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Annual Report 2008 - MDM Bank

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Annual Report 2008 - MDM Bank Powered By Docstoc
					      Annual report 2008




      Contents



2     Chairman and CEO Statement
7     MDM Bank’s Mission, Vision and Values
8     Key Indicators
10    Legal and Ownership Structure
12    Overview of the Russian Economy and Banking Sector
19    Planned Merger of MDM Bank and URSA Bank
21    Regional Expansion and Branch Network
25    Management Discussion and Analysis
53    Review of Business Units
53              Corporate and Investment Banking
57              Private Banking
59              Retail Banking
63              Small Business Banking
65    Information Technology
67    Corporate Governance and Management
82    Internal Control
84    Risk Management
88    Compliance Control
89    Internal Audit
91    Human Resources
93    Corporate Communications
97    Consolidated Financial Statements
187   Contact Details
188   Principal Correspondent Accounts
189   Licenses
191   Memberships
2   MDM Bank Annual report 2008



Chairman and CEO Statement




    OLEG VIYUGIN                  IGOR KIM
                                                                                                                        3




Dear shareholders, clients and partners:
2008 marked the next step forward in the progressive development of MDM Bank. During the reported period,
we maintained a stable balance sheet and profitability. This held true even during the second half of the year,
when conditions in the country’s banking sector sharply deteriorated. According to the Company’s IFRS audited
financials for the period, the Bank’s total profit for the year was 3.3 billion rubles, including 1.2 billion rubles
during the second half of the year.
Financial results for the reported period were lower than in 2007, primarily due to the conservative policy MDM
Bank adopted in response to the global financial crisis and the fact the Bank focused on protecting the interests
of its depositors and lenders: while the Bank’s loan portfolio and working assets continued to provide stable
high returns, the conscious decision to sustain a large liquidity cushion negatively affected the Bank’s profit
level. At the same time, the Bank foresaw the difficulties that its borrowers would face in servicing debts during
the serious economic downturn. As a result, MDM abandoned its policy of actively expanding its loan portfolio
and instead chose to build loan loss reserves in advance. This strategic shift decreased potential profits by at
least 3–4 billion rubles.
In our internal policy, we proceeded from the understanding that the crisis, which became pronounced
in the fall of 2008, would continue, and that it would begin to affect the country’s real economy. Russia’s
industrial and financial organizations will need to adapt to a sharp fall in external demand and an almost
complete shut-down of the capital markets. In these new economic conditions, the optimization procedures
undertaken by the Bank at the end of 2008, which helped reduce the annual cost/income ratio to 42.9%,
was clearly a necessary step to preserve shareholder capital, as well as to protect our depositors and
clients from any negative impact of the economic downturn. We plan that this the cost/income ratio will
reach 30–35% in 2009, when the full effect of the optimization measures will be achieved. The Bank also
re-assessed its risk evaluation approach, temporarily limiting lending to those sectors of the economy that
were most sensitive to the crisis, and doing so well in advance of its onset. This led to a temporary decline in
the loan portfolio, which, combined with a decrease in overall risk, allowed the Bank to avoid any balance
sheet liquidity issues without depending on help from Russian monetary authorities. Finally, to strengthen
the liabilities side of the balance sheet, the Bank paid particular attention to attracting retail deposits. In 2008,
the growth in retail deposits reached 80%, bettering our main competitors and for the Russian banking sector
as a whole.
These measures enabled MDM Bank to maintain a strong Basel accord capital adequacy ratio of 17.9%.
The Bank finished 2008 with the highest credit ratings among Russian non-state banks from Standard & Poor’s,
Moody’s and Fitch.
4   MDM Bank Annual report 2008




    During the reported period, the Bank continued to implement its strategy of transforming MDM from a financial
    institution primarily focused on corporate clients into a fully-fledged universal bank. The Bank gradually
    changed the structure of its loan portfolio to place greater emphasis on small- and medium-sized enterprises.
    This also led to a greater diversification of liabilities and increased stability. At the end of 2008, S&P increased
    the corporate governance rating of the Bank to CGS-6.9 on the Russian scale, which corresponds to its 6+ score
    on the international scale.
    An important, real step toward implementing this strategy was the decision to merge MDM Bank and URSA
    Bank. The merger, which will be finalized in 2009, will enable both banks to make significant progress on
    implementing their strategies of increased diversification and better stability in assets and liabilities for
    the consolidated bank. Synergies from the merger of the two banks’ competencies in the retail and corporate
    sectors, as well as consolidation on the operations side, will allow the merged bank to occupy a leading position
    in the Russian banking sector.
    MDM Bank is basing its long-term plans on the assumption that the global financial crisis will continue to
    negatively affect the Russia’s economy and banking sector. Our asset and liability management and capital
    management policies take into account the inevitable decline in quality of the old loan portfolio. In terms of
    client services, we understand that our clients need new types of banking products aimed at preserving and
    protecting companies’ core businesses and overcoming systemic problems in the context of the current crisis.
    With these factors in mind, the Bank maintains its conservative approach to liquidity management and risk
    management and intends to carefully monitor and preserve sufficient capital adequacy levels. Despite increased
    credit risks, MDM Bank will offer credit resources and a broad range of services to meet today’s challenges to
    companies that seek constructive solutions, can effectively use borrowed capital, and are capable of efficiently
    running their businesses, either themselves or with the assistance of the bank.
    With the goal of completing the merger in 2009, MDM Bank and URSA Bank have independently begun
    coordinating their business development and balance sheet management in order to begin the real operational
    merger with harmonized businesses and an effective team of managers.
    In terms of business results, we have taken a realistic view of 2009. We believe that the measures taken by
    banking regulators in developed countries are in line with the measures that have helped overcome banking
    crises in many countries. It is reasonable to assume that these actions will help to decrease the level of
    accumulated ineffective leverage, to replenish banks capital and to gradually re-establish confidence in
    the sector. Eventually positive trends will return to both financial and credit markets. As such, in 2009 we will
    concentrate on completing the merger between MDM Bank and URSA Bank and on offering our clients practical
    new credit and commission-based products and services that will help them successfully negotiate the the
current global financial crisis. We are convinced that our client-centered approach during the crisis period is
particularly effective, since in the long-term it will build the foundation for faster growth of our clients, and
therefore for MDM Bank as well.
Based on this, in the year to come, the Bank’s management intends to maintain an adequate level of return
on average equity and to sustain a capital adequacy level that corresponds with regulatory requirements. At
the same time, the Bank will seek to minimize risks – focusing on growth through the development of client
relations. We understand that 2009 will be a challenging year for the Bank, but we believe that we have
a management team capable of working efficiently in these new conditions. MDM Bank will remain fully focused
not only on fulfilling its obligations to depositors, creditors and clients, but also on significantly increasing its
base of clients and business partners.


Respectfully yours,




OLEG VIYUGIN                                                IGOR KIM
Chairman of the Board of Directors                          Chairman of the Management Board
MDM Bank                                                    MDM Bank
MDM Asset Management has
developed new investment
strategies and programs
specifically designed for
the current economic situation
                                                                                                                              7


MDM Bank’s Mission,
Vision and Values



Mission
          MDM Bank’s Mission is to be a respected and successful universal financial institution, achieving market
          leadership by adhering to globally accepted standards of banking services and principles of corporate ethics.


Vision
          MDM Bank strives to ensure consistent high returns on equity capital by pursuing the following goals:
          • Provide the highest quality and cost effective services to all our corporate and retail clients;
          • Offer products and services that support our clients at each stage of their development, helping them grow
            their business and prosperity;
          • Extend and deepen our nationwide franchise by developing our business with small- and medium-size
            companies and establishing a strong regional presence;
          • Ensure exceptional career opportunities to our employees and maintain the highest standards of corporate
            governance.


Values
          • Expertise. We are guided by the highest professional standards and thorough market analysis; we continuously
            augment our capabilities by fostering initiative and professional development of our staff.


          • Client focus. A partnership philosophy forms the basis of our client relations. We strive to be a model of
            reliability and efficiency for all our counterparties.


          • Integrity and confidentiality. We act with honesty and integrity with regard to our employees, clients and
            competitors. We comply with both the spirit and the letter of the law.


          • Transparency. We support productive communications within the Bank and open relationships with our
            external stakeholders.


          • Social responsibility. We contribute to the wellbeing of society by offering first-class economic opportunities
            to our clients and implementing environmental programs, as well as supporting educational and cultural
            projects.
8                  MDM Bank Annual report 2008



Key Indicators
Revenue                                                            Return on Average Equity
                                                                   (excl. one-off transactions)

                                                          27,000                                                          18




                                                                                     16.6
                                                          24,000                                                          16
                                                 21,832

                                                          21,000            3.6                                           14




                                                                   13.0
                       17,832




                                22.4                      18,000                                      –8.4                12
13,047




            37.0                                          15,000                                                          10




                                                                                                             8.2
                                                          12,000                                                           8

                                                           9,000                                                           6

                                                           6,000                                                           4

                                                           3,000                                                           2

                                                              0                                                            0


2006                   2007                      2008              2006              2007                    2008

         Revenues, RUR mln               Change, %                         ROAE, %      Change, pp



Net income                                                         Corporate and investment banking: Total operating
                                                                   income before impairment losses and provisions




                                                                                                             14,822
                       5,516




                                                                                     13,381




                                                           5,400                              10.8                     13,500

                                                           4,800                                                       12,000
                                         –40.1                              37.0
                                                           4,200                                                       10,500
                                                                   9,735
                                                 3,304




          66.0
3,320




                                                           3,600                                                        9,000

                                                           3,000                                                        7,500

                                                           2,400                                                       6,000

                                                           1,800                                                       4,500

                                                           1,200                                                        3,000

                                                            600                                                         1,500

                                                               0                                                           0


2006                   2007                      2008              2006              2007                    2008

         Net income, RUR mln              Change, %                        RUR mln    Change, %



Retail banking: Total operating income before                      Treasury: Total operating income before impairment
impairment losses and provisions                                   losses and provisions
                                                 4,751




                                                           4,500                                                        1,450
                                                                                                             1,386




                                  19.5
                       3,976




                                                           4,000                                                        1,300

                                                           3,500                                                        1,050

                                                           3,000                              135.9                      900
          90.5

                                                           2,500                                                         750
2,087




                                                           2,000                                                         600
                                                                                     565




                                                           1,500              29.9                                       450
                                                                   435




                                                           1,000                                                         300

                                                            500                                                          150

                                                              0                                                            0


2006                   2007                      2008              2006              2007                    2008

         RUR mln        Change, %                                          RUR mln    Change, %
                                                                                                                                                          9




Corporate and investment banking results before                            Retail banking results before
central overhead                                                           central overhead




                         10,120
                                                               9,900                                                                            2,700




                                                                                                                               2,452
                                          –9.4




                                                 9,172
                                                               8,800                                               13.4                        2,400




                                                                                                    2,162
         49.0




                                                                           1,686
                                                               7,700                      28.2                                                  2,100
6,805




                                                               6,600                                                                            1,800

                                                               5,500                                                                            1,500

                                                               4,400                                                                            1,200

                                                               3,300                                                                             900

                                                               2,200                                                                             600

                                                               1,100                                                                             300

                                                                   0                                                                               0


2006                    2007                     2008                      2006                     2007                      2008

        CIB results before centralized costs, RUR mln        Change, %             Retail results before centralized costs, RUR mln           Change, %



Treasury results before                                                    Capital adequacy ratio, as per Basel Agreement, %
central overhead
                                                 1,341




                                                                                                                                                  18




                                                                                                                                       17.9
                                                               1,350




                                                                                                            17.2




                                                                                                                               16.0
                                                               1,200                                                                              16
                                                                                                     14.5
                                                               1,050                                                                              14
                                                                                   13.7




                                  161.8                         900                                                                               12
                                                                           10.9




                                                                750                                                                               10

                                                                600                                                                                8
                         492




            22.7                                                450                                                                                6
401




                                                                300                                                                                4

                                                                150                                                                                2

                                                                  0                                                                                0


2006                    2007                     2008                      2006                     2007                      2008

        Treasure results before centralized costs, RUR mln     Change, %           Tier I capital ratio               Total capital ratio




                   MDM Bank’s other competitive advantages include:
                   • The highest international credit ratings among privately-owned Russian banks;
                   • A stable financial standing, which will allow the Bank to strengthen its market position during
                     the economic crisis (capital adequacy ratio, as per Basel Agreement totaled 17.9% at the end of 2008);
                   • The Bank’s shareholders are prepared to provide financial support to the Bank, if necessary;
                   • A large liquidity cushion (approximately USD 1.6 bln in highly liquid assets at the end of 2008);
                   • The highest quality corporate governance and transparency among Russian banks, affirmed by Standard
                     & Poor’s corporate governance score.
10      MDM Bank Annual report 2008




MDM Bank offers retail clients
a broad range of financial
products and services,
including term deposits,
consumer lending, money
transfers
                                                                                                                   11


Legal and Ownership
Structure



       MDM Bank’s subsidiaries include Russian leasing and asset management companies, LTB Bank (based in Riga),
       and securities brokerage and investment companies in Cyprus.




                AS LTB Bank                                      MDM Asset Management

                                                                 Asset management




                MDM Investments Ltd (Cyprus)                     LeasingPromHolding
                Securities brokerage company                     Leasing company




                MCM Russian Investments (Cyprus)
                Investment company




Shareholder Structure

       MDM Bank’s principal owners include: Mr. Sergey Popov, as the majority beneficial shareholder (with
       an approximately 77% beneficial interest); Olivant Limited, which holds a 9.5% beneficial interest, and
       Mr. Martin Andersson with an 8.5% beneficial interest. In addition, the IFC holds a 5% direct interest in
       the Bank.
12    MDM Bank Annual report 2008



Overview of the Russian Economy
and Banking Sector



Operating Environment

      2008 was the year when the crisis that had started as turmoil in a limited segment of the financial markets –
      US subprime mortgages – swept first through the financial industry, then into the real sector of all OECD
      countries, and finally, by 3Q 2008, hit Russia. In 1H 2008, world liquidity had still been plentiful enough
      to sustain economic growth in Europe and emerging markets, as well as to keep natural resource prices at
      elevated levels. Nonetheless, the situation had started to deteriorate by mid-year, when signs of the crisis
      began to materialize in Eurozone countries, from there deepening and sweeping through all segments of all
      economies, regardless of geographical boundaries. The entire world witnessed a massive and agonizing process
      of deleveraging that shook the international banking system and incited a universal flight to safety, as investors
      sought secure ports of call in the form of the most liquid and risk-free assets, mainly dollar denominated.
      Meantime, in 3Q 2008, as inflated natural resource prices started to plunge, capital headed out of Russia.


      The average price for Urals crude in 2008 was USD 92 per bbl, as compared to USD 70 the year before, but
      a sharp decline in oil prices in 2H 2008, coupled with a growing net capital outflow in 1Q, 3Q and 4Q 2008,
      completely reversed the positive external market conditions of 1H08, leading to the Russian economy’s about-
      face from growth to recession.


      Russia’s Balance of Payment Performance Over 2008

                               Current        Current      Net Private                                       Average
                              Account        Account           Capital         Capital         USD/          Urals Oil
                              Balance,       Balance,           Flows,      Flight, bn      RUR Rate      Price, USD/
                               bln USD    as % of GDP         bln USD            USD       Change, %              Bbl

      1Q 2008                      37.3           10.2           –25.7           –15.5            –4.2           95.2

      2Q 2008                      32.4             7.4           38.2            –8.5            –0.4          116.7

      3Q 2008                      21.8             4.8          –16.7           –10.6            15.8          112.7

      4Q 2008                       8.1             1.7         –133.3           –12.6            15.5           53.5

      Entire 2008                  99.6            6.1*         –137.4           –47.3            27.6            91.7     |*| Average for period.



      The key factor behind Russia’s buoyant economic growth from 2005 to 1H 2008 was plentiful global liquidity
      that propped up both international demand for crude and Russia’s domestic liquidity. A healthy growth in
      fixed capital investments (FCI) in Russia that persisted in double digits – reaching as high as 21% in 2007 –
      made a record contribution of 4.2pp to total GDP growth that year, and, as the global crisis started to damage
      the Russian economy, was at 3pp over 9M 2008 (the most recent data available officially as of the date of this
      report’s writing).


      In 3Q 2008, Russia posted a net private outflow of near USD 17 bln, which turned out to be only a prelude to
      a massive outflow of USD 133 bln in 4Q 2008.


      Looking deeper at the Russian balance of payments, we note the following: in 2007, net private capital inflow
      had been comparable to the current account surplus and even surpassed it, hitting USD 83 bln vs. USD 77 bln,
      respectively, helping Russia’s gold and forex reserves grow by USD 150 bln, which translated to approximately
      USD 160 bln worth of net currency purchases (excluding non-dollar reserve component revaluation) by
                                                                                                                     13




the CBR, according to our estimates. In 2008, according to preliminary data from the Ministry of Finance
of the Russian Federation, the net capital outflow reached as much as USD 138 bln on the back of a record
current accounts surplus of USD 99 bln. While the new methods of measuring international reserves applied
by the CBR since mid-2008 and based on the mark-to-market approach, rather than the earlier amortization-
based approach, makes it difficult to reliably monitor the selling and buying activities of the Central Bank on
the domestic FX market, Ministry of Finance data shows that the Russian Federation’s gross reserve figure
declined by USD 45.3 bln during 2008.


An important factor that provoked intense pressure on the ruble at the end of 2008 – in addition to
the repatriation of funds by foreign investors – was the large volume of external corporate debt, roughly USD
500 bln, of which USD 135 bln was to be paid in the course of one year. The fact total gross Russian external
debt of more than USD 540 bln had approached the gross international reserve amount of USD 580 bln as of
late August 2008, exacerbated by refinancing fears, boosted the demand for hard currency, both for hedging
and speculative purposes.


For several months in 3Q 2008 it appeared that the CBR possessed adequate resources to protect the ruble.
However, the ruble’s convertibility (the absence of any capital control), the drop in oil prices in November
2008 below USD 60 per bbl and the continuing and deepening devaluation of peer currencies against the dollar
finally forced the CBR to start the so-called ‘gradual ruble devaluation’, which by year end had resulted in
a devaluation of 17% vs. the bi-currency basket and approximately 30% vs. the dollar.


Besides FCI, another important driver of Russian economic growth between 2005 and 1H 2008 was fast-
growing consumer demand, which contributed more than 7pp in 2007 and 6.5pp over 9M 2008 to overall GDP
growth . The latter figure is the second highest in history (following the 2007 record). Consumer expenditures
by households rose 13.1% in real terms in 2007 and a further 12.9% over 9M 2008, which outpaced GDP
growth, which was 7.4% over 9M 2008, significantly.



Oil Prices, Industrial Growth and Fixed Capital Investment in Russia in 2005–2008

 90                                                                                                             24

 70                                                                                                             21

 50                                                                                                             18

 30                                                                                                             15

 10                                                                                                             12

–10                                                                                                              9

–30                                                                                                              6

–50                                                                                                              3

–70                                                                                                              0

–90                                                                                                             –3


      01.05   05.05     09.05     01.06    05.06    09.06   01.07   05.07    09.07     01.08    05.08   09.08

  Change in oil price, % year-on-year (left axis)
  Fixed capital investment, % year-on-year (right axis)      Industrial growth (without axis)
Source: State Statistics Service, Reuters, MDM
14   MDM Bank Annual report 2008




     Russia’s GDP Growth Components
     Investment in growth, %

     18                                                    5

     15                                                    4

     12                                                    3

      9                                                    2

      6                                                    1

      3                                                    0

      0                                                   –1

     –3                                                   –2

     –6                                                   –3

     –9                                                   –4

              96 97 98 99 00 01    02 03 04 05 06 07 08

          Final consumption expenditure
          Net export
          Gross savings         Investment
     Source: State Statistics Service, MDM


     Total estimated GDP growth for 2008 has been estimated at 5.6% by the Economic Ministry, which effectively
     means stagnation began in 4Q 2008, with growth of only 0.5%. However, the consumption boom of 2007
     and early 2008, stemming from high domestic liquidity, had so much inertia that in the last month of 2008
     Russia’s households showed negative savings – for the first time in the country’s post-1998 history.

     In 4Q 2008, all economic indicators sharply deteriorated. According to our internal evaluation (based on
     data from the Russian Federation State Statistics Service), industrial production declined 6%; investment
     in property, plant and equipment dropped approximately 2%; and real household income decreased
     approximately 0.6%. As of end of the year, according to data from the State Statistics Service, the increase in
     investment in property, plant and equipment totaled 9.1%; real disposable income grew only 2.7% (compared
     with 12% in 2007), and the volume of industrial production rose by only 2%. However, it must be noted that
     industrial production growth had already slowed down by the middle of 2008 and many of Russia’s extraction
     industries had demonstrated serious indications of stagnation in 2007–2008.


     The CBR’s policy throughout 2008, excluding the fourth quarter, was still aimed at ensuring ruble exchange
     rate stability and curbing inflation. Throughout 2007 and the early part of 2008 the Russian monetary
     authorities were active in sterilizing the excess liquidity that originated from high currency inflows in
     the controlled ruble float environment. According to our estimates, in 2008 the federal budget, including
     the reserve and the sovereign wealth funds, sucked in approximately 70% of the entire ruble issuance through
     currency purchases by the CBR in the first half of the year. Later on, as capital inflows had almost dried up,
     ruble issuance by the CBR practically ceased, and the source of liquidity shifted toward borrowing from
     the Central Bank and fiscal expenditure. The growth of the broad monetary base totaled a mere RUR 65 bln
     over 2008, as compared to RUR 1.4 trn in 2007. M2 expansion was at an unprecedented low of 3% over 2008,
     compared to 48% a year ago. As a result, the M2 to GDP ratio fell to the level of early 2007, 31%.
                                                                                                                                  15




       Adversely, despite all efforts by the CBR and Ministry of Finance, CPI inflation reached 13.4% in 2008 vs.
       11.8% the previous year, its highest level since 2002. The CPI acceleration was mainly attributable to the very
       high ruble issuance of late 2007 and to elevated oil prices in 1H 2008 that exceeded USD 100 per bbl and
       played on domestic energy prices as well. The late 2008 ruble devaluation had little effect on inflation that
       year, as a significant lag occurs before this inflationary factor comes onto play (up to six months).


The Banking Sector

       Key developments in 2008
       2008 was a very challenging year for the Russian banking system, as it was for almost all banking systems
       worldwide. The first half of 2008 was relatively benign for Russian banks, as they still retained access to
       capital markets and issued bond placements both locally and internationally. Consolidated banks’ balance
       sheets expanded in January-June 2008 by 20% to reach almost USD 1 trn.


       However, in the second half of last year the situation changed dramatically. The sequence of events, of which
       the bankruptcy of Lehman Brothers was the most significant, hit the Russian banking system hard.


       Debt markets shut down completely, while capital flight from Russia intensified. The latter, combined with a sharp
       decline in oil prices, led to a significant devaluation of the ruble. Confidence in Russian banks was shaken. As
       a result, we saw significant volatility in the deposit base of the banks – specifically a redistribution of market share
       in favor of state-controlled giants and a partial conversion of customer accounts into foreign currency.


       Needing to stabilize their liquidity positions, banks have significantly scaled down lending activities.
       The effects of the “credit squeeze” and financial crisis have started feeding through into the real economy,
       which, in turn, has led to the rise in default rates and deterioration of banks’ asset quality.

       In dollar terms, the consolidated balance sheet of the banking system shrank in the second half of 2008 –
       a first in recent times. 2008 closed with banks’ total assets standing at USD 921 bln, 6.5% lower than the mid-
       year high watermark.


       In fact, the damage to the Russian banking system could have been far worse if not for unprecedented support
       from the regulators. The most important items on the long list of support measures included a significant
       expansion of Central Bank of Russia (CBR) refinancing tools, a relaxation of mandatory cash reserves
       requirements, large subordinated loan injections into key state banks and select privately-owned banks,
       as well as, of course, five bailouts of sizeable banks that had become technically insolvent. There are also
       ongoing discussions in the government about further recapitalization of Russian banks. Experience elsewhere
       shows that regulators are extremely supportive toward local financial institutions of significant size, as they
       see the failure of such institutions as threatening to the sustainability of the entire financial system.


       Outlook for 2009
       In 2009, the development of the Russian banking sector will be fundamentally affected by the following factors:


       • Support from state regulators. We assume that during this period the government and the CBR will
         continue to provide liquidity resources for Russian banks. Additionally, we believe that the CBR will continue
         to maintain a relatively soft approach on mandatory reserves regulation and oversight.
16   MDM Bank Annual report 2008




     • Concentration on re-capitalization issues. It is quite likely that in 2009 the quality of Russian banks’
       loan portfolios will continue to deteriorate. The acceleration loan impairment losses will have an extremely
      negative effect on profitability and, more importantly, on capital adequacy ratios. During the fourth quarter
      of 2008, the negative effect from the increase in past-due debt was largely compensated for by profits
      from the revaluation of banks’ net currency position (due to ruble devaluation). However, this was a one-
      off event. In 2009, many financial institutions will be required to recapitalize, whether through taking on
      subordinated loans, or by issuing preferred and common shares. These capital injections will be financed
      primarily by the government and by existing private shareholders of the affected banks.


     • Active efforts aimed at strengthening the deposit base. Most wholesale capital markets will likely
       remain inaccessible for the majority of Russian banks in 2009. As a result, deposits will be a key source for
      bank funding, along with re-financing instruments from the CBR. Russian banks have the possibility to
      improve their deposit-to-loans ratio, which stood at 54% at the beginning of 2009.


     • Intensive consolidation. We expect that 2009 will see numerous acquisitions in the Russian banking
       system: large institutions will actively acquire smaller competitors (which have become cheaper). Some
       mergers are possible as well, but the number of mergers will be minimal. The government actively supports
       these processes, because it believes that they will help maintain economic and social stability in Russia.
       To accelerate these processes, in December 2008, the Russian President signed amendments abolishing
       provisions under which all depositors and creditors of a bank had a put option on any liabilities in the event
       of structural reorganizations, such as a merger or takeover. The newly signed version of the legislation
       grants creditors these rights only in situations in which they are explicitly spelled out in a contract with
       the bank.
                                                                                                                               17




Russian Federation total banking assets, bln USD                    Deposit/Loans ratio, %
                                                              900                                                        100

                                                              800                                                        90

                                                                                                                         80
                                                              700
                                                                                                                          70
                                                              600
                                                                                                                         60
                                                              500
                                                                                                                         50
                                                              400
                                                                                                                         40
                                                              300
                                                                                                                         30
                                                              200                                                         20

                                                              100                                                         10

                                                                0                                                          0


2005     2006       2007      2008          2009 F                  2005       2006       2007       2008       2009 F

Source: Data from the Central Bank of Russia and                    Source: Data from the Central Bank of Russia and
MDM Bank estimates                                                  MDM Bank estimates


Russian banks’ total capital adequacy ratio, %
                                                               18

                                                               16

                                                               14

                                                               12

                                                               10

                                                                8

                                                                6

                                                                4

                                                                2

                                                                0


2005      2006         2007          2008            2009 F

Source: Data from the Central Bank of Russia and
MDM Bank estimates
MDM Bank applies a bespoke
approach to clients depending
on their needs.
Alcoholic beverages and food
manufacturer OJSC Synergy
MDM Bank Corporate & Investment
Banking client

Vladislav Bazehnov, deputy operations
director of OJSC Synergy
                                                                                                                           19


Planned Merger of MDM Bank
and URSA Bank



   On 3 December 2008, the major shareholders of MDM Bank and URSA Bank announced their intention to
   merge the two banks. The new organization will be created based on the legal entity and general banking
   license of URSA Bank, but will operate under the brand name of MDM Bank. The planned transaction has
   received broad-based support from shareholders, the Central Bank of Russia and the Russian government, as
   well as by investors and analysts.


   Following the merger, the Bank will have equity of approximately RUR 60 bln and assets of around RUR 500 bln
   (based on MDM Bank and URSA Bank Russian Accounting Standards reporting for year-end2008), will become
   one of Russia’s leading universal financial institutions and will have significant competitive advantages.
   The merged bank will realize considerable advantages from integrating its commercial and financial activities.
   At the same time, it will also posses a large and diversified liability base, relying on an extensive regional branch
   network with approximately 500 points of sale across Russia.


   The strategic rationale for the merger between MDM Bank and URSA Bank is as follows:


   • The creation of one of Russia’s largest private banks. The newly merged bank will be one of the five
     largest Russian banks and will also be among the top ten competitors for key banking products.


   • Complementary structures of business and client bases. The considerable achievements of MDM Bank
     in corporate and investment banking will be combined with the successful experience of URSA Bank in
     serving retail clients and small- and medium-sized enterprises. Diversifying the product line and business
     process will enable the merged bank to strengthen its position in both the retail and corporate sectors.


   • Complementary regional presence. MDM Bank has a broad retail network throughout Central and
     Western Russia. The home regions of URSA Bank are Siberia, the Urals and the Russian Far East. As a result,
     the merged bank will be widely represented in all key Russian regions.


   • High corporate governance standards. MDM Bank adheres to best practice corporate governance and acts
    on the basis of informational transparency. These guiding principles will also be practiced in the merged
    bank.


   • Better access to funding. The merged bank will enjoy significant advantages in areas such as attracting retail
     deposits. It will be able to more actively and effectively attract deposits due to both its broad geographical
     coverage and its reputation as a strong and stable bank. In the current economic situation, retail deposits
     have become an increasingly important source of funding; over time, however, debt financing costs will also
     come down as the market re-opens.


   • Cost and revenue synergies. The merged bank will maintain and strengthen its position in the market
     through centralization and optimization of operations, including switching to a unified IT-platform,
     decreasing personnel costs, implementing best practices, elimination of duplicate structures, increased
     commission revenues from corporate clients through an improved product line and information sharing on
     best products in these areas.
20   MDM Bank Annual report 2008




     According to the Bank’s business plan, the synergy effect from the merger (measured in monetary terms)
     will range from RUR 4.6 bln to RUR 7.3 bln between 2009 and 2011. Approximately 70% of this benefit will
     be obtained through cost synergies (including the integration of business processes, network optimization,
     personnel cost optimization through increased labor productivity, as well as decreased advertising expenses
     because of a strengthened, unified brand), while the other benefits will be obtained through revenue synergies
     (RUR 0.6 –1.3 bln) and financial synergies (RUR 0.3 bln). The Bank estimates that the synergetic effect in
     2009 will total RUR 0.3 bln.


     In 2010 –2011, the merged bank intends to significantly broaden its retail network by opening 400 new
     branch banks.
                                                                                                                        21


Regional Expansion
and the Branch Network



   An effective branch network is a key factor for attracting both retail and corporate clients, and it is therefore
   integral to the implementation of MDM Bank’s development strategy. The Bank’s branches offer the up-to-date
   banking services to a broad spectrum of customers throughout Russia, including large corporations, small- and
   medium-sized enterprises, entrepreneurs and individual consumers.


   During the reported period, MDM Bank successfully opened 63 new facilities in its branch network. New offices
   began working in Moscow, Achinsk, Volgograd, Ekaterinburg, Nevinnomysk, Novosibirsk, Omsk, Rostov-on-
   Don, Samara, St. Petersburg, Tuapse, Tyumen and Chita. In total, MDM Bank’s regional Russian network now
   has 199 offices.


   In 2009, MDM Bank will continue to develop its regional business, and its branch network will play
   an increasingly important role in the Bank’s activity. This focus on the local branches and regional business will
   allow the Bank to build a close relationship with its clients and offer the full spectrum of high quality services
   to its clients.


   In 2008, the Bank implemented a matrix structure for network management, according to which control
   over MDM’s administrative functions is carried out at the regional level. On a functional level, employees in
   the regional networks are fully accountable to the management of the respective business units at the Head
   Office.


   To improve the work of the Bank’s branch network, to optimize the system of its administrative management
   and to centralize the activities of the Bank’s middle and back office, the Bank created three regional centers at
   the beginning of 2009. These three regional centers unified the Bank’s work across the whole country.


   Regional center directors report to the Network Management unit, which is in turn overseen by head of
   the Network Management unit. Within the regions in which they operate, the directors of the regional centers
   are charged with responsibility for fulfilling the Bank’s strategic goals. Gradually, MDM’s head office is
   transferring business development powers to the local level.


   MDM Bank branches, working within regional centers, bear responsibility for their own managerial decisions
   in the regions and for providing the Bank’s products and services to clients. Budgeting and operational
   management is mainly performed according to the “bottom-up” principle along the management chain.
   The Bank uses the same principles in respect to support functions (such as human resources, legal support,
   internal audit, corporate communications, etc.) At the same time, the system of branch network management
   is based on fostering strong partnerships between functional and regional managers.
22           MDM Bank Annual report 2008




Expanding banking services
for small businesses
is a strategic priority
for MDM Bank.
MDM Bank Small Business Lending
Department client

Mikhail Nepryntsev
Children’s goods retailer
                                                                                                                       23




Distribution of responsibility within the regional network

      Central office              Regional center                  Branch                        Outlet

• General management         • Supervision and          • Supervision and control • Sales of services to
  and control                  administrative control     over outlet sales            small- enterprises and
• Strategic planning, risk   • Coordination of business • Middle office                individuals
  assessment, asset and      • HR department at         • Sales of services to large • Transactions
  liability management,        regional level, branch     companies, small- and
  financial reporting and      network development        medium- enterprises and
  methodology                  and financial reporting    individuals
• Centralized back office
  and underwriting
• Call-center


The matrix structure allows the Bank to adjust its branch network activities to the specific conditions prevalent in
each individual region. At the same time, this structure allows the Bank to centralize the functions of its middle
and back offices. Most importantly, this paradigm significantly boosts client services and the effectiveness of all
of the Bank’s structures, while simultaneously cutting costs through economies of scale.
24          MDM Bank Annual report 2008




MDM Bank works
with a broad array
of companies from nearly
every sector of the Russian
economy
Media-corporation VGTRK
MDM Bank Corporate & Investment
Banking client

Maria Sittel, “Vesti” news anchor
                                                                                                                        25


Management Discussion
and Analysis



Consolidated Performance

      The main factors that influenced MDM Bank’s performance in 2008 were:


      • The development of the global economic crisis


      • The strategic decision by the Bank protect clients and depositors by placing stability and liquidity ahead of
        profitability during the time of crisis.


      • Increased net interest margin, and increased net interest income


      • Increased income from financial operations: early redemption of debt, trading in precious metals


      • Securities losses and decreased foreign exchange income


      • Impact of early cost optimization measures


      • Decreasing asset quality and high coverage ratio of NPLs by loan loss provisions


      The Bank’s consolidated net profit for 2008 totaled RUR 3,304 mln (USD 133 mln), a decrease of 40.1% from
      the RUR 5,516 mln (USD 216 mln) reported in 2007. Return on average equity was also lower in 2008, at 8.2%
      versus 16.6% (excluding a one-off capital gain from sale of premises) for MDM Bank in 2007. The decrease in
      net profit and return on average equity (ROAE) is due to substantial deterioration of the economic environment
      in the world and in Russia.


      A list of metrics reflecting the Bank’s principal strategic objectives determined at the beginning of 2008 is
      presented below. The list of indicators reflects, directly and indirectly, the following objectives, which will
      facilitate maximum growth of the Bank’s business value if achieved in a balanced way:


      • effective use of capital, financial stability and high quality of revenues
      • high level of customer service
      • productive, competent and loyal staff
      • efficient internal processes
26   MDM Bank Annual report 2008




     Primary performance indicators

                                                                  Change                 Change
     RUR mln or %                             2008     2007    2007/2008      2006    2006/2007

     Revenues                                21,832   17,832       22.4%     13,047       36.7%

     Net profit                               3,304    5,516     (40.1)%      3,320       66.1%

     Net interest margin                      5.7%     5.2%        0.5 pp     6.1%       (0.9) pp

     Cost of risk (Provision expense /
     Average risk-weighted assets)            3.2%     0.9%        2.3 pp     1.0%       (0.1) pp

     ROAE                                     8.2%     17.8%      (9.6) pp   13.0%        4.8 pp

     ROAA                                     1.0%     1.9%       (0.9) pp    1.8%         0.1 pp

     Cost / income                           42.9%    48.3%      (5.4) pp    51.5%       (3.2) pp

     Total Assets/Employee                      50       56           (6)       55             1

     Cost of risk (provisioning expense on
     loans to average loans for the year)     3.2%      1.1%       2.1 pp     1.5%       (0.4) pp

     NPLs to total portfolio (Non-
     performing loans / Gross loans)          4.2%     2.0%        2.2 pp     1.3%         0.7 pp

     Coverage of NPLs (Provisions / NPLs)    139.3%   163.7%    (24.4) pp    197.6%     (33.9) pp

     Tier I                                  16.0%     14.5%       1.5 pp    10.9%        3.6 pp

     Total Capital ratio                      17.9%    17.2%       0.7 pp    13.7%        3.5 pp

     Deposits (excluding volatile customer
     accounts at Latvian Trade Bank) /
     Loans                                    47.5%    51.7%      (4.2) pp    47.1%       4.6 pp

     Employees (end of period)                6,563    5,775          788     4,421        1,354

     Network (branches, additional offices
     and operating offices).                    199     164            35      123            41
                                                                                                                        27




Secondary performance indicators

                                                                              Change                        Change
RUR mln or %                                        2008         2007      2007/2008           2006      2006/2007

ROAE before investments (excluding one-
off items)                                          9.1%        16.0%          (6.9) pp       12.9%            3.1 pp

Operating expenses (before investments)
/ Revenue before result from trading in
securities                                         39.3%        48.2%          (8.9) pp       52.9%            4.7 pp

Operating expenses (before investments)
/ Revenue before result from FX                    42.5%        51.2%          (8.7) pp       56.1%          (4.9) pp

Share of net fees and commissions in
revenue before result from trading in
securities                                         10.0%        13.4%          (3.4) pp       10.3%            3.1 pp

Share of net fees and commissions in
revenue before result from FX                      10.8%        14.2%          (3.4) pp       10.9%            3.3 pp

Revenue / Average staff (RUR ‘000)                 3,486         3,453              33        3,003              450



In 3Q 2008, the Bank’s management and Board of Directors took the decision to focus on shorter-term strategic
goals that would help to ensure MDM Bank’s stability and strength during the crisis. The six tactical goals for
the Bank in 2009 are the following:


Goal                                    Achievements

Increase deposit base by 50%            • The Bank has introduced a number of attractive, competitive deposit
                                          products for standard retail clients, high net worth individuals and small
                                          businesses
                                        • Retail term deposits increased 79.9% y-o-y from RUR 14,094 mln on
                                          31 December 2007 to RUR 25,362 mln as of 31 December 2008. This trend
                                          has continued in Q1 2009.

Maintain excess liquidity cushion       • As of YE 2008, MDM Bank had USD 1.6 bln in excess liquidity held as
that is adequate for the market           cash in overnight accounts. This sum is more than adequate to enable
situation                                 the Bank to meet all international wholesale funding coming due in 2009
                                          (approximately USD 800 mln)

Maintain ROAE of at least 10%           • The Bank began taking measures to decrease costs in 3Q 2008, and aims
                                          to reduce operating expenses by 25% y-o-y in 2009.

Increase MDM Bank’s share of profit • MDM Bank’s small business loan portfolio grew by 89.1% from RUR
in strategically important segments   8,214 mln at YE 2007 to RUR 15,529 as of YE 2008
(small and mid-sized companies)
relative to competitors

Maintain international credit       • As of YE 2008, MDM Bank had the highest combined ratings from Standard
ratings at levels higher than those   & Poor’s, Fitch and Moody’s among privately-owned Russian Banks
of MDM Bank’s leading competitors

Maintain regulatory capital             • As of YE 2008, MDM Bank’s regulatory capital adequacy ratio was 14.6%
adequacy ratio (N1) of at least 12%       (including post-balance sheet events)
28     MDM Bank Annual report 2008




Review of the Income Statement

                                                          Year Ended     Year Ended     Year Ended
                                                         December 31    December 31    December 31
       RUR mln                                                  2008           2007           2006

       Interest income                                        32,893         28,345         17,326

       Interest expense                                      (15,985)       (14,213)        (7,269)


       Net interest income                                    16,908         14,132         10,057

       Loan impairment losses                                 (6,616)        (2,083)        (1,741)


       Net interest income after loan
       impairment losses                                      10,292         12,049          8,316


       (Losses)/gains arising from trading
       securities, net                                         (997)            309            457

       Gains/(losses) arising from trading in precious
       metals, net                                               504           (22)             50

       Gains from foreign exchange, net                          914          1,364          1,083

       Gains/(losses) from interest-based derivative
       financial instruments, net                                520          (520)          (100)

       Gains from early redemption of debt                     1,134              –              –

       Fee and commission income                               3,142          2,978          2,022

       Fee and commission expense                              (883)          (634)          (634)

       Other assets impairment losses                          (518)             (3)            (2)

       Impairment of investment securities held
       to maturity                                             (371)              –             13

       Other provisions                                        (330)              –             (2)

       Other operating income                                    596            230            125


       Operating income                                       14,003         15,751         11,317

       Operating expenses                                     (9,366)        (8,622)        (6,715)

       Result on disposal of premises                              –            498           (39)


       Profit before taxation                                  4,637          7,627          4,563

       Income tax expense                                     (1,333)        (2,111)        (1,243)


       Profit for the year                                     3,304          5,516          3,320
                                                                                                               29




Revenues
The Bank increased its consolidated revenue (excluding the impact of a one-time gain of RUR 498 mln before
tax in 2007) by 22.4% to RUR 21,832 mln (USD 878 mln), primarily due to increases in net interest income and
gains from early redemption of debt.



                                                         27,000

                                                     24,000
                                       21,832




                                                         21,000
                     17,832




                              22.4
                                                     18,000
 13,047




             36.7                                    15,000

                                                     12,000

                                                          9,000

                                                         6,000

                                                         3,000

                                                             0


2006                2007               2008

          RUR mln    Change, %




                                                                              Change                Change
                                                                           2007/2008,            2007/2006,
RUR mln or %                                     2008              2007            %     2006            %

Interest income

Loans and advances to customers                 28,647            23,865          20    14,747          62

Overnight deposits and due from
other banks                                      2,860             3,098          (8)    1,496          107

Investment securities available
for sale                                          399                  –            –        –            –

Investments securities held to
maturity                                           66                  –            –        –            –


Total interest income on
financial assets not at fair value
through profit and loss                         31,972            26,963          19    16,243          66

Trading securities                                 916             1,361         (33)     792           72

Other financial assets at fair value
through profit and loss                             5                 21         (76)     291          (93)


Total interest income                           32,893            28,345          16    17,326          64
30   MDM Bank Annual report 2008




                                                                           Change                        Change
                                                                        2007/2008,                    2007/2006,
     RUR mln or %                                2008           2008            %             2008            %


     Interest expense

     Customer accounts                         (6,628)        (4,446)            49         (2,167)           105

     Due to other banks                        (5,758)        (4,966)            16        (2,390)            108

     Debt securities in issue                  (3,111)        (4,267)           –27        (2,483)             72

     Subordinated debt                          (488)           (534)            –9          (229)            133


     Total interest expense                  (15,985)       (14,213)             12        (7,269)             96

     Net interest income                       16,908         14,132             20         10,057             41




                                                                           Change                         Change
                                                   Average, %                (p.p.)    Average, %           (p.p.)

                                              2008            2007      2007/2008            2006     2006/2007

     Average yield for

     Loans                                     14.0             12.7           1.3            12.0            0.7

     Interest-bearing investment
     securities                                10.8              8.8           2.0             8.3            0.5

     loans and other interest-bearing
     funds placed in banks                       3.6             4.6          (1.0)            4.8           (0.2)

     Total interest-bearing assets             11.1             10.5           0.6            10.3            0.2

     Average rate paid for

     Term deposits                              6.6              6.0           0.6             6.4           (0.4)


     Other interest-bearing deposits            1.5              0.9           0.6             0.2            0.7

     Short-term debt                            8.0              8.0           0.0             6.7            1.3

     Long-term debt                              5.6             5.9          (0.3)            5.2            0.7

     Total interest-bearing liabilities         5.5              5.6          (0.1)            4.6            1.0


     Net interest income accounted for 77.4% of total revenue, growing by 19.6% during 2008 to RUR 16,908 mln
     (USD 680 mln), while net interest margin increased to 5.7%, up from 5.2% in 2007. Two factors contributed to
     growth in net interest income in 2008: resumed growth in the corporate loan portfolio in the first two quarters
     of 2008 and ongoing repricing in the corporate and small business loan portfolios (discussed below).
                                                                                                                                  31




Net interest margins rose in 2008 despite an increase in interest rates on customer accounts, as increased
borrowing costs corresponded with the overall growth of the gross margin. Relative to 2007, the overall cost of
funds increased by less than asset yields, which resulted in an overall increase of the net interest margin.



Annual data                                              2008 quarter data




                                                                                                                12.4
                                                    12                                                                       12




                                                                                             11.1
                                11.1
10.5




                                                         10.2




                                                                              10.3
                                                    10                                                                       10


                                                    8                                                                        8




                                                                                                                       6.5
                                                                                                                       6.2
                                                                                                          6.1
                                                    6                                                                        6
                                                                5.7




                                                                                       5.5
         5.6




                                       5.5
                                       5.7




                                                                                                    5.3
                                                                                     5.1
                                                                      4.8
       5.2




                                                    4                                                                        4


                                                    2                                                                        2


                                                    0                                                                        0


2007                            2008                     1Q2008               2Q2008         3Q2008             4Q2008
       Yield on Assets, %                                       Yield on Assets, %
       Cost of funds, %                                         Cost of funds, %
       Net Interest Margin, %                                   Net Interest Margin, %




Net fees and commissions decreased by 3.6% in 2008 to RUR 2,259 mln (USD 91 mln) from
RUR 2,344 mln (USD 92 mln), primarily as a result of a decline in investment banking and brokerage
commissions (2008: RUR 177 mln; 2007: RUR 504 mln), as well as increased commission expenses on
settlement transactions, principally due to the growing number of transactions with debit and credit cards
issued by MDM Bank, in addition to the increased number of transactions with non-MDM Bank cards using
MDM Bank’s acquiring network. Total fee and commission income, however, rose slightly, led by increases in
commissions on settlement and trade finance transactions (2008: RUR 1,834 mln; 2007: RUR 1,417 mln) and
commissions on foreign currency transactions (2008: RUR 545 mln; 2007: RUR 364 mln). As a result, fee and
commission income decreased as a share of net revenues before result from trading in securities to 10% from
13.4% in 2007.
32   MDM Bank Annual report 2008




                                                                          Change                       Change
                                                                       2007/2008,                   2006/2007,
     RUR mln or %                               2008           2007            %            2006            %

     Commission on settlement and
     trade finance                              1,834          1,417            29          1,115            27

     Commission on foreign exchange
     transactions                                545            364             50           344               6

     Commission on cash transactions              326           370           (12)           263              41

     Commission for business referral             213           275           (23)             79           248

     Brokerage and investment banking
     commissions                                  177           504           (65)            211           139

     Commission for trust and fiduciary
     assets                                        41            41              –              7           486

     Other                                          6              7          (14)              3           133

     Total fee and commission income            3,142         2,978              6         2,022             47

     Commission on settlement
     transactions                               (409)         (297)             38          (258)            15

     Commission on foreign currency
     transactions                               (164)           (73)           125          (126)           (42)

     Commission on cash transactions            (133)         (185)           (28)           (73)           153

     Commission on banking
     transactions                               (128)              –             –              –              –

     Other                                       (49)           (79)          (38)          (177)           (55)

     Total fee and commission
     expense                                    (883)         (634)             39          (634)              –


     Net fee and commission income             2,259          2,344             (4)        1,388             69

     Net result from trading, including trading in securities, foreign exchange and precious metals, decreased
     by 16.8% in 2008 to RUR 941 mln (USD 37.9 mln) from RUR 1,131 mln (USD 44.2 mln) in 2007. The result
     was impacted by the turbulence in the capital markets in the first and third quarters, when the Bank recorded
     losses from securities trading of RUR 297 mln (USD 12.4 mln) and RUR 575 mln (USD 23.9 mln), respectively,
     and a YE 2008 result of RUR (997) mln from trading securities. This was partly offset by net gains from
     trading in precious metals (2008: RUR 504 mln; 2007: RUR (22) mln). Additionally, a gain of RUR 1,134 mln
     (USD 45.6 mln) from early redemption of debt was recorded in Q4 2008.
                                                                                                                    33




                                     1,364



                                                                     1,200
           1,083




                                                            914
                                                                       800
457




                                                      504
                                                                       400
                        309




                                              (997)




                                                                         0
                              (22)
      50




                                                                      –400


                                                                      –800


                                                                     –1,200


  2006                    2007                    2008
      (Losses)/gains arising from trading securities, net, RUR mln
      Gains /(losses) arising from trading in precious metals, net, RUR mln
      Gains from foreign exchange, net, RUR mln




Operating expenses
Growth in operating expenses in 2008 equaled 8.6%, which compares favorably both to 2007 operating
expenses (28.4%) and the rate of revenue growth in 2008 (22.4%)(2007: 36.7%). This resulted in the overall
cost / income ratio improving from 48.3% to 42.9%. The ratio of operating costs to revenues before trading
results in securities, which is more indicative of efficiency levels, also improved, from 48.2% the previous year
to 39.3% in 2008.


