S&P Viewpoint

Standard & Poor's follows the fundamental principles of consistency and objectivity in its research. As a general rule, all methodological changes are disclosed, the reasons for these changes are communicated and their effects are discussed. We have introduced two changes to our methodology based on the feedback on our 2005 survey.

First, we introduced several new criteria items in all the blocks to measure the disclosure more accurately and amalgamated some close-in-meaning questions to make distinctive categories and avoid "double-counting." The introduction of 15 new criteria items resulted in a 0.9 p.p. downward shift on average with a standard deviation of 1.2 p.p. Amalgamating the questions had an additional downward effect of 0.7 p.p. Overall, changes to the questionnaire on average resulted in a 1.6 p.p. downward shift.

Second, our approach to accounting for disclosure in various media has been altered. Under the new weighting system, public disclosure, regardless of the source through which it has been made, yields 80% of the maximum score on each point of the questionnaire. The remaining 20% of points are awarded if this information is present in the other two sources as well (10% to each). This scoring system reflects the notion that replication of information in various sources holds value for investors, as it makes the information more easily accessible. The value of replication is, however, incremental compared with the fact of disclosure as such. The corresponding alteration to the scoring system has a moderate but statistically insignificant effect on the individual scores--the average upward shift is 5.3 p.p. with a standard deviation of 3.9 p.p.

Third, in the present survey we accounted for information contained in the bond, ADR, and GDR issue prospectuses, classifying them as regulatory reporting. These prospectuses are usually highly informative, and they are often made public by either the company or the stock exchanges. Accordingly, we accounted for prospectuses for the bonds, ADRs, and GDRs issued after Jan. 1, 2006, that were published either on a company's Web site or that of the stock exchange. Beside that, we included information contained in annual IFRS financials for the companies listed on the London Stock Exchange (LSE) and annual reports for the companies listed on Alternative Investment Market (AIM; a small funds branch of the LSE that offers a waiver for some of the disclosure requirements associated with a listing as compared to the exchange's main trading floor) into regulatory reporting, as these documents are filed with regulatory authorities and are made public. All this significantly affected several individual scores, but had an immaterial effect on the average score, as relatively few companies published prospectuses satisfying our criteria, only three companies in our survey are listed on AIM, and, in general, the increase in the individual scores from counting the same information twice is incremental under the new weighting system.

Overall, we estimate the methodological changes inflated the scores by 3.7 p.p. on average, as compared to what would have been obtained with the scoring criteria applied in our 2005 survey. We strongly believe that these changes enhanced our T&D methodology and allowed it to measure disclosure more accurately, thus making the results more objective and relevant. At the same time, we recognize that these changes impair comparability with the results of last year's survey.

As a part of the T&D project, we also updated our study on ownership concentration and disclosure of Russian corporations. This research complements the questionnaire-based T&D study by providing an in-depth view of ownership concentration and disclosure practices by Russian companies. Additionally, as an extension of our study of transparency, we conducted a survey of corporate governance structures of companies included in the survey.

Results show that the level of transparency of the 70 largest Russian companies is 53.5% (see table 1). Comparing this year's results with the results of the companies included in the Transparency Index last year shows a modest absolute increase of 3.5 p.p. (around a 0.2 p.p. decrease net of methodology changes). The increase for the 50 companies included in both the 2005 and 2006 surveys is 4.6 p.p. (0.9 p.p. net of methodological changes). Therefore, both comparisons indicate a very slow pace of growth, which is not statistically meaningful.

Table 1 Transparency Scores Of 70 Largest Russian Companies, 2006
Rank 2006	Rank 2005	Rank 2004			Company	2006 score (%)	Ownership structure and shareholder rights (%)	Financial and operational information (%)	Board and management structure and process (%)	2005 score (%)	2004 score (%)
1	1	3			Mobile TeleSystems (MTS)	79	82	86	61	84	78
2	3	42			Mechel	77	80	86	57	79	29
3	5	17			Golden Telecom	76	66	81	78	75	57
4	2	1			Rostelecom	76	78	79	68	82	85
5	4	2			Wimm-Bill-Dann Foods (WBD)	75	85	74	64	77	83
6	11	12			VolgaTelecom	74	78	73	70	65	61
7	5	4			Vimpelcom	73	78	74	66	75	70
8	7	8			North-West Telecom (NWT)	72	75	68	76	71	62
9	22	N/A			Sistema	70	76	70	63	54	N/A
10	10	16			Southern Telecommunications Co. (STC)	68	73	63	66	67	58
11	N/A	N/A			Novolipetsk Steel (NLMK)	68	58	76	64	N/A	N/A
12	N/A	N/A			Rosneft	66	65	71	59	N/A	N/A
13	N/A	N/A			Comstar-UTS	66	80	69	43	N/A	N/A
14	16	11			Gazprom	66	70	74	45	60	61
15	N/A	N/A			Polyus Gold	65	81	68	45	N/A	N/A
16	9	6			LUKOIL	65	54	77	58	68	64
17	18	7			MMC Norilsk Nickel	64	62	76	43	58	63
18	33	34			Kuzbassenergo	63	48	72	61	46	32
19	13	10			Central Telecommunications Co.	62	64	62	61	63	62
20	14	18			Sibirtelecom	61	56	62	67	63	56
21	12	13			Uralsvyazinform	60	65	60	53	64	60
22	17	22			Power Machines	60	53	62	63	58	47
23	N/A	N/A			Gazprom Neft	60	68	63	45	57	N/A
24	31	32			Severstal	60	58	68	45	47	33
25	19	9			Mosenergo	59	55	63	58	58	62
26	8	14			RosBusinessConsulting (RBC)	59	58	61	56	69	59
27	N/A	N/A			TGC-8	58	62	51	65	N/A	N/A
28	28	26			Baltika	57	61	65	38	50	44
29	N/A	N/A			Sibir Energy	57	45	73	41	N/A	N/A
30	21	5			Dalsvyaz	57	67	54	50	55	68
31	35	29			Sberbank	57	51	65	48	45	38
32	24	23			OMZ	56	53	63	45	53	45
33	26	19			RAO UES	55	58	55	53	52	54
34	36	N/A			NOVATEK	55	41	69	46	44	N/A
35	N/A	N/A			WGC-6	55	69	46	59	N/A	N/A
36	N/A	N/A			Amtel-Vredestein	55	41	62	58	N/A	N/A
37	34	24			MMK	55	51	61	47	46	45
38	53	N/A			Pyaterochka	54	46	62	50	3	N/A
39	N/A	N/A			TMK	53	62	49	51	N/A	N/A
40	52	N/A			Evraz Group	52	30	74	41	21	N/A
41	N/A	N/A			Magnet	52	56	58	37	N/A	N/A
42	N/A	N/A			Severstal-Auto	52	51	54	51	60	N/A
43	27	20			Aeroflot	52	58	52	43	51	47
44	29	27			Kalina	51	49	60	36	49	44
45	54	N/A			Rambler Media	49	18	66	53	2	N/A
46	N/A	N/A			WGC-3	48	52	43	52	N/A	N/A
47	38	N/A			Yakutskenergo	47	45	48	47	43	N/A
48	30	21			Moscow City Telephone Network (MGTS)	47	54	44	43	48	47
49	23	25			TNK-BP	46	62	38	45	54	45
50	N/A	N/A			WGC-5	46	55	36	58	N/A	N/A
51	49	44			IRKUT	45	45	49	39	30	28
52	N/A	N/A			WGC-2	45	56	36	49	N/A	N/A
53	N/A	N/A			VSMPO-AVISMA	44	47	45	40	N/A	N/A
54	39	31			KAMAZ	44	45	50	31	41	35
55	43	N/A			Lebedyansky	44	44	54	24	36	N/A
56	46	43			Irkutskenergo	43	45	43	40	34	28
57	37	38			Pharmacy Chain 36.6	41	45	44	34	43	30
58	N/A	N/A			Urals Energy	41	15	61	32	N/A	N/A
59	45	37			Surgutneftegas	40	42	45	30	35	31
60	40	33			GAZ	39	40	45	27	41	32
61	N/A	N/A			TGC-9	37	49	26	57	N/A	N/A
62	N/A	N/A			Seventh Continent	36	44	39	22	N/A	N/A
63	N/A	N/A			TGC-5	35	41	40	38	N/A	N/A
64	32	45			Tatneft	31	46	23	31	47	25
65	N/A	N/A			RITEK	30	41	24	31	N/A	N/A
66	N/A	N/A			Mikhailovsky GOK	30	64	25	35	23	22
67	42	36			AvtoVAZ	30	37	29	23	37	31
68	50	35			Bashkirenergo	28	30	26	30	27	32
69	N/A	N/A			TGC-6	28	45	17	30	N/A	N/A
70	51	46			Bashneft	21	20	23	19	23	6
					Average	53	55	56	48	50	46
N/A--Not applicable.

