actual investors, shippers, passengers, miscellaneous stakeholders and information users with comprehensive and relevant data about JSCo «Russian Railways»' operations in 2007 and the trends of Company's development. The report complies with requirements of the following standards and legal acts: — Federal Law On Joint-stock Companies; — Order No. 228 of Rosimushchestvo, dated July 26, 2005, On Regulation of Operations of the Federal Agency for Federal Property Management in the Sphere of Corporate Governance (with recommendations on forming Russian Federation's position with respect to adoption of the annual report of an open joint-stock company whose shares are held by the Russian Federation); — Regulation No. 17/ps of the Federal Securities Commission (FSC), dated 31 May 2002, On Adopting the Regulations on Additional Requirements to the Procedures for Preparing, Convening and Holding a General Shareholders' Meeting. — Regulation No. 421/r of the FSC, dated 4 April 2002, On Recommendation to Apply the Code of Corporate Conduct. This report is a review of the current conditions of Russian Railways and the results of its operations during the years ending on December 31, 2007, December 31, 2006 and, in some cases, December 31, 2005 as well as the major trends which may impact on its future performance. For the purposes of this document the word «Company», the pronoun «we» and its different forms refer to Russian Railways. All amounts are quoted in billion rubles unless specified otherwise. This report contains statements which have the same nature as projections. Such verbs as «consider», «expect», «seek», «plan» and their synonyms signify the current projections and opinion of Company's management with respect to future results.

Annual Report JSC «RZD» 2007

Due to the characteristics of projections risks and uncertainties both of the general and specific nature are inherent to them. In this context there is always a risk that the preliminary estimates, projections, plans and other forecasts will not come true. It should be remembered that under the influence of a broad range of material circumstances the actual results may significantly differ from targets, benchmarks, expected results, the estimates and intents included into projections by a significant margin.


Welcoming Speech by A.D. Zhukov, Chairman of the Board of JSCo «Russian Railways»


9

Ladies and Gentlemen, Our state’s strategic issues concerning the economic and social spheres may be resolved if Russian railways develop at a rapid rate. Taking into account the current GDP growth rates and the population’s migration activity, the requirements for railway services will increase in the next five years, not to mention the long term: new mineral and raw material deposits cannot be developed without developing the railways. In this respect, JSCo «Russian Railways» plays an important role. The growth rates of freight turnover, an increase in freight traffic, investment growth and the financial indicators of JSCo «Russian Railways» shows that the year 2007 was quite successful for the Company. Conditions have been created for promoting competition in the most diverse spheres of the railway market; operations on the railway freight car market are rapidly growing, and transportation costs are decreasing due to the introduction of innovative technologies. Over 179 billion rubles have been paid by the Company into the budgets of all levels, and in many regions the Company remains a system-forming enterprise and the largest taxpayer and employer, proving without fail that “roads are a source of life in Russia”. The Company continues to bear a heavy social burden by ensuring that the public fully enjoys the constitutional right to freely travel across the country’s territory; it uses the revenue from other types of activities to cover the losses incurred by passenger transportation. Herewith, the Company is making a considerable effort to improve the services offered to passengers. By decision of the Board of JSCo «Russian Railways», the Company is providing the usual benefits to students and schoolchildren at its own expense. Last year’s results have shown that the Company is becoming one of the European leaders in railway transportation and railway infrastructure development. Today, railway transportation is playing an important role in forming Russia's geo-economic and geopolitical position. Our task is to make the utmost use of our geographic advantages and the transit potential so as to receive dividends from international traffic and create a new instrument of Russian influence on world economic processes. Many important events have occurred in the railway industry in 2007, being initiated and actively promoted by JSCo «Russian Railways». Certainly, we believe that the formation of the “Strategy of Development of Railway Transportation in Russia up to 2030”, supported by the country’s leadership, was the most notable event of the year. The Strategy of Development of Railway Transportation in Russia up to 2030 clearly shows the extent of state support and the limits to state regulation, whereby competitive conditions are created while the stability and effectiveness of the state railway

Annual Report JSC «RZD» 2007

sector’s work is not reduced. Such conditions include the attraction of considerable investments in the railway industry; they should go to all the segments of railway transportation and be used mainly to develop the public-private partnership. The Target Model of the Railway Transportation Service Market by the End of the Third Reform Stage, adopted in 2007, is of great importance. It was worked out with the direct participation of the executives and experts from JSCo «Russian Railways». This model offers clear-cut guidelines for planning work and business by all the market participants, namely, transportation companies, service users and potential investors. Therefore, the previous year has become an important landmark of development of JSCo «Russian Railways» for many years to come. I wish all the employees of JSCo «Russian Railways» success in their work for the Company’s benefit.

Chairman of the Board of JSCo «Russian Railways» A.D. Zhukov


Welcoming Speech by V.I. Yakunin, President of JSCo «Russian Railways»


11

Dear Shareholders, Partners and Colleagues, Today, we are summing up the results of the anniversary year of Russian railways, which are now 170 years old. Symbolically, the anniversary year 2007 has become the beginning of the new position of JSCo «Russian Railways» in the world transportation market, i.e. re-branding, which in the next few years will apply to the Company's visual image and to the gist of building and managing a business. We are showing the changes in JSCo «Russian Railways» to the world and at the same time are confirming the principles of work that remain unchanged for us. The results of 2007 show, for instance, that JSCo «Russian Railways» are developing in full conformity with the tasks set by the President and the Government of the country, and with the program for structurally reforming railway transportation. Our activity fully conforms to the strategic tasks of Russia’s socio-economic development and its interests. In this respect, the fact that the Company’s plans, set out in the “Strategy of Development of Railway Transportation up to 2030”, were fully supported by the participants in the 1st Railway Congress: V.V. Putin - the President of Russia – and by the leading officials of the Russian Government and the regional governments, Russian industrial leaders, and our associates in the transportation market, is of great importance to us. Last year our work was targeted at creating conditions for actively developing and upgrading railways. The Company is now using all types of resources far more efficiently. In this respect, the influence of railway tariffs on the level of inflation has been more than halved. Under the conditions of high market prices of the resources used by the Company, we managed to reduce the growing cost of transportation below the inflation level by taking steps to save resources and increase labor productivity. Thereby we confirmed our underlying principle in maintaining business, namely, success is to be achieved by actually increasing effectiveness. We are saying once more that people are the Company’s main resources; owing to their everyday work, JSCo «Russian Railways» attained a new production, financial and economic level in 2007. This is especially true of intensively growing freight transportation, where we broke a few records. Last year we transported 1,344.2 million tons, which is 2.6% more than in the previous year. Freight turnover exceeded 2,312.6 billion t/km, growing by 7.7%; in addition, 1,281,946,000 passengers were transported. As the Company’s financial position improved, it introduced a new system of labor payment and substantially increased salaries and wages, which grew by almost 18% for employees engaged in carriages. In this respect, JSCo «Russian

Annual Report JSC «RZD» 2007

Railways» are strictly maintaining the economically substantiated relationship between the growth of real wages and labor productivity. In 2007, JSCo «Russian Railways» used 75 billion rubles to fulfill the obligations under the Collective Agreement. In November of that year, a new Collective Agreement was signed for 2008-2010. The new document strengthens the employees’ social protection and fully corresponds to the current requirements for transforming social outlays into an instrument for enhancing the Company’s effectiveness. Last year, we sped up structural transformations. A new project called “Building a System of Management of JSCo «Russian Railways» under Conditions of Reform” was launched. Its purpose is to work out and introduce new effective principles of management in the Company that meet the new requirements as JSCo «Russian Railways» are transformed into a holding company. The Board of JSCo «Russian Railways» approved the establishment of 15 subsidiaries and joint ventures. A major operator subsidiary called "First Freight Company" was established for the purpose of renewing the rolling stock and consolidating the market positions of JSCo «Russian Railways». Much is being done by the Company for passengers: new routes, including international ones, are being opened; our trains now go to Paris, Amsterdam, Basel and Munich. Russian passengers can choose a man’s or a woman’s compartment, purchase train tickets via the Internet, and enjoy other services offered today. In 2007, JSCo «Russian Railways» considerably strengthened its positions in the international transportation market. We entered into a few very important agreements with our foreign partners in order to integrate the Company further in the international transportation system and use our country’s transit opportunities more effectively. Certainly, we do not intend to “rest on our laurels”. Last year’s indicators are merely a launching pad for subsequent development. Our objective is not simply to maintain the current development rates, but to make a qualitative leap forward. We are changing. And changing for your sake!

President of JSCo «Russian Railways» V.I. Yakunin


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

General Information on JSCo «Russian Railways»


13

Annual Report JSC «RZD» 2007

General legal information The monetary amounts in this section are given in kRUB Full name of the open joint-stock company (in Russian): открытое акционерное общество «Российские железные дороги» (abbreviated ОАО «РЖД») Name in English: Open Joint Stock Company «Russian Railways» (JSCo «Russian Railways») State registration certificate: series 77 No. 007105126 issued on September 23, 2003 Constituency of the Russian Federation: city of Moscow Registered address: Ul. Novaya Basmannaya 2, Moscow 107174 Postal address: Ul. Novaya Basmannaya 2, Moscow 107174 Types of activity — freight transport; — long-distance passenger transport; — suburban passenger transport; — provision of infrastructure services; — provision of locomotive propulsion services; — repair and maintenance of rolling stock; — building infrastructure; — science & research and experimental & constructional work; — maintaining the social sphere; — other types of activities Information on inclusion in the list of strategic joint stock companies: pursuant to Edict No. 1009 of the President of the Russian Federation of August 4, 2004 “Concerning Approval of the List of Strategic Enterprises and Strategic Joint Stock Companies”, JSCo «Russian Railways» has been included in the list of open joint stock companies whose shares are owned by the Russian Federation, and the participation of the Russian Federation in the management of which is in the state’s strategic interests, promotes its defense capability and security, and protects its citizens’ morality, health, rights and legal interests. Full name and address of the register holder: Open Joint Stock Company «Russian Railways». The Company itself keeps the shareholders’ register; a decision to transfer the functions of keeping the shareholders’ register to the registrar was not made. уб.:


14

General Information on JSCo «Russian Railways»

Size of equity, kRUB:

1 541 697 819

There are no preference shares The Company’s principal shareholders:

Number of ordinary shares:

the Russian Federation

Nominal value of ordinary shares, kRUB:

Amount of contribution by the Russian Federation, kRUB:

1 541 697 819

1 541 697 819

State registration number of the issue of ordinary shares and the state registration date:

Share of the Russian Federation in charter capital,%

1 541 697 819

1-01-65045-D dated December 2, 2003

100

State registration number of the additional issue of ordinary shares and the state registration date:

100

Share of the Russian Federation, ordinary shares, %

1-01-65045-D-001D dated December 13, 2007

Full name and address of the company’s auditor: Closed joint stock company BDO Unicon (using statutory financial statements) Address: Varshavskoye Shosse 125, Bldg. 1, Sector 11, Moscow 117545, Russian Federation Ernst & Young Limited Liability Company (IFRS financial statements) Address: Sadovnicheskaya Nab. 77, Bldg. 1, Moscow 115035, Russia Changes in statutory activities in 2007: — By Decree No. 483 of the Government of the Russian Federation of July 26, 2007 “Concerning Amendments to the Charter of the Open Joint Stock Company «Russian Railways», greater powers have been given to the president of JSCo «Russian Railways» (e.g. entering into transactions worth more than 3 billion rubles, appointing chief executives of non-state institutions, and approving the issuer’s quarterly reports). — By Decree No. 811 of the Government of the Russian Federation of November 26, 2007 "Concerning Amendments to the Charter Capital of the Open Joint Stock Company «Russian Railways»", JSCo «Russian Railways» has received the right to issue, in addition to the placed shares, 5,997,819 ordinary registered shares with a nominal value of 1,000 rubles each for the total amount of 5,997,819,000 rubles, which after their placement give the same rights as ordinary registered shares floated upon the company's incorporation. — As of January 1, 2007, the size of the Company’s charter capital was 1,535,700,000 kRUB. By Resolution No. 1686r of the Government of the Russian Federation of November 26, 2007 “Concerning an Increase in the Charter Capital of JSCo «Russian Railways», the charter capital of JSCo «Russian Railways» was enlarged by 5,997,819,000 (five billion nine hundred ninety-seven million eight hundred nineteen thousand) rubles by issuing 5,997,819 (five million nine hundred ninety-seven thousand eight hundred nineteen) additional shares, including those at the expense of the 50% paid-in shares of JSCo AK Zheleznye Dorogi Yakutii, 75% of the shares of JSCo TransCreditBank, 100% - 1 share of the shares of JSCo Gazeta Gudok, and 87.4% of the shares VSM. The draft amendments to the Company’s charter are being agreed on by the ministries concerned.


15

Annual Report JSC «RZD» 2007

List of related parties The Company’s related parties are the following: — members of the Board of Directors (see subsection “Members of the Board of Directors” of section IV); — the Company’s president (see the subsection “President of JSCo «Russian Railways» ” of section IV); — members of the Company’s Management Board (see the subsection “Management Board” of section IV); — legal entities in which the Company has more than 20% stock power of the voting shares or of the contributions and/or the equitable interest of the Company’s charter capital or equity capital (see the subsection “Reform and Participation in Subsidiaries and Affiliates” of section VIII).

Structure of the holding company The holding company is structurally composed of the parent company JSCo «Russian Railways» and its subsidiaries and affiliates. (I) As of January 1, 2007, the Company was structurally composed of branches engaged in certain types of activity: Branch offices – railways: — Oktyabrskaya; — Kaliningradskaya; — Moskovskaya; — Gorkovskaya; — Severnaya; — Severo-Kavkazskaya; — Yugo-Vostochnaya; — Privolzhskaya; — Kuibyshevskaya; — Sverdlovskaya; — Yuzhno-Uralskaya; — Zapadno-Sibirskaya; — Krasnoyarskaya; — Vostochno-Sibirskaya; — Zabaikalskaya; — Dalnevostochnaya; — Sakhalinskaya.

Functional branch offices: — branch offices engaged in transportation (4) — branch offices providing technical, economic and financial support (6) — branch offices engaged in capital construction (45) — branch offices engaged in rolling stock repair and maintenance (30) — branch offices operating track facilities (15) — branch offices which are electro-technical plants (8) — branch offices engaged in IT development and telecommunications (3) — branch offices engaged in the social sphere (20) — R&D branch offices (10) — other branch offices (2)


16

General Information on JSCo «Russian Railways»

The Company’s representative offices are located in Pyongyang, Beijing, Warsaw, Prague 6, Helsinki, Berlin, Budapest VI, Tallinn, Kiev and Teheran. A representative office has been established in the Republic of Armenia in accordance with the decision of the Board of Directors of JSCo «Russian Railways» (Minutes No. 18 of November 19, 2007). In the reporting year, in accordance with the decisions of the Board of Directors, the branch offices of JSCo «Russian Railways», on the basis of the assets of which subsidiaries were set up, have been liquidated: — capital construction branches – 41 (Minutes No. 9 of May 2, 2007); — electro-technical plants – 8 (Minutes No. 11 of May 28, 2007); — in the sphere of capital repairs of freight cars and the production of spare parts for them - 3 (Minutes No. 14 of August 31, 2007). The following branch offices of JSCo «Russian Railways» were established: а) design engineering bureau for IT systems development (Minutes No. 19 of November 16, 2006); b) central management office for railway track repair (Minutes dated April 20, 2007); c) In the Management Office for the Comprehensive Reconstruction of Railways and the Construction of Railway Units - a branch office of JSCo «Russian Railways» –the following autonomous structural subdivisions were created: the customer's Khabarovsk group for building railway units (the Management Office for the Construction of Railway Units of the City of Khabarovsk) and the customer’s Rostov group for building railway units (the Management Office for the Construction of Railway Units in the south of Russia); d) Company’s new branch office, namely, the Management Office for Railway Stations, started working in 2007. (II) As of December 31, 2007, JSCo «Russian Railways» owned shares in 131 companies. The Company’s investments include investments in the charter capital of 115 subsidiaries and affiliates (including those for which a provision has been created), of which 59 companies are subsidiaries (with an equitable interest of 50% and more), while the remaining 56 companies are affiliates (with an equitable interest of 20% to 50%). The contributions to the charter capital of subsidiaries and affiliates amount to 9.88% of the size of the charter capital of JSCo «Russian Railways».


17

Annual Report JSC «RZD» 2007

In 2007, 15 subsidiaries of JSCo «Russian Railways» were established in the context of the structural railway reform: №

Name of Subsidiary

Amount, kRUB

Date of meeting of founding members

Date of state registration of the company

1

CJSCo CHOP RZD OKhRANA

21,834

January 15, 2007

January 31, 2007

2

JSCo ReilTransAvto

1,665,233

January 17, 2007

February 2, 2007

3

JSCo Port Ust-Luga Transportation Company

50,000

March 21, 2007

March 29, 2007

4

JSCo Alatyrsky Mechanical Plant

104,657

March 15, 2007

March 30, 2007

5

JSCo Vladicaucasus Train Car Repair Plant named by S.M.Kirov 1,172,955

March 15, 2007

April 10, 2007

6

JSCo Vologda Train Car Repair Plant

727,051

March 15, 2007

April 11, 2007

7

JSCo Krasnoyarsk Train Car Repair Plant

1,430,483

March 15, 2007

April 6, 2007

8

JSCo Moscow Locomotive Repair Plant

946,585

March 15, 2007

March 28, 2007

9

JSCo Moscow Mechanical Plant Krasny Put

562,512

March 15, 2007

April 5, 2007

10

JSCo Petukhov casting and mechanical plant

285,457

March 15, 2007

April 3, 2007

11

JSCo Railway Trade Company

8,077,296

May 15, 2007

June 4, 2007

12

JSCo Don-Suburbs

74

June 7, 2007

June 22, 2007

13

JSCo First Freight Company

85,652,434

July 18, 2007

July 26, 2007

14

JSCo Russia-wide Research Institute of Rail Transportation

3,191,502

July 18, 2007

August 9, 2007

15

JSCo State Research Institute of Automated Systems

561,733

July 18, 2007

August 8, 2007

As was mentioned above, the federally owned 50% of the shares of charter capital of JSCo Aktsionernaya Kompaniya Zheleznye Dorogi Yakutii (JSCo Railways of Yakutia), 75% of the shares of JSCo Transkreditbank, 100% minus 1 share of the shares of JSCo Newspaper Gudok, and 87.4% of the shares of RJSCo VSM (Vysokoskorostnye Magistrali) (High-speed Lines) were contributed by the Russian Federation to the charter capital of JSCo «Russian Railways» in 2007. In 2007, JSCo «Russian Railways» terminated its participation in JSCo Sankt-Peterburgskaya Torgovaya Kompaniya (ORC) (100%), CJSCo Transkreditkart (40%), JSCo Elgaugol (29.49%), and JSCo LLMZ-KAMAKh (49%). CJSCo Izhvelokom, LLC Alnashskiy Spirtzavod, LLC Asan-spirt and LLC Brat i Sestra (writing off the provision) also withdrew from the companies, whose shares and equitable interests are owned by JSCo «Russian Railways». The participation of JSCo «Russian Railways» in subsidiaries and affiliates is analyzed in the subsection “Reform and Participation in Subsidiaries and Affiliates" of the section “Priority Directions of Activity”.


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Activities of the Management and Control Bodies of JSCo "Russian Railways"


19

Annual Report JSC «RZD» 2007

In accordance with the сharter of JSCo «Russian Railways», the following regulatory bodies were established in JSCo «Russian Railways»: — General Shareholders’ Meeting; — Board of Directors; — President; — Management Board. The Audit Committee is the control body responsible for monitoring the Company’s financial and economic activities.

General Shareholders’ Meeting The Company’s supreme governing body is the General Shareholders’ Meeting. The Company’s sole shareholder is the Russian Federation. Inasmuch as the Russian Federation is the Company’s sole shareholder, and the Russian Government exercises powers on behalf of the Russian Federation, pursuant to Article 47 of the Federal Law “Concerning Joint Stock Companies”, decisions on the composition of the Board of Directors of JSCo «Russian Railways» are adopted by the Russian Government alone and drawn up in writing. Shareholder decisions are officially made out in the form of an instruction of the Government of the Russian Federation. The decisions of the annual general shareholders’ meeting in 2007 were approved by Instruction No. 864-r of the Government of the Russian Federation of June 30, 2007. The decisions of the extraordinary general shareholders’ meeting in 2007 were approved by Instruction No. 1686-r of the Government of the Russian Federation of November 26, 2007 “On an Increase in the Charter Capital of JSCo «Russian Railways» and Decree No. 811 of the Government of the Russian Federation of November 26, 2007 “Concerning the Introduction of Amendments to the Charter of JSCo «Russian Railways».

Board of Directors The Board of Directors of JSCo «Russian Railways» is responsible for general management of the Company’s activities and acts on the basis of norms stipulated by the laws of the Russian Federation; the Charter of JSCo «Russian Railways», approved by Decree No. 585 of the Government of the Russian Federation of September 18, 2003, and the Statute on the Board of Directors of JSCo «Russian Railways», approved by Instruction No. 265-r of the Government of the Russian Federation of February 25.


20

Activities of the Management and Control Bodies of JSCo «Russian Railways»

Members of the Board of Directors The Board of Directors of JSCo «Russian Railways», elected in accordance with Instruction No. 930-r of the Government of the Russian Federation of June 30, 2006, was approved in the number of 11 members (positions at the time of election): Full name

Position

V. N. Ampilogov

Deputy Director of the Department for Industry Development of the Government of the Russian Federation

A. D. Zhukov

Deputy Prime Minister of the Russian Federation

I. E. Levitin

Minister of Transport of the Russian Federation

A. S. Misharin

Deputy Minister of Transport of the Russian Federation

V. L. Nazarov

Head of the Federal Agency for Federal Property Management

G. M. Fadeyev

Aide to the Prime Minister of the Russian Federation

V. B. Khristenko

Minister of Industry and Power of the Russian Federation

A. V. Sharonov

State Secretary, Deputy Minister of Economic Development and Trade of the Russian Federation

K. P. Shenfeld

Acting Head of the Federal Rail Transport Agency of the Ministry of Transport of the Russian Federation

I. I. Shuvalov

Aide to the President of the Russian Federation

V. I. Yakunin

President of JSCo «Russian Railways»

The Board of Directors of JSCo «Russian Railways», elected in accordance with Instruction No. 864-r of the Government of the Russian Federation of June 30, 2007, was approved in the number of 12 members (positions at the time of election): Full name

Position

V. N. Ampilogov

Deputy Director of a department of the Government of the Russian Federation

V.S. Belov

Director of a department of the Ministry of Finance of the Russian Federation

A.V. Dementyev

Deputy Minister of Industry and Power of the Russian Federation

A. D. Zhukov

Deputy Prime Minister of the Russian Federation

A.L. Kostin

President and chairman of the management board of the open joint stock company Foreign Trade Bank

I. E. Levitin

Minister of Transport of the Russian Federation

A. S. Misharin

Deputy Minister of Transport of the Russian Federation

V. L. Nazarov

Head of the Federal Agency for Federal Property Management

A. V. Popova

Director of a department of the Ministry for Economic Development and Trade of the Russian Federation

G. M. Fadeyev

Aide to the Prime Minister of the Russian Federation

I. I. Shuvalov

Aide to the President of the Russian Federation

V. I. Yakunin

President of JSCo «Russian Railways»

A. D. Zhukov, Deputy Prime Minister of the Russian Federation, was elected Chairman of the Board of Directors of JSCo «Russian Railways». The members of the Board of Directors of JSCo «Russian Railways» receive no remuneration for performing their functions as members of the Board of JSCo «Russian Railways».


21

Annual Report JSC «RZD» 2007

Data on participation in meetings of the Board of Directors of JSCo «Russian Railways» From January 1, 2007 to June 30, 2007 №1

№2

№3

№4

№5

№6

№7

№8

№9

№10

№11

№12

V. N. Ampilogov

+

+

+

+

+

+

+

+

+

+

+

+

A. D. Zhukov

+

+

+

+

+

+

+

+

+

+

+

+

I. E. Levitin

+

+

+

+

+

+

+

+

+

+

+

A. S. Misharin

+

+

+

+

+

+

+

+

+

+

+

+

V. L. Nazarov

+

+

+

+

+

+

+

+

+

+

+

+

G. M. Fadeyev

+

+

+

+

+

+

+

+

+

+

+

+

V. B. Khristenko

+

+

+

+

+

+

+

+

+

+

A. V. Sharonov

+

+

+

+

+

+

+

+

+

+

+

+

K. P. Shenfeld

+

+

+

+

+

+

+

+

+

+

+

+

I. I. Shuvalov

+

+

+

+

+

+

+

+

+

+

+

+

V. I. Yakunin

+

+

+

+

+

+

+

+

+

+

+

+

№17

№18

№19

№20

№21

№22

№23

From July 1, 2007 to December 31, 2007 №13

№14

№15

№16

V. N. Ampilogov

+

+

+

+

+

+

+

+

+

+

V.S. Belov

+

+

+

+

+

+

+

+

+

A.V. Dementyev

+

+

+

+

+

+

+

+

+

+

+

A. D. Zhukov

+

+

+

+

+

+

+

+

+

+

A.L. Kostin

+

+

+

+

+

+

+

+

+

+

I.E. Levitin I.E.

+

+

+

+

+

+

+

+

+

+

A. S. Misharin

+

+

+

+

+

+

+

+

+

+

+

V. L. Nazarov

+

+

+

+

+

A. V. Popova

+

+

+

+

+

+

+

+

+

+

G. M. Fadeyev

+

+

+

+

+

+

+

+

+

+

+

I. I. Shuvalov

+

+

+

+

+

+

+

+

V. I. Yakunin

+

+

+

+

+

+

+

+

+

+

+

Meetings of the Board of Directors of JSCo «Russian Railways» In the reporting period, the Board of Directors of JSCo «Russian Railways» held 23 meetings at which 169 issues were considered. All decisions of the Board of Directors were fulfilled, or the time limits for their fulfillment were carried over by decision of the Board to the first half of 2008.


22

Activities of the Management and Control Bodies of JSCo «Russian Railways»

Issues considered at the meetings of the Board of Directors of JSCo «Russian Railways» in 2007 No. 1 dated January 22, 2007

No. 3 dated February 16, 2007

1. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the ОАО Yamal Railway Company Budget administration for 2005" on the Agenda of the Meeting of the Board of Directors of the ОАО Yamal Railway Company.

1. On the approval of a set of documents for the establishment of subsidiaries for capital repairs and maintenance of passenger train cars and the rolling stock and the production of spare parts for them, and on the time limits for and the ways of selling the shares of these subsidiaries (on the basis of the Vologda Train Car Repair Plant, the Alatyr Machine-building Plant, the Vladicaucasus Train Car Repair Plant, the Krasny Put Moscow Machine-building Plant, the Moscow Locomotive Repair Plant, Petukhov Foundry, and the Krasnoyarsk Train Car Repair Plant.

2. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the CJSCo Zheldoripoteka Budget administration for 2005" on the Agenda of the Meeting of the Board of Directors of CJSCo Zheldoripoteka. 3. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the JSCo Omsk-Suburban Railways Budget for 2005" on the Agenda of the Meeting of the Board of Directors of JSCo Omsk-Suburban Railways. 4. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the CJSCo TransTeleCom Company Budget administration for 2005" on the Agenda of the Meeting of the Board of Directors of CJSCo TransTeleCom Company. 5. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the JSCo Altai-Suburban Railways Budget administration for 2005" on the Agenda of the Meeting of the Board of Directors of JSCo Altai-Suburban Railways. 6. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the CJSCo TRANSKAT Budget administration for 2005" on the Agenda of the Meeting of the Board of Directors of CJSCo TRANSKAT. 7. On the Adoption of the Decision to Approve a Supplementary Agreement to the State Contract for Military Railway Shipments and Transportation Services for 2006.

No. 2 dated February 12, 2007 1. On the approval of the JSCo «Russian Railways» Report for Q4 2006. 2. On the transfer of the special-purpose train car stock of JSCo «Russian Railways» into federal ownership without consideration.

2. On the establishment of a joint venture by JSCo «Russian Railways» and JSCo Ust-Luga Company. 3. On granting railway fare discounts to students of higher and secondary educational institutions in 2007. 4. On the approval of the list of subsidiaries and affiliates in relation to which the Board of Directors of JSCo «Russian Railways» adopts a decision in accordance with the Charter of JSCo «Russian Railways». 5. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the Fulfillment of the CJSCo FK Lokomotiv Budget for 2005" on the Agenda of the Meeting of the Board of Directors of CJSCo FK Lokomotiv. 6. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo Arena-2000 Budget for 2005" on the Agenda of the Meeting of the Board of Directors of JSCo Arena-2000. 7. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo Arena-2000 Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Arena-2000. 8. On the position of JSCo «Russian Railways» (its representatives) on the issue of the adoption of a decision on the participation of JSCo Roszheldorproekt in other organizations at the meeting of the Board of Directors of Roszheldorproekt. 9. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo Roszheldorproekt Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Roszheldorproekt. 10. On the position of JSCo «Russian Railways» (its repre-


23

sentatives) on the issue “Approval of the ОАО Yamal Railway Company Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Yamal Railway Company. On the time limits for and the methods of selling the shares of JSCo ELTEZA and JSCo Roslavl Train Car Repair Plant.

No. 4 dated March 5, 2007 1. On the Appointment of a Member of the Management Board of JSCo «Russian Railways».

No. 5 dated March 5, 2007 1. On partially paying in the Charter Capital of JSCo TransContainer in cash. 2. On the approval of related deals for transforming the region of the Izvestkovaya-Chegdomyn Railway Line that is in the area of influence of the Bureiskaya Hydroelectric Plant, Khabarovsk Territory. 3. On the approval of executing related deals for attracting loans by entering into agreements with Deutsche Bank AG to finance work under a service contract for developing, manufacturing and delivering high-speed electric trains with the company Siemens AG and on fixing the price of those deals. 4. On the position of JSCo «Russian Railways» (its representatives) on the issue of the Agenda of the Meeting of the Board of Directors of JSCo ELTEZA.

No. 6 dated March 23, 2007 1. On the approval of investment and financial programs of JSCo «Russian Railways» for the year 2007 and up to 2009. 2. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the CJSCo TransTeleCom Company Budget for 2007" on the Agenda of the Meeting of the Board of Directors of CJSCo TransTeleCom Company. 3. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the CJSCo Russkaya Troika Budget for 2007" on the Agenda of the Meeting of the Board of Directors of CJSCo Russkaya Troika. 4. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the JSCo Roslavlskiy VRZ Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Roslavlskiy VRZ. 5. On the position of JSCo «Russian Railways» (its represen-

Annual Report JSC «RZD» 2007

tatives) on the issue "Approval of the JSCo Barnaulskiy Train Car Repair Plant Budget for 2007" on the Agenda of the Meeting of the Board of Directors of the JSCo Barnaulskiy Train Car Repair Plant. 6. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the JSCo Kaluzhsky Plant Remput'mash Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Kaluzhsky Plant "Remput'mash". 7. On the position of JSCo «Russian Railways» (its representatives) on the items of the Agenda of the Meeting of the Board of Directors of JSCo Kaluzhsky Plant Remput’mash, included in the list of subsidiaries and affiliates, on which the Board of Directors of JSCo «Russian Railways» adopts decisions in accordance with the first paragraph of Article 71.23 of the JSCo «Russian Railways» Charter: "On the Sale of Shares, the Title to Which Has Been Acquired by the Company" and "On the Approval of a Deal in the Execution of Which Interest Is Taken by a Member of the Management Board of JSCo «Russian Railways»". 8. On the position of JSCo «Russian Railways» (its representatives) on the items of the Agenda of the Meeting of the Board of Directors of JSCo United Electro-technical Plants, included in the list of subsidiaries and affiliates, on which the Board of Directors of JSCo «Russian Railways» adopts decisions in accordance with the first paragraph of Article 71.23 of the JSCo «Russian Railways» Charter: "On the Sale of Shares, the Title to Which Has Been Acquired by the Company" and "On the Approval of a Deal in the Execution of Which Interest Is Taken by a Member of the Management Board of JSCo «Russian Railways»". 9. On the approval of a transaction in the sale/purchase of shares of the Yugo-Vostok Inter-Regional Joint-Stock Bank (open joint-stock company) that belong to JSCo «Russian Railways». 10. On the approval of a transaction in the sale/purchase of CJSCo TransCreditCard shares which belong to JSCo «Russian Railways».

No. 7 dated March 26, 2007 1. On the position of JSCo «Russian Railways» (its representatives) on the items of the agenda of the general shareholders’ meetings and the meetings of the boards of directors of the companies included in the list of subsidiaries and affiliates in relation to which the Board of Directors of JSCo «Russian Railways» adopts decisions in accordance with Article 71.23 of the Charter of JSCo «Russian Railways». 2. On awarding a premium to the President of JSCo «Russian Railways» and assessing his performance according to the results of Q4 2006.


24

Activities of the Management and Control Bodies of JSCo «Russian Railways»

No. 8 dated April 20, 2007

No. 9 dated May 2, 2007

1. On the election of the chairperson at a BoD meeting.

1. On awarding a premium to the President of JSCo «Russian Railways» and assessing his performance for Q1 2007.

2. On the concept of reforming the repair railway facilities of JSCo «Russian Railways». 3. On the establishment of a subsidiary of JSCo «Russian Railways» for providing catering services and on the time limits for and the ways of selling the subsidiary’s shares. 4. On the establishment of the joint venture CJSCo Eurasia Rail Logistics. 5. On the establishment of the suburban passenger company JSCo Don Suburbs, a subsidiary of JSCo «Russian Railways», with the participation of the Administration of the Rostov Region. 6. On the establishment of the Russia-wide railway employers’ association. 7. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo TransContainer Budget for 2007” on the Agenda of the Meeting of the Board of Directors of JSCo TransContainer. 8. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo Refservis Budget for 2007” on the Agenda of the Meeting of the Board of Directors of JSCo Refservis. 9. On the principles of provision of sponsor support and charity aid by JSCo «Russian Railways» and the JSCo «Russian Railways»’ oversight of the purposeful use of the allocations.

2. On the liquidation of the branch offices of JSCo «Russian Railways», on the basis of the assets of which the subsidiaries JSCo Roszheldorstroy and JSCo Roszheldorproyekt were established.

No. 10 dated May 25, 2007 1. On the audit report on the financial statements of JSCo «Russian Railways» for 2006. 2. On the Audit Committeereport on the financial and economic performance of JSCo «Russian Railways» for 2006. 3. On the Results of the Auditor Tender for an Annual Audit of the Financial and Economic Performance of JSCo «Russian Railways» and the Fee for the Auditor's Services. 4. On the primary approval by the board of directors of the annual report of JSCo «Russian Railways» for 2006. 5. On the approval of the annual financial statements of JSCo «Russian Railways» for 2006, including the profits and losses statement. 6. On recommendations concerning the maximum amount of dividends on shares and their payment procedure for the annual general shareholders’ meeting of JSCo «Russian Railways» on the results of the company’s performance for 2006.

10. On the adoption of the decision to approve the agreement for the sale/purchase of realty of JSCo «Russian Railways» with the non-commercial organization Non-state Pension Fund Wellbeing as a deal, in which there is interest, in accordance with Article 83 of Federal Law No. 208-FZ of December 26, 1995 “Concerning Joint Stock Companies”.

7. On the allocation of profit of JSCo «Russian Railways» according to the results of the fiscal year.

11. On the approval of the agreement for issuing workrelated and one-time transportation requirements of JSCo «Russian Railways» to formalize the non-cash transportation documents (tickets) for the employees of JSCo Roszheldorproekt to go by train on long-distance trips.

1. On the release from duties of a member of the Management Board of JSCo «Russian Railways».

12. On the appointment of the representatives of JSCo «Russian Railways» for participation in the general meetings of shareholders of subsidiaries and affiliates.

No. 11 dated May 28, 2007

2. On the liquidation of the branch offices of JSCo «Russian Railways», on the basis of the assets of which the joint stock company United Electro-technical Plants was established. 3. On the approval of the JSCo «Russian Railways» Report for Q1 2007.

13. Miscellaneous 13.1. On the time limits for and the ways of selling shares of JSCo TransContainer.

4. On the adoption of the decision approving the loan agreement between JSCo «Russian Railways» and JSCo High-speed Lines as a transaction in which there is interest


25

Annual Report JSC «RZD» 2007

in accordance with Article 83 of the Federal Law “Concerning Joint Stock Companies”.

on the Agenda of the Meeting of the Board of Directors of JSCo RailTransAuto.

5. On the approval of Agreement No. 22/08/2 for Passenger Transport Services for Discount Category Passengers Traveling Free of Charge on Suburban Trains dated February 7, 2007.

