TIDMPRDF
15 September 2011
Prosperity Russia Domestic Fund Limited
Half-yearly report for the six months ended 30 June 2011
Prosperity Russia Domestic Fund Limited ("PRDF") a Guernsey incorporated,
closed-ended investment company admitted to AIM, today announces its half-yearly
report for the six months ended 30 June 2011. PRDF 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:
· Unaudited net asset value per share of US$0.968 (based on mid-prices)
at 30 June 2011 (or US$0.957 per share based on bid-prices), representing a
decline in the first half of the year of 2.0%
· In the same period, the RTS index gained 7.7% with most of this growth
coming from large oil and gas exporters, which PRDF is not exposed to according
to its mandate
· Key investments at 30 June 2011 were Mriya Agro (10.97% of net
assets), Dixy Group (9.74% of net assets), M Video (9.07% of net assets), Magnit
(7.25% of net assets), MHP (7.12% of net assets), Cherkizovo Group (7.01% of net
assets), Sistema (6.17% of net assets) and Transneft (6.08% of net assets)
· Latest unaudited net asset value per share of US$0.768 (based on mid-
prices) at 9 September 2011
The half-yearly results are unaudited.
Commenting, Sir David Kinloch, Chairman said:
"Our net asset value per share of US$0.968 at 30 June 2011 was little changed
compared with that at our year-end. However, as shareholders will be aware,
since July a combination of Eurozone sovereign debt worries, together with
rising inflation and increasing concern over the likelihood of a double dip
recession in the US and Europe have resulted in a period of extreme stock market
volatility. Looking forward, although Russia will clearly be adversely affected
if global economies experience a major downturn, we believe that our portfolio
continues to offer good growth prospects in the longer term."
Enquiries:
Prosperity Capital Management (UK) Limited
Elly Wordsworth / Leon Santos
Tel: 020 7299 6950
Kleinwort Benson (Channel Islands) Fund Services Limited
Company Secretary
Tel: 01481 727111
Chairman's Statement
Our NAV per share of US$0.968 at 30 June 2011 was little changed compared with
that at our year-end on 31 December 2010. However, as shareholders will be
aware, since July a combination of Eurozone sovereign debt worries, together
with rising inflation and increasing concern over the likelihood of a double dip
recession in the US and Europe have resulted in a period of extreme stock market
volatility. At the time of writing our reported NAV has fallen to US$0.768.
As explained in detail in the accompanying Manager's Report, although investor
sentiment globally has deteriorated markedly in recent months, reports from many
of the companies in which we have holdings indicate that they continue to show
progress. In addition, leverage of most of these companies remains low and their
valuations are generally undemanding.
Looking forward, although Russia will clearly be adversely effected if global
economies experience a major downturn, we believe that our portfolio continues
to offer good growth prospects in the longer term.
We are issuing today an Announcement relating to preparation of the necessary
steps to be taken prior to putting a proposal to shareholders in the run up to
the planned shareholder continuation vote to be held no later than February 2012
Sir David Kinloch
Chairman
September 2011
Manager's Report
SUMMARY
The first half of 2011 saw Russia's economic recovery consolidate, as global
demand continued to strengthen - despite volatile investor sentiment. Real GDP
growth slowed slightly from 4% in 2010, to 3.7% during the first six months of
this year. Relatively strong commodity prices have kept internal and external
balances healthy so far during 2011. While higher inflation has impacted real
incomes between January and June, retail sales have remained buoyant in part due
to an expansion of consumer credit, albeit from a very low base.
During the first quarter, a weak dollar and high oil prices - supported by
"risk-on" sentiment among global investors - helped the Russian market
significantly to out-perform. The RTS index of leading Russian shares gained
15.5% between January and March, while the MSCI EM of all emerging markets rose
1.7% and the S&P500 was up 5.4%
The second quarter, though, was much more challenging, with Middle Eastern
unrest combined with Japan's tragic earthquake and renewed fears about Western
sovereign indebtedness. Against this "risk-off" backdrop, the Russian market
lost 6.2% between April and June. By the end of the first half of 2011, the RTS
had risen 7.7%, while the MSCI EM was flat and the S&P500 was up 5.0%.
Against this market backdrop, Prosperity Russia Domestic Fund Limited - "PRDF"
or "the Fund" - returned 2% in US Dollars net of PCM fees during the first six
months of this year, underperforming the index by 5.7 percentage points.
At the end of June, the RTS had a composite P/E of 8.3x 2011 earnings,
representing a significant discount both historically and compared to other
large emerging markets. During the late summer months, as growing concerns about
Western sovereign indebtedness have further impacted global markets, the
valuation of the Russian market has fallen to levels not seen since the first
quarter of 2009.
THE ECONOMY
Russian GDP grew 4.1% year-on-year during the first three months of 2011, before
slowing slightly as global demand was hit by worsening investor sentiment. The
economy expanded 3.7% during the first half of the year. An expansion of around
4.0-4.5% looks likely for 2011 as a whole, not least due to benign base effects
which kick-in during the third quarter, given that Russia suffered its worst
drought in 50 years during the summer of 2010.
Russia's relative economic buoyancy during 2011 has relied, to some extent, on
its strong consumer sector. Retail trade grew by 5.6% during the second quarter,
amounting to a 5.3% expansion for the first half of the year. At the same time,
inflation is abating and is on course for 7-8% during 2011, which would be a new
post-Soviet low, down from 8.8% in both 2009 and 2010. As such, real disposable
incomes are rising, while consumption is also being bolstered by "informal
wages" and the growth, from a very low base, of retail credit - currently
expanding at an annual rate of 25%.
Industrial production rose 5.7% in June, up 5.2% during the first-half, before
falling back slightly to 5.2% year-on-year in July. Fixed capital investment has
grown by 3.6% during the first six months of 2011. Manufacturing growth in July
was 5.5% year-on-year. With industrial production up 5.2% during the first-half,
having risen 8.2% last year, Russia has chalked up a creditable real terms
recovery since 2009. Two of the fastest growing manufacturing segments have been
car production and construction materials, both expanding by more than 10%.
Unemployment was 6.1% in June, down from 7.2% as recently as April.
Several "alternative" indicators in Russia, regularly tracked by PCM, point to
an encouraging underlying growth trend. Russian railway cargo turnover, for
instance, was up 6.9% year-on-year during the first six months of 2011. Russian
air passenger numbers were also strong during the first half, with Rosaviation
reporting that "year-on-year" traffic was 12.1% higher. Russia's advertising
market has also been booming, with TV advertising revenues totaling US$2.2bn
during the first half, 35% above the same period last year. Internet advertising
generated US$611m, 65% higher than the first six months of 2010.
Despite continued buoyancy, and the boost to Russia's fiscal and external
balances from higher commodity prices, business confidence in some sectors has
remained fragile - a symptom, perhaps, of the uncertain international
environment. The real appreciation of the Russian Ruble and higher corporate
taxes between January and June have also weighed on economic sentiment.
