Contents

Introduction Main Financial Results of the Bank Operational Environment of Sudostroitelny Bank's Activities in 2004 Macroeconomic Situation in Russia Development of the Situation in the Banking Sector Results of Sudostroitelny Banks Activities in 2004 Client Policy Services to Corporate Clients Services to Retail Clients Services to Financial Institutions Fundamentals of Formation of Value Principles of the Banks Activities The Risk Management Practice Development of Sales Channels Team of Professionals Information Technologies Communication Strategy Prospects of Development Social Responsibility of the Bank Financial Statements 3 4 6 6 9 12 12 13 15 16 18 18 20 24 25 26 26 28 31 33

Annual Report 2004

The growth in the client base consequently led to a significant growth in the assets of the Bank. Compared to the asset-base of 2003, the Bank assets increased by one third in 2004 (33.6%) reaching RUR 19.1 billion.

Main Financial Results of the Bank

One of the major indicators of the Bank's activities is its financial results. In the course of the past year, Sudostroitelny Bank maintained positive dynamics in all basic parameters. There was a considerable growth in the number of corporate clients that the Bank attracted for its services, which in turn increased financial flows from both the new and existing corporate clients of the Bank.

The volume of equity capital kept growing and reached RUR 2.96 billion by the end of the reporting period. In the rating list of the 50 leading Russian commercial banks published by the British The Banker, Sudostroitelny Bank ranked 36th in the terms of equity capital and 37th in the terms of assets (in accordance with International Accounting Standards).

In 2004, Sudostroitelny Bank solidified its positions as one of the largest players of the exchanging currency and interbank markets. The volume of currency trading

Annual Report 2004

operations with US dollars grew in the reporting period by almost 2.7 times and equaled USD 71 billion; the volume of transactions with euros reached EUR 11.1 billion.

Reserve Fund which became possible after the Central Bank of Russia had reduced the obligatory provision rate allowed for raising the resources on the Bank's accounts with Clearing Center of the Bank of Russia, without doing any harm to the Bank's cost efficiency.

Financing corporate clients remained one of the major methods for investing the Bank's assets during the last year. The consolidated credit portfolio of Sudostroitelny Bank in the course of the reporting year grew by 94% and, as of January 1st 2005, it totaled an amount in excess of RUR 6.5 billion. During the same period, the volume of interbank credits that the Bank extended to its financial institutional clients also grew to RUR 4.14 billion as of January 1st 2005. By the end of the year, the balance on the Bank's accounts with the Clearing Center grew by almost 88% and reached RUR 1.86 billion. A significant volume of liquid resources allowed the Bank to overcome smoothly payment peaks and, last summer, to maintain liquidity and solvency during the period of instability in the banking sector.

The profit indicators also highlight the effiIn its strategy to continually enlarge its resource base, Sudostroitelny Bank increased its investment portfolio with holdings of the most liquid forms of securities in the Russian market. However, the majority of this type of investment in the Russian stock market were corporate bonds (as of January 1st 2005 53% of the portfolio), Russian Eurobonds (20% of the portfolio) and OVGVZ domestic government bonds denominated in foreign currency (10% of the portfolio). A significant portion of the investment activities of the Bank still corresponds to transactions with bills of exchange. The results of the reporting year for bills of exchange portfolio totaled RUR 2.85 billion. The stable growth of the Bank's major financial parameters confirms the correct choice of the Bank's development strategy and the management's professional approach to banking in the emerging market of Russia. ciency of Sudostroitelny Bank in a very evident way. The Bank's profit grew in 2004 by more than 2.5 times and exceeded RUR 280 million.

Great attention was traditionally paid to maintaining high liquidity assets. Reducing of the amount of funds destined for the Obligatory

Macroeconomic Situation in Russia

The country's considerable positive balance of payments contributed to the strengthening of the Russian currency.

Operational Environment of Sudostroitelny Bank's Activities in 2004

Generally speaking, the long-term political and economic stabilization of Russia, as well as the growth of the predictability and forecastability of macroeconomic processes, have created favorable conditions for the further development of Sudostroitelny Bank.

In spite of the initial decrease in the ruble's exchange rate in the middle of the year 2004, by the end of the year 2004 its exchange rate grew from RUR 29.45 to 27.75 to the US dollar, which constitutes a growth of 5.7%.

In real terms, the actual growth of the ruble against the US dollar in December 2004, compared to December 2003, totaled 14.0%, and 6.0%, respectively, against the euro. In the course of this entire period, the Bank of Russia provided for a certain smoothness in the fluctuations of the currency and, when necessary, resorted to ruble or US dollar interventions in

Annual Report 2004

order to preserve the equilibrium between the market's supply and demand.

At the same time, the growth of the money supply had a positive impact on the situation in the production sector of the economy. The volume of industrial production in Russia increased in 2004 by 6.1% compared to the previous year. As a matter of fact, positive dynamics were maintained in most of the non-extractive sectors of the economy which proved to be most favorable. In particular whilst the production volume in the fuel sector grew last year by 7.1%, the same parameter in machine-building and metal-working grew to 11.7% compared to the previous year.

During the major part of the year 2004, the Bank of Russia prevented any significant strengthening of the Russian ruble by acquiring excessive amounts of foreign currencies. As a result, the gold and foreign currency reserves of the Central Bank of the Russian Federation grew from 76.9 to 124.5 billion US dollars.

A significant volume of foreign currency purchases by the Bank of Russia has also contributed to the growth of the money supply. In the year 2004, the volume of monetary aggregates in this country rose from RUR 3.21 to 4.36 trillion, in other words a 35.8% growth in these aggregates a most significant factor in inflation.

In spite of the slowing down of the inflation rate from 12% per annum in 2003 to 11.7% per annum in 2004 the indicator still exceeded the objective set by the government and was considerably different from that of developed countries. The growth of the cost of energy resources should also be stressed among other important factors that led to inflation and were of great importance last year; the same refers to the costs of production and of services of other natural monopolies in this country, such as electricity and gas.

Operational Environment of Sudostroitelny Bank's Activities in 2004

There have been many factors providing for the growth of production output. Amongst these, we can point to the country's stable macroeconomic situation, international market opportunities that were favourable for Russia, growth of internal demand from both industry and retail sector. The financial position of industry, which was indeed stable, did create conditions that lead to high investment activity. For example, the volume of investments in fixed capital in the year 2004 exceeded that of the level of the previous year by 10.9%. There was a large demand for loan resources from enterprises, and it was followed by growing credit activities (among other reasons due to the availability of foreign resources); leasing and factoring operations were expanding as well. Sudostroitelny Bank for its part, within this scenario of increased business activities, sought to react to the changing needs of the clients by developing the latest forms of business financing. In the reporting year, the total volume of the credit portfolio grew by 94%, totaling RUR 6.5 billion.

The positive pricing dynamics of securities issued by leading firms in the first months of the year were followed by falling prices later in the year, namely due to expectations for a further rise of interest rates in the USA; a fall of stock prices in American exchanges; reduced liquidity of the ruble, and a weaker ruble rate all these factors provided for the growth of sales and a return the pricing levels of the majority of share quotations to levels in the beginning of the year 2004.

A new growth wave that occurred in October through November did not last very long. Even though the situation was no more ambiguous in respect to further world market tendencies influenced by the results of the US presidential elections, the position of the US dollar slackened worldwide, and an afflux of capital to emerging markets occurred.

