2. Operating Environment of the Group

The Group primarily conducts its business in the Russian Federation. The Russian Federation continues economic reforms and development of its legal, tax and regulatory frameworks. The recent developments of the Russian government are focused on modernisation of the Russian economy in order to improve its productivity and quality and to increase the proportion of industries producing high-value-added products and services. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

During 2011 the development of the Russian economy was constrained by the unstable economic environment in Europe and USA. Low or negative growth rates of developed economies characterised by substantial amounts of internal and external borrowings, were the main global trends on international financial markets in 2011. As a result volatility on the Russian stock and currency markets grew significantly during the year. Thus, in the second half of 2011, on the back of worsened economic conditions in Eurozone, RUR/USD exchange rates grew from RR 28.1 per US Dollar in July 2011 to RR 32.2 per US Dollar as at the end of the year.

At the same time Russia's economic recovery trend continued during 2011. The GDP rate grew by 4.3% according to preliminary report of Federal government statistic service. Internal consumer and investment demand were the main drivers for growth. External demand decreased slightly due to global instability which led to a decrease in the export industries of the Russian economy. Real income of the population stayed at almost the same level as in 2010.

Higher loan growth rate over deposit growth rate was the distinctive feature of the Russian economy in 2011 which led to a lack of liquidity in the financial sector in the second part of the year.

Despite economic recovery trends, there continues to be uncertainty regarding further economic growth in Russia, access to capital markets and the cost of capital which could negatively affect the Group’s future financial position, the results of its operations and its business prospects. As the Russian economy is vulnerable to global economic slowdowns, there still remain the risks of fluctuations on the Russian financial markets. While the management of the Group believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, unexpected deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable.

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