Russia's Manufacturing PMI Survey Index, having fallen to 50.7 in May, dropped
further to 50.6 in June and 49.8 in July - the first reading below 50 since
December 2009. The most recent numbers could well have reflected the impact of
European debt concerns on Russian exports. Having said that, the Services PMI
Survey Index surged to 56.9 in July, the second-highest reading this year and up
from 55.1 the month before.
During the first quarter of 2011, price pressures were relatively high. This was
mainly due to the lingering impact of last summer's serious drought, combined
with the very heavy weighting of food (38.5%) in Russia's CPI basket. Between
January and March, CPI growth averaged 9.6% year-on-year. As a result, in late
February, the Central Bank of Russia (CBR) reversed the interest rate cycle,
raising the main re-financing rate 25bp to 8%. In late April, rates were hiked
once again to 8.25%, but have since been held.
Russia is on course to deliver a reasonable grain harvest this summer - which
will have a sizeable positive impact on the headline CPI. The Agricultural
Ministry estimates a total haul of 90m tons, significantly up from last year's
60.9m tons, a figure well short of the country's domestic needs and which
prompted the government to ban grain exports. That ban now having been lifted,
Russia is likely to sell some 20m tons abroad in the coming year, reclaiming its
place among the world's top exporters.
During the first quarter, adverse-base effects made food much more expensive
than during the first three months of 2010. This summer, though, as the harvest
has been reaped, such effects have reversed, becoming "benign". At its monthly
monetary policy meeting in August, the CBR confirmed that CPI inflation grew
9.0% year-on-year in July, down from 9.6% the month before. Officials cited
lower price pressures, along with a fragile global growth outlook as reasons to
keep rates unchanged.
While inflation is likely to ease in the second half of the year, pre-election
spending, not least on public-sector salaries, could yet undermine the CBR's
efforts. Finance Minister Alexei Kudrin estimates that Russia's budget deficit
will be 1.3% of GDP in 2011. This assumes an average oil price of US$93 per
barrel - whereas, up until the end of July, crude had averaged US$111 this year.
During the first six months of 2011, Russia actually posted a fiscal surplus of
1.9% of GDP. Spending during the first half of the year was 20.4% of GDP,
compared to 19.1% during the same period in 2010. While the Ministry of Finance
under Alexei Kudrin (now in place more than 11 years) is determined government
expenditure will remain modest, this assumption will obviously come under
pressure as Russia's election season gets into full swing. Parliamentary
elections will take place in December, with a Presidential vote in March 2012.
The key sectors likely to see additional spending are pensions, public sector
salaries and wages for military personnel. A planned reduction in social
security taxes from 34% to 30% will also be financed by an additional allocation
from budget funds. Money has also been earmarked for the state's contribution to
a US$10bn equity fund, to be created jointly with foreign capital in order
to foster investment in non-energy sectors.
While government spending will rise in the months to come, not least due to
electioneering, even the rather modest projected deficit rests on assumptions -
not least the average oil price - which may end up being bettered. In addition,
even with this extra spending, federal government expenditure will remain at not
much more than a fifth of GDP in 2011, extremely low by international standards.
THE MARKET
During the first quarter of 2011 supported by "risk-on" sentiment among global
investors and firm commodity prices, the RTS gained 15.5%. Over the same period,
the MSCI EM rose only 1.7% and America's S&P500 gained 5.4%.
In the second quarter, though, as investor sentiment deteriorated, the Russian
market suffered somewhat, but held up relatively well overall. The RTS lost
6.2% during Q2, while China's Shanghai Composite was down 14.8% over the same
period. So the RTS was buffeted by the "risk off" onslaught but Russian equities
fared better than many other emerging markets.
Over the first six months of the year, then, the RTS gained 7.7%. Over the same
period, China's main index was 2% lower, Brazilian shares lost 9% and Indian
stocks were off 10%. The S&P500, meanwhile, was up 5.0%.
While data on portfolio inflows is patchy, the available information suggests
Russia-focused funds saw considerable inflows during the first half of 2011 -
out-stripping investment vehicles focused on other large emerging markets.
According to EPRF Global, Russian funds enjoyed net short-term inflows of
US$3.4bn during the first six months of 2011, the same as during the whole of
2010. Indian funds endured half net outflows of US$1.6bn, while Chinese funds
saw net redemptions of US$778m and Brazilian funds lost US$177m. Funds focused
on Eastern Europe, excluding Russia and CIS, had US$761m of net outflows and EM
funds as a whole lost US$6.6bn. So the evidence suggests investors favored
Russia during the first half of the year.
While a rather high proportion of Russian inflows during 2011 have been in the
form of ETF exposure, this proportion appears to be falling. EPRF estimates that
70% of portfolio inflows to Russia were via ETFs during the first quarter - but
this share fell to 50% during the second three months of the year. Such "index-
tracking" ETF 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 between
January and June 2011, but has also been increasingly cited among mainstream
professional investors as a market with good prospects.
Within the broader Russian market, the RTS Oil and Gas Index gained 12% during
the first six months - some 5 percentage points more than the MSCI Oil and Gas
Index of energy stocks worldwide. Some domestic sectors also performed quite
well as the Russian economy continued to recover. The RTS Telecoms Index, for
instance, was up 14%. The RTS Retail & Consumer Index, though, lost 5% during
the first half, partly due to local investors switching into better-value
stocks. The RTS Electrical Utilities Index also under-performed - down 10% -
largely due to fears that pre-election rhetoric referring to caps on recently-
liberalized wholesale electricity prices could become reality.
The RTS ended the first half with a composite multiple of 8.3x 2011 earnings.
This compared to 11.1x on Brazil's main index, 14.0x in China and 16.0x in
India. The RTS has a lower valuation than other large emerging markets - but
also an earnings multiple less than 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.
PROSPERITY RUSSIA DOMESTIC FUND
For the first half of 2011, the PRDF NAV declined by 2%, or US$7.3m, of which
US$3.1m was attributable to a net decline in the portfolio and US$4.2m was fees
and expenses. During this period, RTS was up by 7.7% with most of the
performance coming from large oil and gas exporters, which PRDF is not exposed
to according to its mandate.
PRDF's agriculture exposure (11.6% at the beginning of the year) was up by 8.1%
on an organic basis and produced a US$3.4m profit for the Fund. PRDF took some
profits from Mriya (US$2m) and invested US$0.6m into LandKom, a smaller but much
cheaper agriculture company listed on AIM.
Our consumer exposure was down by 8.1% on an organic basis and produced a
US$5.0m loss. Our Cherkizovo (7%) position was flat in the period, up in GDRs,
while down by 2% in local shares. Cherkizovo financials showed profitability in-
line with expectations during the first quarter. Our MHPC (7.1%) investment lost
3.5% in the period, while we added US$0.1m to the name. MHPC financials were in-
line with expectations. Our visit to the company's construction site revealed a
rapid pace of expansion and confirmed earlier production targets.
We averaged down our cost of CEDC by buying on the market in the correction and
took profits later in the period, taking advantage of liquidity. CEDC produced a
US$2.5m loss during the first half of 2011 for the Fund. Overall our investment
in CEDC produced a US$3.6m loss for the fund since we initially acquired shares
in August 2010. Our Protek position (1.1%) was down by a further 40% as the
company released financials revealing further margin pressure in its core
business.
