32. Fiancial instruments

The Group’s principal financial instruments comprise cash and cash equivalents, investments, bank loans, bonds and promissory notes issued and finance leases liabilities. These instruments serve to finance the Group’s operations and capital expenditures; its corporate financial transactions such as share repurchase and acquisition strategy; place available funds in course of cash management. Other financial assets and liabilities such as trade receivables and trade payables arise directly from the Group’s operations. The following table presents the carrying amounts of financial assets and liabilities as at 31 December 2013, 2012 and 2011:


Classes Categories 31 December 2013 31 December 2012 31 December 2011
Cash and cash equivalents Loans and receivables 7,960 13,629 9,634
Trade and other receivables Loans and receivables 40,986 36,449 31,250
Available–for–sale financial assets at cost Available–for–sale 83 102 36
Available–for–sale financial assets at fair value Available–for–sale 6 2,821 776
Loans Loans and receivables 1,996 3,604 5,626
Non–hedge derivative Financial assets at fair value through profit or loss 401
Total financial assets   51,432 56,605 47,322
   
Bank and corporate loans Liabilities at amortized cost 175,925 201,115 161,095
Bonds Liabilities at amortized cost 40,000 11,613 8,889
Promissory notes Liabilities at amortized cost 386 819 879
Vendor financing Liabilities at amortized cost 64 2,730 2,786
Finance lease liabilities Liabilities at amortized cost 168 878 2,661
Interest payable Liabilities at amortized cost 1,170 630 678
Other borrowings Liabilities at amortized cost 96 105 105
Trade and other payables Liabilities at amortized cost 43,045 54,666 53,001
Non–hedge derivative Financial liabilities at fair value through profit and loss 878 24
Total financial liabilities   261,732 272,556 230,118

The fair value of cash and cash equivalents, current receivables, trade payables, other current financial assets and liabilities approximate their carrying amount largely due to the short–term maturity of these instruments.

The fair value of long–term debt investments, long–term accounts receivable and non–current accounts payable correspond to the present values of the payments related to the assets and liabilities, taking into account the current interest rate parameters that reflect market–based changes to terms and conditions and expectations. Fair value of financial liabilities approximate their carrying amount.

Available for sale investments accounted for at cost include unquoted equity investments whose value cannot be measured reliably. Quoted prices are not available for these investments due to the absence of an active market. It is also impracticable to derive fair value using the similar transaction method. The discounting cash flow method cannot be applied to such investments as there are no reliably determinable cash flows related to them.

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
  • Level 2: inputs other than quoted prices included within 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)

  •   2013 2012 2011
    Available–for–sale financial assets      
    Long–term investments at fair value      
    Level 1 6 2,821 776
    Level 2
    Level 3
    Total long–term equity investments at fair value 6 2,821 776
    Financial assets at fair value through profit and loss      
    Non–hedge derivatives      
    Level 1
    Level 2 401
    Level 3
    Total non–hedge derivatives 401
    Financial liabilities at fair value through profit and loss      
    Non–hedge derivatives      
    Level 1
    Level 2 878 24
    Level 3
    Total non–hedge derivatives 878 24

    Income and expenses on financial instruments


        Finance costs Other investing and financing gains and losses   Equity
    2013 Bad debt income/ (expense) Interest expense Interest income Dividend income Gains / (losses) on asset disposal Fair value change Impairment loss (reversal of impairment) Other Foreign exchange gains / (losses) Fair value change Total
    Cash and cash equivalents 676 19 695
    Trade and other receivables (2,140) 45 295 (1,800)
    Available for sale financial instruments 9 20 41 386 456
    Loans 509 (17) 23 515
    Total financial assets (2,140) 1,239 20 41 386 (17) 337 (134)
    Bank and corporate loans (11,893) (170) (12,063)
    Bonds (2,889) (2,889)
    Promissory notes (12) (12)
    Vendor financing (63) (178) (241)
    Finance lease liabilities (48) (48)
    Trade and other payables and non–hedge derivatives (878) (551) (1,429)
    Total financial liabilities (14,893) (878) (911) (16,682)