Contradictory internal events occurring in Russia were hindering a more substantial growth in the value of domestic securities; in

Simultaneously, the impact of the positive tendencies in the production sector of the economy was not as obvious as in the cost dynamics of liquid securities. Thus, by the end of the year 2004, one of the key indicators of the domestic market the Russian trade system index (RTS) grew only by 7% (up to 614 points), significantly less than that of the year before.

particular, government tax claims against a number of large companies had a negative impact on the mood of investors.

Annual Report 2004

Throughout the year, this environment of instability in the value of shares on the market caused the Bank to form its portfolio primarily with ruble and foreign currency denominated corporate bonds issued by the most secure issuers (corporate bonds represented 58% of the Bank's portfolio by the end of the year), because these securities are less subject to unfavourable fluctuations in such a volatile market. Positive tendencies in the economy of this country were accompanied by accelerated developments in the banking sector.

Development of the Situation in the Banking Sector

In 2004, the income of the population continued to grow. It rose by 21.3% in comparison with the previous year and totaled RUR 10.8 trillion. Simultaneously their level of consumption also grew. In fact 70.2% of their expenses represented the purchase of goods and payments for services. To finance it the general population purchased foreign currency to a greater extent in the year 2004 than in the previous year. Concomitantly the level of savings among the population declined.

In the reporting year, the assets of domestic banks grew by 27.4% and reached RUR 7.1 trillion. The growth of capitalization however was a bit slower: according to the results of the year 2004, the equity capital of the Russian banking sector increased by 16.1% and totaled RUR 946.6 billion. The faster growth of bank assets resulted in a lower index of capital sufficiency in the banking sector (i. e. the ratio between equity capital and assets weighted subject to the risk rate). Thus, during the past year this index lowered from 19.1% to 17%.

The existing situation was in great deal conditioned by the lack of any incentive to save and the absence of any reliable or profitable investment instruments for surplus resources. One of the factors not allowing the growth of the share corresponding to bank deposits in the structure of expenses of the individuals was the instability in the banking sector in the middle of 2004. Under such conditions, the efforts of Sudostroitelny Bank were aimed at raising the attractiveness of private deposits; in the first instance, they were targeting the wealthiest clients the most stable group of the population, those less subject to reacting to current fluctuations in the banking climate. In the year 2004, there was a continual process of consolidation in bank capital. Within one year alone, the share of assets corresponding to the five largest banks grew from 42.9% to 45.1% of the total universe of assets among Russian banks; the share of assets of the largest twenty banks grew from 60.4% to 61.6%. By contrast, asset growth amongst Russian banks with participation of foreign capital remained stable.

Operational Environment of Sudostroitelny Bank's Activities in 2004

In the course of the year 2004, the Bank of Russia continued its policy of seeking out unreliable banks and removed their licenses.

During the reporting year, the volume of funds on the accounts of individuals with Russian banks grew: the growth totaled 27.9% by comparison to the previous year, and in absolute figures it attained RUR 1.96 trillion.

Large Russian banks carried on with financing the current needs of its corporate clientele. The year 2004 showed that financial resources granted to companies outside the financial sector grew by 39% and equaled RUR 3.15 trillion, or 1.8% of Russia's annual gross domestic product. The growth of demand for credit resources from the clients of Sudostroitelny Bank also provided for the increase in the share of loans in the total volume of the Bank's operations: in the course of the year 2004, the amount of credits granted grew from 23.5% to 34.1% in the general structure of the Bank's assets. One of the factors that stifled the attraction of funds to retail accounts was the instability in the banking sector in the period from May through the end of June of last year. The Central Bank's withdrawal of licenses from a number of quite well-known credit organizations made both retail and corporate clients rather nervous about the banking sector as a whole, and as a result banks reacted by significantly lowering credit limits. On the other hand, a number of banks faced problems with liquidity due to the lack of a normally functioning interbank market, which then led to delays in payments from deposit accounts One of the most positive tendencies in the year 2004 was an increase in the quality of the credit portfolios of domestic banks and a further professionalization in the management of risk in the banking system. During the past year the total amount of bad debts amongst Russian banks as a whole decreased from 1.6% to 1.4%. Most remarkably due to the particularly efficient management of risk Sudostroitelny Bank reduced non-performing loans to 0.2% of the total portfolio. and caused panic among private depositors.

Annual Report 2004

In terms of instability in the Russian banking industry, the top priority of Sudostroitelny Bank was minimizing its effects on client actions and perceptions by reducing the number of operations in the most risky market segments. More specifically, the Bank had to reduce largely the number of its partners in the interbank market and to lower some relevant credit limits. But the shrinking income from this activity was compensated by an adequate growth of transactions with other financial instruments. The Bank also managed to avoid the danger of a massive deposits outflow. Primarily, the majority of the Bank's clients work with the Bank for many years and are quite comfortable vis-a-vis the Bank's management and its relationship with clients and their funds; moreover, the share of retail funds within the total volume of liabilities was and remains rather small (less than 1%). Over the whole period of the so called crisis of trust, Sudostroitelny Bank continued to meet its obligations to clients uninterruptedly.

In medium-term prospects, we can expect that positive tendencies in the banking sector will persist. Within the conditions of heightened business activity, the demand for financial products and services (in the first instance in the sector of loans) will remain high; it will provide for development of the banking sector, and in particular for the further capitalization of banks. Besides this, the expansion of banks outside the greater Moscow region and the opening of new subsidiaries and branch offices will continue for some years to come, especially in economically attractive regions, where we can expect much stronger competition. The approval and the practical implantation of the Law On the System of Private Deposits Guarantees should assist in restoring people's confidence in banks and consequently in having a positive impact on the stability of banks' liabilities and the dynamics of funds attracted by banks.

Client Policy
In the year 2004, Sudostroitelny Bank continued to attract clients in increasing numbers, and concomitantly, the volume of client funds also grew considerably. As of January 1st 2005, the total amount of clients funds on accounts exceeded RUR 7.3 billion, thus increasing these resources in the reporting period by almost 60%, compared to the year 2003.

Results of Sudostroitelny Banks Activities in 2004

One of strategic objectives of Sudostroitelny Bank over the course of its 10 years of existence has been, and is, to provide high quality banking services to its retail and corporate clientele namely the Bank makes every effort to provide a fully personalized approach to each of the clients and to take into account all their needs.

Over 100 enterprises from different sectors of the economy became clients of the Bank during the past year. For example, such companies as FGUP Rostek (Federal State Unitary Enterprise), Expert magazine, Component (a manufacturing enterprise), Zhiva Insurance Company, Russian Sky Air Company (cargo and

Annual Report 2004

passenger aviation), Nissa Centrum Ltd., Master Distribution Systems, Neva-Sport (distributor of Babolat) are among the new clients.

Personal attention paid to the clients in understanding their needs, and an effort to contribute as fully as possible to the satisfaction of these needs through the delivery of high quality products and services these actions best summarize the Banks strategy towards its clients in the reporting year.

The development of various programmes and projects within the existing agreements with clients has also contributed to enlarging the number of companies to which the Bank delivers products and services, thereby further diversifying the Banks client base. As an example, we can mention that as part of the Banks collaboration with the Aeroflot Corporation last year, Sudostroitelny Bank issued on-line bank guarantees for the travel agents who sell Aeroflot tickets. Also there was an agreement concerning the acceptance of bank guarantees provided by other large airline companies, such as Lufthansa, Delta, Air China, Air Astana, Tel Aviation, and others. A major benefit that resulted from this service was the establishment of business relationship with airline carriers and associated travel agencies.