PRDF's retail exposure produced a US$3.0m organic gain (3.3%) in the first six
months of this year. We took US$5.2m in profits in M Video to fund a capital
increase of Dixy ($7.0 m). Dixy was up 6.5% over the period, boosted by the
closing of the Victoria acquisition. M Video was up by only 2.5% despite strong
sales figures for the first half. Magnit was also flat in the period despite
record sales growth.
Our engineering exposure saw a US$1.4m organic loss for the portfolio in the
period (-12.1%). Sollers (1.5% of the fund) was down by 12% following an
announcement of a change of strategic partner from Fiat to Ford. We exited 2
non-core holdings, generating US$0.9m of proceeds.
The Fund's transport exposure produced a US$4.8m organic profit (16%). Our
Transneft position was up 17.6% and produced a US$3.4m gain. We took US$2.0m in
profits to invest in Transcontainer, which was up by 26% and produced a further
US$1.0m. We invested an additional US$2.6m in Globaltrans, which produced a
US$0.2m gain during the first half.
Our financial's exposure generated a US$0.4m profit. Kazkom prefs were down by
12% in the first six months of the year as financials continued to show no
demand for new loans. We exited our position in MDM prefs realizing a US$1.6m
profit for the period.
The Fund's oil and gas exposure was down 7% (US$0.6m). Integra lost 7.3% of its
value during the first half of 2011 on weak first quarter financials.
Our power sector exposure was down by 29% during the first half, producing a
US$11.8m loss. Overall, the power sector was very weak as investors digested
negative pre-election news-flow from the government regarding tariff regulation.
Bashkirenergo was down by 29%, generating a US$5.6m loss. TGK-5 fell 39%,
amounting to a US$4.0m loss. TGK-9 dropped 20% and produced a US$1.1m loss. We
exited 2 non-core holdings in power supply, raising US$0.1m.
The Fund's real estate exposure was up by 9% and produced a US$1.7m return.
Mirland (2.9%) gained 18%, generating a US$1.8m profit. RGI International (2%)
was up by 5% and we added US$5.0m to the position. Our investment in XXI Century
was down by 72% as the company underwent a restructuring and significant
dilution, producing a US$0.2m loss.
Our telecom investments produced a US$1.3m gain. We swapped Sistema GDRs into
local shares and gained US$1.9m on the trade. Our Vimpelcom position fell
14.5%, producing a US$1.8m loss.
Top ten holdings - 30 June 2011
| |
=-------------------+-----------------+-------
Name | % of net assets | US$m
=-------------------+-----------------+-------
| |
=-------------------+-----------------+-------
Myria Agro | 11.0 | 36.7
=-------------------+-----------------+-------
Dixy Group | 9.7 | 32.6
=-------------------+-----------------+-------
M Video | 9.0 | 30.4
=-------------------+-----------------+-------
Magnit | 7.3 | 24.3
=-------------------+-----------------+-------
MHP | 7.1 | 23.9
=-------------------+-----------------+-------
Cherkizovo Group | 7.0 | 23.5
=-------------------+-----------------+-------
Sistema | 6.2 | 20.7
=-------------------+-----------------+-------
Transneft | 6.1 | 20.4
=-------------------+-----------------+-------
Bashkirenergo | 4.0 | 13.5
=-------------------+-----------------+-------
RGI International | 3.5 | 11.8
=-------------------+-----------------+-------
| |
=-------------------+-----------------+-------
Total | 70.9 | 237.8
=-------------------+-----------------+-------
| |
=-------------------+-----------------+-------
LOOKING FORWARD
At the time of writing, global economic sentiment has seriously deteriorated,
causing the RTS to fall. A big question is how Russian shares will fare if the
current global sell-off becomes a fully-blown "Minsky moment". After all, the
RTS lost around 70% in 2008, as the world moved decisively to extreme "risk-off"
mode in the aftermath of the collapse of Lehman Brothers. In several important
ways, though, the Russian market and the broader economy have developed
significantly since mid-2008.
* Russian Ruble fundamentally stronger
One reason RTS fell so sharply three years ago is that the ruble lost a third of
its value against the US Dollar over just six months, as oil prices tumbled from
US$150 to less than US$40. The Russian Ruble had appreciated significantly in
prior years, so was vulnerable to collapse when oil prices crashed. In the
current situation, though, the ruble doesn't look over-valued. It is arguably
fundamentally under-valued - by around 25%-30% on a PPP basis, according to the
OECD.
In 2008, for first time in post-Soviet history, Russia endured a financial
crisis but, while doing so, managed to avoid the confiscatory implications of a
one-off devaluation. As a result, and given Western currency debasement, Russian
Ruble deposits have soared since 2009 with Russian savers and firms increasingly
using their own currency as a store of value. The Russian Ruble may now be
considered "a hard currency within its own borders" - so looks less vulnerable
to "dollar flight" than in 2008.
* Oil markets now very different
In first half of 2008, oil was in midst of speculative bubble. When that burst -
with prices falling from US$149 to US$32 per barrel - there were very
significant negative implications for Russia. In the present context, though,
oil prices now seem to be at levels roughly in line with underlying
supply/demand realities.
In the aftermath of the Lehman collapse, "demand destruction" was the main theme
on crude markets, with investors seeing sub-prime as negative for oil as world
demand fell due to recession. Now, there is a much wider market understanding
that population pressures and rising per capita wealth in the emerging markets
mean global commodity use will keep growing even during a Western slowdown.
So oil prices of US$80+ today appear to be compatible with sluggish Western
economies - a very different situation from 2008. Back then, some influential
investors backed crude plunging below US$20. Almost no-one believes that now.
Even oil bears talk about a floor at US$60 or US$70.
On supply side, just a year before 2008, OPEC had been targeting US$25 a barrel.
That is now unthinkable. Saudi Arabia and other Middle East producers are
currently running budgets with break-even oil prices above US$100. They are
likely to spend even more going forward, in a bid to keep social unrest in
check. Rather than restraining oil prices, OPEC is now much more focused on
domestic political concerns. In addition, together with a growing understanding
of geological constraints on future oil supplies, crude and other tangibles are
increasingly being used as a "dollar debasement hedge". This should help keep
oil markets relatively firm, even if prices become more volatile.
* Less leverage in the Russian market
Prior to mid-2008, some large Russian industrialists had used local equity
holdings to collateralize overseas corporate loans. Many foreign asset managers
also had heavily-levered positions in Russian equity - given the easy
availability of credit and widespread "risk-on" sentiment. When the RTS began
falling, this leverage sparked sudden margin calls and self-reinforcing waves of
"forced selling" - sending stocks spiraling downwards, way below "fundamental
value".
Russian company balance sheets are currently much stronger. Lots of weaker firms
have been "weeded-out". Many big industrialists have rationalized holdings
and/or restructured liabilities. Latest CBR figures show that Russia now has
only US$60bn of short-term loans, down from US$110bn prior to the Lehman crisis.
