Financial Risk Management Objectives and Policies
In the course of its business, the Group is exposed to a number of financial risks: market risk (including interest rate risk and foreign currency risk), liquidity risk and credit risk. The presented information shows susceptibility of the Group concerning each of these risks. The Board of Directors reviews and establishes policies for managing each of these risks which are summarised below.
Market Risk
The Group is exposed to risk from movements in interest rates and foreign currency exchange rates that affect its assets, liabilities and anticipated future transactions. The objective of market risk management is to manage and control market risk exposures, while optimising the return on the risk.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Group’s interest rate risk management policy is to minimise risk with the aim to achieve financial structure objectives defined and approved in the management’s plans. Borrowing requirements of the Group’s companies are pooled by the Group’s central finance department in order to manage net positions and the funding of portfolio developments consistently with management’s plans while maintaining a level of risk exposure within prescribed limits.
The Group borrows on both a fixed and variable rate basis. EURIBOR and LIBOR served as the basis for the calculation of interest rates on loans with variable rate. The Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to hedge underlying debt obligations. Variable rate loans accounted for 8% of the total loan portfolio at the end of 2014, after taking into account the effect of interest rate swaps (9% at the end of 2013).
The Group does not have any financial assets with variable interest rate.
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of loans and borrowings affected, after the impact of hedge accounting. With all other variables held constant, the Group’s profit/(loss) before tax is affected through the impact on floating rate borrowings, as follows:
| Basis points | Effect on profit/(loss) before tax | |
| As at December 31, 2014 | ||
| Increase in LIBOR | 2 | (40) |
| Decrease in LIBOR | (2) | 40 |
| Increase in EURIBOR | 7 | (55) |
| Decrease in EURIBOR | (7) | 55 |
| As at December 31, 2013 | ||
| Increase in LIBOR | 3 | (76) |
| Decrease in LIBOR | (3) | 76 |
| Increase in EURIBOR | 13 | (119) |
| Decrease in EURIBOR | (13) | 119 |
Foreign Currency Risk
The Group’s exposure to currency risk relates to sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group’s subsidiaries, and the Group’s net investments in foreign operations. The currencies in which these transactions and balances primarily denominated are US dollars and euro.
The Group’s exposure to currency risk determined as the net monetary position in respective currencies was as follows as at December 31:
| 2014 | 2013 | |
| USD/RUR | (1 571 946) | (1 731 183) |
| EUR/RUR | (79 014) | (94 785) |
| USD/EUR | (5 584) | 23 877 |
| USD/RON | (4 893) | (14 185) |
| EUR/RON | (50 723) | (84 008) |
| KZT/RUR | 10 350 | 8 700 |
| USD/CAD | (25 049) | (9 441) |
The Group hedged its net investments in foreign operations against foreign currency risk using borrowings in US dollars made by Russian companies of the Group and its exposure to currency risk related to USD denominated sales of Romanian subsidiaries using USD/RON forward contracts. The Group doesn’t have other formal arrangements to manage currency risks of the Group’s operations and balances. However, the Group seeks to bring its financial liabilities in foreign currency in line with export net sales, thus mitigating currency risk.
The following table demonstrates the sensitivity to reasonably possible changes in the respective currencies, with all other variables held constant, of the Group’s profit/(loss) before tax and other comprehensive income/(loss). The movement in other comprehensive income/(loss) arises from gains or losses on the US dollar-denominated borrowings related to the effective portion of the hedge of net investments in foreign operations (Note 29 viii). In estimating reasonably possible changes for 2014 the Group assessed the volatility of foreign exchange rates during the year ended December 31, 2014 (2013: historical data for the three preceding years). The approach to the calculation of the volatility was changed in 2014 due to the increased volatility of Russian rouble against other currencies in the past few months.
