Document Sample

            ANNUAL REPORT 2008


Annual report 2008
                                                                               THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                               ANNUAL REPORT 2008

8 COUNTRIES                                                  1. Chairman of the Board address                                  4
INTERNATIONAL WIDE RELIABILITY                               2. General information about the Bank                              7
                                                               Brief data                                                       7
                                                               Mission, goals and corporate values                              8
                                                               Administration                                                   9
                                                               Board of directors                                              10
                                                               Bank’s management                                               11
                                                               Main developments in 2008                                       12
                                                               Membership in organizations                                     12
                                                               Awards and ratings                                              13
                                                               Charity and sponsorship projects                                13

                                                             3. External environment                                           15
                                                               Financial situation in the RF in 2008                           15
                                                               Overview of the Russian banking sector in 2008                  16

                                                             4. Bank’s operations in 2008                                      19
                                                               Overall financial performance                                   19
                                                               Corporate business                                              20
                                                               Customer lending                                                23
                                                               Retail business                                                 25
                                                               Operations in financial markets                                 29

                                                             5. Bank’s operations in Russian regions in 2008                   31
                                                               Saint Petersburg                                                32
                                                               Yekaterinburg                                                   33

                                                             6. Bank’s support services                                        35
                                                               Risk management and internal control                            35
The International Bank of Azerbaijan (IBA), a joint            Information technologies                                        36
stock commercial bank with participation of the state,         Human resources department                                      37
established in 1992 on the basis of Vnesheconombank
of the USSR division served as a platform for the IBA
international network. Currently the IBA international       7. Priority directions of the Banks’ operations
network incorporates the following subsidiary banks             and development prospects                                      39
IBA-MOSCOW and IBA-Georgia, representative offices
in London, New York, Luxemburg, Dubai, Frankfurt
on the Maine and besides the IBA has its own leasing         8. Contact information                                            43
and insurance companies, the processing company                Main Bank details                                               43
«Azericard». As of today IBA has high international            ATMs addresses                                                  43
ratings of such companies as Fitch (BB+) and Moody’s
(Baa2). According to its performance in 2008 Global
Finance magazine awarded IBA as «The Best Bank               9. Bank’s financial statements
of Global Developing Markets», and Emea Finance                 and independent auditors’ report                               45
magazine named it as «The Best Bank of the CIS, Central
and Eastern Europe». By the end of 2008 IBA assets
constitute the equivalent of about USD 4.8 billion and its
capital – USD 489 million.

                                                                                                                                         THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                                                                         ANNUAL REPORT 2008

                    CHAIRMAN OF THE BOARD                                                                          Bank’s web-site. It has also launched the Internet           ners. I am positive that further joint work will ensure

                                                                                                                   banking services project.                                    achievement of our goals.

                                                                                                                   In 2008, IBA-MOSCOW paid special attention to at-            It is a great honour for me to present the Annual Re-
                                                                                                                   tracting term deposits of individuals. It improved the       port of THE INTERNATIONAL BANK OF AZERBA-
                                                                                                                   range of deposit products introducing new types of           IJAN-MOSCOW and the financial statements for
                                                                                                                   deposits with excess return that meet the current            2008 approved by the international auditors Price-
                                                                                                                   conditions in the term deposit market. IBA-MOS-              waterhouseCoopers.
                                                         Acting in the interests of our customers and part-
                                                                                                                   COW offers to wealthy customers deposits with
                                                         ners in 2008 IBA-MOSCOW consistently expanded
                                                                                                                   most beneficial interest rates. By the end of 2008,          Faithfully yours,
                                                         its business with successful development dynam-
                                                                                                                   the individual deposits portfolio grew by 102% con-
                                                         ics. Currently IBA-MOSCOW is one of the TOP 200
                                                                                                                   stituting RUB 592.8 million, while the aggregate             Fuad R. Abdullaev
                                                         Russian banks and we are planning to enter TOP
                                                                                                                   amount of customer accounts grew by 77% to RUB
                                                         100 within the next few years. By the end of 2008,
                                                                                                                   729.6 million.                                               Chairman of the Board
                                                         the Bank’s capital (net assets attributable to partici-
                                                         pant) increased by 26.7% amounting to RUB 1,018           In the retailing sphere IBA-MOSCOW strives to
                                                         million and the assets reached RUB 9,829 million          bring its services closer to the potential customers
                                                         (growth by 38%). The performance for 2008 is the          by expanding the service network. In 2008 the Bank
                                                         best evidence of IBA-MOSCOW faultless choice              opened a new operating cash desk «Golovinskoye»
                                                         of the business strategy deve-loped and approved          located in a strategically important place with great
                                                         in 2007. In the process of its implementation, the        concentration of potential customers. The operat-
                                                         Bank managed to significantly improve its assets          ing cash desk is oriented at servicing money trans-
                                                         structure both from the point of view of their ability    fers to Azerbaijan and other countries. Thus, the
                                                         to generate high and stable revenues and safety           total number of units in the Bank’s network today
                                                         from risks.                                               includes 12 service offices in three most economi-
                                                                                                                   cally developed regions of the RF.
                                                         The year 2008 was successful for the Bank in all
                                                         the main areas of activity.                               IBA-MOSCOW holds traditionally strong positions
                                                                                                                   in the interbank market. In 2008 the amount of in-
                                                         IBA-MOSCOW credit portfolio reached RUB                   terbank loans extended grew by 18% and consti-
                                                         7,676.7 million in 2008 thus exceeding the figure         tuted RUB 5,981 million, transactions with bills of
                                                         for 2007 by 63%. Customer accounts amounted               exchange and bonds of Russian banks and com-
                                                         to RUB 3,254 million (growth by 88%). In 2008             panies amounted to RUB 190.78 million. Jointly
                                                         before-tax income grew by 48.3% and constituted           with Raiffeisen Bank IBA-MOSCOW participated
                                                         RUB 137.9 million. Net profit according to IFRS           in arranging a syndicated loan to Etalonbank for
                                                         was RUB 89.5 million, i.e. 59.2% over 2007.               RUB 15 million. To fund its main activity in 2008
                                                                                                                   IBA-MOSCOW raised a syndicated loan of foreign
                                                         Servicing of money transfers between Russia and           banks for USD 55 million for the term of one year.
                                                         Azerbaijan without opening an account is one of           The arrangement reaffirms the stable position of the
                                                         the most popular mass-scale and fast growing              Bank and confidence therein on the part of interna-
                                                         retail services of the Bank. The amount of the            tional financial institutions.
                                                         transfers grew by 14% in 2008 reaching USD 113
                                                         million. The number of transfers was 67,000. The          In 2009 the Bank’s staff will have to address a seri-
  Сustomers, partners                                    popularity and high rate of growth of the service is      ous challenge facing IBA-MOSCOW and the whole
                                                         due to the large number of Azerbaijanis residing or       banking system of Russia due to the global financial
  and shareholders!                                      staying in the territory of Russia. In 2008 the Bank      crisis. The most important task for the Bank will be
                                                         introduced an additional package of money trans-          to retain its assets and further develop its accumu-
This year is the 7th year of THE INTERNA-                fer servicing in the interests of the customers that      lated potential. The Bank has many objectives in
TIONAL BANK OF AZERBAIJAN-MOSCOW op-                     may be regarded as a prototype of the Bank’s own          most areas of its work: introduction of new products
eration in the Russian financial market. Today           system of international money transfers, where            and services, improvement of corporate manage-
IBA-MOSCOW is a full-service financial institution       IBA-MOSCOW will act as a clearing bank. To di-            ment mechanisms, enhancement of its technologi-
with a regional network that offers a large spectrum     versify its business the Bank offers to its customers     cal framework, etc.
of products and services. The Bank plays a notice-       the money transfer service virtually to any location      The top management and the staff of IBA-MOS-
able role in creating conditions for strengthening       in the world via Contact and Migom systems.               COW are confident that the Bank will pass the test
traditional economic relations between business                                                                    with flying colors and in future will lead the way to
structures of Azerbaijan and Russia, promising           In 2008, the Bank continued to issue its own Visa
                                                         cards and launched the issue of bank cards of             effective and reliable operation.
projects lending thus eventually promoting trade
between the two countries.                               MasterCard Worldwide international payment                We thank our customers, partners and sharehold-
                                                         system. By the end of 2008, the Bank had issued           ers for their support and trust. Friendly relations es-
The year 2008 was quite strenuous for the Russian        about 17,000 bank cards. In terms of this service,        tablished between us during our cooperation let us
banking sector due to problems encountered in the        the Bank is one of 100 major bank cards issuers           look into future with optimism and will serve as the
world financial system. Summing up the past year,        in Russia. In order to offer more convenience of          main stimulus for maintaining high rates of develop-
I would like to say that in the far from simple situa-   cards servicing the Bank persistently increases the       ment of the Bank. I would like to say many warm
tion IBA-MOSCOW was able to retain stability and         number of ATMs and POS terminals (27 and 130              words to IBA-MOSCOW staff members as it is
demonstrated traditionally steady growth. Last year      units installed correspondingly by the end of 2008)       thanks to their professionalism that the Bank grows
once again confirmed that our chosen way, long-          and implements payroll card and partnership pro-          and develops rapidly.
term relations with our customers based on the           grams. The Bank pays great attention to the devel-
principles of mutual trust and partnership that have     opment and introduction of modern card services.          IBA-MOSCOW is not going to rest and is prepared
always been of highest value for the Bank help IBA-      In 2008 the Bank offered to its customers a new           to go on increasing its wealth and providing high
MOSCOW to cope with the most difficult problems.         service – on-line applications for bank cards via the     quality financial service to its customers and part-

                                                                                                              4                         5
                                                                                THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                ANNUAL REPORT 2008


8 COUNTRIES –                                                     2             GENERAL INFORMATION
                                                                                ABOUT THE BANK
CHALLENGES                                                  Brief data                                                 Full name:
                                                                                                                       «THE INTERNATIONAL BANK OF AZERBAIJAN –
INTERNATIONAL WIDE RELIABILITY                                                                                         MOSCOW» Limited Liability Company
                                                            «THE INTERNATIONAL BANK OF AZERBAIJAN –
                                                            MOSCOW» Limited Liability Company was estab-               Short name:
                                                            lished on January 25, 2002.
                                                                                                                       «IBA-MOSCOW» LLC
                                                            «IBA-MOSCOW» LLC (hereinafter IBA-MOSCOW)
                                                            is a subsidiary of the Open Joint Stock Company
                                                            «The International Bank of Azerbaijan» (The Re-            General license of the Bank of Russia:
                                                            public of Azerbaijan).                                     № 3395 to effect banking transactions with funds
                                                            IBA-MOSCOW is a legal entity with 100% foreign             in rubles and foreign currency for legal entities and
                                                            capital established according to the legislation of        individuals
                                                            the Russian Federation.
                                                                                                                       Official registration date:
                                                                                                                       January 25, 2002

                                                                                                                       ZAO «PricewaterhouseCoopers Audit»

                                                                                                                       Registered address:
                                                                                                                       6/2 Tverskaya street, Moscow, 125009

                                                                                                                       + 7 (495) 937 77 27
                                                                                                                       + 7 (495) 933 83 15

                                                                                                                       + 7 (495) 937 77 19


                                                                                                                       Corporate web site in the Internet:
The International Bank of Azerbaijan
(parent bank of the IBA Group)

The Republic of Azerbaijan
Baku is the capital of the most dynamically developing
economy that has every chance to become one of the
major financial centres of the world in the near future.
Azerbaijan holds one of the leading places in the CIS
and Eastern Europe by investment per capita. IBA is the
biggest financial and lending institution in the Caucasus
region rather than in Azerbaijan alone. It has been in
the market since 1992 playing a leading role in the
development of most important sectors of economy in the

                                                        GENERAL INFORMATION                                                             THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                        ABOUT THE BANK                                                                  ANNUAL REPORT 2008

Mission, goals and corporate values                                                                              Administration

  IBA-MOSCOW mission                                      Corporate values                                         Supreme administrative body                                    Risk Management Committee
                                                        IBA-MOSCOW regards its customers and business            The sole participant, Open Joint Stock Company                The Risk Management Committee is a working col-
Main items                                              partners as its main asset. The Bank promotes busi-      «The International Bank of Azerbaijan» is the su-             lective body of the Bank responsible for package
 Operate as a «universal banking institution» pro-     ness development of its customers and business           preme administrative authority of the Bank. The               solutions of problems arising from the analysis of
viding all types of credit, settlement and financial    partners ensuring growth of its own capitalization,      Participant makes the main decisions, examines                overall risks of the Bank and for developing a policy
services to the customers                               scale of operation and financial stability. IBA-MOS-     the performance of IBA-MOSCOW and the annual                  of their management. The terms of reference of the
                                                        COW pursues the policy of mutually beneficial and        reports of the Board.                                         Committee also include development of procedures
 Shape and maintain the image of a reliable and        long-term cooperation with its customers. The Bank                                                                     and documents referring to business processes of
stable bank, a perfect business partner                 holds to its own traditions of business operation                                                                      the Bank. The Committee consists of five members.
                                                        based on the principles of openness, responsibil-          Supervisory Board
 Maintain liquidity at the level corresponding to
                                                        ity, trust and social justice. The inside environment    The Supervisory Board is an administrative body
execution of all the liabilities
                                                        of the Bank is trust-based, positive and business-       of IBA-MOSCOW in charge of general manage-
                                                                                                                                                                                  Information Technology
 Ensure high quality and modern financial servic-      friendly.                                                ment of its activity except issues referred to the               Committee
ing to corporate and retail customers                                                                            exclusive competence of the sole Participant. The
                                                                                                                                                                               The Information Technology Committee is a work-
 Steadily develop the product range oriented at        IBA-MOSCOW values also include:                          Supervisory Board determines long-term strategy
                                                                                                                                                                               ing collective body of the Bank. The Committee
meeting the needs of different customer categories                                                               of the Bank, develops main provisions and docu-
                                                                                                                                                                               shapes the general strategy of development and
                                                                                                                 ments and takes part in operative decision making.
 Pursue competitive pricing policy                     Competence                                               The Supervisory Board of IBA-MOSCOW consists
                                                                                                                                                                               implementation of info-communication technologies
                                                                                                                                                                               in the Bank and promotes their introduction, author-
                                                        In its work the Bank relies on careful analysis of       of three persons and is headed by the Chairman,
 Achieve maximum possible efficiency of opera-                                                                                                                                izes purchases of necessary hardware and soft-
                                                        market conditions and highest standards of finan-        Asker N. Mamedov.
tion                                                                                                                                                                           ware, oversees technological problems emerging in
                                                        cial services. It constantly develops these by sup-
                                                                                                                                                                               provision of services to the customers by structural
 Bring banking services closer to customers            porting creative initiative and upgrading profession-
through expanding the service network                   al qualifications of its employees.
                                                                                                                   Board of Directors                                          divisions. The Committee consists of five members.
                                                                                                                 The Board of Directors is a collective executive
 Participate in and develop trade and economic
                                                        Honesty and confidentiality                              body of the IBA-MOSCOW. The Board of Directors
relations between Russia and Azerbaijan
                                                                                                                 develops mid-term strategy of the Bank and makes
 Help strengthen Azerbaijani business positions        The Bank is straightforward and regardful in rela-       the most important operative decisions. The Board
in the Russian market                                   tions with all its counterparts, competitors and         of Directors consists of 7 members.
                                                        employees. It firmly adheres to the principles of
 Promote interests of the parent bank (IBA) and        banker’s duty of secrecy, ensuring complete confi-
look for possibilities of expanding its business in     dentiality of business information.                        Chairman of the Board
                                                                                                                 Chairman of the Board is the Chief Executive Of-
                                                        Interest in the customer                                 ficer of the Bank and Head of the Board. His terms
  Main strategic goal                                   The Bank’s philosophy is that of mutually beneficial
                                                                                                                 of reference include a wide range of issues relating
                                                                                                                 to the Bank’s operation and current transactions.
IBA-MOSCOW positions itself as a universal dy-          cooperation as a basis of interoperation with cus-
                                                                                                                 Chairman of the Board is Fuad R. Abdullaev.
namically developing and highly reliable bank pro-      tomers exemplifying reliability and efficiency to all
moting successful operation of its customers by         its counterparties.
offering high-quality financial services. IBA-MOS-                                                                 Asset and Liability Committee
COW strives to achieve its strategic priorities using   Information transparency
a functional model oriented primarily at differenti-                                                             The Asset and Liability Committee of the Bank is a
ated servicing of corporate business with simulta-      The Bank maintains effective information exchange        working collective body of the Bank responsible for
neous development of a specialized retail products      within its structure and in relations of openness with   package solutions of problems connected with the
and services portfolio designed for a wide range of     external interested parties, at the same time ensur-     management of the Bank’s asset and liability struc-
customers.                                              ing proper confidentiality of business information       ture, its tariff policy, liquidity risks and interest rate
                                                        and banker’s secret.                                     risks. The Committee consists of five members and
As a result of activating the model IBA-MOSCOW                                                                   with Chairman of the Board as its head.
will join TOP 100 Russian banks by «assets value».
                                                        Social responsibility
                                                        The Bank contributes to growing welfare of the
                                                                                                                   Credit Committee
                                                        community, providing to its partners first-rate eco-     The Credit Committee is a working collective body of
                                                        nomic opportunities and implementing cultural and        the Bank. The Committee is in charge of the Bank’s
                                                        other projects.                                          credit portfolio management, evaluates credit risks
                                                                                                                 and examines credit requests and makes decisions
                                                                                                                 thereon. The Committee consists of five members.

                                                                                                           8                           9
                                         GENERAL INFORMATION                                                         THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                         ABOUT THE BANK                                                              ANNUAL REPORT 2008

Board                                                                                          Bank’s
of directors                                                                                   management

                                                                                                                                               Azer M. Safarov              Elina V. Bagreeva
                                                                                                                                                     Adviser               Head, Administrative
                                                                                                                                          to the Chairman of the Board    Management Department

                            Fuad R. Abdullaev
                            Chairman of the Board

                                                                                                     Gulu A. Abbasov                            Irina Y. Dubova               Nikita Y. Bizin
                                                                                                     Head, Information                          Head, Customer           Head, Strategic Development
                                                                                                  Technologies Department                      Service Department         and Marketing Department

   Lidiya S. Startseva     Balabek S. Balabekov                Vladislav N. Bortnevskiy
        First Deputy              Deputy                              Deputy Chairman
   Chairman of the Board    Chairman of the Board              of the Board – Head, Treasury

                                                                                                   Ludmila A. Izhokina                        Jamil U. Ibragimov           Svetlana E. Sarzhina
                                                                                                   Head, Currency Control                       Head, Economic                  Head, Internal
                                                                                               and Financial Monitoring Division               Security Department             Control Division

Valentina P. Onushkevich    Rafael S. Abbasov                     Dmitriy G. Plaksin
                                                                                                    Fuad G. Gasymov                          Zulfia A. Kamalova           Gennady L. Kulashko
     Chief Accountant       Head, Legal Department              Head, Department of Credit
                                                                                                    Director, Branch Office                    Head, Plastic Cards         Director, Branch Office
                                                                and Guarantee Transactions
                                                                                                      in Saint Petersburg                         Department                  in Yekaterinburg

                                                                                         10                         11
                                                          GENERAL INFORMATION                                                      THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                          ABOUT THE BANK                                                           ANNUAL REPORT 2008

Main developments                                         Membership                                          Awards and ratings                                          Charity and sponsorship
in 2008                                                   in organizations                                      Ratings                                                   projects
                                                                                                              According to its performance in 2008 IBA-MOS-
 Registered capital of the Bank grew and con-             Non-governmental no-commercial «Association       COW gained the following positions in the RBC rat-          IBA-MOSCOW regards social responsibility as one
stituted RUB 544.6 million, with internal funds (net      of Russian Banks»                                   ing «Major Russian Banks»:                                  of its main priorities.
assets attributable to participant) increased to RUB
                                                           Non-commercial «Association of Russian Re-        171st by «net assets» (37 places up in the rating           The Bank wishes to share its success with the com-
1,018 million
                                                          gional Banks»                                       for 2008 )                                                  munity in which it operates focusing its attention on
 According to the main financial indicators,                                                                                                                             key areas of the environment from the point of view
                                                           Non-commercial partnership «Moscow Banking        146th by «credit portfolio» (37 places up in the rat-
namely «assets», «credit portfolio», «corporate                                                                                                                           of its harmonious development.
                                                          Union»                                              ing for 2008 )
loans» the Bank joined TOP 200 Russian banks
                                                                                                                                                                          The Bank is well aware of its role in shaping a
                                                           Moscow Chamber of Commerce and Industry           120th by «loans to legal entities» (42 places up in
 The Bank opened a new operating cash desk                                                                                                                               healthy social situation and it is determined to go on
                                                                                                              the rating for 2008)
«Golovinskoye» within the framework of the net-            Associated member of the Chamber of Com-                                                                      with participation in social life as much as possible.
work development strategy                                 merce and Industry of the Russian Federation        256th by «deposit portfolio» (144 places up in the
                                                                                                                                                                          The Bank traditionally provides material support to
                                                                                                              rating for 2008 )
 The Bank raised a syndicated loan for USD 55             American Chamber of Commerce in Russia                                                                        various public events, sponsors printed mass me-
million in the international capital market to fund its                                                       201st by «legal entities deposits» (138 places up in        dia, funds individual projects in the sphere of sci-
main activity                                              Associated member of Visa International pay-      the rating for 2008 )                                       ence and art.
                                                          ment system
 Jointly with «FB Consult» company the Bank
                                                           Full member of MasterCard Worldwide interna-
launched the pilot project CRM SalesLogix
                                                          tional payment system
 The Bank continued implementing the program                                                                 Winner of the National Banking Award for 2008
of card business development: by the end of 2008           Russian National Association of Members of
                                                                                                              in the category «Bank with participation of foreign
it issued about 17,000 bank cards, installed 27           SWIFT
                                                                                                              capital that made a significant contribution to the
ATMs and about 130 POS terminals, implemented              Closed Joint Stock Company «Moscow Inter-         development of Russian economy»
81 payroll card programs. It carried out advertising      bank Currency Exchange»
campaigns to promote its services. The Bank start-                                                            Association of Russian Banks, Association of Re-
ed issuing cards of the international payment sys-         Urals Banking Union                               gional Banks of Russia with support of the Bank of
tem MasterCard Worldwide and some new types of                                                                Russia are organizers of the Award. The National
                                                           Member of the Azerbaijan-Russia Intergovern-      banking magazine is the founder of the Award.
cards in the Business and Platinum categories of          mental Commission
the international payment system Visa International                                                           The main purposes of the National Banking Award
                                                           Co-founder of the public organization «Centre     include: enhancing the public image of the Russian
 The Bank developed and put into operation a             of Business Partnership for CIS Countries»
new corporate website of IBA-MOSCOW in Rus-                                                                   banking system, provision of banking services to
sian and English that is a universal forum for infor-      Authorized bank of the Government of the City     real customers, objective, simple and clear guide-
mation exchange with its customers and partners           of Moscow                                           lines for selection of the Bank’s customers; adding
                                                                                                              openness and transparency to the banking system,
 The Bank was granted the status of an asso-             IBA-MOSCOW is a participant of the Deposit Insur-   forming the elite of the banking sector.
ciated member of the Bank of Russia RTGS (real            ance System (Certificate No 264 of December 02,
time gross settlement and banking electronic ex-          2004).                                              This award is a kind of a quality stamp granted
press money transfer system)                                                                                  annually to banks in the capital and regions. After
                                                                                                              examination of the documents submitted by the Ex-
 IBA-MOSCOW won the National Banking                                                                         pert Board of the Award the panel determines the
Award in the category «Bank with participation of                                                             winners.
foreign capital that made a significant contribution
to the development of Russian economy»
 The Bank participated in organization and work
of the First International banking Conference of CIS
countries in Baku entitled «Financial markets in the
CIS countries: development and integration»
 To expand its range of retail services the Bank
signed an agreement with Migom international
money transfers system. All the IBA-MOSCOW
service offices were technologically prepared and
commissioned to service the customers accord-
 The Bank started servicing express payments of
the population through «Mobile Express» system
 The Bank held a celebration of the fifth anniver-
sary of its regional branch office in Saint Peters-
burg. The Bank’s customers, partners, and Rus-
sian and Azerbaijani officials attended the event

                                                                                                       12                         13
                                                                                   THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                   ANNUAL REPORT 2008


8 COUNTRIES –                                                          3           EXTERNAL
INTERNATIONAL WIDE RELIABILITY                               Financial situation                                          Commodity exports in 2008 constituted USD 471.8
                                                                                                                          billion and grew by 33.1%. In the last quarter of
                                                                                                                          2008 exports went down in value by 10.4% against
                                                             in the RF in 2008                                            the last year and by 28.3% against the third quarter
                                                                                                                          of 2008.
                                                             In 2008 the global economic crisis halted the up-
                                                             ward economic trend of the past few years.                   In December 2008 exports of gas in volume dropped
                                                                                                                          by 26.4% and exports of oil in value went down by
                                                             During 2008 the trends determining the situation             45.9% while in volume it grew by 1.2%. The need to
                                                             in the money and currency markets were multidi-              honor long-term contracts prevented exports drop.
                                                             rectional. Thus while in the first half of the year,
                                                             the banking sector had quite a lot of liquidity start-       In 2008 exports to far abroad and CIS countries
                                                             ing with August it began to feel an acute short-             went up thanks to growing prices with volumes go-
                                                             age thereof. In addition to that, in the second half         ing down.
                                                             of 2008 crisis processes going on in the global              In 2008 exports of fuel and energy continued to
                                                             financial markets greatly affected the situation in          grow at an advanced rate (142.1%) due to which
                                                             the internal money market forcing investors to re-           their share in the exports structure increased and
                                                             evaluate risks and withdraw their funds from Rus-            the share of other commodities went down.
                                                             sian assets. Besides, sale of foreign currency by
                                                             the Bank of Russia as part of its policy of rate of          Exports of non-oil and gas raw materials grew by
                                                             exchange regulation became an important means                19.1%, and a year earlier – by 18.8%, with ma-
                                                             of ruble funds withdrawal.                                   chines and equipment up by 17% (by 12.8%) and
                                                                                                                          other goods by 1.9% (by 48.7%)
                                                             In 2008 the balance of payments of the Russian               In 2008 commodity imports amounted to USD 292
                                                             Federation showed a sharp change of trends of                billion and grew by 30.6% against 2007. In the last
                                                             the past few years. As the financial and economic            quarter of 2008 imports growth rates went down
                                                             crisis expanded, some foreign investors started to           by 13.4% against the third quarter of 2008 due to
                                                             take their funds away from Russian economy. The              contraction of investment and consumer demand
                                                             aggregate amount of net export of private capital            because of the credit crisis.
                                                             exceeded its import in 2005-2007 leading to shrink-
                                                             ing of international reserves for the first time since       Imports from far abroad countries grew both in vol-
                                                             1998 even against the background of a record high            ume and in price, by 16.2% and 16.6% correspond-
                                                             surplus of the current accounts. Nevertheless, the           ingly. Supplies from CIS countries went down by
                                                             international reserves accumulated by Russia en-             2.3% with prices growing by 25.5%.
                                                             able it to cushion the impact of the negative trends
                                                                                                                          Inflation in the consumer market increased in 2008
                                                             in trans-border movement of capitals and bear out
                                                                                                                          against the last year and reached 13.3% (11.9% in
                                                             mass exports of capital by non-residents.
                                                                                                                          2007). Food staples prices contributed significantly
                                                                                                                          to inflation as food prices was 16.5% (15.6% in
                                                             Overall, one may divide the year 2008 into three
                                                             parts: before crisis – when trends of the previous
                                                             years were still in force (the first six months); tran-      GDP increased by 5.6% to RUB 41,549.4 billion.
                                                             sitional third quarter and recessionary forth quarter,
                                                             the indicators of which significantly differed from          Despite the fact that according to overall perform-
THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW                those of the previous periods.                               ance of 2008 the situation with retailing was favour-
(bank subsidiary)                                                                                                         able, during the year it was controversial. With high
                                                             In the third quarter of 2008 global commodity prices         rates of growth of 16.7% in the first quarter against
Russian Federation                                           and world demand rates started to go down with               the same period of 2007 (14.7% in the first quarter
                                                             export supplies slowing down both in volume and in           of 2007) the sales dynamics started to slow down
Moscow                                                       value. At the same time lower real rate of exchange          from the beginning of the second quarter. As infla-
                                                             of the ruble and population incomes resulted in              tion processes began to accelerate in the consumer
Moscow is the major all-Russian financial centre with        considerably decreasing imports. However high                market, real disposable incomes of the population
concentration of about half of the banks registered in the   dynamics of exports and imports growth in three              slowed down and conditions of lending for trading
country.                                                     quarters of 2008 allowed highly estimate Russian             organizations deteriorated in the third and forth
In 2002 IBA opened IBA-MOSCOW, its first bank                foreign trade indicators in 2008.                            quarters of 2008 the negative effect of the grow-
subsidiary in Moscow. The Bank plays an active role                                                                       ing financial crisis on the real sector of Russian
in strengthening and developing trade and economic           Foreign trade in 2008 году grew by 32.2% con-                economy, including retailing, strengthened. Due to
relations between the two countries, offers financial        stituting USD 763.7 billion. Trade with far abroad           aggregate effect of these factors in 2008 the retail-
support to Azerbaijani businessmen in the Russian            countries grew at a faster rate to 132.8%. Trade             ing revenue growth was 13.0% that is 3.1% below
market.                                                      with the CIS countries grew by 28.4%.                        the figure for 2007.

