Sovereign risks

The condition of the economy of the country to a large extent depends on the effectiveness of decisions made and implemented by organs of power in the Russian Federation in the fields of the economy, finance and monetary policy, on the development of civil, tax and administrative legislation and practices in applying it. Therefore a risk for Kubanenergo might be a general deterioration in the socio-economic situation in the country and/or the regions it operates in. At the current time the Company assesses the risk of changes which could lead to negative consequences for the sector and the economy as a whole to be low.

Regional risks

Kubanenergo is a major regional distribution network company carrying out its production work in Krasnodar Region and the Republic of Adigeys. In agreement with the investment ratings for Russian regions for 2010–2011 produced by the Expert RA ratings agency, Krasnodar Region has a 1A rating, which means maximum potential in the region with minimal investment risk.

To reduce the influence of regional risks on realising its own investment programme the Company constantly cooperates with state organs and develops actions agreed with them in relation to investment projects approved at the level of the Government of the Russian Federation. Work is also carried out on agreeing long term programmes for development of Kubanenergo branch zones with regional and local organs of power.

The regions in which Kubanenergo carries out its production work are politically stable and the risk of internal military conflicts or a state of emergency arising is minimal. As the same time given the less stable neighbouring regions and in connection with construction of Olympic facilities in the Sochi energy district a risk of terrorist acts in regions where the Company works does exist. To minimise this risk Kubanenergo works closely with the corresponding state organs and applies the measures agreed with them on ensuring production safety. In the Company targeted actions are also developed and implemented on protecting energy facilities from sabotage or terrorist acts.

Ensuring the safety of constructing Olympic facilities is carried out in accordance with Decree of the Government of the Russian Federation в„– 458 of 1 June 2009 On Ensuring the Safety of Olympic Facilities, Stipulated by the Programme for Construction of Olympic Facilities and Developing the City of Sochi as a Mountain Resort, During the Construction Period.