Magnit
Annual Report 2016

Plain-text annual report

Ratified by the resolution of the Board of Directors of PJSC “Magnit” of April 28, 2017, minutes w/o No. of April 28, 2017 Ratified by the resolution of the annual shareholders meeting of PJSC “Magnit” of June 8, 2017, minutes w/o No. of June 8, 2017 2016 ANNUAL REPORT PUBLIC JOINT STOCK COMPANY “MAGNIT” 15/5 Solnechnaya street, Krasnodar, Russian Federation Chief Executive Officer _____________________ S. Galitskiy seal KRASNODAR 2017 TABLE OF CONTENTS 1. PERFORMANCE HIGHLIGHTS ......................................................................................... 3 2. MISSION .................................................................................................................................. 6 3. INFORMATION ON THE PERSON IN THE POSITION OF A SOLE EXECUTIVE BODY ............................................................................................................................................. 7 4. INFORMATION ON THE COLLEGIAL EXECUTIVE BODY MEMBERS (MANAGEMENT BOARD) ...................................................................................................... 9 5. INFORMATION ON THE BOARD OF DIRECTORS MEMBERS ............................. 14 6. REPORT OF THE BOARD OF DIRECTORS ON 2016 OPERATIONS ..................... 21 7. MAIN 2016 CORPORATE EVENTS .................................................................................. 29 8. POSITION OF THE COMPANY IN INDUSTRY ........................................................... 31 9. PRIORITY AREAS OF THE COMPANY’S OPERATIONS ......................................... 46 10. PRIORITIES OF THE COMPANY’S DEVELOPMENT .............................................. 48 11. INFORMATION ON THE PAID DIVIDENDS ............................................................ 51 12. SECURITIES ......................................................................................................................... 54 13. TRANSACTIONS EXECUTED WITHIN THE YEAR 2016 CONSIDERED MAJOR TRANSACTIONS ACCORDING TO THE FEDERAL LAW “ON JOINT STOCK COMPANIES” ............................................................................................................................ 79 14. TRANSACTIONS EXECUTED WITHIN THE YEAR 2016 CONSIDERED RELATED PARTY TRANSACTIONS ACCORDING TO THE FEDERAL LAW “ON JOINT STOCK COMPANIES” ............................................................................................... 82 15. MAIN RISK FACTORS INHERENT IN THE СOMPANY OPERATION ............... 83 16. KEY ASPECTS OF THE SOCIAL AND ENVIRONMENTAL POLICY ................. 111 17. CORPORATE GOVERNANCE ...................................................................................... 116 18. INFORMATION ON THE AUDITOR AND THE CONSULTANT OF THE COMPANY ............................................................................................................................... 129 19. INFORMATION ON THE VOLUMES OF THE UTILIZED ENERGY RESOURCES WITHIN 2016 .................................................................................................. 131 20. MANAGEMENT RESPONSIBILITY STATEMENT ................................................. 132 ANNEXES TO FY 2016 ANNUAL REPORT OF PJSC “MAGNIT” ............................... 133 ANNEX No. 1: Consolidated financial statements of PJSC “Magnit” for the year ended on December 31, 2016. ANNEX No. 2: Consolidated financial statements of PJSC "Magnit" for the year 2016 prepared in accordance with the Federal law N 208-FZ "On consolidated financial statements". ANNEX No. 3: Accounting report of JSC “Tander” for the year 2016 prepared in accordance with RAS. ANNEX No. 4: Accounting report of PJSC “Magnit” for the year 2016 prepared in accordance with RAS. ANNEX No. 5: Transactions executed within the year 2016 considered related party transactions according to the Federal law “Оn Joint Stock Companies”. ANNEX No. 6: Report on the compliance with the principles and recommendations of the corporate governance code for the year 2016. 2 1. PERFORMANCE HIGHLIGHTS 2016 Key Operational Results1: Number of opened stores, NET Total number of stores, Selling space, thousand sq. m. Number of customers, million Convenience stores Hypermarkets Magnit Family Drogerie stores Convenience stores Hypermarkets Magnit Family Drogerie stores Convenience Stores Hypermarkets Magnit Family Drogerie stores Convenience stores Hypermarkets Magnit Family Drogerie stores 1 "Magnit" group of companies 3 1,970 927 18 39 986 14,059 10,521 237 194 3,107 5,067.67 3,452.40 683.67 212.76 718.84 3,817.13 3,220.10 262.10 127.00 207.93 LFL Results: Formats Convenience Stores Hypermarkets Magnit Family Cosmetics Stores Total 12M 2016 – 12M 20152 # of Stores Average Ticket 8,663 211 133 1,911 10,918 0.32% (0.85)% (1.08)% 7.55% (0.90)% Traffic 2.05% (9.32)% (6.04)% (2.50)% Sales 2.38% (10.09)% (7.05)% 4.87% 0.65% (0.26)% 2 LFL calculation base includes stores (all formats), which have been opened 12 months prior to the last month of the reporting period. i.e. by December 1, 2015. 4 2016 Key Financial Results: Net sales, mn RUR Net sales, mn US$3 Gross profit, mn RUR Gross profit, mn US$ Gross margin, % EBITDAR, mn RUR EBITDAR, mn US$ EBITDAR margin, % EBITDA, mn RUR EBITDA, mn US$ EBITDA margin, % EBIT, mn RUR EBIT, mn US$ EBIT margin, % Net profit, mn RUR Net profit, mn US$ Net profit margin, % Market capitalization, mn RUR4 Market capitalization, mn USD5 Convenience stores Hypermarkets Magnit Family Drogerie stores Wholesale Convenience stores Hypermarkets Magnit Family Drogerie stores Wholesale 1,074,811.55 790,157.07 157,688.53 56,910.82 64,449.43 5,605.71 16,033.61 11,787.25 2,352.34 848.97 961.43 83.62 295,759.01 4,412.02 27.52% 146,264.42 2,181.91 13.61% 107,793.02 1,608.01 10.03% 81,967.38 1,222.76 7.63% 54,408.99 811.65 5.06% 1,031,475.26 17,113.39 3 Based on the average exchange rate for 2016 of 67.0349 RUR per 1 USD 4 PJSC “Moscow Stock Exchange” (previously CJSC “MICEX Stock Exchange”) as of December 31, 2016 5 Based on the exchange rate for December 30, 2016 of 60,2730 RUR per USD 5 2. MISSION “We work hard to increase the prosperity of our customers by minimizing their expenditure on quality consumer goods through: - Efficient use of the Company's resources; - On-going improvements in technology; - Adequate compensation for our employees” 6 3. INFORMATION ON THE PERSON IN THE POSITION OF A SOLE EXECUTIVE BODY On April 13, 2006 Sergey Galitskiy was elected as a Chief Executive Officer of PJSC “Magnit” (hereinafter – the “Company” or the “Issuer”) by the resolution of the Board of Directors of April 12, 2006. On April 6, 2015 the Board of Directors (Minutes w/o № of 06.04.2015) decided to reappoint the Chief Executive Officer. Biographical information on the person in the position of a sole executive body: Surname and first name: Sergey Galitskiy Date of birth: 14.08.1967 Education: higher - in 1992 graduated from Kuban State University with a degree in Economics. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 01.04.2004 – present day Organization: PJSC “Magnit” Position: member of the Board of Directors; 2) Period: 13.04.2006 – present day Organization: PJSC “Magnit” Position: CEO; 3) Period: 05.08.2009 – 03.10.2014 Organization: NP “FC “Krasnodar” Position: President (secondary employment); 4) Period: 15.07.2010 – present day Organization: PJSC “Magnit” Position: Chairman of the Management Board; 5) Period: 09.10.2014 – present day Organization: LLC “Football Club “Krasnodar” Position: President (secondary employment); 6) Period: 25.06.2015 – present day Organization: PJSC VTB Bank Position: member of the Supervisory Board. Stockholding of CEO in the Company’s charter capital: 35.10948% (as of 31.12.2016). Ordinary shares, owned by CEO: 35.10948% (as of 31.12.2016). Information on the transactions of acquisition/disposal of the Company’s shares, made by the person in the position of the sole executive body within the reporting period: № Date of transaction 1 31.03.2016 Type of transaction Disposal of securities Quantity of securities Description of securities 3,363,000 Ordinary registered uncertified shares 7 PRINCIPAL PROVISIONS OF COMPENSATION POLICY OF THE COMPANY AND (OR) REIMBURSEMENT OF EXPENSES OF A PERSON IN THE POSITION OF THE SOLE EXECUTIVE BODY OF THE COMPANY Under the Clause 6 of the Regulations “On the Sole Executive Body of PJSC “Magnit”, ratified by the resolution of the annual General Shareholders Meeting of 24.06.2010 (minutes of 28.06.2010 and in previous editions), the wage rate and other payments charged to the CEO shall be determined by the labor contract executed with the CEO. 8 4. INFORMATION ON THE COLLEGIAL EXECUTIVE BODY MEMBERS (MANAGEMENT BOARD) as of December 31, 2016 Sergey Galitskiy - Chairman of the Management Board Date of birth: 14.08.1967 Education: higher - in 1992 graduated from Kuban State University with a degree in Economics. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 01.04.2004 – present day Organization: PJSC “Magnit” Position: member of the Board of Directors; 2) Period: 13.04.2006 – present day Organization: PJSC “Magnit” Position: CEO; 3) Period: 05.08.2009 – 03.10.2014 Organization: NP “FC “Krasnodar” Position: President (secondary employment); 4) Period: 15.07.2010 – present day Organization: PJSC “Magnit” Position: Chairman of the Management Board; 5) Period: 09.10.2014 – present day Organization: LLC “Football Club “Krasnodar” Position: President (secondary employment); 6) Period: 25.06.2015 – present day Organization: PJSC VTB Bank Position: member of the Supervisory Board. Stockholding of CEO in the Company’s charter capital: 35.10948% (as of 31.12.2016). Ordinary shares owned by CEO: 35.10948% (as of 31.12.2016). Information on the transactions of acquisition/disposal of the Company’s shares, made by the person in the position of a sole executive body within the reporting period: № Date of transaction 1 31.03.2016 Type of transaction Disposal of securities Alexander Barsukov Quantity of securities Description of securities 3,363,000 Ordinary registered uncertified shares Date of birth: 08.07.1977 Education: higher - in 1998 graduated from Rostov Law Institute of Ministry of Internal Affairs of the Russian Federation with a degree in Law. Positions held in the Company and other companies over the last five years, including secondary employment: 9 1) Period: 16.07.2008 – 19.12.2012 Organization: JSC “Tander” Position: Hypermarkets Sales Director; 2) Period: 15.07.2010 – present day Organization: PJSC “Magnit” Position: Member of the Management Board; 3) Period: 20.12.2012 – 31.08.2015 Organization: JSC “Tander” Position: Director of Hypermarkets Sales Department; 4) Period: 01.09.2015 – 30.11.2015 Organization: JSC “Tander” Position: Deputy General Director of Sales and Marketing; 5) Period: 01.12.2015 – 11.01.2016 Organization: JSC “Tander” Position: Deputy General Director of Sales; 6) Period: 12.01.2016 – 17.10.2016 Organization: JSC “Tander” Position: General Director. Stockholding of the person in the issuer’s charter capital: no share. Ordinary shares owned by the person: no share. Information on the transactions of acquisition/disposal of the Company’s shares, made by the person in the position of the member of the Management Board within the reporting period: № 1 2 Date of transaction 03.02.2016 02.04.2016 Type of transaction Disposal of securities Disposal of securities Quantity of securities 540 300 Description of securities Ordinary registered uncertified shares Ordinary registered uncertified shares Marina Ivanova Date of birth: 02.01.1964 Education: higher - in 1990 graduated from Tajik State University n.a. Lenin with a degree in Chemistry and Biology Teaching. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 12.08.2008 – present day Organization: JSC "Tander" Position: Business Director (Head Office); 2) Period: 12.10.2012 – present day Organization: PJSC "Magnit" Position: Member of the Management Board; Stockholding of the person in the issuer’s charter capital: no share. 10 Ordinary shares owned by the person: no share. Information on the transactions of acquisition/disposal of the Company’s shares, made by the person in the position of the member of the Management Board within the reporting period: № Date of transaction 1 15.04.2016 Type of transaction Disposal of securities Quantity of securities 1,000 Description of securities Ordinary registered uncertified shares Ilya Sattarov Date of birth: 13.07.1976 Education: higher - in 1998 graduated from Kuban State University with a degree in Economics. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 02.07.2007 – 07.12.2010 Organization: Commercial Joint-Stock Bank “Societe Generale Vostok Bank”, Closed Joint-Stock Company Position: CEO (JSC “SGVB” Krasnodar Branch); 2) Period: 08.12.2010 – 31.01.2011 Organization: JSC “Tander” Position: Director of Assets Acquisition and Management (Head Office); 3) Period: 01.02.2011 – 31.07.2011 Organization: JSC “Tander” Position: Director of Transport (Transport Department); 4) Period: 01.08.2011 – 14.06.2015 Organization: JSC “Tander” Position: Deputy General Director of Logistics (Head Office); 5) Period: 12.10.2012 – 22.06.2016 Organization: PJSC “Magnit" Position: Member of the Management Board; 6) Period: 15.06.2015 – 30.06.2016 Organization: JSC “Tander” Position: Deputy General Director of Logistics and HR (Head Office); 7) Period: 01.07.2016 – present day Organization: JSC “Tander” Position: Deputy General Director of Sales and HR; 8) Period: 18.10.2016 – present day Organization: PJSC “Magnit" Position: Member of the Management Board. Stockholding of the person in the Company’s charter capital: 0.000214% (as of 31.12.2016). Ordinary shares, owned by the person: 0.000214% (as of 31.12.2016). 11 Information on the transactions of acquisition/disposal of the Company’s shares, made by the person in the position of the member of the Management Board within the reporting period: № 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Date of transaction 19.01.2016 20.01.2016 20.01.2016 21.01.2016 21.01.2016 22.01.2016 25.01.2016 28.01.2016 29.01.2016 29.01.2016 01.02.2016 01.02.2016 23.03.2016 24.03.2016 24.03.2016 25.03.2016 25.03.2016 18.05.2016 09.06.2016 10.08.2016 Type of transaction Disposal of securities Acquisition of securities Disposal of securities Acquisition of securities Disposal of securities Disposal of securities Disposal of securities Disposal of securities Acquisition of securities Disposal of securities Acquisition of securities Disposal of securities Disposal of securities Acquisition of securities Disposal of securities Acquisition of securities Disposal of securities Disposal of securities Disposal of securities Disposal of securities Quantity of securities Description of securities Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares Ordinary registered uncertified shares 1 1 1 1 350 200 200 1 1 1 1 265 1 1 1 1 20 220 54 285 12 PRINCIPAL PROVISIONS OF COMPENSATION POLICY OF THE COMPANY (OR) REIMBURSEMENT OF EXPENSES OF THE MEMBERS OF THE AND MANAGEMENT BOARD OF THE COMPANY AND THE AMOUNT OF REMUNERATION (REINBERSEMENT OF EXPENSES) PAID DURING THE REPORTING YEAR According to the Regulations “On the Collegial Executive Body (the Management Board) of PJSC “Magnit” the remuneration of the Management Board’s member consists of the remuneration under a labor contract or an additional agreement to it. The remuneration from the net profit of the Company according to the data of the annual accounting report can be annually paid to the members of the Management Board. The terms and procedure of payment of remuneration to the Management Board’s members shall be determined by the Board of Directors. According to a labor contract the wage rate for the participation in the operation of the Management Board constitutes 50,000 rubles per month. On June 2, 2016 the General Shareholders Meeting adopted a decision not to pay the remuneration following the results of the year (Minutes w/o № of 03.06.2016). The amount of the remuneration for the participation in the operation of the Management Board paid in 2016 constitutes 129,491,272.16 rubles (including remuneration of S. Galitskiy as the sole executive body). The compensation policy of the Company shall not provide the reimbursement of the expenses of the Management Board’s members related to the exercise of their functions. Within the 2016 year the expenses to the Management Board’s members related to the participation in the operation of the Management Board have not been reimbursed. 13 5. INFORMATION ON THE BOARD OF DIRECTORS MEMBERS as of December 31, 2016 Khachatur Pombukhchan – the Chairman of the Board of Directors Date of birth: 16.03.1974. Education: higher - in 1996 graduated from Kuban State University with a degree in Applied Mathematics; in 2000 from All-Russian Distance Institute of Finance and Economics with a degree in Economics. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 19.06.2008 – 17.05.2012 Organization: LLC “Magnit Finance” Position: General Director; 2) Period: 25.06.2008 – 23.06.2010 Organization: PJSC “Magnit” Position: Member of the Board of Directors; 3) Period: 01.07.2008 – present day Organization: JSC “Tander” Position: Financial Director; 4) Period: 01.07.2008 – present day Organization: PJSC “Magnit” Position: Financial Executive Officer; 5) Period: 24.06.2010 – present day Organization: PJSC “Magnit” Position: Chairman of the Board of Directors. Stockholding of the person in the issuer’s charter capital: no share. Ordinary shares, owned by the person: no share. Information on the transactions of acquisition/disposal of the Company’s shares, made by the member of the Board of Directors within the reporting period: the person did not execute transactions of acquisition/disposal of the Company’s shares within the reporting period. Vladimir Gordeychuk Date of birth: 15.08.1961. Education: in 1988 graduated from Novorossiysk Higher Marine and Engineering College, specialization of navigator. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 28.06.2006 – 11.01.2016. Organization: JSC “Tander”. Position: General Director; 2) Period: 12.04.2006 – 12.01.2016. Organization: PJSC “Magnit”. Position: Second Deputy CEO; 14 3) Period: 2016 – present day Organization: PJSC “Magnit”. Position: Member of the Board of Directors. Shareholding of the person in the issuer’s charter capital: 1.0605% (as of 31.12.2016). Ordinary shares owned by the person: 1.0605% (as of 31.12.2016). Information on the transactions of acquisition/disposal of the Company’s shares, made by the Board of Directors’ member during the reporting period: № Date of transaction 1 09.11.2016 Type of transaction Disposal of securities Quantity of securities 1,200,000 Description of securities Ordinary registered uncertified shares Alexey Pshenichniy Date of birth: 23.02.1967 Education: higher – in 1990 graduated from Krasnodar State Institute of Physical Culture with a degree in Teaching and Organization of health and fitness activities and tourism; additional (to higher) education – in 2004 graduated from Academy of National Economy under the Government of the Russian Federation, Master of Business Administration (MBA) degree. Positions held in the Company and other companies over the last five years, including secondary employment: 1)Period: 01.02.2010 - present day Organization: Limited Liability Company “Bazis” Position: Director (secondary employment); 2) Period: 01.02.2010 – 31.03.2012 Organization: Limited Liability Company “Yunior” Position: Director (secondary employment); 3) Period: 01.01.2004 - present day Organization: Limited Liability Company “Sports goods retail chain “Visshaya LIGA”” Position: Director (secondary employment); 4) Period: 13.12.2012 – present day Organization: Limited Liability Company “Sport Plyus” Position: Director (secondary employment); 5) Period: 29.05.2014 - present day Organization: PJSC “Magnit” Position: Member of the Board of Directors. Shareholding of the person in the Company’s charter capital: no share. Ordinary shares owned by the person: no share. Information on the transactions of acquisition/disposal of the Company’s shares made by the Board of Directors’ member within the reporting period: within the reporting period no transactions on acquisition/disposal of the Company’s shares were made. 15 Sergey Galitskiy Date of birth: 14.08.1967 Education: higher - in 1992 graduated from Kuban State University with a degree in Economics. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 01.04.2004 – present day Organization: PJSC “Magnit” Position: member of the Board of Directors; 2) Period: 13.04.2006 – present day Organization: PJSC “Magnit” Position: CEO; 3) Period: 05.08.2009 – 03.10.2014 Organization: NP “FC “Krasnodar” Position: President (secondary employment); 4) Period: 15.07.2010 – present day Organization: PJSC “Magnit” Position: Chairman of the Management Board; 5) Period: 09.10.2014 – present day Organization: LLC “Football Club “Krasnodar” Position: President (secondary employment); 6) Period: 25.06.2015 – present day Organization: PJSC VTB Bank Position: member of the Supervisory Board. Stockholding of CEO in the Company’s share capital: 35.10948% (as of 31.12.2016). Ordinary shares, owned by CEO: 35.10948% (as of 31.12.2016). Information on the transactions of acquisition/disposal of the Company’s shares, made by the person in the position of the sole executive body within the reporting period: № Date of transaction 1 31.03.2016 Type of transaction Disposal of securities Alexander Zayonts Quantity of securities Description of securities 3,363,000 Ordinary registered uncertified shares Date of birth: 10.01.1967 Education: higher – graduated from Moscow Institute of Chemical Engineering n.a. D.I. Mendeleev with a degree in Chemical process engineering. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 09.01.2008 – present day Organization: LLC "Domashniy Interier" Position: General Director; 16 2) Period: 01.12.2009 – September 2013 Organization: LLC "Obiedinennye resursy" Position: Member of the Board of Directors; 3) Period: 24.06.2010 – present day Organization: PJSC "Magnit" Position: Member of the Board of Directors; 4) Period: 13.04.2012 – present day Organization: LLC “EDELVEIS” (secondary employment) Position: General Director. 5) Period: 2015 – present day Organization: LLC “Galereya vkusa” (secondary employment) Position: General Director. Shareholding of the person in the Company’s charter capital: no share. Ordinary shares owned by the person: no share. Information on the transactions of acquisition/disposal of the Company’s shares made by the Board of Directors’ member within the reporting period: within the reporting period no transactions of acquisition/disposal of the Company’s shares were made. Aleksandr Aleksandrov Date of birth: 22.11.1975 Education: higher - graduated from Institute of International Law, Economics, Liberal Arts and Management n.a. K.V. Rossinskigo with a degree in Law. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 09.04.2004– present day Organization: Limited Liability Company “Yuzhnaya Torgovaya Companiya” Position: General Director (secondary employment); 2) Period: 05.01.2005 – December 2016 Organization: Limited Liability Company “YUTKO-REGION” Position: Director (secondary employment); 3) Period: 04.06.2015 – present day Organization: PJSC "Magnit" Position: Member of the Board of Directors; 4) Period: January 2017 – present day Organization: Limited Liability Company “YUTKO-REGION” Position: Head of liquidation commission. Shareholding of the person in the issuer’s charter capital: no share. Ordinary shares owned by the person: no share. Information on transactions of acquisition/disposal of the Company’s shares made by the Board of Directors’ member within the reporting period: within the reporting period no transactions of acquisition/disposal of the Company’s shares were made. Aslan Shkhachemukov 17 Date of birth: 22.08.1962 Education: higher – in 1987 graduated from Krasnodar Polytechnic Institute of the Order of the Red Banner of Labor with a degree in Industrial Engineering. Positions held in the Company and other companies over the last five years, including secondary employment: 1) Period: 01.10.2007 – 29.02.2012 Organization: JSC “Tander” Position: Deputy General Director; 2) Period: 23.06.2011 – present day Organization: PJSC ”Magnit” Position: Member of the Board of Directors; 3) Period: 01.03.2012 – 31.05.2015 Organization: JSC “Tander” Position: Deputy General Director of Economic Security and Organizational Issues. 4) Period: 01.06.2015– 10.01.2016 Organization: JSC “Tander” Position: Deputy General Director of Economic Security and Organizational Issues, GR and PR. 5) Period: 11.01.2016 – 18.12.2016 Organization: JSC “Tander” Position: Deputy General Director of Security, Legal Assistance, GR and PR; 6) Period: 19.12.2016 – present day Organization: JSC “Tander” Position: Deputy General Director of Security, Legal Assistance, Audit Activities, GR and PR. Shareholding of the person in the issuer’s charter capital: 0.009401% (as of 31.12.2016). Ordinary shares owned by the person: 0.009401% (as of 31.12.2016). Information on the transactions of acquisition/disposal of the Company’s shares made by the Board of Directors’ member within the reporting period: № 1 2 Date of transaction 06.04.2016 06.12.2016 Type of transaction Acquisition of securities Acquisition of securities Quantity of securities 128 95 Description of securities Ordinary registered uncertified shares Ordinary registered uncertified shares PRINCIPAL PROVISIONS OF COMPENSATION POLICY OF THE COMPANY AND (OR) REIMBURSEMENT OF EXPENSES OF THE BOARD OF DIRECTORS’ MEMBERS OF THE COMPANY AND THE AMOUNT OF REMUNERATION (REINBERSEMENT OF EXPENSES) PAID DURING THE REPORTING YEAR According to the Regulations “On the Board of Directors of PJSC “Magnit”, ratified by the resolution of the annual General Shareholders Meeting of 04.06.2015 (minutes of 05.06.2015), remuneration of the Board of Directors’ members shall be paid upon the resolution of the 18 General Shareholders Meeting in the form of remuneration for participation in the operation of the Board of Directors and remuneration for the achieved results. The remuneration for the participation in the Board of Directors’ operation amounts to 120,000 (one hundred and twenty thousand) rubles per month. The remuneration to the independent director for participation in the Board of Directors’ operation amounts to 30,000 (thirty thousand) US dollars per year, additionally - 2,000 (two thousand) US dollars for participation by means of personal presence in each meeting of the Board of Directors, held in the form of physical presence, - 500 (five hundred) US dollars for participation, by means of directing the written opinion, in each meeting of the Board of Directors held in the form of physical presence, or for participation in each meeting of the Board of Directors held in absentia form. Year-end bonus may be additionally paid to the remuneration of the Board of Directors’ members. The fixed amount of year-end bonus shall be paid to the members of the Board of Directors after the approval of corresponding annual financial statements by the decision of the General Shareholders Meeting of the Company. In case of absence of net profit (profit for the distribution) in the Company the remuneration to the members of the Board of Directors (remuneration for the participation in the operation of the Board of Directors, year-end bonus) shall not be paid. The members of the Board of Directors shall not be entitled to receive remuneration and (or) reimbursement of expenses for the performance of their duties in any way and form, for the adoption of decisions by the Board of Directors or by other authorities of the Company, as well as for the exercise of their rights and duties as a member of the Board of Directors, for the except of remuneration and (or) reimbursement of expenses, received upon the decision of the General Shareholders Meeting. On June 2, 2016 the General Shareholders Meeting made a decision not to pay year-end bonus (minutes of 03.06.2016) In 2016 the remuneration for the participation in the operation of the Board of Directors within 2015 year in the amount of 13,405,102.68 rubles (upon the resolution of the General Shareholders Meeting of 02.06.2016 (minutes w/o № of 03.06.2016) was paid to the members of the Board of Directors and salary to the members of the Board of Directors, who are employed in the Company, as well as who work in secondary employment, in the amount of 88,100.26 rubles (the amount doesn’t include the remuneration to Sergey Galitskiy as the CEO and the Chairman of the Management Board of the Company). According to the Regulations “On the Board of Directors of PJSC “Magnit”, ratified by the resolution of the annual General Shareholders Meeting of 04.06.2015 (minutes w/o № of 05.06.2015), the Company shall reimburse the expenses of the members of the Board of Directors which are directly related to the exercise of their duties, including: - Expenses related to traveling to the place of the meeting of the Board of Directors; - Expenses related to accommodation during the period of holding of the meeting of the Board of Directors; - Representational expenses; - Expenses related to the expert consultation on the issues considered at the Board of Directors’ meetings, as well as on translation of the documents/materials presented to the members of the Board of Directors. The amount of such expenses should be preliminarily agreed with the Chairman of the Board of Directors, Chairman of the Revision Committee. The reimbursement of expenses shall 19 be made via cash register of the Company based on the application on reimbursement of expenses made by the member of the Board of Directors. The original documents confirming actual incurred expenses (tickets, bills, receipts, etc.) shall be necessarily attached to the application. The Board of Directors may adopt a decision on refusal of reimbursement of expenses incurred by the Board of Directors’ member at its meeting by majority of votes of elected members, if it is established that this member of the Board of Directors acted against the interests of the Company. During 2016 year the expenses related to the exercise of duties of the members of the Board of Directors of PJSC “Magnit” have not been reimbursed. 20 6. REPORT OF THE BOARD OF DIRECTORS ON 2016 OPERATIONS The structure of the Board of Directors, elected by the annual General Shareholders Meeting on June 4, 2015 (minutes of 05.06.2015): № Full name of a member of the Board of Directors Date of birth 1 2 3 4 5 6 7 Andrey Arutyunyan Alexey Pshenichnyi Sergey Galitskiy Alexander Zayonts Aleksandr Aleksandrov Khachatur Pombukhchan Aslan Shkhachemukov 12.01.1969 23.02.1967 14.08.1967 10.01.1967 22.11.1975 16.03.1974 22.08.1962 The structure of the Board of Directors, elected by the annual General Shareholders Meeting on June 2, 2016 (minutes of 03.06.2016): № Full name of a member of the Board of Directors Date of birth 1 2 3 4 5 6 7 Vladimir Gordeychuk Alexey Pshenichniy Sergey Galitskiy Alexander Zayonts Aleksandr Aleksandrov Khachatur Pombukhchan Aslan Shkhachemukov 15.08.1961 23.02.1967 14.08.1967 10.01.1967 22.11.1975 16.03.1974 22.08.1962 The current structure of the Board of Directors includes three independent directors - Alexey Pshenichniy, Alexander Zayonts, Aleksandr Aleksandrov. Khachatur Pombukhchan was elected as a Chairman of the Board of Directors by the unanimous resolution at the first Board of Directors’ meeting as of June 22, 2016, Aslan Shkhachemukov as a Deputy Chairman and Vladimir Gordeychyk as a Secretary of the Board of Directors. The Board of Directors of the Company operated under the Federal Law “On Joint-Stock Companies”, the Charter of the Company, the Regulations on the Board of Directors of PJSC “Magnit” and the Regulations on the Committees of the Board of Directors of PJSC “Magnit”. According to the provisions of the corporate documents the committees of the Board of Directors were formed to provide its operating efficiency and to prepare the most important issues. 21 According to the resolution of the Board of Directors as of June 22, 2016 the membership of the committees are formed as follows: HR and Remuneration Committee of the Board of Directors: Full name of a member of the Board of Directors Position in the committee Aleksandr Aleksandrov member of the committee Alexey Pshenichniy Alexander Zayonts chairman of the committee member of the committee Audit Committee of the Board of Directors: Full name of a member of the Board of Directors Position in the committee Alexander Zayonts chairman of the committee Aleksandr Aleksandrov member of the committee Alexey Pshenichniy member of the committee № 1 2 3 № 1 2 3 The meetings of the committees are held as and when required, but not less than 1 (One) time per year. All the members of the correspondent committees participated in all the meetings of the Board of Directors’ committees, which had been held within the reporting period. Within 2016 year the Board of Directors held 11 meetings and considered 84 issues. All the meetings of the Board of Directors were held in the form of joint presence. Information on the presence of directors in the meetings of the Board of Directors in 2016: Full name of a member of the Board of Directors Andrey Arutyunyan Alexey Pshenichniy Sergey Galitskiy Alexander Zayonts Vladimir Gordeychuk Khachatur Pombukhchan Aslan Shkhachemukov Aleksandr Aleksandrov Status Participation in the meeting Independent Executive - + - + - - - + + - + - - + - - 22 Total number* 5 of 5 11 of 11 11 of 11 11 of 11 6 of 6 11 of 11 11 of 11 11 of 11 Physical presence In absentia 5 11 11 11 6 11 11 11 - - - - - - - - *in this context the indication (5 of 4) will signify that the director may participate (may adopt decisions on the issues raised for voting) in 5 meetings and participated in 4 of them. Main issues considered by the Board of Directors in 2016: Date of the meeting 04.02.2016 04.02.2016 04.02.2016 Considered issues The nominees to the Board of Directors were considered and enrolled on a voter list for election at the annual General Shareholders Meeting. The nominees to the position of auditor were considered and enrolled on a voter list for election at the annual General Shareholders Meeting. Business priorities of PJSC “Magnit” for the year 2016 and the first quarter of 2016 were determined. 29.03.2016 Internal control and risk management policy of PJSC “Magnit” was ratified. 29.03.2016 The changes in the business plan of PJSC “Magnit” Internal audit department for the year 2016 were approved. 29.03.2016 Related party transactions were approved. 29.03.2016 PJSC “Magnit” business priorities for the second quarter of 2016 were determined. 07.04.2016 The decision on calling of the annual General Shareholders Meeting was made. 07.04.2016 07.04.2016 The recommendations to the General Shareholders Meeting on the profit distribution, including the dividend amount on PJSC “Magnit” shares and procedure of its payment, and loss of the Company following the results of 2015 financial year were approved. The annual report of PJSC “Magnit” for 2015 financial year was preliminarily approved and submitted for consideration of the General Shareholders Meeting. 07.04.2016 The amount of remuneration for the auditor’s services was determined. 07.04.2016 07.04.2016 07.04.2016 27.05.2016 27.05.2016 The decision on determination of the price of the transactions the approval of which as major related-party transactions is included to the agenda of the General Shareholders Meeting of PJSC “Magnit” was adopted. The list of candidates to be elected to the PJSC “Magnit” Board of Directors at the annual General Shareholders Meeting of the Company was approved. The list of candidates to be elected to the PJSC “Magnit” Revision commission at the annual General Shareholders Meeting of the Company was approved. The Regulations on the PJSC “Magnit” corporate governance department were ratified. The nominee for the position of the Director for corporate governance of PJSC “Magnit” was approved. 27.05.2016 The Regulations on the dividend policy of PJSC “Magnit” were ratified. 27.05.2016 22.06.2016 The Regulations on the committees of the PJSC "Magnit" Board of Directors were ratified. The Chairman of the Board of Directors of PJSC “Magnit”, the Deputy Chairman of the Board of Directors and the Secretary of the Board of Directors of PJSC “Magnit” were elected. 23 22.06.2016 22.06.2016 The members of the Audit committee of the Board of Directors of PJSC “Magnit” and its Chairman were elected. The members of the HR and Remuneration Committee of the Board of Directors of PJSC “Magnit” and its Chairman were elected. 22.06.2016 The members of the Management Board of PJSC “Magnit” were elected. 22.06.2016 22.06.2016 The Program and the Prospectus of PJSC “Magnit” exchange-traded bonds of the 002P series were approved. Business priorities of PJSC “Magnit” for the third quarter of 2016 were determined. 22.06.2016 The auditor’s amount of remuneration was determined. 01.08.2016 01.08.2016 01.08.2016 29.09.2016 17.10.2016 31.10.2016 31.10.2016 31.10.2016 31.10.2016 The decision on calling of the extraordinary General Shareholders Meeting of PJSC “Magnit” was made. The recommendations to the General Shareholders Meeting on the dividend amount on PJSC “Magnit” shares following the results of the 1H 2016, the procedure of its payment and the dividend record date were approved. The decision on determination of the price of the transactions the approval of which as major related-party transactions is included to the agenda of the General Shareholders Meeting of PJSC “Magnit” was made. Business priorities of PJSC “Magnit” for the fourth quarter of 2016 were determined. The authorities of the member of the PJSC “Magnit” collective executive body (Management Board) were early terminated. The decision on calling of the extraordinary General Shareholders Meeting of PJSC “Magnit” was made. The recommendations to the General Shareholders Meeting on the dividend amount on PJSC “Magnit” shares following the results of the 9 months of 2016 reporting year, the procedure of its payment and the dividend record date were approved. The list of candidates to be elected to the PJSC “Magnit” Revision commission at the extraordinary General Shareholders Meeting of the Company was approved. The decision on determination of the price of the transactions the approval of which as major related-party transactions is included to the agenda of the General Shareholders Meeting of PJSC “Magnit” was made. 31.10.2016 The amount of remuneration for the auditor’s services was determined. 31.10.2016 The Code of Business Ethics of PJSC “Magnit” was ratified. 15.12.2016 The business plan of the Internal Audit Department of PJSC “Magnit” for 2017 was approved. 15.12.2016 Related party transactions were approved. 15.12.2016 The Regulations on the committees of the PJSC “Magnit” Board of Directors in the new edition were approved. Besides, within the reporting period the issues related to determination of the position of PJSC “Magnit” representative on realization of the voting rights on the Company’s stocks and 24 shares in other companies were examined by the Board of Directors of PJSC “Magnit” in accordance with the Clause 14.2 of the Charter. Thus, the meetings on the issues concerning determination of the position of PJSC “Magnit” representative on realization of the voting rights on the Company’s shares of JSC “Tander”, stock in Retail import LLC, LLC “Tandem”, LLC “Alcotrading” were held in February, April, May, August, September, October, and December of 2016 year. The performance evaluation of the Board of Directors Within the reporting period the HR and Remuneration Committee of the Board of Directors in accordance with its competence evaluated the performance of the current membership of the Board of Directors. The Committee evaluated the following: 1. The Board of Directors performance: compliance of the Board of Directors structure with the functions performed; qualitative composition of the Board of Directors; internal dynamics (process) of the Board of Directors performance; performance of the Company’s Secretary; performance of its main functions by the Board of Directors. 2. Performance of the Chairman of the Board of Directors: general management of the Board of Directors; development of the Board of Directors as a management body of the Company; management of the Board of Directors meetings; collaboration with the Company Management Board; collaboration with the Company’s shareholders and investors; personal attributes; management skills; communication skills; skills of performing the functions of the Chairman of the Board of Directors; skills of performing the functions of a member of the Board of Directors; professional skills. 