                                                        EXTERNAL                                                                         THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                        ENVIRONMENT                                                                      ANNUAL REPORT 2008

In 2008 population incomes grew considerably
slower than in 2007. Real disposable incomes in-        Overview of the Russian                                    The amount of bonds issues by banks in 2008 grew
                                                                                                                   by 29.3% .The share of the source in the bank-
creased by 2.7% against 12.1% in 2007. This can                                                                    ing sector liabilities decreased from 1.4% as of
be accounted for by higher inflation in 2008 and the    banking sector in 2008                                     01.01.2008 to 1.3% as of 01.01.2009. The amount
unfavorable situation in economy that resulted in                                                                  of bills of exchanged issued by banks decreased by
lower incomes of the employees and from entrepre-                                                                  8% with their share in the banking sector liabilities
neurial activity.                                       By the end of 2008 in the RF there functioned 1,108        dropping from 4.1% to 2.7%.
                                                        credit organizations (having the right to effect bank-
Nominal cash incomes of the population constitut-       ing operations). The number of registered credit or-
ed RUB 25,522.3 billion, i.e. by 19.8% more that in     ganizations was 1,228. The number of banks with              Active transactions
2007. Population spending and savings in money          the General license was 298 by the end of 2008.
terms in 2008 were estimated at RUB 25,526.4 bil-                                                                  In 2008 loans and other funds granted to non-fi-
lion, 24.6% over 2007. The surplus of income and        The ratio of credit organizations capital to GDP was       nancial organizations increased by 34.3% to RUB
savings over expenditure constituted – RUB 4.1 bil-     9.2% and of their assets – 67.5%. Despite unfavo-          12,509.7 billion with their share in the banking sec-
lion (RUB 819 billion in 2007). The «minus» sign in     rable macroeconomic conditions, the banking sec-           tor assets going down from 46.3% to 44.6%. In
the ratio means that this year the revenues of the      tor was able to retain high rates of growth. In 2008       2008 the share of loan arrears of non-financial or-
population were not sufficient. Thus, the population    the assets if the banking sector grew by 39.2%             ganizations grew from 0.9% to 2.1%.
was spending its savings of the previous years.         reaching RUB 28,022.3 billion (growth by 44.1% in          In 2008 individual loans grew by 35.2% to RUB
                                                        2007). The capital base increased by 42.7% to RUB          4,017.2 billion, with their share in the banking sector
Despite the unfavorable economic situation and          3,811.1 billion (RUB 2,671.5 billion in 2007). The
slower incomes growth, the population continued                                                                    assets decreasing from 14.8% to 14.3%, while their
                                                        main trend of development of the banking sector in         share in the aggregate bank loans dropped from
to increase their consumer spending. In 2008 con-       2008 was characterized by further growth and high-
sumer spending grew to 73.1% in the population                                                                     20.8% to 20.2% correspondingly. Loan arrears in
                                                        er competition in virtually every area of banking.         2008 increased by 53.9%, with their share in the
expenses structure (72.4% in 2007). Moreover,
the growth was due to increasing share of buying        Foreign capital actively expanded its presence in          individual loans growing from 3.2% to 3.7%.
goods to 57.1% (55.6% in 2007).                         the RF. The number of credit organizations 100%            Securities portfolio acquired by the banks in 2008
                                                        owned by foreign capital in Russia reached 75 by           increased by 5.1% to RUB 2,365.2 billion, with
Due to the crisis of confidence in banks and devalu-    the end of 2008, while the total number of banks
ation of the national currency, the population start-                                                              its share in the banking sector assets decreasing
                                                        with participation of non-residents grew to 221.           from 11.2% to 8.4%. Investments into obligations–
ed to withdraw money from banks from September          52.5% or 116 of these organizations hold a Gen-
2008. As a result, in 2008 as a whole the share of                                                                 74.4% in the securities portfolio, which in 2008 grew
                                                        eral license to carry out banking operations. Acting       by 14.2% to RUB 1,760.3 billion, account for the
savings on deposits and in securities in the struc-     credit organizations with participation of non-resi-
ture of population expenses constituted 0.2% (6.8%                                                                 bulk share of obligations.
                                                        dents are located in 38 entities of the RF, including
in 2007).                                               129 or 58.3% of the total in the Moscow Region.
To protect their revenues from devaluation and ex-                                                                   Interbank market
pecting some profit in future the population began        Funding base                                             Claims for interbank market loans extended in 2008
to buy foreign currency. Starting from September                                                                   grew by 76.4% to RUB 2,501.2 billion, with their
the process accelerated noticeably. Overall, in the     The balances in customers’ accounts grew by                share in the banking sector assets growing from
year the population spent 7.9% of incomes to buy        20.4% to RUB 14,748.5 billion in 2008 and their            7% to 8.1% in the year. Moreover, the funds placed
foreign currency (5.4% in 2007).                        share in the liabilities of the banking sector dropped     in non-resident banks increased by 114.2% and the
                                                        from 60.9% as of 01.01.2008 to 52.6% as of                 funds placed in the internal interbank market grew
Unemployment calculated according to the ILO            01.01.2009.
methodology increased by 1.2 million people in                                                                     by 19.5%.
December 2008 against December of 2007 and              In 2008 funds in individual accounts grew by 14.5%         The amount of extended interbank loans in 2008
reached 5.8 million or 7.7% of economically active      to RUB 5,907 billion. Their share in the liabilities of    grew by 29.6% to RUB 3,639.6 billion, with their
population by the end of December 2008. Such a          the banking sector went down from 25.6% to 21.1%.          share in the banking sector liabilities decreased
dramatic growth of unemployment is another nega-        The rate of outflow of individual funds in rubles con-     from 13.9% to 13%. The amount of interbank loans
tive consequence of the economic situation under        stituted 3.6% in the year and the growth rate of in-       raised from non-resident banks grew by 24.9%,
the influence of the financial crisis.                  dividual deposits in foreign currency was 136.3%.          those raised in the internal market – by 44.8%.
                                                        As a result, the share of individual ruble deposits in
In order to prevent the possible negative effects of    taken together individual deposits decreased from
the global financial crisis certain steps in support    87.1% to 73.3% in the year. The figures show that            Financial performance of
of the labour market are being implemented within       the population was losing confidence in the national
the framework of Plan of Action № 4863p-P13 de-         currency unit. Individual time deposits for over 1
                                                                                                                     credit organizations
signed to improve the situation in the financial sec-   year grew by 19.5% constituting 65.2% of the ag-           In 2008 total return of credit organizations consti-
tor and individual economic sectors. The Plan was       gregate individual deposits.                               tuted RUB 409.2 billion, that is 19.4% below the
approved by the Government of the Russian Fed-                                                                     figure for 2007. 1,050 credit organizations (94.8%
eration on November 6, 2008.                            The amount of deposits and other borrowed funds
                                                                                                                   of the total as of 01.01.2009) gained RUB 446.9
                                                        of legal entitles grew by 40.5% in 2008 reaching
                                                                                                                   billion. 56 credit organizations (5.1% of the total)
                                                        RUB 4,945.4 billion, with their share in the liabilities
                                                                                                                   bore losses of RUB 37.8 billion. For comparison in
                                                        of the banking sector growing from 17.5% to 17.6%.
                                                                                                                   2007 1,123 credit organizations (98.9% of the total)
                                                        The banks’ debt on credits, deposits and other bor-
                                                                                                                   gained RUB 508.9 billion, while 11 credit organiza-
                                                        rowed funds granted by the Bank of Russia grew 99
                                                                                                                   tions (1% of the total) bore losses of RUB 0.9 billion.
                                                        times to RUB 3,370.4 billion, mostly in the period of
                                                        deepening crisis starting with September 2008. The
                                                        funds in current and other accounts of organiza-
                                                        tions increased by 8.9% to 3,521 billion rubles, with
                                                        their share in the banking sector liabilities dropping
                                                        from 16.1% to 12.6%.

                                                                                                           16                           17
                                                                                     THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                     ANNUAL REPORT 2008


                                                                      4               BANK’S OPERATIONS
                                                                                      IN 2008
                                                               Overall financial
                                                               The Bank’s performance in 2008 looks optimistic
                                                               despite unfavorable financial situation emerging in
                                                               the external and internal markets at the end of the
                                                               year. In 2008 the global liquidity crises adversely
                                                               affected the overall situation in the banking sector.
                                                               However, it did not prevent IBA-MOSCOW from en-
                                                               hancing its financial performance.
                                                               In 2008 IBA-MOSCOW continued successful deve-
                                                               lopment of the past few years expanding its busi-
                                                               ness in all the main areas.                                  NET ASSETS OF THE PARTICIPANT
                                                                                                                            (figures in dynamics for 2002-2008, RUB, million)
                                                               The net assets attributable to participant (capital ac-
                                                               cording to IFRS standards) grew by RUB 215 mil-
                                                               lion or by 26,7% and constituted RUB 1,018 million
                                                               by the end of 2008. The growth to RUB 1,018 mil-
                                                               lion was mainly due to net profit gained by the Bank,
                                                               a subordinated loan, and the participant’s contribu-
                                                               tion to the registered capital of the Bank. As the net
                                                               assets of the participant grew, the capital ratio of
                                                               the Bank went up.
                                                               The Bank’s assets went up by RUB 2,706 million
                                                               or by 38% and by the end of 2008 constituted RUB
                                                               9,829.6 million. The assets growth was mainly due
                                                               to increased raising of term funds, including through
                                                               borrowing in financial markets (58%) and consumer
                                                               funds (36.9%).
                                                               Orientation at the corporate segment of the mar-
                                                               ket combined with intensive business development
                                                               enabled IBA-MOSCOW to increase significantly the             ASSETS
                                                               amount of loans extended. In 2008 principal receiv-          (figures in dynamics for 2002-2008, RUB, million)
                                                               able grew by 63% and constituted RUB 7,676.7
                                                               million. The share of receivables in the Bank’s ag-
                                                               gregate assets was 78.1%. Loans to legal entities
                                                               accounted for 90% in the credit portfolio structure.
                                                               In 2008 the Bank started export financing. As of
                                                               01.01.2009 the amount of export financing was
                                                               EUR 4.5 million.
IBA representative office
                                                               IBA-MOSCOW was able to achieve good growth
                                                               dynamics of customer funds, which demonstrated
Great Britain                                                  their unwavering confidence in the Bank. Individual
London                                                         customers’ funds in accounts almost doubled and
                                                               reached RUB 3,254 million by the end of 2008 (RUB
London is the economic and financial centre of Great           1,730.5 million in 2007). Corporate customer funds
Britain and Western Europe with headquarters of major          on accounts were RUB 2,524.2 million (growth by
banks, financial and transnational companies situated in       almost 91% against the last year) and retail funds
the city. It is also the global centre of stock and currency   increased by RUB 729.6 million (growth by 77%).
transactions. The IBA office in London was opened              In 2008 the interest income of the Bank grew by
in 2002 due to the need to expand cooperation with             RUB 318.1 million or 57% and constituted RUB                 CREDIT PORTFOLIO SHARE IN ASSETS
European banks.                                                                                                             (figures in dynamics for 2002-2008, in %)

                                                           BANK OPERATIONS                                                                  THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                           IN 2008                                                                          ANNUAL REPORT 2008

872.9 million, with non-interest commission income
reaching RUB 147.4 million (growth by 85.8%).              Corporate business                                          Trade finance and currency control                          The main principles of building the customer
                                                                                                                                                                                   base include:
                                                                                                                        Export and import Letters of Credit
The revenue structure speaks of the Bank’s orien-                                                                                                                                   Establishing long-term and mutually beneficial
                                                                                                                        «Stand-by» Letters of Credit
tation at lending that is actively expanding. Moreo-       In 2008 development of IBA-MOSCOW corporate                                                                             relations with customers
ver the Bank aims at ensuring a better balanced            business went on. This area of business is one of            Confirmed LC opened in favor of IBA (parent
                                                                                                                                                                                    All-round approach to solving customers’ prob-
ratio between interest and non-interest revenues.          the Bank’s priorities.                                      bank)
Though it has not been achieved yet.
                                                           For dealing with corporate customers the Bank re-            Documentary collection
                                                                                                                                                                                    Maximum satisfaction of customers’ require-
In 2008 according to IFRS the net profit was regis-        lies on traditionally wide and constantly updated
tered at RUB 89.5 million, growth by 59.2% (RUB            range of banking products and services, high stand-          Tender guarantees, performance guarantees,                ments to banking products and services with due
                                                                                                                       advance repayment guarantees                                regard to their business specifics
137.9 before pay taxes).                                   ards of servicing, flexible tariff policy, individual ap-
                                                           proach to meeting customers’ needs and speedy                Guarantees with counter-guarantees of IBA                 Customers of the Bank include resident and non-
In 2008 the return on the Bank’s assets was 2%
                                                           operative decisions. All together these factors help        (parent bank)                                               resident companies, organizations servicing eco-
and return on capital – 18% that confirms effective
                                                           to establish relations of trust with new customers                                                                      nomic relations between Russia and Azerbaijan,
business development.                                                                                                   Currency control function under export-import
                                                           and develop and strengthen mutually beneficial co-                                                                      representatives of big Russian business operating
Expanding customer base, asset growth, primarily           operation with companies that already use services          contracts                                                   in production, construction, transport, trade and
lending, and first of all greater profitability of busi-   of IBA-MOSCOW.                                                                                                          services, mass media and leasing.
ness form the basis for the Bank’s progress towards                                                                    Transactions in money and financial markets
                                                           The established banking practice confirms that any
achieving its targets.
                                                           modern bank develops through enhancing the qual-             Term deposits
                                                           ity of service, recruiting new corporate customers
                                                           dealing in different areas of economy.                       Conversion transactions

                                                           Following this trend, IBA-MOSCOW consistently                Transactions with bills of exchange
                                                           pursues its corporate policy. The Bank recruited             Financial consulting
                                                           new customers in 2008 thanks to maintaining per-
                                                           manent constructive dialogue with different com-            The Bank gets on with expanding and updating its
                                                           panies, paying attention to their problems, making          product range, develops new offers that are ori-
                                                           modern and progressive decisions. By the end of             ented at the specific features of operation, industry
                                                           the year the customer base increased by 60% con-            specifics and individual needs of every customer.
                                                           stituting 1,509 organizations.                              In 2008, with tougher competition in the banking
                                                           IBA-MOSCOW develops long-term and mutually                  services market, IBA-MOSCOW continued shaping
                                                           beneficial partnership relations with its corporate         its customer base.
                                                           customers, offering to them a wide range of highly          Currently the corporate customer base of IBA-
                                                           professional banking services and products. Cur-            MOSCOW is fairly well diversified and collaboration
                                                           rently the corporate business of the Bank includes a        is based on maintaining the right balance between
                                                           package of main services in demand on the market.           the interests of the customer and the Bank. The
                                                                                                                       customer base includes a wide range of industries
                                                           Settlement and cash services                                thus enabling the Bank to avoid any negative con-
                                                                                                                       sequences of financial crisis.                               ECONOMIC SECTORS CONCENTRATIONS WITHIN
                                                            Opening and managing current accounts in ru-
                                                                                                                                                                                    LEGAL ENTITIES ACCOUNTS
                                                           bles and foreign currency                                                                                                (figures for 01.01.2009, in % of total legal entities accounts)
                                                            Cashless money transfers in rubles and foreign
INTEREST INCOME                                            currency
(figures in dynamics for 2002-2008, RUB, million)
                                                            Transactions with cash funds
                                                            Servicing through «Bank-Customer» system
                                                            Payroll card programs with Visa International
                                                            Trade acquiring

                                                                                                                       ECONOMIC SECTORS CONCENTRATIONS WITHIN
                                                                                                                       LEGAL ENTITIES ACCOUNTS
COMMISSION INCOME                                                                                                      (figures for 01.01.2009, RUB, million)
(figures in dynamics for 2004-2008, RUB, million)

                                                                                                               20                          21
                                                        BANK OPERATIONS                                                              THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                        IN 2008                                                                      ANNUAL REPORT 2008

The Bank pays much attention to its image and fa-
miliarity in target markets using all the instruments
                                                        institute of personal managers in charge of all the
                                                        aspects of customer relations and supervising deci-    Customer lending
of advertising and PR communication that help to        sion-making in the Bank.
attract corporate customers.
                                                        It should be noted that throughout its history the     In 2008 lending remained one of the priority areas
In 2008 the Bank opened 927 new accounts of le-         Bank has pursued the strategy of providing pack-       of IBA-MOSCOW operation generating the bulk of
gal entities. As of 01.01.2009 the total number of      age services to its corporate customers and estab-     its revenue.
accounts of legal entitles was 2,803 exceeding the      lishing long-term partnership relations with special
figure for 2007 by 64%.                                 emphasis on individual approach.                       When shaping its credit portfolio the Bank aims at
                                                                                                               ensuring maximum satisfaction of its customers’
By the end of 2008 money funds of legal entities        IBA-MOSCOW is determined to compete with other         needs in borrowed funds on the one hand and most
reached RUB 2,524 million exceeding the figure for      banks in the area of quality of customer service,      secure investment of the borrowed funds on the
2007 by RUB 1,205 million or by 91%. Funds in the       terms of service and the range of services offered.    other. In each case IBA-MOSCOW tries to find an
current accounts of legal entities constituted the      The main advantage of the Bank is that it is able to   individual approach to the borrower. It focuses on
equivalent of RUB 1,087.1 million, greatly exceed-      offer a whole package of interconnected products       minimization of credit risks as a rule through careful
ing (by 36% or RUB 288 million) the figure for the      that can meet the customer’s wishes and require-       analysis of creditworthiness of potential borrowers,
previous period (RUB 799.3 million in 2007).            ments to a maximum. Any legal entity may use the       diversification of the credit portfolio and availability
                                                        widest range of services from settlement and cash      of highly liquid security.
According to the performance in 2008 non-interest
                                                        services and lending to implementation of joint pay-                                                                CUSTOMER LOAN PORTFOLIO
commission income reached RUB 84.2 million or
                                                        roll card programs. The Bank is prepared to organ-                                                                  (figures in dynamics for 2002-2008, RUB, million)
79% over the figure of 2007. Steady growth of the                                                              In 2008 the main objectives of the lending
                                                        ize additional cash dispensers in most convenient
number and value of currency and ruble customer                                                                policy of the Bank were:
                                                        locations for the customer.
payments during the year and well-balanced tariff
                                                                                                                To meet the needs of the customers in credit
policy of the Bank may account for such positive
                                                                                                               products necessary for their business operations
                                                                                                                To gain the interest and other types of revenues
Major customers of IBA-MOSCOW include:                                                                         from lending according to the plan

The Russian Representative office of the State                                                                  To maintain and enhance the business reputa-
Concern «AZAL» (passenger operations), FSUE                                                                    tion of the Bank with its customers
State TV Channel «Russia» (mass media), «Cro-                                                                   To study all the aspects of customers’ needs,
cus International» (construction, trade, exhibition                                                            sphere and specifics of their business in order to be
services), OOO «Podolskiy Furniture Works» (man-                                                               able to make well-grounded lending decisions
ufacture), OOO «RusAvto» (transportation servic-
es), «NISSA» Group of Companies (polygraphy),                                                                   To provide high quality service to the custom-
«Metropolis» Group of Companies (investments                                                                   ers and attract more promising credit applications
and real estate), ZAO «Mosazervinzavod», OOO                                                                   through offering a wide range of various credit pro-
«Rusbusnessinvest» (investment services), OOO                                                                  ducts
«InterProConsulting» (consulting services).                                                                     To diversify the credit portfolio
IBA-MOSCOW manages the accounts of the Em-
bassy of the Republic of Azerbaijan to the Russian                                                             The main credit products in 2008 were:
Federation in Moscow and the General Consulate
in Saint Petersburg.                                                                                            Loans                                                      ECONOMIC SECTOR RISK CONCENTRATIONS WITHIN
                                                                                                                                                                            THE CUSTOMER LOAN PORTFOLIO
During 2008 the Bank worked at investing free                                                                   Credit facility with a drawdown limit                      (figures for 01.01.2009, in % of the total customer loan
monetary funds of organizations in financial instru-                                                            Revolving credit facility with a limit of indebted-
ments offered by the Bank (term deposits). In Sep-                                                             ness
tember 2008 the Bank introduced new base rates          LEGAL ENTITIES, CURRENT/SETTLEMENT ACCOUNTS
on deposits that are more advantageous for legal        (figures in dynamics for 2002-2008, RUB, million )      Overdraft
entities. Competitive interest policy and the pos-                                                              Bank guarantee
sibility of coordinating individual terms and condi-
tions enabled the Bank to increase significantly its                                                            Buyer’s credit
deposit portfolio of legal entities by 176.4% against                                                          The amount of customer loans extended grew by
2007 to RUB 1,437,1 million and is planning to get                                                             63% and constituted the equivalent of RUB 7,676.7
on with this work in future.                                                                                   million by the end of 2008, with 90% of the cred-
In 2008 IBA-MOSCOW continued offering the serv-                                                                it portfolio or RUB 6,929.6 million for corporate
ice of salary payments to organizations employees                                                              projects funding
using Visa cards (payroll card program). During the                                                            In 2008 the Bank’s revenue from lending consti-
year the Bank signed 30 agreements with organiza-                                                              tuted RUB 872.9 million. Preference was given to
tions (overall 81 agreements as of 01.01.09) issu-                                                             medium size and large organizations. All the Bank’s
ing 2,600 cards within the framework of the project.                                                           borrowers are profitable companies with stable
The most sizable organizations using the service                                                               growing income, «transparent» accounting and
are: Public Association «Rosokhotryblovcoyuz» –                                                                good development prospects.
110 persons, ZAO «Belrusneftegaz» – 45 persons,
ZAO «Metropolis» – 70 persons, OAO «Hotel
«Moskvich» – 45 persons and some others.
To service its VIP customers and organizations col-                                                                                                                         ECONOMIC SECTOR RISK CONCENTRATIONS WITHIN
                                                        ACCOUNTS OF LEGAL ENTITIES                                                                                          THE CUSTOMER LOAN PORTFOLIO
laborating with IBA-MOCOW the Bank set up the           (figures in dynamics for 2002-2008, units)                                                                          (figures for 01.01.2009, RUB, million)

                                                                                                        22                          23
                                                           BANK OPERATIONS                                                              THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                           IN 2008                                                                      ANNUAL REPORT 2008

In 2008 the following figures characterized the
credit portfolio of corporate customers:
                                                           paid, average weighted interest rates, interest rev-
                                                           enues of the past and future periods.                   Retail business                                                Money transfers
                                                                                                                                                                               Money transfers without opening an account rep-
 Credits extended to prime borrowers catego-              In its operations in the loan market IBA-MOSCOW                                                                     resent one of the most important and mass scale
rized in accordance with the Bank of Russia re-            wants to meet the needs of its customers, ensure        In 2008 IBA-MOSCOW went on with developing                  retail business of MBA-MOSCOW that is rapidly de-
quirements as first and second quality category            adequate yield and keep the risks at an acceptable      its retail business. The Bank actively worked in all        veloping. The Bank pays special attention to servic-
constituted 58% of the total portfolio of legal entities   level. The Bank grants credit resources within the      the areas of the business focusing on expansion of          ing individual money transfers without opening an
                                                           limits of its capital and borrowed funds, ensuring a    the range of services, enhancement of their quality         account between Russia and Azerbaijan using the
 Overdue debt in the credit portfolio was 1.1%
                                                           proper balance of assets and liabilities in relations   and optimization of servicing. The Bank was able to         facilities of the parent bank that has a vast network
 Credit portfolio share with marketable collateral        to time and volume. The Bank has gained sufficient      increase the inflow of customers to IBA-MOSCOW              of service offices in the territory of the Republic.
reached 85%                                                experience of lending to Russian businesses, mas-       service offices thanks to their convenient location,        The transfers are characterized by high speed and
                                                           tered the techniques of selection aof reliable cus-     optimum working hours and competitive product               low cost. IBA-MOSCOW charges one of the low-
Loans extended by the Bank in 2008 were mostly             tomers and risk appraisal procedures.                   range.                                                      est commissions in the Russian banking market.
short-term (up to one year) and mid-term (over one
year). Loans granted to resident and non-resident                                                                                                                              The Bank effects the transfer after the customer’s
                                                                                                                   The Bank considers development of retailing as
legal entities of all forms of ownership – customers       In implementing its lending policy the Bank                                                                         application online and the counteragents of sender
                                                                                                                   strategically important and each year it expands its
of the Bank that have current accounts, which they         aims at:                                                                                                            can receive the money in virtually every locality in
                                                                                                                   work with private customers. Thanks to personal-
actively use. The Bank carries out an all-round ex-                                                                                                                            Azerbaijan 15-20 minutes after the execution.
                                                            Consolidating business relations and expanding        ized approach to every customer and transparent
amination of economic activity of each such cus-           trade between Azerbaijan and Russia                     terms and conditions for all the products offered           In 2008 the Bank went on optimizing the technical
tomer.                                                                                                             IBA-MOSCOW managed to gain the reputation of                conditions of money transfers servicing that allowed
                                                            Enhancing the Bank’s efficiency through grant-        a reliable, stable and time-proved partner. In 2008         shortening the time of execution and improving cus-
In 2008 major borrowers of the Bank included such          ing liquid loans with maximum profitability
companies as: VGTRK (Russia TV Channel, mass                                                                       individual funds constituted RUB 729.6 million, i.e.        tomer service.
media, credit line to replenish current assets), «Cro-      Consolidating relations between the Bank and          77% over the figure for 2007. This is a good indi-
cus» Group of Companies (trade, credit line to re-         real sector of economy, expanding mutually benefi-      cator of confidence in the Bank that makes an im-
plenish current assets), «Globus-Leasing» (leasing         cial cooperation with manufacturing companies of        portant stimulus for retail services development and
services, credit to replenish current assets).             consumer goods, organizations of wholesale and          ongoing quality enhancement. Commission rev-
                                                           retail commerce, etc.                                   enue of retail customers servicing was RUB 63.2
In shaping its loan portfolio the Bank pursued mod-                                                                million.
erately conservative policy and paid special atten-         Promoting strategic goals of the Bank in ac-
tion to credit risks management. When lending to           cordance with the approved development business         In developing its retail business IBA-MOSCOW pur-
legal entities the Bank made decisions after a de-         plans and guidelines of the Bank’s operation            sues customer-oriented policy aimed at long-term
tailed study of projects to be funded, analysis of                                                                 relations with the customer. For this purpose the
                                                            Developing and introducing new loan products          Bank develops market-based clear products with
financial statements and appraisal of marketability
                                                           in order to strengthen competitive position of the      evident advantages for the customer. High qualifi-
of collaterals.
                                                           Bank in the financial services market with minimum      cations of the staff add to stronger cooperation. As
When examining loan applications the Bank spe-             risk component of lending operations                    a dynamically developing universal financial institu-
cialists paid special attention to the possibility of                                                              tion the Bank offers to its customers a wide range of
obtaining a 100% security from the borrower in the                                                                 services and quality service.
form of marketable collateral.
In 2008 revolving credit facilities with drawdown                                                                  In 2008 the Bank offered to retail customers
limit, credit facilities, loans and bank guarantees                                                                the following products and services:
constituted the bulk of the corporate credit portfolio.
                                                                                                                    Servicing of money transfers without opening
Buyer’s credits werе extended to most reliable indi-                                                                                                                            TOTAL NUMBER OF MONEY TRANSFERS WITHOUT
                                                                                                                   and account in rubles and foreign currency, includ-
vidual borrowers.                                                                                                                                                               OPENING AN ACCOUNT BETWEEN RUSSIA
                                                                                                                   ing via Contact and Migom systems                            AND AZERBAIJAN SERVICED WITH PARTICIPATION
As of the end of 2008 with the customer loan portfo-                                                                                                                            OF IBA-MOSCOW
                                                                                                                    Deposit banking
lio of RUB 7,676.7 million, collateral security of the                                                                                                                          (figures in dynamics for 2002-2008, thousand units)
loan amount, interest and possible costs constitut-                                                                 Issuing and servicing of bank cards of interna-
ed about RUB 9,906.6 billion. The Bank accepted                                                                    tional payment system Visa International and Mas-
for collateral bank guarantees, guarantee deposits,                                                                terCard Worldwide
mortgage, pledge of equipment, vehicles, material
assets, warrantees provided by legal entities and                                                                   Consumer lending
individuals.                                                                                                        Overdraft lending using bank cards
The bulk of the credit resources is allocated to re-                                                                Leasing of individual safe deposit boxes
plenish current assets (purchases of materials as-
sets and raw materials for sale and production).                                                                    Conversion and currency exchange operations

During 2008 IBA-MOSCOW focused on diversifi-                                                                        Servicing express payments via «Mobil Ex-
cation of credit risks. In this connection the Bank                                                                press» system
concentrated its credit portfolio in industries with fa-                                                            Individual servicing of well-to-do customers
vorable mid-term development prospects. In 2008
maximum concentration of credit risks by industry
constituted 35% – loans to trade companies that
successfully operate and are creditworthy thanks
to high assets turnover.
                                                                                                                                                                                TOTAL VOLUME OF MONEY TRANSFERS WITHOUT
The Bank’s experts constantly monitor the current                                                                                                                               OPENING AN ACCOUNT BETWEEN RUSSIA
state of the credit portfolio, appraise parameters                                                                                                                              AND AZERBAIJAN SERVICED WITH PARTICIPATION
                                                                                                                                                                                OF IBA-MOSCOW
dynamics in connection with loans granted and re-                                                                                                                               (figures in dynamics for 2002-2008, USD, million)

                                                                                                           24                          25
                                                      BANK OPERATIONS                                                                  THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                      IN 2008                                                                          ANNUAL REPORT 2008

In 2008 figures characterizing the number of trans-   The Bank’s commission for money transfer servic-            Individual funds raising                                    This type of deposit is designed for customers who
fers, the amount of funds transferred, commission     ing was RUB 17.7 million, growth by 24% over the                                                                        have a good understanding of the economic situa-
fee grew steadily.                                    figure for 2007.                                          Working at consolidation of the customer base and             tion, are apt to manage their savings and receive
                                                                                                                higher efficiency of retailing in 2008 IBA-MOSCOW             higher return on these. Advertising campaigns di-
By the end of 2008 the number of money trans-         The Bank has acquired a stable and growing cus-           was able to ensure a stable growth of the amount              rected at the existing customers and attraction of
fers without opening an account was 67,000 units.     tomer base for the service consisting of about            of funds in individual accounts that constituted RUB          new ones also helped to ensure deposits increase.
Money transfers without opening an account be-        15,000 persons regularly transferring money to Az-        729.6 million by the end of 2008 (growth up to 77%).          IBA-MOSCOW special deposit offers turned to be
tween Russia and Azerbaijan services in the IBA-      erbaijan during the year. The money transfers have
                                                                                                                The total number of individual current and term ac-           of great interest among customers. At the end of
MOSCOW network constituted 91% of the total or        a social importance as these enable people that live
                                                                                                                counts increased by 187% to about 4,300 units by              2008 the Bank designed and introduced higher
61 thousand units, exceeding the figure for 2007 by   or work in other countries to provide material assist-
                                                                                                                the end of 2008.                                              yield deposits for the term of 6 and 12 months and
15% or 8,000 units.                                   ance to their relatives. With this in view IBA-MOS-
                                                                                                                                                                              gifts for the customers («Vostochniy Dvorik» and
                                                      COW charges lowest tariffs for money transfers to         Today IBA-MOSCOW is taking steps towards de-
In 2008 the total amount of money transfers be-                                                                                                                               «Eighth Wonder of the World») that generated an
                                                      Azerbaijan.                                               veloping and promoting services of term investment
tween Russia and Azerbaijan serviced with partici-                                                                                                                            inflow of funds to the Bank.
pation of the Bank was USD 113 million. The aggre-    In 2008 the growth of money transfers via the Con-        of individual funds. Term deposits of the popula-
                                                                                                                tion are becoming more important in the Bank’s li-            Currently IBA-MOSCOW accepts individual funds
gate amount of money transfers without opening an     tact system went on. It is possible to send and
                                                                                                                abilities enabling it to expand the funding base and          in RUB, USD and EUR. Depending on the type of
account between Russia and Azerbaijan, serviced       receive money transfers in RUB, USD and EUR
                                                                                                                ensure business diversification. Variety of deposits          deposit, interest can be paid monthly, quarterly or at
in the IBA-MOSCOW network exceeded the figure         via this system. The geography of the transfers
                                                                                                                enables individual customers to preserve their mon-           the end of the term. In addition to that, interest can
of 2007 by 21% constituting USD 108 million.          includes the territory of Russia, CIS countries and
                                                                                                                ey funds, protect these from inflation and receive            be capitalized. It is allowed to refill the deposits dur-
                                                      Baltic States as well as far abroad countries. Mon-
The average amount of the transfer to Azerbaijan                                                                additional return.                                            ing their term. By the end of 2008 the Bank offered
                                                      ey transfers to CIS countries are in most demand.
was USD 1,770. The amount of money transfers                                                                                                                                  to its customers over 15 types of term deposits.
                                                      IBA-MOSCOW provides the service to its custom-            In 2008 the Bank offered to its customers a wide
to one customer constitutes USD 5,000 – 7,000 a
                                                      ers since December 2006. In 2008 the number of            range of deposits that virtually held all the possible        By the end of 2008 the amount of individual term
                                                      money transfers via the Contact system was about          options in relation to terms, currency, return, pos-          deposits constituted RUB 592.8 million, 102% over
                                                      18,700 units. The amount of customer operations           sibilities of transactions with the deposit principal         the figure for 2007. The number of term deposits
                                                      via the Contact system constituted RUB 378 million        and interest. The average amount of an individual             was 752.
                                                      in 2008.                                                  deposit was about RUB150 thousand.                            In 2008 IBA-MOSCOW did its best to provide con-
                                                      In the second half of 2008 the Bank signed an             With the changing situation in the market of term             venient and speedy service to retail customers.
                                                      agreement with the Migom money transfers system           funds of RF individuals during the year IBA-MOS-              Thus, one can open a current account of a deposit
                                                      within the framework of individual money transfers        COW developed special offers for customers for                with the Bank for 10-15 minutes.
                                                      servicing. The staff of all service offices of the Bank   new types of deposits with high yield and attractive
                                                      underwent technical training and now can provide          additional terms. To promote special offers of de-
                                                      the service to the customers.                             posits the Bank used advertising in mass media and
                                                      It is worth noting that the Bank offers servicing of      promotion actions among the Bank’s customers.
                                                      money transfers via Contact and Migom systems             Under unstable conditions in the global financial
                                                      as an additional service. Moreover IBA-MOSCOW             markets and a wide financial crisis, IBA-MOSCOW
                                                      pays special attention to developing and promoting        monitored the requirements and needs of the cus-
                                                      its own money transfer service between Russia and         tomers and introduced a number of attractive offers
                                                      Azerbaijan.                                               in 2008. One of these was the «Multicurrency» de-
                                                      In the wide-scale retailing segment the Bank uses         posit that makes conversion transactions possible.
OPENING AN ACCOUNT BETWEEN RUSSIA AND                 standardized banking technologies, unitized pro-
AZERBAIJAN SERVICED IN THE SERVICE OFFICES            duct range, standard instructive regulatory and
OF IBA-MOSCOW                                         methodological documents and reporting system
(figures in dynamics for 2002-2008, thousand units)   and pursues a flexible tariff and marketing policy
                                                      with due regard for regional market conditions in
                                                      locations of the Bank’s branch offices.
                                                      In 2008 IBA-MOSCOW actively developed all areas
                                                      of retailing, focusing on expansion of service range,
                                                      enhancement of the quality of service and develop-
                                                      ment of new products that meet the customers’ re-
                                                      quirements in full.