Staff costs, representing 60.6% in 2008 of the Bank’s overall operating cost base, declined by 1.3% to
RUR 5,673 mln (USD 228 mln), despite new staff hires and network expansion (number of personnel increased
by 788 and the Bank increased the number of outlets by 35 in 2008). This was primarily due to cost-saving
efforts undertaken beginning in Q3 2008 and continuing through the end of the year. Average cost per employee
decreased by 18.6% to RUR 905.7 thsd (USD 36.4 thsd) per year, while staff productivity, as evidenced by
revenue per staff, rose by 6.4%, from RUR 3,393 thsd (USD 132.7 thsd) to RUR 3,611 thsd (USD 145.3 thsd).
34   MDM Bank Annual report 2008




                                                             3,611



                                                                             3600
                                        3,393
             2,921




                                                                             3200

                                                                             2800

                                                                             2400

                                                                             2000

                                                                             1600
                                1,113
     1,052




                                                                             1200
                                                       906




                                                                              800

                                                                              400

                                                                                0

     2006                       2007                   2008
             Staff costs per average staff, RUR thsd
             Revenue before result from trading in securities per average staff, RUR thsd



     Non-staff operating costs grew by 28.4% to RUR 3,693 mln (USD 148.6 mln), a slower pace than in
     the previous two years. Over 95% of the increase in non-staff expenses was attributed to depreciation, rent and
     other expenses related to property, plant and equipment, which grew in 2008 by RUR 818 mln, an increase of
     69%, on branch expansion (all new outlets opened by the Bank are being rented) and increasing rental rates in
     the first half of the year. Details of non-staff costs are presented in the table below.


                                                                                                    Change               Change
                                                                                                 2007/2008,           2006/2007,
     RUR mln or %                                                    2008             2007               %    2006            %

     Depreciation, rent and other
     expenses related to property,
     plant and equipment                                             1,999            1,181             69     737           60

     Professional services                                            505               416              21    377            10

     Taxes other than on income                                       439               485             (9)    389           25

     Advertising and marketing                                        238               365            (35)    244           50

     Security                                                         197               164             20     157            4

     Telecommunications                                               152               102             49      81           26

     Software                                                         130               134             (3)    106           26

     Other                                                             33                   29           14     52          (44)



     Total non-staff operating costs                                 3,693           2,876              28    2,143          34
                                                                                                                                                            35




                      Provisions and asset quality

                                      In 2008, the Bank maintained its conservative provisioning policy across all asset classes. During the third and
                                      fourth quarters of 2008, the effects of the global economic crisis began to have an increasing impact on credit
                                      quality in the Russian Federation, leaving Russian corporations dependent on refinancing in a challenging
                                      position, and precipitating a decline in asset quality throughout the banking sector.


                                      The Bank’s total provisioning expense, including provision for losses on credit related commitments, was RUR
                                      6,616 mln in 2008 (USD 266.2 mln), up 217.6% from RUR 2,083 mln (USD 81.4 mln) in 2007. Cost of risk, or
                                      the provisioning expense over average risk exposure, increased compared to 2007 levels for the overall loan
                                      portfolio, as well as in the corporate, small business and loans to individuals portfolios.



                                      Cost of risk, %


                                                                                                               9
                                                                                                  8,2




                                                                                                              7,5
                                            6,5




                                                                                                               6
                                                                          5,9




                                                                                                              4,5
                                                                    3,7




                                                                                                        3,2




                                                                                                               3
                                                                                      3,0
                                                  2,2




                                                                                                              1,5
                                                                                            1,5
                                                        1,4




                                                                                1,1
                                      0,5




                                                              0,3




                                                                                                               0


                                        2006                        2007                    2008
                                            Corporate
                                            Consumer
                                            Small Business
                                            Total



                                      As a result of provisioning, non-performing loans* (NPLs) were comfortably covered by provisions at the end
|*| Non-performing loans are          of 2008 across all portfolio segments, with total coverage at 139.3%, despite a significant increase in NPL levels.
    defined as loans with princi-
    pal and/or interest overdue       Going forward, MDM Bank will continue to maintain adequate loan loss provisions in line with the market
    by more than 90 days and          situation.
    other loans classified as non-
    performing by management.
    A loan is usually classified as
    non-performing by manage-
    ment if it is not probable that
    it will be recovered through
    means other than reposses-
    sion and subsequent realiza-
    tion of collateral.
36   MDM Bank Annual report 2008




     Non-performing loans more than doubled in 2008 from 2.0% of gross loans at YE 2007 to 4.2% of gross loans
     at YE 2008 (from RUR 3,784 mln to RUR 8,763 mln). This increase was driven primarily by worsening asset
     quality in the corporate loan portfolio: NPLs in this portfolio increased from 0.8% to 3.5% of loans to corporate
     customers during 2008 (RUR 1,014 mln to RUR 4,756 mln).


     Coverage of NPLs, %                                                                  NPLs (as % of gross loans), %


                                                                                    360                                                                          6




                                                                                                                                               6.0
                                                                                                                       5.9
                              309.2




                                                                                    300                                                                          5




                                                                                                                                                     4.8
     245.8




                                                                                    240




                                                                                                                                                           4.2
                                                                                                                                                                 4
                      223.3




                                                                                                3.7
                     197.6




                                                                                                                                         3.5
                                                 199.6




                                                                            176.0




                                                                                    180                                                                          3
                                              163.7




                                                         153.3




                                                                                                                             2.8
             137.6




                                                                         139.3
                                      112.5




                                                                 117.2




                                                                                    120                                                                          2
                                                                                                                                   2.0
                                                                                                        1.3




                                                                                     60                                                                          1
                                                                                          1.0

                                                                                                      0.9




                                                                                                                 0.8




                                                                                      0                                                                          0


         2006                         2007                       2008                       2006                       2007                2008
             Corporate                                                                          Corporate
             Retail                                                                             Retail
             Small Business                                                                     Small Business
             Total                                                                              Total




     Taxation
     Tax expense in 2008 amounted to RUR 1,333 mln (USD 53.6 mln), down 36.9% from 2007. The effective tax
     rate in 2008 stood at 28.7% (2007: 27.7%; 2006: 27.2%), mainly due to non-deductible losses on securities.


     Segments
     MDM Bank reported three main reportable operating segments in 2008: Corporate and Investment Banking,
     Retail Banking and Central Treasury.
                                                                                                  37




Corporate and Investment Banking

                                                               Change                  Change
                                                            2007/2008,              2005/2007,
RUR mln or %                             2008       2007            %      2006             %

External interest income                24,222    21,859          10.8    13,745          59.0

External interest expense               (9,472)   (7,311)         29.6    (4,117)         77.6

Internal funding charge                 (4,208)   (5,564)        (24.4)   (3,526)         57.8

Allowance for capital benefit            1,937     1,811            7.0    1,398          29.5


Net interest income                     12,479    10,795          15.6     7,500          43.9

Fee and commission income                1,805     1,831          (1.4)    1,312          39.6

Fee and commission expense               (445)      (401)         11.0     (459)        (12.6)

Trading, other financial assets at
fair value through profit or loss and
foreign exchange results                   820       981         (16.4)    1,315         (25.4)

Other operating income                     163       175          (6.9)       67         161.2

Total operating income
before impairment losses and
provisions                              14,822    13,381          10.8     9,735          37.5

Direct operating expenses               (1,739)   (2,450)        (29.0)   (2,363)           3.7

Impairment losses and provisions        (5,418)     (514)        954.1     (469)            9.6

Reversal of accounting impairment
losses and provisions                    5,418       514         954.1       469            9.6

Risk charges                            (3,911)     (811)        382.2     (567)          43.0


Segment result before central
overhead                                 9,172    10,120          (9.4)    6,805          48.7

Allocation of central overheads         (1,387)    (940)           47.6   (1,817)        (48.1)


Profit before taxation                   7,785     9,180         –15.2     4,988          84.0
38   MDM Bank Annual report 2008




     Corporate and Investment Banking (CIB) includes deposit taking and lending to corporate clients, leasing,
     factoring, settlements, cash management, cash collection, trade finance, syndications, a forfait financing,
     export credit agency financing, corporate finance, debt and equity capital markets, money markets, trading
     and brokerage in securities, foreign exchange and precious metals, repo transactions, banknote trading, and
     trading in derivatives.


     Net income before taxes and allocation of central overheads decreased by 9.4% in 2008 to RUR 9,172 mln
     (USD 369 mln) from RUR 10,120 mln (USD 395.7 mln) in 2007. At the same time, net interest income rose
     15.6% from RUR 10,795 mln (USD 422 mln) to RUR 12,479 mln (USD 502.1 mln) in 2008, primarily due to
     rate repricing on the corporate loan portfolio: the weighted average interest rate for RUR loans to corporate
     clients increased from 13.9% in 2007 to 17.0% in 2008. The decrease in income before taxation first of all
     was due to provision growth in the corporate loan portfolio. The result was also affected by a 29.2% decrease
     in direct operating expenses, from RUR 2,450 mln (USD 95.8 mln) in 2007 to RUR 1,739 mln (USD 70 mln)
     in 2008, which was primarily due to cost and staff optimizations in line with market developments and
     the Bank’s business focus in the third and fourth quarters.


                                            December 31                            Average Balance

     RUR mln                        2008          2007           2006          2008          2007          2006

     Total loans, net             142,523       138,024       137,331       121,680       148,411        114,061

     Total earning assets         180,756       198,164       187,231       184,148       200,498       172,567

     Total assets                 210,205       204,833       191,337       236,283       216,956       164,721

     Total deposits                94,558       101,775        71,495       116,792        94,204        64,495
                                                                                                  39




Retail Banking

                                                               Change                  Change
                                                            2007/2008,              2006/2007,
RUR mln or %                              2008      2007            %      2006             %

External interest income                 7,863     5,467          43.8     2,994          82.6

External interest expense                (664)     (312)         112.8     (235)          32.8

Internal funding charge                 (3,848)   (2,491)         54.5    (1,315)         89.4

Allowance for capital benefit              444       316          40.5       181          74.6


Net interest income                      3,795     2,980          27.3     1,625          83.4

Fee and commission income                1,337      1,141          17.2      552         106.7

Fee and commission expense               (353)     (225)          56.9     (170)          32.4

Trading, other financial assets at
fair value through profit or loss and
foreign exchange results                   (41)       72        (156.9)       73          (1.4)

Other operating income                      13         8          62.5         7          14.3


Total operating income
before impairment losses and
provisions                               4,751     3,976          19.5     2,087          90.5


Direct operating expenses               (1,629)   (1,447)         12.6     (865)          67.3


Impairment losses and provisions        (1,726)   (1,564)         10.4    (1,164)         34.4


Reversal of accounting impairment
losses and provisions                    1,726     1,564          10.4     1,164          34.4

Risk charges                              (670)      367       (282.6)       239          53.6


Segment result before central
overhead                                 2,452     2,162          13.4     1,686          28.2


Allocation of central overheads         (2,326)   (1,785)         30.3    (1,264)         41.2


Profit before taxation                     126       377        (66.6)       180         109.4
40   MDM Bank Annual report 2008




     Retail banking includes deposit taking and lending to individuals, small and medium enterprises and individual
     entrepreneurs, money transfer and foreign exchange services, a range of banking card products provided to
     individual customers, as well as settlements, cash management, and cash collection for small and medium
     enterprises.


     Net income before taxes and allocation of central overheads increased 13.4% in 2008 to RUR 2,452 mln
     (USD 98.7 mln) from RUR 2,162 mln (USD 84.5 mln) in 2007. The increase was due both to net interest
     income, which rose 27.3% from RUR 2,980 mln (USD 116.5 mln) to RUR 3,795 mln (USD 152.7 mln) in 2008,
     and a 7.4% increase in fee and commission income to RUR 984 mln (USD 39.6 mln) in 2008 from RUR 916 mln
     (USD 35.8 mln) in 2007. Net interest income rose both as a result of an increase in the size and margins in
     the small business loan portfolio, as well as growth of the retail portfolio. The small business and retail loan
     portfolios increased in size by RUR 7,315 mln (USD 249 mln) and RUR 3,611 mln (USD 122.9 mln) respectively,
     with small business loans totaling RUR 15,529 mln (USD 528.5 mln) and retail loans totaling RUR 40,460 mln
     (USD 1,377.1 mln) at YE 2008. Weighted average interest rates on RUR loans to small businesses rose from
     15.5% in 2007 to 18.6% in 2008. Direct operating expenses for retail banking increased by 12.6% from
     RUR 1,447 mln (USD 58.2 mln) in 2007 to RUR 1,629 mln (USD 63.7 mln) in 2008, on the back of significant
     network expansion during the year. At the same time, the Bank optimized costs for existing offices and staff, as
     indicated by operating costs per point of sale (2008: RUR 8.19 mln; 2007: RUR 8.82 mln)


                                                       December 31                      Average Balance
     RUR mln                                    2008        2007        2006         2008        2007        2006

     Total loans, net                         52,284       42,287      29,544      48,566       37,484      25,764

     Total earning assets                     52,284       42,287      33,874      48,566       37,484      25,764

     Total assets                             53,776       42,825      31,412      49,279       38,343      31,191

     Total deposits                           20,514       14,669      10,808       17,142      11,585      13,623
                                                                                                                   41




Central Treasury

                                                                       Change                        Change
                                                                    2007/2008,                    2006/2007,
RUR mln ro %                                2008           2007             %            2006             %

External interest income                      808          1,019          (20.7)          242            321.1

External interest expense                 (5,608)        (6,000)           (6.5)       (2,888)           107.8

Internal funding charge                     4,794          5,419          (11.5)         3,067            76.7

Allowance for capital benefit                 108            38           184.2             12           216.7


Net interest income                           102           476          (78.6)           433              9.9

Fee and commission income                        –             6         (100.0)             –               –

Fee and commission expense                   (83)            (8)          937.5            (3)           166.7

Trading, other financial assets at
fair value through profit or loss and
foreign exchange results                    1,365            80         1,606.3              –               –

Other operating income                          2            11           (81.8)             5          120.0


Total operating income before
impairment losses and provisions            1,386           565           145.3           435             29.9


Direct operating expenses                    (45)           (73)          (38.4)          (34)           114.7


Direct operating expenses                   1,341           492           172.6           401            22.7

Allocation of central overheads                (2)           (1)          100.0            (7)          (85.7)


Profit before taxation                      1,339           491           172.7           394            24.6

Central Treasury includes treasury, which undertakes the Bank’s funding and centralized risk management
activities through borrowings, issue of debt securities, use of derivatives for risk management and investing in
liquid assets such as short-term placements.


The segment result before taxation and allocation of central overheads increased 172.6% to RUR 1,341 mln
(USD 54 mln) in 2008 vs. RUR 492 mln (USD 19.2 mln) in 2007. The primary driver of this result was a gain
from the repurchase of MDM Bank’s own debt securities (RUR 1,134 mln; USD 45.6 mln). External interest
income, which primarily represents earnings from the Bank’s placement of its excess liquidity, declined by
42    MDM Bank Annual report 2008




       20.7% from RUR 1,019 mln (USD 39.8 mln) in 2007 to RUR 808 mln (USD 32.5 mln) in 2008 as a result of
       lower volumes on excess liquidity that were held during the year.


                                                          December 31                      Average Balance
       RUR mln                                    2008         2007         2006        2008          2007      2006

       Total loans, net                               –            –             –         –              –         –

       Total earning assets                       2,940        7,046        7,960      3,232         26,476     5,459

       Total assets                              56,401       66,985       19,176     36,698         41,554    15,403

       Total liabilities                        106,675       83,896      62,442      83,375         80,447      n/a*




Balance Sheet Review

                                                                December 31          December 31         December 31
       RUR mln                                                        2008                 2007                2006

       Assets

       Cash and cash equivalents                                        77,271            83,434               32,642

       Mandatory cash balances with central banks                        1,942             5,538                4,030

       Due from other banks                                             31,651            27,834               13,201


       Trading securities:

       – owned by the Group                                               194             10,875               13,510

       – pledged under sale and repurchase agreements                        –             2,987                3,624

       Derivative financial instruments                                  3,083                 260               255


       Available-for-sale financial assets:

       – owned by the Group                                              8,676                 290                  –

       – pledged under sale and repurchase agreements                     379                    –                  –

       Investment securities held to maturity                             108                    –                  –

       Loans and advances to customers                                 194,806           180,311              166,875

       Property, plant and equipment and intangible
       assets                                                            6,832             5,956                4,443

       Other assets                                                      4,175             3,997                4,542
                                                                                                                        |*| Due to changes in the sector
                                                                                                                            reporting beetween 2006
       Total assets                                                    329,117           321,482              243,122       and 2007
                                                                                                               43




                                                      December 31        December 31        December 31
                                                            2008               2007               2006

Liabilities

Due to central bank                                         35,575                 846              1,526

Due to other banks                                          97,375             101,516             59,346

Derivative financial instruments                             2,372                 874                667

Customer accounts                                          115,071             124,132             92,805

Debt securities in issue                                    28,700              46,631             52,870

Subordinated debt                                            5,966               5,066              5,452

Deferred tax liability                                         980                 770                652

Other liabilities                                            2,004               2,749              2,480

Total liabilities                                          288,043            282,584             215,798


Equity

Share capital                                                 1,794              1,794              1,736

Share premium                                                14,198             14,198              9,588

Revaluation of premises                                       3,143              2,986              1,942

Revaluation of available-for-sale financial assets          (1,566)                 21                   –

Cumulative translation reserve                                 326                  24                (21)

Retained earnings                                           23,179              19,875             14,079

Total equity                                                41,074             38,898              27,324


Total liabilities and equity                               329,117            321,482             243,122



The Bank’s total assets increased by 2.4% to RUR 329,117 mln (USD 11,202 mln) in 2008, following 32.2%
growth in 2007. The balance sheet grew only during the second quarter of 2008, as the Bank focused primarily
on liquidity, and in 4Q 2008 accelerated efforts to reduce exposure to riskier sectors of the economy and
temporarily significantly reduced new corporate lending pending analysis of the sectors to which the Bank
would seek to lend going forward.
44      MDM Bank Annual report 2008




        Total assets, RUR mln
                       352,384




                                   333,858




                                                            360,000
                                               329,117
        305,546




                                                            300,000


                                                            240,000


                                                            180,000


                                                            120,000


                                                             60,000


                                                                 0


        Q1 2008    Q2 2008       Q3 2008     Q4 2008




                                                         December 31                           Average

        RUR mln                                   2008         2007      2006         2008          2007         2006

        Interest-earning assets

        Loans                                194,806        180,311    166,875      204,168      187,565       123,346

        Interest-bearing investment
        securities                              8,335        12,065     16,360       12,835       15,789        12,969

        Loans and other interest-
        bearing funds placed in banks          70,746        94,653     38,677       80,368        67,106       31,137

        Total assets                         329,117        321,482    243,122     328,477       290,019      182,181


        Interest-bearing liabilities

        Term deposits                          78,413        87,852     54,461       89,860       68,391        32,703

        Other interest-bearing
        deposits                              36,658         36,280     38,344       45,148       40,182        38,429

        Debt securities in issue and
        other obligations                     34,666         51,697     58,322       44,715       60,028        38,978

        Interbank lending                    132,950        102,362     60,872      103,001       84,973        45,945

        Total liabilities                    288,043        282,584    215,798     288,103       257,848       147,179



Liquidity

        Starting from 3Q 2007, the Bank moved to bolster its liquidity position to a level that would be adequate in
        response to the unprecedented deterioration in global credit markets. This was achieved mainly through active
        management of the corporate loan portfolio. As a result of these efforts, a sizeable excess liquidity cushion was
        built up, and a substantial positive liquidity gap was achieved for maturity of up to 12 months, by the end of
        2007, and was maintained throughout 2008.
                                                                                                                                                                                                                                           45




      The Bank plans to maintain its conservative stance on liquidity, at the expense of profitability and growth,
      until economic stability returns and more visibility on international borrowing is achieved. For a more detailed
      discussion of liquidity risk management, please refer to note 28 of the Financial Statements.


Lending

      The Bank’s overall gross loan portfolio reached RUR 207,009 mln (USD 7,045.8 mln) at the end of 2008,
      up 8.0% over the previous year. Gross loans to corporate customers and loan to individuals grew by 13.3%
      and 9.8% respectively, while small business loans, a strategic priority for the Bank, grew significantly faster,
      increasing 89.1% during 2008. Loans to corporate customers amounted to RUR 137,800 mln (USD 4,690 mln)
      and continue to make up the majority of the portfolio, representing 66.6% of gross loans (2007: 65.2%),
      while the faster-growing small business portfolio (RUR 15,529 mln; USD 528.5 mln) made up 7.5% of gross
      loans, up from 4.4% at YE2007. The remainder is represented by retail lending amounting to RUR 40,460 mln
      (USD 1,377 mln), which accounts for 19.5% of gross loans.

      Gross Loans, RUR mln
                                                                                                                                       230,008




                                                                                                                                                                                   240 000
                                                                                                     207,428




                                                                                                                                                                         207,009
                              186,505




                                                                   189,889




                                                                                                                                                                                   200 000
                                                                                                               157,770




                                                                                                                                                 137,800
                                                                             141,056




                                                                                                                                                                                   160 000
                                        125,678
      121,585




                                                                                                                                                                                   120 000


                                                                                                                                                                                    80 000
                                                                                                                                                                40,460
                                                                                                                              41,277
                                                                                            38,895
                     36,849




                                                  37,991




                                                                                                                                                                                    40 000
                                                                                                                                                           15,529
                                                                                                                         14,107
                                                                                       10,795
                8,214




                                                           8,951




                                                                                                                                                                                        0


           2007                         Q1 2008                               1H 2008                           Q3 2008                            YE 2008
                Corporate
                Retail
                Small Business
                Total



      The overall composition of the loan portfolio is shown in the table below.


                                                                                                                                                                                                        Change                   Change
      RUR mln or %                                                                                                                                             2008                           2007 2007/2008, %     2006    2006-2007, %
      Commercial loans                                                                                                                               137,800                             121,585           13.3   113,330            7.3
      Small business loans                                                                                                                                 15,529                             8,214        89.1     4,416           86.0
      Net investment in finance lease                                                                                                                         2,860                           3,727       –23.3     2,095           77.9
      Retail loans                                                                                                                                         40,460                            36,849         9.8    28,001           31.6
      Investment banking loans                                                                                                                             10,360                            16,130       –35.8    23,532          –31.5
      Total gross loans                                                                                                                            207,009                               186,505           11.0   171,374            8.8
      Credit-related commitments (off-BS)                                                                                                                  51,775                            62,035       –16.5    41,805           48.4
46   MDM Bank Annual report 2008




     The Bank has continued to make progress on increasing the granularity and diversification of its corporate loan
     portfolio. Total exposures to the top 20 corporate borrowers represented 17.0% of the total portfolio (including
     off-balance sheet and excluding reverse repurchase agreements and margin loans), down from 18.9% in 2007
     and 23.7% in 2006.


     Significant efforts have been made to preserve industry diversification in the Bank’s loan portfolio. The Bank’s
     largest industry exposures at YE 2008 were to Trade, Individuals, Real Estate Management, Manufacturing and
     Wholesale Trade. Construction is no longer among the top 5 industries, and exposure to this sector dropped by
     35.3% from RUR 22,247 mln (USD 906.3 mln, 12% of gross loans) in 2007 to RUR 14,397 mln (USD 490 mln,
     7% of gross loans) in 2008. Since 2006, the Bank’s exposure to the construction sector has fallen both in terms
     of its share of the loan portfolio (2008: 7%; 2007: 12%; 2006: 14%) and in absolute terms (2008: RUR 14,397
     mln; 2007: RUR 22,247 mln; 2006: RUR 24,381 mln).


     The following charts show risk concentrations by economic sector within the customer loan portfolio (excluding
     margin loans, reverse repos and other loans of an investment nature).



          2006                                                          2007
                           17%
                                                                           14%        13%
          14%                           10%
                                                Retail trade                                      Retail trade
                                                Wholesale trade                             9%    Wholesale trade
                                                                  12%
                                          7%    Individuals                                       Individuals
                                                Manufacturing                                     Manufacturing

     16%
                                                Real Estate       10%
                                                                                                  Real Estate
                                                                                            20%
                                        17%     Finance                                           Finance

                8%
                                                Construction                                      Construction
                                                                          13%
                            11%                                                  9%
                                                Other                                             Other




          2008
                16%
                                  17%
                                                Retail trade
      7%                                        Wholesale trade

                                          11%
                                                Individuals
     5%
                                                Manufacturing
                                                Real Estate
      13%                                       Finance
                                   19%
                                                Construction
                     12%
                                                Other


     The following table shows loan loss provisions for each of the major sectors listed above.
                                                                                                                  47




Loan Loss Provisions Allocated

                                                                         2008
                                                                                            Provisions as %
Sector (UPDATE)                          Amount of Provisions, RUR mln.              of gross loans to sector

Retail trade                                                        1,998                                 5.6

Wholesale trade                                                     2,480                               11.2

Individuals                                                         2,859                                 7.1

Manufacturing                                                       1,569                                 6.1

Real Estate                                                           727                                2.7

Finance                                                               223                                 1.9

Construction                                                        1,006                                 7.0

Other                                                               1,341                                 4.4

Total                                                              12,203                                5.9


Loan Currency Breakdown

                                                                   Change                           Change
                                                                2008/2007,                       2007/2006,
RUR mln or %                         2008             2007              %              2006              %

Corporate Loans                    137,800         121,585              13.3         113,330              7.3

RUR                                 54,636           59,261              (8)          56,371                5

Currency                            83,164          62,324               33           56,959                9

Small Business Loans                15,529            8,214             89.1           4,416             86.0

RUR                                 15,141            6,738             125            3,531               91

Currency                               388            1,476             (74)             885               67

Retail loans                        40,460          36,849               9.8          28,001             31.6

RUR                                 32,114           31,042                 3         21,626               44

Currency                             8,346            5,807              44            6,375              (9)



The share of foreign exchange loans increased during 2008, primarily due to increasing USD and EUR exchange
rates against the RUR (20% and 15% respectively).


For a more detailed examination of asset quality and provisioning, please refer to Provisions and Asset Quality
section of the Income Statement Review above, and to note 11 of the Financial Statements.
48          MDM Bank Annual report 2008




Securities

            The Bank’s exposure to trading securities decreased in 2007 by 98.2% to RUR 194 mln (USD 6.6 mln).
            The small amount of securities remaining in the Bank’s portfolio is made up entirely of corporate shares, which
            decreased by 87.0% from RUR 1,488 mln in 2007. At the same time, in 3Q 2008, following the introduction of
            amendments to IAS 39 and IFRS 7, the Bank reclassified certain debt trading securities to Available For Sale
            (RUR 10,009 mln; USD 396.5 mln), Held To Maturity (RUR 1,184 mln; USD 46.9 mln) and loans and advances
            to customers (RUR 3,924 mln; USD 155.4 mln). An examination of the impact of these reclassifications can be
            found in the audited financial statements 119 of this annual report.


                                      2008                  2007                                2006
                                             % of                   % of       Change                   % of     Change
                                           share-                 share-        2008/                 share-      2007/
                                          holders'               holders'        2007,               holders'     2006,
RUR mln or %                               equity                 equity            %                 equity         %

Fixed income portfolio

– government and municipal
  bonds                               –           –       332         0.9            –      1 498         5.5      (77.8)

Due in one year or less               –           –         –           –            –          1           –           –

Over 1 year through 5 years           –           –        82         0.2            –        288         1.1     (71.5)

Over 5 years through 10 years         –           –         –         0.6            –        506         1.9           –

Over 10 years                         –           –       250         0.6            –        703         2.6      (64.4)

– corporate bonds and
  promissory notes                8,335       20.3     11,507        29.6        (27.6)    13,458        49.3      (14.5)

Due in one year or less           5,683       13.8        434         1.1      1,209.4      2,146         7.9      (79.8)

Over 1 year through 5 years      2,544          6.2    10,278        26.4       (75.3)     10,951        40.1       (6.1)

Over 5 years through 10 years      108          0.3       544         1.4        (80.1        346         1.3        57.2

Over 10 years                         –           –       251         0.6      (100.0)         15         0.1       15.7

Total fixed income:               8,335       20.3     11,839        30.4         (29.6    14,956        54.7      (20.8)

Due in one year or less           5,683       13.8        434         1.1      1,210.5      2,147         7.9      (79.8)

Over 1 year through 5 years      2,544          6.2    10,360        26.6        (75.4)    11,239        41.1       (7.8)

Over 5 years through 10 years      108          0.3       544         1.4        (89.7)       852         3.1       22.6

Over 10 years                         –           –       501         1.3            –        718         2.6      (30.2)

VAR (10 days, 99%
confidence)                       1,370         3.3       326         0.8        320.2        159         0.6      105.0


Equities

– long positions                  1,022         2.5     2,313         5.9        (55.8)     2,178         8.0         6.2

– short positions                     –           –         –           –            –        229         0.8           –

VAR (10 days, 99%
confidence)                         131         0.3       411         1.1        (68.1)       497         1.8      (17.3)
                                                                                                                              49




Customer accounts

      Customer accounts at the end of 2008 totaled RUR 115,071 mln (USD 3,916 mln), down by 7.3% from RUR
      124,132 mln (USD 5,057 mln) in 2007. The overall decline was driven by a 38% decrease in corporate term
      deposits from RUR 68,426 (USD 2,787.6 mln) at YE 2007 to RUR 42,451 mln (USD 1,444.9 mln) at YE 2008,
      which made up 36.9% of overall customer accounts as of YE 2008. A more accurate measure of customer
      accounts, however, can be made by excluding volatile customer accounts MDM Bank’s 100%-owned subsidiary
      Latvian Trade Bank (LTB), which management does not consider for liquidity management purposes due to
      the short-term and volatile nature of deposits in this bank. Excluding LTB, customer accounts were stable in
      2008, increasing from RUR 96,470 mln (USD 3,930.1 mln) at YE 2007 to RUR 98,347 mln (USD 3,347.4 mln) at
      YE 2008. Retail term deposits (including deposits from private banking customers) also grew by 79.9%, reaching
      RUR 25,362 mln (USD 863.2 mln) at 31 December 2008. In line with the Bank’s strategy to develop its retail
      business and diversify its funding and asset bases, retail deposits now account for 22.0% of customer accounts, vs.
      11.4% at the end of 2007.


      Customer accounts

                                                                                Change                         Change
                                                                             2008/2007,                     2007/2006,
       RUR mln or %                                 2008          2007               %             2006             %

      Corporate banking business                   78,810        92,422              (15)         68,918              34

      Small business banking business               5,224         4,371                20          2,526              73

      Retail business                              15,289        10,298                48          8,282              24

      Private banking                              15,748         9,353                68          2,578             263

      Total customer accounts by
      business line                               115,071       116,444               (1)         82,304               41


      Other customer accounts                            –        7,688                 –          7,906             (20)

      Total customer accounts                     115,071       124,132               (7)         90,210              38

      The share of current account balances in total customer accounts rose insignificantly from 29.2% at YE 2007 to
      31.9% at YE 2008.


      According to the updated strategy, the Bank seeks to increase the share of deposits predominantly in the retail
      segment in its total liabilities, paying particular attention to diversification and granularity of the deposit base.
      Management believes that such deposits represent the most stable funding base in the current environment.


                                                  Average amount,
                                                         RUR mln          Average rate paid, %       % of total deposits

      Accounts and demand deposits                           45,148                         1.5                       33

      Term Deposits                                          89,860                         6.6                       67
50     MDM Bank Annual report 2008




International borrowing

       During 2008, international markets were largely closed to Russian private banks. Due to its size and highest
       credit ratings among private Russian banks, however, MDM Bank was able to raise USD 535 mln from
       an IFC A/B syndicated loan in July 2008.


       The Bank remains largely opportunistic in 2009, with all plans on syndications and capital market transactions
       subject to market conditions.


       The following table shows MDM’s international borrowings as of 31 December 2008, 2007 and 2006.


                                                                          Change                          Change
                                                                       2008/2007,                      2007/2006,
       RUR mln or %                            2008         2007               %           2006                %

       Included in due to other banks:

       Syndicated loans                        8,281       24,839            (66.7)       12,560               87.9

       Trade finance borrowings               31,570       29,116               8.4       12,648             154.7

       Loans from international
       financial institutions                 29,396       11,515             155.3          660            1644.7


       Loans from international
       financial institutions:
       Unsecured loan participation
       notes                                  11,808       11,043               6.9       14,569             (24.2)

       Loan participation notes secured
       by diversified payment rights
       (“DPR”)                                 9,791       14,133            (30.7)       13,042                8.4

       Loan participation notes secured
       by a pool of car loans                  1,282        4,153             (69.1)       9,828             (57.7)

       Subordinated loan participation
       notes                                   5,966        5,066               17.8       5,452              (7.1)

       Total international borrowings        98,004       99,865               (1.8)      68,759              64.1
                                                                                                                                 51




Capital

          Following a capital increase completed in 3Q 2007 of RUR 4,668 mln (USD 184 mln) in favor of the International
          Financial Corporation (IFC), which is now a 5% shareholder in the Bank, the Bank’s capital base expanded to
          a very comfortable level relative to its risk-weighted assets. At YE 2007, the total capital ratio on a consolidated
          basis rose to 17.2% from 13.7% at the end of 2006 also due to recapitalization of net income. The Bank’s capital
          adequacy ratio as of 31 December 2008 was 17.9%. While management believes that the Bank’s minimum total
          capital ratio consistent with its objective to reach an investment-grade credit rating is around 12%, it is likely
          that the ratio will remain significantly above this level in 2009. This is mainly due to the restricted ability to
          increase leverage by international borrowing due to the ongoing volatility in the global capital markets.


                                                                                   2008              2007             2006

          Tier I capital, RUR mln                                                 39,497           35,891           25,382

          Tier II capital, RUR mln                                                 4,587            6,494             6,709

          Total capital, RUR mln                                                 44,084            42,385           32,091

          Total risk-weighted assets, RUR mln                                   246,646           246,799          233,516

          Tier I capital ratio, %                                                   16.0              14.5             10.9

          Total capital ratio, %                                                     17.9             17.2             13.7



Dividends

          Pursuant to a Resolution of the 26 May 2008 Annual General Shareholders’ Meeting, dividends on ordinary
          shares and on preferred registered shares for 2007 were neither accrued nor paid. The Bank’s 2007 profits were
          reinvested in the Bank’s development.
52          MDM Bank Annual report 2008




In 2009 MDM Bank will focus
specifically on establishing
long-term relationships with
key clients.
Electronics and home appliances re-
tailer Technosila
MDM Bank Corporate & Investment
Banking client

Igor Roslyakov, head of sales and trade
marketing department at Technosila
                                                                                                                           53


Review of Business Units




Corporate and Investment Banking
2008 key indicators
       • During the reported period, the average volume of funds attracted from MDM Bank’s corporate
         clients increased more than 8.3%: accrued liabilities rose from RUR 52,142 mln in 2007 to RUR
         56,476 mln in 2008. During the same period, running balances increased more than 44% from
         RUR 42,062 mln to RUR 60,016 mln.
       • The average increase in the annual loan indebtedness of corporate clients totaled 9.6% – rising
         from RUR 127,928 mln in 2007 to RUR 140,148 mln in 2008.
       • At the end of 2008, according to Cbonds ratings, MDM Bank was the second largest organizer
         of CLN (credit linked notes) issues in the CIS.
       • The reliability of the Bank’s professional platform for financial markets was affirmed by
         the numerous awards won by MDM in 2008, including MMBA first place prizes in the categories
         “Superdealing on the interbank credit market,” “Superdealing on the currency market” and
         “Superdealer of the market.” The Bank and its traders regularly top such award categories.


       MDM Bank works with all types of companies – from large corporate holdings to individual entrepreneurs –
       across nearly all segments of the Russian economy. The Bank’s corporate and investment banking unit offers
       a broad range of services to its corporate clients, including deposit accounts, lending, leasing, factoring, cash
       management services, collection, trade finance, forfaiting and export financing. Among MDM Bank’s investment
       banking services are corporate finance, consulting, inter-bank credit, securities trading and placement, repo,
       FOREX operations, hedging, money market and precious metals operations, banknote transactions and
       analytical support. Actively working with corporate clients throughout Russia helps MDM Bank diversify its
       loan portfolio and to continuously improve its quality.

       At the start of 2008, the Bank created the Corporate Finance Department by linking investment banking with
       trade finance, project finance and syndications. Combining these separate units into one department allowed
       for significant synergistic benefits – not only for the Bank, by creating a platform to effectively interact with
       international financial institutions – but also for the Company’s corporate clients by offering them access to
       MDM Bank’s highly qualified specialists.


       In 2008, MDM Bank conducted a comprehensive industry-based analysis of businesses and developed
       a methodology of how to service these companies based on their specific needs within each sector.


       The Bank also offered multiple approaches to solving common problems that have occurred during the current
       financial crisis, including late payments (related to corporate clients clearing payments), promissory notes and
       counter-trade operation settlements.


       In addition, the Bank launched working groups to address the needs of debtor companies in sectors of
       the Russian economy most affected by the global economic crisis.


       During the reported period, MDM Bank significantly broadened and modernized its range of banking products
       and services with the goal of increasing corporate customer accounts. In addition, MDM Bank also introduced
54   MDM Bank Annual report 2008




     new term deposits with interest paid in advance, and allowed clients to change the currency and/or term of
     a deposit without losing accrued interest.


     Revenue from inter-bank lending operations in 2008 doubled to USD 12 mln, and daily transaction volumes
     totaled approximately USD 500 mln.


     During the reported period, revenue from banknote transactions increased two fold to USD 16 mln and
     daily transaction volumes totaled USD 100 mln. Operations with derivative instruments brought the bank
     an additional USD 4 mln in profit (which also doubled the 2007 figure).


     MDM Bank remains one of Russia’s largest traders in the round-the-clock purchase and sale of the world’s
     largest currencies and is also one of the leading traders on the domestic FOREX market (in terms of the purchase
     and sale dollars for rubles). At the end of 2008, the Bank’s market share totaled 40% and 8%, respectively,
     whereas the average daily volume of exchange operations reached USD 2 bln. Revenue from FOREX operations
     increased USD 25 mln and reached USD 41 mln.


     MDM Bank is one of the largest players on the inter-bank market for precious metal operations. In 2008,
     the Bank held approximately an 8% share of the Russian gold market. During the same time, revenue from
     these operations increased to USD 20.3 mln from a loss of USD 0.86 mln in 2007.


     In 2008, MDM Bank launched a number of large-scale projects within its Project Finance division. At the same
     time, the bank was able to raise tied financing from foreign credit institutions for importing companies, which
     significantly cut borrowers’ expenses on servicing loans.


     Despite the fact foreign banks actively decreased credit lines to Russian companies and financial institutions
     during the reported period, MDM Bank’s credit quality remained high. This enabled the Bank to increase
     the volume of project and structured financing it offered its clients by 50.7% from 2007 to 2008 (from
     USD 223 mln to USD 336 mln).


     Despite unfavorable external economic conditions, MDM Bank was able to successfully carry out several
     landmark transactions on the Russian market, including organizing the issue of USD 200 mln of Credit Linked
     Notes, CLN for OJSC United Aircraft Corporation and attracting USD 90 mln for OJSC Sibirtelecom.


     The Bank’s Strategic Consulting and Rating Advisory unit (created at the end of 2007) launched a number of
     successful projects during the reported period, including: securing a rating for OJSC Salavatnefteorgsyntez,
     supporting the ratings for both OJSC Nizhnekamskneftekhim and OJSC Uralsvyazinform and offering strategic
     consulting for both the Uniway group of companies and CJSC Ekonomiko-Finansovaya Energetichesko-
     Stroitelnaya korporatsia (EFESk).


     In 2009, MDM Bank will focus particularly on developing loyalty programs, creating mechanisms for
     maintaining long-term relationships with key clients and forming client profiles (based on individual needs).
     The Bank will continue to actively work on attracting customer accounts from its corporate clients. The Bank’s
     will increase commission income by developing and introducing new services, broadening the Bank’s product
     line and effectively optimizing costs for existing banking products.
The Bank has been able to successfully adapt to the rapidly changing economic conditions of the last year. Our
goal is not simply to survive in these challenging times, but to actively work and support our clients throughout
this period. MDM Bank carefully analyzes global economic trends, as well as capital market dynamics; with
this information and a thorough understanding of these problems, the Bank is able to offer its clients the best
possible financial solutions. In 2009, MDM Bank will focus on the following areas of corporate and investment
banking: debt restructuring services; financing using the CBR Lombard list; developing new credit facilities
(combining debt and equity financing); and offering consulting services to clients to effectively address
the ongoing economic crisis. MDM Bank strives to ensure that all its clients feel supported by the Bank, and that
in turn, these clients are able to use the Bank’s financial products and services – not only to retain but also to
strengthen their market positions during these difficult times.


Unit Key Performance Indicators

                                                                                                      Change
                                                                                                   2007/2008,
RUR bln or %                                                            2008             2007              %

Revenues                                                               14,574          13,252              10.0

Operating expenses (before overall banking costs)                       1,517            2,301           (34.1)

Assets                                                               210,206          204,814               2.6

Liabilities                                                          142,284          164,710            (13.6)
56      MDM Bank Annual report 2008




MDM Bank Private Banking
develops personalized
investment strategies that
balance each client’s appetite
for risk and return
                                                                                                                           57




Private Banking
2008 key indicators
       • Private Banking clients' customer accounts increased 68.3% to RUR 15,749 mln.
       • Client base expanded from 605 to 1,041 clients.
       • New Swiss franc- and Great British pound-based deposit programs launched together with
         a “deposit converter” service.
       • Clients offered precious metals trading accounts offering exposure to metals market.
       • Mutual funds client base increased 60%.
       • Network of offices offering asset management services expanded to 55 throughout
         the country.
       The Private Banking unit offers VIP clients with more than USD 200,000 in assets a wide array of investment
       and banking products and services, including financial planning, consulting and portfolio management.
       The open architecture platform offers clients access to an unlimited number of services offered by financial
       institutions worldwide. In addition, MDM Bank offers clients its own banking products, which may be adapted
       based on each client’s individual needs. The principal target segment for MDM’s private banking unit are
       business owners and the senior management of large Russian companies, as well as wealthy foreign clients
       seeking access to the Russian market through investment products and banking services.


       Structured investment products available through the open architecture platform performed well in 2008.
       This program was extremely successful: assets under management in this segment increased from negligible
       levels in 2007 to over RUR 800 mln (these assets are not reflected on the balance sheet of MDM Bank, because
       the Bank acts as an agent for these products). Beginning in 2008, Private Banking clients were offered precious
       metal trading accounts from MDM Bank. In addition, new strategies were developed for portfolio management,
       which include greater focus on asset protection, and a new fund of funds was launched, the “MDM-World
       of Funds” unit investment fund. The overall cash inflow into “MDM-World of Funds” totaled RUR 56 mln
       during the reported period – according to Investfunds, this was the highest cash inflow among Russian funds of
       funds in 2008.


       MDM Bank cares about its clients and values their time. In 2008, for client convenience MDM Bank began
       offering its full array of Private Banking services in Ekaterinburg. In addition, MDM Private Banking
       representatives have expanded the list of cities to which they regularly travel. MDM Bank clients now have
       access to private banking services in 43 Russian cities.


       Since 2001, the Bank’s asset management business has been performed through MDM Bank’s subsidiary
       OOO “MDM Asset Management” (referred to throughout the text as MDM AM). The company manages mutual
       investment funds, pension funds and pension savings. In December 2008, MDM Bank’s asset management
       business was integrated into the Private Banking unit.


       In 2009, the Private Banking unit intends to expand its client base, further improve service quality and
       broaden its product line to fully meet the needs of MDM Bank clients. The growth in its customer base should
       be supported by the synergetic effect from the merger of MDM Bank and URSA Bank. The Private Banking
       unit expects client liabilities to grow at the same pace as in 2008. To broaden the regional reach of the Private
58   MDM Bank Annual report 2008




              Banking unit and improve the quality of client servicing at the local level, the Bank plans to staff its Tyumen and
              Novosibirsk branches with Private Banking unit representatives.


              In turn, MDM AM plans to increase the volume of assets under management in 2009 by raising funds from
              clients that participate in the state program of co-financing retirement pensions and which had concluded
              an agreement on the obligatory pension insurance with the non-state MDM pension fund. In addition, MDM
              AM intends to revise the existing investment strategy and introduce new programs that address the needs of
              the current economic situation.


              Unit Key Performance Indicators

              RUR bln or %                                                             2008             2007        Change, %

              Revenues                                                                   248              129             92.2

              Operating expenses (before overall banking costs)                          222              149              49.0

              Assets under management                                                  1,240            4,809            (74.2)

              Client liabilities                                                      15,749            9,417             68.4
                                                                                                                          59




Retail Banking
2008 key indicators
       • Retail client deposits increased more than 50% during the reported period, maintaining positive
         momentum even at the end of the year. This once again demonstrated clients’ trust in MDM Bank
         as a reliable financial institution.
       • The network of MDM Bank ATMs and self-service banking kiosks increased 77% from 707 to
         1,258 units.
       • MDM Bank placed second in a Senteo International and PricewaterhouseCoopers survey
         of the quality of retail banking services in Russia, titled “Index of client impressions 2008:
         Who leads the Russian retail banking business?”; the Bank was also among the top three in
         a ranking of retail service quality prepared by The Retail Finance magazine and SAS Russia/
         CIS company.

       The Retail Banking unit works with individuals, small- and medium-sized enterprises and entrepreneurs,
       offering clients a broad range of financial products and services, including: cash and settlement services, cash
       collection for small- and medium-sized enterprises, money transfers, debit and credit cards, currency exchange
       operations, mortgage and car loans, consumer loans, acquiring and a number of term deposits in rubles, dollars
       and euros.


       In 2008, MDM Bank launched new retail deposits and offered several unique services to its depositors, including
       the “Deposit converter” (which enabled clients to transfer a deposit from one currency into another without
       losing accrued interest) and the “Deposit time-out” (which allowed clients to withdraw a portion of a deposit
       for up to 14 days without losing any interest). In 2008, MDM Bank also launched the “paying card” project,
       which combines the advantages of a bank payment card and a term deposit.

       In 2008, MDM Bank repeatedly won tenders conducted by the Russian State Deposit Insurance Agency (DIA)
       to act as the agent bank to pay out insurance compensation to depositors of troubled banks. About one-third of
       all clients that applied for compensation kept their funds in MDM Bank accounts (the overall sum of deposits
       exceeded RUR 240 mln), thus illustrating high levels of confidence in the Bank.


       The Bank’s acquiring service was also successful during the reported period: volumes increased 80.8% (from
       RUR 6,910 to RUR 12,494 mln), whereas the volume of payment acceptance services increased 39.9% (from
       RUR 263 to RUR 368 million). In 2008, approximately 1,000 new clients joined the acquiring service, and
       the Bank’s terminal network increased 52.5% (from 3,579 to 5,457 units).


       MDM Bank conducts a conservative financial and lending policy, thoroughly evaluating the creditworthiness of
       potential borrowers. The Bank was one of the first to foresee changes in Russia’s economic outlook. The Bank’s
       retail loan portfolio is well-diversified, which allows the Bank to not only successfully develop long-term
       relationships with existing clients, but also to actively attract new ones.
60      MDM Bank Annual report 2008




In 2008 MDM Bank launched
new retail deposits and
introduced unique services
for its depositors, including
the Deposit Converter, which
enabled clients to switch term
deposits from one currency
into another without losing
the accrued interest
                                                                                                                     61




During the reported period, MDM Bank implemented unified standards of service quality for all retail front office
employees. Training methods were developed and have been implemented, including methods for analyzing
complicated situations (which may arise through daily client service work). In the process of the training
program, employees also work out the key competencies of case management and how to effectively promote
banking products and services.


In 2009, the top priority for the Retail Banking unit is to increase profitability, grow volumes and further
improve efficiency levels. The Bank will work to steadily improve the quality of its loan portfolio, which in turn
will increase profitability. MDM Bank also intends to introduce new approaches to developing a full range of
savings products by introducing special offers for target client segments and optimizing sales technologies.
In addition, MDM Bank intends to develop a multi-tiered system to support the whole spectrum of banking
products and to analyze its effectiveness.


Unit Key Performance Indicators

RUR bln or %                                                            2008             2007       Change, %

Revenues                                                                3,146            3,074              2.3

Operating expenses (before overall banking costs)                       1,190            1,075             10.7

Assets                                                                 39,070           34,840             12.1

Client liabilities                                                     15,289           10,298             48.5
62         MDM Bank Annual report 2008




In 2009 MDM Bank will
continue to develop and
improve its range of services
for small business clients and
will focus on high margin
products.
Meat product manufacturer
“Myasnoi Dom”
MDM Bank Small Business Lending
Department client

Sergey Efimov, company owner
                                                                                                                         63




Small Business Banking
2008 key indicators
       • The small business loan portfolio increased 89% from RUR 8.2 to RUR 15.5 bln.
       • New MDM Energy loans totaling more than RUR 400 mln were approved during the year.
       • Projects financed by MDM Bank helped Russian companies to save more than USD 100 mln
         yearly and decrease greenhouse gas emissions by 250,000 tons of CO2-equivalent.

       Small business banking is a strategic priority for MDM Bank. The Bank offers small enterprises a wide array of
       banking products and services, including deposits, credit and leasing and cash management services.


       In 2008, the Bank conducted a full-scale optimization of its procedures and processes, which helped
       improve client interaction with the Bank. Simplified contracts were introduced, procedures for credit decisions
       were improved, the pricing system for small business products was modernized, and the Bank’s CRM-systems
       were updated.


