TIDMPRDF
30 April 2010
Prosperity Russia Domestic Fund Limited
Final results for the year ended 31 December 2009
Prosperity Russia Domestic Fund Limited (the "Company") a Guernsey incorporated,
closed-ended investment company admitted to AIM, today announces its final
results for the year ended 31 December 2009. The Company has been established
with the principal purpose of providing investors with a listed vehicle through
which to participate in the investment opportunities arising from the corporate
restructuring and consolidation which are currently taking place in the small
and mid-cap markets in Russia and, to a lesser extent, other newly independent
states of the former Soviet Union.
Key developments:
* Audited net asset value per share of US$0.628 (US$0.636 based on mid-prices)
at 31 December 2009, representing an increase in the year of 177% (169%
based on mid-prices) and a significant outperformance of the Russian RTS
index which rose 129%
* Key investments at 31 December 2009 (and percentage of net assets) were
Magnit (11.8%), M Video (7.6%), Efes Breweries (7.3%), Sistema (7.0%), Dixy
Group (6.8%), Kazkommertsbank (5.5%), Mriya Agro (5.4%), MHP (5.2%),
Bashkirenergo (4.8%) and Cherkizovo Group (4.5%)
* The Company has sold its investment in Efes Breweries since the year end.
* Latest unaudited net asset value per share of US$0.873 (based on mid-prices)
at 23 April 2010
The final results are extracted from the audited annual accounts.
Commenting, Sir David Kinloch, Chairman said:
"During 2009 our strategy has been to remain fully invested and this has served
us well. During the year our Managers have worked successfully to adapt and
improve our portfolio and wise sector allocation and skilful stock selection
have contributed to a successful outcome for the year. Looking to the future,
although worries over corporate governance continue to put off some overseas
investors, we believe that valuations in Russia remain low compared with those
prevailing in other major markets including China and India. Consequently,
subject to the usual caveats, we remain positive regarding the outlook for your
company's portfolio in the current year."
Enquiries:
Prosperity Capital Management
Elly Wordsworth
Tel: 020 7299 6950
Kleinwort Benson (Channel Islands) Fund Services Limited
Company Secretary
Tel: 01481 727111
CHAIRMAN'S STATEMENT
I am pleased to be able to report that the NAV per share on 31 December 2009 was
$0.636, an increase of 169% over the previous year's figure. Furthermore it is
particularly gratifying that this increase was 39% ahead of the advance in the
RTS index over the same period.
Shareholders will recall the dramatic falls in markets across the world,
including Russia during 2008. The Russian market remained subdued during the
first quarter of 2009 against a recessionary background. However, sentiment
changed significantly in the second quarter and share prices firmed rapidly from
their lows and by quarter-end the market had risen by 57%. Thereafter the market
continued its recovery trend until the year-end and it has remained firm during
the 1st quarter of 2010. At the time of writing the latest unaudited NAV per
share was $0.873 (based on mid-prices) at 23 April 2010, a welcome increase of
37% over the year-end figure reported above.
During 2009 our strategy has been to remain fully invested and this has served
us well in view of the rapid change in sentiment which resulted in share prices
rising sharply from their lows following the massive sell off in markets as the
global credit crunch crisis evolved.
The reasons behind these events are explained in detail in the accompanying
Manager's Report. However, in brief, I believe the key drivers were a
combination of factors including the perception of enhanced political stability
in Russia, a successful defence by the CBR of the rouble following its
devaluation, basic stability of the banking system, steadily reducing interest
rates, rising oil prices and anticipation of GDP growth currently estimated in
the range between 4% and 6% in 2010.
During the year our Managers have worked successfully to adapt and improve our
portfolio and wise sector allocation and skilful stock selection have
contributed to a successful outcome for the year.
Looking to the future, although worries over corporate governance continue to
put off some overseas investors, we believe that valuations in Russia remain low
compared with those prevailing in other major markets including China and India.
Consequently, subject to the usual caveats, we remain positive regarding the
outlook for your company's portfolio in the current year.
Sir David Kinloch
Chairman
29 April 2010
MANAGER'S REPORT
Dear Shareholders,
After an extremely arduous 2008, last year was much more promising both for the
Prosperity Russia Domestic Fund (the "Fund" or "PRDF") and the Russian market
more generally. During 2009, the RTS index of leading stocks rose 129% - with
Russia ranking as the second best performing major stock market in the world.
PRDF out-performed the market strongly, gaining 168% - 39 percentage points
ahead of the index.
Russia endured its first recession in a decade during 2009. The economy
contracted 6.2% last year. Having said that, Russia recovered during the second
half of 2009 and into the first few months of 2010 - showing unequivocal signs
that economic growth has resumed. At the time of writing, consensus forecasts
suggest Russian GDP will expand at between 4% and 6% during 2010.
PRDF's exposure to consumer/retail stocks increased significantly, reaching
47.5% by the end of last year, up from 30% at the same time in 2008. The share
of assets held in financial stocks fell sharply during 2009, while the Fund also
partially divested its holdings of engineering stocks.
While the Russian market gained 56% during the first six months of last year,
PRDF held its own - gaining 57%. The Fund achieved this first half performance
even though its domestic focus meant it lacked exposure to the export-focused
oil and gas "blue chips" that led the equity recovery as commodity prices rose.
During the second half of the year, as the economy began to turn, and retail and
consumer stocks came back into favour, PRDF surged. By the end of the year, PRDF
(up 168%) was the third-best performing Russia fund on the market, behind
Prosperity Cub Fund (up 204%) and Russian Prosperity Fund (up 195%). The Manager
remains mindful that, as of December 2009, PRDF remained down 36% since its
February 2007 inception.
MARKET/ECONOMIC REPORT
During 2008, the Russian economy grew 5.6% - but much of that growth took place
during the first half of the year. The Lehman Brothers collapse in the third
quarter of 2008 and resulting global "rush from risk" hit the then
heavily-leveraged Russian equity market badly. After prolonged bouts of "forced
selling", as indebted portfolio investors struggled to meet margin calls and
offloaded shares into a falling market, the RTS ended 2008 down 73% - the first
annual drop in eight years.
Not surprisingly, this negative sentiment spilt over into 2009 as the global
outlook remained gloomy. During the first quarter of this year, the RTS was
relatively flat, oscillating within a 500-650 point corridor (compared to its
2,488 peak in May 2008). Share prices languished at multiples that, for the most
part, remained well below "fundamental value". By the end of the first quarter,
though, as commodity prices began to recover, the RTS was up 10% year-to-date.
During early 2009, currency fears and a lack of bank lending starved firms of
liquidity, causing double-digit percentage drops in industrial production and
investment. In March, real GDP was 9.5% lower than the same month the year
before. Strong GDP growth during the first half of 2008 meant that annual GDP
numbers continued to be weighed-down by "adverse base" effects during the second
quarter of 2009 as well, even as economic activity began to recover.
Real GDP at the end of the second quarter was no less than 7.4% up on the
quarter before - but remained significantly down year-on-year. At the same time,
Russia's All-sector PMI index, having dipped sharply during the five months to
January 2009, had risen for five months in a row. During April, May and June,
the combination of ultra-low valuations and signs of genuine economic recovery
saw the market rally strongly. By the end of the second quarter, the market was
up 56% since the start of the year.
Another significant reason for the market's partial recovery during the second
quarter was the performance of the rouble. From the summer of 2008, and more
markedly after the Lehman collapse, the Russian currency came under severe
pressure as oil prices tumbled from more than $140 a barrel to less than $50.
While oil and gas account for only 25% of the Russian economy (down from 40% as
recently as 2002), hydrocarbons make up around half of exports, leaving the
currency vulnerable to sudden falls in the price of crude.
In late January 2009, the Central Bank of Russia (CBR) announced it would defend
the currency within a band of between 26 and 41 against the combined dollar-euro
basket. While this announcement was greeted with derision from some quarters,
the rouble band held firm. By the end of June, the currency stood at 36.8 to the
basket and, with the CBR once again intervening to prevent over-appreciation,
the rouble was widely perceived to be "out of the woods". From $386bn in
January, CBR reserves had also recovered to $412bn by the end of the second
quarter. Crucially, bank deposits had also begun to increase as the general
population switched back into roubles, amidst a growing belief that the domestic
currency was "safe" once more.
While the rouble benefited from recovering oil prices (crude had returned to $72
by mid-year), it was also helped by the fact that Russia continued to run both
trade and current account surpluses during the first half of 2009. This was in
part due to a sharp import adjustment, as consumers eschewed expensive
foreign-made foods and business delayed purchases of overseas capital goods.
In some senses, the rouble went through a "perfect storm" during late 2008 and
early 2009. The fact that the Russian currency stabilised, and households and
companies didn't lose any of their bank deposits, has significantly enhanced the
credibility, both at home and abroad, of the CBR and the rouble in general. The
Manager views this as a significant positive development for asset prices going
forward.
Relative rouble stability allowed the CBR to lower interest rates no less than
five times between April and July from 13% to 10.75%. As the global economy
began to stir, Russia's recovery gathered pace during the third quarter, spurred
on not only by falling borrowing costs, but also the 30% rouble depreciation and
a sizeable fiscal boost. Manufacturing output returned to quarter-on-quarter
growth, as did mineral extraction, transportation services and retail and
wholesale trade. By the end of September, the RTS was up 98% year-to-date but
the earlier period of forced selling meant valuations were recovering from
extremely low levels. So despite the strong run-up, the Russian market was still
trading at only 8x average earnings, less than half the comparative multiples in
other large emerging markets such as India and China.
During the final quarter of 2009, Russia continued to benefit from strengthening
global demand and firm commodity prices. In November, industrial production grew
1.5% year-on-year and real household disposable income was up 2% on the same
month in 2008. By the end of December, base rates had been cut to 8.5%, with the
rouble emerging as a "carry trade" currency - having been heavily-shorted just
six months before.
While the RTS ended the year 129% up at 1,444, much of this recovery appears to
have been built on domestic money. Data from the EPRF consultancy showed
Russia's GEM share of portfolio investment across all large emerging markets was
only 7.3% at the end of 2009, well below the 12.5% level when the RTS peaked in
May 2008. While there were some high-profile overseas investments into the
Russian equity market last year, and data on portfolio inflows is patchy, it
does seem that Russia remains "out-of-favour" with international investors. This
is despite the fact that, at the end of the year, the Russian market continued
to display attractive valuations, trading at 8.8x average earnings, the lowest
of any major market in the world. The RTS remains some 40% below its pre-crisis
high, compared to a 20% average shortfall across other large emerging markets.
While 2009 saw a steep economic contraction in Russia, there were many
encouraging aspects to the country's performance. During the period of greatest
pressure during the first quarter, the authorities reacted quickly and, for the
most part, sensibly. At no time was Russia's banking system under any threat of
systemic collapse.
While the currency adjusted significantly, there was no collapse - and by the
end of 2009, the rouble was back at the same level as the end of 2008.
The Russian government did not use the opportunity presented by the crisis to
significantly increase its stakes in the country's productive capacity. The
authorities also avoided using any form of "quantitative easing", while the
fiscal boost was relatively moderate and funded by a combination of reserves and
taxation, rather than extra government leverage.
Despite many predictions to the contrary, Russia's external balance stayed
firmly positive during 2009, registering a current account surplus equal to
3.8% of GDP - the tenth such surplus in as many years. Imports fell no less than
41% in dollar terms during the year (to $170.1bn), illustrating the economy's
ability to adjust quickly to adversity.
While last year saw Russia's first budget deficit in a decade, it was rather
smaller than initially predicted - at 5.9% of GDP. Also of note is that the CPI
index rose by only 8.8% during 2009, down from 13.3% the year before. This was
post-Soviet Russia's first single-digit annual inflation number. Ten years ago,
annual inflation was 86%.
THE FUND
The net asset value per share of PRDF rose 168% during 2009. The RTS index rose
129% over the same period. Throughout the year, the Manager stuck to the Fund's
broad investment principles - pursuing a research-driven, unlevered,
"fundamental growth and value" investment strategy. The Fund maintained its
focus on firms benefiting from the on-going development of Russia's consumer
sector and domestic capital investment, with exposure primarily to small/mid cap
companies and particularly those set to become more liquid as the domestic
economy develops.
PRDF's retail and consumer stock exposure increased markedly throughout 2009 -
from 30% of the Fund's assets at the start of the year, to 47.5% by year end.
This exposure weighed on relative performance during the first quarter, as
investors switched into energy blue chips. But the Manager's decision to
increasingly back consumer and retail stocks paid off thereafter - with such
positions contributing heavily to PRDF's ultimate 2009 out-performance.
Throughout the year, food retailer Magnit, a company long-favoured by PCM, rose
355%. The company delivered extremely strong revenue growth during 2009 despite
the slowdown and gained market share as weaker rivals suffered.
Electronics retailer M-Video - another core holding - also thrived in a tougher
market, its share price gaining 345% as it became Russia's largest electronics
retailer by market share. The Fund also benefited from the strong performance of
Efes breweries (not least after its main owner offered to buy the free-float).