                                                        Servicing of express payment
                                                        of the population
                                                      Customers can effect various express payments
                                                      such as housing and utility payments, international
                                                      calls, pay TV and access to the Internet in all the
                                                      outlets of IBA-MOSCOW. To service express pay-
                                                      ments of the population in 2008 the Bank signed a
TOTAL VOLUME OF MONEY TRANSFERS WITHOUT               special agreement with «Mobil Express» payment            STRUCTURE OF MONEY BALANCES IN INDIVIDUAL
OPENING AN ACCOUNT BETWEEN RUSSIA AND                 system.                                                   CURRENT ACCOUNTS, BANK CARDS ACCOUNTS
AZERBAIJAN SERVICED IN THE SERVICE OFFICES                                                                      AND TERM DEPOSITS
OF IBA-MOSCOW                                         In the past year the amount of transfers via Mobil        (figures for 01.01.2009, in % of the aggregate amount         INDIVIDUALS, CURRENT ACCOUNTS/ TERM DEPOSITS
(figures in dynamics for 2002-2008, USD, million)     Express system constituted about RUB 3 million.           of money balances in individual accounts)                     (figures in dynamics for 2004-2008, RUB, million)

                                                                                                        26                            27
                                                        BANK OPERATIONS                                                                      THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                        IN 2008                                                                              ANNUAL REPORT 2008

  Individual safe deposit boxes                           Retail lending                                            Operations                                                      In 2008 IBA-MOSCOW jointly with ZAO Raiffeisen
                                                                                                                                                                                    Bank took part in arranging a syndicated credit of
Currently 2 IBA-MOSCOW offices (The Central             In 2008 IBA-MOSCOW extended loans to its re-                                                                                RUB 15 million to OAO «Etalonbank».
office in Moscow and the branch office in Saint         tail customers in the form of overdrafts within the         in financial markets                                            The amount of the Bank’s interbank credit alloca-
Petersburg) are equipped with individual safe de-       framework of payroll card programs and granted
posit boxes. The Bank’s vaults meet all the modern      retail credits. It is worth noting that retail lending is                                                                   tions reached RUB 69,896 million, USD 835.1 mil-
                                                                                                                    In 2008 IBA-MOSCOW went on with active opera-
requirements to security ensuring safety of values      not developing on a mass scale. The Bank extends                                                                            lion, EUR 244.6 million and amount of contracted
                                                                                                                    tions in financial markets.
left in trust with the Bank and convenience for the     retail credits on an individual basis trying to avoid                                                                       loans in 2008 reached RUB 375.5 million, USD 95.7
customers. IBA-MOSCOW customers can lease               risks and giving preference to employees and top            Stable partnership relations with counterparty                  million, EUR 1.3 million.
individual safe deposit boxes of different sizes for    managers of its corporate customers.                        banks enabled the Bank to create optimum condi-
                                                                                                                                                                                    In 2008 the amount of the Bank’s allocated inter-
any convenient period. The Bank’ commission fee                                                                     tions for solving the problems connected with cus-
                                                                                                                                                                                    bank deposits reached RUB 1,450 million, USD
for the service constituted RUB 0.5 million in 2008.                                                                tomer service. Development of the correspondent
                                                          Individual servicing of                                                                                                   2,005.4 million, EUR 36 million and the amount of
                                                                                                                    banks network is important for ensuring operative
                                                                                                                                                                                    contracted deposits was RUB 253.8 million, USD
  Bank cards                                              wealthy customers                                         and smooth servicing of the growing number of IBA-
                                                                                                                                                                                    164.9 million, EUR 31.2 million.
                                                                                                                    MOSCOW customer payments in all directions and
                                                        Work with wealthy customers is a privilege and a            for supporting operations of the Bank’s Treasury                In order to finance its principle activity in 2008 IBA-
The year 2008 was sufficiently successful for IBA-
                                                        great responsibility. IBA-MOSCOW has a long pos-            in the area of raising and placing short-term free              MOSCOW raised a syndicated loan of USD 55 mil-
MOSCOW in the area of bank card business. In
                                                        itive experience of servicing VIP customers offering        funds, sale and purchase of currency, transactions              lion at LIBOR + 1.25% rate for the term of 364 days
the year under review, the Bank started issuing
                                                        to these a wide range of financial transactions that        with securities.                                                with possible prolongation for 364 days. Bayerische
bank cards of MasterCard Worldwide international
                                                        include both standard banking services and uncon-                                                                           Landesbank, Credit Suisse и BANIF – Banco Inter-
payment system. IBA-MOSCOW also began to is-                                                                        Main correspondent banks:
                                                        ventional solutions. Individual approach and atten-                                                                         nacional do Funchal S.A acted as main arrangers
sue new types of Visa Platinum Premium cards for
                                                        tion to special needs of the customer are impor-             Citibank, N Y (USA)                                           of the loan. Such banks as Landesbank Baden-
wealthy customers and Visa Business cards for
                                                        tant constituents of the Bank’s operation. Thanks            JP Morgan Chase Bank, N.A.                                    Wuerttemberg, Mega International Commercial
travel and entertainment expenses of organiza-
                                                        to the experience and expertise of IBA-MOSCOW                Raiffeisen Zentralbank Osterreich AG (RZB-                    Bank Co. Ltd., Paris branch, AKA Ausfuhrkredit-
tions’ employees. In 2008 the Bank offered to open
                                                        team members as well as its reputation and scale            Austria)                                                        Gesellschaft m.b.H., Banque de Commerce et de
card accounts for the customers in EUR in addition
                                                        of operation the Bank invariably offers high quality         Banqua de Commerce et de Placements SA                        Placements S.A., Caixa Geral de Depositos S.A.,
to accounts in RUB and USD.
                                                        products and services that ensure recognition and            Open Joint Stock Company «The International                   France Branch, Land Bank of Taiwan, Offshore
In 2008 the bank launches the service of ordering       loyalty of «special» customers.                             Bank of Azerbaijan»                                             Banking Branch were participants of the deal. The
bank cards via its corporate web-site thus enabling                                                                  «CAPITAL BANK» (ОАО)                                          borrowed funds were used to carry out trade financ-
                                                        In 2008 the IBA-MOSCOW product range for VIP
the customers to save time of documents execu-                                                                       ОАО «AZERGASBANK»                                             ing transactions and expand the credit portfolio of
                                                        customers included standard banking products
tion.                                                                                                                ОАО «Turanbank»                                               the Bank.
                                                        and services, additional programs of support of the
As of 01.01.2009 the Bank issued about 17,000           way of life (holiday and business trips, real estate         «Rabitabank» АCB
                                                                                                                                                                                    In order to increase the Bank’s capital base since
bank cards. The growth constituted about 7,600          transactions, etc.) and special products and serv-           ZАО Commercial bank «Bank Standard»
                                                                                                                                                                                    2005 the Bank has been using a subordinated de-
cards in the year. Some 2,600 bank cards were is-       ices for VIP customers.                                      Joint Stock Commercial Savings Bank of the RF
                                                                                                                                                                                    posit of USD 7 million and in 2008 the Bank raised
sued within the payroll card programs for organiza-                                                                 (ОАО)
                                                                                                                                                                                    another subordinated deposit of USD 2 million.
                                                        Thus in 2008 IBA-MOSCOW expanded the deposit                 Joint Stock bank of gas industry «Gasprom-
tions that signed corresponding agreements with
                                                        range for VIP customers introducing «IBA-Premi-             bank» (ZАО)                                                     Thanks to the favorable situation in the stock mar-
the Bank. The growth constituted 51% in the year.
                                                        um» and «Multicurrency Premium» deposits. It also            ACB «Bank of Moscow» (ОАО)                                    ket in the first half of 2008 IBA-MOSCOW was able
In order to stimulate sales of card products IBA-       offers the opportunity of transferring deposits to the       ZАО «Raiffeisen Austria» (Moscow)                             to continue successfully active transactions with
MOSCOW launches a series of marketing actions           «Platinum» category ensuring higher yield on the             Bank ZENITH (ОАО)                                             securities. The Bank formed a portfolio of bills of
that positively reflected on the Bank’s issue of bank   funds. These types of deposits are designed for              Joint Stock Commercial bank «EUROFINANCE                      exchange of RUB 190.78 million. In 2008 purchases
cards.                                                  customers that have substantial free money funds            MOSNARBANK» (ОАО)                                               of bank bills constituted RUB 1,137.4 million and
                                                        and are interested in higher yield. In addition to in-                                                                      sales – RUB 1,585.2 million. Net income of transac-
To dispense cash on cards by the end of 2008 the        dividual and high quality service the Bank offers as        By the end of 2008 IBA-MOSCOW held 51 NOS-
                                                                                                                                                                                    tions with bank bills was RUB 43.5 million. Purchas-
Bank put into operation 27 ATMs. The amount of          a gift Visa Gold/MasterCard Gold cards to its cus-          TRO (due from banks) accounts and 56 LORO (due
                                                                                                                                                                                    es of corporate bills of exchange amounted to RUB
cash funds dispensed through the ATM network            tomers holding VIP and «Platinum» deposits.                 to banks) accounts with correspondent banks of (in-
                                                                                                                                                                                    12,345.8 million and sales – RUB 12,721.1 million
constituted RUB 734.8 million and USD 27.8 mil-                                                                     cluding Russian and foreign banks).
                                                                                                                                                                                    in 2008. Net income of transactions with corporate
lion in 2008.                                           The fact that the number of VIP customers grows
                                                                                                                    The Bank operates with its free money funds pur-                bills was RUB 224.7 million.
                                                        every year speaks of the high level of confidence in
To service cashless operations on bank cards in         the Bank and confirms its reputation as a reliable          suing balanced limit policies aimed at controlling
the sales and service network the Bank installed        financial partner.                                          and diminishing risks of operations in the interbank
some 130 POS terminals. The amount of transac-                                                                      market.
tions within the framework of merchant account
constituted RUB 579.4 million in 2008.
In 2008 cash balances in card accounts were RUB                                                                     CORRESPONDENT ACCOUNTS
44.86 million, USD 1.1 million, EUR 115.4 thou-                                                                     (figures in dynamics for 2002-2008,units)
The Bank’ commission fee for the card service
constituted RUB 28.1 million in 2008 (growth up to

                                                                                                            28                              29
                                                                                    THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                    ANNUAL REPORT 2008


                                                                     5             BANK’S OPERATIONS
                                                                                   IN RUSSIAN REGIONS IN 2008
BUSINESS STYLE                                                One of the strategic goals of IBA-MOSCOW is to               self-repayment. In this connection, special attention
                                                              establish and expand a network of branch offices             is paid to business development issues, attraction
INTERNATIONAL WIDE RELIABILITY                                in RF regions.                                               of new customers, formation and expansion of the
                                                                                                                           credit portfolio.
                                                              The program of expansion of the regional network
                                                              suggests increasing the number of sales offices              Today the Bank’s strategy in the RF regions in-
                                                              through going into promising and dynamically de-             cludes balanced rational approach to developing
                                                              veloping regions of the RF, opening of branch of-            its regional network of branch offices and service
                                                              fices there and further expanding the network                offices. It is planned to expand the Bank’ presence
                                                              providing there are good prospects for business              in regions on the basis of Saint Petersburg branch
                                                              development. Business in regions plays an impor-             office through opening outlets and operating cash
                                                              tant role in the Bank’s development enabling it to           desks in the city and the region.
                                                              raise additional financial resources and place these
                                                                                                                           The Bank studies the possibilities of opening branch
                                                                                                                           offices in some other RF regions with a high level of
                                                              In 2008 the regional network enabled the Bank to             economic development. In 2008 the Bank studied
                                                              diversify industrial and regional risks, concentrate         the prospects of opening a branch office in Nizhniy
                                                              money flows in a unified settlement banking system           Novgorod. In addition to that it studies the possibil-
                                                              through providing a full-scale and high quality finan-       ity of acquiring a regional bank with a developed
                                                              cial service to every customer category.                     infrastructure and an extensive customer base.

                                                              The main priorities of the Bank’s regional
                                                              network development include:
                                                               Developing regional outlets network in major cit-
                                                              ies with compliance to the established desirability
                                                              criteria standards
                                                               Shaping efficient business
                                                               Laying the basis for long-term investment attrac-
                                                              tiveness with maximum use of internal resources
                                                              and market possibilities
                                                               Recoupment of the costs of opening regional
                                                              Priority regions for the Bank are determined as Rus-
                                                              sian federal entities of the TOP 20 according to the
                                                              favorable situation rating (social and economic situ-
                                                              ation in the entity with due regard for the financial
                                                              sector development).

                                                              Priority regions for IBA-MOSCOW:
                                                               Central Federal District: the city of Moscow,
IBA representative office
                                                              Moscow Region

Federal Republic of Germany                                    North-West Federal District: Saint Petersburg,
                                                              Leningradskiy Region
Frankfurt on the Main
                                                               Urals Federal District: Yekaterinburg
Frankfurt on the Main is the economic and financial capital    Privolzhskiy Federal District: Nizhniy Novgorod
of Germany and the second largest after London financial
centre in Europe. The famous local stock exchange is          By the end of 2008 the regional network of IBA-
forth in the world by trading volume. Frankfurt on the Main   MOSCOW service offices consists of a branch of-
                                                              fice and 2 outlets in Saint Petersburg and a branch
is the city of huge skyscrapers and offices of German and
                                                              office in Yekaterinburg.
foreign banks.
The IBA office in Frankfurt on the Main has been in           The task set before managers of the regional net-
operation since 2005. It was opened due to expanding          work offices is to ensure as soon as possible suffi-
collaboration with German banks.                              cient transactions volume and reaching operational

                                                        BANK’S OPERATION                                                            THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                        IN RUSSIAN REGIONS IN 2008                                                  ANNUAL REPORT 2008

Saint Petersburg                                        In 2008 the regional division of the Bank ser-
                                                        viced 16,528 money transfers to Azerbaijan to the     Yekaterinburg                                                By the end of 2008 the issue of bank cards consti-
                                                                                                                                                                           tuted 298. Last year the branch issued 181 cards
                                                        amount of USD 26.07 million. Commission fee for                                                                    of Visa and MasterCard international payment sys-
  Saint Petersburg economy                              servicing money transfers to Azerbaijan was RUB 5       Yekaterinburg economy                                      tems. To support card transactions the branch of-
                                                        million. The average amount of a money transfer in                                                                 fice installed 4 ATMs by the end of 2008.
  in 2008                                               the branch office was USD 1,432. The branch office      in 2008
                                                                                                                                                                           Major customers of Yekaterinburg branch office
Organizational revenue constituted RUB 3,934.5          has a stable customer base of about 6,000 persons     Yekaterinburg is one of the largest industrial centers       included such companies as OAO «Uralbiofarm»,
billion. Industrial production grew by 4.1% against     for money transfers to Azerbaijan. In 2008 the cus-   of the RF. Over 120 enterprises and organizations            OAO «Family Medicine Centre», ZAO «Rostverk»,
2007. In 2008 sales of consumer goods in Saint          tomer base grew by about 2,500. The money trans-      are registered in the city. In 2008 total deliveries of      OOO Trading company «Cityfruit», OAO TD «Ener-
Petersburg reached RUB 564.8 billion, that is by        fers via Contact system constituted the equivalent    internal production of medium size and big enter-            gozapchast».
11.2% more that in the previous year. The city          of RUB 32 million and the number of transfers was     prises in Yekaterinburg reached RUB 138.6 billion
budget showed a surplus of RUB 37 billion. The to-      2,104.                                                (growth by 8.9% against 2007). The leaders were
tal revenues of the budget were about RUB 350 bil-      By the end of 2008 bank cards issue reached 3,538     metallurgy and industrial production (RUB 39.5 bil-
lion. By the end of the year 84% of organizations in    units, i.e. 23% over the previous year. In the past   lion), machine building and electronics (RUB 12.7
various business spheres were in the black. In Jan-     year the branch office issued 1,422 bank cards of     billion), chemicals and pharmaceuticals (RUB 11.4
uary-November of 2008 the financial performance         Visa and MasterСard international payment sys-        billion). Profit of Yekaterinburg enterprises exceed-
surplus of organizations increased by 7% against        tems. To support card transactions the bank in-       ed the figure for 2007 by 5.9%.
the same period of the previous year constituting       stalled 8 ATMs and 60 POS terminals in trade and      Retail sales revenue in 2008 grew by 17% constitu-
RUB 283.6 billion. Organizations in manufacturing       services network. The cash dispense through the       ting about RUB 360 billion.
transport and communication sectors showed the          ATMs was RUB 194.4 million and USD 5.2 million,
best financial performance surplus.                     transactions with POS terminals constituted RUB       In 2008 wages and salaries grew in real terms
                                                        65.9 million by the end of 2008.                      by 8%.
As of 01.12.08 loans (in rubles and foreign cur-
rencies) extended by credit organizations to enter-     IBA-MOSCOW branch office customers include            As of the end of 2008 Yekaterinburg holds 4th place
prises and population increased by 48% against the      such locally well-known companies as ZAO «Inter-      in the RF by population of 1.36 million.
beginning of the year reaching RUB 997.7 billion.       national Baltic Investment Company», ZAO «Ipara-
                                                        Saint Petersburg», OOO «Globus Leasing», OOO
Monetary incomes of the population constituted
                                                        «Am-Trade», OOO «Deliko», OOO «Saint Pe-
                                                                                                                Branch office
RUB 841.9 billion in January-November of RUB
2008 billion.                                           tersburg Porcelain Factory», OOO «Logo-Trade»,        The IBA-MOSCOW branch office in Yekaterinburg
                                                        OOO «Skart Ltd», OOO «Inter-Business», «Forum         was opened in 2005.
By the end of 2008 the population in Saint Peters-      Broker» Group of Companies.
burg was 4,582 million.                                                                                       By the end of 2008 202 corporate accounts and 437
                                                        The IBA-MOSCOW branch office in Saint Peters-         current and term retail accounts were opened with
                                                        burg manages the accounts of the General Consu-       the Yekaterinburg branch office.
  Branch office, outlets                                late of the Republic of Azerbaijan.
                                                                                                              At the end of the year the aggregate funds in the
The IBA-MOSCOW branch office in Saint Pe-               In June 2008, celebration of the 5th anniversary of   customers’ accounts constituted RUB 25.3 million,
tersburg was opened in 2003. In 2006 the                the IBA-MOSCOW branch office in Saint Peters-         with RUB 17.9 million in corporate accounts.
«Obukhovskiy» outlet was established on its basis.      burg took place. Russian and Azerbaijani officials,
In 2007 the «Kushelevskiy» outlet was opened in                                                               The aggregate funds in retail accounts grew to RUB
                                                        representatives of business and culture attended
Saint Petersburg.                                                                                             7.4 million in 2008.
                                                        the event.
By the end of 2008 the number of corporate ac-                                                                The loan portfolio of the branch grew considerably
counts in Saint Petersburg branch office increased                                                            to RUB 620 million by the end of the year. The main
by 53% to 892 and the number of individual current                                                            credit products included term credits, revolving and
and term accounts grew by 25% to 852.                                                                         nonrevolving credit lines. The borrowers mainly
                                                                                                              used the loans to replenish their current assets and
The aggregate funds on customers’ accounts al-                                                                to acquire fixed assets. The borrowers included
most doubled and in 2008 it constituted RUB 63.08                                                             trade and production companies. The bulk of the
million.                                                                                                      loans was granted for the term to 1 year.
The credit portfolio also increased reaching RUB                                                              Last year the branch office of the Bank gained inter-
1,120.6 million by the end of 2008. The corporate                                                             est income of RUB 48.4 million and commission fee
loan portfolio accounted for 84% thereof or RUB                                                               of RUB 12.9 million.
949.9 million.
                                                                                                              In 2008 the branch office of the Bank serviced
In 2008 the main credit products included term                                                                3,829 money transfers to Azerbaijan to the amount
loans, revolving and nonrevolving credit lines. Prime                                                         of USD 14 million. Commission for servicing money
borrowers’ share in the loan portfolio of the branch                                                          transfers to Azerbaijan constituted RUB 1.7 million.
office constituted 57.5%. The borrowers mostly                                                                The average amount of a transfer in Yekaterinburg
used the loans to replenish their current assets and                                                          was USD 3,670. The branch office has a stable
for financing construction projects. The borrowers                                                            customer base for money transfers of about 1,300
included investment and production companies,                                                                 persons. Money transfers via the Contact system
trade and services enterprises. Most loans were                                                               constituted the equivalent of RUB 3.4 million and
granted for the term of 1 year.                                                                               USD 0.1 million, and the number of transfers was
                                                                                                              209 units.
In 2008 the interest yield of the branch office was
RUB 147.3 million (growth by 34%) and the com-
mission fee was RUB 84.9 million rubles (growth by

                                                                                                      32                           33
                                                                                   THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                   ANNUAL REPORT 2008


                                                                    6             BANK’S
                                                                                  SUPPORT SERVICES
FINANCIAL                                                    Risk management                                              cation of failures, development of suggestions and
                                                                                                                          control over implementation of decisions designed

TARGETS                                                      and internal control                                         to improve the internal control system of the Bank
                                                                                                                           Control over the system of countering money
                                                                                                                          laundering and financing of terrorist activities
INTERNATIONAL WIDE RELIABILITY                               Internal control and effective risk management are
                                                                                                                           Control over compliance of the Bank’s operation
                                                             important conditions of ensuring reliability and suc-
                                                                                                                          in the securities market with the RF legislation and
                                                             cessful development of IBA-MOSCOW.
                                                                                                                          regulatory acts of the federal activity for financial

                                                               Internal control system
                                                             To ensure authenticity of financial statements,                 Risk management
                                                             compliance with regulatory acts, efficiency of the           Effective risk management is one of the key aspects
                                                             Bank, observation of legal interests of depositors,          of successful operation of a financial organization.
                                                             creditors and other Bank’s counterparties IBA-
                                                             MOSCOW has lined up an effective internal con-               In order to ensure adequate assessment of risks
                                                             trol system. The system includes reviews aimed at            emerging in the process of banking operation IBA-
                                                             disclosing in due time cases of violation of internal        MOSCOW has developed a package approach to
                                                             policies and procedures, coordination and delega-            risk assessment that includes regulations, methods
                                                             tion of powers, observation of limits and following          and procedures allowing analysis and monitoring of
                                                             control over remedial actions.                               banking risks and a system of collegiate bodies of
                                                                                                                          decision making.

                                                             Internal control is aimed at ensuring:                       Credit risk
                                                              Efficient assets and liabilities management in-            Credit risk means the risk of financial losses through
                                                             cluding security of the assets, banking risks man-           non-execution of obligations by the Bank’s counter-
                                                             agement and effectiveness of financial and eco-              parties, primarily by borrowers.
                                                             nomic activity in banking transactions and other
                                                             deals                                                        This risk is critical for the Bank’s operation as it
                                                                                                                          leads to serious consequences for financial stability
                                                              Authenticity, fullness and timely delivery of finan-       of the Bank. Therefore, it merits special attention of
                                                             cial statements, accounting and other reports and            the Bank.
                                                             of information security
                                                                                                                          The minimum overdue loan debt speaks of the ef-
                                                              Non-involvement of the Bank and its staff in any           fectiveness of the current system of risk assess-
                                                             illegal activities, including legalization of criminal       ment, control and credit risk management in IBA-
                                                             revenues (money laundering) and financing of ter-            MOSCOW: its share in the aggregate loan portfolio
                                                             rorist actions and timely reporting of available infor-      of the Bank has not exceeded 1% for a long time.
                                                             mation to government authorities and the Bank of
                                                             Russia in conformity with the RF legislation                  Liquidity risks
                                                              Observation of regulatory acts, statutory and in-          The imbalance between the Bank’s assets and li-
                                                             ternal documents of the Bank                                 abilities lead times determines liquidity risk.
IBA representative office
                                                                                                                          Liquidity risk management in the Bank is designed
Grand Duchy of Luxembourg                                    Internal control covers the following main                   to ensure its creditworthiness, shaping of its assets
                                                             areas of activity:                                           and liabilities structure that allows optimum balanc-
Luxembourg                                                                                                                ing of liquidity and profitability.
                                                              Control on the part of the administrative bodies
Luxembourg is a prosperous financial centre of inter-        over organization of the Bank’s operation
national repute. It is a city of banks and bankers, one                                                                   Operations risk
                                                              Control over operation of the system of banking
of the major business and financial centres of the world                                                                  Operations risk means the possibility of losses for
                                                             risk management and appraisal of banking risks
located in the heart of Western Europe. The IBA office has                                                                the Bank due to lack of correlation between internal
been in operation Luxemburg since 2007. It was opened         Control over distribution of powers in effecting           rules and procedures of banking operations and the
due to growing collaboration with European, particularly     banking transaction and other deals                          nature and scale thereof anв the requirements of
Luxembourg banks. IBA is considering the possibility                                                                      the Russian legislation.
                                                              Ongoing monitoring of the internal control sys-
of opening jointly with one of the international banks in                                                                 To minimize operations risk IBA-MOSCOW on a
                                                             tem functioning aimed at appraising its correspond-
Luxembourg an investment bank subsidiary under the           ence with the Bank’ operation objectives, identifi-          regular basis carries out detailed analysis of the in-
auspices of IBA office.

                                                          BANK’S SUPPORT                                                                 THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                          SERVICES                                                                       ANNUAL REPORT 2008

ternal procedures, established document flow and
accounting, that enables the Bank to improve its          Information                                              Human resources                                              IBA-MOSCOW believe that human resources are
                                                                                                                                                                                the basis of any organization, therefore ongoing
banking operations.                                                                                                                                                             professional development of the personnel is an in-
                                                          technologies                                             department                                                   dispensible condition for successful operation and
Market risk                                                                                                                                                                     development of the Bank. In 2008 about 50 Bank
                                                                                                                                                                                employees underwent training in various seminars
Market risk is connected with unfavorable                 IBA-MOSCOW continuously develops and up-                 Dynamic development of IBA-MOSCOW depends                    and refresher courses. This is how the Bank invest-
changes in the market situation resulting in              dates it technological base ensuring that it meets       on well-conceived and effective human resources              ing into its staff invests into business development.
losses for the Bank. The changes may include:             the growing scale of business, expanding product         policy. The performance of the Bank in 2008 is
                                                          range and regional network. The Bank has all the         mostly due to high professionalism of the staff and          In selecting personnel, the Bank attaches great im-
 Changing market value of financial instruments                                                                                                                                portance to correspondence of the candidates to
                                                          range of modern banking information technologies:        optimum administration structure.
(stock exchange risk)                                                                                                                                                           corporate culture of the Bank. All the employees
                                                          industrial automated banking systems (ABS) with
                                                                                                                   The human resources management policy of the                 should accept the corporate ethics of IBA-MOS-
 Changing interest rates (interest rate risk)            every functionality for servicing corporate custom-
                                                                                                                   Bank goes back to IBA-MOSCOW mission and is                  COW that includes attentive attitude to the cus-
                                                          ers, a centralized ABS for registering retail transac-
 Changing currency rates of exchange (currency           tions, a corporate data bank, a system of simula-
                                                                                                                   designed at ensuring and promoting it competitive            tomers, compliance with the legislation, teamwork,
risk)                                                                                                              advantages.                                                  professional ability, and desire to improve services,
                                                          tion and optimization of business processes. The
                                                          Bank’s information technologies are based on the         The Bank strives to establish long-term labour rela-         products and procedures.
The Bank manages market risk through ongoing
cooperation of collegiate bodies and structural divi-     best domestic and foreign automated systems and          tions with its employees on principles of social part-       In addition to professional and career development,
sions of IBA-MOSCOW.                                      solutions in the area of corporate communication         nership and compliance with labour legislation.              material incentives play an important role in stimu-
                                                          facilities.                                                                                                           lating the personnel. The Bank has developed and
Legal risk                                                Information technologies development is an impor-        Strategic goals of the IBA-MOSCOW human                      successfully introduced a motivation system based
                                                          tant area that helps to establish operating collabo-     resources policy:                                            on a competitive wage system. In 2008 the staff of
Legal risk is connected with complete or partial non-                                                                                                                           the Bank grew by 19% reaching 255. The average
                                                          ration of services in the Bank and provide high qual-
execution of the terms of an agreement by the other                                                                 Mobile highly professional team                            age of the employees is 37 years. Thanks to such
                                                          ity services to the customers.
party, growing liabilities due to illegal transactions,                                                                                                                         a strong team the Bank managed to achieve good
                                                                                                                    Strong administrative staff
mistakes, errors of judgment and irregularities in        From the very beginning, IBA-MOSCOW has                                                                               results in the past year.
execution of documents, forging or stealing thereof,      adopted a most flexible IT-strategy envisaging con-       Balanced optimum staff
lack of powers of persons, signing the agreement,         tinuous improvement of the information technol-                                                                       IBA-MOSCOW is planning to increase further its
                                                                                                                   The main areas of the Bank’s human resources                 staff in 2009 in order to ensure achievement of its
incorrect execution of backup documentation and           ogy system along with the growing needs. In 2008
                                                                                                                   policy in 2008 included: recruitment of high bank-           strategic targets.
ensuing possible losses of the Bank’s assets.             the Bank signed an agreement with Migom money
                                                                                                                   ing professionals to structural divisions of the Bank,
                                                          transfer system under which all the offices of the
The Legal Department of the Bank carries out anal-                                                                 professional development and training of the per-
                                                          Bank were equipped technologically to service cus-
ysis of legal risks in order to identify unconformities                                                            sonnel, enhancing motivation of the employees,
                                                          tomers with the staff undergoing training.
between draft documents (including local regula-                                                                   development of corporate culture and activation of
tions, internal rules and procedures, contracts, or-      The Bank further develops customer service via           each promising employee’s potential.
ders, etc.) and the current RF legislation, common        «Bank-Customer» system with many new organi-
                                                                                                                   In 2008 as the Bank’s developed at a high rate, the
business practices and the Bank’s interests.              zations connected thereto.
                                                                                                                   staff grew and as the product range offered to the
                                                          To increase non-cash operations with bank cards          customers expanded it became necessary organ-
Reputation risk                                           of the Bank and cash disbursements by the end            ize professional development of the employees.
The risk of losing business к reputation is connect-      of 2008 the Bank installed and put into operation        The Bank solved these problems through pursuing
ed with the possibility of the Bank’s losses due to       about 130 POS terminals and 27 ATMs.                     its approved human resources policy that helped
decreasing number of customers (counterparties)                                                                    IBA-MOSCOW to put together a highly professional
                                                          With the new «Golovinskoye» operating cash desk
because of the negative public image of the Bank.                                                                  team.
                                                          in Moscow it was equipped with appropriate tech-
To diminish the risk the Bank adheres to the princi-      nology, communication lines were laid and access
                                                          to information and banking resources was organ-          When selecting experts and managers
ples of transparency of transactions and openness
                                                          ized.                                                    IBA-MOSCOW first looks at the following
of relations with counterparties and the business
                                                                                                                   characteristics of the candidates:
community on the whole and pursues a balanced             Jointly with «FB Consult» company in June 2008
marketing policy. The Press Service of IBA-MOS-           the Bank launched CRM SalesLogix pilot project.           The ability to understand their duties and objec-
COW on a regular basis carries out mass media             The project will enable the IBA-MOSCOW to im-            tive self-esteem
analysis in order to prevent and in due time react        plement the strategy of the Bank, in particular to
to unfair competition (in particular information at-                                                                Positive approach to solving any complex prob-
                                                          provide to the customers a full package of most          lems
tacks).                                                   advanced technologies of banking products and
                                                          services and to create most comfortable conditions        Adequate education
                                                          for the customers’ relations with the Bank.
                                                                                                                    The ability to make use of the acquired experi-
                                                                                                                   ence and practical knowledge in everyday work
                                                                                                                    The ability to work in a team and observe dis-
                                                                                                                    Creative ability and the ability to make non-
                                                                                                                   standard decisions
                                                                                                                    The ability to get on well with people
                                                                                                                   Another characteristic that plays a decisive role for
                                                                                                                   selecting a candidate is his/her readiness to up-
                                                                                                                   grade his/her skills.