This fall in short-term indebtedness is accounted for largely by private
companies. Only 15% of non-state Russian corporate liabilities are now short-
term, down from 30% in mid-2008. This reduces external vulnerability.
* Low valuations
While other large emerging markets over the longer-term have attracted strong
hot-money inflows since "sub-prime", relatively little foreign cash has returned
to the Russian market since early 2009, even allowing for some Russian inflows
during the first half of this year. Certainly, few of the heavily-levered hedge
funds in the Russian market prior to the credit crunch appear to have raised new
cash.
Some emerging market indices have valuations that still look quite high, even
after recent pull-backs. This suggests they rose "too far, too fast" since the
credit-crunch, as non-Western assets have become more popular. The same can't be
said of the RTS. Russian valuations remain extremely undemanding - not least
compared to the RTS in mid-2008. This has become especially true in recent
weeks.
If we are about to endure another global crisis, Russia is obviously not immune.
Having said that, since the last bout of worldwide investor panic, market
participants have watched the RTS stage a strong recovery. The world's two top-
performing markets in 2009, in the aftermath of sub-prime, were Russia and
Brazil - both of which have low government debt and lots of commodities. Russia
was among the world's best-performing emerging markets last year too.
Given ongoing fears over Western currency debasement and sovereign debt, it may
be that, in extremis, once the initial panic is over, investors again ultimately
favor nations with fiscal strength and extensive tangible assets. Russia's
government, having raised spending in recent years, and likely to do more so as
the election season intensifies, still has debts below 10% of GDP. The CBR has
also rebuilt its reserves to US$535bn, close to pre-crisis levels. Again, robust
fundamentals should help support the market - at least in relative terms. For a
combination of reasons, then, including a better macroeconomic starting point,
much lower market leverage, relatively little "hot money" and low multiples -
PCM believes that Russian assets look far less vulnerable over the medium-term
than the last time global sentiment turned seriously negative.
PROSPERITY CAPITAL MANAGEMENT LIMITED
SEPTEMBER 2011
Consolidated Supplemental Schedule of Investments A (unaudited)
As at 30 June 2011
(All amounts stated in United States Dollars)
=-------------------------------------------------------------------------------
30 June 2011 31 December 2010
=-------------------------------------------------------------------------------
% Net % Net
Description Cost Fair Value Assets(1) Cost Fair Value Assets(1)
=-------------------------------------------------------------------------------
Analysis of investments
:
=-------------------------------------------------------------------------------
Non-exchange
traded
financial
instruments 2,008,991 224,967 0.07% 2,001,250 224,388 0.07%
Exchange
traded
financial
instruments 243,290,186 327,910,425 97.89% 246,659,892 339,532,231 98.74%
=-------------------------------------------------------------------------------
245,299,177 328,135,392 97.96% 248,661,142 339,756,619 98.81%
=-------------------------------------------------------------------------------
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 Standards
("IFRS") and as reflected in the consolidated statement of financial position.
Consolidated Supplemental Schedule of Investments B (unaudited)
As at 30 June 2011
(All amounts stated in United States Dollars
=-------------------------------------------------------------------------------------
30 June
2011 31 December 2010
=-------------------------------------------------------------------------------------
% Net % Net
Description Cost Fair Value Assets(1) Cost Fair Value Assets(1)
=-------------------------------------------------------------------------------------
Analysis of investments by industry :
Consumer, Cyclical 12,596,431 28,851,449 8.61% 12,539,254 29,604,907 8.61%
Consumer, Non-
cyclical 36,523,818 110,711,269 33.05% 32,583,330 106,827,243 31.07%
Engineering 25,888,183 3,623,046 1.08% 34,931,484 6,347,526 1.85%
Financials 18,446,911 8,950,900 2.67% 29,215,101 15,428,113 4.49%
Food 1,500 829 0.00% 6,399,987 6,376,913 1.85%
Industrial 2,144,102 4,616,184 1.38% 2,144,102 5,290,436 1.54%
Information
Technology 1,698,435 4,857,496 1.45% 1,698,435 3,767,707 1.10%
Materials 16,061,386 37,483,460 11.19% 16,290,746 36,188,960 10.52%
Media 9,396,309 84,699 0.03% 9,396,309 99,686 0.03%
Oil & Gas 7,455,917 8,036,144 2.40% 7,602,417 8,758,864 2.55%
Pharmaceutical 6,441,115 2,310,849 0.69% 6,441,115 3,906,948 1.14%
Power 40,693,463 34,293,254 10.24% 32,291,305 39,623,595 11.52%
Real Estate 17,958,002 22,984,591 6.86% 13,089,598 16,618,980 4.83%
Telecommunications 27,125,190 28,242,833 8.43% 24,039,915 34,469,494 10.02%
Transport 22,868,415 33,088,389 9.88% 19,998,044 26,447,247 7.69%
=-------------------------------------------------------------------------------------
245,299,177 328,135,392 97.96% 248,661,142 339,756,619 98.81%
=-------------------------------------------------------------------------------------
Concentration of investments:
As at 30 June 2011 and 31 December 2010, the Group had invested in certain
companies which had estimated fair market values that were individually in
excess of 5% of net assets(1). These companies are identified in the schedule
below:
=-------------------------------------------------------------------------------
31 December
30 June 2011 2010
=-------------------------------------------------------------------------------
% Net
Fair Value % Net Assets(1) Fair Value Assets(1)
=-------------------------------------------------------------------------------
Mriya Agro 36,747,276 10.97% 36,188,960 10.52%
Dixy Group 32,626,366 9.74% 24,294,224 7.07%
M Video 30,365,176 9.07% 34,639,860 10.07%
Magnit 24,297,495 7.25% 23,978,563 6.97%
MHP 23,856,855 7.12% 24,553,377 7.14%
Cherkizovo Group(2) 23,484,258 7.01% 24,017,808 6.98%
Sistema 20,679,469 6.17% 17,449,171 5.07%
Transneft 20,351,583 6.08% 19,034,510 5.54%
Bashkirenergo(3) - - 20,790,655 6.05%
=-------------------------------------------------------------------------------
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 Standards ("IFRS") and as reflected in the consolidated statement of
financial position.
(2 )Cherkizovo Group: total fair value of US$23,484,258 (31 December 2010:
US$24,017,808) includes ordinary shares of US$18,489,664 (31 December 2010:
US$19,020,090) and GDRs of US$4,994,594 (31 December 2010: US$4,997,718),
representing 5.52% and 1.49% (31 December 2010: 5.53% and 1.45%) of net assets
respectively.
(3) Bashkirenergo: total fair value of US$13,454,046, all of which related to
ordinary shares, representing 4% of net assets (31 December 2010: total fair
value of US$20,790,655, included ordinary shares of US$18,873,428 and preference
shares of US$1,917,227, representing 5.49% and 0.56% of net assets
respectively).