The stock rose 156% during 2009. At the end of 2009, PRDF's retail holdings
traded at 9x 2010 P/E and its exposure to Russia's consumer goods sector was
valued at 5.4x 2010 P/E.
The Fund's telecoms exposure fell from 14.7% of AUM at the start of the year to
12.3% by the end of December. In August, the Manager divested the Fund's share
of PCM's strategic stake in fixed-line operator Center Telecom at a significant
premium to the market. Sistema (which controls MTS, Russia's largest mobile
telephony company) now accounts for 7% of the Fund. The stock rose 281% during
2009.
PRDF's power exposure remained roughly stable in terms of Fund share, ending the
year slightly down at 11% of AUM. The recently privatised gencos and power
distribution companies suffered badly during the early part of 2009, as
electricity demand fell. But the sector recovered strongly and eventually
out-performed - not least due to on-going price liberalisation and sector
reform. Bashkirenergo did particularly well, gaining 450% last year. At the end
of 2009, the Fund's power holdings traded at 7x 2010 P/E.
Mriya (Ukrainian agricultural firm) and MHP (integrated Ukrainian poultry
producer) each accounted for more than 5% of the Fund's net assets at the end of
2009. The Manager feels that both holdings have high-growth potential, and they
have recently performed very well, showing extremely strong revenue growth. The
Manager also acquired a stake in Furshet, Ukraine's third largest supermarket
chain, which has a joint-venture with French retailer Auchan.
PRDF's exposure to Kazkommertsbank weighed on the Fund's performance, given the
adverse conditions in the Kazakh banking sector - which was among the hardest
hit by the credit crunch. The Manager remains convinced, though, that
Kazakhstan's largest bank will emerge as a strong going-concern and finds the
stock extremely cheap, trading at 2010 P/E of 4.0x at the end of 2009. The
Fund's total exposure to the financial sector fell from 22.2% to 11% of AUM last
year - in part due to the divestment of Kazakhstan's Alliance Bank - but
remained attractively valued at year end, trading at only 3.0x 2010 P/E.
Overall, the Fund's assets were valued at an average 2010 P/E of 5x at the end
of 2009 - representing a significant discount to RTS. The Manager expects most
of PRDF's mid-cap stocks to be re-rated as the Russian market continues to
recover and liquidity improves.
It is also pleasing that while the Fund still trades at a discount to its NAV on
AIM, after considerable efforts to find buyers this discount is much narrower
than many other traded emerging market funds - a trend that has continued into
the new year. While the average month-end PRDF discount was 24% during 2009,
that average fell to 17% during the first three months of 2010.
LOOKING FORWARD
After a tough year, Russia's economic recovery is now growing in strength and
pace. Annual GDP growth hit 5.2% in January 2010 on a seasonally-adjusted basis,
with real disposable incomes up 7.1% - albeit in part due to low base effects.
At the time of writing, Russia's Manufacturing PMI index has been above the
50-mark - indicating growth - for eight months in a row.
While the global outlook remains fragile, Russia's economic prospects look
reasonably good. The country is now the world's seventh biggest economy and
largest energy exporter. Russia faces relatively little consumer or corporate
de-leveraging. Solid public-sector finances mean corporate tax cuts are more
likely going forward than the hefty tax rises facing the West. Having raised
public spending to 24% of GDP in 2009, up from 18% the year before, the
government remains committed to sustaining its fiscal boost.
Base interest rates were cut no fewer than ten times last year, from 13% to
8.5% - and have since been cut again to 8.25%. As inflation moderates, monetary
policy should keep getting looser. First quarter figures are likely to show that
the Russian economy has chalked-up two successive quarters of strong growth -
which will help restore widespread access to international capital for large
Russian companies. Together with positive real interest rates and rising bank
deposits, a more benign outlook should also re-open domestic loan flows to
second- and third-tier firms.
International observers are upgrading their Russian growth assumptions - with
the IMF and Goldman Sachs recently increasing their 2010 forecasts to 3.5% and
4.5% respectively. Such "re-rating" of Russia's growth prospects could bolster a
market yet to benefit significantly from greater interest in EM stocks in the
wake of the "sub-prime" fiasco. If there is a renewed bout of global systemic
weakness, Russia may be relatively well-placed. The country now has $448bn of
reserves - the world's third biggest haul - with an additional $150bn of reserve
holdings split between two nascent sovereign wealth funds. At the same time,
total household, corporate and sovereign debts are around 50% of GDP, by far the
lowest of any major economy.
So Russia has very low debts - which should help insulate it from the "sovereign
default contagion" fears now stalking global markets. Russia also has the
world's largest stock of "tangible" assets - which, again, could be attractive
if global price pressures rise in the aftermath of mass money-printing and as
Western nations try to inflate away their debts.
In general, the Manager believes Russia is in the relatively early stages of a
period of strong long-term growth - based on commodity-linked exports and a
domestic expansion that will play an increasingly important role in the years to
come. At the same time, global macroeconomic trends could bode well for Russian
asset prices. Given on-going currency stability, and the continued recovery of
the domestic economy, the market could not only attract more domestic money but
also enjoy more inflows from abroad. Russia could well prove increasingly
attractive as the "developed" world "de-leverages" and Western central banks
undermine faith in paper-based fiat currencies.
PCM's position in the market and the scope of our investments reflects the fact
that Russia is well on its way to becoming a fully-fledged Western economy -
with capital needs that go way beyond oil and gas. We acknowledge that much of
the rest of the world remains to be convinced, but we maintain that while that
gap between perception and reality is a huge challenge, it also represents an
enormous investment opportunity. While Russia faces economic challenges, many
firms remain in a situation where restructuring and consolidation can lead to
enhanced profitability even in a relatively low-growth environment. The assets
owned by the Fund are, for the most part, unimpaired and continue to trade at
extremely low valuations by international standards.
Political risk is often seen as the key concern among global portfolio investors
interested in Russia. The country is a relatively new market economy and
institution-building remains a work in progress. The situation is rarely as bad
as described by the Western press - which, over many years, has generally
covered Russia in a very "negative" manner. Having said that, recent terrorist
atrocities (not least the Moscow Metro bombings) point to a potential pick-up in
political risk.
These attacks are clearly a threat to the Medvedev-Putin government and its
legitimacy. As such, the Kremlin is likely to react with "strong-arm" tactics.
While relations with Chechnya are much improved, Moscow's authority in Dagestan
and Ingushetia is obviously under scrutiny. With the Caucasus on one of the
world's major geopolitical fault lines, it will take many years to untangle the
historic, social and religious conflicts across that troubled region. Such
issues are likely to pervade during any realistic investment horizon. Having
said that, although terrorist atrocities rightly generate a great deal of
international attention, the impact of the Caucasus conflict on the broader
Russian economy is rather limited.
As the Manager has long-maintained, corporate governance remains a much more
serious risk when investing in this market. That is why PCM continues to be a
highly "active" shareholder, with a large on-the-ground presence in Moscow and
often holding significant minority stakes and boards seats, so enabling a proper
monitoring of management performance. The Manager, and the entire PCM team,
works hard to stand up for our shareholder rights and brings litigation and
other legitimate pressures to bear on counterparties whom we feel have acted in
an illegal or otherwise improper manner.
For the most part, corporate governance in Russia has improved significantly
during the last ten years. Accounting standards are unrecognisably superior,
peer pressure is exerting a positive influence and the Russian court system -
while still deeply imperfect - is also much better than it was.
Having said that, the steep asset price decline of late 2008 and early 2009 did
put a lot of counter-parties under pressure - which led to some high-profile
corporate governance abuses. While such behaviour was by no means unique to
Russia, general nervousness among international investors towards this market
meant that such events are likely to have impacted asset prices
disproportionately.
CONCLUSION
In summary, during 2009, PRDF substantially out-performed the RTS - despite the
Fund's considerable under-weight in the large energy blue-chips which led the
rally. This encouraging performance has been achieved by an investment strategy
that has continued to focus on well-managed, unimpaired companies - not least in
the consumer-retail sector - which are benefiting from the continued development
of Russia's fast-developing domestic sector.
Given that the RTS is still trading at one of the lowest valuations of any major
stock index in the world - and small- and mid-cap stocks such as those targeted
by PRDF at even lower multiples the Manager feels that the Fund remains
extremely good value.
While PRDF's NAV remains some 36% down since inception, the Manager feels the
Fund's 2009 performance was encouraging. At the same time, at the end of
December 2009, the average multiple of the portfolio companies was only 8x
earnings on a forward looking basis - suggesting their fundamental value will
remain on an upward trend as the Russian market continues to recover and, once
again, attracts the attention of significant money from overseas portfolio
investors.
Please rest assured that the Manager will continue to work hard for Fund
shareholders throughout 2010 and going forward. We will maintain our established
channels of communication - through our monthly performance reports, PCM
newsletters and investor conference calls.
We are fully focused on realising the value of our holdings and will continue to
be an "active" investor - so guarding against patchy corporate governance. While
the Russian market still has some way to go to make up the large drop in asset
prices during 2008, the RTS staged a strong recovery last year. In that context,
along with the managers of our portfolio companies, we at PCM will continue to
do everything in our power to deliver healthy shareholder returns.
KEY INVESTMENTS (as of 31 December 2009)
Magnit (11.8% of net assets)
Magnit operates an ever-growing number of discount supermarkets. In addition to
trading with a 13.7x 2010 P/E at the end of 2009, the company has a strong
history of reporting double-digit sales growth - even during the recent
slowdown. Magnit operates in a cost-conscious segment of the market and has seen
its market share increase at the expense of weaker rivals amid the overall
market contraction. The stock rose by 355% last year and PCM sits on the Magnit
Board of Directors.
M Video (7.6% of net assets)
Having registered $3bn of sales in 2008 (+44% YoY), M Video became the largest
consumer electronics retailer in Russia last year. The company operates over
140 standardised hypermarkets on mainly leased premises in shopping centres in
over 40 Russian cities. The stock gained 345% last year and trades at 5.6x 2010
P/E.
Efes Breweries International (7.3% of net assets) - Sold in 2010
Efes Breweries International, which is 70% owned by the largest Turkish brewer,
Anadolu Efes, has 10% of the Russian beer market and 25% of the Kazakh beer
market via a JV with Heineken, as well as dominant positions in Moldova and
Georgia. Russia is the third largest beer market in the world and still has too
many players. Efes rose 155% during 2009, ending the year trading at 7.4x 2010
P/E.
Sistema JSFC (7.0% of net assets)
Sistema is the conglomerate owning a controlling share in MTS, the largest
Russian mobile operator; Comstar, national CLEC operator; Sitronics, an IT
manufacturing company; private pharma, tourism and financial companies and a
recently acquired oil company - Bashneft - which is the eighth largest in
Russia. Despite a share price rise of 281% during 2009, the company still trades
at a deep discount to the sum of its parts, with a 4.2x 2010 P/E.
Dixy Group OJSC (6.8% of net assets)
Dixy Group is the third largest discount food retailer in Russia. The company
operates over 450 leased (70%) and owned (30%) stores in residential areas of
large and small cities in Central Russia, the North-West and in the Urals. We
see an upside to profitability relative to the peer group and view the
3.8x 2010 P/E as undemanding given structural undersupply of modern retail in
Russia and significant space growth potential. The share price of Dixy Group
rose 305% last year and PCM sits on the Board of Directors
Kazkommertsbank (5.5% of net assets)
Kazkommertsbank (KKB) is the largest bank in Kazakhstan, with a 20% market share
of total banking assets. The bank also operates in Russia, Tajikistan and
Kyrgyzstan. With the Kazakh financial sector particularly hard hit during the
credit crunch, as overseas credit was quickly withdrawn, KKB spent 2009 focusing
on asset quality, liquidity management and maintaining operating efficiency. The
stock rose 21% during 2009. The Manager remains convinced, that Kazakhstan's
largest bank will emerge as a strong going-concern and finds the stock extremely
cheap, trading at 2010 P/E of 4.0x.
Mriya Agro Hldg (5.4% of net assets)
Mriya Agro is an agricultural company in Ukraine with a 15-year track record of
superior yields and control over 250,000 hectares of land. We expect this
privately-held company to generate significant EBITDA, which in the Manager's
view will show strong YoY growth - largely driven by the cultivation of 180,000
hectares in 2009. The company trades with a 2.8x 2010 P/E that is viewed by the
Manager as excellent value for a firm with high growth potential. PCM sits on
the Mriya Board of Directors.
MHP SA (5.2% of net assets)
MHP SA is a low-cost Ukrainian integrated poultry-producer. The company has a
45% market share in poultry production (over 80% of MHP's sales) and, despite a
204% share price rise during 2009, trades at a 10% discount to its meat
processing peers based on a 12-month forward EV/EBITDA. MHP has a 5.6x 2010 P/E
and is another deep-value play.