       During the reported period, MDM Bank improved and introduced products targeted at small businesses. One of
       the most significant changes was the MDM Micro loan program for private business owners or entrepreneurs. In
       addition, the compulsory clause requiring collateral insurance was removed for the MDM Small product. This
       change made the product more affordable for a larger number of clients, while at the same time not increasing
       the risk for the Bank.


       The MDM Energy project, implemented in conjunction with the International Finance Corporation (IFC),
       achieved outstanding results during the reported period. This credit product is aimed at increasing the energy
       efficiency of Russian enterprises. MDM Energy combines traditional lending with consulting services from
       IFC experts. To promote MDM Energy in Russia’s regions, during the reported period, MDM Bank conducted
       a series of educational seminars in 30 Russian cities, which more than 600 representatives from small- and
       medium-sized businesses attended.


       In order to broaden the services offered to small business clients, the Bank launched in December 2008
       a consulting program focused on low-cost energy efficiency measures. The program “Economize intelligently”
       offers small businesses the opportunity to significantly decrease operating costs without additional investment
       and at a minimal cost.


       During the reported period, MDM Bank also promoted partner programs developed together with regional
       small business support foundations. Work on these programs was carried out at the Bank’s branches in Moscow,
64   MDM Bank Annual report 2008




     Perm, Penza and Omsk. MDM Bank also actively developed activities in the field of servicing small business
     clients at the regional level – servicing such clients 28 new points of sales throughout Russia.


     In 2009, MDM Bank plans to continue to optimize its structure, which will also allow it to decrease operational
     costs connected with selling its banking services.


     Unit Key Performance Indicators

     RUR bln or %                                                          2008             2007       Change, %

     Revenues                                                              1,605             902              77.9

     Operating expenses (before overall banking costs)                       440             372             18.0

     Assets                                                               14,706            7,985            84.2

     Client liabilities                                                    5,224            4,371             19.5
                                                                                                                            65


Information Technology




       In 2008, MDM Bank focused on continuing improvements and modernizations to its existing IT infrastructure,
       laying the foundation for the launch of a completely new core banking system, the first elements of which will
       be put into operation in 2009. This system will serve as the basis for reorganizing the Bank’s operational model,
       which will play an important role in accomplishing the strategic goal of providing the highest quality service to
       clients, while at the same time increasing the effectiveness of the work of all of the Bank’s units.


The Core Banking System

       In connection with the planned merger of MDM Bank and URSA Bank in 2009, work will start on introduction of
       a fundamentally new IT system that will accelerate transaction processing speed and integrate data processing.
       As a result, various business units will be able to access information about clients and use it for cross-selling,
       which should significantly increase the efficiency of the Bank’s operations. The core banking system was
       launched in January 2009, and a special division has been created to focus on its implementation.


Main Goals of the New System

       • To create a centralized database of the Bank’s clients.


       • To increase the efficiency of all processes, from opening an account to risk analysis and CRM.


       • To support a new client-oriented model of retail business, minimizing input from the middle and back offices
         when dealing with the Bank’s clients.


       • To significantly decrease risks by using improved technology for processing loan applications, underwriting
         and operating the integrated trade system.

       • To increase the efficiency of procedures in the Bank’s middle and back offices by centralizing procedures,
         obtaining a positive effect for the whole Bank.


       In 2009, MDM Bank plans to launch the main elements of its centralized banking system.


Security of the Systems

       The security of the Bank’s IT systems is paramount for both MDM Bank and its clients. In 2009, the Bank intends
       to significantly modernize the equipment, software and architecture of its IT-systems to ensure maximum
       protection from any unauthorized access to the corporate network and client data. At the same time, the clients
       and partners of the Bank will continue to be able to obtain full remote access to their accounts and conduct
       on-line banking operations.
66     MDM Bank Annual report 2008




System of Credit Applications

       In 2009, MDM Bank plans to introduce a new Credit conveyor, which will simplify and centralize the sales
       management process. On the back of this system, the Bank will also re-launch other products for retail clients
       and small businesses.


Electronic Document Management

       The new system of electronic document management was selected as an IT platform for automating the flow of
       business documentation. In 2009, the electronic (paperless) document management system for point of sales
       will be operational. In the future, the Bank plans to expand this system, including the possibility of achieving
       a paperless environment for the Bank’s entire business document flow.
                                                                                                                            67

Corporate Governance
and Management



       MDM Bank’s adheres to global best practice in corporate governance. The Bank’s executive bodies are fully
       responsible for defining and implementing business strategy as well as evaluating client, shareholder, and
       employee confidence in the Bank.


       MDM Bank’s information transparency policy is recognized as being a cornerstone of the Bank’s reputation as
       a respected and successful private financial institution. The Bank adheres to the code of corporate conduct.


       In 2008, Standard & Poor’s confirmed the Bank’s overall international scale Corporate Governance Score (CGS)
       at 6+, and raised its Russian national scale CGS to 6.9 from 6.7.


Board of Directors

       The MDM Bank Board of Directors approves and oversees the implementation of the Bank’s strategy and
       the fulfillment of the Management Board’s set tasks and performance targets, while also providing support as
       necessary.


       The members of the Board of Directors are active participants in the Bank’s operations and receive timely access
       to information on the Bank’s activities. The Chairman of the Board of Directors is a strong leader and efficiently
       manages the Board’s functions.


       The Board of Directors combines knowledge and experience, as well as a unified management approach that
       facilitates constructive discourse when reviewing Bank issues.

The Board in 2008

       Activity highlights in 2008 included:
       • Approving MDM Bank’s mission, vision and values;
       • Improving the quality of corporate governance, particularly with regard to: making the necessary changes to
         the Bank’s internal regulations; optimizing internal processes, specifically interaction between the Board of
         Directors and the Management Board; and enhancing information transparency policy;
       • Composing a new and efficient risk management system, specifically producing expedited internal and
         external communications for risk reporting;
       • Adjusting the internal control process by strengthening the functions of the Internal Audit and Compliance
         departments, respectively;
       • Strengthening management oversight functions by requiring a regular review of the Management Board’s
         reports on business development, competitors’ activities, budget performance, market position and the Bank’s
         overall results;
       • Changing the organizational structure based on business requirements and to fulfill the Bank’s strategic
         goals.
68    MDM Bank Annual report 2008




Biographies & Recent Changes

      MDM Bank Board of Directors, as of 31 December 2008:


                       First
      Name             appointed    Other relevant positions and Bio

      Oleg Viyugin     2007         Chairman of the Board of Directors
      Chairman                      Member of the Audit and Risk Management Committee
                                    Member of the Strategy Committee
                                    Member of the Nominations and Remuneration Committee
                                    Independent Director

                                    Before joining the MDM Bank Board of Directors in 2007, Oleg headed
                                    the Federal Financial Markets Service of the Russian Federation, a position he
                                    had held since 2004. Between 1999 and 2002, he was Executive Vice-President
                                    at Troika Dialog, Russia’s oldest investment bank.
                                    Oleg has also held a variety of senior positions within the Russian government,
                                    including First Deputy Minister of Finance, First Deputy Chairman of
                                    the Central Bank of Russia, and Extraordinary Advisor to the Prime Minister of
                                    the Russian Federation.
                                    Upon graduating from the Department of Mechanics and Mathematics at
                                    Moscow State University in 1974, Oleg successfully defended his Ph.D. in
                                    physics and mathematics at the same university in 1977.

      Sergei Popov     2002         Member of the Board of Directors
                                    Deputy Chairman of the Board of Directors

                                    Sergei joined the MDM Board of Directors in 2002, before which he served
                                    on the boards of several blue-chip Russian companies, including RAO UES of
                                    Russia, Piping Metallurgy Company (TMK), Eurochem, and MDM Industrial
                                    Group, which he co-founded in 2000.
                                    In 1997, Sergei co-founded Trading and Industrial Group MDM, where he took
                                    a senior role in strategy development until 1999. Prior to working at Trading
                                    and Industrial Group MDM, Sergei was a partner and commercial director
                                    at OOO Prodcontract Company. Upon graduating from Urals State Technical
                                    University with a major in heat power engineering in 1993, Sergei became
                                    a partner in the Urals-Siberia Trading and Industrial Company (USTPK), which
                                    specialized in energy and pipe trading as well as supplying raw materials to
                                    Russian metallurgical plants.
                                    Sergei also currently sits on Board of Directors at SUEK, Russia’s leading coal
                                    supplier.
                                                                                                         69




Martin          2007   Member of the Board of Directors
Andersson              Chairman of the Nominations and Remuneration Committee
                       Member of the Strategy Committee

                       Before joining the MDM Board of Directors in 2007, Martin also chaired
                       the Boards of Directors at Brunswick Rail Leasing (2005-2007) and Brunswick
                       Capital Limited (2002-2007).
                       In 1993 Martin co-founded the Brunswick Group, and was appointed CEO
                       at Brunswick Brokerage in November 1993. In 1999 he became Chairman of
                       Brunswick UBS Warburg. Between 1992 and 1993, Martin served as an advisor
                       to the Russian government’s privatization committee, and from 1990, he
                       worked as a consultant at Booz Allen Hamilton in Mergers & Acquisitions.
                       Martin also sits on the Board of Directors of SUEK.

Luqman Arnold   2007   Member of the Board of Directors
                       Chairman of the Strategy Committee

                       Luqman’s 35-year career has spanned commercial, investment and retail
                       banking, insurance, asset and wealth management, and has included posts as
                       President and Chairman of the Group Executive Board of UBS AG and CEO of
                       Abbey National PLC. He has also worked at BNP Paribas and CSFB.

Sergei          2007   Member of the Board of Directors
Shapiguzov             Chairman of the Audit and Risk Management Committee
                       Independent Director

                       Since 1990, Sergei has headed FBK, a leading Russian auditing firm, and is
                       currently a managing partner at the firm. Between 1992 and 1994, he was
                       director of KPMG’s Russian branch.
                       Sergei graduated from the Department of Economics at Moscow State
                       University in 1972. In 1981 he defended a Ph.D. in economics before earning
                       another degree in applied mathematics and cybernetics from Moscow State
                       University in 1984.

Edward Nassim   2007   Member of the Board of Directors
                       Independent Director

                       Edward has served as Vice President for Europe, Africa, and the Middle East
                       of the International Finance Council, a World Bank Group member, until his
                       recent retirement. In his previous role as IFC Director of Operations in Europe
                       from 1991 to 2006, Edward helped pioneer investments in many sectors of
                       the Russian economy.
                       In 1989, Edward was appointed as IFC's first Director of Corporate Finance
                       Services. He was involved in several transactions worldwide, including
                       the restructuring and privatizing of some of the first, large state-owned
                       companies in Czechoslovakia and Poland. Edward has also been involved in
                       several advisory services initiatives in areas including corporate governance,
                       improving the business climate in the SME sector, leasing, energy efficiency,
                       and housing finance.
                       Edward holds undergraduate and graduate degrees from Imperial College,
                       London, and an MBA from Harvard Business School.
70    MDM Bank Annual report 2008




      Igor Kouzin       2008         Member of the Board of Directors
                                     Member of the Audit and Risk Management Committee

                                     Igor joined MDM Bank as its CEO in October 2008, where he served until
                                     the merger with URSA Bank was announced in December 2008. Igor joined
                                     MDM from DeltaCredit, where he had been CEO since 2004. Igor has ten years’
                                     experience working for fast-growing international financial companies.
                                     Prior to joining DeltaCredit, Igor was Vice President for International Markets
                                     at Sanchez Computer Associates, Inc., a banking technology provider. He also
                                     managed the company’s activities in Central and Eastern Europe as well as Asia.
                                     Igor was one of the founders of Profile Venture Partners, which had its
                                     headquarters in the US, and from 1999 until 2002 he was a managing director
                                     there.
                                     Igor began his career with McKinsey & Company in Toronto and Washington,
                                     D.C., where he participated in the successful initial development, launch
                                     and continued development of several banks. Mr. Kouzin has an MBA from
                                     the University of Chicago’s Graduate School of Business (GSB).


      As of 31 December 2008, three Board members have the status of independent directors (as defined in
      Paragraph 6 of the Provisions on the Board of Directors of MDM Bank (http://www.mdmbank.com/about/
      administration/directors), which corresponds to the independence criteria applied in international practice.


Board Committees

      The three board committees that were re-formed in June 2008 and then again in December 2008 following
      the election of new members to the Board of Directors are the:
      • Strategy Committee;
      • Audit and Risk Management Committee;
      • Nominations and Remuneration Committee.


      In 2008, the committees continued to play an important role as a forum for detailed analysis, as well as for
      developing grounded, independent and professional recommendations for the Board of Directors on specific
      issues relating to the Bank. Working in close contact with management, the committees ensure efficient
      communication between executive management and the Board of Directors. The vast majority of issues are
      reviewed by the committees before the Bank’s management discusses them with the Board of Directors, which
      receives responses at every meeting from the committees’ respective chairmen, as well as the Chairman of
      the Management Board.


      The Chairman of the Management Board has a standing invitation to all committee meetings. The members of
      the Management Board, as well as other managers and representatives of the Bank, are also frequently invited
      to participate for relevant agenda items. Ernst & Young, the Bank’s external IFRS and RAS auditor, regularly
      participates in Audit and Risk Management Committee meetings.
                                                                                                                          71




Strategy Committee

      Luqman Arnold                        Committee Chairman                                 since June 2007

      Martin Andersson                     Committee member                                   since May 2006

      Oleg Viyugin                         Committee member (Independent Director)            since June 2007

      Sergei Popov                         Committee member                                   since December 2008


      The Strategy Committee is responsible for reviewing all strategy recommendations and any major projects that
      will involve a significant commitment of management time or the Bank’s financial resources. The committee
      also reviews the annual budget to ensure that it is consistent with long-term strategic goals. Moreover,
      the committee monitors and enforces the positions taken by the Board of Directors on strategic issues.


      Key Developments in 2008
      In 2008, the committee was essential in approving the Bank’s annual budget, taking key decisions on the core
      banking system, composing the Bank’s mission, vision and values as well as developing the retail business
      strategy.


      The committee evaluated the Bank’s regional strategy and operating model during the year, ultimately deciding
      to alter the development of the Bank’s regional network to improve the efficiency and productivity of those
      business units which develop services for individuals and small businesses.


      Beginning in October 2008, the committee became the Bank’s main forum for discussion of the economic
      situation in Russia and the world, as well as on measures that the Bank should take in the fast-changing business
      environment.


      The committee specifically concentrated on the effect of inflation on the quality of the Bank’s loan portfolios,
      and developed means to address this issue. The committee supported management’s initiative to switch to
      quarterly budgeting for 2009.


      At the end of October, the Strategy Committee, during a discussion on working with the Board of Directors,
      approved means for quickly informing the Management Board of suggestions on how the Bank should operate
      in the unstable economic environment. There was also an in-depth discussion on planning in 2009, resulting
      in management being assigned responsibility for developing various response scenarios to potential changes
      in the economic climate and to prepare suggestions for various factors. The committee also discussed how
      to optimize expenses and improve efficiency and stability, before passing the suggestions to the Board of
      Directors.


      The Committee’s work resulted in increased business-processes control system efficiency throughout the Bank,
      particularly in more precise expense planning and improved business profitability.
72    MDM Bank Annual report 2008




Audit and Risk Management Committee

      Sergei Shapiguzov                      Committee Chairman
                                             (Independent Director)                               since June 2007

      Oleg Viyugin                           Committee member (Independent Director)              since June 2007

      Igor Kouzin                            Committee member                                     since December 2008



      The Audit and Risk Management Committee reviews the financial reporting process and ensures the publication
      of comparable, transparent and accurate financial information. It reviews the effectiveness of the internal
      financial control and risk management systems, as well as the internal and external audit functions, including
      appointing the Bank’s independent auditors and reviewing their performance. The committee also evaluates
      the procedures for enforcing Bank compliance with legislative and regulatory requirements pertaining to
      financial reporting. It provides control over banking risks, sets the Bank’s risk profiles, appraises the effectiveness
      of risk level evaluation systems, risk analysis and, if necessary, reviews major transactions.


      Key Developments in 2008
      In 2008, the Audit Committee initiated a regular review of external auditor recommendations to provide more
      efficient results in addressing those recommendations. The committee also regularly reviewed management
      reports and Internal Audit Department reports. An independent external audit and risks expert was invited to
      work with the committee on a permanent basis.


      The Internal Audit Department regularly tests the Bank’s extensive internal control system. The committee
      participated in the development and introduction into the Bank’s internal processes of an electronic database
      with auditors’ recommendations, which was created in 2008 to improve the internal auditors’ efficiency.
      The database tracks in real time how respective departments are fulfilling the recommendations.


      The committee reviews all of the Bank’s planning and audit methodology documents during its meetings and
      then passes them to the Board of Directors.


      The committee has designed a risk-forecasting model that is reviewed at all its meetings, before presenting its
      recommendations – based on a detailed study of the economic climate – to the Board of Directors. This enables
      the Board to make carefully weighted strategic decisions in the fast-changing market.


      MDM Bank’s financial and operating information transparency is highly rated. Standard & Poor’s confirmed
      the Bank’s overall CGS-6+ (international scale) and raised the Bank’s Russian national scale from CGS-6.7
      to CGS-6.9.
                                                                                                                       73




Nominations and Remuneration Committee

      Martin Andersson                    Committee Chairman                               since June 2007

      Oleg Viyugin                        Committee member (Independent Director)          since December 2008

      Brian Kearns                        Committee member (external expert)               since December 2008



      The Nominations and Remuneration Committee provides recommendations on employee policy issues,
      including the incentive program. The committee also determines the total volume and system of compensation
      for the Bank’s personnel.


      The Bank has structured its employee social policy on the principle of solid and long-term relationships, as
      reflected in its approach to forming and managing strategic personnel reserves.


      Key Developments in 2008
      In 2008, the committee sent a team of senior management to study the MDM-INSEAD Bank Leadership Program
      at the INSEAD business school, which led to the creation of a training scheme for the Bank’s middle and senior
      management.


      The committee created a new performance-evaluation scale for the Board of Directors, which was endorsed by
      the Chairman and members of the Management Board. Corporate governance was improved significantly and
      the interaction between the Bank’s management and employees was optimized via examination of the Board of
      Directors and the Chairman of the Management Board.


      The committee and the HR Department worked together specifically to implement the Bank’s incentive
      program, drafting recommendations on key efficiency indicators for the Management Board’s members. In
      conjunction with a professional consultant, the committee began developing a long-term incentive program for
      the Bank’s employees.


      In the current macroeconomic climate, the committee constantly monitors personnel efficiency and makes
      recommendations on the advisability of changing the Bank’s organizational structure.
74     MDM Bank Annual report 2008




Statistics on Corporate Events

       General Shareholders’ Meetings:


       – Annual (1)                                 May 26, 2008

       – Extraordinary (3)                          August 11, 2008
                                                    October 10, 2008
                                                    December 15, 2008


       Revision Commission Meetings:

       – Physical meetings:                         3


       Board of Directors’ Meetings:

       – Physical meetings                          8

       – By correspondence/phone                    8


       Board Committee Meetings:

       – Комитет по стратегии                       8

       – Комитет по аудиту и рискам                 9

       – Комитет по назначениям и вознаграждениям   8


       Management Board Meetings:

       – Physical meetings                          62

       – By correspondence/phone                    4
                                                                                                                       75




The Management Board

      The Management Board, as of April 2, 2009:


                        Position
      Name              with MDM Bank              Bio

      Igor Kim          Chairman of                Following the announcement of the planned merger between
                        the Management             MDM Bank and URSA Bank in December 2008, the MDM Bank
                        Board                      Board of Directors appointed Igor as CEO and Chairman of
                                                   the Management Board of MDM Bank.
                        Chief Executive Officer
                        (CEO)                   Since 2006, Igor had been Chairman of the Board of Directors and
                                                Chairman of the Strategy Committee at URSA Bank, which was
                                                created when Uralvneshtorgbank and Sibacadembank merged.
                                                Prior to the merger, Igor served as Chairman of the Board of
                                                Directors of Sibacadembank, where he began working in 1997,
                                                and Chairman of the Supervisory Board of Uralvneshtorgbank, in
                                                which he had acquired a stake in 2004.

                                                   Between 2001 and 2004, Igor served as Chairman of
                                                   the Management Board of Bank Caspian in Kazakhstan. He began
                                                   his banking career in 1993 at Russky Narodny Bank as Deputy
                                                   Chairman of the Management Board.

                                                   Igor graduated from Novosibirsk State University with a degree in
                                                   Economic Cybernetics in 1990.

      Alexey Drobot     Deputy Chairman            Alexey was appointed Head of Corporate & Investment Banking in
                        of the Management          October 2007, and in November 2007, he joined the Management
                        Board                      Board. Previously, Alexey was the Head of MDM Bank’s Corporate
                                                   Banking, where he implemented the Bank’s strategic objectives in
                        Head of Corporate          working with corporate clients and managed the Bank’s corporate
                        & Investment Banking       banking divisions.

                                                   Alexey joined MDM Bank in 2001 as Head of the Credit
                                                   Department of the Novoarbatsky office. Successive
                                                   appointments included Deputy Head of the Client Department
                                                   of the Sukharevsky office as well as Head of the Central District
                                                   Client Department. In 2006, he was appointed Head of the Moscow
                                                   Network Development Department, where he managed large
                                                   corporate client origination and client services.

                                                   Prior to joining MDM Bank in 2001, Alexey worked as Commercial
                                                   Director and Deputy General Director of Finance at various
                                                   companies. In 1999, he started his career in banking as a senior
                                                   credit expert at KMB Bank.

                                                   Alexey graduated from the Leningrad Military-Naval College. In
                                                   1998, he received a degree from the Norilsk Industrial Institute
                                                   and, in 2001, received a degree with honors in Finance and Credit
                                                   from the State Academy of Finance.
76   MDM Bank Annual report 2008




     Svetlana         Deputy Chairwoman        Svetlana was appointed Deputy Chairwoman of the MDM Bank
     Mironova         of the Management        Management Board and Head of the MDM Network Management
                      Board                    unit in March 2009. She oversees issues relating to the operation,
                                               efficiency and development of the Bank’s regional network.
                      Head of Network
                      Management Unit          Svetlana joined MDM Bank from URSA Bank, where she
                                               was a deputy general director and head of the Urals division
                                               of the Bank from 2007. From 2005 to 2007, Svetlana was
                                               a deputy general director and management board member at
                                               Sibacadembank, where she was in charge of corporate banking.
                                               Prior to that, from 2002, she headed the Kuzbasskiy branch.
                                               Svetlana began her banking career in 1995 as an accountant
                                               at Russkiy Narodniy Bank. Following Russkiy Narodniy Bank’s
                                               merger with Sibacadembank, she was a directorate head and then
                                               deputy director of the Kusbasskiy branch.

                                               Svetlana graduated from the Novosibirsk Engineering and
                                               Construction Institute in 1993 with a degree in Construction
                                               Economics and Management.

     Tatyana Pupkova Deputy Chairwoman         Tatyana joined MDM Bank in 2008 as Chief Operating Officer,
                     of the Management         and was appointed Deputy Chairman of the Management Board
                     Board                     in 2009.

                      Chief Operating          Prior to joining MDM, Tatyana was Chairman of the Management
                      Officer                  Board at Etalonbank (formerly JSC Zheldorbank), a position she
                                               took after resigning from a similar position at Uralvheshtorgbank.
                                               Previously, Tatyana worked at Kaspiyskiy Bank, where she was
                                               promoted from Director of the Operating Department to Deputy
                                               Chairman of the Management Board, and KRAMDS Bank,
                                               a commercial innovation bank in Kazakhstan.

                                               Tatyana holds diplomas and degrees from the Institute of Energy,
                                               the Kazakh State Academy of Management’s Market Institute, and
                                               the Adilet Higher School of Law. She speaks fluent English.

     Vadim Sorokin    Deputy Chairman          Vadim was appointed Chief Financial Officer (CFO) of MDM
                      of the Management        Bank in October 2008. His candidacy for the position of Deputy
                      Board                    Chairman of the MDM Bank Management Board was submitted in
                                               November 2008.
                      Chief Financial Officer
                      (CFO)                   Prior to joining MDM Bank, Vadim worked at Deloitte and Touche
                                              (later Deloitte) CIS from 1997 to 2008. He became a partner in
                                              2001 and managed the company’s financial institutions service
                                              practice. From 1989–1997, He worked variously as the financial
                                              director for Eastern European Investment Alliance, vice president
                                              for finance at Alba Alliance Bank as well as the chief accountant
                                              at a transport company. Vadimbegan his professional career at
                                              KPMG.

                                               He is a graduate of the Moscow Finance Institute, with a major in
                                               Accounting, Analysis and Audit.
                                                                                                               77




Konstantin       Managing Director of     Konstantin was appointed as Managing Director of the Direct
Leonov           the Direct Investments   Investments Management Department in March 2009.
                 Management               The Department works with clients’ problem loans from specific
                 Department               sectors of the economy.

                                          From October 2007 until his recent appointment, Konstantin
                                          was Head of Network Management. He has been a member of
                                          the Bank’s Management Board since January 2008 and has been
                                          with the Bank since 2001. From November 2001 through October
                                          2007, he worked as Head of the MDM Bank Branch in Rostov-on-
                                          Don.

                                          He started his career in banking in December 1995 at the Rostov
                                          branch of JSCB INKOMBANK as a specialist in Securities Trading.
                                          In 1997, he was appointed Head of Securities Trading and in 1999
                                          Head of the Branch. In November 1999, he moved to the Rostov
                                          branch of Vneshtorgbank as Deputy Head of the Branch.

                                          Konstantin graduated from the Rostov-on-Don Institute of
                                          National Economy (RINH) in 1994 with a degree in Finance,
                                          Credit and Monetary Circulation.

Oleg Novolodskiy Head of Risk             Oleg joined MDM Bank in April 2009 as Head of Risk
                 Management               Management. His responsibilities include control of credit, market
                                          and operational risks. Oleg will officially join on the Management
                                          Board following approval of his candidacy by the Central Bank of
                                          Russia.

                                          Oleg joined MDM Bank from URSA Bank, where he was Managing
                                          Director in charge of risk management. In March 2006, he joined
                                          URSA from the Central Bank of Russia’s Novosibirsk office as
                                          Managing Director of Sibacadembank. From 1993 to 2006,
                                          Oleg worked in the head office of the Central Bank of Russia’s
                                          Novosibirsk office.

                                          In 1994 Oleg graduated from Novosibirsk State University with
                                          a degree in Economic Cybernetics.
78   MDM Bank Annual report 2008




     Tatyana Raimova Member of               Tatyana joined MDM Bank in 2008 as Managing Director of Retail
                     the Management          Banking. In March 2009 she became a member of the Management
                     Board                   Board.

                      Managing Director of   Prior to joining MDM Bank, Tatyana worked at insurance company
                      Retail Banking         ZapSib ZhASO,, where she managed all business processes.
                                             Between 2007 and 2008, she was Deputy General Director at
                                             URSA Bank, in charge of the Siberian retail banking business,
                                             the processing center, the contact center and the professional
                                             training center.

                                             From 2002 until joining URSA, Tatyana worked at Sibacadembank
                                             as Head of the Credit and Debit Cards Department, prior to
                                             assuming an active role in developing retail banking services.
                                             Tatyana has also held various positions at BashKreditBank
                                             and the Novosibirsk Bank, and has over 12 years experience in
                                             the banking sector.

                                             Tatyana graduated from the Novosibirsk Economics Institute with
                                             a degree in Economics in 1989.

     Konstantin       Head of Treasury       Konstantin was appointed Head of newly-formed Treasury, which
     Rogov                                   includes a section of Corporate & Investment Banking, in March
                                             2009. Konstantin will become a formal member of the MDM
                                             Bank Management Board following approval of his candidacy by
                                             the Central Bank of Russia.

                                             From November 2008, Konstantin was Deputy Head of Corporate
                                             & Investment Banking. He joined MDM Bank as the Head of
                                             Treasury in 2003.

                                             Before his career at MDM Bank, Konstantin was Head of
                                             the Treasury Department at Impexbank from 1998. Between 1995
                                             and 1998, Konstantin worked at Russian Credit Bank, where he
                                             was eventually promoted to head the treasury department. He has
                                             worked in the banking industry since 1994, and has experience
                                             dealing with securities trading, liquidity management, as well as
                                             assets and liabilities.

                                             Konstantin graduated from the Moscow Institute of Physics
                                             and Technology in 1993, with a degree in Applied Physics and
                                             Mathematics. In 1997, he graduated from the Russian State
                                             Academy of Finance with a degree in Finance and Credit.
                                                                                                                         79




Invited to the Management Board on a Permanent Basis

Julia                      Director of Corporate   Julia was appointed Director of Corporate Relations of MDM
Kochetygova                Relations               Bank in June 2007. She coordinates the Bank’s external relations,
                                                   including relations with investors, government organizations and
                                                   the press as well as social programs.

                                                   Prior to joining MDM Bank, Julia was Director of Governance
                                                   Services at Standard & Poor’s (S&P), where her responsibilities
                                                   included global management of Corporate Governance Scores
                                                   (CGS), business development as well as analytical due diligence
                                                   of corporate governance practices in Russia and other emerging
                                                   markets. In her previous position at S&P, Julia was responsible for
                                                   the company’s business development in Russia and the CIS.

                                                   Before joining S&P in 2000, Julia held a number of senior
                                                   executive and analytical positions at SKATE Information
                                                   and Consulting Agency (1995–1999) as well as teaching and
                                                   undertaking research at the Higher School of Economics and
                                                   the Institute of Economics at the Russian Academy of Sciences.

                                                   Julia graduated from the Plekhanov Moscow Institute of National
                                                   Economy as well as the World Bank School of Market Economy.
                                                   She holds a Ph. D. in Economics.




Departures                                                    New Members*

June 2008                         N. Blatova                  January 2008                 K Leonov

November 2008                     A. Ilyin                    February 2008                S. Babayan

November 2008                     S. Babayan                  September 2008               M. Egorov

December 2008                     M. Perhirin                 December 2008                I. Kim

February 2009                     O. Mashtalyar               December 2008                V. Sorokin

March 2009                        M. Egorov                   March 2009                   S. Mironova

                                                              April 2009                   O. Novolodskiy




|*| Date that the Management
    Board Members’
    appointment was
    approved by the RF Central
    Bank.
80            MDM Bank Annual report 2008



MDM Bank Management Structure*




                                              General Shareholders'
                                              Meeting




     Board of Directors                       Board of Directors                       Internal Audit
     Committees:                              О. Viyugin                               J. Molotkovskaya
     Audit and Risk Management
     Strategy Nominations &
     Remunerations



     Management Board                         Management Board,
     Committees:                              Chief Executive Officier
     Credit, ALCO, Tariffs,                   I. Kim
     Counteragents & Financial
     Instruments



     Consultative Bodies
     Change Management Committee,
     Main Management Council,
     Extended Management
     Council



   Group Strategic Business Units                                  Group Corporate Services Centre


     Corporate                   Retail Banking                    Finance                      Operations
     and Investment              T. Raimova                        V. Sorokin                   Т. Pupkova
     Banking
     A. Drobot
                                 Treasury                          Network                      Corporate Relations
                                 K. Rogov                          S. Mironova                  J. Kochetygova
     Private Banking
     V. Lewis
                                                                   Risks                        Strategic
                                                                   O. Novolodskiy               Development
                                                                                                М. Mazzarelli

                                                                   Compliance Control
                                                                   А. Savushkin                 Business Support
                                                                                                D. Kuznetsov

                                                                   Distressed Assets
                                                                   S. Shaporenko                Direct Investments
                                                                                                Management
                                                                                                Department
                                                                                                K. Leonov




 |*| Information current as at
     2 April 2009.
                                                                                                                          81




Board of Directors and Management Board Compensation

      The total paid to members of the Board of Directors for their respective positions, including reimbursement for
      expenses incurred when fulfilling their duties, was RUR 91 mln in 2008.


      Payments, including accrued reimbursement for expenses, for the Bank’s senior management (particularly
      the members of the Management Board and the chief accountant) in 2008 totaled RUR 635 mln.


Dividends

      Pursuant to the decision reached by the General Shareholders’ Meeting, as of 26 May 2008, dividends were
      not paid for 2007 on either common or preferred shares. Profits from 2007 were earmarked for growing
      the Bank.


MDM Bank’s Corporate Governance Awards in 2008

      In 2008, Standard & Poor’s (S&P) confirmed the Bank’s overall CGS-6+ (international scale). At the same time,
      S&P raised the Bank’s Russian national scale from CGS-6.7 to CGS-6.9.


      MDM Bank is confident that adherence to global corporate governance best practices enables the Bank to
      maintain its position as a leader in corporate governance and transparency among private Russian financial
      organizations.


      MDM Bank also received Euromoney’s “The Best Managed Banks in Corporate & Investment Banking in Central
      and Eastern Europe for 2007” award, which was presented for the first time in the category of Best Companies
      in the CEE, as judged by European banking experts. The Bank performed particularly well in measurements
      of its consistency and assuredness when implementing strategy, the success of its operational management,
      financial statement transparency, corporate governance standards, as well as the level of disclosure to investors
      and analysts.


      MDM Bank’s 2007 annual report won first place in the category “Finance” at the annual report competition
      held by the Krasnodar region administration in Sochi, Russia.
82     MDM Bank Annual report 2008



Internal Control




       The Bank’s internal control system encompasses all levels of management within the Bank and its subsidiaries.
       The system involves all internal processes and interactions, and is not restricted to specialized units such as
       the Internal Audit Department, Compliance Department or Risk Management. The Bank’s internal control
       system aims to achieve the following important objectives:

       • Efficient and result-oriented financial and operational procedures for executing banking operations and
         other transactions, and asset and liabilities management, including ensuring the integrity of the bank’s assets
         and risk management;

       • Accurate, complete objective and timely financial statements, as well as accounting, statistical and other
         reports (for internal and external users) that are necessary for decision-making by the Bank’s management,
         as well as information security;

       • Compliance with applicable laws and regulations, including the charter of the credit organization;

       • Preventing the Bank or its employees from being drawn into unlawful activity, such as money laundering,
         financing of terrorism, as well as ensuring timely presentation of information to the Central Bank of Russia
         and other authorities in accordance with the laws of the Russian Federation.

       The Bank has a created and approved a Regulation on Internal Control that defines the goals and objectives
       of the internal control system, its functioning principles, as well as the bodies and individuals responsible for
       internal control.

       The Regulation on Internal Control is modified and updated to improve the Bank’s internal control system
       when the tasks and internal control functions change, or if the Central Bank of Russia amends the regulatory
       acts for internal control in credit organizations in the Russian Federation.

       The internal control system is built on the following five elements:

Control Environment
       The qualitative features of the Bank’s management and its corporate governance system are defining factors
       of a control environment. An important element of the internal control system is the development of a culture
       of control. The responsibilities of the Board of Directors and management include drawing attention to
       the importance of internal control through their actions and statements. This includes the ethical standards
       that that managers demonstrate both within the organization and to third parties. The management bodies of
       the bank also bear responsibility for building a corporate culture that underlines and demonstrates to personnel
       on all levels the importance of internal control.

       In 2008, the Bank continued to refine its corporate governance system, as discussed in the Corporate
       Governance and Management section on page 67.

Risk Identification and Assessment
       An important element of internal control at MDM Bank is identifying and evaluating risks that the Bank takes
       upon itself. The Bank has created a system for banking risk management to achieve this goal.

       The functioning of the Bank’s risk management system is controlled on a constant basis in line with the Bank’s
       internal documents. The system covers all types of risks that the Bank is exposed to: credit, currency, market,
       interest, liquidity, operational, legal, strategic and reputational risks.
                                                                                                                             83




        The Bank has implemented a robust risk management system that covers all potential business and financial
        risks. This system is discussed in detail in the Risk Management section on page 84.

Control Activities
        Control activities relate to the day-to-day functioning of internal policies and procedures designed to
        ensure, among other things, proper segregation of duties to avoid conflicts of interest, proper authorization
        of transactions, accounting reconciliations, and analysis of deviations between actual and expected results.
        Control activities are a constant part of the bank’s activities and are conducted to eliminate risks identified by
        the Bank through its risk identification and evaluation procedures. The activities also include safeguarding
        assets and other controls.

Information and communication
        A robust management information and communication system is required for the internal control system to
        function effectively. An effective system of internal control requires reliable, useful and adequate financial
        and operational information, as well as information about compliance with established regulations and
        requirements and external information about market events and conditions that is required for decision-
        making.

        In 2008, the Bank made important strides toward improving the relevance, timeliness and reliability of its
        management information, as well as further strengthening controls over confidential information. An internal
        communications system was implemented during 2007 (discussed in the Corporate Communications section
        on page 93).

Monitoring
        The Bank seeks to improve internal control in order to ensure the system’s efficient functioning and taking into
        account the changing internal and external factors that influence the Bank.

        Monitoring of the internal control system is conducted on an ongoing basis by management and employees
        from various departments, including departments that execute banking operations and other transactions, as
        well as accounting and financial reporting and the Internal Audit Department.

        The Bank’s management reports to the Board of Directors on an annual basis about the status of the internal
        control system, evaluates its effectiveness, discusses any shortcomings and steps taken to address them. This
        report also includes an evaluation of the effectiveness of the Bank’s capital adequacy monitoring (based both
        on Basel requirements and CBR requirements) and an evaluation of internal controls for the preparation of
        financial reporting.

        An important part of the ongoing monitoring of the internal control system is the work of the Internal Audit
        Department, which provides an independent assessment of the adequacy of existing rules and procedures, as
        well as their observance. The Internal Audit Department functions independently of the bank’s business and
        operational management and has access to all operations conducted by the Bank, including its branch offices
        and subsidiaries (see the Internal Audit section on page 89).

        The Bank’s external auditors, while not a part of the system of Internal Control, nonetheless play an important
        role in evaluation of the system of control over the correctness of the Bank’s financial reporting as well as
        offering recommendations regarding the system of Internal Control, based on audit results.
84     MDM Bank Annual report 2008



Risk Management




       MDM Bank’s risk management system aims to identify, analyze and manage the Bank’s risk exposure. All Bank
       operations that involve risk are conducted within established limits and restrictions, and risk compliance is
       constantly monitored. MDM Bank’s risk management is based on three main principles: (1) limiting potential
       losses, (2) evaluating risks in a timely fashion, and (3) maintaining clear and effective risk governance.


       MDM Bank has established an efficient and reliable risk management system, combining the latest global
       standards with procedures established by the Bank. The system encompasses the full range of risks involved
       in financial operations, including: credit risk and market risks, which includes stock market, currency and
       interest-rate risks, as well as liquidity, operating, legal, reputational and other risks. The Bank has highly
       qualified team of experts in the Risk Management unit designing and developing the risk-management
       system.


Key Developments in 2008
       • The launch of a capital-allocation system for risk, with the key indicators being risk adjusted
         return on capital (RAROC) and shareholder value added (SVA).
       • The introduction of a social and environmental risk-assessment system into the credit process,
         based on International Financial Corporation (IFC) and European Bank for Reconstruction and
         Development (EBRD) standards.
       • Improving the loan portfolio monitoring method – specifically designed and implemented as
         a means to monitor industry loan portfolio risks. Also, the Bank began to assess comprehensively
         on a monthly basis the quality of service rendered to the Bank's small- and medium-sized
         business clients at its offices, from attracting new clients to working with businesses that have
         breached their loan contracts. This enables the Bank to efficiently and swiftly identify problem
         areas and to make the necessary changes to the credit process.
       • An improved market risk assessment method, specifically in assessing repo risks and determining
         fair prices for third-party promissory notes.
       At the same time, the global financial crisis caused several changes to Risk Management’s activities, the most
       important being the timely introduction of operational measures to minimize risks. Consequently, the Bank
       achieved the following:
       • Liquidity was maintained at a sufficient level.
       • Credit policy was changed, thereby halting simplified credit analysis and significantly raising the standard
         of financial solvency required for a client to receive a loan, as well as broadening credit decisions requiring
         direct involvement of Risk Management.
       • Market risk limits were made more rigorous, specifically to reduce risk in currency operations, debt security,
         derivative instruments, margin trading and repo operations.


Plans for 2009

       MDM Bank’s main objectives for 2009 will be to maintain liquidity and adjust risk management to reflect
       the new economic reality.


       The Bank intends to update its credit policy: to define target client groups based on their tolerance indices in
       crisis conditions and their credit-analysis parameters, as well as introduce measures to assess risks objectively
       and to enable flexibility in making changes to risk management policy. This includes creating a statistical rating
                                                                                                                          85




       system to rate corporate clients and small- and mid-sized business; and to begin using statistical scoring cards
       for all retail programs.


       There are plans to use qualitative and new quantitative assessment models to improve objectivity and brevity
       when assessing operational risks.


       In addition to the current early warning indicators for liquidity risk, the Bank plans to design and implement
       analogous systems for other major financial risks.


       A detailed description of the financial risk management system is presented in Note 28, “Financial Risk
       Management”, as an note to the Bank’s audited financial statements. Please also see Note 11, “Loans and
       Advances to Customers”, where important credit risk information is discussed in detail.


Operational Risks

       Operational risks are direct or indirect losses caused by various factors involving processes, personnel, or
       the Group’s technology and infrastructure. Losses can also be caused by external factors differing from credit
       and market – as well as liquidity – risks.


       Operational Risk Management
       The Bank seeks to minimize possible financial losses and damage to the Bank’s reputation, as well as to ensure
       the optimization of general expenses, minimize superfluous managerial procedures that may limit initiative,
       and utilize new problem solving methods.


       The Bank manages operational risks by taking into account recommendations from the Central Bank of
       the Russian Federation and the Basel Committee on Banking Supervision, when seeking best practices and
       managing operational risks.


       The Bank accomplishes this via compilation, monitoring, operational risk minimization and continuous
       management.


       The Risk unit develops operational risk management methodology, coordinates the risk management procedure
       as part of the Bank unit, makes corresponding suggestions to improve operations, as well as presents reports on
       the Bank’s level of operational risk to the Management Board.


       The management of each department is responsible for controlling risks assigned to it.


       The overall operational risk management standards of the Bank include the following:
       • Separation of powers, specifically independent operation authorization and operation monitoring;
       • Adherence to the requirements of the regulating authorities and legislation;
       • Procedures to minimize operational risks;
       • Management and procedure documentation;
       • Periodic assessment of exposure to operational risks;
       • Immediate reporting on losses due to operational risks;
       • Maintenance of plans for emergency situations;
86   MDM Bank Annual report 2008




     • Professional development, specifically using training programs;
     • Ethical business practices;
     • All methods to minimize risk, specifically insurance, where it is efficient.


     Operational Risk Assessment
     Operational risk compilation, analysis and monitoring include the following:
     • Collecting information on past operational losses by the Bank;
     • Analysis of operational risks for products and processes;
     • Compiling operational risks for new products, processes and large transactions.


     A risk chart is created based on an analysis of operational risks, using a quantitative rating based on key risk
     indicators for each of the Bank’s separate and operations..


     Upgraded Operational Risk Management Methods
     During 2008, MDM Bank implemented a capital allocation system for overall risk that includes operational risk
     assessment. In turn, this motivated the business unit to take measures to lower operational risks on current
     transactions.


     A tax and legal risk assessment system was also implemented, resulting in the Bank’s full risk assessment
     increasing noticeably.


     There were no major problems recorded in the operational processes for the fiscal year.


     In 2009, the Bank plans to implement quantitative models of operational risk assessment in addition to
     the current qualitative models, which will result in improvements in the level of objectivity and speed when
     assessing these risks.
                                                                                                                           87




Additional Risks

       The Bank also manages legal, reputational, country and other risks.


       Legal Risk
       Legal risks concern possible damages to the Bank arising from internal and external legal factors.


       Internal risk factors include:
       • Non-adherence to the applicable legislation;
       • Internal documentation inconsistent with the applicable legislation, as well as the Group’s inability to bring
         its activity and internal documents in line with changes in legislation in a timely manner;
       • Insufficiently accurate analysis of the legal risks of new products, operations and technology.


       External risk factors include:
       • An imperfect legal system;
       • Breach of contract conditions by the Bank’s clients or counter parties;
       • The Bank’s and/or its clients’ subsidiaries being located in jurisdictions of various governments.


       Legal risks are managed with the goal of reducing or eliminating possible losses, specifically in terms of court-
       awarded monetary funds.


       The Legal Department monitors legal risks, while the Tax Department monitors tax risks.


       Legal risks are managed according to the following principles:
       • Standard contract forms provisionally agreed upon by all respective parties of the Bank, specifically by
         the units responsible for risk management that the transaction contains;
       • Most transactions are made based on standard contract forms;
       • Only in exceptional instances are transactions made based on non-standard contracts that the Legal
         Department approves;
       • Contracts are signed only after the counter party’s credentials have been verified;
       • Utmost attention is paid to the legal risk assessment of the property put up for collateral. The pledgor has to
         show a full list of documents that confirm his legal property rights to the object used as collateral.


       Reputational Risk
       Reputational risks occur when people form a negative opinion of the Bank. These risks are managed according
       to the following main principles:
       • The Bank fulfills all its obligations in a timely manner to clients and counterparties, and adheres to all
         applicable legislation and norms of business etiquette;
       • Obligatory due diligence is conducted on counterparties and clients in accordance with the on Anti-Money-
         Laundering, Illegal Funds and Anti-Terrorism Acts;
       • A system is used to prevent price manipulation on the securities market;
       • The MDM Bank Public Relations Department monitors external information on the Bank and sets in motion
         steps and previously developed regulations to counter negative information and news flow.
88   MDM Bank Annual report 2008



Compliance Department




     In 2008, MDM Bank’s Board of Directors developed and approved the “Policy on Managing Compliance
     Risks for MDM Bank and its Subsidiaries.” The document describes the structure of the compliance system
     as well as the main regulatory, reputational and financial risks. As per the document, the main principles of
     the compliance risks were developed, particularly recommendations to identify and prevent them.


     The main compliance principles are as follows:
     • Adherence to legislation and internal rules and standards is an absolute requirement for all Bank units and
       employees, as well as key to the decision-making system;
     • When fulfilling the Bank’s duties, it is not only necessary to adhere to the legislation and requirements of
       the regulatory bodies, but also to assess how the Bank’s decisions and actions correspond to its values, and to
       take into consideration the interests of all its shareholders;
     • MDM Bank is continuously improving its approach to identifying, analyzing and managing compliance risks
       and provides the necessary qualification level for its employees in managing these risks.


     To fulfill these tasks, the Compliance Control Department was formed, combining two units: the Financial
     Monitoring Department, the main functions of which are to develop and fulfill the internal control rules and
     other internal organization measures to identify and prevent money laundering and the financing of terrorism;
     and the Financial Market Operations Compliance Control Department, which oversees the Bank’s adherence to
     required legislation, financial markets legal norms acts, internal rules and professional participant securities
     market procedures.


     The department’s main tasks are to manage compliance risks efficiently, and to counsel the Bank’s executive
     bodies on the laws, rules and standards in relation to compliance risk management. The department also
     counsels the Bank’s executive bodies on training personnel on compliance risk issues, develops policies,
     procedures and other documents on compliance control, as well as identifies and analyzes compliance risks.


     The Compliance Control Department answers directly to the Chairman of MDM Bank’s Management Board
     and presents on a regular basis the Management Board and the Board of Directors consolidated reports which
     identify risks and detail measures to reduce them.


     The Compliance Control Department’s operation in accordance to the “Policy on Managing Compliance Risks to
     MDM Bank and its Subsidiaries” has enabled the Bank to minimize its risks and maintain its strong reputation.
                                                                                                                            89

Internal Audit




      The Internal Audit Department’s main goal is to provide for the efficient operation of the Bank’s units by
      internally auditing activities and presenting independent and objective recommendations on improving
      the quality of the internal control system, risk management and corporate governance.


      The department’s employees are on the staff of the Bank’s Head Office, although the department is
      an independent structure answering functionally to the Board of Directors’ Audit and Risk Committee, which
      independently assesses the operations of the internal auditors. Additionally, for administrative purposes
      the department reports to the Chairman of the Management Board to ensure efficient reporting on the internal
      control system to the Bank’s senior management.


      The Internal Audit Department interacts with the Bank’s external auditor, and, when necessary, informs it on
      all current events for the Bank’s activity.


      The department’s director reports on a monthly basis to the Audit and Risk Committee and prepares a report
      for the Board of Directors twice yearly. The department’s director also participates in weekly management
      meetings and is part of the Bank’s Main Management Council.


Key Developments in 2008

      In 2008, thirty-six people worked in the Internal Audit Department, including four IT audit specialists. All of
      the department’s employees are highly qualified specialists with significant experience working in large global
      auditing firms or similar departments in other large banks. Three of the employees are qualified as Certified
      Information Systems Auditors (CISA). Four of the department’s employees are part of the Bank’s Revisiory
      Commission.

      One of the department’s most important activities in 2008 was auditing the Bank’s regional branch offices.
      Consequently, the Network Audit Department and the Local Regional Auditors Department were set up as part of
      the department’s structure to ensure timely and regular audits, and to monitor implementation of the auditors’
      recommendations. Every regional bank has at least one employee in the Internal Audit Department, whose
      specialists in the regions operate in accordance to the approved annual plan, assess the efficiency of the internal
      control system at the branches, and participate in unscheduled reviews. They answer to the Department’s
      director and provide independent and objective spot-audits.


