TIDMPRDF
28 April 2011
Prosperity Russia Domestic Fund Limited
Final results for the year ended 31 December 2010
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 2010. 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$0.982 (US$0.988 based on mid-prices)
at 31 December 2010, representing an increase in the year of 56.4% (55.4% based
on mid-prices) and a significant outperformance of the Russian RTS index which
rose 22.5%
· Key investments at 31 December 2010 (and percentage of net assets) were Mriya
Agro (10.52%), M Video (10.07%), MHP (7.14%), Dixy Group (7.07%), Cherkizovo
Group (6.98%), Magnit (6.97%), Bashkirenergo (6.05%), Transneft (5.54%) and
Sistema (5.07%)
· Latest unaudited net asset value per share of US$1.004 (based on mid-prices)
at 15 April 2011
The final results are extracted from the audited annual accounts.
Commenting, Sir David Kinloch, Chairman said:
"I am pleased to be able to report further progress and a good result for the
year ended 31 December 2010. At the year end our NAV per share was $0.982, an
increase of 55.4% over that reported at the previous year end. This represented
an outperformance of 32.9% against the rise in the RTS Index during the year.
Rising inflation, continuing dollar weakness, worries over sovereign debt,
particularly in the Eurozone, and instability in the Middle East are all grounds
for concern. However, the outlook in Russia is more encouraging and should lead
to further progress. Furthermore, when viewed against other large Emerging
Markets, we believe that valuations of many Russian stocks remain attractive.
Accordingly, and subject to the usual caveats, we remain positive regarding
prospects."
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 further progress and a good result for the
year ended 31 December 2010. At the year end our NAV per share was $0.988, an
increase of 55.4% over that reported at the previous year end. This represented
an outperformance of 32.9% against the rise in the RTS Index during the year.
In my Interim Statement I reported good performance for the first half of 2010.
This continued in the second half, assisted in part by strength in the oil
price, a stable ruble, a growing Russian economy, corporate activity and
favourable corporate earnings trends.
Our strategy has continued to be one of remaining fully invested in carefully
selected positions, with an emphasis on small and mid-cap stocks in the domestic
sector and this has served us well.
During 2010 the Russian economy continued its recent growth trend, albeit at a
slightly lower rate than some forecasts early in the year. Inflation remained
a cause for concern and has recently led to tighter credit conditions.
The accompanying Manager's Report sets out in customary detail the key
developments during the year in the context of the economy and the sectors in
which we have concentrated our investments. As before, your Board believes that
we have been served particularly well by our deservedly respected management
team.
On the political front the overall picture has been one of stability and we
believe that this should continue. As in recent years, growing prosperity and
enhanced employment prospects should obviously benefit domestic sentiment.
Looking forward, our view is that the outlook for further growth remains good
and Russia's government policies have generally been helpful to the business
sector and should lead to further progress.
Turning to developments outside Russia we are more cautious. Rising inflation,
continuing dollar weakness, worries over sovereign debt, particularly in the
Eurozone, and instability in the Middle East are all grounds for concern.
However, the outlook in Russia is more encouraging and should lead to further
progress. Furthermore, when viewed against other large Emerging Markets, we
believe that valuations of many Russian stocks remain attractive. Accordingly,
and subject to the usual caveats, we remain positive regarding prospects.
Sir David Kinloch
Chairman
28 April 2011
Manager's Report
SUMMARY
The second half of 2010 saw Russia's economic recovery consolidate, as global
demand continued to strengthen. Building on a reasonably strong first six
months, consumer spending and investment grew further between July and December
- despite the impact of the worst drought in 50 years, which significantly
impacted Russia's agricultural sector and, in some parts of the country,
undermined broader economic activity. During the year as a whole, Russian GDP
grew by 4%.
Having had a mixed first half of 2010, the Russian market surged through the
autumn and early winter months. The dollar-terms RTS index of leading shares
ended the year some 22.5% up. The MSCI EM index of all emerging markets,
meanwhile, gained 17% last year while the S&P 500 rose 12.8%.
Against this strong domestic backdrop, the Prosperity Russian Domestic Fund -
"PRDF" or "the Fund" - performed extremely well in 2010, returning 55.4% in
dollars and net of PCM fees, beating the broader market by 32.9 percentage
points. This pleasing return resulted from the fund's emphasis on small- and
mid-cap stocks geared towards Russia's domestic economy.
The RTS index ended the year with a composite P/E of 8.5x 2011 earnings,
representing a significant discount both historically and compared to other
large emerging markets. PRDF was trading at 8x 2011 earnings at the turn of the
year.
THE ECONOMY
Russia's economic recovery continued during 2010, paving the way for another
reasonably strong year in 2011. While GDP expanded by only 2.9% during the first
quarter, year-on-year growth of 5.4% was registered between April and June as
credit lines were restored and domestic demand began to strengthen.
The economy slowed during the third quarter, growing by only 2.7% as Central and
Southern Russia were hit by the worst drought in half a century. The fall-out
from such adverse weather conditions included numerous wild-fires, the drought
and its implications diverting millions of workers from their usual tasks.
Between October and December, though, the economy staged a creditable recovery,
expanding 5% year-on-year, resulting in 4% GDP growth for the year as a whole.
This outcome represented a marked turn-around from 2009, when the Russian
economy, in the wake of the global "sub-prime" crisis, contracted by 7.9%.
Industrial production expanded 7.5% during 2010, with fixed capital investment
also up 7.5%, having fallen no less than 17.5% the year before. Real disposable
income grew 4.3% last year and retail trade expanded 5.1% in ruble terms,
compared to a 5.5% contraction in 2009. Unemployment fell steadily throughout
the year to an estimated 6.8%, having risen to 8.2% in 2009.
Despite this turnaround, Russian inflation remained relatively subdued for much
of 2010. Up until the middle of July, the CPI had risen only 4.7% year-to-date,
having increased 7.9% during the same period in 2009. With food accounting for
no less than 38% of Russia's CPI basket - a far higher share than many countries
with much lower average incomes - headline inflation became vulnerable to the
impact of poor harvests, not only in Russia but across the world. As soft
commodity prices surged, in a re-run of the 2008 global food price spike,
inflationary pressures rose.
During 2010 as a whole, CPI inflation turned out to be 8.8%. The main driver of
this outcome was definitely poor harvests in Russia and elsewhere - seeing as
annual domestic food price inflation hit 12.9%, compared to only 6.1% the year
before. At the same time, the Central Bank of Russia (CBR) acknowledged that
year-end inflation was also fuelled by loose monetary policy in late 2009 and
the early part of last year. While the 2010 inflation figure was disappointingly
high, it still equaled the previous year's post-Soviet low.
Russia's economic recovery was driven not only by growing global demand, not
least among the EMs, but also the continued expansion of domestic credit.
Preliminary CBR numbers suggest retail loan growth of 13-14% during 2010, with
corporate loans up 12%. Official projections point to a 20% credit expansion
during 2011. These are large increases, albeit from a very low base. Total
outstanding consumer credit in Russia, including mortgages, amounts to less than
3% of national income. Combined personal, corporate and state debts total less
than 50% of GDP - compared to more than 100% in most other large EMs and over
200% in many Western countries. As such, Russia has significant scope to "lever-
up" during the next few years, just as most other large economies will be forced
to "de-lever" and lower their liabilities.
Robust economic growth was also assisted by comparatively high commodity prices
- with Brent crude averaging $78 a barrel during 2010, compared to $61 the year
before. These factors, coupled with relatively prudent spending, led to a
significant strengthening of Russia's budget during 2010. Throughout the year,
official annual budget deficit forecasts were very cautious - typically
exceeding 5% of GDP. The eventual fiscal shortfall for 2010 was 3.3% of GDP,
down from 5.9% the year before.
Federal state expenditure fell to 22.7% of national income last year, down from
24.7% during 2009 - when Russia implemented a sizeable fiscal boost. At the end
of 2010, CBR reserves amounted to $479bn - up from $439bn 12 months earlier and
the world's third largest haul.
Strong commodity prices also helped to expand Russia's balance of trade to
$149.2bn in 2010, compared to $111.6bn the year before. The current account
surplus amounted to a creditable 4.9% of GDP last year, up from 3.9% in 2009.
Having said that, imports rose sharply during 2010, from $191.8bn to $243.3bn.