11. On the approval of the JSCo RailTransAuto budget for 2007.

No. 12 dated June 28, 2007 1. On the approval of the concept of reform and the establishment of subsidiaries of JSCo «Russian Railways», on the establishment of the subsidiaries of JSCo «Russian Railways», Russia-wide Research Institute of Rail Transportation and of the Research Institute of Automated Systems, and on the time limits for and the ways of selling the shares of these subsidiaries. 2. On the approval of a set of documents for establishing the open joint-stock company First Freight Company, a subsidiary of JSCo «Russian Railways», and on the time limits for and the ways of selling the subsidiary’s shares. 3. On the concept of reforming plants for the repair of locomotives and the production of spare parts for them. 4. On the position of the representatives of JSCo «Russian Railways» on the Board of Directors of JSCo Roszheldorstroy on the issue “Participation of JSCo Roszheldorstroy in the establishment of the new organization Zarybezhstroytekhnologiya". 5. On the participation of JSCo «Russian Railways» in establishing the non-commercial partnership Railway Equipment Manufacturers’ Association. 6. On the approval of entry into a loan agreement by JSCo «Russian Railways» and JSCo High-speed Lines, as a transaction in which there is interest, in accordance with Article 83 of the Federal Law “Concerning Joint Stock Companies”. 7. On the approval of the agreement for the technical maintenance and repair of 8 (eight) high-speed trains with the company Siemens Actiengesellschaft and the determination of its price. 8. On the position of JSCo «Russian Railways» (its representatives) on the issue "Flotation by JSCo TransContainer of Bonds and the Approval of the Relevant Issuance Documents” at the meeting of the Board of Directors of JSCo TransContainer. 9. On the approval of the JSCo ELTEZA budget for 2007. 10. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of a Major Transaction”

12. On the schedule of the Board of Directors of JSCo «Russian Railways» for H2 2007. 13. On the release from duty and appointment of a member of the Management Board of JSCo «Russian Railways» (Instruction No. 2508p-P13 of the Government of the Russian Federation of June 27, 2007). 14. On the approval of the key indicators of the effective performance of the Vice President for corporate governance of JSCo «Russian Railways». 15. On giving an annual premium to the members of the Management Board of JSCo «Russian Railways» and making a summarized qualitative assessment of the performance of the Management Board of JSCo «Russian Railways» as a whole for 2006. 16. On the approval of assessing the fulfillment of the key indicators of the effective performance of the President of JSCo «Russian Railways» for 2006. 17. On the approval of the amount of a provision for the purpose of determining the amount of premiums given in the long term to the chief executives of JSCo «Russian Railways» in 2004 – 2006

No. 13 dated August 9, 2007 1. On the election of the Chairman of the Board of Directors of JSCo «Russian Railways». 2. On the position of JSCo «Russian Railways» (its representatives) on the issue “Sale of Shares, the Title to Which Was Transferred to the Company” on the agenda of the meeting of the Board of Directors of JSCo Refservis included in the list of subsidiaries and affiliates on which the Board of Directors of JSCo «Russian Railways» adopts a decision in accordance with the first paragraph of Article 71.23 of the Charter of JSCo «Russian Railways». 3. On the position of JSCo «Russian Railways» (its representatives) on the issue “Sale of Shares, the Title to Which Was Transferred to the Company” on the agenda of the meeting of the Board of Directors of JSCo Barnaul Train Car Repair Plant included in the list of subsidiaries and affiliates on which the Board of Directors of JSCo «Russian Railways» adopts a decision in accordance with the first paragraph of Article 71.23 of the Charter of JSCo «Russian Railways».


26

Activities of the Management and Control Bodies of JSCo «Russian Railways»

4. On the position of JSCo «Russian Railways» (its representatives) on the issue “Sale of Shares, the Title to Which Was Transferred to the Company” on the agenda of the meeting of the Board of Directors of JSCo Roslavl Train Car Repair Plant included in the list of subsidiaries and affiliates on which the Board of Directors of JSCo «Russian Railways» adopts a decision in accordance with the first paragraph of Article 71.23 of the Charter of JSCo «Russian Railways». 5. On awarding a premium to the President of JSCo «Russian Railways» and assessing his performance according to the results of Q2 2007. 6. On the introduction of additions to the system of key indices of the performance of members of the Management Board of JSCo «Russian Railways». 7. On the position of JSCo «Russian Railways» (its representatives) on the items of the agenda of the general shareholders’ meeting of JSCo First Freight Company included in the list of subsidiaries and affiliates on which the Board of Directors of JSCo «Russian Railways» adopts decisions in accordance with the first paragraph of Article 71.23 of the Charter of JSCo «Russian Railways».

No. 14 dated August 31, 2007 1. On electing the chairperson at a BoD meeting. 2. On adjusting the investment and financial programs of JSCo «Russian Railways». 3. On the monetary evaluation of assets contributed as payment for the additional shares of JSCo «Russian Railways» and the determination of the cost of flotation of additional shares of JSCo «Russian Railways». 4. On the release from duty and appointment of the members of the Management Board of JSCo «Russian Railways».

8. On the position of the company (its representatives) when the management bodies of CJSCo Russkaya Troika consider the issues of the agenda of the general shareholders’ meeting and the BoD meeting. 9. On the terms and procedure of sale of 15% of the shares of JSCo TransContainer to a limited number of investors according to the tender results. 10. On the approval of the agreement on surety by JSCo «Russian Railways» in favor of OKO VAMK in relation to the credit agreement for Ou KageNap Tratz Ih! 11. Agreement on the sale/purchase of the shares of CJSCo TsNIITEI-IS that belong to JSCo «Russian Railways». 12. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the Report on the Fulfillment of the JSCo Kaluzhsky Plant Remput'mash Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo Kaluzhsky Plant Remput'mash. 13. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the Report on the Fulfillment of the JSCo Roszheldorproekt Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo Roszheldorproekt. 14. On the approval of contractor agreements and the supplementary agreements to them as deals, in which there is interest, in accordance with Article 83 of the Federal Law “Concerning Joint Stock Companies”. 15. On the adoption of the decision to approve the agreements for the lease of realty of JSCo «Russian Railways» with JSCo Roszheldorproekt and JSCo Roszheldorstroy as deals, in which there is interest, in accordance with Article 83 of the Federal Law “Concerning Joint Stock Companies”. 16. On the liquidation of the branch offices of JSCo «Russian Railways», on the basis of the assets of which subsidiary joint stock companies were established in the sphere of capital repairs of freight railway cars and the production of spare parts for them.

5. On giving railway fare discounts from September 1 to December 31, 2007 to students of institutions of higher and general learning. No. 15 dated October 1, 2007 6. On providing financial and economic information to the tax authority at the place of registration, except for information which is a state or military secret and is provided on paper.

1. On the approval of the loan agreement between JSCo «Russian Railways» and JSCo Elgaugol as a transaction in which there is interest.

7. On providing documents to the tax authority at the place of registration whereby the tax authority is permitted to give financial and economic information to government authorities in compliance with Article 102.1.1 of the Tax Code of the Russian Federation.

2. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the Fulfillment of the JSCo Barnaul Train Car Repair Plant Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo Barnaul Train Car Repair Plant.


27

3. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the Fulfillment of the JSCo Roslavl Train Car Repair Plant Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo Roslavl Train Car Repair Plant. 4. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the CJSCo TransTeleCom Budget for 2006” of the Agenda of the Meeting of the Board of Directors of CJSCo TransTeleCom. 5. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the CJSCo Russkaya Troika Budget for 2006" on the Agenda of the Meeting of the Board of Directors of CJSCo Russkaya Troika

No. 16 dated October 5, 2007 1. Principal undertakings in strategically developing the rail transportation system in Russia by 2030.

Annual Report JSC «RZD» 2007

8. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo Roszheldorstroy Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Roszheldorstroy. 9. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the Fulfillment of the JSCo ELTEZA Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo ELTEZA. 10. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the Fulfillment of the JSCo Refservis Budget for 2006 (May – December)" on the Agenda of the Meeting of the Board of Directors of JSCo Refservis. 11. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo Arena-2000 Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo Arena-2000. 12. Miscellaneous

2. On the investment and financial programs of JSCo «Russian Railways» for the year 2008 and until 2010. 3. On the approval of the agreement for the possession and use of freight cars, entered into by JSCo «Russian Railways» and JSCo First Freight Company, as a transaction in which there is interest, and the position of the representatives of JSCo «Russian Railways» on the Board of Directors of JSCo First Freight Company. 4. On the participation of JSCo «Russian Railways» in the joint venture Trans-Eurasia Logistics GmbH and on the position of JSCo «Russian Railways» on the issue “Participation of JSCo TransContainer in the Establishment of the Joint Venture Trans-Eurasia Logistics GmbH” on the Agenda of the Meeting of the Board of Directors of JSCo TransContainer. 5. On the approval of the supply contract for electric locomotives of the EP1P type. 6. On the approval of the service contract with JSCo Highspeed Lines. 7. On the position of JSCo «Russian Railways» (its representatives) on the issue "Sale of Shares, the Title to Which Has Been Acquired by the Company" on the Agenda of the Meeting of the Board of Directors of JSCo Roszheldorproekt, included in the list of subsidiaries and affiliates, on which the Board of Directors of JSCo «Russian Railways» adopts a decision in accordance with the first paragraph of Article 71.23 of the JSCo «Russian Railways» Charter, and on the approval of the transaction in which interest is taken by a member of the Management Board of JSCo «Russian Railways».

12.1. On the release from duties of the Vice President of JSCo «Russian Railways». 12.2. On the announcement of gratitude to S.M. Babayev. 12.3. On the transition to a unified system for numerically registering train cars and containers owned by JSCo «Russian Railways», their subsidiaries, and outside rolling stock operators. 12.4. On the committees and commissions of the Board of Directors of JSCo «Russian Railways».

No. 17 dated October 30, 2007 1. On the course of undertakings by JSCo «Russian Railways» in 2007 concerning the third phase of the structural railway reform. 2. On the policy pursued in providing social guarantees to the public with regard to long-distance passenger transportation and the solvency and requirements of the public. 3. On the approval of transactions with the interested party JSCo TD RZD. 3.1. On the approval of the agreement for the delivery of EP2K locomotives. 3.2. On the approval of the agreement for the delivery of E5K locomotives.


28

Activities of the Management and Control Bodies of JSCo «Russian Railways»

3.3. On the approval of Supplementary Agreement No. 2 to Agreement No. 100 for the Delivery of EP1M Locomotives dated March 13, 2007. 3.4. On the approval of Supplementary agreement No. 3 to Agreement No. 47 for the Delivery of ZES5K Locomotives dated February 16, 2007.

ments B.V. entered into by The Breakers Investments B.V. and JSCo «Russian Railways». 1.3. On the approval of the entry of JSCo «Russian Railways» into the agreement of the sale/purchase of shares of The Breakers Investments B.V. 2. On the results of the management of realty of JSCo «Russian Railways» in 2006 and H1 2007.

No. 18 dated November 19, 2007 1. On establishing a representative office of JSCo «Russian Railways» in the Republic of Armenia. 2. Under a deed of gift, the alienation of the building of the waiting room (of the station) and the railway platform with the overhanging arch, which are part of the production and technological unit of the Train Car Section of the Central Direction of the Management Office for Providing Services to Passengers, as well as special work-related train cars by putting them into the ownership of the Russian Federation. 3. On the introduction of amendments to the decision of the Board of Directors of JSCo «Russian Railways» of August 18, 2004 (Minutes No. 11) on the issue “Secretariat of the Board of Directors of JSCo «Russian Railways». 4. On awarding a premium to the President of JSCo «Russian Railways» and assessing his performance according to the results of work for Q3 2007. 5. On the position of the representatives of JSCo «Russian Railways» on the issue "Approval of the Agenda of the General Shareholders' Meeting" of the Agenda of Meetings of the Board of Directors of subsidiaries and affiliates that are included in the list approved by the Board of Directors annually. 6. On the approval of the agreements for the lease of realty of JSCo «Russian Railways» with JSCo Roszheldorproekt as deals, in which there is interest, in accordance with Article 83 of the Federal Law “Concerning Joint Stock Companies”.

No. 19 dated November 28, 2007 1. On the approval of the transaction involving the acquisition by JSCo «Russian Railways» of 25% + 1 share of the company The Breakers Investments B.V. 1.1. On the approval of the participation of JSCo «Russian Railways» in The Breakers Investments B.V. 1.2. On the price of assets acquired under the agreement for the sale/purchase of shares of The Breakers Invest-

3. On the position of JSCo «Russian Railways» (its representatives) at the meeting of the Board of Directors of CJSCo TransTeleCom Company on the following items of the agenda: “Termination of the Company’s Participation in CJSCo TransCreditCard”, “Determination of the Market Value of Assets”, and “Approval of the Agreement for the Sale/Purchase of Shares of CJSCo TransCreditCard as a Transaction in Which There Is Interest”. 4. On the time limits for and the ways of selling the shares of JSCo Roslavl Train Car Repair Plant. Primary approval of a deal in selling the shares of JSCo Roslavl Train Car Repair Plant, which constitute 49% of charter capital after its increase as a result of the flotation of shares of an additional issue, to the tender winner by private subscription. 5. On the time limits for and the ways of selling the shares of JSCo Saransk Train Car Repair Plant. Primary approval of a deal in selling the shares of JSCo Saransk Train Car Repair Plant, which constitute 49% of charter capital after its increase as a result of the flotation of shares of an additional issue, to the tender winner by private subscription. 6. Primary approval of a deal in selling the JSCo Refservis shares owned by JSCo «Russian Railways», which constitute 25% of charter capital, at a trade session. 7. Primary approval of a deal in selling the shares of the Vereschagin Plant for the Repair of Railway Machinery Remput’mash, which are owned by JSCo «Russian Railways» and constitute 25% of charter capital plus 1 share, at a trade session. 8. Primary approval of a deal in selling the JSCo Roszheldorproekt shares owned by JSCo «Russian Railways», which constitute 50% of charter capital minus 1 share, at a trade session. 9. Primary approval of a deal in selling the shares of the Abdulin Plant for the Repair of Railway Machinery Remput’mash, which are owned by JSCo «Russian Railways» and constitute 25% of charter capital plus 1 share, at a trade session. 10. Primary approval of a deal in selling the shares of the Orenburg Plant for the Repair of Railway Machinery Remput’mash, which are owned by JSCo «Russian Railways» and constitute 25% of charter capital plus 1 share, at a trade session.


29

11. On the time limits for and the ways of selling the shares of JSCo Barnaul Train Car Repair Plant. Primary approval of a deal in selling the shares of JSCo Barnaul Train Car Repair Plant, which constitute 49% of charter capital after its increase as a result of the flotation of shares of an additional issue, to the tender winner by private subscription. 12. Primary approval of a deal in selling the shares of the Research Institute for the Technology, Control and Diagnosis of Railway Transportation, which are owned by JSCo «Russian Railways» and constitute 25% of charter capital plus 1 share, at a trade session.

Annual Report JSC «RZD» 2007

2. On the price of assets acquired under the agreement for the sale/purchase of shares of The Breakers Investments B.V. entered into by The Breakers Investments B.V. and JSCo «Russian Railways». 3. On the approval of the entry of JSCo «Russian Railways» into the agreement of the sale/purchase of shares of The Breakers Investments B.V. 4. On the establishment of a competitive transnational company for producing rolling stock with the participation of The Breakers Investments B.V. and a strategic foreign partner who is among the global leaders in this sphere.

13. Miscellaneous 13.1. On the approval of the decision additionally to issue registered book-entry shares of JSCo «Russian Railways» in the amount of 5,997,819 (five million nine hundred ninety-seven thousand eight hundred nineteen) units with a face value of 1,000 rubles each, offered by private subscription to the sole shareholder, namely, the Russian Federation represented by the Government of the Russian Federation. 13.2. On the release from duties of a member of the Management Board of JSCo «Russian Railways».

No. 20 dated November 29, 2007 1. On the approval of Supplementary Agreement No. 1 to Agreement No. 54 dated February 26, 2007. 2. On the position of JSCo «Russian Railways» (its representatives) at the extraordinary general meeting of shareholders of JSCo TransContainer on the agenda item “Participation of JSCo TransContainer in Associations and Other Unions of Commercial Organizations” and on the issue "Adoption of a Decision on the Participation of JSCo TransContainer in Other Organizations” on the Agenda of the Meeting of the Board of Directors of JSCo TransContainer. 3. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the Fulfillment of the JSCo TransContainer Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo TransContainer.

No. 22 dated December 21, 2007 1. On granting railway fare discounts to students of higher and secondary educational institutions in 2008. 2. On the position of JSCo «Russian Railways» (its representatives) on the item of the Agenda of the Meeting of the Board of Directors of JSCo Roszheldorstroy. 3. On the approval of the agreements for a social and technical order for catering services entered into by JSCo «Russian Railways» and JSCo ZTK, in relation to which there is interest, in accordance with Article 83 of Federal Law No. 208-FZ of December 26, 1995 "Concerning Joint Stock Companies". 4. On the position of JSCo «Russian Railways» (its representatives) at the extraordinary general meeting of shareholders of JSCo ELTEZA on the issue "Adoption of the Decision on the Participation of JSCo ELTEZA in the Noncommercial Organization Russian Association of Commodity Producers (Employers)”. 5. On the approval of the entry by JSCo «Russian Railways» and CJSCo Zheldoripoteka into an agreement on the sale/purchase of realty located at Nizhniy Novgorod, Ul. Vitebskaya 45 as a transaction in which there is interest in accordance with Article 83 of the Federal Law “Concerning Joint Stock Companies”.

No. 23 dated December 21, 2007

No. 21 dated December 7, 2007 On the approval of the transaction involving the acquisition by JSCo «Russian Railways» of 25% + 1 share of the company The Breakers Investments B.V. 1. On the approval of the participation of JSCo «Russian Railways» in The Breakers Investments B.V.

1. On the approval of a set of documents for establishing the joint stock company South Caucasus Railway in the Republic of Armenia. 2. On the approval of the participation of JSCo «Russian Railways» in establishing the management company Murmansk Transport Junction. 3. On the approval of the transaction involving the acquisi-


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Activities of the Management and Control Bodies of JSCo «Russian Railways»

tion by JSCo «Russian Railways» of a 50% equitable interest in the charter capital of LLC Aeroexpress. 4. On the approval of the loan agreement between JSCo «Russian Railways» and JSCo High-speed Lines as a transaction in which there is interest. 5. On the approval of the timetable of the Board of Directors of JSCo «Russian Railways» for H1 2007. 6. On working out the mechanisms of financing the construction of the railway between Yaiva and Solikamsk, bypassing the technogenic disaster area. 7. On the approval of transactions in selling the shares of JSCo TransContainer

Brief autobiographical information on members of the Board of Directors of JSCo «Russian Railways» Alexander Dmitriyevich Zhukov, Chairman of the Board of Directors Born in 1956. In 1978, graduated from the Moscow State University as a mathematical economist. In 2000-2003, Deputy of the Russian State Duma (third convocation), Chairman of the Budget and Tax Committee, member of the Commission on State Debt and Foreign Assets of the Russian Federation, co-chairman of the Commission on Federal Budget Expenses for Defense and State Security. In 2003-2004, Deputy of the Russian State Duma (fourth convocation), First Deputy Chairman of the State Duma. Since 2004, Deputy Prime Minister of the Russian Federation, member and chairman of the Board of Directors of JSCo «Russian Railways».

Vladimir Ivanovich Yakunin, President of JSCo «Russian Railways» Born in 1948. In 1972, graduated from the Leningrad Institute of Mechanics. Since October 2000, Deputy Minister of Transport of the Russian Federation. Since February 2002, First Deputy Minister of Railways. On October 24, 2003, the Board of Directors of JSCo «Russian Railways» unanimously approved Vladimir Yakunin’s appointment as First Vice President of JSCo «Russian Railways». By Instruction No. 786-r of the Government of the Russian Federation of June 14, 2005, appointed President of JSCo «Russian Railways». Vladimir Yakunin is Chairman of the Board of Trustees of the National Achievement Center and the St. Andrew Foundation. Since 2006, research supervisor and Chairman of the Board of Trustees of the Center for Problem Analysis and State Managerial Project Planning of the Social Science Division of the Russian Academy of Science.

Vladimir Nikolayevich Ampilogov Born in 1950. In 1976 graduated from Ryazan Radio Engineering Institute, specializing in engineering. Since 1997, Head of Department, Deputy Director of the Staff Department of the Government of the Russian Federation. Since 2005, member of the Board of Directors of JSCo «Russian Railways».


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Annual Report JSC «RZD» 2007

Vladimir Sergeyevich Belov

Alexander Sergeyevich Misharin

Born in 1951. In 1974, graduated from the Leningrad Water Transport Institute. In 1992 – 1995, deputy director of a department of the Ministry of Transport of the Russian Federation, in 1995 – 2004, head of a department of the Ministry of Finance of the Russian Federation, and in 2004 – 2007, Director of the Department for Budgetary Policy in Economic Sectors of the Ministry of Finance of the Russian Federation. Since October 27, 2007, Deputy Minister of Health Care and Social Development of the Russian Federation. PhD in economics. Distinguished Economist of the Russian Federation.

Born in 1959. In 1981, graduated from the Urals Electromechanical Institute of Railway Engineering, specializing in engineering, and in 1997 graduated from Urals State University of Railway Transport, specializing in economics. In 1998-2000, Deputy Minister of Railways of the Russian Federation. In 2000-2002, First Deputy Minister of Railways of the Russian Federation, and then Deputy Minister of Railways of the Russian Federation. In 2002-2003, head of the federal unitary enterprise Sverdlovsk Railways. In 2003-2004, head of Sverdlovskaya Railways (a branch of JSCo «Russian Railways»), then for a year Director of the Department of Comprehensive Infrastructure development of the Ministry of Transport and Communications of the Russian Federation. Since 2004, Deputy Minister of Transport of the Russian Federation. Since 2005, member of the Boards of Directors of JSCo «Russian Railways» and the Sheremetyevo International Airport.

Andrey Vladimirovich Dementyev Born in 1967. Graduated from the Chelyabinsk Polytechnic Institute and Academy of National Economy affiliated to the Government of the Russian Federation in 1991 and 1996, respectively. In 1996 – 1997, First Deputy Chairman of the Chelyabinsk Regional Committee for the Management of State-owned Property, in 1997 – 1998, Chairman of the Chelyabinsk Regional Department of the Federal Securities Market Commission of the Russian Federation, in 1998, advisor to the Deputy Prime Minister of the Russian Federation, in 1999, Deputy Head of the Financial and Economic Department of the Administration for Managing the Affairs of the President of the Russian Federation, in 1999 – 2004, Deputy Head of the Secretariat of the First Deputy Prime Minister of the Russian Federation, and in 2004 – 2005, Director of the Department for Structural and Investment Policies in Industry and Power of the Ministry of Industry and Energy of the Russian Federation. On December 8, 2005, appointed Deputy Minister of Industry and Energy of the Russian Federation by Instruction No. 2143-r of the Government of the Russian Federation.

Andrey Leonidovich Kostin Born in 1956. In 1979, graduated with honors from the Moscow State University (economic department), specializing as an international economist. PhD in economics. On October 14, 1999, the President issued an Edict to extend the powers of A.L. Kostin, Chairman of the Bank for Development and Foreign Economic Affairs, for 3 years. On June 10, 2002, appointed to the positions of President and Management Board Chairman of the VTB Bank. On April 4, 2007, the supervisory board of the VTB Bank adopted the decision to extend the powers of A.L. Kostin as the President and Management Board Chairman of VTB Bank up to 2012. Member of the Board of Directors of the oil company Rosneft, member of the Board of Directors of JSCo «Russian Railways», the Board of Directors of Sovkomflot and the Board of Directors of the United Aircraft Construction Corporation, and President of the Sport Gymnastics Federation of Russia.

Igor Yevgenyevich Levitin Born in 1952. In 1983, graduated from the Military Academy of Logistics and Transport, specializing in railway engineering. In 1996-2004, Deputy General Director of Severstaltrans. Since 2004, Minister of Transport of the Russian Federation, member of the Board of Directors of JSCo «Russian Railways». Since 2005, member of the Boards of Directors of Aeroflot–Russian Airlines and the Sheremetyevo International Airport.

Valery Lvovich Nazarov Born in 1955. In 1985, graduated from The BonchBruevich Saint-Petersburg State University of Telecommunications as an engineer. In 1993, graduated from the State Service Institute under the auspices of the Russian Government, specializing in state municipal management.


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Activities of the Management and Control Bodies of JSCo «Russian Railways»

In 1999-2004, Chairman of the St. Petersburg Committee for Municipal Property Management. In 2004, concurrently Deputy Chief of Administration and Head of the Main Control Department of the President of the Russian Federation. Since 2004, member of the Board of Directors of JSCo «Russian Railways» and Head of the Federal Agency for Federal Property Management of the Russian Federation.

Management Board Chairman of the Management Board of JSCo «Russian Railways»

V.I. Yakunin, President of JSCo «Russian Railways» Members of the Management Board of JSCo «Russian Railways» as of December 31, 2007: V. N. Morozov – First Vice President

Anna Vladislavovna Popova F. B. Andreyev – Senior Vice President Born in 1964. In 1986, graduated from the Leningrad Financial and Economic Institute of the Order of the Red Labor Banner, specializing in industrial planning. PhD in economics. Since 1999, reader at the St. Petersburg State University. Since 2004, Director of the Corporate Governance Department of the Ministry for Economic Development and Trade of the Russian Federation. Since 2007, Deputy Minister of Economic Development and Trade of the Russian Federation, and member of the Board of Directors of JSCo «Russian Railways».

B. M. Lapidus – Senior Vice President G. V. Kraft – Chief Accountant M. P. Akulov – Vice President O. Y. Atkov – Vice President A. S. Bobreshov – Vice President V. B. Vorobyov – Vice President

Gennady Matveyevich Fadeyev

V. A. Gapanovich – Vice President

Born in 1937. In 1999-2003, Head of the Moscow Railway of the Ministry of Railways of the Russian Federation. In 2002 – 2003, Minister of Railways of the Russian Federation. In 2003 – 2005, President and Management Board Chairman of JSCo «Russian Railways». Since 2003, member of the Board of Directors of JSCo «Russian Railways», and since 2005, an aide to the Prime Minister of the Russian Federation. Since November 2005, Acting Director of the Federal Railway Agency. Since September 2006, Deputy Director of the All-Russian Railway Research Institute. Since June 2006, member of the Board of Directors of JSCo «Russian Railways».

G. V. Kornilov – Vice President V.G. Lemeshko – Vice President A. A. Mersiyanov – Vice President V.I. Reshetnikov – Vice President O. V. Toni – Vice President V.I. Bynkov - Secretary of State and Head of the Legal Department O. E. Gnedkova – Head of Corporate Finance

Igor Ivanovich Shuvalov

A. G. Ivashkin – Head of Administration

Born in 1967. In 1992, graduated from the Moscow State University, specializing in jurisprudence. In 2000 – 2003, Chief of Staff of the Government of the Russian Federation. Since 2003, an aide to the President of the Russian Federation. Since 2004, an aide to the President of the Russian Federation and member of the Boards of Directors of JSCo «Russian Railways», Sovkomflot and Gazprom.

S. V. Mikhailov – Head of Corporate Communications A. Y. Semechkin - Advisor to the President, Director of the federal state-owned unitary enterprise Russian Railway Research Institute V. I. Starostenko – Director of the Moscow Railway A. V. Tselko – Director of the West Siberian Railway


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Brief autobiographical information on members of the Management Board of JSCo «Russian Railways»

Annual Report JSC «RZD» 2007

Galina Vasilyevna Kraft Chief Accountant of JSCo «Russian Railways»

Born in 1954. In 1977, graduated from St. Petersburg State University of Railway Transport. Railway engineer specializing in railway operations, PhD in technology. In May 1999 - May 2000, Deputy Minister of Railways, in 2002 – 2003, First Deputy Minister, and in November 2003 – June 2004, Minister of Railways of the Russian Federation. Since July 2004, Executive Director of Wellbeing, a non-state pension fund. On August 17, 2005, appointed First Vice President of JSCo «Russian Railways».

Born in 1950. Graduated from St. Petersburg State University of Railway Transport., specializations: “Railway Automation, Remote Control and Telecommunications” and “Economics and Organization of Rail Transport”. Railway electrical engineer and engineer-economist, PhD in economics. In 2000-2002, Professor, head of the accounting and audit department of St. Petersburg State University of Railway Transport. In 2002-2003, Deputy Director of the Finance Department of the Ministry of Railways of Russia, head of the Investment Management Department of the federal state unitary enterprise Directorate of Railways of the Ministry of Railways of the Russian Federation. In 2003, Head of the Investment Department of JSCo «Russian Railways». In 2003-2005, Vice President of JSCo «Russian Railways», Head of the Investment Department of JSCo «Russian Railways». In August 2005 – December 2005, Vice President of JSCo «Russian Railways». On December 23, 2005, appointed Chief Accountant of JSCo «Russian Railways».

Fyodor Borisovich Andreyev Senior Vice President of JSCo «Russian Railways».

Mikhail Pavlovich Akulov Vice President of JSCo «Russian Railways»

Born in 1966. In 1989, graduated from Leningrad State University, specializing in political economy. Economist, lecturer of political economy. In 1999-2001, Chairman of the Board of BaltoneximBank, St. Petersburg. In 2002-2003, First Vice President for the Economy and Finance of ALROSA, Moscow. In 2003, Vice President of JSCo «Russian Railways». In 2005, Senior Vice President of JSCo «Russian Railways».

Born in 1960. In 1982, graduated from Moscow State university of Railway Engineering as a railway engineer, and in 1998 graduated from the Economic Academy under the auspices of the Government of the Russian Federation. In 20002002, head of the West Siberian Railway. In 2002-2003, Deputy Minister of Railways of the Russian Federation. In 2003-2004, First Deputy Minister of Railways of the Russian Federation. In March 2004 – November 2005, Director of the Federal Railway Agency of the Ministry of Transport of the Russian Federation. In November 2005, appointed Vice President of JSCo «Russian Railways».

Vadim Nikolayevich Morozov First Vice President of JSCo «Russian Railways»

Boris Moiseyevich Lapidus Senior Vice President of JSCo «Russian Railways». Born in 1947. Graduate of the All-Union Extramural Railway Engineering Institute. Specializations: railway electrification, economics and organization of rail transport. Professor, PhD in economics. In 1994-2003, Head of the Economic and Development Administration of the Russian Ministry of Railways, General Director of the Center for High-Comfort Rail Service of the Ministry of Railways, Head of the Economic Department of the Ministry of Railways, Director of the Economic Department of the Ministry of Railways, member of a collective body. In 2003, Head of the Economic Forecasting and Strategic Development Department of JSCo «Russian Railways». In 2003, Vice President of JSCo «Russian Railways», and in 2005, Senior Vice President of JSCo «Russian Railways».

Oleg Yurevich Atkov Vice President of JSCo «Russian Railways» Born in 1949. PhD in Medicine, Professor, Hero of the Soviet Union, honored with the Lenin Komsomol Award (1978) and the State Award of the USSR (1989). Graduated from the Moscow Medical Academy named after I.M. Sechenov (1975) and completed postgraduate courses (1978). In 2002, Director of the Health Care Department of the Ministry of Railways of the Russian Federation, and since 2003 head of the Medical Security Department of JSCo «Russian Railways». On August 17, 2005, appointed Vice President of JSCo «Russian Railways». Since 1991, concurrently Head of the Department of Instrumental Diagnostic Methods of Russian State Medical University.


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Activities of the Management and Control Bodies of JSCo «Russian Railways»

Alexander Sergeyevich Bobreshov Vice President of JSCo «Russian Railways»

Vyacheslav Grigoryevich Lemeshko Vice President of JSCo «Russian Railways»

Born in 1965. Higher education, in 1988 graduated from Leningrad Shipbuilding Institute, electrical engineer. After graduating from the institute, worked as an engineer at the laboratory of the Central Research Institute named after Academician A.N. Krylov. In 2004, invited to work at JSCo «Russian Railways» as deputy head of the Security Department. Since July 2004, head of the Security Department of JSCo «Russian Railways». On August 17, 2005, appointed Vice President of JSCo «Russian Railways».

Born in 1946. In 1970, graduated from the Moscow State university of Railway Engineering , specializing in railway operations. Since 2003, performed the duties of head of Kuibyshev Railway. On August 18, 2003, appointed head of Kuibyshev Railway. On September 27, 2003, appointed head of Kuibyshev Railway as a branch office of JSCo «Russian Railways». Since July 2007, Vice President of JSCo «Russian Railways».

Vladimir Borisovich Vorobyov Vice President of JSCo «Russian Railways» Born in 1949. In 1978, graduated from the Moscow State university of Railway Engineering . In 1999 – 2002, Deputy Director of the Moscow Railway for Track Facilities. In 2002, appointed Director of the North Caucasus Railway; member of the Management Board of JSCo Railways since 2005. In December 2006, appointed Vice President of JSCo «Russian Railways».

Valentin Alexandrovich Gaponovich Vice President of JSCo «Russian Railways» Born in 1955. In 1992, graduated from Novosibirsk State university of Railway Engineering , and in 1998, from the Economic Academy under the auspices of the Government of the Russian Federation. Specialization: rail transport management, railway engineering relating to rail transport management. In 2000-2003, Chief Engineer of Oktyabrsky Railway. In 2003, Vice President of JSCo «Russian Railways».

Georgiy Viktorovich Kornilov Vice President of JSCo «Russian Railways» Born in 1953. In 1976, graduated from Odessa Naval Engineering Institute (shipboard machines and devices, mechanical engineer), and in 1981 passed the KGB Higher Training Course. In 1981 - 2004, held operational and managing positions in the KGB of the USSR and in the Federal Counterintelligence Service and the Federal Security Service of Russia, and since 2004, Vice President of JSCo «Russian Railways».

Alexey Anvyarovich Mersiyanov Vice President of JSCo «Russian Railways» Born in 1969. In 1991, graduated from the Mozhaisky Military Space Engineering Institute, radio electronics engineer, PhD in Economics. In 1999, an aide to the First Vice Governor of St. Petersburg, then Deputy Chairman of the Committee of Economic and Industrial Policy of the St. Petersburg Administration, advisor to the Department of Seaport Production Regulation of the Russian Ministry of Transport. Since 2002, Deputy, First Deputy, General Director of Roszheldorsnab (state-owned enterprise for the material and technical maintenance of rail transportation) of the Russian Ministry of Railways. In 2003, appointed Vice President and Director of Roszheldorsnab as a branch office of JSCo «Russian Railways». Since 2005, Director of Roszheldorsnab as a branch office of JSCo «Russian Railways». In November 2006, appointed Vice President of JSCo «Russian Railways».

Valery Ilyich Reshetnikov Vice President of JSCo «Russian Railways» Born in 1952. In 1975, graduated from Leningrad Electronic Engineering Institute, specializing in system maintenance engineering. In 2002, appointed head of the Directorate for Economic Protection of the Ministry of Railways of Russia, and since October 2003, head of the Security Department of JSCo «Russian Railways». Since 2005, advisor to the President of JSCo «Russian Railways». In March 2007, appointed Vice President and member of the Management Board.


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Annual Report JSC «RZD» 2007

Oleg Vilyamsovich Toni Vice President of JSCo «Russian Railways»

Alexei Georgiyevich Ivashkin Head of Administration of JSCo «Russian Railways»

Born in 1964. Graduated from the Voronezh Institute of Civil Engineering. Civil engineer. In March 2004 appointed First Deputy Director and in September 2004 - Director of the Capital Construction Department of JSCo «Russian Railways». Since August 2005, member of the Management Board of JSCo «Russian Railways». In April 2006, appointed Vice President of JSCo «Russian Railways».

Born in 1956. In 1978, graduated from the Tashkent Polytechnic Institute as a mechanical engineer. In 1995 – 2001, deputy head of Administration of the Chilanzar District of Tashkent. In 2001 – 2003, deputy head of Sochi City. In 2003 – 2005, First Deputy Head of Sochi City. Since 2005, Head of Administration and member of the Management Board of JSCo «Russian Railways».

Vadim Ivanovich Bynkov Secretary of State and Head of the Legal Department

Sergey Vladimirovich Mikhailov Head of the Corporate Communications Department of JSCo «Russian Railways»

Born in 1962. In 1985, graduated from the Kalinin State University, specializing in jurisprudence. In 1998 - 1999, head of the Legal Department of Komitek, Moscow. In 1999 – 2000, head of the Legal Department of CJSCo Evroseverneft, Moscow. In 2000 – 2001, head of the Legal Department of ESN Energo. In 2001 – 2002, director for law-governed work and corporate policy of the Management Company of the MDM Group. In 2002 - 2004, head of the Legal Department of JSCo IG Alrosa. In 2004 – 2005, chief attorney of JSCo Russian Utility Systems. Since August 2007, head of the Legal Department of JSCo «Russian Railways», member of the Management Board of JSCo «Russian Railways». Since December 18, 2007, Secretary of State and Head of the Legal Department of JSCo «Russian Railways», member of the Management Board of JSCo «Russian Railways».

Born in 1971. Graduated from Moscow State Institute of International Relations (Department of International Journalism) under the auspices of the Ministry of Foreign Affairs of the Russian Federation, Public Relations Division. Member of the Journalists’ Union of the Russian Federation. In 2000 – 2001, President of the Russian Division of ICCO, the Association of Public Relations Consulting Companies. In 2004 – 2005, an advisor to the President, member of the Management Board of JSCo «Russian Railways». In 2005 – 2006, head of the Public Relations Department and member of the Management Board of JSCo «Russian Railways». Since 2006, head of the Corporate Communications Department and member of the Management Board of JSCo «Russian Railways».

Olga Eduardovna Gnedkova Head of the Corporate Finance Department of JSCo «Russian Railways»

Andrey Evgenyevich Semechkin Advisor to the President, Director of the federal state-owned unitary enterprise All-Russian Railway Research Institute

Born in 1960. In 1981, graduated from Novosibirsk State university of Railway Engineering, specializing in accounting. PhD in economics. In 2000 – 2002, Head of the Financial Service of the West Siberian Railway, Russian Ministry of Railways. In 2002 – 2003, Head of the Financial Service of Moscow Railway (federal unitary enterprise). In 2003 – 2004, Deputy Director of the Moscow Railway and Head of the Financial Service, Deputy Director of the Moscow Railway for Economy and Finance. In 2004 – 2005, Head of the Financial Management Department of JSCo «Russian Railways». Since 2005, Head of the Corporate Finance Department and member of the Management Board of JSCo «Russian Railways».

Born in 1959. PhD in Science (Technology), Professor, Associate Member of the Russian Academy of Science. Since 2002, Deputy Director for Research of the Institute of Systemic Analysis of the Russian Academy of Science. On August 17, 2005, appointed Vice President of JSCo «Russian Railways». Since September 4, 2006, director of the federal state-owned unitary enterprise Russian Railway Research Institute. Member of the Management Board of JSCo «Russian Railways».


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Activities of the Management and Control Bodies of JSCo «Russian Railways»

Vladimir Ivanovich Starostenko Director of the Moscow Railway

Alexander Vitalyevich Tselko Director of the West Siberian Railway

Born in 1948. In 1975, graduated from Novosibirsk State university of Railway Engineering as an engineer in operating railways. In February 2002, appointed Director of the Moscow Railway by an instruction issued by the Russian Government. Since 2003, member of the Management Board of JSCo «Russian Railways».

Born in 1956. In 1978, graduated from the Novosibirsk Railway Engineering Institute, specializing in railway operations. In May 2000, appointed Deputy Minister of Railways of the Russian Federation, and on August 17 of the same year, First Deputy Minister of Railways of the Russian Federation. On February 8, 2002, appointed Director of the Zapadno-Sibirskaya Railway. Since 2003, member of the Management Board of JSCo «Russian Railways».