Bashkirenergo (4.8% of net assets)
Bashkirenergo is a 4,600 MW capacity integrated power utility in the region of
Bashkiria. The stock rose 450% during 2009 following the purchase of a majority
control of the Bashkirian energy assets, including Bashkirenergo, by Sistema
Holding. This is seen as a positive catalyst for the company's development and
Sistema's capital market credentials should raise Bashkirenergo's profile with
international investors. We see further potential upside coming from unbundling
and new ownership so as to eliminate the significant discount to the value of
the component assets.
Cherkizovo (4.5% of net assets)
Cherkizovo is Russia's largest domestic meat and poultry producer. It started as
a family-owned company but, following an IPO in 2006, there is now a 28%
free-float. The company is looking to double production volumes over the next 5
years - a plan that the Manager feels is achievable. PCM holds 4.5% of the
company. Cherkizovo's share price (GDR) rose 577% during 2009 and the company
ended the year valued at 3.9x P/E 2010.
PRDF SECTOR BREAK-DOWN (% of net assets, year end)
+----------------------------------+------+------+
| Sectors | 2009 | 2008 |
+----------------------------------+------+------+
+----------------------------------+------+------+
| Consumer (Cyclical/Non-cyclical) | 47.5 | 30.1 |
+----------------------------------+------+------+
| Telecom | 12.3 | 14.7 |
+----------------------------------+------+------+
| Power | 11.3 | 13.5 |
+----------------------------------+------+------+
| Financial | 11.0 | 22.2 |
+----------------------------------+------+------+
| Engineering/Industrial | 8.4 | 16.7 |
+----------------------------------+------+------+
| Other | 9.3 | 2.9 |
+----------------------------------+------+------+
TOP POSITIONS (as of 31 December 2009)
+------------------------------+-----------------+------+
| Name | % of Net Assets | US$m |
+------------------------------+-----------------+------+
+------------------------------+-----------------+------+
| Magnit | 11.8% | 25.9 |
+------------------------------+-----------------+------+
| M-Video | 7.6% | 16.7 |
+------------------------------+-----------------+------+
| EFES Breweries International | 7.3% | 16.1 |
+------------------------------+-----------------+------+
| Sistema | 7.0% | 15.3 |
+------------------------------+-----------------+------+
| Dixy Group | 6.8% | 14.9 |
+------------------------------+-----------------+------+
| Kazkommertsbank | 5.5% | 12.0 |
+------------------------------+-----------------+------+
| Mriya Agro | 5.4% | 11.8 |
+------------------------------+-----------------+------+
| MHP | 5.2% | 11.5 |
+------------------------------+-----------------+------+
| Bashkirenergo | 4.8% | 10.6 |
+------------------------------+-----------------+------+
| Cherkizovo Group | 4.5% | 9.9 |
+------------------------------+-----------------+------+
Prosperity Capital Management Limited
Grand Cayman
April 2010
Consolidated Supplemental Schedule of Investments (unaudited)
As at 31 December 2009
(All amounts stated in United States Dollars)
31 December 2009 31 December 2008
Fair % of Fair % of net
Description Cost Value net Cost Value assets(1)
assets(1)
Analysis of investments by
industry:
Consumer, Cyclical 10,283,754 14,574,827 6.63% 5,292,846 1,494,459 1.88%
Consumer, 78,228,965 89,774,070 40.84% 89,331,236 22,464,842 28.23%
Non-cyclical
Engineering 45,251,093 14,212,548 6.46% 46,908,654 13,264,589 16.68%
Financial 36,243,344 24,070,198 10.95% 56,483,597 17,687,652 22.24%
Industrial 2,571,374 4,233,650 1.93% - - -
Materials 13,605,542 11,817,607 5.37% - - -
Media 9,396,309 107,106 0.05% 9,396,309 94,329 0.12%
Oil & Gas 3,905,489 3,816,731 1.74% 490,167 224,959 0.28%
Power 34,089,822 24,760,502 11.26% 58,689,788 10,739,651 13.51%
Real Estate - - - 6,902,555 1,641,151 2.06%
Telecommunications 15,070,403 27,033,638 12.30% 69,241,129 11,666,283 14.67%
Transport 6,075,360 4,944,127 2.25% 3,232,298 362,408 0.46%
254,721,455 219,345,004 99.78% 345,968,579 79,640,323 100.13%
Concentration of investments:
As of 31 December 2009, the Group had invested in certain companies which had
estimated fair market values that were individually in excess of 5% of net
assets(1). These companies are identified in the schedule below:
31 December 2009 31 December 2008
% of % of
Fair net Fair net
Value assets(1) Value assets(1)
Magnit OAO 25,882,447 11.77% - -
M Video 16,681,804 7.59% - -
Efes Breweries International 16,133,234 7.34% 4,650,060 5.85%
Sistema JSFC 15,292,935 6.96% - -
Dixy Group OJSC 14,939,329 6.80% 4,520,107 5.68%
Kazkommertsbank 11,981,999 5.45% 5,630,954 7.08%
Mriya Agro Holdings 11,817,607 5.38% - -
MHP 11,475,125 5.22% - -
Center Telecom - - 5,516,128 6.94%
Alliance Bank - - 5,435,648 6.83%
Sberbank Rossii - - 4,222,077 5.31%
(1 )Except as otherwise expressly indicated, the term "net assets" (total assets
less total liabilities) as used in the financial statements refers to net assets
as determined in accordance with International Financial Reporting Standard
("IFRS") and as reflected in the consolidated statement of financial position.
31 December 2009 31 December 2008
Fair % of Fair % of
Description Cost Value net Cost Value net
assets(1) assets(1)
Analysis of investments:
Non-exchange
traded
financial
instruments 17,403,426 4,679,995 2.13% 8,188,248 1,255,239 1.58%
Exchange
traded
financial
instruments 237,318,029 214,665,009 97.65% 337,780,331 78,385,084 98.55%
254,721,455 219,345,004 99.78% 345,968,579 79,640,323 100.13%
See note 5 regarding the Group's policy with respect to determining the fair
value of investments.
(1 )Except as otherwise expressly indicated, the term "net assets" (total assets
less total liabilities) as used in the consolidated financial statements refers
to net assets as determined in accordance with International Financial Reporting
Standard ("IFRS") and as reflected in the consolidated statement of financial
position.
Consolidated Statement of Financial Position
As at 31 December 2009
(All amounts stated in United States Dollars)
+--------------------------------------+----+----------------++----------------+
| |Note|31 December 2009||31 December 2008|
+--------------------------------------+----+----------------++----------------+
| | | US$|| US$|
+--------------------------------------+----+----------------++----------------+
|Assets | | || |
+--------------------------------------+----+----------------++----------------+
|Current assets | | || |
+--------------------------------------+----+----------------++----------------+
|Financial assets at fair value through| | || |
|profit or loss | | || |
+--------------------------------------+----+----------------++----------------+
|Designated at fair value through | | || |
|profit or loss upon initial | | || |
|recognition | | || |
+--------------------------------------+----+----------------++----------------+
|Equity investments |5 | 217,407,956|| 79,640,323|
+--------------------------------------+----+----------------++----------------+
|Total designated at fair value through| | || |
|profit or loss upon initial | | || |
|recognition | | 217,407,956|| 79,640,323|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Held for trading | | || |
+--------------------------------------+----+----------------++----------------+
|Forward contracts |6 | 1,937,048|| -|
+--------------------------------------+----+----------------++----------------+
|Total held for trading | | 1,937,048|| -|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Total financial assets at fair value | | || |
|through profit or loss | | 219,345,004|| 79,640,323|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Loans and receivables | | || |
+--------------------------------------+----+----------------++----------------+
|Cash |8 | 1,932,979|| 670,588|
+--------------------------------------+----+----------------++----------------+
|Dividends receivable | | 192,465|| 54,986|
+--------------------------------------+----+----------------++----------------+
|Amounts receivable on investments sold| | 66,637|| 1,293,260|
+--------------------------------------+----+----------------++----------------+
|Total loans and receivables | | 2,192,081|| 2,018,834|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Total assets | | 221,537,085|| 81,659,157|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Equity | | || |
+--------------------------------------+----+----------------++----------------+
| Share capital |9 | 3,500,000|| 3,500,000|
+--------------------------------------+----+----------------++----------------+
| Share premium |10 | 134,400,629|| 134,400,629|
+--------------------------------------+----+----------------++----------------+
| Other reserve | | 200,000,000|| 200,000,000|
+--------------------------------------+----+----------------++----------------+
| Retained earnings | | (118,060,903)|| (258,363,321)|
+--------------------------------------+----+----------------++----------------+
|Total equity | | 219,839,726|| 79,537,308|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Liabilities | | || |
+--------------------------------------+----+----------------++----------------+
|Current liabilities | | || |
+--------------------------------------+----+----------------++----------------+
|Financial liabilities measured at | | || |
|amortised cost | | || |
+--------------------------------------+----+----------------++----------------+
|Accrued expenses |11 | 1,697,359|| 1,072,159|
+--------------------------------------+----+----------------++----------------+
|Amounts payable on investments | | || |
|purchased | | -|| 1,049,690|
+--------------------------------------+----+----------------++----------------+
|Total liabilities | | 1,697,359|| 2,121,849|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Total equity and liabilities | | 221,537,085|| 81,659,157|
+--------------------------------------+----+----------------++----------------+
|Net asset value per share | | 0.628|| 0.227|
+--------------------------------------+----+----------------++----------------+
+--------------------------------------+----+----------------++----------------+
|Net asset value per share based on 350,000,000 (31 December |
|2008: 350,000,000) shares outstanding. |
+------------------------------------------------------------------------------+
These consolidated financial statements were approved by the Board of Directors
on 29 April 2010.
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2009
(All amounts stated in United States Dollars)
+--------------------------------------------+----+-------------++-------------+
| |Note|Year ended 31||Year ended 31|
| | |December 2009||December 2008|
+--------------------------------------------+----+-------------++-------------+
| | | US$|| US$|
+--------------------------------------------+----+-------------++-------------+
|Investment income | | || |
+--------------------------------------------+----+-------------++-------------+
|Income |3 | 4,017,379|| 5,284,742|
+--------------------------------------------+----+-------------++-------------+
|Net foreign exchange (loss)/gain | | (101,171)|| 45,016|
+--------------------------------------------+----+-------------++-------------+
|Net gain/(loss) on investments designated at| | || |
|fair value through profit or loss upon |4 | || |
|initial recognition | | 140,753,798||(319,075,048)|
+--------------------------------------------+----+-------------++-------------+
|Net investment income/(loss) | | 144,670,006||(313,745,290)|
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
|Operating expenses | 11 | (4,215,991)|| (7,418,080)|
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
|Profit/(loss) from operations before finance| | 140,454,015||(321,163,370)|
|costs | | || |
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
|Finance costs | | || |
+--------------------------------------------+----+-------------++-------------+
|Interest expense | | -|| (64,623)|
+--------------------------------------------+----+-------------++-------------+
|Withholding tax | | (151,597)|| (562,700)|
+--------------------------------------------+----+-------------++-------------+
|Total finance costs | | (151,597)|| (627,323)|
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
|Total comprehensive income/(loss) for the | | 140,302,418||(321,790,693)|
|year | | || |
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
|Earnings/(loss) per ordinary share | | || |
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
|Basic & diluted |9 | US$0.401|| (US$0.919)|
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
|Weighted average ordinary shares outstanding| | || |
+--------------------------------------------+----+-------------++-------------+
| | | Number|| Number|
+--------------------------------------------+----+-------------++-------------+
|Basic & diluted | | 350,000,000|| 350,000,000|
+--------------------------------------------+----+-------------++-------------+
+--------------------------------------------+----+-------------++-------------+
All items in the above statement are derived from continuing operations.
All income is attributable to the ordinary shareholders of the Group.