Out of the comparable 50 companies, 32 companies increased their scores by 9.7 p.p. on average (6.0 p.p. net of methodological changes), while the scores of 18 companies declined by 4.6 p.p. on average (drop of 8.2 p.p. net of methodological changes). This year, we noticed a sharp decrease in the range of scores--58 p.p. compared with 82 p.p. in 2005. The lowest score (Bashneft, 21%) is 19 p.p. higher than the lowest absolute score last year. Meanwhile, the highest score (MTS with 79% this year, 84% in 2005) has gone down by 5 p.p., mainly due to methodological changes. The most notable tendency is the increase in the lower bound due to the impressive growth of transparency of the companies that showed low scores last year. Particularly noteworthy are Pyaterochka, the growth leader this year, +51 p.p.; Rambler, +47 p.p.; and Evraz Group, +31 p.p. We attribute this improvement to the companies' increased experience in catering to the information demands of new stakeholders (e.g. new minority shareholders after an IPO) and a corresponding change in disclosure policy, which now requires public disclosure of information that had previously been presented only to certain regulators. Such dramatic changes have also made moot the surprising observation of last year that IPOs do not necessarily lead to improvements in transparency.

The drop in the score of MTS and several other leading companies is explained by relatively weak disclosure of our new criteria items, such as those pertaining to social reporting, board meeting statistics, and transparency of informational policy. On the other hand, the change in our weighting system related to disclosure channels, which caused a mathematical raising of scores on most companies, did not have a substantial positive effect on the leaders in disclosure as they tend to replicate the disclosed information in all major channels (such as in the case of a 20-F report published on the Web).

Most of the companies that scored below 60% in our previous survey tend to show better results this year, while the higher scoring companies are less likely to have improved their scores (see table 2).

Table 2 Relation Between Last Year's Scores And Growth
T&D score in 2005 (%)	Average growth 2005-2006 (p.p.)
<20%	48.8
20%-40%	7.4
40%-60%	3.8
60%-80%	(1.7)
>80%	(4.5)
p.p.--Percentage point.

Apparently, the most transparent Russian companies appear to have reached a certain stable level of disclosure that meets the applicable regulatory requirements and is generally acceptable to international investors. Further improvements to disclosure might require releasing information on sensitive issues such as details of executive pay, and a description of board procedures, which even the most transparent Russian companies currently choose not to elaborate on, despite the fact that such disclosure is common in international practice. Social reporting is another important direction for improvements in transparency for the high-scoring companies. Although there is an increased interest in producing such reports, only two Russian companies have produced these reports so far, due to the associated costs as well the need to embrace the philosophy that underlies such disclosure. The latter might represent a particular challenge for management and the boards.

To a lesser extent, this logic applies to companies with intermediate transparency scores. Pressures to improve disclosure may be present, but they are less pronounced than in the case of the least-transparent companies.

The increase in the number of companies scoring more than 50% this year is a positive change. This applies to 44 companies out of 70 as compared to 28 out of 54 in our previous survey (63% of this year's sample and 52% of last year's sample). A breakdown of the total market capitalization of 70 Russian companies by transparency scores presents a generally encouraging picture (see charts 1 and 2). About 85% of the aggregate market capitalization of the companies included in the survey (78% a year earlier) and around three-quarters of the entire Russian stock market capitalization is associated with the transparency levels above 50%. The improvement has been affected to a large extent by the addition of Rosneft to our sample. With a score of 66%, Rosneft accounts for around 11% of the total market capitalization of companies included in the survey.

As in our previous survey, much of the aggregate market capitalization falling into the 60% to 70% range is represented by Gazprom's stock, which accounts for around one-third of aggregate market capitalization. Furthermore, LUKOIL, with a 65% score, accounts for another 8%.

Only 6% of the total Russian stock market capitalization belongs to the >70% category. In the previous year, these companies totaled 9% of the respective value. This change is explained by a fall in the leaders' scores, mostly due to changes in methodology, as detailed above.

Another interesting observation is that the distribution of scores became much more homogeneous this year. The average difference between the companies closest to each other in ranking does not exceed 0.8 p.p. (and 0.7 p.p. if the outlier, Bashneft, with a gap of 7 p.p., is taken out). The second-largest gap is less than 4 p.p. (Tatneft). This may be a result of the increase in the sample by almost a third, which made sample distribution denser. At the same time, the lack of clearly fragmented clusters implicitly supports the view that transparency is substantially affected by market-based disclosure mechanisms in addition to regulatory pressures, and the importance of these mechanisms appears to be on the rise as the dependence of companies on the international capital markets strengthens. While the U.S.-listed companies (MTS, Mechel, Golden Telecom, Rostelecom, WBD and Vimpelcom) came out as leaders in terms of transparency as in the previous years, VolgaTelecom (74%) and NWT (72%), scored only slightly lower on average, even though they do not face the stringent requirements of the U.S. SEC. Much of the disclosure by these companies (including the IFRS financials) is entirely voluntary.

We note the strengthening temporal stability of disclosure scores. Spearman's rank correlation test (which examines the direction and strength of the relationship between the sequences of scores over time) for small-to-medium samples based on our 2003-2006 results shows that there is strong year-on-year correlation between the ranks (see table 3). For the 2006-2005 period this correlation can be classified as very strong.

Table 3 Spearman’s Year-On-Year Rank Correlation Tests
	2005	2004	2003
2006	0.85	N/A	N/A
2005	1	0.81	N/A
2004	N/A	1	0.76
N/A--Not applicable.