    Income and expenses on financial instruments


        Finance costs Other investing and financing gains and losses   Equity
    2012 Bad debt income/ (expense) Interest expense Interest income Dividend income Gains / (losses) on asset disposal Fair value change Impairment loss (reversal of impairment) Other Foreign exchange gains / (losses) Fair value reclassification Fair value change Total
    Cash and cash equivalents 343 (16) 327
    Trade and other receivables (1,389) 10 603 5 (771)
    Available for sale financial instruments 37 804 (9) 145 (740) 1 238
    Loans 446 34 (11) 469
    Total financial assets (1,389) 10 1,392 37 838 (9) 145 (22) (740) 1 263
    Bank and corporate loans (14,005) 215 (13,790)
    Bonds (531) (531)
    Promissory notes (115) 9 (106)
    Vendor financing (125) 70 (55)
    Finance lease liabilities (371) (371)
    Trade and other payables and non–hedge derivatives 24 211 235
    Total financial liabilities (15,147) 24 505 (14,618)

    Income and expenses on financial instruments


        Finance costs Other investing and financing gains and losses    Equity
    2011 Bad debt income/ (expense) Interest expense Interest income Dividend income Gains / (losses) on asset disposal Fair value change Impairment loss (reversal of impairment) Other Foreign exchange gains / (losses) Fair value change Total
    Cash and cash equivalents 357 (152) 205
    Trade and other receivables (632) 21 77 141 (393)
    Available for sale financial instruments 31 (257) (226)
    Loans 617 25 76 (88) 630
    Total financial assets (632) 21 1,051 31 25 76 (99) (257) 216
    Bank and corporate loans (9,780) (32) (9,812)
    Bonds (1,589) (1,589)
    Promissory notes (74) (74)
    Vendor financing (148) (125) (273)
    Finance lease liabilities (565) (2) (567)
    Interest payable (10) (7) (17)
    Trade and other payables and non–hedge derivatives (1,263) 51 (1) (113) (1,326)
    Total financial liabilities (13,429) 51 (1) (279) (13,658)

    (a) Credit risk

    Each class of financial assets represented in the Group’s statement of financial position to some extent is exposed to credit risk. Management develops and implements policies and procedures aiming to minimize the exposure and impact on the Group’s financial position in case of risk realization.

    Financial instruments that could expose the Group to concentrations of credit risk are mainly trade and other receivables. The credit risk associated with these assets is limited due to the Group’s large customer base and ongoing procedures to monitor the credit worthiness of customers and other debtors.

    The Group’s accounts receivable are represented by receivables from the Government and other public organizations, businesses and individuals each of them bearing different credit risk. Collection of receivables from the Government and other public organizations is mainly influenced by political and economic factors and not always under full control of the Group. However, management undertakes all possible efforts to minimize the exposure to risk of receivable from this category of clients. In particular, creditworthiness of such subscribers is assessed based on financing limits set by the Government. Management believes there were no significant unprovided losses relating to these or other receivables as at 31 December 2013, 2012 and 2011.

    To reduce risk of exposure on receivables from businesses and individuals the Group implements a range of procedures. Credit risk is determined based on a summary of probabilities of occurrences and possible impact of events negatively influencing the customer’s ability to discharge its obligation. A credit rating is attributed to a customer on initial stage of cooperation and, then, reassessed periodically based on credit history. As a part of its credit risk management policy, the Group arranges preventive procedures which are represented by but not limited to advance payments, request for collaterals and banks and third parties guarantees. For collection of receivables, which are past due, the Group takes a variety of actions from suspension of rendering of services to taking legal action.