                                                                                                           36                           37
                                                                                     THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                     ANNUAL REPORT 2008

                                                                                     PRIORITY DIRECTIONS
                                                                      7              OF THE BANK’S OPERATIONS
COMMON HUMAN                                                                         AND DEVELOPMENT
RESOURCES                                                                            PROSPECTS
POLICY                                                         In 2008 IBA-MOSCOW followed the «Strategic Plan              IBA-MOSCOW adheres to conservative lending
                                                               of Development for 2008-2010» approved by the                policy, receiving medium yield rate to maintain its
INTERNATIONAL WIDE RELIABILITY                                 Board.                                                       stable financial position and guaranteeing to its cus-
                                                                                                                            tomers due operations execution and safety of their
                                                               IBA-MOSCOW performance in the year under re-
                                                               view shows that the planned targets were success-
                                                               fully achieved. The Bank joined actively growing             The Bank considers its corporate business as a
                                                               medium size financial institutions by such important         possibility to organize work with several customer
                                                               indicators as assets and capital. The Bank’s effi-           groups: the company and its counterparties (corpo-
                                                               ciency corresponds to that of the banking system             rate segment), top managers and other officials of
                                                               ensuring adequate yield of stockholders’ invest-             companies (VIP retail segment), company employ-
                                                               ments.                                                       ees (mass retail segment).
                                                               In the near future IBA-MOSCOW will be working                The Bank actively introduces the pattern of collabo-
                                                               to strengthen its positions in the Russian market            ration with the customers that ensures individual
                                                               through more accurate positioning and joining TOP            service and specially designed product solutions
                                                               100 leading banks in the Russian Federation.                 with due regard for the customer’s specific needs.
                                                                                                                            Implementation of the practice enables the Bank to
                                                               Infrastructure development in combination with in-
                                                                                                                            expand effectively its customer base and transac-
                                                               tensive work with corporate and retail; customers
                                                                                                                            tions volume with the existing customers.
                                                               should ensure growth of quantitative and qualitative
                                                               indicators of the Bank.                                      IBA-MOSCOW focuses on development of product
                                                                                                                            range, introduction of modern products and serv-
                                                               Currently in its operation IBA-MOSCOW relies on
                                                                                                                            ices and information support of sales and on bring-
                                                               assessment of the external environment factors
                                                                                                                            ing information about the Bank’s possibilities to end
                                                               (Goskomstat data, Ministry for Economic Devel-
                                                               opment and Trade, Association of Russian Banks,
                                                               etc.) with due regard for its own financial and or-          IBA-MOSCOW capital grows constantly (with the
                                                               ganizational possibilities. Analyzing the trends in          Bank considering the process as one of its priori-
                                                               the banking sphere the Bank is able to identify the          ties) enabling the Bank to expand its loan portfolio
                                                               structure of the competitive environment and the             and raise the credit rate to one borrower.
                                                               main groups of competitors and their advantages
                                                               and shortcomings.
                                                               Assessment of the internal development of the
                                                               Bank, its customer base and the product range
                                                               shows that IBA-MOSCOW possesses sufficient
                                                               development potential in the corporate and retailing
                                                               sectors. In addition to that, the Bank has a large
                                                               group of loyal customers in the corporate seg-
                                                               ment – companies with business ties with Azerbai-
                                                               jan, and in the retailing segment, these are numer-
                                                               ous representatives of the Azerbaijani expat com-
                                                               munity residing or temporarily staying in the territory
IBA representative office                                      of the Russian Federation.
                                                               In maintaining its relations with corporate business
United Arab Emirates                                           the Bank attaches great importance to lending is-
Dubai                                                          sues. The Bank has a vast credit portfolio diver-
                                                               sified by the type of business, loan amounts and
Dubai with its high degree of attractiveness for business is   terms of lending. When selecting potential custom-
a fast developing financial and business centre of the UAE     ers the Bank gives preference to companies in the
and the Near East a whole. The IBA office in Dubai has         real economy sector, manufacturing companies
been in operation since 2008. IBA was the first foreign bank   producing competitive products. The Bank also
                                                               carefully studies long-term investment projects of
to open its representative office in the common market
                                                               companies for the possibility of funding. In its work
rather than in the Dubai free economic zone. This location
                                                               with customers the Bank uses cross sales, goes for
enables the IBA office to use additional possibilities and
                                                               increasing joint transactions.
act as an arranger of funding for multitype projects.

                                                          PRIORITY DIRECTIONS OF THE BANKS’                                              THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                          OPERATIONS AND DEVELOPMENT PROSPECTS                                           ANNUAL REPORT 2008

To fund corporate projects IBA-MOSCOW is plan-            The Bank has completes optimizing technical con-          Currently the market strategy of the Bank can
ning to raise additional resources in the internation-    ditions within the framework of servicing money           be summed up as follows:
al capital market and use customers’ funds. Moreo-        transfers without opening an account between Rus-
                                                                                                                     Developing relations with big and medium size
ver, the Bank has in its disposal sufficient funds of     sia and Azerbaijan. This considerably simplifies the
                                                                                                                    corporate business on the basis of lending, attract-
the parent bank. IBA-MOSCOW is also planning to           transfer procedure for the customers. In addition
                                                                                                                    ing reliable borrowers, increasing cross sales and
assert its reliability and financial stability through    to the agreement with Contact system the Bank
                                                                                                                    commission fees
gaining a credit rating of a first class international    signed an agreement with Migom international
rating agency as this will further enable it to raise     money transfer system. Now the Bank’s custom-              Enhancing the quality of the loan portfolio, re-
additional funds.                                         ers can transfer funds on competitive terms to CIS        ducing risks
                                                          countries, countries of far abroad and in Russia.
In order to expand its presence in the retail market
                                                          Special attention is given to the development of in-       Introducing a mass-scale sales system in prom-
the Bank focuses on network development issues.                                                                     ising corporate segments ( small and medium size
                                                          dividual customers deposit portfolio mainly through
Currently there are 8 service offices in Moscow.                                                                    business), gaining competitive advantage through
                                                          attracting mass depositors with new offers with
The Bank has branch offices in two most developed                                                                   a high standard of servicing and modern products
                                                          beneficial conditions for potential customers. The
Russian regions: in Saint Petersburg and Yekaterin-                                                                 and services
                                                          Bank has improved the terms and conditions of the
burg. A network of outlets is being developed on the
                                                          main types of deposits, is introducing new offers          Expanding the customer base in the corporate
basis of Saint Petersburg branch. IBA-MOSCOW
                                                          that take into account the changing market situa-         and retailing segments
service network consists of 12 offices in the terri-
                                                          tion and launches advertising campaigns. The main
tory of the RF. In the near future it is planned to ex-                                                              Funding in the amount adequate to target fig-
                                                          objective for the future includes balanced increase
pand the Bank’s presence in the Moscow region as                                                                    ures, raising funds in the international capital mar-
                                                          of the share of private customers in the Bank’s li-
the most promising economically and to bring the                                                                    ket, using customers’ funds, diminishing depend-
                                                          abilities structure.
number of offices to 10-15, with the total number                                                                   ence of the parent bank’s resources
growing to 20. In addition to that, the Bank consid-      The Bank is planning to develop further channels
ered the possibility of acquiring (takeover) of some      of remote access to its services, including ATMs,          Servicing trade and economic relations be-
Moscow or regional financial institution in accord-       thus diminishing the load of work on its offices and      tween Russia and Azerbaijan, funding various joint
ance with its infrastructure development strategy.        cutting the costs. The Bank will also offer to its cus-   projects
                                                          tomers some modern Internet and mobile commu-              Increasing volume of transactions with corporate
As for the network divisions the Bank is planning
                                                          nication based services.                                  customers in the area of export and trade financing
to offer mass retail products at the same time de-
veloping relations with corporate business accord-        To optimize sales and customer servicing the cor-          Increasing the volume of retail sales, develop-
ing to the territorial principle. Network development,    porate and retailing sectors the Bank started intro-      ment and promotion of new promising and profit-
establishment of efficient service centres should         ducing a CRM SalesLogix system and accompany-             able products
help to enhance the Bank’s competitiveness and its        ing applications.
capitalization. Moreover after the Bank was granted                                                                  Developing further the network as an important
the Bank of Russia General License it became pos-                                                                   element for increasing sales growth and gaining
sible to implement the plans to open shortly an IBA-                                                                competitive advantage
MOSCOW representative office in Frankfurt on the                                                                     Acquiring an international credit rating
Main (Germany).
                                                                                                                     Ensuring information and marketing support to
Establishment of the Bank’s own processing centre                                                                   sales, gaining loyalty of the customers, identifying
ensuring provision of a modern range of high quality                                                                the group of corporate and retail customers that
banking services and further expansion and expan-                                                                   bring the bulk of the revenue
sion of service will give IBA-MOSCOW advantage
in the competitive market of bank cards.                                                                             Organizing PR campaigns in the Azerbaijani
                                                                                                                    expat community, participating in public national
The Bank’s plan for the near future include further                                                                 Azerbaijani organizations regarded as a source of
development of MasterCard project – issue of ad-                                                                    retail and corporate customers
ditional Platinum and Business cards, expansion
of the ATMs network (including those with the                                                                        Ensuring internal technological balance of the
cash acceptance and crediting to bank card ac-                                                                      Bank, mobility, purposefulness, integrity and pro-
counts function) and POS terminals, payroll card                                                                    fessionalism
programs, Internet banking, further development of
                                                                                                                    All these elements of the Bank’s market strategy
Card Transfer services.
                                                                                                                    create prerequisites for establishing long-term com-
                                                                                                                    prehensive and mutually beneficial relations with
                                                                                                                    customers based on offers of first-rate products, un-
                                                                                                                    derstanding of the customer’s specifics and needs
                                                                                                                    and ensuring effective partnership

                                                                                                            40                          41
                                                                              THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                              ANNUAL REPORT 2008


                                                                 8           CONTACT
ETHICS                                                    Main Bank details                                          ATMs addresses
INTERNATIONAL WIDE RELIABILITY                              Moscow                                                      Moscow
                                                          Central office                                             6/2 Tverskaya street
                                                          6/2 Tverskaya street                                       43/1 Pokrovka street
                                                          Tel.: +7 (495) 933 83 15
                                                                                                                     12/14 Usievicha street
                                                          Outlet «In Pokrovka»
                                                                                                                     1 Tekstilscthikov 11th street (hotel «Moskvich»)
                                                          43/1 Pokrovka street
                                                          Tel.: +7 (495) 937 77 27                                   3/1 Tschelkovskoye highway (shopping mall
                                                          Outlet «Movie theatre «Baku»
                                                          12/14 Usievicha street                                     15 Voznesenskiy pereulok
                                                          Tel.: +7 (499) 151 89 02                                   4 Trifonovskaya street
                                                          Outlet «Hotel «Moskvich»                                   4/2 Mukomolniy proezd
                                                          1 Tekstilschikov 11th street
                                                                                                                     1 Golovinskoye highway
                                                          Tel.: +7 (499) 176 88 11
                                                                                                                     1A Golovinskoye highway
                                                          Outlet «Cherkizovo»
                                                          3/1 Tschelkovskoye highway                                 1 Novgorodkaya street
                                                          Tel.: +7 (495) 988 78 14                                   5A Rassvetnaya alley
                                                          Operating cash desk «In Kutuzovskiy»
                                                          24 Kutuzovskiy prospect                                       Moscow region
                                                          Tel.: +7 (495) 510 60 56
                                                                                                                     «Domodedovo» airport
                                                          Operating cash desk «Golovinskoye»
                                                                                                                     «Tvoy Dom» shopping mall, main entrance,
                                                          1 Golovinskoye highway
                                                                                                                     24th km Ring Road
                                                          Tel.: +7 (495) 708 03 46
                                                                                                                     «Tvoy Dom» shopping mall, supermarket,
                                                                                                                     24th km Ring Road
                                                            Moscow region
                                                                                                                     «Crocus-city» shopping mall,
                                                          Outlet «Tvoy dom»                                          65-66th km Ring Road
                                                          Shopping mall «Tvoy Dom», ring road 24 km
                                                          Tel.: +7 (495) 228 12 17
                                                                                                                        Saint Petersburg
                                                            Saint Petersburg                                         63 Marata street
                                                                                                                     75A Obukhovskoy oborony prospect
                                                          Branch office
                                                          63 Marata street                                           20A Kushelevskaya road
                                                          Tel.: +7 (812) 334 20 80                                   2 Alexander Nevskiy square, hotel «Moskva»
IBA representative office                                 Outlet «Obukhovskiy»                                       177 Moskovskiy proezd
                                                          75A Obukhovskoy oborony prospect
                                                                                                                     40 Tchaikovskogo street
United States of America                                  Tel.: +7 (812) 365 31 27
                                                                                                                     150/1 Obvodnoy canal embankment
New-York                                                  Outlet «Kushelevskiy»
                                                          20A Kushelevskaya road                                     3 Kollontay street
New-York is the global centre of international business   Tel.: +7 (812) 535 81 84
and commerce and the main financial centre of the USA                                                                   Yekaterinburg
with head offices of most influential banks, insurance      Yekaterinburg                                            26 Rosy Luxemburg street
companies and the famous stock exchange (NYSE) –
the biggest financial and banking transactions centre     Branch office                                              32 Blukhera street
located in the city. The IBA office in New York was       26 Rosa Luxemberg street
                                                                                                                     9 Vainera street
opened in 2009 to promote mutually beneficial relations   Tel.: +7 (343) 350 15 50
                                                                                                                     4 Tscherbakova street
between American and Azerbaijani business circles and
investments from the USA to Azerbaijan.

                                                                                         THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW

                                                                                         ANNUAL REPORT 2008

                                                                                        INTERNATIONAL FINANCIAL
                                                                      9                 REPORTING STANDARDS
COMMON                                                                                  FINANCIAL STATEMENTS
CUSTOMER                                                                                AND INDEPENDENT
SERVICE                                                                                 AUDITOR’S REPORT
INTERNATIONAL WIDE RELIABILITY                                  INDEPENDENT AUDITOR’S REPORT                                                                                                                        46
                                                                FINANCIAL STATEMENTS                                                                                                                                 47
                                                                 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
                                                                 Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
                                                                 Statement of Changes in Net Assets Attributable to Participant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
                                                                 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

                                                                NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2008 51
                                                                 1.     Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
                                                                 2.     Operating Environment of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
                                                                 3.     Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
                                                                 4.     Critical Accounting Estimates, and Judgements in Applying Accounting Policies . . . . . . . . . . . . 58
                                                                 5.     Adoption of New or Revised Standards and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
                                                                 6.     New accounting pronouncements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
                                                                 7.     Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
                                                                 8.     Due from Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
                                                                 9.     Loans and Advances to Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
                                                                 10. Premises, Equipment and Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
                                                                 11. Other Financial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
                                                                 12. Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
                                                                 13. Due to Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
                                                                 14. Customer Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
                                                                 15. Other Financial Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
                                                                 16. Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
                                                                 17. Net Assets Attributable to Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
                                                                 18. Interest Income and Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
IBA-Georgia                                                      19. Fee and Commission Income and Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
(bank subsidiary)                                                20. Administrative and Other Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
                                                                 21. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
                                                                 22. Financial Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
                                                                 23. Management of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Tbilisi is capital and the major cultural and business centre    24. Contingencies and Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
of Georgia. Azerbaijani-Georgian economic relations are
                                                                 25. Fair Value of Financial Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
developing intensively and IBA-Georgia bank oriented
at their financial support has good prospects of long-           26. Reconciliation of Classes of Financial Instruments with Measurement Categories . . . . . . . . . . . 90
term growth. IBA-Georgia was opened in 2006 due to               27. Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
expanding IBA network in CIS countries. Within the next
                                                                 28. Events After the Balance Sheet Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
few years, the IBA bank subsidiary may well become one
of the leading banks in Georgia.

                                                                                                                                          THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                        BANK FINANCIAL STATEMENTS
                                                        AND INDEPENDENT AUDITORS’ REPORT                                                  ANNUAL REPORT 2008

                                                                                                                 FINANCIAL STATEMENTS
                                                                                                                 Balance Sheet
To the Participant and the Board of Directors of        Auditor’s Responsibility                                 In thousands of Russian Roubles                                                 Note
                                                                                                                                                                                                          31 December   31 December
the International Bank of Azerbaijan – Moscow:                                                                                                                                                                2008          2007
                                                        3. Our responsibility is to express an opinion on
1. We have audited the accompanying financial           these financial statements based on our audit. We
statements of the International Bank of Azerbaijan      conducted our audit in accordance with Internation-
– Moscow (the “Bank”) which comprise the balance        al Standards on Auditing. Those Standards require
sheet as at 31 December 2008 and the income             that we comply with ethical requirements, and plan
statement, statement of changes in net assets at-       and perform the audit to obtain reasonable assur-        ASSETS
tributable to participant and statement of cash flows   ance whether the financial statements are free from
for the year then ended and a summary of sig-                                                                    Cash and cash equivalents                                                         7      1 888 195      795 446
                                                        material misstatement.
nificant accounting policies and other explanatory                                                               Mandatory cash balances with the Central Bank                                              14 976        98 539
notes.                                                  4. An audit involves performing procedures to ob-        of the Russian Federation
                                                        tain audit evidence about the amounts and disclo-
                                                        sures in the financial statements. The procedures        Due from other banks                                                              8       283 090      1 190 292
Management’s Responsibility for the                     selected depend on the auditor’s judgement, in-          Loans and advances to customers                                                   9      7 091 364     4 520 153
Financial Statements                                    cluding the assessment of the risks of material mis-
                                                                                                                 Current income tax prepayment                                                              30 682           -
                                                        statement of the financial statements, whether due
2. Management is responsible for the preparation
                                                        to fraud or error. In making those risk assessments,     Premises and equipment                                                           10       479 027       474 155
and fair presentation of these financial statements
                                                        the auditor considers internal control relevant to the   Intangible assets                                                                10        15 353        6 768
in accordance with International Financial Report-
                                                        entity’s preparation and fair presentation of the fi-
ing Standards. This responsibility includes: design-                                                             Other financial assets                                                           11        3 260         23 481
                                                        nancial statements in order to design audit proce-
ing, implementing and maintaining internal control
                                                        dures that are appropriate in the circumstances, but     Other assets                                                                     12        23 715        4 365
relevant to the preparation and fair presentation of
                                                        not for the purpose of expressing an opinion on the
financial statements that are free from material mis-
                                                        effectiveness of the entity’s internal control. An au-
statement, whether due to fraud or error; selecting                                                              TOTAL ASSETS                                                                             9 829 662     7 113 199
                                                        dit also includes evaluating the appropriateness of
and applying appropriate accounting policies; and
                                                        accounting policies used and the reasonableness
making accounting estimates that are reasonable in
                                                        of accounting estimates made by management, as
the circumstances.                                                                                               LIABILITIES
                                                        well as evaluating the overall presentation of the fi-
                                                        nancial statements.                                      Due to other banks                                                               13      5 131 014     4 229 914

                                                        5. We believe that the audit evidence we have            Customer accounts                                                                14      3 254 037     1 730 526
                                                        obtained is sufficient and appropriate to provide a      Deferred tax liability                                                           21        56 199        77 703
                                                        basis for our audit opinion.
                                                                                                                 Taxation payable                                                                              -          14 046

                                                        Opinion                                                  Other financial liabilities                                                      15        25 824        29 820
                                                                                                                 Subordinated debt                                                                16       344 534       227 879
                                                        6. In our opinion, the accompanying financial
                                                        statements present fairly, in all material respects,
                                                        the financial position of the Bank as of 31 Decem-       Total liabilities excluding net assets attributable to participant                       8 811 608     6 309 888
                                                        ber 2008, and its financial performance and its cash
                                                        flows for the year then ended in accordance with
                                                        International Financial Reporting Standards.             Net assets attributable to participant                                           17      1 018 054      803 311

                                                        Emphasis of Matter
                                                                                                                 TOTAL LIABILITIES                                                                        9 829 662     7 113 199
                                                        7. Without qualifying our opinion, we draw at-
                                                        tention to Note 27 to the accompanying financial
                                                        statements. A substantial proportion of the Bank’s       Approved for issue by the Management Board and signed on its behalf on 5 June 2009.
                                                        liabilities and guarantees received are due to and
                                                        from the Parent Bank and a significant component
                                                        of the Bank’s expenses is incurred on transactions
                                                        with the Parent Bank.

                                                        5 June 2009
                                                        Moscow, Russian Federation
                                                                                                                 F.R. Abdullaev                                                       V.P. Onushkevitch
                                                                                                                 Chairman of the Management Board                                     Chief Accountant

                                                                                                         46                               47
                                                                                                                                    THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                          ANNUAL REPORT 2008

Income Statement                                                                                              Statement of Changes in Net Assets Attributable
                                                                                                              to Participant
In thousands of Russian Roubles                                        Note          2008       2007
                                                                                                                                                                                  Par-                              Total net
                                                                                                                                                                               ticipant’s              Retained    assets at-
                                                                                                              In thousands of Russian Roubles                         Note                  Reserves
                                                                                                                                                                                contibu-               earnings   tributable to
                                                                                                                                                                                  tions                            participant

Interest income                                                         18         872 978    554 854
Interest expense                                                        18        (404 510)   (263 299)
                                                                                                              Balance at 31 December 2006                                      301 712      118 610    35 229      455 551

Net interest income                                                                468 468    291 555
Loan impairment provision                                                9        (398 317)   (125 277)
                                                                                                              - Realised revaluation reserve                                        -       (8 399)       -        (8 399)
                                                                                                              - Revaluation                                            10           -       211 480       -        211 480
Net interest income after provision for loan impairment                            70 151     166 278
                                                                                                              Income tax related to revaluation of premises            21           -       (50 755)      -        (50 755)
Fee and commission income                                               19         147 450     79 344         recorded in net assets attributable to participant
Fee and commission expense                                              19         (47 690)   (14 385)        Increase in net assets attributable to participant                    -          -       56 223       56 223
Gains less losses from trading securities                                          218 788     90 733         Contributions from participant                           17      137 600         -          -        137 600
Gains less losses from trading in foreign currencies                               139 229     49 632         Share premium on contribution from participant                    1 611          -          -         1 611
Foreign exchange translation gains less losses                                      2 842      1 119
Other operating income                                                              2 835      1 797          Total recognised income                                               -       152 326    56 223      208 549
Administrative and other operating expenses                             20        (395 665)   (281 491)

                                                                                                              Balance at 31 December 2007                                      440 923      270 936    91 452      803 311
Profit before tax                                                                  137 940     93 027
Income tax expense                                                      21         (48 404)   (36 804)
                                                                                                              - Realized revaluation reserve                                        -       (6 118)     6 118           -
Increase in net assets attributable to participant                                 89 536      56 223
                                                                                                              - Revaluation                                            10           -       10 587        -         10 587
                                                                                                              Income tax related to revaluation of premises
                                                                                                              recorded in net assets attributable to participant       21           -       10 880        -         10 880
                                                                                                              Increase in net assets attributable to participant                    -          -       89 536       89 536
                                                                                                              Contributions from participant                           17      103 740         -          -        103 740

                                                                                                              Total recognised income                                               -       15 349     95 654      111 003

                                                                                                              Balance at 31 December 2008                                      544 663      286 285    187 106    1 018 054

                                                                                                         48                        49
                                                                                                                                      THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                           BANK FINANCIAL STATEMENTS
                                                           AND INDEPENDENT AUDITORS’ REPORT                                           ANNUAL REPORT 2008

Statement of Cash Flows                                                                                          NOTES TO THE FINANCIAL
                                                                                                                 STATEMENTS – 31 DECEMBER 2008
In thousands of Russian Roubles                                              Note       2008         2007

                                                                                                                 1. Introduction                                             2. Operating
                                                                                                                 These financial statements have been prepared in
Cash flows from operating activities
Interest received                                                                     878 660      547 385
                                                                                                                 accordance with International Financial Reporting
                                                                                                                 Standards for the year ended 31 December 2008
                                                                                                                                                                             of the Bank
Interest paid                                                                        (410 705)    (235 937)      for International Bank of Azerbaijan – Moscow (the
Income received from trading in trading securities                                    218 788       90 733       “Bank”).                                                    The Russian Federation displays certain character-
                                                                                                                                                                             istics of an emerging market, including relatively high
Income received from trading in foreign currencies                                    139 229       49 632       The Bank was incorporated and is domiciled in the
                                                                                                                                                                             inflation. Despite strong economic growth in recent
                                                                                                                 Russian Federation. The Bank is a limited liability
Fees and commissions received                                                         145 818       79 226                                                                   years, the financial situation in the Russian market
                                                                                                                 company and was set up in accordance with Rus-
                                                                                                                                                                             significantly deteriorated during 2008, particularly
Fees and commissions paid                                                             (47 690)     (26 576)      sian regulations. The Bank is wholly owned by In-
                                                                                                                                                                             in the fourth quarter. As a result of global volatility
Other operating income received                                                        2 869        1 797        ternational Bank of the Republic of Azerbaijan (the
                                                                                                                                                                             in financial and commodity markets, among other
                                                                                                                 “Parent Bank”).
Staff costs paid                                                                     (206 917)    (122 170)                                                                  factors, there has been a significant decline in the
                                                                                                                 Principal activity. The Bank’s principal business           Russian stock market since mid-2008. Since Sep-
Administrative and other operating expenses paid                                     (161 278)    (139 161)                                                                  tember 2008, there has been increased volatility
                                                                                                                 activity is commercial and retail banking operations
Income tax paid                                                                       (59 033)     (14 318)      within the Russian Federation. The Bank has op-             in currency markets and the Russian Rouble (RR)
Cash flows from operating activities before changes in operating assets                                          erated under a full banking license issued by the           has depreciated significantly against some major
and liabilities                                                                       499 741      230 611       Central Bank of the Russian Federation (“CBRF”)             currencies. The official US Dollar (USD) exchange
                                                                                                                 since 25 January 2002. The Bank participates in             rate of the Central Bank of the Russian Federation
                                                                                                                 the State deposit insurance scheme, which was               increased from RR 25.37 at 1 October 2008 to RR
Changes in operating assets and liabilities                                                                      introduced by the Federal Law #177-FZ “Depos-               29.38 at 31 December 2008 and RR 30.93 at 11
                                                                                                                 its of Individuals Insurance in Russian Federation”         June 2009.
Net decrease/(increase) in mandatory cash balances with the CBRF                       83 563      (12 313)
                                                                                                                 dated 23 December 2003. Before October 2008
Net decrease/(increase) in due from other banks                                       494 511     (2 002 089)                                                                The banking sector in the Russian Federation is
                                                                                                                 the State Deposit Insurance Agency guaranteed
                                                                                                                                                                             sensitive to adverse fluctuations in confidence and
Net increase in loans and advances to customers                                     (2 968 395)   (530 122)      100% repayment of individual deposits up to RR
                                                                                                                                                                             economic conditions and may occasionally experi-
                                                                                                                 100 thousand per individual and 90% repayment
Net decrease/(increase) in securities                                                 415 041     (498 899)                                                                  ence reductions in liquidity. Management is unable
                                                                                                                 of individual deposits exceeding RR 100 thousand
                                                                                                                                                                             to predict all developments which could have an im-
Net decrease/(increase) in other assets                                               (28 664)     (21 787)      per individual but not exceeding RR 400 thousand
                                                                                                                                                                             pact on the banking sector and consequently what
Net increase in due to other banks                                                    901 952     1 618 006      in case of the withdrawal of a license of a bank or
                                                                                                                                                                             effect, if any, they could have on the financial posi-
                                                                                                                 a CBRF imposed moratorium on payments. On 13
Net increase in customer accounts                                                    1 524 071    1 070 322                                                                  tion of the Bank.
                                                                                                                 October 2008 amendments were made to Federal
Net increase/(decrease) in other liabilities                                          (21 322)       930         Law #177-FZ, according to which individual depos-           Due to increased market volatility, one-day Mos-
Net cash from operating activities                                                    900 498      (145 341)     its with the bank with respect to which an insured          Prime rate fluctuated between 4.75% p.a. and
                                                                                                                 event occurred shall be repaid in the amount of             25.17% p.a. during from 30 September 2008 – 11
                                                                                                                 100% of deposits with the bank but not in excess of         June 2009.
Cash flows from investing activities                                                                             RR 700 thousand.
                                                                                                                                                                             The International reserves of the Russian Federa-
Acquisition of fixed assets and intangible assets                            10       (43 658)     (17 846)      The Bank has two (2007: two) branches within the            tion decreased from USD 556 813 000 thousand at
Proceeds from disposal of equipment                                                    15 492          -         Russian Federation: in Saint-Petersburg and Yeka-           30 September 2008 to USD 427 080 000 thousand
                                                                                                                 terinburg (2007: Saint-Petersburg and Yekaterin-            at 31 December 2008 and to USD 404 171 000
Net cash used in investing activities                                                 (28 164)     (17 846)      burg).                                                      thousand at 1 June 2009
                                                                                                                 Registered address and place of business. The               The commodities market was also impacted by the
Cash flows from financing activities                                                                             Bank’s registered address is:                               latest events on the financial markets. The spot
Subordinated debt received                                                            116 655       61 144                                                                   Free On Board price of Urals oil decreased from
                                                                                                                 Tverskaya 6 st., bld.2, Moscow, Russian Federa-
                                                                                                                                                                             USD 91.15 at 29 September 2008 to USD 41.83 at
Contribution from participant                                                         103 740      139 211       tion.
                                                                                                                                                                             31 December 2008 and USD 67.56 at 4 June 2009.
Net cash from/(used in) financing activities                                          220 395      200 355       Presentation currency. These financial state-
                                                                                                                                                                             A number of measures have been undertaken
                                                                                                                 ments are presented in thousands of Russian Rou-
                                                                                                                                                                             to support the Russian financial markets,
                                                                                                                 bles (“RR thousands”).
Effect of exchange rate changes on cash and cash equivalents                             20         (491)                                                                    including the following:
Net increase in cash and cash equivalents                                            1 092 749      36 677                                                                    In October 2008 the CBRF reduced the man-
                                                                                                                                                                             datory reserves ratio to 0.5% and the guaranteed
Cash and cash equivalents at the beginning of the year                        7       795 446      758 769
                                                                                                                                                                             repayment of individual deposits under the state
Cash and cash equivalents at the end of the year                              7      1 888 195     795 446                                                                   deposit insurance scheme was raised to RR 700
                                                                                                                                                                             thousand per individual in case of the withdrawal of
                                                                                                                                                                             a license of a bank or a CBRF imposed moratorium
                                                                                                                                                                             on payments: and

                                                                                                            50                       51
                                                                                                                                           THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                           BANK FINANCIAL STATEMENTS
                                                           AND INDEPENDENT AUDITORS’ REPORT                                                ANNUAL REPORT 2008