      In 2008, the department developed, introduced and began using use the E-DVA automated report and
      control system. This system offers a combined database that, from the audits, contains all the department’s
      recommendations and comments to the responsible party in the Bank, which can be ranked according to
      importance, as well as their completion status. All relevant departments in the Bank’s have access to the E-DVA
      system and report online on completing the audit recommendations.


      The E-DVA system allows for the following:
      • Saving all audit recommendations;
      • Constant control over their completion by the responsible employees of the Bank;
      • Drawing up analytical reports to assess risks according to the type of the Bank’s activities;
      • Operations planning and assessment of work efficiency of the Internal Audit Department;
      • Assessing the efficiency of eliminating previous deficiencies in operations by the Bank’s structure units.
90     MDM Bank Annual report 2008




       The Department also updated a previously developed risk assessment method which is used to assess risks
       yearly and to plan the Department’s activities. The allocation of audited units was revised and supplemented
       and the list of factors was updated and is used to assess inherent risk. The Compliance Control Department’s
       director and those responsible for corresponding business processes were included in the main expert group to
       assess control risk.


       The Internal Audit Department’s review plan for 2009 was developed taking a risk-informed approach.
       The Bank’s main risk areas are reviewed on a yearly basis. The annual plan incorporates the possibility to
       conduct spot audits if the Bank’s management is requested to do so.


       At the end of 2008, the Internal Audit Department reviewed the strategy and action plan for the fourth quarter
       of 2008. The changes will allow for the following:
       • Maximum rational use of the department’s resources;
       • Maximum relevance of the audit remarks;
       • Timely assessment of risks that arise during a period of financial crisis;
       • Reduction in expenses for audits.


Plans for 2009

       The department plans to regularly review in 2009 the audit recommendation fulfillment and to follow their
       enactment continuously via the E-DVA system. The department plans to initiate a new automated audit
       format.
                                                                                                                         91


Human Resources




       MDM Bank Employees



                                                                1,400                                           4,500

                                                                                                                4,000
                                                                1,200
                                                                                                                3,500
                                                                1,000
                                                                                                                3,000
                                                                 800                                            2,500

                                                                 600                                            2,000

                                                                                                                1,500
                                                                 400
                                                                                                                1, 000
                                                                 200
                                                                                                                  500
                                                                   0                                                0

       Under    18–25   25–30   30–40   40–50   50–60   Above           2007                 2008
         18                                              60
                                                                          Head Office
         Male                                                             Regional Network
         Female




       A concerted effort was made in 2008 to implement the plans that fell under the Bank’s comprehensive employee
       strategy, approved at the end of 2007.


       Systematic integration of professional operations in the Bank’s business strategy became the main focus in
       conducting a number of planned events, which transformed the Bank’s Human Resources Department from its
       original role as an administrative service unit to a full HR partner for all of the Bank’s business units.


       The HR Department’s main task is creating an environment for the Bank’s employees that engenders real
       participation from each employee in the business.


       In 2008, the following tasks were prioritized: introducing an incentive system; ensuring efficiency in personal
       and team operations; improving professional qualifications; and developing personnel.


       A new regulatory framework was approved in MDM Bank in 2008, which incorporated the best global HR
       practices and took into account business strategy priorities, as well as the specifics of the Bank’s operating
       model. An instrument that allowed for the analysis of the Bank’s employees’ functional responsibilities was
       developed, thereby enabling systemization of information on the activities of units and individual employees,
       and by extension the use of the organization’s professional potential most efficiently.


       The personnel records were fully automated during the past year, with all of MDM Bank’s affiliates switching
       to a new IT platform that optimizes documentation management and significantly saves work time for HR
       specialists.


Hiring personnel

       The banking specialist job market in 2008 remained highly competitive. The HR Department constantly
       monitored the job market to allow MDM Bank to maintain its position as one of the most attractive employers
       in the Russian banking sector. Systematic work on strengthening the Bank’s recruiting team and improving
92     MDM Bank Annual report 2008




       the search process in order to attract highly qualified candidates produced excellent results in 2008. In the third
       and fourth quarters, 96% of the vacancies in the Main Office and affiliates were filled by the HR Department
       itself, without using external recruiting firms.


       MDM Bank staff numbers increased in 2008 to 6,563, with practically all of the new employees joining
       the Bank’s regional offices as a result of the Bank actively implementing in its regional network the development
       strategy during the last year. The Bank’s professional and intellectual potential is highlighted by the fact 5,348
       employees have a university education and 366 employees combine work and study in various university
       programs.


Training and development

       The employee management development program begun in 2007 was successfully concluded in 2008.
       The Bank’s senior management last year took the INSEAD course specially designed for MDM Bank. Based on
       this, they organized and conducted workshops during which the Bank’s full management team was introduced
       to global best practices in the banking business and shared their ideas on improving the Bank’s management
       system.


       During the development process for the Bank’s structured unit managers, training focused on developing skills
       for efficient internal and external communication. At Head Office and in the Bank’s regional branches, 250
       mid-level managers participated in specialized training sessions.


       In 2008, in-house training and personnel development courses were initiated, with focus shifting from external
       training to in-house courses. This optimized training costs while simultaneously ensuring that the Bank’s
       employees had the chance to take training programs that were in full compliance with their daily business tasks
       and geared toward developing skills necessary for efficient work in a dynamically changing market. Today,
       training managers work in all the Bank’s regional branches. Training sessions on sales received high marks
       from participants and significantly helped in working with client managers. The business trainers’ value in
       quickly responding to business demands was successfully demonstrated at the end of 2008, when the global
       financial crisis required adjustments in all of the Bank’s units, and clarification for current and potential clients
       regarding the financial situation and the actions taken by the Bank to protect the interests of its investors and
       depositors. The “Everyone to the Front Lines for Victory” and “Crisis or New Possibilities?” training sessions
       resolved the Bank’s important employee incentive support tasks. From April to December 2008, 2,662 MDM
       Bank employees attended internal corporate training sessions developed by the Training and Development
       Department in conjunction with the business units. Meanwhile, 887 employees attended external training
       sessions.


Outlook for 2009

       The process of creating a unified bank presents the HR Department with new and exacting tasks. The most
       important goals are rethinking and reorganizing the Bank’s organizational structure, developing optimal
       principles to involve employees in business decisions by using internal personnel rotation, as well as forming
       the Bank’s strategic employee reserve and a unified value system within the bank. There are also plans to
       improve the HR processes, increase employees’ professional qualifications at all levels, strengthen corporate
       culture and increase staff loyalty.
                                                                                                                        93


Corporate Communications




   MDM Bank’s information policy has established a systematic and comprehensive approach to transparency that
   quickly improved the quality of communications with target audiences. In 2008, Corporate Communications,
   which included the Investor Relations Division, the Corporate Social Responsibility Division, the Public
   Relations Department and the Internal Communications Division, encompassed the full spectrum of the Bank’s
   communications.


   As a result of the work of the Investor Relations Division, which is responsible for the quality, efficiency and
   availability of information, the Bank remains one of the leaders in the Russian banking system in terms of
   information transparency. The Bank’s 2007 Annual Report set a new standard and placed first among other
   annual reports in several competitions.


   The Public Relations Department structured the Bank’s crisis communication and prepared recommendations
   for the Bank’s managers on how to communicate with target audiences. A new section was created on the MDM
   Bank website, simplifying the search process for necessary information about the Bank, its products and
   services and the situation on the financial markets.


   The Corporate Social Responsibility Division in 2008 concentrated its efforts on implementing priorities
   approved in the Bank’s Corporate and Social Responsibility (CSR) strategy, such as education and musical
   events. Three major long-term programs were launched during the year: Culture, under the name World of
   Divine Melodies; Education, under the name World of Young Business People; and Financial Literacy.


   The Bank’s initiatives were in demand in the regions, as attested by the following figures:
   • The 12 best teachers, who were selected through an open competition, from seven leading regional partner
     higher education institutions took part in an exchange program at the Stockholm University School of
     Business and received grants to develop modern academic curricula;
   • Forty-nine of the best students at partner institutions of higher learning received scholarships from MDM
     Bank;
   • More than 2,000 people participated in free seminars on financial literacy organized by the Bank;
   • More than 18,000 classical music lovers attended concerts organized as part of the World of Divine Melodies
     programs.


   Detailed information on programs conducted as part of the Bank’s CSR activities is included in MDM Bank’s
   first Corporate Social Responsibility Report for 2008.


   At the beginning of 2008, the Internal Communications Division polled MDM Bank employees to research
   the quality of corporate culture and the internal communications channels. More than 2,500 employees
   from 80 of the Bank’s structural units participated in the poll, with the results used to assess the efficiency of
   the information channels, the methods and instruments for internal communications, as well as to find out
   employee opinions on how to improve the current channels, methods and instruments. The poll results also
   helped define the main areas for internal communications development for 2008.


   The internal communications system operated successfully, and enabled the following:
   • The exchange process between units, various management levels and employees, as well as various regions,
     was structured as part of strategic sessions;
   • Employees were efficiently informed on strategic and operation decisions;
94     MDM Bank Annual report 2008




       • The Bank’s hotline, e-mail and message board provided and fostered feedback from employees.
       • A corporate culture was engendered and the Bank’s philosophy, based on its Mission, Vision and Values, was
        introduced.


       During the year, two consultative organs operated under the Management Board – the Main Management
       Council (MMC) and the Extended Management Council (EMC). At the weekly MMC meetings, the directors of
       the Bank’s main business units discussed and resolved issues. EMC meetings were convened on a quarterly basis
       to discuss important events and key management decisions.


       Professional training aimed at improving the communication skills of the Bank’s senior managers increased
       the efficiency of the external and internal information companies. Beginning in Moscow, training then spread
       to all of the Bank’s regional branches, with 171 of the Bank’s managers of various levels and speakers receiving
       training.


       In June 2008, work began on updating the corporate intranet site based on better software that offers new
       possibilities to integrate employees in the united information media. These possibilities are particularly as
       follows:
       • Information support for business and corporate communication;
       • Work space for each unit, group and employee;
       • Knowledge-gathering and management system;
       • Information protection.


Plans for 2009

       In 2009, the Bank plans to continue improving the information disclosure system and supporting information
       transparency for all the main target audiences. The intranet site will be completely updated, which will present
       users with considerably more convenient instruments to communicate internally. The new version is set for
       launch in May 2009. MDM Bank is also planning to approve a Code of Corporate Ethics and, with the assistance
       of various means of communication, to report its basic standards to every employee.
Consolidated Financial Statements
For the Year Ended 31 December 2008
Together with Independent Auditors’ Report
96


      Contents


97    Independent Auditor’s Report
98    Consolidated Balance Sheet
99    Consolidated Income Statement
100   Consolidated Cash Flow Statement
101   Consolidated Statement of Changes in Equity

      Notes to the Consolidated Financial Statements
102   1. Organisation of the Group and its Principal Activities
103   2. Operating Environment of the Group
104   3. Basis of Preparation
105   4. Significant Accounting Policies
122   5. Cash and Cash Equivalents
123   6. Due from Other Banks
124   7. Trading Securities
125   8. Derivative Financial Instruments
129   9. Available-for-Sale Financial Assets
130   10. Investment Securities Held to Maturity
130   11. Loans and Advances to Customers
140   12. Property, Plant and Equipment and Intangible Assets
141   13. Other Assets
142   14. Due to Central Banks
142   15. Due to Other Banks
143   16. Customer Accounts
144   17. Debt Securities in Issue
146   18. Subordinated Debt
146   19. Other Liabilities
146   20. Share Capital
147   21. Interest Income and Expense
148   22. Gains less Losses from Foreign Exchange
148   23. Fee and Commission Income and Expense
148   24. Other Operating Income
149   25. Operating Expenses
149   26. Income Taxes
151   27. Analysis by Segment
154   28. Financial Risk Management
175   29. Contingent Liabilities and Commitments
177   30. Fair Value of Financial Instruments
180   31. Related Party Transactions
185   32. Principal Subsidiaries
186   33. Subsequent Events
                                                                                                                            97

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Independent Auditor’s Report

       To the Shareholders and Board of Directors of MDM Bank

       We have audited the accompanying consolidated financial statements of MDM Bank and its subsidiaries (the
       “Group”), which comprise the consolidated balance sheet as at 31 December 2008, and the consolidated
       income statement, consolidated statement of changes in equity and consolidated cash flow statement for the
       year then ended, and a summary of significant accounting policies and other explanatory notes.


       Management’s Responsibility for the Financial Statements

       Management is responsible for the preparation and fair presentation of these consolidated financial
       statements in accordance with International Financial Reporting Standards. This responsibility includes:
       designing, implementing and maintaining internal control relevant to the preparation and fair presentation
       of financial statements that are free from material misstatements, whether due to fraud or error; selecting
       and applying appropriate accounting policies; and making accounting estimates that are reasonable in the
       circumstances.


       Auditor’s Responsibility

       Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
       We conducted our audit in accordance with International Standards on Auditing. Those standards require
       that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
       whether the consolidated financial statements are free from material misstatement.


       An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
       in the financial statements. The procedures selected depend on the auditor’s judgment, including the
       assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
       In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
       and fair presentation of the financial statements in order to design audit procedures that are appropriate
       in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
       internal control. An audit also includes evaluating the appropriateness of accounting policies used and the
       reasonableness of accounting estimates made by management, as well as evaluating the overall presentation
       of the financial statements.


       We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
       audit opinion.


       Opinion

       In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
       position of the Group as at 31 December 2008, and its financial performance and its cash flows for the year
       then ended in accordance with International Financial Reporting Standards.




       9 April 2009
98   MDM Bank
     Consolidated Balance Sheet as at 31 December 2008
     (expressed in millions of Russian Roubles – refer to Note 3)


                                                                                              31 December   31 December
                                                                             Note                    2008          2007

     Assets
     Cash and cash equivalents                                                   5               77 271        83 434
     Mandatory cash balances with central banks                                                    1 942         5 538
     Due from other banks                                                        6                31 651       27 834
     Trading securities:
      - owned by the Group                                                       7                   194        10 875
      - pledged under sale and repurchase agreements                             7                      -        2 987
     Derivative financial instruments                                            8                 3 083           260
     Available-for-sale financial assets                                         9
      - owned by the Group                                                                         8 676          290
      - pledged under sale and repurchase agreements                                                 379              -
     Investment securities held to maturity                                    10                    108              -
     Loans and advances to customers                                            11              194 806        180 311
     Property, plant and equipment and intangible assets                       12                  6 832         5 956
     Other assets                                                              13                  4 175         3 997
     Total assets                                                                               329 117       321 482


     Liabilities
     Due to central bank                                                       14                35 575           846
     Due to other banks                                                        15                97 375       101 516
     Derivative financial instruments                                            8                 2 372           874
     Customer accounts                                                         16                115 071      124 132
     Debt securities in issue                                                  17                28 700        46 631
     Subordinated debt                                                         18                  5 966         5 066
     Deferred tax liability                                                    26                   980           770
     Other liabilities                                                         19                  2 004         2 749
     Total liabilities                                                                          288 043       282 584


     Equity
     Share capital                                                             20                  1 794         1 794
     Share premium                                                                                14 198        14 198
     Revaluation of premises                                                                       3 143         2 986
     Revaluation of available-for-sale financial assets                                          (1 566)            21
     Cumulative translation reserve                                                                  326            24
     Retained earnings                                                                            23 179        19 875
     Total equity                                                                                 41 074       38 898
     Total liabilities and equity                                                               329 117       321 482


     The consolidated financial statements are approved for issue by the Management Board of MDM Bank and
     signed on its behalf on 9 April 2009.




     Igor Kim                                                       Vadim Sorokin
     Chairman of the Management Board                               Chief Financial Officer




     The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
MDM Bank                                                                                                        99
Consolidated Income Statement for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)



                                                                                     Year ended    Year ended
                                                                                    31 December   31 December
                                                                   Note                    2008          2007

Interest income                                                      21                32 893        28 345
Interest expense                                                     21               (15 985)      (14 213)


Net interest income                                                                    16 908         14 132
Loan impairment losses                                                11                (6 616)      (2 083)


Net interest income after loan impairment losses                                       10 292        12 049


(Losses)/gains arising from trading securities, net                                      (997)          309
Gains/(losses) arising from trading in precious metals, net                               504            (22)
Gains from foreign exchange, net                                     22                    914         1 364
Gains/(losses) from interest-based derivative financial
instruments, net                                                                           520         (520)
Gains from early redemption of debt                                                      1 134              -
Fee and commission income                                            23                  3 142         2 978
Fee and commission expense                                           23                  (883)         (634)
Other assets impairment losses                                       13                  (518)            (3)
Impairment of investment securities held to maturity                 10                  (371)              -
Other provisions                                                     13                  (330)              -
Other operating income                                               24                    596           230


Operating income                                                                       14 003         15 751
Operating expenses                                                   25                (9 366)       (8 622)
Gain on disposal of premises                                                                  -          498


Profit before taxation                                                                   4 637         7 627
Income tax expense                                                   26                (1 333)        (2 111)
Profit for the year                                                                      3 304         5 516




Igor Kim                                                  Vadim Sorokin
Chairman of the Management Board                          Chief Financial Officer




The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
100   MDM Bank
      Consolidated Cash Flow Statement for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)



                                                                                                     Year ended    Year ended
                                                                                                    31 December   31 December
                                                                                             Note          2008          2007
      Cash flows from operating activities
      Interest received                                                                                31 689        28 357
      Interest paid                                                                                   (14 669)      (13 701)
      (Losses)/gains from trading in securities                                                           (181)          767
      Losses net of gains from interest-based derivative financial instruments                           (348)         (310)
      Gains/(losses) from trading in precious metals                                                       160         (768)
      Realised gains/(losses) from trading in foreign currencies                                         2 948           (26)
      Commissions received                                                                               3 091         2 953
      Commissions paid                                                                                   (861)         (635)
      Other operating income received                                                                     243           246
      Operating expenses paid                                                                          (9 104)       (8 572)
      Income tax paid                                                                                  (1 488)       (2 003)
      Cash flows from operating activities before changes in operating
      assets and liabilities                                                                           11 480          6 308


      Changes in operating assets and liabilities
      Net decrease/(increase) in mandatory cash balances with central banks                              4 076        (1 481)
      Net increase in due from other banks                                                             (1 007)       (15 114)
      Net (increase) / decrease in trading securities                                                    (525)         2 489
      Net decrease in other financial assets at fair value through profit or loss                          221         1 063
      Net increase in available-for-sale assets                                                          (390)         (263)
      Net decrease in investment securities held to maturity                                              650               -
      Net decrease/(increase) in loans and advances to customers                                         1 745      (20 255)
      Net increase in due to central banks                                                             35 000               -
      Net (decrease)/increase in due to other banks                                                   (21 058)       45 550
      Net (decrease)/increase in customer accounts                                                    (20 578)       35 088
      Net (decrease)/increase in promissory notes issued and deposit certificates                     (12 483)         2 210
      Net increase in other assets less other liabilities                                                  (39)        (423)
      Net cash (used in)/from operating activities                                                     (2 908)       55 172


      Cash flows from investing activities
      Purchase of property, plant and equipment                                                         (1 626)        (797)
      Proceeds from sale of property, plant and equipment                                                    9         1 156
      Net cash (used in)/from investing activities                                                     (1 617)           359


      Cash flows from financing activities
      Loan participation notes and bonds issued                                                          1 178        21 813
      Loan participation notes repaid/repurchased                                                     (11 836)      (28 378)
      Subordinated debt repaid/repurchased                                                                 (95)             -
      Share capital issued                                                                                    -        4 668
      Net cash used in financing activities                                                           (10 753)       (1 897)
      Effect of exchange rate changes on cash and cash equivalents                                       9 115       (2 842)
      Net increase in cash and cash equivalents                                                        (6 163)       50 792
      Cash and cash equivalents at the beginning of the year                                   5       83 434        32 642
      Cash and cash equivalents at the end of the year                                         5       77 271        83 434




      Igor Kim                                                     Vadim Sorokin
      Chairman of the Management Board                             Chief Financial Officer


      The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
MDM Bank                                                                                                                     101
Consolidated Statement of Changes in Equity for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)



                                                                                Revalua-
                                                                                   tion of    Cumu-
                                                                      Reva-    available-      lative
                                                                     luation     for-sale      trans-
                                               Share       Share          of    financial      lation   Retained     Total
                                              capital   premium    premises        assets    reserve    earnings    equity

Balance as at 1 January 2007                  1 736      9 588      1 942               -      (21)     14 079     27 324


Revaluation of premises, net of deferred
tax (Note 12)                                       -          -    1 324                -          -          -    1 324
Revaluation of available-for-sale financial
assets, net of deferred tax (Note 9)                -          -           -          21            -          -       21
Currency translation differences                    -          -           -             -       45            -       45


Total recognised income directly in
equity for the year ended 31 December
2007                                                -          -    1 324             21         45            -    1 390
Profit for the year ended 31 December
2007                                                -          -           -             -          -    5 516      5 516


Total income recognised for the year
ended 31 December 2007                              -          -    1 324             21         45      5 516      6 906
Disposal of premises (Note 12)                      -          -     (280)               -          -      280           -
Share capital issued                             58      4 610             -             -          -          -    4 668


Balance as at 31 December 2007                1 794     14 198      2 986             21         24     19 875     38 898


Currency translation differences                    -          -           -             -     302             -      302
Revaluation of available-for-sale financial
assets, net of deferred tax (Note 9)                -          -           -    (1 587)             -          -   (1 587)
Effect of change in income tax rate                 -          -       157               -          -          -      157


Total income and expense recognised
directly in equity for the year ended
31 December 2008                                    -          -       157      (1 587)        302             -   (1 128)
Profit for the year ended 31 December
2008                                                -          -           -             -          -    3 304      3 304


Total income and expense recognised
for the year ended 31 December 2008                 -          -       157      (1 587)        302       3 304      2 176


Balance as at 31 December 2008                1 794     14 198      3 143       (1 566)        326      23 179     41 074




Igor Kim                                                  Vadim Sorokin
Chairman of the Management Board                          Chief Financial Officer




The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
102     MDM Bank
        Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
        (expressed in millions of Russian Roubles – refer to Note 3)

1. Organisation of the Group and its Principal Activities
        These consolidated financial statements include the financial statements of MDM Bank (Open Joint Stock
        Company) (“the Bank”) and its subsidiaries. MDM Bank and its subsidiaries are hereinafter collectively
        referred to as the “Group”.


        As at 31 December 2008, the Group operated two banks, one in the Russian Federation and one in Latvia,
        securities trading and asset management companies and leasing companies.


        MDM Bank, the parent company and the lead operating entity of the Group, has been registered in the Russian
        Federation to carry out banking activities since 1993. The Bank operates under a general banking license
        issued by the Central Bank of the Russian Federation (“the CBR”). The Bank also has broker and dealer
        licenses issued by the Russian Federal Financial Markets Service. The Bank participates in the state deposit
        insurance system, which was introduced by the Federal Law #177-FZ “Deposits of individuals insurance in
        Russian Federation” dated 23 December 2003. The State Deposit Insurance Agency guarantees repayment of
        100% of individual deposits up to RUR 700 thousand per individual in case of the withdrawal of a licence of
        a bank or the CBR imposed moratorium on payments.


        The Group operates in two major business areas: Corporate and investment banking and Retail banking.
        The Group also has a Central treasury, which undertakes the Group’s funding and certain centralised risk
        management activities. Refer to Note 27.


        The activities of the Group are conducted principally in Russia, although the Group also conducts operations
        on international markets.


        The Bank’s registered address is: Kotelnicheskaya emb. 33 bld. 1, Moscow, Russian Federation. As at
        31 December 2008 the Group has 35 branches (31 December 2007: 35). All branches are located within the
        Russian Federation. The Group also operates a number of sub-branches in the Russian Federation and cash
        exchange offices and a network of retail micro offices in Moscow. As at 31 December 2008, the total number
        of points of sale of MDM Bank’s network was 199 (31 December 2007: 164).


        As at 31 December 2008 and 31 December 2007, the Bank’s parent company is ZAO Banking Holding MDM
        (Russia). ZAO Banking Holding MDM is a 100% subsidiary of MDM Holding SE, a European company based
        in Cyprus.


        As at 31 December 2008 and 31 December 2007, Mr. Sergey Popov was the majority beneficial shareholder
        of the Group with approximately 77% beneficial interest, Olivant Limited had a 9.5% beneficial interest,
        Mr. Martin Andersson had an 8.5% beneficial interest and the International Financial Corporation (the
        “IFC”) had a 5.0% direct interest. In addition, Olivant Limited has an option to purchase a further 4.75%
        interest. Refer to Note 31 for information on related party transactions.


        On 3 December 2008 the shareholders of MDM Bank and URSA Bank (a large privately-owned Russian bank
        based in Siberia and the Urals) announced their intent to combine their equity stakes. A detailed integration
        plan will be developed simultaneously with the legal merger of the two banks. The integration of the two
        banks is expected to be complete within 12-18 months. Prior to the legal merger, both banks will continue to
        function independently. Completion of the transaction remains subject to obtaining the necessary approvals
        and consents, including those from the Central Bank of the Russian Federation and the Federal Antimonopoly
        Service.


        For the purposes of these consolidated financial statements, key management personnel of the Group,
        collectively, is referred to as “management”.
       MDM Bank                                                                                                            103
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

2. Operating Environment of the Group
       The Russian Federation displays certain characteristics of an emerging market, including relatively high
       inflation.


       The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations
       and frequent changes. Furthermore, the need for further developments in the bankruptcy laws, the absence
       of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal
       impediments contribute to the challenges faced by banks currently operating in the Russian Federation.
       The future economic direction of the Russian Federation is largely dependent upon the effectiveness of
       economic, financial and monetary measures undertaken by the Government, together with tax, legal,
       regulatory, and political developments.


       Recent volatility in global and Russian financial markets
       The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other
       things, a lower level of capital market funding, lower liquidity levels across the banking sector, and, at times,
       higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in
       the global financial markets have also led to bank failures and bank rescues in the United States of America,
       Western Europe, Russia and elsewhere. Since September 2008 several medium-sized Russian banks have
       been acquired by state-controlled banks and companies due to their liquidity problems. The full extent of the
       impact of the ongoing financial crisis is proving to be difficult to anticipate or completely guard against.


       Despite strong economic growth in recent years, the financial situation in the Russian market significantly
       deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and
       commodity markets, among other factors, there has been a significant decline in the Russian stock market since
       mid-2008. Since September 2008, there has been increased volatility in currency markets and the Russian Rouble
       (RUR) has depreciated significantly against some major currencies. The official US Dollar (USD) exchange rate
       of the Central Bank of the Russian Federation increased from RUR 25.37 at 1 October 2008 to RUR 29.38 at
       31 December 2008 and RUR 34.01 at 31 March 2009.


       Due to increased market volatility, one-day MosPrime rate fluctuated between 4.75% p.a. and 22.67% p.a.
       during the fourth quarter.


       International reserves of the Russian Federation decreased from USD 557 billion at 30 September 2008 to
       USD 427 billion at 31 December 2008.


       The commodities market was also impacted by the latest events on the financial markets. The price of Urals
       oil for barrel decreased from USD 97.44 as at 30 September 2008 to USD 41.76 as at 31 December 2008.


       A number of measures have been undertaken to support the Russian financial markets, including the
       following:
       • In October 2008 the CBR reduced the mandatory reserves ratio to 0.5%;
       • The guarantee repayment of individual deposits under the state deposit insurance scheme was raised to
          RUR 700 thousand per individual in case of the withdrawal of a licence of a bank or the CBR-imposed
          moratorium on payments;
       • The list of assets which can be pledged under repurchase agreements with the CBR was significantly
          extended;
       • Vnesheconombank (VEB) was appointed to re-finance foreign debt of the largest companies and banks;
       • The largest Russian banks meeting certain criteria have been entitled to participate in Ministry of Finance
          and CBR deposit auctions, where each bank was allocated a limit of non-collaterised borrowings it might
          receive;
       • CBR implemented a loss compensation scheme for interbank lending to allow the largest banks support
          the medium-sized banks.


       The volume of wholesale financing has significantly reduced since August 2007. Such circumstances may
       affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and
       conditions similar to those applied to earlier transactions.
104    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       Borrowers of the Group may be affected by the lower liquidity situation which could in turn impact their
       ability to repay the amounts owed. Deteriorating operating conditions for borrowers may also have an impact
       on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets.
       To the extent that information is available, management has properly reflected revised estimates of expected
       future cash flows in its impairment assessments.


       The amount of provision for impaired loans is based on management’s appraisals of these assets at the
       balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs
       for obtaining and selling the collateral. The market in Russia for many types of collateral, especially real
       estate, has been severely affected by the recent volatility in global financial markets resulting in there being
       a low level of liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may
       differ from the value ascribed in estimating allowances for impairment.


       The fair values of quoted investments in active markets are based on current bid prices (financial assets) or
       offer prices (financial liabilities). If there is no active market for a financial instrument, the Group establishes
       fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted
       cash flow analysis, option pricing models and other valuation techniques commonly used by market
       participants. The valuation models reflect current market conditions at the measurement date which may not
       be representative of market conditions either before or after the measurement date. As at the balance sheet
       date management has reviewed its models to ensure they appropriately reflect current market conditions,
       including the relative liquidity of the market and credit spreads.


       As a result of the recent volatility in financial markets there are no longer regularly occurring transactions
       on an arm’s length basis for some debt available-for-sale financial assets and, as such, in the opinion of
       management many financial instruments are no longer being quoted on an active market in accordance
       with IAS 39.AG71. Hence fair value as at 31 December 2008 of these instruments has been determined
       using a valuation technique. The objective of the valuation technique is to establish what the transaction
       price would have been on the reporting date in an arm’s length exchange motivated by normal business
       considerations. Determining fair value requires consideration of current market conditions, including the
       relative liquidity of the market and current credit spreads. The valuation techniques used by management
       to determine fair value in the absence of an active market include discounted cash flow analysis, taking into
       consideration market spreads for similar financial instruments quoted in an active market.


       Management is unable to reliably determine the effects on the banking sector the Group’s future financial
       position of any further deterioration in the liquidity of the financial markets and the increased volatility in
       the currency and equity markets. Management believes it is taking all the necessary measures to support the
       sustainability and growth of the Group’s business in the current circumstances.


3. Basis of Preparation
       (a) Statement of compliance
       These consolidated financial statements have been prepared in accordance with the requirements of
       International Financial Reporting Standards (“IFRS”).


       (b) Basis of measurement
       These consolidated financial statements are prepared on the historical cost basis except that financial
       instruments held for trading, other financial instruments held at fair value through profit or loss, derivative
       financial instruments and available-for-sale financial instruments are stated at fair value, and certain class
       of property, plant and equipment are stated at revalued amounts.


       (c) Presentation currency
       These consolidated financial statements are presented in Russian Roubles (“RUR”). Amounts in Russian
       Roubles have been rounded to the nearest million.


       (d) Use of estimates and judgements
       The preparation of financial statements in accordance with IFRS requires management to make judgements,
       estimates and assumptions that affect the application of policies and the reported amounts of assets and
        MDM Bank                                                                                                                   105
        Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
        (expressed in millions of Russian Roubles – refer to Note 3)

        liabilities, income and expense. The estimates and associated assumptions are based on historical experience
        and various other factors, that are believed to be reasonable under the circumstances, the results of which
        form the basis of making the judgements about carrying values of assets and liabilities that are not readily
        apparent from other sources. Although these estimates are based on management’s best knowledge of
        current events and actions, actual results ultimately may differ from these estimates.


        The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
        are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period
        of the revision and future periods if the revision affects both current and future periods.


        Information about significant areas of estimation uncertainty and critical judgments made by management
        in the application of IFRSs that have a significant effect on the amounts recognised in these consolidated
        financial statements are described in the following notes:
        • Note 2 “Operating environment of the Group” in respect of loan impairment allowance and valuation of
           available-for-sale financial assets.
        • Note 4 (l) “Significant accounting policies” and Note 11 (a) “Loans and advances to customers” in respect
           of loan impairment allowance.
        • Note 8 “Derivative financial instruments” in respect of valuation of complex derivative products.
        • Note 12 “Property, plant and equipment and intangible assets” in respect of valuation of premises.
        • Note 29 (b) “Contingent liabilities and commitments” in respect of tax contingencies.


4. Significant Accounting Policies
        The following significant accounting policies have been applied in the preparation of these financial
        statements. The accounting policies have been consistently applied and they are consistent with those used in
        the consolidated financial statements for the year ended 31 December 2007. Changes in accounting policies
        as a result of revised accounting standards are described below in this Note.


        (a) Subsidiaries
        Subsidiaries are those companies and other entities (including special purpose entities) in which the Group,
        directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to
        govern the financial and operating policies so as to obtain benefits from their activities. The existence and
        effect of potential voting rights that are presently exercisable or presently convertible are considered when
        assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which
        control is transferred to the Group (acquisition date) and are removed from consolidation from the date that
        control ceases.

        Special purpose entities (“SPEs”) are entities which are created to accomplish a narrow and well-defined
        objective, such as the securitisation of particular assets, or the execution of a specific borrowing transaction.
        The financial statements of SPEs are included in the consolidated financial statements when the substance of
        the relationship between the Group and the SPE indicates that the SPE is controlled by the Group, even if the
        Group does not have any direct or indirect shareholdings in the entity.


        Intra-group transactions, balances and unrealised gains on transactions between the Group companies
        are eliminated. Unrealised losses are also eliminated, but only to the extent that there is no evidence of
        impairment. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency
        with the policies adopted by the Group.


        (b) Functional currency
        Functional currency for each Group company has been determined as the currency of the primary economic
        environment in which the company operates. The Russian Rouble (“RUR”) has been selected as the functional
        currency for the Bank, Group companies domiciled in the Russian Federation and certain Group companies
        domiciled outside of the Russian Federation, where it reflects the economic substance of the underlying
        events and circumstances. For other Group companies the currencies of the respective countries in which
        these companies are domiciled have been selected as their functional currencies.
106   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The results and financial position of each foreign entity of the Group (the functional currency of none of which is
      a currency of a hyperinflationary economy) are translated into the presentation currency as follows:


      assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that
      balance sheet;


      (i) income and expenses for each income statement are translated at average exchange rates (unless this
          average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction
          dates, in which case income and expenses are translated at the dates of the transactions); and


      (ii) all resulting exchange differences are recognised as a separate component of equity as cumulative
           translation reserve.


      When a foreign subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of
      all, or part of, that entity, the exchange differences deferred in equity are reclassified to profit or loss.

      (c) Foreign currency translation
      Transactions in foreign currencies are translated to the functional currency of the relevant Group entity at the
      foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign
      currencies are translated to the functional currency at the foreign exchange rates at the respective balance
      sheet date. The foreign currency gain or loss on monetary assets and liabilities is the difference between
      amortised cost in the functional currency at the beginning of the period, adjusted for interest accrued using
      the effective interest rate and payments during the period, and the amortised cost in foreign currency
      translated at the exchange rate at the end of the period. Non-monetary items that are measured at historical
      cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.
      Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates
      at the date when the fair value was determined. Foreign exchange differences arising on translation are
      recognised in the consolidated income statement, except for differences arising on translation on available-
      for-sale equity instruments, which are recognised directly in equity.


      As at 31 December 2008 the principal rates of exchange used for translating foreign currency balances were
      RUR 29.3804 to USD 1 and RUR 41.4411 to EUR 1 for US Dollar and Euro, respectively (31 December 2007:
      RUR 24.5462 to USD 1 and RUR 35.9332 to 1 EUR for US Dollar and Euro, respectively).


      (d) Accounting for the effects of hyperinflation
      In periods prior to 1 January 2003 the Russian Federation experienced relatively high levels of inflation and
      was considered to be a hyperinflationary economy as defined by International Financial Reporting Standard
      IAS 29 “Financial Reporting in Hyperinflationary Economies”.


      The characteristics of the economic environment of the Russian Federation indicated that hyperinflation had
      ceased effective from 1 January 2003. Restatement procedures of IAS 29 are therefore only applied to non-
      monetary assets acquired or revalued and non-monetary liabilities incurred or assumed prior to that date.
      For these balances, the amounts expressed in the measuring unit current as at 31 December 2002 are the
      basis for the carrying amounts in these consolidated financial statements. The restatement was calculated
      using the conversion factors derived from the Russian Federation Consumer Price Index (“CPI”), published
      by the Russian Statistics Agency.


      (e) Financial assets and liabilities

      (i) Classification of financial instruments
      Financial instruments at fair value through profit or loss include financial assets or liabilities held for trading
      and financial instruments designated at fair value through profit or loss at initial recognition.


      A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling it
      in the near term or it is a part of a portfolio for which there is evidence of a recent actual pattern of short-term
      profit-taking, or it is a derivative (except for a derivative that is a financial guarantee contract or a designated
      and effective hedging instrument).
MDM Bank                                                                                                                 107
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The Group designates financial assets and liabilities at fair value through profit or loss where either:
- a group of financial assets, liabilities or both is managed and their performance is evaluated on a fair value
  basis in accordance with a documented risk management or investment strategy;
- the designation eliminates or significantly reduces a measurement or recognition inconsistency (“an
  accounting mismatch”) which would otherwise arise; or
- the financial instrument represents a hybrid (combined) contract that contains an embedded derivative
  that significantly modifies the cash flows that would otherwise be required under the contract.


Financial assets and liabilities at fair value through profit or loss are not reclassified subsequent to initial
recognition. Financial instruments at fair value through profit or loss include trading securities, other financial
assets at fair value through profit or loss, derivative financial instruments and trading liabilities.


Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market, other than those that the Group intends to sell immediately or in the near term,
which are classified as held for trading, or those which the Group designates at initial recognition as at fair
value through profit or loss or available-for-sale financial assets. Loans and receivables include cash and cash
equivalents, due from other banks, including central banks, loans and advances to customers, and other
receivables.


Held to maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that the Group’s management has the positive intention and ability to hold to maturity.


Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale
and are not classified as loans and receivables, held to maturity investments or financial instruments at fair
value through profit or loss. Available-for-sale financial assets may be sold in response to needs for liquidity
or changes in interest rates, exchange rates or equity prices.


Promissory notes purchased are included in trading securities or in loans and advances to customers or in
due from other banks, depending on their substance and are subsequently remeasured and accounted for in
accordance with the accounting policies applicable for these classes of assets.


Financial liabilities, which are not financial liabilities at fair value through profit or loss or financial guarantee
contracts, include debt securities in issue, due to other banks, customer accounts, subordinated debt and
other payables. Debt securities in issue include promissory notes, certificates of deposit, loan participation
notes and bonds issued by the Group.


Management determines the appropriate classification of financial instruments at the time of the initial
recognition.

(ii) Amortised cost measurement principles
Amortised cost is the amount at which the financial instrument was recognised at initial recognition less
any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred
impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition
and of any premium or discount to maturity amount using the effective interest method. Accrued interest
income and accrued interest expense, including both accrued coupon and amortised discount or premium
(including fees deferred at origination, if any), are not presented separately and are included in the carrying
values of related balance sheet items.


Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of
a financial instrument. An incremental cost is one that would not have been incurred if the transaction had
not taken place. Transaction costs include fees and commissions paid to agents (including employees acting
as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and
transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or
internal administrative or holding costs.


The effective interest method is a method of allocating interest income or interest expense over the relevant period
so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective
108   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future
      credit losses, except that future credit losses are not considered when estimating those cash receipts) through
      the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of
      the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to
      the next interest repricing date except for the premium or discount which reflects the credit spread over the
      floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or
      discounts are amortised over the whole expected life of the instrument. The present value calculation includes
      all fees paid or received between parties to the contract that are an integral part of the effective interest rate
      (refer to income and expense recognition policy).

      (iii) Fair value measurement principles
      Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable,
      willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and
      current offer price for financial liabilities which are quoted in an active market. For assets and liabilities with
      offsetting market risks, the Group may use mid-market prices as a basis for establishing fair values for the
      offsetting risk positions and apply the bid or offer price to the net open position as appropriate. A financial
      instrument is regarded as quoted in an active market if quoted prices are readily and regularly available
      from an exchange or other institution and those prices represent actual and regularly occurring market
      transactions on an arm’s length basis.


      Where an active market price is not available, fair value is determined using valuation techniques with a maximum
      use of market inputs. Such valuation techniques include reference to recent arm’s length market transactions,
      current market prices of substantially similar instruments, discounted cash flow and option pricing models and
      other techniques commonly used by market participants to price the instrument.


      Where discounted cash flow techniques are used, estimated future cash flows are based on management’s
      best estimates and the discount rate is a market-based rate at the balance sheet date for an instrument with
      similar terms and conditions. Where pricing models are used, inputs are based on market-based measures
      at the balance sheet date.


      The fair value of a financial liability with a demand feature, such as a demand deposit, is not less than
      the amount payable on demand, discounted from the first date that the amount could be redeemed by the
      counterparty.


      (iv) Initial recognition
      Trading securities, derivatives and other financial assets and liabilities at fair value through profit or loss are
      initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction
      costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition
      is only recorded if there is a difference between fair value and transaction price which can be evidenced by other
      observable current market transactions in the same instrument or by a valuation technique whose inputs include
      only data from observable markets. Where an initial gain or loss is not based entirely on observable market data,
      it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become
      observable, or on disposal of the financial asset or liability.


      Where the transaction price in a non-active market is different to the fair value from other observable current
      market transactions in the same instrument or based on a valuation technique whose variables include only data
      from observable markets, the Group immediately recognises the difference between the transaction price and fair
      value (a “Day 1” profit) in the income statement. In cases where use is made of data which is not observable, the
      difference between the transaction price and model value is only recognised when in the income statement when
      the inputs become observable, or when the instrument is derecognised.


      All purchases and sales of financial assets that require delivery within the time frame established by
      regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the
      date that the Group commits to deliver a financial asset. All other purchases and sales are recognised on the
      settlement date with the change in value between the commitment date and settlement date not recognised
      for assets carried at cost or amortised cost; recognised in profit or loss for trading securities, derivatives and
MDM Bank                                                                                                                    109
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

other financial assets at fair value through profit or loss; and recognised in equity for assets classified as
available for sale.

(v) Subsequent measurement
Subsequent to initial recognition, financial assets are measured at their fair values, without any deduction
for transaction costs that may be incurred on sale or other disposal, except for:
- loans and receivables and held to maturity investments, which are measured at amortised cost using the
   effective interest method;
- investments in equity instruments that do not have a quoted market price in an active market and whose
   fair value cannot be reliably measured, which are measured at cost.


Financial liabilities at fair value through profit or loss are measured at their fair value. Financial liabilities, other
than financial liabilities at fair value through profit or loss and financial liabilities that arise when a transfer of
a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost subsequent
to initial recognition.


Financial assets or liabilities originated at interest rates different from market rates are re-measured at
origination to their fair value, being future cash flows discounted at market interest rates for similar instruments.
The difference between the fair value and the nominal value at origination is credited or charged to the
consolidated income statement as gains or losses on origination of financial instruments at rates different from
market rates. Subsequently, the carrying amount of such assets or liabilities is adjusted for amortisation of the
gains/losses on origination and the related income/expense is recorded as interest income/expense within the
consolidated income statement as part of the effective interest rate.


(vi) Gains and losses on subsequent measurement
All gains and losses arising from changes in the fair value of financial assets and liabilities at fair value
through profit or loss are included in the consolidated income statement in the period in which they arise.
Interest earned on trading securities and other securities at fair value through profit or loss calculated
using the effective interest method is presented in the consolidated income statement as interest income.
Dividends are included in dividend income within other operating income when the Group’s right to receive
the dividend payment is established and it is probable that the dividends will be collected. All other elements
of the changes in the fair value and gains or losses on derecognition are recorded in profit or loss as gains less
losses from trading in securities or gains less losses from other financial assets at fair value through profit or
loss in the period in which they arise.


Interest income on available-for-sale debt securities is calculated using the effective interest method and
recognised in profit or loss. Foreign exchange gains or losses on available-for-sale debt security investments
are recognised in the consolidated income statement. Dividends on available-for-sale equity instruments are
recognised in profit or loss when the Group’s right to receive payment is established and it is probable that
the dividends will be collected. All other elements of changes in the fair value are deferred in equity until the
investment is derecognised or impaired, at which time the cumulative gain or loss is removed from equity to
profit or loss. The Group uses the “last in – first out” (“LIFO”) method for measurement of gains or losses to
be recognised in profit or loss.
110   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      (vii) Derecognition
      Financial assets
      A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets)
      is derecognised where:
      - the rights to receive cash flows from the asset have expired;
      - the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive
         cash flows from the asset, but has assumed an obligation to pay them in full without material delay to
         a third party under a ‘pass-through’ arrangement; and
      - the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither
         transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of
         the asset.


      Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred
      nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset
      is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that
      takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying
      amount of the asset and the maximum amount of consideration that the Group could be required to repay.


      Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled
      option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the
      amount of the transferred asset that the Group may repurchase, except that in the case of a written put
      option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of
      the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the
      option exercise price.


      The Group also derecognises certain financial assets determined to be uncollectible when they are written
      off against provision for impairment. Refer to impairment of financial assets policy below.


      Securitisation
      As part of its operational activities, the Group securitises financial assets, generally through the transfer
      of these assets to special purpose entities that issue debt securities to investors. The transferred assets may
      qualify for derecognition in full or in part. Interests in the securitised financial assets may be retained by the
      Group and are primarily classified as loans to customers. Gains or losses on securitisations are based on the
      carrying amount of the financial assets derecognised and the retained interest, based on their relative fair
      values at the date of transfer.


      Financial liabilities
      A financial liability is derecognised when the obligation under the liability is discharged or cancelled or
      expires. Where an existing financial liability is replaced by another from the same lender on substantially
      different terms, or the terms of an existing liability are substantially modified, such an exchange or
      modification is treated as a derecognition of the original liability and the recognition of a new liability, and
      the difference in the respective carrying amounts is recognised in the consolidated income statement.


      If the Group purchases its own debt, it is removed from the consolidated balance sheet and the difference between
      the carrying amount of the liability and the consideration paid is included in gains or losses arising from early
      redemption of debt.


      (viii) Offsetting
      Financial assets and liabilities are set off and the net amount reported in the consolidated balance sheet only
      when there is a legally enforceable right to set off the amounts, and there is an intention either to settle on
      a net basis, or to realise the asset and settle the liability simultaneously.


      Income and expenses are presented on a net basis only where either the Group has set off the related assets
      and liabilities as described above, or for gains and losses arising from a group of similar transactions such as
      the Group’s trading activity.
MDM Bank                                                                                                                  111
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

(ix) Impairment of financial assets
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or
a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired
if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after
the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the
estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
Objective evidence that financial assets are impaired can include significant financial difficulty, default or
delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance by the
Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter
bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other
observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the
group, or economic conditions that correlate with defaults in the group.


Financial assets carried at amortised cost
For amounts due from other banks, loans to customers, including net investment in finance leases, and
other financial assets carried at amortised cost, the Group initially assesses individually whether objective
evidence of impairment exists individually for financial assets that are individually significant, and
individually or collectively for financial assets that are not individually significant. If the Group determines
that no objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics
and collectively assesses them for impairment. Assets that are individually assessed for impairment and for
which an impairment loss is, or continues to be, recognised are not included in a collective assessment of
impairment.


If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured
as the difference between the assets’ carrying amount and the present value of estimated future cash flows
(excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is
reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated
income statement. Interest income continues to be accrued on the reduced carrying amount based on the
original effective interest rate of the asset. Changes in impairment provisions attributable to time value are
reflected as a component of interest income.


The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest
rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current
effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised
financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the
collateral, whether or not foreclosure is probable. Each asset individually assessed for impairment is assessed on
its merits, and the workout strategy and estimate of cash flows considered recoverable are independently verified
by the Risk Department.


The accuracy of the allowances depends on how accurately future cash flows are estimated for specific
counterparty allowances and how accurately the model assumptions and parameters used in determining
collective allowances predict future cash flows from loans collectively assessed for impairment.


In some cases the observable data required to estimate the amount of impairment loss on a loan may be
limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in
financial difficulties and there is limited available historical data relating to similar borrowers. In such cases,
the Group uses its experience and judgement to estimate the amount of any impairment loss. The assumptions
used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any
differences between loss estimates and actual loss experience.


For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar
credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups
of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual
terms of the assets being evaluated. In assessing collective impairment the Group uses statistical modelling of
historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted
for management’s judgement as to whether current economic and credit conditions are such that the actual
112   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the
      expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they
      remain appropriate. The estimated period between a loss occurring and its identification is determined by
      management for each identified portfolio. In general, the periods used vary between 3 and 12 months.


      When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans
      are written off after all the necessary procedures have been completed and the amount of the loss has been
      determined. Subsequent recoveries of amounts previously written off are credited to the provision for loan
      impairment in the consolidated income statement.


      Held-to-maturity financial investments. For held-to-maturity investments the Group assesses individually whether
      there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred,
      the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of
      estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised
      in the consolidated income statement. If, in a subsequent year, the amount of the estimated impairment loss
      decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are
      credited to the consolidated income statement.

      Available-for-sale financial assets. For available-for-sale financial assets, the Group assesses at each balance
      sheet date whether there is objective evidence that an investment or a group of investments is impaired.


      In the case of equity investments classified as available-for-sale, objective evidence would include a significant
      or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment,
      the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less
      any impairment loss on that investment previously recognised in the consolidated income statement – is
      removed from equity and recognised in the consolidated income statement. Impairment losses on equity
      investments are not reversed through the consolidated income statement; increases in their fair value after
      impairment are recognised directly in equity.