Part of this increase was driven by purchases of capital goods abroad, with
machinery and equipment accounting for 44.2% of Russian imports.
The ruble gained 2.5% during the year against the 55:45 dollar/euro basket
targeted by the CBR. Against the dollar, the currency ended 2010 around 1.5%
weaker, while strengthening almost 6% against euro. In general, Russia's
currency became firmer during the final months of 2010 - a trend which has
continued into the new year. This is partly due to stronger growth and rising
oil prices but also because of expectations the CBR would raise its main "re-
financing" rate relatively early in 2011.
Higher rates are likely to lure more "carry trade" flows towards the ruble - as
investors seek to make returns by borrowing in countries with low rates, then
re-investing the proceeds in jurisdictions where even relatively risk-free
returns are higher.
For much of 2010, the Russian authorities resisted such inflows, given their
impact on export competitiveness. But now that controlling inflation has been
re-prioritised, moderate carry-trade inflows, and their impact on exchange rates
and therefore import prices, could help Russia rein-in CPI inflation during
2011 as a whole.
Looking ahead, most market participants are estimating GDP growth of around
4.5-5.5% this year. At the time of writing, the CBR is forecasting a 5%
expansion. Having said that, inflation has been rather high during early 2011 -
reaching 9.5% in February - not only due to the lingering effect of last
summer's drought on food supplies, but also because of rises in regulated
utility tariffs and higher social security taxes.
During the last week of 2010, the CBR increased its overnight deposit rates by
25bp to 2.75%, while keeping the re-financing rate unchanged at 7.75%. While
this move fell short of a full scale "rate-rise", it nevertheless sent an
unequivocal signal to the markets and the broader economy that the Russian
interest-rate cycle had turned. As such, in late February 2011, the CBR
implemented a 25bp rise in its "re-financing" rate.
THE MARKET
Having fallen 7.3% during the first six months of the year, the Russian market
staged a strong recovery during the second half, helped by a generally positive
sentiment towards global equities and a stream of Russian IPOs.
Over 2010 as a whole, the RTS rose 22.5% in dollar-terms. Meanwhile, of the
other large EMs, Brazil's Bovespo Index gained 2.5%, India's Bombay Sensex 30
increased 17.6% and the Chinese Shanghai A Index lost 14.5%. At around 1,770,
the RTS ended the year some 30% below its pre-crisis peak of May 2008.
The Russian market was exposed to international "risk-on, risk-off" sentiments
throughout last year - driven, not least, by the activities of the Federal
Reserve and other Western central banks. In addition, because many of the "blue
chips" dominating the RTS are export-oriented, some foreign investors treated
them as simple derivatives of Western growth. Such views ignore the strong
earnings outlook at many of these firms, not least due to Russia's growing trade
with Asia.
While the broader RTS index showed creditable gains during 2010, certain
domestic sectors fared much better - as shown by the stark out-performance of
numerous second- and third-tier stocks. The RTS Oil and Gas Index increased only
7% during 2010 - matching the rise in the MSCI Oil and Gas Index of energy
stocks worldwide. This illustrates that the out-performance of Russian equities
last year was not driven by gains among big hydrocarbon companies. In fact,
given that the RTS is heavily geared towards oil and gas "mega-caps", their
relatively subdued performance held back the overall index during 2010.
Many domestic sectors, though, performed extremely well as the Russian economy
continued to recover - a theme that was exploited by various PCM funds, not
least PRDF. The RTS Retail & Consumer Index, for instance, rose 81% last year,
reflecting strong consumer demand. The RTS Electrical Utilities Index, covering
another domestically-focused sector, gained 35% during 2010, given rising
electricity use and the on-going liberalisation of commercial power prices.
Domestic and other second-tier stocks have also benefited during 2010 from the
growth of M&A activity in Russia - with such transactions hitting a three-year
high in Q4, in part due to lower local borrowing costs. Deals involving Russian
companies worth $33.8bn were conducted between the end of September and mid-
December, three times the level in the same period last year. Total M&A in the
much larger Chinese economy was $37.7bn over this timeframe, while Brazil, of
comparable economic size to Russia, registered only $8.2bn.
The cost of three- to five-year ruble loans dropped to 8-12% during the autumn,
from 13-15% the year before. Apart from lower credit costs, M&A activity also
reflected the growing cash cushions on the balance sheets of Russia's stronger
companies, together with the weakened positions of those firms which the 2008
crisis exposed as inherently inferior.
The RTS ended the year trading at a composite earnings multiple of 8.5x 2011
earnings, compared to an average P/E of 12.8x on China's main index, 15.9x in
India and 10.3x in Brazil. The Russian market is characterised by an earnings
multiple less that is not only significantly lower than other large EMs but
which is also half that of mid-2007, when Russia was valued close to the EM
average. While low RTS valuations are often attributed to "Russia-risk", they
also in many cases reflect high earnings growth. Many of PCM's portfolio
companies - well-run firms, with low debts and strong earnings - have single-
digit P/Es.
Towards the end of 2010, there was much discussion of the risk represented by
the estimated $170bn that has flowed from developed market equities into EM
funds during 2009 and 2010, in the aftermath of the sub-prime melt-down, and the
related "flight to quality - but away from the West". The concern was that
renewed dollar strength and America's apparently improving growth outlook could
lead to a reversal.
There has been some evidence of this happening - given the subdued performance
of the Chinese and Brazilian markets during the final quarter of the year. The
fall of these previously very popular markets was partly related to the
repatriation of Western money - not only by profit-taking, but also the
perceived attractiveness of equity
markets in the West.
It is difficult to apply this analysis to Russia, though. As "favoured" EMs,
China, India and Brazil received a disproportionate share of the portfolio
investment that fled the West following the credit crunch. Russia did not
receive nearly as much "hot money" - one reason the RTS valuation has remained
so low in relative terms.
Having said that, during the final weeks of 2010 and into 2011, after a spate of
Russian IPOs and with commodity prices rising, the Russian market began to
attract much more overseas cash. While Asian and Latin American funds reported
recent net redemptions, Russia-focused funds saw strong inflows.
The main source of new money entering Russia at the turn of the year was via
ETFs. Such "index-tracking" investment is generally speculative, can often be
fickle and is usually beneficial only to Russia's best-known "blue chips".
Having said that, such inflows reflect the fact that the RTS not only performed
well during the third and fourth quarters, but also that Russia is now being
increasingly cited among mainstream professional investors as a market with good
prospects going into 2011 and beyond.
The Manager believes such sentiment is justified, inter alia, for the following
reasons:
* Russia's domestic recovery: Consumption will remain the key growth driver,
but strong fixed investment - not least in infrastructure - is also likely
to contribute significantly. The CBR's 5% growth forecast for 2011 is not
unreasonable.
* Strong earnings growth: In the context of rising GDP, the earnings rebound
looks set to continue this year. Earnings growth of 15-20% this year looks
likely.
* Current valuations: Valuations are still very far from reflecting such
earnings growth, suggesting scope for future multiple expansion. The "Russia
discount" extends beyond the oil/gas sector, to include banks, utilities,
real estate, transportation and infrastructure companies.
* Commodity prices: Oil looks set to remain firm during 2011, trading in the
$80-120 range as EM demand keeps growing and Western usage also ticks up.
The same applies to basic materials such as iron ore, nickel, titanium,
palladium, gold and timber - which Russia also has in abundance.
* Big scope for more exposure: The RTS, and Russia in general, remain
extremely "under-owned" by international investors, with a GEM-weighting of
around 7% at the end of 2010, even after end-of-year inflows, compared to
13% in mid-2008 - at which point EMs in general were far less popular among
global investors than they are now.
* Corporate governance upside: While PCM is no stranger to governance
disputes, the Manager strongly maintains that Western perceptions of Russia
are too pessimistic. The RTS is priced as if the legal system and business
environment are far worse than almost all other EMs. This is simply not
true.
* Privatisation: The Russian government is now committed to selling-off $60bn
of assets by 2015, in the biggest wave of privatisation since the path-
breaking "voucher-auctions" of the mid-1990s. This should improve market
liquidity, corporate transparency and the investment climate generally. The
proposed share swap between state-controlled Rosneft and BP, despite ongoing
legal complications, was a major signal of intent in the Manager's view,
together with the sale of 10% of VTB, Russia's second-largest bank.
