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FINANCIAL RISKS

The economy of the Republic of Kazakhstan is sensitive to fluctuations in international financial markets and any slowdown in global economic growth. The recent international financial crisis has led to instability in capital markets, lack of liquidity in the banking sector, as well as to fluctuations in the exchange rate of the tenge. There is some uncertainty about the ability to access the allocation of capital in highly reliable banks and the value of such allocation for the Company, which in turn may affect its financial position, as well as the results of its operations and plans. The continuation of the international financial crisis may also adversely affect the solvency of the consumers of the Company, which can lead to declining revenues and liquidity.

The Company is exposed to various financial risks, among which are the currency risks, inflation risks, risks of changes in interest rates on the allocated temporarily free funds, credit and tax risks. The probability of their occurrence and degree of impact on the financial results of the Company are continually evaluated and taken into account in drawing up development plans.

Inflation risks

The company conducts its principal operations in the Republic of Kazakhstan and uses KZT as a basic currency of accounts. The costs associated with the payment of wages, energy costs, the cost of logistics services are sensitive to the inflation of KZT.

Interest rate exposures

The operation of the Company is exposed to interest rate changes, which may adversely affect the value of temporarily funds assets and, accordingly, the financial results of operations of the Company.

Currency risks

Currency risk is the fluctuation in exchange rates, which has a multidirectional impact on financial and economic activities of the Company.

A considerable part of the Company’s revenues is denominated in US dollars (USD) or linked to USD. A part of the Company’s expenses is denominated in foreign currency, or otherwise significantly dependent on the fluctuations of foreign currencies (mainly the USD and to a lesser extent the euro and the ruble) for KZT. Currently, the majority of operating costs of the Company are paid at prices fixed in KZT.

A rise in the value of the dollar would make oil exports more profitable.

In the case of a negative impact of changes in interest rates and exchange rates the Company will perform the following steps to reduce the negative effects:

  • expansion of the number of partner banks, primarily drawn from the institutions least affected by the current global financial crisis;
  • greater use of trade finance instruments (letters of credit, guarantees) allowing the Company to reduce the dependence of its activities on base interest rates.

The Company does not resort to hedging of the specified risks at the moment, but in each situation uses internal tools and provisions of financial risk management, allowing it to guarantee fulfillment of its obligations on time and in full.

The following indicators of the Company’s financial statements are most susceptible to changes as a result of the influence of financial risk:

  • net income;
  • revenues;
  • costs;
  • receivables.

Credit risks

Operations associated with the movement of material and cash flows for contractors, beginning with financial institutions serving the financial flows of the Company, and ending with the end buyers of products and contractors providing various services for the Company, are all subject to credit risks.

An efficient centralized cash management system implemented by the Treasury of the Company allows it to minimize credit risks.

Financial risks, their probability and nature of changes in the statements

Risk

Risk probability

Nature of changes in the statements

Falling of bank deposit rates

average

Decrease in profit due to falling of revenues for the placement of temporarily free funds

Foreign exchange risk

(the risk of devaluation of the the exchange rate of the Tenge against the Euro and USD)

average

Increased cost of purchased equipment - increased depreciation

Inflation risk

average

Increase in accounts receivable, increase in costs of outputs

Credit risk

average

Problem with receivables. Reduction of profit