The more detailed analysis of six disclosure components shows that in general disclosure patterns stayed largely the same over the year, comparing them with the results of 54 companies last year, net of the changes in methodology and sample composition (see table 4). Component 1 (ownership structure) is the notable exception. The score for this component increased by 7 p.p., of which about 3.4 p.p. can be attributed to the changes in methodology and 2.7 p.p. to the change in the sample composition. Net of these issues, there was a growth of 0.9 p.p. driven by tangible improvements in the ownership disclosure of the companies that were included in both the 2005 and 2006 surveys. For instance, of these companies, Gazprom Neft and Pyaterochka fully disclosed their beneficial owners for the first time since our previous survey. Several companies provided additional detail on their beneficial ownership structure that allowed us to treat their ownership disclosure as complete (e.g., Vimpelcom, TNK-BP, Novatek, and Power Machines), while ownership disclosure of a few companies improved slightly (Gazprom, Norilsk Nickel, Mechel, MGTS, Tatneft, and Bashneft). Another reason is improvements in the availability of ownership-related information in English, although this had a smaller effect. We tend to relate improvements in ownership disclosure to the fact that more Russian companies are approaching international markets through IPOs or bond issues.

Table 4 Comparative Table On Disclosure By Components By The Largest Russian Companies In 2006 And 2005
	--Components (%)--
	1	2	3	4	5	6
70 Russian companies, 2006	56	53	55	63	56	30
54 Russian companies, 2005	49	49	46	67	57	29
Note: Component 1: Ownership structure. Component 2: Shareholder rights. Component 3: Financial information. Component 4: Operational information. Component 5: Board and management information. Component 6: Board and management remuneration.

The average score for component 3: financial information, also increased by an average of 9 p.p. About one-fourth of this increase is attributable to genuine improvements in disclosure. This differs from component 2: shareholder rights (growth of 4 p.p.), where the gross increase is turned into only a marginal growth if we account for changes in methodology and sample composition. Significant improvements in annual and interim IFRS reporting as companies were able to present such reports earlier and provide more detailed notes (e.g., revenue/cost structures, segment analysis, and methods of asset valuation) were the main contributors to the score for component 3. There also was a slight improvement in disclosure of auditor remuneration.

The most information is disclosed in component 4: operational information, on which 55 companies (79% of the sample) scored more than 50%, with the highest score of 93% (Mechel) and the lowest of 24% (Seventh Continent). The gross average score for this component has still decreased. An upward shift from the new weighting system was outweighed by the introduction of several new questions, disclosure on which is limited, and the changes in the sample composition (negative 1.9 p.p.). At the same time, there was a small absolute decrease in the average score of component 5: board and management information (1 p.p.) and a slight gross increase in that of component 6: board and management remuneration (1.3 p.p.), which turn into insignificant figures when netted of the effects of the criteria and sample changes. As in our previous survey, component 6 comes out the weakest. Only 11 companies (16% of the sample) disclosed information on more than a half of relevant criteria items with the highest scores of 89% (Golden Telecom, listed on NASDAQ), and around 72% (Vimpelcom and Rostelecom, listed on the NYSE; and NWT), and the lowest scores of zero (AvtoVAZ, Norilsk Nickel, Ritek, Seventh Continent, Surgutneftegas, and Tatneft).

The disclosure of specific best- and worst-disclosed items by Russian companies in 2006 is summarized in chart 3. The classification of the items as best or worst disclosed is based on the proportion of companies providing information on this item out of all the companies where such disclosure is relevant.

There was a slight improvement in ownership disclosure by Russian companies. For example, the number of the companies (as a proportion of the sample) disclosing the largest shareholder rose by 15 p.p. to 76% from 61% last year, and the number of those that disclosed more than 50% of the beneficial ownership by 10 p.p. to 76%. IFRS reporting is another area of improvement. The number of companies (as a proportion of the sample) that provided annual IFRS financials, increased by 15 p.p. to 71%, and those providing notes to these statements by one-fifth from 51%. Nonetheless, this does not allow us to treat these items as best-disclosed.

In our opinion, the most critical areas in which the disclosure practices of Russian companies are weak include detailed information about related-party transactions (e.g., exact terms and indication whether such transactions are carried out at the market terms), exhaustive ownership disclosure (e.g., disclosing every shareholder owning more than 10%), auditor engagement (scope of services, nonaudit services, and remuneration), ownership structures of affiliates and subsidiaries, and details and principles of board and executive remuneration.

As in our previous survey, corporate Web sites are the most informative channel with a gross average score of 57% (3 p.p. down from last year, see table 5). The fact that Web sites still hold the lead is partly explained by our approach to scoring: We consider all the information contained on the Web site even if it was actually contained in annual reports or regulatory filings published on the Web. (The potentially confusing effect of "multiple accounting" of the information is minimized by our new scoring method, which gives a modest reward for replication of information in various disclosure media.) In our view, the modest decline in the gross scores for the Web sites and regulatory filings results from a combination of two contradicting factors: the improved disclosure by those firms that were included in the sample of our previous survey, and the change in criteria and sample composition, which had a negative effect. We included 21 new companies with average score for the Web site information of 51.6% and excluded five companies with an average of 34.5%, while the average effect of change in criteria is negative 1.6 p.p. This yields an estimated actual decline of 0.7 p.p. The same reasoning applies to the change in the average score of regulatory reporting source (estimate of the actual growth is 0.3 p.p.).

Table 5 Sources Of Disclosure
	Annual reports (%)	Web site information (%)	Regulatory filings (%)
70 Russian companies, 2006	38	57	40
54 Russian companies, 2005	36	60	43

A more interesting result is the growth in the average score of the annual reports, where we estimate the effective improvement of 5.0 p.p. The main reason for this improvement is that more companies among those 50 included in the 2005 and 2006 surveys provided English versions of their annual reports. There also was a slight improvement in the quality of these reports.

As in the previous years, the telecommunications sector continues to be the most transparent (see table 6). Its market capitalization weighted transparency index (CWTI) is 73% (up by 1 p.p. from last year). The CWTI of all the sectors improved, except for the engineering sector, the least transparent to date. This is largely driven by the decrease in the disclosure practices by AvtoVAZ, the largest company in the sector among those included in our survey (7 p.p. decrease; 10.9 p.p. net of methodological changes).

The most notable rise was in the food, consumer, and retail sector. The CWTI of this sector was 54%, 16 p.p. over last year's result. This increase comes mainly from two sources: first, Pyaterochka, which accounts for one-fifth of the total sector capitalization in our survey, showed outstanding growth of 51 p.p., and, second, the sector definition now includes Magnet (52%) and Amtel Vredestein (55%), which have results significantly exceeding the sector's average figure of the previous year.

A modest increase in Power Generation's CWTI is in fact comparable to zero if we net the effects from methodological changes out. We find this quite surprising given the active phase of reform in the Russian electricity sector and the strong need of the energy-generating companies to attract investments, which usually requires material increases in transparency. On the other hand, the stable 5 p.p. year-on-year rise in the CWTI of the oil and gas sector is not an expected result given high oil prices, which do not usually increase the motivation to become more transparent to attract investors' funds.

Table 6 Disclosure By Industries
Industry	2006 CWTI (%)	2005 CWTI (%)	Change 2006-2005 (%)	Change 2005-2004 (%)
Telecommunications	73	72	1	0
Metallurgy	62	51	10	1
Oil & gas	61	56	5	5
Banking	57	45	12	7
IT	56	53	3	(6)
Food, consumer, and retail	54	38	16	(10)
Power generation	52	50	2	(1)
Engineering	43	46	(4)	6
Total	54	50	4	4
CWTI--Capitalization weighted transparency index.