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Annual Report JSC «RZD» 2007

Audit Committee Under Instruction No. 930-r of the Government of the Russian Federation, dated June 30, 2006, the following membership of the Audit Committee of JSCo «Russian Railways» in the number of 9 persons (their positions at the time of their election) has been determined: Full name

Position

A. V. Kazutin

Head of section of the Department of the Ministry of Transport of the Russian Federation

V.M. Kravchenko

Deputy Director of the Department of the Ministry for Economic Development and Trade of the Russian Federation

E.F. Mikhailov

Deputy director of a Department of the Ministry for Economic Development and Trade of the Russian Federation

G.S. Nikitin

Head of the Administration of the Federal Agency for the Management of Federal Property

E.N. Polyakov

Head of the Administration of the Federal Agency for the Management of Federal Property

A.N.Sinev

Deputy Head of the Administration of the Federal Tariff Service of Russia

T.I. Stebunova

Deputy Head of the Administration of the Federal Tariff Service of Russia

S.L. Tugarinov

Deputy Director of the Department of the Ministry of Transport of the Russian Federation

V.I. Cherkashin

Deputy Head of the Administration of Roszheldor.

Under Instruction No. 864-r of the Government of the Russian Federation, dated June 30, 2007, the following membership of the Audit Committee of JSCo «Russian Railways» in the number of 9 persons (their positions at the time of their election) has been determined: Full name

Position

M.P. Vinter

Head of the Administration of Roszheldor

A. V. Kazutin

Head of section of the Department of the Ministry of Transport of the Russian Federation

E.F. Mikhailov

Deputy Director of the Department of the Ministry for Economic Development and Trade of the Russian Federation

S.V. Nesvetailova

Head of section of the Department of the Ministry for Economic Development and Trade of the Russian Federation

G.S. Nikitin

Head of the Administration of the Federal Agency for the Management of Federal Property

V.V. Oseledko

Head of section of the Department of the Ministry of Industry and Energy of Russia

E.N. Polyakov

Head of the Administration of the Federal Agency for the Management of Federal Property

S.L. Tugarinov

Deputy Director of the Department of the Ministry of Transport of the Russian Federation

O. V. Fedyushkina

Advisor at the section of the Federal Agency for the Management of Federal Property


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

The Company's Strategy and Mission


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JSCo «Russian Railways», a major national transportation company, intends to create infrastructural conditions so as to promote innovatory economic development, the country’s transportation unity and global competitiveness of Russia’s transportation system, and qualitatively satisfy the demand of the state and the public for transportation services. JSCo «Russian Railways»' operating philosophy is to ensure that its corporate goals conform to long-term national interests. JSCo «Russian Railways» pursues a policy of common destiny, being a combination of state, consumer and own interests. High development rates, shareholders’ profit, the profitability of own activity, the employees’ social and economic security, quality satisfaction of customer needs and mutually beneficial cooperation with partners and suppliers are equally important to JSCo «Russian Railways». JSCo «Russian Railways», a dynamic vertically integrated national transportation company, believes its mission is to meet effectively the market demand for transportation services, increase its global competitiveness, achieve financial stability and ensure social responsibility of the business. According to the decisions adopted at the meeting of the final Management Board of JSCo «Russian Railways» in December 2007, the following goals are the most important for 2008 – 2010:

Annual Report JSC «RZD» 2007

1. Improving the financial and economic indices of JSCo «Russian Railways» by sharply promoting the management of the quality of operations. 2. Rapidly upgrading the infrastructure and the rolling stock. 3. Expanding the transportation business and strengthening competitive positions on the domestic and global markets. 4. Radically improving the labor stimulation system and increasing the involvement of employees, thereby ensuring the growth of human capital, greater labor productivity and the efficiency of JSCo «Russian Railways» as a whole. 5. Developing the mechanism of the real cost of labor estimation of JSCo «Russian Railways» employees.


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Overview of the Main Corporate Events in 2007


41

In 2007, JSCo Russian Railways celebrated its 170th anniversary! May 24 - 26: the second international railway business forum “Strategic Partnership 1520” was held in Sochi. May 24: the presentation of the new corporate style of JSCo «Russian Railways» was held in Sochi. May 25: JSCo «Russian Railways» and CJSCo Transmashholding signed a contract for developing and delivering 806 locomotives of four fundamentally new modifications until 2015. June 18: the statement of the establishment of the joint venture CJSCo Eurasia Rail Logistics (CJSCo ERL) with the participation of the railways of Russia, Germany, Poland and the Belarus Republic was signed in Moscow. June 18 – 20: 70th Session of the General Assembly of the International Railway Union was held in Moscow. June 21: the Agreement on the Establishment of a Joint Venture in Transportation and Logistics was signed by JSCo «Russian Railways» and Deutsche Bahn AG (Germany) in Moscow. June 28: the Board of Directors of JSCo «Russian Railways» approved the set of documents concerning the establishment of JSCo First Freight Company (Pervaya Gruzovaya Companya). July 20: in Germany, production of the first high-speed train Velaro RUS which is to run between Moscow and St. Petersburg was started.

Annual Report JSC «RZD» 2007

September 6: the Russian Government approved the draft “Strategy of Development of Railway Transportation in Russia up to 2030”. According to the Strategy, investments in rail transportation in the Russian Federation until 2030 will total 13.7 trillion rubles. The share of investments from the federal budget is 20%, from the constituencies of the Russian Federation, 5%, and from private investors, 75%, including JSCo «Russian Railways», 42%. September 19: JSCo «Russian Railways» and the federal state unitary enterprise Uralwagonzavod signed a three-year contract for the delivery of 40,000 railway freight cars until 2010 at the International Exhibition of Railway Equipment and Technologies of EXPO 1520 in Sherbinka. October 24-25: the first railway congress was held in Moscow under the name “Development 2030”. Railway executives, government officials and businesspeople discussed the development of the railway industry until 2030. V.V. Putin, President of the Russian Federation, attended the forum. November 30: the production of the first high-speed train PENDOLINO which is to carry passengers between St. Petersburg and Helsinki (Finland) was started in Italy (city of Saviliano). December 7: the first passenger trains left Belorussky Station in Moscow on their way to Amsterdam and Munich, and on December 11, to Paris (this route was renewed after a lapse of 13 years). December 27: Express, a new luxury train of JSCo «Russian Railways», started to run between Moscow and St. Petersburg.


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

The Company's current position in the industry


43

Annual Report JSC «RZD» 2007

Share of JSCo «Russian Railways» of the transportation services market The share of rail transport in the total cargo turnover of the country’s transportation network (including pipelines) increased to 42.5% in 2007 from to 40.8% in 2006, while the

share in the passenger turnover (excluding internal water and sea transport), vice versa, fell from 43.8% in 2006 to 40.3% in 2007.

Changes in the structure of cargo and passenger turnover, by types of transport, 2006-2007 1. Freight turnover, by types of transport Name

2006

2007

Change in share, p.p.

Railway

40.8

42.5

+1.7

Motor vehicles

4.1

4.2

+0.1

Sea

1.2

1.3

+0.1

Internal water

1.5

1.7

+0.2

Air (transport aviation)

0.1

0.1

-

Pipelines

52.3

50.2

-2.1

2. Passenger turnover, by types of transport Name

2006

2007

Change in share, p.p.

Railway

43.8

40.3

-3.5

Mechanical transport

33.2

34.1

+0.9

Air (transport aviation)

23.0

25.6

+2.6

Freight transportation services In 2007, the Company fully met the freight handling plan: the total tonnage handled amounted to 1,344.2 mln tons, a 2.6% rise from the 2006 level. In total, for the last four years the volume of freight handled grew by 15.8%.

In 2007, the seasonality of the submission of cargo for transportation typical for railroad transport remained. However, as compared to 2006, the degree of irregularity was reduced (see Fig.1).

The positive dynamics in freight handling tonnage secured a stable growth in freight turnover. In 2007, the overall freight turnover reported by the Company was 2,312.6 bln tkm (including the backrun of empty private and leased track cars), a 7.7% increase as compared to 2006. Tariff frieght turnover reached 2,090.3 bln tkm (+7.1%).

While in 2006 the maximum monthly freight handling volume deviation was around 12% against the average annual, in 2007 the gap was reduced almost twice to reach 6% only. The deviation during the traditional peak load months (October, November) did not exceed 3% from the average level. In 2007, the average tonnage handled daily reached 3,683,000 tons.


44

The Company's current position in the industry

3900

3 791

3800

3 788

3 759

+2.6%

3 746 3 701

3 686

3700 3 619

3 663 3 648

3 649

3 662 3 627 3 500

3500

3 617

3 618

3 682 3 646

3 446

2006

3 484 3 448

3 316

3 390

3 332

3 466

3 385

3 377

3 454

+4.3%

3 448

3 411 3400

3 482

2005

3 353

+5.2%

3 288

3300

3 325

3 216 3200

+3.0%

3 661

3 519

3 491

3 459

2007

3 698 3 636

3 622

3600 3 538

3 726

3 746

2004

3 175

3100

3 140

3000

3 041 January

March

May

July

September

November

Fig.1. Dynamics of average tonnage handled daily within 2004-2007, in thousands of tons The share of the highly profitable cargo segment remained stable (32.4%), while the medium profitable cargo share grew by 0.36 p.p. to 8.4% (see Fig. 2). Share of the low profitable cargo segment fell down to 58.1% (-0.58 p.p.). In 2007 an accelerated freight handling growth was secured in the medium profitable cargo segment (107.0%) with a moderate growth in the highly profitable and low profitable cargo sectors (102.6% and 101.5%, respectively).

2007

In comparison to 2006, the maximum increase was reported for the following types of cargo: industrial commodities and molding materials – 4.7 mln tons (+13.5%), oil and oil prod-

32.4%

2006

+0.3%

32.4%

Highly profitable cargo

8.4% +0.36%

8.0%

58.1% –0.58%

58.7%

Medium profitable cargo

Low profitable cargo

Fig.2. Freight handling structure in 2006-2007, %

ucts -- 4.7 mln tons (+2.1%), grain – 4.5 mln tons (+24.7%), imports – 3.4 mln tons (+30.7%), ferrous metals – 3.3 mln tons (+4.1%), cement – 3.2 mln tons (+8.4%). The transportation market is characterized by a rapid development of competition. The volume of cargo carried in private or leased railcars in 2007 was for 38.5% of the total rail cargo traffic in Russia. For comparison: this indicator equaled 36.0% in 2006, 34 % in 2005, and 31.5% in 2004. As compared with the previous year, the volume of highly profitable and low profitable cargo transportation using the publicly-owned freight stock decreased in 2007 (by 5.2% and 0.2%, respectively). Considering an insufficient rate of growth in medium profitable cargo transportation volume (+1.0%), the overall volume of transportation in publiclyowned freight stock decreased by 1.7%. Share of the general purpose freight stock of JSCo «Russian Railways» in the transportation of highly profitable cargo is decreasing in 2007 the share of oil products fell down to 31.4% (35.8% in 2006), and that of ferrous metals – to 60% (63.2%). Consequently, expansion of private operators into the highly profitable freight market continues.


45

Annual Report JSC «RZD» 2007

100% 4.7 90%

80%

4.6 Private railcars

22.8

4.5 Private railcars

27.5%

31.0% 26.4

28.7

3.0 3.6

1.8 3.3

4.7 Private railcars

Private railcars

33.2%

36.4% 31.7

70% 4.0 60%

5.2

2.1 4.0

50%

40%

30%

General purpose freight stock

General purpose freight stock

General purpose freight stock

General purpose freight stock

68.5%

66.0%

65.0%

61.5%

63.3

62.4

61.7

57.5

20%

10%

0%

2004 Foreign private and leased stock

2005

2006

2007

Private (belonging to owners in Russia)

Russian Railways freight stock leased out

Publicly-owned freight stock owned by railway administrations of the CIS and Baltic countries

Freight stock of JSCo «Russian Railways»

Fig. 3. Changes in freight traffic structure by rolling stock owners in 2004-2007 Due to the differentiated indexation of freight tariffs, and increase in the "wagon component” of the tariff for transportation of cargo in gondola cars in particular, private-owned transportation companies increased the volume of lowprofitable freight handled – share of private freight stock in the transportation of coal grew by 3 % points (p.p) to reach 20.9%, while transportation of mineral and building cargoes went up by 3.9 p.p. (reaching 24.5%). A key driver for JSCo «Russian Railways» transportation activities amidst the growing competition on the cargo transportation market is the performance of subsidiary operating companies, and, mainly, JSCo First Freight Company (Pervaya Gruzovaya Companya) starting its operating activities in November 2007 (see also "Reform and Participation in Subsidiaries and Affiliates")

The stock of cars contributed to the charter capital of JSCo FFC comprised 177,000 items, the major part of which have been transfered for use (management) by JSCo «Russian Railways». One of the key elements in the development strategy of the operating company is the gradual transition of the car stock from the use by the parent company into independent operation. At present, the subsidiary manages the stock of about 30,000 cars and its share in the overall freight handling volume of JSCo «Russian Railways» has reached 1.5%. Thus, JSCo FFC earned a place among railway transportation leaders. Cooperation between JSCo «Russian Railways» and JSCo FFC is performed on a contractual basis with the parent company JSCo «Russian Railways» rendering fully compensated services subject to the level of profitability


46

The Company's current position in the industry

Rail freight transportation growth rates by freight stock owners in 2007 (% to 2006) Freight group

Highly profitable

General purpose freight stock

of which: Russian Railways stock

Russian RailFreight stock ways stock leased out owned by railway administrations of CIS and Baltic countries

Privatelyowned freight stock

of which: privatelyowned (Russian owners)

94.8

93.7

111.9

112.7

112.6

112.6

Total Private and leased stock of other countries

114.0

103.9

Medium profitable 101.0

96.9

156.1

155.2

126.6

127.4

113.9

108.3

Low profitable

99.8

98.6

124.9

98.5

114.5

116.9

102.6

103.8

Total railways

98.7

97.3

125.3

120.8

114.1

115.1

107.2

104.2

21.8%

Passenger service

Branded trains

33.9%

Passanger trains

Key performance indicators The year 2007 showed a stable growth in the volumes of long-distance passenger transportation services. As compared to the previous year, the long-distance passenger turnover increased by 2.5%, while for suburban transportation the passenger turnover reduced by 13% due to the changes in the process of granting the right for free of charge transportation services to passengers entitled to reduced tariffs under federal law. The number of passengers carried equaled to 1,281,946,000, including 136,650,000 long-distance passengers (100.5% as compared to 2006), and 1,145,296,000 suburban passengers (94.6% as compared to 2006).

Open-plan cars

Compartment and ďŹ rst-class cars

Luxury cars

281

83

540

587 6 268

5 723

10 623

8 741

Long-distance passenger car occupancy reached 74.1% (+1.6% as compared to the previous year). During peak periods the occupancy of open-plan cars in direct trains would exceed 85% for the entire itinerary of travel, which means 90-100% occupancy at the departure.

1 226

Long-distance passenger service

Standart and sitting cars

771

For revenues from passenger transportation please refer to Section "Financial and economic results�.

44.3%

High-speed trains

For long-distance transportation the Company uses branded trains, socially significant and high-speed trains. The diagram below illustrates the share of passenger turnover depending on type of train.

Passanger trains

21 942

18 057

It should be noted, however, that the branded train passenger turnover share decreased, as compared to 2006, by 4.6 p.p. due to an increase in the high and ordinary speed passenger trains turnover by 3.8 and 0.8 p.p., respectively.

High-speed trains Branded trains


47

Analysis revealed that, as compared to the previous year, the decrease in the branded trains share mostly occurred due to a 10% decrease in the number of open-plan car passengers, and a 13.1% decrease in the number of passengers using compartment cars. At the same time, the share of passenger turnover on highspeed trains increased. This demonstrates a shift in demands of the population towards faster and more comfortable travel service. Passenger turnover of high-speed and rapid trains equaled to 2 mln people increasing against 2006 by 4%.

Suburban passenger transportation In 2007 the total number of passengers that used suburban transportation services reached 1,145.3 mln, which is 5.4% (or 10.9 mln passengers) less as compared to the previous year. The number stated above comprises 227.4 mln privileged passengers entitled to federal benefits (19.9% of the total number of passengers carried), and 130.4 mln privileged passengers entitled to regional benefits (11.4% correspondingly).

Independent carriers For long-distance transportation, a Moscow-Saint Petersburg service was launched by the following three independent carriers: ZAO TC Grand Service Express, OOO Passazhirskie Perevozki, and OOO Tverskoy Express. On 29 February 2008 an agreement was reached with OOO Yuzhny Transit for passenger transportation services on the Volgograd-Derbent, State border-Volgograd route, and further to Baku. In total, private carriers transported 492,700 passengers, which is equal to 0.4% of the total number of passengers traveling long-distance. – OAO St. Petersburg – Vitebsk Suburban Passenger Company on the Oktyabrskaya Railway; – OAO Krasprigorod on the Krasnoyarsk Railway. Seven subsidiaries of JSCo «Russian Railways» are already rendering suburban transport services on the territory of Russia: – JSCo Central Suburban Passenger Company on the Moscow Railway; – JSCo Express-Suburban on the West Siberian Railway; – JSCo Omsk-Suburban on the West Siberian Railway; – JSCo Kuzbass-Suburban on the West Siberian Railway; – JSCo Altay-Suburban on the West Siberian Railway; The transportation companies showed the following performance results: number of passengers carried – 285,486.4

Annual Report JSC «RZD» 2007

thousand, passenger turnover – 11,158.7 mln passenger-km.

Improving transportation quality Measures continue to be taken for the purpose of improving the quality of service to passengers at railway stations and on trains. The Company applies a flexible tariff regulation system. Passengers may plan their traveling for the periods when the lowest tariffs apply, thus reducing expenses. A number of new and more technologically advanced railway stations have recently been set for operation, passenger car depots and passenger facilities have been repaired and reconstructed. The new Svetlogorsk-2 and Cheliabinsk railway stations opened this year on the Kaliningradskaya and Yuzhno-Uralskaya Railways, respectively. Starting May 2007, railway transport users were offered a new service – electronic ticketing for long-distance passenger trains with an option to pay using a bank card via the corporate JSCo «Russian Railways» web-portal. Every year the Company acquires new comfortable and upto-date passenger cars and expands the range of services. This includes arrangement of children’s rooms, libraries, taxi call services, hotel reservation services, reservation and selling of railway tickets, video-programs, etc. For passenger security purposes all cars are equipped with video surveillance systems enabling the train steward to stay aware of the situation in the car from the service compartment. A new service has been introduced for the summer travel period, i.e. choice of a compartment for ladies, gentlemen, or a mixed one. Positive changes, relating to investments into the passenger complex development have been achieved in the recent years allowing for a significant decrease in the depreciation of fixed assets, optimization of technological business processes thus taking passenger transportation services to the next level, including increase in the level of comfort and greater speed of passenger trains. Work is in progress to introduce additional luxury sleeping cars whose state-of-the-art design and equipment provide the maximum level of service and comfort on the way.

International transportation One of the major goals for passenger complex this year is the expansion of the service direction range on the international railway passenger transportation market. Today JSCo «Russian Railways» offers passenger transportation services


48

The Company's current position in the industry

to the following 19 countries in Europe and Asia: Germany, Switzerland, the Netherlands, France, Poland, Austria, Slovakia, Czech Republic, Hungary, Romania, Bulgaria, Greece, Italy, Croatia, Serbia, Finland, China, Mongolia, and North Korea via 61 international routes, as well as to eight CIS states: Ukraine, Belarus, Moldova, Kazakhstan, Kyrgyzstan, Uzbekistan, Azerbaijan, and Tajikistan. In 2007, the volume of international passenger traffic amounted to 25.7 mln, passengers, including – to and from CIS and Baltic states – 24.9 mln passengers; – to and from non-FSU states – 0.8 mln passengers. As compared to 2006, the transportation volume has grown by: – 101% regarding the CIS and Baltic states; – 112% regarding non-FSU states. In 2007 JSCo «Russian Railways» started operating new routes to far-abroad countries, i.e. to France, Switzerland, and the Netherlands. A railway link with Slovakia started operating via transit through the Ukrainian Chop border-crossing point. There has been an increase in traffic to Austria. Increase in the running periodicity of the Saratov-Berlin train as well as the direct Moscow-Thessaloniki (Greece) passenger car route through the Chop border-crossing point was agreed upon. The latter will allow for the establishment of a new link with Macedonia and Montenegro. In 2010, high speed passenger service between St. Petersburg and Helsinki is planned for launch.

Maintenance and repair Beside transportation services, the most significant activity for JSCo «Russian Railways» is other owners’ rolling stock repair and maintenance. Structure of the rolling stock maintenance market to a large extent depends on the structure of the railway transportation market. The largest share of locomotives (98%) is owned by JSCo «Russian Railways» which determines the overwhelming share (91.7%) of JSCo «Russian Railways» in the structure of both the demand and supply at the traction rolling stock repair and maintenance services market. Demand at the freight car repair and maintenance market almost corresponds to the structure of privately-owned stock – more than a third of the freight cars in Russia are owned by private companies thus determining their 22.4% share in the consumption at this repair and maintenance market segment. The private car-maintenance sector of the repair and maintenance market in Russia is composed of no less than 30 specialized enterprises together holding a 6% share, while the major volume of services is rendered by the maintenance base of JSCo «Russian Railways». JSCo «Russian Railways» owns the most part of the passenger rolling stock occupying the dominant position at the passenger car and multiple-unit stock repair and maintenance market. The share of demand from other owners is slightly over 3%, while the share of the privately-owned maintenance enterprises in the passenger rolling-stock segment equals about 6%. The tables below disclose the repair and maintenance market in Russia (including technical provision of wheel pairs with a replacement of element.

The tables below disclose the repair and maintenance market in Russia (including technical provision of wheel pairs with a replacement of element: 1. The Russian rolling stock repair and maintenance market in 2007(locomotives, freight cars, passenger cars, and multiple-unit stock) Suppliers/Consumers rolling stock repair and maintenance services

Market capacity (Bln RUR)

including: JSCo «Russian Railways»

Subsidiaries and associates of JSCo «Russian Railways»

Third-party rolling stock owners

Total repair and maintenance volume

Market including: structure, JSCo Subsid% «Russian iaries Railand asways» sociates of JSCo «Russian Railways»

Third-party Total rerolling stock pair and owners maintenance volume

JSCo «Russian Railways»

55.6

53.5

2.1

8.2

63.8

72.7

70.0

2.7

10.7

83.4

Subsidiaries and associates of JSCo «Russian Railways»

7.8

7.7

0.1

0.44

8.24

10.2

10.1

0.1

0.6

10.8

Private enterprises

1.2

1.15

0.05

3.2

4.4

1.6

1.5

0.1

4.2

5.8

Total capacity of the Russian repair and maintenance market

64.6

62.35

2.25

11.84

76.44

84.5

81.6

2.9

15.5

100.0


49

Annual Report JSC «RZD» 2007

2. The Russian locomotives repair and maintenance market in 2007 Suppliers/Consumers rolling stock repair and maintenance services

Market capacity (Bln RUR)

including:

JSCo «Russian Railways»

20.8

Private enterprises Total capacity of the Russian repair and maintenance market

Thirdparty rolling stock owners

Total repair and maintenance volume

Market structure, %

including:

20.8

0.5

21.3

90.4

0.3

0.3

1.4

1.7

21.1

21.1

1.9

JSCo «Russian Railways»

Subsidiaries and associates of JSCo «Russian Railways»

Thirdparty rolling stock owners

Total repair and maintenance volume

90.4

2.2

92.6

1.3

1.3

6.1

7.4

23.0

91.7

91.7

8.3

100.0

Total repair and maintenance volume

Market structure, %

including:

Thirdparty rolling stock owners

Total repair and maintenance volume

JSCo «Russian Railways»

Subsidiaries and associates of JSCo «Russian Railways»

Subsidiaries and associates

3. The Russian freight stock repair and maintenance market in 2007 Suppliers/Consumers rolling stock repair and maintenance services

Market capacity (Bln RUR)

including: JSCo «Russian Railways»

Subsidiaries and associates of JSCo «Russian Railways»

Thirdparty rolling stock owners

JSCo «Russian Railways»

Subsidiaries and associates of JSCo «Russian Railways»

JSCo «Russian Railways»

27.0

25.1

1.9

7.4

34.4

62.9

58.5

4.4

17.3

80.2

Subsidiaries and associates

6.1

6.0

0.1

0.4

6.5

14.2

14.0

0.2

0.9

15.1

Private enterprises

0.2

0.15

0.05

1.8

2.0

0.5

0.4

0.1

4.2

4.7

Total capacity of the Russian repair and maintenance market

33.3

31.25

2.05

9.6

42.9

77.6

72.9

4.7

22.4

100.0

Thirdparty rolling stock owners

Total repair and maintenance volume

2.8

76.8

4. The Russian passenger and multiple-unit stock repair and maintenance market in 2007 Suppliers/Consumers rolling stock repair and maintenance services

Market capacity (Bln RUR)

including: JSCo «Russian Railways»

Subsidiaries and associates of JSCo «Russian Railways»

JSCo «Russian Railways»

7.8

7.6

0.2

Subsidiaries and associates

1.7

1.7

Private enterprises

0.7

0.7

Total capacity of the Russian repair and maintenance market

10.2

10.0

Thirdparty rolling stock owners

Total repair and maintenance volume

Market structure, %

including: JSCo «Russian Railways»

Subsidiaries and associates of JSCo «Russian Railways»

0.3

8.1

74.0

72.1

1.9

0.04

0.2

0.34

Description of the Company’s infrastructure As of 1 January 2008 the spread of the railway network (length of railways in use) reached 85,155 km and is shortening due to disassembly of low-intensity sections. During 2007 the length of the railways in use was reduced by 61 km. Of the entire railways length the broad gauge line (1,520 mm) constitutes 84,320 km, 805 km of the Sakhalin Railroad have a 1,067 mm wide gauge, and 30 km of the Gorkovskaya Railroad have a narrow gage of 750 mm. Double- and multi-track sections have a length of 37,075 km (43.5%) with the remaining 48,080 km related to singletrack sections (56.5%).

1.74

16.2

16.2

0.7

6.6

6.6

10.54

96.8

94.9

0.4

16.6 6.6

1.9

3.2

100.0

The length of railways equipped with automatic block signaling and central traffic control is 62,082 km (a 44-km increase during 2007), or 72.9% of the total length. The electrified mileage reaching 42,911 km (50.4%) remaining the same as in 2006. The bulk of freight turnover (more than 80%) still falls on electric haulage sections. The total length of main tracks is equal to 123,880 km, the length of station tracks is 50,488 km. The key indicators relating to equipment facilities of the railways in Russia (updated information) as of 31 December 2007 are provided in the table below.


50

The Company's current position in the industry

Key indicators of equipment status of the Railways in Russia as of 1 January 2008 (km) Indicators

2007

2008

2008 in % to 2007

Length of railways in use

85216

85155

99.9

including sections: double- and multi-track

36940

37075

100.4

same in %

43.3

43.5

0.2

with automatic block signaling and central traffic control

62038

62082

100.1

same in %

72.8

72.9

0.1

of which equipped with central traffic control

38194

38959

102.0

with semi-automatic block signaling

20555

20565

100.0

same in %

24.1

24.2

0.1

with intra-train radio communication

83976

83945

100.0

same in %

98.5

98.6

0.1

electrified

42911

42911

100.0

same in %

50.4

50.4

0

The total length of main tracks

123789

123880

100.1

including: P-75

1233

1142

92.6

same in %

1.0

0.9

-0.1

P-65

117564

118094

100.5

same in %

95.0

95.3

0.3

P-50 and weight-similar

3989

3770

94.5

same in %

3.2

3.0

-0.2

on crashed natural stone, graded gravel, and asbestos

120155

122602

102.0

same as % of the length of ballasted track

97.4

99.3

1.9

length of continuously welded railroad track

63311

67108

106.0

same in %

51.1

54.2

3.1

length of rails on reinforced concrete sleepers -

68059

72040

105.8

same in %

55.0

58.2

3.2

length of track with thermally reinforced rails

108694

109647

100.9

same in %

87.8

88.5

0.7

Total length of station tracks

50680

50488

99.6

same as % of the length of railways in use

59.5

59.3

-0.2

Description of rolling stock Locomotives The recorded fleet of JSCo «Russian Railways» is composed of 19,878 locomotives, including 2,222 passenger electric locomotives, 524 passenger diesel locomotives, 7,308 electric locomotives, 3,853 diesel locomotives, and 5,971 diesel-locomotive shunters. The service life of 632 passenger electric locomotives has expired, of which 429 are DC locomotives (44.7%) and 203 are AC locomotives (16.2%).

353 AC locomotives (9.1%), 219 mainline diesel locomotives (5.8%) and 1,735 diesel-locomotive shunters have an expired service life but are still being used in freight transport (For Supply of Locomotives refer to Section Principal Results of Investment Activities, The Locomotives sub-section). The following infrastructure is maintained within JSCo «Russian Railways» for the provision of freight and passenger railway transport services via railways: – locomotive depots – 201, of which 24 are electric and 89 are diesel locomotive depots; – locomotive maintenance points – 322, of which 82 are designed for electric locomotives, 149 for diesel loco-


51

Annual Report JSC «RZD» 2007

Freight cars

motives and 91 represent combined-type maintenance points; – servicing points – 460, of which 96 are for electric locomotives, 250 for diesel locomotives and 114 are combined-type servicing points; – rest facilities for locomotive crews – 384 (278 rest homes and 106 rest rooms); the total number of rooms is equal to 6,597 with sleeping accommodation for 15,290 persons.

As of 31 December 2007 the recorded fleet of JSCo «Russian Railways» comprised 568,300 freight cars (see the table). However, this number includes 151,800 cars that were transferred to the balance sheet of JSCo First Freight Company (Pervaya Gruzovaya Companya) but are still used by JSCo «Russian Railways», as well as 23,200 cars to be contributed to the share capital of JSCo FFC but not yet transferred as of 31 December 2007.

The freight stock of the Russian Federation railway transport as of 31 December 2007 Car type/Owner

JSCo «Russian Railways»

Owned by JSCo FFC JSCo FFC but used by JSCo «Russian Railways»

JSCo TransConteyner

JSCo Refservice

JSCo RailTransAvto

Other owners

Total for the Russian Federation

Covered

59,068

11,749

2,377

0

0

0

14,360

87,554

Platforms

4,8523

1,988

4,471

0

0

0

11,657

66,639

Gondola cars

217,845

43,906

3,072

0

0

0

79,460

344,283

Tank cars

7,006

64,180

4,473

0

0

0

15,8682

234,341

Refrigerator cars

2,664

0

0

0

2738

0

3,599

9,001

Other

79,930

30,019

10,765

21435

4102

980

85,040

232,271

3,688

8,794

7,949

0

0

0

9,874

30,305

including: Cement cars Pellet cars

160

1,613

0

0

0

0

4,619

6,392

Grain cars

24,558

6,915

1,081

0

0

0

499

33,053

Mineral wagons

5,222

12,664

1,735

0

0

0

20,926

40,547

Other

46,302

33

0

21,435

4,102

980

49,122

121,974

Transporter wagons

1,432

0

0

0

0

0

0

1,432

TOTAL:

416,468

151,842

25,158

21,435

6,840

980

352,798

975,521

Car type/Owner

JSCo «Russian Railways» system

% of stock

Other owners

% of stock

Total for the Russian Federation

Covered

73,194

83.6

14,360

16.4

87,554

Platforms

54,982

82.5

11,657

17.5

66,639

Gondola cars

264,823

76.9

79,460

23.1

344,283

Tank cars

75,659

32.3

158,682

67.7

234,341

Refrigerator cars

5,402

60.0

3,599

39.7

9,001

Other

147,231

63.4

85,040

36.6

232,271

Cement cars

20,431

67.4

9,874

32.5

30,305

Pellet cars

1,773

27.7

4,619

71.9

6,392

Grain cars

32,554

98.5

499

1.5

33,053

Mineral wagons

19,621

48.4

20,926

51.5

40,547

Other

72,852

59.7

49,122

40.3

121,974

Transporter wagons

1,432

100.0

0

0.0

1,432

TOTAL:

622,723

63.8

352,798

36.2

975,521

including:


52

The Company's current position in the industry

were derecognized. On the whole, the freight car fleet belonging to the member-entities of Russian Railways Holding increased by 4,500 items.

In 2007, the recorded fleet of JSCo «Russian Railways» decreased by 49,900 units. Starting Q1 of 2007, the cars transferred to the subsidiaries of JSCo «Russian Railways»

Quantitative change in the recorded freight car fleet of JSCo «Russian Railways» during 2005-2007 Type of car

By year-end, in thousands of items

Fleet change in 2007*

Fleet change in 2007**

2005

2006

2007*

2007**

Covered

78.6

74.0

70.8

73.2

-3.2

-0.8

Platforms

62.5

57.9

50.5

55.0

-7.4

-2.9

Tank cars

79.6

76.3

71.2

75.7

-5.1

-0.6

Gondola cars

255.4

259.6

261.7

264.8

2.1

5.2

Other

142.6

142.1

110.0

147.2

-32.1

5.1

Refrigerator cars

8.3

6.9

2.7

5.4

-4.2

-1.5

Transporter wagons

1.4

1.4

1.4

1.4

0

0

Total

628.4

618.2

568.3

622.7

-49.9

4.5

Passenger cars

Total freight turnover

Long-distance passenger fleet

The freight turnover (including the empty-run of privateowned and leased rolling stock) grew by 7.7% as compared with the 2006 level. A high dynamics of freight turnover was reached at the Privolzhskaya (+15.5%), Kuibyshevskaya (+13.3%), Yuzhno-Uralskaya (+12.6%), and VostochnoSibirskaya (+10.6%) Railways.

Group types

31.12.2006

31.12.2007

First class

1,258

1,202

Compartment

10,966

10,542

Open

10,304

10,103

Interregional

588

523

Dining car

890

876

Luggage car

774

785

Service car

70

70

Total

24,850

24,101

Motor-car stock The total multiple unit stock used on the railway network is composed of 15,616 cars, which is 260 cars less from the last year level.

Summary performance information on railways The detailed description of the railway branches of JSCo «Russian Railways» with a specification of their fields of activity may be found on the Company's web-site (www.rzd.ru).

Handling, total In 2007 the total tonnage handled grew by 2.6% to exceed 1,344.2 mln tons. There was a noticeably high dynamics in freight handling volumes at Severo-Kavkazskaya (+11%), Yuzhno-Uralskaya (+9.7%), Dalnevostochnaya (+8.0%), and Kaliningradskaya (+6.7%) Railways.

Total passenger turnover In 2007 the turnover of passengers using the JSCo «Russian Railways» infrastructure reached 174.1 bln of passenger-km falling below the last year's level by 2.1%. An increase in passenger turnover was reached by the following nine Railways: Severo-Kavkazskaya, Privolzhskaya, Zabaikalskaya, Vostochno-Sibirskaya, Yugo-Vostochnaya, Zapadno-Sibirskaya, Sahalinskaya, Dalnevostochnaya and Kuibyshevskaya Railways.

Total fulfillment of freight service schedule The fulfillment of freight service schedule has improved on the following 10 Railways: Oktyabrskaya, Sevarnaya, Severo-Kavkazskaya, Yuzhno-Uralskaya, Vostochno-Sibirskaya, Krasnoyarskaya, Zabaikalskaya, Dalnevostochnaya, Sverdlovskaya and Yugo-Vostochnaya, while Sakhalinskaya Railway boasts a 100% schedule fulfillment.

Total fulfillment of passenger service schedule In 2007 nine Railways improved the fulfillment of passenger train schedule, with the most dynamic results achieved by the Oktyabrskaya (from 98.5% in 2006 to


53

99.1% in 2007), Severnaya(from 98.9% in 2006 to 99.2% in 2007), and Privolzhskaya (from 98.6% in 2006 to 99.1% in 2007) Railways. At the same time, 13 Railways reached a level of the passenger service schedule fulfillment exceeding 99%.

Total fulfillment of suburban service schedule The fulfillment of suburban service schedule remained approximately equal to the last year's level. With reference to the majority of Railways the indicator almost approaches the 100% level with the following four Railways providing for its further growth: Gorkovskaya (from 99.4% in 2006 to 99.7% in 2007), Severnaya (from 99.4% to 99.5%), Krasnoyarskaya (from 99.7% to 99.8%), and Delnevostochnaya (from 99.7% to 99.8%) Railways.

Total locomotive productivity The high dynamics of freight transportation has been achieved due to an increase in the efficiency of the rolling stock usage. The locomotive productivity increased on the following Railways: Sakhalinskaya (+11.2%), Zabaikalskaya (+5.1%), Severo-Kavkazskaya (+5.1%), Oktyabrskaya (+3.1%), Dalnevostochnaya (+2.1%), Moscow (+1.8%) and other Railways. The sharpest indicator growth was achieved by Krasnoyarskaya Railway – over 2.5 mln tkm (gross) per locomotive.

Total operating speed of freight cars Due to highly effective operations in 2007, the operating speed of freight trains has seen an overall increase of 0.4%, and by the following 10 Railways in particular: Moscovskaya, Oktyabrskaya, Severo-Kavkazskaya, Sakhalinskaya, Zabaikalskaya, Vostochno-Sibirskaya, Krasnoyarskaya, Zapadno-Sibirskaya, and Yugo-Vostochnaya Railways. The Zapadno-Sibirskaya Railway reached the highest operating speed of 57.5 km/h in 2007.

Total service speed of freight cars Despite the fact that the service speed of freight cars remained the same as in 2006, more than half of the Railways made a significant contribution to the improvement of this important qualitative indicator. They are: Sakhalinskaya, Severo-Kavkazskaya, Zabaikalskaya, Yugo-Vostochnaya, Zapadno-Sibirskaya, Severnaya, Krasnoyarskaya, Dalnevostochnaya, and Kaliningradskaya Railways. The most dynamic increase in the service speed was achieved by the Oktyabrskaya (+3.6%) and Moscovskaya (+2.7%) Railways.

Annual Report JSC «RZD» 2007

Total freight car turnover The overall freight car turnover has been accelerated by 0.4%. A number of railways achieved an exceedingly high dynamics of growth: 18% by the Oktyabrskaya Railway, +7.2% by the Severnaya Railway, +6.6% by the SeveroKavkazskaya Railway, 5.2% by the Sakhalinskaya Railway, and +4.9% by the Yugo-Zapadnaya Railways.