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Changes in Equity
For the years ended 31 December 2009 and 31 December 2008
(All amounts stated in United States Dollars)
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
| | Ordinary| Share| Share| Other| Retained| Total|
| | shares| capital| premium| reserves| earnings| |
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
| | Number| US$| US$|US$ | US$| US$|
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
|Balance at 1 | |3,500,000|134,400,629|200,000,000| 63,427,372| 401,328,001|
|January 2008 |350,000,000| | | | | |
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
|Total | | | | | | |
|comprehensive| | | | | | |
|loss for the | | | | | | |
|year | -| -| -| -|(321,790,693)|(321,790,693)|
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
|Balance at | | | | | | |
|31 December | | | | | | |
|2008 |350,000,000|3,500,000|134,400,629|200,000,000|(258,363,321)| 79,537,308|
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
|Total | | | | | | |
|comprehensive| | | | | | |
|income for | | | | | | |
|the year | -| -| -| -| 140,302,418| 140,302,418|
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
|Balance at | | | | | | |
|31 December | | | | | | |
|2009 |350,000,000|3,500,000|134,400,629|200,000,000|(118,060,903)| 219,839,726|
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
+-------------+-----------+---------+-----------+-----------+-------------+-------------+
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2009
(All amounts stated in United States Dollars)
+----------------------------+----+---------------------++---------------------+
| |Note| Year ended 31 || Year ended 31 |
| | | December 2009|| December 2008|
+----------------------------+----+---------------------++---------------------+
| | | US$|| US$|
+----------------------------+----+---------------------++---------------------+
|Operating activities | | || |
+----------------------------+----+---------------------++---------------------+
|Total comprehensive| | 140,302,418|| (321,790,693)|
|income/(loss) for the year | | || |
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|Adjustments for: | | || |
+----------------------------+----+---------------------++---------------------+
|Changes in net unrealised| 4 | (231,177,186)|| |
|(gains)/losses on| | || |
|investments | | || 324,457,563|
+----------------------------+----+---------------------++---------------------+
|Realised loss/(gain) on| 4 | 90,423,388|| |
|investments | | || (5,382,515)|
+----------------------------+----+---------------------++---------------------+
| | | (451,380)|| (2,715,645)|
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|(Increase)/decrease in| | (137,479)|| |
|receivables | | || 234,825|
+----------------------------+----+---------------------++---------------------+
|Increase/(decrease) in| | 625,200|| |
|payables | | || (14,982,089)|
+----------------------------+----+---------------------++---------------------+
|Cash generated from/(used)| | 487,721|| |
|in operations | | || (14,747,264)|
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|Cash flows generated| | 36,341|| |
|from/(used in) operating| | || |
|activities | | || (17,462,909)|
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|Cash flows from investing | | || |
|activities | | || |
+----------------------------+----+---------------------++---------------------+
|Purchases of investments | | (96,362,330)|| (116,306,981)|
+----------------------------+----+---------------------++---------------------+
|Proceeds from sale of | | || 134,116,797|
|investments | | 97,588,380|| |
+----------------------------+----+---------------------++---------------------+
|Cash flows generated from | | || |
|investing activities | | 1,226,050|| 17,809,816|
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|Cash flows from financing | | || |
|activities | | || |
+----------------------------+----+---------------------++---------------------+
|Proceeds from repurchase | | || |
|agreement | | -|| 4,090,500|
+----------------------------+----+---------------------++---------------------+
|Repayment of repurchase | | || |
|agreement | | -|| (4,090,500)|
+----------------------------+----+---------------------++---------------------+
|Cash flows generated from | | || |
|financing activities | | -|| -|
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|Net increase in cash | | 1,262,391|| 346,907|
+----------------------------+----+---------------------++---------------------+
|Cash at 1 January | | 670,588|| 323,681|
+----------------------------+----+---------------------++---------------------+
|Cash at 31 December | | 1,932,979|| 670,588|
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|Supplementary information | | || |
+----------------------------+----+---------------------++---------------------+
+----------------------------+----+---------------------++---------------------+
|Interest received | | 1,419|| 35,648|
+----------------------------+----+---------------------++---------------------+
|Dividends received (net of | | || |
|withholding tax US$128,877 | | || |
|(2008: US$562,700)) | | 3,735,616|| 4,948,237|
+----------------------------+----+---------------------++---------------------+
The accompanying notes form an integral part of the financial statements.
Notes to the Consolidated Financial Statements
1. Organisation and structure
Prosperity Russia Domestic Fund Limited (the "Company") was registered on 29
December 2006 with registered number 46129, is domiciled in Guernsey, Channel
Islands, and commenced its operations on 22 February 2007. The Company is a
closed-ended investment company incorporated in Guernsey with limited liability
under the Companies (Guernsey) Law, 2008 (the "Companies Law"), and its ordinary
shares are listed on the Alternative Investment Market ("AIM") of the London
Stock Exchange. The registered office of the Company is Dorey Court, Admiral
Park, St Peter Port, Guernsey GY1 3BG, Channel Islands. "Group" is defined as
the Company and its subsidiary, Roselia Limited.
The Group's investment objective is to achieve capital growth by investing in a
portfolio of securities involved in the corporate restructuring and
consolidation which are expected to take place in Russia and other NIS (Newly
Independent States) countries which are expected to benefit from the increase in
consumer demand and capital investment in such countries. The Group will invest
primarily in small and medium-sized companies, with the aim of being an active
and influential minority shareholder.
The Group will invest at least 75% of its gross assets in the securities of
companies established or having their principal operations in Russia. The Group
may invest up to 25% of its gross assets in the securities of companies
established or having their principal operations in NIS countries other than
Russia, which the Manager expects to be primarily the Ukraine and Kazakhstan,
however, the Group may, within such limitation and on an opportunistic basis,
invest in the securities of companies established or having their principal
operations in other NIS countries. The Group may not invest more than 25% of its
gross assets in the securities of companies not listed on a recognised stock
exchange or traded on a recognised OTC securities market.
The Group's investment management activities are managed by Prosperity Capital
Management Limited (the "Manager") as supervised by the Board of Directors. It
was incorporated with limited liability and registered as an exempted company
under the laws of the Cayman Islands. The Group has entered into a management
agreement (the "Management Agreement") under which the Manager, subject to the
overall supervision and control of the Directors, has responsibility for
identifying, analysing, timing and making the Group's investments, as well as
monitoring and disposing of such investments. The Manager will assist and advise
the Directors if required with the valuation of the Group's assets generally.
Under the terms of the Management Agreement, the Company has agreed to pay the
Manager a management fee and a performance fee. Refer to note 11 for further
details. The Company is administered by Kleinwort Benson (Channel Islands) Fund
Services Limited (the "Administrator"). The Sub- Administrator provides certain
administration services to the Group under a sub-administration agreement. This
sub-administration agreement novated from Investors Fund Services (Ireland)
Limited (IFSIL) to State Street Fund Services (Ireland) Limited on 17 July 2009.
The Company owns 100% of the share capital of Roselia Limited, a Cyprus company.
Roselia Limited is a subsidiary of the Company as Prosperity Russia Domestic
Fund Limited retains control over the company through its retention of all the
risks and rewards of the assets transferred to, or purchased from Roselia
Limited.
2. Significant accounting policies
(a) Statement of compliance
These consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Roselia Limited (the "Cyprus Subsidiary") (together
"the Group"), which give a true and fair view, have been prepared in accordance
with International Financial Reporting Standards ("IFRS") and interpretations
approved by the International Accounting Standards Board ("IASB"), and are in
compliance with the Companies (Guernsey) Law 2008.
(b) Basis of preparation
The consolidated financial statements are presented in United States Dollars
which is the functional currency of the Group reflecting the fact that the
Company's shares are issued and redeemed in United States Dollars and
distributions to investors are also made in United States Dollars.
The principal accounting policies of the Group have been applied consistently
during the year and are consistent with those used in the prior year with the
exception of the changes in accounting policies as outlined below and the change
in dividend income policy as detailed in note 2 (i) below.
(c) Standards and interpretations
During the year, the Group adopted the following new and revised accounting
standards in the preparation of these consolidated financial statements. The
adoption of these new and revised standards resulted only in additional
disclosures in, and certain changes in presentation of, the consolidated
financial statements. The adoption of these standards did not result in any
changes in the measurement of amounts reported for the current or prior
financial periods. As described in note 2 (i) "dividend income" a change in
accounting policy was implemented relating to the recognition of dividend
income.
i. Presentation of financial statements
The Company applied revised IAS 1 Presentation of Financial Statements (2007),
which became effective as of 1 January 2009. As a result of this revised
standard, any equity-classified shareholdings related changes in net assets are
presented in a statement of changes in equity, whereas all non-shareholdings
related changes in net assets are presented in a statement of comprehensive
income. This change in presentation format does not have any impact on the
presentation and disclosure of the Group's consolidated statement of
comprehensive income or the consolidated statement of changes in equity as the
amounts due to holders is classified as equity and no other comprehensive income
items arise. Where applicable, the Group has adopted the single-statement
approach in the presentation of its total comprehensive income.
The Group has also chosen to adopt the new titles for the primary statements as
set out in IAS 1 which is considered to better reflect the function of each of
the primary statements.
Amendments to IAS 1, Presentation of Financial Statements (2007), issued in May
2008 as part of IASB's annual improvement project, clarifies that some rather
than all financial assets and financial liabilities classified as held for
trading are classified as current only when these assets or liabilities are
expected to be realised or settled within twelve months from the financial
reporting period end date. The application of this amendment does not have any
significant impact on the classification of the assets and liabilities of the
Group in the current or prior financial periods.
The adoption of this revised standard has impacted only on presentation aspects
and does not impact the amounts reported in the current or prior financial
periods.
ii. Fair value disclosures
In March 2009, the IASB issued Amendments to IFRS 7 Financial Instruments:
Disclosures - Improving Disclosures about Financial Instruments, which became
effective for financial periods beginning on or after 1 January 2009.
The amendments apply to financial assets and financial liabilities measured in
the consolidated statement of financial position at fair value, and extend the
related fair value disclosures. A key disclosure now required is the
categorisation of fair value measurements within a three-level hierarchy that
reflects the significance of inputs used in measuring the fair values. The fair
value hierarchy is as follows:
* Level 1: quoted prices (unadjusted) in active markets for identical assets
or liabilities.
* Level 2: inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e., as prices) or
indirectly (i.e., derived from prices).
* Level 3: inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
These new requirements do not have any financial impact on the measurement
approach to amounts reported in the consolidated financial statements for the
current period when compared to the approach used in prior financial periods.
Comparative information has not been presented as permitted by the transitional
provisions of the amendment.
The amendments to IFRS 7 also revised the minimum disclosure requirements on
liquidity risk whereby an analysis of remaining contractual maturities for
derivative financial liabilities would now only be required for derivative
financial liabilities whose contractual maturities analysis are essential for an
understanding of the timing of cash flows of the entity. This revision has not
resulted in any changes in the liquidity risk disclosures made by the Group with
respect to its derivative financial liabilities in the current or prior
financial periods.
iii. Operating segments
IFRS 8, Operating Segments, which is effective for financial statements for
periods beginning on or after 1 January 2009, was adopted by the Group during
the current financial period. IFRS 8 replaces IAS 14, Segment Reporting, and
resulted in changes in the method of identifying and presenting operating
segment information within the financial statements. Operating segment
information is now presented on the "management approach" basis which is
consistent with the information provided internally to the chief operating
decision maker of the Group.
The adoption of IFRS 8 has not resulted in any changes in the operating segments
identified for the Group. The Group continues to be engaged only in a single
segment of business. There was no requirement to re-state any comparative
segment information to conform with the disclosures now required by IFRS 8 under
its transitional requirements. Since the change in accounting policy only
impacts presentation and disclosure aspects, there is no impact on earnings per
share.
iv. New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations that have
been issued to date are not yet effective for the consolidated financial
statements of the Group for the year ended 31 December 2009, and have not been
applied nor early adopted in preparing these consolidated financial statements.
None of these are expected to have a significant effect on the consolidated
financial statements of the Company in the period of initial adoption.
(d.) Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists where the
Company has the power to govern the financial and operating policies of an
entity, so as to obtain benefits from its activities. In assessing control,
potential voting rights that evidently are exercisable are taken into account.
The consolidated financial statements comprise the financial statements of the
Company and the Cyprus Subsidiary for the year ended 31 December 2009. The
Cyprus Subsidiary has been consolidated from the date on which control is
transferred to the Company and will cease to be consolidated from the date on
which control is transferred from the Company. At 31 December 2009, the Cyprus
Subsidiary was the Company's only subsidiary.
(e) Use of estimates and judgements
The preparation of consolidated financial statements in accordance with the
recognition and measurement principles of IFRS requires management to make
judgements, estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of income and
expenses during the year.
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 for making the judgements
about carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from those estimates.
(f) Financial instruments
(i) Classification
Financial instruments designated at fair value through profit or loss upon
initial recognition include investments in exchange traded and non-exchange
traded equity instruments.
A financial asset or financial liability is classified as held for trading if it
is acquired or incurred principally for the purpose of selling or repurchasing
in the near term. Derivatives are also categorised as held for trading. The
Company does not classify any derivatives as hedges in a hedging relationship.
All other assets are carried at amortised cost.
Financial liabilities are carried at amortised cost.
(ii) Recognition
The Group recognises financial assets and financial liabilities on the date it
becomes party to the contractual provisions of the instrument.
Transactions are recognised using trade date accounting.
(iii) Measurement
Financial instruments are measured initially at fair value (transaction price).
Transaction costs on financial assets designated at fair value through profit or
loss are expensed immediately.
Subsequent to initial recognition, all financial instruments classified at fair
value through profit or loss are measured at fair value with changes in their
fair value recognised in the consolidated statement of comprehensive income. All
other assets and liabilities are carried at amortised cost.
(iv) Derecognition
The Group derecognises a financial asset when the contractual rights to the
flows from the financial asset expire or it transfers the financial asset and
the transfer qualifies for derecognition in accordance with IAS 39. The Group
uses the First In - First Out (FIFO) method to determine realised gains and
losses on financial asset derecognition. A financial liability is derecognised
when the obligation specified in the contract is discharged, cancelled or
expired.