* WTO accession: This looks increasingly likely during 2011 and should help
spark the interest of both direct and portfolio investors based overseas,
given the positive implications for market access, domestic competition and
further judicial reform. WTO accession, together with the build-up to events
such as the Sochi Olympics and Moscow Grand Prix in 2014 should help
"normalise" international perceptions of Russia.
PROSPERITY RUSSIA DOMESTIC FUND
The net asset value of the Prosperity Russia Domestic Fund gained 33% during the
second half of 2010, as compared with a 32% gain in the RTS Index. This amounted
to a $86m gain on the $260m NAV recorded at the end of the first half of 2010.
During 2010 as a whole, PRDF was up by 55%, compared to a 23% increase in RTS
Index.
The Fund's agricultural exposure (6.3% of total AUM at the beginning of the year
and 11.8% at the end) was up by 137% on an organic basis, producing a $23m
profit for the Fund. The Manager added $2.9m to our positions ($2.7m to Mriya
and $0.2m to Belorechenskoe). Mriya (5.4% at the start of 2010 and 10.5% at the
end) was up by 146% on an organic basis following strong expansion.
Belorechesnkoe, meanwhile, gained 78%.
Our consumer exposure (which fell from 19.4% of the fund to 16.4%) was up by
51% on an organic basis, yielding a $20.3m profit. On a net basis, we reduced
our investments by $3m during 2010. In April, together with other PCM funds,
PRDF sold its stake in Efes Breweries International ($21.6m) to a strategic
buyer, realising a $5m profit.
The Fund increased its exposure to MHPC by $6.0m (5.2% as of the end of 2009 and
7.1% as of the end of 2010). MHPC produced a $6.6m gain. Cherkizovo (7.0% as of
the end of 2010) produced an $11.7m profit. The Fund also made two less
successful investments: a $7.2m investment in the Protek IPO, which lost 45% of
its value ($3.5m), and a $6.9m investment in CEDC, which was flat during the
period.
PRDF's retail exposure returned a handsome $49m organic gain (150%) during
2010. On a net basis, the Manager took $26m in profits and reinvested them in
other sectors. Magnit (11.8% as of the end of 2009 and 7% as of the end of
2010) was up by 124% and returned $13.3m. M-Video (7.6% at the end of 2009 and
10.1% at 2010 year-end) was up 196%, returning $23m. Dixy (which rose from 6.8%
to 7.1% of the Fund) gained 84%, generating a $11m gain. The Manager also
exercised PCM's rights to participate in a 36.6 share issue, selling the shares
shortly after for a $1.4m profit. PRDF, together with other PCM funds, sold its
investment in Anthousa and Ukrainian retailer Furshet, making a $0.8m profit.
The Fund's power sector exposure (which rose slightly from 11.3% to 11.5% of the
Fund) gained 116% on an organic basis, producing a $21.4m profit. Bashkirenergo
(6.1% of PRDF by year-end, up from 4.8%) performed well - with its ordinary
shares gaining 98% and prefs up 48% - generating a $10m gain.
Elsewhere in the power sector, the Manager exited Donbasenergo ($0.1m) while
investing $2.4m in Irkutskenergo, which rose 7% during the period. PRDF's
investment in TGK-5 gained 39% on an organic basis ($2.9m) and we added $2.8m.
Our investment in TGK-9 was up by 49% ($1.9m) and we invested a further $0.3m.
PRDF sold its investment in TGK-7 for $11.3m, producing a $5.7m gain. The Fund
also sold its stake in the Voronezh Power Supply Company for $0.7m, realising a
$0.4m profit.
PRDF's telecom investments (12.3% at the end of 2009 and 10.0% at the end of
2010) were flat during the year. Sistema (7% at the end of 2009 and 5.1% at the
end of 2010) was up by 19% ($2.8m gain). We tendered our Comstar shares in the
offer to MTS. We also sold the remainder of our stake in Comstar on the market
for $8.2m, producing a $1.7m gain. The Manager swapped our entire MTS (2.3% of
the fund) position into Vimpelcom. This preference for Vimpelcom played against
the Fund in 2010, as the position produced a 23% loss ($4.9m).
The Fund's transport exposure produced a $5.6m organic profit. The Manager
slightly increased the stake in Globaltrans ($0.5m) and made a $1.5m profit (88%
organic return in the year). PRDF significantly raised its exposure to Transneft
($11m) from 1.8% to 5.5% and produced a $3.8m profit (26% organic). The Fund
participated in IPO of Transcontainer ($3m), which returned 19% in the period
($0.6m). Overall, we increased our transport exposure from 2.3% to 7.7% of the
portfolio.
PRDF's engineering exposure (6.5% at the end of 2009 and 1.9% at the end of
2010) saw a $5m organic loss for the portfolio. We exited one investment - Elsib
- for $1.3m, realising a $1.3m loss. UTPS (1.7% of the Fund at the start of the
year, falling to 0.4%) saw a further fall in its value (-66%), resulting in a
$2.5m loss. Sollers (which fell from 1.9% to 1.5% of PRDF) was up by 62% on an
organic basis, producing a $2m profit for the Fund.
PRDF's real estate exposure increased by $13.1m during 2010, producing a $3.5m
organic gain (27%). PRDF increased its stake in RGI International, investing
$6.2m, with the stake generating a 12% profit ($0.7m). The Manager also added
Mirland Development ($6.6m), resulting in a $3.4m gain. PRDF sold its
investments in Clubhouse for $0.35m (small profit), while investing $0.3m in XXI
Century in Ukraine.
The Fund's financials exposure suffered in 2010. MDM prefs lost 19% of their
value ($1.5m) and Kazkom prefs lost 16% ($2m). Financials stood at 11% of PRDF's
AUM at the end of 2009 and 4.5% at the end of 2010.
PRDF's limited oil and gas exposure (1.7% at the end of 2009 and 2.6% at the end
of 2010) gained 22% on an organic basis ($1.2m). The Fund added $3.7m to its
position in oil field services company Integra, which produced a 17% gain.
In general, compared with a few years ago, the Russian equity marketplace is now
far less crowded in terms of investors and fund managers. At the same time the
market has become much more diverse as a result of numerous IPOs and placements
by various companies. This environment creates good opportunities for stock-
picking.
The Manager would like to mention that PCM is heavily involved in President
Medvedev's initiative to create an International Financial Center in Moscow.
Alexander Branis CFA, PCM's Chief Investment Officer, has been asked to be
Chairman of a high-level advisory committee on corporate governance. The hope is
that such improvements that the committee can provoke will benefit all portfolio
investors in Russia, not least those invested in PRDF and other PCM vehicles. In
general terms, as the Fund's investee companies continue to develop and
corporate governance improves further, the Manager would expect the Russian
market to re-rate towards other global EMs.
PCM's inherent strengths - our highly experienced Moscow-based research and
investment team, together with our understanding of corporate governance and
other important factors - mean we are well-placed to deliver strong returns for
investors in all PCM funds more broadly, both in absolute terms and relative to
the market. The Manager, and the entire PCM team, will continue to work hard for
PRDF shareholders throughout 2011 and going forward. We will also maintain our
established channels of communication - through our monthly Fund-specific
performance reports, Prosperity Newsletters and regular investor conference
calls.