Services to Corporate Clients

Competitiveness and the long-term prospects of any bank largely depend on its ability to understand client needs and respond with innovative products and services.

In the year 2004, Sudostroitelny Bank continued optimizing products and services offered to clients and developed new high-technology services, such as innovations in its internetbanking system.

The increase in the number of the Banks clients was in many ways the result of the high quality of the products and services that the Bank delivered to them. During the reporting year, Sudostroitelny Bank continued to develop its range of products and services. Special attention was paid to providing clients with competitive interest rates on deposits and attractive fees for services. This policy did not dilute the Banks overall profitability since customers tended to use products and services in greater volume and maintained larger deposits with the Bank.

In this period of steady economic growth and overall political stability corporations, small, medium and large, held high expectations for receiving bank loans. In response to customer expectations, Sudostroitelny Bank extended credit judiciously to its most creditworthy clients in order that they may modernize their infrastructure and professionalize their management and staff.

Results of Sudostroitelny Banks Activities in 2004

In the proceeding year 2004, the Bank offered competitive terms to clients through a broad range of credit instruments. The most popular among these were the classical commercial loan, overdrafts on current accounts, and revolving lines of credit.

documentation. At all times the Bank monitored the financial realities each of its borrowers in order to take a timely trouble-shooting and taking appropriate measures to solve potential problems.

In the year in question, corporations medium By the end of 2004, the overall volume of credits extended to corporations attained RUR 6.3 billion, the bulk of which were loans issued to retail enterprises (13.3%) and building companies (11.4%). During the reporting year the Bank was involved in both short-term crediting (replenishment of circulating assets) and medium-term crediting for a period up to three years (for the production development). At the same time, the tendency towards longer terms of crediting persisted; as of January 1st 2005, about a half of the corporate credit portfolio of the Bank (47.7%) corresponded to loans with maturities beyond one year. Sudostroitelny Bank responded to this demand by enhancing its internet-based online banking system known as Sbank.Ru allowing the Bank thereby not only to better service its clients, but also to emphasize the preeminence of the Banks commitment to high-technology and innovation in product development. By year end over 90% of client international settlements were processed It is worth mentioning that Sudostroitelny Bank exercised extreme caution when managing the risks associated with the loans granted to its clients. To secure its credits the Bank required guarantees and different forms of collateral. Credit limits were established taking into account the actual solvency of the client. However, a number of borrowers had a strong credit history with the Bank and/or funds on account sufficient to assure that the credit would be returned these clients were granted credits without any additional need to cover them. The time required to review an application for a loan usually did not exceed 10 working days from the moment when the client first provided the Bank with sufficient With respect to payment services, Sudostroitelny Bank expanded its franchise with retail and service companies by installing its plastic card POS-terminals in their locales. In the year 2004, the number of such enterprises using this service practically doubled, and the turnover of retail operations processed via plastic cards grew by 44% and totaled RUR 577 million. through Sbank.Ru, and it allowed the Bank to provide a growing portfolio of products and services to clients located in different regions of the country. and large expanded their international trading activities, which resulted in an increase of the demand for the international settlement and trade services that Sudostroitelny Bank provided.

Annual Report 2004

For companies involved in foreign trade, Sudostroitelny Bank offered services related to the payment of custom duties via a microprocessor card known as Customs Card. The ability to pay customs duties directly at the customs desk, through the use of this card on a twenty-four hour basis, saved time significantly for the Banks clients.

individuals was formed last March and since then has become one of the subdivisions of the Department of the Development of Bank Projects. The major efforts of the staff of this new Department were aimed at providing a tailor-made approach to each clients need, guaranteeing to the latter complete information on the products offered by the Bank.

Over the course of the last year, corporate clients increased their interest in the brokerage services of the Bank. Sudostroitelny Bank assisted the clients in structuring their investment portfolios and took care of their depositary operations. The number of securities held in custody by the Bank amounted to 6.9 million, after having grown by 25% with respect to the previous year.

As last years results show, the number of private customers of Sudostroitelny Bank grew by 26% and numbered 3,340; the balance on their accounts grew by 37% and reached RUR 116.7 million. A significant part of the individuals among the Banks clients were drawn from the management and employees of the companies that are the Banks corporate clients.

The rendering of complex services to clients, including consultancy on a wide range of financial and legal issues, as well as comprehensive assistance in the development of new projects and new business directions, remained some of the basic principles in the Banks cooperation with corporate clients.

At present, Sudostroitelny Bank offers the retail customers a variety of cash settlement services, in particular the transfer of rubles and foreign currencies, foreign exchange operations, as well as services provided via the Sbank.Ru Privat remote access system, which allows clients to manage their resources remotely.

Services relating to the issuance and servicing of plastic cards were still very popular

Services to Retail Clients

While responding to the needs of corporate clients, Sudostroitelny Bank continued to develop its retail activities. In order to provide more efficient, rapid, and quality services to individuals, a department of services to

with the retail clients. The total turnover on plastic card accounts at Sudostroitelny Bank in the reporting period increased by 9.6 times and was in excess of RUR 822 million; as of January 1st 2005, the total amount of plastic cards issued grew by 66%.

Results of Sudostroitelny Banks Activities in 2004

In the year 2004, Sudostroitelny Bank began offering its clients the American Express card one of the most prestigious and convenient payment instruments in the world. This product is of a special interest for business people as well as for those who travel a lot and have a high demand for quality service and comfort during their trips. Besides the payment functions, the American Express card provides a number of additional privileges to the holders. In particular, all the card holders can use the twenty-four-hour Global Assist client service; they get considerable discounts in more than three thousand hotels all over the world; they have the right to take part in a bonus program Membership Rewards; whilst paying for air tickets the card holders become automatically insured for the whole time of traveling. The Bank offers the clients several types of American Express cards: Green, Gold, Platinum, and Centurion.

Bank. For example, clients may place term deposits, transfer funds from one account to another, convert currencies, make payments for public utilities, etc.

Services to Financial Institutions

Cooperation with other banks is a necessary part of the business of any financial institution. Sudostroitelny Bank positions itself in its relationships with Russian banks as a clearing bank specializing in the payment and receipt of foreign currencies. At the same time, Sudostroitelny Bank is not involved in providing standardized services to its LORO-correspondents; on the contrary it deals with such banks, as it does with the Banks VIP-clients.

Last year the Bank started issuing Diners Club bank cards nominated in euros. For some types of cards the Bank provided cardholders with overdraft facilities.

The great confidence that other market players demonstrate towards Sudostroitelny Bank allowed for the successful development of its cooperation with other financial institutions in 2004 in a variety of operations. Due to the Banks longstanding favourable reputation as

Sudostroitelny Bank also increased the turnover in rendering Visa card services.

a reliable business partner, Sudostroitelny Bank concluded the general agreements with 105 partners relating to the terms and conditions for participating in the money market. Most recently the total number of such agreements equaled 330.

In the future, Sudostroitelny Bank plans to develop new products for retail clients. In 2005, the range of services offered by the Sbank.Ru Private remote access system will be broadened; with the use of this system, retail clients will be able to operate their accounts without coming to the offices of the

Annual Report 2004

As of January 1st, 2005 the Bank established correspondent relations with 154 banks in the Russian Federation, CIS, and Baltic States, and the number of LORO accounts opened in the Russian rubles and foreign currencies exceeded 380.