3. Performance of the Committees of the Board of Directors: compliance of the structure of the committees with the functions performed; qualitative composition of the committee; internal dynamics (process) of the committee performance; performance of its functions by the committee; holding of the committee meetings. 4. Compliance of the Board of Directors members, which are considered independent, with the criteria of independence determined by the Corporate governance code and the Listing rules of PJSC “Moscow Exchange” (previously – CJSC “MICEX Stock Exchange”). The analysis of the current incentive program for the members of the Board of Directors. The committee determined that operating efficiency of the current membership of the Board of Directors corresponds to the nature and range of activity of the Company, needs of the Company and interests of the shareholders. The management of the Company achieved the following results in 2016: 1. Revenue of the Company increased by 13.07% from 950.61 billion rubles in 2015 to 1.07 trillion rubles in 2016. In 2016 "Magnit" remained the leader of the Russian FMCG retail sector in terms of revenue as well as number of stores, selling space and capitalization. 2. During 2016 the Company added 1,970 stores (927 convenience stores, 18 hypermarkets, 39 “Magnit Family” stores and 986 drogerie stores). The total store base as of December 31, 2016 reached 14,059 stores (10,521 convenience stores, 237 hypermarkets, 194 “Magnit Family” stores and 3,107 drogerie stores). Total selling space of the stores increased by 14.82% from 4,413.72 thousand sq. m. to 5,067.67 thousand sq. m. 25 14059 12089 9711 8093 6884 5309 4055 4002 5006 6046 7200 8344 9594 10521 610 610 1014 1014 1500 1500 1893 2197 2582 3228 1893 2194 2568 3204 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Drogeries Magnit Family Hypermarkets Convenience Stores 3. Number of customers increased by 13.04% from 3,376.86 million in 2015 to 3,817.13 million in 2016. 4. Sales of private label products as a % of sales in 2016 amounted to 11.02%, the number of private label SKUs in 2016 amounted to 611. Magnit will continue to increase the sales of private label products through their expansion in all formats. 800 700 600 500 400 300 200 100 0 12,1% 12,1% 12,3% 12,7% 14,0% 13,2% 13,0% 10,9% 11,0% 11,0% 700 700 530 614 637 613 681 605 596 611 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Number of items Share in Revenue, % 16% 14% 12% 10% 8% 6% 4% 2% 0% 5. In 2016 the Company opened three distribution centers: Dmitrov, Orenburg, Kemerovo. The launch of the new distribution centers improved the quality of service in the Central, Volga and Siberian regions. Total space of 35 distribution centers as of December 31, 2016 stood at about 1,505 thousand sq. m. 6. Magnit continued to make efficiency improvements to its logistics network. The share of products processed via the Company’s distribution centers (centralization ratio) stood at 87%. During the reporting year the fleet of the Company’s vehicles decreased by 169 trucks, total number of vehicles was 5,713. 26 7. The Company was actively working with its employees increasing their loyalty and developing corporate culture. As of December 31, 2016 the total number of the Company’s employees exceeded 270 thousand, out of which 200,233 are in-store personnel; 35,651 people engaged in distribution; 21,654 people in regional branches, 11,151 are employees of the head office and 2,680 – other personnel. Average monthly salary in the Company in 2016 amounted to 32 893 rubles. In 2016 the average number of employees of the "Magnit" group of companies amounted to 230,266 people. Based on the publicly available information the management of the Company assumes that PJSC “Magnit” is the largest private employer in Russia. 8. LFL figures in 2016 vs. 2015 in ruble terms were the following: LFL revenue was (0.26)%, LFL average ticket was (0.90)% and LFL traffic was 0.65%. The decrease of LFL figures year on year was mainly driven by weak macroeconomic conditions and internal cannibalization. 9. Gross margin decreased from 28.49% in 2015 to 27.52% in 2016 due to price investments and continued consumer trading down on the back of zero wage inflation. Gross profit increased from 270.82 billion RUR to 295.76 billion RUR. 10. EBITDA increased from 103.97 billion RUR in 2015 to 107.79 billion RUR in 2016. EBITDA margin in 2016 amounted to 10.03%. Net debt/EBITDA ratio (in ruble terms) at the end of 2016 amounted to 1.03. 11. Net income in 2016 stood at 54.41 billion RUR. Net income margin in 2016 was 5.06%. 28,9% 764 11,3% 6,3% 2014 28,5% 951 10,9% 6,2% 2015 27,52% 1075 10,0% 5,1% 2016 Sales, RUR bn EBITDA Margin, % Gross Margin, % NI Margin, % 12. Magnit paid 49% of its net income in dividends for the 9 months 2016. Dividend per share amounted to 210.72 rubles (accumulatively, including 84.6 rubles for the first half of 2016 and 126.12 rubles for the third quarter 2016). Overall, Magnit’s Board of Directors considers the achieved financial and economic results positive and in line with 2016 internal targets. 27 Following the results of the conducted work the Board of Directors of Magnit recommends the annual general shareholders meeting to approve the performance of the Company’s management bodies during 2016 and to ratify 2016 annual report submitted for the meeting agenda. 28 7. MAIN 2016 CORPORATE EVENTS April June “National Rating Agency” has assigned the reliability rating “AAA” with the stable outlook (maximum reliability) to PJSC “Magnit”. Standard & Poor’s Rating Services affirmed the “BB+” long-term credit rating of “Magnit” with the negative outlook. The annual General Shareholders Meeting was held. The membership of the Management Board of PJSC “Magnit” was formed by the Board of Directors. The Board of Directors formed the committees of the Board of Directors, appointed the chairman, the deputy chairman and the secretary of the Board of Directors. August “Magnit” was ranked 46th in the 100 World’s Most Innovative Companies List by the American edition of the Forbes business magazine and became the only Russian company in the list for the second consecutive year. “Magnit” was ranked 3rd by sales in the Annual Ranking of the 200 Biggest Russia’s Nongovernmental Companies by the Forbes business magazine. September October executives, with Magnit’s support of Volgograd Regional Administration, held a joint session for local producers. Over 70 regional suppliers participated in the session. the The extraordinary General Shareholders Meeting of PJSC “Magnit” was held. Standard & Poor’s Rating Services has affirmed the credit rating of the Issuer at “BB+” level and revised “Negative” outlook to «Stable». "Magnit" CEO Sergey Galitskiy has been included in the list of top business leaders of 17th "TOP-1000 Russian Managers" rating for 2016 prepared by the Russian Managers Association and Kommersant. Moreover, three other executives were included in top five in the industry. “Magnit” retail chain topped the list of the largest Russia’s employers among the companies included in the Annual Ranking of the 200 Biggest Russia’s Nongovernmental Companies by the Forbes business magazine. November “Magnit” hired its 1000th physically-challenged employee and is currently one of a few companies in Russia, which employs such a large number of physically-challenged workers. December The Code of Business Ethics of PJSC “Magnit” was ratified by the Board of Directors. The extraordinary General Shareholders Meeting of PJSC “Magnit” was 29 held. 3 (Three) General Shareholders Meetings were held in 2016. At the annual General Shareholders Meeting, held on June 2, 2016 in the form of joint presence, the positive decisions on all the agenda items were made. The annual report of PJSC “Magnit” following the 2015 year results; annual accounting (financial) reports of PJSC “Magnit”, including statements on financial results; the procedure of distribution of profit (including payment (declaration) of dividends) and loss of PJSC “Magnit” following the 2015 reporting year results; the auditor of PJSC “Magnit” according to the Russian Accounting Standards and the International Financial Reporting Standards were approved. The members of the Board of Directors of PJSC “Magnit” and the Revision Commission of PJSC “Magnit” were elected. The major related party transactions were approved. At the extraordinary General Shareholders Meeting of PJSC “Magnit” held on September 8, 2016 in the form of absentee voting the positive decisions on the agenda items were adopted. The decision on the payment of dividends on the shares of PJSC “Magnit” following the 6 months of 2016 reporting year was made, the PJSC “Magnit” Charter in the new edition was ratified. The major related party transactions were approved. At the extraordinary General Shareholders Meeting of PJSC “Magnit” held on December 8, 2016 in the form of the joint presence the positive decisions on the agenda items were adopted. The decision on the payment of dividends on the shares of PJSC “Magnit” following the 9 months of 2016 reporting year was made. The new membership of the Revision Commission was elected. The major related party transactions were approved. 30 8. POSITION OF THE COMPANY IN INDUSTRY RUSSIAN MARKET This section was prepared with the use of the following materials: IA Infoline, public sources of companies. Retail turnover amounted to 28,137.1 billion RUR in 2016 and decreased by 5.2% in terms of mass of commodities compared to 2015 (in 2015 it decreased by 10%). In 2016 food retail turnover decreased by 5.3%, non-food retail turnover decreased by 5.1% compared to 2015. In December 2016 retail turnover amounted to 2,899.2 billion RUR and decreased by 5.9% in terms of mass of commodities compared to December 2015. Food retail turnover in comparable prices in December 2016 decreased by 6.5% compared to December 2015, non-food – by 5.3%. Food retail turnover in rubles in December 2016 decreased by 0.6% compared to December 2015, non-food – increased by 0.7%. In the fourth quarter of 2016 retail turnover amounted to 7,785.4 billion RUR and decreased by 4.8% in terms of mass of commodities compared to the fourth quarter of 2015 (in the fourth quarter of 2015 it decreased by 12.7%). Food retail turnover in the fourth quarter of 2016 decreased by 5.7%, non-food – by 3.9% compared to the fourth quarter of 2015. Quarterly dynamics of the retail turnover in Russia in 2007-2016 and the guidance of the Ministry of Economic development and Trade for 2017-2019 are provided in the diagram. Dynamics of the key figures of the consumer market in 2007-2016 and guidance for 2017- 2019, % Y-o-Y 25 20 15 10 5 0 -5 -10 -15 -20 7 0 Q 1 7 0 Q 2 7 0 Q 3 7 0 Q 4 8 0 Q 1 8 0 Q 2 8 0 Q 3 8 0 Q 4 9 0 Q 1 9 0 Q 2 9 0 Q 3 9 0 Q 4 0 1 Q 1 0 1 Q 2 0 1 Q 3 0 1 Q 4 1 1 Q 1 1 1 Q 2 1 1 Q 3 1 1 Q 4 2 1 Q 1 2 1 Q 2 2 1 Q 3 2 1 Q 4 3 1 Q 1 3 1 Q 2 3 1 Q 3 3 1 Q 4 4 1 Q 1 4 1 Q 2 4 1 Q 3 4 1 Q 4 5 1 Q 1 5 1 Q 2 5 1 Q 3 5 1 Q 4 5 1 0 2 6 1 Q 1 6 1 Q 2 Growth rate of retail turnover Growth rate of food turnover Growth rate of non-food turnover * 6 8 1 1 H 0 1 2 * 7 1 0 2 6 1 M 9 6 1 Q 3 6 1 Q 4 6 1 0 2 6 1 c e D 6 1 v o N v o N - n a J * 9 1 0 2 The monetary base (broad definition) characterizing money supply by the monetary regulation agencies increased for December 2016 by 698.3 bn RUR compared to November 2016 (growth for December 2015 amounted to 1,156.6 bn RUR). Dynamics of retail turnover and monetary base in 2007-2016, bn RUR Source: IA Infoline 31 Retail turnover (in current prices), bn RUR Monetary base (in broad definition), bn RUR 3400 2900 2400 1900 1400 900 400 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 9 0 n a J 7 0 n u J 7 0 v o N 8 0 r p A 8 0 p e S 9 0 b e F 9 0 l u J 9 0 c e D 0 1 y a M 0 1 t c O 1 1 r a M 1 1 g u A 2 1 n a J 2 1 n u J 2 1 v o N 3 1 r p A 3 1 p e S 4 1 b e F 4 1 l u J 4 1 c e D 5 1 y a M 5 1 t c O 6 1 r a M 6 1 g u A Source: IA Infoline Dynamics of retail turnover in Russia in 2007-2016 and guidance for 2017-2019 Period Turnover, bn RUR FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 1Q 2013 2Q 2013 1H 2013 3Q 2013 4Q 2013 FY 2013 1Q 2014 2Q 2014 1H 2014 3Q 2014 4Q 2014 FY 2014 January 2015 February 2015 March 2015 1Q 2015 April 2015 May 2015 June 2015 2Q 2015 1H 2015 July 2015 August 2015 September 2015 3Q 2015 9M 2015 October 2015 November 2015 December 2015 4Q 2015 FY 2015 January 2016 February 2016 March 2016 1Q 2016 April 2016 May 2016 June 2016 10869 13944,2 14599,2 16512 19104,3 21394,5 5241,3 5692,8 10934,1 6052,0 6699,8 23685,9 5793 6256,8 12049,8 6697,2 7609,3 26356,2 2050,5 2024,4 2196,6 6271,5 2158,9 2213,7 2223,3 6595,9 12867,4 2301,1 2376,7 2322,6 7000,4 19867,8 2385,2 2387,3 2898,1 7670,6 27538,4 2126,2 2098,6 2220,3 6445,1 2204,2 2232,9 2255,7 Dynamics, to the corresponding period In comparable prices, % 115,2 113,0 94,9 106,4 107,0 106,3 104,0 103,8 103,9 104,0 103,6 103,9 103,9 102,1 103,0 101,6 103,1 102,7 95,6 92,6 91,1 93,0 90,2 90,6 90,4 90,4 91,6 90,5 90,6 89,3 90,1 91,1 88,7 87,8 85,9 87,3 90,0 93,6 95,3 93,8 94,2 94,9 93,6 93,8 32 In current prices, % 124,8 128,3 104,7 113,1 115,7 112,0 111,8 111,4 111,4 110,2 110,0 110,7 110,5 109,9 110,2 110,7 113,6 111,3 109,8 108,2 106,9 108,3 105,7 105,7 104,9 105,4 106,8 105,0 105,0 103,6 104,5 106,0 103,2 101,9 98,1 100,8 104,5 103,7 103,7 101,1 102,8 102,1 100,9 101,5 Period Turnover, bn RUR 2Q 2016 1H 2016 July 2016 August 2016 September 2016 3Q 2016 9M 2016 October 2016 November 2016 December 2016 4Q 2016 FY 2016 FY 2017 (guidance) FY 2018 (guidance) FY 2019 (guidance) 6692,8 13137,9 2362,6 2439,8 2411,4 7213,8 20351,7 2446,9 2439,3 2899,2 7785,4 28137,1 29813 31471 33419 Dynamics, to the corresponding period In comparable prices, % 94,1 94,1 94,9 95,0 96,6 95,5 94,6 95,8 95,9 94,1 95,2 94,8 100,6 101,1 101,8 In current prices, % 101,5 102,1 102,7 102,7 103,8 103,0 102,4 102,6 102,2 100,0 101,5 102,2 105,7 105,6 106,2 Source: data of the Federal State Statistics Service and the Ministry of Economic Development and Trade STRUCTURE OF RETAIL TURNOVER BY TYPES OF PRODUCTS Retail turnover in 2016 decreased by 5.2% in terms of mass of commodities compared to 2015 and amounted to 28,137.1 billion RUR, at that consumption of food products decreased by 5.3%, non-food – by 5.1%. In 2016 consumption of alcohol products decreased by 2.4% compared to 2015 and amounted to 96.8 mln dL., at that the growth of consumption was demonstrated only by the other alcohol products (cider, mead, etc.) – 40.6%. Decrease of consumption in 2016 was demonstrated by low-alcohol beverages – by 12.2%, champagne and sparkling wine – by 6.9%, beer-based beverages – 5.6%, beer (excluding beer cocktails and malt beverages) – by 3.7%, cognac and cognac beverages – by 2.4%, wine products excluding champagne and sparkling wine – 2.3%, including wine – by 3.1%, vodka and distilled products – by 0.6%. Dynamics of retail turnover by types of products in 2007-2016, % 25 20 15 10 5 0 -5 -10 -15 -20 19,1 15,1 10,7 8,6 7,6 5 5,1 -8,2 -7,2 -8,8 -9,3 -10,3 -10,3 -11 -15 -6,1 -7,1 -7,1 -6,8 -5,6 -6,6 -6,5 -6,2 -6,5 -4,9 -4,5 -2,5 -3,9 -3,1 -3,2 -5,6 -5,1 -5,3 -3,9 -5,1 Total retail turnover Food products Alcohol drinks Non-food Source: IA Infoline Dynamics of share of food products in retail turnover in 2007-2016 33 50 49 48 47 46 45 44 7 0 n a J 7 0 n u J 7 0 v o N 8 0 r p A 8 0 p e S 9 0 b e F 9 0 l u J Share of food products in retail turnover (excl.tobacco products), % 9 0 c e D 0 1 y a M 0 1 t c O 1 1 r a M 1 1 g u A 2 1 n a J 2 1 n u J 2 1 v o N 3 1 r p A 3 1 p e S 4 1 b e F 4 1 l u J 4 1 c e D 5 1 y a M 5 1 v o N 6 1 r p A 6 1 p e S Share of food products in retail turnover (incl.tobacco products), % Polynomial (Share of food products in retail turnover (excl.tobacco products), %) Polynomial (Share of food products in retail turnover (incl.tobacco products), %) Source: IA Infoline In 2016 the share of food products in the structure of retail turnover did not change vs. 2015. In December 2016 the share of food products decreased by 0.3 pp vs. December 2015. In the fourth quarter of 2016 the share of food products in the structure of retail turnover decreased by 0.3 pp vs. the fourth quarter of 2015. Dynamics of retail turnover by groups of products in 2011-2016 (monthly), bn RUR 3500 3000 2500 2000 1500 1000 500 0 II-11 V-11 VIII-11 XI-11 II-12 V-12 VIII-12 XI-12 II-13 V-13 VIII-13 XI-13 II-14 V-14 VIII-14 XI-14 II-15 V-15 VIII-15 XI-15 II-16 V-16 VIII-16 XI-16 food products non-food products Source: IA Infoline 1492,1 1407,1 Structure of retail turnover by groups of products in 2011-20166 2014 2011 2016 2015 2012 2013 Dec 2015 Dec 2016 4Q 2015 Figures 4Q 2016 Retail turnover food products non-food products share of food products, % share of non-food products, % 19104,3 21394,5 23685,9 26356,2 27538,4 28137,1 2898,1 2899,2 7670,6 7785,4 9104,3 9961,4 11143,0 12380,8 13419,3 13710,4 1415,1 1407,1 3725,9 3756,5 10000,0 11433,2 12542,9 13975,4 14119,1 14426,7 1483,0 1492,1 3944,7 4028,9 47,7 52,3 46,6 53,4 47,0 53,0 47,0 53,0 48,7 51,3 48,7 51,3 48,8 51,2 48,5 51,5 48,6 51,4 48,3 51,7 Source: data of the Federal State Statistics Service Structure of retail turnover by groups of products in 2011-2016 (monthly), % 6 For comparison, from the year 2009 data on the turnover and the share of food products in 2002-2008 are adjusted for tobacco products 34 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 51,5% 48,5% II-11 IV- 11 VI- 11 VIII- 11 X-11 XII- 11 II-12 IV- 12 VI- 12 VIII- 12 X-12 XII- 12 II-13 IV- 013 VI- 13 VIII- 13 X-13 XII- 13 II-14 IV- 14 VI- 14 VIII- 14 X-14 XII- 14 II-15 IV- 15 VI- 15 VIII- 15 X-15 XII- 15 II-16 IV- 16 VI- 16 VIII- 16 X-16 XII- 16 share of food products, % share of non-food products, % Source: IA Infoline STRUCTURE OF RETAIL TURNOVER BY TYPES OF ORGANIZATIONS Following the results of the nine months of 2016 in terms of structure of retail turnover by types of organizations the trend of decrease of the share of marketplaces (by 0.8 pp compared to the nine months of 2015) continued. The share of small enterprises also decreased by 0.6 pp and individual entrepreneurs – by 0.7 pp. The share of large organizations (mostly these are retail networks) increased by 1.6 pp compared to the nine months of 2015, medium- sized enterprises – by 0.5 pp, and the share of micro-sized enterprises did not change. Structure of formation of retail turnover in 2007-2016 by types of organizations, % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 37,3 35,2 34,5 36,2 38,2 40,2 41,3 43,3 44,2 44,3 46,3 44,2 46,3 22,2 26,3 25,8 25,2 25,5 25,0 24,6 23,7 23,4 23,2 22,5 23,2 22,6 25,2 15,3 25,2 26,1 25,9 24,7 24,2 24,7 24,3 24,5 24,5 13,3 13,6 12,7 11,6 10,6 9,4 8,7 7,9 8,0 24,1 7,1 24,6 8,0 23,9 7,2 2008 2007 Open markets 2009 2010 2011 Individual entrepreneurs 2012 2013 Small enterprises 2014 1H2015 1H2016 9M2015 9M2016 2015 Large and mid enterprises (incl. chains) Source: IA Infoline In December 2016 92.9% of retail turnover was formed by trading organizations and individual entrepreneurs operating outside of the marketplaces, the share of retail marketplaces and fairs amounted to 7.1% (in December 2015 – 92.7% and 7.3% correspondingly). Turnover of trading organizations and marketplaces in 2011-2016, bn RUR Figure 2011 2012 2013 2014 2015 2016 Dec 2015 Dec 2016 4Q 2015 4Q 2016 Retail turnover turnover of trading organizations sales of open markets share of trading organizations, % share of open markets, % 19104,3 21394,5 23685,9 26356,2 27538,4 28137,1 2898,1 2899,2 7670,6 7785,4 16898,4 19126,3 21453,8 24057,2 25369,8 26139,4 2687,0 2693,4 7091,2 7230,2 2205,9 2268,2 2232,1 2299,0 2168,6 7354,9 211,1 205,8 579,4 555,2 88,5 89,4 90,6 91,3 92,1 92,9 92,7 92,9 92,4 92,9 11,5 10,6 9,4 8,7 7,9 7,1 7,3 7,1 7,6 7,1 Source: data of the Federal State Statistics Service 35 Compared to December 2015 the turnover of trading organizations decreased by 5.6%, while sales of the marketplaces decreased by 8.8%. In 2016 the turnover of trading organizations dropped off by 4.5% compared to 2015, sales of the marketplaces decreased by 14%. Dynamics of turnover of trading organizations and marketplaces in 2011-2016 (monthly), trn RUR 3 2,5 2 1,5 1 0,5 0 0,21 2,69 III-11 VI-11 IX-11 XII-11 III-12 VI-12 IX-12 XII-12 III-13 VI-13 IX-13 XII-13 III-14 VI-14 IX-14 XII-14 III-15 VI-15 IX-15 XII-15 III-16 VI-16 IX-16 XII-16 Turnover of trading organizations, trn RUR Sales of market places, trn RUR Source: IA Infoline In December 2016 compared to November 2016 the turnover of trading organizations increased by 18.5%, while the sales of the marketplaces grew by 15.5%. Structure of retail turnover in 2011-2016 (monthly), % 100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 