 The list of assets which can be pledged under            cash flows that may result from foreclosure less          Transaction costs are incremental costs that are di-         recognised when the entity becomes a party to the
repurchase agreements with the CBRF was signifi-           costs for obtaining and selling the collateral. The       rectly attributable to the acquisition, issue or dispos-     contractual provisions of the instrument.
cantly extended.                                           market in Russia for many types of collateral, es-        al of a financial instrument. An incremental cost is
                                                                                                                                                                                  Derecognition of financial assets. The Bank
                                                           pecially real estate, has been severely affected          one that would not have been incurred if the trans-
The tax, currency and customs legislation within the                                                                                                                              derecognises financial assets when (a) the assets
                                                           by the recent volatility in global financial markets      action had not taken place. Transaction costs in-
Russian Federation is subject to varying interpreta-                                                                                                                              are redeemed or the rights to cash flows from the
                                                           resulting in there being a low level of liquidity for     clude fees and commissions paid to agents (includ-
tions and frequent changes. Furthermore, the need                                                                                                                                 assets otherwise expired or (b) the Bank has trans-
                                                           certain types of assets. As a result, the actual re-      ing employees acting as selling agents), advisors,
for further developments in the bankruptcy laws, the                                                                                                                              ferred the rights to the cash flows from the financial
                                                           alisable value on foreclosure may differ from the         brokers and dealers, levies by regulatory agencies
absence of formalised procedures for the registra-                                                                                                                                assets or entered into a qualifying pass-through ar-
                                                           value ascribed in estimating allowances for im-           and securities exchanges, and transfer taxes and
tion and enforcement of collateral, and other legal                                                                                                                               rangement while (i) also transferring substantially
                                                           pairment.                                                 duties. Transaction costs do not include debt premi-
and fiscal impediments contribute to the challenges                                                                                                                               all the risks and rewards of ownership of the assets
                                                                                                                     ums or discounts, financing costs or internal admin-
faced by banks currently operating in the Russian          Management believes it is taking all the neces-                                                                        or (ii) neither transferring nor retaining substantially
                                                                                                                     istrative or holding costs.
Federation. The future economic direction of the           sary measures to support the sustainability and                                                                        all risks and rewards of ownership but not retaining
Russian Federation is largely dependent upon the           growth of the Bank’s business in the current cir-         Amortised cost is the amount at which the financial          control. Control is retained if the counterparty does
effectiveness of economic, financial and monetary          cumstances.                                               instrument was recognised at initial recognition less        not have the practical ability to sell the asset in its
measures undertaken by the Government, together                                                                      any principal repayments, plus accrued interest,             entirety to an unrelated third party without needing
with tax, legal, regulatory, and political develop-                                                                  and for financial assets less any write-down for in-         to impose additional restrictions on the sale.
Management is unable to predict all developments
                                                           3. Summary                                                curred impairment losses. Accrued interest includes
                                                                                                                     amortisation of transaction costs deferred at initial
                                                                                                                                                                                  Cash and cash equivalents. Cash and cash
                                                                                                                                                                                  equivalents are items which are readily convertible
                                                                                                                     recognition and of any premium or discount to ma-
which could have an impact on the banking sector
and the wider economy and consequently what ef-
                                                           of Significant                                            turity amount using the effective interest method.
                                                                                                                                                                                  to known amounts of cash and which are subject to
                                                                                                                                                                                  an insignificant risk of changes in value. Cash and
                                                                                                                     Accrued interest income and accrued interest ex-
fect, if any, they could have on the future financial
position of the Bank.
                                                           Accounting Policies                                       pense, including both accrued coupon and amor-
                                                                                                                                                                                  cash equivalents include mandatory reserve depos-
                                                                                                                                                                                  its with the CBRF and all interbank placements with
                                                                                                                     tised discount or premium (including fees deferred           original maturities of less than three months. Funds
Recent volatility in global financial markets.                                                                       at origination, if any), are not presented separately
                                                           Basis of preparation. These financial statements                                                                       restricted for a period of more than three months
The ongoing global financial and economic crisis                                                                     and are included in the carrying values of related
                                                           have been prepared in accordance with Interna-                                                                         on origination are excluded from cash and cash
that emerged out of the severe reduction in global                                                                   balance sheet items.
                                                           tional Financial Reporting Standards (“IFRS”) un-                                                                      equivalents. Cash and cash equivalents are carried
liquidity which commenced in the middle of 2007
                                                           der the historical cost convention, as modified by        The effective interest method is a method of allo-           at amortised cost.
(often referred to as the “Credit Crunch”), has re-
sulted in, among other things, a lower level of capi-      the revaluation of premises and available for sale        cating interest income or interest expense over the          Mandatory cash balances with the CBRF. Man-
tal market funding, lower liquidity levels across the      financial assets. The principal accounting policies       relevant period so as to achieve a constant periodic         datory cash balances with the CBRF are carried at
banking sector and wider economy, and, at times,           applied in the preparation of these financial state-      rate of interest (effective interest rate) on the car-       amortised cost and represent non-interest bearing
higher interbank lending rates and very high vola-         ments are set out below. These policies have been         rying amount. The effective interest rate is the rate        mandatory reserve deposits which are not avail-
tility in local and international stock and currency       consistently applied to all the periods presented,        that exactly discounts estimated future cash pay-            able to finance the Bank’s day to day operations
markets. The uncertainties in the global financial         unless otherwise stated (refer to Note 5).                ments or receipts (excluding future credit losses)           and hence are not considered as part of cash and
markets have also led to failures of banks and oth-                                                                  through the expected life of the financial instrument        cash equivalents for the purposes of the cash flow
                                                           Financial instruments – key measurement                   or a shorter period, if appropriate, to the net carry-
er corporates, and to bank rescues in the United                                                                                                                                  statement.
                                                           terms. Depending on their classification financial        ing amount of the financial instrument. The effective
States of America, Western Europe, Russia and
                                                           instruments are carried at fair value or amortised        interest rate discounts cash flows of variable inter-        Trading securities. Trading securities are securi-
                                                           cost as described below.                                  est instruments to the next interest repricing date          ties which are either acquired for generating a profit
Such circumstances may affect the ability of the                                                                     except for the premium or discount which reflects            from short-term fluctuations in price or trader’s mar-
                                                           Fair value is the amount for which an asset could
Bank to refinance its existing borrowings, customer                                                                  the credit spread over the floating rate specified in        gin, or are securities included in a portfolio in which
                                                           be exchanged, or a liability settled, between knowl-
deposits and other liabilities, as well as the value of                                                              the instrument, or other variables that are not re-          a pattern of short-term trading exists. The Bank
                                                           edgeable, willing parties in an arm’s length transac-
the Bank’s loan portfolio. Under IFRS, a decline in                                                                  set to market rates. Such premiums or discounts              classifies securities into trading securities if it has
                                                           tion. Fair value is the current bid price for financial
the fair value of a financial asset below its amortised                                                              are amortised over the whole expected life of the            an intention to sell them within a short period after
                                                           assets and current asking price for financial liabili-
cost that results from an increase in the base in-                                                                   instrument. The present value calculation includes           purchase, i.e. within six months. Trading securi-
                                                           ties which are quoted in an active market. For as-
terest rate is generally not evidence of impairment.                                                                 all fees and points paid or received between par-            ties are not reclassified out of this category even
                                                           sets and liabilities with offsetting market risks, the
Management is unable to reliably estimate the ef-                                                                    ties to the contract that are an integral part of the        when the Bank’s intentions subsequently change.
                                                           Bank may use mid-market prices as a basis for
fects on the Bank’s financial position of any further                                                                effective interest rate (refer to income and expense         The Bank may choose to reclassify a non-derivative
                                                           establishing fair values for the offsetting risk posi-
possible deterioration in the liquidity of the financial                                                             recognition policy).                                         trading financial asset out of the fair value through
                                                           tions and apply the bid or asking price to the net
markets and their increased volatility. The full extent                                                                                                                           profit or loss category if the asset is no longer held
                                                           open position as appropriate. A financial instrument      Initial recognition of financial instruments. Trad-
of the impact of the ongoing financial crisis is prov-                                                                                                                            for the purpose of selling it in the near term. Finan-
                                                           is regarded as quoted in an active market if quoted       ing securities are initially recorded at fair value. All
ing to be difficult to anticipate or completely guard                                                                                                                             cial assets other than loans and receivables are
                                                           prices are readily and regularly available from an        other financial instruments are initially recorded at
against.                                                                                                                                                                          permitted to be reclassified out of fair value through
                                                           exchange or other institution and those prices rep-       fair value plus transaction costs. Fair value at ini-        profit or loss category only in rare circumstances
Borrowers of the Bank may be affected by the fi-           resent actual and regularly occurring market trans-       tial recognition is best evidenced by the transaction        arising from a single event that is unusual and
nancial and economic situation which could in turn         actions on an arm’s length basis.                         price. A gain or loss on initial recognition is only         highly unlikely to reoccur in the near term. Financial
impact their ability to repay the amounts owed. De-                                                                  recorded if there is a difference between fair value
                                                           Valuation techniques such as discounted cash flows                                                                     assets that would meet the definition of loans and
teriorating operating conditions for borrowers may                                                                   and transaction price which can be evidenced by
                                                           models or models based on recent arm’s length                                                                          receivables may be reclassified if the Bank has the
also have an impact on the Management’s cash                                                                         other observable current market transactions in the
                                                           transactions or consideration of financial data of                                                                     intention and ability to hold these financial assets
flow forecasts and assessment of the impairment of                                                                   same instrument or by a valuation technique whose
                                                           the investees are used to fair value certain financial                                                                 for the foreseeable future or until maturity.
financial and non-financial assets. To the extent that                                                               inputs include only data from observable markets.
                                                           instruments for which external market pricing infor-
information is available, management has properly                                                                                                                                 Trading securities are carried at fair value. Inter-
                                                           mation is not available. Valuation techniques may
reflected revised estimates of expected future cash                                                                  All purchases and sales of financial assets that             est earned on trading securities calculated using
                                                           require assumptions not supported by observable
flows in its impairment assessments.                                                                                 require delivery within the time frame established           the effective interest method is presented in the in-
                                                           market data. Disclosures are made in these finan-
                                                                                                                     by regulation or market convention (“regular way”            come statement as interest income. Dividends are
The amount of provision for impaired loans and             cial statements if changing any such assumptions
                                                                                                                     purchases and sales) are recorded at trade date,             included in dividend income within other operating
advances to customers is based on manage-                  to a reasonably possible alternative would result in
                                                                                                                     which is the date that the Bank commits to deliver           income when the Bank’s right to receive the divi-
ment’s appraisals of these assets at the balance           significantly different profit, income, total assets or
                                                                                                                     a financial asset. All other purchases and sales are         dend payment is established and it is probable that
sheet date after taking into consideration the             total liabilities.

                                                                                                             52                           53
                                                                                                                                          THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                                ANNUAL REPORT 2008

the dividends will be collected. All other elements of    of the debtors’ ability to pay all amounts due ac-        and (ii) the best estimate of expenditure required to
the changes in the fair value and gains or losses on      cording to the contractual terms of the assets being      settle the commitment at the balance sheet date.               Premises                         40 years;
derecognition are recorded in profit or loss as gains     evaluated.
                                                                                                                    Promissory notes purchased. Promissory notes                   Equipment                        5 years; and
less losses from trading securities in the period in
                                                          Future cash flows in a group of financial assets that     purchased are included in trading securities, or in
which they arise.
                                                          are collectively evaluated for impairment are esti-       due from other banks or in loans and advances to                                                over the term of
Due from other banks. Amounts due from other              mated on the basis of the contractual cash flows of       customers, depending on their substance and are                Leasehold improvements           the underlying
banks are recorded when the Bank advances mon-            the assets and the experience of management in            recorded, subsequently remeasured and account-                                                  lease.
ey to counterparty banks with no intention of trad-       respect of the extent to which amounts will become        ed for in accordance with the accounting policies for
ing the resulting unquoted non-derivative receivable      overdue as a result of past loss events and the suc-      these categories of assets.
due on fixed or determinable dates. Amounts due           cess of recovery of overdue amounts. Past experi-
                                                                                                                    Premises and equipment. Premises and equip-
from other banks are carried at amortised cost.           ence is adjusted on the basis of current observable
                                                                                                                    ment are stated at cost, restated to the equivalent          The residual value of an asset is the estimated
                                                          data to reflect the effects of current conditions that
Loans and advances to customers. Loans and                                                                          purchasing power of the Russian Rouble at 31 De-             amount that the Bank would currently obtain from
                                                          did not affect past periods and to remove the effects
advances to customers are recorded when the                                                                         cember 2002 for assets acquired prior to 1 January           disposal of the asset less the estimated costs of
                                                          of past conditions that do not exist currently.
Bank advances money to purchase or originate an                                                                     2003 less accumulated depreciation and provision             disposal, if the asset were already of the age and
unquoted non-derivative receivable from a custom-         If the terms of a financial asset held at amortised       for impairment, where required.                              in the condition expected at the end of its useful life.
er due on fixed or determinable dates and has no          cost are renegotiated or otherwise modified be-                                                                        The residual value of an asset is nil if the Bank ex-
                                                                                                                    Premises and equipment are subject to revalua-
intention of trading the receivable. Loans and ad-        cause of financial difficulties of the borrower or is-                                                                 pects to use the asset until the end of its physical
                                                                                                                    tion with sufficient regularity to ensure that the car-
vances to customers are initially recognised at fair      suer, impairment is measured using the original ef-                                                                    life. The assets’ residual values and useful lives are
                                                                                                                    rying amount does not differ materially from that
value plus transaction costs and subsequently car-        fective interest rate before the modification of terms.                                                                reviewed, and adjusted if appropriate, at each bal-
                                                                                                                    which would be determined using fair value at the
ried at amortised cost.                                                                                                                                                          ance sheet date.
                                                          Impairment losses are recognised through an al-           end of the reporting period. Increases in the car-
Impairment of financial assets carried at amor-           lowance account to write down the asset’s carry-          rying amount arising on revaluation are credited to          Intangible assets. All of the Bank’s intangible as-
tised cost. Impairment losses are recognised in           ing amount to the present value of expected cash          revaluation reserve in equity. Decreases that offset         sets have definite useful life and primarily include
profit or loss when incurred as a result of one or        flows (which exclude future credit losses that have       previous increases of the same asset are charged             capitalised computer software.
more events (“loss events”) that occurred after the       not been incurred) discounted at the effective inter-     against revaluation reserve directly in equity; all
initial recognition of the financial asset and which                                                                other decreases are charged to the income state-             Acquired computer software licences are capital-
                                                          est rate of the asset. The calculation of the present
have an impact on the amount or timing of the es-                                                                   ment. The revaluation reserve for premises and               ised on the basis of the costs incurred to acquire
                                                          value of the estimated future cash flows of a collat-
timated future cash flows of the financial asset or                                                                 equipment included in equity is transferred directly         and bring to use the specific software. Develop-
                                                          eralised financial asset reflects the cash flows that
group of financial assets that can be reliably esti-                                                                to retained earnings when the surplus is realised,           ment costs that are directly associated with iden-
                                                          may result from foreclosure less costs for obtaining
mated.                                                                                                              either on the retirement or disposal of the asset, or        tifiable and unique software controlled by the Bank
                                                          and selling the collateral, whether or not foreclosure
                                                                                                                    as the asset is used by the Bank; in the latter case,        are recorded as intangible assets if the inflow of
If the Bank determines that no objective evidence         is probable.
                                                                                                                    the amount of the surplus realised is the difference         incremental economic benefits exceeding costs is
exists that impairment was incurred for an individu-                                                                                                                             probable. All other costs associated with computer
                                                          If, in a subsequent period, the amount of the im-         between depreciation based on the revalued carry-
ally assessed financial asset, whether significant                                                                                                                               software, e.g. its maintenance, are expensed when
                                                          pairment loss decreases and the decrease can be           ing amount of the asset and depreciation based on
or not, it includes the asset in a group of financial                                                                                                                            incurred. Capitalised computer software is amor-
                                                          related objectively to an event occurring after the       the asset’s original cost.
assets with similar credit risk characteristics and                                                                                                                              tised on a straight line basis over expected useful
                                                          impairment was recognised (such as an improve-
collectively assesses them for impairment. The                                                                      All other items of premises and equipment are                lives of 5 years.
                                                          ment in the debtor’s credit rating), the previously
primary factors that the Bank considers whether a                                                                   stated at cost less accumulated depreciation and
                                                          recognised impairment loss is reversed by adjusting
financial asset is impaired is its overdue status and                                                               impairment losses, if any.                                   Operating leases. Where the Bank is a lessee in
                                                          the allowance account through profit or loss.
realisability of related collateral, if any.                                                                                                                                     a lease which does not transfer substantially all the
                                                                                                                    Costs of minor repairs and maintenance are ex-               risks and rewards incidental to ownership from the
                                                          Uncollectible assets are written off against the re-
                                                                                                                    pensed when incurred. Costs of replacing major               lessor to the Bank, the total lease payments are
The following other principal criteria are                lated impairment loss provision after all the neces-
                                                                                                                    parts or components of premises and equipment                charged to profit or loss on a straight-line basis over
also used to determine whether there is                   sary procedures to recover the asset have been
                                                                                                                    items are capitalised and the replaced part is retired.      the period of the lease.
objective evidence that an impairment loss has            completed and the amount of the loss has been de-
occurred:                                                 termined. Subsequent recoveries of amounts previ-         At each reporting date management assesses
                                                                                                                                                                                 Finance lease liabilities. Where the Bank is a les-
                                                          ously written off are credited to the impairment loss     whether there is any indication of impairment of
 any instalment is overdue and the late payment                                                                                                                                 see in a lease which transferred substantially all the
                                                          account in the income statement.                          premises and equipment. If any such indication
cannot be attributed to a delay caused by the set-                                                                                                                               risks and rewards incidental to ownership to the
                                                                                                                    exists, management estimates the recoverable
tlement systems;                                          Credit related commitments. The Bank enters                                                                            Bank, the assets leased are capitalised in premises
                                                                                                                    amount, which is determined as the higher of an
                                                          into credit related commitments, including letters                                                                     and equipment at the commencement of the lease
 the borrower experiences a significant financial                                                                  asset’s fair value less costs to sell and its value in
                                                          of credit and financial guarantees. Financial guar-                                                                    at the lower of the fair value of the leased asset and
difficulty as evidenced by borrower’s financial infor-                                                              use. The carrying amount is reduced to the recover-
                                                          antees represent irrevocable assurances to make                                                                        the present value of the minimum lease payments.
mation that the bank obtains;                                                                                       able amount and the impairment loss is recognised
                                                          payments in the event that a customer cannot meet                                                                      Each lease payment is allocated between the liabil-
                                                                                                                    in the income statement to the extent it exceeds the
                                                          its obligations to third parties and carry the same                                                                    ity and finance charges so as to achieve a constant
 the borrower considers bankruptcy or a financial                                                                  previous revaluation surplus in equity. An impair-
                                                          credit risk as loans. Financial guarantees and com-                                                                    rate on the finance balance outstanding. The cor-
reorganisation;                                                                                                     ment loss recognised for an asset in prior years
                                                          mitments to provide a loan are initially recognised at                                                                 responding rental obligations, net of future finance
                                                                                                                    is reversed if there has been a change in the esti-
 there is an adverse change in the payment sta-          their fair value, which is normally evidenced by the                                                                   charges, are included in other borrowed funds. The
                                                                                                                    mates used to determine the asset’s value in use or
tus of the borrower as a result of changes in the         amount of fees received. This amount is amortised                                                                      interest cost is charged to the income statement
                                                                                                                    fair value less costs to sell.
national or local economic conditions that impact         on a straight line basis over the life of the commit-                                                                  over the lease period using the effective interest
the borrower; or                                          ment, except for commitments to originate loans if        Gains and losses on disposals determined by com-             method. The assets acquired under finance leases
                                                          it is probable that the Bank will enter into a spe-       paring proceeds with carrying amount are recog-              are depreciated over their useful life or the shorter
 the value of collateral significantly decreases as
                                                          cific lending arrangement and does not expect to          nised in profit or loss.                                     lease term if the Bank is not reasonably certain that
a result of deteriorating market conditions.
                                                          sell the resulting loan shortly after origination; such                                                                it will obtain ownership by the end of the lease term.
                                                                                                                    Depreciation. Depreciation on premises and equip-
For the purposes of a collective evaluation of im-        loan commitment fees are deferred and included in
                                                                                                                    ment is calculated using the straight-line method to         Due to other banks. Amounts due to other banks
pairment, financial assets are grouped on the basis       the carrying value of the loan on initial recognition.
                                                                                                                    allocate their cost or revalued amounts to their re-         are recorded when money or other assets are ad-
of similar credit risk characteristics. Those charac-     At each balance sheet date, the commitments are
                                                                                                                    sidual values over their estimated useful lives at the       vanced to the Bank by counterparty banks. The
teristics are relevant to the estimation of future cash   measured at the higher of (i) the remaining unam-
                                                                                                                    following annual rates:                                      non-derivative liability is carried at amortised cost.
flows for groups of such assets by being indicative       ortised balance of the amount at initial recognition

                                                                                                            54                           55
                                                                                                                                                  THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                             BANK FINANCIAL STATEMENTS
                                                             AND INDEPENDENT AUDITORS’ REPORT                                                     ANNUAL REPORT 2008

Customer accounts. Customer accounts are non-                substantively enacted at the balance sheet date             the present value discount based on the asset’s ef-              Commissions received from fiduciary activities are
derivative liabilities to individuals and corporate          which are expected to apply to the period when the          fective interest rate which was used to measure the              shown in fee and commission income.
customers and are carried at amortised cost.                 temporary differences will reverse or the tax loss          impairment loss.
                                                                                                                                                                                          Offsetting. Financial assets and liabilities are off-
                                                             carry forwards will be utilised. Deferred tax assets
Subordinated debt. Subordinated debt represents                                                                          All other fees, commissions and other income and                 set and the net amount is reported in the balance
                                                             for deductible temporary differences and tax loss
long-term funds attracted by the Bank from the par-                                                                      expense items are generally recorded on an ac-                   sheet only when there is a legally enforceable right
                                                             carry forwards are recorded only to the extent that it
ticipant and is carried at amortised cost. The hold-                                                                     crual basis by reference to completion of the spe-               to offset the recognised amounts, and there is an
                                                             is probable that future taxable profit will be available
ers of the subordinated debt would be subordinate                                                                        cific transaction assessed on the basis of the actual            intention to either settle on a net basis, or to realise
                                                             against which the deductions can be utilised.
to all other creditors to receive repayment of debt in                                                                   service provided as a proportion of the total serv-              the asset and settle the liability simultaneously.
case of liquidation.                                         Uncertain tax positions: The Bank’s uncertain               ices to be provided.
                                                                                                                                                                                          Accounting for the effects of hyperinflation. The
                                                             tax positions are reassessed by Management at
Net assets attributable to participant. The Bank’s                                                                       Commissions and fees arising from negotiating, or                Russian Federation has previously experienced rel-
                                                             every balance sheet date. Liabilities are recorded
equity participant has a right to request redemption                                                                     participating in the negotiation of a transaction for a          atively high levels of inflation and was considered
                                                             for income tax positions that are determined by
of its interest in the Bank in cash. The Bank’s obli-                                                                    third party, such as the acquisition of loans, shares            to be hyperinflationary as defined by IAS 29 “Fi-
                                                             management as more likely than not to result in ad-
gation to redeem gives rise to a financial liability for                                                                 or other securities or the purchase or sale of busi-             nancial Reporting in Hyperinflationary Economies”
                                                             ditional taxes being levied if the positions were to
the present value of the redemption amount even                                                                          nesses, and which are earned on execution of the                 (“IAS 29”). IAS 29 requires that the financial state-
                                                             be challenged by the tax authorities. The assess-
though the obligation is conditional on the equity                                                                       underlying transaction, are recorded on its comple-              ments prepared in the currency of a hyperinflation-
                                                             ment is based on the interpretation of tax laws that
participant exercising the right. It is impractical to de-                                                               tion. Portfolio and other management advisory and                ary economy be stated in terms of the measuring
                                                             have been enacted or substantively enacted by the
termine the fair value of this liability as it is unknown                                                                service fees are recognised based on the applicable              unit current at the balance sheet date. It states that
                                                             balance sheet date and any known court or other
when and if participant will withdraw from the Bank.                                                                     service contracts, usually on a time-proportion basis.           reporting operating results and financial position in
                                                             rulings on such issues. Liabilities for penalties, in-
As a practical expedient, the Bank measures the li-                                                                                                                                       the local currency without restatement is not useful
                                                             terest and taxes other than on income are recog-            Foreign currency translation. The functional cur-
ability presented as “Net assets attributable to par-                                                                                                                                     because money loses purchasing power at such a
                                                             nised based on Management’s best estimate of the            rency of the Bank is the currency of the primary
ticipant” at the IFRS carrying value of the Bank’s net                                                                                                                                    rate that the comparison of amounts from transac-
                                                             expenditure required to settle the obligations at the       economic environment in which the Bank operates.
assets. The liability is non-current because the Bank                                                                                                                                     tions and other events that have occurred at differ-
                                                             balance sheet date.                                         The Bank’s functional currency and the Bank’s
has an unconditional right to defer redemption for                                                                                                                                        ent times, even within the same accounting period,
                                                                                                                         presentation currency is the national currency of the
at least twelve months after the balance sheet date.         Provisions for liabilities and charges. Provisions                                                                           is misleading.
                                                                                                                         Russian Federation, Russian Roubles (“RR”).
                                                             for liabilities and charges are non-financial liabilities
Derivative financial instruments. Foreign ex-                                                                                                                                             The characteristics of the economic environment of
                                                             of uncertain timing or amount. They are accrued             Monetary assets and liabilities are translated into
change contracts are carried at their fair value.                                                                                                                                         the Russian Federation indicate that hyperinflation
                                                             when the Bank has a present legal or constructive           the Bank’s functional currency at the official ex-
                                                                                                                                                                                          has ceased effective from 1 January 2003. Restate-
All derivative instruments are carried as assets             obligation as a result of past events, it is probable       change rate of the CBRF at the respective balance
                                                                                                                                                                                          ment procedures of IAS 29 are therefore only ap-
when fair value is positive and as liabilities when          that an outflow of resources embodying economic             sheet dates. Foreign exchange gains and losses re-
                                                                                                                                                                                          plied to assets acquired or revalued and liabilities
fair value is negative. Changes in the fair value of         benefits will be required to settle the obligation, and     sulting from the settlement of transactions and from
                                                                                                                                                                                          incurred or assumed prior to that date. For these
derivative instruments are included in profit or loss.       a reliable estimate of the amount of the obligation         the translation of monetary assets and liabilities into
                                                                                                                                                                                          balances, the amounts expressed in the measuring
The Bank does not apply hedge accounting.                    can be made.                                                the Bank’s functional currency at year-end official
                                                                                                                                                                                          unit current at as 31 December 2002 are the basis
                                                                                                                         exchange rates of the CBRF are recognised in profit
Certain derivative instruments embedded in other fi-         Trade and other payables. Trade payables are                                                                                 for the carrying amounts in these financial state-
                                                                                                                         or loss. Translation at year-end rates does not ap-
nancial instruments are treated as separate deriva-          accrued when the counterparty has performed its                                                                              ments. The restatement was calculated using the
                                                                                                                         ply to non-monetary items, including equity invest-
tive instruments when their risks and characteristics        obligations under the contract and are carried at                                                                            conversion factors derived from the Russian Fed-
                                                                                                                         ments. Effects of exchange rate changes on the fair
are not closely related to those of the host contract.       amortised cost.                                                                                                              eration Consumer Price Index (“CPI”), published
                                                                                                                         value of equity securities are recorded as part of the
                                                                                                                                                                                          by the Russian Statistics Agency, and from indices
Income taxes. Income taxes have been provided                Income and expense recognition. Interest in-                fair value gain or loss.
                                                                                                                                                                                          obtained from other sources for years prior to 1992.
for in the financial statements in accordance with           come and expense are recorded in the income
                                                                                                                         At 31 December 2008, the principal rate of ex-
Russian legislation enacted or substantively en-             statement for all interest rate instruments on an                                                                            Staff costs and related contributions. Wages,
                                                                                                                         change used for translating foreign currency bal-
acted by the balance sheet date. The income tax              accrual basis using the effective interest method.                                                                           salaries, contributions to the Russian Federation
                                                                                                                         ances was USD 1 = RUB 29.3804 (2007: USD 1 =
charge comprises current tax and deferred tax and            This method defers, as part of interest income or                                                                            state pension and social insurance funds, paid an-
                                                                                                                         RUB 24.5462).
is recognised in the income statement except if it is        expense, all fees paid or received between the par-                                                                          nual leave and sick leave, bonuses, and non-mon-
recognised directly in equity because it relates to          ties to the contract that are an integral part of the ef-   Fiduciary assets. Assets and liabilities held by                 etary benefits are accrued in the year in which the
transactions that are also recognised, in the same           fective interest rate, transaction costs and all other      the Bank in its own name, but on the account of                  associated services are rendered by the employees
or a different period, directly in equity.                   premiums or discounts.                                      third parties, are not reported on the balance sheet.            of the Bank.
Current tax is the amount expected to be paid to or          Fees integral to the effective interest rate include        Changes in presentation. Where necessary, corresponding figures have been adjusted to conform to the
recovered from the taxation authorities in respect           origination fees received or paid by the entity relat-      presentation of the current year amounts. The effect of reclassifications is as follows:
of taxable profits or losses for the current and prior       ing to the creation or acquisition of a financial as-
periods. Taxable profits or losses are based on es-          set or issuance of a financial liability, for example
timates if financial statements are authorised prior         fees for evaluating creditworthiness, evaluating and         In thousands of Russian Roubles                         As originally presented     Reclassification    As presented
to filing relevant tax returns. Taxes other than on          recording guarantees or collateral, negotiating the
income are recorded within administrative and other          terms of the instrument and for processing transac-
operating expenses.                                          tion documents. Commitment fees received by the
                                                             Bank to originate loans at market interest rates are         Balance Sheet as at 31 December 2007
Deferred income tax is provided using the balance            integral to the effective interest rate if it is probable
sheet liability method for tax loss carry forwards                                                                        Cash and cash equivalents                                     893 985                  (98 539)           795 446
                                                             that the Bank will enter into a specific lending ar-
and temporary differences arising between the tax            rangement and does not expect to sell the result-            Mandatory cash balances with the CBRF.                             -                    98 539             98 539
bases of assets and liabilities and their carrying           ing loan shortly after origination. The Bank does not        Due from other banks                                          584 473                  605 819           1 190 292
amounts for financial reporting purposes. In accord-         designate loan commitments as financial liabilities
ance with the initial recognition exemption, deferred                                                                     Investment securities available for sale                      605 819                 (605 819)               -
                                                             at fair value through profit or loss.
taxes are not recorded for temporary differences on                                                                       Other assets                                                   27 846                  (23 481)            4 365
initial recognition of an asset or a liability in a trans-   When loans and other debt instruments become
action if the transaction, when initially recorded, af-      doubtful of collection, they are written down to             Other financial assets                                             -                    23 481             23 481
fects neither accounting nor taxable profit. Deferred        present value of expected cash inflows and interest          Other liabilities                                              11 254                  (11 254)               -
tax balances are measured at tax rates enacted or            income is thereafter recorded for the unwinding of
                                                                                                                          Other financial liabilities                                    18 566                   11 254             29 820

                                                                                                                 56                              57
                                                                                                                                            THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                                  ANNUAL REPORT 2008