(v) Specific instruments
Repurchase transactions
Securities sold subject to a simultaneous agreement to repurchase these
securities at a certain later date at a fixed price are retained in the
consolidated financial statements and are measured in accordance with their
original measurement principles. The proceeds of the sale are reported as
liabilities and are carried at amortised cost as loan amounts outstanding.
Forward contracts
All derivatives, including forward contracts, in a net receivable position
(positive fair value) are reported as financial assets held for trading. All
derivatives, including forward contracts, in a net payable position (negative
fair value) are reported as financial liabilities held for trading.
The fair values of derivatives that are not exchange traded are at the amount
that the Group would receive or pay to terminate the contract at the statement
of financial position date. These amounts are estimated using appropriate
valuation techniques which take into account current market conditions and the
credit-worthiness of the parties to the contract.
(g) Foreign currency translation
Transactions in foreign currency are translated into the functional currency at
the foreign exchange rate prevailing on the transaction date. Monetary assets
and liabilities denominated in foreign currencies at the consolidated statement
of financial position date are translated to United States Dollars at the
foreign exchange rates ruling at that date. Non-monetary assets and liabilities
denominated in foreign currencies that are stated at fair value are translated
to the functional currency at the foreign exchange rates ruling at the dates
that the values were determined. Foreign exchange differences arising on
translation and realised gains and losses on disposals are recognised in the
consolidated statement of comprehensive income.
Foreign exchange gains and losses on financial assets and financial liabilities
at fair value through profit or loss are recognised together with other changes
in the fair value. Included in the consolidated statement of comprehensive
income line item net foreign exchange (loss)/gain are net foreign exchange
gains/(losses) on monetary financial assets and financial liabilities other than
those classified at fair value through profit or loss.
(h) Interest income
Interest income arises from cash deposits and is recognised in the consolidated
statement of comprehensive income by the Group using the effective interest rate
method.
(i) Dividend income
Dividend income is recognised in the consolidated statement of comprehensive
income on the later of the day the board of the investee company recommends the
dividends and the ex-dividend date to the shareholders for approval (where the
Board of Directors announces an ex-dividend date prior to this recommendation
date); and the ex-dividend date. In prior years, dividend income was recognised
in the consolidated statement of comprehensive income on the approval date of
the dividend. In accordance with IAS 8, this represents a change in accounting
policy. This change was applied as the Directors considered that it was a more
appropriate method of recognising dividend income as it results in a more
accurate net asset value. This change in accounting policy was considered to
have an immaterial effect on the prior year results and therefore no restatement
of the comparative figures was deemed necessary.
In some cases, the Group may receive or choose to receive dividends in the form
of additional shares rather than cash. In such cases the Group recognises the
dividend income for the amount of the cash dividend alternative, with the
corresponding debit treated as an additional investment. Dividend income
received by the Group may be subject to withholding tax imposed in the country
of origin. Dividend income is recorded gross of such taxes and the withholding
tax is recognised as a finance expense.
(j) Expenses
All expenses are recognised in the consolidated statement of comprehensive
income on an accrual basis.
(k) Cash
Cash comprises of current deposits with banks.
(l) Share capital
Capital expenses
The expenses of the Group directly attributable to the issuance of shares are
charged to the share premium account.
Ordinary shares
Ordinary shares of the Company represent a residual interest in the net assets
of the Company and are classified as equity. Incremental costs directly
attributable to the issue of ordinary shares are recognised as a deduction from
equity, net of any tax effect.
(m) Operating segments
The Board of Directors has considered the requirements of IFRS 8, Operating
Segments. The Board is of the view that the Group is engaged in a single segment
of business, being that of investing in a common pool of assets comprising
exchange traded equities and non-exchange traded equities, for the purpose of
meeting the Group's investment objective of achieving capital growth by
investing in a portfolio of securities issued by companies in the sectors of the
domestic economies of Russia and other Newly Independent States ("NIS")
countries which are expected to benefit from the increase in consumer demand and
capital investment in such countries. The Company will invest primarily in small
and medium-sized companies, with the aim of being an active and influential
minority shareholder.
The Board, as a whole, has been determined as constituting the chief operating
decision maker of the Group. The key measure of performance used by the Board to
assess the Group's performance and to allocate resources is the total return on
the Group's net asset value, as calculated under IFRS, and therefore no
reconciliation is required between the measure of profit or loss used by the
Board and that contained in the consolidated financial statements.
Information on dividend income, interest income and realised gains or losses
derived from sales of investments, which forms the Group's core source of
revenue, are disclosed in the consolidated statement of comprehensive income.
The Group is domiciled in Guernsey, Channel Islands. All of the Group's income
from investments is received from equity or debt securities investments that are
issued by companies in the sectors of the domestic economies of Russia and other
NIS (Newly Independent States) countries.
The Group has a highly diversified portfolio of investments and, no security of
a single underlying issuer accounts for more than 20% of the Group's net assets,
which is within the Group's investment restriction policy.
The Group has no assets classified as non-current assets.
The Group also has a diversified shareholder population mainly held through
various nominee accounts.
3. Income
+-------------------------+-------------------------++-------------------------+
| | Year Ended 31 December|| Year Ended 31 December|
| | 2009|| 2008|
+-------------------------+-------------------------++-------------------------+
| | US$|| US$|
+-------------------------+-------------------------++-------------------------+
|Interest income from cash| 1,419|| 3,194|
+-------------------------+-------------------------++-------------------------+
|Dividend income | 4,015,960|| 5,281,548|
+-------------------------+-------------------------++-------------------------+
| | 4,017,379|| 5,284,742|
+-------------------------+-------------------------++-------------------------+
4. Gains and losses on investments designated at fair value through profit or
loss upon initial recognition
+------------------------+-------------------------++--------------------------+
| | Year Ended 31 December|| Year Ended 31 December|
| | 2009|| 2008|
+------------------------+-------------------------++--------------------------+
| | US$|| US$|
+------------------------+-------------------------++--------------------------+
|Net realised (loss)/gain| (90,423,388)|| 5,382,515|
|on investments | || |
+------------------------+-------------------------++--------------------------+
|Net unrealised| || |
|gain/(loss) on| 231,177,186|| (324,457,563)|
|investments | || |
+------------------------+-------------------------++--------------------------+
| | 140,753,798|| (319,075,048)|
+------------------------+-------------------------++--------------------------+
5. Investments in securities designated at fair value through profit or loss
upon initial recognition
The following is the Group's policy with respect to determining the fair value
of investments:
(i) At the reporting date, the fair value of exchange traded financial
instruments is based on quoted market prices traded in active markets, without
any deduction for estimated future selling costs. An active market exists if
quoted prices are regularly and readily available from an exchange, dealer,
broker, industry group, pricing services or regulatory agency, and those prices
represent active and regularly occurring market transactions on an arm's length
basis. For financial instruments that are exchange traded and where the exchange
has been determined to be the appropriate active market for these instruments,
the quoted market price is based on the bid price obtainable from either the
Russian Trading Systems (RTS), the Moscow Interbank Currency Exchange (MICEX),
the Ukrainian Stock Exchange (PFTS) or the Kazakhstan Stock Exchange (KASE).
These investments fall into Level 1 of the fair value hierarchy as defined by
IFRS 7 (see note 2).
(ii) At the reporting date, the fair value of (a) non-exchange traded financial
instruments and of (b) exchange traded financial instruments where the exchange
is not considered by the Directors to be an appropriate active market for these
instruments, are estimated by the Manager using market information. The
Sub-Administrator receives confirmation of almost all these bid prices from
independent brokers. Where there is only independent confirmation of those
prices from the independent broker but it can be verified that the valuation is
based on techniques using observed inputs, the investments fall into Level 2 of
the fair value hierarchy as defined by IFRS 7 (see note 2). If it cannot be
verified that the valuation technique used is based significantly on observable
inputs, then the investments fall into Level 3 of the fair value hierarchy as
defined by IFRS 7 (see note 2).
(iii)Where independent broker confirmations are not available for non-exchange
traded financial instruments, the Manager estimates the fair value of such
financial instruments using common valuation techniques. Where these valuations
incorporate some unobservable market information, these investments fall into
Level 3 of the fair value hierarchy as defined by IFRS 7 (see note 2).
(iv) The values of assets or liabilities in currencies other than United States
Dollars are converted into United States Dollars at the prevailing market rate
for such currencies at the close of business in the local market as at the last
available trading date in the period.
In the absence of readily ascertainable market values for the unquoted
investments and for certain listed securities which are not actively traded, the
Board of Directors has approved the estimated market values determined by the
Manager as an estimate of the amount that might reasonably be realised on their
sale. This market value determination was made after considering certain
pertinent factors including the inherent worth of the security. However, because
of the inherent uncertainty of valuation, the estimated values as detailed in
(ii) and (iii) above, may differ from the values that would have been used had a
ready market for the investments existed and the differences could be material.
The details are as follows:
+------------------+----------------+------------++---------------+------------+
|Fair market values| | || | |
|estimated by the |31 December 2009| % of net|| 31 December| % of net|
|Manager in | US$| assets|| 2008 US$| assets|
|accordance with | | || | |
|IFRS | | || | |
+------------------+----------------+------------++---------------+------------+
|Exchange traded | 26,751,354| 12.17%|| 7,244,225| 9.11%|
|investments | | || | |
+------------------+----------------+------------++---------------+------------+
|Non-exchange | 4,679,995| 2.13%|| 1,255,239| 1.58%|
|traded investments| | || | |
+------------------+----------------+------------++---------------+------------+
|Total | 31,431,349| 14.30%|| 8,499,464| 10.69%|
+------------------+----------------+------------++---------------+------------+
The net unrealised loss on investments whose values were estimated by the
Manager using market information is US$20,581,165 (31 December 2008: net
unrealised loss of US$32,888,286).
The Group invests in countries with limited and developing capital markets.
Investing in Russian and CIS securities involves risks not normally associated
with investing in more developed markets and politically and economically stable
jurisdictions. These risks include political, economic and legal uncertainties,
delays in settling portfolio transactions and the risk of loss due to Russia's
and the CIS underdeveloped systems for share registration and transfer. The
limited size of the Russian and the CIS markets for securities also potentially
results in a lack of liquidity. As a result, the Group may be unable to
liquidate its positions easily and may not receive proceeds approximating
estimated fair values.
The Group has certain investments in relatively illiquid securities and
currencies for which there is no guarantee of a return on the investment and no
guarantee that a return or repatriation of any invested amounts in a convertible
currency will be possible. These investments may involve greater risks than
investments in more developed markets and the prices of such investments may be
volatile due to the perceived credit risk. The consequences of political, social
or economic changes in these markets may also have disruptive effects on the
market prices of the Group's investments and the income they generate.
The Russian Federation has historically experienced political and economic
instability, which has affected and may continue to affect the activities of
enterprises operating in this environment. Consequently, operations in the
Russian Federation involve risks which do not typically exist in other markets.
These consolidated financial statements reflect the Board's assessment of the
impact of the Russian business environment on the investments held by the Group.
The future business environment may differ from the Manager's current
assessment. The impact of such differences on the investments held by the Group
may be significant.
The immediate effects of such risks could include declines in economic growth, a
reduction in the availability of credit and borrowers' ability to service debt,
an increase in interest rates, changes and increases in taxes, an increased rate
of inflation, devaluation of the Russian Rouble, restrictions on convertibility
of the Russian Rouble and movements of hard currency, an increase in the number
of bankruptcies of entities (including bank failures), labour unrest and strikes
resulting from the possible increase in unemployment and political turmoil.
These and other potentially significant economic and political conditions and
future policy changes could have a material adverse effect on the operations of
the Group and the realisation and settlement of its assets and liabilities.
6. Forward contracts held for trading
On 25 March 2008, the Subsidiary, entered into an agreement whereby it purchased
investments in two Russian banks (the "Russian Banks"), for US$6,186,998 in cash
from a third party ("the Counterparty"), giving the Subsidiary a 5.10% stake in
each bank. The agreement provided an option (the "Put Option") for the
Subsidiary to sell both the investments back to the Counterparty at the original
purchase price, should the Russian Banks, either together or individually, fail
to meet certain financial targets. Under this Put Option arrangement, cash
settlement by the Counterparty fell due within one month.
In preparing the financial statements for the year ended 31 December 2008, the
investments in the Russian Banks were, in accordance with IAS 39, designated at
fair value through profit and loss. The fair value of the investments at that
date was determined to be US$1,011,285, thus giving rise to an unrealised loss
in that period of US$5,175,713. Due to concerns at that time of the credit
standing of the Counterparty, the Put Option was valued at US$nil at 31 December
2008.
In March 2009, the Russian Banks released financial statements indicating that
financial targets had not been met, thus providing the Subsidiary with the
opportunity to exercise the Put Option and it took the decision to proceed with
that exercise right. However, due to the financial condition of the Counterparty
and its inability to honour the Put Option agreement, that agreement was
modified to extend the settlement period.