7,1 92,9 III-11V-11VII-11IX-11XI-11I-12III-12V-12VII-12IX-12XI-12I-13III кв.IV-13VI-13VIII-13X-13XII-13II-14IV-14VI-14VIII-14X-14XII-14II-15IV-15VI-15VIII-15X-15XII-12II-16IV-16VI-16VIII-16X-16XII-16 share of trading organizations, % share of open markets, % Source: IA Infoline As of January 1, 2017 there were 1,158 retail markets with 311 thousand market slots functioning on the territory of the Russian Federation. The breakdown of the retail markets by types has changed in the fourth quarter of 2016 vs. the third quarter of 2016 towards the increase of the share of specialized construction materials markets, agricultural and agricultural cooperative markets on the back of decrease of the share of multipurpose markets and specialized merchandise markets. As of January 1, 2017 the number of agricultural and agricultural cooperative markets amounted to 275, including 165 markets (60.0% of the total number) located in capital facilities. The level of actual use of the market slots as of January 1, 2017 amounted to 69.3% on average through the Russian Federation, which is lower compared to October 1, 2016 and lower compared to January 1, 2016. Individual entrepreneurs still remain 36 the principal economic entities on the marketplaces. As of January 1, 2017 129.2 thousand individual entrepreneurs operated at retail markets (as of October 1, 2016 – 138.1 thousand). In the fourth quarter of 2016 9.3 thousand fairs were held. Individual entrepreneurs were the principal economic entities on the fairs (66.7% from all market slots were allocated for them). Dynamics of the number of open markets in the Russian Federation and their share in the retail turnover in 2007-2016 6000 5000 4000 3000 2000 1000 0 15,3% 13,6% 13,3% 12,7% 11,6% 10,6% 9,5% 8,6% 8,5% 8,0% 8,0% 7,1% 7,3% 4771 3728 3497 3427 3159 2162 1589 1447 1308 1370 1223 1342 1194 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H2015 1H2016 9M2015 9M2016 Number of markets in the russian Federation e-o-p Share of markets in retail turnover in the Russian Federation (right scale),% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: IA Infoline REGIONAL STRUCTURE OF RETAIL TURNOVER Regional structure of retail turnover in Russia is uneven: 11 constituent territories generated 49.69% of retail turnover in 2016 (Moscow, Moscow region, Saint-Petersburg, Sverdlovsk region, Krasnodar region, Samara region, Republics of Tatarstan and Bashkortostan, Tyumen region, Chelyabinsk region and Rostov region). Compared to 2015, the share of retail turnover attributable to these 11 constituent territories of the Russian Federation decreased by 0.58 pp. Dynamics of share of 69 regions of the Russian Federation (apart from 11 largest) in retail turnover in 2007-2016, % 50,3% 50,2% 49,8% 50,8% 50,9% 50,2% 50,6% 50,3% 50,5% 49,7% 48,9% 48,9% 49,2% 47,7% 47,8% 48,3% 47,1% 46,6% 52% 50% 48% 46% 44% 42% 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q20151Q20162Q20152Q20161H20151H20169M20159M2016 2016 Source: IA Infoline In 2016 the increase of the share in the retail turnover vs. 2015 was demonstrated by Moscow region – by 0.5 pp, North-Western federal district – by 0.18 pp (including Saint- Petersburg – by 0.18 pp), Far-Eastern federal district – by 0.11 pp, North-Caucasian federal 37 by 0.09 pp, while the decline in the retail turnover in 2016 was demonstrated by the tail turnover in 2016 was demonstrated by the district – by 0.09 pp, while the decline in the re (by 0.74 pp), Urals federal district (by Central federal district (by 0.2 pp, including Moscow – (by 0.74 pp), Urals federal district (by Central federal district (by 0.2 pp, including Moscow (by 0.09 pp). The share of 0.24 pp), Siberian federal district (by 0.1pp), Volga federal district – (by 0.09 pp). The share of 0.24 pp), Siberian federal district (by 0.1pp), Volga federal district federal district together with the Crimean federal district (Republic of Crimea and the Southern federal district together with the Crimean federal district (Republic of Crimea and federal district together with the Crimean federal district (Republic of Crimea and Sevastopol) increased by 0.26 pp. Sevastopol) increased by 0.26 pp. Structure of retail turnover by constituent entities Structure of retail turnover by constituent entities of the Russian Federation in 2015, % of the Russian Federation in 2015, % Samara region 2,1% Sverdlovsk region 3,8% Tyumen region 3,0% Structure of retail turnover by constituent entities Structure of retail turnover by constituent of the Russian Federation in 2016, % of the Russian Federation in 2016, % Tyumen region 2,9% Samara region Samara region 2,1% Sverdlovsk region 3,7% Republic of Tatarstan 2,8% Republic of Bashkortostan 2,8% Republic of Tatarstan 2,8% Rostov region 3,0% Krasnodar region 4,2% Chelyabinsk region 1,9% Republic of Bashkortostan 2,9% Other 50,3% Rostov region 3,0% Saint- Petersburg 4,2% Moscow 15,7% Moscow region 6,3% Krasnodar region 4,4% Saint-Petersburgh 4,3% Moscow 14,9% Chelyabinsk region 1,7% Other 50,3% Moscow region 6,8% Source: IA Infoline In 2016 the largest decrease (by more than 5%) of retail turnover vs. 2015 among the In 2016 the largest decrease (by more than 5%) of retail turnover vs. 2015 among the In 2016 the largest decrease (by more than 5%) of retail turnover vs. 2015 among the largest constituent territories of the Russian Federation (share in retail turnover of the Russian largest constituent territories of the Russian Federation (share in retail turnover of the Russian largest constituent territories of the Russian Federation (share in retail turnover of the Russian 10.9%), Chelyabinsk region (- Federation is above 1%) was demonstrated by Stavropol region (-10.9%), Chelyabinsk region ( Federation is above 1%) was demonstrated by Stavropol region ( Yugra (-9%), Perm region (- 10.5%), Moscow (-9.1%), Khanty 9.1%), Khanty-Mansiisk autonomous district-Yugra ( 5.7%), Volgograd region (-5.7%), Saratov 7.5%), Kemerovo region (-7.5%), Irkutsk region (-5.7%), Volgograd region ( 7.5%), Kemerovo region ( 5.5%), Tyumen region excluding autonomous districts (- 5.6%), Sverdlovsk region (-5.5%), Tyumen region excluding autonomous districts ( region (-5.6%), Sverdlovsk region ( 5.3%), Altai region (-5.2%), Samara region ( 5.2%), Samara region (-5.1%). Regional structure of retail turnover of the Russian Federation in 2007-2016, % Regional structure of retail turnover of the Russian Federation in 2007 Regional structure of retail turnover of the Russian Federation in 2007 Region Central federal district Moscow region Moscow North-Western federal district Saint-Petersburg Southern federal district Crimean federal district North-Caucasian federal district Volga federal district Urals federal district Siberian federal district Far-Eastern federal district 6,4 6,12 6,16 6,32 2007 2008 2009 2010 2011 2012 34,4 33,4 33,83 34,18 34,52 34,06 6,1 5,89 18,8 17,0 17,31 17,46 17,39 17,01 9,4 9,20 4,1 3,95 8,5 8,97 0 0 3,8 5,10 17,9 18,4 18,27 18,18 18,16 18,29 10,4 10,8 10,14 9,76 9,63 9,65 11,7 11,6 10,95 10,71 10,80 10,89 3,9 3,83 9,35 9,36 9,13 4,15 4,15 3,88 8,73 8,98 8,91 0 4,66 4,85 4,96 9,3 4,2 8,8 0 4,0 4,07 3,98 3,88 3,8 0 0 5,74 2013 2014 2015 2016 33,93 34,21 33,69 33,49 6,76 16,96 16,83 15,65 14,91 9,66 4,32 6,00 6,26 9,07 3,89 9,01 0 5,11 9,04 3,86 9,13 0,70 5,09 9,48 4,16 9,43 0,92 5,46 5,55 18,48 18,41 17,73 17,64 8,78 9,85 4,43 9,02 10,79 10,23 9,95 4,32 9,24 3,96 3,90 9,72 10,617 The decline within 5% was demonstrated by Novosibirsk region ( The decline within 5% was demonstrated by Novosibirsk region (-4.8%), Republic of 3.4%), Primorsky region (- 3.9%), Rostov region (-3.4%), Voronezh region (-3.4%), Primorsky region ( Bashkortostan (-3.9%), Rostov region ( Source: data of the Federal State Statistics Service Source: data of the Federal State Statistics Service 7 From July 2016 Rosstat has included the Republic of Crimea and Sevastopol in the Southern federal district. From July 2016 Rosstat has included the Republic of Crimea and Sevastopol in the Southern federal district. From July 2016 Rosstat has included the Republic of Crimea and Sevastopol in the Southern federal district. 38 3.1%), Republic of Tatarstan (-2%), Saint-Petersburg (-1.5%), Nizhniy Novgorod region ( 3.1%), Republic of Tatarstan ( Krasnoyarsk region (-1.4%), 1.4%), Khabarovsk region (-0.9%), Leningrad region ( 0.9%), Leningrad region (-0.1%). 1.5%), Nizhniy Novgorod region (-1.4%), Structure of retail turnover by federal districts of the Structure of retail turnover by federal districts of the Russian Federation in 2015, % Russian Federation in 2015, % Structure of retail turnover by federal districts of the Structure of retail turnover by federal districts of the Russian Federation in 2016, % Russian Federation in 2016, % Southern 9,4% North-Caucasian 5,5% Volga 17,7% Urals 9,0% Caucasian North-Caucasian 5,5% Southern 10,6% Volga 17,6% Urals 8,8% North-Western 9,5% Central 33,7% Crimean 0,9% Siberian 10,0% Far-Eastern 4,3% North-Western 9,7% Central 33,5% Siberian 9,9% Far-Eastern 4,4% increase among large regions was demonstrated by the Republic of Dagestan (1.9%), The increase among large regions was demonstrated by the Republic of Dagestan (1.9%), increase among large regions was demonstrated by the Republic of Dagestan (1.9%), ion (1.7%), Moscow region (1%). Belgorod region (1.7%), Moscow region (1%). Source: IA Infoline Dynamics of retail turnover by federal districts in 2011-2016, % Y Dynamics of retail turnover by federal districts in 2011 2016, % Y-o-Y, in comparable 8,2 4,9 3,6 3,9 7,7 4,5 3,1 2,6 6,3 6,3 7,5 4,9 4,3 9,9 8,7 4,8 4,3 prices 7,8 6,6 5,8 3,4 2011 7,3 5,6 5,3 2012 8,3 7,1 3,3 2013 2014 2015 2016 5,34,8 5,7 5 0,7 -5,6 -11,9 -3,1 -7 -2,4 -7,6 -2,9 -4,1 -4,2 -12,7 -1 1,4 -1,4 -1,5 -2,5 -7,3 -11,7 -5,4 -11,4 Central North-Western Southern North-Caucasian Volga Urals Siberian Siberian Far-Eastern Crimean 15 10 5 0 -5 -10 -15 Source: IA Infoline In December 2016 the number of regions 2016 the number of regions8 which demonstrated the growth of retail which demonstrated the growth of retail turnover in physical terms decreased to 7 (in December 2015 – 9) vs. 13 in November 2016 (in 9) vs. 13 in November 2016 (in turnover in physical terms decreased to 7 (in December 2015 9), and in 2016 their number did not change vs. 9 in January-November 2016 9), and in 2016 their number did not change vs. 9 in January November 2015 – 9), and in 2016 their number did not change vs. 9 in January (in 2015 – 5). Number of regions with positive dynamics of retail turnover in physical terms, Y-o-Y Number of regions with positive dynamics of retail turnover in physical terms, Y Number of regions with positive dynamics of retail turnover in physical terms, Y 8 80 constituent entities of the Russian Feder Yamal-Nenets and Nenets Autonomous Area Nenets and Nenets Autonomous Area), which existed as of June 1, 2011. entities of the Russian Federation were included in the analysis (excluding Khanty excluding Khanty-Mansiisk Autonomous District, 39 80 70 60 50 40 30 20 10 0 7 0 r a M 7 0 y a M 7 0 l u J 7 0 p e S 7 0 v o N 8 0 n a J 8 0 r a M 8 0 y a M 8 0 l u J 8 0 p e S 8 0 v o N 9 0 n a J 9 0 r a M 9 0 y a M 9 0 l u J 9 0 p e S 9 0 v o N 0 1 n a J 0 1 r a M 0 1 y a M 0 1 l u J 0 1 p e S 0 1 v o N 1 1 n a J 1 1 r a M 1 1 y a M 1 1 l u J 1 1 p e S 1 1 v o N 2 1 n a J 2 1 r a M 2 1 y a M 2 1 l u J 2 1 p e S 2 1 v o N 3 1 n a J 3 1 r a M 3 1 y a M 3 1 l u J 3 1 p e S 3 1 v o N 4 1 n a J 4 1 r a M 4 1 y a M 4 1 l u J 4 1 p e S 4 1 v o N 5 1 n a J 5 1 r a M 5 1 y a M 5 1 l u J 5 1 p e S 5 1 v o N 6 1 n a J 6 1 r a M 6 1 y a M 6 1 l u J 6 1 p e S 6 1 v o N Source: IA Infoline GOVERNMENT REGULATION OF RETAIL According to the Federal Law № 381 – FZ “On fundamental principles of government regulation of trade activity in the Russian Federation” which came into effect on February 1, 2010, food retail chains (which threshold of dominance on retail market within the boundaries of one region, municipality or urban district exceeds 25%) are prohibited from acquiring and renting additional selling space within the boundaries of the corresponding administrative- territorial entity. The law does not apply to agricultural consumer cooperatives and organizations of consumer cooperation. The law “On fundamental principles of government regulation of trade activity in the Russian Federation” also aims to regulating the cooperation of retail chains and suppliers. The law № 381 – FZ introduced special legal regulation with regard to food supplies and set forth the list of terms which cannot be imposed by food suppliers and their buyers (trading networks) upon each other. In particular, these terms include: reduction of price by suppliers to the level which will not exceed the minimum selling price of this product by economic entities performing corresponding activity subject to the determination of the trade mark-up; payment for the change in the product mix; responsibility for failure to perform obligations on goods supply on more favorable terms than for other economic entities; fee paid by suppliers for access to trade objects within one trading network. Wholesale trade under commission agreement is prohibited. It is prohibited to set a ban on substitution of persons under the food supply agreement through assignment of a claim and liability for noncompliance with this regulation. Payment due date for some food products was set forth. On July 3, 2016 the Federal Law No. 273-FZ “On amendments to the Federal law “On fundamental principles of government regulation of trade activity in the Russian Federation” and to the Code of administrative offences of the Russian Federation” which came into effect on July 15, 2016. The Federal law establishes that the total amount of all payments made by a food products supplier to trade organizations shall not exceed 5% of the price of acquired food products. This total amount shall include remuneration paid by the supplier in relation to the acquisition of a certain number of food products, as well as payment for the products promotion services, logistics services, services for preparing, processing, packaging of these products, and other similar services. It is also specified that the calculation of the total amount of all payments to trading organizations does not take into account the value-added tax amount and the excise amount estimated in accordance with the legislation of the Russian Federation on taxes and fees. The Federal Law decreases the payment due period for food products (for products with up to 10-days expiry period the payment due period has been decreased from 10 40 to 8 working days, for products with up to 30-days expiry - from 30 to 25 calendar days, and for the rest food products including alcoholics drinks - from 45 to 40 calendar days) and it establishes that the payment due periods are calculated not from the date of acceptance of goods but from the date of their actual receipt. The law also determines the obligation of suppliers to submit documents for the delivered goods to trading organizations. In accordance with the Resolution No. 1191 of November 3, 2015 of the Government of the Russian Federation "On some issues related to charging of a fare against compensation for damage caused to federal general purpose motorways by transport vehicles with the permitted maximum weight of over 12 tons", since November 15, 2015 a fare for heavyweight cargo trucks weighing over 12 tons on federal roads has been introduced in Russia. The fare per 1 km will amount to 1.53 rubles until February 29, 2016. From March 1, 2016 to December 31, 2018 the fare per 1 km will amount to 3.06 rubles, from January 1, 2019 – 3.73 rubles per 1 km. The fare per 1 km amounts to 1.53 rubles. From April 15, 2017 the fare per 1 km will amount to 1.91 rubles. On June 30, 2015 the Federal Law No. 182-FZ of June 29, 2015 “On the amendments to the Federal Law “On the state regulation of the production and circulation of ethyl alcohol, alcoholic and alcohol-containing products and on the restriction of consumption (drinking) of alcoholic products” came into effect. In accordance with the law, starting from January 1, 2016 all retailers selling alcohol products, including food service companies, shall provide the information, confirming the fact of purchasing of alcohol products, to the USAIS (Unified State Automated Information System for the government control over the volume of production and circulation of ethyl alcohol, alcoholic and alcohol-containing products). By the middle of 2016 the majority of cash registers in stores selling alcohol (one-year deferral – until September 2017 – is specified for small locations) should have been be connected to the system. Starting from July 1, 2016 retailers selling alcohol products in cities and towns shall record in the USAIS the facts of retail sale of every bottle with a special federal stamp or excise stamp. Stores of retail sale of alcohol products and food service companies located in towns with the population of less than 3,000 people are released from the USAIS. On July 3, 2016 the President of the Russian Federation signed the Federal Law No. 290- FZ “On amendments to the Federal Law “On the application of cash registers for cash transactions and (or) payments using credit cards” and certain legislative acts of the Russian Federation”. The law provides for the phased transition to application of cash register equipment which transfers information on payments made by cash or using electronic payment means through the operator of fiscal data to tax authorities in the electronic form: for newly registered cash register equipment – from January 1, 2017, for currently used cash register equipment – from July 1, 2017, for individuals which previously were not obliged to apply cash registers – from January 1, 2018. Introduction of new cash registered will be split into several stages and will take two years. MAIN COMPETITORS9 The concentration level of the Russian food retail market is rather low – the share of 7 largest players is little over 25.7% of the market, which is considerably inferior to comparable figures in Eastern and Western European countries. Such a low capital concentration creates conditions for competition intensification among retail chains in the nearest future. Currently, development of competition is expressed in capturing extra markets due to growth of the chain itself including franchising schemes as well 9 Source: IA Infoline, public sources of companies. 41 as M&A deals. As a result, chains operating in the Russian market actively increase their presence in Moscow and regions which leads to the record rates of business growth. X5 Retail Group X5 Retail Group N.V. is a leading Russian food retailer. The Company operates several retail formats: the soft discounter chain under the Pyaterochka brand, the supermarket chain under the Perekrestok brand, the hypermarket chain under the Karusel brand and Express convenience stores under various brands. As of December 31, 2016, X5 operates 9,187 stores. It has the leading market position in both Moscow and St. Petersburg and a significant presence in the European part of Russia. Its store base includes 8,363 Pyaterochka soft discounter stores, 539 Perekrestok supermarkets, 91 Karusel hypermarkets and 194 Express stores. As of December 31, 2016 the total selling space of the company amounted to 4,301.75 thousand sq. m. The Company operates 35 DCs and 2,318 Company-owned trucks across the Russian Federation. In 2016 sales of X5 Retail Group stood at 1,033,667 mln RUR. METRO Cash & Carry Metro Cash and Carry is the largest operating company of cash & carry international business format (individual wholesale) of Metro Group. As of December 31, 2016 "Metro Cash & Carry" LLC operates 87 trading centers in 46 regions of Russia (excluding the Republic of Crimea) with the total selling space of 661.8 thousand sq. m. The company also operates “Metro Punct” supermarket with the total selling space of 1.587 thousand sq. m. which was opened in May 2012, a real,-, with the total space of 8.39 thousand sq. m. managed by "Metro Cash & Carry" as a result of the transaction with “Real-Hypermarket” LLC (Metro Group), as well as 2 METRO trading centers in the Republic of Crimea with the total space of 12.6 thousand sq. m. Moreover, in June 2012 the first two franchised “Fasol” stores were opened in St. Petersburg, and in September 2012 – 5 “Fasol” stores in Rostov-on-Don. As of October 1, 2016 the company operates more than 160 franchised “Fasol” stores, out of which 133 are located in Moscow and Moscow region, 12 in Saint- Petersburg, 7 in Rostov-on-Don, 3 in Kaluga and Kaluga region, 3 in Vladimir, 2 in Kazan. Total selling space of the company as of December 31, 2016 amounted to 671.8 thousand sq. m. Sales of METRO Cash & Carry, Russia for 2015 amounted to 225.0 bn rubles (which represents 7.4% growth vs. 2014). Auchan Auchan is a large hypermarket chain operating on the Russian market since 2002. As of December 31, 2016 Auchan Group in Russia operates 129 trading outlets with the total selling space of 918.1 thousand sq. m. 102 hypermarkets including: 65 “Auchan” hypermarkets operate in 31 regions. Besides, Auchan operates 26 “Auchan-city” mini- hypermarkets, 11 “Nasha Raduga” hypermarkets, 4 "Kazhdy Den" convenience stores. The Group also includes 17 supermarkets under the “Auchan Supermarket” brand, 6 “Moy Auchan” stores and 2 LillaPois Beauty drogeries. Total selling space as of December 31, 2016 amounted to 916.4 thousand sq. m. In 2015 Auchan Group net sales in accordance with the Russian Accounting Standards amounted to 345.7 bn rubles. 