In an effort to consolidate its own position on the interbank market, the Bank paid serious attention to the optimization of packaging services of respondent banks in both clearing transactions of the clients and conversion and credit deals. The Bank continued to develop for the provision of correspondent services that would meet the requirements of the latest technological standards. Special attention was paid to implementing a flexible tariff and quotas policy.

Among the correspondents of Sudostroitelny Bank are such well-known financial institutions as Sberbank of Russia, Vneshtorgbank, Deutsche Bank Trust Company Americas (USA), Deutsche Bank AG (Germany), Raiffeisen-Centrobank AG (Austria), Commerzbank (Germany) and others.

The range of competitive services offered and the large network of correspondents have allowed Sudostroitelny Bank to become a settlement bank for a good number of counterparties.

The increase in the number of the Banks partners on the interbank market was a favourable factor for increasing the volume of credit operations. Over the year 2004, the daily turnover of interbank credit deals was in the range between RUR 1.2 and 2.5 billion. Interbank crediting was made within the margins of unsecured limits for banks-counterparts. Whenever there were no fixed limits, interbank credits were granted on a collateral basis, i. e. liquid securities.

In the course of the year 2004, the Bank placed particular emphasis on fine-tuning its risk management policies, on expanding the range of products, and seeking further technological developments.

Clearly, the professionalism and sense of responsibility of management and staff were essential to the defence of existing corporate

Fundamentals of Formation of Value

The Banks financial results, its competitiveness, and its long-term prospects depend on the performance efficiency of various systems and departments, a sound marketing strategy, experience and the professional qualities of its personnel, as well as many other factors.

relationships, the development of new ones, and the expansion of income and increase in profitability of its businesses.

Principles of the Banks Activities

The key factor for the banks successful development is an optimal organizational structure,

Annual Report 2004

which would let the bank on one hand carry out its short-term and long-term strategy, and on the other hand adapt itself rapidly to ongoing changes in the external environment.

goals for each employee creates personal responsibility for a particular segment of work and has a positive impact on the final result of the employees performance.

One of the basic competitive advantages of Sudostroitelny Bank during the whole period of its existence remains its flexibility, its capability to take quick decisions. No matter who, either a department specialist or a top manager, makes a suggestion regarding adjustment of any work principles of the Bank, of client policy, of the product range structure development, etc., this suggestion will be collectively studied in the shortest time possible, and after considered as reasonable, it will be implemented in practice.

One of the main principles of Sudostroitelny Banks work is the highly professional financial resources management, which comprises a certain number of actions aimed at increasing financial resources and reducing the expenses. In the year 2004, due to a successful technology of budgeting it became possible to achieve maximum efficiency from the use of funds, to optimize the process of planning and monitoring of administrative expenses of each department in particular and of the Bank in general.

Flexible approach to decision-making helped Sudostroitelny Bank to make necessary changes in its fees and interest rates in appropriate time, in accordance with the existing market situation. The Bank established individual tariffs for different categories of clients and adjusted the current lines of activities in accordance with the latest changes in the legislative base, regulating banking sector functioning.

The system of managing and bookkeeping of the Banks financial resources has a complex structure and includes short-, mid-, and longterm planning, monitoring, and evaluation of the results, information exchange between the departments, and coordination of their work.

In the course of elaboration of Sudostroitelny Banks budget for the reporting year, many factors were taken into account: tendencies of

High efficiency of Sudostroitelny Banks management was based on strict distribution of responsibilities between the departments. The existing mechanism of delegation of authorities guarantees adequacy and timeliness of decision-making process and discards doubling of the same functions by several departments. Definition of tasks and

the economy development, existing and predictable parameters of the monetary policy of the Central Bank of Russia (the interest rate, the official ruble exchange rate to the main world currencies, etc.) that determine the cost dynamics of attraction and investing of the resources. High-quality planning of income and expenses allowed the Bank to place its

Fundamentals of Formation of Value

financial resources in the most profitable way and to avoid losses. In its turn, serious approach to the financial and management accounting gave an opportunity to obtain objective information on the profitability and performance of each department, as well as provided for making the most efficient decisions relating to reduction of the cost of the bank products and to optimization of expenses. Sudostroitelny Bank considers the risk management as one of crucial factors of the integrated banking management system. Throughout all history of its operation, the Bank consecutively developed the risk manageA traditionally important place in the Banks activities is given to trouble-shooting and prevention of illegal financial operations, i.e. of using the Banks payment system for laundering the gains proceeding from criminal sources and for financing the terrorism. Last year several departments of the Bank continued to work thoroughly in this direction, among them the Financial Monitoring Department, Client Department, Legal Department, and Security Department. Special attention was paid to direct involvement of each employee (within the framework of his/her competence) in revealing transactions of doubtful character that are liable to compulsory monitoring. Enhancing of the efficiency of the risk-related management solutions is one of the primary concerns of Sudostroitelny Bank. Risk management is a matter of responsibility of Financial and Credit Committees of the Bank, which make collegiate resolutions with the regard to the level of risks that the Bank can accept. A special structural subdivision was created Department of the Risk Analysis. It The successful development of Sudostroitelny Bank over the past year has confirmed once again the efficiency of the existing structure of management and a high level of performance of the top management. provides analysis, evaluation, and current control of the Banks risks, as well as develops methodological recommendations for the risk analysis and control. Furthermore, control over the risks that appear in the Banks activities and operative decision-making for their minimization is one of the main tasks of Internal Control Department. ment system which encompasses a package of measures designed for minimization and elimination of risks, as well as monitoring and control of basic types of risks in real time mode. The present system is currently integrated into all areas of the Banks activities.

The Risk Management Practice

Annual Report 2004

Fundamental documents, regulating the risk management system in Sudostroitelny Bank are Limit Policy, Credit Policy, Liquidity Management Policy, regulations on the Banks committees. The present documents govern the maximum allowable risks related to basic types of banking operations, designate powers and responsibility, and specify interaction procedures between various risk management elements.

market risk risk of change of market situation, related to fluctuations of currency rates, change of interest rates, value of securities and financial derivatives; risk of liquidity loss risk of insufficiency of funds in order to meet the Banks own obligations; operational risk risk caused by faulty actions of personnel or by information systems failures.

In the year 2004 the system of risk management was improved essentially. In particular, a Regulation on the System of Evaluation and Control over the Bank Risks was approved, which provides for a complex of activities aiming to prevent potential risks and to minimize loss in case of their occurrence. The Banks experts developed new methods of analysis of the borrowers financial condition and of interest rate risk and liquidity risk evaluation. They optimized the system of authorities delimitation by the risk-related management solutions, and the practice of independent expert opinion was further developed. A high level of automatization risk management system, which was achieved in the year 2004, made it possible to reduce considerably decision-making process with the regard to the risk management.

In the year 2004, with a purpose to maintain a high quality of the credit portfolio, Sudostroitelny Bank continued to pay a special attention to the credit risk management. To define a level of the credit risk related to each credit product, the Bank applied methods based on internal rating system, taking into account the experience of the leading rating agencies. The Bank set rigid requirements to the current financial condition of potential borrowers, exercised overall evaluation of their financial statements, credit history, and business reputation. Special attention was paid to the quality of collateral and its liquidity. Management and control over the credit risks were exercised by the Banks Credit Committee, based on the independent expert opinion. The Banks capital was an estimate basis for determination of the credit risks level. In accordance with the requirements of the Central Bank of the Russian Federation, Sudostroitelny Bank accumulated a sufficient amount of reserves for possible losses on loans with respect to risk groups. After granting the credit to the borrower, the Bank controls the proper use of the funds and monitors the borrowers activities in order to detect potential problems

The risk management system in Sudostroitelny Bank provides for the analysis of the following basic risks, arising in the course of the Banks activities: credit risk risk of losses in case the contracting party fails to meet its obligations;

Fundamentals of Formation of Value

with the credit repayment and if necessary to take preventive measures.

were carried out on a daily basis, with regard to each currency in particular and to the overall foreign currency position. On the base of both domestic and world financial market situations and in compliance with normative requirements of the Central Bank of Russia, the Banks Financial Committee took decisions on optimal size of open foreign currency position.