      In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same
      criteria as financial assets carried at amortised cost. Future interest income is based on the reduced carrying
      amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of
      measuring the impairment loss. The interest income is recorded in the consolidated income statement. If, in
      a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related
      to an event occurring after the impairment loss was recognised in the consolidated income statement, the
      impairment loss is reversed through the consolidated income statement.


      Renegotiated loans. Where possible, the Group seeks to restructure loans rather than to take possession of
      collateral. This may involve extending the payment arrangements and the agreement of new loan conditions.
      Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously
      reviews renegotiated loans so that all criteria are met and that future payments are likely to occur. The loans
      continue to be subject to an individual or collective impairment assessment, calculated using the loan’s
      original effective interest rate.

      (x) Cash and cash equivalents
      Cash and cash equivalents are items, which can be converted into cash within a day. All short-term interbank
      placements, excluding overnight deposits, are included in due from banks. Amounts which relate to funds
      that are of restricted nature are excluded from cash and cash equivalents. Cash and cash equivalents are
      carried at amortised cost in the balance sheet.


      (xi) Mandatory balances with central banks
      Mandatory balances with central banks represent mandatory reserve deposits that are not available to
      finance the Group’s day-to-day operations and hence are not considered as part of cash and cash equivalents
      in the consolidated balance sheet and consolidated cash flow statement.
MDM Bank                                                                                                                113
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

(xii) Sale and repurchase agreements
Where the Group sells/purchases financial asset and simultaneously enters into an agreement to repurchase/
resell the asset at a fixed price on a future date, the arrangement is accounted for as a secured financing
transaction.


Assets sold subject to sale and repurchase (“repo”) agreements are continued to be recognised in the financial
statements. They are reclassified as pledged assets when the transferee has the right by contract or custom
to sell or repledge the collateral. The counterparty liability is included in amounts due to other banks or to
customers, as appropriate.


Assets purchased under agreements to resell (“reverse repo”) are not recognised in the Group’s financial
statements, and corresponding amounts are recorded as due from banks or loans and advances to customers
as appropriate.


The differences between the sale and repurchase prices are treated as interest and accrued over the life of the
repo/reverse repo agreement using the effective interest method.


If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is
recorded as a trading liability and measured at fair value.


(xiii) Derivative financial instruments
Derivative financial instruments include swap, forward, futures, spot transactions and options in interest
rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments.


Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into
and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value
is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are
recognised immediately in the consolidated income statement.


Derivatives may be embedded in another contractual arrangement (a “host contract”). An embedded derivative is
separated from the host contract and it is accounted for as a derivative if, and only if the economic characteristics
and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host
contract, a separate instrument with the same terms as the embedded derivative would meet the definition of
a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in
the consolidated income statement. Derivatives embedded in financial assets or financial liabilities at fair value
through profit or loss are not separated.

Although the Group enters into derivative instruments for risk hedging purposes, the Group does not have
a formal hedging strategy that would qualify for hedge accounting.


(f) Precious metals
Precious metals are stated at fair value. The net realizable value of precious metals is estimated based
on quoted market prices. The cost of precious metals is assigned using the first-in, first-out cost formula.
Precious metals are recorded within other assets.


Precious metals lent to counterparties are retained in the consolidated financial statements.


Precious metals borrowed are recognised in the consolidated financial statements as customer accounts or
due to banks, as appropriate. The obligation to return them is recorded in the balance sheet at the carrying
value of the precious metals borrowed and related accrued interest. If the borrowed precious metals are sold
to third parties, the obligation to return the borrowed precious metals is recorded in the balance sheet at its
fair value.


(g) Property, plant and equipment
Property, plant and equipment are stated at cost, restated to the equivalent purchasing power of the Russian
Rouble at 31 December 2002 for assets acquired prior to 1 January 2003, or revalued amounts, as described
114   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      below, less accumulated depreciation and impairment losses. Historical cost includes expenditure that is
      directly attributable to the acquisition of the assets.

      Where an item of property, plant and equipment comprises major components having different useful lives, they
      are accounted for as separate items of property and equipment. Subsequent expenditure incurred to replace
      a component of an item of property, plant and equipment that is accounted for separately, is capitalised with
      the carrying amount of the component being written off. Other subsequent expenditure is capitalised if future
      economic benefits will arise from the expenditure. All other expenditure, including repairs and maintenance
      expenditure, is recognised in the consolidated income statement when incurred.


      Premises of the Group are subject to revaluation on a regular basis. The frequency of revaluation depends upon
      the movements in the fair values of the premises being revalued. A revaluation increase for an item of premises is
      recognised directly in equity except to the extent that it reverses a previous revaluation decrease recognised in the
      consolidated income statement, in which case it is recognised in the consolidated income statement. A revaluation
      decrease for an item of premises is recognised in the consolidated income statement except to the extent that it
      reverses a previous revaluation increase recognised directly in equity, in which case it is recognised directly in
      equity. The revaluation reserve for premises included in equity is transferred directly to retained earnings on the
      retirement or disposal of the asset.


      Construction in progress is carried at cost less impairment losses. Upon completion, assets are transferred to
      property, plant and equipment at their carrying value. Construction in progress is not depreciated until the
      asset is available for use.


      Gains and losses on disposal of property, plant and equipment are determined by comparing proceeds with
      carrying amount and are recorded in the consolidated income statement.

      (h) Intangible assets
      All of the Group’s intangible assets have a definite useful life and primarily include capitalised computer
      software. They are stated at cost less accumulated amortisation and impairment losses. Acquired computer
      software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific
      software.


      Expenditure on research activities is recognised as an expense in the period in which it is incurred. Subsequent
      expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in
      the specific asset to which it relates. All other costs associated with computer software, e.g. its maintenance, are
      expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful
      lives.

      (i) Depreciation and amortisation
      Depreciation/amortisation commences when the asset is available for use or, in respect of internally
      constructed assets, from the time an asset is completed and ready for use. Depreciation/amortisation is
      applied on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives are
      as follows:

                                                                                                                     years



      Premises                                                                                                         40
      Fixtures and fittings                                                                                          6–10
      Office, computer and other equipment                                                                            4–6
      Intangible assets                                                                                               5–7


      The assets’ residual values and useful lives are reviewed annually, and adjusted if appropriate.


      (j) Impairment
      The carrying amounts of the Group’s assets, other than deferred tax assets, are reviewed at each balance sheet
      date to determine whether there is any indication of impairment. If any such indication exists, the assets’
MDM Bank                                                                                                                115
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

recoverable amounts are estimated. For intangible assets that are not yet available for use, the recoverable
amount is estimated at each annual balance sheet date.


An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit
exceeds its recoverable amount.


Impairment losses are recognised in the consolidated income statement unless the asset is recorded at
a revalued amount in which case it is treated as a revaluation decrease.


Recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs to sell and value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset.
For an asset that does not generate largely independent cash inflows, the recoverable amount is determined
for the cash-generating unit to which the asset belongs.


In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s
carrying amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, if no impairment loss had been recognised.


(k) Provisions
Provisions are recognised if, as a result of past events, the Group has a present legal or constructive obligation,
that can be estimated reliably, and it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation. Provisions are determined by discounting the expected future
cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability.


Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement
is determined by considering the class of obligations as a whole.


A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring
plan, and the restructuring either has commenced or has been announced publicly. Future operating costs
are not provided for.


A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from
the contract are lower than the unavoidable costs of meeting its obligations under the contract. The provision
is measured at the present value of the lower of the expected cost of terminating the contract and the
expected net cost of continuing with the contract. Before a provision is established, the Group recognises any
impairment loss on the assets associated with that contract.


(l) Credit related commitments
In the normal course of business, the Group enters into credit related commitments, comprising undrawn
loan commitments, letters of credit and guarantees, and provides other forms of credit insurance.


Financial guarantees are contracts that require the Group to make specified payments to reimburse the
holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the
terms of a debt instrument.


A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is
measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the
amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and
other credit related commitments are recognised when losses are considered probable and can be measured
reliably.
116   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      Any increase in the liability relating to financial guarantees is taken to the consolidated income statement.
      The premium received is recognised in the consolidated income statement on a straight-line basis over the
      life of the guarantee.

      Financial guarantee liabilities and provisions for other credit related commitments are included within other
      liabilities.

      (m) Income taxes
      Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in
      the consolidated income statement except to the extent that it relates to items recognised directly in equity,
      in which case it is recognised in equity.


      Taxation has been provided for in the consolidated financial statements in accordance with applicable
      legislation currently in force in the respective countries in which the Group operates. Current tax expense
      is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively
      enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Taxes,
      other than on income, are recorded within operating expenses.


      Deferred tax is provided using the balance sheet liability method, providing for temporary differences
      between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
      for taxation purposes. The following temporary differences are not provided for: the initial recognition of
      assets or liabilities that affects neither accounting nor taxable profit; and differences relating to investments
      in subsidiaries where the parent company is able to control the timing of the reversal of the temporary
      difference and it is probable that the temporary difference will not reverse in the foreseeable future.


      The amount of deferred tax provided is based on the expected manner of realisation or settlement of the
      carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance
      sheet date.


      A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be
      available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no
      longer probable that the related tax benefit will be realised. The tax effects of income tax losses available
      for carry forward are recognised as an asset when it is probable that future taxable profits will be available
      against which these losses can be utilised.


      Deferred tax assets and liabilities are netted only within the individual entities of the Group.


      (n) Income and expense recognition
      (i) Interest income and expense
      Interest income and expense are recorded in the consolidated income statement for all debt instruments
      on an accrual basis using the effective interest method. This method defers, as part of interest income or
      expense, all fees paid or received between the parties to the contract that are an integral part of the effective
      interest rate, transaction costs and all other premiums or discounts.


      Fees integral to the effective interest rate include origination fees received or paid by the entity relating
      to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for
      evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms
      of the instrument and for processing transaction documents. Commitment fees received by the Group to
      originate loans at market interest rates are integral to the effective interest rate if it is probable that the
      Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly
      after origination. The Group does not designate loan commitments as financial liabilities at fair value
      through profit or loss.


      (ii) Fee and commission income and expense
      Other fees, commissions and other income and expense items are generally recognised on an accrual basis
      when the service has been provided. Loan origination fees for loans which are probable of being drawn down
      (and are not expected to be sold shortly after recognition), are deferred (together with related incremental
MDM Bank                                                                                                           117
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

costs) and recorded as an adjustment to the effective interest rate on the loan. Where a loan commitment
is not expected to result in the draw-down of a loan, loan commitment fees are recognized on a straight-
line basis over the commitment period. Fees for provision of credit related commitments and other forms of
financial insurance are recognised over the term of the related contract.


Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third
party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, which
are earned on execution of the underlying transaction are recorded on its completion. Portfolio and other
management advisory and service fees are recognised based on the applicable service contracts, usually on
a time-proportion basis. Asset management fees related to investment funds are recorded rateably over the
period the service is provided. The same principle is applied for wealth management, financial planning and
custody services that are continuously provided over an extended period of time. Performance linked fees
are recognised when the performance criteria are fulfilled.


(iii) Other income and expenses
Dividend income is recognised within other operating income in the consolidated income statement on the
date that the dividend is declared.


Non-interest expenses are recognised at the time the products are received or the services are provided,
unless the expenses result from a constructive obligation, against which a liability and related expense are
recognised in the consolidated financial statements.


(o) Pension costs
Companies within the Group which operate in the Russian Federation contribute to the Russian Federation state
pension schemes, social insurance and employment funds in respect of their employees. The contributions to
these funds are expensed as incurred and included within staff costs in the consolidated income statement.
The Group has no further payment obligation once the contribution has been paid.


(p) Leases
(i) Finance leases where the Group is a lessor
Where the Group is a lessor in a lease which transfers substantially all the risks and rewards incidental to
ownership to the lessee, the assets leased out are presented as a finance lease receivable and carried at the
present value of the future lease payments.


The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the
parties to the principal provisions of the lease. For purposes of this definition, a commitment should be in
writing, signed by the parties with interest in the transaction, and should specifically set forth the principal
terms of the transaction. At the inception of the lease the amounts to be recognised at the commencement
of the lease term are determined. The commencement of the lease term is the date from which the lessee is
entitled to exercise its right to use the leased asset. However, if the property covered by the lease has yet to
be constructed, installed or has not been acquired by the Group, the commencement of the lease is deemed
to be the date when construction and installation of the property is completed or the property is acquired by
the Group.


On commencement of the lease term, when the Group enters into a finance lease as a lessor, the present value
of the lease payments (“net investment in leases”) is recorded as part of loans and advances to customers.
The difference between the gross receivable and the present value of the receivable is unearned finance
income. Finance income is recognised over the term of the lease using the effective interest method, which
reflects a constant periodic rate of return. Any advance payments made by the lessee prior to commencement
of the lease are recorded as a reduction in the net investment in lease. Finance income from leases is
recognised as part of interest income on loans and advances to customers.


Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss
events”) that occurred after the initial recognition of the net investment in leases. The Group uses the same
principal criteria to determine that there is objective evidence that an impairment loss has occurred as for
loans carried at amortised costs disclosed earlier in this note. Impairment losses are recognised through
an allowance account to write down the receivables’ net carrying amount to the present value of expected
118   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      cash flows (which exclude future credit losses that have not been incurred) discounted at the interest rates
      implicit in the finance leases. The estimated future cash flows reflect the cash flows that may result from
      obtaining and selling the assets subject to the lease.

      (ii) Operating leases
      Where the Group is the lessee in a lease agreement and the lessor does not transfer substantially all of the
      risks and rewards incidental to ownership of the asset, the arrangement is accounted for as an operating
      lease. The leased asset is not recognised in the Group’s consolidated balance sheet, and lease expenses are
      recognised in the consolidated income statement on a straight-line basis over the period of the lease.


      When an operating lease is terminated before the lease period has expired, any payment required to be made
      to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.


      Where the Group is the lessor in a lease agreement and does not transfer substantially all of the risks and
      rewards incidental to ownership of the asset, the arrangement is accounted for as an operating lease.
      The leased asset is recognised in the Group’s consolidated balance sheet, and depreciation and lease income
      are recognised in the consolidated income statement on a straight-line basis over the period of the lease.


      (q) Fiduciary assets
      The Group provides custody, asset management and other fiduciary services that result in holding or
      placing of assets on behalf of third parties. These assets and income arising thereon are excluded from these
      consolidated financial statements as they are not assets of the Group. Commissions received from such
      business are shown as fees and commissions received in the consolidated income statement.


      (r) Segment reporting
      The Group presents segment information by operating segments. A segment is a distinguishable component
      of the Group about which separate financial information is available that is evaluated regularly by the chief
      operating decision maker in deciding how to allocate resources and in assessing performance. Refer to
      section (s) below.


      (s) Changes in accounting policies
      The accounting policies applied by the Group in these consolidated financial statements are consistent with
      those applied by the Group in the consolidated financial statements for the year ended 31 December 2007,
      except for changes resulting from the amendments to IFRS.


      IFRS 8 “Operating Segments”. As at 1 January 2008, the Group has early adopted IFRS 8 “Operating
      Segments” which is effective for annual periods beginning on or after 1 January 2009 (earlier application
      is permitted). IFRS 8 specifies how an entity should report information about its operating segments and
      sets out requirements for related disclosures about products and services, geographical areas and major
      customers. Operating segments are components of an entity about which separate financial information
      is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate
      resources and in assessing performance. Financial information is required to be reported on the same basis
      as is used internally for evaluating operating segment performance and deciding how to allocate resources
      to operating segments. IFRS 8 “Operating Segments” replaces IAS 14 “Segment Reporting”.


      As a result, the Group has presented information in Note 27 “Analysis by Segment” in these consolidated
      financial statements based on the measures of segment profit and loss, segment assets and other segment
      items reported to the chief operating decision maker of the Group (represented by the Management Board
      of MDM Bank and Chairman of the Management Board). The Group has also presented a reconciliation of
      the total of above measure of reportable segments’ profit and loss to the Group’s profit and loss before tax as
      reported in the consolidated financial statements, and the total of the above measure of reportable segment
      assets to the total assets of the Group as reported in the consolidated financial statements.
MDM Bank                                                                                                              119
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

Reclassification of Financial Assets - Amendments to IAS 39, Financial Instruments: Recognition and
Measurement and IFRS 7 Financial Instruments: Disclosures (issued in October 2008; effective from
1 July 2008). In October 2008, the IASB issued amendments to IAS 39 “Financial Instruments: Recognition
and Measurement”, and IFRS 7 “Financial Instruments: Disclosures”. The amendments to IAS 39 permit
(1) certain reclassifications of non-derivative financial assets (other than those designated under the fair
value option) out of the trading category if they are no longer held for the purpose of selling or repurchasing
them in the near term to either the held to maturity, loans and receivables or available for sale categories
and (2) also allow the reclassification of financial assets from the available for sale category to the loans and
receivables category in particular rare circumstances. Rare circumstances arise from a single event that is
unusual and highly unlikely to recur in the near term. Any reclassified instruments should subsequently be
reviewed for impairment using the IAS 39 impairment rules for the categories into which they are classified.
The amendments to IFRS 7 introduce additional disclosure requirements if an entity has reclassified financial
assets in accordance with the amendments to IAS 39.


The effect of application of amendment to IAS 39 by the Group is as follows:
• The Group has reclassified certain debt trading securities into loans and advances to customers. The Group
  identified certain corporate bonds and eurobonds eligible under the amendments (i.e. fixed maturity
  instruments which are not quoted in an active market), for which as at 1 July 2008 it had an intent to
  hold them to maturity or in the foreseeable future. Under amendments to IAS 39, the reclassifications
  were made with effect from 1 July 2008 at fair value at that date. The above bonds are now accounted for
  at amortised cost in accordance with accounting policies for loans and advances to customers, including
  assessment for impairment.


The deterioration of the global and Russian financial markets during the third quarter 2008 meets the
definition of “rare circumstances” by Amendments to IAS 39. Therefore the Group has also made the
following reclassifications effective from 1 July 2008:
• The Group has reclassified certain debt trading securities into investment securities held to maturity.
   The Group identified certain corporate bonds, eligible under the amendments, for which as at 1 July 2008
   it had an intention and ability to hold them to maturity. The reclassifications were made with effect from
   1 July 2008 at fair value at that date. Investment securities held to maturity are accounted for at amortised
   cost and are assessed for impairment in accordance with IAS 39 requirements for this category.
• The Group has reclassified the remaining part of its debt trading securities into available-for-sale financial
   assets effective from 1 July 2008, as the Group no longer holds these securities for the purpose of selling or
   repurchasing them in the near term. From the reclassification date, the securities are revalued at fair value
   directly in equity through the revaluation of available-for-sale financial assets. Assessment for impairment
   is performed for these securities in accordance with IAS 39 requirements for available-for-sale financial
   assets.


The disclosures below detail the impact of the reclassifications on the consolidated financial statements of
the Group:

                                                              31 December 2008                30 June 2008

                                                        Carrying value       Fair value     Carrying and fair value

Trading securities reclassified to available-for-sale
financial assets                                               8 227             8 227                    12 469
Trading securities reclassified to investment
securities held to maturity                                      108              393                        1 234
Trading securities reclassified to loans and advances
to customers                                                   4 369             3 883                       4 095
120   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

                                                                                             2008

                                                                                                    Would have been recognized
                                                                    Recognised for reclassified      if the reclassifications were
                                                                                        assets                           not made

      Interest income                                                                   1 616                             1 489
      Gains /(losses) arising from trading in securities, net                             266                            (2 259)
      Gains arising from available-for-sale financial assets, net                         299                                    -
      Loan impairment losses                                                            (157)                                    -
      Provision for impairment of investment securities held
      to maturity                                                                       (371)                                    -
      Total recognised in profit and loss for the year
      (before tax)                                                                     1 653                               (770)
      Revaluation of available-for-sale financial assets                              (1 953)                                    -
      Total recognised in equity (before tax)                                           (300)                              (770)


      As at the reclassification date, effective interest rates on reclassified trading assets ranged from 4% to 18%
      with expected recoverable cash flows of RUR 17 714 million.


      (t) Comparative information
      Certain comparative information has been reclassified to conform to changes in presentation in the current
      year, as follows.


      In prior periods the Group presented information for Corporate Banking, Retail Banking, Small Business
      Banking, Investment Banking and Financial Markets, Private Banking and Asset Management and Central
      Treasury segments as reportable business segments. Starting from 1 January 2008, following a change in
      internal management reporting and the way how information is presented internally to the chief operating
      decision maker of the Group, i) Retail Banking segment now includes the Small Business Banking segment;
      and ii) Corporate Banking, Investment Banking and Financial Markets, Private Banking and Asset
      Management together are included in the Corporate and Investment Banking segment. The Group has
      accordingly changed comparative information presented in Note 27 “Analysis by Segment”.


      (u) New standards and interpretations not yet adopted
      Certain new standards and interpretations have been published that are mandatory for the Group’s accounting
      periods beginning on or after 1 January 2009 or later periods and which the Group has not early adopted:


      Puttable Financial Instruments and Obligations Arising on Liquidation - IAS 32 and IAS 1 Amendment
      (effective from 1 January 2009). The amendment requires classification as equity of some financial
      instruments that meet the definition of a financial liability. The Group does not expect the amendment to
      affect its consolidated financial statements.


      IAS 1, Presentation of Financial Statements (revised September 2008; effective for annual periods
      beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income
      statement by a statement of comprehensive income which will also include all non-owner changes in equity,
      such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present
      two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1
      also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of
      the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes
      in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation
      of its financial statements but to have no impact on the recognition or measurement of specific transactions
      and balances.


      IAS 23, Borrowing Costs (revised March 2008; effective for annual periods beginning on or after
      1 January 2009). The revised IAS 23 was issued in March 2008. The main change to IAS 23 is the removal
      of the option of immediately recognising as an expense borrowing costs that relate to assets that take
      a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such
      borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs
      relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January
MDM Bank                                                                                                            121
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

2009. No changes will be made for borrowing costs incurred to this date that have been expensed, and
management does not expect the revised IAS 23 to affect the Group’s financial statements.


IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual
periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total
comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority
interests”) even if this results in the non-controlling interests having a deficit balance (the current standard
requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard
specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control
must be accounted for as equity transactions. It also specifies how an entity should measure any gain or
loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained
in the former subsidiary will have to be measured at its fair value. The Group does not expect the amended
standard to have a material effect on its consolidated financial statements.


Vesting Conditions and Cancellations—Amendment to IFRS 2, Share-based Payment (issued in January
2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that
only service conditions and performance conditions are vesting conditions. Other features of a share-based
payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or
by other parties, should receive the same accounting treatment. The Group does not expect the amendment
to have a material effect on its consolidated financial statements.


IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests
using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair
value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method
to business combinations. The requirement to measure at fair value every asset and liability at each step
in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in
a business combination achieved in stages, the acquirer will have to remeasure its previously held equity
interest in the acquiree at its acquisition date fair value and recognise the resulting gain or loss, if any, in
profit or loss. Acquisition-related costs will be accounted for separately from the business combination and
therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the
acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability
after the acquisition date will be recognised in accordance with other applicable IFRS, as appropriate, rather
than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only
mutual entities and business combinations achieved by contract alone. The Group is currently assessing the
impact of the amended standard on its consolidated financial statements.


Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the
International Accounting Standards Board decided to initiate an annual improvements project as a method
of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist
of a mixture of substantive changes, clarifications, and changes in terminology in various standards.
The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case
of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading
as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and
classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of
definition of a curtailment under IAS 19; accounting for below market interest rate government loans in
accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective
interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in
the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement
of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending
the definition of the fair value through profit or loss category to be consistent with hedge accounting under
IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40;
and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further
amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial
changes only, which the IASB believes have no or minimal effect on accounting. The Group does not expect
the amendments to have any material effect on its consolidated financial statements.
122    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       Other new standards or interpretations. The Group has not early adopted the following other new standards
       or interpretations:
       • IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008).
       • IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or
          after 1 January 2009).
       • IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or
          after 1 October 2008).
       • IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after
          1 July 2009, with earlier application permitted).
       • Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate - IFRS 1 and IAS 27 Amendment
          (revised May 2008; effective for annual periods beginning on or after 1 January 2009).


       Unless otherwise described above, the new standards and interpretations are not expected to significantly
       affect the Group’s consolidated financial statements.


5. Cash and Cash Equivalents
                                                                           31 December 2008         31 December 2007

       Cash on hand                                                                 11 938                    5 326
       Correspondent accounts with central banks                                    22 564                   11 289
       Correspondent accounts and overnight deposits with other
       banks                                                                        39 096                  66 638
       Settlement accounts with trading systems                                      3 673                      181
       Total cash and cash equivalents                                              77 271                  83 434



       Correspondent accounts and overnight deposits with other banks comprise:

                                                                           31 December 2008        31 December 2007

       Investment grade international banks                                         25 887                  59 043
       Russian subsidiaries of investment grade international banks                       -                   2 581
       Large Russian banks                                                          11 741                    1 621
       Other Russian banks                                                           1 404                    2 715
       Other foreign banks                                                              64                     678
       Total correspondent accounts and overnight deposits                         39 096                  66 638


       Investment grade international banks in the table above are multinational or OECD-based banks with
       investment grade ratings as at 31 December 2008 and 31 December 2007, respectively. An investment
       grade rating is an international rating of BBB- or above by Standard & Poor’s, BBB- or above by Fitch and
       Baa3 or above by Moody’s. Large Russian banks in the table above are the banks included in the top thirty
       Russian banks by total assets in accordance with the local accounting standards as at 31 December 2008 and
       31 December 2007, respectively.


       As at 31 December 2008, the Group had tree counterparties with aggregated balances on correspondent
       accounts and overnight deposits greater than 10% of consolidated equity at that date (31 December 2007:
       two counterparties). The total aggregate amount of these balances was RUR 19 593 million, or 25% of total
       cash and cash equivalents, as at 31 December 2008 (31 December 2007: RUR 56 816 million, or 68% of total
       cash and cash equivalents).


       As at 31 December 2008 and 31 December 2007 the Group had obligations under its loan participation notes,
       secured by the Group’s diversified payment rights (“DPR”), i.e. its rights to funds being transferred to the
       Group’s USD and EUR correspondent accounts. As at 31 December 2008, the carrying amount of these notes was
       RUR 9 791 million (31 December 2007: RUR 14 133 million). Refer to Note 17.


       Geographical and currency analysis of cash and cash equivalents is disclosed in Note 28.
       MDM Bank                                                                                                         123
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

6. Due from Other Banks
                                                                            31 December 2008        31 December 2007

       Current interbank loans
       Investment grade international banks                                          11 841                   4 824
       Russian subsidiaries of investment grade international banks                   8 491                   5 510
       Large Russian banks                                                                 -                  1 467
       Other foreign banks                                                                1                     120
       Other Russian banks                                                            6 796                   6 773
       Total current interbank loans                                                27 129                   18 694
       Reverse sale and repurchase agreements
       Investment grade international banks                                           4 522                   7 046
       Large Russian banks                                                                 -                  1 549
       Other Russian banks                                                                 -                    545
       Total reverse sale and repurchase agreements                                   4 522                   9 140
       Due from other banks                                                         31 651                   27 834

       Investment grade international banks in the table above are the multinational or OECD-based banks with
       investment grade ratings as at 31 December 2008 and 31 December 2007, respectively. Refer to Note 5.
       Large Russian banks in the table above are the banks included in the top thirty Russian banks by total
       assets in accordance with the local accounting standards as at 31 December 2008 and 31 December 2007,
       respectively.


       As at 31 December 2008, the Group had two counterparties with aggregated balances greater than 10%
       of consolidated equity at that date (31 December 2007: one counterparty). The total aggregate amount of
       these balances was RUR 10 819 million, or 34% of due from other banks balances, as at 31 December 2008
       (31 December 2007: RUR 7 046 million, or 25% of due from other banks balances). As at 31 December 2008,
       these balances included receivables from a large international bank due under a reverse sale and repurchase
       agreement of RUR 4 522 million (31 December 2007: RUR 7 046 million), which were pledged as collateral
       for term deposits of RUR 4 515 million (31 December 2007: RUR 7 042 million) received by one of the Group’s
       subsidiaries from the same bank. Refer to Note 15.


       Securities received as collateral under reverse sale and repurchase agreements are marketable corporate bonds
       and equity securities. The following table presents information about the fair value of these securities:


                                                                           31 December 2008         31 December 2007

       Held by the Group                                                              4 828                   9 735
       Pledged under sale and repurchase agreements
       (Notes 11, 15 and 16)                                                               -                    129
       Securities received as collateral under reverse sale and
       repurchase agreements                                                         4 828                    9 864


       Included in due from other banks as at 31 December 2008 were loans to an international bank of
       RUR 1 129 million pledged as collateral for interest and principal repayments in respect of loan participation
       notes secured by diversified payment rights (31 December 2007: RUR 1 093 million). Refer to Note 17.


       Geographical and currency analysis, effective interest rates and maturity structure of due from other banks
       are disclosed in Note 28.
124     MDM Bank
        Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
        (expressed in millions of Russian Roubles – refer to Note 3)

7. Trading Securities
                                                                                31 December 2008           31 December 2007

        - Owned by the Group
        Government bonds
        Municipal bonds issued by Russian municipalities                                        -                            2
        Russian Federal loan bonds (OFZ)                                                        -                            1
        Corporate debt and equity securities
        Corporate bonds                                                                         -                        3 855
        Corporate Eurobonds                                                                     -                        5 212
        Promissory notes                                                                        -                          317
        Corporate shares                                                                     194                         1 488
        Total trading securities owned by the Group                                          194                       10 875
        - Pledged under sale and repurchase agreements
        Government bonds
        Russian Federal loan bonds (OFZ)                                                        -                         249
        Municipal bonds issued by Russian municipalities                                        -                           80
        Corporate debt and equity securities
        Corporate bonds                                                                         -                        1 226
        Corporate Eurobonds                                                                     -                         897
        Corporate shares                                                                        -                         535
        Total trading securities pledged under sale and
        repurchase agreements                                                                   -                       2 987
        Total trading securities                                                             194                       13 862

        Municipal bonds are securities issued by Russian municipalities denominated in Russian Roubles.


        Russian Federal loan bonds (OFZ) are securities issued by the Government of the Russian Federation
        denominated in Russian Roubles.


        Corporate bonds are interest-bearing securities, issued by Russian companies.


        Corporate Eurobonds are interest-bearing securities, issued by Russian or foreign companies.


        Promissory notes are debt securities of Russian companies denominated in Russian Roubles issued at
        a discount to nominal value.


        The majority of corporate shares are shares of Russian companies traded in the Moscow Interbank Currency
        Exchange (MICEX) or the Russian Trading System (RTS).


        The following table provides details of the Group’s debt trading securities as at 31 December 2007:

                                                                                                                      Yield to
                                                                                                                      maturity
                                                               Maturity                  Coupon rate per annum       per annum

                                                           Minimum            Maximum     Minimum       Maximum        Average

        Municipal bonds issued
        by Russian municipalities                 October 2011            October 2011       9.2%          9.2%          8.5%
        Russian Federal loan
        bonds (OFZ)                             November 2021        November 2021           9.0%          9.0%          6.5%
        Corporate bonds                               April 2008     November 2018           6.3%         14.1%         10.5%
        Corporate eurobonds                           April 2009     December 2015           7.5%         11.0%         10.3%
        Promissory notes                            March 2008               July 2008              -            -      11.6%
       MDM Bank                                                                                                                    125
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       The following table provides information on the credit quality of the Group’s corporate debt securities based
       on Standard & Poor’s, Fitch and Moody’s international ratings as at 31 December 2007:

                                                                                                          31 December 2007

        Corporate bonds owned by the Group
        Credit rating between BB+ and BBB+                                                                               1 961
        Credit rating BB and below                                                                                       1 823
        Not rated                                                                                                        5 283
        Total corporate bonds owned by the Group                                                                         9 067


        Promissory notes owned by the Group
        Credit rating BB and below                                                                                        109
        Not rated                                                                                                         208
        Total promissory notes owned by the Group                                                                         317


        Corporate bonds pledged under sale and repurchase agreements
        Credit rating between BB+ and BBB+                                                                                504
        Credit rating BB and below                                                                                       1 288
        Not rated                                                                                                         331
        Total corporate bonds pledged under sale and repurchase agreements                                               2 123


       Geographical and currency analysis, effective interest rates and maturity structure of trading securities are
       disclosed in Note 28. Information on related party transactions is disclosed in Note 31.


8. Derivative Financial Instruments
       The fair values of derivative instruments held by the Group are set out in the following table:

                                                          31 December 2008                        31 December 2007

                                                   Contract/       Fair values             Contract/       Fair values
                                                    notional                                notional
                                                     amount      Assets      Liabilities     amount      Assets      Liabilities

        Foreign exchange derivative contracts
        - currency forwards                         83 681       1 337        (1 137)       66 764         245           (421)
        - currency futures                           6 550            -                -     7 478            -                -

        Precious metals derivative contracts
        - precious metals forwards                   2 118          10              (6)      1 175          15              (6)

        Securities derivative contracts
        - securities forwards                              -          -                -       754            -           (25)
        - stock index forwards                       5 876       1 175        (1 175)              -          -                -
        - written securities put options                   -          -                -       245            -                -

        Other derivative contracts
        - cross currency interest rate swaps         2 238         143            (54)       2 002            -           (70)
        - balance guaranteed cross currency
         interest rate swaps                         2 198         418                 -     5 008            -          (352)
        - commodity swaps                                  -          -                -       270            -                -
        Total recognised derivative assets/
        (liabilities)                                            3 083       (2 372)                       260           (874)
126   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      Derivative financial instruments are generally traded in an over-the-counter market with professional market
      counterparties on standardised contractual terms and conditions or exchange traded. The notional amounts
      of certain types of financial instruments provide a basis for comparison with instruments recognised on
      the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current
      fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks.
      The derivative instruments become favourable (positive fair value) or unfavourable (negative fair value) as
      a result of fluctuations in market rates relative to their terms. The aggregate contractual or notional amount
      of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable
      and, thus, the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly
      over time.


      Currency, precious metal and securities forwards are over-the-counter contracts which establish terms and
      conditions of a deal which is settled at a future date.


      Currency futures are exchange traded contracts which establish terms and conditions of a deal which is
      settled at a future date.


      Stock index forwards are over-the-counter contracts whereby one party pays the other party the difference
      between a specified index as at contract date and settlement date.


      Written securities put options as at 31 December 2007 are put options expired in March 2008 written by
      the Group to a major international bank in respect of bonds issued by a Russian entity with a total nominal
      amount of USD 10 million, or RUR 245 million. As at 31 December 2007, the market price of the underlying
      bonds was significantly above the exercise price. Further, the Group had the right to terminate the options
      before maturity under certain conditions related to the price of the underlying bonds. Based on these facts,
      management of the Group estimated that, as at 31 December 2007, the fair value of the related liability
      was nil.


      Cross currency interest rate swaps are over-the-counter contracts whereby one party swaps principal and
      interest payments in one currency determined using a fixed or floating interest rate for principal and interest
      payments in other currency determined using a floating or fixed interest rate.


      Balance guaranteed cross currency interest rate swaps are swap agreements with major international banks,
      in which the Group entered as a part of its car loans securitisation transaction. Under the terms of the swap
      agreements all RUR or USD denominated fixed rate amounts received by the Group from car loans pledged as
      collateral under its loan participation notes are swapped for USD floating rate amounts which are then used
      for repayment of the loan participation notes. Refer to Note 17.

      Derivatives which are embedded in financial instruments measured at fair value through profit or loss are
      not included in the above table. As at 31 December 2007, these derivatives comprised derivatives embedded
      into credit-linked leveraged notes of RUR 226 million included within other assets (Refer to Note 13).
      The maximum losses of the Group in respect of these embedded derivatives were limited to the carrying
      value of the related financial instruments.
MDM Bank                                                                                                            127
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

Remaining maturity, fair value and weighted average exchange rate breakdowns for forward and future
currency contracts as at 31 December 2008 are set out in the following table:

                                                             Weighted aver-             Fair values
                                                 Contract/   age contracted
                                           notional amount   exchange rates          Assets           Liabilities

Forwards
Buy USD sell RUR
Less than three months                            11 512            29.68             179                       -
Between three months and one year                    333            23.67               95                      -

Buy RUR sell USD
Less than three months                            11 865            29.85                2               (126)
Between three months and one year                    172            24.59                 -                (61)

Buy USD sell EUR
Less than three months                            24 198              1.40            951                    (1)

Buy EUR sell USD
Less than three months                            23 053              1.41                -              (887)

Buy RUR sell EUR
Less than three months                               675            38.56                 -                (27)

Buy CHF sell USD
Less than three months                             2 906              1.08              32                      -

Buy USD sell CHF
Less than three months                             2 925              1.07                -                  (9)

Buy JPY sell USD
Less than three months                             1 735            90.42                 -                (18)

Buy USD sell JPY
Less than three months                             2 309            90.55              20                       -

Buy EUR sell LVL
Less than three months                             1 027              0.71                -                  (7)
Other
Less than three months                               971                  -             58                   (1)


Futures
Buy USD sell RUR
Less than three months                               588            25.99                 -                     -
Between three months and one year                  2 350            25.14                 -                     -

Buy RUR sell USD
Less than three months                             1 002            25.05                 -                     -
Between three months and one year                  1 515            25.24                 -                     -

Buy RUR sell EUR
Less than three months                               515            36.81

Buy EUR sell RUR
Less than three months                               580             37.30                -                     -
Total                                             90 231                             1 337            (1 137)
128   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      Remaining maturity, fair value and weighted average exchange rate breakdowns for forward and future
      currency contracts as at 31 December 2007 are set out in the following table:

                                                                     Weighted aver-           Fair values
                                                         Contract/   age contracted
                                                   notional amount   exchange rates        Assets           Liabilities



      Forwards
      Buy USD sell RUR
      Less than three months                              21 536            24.85             22               (128)
      Between three months and one year                    1 242            25.09              4                 (16)

      Buy RUR sell USD
      Less than three months                              19 108            24.74             99                 (24)
      Between three months and one year                    1 122            24.93              5                   (5)

      Buy USD sell EUR
      Less than three months                               4 743              1.44             6                 (25)

      Buy EUR sell USD
      Less than three months                                 772              1.44             1                      -

      Buy EUR sell RUR
      Less than three months                               1 407              35.5              -                (13)

      Buy USD sell CHF
      Less than three months                               1 366              1.15              -                (35)

      Buy CHF sell USD
      Less than three months                               1 380              1.15            27                      -

      Buy USD sell JPY
      Less than three months                               6 110             114.2              -                (95)

      Buy JPY sell USD
      Less than three months                               6 170             113.9            79                      -

      Buy EUR sell LVL
      Less than three months                                 823              1.32              -                (78)
      Other
      Less than three months                                 822                  -            2                      -
      Between three months and one year                      163                  -             -                  (2)

      Futures
      Buy USD sell RUR
      Less than three months                               2 946            25.41               -                     -
      Between three months and one year                      982            25.55               -                     -

      Buy RUR sell USD
      Less than three months                               3 044            25.37               -                     -
      Between three months and one year                      506            25.30               -                     -


      Total                                               74 242                             245               (421)


      Geographical, currency analysis and maturity structure of derivative financial instruments are disclosed in
      Note 28. Information on related party transactions is disclosed in Note 31.
       MDM Bank                                                                                                             129
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

9. Available-for-Sale Financial Assets
                                                                                 31 December 2008     31 December 2007

        - Owned by the Group
        Corporate debt and equity securities
        Corporate bonds                                                                    3 558                        -
        Corporate Eurobonds                                                                3 227                        -
        Promissory notes                                                                   1 063                        -
        Corporate shares                                                                     464                        -
        Investments in mutual funds                                                          364                  290
        Total available-for-sale financial assets owned by the Group                       8 676                  290
        - Pledged under sale and repurchase agreements
        Corporate debt and equity securities
        Corporate bonds                                                                      379                        -
        Total available-for-sale financial assets pledged under sale and
        repurchase agreements                                                                379                        -
        Total available-for-sale financial assets                                          9 055                  290

       As at 31 December 2008 and 31 December 2007, investments in mutual funds comprise the Group’s share in
       a closed mutual investment fund aimed at investment projects in the South of Russia.


       The following table provides details of the Group’s debt available-for-sale securities as at 31 December 2008:

                                                                                                               Yield to
                                                                                                               maturity
                                                              Maturity                  Coupon rate per annum per annum

                                                          Minimum            Maximum     Minimum    Maximum    Average

        Corporate bonds                             February 2009        October 2011       5.5%      18.0%      43.1%
        Corporate Eurobonds                         January 2009           April 2013       4.0%      13.5%     33.4%
        Promissory notes                              March 2009       November 2009            -          -    24.0%



       The following table provides information on the credit quality of the Group’s corporate debt securities based
       on Standard & Poor’s, Fitch and Moody’s international ratings as at 31 December 2008:
                                                                                                       31 December 2008

        Corporate bonds owned by the Group
        Credit rating BB and below                                                                               1 004
        Not rated                                                                                                2 554
        Total corporate bonds owned by the Group                                                                 3 558

        Corporate Eurobonds owned by the Group
        Credit rating between BB+ and BBB+                                                                         132
        Credit rating BB and below                                                                               2 170
        Not rated                                                                                                  925
        Total corporate bonds owned by the Group                                                                 3 227

        Promissory notes owned by the Group
        Credit rating between BB+ and BBB+                                                                         754
        Not rated                                                                                                  309
        Total promissory notes owned by the Group                                                                1 063

        Corporate bonds pledged under sale and repurchase agreements
        Credit rating between BB+ and BBB+                                                                         130
        Credit rating BB and below                                                                                 249
        Total corporate bonds pledged under sale and repurchase agreements                                         379

       Geographical and currency analysis and maturity structure of available-for-sale financial assets are disclosed
       in Note 28.
130    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

10. Investment Securities Held to Maturity
       Included in investment securities held to maturity as at 31 December 2008, are corporate bonds issued by one
       Russian company denominated in Russian Rubles with a carrying value of RUR 479 million, a coupon rate
       of 7.75% and maturity date of 14 June 2014. As at 31 December 2008 provision for impairment in amount of
       RUR 371 million was recognised in respect of these bonds.


11. Loans and Advances to Customers
                                                                              31 December 2008            31 December 2007

        Loans to corporate customers                                                 137 800                       121 585
        Loans to individuals                                                             40 460                     36 849
        Investment banking loans                                                         10 360                     16 130
        Small business loans                                                             15 529                      8 214
        Net investment in finance leases                                                  2 860                      3 727
        Gross loans and advances to customers                                        207 009                       186 505
        Less: loan impairment                                                        (12 203)                       (6 194)
        Loans and advances to customers                                              194 806                       180 311



       (a) Loan impairment
       Movements in loan impairment by classes of loans to customers for the year ended 31 December 2008 are
       as follows:

                                                                                                             Net
                                                        Loans to            Investment        Small investment
                                                      corporate    Loans to    banking      business in finance
                                                      customers individuals      loans        loans       leases       Total

        Loan impairment as at 1 January 2008             3 135      2 460           23         453          123      6 194
        Loan impairment losses during the year           4 039        942          204         835          596      6 616
        Transfer of impairment losses on terminated
        lease contracts to other assets                       -           -           -             -     (249)       (249)
        Loans written off during the year as
        uncollectible                                      (53)         (4)           -        (26)            -       (83)
        Loans sold during the year                       (220)       (666)            -           (1)          -      (887)
        Effect of foreign currency translation             392        127           11            59         23        612
        Loan impairment as at 31 December 2008           7 293      2 859         238        1 320         493      12 203


       Movements in loan impairment by classes of loans to customers for the year ended 31 December 2007 are
       as follows:

                                                                                                             Net
                                                        Loans to            Investment        Small investment
                                                      corporate    Loans to    banking      business in finance
                                                      customers individuals      loans        loans       leases       Total

        Loan impairment as at 1 January 2007            2 896       1 453           18            96        36       4 499
        Loan impairment losses during the year            408       1 217            5         364           89      2 083
        Loans written off during the year as
        uncollectible                                     (81)         (8)           -              -          -       (89)
        Loans sold during the year                        (38)       (163)           -              -          -      (201)
        Effect of foreign currency translation            (50)        (39)           -            (7)        (2)       (98)
        Loan impairment as at 31 December 2007          3 135       2 460          23          453         123       6 194


       Loans sold during the year ended 31 December 2008 comprised loans to corporate customers with a gross book
       value of RUR 297 million against which an impairment allowance of RUR 220 million was recognised, which
       were sold for RUR 44 million, and loans to individuals with a gross book value of RUR 769 million against
       which an impairment allowance of RUR 666 million was recognised, which were sold for RUR 67 million.
MDM Bank                                                                                                        131
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

Included in loans and advances to customers, as at 31 December 2008, was interest accrued on loans
individually assessed for impairment of RUR 372 million (31 December 2007: RUR 22 million).


The Group has reviewed its loan portfolio as at 31 December 2008 and recognised loan impairment as
follows:

                                                                                               Impairment to
                                                       Gross loans   Impairment   Net loans   Gross loans (%)

Loans to corporate customers
   Collectively assessed for impairment
     Standard loans not past due                         90 609        (2 106)     88 503                2.3
     Watch list loans not past due                        31 055         (682)     30 373                2.2
   Total collectively assessed for impairment           121 664        (2 788)    118 876                2.3

   Individually assessed for impairment
     Watch list loans not past due                         5 655         (992)       4 663              17.5
     Overdue loans                                         9 677       (2 709)       6 968             28.0
     Non-recoverable loans                                   804         (804)            -           100.0
   Total individually assessed for impairment             16 136       (4 505)     11 631               27.9
Total loans to corporate customers                      137 800        (7 293)    130 507                5.3

Loans to individuals
   Loans to individuals collectively assessed
   for impairment
     Standard loans to finance purchase of cars           18 874       (1 359)     17 515                7.2
     Express loans to finance purchase of cars             3 110         (613)       2 497             19.7
     Mortgage loans                                       14 017         (498)     13 519                3.6
     Credit card overdrafts                                1 389         (207)       1 182             14.9
     Other loans to individuals                            3 070         (182)       2 888               5.9
Total loans to individuals                               40 460        (2 859)     37 601                7.1

Investment banking loans
   Collectively assessed for impairment
     Margin loans fully secured by traded securities       1 169              -      1 169               0.0
     Reverse sale and repurchase agreements                  863              -       863                0.0
     Other standard loans                                  8 305         (215)       8 090               2.6
   Total collectively assessed for impairment             10 337          (215)    10 122                2.1

   Individually assessed for impairment
     Non-recoverable loans                                     23          (23)           -           100.0
   Total individually assessed for impairment                  23          (23)           -           100.0
Total investment banking loans                            10 360         (238)     10 122                2.3

Small business loans
   Collectively assessed for impairment
     Standard loans to legal entities not past due         8 093         (362)       7 731               4.5
     Watch list loans to legal entities not past due       2 466          (111)      2 355               4.5
     Loans to individual entrepreneurs                     3 894         (193)       3 701               5.0
   Total collectively assessed for impairment             14 453         (666)     13 787                4.6

   Individually assessed for impairment
     Watch list loans not past due                             23           (5)         18              21.7
     Overdue loans                                           550         (146)        404              26.5
     Non-recoverable loans                                   503         (503)            -           100.0
   Total individually assessed for impairment              1 076         (654)        422              60.8
Total small business loans                                15 529       (1 320)     14 209                8.5
132   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

                                                                                                        Impairment to
                                                          Gross loans    Impairment        Net loans   Gross loans (%)

      Net investment in finance leases
         Collectively assessed for impairment                 1 475            (46)           1 429               3.1
         Individually assessed for impairment                 1 385          (447)             938               32.3
      Total net investment in finance leases                  2 860           (493)           2 367              17.2
      Total loans and advances to customers                207 009        (12 203)         194 806                5.9


      Management of the Group believes that receivables under reverse repurchase agreements and margin loans,
      which are fully collateralised by pledge of securities with fair value exceeding the loan amount as at that
      date, are not impaired.


      As at 31 December 2008 renegotiated loans to corporate customers that would otherwise be past due or
      impaired of RUR 16 400 million are included in Group’s loan portfolio (31 December 2007: RUR 572 million).
      Such restructuring activity is aimed at managing customer relationships and maximising collection
      opportunities.


      Express loans to finance purchase of cars are loans for which simplified credit approval procedures are used.