The most transparent companies are private ones. At the same time, comparing the results of the three most transparent private companies and the three controlled by the government showed only a modest 3.6 p.p. difference. This shows that disclosure by the most advanced Russian government-owned companies issuing public debt or equity instruments has the potential to be on par with that of private companies.

The transparency scores of the three companies where the influence of the government became dominant during the last year declined, net of methodological changes (AvtoVAZ, negative 10.9 p.p.; Gazprom Neft, negative 7.3 p.p.; and OMZ, negative 4.5 p.p.). The decline in their transparency is most likely explained by the fact that these companies now have fewer incentives to invest effort in enhancing disclosure as a means to attract investors as they have found a strategic investor--the state--and there are no other likely candidates.

As in the previous years, we studied ownership concentration and disclosure within the framework of the transparency and disclosure survey. We also made an important enhancement to the methodology of ownership analysis. While family owned companies are uncommon in Russia, many companies were created or acquired in the course of privatizations by groups of individuals whose business relations were based on personal trust. As a result, there are a number of companies controlled by groups of individuals with a long history of personal and business relationships. Examples include Evraz Group, IRKUT, LUKOIL, MMK, Norilsk Nickel, RBC, Sistema, and WBD. The arrangements between such individual shareholders, including those on voting policies, are not always formalized and disclosed in public sources.

To avoid unfounded categorizations, we applied two approaches in our study of ownership concentration. First, we took a liberal approach in treating all the disclosed individual holdings owned by individuals as independent stakes, rather than constituents of a consolidated block, unless there was a shareholder agreement providing for coordinated voting policies. This defines the lower bound in our assessment of ownership concentration. Our conservative approach, on the contrary, treated individual stakes of individuals presumably belonging to the same group (e.g., management, founders, etc.) as one block unless there is an explicit mentioning in the company's bylaws or a public shareholder agreement that their voting policies are not coordinated. This approach yielded an upper bound in our assessment of ownership concentration.(1) Further, we based our analysis on the figures under the conservative approach while the values for liberal approach are presented in parenthesis.

Overall, on the basis of both approaches there was a modest decrease in concentration of the largest Russian companies as compared with our previous survey (see table 7). The share of concentrated (>25%) stakes in the aggregate market capitalization of 70 largest Russian companies is 59%--2 p.p. lower than this share in aggregate market capitalization of the 54 companies studied in 2005. For the compared group of 50 companies included in both samples concentration went down by 6 p.p. (from 61% to 55%). At the same time, while there were no widely held companies in our earlier surveys, there is one widely held company under the conservative approach (LUKOIL(2)), and two companies under the liberal approach (LUKOIL and Urals Energy), representing 1% under the conservative approach (3% under the liberal) of the sample. Although this change is not significant in terms of the number of companies involved, it is material in terms of market capitalization, as LUKOIL alone accounts for 8.2% of the aggregate market capitalization.

Table 7 Concentration Of Ownership, 70 Largest Russian Companies, 2006
	--Conservative approach--			--Liberal approach--
	No. of companies	Companies in AMC (%)*	Stakes in AMC (%)¶	No. of companies	Companies in AMC (%)	Stakes in AMC (%)
Widely held companies (largest stake <25%)	1	8.2	8.2	2	8.3	8.3
Companies with at least one blockholder >25%)	69	91.8	59.1	68	91.7	58.9
Of which: majority owned companies (>50%)	59	87.1	55.7	53	86.5	55.1
Companies with direct government stake >25%	7	53.1	31.3	7	53.1	31.3
––Companies with direct government stake >50%	5	52.6	31.2	5	52.6	31.3
Companies with large stakes (>25%) owned by government holdings	26	8.9	5.5	26	8.9	5.5
––Companies controlled by government holdings (50%)	23	6.9	4.8	23	6.9	4.8
––Overall companies controlled by the government	28	59.5	36.0	28	59.5	36.0
Companies with large (>25%) private stakes	45	31.3	22.3	44	31.2	22
Companies with private stakes >50%	31	27.1	19.7	26	26.5	19.2
*Share of combined market capitalization of the relevant companies in aggregate market capitalization of the 70 largest companies. ¶Share of the corresponding stakes in aggregate market capitalization of the 70 largest companies. AMC--Aggregate market capitalization of 70 companies included in the survey.

Ownership concentration in the private sector declined as well. The number of the companies in which private (i.e., not government-owned) stakes exceed 25% of votes is 45 this year (64% of the sample) as opposed to 41 such companies last year, which, however, made up 76% of the sample. The share of these large (>25%) stakes in the overall private ownership has gone down by 14 p.p. to 36% from 50%. (The respective aggregate share of controlling private stakes (i.e., exceeding 50%) has decreased to 32% from 43%.) The major drivers for this drop, in addition to the LUKOIL effect, have been a number of share sales during the IPO boom of the last 12 months and the growing weight of government ownership in the overall market capitalization.

On the contrary, there was increased concentration of government ownership. In 2006, large (>25%) government-owned stakes account for 59% of the overall market capitalization of 33 companies, where the government holds at least 25% stake both directly and indirectly, while in 2005 their share was 54%. For the respective controlling stakes only (>50%) the growth was 7 p.p. (to 60% from 53%). This effect is primarily caused by the fact that we included several new government-owned companies (Rosneft and a number of power generating companies that are subsidiaries of RAO UES).

Another important tendency of the declining share of private versus government ownership in the group of Russia's largest and most liquid companies is worth monitoring. While the 2006 sample included 14 new private companies, it also included several new government-owned companies compared with the 2005 sample. Additionally, changes in the ownership structures of Sibneft (now Gazprom Neft), OMZ, and VSMPO-AVISMA (and indirectly AvtoVAZ), which involved the transfer of big formerly private stakes to direct or indirect government control, plus the accelerated growth of the market value of the government-controlled companies all contributed to this decline in the weight of private stakes. Overall, the share of the companies with large private stakes now constitutes 31% of aggregate market capitalization. This figure has gone down by 27 p.p. from 58% last year. At the same time, joint market capitalization of the companies in which the government holds more than 25% directly has increased to 54% of aggregate market capitalization, compared with only 35% of this amount last year. For the sake of comparability, if we compare the shares of government-owned stakes for the overlapping subsample of 50 companies included both in this and last year's surveys, we still see this effect, though less pronounced. In 2006, the aggregate share of all large government-owned stakes is 31% of aggregate market capitalization as opposed to 21% of this amount in 2005, equaling a net increase of 5 p.p. resulting from the ownership changes and above-the-market growth of government-owned companies (excluding the effect of Rosneft, which accounts for 11% of the aggregate market capitalization).

The analysis of ownership disclosure by the largest Russian corporations yields results that are generally encouraging (see table 8). Equity stakes of any size (but excluding free float) with disclosed beneficial owners account for 58% of the aggregate market capitalization, as compared with 46% of this capitalization last year. Companies that disclose beneficial ownership for all blocks exceeding 25% represent 81% of aggregate market capitalization, 20 p.p. higher than that percentage in our previous survey. The share of respective stakes in the aggregate market capitalization is 51%, up from 36% a year earlier. Ownership disclosure at several companies improved, including Gazprom Neft, Lebedyansky, Novatek, Pyaterochka, and Vimpelcom.