Consolidated Statement of Financial Position (unaudited)
As at 30 June 2011
(All amounts stated in United States Dollars)
Note 30 June 31 December 30 June
2011 2010 2010
US$ 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 5,6 328,135,392 339,756,619 251,679,067
------------- ------------- -------------
Total financial assets at fair
value through profit or loss 328,135,392 339,756,619 251,679,067
------------- ------------- -------------
Loans and receivables
Cash and cash equivalents 7 3,121,306 7,389,443 6,444,759
Dividends receivable 1,332,354 206,663 1,891,955
Amounts receivable on investments
sold 4,435,048 481,707 447,146
Prepayments 34,368 - -
------------- ------------- -------------
Total loans and receivables 8,923,076 8,077,813 8,783,860
------------- ------------- -------------
Total assets 337,058,468 347,834,432 260,462,927
Equity
Share capital 8 3,500,000 3,500,000 3,500,000
Share premium 9 134,400,629 134,400,629 134,400,629
Other reserve 200,000,000 200,000,000 200,000,000
Retained (deficit)/earnings (2,945,726) 5,951,656 (79,824,708)
------------- ------------- -------------
Total equity 334,954,903 343,852,285 258,075,921
------------- ------------- -------------
Liabilities
Current liabilities
Financial liabilities measured at
amortised cost
Accrued expenses 10 1,943,565 1,907,087 1,573,556
Amounts payable on investments
purchased 160,000 2,075,060 813,450
------------- ------------- -------------
Total liabilities 2,103,565 3,982,147 2,387,006
------------- ------------- -------------
Total equity and liabilities 337,058,468 347,834,432 260,462,927
Net asset value per share 0.957 0.982 0.737
Net asset value per share based on 350,000,000 (31 December
2010: 350,000,000; 30 June 2010: 350,000,000) shares outstanding.
These consolidated financial statements were approved by the Board of Directors
on 15 September 2011.
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Comprehensive Income (unaudited)
For the six months ended 30 June 2011
(All amounts stated in United States Dollars)
Six months ended Six months ended
Note 30 June 2011 30 June 2010
US$ US$
Investment (expense)/income
Income 3 1,876,837 2,104,271
Net foreign exchange gains/(losses) 11,285 (72,204)
Net (losses)/gains on investments
designated at fair value through profit
or loss upon initial recognition 4 (6,311,097) 39,464,370
------------------ -----------------
Net investment (expense)/income (4,422,975) 41,496,437
Operating expenses 10 (4,218,155) (2,974,641)
------------------ -----------------
(Loss)/profit from operations before
withholding tax (8,641,130) 38,521,796
Withholding tax (256,252) (285,601)
------------------ -----------------
Total comprehensive (loss)/income for
the period (8,897,382) 38,236,195
Earnings per ordinary share
Basic and Diluted 8 US$(0.025) US$0.109
Weighted average ordinary shares
outstanding
Number of shares Number of shares
Basic and Diluted 8 350,000,000 350,000,000
(Loss)/profit for the financial period equates to the total comprehensive
(loss)/income for the period as there are no items of other comprehensive income
arising.
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Changes in Equity (unaudited)
For the six months ended 30 June 2011
(All amounts stated in United States Dollars)
Retained
Ordinary Share Share Other (deficit)/
Shares capital premium reserve earnings Total
Number US$ US$ US$ US$ US$
Balance at 1
January 2010 350,000,000 3,500,000 134,400,629 200,000,000 (118,060,903) 219,839,726
Total
comprehensive
income for
the period - - - - 38,236,195 38,236,195
------------- ------------------------------------------------------------
Balance at
30 June 2010 350,000,000 3,500,000 134,400,629 200,000,000 (79,824,708) 258,075,921
Balance at 1
January 2011 350,000,000 3,500,000 134,400,629 200,000,000 5,951,656 343,852,285
Total
comprehensive
loss for the
period - - - - (8,897,382) (8,897,382)
------------- ------------------------------------------------------------
Balance at
30 June 2011 350,000,000 3,500,000 134,400,629 200,000,000 (2,945,726) 334,954,903
The accompanying notes form an integral part of the consolidated financial
statements.
Consolidated Statement of Cash Flows (unaudited)
For the six months ended 30 June 2011
(All amounts stated in United States Dollars)
Six months ended Six months ended
30 June 2011 30 June 2010
Note US$ US$
Operating activities
Total comprehensive (loss)/income for
the period (8,897,382) 38,236,195
Adjustments for:
Net unrealised losses/(gains) on 4
investments 8,414,580 (48,771,893)
Net realised (gains)/losses on 4
investments (2,103,483) 9,307,523
------------------ -----------------
(2,586,285) (1,228,175)
------------------ -----------------
Increase in receivables (1,160,059) (1,699,490)
Increase/(decrease) in payables 36,478 (123,803)
------------------ -----------------
Cash used in operations (1,123,581) (1,823,293)
------------------ -----------------
Cash flows used in operating
activities (3,709,866) (3,051,468)
------------------ -----------------
Cash flows from investing activities
Purchases of investments (54,974,554) (42,936,847)
Proceeds from sale of investments 54,416,283 50,500,095
------------------ -----------------
Cash flows (used in)/generated from
investing activities (558,271) 7,563,248
------------------ -----------------
Net (decrease)/increase in cash and
cash equivalents during the period (4,268,137) 4,511,780
Cash and cash equivalents at
beginning of the period 7,389,443 1,932,979
------------------ -----------------
Cash and cash equivalents at end of
the period 3,121,306 6,444,759
Supplementary information
Interest received 717 819
Dividends received (net of
withholding tax US$53,652
(30 June 2010: US$14,312)) 494,176 89,739
The accompanying notes form an integral part of the consolidated financial
statements.
Notes to the Consolidated Financial Statements (unaudited)
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. "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 Newly
Independent States ("NIS" 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 30 June 2011, 31 December 2010 and 30 June 2010 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 10 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 and Subsidiaries of the Company.
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 period and are consistent with those used in the audited consolidated
financial statements for the year ended 31 December 2010.
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 period 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 are
effective for annual periods beginning after 1 January 2011, and have not been
applied in preparing these consolidated financial statements. None of these are
expected to have a significant effect on the measurement of the amounts
recognised in the consolidated financial statements of the Group, except as
follows:
In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements which is
effective for annual periods beginning on or after 1 January 2013. The standard
establishes principles for the presentation and preparation of consolidated
financial statements when an entity controls one or more other entities. IFRS
10 replaces the consolidation requirements in SIC-12 Consolidation-Special
Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. The
Group is currently assessing the impact of this standard and does not plan to
adopt it early.
In May 2011, the IASB issued IFRS 11, Joint Arrangements which is effective for
annual periods beginning on or after 1 January 2013. The standard establishes
principles for financial reporting by parties to a joint arrangement. The Group
is currently assessing the impact of this standard and does not plan to adopt it
early.
In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities
which is effective for annual periods beginning on or after 1 January 2013. The
standard requires entities to disclose the nature, risk, and financial effects
of its interests in other entities. The Group is currently assessing the impact
of this standard and does not plan to adopt it early.
In May 2011, the IASB issued IFRS 13, Fair Value Measurement which is effective
for annual periods beginning on or after 1 January 2013. The standard defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (i.e. an exit price). The Group is currently assessing the
impact of this standard and does not plan to adopt it 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 six months ended 30 June 2011, the consolidated financial
statements comprised the financial statements of the Company and the Cyprus
Subsidiaries, Roselia Limited and Nanjero Limited. As at 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. During the year ended 31 December 2010, the Company acquired
all of the share capital of Nanjero Limited. As at and for the six months ended
30 June 2010, the consolidated financial statements comprised the financial
statements of the Company and Roselia Limited.