Top ten holdings - 31 December 2010
=-----------------------------------------------
Name % of net assets US$m
=-----------------------------------------------
Mriya Agro 10.5% $36.2m
M Video 10.1% $34.6m
MHP 7.1% $24.6m
Dixy Group 7.1% $24.3m
Cherkizovo Group 7.0% $24.0m
Magnit 7.0% $24.0m
Bashkirenergo 6.1% $20.8m
Transneft 5.5% $19.0m
Sistema 5.1% $17.4m
Vimpelcom 4.9% $17.0m
------------------------------
Total 70.4% US$241.9m
=-----------------------------------------------
PROSPERITY CAPITAL MANAGEMENT LIMITED
APRIL 2011
Consolidated Supplemental Schedule of Investments A (unaudited)
As at 31 December 2010
(All amounts stated in United States Dollars)
=-------------------------------------------------------------------------------
31 December 2010 31 December 2009
=-------------------------------------------------------------------------------
Description Cost Fair Value % Net Cost Fair Value % Net
Assets1 Assets1
=-------------------------------------------------------------------------------
Analysis of investments
(unaudited):
=-------------------------------------------------------------------------------
Non-exchange 2,001,250 224,388 0.07% 17,403,426 4,679,995 2.13%
traded
financial
instruments
Exchange 246,659,892 339,532,231 98.74% 237,318,029 214,665,009 97.65%
traded
financial
instruments
=-------------------------------------------------------------------------------
248,661,142 339,756,619 98.81% 254,721,455 219,345,004 99.78%
=-------------------------------------------------------------------------------
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 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 2010 31 December 2009
Description Cost Fair Value % Net Cost Fair Value % Net
Assets1 Assets1
=---------------------------------------------------------------------------------
Analysis of investments by industry
(audited):
Consumer, Cyclical 12,539,254 29,604,907 8.61% 10,283,754 14,574,827 6.63%
Consumer, Non- 32,583,330 106,827,243 31.07% 78,228,965 89,774,070 40.84%
cyclical
Engineering 34,931,484 6,347,526 1.85% 45,251,093 14,212,548 6.46%
Food 6,399,987 6,376,913 1.85% - - -
Financial 29,215,101 15,428,113 4.49% 36,243,344 24,070,198 10.95%
Industrial 2,144,102 5,290,436 1.54% 2,571,374 4,233,650 1.93%
Information 1,698,435 3,767,707 1.10% - - -
Technology
Materials 16,290,746 36,188,960 10.52% 13,605,542 11,817,607 5.37%
Media 9,396,309 99,686 0.03% 9,396,309 107,106 0.05%
Oil & Gas 7,602,417 8,758,864 2.55% 3,905,489 3,816,731 1.74%
Pharmaceutical 6,441,115 3,906,948 1.14% - - -
Power 32,291,305 39,623,595 11.52% 34,089,822 24,760,502 11.26%
Real Estate 13,089,598 16,618,980 4.83% - - -
Telecommunications 24,039,915 34,469,494 10.02% 15,070,403 27,033,638 12.30%
Transport 19,998,044 26,447,247 7.69% 6,075,360 4,944,127 2.25%
=---------------------------------------------------------------------------------
248,661,142 339,756,619 98.81% 254,721,455 219,345,004 99.78%
=---------------------------------------------------------------------------------
Concentration of investments (audited):
As at 31 December 2010 and 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 assets1. These companies are identified in the schedule
below:
=------------------------------------------------------------------------------
31 December 2010 31 December 2009
Fair Value % Net Assets1 Fair Value % Net Assets1
=------------------------------------------------------------------------------
Mriya Agro 36,188,960 10.52% 11,817,607 5.38%
M Video 34,639,860 10.07% 16,681,804 7.59%
MHP 24,553,377 7.14% 11,475,125 5.22%
Dixy Group 24,294,224 7.07% 14,939,329 6.80%
Cherkizovo Group2 24,017,808 6.98% - -
Magnit 23,978,563 6.97% 25,882,447 11.77%
Bashkirenergo3 20,790,655 6.05% - -
Transneft 19,034,510 5.54% - -
Sistema 17,449,171 5.07% 15,292,935 6.96%
Efes Breweries - - 16,133,234 7.34%
International
Kazkommertsbank - - 11,981,999 5.45%
=------------------------------------------------------------------------------
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.
2 Cherkizovo Group: total fair value of US$24,017,808 includes ordinary
shares of US$19,020,090 and GDRs of US$4,997,718, representing 5.53% and 1.45%
of net assets respectively.
3 Bashkirenergo: total fair value of US$20,790,655 includes ordinary
shares of US$18,873,428 and preference shares of US$1,917,227, representing
5.49% and 0.56% of net assets respectively.
Note 31 December 2010 31 December 2009
US$ 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 5,7 339,756,619 217,407,956
-------------------- -----------------
Total designated at fair value 339,756,619 217,407,956
through profit or loss upon initial
recognition
-------------------- -----------------
Held for trading
Forward contracts 6 - 1,937,048
-------------------- -----------------
Total held for trading - 1,937,048
-------------------- -----------------
Total financial assets at fair value 339,756,619 219,345,004
through profit or loss
-------------------- -----------------
Loans and receivables
Cash and cash equivalents 8 7,389,443 1,932,979
Dividends receivable 206,663 192,465
Amounts receivable on investments 481,707 66,637
sold
-------------------- -----------------
Total loans and receivables 8,077,813 2,192,081
-------------------- -----------------
Total assets 347,834,432 221,537,085
Equity
* Share capital 9 3,500,000 3,500,000
* Share premium 10 134,400,629 134,400,629
* eserve 200,000,000 200,000,000
* Retained earnings 5,951,656 (118,060,903)
-------------------- -----------------
Total equity 343,852,285 219,839,726
-------------------- -----------------
Liabilities
Current liabilities
Financial liabilities measured at
amortised cost
Amounts payable on investments 2,075,060 -
purchased
Accrued expenses 11 1,907,087 1,697,359
-------------------- -----------------
Total liabilities 3,982,147 1,697,359
-------------------- -----------------
Total equity and liabilities 347,834,432 221,537,085
Net asset value per share based on 350,000,000 0.982 0.628
(31 December 2009: 350,000,000) shares outstanding
These consolidated financial statements were approved by the Board of Directors
on 28 April 2011.
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2010
(All amounts stated in United States Dollars)
Note Year ended Year ended
31 December 2010 31 December 2009
US$ US$
Investment income
Income 3 2,138,696 4,017,379
Net foreign exchange losses (39,681) (101,171)
Net gains on investments designated 128,820,346 140,753,798
at fair value through profit or loss 4
upon initial recognition
-------------------- -----------------
Net investment income 130,919,361 144,670,006
Operating expenses 11 (6,884,501) (4,215,991)
-------------------- -----------------
Profit from operations before 124,034,860 140,454,015
withholding tax
Withholding tax (22,301) (151,597)
-------------------- -----------------
Total comprehensive income for the 124,012,559 140,302,418
year
Earnings per ordinary share
Basic and Diluted 9 US$0.354 US$0.401
Weighted average ordinary shares
outstanding
Number of shares Number of shares
Basic and Diluted 9 350,000,000 350,000,000
Profit for the financial year equates to the total comprehensive income for the
year as there are no items of other comprehensive income arising.
The accompanying notes form an integral part of the consolidated financial
statements.
Ordinary Share Share Other Retained Total
Shares capital premium reserve earnings
Number US$ US$ US$ US$ US$
Balance at 1
January 2009 350,000,000 3,500,000 134,400,629 200,000,000 (258,363,321) 79,537,308
Total - - - - 140,302,418 140,302,418
comprehensive
income for
the year
------------- ------------------------------------------------------------
Balance at 350,000,000 3,500,000 134,400,629 200,000,000 (118,060,903) 219,839,726
31 December
2009
Balance at 1 350,000,000 3,500,000 134,400,629 200,000,000 (118,060,903) 219,839,726
January 2010
Total - - - - 124,012,559 124,012,559
comprehensive
income for
the year
------------- ------------------------------------------------------------
Balance at 350,000,000 3,500,000 134,400,629 200,000,000 5,951,656 343,852,285
31 December
2010
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2010
(All amounts stated in United States Dollars)
Year ended Year ended
31 December 2010 31 December 2009
Note US$ US$
Operating activities
Total comprehensive income for the 124,012,559 140,302,418
year
Adjustments for:
Net unrealised gains on investments 4 (126,353,653) (231,177,186)
Net realised (gains)/losses on 4 (2,466,693) 90,423,388
investments
------------------ -----------------
(4,807,787) (451,380)
------------------ -----------------
Increase in receivables (14,198) (137,479)
Increase in payables 209,728 625,200
------------------ -----------------
195,530 487,721
------------------ -----------------
Cash flows (used in)/generated from (4,612,257) 36,341
operating activities
------------------ -----------------
Cash flows from investing activities
Purchases of investments (106,569,156) (96,362,330)
Proceeds from sale of investments 116,637,877 97,588,380
------------------ -----------------
Cash flows generated from investing 10,068,721 1,226,050
activities
------------------ -----------------
Net increase in cash and cash 5,456,464 1,262,391
equivalents during the year
Cash and cash equivalents at 1 1,932,979 670,588
January
------------------ -----------------
Cash and cash equivalents at 31 7,389,443 1,932,979
December
Supplementary information
Interest received 3,454 1,419
Dividends received (net of 2,099,891 3,735,616
withholding tax US$22,595
(31 December 2009: US$128,877))
The accompanying notes form an integral part of the consolidated 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 an
authorised 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. During the year
ended 31 December 2010, the Company acquired all of the share capital of an
entity incorporated in Cyprus, Nanjero Limited (see note 15 for further
details). "Group" is defined as the Company and its wholly owned Subsidiaries,
Roselia Limited and Nanjero 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.