Table 8 Concentration Of Ownership, 70 Largest Russian Companies, 2006
	--Conservative approach--			--Liberal approach--
	No. of companies	Companies in AMC (%)*	Stakes in AMC (%)¶	No. of companies	Companies in AMC (%)	Stakes in AMC (%)
Companies disclosing at least one owner	65	94.9	58.2	65	94.9	58.4
Companies disclosing all large (>25%) beneficial owners	58	80.5	50.6	57	80.4	50.3
Of which: companies disclosing all large stakes (>25%) belonging to govt. or govt. holdings	29	61.2	36.1	30	61.4	36.6
Companies disclosing all large (>25%) private owners	33	20.1	14.4	31	19.8	14.0
*Share of combined market capitalization of the relevant companies in aggregate market capitalization of the 70 largest companies. ¶Share of the corresponding stakes in aggregate market capitalization of the 70 largest companies. AMC--Aggregate market capitalization of 70 companies included in the survey.

It is no surprise that ownership disclosure in government-owned enterprises is traditionally strong. In 2005, all 23 companies owned more than 25% directly or indirectly by the government made this information public; in the present survey, this total is 30. There are still some deviations from this practice. At one company, Power Machines, the volume of the (mediated) state participation was not fully available from public disclosures. Power Machines discloses the direct stake of RAO UES, a government-controlled utility giant, amounting to 22% in its reports. However, we did not see references to the fact that RAO UES also comanages a 30% stake owned by Interros, a private company. In addition, OMZ, where Gazprombank consolidated 75% in February 2006, issued a media release in connection to this transaction, but did not replicate this information in its public reports.

The number of companies disclosing all private (i.e., nongovernment) stakes exceeding 25% has increased since last year. Out of 45 companies where such stakes exist, 33 disclose their beneficial ownership, or 73% of this subsample, as compared with 51% in the previous survey (i.e., 21 companies of out of 41 having large private stakes).

Although ownership of Russian companies cannot be considered transparent by international comparison, there have been important improvements in the level of disclosure of private stakes. The share of disclosed private stakes in overall private ownership has risen to 34% from 28% in 2005 and 24% in 2004. In the bulk of the concentrated private ownership, the disclosed share has grown to 74% from 51% (see chart 4).

Unlike the situation in the developed markets, disclosure of beneficial ownership remains voluntary for shareholders in Russia, which is one of the obstacles to higher disclosure at this stage. Russian law does not require the beneficial shareholders to report their indirect stakes, or provide other means for the company to become informed of indirect forms of ownership. These requirements are commonly applied in the developed regulatory regimes, but have not been applied in Russia (see Appendix III for the list of regulations on ownership disclosures of different exchanges). Therefore, in Russia consolidated stakes may emerge without the company's knowledge. Examples include a recent situation at MGTS, a Moscow-based fixed-line telecom operator. According to media reports, Sputnik, a Russian investment fund, had indirectly consolidated about 5% of voting stock of MGTS in 2005. The company was not able to confirm this and therefore, did not report it in public documents.

The gradual movement toward transparency of ownership is associated with the increasing globalization of Russian companies and consequently, their dependence on the international capital markets, and the associated drive to meet the disclosure standards that are considered acceptable by international investors.

There are substantial differences in average disclosure levels for Russian companies listed on the major domestic and international exchanges. These differences are largely, although not entirely, attributable to different levels of disclosure requirements associated with the respective listings (see table 9). The most stringent disclosure requirements apply to companies listed on the U.S. exchanges, which are subject to regulation by the SEC and bound by the Sarbanes-Oxley Act of 2002. Accordingly, the average transparency score on the U.S.-listed companies is 76%, with a lower average score of 61% for the 20 companies listed on the LSE, where the disclosure requirements are less demanding, but still stringent. The lowest average score of 49% belongs to the companies listed on the AIM. An overview of disclosure and governance structure requirements of the world leading stock exchanges is given in Appendix IV.

Table 9 Breakdown By Exchange Transparency Score, 70 Russian Companies, 2006
Stock exchange	Average (%)	No. of companies	No. of companies that improved their scores
NYSE	76	5	0
NASDAQ	76	1	1
LSE	61	20	11
RTS	56	39	21
Frankfurt Stock Exchange	56	20	14
MICEX Stock Exchange	55	35	17
AIM	49	3	1

Interestingly, the average score for the AIM-listed companies was lower than the averages for the major Russian exchanges: Russian Trading System (RTS) and MICEX Stock Exchange. This may appear counterintuitive as these two exchanges currently do not provide any specific disclosure requirements in addition to those specified by the market regulator, FFMS. At the same time, most Russian companies listed on the NYSE and LSE also have listings on these exchanges, driving up the respective averages. Net of these companies, the MICEX- and RTS-listed stock issuers score 48% and 50% for disclosure results, respectively. It is worth noting, however, that stock exchanges and regulators only set minimum disclosure requirements, and are not the only drivers of transparency. Market-based mechanisms may also play an important role, as shown by several high-scoring companies without international listings. This applies to VolgaTelecom, for instance, which has a transparency score close to the average for the NYSE-listed companies, but is not listed internationally.

We analyzed the relation between the companies' relative value (as measured by EV/Sales multiple) and transparency (see chart 5). An exponential regression showed a positive, though weak, association (coefficient of determination is 22%). This quite-low figure is explained by the fact that transparency is secondary in company valuation compared with the market situation, and industry and business perspectives. Moreover, the quality of correlation analysis goes down in a volatile market such as Russia's. (We tried to smooth the effect by taking average valuation coefficients for the period of six months.) Nonetheless, transparency is an important intangible asset, which allows the most transparent companies to enhance their market value through providing more comfort to the investors, who in their turn may demand lower required rates of return on their investment.

The shareholder rights area of governance in Russia is reasonably strong by international standards on the back of solid applicable legislation, with an average score of 67%. Russian law provides for a "one share-one vote" principle, as well as sound procedures for general shareholder meetings (GSM), including those on notification and circulation of respective materials, proxy and in absentia voting, the right to nominate board candidates (for holders of 2% of votes and above) and elect them by a cumulative voting process, preemptive rights for new share issues, supermajority vote on several critical corporate issues such as amending the charter, and so on. Accordingly, shareholders in all companies under Russian jurisdiction are entitled to a broad measure of rights. This means that by the pure fact of being Russian corporations, companies already get credit for their corporate governance structures. This automatically ensures up to 53% of the total score for the shareholder rights component.

Several companies, including Kalina, Lebedyansky, Norilsk Nickel, Seventh Continent, and TMK, were able to attain scores of 80% and higher, by complementing the mandatory rules and procedures with sound internal policies. As judged from public sources, the scope of shareholder rights at these companies approaches that observed at the leading well-governed international companies. Importantly, these companies differ considerably in terms of their industry profile and their exposure to regulation by non-Russian authorities. This suggests that there can be internal drivers for developing strong internal procedures exceeding the legal requirements.

At the same time, several loopholes in the legislation and lack of regulation in certain domains of shareholder rights result in systematic governance weaknesses. These include the use of the direct affiliation principle, rather than the control principle, in identifying related parties for the purpose of submitting transactions involving such parties for board approval. Although some boards may have developed informal routines for a substantive, rather than formal approach to related-party transactions, we did not find reference to such an approach in any of the company charters or bylaws. Dividend payout procedures is another weak area, as the law sets the maximum payout period at six months and provides no guidelines related to the payout schedule. There have been cases when this led to blockholders receiving a dividend earlier than minority shareholders (e.g. MGTS, STC, and Uralsyazinform). None of the companies we surveyed pay all dividends on the same day, which is a common international practice.