    The Group deposits excess cash available with several Russian banks and makes investments in bills of exchange. To manage the credit risk related to deposit of cash available with banks, management of the Group implements procedures to periodically assess the creditworthiness of the banks. To facilitate this assessment, deposits are mainly placed with banks where the Group has already had current settlement account and can easily monitor activity of such banks. Prior to investing in bills of exchange, management of the Group performs an analysis of financial position of the issuer and monitors its creditworthiness over periods up to maturity.

    Maximum exposures to credit risk are limited to the net carrying amounts of respective financial assets. Such exposure is mitigated by collaterals held by the Group.

    (b) Liquidity risk

    The Group monitors its risk of a shortage of funds by preparing and monitoring compliance with cash flow budgets. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, bonds and finance leases. Cash flow budgets consider the maturity of both cash inflows and outflows from the Group’s operations. Based on projected cash flows the decision is taken on either investment of free cash or attracting financing required. Realization of liquidity risk management policy provides the Group with sufficient cash to discharge its obligation on a timely basis. However, since the companies comprising the Group were managed on individual basis in 2011–2013 no financing was provided within the Group introducing the need for certain companies to raise financing from third parties rather than from fellow subsidiaries with excess liquidity.

    Maturity analysis as at 31 December 2013, 2012 and 2011 represented below shows undiscounted cash flows, including estimated interest payments:


    2014 2015 2016 2017 2018 and later Total
    31 December 2013
    Bank and corporate loans 40,583 33,563 69,541 43,175 32,423 219,285
    Bonds 8,981 2,778 1,396 11,230 25,081 49,466
    Promissory notes 377 1 8 386
    Vendor financing 9 9 9 9 28 64
    Finance lease liabilities 78 20 19 18 200 335
    Other borrowings and hedge derivatives 80 20 2 102
    Trade and other payables 43,045 90 1 43,136
    Stock redemption reserve 23,161 23,161
    Total financial liabilities 116,314 36,481 70,967 54,432 57,741 335,935

    2013 2014 2015 2016 2017 and later Total
    31 December 2012            
    Bank and corporate loans 75,458 48,130 61,344 48,430 8,193 241,555
    Bonds 2,680 855 855 855 10,731 15,976
    Promissory notes 810 33 5 11 859
    Vendor financing 2,665 9 9 9 38 2,730
    Finance lease liabilities 903 46 18 18 218 1,203
    Other borrowings and hedge derivatives 71 30 1 4 106
    Trade and other payables 54,666 1 54,667
    Total financial liabilities 137,253 49,103 62,232 49,327 19,181 317,096

    2012 2013 2014 2015 2016 and later Total
    31 December 2011            
    Bank and corporate loans 82,429 52,373 14,084 16,362 15,756 181,004
    Bonds 5,085 2,022 351 351 4,250 12,059
    Promissory notes 844 30 17 8 899
    Vendor financing 2,780 8 8 8 47 2,851
    Finance lease liabilities 2,205 847 44 18 218 3,332
    Other borrowings and hedge derivatives 77 13 10 9 12 121
    Trade and other payables and non–hedge derivatives 52,896 43 1 1 1 52,942
    Total financial liabilities 146,316 55,336 14,515 16,749 20,292 253,208

    (c) Market risks

    Significant market risk exposures are interest rate risk, exchange rate risk and other price risk. Exposure to other price risk arises from available for sale investments quoted on active markets.

    Interest rate risk

    Interest rate risk mainly relates to floating rate debt primary denominated in US dollars, Russian Roubles and euros and financial instruments denominated in Russian Roubles. To manage this risk, the Group entered into interest rate swaps to hedge significant amounts of its floating rate debt. Other borrowings do not materially influence the exposure to interest risk.


    31 December 2013 31 December 2012 31 December 2011
    Fixed rate instruments    
    Financial assets 9,962 20,054 15,900
    Financial liabilities (176,437) (170,419) (170,731)
    (166,475) (150,365) (154,831)
    Variable rate instruments Financial assets 401 135
    Financial liabilities (42,250) (47,471) (6,362)
    (41,849) (47,471) (6,227)

    Fair value sensitivity analysis for fixed rate instruments

    The Group does not account for any fixed rate financial instruments as fair value through profit or loss.

