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MD&A / Risk Management / Financial Risks

Management of the Company’s financial risks is the responsibility of employees acting within the scope of their respective professional activities.

The Company’s Financial Risk Management Panel defines a uniform approach to financial risk management at the Company and its subsidiaries. Activities by the Company’s employees and the Financial Risk Management Panel minimize potential financial losses and help to achieve corporate targets.

Risks

Description

Risk management activities

CREDIT RISK

Company management pays significant attention to managing credit risk.

Gazprom Neft has taken a number of steps to manage credit risk, including: counterparty solvency evaluation; individual lending limits depending on the counterparty’s financial situation; control of advance payments; control of accounts receivable by lines of business, etc.

RISKS ASSOCIATED WITH BORROWINGS

Gazprom Neft efficiently controls risks associated with its borrowing activities.

The Company actively uses alternative sources of debt financing in addition to bank loans. The Company’s stable financial situation (affirmed by international rating agencies) helps it to mobilize funds in Russian and foreign banks with comparative ease.

CURRENCY RISK

Gazprom Neft generates most of its gross revenues from export sales of crude oil and petroleum products. This means that fluctuations in ruble exchange rates may impact the Company’s financial and business performance.

The Company’s currency risk is considerably mitigated by its foreign currency liabilities. The Company takes a large part of its loans on the international credit market in US dollars, and associated debt servicing costs are also in US dollars.

The currency structure of revenues and liabilities acts as a hedging mechanism where opposite factors offset each other. A balanced structure of currency claims and liabilities minimizes the impact of currency risk factors on the Company’s financial and business performance.

INTEREST RISK

As a major borrower, the Company is exposed to the risk of changing interest rates. The international financial market remains the main source of loans. Most of the Company’s debt portfolio is denominated in in US dollars. The interest rates on a portion of the Company's debt (this exact share is not fixed and may vary) is based on LIBOR rates. Increases in LIBOR may cause the cost of debt servicing to incrase for the Company. Higher borrowing costs could potentially have a negative impact on the Company's ability to meet its liabilities and on its liquidity.

In the last year, the LIBOR rate has declined slightly, and the need for further growth stimulus in the world economy made the probability of substantial increases (more than 1%) negligible. Therefore, taking account of the structure of OJSC Gazprom Neft’s current loan portfolio, the Company believes it faces low interest risks at present.

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