Total security level In the context of significant increase in the transportation volume, the relative number of faulty operations per 1 billion ton-km operations was reduced by 7.8% from the 2006 level. The traffic security level increased on 12 out of 17 Railways. The most significant reduction in the number of faulty operations as compared with the 2006 level has been achieved by the Krasnoyarskaya (-22.3%), Vostochno-Sibirskaya (-18.4%), Dalnevostochnaya (-17.5%), and Moscovskaya (-17.1%) Railways.


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Business Priorities


55

Principal results of investment activities The investment program of JSCo «Russian Railways» is generally based on the main provisions of the “Strategy of Development of Railway Transportation in Russia up to 2030”, in accordance with the Program for the Structural Reform of Rail Transport. One of the key tasks at the stage of Russian rail industry reform is to make the Company’s investment activities more efficient. In the period under review, the transition – begun in 2003 – to project financing as a basis for the Company’s investment programs and investment budgets was essentially completed. Efforts continue to improve the system of managing investment projects and delimit the responsibilities of the main participants in the investment process (investor, project manager, customer, contractor, balance-sheet holder). On November 8, 2005, the board of directors of JSCo «Russian Railways» approved the main approaches to enhancing the Company’s investment process based on the principle of end-to-end planning of investment projects (Minutes No. 14). End-to-end planning of investment projects involves putting together a package of the most efficient investment projects in accordance with the Company’s development strategy. The costs of investment projects throughout their realization are included in the investment program. For the long and middle terms, a forecast investment budget is prepared, based on the beginning and ending dates of investment projects as well as on resource limitations. For enhanced control over the investment program’s formulation and realization, Regulation No. 1667r of JSCo «Russian Railways» approved a number of documents regulating the Company’s investment process. In 2007, major efforts were made to enhance the Company’s investment process. Active work was done by the Expert Council and Investment Committee, whose chief tasks are: – ensuring that investment projects are consistent with the Company’s development strategy and scientifictechnical policy; – expert study of the technological and production solutions proposed in investment projects; – selecting the most technologically efficient and best supported options for the realization of investment projects and recommending projects for inclusion in

Annual Report JSC «RZD» 2007

the Company’s investment program. In line with the parameters of the Company’s investment program and financial plan for 2007 and the period through 2009, as approved by the board of directors on March 23, 2007, the Company’s investment budget for 2007 was initially set at 210.1 billion rubles. Based on the Company’s performance in the first half of 2007, and in view of the need to develop and renew railway infrastructure and renovate the Company’s rolling stock, it was proposed that the board of directors of JSCo «Russian Railways» consider increasing the parameters of the Company’s investment budget for 2007 by 51.4 billion rubles to a total 261.5 billion rubles. It is planned to raise external investments of 3.5 billion rubles. This change in the parameters of the Company’s investment program and financial plan for 2007 was approved by the board of directors of JSCo «Russian Railways» on August 31, 2007. Additionally, at a meeting of the Investment Committee on November 1, 2007, in view of the projected results of the Company’s investment program in 2007, and in order to optimize the use of investment resources, it was decided to redistribute the cost limits among certain investment projects without altering the general parameters of the Company’s investment projects, the investment budget or the investment program as a whole. The investment budget is divided into three main sections: dedicated investment projects, unit projects and renewal of rolling stock. Funds to be contributed to the charter capital of subsidiaries are planned separately. The section “dedicated investment projects” comprises projects with planned costs of 119.7 billion rubles, or 45.8% of the total, for the development and modernization of infrastructure in the main directions, enabling the Company to increase its revenues by taking on additional freight. The following investment projects were implemented in this section: – Kuzbass–Far East Transport Hub – Kuzbass–Azov–Black Sea Transport Hub – Kuzbass–Northwest – Oil Transport to China (Phases 1 and 2) – Moving the Izvestkovaya-Chegdomyn Line out of the flood zone of Bureisk Hydroelectric Station – Berkakit-Tommot-Yakutsk – Modernization of the rail infrastructure of Sakhalin Island – Introduction of high-speed service in the Moscow–St. Petersburg direction – Comprehensive reconstruction of the Mga–Gatchina–


56

Business Priorities

Veimarn–Ivangorod section and rail approaches to ports on the southern shore of the Gulf of Finland – Introduction of rapid passenger service in the Moscow–Nizhny Novgorod direction and a number of other projects Dedicated projects also include key projects for the rebuilding of engineering structures, the creation of automated transport-control systems, the implementation of resource-saving technologies and automated systems of commercial energy accounting and passenger registration and monitoring, further development of regular suburban traffic, etc. These projects involved measures to rebuild and modernize infrastructure as well as to improve technology and organize the transport process. In the section “Renewal of Rolling Stock”, planned investments for the acquisition and modernization of all types of rolling stock amounted to 49.7 billion rubles, or 19% of total investment-budget costs. The section “Unit Projects” with planned investment costs of 78.3 billion rubles, or 29.9% of the total, consists of projects for the development and renovation of branch offices’ structural subdivisions engaged in transport and support activities, broken down by unit, projects to renew the fixed assets of railways and functional branch offices, renovation of dangerous sites and sites where environmental safety is a factor, anti-terror measures, socialdevelopment projects, etc. Utilization of own and borrowed investment resources totaled 253.5 billion rubles (96.9 % of the plan). Besides 2.0 billion rubles in investment resources were raised (from outside investors). The investment budget grew by 48.2% as compared with 2006. The mechanism of leasing was used to renew rolling stock in the amount of 28.8 billion rubles (excluding VAT). Renewal of rolling stock accounts for most non-fulfillment of planned cost limits. As regards the renewal of freight rolling stock, the main reason for non-fulfillment of the investment budget was CJSCo Uralvagonzavod’s failure to deliver over 4,700 freight cars, worth 6.8 billion rubles, as scheduled under contracts. In the case of traction rolling stock, late certification resulted in non-delivery of 19 new-series locomotives (12 EP2К electric locomotives, 2 2ES6 electric locomotives and 5 2ТE25К diesel locomotives). These locomotives are being produced for the first time, and many suppliers new to this type of production have been engaged to manufacture components. Many new units are being used in locomotive production. As a result, the periods for certification testing and certification itself have been extended.

Taking into account leasing, 313 locomotives were supplied in 2007 (277 in 2006), 912 passenger cars (755 in 2006), over 15,000 freight cars (8,600 in 2006) and 760 electric-train and rail-bus cars. 258 (318) locomotives, 5,257 (7,300) freight cars and 187 (786) passenger cars were modernized. For unit projects, utilization of the investment budget came to 79.4 billion rubles, or 101.5 %. The development budget of JSCo «Russian Railways» accounts for most over-fulfillment of the plan, in the amount of 1.3 billion rubles. The development budget’s funds are formed and calculated quarterly, and a branch office may additionally spend such funds (above the amount stipulated in the financial and investment budget) in accordance with the methodology determined in the statement on the development budget. Pursuant to the statement on the development budget, budget funds are to be spent on capital investments (except for expenses in connection with construction and assembly work). With respect to contributions to the charter capital of joint stock companies and the acquisition of shares of outside organizations, utilization came to 12.8 billion rubles, or 92.8%. External investments totaled 2.0 billion rubles in 2007. It was originally planned to raise on the order of 3.5 billion rubles in investor funds, but for a number of reasons beyond the Company’s control, a final decision has not been made on some joint projects. These projects, which are still at the development stage, include: – a project to connect the private railway infrastructure of an aluminum plant under construction in Taishet – a project to connect the private railway infrastructure of an aluminum plant under construction in Karabul – a project to connect the private railway infrastructure of a railway ore transshipment terminal in Sovetskaya Gavan. The investment resources raised were used to rebuild station complexes for suburban and long-distance passenger transport, for preventive measures in the framework of a traffic safety program (railway joint stock insurance company) and to link departmental access lines to public lines. The results of the investment program in 2007 may be characterized on the whole as positive, and measures taken in the framework of the Company’s investment projects in 2007 should make it possible to achieve the projected volume of traffic, increase the profitability of JSCo «Russian Railways» and substantially contribute to the socio-economic development of the Russian Federation.


57

Annual Report JSC «RZD» 2007

Aggregate data on utilization of the Company’s 2007 investment budget are given in the table below: Project

Planned

Actual

+/-

%

Total (funds of JSCo «Russian Railways» – own and borrowed)

261.5

253.5

- 8.0

96.9

Dedicated investment projects

119.7

119.4

-0.3

99.7

Renewal of rolling stock

49.7

41.9

-7.8

84.2

Unit projects

78.3

79.4

Contributions to the charter capital of joint stock companies, acquisition of shares of outside organizations

13.8

12.8

of which:

+1.1 -1.0

101.5 92.8

Data on utilization of the approved 2007 budget are given in the following table: Project

Planned

Actual

+/-

%

TOTAL-All sources

265,042.2

255,480.7

-9,561.5

96.4

Total - funds of JSCo «Russian Railways» (own and borrowed)

261,542.2

253,538.8

-8,003.4

96.9

Dedicated investment projects

119,727.8

119,413.5

-314.3

99.7

Development of the following transportation routes infrastructure:

60,811.6

60,500.4

-311.2

99.5

Kuzbass–Far East Transport Hub

8,897.7

8,883.1

-14.6

99.8

Kuzbass–Azov–Black Sea Transport Hub

16,144.5

16,014.4

-130.1

99.2

Kuzbass–Northwest

7,055.0

7,294.4

239.4

103.4

Oil transport to China (Phase 1)

2,553.0

2,315.3

-237.7

90.7

Oil transport to China (Phase 2)

1,653.3

1,663.7

10.4

100.6

Moving the Izvestkovaya-Chegdomyn Line out of the flood zone of Bureisk Hydroelectric Station

583.6

583.6

0.0

100.0

Berkakit-Tommot-Yakutsk

1,000.0

1,000.0

0.0

100.0

The Mineralnye Vody-Kislovodsk stretch was transformed to alternating current operation

1,116.3

1,116.1

-0.2

100.0

Introduction of rapid passenger service on the St. Petersburg–Buslovsk section

4,000.0

3,987.1

-12.9

99.7

Modernization of the rail infrastructure of Sakhalin Island

1,241.2

1,240.2

-1.0

99.9

Introduction of high-speed service in the Moscow–St. Petersburg direction

5,040.0

5,042.0

2.0

100.0

Introduction of rapid passenger service in the Moscow–Nizhny Novgorod direction

4,444.9

4,446.2

1.3

100.0

Comprehensive reconstruction of the Mga–Gatchina–Veimarn–Ivangorod section and rail approaches to ports on the southern shore of the Gulf of Finland

5,424.6

5,409.0

-15.6

99.7

Comprehensive reconstruction of the Trubnaya-V.Baskuntchak-Aksarayskaya section

137.6

137.6

0.0

100.0

Acquisition of the Siemens AG high-speed rolling stock

0.0

0.0

0.0

100.0

Increase in the throughput of the railway infrastructure following the construction of new rail lines (design and exploration work)

50.0

50.0

0.0

100.0

Development of the railway infrastructure approaching the Kozmino Bay to allow oil transportation (design and exploration work)

150.0

146.7

-3.3

97.8

Construction of an additional main track on the Moscow–Kriukovo section

160.0

113.1

-46.9

70.7

Reduction in the travel time of passenger trains in the Moscow-Adler direction (design and exploration work)

250.0

248.0

-2.0

99.2

Reconstruction of the Komsomolsk-on-Amur–Sovetskaya Gavan section, involving construction of the new Kuznetsovsky Tunnel (design and exploration work)

50.0

50.0

0.0

100.0

Construction of a broad-gauge railway entrance to Europe via the Chop-Bratislava-Vienna route (design and exploration work)

60.0

60.0

0.0

100.0

Construction of an additional main track on the Moscow–Kuskovo section

700.0

700.0

0.0

100.0


58

Business Priorities

Construction of a high-speed passenger trunck line between Moscow and St.Petersburg (design and exploration work)

100.0

0.0

-100.0

0.0

Construction and reconstruction of engineering structures

30,274.5

30,275.7

1.2

100.0

Automation of transport control systems

12,199.4

12,312.7

113.2

100.9

Implementation of Resource-Saving Technologies in Rail Transport

3,694.7

3,727.1

32.4

100.9

Development and reconstruction of the communication facilities of the technological segment communications network (Phase II)

1,695.0

1,692.9

-2.1

99.9

Implementation of automated systems of commercial energy accounting

3,027.0

3,019.3

-7.7

99.7

Implementation of automated systems of passenger registration and monitoring

1,641.6

1,669.5

27.9

101.7

Development of regular traffic between Moscow and Sheremetyevo Airport

2,000.0

2,067.5

67.5

103.4

Establishment of a network of warehouses for temporary storage of goods

249.8

242.2

-7.6

97.0

R&D

942.8

779.6

-163.2

82.7

Implementation of automated systems of commercial power accounting for retail energy markets

2,697.4

2,696.8

-0.6

100.0

Introduction of the rapid suburban passenger service between Moscow-Mytishchi-PushkinoBolshevo

10.0

9.9

-0.1

99.5

Introduction of intermodal transportation at the Sochi-Adler-Sochi Airport section (design and exploration work)

30.0

30.0

0.0

100.0

Construction of a six-kilometer bypass of the Berezniki Railway Station

454.0

390.0

-64.0

85.9

Renewal of the rolling stock of JSCo ÂŤRussian RailwaysÂť

49,721.8

41,857.8

-7,863.9

84

Traction rolling stock

20,459.3

18,867.1

-1,592.1

92.2

Freight rolling stock

17,486.1

10,571.1

-6,915.0

60.5

Passenger rolling stock

8,045.8

8,004.1

-41.7

99.5

Motorized rail car rolling stock

3,730.7

4,415.6

684.9

118.4

Unit projects

78,269.6

79,445.7

1,176.1

102

Division of the rails and structures

9,145.5

8,551.9

-593.6

93.5

Transportation division

11,057.3

10,458.6

-598.7

94.6

Increase in traffic safety (without two-sided automatic block signal)

7,220.1

6,960.9

-259.2

96.4

Automation and remote control division

6,750.6

6,738.3

-12.3

99.8

Division of electrification and power supply

6,375.7

6,252.0

-123.7

98.1

Division of commuter passenger transportation

3,839.8

4,015.7

175.9

104.6

Division of long-distance passenger transportation

4,727.9

5,031.5

303.6

106.4

Locomotives division

1,794.1

1,747.1

-47.1

97.4

Rolling stock division

2,218.7

2,488.1

269.4

112.1

Freight and commercial operations division

1,131.1

1,564.0

432.9

138.3

Civil defense facilities

1,382.1

1,365.6

-16.5

98.8

Division of communications and computer technologies (upgrade and technological radio communication)

900.8

901.2

0.4

100.0

Upgrade of hazardous sites

817.5

995.3

177.9

121.8

Anti-terrorist activities

684.0

675.8

-8.2

98.8

Ecological security

610.5

651.5

41.0

106.7

Procurement division

250.8

255.7

4.9

102.0

Renovation of the rolling stock of fire-trains

154.0

138.6

-15.4

90.0

Reconstruction of the railway units in the Chechen Republic

476.3

266.0

-210.3

55.9

Projects for upgrade of the fixed assets of branch offices

13,203.9

14,748.1

1,544.2

111.7


59

Annual Report JSC «RZD» 2007

Social-development projects

5,528.9

5,639.8

110.9

102.0

Program for the provision of occupational safety conditions

466.8

466.3

-0.4

99.9

Renovation of health-care facilities and educational establishments

3,403.1

3,484.1

81.0

102.4

Construction of corporate residential facilities for technical staff

1,659.1

1,689.4

30.4

101.8

Contributions to the charter capital of joint stock companies, acquisition of shares of outside organizations

13,823.0

12,821.7

-1,001.3

92.8

Funds raised

3,500.0

1,941.9

-1,558.1

55.5

Growth in rolling stock (locomotives and freight cars)

Locomotives A growth trend in purchases of new traction rolling stock has persisted over the last 5 years. Purchases of new locomotives in 2004-2007 are shown in the following table:

delivery of freight cars delivery of locomotives

1975

75 784 657

1980

66 436 885

1985

65 446 1.109

2007

2005

2000

1995

1990

52 500 848 7 598 28 1.000 37 8 000 182 15 406 313

Year

Electric locomotives purchased

Diesel locomoTotal tives purchased

2004

55

45

100

2005

106

76

182

2006

157

120

277

2007

159

154

313

Total for 2004-2007

477

395

872

Freight cars In 2007, JSCo «Russian Railways» acquired 15,406 freight cars (7,591 on terms of financial leasing), including: – 14,231 open boxcars – 585 cement hoppers – 490 covered boxcars – 100 grain hoppers At the central office’s railcar repair enterprises and at railcar repair plants, 6,120 freight cars were modernized (re-equipped) in 2007, including: – 4,455 open boxcars for intermediate-bulk containers – 837 timber flatcars – 726 rail flatcars – 72 mineral cars for inert freight – 30 flatcars for wheel pair.

Passenger cars The use of cars that fail to ensure comfortable travel conditions, against a background of rising prices for passengers, has a negative impact on the image of the Company’s passenger service. From 1,200 to 1,300 passenger cars need to be renovated each year. The actual supply of railcars fell from 2,096 in 1992 to 293 in 2000. In the last five years, though, the supply of passenger cars has shown a positive growth trend.


60

Business Priorities

2007 2006 2005

Growth in passenger car supply

Anapa Station and the approaches to Tuapse Region and to construct a second main track on the Razyezd 9 Km– Kiev section.

655

In the Far East Region, work was begun on reconstruction of Komsomolsk-on-Amur Station and Khabarovsk-II Station, on second-phase development of Nakhodka-Vost. Station and rail development of Khmylovsky Branch Line and reconstruction of Ocean Station.

735 912

Supply of motor railcars Series

2005

2006

2007

ED4M (MK, E)

169

260

332

ED9M (MK, E)

224

310

244

ET2M (EM)

128

131

132

RA 1 (RA-2)

56

45

52

DT -1

521

701

708

TOTAL

577

746

760

Integration of port infrastructure In 2007 JSCo «Russian Railways» continued efforts to develop rail approaches and port infrastructure to accommodate constantly growing foreign-trade shipments via Russian seaports. Funds for the realization of this target in the Company’s investment program totaled 18.5 billion rubles, of which: – 7.5 billion rubles for the Northwest Region – 7.4 billion rubles for the Azov–Black Sea Region – 3.6 billion rubles for the Far East Region In the Northwest Region, work continued on the development of Luga Port Station, comprehensive reconstruction of the Mga–Gatchina–Veimarn–Ivangorod section and reconstruction of Avtovo Station and construction of the new Chernyshevskoye Border Station. Reconstruction of Shipovka Station was completed, and design work was begun for the development of Kaliningrad–Sort. and Baltic Forest Stations. In the Azov–Black Sea Region, second main tracks were laid on congested sections: Kotelnikovo–Meliorativny, Shablievskaya–Salsk in the Volga direction and Saratov– Volgograd–Kotelnikovo–Krasnodar. Project documentation was prepared for 8 sections in this direction, with construction to begin in 2008, the first startup complex for the construction of Razyezd 9 Km storage-and-retrieval station was completed, and a feasibility study was prepared for reinforcing the Kotelnikovo–Tikhoretsk-Crimea section, bypassing the Krasnodar hub. Reconstruction of the existing tunnels on the approaches to Novorossiisk Seaport was begun. Preparations were begun to lay second tracks on congested sections of the Tuapse–Adler line, to reconstruct

Project documentation was prepared for the reconstruction of the Komsomolsk-on-Amur–Sovetskaya Gavan section, involving construction of the new Kuznetsovsky Tunnel.

Construction in progress As of December 31, 2007, construction in progress amounted to 220.7 billion rubles—a year-on-year increase of 55.8 billion rubles, or 33.8%. At the beginning of 2008, construction in progress accounted for 86.4% of investment expenses, as compared with 94.6% at the beginning of 2007, which represents a positive trend in commissioning sites more quickly. The increase in construction in progress has to do with measures initiated for infrastructure development and renovation which normally take more than one year, i.e.: – Comprehensive reconstruction of the Mga–Gatchina– Veimarn–Ivangorod section and rail approaches to ports on the southern shore of the Gulf of Finland (including construction of Luga Station) – introduction of rapid passenger service on the St. Petersburg–Buslovsk section – introduction of rapid passenger service in the Moscow–Nizhny Novgorod direction – construction of an additional main track on the Moscow–Kuskovo section – electrification of the Syzran-Sennaya section and construction of a second main track – reconstruction of the Bolshoi Novorossiisk Tunnel and Novoginsk Tunnel on the Armavir–Tuapse section, etc. In 2007, 630.6 million rubles of costs in connection with capital construction in progress were written off. 128.0 billion rubles of construction in progress are included in the investment budget for 2008-2010. It is planned to sell sites worth 4.7 billion rubles and to finish 5.6 billion rubles in construction in progress by bringing in investors. In 2008 it is planned to mothball 0.3 billion rubles of construction in progress and to consider writing off sites in the amount of 2.7 billion rubles. In view of the measures being taken to reduce construction in progress and the projected commissioning of fixed assets in 2008, construction in progress should account for 60.7% of investment costs by the end of 2008.


61

Innovation-based development of JSCo «Russian Railways» White Book With the participation of industry science, Company specialists and institutes of the Russian Academy of Science, the main directions of the Company’s scientific and technical policy were first formulated in a systematic document – “Strategic Directions of the Scientific and Technical Development of JSCo «Russian Railways» through 2015” (the JSCo «Russian Railways» White Book) – which should be viewed as the basis for long-term Company innovation. In practice, the implementation of this policy document will make it possible to achieve the conceptual goal of railtransport reform: the formation of a market of high-quality and competitive transportation services that fully meet existing needs for freight and passenger transport.

Reform of the scientific and technical complex The Company’s scientific and technical complex has been systematically reformed: – based on the All-Russian Railway Research Institute and the All-Russian Computerization and Automation Research and Design Institute – federal unitary enterprises and principal institutions of domestic rail transport – open joint stock companies of the same name were created; – the Technical Policy Department is charged with coordinating efforts to create new locomotives, freight and passenger cars and motor railcars; – to consolidate issues involving the scientific and technical development of Company infrastructure, the infrastructure section of the Technical Policy Department was strengthened and charged with overseeing a number of key Company innovation projects and programs, including a project to create up-to-date train-dispatching and traffic safety systems; – a Center for Innovation Development was formed as a branch of JSCo «Russian Railways» with the following main functions: raising off-budget resources for innovation projects and programs, working with venture funds and arranging for independent technical and economic expert studies of scientific and technical projects and programs; – it was decided to combine the Scientific and Technical Information Center (a structural subdivision of JSCo «Russian Railways») and the Central Science and Technology Library (a Company branch) into one structure, freeing up employees and eliminating duplicated functions; – in order to achieve the Company’s standardization priorities, a standardization service was formed unit-

Annual Report JSC «RZD» 2007

ing all of the Company’s structural subdivisions with a management body in the Technical Policy Department and overseen by a vice president of JSCo «Russian Railways».

Association of Railway Equipment Manufacturers To combine the efforts of manufacturers of railway equipment and its components and ensure that strategic development programs meet the country’s economic needs, the Association of Railway Equipment Manufacturers, a nonprofit partnership, was formed in June 2007, including over 70 major railway-related manufacturers, partly in CIS countries. One of the partnership’s top priorities is to ensure the effective cooperation of domestic manufacturers in realizing the Development Strategy for Transport Machine-Building in the Russian Federation in 2007-2010 and through 2015. This strategy is based on a program of measures to overcome technological backwardness and ensure rapid technical upgrading and modernization of the machine-building complex. The partnership has established business contacts with the Union of the European Railway Industries (UNIFE). The memorandum of cooperation and license agreement signed in Brussels give the Association of Railway Equipment Manufacturers exclusive rights to transmit and distribute the newest version of the European railway industry standard IRIS in the Russian Federation and the CIS as well as to provide in-depth training on this standard to over 100 domestic managers. Also, beginning in 2015, JSCo «Russian Railways» has set itself the goal of ending purchases from manufacturers whose quality management systems and output fail to meet international standards.

High-speed transport Pursuant to Agreement No. 230kt of May 18, 2006 between Siemens AG (Germany) and JSCo «Russian Railways», a base schedule is being followed to develop and produce eight high-speed electric trains with a design speed of 250 kph. On July 20, 2007, the first car body was prepared, and serial production began. Detail design was completed. On April 20, 2007, JSCo «Russian Railways» and Siemens AG signed Agreement No. 232kt for the servicing of high-speed electric trains throughout their life cycle (30 years). In the framework of the investment program “Introduction of High-Speed Passenger Service in the St. Petersburg–Moscow–Nizhny Novgorod Direction”, industrial facilities are being rebuilt for the technical servicing and use of high-speed electric trains. An international tender was held in 2007 for the supply of four electric trains with a speed of 220 kph in order to


62

Business Priorities

realize a project for rapid passenger service between St. Petersburg and Helsinki. On August 27, 2007 the board of directors of Oy Karelian Trains Ltd. approved Alstom (France) as the supplier. The contract for these electric trains, which are unique in meeting both Russian national standards and European technical requirements, entered into force on September 5, 2007. Alstom began design and manufacture. Commercial and technical specifications for high-speed electric trains with a speed of 160 kph have been developed and agreed with the potential manufacturers – CJSCo Transmashholding, Ansaldo Breda (Italy) and Bombardier (Canada) – in order to realize the Company’s approved rapid and high-speed transport program through 2020 as well as transport service for the “Sochi 2014” Olympic Games.

Efficient use of resources The primary objective of the investment project “Implementation of Resource-Saving Technologies in Rail Transport” is wholesale conversion to resource-saving technical methods and technologies that will enable a reduction in the industry’s operating costs by means of: – reduction in specific fuel and energy consumption for hauling operations – optimization of stationary energy consumption – rational use of material resources – effective use of human resources as a result of new automated technologies and technologies with low servicing requirements.

Composition of the scientific and technical development plan for 2007

11%

Other operations

6%

Labor productivity

17%

Regulatory and technical documentation

28%

Efficiency of the use of technical resourses

5%

Labor safety and ecology

7%

5%

Fast and high-speed traffic

11%

Traffic safety

5%

5%

Quality of diagnistics, work and materials

Saving on fuel and energy New resources rolling stock and rail equipment

This investment project also includes the fulfillment of energy-saving goals set by the Company’s Energy Strategy through 2010 and 2030.

Scientific and technical development The Company’s Scientific and Technical Development Plan for 2007 was approved by Regulation No. 137r of JSCo «Russian Railways» of January 31, 2007. Comprehensive scientific and technical projects realized in the framework of the Company’s investment program are among the most effective forms of research and development. Specific results were obtained at Rybnoye-Chelyabinsk Testing Ground in 2007 in the framework of the comprehensive scientific and technical project “Optimization of Transport Control Based on Economic Criteria”. In the first phase of this project, key procedures for managing the stock of locomotives were developed. From the outset, these technologies proved highly effective, allowing a reduction of up to 10% in the stock of locomotives. Comprehensive optimization of control processes at the testing ground will yield annual savings of some 550 million rubles. A full range of advanced technologies was implemented at the testing ground at the same time, providing a multiplier effect. One significant development is the implementation of new devices for monitoring the location of self-propelled rolling stock, including special and rail technology. The satellite navigation systems used for these purposes, including the Russian Global Navigation Satellite System (GLONASS), make it possible to monitor the location of all units in real time, control their speed and eventually coordinate them per unit of time. Another important result of implementing the new technologies will be information from satellite systems for earth remote sensing, permitting us to forecast floods, sinkholes and landslides with a high degree of accuracy and minimum expense. By refining this technology, jointly with the Italian firm Finmeccanica and the Russian space agency Roskosmos, on the Tuapse–Adler section in the reporting year and the year after that, JSCo «Russian Railways» will be able to implement technologies for monitoring potentially hazardous sections of rail. Satellite navigation systems, along with GSM-R digital telecommunication systems, will make it possible to increase traffic safety on low-density lines and sections and ensure that traffic safety requirements are fully met at minimum cost.


63

Management of quality Efforts to introduce a quality-management system in 2007 were made in the following areas: – training – development of internal corporate quality-management rules and requirements – railway pilot projects In the framework of a “cascade training” project, the qualifications of executives at the top three levels were upgraded. Cascade participants developed and defended functional quality-improvement projects. Training materials were developed for the cascade training of employees at levels 4–6. Regulatory documentation was developed to be used in 2008 as a basis for implementing elements of a corporate integrated system of quality management in structural subdivisions, branch offices and rank-and-file enterprises of JSCo «Russian Railways». A quality-management system is being implemented at pilot testing grounds of the Kuibyshevskaya, Oktyabrskaya and Sverdlovskaya railways.

Technical regulation In the framework of technical-regulation reform in the Russian Federation, the Technical Policy Department was charged with coordinating efforts to implement the Federal Law “On Technical Regulation”. Drafts of nine technical regulations – of sixteen stipulated by the Concept for a System of Rail Transport Technical Regulation – were prepared in 2006-2007. The inadequacy of the Federal Law “On Technical Regulation” in such complex technical areas as transport, construction and energy was demonstrated by the practice of drafting technical regulations for rail transport and by an analysis of the preparation of draft technical regulations in related industries. This federal law has slowed the implementation of newly developed technical methods and technologies as well as the introduction of high-speed rail service. In view of these problems, JSCo «Russian Railways» made proposals and, jointly with the Russian Union of Industrialists and Entrepreneurs and the Federal Agency of Technical Regulation, was successful in getting this law amended (Federal Law No. 65-FZ of May 1, 2007 “On Amendments to the Federal Law ‘On Technical Regulation’”). Under the new version of the law, proposals were made to correct the Concept for a System of Rail Transport Technical Regulation. These proposals were submitted to the Russian Government and included, in the form of three

Annual Report JSC «RZD» 2007

technical regulations (“Rail Infrastructure Safety”, “Railway Rolling Stock Safety” and “Safety of High-Speed Rail Infrastructure and Rolling Stock”), in the draft Program for the Development of Technical Regulations, prepared by the Russian Ministry of Industry and Energy and approved by the Government of the Russian Federation. These technical regulations will be based on previously developed drafts of nine technical regulations in the area of rail transport.

Supply of new rolling stock A concept was developed for the conclusion of long-term contracts between JSCo «Russian Railways» and companies manufacturing rolling stock, based on a method of valuing the life cycle of output. The value of the life cycle thus becomes a key economic feature of the manufacturer’s and potential supplier’s competitiveness. For foreign suppliers, the terms of transfer of advanced technologies and distribution of products in Russia should also be taken into consideration in preparing contracts. JSCo «Russian Railways» is ready to conclude agreements for the development of new technology, serial production, testing, certification and subsequent delivery for up to 3 - 5 years. Such an approach is advantageous for both JSCo «Russian Railways» and the manufacturer: – JSCo «Russian Railways» is regularly supplied with new rolling stock in accordance with its strategic needs; – full use is made of technical-audit and quality-control mechanisms for acquired production; – the possibilities of applying a flexible price policy, optimizing costs and minimizing the Company’s financial risks are expanded; – the manufacturer is able to plan its operations on a long-term basis, develop its manufacturing capabilities and obtain soft loans.

International operations According to the “Strategy of Development of Railway Transportation in Russia up to 2030”, approved by the Russian Government, one of the Company’s priorities is to strengthen the global competitiveness of JSCo «Russian Railways» Holding Company and its positions on the Eurasian transport market. The first step in this direction is to ensure organizational, political, legal and technological conditions that are conducive to a qualitatively new level of efficiency of international freight (especially transit) and passenger transport as well as to ensure scientific, technical and technological cooperation and access to foreign markets for leading Russian developments and construction services. In accordance with the strategic line, cooperation with railways in the CIS and Baltic countries was further


64

Business Priorities

developed in order to leverage the chief competitive advantage of “1520-gauge space” by operating as a unified rail fleet with unified technologies and standards. Jointly with the railway administrations and transportation agencies of Austria, Slovakia and Ukraine, JSCo «Russian Railways» began developing a project this year to extend the broad-gauge railway from Košice (Slovakia) to Bratislava and Vienna. Pursuant to the signed memoranda of understanding, a four-sided task group agreed on a schedule for the development of a preliminary feasibility study and related marketing research to be used in the following year as the basis for a business plan. The jubilee Forty-Fifth Session of the Council for Rail Transport in Commonwealth Member Countries, held on February 21-22, 2007 in Moscow, and subsequent sessions in Astana and Baku confirmed the efficacy of this organization. The Company’s consistent policy in the framework of the Council for Rail Transport in Commonwealth Member Countries has made for significant progress in such areas as improving mutual settlements, reducing the shortage of rolling stock, realizing joint projects in the field of logistics and modernizing infrastructure. At the council’s forty-sixth session, as a result of the Company’s efforts, it was decided to form a coordinating committee for improvement of the regulatory legal framework for international rail-transport settlements. On June 2829, 2007, JSCo «Russian Railways» held an organizational meeting with railway-administration representatives at which a statement on the coordinating committee, a draft agreement on cooperation in implementing the statement and a plan of action for the coordinating committee were agreed. At the council’s forty-seventh session, a statement on the coordinating committee was approved. In view of the need for new approaches to financial cooperation between railways, modern methods of mutual settlement and convergence of European systems in the framework of the International Railway Union, the Company’s specialists prepared drafts of a Statement on the Committee for the Regulation of Mutual Settlements between Railways under the Agreement on the Settlement Rules of the Railway Cooperation Organization and the Rules of Procedure of the Railway Cooperation Organization’s Compensation Bureau. These drafts were considered at meetings between representatives of member countries’ railways in May and October 2007. Efforts to create a Committee for the Regulation of Mutual Settlements and a Compensation Bureau under the auspices of the Railway Cooperation Organization will continue. The business forum Strategic Partnership 1520, held for the second year in a row at the Company’s initiative and with its support, has become an effective mechanism for promoting cooperation between railway administrations in the framework of the council and on a bilateral basis, as demonstrated by the large number of contracts and agree-

ments concluded during the forum in Sochi. In order to resolve issues relating to concession assets of the Armenian Railway, on September 12, 2007 JSCo «Russian Railways» officially applied to the Armenian Ministry of Transport and Communication to take part in pre-qualification for a subsequent tender for a concession involving assets of the Armenian Railway. Considerable work has been done with the Chinese railways to develop freight. In 2007 a number of meetings with the leadership of the Chinese Ministry of Railways as well as task-group sessions were held, as a result of which an agreement to strengthen cooperation in the area of international oil transport and a memorandum on scientific and technical cooperation were signed, and specific steps were planned to increase freight traffic, including transit. In view of the need to handle ever growing freight traffic between China and Russia, special attention is being given to developing the Zabaikalsk-Manchuria border crossing. Relations with the German railways have received new impetus. On May 29, 2007 in Sassnitz, Germany, JSCo «Russian Railways» and Railion Deutschland АG signed fundamental documents regulating freight traffic between Russia and Germany in connection with the Baltiysk– Sassnitz-Mukran railway ferry service. The first step has thus been taken toward establishing railway ferry service between ports in Russia and Germany. On June 18, 2007, the heads of the Russian, Belarusian, Polish and German railways signed a declaration of intent to form a joint venture for freight transport by CJSCo Eurasia Rail Logistics. On June 21, 2007, a general agreement on terms of cooperation for the development of transport and logistics was signed between Deutsche Bahn AG and JSCo «Russian Railways». At our initiative, a joint task force of Russian, Chinese and German railways is actively working on issues involved in organizing Eurasian freight traffic between China and Europe. To additionally utilize freight resources and the TransSiberian, the Company concentrated this year on working directly with the leadership of major production companies and forwarders in Japan, providing a basis for the expansion of container transport. Cooperation with the Finnish railways also received new impetus. On April 16-17, 2007 a demonstration container train was given a successful trial run between Kouvola and Moscow in order to develop the Finnish and Russian railways’ capacity for high-quality service. In the area of passenger service, work continued on a project for high-speed traffic between Moscow and Helsinki. Further to the agreement signed in November 2006 to form the joint venture Oy Karelian Trains Ltd, an agreement was concluded with Alstom in September 2007 for the supply of high-speed rolling stock.


65

Technological cooperation was developed with other leading foreign partners as well. A contract worth 300 million euros was signed with Siemens Transportation Systems for the servicing of Velaro RUS high-speed electric trains. An agreement was signed with Finmeccanica S.p.А. for cooperation in jointly developing and producing an electric train with a speed of up to 160 kph for the Russian railways and applying satellite technologies to rail transportation and other areas. Having joined the International Railway Union as a full member last year, JSCo «Russian Railways» actively cooperated with the union in 2007 and took part in the work of its bodies. The session of the union’s executive council and the seventieth anniversary session of its general assembly that were held in Moscow on June 18, 2007 were landmark events. Note that JSCo «Russian Railways», as the sole rail administration, immediately received full membership in the European and Asian regional assemblies of the International Railway Union, which deal with European and Eurasian activities and projects. Our Company was also given responsibility for overseeing such key issues as the development of international transportation corridors and the formulation of quality and certification standards. All of this enables us to make an important contribution to the formation of international transportation space, taking into account the interests of the Russian railways. Aiming to consolidate its role as a key link in the Eurasian rail system, JSCo «Russian Railways» made substantial headway this year on major international infrastructure projects.

Participation of JSCo «Russian Railways» in international rail infrastructure projects 1. Islamic Republic of Iran From February through September 2007, Company specialists did comprehensive work to prepare a technical and economic proposal for a project to electrify the approximately 53 km of rail between Tabriz and Azarshahr. In September 2007 a draft contract for the development and realization of this project was submitted to the Iranian side. The contract has currently been initialed by both sides. The contract is to be signed on March 29, 2008. Talks are also being held with the leadership of the Iranian Railways on tenders to electrify some 1,000 kilometers of double tracks between Teheran and Meshkhed as well as on the construction of a Kazvin–Resht–Astara line with a length of approximately 400 km.