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 30 June 2011 and 31
December 2010, the Cyprus Subsidiaries were the Company's only subsidiaries.
(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 period.
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.
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, and 6.
(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.
(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 gains/(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 and cash equivalents comprise of current deposits with banks and with
brokers.
(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, 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 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
Six months ended Six months ended
30 June 2011 30 June 2010
US$ US$
Income from financial assets at fair value through profit or
loss:
Dividend income 1,876,120 2,103,452
Income from financial assets not at fair value through profit
or loss:
Interest income from cash and cash
equivalents 717 819
------------------------ -----------------
1,876,837 2,104,271
4. Net (losses)/gains on investments designated at fair value through profit
or loss upon initial recognition
Six months ended Six months ended
30 June 2011 30 June 2010
US$ US$
Net realised gains/(losses) on investments 2,103,483 (9,307,523)
Net unrealised (losses)/gains on investments (8,414,580) 48,771,893
------------------ -----------------
(6,311,097) 39,464,370
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 6).
(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 6). 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 6).
(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 6).
(iv) The values of assets or liabilities in currencies other than United States
Dollars are converted into United States Dollars at the prevailing market rate
for such currencies at the close of business in the local market as at the last
available trading date in the period.
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.
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. 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 30 June 2011
Equity investments 314,310,694 13,572,602 252,096 328,135,392
-------------------------------------------
314,310,694 13,572,602 252,096 328,135,392
As at 31 December 2010
Equity investments 310,175,323 28,825,484 755,812 339,756,619
-------------------------------------------
310,175,323 28,825,484 755,812 339,756,619
As at 30 June 2010
Equity investments 196,512,746 54,922,571 243,750 251,679,067
-------------------------------------------
196,512,746 54,922,571 243,750 251,679,067
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 six months ended 30 June 2011
One security that was previously valued based on other observable market inputs
(Level 2 inputs) on 31 December 2010 was valued using quoted market prices in an
active market (Level 1 inputs) on 30 June 2011, as the security had been
actively traded on the financial reporting date. Transfers into/from Level 3 are
detailed in section (c) below.
(ii) 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.
(iii) Transfers during the six months ended 30 June 2010
Three securities that were previously valued using quoted market prices in an
active market (Level 1 inputs) on 31 December 2009 were valued based on other
observable market inputs (Level 2 inputs) on 30 June 2010, as the securities had
not been actively traded on the financial reporting date.
Three 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 30 June 2010, 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 period/year
between Level 1 and Level 2 of the fair value hierarchy for financial assets
recognised at fair value:
During the period one security changed from Level 1 classification to Level 2
and one security changed from Level 2 classification to Level 1.
Financial assets designated at fair | | |
value | | |
through profit or loss upon initial | Transfers from| | Transfers from
recognition |Level 1 to Level 2| |Level 2 to Level 1
=--------------------------------------+------------------+-+------------------
| US$| | US$
=--------------------------------------+------------------+-+------------------
Equity investments: | | |
=--------------------------------------+------------------+-+------------------
| | |
=--------------------------------------+------------------+-+------------------
Period ended 30 June 2011 | 4,994,594| | 11,790,544
=--------------------------------------+------------------+-+------------------
| | |
=--------------------------------------+------------------+-+------------------
Period ended 31 December 2010 | 3,887,471| | 48,484,487
=--------------------------------------+------------------+-+------------------
| | |
=--------------------------------------+------------------+-+------------------
Period ended 30 June 2010 | 21,370,425| | 11,249,584
=--------------------------------------+------------------+-+------------------
| | |
(c) Level 3 reconciliation
|Six months ended| Year ended|Six months ended
| 30 June 2011|31 December 2010| 30 June 2010
=---------------------------+----------------+----------------+----------------
| Level 3| Level 3| Level 3
=---------------------------+----------------+----------------+----------------
Financial assets designated| | |
at fair value through | | |
profit or loss upon initial| | |
recognition | US$| US$| US$
=---------------------------+----------------+----------------+----------------
Opening balance | 755,812| 5,624,912| 5,624,912
=---------------------------+----------------+----------------+----------------
Total net gains and losses | | |
on investments designated | | |
at fair value through | | |
profit or loss upon initial| | |
recognition in the | | |
consolidated statement of | | |
comprehensive income | (208,235)| 896,013| 1,136,453
=---------------------------+----------------+----------------+----------------
Purchases | -| 325,872| -
=---------------------------+----------------+----------------+----------------
Sales | -| (6,335,897)| (6,180,580)
=---------------------------+----------------+----------------+----------------
Transfers from Level 3 to | | |
Level 2 | (323,327)| (138)| (337,035)
=---------------------------+----------------+----------------+----------------
Transfers to Level 3 from | | |
Level 2 | 27,846| 245,050| -
=---------------------------+----------------+----------------+----------------
Closing balance | 252,096| 755,812| 243,750
The net unrealised loss attributable to the Level 3 securities held as at 30
June 2011 amounted to US$208,235 (31 December 2010: unrealised gain US$58,860;
30 June 2010: US$nil) 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 30 June 2011: 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.
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.
As at 30 June 2010: Level 3
The value of the one Level 3 security, Russian Maintenance Corporation, was
estimated using the latest OTC market data and information known to the Manager.
(d) Effect of change in significant assumptions of Level 3 financial
instruments
As at 30 June 2011, 31 December 2010 and 30 June 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.
7. 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.
30 June 2011 31 December 2010 30 June 2010
US$ US$ US$
State Street Custodial Services
(Ireland) Limited 3,079,281 7,347,015 6,444,759
ING Bank (Eurasia) ZAO 2 21,147 -
Marfin Popular Bank Public
Company Limited 42,023 21,281 -
-------------- ------------------ -------------
3,121,306 7,389,443 6,444,759
30 June 2011 31 December 2010 30 June 2010
Credit rating Credit rating Credit rating
State Street Custodial Services
(Ireland) Limited AA- A+ A1
ING Bank (Eurasia) ZAO A+ A+ A+
Marfin Popular Bank Public
Company Limited Baa3 Baa2 Baa
8. Share capital
Capital management
The Company has issued one class of ordinary share to date. The Company's
capital managed as at the period 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 period 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.
Authorised share capital - 30 June 2011
Number of ordinary shares 30 June 2011
US$
Ordinary shares of par value US$0.01 1,000,000,000 10,000,000
each
Issued and fully paid - 30 June 2011
Number of ordinary shares 30 June 2011
US$
Balance at beginning and end of period 350,000,000 3,500,000
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 - 30 June 2010
Number of ordinary shares 30 June 2010
US$
Ordinary shares of par value US$0.01 1,000,000,000 10,000,000
each
Issued and fully paid - 30 June 2010
Number of ordinary shares 30 June 2010
US$
Balance at beginning and end of period 350,000,000 3,500,000
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.