According to the revised arrangement, dated 11 August 2009, a prepayment of the
sale proceeds was due upfront from the Counterparty amounting to US$225,380 and
this was duly paid. The remainder of the proceeds (US$4,328,540) is required to
be paid no later than 30 November 2010. Related to this, the Counterparty
pledged collateral to the Subsidiary as security to ensure final settlement.
This collateral is in the form of other securities and these are held in a
separate account in escrow pending the final settlement under the revised
arrangement. If the Counterparty does not provide the cash proceeds (the
remainder of the original purchase price) within the 18 month timeframe, the
Subsidiary can take title to the collateral securities.
As at 31 December 2009, the counterparty had made no further cash payments in
respect of this transaction.
The Group has determined that neither the exercise of the Put Option nor the
negotiation of the subsequent revised settlement arrangement meet the
requirements of IAS 39 to allow derecognition of the Russian Bank shares from
the consolidated statement of financial position. This is because the Subsidiary
did not transfer substantially all the risks and rewards of ownership of those
Russian Bank shares.
The Subsidiary is still exposed to the risk of retaining ownership of those
shares where a fall in the value of the shares arises as in that event the
Counterparty may fail to make settlement in cash. In addition, the Subsidiary
continues to be entitled to any dividend and voting rights in relation to the
shares. Therefore the Russian Bank shares continue to be fair valued through
profit or loss, in accordance with IAS 39. The fair value of these shares as at
31 December 2009 was US$2,391,492.
Regarding the extended settlement arrangement with the Counterparty, relating to
the sell-back of the Russian Bank shares, this has, in substance, been treated
as a forward sale arrangement. The fair value of this arrangement takes into
account, the maximum cash settlement amount that can be received (US$4,553,920,
of which US$225,380 has been received), the fair value at any point in time of
the Russian Bank shares and the fair value of the collateral pledged.
Therefore at each valuation point the market value of the Russian Bank shares
will be compared to US$4,328,540 (the remainder that is due under the forward
sale arrangement) and the value of the forward sale will be computed based on
the difference, but also taking into account the value of the collateral. The
value attributed to the forward sale contract will be negative if the market
value of the Russian Bank shares exceeds the cash amount under the forward sale.
The value of the forward sale contract will be positive if the market value of
the Russian Bank shares is lower than that cash settlement amount due. The
maximum value that can be attributed to the resulting forward sale asset is the
lower of (i) the fair value of the pledged shares (valued at US$4,178,284 as at
31 December 2009) and (ii) the cash amount due under the sale agreement less the
fair value of the Russian Bank shares, discounting for time value as
appropriate.
The forward contract had an estimated positive fair value of US$1,937,048 at 31
December 2009 (31 December 2008: US$nil).
7. Fair value information
(a) Fair value hierarchy analysis
The table below provides an analysis of the fair value measurement used by the
Group to fair value its financial instruments in its consolidated statement of
financial position categorised by the fair value hierarchy as described in Note
5:
+--------------------++---------------+------------+------------+-------------+
| || Level 1 | Level 2 | Level 3 | Total |
+--------------------++---------------+------------+------------+-------------+
| 31 December 2009 || US$ | US$ | US$ | US$ |
+--------------------++---------------+------------+------------+-------------+
| Financial assets designated at fair | | | |
| value through profit and loss upon | | | |
| initial recognition | | | |
+--------------------++---------------+------------++-----------+-------------+
| Equity investments || 155,048,116 | 58,671,976 || 3,687,864 | 217,407,956 |
+--------------------++---------------+------------++-----------+-------------+
| Forward contracts || - | - || 1,937,048 | 1,937,048 |
+--------------------++---------------+------------++-----------+-------------+
| || 155,048,116 | 58,671,976 || 5,624,912 | 219,345,004 |
+--------------------++---------------+------------++-----------+-------------+
The level in the fair value hierarchy within which the fair value measurement is
categorised in its entirety is determined based on the lowest level input that
is significant to the fair value measurement in its entirety.
(b) Transfers between levels of the fair value hierarchy
Two securities that were previously valued using quoted market prices in an
active market (Level 1 inputs) on 31 December 2008 were valued based on other
observable market inputs (Level 2 inputs) on 31 December 2009, as the securities
had not been actively traded on the financial reporting date. Four securities
that were previously valued based on other observable market inputs (Level 2
inputs) on 31 December 2008 were valued using quoted market prices in an active
market (Level 1 inputs) on 31 December 2009, as the securities had been actively
traded on the financial reporting date. Transfers into Level 3 are detailed in
section (c) below.
The following table shows the total significant transfers during the year
between Level 1 and Level 2 of the fair value hierarchy for financial assets
recognised at fair value:
+--------------------------+-------------------------++------------------------+
|Financial assets |Transfers from Level 1 to|| Transfers from Level 2 |
|designated at fair value | Level 2|| to Level 1|
|through profit or loss | || |
|upon initial recognition | || |
+--------------------------+-------------------------++------------------------+
| | US$|| US$|
+--------------------------+-------------------------++------------------------+
|Equities | 11,817,644|| 11,558,910|
+--------------------------+-------------------------++------------------------+
(c) Level 3 reconciliation
+-------------------------------------------------------------------++---------+
| || Level 3|
|Financial assets designated at fair value through profit or loss || US$|
+-------------------------------------------------------------------++---------+
|Balance at 1 January 2009 ||1,255,239|
+-------------------------------------------------------------------++---------+
|Total gains and losses recognised in the consolidated statement of || |
|comprehensive income for the year ||3,895,438|
+-------------------------------------------------------------------++---------+
|Purchases || 884,996|
+-------------------------------------------------------------------++---------+
|Sales ||(505,091)|
+-------------------------------------------------------------------++---------+
|Transfers into Level 3 || 94,330|
+-------------------------------------------------------------------++---------+
|Balance at 31 December 2009 ||5,624,912|
+-------------------------------------------------------------------++---------+
The Level 3 classification of financial assets as at 31 December 2009, consists
of the following securities:
+---------------------------------+------------------++
| | 31 December 2009 ||
+---------------------------------+------------------++
| | Fair Value ||
+---------------------------------+------------------++
| | US$ ||
+---------------------------------+------------------++
| Smolenska | 599 ||
+---------------------------------+------------------++
| INTL Marketing & Sales Group | 107,105 ||
+---------------------------------+------------------++
| Russian Maintenance Corporation | 243,750 ||
+---------------------------------+------------------++
| Anthausa | 944,918 ||
+---------------------------------+------------------++
| Rostovpromstroibank | 2,391,492 ||
+---------------------------------+------------------++
| Forward contract | 1,937,048 ||
+---------------------------------+------------------++
| | 5,624,912 ||
+---------------------------------+------------------++
The value of shares in Rostovpromstroibank has been estimated by the Manager
using a valuation model based on the price to book ratio of similar entities,
with a discount applied to the ratio to factor to account for additional risk.
The value of Anthausa, Smolenska, Russian Maintenance Corporation and INTL
Marketing & Sales Group were estimated using the latest OTC market data and
information known to the Manager.
The value of the forward contract is detailed in note 6.
(d)Effect of change in significant assumptions of Level 3 financial instruments
In estimating the fair value of the forward contract as described in note 6,
Management believes that it is reasonably possible to use an alternative
assumption related to the market value of industry peers by adjusting the
discount applied to take into account the specific factors relevant to the
Pledged Shares. If the discount factor were to have increased or decreased by
20%, the fair value of the forward contract would have also varied by 20%.
In estimating the value of the investment in the shares of Rostpromstroibank,
the Manager believes it is reasonably possible to use an alternative assumption
by adjusting the discount applied to account for specific risk relevant to this
investment. If the discount factor were to have increased or decreased by 20%,
the fair value of the forward contract would have also varied by 20%.
8. Cash
Cash balances are held by State Street Custodial Services (Ireland) Limited (a
State Street Bank and Trust Company). The credit rating of State Street
Custodial Services (Ireland) Limited is A1 (31 December 2008: A1) (S&P).
9. Share capital
Capital management
The Company has issued one class of ordinary share to date. The Company's
capital managed as at the year end is represented by the value of the shares
issued to date.
The investment objective of the Company is to achieve capital growth by
investing in a portfolio of securities issued by companies in the sectors of the
domestic economies of Russia and other Newly Independent States ("NIS")
countries which are expected to benefit from the increase in consumer demand and
capital investment in such countries. The Company will invest primarily in small
and medium-sized companies, with the aim of being an active and influential
minority shareholder.
The Company has the ability to purchase its own shares on the market; the timing
of these purchases depends on market prices. The Company monitors the trading
price of its shares in comparison to the net asset value of the shares in
considering whether to purchase its own shares on the market.
There were no changes in the policies and procedures during the year with
respect to the Group's approach to its capital management programme. The Group
is not subject to any externally imposed capital requirements.
Authorised share capital - 31 December 2009
+----------------------------------+-------------------------++----------------+
| |Number of ordinary shares||31 December 2009|
| | || US$|
+----------------------------------+-------------------------++----------------+
|Ordinary shares of par value| 1,000,000,000|| 10,000,000|
|US$0.01 each | || |
+----------------------------------+-------------------------++----------------+
+----------------------------------+-------------------------++----------------+
|Issued and fully paid - 31 | || |
|December 2009 | || |
+----------------------------------+-------------------------++----------------+
| |Number of ordinary shares||31 December 2009|
| | || US$|
+----------------------------------+-------------------------++----------------+
|Balance at beginning and end of| 350,000,000|| 3,500,000|
|year | || |
+----------------------------------+-------------------------++----------------+
Authorised share capital - 31 December 2008
+----------------------------------+-------------------------++----------------+
| |Number of ordinary shares||31 December 2008|
| | || US$|
+----------------------------------+-------------------------++----------------+
|Ordinary shares of par value| 1,000,000,000|| 10,000,000|
|US$0.01 each | || |
+----------------------------------+-------------------------++----------------+
+----------------------------------+-------------------------++----------------+
|Issued and fully paid - 31 | || |
|December 2008 | || |
+----------------------------------+-------------------------++----------------+
| |Number of ordinary shares||31 December 2008|
| | || US$|
+----------------------------------+-------------------------++----------------+
|Balance at beginning and end of| 350,000,000|| 3,500,000|
|year | || |
+----------------------------------+-------------------------++----------------+
The authorised share capital of the Company on incorporation was US$10,000,
divided into 1,000,000 ordinary shares of US$0.01 each. By special resolution
dated 5 February 2007, the authorised share capital of the Company was increased
to US$10,000,000, divided into 1,000,000,000 ordinary shares of US$0.01 each.
On incorporation, 2 ordinary shares were issued, fully paid to the subscribers
to the memorandum of association of the Company. Those ordinary shares have been
made available under the initial placing. The placing price of US$1 per placing
share represents a premium of 99 cents to the nominal value of an ordinary
share.
Every shareholder present in person or by proxy at the annual general meeting
has one vote. Upon a poll, every member present in person or by proxy has one
vote for each share held by him.
On winding-up of the Company, after paying all the debts attributable to and
satisfying all the liabilities of the Company, shareholders shall be entitled to
receive by way of capital any surplus assets of the Company attributable to the
shares as a class in proportion to their holdings.
The holders of ordinary shares have the right to receive in proportion to their
holdings all the revenue profits of the Company attributable to the ordinary
shares as a class available for distribution and determined to be distributed by
way of interim and/or final dividend at such times as the Directors may, in
their absolute discretion, determine.
Earnings per share
The calculation of basic earnings as at 31 December 2009 was based on the profit
(2008: loss) attributable to ordinary shareholders for the year of US$0.401
(2008: (US$0.919)) and the weighted average number of ordinary shares
outstanding during the year of 350,000,000 shares (2008: 350,000,000). The
change in accounting policy discussed in note 2 (i) did not have any material
impact on the 2009 and 2008 earnings per share.
The Group does not have any instruments issued with dilutive effect on the basic
earnings per share.
10. Share premium
+----------------------------------+------------------+------------------+
| Share premium | 31 December 2009 | 31 December 2008 |
+----------------------------------+------------------+------------------+
| | US$ | US$ |
+----------------------------------+------------------+------------------+
| Balance at the start of the year | 134,400,629 | 134,400,629 |
+----------------------------------+------------------+------------------+
| Balance at the end of the year | 134,400,629 | 134,400,629 |
+----------------------------------+------------------+------------------+
11. Operating expenses and material agreements
+------------------------++-------------------------++-------------------------+
| || Year ended 31 December|| Year ended 31 December|
| || 2009|| 2008|
+------------------------++-------------------------++-------------------------+
| || US$|| US$|
+------------------------++-------------------------++-------------------------+
|Expenses || || |
+------------------------++-------------------------++-------------------------+
|Management fee || (2,802,201)|| (6,066,947)|
+------------------------++-------------------------++-------------------------+
|Legal fees || (415,259)|| (61,345)|
+------------------------++-------------------------++-------------------------+
|Administration fee || (239,456)|| (331,147)|
+------------------------++-------------------------++-------------------------+
|Directors' fees || (235,664)|| (246,785)|
+------------------------++-------------------------++-------------------------+
|Other expenses || (188,979)|| (251,007)|
+------------------------++-------------------------++-------------------------+
|Russian custodians' fees|| (187,574)|| (159,696)|
+------------------------++-------------------------++-------------------------+
|Audit fee || (122,801)|| (277,288)|
+------------------------++-------------------------++-------------------------+
|Registrar fee || (24,057)|| (23,865)|
+------------------------++-------------------------++-------------------------+
|Total operating expenses|| (4,215,991)|| (7,418,080)|
+------------------------++-------------------------++-------------------------+
Manager
The Company is party to a Management Agreement with Prosperity Capital
Management Limited, dated 15 February 2007, pursuant to which the Manager
provides investment management services to the Company.