Annual Report JSC «RZD» 2007

2. People’s Democratic Republic of Algeria In late 2007 RSC Russian Railways finished work on a tender proposal for “Development of Suburban Rail Service in Algiers”, and the bid was submitted to the tender committee on January 2, 2008. The project involves major repairs to some 95 km of rail, reconstruction of existing stations and construction of 14 new stations, roadbeds and engineering structures, development of signaling and communication systems and electrification of these sections. In February 2008, ANESRIF, the organizer, announced that JSCo «Russian Railways» had won the tender. The Algerian side is currently putting the final touches on the contract, and JSCo «Russian Railways» is actively preparing for the project. Preliminary talks have also been held with representatives of the Algerian National Agency for Railway Projects and Investments (ANESRIF) on involvement in electrifying a number of rail lines in Algeria with an overall length of some 1,000 km. 3. Great Socialist People’s Libyan Arab Jamahiriya In fulfillment of protocols signed in July and August 2007 with the leadership of the Organization for the Management and Realization of Libyan Railway Projects, JSCo «Russian Railways» prepared a technical and economic proposal on a tight schedule for the construction of 554 km of double tracks between Sirt and Benghazi as part of the Trans-Arab Railway along the Mediterranean coast. 4. Democratic People’s Republic of Korea JSCo «Russian Railways» has completed its workup of the part subject to approval of the projects “Reconstruction of the Rail Section between Hasan and Rajin Stations” and “Establishment of a Container Terminal in the Port of Rajin”. All materials have been sent for approval by the Korean side. Working documentation is still under development. In April-May 2008 the active phase of preliminary work and basic construction and assembly is to begin. An order was filled for equipment with a lengthy production period for the first stage of the container terminal in the port of Rajin. 5. Kingdom of Bahrain Work has been completed to obtain the three principal licenses for operations in Bahrain (road construction, housing construction, structural work and technical maintenance of buildings and structures). The highest license category, АА, was granted for structural work and technical maintenance, allowing the license holder to erect high-rise buildings of thirty and more floors.


66

Business Priorities

To identify the most promising and profitable business projects, the Company does active work to select construction projects with both state and private sources of financing.

JSCo «Russian Railways» is developing from a railway company into a leading transport and logistics company that provides freight and passenger transport using all the tools available to modern business.

Among the most promising transport-construction projects is a project to build one of the world’s longest highway bridges between Bahrain and Qatar with a length of some 40 km. A tender is planned in the second half of 2008.

JSCo «Russian Railways» has until now been perceived by many in Russia and abroad as a state structure whose chief task is to promote the state's social functions. JSCo «Russian Railways» has been transformed into a holding company, including subsidiaries and affiliates, with a well-developed system of managing its business units.

Work is currently being completed to establish and register a representation of JSCo «Russian Railways» in Bahrain, allowing more efficient and better-quality monitoring of the infrastructure market in Bahrain and other economically developed states in the Persian Gulf region. 6. Other projects Markets for infrastructure projects in the Balkan countries (Bulgaria, Serbia, Croatia) and CIS member states continue to be studied in order to identify projects that are economically attractive for JSCo «Russian Railways».

Reform and Participation in Subsidiaries and Affiliates Company repositioning As a result of the program for structural reform of rail transport, JSCo Railways presented its new corporate style in May 2007 at the second international business forum “Strategic Partnership 1520”. The updated brand is designed to position JSCo «Russian Railways» as a successful world provider of comprehensive transport and logistics services with the resources and advanced technologies to develop rail infrastructure both in Russia and abroad. The effort to create a strong market brand is an integral part of a modern commercial structure. Brand plays a significant role in enhancing a company’s strategic efforts as well as its marketing initiatives and measures to develop a corporate culture. In addition to enhancing general effectiveness, a brand is itself an intangible asset that contributes to a company’s capitalization. The need to develop unified packaging and to breathe new life into the JSCo «Russian Railways» brand has to do with the following key factors: The Company lacked a corporate style as the basis for its brand, which is an important element of the Company’s development ideology in market conditions.

For strategic market positioning in conditions of growing competition, the holding company formed by JSCo «Russian Railways» needs to be more active in applying modern communication tools united by a single ideology. The Company’s new trademark was developed so that it would be perceived not as an abbreviation but as an independent and complete graphic symbol not requiring translation into foreign languages. In October 2007 the management board of JSCo «Russian Railways» approved the corporate (company) trademark, logotype and corporate (company) fonts. A range of work was done: identification of trademarks registered to JSCo «Russian Railways» (enterprises of the former Russian Ministry of Railways, subsidiaries and affiliates of JSCo «Russian Railways»), identification and analysis of third-party violations of rights to the Company’s name.

Reform The holding company’s structure and principal changes made during 2007 are summarized in Section II (“General Information on the Open Joint Stock Company «Russian Railways», subsection: “Holding-Company Structure”). In accordance with the plan of measures to realize the Program for the Structural Reform of Rail Transport in 20062010, a Special-Purpose Model of the Rail Service Market at the Third Stage of Reform was developed and approved by the Government Commission for the Development of Industry, Technology and Transport in May 2007. The model clarifies the logic and progress of structural transformations through 2010, describing the market’s structure at the end of the third stage, its key players and the basis for cooperation among them as well as the principles of regulation. A total of 47 subsidiaries and affiliates were established by the beginning of 2008 in the framework of the structural reform program. The creation of subsidiaries makes it possible to formulate a clear development strategy for each field of activity, create a new system of personnel motivation and increase the holding company’s transparency.


67

Annual Report JSC «RZD» 2007

In 2007 structural reform of rail transport in Russia was given a favorable assessment by experts of the Organization for Economic Cooperation and Development, the European Conference of Ministers of Transport and the President and Government of the Russian Federation.

Freight Car Repairs and a Railway Station Directorate have been set up, and a Central Directorate for Track Repair is being formed. Directorate status gives subdivisions a greater degree of independence and responsibility for results as well as increasing the financial transparency of operations.

The following subsidiaries were created In 2007 by decisions of the board of directors of JSCo «Russian Railways»: – First Freight Company, formed in accordance with the Special-Purpose Model of the Market as a rolling stock operator with a charter capital of 85.6 billion rubles in order to strengthen the market positions of JSCo «Russian Railways» First Freight Company (Pervaya Gruzovaya Companya) began its operating and financial activities as a rolling stock operator on October 26, 2007, engaging in: 1. delivery of rolling stock for use by JSCo Russian Railways 2. rental of rolling stock to third parties 3. operation of own rolling stock 4. shipping services – 7 subsidiaries based on assets of the Vagonremmash directorate’s plants for major repairs and maintenance of passenger cars and electric rolling stock with a total of 5.2 billion rubles in charter capital investments. – 2 subsidiaries in the sphere of science & research and experimental & constructional work, the All-Russian Railway Research Institute (JSCo) and the Automated Systems Research Institute (JSCo), with charter capital of 3.2 billion rubles and 748 million rubles, respectively (JSCo «Russian Railways» has a 75% interest in the Automated Systems Research Institute) – Railway Commercial Company, with capital of over 8 billion rubles – Don-Prigorod Company for suburban passenger transport – Ust-Luga Port Transportation Company (JSCo) to provide transportation services on rail approaches to the commercial seaport of Ust-Luga – Murmansk Hub Management Company (JSCo) to formulate a development strategy for the Murmansk transport hub, realize investment projects and implement modern logistical systems – RailTransAuto (JSCo) to consolidate freight traffic in the auto and transport-vehicle sector with a charter capital of 3.3 billion rubles (JSCo «Russian Railways» has a 51% interest).

In order to diversify the Company’s business, enhance interaction with other types of transport, broaden the range of services provided and generate additional cash flows in the course of corporate construction, JSCo «Russian Railways» is considering the feasibility and effectiveness of creating “initiative” subsidiaries and affiliates as well as buying into the charter capital of companies already established.

In 2007 the board of directors of JSCo «Russian Railways» also approved the creation of 3 subsidiaries, including: – 2 companies involving foreign partners to organize international transport: Eurasia Rail Logistics and TransEurasia Logistics GmbH (see “International Operations”) – South Caucasus Railway to handle rail transport in Armenia To prepare for the subsequent organizational separation and creation of subsidiaries, a Central Directorate for

JSCo «Russian Railways» is thus continuing its efforts to buy into the charter capital of port complexes in order to enhance the interaction of rail and sea transport. The Company’s board of directors has approved the formation of a management company to develop the Murmansk transport hub and acquire a 25% share in its charter capital. To develop intermodal passenger traffic, the Company’s board of directors has approved the acquisition of a 50% block of shares of Aeroexpress (JSCo), operator of a future line to Sheremetyevo International Airport. In 2007 JSCo «Russian Railways» acquired a blocking stake in Transmashholding (CJSCo), a major Russian transport machine-building company. This will enable JSCo «Russian Railways» to cooperate more effectively with its main supplier, pave the way for long-term contracts, minimize strategic risks, improve opportunities for raising investments and create conditions for expanding operations and further developing services. The Program for Structural Reform of Rail Transport and the Special-Purpose Model of the Rail Service Market at the Third Stage of Reform involve raising private investments on a large scale by selling shares of Company subsidiaries. In late 2007 the board of directors of JSCo «Russian Railways» approved the sale of shares in ten subsidiaries: Transcontainer (JSCo), Remputmash plants in Abdulino, Vereschagino and Orenburg, Roszheldorproekt (JSCo), the Research Institute for Rail-Transport Technology, Control and Diagnostics, Refservice (JSCo) and railcar repair plants in Barnaul, Saransk and Roslavl. The reforms made it possible to step up efforts to put railway assets and land that were unused or used inefficiently into circulation. Thus, in the second half of 2007, construction is in progress on the Ulak–Elga section in Yakutia and the Company’s block of shares in Elgaugol (JSCo) were sold for 14.2 billion rubles, and the development of a major coal deposit was accelerated as a result. The active utilization of Company real estate in development projects involving foreign investors has begun. In the last year, over 100 billion rubles in Company assets have been involved in the process of corporate transformation.


68

Business Priorities

Analysis of the operations of subsidiaries and affiliates An analysis of the financial and business operations of Company subsidiaries in 2007 showed overall growth in efficiency. In 2007 JSCo «Russian Railways» received 372.7 million rubles in dividends on its settlement account for 2006. Dividends of 500 million rubles are planned based on the results of 2007. Planned dividends are calculated and included in the business plans of subsidiaries and affiliates for 2008 based on the approved three-year financial plan of JSCo «Russian Railways». It should be noted, however, that under Russian law, charter capital must be paid in full before dividends can be paid to shareholders. As of March 1, 2008, the charter capital of the following subsidiaries and affiliates had not been fully formed: – JSCo Roszheldorstroy – charter capital 99.6% paid – JSCo Alatyr Mechanical Plant – charter capital 96.3% paid – JSCo Petukhovo Casting and Mechanical Plant – charter capital 99.94% paid – JSCo Railway Commercial Company – charter capital 99.4% paid – JSCo First Freight Company (Pervaya Gruzovaya Companya) – charter capital 90.1% paid – JSCo All-Russian Railway Research Institute – charter capital 97.2% paid – JSCo Automated Systems Research Institute – charter capital 96.7% paid by JSCo «Russian Railways» (JSCo «Russian Railways» has a 75% interest in the Automated Systems Research Institute Management Company)

Charter capital was not fully formed due to the need to make property rights official and, in certain cases, disaggregate fixed assets contributed to the Company’s charter capital. The Company’s financial investments in companies in which it holds a stake came to 41.8 billion rubles at the end of 2006 and 152.5 billion rubles based on the results of 2007. The growth of the Company’s financial investments in such companies – up 264.8% from 2006 – has to do with the creation of major subsidiaries in 2007 based on Company branches (See “Holding Structure”) and the formation of their charter capital. Thus, unconsolidated revenues in respect of subsidiaries and affiliates for 2007 totaled 179.7 billion rubles – up 93.7 billion rubles, or 108%, from 2006. Net unconsolidated profit in 2007 was up 5.5 billion rubles, or 120.9%, from 2006 at 10.1 billion rubles. Total unconsolidated assets of subsidiaries and affiliates in 2007 grew by 434%, or 365.1 billion rubles, to a level of 449.1 billion rubles as of January 1, 2008. Net assets in 2007 increased by 515%, or 252.5 billion rubles, to 301.4 billion rubles as of December 31, 2007. Equity capital in 2007 grew by 296.3%, or 145.9 billion rubles, to 195.2 billion rubles as of December 31, 2007. The significant growth in key financial indicators has to do with the creation of new subsidiaries. Companies that were established and began their business activities in 2007 and companies whose shares were obtained by JSCo «Russian Railways» in 2007 achieved the following indicators: – total assets – 341.3 billion rubles – net assets – 246.3 billion rubles – equity capital – 140.3 billion rubles – total revenues – 54.8 billion rubles – total unconsolidated net profit – 3.8 billion rubles.

List of subsidiaries and affiliates Companies in whose charter capital JSCo «Russian Railways» has an interest of at least 50% (Subsidiaries) No.

Company

Location

Field of activity

JSCo RR’s share (%)

Charter capital (RUR mln.)

Invested by JSCo RR as of January 1, 2007, (RUR mln.)

Received/ disposed (RUR mln.)

Invested by JSCo RR as of December 31, 2007, (RUR mln.)

1

CJSCo Regio-TeleCom DV

Khabarovsk

telecommunications

51

0.2

0.1

0.0

0.1

2

JSCo Altay-Prigorod

Barnaul

transport

51

0.1

0.1

0.0

0.1

3

JSCo Kuzbass-Prigorod

Kemerovo

transport

51

0.1

0.1

0.0

0.1

4

JSCo Omsk-Prigorod

Omsk

transport

51

0.1

0.1

0.0

0.1

5

JSCo Express Prigorod

Novosibirsk

transport

51

261.0

0.1

84.4

84.5

6

Oy Karelian Trans

Helsinki

transport

50

34.1

17.1

0.0

17.1


69

Annual Report JSC «RZD» 2007

7

CJSCo Eurasia Intertrans

Yuzhnosakhalinsk travel

51

0.2

0.1

0.0

0.1

8

JSCo Volgogradtransprigorod

Volgograd

transport

51

0.1

0.1

0.0

0.1

9

CJSCo Transkat

St. Petersburg

manufacturing

57

90.1

51.4

0.0

51.4

10

JSCo KRP-Invest

Moscow

Rolling stock repairs

100

14.5

14.5

0.0

14.5

11

CJSCo Locomotive Football Club

Moscow

sport

70

0.1

0.0

0.0

0.0

83

10.0

8.3

0.0

8.3

12

JSCo BAM-Invest

Moscow

Finance and investment

13

JSCo Arena-2000

Yaroslavl

sport

100

2,101.2

2,100.1

0.0

2,100.1

14

CJSCo Zheldoripoteka

Moscow

Construction, realty

100

500.0

500.0

-0.1

499.9

15

CJSCo TransTeleCom

Moscow

telecommunications

100

2.0

434.2

-0.2

434.0

16

ORS St. Petersburg Trading Company

St. Petersburg

commerce

100

5.5

5.5

-5.5

0.0

17

ООО Energopromsbyt

Moscow

manufacturing

51

0.0

0.0

0.0

0.0

18 19

CJSCo Russian Troika

Vladivostok

transport

50

472.0

236.0

-236.0

0.0

JSCo Sverdlov Suburban Company Yekaterinburg

transport

51

0.1

0.1

0.0

0.1

20

JSCo Elteza

Moscow

manufacturing

100

2,368.9

2,365.3

3.6

2,368.9

21

JSCo Express Primorya

Vladivostok

transport

51

0.1

0.1

0.0

0.1

22 23

JSCo Krasprigorod

Krasnoyarsk

transport

51

0.1

0.1

0.0

0.1

JSCo Kaluga Plant (Remputmash)

Kaluga

manufacturing

100

2,330.6

2,209.3

121.3

2,330.6

24

JSCo Abdulino Plant (Remputmash) Abdulino

manufacturing

100

161.7

153.1

8.6

161.7

25

JSCo Vereschagino Plant (Remputmash)

Vereschagino

manufacturing

100

259.8

233.7

26.1

259.8

26

JSCo Moscow Pilot Track Machine Plant (Remputmash)

Moscow

manufacturing

100

36.5

12.2

0.0

12.2

27

JSCo Orenburg Track Repair Plant (Remputmash)

Orenburg

manufacturing

100

48.8

45.5

3.3

48.8

28

JSCo Perm Motor Railcar Repair Plant (Remputmash)

Perm

manufacturing

100

410.8

401.1

9.7

410.8

29

JSCo Sverdlov Rail Repair and Engineering Plant (Remputmash)

Yekaterinburg

manufacturing

100

419.1

419.1

0.0

419.1

30

JSCo Меtаlworker-Remputmash Experimental Plant

Kaliningrad

manufacturing

100

480.8

480.8

0.0

480.8

31

JSCo Yaroslav Railcar Repair Plant (Remputmash)

Yaroslavl

manufacturing

100

385,3

348.2

37,1

385,3

32

JSCo Roszheldorproekt

Moscow

scientific production

100

1,366.5

1,366.5

0.0

1,366.5

33

JSCo Roszheldorstroy

Moscow

construction

100

10,162.7

10,162.7

0.0

10,162.7

34

JSCo Refservice

Moscow

manufacturing

100

3,491.5

3,491.5

0.0

3,491.5

35

JSCo TransContainer

Moscow

transport

100

13,894.8

13,894.8

0.0

13,894.8

36

JSCo Railway Technology, Control and Diagnostics Research Institute Omsk

scientific production

100

36.0

36.0

0.0

36.0

JSCo All-Russian Rolling Stock Research and Design Institute

scientific production

100

147.0

147.0

0.0

147.0

manufacturing

100

518.5

518.5

0.0

518.5

37 38

Moscow

JSCo Saransk Railcar Repair Plant Saransk


70

39

Business Priorities

JSCo Barnaul Railcar Repair Plant

Barnaul

manufacturing

100

868.7

868.7

0.0

868.7

JSCo Roslavl Railcar Repair Plant

Roslavl

manufacturing

100

870.8

870.8

0.0

870.8

ООО St. Petersburg–Vitebsk PPK

St. Petersburg

manufacturing

74

0.1

0.1

0.0

0.1

42

JSCo High-Speed Mainlines

Moscow

transport

75

1.0

0.8

0.0

0.8

43

CJSCo Okhrana-RZD Private Security Firm

Moscow

security

100

21.8

0.0

21.8

21.8

44

JSCo RailTransAuto

Moscow

transport

51

3,265.2

0.0

1,665.2

1,665.2

45

JSCo Vologda VRZ

Vologda

manufacturing

100

727.1

0.0

727.1

727.1

46

JSCo Vladikavkaz VRZ

Vladikavkaz

manufacturing

100

1,173.0

0.0

1,173.0

1,173.0

47

JSCo Moscow LRZ

Moscow

manufacturing

100

946.6

0.0

946.6

946.6

48

JSCo Petukhovo LMZ

Petukhovsk

manufacturing

100

285.5

0.0

285.5

285.5

49

JSCo Alatyr MZ

Alatyr

manufacturing

100

104.7

0.0

104.7

104.7

50

JSCo Krasnoyarsk EVRZ

Krasnoyarsk

manufacturing

100

1,430.5

0.0

1,430.5

1,430.5

51

JSCo Krasny Put Moscow Machine Plant

Moscow

manufacturing

100

562.5

0.0

562.5

562.5

52

JSCo Pool Trans

Moscow

transport

50

100.0

0.0

50.0

50.0

53

JSCo All-Russian Railway Research Institute

Moscow

science

100

3,191.5

0.0

3,191.5

3,191.5

54

JSCo Automated Systems Research Institute

Moscow

science

75

749.0

0.0

561.7

561.7

JSCo First Freight Company

Moscow

transport

100

85,652.4

0.0

85,652.4

85,652.4

JSCo Railway Commercial Company Moscow

commerce

100

8,077.3

0.0

8,077.3

8,077.3

57

JSCo TransCreditBank

Moscow

banking

75

7,930.4

0.0

5,947.8

5,947.8

58 59

JSCo Gudok Newspaper

Moscow

social

100

50.0

0.0

50.0

50.0

JSCo High-Speed Mainlines

Moscow

transport

87

0.0

0.0

0.0

0.0

JSCo Yakutia Railways

Yakutsk

transport

50

0.0

0.0

0.0

0.0

JSCo Don-Prigorod

Rostov

transport

74

0.1

0.0

0.1

0.1

156,018.9

41,393.3

110,499.9

151,893.2

40 41

55 56

60 61

Total

The most significant of the above companies are: – JSCo First Freight Company (Pervaya Gruzovaya Companya) – JSCo TransContainer – JSCo Roszheldorstroy – JSCo Railway Commercial Company – JSCo TransCreditBank – JSCo Refservice – JSCo All-Russian Railway Research Institute – JSCo ELTEZA

– – – – – – – – –

JSCo JSCo JSCo JSCo JSCo JSCo JSCo JSCo JSCo

Kaluga Plant (Remputmash) Arena-2000 RailTransAuto Krasnoyarsk Electric Rail Car Repair Plant Roszheldorproekt Vladikavkaz Railcar Repair Plant Moscow Locomotive Repair Plant Roslavl Railcar Repair Plant Barnaul Railcar Repair Plant


71

Annual Report JSC «RZD» 2007

Affiliated companies of JSCo «Russian Railways» (charter-capital interest of from 20% to 50%) No.

Company

Line of activity

Type of invest- Invested as of De- Capital ment cember 31, 2007 share, % (mln. rubles)

1

CJSCo Railway Implementation Center (Chelyabinsk)

manufacturing

stocks

0.098

49

2

CJSCo October Railway Implementation Center

manufacturing

stocks

0.098

49

3

CJSCo Railway Implementation Center (Kaliningrad)

manufacturing

stocks

0.098

49

4

CJSCo Railway Implementation Center (Nizhny Novgorod)

manufacturing

stocks

0.098

49

5

CJSCo Railway Implementation Center (Voronezh)

manufacturing

stocks

0.098

49

6

CJSCo Railway Implementation Center (Samara)

manufacturing

stocks

0.098

49

7

CJSCo Railway Center for the Implementation of New Methods and Technologies (Novosibirsk)

manufacturing

stocks

0.098

49

8

CJSCo Krasnoyarsk Railway Implementation Center

manufacturing

stocks

0.098

49

9

CJSCo Railway Implementation Center (Chita)

manufacturing

stocks

0.098

49

10

CJSCo Railway Implementation Center (Khabarovsk)

manufacturing

stocks

0.098

49

11

CJSCo Railway Center for the Implementation of New Methods and Technologies (Yaroslavl)

manufacturing

stocks

0.098

49

12

CJSCo Kaliningrad-TransTeleCom

investment

stocks

0.999

49,95

13

CJSCo Transport Technologies

science

stocks

10

49

14

CJSCo TransTeleCom Center

manufacturing

stocks

0.999

49,95

15

CJSCo TransTeleCom-NN

manufacturing

stocks

0.999

49,9

16

CJSCo Southeast TransTeleCom

manufacturing

stocks

0.999

49,95

17

JSCo Central Passenger Company

transport

stocks

0.148

49,3

18

CJSCo TransTeleCom-Chita

manufacturing

stocks

0.999

49,95

19

CJSCo Caucasus-TransTeleCom

manufacturing

stocks

2

47,8

20

CJSCo Apsat Coalmining Company

manufacturing

stocks

0

48.6

21

CJSCo Rascom

manufacturing

stocks

7

46

22

CJSCo Oktransvneshterminal

manufacturing

stocks

0.025

45

23

JSCo Yamal Railway Company

manufacturing

stocks

5

45

24

CJSCo Industry Center for the Introduction of New Methods and Technologies science

stocks

0.391

43.43

25

JSCo Magistral Railcar Design Center

manufacturing

stocks

0

40.45

26

CJSCo SamaraTransTeleCom

manufacturing

stocks

0.8

40

27

CJSCo SibTransTeleCom

manufacturing

stocks

0.122

40.67

28

CJSCo SakhalinTransTeleCom

manufacturing

stocks

0.798

39.9


72

Business Priorities

29

CJSCo TransTeleCom-DV

manufacturing

stocks

0.798

39.9

30

JSCo Baikal Waters

manufacturing

stocks

0

34.9

31

CJSCo BaikalTransTeleCom

manufacturing

stocks

0.7

35

32

JSCo Trans-Baikal Mining Company

manufacturing

stocks

0

34.29

33

CJSCo Uraltrans Joint Venture*

manufacturing

stocks

0

33.33

34

CJSCo Southern Region TV Television and Radio Corporation

social

stocks

0

31.36

35

CJSCo Railway Implementation Center (Rostov-on-Don)

manufacturing

stocks

0.062

31

36

LLC Industry Center for the Development and Implementation of Information Systems

science

доля

0.003

26

37

CJSCo Talgorus

manufacturing

stocks

0.52

26

38

CJSCo Yuzhural-TransTeleCom

manufacturing

stocks

0.5

25

39

CJSCo Moscow Railway Implementation Center

manufacturing

stocks

0.05

25

40

CJSCo Railway Implementation Center (Saratov)

manufacturing

stocks

0.1

25

41

CJSCo Railway Implementation Center (Irkutsk)

manufacturing

stocks

0.05

25

42

CJSCo Russian Troika

transport

stocks

236

25

43

CJSCo St. Petersburg Teleport

manufacturing

stocks

0.25

25.01

44

CJSCo SeverTransTeleCom

manufacturing

stocks

0.504

25.2

45

CJSCo VolgaTransTeleCom

manufacturing

stocks

0.15

25

46

CJSCo Ekza

manufacturing

stocks

0.371

24.73

47

CJSCo Ural Mobile Networks

manufacturing

stocks

0.144

25.1

48

CJSCo Zap-SibTransTeleCom

manufacturing

stocks

0.502

25.1

49

JSCo Caucasus Sea Ferry Service*

manufacturing

stocks

0

25

50

JSCo Zabaikalstalinvest Trans-Baikal Mining and Metallurgy Enterprise

manufacturing

stocks

100

25.1

51

CJSCo Translease Leasing Company

finance

stocks

0.375

25

52

CJSCo Central Information and Technical-Economic Research Institute-IS

science

stocks

0.012

24

53

CJSCo Trans-Baikal Railway Joint Stock Insurance Company*

insurance

stocks

0

22.19

54

LLC Southeast Express Editorial Office*

manufacturing

share interest 0

50

55

LLC Bombardier Transportation (Signal)

science

share interest 1

36

56

JSCo «Russian Railways» Trading House

manufacturing

stocks

2

19.9

Total

ххх

ххх

376

ххх


73

Human Resources The Company’s human resource efforts in 2007 centered on realizing the Company’s personnel policy, as set forth in the functional strategy for the development of human resources and the functional strategy for quality management. The main efforts of the human resources department and human resources services and sections of railways, functional branches and structural subdivisions were focused on: – providing JSCo «Russian Railways» with professional staff in all lines of activity – using employees more efficiently – motivating employees to work efficiently – enhancing the training system for managers, specialists and employees in primary occupations – preparation of a reserve of managerial personnel – working with youth as a primary source of new managers and specialists The staffing level for primary occupations in structural subdivisions of the railways stood at 98.3% of the plan as of January 1, 2008 (98.8% in 2006). There were 106,200 new hires in 2007 (106,600 in 2006), including 29,300 in locomotive subdivisions (16,900 assistant engineers) and 41,700 in track subdivisions, including 27,800 linemen. Measures were taken to strengthen Company management: 5 railway directors and 3 first deputy directors were named as well as 5 chief engineers, 30 deputy directors, 80 service heads and 17 division heads. 430 managers and specialists were appointed by Company order. Staff turnover on the railways stood at 10.8% in 2007 – up 2.7% from 2006. Turnover on the Kaliningrad, Moscow, Northern, North Caucasus, Kuibyshev and Sverdlovsk railways considerably exceeds the network average. Staff turnover was substantially higher in the railcar, track and transport areas. By primary occupation, turnover was up among assistant engineers of electric and diesel locomotives, linemen and railcar repair workers. New directions in 2007 included the following: – 254 Company managers received training in quality management (cascade level 1–3), 4,000 employees received training in corporate management, 3,000 in marketing and 4,500 in information technologies; – The Company expanded its cooperation with institutions of higher education: the Company sent 4 employees for training to the Plekhanov Economic Academy, 8 to the State University of Management and 10 to St. Petersburg State University. A group of 19 students was additionally formed at the Moscow State Institute for International Relations for training in “International Transport and Logistics”. 72,100 managers and specialists (64,800 in 2006) received retraining and upgraded their qualifications, including

Annual Report JSC «RZD» 2007

over 4,000 from the replacement reserve for top management positions in structural subdivisions. 46 employees were retrained at the Academy of National Economy under the Government of the Russian Federation, including 15 in the program Modern Problems of Corporate Management in Rail Transport: Building an Efficient Holding Company, 15 in Corporate Management in Rail Transport: Building a Modern Logistics Company and 16 in InnovationBased Development of JSCo «Russian Railways». A group of 30 specialists in the Company’s administration received training in the Company Risk-Management System program and 25 managers in the Corporate Director program under the auspices of the State University–Higher School of Economics. To study the experience of foreign rail transport companies, some 500 managers and specialists were trained abroad in 2007 (122 managers in 2006) (in the US, Germany, France, Spain, Sweden, Canada, Finland, the United Kingdom, China, Japan and South Korea). These included managers and specialists in the areas of locomotives, railcars, labor protection and industrial safety, accounting, finance, treasury, tracks, human resources and the Federal Passenger Directorate. Some 61,000 regular employees were trained (59,300 in 2006), and around 159,000 (160,800 in 2006) upgraded their qualifications. The training of locomotive crews was a major focus of attention. In connection with growing rail traffic, technical schools, training centers and other educational institutions trained 6,980 locomotive engineers and 5,139 assistant engineers – up 22% from 2006. To train regular employees, new educational divisions were opened in 2007 on the West Siberian and Sverdlovsk railways (a technical school in Omsk and a training center in Tyumen). To strengthen the material and technical facilities of railway technical schools and training centers, 691.6 million rubles (600.0 million in 2006) in investments were utilized in 2007, including 118.6 million rubles to reequip the training labs of technical schools and training centers with modern equipment. By presidential decree, a new state medal “For Railway Development" was created to mark the 170th anniversary of Russian rail transport and awarded to 325 Company employees. By order of JSCo «Russian Railways», an anniversary pin “The Russian Railways Are 170” was created and awarded to over 4,500 employees. Over 11,800 Company employees and non-employees (6,800 in 2006) received some sort of award, including:


74

Business Priorities

– 536 (220 in 2006) received state awards; – 465 (355 in 2006) received awards from the Russian Ministry of Transport; – over 10,800 (6,300 in 2006) received JSCo «Russian Railways» awards, of which 310 (213 in 2006) received the Company’s highest award – Honored Railway Worker of JSCo «Russian Railways».

Social sphere The creation of favorable social conditions for employees is a key objective of the Company’s social development in contemporary conditions. In 2007 social services provided by JSCo «Russian Railways» included: – 270 non-state health-care facilities – 323 non-state educational institutions (preschools, boarding schools, general-education schools); – 888 social facilities (cultural and sports facilities, children’s recreation camps, children’s railways, sanatoriumdispensaries, holiday and tourist centers, public amenities). Losses from social services came to 3.2 billion rubles – 3.4% below the level of 2006. To reduce the financial burden on the Company, the possibility of selling, renting, reorganizing or writing off certain social facilities or turning them into municipal property is being considered. At the same time, it is essential to retain social facilities in regions where railway companies form the core of the local economy, since the loss of such facilities would lead to an increase in social service costs. One key objective of the Company’s development strategy is the transition from financing individual social facilities to financing industry orders in order to reduce losses, improve cost recovery and stimulate the facilities’ own commercial activities. For these purposes, social income and expense budgets for 2008 envisage loss-free operations of health-care and children’s recreation facilities. So that social facilities will be better able to pay for themselves, it is planned to expand the list and increase the quantity of paid services provided to outside organizations and individuals and to bring the cost of services into line with the expenses involved in providing them.

Development of the social sphere The Company’s collective agreement – first concluded with the industry trade union in 2005 in connection with the formation of JSCo «Russian Railways» – is a legal docu-

ment regulating the Company’s social and labor relations. The agreement plays a key role in ensuring the stable work of labor collectives, promotes effective industry development and reform and constitutes the basis for collective agreements at Company branches. In 2007 some 75 billion rubles were utilized in meeting obligations under the agreement (excluding subsidiaries and affiliates that have separated from the Company), including 59.4 billion rubles on the railways. The social package (including recreation in holiday centers and sanatoriums, health care and other social guarantees) averages 34,900 rubles per employee per year and 6,400 rubles per non-working retiree. Company employees and retirees are provided with medical care, including a corporate system of voluntary medical insurance, sanatorium and resort treatment, preferential prices for household fuel, one-time rail passes for free travel in passenger compartments and an annual pass for suburban trains. Pursuant to a decision of the Company’s board of directors, the All-Russian Industry Association of Railway Employers was formed in June 2007. With the involvement of the Russian Union of Railworkers, an industry agreement of railway employers was prepared and approved by the Company’s management board. The agreement will make it possible to establish general principles for the regulation of social and labor relations at railway enterprises, taking into account the economic potential and specifics of economic relations in constituent entities of the Russian Federation. A number of documents of social nature were signed regulating the operations of subsidiaries and affiliates. Under the collective agreement for 2008-2010, the Company is to provide employees of subsidiaries and affiliates that it creates with social guarantees of at least the amount stipulated by the collective agreement for a period of one year after the charter capital is formed. Subsequently, each subsidiary’s social payments should be made in accordance with its performance.

Housing program The Company is promoting a housing policy designed to consolidate personnel and improve housing conditions – above all, for young employees and members of their families. In 2007 Company employees were granted subsidized mortgage loans of 6.6 billion rubles, improving housing conditions for some 5,800 families of railworkers – up 30% from the level of 2006 and 2.5 times higher than in 2005.


75

In addition, some 200 young families received approximately 43 million rubles in corporate support for partial repayment of mortgage loans in connection with the birth of children. Ninety families of employees with three or more minor children were granted non-repayable subsidies of 66 million rubles to cover up to 70% of the cost of housing purchases.

Health care JSCo «Russian Railways» has an effective system of health and medical care for employees and their families, offering a full range of medical services, including a system of mandatory and voluntary health insurance. Special attention is given to medical care for employees and retirees living at remote stations and branch lines. For these purposes, three mobile consultation and diagnostic facilities were created (honored in 2006 with a special government award) as well as medical railcars that today service over 4 million patients in 63 regions. In 2007 automated systems for pre-run medical screening of locomotive crews were introduced on all railways. The purpose of such systems is to identify crew members who present a health risk. In cooperation with the administration of Krasnoyarsk Territory, the mobile Doctor Voino-Yasenetsky–St. Luke Consultation and Diagnostic Center was set up. A similar project is currently being developed with the administration of Sverdlovsk Region. A Center for Cardiac and Arterial Surgery was opened at the North Caucasus Railway Clinical Hospital (Rostov-on-Don). The center is to handle up to 700 heart operations each year. In addition to railworkers, residents of the Southern Federal District will receive medical treatment there as well. At Central Hospital No. 4 in Ruza District, Moscow Region, a rehabilitation center was opened – a treatment facility fundamentally new to Russia. The center is designed to restore employees’ health by means of physical therapy. In 2007, medical facilities were supplied with equipment for medical examination boards, rehabilitation centers, psychophysical centers on railways and diagnostic equipment. In addition, such high-tech innovative equipment as MR scanners, angiographic complexes and CT scanners were acquired. Sanatorium and resort treatment, rehabilitation and treatment for Company employees, members of their families and non-working retirees take place at industry health centers, including 16 central sanatoriums and 62 railway sanatorium-dispensaries.

Annual Report JSC «RZD» 2007

In 2007 over 122,000 Company employees, members of their families and non-working retirees vacationed and received courses of treatment. In allocating sanatorium and resort vacations, special consideration is given to employees directly responsible for railway traffic safety.

Youth policy The effectiveness of the Company’s operations and management is a factor, above all, of its human potential, timely reorganization and innovation. International practice shows that young employees are the most consistent source of initiative in reorganization, retooling and the introduction of new methods. In 2006 the Company adopted the JSCo «Russian Railways» Young Employees target program (2006-2010) to create conditions in which young employees can achieve and benefit from the best traditions of professional development and patriotic and moral education. The program's conceptual foundation is a solution involving greater personal competitiveness among young employees. Young employees should account for 25% of Company employees by 2010, and they should be 20% more satisfied with their socioeconomic position in the Company, while maintaining an average 5-7% rate of growth in labor productivity. Company branches do important work in selecting promising young people with leadership qualities and contributing to their development. In 2007 JSCo «Russian Railways» held over 30 major youth events throughout the country. A key event, capping the Company’s work in this direction for the year, was the Russian Railways Youth Forum, held in Moscow from September 27 through October 1, 2007. The Moscow forum has become a venue for stimulating young employees. The forum included presentations of specific projects specially developed by young employees to be used in achieving the Company’s goals. Forum participants saw that the Company’s youth policy is not just pretty words and long pages of reports, but real work that they can enter into and excel. The most popular youth program is Housing for Young Employees (84.07%) as well as Healthy Lifestyle (83.27%), Young Family (82.47%), Young Employee Health (78.13%), Young Employee Professionalism (75.47%) and Enhanced Cooperation with Educational Institutions (71.33%). Children’s railways are the primary facilities used in systematic occupational work with the adolescent age category. Today the JSCo «Russian Railways» system includes 24 children’s railways.


76

Business Priorities

To ensure the efficient operation of children’s railways, a draft Concept for the Development of Children’s Railways has been developed. In 2007, a children’s railway was built and put into operation in Kazan with the participation of the Republic of Tatarstan. At the initiative of Aman Tuleyev, Governor of Kemerovo Region, construction has begun on a children’s railway in Kemerovo. An international exhibition of the technical achievements of young railworkers, in which graduates of all children’s railways took part. Exhibition participants were awarded diplomas of the President of JSCo «Russian Railways». For the children’s category, a transition is being made to new learning programs involving additional education and the use of up-to-date methods and technologies in organizing children’s recreation. The Rails of the Future Children’s Camp on Russia’s Black Sea Coast has become the model used in developing standards for corporate children’s camps and a methodology of children’s treatment and recreation to be applied to all of the Company’s camps. This is the start of a major effort to systematize existing programs and create new programs for educational and occupational work with children. Over 97,500 children of Company employees were treated this year in the Mother and Child Program, and over 14,000 vacationed and recuperated on the Black Sea coast.