Management carried out these reclassifications re-        timing of future cash flows are reviewed regularly        and their Interaction (effective for annual periods            March 2008. The main change to IAS 23 is the re-
lating to the prior year figures reported in the finan-   to reduce any differences between loss estimates          beginning on or after 1 January 2008).                         moval of the option of immediately recognising as
cial statements in order to provide better informa-       and actual loss experience. To the extent that the                                                                       an expense borrowing costs that relate to assets
                                                                                                                    These interpretations did not have any significant
tion to the users of the financial statements.            assessed delay in repayment of principal on 5% of                                                                        that take a substantial period of time to get ready for
                                                                                                                    effect on the Bank’s financial statements.
                                                          the total loans and advances to customers differs                                                                        use or sale. An entity is, therefore, required to capi-
Cash and cash equivalents were split to the sepa-
                                                          by +/- one month, the provision would be approxi-         Reclassification of Financial Assets – Amend-                  talise such borrowing costs as part of the cost of the
rate balance sheet lines according to their sub-
                                                          mately RR 4 303 thousand (2007: RR 2 460 thou-            ments to IAS 39, Financial Instruments: Recog-                 asset. The revised standard applies prospectively
stance: Cash and cash equivalents and Mandatory
                                                          sand) higher or RR 4 191 thousand (2007: RR 2             nition and Measurement, and IFRS 7, Financial                  to borrowing costs relating to qualifying assets for
cash balances with the CBRF.
                                                          575 thousand) lower.                                      Instruments: Disclosures and a subsequent                      which the commencement date for capitalisation is
Promissory notes purchased were reclassified from                                                                   amendment, Reclassification of Financial As-                   on or after 1 January 2009. Management is current-
                                                          Revaluation of premises. Management uses
Investment securities available for sale to Due from                                                                sets: Effective Date and Transition. The amend-                ly assessing the impact of the amended standard
                                                          judgement to determine when factors dictate that
other banks according to their substance.                                                                           ments allow entities the options (a) to reclassify a           on the Bank’s financial statements.
                                                          a revaluation of the Bank’s premises is appropriate
                                                                                                                    financial asset out of the held to trading category if,
Other assets were split to the separate balance           in order for the balance sheet to reflect fair value                                                                     IAS 1, Presentation of Financial Statements
                                                                                                                    in rare circumstances, the asset is no longer held
sheet lines: other assets and other financial assets.     at each balance sheet date and how the assess-                                                                           (revised September 2008; effective for annual
                                                                                                                    for the purpose of selling or repurchasing it in the
                                                          ment of the fair value of premises is performed. The                                                                     periods beginning on or after 1 January 2009).
Commission claims to customers recorded within                                                                      near term; and (b) to reclassify an available-for-sale
                                                          fair value of premises is usually determined from                                                                        The main change in IAS 1 is the replacement of the
other assets were reclassified to other financial                                                                   asset or an asset held for trading to the loans and
                                                          market-based evidence by an appraisal that is un-                                                                        income statement by a statement of comprehensive
assets.                                                                                                             receivables category, if the entity has the intention
                                                          dertaken by professionally qualified valuers. The                                                                        income which will also include all non-owner chang-
                                                                                                                    and ability to hold the financial asset for the fore-
Accrued employee benefit costs and other accrued          evidence used by the valuers includes estimates of                                                                       es in equity, such as the revaluation of available-
                                                                                                                    seeable future or until maturity (subject to the as-
liabilities recorded within other liabilities were re-    prevailing market prices per square metre of prop-                                                                       for-sale financial assets. Alternatively, entities will
                                                                                                                    set otherwise meeting the definition of loans and
classified to other financial liabilities.                erties with characteristics similar to those of the                                                                      be allowed to present two statements: a separate
                                                                                                                    receivables). The amendments may be applied with
                                                          Bank’s properties. These estimates are based on                                                                          income statement and a statement of comprehen-
                                                                                                                    retrospective effect from 1 July 2008 for any re-
                                                          the valuer’s experience using comparable sale in-                                                                        sive income. The revised IAS 1 also introduces a
4. Critical Accounting                                    formation and represent a benchmark of the current
                                                          situation and trends in the market. The most sig-
                                                                                                                    classifications made before 1 November 2008; the
                                                                                                                    reclassifications allowed by the amendments may
                                                                                                                                                                                   requirement to present a statement of financial po-
                                                                                                                                                                                   sition (balance sheet) at the beginning of the earli-
Estimates, and                                            nificant estimate made in performing the valuations
                                                          is the sale price per square metre for comparable
                                                                                                                    not be applied before 1 July 2008 and retrospective
                                                                                                                    reclassifications are only allowed if made prior to 1
                                                                                                                                                                                   est comparative period whenever the entity restates
                                                                                                                                                                                   comparatives due to reclassifications, changes in
                                                                                                                    November 2008. Any reclassification of a financial
Judgements in Applying                                    buildings. Refer to Note 10. To the extent that the
                                                          estimate for the sale price per square metre used
                                                                                                                    asset made on or after 1 November 2008 takes ef-
                                                                                                                                                                                   accounting policies, or corrections of errors. Man-
                                                                                                                                                                                   agement expects the revised IAS 1 to affect the
                                                                                                                    fect only from the date when the reclassification is
Accounting Policies                                       in the independent valuation differed by 5%, the
                                                          revalued amounts of premises as at 31 December
                                                                                                                    made. The Bank has not elected to make any of the
                                                                                                                                                                                   presentation of the Bank’s financial statements but
                                                                                                                                                                                   to have no impact on the recognition or measure-
                                                                                                                    optional reclassifications during the year.
Changes in accounting estimates. The Bank                 2008 would differ by +/- RR 21 219 thousand (2007:                                                                       ment of specific transactions and balances.
makes estimates and assumptions that affect the           revalued amounts of premises would differ by +/-
                                                                                                                                                                                   IAS 27, Consolidated and Separate Financial
                                                          RR 21 221 thousand).
amounts of assets and liabilities recognised in the
financial statements within the next financial year.
                                                          Tax legislation. Russian tax, currency and cus-
                                                                                                                    6. New accounting                                              Statements (revised January 2008; effective
                                                                                                                                                                                   for annual periods beginning on or after 1 July
Estimates and judgements are continually evalu-
ated and are based on management’s experience
                                                          toms legislation is subject to varying interpretations.
                                                          Refer to Note 21.
                                                                                                                    pronouncements                                                 2009). The revised IAS 27 will require an entity to
                                                                                                                                                                                   attribute total comprehensive income to the own-
and other factors, including expectations of future                                                                 Certain new standards and interpretations have                 ers of the parent and to the non-controlling inter-
events that are believed to be reasonable under the       Initial recognition of related party transactions.        been published that are mandatory for the Bank’s               ests (previously minority interests) even if this re-
circumstances. Management also makes certain              In the normal course of business the Bank enters          accounting periods beginning on or after 1 January             sults in the non-controlling interests having a deficit
judgements, apart from those involving estimations,       into transactions with its related parties. IAS 39        2009 or later periods and which the Bank has not               balance. The current standard requires the excess
in the process of applying the accounting policies.       requires initial recognition of financial instruments     early adopted:                                                 losses to be allocated to the owners of the Parent
Judgements that have the most significant effect on       based on their fair values. Judgement is applied in
                                                                                                                                                                                   Company in most cases. The revised standard
the amounts recognised in the financial statements        determining if transactions are priced at market or       IFRS 8, Operating Segments (effective for an-
                                                                                                                                                                                   specifies that changes in a parent’s ownership in-
and estimates that can cause a significant adjust-        non-market interest rates, where there is no active       nual periods beginning on or after 1 January
                                                                                                                                                                                   terest in a subsidiary that do not result in the loss
ment to the carrying amount of assets and liabilities     market for such transactions. The basis for judge-        2009). The standard applies to entities whose debt
                                                                                                                                                                                   of control must be accounted for as equity transac-
within the next financial year include:                   ment is pricing for similar types of transactions with    or equity instruments are traded in a public market
                                                                                                                                                                                   tions. It also specifies how an entity should measure
                                                          unrelated parties and effective interest rate analysis.   or that file, or are in the process of filing, their finan-
Impairment losses on loans and advances.                                                                                                                                           any gain or loss arising on the loss of control of a
                                                                                                                    cial statements with a regulatory organisation for
Management regularly reviews the Bank’s loan                                                                                                                                       subsidiary. At the date when control is lost, any in-
                                                                                                                    the purpose of issuing any class of instruments in a
portfolios to assess impairment. In determining
whether an impairment loss should be recorded
                                                          5. Adoption of New or                                     public market. IFRS 8 requires an entity to report fi-
                                                                                                                    nancial and descriptive information about its operat-
                                                                                                                                                                                   vestment retained in the former subsidiary will have
                                                                                                                                                                                   to be measured at its fair value. Management does
                                                                                                                                                                                   not expect the amended standard to have a mate-
in the income statement, the Management makes
judgements as to whether there is any observable          Revised Standards and                                     ing segments and specifies how an entity should re-
                                                                                                                    port such information. Management does not expect
                                                                                                                                                                                   rial effect on the Bank’s financial statements.
data indicating that there is a measurable decrease
in the estimated future cash flows from a portfolio of    Interpretations                                           IFRS 8 to affect the Bank’s financial statements.              Vesting Conditions and Cancellations – Amend-
                                                                                                                                                                                   ment to IFRS 2, Share-based Payment (issued
loans before the decrease can be identified with an                                                                 Puttable Financial Instruments and Obliga-
                                                          Certain new IFRSs became effective for the Bank                                                                          in January 2008; effective for annual periods
individual loan in that portfolio. This evidence may                                                                tions Arising on Liquidation – IAS 32 and IAS
                                                          from 1 January 2008.                                                                                                     beginning on or after 1 January 2009). The
include observable data indicating that there has                                                                   1 Amendment (effective from 1 January 2009).
                                                                                                                                                                                   amendment clarifies that only service conditions
been an adverse change in the payment status of            IFRIC 11, IFRS 2 – Group and Treasury Share             The amendment requires classification as equity of
                                                                                                                                                                                   and performance conditions are vesting conditions.
borrowers in the Bank, or national or local economic      Transactions (effective for annual periods begin-         some financial instruments that meet the definition
                                                                                                                                                                                   Other features of a share-based payment are not
conditions that correlate with defaults on assets in      ning on or after 1 March 2007);                           of a financial liability. Management is currently as-
                                                                                                                                                                                   vesting conditions. The amendment specifies that
the Bank. Management uses estimates based on                                                                        sessing the impact of the amendment on the Bank’s
                                                           IFRIC 12, Service Concession Arrangements                                                                              all cancellations, whether by the entity or by other
historical loss experience for assets with credit risk                                                              financial statements.
                                                          (effective for annual periods beginning on or after 1                                                                    parties, should receive the same accounting treat-
characteristics and objective evidence of impair-
                                                          January 2008); and                                        IAS 23, Borrowing Costs (revised March 2008; ef-               ment. Management is currently assessing the im-
ment similar to those in the portfolio when schedul-
                                                                                                                    fective for annual periods beginning on or after 1             pact of the amended Standard on the Bank’s finan-
ing its future cash flows. The methodology and as-         IFRIC 14, IAS 19 – The Limit on a Defined
                                                                                                                    January 2009). The revised IAS 23 was issued in                cial statements.
sumptions used for estimating both the amount and         Benefit Asset, Minimum Funding Requirements

                                                                                                            58                             59
                                                                                                                                            THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                                  ANNUAL REPORT 2008

IFRS 3, Business Combinations (revised Janu-              IFRIC allows the hedging instrument to be held by           accounting under IAS 39; introduction of accounting          financial assets it holds for managing liquidity risk,
ary 2008; effective for business combinations             any entity or entities within a group except the for-       for investment properties under construction in ac-          if that information is necessary to enable users of
for which the acquisition date is on or after the         eign operation that itself is being hedged. The inter-      cordance with IAS 40; and reduction in restrictions          its financial statements to evaluate the nature and
beginning of the first annual reporting period            pretation also clarifies how the gain or loss recycled      over manner of determining fair value of biological          extent of liquidity risk. The Bank is currently assess-
beginning on or after 1 July 2009). The revised           from the currency translation reserve to profit or          assets under IAS 41. Further amendments made                 ing the impact of the amendment on disclosures in
IFRS 3 will allow entities to choose to measure           loss is calculated on disposal of the hedged foreign        to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS             its financial statements.
non-controlling interests using the existing IFRS 3       operation. Reporting entities will apply IAS 39 to          7 represent terminology or editorial changes only,           Embedded Derivatives – Amendments to IFRIC
method (proportionate share of the acquiree’s iden-       discontinue hedge accounting prospectively when             which the IASB believes have no or minimal effect            9 and IAS 39 (effective for annual periods end-
tifiable net assets) or at fair value. The revised IFRS   their hedges do not meet the criteria for hedge ac-         on accounting. Management does not expect the                ing on or after 30 June 2009). The amendments
3 is more detailed in providing guidance on the ap-       counting in IFRIC 16. IFRIC 16 is not expected to           amendment to have a material effect on the Bank’s            clarify that on reclassification of a financial asset out
plication of the purchase method to business com-         have an impact on the Bank’s financial statements           financial statements.                                        of the ‘at fair value through profit or loss’ category,
binations. The requirement to measure at fair value       as the Bank does not apply hedge accounting.                                                                             all embedded derivatives have to be assessed and,
                                                                                                                      IFRIC 17, Distribution of Non-Cash Assets to
every asset and liability at each step in a step ac-      Cost of an Investment in a Subsidiary, Jointly                                                                           if necessary, separately accounted for.
                                                                                                                      Owners (effective for annual periods beginning
quisition for the purposes of calculating a portion of    Controlled Entity or Associate – IFRS 1 and IAS             on or after 1 July 2009, with earlier application            Improvements to International Financial Re-
goodwill has been removed. Instead, in a business         27 Amendment (revised May 2008; effective for               permitted). The amendment clarifies when and                 porting Standards (issued in April 2009; amend-
combination achieved in stages, the acquirer will         annual periods beginning on or after 1 January              how distribution of non-cash assets as dividends to          ments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16
have to remeasure its previously held equity inter-       2009). The amendment allows first-time adopters of          the owners should be recognised. An entity should            are effective for annual periods beginning on or
est in the acquiree at its acquisition-date fair value    IFRS to measure investments in subsidiaries, jointly        measure a liability to distribute non-cash assets as         after 1 July 2009; amendments to IFRS 5, IFRS
and recognise the resulting gain or loss, if any, in      controlled entities or associates at fair value or at       a dividend to its owners at the fair value of the as-        8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are
profit or loss. Acquisition-related costs will be ac-     previous GAAP carrying value as deemed cost in              sets to be distributed. A gain or loss on disposal of        effective for annual periods beginning on or
counted for separately from the business combina-         the separate financial statements. The amendment            the distributed non-cash assets will be recognised           after 1 January 2010). The improvements consist
tion and therefore recognised as expenses rather          also requires distributions from pre-acquisition net        in profit or loss when the entity settles the dividend       of a mixture of substantive changes and clarifica-
than included in goodwill. An acquirer will have to       assets of investees to be recognised in profit or loss      payable. IFRIC 17 is not relevant to the Bank’s op-          tions in the following standards and interpretations:
recognise at the acquisition date a liability for any     rather than as a recovery of the investment. The            erations because it does not distribute non-cash as-         clarification that contributions of businesses in com-
contingent purchase consideration. Changes in the         amendment will not have an impact on the Bank’s             sets to owners.                                              mon control transactions and formation of joint ven-
value of that liability after the acquisition date will   financial statements.
be recognised in accordance with other applica-                                                                       IFRS 1, First-time Adoption of International Fi-             tures are not within the scope of IFRS 2; clarifica-
ble IFRSs, as appropriate, rather than by adjusting       Eligible Hedged Items – Amendment to IAS 39,                nancial Reporting Standards (effective for the               tion of disclosure requirements set by IFRS 5 and
goodwill. The revised IFRS 3 brings into its scope        Financial Instruments: Recognition and Meas-                first IFRS financial statements for a period be-             other standards for non-current assets (or disposal
business combinations involving only mutual enti-         urement (effective with retrospective applica-              ginning on or after 1 July 2009). The revised IFRS           groups) classified as held for sale or discontinued
ties and business combinations achieved by con-           tion for annual periods beginning on or after 1             1 retains the substance of its previous version but          operations; requiring to report a measure of total
tract alone. Management is currently assessing the        July 2009, with earlier application permitted).             within a changed structure in order to make it easier        assets and liabilities for each reportable segment
impact of the amended standard on the Bank’s fi-          The amendment clarifies how the principles that             for the reader to understand and to better accom-            under IFRS 8 only if such amounts are regularly
nancial statements.                                       determine whether a hedged risk or portion of cash          modate future changes. The revised standard does             provided to the chief operating decision maker;
                                                          flows is eligible for designation should be applied         not have any effect on the Bank’s financial state-           amending IAS 1 to allow classification of certain li-
IFRIC 13, Customer Loyalty Programmes (effec-             in particular situations. The amendment is not ex-                                                                       abilities settled by entity’s own equity instruments
tive for annual periods beginning on or after 1                                                                       ments.
                                                          pected to have an impact on the Bank’s financial                                                                         as non-current; changing IAS 7 such that only ex-
July 2008). IFRIC 13 clarifies that where goods or        statements as the Bank does not apply hedge ac-             IFRIC 18, Transfers of Assets from Custom-                   penditures that result in a recognised asset are eli-
services are sold together with a customer loyalty        counting.                                                   ers (effective for annual periods beginning on               gible for classification as investing activities; allow-
incentive (for example, loyalty points or free prod-                                                                  or after 1 July 2009). The interpretation clarifies          ing classification of certain long-term land leases as
ucts), the arrangement is a multiple-element ar-          Improvements to International Financial Re-
                                                                                                                      the accounting for transfers of assets from custom-          finance leases under IAS 17 even without transfer
rangement and the consideration receivable from           porting Standards (issued in May 2008). In 2007,
                                                                                                                      ers, namely, the circumstances in which the defini-          of ownership of the land at the end of the lease;
the customer is allocated between the components          the International Accounting Standards Board de-
                                                                                                                      tion of an asset is met; the recognition of the asset        providing additional guidance in IAS 18 for deter-
of the arrangement using fair values. Management          cided to initiate an annual improvements project as
                                                                                                                      and the measurement of its cost on initial recogni-          mining whether an entity acts as a principal or an
is currently assessing the impact of the Interpreta-      a method of making the required, but non-urgent,
                                                                                                                      tion; the identification of the separately identifiable      agent; clarification in IAS 36 that a cash generating
tion on the Bank’s financial statements.                  amendments to IFRS. The amendments issued
                                                                                                                      services (one or more services in exchange for the           unit shall not be larger than an operating segment
                                                          in May 2008 consist of a mixture of substantive
IFRIC 15, Agreements for the Construction of                                                                          transferred asset); the recognition of revenue, and          before aggregation; supplementing IAS 38 regard-
                                                          changes, clarifications, and changes in terminology
Real Estate (effective for annual periods begin-                                                                      the accounting for transfers of cash from customers          ing measurement of fair value of intangible assets
                                                          in various standards. The substantive changes re-
ning on or after 1 January 2009). The interpre-                                                                       IFRIC 18 is not expected to have any impact on the           acquired in a business combination; amending IAS
                                                          late to the following areas: classification as held for
tation applies to the accounting for revenue and                                                                      Bank’s financial statements.                                 39 (i) to include in its scope option contracts that
                                                          sale under IFRS 5 in case of a loss of control over a
associated expenses by entities that undertake the        subsidiary; possibility of presentation of financial in-    Improving Disclosures about Financial Instru-                could result in business combinations, (ii) to clarify
construction of real estate directly or through sub-      struments held for trading as non-current under IAS         ments – Amendments to IFRS 7, Financial In-                  the period of reclassifying gains or losses on cash
contractors, and provides guidance for determin-          1; accounting for sale of IAS 16 assets which were          struments: Disclosures (issued in March 2009;                flow hedging instruments from equity to profit or
ing whether agreements for the construction of real       previously held for rental and classification of the re-    effective for annual periods beginning on or af-             loss and (iii) to state that a prepayment option is
estate are within the scope of IAS 11 or IAS 18. It       lated cash flows under IAS 7 as cash flows from op-         ter 1 January 2009). The amendment requires en-              closely related to the host contract if upon exer-
also provides criteria for determining when entities      erating activities; clarification of definition of a cur-   hanced disclosures about fair value measurements             cise the borrower reimburses economic loss of the
should recognise revenue on such transactions.            tailment under IAS 19; accounting for below market          and liquidity risk. The entity will be required to dis-      lender; amending IFRIC 9 to state that embedded
IFRIC 15 is not relevant to the Bank’s operations         interest rate government loans in accordance with           close an analysis of financial instruments using a           derivatives in contracts acquired in common con-
because it does not have any agreements for the           IAS 20; making the definition of borrowing costs in         three-level fair value measurement hierarchy. The            trol transactions and formation of joint ventures are
construction of real estate.                              IAS 23 consistent with the effective interest meth-         amendment (a) clarifies that the maturity analysis of        not within its scope; and removing the restriction in
IFRIC 16, Hedges of a Net Investment in a For-            od; clarification of accounting for subsidiaries held       liabilities should include issued financial guarantee        IFRIC 16 that hedging instruments may not be held
eign Operation (effective for annual periods              for sale under IAS 27 and IFRS 5; reduction in the          contracts at the maximum amount of the guarantee             by the foreign operation that itself is being hedged.
beginning on or after 1 October 2008). The in-            disclosure requirements relating to associates and          in the earliest period in which the guarantee could          Management does not expect the amendments to
terpretation explains which currency risk expo-           joint ventures under IAS 28 and IAS 31; enhance-            be called and; (b) requires disclosure of remaining          have any material effect on the Bank’s financial
sures are eligible for hedge accounting and states        ment of disclosures required by IAS 36; clarification       contractual maturities of financial derivatives if the       statements.
that translation from the functional currency to the      of accounting for advertising costs under IAS 38;           contractual maturities are essential for an under-           Unless otherwise described above, the new stand-
presentation currency does not create an exposure         amending the definition of the fair value through           standing of the timing of the cash flows. An entity          ards and interpretations are not expected to signifi-
to which hedge accounting could be applied. The           profit or loss category to be consistent with hedge         will further have to disclose a maturity analysis of         cantly affect the Bank’s financial statements.

                                                                                                              60                           61
                                                                                                                                  THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                      BANK FINANCIAL STATEMENTS
                                                      AND INDEPENDENT AUDITORS’ REPORT                                            ANNUAL REPORT 2008

7. Cash and Cash Equivalents                                                                               8. Due from Other Banks
                                                                                                           At 31 December 2008 and 31 December 2007 due from other banks was represented by current term place-
                                                                                                           ments with other banks. Due from other banks are unsecured and represent current and not impaired loans.
 In thousands of Russian Roubles                                2008                      2007             Analysis by credit quality of amounts due from other banks is as follows:

                                                                                                            In thousands of Russian Roubles                                        2008                 2007

 Current and not impaired
 Cash on hand                                                 262 343                    159 444
 Cash balances with the CBRF
 (other than mandatory reserve deposits)                      242 386                    247 503
                                                                                                            Current and not impaired
                                                                                                            Short-term placements with other banks
 Correspondent accounts and overnight placements                                                            with original maturities of more than three months
 with other banks
                                                                                                            Top 20 Russian banks                                                  90 037              290 560
                                                                                                             - А3/Stable (Moody’s)                                                90 037              120 017
 Top 20 Russian banks                                          40 208                    15 777
                                                                                                             - Ва3/Stable (Moody’s)                                                  -                 3 595
  - А3/Stable (Moody’s)                                        34 117                     3 407
                                                                                                             - Ваа1/Stable (Moody’s)                                                 -                142 394
  - Ваа1/Stable (Moody’s)                                      6 091                     12 370
 Other Russian banks                                           2 831                      9 615
                                                                                                             - Not rated                                                             -                 24 554

  - Ваа2/Stable (Moody’s)                                      2 116                      4 238             Other Russian banks                                                    200                293 913

  - Not rated                                                   715                       5 377
 OECD banks                                                  1 111 024                   312 204            Promissory Notes
  - Аа3/Stable (Moody’s)                                      543 673                    11 782             Top 20 Russian banks                                                  192 853             383 436
  - Аа2/Stable (Moody’s)                                       2 330                        -                - А3/Stable (Moody’s)                                                47 197               24 658
  - Аа1/Stable (Moody’s)                                      565 021                    300 422             - Ваа2/Stable (Moody’s)                                              95 865               17 999
 CIS banks                                                    229 403                    50 903              - Ва3/Stable (Moody’s)                                               49 791              201 948
  - Ваа2/Stable (Moody’s)                                     164 974                    21 744              - Not rated                                                             -                138 831
  - Not rated                                                  64 429                    29 159             Other Russian banks                                                      -                222 383

 Total Cash and Cash Equivalents                             1 888 195                   795 446            Total due from other banks                                            283 090             1 190 292

Geographical, currency and interest rate analyses of cash and cash equivalents are disclosed in Note 22.   At 31 December 2008 the estimated fair value of due from other banks was RR 90 237 thousand (2007: RR
The information on related party balances is disclosed in Note 27.                                         584 473 thousand).
                                                                                                           Promissory notes of Russian banks represent short-term promissory notes of commercial banks in Russia.
                                                                                                           These promissory notes are denominated in Russian Roubles, bear an average interest rate of 13.0% per
                                                                                                           annum with maturities in January - May 2009.
                                                                                                           Subsequent to 31 December 2008, RR 105 889 thousand of these promissory notes was redeemed.
                                                                                                           Geographical, currency, maturity and interest rate analyses of due from other banks are disclosed in Note 22.
                                                                                                           The information on related party balances is disclosed in Note 27.

                                                                                                    62                           63
                                                                                                                                                           THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                              BANK FINANCIAL STATEMENTS
                                                              AND INDEPENDENT AUDITORS’ REPORT                                                             ANNUAL REPORT 2008

9. Loans and Advances to Customers                                                                                                  Economic sector risk concentrations within the customer loan portfolio are as follows:

                                                                                                                                                                                                                        2008                     2007

                                                                                                                                     In thousands of Russian Roubles

                                                                                                                                                                                                              Amount           %         Amount           %
 In thousands of Russian Roubles                                                                      2008              2007

                                                                                                                                     Trade                                                                  2 695 980          35      1 901 093          40
                                                                                                                                     Leasing                                                                1 120 947          15       320 944            7
 Corporate loans                                                                                  6 923 892           4 015 543
                                                                                                                                     Manufacturing                                                           953 965           12       227 523            5
 Loans to individuals - consumer loans                                                             721 463            655 802
                                                                                                                                     Construction                                                            947 884           12       300 581            6
 Overdrafts                                                                                         25 718             27 182
                                                                                                                                     Individuals                                                             747 181           10       691 646           15
 Loans to individuals – entrepreneurs                                                               5 644              3 000
                                                                                                                                     Mass media                                                              534 707               7    180 386            4
 Mortgage loans                                                                                        -               5 662
                                                                                                                                     Services                                                                512 044               7    581 748           12
                                                                                                                                     Real estate                                                             164 009               2    503 268           11
 Less: Provision for loan impairment                                                              (585 353)           (187 036)
                                                                                                                                     Total loans and advances to customers
                                                                                                                                     (before provision for loan impairment)                                 7 676 717          100     4 707 189         100
 Total loans and advances to customers                                                            7 091 364           4 520 153

                                                                                                                                    At 31 December 2008, the Bank had 50 clients with aggregated loan amounts above RR 50 000 thousand. The ag-
                                                                                                                                    gregate amount of these loans is RR 5 804 852 thousand, or 76% of total loans and advances to customers.
Movements in the provision for loan impairment during 2008 are as follows:
                                                                                                                                    At 31 December 2007, the Bank had 31 clients with aggregated loan amounts above RR 50 000 thousand. The ag-
                                                                                                                                    gregate amount of these loans is RR 2 678 245 thousand, or 57% of total loans and advances to customers.

                                                                         Individual                                                 Under the Bank’s credit policy borrowers have the right for an early repayment of loans at par.
                                              Corporate   Consum-                          Mortgage          Over-
 In thousands of Russian Roubles                                         entrepre-                                       Total
                                                loans     er loans                          loans            drafts                 The carrying value of each class of loans and advances to customers approximates their fair value at 31 December
                                                                                                                                    2008 and 31 December 2007. At 31 December 2008, the estimated fair value of loans and advances to customers
                                                                                                                                    was RR 7 091 364 thousand (2007: RR 4 520 153 thousand).
                                                                                                                                    Information about collateral at 31 December 2008 is as follows:

 Provision for loan impairment
 at 1 January 2008                            144 196     40 448           211               398             1 783      187 036                                                                            Individual
                                                                                                                                                                                Corporate   Consumer                       Mortgage
                                                                                                                                     In thousands of Russian Roubles                                       entrepre-                   Overdrafts       Total
                                                                                                                                                                                  loans       loans                         loans
 Charges to provision for impairment                                                                                                                                                                         neurs
 during the year                              336 471     60 349            85              (398)            1 810      398 317

 Provision for loan impairment
 at 31 December 2008                          480 667     100 797          296                -              3 593      585 353
                                                                                                                                     Unsecured loans                               3        249 205         4 144              -        22 745      276 097
                                                                                                                                     Loans collateralised by:
                                                                                                                                     Residential real estate                    370 728     54 528          1 500                                   426 756
Movements in the provision for loan impairment during 2007 are as follows:
                                                                                                                                     movables and equipment                     1 756 242   71 539             -               -           -        1 827 781
                                                                                                                                     guarantees from the Parent Bank            2 321 287   121 684            -               -           -        2 442 971
                                                      Cor-                    Individual      Mort-                                  cash deposits                              1 734 996   34 963             -               -           -        1 769 959
                                                                Consum-                                    Over-
 In thousands of Russian Roubles                     porate                   entrepre-       gage                       Total
                                                                er loans                                   drafts                    other assets                               740 637     189 544            -               -        2 972       933 153
                                                     loans                      neurs         loans
                                                                                                                                     Total loans and advances
                                                                                                                                     to customers                               6 923 893   721 463         5 644              -        25 717      7 676 717

 Provision for loan impairment at 1 January 2007    52 442       7 466           48           935            868        61 759
 Charges to provision for impairment during
 the year                                           91 754       32 982          163          (537)          915       125 277

 Provision for loan impairment
 at 31 December 2007                               144 196       40 448          211          398          1 783       187 036

                                                                                                                               64                         65
                                                                                                                                                     THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                               BANK FINANCIAL STATEMENTS
                                                               AND INDEPENDENT AUDITORS’ REPORT                                                      ANNUAL REPORT 2008

Information about collateral at 31 December 2007 is as follows:                                                              Analysis by credit quality of loans outstanding at 31 December 2007 is as follows:

                                                                           Individual                                                                                                                Individual
                                             Corporate      Consumer                      Mortgage      Over-                                                              Corporate    Consumer                  Mortgage   Over-
 In thousands of Russian Roubles                                           entrepre-                               Total      In thousands of Russian Roubles                                        entrepre-                              Total
                                               loans          loans                        loans        drafts                                                               loans        loans                    loans     drafts
                                                                             neurs                                                                                                                     neurs

                                                                                                                              Current and not impaired
 Unsecured loans                               655          240 093             -              -       23 273     264 021     Including:
 Loans collateralised by:                                                                                                     Borrowers with credit history
                                                                                                                              over three years                              644 406      30 047          -           -          -         674 453
 residential real estate                     636 862        160 952             -          5 662        692       804 168
                                                                                                                              Borrowers with credit history
 movables and equipment                      472 325         12 749             -              -        247       485 321
                                                                                                                              between two and three years                   467 763       7 273       2 789        3 275        -         481 100
 stocks in turnover                          538 472           -            3 000              -          -       541 472
                                                                                                                              Borrowers with credit history
 guarantees from the Parent Bank             1 161 130      198 064             -              -       2 969     1 362 163    between one and two years                    1 006 452     72 826          -           -          -         1 079 278
 cash deposits                               1 170 119       29 210             -              -          -      1 199 329    New borrowers                                1 752 726    505 209          -         1 989     25 398       2 285 322
 other assets                                 35 981         14 734             -              -          -       50 715      Total current and not impaired               3 871 347    615 355       2 789        5 264     25 398       4 520 153
 Total loans and advances to customers       4 015 544      655 802         3 000          5 662       27 181    4 707 189
                                                                                                                             The Bank applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments: Rec-
                                                                                                                             ognition and Measurement, and created portfolio provisions for impairment losses that were incurred, but
Analysis by credit quality of loans outstanding at 31 December 2008 is as follows:                                           have not been specifically identified with any individual loan by the balance sheet date. The Bank’s policy
                                                                                                                             is to classify each loan as ”current and not impaired” until a specific objective evidence of impairment of the
                                                                                                                             loan is identified. The impairment provisions exceed the total gross amount of individually impaired loans as
                                                                             Individual        Mort-                         a result of this policy and the portfolio impairment methodology.
                                                 Corporate     Consum-                                  Over-
 In thousands of Russian Roubles                                             entrepre-         gage                Total
                                                   loans       er loans                                 drafts               The primary factors that the Bank considers whether a loan is impaired are its overdue status and realis-
                                                                               neurs           loans
                                                                                                                             ability of related collateral, if any. As a result, the Bank presented the below ageing analysis of loans that are
                                                                                                                             individually determined to be impaired.
                                                                                                                             Current and not impaired, but renegotiated loans represent the carrying amount of loans that would otherwise
                                                                                                                             be past due or impaired whose terms have been renegotiated. Past due, but not impaired loans represent
 Current and not impaired                                                                                                    collateralised loans where the fair value of collateral covers the overdue interest and principal repayments.
                                                                                                                             The amount reported as past due, but not impaired is the whole balance of such loans, not only the individual
                                                                                                                             instalments that are past due.
 Borrowers with credit history                    911 567       34 479              -              -      -      946 046
 over three years                                                                                                            As at 31 December 2008, total estimated value of collateral was RR 561 532 thousand (2007: RR nil thou-
                                                                                                                             sand) for past due and individually impaired corporate loans. These amounts comprise collateral which has
 Borrowers with credit history                   1 632 991      41 535              -              -      -      1 674 526
                                                                                                                             been assessed by the Bank’s internal valuation procedures as at the date of origination of the loan. Fair value
 between two and three years
                                                                                                                             of collateral for past due and individually impaired corporate loans has not significantly changed since the
 Borrowers with credit history                   1 748 587     369 517          3 927              -      -      2 122 031   date of loan origination.
 between one year and two years
                                                                                                                             The fair value of collateral in respect of loans past due but not impaired and in respect of loans individually
 New borrowers                                   1 761 482     146 132          1 421              -   21 738    1 930 773   determined to be impaired at 31 December 2008 was as follows:
 Total current and not impaired                  6 054 627     591 663          5 348                  21 738    6 673 376

 Past due but not impaired                                                                                                                                                Corporate    Consumer                   Mortgage
                                                                                                                              In thousands of Russian Roubles                                        entrepre-               Overdrafts      Total
                                                                                                                                                                            loans        loans                     loans
 - less than 30 days overdue                      332 046       16 525              -              -     16      348 587
 - 30 to 90 days overdue                             128           5 053            -              -      -       5 181
 - 90 to 180 days overdue                              37          7 425            -              -    370       7 832
                                                                                                                              Fair value of collateral – loans
 Total past due but not impaired                 332 211       29 003       -              -           386       361 600
                                                                                                                              past due but not impaired
                                                                                                                              - real estate                                39 727        16 755          -           -              -       56 482
 Loans individually determined
                                                                                                                              - movables and equipment                     52 550        2 780           -           -              -       55 330
 to be impaired (gross)
                                                                                                                              - corporate guarantees                       387 720          -            -           -              -       387 720
 - 90 to 180 days overdue                         56 388             -              -              -      -       56 388
                                                                                                                              Fair value of collateral – individually
 Total individually impaired loans (gross)        56 388             -              -              -      -       56 388
                                                                                                                              impaired loans
                                                                                                                              - movables and equipment                     62 000           -            -           -              -       62 000
 Total loans and advances to customers           6 443 226     620 666          5 348              -   22 124    7 091 364
                                                                                                                              Total                                        541 997       19 535          -           -              -       561 532
                                                                                                                             Geographical, currency, interest rate and maturity analyses of loans and advances to customers are dis-
                                                                                                                             closed in Note 22.

                                                                                                                       66                           67
                                                                                                                                          THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                           BANK FINANCIAL STATEMENTS
                                                           AND INDEPENDENT AUDITORS’ REPORT                                               ANNUAL REPORT 2008

10. Premises, Equipment and Intangible Assets                                                                     11. Other Financial Assets

                                                   Office and   Leasehold      Total     Computer
 In thousands of Russian Roubles        Premises   computer      improve-    tangible    software      Total       In thousands of Russian Roubles                                         2008                2007
                                                   equipment      ments       assets      licences

 Carrying amount at 1 January 2007      218 572     39 282        3 135     260 989       6 004      266 993       Commission claims to customers                                         2 025                 -
                                                                                                                   Trade receivables                                                      1 235               1 920
 Additions                                 -        14 716          -        14 716       3 130       17 846       Credit and debit cards receivables                                       -                 21 561
 Depreciation charge (Note 20)          (5 642)     (7 287)       (101)     (13 030)      (2 366)    (15 396)      Total other financial assets                                           3 260               23 481
 Revaluation                            211 480        -            -       211 480           -      211 480
 Carrying amount at                                                                                               At 31 December 2008, all other financial assets are current and not impaired or past due.
 31 December 2007                       424 410     46 711        3 034     474 155       6 768      480 923

 Cost/valuation at 31 December 2007     424 410     68 454        3 377     496 241       16 409     512 650      12. Other Assets
 Accumulated depreciation                  -       (21 743)       (343)     (22 086)      (9 641)    (31 727)
 Carrying amount
 at 31 December 2007                    424 410     46 711        3 034     474 155       6 768      480 923
                                                                                                                   In thousands of Russian Roubles                                         2008                2007
 Additions                                 -        32 700          -        32 700       10 958      43 658
 Disposals                                 -       (15 492)         -       (15 492)          -      (15 492)
 Depreciation charge (Note 20)         (10 610)    (12 212)       (101)     (22 923)      (2 373)    (25 296)
 Revaluation                            10 587         -            -        10 587           -       10 587
                                                                                                                   Prepayments for services                                               11 896              4 063
 Carrying amount
 at 31 December 2008                    424 387     51 707        2 933     479 027       15 353     494 380       Prepayments for insurance                                              3 330                 -
                                                                                                                   Prepayments for equipment and intangible assets                        3 082                 -
 Cost/valuation at 31 December 2008     424 387     85 662        3 377     513 426       27 367     540 793       Prepayments for rent                                                   2 274                 -
 Accumulated depreciation                  -       (33 955)       (444)     (34 399)     (12 014)    (46 413)      Prepaid taxes other than income tax                                     309                 213
 Carrying amount                                                                                                   Other                                                                  2 824                89
 at 31 December 2008                    424 387     51 707        2 933     479 027       15 353     494 380       Total other assets                                                     23 715              4 365

Premises were independently valued for the first time on 31 December 2005. The valuation was carried out
by an independent firm of valuers, Debenham Tie Leung, who hold a recognisedrecognized and relevant pro-          At 31 December 2008, all other assets are current and not impaired or past due.
fessional qualification and who have recent experience in valuation of assets of similar location and category.
                                                                                                                  Geographical, currency and maturity analyses of other assets are disclosed in Note 22. The information on
Premises were valued by the same firm as at 31 December 2007 and 31 December 2008. The premises
                                                                                                                  related party balances is disclosed in Note 27.
have been valued based on comparable recent market transactions on arm’s length terms. The valuation
was undertaken based on the market value. The market value is the estimated amount for which a property
should exchange between willing parties in an arm’s length transaction and is determined by the price which
an independent party would pay for an object similar by its quality and use. The market value of premises was
estimated based on information on sales of the comparable objects that took place in the market
At 31 December 2008, the carrying amount of premises would have been RR 91 810 thousand (2007: RR
102 420 thousand), had the assets been carried at cost less depreciation. Included in the above carrying
amount of premises is RR 23 thousand (2007: income of RR 211 480) representing a loss from the revalua-
tion of the Bank’s premises. This amount was also posted directly to equity. Included in the above carrying
amount is RR 13 800 thousand (2007: RR 21 268 thousand) representing fixed assets under finance leases.
The leased assets comprise vehicles with a carrying value of RR 10 291 thousand and ATM machines with
a carrying value of RR 3 509 thousand. Refer to Note 15 for finance lease liabilities.