As at 31 December 2010 and 31 December 2009 the Group had no employees. The
Group's investment management activities are managed by Prosperity Capital
Management Limited (the "Manager") as supervised by the Board of Directors. The
Manager 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,
(see note 11 for further details). The Company is administered by Kleinwort
Benson (Channel Islands) Fund Services Limited (the "Administrator"). The Sub-
Administrator, State Street Fund Services (Ireland) Limited, provides certain
administration services to the Group under a sub-administration agreement.
The Company owns 100% of the share capital of Roselia Limited and Nanjero
Limited, both Cyprus companies. Roselia Limited and Nanjero Limited are both
Subsidiaries of the Company as Prosperity Russia Domestic Fund Limited retains
control over the companies through its retention of all the risks and rewards of
the assets transferred to, or purchased from them.
2. Significant accounting policies
(a) Statement of compliance
These consolidated financial statements include the accounts of the Company and
its wholly owned Subsidiaries, Roselia Limited and Nanjero Limited (the "Cyprus
Subsidiaries") (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 Company and its subsidiaries 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.
In accordance with the prospectus, a continuation vote will be put to the
shareholders no later than 21 February 2012. Whilst the Directors cannot be
certain what the results of this vote will be, the consolidated financial
statements are prepared on a going concern basis supported by the Directors'
current assessment of the Company's ability to continue in existence for the
foreseeable future and ongoing shareholder interest in the continuation of the
Company.
Based on the above, the Directors have a reasonable expectation that the Company
has adequate resources to continue in operational existence for the foreseeable
future, and they continue to adopt the going concern basis in preparing the
consolidated financial statements. If the ordinary resolution for the Company to
continue as an investment company is not passed, the Company will seek to be
wound up within twelve months of the date of such determination.
(c) Changes in accounting policies
(i) New standards
The Group did not adopt any new accounting standards during the year in the
preparation of these consolidated financial statements.
(ii) New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations in issue
are effective for annual periods beginning after 1 January 2010, and have not
been applied in preparing these consolidated financial statements. None of these
are expected to have significant effect on the measurement of the amounts
recognised in the consolidated financial statements of the Group. However, IFRS
9 Financial Instruments, issued in November 2009 (IFRS 9 (2009)) will change the
classification of financial assets.
The standard is not expected to have an impact on the measurement basis of the
financial assets since the majority of the Group's financial assets are measured
at fair value through profit or loss.
IFRS 9 (2009) deals with classification and measurement of financial assets and
its requirements represent a significant change from the existing requirements
in IAS 39 in respect of financial assets. The standard contains two primary
measurement categories for financial assets: at amortised cost and fair value. A
financial asset would be measured at amortised cost if it is held within a
business model whose objective is to hold assets in order to collect contractual
cash flows, and the asset's contractual terms give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal
outstanding.
2. Significant accounting policies (continued)
(c) Changes in accounting policies (continued)
(ii) New standards and interpretations not yet adopted (continued)
All other financial assets would be measured at fair value. The standard
eliminates the existing IAS 39 categories of held to maturity, available for
sale and loans and receivables.
For an investment in an equity instrument which is not held for trading, the
standard permits an irrevocable election, on initial recognition, on an
individual share-by-share basis, to present all fair value changes from the
investment in other comprehensive income. No amount recognised in other
comprehensive income would ever be reclassified to profit or loss. However,
dividends on such investments are recognised in profit or loss, rather than
other comprehensive income unless they clearly represent a partial recovery of
the cost of the investment. Investments in equity instruments in respect of
which an entity does not elect to present fair value changes in other
comprehensive income would be measured at fair value with changes in fair value
recognised in profit or loss.
The standard requires that derivatives embedded in contracts with a host that is
a financial asset within the scope of the standard are not separated; instead
the hybrid financial instrument is assessed in its entirety as to whether it
should be measured at amortised cost or fair value.
The standard is effective for annual periods beginning on or after 1 January
2013. Earlier application is permitted. The Group does not plan to adopt this
standard early.
(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.
As at and for the year ended 31 December 2010, the consolidated financial
statements comprised the financial statements of the Company and the Cyprus
Subsidiaries, Roselia Limited and Nanjero Limited. As at and for the year ended
31 December 2009, the consolidated financial statements comprised the financial
statements of the Company and Roselia Limited. Nanjero Limited was incorporated
during 2010.
The Cyprus Subsidiaries have been consolidated from the date on which control
was transferred to the Company and will cease to be consolidated from the date
on which control is transferred from the Company. At 31 December 2010, the
Cyprus Subsidiaries were the Company's only subsidiaries. At 31 December 2009,
Roselia Limited was the Company's only subsidiary.
At the date of approval of these consolidated financial statements the new
subsidiary, Nanjero Limited, had not commenced trading.
(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.
2. Significant accounting policies (continued)
(e) Use of estimates and judgements (continued)
Information about significant areas of estimation, uncertainty and critical
judgements in applying accounting policies that have the most significant effect
on the amounts recognised in the consolidated financial statements are described
in notes 5, 6 and 7.
(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, which is usually the
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 through profit or loss 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.
2. Significant accounting policies (continued)
(f) Financial instruments (continued)
(v) Specific instruments (continued)
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 through
profit or loss 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 net foreign exchange losses in the consolidated
statement of comprehensive income 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 and cash equivalents carried at amortised cost
and is recognised through profit or loss in the consolidated statement of
comprehensive income by the Group using the effective interest rate method on an
accrual basis.
(i) Dividend income
Dividend income is recognised through profit or loss 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 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 through profit or loss in the consolidated statement
of comprehensive income on an accrual basis.
(k) Cash and cash equivalents
Cash comprises of current deposits with banks and with brokers.
2. Significant accounting policies (continued)
(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 total equity
of the Company and are classified as equity.
(m) Operating segments
The Board of Directors has considered the requirements of IFRS 8, Operating
Segments. The Board of Directors 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 of Directors, 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 of Directors to assess the
Group's performance and to allocate resources is the total return on the Group's
total equity value, as calculated under IFRS, and therefore no reconciliation is
required between the measure of profit or loss used by the Board of Directors
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 Company 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 total
equity, 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 Year ended
31 December 2010 31 December 2009
US$ US$
Income from financial assets at fair value
through profit or loss:
Dividend income 2,135,242 4,015,960
Income from financial assets not at fair
value through profit or loss:
Interest income from cash and cash 3,454 1,419
equivalents
------------------ -----------------
2,138,696 4,017,379
4. Gains and losses on investments designated at fair value through
profit or loss upon initial recognition
Year ended Year ended
31 December 2010 31 December 2009
US$ US$
Net realised gains/(losses) on investments 2,466,693 (90,423,388)
Net unrealised gains on investments 126,353,653 231,177,186
------------------ -----------------
128,820,346 140,753,798
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 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 7).
(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 observable inputs, the investments fall into Level 2
of the fair value hierarchy as defined by IFRS 7 (see note 7). 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 7).
(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 7).
(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 year.
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, which have been considered in estimating fair
values, 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.
5. Investments in securities designated at fair value through profit or
loss upon initial recognition (continued)
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 Ruble, restrictions on convertibility
of the Russian Ruble 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 original Cyprus Subsidiary, ("Roselia Limited"), 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 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) was outstanding
as at 31 December 2009. Related to this, the Counterparty pledged collateral to
the Subsidiary as security to ensure final settlement. This collateral was in
the form of other securities and these were held in a separate account in escrow
pending the final settlement under the revised arrangement.
If the Counterparty did not provide the cash proceeds (the remainder of the
original purchase price) within the 18 month timeframe (i.e. by 30 November
2010) the Subsidiary could take title to the collateral securities.