      The following table shows gross loans and advances to customers and related loan impairment, as at
      31 December 2007:

                                                                                                        Impairment to
                                                          Gross loans    Impairment        Net loans   Gross loans (%)

      Loans to corporate customers
         Collectively assessed for impairment
           Standard loans not past due                       85 182        (1 345)          83 837                1.6
           Watch list loans not past due                     34 012          (527)          33 485                1.5
         Total collectively assessed for impairment         119 194         (1 872)        117 322                1.6

         Individually assessed for impairment
           Watch list loans not past due                      1 362          (248)            1 114             18.2
           Overdue loans                                          15            (1)              14               6.7
           Non-recoverable loans                              1 014         (1 014)                -           100.0
         Total individually assessed for impairment           2 391         (1 263)          1 128              52.8
      Total loans to corporate customers                   121 585         (3 135)         118 450                2.6

      Loans to individuals
         Loans to individuals collectively assessed for
         impairment
           Standard loans to finance purchase of cars        19 422         (1 081)         18 341                5.6
           Express loans to finance purchase of cars          6 432          (973)           5 459               15.1
           Mortgage loans                                     8 220          (193)           8 027                2.3
           Credit card overdrafts                             1 363          (145)           1 218              10.6
           Other loans to individuals                         1 412            (68)          1 344                4.8
      Total loans to individuals                            36 849         (2 460)          34 389                6.7

      Investment banking loans
         Collectively assessed for impairment
           Margin loans fully secured by traded
           securities                                         2 098               -          2 098                    -
           Reverse sale and repurchase agreements           12 090                -         12 090                    -
           Other standard loans                               1 942            (23)          1 919                1.2
      Total investment banking loans                         16 130           (23)          16 107                0.1
MDM Bank                                                                                                          133
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

                                                                                                 Impairment to
                                                       Gross loans   Impairment   Net loans     Gross loans (%)

Small business loans
   Collectively assessed for impairment
     Standard loans to legal entities not past due         6 220         (205)       6 015                 3.3
     Watch list loans to legal entities not past due         510           (15)       495                  2.9
     Loans to individual entrepreneurs                     1 187           (11)      1 176                 0.9
   Total collectively assessed for impairment              7 917         (231)       7 686                 2.9

   Individually assessed for impairment
     Overdue loans                                           137          (62)          75               45.3
     Non-recoverable loans                                   160         (160)            -             100.0
   Total individually assessed for impairment                297         (222)          75               74.7
Total small business loans                                 8 214         (453)       7 761                 5.5

Net investment in finance leases
   Collectively assessed for impairment                    2 315          (32)       2 283                 1.4
   Individually assessed for impairment                    1 412           (91)      1 321                 6.4
Total net investment in finance leases                     3 727         (123)       3 604                 3.3
Total loans and advances to customers                   186 505        (6 194)    180 311                  3.3



The following table shows the ageing analysis of loans to individuals as at 31 December 2008:

                                                                                                 Impairment to
                                                       Gross loans   Impairment   Net loans     Gross loans (%)

 Standard loans to finance purchase of cars
     - Not past due                                       16 620           (56)    16 564                  0.3
     - Overdue less than 30 days                              681          (56)       625                  8.2
     - Overdue 30-89 days                                    390          (133)       257                 34.1
     - Overdue 90-179 days                                    182         (135)         47                74.2
     - Overdue 180-360 days                                  234          (212)         22               90.6
     - Overdue more than 360 days                             767        (767)            -             100.0
Total loans to finance purchase of cars                   18 874       (1 359)      17 515                 7.2

Express loans to finance purchase of cars
     - Not past due                                        2 251           (13)      2 238                 0.6
     - Overdue less than 30 days                             165           (13)        152                  7.9
     - Overdue 30-89 days                                    109           (33)         76               30.3
     - Overdue 90-179 days                                     61          (42)         19                68.9
     - Overdue 180-360 days                                   116        (104)          12                89.7
     - Overdue more than 360 days                            408         (408)            -             100.0
Total express loans to finance purchase
of cars                                                     3 110        (613)       2 497                19.7

Mortgage loans
     - Not past due                                       13 065           (42)    13 023                  0.3
     - Overdue less than 30 days                             389           (48)        341                12.3
     - Overdue 30-89 days                                     216          (83)        133               38.4
     - Overdue 90-179 days                                     77          (62)         15               80.5
     - Overdue 180-360 days                                   125         (118)          7                94.4
     - Overdue more than 360 days                            145         (145)           0              100.0
Total mortgage loans                                      14 017         (498)     13 519                  3.6
134   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

                                                                                                       Impairment to
                                                         Gross loans   Impairment        Net loans    Gross loans (%)

       Credit card overdrafts
           - Not past due                                    1 088           (12)          1 076                 1.1
           - Overdue less than 30 days                           75          (11)             64               14.7
           - Overdue 30-89 days                                  54         (26)               28              48.1
           - Overdue 90-179 days                                 30         (23)                7              76.7
           - Overdue 180-360 days                                58          (51)               7               87.9
           - Overdue more than 360 days                         84          (84)                0             100.0
       Total credit card overdrafts                          1 389         (207)           1 182               14.9

      Other loans to individuals
           - Not past due                                    2 770          (26)           2 744                 0.9
           - Overdue less than 30 days                         151          (29)             122                19.2
           - Overdue 30-89 days                                 44          (26)               18               59.1
           - Overdue 90-179 days                                 27         (24)                3              88.9
           - Overdue 180-360 days                                30         (29)                1              96.7
           - Overdue more than 360 days                          48         (48)                0             100.0
      Total other loans to individuals                       3 070         (182)           2 888                 5.9
      Total loans to individuals                           40 460        (2 859)         37 601                  7.1


      The following table shows the ageing analysis of loans to individuals as at 31 December 2007:

                                                                                                       Impairment to
                                                         Gross loans   Impairment        Net loans    Gross loans (%)

       Standard loans to finance purchase of cars
           - Not past due                                   17 762          (70)          17 692                 0.4
           - Overdue less than 30 days                         519          (44)             475                 8.5
           - Overdue 30-89 days                                207          (87)             120               42.0
           - Overdue 90-179 days                               156         (120)               36              76.9
           - Overdue 180-360 days                              276         (258)               18              93.5
           - Overdue more than 360 days                        502         (502)                 -            100.0
       Total loans to finance purchase of cars             19 422        (1 081)          18 341                 5.6

      Express loans to finance purchase of cars
           - Not past due                                    5 048          (39)           5 009                 0.8
           - Overdue less than 30 days                         301          (29)             272                 9.6
           - Overdue 30-89 days                                167          (70)               97               41.9
           - Overdue 90-179 days                               147         (104)              43               70.7
           - Overdue 180-360 days                              301         (263)               38               87.4
           - Overdue more than 360 days                        468         (468)                 -            100.0
       Total express loans to finance purchase of cars       6 432         (973)           5 459               15.1

      Mortgage loans
           - Not past due                                    7 847           (31)          7 816                 0.4
           - Overdue less than 30 days                         161           (19)            142                11.8
           - Overdue 30-89 days                                  67         (29)               38              43.3
           - Overdue 90-179 days                                 82         (57)               25              69.5
           - Overdue 180-360 days                                53         (47)                6              88.7
           - Overdue more than 360 days                          10          (10)                -              100
       Total mortgage loans                                  8 220         (193)           8 027                 2.3
MDM Bank                                                                                                        135
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

                                                                                               Impairment to
                                                Gross loans     Impairment        Net loans   Gross loans (%)

 Credit card overdrafts
     - Not past due                                 1 138              (6)           1 132               0.5
     - Overdue less than 30 days                        52             (6)              46              11.5
     - Overdue 30-89 days                               42            (14)              28             33.3
     - Overdue 90-179 days                              23            (15)               8             65.2
     - Overdue 180-360 days                             34            (30)               4             88.2
     - Overdue more than 360 days                       74            (74)                -           100.0
Total credit card overdrafts                        1 363           (145)            1 218             10.6

Other loans to individuals
     - Not past due                                 1 313              (9)           1 304               0.7
     - Overdue less than 30 days                        26             (2)              24               7.7
     - Overdue 30-89 days                               13             (3)              10              23.1
     - Overdue 90-179 days                               8             (4)               4             50.0
     - Overdue 180-360 days                             12            (10)               2             83.3
     - Overdue more than 360 days                       40            (40)                -           100.0
Total other loans to individuals                    1 412             (68)           1 344               4.8
Total loans to individuals                         36 849         (2 460)         34 389                 6.7


The table below shows the ageing analysis of loans to corporate customers which were individually assessed
for impairment, as at 31 December 2008:

                                                                                               Impairment to
                                                Gross loans     Impairment        Net loans   Gross loans (%)

Watch list loans not past due                       5 655           (992)            4 663             17.5

Overdue loans
     - Overdue less than 30 days                    1 661            (170)           1 491             10.2
     - Overdue from 30 to 90 days                   6 113          (1 792)           4 321             29.3
     - Overdue from 90 to 180 days                    942            (214)            728              22.7
     - Overdue from 180 to 360 days                   918           (509)             409              55.4
     - Overdue more than 360 days                      43             (24)              19             55.0
Total overdue loans                                 9 677         (2 709)            6 968             28.0

Non-recoverable loans
     - Overdue less than 360 days                     147           (147)                 -           100.0
     - Overdue more than 360 days                     657           (657)                 -           100.0
Total non-recoverable loans                           804           (804)                 -          100.0
Total loans to corporate customers
individually assessed for impairment               16 136         (4 505)          11 631              27.9
136   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The table below shows the ageing analysis of loans to corporate customers which were individually assessed
      for impairment, as at 31 December 2007:

                                                                                                     Impairment to
                                                      Gross loans     Impairment        Net loans   Gross loans (%)

      Watch list loans not past due                       1 362           (248)            1 114             18.2
      Overdue loans
           - Overdue less than 30 days                        15             (1)              14               6.7
      Total overdue loans                                     15             (1)              14               6.7
      Non-recoverable loans
           - Overdue less than 360 days                      113           (113)                -           100.0
           - Overdue more than 360 days                     901            (901)                -           100.0
      Total non-recoverable loans                         1 014          (1 014)                -           100.0
      Total loans to corporate customers
      individually assessed for impairment                2 391         (1 263)            1 128             52.8


      The table below shows the ageing analysis of small business loans which were individually assessed for
      impairment, as at 31 December 2008:

                                                                                                     Impairment to
                                                      Gross loans     Impairment        Net loans   gross loans (%)

      Watch list loans not past due                           23             (5)              18              21.7
      Overdue loans
           - Overdue less than 30 days                       149            (19)            130               12.8
           - Overdue 30-90 days                             229             (67)            162               29.3
           - Overdue 90-180 days                              73            (28)              45             38.4
           - Overdue 180-360 days                             94            (31)              63              33.0
           - Overdue more than 360 days                        5             (1)               4              20.0
      Total overdue loans                                   550           (146)             404              26.5

      Non-recoverable loans
           - Overdue less than 360 days                     350           (350)                 -           100.0
           - Overdue more than 360 days                      153           (153)                -           100.0
      Total non-recoverable loans                           503           (503)                 -           100.0
      Total small business loans individually
      assessed for impairment                             1 076           (654)             422              60.8

      The table below shows the ageing analysis of small business loans which were individually assessed for
      impairment, as at 31 December 2007:

                                                                                                     Impairment to
                                                      Gross loans     Impairment       Net loans    gross loans (%)

      Overdue loans
           - Overdue less than 30 days                       54              (4)             50                7.4
           - Overdue 30-90 days                               16             (9)               7             56.3
           - Overdue 90-180 days                              35            (21)             14              60.0
           - Overdue 180-360 days                             32           (28)                4             87.5
      Total overdue loans                                   137            (62)              75              45.3

      Non-recoverable loans
           - Overdue less than 360 days                     128           (128)                -           100.0
           - Overdue more than 360 days                       32           (32)                -           100.0
      Total non-recoverable loans                           160           (160)                -           100.0
      Total small business loans individually
      assessed for impairment                               297           (222)              75              74.7
MDM Bank                                                                                                              137
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The table below shows the ageing analysis of finance lease contracts which were individually assessed for
impairment, as at 31 December 2008:

                                                                                                     Impairment to
                                                Gross loans     Impairment           Net loans      Gross loans (%)

Watch list contracts not past due                      83            (24)                  59                28.9

Overdue finance lease contracts
     - Overdue less than 30 days                      293             (31)               262                 10.6
     - Overdue 30-90 days                             283            (29)                254                 10.2
     - Overdue 90-180 days                            256           (125)                131                 48.8
     - Overdue 180-360 days                           367           (193)                174                 52.6
     - Overdue more than 360 days                     103            (45)                  58                43.7
Total overdue finance lease contracts               1 302           (423)                879                 32.5
Total finance lease contracts
assessed for impairment                             1 385           (447)                938                 32.3


The table below shows the ageing analysis of finance lease contracts which were individually assessed for
impairment, as at 31 December 2007:

                                                                                                    Impairment to
                                               Gross loans     Impairment        Net loans         Gross loans (%)

Overdue financial lease contracts
     - Overdue less than 30 days                   1 055             (33)             1 022                   3.1
     - Overdue 90-180 days                            357            (58)                299                 16.2
Total overdue finance lease contracts               1 412            (91)              1 321                  6.4
Total financial lease contracts
individually assessed for impairment                1 412            (91)              1 321                  6.4

Non-performing loans comprise loans with principal or/and interest overdue by more than 90 days and
other loans classified as non-performing by management. A loan is usually classified as non-performing
by management if it is not probable that it will be recovered through means other than repossession and
subsequent realization of collateral.


The amounts of non-performing loans as at 31 December 2008 and 31 December 2007 are as follows:

                                                                  31 December 2008               31 December 2007

Loans to corporate customers                                                 4 756                          1 014
Loans to individuals                                                         2 439                          2 186
Investment banking loans                                                       23                                 -
Small business loans                                                          750                             227
Net investment in finance leases                                              795                             357
Total non-performing loans                                                   8 763                          3 784

The loan portfolio as at 31 December 2008 included overdue loans totalling RUR 17 608 million
(31 December 2007: RUR 5 306 million).
138   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      (b) Collateral
      The following table provides an analysis of the loan portfolio, net of impairment, by types of collateral as at
      31 December 2008:

                                                                                    Other
                                                                      Motor    realisable        Other           No
                                           Securities Real estate   vehicles    collateral   collateral   collateral      Total

      Loans to corporate customers           8 025      21 896         216      31 352       58 075       10 943 130 507
      Loans to individuals                       -      13 519      20 011           -            -        4 071  37 601
      Investment banking loans               2 032           -           -           -        3 721        4 369  10 122
      Small business loans                      10       5 850       1 395       2 721        3 281          952  14 209
      Net investment in finance leases           -           -       1 287       1 078            2            -   2 367
      Total                                 10 067      41 265      22 909      35 151       65 079       20 335 194 806


      The following table provides an analysis of the loan portfolio, net of impairment, by types of collateral as at
      31 December 2007:

                                                                                    Other
                                                                      Motor    realisable        Other           No
                                           Securities Real estate   vehicles    collateral   collateral   collateral      Total

      Loans to corporate customers           7 721      22 926          89      27 753       53 888         6 073      118 450
      Loans to individuals                       -       8 027      23 800           -            1         2 561       34 389
      Investment banking loans              14 188           -           -       1 919            -             -       16 107
      Small business loans                       -         292          44          94        6 776           555        7 761
      Net investment in finance leases           -           -         813       2 791            -             -        3 604
      Total                                 21 909      31 245      24 746      32 557       60 665         9 189      180 311


      The amounts shown in the tables above represent the carrying value of the loans, and do not necessarily
      represent the fair value of the collateral.


      Other realisable collateral is collateral, which, in the opinion of the Group’s management, the Group will be
      able to sell to reduce losses in case of a loan default.


      Other collateral is collateral which the Group may not be able to sell easily in the market in order to recover
      the loan. Such collateral may include goods in turnover, corporate or personal guarantees and it is used by
      the Group as a tool in the process of negotiations with the borrower in case of loan default.


      Loans issued to finance purchase of cars are secured by underlying cars. The majority of credit card overdrafts
      and other loans to individuals are not secured. Mortgage loans are secured by underlying real estate.

      Loans to corporate customers individually assessed for impairment with gross value of RUR 10 804 million
      were secured by collateral with fair value of RUR 6 257 million, as at 31 December 2008 (31 December 2007:
      loans individually assessed for impairment with gross value of RUR 71 million were secured by collateral
      with fair value of RUR 99 million). There was no collateral or it is impracticable to determine fair value of
      collateral for other overdue or impaired loans.


      During the year ended 31 December 2008 the Group obtained assets by taking control of collateral accepted
      as security with fair value of RUR 264 million (31 December 2007: assets with fair value of RUR 129 million),
      of which assets totalling RUR 113 million were sold by the Group in the same period (31 December 2007:
      assets with fair value of RUR 49 million).


      Securities received as collateral under reverse sale and repurchase agreements are marketable corporate bonds
      and equity securities. The following table presents information about the fair value of these securities:

                                                                                    31 December 2008         31 December 2007

      Held by the Group                                                                         1 590                   7 273
      Pledged under sale and repurchase agreements (Notes 6, 15 and 16)                               -                 8 370
      Securities received as collateral under reverse sale and repurchase
      agreements                                                                                1 590                  15 643
MDM Bank                                                                                                              139
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

(c) Finance leases
Loans and advances to customers include finance lease receivables, which are analysed as follows:

                                                                      31 December 2008             31 December 2007

Gross investment in finance leases, receivable:
- Not later than 1 year                                                          2 087                       2 189
- Later than 1 year and not later than 5 years                                   1 353                       2 390
- Later than 5 years                                                                  -                         37
Less: Unearned finance income                                                    (580)                       (889)
Net investment in finance leases                                                 2 860                       3 727

Net investment in finance leases are analysed as follows:

                                                                      31 December 2008             31 December 2007

Net investment in finance leases, receivable:
- Not later than 1 year                                                          2 001                       1 767
- Later than 1 year and not later than 5 years                                     859                       1 930
- Later than 5 years                                                                  -                         30
Net investment in finance leases                                                 2 860                       3 727


(d) Pledged loans and asset securitisation
The Group has transferred a pool of loans to individuals to finance the purchase of cars to Taganka Car Loan
Finance plc, an entity which is in substance controlled by the Group. Accordingly, the financial statements
of Taganka Car Loan Finance plc are consolidated into these consolidated financial statements and the loans
are included in the consolidated balance sheet. These loans are pledged by the Group as collateral under
secured loan participation notes issued by the Group. As at 31 December 2008, the amount of loans pledged
was RUR 2 195 million (31 December 2007: RUR 4 745 million). As at 31 December 2008, the carrying
amount of the notes was RUR 1 282 million (31 December 2007: RUR 4 153 million). Refer to Note 17.


(e) Concentration analysis
As at 31 December 2008, credit exposure to ten largest borrowers (or groups of borrowers), excluding claims under
reverse repurchase agreements fully secured by traded securities, totalled RUR 22 470 million, or 11% of the
gross loan portfolio of the Group (31 December 2007: RUR 20 778 million, or 11% of the gross loan portfolio).


Economic sector risk concentrations within the customer loan portfolio are as follows:

                                                      31 December 2008                    31 December 2007

                                                       Amount                %            Amount                 %

Individuals                                           40 460                19            36 849                20
Retail trade                                          35 507                17            24 276                13
Real estate                                           26 719                13            24 971                13
Manufacturing                                         25 576                12            17 239                 9
Wholesale trade                                       22 104                11            15 759                 9
Construction                                          14 397                 7            22 247                12
Finance                                               11 769                 5            18 706                10
Ore                                                    7 172                 3             3 661                 2
Chemicals                                              3 820                 2             2 744                 1
Transport                                              3 392                 2             3 983                 2
Food and agriculture                                    3 316                2             1 289                 1
Oil and gas                                            3 273                 2             2 836                 1
Metallurgy                                             2 501                 1             3 553                 2
Communication                                          1 529                 1             1 750                 1
Energy and atomic power                                1 071                 1             1 036                 1
Other                                                  4 403                 2             5 606                 3
Gross loans and advances to customers               207 009               100         186 505                  100
140    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       Geographical and currency analysis, effective interest rates and maturity structure of loans and advances to
       customers are disclosed in Note 28. Information on related party transactions is disclosed in Note 31.


12. Property, Plant and Equipment and Intangible Assets
       The reconciliation of the carrying amount of property, plant and equipment and intangible assets as at
       31 December 2008 and as at 1 January 2008 is presented below:

                                                          Office,                       Total                   Total property,
                                                        computer                    property,                 plant and equip-
                                                        and other Fixtures and      plant and   Intangible   ment and intangi-
                                            Premises   equipment        fittings   equipment        assets            ble assets

        Net book amount as at
        1 January 2008                       4 928          800            224        5 952             4               5 956
        Cost or valuation
        Opening balance                      4 928        1 499           299         6 726            14               6 740
        Additions (Note 27)                    145          866            285        1 296          184                1 480
        Disposals                                  -        (37)           (22)         (59)             -                (59)
        Effect of foreign currency
        translation                                -            4              -           4            2                     6
        Closing balance                      5 073        2 332            562        7 967          200                8 167

        Accumulated depreciation,
        amortisation and impairment
        Opening balance                            -        699             75          774           10                  784
        Depreciation and amortisation
        charge (Note 27)                       145          346             53          544           45                  589
        Disposals                                  -        (30)           (13)         (43)             -                (43)
        Effect of foreign
        currency translation                       -            3              -           3            2                     5
        Closing balance                        145        1 018            115        1 278           57                1 335
        Net book amount as at
        31 December 2008                     4 928        1 314            447        6 689          143                6 832



       The reconciliation of the carrying amount of property, plant and equipment and intangible assets as at
       31 December 2007 and as at 1 January 2007 is presented below:

                                                          Office,                       Total                   Total property,
                                                        computer                    property,                         plant and
                                                        and other      Fixtures     plant and   Intangible     equipment and
                                           Premises    equipment    and fittings   equipment        assets    intangible assets

        Net book amount as at
        1 January 2007                       3 855          525             60        4 440              3              4 443
        Cost or valuation
        Opening balance                      3 879        1 046             97        5 022            11               5 033
        Additions (Note 27)                     62          486            246          794              3                797
        Disposals                            (654)          (34)           (44)        (732)             -              (732)
        Elimination of accumulated
        depreciation of revalued assets       (101)             -              -       (101)             -               (101)

        Effect of foreign
        currency translation                      -            1               -           1             -                    1
        Revaluation                          1 742              -              -      1 742              -              1 742
        Closing balance                      4 928        1 499            299        6 726            14               6 740
       MDM Bank                                                                                                                            141
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

                                                               Office,                        Total                      Total property,
                                                             computer                     property,                            plant and
                                                             and other      Fixtures      plant and      Intangible     equipment and
                                                 Premises   equipment    and fittings    equipment           assets    intangible assets

        Accumulated depreciation,
        amortisation and impairment
        Opening balance                               24         521             37           582                8                 590

        Depreciation and amortisation
        charge (Note 27)                              96         203             46           345                2                 347
        Disposals                                   (19)         (26)            (8)          (53)                -               (53)
        Effect of foreign currency
        translation                                     -           1               -            1                -                   1
        Elimination of accumulated
        depreciation of revalued assets            (101)             -              -        (101)                -              (101)
        Closing balance                                 -        699             75           774              10                  784
        Net book amount as at
        31 December 2007                          4 928          800           224          5 952                4              5 956


       As at 31 December 2007 premises of the Group were revalued by management based on the results of
       independent appraisals performed by an independent firm of appraisers, which resulted in a revaluation
       increase of RUR 1 742 million. As at 31 December 2008 the Group has assessed the market value of its
       premises and concluded that the market value is not materially different from their carrying value.


       Included in the net book value of premises as at 31 December 2008 was RUR 3 929 million (31 December 2007:
       RUR 3 929 million) representing the revaluation surplus.


       The net book value of premises that would have been recognised under the historical cost method was
       RUR 1 282 million as at 31 December 2008 (31 December 2007: RUR 1 186 million).


       The gross book value of fully depreciated property, plant and equipment that was still in use was
       RUR 347 million as at 31 December 2008 (31 December 2007: RUR 229 million).


13. Other Assets
                                                                                        31 December 2008              31 December 2007

        Amounts in course of settlement                                                           1 086                            708
        Claims and repossessed collateral on terminated finance lease contracts                        840                             -
        Current income tax prepayment                                                                  735                          48
        Trade debtors and prepayments                                                                  632                         554
        Prepaid taxes other than income tax                                                            291                         592
        Precious metals                                                                                263                         856
        Settlements on securities transactions                                                         187                         280
        Advances to suppliers of equipment for finance leases                                          162                         517
        Deferred tax asset                                                                             108                             -
        Credit-linked leveraged notes                                                                     -                        226
        Other                                                                                          548                         221
        Gross other assets                                                                        4 852                         4 002
        Less: other assets impairment                                                                 (677)                         (5)
        Other assets                                                                              4 175                         3 997
142    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       Movements in other assets impairment are as follows:

                                                                                     Year ended               Year ended
                                                                              31 December 2008         31 December 2007

        Other assets impairment as at 1 January                                              5                        2
        Net charge to other assets impairment during the year                             518                         3
        Transfer of loan impairment losses on terminated lease
        contracts                                                                         249                          -
        Write-offs                                                                        (95)                         -
        Other assets impairment as at 31 December                                         677                         5


       Claims and repossessed collateral on terminated finance lease contracts represent equipment repossessed
       from non-performing debtors on finance lease arrangements and claims to insurance companies on
       agreements where the lease equipment has been destroyed or significantly damaged to the extent qualifying
       for termination of the leased agreement.


       Credit-linked leveraged notes are financial assets designated at fair value through profit or loss. Credit-linked
       leveraged notes as at 31 December 2007 were notes issued by a major international bank, the repayment
       amount of which was linked to the market price of a certain bond issued by a Russian entity. Credit-linked
       leveraged notes, as at 31 December 2007, comprised notes with a nominal amount of USD 9 million or
       RUR 221 million, a coupon rate of 17.24% and a maturity date of 20 February 2008.


       Specific provisions are recorded against other assets if impairment is identified. The recoverable amount of
       other financial assets is calculated based on discounted expected future cash flows the recoverable amount
       of other non-financial assets represents the higher of fair value less costs to sell and value in use.


       Included in other assets impairment losses for the year ended 31 December 2008 is the amount of
       RUR 329 million representing the write-off of capitalised expenses on new core banking system development,
       for which no future economic benefits are expected to be received in the foreseeable future due to the decision
       of the management of the Group to suspend program’s development; and the amount of RUR 249 million
       representing provision for impairment of repossessed collateral on terminated finance lease contracts
       transferred from loan impairment losses at termination of the contracts; and provisions for other impaired
       assets in the amount of RUR 99 million.


       Geographical and currency analysis and maturity structure of other assets are disclosed in Note 28.


14. Due to Central Banks
       Due to central banks represent sale and repurchase agreements in the amount of RUR 317 million
       (31 December 2007: RUR 846 million) collaterised by the eligible available for sale financial assets with a fair
       value of RUR 369 and uncollaterised term deposits in the amount RUR 35 258 million. As at 31 December 2008
       the total limit of such uncollaterised deposits available to the Group comprised RUR 45 928 million.


       Geographical and currency analysis and maturity structure of due to central banks are disclosed in Note 28.


15. Due to Other Banks
                                                                             31 December 2008          31 December 2007

        Trade finance facilities                                                       31 570                   29 116
        Loans from international financial institutions                                29 396                   11 515
        Term deposits from other banks                                                 15 634                   15 648
        Bilateral structured financing                                                  9 073                    7 042
        Syndicated loans                                                                8 281                   24 839
        Correspondent accounts and overnight deposits of other banks                    3 421                    6 039
        Sale and repurchase agreements                                                        -                  7 317
        Total due to other banks                                                       97 375                  101 516
       MDM Bank                                                                                                        143
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       As at 31 December 2008, the Group had four counterparties with aggregate balances greater than 10%
       of consolidated equity at the date (31 December 2007: six counterparties). The total aggregate amount
       of these balances was RUR 39 610 million or 41% of due to other banks balances (31 December 2007:
       RUR 38 928 million, or 38% of due to other banks balances).


       Included in due to other banks balances, as at 31 December 2008, were term deposits received from a large
       international bank of RUR 4 515 million (31 December 2007: RUR 7 042 million), in respect of which
       the Group pledged its receivable under a reverse sale and repurchase agreement from the same bank of
       RUR 4 522 million (31 December 2007: RUR 7 046 million) as collateral. Refer to Note 6.


       The following table presents information about assets sold under sale and repurchase agreements with other
       banks:

                                                                           31 December 2008        31 December 2007

       Securities received as collateral under reverse sale and
       repurchase agreements, fair value (Notes 6, 11 and 16)                          369                   7 425
       Trading securities, carrying value (Note 7 and 16)                                 -                  2 674
       Total assets sold under sale and repurchase agreements
       with other banks                                                               369                   10 099


       In August 2008, the Group obtained a syndicated loan from an international financial institution in total
       amount of USD 535 million (equivalent to RUR 15 719 million as at 31 December 2008). The loan bears
       a floating interest rate and is repayable in two tranches: tranche A in the amount of USD 500 million is
       repayable in July 2009 and tranche B in the amount of USD 35 million is repayable in March 2012.


       Geographical and currency analysis, effective interest rates and maturity structure of due to other banks are
       disclosed in Note 28.


16. Customer Accounts
                                                                           31 December 2008        31 December 2007

       State organisations
       - Current/settlement accounts                                                     4                        1
       - Term deposits                                                              10 600                    4 016

       Other legal entities
       - Current/settlement accounts                                                31 587                  30 867
       - Term deposits                                                              42 451                  68 426
       - Sale and repurchase agreements                                                   -                   1 316

       Retail customers
       - Current/demand accounts                                                     5 067                    5 412
       - Term deposits                                                              25 362                  14 094
       Total customer accounts                                                     115 071                 124 132


       The following table presents information about assets sold under sale and repurchase agreements with
       customers:

                                                                           31 December 2008        31 December 2007

       Securities received as collateral under reverse sale and
       repurchase agreements, fair value (Notes 6, 11 and 15)                             -                   1 074
       Trading securities, carrying value (Note 7 and 15)                                 -                    313
       Total assets sold under sale and repurchase agreements
       with customers                                                                     -                  1 387
144     MDM Bank
        Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
        (expressed in millions of Russian Roubles – refer to Note 3)

        Economic sector concentrations within customer accounts are as follows:

                                                                  31 December 2008                         31 December 2007

                                                                  Amount                   %               Amount                 %

        Individuals                                               30 429                 27                19 506                16
        Trade                                                     27 214                 24                41 194                33
        Finance                                                   25 488                 22                32 706                26
        Manufacturing                                             15 073                 13                11 655                 9
        State                                                     10 604                   9                4 017                 3
        Mining and oil                                             2 448                   2               13 143                11
        Intergovernmental organisations                                -                   -                1 142                 1
        Other                                                      3 815                   3                  769                 1
        Total customer accounts                               115 071                   100               124 132               100


        As at 31 December 2008, aggregate balances of the ten largest customers (or groups of customers) totalled
        RUR 39 705 million or 35% of total customer accounts (31 December 2007: RUR 53 852 million, or 43% of
        total customer accounts).


        As at 31 December 2008, the Group had three customers with aggregated accounts greater than 10% of
        consolidated equity at the date (31 December 2007: four customers). The total aggregate amount of
        these accounts was RUR 20 958 million or 18% of the total customer accounts (31 December 2007:
        RUR 39 216 million or 32% of the total customer accounts).


        Included in customer accounts, as at 31 December 2008, was an amount of RUR 8 577 million held as collateral
        for irrevocable commitments under import letters of credit (31 December 2007: RUR 17 561 million).


        Geographical and currency analysis, effective interest rates and maturity structure of customer accounts are
        disclosed in Note 28. Information on related party transactions is disclosed in Note 31.


17. Debt Securities in Issue
                                                                                     31 December 2008               31 December 2007

        Unsecured loan participation notes                                                     11 808                         11 043
        Loan participation notes secured by diversified payment rights (“DPR”)                   9 791                        14 133
        Promissory notes                                                                         5 370                         9 771
        Loan participation notes secured by a pool of car loans                                  1 282                         4 153
        Domestic bonds                                                                             422                         6 007
        Deposit certificates                                                                        27                         1 524
        Total debt securities in issue                                                         28 700                         46 631


        Loan participation notes, bonds issued, promissory notes and deposit certificates are unconditional debt
        instruments issued by the Group.


        As at 31 December 2008 loan participation notes and bonds comprised the following issues:

                                                   Carrying amount   Issue date                Maturity                  Coupon rate

        Russian bonds denominated in RUR                     422     9 October 2007            1 October 2009                  8.5%
        Tranche C (junior) loan participation notes
        secured by a pool of car loans:                    1 282     23 October 2006           14 November 2013         Libor + 3.3%
        Loan participation notes secured by diversified
        payment rights denominated in EUR                   4 616    21 November 2006 15 December 2011                 Euribor + 2%
        Loan participation notes secured by diversified
        payment rights denominated in USD                  5 175     21 May 2007               15 June 2012               Libor + 2%
        Unsecured loan participation notes
        denominated in USD                                10 273     25 January 2007           25 January 2010                  7.8%
        Unsecured loan participation notes
        denominated in USD                                 1 535     6 March 2008              2 March 2009                    8.0%
MDM Bank                                                                                                          145
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

As at 31 December 2007 loan participation notes and bonds comprise the following issues:

                                      Carrying amount Issue date           Maturity                 Coupon rate

Russian bonds denominated in RUR             6 007    9 October 2007       1 October 2009                8.5%
Loan participation notes secured
by a pool of car loans:

   - tranche A (senior)                        957    23 October 2006      14 November 2013         Libor + 1%

   - tranche B (sub-senior)                  1 879    23 October 2006      14 November 2013       Libor + 1.6%

   - tranche C (junior)                       1 317   23 October 2006      14 November 2013       Libor + 3.3%
Loan participation notes secured by
diversified payment rights denominated
in EUR                                       6 440    21 November 2006     15 December 2011       Euribor + 2%
Loan participation notes secured by
diversified payment rights denominated
in USD                                       7 693    21 May 2007          15 June 2012             Libor + 2%
Unsecured loan participation notes
denominated in USD                          10 547    25 January 2007      25 January 2010                7.8%
Unsecured loan participation notes
denominated in USD                             496    23 October 2007      21 October 2008              11.0%


Maturity dates in the tables above represent latest contractual dates when the last payment under the notes is
due. Loan participation notes secured by diversified payment rights and loan participation notes secured by
a pool of car loans have quarterly and monthly repayments, respectively. Loan participation notes secured by
a pool of car loans may be repaid before contractual repayment dates in case of earlier repayment of underlying
car loans. As at 31 December 2008, the expected repayment date of loan participation notes secured by
a pool of car loans is 15 August 2009 for tranche C (31 December 2007: 15 March 2008, 15 November 2008
and 15 August 2009 for tranches A, B and C, respectively).


In October 2007, the Group repurchased its own fixed rate RUR denominated bonds with an aggregate
nominal amount of RUR 6 000 million issued in October 2006 from investors at par value under the early
redemption option. The bonds were reissued by the Group in October 2007 with a discount of 2.4% to par
value, and a coupon rate of 8.5%. In October 2008, the Group repurchased 90.6% of these bonds with an
aggregate nominal amount of RUR 5 346 million from investors at par value under the early redemption
option. The bonds have a maturity date in October 2009.


In October 2006, the Group issued three tranches of loan participation notes totaling USD 403.1 million
secured by a pool of car loans with a carrying value of RUR 2 195 million, as at 31 December 2008
(31 December 2007: RUR 4 745 million). Total amounts of tranche A, tranche B and tranche C notes on the
issue date were USD 270.9 million, USD 77.4 million, and USD 54.8 million, respectively. The issue proceeds
net of transaction costs amounted to USD 395 million. The notes have monthly repayments. Under the
conditions of the notes, more senior tranches are repaid first. During year ended 31 December 2008, the
Group fully repaid Tranches A and B of the notes. As a part of this transaction, the Group entered into balance
guaranteed cross currency interest rate swap agreements with major international banks. Under conditions
of the swap agreements, all RUR or USD denominated fixed rate amounts received by the Group from car
loans pledged as collateral under its loan participation notes are swapped for USD floating rate amounts
which are then used for repayment of the loan participation notes. Refer to Notes 8 and 11.


In November 2006, the Group issued floating rate loan participation notes of USD 200 million and
EUR 225 million secured by the Group’s diversified payment rights, i.e. its rights to funds being transferred
to the Group’s USD and EUR correspondent accounts. The issue proceeds net of transaction costs amounted
to USD 198 million and EUR 223 million. The principal of the notes is repaid quarterly by equal installments
with a final maturity on 15 December 2011. In May 2007, the Group issued additional loan participation
notes of USD 350 million secured by the Group’s diversified payment rights while loan participation notes of
USD 200 million issued in November 2006 were repaid. The issue proceeds net of transaction costs amounted
to USD 345 million. The principal of the notes is repaid quarterly by equal installments with a final maturity
on 15 June 2012. Included in due from other banks balances, as at 31 December 2008 are loans to a large
146     MDM Bank
        Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
        (expressed in millions of Russian Roubles – refer to Note 3)

        international bank of RUR 1 129 million (31 December 2007: RUR 1 093 million) pledged as collateral for
        interest and principal repayments in respect of these notes. Refer to Note 6.

        In January 2007, the Group issued fixed rate loan participation notes with an aggregate nominal amount of
        USD 425 million. The issue proceeds net of transaction costs amounted to USD 423 million.


        In March 2008, the Group issued fixed rate loan participation notes with an aggregate nominal amount of
        USD 53 million. The issue proceeds net of transaction costs amounted to RUR 1 151 million.


        Geographical and currency analysis, effective interest rates and maturity structure of debt securities in issue
        are disclosed in Note 28.


18. Subordinated Debt
                                                                             31 December 2008         31 December 2007

         Subordinated loan participation notes                                         5 966                    5 066
         Total subordinated debt                                                       5 966                    5 066

        In July 2006, the Group issued USD 200 million fixed rate subordinated unsecured notes maturing in July 2011
        with a coupon rate of 9.75% per annum. The issue proceeds net of transaction costs were USD 199 million.


        In case of bankruptcy, the repayment of the subordinated loan participation notes shall be made after
        repayment in full of all other liabilities of the Bank.


        Geographical and currency analysis, effective interest rates and maturity structure of subordinated debt are
        disclosed in Note 28.


19. Other Liabilities
                                                                             31 December 2008         31 December 2007

         Settlements with suppliers and other creditors                                 1 401                     940
         Accrued staff compensation expenses                                              274                     710
         Taxes other than income tax payable                                             109                        46
         Settlements on conversion operations                                              39                     801
         Liabilities from credit related commitments                                       38                      101
         Current income tax payable                                                         8                      112
         Other                                                                            135                       39
         Total other liabilities                                                       2 004                     2 749


        Included in liabilities from credit related commitments as at 31 December 2008 was a provision for losses
        in respect of credit related commitments of RUR 38 million (31 December 2007: RUR 44 million). Refer to
        Note 29.


        Geographical and currency analysis, maturity structure of other liabilities are disclosed in Note 28.


20. Share Capital
        The share capital of the Bank has been contributed by shareholders in Russian Roubles. Shareholders are
        entitled to dividends and any capital distribution in Russian Roubles.


        As at 31 December 2008 and 31 December 2007, share capital of the Bank consisted of 2 265 738 authorized,
        issued and fully paid ordinary shares with a fixed nominal value of 500 Russian Roubles and 50 050 authorized,
        issued and fully paid preference shares with a fixed nominal value of 500 Russian Roubles.
       MDM Bank                                                                                                                       147
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       Ordinary shares carry the right to vote at annual general and extraordinary meetings, right to receive
       dividends and a residual interest in the assets of the Bank after deducting all its liabilities on liquidation. All
       ordinary shares provide equal rights to their owners.


       Preference shares have no right of conversion or redemption. Preference shares carry the right to vote at
       annual general and extraordinary meetings in respect of issues that influence the interests of preference
       shareholders, including reorganisation and liquidation. Preference shares are entitled to receive the same
       dividends as dividends attributable to ordinary shareholders. If the dividend is not paid, preference shares
       carry the right to vote at annual general and extraordinary meetings until dividends are paid. Dividends are
       not cumulative. In the event of liquidation preference shareholders are entitled to receive declared unpaid
       dividends and the par value of the preference shares (“liquidation value”).


       Dividends payable to the Bank’s shareholders are restricted to the maximum retained earnings of the Bank,
       which are determined in accordance with legislation in the Russian Federation. As at 31 December 2008,
       the Bank’s reserves available for distribution amounted to RUR 20 459 million (31 December 2007:
       RUR 21 428 million). No dividends on ordinary or preference shares have been declared during the year
       ended 31 December 2008 and 31 December 2007.


       The share capital of the Bank, as at 31 December 2008 and 31 December 2007, comprised the following:

                                                                      Nominal value      Inflation adjustment   Total share capital

       Ordinary shares                                                      1 133                       534                1 667
       Preference shares                                                        25                        102                 127
       Total share capital                                                  1 158                       636                1 794




21. Interest Income and Expense
                                                                                             Year ended                Year ended
                                                                                      31 December 2008          31 December 2007

       Interest income
       Loans and advances to customers                                                         28 647                     23 865
       Overnight deposits and due from other banks                                               2 860                     3 098
       Investment securities available for sale                                                    399                            -
       Investments securities held to maturity                                                       66                           -

       Total interest income on financial assets not at fair value
       through profit or loss                                                                  31 972                     26 963
       Trading securities                                                                          916                      1 361
       Other financial assets at fair value through profit and loss                                   5                        21
       Total interest income                                                                   32 893                     28 345

       Interest expense
       Customer accounts                                                                       (6 628)                    (4 446)
       Due to other banks                                                                      (5 758)                    (4 966)
       Debt securities in issue                                                                 (3 111)                   (4 267)
       Subordinated debt                                                                         (488)                      (534)
       Total interest expense                                                                 (15 985)                  (14 213)
       Net interest income                                                                     16 908                     14 132


       Included in interest income on loans to customers the year ended 31 December 2008 was RUR 724 million in
       respect of interest income from finance leases (31 December 2007: RUR 604 million).


       Information on related party transactions is disclosed in Note 31.
148    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

22. Gains less Losses from Foreign Exchange
                                                                                   Year ended          Year ended
                                                                            31 December 2008    31 December 2007

       Gains less losses from trading in foreign currencies                           2 895                (609)
       Foreign exchange translation gains less losses                                (1 981)              1 973
       Total gains less losses from foreign exchange                                     914              1 364


       Information on related party transactions is disclosed in Note 31.


23. Fee and Commission Income and Expense
                                                                                   Year ended          Year ended
                                                                            31 December 2008    31 December 2007

       Commission on settlement and trade finance transactions                        1 834                1 417
       Commission on foreign currency transactions                                      545                 364
       Commission on cash transactions                                                  326                 370
       Commission for business referral                                                  213                275
       Commission for brokerage and other services of an investment
       banking nature                                                                   177                 504
       Commission for trust and fiduciary services                                        41                  41
       Other                                                                               6                   7
       Total fee and commission income                                                3 142               2 978

       Commission on settlement transactions                                           (409)               (297)
       Commission on foreign currency transactions                                     (164)                (73)
       Commission on cash transactions                                                 (133)               (185)
       Commission on banking transactions                                              (128)                    -
       Other                                                                            (49)                (79)
       Total fee and commission expense                                                (883)               (634)
       Net fee and commission income                                                  2 259               2 344


       Information on related party transactions is disclosed in Note 31.


24. Other Operating Income
                                                                            31 December 2008    31 December 2007

       Gains less losses arising from available for sale financial assets               299                     -
       Release of provision for losses on credit related commission                        6                   5
       Gains less losses from other financial assets at fair value from
       profit or loss                                                                       -                  2
       Other income                                                                     291                 223
       Other operating income                                                           596                 230
       MDM Bank                                                                                                        149
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

25. Operating Expenses
                                                                                   Year ended             Year ended
                                                                            31 December 2008       31 December 2007

       Staff costs                                                                    5 673                   5 746
       Depreciation, rent and other expenses related to property,
       plant and equipment                                                            1 999                   1 181
       Professional services                                                            505                     416
       Taxes other than on income                                                       439                    485
       Advertising and marketing                                                        238                    365
       Security                                                                         197                    164
       Telecommunications                                                                152                   102
       Software                                                                         130                    134
       Other                                                                              33                     29
       Total operating expenses                                                       9 366                  8 622

       Information on related party transactions is disclosed in Note 31.


26. Income Taxes
       Income tax expense comprises the following:

                                                                                   Year ended             Year ended
                                                                            31 December 2008       31 December 2007

       Current tax charge                                                               687                   2 417
       Deferred taxation movement due to origination and reversal of
       temporary differences and movement in valuation allowance                        646                   (306)
       Income tax expense                                                             1 333                   2 111

       As at 31 December 2008, the income tax rate applicable to the majority of the Russian entities of the Group’s
       income was 24% (31 December 2007: 24%). As at 31 December 2008, the income tax rate applicable to
       income of non-Russian entities of the Group ranged from 0% to 15% (31 December 2007: from 0% to 15%).


       Effective from 1 January 2009, the income tax rate in the Russian Federation has been reduced to 20%.
       Accordingly, the deferred tax balances have been reviewed as at 31 December 2008 to reflect that change.


       The reconciliation between the expected and the actual income tax expense is provided below:

                                                                                   Year ended             Year ended
                                                                            31 December 2008       31 December 2007

       Profit before taxation                                                         4 637                  7 627
       Theoretical income tax expense at the applicable statutory rate                 1 113                 1 830
       Tax effect of items taxed at different tax rates                                 173                   (164)
       Tax effect of items which are not deductible or assessable for
       taxation purposes, and other items of a non-temporary nature                     195                    466
       Previous year overpayment                                                        (53)                       -
       Unrecognised net deferred tax asset movement                                       (2)                   (21)
       Effect of change in tax rate                                                     (93)                       -
       Income tax expense                                                             1 333                  2 111
150   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      Movements in temporary differences for the year ended 31 December 2008:

                                                                                                                 Effect of
                                                           Movement           Movement           Effect of change in tax
                                                            charged/           recorded change in tax rate recorded
                                             1 January   (credited) to        directly to rate recorded       in profit or    31 December
                                                 2008    profit or loss           equity        in equity            loss            2008

      Tax effect of deductible/
      (taxable) temporary differences
      Impairment allowances
      and provisions                            (128)            345                    -                -          (36)             181
      Accruals                                   563         (1 113)                    -                -              75         (475)
      Property, plant and equipment           (1 019)            305                                 157            (38)           (595)
      Securities                                   (2)         (444)                475              (88)               75            16
      Tax loss carry forwards                        -             26                   -                -              (4)           22
      Other                                     (182)            139                    -                -              22           (21)

      Gross deferred tax liability              (768)          (742)                475               69                94         (872)
      Less unrecognised deferred tax
      asset                                        (2)               2                  -                -                -             -
      Net deferred tax liability                (770)          (740)                475               69                94         (872)
      Deferred tax asset                             -                                                                               108
      Deferred tax liability                    (770)                                                                              (980)



      Movements in temporary differences for the year ended 31 December 2007:

                                                                                    Movements
                                                                                     charged/             Movement
                                                                                     (credited)     recorded directly         31 December
                                                         1 January 2007         to profit or loss          to equity                 2007

      Tax effect of deductible/(taxable)
      temporary differences
      Impairment allowances and provisions                        (396)                      268                    -               (128)
      Accruals                                                      393                      170                    -                563
      Property, plant and equipment                               (699)                       98               (418)              (1 019)
      Securities                                                      53                     (49)                 (6)                 (2)
      Other                                                           20                    (202)                   -               (182)

      Gross deferred tax liability                                (629)                      285              (424)                (768)
      Less unrecognised deferred tax asset                          (23)                      21                    -                 (2)
      Net deferred tax liability                                  (652)                      306              (424)                (770)
      Deferred tax asset                                                  -                                                             -
      Deferred tax liability                                      (652)                                                            (770)

      Deferred income taxes are calculated on all temporary differences under the liability method using the
      income tax rates applicable to entities of the Group.

      As at 31 December 2008 and 31 December 2007, the Group did not recognise a deferred tax liability in respect
      of its investments in subsidiaries as the Group was able to control the timing of the reversal of the temporary
      differences and it was not probable that the temporary differences will reverse in the foreseeable future.


      In the context of the Group’s current structure, tax losses and current tax assets of different companies may
      not be offset against current tax liabilities and taxable profits of other companies and, accordingly, taxes may
      accrue even where there is a net consolidated tax loss. Therefore, a deferred tax asset of one company of the
      Group may not be offset against a deferred tax liability of another company.


      As at 31 December 2007, a net deferred tax asset in respect of net deductible temporary differences of
      RUR 2 million has not been recorded as it was not probable that the relevant entity of the Group will have
      sufficient taxable profit that will allow the Group to benefit from the deferred tax asset.
       MDM Bank                                                                                                            151
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

27. Analysis by Segment
       The Group is organised into three main reportable operating segments:
       • Corporate and investment banking – includes deposit taking and lending to corporate clients, leasing,
         factoring, settlements, cash management, cash collection, trade finance, syndications, a forfait financing,
         export credit agency financing, corporate finance, debt and equity capital markets, money markets,
         trading and brokerage in securities, foreign exchange and precious metals, repo transactions, banknote
         trading, and trading in derivatives.
       • Retail banking – includes deposit taking and lending to individuals, small and medium enterprises and
         individual entrepreneurs, money transfer and foreign exchange services, a range of banking card products
         provided to individual customers, also settlements, cash management, and cash collection for small and
         medium enterprises.
       • Central treasury – includes treasury, which undertakes the Group’s funding and centralized risk
         management activities through borrowings, issue of debt securities, use of derivatives for risk management
         and investing in liquid assets such as short-term placements.


       The Group evaluates performance of its operating segments on the basis of profit and loss before tax not
       including non-recurring gains and losses, such as results on disposal of property, plant and equipment or results
       from business combinations. The accounting policies of the operating segments of the Group are the same as
       those described in the summary of significant accounting policies (refer to Note 4), except for the following:
       • the Group records risk charges on operating segments representing cost of credit risk associated with new
          operations of the segment originated in the reporting period;
       • at the same time the Group does not include impairment losses and provisions in accordance with IFRS in
          determination of the segment profit and loss;
       • the Group records an allowance for capital benefits representing internal notional interest income earned
          on risk-weighted capital allocated to operating segments to finance the activities of the segment.