The efficiency of the current system of credit risks management enabled the Bank to maintain high quality of the credit portfolio in the year 2004. As of January 1st, 2005, the volume of bad loans didnt exceed 0.2% of the total amount of the credit resources. Meanwhile, the reserves for losses constituted 12% of the credit portfolio volume, that is RUR 1.3 billion in absolute figures.

The Banks experts carried out regular monitoring of the activities of the securities issuers, which form the Banks investment portfolio. In accordance with the data obtained, the procedure and structure of financial assets portfolio were established. Besides limitation of the investment volume, a number of instruments were limited by the price fluctuation range within a certain time period. The stoploss order closed the position automatically when the certain price level was reached.

Control and management of market risks, including interest rate and exchange rate risks, and risk of change in asset value, is a question of major importance in the risk management system of Sudostroitelny Bank. In the year 2004, Sudostroitelny Bank continued to improve the system of market risks management, regulation of which was exercised by means of limit system by separate types of banking operations. The limits were determined on the basis of various methods of statistical analysis: VAR and stress-testing.

To ensure control and to minimize risk of liquidity loss the Banks experts carried out daily monitoring of the assets and liabilities structure with respect to amounts and maturity dates, as well as provided forecasts for their possible future fluctuations. Within their area of responsibility, Financial Committee and Department of Stock Market and Money Market Operations divided functions for the management of liquidity risk. Last year, application of these effective methods and amended Regulation on the Order of Liquidity Management enabled the Bank to meet compulsory normative requirements of the Central Bank of Russia concerning liquidity, and to execute all the clients payments without any delays.

With the purpose of interest risks minimization, an optimization of interest rates on attracted and invested resources was regularly carried out in accordance with the tariff policy, adopted by the Financial Committee of the Bank and depending on the current market situation.

Monitoring and forecasting of changes in the open foreign currency position of the Bank

Annual Report 2004

Management of operational risks is based on a clear distinguishing of authorities between the Banks departments. With this regard, the Bank maintained an internal control system operated in complete correspondence with the normative requirements of the Central Bank of Russia and Basel Committees recommendations. Internal control was carried out by the top management of the Bank, by the Chief Accountant and his deputies, by the Internal Control Department, by the Supervisor of professional participant of securities market, and by the Responsible specialist for counteracting against legalization (laundering) of revenues gained by criminal means. Improvement of Internal control system was provided by internal inspections, which were regularly conducted by the Internal Control Department. Furthermore, for the purposes of minimizing operational risks, the Bank carried out a complex of measures designed for professional education of its employees and undertook ongoing efforts for the IT improvement.

Sudostroitelny Bank paid great attention to counteraction against legalization (laundering) of revenues gained by criminal means and to prevention of terrorism financing. For this purpose a special division the Financial Monitoring Department was created. Acting in close cooperation with the other Banks departments, this Department is aimed at revealing illegal financial schemes and at checking all doubtful operations. Last year the Internal Monitoring Regulations for Counteracting to Legalization (Laundering) of Revenues Gained by Criminal Means and Prevention of Terrorism Financing were elaborated and approved as the main Banks document in this field.

Sudostroitelny Bank plans henceforth to improve the risk management system in order to increase profitability of its business, to ensure the necessary level of financial stability, and to maximize the safety of its clients funds.

Fundamentals of Formation of Value

The strategic targets of the regional development of Sudostroitelny Bank are the need for consolidation of the resource base, the optimization of the Banks active operations

Development of Sales Channels

At the present time one of the main ways of development of credit institutions is the expansion of the network of branch offices rendering financial services. The correct approach to the development of a branch-office network ensures the growth of the client base, optimization of the clients financial flows, and consolidation of the Banks competitive positions in the markets of other regions.

structure, and the increase of reliability. Opening of the new affiliates allows the Bank to extend the margins of cooperation of the clients with the Bank, to facilitate the settlements, to raise the level of servicing the clients in remote regions, to ensure the introduction of principally new banking products. The development of the affiliate network should contribute to the gradual increase in the volume of the Banks activities and its presence in the regional markets, to the development of the business connections and, thus, become an additional catalyst of its

In the year 2004, Sudostroitelny Bank succeeded in efficient functioning of its regional branch offices in St. Petersburg and Nizhniy Novgorod. The Bank continued its expansion in the regions with a high economic activity and favourable investment climate. In particular, in the nearest future the Bank plans to open the branch offices in the cities Yekaterinburg, Kaliningrad and in the town Ivanovo. Moreover, it is planned to develop a network of additional offices in Moscow. The geography of the new branches is greatly determined by the direction of financial flows and by the business interests of the Banks clients.

business.

An important task while opening new branches and additional offices is to maintain common principles of service and a common range of products, as well as to use common fees and commissions at all the regional and Moscow branch offices.

Annual Report 2004

international financial structures is one of the tasks of the Department headed by Mr. Beesen. This will allow the Bank, on one hand, to offer the clients favourable pricing conditions and, on

Team of Professionals
Positive dynamics of development, efficiency, and reliability of Sudostroitelny Bank are in great measure connected with its competent and qualified personnel, united by a common idea and common interests. In the year 2004, the Banks personnel kept growing the number of employees increased from 184 up to 210, and 135 of them (64% of the total number of employees) are young professionals aged under 35.

the other hand, to develop a new profitable direction of banking activities.

The extension of the product range and development of the new business lines required from the Banks employees to improve essentially their professional skills. In the year 2004, the management and the employees of Sudostroitelny Bank regularly took part in conferences and seminars held by the Central Bank of Russia, by different bank associations and unions, and other financial structures. The representatives of the Bank participated in

Development of progressive lines of business of Sudostroitelny Bank and cooperation with foreign partners make special demands to the Banks employees. Due to this fact, it is of great importance to employ highly professional bankers that are world-level experts. Thus, Sergey Panteleev, who has a considerable experience in the field of corporate clients crediting (including the experience acquired during his stay as a trainee with the Standard Federal Savings Bank, USA), was appointed to the position of the Deputy Chairman of the Board. Besides that, an important event was the designation of Richard Beesen to the position of the Director of the International Business Development (ex-vice-president of the Citibank, Bankers Trust Company, and Deutsche Bank Trust Company Americas); he has a broad experience of work with the largest international banks and export agencies. To develop an infrastructure giving an opportunity for the Bank and its clients to establish cooperation with the

such events as Yalta Interbank Conference, North-Western Banking Conference, Russian Bond Congress-2004, international forum Banks of Russia XXI Century, and others.

The employees of Sudostroitelny Bank constantly improved their general knowledge and intellectual level; in particular, many of them aim at obtaining a second higher education or an academic degree. By the end of the reporting year, 154 employees (73%) had higher education, 8 employees had academic degrees, 20 employees were university students, and 14 employees had practical training with the Bank after they received theoretical knowledge in colleges (among them are Moscow State University named after Lomonosov, State Management University, Moscow Academy of Economics and Law, Financial Academy of the Russian Federation Government, Royal Holloy Institute, London).