42 Dixy “Dixy” Group of Companies is one of Russia's leading retailers of food and everyday products. The Company operates in Central, Northwestern, Volga and Urals federal districts of Russia, and in Kaliningrad and Kaliningrad region. As of December 31, 2016 the company operated 2,802 stores, including: 2,646 “Dixy” neighbourhood stores, 116 “Victoria” stores, and 40 “MEGAMART” and “MINIMART” compact hypermarkets in 778 cities and towns of the Russian Federation. Net selling space of the Group as of December 31, 2016 amounted to 952,5 sq. m. In 2016 total sales of “Dixy” Group of Companies increased by 14.3% in ruble terms compared to the same period last year and stood at 311.24 billion rubles. Lenta “Lenta”, the company which operates the hypermarket chain under the same brand, was founded in 1993. As of December 31, 2016 "Lenta" operates 191 hypermarkets located in 77 cities across Russia and 49 supermarkets in Moscow, Saint-Petersburg and Central Russia. Total selling space of the chain as of December 31, 2016 amounted to 1,146.15 thousand sq. m. The number of the company’s employees amounted to more than 38,400 employees. 8.4 million people throughout Russia are the active loyalty cards holders of the chain. In 2016 net sales of “Lenta” retail chain increased by 21.2% compared to 2015 and amounted to 306.4 billion rubles. О'KEY “O’KEY” is one of the largest retail chains in Russia. Its primary retail format is the modern Western European hypermarket under the “O’KEY” brand, complemented by “O’KEY - Express” supermarkets. As of December 31, 2016 "O'KEY" operated 164 stores across Russia: 74 hypermarkets, 37 supermarkets and 54 discounters. As of December 31, 2016 total selling space of the Company amounted to about 623 thousand sq. m. In 2016 “О'KEY” sales amounted to 175.47 billion rubles, increasing by 8.0% compared to 2015. Legal name X5 Retail Group N.V. ”Magnit”, PJSC “Auchan”, LLC Number of stores of the largest FMCG retailers in 2007-2016, eop. Brand Pyaterochka Perekrestok Karusel, Perekrestok Hyper Perekrestok Express All formats Magnit Magnit Hypermarket Magnit Kosmetik Magnit Family All formats Auchan, Auchan-City, Nasha Raduga, Kazhdy Den, Moy Auchan, Auchan Supermarket Main formats1 2007 674 194 D S H CS 22 0 all formats 890 2194 3 - - CS H МК MF all formats 2197 2008 848 207 2009 1039 275 2010 1392 301 2011 2012 2013 2014 2015 1918 3220 3882 4789 6265 321 370 390 403 478 2016 8363 539 46 58 71 77 78 83 82 90 91 0 1101 2568 14 - - 2582 0 1372 3204 24 - - 3228 45 1809 4004 51 - 2 4055 134 189 209 187 194 70 2386 3802 4544 5483 7020 9187 5006 6046 7200 8344 9594 10521 126 161 190 219 237 93 155 194 - 46 20 210 692 686 1080 2121 3107 5309 6884 8093 9711 12089 14059 97 H 18 33 38 44 49 57 79 85 96 129 1 Key: D - Discounter, H - Hypermarket, S - Supermarket, CS - Convenience Store, МК – Drogerie Store, MF – Magnit Family 43 Legal name “МЕТRО Cash and Carry”, LLC “O'key”, LLC “Lenta”, LLC “Dixy Group”, PJSC Brand Main formats1 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 METRO, METRO Punct, real,- О'Кей, О'Кей-экспресс, DA! Lenta Megamart, Minimart, Dixy Victoria, Cash, Deshevo, Kvartal All formats S, H 39 48 52 57 62 68 72 80 87 89 S, H 24 37 46 57 71 83 94 108 146 164 H, S D, S, H 26 388 34 481 36 537 39 646 56 132 172 87 42 894 1422 1712 2100 2599 240 2686 CS, S, H 194 215 208 257 225 77 87 95 109 116 all formats 388 493 537 646 1119 1499 1799 2195 2708 2802 Total selling space of FMCG retailers in Russia in 2007-2016, eop, thousand sq. m. Legal name Brans X5 Retail Group N.V. ”Magnit”, PJSC “Auchan”, LLC “МЕТRО Cash and Carry”, LLC “O'key”, LLC “Lenta”, LLC “Dixy Group”, PJSC Pyaterochka Perekrestok Karusel, Perekrestok Hyper Perekrestok Express All formats Magnit Magnit Hypermarket Magnit Kosmetik Magnit Family All formats Auchan, Auchan-City, Nasha Raduga, Kazhdy Den, Moy Auchan, Auchan Supermarket METRO, METRO Punct, real,- О'Кей, О'Кей- экспресс, DA! Lenta Megamart, Minimart, Dixy Victoria, Cash, Deshevo, Kvartal, Semeynaya Kopilka All formats Main formats D S 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 357,5 419,2 251,7 222,4 493,0 284,4 586,3 313,0 735,2 333,9 1191,4 383,5 1414,1 397,8 1754,3 415,8 2422,6 484,0 3329,3 548,5 H 126,0 232,5 285,6 351,8 371,3 368,2 375,8 358,6 390,1 386,9 - CS - all formats 735,2 874,1 640,1 767,1 11,6 56,4 - - all formats 651,7 823,5 CS H МК MF - - 9,2 1260,3 1256,8 165,1 - 0,4 - 1063 978,5 81,4 - - 1059,9 1422,3 26,7 12,7 1453,1 1969,7 1637,8 1977,5 387,6 282,2 24,4 - 50,1 159,8 1970,2 2549,3 35,2 2222,9 2312,2 482,9 53,3 163,0 3011,4 43,6 2572,2 2673,3 559,1 109,1 249,2 3590,6 36,4 3333,2 3119,6 639,1 170,2 484,8 4413,7 37,1 4301,8 3452,4 683,7 212,8 718,8 5067,7 H 250,6 340,1 386,6 452,3 493,8 565,4 731,3 779,9 835,6 916,4 S, H 326,3 394,5 427,4 464,5 499,5 538,1 566,5 619,2 660,3 671,8 S, H 149,2 191,7 232,7 287,4 346,0 428,0 489,0 522,0 593,0 622,9 H, S 186,7 244,7 260,9 281,7 306,0 413,1 508,0 701,2 882,4 1146,1 D, S, H 149,1 189,8 206,0 227,9 286,7 447,3 541,3 663,6 811,6 852,1 CS, S, H 99,7 109,6 104,6 123,5 118,4 67,6 75,9 82,9 96,1 100,4 all formats 149,1 191,0 206,0 227,9 405,1 514,9 617,2 746,5 907,6 952,5 Dynamics of net sales (excluding VAT) of the largest FMCG retailers in 2007-2016, billion RUR Main formats CS, D, S, H CS, H, МК, MF Legal name Brand X5 Retail Group N.V. ”Magnit”, PJSC “Auchan”, LLC “МЕТRО Cash and Carry”, LLC Pyaterochka, Perekrestok, Karusel, Perekrestok Express Magnit Auchan, Auchan- City, Nasha Raduga METRO, METRO Punct, real,- Data 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 IFRS 136,1 207,2 275,0 8 342,5 8 452,4 8 490,0 9 532,7 633,8 7 804,1 3 1033, 67 IFRS 94,04 132,4 236,1 9 335,7 448,6 6 579,7 763,5 3 950,6 1 1074, 81 169,8 6 158,3 6 H RAS 90,6 128,1 178,1 205,1 232,6 281,7 314,8 345,7 S, H IFRS 89,2 111,2 114,3 117,9 9 139,9 6 164,6 183,2 209,5 225,0 44 - - “O'key”, LLC “Lenta”, LLC “Dixy Group”, PJSC O'key, O'key- express S, H IFRS 30,53 51,14 67,88 82,67 92,21 115,9 2 139,5 151,9 8 162,5 1 175,4 7 Lenta H, S IFRS 32,9 50,8 55,6 70,6 89,8 109,9 144,3 194,0 252,7 6 306,3 5 All formats CS, D, S, H IFRS 36,65 48,3 54,26 64,8 102,2 3 147,0 5 180,5 229,0 272,3 5 311,2 4 COMPETITIVE ADVANTAGES OF “MAGNIT” Multi-format business Implementation of the strategic decision to develop the formats of hypermarket, “Magnit Family” store and drogerie store allows the Group to conduct more profound segmentation of existing markets and consider population with the different level of income as potential customers. Moreover, pricing policy of the Group allows it to compete with open-air markets targeting customers with the level of income below the average. Strong regional coverage “Magnit” group of companies has considerable experience of operation in regions: in 2002 – 2016 the growth of the Group turnover was a result of its expansion into the cities with a population of less than 500 thousand people. In the nearest future the regions are expected to face the highest growth of consumer demand, which creates favorable conditions for medium- term dynamics of the Group business. Russia’s largest retailer in terms of the number of stores In terms of the number of stores “Magnit” is the largest food retail chain in Russia, which has a positive impact on cooperation with the largest food and beverage producers promoting their products on the regional markets. First of all, it is reflected in favorable purchasing terms and corresponding efficiency improvement. Recognized brand According to the independent expert research, IGD in particular, Russian customers pay significant attention to the brand when purchasing non-food and food items. The large store chain under “Magnit” brand allows the Group to strengthen its positions in the occupied market niche. Efficient logistics system Developed logistics system, distribution centers and own fleet of vehicles enable the Group to strictly monitor its delivery costs. Operating distribution centers results in lower purchasing prices and less pressure on the store at goods acceptance which ultimately contributes to more efficient business organization. The Group employs highly efficient automated stock replenishment system, which gives opportunity to achieve high turnover level as well as to reduce costs. 45 9. PRIORITY AREAS OF THE COMPANY’S OPERATIONS Headquartered in the southern Russia city of Krasnodar, public joint-stock company “Magnit” is the holding company for a group of entities that operate in the retail trade under the “Magnit” brand. “Magnit” is the largest FMCG retail chain in Russia. As of December 31, 2016 the chain consisted of 14,059 stores: 10,521 convenience stores, 237 hypermarkets, 194 “Magnit Family” stores and 3,107 drogerie stores in 2,494 cities and towns throughout the Russian Federation. Approximately two-thirds of the Magnit’s stores are located in cities with the population of less than 500,000 inhabitants. Most of its stores are located in the Southern, Central and Volga regions. The Company’s stores also operate in the North-Western, North-Caucasian, Urals and Siberian regions. As of the end of 2016 the number of stores located in the Southern Federal region accounted for 2,414, in the Volga region – 4,118, North-Caucasian – 497, Central – 3,744, North- Western – 1,389, the number of stores in the Urals and Siberian regions amounted to 1,311 and 586 correspondingly. As of December 31, 2016 the Company operates an in-house logistics system consisting of 35 modern distribution centers (DCs): nine of them are located in the Volga Federal region (Dzerzhinsk, Engels, Izhevsk, Orenburg, Penza, Perm, Sterlitamak, Togliatti, Zelenodolsk), nine are located in the Central Federal region (Dmitrov, Ivanovo, Kolomna, Oryol, Smolensk, 46 Tambov, Tula, Voronezh, Yaroslavl), another eight are based in the Southern Federal region (Astrakhan, Bataysk, Erzovka, Krasnodar, Kropotkin, Novorossiysk, Shakhty and Slavyansk- On-Kuban), three in the Urals (Chelyabinsk, Tyumen and Yekaterinburg) and the Siberian (Kemerovo, Novosibirsk and Omsk) Federal regions, two in the North-Western Federal region (Kolpino and Veliky Novgorod) and one in the North-Caucasian Federal region (Lermontov). Federal Region Central Volga Southern Urals Siberian North-Western North-Caucasian Total Warehousing space, sq. m. 476,886 381,723 308,154 141,497 83,596 73,258 40,225 1,505,338 Number of serviced stores 4,058 4,367 2,406 1,223 578 934 493 14,059 Number of DCs 9 9 8 3 3 2 1 35 The Company operates automated stock replenishment system and a fleet of 5,713 vehicles. 47 10. PRIORITIES OF THE COMPANY’S DEVELOPMENT The Company’s management outlines the following priority development trends for the next 18 months: • To significantly ramp up the pace of expansion by opening profitable stores; • To keep efficiency in the focus of the Company; • To retain current customers and attract the new ones, to improve the overall brand perception through, inter alia, store redesign; • Additionally to low prices and attractive assortment, to improve the store atmosphere as it is the basis for building the customer loyalty; • To build efficient marketing that will meet the customer expectations; • To organize and develop new sales channels. Chain expansion In the nearest 2-3 years the Company plans to keep high pace of business growth with a purpose to open 1,700 convenience stores, over 15 hypermarkets and over 25 “Magnit Family” stores and 1,000 drogeries in 2017. The Company’s accumulated experience and technologies enable it to open profitable convenience and drogerie stores even in locations with the population of as little as 5,000 people and 25,000 people for hypermarkets and “Magnit Family” stores. The Company’s stores are present in 7 out of 9 federal regions: Southern, Central, Volga, North-Caucasian, North-Western, Urals and Siberian. The Company plans to increase the density of its stores in these regions and continue to expand in the markets of Moscow, Saint- Petersburg and Western Siberia. Development of the multi-format model Currently, the Company is actively expanding its four formats: “convenience store”, hypermarket, “Magnit Family” and “drogerie store”. The format of a convenience store is a neighborhood store oriented at all customers living within 500 meters radius. The assortment of a convenience store consists of more than 3,800 food and non-food FMCG offered at reasonable prices. Average total space of a store is 459 sq. m., average selling space is 328 sq. m. As of December 31, 2016 “Magnit” retail chain operates 10,521 convenience stores, out of which 927 were opened in 2016. Since 2007 the Company has been opening hypermarkets. As of December 31, 2016 “Magnit” retail chain operates 237 stores of this format, out of which 18 were opened in 2016. The Company opens its hypermarkets mainly in the cities with population of 50,000 - 500,000 people; the stores are located in the city (within the city boundaries) and target people living within the radius of 7 km. Based on the location (size of the location or of the area in a large city) there are 3 sub- formats of the hypermarket: “small” with the selling space of up to 3,000 sq. m. (excluding rental space); “medium” with the selling space of 3,000 – 6,000 sq. m. (excluding rental space); “large” with the selling space of over 6,000 sq. m.; (excluding rental space). 48 Strategic development of the hypermarket format enables to conduct deeper segmentation of the existing markets and consider population with different income as potential customers while achieving the high turnover per store and the average ticket as well as the fast pace of business growth. In 2010 the Group started to examine a new segment of the retail market and launched 2 trial stores of a new format – “a drogerie store”. Unlike convenience stores, stores under “Magnit Kosmetik” brand offer a mix of non-food group of products: personal care, household cleaning products, cosmetics and perfumery goods. As of December 31, 2016 the total number of drogeries was 3,107, out of which 986 were opened in 2016. In May 2012 a new format – “Magnit Family” was launched. One of the reasons to expand into this format was to meet the needs of customers in wider assortment and aggressive pricing in the premises not suitable for a standard hypermarket due to space limitations. Key features of the format are: - Selling space of up to 1,500 sq. m.; - Expanded fresh zone; - Limited non-food assortment; - Own production facilities (ready meals); - Main technologies of the hypermarket format; - Pricing of the hypermarket format; - Location primarily in the leased premises of the shopping and entertainment malls. The number of the new format stores is growing through the opening of the new outlets as well as the reformatting of the certain convenience stores with excessive selling space for this format (about 1,500 sq.m.) and the upside sales potential. In 2016 the Group opened 39 “Magnit Family” stores. As of December 31, 2016 “Magnit” retail chain operated 194 “Magnit Family” stores. Pricing policy of the Company allows it to compete with open markets considering customers with income below average as the target audience. Brand recognition and customer loyalty The Company continues to expand its footprint into areas with the low penetration and continues to adjust its assortment to meet the needs of consumers. Within the complex of measures taken to increase the loyalty to the “Magnit” brand, the Company analyses customers’ preferences in order to build its marketing program considering the nature of different formats. Other means of improving the Company's brand perception is to improve the level of service and ambiance in the stores through corresponding work with its employees. In 2016 in order to increase efficiency of the stores and improve the Magnit brand perception, the Company launched the convenience stores redesign program. The changes within the program included internal and external design of the stores, their planograms and assortment balance in favor of the fresh categories. The program will help increase the stores appeal, improve ambiance in the stores and the customers shopping experience. 49 In 2016 Magnit redesigned 159 stores and plans to redesign another 2,000 stores in 2017. Moreover, starting from September 2016 all new stores have been opened under the redesign concept. Minimization of expenses The main drivers of successful development in the above direction are further improvements of the logistics processes and investments in the IT system which provides the Company with maximum effective stock and transport flow management systems, and contributes to its leadership in terms of cost control. Active introduction of private label products to the assortment is in place to increase the Company’s profitability. The status of Russia’s largest FMCG retail chain in terms of sales, number of stores and customers supports the Company’s efficient cooperation with suppliers and achievement of most favorable purchasing terms. Development of direct import, first of all direct import of fresh fruit and vegetables, also contributes to the minimization of logistics costs. 50 11. INFORMATION ON THE PAID DIVIDENDS The dividend policy of the Company oriented to the social welfare of the shareholders and securing of growth of capitalization of the Company. The Company considers the growth of capitalization as the primary way of serving of financial interests of the shareholders on the deriving revenue from the shares of the Company. The dividend policy consists in the optimization of ratios between the expendable and capitalized parts of realized profit of the Company in order to increase the market value of the shares. The dividend policy of the Company is based on the following principles: - the principle of transparency implies the identification and disclosure of information about the obligations and responsibilities of the parties, participating in the implementation of dividend policy, including the procedure and terms and conditions of making decisions on the dividends payment; the principle of timeliness implies the establishment of time limits during the payment of dividends; the principle of reasonableness implies that the decisions on the payment and on the amount of dividends can be adopted only in case of achievement of positive financial result by the Company, taking into consideration the development plan and its investment programs; the principle of justice implies the guarantee of equal rights of the shareholders for reception of information about made decisions on dividends payment, their amount and the procedure of their payment; the principle of sequence implies the strict performance of procedures and principles of the dividend policy; the principle of development implies continual amendment of dividend policy within the framework of improvement of the procedures of corporative governance and revision of its provisions due to the change of strategic aims of the Company; the principle of stability implies the intention of the Company to the stable dividends payment. - - - - - - On June 2, 2016 (minutes of 03.06.2016) the annual General Shareholders Meeting made a decision to pay dividends on ordinary registered shares of PJSC “Magnit” following the results of 2015 reporting year. On September 8, 2016 (minutes of 12.09.2016) the extraordinary General Shareholders Meeting made a decision to pay dividends on ordinary registered shares of PJSC “Magnit” following the results of the 6 months of 2016 reporting year. On December 8, 2016 (minutes of 09.12.2016) the extraordinary General Shareholders Meeting decided to pay dividends on ordinary registered shares of PJSC “Magnit” following the results of the 9 months of 2016 reporting year. Information on the paid dividends Dividend period: the 9 months of 2015. The amount of declared (accrued) dividends on shares of this category (type) per one share, RUB: - the amount of dividend accrued per one ordinary registered uncertified share following the results of the 9 months of 2015 reporting year – 179.77 rubles. 