The Company pays the Manager a management fee and a performance fee.
Management fee
The Company has agreed to pay the Manager a management fee, which is equal to
2% of the net asset value per annum, which is payable quarterly in arrears. The
management fee charge for the year ended 31 December 2009 was US$2,802,201 (31
December 2008: US$6,066,947). At 31 December 2009 US$1,086,059 (31 December
2008: US$656,451) was payable.
Performance fee
The Group has agreed to pay the Manager a performance fee payable in respect of
each reference period following the end of such reference period. The
performance fee will be calculated on an ordinary share by ordinary share basis,
by reference to the performance of such ordinary shares over each reference
period as follows:
(i) The performance fee in respect of any ordinary share will be an amount
equal to 20% of the excess (if any) of (a) the adjusted closing net asset value
per ordinary share for such ordinary share over (b) the greater of (i) the
opening net asset value per ordinary share and (ii) the high water mark (the
highest net asset value per ordinary share as at the date of issuance of such
ordinary share and as at the last day of all prior reference periods in which a
performance fee was payable with respect to such ordinary share, net of any such
performance fee) for such ordinary share; and
(ii) The performance fee in respect of any ordinary share will be payable
only where the adjusted closing net asset value per ordinary share for such
ordinary share would, when taken together with all distributions (if any) made
by the Company with respect to such ordinary share in all preceding reference
periods, be sufficient to provide an internal rate of return on the placing
price which is equal to or greater than 8%.
No performance fees were charged during or payable at the end of the current
year or the prior year.
Legal fees
Legal fees were incurred as a result of additional regulatory filings in Russia.
Administration fee
The Group is party to an Administration Agreement with Kleinwort Benson (Channel
Islands) Fund Services Limited dated 15 February 2007, pursuant to which the
Administrator has agreed to provide administrative and company secretarial
services to the Group. The Administrator will receive a fee of 0.0925% of the
net asset value per annum, subject to a minimum monthly fee of US$16,000, from
the Group for its services. The Administrator will be responsible for the fees
of the Sub-Administrator. The Group will reimburse the Administrator and
Sub-Administrator for all reasonable out-of-pocket expenses incurred by the
Administrator solely in connection with the performance of its services.
The Administrator fee charge for the year was US$239,456 (31 December 2008:
US$331,147). At 31 December 2009 US$39,865 (31 December 2008: US$31,073) was
payable.
Custodians' fees
The Cyprus Subsidiary has appointed ING Bank (Eurasia) ZAO as the Russian
Custodian. The Russian Custodian will provide custodial services in relation to
the Cyprus Subsidiary's Russian assets, which include the safe keeping of
securities certificates and recording and certifying the rights to securities.
The Russian Custodian receives a fee for its services, payable monthly in
arrears, which is within the range 0.03% to 0.08% per annum of the net asset
value of equities, international securities and exchange-traded securities held
by the Cyprus Subsidiary. The Russian Custodian's fees charged for the year
ended 31 December 2009 was US$187,574 (31 December 2008: US$159,696). At 31
December 2009 US$75,587 (31 December 2008: US$30,293) was payable.
The Company has appointed State Street Custodial Services (Ireland) Limited as
the Global Custodian. The Global Custodian will act as custodian of the US
Dollar and non-Russian securities of the Group and will provide the Group with
execution and settlement services. The Group will pay the Global Custodian a
fee, payable monthly in arrears, in an amount of: (i) 0.08% of the net asset
value up to US$2,500,000,000, (ii) 0.07% of the net asset value exceeding
US$2,500,000,000, up to US$5,000,000,000, and (iii) 0.06% of the net asset value
exceeding US$5,000,000,000. The Company will also reimburse the Global
Custodian's reasonable out-of-pocket expenses.
Registrar fee
The Registrar is entitled to a minimum annual registration fee of GBP4,500 and an
annual fee of GBP1,500 for the maintenance of the share register. Other fees are
payable according to the usage of its services by the Company. The Group will
reimburse the Registrar for all reasonable disbursements incurred in the proper
execution of its duties to the Group.
The Registrar fee charged for the year ended 31 December 2009 was US$24,057 (31
December 2008: US$23,865). At 31 December 2009 US$8,896 (31 December 2008:
US$4,446) was payable.
Directors' fees
During the year ended 31 December 2009, the Directors charged fees of US$235,664
(31 December 2008: US$246,785). At 31 December 2009 US$55,856 (31 December
2008: US$64,671) was payable.
Auditor fees
During the year ended 31 December 2009, the Auditor charged fees of US$122,801
(31 December 2008: US$277,288). At 31 December 2009 US$94,012 (31 December
2008: US$135,579) was payable.
12. Taxation
Guernsey taxation
The Company has applied for and been granted exempt status for Guernsey income
tax purposes under the Income Tax (Exempt Bodies) (Bailiwick of Guernsey)
Ordinance 1989. Under the provision of the Ordinance, the Company will pay an
annual fee to the Guernsey Income Tax Authority, which is currently fixed at
GBP600, but will not be liable to Guernsey income tax, other than on Guernsey
source income (excluding, by concession, Guernsey bank deposit interest).
Cyprus taxation
Prior to 2009, A Cypriot company was liable to defence fund tax in Cyprus, at
the rate of 15%, if it received dividends from a Russian company in which its
holdings was less than 1% of the issued share capital of that Russian company.
Any tax withheld in Russia, could have been set off against the Cyprus 15%
defence fund tax. A Cypriot company was not subject to corporation tax in Cyprus
on dividends received from a Russian company in which its holdings were 1% or
more of the issued share capital of that Russian company. Effective 1 January
2009, Cypriot companies are no longer subject to corporation tax in Cyprus on
dividends received from a Russian company.
No withholding tax will be due on the payment of dividends by a Cypriot company
to a company in Guernsey, under a domestic law exemption which is available when
the owner of the Cyprus entity is a corporation residing outside Cyprus.
The Group expects to make the majority of its investments through one or more
entities organised as Cyprus Subsidiaries. Management and control of the
Subsidiary will take place in Cyprus and it is therefore expected that the
Subsidiary will be treated as resident in Cyprus for tax purposes. As a result,
investments in securities are expected to be subject to reduced withholding
taxes in Russia on dividend income received in Cyprus. Under the Russia/Cyprus
Double Taxation Treaty, the rate of Russian withholding tax on dividends may be
reduced to 5% (10% if the amount of investment in the Russian company is less
than US$100,000).
Russian taxation
Taxation of dividends
Currently, dividends distributable by a Russian company to a foreign investor
which does not have a permanent establishment in Russia are generally subject to
withholding tax on Russian source income at 15%, unless a reduced rate of
taxation is provided by a double taxation treaty (DTT).
Pursuant to the effective Russia/Cyprus DTT, Russian withholding tax on income
at a rate of 5% applies to dividends paid by Russian companies to the Cyprus
Subsidiary when the latter has invested at least US$100,000 in the Russian
company. A 10% withholding rate applies if this condition is not met. The
reduced tax rates can only be applied in accordance with the Russia/Cyprus DTT,
if the Cyprus Subsidiary does not have a permanent establishment in Russia.
Taxation of capital gains
Under the Russia/Cyprus DTT, income from the sale of shares of a Russian company
is not taxed in Russia, as the Cyprus Subsidiary is not considered to have a
permanent establishment in Russia. Capital gains accruing from a disposal of
property (including shares) are only taxable in Cyprus where the value of such
gains derives directly or indirectly from immovable property in Cyprus.
The Directors believe that the Cyprus Subsidiary conducts its affairs in such a
way that it will not be deemed to have a permanent establishment in Russia.
Should the Russian authorities regard the Cyprus Subsidiary as having a
permanent establishment in Russia to which the investments in Russian companies
are attributed, and over 50% of the Cyprus Subsidiary's assets consists of
immovable property located in Russia, capital gains from the disposal of shares
in such Russian investments would be subject to profits tax at a rate of 20% on
gross income or 24% on the difference between sales proceeds and cost.
13. Financial risk management
Strategy in using financial instruments
The Group's activities, as dictated by its investment management strategy,
expose it to a variety of financial risks. Asset allocation is determined by the
Group's Manager who has been given discretionary authority to manage the
distribution of the assets to achieve the Group's investment objectives. The
Group's and the Manager's overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential adverse
effects on the Group's financial performance.
The nature and extent of the risks arising on the financial instruments
outstanding at the consolidated statement of financial position date and the
respective risk management policies employed by the Group are discussed below.
There have been no significant changes to the respective identified risk
exposures of the Group and the risk management policies and methodologies
adopted by the Group during the year.
(i) Market price risk
Market risk embodies the potential for both losses and gains and includes
currency risk, interest rate risk and price risk.
Market risk arises mainly from uncertainty about future prices of the financial
instruments held. It represents the potential loss the Group might suffer
through holding market positions that fluctuate in market value. The Manager
considers the diversification of the portfolio in order to minimise the risk
associated with particular countries or industry sectors while continuing to
pursue the Group's investment objective.
The investments of the Group are subject to market fluctuations and the risk
inherent in investment in financial instruments and there can be no assurance
that the investments will appreciate in value. All securities investments
present a risk of loss of capital. The Manager aims to moderate this risk
through the selection of securities with an appropriate risk/reward profile. The
maximum risk resulting from financial instruments is
determined by the fair value of the financial instruments.
The Group's equity investments are susceptible to market price risk arising from
uncertainties about future prices of the investments. At 31 December 2009, the
Group's market risk is affected by two main components: changes in actual market
prices and foreign currency movements. An analysis of securities by industry and
details of concentration of investments, where the Group invested in certain
companies which had estimated fair market values that were individually in
excess of 5% of net assets, are shown in the consolidated supplemental schedule
of investments. Foreign currency movements are covered in the notes below.
(ii) Foreign currency risk
Currency risk is the risk that the fair value or future cash flows of financial
instruments will fluctuate because of changes in foreign exchange rates. All
investments in securities are valued in United States Dollars. However the
companies in which the Group invests are almost all Russian companies which have
their primary area of business within Russia. The values of such companies will
be affected by many factors including, inter alia, the general Russian business
environment and the value of the Russian currency, the Russian Rouble, as
expressed against other currencies particularly the United States Dollar. The
degree to which a change in the exchange rate between the Russian Rouble and the
United States Dollar affects the value of an investment in a foreign company
varies depending on how the market values the underlying assets of that
company. The Group also incurs foreign currency risk on cash, dividends
receivable, other receivables and payable balances that are denominated in
currencies other than United States Dollars (predominately Russian Rouble).
At 31 December 2009, the Group's exposure to foreign currency, based on the
carrying value of the monetary assets and liabilities, was as follows:
+--------------+----------------+------------+-----+--------------+------------+
|31 December | *Investments at| Forward| Cash| Other net| |
|2009 | fair value| Contract| | assets and| |
| | | | | liabilities|Net exposure|
+--------------+----------------+------------+-----+--------------+------------+
|Currency | US$| US$| US$| US$| US$|
|profile | | | | | |
+--------------+----------------+------------+-----+--------------+------------+
|Kazakhstan | | -| -| | |
|Tenge | 11,982,036| | | -| 11,982,036|
+--------------+----------------+------------+-----+--------------+------------+
|Russian Rouble| 192,884,232| 1,937,048|6,953| 185,715| 195,013,948|
+--------------+----------------+------------+-----+--------------+------------+
|Ukraine Hryvna| 12,541,688| -| -| -| 12,541,688|
+--------------+----------------+------------+-----+--------------+------------+
| | 217,407,956| 1,937,048|6,953| 185,715| 219,537,672|
+--------------+----------------+------------+-----+--------------+------------+
* These investments were settled in United States Dollars by the Group. However
the underlying exposure is to the local currency.