6. Forward contracts held for trading (continued)
31 December 2009
The Group determined that neither the exercise of the Put Option nor the
negotiation of the subsequent revised settlement arrangement met the
requirements of IAS 39 to allow derecognition of the Russian Bank shares from
the consolidated statement of financial position. This was because the
Subsidiary did not transfer substantially all the risks and rewards of ownership
of the Russian Bank shares in the prior periods.
The Subsidiary was still exposed to the risk of retaining ownership of those
shares where there was a fall in the value of the shares as in that event the
Counterparty could have failed to make settlement in cash. In addition, the
Subsidiary continued to be entitled to any dividend income and voting rights in
relation to the shares. Therefore the Russian Bank shares were fair valued
through profit or loss, in accordance with IAS 39 as at 31 December 2009. 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 was, in substance, treated as a
forward sale arrangement as at 31 December 2009. The fair value of this
arrangement took into account, the maximum cash settlement amount that could be
received (US$4,553,920, of which US$225,380 had been received as at 31 December
2009), 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
was compared to US$4,328,540 (the remainder that was due under the forward sale
arrangement as at 31 December 2009) and the value of the forward sale was
computed based on the difference, but also taking into account the value of the
collateral. The value attributed to the forward sale contract would have been
negative if the market value of the Russian Bank shares exceeded the cash amount
under the forward sale. The value of the forward sale contract would have been
positive if the market value of the Russian Bank shares was lower than that cash
settlement amount due.
The maximum value that could be attributed to the resulting forward sale asset
was the lower of:
i. the fair value of the pledged shares (valued at US$nil as at 31 December
2010 as the balance of the cash from the counterparty was received; 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 at 31 December 2009 of
US$1,937,048.
31 December 2010
During the year ended 31 December 2010, the balance of the proceeds,
US$4,328,540, was received from the Counterparty. As the Counterparty settled
the transaction during the year, the Subsidiary was not entitled to any dividend
or voting rights in relation to the Russian bank shares and was no longer
exposed to any risk attaching to these shares. A net gain of US$125,031 was
realised on the transaction during the year ended 31 December 2010.
7. Fair value information
Financial assets and financial liabilities are measured in the consolidated
statement of financial position at fair value. The fair value measurements are
categorised within the three-level hierarchy that reflects the significance of
inputs used in measuring the fair values.
The fair value hierarchy is as follows:
* Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities.
* Level 2: inputs other than quoted prices included in Level 1 that
are observable for the asset or liability, either directly (i.e., as prices)
or indirectly (i.e., derived from prices).
* Level 3: inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
(a) Fair value hierarchy analysis
The table below provides an analysis of the fair value measurement used by the
Group to fair value its financial instruments in its consolidated statement of
financial position categorised by the fair value hierarchy as detailed above.
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Financial assets designated at fair
value through profit or loss upon
initial recognition
As at 31 December 2010
Equity investments 310,175,323 28,825,484 755,812 339,756,619
Forward contracts (note 6) - - - -
---------------------------------------------
310,175,323 28,825,484 755,812 339,756,619
As at 31 December 2009
Equity investments 155,048,116 58,671,976 3,687,864 217,407,956
Forward contracts (note 6) - - 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
(i)Transfers during the year ended 31 December 2010
One security that was previously valued using quoted market prices in an active
market (Level 1 inputs) on 31 December 2009 was valued based on other observable
market inputs (Level 2 inputs) on 31 December 2010, as the security 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 2009 were valued using quoted market
prices in an active market (Level 1 inputs) on 31 December 2010, as the
securities had been actively traded on the financial reporting date. Transfers
into/from Level 3 are detailed in section (c) below.
In addition, one security which was valued using other market inputs (Level 2
inputs) on 31 December 2009 and also on 31 December 2010 was valued based on
quoted market prices in an active market (Level 1 inputs) during the year, as
the security was actively traded during the financial reporting year.
7. Fair value information (continued)
(b) Transfers between Levels of the fair value hierarchy (continued)
(ii) Transfers during the year ended 31 December 2009
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/from 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 designated at fair Transfers from Transfers from
value Level 1 to Level 2 Level 2 to Level 1
through profit or loss upon initial
recognition
US$ US$
Equity investments:
Year ended 31 December 2010 3,887,471 48,484,487
Year ended 31 December 2009 11,817,644 11,558,910
(c) Level 3 reconciliation
Level 3 Level 3
Year ended Year ended
31 December 2010 31 December 2009
Financial assets designated at fair value US$ US$
through
profit or loss upon initial recognition
Opening balance 5,624,912 1,255,239
Total net gains and losses on investments 896,013 3,895,438
designated at fair value through profit or
loss upon initial recognition in the
consolidated statement of comprehensive
income
Purchases 325,872 884,996
Sales (6,335,897) (505,091)
Transfers from Level 3 to Level 2 (138) -
Transfers to Level 3 from Level 2 245,050 94,330
------------------ -----------------
Closing balance 755,812 5,624,912
The net unrealised loss attributable to the Level 3 securities held as at 31
December 2010 amounted to US$58,860 (31 December 2009: unrealised gain
US$4,025,313) which is included in the net gains on investments in securities
designated at fair value through profit or loss upon initial recognition in the
consolidated statement of comprehensive income.
As at 31 December 2010: Level 3
The values of the Level 3 securities were estimated by the Manager using peer
valuation techniques, company and industry forecasts and other market data known
to the Manager.
7.Fair value information (continued)
(c)Level 3 reconciliation (continued)
As at 31 December 2009: Level 3
The value of shares in Rostovpromstroibank was 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 values of the other Level 3 securities 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
As at 31 December 2010
In estimating the fair value of Level 3 securities, the Manager believed it was
possible to use various alternative assumptions with respect to the financial
ratios of peer companies, and company and industry forecasts. Any significant
change in these assumptions would result in a significant corresponding change
in the estimated fair values.
As at 31 December 2009
In estimating the fair value of the forward contract as described in note 6,
Management believed that it was 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 Rostovpromstroibank,
the Manager believed it was 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 and cash equivalents
Cash balances are held by State Street Custodial Services (Ireland) Limited, ING
Bank (Eurasia) ZAO and Marfin Popular Bank Public Company Limited. During the
year ended 31 December 2010, a new bank account was opened with Marfin Popular
Bank Public Company Limited.
31 December 2010 31 December 2009
US$ US$
State Street Custodial Services (Ireland) 7,347,015 1,926,025
Limited
ING Bank (Eurasia) ZAO 21,147 6,954
Marfin Popular Bank Public Company Limited 21,281 -
------------------ -----------------
7,389,443 1,932,979
31 December 2010 31 December 2009
Credit rating Credit rating
State Street Custodial Services (Ireland) A+ A1
Limited
ING Bank (Eurasia) ZAO A+ A1
Marfin Popular Bank Public Company Limited Baa2 -
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. It is therefore anticipated
that all income and capital gains derived from the Company's investment
programme will continue to be re-invested. However, income and capital gains may
be distributed to shareholders, if the Directors deem it appropriate. 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.
In addition, any shareholder who holds, as at the time of subscription or at any
time thereafter, more than 7.5% of the outstanding ordinary shares may request
that the Company repurchase all or part of its ordinary shares at the expense of
such shareholder at the end of that calendar quarter. Subject to the discretion
of the Directors, the Company may pay the shareholder the proceeds of such
repurchase by transferring a pro rata portion of the securities in the Group's
portfolio. Any such distributions will be effected so as to avoid any material
prejudice to the interest of the remaining shareholders.
Prospective investors should note that the exercise of the Company's power to
repurchase ordinary shares is entirely discretionary and they should place no
expectation or reliance on the Directors exercising such discretion on any one
or more occasions.
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.
Liquidity Events
The Company, acting on the advice of its Manager, Prosperity Capital Management
Limited, and taking account of the investment programme of the Company and the
prevailing conditions of the local markets, will no later than the fifth
anniversary of its admission to AIM, and each following anniversary put to the
vote of its shareholders the option of realising the Company's investments and
winding up the Company, which the Company would seek to carry out within twelve
months of the date of such determination.
The Company will pursue such option if it is voted for by not less than 75% of
members voting on the resolution. If such option is not voted for by such
majority, the Company will continue to conduct its operations pursuant to its
existing investment objective and arrangements.