51 The total amount of the declared (accrued) dividends on all shares of this category (type), RUB: - the total amount of dividends accrued on the ordinary registered uncertified shares following the results of the 9 months of 2015 reporting year – 16,999,294,788.35 rubles. The date of decision on the payment (declaration) of dividends: December 22, 2015. The record date: January 8, 2016. The total amount of dividends paid on all shares of the issuer of one category (type), RUB: 16,999,294,788.35 rubles. Dividend period: 2015 year. The amount of declared (accrued) dividends on shares of this category (type) per one share, RUB: - the amount of dividend accrued per one ordinary registered uncertified share following the results of 2015 reporting year – 42.30 rubles. The total amount of the declared (accrued) dividends on all shares of this category (type), RUB: - the total amount of dividends accrued on the ordinary registered uncertified shares following the results of 2015 reporting year – 3,999,945,316.50 rubles. The date of decision on the payment (declaration) of dividends: June 2, 2016. The record date: June 17, 2016. The total amount of dividends paid on all shares of the issuer of one category (type), RUB: 3,999,940,409.70 rubles. Dividend period: the 6 months of 2016. The amount of declared (accrued) dividends on shares of this category (type) per one share, RUB: -the amount of dividends accrued per one ordinary registered uncertified share following the results of the 6 months of 2016 financial year – 84.60 rubles. The total amount of the declared (accrued) dividends on all shares of this category (type), RUB: -the total amount of dividends accrued on the ordinary registered uncertified shares following the results of the 6 months of 2016 financial year – 7,999,890,633.00 rubles. The date of decision on the payment (declaration) of dividends: September 12, 2016. The record date: September 23, 2016. The total amount of dividends paid on all shares of the issuer of one category (type), RUB: 7,999,849,771.20 rubles. Dividend period: the 9 months of 2016. The amount of declared (accrued) dividends on shares of this category (type) per one share, RUB: -the amount of dividends accrued per one ordinary registered uncertified share following the results of the 9 months of 2016 financial year – 126.12 rubles. The total amount of the declared (accrued) dividends on all shares of this category (type), RUB: -the total amount of dividends accrued on the ordinary registered uncertified shares following the 9 months of 2016 financial year – 11,926,078,092.60 rubles. The date of decision on the payment (declaration) of dividends: December 8, 2016. The record date: December 23, 2016. 52 The total amount of dividends paid on all shares of the issuer of one category (type), RUB: 11,926,063,462.68 rubles (as of the end date of the reporting period, the dividend payment period has not come). 53 12. SECURITIES AUTHORIZED CAPITAL STOCK The authorized capital stock of the Company determines the minimum amount of assets that guarantees its creditors’ interests. As of December 31, 2016 authorized capital stock of the public joint-stock company “Magnit” amounts to 945,613.55 rubles. It consists of 94,561,355 ordinary registered uncertified shares with a nominal value per share of 0.01 rubles. The Company is entitled to offer additional ordinary registered shares in the amount of 106,288,645 with the nominal value per share of 0.01 rubles (authorized shares). Information on the listed shares of PJSC “Magnit” as of 31.12.2016: Description of security Number of state registration Date of state registration Nominal, RUR Total number of securities Ordinary registered uncertified shares Total: 1-01-60525-Р 04.03.2004 0.01 94,561,355 94,561,355 Structure of PJSC “Magnit” share capital as of 31.12.2016: Number of registered entities Name Share in the charter capital, % Legal entities including nominal holders Individuals Total: 4 2 23 27 63.34 63.34 36.66 100 Information on PJSC “Magnit” outstanding shares listed outside the Russian Federation in accordance with the foreign law of securities of foreign issuers certifying rights in respect of the above shares of the Company: Category (type) of shares outstanding outside the Russian Federation: ordinary registered shares; Percentage of shares outstanding outside the Russian Federation as a % of the total number of shares of the corresponding category (type): 29.94%; name, address of the foreign issuer which securities certify the rights in respect of the shares of the Company of the corresponding category (type): JP Morgan Chase Bank, N. A., 4 New York Plaza, 12th Floor, New York, 10004 New York United States of America); short description of the program (type of the program) of the securities issue of the foreign issuer certifying the rights in respect of the shares of the corresponding category (type): in accordance with foreign law JPMorgan Chase Bank, N. A. issued securities (global depositary receipts, “GDRs”) certifying the rights in respect of the ordinary registered shares of PJSC “Magnit”; information on obtaining a permit of the federal executive body for the securities market to list the issuer’s shares of the corresponding category (type) outside the Russian Federation: 54 - in accordance with the order of FFMS of Russia of March 27, 2008 № 08-661/pz-i placement and listing outside the Russian Federation of the ordinary registered uncertified shares of PJSC “Magnit”, state registration number of the securities issue 1-01-60525-P of 04.03.2004, state registration number of the additional securities issue 1-01-60525-Р-004D of 20.03.2008 in the amount of 11,522,000 (eleven million five hundred and twenty two thousand) ordinary registered uncertified shares is permitted; - in accordance with the order of FFMS of Russia of October 02, 2009 № 09-3132/pz-i offering and listing outside the Russian Federation of ordinary registered uncertified shares of PJSC “Magnit”, state registration number of the securities issue 1-01-60525-P of 04.03.2004, state registration number of the additional securities issue 1-01-60525-Р-005D of 02.10.2009 in the amount of 16 792 946 (sixteen million seven hundred ninety two four thousand nine hundred forty six) ordinary registered uncertified shares is permitted; name of the foreign trade organizer (trade organizers) through which securities of the foreign issuer certifying the rights in respect of the issuers’ shares are listed: London Stock Exchange. BONDS Bond issue of PJSC “Magnit” of BO-01 series: In 2010 the Company offered its investors the first Exchange-traded bond issue. The issue comprised 1 million securities with the nominal value of 1 thousand rubles. The maturity of the issue was 3 years. The purpose of the issue of the exchange-traded bonds of BO-01 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-01 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on September 13, 2010. The number of the placed securities amounted to 1 million bonds which constitutes 100% of the total number of securities subject to placement. The entire bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-01 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results № 4B02-01-60525-P of February 02, 2010 1,000,000,000 rubles 1,000,000 bonds 1,000 rubles 100% of nominal value 13.09.2010 open subscription 1,092nd day from the date of placement (09.09.2013) 6 RU000A0JR118 RU000A0JR118 8.25 % 55 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % The first coupon yield of BO-01 series Exchange-traded bond issue was paid on March 14, 2011. The total amount of yield paid on the first coupon amounted to 41.14 million rubles, the amount of yield of the first coupon paid per one bond amounted to 41.14 rubles. The second coupon yield of BO-01 series Exchange-traded bond issue was paid on September 12, 2011. The total amount of yield paid on the second coupon amounted to 41.14 million rubles, the amount of yield of the second coupon paid per one bond amounted to 41.14 rubles. The third coupon yield of BO-01 series Exchange-traded bond issue was paid on March 12, 2012. The total amount of yield paid on the third coupon amounted to 41.14 million rubles, the amount of yield of the third coupon paid per one bond amounted to 41.14 rubles. The forth coupon yield of BO-01 series Exchange-traded bond issue was paid on September 10, 2012. The total amount of yield paid on the forth coupon amounted to 41.14 million rubles, the amount of yield of the forth coupon paid per one bond amounted to 41.14 rubles. The fifth coupon yield of BO-01 series Exchange-traded bond issue was paid on March 11, 2013. The total amount of yield paid on the fifth coupon amounted to 41.14 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 41.14 rubles. The sixth coupon yield of BO-01 series Exchange-traded bond issue was paid on September 9, 2013. The total amount of yield paid on the sixth coupon amounted to 41.14 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 41.14 rubles. On September 9, 2013 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of BO-01 series. Bond issue of PJSC “Magnit” of BO-02 series: In 2010 the Company offered its investors the second Exchange-traded bond issue. The issue comprised 1 million securities with the nominal value of 1 thousand rubles. Maturity of the issue was 3 years. The purpose of the issue of the exchange-traded bonds of BO- 02 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-02 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on September 13, 2010. The number of the placed securities amounted to 1 million bonds which constitutes 100% of the total number of securities subject to placement. The entire bond issue was realized in full in the course of auction in the first day of placement. 56 Parameters of the bond issue of PJSC “Magnit” of BO-02 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate № 4B02-02-60525-P of February 02, 2010 1,000,000,000 rubles 1,000,000 bonds 1,000 rubles 100% of nominal value 13.09.2010 open subscription 1,092nd day from the date of placement (09.09.2013) 6 RU000A0JR126 RU000A0JR126 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % The first coupon yield of BO-02 series Exchange-traded bond issue was paid on March 14, 2011. The total amount of yield paid on the first coupon amounted to 41.14 million rubles, the amount of yield of the first coupon paid per one bond amounted to 41.14 rubles. The second coupon yield of BO-02 series Exchange-traded bond issue was paid on September 12, 2011. The total amount of yield paid on the second coupon amounted to 41.14 million rubles, the amount of yield of the second coupon paid per one bond amounted to 41.14 rubles. The third coupon yield of BO-02 series Exchange-traded bond issue was paid on March 12, 2012. The total amount of yield paid on the third coupon amounted to 41.14 million rubles, the amount of yield of the third coupon paid per one bond amounted to 41.14 rubles. The forth coupon yield of BO-02 series Exchange-traded bond issue was paid on September 10, 2012. The total amount of yield paid on the forth coupon amounted to 41.14 million rubles, the amount of yield of the forth coupon paid per one bond amounted to 41.14 rubles. The fifth coupon yield of BO-02 series Exchange-traded bond issue was paid on March 11, 2013. The total amount of yield paid on the fifth coupon amounted to 41.14 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 41.14 rubles. The sixth coupon yield of BO-02 series Exchange-traded bond issue was paid on September 9, 2013. The total amount of yield paid on the sixth coupon amounted to 41.14 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 41.14 rubles. On September 9, 2013 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of BO-02 series. 57 Bond issue of PJSC “Magnit” of BO-03 series: In 2010 the Company offered its investors the third Exchange-traded bond issue. Issue comprised 1.5 million securities with the nominal value of 1 thousand rubles. The maturity of the issue was 3 years. The purpose of the issue of the exchange-traded bonds of BO- 03 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. The offering of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-03 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on September 13, 2010. The number of the placed securities amounted to 1.5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-03 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate № 4B02-03-60525-P of February 02, 2010 1,500,000,000 rubles 1,500,000 bonds 1,000 rubles 100% of nominal value 13.09.2010 open subscription 1,092nd day from the date of placement (09.09.2013) 6 RU000A0JR142 RU000A0JR142 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % The first coupon yield of BO-03 series Exchange-traded bond issue was paid on March 14, 2011. The total amount of yield paid on the first coupon amounted to 61.71 million rubles, the amount of yield of the first coupon paid per one bond amounted to 41.14 rubles. The second coupon yield of BO-03 series Exchange-traded bond issue was paid on September 12, 2011. The total amount of yield paid on the second coupon amounted to 61.71 million rubles, the amount of yield of the second coupon paid per one bond amounted to 41.14 rubles. The third coupon yield of BO-03 series Exchange-traded bond issue was paid on March 12, 2012. The total amount of yield paid on the third coupon amounted to 61.71 million rubles, the amount of yield of the third coupon paid per one bond amounted to 41.14 rubles. 58 The fourth coupon yield of BO-03 series Exchange-traded bond issue was paid on September 10, 2012. The total amount of yield paid on the fourth coupon amounted to 61.71 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 41.14 rubles. The fifth coupon yield of BO-03 series Exchange-traded bond issue was paid on March 11, 2013. The total amount of yield paid on the fifth coupon amounted to 61.71 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 41.14 rubles. The sixth coupon yield of BO-03 series Exchange-traded bond issue was paid on September 9, 2013. The total amount of yield paid on the sixth coupon amounted to 67.71 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 41.14 rubles. On September 9, 2013 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of BO-03 series. Bond issue of PJSC “Magnit” of BO-04 series: In 2010 the Company offered its investors the fourth Exchange-traded bond issue. Issue comprised 2 million securities with the nominal value of 1 thousand rubles. Maturity of the issue was 3 years. The purpose of the issue of the exchange-traded bonds of BO- 04 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-04 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on September 13, 2010. The number of the placed securities amounted to 2 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-04 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate № 4B02-04-60525-P of February 02, 2010 2,000,000,000 rubles 2,000,000 bonds 1,000 rubles 100% of nominal value 13.09.2010 open subscription 1,092nd day from the date of placement (09.09.2013) 6 RU000A0JR159 RU000A0JR159 8.25 % 8.25 % 8.25 % 8.25 % 8.25 % 59 5 coupon interest rate 6 coupon interest rate 8.25 % 8.25 % The first coupon yield of BO-04 series Exchange-traded bond issue was paid on March 14, 2011. The total amount of yield paid on the first coupon amounted to 82.28 million rubles, the amount of yield of the first coupon paid per one bond amounted to 41.14 rubles. The second coupon yield of BO-04 series Exchange-traded bond issue was paid on September 12, 2011. The total amount of yield paid on the second coupon amounted to 82.28 million rubles, the amount of yield of the second coupon paid per one bond amounted to 41.14 rubles. The third coupon yield of BO-04 series Exchange-traded bond issue was paid on March 12, 2012. The total amount of yield paid on the third coupon amounted to 82.28 million rubles, the amount of yield of the third coupon paid per one bond amounted to 41.14 rubles. The fourth coupon yield of BO-04 series Exchange-traded bond issue was paid on September 10, 2012. The total amount of yield paid on the fourth coupon amounted to 82.28 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 41.14 rubles. The fifth coupon yield of BO-04 series Exchange-traded bond issue was paid on March 11, 2013. The total amount of yield paid on the fifth coupon amounted to 82.28 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 41.14 rubles. The sixth coupon yield of BO-04 series Exchange-traded bond issue was paid on September 9, 2013. The total amount of yield paid on the sixth coupon amounted to 82.28 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 41.14 rubles. On September 9, 2013 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of BO-04 series. Bond issue of PJSC “Magnit” of BO-05 series: In 2011 the Company offered its investors the fifth Exchange-traded bond issue. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the exchange-traded bonds of BO-05 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-05 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on March 4, 2011. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-05 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security 60 № 4B02-05-60525-P of February 16, 2011 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate 100% of nominal value 04.03.2011 open subscription 1,092nd day from the date of placement (28.02.2014) 6 RU000A0JR9N3 RU000A0JR9N3 8.00 % 8.00 % 8.00 % 8.00 % 8.00 % 8.00 % 8.00 % The first coupon yield of BO-05 series Exchange-traded bond issue was paid on September 2, 2011. The total amount of yield paid on the first coupon amounted to 199.45 million rubles, the amount of yield of the first coupon paid per one bond amounted to 39.89 rubles. The second coupon yield of BO-05 series Exchange-traded bond issue was paid on March 2, 2012. The total amount of yield paid on the second coupon amounted to 199.45 million rubles, the amount of yield of the second coupon paid per one bond amounted to 39.89 rubles. The third coupon yield of BO-05 series Exchange-traded bond issue was paid on August 30, 2012. The total amount of yield paid on the third coupon amounted to 199.45 million rubles, the amount of yield of the third coupon paid per one bond amounted to 39.89 rubles. The fourth coupon yield of BO-05 series Exchange-traded bond issue was paid on March 1, 2013. The total amount of yield paid on the fourth coupon amounted to 199.45 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 39.89 rubles. The fifth coupon yield of BO-05 series Exchange-traded bond issue was paid on August 30, 2013. The total amount of yield paid on the fifth coupon amounted to 199.45 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 39.89 rubles. The sixth coupon yield of BO-05 series Exchange-traded bond issue was paid on February 28, 2014. The total amount of yield paid on the sixth coupon amounted to 199.45 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 39.89 rubles. On February 28, 2014 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of BO-05 series. Bond issue of PJSC “Magnit” of BO-06 series: In 2011 the Company offered its investors the sixth Exchange-traded bond issue. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the exchange-traded bonds of BO-06 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. 61 Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to the bearer of BO-06 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on April 26, 2011. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-06 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate № 4B02-06-60525-P of February 16, 2011 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles 100% of nominal value 26.04.2011 open subscription 1,092nd day from the date of placement (22.04.2014) 6 RU000A0JRFQ4 RU000A0JRFQ4 7.75 % 7.75 % 7.75 % 7.75 % 7.75 % 7.75 % 7.75 % The first coupon yield of BO-06 series Exchange-traded bond issue was paid on October 25, 2011. The total amount of yield paid on the first coupon amounted to 193.2 million rubles, the amount of yield of the first coupon paid per one bond amounted to 38.64 rubles. The second coupon yield of BO-06 series Exchange-traded bond issue was paid on April 24, 2012. The total amount of yield paid on the second coupon amounted to 193.2 million rubles, the amount of yield of the second coupon paid per one bond amounted to 38.64 rubles. The third coupon yield of BO-06 series Exchange-traded bond issue was paid on October 23, 2012. The total amount of yield paid on the third coupon amounted to 193.2 million rubles, the amount of yield of the third coupon paid per one bond amounted to 38.64 rubles. The fourth coupon yield of BO-06 series Exchange-traded bond issue was paid on April 23, 2013. The total amount of yield paid on the fourth coupon amounted to 193.2 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 38.64 rubles. The fifth coupon yield of BO-06 series Exchange-traded bond issue was paid on October 22, 2013. The total amount of yield paid on the fifth coupon amounted to 193.2 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 38.64 rubles. The sixth coupon yield of BO-05 series Exchange-traded bond issue was paid on April 22, 2014. The total amount of yield paid on the sixth coupon amounted to 193.2 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 38.64 rubles. 62 On April 22, 2014 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of BO-06 series. Bond issue of PJSC “Magnit” of BO-07 series: In 2012 the Company offered its investors the seventh Exchange-traded bond issue. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the exchange-traded bonds of BO-07 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-07 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on September 24, 2012. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-07 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate № 4B02-07-60525-P of August 10, 2011 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles 100% of nominal value 24.09.2012 open subscription 1,092nd day from the date of placement (21.09.2015) 6 RU000A0JT171 RU000A0JT171 8.90 % 8.90 % 8.90 % 8.90 % 8.90 % 8.90 % 8.90 % The first coupon yield of BO-07 series Exchange-traded bond issue was paid on March 25, 2013. The total amount of yield paid on the first coupon amounted to 221.9 million rubles, the amount of yield of the first coupon paid per one bond amounted to 44.38 rubles. The second coupon yield of BO-07 series Exchange-traded bond issue was paid on September 23, 2013. The total amount of yield paid on the second coupon amounted to 221.9 million rubles, the amount of yield of the second coupon paid per one bond amounted to 44.38 rubles. 63 The third coupon yield of BO-07 series Exchange-traded bond issue was paid on March 24, 2014. The total amount of yield paid on the third coupon amounted to 221.9 million rubles, the amount of yield of the third coupon paid per one bond amounted to 44.38 rubles. The fourth coupon yield of BO-07 series Exchange-traded bond issue was paid on September 22, 2014. The total amount of yield paid on the fourth coupon amounted to 221.9 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 44.38 rubles. The fifth coupon yield of BO-07 series Exchange-traded bond issue was paid on March 23, 2015. The total amount of yield paid on the fifth coupon amounted to 221.9 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 44.38 rubles. The sixth coupon yield of BO-07 series Exchange-traded bond issue was paid on September 21, 2015. The total amount of yield paid on the fifth coupon amounted to 221.9 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 44.38 rubles. On September 21, 2015 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of BO-07 series. Bond issue of PJSC “Magnit” of 01 series: In 2013 the Company offered its investors the issue of non-convertible certified interest- bearing bonds to the bearer with the obligatory centralized custody of 01 series. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the bonds of 01 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible bonds payable to the bearer of 01 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on February 26, 2013. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of 01 series: Date and the number of state registration Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate № 4-01-60525-P of December 27, 2012 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles 100% of nominal value 26.02.2013 open subscription 1,092nd day from the date of placement (23.02.2016) 6 RU000A0JTP09 RU000A0JTP09 8.50 % 8.50 % 8.50 % 64 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate 8.50 % 8.50 % 8.50 % 8.50 % The first coupon yield of 01 series bond issue was paid on August 27, 2013. The total amount of yield paid on the first coupon amounted to 221.9 million rubles, the amount of yield of the first coupon paid per one bond amounted to 42.38 rubles. The second coupon yield of 01 series bond issue was paid on February 27, 2014. The total amount of yield paid on the second coupon amounted to 211.9 million rubles, the amount of yield of the second coupon paid per one bond amounted to 42.38 rubles. The third coupon yield of 01 series bond issue was paid on August 26, 2014. The total amount of yield paid on the third coupon amounted to 211.9 million rubles, the amount of yield of the third coupon paid per one bond amounted to 42.38 rubles. The fourth coupon yield of 01 series bond issue was paid on February 24, 2015. The total amount of yield paid on the fourth coupon amounted to 211.9 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 42.38 rubles. The fifth coupon yield of 01 series bond issue was paid on August 25, 2015. The total amount of yield paid on the fifth coupon amounted to 211.9 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 42.38 rubles. The sixth coupon yield of 01 series bond issue was paid on February 23, 2016. The total amount of yield paid on the sixth coupon amounted to 211.9 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 42.38 rubles. On February 23, 2016 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of the 01 series. Based on trading for the period from 04.01.2016 to 22.02.2016 the weighted average price of transactions with bonds of 01 series varied from min 99.66% (15.01.2016) to max 99.96% (20.02.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 99.66% (13.01.2016, 14.01.2016 and 15.01.2016) to max 99.96% (20.02.2016 and 22.02.2016). Bond issue of PJSC “Magnit” of BO-08 series: In 2013 the Company offered its investors the nineth Exchange-traded bond issue. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the exchange-traded bonds of BO-08 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-08 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on April 2, 2013. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-08 series: Identification number of the issue and the date of its assignment № 4B02-08-60525-P of August 10, 2011 65 Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles 100% of nominal value 02.04.2013 open subscription 1,092nd day from the date of placement (29.03.2016) 6 RU000A0JTT21 RU000A0JTT21 8.40 % 8.40 % 8.40 % 8.40 % 8.40 % 8.40 % 8.40 % The first coupon yield of BO-08 series Exchange-traded bond issue was paid on October 1, 2013. The total amount of yield paid on the first coupon amounted to 209.4 million rubles, the amount of yield of the first coupon paid per one bond amounted to 41.88 rubles. The second coupon yield of BO-08 series Exchange-traded bond issue was paid on April 1, 2014. The total amount of yield paid on the second coupon amounted to 209.4 million rubles, the amount of yield of the second coupon paid per one bond amounted to 41.88 rubles. The third coupon yield of BO-08 series Exchange-traded bond issue was paid on September 30, 2014. The total amount of yield paid on the third coupon amounted to 209.4 million rubles, the amount of yield of the third coupon paid per one bond amounted to 41.88 rubles. The fourth coupon yield of BO-08 series Exchange-traded bond issue was paid on March 31, 2015. The total amount of yield paid on the fourth coupon amounted to 209.4 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 41.88 rubles. The fifth coupon yield of BO-08 series Exchange-traded bond issue was paid on September 29, 2015. The total amount of yield paid on the fifth coupon amounted to 209.4 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 41.88 rubles. The sixth coupon yield of BO-08 series Exchange-traded bond issue was paid on March 29, 2016. The total amount of yield paid on the sixth coupon amounted to 209.4 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 41.88 rubles. On March 29, 2016 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of the BO-08 series. Based on trading for the period from 04.01.2016 to 29.03.2016 the weighted average price of transactions with Exchange-traded bonds of BO-08 series was not calculated because there were no transactions within this period. Acknowledgeable quote within this period amounted to 97.20%. 66 Bond issue of PJSC “Magnit” of BO-09 series: In 2013 the Company offered its investors the ninth Exchange-traded bond issue. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the exchange-traded bonds of BO-09 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-09 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on April 4, 2013. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-09 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate № 4B02-09-60525-P of August 10, 2011 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles 100% of nominal value 02.04.2013 open subscription 1,092nd day from the date of placement (29.03.2016) 6 RU000A0JTT39 RU000A0JTT39 8.40 % 8.40 % 8.40 % 8.40 % 8.40 % 8.40 % 8.40 % The first coupon yield of BO-09 series Exchange-traded bond issue was paid on October 1, 2013. The total amount of yield paid on the first coupon amounted to 209.4 million rubles, the amount of yield of the first coupon paid per one bond amounted to 41.88 rubles. The second coupon yield of BO-09 series Exchange-traded bond issue was paid on April 1, 2014. The total amount of yield paid on the second coupon amounted to 209.4 million rubles, the amount of yield of the second coupon paid per one bond amounted to 41.88 rubles. The third coupon yield of BO-09 series Exchange-traded bond issue was paid on September 30, 2014. The total amount of yield paid on the third coupon amounted to 209.4 million rubles, the amount of yield of the third coupon paid per one bond amounted to 41.88 rubles. 67 The fourth coupon yield of BO-09 series Exchange-traded bond issue was paid on March 31, 2015. The total amount of yield paid on the fourth coupon amounted to 209.4 million rubles, the amount of yield of the fourth coupon paid per one bond amounted to 41.88 rubles. The fifth coupon yield of BO-09 series Exchange-traded bond issue was paid on September 29, 2015. The total amount of yield paid on the fifth coupon amounted to 209.4 million rubles, the amount of yield of the fifth coupon paid per one bond amounted to 41.88 rubles. The sixth coupon yield of BO-09 series Exchange-traded bond issue was paid on March 29, 2016. The total amount of yield paid on the sixth coupon amounted to 209.4 million rubles, the amount of yield of the sixth coupon paid per one bond amounted to 41.88 rubles. On March 29, 2016 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of the BO-09 series. Based on trading for the period from 04.01.2016 to 29.03.2016 the weighted average price of transactions with Exchange-traded bonds of BO-09 series was not calculated because there were no transactions within this period. Acknowledgeable quote within this period amounted to 97.31%. Bond issue of PJSC “Magnit” of 02 series: In 2015 the Company offered its investors the issue of non-convertible certified interest- bearing bonds to the bearer with the obligatory centralized custody of 02 series. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the bonds of 02 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the non-convertible certified interest-bearing bonds payable to the bearer of 02 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on May 15, 2015. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of 02 series: Date and the number of state registration Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 68 № 4-02-60525-P of December 27, 2012 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles 100% of nominal value 15.05.2015 open subscription 1,092nd day from the date of placement (11.05.2018) 6 RU000A0JVE99 RU000A0JVE99 12.10 % 12.10 % 12.10 % 12.10 % 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate 12.10 % 12.10 % 12.10 % The first coupon yield of 02 series bond issue was paid on November 13, 2015. The total amount of yield paid on the first coupon amounted to 301.65 million rubles, the amount of yield of the first coupon paid per one bond amounted to 60.33 rubles. The second coupon yield of 02 series bond issue was paid on May 13, 2016. The total amount of yield paid on the second coupon amounted to 301.65 million rubles, the amount of yield of the second coupon paid per one bond amounted to 60.33 rubles. On May 13, 2016 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of the 02 series. Based on trading for the period from 04.01.2016 to 13.05.2016 the weighted average price of transactions with bonds of 02 series varied from min 100.00% (18.03.2016) to max 103.00% (22.04.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 99.91% (12.05.2016, 13.05.2016) to max 103.00% (22.04.2016, from 25.04.2016 to 28.04.2016). Bond issue of PJSC “Magnit” of 03 series: In 2015 the Company offered its investors the issue of non-convertible certified interest- bearing bonds to the bearer with the obligatory centralized custody of 03 series. Issue comprised 5 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 3 years. The purpose of the issue of the bonds of 03 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the non-convertible certified interest-bearing bonds payable to the bearer of 03 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on May 15, 2015. The number of the placed securities amounted to 5 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of 03 series: Date and the number of state registration Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 69 № 4-03-60525-P of December 27, 2012 5,000,000,000 rubles 5,000,000 bonds 1,000 rubles 100% of nominal value 15.05.2015 open subscription 1,092nd day from the date of placement (11.05.2018) 6 RU000A0JVE81 RU000A0JVE81 12.10 % 12.10 % 12.10 % 3 coupon interest rate 4 coupon interest rate 5 coupon interest rate 6 coupon interest rate 12.10 % 12.10 % 12.10 % 12.10 % The first coupon yield of 03 series bond issue was paid on November 13, 2015. The total amount of yield paid on the first coupon amounted to 301.65 million rubles, the amount of yield of the first coupon paid per one bond amounted to 60.33 rubles. The second coupon yield of 03 series bond issue was paid on May 13, 2016. The total amount of yield paid on the second coupon amounted to 301.65 million rubles, the amount of yield of the second coupon paid per one bond amounted to 60.33 rubles. On May 13, 2016 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of the 03 series. Based on trading for the period from 04.01.2016 to 13.05.2016 the weighted average price of transactions with bonds of 03 series varied from min 99.75% (12.05.2016) to max 102.13% (28.04.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 99.50% (12.05.2016, 13.05.2016) to max 102.20% (28.04.2016, 29.04.2016, 04.05.2016, 05.05.2016, 06.05.2016, 10.05.2016, 11.05.2016). Bond issue of PJSC “Magnit” of BO-10 series: In 2015 the Company offered its investors the tenth Exchange-traded bond issue. Issue comprised 10 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 1 year. The purpose of the issue of the exchange-traded bonds of BO-10 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-10 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on July 23, 2015. The number of the placed securities amounted to 10 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-10 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code № 4B02-10-60525-P of July 30, 2013 10,000,000,000 rubles 10,000,000 bonds 1,000 rubles 100% of nominal value 23.07.2015 open subscription 364th day from the date of placement (21.07.2016) 2 RU000A0JVMV2 RU000A0JVMV2 70 Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 11.60 % 11.60 % 11.60 % The first coupon yield of BO-10 series Exchange-traded bond issue was paid on January 21, 2016. The total amount of yield paid on the first coupon amounted to 587.4 million rubles, the amount of yield of the first coupon paid per one bond amounted to 57.84 rubles. The second coupon yield of BO-10 series Exchange-traded bond issue was paid on July 21, 2016. The total amount of yield paid on the second coupon amounted to 587.4 million rubles, the amount of yield of the second coupon paid per one bond amounted to 57.84 rubles. On July 21, 2016 PJSC “Magnit” fulfilled its obligations to bond holders on time and in full and redeemed the nominal value of bonds of the BO-10 series. Based on trading for the period from 04.01.2016 to 21.07.2016 the weighted average price of transactions with bonds of BO-10 series varied from min 99.90% (12.05.2016) to max 100.70% (07.03.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 100.00% (08.02.2016, 20.06.2016, 22.06.2016, 27.06.2016, 07.07.2016, 18.07.2016, 20.07.2016, 21.07.2016) to max 100.70% (07.03.2016). Bond issue of PJSC “Magnit” of BO-11 series: In 2015 the Company offered its investors the eleventh Exchange-traded bond issue. Issue comprised 10 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 1 year and a half. The purpose of the issue of the exchange-traded bonds of BO-11 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-11 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on October 20, 2015. The number of the placed securities amounted to 10 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-11 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code № 4B02-11-60525-P of July 30, 2013 10,000,000,000 rubles 10,000,000 bonds 1,000 rubles 100% of nominal value 20.10.2015 open subscription 546th day from the date of placement (18.04.2017) 3 RU000A0JVUZ6 RU000A0JVUZ6 71 Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 11.70 % 11.70 % 11.70 % 11.70 % The first coupon yield of BO-11 series Exchange-traded bond issue was paid on April 19, 2016. The total amount of yield paid on the first coupon amounted to 583.4 million rubles, the amount of yield of the first coupon paid per one bond amounted to 58.34 rubles. The second coupon yield of BO-11 series Exchange-traded bond issue was paid on October 18, 2016. The total amount of yield paid on the second coupon amounted to 583.4 million rubles, the amount of yield of the second coupon paid per one bond amounted to 58.34 rubles. Based on trading for the period from 04.01.2016 to 30.12.2016 the weighted average price of transactions with bonds of BO-11 series varied from min 91.53% (15.06.2016) to max 101.75% (05.08.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 91.53% (15.06.2016) to max 101.75% (05.08.2016, 08.08.2016, 09.08.2016, 10.08.2016, 11.08.2016). Bond issue of PJSC “Magnit” of BO-001P-01 series: In 2015 the Company offered its investors the Exchange-traded bond issue of BO-001P- 01 series. Issue comprised 10 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is 1 year and a half. The purpose of the issue of the exchange-traded bonds of BO-001P-01 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the certified interest-bearing non-convertible Exchange-traded bonds payable to bearer of BO-001P-01 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX stock exchange commenced on November 11, 2015. The number of the placed securities amounted to 10 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-001P-01 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code № 4B02-01-60525-P-001P of November 5, 2015 10,000,000,000 rubles 10,000,000 bonds 1,000 rubles 100% of nominal value 11.11.2015 open subscription 546th day from the date of placement (10.05.2017) 3 RU000A0JVXM8 72 ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate RU000A0JVXM8 11.20 % 11.20 % 11.20 % 11.20 % The first coupon yield of BO-001P-01 series Exchange-traded bond issue was paid on May 11, 2016. The total amount of yield paid on the first coupon amounted to 558.5 million rubles, the amount of yield of the first coupon paid per one bond amounted to 55.85 rubles. The second coupon yield of BO-001P-01 series Exchange-traded bond issue was paid on November 9, 2016. The total amount of yield paid on the second coupon amounted to 558.5 million rubles, the amount of yield of the second coupon paid per one bond amounted to 55.85 rubles. Based on trading for the period from 04.01.2016 to 30.12.2016 the weighted average price of transactions with Exchange-traded bonds of BO-001P-01 series varied from min 99.61% (25.01.2016, 26.01.2016) to max 101.42% (29.08.