                                                                                                           68                           69
                                                                                                                                         THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                               ANNUAL REPORT 2008

13. Due to Other Banks                                                                                            14. Customer Accounts

 In thousands of Russian Roubles                                     2008                      2007                In thousands of Russian Roubles                                         2008                    2007

 Correspondent accounts and overnight placements                                                                   Legal entities
 of other banks                                                    124 192                   298 208
                                                                                                                   - Current/settlement accounts                                         1 087 162               799 307
 - Parent Bank                                                     78 595                    221 620
                                                                                                                   - Term deposits                                                       1 437 117               519 810
 - CIS banks                                                       38 803                     69 102
 - Other Russian banks                                              6 794                     7 486
                                                                                                                   - Current/demand accounts                                             136 894                 118 753
                                                                                                                   - Term deposits                                                       592 864                 292 656
 Term deposits of other banks                                     5 006 822                  3 931 706
                                                                                                                   Total customer accounts                                               3 254 037               1 730 526
 - Parent Bank                                                    3 080 762                  1 889 391
 - OECD countries banks                                           1 822 702                  1 742 086            Economic sector concentrations within customer accounts are as follows:
 - Other Russian banks                                             103 358                   300 229
 Total due to other banks                                         5 131 014                  4 229 914
                                                                                                                                                                                 2008                          2007
Correspondent accounts and overnight placements of other banks are current.                                        In thousands of Russian Roubles
On 22 August, 2008 the Bank signed a loan agreement with Bayerische Landesbank (registered in Germany)                                                                  Amount              %         Amount                 %
in the amount of USD 55 000 thousand. The borrowing facility bears a market interest rate. The Bank will utili-
seutilize amounts borrowed under this agreement for its general corporate lending purposes. The agreement
was signed for one year with an option of automatic renewal for the next year. The Bank is obliged to comply
with certain financial covenants stipulated by the aforementioned agreement. Refer to Note 23.
                                                                                                                   Trade                                              1 778 798            55        873 476                 50
On 21 October 2008, the Bank signed a loan agreement with Commerzbank AG (registered in Germany)
in the amount of Euro 2 647 thousand. The borrowing facility bears a market interest rate and is repayable         Individuals                                         729 758             22        413 286                 24
within five yaersyears. The Bank will utiliseutilize amounts borrowed under this agreement for its export fi-      Services                                            305 764              9        270 275                 15
nancing purposes. The agreement was signed for one year with an option of renewal for the next year. There
                                                                                                                   Mass media                                          216 131              7         53 596                  3
are no financial covenants with regard to this borrowing fthatthat the Bank should comply with.
                                                                                                                   Construction and real estate                         98 889              3            -                    -
On 20 August, 15 October and 20 October 2008, the Bank signed loan agreements with Bayerische Hypo-
und Vereinsbank Aktiengesellschaft (registered in the Netherlands) in the aggregate amount of Euro 1 669           Manufacturing                                        49 281              2         27 504                  2
thousand. The borrowing facility bears a market interest rate and are repayable within six years. The Bank         Transport                                            24 012              1         36 388                  2
will utiliseutilize amounts borrowed under these agreements for its export financing purposes. There are no
                                                                                                                   Insurance                                            15 037              -         17 893                  1
financial covenants with regard to these borrowings that the Bank should comply with.
                                                                                                                   Municipality                                            -                -         8 708                   1
Term deposits of the Parent Bank include deposits in the amounts of RR 50 000 thousand, Euro 30 865
thousand, and USD 59 599 thousand with interest rates from 7.2% p.a. to 9.5% p.a. with maturity in 2009            Leasing                                              2 830               -          708                    -
and the first quarter of 2010.                                                                                     Other                                                33 537              1         28 692                  2
The management of the Bank believes that it will be able to replace at an acceptable cost, liabilities due to      Total customer accounts                            3 254 037            100       1 730 526               100
other banks as they mature. The management of the Bank believes that due to other banks liabilities pre-
sented above provide a long term and stable source of funding for the Bank.                                       At 31 December 2008, the Bank had 31 customers with balances above RR 8 000 thousand. The aggregate
At 31 December 2008, the estimated fair value of due to other banks was RR 5 131 014 thousand (2007: RR           balance of these customers was RR 2 439 390 thousand or 75% of total customer accounts.
4 229 914 thousand).                                                                                              At 31 December 2007, the Bank had 24 customers with balances above RR 8 000 thousand. The aggregate
The Bank has a right to early repay deposits placed by other banks at par plus accrued interest.                  balance of these customers was RR 1 077 562 thousand or 62% of total customer accounts.

Geographical, currency, maturity and interest rate analyses of due to other banks are disclosed in Note 22.       At 31 December 2008, the estimated fair value of customer accounts was RR 3 254 037 thousand (2007:
The information on related party balances is disclosed in Note 27.                                                RR 1 730 526 thousand).
                                                                                                                  Geographical, currency, interest rate and maturity analyses of customer accounts are disclosed in Note 22.

                                                                                                          70                            71
                                                                                                                                         THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                               ANNUAL REPORT 2008

15. Other Financial Liabilities                                                                                    16. Subordinated debt                                        17. Net Assets
Other financial liabilities comprise the following:                                                                At 31 December 2008, the Bank had subordinated
                                                                                                                                                                                Attributable to
                                                                                                                   loans from the participant, International Bank of
                                                                                                                   Azerbaijan, denominated in USD. The loans bear
                                                                                                                   interest rates from 5.2% to 9% per annum. Two
 In thousands of Russian Roubles                                       2008                      2007              loans are repayable in March 2012; one in July               The Bank is a limited liability company. In accord-
                                                                                                                   2014 and another one in February 2015. Interest is           ance with the effective Russian law, voting rights of
                                                                                                                   paid quarterly. This subordinated debt is accounted          the participants are determined by their percentage
                                                                                                                   for as part of additional capital for statutory ratios       participation in the registered charter capital. The
                                                                                                                   calculation purposes. Under the terms of subordi-            Bank has only one participant.
                                                                                                                   nated debt, in the event of liquidation of the Bank,
 Trade payables                                                      12 671                     2 759              the claims on these deposits shall only be satisfied         In 2007 the participant of the Bank decided to in-
                                                                                                                   after claims of all other creditors of the Bank.             crease the net assets of the Bank and made the
 Finance lease liabilities                                            4 835                    11 241                                                                           contribution for the amount of RR 137 600 thousand
 Audit fee payable                                                    1 955                     4 202              At 31 December 2008, the estimated fair value of             in December 2007.
                                                                                                                   the subordinated loans was RR 344 534 thousand
 Accrued employee benefit costs                                       1 632                    11 251              (2007: RR 227 879 thousand).                                 In 2008 the participant of the Bank decided to in-
 Amounts in the course of settlement                                  2 703                        -                                                                            crease the net assets of the Bank and made the
                                                                                                                   Geographical, currency, maturity and interest rate           contribution for the amount of RR 103 740 thousand
 Other                                                                2 028                      367               analyses of the loans from the participant are dis-          in December 2008. The contribution was registered
 Total other financial liabilities                                   25 824                    29 820              closed in Note 22. The information on related party          by CBRF in January 2009. Refer to Note 28.
                                                                                                                   balances is disclosed in Note 27.
                                                                                                                                                                                The participant is entitled to its share of net assets
                                                                                                                                                                                of the Bank at withdrawal. The Bank has an obliga-
At 31 December 2008, all other financial liabilities are not impaired or past due.
                                                                                                                                                                                tion to redeem the participant’s interests in case of
The carrying amount of each class of other financial liabilities approximates fair value at 31 December 2008                                                                    withdrawal. The basis for settlements is the Bank’s
and 31 December 2007. At 31 December 2008, the estimated fair value of other financial liabilities was RR                                                                       financial reports prepared in accordance with Rus-
25 824 thousand (2007: RR 29 820 thousand).                                                                                                                                     sian Accounting Rules. Russian law defines the
                                                                                                                                                                                valuation of a participant’s share at withdrawal as
The estimated fair value of finance lease liabilities is RR 4 835 thousand (2007: RR 11 241 thousand).                                                                          a portion of the Bank’s net assets calculated in ac-
                                                                                                                                                                                cordance with the Russian law for the year preced-
                                                                                                                                                                                ing the year of participant’s withdrawal. This buy-
At 31 December 2007 and 31 December 2008, minimum lease payments under finance leases and their                                                                                 out obligation represents a liability under IFRS.
present values are as follows:                                                                                                                                                  The Bank’s accounting policy for determining the
                                                                                                                                                                                amount of the liability applied as a practical expedi-
                                                                                                                                                                                ent is disclosed in Note 3. The Bank’s net assets re-
                                                                                       Later than 1 year and not                                                                ported in accordance with the Russian regulations
 In thousands of Russian Roubles                               Not later than 1 year                                                                                            are RR 963 796 thousand at 31 December 2008
                                                                                           later than 5 years
                                                                                                                                                                                (2007: RR: 859 261 thousand). This amount would
                                                                                                                                                                                have been payable after more than 12 months if the
                                                                                                                                                                                participant had exercised its redemption right at the
                                                                                                                                                                                balance sheet date.

 Minimum lease payments at 31 December 2007                          10 299                     5 730
 Less: future finance charges                                        (3 633)                   (1 155)
 Present value of minimum lease payments
 at 31 December 2007                                                  6 666                     4 575

 Minimum lease payments at 31 December 2008                           2 018                     5 587
 Less: future finance charges                                         (446)                    (2 325)
 Present value of minimum lease payments
 at 31 December 2008                                                  1 572                     3 262

Geographical, currency and maturity analyses of other financial liabilities are disclosed in Note 22.

                                                                                                              72                        73
                                                                                                                                THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                       BANK FINANCIAL STATEMENTS
                                                       AND INDEPENDENT AUDITORS’ REPORT                                         ANNUAL REPORT 2008

18. Interest Income and Expense                                                                          20. Administrative and Other Operating Expenses

In thousands of Russian Roubles                                               2008         2007           In thousands of Russian Roubles                                  Note     2008                2007

Interest income
Loans and advances to customers                                             797 045       505 410         Staff costs                                                             206 917             133 432
Due from other banks                                                         28 126       24 079          Taxes other than on income                                               26 027              29 250
Debt trading securities                                                      41 429        457            Lease expenses                                                           25 809              26 581
Investment securities available for sale                                       414        13 841          Security services                                                        18 779              18 402
Correspondent accounts and overnight placements with other banks              5 964       11 067          Depreciation of premises, equipment and amortisation
                                                                                                          of intangible assets                                              10     25 296              15 396
Total interest income                                                       872 978       554 854
                                                                                                          Other costs of premises and equipment                                    18 946              12 424
Interest expense
                                                                                                          Software maintenance                                                     11 850               6 044
Term deposits of other banks                                                117 351       215 836
                                                                                                          Communication                                                            6 114                5 642
Subordinated loan                                                           185 549        5 801
                                                                                                          Advertising and marketing services                                       9 171                5 269
Term deposits of individuals                                                 35 017       20 961
                                                                                                          Audit expenses                                                           4 602                4 004
Correspondent accounts of other banks                                         1 577        581
                                                                                                          Business trips expenses                                                  3 040                2 655
Term deposits of legal entities                                              64 991       19 315
                                                                                                          Insurance contributions                                                  6 247                1 829
Current accounts of legal entities                                             25          805
                                                                                                          Representative expenses                                                  1 314                1 199
Total interest expense                                                      404 510       263 299
                                                                                                          Membership fees                                                           648                 522
Net interest income                                                         468 468       291 555
                                                                                                          Other                                                                    30 905              18 842
                                                                                                          Total administrative and other operating expenses                       395 665             281 491

19. Fee and Commission Income and Expense                                                                Included in staff costs are statutory social security and pension contributions of RR 23 646 thousand (2007:
                                                                                                         RR 10 928 thousand).

In thousands of Russian Roubles                                               2008         2007
                                                                                                         21. Income Taxes
                                                                                                         Income tax expense comprises the following:

Fee and commission income
- Settlement transactions                                                    77 042       31 492          In thousands of Russian Roubles                                           2008                2007
- Cash transactions                                                          19 554       25 584
- Transactions with plastic cards                                            28 165       12 407
- Guarantees issued                                                           9 966        4 041
- Other                                                                      12 723        5 820
                                                                                                          Current tax                                                              59 028              33 680
Total fee and commission income                                              147 450      79 344
                                                                                                          Deferred tax                                                            (10 624)              3 124
Fee and commission expense
                                                                                                          Income tax expense for the year                                          48 404              36 804
- Settlement transactions                                                    32 758        4 547
- Transactions with plastic cards                                            11 704        6 450
- Guarantees received                                                         3 027         877          The income tax rate applicable to the majority of the Bank’s income is 24% (2007: 24%). A reconciliation
                                                                                                         between the expected and the actual taxation charge is provided below. On 26 November 2008, the Russian
- Cash transactions                                                            201         1 300
                                                                                                         Federation reduced the standard corporate income tax rate from 24% to 20% with effect from 1 January
- Other                                                                         -          1 211         2009. The impact of the change in tax rate presented below represents the effect of applying the reduced
Total fee and commission expense                                             47 690       14 385         20% tax rate to deferred tax balances at 31 December 2008.
Net fee and commission income                                                99 760       64 959

                                                                                                    74                         75
                                                                                                                                                    THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                              BANK FINANCIAL STATEMENTS
                                                              AND INDEPENDENT AUDITORS’ REPORT                                                      ANNUAL REPORT 2008

                                                                                                                              22. Financial Risk                                           The Internal Audit Department reports directly to the
                                                                                                                                                                                           Supervisory Board. The Internal Audit Department’s
                                                                                                                                                                                           working plans, schedule of audits and its reports,
 In thousands of Russian Roubles                                                    2008                      2007
                                                                                                                              Management                                                   including non-planned audits, are closely reviewed
                                                                                                                                                                                           and approved by the Supervisory Board.
                                                                                                                              The risk management function within the Bank is
                                                                                                                              carried out in respect of financial risks (credit, mar-      The Credit Committee consists of five members
                                                                                                                              ket, geographical, currency, liquidity and interest          elected by the Supervisory Board. The Credit Com-
                                                                                                                              rate), operational risks and legal risks. The taking         mittee manages and approves, or recommends for
 Theoretical tax charge at the applicable statutory rate (2008: 24%;                                                          of risk is integral to the Bank’s business. The pri-         approval, corporate, retail and financial organisa-
 2007: 24%)                                                                       33 106                     22 326           mary objectives of the financial risk management             tions’ counterparty credit risk exposures within its
                                                                                                                              function are to establish risk limits, and then ensure       credit approval authority. It also continuously re-
                                                                                                                              that exposure to risks stays within these limits. The        views and makes recommendations as to analysis
 Tax effect of items which are not deductible or assessable for                                                               operational and legal risk management functions              methodology and portfolio quality, including over-
 taxation purposes:                                                                                                           are intended to ensure proper functioning of inter-          all structure, diversification and pricing. The Credit
 - Non deductible expenses                                                        13 723                     14 478           nal policies and procedures to minimise operational          Committee is one of the bodies which ensures ad-
                                                                                                                              and legal risks. The Bank’s risk management func-            herence to all approval and authority limits and high
 - Effect of reduction in tax rate to 20% enacted in 2008 with effect
                                                                                                                              tion’s aim is to achieve an appropriate balance be-          standards for risk analysis and assessments.
 from 1 January 2009                                                               1 575                       -
                                                                                                                              tween risk and return and to minimise potential ad-
 Income tax expense for the year                                                  48 404                     36 804           verse effects on the Bank’s financial performance.           ALCO is responsible for the management and opti-
                                                                                                                                                                                           misation of the Bank’s asset and liability structure.
                                                                                                                              The risk management framework. The risk man-                 It is an integral part of the risk management proc-
Differences between IFRS and Russian statutory taxation regulations give rise to certain temporary differ-                    agement function is an integral part of the Bank’s in-       ess that focuses on various market risks, including
ences between the carrying amount of some assets and liabilities for financial reporting purposes and their                   ternal control system and is centralised. The Bank’s         liquidity, foreign currency and interest rate risks.
tax bases. The tax effect of the movement on these temporary differences is recorded at the rate of 20%                       risk management policies and approaches aim to               ALCO’s functions include making recommenda-
(2007: 24%).                                                                                                                  identify, analyse, mitigate and manage the risks             tions for approval of strategies, policies and limits
                                                                                                                              faced by the Bank. This is accomplished through              associated with the aforementioned risks. It is re-
                                                                                                                              setting appropriate risk limits and controls, continu-       sponsible for providing timely and reliable informa-
                                                                                                                              ously monitoring risk levels and the adherence to            tion and reports regarding these risk areas. ALCO
                                                          31 December   Charged to                           31 December      limits and procedures and ensuring that business             assists in setting pricing policies and funding strat-
 In thousands of Russian Roubles                                                           directly to net
                                                              2007      profit or loss                           2008
                                                                                               assets                         processes are correctly formulated and maintained.           egies. It is also responsible, along with other risk
                                                                                                                                                                                           management and controlling units of the Bank, for
                                                                                                                              Risk Management policies and procedures are re-              ensuring that Treasury and other relevant units
                                                                                                                              viewed regularly to reflect changes in market condi-         work with the parameters set by ALCO, the Risk
                                                                                                                              tions, products and services offered and to ensure           Management Committee, the Executive Board and
                                                                                                                              that “best practices” are implemented. The Bank, as          the Supervisory Board.
 Tax effect of deductible temporary differences                                                                               part of its risk culture, emphasises integrity, man-
 Loan impairment provision                                  14 319         1 168                  -            15 487         agement and employee standards in order to main-             Credit risk. Credit risk is the risk of financial loss
                                                                                                                              tain and continuously improve upon a conservative            to the Bank if a customer or counterparty fails to
 Accruals and prepayments                                      -           2 332                        -       1 484                                                                      meet its contractual obligations when due. The ma-
                                                                                                                              control environment.
                                                                                                                                                                                           jor portion of credit risk arises from the Banks’ loans
 Finance leases                                              1 813        (1 321)                 -                492        Risk management bodies and governance. Risk                  and advances to customers and banks and other
                                                                                                                              management policy, assessment, approval, moni-               on and off balance sheet credit exposures.
 Provision for impairment of other assets                   (2 279)        2 279                  -                  -
                                                                                                                              toring and controls are conducted by a number of
 Discounting of loans from participant                      (3 400)        1 781                  -            (1 619)        specialised bodies within the Bank. These bodies             The Bank structures the levels of credit risk it under-
                                                                                                                              also oversee the risk management policies. The               takes by placing limits on the amount of risk accept-
 Premises and equipment                                     (87 308)       4 385              10 880           (72 043)
                                                                                                                              Bank has established executive bodies, commit-               ed in relation to one borrower, or groups of borrow-
 Total net deferred tax liability                           (77 703)      10 624              10 880           (56 199)       tees and departments, which conform to Russian               ers. Such risks are monitored on a revolving basis
                                                                                                                              law and the best industry practices.                         and subject to an annual or more frequent review.

                                                                                                                              Established by, appointed by and reporting directly          The Bank’s Credit Committee and the Committee
                                                          31 December   Charged to
                                                                                                             31 December
                                                                                                                              to Executive Board, the Risk Management Commit-              on Bank Cards set credit limits for borrowers:
 In thousands of Russian Roubles                                                           directly to net                    tee, the Credit Committee and the Asset and Liabil-
                                                              2006      profit or loss                           2007
                                                                                               assets                                                                                       The Credit Committee considers and approves
                                                                                                                              ity Committee (“ALCO”). The Internal Audit Depart-
                                                                                                                              ment subordinates to the Supervisory Board.                  limits up to USD 200 thousand. The Committee
                                                                                                                                                                                           meets on a regular basis. It is also responsible for
                                                                                                                              The Risk Management Committee is chaired by the              issuing guidance to lower level credit committees;
                                                                                                                              Member of the Executive Board responsible for risk
                                                                                                                              management. This Committee is responsible for                 The Credit Committee on Bank Cards considers
 Tax effect of deductible temporary differences
                                                                                                                              establishing risk management methodologies and               and approves credit limits below USD 50 thousand.
 Loan impairment provision                                   4 649         9 670                  -            14 319         ensuring that the risk appetite of the Bank is cor-          The Committee meets on a regular basis.
 Finance leases                                              (885)         2 698                  -             1 813         rectly reflected in the strategic and business plans         The Management Board takes decisions with re-
                                                                                                                              of the Bank. It is the main forum for discussing             gard to credit risk on applications from USD 200
 Accruals and prepayments                                    1 969        (2 817)                 -             (848)
                                                                                                                              and recommending changes in all risk approaches              thousand to USD 3 million; applications above USD
 Provision for impairment of other assets                   (2 279)           -                   -            (2 279)        and procedures to the Executive and Supervisory              3 million are referred to the Supervisory Board of
 Discounting of loans from participant                      (3 400)           -                   -            (3 400)        Boards. It ensures that the Risk Management De-              the Bank.
                                                                                                                              partment, the Credit Committee and ALCO, as well
 Premises and equipment                                    (23 878)      (12 675)            (50 755)         (87 308)        as the Executive Board, address all potential risks          Loan applications originated by the relevant client
 Total net deferred tax liability                          (23 824)       (3 124)            (50 755)         (77 703)        facing the Bank and reports on these issues to the           relationship managers are passed on to the rel-
                                                                                                                              Supervisory Board.                                           evant credit committee for approval of credit limit.

                                                                                                                         76                        77
                                                                                                                                              THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                                    ANNUAL REPORT 2008

The Bank uses the following methods to                    Bank with regard to the provision for impairment of       market is the investment, from time to time, in promissory notes and securities issued by other banks or legal
assess and manage credit risk:                            loans issued to customers is aimed to comply with         entities in order to help manage its liquidity position. The Bank does not normally trade in the derivatives
                                                          the CBRF Regulation on the procedure for book-            market and has no exposure to this market.
 acceptance of pledge, guarantees and warran-
                                                          ing provision for impairment of loans and equiva-
ties from third parties (companies and individuals)
                                                          lent debt. In its IFRS reporting, the Bank utilises the   Geographical risk concentrations. The geographical concentration of the Bank’s assets and liabilities at
as loan collateral;
                                                          methodology contained in IAS 39 – Financial Instru-       31 December 2008 is set out below:
 classification of borrowers by risk groups and          ments: Recognition and Measurement. For the ac-
loan assessment to calculate a provision for impair-      counting policy in accordance with IFRS regarding
ment of this category of financial assets.                impairment please refer to Note 3.
                                                                                                                     In thousands of Russian Roubles                                     Russia      OECD           CIS          Total
In order to monitor credit risk exposures, regular        Collateral and other credit enhancements. Cred-
reports are produced by officers of the Division          it risk for off-balance sheet financial instruments is
of Credit and Guarantee Transactions based on             defined as the possibility of sustaining a loss as
a structured analysis focusing on the customer’s          a result of another party to a financial instrument
business and financial performance. Any signifi-          failing to perform in accordance with the terms of
cant exposures against customers with deteriorat-         the contract. The Bank uses the same credit policy
                                                          in making conditional obligations as it does to on-        Assets
ing creditworthiness are reported to and reviewed
by the Management Board. The Bank does not use            balance sheet financial instruments through es-            Cash and cash equivalents                                          547 768    1 111 024      229 403      1 888 195
formalised internal credit ratings to monitor expo-       tablished credit approvals, risk control limits and
                                                                                                                     Mandatory cash balances with the Central Bank
sures to credit risk. The Division of Credit and Guar-    monitoring procedures. Exposure to credit risk is
                                                                                                                     of the Russian Federation                                           14 976         -             -         14 976
antee Transactions performs an ageing analysis of         also assessed and managed, in part, by obtaining,
loans and follows up past due balances. Manage-           controlling and monitoring collateral in the form of       Due from other banks                                               283 090         -             -        283 090
ment therefore considers it appropriate to provide        mortgage interests over property, pledge of assets         Loans and advances to customers                                   6 227 074    386 804       477 486      7 091 364
ageing and other information about credit risk as         and securities and other collateral including depos-
                                                                                                                     Current income tax prepayment                                       30 682         -                       30 682
disclosed in Note 9.                                      its, corporate and personal guarantees.
                                                                                                                     Premises and equipment                                             494 380         -             -        494 380
Credit risk management. Credit risk policy is de-         While collateral is an important mitigating factor in
                                                          assessing the credit risk, it is the Bank’s policy to      Other financial assets                                               3 260         -             -         3 260
veloped by the Credit Department and Executive
Board in line with the risk profile and strategic plans   establish that loans are within the customer’s ca-         Other assets                                                        23 715         -             -         23 715
of the Bank.                                              pacity to repay rather than to rely solely on secu-
                                                                                                                     Total assets                                                      7 624 945   1 497 828      706 889      9 829 662
                                                          rity. Collateral is considered as a secondary source
                                                          of repayment. In limited cases, depending on the
This policy establishes:
                                                          customer’s standing or on the type of product or           Liabilities
 Procedures for generating, analysing, reviewing         amounts, the facilities may be unsecured. The Bank
                                                          has in place various limits on the unsecured por-          Due to other banks                                                 185 953    1 746 901     3 198 160     5 131 014
and approving counterparty risk exposures;
                                                          tions of its risk portfolio.                               Customer accounts                                                 1 478 783   1 563 624      211 630      3 254 037
 The methodology for the credit assessment of
counterparties;                                           The principal types of collateral accepted by the          Loans from participants                                                  -         -         344 534      344 534
                                                          Bank are as follows:                                       Deferred tax liability                                              56 199         -             -         56 199
 The methodology for the credit rating of coun-
terparties;                                                Residential real estate                                  Other financial liabilities                                         25 824         -             -         25 824

 The methodology for the evaluation and control           Movables and equipment                                   Total liabilities excluding net assets attributable
                                                                                                                     to participant                                                    1 746 759   3 310 525     3 754 324     8 811 608
of collateral;                                             Guarantees received fronfrom the Parent Bank
 Credit documentation requirements;                       Cash deposits of the Parent Bank
                                                                                                                     Net position on geographical risk                                 5 878 186   (1 812 697)   (3 047 435)   1 018 054
 Loan administration procedures;                          Guarantees of individuals
 Procedures for the ongoing monitoring of credit         Maximum exposure to credit risk. The Bank’s                Credit related commitments (Note 24)                              1 079 145        -             -        1 079 145
exposures;                                                maximum exposure to credit risk is reflected in the
 Loan loss provisioning policy.                          carrying amounts of financial assets on the balance
                                                          sheet. The impact of possible netting of assets and       Assets, liabilities and credit related commitments have been based on the country in which the counterparty
For certain retail loan products, a credit scoring        liabilities to reduce potential credit exposure is not    is located. Balances with Russian counterparties actually outstanding to/from offshore companies of these
system is used, plus the Bank uses its internal da-       significant. The maximum credit risk for off-balance      Russian counterparties are allocated to the caption “Russia”. Cash on hand and premises and equipment
tabase and that of the CBRF to identify potentially       items, mainly letters of credit and guarantees, rep-      have been allocated based on the country in which they are physically located.
risky customers. Credit assessments are done on           resents the gross amount of the commitment. The
a portfolio basis concentrating on amount and term        Bank’s maximum exposure to off-balance credit risk
limits, approval procedures, target groups, types of      is disclosed in Note 24. The credit risk is mitigated
product, default statistics, loan/value ratios (if ap-    by collateral and other credit enhancements.
plicable), and pricing.
                                                          Market risk. The Bank is exposed to market risks.
Past due, non-performing loans. All past-dues             Market risks arise from open positions in interest
statistics are reported to the Credit Committee on at     rates, currency and equity products, all of which
least a monthly basis. All corporate loan past-due        are exposed to general and specific market move-
issues are individually reported to the Credit Com-       ments. The Bank manages market risk through
mittee.                                                   policies of very limited exposures to these risks and
                                                          periodic estimations of the Bank’s positions regard-
Allowance for loan losses – reserve policy. The           ing these risks.
Bank establishes an allowance for loan losses that
represents its estimate of losses incurred in its risk    The Bank does not have any trading positions in
exposures The calculation technique used by the           financial instruments. Its exposure to the securities

                                                                                                            78                                79
                                                                                                                                                        THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                                  BANK FINANCIAL STATEMENTS
                                                                  AND INDEPENDENT AUDITORS’ REPORT                                                      ANNUAL REPORT 2008

The geographical concentration of the Bank’s assets and liabilities at 31 December 2007 is set out below:                        The above analysis includes only monetary assets and liabilities. Investments in non-monetary assets are
                                                                                                                                 not considered to give rise to any material currency risk.
                                                                                                                                 The Bank issued loans and advances in foreign currency. Movements in foreign exchange rates may affect
 In thousands of Russian Roubles                                     Russia       OECD              CIS             Total
                                                                                                                                 the borrowers’ repayment ability and incurrence of loan losses.
                                                                                                                                 The following table presents sensitivities of profit or loss and equity to reasonably possible changes in ex-
                                                                                                                                 change rates applied at the balance sheet date, with all other variables held constant:

                                                                                                                                                                                               At 31 December 2008           At 31 December 2007
                                                                                                                                  In thousands of Russian Roubles
 Cash and cash equivalents                                          432 339      312 204          50 903          795 446
                                                                                                                                                                                               Impact on profit or loss     Impact on profit or loss
 Mandatory cash balances with the Central Bank
 of the Russian Federation                                           98 539          -                -           98 539
 Due from other banks                                              1 190 292         -                -          1 190 292
 Loans and advances to customers                                   4 376 245     143 908              -          4 520 153
                                                                                                                                  US Dollars strengthening by 25% (2007: 5%)                            (84 926)                   (7 320)
 Current income tax prepayment                                      480 923          -                -           480 923
                                                                                                                                  US Dollars weakening by 25% (2007: 5%)                                84 926                      7 320
 Premises and equipment                                              23 481          -                -           23 481
                                                                                                                                  Euro strengthening by 25% (2007: 5%)                                  (28 482)                     189
 Other assets                                                         4 365          -                -            4 365
                                                                                                                                  Euro weakening by 25% (2007: 5%)                                      28 482                      (189)
 Total assets                                                      6 606 184     456 112          50 903         7 113 199