9. Share capital (continued)
Authorised share capital - 31 December 2010
Number of ordinary shares 31 December 2010
US$
Ordinary shares of par value 1,000,000,000 10,000,000
US$0.01 each
Issued and fully paid - 31 December
2010
Number of ordinary shares 31 December 2010
US$
Balance at beginning and end of 350,000,000 3,500,000
year
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
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.
Restrictions on transfer of shares
Subject to the restrictions noted below as may be applicable, any shareholder
may transfer all or any of his/her shares in any form which the Directors may
accept. Any written instrument of transfer of a share must be signed by or on
behalf of the transferor and, in the case of a partly paid share, the transferee
and the transferor will be deemed to remain the holder of such share until the
name of the transferee is entered in the register.
9. Share capital (continued)
Restrictions on transfer of shares (continued)
The Directors may, in their absolute discretion and without assigning any
reasons therefore, refuse to register a transfer of any share in certificated
form which is not fully paid or on which the Company has a lien or where such
transfer may give rise to or constitute (in the absolute discretion of the
Directors) a legal, regulatory, fiscal, tax or pecuniary disadvantage to the
Company, provided, in the case of a listed share, that this would not prevent
dealings in the share from taking place on an open and proper basis and would
not be in contravention of any of the requirements or the rules of any
recognised investment exchange (including but not limited to AIM) to which the
Company may be subject from time to time. The Directors may only decline to
register a transfer of a share in uncertificated form in the circumstances set
out in the CREST ¹ regulations or where there are four or more joint holders. The
Directors may also refuse to register any transfer of a share which has not been
admitted to settlement in CREST ¹:
(i) unless it is in respect of only one class of shares;
(ii) unless it is in favour of a single transferee or not more than four
joint transferees; and
(iii) unless it is delivered for registration to the office, or such
other place as the Directors may decide, accompanied by the certificate for the
shares to which it relates and such other evidence as the Directors may
reasonably require to prove title of the transferor and the due execution by him
of the transfer or, if the transfer is executed by some other person on his
behalf, the authority of that person to do so.
¹CREST is the computerised settlement system to facilitate the transfer of title
of shares in uncertificated form.
If the Directors refuse to register a transfer they must, within two months of
the date on which the instrument of transfer was lodged with the Company, send
notice of the refusal to the transferee.
Subject to the Companies Laws, registration of transfers may be suspended and
the register of members closed by the Directors at their discretion, provided
that the register of members shall not be closed for more than 30 days in any
year.
Earnings per share
The calculation of basic earnings was based on the profit attributable to
ordinary shareholders for the year of US$0.354 (31 December 2009: US$0.401) and
the weighted average number of ordinary shares outstanding during the year of
350,000,000 shares (31 December 2009: 350,000,000). The Group does not have any
instruments issued with dilutive effect on the basic earnings per share.
10. Share premium
Share premium 31 December 2010 31 December 2009
US$ 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
The ordinary shares of the Company have a par value of US$0.01 each. Share
premium represents the excess of the issue and repurchase price of the ordinary
shares issued and repurchased over this par value.
11. Operating expenses and material agreements
Year ended Year ended
31 December 2010 31 December 2009
US$ US$
Expenses
Management fees (5,740,974) (2,802,201)
Administration fees (289,693) (203,962)
Transaction fees (255,825) (8,102)
Directors' fees (207,948) (209,702)
Custodians' fees (195,017) (223,068)
Statutory audit fees (122,685) (107,576)
Other expenses (99,198) (173,538)
Other assurance service fees (54,642) (7,339)
Other non-audit service fees (43,697) -
Registrar fees (16,707) (24,057)
Tax advisory service fees (14,490) (15,225)
Directors' out-of-pocket expenses (11,773) (25,962)
Legal fees 168,148 (415,259)
------------------ -----------------
Total operating expenses (6,884,501) (4,215,991)
Manager
The Group 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 Group.
The Group pays the Manager a management fee and a performance fee.
Management fees
The Group has agreed to pay the Manager a management fee, which is equal to 2%
per annum of the net asset value, payable quarterly in arrears. The management
fee charge for the year ended 31 December 2010 was US$5,740,974 (31 December
2009: US$2,802,201). At 31 December 2010 US$1,670,385 (31 December 2009:
US$1,086,059) was payable.
Performance fees
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.
11. Operating expenses and material agreements (continued)
Legal fees
The legal fees expense increased net income in the current year as the Manager
negotiated a discount on the payment of legal costs that had been accrued in the
prior year.
Administrator's and Sub-Administrator's fees
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 is 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 administration fee charge for the year ended 31 December 2010 was US$289,693
(31 December 2009: US$203,962). At 31 December 2010 US$22,609 (31 December
2009: US$33,570) was payable.
Custodians' fees
Russian Custodian
The Cyprus Subsidiaries have appointed ING Bank (Eurasia) ZAO as the Russian
Custodian. The Russian Custodian will provide custodial services in relation to
the Cyprus Subsidiaries' 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 0.035% to 0.080% per annum of the net asset
value of equities, international securities and exchange-traded securities held
by the Cyprus Subsidiaries.
The Russian Custodian's fee charge for the year ended 31 December 2010 was
US$140,932 (31 December 2009: US$187,574). At 31 December 2010 US$13,344 (31
December 2009 US$75,587) was payable.
Global Custodian
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 an
annual fee of 0.015% of assets held in custody, payable monthly in arrears. The
Company will also reimburse the Global Custodian's reasonable out-of-pocket
expenses.
The Global Custodian fee charge for the year ended 31 December 2010 was
US$54,085 (31 December 2009: US$35,494). At 31 December 2010, US$4,239 (31
December 2009: US$6,295) was payable.
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 charge for the year ended 31 December 2010 was US$16,707 (31
December 2009: US$24,057). At 31 December 2010 US$2,361 (31 December 2009:
US$8,896) was payable.
11. Operating expenses and material agreements (continued)
Directors' fees andDirectors' out-of-pocket expenses
During the year ended 31 December 2010, the Directors charged fees for the year
of US$207,948 (31 December 2009: US$209,702) and out-of-pocket expenses of
US$11,773 (31 December 2009: US$25,962). At 31 December 2010 US$53,123 (31
December 2009: US$55,856) was payable.
Auditor's remuneration
Statutory audit fees
The statutory audit fees charge for the year ended 31 December 2010 was
US$122,685 (31 December 2009: US$107,576). At 31 December 2010, US$95,359 (31
December 2009: US$78,012) was payable.
Tax advisory service fees
The tax advisory service fee charge for the year ended 31 December 2010 amounted
to US$14,490 (31 December 2009: US$15,225). At 31 December 2010, US$16,000 (31
December 2009: US$16,000) was payable.
Other assurance service fees and other non-audit service fees for the year ended
31 December 2010 amounted to US$54,642 and US$43,697 respectively (31 December
2009: US$7,339 and US$nil respectively).
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
Effective 1 January 2009, Cypriot companies are not 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 the Cyprus
Subsidiaries. Management and control of the Cyprus Subsidiaries is Cyprus and
they are 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).
12. Taxation (continued)
Russian taxation (continued)
Taxation of dividends(continued)
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
Subsidiaries 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 Subsidiaries do 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 Subsidiaries are 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 Subsidiaries conduct their affairs in such
a way that they will not be deemed to have a permanent establishment in Russia.
Should the Russian authorities regard the Cyprus Subsidiaries as having a
permanent establishment in Russia to which the investments in Russian companies
are attributed, and over 50% of the Cyprus Subsidiaries' 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 price risk embodies the potential for both losses and gains and includes
currency risk, interest rate risk and price risk.
Market price 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.
13. Financial risk management (continued)
(i) Market price risk (continued)
The Group's equity investments are susceptible to market price risk arising from
uncertainties about future prices of the investments. At 31 December 2010, the
Group's market price 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 total equity, is shown in the consolidated
supplemental schedule of investments and forms part of the notes to the audited
consolidated financial statements. 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 Ruble, as
expressed against other currencies particularly the United States Dollar. The
degree to which a change in the exchange rate between the Russian Ruble 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, and
other receivables and payable balances that are denominated in currencies other
than United States Dollars (predominately Russian Ruble).