In general, relatively few companies make an effort to go beyond the scope of requirements provided by the Russian Law On Joint-Stock Companies and related acts and regulations. For example, interim dividend payments (not required by law, but common in international practice) are paid by 14 companies. Only 27 companies have explicit guidelines for completing dividend payments within 60 days after the annual general meeting (AGM), compared with the mandatory six-month period. In addition, with some rare exceptions (e.g., Severstal), formal dividend policies typically have little value for shareholders as they contain nominal information only and usually do not extend beyond replicating provisions of the law and the company charter. In addition to the issues outlined above, independence of registrars remains one of the principle concerns related to shareholder rights. Only about half (36) of the surveyed companies follow the international standards in appointing registrars that have no ownership ties to the companies or their blockholders.

Few companies made IFRS financials available before GSMs. Among the 54 companies that made their IFRS financials public, the average period of time from the end of the financial year (2005) until the publication was 5.1 months (see table 10).

Table 10 Timeliness Of Publication Of The 2005 IFRS/U.S. GAAP Financials In 2006
	March	April	May	June	July	August	September
No. of companies	5	11	13	13	8	3	1
Cumulative no. of companies	5	16	29	42	50	53	54

While these informational drawbacks hardly impair the rights of strategic shareholders that dominate the ownership structure of the economy, they indicate weaknesses related to the rights of minority shareholders, and leave substantial room for improvement.

Board compositions and procedures appear to be a much weaker area of governance in terms of their potential for serving the interests of a broad shareholder base--the average score for this component is 34%. We clearly understand the limitations to what can be said about the board composition and process on the basis of public information. As these limitations prescribe certain connotations, we introduced the concepts of "external", "formally independent" directors, "directors representing the majority shareholder group", and "minority shareholder representatives".(5) Judgments on these structural classifications are based on directors' official background information, and media and research sources. Obviously, this approach results in a relatively liberal assessment of director's independence. For example, a sample test comparing the share of independent directors and minority shareholder representatives in companies that have undergone a thorough governance analysis within the framework of corporate governance scores (CGS) by Standard & Poor's, shows that the public-information-based approach overestimates the number of such directors by 36% compared with the number reached through an in-depth interactive analysis. The latter effectively addresses the issues of potential and actual conflicts of interest, which directors may be exposed to but may not be disclosing, while the former does not attempt to do that.

The boards of Russian companies are heavily dominated by the nominees of the majority shareholders, in most cases at the expense of proper balance and independence (see table 11). We found that in 46 companies out of 70 the representation of the largest shareholder and management (including their affiliated parties) on the board exceeds the share of the majority shareholder in the capital. So far, relatively few blockholders have adopted a hands-off approach by partly delegating decision-making authority to external directors. Most Russian blockholders choose to maintain tight control over the companies by maximizing their board presence, despite the fact that all the surveyed companies are public. Only 13 companies (19% of the total) have one-third or more board members who are external. Four companies (Amtel-Vredestein, Novatek, Pharmacy Chain 36.6, and WBD) have external board majorities, despite their being majority owned. In the majority of the other cases, however, board compositions impair the ability of a board to serve the interests of all the shareholders as opposed to only the controlling shareholders. Accordingly, this increases risks for potential equity investors and raises the discounts in market valuations. While the separation of chief executive and board chairperson's positions is mandatory in Russia (the only company in our sample not bound by that norm is the U.S.-incorporated Golden Telecom, which opts for separation of these roles as well), only three companies (Vimpelcom, Kalina, and Pyaterochka) have external board chairmen.

Table 11 Board Of Directors Composition Breakdown, 70 Russian Companies, 2006
Insiders:	67.5	External directors:	22.3	Representatives of noncontrolling strategic investors (>10% of shareholding)	10.2
Of which:		Of which:
Management and former management	21.0	Representatives of portfolio investors (<10% of shareholding) (Figure for breakdown combined with category below.)	3.9	N/A	N/A
Controlling private owner representatives	30.9			N/A	N/A
Controlling government owner representatives	14.5	Independent directors (Figure for breakdown combined with category below.)	18.5	N/A	N/A
Service providers	1.2			N/A	N/A
Note: All figures as average proportions of the company’s board (in %). N/A--Not applicable.

The applicable Russian legislation defines the minimal materiality threshold for transactions requiring board approval at 25% of assets (stand-alone under Russian Accounting Standards)--a very liberal level by international comparison, as it allows management much freedom in performing virtually uncontrolled acquisitions or divestments. Russian companies are free to define a lower threshold in their charters, however, and many chose to do so. In 20 companies in our sample, thresholds of 10% of assets were explicitly mentioned in charters or bylaws; in 15 companies this threshold was lower, at 5%. This reflects the general motivation of majority shareholders to ensure accountability of management by developing appropriate control mechanisms and performing close oversight. Accordingly, risks of self-serving behavior by managers are relatively small, at least at the larger companies. This measure does not mitigate the primary governance risks, however, which come in the form of a blockholder using its influence to the detriment of other investors.

Positively, there is a high level of expertise present on the boards, as judged from publicly available biographical data (see table 12). In all the 70 companies, boards included members with experience in strategic management (beside the companies' executives), while 62 companies had a majority of members with expertise in either the industry, strategic management, or finance/audit. Our analysis shows that in general, this reflects the tendency of the majorityholder entities to appoint their senior managers to the boards of subsidiaries. As a result, board expertise is to a large extent represented by strategic shareholders: about half (54%) of the companies had external board members with expertise in finance/audit, and 26 companies had these members with relevant industry experience.

Table 12 Board Of Directors Competencies, 70 Russian Companies, 2006
	No. of companies	Share in the sample (%)
Companies that have board members (apart from executives) with expertise in strategic management	70	100.0
Companies that have external board members with expertise in finance/audit	38	54.3
Companies that have external board members with relevant industry experience	26	37.1
Companies that have a majority of members with expertise in either the industry, or strategic management, or finance/audit	62	88.5

An increasing number of companies are developing formal board-level committee structures. The share of companies that have formal audit committees has increased to 74% (52 out of 70 companies) from 54% in our previous survey (29 out of 54). A total of 63% of companies in our sample have compensation/nominations committees, and 46% have strategy/risk committees.

There has been some improvement in the independence of the audit committees among the companies we surveyed. In 20 companies out of 52 (38%), external directors were in the majority on the audit committees (up from 17 in our previous survey), while 32 audit committees (62%) have external chairmen (see table 13). Independence and competence of the audit committee is a critical element of governance. For example, the Code of Corporate Conduct issued by FFMS recommends that audit committees include only independent directors, to avoid conflicts of interest. Only eight audit committees in our survey were composed entirely of external members, in line with this recommendation.

Table 13 Board Of Directors Committees And Their Composition, 70 Russian Companies, 2006
	Audit committee		Remuneration/ Nominations committee		Strategy/Risk committee
	(No.)	(%)	(No.)	(%)	(No.)	(%)
Companies that have the corresponding committee	52	74	44	63	32	46
Among these committees:
Majority of external directors	20	29	7	16	2	6
External chairman	32	62	18	41	10	31

In addition, the effectiveness of the audit process in many cases is hindered by limited independence of the internal audit. Only at seven companies do the bylaws provide that the internal audit department reports directly to the audit committee or the board.