Veterans’ benefits Upon retirement, employees are paid a monthly award for conscientious work. Over 560,000 veterans receive monthly material assistance through the Honor Charitable Fund. More than 147,500 non-working veterans receive non-state pensions averaging 1,803 rubles through the Well-Being Pension Fund. In 2007 over 25,000 workers arranged to receive such pensions. Special attention is given to railworkers who are veterans of the Great Patriotic War and those who labored in the rear. Over 180,000 veterans receive additional material assistance each year in honor of Victory Day.

Sponsored and charitable activities

operated in 2007 in accordance with the charity plan approved by the Company’s management board. A total of over 1,600 requests made by individuals and organizations for financial assistance were considered at committee sessions. Based on the committees’ decisions, a total of 325 million rubles in financial assistance was provided in 2007 to over 800 individuals and more than 500 organizations. A key principal of the committees' work is a comprehensive evaluation of requests and the search for optimal means of satisfying them. When a charitable (sponsored) contribution could enhance the Company’s image, the involved subdivisions concluded agreements with the recipients of charitable (sponsored) assistance for advertising services and publicity. The Company’s financing of professional sports teams stimulates the development of sport among railworkers and their families as well as promoting a healthy lifestyle. The Company’s support for sports enabled it to play an active role in governmential social programs on both federal and regional levels. This in turn contributed to a positive public opinion of the Company’s operations. By financing professional athletic clubs in 2007, JSCo «Russian Railways» also supported children’s sports, inasmuch as these clubs sponsor physical education schools attended by railworkers’ children. Professional clubs financed by JSCo «Russian Railways» have achieved good results in both Russian and international arenas. Advertising campaigns involving these clubs during Russian, European and world championships enable JSCo «Russian Railways» to position itself as a socially oriented company, enhancing its prestige and image. According to the approved plan, financing for athletic clubs totaled over 2,080.5 million rubles. With the Company’s financial support, Lokomotiv Football Club held the Locoball 2007–Russian Railways Children’s Football Festival, and the basketball club held the Lokomotiv School League Competition. In 2007, 45 million rubles went toward the financing of the Lokomotiv Physical Education and Athletic Society. 38.0 million rubles were spent on athletic instruction at higher educational institutions and railway technical colleges.

In 2007 JSCo «Russian Railways» continued its charitable activities, further enhancing its image as a socially responsible company.

Agreements were signed with athletic clubs allowing JSCo «Russian Railways» to oversee the utilization of funds.

The Company’s committee for requests by social, religious and other organizations and the committee for requests for individuals’ personal needs (hereinafter, “committees”)

The Company strongly emphasizes physical education and sport. Today, the Company’s sports facilities accommodate some 45,000 employees and family members, over 2,000


77

athletic groups and 50 different sports. Over 3,000 mass sports events were held, involving some 200,000 participants. In 2007 Russian railworkers took first place in the general ranking of the Railworkers’ International Sports Union (USIC).

Transportation Safety Passenger and freight transportation safety is among the most important objectives of JSCo «Russian Railways». The following occurred in 2007: – 4 cases of freight car crashes (when performing shunting operations); – 71 cases when trains ran off the rails; – 21 cases when trains passed the red light signal. However, the Company’s radical measures substantially improved transportation safety, e.g. 1) total number of railway defects decreased by 3% in 2007 against the figure for 2006. 2) the relative number of defects per billion kilometer tons of work performed and presented was reduced by 12%. Compared to the 2006 figures, transportation safety violations were reduced by: – 43% when automatic rolling-stock couplers burst; – 26% when trains ran off the tracks during shunting operations; – 23% when cars were disconnected from passenger trains as they were running; – 11% when the green light signal changed to the red light signal in the course of passage. To reduce railway traffic safety violations, JSCo «Russian Railways» took radical operational, tactical and strategic steps. The fulfillment of the Plan for Enhancing Transportation Safety in JSCo «Russian Railways» was among the key factors of making transportation safer. In four years, JSCo «Russian Railways» invested more than 21 billion rubles, including 7.22 billion rubles in 2007, in implementing the Plan. In May 2007, the Company approved the functional strategy of ensuring the guaranteed safety and reliability of transportation, which is among the 16 functional strategies of JSCo «Russian Railways». This strategy is among the general directions of our Company’s activity that are determined by the Strategic Program for the Development of JSCo «Russian Railways». The strategy should be a document on the basis of which our Company's policy will be formed and followed in making transportation safe. The functional strategy envisages a comprehensive analysis of the current condition of technical resources, the

Annual Report JSC «RZD» 2007

operators’ training and technical documentation. It should show the overall extent of the risk for a certain railway region, thereby combining the said strategy with risk management strategy. The Strategy envisages the establishment of a situation center as the basic management instrument in the system of ensuring safety. Its basic objectives are: – prediction and calculation of risks and the determination of the places of their occurrence on the basis of the information on the condition of the technical resources and the modeling methods; – preparation of recommendations for the timely adoption of preventive control decisions to reduce risks arising from safety transportation violations; – effective management when organizing work in eliminating destabilizing factors as well as the after-effects of crisis situations and accidents. This strategy of ensuring guaranteed safety and reliability of transportation corresponds to the indicators of the general “Strategy of Development of Railway Transportation in Russia up to 2030”, among which is traffic safety. The Company goes to great lengths to stimulate railway employees who directly ensure traffic safety. In 2007, 173 employees who are directly responsible for transportation were awarded the badge “For Traffic Safety” for their big contribution to the prevention of railway accidents and for particular vigilance in precluding traffic safety violations which could have led to severe consequences. Last year, 172,500 employees of the Company were awarded a total amount of 2.0 billion rubles for ensuring the safety of work in 2006. According to the results of work in 2007, 164,600 employees were awarded as much as 3.0 billion rubles for those purposes. These outlays stimulate safety. Several norms were worked out, including those for cooperation between the railways and the branch offices, on the issues of railway traffic safety in connection with the structural reforms concerning train car facilities and long-distance passenger trains and the establishment of the Central Management Office for Freight Car Repairs and the Federal Passenger Management Office. The steps taken by the Company at this stage allow control over these branches to be maintained and their functional safety to be ensured. Certain work is being done in the Company within the legislative framework to establish subsidiaries and affiliates. The Regulation for Cooperation between JSCo «Russian Railways» and Subsidiaries and Affiliates on Train Traffic Safety was worked out and put into effect in October 2007. It determines the procedure of cooperation, the maintenance of a unified norm-related legal sphere and traffic safety, and warnings of transportation accidents


78

Business Priorities

and events at the infrastructural units of JSCo «Russian Railways». On September 3, 2007, JSCo «Russian Railways» and the Federal Service for Transportation Oversight entered into an agreement on cooperation in making railway traffic safety more effective. The agreement envisages the development of data exchange by using modern information systems, scientific methodological and advisory explanatory work in the sphere of traffic safety, licensing and certification on rail transport, participation in developing and considering the drafts of legislative and other norm-related legal and technical acts, and the organization of joint investigations of railway accidents.

Safety in operation The reports of the regional security centers indicate that in 2007 there were 1,941 instances of unlawful intervention in railway transport operations, being 104 instances (or 5.3%) more than in 2006, but 246 instances (or 11.2%) less than in 2005. A favorable fact is that the anonymous calls of a threat of a terrorist act and instances of detection of explosives decreased in 2007. However, such unlawful actions as the dismantling of tracks and placing of foreign objects on them, and unlawful actions taken in relation to railway transport workers increased in 2007. The following data describes the operating situation on the railways of Russia:

The agreement promoted the elaboration of norm-related acts in the sphere of traffic safety.

Statistical data on unlawful intervention in railway traffic in 2005 - 2007 No.

Unlawful actions

In 2005

In 2006

In 2007

1.

Recorded acts of unlawful intervention, total:

2,187

1,837

1,941

1.1

- explosions

8

2

3

1.1.1 - fatalities/ injured

1/11

-

1/0

1.2

- explosions prevented

7

8

1

1.3

- shooting

2

8

4

1.4

- dismantling tracks

142

88

159

1.5

- placing objects on tracks

623

608

714

1.6

- threat of an explosion of a railway unit

2

1

6

1.7

- detection of suspicious objects

878

595

567

1.8

- detection of radioactive and poisonous substances

2

4

14

1.9

- detection of explosives, arms and ammunition

236

289

261

2.0

- unlawful actions taken in relation to a railway transport worker

31

28

57

2.1

- picketing a railway and stopping trains

2

1

2

2.2

- anonymous calls of a threat of a terrorist act

256

205

153

Labor Safety The labor safety management system has been formed down the years in railway transportation. It is part of the Company’s management system, ensuring a comprehensive approach and a unified procedure for organizing labor protection at all levels. In 2007, JSCo «Russian Railways» spent a total of 7.6 billion rubles on labor protection measures, including 2.3 billion rubles on special clothing, special footwear and other means of protecting an individual.

Labor protection expenses of JSCo «Russian Railways» averaged 6,400 rubles per worker, and that of the whole railway network, 6,600 rubles per worker (in 2006, 5,800 rubles per worker). Mandatory social insurance against accidents at work and occupational illnesses is an important aspect of the economic mechanism of making the management of labor protection more effective. The social insurance fund was used to finance comprehensive medical examinations of employees in the amount of 223 million rubles.


79

The Company also continued to implement the Plan for Improving Conditions and Protecting Labor for 2005 – 2007. The Plan has the following sections: 1. Measures to reduce occupational injuries. 2. Measures to reduce occupational illnesses by improving working conditions. 3. Improvement of hygienic conditions. In 3 years, 5.1 billion rubles were spent on the measures envisaged by the Plan, including 1.5 billion rubles from centralized investments. In 2007, more than 700 WCs were built, reconstructed and repaired, and 5,800 heated places and dining halls were equipped. In addition, 1,100 locomotive drivers’ compartments were fitted out with more durable glass, and roughly a thousand drivers' compartments, with non-vibrating driver's seats. More than 240 air cleaning devices, about 200 sets of thermal screens, 103 industrial washing machines and 59 dry-cleaning machines for special clothing were supplied, and about 1,200 sets of technical Labor Safety devices against electric shock and for electrification, electricity provision, automatic equipment, telecommunication equipment, communications and computers were acquired. To improve the work in training employees on labor protection matters, 69 automatic training examination sets for labor protection and 257 training sets for giving first aid to victims were supplied. Although the Company spends considerable resources on the railway employees’ safety, injuries are unavoidable. However, the number of injured persons was reduced by 1% in 2007 against the 2006 figure due to the systematic work done by JSCo «Russian Railways». The main types of fatal accidents were when railway employees were hit by a running train, received an electric shock, fell off, or got into a railway accident. In the Company, work is being done to reduce the above risks. Alarm systems are being established to warn the teams working on railway tracks that a train is coming, and new know-how is being developed to repair and maintain the railways and the electric supply devices. The projected norms concerning the free supply of the means for protecting an individual include protective suits against the thermal influence of an electric arc, an electric current, etc. An inspection of workplaces to check working conditions is among the most important aspects of the work in improving working conditions and preventing occupational injuries and occupational illnesses. In 5 years, 520,000 railway workplaces were inspected. To plan the work in inspecting workplaces and in bringing them into conformity with the labor protection requirements, the railway offices and the Management Offices of JSCo «Russian Railways» approved the schedules for inspecting workplaces for 2008 – 2012 and the schedules for bringing the

Annual Report JSC «RZD» 2007

workplaces with eliminable harmful factors into conformity with the requirements of the norms for 2008 – 2010. The effect of hazardous or harmful production factors at the workplaces can be substantially reduced by using the means for individual protection. In 2007, 2.3 billion rubles were spent on acquiring special clothing, special footwear and other means for individual protection. The Company adheres to its Regulations for providing employees of the railway office branches of JSCo «Russian Railways» with the means for individual protection at all levels, including the trade unions. In 2007, the new Standard Rules for the Free Provision of Certified Special Clothing, Special Footwear and Other Means of Individual Protection to the Employees of Railways of the Russian Federation were drafted. Professional training and explanatory work concerning labor protection are among the preventive measures intended to reduce occupational injuries. Last year alone, over 13,000 executives and specialists from railway offices and other branch offices underwent labor protection training in training centers. Model Curricula and Programs for Training the Employees of JSCo «Russian Railways» in Relation to Labor Protection, which establish the requirements for the level of knowledge of each category of employees and executives, were developed and approved with a view to providing labor protection training. Currently, roughly 200 norm-related and organizationalmethodological documents concerning labor protection are applied in the Company. “Labor Protection Train Cars”, which are supplied with modern automatic training equipment, play an important role in training the employees of JSCo «Russian Railways» and checking their labor protection knowledge. Currently, all railways have such cars, which run according to the schedules approved by the chief railway engineers for work at the railway line stations and remote areas. The Management Office carries on work in improving and implementing the new forms of training by using data systems, modern training equipment and multimedia applications. Information on labor protection in the Company is regularly published in Russia-wide periodicals and in regional and local publications.

Environmental Protection In JSCo «Russian Railways», environmental protection activity is being carried on in accordance with the environmental protection legislation of the Russian Federation and the department environmental programs.


80

Business Priorities

The environmental policy of JSCo «Russian Railways» is aimed at forming a general strategy and principles of ensuring the environmental safety of the commercial activities carried on by the branches of JSCo «Russian Railways». The environmental policy of JSCo «Russian Railways» is based on the following: 1. use of effective resource-saving and environmentally safe know-how and environmentally safe materials; 2. enhancement of environmental safety, the investment appeal and competitiveness of JSCo «Russian Railways» versus other types of transport vehicles by: – reducing the discharge of noxious substances into the atmosphere; – reducing the discharge of contaminated sewage into surface water expanses; – reducing the amount of the production wastesformed; 3. rational use of natural resources; 4. reduction of the risk of accidents in technological production processes and when transporting hazardous freight and storing it in warehouses; 5. greater effectiveness when eliminating the environmental consequences of accidents; 6. stringent environmental demands made on the rolling stock, fuel, and the transportation infrastructure; 7. taking account of environmental factors when adopting management decisions; 8. ensuring production environmental control; 9. taking preventive steps to make the operation of the environmental protection equipment more effective, thereby precluding excessive atmospheric pollution; 10. use of standards of the series GOST (All-Union standard) R ISO 14000 in managing environmental-protection activities of JSCo «Russian Railways». In recent years, the transportation of freight and passengers has grown, while the amounts of discharges of pollutants into the atmosphere and the load on the environment have been steadily reduced. For instance, the discharge of noxious substances from stationary units into the atmosphere, the discharge of contaminated sewage into the surface water expanses, and the use of water for production purposes per unit of transport operations are being reduced by 9-15% annually. That is ensured first and foremost by introducing sectoral environmental programs and projects and by technical reequipment. The effect of the industry on the environment in 2007 versus 2006 is described by the following basic parameters: – discharges of noxious substances into the atmosphere were reduced by 12,500 tons and amounted to 145,100 tons; – discharges of contaminated sewage into the surface water expanses were reduced by 2.6 million cubic meters

and constituted 16.1 million cubic meters; – use of water for technical requirements was cut by 6,300 cubic meters and came to 80.9 million cubic meters; – 850,500 tons of waste out of the 2.7 million tons of production and consumer wastes formed were used and rendered harmless. Production environmental laboratories on railways are important in ensuring environmental safety and complying with environmental protection legislation concerning the organization of production environmental control. One of the main objectives of these laboratories is to inform the structural subdivisions of railway offices of the actual effect of their commercial activity on the environment so that preventive measures can be taken in time to reduce the technogenic burden on the environment. In 2007, discharges of contaminants into the atmosphere and water expanses as well as soil contamination were controlled by: – stationary units, i.e. 56 environmental laboratories, including 8 train car laboratories with a set of analytical equipment on them and 31 motor car laboratories; – mobile units (diesel locomotives), i.e. 121 environnemental control units. After engine repairs, all the diesel locomotives were necessarily tested at their sites for environmental purposes. At the motor vehicle junctions, the discharges of noxious substances by motor vehicles are controlled at the environmental control units. In 2007, the environmental railway laboratories made 309,800 analyses of the air, sewage and soil; 32,000 sources of discharges of noxious substances into the atmosphere were inventoried, 1,116 volumes of norm-related environmental documentation were worked out, and 3,668 permits for discharges of noxious substances into the atmosphere and the placement of wastes were extended at the environmental protection bodies. When contaminant discharges into the atmosphere were instrumentally measured, it became clear that the discharges at some units did not conform (being less) to the established limits, and therefore, by adjusting the environmental bills issued by the territorial bodies of the Federal Service for Environmental, Technological and Nuclear Oversight, the environmental payments were cut by 110.512 million rubles, and payment for the actual discharges was to be made. In 2007, the following was performed on the basis of the investment project "Ensuring Environmental Safety": – 13 environmental protection units were built, reconstructed and put into operation. 141 units for the purification of discharges of noxious substances into the atmosphere, additional purification of sewage and the rendering of wastes harmless were put into operation. As a result, the discharge of contaminated sewage will be reduced by 0.87 million cubic meters and that of noxious


81

substances into the atmosphere, by 1,300 tons, while 31,400 tons of production wastes will be rendered harmless in 2008; – 11 mobile environmental laboratories on the basis of the Gazel motor cars and 2 train car laboratories were supplied to the railways to ensure production environmental control and prompt visits to the places of extraordinary situations. Stationary environmental laboratories received 16 sets of special laboratory furniture and 273 units of analytical devices and measurement instruments; – 389 units of equipment (vacuum oil collectors on a motor vehicle or trailer, skimmers, blocking booms and tanks) were supplied to the railways to eliminate the accidental spillages of oil products. Although the discharges of noxious substances into the environment are being steadily reduced as a result of environmental protection measures, many issues are yet to be resolved: only 31% of the contaminants discharged into the atmosphere are trapped and rendered harmless, 32% of the sewage is purified at installations, and 29% of the wastes are rendered harmless and used in technical processes. The measures taken are not enough if account is taken of the more stringent demands made by the environmental protection bodies and if the technogenic effect on the environment is to be minimized and excessive environmental payments are to be reduced. It is necessary further to improve and develop the system of managing environmental protection activity in JSCo «Russian Railways» in respect of the structural transformations being made, and to increase the financial amounts used to carry out environmental protection measures.

Annual Report JSC «RZD» 2007


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Financial and economic results (Board of Directors report)


83

The Company's financial and economic achievements  Russia's favorable economic environment, which gave rise to a positive trend in freight transportation volumes, ensured profitability of JSCo «Russian Railways» operations (profitability in 2007 was 8.7%).  In 2007 the railways handled altogether 1,344.2 mln tons of freight – 33.8 mln tons or 2.6% more than in 2006.  The positive dynamics in freight forward tonnage secured a growth in freight turnover. In 2007, overall freight turnover reached 2,312.6 bln ton-km, a 7.7% increase as compared to 2006.  In 2007, the volume of passenger traffic was on the level of 174.1 bln passenger-km (97,9% year-on-year), including: long-distance service – 128.1 bln passenger-km (102.5%), suburban service - 46.0 bln passenger-km (87.0%). The decrease in the number of passengers carried in 2007 was due to the change in the procedure of granting reductions on suburban passengers to entitled categories of citizens (see income from passenger transportation).  The railway tariff growth index (108%) was in general lower than the price growth index (113.9%). Against the background of increasing goods prices, the railways' tariff policy contributed to lowering the transport component for the main categories of cargoes forwarded.  Revenue from freight transportation in 2007 was 754.9 bln, which is 96.9 bln or 14.7% more than in 2006.  As a result of optimizing terms of settlement and the cash flow management system, the financial cycle (turnover) was reduced by 4 days.  Based on instruction of the Government of the Russian Federation No. 640-r of May 21, 2007, the procedure of separate accounting for income, expenses and financial results by activities, tariff components was developed and approved by the Ministry of Transport of the Russian Federation Order No. 124 dated August 17, 2007.  The concept of separate accounting served as a basis for adopting a decision on the governmental level to compensate losses from long-distance passenger transportation in the amount of 10.9 bln.

Annual Report JSC «RZD» 2007

 The Company reconfirmed its credit rating, which is the highest attainable in the Russian Federation.  The Board of Directors of JSCo «Russian Railways» approved the establishment of 17 subsidiaries and associates, among them the First Freight Company, which was incorporated with a charter capital of RUR 85.7 bln.  In 2007, the net unconsolidated income of subsidiaries and associates grew by RUR 5.5 bln compared to 2006 (more than a two-fold increase) and reached RUR 10.1 bln.  Due to systematic efforts aimed at reducing losses from maintaining the social sphere, such losses decreased in 2007 by RUR 0.1 bln as compared to 2006.  The JSCo «Russian Railways» 2006 Annual Report was acknowledged to be one of the best along with 30 other annual reports in Russia.  5700 mortgage loans were issued in 2007 under the corporate support program.


84

Financial and economic results (Board of Directors report)

Financial results

The Company's net profit for 2007 was RUR 84.5 bln, showing a RUR 58.1 bln growth compared to 2006.

Indicator

UOM

2006 Report

2007 BoD Plan Report

% Report of plan

% Report of 2006 indicator

Passenger turnover

bln passenger-km

177.8

178.5

174.1

97.5

97.9

Freight turnover

bln ton-km

2148.0

2266.1

2312.6

102.1

107.7

Combined turnover

bln combined ton-km 2325.8

2444.6

2486.7

101.7

106.9

Total revenue

RUR bln

848.9

957.7

975.6

101.9

114.9

Total revenue from transportation

RUR bln

772.0

877.1

884.4

100.8

114.6

- Passenger transportation

RUR bln

114.0

128.3

129.5

100.9

113.6

of them long-distance

RUR bln

92.0

109.9

109.4

99.5

118.9

suburban

RUR bln

22.0

18.4

20.1

109.1

91.4

- Freight transportation

RUR bln

658.0

748.8

754.9

100.8

114.7

Revenue from other types of activities

RUR bln

76.9

80.6

91.2

113.2

118.6

Total expenses

RUR bln

778.2

895.1

899.0

100.4

115.5

Transportation expenses

RUR bln

709.8

822.7

819.4

99.6

115.4

- Passenger transportation

RUR bln

157.1

183.9

180.0

97.9

114.6

of them long-distance

RUR bln

113.2

133.8

132.2

98.8

116.8

suburban

RUR bln

43.9

50.1

47.8

95.4

108.9

- Freight transportation

RUR bln

552.7

638.8

639.4

100.1

115.7

Expenses related to other types of activities

RUR bln

68.3

72.5

79.6

109.9

116.5

Total operating profit

RUR bln

70.8

62.6

76.6

122.4

108.2

Profit from transportation

RUR bln

62.2

54.5

65.0

119.4

104.5

- Passenger transportation

RUR bln

-43.1

-55.6

-50.5

90.8

117.2

of them long-distance

RUR bln

-21.2

-23.9

-22.8

95.2

107.5

suburban

RUR bln

-21.9

-31.7

-27.7

87.5

126.5

- Freight transportation

RUR bln

105.3

110.1

115.5

104.9

109.7

Profit from other types of activities

RUR bln

8.6

8.1

11.6

142.8

134.9

Transportation cost

kop. per 10 km

305.22

336.52

329.50

97.9

108.0

Result from other and extraordinary operations

RUR bln

-11.6

48.7

52.4

107.6

-451.7

Profit before tax

RUR bln

59.2

111.2

129.0

115.9

217.9

Net profit

RUR bln

26.4

76.0

84.5

111.2

319.9

Key macroeconomic factors The following key macroeconomic factors affect the financial result of the Company: – Tariffs level for all types of transportation, which determine the Company's revenues; – Prices for raw materials and other similar assets pur-

chased, services acquired, provision of infrastructure services, repair and maintenance of rolling stock, etc., which determine the Company's expenses; – Taxation.


85

Tariff system Tariffs for freight transportation services on domestic and international routes (excluding transit). Freight railway transportation is a natural monopolistic type of activity and is subject to government regulation according to the Federal Law "On Natural Monopolies". Based on this Law, government bodies in charge of regulating natural monopolies determine (fix) prices (tariffs) or their maximum level. The federal executive body currently in charge of regulating tariffs for freight transportation services on domestic and international routes (excluding transit) is the Federal Tariff Service, whose statute was adopted by Decree No. 332 of the Russian Government dated June 30, 2004. Freight tariffs on Russian railways on domestic and international routes (excluding transit) are regulated by Tariff Regulation No. 1 (Statutory Price List No. 10-01) "Tariffs for Freight Transportation and Infrastructure Services Provided by JSCo «Russian Railways»", approved by Resolution No. 47-t/5 of the Federal Energy Commission (FEC) of the Russian Federation dated June 17, 2003 and registered by the Ministry of Justice of the Russian Federation on July 9, 2003 (Registration No. 4882). Tariffs for freight transportation services on domestic and international routes (excluding transit) are set in rubles. Since August 1, 2001, export and import (EXIM) rail traffic via Russian ports has been paid for on the basis of tariffs established for freight traffic on domestic routes (according to regulations set forth in Section 2, Price List No. 10-01). One of the main goals of state tariff regulation is achieving conformity of tariffs for different types of transportation and their unification. Since 2005, this goal has been achieved by differential indexing in accordance with Sections 2 and 3 of Price List No. 10-01. Tariffs for coal transportation have been unified since January 1, 2006. Tariffs for transportation of coal coke, peat and slate, non-ferrous metals ore and concentrate and their industrial products, automobiles and spare parts have been unified since January 1, 2007. Tariffs for freight transportation services. The tariff policy of the railways in the CIS countries for international freight transportation (hereinafter – "Tariff policy") is revised and adopted annually at the Tariff Conference of railway administrations – participants of the Tariff Agreement of railway administrations (railways) of CIS states and Estonia and is applied to freight forwarding:

Annual Report JSC «RZD» 2007

– from third countries to third countries by transit via railways of the CIS member states – from (to) CIS member-state(s) and the Estonian Republic to (from) (a) third country (countries) – in-between rail terminals of the CIS member-states Tariff rates are set on the basis of the International Rail Transit Tariff (ITT) and Unified Transit Tariff (UTT) denominated in Swiss francs, except for tariffs for transit container freight traffic that are denominated in US dollars. In coordinating the tariff policy for the next freight year, amendments related to the following are introduced: – changes in international freight tariffs ITT and UTT; – changes in the regulatory framework; – changes in the tariff level. The charges for traffic to/from China, Vietnam, the Democratic People's Republic of Korea and Mongolia are defined in accordance with UTT rules and take into account the CIS tariff policy. The charges for traffic to/from other countries are defined in accordance with ITT rules and take into account the CIS tariff policy. Based on Decree of the Federal Tariff Service No. 353-t/4 of December 9, 2006, registered by the Ministry of Justice on December 18, 2006 (registration No. 8626), from January 1, 2007, the ceiling levels of tariffs, payments and fees from Price List No. 10-01 have been indexed by an average of 1.08 times. At the same time, pursuant to Decree of the Federal Tariff Service No. 356-t/7 of December 9, 2006 "On setting exceptional tariffs for railway freight transportation for 2007" registered by the Ministry of Justice on December 18, 2006 (registration No. 8628), (as revised in accordance with FTS Decrees No. 106-t/12 of May 18, 2007 , No. 114-t/1 of June 05, 2007, No. 221-t/1 of September 4, 2007, No. 264-t/2 of October 23, 2007, No. 265-t/3 of October 23, 2007, No. 266-t/4 of October , 2007), the railway transport provides exceptional tariffs on over 40 positions. At the same time it should be noted that the increase in prices for some cargoes exceeded the average 2007 industrial price growth of 13.9% (average for the year).


86

Financial and economic results (Board of Directors report)

Volumetric share of cargoes transported under exceptional tariffs CARGO

2006

2007

Change

Coal

52.9%

53.7%

0.2%

Coke

11.7%

6.3%

-40.2%

Crude oil

32.8%

34.7%

3.8%

Petroleum products

2.3%

2.0%

-8.5%

Iron ores and iron-ore concentrates

0.0%

0.0%

13.1%

Non-ferrous ores and concentrates

19.4%

20.2%

9.4%

Ferrous metals and rolled products

6.1%

5.2%

-9.6%

Non-ferrous metals

28.4%

28.0%

4.9%

Timber

0.4%

0.8%

91.7%

Mineral construction cargoes

0.8%

1.1%

48.0%

Fertilizers

9.7%

13.5%

47.0%

Grains

0.5%

5.4%

1327.0%

Other cargoes

8.3%

11.0%

36.1%

Total volume of cargoes transported under exceptional tariffs, million tons

225.97

236.68

4.7%

2007 marked higher prices in the energy markets and the fertilizer market. So, for example, coke prices on the export market increased by 2.1 times, whereas for coal concentrate on the domestic market – by 62%. Throughout 2007, the railway tariff remained unchanged. At the same time domestic prices for coke grew by 2.06 times, representing higher profitability for private producers. A similar situation was characteristic for the fertilizers market. Price patterns for iron ore on the Russian market in 2007 were stable due to the practice of signing annual contracts at fixed prices.

estate, the need to realize the state Affordable Housing program. The profitability of oil companies remained on the same level, as 2007 saw repeated increases in oil and petroleum products duties, which depend on global prices. With railway tariffs remaining unchanged throughout 2007, ferrous metal prices rose by 1.21-1.33 times depending on the goods.

Higher grain prices are due to the fact that global food reserves are currently at the lowest level in the past 15 years. Besides, more grain is now used for the production of biological fuel.

The railway tariff growth index was in general lower than the price growth index. Against the background of increasing goods prices, the railways' tariff policy contributed to lowering the transport component for the main categories of cargoes forwarded.

A steady growth of cement prices is caused by a deficit of production capacities, high demand from construction companies, which is related to expanding residential construction due to a robust consumer demand for real

In 2007, transportation in general purpose freight stock dropped by 5.3% as compared to 2006. This concerns mainly expensive goods: non-ferrous and ferrous metals, oil and petroleum products, fertilizers.

Increase of customs duties for certain transported cargoes Cargo

Export customs duties increase Dec. 2007 to Jan. 2005

Export customs duties increase Dec. 2007 to Jan. 2007

Coal coke

Unchanged (=0)

Reduced to 0

Round timber

Increased by 4 times

Increased by 2.5 times

Sawn timber

Reduced to 0

Reduced to 0

Crude oil

Increased by 4.02 times

Increased by 1.85 times

Petroleum products

Increased by 3.48 times

Increased by 1.77 times

Grain Wheat

Set at 10% in December 2007

Grain Barley

Set at 30% in December 2007


87

Annual Report JSC «RZD» 2007

Share of transportation by general-purpose freight stock. Influence of macroeconomic factors (see also "Transportation expenses"). CARGO

2006

2007

Change

Coal

82.1%

77.0%

-7.5%

Coke

86.3%

82.5%

6.0%

Crude oil

18.1%

11.0%

-40.5%

Petroleum products

42.7%

29.8%

-27.1%

Iron ores and iron-ore concentrates

49.4%

51.6%

8.5%

Non-ferrous ores and concentrates

34.5%

33.9%

3.5%

Ferrous metals and rolled products

67.5%

63.2%

-0.1%

Non-ferrous metals

72.0%

64.9%

-4.2%

Timber

67.3%

55.0%

-15.7%

Mineral construction cargoes

79.1%

72.1%

-0.7%

Fertilizers

31.9%

26.0%

-13.9%

Grains

97.3%

92.1%

15.2%

Other

59.7%

54.5%

-5.9%

Total volume of cargoes, million tons

937.02

887.11

-5.3%

Taxation

the Company is allocated for tax payments. A total of RUR 174.4 bln (up 2.4% from 2006) was accrued in 2007 in taxes and mandatory budget payments. Tax payments to budgets of all levels constituted RUR 179.2 bln in cash.

According to its tax accounting policy, JSCo «Russian Railways» determines income and expenses based on the accrual method. Practically every fifth rouble earned by

Tax and mandatory cash payments to budgets and social funds of the Russian Federation (RUR bln) Item

2005

2006

2007

(+/-) 2007 to 2005

(+/-) 2007 to 2006

% 2007 to 2005

% 2007 to 2006

Total taxes and levies

188.0

180.6

179.2

-8.9

1.4

95.3

99.2

78.9

52.7

41.0

-37.9

-11.7

51.9

77.8

Value added tax

72.2

41.9

32.7

-39.6

-9.3

45.2

77.9

Income tax

6.6

10.7

8.3

1.6

-2.5

124.6

77.1

Regional and local budgets

58.8

74.9

75.8

17.0

0.9

129.0

101.2

Corporate income tax

17.7

28.8

22.5

4.8

-6.3

127.2

78.2

Personal income tax

26.3

28.6

32.8

6.5

4.2

124.6

114.8

Property tax

13.4

16.1

18.6

5.2

2.5

138.7

115.3

Land tax

1.0

1.1

1.5

0.5

0.4

148.2

136.2

Mandatory social security funds

50.4

53.0

62.4

12.0

9.4

123.8

117.7

Unified social tax

48.9

51.7

60.9

12.0

9.2

124.6

117.8

Accident insurance fund

1.5

1.3

1.5

0.0

0.2

98.3

113.8

including: Federal budget of them

of them

including:


88

Financial and economic results (Board of Directors report)

The amount of tax cash payments in 2007 decreased by RUR 1.4 bln, or 0.8%, compared to 2006, which was due to a RUR 11.7 bln, or 22.2%, drop in tax payments to the federal budget. VAT. A reduction in VAT-related tax payments compared to previous periods was primarily due to a change in Russian tax legislation. Starting from January 1, 2007, the special procedure of recovering VAT on export operations was abolished. According to that procedure, a separate VAT declaration at the rate of 0% had to be submitted to the tax authorities, who audited it in house within 3 months thereof, and then passed a decision on the recovery of input VAT on export operations based on the results of the audit. Starting from January 1, 2007, VAT on export operations (at the rate of 0%) is recorded together with domestic VAT (at rates of 10%, 18%) in a single tax declaration, and its recovery bears a declarative nature. Besides, tax deductions in 2007 were higher due to an increase in fixed assets put into operation, according to the investment program of JSCo «Russian Railways». VAT at 0% relating to 2006 operations was reimbursed in 2007 from the federal budget in the amount of RUR 15.5 bln. VAT in the amount of RUR 17.1 bln was paid in cash to the budget. Thus, in 2007 VAT payments were offset for a total of RUR 32.6 bln. Corporate income tax payable to the federal budget and to budgets of the constituent entities of the Russian Federation amounted in 2007 to RUR 35.0 bln - RUR 4.2 bln, or 13.6%, more than in 2006. Actual payments to the consolidated budget amounted in 2007 to RUR 30.8 bln. The decrease in the amount of income tax paid with regard to the reporting period is related to a reduction of the income tax base for 2007 because of a RUR 4.3 bln increase in the depreciation premium due to the commissioning of fixed assets planned for commissioning in 2006. Besides, advance income tax payments made in Q4 2006 and totaling RUR 4.7 bln were offset in 2007 against current tax payments. While, according to the Tax Code of the Russian Federation, the nominal income tax rate in 2007 was 24%, the effective income tax rate of JSCo «Russian Railways» constituted 35.5%. In 2007, RUR 75.8 bln was paid to the budgets of the municipal units of the Russian Federation and to local budgets. Compared to 2005-2006, the increase in tax payments to regional and local budgets amounted to 29.0% (RUR 58.8 bln paid) and 1.2% (RUR 74.9 bln paid), respectively. This increase was due to higher property tax, land tax and personal income tax payments. The property tax in 2007 grew by 38.7% and 15.3% compared to 2005-2006, respectively. The RUR 252 bln

increase in the amount of tax in 2007 was due to the revaluation of fixed assets as of January 1, 2007, commissioning and modernization of fixed assets. The amount of land tax paid to the budget in 2007 was 48.2% higher than in 2005 and 36.2% higher than in 2006 due to new land plots recorded on the balance sheet, higher land tax rates imposed by some municipalities, as well as an increase in the value of land plots in some regions. 2007 was marked as well by higher contributions to mandatory social security funds – by 23.8% as compared to 2005 and by 17.7% as compared to 2006. Restructured tax liabilities. Pursuant to the Federal Law No.115-FZ dated July 07, 2003, Resolutions of the Government of the Russian Federation No. 699 dated October 1, 2001, and No. 603 dated September 29, 2003, JSCo «Russian Railways» is entitled to restructure its tax liabilities due to being the legal successor of federal railway organizations, whose property and property complexes have been contributed to the charter capital of JSCo «Russian Railways». Early repayment of restructured arrears in 2004, in 20052007 enabled JSCo «Russian Railways» to write off RUR 20.0 bln of restructured interest and penalties accrued in favour of the federal budget, budgets of the constituent entities of the Russian Federation and local budgets. The liabilities have been settled in full.

Revenue from all types of activity Total revenue from all types of activity in 2007 was RUR 975.6 bln (14.9% higher than in 2006) with the largest share belonging to freight transportation (77.4%). This type of activity has remained the most profitable over the past several years (profitability of freight transportation is 15.3%).

Revenue from freight transportation Revenue from freight transportation in 2007 was RUR 754.9 bln, which is RUR 96.9 bln or 14.7% more than in 2006. The main reason for revenue growth was the significant overfulfillment of handling volumes. Results of 2007 show significant structural changes in freight transportation, as compared to 2006. The strongest growth, both in volume and by revenue, was demonstrated by domestic transportation and by transportation of imported goods.


89

754.9 bln RUR

Freight transportation

20.1

bln RUR Suburban passenger transportation

109.4 91.2

bln RUR Other types of activities

bln RUR

Long-distance passenger transportation

Revenue from passenger transportation Revenue from passenger transportation in 2007 was RUR 129.5 bln. The target approved by the Board of Directors was fulfilled by 100.9% (revenue exceeded the target level by RUR 1.2 bln). Revenue from long-distance transportation was RUR 109.4 bln, which is 18.9% higher than in 2006; at the same time expenses amounted to RUR 132.2 bln. The Company incurred losses in the amount of RUR 22.8 bln, which is significantly lower than the target loss (by 4.8%) approved by the Company's Board of Directors. In 2006 a principal decision was made on the governmental level regarding the need to use budget funds to compensate losses from passenger transportation. This decision was formalized by Decree of the Government of the Russian Federation No. 207 dated April 7, 2007. In line with this governmental Decree, funds in the amount of RUR 10.9 bln were allocated from the federal budget to compensate JSCo «Russian Railways» losses from passenger transportation. This gave JSCo «Russian Railways» access to investment sources for the renewal of its passenger service fixed assets, and first and foremost, its rolling stock.