| As at December 31, 2014 | ||||||
| Volatility range | Effect on profit/(loss) before tax | Effect on other comprehensive income/(loss) | ||||
| Low | High | Low | High | Low | High | |
| USD/RUR | 27,97% | -27,97% | (122 908) | 122 908 | (316 765) | 316 765 |
| EUR/RUR | 28,70% | -28,70% | (22 677) | 22 677 | – | – |
| USD/EUR | 6,15% | -6,15% | (343) | 343 | – | – |
| USD/RON | 6,64% | -6,64% | (325) | 325 | – | – |
| EUR/RON | 2,99% | -2,99% | (1 517) | 1 517 | – | – |
| KZT/RUR | 32,52% | -32,52% | 3 366 | (3 366) | – | – |
| USD/CAD | 6,37% | -6,37% | (1 596) | 1 596 | – | – |
| As at December 31, 2013 | ||||||
| Volatility range | Effect on profit/(loss) before tax | Effect on other comprehensive income/(loss) | ||||
| Low | High | Low | High | Low | High | |
| USD/RUR | 10,18% | -10,18% | (64 392) | 64 392 | (111 842) | 111 842 |
| EUR/RUR | 7,84% | -7,84% | (7 431) | 7 431 | – | – |
| USD/EUR | 9,24% | -9,24% | 2 206 | (2 206) | – | – |
| USD/RON | 11,02% | -11,02% | (1 563) | 1 563 | – | – |
| EUR/RON | 4,60% | -4,60% | (3 864) | 3 864 | – | – |
| KZT/RUR | 9,96% | -9,96% | 867 | (867) | – | – |
| USD/CAD | 7,42% | -7,42% | (701) | 701 | – | – |
Liquidity Risk
Liquidity risk arises when the Group encounters difficulties to meet commitments associated with liabilities and other payment obligations. The Group’s approach to managing 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 risking damage to the Group’s reputation.
The Group manages liquidity risk by targeting an optimal ratio between equity and total debt consistent with management plans and business objectives. This enables the Group to maintain an appropriate level of liquidity and financial capacity as to minimise borrowing expenses and to achieve an optimal profile of composition and duration of indebtedness. The Group has access to a wide range of funding at competitive rates through the capital markets and banks and coordinates relationships with banks centrally. At present, the Group believes it has access to sufficient funding and has also both committed and uncommitted borrowing facilities to meet currently foreseeable borrowing requirements.
Effective management of the liquidity risk has the objective of ensuring both availability of adequate funding to meet short-term requirements and due obligations, and a sufficient level of flexibility in order to fund the development plans of the Group’s business, maintaining an adequate finance structure in terms of debt composition and maturity. This implies the adoption of a strategy for pursuing an adequate structure of borrowing facilities (particularly availability of committed borrowings facilities) and the maintenance of cash reserves.
The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including interest payments:
| As at December 31, 2014 | Less than 1 year | 1 to 2 years | 2 to 3 years | 3 to 4 years | >4 years | TOTAL |
| Trade and other payables | 629 789 | – | – | – | – | 629 789 |
| Accounts payable to related parties | 43 484 | – | – | – | – | 43 484 |
| Interest-bearing loans and borrowings: | ||||||
| Principal | 728 574 | 626 217 | 534 385 | 514 716 | 743 783 | 3 147 675 |
| Interest | 201 592 | 168 784 | 116 442 | 79 121 | 59 044 | 624 983 |
| Finance lease liability | 7 664 | 10 434 | 5 188 | 4 809 | 37 844 | 65 939 |
| Dividends payable | 1 889 | – | – | – | – | 1 889 |
| Liabilities under put options of noncontrolling interest shareholders in subsidiaries | 6 639 | – | – | 15 326 | – | 21 965 |
| Other non-current liabilities | – | 3 | 33 | – | 8 263 | 8 299 |
| 1 619 631 | 805 438 | 656 048 | 613 972 | 848 934 | 4 544 023 |
| As at December 31, 2013 | Less than 1 year | 1 to 2 years | 2 to 3 years | 3 to 4 years | >4 years | TOTAL |
| Trade and other payables | 835 416 | – | – | – | – | 835 416 |
| Accounts payable to related parties | 101 151 | – | – | – | – | 101 151 |
| Interest-bearing loans and borrowings: | ||||||
| Principal | 362 168 | 902 118 | 561 187 | 493 876 | 1 302 195 | 3 621 544 |
| Interest | 220 498 | 182 787 | 146 618 | 112 464 | 137 340 | 799 707 |
| Finance lease liability | 5 968 | 5 739 | 5 503 | 5 365 | 44 051 | 66 626 |
| Dividends payable | 5 863 | – | – | – | – | 5 863 |
| Liabilities under put options of noncontrolling interest shareholders in subsidiaries | 9 323 | – | – | – | 31 697 | 41 020 |
| Other non-current liabilities | – | 41 | – | – | 8 701 | 8 742 |
| 1 540 387 | 1 090 685 | 713 308 | 611 705 | 1 523 984 | 5 480 069 |
Credit Risk
Credit risk is the potential exposure of the Group to losses that would be recognised if counterparties failed to perform or failed to pay amounts due. Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of trade and other receivables, cash and cash equivalents.
The credit risk arising from the Group’s normal commercial operations is controlled by each operating unit within Group-approved procedures for evaluating the reliability and solvency of each counterparty, including receivable collection. The monitoring activity of credit risk exposure is performed at the Group level according to set guidelines and measurement techniques to qualify and monitor counterparty risk.