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 loss attributable to ordinary
shareholders for the period of US$(0.025) (31 December 2010: US$0.354; 30 June
2010: US$0.109) and the weighted average number of ordinary shares outstanding
during the period of 350,000,000 shares (31 December 2010: 350,000,000; 30 June
2010: 350,000,000). The Group does not have any instruments issued with dilutive
effect on the basic earnings per share.
9. Share premium
Share premium 30 June 2011 31 December 2010 30 June 2010
US$ US$ US$
Balance at the start of the
period/year 134,400,629 134,400,629 134,400,629
-------------- ------------------ -------------
Balance at the end of the
period/year 134,400,629 134,400,629 134,400,629
The ordinary shares of the Company have a par value of US$0.01 each. Share
premium represents the excess of the issue and repurchase price of the ordinary
shares issued and repurchased over this par value.
10. Operating expenses and material agreements
Six months ended Six months ended
30 June 2011 30 June 2010
US$ US$
Expenses
Management fees (3,498,852) (2,629,387)
Transaction fees (205,945) (64,839)
Sub-Administrator's fees (151,252) (107,887)
Directors' fees (108,208) (103,071)
Statutory audit fees (63,747) (70,723)
Legal fees (47,797) 208,670
Russian Custodian fees (44,066) (78,667)
Other assurance service fees (27,867) (28,307)
Other expenses (23,950) (25,479)
Administrator's fees (23,633) (16,857)
Global Custodian fees (11,179) (39,334)
Registrar fees (8,386) (4,459)
Directors' business expenses (2,818) (2,754)
Tax advisory service fees (455) (11,547)
-------------------- -------------------
Total operating expenses (4,218,155) (2,974,641)
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 six months ended 30 June 2011 was US$3,498,852 (30 June
2010: US$2,629,387). At 30 June 2011 US$1,730,202 (31 December 2010:
US$1,670,385; 30 June 2010: US$1,388,900) 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
period or the prior period.
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 six months ended 30 June 2011 was
US$174,885 (30 June 2010: US$124,744). At 30 June 2011 US$26,121 (31 December
2010: US$22,609; 30 June 2010: US$57,900) 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 six months ended 30 June 2011 was
US$44,066 (30 June 2010: US$78,667). At 30 June 2011 US$5,107 (31 December 2010
US$13,344; 30 June 2010: US$10,697) 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 six months ended 30 June 2011 was
US$11,179 (30 June 2010: US$39,334). At 30 June 2011, US$3,585 (31 December
2010: US$4,239; 30 June 2010: US$5,348) 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 six months ended 30 June 2011 was US$8,386 (30
June 2010: US$4,459). At 30 June 2011 US$2,402 (31 December 2010: US$2,361; 30
June 2010: US$1,443) was payable.
Directors' fees and Directors' business expenses
During the six months ended 30 June 2011, the Directors charged fees for the
period of US$108,208 (GB GBP67,500) (30 June 2010: US$103,071 (GB GBP67,500)) and
business expenses of US$2,818 (30 June 2010: US$2,754). At 30 June 2011
US$54,041 (31 December 2010: US$53,123; 30 June 2010: US$50,582) was payable.
Auditor's remuneration
Statutory audit fees
The statutory audit fees charge for the six months ended 30 June 2011 was
US$63,747 (30 June 2010: US$70,723). At 30 June 2011, US$76,026 (31 December
2010: US$95,359; 30 June 2010: US$62,218) was payable.
Tax advisory service fees
The tax advisory service fee charge for the six months ended 30 June 2011
amounted to US$455 (30 June 2010: US$11,547). At 30 June 2011, US$16,455 (31
December 2010: US$16,000; 30 June 2010: US$nil) was payable.
Other assurance service fees and other non-audit service fees for the six months
ended 30 June 2011 amounted to US$27,867 and US$nil respectively (30 June 2010:
US$28,307 and US$nil respectively). At 30 June 2011, US$27,896 (31 December
2010: US$nil; 30 June 2010: US$25,069) was prepaid.
11. 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
sourced 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 in 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).
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.
12. 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 period.
(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.
The Group's equity investments are susceptible to market price risk arising from
uncertainties about future prices of the investments. At 30 June 2011, 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
unaudited 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 30 June 2011, the Group's exposure to foreign currency, based on the carrying
value of the monetary assets and liabilities, was as follows:
*Investments at Cash and cash Other net assets
30 June 2011 fair value equivalents and (liabilities) Net exposure
Currency
profile US$ US$ US$ US$
Euro - 42,023 (70,055) (28,032)
British Pounds - (43,970) (43,970)
Kazakhstan
Tenge 8,950,872 - - 8,950,872
Russian Ruble 281,642,560 2 5,544,854 287,187,416
Ukraine Hryvna 37,541,960 - - 37,541,960
-----------------------------------------------------------------
328,135,392 42,025 5,430,829 333,608,246
* These investments were settled in United States Dollars by the Group.
However the underlying exposure is to the local currency.
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 at Cash and cash Other net assets
2010 fair value equivalents and (liabilities) Net exposure
Currency
profile US$ US$ US$ US$
Euro - 21,281 - 21,281
Kazakhstan
Tenge 10,368,058 - - 10,368,058
Russian Ruble 293,141,101 21,147 184,280 293,346,528
Ukraine Hryvna 36,247,460 - - 36,247,460
-----------------------------------------------------------------
339,756,619 42,428 184,280 339,983,327
At 30 June 2010, the Group's exposure to foreign currency, based on the carrying
value of the monetary assets and liabilities, was as follows:
*Investments at Cash and cash Other net assets
30 June 2010 fair value equivalents and (liabilities) Net exposure
Currency
profile US$ US$ US$ US$
Kazakhstan
Tenge 10,368,090 - - 10,368,090
Russian Ruble 219,362,254 12,259 1,078,505 220,453,018
Ukraine Hryvna 21,948,723 - - 21,948,723
-----------------------------------------------------------------
251,679,067 12,259 1,078,505 252,769,831
* These investments were settled in United States Dollars by the Group.
However the underlying exposure is to the local currency.
Sensitivity analysis
At 30 June 2011, 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$16,406,770 (31 December 2010: US$16,987,831; 30 June 2010: US$12,583,953).
At 30 June 2011, 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$273,643 (31 December 2010: US$11,335; 30 June 2010: US$54,538).
(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 30 June 2011, 99.93% (31 December 2010: 99.93%; 30 June 2010: 99.77%) of the
Group's investments are listed on RTS, MICEX and other major exchanges. A 3%
increase in stock prices at 30 June 2011 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$9,837,313 (31 December 2010:
US$10,185,967; 30 June 2010: US$7,532,948). An equal change in the opposite
direction would have decreased the net assets attributable to holders of
ordinary shares and the changes in net assets attributable to holders of
ordinary shares by an equal, but opposite amount.
(iv) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in raising
funds to meet commitments. Due to the Manager's prominence in the Russian
equities market, it is possible for total shareholdings amongst all funds
managed by the Manager to become a significant proportion of certain of the
investees' outstanding shares. Liquidity risk may result from an inability to
sell investments quickly at close to fair value.