Annual Report JSC «RZD» 2007

1. A fewer number of passengers carried due to the change in the procedure of granting reductions on suburban commuters to citizens – beneficiaries of this social service. In 2007, such categories of passengers received single tickets for an unlimited number of rides regardless of the destination, valid for a period of one month – not more than one ticket for each destination. In 2006 seasonal tickets were issued for 1,2 or 3 months for an unlimited number of rides and destinations. 2. Expansion of suburban passenger transportation companies. Losses from suburban transportation amounted to RUR 27.7 bln in 2007 (not taking into account subsidies from regional budgets) against RUR 21.9 bln in 2006. Subsidies in cash from regional budgets of the municipal units constituent entities of the Russian Federation allocated to compensate losses from suburban tariffs amounted to RUR 1.9 bln compared to RUR 1.5 bln in 2006, i.e. grew by 23%. In average by regions, revenue from suburban passenger transportation (including subsidies in cash) covered 46% of related expenses.

Expenses related to all types of activity Total expenses of JSCo «Russian Railways» in 2007 amounted to RUR 899.0 bln, up RUR 120.8 bln, or 15.5%, from the previous year.

Transportation expenses Cost of transportation services Transportation expenses amounted to RUR 819.4 bln, up 15.4% from the previous year. At the same time, Company costs grew by 8.0%, which is lower than the industrial price growth rate (13.9%).

In 2007, JSCo «Russian Railways» fully met the assumed obligations to ensure transportation of passengers entitled to reduced tariffs, including both federal and regional beneficiaries.

The most significant increase compared to 2006 was recorded for other material costs (RUR 31.3 bln, or 50.1%), other expenses (RUR 12.8 bln, or 20.4%) and electric energy (RUR 7.9 bln, or 17.3%). The increase in other material costs occurred due to higher volumes of capital repairs performed by external contractors, and in other expenses – primarily due to tax and lease payments.

Revenue from suburban transportation in 2007 was RUR 20.1 bln, with the target exceeded by RUR 1.7 bln (+9.1%). However, generated revenue is RUR 1.96 bln (8.7%) lower than the level achieved in the previous year. Two reasons underlie the 2007 drop in revenue:

Structural changes brought about a change in the Company's expense structure by cost item. Thus, the share of expenses for materials fell from 16.0% in 2004 to 12.6% in 2007, whereas other material costs increased from 9.2% to 11.4% respectively.


90

Financial and economic results (Board of Directors report)

Besides, the trend of the recent years, with petroleum product prices growing faster than electricity tariffs, resulted in energy costs and diesel fuel costs practically matching each other, whereas 84.0% of the traffic volume relies on electric traction.

Based on 2007 results, labor productivity grew by 8.9% at JSCo «Russian Railways» in general. The average salary in the Company increased by 18.4% from the level of 2006 and reached RUR 17,506. Salary growth in real terms was 8.6%. Thus, the Company secured outstripping labor productivity growth rates.

Capital repairs of fixed assets Expenses related to the capital repairs of fixed assets in 2007 exceeded RUR 149 bln, up RUR 22 bln or 17.3% on the figure of the preceding year. The programs of rolling stock capital maintenance and repairs by branches, as well as by enterprises outside the Company structure, were accomplished as targeted. 21 thousand freight cars, 1,160 electric locomotives and 1,560 diesel locomotive sections, 3,706 passenger cars, and 840 electric train sections were repaired in 2007. In order to improve the quality of service provided to passengers both in long-distance and in suburban transportation, a large volume of capital repairs of passenger service facilities was conducted; over RUR 4.8 bln were spent for this purpose (in 2006 - RUR 3.1 bln). 11.8 thousand km of tracks were repaired in 2007, up 0.7 thousand km from the volume of track repairs in 2006. As in previous years, substantial capital repairs had priority. This enabled the Company to improve the appraisal by points of the main track compared to the previous year (network average as of January 1, 2007 - 42 points, as of December 31, 2007 – 39 points). Engineering structures were submitted to capital repairs for a total value of almost RUR 7.3 bln. (in 2006 – RUR 6.2 bln), the roadbed – for RUR 5.0 bln. (RUR 4.5 bln). Human Resources In 2007, the scope of work was carried out by a work force of 1,215 thousand people, of whom 1,057 thousand were engaged in transportation services. Compared to 2006 the work force engaged in all types of activities except those engaged in transportation services was reduced by 42.1 thousand people (3.2%) and in transportation services by 26.4 thousand people (2.4). To cope with the traffic volume the personnel of the core business groups was increased compared to 2006: locomotive crews (by 2,290 people or by 2.1%) and staff engaged in forming trains (by 302 people or by 1.1%). For other business groups (repairmen engaged in locomotive current repairs, electricians servicing the signals and interlocking facilities, freight cars maintenance and current repairs personnel and catenary system electricians) the number of personnel was reduced.

According to the Collective bargain agreement, salaries of the Company's personnel were indexed in 2007 in line with the consumer price growth. Over the past few years the Company has been providing incentives to employees for trouble-free work. In 2007, RUR 2 bln were allocated for these purposes, 172.5 thousand people received bonuses averaging RUR 11.6 thousand per person. Due to the introduction of the corporate labor compensation system for employees of JSCo «Russian Railways» branches and structural units, starting from April 1, 2007, the payroll fund was increased by 10%. The introduction of the corporate labor compensation system signified the creation of a principally new compensation mechanism based on its differentiation with due account for individual assessment of professionalism, performance and labor input of the workers, as well as processes taking place on the labor market. The main goals and purposes pursued in introducing the corporate labor compensation system were realized as follows: – the minimum monthly wage in the Company was significantly raised and brought closer to the legally established minimum subsistence level in the Russian Federation. The wage rate ratio of a first category worker at JSCo «Russian Railways» to the subsistence level in the Russian Federation increased from 50% to 90%; – wage rates and official salaries were raised on average by 56%, the guaranteed compensation part was increased to 60 %; – the level of labor compensation was raised for all categories of the Company's personnel; – conditions were created for providing targeted incentives for the personnel. Due to the positive financial and economic results of the Company's operations, about RUR 3 bln were allocated in December 2007 as bonuses for personnel demonstrating high labor productivity. Special attention was paid to ensuring the maximum possible labor compensation growth for personnel engaged in core business activities. Based on the results of 2007, the


91

labor compensation of railway personnel engaged in core business activities grew in the range from 15% for catenary system electricians to 21% for locomotive engineers. Despite the efforts to increase labor compensation, its growth rate in 2007 continued to drop as compared to the average dynamics throughout the country – from 58% in 2004 to 29.4% in 2007. On the one hand, such a situation is determined by positive processes in Russia's economy, including the development of manufacturing, services, creation of new jobs and as a result higher competition on the labor market. On the other hand, state regulation of railway tariffs limits the Company's costs, including payroll costs.

Annual Report JSC «RZD» 2007

However, due to JSCo «Russian Railways» implementing a program of measures aimed at costs optimization, transportation expenses were RUR 15.4 bln lower than the objective estimated level.

20.7%

Freight traffic indexation Growth rate of transportation costs

12.7%

13.9%

12.4%

10.3%

9.7%

10.0%

In 2007, the railway transport was 7th among key Russian industries by level of labor compensation and 9th by its growth rate.

8.0%

9.0%

9.3% 7.3%

7.7%

In 13 regions out of 76 the level of labor compensation is lagging behind, namely in Moscow, St. Petersburg, the Leningrad, Belgorod, Samara, Tomsk and Sakhalin Regions, Krasnoyarsk Territory, Republics of Komi, Tatarstan, Bashkortostan, as well as in the Khanty-Mansijsk and YamaloNenets Autonomous Districts. The labor turnover increased from 8.1% in 2006 to 10.8% in 2007 and for certain core occupations exceeded this level significantly. In general, the labor turnover in the Russian Federation is determined as a percent of drop outs to the total personnel. According to Rosstat, in 2007 this indicator for Russia in general was 31.3%, whereas for the railway network – 14.2%, which is more than two times lower.

2005

2006

Industrial output PPI Customer price index

+15.4

834.8

819.4

Thus, the dynamics of the labor turnover in the Company are in line with the processes characteristic for the country's economics in general.

+18.8

Price factor change and cost optimization Due to targeted cost savings, in the four years of JSCo «Russian Railways» operations, actual expenses of the Company for each reporting period were lower than the objective expense estimates for that period based on the actual MEDT (Ministry of Economic Development and Trade) social development indices for Russia, previous year expenses and actual transportation volumes.

2007

728.7

709.9

+57.5

675.8

618.3

2007 was marked by an upward adjustment of the projected indicators for almost all industries, whose products and services are consumed by JSCo «Russian Railways». According to the actual price indices and inflation rates, the Company's operating expenses in 2007 should have amounted to RUR 834.8 bln.

2005

2006

2007

Expenses Right under Russian Ministry of Economic Development and Trade indices


92

Financial and economic results (Board of Directors report)

This program includes such cost saving spheres and measures as: – improving planning and regulation of production processes; – optimizing the use of human resources and raising labor productivity; – recycling materials and spare parts; – recovering parts and components in the course of repairing and maintaining rolling stock, tracks and infrastructure; – introducing resource saving technologies (recovery of wheel pair tread surface, wheel pair flanges, axle-box bodies, bogie side frames, profile polishing of rails and track switches, build-up welding of track crossings and rail ends, etc.); – improving the procedure of placing orders based on tenders; – conducting a pricing policy aimed at curbing the growth of prices set by the suppliers of material and technical resources purchased by the Company.

Specific energy consumption, кWh/10 thousand ton.km gross

119.1

cost savings of

117.7 117.2 116.4

2005

2006

2007

Specific diesel fuel consumption, 1 kg of fuel equivalent/10000 ton.km gross

68.3

cost savings of

–0.8 bln RUR

67.8 67.1

65.8

2004

2005

2006

It should be noted that the increase in traffic volumes remains steadily ahead of the fuel and energy resources consumption growth, this being an indicator of the effectiveness of the Company's technical and organizational energy saving measures. Thus, with diesel-locomotive traffic volumes up 4.7% on the previous year, the consumption of diesel fuel grew only by 2.8%. A 1.9% reduction in the specific consumption of diesel fuel resulted in saving 58.6 thousand tons of this type of fuel for a total value of RUR 769.3 mln. Whereas electric traction traffic volumes increased by 6.1%, electricity consumption grew by 5.4%. Energy consumption per unit was reduced by 0.7%, thus 274.5 mln kWh of electricity for the amount of RUR 316.8 mln were saved.

Other types of activities –0.3 bln RUR

2004

The Company is taking consequent measures on reducing the specific consumption of fuel and energy for train traction.

2007

JSCo «Russian Railways» profit from other types of activities (OTA) in 2007 amounted to RUR 11.6 bln. The profitability of OTA in 2007 was 14.5%, which is 1.8 percentage points higher then in 2006. The reforming of the industry and the establishment of JSCo Transcontainer and JSCo Refservice in 2007, the expansion of operations of suburban companies on the Moscow and Oktyabrskaya Railways brought about changes to the structure of work and services classified as other activities. The spin-off of certain types of activities into vertically integrated branches had a positive impact on the growth of profit from other types of activities. For example, the profit from repair and maintenance of rolling stock was RUR 0.8 bln higher than in 2006. Due to systematic efforts aimed at reducing losses from maintaining the social sphere, such losses decreased in 2007 by RUR 0.1 bln in comparison with 2006. Measures aimed at increasing the efficiency of other types of activity will be further pursued in 2008. The introduced separate accounting by types of activity will serve as a methodological tool for this purpose. It will permit the Company to form the complete cost of work and services and as a result to determine the balanced level of prices for railway products, work and services, as well as to enhance the transparency and accuracy of accounting, thus in future enabling to adopt promptly economically feasible decisions on all managerial levels of the Company.


93

Other income and expenses

Annual Report JSC «RZD» 2007

The increase of the financial result from other income and expenses of the Company was also influenced by the sale of interest in JSCo Elgaugol and an unfinished access railway to the Elga coal deposit.

In 2007 the profit from other income and expenses was RUR 52.4 bln, which is RUR 64.0 bln more than in 2006.

In 2007, the Company continued transfering federal housing and utilities to municipalities and constituent entities of the Russian Federation, which helped reduce the Company's maintenance expenses by RUR 0.4 bln compared to 2006.

The increase in the profit from other income and expenses in 2007 was due to the revaluation of property contributed to the charter capital of JSCo «Russian Railways» subsidiary JSCo First Freight Company (Pervaya Gruzovaya Companya) established in 2007, as well as other subsidiaries.

At the same time, in 2007 there was an increase in the provision for doubtful debts created with respect to the debt of the Federal Agency for Health and Social Development for railway transportation of passengers entitled to reduced tariffs.

The growth in other income is also determined by the first ever compensation of losses in the income of JSCo «Russian Railways» resulting from state regulation of tariffs in long-distance passenger transportation in the amount of RUR 10.9 bln.

Other income and expense key items, RUR bln.

67.3 38.6 12.8 Excess of the monetary value of the contribution over the book value of the property contributed to the charter capital of the subsidiaries

Income

Budget financing

Expenses

6.8 Sale of assets

Penalties and reimbursement of losses caused

Provision for doubtful debts and other operations with amounts outstanding

Social policy-related costs (social infrastructure assets, Fund Honor (Pochet), Non-State Pension Fund "Blagosostoyanie", etc.)

Sale of assets

–10.5 –24.8 –35.7


94

Financial and economic results (Board of Directors report)

Assets and liabilities ASSETS

01.01.2007

31.12.2007

+/-

%

Intangible Assets

891.7

1,745.9

854.1

195.8%

Research and development expenses

300.3

230.0

-70.3

76.6%

Fixed assets

2,296,201.1

2,275,151.0

-21,050.1

99.1%

Construction-in-progress

164,863.3

220,657.0

55,793.6

133.8%

Income-bearing investments in tangible assets

1,059.9

2,724.4

1,664.5

257.0%

Long-term financial investments

53,713.8

162,743.4

109,029.6

303.0%

Deferred tax assets

12,105.1

13,795.0

1,689.9

114.0%

Other non current assets

30,578.6

35,158.7

4,580.1

115.0%

Total for section I

2,559,713.9

2,712,205.2

152,491.3

106.0%

Inventories

54,705.1

67,597.4

12,892.4

123.6%

Input VAT

25,230.6

10,650.5

-14,580.1

42.2%

Long-term accounts receivable

10,866.4

20,307.0

9,440.5

186.9%

Short-term accounts receivable

29,589.7

44,277.5

14,687.8

149.6%

Short-term financial investments

11,025.5

2,543.0

-8,482.5

23.1%

Cash and cash equivalents

7,174.0

3,515.3

-3,658.6

49.0%

Other current assets

7,255.6

10,276.0

3,020.3

141.6%

Total for section II

145,847.0

159,166.8

13,319.8

109.1%

TOTAL ASSETS

2,705,560.8

2,871,372.0

165,811.1

106.1%

LIABILITIES

01.01.2007

31.12.2007

+/-

%

Charter capital

1,535,700.0

1,541,697.8

5,997.8

100.4%

Additional capital

908,020.9

905,081.6

-2,939.3

99.7%

Retained earnings / loss for the reporting year

50,997.5

136,437.5

85,440.0

267.5%

Reserve capital

1,218.7

2,539.2

1,320.5

208.4%

Total for section III

2,495,937.1

2,585,756.2

89,819.1

103.6%

Loans and borrowings

46,129.8

41,382.1

-4,747.7

89.7%

Deferred tax liabilities

25,896.5

38,111.3

12,214.8

147.2%

Restructured taxes and levies payable

488.7

50.1

-438.6

10.3%

Restructured payables to extra-budgetary funds

2,278.2

0.0

-2,278.2

0.0%

Total for section IV

74,793.3

79,543.5

4,750.3

106.4%

Loans and borrowings

14,054.6

37,603.8

23,549.2

267.6%

Accounts payable

116,219.9

163,219.6

46,999.7

140.4%

Deferred income

4,556.0

5,248.9

692.9

115.2%

Total for section V

134,830.5

206,072.3

71,241.8

152.8%

TOTAL LIABILITIES

2,705,560.8

2,871,372.0

165,811.1

106.1%

I. Non-current assets

II. Current assets

III. Capital and reserves

IV. Non-current liabilities

V. Current liabilities


95

Annual Report JSC «RZD» 2007

Changes in fixed assets

The share of non-current assets in the total balance sheet assets is 94.5% represented principally by fixed assets and construction-in-progress, which demonstrates the Company's strong material potential. The majority of fixed assets is represented by facilities and transfer devices – 61.2%, transport vehicles – 14.9% and machinery and equipment – 12.0%, this resulting directly from the specifics of the Company's operations. Construction-in-progress is described in the Section Business priorities, Subsection Principal results of investment activities. Besides, 6% of non-current assets are represented by long-term financial investments (see Financial investments).

The share of active fixed assets in total fixed assets increased during the year by 0.34% demonstrating a positive trend providing for higher labor productivity and traffic volumes. Along with the 3.14% growth of the return on fixed assets ratio compared with the beginning of the year, this generally indicates a more efficient use of fixed assets. In the reporting year the fixed assets replacement ratio increased by 24.3%. This indicator characterizes investment efficiency. However, the movement in the ratio of accumulated depreciation to the replacement cost of fixed assets, which is called depreciation reserve ratio in financial analysis, indicates the need to invest more in fixed assets.

Current assets comprise 5.5% of total assets, with their share and absolute value growing throughout the period under review (see Working capital management). Equity comprises almost 90% of the Company’s liabilities and equity, thus characterizing a high degree of the Company's financial independence. RUR bln

Buildings

Facilities

Machinery and equipment

Transport vehicles

Fixtures and other fixed assets

TOTAL:

Cost (replacement cost) at January 1, 2007

331.0

1,732.6

296.5

431.0

11.3

2,802.4

Acquisition

14.2

97.7

66.3

87.9

2.4

268.5

Disposals

9.2

44.7

12.0

85.0

2.7

153.6

Accumulated depreciation

36.3

312.9

134.4

155.1

3.4

642.1

Net book value at December 31, 2007

299.7

1,472.7

216.4

278.8

7.6

2,275.2

2007

Deviation

At beginning of period

At end of period

+/-

%

Share of active fixed assets in total fixed assets, х

0.880

0.883

+0.003

+0.34

Depreciation reserve ratio,х

0.181

0.220

+0.039

+21.55

2006

2007

Return on fixed assets, х

0.414

0.427

0.013

+3.14

Fixed assets replacement ratio, х

0.074

0.092

0.018

+24.32


96

Financial and economic results (Board of Directors report)

Financial investments Breakdown of total financial investments, RUR bln Indicator

As of 01.01.2007

Acquisition

Disposals

As of 31.12.2007

Deviation

Long-term financial investments

53.7

118.9

9.9

162.7

109.0

Short-term financial investments

11.0

299.4

307.8

2.5

-8.5

33.3

28.7

35.2

4.6

Other long-term financial investments (assets in operational manage30.6 ment) Other short-term financial investments (assets in operational management)

1.0

11.5

11.9

0.6

-0.4

Total

96.3

463.0

358.3

201.0

104.7

including a breakdown of short-term financial investments (excluding assets under operational management), RUR thousand As of 01.01.2007

Acquisition

Disposals

As of 31.12.2007

Deviation

Total long-term financial investments: including:

53.7

118.9

9.9

162.7

109.0

Investments in the equity of other companies, total

41.8

110.9

0.2

152.5

110.7

Including: investments in subsidiaries and associated companies

41.6

110.9

0.2

152.3

110.7

Investments in Government securities

0.0

0.0

0.0

0.0

Corporate securities

0.2

0.2

0.0

Indicator

Loans granted

5.3

0.2

0.2

5.3

0.0

Deposits

6.1

7.8

9.5

4.4

-1.7

Other investments

0.3

0.3

0.0

Out of RUR 162.7 bln of long-term financial investments, RUR 152.5 bln are investments in the equity of other companies,

mainly subsidiaries and associated companies.

1.37

The participation of JSCo «Russian Railways» in subsidiaries and associates is described in the Section Business priorities, Subsection of JSCo «Russian Railways» and its participation in subsidiaries and associates.

1.08

Working capital management The Company conducts an aggressive operating and investment activity, which requires significant financial means. An active cash flow and working capital management policy is needed to cope with this. When describing the Company's measures on enhancing its net working capital management system, the following components of this system should be mentioned: 1) Inventory management; 2) Receivables collection management; 3) Payables settlement management; 4) Prepayment management; 5) Loans and borrowings management; 6) Cash balance management;

0.77 0.34

0.37

0.10

0.14

2005

2006 Current liquidity ratio Quick liquidity ratio Cash ratio

0.24 0.03 2007


97

In terms of liquidity and ability to pay the Company has to cope with two main tasks: – provide the necessary financing to meet the Company's dynamic requirements; – ensure that it is able to meet its liabilities.

Current assets structure

The Company follows the principle of maintaining the working capital on a level sufficient for the development of its business. In 2007, the strategy of managing working capital and its sources was in line with the Company's needs and consisted of a maximum reduction of the financial cycle in order to release cash as soon as possible and allocate it for the financing of current and investment activities, this being evidenced by reduced liquidity.

Inventories

Annual Report JSC «RZD» 2007

10.3 6%

Other current assets

67.6 42%

64.6 41%

Accounts receivable

Currently a shorter cash cycle and higher liabilities resulted in lower liquidity ratios (current liquidity ratio, quick liquidity ratio and cash ratio). However, this decrease represents a stage in the strategy of replacing productive assets, characterized by a significant increase of investment activity on the background of continuing growth of operating activity. The surge resulted in a changed approach to financing, aimed at reducing to the utmost the use of the Company's own funds, including available balances on current accounts, and resorting to additional borrowings.

Inventory management

Thus, a year-on-year increase of the investment program by 1.5 times, material costs by 17.6% and revenue by 14.9% resulted in a respective growth of such net working capital components, as inventory, settlements with debtors and creditors and loans and borrowings.

In 2008 we plan to increase the volume of track capital repairs from 11.8 thousand km to 15.6 thousand km (+32.2%), which required forming the necessary inventory stock, especially of track materials, already in 2007. Overall, the stock of raw materials and supplies grew by RUR 11.7 bln.

10.7 7%

Input VAT

3.5 2.5 2% 2%

Cash and cash equivalents

Short-term financial investments

Inventory availability and changes, RUR bln Balance at 01.01.2007

Acquisition in 2007

Disposals in 2007

Balance at 31.12.2007

Deviation (+, -)

54.71

1,374.38

1,361.48

67.60

12.89

raw materials, supplies, other similar assets

44.90

253.36

241.68

56.58

11.68

Rearers and fatteners

0.03

0.01

0.02

0.02

-0.01

Work-in-progress costs

1.54

1,075.33

1,075.57

1.30

-0.25

Finished products and goods for resale

1.50

18.32

19.24

0.57

-0.93

Deferred expenses

6.72

27.36

24.96

9.12

2.40

Other inventories and expenses

0.00

0.01

0.00

0.01

0.01

Inventory, total: including:

Accounts receivable 2007 was marked by an improvement of the financial cycle structure, both in terms of inventory management, and in terms of settlements. The turnover period of accounts receivable (excluding advances issued) was 10 days, which is 2.8 times lower than the turnover period of accounts payable (excluding advances received). The average an-

nual turnover periods of advances issued and advances received in 2007 constituted 12 days and 17 days respectively. Due to optimizing settlements with debtors and creditors, the financial cycle in 2007 was reduced to 38 days, which is 4 days less than in 2006. Investment activity requires significant prepayments in order, among others, to reduce future costs. In case


98

Financial and economic results (Board of Directors report)

Financial cycle of JSC Russian Railways for 2006-2007

2007 Turnover period of advances issued

12 days

Production cycle – turnover of inventories attributable to production, work in progress and finished goods

Turnover of accounts receivable

64 days

10 days Turnover of account payable

38 days

31 days

8 days

17 days

– 4 days

2006 Turnover period of advances issued

Turnover of advances received

Production cycle – turnover of inventories attributable to production, work in progress and finished goods

Turnover of accounts receivable

59 days

10 days

42 days

Turnover of account payable

24 days JSCo «Russian Railways» fails to advance the amounts required, counterparties (including lessors) will be forced under the pressure of the market to attract interestbearing credit resources, thus significantly raising the price of work and services for JSCo «Russian Railways». This, in turn, will require JSCo «Russian Railways» to seek additional sources of covering these expenses, one of them being higher transportation tariffs. In order to cut costs, in 2007 the approach to issuing advances to certain counterparties was altered. This, along with an increase in the investment program (150%) and growth of material costs (117.6%) resulted in a two-fold increase of advances issued, which at December 31, 2007 amounted to RUR 22.7 bln. Higher advances issued resulted in a general increase of accounts receivable as of December 31, 2007, by 1.4 times to RUR 64.6 bln. Of a total of RUR 22.7 bln advances issued as of December 31, 2007, RUR 11.9 bln are attributable to lease agreements, 3.5 times up on the beginning of the year (see also Leasing). Advances also include capital expenditure advances in the amount of RUR 4.5 bln, including a long-term advance of RUR 2 bln under a contract with Siemens, current prepayments for fuel and invento-

Turnover of advances received

14 days

ries in the amount of RUR 3.0 bln and about RUR 3.3 bln in other advances. On December 28, 2007, according to Sales-Purchase Agreement No. 1038 of December 26, 2007, between JSCo «Russian Railways» and The Breakers Investments B.V., JSCo «Russian Railways» paid for a blocking stake (25% + 1 share) in CJSCo Transmashholding, which resulted in RUR 9.3 bln in receivables. The Company will acquire title to the shares upon fulfilling precedent conditions stipulated in Joint Venture Agreement No. 1040 dated December 26, 2007. Other major debtors include counterparties working under social and federal programs, such as CJSCo Zheldoripoteka – RUR 3.4 bln and Federal Railway Agency Single Customer Group – RUR 5.7 bln (construction of the railway Berkakit-Tommot-Yakutsk – RUR 3 bln, Izvestkovaya-Chegdomyn – RUR 2.7 bln). The receivables arose due to equity participation of JSCo «Russian Railways» in the construction of these assets. Due to the fact that the work conducted is accounted for by the indicated counterparties, these receivables will be settled upon full completion of the construction.


99

Annual Report JSC «RZD» 2007

Days

29.0

Accounts Receivable Structure

0.6

Settlements on claim

23.0

21.0

Other accounts receivable

22.7

Advances issued

64.6 bln RUR

10.0

10.0

2006

2007 Turnover period of total accounts receivable (net of advances issued), days Turnover period of trade accounts receivable, days

0.1

0.3

Notes receivable

Wage settlements

5.2

For transportation

7.3 7.3

Taxes and levies

Total trade accounts receivable

In terms of managing accounts receivable, the following was achieved in 2007: – Overdue receivables were reduced from RUR 2.4 bln to RUR 2.0 bln and their share - from 5.8% to 3%; – The structure of the financial cycle was improved. Claims lodged and measures undertaken by the management on collecting trade accounts receivables in cash resulted in a reduction of the turnover period of this type of receivables to 23.4 days from 29 days in the previous year. Total trade receivables amounted to RUR 7.3 bln. Trade receivables include amounts owed for utilities services provided by JSCo «Russian Railways» branches in the amount of RUR 430 mln. These receivables are to a large extent overdue, and are mainly a result of the problem of collecting revenue from providing socially significant services (settlements with municipal institutions and individuals for utilities). The debt of municipal enterprises for utilities was reduced by 17% in 2007. However, in accordance with the Federal Law On Accounting stipulating that financial reporting should present fairly the financial position of a company, its reduction is due to the creation of a provision for doubtful debts. In its financial statements the Company shows accounts receivable less the provision for doubtful debts. According to the Company's accounting policy, accounts receivable that have not been settled within the contractual terms and are not secured by respective guarantees are considered to be doubtful debts.

One of the most significant issues is collecting receivables related to the transportation of passengers entitled to reduced tariffs. Thus, in 2007 the amount of revenue accrued for suburban passengers transportation entitled to reduced tariffs under federal law amounted to RUR 7.5 bln, exceeding by RUR 3.2 bln (67.8%) the value of services under the Agreement between the Federal Agency for Health and Social Development (Roszdrav) and JSCo «Russian Railways», which resulted in a respective increase of accounts receivable. Besides the receivables which arose in 2007, a provision for doubtful debts in the amount of RUR 8.6 bln was

64.6

40.5 22.7 11.3 7.0

7.3

01-Jan-2007

01-Jan-2008

Total accounts receivable, bln RUR

As of the end of 2007, accounts receivable related to transportation amounted to RUR 5.2 bln, RUR 0.6 bln (9.3 %) less than a year before.

Trade accounts receivable, bln RUR Advances issued, bln RUR


100

Financial and economic results (Board of Directors report)

created with regard to unsettled receivables of previous years (which arose before 2007) based on the Protocol of the Stocktaking Commission No. BM-27pr of March 31, 2008, concerning settlements with Roszdrav for suburban passengers’ transportation entitled to reduced tariffs. Receivables due from regions of the Russian Federation for railway transportation of regional passengers entitled to reduced tariffs by JSCo Russian Railway branches in 2007 amounted to RUR 0.5 bln. In most constituent entities of the Russian Federation this debt is current. As of December 31, 2007, total receivables due to JSCo «Russian Railways» from foreign railways amounts to USD 28.2 mln compared to USD 35.6 mln at the beginning of the year.

Accounts payable As of December 31, 2007, accounts payable amounted to RUR 163.2 bln, up RUR 47 bln from the beginning of the year. Overdue accounts payable comprised 0.06% of the total amount. The turnover period of accounts payable (excluding advances received) is 31 days compared to 24 days in the previous year. The growth of accounts payable compared to the beginning of the year was due to a planned increase of trade payables by RUR 21.4 bln, RUR 16.3 bln more in advances received for transportation and contributions to charter capitals of subsidiaries established in 2007. As a result of an almost 1.5-time growth of the investment program and a 17.6% increase of material costs as compared to 2006, trade payables grew by 49% to reach RUR 65.3 bln as of December 31, 2007.

Thus, in spite of higher payables in absolute terms, the turnover period of trade accounts payable increased compared to the previous year by 4 days only to reach 34 days. At the same time overdue trade payables were reduced by 9.7%. Longer turnover of accounts payable on the background of lower overdue liabilities was preplanned in order to reduce the credit burden related to interestbearing borrowings. Overdue trade payables amount to RUR 0.9 bln, or 0.06% of the total amount payable. Other accounts payable amounted to RUR 15.4, up RUR 5.0 bln on the beginning of the year. The most significant item in this category is payables to charter capitals (RUR 8.9 bln) due from the founder (JSCo «Russian Railways»). These payables represent the difference between the registered charter capital of the established subsidiaries and the assets actually contributed to the subsidiaries. The remaining assets have not been contributed yet because of the time-consuming and lengthy process of registering and transferring property. Information regarding subsidiaries, whose charter capital has not been fully formed, is provided in the Section Business priorities, Subsection Reform and Participation in Subsidiaries and Affiliates.

Loans and borrowings management ("Borrowing Program") Taking into account the situation on the capital markets and the structure of JSCo «Russian Railways» foreign currency revenues in 2007, JSCo «Russian Railways» debt

34.2

30.0

65.3

Accounts payable structure

55.3

44.0

Advances received for transportation services

65.3

Total trade accounts payable

163.2 bln RUR

01-Jan-07

15.4

Other accounts payable

3.5

Advances received

11.6 12.0

Current taxes

Current payables to personnel

01-Jan-08

Trade accounts payable, bln RUR Turnover period of trade accounts payable, days


101

maturities on borrowed resources (to 14 years maximum), as well as development of project financing – delivery of Siemens trains for the high-speed route Moscow-St. Petersburg – with the participation of CALYON Bank and Deutsche Bank (EURIBOR + 0.09%).

management strategy is based on budget and financial plan indicators and is aimed at: 1. Strengthening financial stability; 2. Providing an optimal structure of the Company's working capital; 3. Securing required sources of financing for investment activities; 4. Strengthening relationships with external creditors and investors.

As of today, project financing is the cheapest mode of raising mid-term and long-term funds, which is used to cover expenses under investment programs and assumes the targeted nature of raised funds – long-term projects with lengthy payback periods (including borrowings against foreign export insurance coverage).

The low level of JSCo «Russian Railways» debt burden (see table) compared to other Russian corporate borrowers, along with high credit ratings and their stable forecast, enabled the Company to pursue a more flexible borrowing policy, in terms of methods and sources of financing.

A shift in the maturity structure of JSCo «Russian Railways» debt towards short-term financing is temporary and related to the following reasons: 1) Attracting short-term "bridge" financing (up to 1 year) with its further replacement by long-term borrowings in the course of 2008 (including attracting a syndicated loan in 2008 in the amount of USD 1 bln and an inaugural issue of Eurobonds); 2) Waiting for favorable market conditions, including lower interest rates, for attracting long-term credit resources; 3) Transfer of debentures from the category of longterm to short-term (DRESDNER BANK AG – USD 300 mln) due to first tranche under this loan falling due in November 2008.

Following are JSCo «Russian Railways» debt burden ratios: 01.01.2007

31.12.2007

Total debt / EBITDA (x)

0.29

0.27

Total debt / Revenue (x)

0.07

0.08

Annual Report JSC «RZD» 2007

It should be noted that these ratios are at a safe distance from the financial covenants stipulated in the Company's existing loan agreements. The pursued policy resulted in a further decrease in the cost of raising and servicing borrowings, extension of Changes in loans and borrowings in 2007: Indicator

01.01.2007

Received

Repaid

31.12.2007

Deviation

Current liabilities

14.1

38.4

14.8

37.6

23.5

– Short-term loans

0.0

37.6

0.1

37.6

37.6

– Bonds 02 series with a maturity of 3 years

Of them: 4.0

0.3

4.3

0.0

-4.0

– Bonds 04 series with a maturity of 1.5 years

10.0

0.3

10.3

0.0

-10.0

Non-current liabilities

46.1

8.2

13.0

41.4

-4.7

– Long-term loans

16.7

6.1

10.9

11.9

-4.8

– Bonds 03 series with a maturity of 5 years

4.0

0.3

0.3

4.0

0.0

– Bonds 05 series with a maturity of 3 years

10.3

0.7

0.7

10.3

0.0

– Bonds 06 series with a maturity of 5 years

10.1

0.7

0.7

10.1

0.0

– Bonds 07 series with a maturity of 7 years

5.0

0.4

0.4

5.0

0.0

Total

60.2

46.6

27.8

79.0

18.8

including:


102

Financial and economic results (Board of Directors report)

Leasing

selecting leasing companies by holding open tenders.

Starting from 2003, the Company actively employs leasing, which permits it to accelerate the replacement of rolling stock and equipment. JSCo «Russian Railways» is a major consumer of the products manufactured by domestic transport machine building enterprises. By increasing the volume of fixed assets purchased under lease, JSCo «Russian Railways» is investing significant funds in the support and development of manufacturing capacities of domestic producers. Lease financing is effected in the framework of the Borrowing Program aimed at the complex development of the Company's financial resource base and the expansion of its presence on the Russian and international financial markets. JSCo «Russian Railways» has an extensive experience of

Since 2003, counterparties under lease contracts are annually selected on the basis of competitive bidding. In 2003-2006, the volume of lease contracts amounted to RUR 73.6 bln. In 2007, JSCo «Russian Railways» held two open tenders on selecting leasing companies for leasing rolling stock for a total amount of RUR 34 bln (VAT included). The winner of the 2007 tenders was CJSCo RG Leasing. Since 2003, JSCo «Russian Railways» managed to reduce the cost of lease financing from 16% to 7.33% p.a. with lease terms of 5 to 8 years. In 2007, the weighted average lease financing rate was 7.91% p.a. (similar indicator for 2006 – 9.63% p.a.) with the weighted average lease term of 6.5 years (in 2006 – 6.6 years).

Key indicators of the lease program in 2006-2007: Type of rolling stock

Freight cars

Rolling stock value (RUR bln, VAT included)

Number of rolling stock units

2006

2007

2006

2007

8.51

12.25

5,946

7,878

Passenger cars

13.28

11.99

694

602

Traction rolling stock

0

2.92

0

46

Motorized rail car rolling stock

7.84

6.81

619

492

Total

29.63

33.97

7,259

9,018

Ratings By its technical and financial parameters JSCo «Russian Railways» is one of the leading transport companies in the world. Considering this and taking into account stable fundamental indicators of the Company's creditworthiness, JSCo «Russian Railways» continues to enjoy high credit ratings assigned by leading international rating agencies (Moody’s, Standard & Poor’s and Fitch). The investment rating of JSCo «Russian Railways» reflects the Company's close connection with the state, as well as its balanced financial and general strategy. Moreover, the ratings show that the Company is efficiently managed, and the Russian railway reform is going in the right direction contributing to the dynamic development of this sector. At the same time JSCo «Russian Railways» is maintaining active contacts with rating agencies, creditors and investors. Regular annual meetings between the Company's management and representatives of rating agencies took place in December 2007.

Rating as of December 31, 2007 Moody's

Baa2 / Stable

Standard & Poor's

BBB+ / Stable

Fitch

BBB+ / Stable

Moody's

A3 / Stable

Standard & Poor's

BBB+ / Stable

Fitch

BBB+ / Stable

Financial Risk Management Within the framework of risk management, a concept for managing financial risks was worked out providing analysis, identification of key indicators, development of a management model and procedure for monitoring credit risks, liquidity risks, operational, property and market risks. Within the framework of implementing financial risk management, the following was developed and introduced:


103

– financial investment threshold calculation methodology – methodology of calculating thresholds for counterparties providing guarantees to JSCo «Russian Railways» for complying with tender procedures, as well as for due fulfillment of contract obligations. The introduction of the above methodologies will permit the Company to minimize the risk of a counterparty defaulting. Implementing liquidity risk management has permitted the Company to enhance the mechanism of high quality and flexible cash planning. The Company's insurance system established in the previous years received a qualitative boost in the current year – the mechanism from describing insurance risks to settling insurance cases was perfected, a limited list of documents to be presented in case of an insurance event was established, terms of paying out insurance compensation were reduced, and financial liability of the insurance company for untimely settlements was introduced. With the dynamic of insurance events per year remaining unchanged, the amount of insurance compensation increased and exceeded RUR 350 mln for the year. Automation of the Company's insurance system was completed, which will permit to maintain all required databases, interact efficiently with JSCo «Russian Railways» units and organize informative reporting. In terms of market risk management, the Company developed a solid legal, tax and methodological base for managing the interest rate risk arising from borrowings linked to a floating interest rate (Libor, for example), as well as the currency risk arising from the Company's revenues and borrowings in foreign currencies. The work carried out so far will help the Company to perform procedures on hedging its existing risks next year.