The Group sells goods to some of the biggest Russian and international companies on credit terms. It is the Group’s policy that all customers applying for the credit terms are subject to credit verification procedures.
As at December 31, 2014, accounts receivable from the three biggest debtors of the Group amounted to 207,044 (December 31, 2013: 317,162). Management determines concentration by reference to receivables from particular customers as percentage of total accounts receivable.
The ageing analysis of trade and other receivables and other financial assets is presented in the table below:
| 2014 | 2013 | |||
| Gross amount | Impairment | Gross amount | Impairment | |
| Current trade and other receivables – not past due | 646 515 | (18 345) | 781 817 | (4 459) |
| Current trade and other receivables – past due less than 30 days | 61 489 | (1 188) | 85 771 | (546) |
| between 30 and 90 days | 17 608 | (282) | 85 486 | (702) |
| over 90 days | 38 197 | (20 385) | 73 861 | (30 433) |
| Accounts receivable from related parties – not past due | 4 749 | (18) | 4 608 | (32) |
| Non-current trade and other receivables – not past due | 5 215 | (38) | 27 072 | (18 819) |
| Other – not past due | 4 253 | – | 5 712 | – |
| 778 026 | (40 256) | 1 064 327 | (54 991) | |
Movement in allowance for doubtful debts was as follows:
| 2014 | 2013 | |
| Balance at the beginning of the year | 54 991 | 42 759 |
| Utilised during the year | (6 284) | (800) |
| Additional increase in allowance | 13 997 | 16 032 |
| Currency translation adjustment | (22 448) | (3 000) |
| Balance at the end of the year | 40 256 | 54 991 |
Capital Management
The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise the return to shareholders. The Board of directors reviews the Group’s performance and establishes key performance indicators. In addition, the Group is subject to externally imposed capital requirements (debt covenants) which are used for capital monitoring. Through 2014, the Group was in compliance with such externally imposed capital requirements. The Group met its objectives for managing capital.
Capital includes equity attributable to the equity holders of the parent entity. The Group manages its capital structure and adjusts it by issue of new shares, dividend payments to shareholders, purchase of treasury shares. The Group monitors the compliance of the amount of legal reserve with the statutory requirements and makes appropriations of profits to legal reserve. In addition, the Group monitors distributable profits on a regular basis and determines the amounts and timing of dividend payments.
Fair Value of Financial Instruments Carried at Fair Value
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
- Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities;
- Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly;
- Level 3: Techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
The Group held the following financial instruments recorded at fair value:
| 2014 | 2013 | |
| Embedded Conversion Option | – | (2 080) |
| Total current derivative financial instruments | – | (2 080) |
| Interest rate swaps | (2 076) | (3 501) |
| Total non-current derivative financial instruments | (2 076) | (3 501) |
Financial instruments at fair value were measured by the Group using valuation techniques based on observable market data (Level 2 fair value measurement hierarchy).
The Group’s derivative financial instruments comprised of interest rate swaps and currency forwards. The use of derivatives was governed by the Group’s policies consistent with the overall risk management strategy of the Group. The derivatives were designated as hedging instruments in cash flow hedges. The valuation techniques applied to derivatives included forward pricing and swap models, using present value calculations. The models incorporated various inputs including the credit quality of counterparties, foreign exchange forward rates and interest rate curves.
During the reporting period, there were no transfers between Level 1 and Level 2 fair value measurement hierarchy, and no transfers into and out of Level 3 fair value measurement hierarchy.
Fair Value of Financial Instruments not Carried at Fair Value
For financial assets and financial liabilities that are liquid or having a short-term maturity (cash and cash equivalents, short-term accounts receivable, short-term loans) the carrying amounts approximate their fair value.
The following table shows financial instruments which carrying values differ from fair values:
| 2014 | 2013 | |||
| Par value | Fair value | Par value | Fair value | |
| Financial liabilities | ||||
| Fixed rate long-term bank loans | 1 161 283 | 1 089 008 | 1 489 452 | 1 489 888 |
| Variable rate long-term bank loans | 408 379 | 405 099 | 497 756 | 480 429 |
| 5.25 per cent convertible bonds | 311 000 | 289 043 | 412 500 | 415 993 |
| 6.75 per cent loan participation notes due 2020 | 500 000 | 291 665 | 500 000 | 506 755 |
| 7.75 per cent loan participation notes due 2018 | 500 000 | 320 000 | 500 000 | 523 315 |
For quoted debt instruments (bonds and loan participation notes) the fair values were determined based on quoted market prices. The fair values of unquoted debt instruments were estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.