However, as the Group does not allow for redemption of any shares by
shareholders, the only significant commitments arise out of the investment
process. The Manager takes into account the liquidity of investee's stakes and
the required time to liquidate stakes via the market or a block trade without
impairment to fair value.
Liquidity risk is monitored through analysis of the regular fund cash reports,
enabling the Manager to potentially foresee liquidity shortages, and to allocate
or liquidate assets accordingly to fund additional commitments.
This information is provided by the Sub-Administrator and can be accessed by all
members of the Manager and Adviser who initiate or monitor transactions, and is
reconciled against the data delivered by the Custodians on a regular basis.
The table below analyses the Group's financial liabilities into relevant
maturity groupings based on the remaining period at the consolidated statement
of financial position date to the contractual maturity date. Balances due within
12 months equal their carrying balances, as the impact of discounting is not
significant.
Less than 1 3 months - 1
month 1-3 months year 1-5 years Total
As at 30 June 2011 US$ US$ US$ US$ US$
Liabilities
Amounts payable on
investments
purchased 160,000 - - - 160,000
Accrued expenses 1,822,566 28,518 92,481 - 1,943,565
--------------------------------------------------------------
Total liabilities 1,982,566 28,518 92,481 - 2,103,565
Less than 1 3 months - 1
month 1-3 months year 1-5 years Total
As at 31 December
2010 US$ US$ US$ US$ US$
Liabilities
Amounts payable on
investments
purchased 2,075,060 - - - 2,075,060
Accrued expenses 1,683,729 223,358 - - 1,907,087
--------------------------------------------------------------
Total liabilities 3,758,789 223,358 - - 3,982,147
Less than 1 3 months - 1
month 1-3 months year 1-5 years Total
As at 30 June 2010 US$ US$ US$ US$ US$
Liabilities
Amounts payable on
investments
purchased 813,450 - - - 813,450
Accrued expenses 1,404,946 168,610 - - 1,573,556
--------------------------------------------------------------
Total liabilities 2,218,396 168,610 - - 2,387,006
(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 7 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 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 30 June
2011 (or at 31 December 2010 and 30 June 2010).
The following represented the credit risk to the Group as at period/year end:
30 June 2011 31 December 2010 30 June 2010
US$ US$ US$
Cash and cash equivalents 3,121,306 7,389,443 6,444,759
Dividends receivable 1,332,354 206,663 1,891,955
Amounts receivable on investments
sold 4,435,048 481,707 447,146
Prepayments 34,368 - -
-------------- ------------------ -------------
8,923,076 8,077,813 8,783,860
(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$3,121,306 (31 December 2010:
US$7,389,443; 30 June 2010: US$6,444,759).
13. 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 investment is IDGC of South (31 December 2010: Dixy
Group, Bashkirenergo and Energospetsmontaz; 30 June 2010: Dixy Group and
Bashkirenergo). The fair market value of this investment (31 December
2010: 11; 30 June 2010: 10) determined in accordance with IFRS represents 1.28%
(31 December 2010: 13.58%; 30 June 2010: 13.85%) of the fair market value of the
Group's total net assets.
During the six months ended 30 June 2011, the Directors charged fees for the
period of US$108,208 (30 June 2010: US$100,317) and out-of-pocket expenses of
US$2,818 (30 June 2010: US$2,754). At 30 June 2011 US$54,041 (31 December 2010:
US$53,123; 30 June 2010: US$50,582) was payable. Expenses charged during the
period by the Administrator, Manager and Custodians are as detailed in note 10.
During the period the Group entered into transactions with other funds managed
by the Manager. The aforementioned transactions were conducted for efficiency
purposes whereby the Group purchased and/or sold securities on behalf of other
funds managed by the Manager and then purchased or sold them on to the relevant
counterparties. The trades took place at market value and therefore the Group
was neither advantaged nor disadvantaged due to these transactions.
The transactions were as follows:
| |Six months ended| |Six months ended
=--------------------------------+-+----------------+-+----------------
| | 30 June 2011| | 30 June 2010
=--------------------------------+-+----------------+-+----------------
| | US$| | US$
=--------------------------------+-+----------------+-+----------------
The Russian Prosperity Euro Fund| | | |
=--------------------------------+-+----------------+-+----------------
Total purchases | | -| | 134,379
=--------------------------------+-+----------------+-+----------------
| | | |
=--------------------------------+-+----------------+-+----------------
The Prosperity Cub Fund | | | |
=--------------------------------+-+----------------+-+----------------
Total purchases | | 1,416,933| | -
=--------------------------------+-+----------------+-+----------------
| | | |
=--------------------------------+-+----------------+-+----------------
The Russian Prosperity Fund | | | |
=--------------------------------+-+----------------+-+----------------
Total purchases | | 2,580,122| | -
The Directors' interests in the share capital of the Company at 30 June
2011, 31 December 2010 and 30 June 2010 (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 Number of
Ordinary Shares Ordinary Shares Ordinary Shares
30 June 2011 31 December 2010 30 June 2010
Sir David Kinloch (Chairman) *121,000 *121,000 *121,000
Anthony Hall 100,000 100,000 100,000
Timothy Henderson 50,000 50,000 50,000
Roger Phillips 50,000 50,000 50,000
James Williams **137,000 **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.
14. Significant events during the period
The new subsidiary, Nanjero Limited, commenced trading on 17 June 2011.
15. Significant events subsequent to the period end
There have been no other events subsequent to the period end, which require
adjustment to or disclosure in the unaudited consolidated financial statements.
The Manager's Report draws attention to significant volatility in the markets
since the period end.
16. Changes to legal documentation
There were no changes to the Memorandum and Articles of Association or the
Prospectus of the Company during the period.
17. Approval of the consolidated financial statements
The consolidated financial statements were approved by the Board of Directors on
15 September 2011.
Supplemental Information (unaudited)
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:
30 June 2011 31 December 2010 30 June 2010
US$ US$ US$
Net assets attributable to
shareholders at market mid prices 338,662,759 345,953,835 259,836,257
Adjustment to value of
investments at bid prices (3,707,856) (2,101,550) (1,760,336)
-------------- ------------------ -------------
Net assets attributable to
shareholders as per consolidated
statement of financial position 334,954,903 343,852,285 258,075,921
30 June 2011 31 December 2010 30 June 2010
US$ US$ US$
Net asset value per share at
market mid prices 0.968 0.988 0.742
Adjustment per share to value of
investments at bid prices (0.011) (0.006) (0.005)
-------------- ------------------ -------------
Net asset value per share
attributable to shareholders as
per consolidated statement of
financial position 0.957 0.982 0.737
Foreign exchange rates
The following foreign exchange rates were used to translate assets and
liabilities into United States Dollars:
30 June 2011 31 December 2010 30 June 2010
Euro 0.6912 0.7465 0.8158
British Pounds 0.6229 - -
Kazakhstan Tenge 145.9000 147.3700 147.3700
Russian Ruble 27.8910 30.5270 31.2325
Ukraine Hryvna 7.9775 7.9675 7.9060
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#1546983]
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