       The Group has in place a procedure for allocating depreciation and amortisation expense between operating
       segments of the Group to determine segment profit or loss. However, the Group does not allocate net book
       value of certain property, plant and equipment between operating segments to determine segment assets.
       Such property, plant and equipment are included in “Unallocated” category in reconciliation of the total of
       segment assets to total assets of the Group.


       All assets and liabilities of operating segments are subject to mandatory placement/funding through the
       Central treasury, which results in internal funding charges related to such placement/funding. Such charges
       are calculated using internal rates, which are based on current market borrowing rates. Internal funding
       charges result for Central treasury also includes notional expense incurred by Central treasury for use of
       nominal amount of monetary capital of the Group for further funding of other operating segments.


       The capital is further allocated to each operating segment to cover risks associated with its assets. Such risk-
       weighted capital is subject to placement in Central treasury by other segments. The result of this adjustment
       is presented as an allowance for capital benefit for each operating segment.


       The Group also has a central administrative function that manages its premises and certain corporate costs.
       Cost sharing agreements are used to allocate central costs to operating segments on a reasonable basis.


       The majority of operations, credit related commitments, capital expenditure, and revenues of the Group
       relate to residents of the Russian Federation.


       Segment breakdown of assets and liabilities of the Group is set out below:

                                                                             31 December 2008          31 December 2007

       Assets
       Corporate and investment banking                                              210 205                   204 833
       Retail banking                                                                 53 776                    42 825
       Central treasury                                                               56 401                    66 985
       Unallocated assets                                                               8 735                    6 839
       Total assets                                                                  329 117                  321 482
152   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

                                                                                                31 December 2008                31 December 2007


          Liabilities
          Corporate and investment banking                                                                158 034                          174 125
          Retail banking                                                                                    21 382                          15 791
          Central treasury                                                                                106 675                           83 896
          Unallocated liabilities                                                                            1 952                            8 772
          Total liabilities                                                                              288 043                         282 584

      Segment information for the operating segments of the Group for the year ended 31 December 2008 is set
      out below:

                                                         Corporate and             Retail             Central                          Consolidated
                                                    investment banking           banking            treasury        Unallocated              Group

          External interest income                            24 222              7 863                 808                     -           32 893
          External interest expense                           (9 472)              (664)            (5 608)                (241)          (15 985)
          Internal funding charge1                            (4 208)           (3 848)               4 794               3 262                     -
                                           2
          Allowance for capital benefit                         1 937               444                 108             (2 489)                     -

          Net interest income                                 12 479              3 795                 102                 532             16 908
          Fee and commission income                             1 805             1 337                      -                  -             3 142
          Fee and commission expense                            (445)              (353)                (83)                  (2)             (883)
          Trading, other financial assets at
          fair value through profit or loss
          and foreign exchange results                            820                (41)             1 365                 230               2 374
          Other operating income                                   163                13                    2                113                291

          Total operating income
          before impairment losses and
          provisions                                          14 822              4 751               1 386                 873             21 832
                                       3
          Direct operating expenses                           (1 739)            (1 629)                (45)                    -           (3 413)
          Impairment losses and provisions                     (5 418)           (1 726)                     -            (685)             (7 829)
          Reversal of accounting impairment
          losses and provisions4                                5 418             1 726                      -          (7 144)                     -
          Risk charges5                                        (3 911)             (670)                     -            4 581                     -

          Segment result before central
          overhead                                              9 172             2 452               1 341             (2 375)             10 590
          Allocation of central overheads6                    (1 387)           (2 326)                   (2)           (1 754)             (5 469)
          Investment spending7                                         -                 -                   -            (484)               (484)

          Profit before taxation                                7 785                126              1 339             (4 613)              4 637
          Income tax                                                                                                    (1 333)             (1 333)

          Net profit for the year                                                                                                            3 304

      1
        Refer to description of internal funding charges above. The amount included in “Unallocated” category represents notional income on
        placement of monetary capital to central treasury.
      2
        Refer to description of allowance of capital benefit above. The amount included in “Unallocated” category represents a reconciling item to the
        total consolidated profit of the Group.
      3
        Direct operating expenses represent part of total operating expenses of the Group directly attributable to operating segments.
      4
        Refer to description of segment accounting policies used above. Impairment losses and provisions in accordance with IFRS are not included
        in determination of segment profit and loss.
      5
        Refer to description of risk charges above. The amount included in “Unallocated” category represents a reconciling item to the total
        consolidated profit of the Group.
      6
        Allocation of central overheads represents part of total operating expenses of the Group incurred by the central cost centers of the Group,
        allocated to operating segments based on internal allocation rules.
      7
        Part of operating expenses of the Group representing ongoing costs of development of the distribution network, long-term venture projects
        and other similar costs. These costs are not internally allocated to operating segments.
MDM Bank                                                                                                                                           153
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

Segment information for the operating segments of the Group for the year ended 31 December 2007 is set
out below:

                                                Corporate and
                                                   investment                Retail             Central                          Consolidated
                                                      banking              banking            treasury        Unallocated              Group

    External interest income                           21 859               5 467               1 019                     -           28 345
    External interest expense                          (7 311)               (312)            (6 000)               (590)            (14 213)
    Internal funding charge1                           (5 564)             (2 491)              5 419               2 636                     -
                                    2
    Allowance for capital benefit                        1 811                 316                  38            (2 165)                     -

    Net interest income                                10 795               2 980                 476                (119)            14 132
    Fee and commission income                            1 831              1 141                     6                   -            2 978
    Fee and commission expense                           (401)               (225)                  (8)                   -             (634)
    Trading, other financial assets at
    fair value through profit or loss
    and foreign exchange results                           981                  72                  80                    -             1 133
    Other operating income                                 175                    8                 11                527                 721

    Total operating income
    before impairment losses and
    provisions                                         13 381               3 976                 565                 408             18 330
    Direct operating expenses3                        (2 450)             (1 447)                 (73)                    -           (3 970)
    Impairment losses and provisions                     (514)            (1 564)                      -                (3)           (2 081)
    Reversal of accounting impairment
    losses and provisions4                                 514              1 564                      -          (2 078)                     -
    Risk charges5                                         (811)              (367)                     -            1 178                     -

    Segment result before central
    overhead                                           10 120               2 162                 492               (495)             12 279
    Allocation of central overheads     6
                                                         (940)             (1 785)                  (1)           (1 743)             (4 469)
    Investment spending7                                       -                   -                   -             (183)              (183)

    Profit before taxation                              9 180                 377                 491             (2 421)              7 627
    Income tax                                                                                                                        (2 111)
    Net profit for the year                                                                                                             5 516

1
  Refer to description of internal funding charges above. The amount included in “Unallocated” category represents notional income on
  placement of monetary capital to central treasury.
2
  Refer to description of allowance of capital benefit above. The amount included in “Unallocated” category represents a reconciling item to the
  total consolidated profit of the Group.
3
  Direct operating expenses represent part of total operating expenses of the Group directly attributable to operating segments.
4
  Refer to description of segment accounting policies used above. Impairment losses and provisions in accordance with IFRS are not included
  in determination of segment profit and loss.
5
  Refer to description of risk charges above. The amount included in “Unallocated” category represents a reconciling item to the total
  consolidated profit of the Group.
6
  Allocation of central overheads represents part of total operating expenses of the Group incurred by the central cost centers of the Group,
  allocated to operating segments based on internal allocation rules
7
  Part of operating expenses of the Group representing ongoing costs of development of the distribution network, long-term venture projects
  and other similar costs. These costs are not internally allocated to operating segments
154    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       Capital expenditures and depreciation and amortisation charge for the operating segments of the Group for
       the year ended 31 December 2008 is set out below:

                                             Corporate and
                                                investment          Retail         Central                  Consolidated
                                                   banking        banking        treasury    Unallocated          Group

       Capital expenditures (Note 12)                 117            326                3         1 034          1 480
       Depreciation and amortisation
       charge (Note 12)                                38             93                 -          458            589


       Capital expenditures and depreciation charge for the operating segments of the Group for the year ended
       31 December 2007 is set out below:

                                             Corporate and
                                                investment          Retail         Central                  Consolidated
                                                   banking        banking        treasury    Unallocated          Group

       Capital expenditures (Note 12)                356             441                 -             -           797
       Depreciation and amortisation
       charge (Note 12)                                 7             23                 -          317            347


       Outstanding credit related commitments for the operating segments of the Group as at 31 December 2008
       and 31 December 2007 are set out below:

                                                                             31 December 2008          31 December 2007

       Corporate and investment banking                                                50 051                   51 854
       Retail banking                                                                    1 724                  10 181
       Total credit related commitments (Note 29)                                      51 775                   62 035


       The majority of Group’s revenues from external customers are attributed to customers domiciled in Russian
       Federation (including subsidiaries and affiliates of these customers registered outside Russian Federation).
       Revenues from external customers domiciled in foreign countries are not significant.


28. Financial Risk Management
       Taking risk is core to the financial business. The Group’s aim is to achieve an appropriate balance between
       risk and return and minimize potential adverse effect of risk on the Group’s financial performance. Major
       financial risks to which the Group is exposed include credit, market, liquidity, and other risks.


       (a) Risk management framework
       The Group’s risk management policies aim to identify, analyze and manage the risks to which the Group is
       exposed.


       Risk management function within the Group is based on the following main principles:
       • Limitation of potential losses – the Group’s transactions associated with risks are performed within
         a system of limits/restrictions on certain types of risk.
       • Timeliness of risk assessment – all new products and transactions of the Group are analyzed for associated
         risks. Based on the results of the risk analysis, a system of limits/restrictions and appropriate controls are
         implemented for this product/transaction.
       • Risk management activities – based on the assessment of changes in the external and internal risk factors,
         appropriate steps are taken to either accept, avoid, mitigate or pass on the risks, in order to achieve optimal
         risk-reward balance for the Group. Clear segregation of duties between corporate management structures
         and business-units ensures effective risk management and should eliminate conflicts of interests.


       Risk management functions are allocated in the Group in the following way.


       The Board of Directors of MDM Bank has overall responsibility for the oversight of risk management, the
       management of key risks and approving major risk management principles, policies and procedures.
MDM Bank                                                                                                          155
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The Audit and Risk Committee of the Board of Directors of MDM Bank is responsible for overseeing the
internal control framework and assessing the adequacy of risk management and compliance policies and
procedures. It meets regularly and provides recommendations to the Board of Directors of MDM Bank on
development of the framework, as well as its views on the quality of risk management and compliance.


The Management Board of MDM Bank is responsible for monitoring and implementation of risk mitigation
measures and making sure that both the Group and the Bank operate within the established risk
parameters.


Credit, market and liquidity risks at both the portfolio and major transaction levels are managed and
controlled by the Senior Credit Committee, Senior Committee on Counterparties and Financial Instruments
and Asset and Liability Management Committee (ALCO).


The Risk Department of MDM Bank is responsible for overall risk management and compliance functions,
ensuring the implementation of common principles and methods for identifying, measuring, managing and
reporting both financial and non-financial risks. The Risk Department develops the methodology for risk
measurement and performs independent risk analysis of products and programs submitted for approval and
limits on specific clients/operations, performs portfolio analysis on current products and programs, and
develops a number of aggregated risk limits (i.e. industry/sector limits, limits on insurance of pledges by
insurance companies etc.). Additionally, the Risk Department prepares monthly reports on risk management
covering all the main risks, including credit, market, liquidity and operational risks, which are reported to
the Board of Directors and the Management Board of MDM Bank.


The business units of the Group manage risks within their functional duties.


The Internal Audit Department of MDM Bank audits the Group’s business units to check their compliance
with the internal policies of the Group, reports its findings to the Board of Directors and management of the
Group and proposes remedial actions for the findings.


The main risk management policies and procedures currently used by the Group and details of major measures
aimed at increasing the effectiveness and quality of risk management which are planned for implementation
in the current financial year, are described below.


(b) Credit Risk
Credit risk is the risk of losses as a result of the non-performance, late or partial performance by a debtor
of its contractual financial obligations to the Group. Credit risk arises principally from credit transactions,
transactions with counterparties on the financial markets, purchase of debt securities and other on and off
balance sheet credit exposures.


For risk reporting purposes, the Group considers and consolidates all elements of credit risk exposures such
as individual debtor default risk, country and industry risk.


For risk management purposes, credit risk arising from positions in trading securities and other financial
assets at fair value through profit or loss is managed and reported as a market risk exposure.


(i) Credit risk management
The Group limits concentrations of exposure to individual customers, counterparties and issuers (for
securities), groups of related customers, as well as exposure by industry/sector etc.


To limit potential losses arising from credit risk, all transactions involving credit risk (including sale and
repurchase agreements and other transactions with collateral) are performed within established limits.


The process of developing and setting limits is aimed at minimizing conflicts of interest.


The application to establish a limit is originated by the relevant client managers.
156   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      Credit risk analyses are performed either by the Credit Department or the Risk Department (in respect of
      limits for financial institutions: banks, funds and investment companies, etc.).

      The credit risk limits are then approved by the Senior Credit Committee, by the Senior Committee on
      Counterparties and Financial Instruments (in respect of limits for financial institutions) or by an authorized
      underwriter.


      In order to facilitate efficient decision-making, the Group has established a hierarchy of authority for approval
      of credit risk limits depending on the type and amount of the exposure to risk.


      Authority to approve corporate and retail exposures subject to credit risk operated during the major part of
      year ended 31 December 2008 was allocated as follows:


      The Senior Credit Committee approves credit risk management policies and procedures, new standard
      products and programs for corporate, small business and retail customers of the Group, and approves
      all credit risk limits above RUR 250 million. The Senior Credit Committee includes the heads of client,
      investment, credit, collections and retail units of the Group. The chairman of the Senior Credit Committee is
      the Head of the Risk Department (with the veto right).


      Applications for limit setting or new standard product/program approval are subject to independent
      assessment by the Risk Department prior to being passed on to the Senior Credit Committee. The Risk
      Department assesses risks and provides recommendations to the members of the Senior Credit Committee
      on mitigating risks identified.


      In order to facilitate efficient decision-making for limits approval procedure, authority to approve limits for
      lower amounts were delegated as follows:
      • Authority to approve small limits within the retail lending programs approved by the Senior Credit
         Committee is delegated to Junior credit committees for retail lending in branches (for customers of
         regional branches). Such authority varies depending on standard credit products: auto loan, mortgage
         loan, consumer loan and credit card, etc.
      • Authority to approve small limits (up to RUR 10 million) within the small business lending programs
         approved by the Senior Credit Committee is delegated to Junior credit committees for standard lending
         products in branches and to Small Business Lending Division (for customers of the Head Office).
      • Authority to approve limits to corporate and small business customers within the small business lending
         programs approved by the Senior Credit Committee, which requires control of basic covenants, rather than
         detailed financial analysis is delegated to underwriters of the Credit Department. The authority is limited
         to RUR 30 million per customer. The underwriters are authorized by the Head of the Risk Department.
      • Authority to approve all other credit limits to corporate, small business and retail customers within
         RUR 250 million is delegated to underwriters of the Risk Department.


      The authority to approve deals with financial institutions subject to credit risk operated during the major
      part of the year ended 31 December 2008 is allocated as follows:


      The Senior Committee on Counterparties and Financial Instruments approves credit risk management
      policies and procedures, for the Group’s operations on financial markets, and approves all credit risk limits
      above USD 25 million. The Senior Committee on Counterparties and Financial Instruments includes the
      Chief Financial Officer of MDM Bank and the head of investment unit of the Group. The chairman of the
      Senior Committee on Counterparties and Financial Instruments is the Head of the Risk Department. All
      limits over USD 75 million must be approved by the Chairman of the Management Board of MDM Bank (who
      has a veto right).


      Applications for limit setting are subject to independent assessment by the Risk Department prior to being
      passed on to the Senior Committee on Counterparties and Financial Instruments. The Risk Department
      assesses risks and provides recommendations to the members of the Senior Committee on Counterparties
      and Financial Instruments on mitigating risks identified.
MDM Bank                                                                                                             157
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

Authority to approve credit limits to financial institutions within USD 25 million is delegated to underwriters
of the Risk Department.


At the end of 2008 the Group undertook a number of crisis management steps on toughening the approach to
decision making in the area of approval/ change of credit limits:
• powers of business units on decision-making are reduced significantly: amounts eligible for approval
  by Junior Credit Committees in regional branches were lowered and transferred at the level of Regional
  banks;
• decision-making on corporate clients is transferred to the level of the Senior Credit Committee, on financial
  institutions – to the level of the Senior Committee on counterparties and financial instruments;
• approval of limits on small and medium business is transferred to the level of underwriters of the Risk
  Department.


The above measures are aimed to improve prudence of limit approval decision in the complex current
environment where previously used procedures may lead to inadequate decisions.


The Group’s activities may give rise to settlement risk at the time of settlement of transactions. Settlement
risk is the risk of loss due to the failure of a counterparty to honor its obligations to deliver cash, securities
or other assets as contractually agreed. For certain types of transactions the Group mitigates this risk by
conducting settlements through settlement/clearing agents to ensure that a trade is settled only when
both parties have fulfilled their contractual settlement obligations. Acceptance of settlement risk on free
settlement transactions requires transaction specific and/or counterparty specific settlement limits which
form part of the credit risk limits.


(ii) Policies for credit risk analysis and setting credit risk limits
Credit analysis is performed using approved methodologies. These methodologies include a methodology for
analyzing the financial standing of debtors and a methodology for the assessment of collateral.


Analysis of debtor financial standing is performed using all the information on the debtor available to the
Group in accordance with methodology applied. This analysis includes assessment of current and expected
debtor financial position and the current business of the debtor. Generally, the group of companies of the
debtor is evaluated as a whole, provided that all members of the group accept responsibility for the loan.


Analysis of the expected creditworthiness of individuals within retail lending is performed based on the
current income and profile of the customer using scoring models which are based on statistical analysis of
defaults by individual lending program.

The Group internally assesses collateral using methodologies developed for each type of collateral. Valuations
performed by third parties, including independent appraisal firms authorized by the Group, may serve as the
external data used for such assessment.


The Group normally accepts the following types of property as collateral:
• in the commercial and industrial sector, charges over business assets such as premises, equipment, stock
  and debtors;
• in the commercial real estate sector, mortgages and/or charges over the properties being financed;
• in the financial sector, charges over financial instruments such as debt securities and equities;
• in the retail sector, mortgages over residential properties, and charges over motor vehicles or other
  valuables.


Collateral is not generally held over loans and advances to banks, except where securities are held as collateral
in reverse repurchase agreements and secured lending lines. Collateral is not held against exposures to
securities.
158   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The Group usually requires collateral, equipment and products to be insured for any loss or damage by
      approved insurance companies.

      At the end of 2008 the Group undertook a number of crisis management steps aimed at toughening the
      approach to risk assessment during the crisis period:
      • simplified procedures on limits approval were suspended, clients are considered only on the basis of the
        detailed analysis of their credit status. Overall minimal requirements to the financial position of clients
        were increased;
      • approval of limits for lending to construction industry and several other industries which in the opinion of
        the Group will be most affected by the crisis were suspended;
      • all limits on purchase of debt securities (bonds, promissory notes) to the Group’s proprietary position were
        suspended;
      • uncollaterised lending was suspended, discounts rates on collateral received were raised, additional
        procedures were performed to increase collateral on existing loans;
      • in retail lending the Group has now suspended all products, except consumer lending: represented by high
        margin loans in small amounts and relatively short term with monthly annuity repayments. Significant
        changes were made to the client scoring techniques to exclude most clients with higher probability of default:
        clients are accepted only if their income is supported by documents; maximum share of annuity payment in
        the client’s free cash flow was lowered; other potential client “portrait” features were amended.


      The Group also analyzes other risks arising from the business of the debtor or transactions being financed.
      Other risks include the following:
      • Ecological/social risks are the reputation risks of the Group and credit risks arising from the debtor’s non-
        compliance with environmental, health, safety, non-discrimination and other legal requirements regulating
        ecological, labor and social activities, as well as from environmental damage by third parties to the debtor’s
        activities and property. In 2008 the Group adopted the Policy of ecological risk management. Assessment of
        this risk is based on the standards of International Finance Corporation and European Bank for Reconstruction
        and Development and is performed for all credit risk limits for corporate and small business clients.
      • Compliance risk is the risk that the debtor will face difficulties in servicing the loan due to claims against
        the debtor by the regulatory authorities.
      • Reputation risk is the risk from the possible association of the Group with the illegal activities of its
        customer. Generally, in order to mitigate reputation risk all the Group’s customers are subject to a check by
        the Security Department.
      • Legal risk is the risk of potential losses due to weaknesses in the legal framework or insufficient analysis
        of legal issues during preparation of credit documentation.


      The main principles for setting limits include:
      • the financial position of the debtor (current and expected) should allow the debtor to repay outstanding
        loans on a timely basis, without the Group having to realize collateral (which is an important but secondary
        factor in limit setting);
      • the intended use of lending products within a limit should be consistent with the business of the debtor;
      • sources of repayment of lending products should be identifiable and their existence should be validated;
      • other risks identified should be acceptable.


      Risk-Adjusted Return on Capital (RAROC) is the a key measure for evaluation of risk-reward of the considered
      limit.

      (iii) Credit risk measurement
      The quantitative assessment of credit risk is based on the “expected loss model”, as recommended by the Basel
      Committee on Banking Regulations and Supervisory Practices (the “Basel Committee”). The “expected loss
      model” can be contrasted with impairment allowances required under International Accounting Standard 39
      “Financial Instruments: Recognition and Measurement” (“IAS 39”), which are based on losses that have been
      incurred as at the balance sheet date (the “incurred loss model”) rather than expected losses. The “expected loss
      model” calculates expected losses for various credit exposures based on the probability of default (PD), exposure
      at default (EAD) and loss given default (LGD).
MDM Bank                                                                                                             159
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The Group assesses the probability of default of individual counterparties using internal rating tools tailored to
the various categories of debtor, industry/sector and different standard credit products/programs. They have
been developed internally and combine statistical analysis with credit and risk department officer judgment and
are validated, where appropriate, by comparison with externally available data.


The exposure at default is the expected amount of the exposure at the time of default.


Loss given default is estimated based on the historical recovery rate and typically varies by type of
counterparty, type and availability of collateral or other credit risk mitigation tools.


Information on the credit quality of the Group’s loan portfolio and impairment allowances recorded under
IAS 39 is presented in Note 11.


(iv) Policies for providing credit products within established limits
When providing credit products within established limits the Group implements a set of procedures to
mitigate the risk of conflict of interests and operating risks:
• A client relationship unit initiates the issue of a credit product within the established limit.
• The supporting unit (middle-office) prepares credit documentation and monitors compliance with the
  terms of the limit.
• The Operations Department executes the transaction and records it in the Group’s accounting systems.


(v) Principles for credit risk monitoring
Credit risk monitoring comprises two components:


• Monitoring of established limits


The Group regularly monitors the payment discipline of debtors, availability and value of collateral, financial
standing of debtors, their ecological/social risks and compliance with other covenants established under the
limits.


Corporate clients and small business clients are usually monitored by supporting units (middle-office) of the
Group. Financial institutions are monitored by the Risk Department.


Based on the monitoring results, the Credit Department performs regular assessment of the credit exposures
for any indications of individual impairment. If necessary, the Group implements steps to mitigate credit risk.
These may include revision of limit terms, request for additional collateral etc. In certain cases recovery of
the loan is delegated to the special department responsible for collection of bad debts.

• Portfolio-based monitoring


Apart from monitoring individual risk limits, the Risk Department also periodically assesses credit risk for
the loan portfolio as a whole and for individual standard programs and products.


Such analysis includes analysis of the default rates for portfolios, adequacy of impairment losses recognized,
level of industry and geographical concentration, and portfolio diversification.


If negative trends are identified, the Risk Department analyzes the trends and initiates required changes to
the credit policies and methodology of the Group.


(vi) Allowance for loan losses
The Group establishes an allowance for loan losses that represents its estimate of losses incurred in its loan
portfolio.
160   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The Group writes off a loan balance against related allowances for loan losses when the Group’s Senior Credit
      Committee determines that the loans are uncollectible and when all necessary steps to collect the loan are
      completed. For smaller balance standardized loans, write off decisions are generally based on a product
      specific past due status. Generally, overdue loans are written off when overdue more than one year or if the
      debtor is declared bankrupt.

      (vii) Maximum exposure to credit risk
      The Group’s maximum exposure to on balance sheet credit risk is generally reflected in the carrying amounts
      of financial assets on the balance sheet. The impact of possible netting of assets and liabilities to reduce
      potential credit exposure is not significant.


      Credit risk for off balance sheet financial instruments is defined as the possibility of sustaining a loss as
      a result of another party to a financial instrument failing to perform in accordance with the terms of the
      contract. The Group uses the same procedures and methodologies, as defined by the Group’s credit policy,
      for approving credit related commitments (undrawn loan commitments, letters of credit and guarantees) as
      it does for on balance sheet credit obligations (loans). The Group’s maximum exposure to off balance sheet
      credit risk is reflected in Note 29 “Contingent liabilities and commitments”.


      For analysis of concentration of credit risk in respect of loans and advances to customers refer to Note 11
      “Loans and advances to customers”.


      (viii) Changes in the credit risk management process
      The Group constantly takes steps to improve its risk management systems in line with international best
      practices. During the year ended 31 December 2008 the Group:
      • Improved the limits approval procedure, by implementation of the underwriting system as described in
        section (i) of this Note.
      • Implemented system of capital at risk allocation integrated with the credit risk management system.
        Expected and actual RAROC (Risk-Adjusted Return on Capital) is now considered as one of the key risk-
        reward measures.
      • Established the procedure for ecological/social risks evaluation as part of credit approval process
        based on standards of International Finance Corporation and European Bank for Reconstruction and
        Development.
      • Improved methods of monitoring the loan portfolio. In particular, the Group has developed and introduced
        procedures of monitoring sector risks of the loan portfolio. The procedures now allow to carry out more
        prudent industry risk limit policy. Additionally, the Group has introduced monthly assessment of the
        quality of small and medium business lending procedures of the Bank’s branches, including sales and
        selection of new customers and work with customers that breached lending limits. The above monitoring
        procedures identify problem areas on a more timely and accurate basis and to take relevant corrective
        actions to the lending procedures.


      In 2009 the major objective of the Group will be to adjust its credit risk management policy and procedures
      to the new economic environment:
      • Definition of target groups of clients, based on their sustainability in the crisis environment, and key
         indicators for their credit analysis;
      • Optimization of the product range for all types of clients;
      • Introduction of decision making systems which allow more accurate risk assessment, identification of
         potential crisis areas in advance and to change risk management policies flexibly: statistical rating and
         scoring models, increased frequency of stress-testing of the loan portfolio, system of Early Warning
         Indicators etc.;
      • Development of restructuring programs for current loans of “good” retail clients of the Group (those
         which have not committed any significant defaults) who have temporary financial difficulties, but overall
         assessment shows that those clients will be able to service and repay their debt at mutually acceptable
         terms.
MDM Bank                                                                                                           161
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

(c) Market risk
Market risk is the risk that movements in market prices, including foreign exchange rates, interest rates,
credit spreads and equity prices will have an adverse affect on the Group’s income or the value of its financial
instruments. Market risk comprises interest rate risk, currency risk and other price risks. Market risk arises
from open positions in interest rate, currency and equity financial instruments, which are subject to general
and specific market movements and changes in the level of volatility of market prices.


(i) Market risk management
The objective of market risk management is to manage and keep market risk exposures within acceptable
parameters, whilst optimizing the return on risk.


Market risk management is based on proper allocation of risk management functions with the objective to
limit potential losses.


Market risk is managed through the system of limits, which includes position limits, loss limits, and limits
on certain deal parameters. The system of limits sets the acceptable risk level at any point of time, including
intra-day positions. Compliance with limits is controlled on a daily basis.


The Asset and Liability Committee (ALCO) is responsible for managing the Group’s market risk. The committee
approves market risk limits based on recommendations of the market risk unit of Risk Department.


The limit structure corresponds to the volume and structure of the Group’s operations in the financial
markets.


Use of new types of financial instruments is permitted only after approval by ALCO which includes the
following procedures:
• The front-office unit initiates the procedure of setting the required limits, including market risk limits.
• The Risk Department performs a detailed analysis of a proposed transaction, develops market risk
   assessment procedures, establishes appropriate risk limits and develops required control procedures.
• The Risk Department submits recommendations to ALCO on acceptability of the proposed transaction,
   risk limits and control procedures.


(ii) Quantitative assessment of market risk
To obtain an accurate assessment of market risk, the Group revalues its positions to current market prices
on a daily basis and calculates volatilities of the risk factors. Results of such calculations are incorporated
into the quantitative assessment of market risks for its trading positions using the Value-at-Risk (“VaR”)
methodology. VaR is a technique that estimates the potential losses that could occur on risk positions
as a result of movements in market rates and prices over a specified time horizon and to a given level of
confidence. The VaR model used by the Group is based upon a 99 percent confidence level and assumes
a 10-day holding period. The Group applies a linear VaR model. Potential movements in market prices
are determined with reference to market data for at least the last 12 months. Back-testing of the model is
performed at least once every six months.


A summary of the VaR estimates in respect of foreign currency risk and securities price risk for the Group’s
portfolio of trading securities and liquid available-for-sale financial instruments (liquid instruments are
defined as those which the Group will be able to liquidate within 10 days) as at 31 December 2008 and
31 December 2007 is as follows:

                                                                      31 December 2008         31 December 2007

Foreign exchange risk                                                              80                       36
Fixed income securities price risk                                              1 370                      326
Equity securities price risk                                                      131                      411
162   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      Although VaR is a valuable tool in measuring market risk exposures, it has a number of limitations, especially
      in less liquid markets, which include the majority of the debt and equity instruments traded in Russia:
      • The use of historical data as a basis for determining future events may not encompass all possible
         scenarios.
      • A 10-day holding period assumes that all positions can be liquidated or hedged within that period. This is
         considered to be a realistic assumption in almost all cases but may not be the case in situations in which
         there is severe market illiquidity for a prolonged period.
      • The use of a 99% confidence level does not take into account losses that may occur beyond this level. There
         is a one percent probability that the loss could exceed the VaR.
      • As VaR is only calculated on an end-of-day basis, it does not necessarily reflect exposures that may arise
         on positions during the trading day.


      Due to the above limitations of the VaR methodology the Group additionally performs stress-testing of the
      risk positions using scenarios of unfavourable changes of the major risk factors. Further, the limitations of
      the VaR methodology are recognized by supplementing VaR limits with limits of open positions for financial
      instruments and risk exposures and limits of sensitivity to risk factors.


      In addition, the Group performs scenario stress-testing for trading positions on a monthly basis to model the
      possible financial impact of exceptional market scenarios on individual trading portfolios and the Group’s
      overall position.

      (iii) Price risk
      Price risk is the risk that movements in market prices resulting from factors associated with issuers of financial
      instruments (specific risk) and general changes in the market prices of financial instruments (general risk)
      will have an adverse affect on the Group’s income or the value of its financial instruments.


      Price risk for financial instruments held within the Group’s trading portfolios is managed by setting limits on
      investments in financial instruments taking into account their liquidity, setting stop-loss limits for trading
      portfolios, and maintaining a diversified structure of portfolios.


      Positions in securities are monitored centrally across the Group.


      (iv) Currency risk
      Currency risk is the risk that movements in foreign exchange rates will have an adverse affect on the Group’s
      income or the value of its portfolios of financial instruments.


      Currency risk mainly results from open foreign currency positions. All transactions with currency risk
      exposure are performed within limits on open foreign currency positions. Such limits are established taking
      into consideration expected future movements in foreign exchange rates which are based on historical
      volatilities, scenario modeling and expert estimates.


      Traders manage currency risk in respect of the Group’s trading foreign currency positions which are opened
      within the limits established by the ALCO.


      The Treasury Department manages currency risk in respect of the currency mismatch between non-trading
      assets and liabilities (structural foreign currency position). The Group’s target is to maintain a risk neutral
      structural foreign currency position.


      Transactions are generally performed in three major currencies: the Russian rouble, US dollar and Euro.


      For the purposes of currency risk management the Group applies a system of controls over overall open
      foreign currency positions, and trading positions which are monitored on real-time basis.
MDM Bank                                                                                                         163
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

As at 31 December 2008, the Group has the following positions in different currencies:

                                                                                             Other
                                                          RUR       USD        EUR       currencies      Total

Assets
Cash and cash equivalents                             28 405     43 353      5 282            231      77 271
Mandatory cash balances with central banks               415           -         -          1 527       1 942
Due from other banks                                    9 737    14 749      7 122             43      31 651
Trading securities
 - owned by the Group                                    194           -         -                -      194
 - pledged under sale and repurchase agreements             -          -         -                -          -
Derivative financial instruments                           2      2 996         49             36       3 083
Available-for-sale financial assets
 - owned by the Group                                   6 033     2 574         58              11      8 676
 - pledged under sale and repurchase agreements          379           -         -                -      379
Investment securities held to maturity                   108           -         -                -      108
Loans and advances to customers                       101 640   75 809     16 841             516     194 806
Property, plant and equipment and intangible assets     6 820          -         -              12      6 832
Other assets                                            3 447       307       403               18      4 175
Total assets                                          157 180   139 788    29 755           2 394     329 117

Liabilities
Due to central bank                                    35 575          -         -                -    35 575
Due to other banks                                     11 455    73 041    12 877                2     97 375
Derivative financial instruments                         215      1 244       894               19      2 372
Customer accounts                                      58 122    44 757    11 988             204     115 071
Debt securities in issue                                2 994    20 940      4 766                -    28 700
Subordinated debt                                           -     5 966          -                -     5 966
Deferred tax liability                                   879        101          -                -      980
Other liabilities                                       1 738       140         99             27       2 004
Total liabilities                                     110 978   146 189    30 624             252     288 043

Net balance sheet position                            46 202     (6 401)     (869)          2 142      41 074
Off balance sheet net notional position               (4 564)     6 692      (248)        (1 880)           -
Net position                                          41 638        291    (1 117)            262      41 074
Credit related commitments                            25 035     20 719     5 842             179      51 775



Currency classification of monetary assets and liabilities is based on the currency in which they are
denominated. Investments in equities have been attributed to the currency of the country where the issuer
of the equity instrument is resident (predominantly, the Russian Rouble and the Russian Federation,
respectively). Currency classification of tangible assets (precious metals, property, plant and equipment)
and prepayments has been based on the functional currency used to record them.


The Group has extended loans and advances denominated in foreign currencies. Depending on the revenue
stream of the borrower, the possible appreciation of the currencies in which loans and advances have been
extended against the Russian Rouble may adversely affect the borrower’s repayment ability and therefore
increase the likelihood of future loan losses.
164   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      As at 31 December 2007, the Group had the following positions in different currencies:

                                                                                                      Other
                                                                 RUR          USD          EUR    currencies        Total

      Assets
      Cash and cash equivalents                              21 759       58 298        3 150          227       83 434
      Mandatory cash balances with central banks              3 883              -            -      1 655        5 538
      Due from other banks                                    9 478       14 751        3 605              -     27 834
      Trading securities
       - owned by the Group                                   7 504        3 370             1             -     10 875
       - pledged under sale and repurchase agreements         2 090          897              -            -      2 987
      Derivative financial instruments                          104            44             -        112          260
      Available-for-sale financial assets                       290              -            -            -        290
      Loans and advances to customers                        98 926       68 036       13 341             8     180 311
      Property, plant and equipment and intangible
      assets                                                  5 942              -            -          14       5 956
      Other assets                                            2 335          703            88         871        3 997
      Total assets                                          152 311     146 099        20 185        2 887     321 482

      Liabilities
      Due to central bank                                       846              -            -            -        846
      Due to other banks                                     15 850       76 949        8 714             3     101 516
      Derivative financial instruments                            29         754            91             -        874
      Customer accounts                                      71 228       49 969        2 799          136      124 132
      Debt securities in issue                               13 182       26 205        7 244              -     46 631
      Subordinated debt                                             -      5 066              -            -      5 066
      Deferred tax liability                                    752            18             -            -        770
      Other liabilities                                       2 446          186            14         103        2 749
      Total liabilities                                     104 333      159 147       18 862          242     282 584

      Net balance sheet position                             47 978     (13 048)        1 323        2 645       38 898
      Off balance sheet net notional position                (9 228)      11 947       (1 721)       (998)              -
      Net position                                           38 750       (1 101)        (398)       1 647       38 898
      Credit related commitments                             28 024       26 793        7 140           78       62 035


      (v) Interest rate risk
      Interest rate risk is the risk that movements in interest rates will have an adverse affect on the Group’s revenue
      or the value of its portfolios of financial instruments.


      The Group is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its
      financial position and cash flows. Interest margins may increase as a result of such changes but may also
      reduce or create losses in the event that unexpected movements arise.


      Management of interest rate risk is performed through analysis of the structure of assets and liabilities by
      repricing dates (gap-analysis).


      Dynamic modeling of balance sheet structure is performed for different scenarios of movement in interest
      rates. Apart from gap-analysis the Group assesses the duration of its assets and liabilities. Interest rate risk is
      measured for the Group as a whole on a consolidated basis.


      The impact of changes in interest rates on the Group’s profit before tax is assessed as a key measure of interest
      rate risk.


      All new products and transactions of the Group are evaluated from the interest rate risk perspective prior to
      starting these transactions.
MDM Bank                                                                                                          165
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

ALCO is responsible for the Group’s asset and liability management. ALCO delegates day-to-day management
of the interest rate mismatch to the Treasury Department. The Risk Department independently monitors
compliance with limits established to control interest rate risk.


The table below summarises the effective average interest rate, by major currencies, for major monetary
financial instruments. The analysis has been prepared on the basis of weighted average interest rates for the
various financial instruments using period-end effective interest rates.

                                                     31 December 2008                31 December 2007
                                                            %                               %

                                                                       EUR and                         EUR and
                                                                          other                           other
                                                    RUR       USD    currencies    RUR        USD    currencies

Assets
Due from other banks:
- Current interbank loans                          20.4        1.2         2.0      6.4       5.2          3.8
- Reverse sale and repurchase agreements              -        5.1            -    10.0       6.7             -
Trading securities:
- Municipal bonds issued by Russian
 municipalities                                       -          -            -     8.5          -            -
- Russian Federal loan bonds (OFZ)                    -          -            -     6.5          -            -
- Corporate bonds                                     -          -            -    11.3          -            -
- Corporate Eurobonds                                 -          -            -     8.4      10.3             -
- Promissory notes                                    -          -            -    12.0          -            -
Other financial assets at fair value
through profit or loss                                -          -            -       -      12.8             -
Loans and advances to customers:
- Loans to corporate customers                     17.0      13.4        10.9      13.9      12.0        10.7
- Loans to individuals                             13.3       11.1         9.8     13.5      11.4          9.4
- Investment banking loans                         10.4      14.3             -     9.5       9.7             -
- Small business loans                             18.6      14.4        14.4      15.5      13.2        13.0
- Net investment in finance lease                  31.2      22.9        34.0      31.4      22.4        31.2


Liabilities
Due to central banks                               12.0          -            -       -          -            -
Due to other banks:
- Bilateral structured financing                      -        4.9            -       -       6.5             -
- Syndicated loans                                  8.5        2.7         5.7        -       5.5          6.4
- Trade finance facilities                          2.8        4.6         5.5      6.4       6.3          5.8
- Loans from international
financial institutions                                -       4.5             -       -       6.7             -
- Term deposits from other banks                   18.7        1.7         4.1      4.4       4.7          4.5
- Sale and repurchase agreements                   10.0        2.7            -     6.3        7.1            -
Customer accounts:
- Term deposits                                     8.5        8.2         8.4      7.8       5.4          5.4
- Sale and repurchase agreements                      -          -            -     6.3        5.1            -
Debt securities in issue:
- Unsecured loan participation notes                  -        8.1            -       -       8.2             -
- Loan participation notes secured by
 diversified payments rights                          -        4.1         5.8        -        7.6         7.5
- Loan participation notes secured by
 a pool of car loans                                  -        9.6            -       -       9.4             -
- Promissory notes                                  9.3        6.9         5.0      6.4       6.5          5.6
- Bonds                                            10.8          -            -    11.5          -            -
- Deposit certificates                              9.3          -            -    11.7          -            -
Subordinated debt                                     -        8.2            -       -      10.0             -
166   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The table below summarises the Group’s exposure to interest rate risks as at 31 December 2008. Included in
      the tables are the assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing
      or maturity dates.

                                                                                                             Non
                                             Less than   From 1 to    From 6 to   From 1 to   More than   interest
                                              1 month    6 months    12 months      3 years     3 years   bearing       Total

      Assets
      Cash and cash equivalents              77 271              -            -           -           -          -   77 271
      Mandatory cash balances with
      central banks                            1 036         369          355         178            4           -     1 942
      Due from other banks                   23 217        7 653          780            1            -          -    31 651
      Trading securities
       - owned by the Group                          -           -            -           -           -      194        194
      - pledged under sale
      and repurchase agreements                      -           -            -           -           -          -          -
      Derivative financial instruments        1 240           63        1 350         400           30           -     3 083
      Available-for-sale financial assets
      - owned by the Group                       307       3 090        2 156       2 164          131       828       8 676
      - pledged under sale and
      repurchase agreements                          -       130              -       249             -          -      379
      Investment securities held to
      maturity                                       -           -            -           -           -      108        108
      Loans and advances to customers        21 955       62 119      30 612      39 989       40 131            -   194 806
      Property, plant and equipment and
      intangible assets                              -           -            -           -           -   6 832        6 832
      Other assets                             4 149            5          20            1            -          -     4 175
      Total assets                          129 175       73 429      35 273      42 982       40 296     7 962      329 117

      Liabilities
      Due to central banks                     1 317      34 258              -           -           -          -    35 575
      Due to other banks                     18 340       54 784        7 574       5 716      10 961            -    97 375
      Derivative financial instruments        1 050           45        1 250          27             -          -     2 372
      Customer accounts                      61 227       22 051      20 973      10 565          255            -   115 071
      Debt securities in issue                   623      13 865        3 898     10 270            44           -   28 700
      Subordinated debt                          286             -            -           -     5 680            -     5 966
      Deferred tax liability                         -           -            -           -           -      980        980
      Other liabilities                       2 004              -            -           -           -          -    2 004
      Total liabilities                      84 847 125 003           33 695      26 578       16 940        980 288 043

      Interest rate sensitivity gap          44 328      (51 574)       1 578     16 404       23 356
      Off balance sheet net notional
      position                                 3 757          28        (516)       (929)      (2 221)
      Interest rate sensitivity gap,
      including interest-based
      derivative financial instruments       48 085 (51 546)            1 062     15 475       21 135
MDM Bank                                                                                                                         167
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The Group’s exposure to interest rate risks as at 31 December 2007 is set out below:

                                                                                                             Non
                                       Less than    From 1 to     From 6 to   From 1 to     More than     interest
                                        1 month     6 months     12 months      3 years       3 years     bearing        Total

Assets
Cash and cash equivalents              83 434               -             -            -             -            -   83 434
Mandatory cash balances with
central banks                                   -           -             -            -             -     5 538        5 538
Due from other banks                   18 773         8 486           303              -           272            -   27 834
Trading securities
 - owned by the Group                           -       274           159          4 171       4 783       1 488       10 875
- pledged under sale
and repurchase agreements                       -           -             -         513        1 939         535        2 987
Derivative financial instruments                -           -             -            -             -       260         260
Available-for-sale financial assets             -           -             -            -             -       290         290
Loans and advances to customers        23 742       55 843        30 481          39 215     31 030               -   180 311
Property, plant and equipment and
intangible assets                               -           -             -            -             -     5 956        5 956
Other assets                                    -       226               -            -             -     3 771       3 997
Total assets                          125 949       64 829        30 943          43 899     38 024      17 838 321 482

Liabilities
Due to central bank                        846              -             -            -             -            -      846
Due to other banks                     42 582       24 228         17 415         11 455       5 836              -   101 516
Derivative financial instruments                -           -             -            -             -       874         874
Customer accounts                      69 618       29 747        17 975           6 758           34             -   124 132
Debt securities in issue                 6 738      18 007         11 188         10 666            32            -   46 631
Subordinated debt                          211              -             -            -       4 855              -    5 066
Deferred tax liability                          -           -             -            -             -       770         770
Other liabilities                               -           -             -            -             -     2 749        2 749
Total liabilities                     119 995       71 982        46 578          28 879     10 757       4 393 282 584

Interest rate sensitivity gap           5 954       (7 153) (15 635)              15 020     27 267
Off balance sheet net notional
position                                6 400         (816)         (380)     (4 668)          (536)
Interest rate sensitivity gap,
including interest-based
derivative financial instruments       12 354       (7 969)      (16 015)         10 352     26 731

Loan participation notes secured by a pool of car loans have been presented in the above tables based on the
maturity of car loans pledged under the notes.


The management of interest rate risk by monitoring the interest rate gap is supplemented by monitoring the
sensitivity of the Group’s profit before tax to various interest rate scenarios.


An analysis of sensitivity of the Group’s profit before tax for the period to changes in the market interest rate
based on a simplified scenario of a 100 basis point (bp) parallel fall or rise in all yield curves (assuming no
asymmetrical movement in yield curves and a constant balance sheet position) is as follows:

                                             31 December 2008                                  31 December 2007

                                                        Other                                            Other
RUR million                               RUR       currencies            Total             RUR      currencies          Total

100 bp parallel increase                 123             252              375               199           115            314
100 bp parallel decrease                (123)           (252)           (375)              (199)         (115)          (314)
168   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      (vi) Changes in the market risk management process
      In 2008 the Group improved its market risk assessment methodology, including assessment of risks related to
      securities purchased under reverse sale and repurchase agreements, and fair value measurement technique
      for promissory notes purchased.


      At the end of 2008 the Group tightened its market risk limit system in respect to change in market risk level,
      in order to reduce risks for currency, fixed income, derivatives, margin trading operation risk.


      In 2009 the Group is planning to implement Early Warning Indicators system in its market risk management
      framework.


      (d) Liquidity risk
      Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial
      liabilities. The Group is exposed to daily calls on its available cash resources from overnight deposits,
      current accounts, maturing deposits, loan drawdowns, guarantees and from margin and other calls on cash-
      settled derivative instruments. The Group does not maintain cash resources to meet all of these needs as
      experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level
      of certainty. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching
      and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental
      to the management of financial institutions, including the Group. It is unusual for financial institutions to
      ever be completely matched since business transacted is often of an uncertain term and of different types.
      An unmatched position potentially enhances profitability, but can also increase the risk of losses.


      (i) Liquidity risk management
      The Group’s approach to management of liquidity is to ensure that it will always have sufficient liquidity to
      meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable
      losses or taking risk of damage to the Group’s reputation.


      The Group seeks to actively support a diversified and stable funding base comprising debt securities in issue,
      long-term and short-term loans from other banks, core corporate and retail customer deposits, accompanied
      by holding diversified portfolios of highly liquid assets, in order to be able to respond quickly and smoothly
      to unforeseen liquidity requirements.


      The liquidity management policy of the Group requires:
      • projecting cash flows by major currencies and considering the level of liquid assets necessary in relation
        thereto;
      • maintaining a diverse range of funding sources;
      • managing the concentration and profile of funding;
      • maintaining debt financing plans;
      • maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any
        interruption to cash flows;
      • maintaining liquidity and funding contingency plans;
      • monitoring balance sheet liquidity ratios against regulatory requirements.


      The Treasury Department receives information from business units regarding the liquidity profile of their
      financial assets and liabilities and details of other projected cash flows arising from projected future
      business. The Treasury Department then provides for an adequate portfolio of short-term liquid assets to
      be maintained, largely made up of short-term liquid trading securities, loans to banks and other inter-bank
      facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.


      The daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios
      covering both normal and more severe market conditions is performed by the Treasury Department. Under
      the normal market conditions, liquidity reports covering the liquidity position of the Group are presented to
      senior management on a weekly basis. Decisions on the Group’s liquidity management are made by the ALCO
      and implemented by the Treasury Department.
MDM Bank                                                                                                                  169
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

(ii) Liquidity risk measurement
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing
liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to
changes in interest and exchange rates.


The tables below show the carrying amounts of assets and liabilities of the Group by their remaining
contractual maturity, with the exception of loan participation notes secured by a pool of car loans, which
have been presented based on their expected repayment dates (refer to Note 17), and trading securities
owned by the Group, which are shown in the category “Demand and less than 1 month” based on the fact
that management believes that all of these trading securities could be liquidated within one month in the
normal course of business.