At 31 December 2010, the Group's exposure to foreign currency, based on the
carrying value of the monetary assets and liabilities, was as follows:
31 December *Investments Forward Cash and cash Other net Net exposure
2010 at fair value contract equivalents assets and
liabilities
Currency US$ US$ US$ US$ US$
profile
Euro - - 21,281 - 21,281
Kazakhstan 10,368,058 - - - 10,368,058
Tenge
Russian Ruble 293,141,101 - 21,147 184,280 293,346,528
Ukraine 36,247,460 - - - 36,247,460
Hryvna
-------------------------------------------------------------------
339,756,619 - 42,428 184,280 339,983,327
At 31 December 2009 the Group's exposure to foreign currency, based on the
carrying value of monetary assets and liabilities, was as follows:
31 December *Investments Forward Cash and cash Other net Net exposure
2009 at fair value contract equivalents assets and
liabilities
Currency US$ US$ US$ US$ US$
profile
Kazakhstan 11,982,036 - - - 11,982,036
Tenge
Russian 192,884,232 1,937,048 6,953 185,715 195,013,948
Ruble
Ukraine 12,541,688 - - - 12,541,688
Hryvna
--------------------------------------------------------------------
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.
13. Financial risk management (continued)
(ii) Foreign currency risk (continued)
Sensitivity analysis
At 31 December 2010, 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$16,987,831 (31 December 2009: US$10,967,250).
At 31 December 2010, 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 all other net assets and
liabilities attributable to holders of ordinary shares would have amounted to
US$11,335 (31 December 2009: US$9,633).
(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 through profit or loss 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 2010, 99.93% (31 December 2009: 97.87%) of the Group's
investments are listed on RTS, MICEX and other major exchanges. A 3% increase in
stock prices at 31 December 2010 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$10,185,967 (31 December 2009:
US$6,439,950). 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 analysis of 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.
13. Financial risk management (continued)
(iv) Liquidity risk (continued)
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 1-3 months 3 months - 1 1-5 years Total
month year
As at 31 December US$ US$ US$ US$ US$
2010
Liabilities
Amounts payable on 2,075,060 - - - 2,075,060
investments
purchased
Accrued expenses 1,683,729 223,358 - - 1,907,087
--------------------------------------------------------------
Total liabilities 3,758,789 223,358 - - 3,982,147
Less than 1 1-3 months 3 months - 1 1-5 years Total
month year
As at 31 December US$ US$ US$ US$ US$
2009
Liabilities
Accrued expenses 1,161,645 535,714 - - 1,697,359
--------------------------------------------------------------
Total liabilities 1,161,645 535,714 - - 1,697,359
(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 (see note 8 for details of associated credit ratings). 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 as at 31 December 2009
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
concentration of investments table in the consolidated supplemental schedule of
investments. Other than those outlined above, and discussed in note 5, there
were no significant concentrations of credit risk to counterparties at 31
December 2010 (or at 31 December 2009).
13. Financial risk management (continued)
(v) Credit risk (continued)
The following represents the credit risk to the Group as at year end:
31 December 2010 31 December 2009
US$ US$
Cash and cash equivalents 7,389,443 1,932,979
Dividends receivable 206,663 192,465
Amounts receivable on investments sold 481,707 66,637
------------------ -----------------
8,077,813 2,192,081
(vi) Interest rate risk
The majority of the Group's financial assets and liabilities are non-interest
bearing. As a result, the Group is not subject to significant amounts of risk
due to fluctuations in the prevailing levels of market interest rates. Any
excess cash is invested at short-term market interest rates. The Group is
subject to interest rate risk only on cash of US$7,389,443 (31 December 2009:
US$1,932,979).
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 Dixy Group, Bashkirenergo and
Energospetsmontazh (31 December 2009: Bashkirenergo, Dixy Group and
Urengoytruboprovodstroy). The fair market value of all 11 (31 December
2009: 15) investments which have related party representatives on their boards
of directors determined in accordance with IFRS represents 13.58% (31 December
2009: 17.29%) of the fair market value of the Group's total net assets.
During the year ended 31 December 2010, the Directors charged fees for the year
of US$207,948 (31 December 2009: US$209,702) and out-of-pocket expenses of
US$11,773 (31 December 2009: US$25,962). At 31 December 2010 US$53,123 (31
December 2009: US$55,856) was payable. Expenses charged during the year by the
Administrator, Manager and Custodians are as detailed in note 11.
During the year the Group entered into transactions with other funds managed by
the Manager. The aforementioned transactions were conducted for efficiency
purposes whereby the Group purchased and/or sold securities on behalf of other
funds managed by the Manager and then purchased or sold them on to the relevant
counterparties. The trades took place at market value and therefore the Group
was neither advantaged nor disadvantaged due to these transactions.
14. Transactions with related parties (continued)
The transactions were as follows:
Year ended Year ended
31 December 2010 31 December 2009
US$ US$
The Russian Prosperity Euro Fund
Total sales - 66,636
Total purchases 2,420,829 172,996
Prosperity Voskhod Fund Limited
Total sales - 683,943
Total purchases - -
The Prosperity Cub Fund
Total sales - 159,026
Total purchases - 1,131,598
New Russian Generation Limited
Total sales - 1,206,212
Total purchases - 125,406
The Prosperity Quest Fund
Total sales - 308,435
Total purchases - 41,650
The Russian Prosperity Fund
Total sales - -
Total purchases - 24,211
The Directors' interests in the share capital of the Company at 31 December
2010 and at 31 December 2009 (some of which are held directly or by entities in
which the Directors may have a beneficial interest) were as follows:
Number of Number of
Ordinary Shares Ordinary Shares
31 December 2010 31 December 2009
Sir David Kinloch (Chairman) *121,000 *121,000
Anthony Hall 100,000 100,000
Timothy Henderson 50,000 50,000
Roger Phillips 50,000 50,000
James Williams **137,000 **137,000
* 21,000 of these shares are held as trustee.
** 37,000 of these shares are held by a party related to the Director.
15. Significant events during the year
The Russian Bank shares, the subject of a Share Sale and Purchase Agreement
during 2009, were sold during the year as outlined in note 6. The balance of the
proceeds, US$4,328,540, was received from the counterparty and a net gain of
US$125,031 was realised on the transaction during the year ended 31 December
2010.
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.
During the year ended 31 December 2009, the Company acquired all of the share
capital of an entity incorporated in Cyprus, Nanjero Limited, at a cost of
US$1,470. Nanjero Limited was incorporated on 24 February 2010. At the time of
purchase, Nanjero Limited had no assets or liabilities, other than cash and
share capital of US$1,470. Nanjero Limited will serve as an additional Cyprus
trading subsidiary as outlined in the prospectus of the Company. At the date of
approval of these consolidated financial statements the new Subsidiary had not
commenced trading.
16. Significant events subsequent to the year end
There were no significant events subsequent to the year end date that require
adjustment to, or disclosure in, the consolidated financial statements.
A continuation vote will be put to the shareholders no later than the fifth
anniversary of the Company's admission to AIM as described in note 2 (b).
17. Commitments and contingencies
The Group had no commitments or contingencies as at 31 December 2010 (31
December 2009: US$nil).
18. Changes to legal documentation
There were no changes to the Memorandum and Articles of Association of the
Company during the year.
19. Approval of the consolidated financial statements
The consolidated financial statements were approved by the Board of Directors on
28 April 2011.
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, these 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 2010 31 December 2009
US$ US$
Net assets attributable to shareholders at 345,953,835 222,590,795
market mid prices
Adjustment to value of investments at bid (2,101,550) (2,751,069)
prices
------------------ -----------------
Net assets attributable to shareholders as 343,852,285 219,839,726
per consolidated statement of financial
position
31 December 2010 31 December 2009
US$ US$
Net asset value per share at market mid 0.988 0.636
prices
Adjustment per share to value of investments (0.006) (0.008)
at bid prices
------------------ -----------------
Net asset value per share at bid prices 0.982 0.628
Foreign exchange rates
The following foreign exchange rates were used to translate assets and
liabilities into the reporting currency (United States Dollars):
31 December 2010 31 December 2009
Kazakhstan Tenge 147.3700 148.5200
Russian Ruble 30.5270 30.3135
Ukraine Hryvna 7.9675 8.0100
This announcement is distributed by Thomson Reuters on behalf of
Thomson Reuters clients. The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and
other applicable laws; and
(ii) they are solely responsible for the content, accuracy and
originality of the information contained therein.
Source: Prosperity Russia Domestic Fund Limited via Thomson Reuters ONE
[HUG#1510510]
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