Fundamentals of Formation of Value

As a main result of the personnel employment policy, the Banks team was formed. Its main characteristics are high professionalism and responsibility, interest in the final result, and concern for the Banks success.

information about their payment limits and credit their card accounts), make currency exchange operations, obtain information about their credit lines, as well as send messages to the Bank.

During the reporting year Sudostroitelny Bank continued to update Sbank.Ru remote access system for the corporate clients. By the level

Information Technologies
In the conditions of growing competition within the banking sector, high level of development of information technologies remains an important advantage of Sudostroitelny Bank. In the year 2004, the Bank continued to develop new software products, introducing progressive technological solutions, aiming to enhance the efficiency of its own business, to improve client service, and to ensure fast and safe operations.

of service Sbank.Ru occupies one of the leading places among the Russian internet-banking systems for the corporations.

Communication Strategy
The development of competent communication strategy that contributes to constant expansion of the clients base, and therefore acts as a catalyst of the Banks business is an

Last year Sudostroitelny Bank enhanced the complex of on-line services rendered with the use of internet-banking technologies. Thus, private clients were proposed to use the Banks services via Sbank.Ru Private remote access system. Sbank.Ru Private system allows private clients to manage their bank accounts opened with Sudostroitelny Bank in the real time mode, on a twenty-four hour basis, seven days a week, from any place in the world where a computer connected to the Internet is available. Using this system private clients can obtain the latest information about their accounts, make ruble and foreign currency transfers, control their plastic card transactions (obtain statements of account,

efficient instrument of positioning in the market of banking services. In the year 2004, Sudostroitelny Bank placed emphasis on informing the target audience about the Banks activities, on maintaining favourable image in the opinion of current and potential clients and partners, as well as on stimulating the sales of various products and services.

Annual Report 2004

The principal task of the communication policy remains to produce an image of Sudostroitelny Bank as a dynamically developing reliable credit and financial organization. The Bank invariably adheres to the principles of openness and transparency, timely informing the public about main results of its activities and stating its position on different events and processes of the economical life of this country. In the reporting year, the managers and employees of the Bank actively participated in the discussions organized by the mass media dedicated to important economic issues, banking system development issues, and legal regulations in the financial sphere, took part in conferences, forums, and congresses of professional associations.

Under the conditions of a tighter integration of Russia into the global economic space and internationalization of the foreign economic relations, Sudostroitelny Bank adheres to the world business organization standards. For several years the Bank was actively cooperating with PricewaterhouseCoopers audit company. Last year together with the experts of this company the Bank got prepared for the transition to the International Accounting Standards (IAS) in accordance with the methodology of the Central Bank of Russia. Thus, the financial statements for the year 2004 were for the first time totally transformed according to the international standards. Transition to IAS allowed the Bank to provide higher level of business transparency, which should have a favourable impact on its market position, and in particular contribute to attraction of investments and capital at the international market.

Special emphasis in the year 2004 was put on marketing research with aim to determine consumer preferences of the Banks clients and to study distinctive features of the target audience. According to the research results, decisions were made with respect to correction of the fees policy, perfection of the product range, and necessity of advertising in certain mass media.

Last year advertising campaigns gave to present and potential customers better information about Sudostroitelny Bank and its services and consequently provided for efficient marketing of the new products.

The Bank keeps following the policy of independence from financial and industrial groups; it contributes to attraction of a wide range of clients from different economy sectors and to further industrial and regional business diversification. In the year 2005, it is planned to attract a number of companies which at present time are contracting parties of the existing Banks clients, and to increase the number of large corporate clients served on individual basis. Organization of complex individual service will provide for the loyalty of main clients and for the growth of the clients base. One of the Banks primary goals is to

Prospects of Development
Sudostroitelny Bank seeks further consolidation of its positions in different segments of the financial market, in the first place in the field of services for corporate clients, VIP private clients and on the interbank market.

become a major settlement bank for a maximum number of clients.

The management of Sudostroitelny Bank considers the further growth of the clients business in connection with the regional market development, both by promotion the Sbank.Ru

Annual Report 2004

internet-banking system and through the development of the branch network. In medium-term outlook the Bank plans to ensure its presence in a number of large cities of Russia, rendering to the clients in remote regions a full range of services available to the clients in the head office. During the year 2005 the Bank plans to reorganize its representative office in Ivanovo into a branch office and to open branch offices in Yekaterinburg and Kaliningrad. In the years 2006 and 2007 the Bank plans to open offices in such cities as Volgograd, Rostov-na-Donu, Novosibirsk, and Irkutsk. The choice of organizational and legal forms of the regional Banks offices is determined by the possibility to exercise a stricter centralized control over such network. The choice of regions in the first place will be determined by the needs of the Banks clients businesses.

In the nearest future such a promising sector as trade finance should receive considerable impulse. Besides the growth of the Banks profit, the development of this sector of business will assist to the consolidation of relationships with Western financial organizations, recognition of Sudostroitelny Bank in the international market, and maintenance of high level of its business reputation. Therefore it is extremely important to develop relations with the large European financial organizations, Ex-Im Bank of the USA, famous export agencies like Hermes and Coface. An important step for the Bank will be participation in the trade finance programs of the European Bank for Reconstruction and Development, in the program of the USDA on financing of importers of agricultural commodities.

Following the needs of its clients, Sudostroitelny Bank aims at a further decrease of the In the year 2005, Sudostroitelny Bank continues to increase its clients financing. Considerable attention will be paid to documentary credit operations guarantees and letters of credit; to own bills of exchange and overdrafts. In addition it is planned to actively develop crediting of leasing projects. credit resources cost. With this purpose it was planned to attract considerable assets volume on foreign markets, particularly from international financial organizations. Transition to the International Accounting Standards (Banks Financial Statements for the year 2004 were for the first time formed in compliance with IAS) and the forthcoming credit rating by Moodys agency will assist to the enhancement of the Banks possibilities in attracting the foreign loans.

Prospects of Development

Sudostroitelny Bank plans to increase the number of individual clients (mainly due to the services rendered to middle-class clients and those with above-average income). Taking into account the specific character of this target audience, the introduction of an advanced system of account management via Internet should become an efficient instrument of attracting individuals. Besides a complete package of services connected with the account managing, it will also include the possibility to pay for the public utilities etc.

Sudostroitelny Bank intends to expand the service range for small regional and Moscow banks, in particular by introducing settlements service and opening correspondent accounts. The Bank seeks to maintain the position of one of the largest operators in the foreign exchange and interbank markets.

Among the strategic plans of Sudostroitelny Bank are the following: an increase of noninterest income up to 25% of its aggregate income, an increase of profitability up to 17%, and a growth of the Banks equity capital due

Further development of plastic cards program of Sudostroitelny Bank plays an important role in enhancing the quality of the retail client services. In the nearest future the Bank plans to raise the status of the membership in Visa system from Participant up to Principal member, and to enter as an associate member into the MasterCard system. The network of ATMs will be developed in Moscow and other cities where the branches and offices of the Bank will be located.

to the net profit.

The sponsor activities of Sudostroitelny Bank are systematic.