The position as at 31 December 2008 is set out below:

                                      Less than   From 1 to    From 6 to From 1 to 3   More than   No stated
                                       1 month    6 months    12 months       years      3 years    maturity      Total

Assets
Cash and cash equivalents             77 271              -           -            -           -           -   77 271
Mandatory cash balances
with central banks                      1 036         369          355         178            4            -     1 942
Due from other banks                   23 217       7 653          780            1            -           -    31 651
Trading securities
 - owned by the Group                         -           -           -            -           -       194        194
 - pledged under sale and
   repurchase agreements                      -           -           -            -           -           -          -
Derivative financial instruments        1 240          63        1 350         400           30            -     3 083
Available-for-sale financial assets
- owned by the Group                      307       3 090        2 156       2 164          131        828       8 676
- pledged under sale and
  repurchase agreements                       -       130             -        249             -           -      379
Investments securities held
to maturity                               108             -           -            -           -           -      108
Loans and advances to customers        21 432      60 753      30 813      41 606       40 202             -   194 806
Property, plant and equipment and
intangible assets                             -           -           -            -           -     6 832       6 832
Other assets                            4 149            5          20            1            -           -     4 175
Total assets                          128 760     72 063       35 474      44 599       40 367       7 854     329 117

Liabilities
Due to central banks                    1 317      34 258             -            -           -           -    35 575
Due to other banks                     17 153      23 019      22 303       19 957      14 943             -    97 375
Derivative financial instruments        1 050          45        1 250          27             -           -     2 372
Customer accounts                      61 227      22 051      20 973      10 565          255             -   115 071
Debt securities in issue                  335       5 594        5 418     16 605           748                28 700
Subordinated debt                         286             -           -            -     5 680             -     5 966
Deferred tax liability                        -           -           -            -           -       980        980
Other liabilities                       1 996            8            -            -           -           -    2 004
Total liabilities                     83 364      84 975       49 944      47 154       21 626         980 288 043

Net liquidity gap                     45 396      (12 912) (14 470)        (2 555)      18 741       6 874      41 074
Cumulative liquidity gap              45 396      32 484       18 014      15 459       34 200      41 074
170   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The position as at 31 December 2007 is set out below:

                                            Less than   From 1 to    From 6 to   From 1 to   More than    No stated
                                             1 month    6 months    12 months      3 years     3 years     maturity      Total

      Assets
      Cash and cash equivalents              83 434             -            -           -            -           -   83 434
      Mandatory cash balances with
      central banks                           3 010       1 129          747         529          123             -     5 538
      Due from other banks                   18 773       8 486          303             -       272              -   27 834
      Trading securities
       - owned by the Group                  10 875             -            -           -            -           -    10 875
       - pledged under sale and
      repurchase agreements                   2 865         122              -           -            -           -     2 987
      Derivative financial instruments          198          54             8            -            -           -      260
      Available-for-sale financial assets           -           -            -           -            -       290        290
      Loans and advances to customers        22 483     51 657       28 218       44 148      33 805              -   180 311
      Property, plant and equipment and
      intangible assets                             -           -            -           -            -     5 956       5 956
      Other assets                            3 723         274              -           -            -           -    3 997
      Total assets                          145 361     61 722       29 276       44 677      34 200        6 246 321 482

      Liabilities
      Due to central bank                       846             -            -           -            -           -      846
      Due to other banks                     28 239      31 381      17 707       18 373        5 816             -   101 516
      Derivative financial instruments          275         235          196         168              -           -      874
      Customer accounts                      69 618     29 747       17 975        6 758             34           -   124 132
      Debt securities in issue                2 596       6 490      12 850       20 531       4 164              -   46 631
      Subordinated debt                         211             -            -           -     4 855              -    5 066
      Deferred tax liability                        -           -            -           -            -       770        770
      Other liabilities                       2 690           17            4         38              -           -     2 749
      Total liabilities                     104 475     67 870       48 732       45 868      14 869          770 282 584

      Net liquidity gap                     40 886      (6 148) (19 456)          (1 191)     19 331        5 476     38 898
      Cumulative liquidity gap              40 886      34 738       15 282       14 091      33 422      38 898


      The following table shows the contractual maturities of trading securities of the Group:

                                                                                 31 December 2008            31 December 2007

      Demand and less than 1 month                                                               -                           -
      From 1 to 6 months                                                                         -                       274
      From 6 to 12 months                                                                        -                       159
      From 1 to 3 years                                                                          -                     4 684
      More than 3 years                                                                          -                      6 722
      No stated maturity                                                                      194                       2 023
      Total trading securities                                                                194                     13 862

      Management believes that in spite of a substantial portion of customer accounts being on demand (customer
      current/settlement accounts), diversification of these funds by number and type of depositors, and the past
      experience of the Group indicates that these deposits provide a long-term and stable source of funding for
      the Group.


      The following table shows the undiscounted cash flows on the Group’s financial liabilities and unrecognized
      loan commitments on the basis of their earliest possible contractual maturity. The gross nominal (inflow)/
      outflow disclosed in the table is the contractual, undiscounted cash flow on the financial liability or
      commitment. Loan participation notes secured by a pool of car loans have been presented based on their
MDM Bank                                                                                                                     171
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

expected repayment dates (refer to Note 16). The Group’s expected cash flows on these financial liabilities
and unrecognized loan commitments vary significantly from this analysis.


The position of the Group as at 31 December 2008 was as follows:

                                       Demand                                                       Total gross
                                       and less                                                        nominal
                                          than    From1 to 6    From 6 to   From 1 to   More than     (inflow)/   Carrying
                                       1 month        month    12 months      3 years     3 years       outflow    amount

Non-derivative liabilities
Due to central bank                      1 328     35 664               -           -           -     36 992       35 575
Due to other banks                      17 214     23 424       23 024      21 090       18 647 103 399            97 375
Customer accounts                       56 912     26 226        23 317     12 580          288      119 323      115 071
Debt securities in issue                 1 224       6 773        5 114      17 180       1 000       31 291       28 700
Subordinated debt                          286             -        286       6 711             -      7 283        5 966
Other financial liabilities              1 920             -            -           -           -      1 920        1 958
Gross settled derivative financial
instruments
 - Inflow                             (84 133)     (5 769)      (1 006)       (944)         (82)    (91 934)        (674)
 - Outflow                              84 141       5 759          946         849           86      91 781          612
Total                                  78 892      92 077       51 681      57 466       19 939 300 055 284 583
Credit related commitments             29 855      15 098         4 530       1 927         365       51 775       51 737


The position of the Group as at 31 December 2007 was as follows:

                                       Demand                                                       Total gross
                                       and less                                                        nominal
                                          than From 1 to 6      From 6 to   From 1 to   More than     (inflow)/   Carrying
                                       1 month     month       12 months      3 years     3 years       outflow    amount

Non-derivative liabilities
Due to other banks                     29 203      32 038       18 480      20 833        9 266     109 820       102 362
Customer accounts                      69 855      29 999        19 213       7 890           45 127 002          124 132
Debt securities in issue                 2 984       7 352      14 220      22 878        4 653       52 087       46 631
Subordinated debt                          239             -        239         957       5 388        6 823        5 066
Other financial liabilities              2 493           17            4         38             -      2 552        2 552

Gross settled derivative
financial instruments
 - Inflow                             (57 680)    (10 648)      (3 850)     (1 750)        (168)    (74 096)        (260)
 - Outflow                             57 799      10 743         3 996       1 885          178      74 601         874
Total                                 104 893      69 501       52 302      52 731       19 362 298 789           281 357
Credit related commitments             42 937        7 063        7 164       4 715         156       62 035       61 991

The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirement of
the CBR. These ratios include:
• Instant liquidity ratio (N2), which is calculated as the ratio of highly-liquid assets to liabilities payable on
  demand.
• Current liquidity ratio (N3), which is calculated as the ratio of liquid assets to liabilities maturing within
  30 calendar days.
• Long-term liquidity ratio (N4), which is calculated as the ratio of assets maturing after one year to capital
  and liabilities maturing after one year.
172   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      MDM Bank was in compliance with the above ratios during the year ended 31 December 2008 and year ended
      31 December 2007. The following table presents the mandatory liquidity ratios for MDM Bank calculated as
      at 31 December 2008 and 31 December 2007:

                                                                 Requirement      31 December 2008         31 December 2007

      Instant liquidity ratio (N2)                            Minimum 15%                 120.9%                   124.8%
      Current liquidity ratio (N3)                            Minimum 50%                 132.4%                   118.9%
      Long-term liquidity ratio (N4).                       Maximum 120%                    72.1%                   71.2%


      (iii) Changes in the liquidity risk management processes
      To improve the liquidity risk management system, at the end of 2007 the Bank introduced a system of early
      warning indicators. The system of early warning indicators is aimed at identifying an increase in liquidity
      risk at the early stages. The system is based on day-to-day monitoring of a number of the Bank’s balance sheet
      ratios, market indicators of financial market conditions as well as other external available data.


      (e) Country risks
      Country risk is the risk of losses as a result of foreign counterparties failing to meet their obligations due to
      economical, political and social changes in the respective country.


      The majority of the operations of the Group are located in Russia. The Group accepts other country risk only
      after performing a separate analysis.


      The majority of the operations of the Group are located in Russia. The geographical analysis of the Group’s
      assets and liabilities as at 31 December 2008 is set out below:

                                                                                            Non-OECD
                                                               Russia OECD countries         countries                Total

      Assets
      Cash and cash equivalents                              51 184            25 428            659               77 271
      Mandatory cash balances with central banks                 415                -           1 527               1 942
      Due from other banks                                   15 287            16 363                 1            31 651
      Trading securities
       - owned by the Group                                      194                -                  -              194
       - pledged under sale and repurchase agreements                                                                     -
      Derivative financial instruments                         1 106             347           1 630                3 083
      Available-for-sale financial assets
      - owned by the Group                                     8 676                -                  -            8 676
      - pledged under sale and repurchase agreements             379                -                  -              379
      Investments securities held to maturity                    108                -                  -              108
      Loans and advances to customers                       192 914              723            1 169             194 806
      Property, plant and equipment and intangible assets      6 812                -                20             6 832
      Other assets                                             3 947              10                 218             4 175
      Total assets                                          281 022            42 871          5 224              329 117

      Liabilities
      Due to central banks                                   35 575                 -                  -           35 575
      Due to other banks                                     17 557            76 278          3 540               97 375
      Derivative financial instruments                           760             409            1203                2 372
      Customer accounts                                     110 886              832           3 353              115 071
      Debt securities in issue                                 2 997           25 703                  -           28 700
      Subordinated debt                                             -           5 966                  -            5 966
      Deferred tax liability                                     879             101                   -              980
      Other liabilities                                        1 894              36                  74            2 004
      Total liabilities                                     170 548        109 325              8 170            288 043
      Net position                                          110 474        (66 454)           (2 946)
MDM Bank                                                                                                           173
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The geographical analysis of the Group’s assets and liabilities as at 31 December 2007 is set out below:

                                                                                   Non-OECD
                                                      Russia   OECD countries       countries              Total

Assets
Cash and cash equivalents                            23 420          58 673            1 341          83 434
Mandatory cash balances with central banks            3 883                 -          1 655           5 538
Due from other banks                                 15 524          11 870             440           27 834
Trading securities
 - owned by the Group                                10 875                 -               -         10 875
- pledged under sale and repurchase
agreements                                            2 987                 -               -          2 987
Derivative financial instruments                        114               50              96               260
Available-for-sale financial assets                     290                 -               -              290
Loans and advances to customers                     178 181           1 087            1 043         180 311
Property, plant and equipment and
intangible assets                                     5 932                 -             24           5 956
Other assets                                          3 555             240              202           3 997
Total assets                                       244 761           71 920            4 801         321 482

Liabilities
Due to central bank                                     846                 -               -              846
Due to other banks                                   17 845          77 706            5 965         101 516
Derivative financial instruments                        539             322               13               874
Customer accounts                                    74 982          20 699          28 451          124 132
Debt securities in issue                             12 804          33 799               28          46 631
Subordinated debt                                          -          5 066                 -          5 066
Deferred tax liability                                  752               18                -              770
Other liabilities                                     2 535                4             210           2 749
Total liabilities                                  110 303          137 614          34 667         282 584
Net position                                       134 458         (65 694)         (29 866)


The majority of credit related commitments, as at 31 December 2008 and 31 December 2007, are related to
residents of the Russian Federation.


The geographical classification of financial assets, liabilities and credit related commitments has been based
on the country in which the counterparty is located. The classification of tangible assets (precious metals,
property, plant and equipment) has been based on the country in which they are physically held.


As at 31 December 2008, loans and advances to customers of RUR 12 143 million (31 December 2007:
RUR 17 958 million), included in the above tables as being with Russian counterparties, have been granted
to subsidiaries and affiliates of these Russian counterparties located outside of the Russian Federation.

(f) Capital management
(i) Capital management policy
The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market
confidence and to sustain future development of its business.


The Central Bank of Russia sets and monitors regulatory capital requirements for MDM Bank, the lead
operating entity of the Group. The Central Bank of Latvia sets and monitors capital requirements for Latvian
Trade Bank.


Under the current capital requirements set by the CBR banks have to maintain a ratio of capital to risk
weighted assets (“statutory capital adequacy ratio”) above the prescribed minimum level. As at 31 December
2008, this minimum level is 10% (31 December 2007: 10%).
174   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      MDM Bank was in compliance with the statutory capital adequacy ratio during the year ended 31 December
      2008 and 31 December 2007. As at 31 December 2008, the statutory capital of MDM Bank on a standalone
      basis was RUR 41 500 million (31 December 2007: RUR 35 850 million). The statutory adequacy capital ratio
      of MDM Bank as at 31 December 2008 was 14.6% (31 December 2007: 14.4%).


      The Group and the Bank also are subject to minimum capital requirements established by covenants under
      liabilities incurred by the Bank or the Group, including capital adequacy levels calculated in accordance with
      the requirements of the Basle Accord, as defined in the International Convergence of Capital Measurement
      and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market
      risks (updated November 2005), commonly known as Basel I. As at 31 December 2008 and 31 December
      2007, such minimum capital requirements for total capital ratio was 12%.


      The following table shows the composition of the Group’s capital position calculated in accordance with the
      requirements of the Basle Accord, as at 31 December 2008 and 31 December 2007:

                                                                             31 December 2008          31 December 2007

      Tier 1 capital
      Share capital                                                                     1 794                    1 794
      Share premium                                                                   14 198                    14 198
      Cumulative translation reserves                                                    326                        24
      Retained earnings                                                               23 179                    19 875
      Total tier 1 capital                                                            39 497                    35 891

      Tier 2 capital
      Asset revaluation reserve                                                        1 577                     3 007
      Subordinated debt (unamortised portion)                                           3 010                    3 487
      Total tier 2 capital                                                             4 587                     6 494

      Total capital                                                                   44 084                    42 385

      Risk-weighted assets
      Banking book                                                                   241 232                  225 322
      Trading book                                                                      5 414                   21 477
      Total risk weighted assets                                                    246 646                   246 799
      Total capital expressed as a percentage of risk-weighted
      assets (“total capital ratio”)                                                     17.9                      17.2
      Total tier 1 capital expressed as a percentage of risk-
      weighted assets (“tier 1 capital ratio”)                                           16.0                     14.5

      The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the
      nature of – and reflecting an estimate of credit, market and other risks associated with – each asset and
      counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for
      off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential
      losses.


      The Group and the Bank have complied with all externally imposed capital requirements as at
      31 December 2008 and 31 December 2007.


      The management of the Group believes that a 10% tier I capital ratio and a 12% total capital ratio, calculated
      in accordance with the requirements of the Basle Accord, are the appropriate minimum capitalization levels
      for the Group and MDM Bank.


      The allocation of capital between specific operations and activities is, to a large extent, driven by optimization
      of the return achieved on the capital allocated. Although maximization of return on risk-adjusted capital is
      the principal basis used in determining how capital is allocated within the Group to particular operations
      or activities, it is not the sole basis used for decision making. Account is also taken of synergies with other
      operations and activities, the availability of management and other resources and the fit of the activity with
       MDM Bank                                                                                                           175
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       the Group’s longer term strategic objectives. The Group’s policies in respect of capital management and
       allocation are regularly reviewed by the Board of Directors of MDM Bank through approval and review of
       annual budgets, including those for various business segments of the Group.


       (ii) Changes in the capital management policy
       In the end of 2007 the Group established a policy of allocation of capital by individual transactions and
       activities. This policy includes:
       • the methodology of calculation of capital at risk allocated to individual transactions and activities;
       • the methodology of calculation of capital used for each segment of the Group’s business;
       • the methodology of calculation of RAROC and shareholder value added (SVA).


       Target returns on allocated capital and of the SVA amounts were set for the Group and individual business
       units within the Group in 2008 budgets.


29. Contingent Liabilities and Commitments
       (a) Legal proceedings
       In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes
       that the ultimate liability, if any, arising from such actions or complaints, will not have a material adverse
       effect on the financial condition or the results of future operations of the Group.


       (b) Tax legislation
       The Group operates in a number of tax jurisdictions. In the normal course of business, management must
       interpret and apply existing legislation to transactions with third parties and its own activities.


       Current Russian tax legislation is principally based on the form in which transactions are documented and
       the underlying accounting treatment as prescribed by Russian Accounting Rules. The interpretation of
       Russian tax legislation by the tax authorities and court practice, which are constantly changing, in the future
       may focus less on the form and more on the substance of a transaction. Recent events within the Russian
       Federation suggest that the tax authorities are taking a more assertive position in their interpretation and
       enforcement of tax legislation. Tax years remain open to normal audit by the Russian tax authorities for three
       years; during such time any change in interpretation or practice, even if there is no change in Russian tax
       legislation, could be applied retroactively. The interpretation and practice in other jurisdictions in which the
       Group operates are also changing, sometimes with retroactive effect.


       In management’s opinion, the Group is in substantial compliance with the tax and other laws governing its
       operations in Russia and in other tax jurisdictions. However, a risk remains that the relevant authorities could
       take different positions with regard to interpretative issues or that court practice could develop adversely to
       positions taken by the Group and the effect on the financial position of the Group, should the authorities
       succeed in asserting their positions, could be significant.


       In August 2008, MDM Bank received the final results of the tax audit for 2005-2006 from the Federal Tax
       Service of the Ministry of Finance. In accordance with the resolution, the tax authorities have assessed
       additional taxes against MDM Bank of approximately RUR 194 million and fines and penalties at a maximum
       of RUR 63 million.


       The Bank filed a complaint in arbitration to overrule the tax inspectors’ claim. The final hearing on the
       issue took place on 20 February 2009 in St. Petersburg Arbitration Court and the complaint of the Bank
       was upheld by the Court, while the inspectors’ claim was overruled. The tax authorities are entitled to
       take an appeal on this ruling due to Federal Tax Service internal requirements regardless of the arbitration
       perspectives. Accordingly, the Group has not recorded provisions in respect of the above contingencies in
       these consolidated financial statements.


       (c) Capital commitments
       As at 31 December 2008, the Group had capital commitments mainly in respect of the development of its
       branch network and system enhancements, totalling approximately RUR 132 million (31 December 2007:
       RUR 315 million).
176   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      (d) Operating lease commitments
      Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases
      are as follows:

                                                                          31 December 2008         31 December 2007

      Not later than 1 year                                                            503                     547
      Later than 1 year and not later than 5 years                                   1 559                   1 483
      Later than 5 years                                                               417                     552
      Total operating lease commitments                                              2 479                   2 582


      During the year ended 31 December 2008 RUR 869 million was recognised as an expense in the consolidated
      income statement in respect of operating leases (31 December 2007: RUR 486 million).

      (e) Credit related commitments
      Credit related commitments comprise letters of credit, guarantees and undrawn loan commitments.
      The contractual amount of these commitments represents the value at risk should amounts under the
      contract be fully drawn upon.


      Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial
      letters of credit – which are written undertakings by the Group on behalf of a customer authorising a third
      party to draw drafts on the Group up to a stipulated amount under specific terms and conditions – are
      collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than
      a direct loan. The primary purpose of undrawn loan commitments is to ensure that funds are available to
      a customer as required. With respect to credit risk on commitments to extend credit, the Group is potentially
      exposed to loss in an amount equal to the total unused commitments. However, the likely amount of such
      potential loss is less than the total unused commitments, as most commitments to extend credit are contingent
      upon customers maintaining specific credit standards.


      Outstanding credit related commitments are as follows:

                                                                          31 December 2008        31 December 2007

      Letters of credit                                                            25 340                  28 125
      Undrawn loan commitments                                                     19 296                  18 282
      Guarantees issued                                                              7 139                 15 628
      Total credit related commitments                                             51 775                  62 035


      The Group creates provisions for losses on a collective and individual basis for its credit related
      commitments.


      Movements in provision for losses on credit related commitments are as follows:

                                                                                 Year ended              Year ended
                                                                          31 December 2008        31 December 2007

      Provision for losses on credit related commitments as at
      1 January                                                                         44                      50
      Effect of foreign currency translation                                             3                      (1)
      Provision during the year                                                         (9)                     (5)
      Provision for losses on credit related commitments as at
      31 December (Note 19)                                                             38                      44

      The total outstanding contractual amount of guarantees, letters of credit and undrawn loan commitments
      does not necessarily represent future cash requirements, as these commitments may expire or terminate
      without being funded.


      Currency analysis of credit related commitments is disclosed in Note 28. Information on related party
      transactions is disclosed in Note 31.
       MDM Bank                                                                                                           177
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       (f) Fiduciary assets
       The Group provides custody services to its customers, whereby it holds securities on behalf of customers
       and receives fee income for providing these services. These securities are not assets of the Group and are not
       recognised in the consolidated balance sheet.


       The Group also provides asset management services to individuals, trusts, retirement benefit plans and other
       institutions, whereby it holds or invests funds received at the discretion of the customer. The Group receives
       fee income for providing these services. Assets for which the Group provides asset management services to its
       customers are not assets of the Group and are not recognised in the consolidated balance sheet. The Group is
       not exposed to any credit risk relating to such placements, as it does not guarantee these investments.


       As at 31 December 2008, total assets for which the Group provides asset management services to its customers
       were RUR 1 240 million including mutual funds of RUR 180 million and discretionally managed portfolios
       of RUR 868 million (31 December 2007: RUR 4 809 million including mutual funds of RUR 304 million and
       discretionally managed portfolios of RUR 4 505 million).


30. Fair Value of Financial Instruments
       The Group has performed an assessment of its financial instruments, as required by IFRS 7 “Financial
       Instruments: Disclosures”.


       The estimated fair value of cash and cash equivalents, which is comprised of cash, correspondent accounts
       with central banks, correspondent accounts, overnight deposits with other banks and other floating rate
       placements is their carrying value.


       The estimated fair value of mandatory cash balances with central banks represents the amount proportionate
       to the discounted amount of estimated future cash flows on due to other banks, customer accounts and debt
       securities in issue to which these mandatory cash balances relate.


       The estimated fair value of fixed rate balances due from other banks, including central banks, is calculated
       based on discounted expected future principal and interest cash flows.


       The estimated fair value of quoted trading securities, derivative financial instruments and other financial
       assets at fair value through profit or loss and available-for-sale financial assets is based on quoted market
       prices at the balance sheet date without any deduction for transaction costs. For securities and derivative
       financial instruments not traded in an active market, the fair value is estimated by using valuation techniques,
       which include the use of recent arm’s length transactions, discounted cash flow analysis and other valuation
       techniques commonly used by market participants.


       The estimated fair value of loans and advances to customers represents the discounted amount of estimated
       future cash flows expected to be received.


       The estimated fair value of due to other banks and customer accounts balances, which are payable on demand,
       is their carrying value. The estimated fair value of due to other banks and customer accounts balances,
       which are not payable on demand, and other borrowed funds, which are not quoted in an active market, is
       calculated based on discounted expected future principal and interest cash flows.


       The estimated fair value of debt securities in issue and subordinated debt is based on quoted market prices at
       the balance sheet date without any deduction for transaction costs.


       The estimated fair value of all other financial instruments represents the discounted amount of estimated
       future cash flows expected to be received or paid.


       Where discounted cash flow techniques are used, estimated future cash flows are based on management’s
       best estimates and the discount rate is a market-based rate for a similar instrument at the balance sheet
       date.
178   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The estimates of fair value are intended to approximate the amount for which a financial instrument could
      be exchanged between knowledgeable, willing parties in an arm’s length transaction. However given the
      uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable
      in an immediate sale of the assets or settlement of liabilities.


      The following table summarises the fair values of major financial assets and liabilities:

                                                                   31 December 2008               31 December 2007

                                                             Carrying value     Fair value Carrying value      Fair value

      Cash and cash equivalents                                    77 271        77 271           83 434        83 434

      Mandatory cash balances with central banks                    1 942         1 822            5 538          5 274

      Due from other banks                                         31 651        31 496           27 834        27 853

      Trading securities:
       - owned by the Group                                           194             194         10 875        10 875
       - pledged under sale and repurchase agreements                     -             -          2 987         2 987

      Derivative financial instruments                              3 083         3 083              260              260

      Available-for-sale financial assets:
      - owned by the Group                                          8 676         8 676              290              290
      - pledged under sale and repurchase agreements                  379             379               -                -

      Investment securities held to maturity                          108             393               -                -

      Loans and advances to customers:
      - Loans to corporate customers                             130 507        128 252         117 326        117 054
      - Loans to individuals                                       37 601        37 602           35 513        35 513
      - Investment banking loans                                   10 122        10 064           16 107        16 114
      - Small business loans                                       14 209        13 201            7 761          7 676
      - Net investment in finance lease                             2 367         2 287            3 604          3 591

      Due to central bank                                        (35 575)       (35 558)           (846)             (846)
      Due to other banks
      - Correspondent accounts and overnight deposits of
      other banks                                                  (3 421)       (3 421)          (6 039)       (6 039)
      - Bilateral structured financing                             (9 073)       (8 977)          (7 042)       (7 042)
      - Syndicated loans                                           (8 281)       (8 063)       (24 839)       (24 906)
      - Trade finance facilities                                 (31 569)       (31 931)       (29 116)       (29 008)
      - Loans from international financial institutions          (29 396)       (28 783)        (11 515)       (11 273)
      - Term deposits from other banks                           (15 634)       (15 699)       (15 648)        (15 680)
      - Sale and repurchase agreements                                    -             -         (7 317)       (7 395)

      Derivative financial instruments                             (2 372)       (2 372)            (874)            (874)

      Customer accounts:
      - State organisations
       Current/settlement accounts                                      (4)           (4)             (1)              (1)
       Term deposits                                             (10 600)       (10 584)          (4 016)       (4 021)

      - Other legal entities
       Current/settlement accounts                               (31 587)       (31 587)       (30 867)       (30 867)
       Term deposits                                             (42 451)       (42 486)       (68 426)        (68 416)
       Sale and repurchase agreements                                     -             -         (1 316)       (1 316)
MDM Bank                                                                                                                     179
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

                                                                     31 December 2008             31 December 2007

                                                             Carrying value       Fair value Carrying value    Fair value

- Retail customers
 Current/demand accounts                                             (5 067)       (5 067)         (5 412)      (5 412)
 Term deposits                                                   (25 362)        (25 377)        (14 094)      (14 069)

Debt securities in issue:
- Unsecured loan participation notes                              (11 808)         (9 946)       (11 043)      (10 825)

- Loan participation notes secured by diversified
  payment rights (“DPR”)                                             (9 791)       (9 861)       (14 133)      (14 239)
- Promissory notes                                                   (5 370)       (5 329)         (9 771)      (9 708)

- Loan participation notes secured by a pool of car loans            (1 282)       (1 288)         (4 153)      (4 161)
- Bonds                                                                (422)            (427)     (6 007)       (6 122)
- Deposit certificates                                                  (27)             (25)      (1 524)      (1 527)

Subordinated debt                                                    (5 966)       (5 990)        (5 066)       (5 099)



The following table shows an analysis of financial instruments recorded at fair value, between those whose
fair value is based on quoted market prices, those involving valuation techniques where all the model inputs
are observable in the market, and those where the valuation techniques involve the use of non-market
observable inputs as at 31 December 2008:

                                                                         Valuation         Valuation
                                                                        techniques techniques based
                                                            Quoted based on market    on non-market
                                                     market price observable inputs observable inputs                Total

Financial assets
Trading securities
- owned by the Group                                          170                 24                   -             194
- pledged under sale and repurchase
  agreements                                                     -                  -                  -                 -
Derivative financial instruments                                 -             3 083                   -         3 083
Available-for-sale financial assets
- owned by the Group                                        5 488              2 738               450           8 676
- pledged under sale and repurchase
  agreements                                                  379                   -                  -             379

Financial liabilities
Derivative financial instruments                                 -             2 372                   -         2 372
180    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       The following table shows an analysis of financial instruments recorded at fair value, between those whose
       fair value is based on quoted market prices, those involving valuation techniques where all the model inputs
       are observable in the market, and those where the valuation techniques involve the use of non-market
       observable inputs as at 31 December 2007:

                                                                            Valuation         Valuation
                                                                           techniques techniques based
                                                            Quoted    based on market    on non-market
                                                        market price observable inputs observable inputs              Total



        Financial assets
        Trading securities
        - owned by the Group                                 5 907              4 968                  -          10 875
        - pledged under sale and repurchase
        agreements                                           2 938                  49                 -            2 987
        Derivative financial instruments                       260                    -                -              260
        Other financial assets at fair value through
        profit or loss                                            -               226                  -              226
        Available-for-sale financial assets                       -                   -            290                290

        Financial liabilities
        Derivative financial instruments                          -               874                  -              874




31. Related Party Transactions
       For the purposes of these consolidated financial statements, parties are considered to be related if one party
       has the ability to control the other party or exercise significant influence over the other party in making
       financial or operational decisions as defined by International Financial Reporting Standard IAS 24 “Related
       Party Disclosures”. In considering each possible related party relationship, attention is directed to the
       substance of the relationship, not merely the legal form.


       Related parties comprise immediate and indirect parent companies and ultimate beneficiaries of the Group,
       directors and key management personnel, and other related parties. Other related parties are entities, which
       are under common control with the Group, and entities, which are significantly influenced by the Group’s
       beneficiaries, directors and key management personnel. As at 31 December 2008, these primarily consisted
       of Joint Stock Company Siberian Coal Energy Company (SUEK) (coal and energy), holding companies for
       SUEK, and other fellow subsidiaries. Joint Stock Company Mineral and Chemical Company EuroChem
       (mineral fertilizers) was a related party until May 2007.


       Banking transactions are entered into in the normal course of business with the related parties. These
       include settlements, loans, deposit taking, trade finance, securities and foreign currency transactions. These
       transaction are priced mainly on normal market terms.


       The following table shows credit exposure of the Group to related parties as at 31 December 2008 and
       31 December 2007:

                                                               31 December 2008                    31 December 2007

                                                            Amount     % of Total assets         Amount    % of Total assets

        Total credit balance sheet exposure
        (net of impairment)                                     111                 0.1             205                 0.1
        Total credit on and off balance sheet
        exposure (net of impairment)                            111                 0.1             205                 0.1
MDM Bank                                                                                                                         181
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The outstanding balances as at 31 December 2008 with related parties are as follows:

                                                                               (d) Other related parties
                                               (b)    (c) Immediate
                                         Directors               and              Companies
                                   (a)    and key    indirect parent               controlled
                               Benefi-   manage-      companies of                    by key
                               ciaries       ment           the Bank    SUEK     management         Other       Total    Total

Assets
Due from other banks                 -           -                 -       -               24              -      24      24
Trading securities
   - Corporate shares                -           -                 -       2                  -            -       2        2
Available-for-sale financial
assets
   - Corporate bonds                 -           -                 -       -                41             -      41      41
Loans and advances to
customers (gross)                    -        37                   -       8                  -            -       8      45
Loan impairment                      -         (1)                 -       -                  -            -        -      (1)
Total assets                         -        36                   -      10               65              -      75     111

Liabilities
Due to other banks                   -           -                 -       -              530              -    530      530
Customer accounts
 - Current accounts                 6         42                41      155                   -    1 722       1 877    1 966
 - Term deposits               1 378         423                   -    658                   -            -    658     2 459
Total liabilities              1 384         465                41      813               530     1 722        3 065    4 955


The results of transactions with related parties for the year ended 31 December 2008 are as follows:

                                                                               (d) Other related parties
                                             (b)            (c)
                                       Directors Immediate and                   Companies
                                   (a) and key indirect parent                    controlled
                               Benefi- manage-     companies of                      my key
                               ciaries     ment       the Bank         SUEK     management         Other        Total    Total

Interest income on amount
due from other banks                 -          -                 -        -                5              -       5        5
Interest income on loans
and advances to customers            -          3                 -       5                  -             -       5        8
Loan impairment reversal             -        (1)                 -       2                  -             -       2        1
Interest expense on
customer accounts               (146)        (26)                 -    (160)                 -        (2)      (162)    (334)
Results from trading in
foreign currencies                   -          -                 -     243                 7         28        278      278
Operating expenses                   -     (726)              (64)         -                 -             -        -    790
Fee and commission
income/(expenses)                    -          -                 -       5                 6              -     11       11
182   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      The outstanding balances as at 31 December 2007 with related parties are as follows:

                                                                                       (c)
                                                                         Immediate and          (d) Other related parties
                                                                 (b)      indirect parent
                                              (a) Directors and key    companies of the
                                    Beneficiaries     management                    Bank        SUEK        Other       Total      Total

      Assets
      Trading securities
      - Corporate shares                        -                  -                     -            7          -           7        7
      Loans and advances to
      customers (gross)                         -                  -                     -          200          -     200         200
      Loan impairment                           -                  -                     -           (2)         -          (2)     (2)
      Total assets                              -                  -                     -          205          -      205        205

      Liabilities
      Customer accounts
      - Current accounts                      13                19                    13            702          -      702        747
      - Term deposits                       951                199                       -     2 462         124     2 586        3 736
      Total liabilities                     964                218                    13       3 164         124     3 288        4 483


      The results of transactions with related parties for the year ended 31 December 2007 are as follows:

                                                                                      (c)
                                                               (b)      Immediate and           (d) Other related parties
                                                         Directors       indirect parent
                                              (a)         and key            companies
                                    Beneficiaries     management            of the Bank         SUEK        Other      Total       Total

      Interest income on
      loans and advances to
      customers                                 -                 -                     -            58          -          58      58
      Interest income received
      from securities issued by
      related parties                           -                 -                     -            13          -          13      13
      Loan impairment reversal                  -                 -                     -             4          -           4        4
      Interest expense on
      customer accounts                     (14)               (11)                 (47)             (2)   (244)     (246)        (318)
      Net trading gain from
      trading in securities
      issued by related parties                 -                 -                     -            15          -          15      15
      Results from trading in
      foreign currencies                        -                 -                  (3)             12          -          12        9
      Net fee and commission
      income                                    -                 -                     -             7          -           7        7
      Operating expenses                        -            (934)                      -           (81)         -     (81) (1 015)


      (a) Transactions with beneficiaries of the Group
      As at 1 December 2008 and 31 December 2007 term deposits from beneficiaries had remaining maturities
      less than one year. The table below summarises information about average effective interest rates and
      outstanding balances of term deposits from beneficiaries:

                                              31 December 2008                                         31 December 2007

                                      RUR           USD        EUR          Total            RUR           USD        EUR          Total

      Outstanding balances             33           645       700         1 378              797           86          68          951
      Average effective
      interest rate, %               10.8           9.2        9.6           9.4             11.0          7.2         6.8        10.3
MDM Bank                                                                                                               183
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)

The table below summarises information about average balances of term deposits of beneficiaries of the
Group:

                                                      Year ended 31 December 2008        Year ended 31 December 2007

RUR                                                                          1 078                               21
USD                                                                            159                              123
EUR                                                                            147                               63


(b) Transactions with the members of the board of directors and key management personnel
The total remuneration of the members of the Board of Directors of MDM Bank, including discretionary
compensation, amounted to RUR 91 million for the year ended 31 December 2008 (31 December 2007:
RUR 86 million). MDM Bank’s Board of Directors was composed of 7 members, as at 31 December 2008
(31 December 2007: 7 members), all of them non-executive. The Board has elected three Board Committees:
Audit and Risk Committee, Strategy Committee, and Nomination and Remuneration Committee. Boards
stand for re-election every year under Russian law.


Key management personnel comprise members of the Management Board of MDM Bank, heads of core
business units and the Chief accountant of MDM Bank. As at 31 December 2008, key management personnel
comprised of 10 persons (31 December 2007: 11 persons).


The total remuneration of key management personnel, including discretionary compensation, is as follows:

                                                                                Year ended                Year ended
                                                                         31 December 2008          31 December 2007

Salary and bonuses                                                                   596                       716
Contributions to the Russian Federation State pension fund                              1                         1
Termination benefits                                                                   38                       131
Total remuneration of key management personnel                                       635                       848


The Group does not provide post-employment, share-based or other long-term benefits to the directors and
key management personnel.


The table below summarises information about average effective interest rates and outstanding balances of
term deposits from the directors and key management personnel:

                                         31 December 2008                             31 December 2007

                                 RUR        USD        EUR       Total         RUR           USD     EUR       Total

Outstanding balances                42      270        111       423          163            15       21       199
Average effective interest
rate, %                         10.8         9.1       9.4        9.4          9.5           8.6     5.8        9.0


The table below summarises information about the remaining maturity of deposits from the directors and
key management personnel:

                                                                         31 December 2008          31 December 2007

Term deposits due to customers
Up to one year remaining maturity                                                      59                      172
From 1 to 5 years remaining maturity                                                 364                         27
184   MDM Bank
      Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
      (expressed in millions of Russian Roubles – refer to Note 3)

      (c) Transactions with immediate and indirect parent companies of the Bank
      The table below summarises information about average balances with immediate and indirect parent
      companies of the Bank and entities controlled by these companies:

                                                          Year ended 31 December 2008     Year ended 31 December 2007

      Term deposits due to customers
      RUR                                                                        192                             618
      USD                                                                         46                                1
      EUR                                                                         34                                1



      (d) Transactions with other related parties
      The table below summarises information about average effective interest rates and outstanding balances
      with other related parties:

                                               31 December 2008                         31 December 2007

                                        RUR      USD        EUR        Total     RUR       USD        EUR        Total

      Due from other banks
      Outstanding balance                24         -             -     24          -         -            -         -
      Average effective interest
      rate, %                           12.0        -             -    12.0         -         -            -         -

      Corporate shares
      Outstanding balance                 2         -             -       2        7          -            -        7

      Corporate bonds
      Outstanding balance                41         -             -     41          -         -            -         -
      Coupon rate, %                    10.1        -             -    10.1         -         -            -         -

      Loans and advances to
      customers
      Outstanding balance                 8         -             -       8     200           -            -    200
      Average yield to maturity, %     26.5         -             -   26.5      10.8          -            -    10.8
      Current accounts                 1 876       1              -   1 877         -         -            -         -

      Term deposits due to
      customers
      Outstanding balance               658         -             -    658     2 462       124             -   2 586
      Average effective interest
      rate, %                            8.5        -             -     8.5      8.4        6.0            -     8.3

      Due to other banks
      Outstanding balance               150      380              -    530          -         -            -         -
      Average effective interest
      rate, %                            8.5      2.6             -     6.4         -         -            -         -

      Balances on current accounts of other related parties are on terms similar to those for third parties.
        MDM Bank                                                                                                                 185
        Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
        (expressed in millions of Russian Roubles – refer to Note 3)

       The table below summarises information about average balances with other related parties:

                                                              Year ended 31 December 2008         Year ended 31 December 2007

        Corporate bonds
        RUR                                                                                 2                                -
        Corporate shares
        RUR                                                                                 7                                7
        Loans and advances to customers
        RUR                                                                               99                            200
        Term deposits due to customers
        RUR                                                                            5 383                          2 462
        USD                                                                               29                             124
        Credit related commitments
        RUR                                                                                 -                                -
        Due to other banks
        RUR                                                                               70                                 -
        USD                                                                              524                                 -
        EUR                                                                               98                                 -



       The table below summarises information about the remaining maturity of balances with other related parties:

                                                                                    31 December 2008        31 December 2007

        Loans and advances to customers
        Up to one year remaining maturity                                                         8                     200
        Term deposits
        Up to one year remaining maturity                                                       658                   2 586



32. Principal Subsidiaries
       Included in the table below is the list of the principal subsidiaries of the Group, as at 31 December 2008 and
       31 December 2007.

                                                                                        Voting rights/      Voting rights/
                                                                                       equity owned, %     equity owned, %

        Name                                                         Jurisdiction       31 December 2008    31 December 2007

        Banking
        Latvian Trade Bank                                               Latvia                   100.0                100.0

        Securities trading
        MDM Investments Limited                                         Cyprus                    100.0                100.0
        MCM Russian Investments Limited                                 Cyprus                    100.0                100.0

        Asset management
        MDM Asset Management                                             Russia                   100.0                100.0

        Leasing
        LeasingPromHold                                                  Russia                   100.0                100.0
        MDM Leasing                                                      Russia                   100.0                100.0

        Special purpose entities for financing transactions
        MDM International Funding plc                                   Ireland                   100.0                100.0
        Taganka Car Loan Finance plc                                    Ireland                   100.0                100.0
        MDM DPR Finance Company S.A.                                Luxemburg                     100.0                100.0
        MDM ECP Limited                                                 Ireland                   100.0                100.0
186    MDM Bank
       Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
       (expressed in millions of Russian Roubles – refer to Note 3)

       Latvian Trade Bank is a commercial bank licensed by the Central Bank of Latvia to perform banking
       operations.

       MDM Investments Limited is a company licensed by the Cyprus Securities and Exchange Commission
       specializing in securities brokerage, trading on its own account and asset management.


       MCM Russian Investments Limited is a company that specializes in trading in securities on its own account
       and providing margin loans to customers of MDM Investments Limited.


       MDM Asset Management is a company licensed by the Russian Federal Financial Markets Service to manage
       third-party assets and collective investment schemes.


       LeasingPromHold is a company specializing in provision of leasing services to corporate customers of the Group.


       MDM International Funding plc, Taganka Car Loan Finance plc, MDM DPR Finance Company S.A. and MDM
       ECP Limited are special purpose entities used for financing transactions in international capital markets
       such as loan participation note issues, asset securitisations, future flows (DPR) securitisations etc. These
       SPEs are controlled by the Group through the predetermination of the activities of SPEs, having rights to
       obtain the majority of benefits of the SPEs, and retaining the majority of the residual risks and rewards
       related to the SPEs.


33. Subsequent Events
       In April 2009 the Group acquired 84% of the share capital of OAO Moskvichka. The company’s main asset
       is premises in Moscow with a fair value of RUR 839 million. The purchase consideration paid by the Group
       was RUR 702 million.
                                                                                         187


Contact Details




   Head Office
   Address: 33/1 Kotelnicheskaya Embankment, Moscow, 115172, Russia
   Call Center (24 hours):                                            +7(495) 797-9500
   fax (general):                                                     +7(495) 797-9501
   Small business Lending:                                            +7(800) 333-0800
   Cardholder Support Center (24 hours):                              +7(495) 795-2500


   Telex                   414121 MDMD RU
   S.W.I.F.T.              MOBW RU MM
   Bloomberg               MDMG
   Reuters                 MBWM, MDMM, MDMB
   X-400                   C: USSR, A: SOVMAIL
   SPRINT                  MDMBANK/CUSTOMERS


   Website:                www.mdmbank.ru; www.mdmbank.com


   Settlements
   Ms. Tatyana Berezhnova,
   Head of Interbank Transactions
   Tel.: +7(495) 960-2258
   E-mail: korr@mdmbank.com


   Investor Relations
   Mr. Sam VanDerlip
   Head of Investor Relations
   Tel.: +7(495) 221-3075
   Fax: +7(495) 221-3076
   E-mail: sam.vanderlip@mdmbank.com


   Public Relations
   Mr. Pavel Nefedov
   Head of Public Relations
   Tel.: +7(495) 363-2741
   Fax: +7(495) 363-2742
   E-mail: pavel.nefedov@mdmbank.com
188   MDM Bank Annual report 2008



Principal Correspondent Accounts




                           Account No. 30101810900000000466
      RUR
                           OPERU of MosKovsky GTU of the Bank of Russia

                           Account No. 890-0514-841
      USD                  BANK OF NEW YORK,
                           One Wall Street, 8th Floor, New York, NY, 10286 USA, S.W.I.F.T: IRVTUS3N

                           Account No. 100947414900
      EUR                  DEUTSCHE BANK AG
                           12, Taunusanlage 60262 Frankfurt/Main, Germany, S.W.I.F.T: DEUTDEFF

                           Account No. 0230-69226.05Z
                           UBS AG
      CHF
                           P.O. Box 8098, Zurich, Switzerland, Global Services Financial Institutions, S.W.I.F.T:
                           UBSWCHZH80A

                           Account Nо. 0314319 0000 GBP 000 LDN
                           DEUTSCHE BANK AG
      GBP
                           Winchester House 1, Great Winchester Street, London, EC2N 2DB U.K., SORT CODE
                           405081, S.W.I.F.T : DEUTGB2L

                           Account No. 99-40-390-349
      SEK                  SVENSKA HANDELSBANKEN
                           Blasiehomstorg 11, 106 70 Stockholm, Sweden, S.W.I.F.T: HANDSESS

                           Account No. 7001.02.05954
      NOK                  DNB NOR BANK ASA, (formerly DEN NORSKE BANK ASA) Stranden 21, 0250 Oslo,
                           Norway, S.W.I.F.T: DNBANOKK

                           Account No. 3996052575
      DKK                  DEN DANSKE BANK
                           Holmens kanal 2-12, DK-092, Copenhagen K, Denmark, S.W.I.F.T: DABADKKK

                           Account No. 653-0423130
      JPY                  BANK OF TOKYO – MITSUBISHI
                           7-1 Marunouchi 2-Chome, Chiyoda-ku, Tokyo, 100, Japan, S.W.I.F.T: BOTKJPJT

                           Account No. 1702795061015
      BYR                  BELVNESHECONOMBANK
                           Myasnikov Str., 32, 220050 Minsk, Belarus, МFО 226, S.W.I.F.T: BELBBY2X

                           Account No. LV16LATC0073000430330
      UAH                  LATVIJAS TIRDZNIECIBAS BANKA
                           4 Trijadibas iela, LV-1048 Riga, Latvia, S.W.I.F.T: LATCLV22
                                                                             189


Licences




   MDM Bank


   Activity           General Banking License
   Issuing body       Central Bank of Russia
   Number and date    № 2361 of 31.03.2008


   Activity           Precious Metals Operations
   Issuing body       Central Bank of Russia
   Number and date    № 2361 of 31.03.2008


   Activity           Gold Export
   Issuing body       Ministry of Economic Development and Trade of Russia
   Number and date    № LG0270805506749 of 30.05.2008


   Activity           Silver Export
   Issuing body       Ministry of Economic Development and Trade of Russia
   Number and date:   № LG0270805506750 of 30.05.2008


   Activity           Exchange Broker
   Issuing body       Federal Securities Market Commission of Russia
   Number and date    № 861 of 24.08.2006


   Activity           Custody Operations
                      (professional securities market participant)
   Issuing body       Federal Securities Market Commission of Russia
   Number and date    № 177-03942-000100 of 15.12.2000


   Activity           Brokerage Operations
                      (professional securities market participant)
   Issuing body       Federal Securities Market Commission of Russia
   Number and date    № 177-02956-100000 of 27.11.2000


   Activity           Dealing Operations
                      (professional securities market participant)
   Issuing body       Federal Securities Market Commission of Russia
   Number and date    № 177-03060-010000 of 27.11.2000
                      Asset Management Operations
   Activity           (professional securities market participant)
   Issuing body       Federal Securities Market Commission of Russia
   Number and date    № 177-03134-001000 of 27.11.2000
190   MDM Bank Annual report 2008




      MDM Bank has been a member of the deposit insurance system since 15 December 2004.


      MDM Asset Management

      Activity                          Managing investment funds, mutual funds and private pension funds

      Issuing body:                     Federal Securities Market Commission of Russia

      Number and date:                  № 21-000-1-00045, issued on 24 January 2001


      Activity                          Securities Management

      Issuing body:                     Federal Financial Markets Service

      Number and date:                  № 077-11425-001000, issued on 17 July 2008


      Latvian Trade Bank

      Activity                          Credit Institution

      Issuing body:                     Financial and Capital Market Commission of the Republic of Latvia

      Number and date:                  № 06.01.02.01.010/82 of 4 December 1991 (over-issued on 10 January
                                        2004 as a result of over-registration in the company registry of
                                        the Republic of Latvia)


      MDM Investments Limited

      Activity                          1) Broker and Depository
                                        2) Securities Management
                                        3) Financial Consulting

      Issuing body:                     Securities and Exchange Commission

      Number and date:                  № SIF/038/04, issued on 26.07.2004
                                                                                                              191

Memberships




  • Association of Russian Banks, Moscow


  • Moscow Interbank Currency Exchange (MICEX) ZAO, Moscow


  • MICEX Stock Exchange ZAO, Moscow


  • National Association of Stock Market Participants (SRO), Moscow


  • St. Petersburg Stock Exchange ZAO, St. Petersburg


  • Moscow Stock Exchange, Moscow


  • Russian Trading System (RTS), Moscow


  • National Stock Association (SRO), Moscow


  • National Currency Association, Moscow


  • Moscow International Currency Association, Moscow


  • Association of Russian Regional Banks, Moscow


  • ROSSWIFT, Moscow


  • US-Russia Business Council, Washington, DC, U.S.A.


  • National Council for Corporate Governance


  The Bank has adopted and fully observes in its operations the principles and norms of professional ethics
  developed by the associations, exchanges and partnerships of which it is a member.
192   MDM Bank Annual report 2008




Annual Report 2008

      This Report is available in Russian and English. In the event of any discrepancy between the texts of the Russian
      and English versions, the text in the Russian version shall prevail.


      Detailed information on related-party transactions is provided in Annex 1 to this Report, which is available in
      PDF format on the Bank’s website at www.mdmbank.ru.


      The Bank was not involved in any major transactions in 2008, as defined by the Russian Law On Joint-Stock
      Companies.


      Annex 1 shall be viewed as an integral part of this Annual Report.




                                                                                                                          Design and special photography Agey Tomesh

				
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