At 31 December 2008 the Group's exposure to foreign currency, based on the
carrying value of monetary assets and liabilities, was as follows:
+--------------+----------------+------------+----+---------------+------------+
|31 December | *Investments at| Forward|Cash| Other net| |
|2008 | fair value| Contract| | assets and| |
| | | | | liabilities|Net exposure|
+--------------+----------------+------------+----+---------------+------------+
|Currency | US$| US$| US$| US$| |
|profile | | | | | US$|
+--------------+----------------+------------+----+---------------+------------+
|Kazakhstan | | -| -| | |
|Tenge | 10,658,566| | | -| 10,658,566|
+--------------+----------------+------------+----+---------------+------------+
|Russian Rouble| 68,981,757| -| -| 7,397| 68,989,154|
+--------------+----------------+------------+----+---------------+------------+
| | 79,640,323| -| -| 7,397| 79,647,720|
+--------------+----------------+------------+----+---------------+------------+
Sensitivity analysis
At 31 December 2009, had the exchange rate between the United States Dollar and
other currencies increased or decreased by 5% with all other variables held
constant, the increase or decrease respectively in the value of the Company's
investments denominated in currencies other than United States Dollars
attributable to holders of ordinary shares would have amounted to a maximum
US$10,967,250 (31 December 2008: US$3,982,016).
At 31 December 2009, had the exchange rate between the United States Dollar and
other currencies above increased or decreased by 5% with all other variables
held constant, the increase or decrease respectively in other net assets and
liabilities attributable to holders of ordinary shares would have amounted to
US$9,633 (31 December 2008: US$370).
(iii) Price risk
Price risk is the risk that the value of the investments will fluctuate as a
result of changes in market prices (other than those arising from interest rate
risk or currency risk), whether caused by factors specific to an individual
investment, its issuer or all factors affecting all instruments traded in the
market.
As the majority of the Group's financial instruments are carried at fair value
with fair value changes recognised in the consolidated statement of
comprehensive income, all changes in the market conditions will directly affect
net investment income.
Price risk is managed by the Group's Manager by constructing a diversified
portfolio of instruments traded on various markets.
Sensitivity analysis
At 31 December 2009, 97.87% (31 December 2008: 98.42%) of the Group's
investments are listed on RTS, MICEX and other major exchanges. A 3% increase in
stock prices at 31 December 2009 would have increased the net assets
attributable to holders of ordinary shares and the changes in net assets
attributable to holders of ordinary shares by US$6,439,950 (31 December 2008:
US$2,351,553). An equal change in the opposite direction would have decreased
the net assets attributable to holders of ordinary shares and the changes in net
assets attributable to holders of ordinary shares by an equal, but opposite
amount.
(iv) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in raising
funds to meet commitments. Due to the Manager's prominence in the Russian
equities market, it is possible for total shareholdings amongst all funds
managed by the Manager to become a significant proportion of certain of the
investees' outstanding shares. Liquidity risk may result from an inability to
sell investments quickly at close to fair value.
However, as the Group does not allow for redemption of any shares by
shareholders, the only significant commitments arise out of the investment
process. The Manager takes into account the liquidity of investee's stakes and
the required time to liquidate stakes via the market or a block trade without
impairment to fair value.
Liquidity risk is monitored through the regular fund cash reports, enabling the
Manager to potentially foresee liquidity shortages, and to allocate or liquidate
assets accordingly to fund additional commitments.
This information is provided by the Sub-Administrator and can be accessed by all
members of the Manager and Adviser who initiate or monitor transactions, and is
reconciled against the data delivered by the Custodians on a regular basis.
The table below analyses the Group's financial liabilities into relevant
maturity groupings based on the remaining period at the consolidated statement
of financial position date to the contractual maturity date. The amounts in the
table are in contractual undiscounted cash flows. Balances due within 12 months
equal their carrying balances, as the impact of discounting is not significant.
+--------------------+-----------------+----------+--------+---------+---------+
| |Less than 1 month|1-3 months|3 months|1-5 years| Total|
| | | |- 1 year| | |
+--------------------+-----------------+----------+--------+---------+---------+
|As at 31 December | US$| US$| US$| US$| US$|
|2009 | | | | | |
+--------------------+-----------------+----------+--------+---------+---------+
|Liabilities | | | | | |
+--------------------+-----------------+----------+--------+---------+---------+
|Accrued expenses | 1,161,645| 535,714| -| -|1,697,359|
+--------------------+-----------------+----------+--------+---------+---------+
|Amounts payable on | | | | | |
|investments | -| -| -| -| -|
|purchased | | | | | |
+--------------------+-----------------+----------+--------+---------+---------+
|Total liabilities | 1,161,645| 535,714| -| -|1,697,359|
+--------------------+-----------------+----------+--------+---------+---------+
+--------------------+-----------------+----------+--------+---------+---------+
| |Less than 1 month|1-3 months|3 months|1-5 years| Total|
| | | |- 1 year| | |
+--------------------+-----------------+----------+--------+---------+---------+
|As at 31 December | US$| US$| US$| US$| US$|
|2008 | | | | | |
+--------------------+-----------------+----------+--------+---------+---------+
|Liabilities | | | | | |
+--------------------+-----------------+----------+--------+---------+---------+
|Accrued expenses | 686,744| 385,415| -| -|1,072,159|
+--------------------+-----------------+----------+--------+---------+---------+
|Amounts payable on | | | | | |
|investments | 1,049,690| -| -| -|1,049,690|
|purchased | | | | | |
+--------------------+-----------------+----------+--------+---------+---------+
|Total liabilities | 1,736,434| 385,415| -| -|2,121,849|
+--------------------+-----------------+----------+--------+---------+---------+
(v) Credit risk
Financial assets which potentially expose the Group to credit risk consist
principally of investments in cash balances and deposits with and receivable
from brokers. The extent of the Group's exposure to credit risk in respect of
these financial assets approximates their carrying value. Management does not
anticipate any material losses as a result of these concentrations. The Group
will be exposed to credit risk on parties with whom it trades and will also bear
the risk of settlement default. The Group minimises concentration of credit risk
by undertaking transactions with a large number of customers and counterparties
who are recognised and reputable.
Credit risk arising on transactions with brokers relates to transactions
awaiting settlement. Risk relating to unsettled transactions is considered small
due to the short settlement year involved and the high credit quality of the
brokers used. The Adviser monitors the credit rating and financials of the
brokers used to further mitigate the risk. Substantially all of the assets of
the Group are held with the Custodians. Bankruptcy or insolvency of the
Custodians may cause the Group's rights with respect to cash held with it to be
delayed or limited.
The counterparty risk attaching to the forward contract and the recoverability
of the remaining 95% of the sale proceeds of the Russian Bank shares is detailed
in note 6.
The Manager analyses credit concentration based on the counterparty and the
industry of the financial assets that the Group holds, as shown in the table.
Other than those outlined above, and discussed in note 5, there were no
significant concentrations of credit risk to counterparties at 31 December 2009.
(vi) Interest rate risk
The Group does not have any interest bearing financial assets or interest
bearing financial liabilities at the year end date except cash at bank and hence
are not exposed to any significant interest rate risk.
14. Transactions with related parties
A Director and certain key employees of the Adviser and a shareholder of the
Manager, are also Directors of other companies in which the Group has an
investment. The largest of these investments are Bashkirenergo, Dixy Group and
Urengoytruboprovodstroy (31 December 2008: Centre Telecom, Southern Telecom and
Bashkirenergo). The fair market value of all 15 (31 December 2008: 23)
investments which have related party representatives on their boards of
directors determined in accordance with IFRS represents 17.29% (31 December
2008: 30.15%) of the fair market value of the Group's net assets determined in
accordance with IFRS.
During the year ended 31 December 2009, the Directors charged fees of US$235,664
(31 December 2008: US$246,785). At 31 December 2009 US$55,856 (31 December
2008: US$64,671) was payable. Expenses charged during the year by the
Administrator, Manager and Custodian are as detailed in note 11.
During the year the Group entered into transactions with other funds managed by
the Manager. The aforementioned transactions were conducted for efficiency
purposes whereby the Group purchased and/or sold securities on behalf of other
funds managed by the Manager and then purchased or sold them on to the relevant
counterparties. The trades took place at market value and therefore the Group
was neither advantaged nor disadvantaged due to these transactions. The
transactions were as follows:
Year ended Year ended
31 December 2009 31 December 2008
US$ US$
New Russian Generation Limited
Total purchases 125,406 -
Total sales 1,206,212 -
Prosperity Voskhod Fund Limited
Total sales 683,943 -
The Prosperity Cub Fund
Total purchases 1,131,598 -
Total sales 159,026 781,218
The Prosperity Quest Fund
Total purchases 41,650 4,312,261
Total sales 308,435 -
The Russian Prosperity Fund
Total purchases 24,211 -
The Russian Prosperity Fund (Euro)
Total purchases 172,996 -
Total Sales 66,636 -
15. Significant events during the year
On 17 July 2009, the sub-administration agreement novated from Investors Fund
Services (Ireland) Limited to State Street Fund Services (Ireland) Limited and
the global custodian agreement novated from Investors Trust Custodial Services
(Ireland) Limited to State Street Custodial Services (Ireland) Limited.
There was a change in dividend income accounting policy during the year, as
outlined in note 2 (i).
Russian bank shares, the subject of a Share Sale and Purchase Agreement, were
valued as at 31 December 2009 based on the methodology as outlined in note 6.
During the year the Group, under new rules in Guernsey, changed automatically
from a Registered Scheme to an Authorised Scheme.
16. Events subsequent to the year end date
In March 2010, the registered office of the Adviser and Manager of the Company
changed from PO Box 897, One Capital Place, Grand Cayman KY1 1103, Cayman
Islands to PO Box 897GT, Windward 1, Regatta Office Park, Grand Cayman KY1
1103, Cayman Islands.
17. Commitments and contingencies
The Group had no commitments or contingencies as at 31 December 2009 (2008:
US$nil) (2007: US$nil).
18. Changes to legal documentation
There were no changes to the prospectus during the year. The Memorandum and
Articles of Association of the Company was amended by Special Resolution adopted
on 22 July 2009.
19. Approval of the consolidated financial statements
The consolidated financial statements were approved by the Board of Directors on
29 April 2010.
Supplemental Unaudited Information
Reconciliation of net asset value
On an on-going basis, the Group plans to publish net asset value and net asset
value per share determinations calculated on a basis that differs from the basis
used to determine the Group's net asset value for the purposes of the Group's
IFRS financial statements. This alternate basis of calculation used to calculate
the published net asset value and net asset value per share differs from the
IFRS calculation used in these financial statements in that:
* for non-exchange quoted investments where there has been a third party
transaction will be valued at the transaction price, where it has been
verified by at least two leading brokers of Russian securities. This may
lead to the investments not being carried at fair value as prescribed by
IFRS. IFRS requires such investments to be carried at fair value which
should be estimated using an appropriate valuation technique as prescribed
by IAS 39; Financial Instruments: Recognition and Measurement. Carrying at
cost or the last third party transaction price may not equate to the
investments' fair value at a point in time;
* for securities which are unlisted and for which broker quotes are normally
available, such securities will be valued at the last third party
transaction price, where it has been verified by at least two leading
brokers of Russian securities. This may lead to the investment not being
carried at fair value as prescribed by IFRS. IFRS requires such investments
to be carried at the current bid price at the date of valuation. At any
valuation point, the current bid price may differ from the last third party
price;
* for Exchange traded securities are valued at the last trade price on the
valuation date, where the last trade price falls within the closing bid/ask
spread, and at the average of best bid and best ask price, where the last
trade price falls outside the closing bid/ask spread. IFRS requires
securities that are quoted in an active market to be valued at the current
bid price.
The adjustments result in the following:
+-------------------------------------------+----------------++----------------+
| |31 December 2009||31 December 2008|
+-------------------------------------------+----------------++----------------+
| | US$|| US$|
+-------------------------------------------+----------------++----------------+
|Net assets attributable to shareholders at | 222,590,795|| 82,780,446|
|market mid prices | || |
+-------------------------------------------+----------------++----------------+
|Adjustment to value of investments at bid | (2,751,069)|| (3,243,138)|
|prices | || |
+-------------------------------------------+----------------++----------------+
|Net assets attributable to shareholders as | || |
|per Consolidated Statement of Financial | 219,839,726|| 79,537,308|
|Position | || |
+-------------------------------------------+----------------++----------------+
+-------------------------------------------+----------------++----------------+
| |31 December 2009||31 December 2008|
+-------------------------------------------+----------------++----------------+
| | US$|| US$|
+-------------------------------------------+----------------++----------------+
|Net asset value per share at market mid | || |
|prices | 0.636|| 0.236|
+-------------------------------------------+----------------++----------------+
|Adjustment per share to value of | || |
|investments at bid prices | (0.008)|| (0.009)|
+-------------------------------------------+----------------++----------------+
|Net asset value per share at bid prices | 0.628|| 0.227|
+-------------------------------------------+----------------++----------------+
* During the year the Directors resolved to publish the net asset value per
share to three decimal places.
Foreign exchange rates
The following foreign exchange rates were used to translate assets and
liabilities into the reporting currency (United States Dollars):
31 December 2009 31 December 2008
Kazakhstan Tenge 148.5200 120.8750
Russian Rouble 30.3135 30.5350
Ukraine Hryvna 8.0100 7.6750
[HUG#1410823]
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