At the present day one of the key tasks of our society is to contribute to the formation of a well-educated and modern Russian individual. That is why the Bank systematically supports organizations dealing with education and culture of the young generation. In the year 2004, donations were made in favour of Suzdal Orthodox School, which despite all the difficulties started a noble undertaking to revive the Russian pedagogic traditions. At the present day in the four classes of the school study 30 children, two thirds of which are from families with low income or from families with many children.

Social Responsibility of the Bank

During all the years of its existence, Sudostroitelny Bank took an active civil position. Contributing to the growth of material wealth of clients and thus to consolidation of the economy of our country, the Bank at the same time was aware of the social responsibility of a large credit institution, and annually destined a part of its profit for the charitable and socially important purposes.

Social Responsibility of the Bank

Taking into account the importance of popularization of healthy style of life, in the year 2004 the Bank continued to support professional and amateur sport. Within the frame of cooperation with the Russian Professional Hockey League the Bank contributed to a number of events promoting popularization of this sport. In particular, upon the results of All Stars 2004 games (between NHL and PHL) held in Moscow and St. Petersburg in December 2004, the Bank awarded The Best Player prizes to Andrey Kovalenko and Dmitry Ryabikin. After closing of the hockey season the winner of The Best Play-Off Player prize established by Sudostroitelny Bank was nominated. The best player of the closing stage of the Russian Championship was named Maxim Sokolov, the goalkeeper of Avangard team from Omsk, and during the grand closing of the 2003/2004 season the representatives of Sudostroitelny Bank awarded him a memorable silver Cup and a money prize.

Sudostroitelny Bank pays much attention to the support of promising and creative young people. In March July 2004 a chess tournament for Sudostroitelny Banks Cup took place between the actual European champion Alexandra Kosteniuk one of the youngest Russian chess-players and the readers of Kommersant newspaper (3.5 thousand participants from 32 countries sent their versions of moves via the Internet and SMS text messages). By the result of the match Alexandra Kosteniuk became the winner and was awarded with a memorable Cup and a money prize.

Sudostroitelny Bank plans to support corporations and individuals, whose activities are directed to the intellectual and physical development of the society and to strengthening health of the nation, and in its turn plans to continue cooperation with children, youth, and sport organizations of this country.

An important place in the social activities of the Bank during the reported year was given to the financial support of the Russian Federation of the Close Fight and Traditional Karate. The most socially important is the programme Doprizyvnik run by the Federation since 1997. The programme is oriented to the preparation of teenagers aged 14-16 for the military service in the Russian Army.

Financial Statements

BALANCE SHEET

AS OF JANUARY 1, 2005

Credit institution Commercial Bank Sudostroitelny Bank (Limited Liability Company) Sudostroitelny Bank Ltd.

Registration number 2999

BIC 044579918

Postal address Sadovnicheskaya St. 5, 115035 Moscow

Thousand rubles No. Items For the accounting period For the previous accounting period

ASSETS

1. 2. 2.1. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Cash Funds and accounts with the Central Bank of Russia Required provision with the Central Bank of Russia Funds with credit institutions Net investments into commercial securities Loans and advances to clients, net Net investments into securities held till maturity Net investments into securities for resale Fixed, tangible, and intangible assets Accrued interest Other assets Total assets

47 336 1 751 514 64 933 2 337 690 238 534 12 221 773 452 908 227 913 27 611 3 980 108 158 17 417 417

55 573 1 149 455 249 166 2 430 235 172 126 9 266 291 391 200 132 813 18 531 1 984 30 782 13 648 990

34 Annual Report 2004

II

LIABILITIES

12. 13. 14. 14.1. 15. 16. 17. 18.

Loans from the Central Bank of Russia Credits from other banks and credit institutions Clients' accounts (non-credit institutions) Including personal accounts Issued bills of exchange Interest outstanding Other liabilities Provision for possible losses from term investments and off-balance liabilities and from operations with off-shore residents

0 7 005 574 4 654 296 213 589 2 647 907 88 811 67 589 22 809

0 6 227 996 3 159 027 52 836 1 422 319 209 516 39 756 5 229

19.

Total liabilities

14 486 986

11 063 843

III

EQUITY

20. 20.1. 20.2. 20.3. 21. 22. 23. 24. 25. 26. 27. 28.

Authorized capital (Shareholders' equity) Registered common shares Registered preference shares Unregistered authorized capital of non-joint stock credit institutions Treasury shares, bought out from shareholders Capital surplus Revaluation of fixed assets Expenses of future accounting periods, influencing equity capital Funds and profit of the previous years at the disposal of the Bank Profit (loss) for the accounting period Total equity Total liabilities and equity

2 660 000 2 660 000 0 0 0 0 0 149 479 139 191 280 719 2 930 431 17 417 417

2 660 000 2 660 000 0 0 0 0 0 216 085 34 842 106 390 2 585 147 13 648 990

IV

OFF-BALANCE LIABILITIES

29. 30.

Irrevocable liabilities of the Bank Guarantees issued by the Bank

3 020 426 339 469

3 879 101 77 290

Certain of the Operations of Section V Trust management accounts that are listed below do not appear on the Balance Sheet because in the accounting period they were not business lines of the Bank: 1. Cash desk, 2. Securities in trust management, 3. Precious metals, 4. Credits granted, 5. Funds used for other purposes, 6. Trust management settlements, 7. Accrued interest (coupon) income on bonds payed, 8. Current accounts, 9. Expenses on trust management, 10. Loss from trust management, 11. Capital in trust management, 12. Trust management settlements, 13. Accrued interest (coupon) income on bonds received, 14. Revenues from trust management, 15. Profit from trust management.

Chairman of the Board

A. Golubkov

Chief Accountant

E. Zubova

2004 Annual Report 35

INCOME STATEMENT
for the year 2004 Credit institution: Commercial Bank Sudostroitelny Bank (Limited Liability Company) Sudostroitelny Bank Ltd. Registration number 2999 BIC 044579918 Postal address Sadovnicheskaya St. 5, 115035 Moscow

Thousand rubles No. Items For the accounting period For the previous accounting period Interest and similar income 1 2 3 4 5 6 Interbank credits granted and cash on NOSTRO accounts Credits to other clients Leasing services Securities with fixed interest rate Other sources Total interest and similar income Interest and similar expenses 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Interbank credits attracted and cash on LORO accounts Deposits of the clients Bills of exchange issued by the Bank Total interest and similar expenses Net interest income Net income from operations with securities Net income from operations with foreign currency Net income from operations with precious metals and other financial instruments Net income from revaluation of foreign currency Commission income Commission expenses Net income from one-time operations Other operating income, net Management expenses Provision for possible losses Profit before taxation Taxes (including profit tax) Net profit for the accounting period 156 011 5 507 53 981 215 499 1 293 037 -28 949 -9 551 0 22 785 98 187 21 049 -259 -5 956 149 390 -905 053 293 802 12 999 280 803 36 162 1 735 9 128 47 025 387 856 157 562 -2 921 0 -160 764 21 340 12 237 244 -2 748 52 144 -217 469 118 719 12 329 106 390 374 261 1 060 048 0 72 926 1 301 1 508 536 42 009 353 541 0 38 545 786 434 881

Chairman of the Board

A. Golubkov

Chief Accountant

E. Zubova

36 Annual Report 2004

REPORT ON THE LEVEL OF CAPITAL SUFFICIENCY AND PROVISION FOR LOSSES ON HIGH-RISK LOANS AND OTHER ASSETS
AS OF JANUARY 1, 2005

Credit institution Commercial Bank Sudostroitelny Bank (Limited Liability Company) Sudostroitelny Bank Ltd.