 Due to other banks                                                 307 697     1 742 086       2 180 131        4 229 914       Other than as a result of any impact on the Bank’s             Current liquidity ratio (N3), which is calculated
                                                                                                                                 profit or loss, there is no other impact on the Bank’s        as the ratio of liquid assets to liabilities maturing
 Customer accounts                                                 1 064 693     532 539         133 294         1 730 526
                                                                                                                                 equity as a result of such changes in exchange                within 30 calendar days. The ratio was 153.2% at
 Loans from participants                                                         227 879              -           227 879        rates. The exposure was calculated only for mone-             31 December 2008 (2007: 86.3%).
 Taxation payable                                                    14 046          -                -           14 046         tary balances denominated in currencies other than
                                                                                                                                                                                                Long-term liquidity ratio (N4), which is calculat-
                                                                                                                                 the functional currency of the Bank.
 Deferred tax liability                                              77 703          -                -           77 703                                                                       ed as the ratio of assets maturing after one year to
                                                                                                                                 Liquidity risk. Liquidity risk is defined as the risk         regulatory capital and liabilities maturing after one
 Other financial liabilities                                         29 820          -                -           29 820
                                                                                                                                 that the Bank will encounter difficulty in meeting            year. The ratio was 45.1% at 31 December 2008
 Total liabilities excluding net assets attributable                                                                             obligations associated with financial liabilities. The        (2007: 84.7%).
 to participant                                                    1 493 959    2 502 504       2 313 425        6 309 888       Bank is exposed to daily calls on its available cash
                                                                                                                                                                                               The Treasury Department receives information
                                                                                                                                 resources from overnight deposits, client accounts,
                                                                                                                                                                                               about the liquidity profile of the financial assets and
                                                                                                                                 maturing deposits, loan draw downs and guaran-
 Net position on geographical risk                                 5 112 225    (2 046 392)     (2 262 522)       803 311                                                                      liabilities. The Treasury then provides for an ad-
                                                                                                                                 tees. The Bank does not maintain cash resources
                                                                                                                                                                                               equate portfolio of short-term liquid assets, largely
                                                                                                                                 to meet all of these needs as experience shows that
                                                                                                                                                                                               made up of short-term liquid promissory notes, de-
 Credit related commitments (Note 24)                               874 544          -                -           874 544        a minimum level of reinvestment of maturing funds
                                                                                                                                                                                               posits with banks and other inter-bank facilities, to
                                                                                                                                 can be predicted with a high level of certainty. Li-
                                                                                                                                                                                               ensure that sufficient liquidity is maintained within
                                                                                                                                 quidity management issues are within the authority
                                                                                                                                                                                               the Bank as a whole.
                                                                                                                                 of the Asset/Liability Committee of the Bank. Liquid-
Currency risk. The Bank takes on exposure to the effects of movements in foreign exchange rates to
                                                                                                                                 ity risk is managed by the Risk Committee of the              The daily liquidity position is monitored and regular
Russian rouble on its financial position and cash flows. The Management Board sets limits on the level of
                                                                                                                                 Bank.                                                         liquidity stress testing under a variety of scenarios
exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The
table below summarises the Bank’s exposure to foreign currency exchange rate risk at the balance sheet                                                                                         covering both normal and more severe market con-
                                                                                                                                 The Bank seeks to maintain a stable funding base
date:                                                                                                                                                                                          ditions is performed by the Treasury Department.
                                                                                                                                 comprising primarily amounts due to other banks
                                                                                                                                 and corporate customer/individual deposits and                The table below shows liabilities as at 31 Decem-
                                           At 31 December 2008                             At 31 December 2007                   invest the funds in diversified portfolios of liquid          ber 2008 by their remaining contractual maturity.
                                                                                                                                 assets, in order to be able to respond quickly and            The amounts disclosed in the table are the con-
 In thousands of Russian
                               Monetary          Monetary        Net balance   Monetary         Monetary         Net balance     smoothly to unforeseen liquidity requirements.                tractual undiscounted cash flows including total
                               financial         financial          sheet      financial        financial           sheet
                                                                                                                                                                                               finance lease obligations (before deducting future
                                assets           liabilities      position      assets          liabilities       position       The Bank’s liquidity management requires analysis
                                                                                                                                                                                               finance charges) and total commitments to issue
                                                                                                                                 of the level of liquid assets necessary to settle liabil-
                                                                                                                                                                                               loans. Such undiscounted cash flows differ from
                                                                                                                                 ities when due; providing access to various sources
                                                                                                                                                                                               the amount included in the balance sheet because
                                                                                                                                 of funding; availability of plans in case of funding
                                                                                                                                                                                               the balance sheet amount is based on discounted
                                                                                                                                 problems and exercise of control over compliance
 Russian Roubles               1 897 734         927 317          970 417      2 377 141        1 824 635         552 506                                                                      cash flows. When the amount payable is not fixed,
                                                                                                                                 of the balance sheet liquidity ratios with the statuto-
 US Dollars                    4 960 746        5 300 448        (339 702)     4 116 551        4 263 319        (146 768)                                                                     the amount disclosed is determined by reference to
                                                                                                                                 ry requirements. The Bank calculates liquidity ratios
                                                                                                                                                                                               the conditions existing at the reporting date. Foreign
 Euro                          2 413 712        2 527 639        (113 927)     124 526          120 754            3 772         on a daily basis in accordance with the requirement
                                                                                                                                                                                               currency payments are translated using the spot ex-
                                                                                                                                 of the Central Bank of Russia. These ratios are:
 Other                             8 693               5           8 688        9 693             9 431             262                                                                        change rate at the balance sheet date.
                                                                                                                                  Instant liquidity ratio (N2), which is calculated as
 Total                         9 280 885        8 755 409         525 476      6 627 911        6 218 139         409 772
                                                                                                                                 the ratio of highly-liquid assets to liabilities payable
                                                                                                                                 on demand. The ratio was 115.7% at 31 December
                                                                                                                                 2008 (2007: 59.9%).

                                                                                                                            80                         81
                                                                                                                                                                      THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                                      BANK FINANCIAL STATEMENTS
                                                                      AND INDEPENDENT AUDITORS’ REPORT                                                                ANNUAL REPORT 2008

The undiscounted maturity analysis of financial liabilities at 31 December 2008 is as follows:                                              The Bank does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Bank
                                                                                                                                            monitors expected maturities, which may be summarised as follows at 31 December 2008:

                                                                                               From 12
                                           and less          From 1         From 3 to                           Over                                                                        Demand
 In thousands of Russian Roubles                                                               months                          Total
                                             than         to 3 months       12 months                          5 years                                                                      and less    From 1 to     From 6 to     Over
                                                                                              to 5 years                                     In thousands of Russian Roubles                                                                  Overdue     Total
                                           1 month                                                                                                                                            than      6 months      12 months   12 months
                                                                                                                                                                                            1 month

 Liabilities                                                                                                                     -
 Due to other banks                       217 046         1 463 458         3 202 466         258 238           8 014       5 149 222        Assets

 Customer accounts – individuals          463 824            46 545          204 888           25 395             -          740 652         Cash and cash equivalents                     1 888 195        -             -           -          -      1 888 195

 Customer accounts – other                1 137 713        564 535           841 962              -               -         2 544 210        Mandatory cash balances
                                                                                                                                             with the Central Bank
 Subordinated debt                            -              5 979             18 269         283 470          157 743       465 461         of the Russian Federation                      14 976          -             -           -          -       14 976
 Other financial liabilities                514              15 746            3 795           1 725              -          21 780          Due from other banks                          140 028      143 062                                         283 090
 Financial guarantees                      1 766             18 940            2 969          200 000             -          223 674         Loans and advances to customers               272 605     3 628 529      2 417 714   691 608     80 908    7 091 364
 Other credit related commitments         391 208            95 428          305 667           63 168             -          855 471         Other financial assets                         3 260           -             -           -          -       3 260
 Total potential future payments
 for financial obligations                2 212 071       2 210 631         4 580 016         831 997          165 757      10 000 472
                                                                                                                                             Total financial assets                        2 319 064   3 771 591      2 417 714   691 608     80 908    9 280 885

 Net assets attributable
 to participant                               -                -                 -            1 018 054           -         1 018 054        Liabilities
                                                                                                                                             Due to other banks                            140 424     2 533 676      2 186 014   270 900        -      5 131 014
                                                                                                                                             Customer accounts                             1 785 050   1 174 838      272 184      21 965        -      3 254 037
                                                                                                                                             Subordinated debt                                 -            -             -       344 534        -      344 534
The maturity analysis of financial liabilities at 31 December 2007 is as follows:
                                                                                                                                             Other financial liabilities                    25 824          -             -           -          -       25 824
                                                                                                                                             Total financial liabilities                   1 951 298   3 708 514      2 458 198   637 399        -      8 755 409
                                                                                                   From 12
                                                  and less         From 1 to     From 3 to                         Over
 In thousands of Russian Roubles                                                                   months                      Total
                                                    than           3 months      12 months                        5 years
                                                                                                  to 5 years                                 Net liquidity gap at 31 December 2008         367 766       63 077       (40 484)     54 209     80 908    525 476
                                                  1 month

                                                                                                                                             Cumulative liquidity gap
                                                                                                                                             at 31 December 2008                           367 766      430 843       390 359     444 568     525 476       -

 Due to other banks                               298 208          497 242       3 317 213        303 049             -      4 415 712      The above analysis is based on expected maturities. The entire portfolio of trading securities is therefore
                                                                                                                                            classified within demand and less than one month based on management’s assessment of the portfolio’s
 Customer accounts – individuals                  126 191          58 618         183 135             48 341          -      416 285
 Customer accounts – other                    1 232 393            61 046            28 234             -             -      1 321 673
 Other borrowed funds                                 -             3 901            11 704       311 267             -      326 872
 Other financial liabilities                       818              1 484            3 238            2 006           -        7 546
 Financial guarantees                              5 953               -             1 889        136 548        12 274      156 664
 Other credit related commitments                 311 498          196 370        210 012               -             -      717 880
 Total potential future payments for
 financial obligations                        1 975 061            818 661       3 755 425        801 211        12 274      7 362 632

 Net assets attributable to participant               -                -                -         803 311             -      803 311

Customer accounts are classified in the above analysis based on contractual maturities. However, in accord-
ance with Russian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they forfeit
their right to accrued interest.

                                                                                                                                       82                           83
                                                                                                                                                   THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                               BANK FINANCIAL STATEMENTS
                                                               AND INDEPENDENT AUDITORS’ REPORT                                                    ANNUAL REPORT 2008

The analysis by expected maturities may be summarised as follows at 31 December 2007:

                                                                                                                                                                            Demand and
                                                                                                                                                                                              From 1 to 6   From 6 to 12         More than
                                                                                                                          In thousands of Russian Roubles                    less than                                                             Total
                                                  Demand and                                                                                                                                    months        months              1 year
                                                                 From 1 to 6   From 6 to 12     Over                                                                          1 month
 In thousands of Russian Roubles                   less than                                                Total
                                                                   months        months       12 months
                                                    1 month

                                                                                                                          31 December 2007
 Assets                                                                                                                   Total financial assets                             1 764 021        1 904 715     1 885 796           1 073 379        6 627 911
 Cash and cash equivalents                          795 446           -             -             -       795 446         Total financial liabilities                        1 698 887        1 186 417     2 786 082            546 753         6 218 139
 Mandatory cash balances with the Central                                                                                 Net interest sensitivity gap
 Bank of the Russian Federation                      98 539           -             -             -        98 539         at 31 December 2007                                 65 134           718 298      (900 286)            526 626         409 772
 Due from other banks                               693 285       497 007           -             -       1 190 292
 Loans and advances to customers                    153 270      1 407 708     1 885 796      1 073 379   4 520 153       31 December 2008
 Other financial assets                              23 481           -             -             -        23 481         Total financial assets                             2 319 064        3 771 591     2 417 714            772 516         9 280 885
 Total financial assets                            1 764 021     1 904 715     1 885 796      1 073 379   6 627 911       Total financial liabilities                        1 951 298        3 708 514     2 458 198            637 399         8 755 409
                                                                                                                          Net interest sensitivity gap
 Liabilities                                                                                                              at 31 December 2008                                 367 766          63 077        (40 484)            135 117         525 476

 Due to other banks                                 310 604       996 098      2 651 314      271 898     4 229 914
 Customer accounts                                 1 358 463      190 319       134 768        46 976     1 730 526      At 31 December 2008, if interest rates at that date had been 50 basis points lower with all other variables
 Other borrowed funds                                   -             -             -         227 879     227 879        held constant, the profit for the year would have been RR 2 690 thousand (2007: RR 2 105 thousand) higher,
                                                                                                                         mainly as a result of lower interest expense on floating rate liabilities. If interest rates at that date had been
 Other financial liabilities                         29 820           -             -             -        29 820
                                                                                                                         50 basis points higher with all other variables held constant, the profit for the year would have been RR 2
 Total financial liabilities                       1 698 887     1 186 417     2 786 082      546 753     6 218 139      690 thousand (2007: RR 2 105 thousand) lower, mainly as a result of higher interest expense on floating rate

 Net liquidity gap at 31 December 2007               65 134       718 298      (900 286)      526 626     409 772        The Bank is exposed to cash flow interest rate risk, principally through assets and liabilities for which interest
                                                                                                                         rates are reset as market rates change. These assets and liabilities are presented in the above table as being
                                                                                                                         repriced in the short-term. The Bank is exposed to fair value interest rate risk as a result of assets and liabili-
 Cumulative liquidity gap                                                                                                ties at fixed interest rates; these are primarily presented in the above table as being repriced in the long-term.
 at 31 December 2007                                 65 134       783 432      (116 854)      409 772         -          In practice, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to
                                                                                                                         reflect current market conditions.
The matching and/or controlled mismatching of the              Liquidity requirements to support calls under guar-       The Bank monitors interest rates for its financial instruments. The table below summarises interest rates
maturities and interest rates of assets and liabilities        antees and standby letters of credit are consider-        based on reports reviewed by key management personnel:
is fundamental to the successful management of                 ably less than the amount of the commitment be-
the Bank. It is unusual for banks ever to be com-              cause the Bank does not generally expect the third                                                                               2008                                   2007
pletely matched since business transacted is often             party to draw funds under the agreement. The total
of an uncertain term and of different types. An un-            outstanding contractual amount of commitments to           In % p.a.
matched position potentially enhances profitability,           extend credit does not necessarily represent future                                                               US Dollars        RR       Euro     US Dollars          RR          Euro
but can also increase the risk of losses. The maturi-          cash requirements, since many of these commit-
ties of assets and liabilities and the ability to replace,     ments will expire or terminate without being funded.
at an acceptable cost, interest-bearing liabilities as
they mature, are important factors in assessing the            Interest rate risk. The Bank takes on exposure             Assets
liquidity of the Bank and its exposure to changes in           to the effects of fluctuations in the prevailing lev-
                                                                                                                          Cash and cash equivalents                                  0              -        -             3.7               -         -
interest and exchange rates. Management believes               els of market interest rates on its financial position
that in spite of a substantial portion of customers            and cash flows. Interest margins may increase as           Due from other banks                                         -        12.2         -             3.9           6.3         4.9
accounts being on demand, diversification of these             a result of such changes but may reduce or cre-            Loans and advances to customers                           14.6        16.7        15.5        13.6            15.8         13.2
deposits by number and type of depositors, and                 ate losses in the event that unexpected movements
the past experience of the Bank would indicate that            arise. Management monitors on a daily basis and
these customer accounts provide a long-term and                sets limits on the level of mismatch of interest rate      Liabilities
stable source of funding for the Bank.                         repricing that may be undertaken.                          Due to other banks                                        5.9         12.3        7.5            6.9          9.29           -
Customer accounts are classified in the above anal-            The table below summarises the Bank’s exposure             Customer accounts                                                                                 -                -         -
ysis based on contractual maturities. However, in              to interest rate risks. The table presents the aggre-      - current and settlement accounts                            -            -        -              -                -         -
accordance with the Civil Code of the RF, individu-            gated amounts of the Bank’s assets and liabilities
als have a right to withdraw their deposits prior to           at carrying amounts, categorised by the earlier of         - term deposits                                           10.2           9.8      8.2            8.3           7.2         5.1
maturity if they forfeit their right to a certain portion      contractual interest repricing or maturity dates.          Subordinated loan                                         6.8             -        -             6.3               -         -
of accrued interest.
                                                                                                                          Finance lease liabilities                                    -        25.0         -              -           28.2           -

                                                                                                                         The sign “-“ in the table above means that the Bank does not have the respective assets or liabilities in cor-
                                                                                                                         responding currency.

                                                                                                                    84                           85
                                                                                                                                        THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                         BANK FINANCIAL STATEMENTS
                                                         AND INDEPENDENT AUDITORS’ REPORT                                               ANNUAL REPORT 2008

23. Management of Capital                                                                                        24. Contingencies                                             Compliance with covenants. As stipulated in the
                                                                                                                                                                               loan agreement (refer to Note 13) the Bank is sub-
                                                                                                                                                                               ject to certain financial and non-financial covenants.
The Bank’s objectives when managing capital are (i) to comply with capital requirements set by the CBRF,
                                                                                                                 and Commitments                                               Non-financial liabilities of the Bank represent re-
                                                                                                                                                                               quirements on submission of statutory accounting
and (ii) to safeguard the Bank’s ability to continue as a going concern. Compliance with capital adequacy
                                                                                                                                                                               reports of the Bank and financial statements of the
ratios set by the CBRF, is monitored daily with reports outlining their calculation reviewed and signed by the   Legal proceedings. From time to time and in the               Guarantor on loans. Under financial liabilities the
Deputy Chairman of the Management Board and the Chief Accountant and sent to the CBRF on a monthly               normal course of business, claims against the Bank            Bank should ensure (during the term of an agree-
basis.                                                                                                           may be received. On the basis of its own estimates            ment) compliance with the CBRF ratios as well as
                                                                                                                 and internal professional advice management is of             contractual minimum capital adequacy, tangible
Under the current capital requirements set by the CBRF banks have to maintain a ratio of regulatory capital to
                                                                                                                 the opinion that no material losses will be incurred          net worth. Non-compliance with such covenants
risk weighted assets (“statutory capital ratio”) above a prescribed minimum level. Regulatory capital is based
                                                                                                                 in respect of claims and accordingly no provision             may result in negative consequences for the Bank
on the Bank’s reports prepared under Russian accounting standards and comprises:
                                                                                                                 has been made in these financial statements.                  including growth in the cost of borrowings and dec-
                                                                                                                 Tax legislation. Russian tax and customs legisla-             laration of default. Management believes that the
                                                                                                                 tion is subject to varying interpretations, and chang-        Bank is in compliance with the above covenants as
 In thousands of Russian Roubles                                    2008                      2007               es, which can occur frequently. Management’s                  at 31 December 2008 and throughout the year then
                                                                                                                 interpretation of such legislation as applied to the          ended (2007: no instances of non compliance).
                                                                                                                 transactions and activity of the Bank may be chal-            Credit related commitments. The primary pur-
                                                                                                                 lenged by the relevant authorities.                           pose of these instruments is to ensure that funds
                                                                                                                 The Russian tax authorities may be taking a more              are available to a customer as required. Guaran-
                                                                                                                 assertive and sophisticated approach in their inter-          tees, which represent irrevocable assurances that
 Net assets under Russian GAAP                                    746 674                    643 370                                                                           the Bank will make payments in the event that a
                                                                                                                 pretation of the legislation and tax examinations.
 Less intangible assets                                             (14)                      (16)               This includes them following guidance from the Su-            customer cannot meet its obligations to third par-
                                                                                                                 preme Arbitration Court for anti-avoidance claims             ties, carry the same credit risk as loans. Documen-
 Plus subordinated debt                                           270 300                    211 097
                                                                                                                 based on reviewing the substance and business                 tary letters of credit which are written undertakings
 Total regulatory capital                                        1 016 960                   854 451             purpose of transactions. Combined with a possible             by the Bank on behalf of a customer authorising a
 Actual adequacy of equity (capital)                               13.5%                     12.6%               increase in tax collection efforts to respond to budg-        third party to draw drafts on the Bank up to a stipu-
                                                                                                                 et pressures, the above may lead to an increase in            lated amount under specific terms and conditions,
 Normative ratio of equity (capital) adequacy                      10.0%                     10.0%                                                                             are collateralised by the underlying shipments of
                                                                                                                 the level and frequency of scrutiny by the tax au-
                                                                                                                 thorities. In particular, it is possible that transactions    goods to which they relate or cash deposits and
The capital that the Bank manages is consistent with the amount required by the CBRF for statutory capital       and activities that have not been challenged in the           therefore carry less risk than a direct borrowing.
adequacy purposes. The amount of capital that the Bank manages as at 31 December 2008 is RR 1 016 960            past may be challenged.
thousand (2007: RR 854 451 thousand).
                                                                                                                 As a result, significant additional taxes, penalties
The Bank is also subject to minimum capital requirements established by covenants stated in the loan agree-      and interest may be assessed. Fiscal periods re-
ment described in the Note 13, including capital adequacy levels as required by the laws of RF, calculated on    main open to review by the authorities in respect of
the basis of the Bank for International Settlements regulaionsregulations and Tangible Net Worth. “Tangible      taxes for three calendar years preceding the year of
Net Worth” means the aggregate of the amount paid up or credited as paid up on the contributed capital           review. Under certain circumstances reviews may
adjusted by certain dimensions based on its latest audited balance sheet.                                        cover longer periods.
The composition of the Bank’s Tangible Net Worth calculated, based on the financial statements of the Bank,      Management of the Bank believes that its interpre-
is as follows:                                                                                                   tation of the relevant legislation is appropriate and
                                                                                                                 the Bank’s tax, currency and customs positions will
                                                                                                                 be sustained. Therefore, as at 31 December 2008,
                                                                                                                 Management has not created any provision for po-
 In thousands of Russain Roubles                                                 2008                            tential tax liabilities (2007: nil).
                                                                                                                 Capital expenditure commitments. As at 31 De-
                                                                                                                 cember 2008 and 31 December 2007 the Bank had
                                                                                                                 no capital expenditure commitments.
                                                                                                                 Operating lease commitments. As at 31 Decem-
 Participant’s contributions                                                   544 663                           ber 2008 and 31 December 2007, the Bank had no
                                                                                                                 operating lease commitments.
 Retained earnings                                                             187 106
 Reserves                                                                      286 285
 Less: Intangible assets                                                       (15 353)
 Less: Revaluation reserve for premises                                       (255 256)
 Less: Deferred tax accruals                                                    56 199

 Current year profit                                                            89 536
 Total Tangible Net Worth                                                      893 180

Management believes that the Bank is in compliance with the requirement towards the Tangible Net Worth as
at 31 December 2008 and throughout the year then ended (2007: no instances of non compliance).

                                                                                                         86                            87
                                                                                                                                         THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                          BANK FINANCIAL STATEMENTS
                                                          AND INDEPENDENT AUDITORS’ REPORT                                               ANNUAL REPORT 2008

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of
loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is   25. Fair Value of                                            continue to limit the volume of activity in the finan-
                                                                                                                                                                                cial markets. Market quotations may be outdated or
potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount                                                                      reflect distress sale transactions and therefore not
of loss is less than the total unused commitments since most commitments to extend credit are contingent           Financial Instruments                                        represent fair values of financial instruments. Man-
upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit re-                                                                      agement has used all available market information
lated commitments because longer-term commitments generally have a greater degree of credit risk than                                                                           in estimating the fair value of financial instruments.
shorter-term commitments. Outstanding credit related commitments are as follows:                                   Fair value is the amount at which a financial instru-
                                                                                                                   ment could be exchanged in a current transaction             Financial instruments carried at fair value. Cash
                                                                                                                   between willing parties, other than in a forced sale         and cash equivalents are carried at amortised cost
                                                                                                                   or liquidation, and is best evidenced by an active           which approximates current fair value. Refer to
                                                                     2008                       2007               quoted market price.                                         Note 7.
                                                                                                                   The estimated fair values of financial instruments           Loans and receivables carried at amortised
                                                                                                                   have been determined by the Bank using available             cost. The estimated fair value of fixed interest rate
                                                                                                                   market information, where it exists, and appropri-           instruments is based on estimated future cash flows
                                                                                                                   ate valuation methodologies. However, judgment is            expected to be received discounted at current in-
                                                                                                                   necessarily required to interpret market data to de-         terest rates for new instruments with similar credit
 Import letters of credit                                          582 377                    406 382              termine the estimated fair value. The Russian Fed-           risk and remaining maturity. Discount rates used
 Unused limits on overdraft loans                                  165 235                    295 280              eration continues to display some characteristics            depend on currency, maturity of the instrument and
                                                                                                                   of an emerging market and economic conditions                credit risk of the counterparty and were as follows:
 Undrawn credit lines                                              107 859                     16 218
 Guarantees issued                                                 223 675                    156 664
 Total credit related commitments                                 1 079 146                   874 544
                                                                                                                                                                                           2008                       2007

The total outstanding contractual amount of undrawn overdraft limits, letters of credit, and guarantees does
not necessarily represent future cash requirements, as these financial instruments may expire or terminate
without being funded.
Credit related commitments are denominated in currencies as follows:                                                Due from other banks –Note 8
                                                                                                                    Term placements with other banks                                     11% p.a.             1.5% to 10.3% p.a.
                                                                                                                    Promissory notes of Russian banks                              12.0% to 15.0% p.a.           7% to9% p.a.
 In thousands of Russian Roubles                                     2008                       2007

                                                                                                                    Loans and advances to customers – Note 9
                                                                                                                    Corporate loans                                                10.0% to 25.0% p.a.         12% to 26% p.a.
                                                                                                                    Loans to individuals – consumer loans                          12.0% to 24.0% p.a.         12% to 20% p.a.
                                                                                                                    Loans to individuals – entrepreneurs                                 20% p.a.                  17% p.a
 US Dollars                                                        561 039                    625 896
                                                                                                                    Loans to individuals – overdrafts                              10.0% to 36.0% p.a.         12% to 36% p.a.
 Russian Roubles                                                   333 961                    211 218
                                                                                                                    Loans to individuals – mortgage loans                                   -                  12% to 18% p.a.
 Euro                                                              184 146                     37 430
 Total                                                            1 079 146                   874 544

Fiduciary assets. These assets are not included in the Bank’s balance sheet as they are not assets of the
Bank. Nominal values of fiduciary assets are normally different from the fair values of respective securities.     Refer to Notes 8 and 9 for the estimated fair values of due from other banks and loans and advances to
As at 31 December 2008 the Bank had fiduciary assets of RR 13 966 087 thousand (2007: RR 3 301 089                 customers, respectively.
thousand) which included promissory notes of the International Bank of Azerbaijan held in the Bank.
                                                                                                                   Liabilities carried at amortised cost. The estimated fair value of fixed interest rate instruments with stated
                                                                                                                   maturity, for which a quoted market price is not available, was estimated based on expected cash flows
                                                                                                                   discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The
                                                                                                                   fair value of liabilities repayable on demand or after a notice period (“demandable liabilities”) is estimated as
                                                                                                                   the amount payable on demand, discounted from the first date that the amount could be required to be paid.
                                                                                                                   Refer to Notes 13, 14 and 16 for the estimated fair values of due to other banks, customer accounts and
                                                                                                                   subordinated debt, respectively. The estimated fair value of finance lease liabilities represent an amount of
                                                                                                                   expected cash flows discounted at the interest rate implicit in the lease. The estimated fair value of finance
                                                                                                                   lease receivables is disclosed in Note 15. Discount rates used were consistent with the Bank’s credit risk and
                                                                                                                   also depend on currency and maturity of the instrument and ranged from 4.0% p.a. to 15% p.a. (2007: from
                                                                                                                   4% p.a. to 12% p.a.).

                                                                                                           88                           89
                                                                                                                                                 THE INTERNATIONAL BANK OF AZERBAIJAN – MOSCOW
                                                               BANK FINANCIAL STATEMENTS
                                                               AND INDEPENDENT AUDITORS’ REPORT                                                  ANNUAL REPORT 2008

26. Reconciliation                                                                                                        27. Related Party Transactions
of Classes of Financial Instruments                                                                                       For the purposes of these financial statements, parties are considered to be related if one party has the ability
with Measurement Categories                                                                                               to control the other party, is under common control, or can exercise significant influence over the other party
                                                                                                                          in making financial or operational decisions. In considering each possible related party relationship, attention
                                                                                                                          is directed to the substance of the relationship, not merely the legal form.
For the purposes of measurement, IAS 39, Financial Instruments: Recognition of Measurement, classifies                    International Bank of the Republic of Azerbaijan is the direct parent company of the Bank and is controlled
financial assets into the following categories: (a) loans and receivables; (b) available for sale financial assets;       by. the Government of the Republic of Azerbaijan. International Bank of Azerbaijan Republic-Georgia (“IBAR
(c) financial assets held to maturity and (d) financial assets at fair value through profit or loss (“FVTPL”). Fi-        Georgia”) is a related party under common control of the Parent Bank.
nancial assets at fair value through profit or loss have two subcategories: (i) assets designated as such upon
initial recognition, and (ii) those classified as held for trading. The following table provides a reconciliation of      At 31 December 2008, the outstanding balances with related parties were as follows:
classes of financial assets with these measurement categories.

                                                                                                                           In thousands of Russian Roubles                                             Parent Bank         IBAR Georgia

                                                         2008                                     2007

 In thousands of Russian Roubles                       Available-                             Available-
                                          Loans and                              Loans and
                                                        for-sale       Total                   for-sale      Total
                                         receivables                            receivables
                                                         assets                                 assets
                                                                                                                           Cash and cash equivalents (contractual interest rate: 0%-3% p.a.)            164 974              29 526
                                                                                                                           Due to other banks (contractual interest rate: 7%-7.5% p.a.)                3 159 357              147
                                                                                                                           Loans from participant (contractual interest rate: 5.2%-9% p.a.)             344 534                 -
 Cash and cash equivalents               1 888 195         -        1 888 195    795 446           -       795 446
 Mandatory cash balances with the                                                                                         The income and expense items with related parties for 2008 were as follows:
 CBRF                                     14 976           -         14 976       98 539           -        98 539

 Due from other banks                     283 090                    283 090    1 190 292                  1 190 292       In thousands of Russian Roubles                                             Parent Bank         IBAR Georgia
 - Term placements with other banks       90 237           -         90 237      584 473           -       584 473
 - Promissory notes of Russian banks      192 853          -         192 853     605 819           -       605 819

 Loans and advances
 to customers                            7 091 364                  7 091 364   4 520 153                  4 520 153       Interest income                                                                1 811                139
 - Corporate loans                       6 443 226         -        6 443 226   3 871 347          -       3 871 347       Interest expense                                                             (176 063)               -
 - Loans to individuals –                                                                                                  Foreign exchange translation gains less losses                               (516 619)             4 857
 consumer loans                           620 666          -         620 666     615 355           -       615 355
                                                                                                                           Fee and commission income                                                       548                  6
 - Loans to individuals –
 entrepreneurs                             5 348           -          5 348       2 789            -        2 789          Fee and commission expense                                                   (11 047)                -

 - Overdrafts                             22 124           -         22 124       25 398           -        25 398         Results from operations with trading securities                              219 121                 -
 - Mortgage loans                             -            -             -        5 264            -        5 264
                                                                                                                          At 31 December 2008, other rights and obligations with related parties were as follows:
 Other financial assets:                   3 260                      3 260       23 481                    23 481
 Trade receivables                         1 235           -          1 235       1 920            -        1 920
 Claims to customers on claims             2 025           -          2 025          -             -           -           In thousands of Russian Roubles                                             Parent Bank        IBAR Georgia

 Receivables on operations
 with plastic cards                           -            -             -        21 561           -        21 561
 Total financial assets                  9 280 885         -        9 280 885   6 627 911          -       6 627 911

 Non-financial assets                     548 777          -         548 777     485 288           -       485 288         Guarantees received by the Bank at the year end                             6 273 991                -

 Total assets                            9 829 662         -        9 829 662   7 113 199                  7 113 199

All of the Bank’s financial liabilities are carried at amortised cost.

                                                                                                                     90                         91
                                                         BANK FINANCIAL STATEMENTS
                                                         AND INDEPENDENT AUDITORS’ REPORT

At 31 December 2007, the outstanding balances with related parties were as follows:

 In thousands of Russian Roubles                                                       Parent Bank

 Cash and cash equivalents (contractual interest rate: 0%-3 % p.a.)                      21 744
 Due to other banks (contractual interest rate: 6.2%-7.4% p.a.)                        2 110 093
 Loans from participant (contractual interest rate: 5.2% p.a.)                          227 883

The income and expense items with related parties for 2007 were as follows:

 In thousands of Russian Roubles                                                       Parent Bank

 Interest income                                                                            6
 Interest expense                                                                       (136 417)
 Foreign exchange translation gains less losses                                          153 108
 Fee and commission income                                                                  465
 Fee and commission expense                                                               (841)
 Results from operations with trading securities                                         82 659

At 31 December 2007, other rights and obligations with related parties were as follows:

 In thousands of Russian Roubles                                                        Parent Bank

 Guarantees received by the Bank at the year end                                        2 558 843

Key management of the Bank include the members of the Board of directors of the Bank in the amount of 7
people (2007: 7). Key management compensation is presented below:

                                                                                2008                   2007

 In thousands of Russian Roubles

                                                                              Expenses               Expenses

 Short-term benefits:
 - Salaries                                                                    18 916                 6 766
 - Short-term bonuses                                                          1 466                  3 931
 - Bonus to mark the fifth anniversary of the Bank                                -                    655
 Total                                                                         20 382                 11 352

28. Events After the Balance Sheet Date
In December 2008, the Bank’s sole participant increased its contributions into the Bank by RR 103 740 thou-
sand. The Central Bank of the Russian Federation registered changes in the Bank’s charter on 21 January
2009. Refer to Note 17.


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