The presence of external members on other committees was substantially weaker. Only seven compensation/nominations committees (16%) and two strategy/risk committees (6%) had external majorities. A total of 18 compensation/nominations committees (41% of their total number) and 10 strategy/risk committees (31%) had external chairmen.

There also is a widespread practice of appointing nonboard members to board-level committees, which is a weakness from the governance perspective. This was the case with 27% of the existing audit committees, 41% of the compensation/nominations committees, and 47% of strategy/risk committees. Indeed, such experts are not subject to fiduciary duties even if they are given voting rights at committee sessions. Moreover, this is often a result of a majority shareholder nominating functional personnel less senior than the members elected to the board in order to exercise closer control.

Typically, companies do not disclose the actual statistics of board sessions and attendance rates, and we observed that none of the companies has adopted bylaws that provide for a greater frequency of face-to-face meetings than that required by the law (four meetings per year). In the international practice, this limited frequency of meetings at the stage when companies have limited experience with institutionalized governance is considered as too low.

The scores for corporate governance among the companies listed on various stock exchanges are quite dissimilar, ranging from 39% (AIM) to 54% (NYSE). In many respects this is explained by the different governance structure/procedures required by the stock exchanges and the respective regulatory authorities (see table 14). In our view, the strictest regulation on corporate governance structures/procedures is observed at NYSE and NASDAQ, which fall under the U.S. SEC regulatory environment bound by Sarbanes-Oxley. (See Appendix IV, which summarizes major corporate governance requirements by major stock exchanges.) The least-onerous mandatory governance requirements are found at the AIM (while the requirements of MICEX Stock Exchange, RTS, and the Frankfurt Stock Exchange are not much stricter); therefore, companies listed only at these stock exchanges have lower scores. Interestingly, the differences in requirements primarily explain the dissimilarities of the scores for the second component (board structure and process) as these requirements deal mostly with board and audit committee composition and independence accounted for this in this component.

Table 14 Breakdown Of Scores For Governance Structures By Exchanges, 70 Russian Companies, 2006
Stock exchange	Total (%)	Shareholder rights (%)	Board structure and process (%)	No. of companies
NYSE	54	71	46	5
NASDAQ	51	43	54	1
LSE	48	66	41	20
MICEX Stock Exchange	47	67	38	35
RTS	46	69	38	39
Frankfurt Stock Exchange	43	66	33	20
AIM	39	62	29	3
Listed only on RTS	42	71	29	16
Listed only on MICEX Stock Exchange	41	70	29	16

Governance structures in the shareholder rights component seem to be well supported by the requirements generally applicable to public companies in the Russian jurisdiction, rather than those specific for the U.S. exchanges. As we pointed out earlier, this largely rests on Russian law, which is, at least in letter, highly protective of shareholder rights. The positive difference between companies incorporated in Russia and Golden Telecom, incorporated under U.S. law is particularly notable (which does not suggest, however, that governance practices are less effective at this company). The same explanation applies for companies listed on the AIM, as two out of three companies (Sibir Energy and Urals Energy), are incorporated offshore and therefore, are not subject to the stricter requirements on shareholder rights that Russian companies are.

The discovered lack of any visible correlation between a company's value multiples (EV/Sales and P/B) and formal governance structures is not surprising. Even as a prerequisite, these structures only create a framework for sound governance practices, ensuring a balanced influence, tangible internal control environment, and effective motivation of key decision-makers. Without the assurance of those, we cannot expect the market to react positively on the existence of structures only.

Research assistance provided by: Elena Pastoukhova, Maria Chaderina, Artyom Neklyudov, Vladimir Greeniv, and Eino Rots.

Disclosure of:

1. The number and par value of issued ordinary shares.

2. The number and par value of issued other types of shares disclosed.

3. The number and par value of authorized but unissued shares of all types.

4. The identity of the largest shareholder.

5. The identity of holders of all large stakes (blocking: > 25%; controlling: > 50%).

6. The identity of shareholders holding at least 25% of voting shares in total.

7. The identity of shareholders holding at least 50% of voting shares in total.

8. The identity of shareholders holding at least 75% of voting shares in total.

9. The number and identity of each shareholder holding more than 10%.

10. Shareholding in the company by individual senior managers.

11. Shareholding in the company by individual directors.

12. The description of share classes.

13. A review of shareholders by type.

14. The percentage of cross-ownership.

15. Information about listings on exchanges.

16. Information about indirect ownership (e.g., convertible instruments).

17. The ownership structure of affiliates.

Disclosure of:

18. Corporate governance charter or corporate governance guidelines.

19. Evidence of existence of a code of business conduct and ethics.

20. The contents of the code of business conduct and ethics.

21. Articles of association (including changes).

22. Voting rights for each voting or nonvoting share.

23. The way that shareholders nominate directors to the board.

24. The way that shareholders convene an extraordinary general meeting (EGM).

25. Procedure for initiating inquiries with the board.

26. Procedure for putting forward proposals at shareholders meetings.

27. Formalized dividend policy.

28. Review of the last shareholders meeting.

29. Full general shareholder meeting (GSM) minutes.

30. Calendar of important shareholder future dates.

31. GSM materials published on the Web site.

32. Detailed press releases covering last corporate events.

33. Policy on information disclosure.

Disclosure of:

34. The company's accounting policy.

35. The accounting standards it uses for its accounts.

36. Accounts according to local standards.

37. Annual financial statements according to an internationally recognized accounting standard (IFRS/U.S. GAAP).

38. Notes to annual financial statements according to IFRS/U.S. GAAP.

39. Independent auditor's report on annual financial statements according to IFRS/U.S. GAAP.

40. Unqualified (clean) audit opinion on annual financial statements according to IFRS/U.S. GAAP.

41. Disclosure of related-party transactions (RPTs): sales to/purchases from, payables to/receivables from related parties.

42. Transactions with the companies from the same group.

43. Indication that RPTs are made on market or nonmarket terms

44. Exact terms of RPTs.

45. Interim (quarterly or semiannual) financial statements according to an internationally recognized accounting standard (IFRS/U.S. GAAP).

46. Notes to these financial statements.

47. Whether these financial statements are audited or at least reviewed.

48. Whether these are consolidated financial statements or those of only the parent company are audited.

49. Consolidated financial statements according to the local standards.

50. Methods of asset valuation.

51. A list of affiliates in which the company holds a minority stake.

52. A basic earnings forecast of any kind.

53. A detailed earnings forecast.

54. Segment analysis (results broken down by business line).

55. Revenue structure (detailed breakdown).

56. Cost structure (high degree of detail).

57. The name of the auditing firm.

58. Whether the audit firm is a top-tier auditor.

59. Auditor rotation policy.

60. How much the company pays in audit fees to the auditor.

61. Whether auditor renders nonaudit services.

62. Nonaudit fees paid to the auditor.

Disclosure of:

63. Details of the type of business the company is in.

64. Details of the products or services the company produces or provides.

65. Output in physical terms.

66. A description of functional relationships between key operating units within the group.

67. Industry indicators that allow comparison with peers.

68. Other financial indicators.

69. Characteristics of fixed assets employed (including licenses).

70. Efficiency indicators.

71. A discussion of corporate strategy.

72. Any plans for investment in the coming years.

73. Detailed information about investment plans in the coming year.

74. An output forecast of any kind.

75. An overview of trends in its industry; regulatory environment with regard to industry.

76. The market share for any or all of the company's businesses.

77. Social reporting (e.g., Global Reporting Initiative).

78. Overview of compliance with ecology law.

79. Principles of corporate citizenship.

Disclosure of:

80. The list of board members (names).

81. Details about the current employment and position of directors.

82. Other details: previous employment and positions, education, etc.

83. When each director joined the board.

84. The name of the chairman.

85. Details about role of the board of directors at the company.

86. A list of matters reserved for the board.

87. A list of board committees.

88. Names of all members of each existing committee.

89. The bylaws on other internal audit functions besides the audit committee.

90. Information about the ratio of in absentia and in person board meetings.

91. Attendance record for board meetings.

92. A review of the last board meeting.

93. A detailed review of the last board meetings (including voting results on each item of the agenda).

94. The list of senior managers not on the board of directors.

95. The backgrounds of senior managers.

96. The nonfinancial details of the CEO's contract.

97. The number of shares held in other affiliated companies by managers.

98. Whether director training is provided.

Disclosure of:

99. The decision-making process for directors' pay.

100. The specifics of directors' pay, including the salary levels.

101. The form of directors' salaries, such as whether they are in cash or shares.

102. The specifics of pay for directors.

103. The decision-making process for determining managerial (not board) pay.

104. The specifics of managers' (not board) pay, such as salary levels and bonuses.

105. The form of managers' (not board) pay.

106. The specifics of performance-related pay for managers.

1. Annual GSM materials include IFRS or U.S. GAAP financials.

2. Annual IFRS statements are published within three months after the end of the reporting year.

3. Share registrar is independent.

4. CEO is elected by the board of directors.

5. Dividend payout period does not exceed 60 days.

6. Company follows single-day dividend payout policy.

7. Company pays dividends for three quarters of the last year and the first quarter of the current year.

8. Company pays interim dividends.

9. Preemptive rights in case of share issue.

10. One share-one vote principle.

11. GSM competence includes basic shareholder rights (changes to Articles of Association, reorganization and liquidation, deciding upon quantitative and personal board composition, increase/decrease in charter capital, choosing an auditor, deciding upon interim dividends, approval of annual reports and financial statements, approval of share issues, deciding upon large transactions and related-party transactions, approval of internal company documents).

12. In absentia and proxy voting are allowed.

13. Company uses electronic voting systems and facsimile electronic messaging systems.

14. Shareholders must be notified about GSM at least 20 days in advance.

15. Owners of more than 2% of share capital can place items on the GSM agenda and nominate candidates to the board.

16. Owners of more than 10% of share capital can call EGM.

17. Shareholders vote by ballots.

18. Directors are elected by cumulative voting.

19. The term of the entire board directors does not exceed three years.

20. When defining a related-party transaction the company uses the control-principle definition rather than that of direct affiliation.

21. Supermajority voting rules on critical corporate issues (75% supermajority, such as decrease in charter capital, share issues, changes to Articles of Association, reorganization and liquidation, share buyback, approval of transaction for the sum exceeding 50% of company's total assets).

22. Buyer of 30 or more percent of capital must make sell offers to other shareholders.

23. Shareholder has a right to claim buyback when he objects to critical corporate decisions (reorganization, changes to Articles of Association that may limit shareholder's rights).

24. Certification (e.g., ISO, OHSAS).

25. Representation of the majority shareholding group and management in the board of directors does not exceed their share in capital.

26. Majority of the board is external.

27. More than one third of the board members are external.

28. Board chairman is external.

29. Board includes external members with relevant industry experience.

30. Board includes external members with expertise in finance/audit.

31. Board includes external members, except for executives of the company, with expertise in strategic management.

32. At least half of the board members possess expertise in these spheres.

33. Existence of audit committee.

34. Existence of nomination and remuneration committee.

35. Existence of strategy or risk management committees.

36. Majority of the audit committee is external.

37. Majority of the nomination and remuneration committee is external.

38. Majority of strategy or risk management committees is external.

39. Chairman of the audit committee is external.

40. Chairman of the nomination and remuneration committee is external.

41. Chairman of strategy or risk management committees is external.

42. Nonexecutive audit committee and risk committee.

43. Audit committee consists of external members only.

44. Confirmation of high level of financial expertise of audit committee members.

45. Existence of Code of Ethics for board members.

46. Existence of bylaws on audit committee (description of role and procedures).

47. Existence of bylaws on nomination and remuneration committee.

48. Existence of bylaws on strategy or risk management committees.

49. Audit committee does not include nondirectors.

50. Nomination and remuneration committee does not include nondirectors.

51. Strategy or risk management committees do not include nondirectors.

52. Internal control department reports to audit committee.

53. Board meets every two months.

54. Audit committee meets every quarter.

55. Company does not provide loans to management or directors.

56. The board of director's competence is formalized and includes the following: determination of strategy (key company's development directions), calling GSM and determining its agenda, increase in charter capital, approving share buyback/share issues and their terms, deciding upon the auditor's remuneration, recommendations on dividend payments, approving share registrar and his contract, deciding upon large transactions and related-party transactions.

57. CEO/Chairman separation.

58. Board of directors decides upon transactions the sum of which exceeds 5% of company's assets.

59. Board of directors decides upon transactions the sum of which exceeds 10% of company's assets.

No requirements.

No requirements.

No requirements. The EU Transparency Directive applies only to regulated markets (AIM is not a regulated one).

No requirements.

Non-EU issuers listed before Jan. 1, 2007, will be permitted to use national accounting principles equivalent to IFRS going forward. However, despite the recommendation of the Committee of the European Securities Regulators to recognize accounting principles adopted in Canada, Japan, and the U.S. as equivalent to IFRS, the final decision of the EC has not been made. New issuers will be obliged to comply with IFRS.

Non-EU issuers listed before Jan. 1, 2007, will be permitted to use national accounting principles equivalent to IFRS going forward. However, despite the recommendation of the Committee of the European Securities Regulators to recognize accounting principles adopted in Canada, Japan, and the U.S. as equivalent to IFRS, the final decision of the EC has not been made. New issuers will be obliged to comply with IFRS.

Non-EU issuers listed before Jan. 1, 2007, will be permitted to use national accounting principles equivalent to IFRS going forward. However, despite the recommendation of the Committee of the European Securities Regulators to recognize accounting principles adopted in Canada, Japan, and the U.S. as equivalent to IFRS, the final decision of the EC has not been made. New issuers will be obliged to comply with IFRS.

• Sarbanes-Oxley Act of 2002
• NYSE Corporate governance rules (NYSE rules)
• Securities Exchange Act of 1934 (Exchange Act)

There are no regulatory requirements on governance structures. The set of recommendations is laid out in the German Corporate Governance Code. Stock Corporation Act requires German listed companies to report any incompliance with the code's provisions ("comply or explain" regime). No requirements for foreign companies.

There are no regulatory requirements on governance structures. The set of recommendations is laid out in the U.K. Combined Code. U.K. Listing Authority (UKLA) listing rules require U.K.-based companies to disclose their compliance with the code ("comply or explain" regime). No requirements for foreign companies.

AIM rules do not regulate governance issues; this is not a regulated market, and AIM rules are not approved by the UKLA.

MICEX/RTS listing rules incorporate certain provision of the Code of Corporate Conduct, which are mandatory: some others are recommended on "comply or explain" basis.

No requirements.

No requirements.

No requirements.

No requirements.

No requirements.

No requirements.

No requirements.

No requirements.