Registration number 2999 Postal address

BIC 044579918

Sadovnicheskaya St. 5, 115035 Moscow

No.

Items

For the accounting period

For the previous accounting period

1 2 3

Equity capital, RUR thousand Real value of the Bank's equity capital sufficiency, % Normative value of the Bank's equity capital sufficiency, calculated in accordance with the requirements of the Bank of Russia, %

2 961 750,00 24,6 10,0

2 669 619,00 22,3 10,0

4 5 6 7

Estimated provision for possible losses on loans, RUR thousand Provision for possible losses on loans set up in fact, RUR thousand Estimated provision for possible losses, RUR thousand Provision for possible losses set up in fact, RUR thousand

1 304 502,00 1 304 502,00 5 802,00 5 802,00

418 673,00 418 673,00 4 158,00 4 158,00

Chairman of the Board

A. Golubkov

Chief Accountant

E. Zubova

2004 Annual Report 37

ZAO PricewaterhouseCoopers Audit Kosmodamianskaya nab. 52/5 115054 Moscow Russia Telephone +7 (095) 967 6000 Facsimile +7 (095) 967 6001 AUDITORS' REPORT

To the participants and the Board of Directors of Sudostroitelny Bank:

We have audited the accompanying balance sheet of Sudostroitelny Bank (the Bank) as at 31 December 2004, and the related statements of income, of cash flows and of changes in redeemable participants' equity for the year then ended. These financial statements are the responsibility of the Bank's Management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2004 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Moscow, Russian Federation 26 September 2005

38 Annual Report 2004

SUDOSTROITELNY BANK Balance Sheet as at 31 December 2004 (in thousands of Russian Rubles)
Note Assets Cash and cash equivalents Mandatory cash balances with the Central Bank of the Russian Federation Trading securities Due from other banks Loans and advances to customers Other assets Premises and equipment Total assets 6 7 8 9 10 5 3 098 911 64 933 3 792 325 5 147 672 5 593 124 118 146 23 635 17 838 746 6 709 070 249 166 3 086 647 632 995 3 029 299 28 452 262 998 13 998 627 2004 2003

Liabilities Due to other banks Customer accounts Promissory notes issued Other liabilities Deferred tax liability Total liabilities 11 12 13 14 20 7 010 109 4 667 493 2 697 481 102 428 88 715 14 566 226 6 228 616 3 173 574 1 431 739 72 865 66 553 10 973 347

Redeemable participants' equity Charter capital Retained earnings Total redeemable participants' equity 15 16 2 936 847 335 673 3 272 520 2 936 847 88 433 3 025 280

Total liabilities and redeemable participants' equity

17 838 746

13 998 627

Approved for issue by the Board of Directors and signed on its behalf on 26 September 2005.

______________________________ Alexei Golubkov Chairman of the Board

______________________________ Elena Zubova Chief Accountant

2004 Annual Report 39

SUDOSTROITELNY BANK Statement of Income for the Year Ended 31 December 2004 (in thousands of Russian Rubles)
Note 2004 2003

Interest income Interest expense

17 17

1 084 076 (322 480)

446 019 (70 008)

Net interest income Provision for loan impairment 8

761 596 (388 670)

376 011 (58 296)

Net interest income after provision for loan impairment Gains less losses arising from trading securities Gains less losses arising from trading in foreign currencies Foreign exchange translation gains less losses Fee and commission income Fee and commission expense Gains on origination of assets at rates below market Recovery/(provision) for losses on credit related commitments Other operating income 22 18 18

372 926 (6 643) 119 219 (87 052) 99 488 (27 028) 3 139 2 228

317 715 165 540 64 925 (184 755) 22 127 (17 186) (4 642) (5 785) 2 891

Operating income Operating expenses Gains arising from early retirement of debt 19

476 277 (205 846)

360 830 (119 766) 4 456

Profit before tax Income tax expense 20

270 431 (23 191)

245 520 (59 755)

Net profit

247 240

185 765

40 Annual Report 2004

SUDOSTROITELNY BANK Statement of Cash Flows for the Year Ended 31 December 2004 (in thousands of Russian Rubles)
Note Cash flows from operating activities Interest received Interest paid (Expenses paid)/income received from trading in trading securities Income received from trading in foreign currencies Fees and commissions received Fees and commissions paid Other operating income received Operating expenses Income tax paid 1 066 702 (219 374) (25 662) 106 265 99 488 (27 028) 1 661 (162 079) (4 027) 426 343 (62 375) 162 472 65 879 22 127 (17 186) 2 891 (108 361) (2 397) 2004 2003

Cash flows from operating activities before changes in operating assets and liabilities

835 946

489 393

Changes in operating assets and liabilities Net (increase)/decrease in mandatory cash balances with the Central Bank of the Russian Federation Net increase in trading securities Net (increase)/decrease in due from other banks Net increase in loans and advances to customers Net (increase)/decrease in other assets Net increase in due to other banks Net increase in customer accounts Net increase in promissory notes issued Net increase/(decrease) in other liabilities 184 233 (699 610) (4 530 863) (2 986 690) (87 706) 842 332 1 501 665 1 170 820 40 228 (122 487) (2 395 067) 3 718 990 (857 953) 44 069 1 562 644 1 361 720 1 253 909 63 954

Net cash (used in)/from operating activities

(3 729 645)

5 119 172

Cash flows from investing activities Acquisition of premises and equipment Proceeds from disposal of premises and equipment Dividend income received 10 (17 139) 218 998 588 (9 516) 1 587 9

Net cash (used in)/from investing activities

202 447

(7 920)

Cash flows from financing activities Capital contributions from shareholders other than share issues Capital distributions to the shareholders other than dividends 15 16 1 000 000 (2 100)

Net cash from financing activities

997 900

Effect of exchange rate changes on cash and cash equivalents

(82 961)

(92 539)

Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents as at the beginning of the year

(3 610 159) 6 709 070

6 016 613 692 457

Cash and cash equivalents as at the end of the year

3 098 911

6 709 070

2004 Annual Report 41

SUDOSTROITELNY BANK Statement of Changes in Redeemable Participants' Equity for the Year Ended 31 December 2004 (in thousands of Russian Rubles)
Note Share capital Retained earnings Total shareholders' equity

Balance as at 1 January 2003 Net profit for the year Participants' contributions to the charter capital Distribution to participants 15 16

1 936 847 1 000 000

(95 232) 185 765 (2 100)

1 841 615 185 765 1 000 000 (2 100)

Balance as at 31 December 2003 Net profit for the year

2 936 847

88 433 247 240

3 025 280 247 240

Balance as at 31 December 2004

2 936 847

335 673

3 272 520

42 Annual Report 2004

5, Sadovnicheskaya str., Moscow, 115035, Russia Tel.: +7 (095) 777-1121, 745-9890 Fax: +7 (095) 959-0888 E-mail: common@sbank.ru www.sbank.ru St.-Petersburg branch Office 6, bld. 25-A, emb. Griboedova, St.-Petersburg, 191186, Russia Tel.: +7 (812) 117-2923, 117-2824 Fax: +7 (812) 312-3426 E-mail: common@spb.sbank.ru Nizhny Novgorod 3, Novaya str., Nizhny Novgorod, 603000, Russia Tel./Fax: +7 (8312) 78-0517, 78-0518, 78-0519 E-mail: common@sbank.nn.ru