Annual Report JSC «RZD» 2007

Mortgage 5700 mortgage loans were issued in 2007 under the corporate support program. Documents regulating the corporate support program were amended, the general list of those seeking corporate support was broken down by categories of employees (including young specialists); starting from 2008, the total limit of funds allocated for mortgage subsidies provides separate limits for subsidizing different employee categories, as well as other amendments (see Section Business Priorities, Subsection Social sphere).


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Information about Interested party transactions


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In 2007, the Board of Directors of JSCo «Russian Railways» approved transactions which are qualified in accordance with Federal law On Joint-stock Companies as the transactions of interest: 1. Approval of acquisition of the shares in JSCo Kaluzhskiy zavod Remputmash. The parties of the transaction are JSCo Kaluzhskiy zavod Remputmash (seller) and JSCo «Russian Railways» (buyer). The subject of the transaction is 121,281 ordinary book-entry shares in bearer's name of JSCo Kaluzhskiy zavod Remputmash with the par value of RUR 1,000 per share. The transaction price is RUR 121,281,000. (Minutes No. 6, dated March 23, 2007) 2. Approval of acquisition of the shares in JSCo Ob'edinennye elektrotekhnicheskie zavody. The parties of the transactions are JSCo Ob'edinennye elektrotekhnicheskie zavody (seller) and Russian Railways (buyer). The subject of the transaction is 3,611 ordinary book-entry shares in bearer's name of JSCo Kaluzhskiy zavod Remputmash with the par value of RUR 1,000 per share. The transaction price is RUR 3,611,000. (Minutes No. 6, dated March 23, 2007) 3. Adoption of the decision on approval of the loan agreement between JSCo «Russian Railways» and JSCo Skorostnye magistrali. The parties of the transactions are JSCo Skorostnye magistrali (borrower) and Russian Railways (lender). The subject of the transaction is issuance of a loan at fixed rate in the amount of RUR 105,744,000 in accordance with the loan agreement. The price of the agreement is defined as the amount of RUR 105,744,000 stipulated therein. Miscellaneous terms and conditions: interest rate – 10.5%, maturity date – 30 June 2008, transfer of funds to the borrower's current account in accordance with the following schedule: RUR 68,937,000 – by 2 May 2007, RUR 18,404,000 – by July 2, 2007, RUR 18,403,000 – by 1 October 2007. (Minutes No. 11 of 28 May 2007) 4. Approval of the borrowing agreement between JSCo «Russian Railways» and JSCo Skorostnye magistrali. The parties of the transactions are JSCo Skorostnye magistrali (borrower) and Russian Railways (lender). The subject of the transaction is issuance of an earmarked loan (for land reclamation, registration of the rights to use the land plots allocated for construction of Moscow – Saint Petersburg high-speed railway in the name of RJSCo VSM as well as the buy-out of minority interests in RJSCo VSM and financial support thereof) by quarterly tranches as the stages of work are completed. Documents attesting to the need of receiving the next tranche and the earmarked use of earlier received funds are to be submitted by the borrower in accordance with the list adopted by the lender. The maximal price of the agreement is RUR 485,400,000, the maturity date is June 30, 2010. Interest rate is 10.5% per annum. For missing the dead-

Annual Report JSC «RZD» 2007

lines of principal and interest payments the borrower will pay the lender penalty at the rate of 0.06 % of the overdue amount for each day of the delay. (Minutes No. 12, dated June 28, 2007) 5. General agreement No. 2668/06, dated April 3, 2006, with supplements 1-5 thereto as well as draft supplement No. 6 under the title Rehabilitation of Railway Mga – Gatchina – Weimarn – Ivangorod and the Spur Tracks to the Ports on the Southern Shore of the Gulf of Finland. The client is JSCo «Russian Railways» represented by the head of DKRS (Directorate for Railway Rehabilitation), JSCo «Russian Railways» branch. The general contractor is SMT 1, branch of JSCo Roszheldorstroi. The term set for performance of work is from April 2006 till November 30, 2010. In accordance with supplement No. 6, the total cost of work under the agreement is RUR 4,237,115,648 (VAT included). (Minutes No. 14, dated August 31, 2007) 6. General agreement No. 2664/06-4 with supplements 1-5 thereto as well as supplement No. 6 under the title Organization of High-speed Passenger Transport by Rail from Moscow to Saint Petersburg. The client is Russian Railways represented by the head of DKRS, affiliate of JSCo «Russian Railways». The general contractor is SMT 1, affiliate of JSCo Roszheldorstroi. The term set for performance of work is from April 2006 till November 30, 2009. The total cost of work under the agreement in accordance with supplement No. 6 is RUR 3,050,467,424 (VAT included). (Minutes No. 14, dated August 31, 2007) 7. Approval of the agreements on lease of real properties owned by JSCo «Russian Railways» with JSCo Roszheldorproekt and JSCo Roszheldorstroi. The lessor is JSCo «Russian Railways». The lessees are JSCo Roszheldorproekt and JSCo Roszheldorstroi. The subject of the agreements is the lease of real properties owned by JSCo «Russian Railways». (Minutes No. 14, dated August 31, 2007) 8. Approval of the loan agreement between JSCo «Russian Railways» and JSCo Elgaurol. The lender is JSCo «Russian Railways» and the borrower is JSCo Elgaurol. The loan amount is RUR 6,200,000. The maturity date is July 2, 2008. The interest rate under the agreement is 8 %. Penalty at the rate of 0.3 % of the overdue amount for each day of the delay is charged for missing the deadlines of principal and interest payments. (Minutes No. 15, dated October 1, 2007) 9. Approval of the agreement on supply of electric locomotives AP1P. The supplier is JSCo Trade House (Torgovy Dom) JSCo «Russian Railways». The buyer is JSCo «Russian Railways». The subject of the transaction is supply of eight main line electric locomotives AP1P to the locomotive shed of Zabaikalskaya railway over the period from October to December 2007. The price of


106

Information about Interested party transactions

the transaction is RUR 417,488,980 (VAT included). The agreement is effective from the signing date till 31 December 2007. (Minutes No. 16, dated October 5, 2007) 10. Approval of the service agreement with JSCo Skorostnye magistrali. The Client is JSCo «Russian Railways» and the contractor is JSCo Skorostnye magistrali. The subject of the transaction is provision of advisory services on technical and economic issues of rolling stock acquisition for the extra-high-speed and high-speed passenger transport and organization of its maintenance and repair. The price of the transaction is RUR 8,200,000. (Minutes No. 16, dated October 5, 2007) 11. Approval of the agreement between JSCo «Russian Railways» and JSCo First Freight Company (Pervaya Gruzovaya Companya) on possession and use of freight cars. The subject of the agreement is the placement by JSCo First Freight Company (Pervaya Gruzovaya Companya) of 161 762 freight cars in JSCo «Russian Railways» possession for transporting freight by rail. The agreement will remain effective till 31 December 2009 and may be extended by one year. The price of the transaction is the payment for the right of JSCo «Russian Railways» to possess and use the foregoing freight cars, which is not to exceed RUR 46,949,602,295 and 12 kopecks calculated on the basis of the daily rate of RUR 317 and 63 kopecks (excluded VAT) for the JSCo «Russian Railways» possession and use of one freight car. The rates for possession and use of one freight car are subject to amendment in accordance with the indexation of railway freight tariffs by the average indexation parameter as of the effective date of a respective order of Russia's Federal Tariff Service on the indexation of tariffs, levies and fees for freight transport by rail in the next period. (Minutes No. 16, dated October 5, 2007) 12. Approval of the agreement on supply of electric locomotives AP2K between JSCo «Russian Railways» and JSCo Trade House (Torgovy Dom) RZD. The supplier is JSCo Trade House RZD. The Client is JSCo «Russian Railways». The subject of the transaction is supply of one hundred and three main line electric locomotives to the locomotive shed in accordance with client's orders over the period from October 2007 till December 2009. The price of the transaction is RUR 7,771,144,494 (VAT included). The agreement is effective from the signing date till 31 December 2009. (Minutes No. 17, dated October 30, 2007) 13. Approval of the agreement on supply of electric locomotives A5K between JSCo «Russian Railways» and JSCo Trade House (Torgovy Dom) JSCo «Russian Railways». The supplier is JSCo Trade House (Torgovy Dom) JSCo «Russian Railways». The client is JSCo «Russian Railways». The subject of the transaction is supply of one hundred and nine main line electric locomotives A52K to the locomotive shed in accordance with

client's orders over the period from October 2007 till November 2009. The price of the transaction is RUR 4,752,959,840 (VAT included). The effective term of the agreement is from the signing date till December 31, 2009. (Minutes No. 17, dated October 30, 2007) 14. Approval of supplement No. 2 to agreement No. 100, dated 13 March 2007, on supply of electric locomotives AP1M between JSCo «Russian Railways» and JSCo Trade House (Torgovy Dom) JSCo «Russian Railways». The supplier is JSCo (Torgovy Dom) JSCo «Russian Railways». The client is JSCo «Russian Railways». The subject of the transaction is supply of forty one main line electric locomotives AP1M to the locomotive sheds of Severo-Kavkazskaya, Oktiabrskaya, Zabaikalskaya and Yugo-Vostochnaya railways over the period from April 2007 till December 2007. The price of the transaction is RUR 2,134,782,807 and 8 kopecks (including VAT). The effective term of the agreement is from the signing date till 31 December 2007. (Minutes No. 17, dated October 30, 2007) 15. Approval of supplement No. 3 to agreement № 47, dated 16 February 2007, between JSCo «Russian Railways» and JSCo Trade House (Torgovy Dom) JSCo «Russian Railways» on supply of electric locomotives 3AS5K. The supplier is JSCo Trade House (Torgovy Dom) JSCo «Russian Railways». The client is JSCo «Russian Railways». The subject of the transaction is supply of twenty seven main line electric locomotives 3AS5K to the locomotive sheds of Vostochno-Sibirskaya and Dalnevostochnaya railways over the period from April 2007 till December 2007. The price of the transaction is RUR 2,904,501,729 (VAT included). The effective term of the agreement is from the signing date till 31 December 2007. (Minutes No. 17, dated October 30, 2007) 16. Approval of the agreements on lease of real properties between JSCo «Russian Railways» and JSCo Roszheldorproekt. The lessor is JSCo «Russian Railways». The lessee is JSCo Roszheldorproekt. The subject of the agreements is the lease of real properties owned by JSCo «Russian Railways». The monthly lease fee is calculated pursuant to independent appraisers' reports. (Minutes No. 18, dated November 19, 2007) 17. Approval of supplement No. 1 to agreement No. 54, dated 26 February 2007, on supply of railcars between JSCo «Russian Railways» and JSCo Trade House (Torgovy Dom) JSCo «Russian Railways». The supplier is JSCo Trade House (Torgovy Dom) JSCo «Russian Railways». The client is JSCo «Russian Railways». The subject of the transaction is supply of thirty sleeping railcars of 61-4174.03 type and thirty eight staff railcars of 61-4186.03 type. The price of the transaction is RUR 1,346,020,924 and 82 kopecks (VAT included). The effective term of the agreement is from the signing date till 31 December 2007. (Minutes No. 54, dated November 29, 2007)


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18. Approval of the agreement on social and technological order in the sphere of catering and retail services between JSCo «Russian Railways» and JSCo Railway Trading Corporation (Zheleznodorozhnaya Torgovaya Compania) . The subject of the transaction is provision of catering services to employees during the liquidation of consequences of emergencies, which includes the purchase of necessary foodstuffs, cooking, packing, delivery and distribution of MREs. The effective term of the agreement is from the signing date till December 31, 2008. (Minutes No. 22, dated December 21, 2007) 19. Approval of the agreement on sale of real properties between JSCo «Russian Railways» and CJSCo Zheldoripoteka. The subject of the transaction is the sale of real properties located at the address of 45, ul. Vitebskaya, Nizhniy Novgorod. The price of the transaction is RUR 9,111,000 20. Approval of the loan agreement between JSCo «Russian Railways» and JSCo Skorostnye magistrali. The parties of the transaction are JSCo Skorostnye magistrali (borrower) and JSCo «Russian Railways» (lender).

Annual Report JSC «RZD» 2007

The subject of the transaction is issuance of an earmarked loan (for land reclamation, registration of the rights to use the land plots allocated for construction of Moscow – Saint Petersburg high-speed railway in the name of RJSCo VSM) by quarterly tranches as the stages of work are completed. Documents attesting to the need of receiving the next tranche and the earmarked use of earlier received funds are to be submitted by the borrower in accordance with the list adopted by the lender. The maximal price of the agreement is RUR 495,670,000, the maturity date is 30 June 2010. Interest rate is 10% per annum. For missing the deadlines of principal and interest payments the borrower will pay the lender penalty at the rate of 0.06% of the overdue amount for each day of the delay. (Minutes No. 23, dated December 21, 2007)


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Information about Large Transactions


109

Annual Report JSC «RZD» 2007

There were no large transactions (valued at 25 % of the Company's total assets pursuant to the balance sheet or higher) in the reporting period. In 2007, the Board of Directors of JSCo «Russian Railways» approved 6 (six) transactions, which were within the scope of the procedures for approval of large transactions in accordance with the Charter of JSCo «Russian Railways».

4. Approval of the guarantee agreement by JSCo «Russian Railways» in favor of ОКО BANK in respect of the loan agreement for Oy Karelian Trains Ltd. The parties of the transaction are JSCo «Russian Railways» (guarantor), ОКО BANK PLC (creditor) and Oy Karelian Trains Ltd (debtor). The price of the transaction is € 80,000,000. (Minutes No. 14, dated August 31, 2007)

1. Approval of the transaction on borrowing in accordance with the loan agreement and the loan agreement with collateral between JSCo «Russian Railways» and Deutsche Bank AG. The parties of the transaction are JSCo «Russian Railways» (borrower) and Deutsche Bank AG (lender). The subject of the transaction is mobilization of loans for financing the design, production and delivery of high-speed electric trains pursuant to the agreements with Siemens AG. The principal amount is not to exceed € 43,000,000 under the loan agreement and € 255,000,000 under the loan agreement with collateral. The interest rate is up to EURIBOR plus 0.675% per annum under the loan agreement and up to EURIBOR plus 0.09% per annum under the loan agreement with collateral. The commission fee is up to 0.2% and 0.2% of the loan agreement amount and up to 0.15% and 0.06% of the amount of the loan agreement with collateral. (Minutes No. 5, dated March 5, 2007)

5. Approval of the supplementary agreement to the state contract on delivery of military cargo by rail and provision of transportation services in 2006. The parties of the transaction are JSCo «Russian Railways» (head contractor) and the Ministry of Defense of the Russian Federation (government client). The price of the supplementary agreement is RUR 1,000,000,000. The price of the state contract with the supplementary agreement is RUR 12,500,000,000. The state contract is effective from the signing date till December 31, 2006. (Minutes No. 1, dated January 22, 2007)

2. Approval of the borrowing under the loan agreement and the loan agreement with collateral between JSCo «Russian Railways» and Deutsche Bank AG. The parties of the transaction are JSCo «Russian Railways» (borrower) and Deutsche Bank AG (creditor). The subject of the transaction is mobilization of loans to the total amount of € 300,000,000 on the basis of the loan agreement with a floating interest rate for the term above 7 years and the loan agreement with collateral with a floating interest rate for the term above 14 years. Interest rate is up to EURIBOR plus 0.675 % per annum under the loan agreement and up to EURIBOR plus 0.09 % per annum under the loan agreement with collateral. The commission fee is up to 0.2 % and 0.2 % of the loan amount and up to 0.15 % and 0.06 % of the amount of the loan agreement with collateral. (Minutes No. 5, dated March 5, 2007) 3. Approval of the agreement with Siemens Aktiengesellschaft on maintenance and repair of eight high-speed trains. The parties of the transaction are JSCo «Russian Railways» (client) and Siemens Aktiengesellschaft (contractor). The subject of the transaction is a set of obligations for provision of the planned and emergency services ensuring continuous operation and functioning of four trains with the single-system capability and four trains with the dual-system capability. The price of the agreement is € 354,160,000 for 30 years and 8 trains under the condition that each train has the annual run of 500,000 km. The agreement is effective for 30 years after the agreed-upon acceptance of the final train. (Minutes No. 12, dated June 28, 2007)

6. Approval of the transactions with related parties to rehabilitate the section of Izvestkovaya – Chegdomyn railway located in the zone affected by the headwaters of Bureiskaya hydropower plant in Khabarovskiy Krai. The parties of the transaction are JSCo «Russian Railways» (general contractor), Federal Railway Agency (government client) and Unified group (Edinaya Gruppa) federal state unitary enterprise of the Federal Railway Agency. The subject of the transaction is to rehabilitate the section of Izvestkovaya – Chegdomyn railway located in the zone affected by the headwaters of Bureiskaya hydropower plant in Khabarovskiy Krai. The price of the transaction is RUR 3,475,000,000. The term is December 26, 2008. (Minutes No. 5, dated March 5, 2007)


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Statement on Dividends Paid


111

The Company is increasing the total dividends distributed annually. Thus, the total dividends distributed were RUR 0.88 bln in 2004, RUR 0.98 bln in 2005 and RUR 1.051 bln in 2006.

2006 2005 2004

Dividends in the amount of RUR 1,051,300,000 on ordinary shares (VAT exempt) were paid pursuant to Directive No. 864-r, of the Government of the Russian Federation, dated June 30, 2007, by payment order No. 53, dated July 24, 2007. JSCo «Russian Railways» has no dividend to shareholders

875 000 000 RUR 976 000 000 RUR 1 051 000 000 RUR

Annual Report JSC «RZD» 2007


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Draft Distribution of the Company's Net Profits Earned in 2007


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Currently, one of the major objectives of the Company is mobilization of virtually any feasible financing source to support the dynamic investment growth and, in doing so, to maintain the cost of freight and passenger transit at an acceptable level which emphasizes the urgent need of financing investment projects from the Company's equity and reserves. The net profit from the Company's operations in 2007 was RUR 84,495.3 million. A significant share of the net profit resulted from excess of the value of the assets agreed upon by the founders that were contributed to the charter capital of the Company’s subsidiaries, over their book value. The main excess resulted from the establishment of JSCo First Freight Company (Pervaya Gruzovaya Companya) and the transfer of 177 thousand freight cars to JSCo First Freight Company (Pervaya Gruzovaya Companya). The similar situation exists with the Company's results in recent period. Over the past three years jointly with the Board of Directors of the Company pursued the policy of dividend distribution against the net cash profits without taking from account excess of the appraisal of contributions agreed upon by the founders over the book value of underlying assets contributed to the charter capital of subsidiaries. The mentioned access amount was RUR 17.662,3 million in 2007. The dividend policy of JSCo «Russian Railways» has been also influenced by the following factor. Resulting from an accident in October 2006 caused by the flooding of Verkhnikamskiy potassium and magnesium salt mine in the city of Berezniki the nearby railway was under the threat of destruction. Therefore, in accordance with the decisions adopted at a meeting chaired by Deputy Chairman of the Government of the Russian Federation A. Zhukov (Minutes No. AZh-P952pr, dated 19 December 2007), JSCo «Russian Railways» was authorized to allocate RUR 800 million for construction of 53 km railway Yaiva – Solikamsk with a subse-

Annual Report JSC «RZD» 2007

quent reduction by the foregoing amount of the dividends planned for payment to the Russian Federation as of the end of 2007. In accordance with Instruction DM-P9-4679B of the Government of the Russian Federation, dated September 27, 2007, and taking into account the position of the Ministry of Transportation (letter No. IL-19/6290, dated August 23, 2007), JSCo «Russian Railways» also financed construction of a provisional bypass on railway Perm – Solikamsk with a subsequent reduction of dividends by the cost of constructing the bypass of 6 km around Berezniki railway station in the amount of RUR 454 million.


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Draft Distribution of the Company's Net Profits Earned in 2007

Taking the foregoing into account, a draft distribution of the net profit earned by JSCo «Russian Railways» as of the end of 2007 is as follows. Distribution of the net profit received by JSCo «Russian Railways» in 2007 Indicator

Amount (RUR mln)

%

Net profit in the reporting period

84,495.3

100

Net profit distributed, including:

4,737.0

6

Reserve capital

4,224.8

5

Distribution of dividends on placed shares

512.2

1

Accumulated profits, including:

79,758.3

94

Compensation for construction of the 6 km bypass (Berezniki)

454.0

Financing of railway Yaiva – Solikamsk, 53 km

800.0

Renovation of passenger cars

23,282.0

Renovation of railcars

13,285.5

Renovation of passenger locomotives

8,776.5

Renovation and development of the facilities used for long-distance haul

4,405.7

Renovation and development of the facilities used for commuter haul

5,469.5

Project for modernization of passenger cars through the installation of a safety control system with diagnostic and communication elements

1,695.0

Project for comprehensive rehabilitation of railway Mga – Gatchina – Weimarn – Ivangorod and the spur tracks 13,682.6 to the ports on the Southern shore of the Gulf of Finland, subject to construction of Luzhskaya railway station Project for comprehensive rehabilitation of railway Kotelnikovo – Tikhoretskaya – Krymskaya and the construction of a bypass of Krasnodar rail junction

5,401.0

Project for comprehensive rehabilitation of railway Trubnaya – V. Baskunchak – Aksaraiskaya

1,978.4

Project for rehabilitation of railway facilities in the Chechen Republic

528.1

Indicator

Amount

(RUR mln)

%

Net profit in the reporting period

84,495.3

Including economically justified cash profits 10% of economically justified cash profits

%

17,662.3 1,766.2

compensation for construction of the 6 km bypass (Berezniki)

(454.0)

financing of Yaiva – Solikamsk railway, 53 km

(800.0)

Dividends distributed on placed shares

512.2

10


115

Annual Report JSC «RZD» 2007


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Description of the Main Risk Factors Associated with Company's Operations


117

Annual Report JSC «RZD» 2007

Information about pending judicial procedures whereby the Company is a respondent to debt collection claims with the specification of aggregate claimed amounts As of December 31, 2007 there were 3,931 claims issued against JSCo RZD in arbitration courts. The total amount of the foregoing claims was RUR 4,112,239 4 thousand.

— There were 282 claims to the total amount of RUR 1,401,114.4 thousand pending in the arbitration courts of appeal. — There were 194 claims to the total amount of RUR 500,144.8 thousand pending in the arbitration courts of review.

The foregoing claims mainly resulted from a failure to perform or undue performance of obligations. Information as of December 31, 2007 on pending judicial procedures whereby JSCo «Russian Railways» was a respondent follows: — There were 3,455 claims to the total amount of RUR 2,210,980.2 thousand pending in the arbitration courts of first instance.

Information about pending judicial procedures whereby the Company is a claimant in debt collection claims with the specification of aggregate claimed amounts As of December 31, 2007 there were 6,917 claims in which JSCo «Russian Railways» was a claimant. The total amount of the foregoing claims was RUR 3,708,417.6 thousand. Information as of December 31, 2007 on pending judicial procedures whereby JSCo «Russian Railways» was a claimant follows: — There are 6,589 claims to the total amount of RUR 3,044,512.3 thousand pending in the arbitration courts of first instance.

— There are 216 claims to the total amount of RUR 510,589.2 thousand pending in the arbitration courts of appeal. — There are 112 claims to the total amount of RUR 153,316.1 thousand pending in the arbitration courts of review.


Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Development Prospects


119

Development subject to accessing the promising markets Carriage of high-tonnage containers is a promising market segment with high growth rates. In 2007, JSCo «Russian Railways» carried 1.4 million TEU of high-tonnage containers with the total load of 18.4 million tons which was 17 % higher than in 2006 (see the Table). The significant growth of high-tonnage container carriage by 1.3 times was achieved in the international sector.

Annual Report JSC «RZD» 2007

have been the segments of international transportation with the highest growth rates while the growth rate of export carriage has been slowing down. Thus, the import carriage increased by 1.5 times to reach 351.3 thousand TEU, the transit carriage – by 1.3 times to reach 124.8 thousand TEU, and the export carriage – by 8.8 % to reach 346.2 thousand TEU. International high-tonnage container carriage accounted for 822.3 thousand TEU or 59.1 % of the total. The dynamic growth of high-tonnage container carriage has been achieved due to the introduction and wide use of the technology of accelerated container trains. 2,426 container trains were made up in 2007, which carried more than 250 thousand TEU or nearly a third of the total international high-tonnage container carriage by rail.

Import and transit carriage of high-tonnage containers

Breakdown of the dynamics of high-tonnage container carriage by transportation types in 2006-2007, in TEU Transportation type

Volume, TEU thousand

Growth rate, % to the previous year

Structure of the carried volume, %

2006

2007

2006

2007

2006

2007

1 190,2

1 392,0

108,1

117,0

100,0

100,0

Domestic carriage

546,2

569,7

105,6

104,3

45,9

40,9

International carriage

644,1

822,3

110,4

127,7

54,1

59,1

Import

229,6

351,3

137,3

153,0

19,3

25,2

Transit

96,3

124,8

70,4

129,6

8,1

9,0

Export

318,2

346,2

114,0

108,8

26,7

24,9

Total Including:

Including:

Possible Development Directions, subject to Market Trends and Company’s Potential In long term development of JSCo «Russian Railways» will have the objective of setting up a highly efficient holding company, development of its market potential and capitalization growth, enhancement of its investment attractiveness and competitive edge at strategic markets. The objectives at the market of infrastructure services include an accelerated modernization of infrastructure facilities, liquidation of bottlenecks in the current railway system and raising the efficiency of railway transportation (increase of speed, axle load, cost reduction, etc.), development of infrastructure in accordance with the projected industrial growth rates, the capacity of other transportation means in the Russian Federation and the neighboring railways, provision of transportation services to new industrial centers, development of new deposits, etc. The main strategic objectives of JSCo «Russian Railways» at

the freight transportation market include ensuring its competitiveness in the profitable market segments, provision of complex transport services, accelerated development of container carriage, ensuring the maximal efficiency of mass freight carriage on the basis of the economy of scale and further improvement of the foregoing technology, dynamic modernization of technical means and technologies in the sphere of freight transportation, etc. Taking into account the effective legal base and technological characteristics of the railway industry JSCo «Russian Railways» will remain the sole carrier providing freight transportation on the basis of the full-fledged performance of public contract till 2010. Logistic operations will develop dynamically. Taking into account the current deficit of high-grade terminals and warehouses in Russia the priority direction will be the construction of logistic centers with railway terminals (TLTs) in major transportation centers (the construction of logistic centers with railway terminals in Moscow (Kuntsevo, Kurskaya), Moskovskaya Oblast (Belyi Rast), Leningradskaya Oblast (Shushary), Yekaterinburg, Nizhniy Novgorod, Novosibirsk, Irkutsk and other cities will be the highest priority).


120

Development Prospects

The reformed system of compensation from the federal budget for the missed income related to the carriage at administered tariffs will make it possible for the participants of the market of passenger transport to function with a sufficient operating margin. It will allow setting up the Federal Passenger Company (Federalnaya Passagirskaya Compania) by 2009 on the basis of the current Federal Passenger Directorate, which will be an important part of the railway reform. Development of the extra-high-speed and high-speed passenger transport is one of the priorities of the passenger transport market. Other plans include further work for the establishment of JSCo «Russian Railways»’ subsidiaries providing commuter transportation services. The main strategic objective of JSCo «Russian Railways» holding on the international market is the provision, on the basis of dynamic cooperation with foreign railway authorities, companies and specialized international institutions, of maximally favorable conditions for raising the efficiency of international freight carriage, transit carriage included, passenger transport, cooperation in the spheres of research & development and technology, access to foreign markets for Russian inventions in the railway sector and construction services. Priority will be given to social policy issues and raising the status of employment with railway companies. Enhancing the Company’s competitiveness at the labor market is one of the major objectives in this context. The main principle is wage bill formation on the basis of an economically sustainable ratio between labor productivity and real wages' growth in long term.

Planned Investment Projects Realization of the ongoing investment projects will be continued in 2008 – 2010 in accordance with the JSCo «Russian Railways» investment program. The most significant projects are: – Kuzbass – North West, Far East, Azov and Black Sea railway junctions whose completion is scheduled to 2008; – Oil Transport to China (Phases 1 and 2); – Complex rehabilitation of railway Mga – Gatchina – Weimarn – Ivangorod and spur tracks to the ports on the southern shore of the Gulf of Finland; – Investment projects under the Program for Development of speed and high-speed Communication at JSCo «Russian Railways» for the Period till 2020 which includes Saint Petersburg – Buslovskaya, Moscow – Saint Petersburg and Moscow – Nizhniy Novgorod railways;

– Construction and rehabilitation of engineering structures. The process of rolling stock repairs and realization of projects for rehabilitation of the fixed assets of JSCo «Russian Railways» companies and branches will continue. There are plans to initiate several new investment projects in 2008. Complex rehabilitation of railway Kotelnikovo – Tikhoretskaya – Timoshevskaya – Krymskaya with a bypass of Krasnodar rail junction Railway Kotelnikovo – Tikhoretskaya – Timoshevskaya – Krymskaya is essential for the transit of export goods from the Volga region, Urals and eastern territories to the sea ports in Krasnodarskiy Krai. There are plans to increase the export volume of coal, crude oil, ferrous metals, fertilizers, timber, grain and other goods by a significant margin in long term. The average annual load of the railway in both directions will be 77.8 million tons by 2015 and 88.4 million tons by 2020. Taking into account such significant growth of the freight traffic it will be essential to build an uninterrupted railway along the route with a double-track electrified bypass of the Krasnodar rail junction. Plans for the current year include preparation of documentation on the foregoing investment project to be submitted, in accordance with the established order, to Ministry of Transport of the Russian Federation and Ministry of Economic Development of the Russian Federation for mobilization of government support from the Investment Fund of the Russian Federation. The total project cost is RUR 71.5 bln, including RUR 5.4 bln in 2008. The projected realization period is 2008-2014. Rehabilitation of the permanent way and complex rehabilitation of the railway track The project has the objective of complete renovation of the permanent way combined with strengthening of the engineering structure, bringing the easement in compliance with the established standards and reconstruction of the roadways of railway crossings. There are plans to complete the following work for track improvement in accordance with the project for rehabilitation of permanent way and comprehensive rehabilitation of railway tracks. In 2008 – 4,562 km, including 2,733 km using capital assets and 1,829 km using operating expenses. In 2009 – 4,783 km, including 3,474 km using capital assets and 1,309 km using operating expenses.


121

In 2010 – 5,249 km, including 3,023 km using capital assets and 2,226 km using operating expenses. The total project cost is RUR 140.7 bln, including RUR 42.2 bln in 2008. The planned period of first stage realization is 2008-2010. Organization of passenger traffic at Presnia – Kanatchikovo section of Moscow Railway Small Ring With a view to organize passenger traffic at the Smaller Ring of Moscow Railway (hereinafter referred to as Small Ring MZD (Maloe Koltco MZD) Russian Railways, jointly with the government of Moscow, plan to complete rehabilitation of Presnia – Kanatchikovo section of Small Ring MZD (Maloe Koltco MZD) with access to Kolomenskoe railway station of Paveletskoie direction of Moscow Railway. The rehabilitation will include adaptation to electric traction and construction of five new passenger stations: City, Kutuzovo, Potylikha, Luzhniki, Ploschad Gagarina and rehabilitation of two goods yards: Kanatchikovo and Presnia. The plans for 2008 include completion of the research and development work with a view to make exect design and investment decisions. RUR 210 million was allocated for such work in 2008. Completion of adaptation to electric traction of Syzran – Sennaya railway Completion of adaptation to electric traction of Syzran – Sennaya railway of Kuibyshevskaya and Privolzhskaya railways (branches of Russian Railways) in 2008 will provide for enhancing carrying capacity of the foregoing railway as well as streamlining costs on the basis of: – saving of operating expenses required for supporting the projected volume of passenger and cargo traffic; – cost savings due to reduction of the delay of passenger and freight trains at Sennaya railway station.

Annual Report JSC «RZD» 2007

ings through the placement of meters at the lead-ins to the Russian Railways power grid and the cancellation of offset schemes. The scope of the project includes over 600 substations. The total project cost is RUR 9.8 bln, including RUR 2.4 bln in 2008. The projected realization period is 2008-2010. Further improvement of hydrometeorological services supporting business activities The project objective is the establishment of a specialized automated information and measuring system for the needs of railway transport that with provide JSCo «Russian Railways» and its subsidiaries will the essential types of operating information and long-term forecasts for the purposes of raising the safety of railway traffic, further improvement of the railway traffic management, mitigation of risks and losses from natural and technological disasters. The total project cost is RUR 0.08 bln, including RUR 0.01 bln in 2008. The projected realization period is 2008-2010. Modernization of passenger cars through installation of a safety control system with diagnostic and communication elements The program for installation of the Passenger train safety control and communication system with GLONASS/GPS for JSCo «Russian Railways» in 2008-2010 will provide comprehensive solution for raising passenger traffic safety and the speed of reaction to emergencies, improving the analysis of rolling stock wear and the planning of rehabilitation and repair of the fixed assets. In accordance with the project, 3,809 passenger cars will be equipped with the foregoing system in 2008, 5,858 passenger cars in 2009 and 8,145 passenger cars in 2010.

The total project cost is RUR 11.5 bln. The projected completion is in 2008.

The total project cost is RUR 3.7 bln, including RUR 1.7 bln in 2008. The projected realization period is 2008-2010.

Rehabilitation and construction of utilities

Acquisition of trucks for freight delivery

The project objective is rehabilitation of facilities for generation of heat, water supply and water disposal which will guarantee the reliability of services and safety of operation.

The project objective is the establishment of a reliable income source through the increase of the scope of transport services, provision of the new types of work and services, raising operational efficiency through the replacement of outdated and worn-out equipment.

The total project cost is RUR 4.3 bln, including, RUR 1.5 bln in 2008. The projected realization period is 2008-2010. Introduction of automated system for commercial accounting of power at the incoming lines of JSCo «Russian Railways»' substations Realization of the project for introduction of automated system for accounting of power at the incoming lines of Russian Railways' substations is targeted at cost sav-

The total project cost is RUR 1.3 bln, including RUR 0.4 bln in 2008. The projected realization period is 2008-2010. Provision of modern calibration equipment to JSCo «Russian Railways» metrological units The main project objective is to improve the quality of metrological service of measuring and testing equipment


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Development Prospects

in structural units of JSCo «Russian Railways» through: – renewal and enhancement of the available measuring equipment to ensure the unity of measurement as well as the preservation and development of Russian Railways' R&D potential; – establishment of mobile calibration units for metrological service of the measuring equipment located at facilities remote from the railway centers of standardization and metrology. There are plans to acquire 866 units of calibration equipment and 11 metrological laboratories in railway cars in accordance with the project for provision of modern calibration equipment to JSCo «Russian Railways» metrological units. The total project cost is RUR 0.8 bln, including RUR 0.2 bln in 2008. The projected realization term is 2008-2010. Liquidation of consequences of the earthquake in Nevelskiy District of Sakhalinskaya Oblast (rehabilitation of the infrastructure of Sakhalinskaya railway) RUR 252.5 million was allocated in 2008 to finance the liquidation of consequences of the earthquake and rehabilitation of the destroyed infrastructure of Sakhalinskaya railway. Construction of a new railway Yaiva – Solikamsk of 53 km to bypass the zone of technological accident in the vicinity of Berezniki railway station The investment program of JSCo «Russian Railways» for 2008-2010 includes the financing of construction of a new section of Sverdlovskaya railway from Yaiva to Solikamsk with the total length of 53 km to bypass the zone of technological accident in the vicinity of Berezniki. The total financing is RUR 8.9 bln, including RUR 3.0 bln in 2008, RUR 4.8 bln in 2009 and RUR 1,1 bln in 2010. Pursuant to the plan, the project will be divided into the following stages: – construction of the first main track of a new electrified railway which is to be put into operation in 2009; – construction of the second main track of a new electrified railway which is to be put into operation in 2010.

Development of the infrastructure of railways for children The objectives of railways for children are as follows: – professional training of the reserve for work at railways and for entering railway institutes and vocational training centers; – social adaptation and professional orientation of teenagers; – development and support of a favorable image of railway professions and the Russian Railways as a socially responsible organization amongst government and local self-government agencies, NGOs, educational institutions, public at large and Russian Railways' employees. The total project cost is RUR 3.0 bln, including RUR 1.1 bln in 2008. The projected realization term is 2008-2010.


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Annual Report JSC «RZD» 2007


Reference

You can always find more detailed on-line information in Russian and English about the Company on its website www.rzd.ru. There you can also find information about the main directions and results of JSCo «Russian Railways» operations, relevant on-line information about the events related to the Company, all aspects of its activities, learn about its social and environmental policies. For Investors section provides the Company's financial and operating results as well as presentations for the investment community and Company's statements. Published statements. The Company's website (www.rzd.ru) presents electronic versions of the following statements: 1. The Company's operating statement; 2. Financial statements; 3. Quarterly financial statements; and 4. Issuer report. Notions and definitions used in the document The names and words JSCo «Russian Railways», RZD and Company, we used in this annual report are synonymous and refer to JSCo RZD. Abbreviations USD – US dollars T/km – ton per kilometer P/km – passengers per kilometer RUR – Russian Rubles Legal address and the head office location: 2, Novaya Basmannaya str., Moscow, 107174, Russia E-mail: rzd@rzd.ru Information service: +7 (495) 262-99-01 SINGLE TELEPHONE LINE OF JSCo «Russian Railways»: 8-800-200-67-67 (toll free from all regions of the Russian Federation) Corporate Finance Department of JSCo «Russian Railways» (investor relations) Telephone: +7 (495) 262-56-49 Facsimile: +7 (495) 262-89-41 Corporate Relations Department (Russian Railways press service) Telephone: +7 (495) 262-71-48 Facsimile: +7 (495) 262-84-09

All photos presented in the Annual Report 2007 were taken within the framework of a joined JSCo "Russian Railways" and Anton Lange's project "Russia through a train window".


JSCo «RZD» 2, Novaya Basmannaya str., Moscow, 107174, Russia www.rzd.ru

RZD Annual Report 2007 eng  

RZD Annual Report 2007 eng

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