    Cash flow sensitivity analysis for variable rate instruments

    The table below demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax.


    2013 2012 2011
    LIBOR (+1%) (60) (100)
    LIBOR (–1%) 60 100
    Euribor (+1%) (10)
    Euribor (–1%) 10
    MosPrime (+1%) (1,090) (20) (90)
    MosPrime (–1%) 1,090 20 90
    Federal loan bonds rate  (+1%) 90
    Federal loan bonds rate  (–1%) (90)
    CB refinancing (+1%) (30)
    CB refinancing (–1%) 30

    Foreign exchange risk

    Currency risk is the risk that fluctuations in exchange rates will adversely affect the Group’s cash flows. As a result, these fluctuations in exchange rates will be reflected in respective items of the Group’s consolidated statement of comprehensive income, statement of financial position and/or statement of cash flows. The Group is exposed to currency risk in relation to its assets and liabilities denominated in foreign currencies, mostly from accounts receivable and payable from operations with international telecom operators, accounts payable for equipment, borrowings issued in foreign currencies. The Group does not have formal procedures to reduce its currency risks.

    Financial assets and liabilities of the Group presented by currency as at 31 December 2013, 2012 and 2011 were as follows:


    31 December 2013 31 December 201231 December 2011
    USD EUR USD EUR USD EUR
    Cash and cash equivalents 327 62 821 17 274 32
    Trade receivables 1,497 879 1,252 670 1,283 310
    Loans and receivables 79 477 259
    Bank and corporate loans (604) (220) (2,232) (487) (4,364) (770)
    Vendor financing (2,553) (2,204)
    Promissory notes (151)  
    Trade and other payables and non–hedge derivatives (3,173) (2,150) (4,514) (249) (2,352) (243)
    Net exposure (1,874) (1,429) (6,900) (49) (7,104) (671)

    The table below demonstrates the sensitivity to a reasonably possible change in exchange rates, with all other variables held constant, of the Group’s profit before tax:


    31 December 2013 31 December 201231 December 2011
    USD EUR USD EUR USD EUR
    Strengthening of the currency (+20%) (374) (286) (1,380) (10) (1,420) (134)
    Weakening of the currency (–20%) 374 286 1,380 10 1,420 134

    The analysis was applied to monetary items denominated in relevant currencies at the reporting date.

    Other price risk

    As at 31 December 2013, the Group’s assets include investments in quoted securities subject to other price risk. To mitigate this risk, the Group regularly analyzes market securities trends and makes a decision to sell a security, when necessary.

    The table below demonstrates the sensitivity to a reasonably possible change in market indexes for securities, with all other variables held constant, of the Group in terms of the result of fair value revaluation recognized in other comprehensive income.


      Increase/decrease in percentage point Effect on revaluation result recognized in other comprehensive income
    2013    
    MICEX + 30.0% 1,191
    MICEX –  30.0% (1,496)
    2012    
    MICEX + 30.0%
    MICEX –  30.0%
    2011    
    MICEX + 30.0% 231
    MICEX –  30.0% (231)

    (d) Capital management policy

    Capital management policy of the companies comprising the Group is primarily focused on increasing credit ratings, improving financial independence and liquidity ratios, improving the structure of payables, and reducing cost of borrowings. Among the main methods of capital management are profit maximization, investment program management, sale of assets to reduce debt, debt portfolio management and restructuring, use of different classes of borrowings. In addition, the companies of the Group are subject to externally imposed capital requirements, which are used for capital monitoring. There were no changes in the objectives, policies and processes of capital management during 2011–2013.

    The Boards of directors of the companies comprising the Group review their performance and establish a variety of key performance indicators which are based on Russian statutory accounts. The companies comprising the Group monitor and manage their debt using financial independence ratio and net debt/equity, net debt/OIBDA ratios.