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 99.54% (04.01.2016, 05.01.2016) to max 101.42% (29.08.2016). Bond issue of PJSC “Magnit” of BO-001P-02 series: In 2016 the Company offered its investors the Exchange-traded bond issue of BO-001P- 02 series. Issue comprised 10 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is two years. The purpose of the issue of the Exchange-traded bonds of BO-001P-02 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the non-convertible interest-bearing certified Exchange-traded bonds payable to bearer of BO-001P-02 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX Stock Exchange commenced on February 29, 2016. The number of the placed securities amounted to 10 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-001P-02 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons № 4B02-02-60525-P-001P of February 24, 2016 10,000,000,000 rubles 10,000,000 bonds 1,000 rubles 100% of nominal value 29.02.2016 open subscription 728th day from the date of placement (26.02.2018) 4 73 Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate RU000A0JW662 RU000A0JW662 11.20 % 11.20 % 11.20 % 11.20 % 11.20 % The first coupon yield of BO-001P-02 series Exchange-traded bond issue was paid on August 29, 2016. The total amount of yield paid on the first coupon amounted to 558.5 million rubles, the amount of yield of the first coupon paid per one bond amounted to 55.85 rubles. Based on trading for the period from 29.02.2016 to 30.12.2016 the weighted average price of transactions with Exchange-traded bonds of BO-001P-02 series varied from min 100.15% (29.02.2016) to max 102.75% (15.09.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 100.40% (01.03.2016) to max 102.75% (15.09.2016, 16.09.2016, 19.09.2016). Bond issue of PJSC “Magnit” of BO-001P-03 series: In 2016 the Company offered its investors the Exchange-traded bond issue of BO-001P- 03 series. Issue comprised 10 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is two years. The purpose of the issue of the Exchange-traded bonds of BO-001P-03 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the non-convertible interest-bearing certified Exchange-traded bonds payable to bearer of BO-001P-03 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX Stock Exchange commenced on April 12, 2016. The number of the placed securities amounted to 10 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-001P-03 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code № 4B02-03-60525-P-001P of April 4, 2016 10,000,000,000 rubles 10,000,000 bonds 1,000 rubles 100% of nominal value 12.04.2016 open subscription 728th day from the date of placement (10.04.2018) 4 RU000A0JWCF4 RU000A0JWCF4 74 Interest rate on the basis of the auction results 1 coupon interest rate 2 coupon interest rate 3 coupon interest rate 4 coupon interest rate 10.60 % 10.60 % 10.60 % 10.60 % 10.60 % The first coupon yield of BO-001P-03 series Exchange-traded bond issue was paid on October 11, 2016. The total amount of yield paid on the first coupon amounted to 528.5 million rubles, the amount of yield of the first coupon paid per one bond amounted to 52.85 rubles. Based on trading for the period from 12.04.2016 to 30.12.2016 the weighted average price of transactions with Exchange-traded bonds of BO-001P-03 series varied from min 100.00% (15.04.2016) to max 102.30% (04.10.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 100.00% (15.04.2016, from 18.04.2016 to 20.04.2016) to max 102.30% (from 04.10.2016 to 07.10.2016). Bond issue of PJSC “Magnit” of BO-001P-04 series: In 2016 the Company offered its investors the Exchange-traded bond issue of BO-001P- 04 series. Issue comprised 10 million securities with the nominal value of 1 thousand rubles. Maturity of the issue is two years. The purpose of the issue of the Exchange-traded bonds of BO-001P-04 series was to attract funds to finance operating activity and expansion of “Magnit” group of companies, to reduce the cost of credit portfolio as well as to build public credit history. Placement of the non-convertible interest-bearing certified Exchange-traded bonds payable to bearer of BO-001P-04 series with the obligatory centralized custody of PJSC “Magnit” on the MICEX Stock Exchange commenced on July 5, 2016. The number of the placed securities amounted to 10 million bonds which constitutes 100% of the total number of securities subject to placement. The bond issue was realized in full in the course of auction in the first day of placement. Parameters of the bond issue of PJSC “Magnit” of BO-001P-04 series: Identification number of the issue and the date of its assignment Volume of the issue Number of securities Nominal value of each security Placement price Date of placement Method of placement Redemption date Number of coupons Trading code ISIN code Interest rate on the basis of the auction results 1 coupon interest rate 75 № 4B02-04-60525-P-001P of June 30, 2016 10,000,000,000 rubles 10,000,000 bonds 1,000 rubles 100% of nominal value 05.07.2016 open subscription 541st day from the date of placement (28.12.2017) 3 RU000A0JWML1 RU000A0JWML1 10.00 % 10.00 % 2 coupon interest rate 3 coupon interest rate 10.00 % 10.00 % The first coupon yield of BO-001P-04 series Exchange-traded bond issue was paid on December 29, 2016. The total amount of yield paid on the first coupon amounted to 484.9 million rubles, the amount of yield of the first coupon paid per one bond amounted to 48.49 rubles. Based on trading for the period from 05.07.2016 to 30.12.2016 the weighted average price of transactions with Exchange-traded bonds of BO-001P-04 series varied from min 100.00% (08.07.2016, 02.08.2016) to max 100.65% (05.10.2016) of the nominal value. Acknowledgeable quote within this period fluctuated from min 100.00% (29.07.2016, 01.08.2016, 02.08.2016) to max 100.65% (from 05.10.2016 to 07.10.2016, from 10.10.2016 to 13.10.2016). SHARES TRADING The shares of PJSC “Magnit” entered the Russian stock market in April 2006. On April 14, 2006 the shares of PJSC “Magnit” were admitted to trading in the section of the List “Listed securities but not included into the quotation lists” of non-profit partnership ““Russian Trading System” Stock Exchange”. On April 24, 2006 trading of PJSC “Magnit” shares in the List of non-listed securities of Close joint-stock company “MICEX Stock Exchange” commenced. On April 28, 2006 the IPO of PJSC “Magnit” on the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX) was completed. The price of one share of PJSC “Magnit” in the course of offering on RTS and MICEX was determined on the level of 27 USD. Proceeds from the stock comprising 18.94% of the charter capital amounted to 368,355 million USD. Deutsche UFG functioned as an IPO coordinator; foreign investors could participate by purchasing the securities of “Magnit” according to the rule “S”. Since December 11, 2007 the shares of PJSC “Magnit” have been included into the Quotation list “B” of OJSC “Russian Trading System” Stock Exchange”. OJSC “Magnit” shares have been admitted to trading in the corresponding list on December 13, 2007. On December 21, 2007 PJSC “Magnit” shares were included in the quotation list “B” of CJSC “MICEX SE” and admitted to trading in the corresponding list. On February 13, 2008 OJSC “Magnit” announced its intention to list global depositary receipts (“GDRs”) representing its ordinary shares on the London Stock Exchange in connection with an offering by the Company of 11,300,000 newly issued ordinary shares in the form of GDRs and shares (including as part of the exercise of statutory pre-emptive rights by the existing shareholders of the Company and by a Company’s shareholder of ordinary shares in the form of shares and GDRs. The offer price was set at 42.50 USD per share. The offer price in ruble terms was set based on the rate of 23.4450 rubles per dollar. A total of 11,245,660 ordinary shares were offered including 9,719,638 shares allocated to international institutional investors. In connection with the offering the selling shareholder has granted the joint bookrunners an over-allotment option to purchase up to an additional 506,585 shares at the offer price which was exercised in full. 76 Conditional dealings in the GDRs commenced on the London Stock Exchange on April 16, 2008 (5 GDRs representing an interest in one share). Admission of the GDRs to the Official List of the UK Listing Authority occurred on April 22, 2008. Proceeds from the offering amounted to approximately 480.25 million USD and were used to finance further expansion of the Company’s chain of hypermarkets as well as to continue the expansion of its convenience store operations and further development of its logistics capabilities. Since July 22, 2009 ordinary shares of the Company were included (transferred) into the Quotation list “A” of the second level at the “Russian Trading System” Stock Exchange”. On August 7, 2009 ordinary shares of the Company were included (transferred) into the Quotation list “A” of the second level at the Moscow Interbank Currency Exchange and admitted to trading in the corresponding list. On September 2, 2009 PJSC “Magnit” announced its intention to offer additional 11,154,918 ordinary shares by public subscription. The offer price amounted to 65 USD per ordinary share and 13 USD per GDR. A total of 5,729,413 ordinary shares were offered. 5,680,000 newly issued ordinary shares in the form of GDRs have been allocated to international institutional investors, resulting in a total free float of 46.51% of the Company’s issued share capital as of December 31, 2009. Gross proceeds to the Company from the follow-on offering amounted to approximately 369.2 USD and were used to finance further expansion of its chain of hypermarkets as well as to continue the expansion of its convenience stores operations and further development of its logistic capabilities. Since November 14, 2010 shares of PJSC “Magnit” have been included (transferred) into the Quotation list “A” of the first level at the “Russian Trading System” Stock Exchange”. According to the Instruction of CJSC “MICEX Stock Exchange ” № 1387-p of 29.12.2010 PJSC “Magnit” shares are included in (transferred to) the quotation list “A” of the first level of CJSC “MICEX Stock Exchange”. On November 30, 2011 PJSC “Magnit” announced its intention to offer newly issued ordinary shares via an accelerated bookbuild placing to Russian and international institutional investors. In connection with the placement the Company has registered with the Russian Federal Financial Market Service 10,813,516 new shares to be placed through an open subscription. The offer price in the Placement has been set at US$ 85 per new share. Payments for shares in rubles were made at an exchange rate of US$1 = RUB 30.8486. The Company placed 5,586,282 ordinary shares out of which 4,117,648 shares were allocated to investors resulting in a free float of 53.83% of the Company’s issued share capital as of December 31, 2011. Gross proceeds to the Company from the placement of additional shares amounted to approximately US$ 475 mn and used to finance its capital expenditure program aimed at further expansion of its chain of hypermarkets as well as the expansion of its convenience store operations and the further development of its logistics capabilities. On December 19, 2011 ordinary shares of PJSC “Magnit” were excluded from the Quotation list “A” of the first level of OJSC “RTS Stock Exchange” as a result of its reorganization through merger with CJSC MICEX. 77 Since June 18, 2013 the shares of PJSC "Magnit" have been included into the Blue Chip Since June 18, 2013 the shares of PJSC "Magnit" have been included into the Blue Chip Since June 18, 2013 the shares of PJSC "Magnit" have been included into the Blue Chip Index Constituents of MICEX. Moscow Exchange Blue Chip Index is an indicator of the market Index Constituents of MICEX. Moscow Exchange Blue Chip Index is an indicator of the market Index Constituents of MICEX. Moscow Exchange Blue Chip Index is an indicator of the market of the most liquid stocks of t he Russian companies. The index is calculated on the basis of the of the most liquid stocks of the Russian companies. The index is calculated on the basis of the most liquid stocks of the Russian stock market. The index is based on the share prices most liquid stocks of the Russian stock market. The index is based on the share prices most liquid stocks of the Russian stock market. The index is based on the share prices denominated in rubles. On June 6, 2014 the ordinary registered shares of PJSC “Magnit” were in included in the On June 6, 2014 the ordinary registered shares of PJSC “Magnit” were in include On June 6, 2014 the ordinary registered shares of PJSC “Magnit” were in include Petersburg Exchange”. list of securities admitted to trading on the OJSC “Saint-Petersburg Exchange”. list of securities admitted to trading on the OJSC “Saint According to trading held from 04.01.2016 to 30.12.2016 on PJSC “Moscow Exchange” PJSC “Moscow Exchange” According to trading held from 0 the average weighted price of transactions with MICEX Stock Exchange” the average weighted price of transactions with (previously – CJSC “MICEX Stock Exchange shares varied from min 8,310 310.00 rubles (27.06.2016) to max 11,609.00 (29.01.2016 According to the trading held from 04.01.2016 to 30.12.2016 on the London Stock According to the trading held from 04.01.2016 to 30.12.2016 on the London Stock According to the trading held from 04.01.2016 to 30.12.2016 on the London Stock global depositary receipts as of closing varied from Exchange the price of transactions with the global depositary receipts as of closing varied from Exchange the price of transactions with the min $29.18 (27.06.2016) to max $44.15 (30.12.2016). min $29.18 (27.06.2016) to max $44.15 (30.12.2016). 29.01.2016). Market capitalization of PJSC “Magnit” as of December 30 Market capitalization of PJSC “Magnit” as of December 3 1,031,475,260,340.00 rubles according to SE”). .00 rubles according to PJSC “Moscow Exchange” (previou to PJSC “Moscow Exchange” (previously – CJSC “MICEX 0, 2016 amounted 78 13. TRANSACTIONS EXECUTED WITHIN THE YEAR 2016 CONSIDERED MAJOR TRANSACTIONS ACCORDING TO THE FEDERAL LAW “ON JOINT STOCK COMPANIES” 1. Date of Transaction Subject and other essentials of transaction Parties of transaction 01.06.2016 The provision of the guarantee by the issuer under the General agreement No. 29- 15/1/691 of 28.09.2015 on opening of the revolving framework credit line with tiered interest rates concluded between PJSC “Sberbank” and JSC “Tander” The Creditor: PJSC “Sberbank” The Borrower: JSC “Tander” The Guarantor: PJSC “Magnit” Transaction amount in money terms, thousand rubles. Transaction amount in percent of the issuer’s balance sheet assets as of the termination date of the last accounting period preceding the date of transaction, % Deadline for the fulfillment of the obligations under the transaction 35,000,000 31.68 27.09.2022 Information obligations on performance of specified Issuer’s authority which made a decision on approval of the transaction, date of decision (date and number of minutes) Other information on transaction indicated at the issuer’s discretion 2. Date of Transaction Subject and other essentials of transaction Parties of transaction 79 JSC “Tander” timely and in full fulfils its obligation to the Creditor. There are no cases when a Creditor makes demands to the Guarantor to fulfill the unperformed obligations of JSC “Tander”. The transaction was approved by the General Shareholders Meeting on December 22, 2015 (Minutes w/o № of 24.12. 2015). none 28.06.2016 The provision of the guarantee by the issuer under the General agreement No. 42- 0-10/2-2015 of 25.08.2015 on the procedure of execution of credit transactions concluded between JSC “Russian Agricultural Bank” and JSC “Tander” (as amended by the additional agreement No. 3 of 28.06.2016) The Creditor: JSC “Russian Agricultural Bank” The Borrower: JSC “Tander” The Guarantor: PJSC “Magnit” Transaction amount in money terms, thousand rubles. Transaction amount in percent of the issuer’s balance sheet assets as of the termination date of the last accounting period preceding the date of transaction, % 40,000,000 36.21 Deadline for the fulfillment of the obligations under the transaction Information obligations on performance of specified Issuer’s authority which made a decision on approval of the transaction, date of decision (date and number of minutes) Other information on transaction indicated at the issuer’s discretion 3. Date of Transaction Subject and other essentials of transaction Parties of transaction The agreement shall be valid for the whole amount of Credits which can be provided to the Borrower by the Creditor in accordance with the Credit agreement, for the period of validation of the Credit agreement extended by 180 (One hundred and eighty) calendar days. JSC “Tander” timely and in full fulfils its obligation to the Creditor. There are no cases when a Creditor makes demands to the Guarantor to fulfill the unperformed obligations of JSC “Tander”. The transaction was approved by the annual General Shareholders Meeting on June 2, 2016 (Minutes w/o № of 03.06. 2016). none 16.08.2016 The provision of the guarantee by the issuer under the General agreement No. 29- 15/1/887 of 16.08.2016 on opening of the revolving framework credit line with tiered interest rates concluded between PJSC “Sberbank” and JSC “Tander” The Creditor: PJSC “Sberbank” The Borrower: JSC “Tander” The Guarantor: PJSC “Magnit” Transaction amount in money terms, thousand rubles. Transaction amount in percent of the issuer’s balance sheet assets as of the termination date of the last accounting period preceding the date of transaction, % Deadline for the fulfillment of the obligations under the transaction 53,000,000 41.55 14.08.2023 Information obligations on performance of specified JSC “Tander” timely and in full fulfils its obligation to the Creditor. There are no cases when a Creditor makes demands to the Guarantor to fulfill the unperformed 80 Issuer’s authority which made a decision on approval of the transaction, date of decision (date and number of minutes) obligations of JSC “Tander”. The transaction was approved by the annual General Shareholders Meeting on June 2, 2016 (Minutes w/o № of 03.06. 2016). Other information on transaction indicated at the issuer’s discretion none 81 14. TRANSACTIONS EXECUTED WITHIN THE YEAR 2016 CONSIDERED RELATED PARTY TRANSACTIONS ACCORDING TO THE FEDERAL LAW “ON JOINT STOCK COMPANIES” Information on the transactions executed in 2016 year and considered as related party transactions according to the Federal Law “On Joint Stock Companies” is represented in the annex to the Annual Report (ref. Annex №5). 82 15. MAIN RISK FACTORS INHERENT IN THE СOMPANY OPERATION The Company’s policy of the risk management Since the Issuer and its subsidiaries operate within one group of companies, where PJSC “Magnit” serves as the holding company (hereafter - “the Group”, “Magnit” retail chain”, “the Company” or “the Issuer“), the description of risks to the greater extent is provided for the entire Group. The description of risk factors provided herein is not complete, it only reflects the view of the Company and its individual assessment. Apart from the risks specified in this report, other risks which are not included in this report may negatively affect the return on investments in the securities of PJSC “Magnit”. Other risks, including those which the Company is not aware of or which it considers immaterial at the present time, may lead to the decrease of earnings, increase of expenses or other events and (or) consequences, in the result of which the price of the Company’s securities may fall. In case one or several risks hereof occur, PJSC “Magnit” will take all possible measures to minimize the effect of negative changes. Today it is impossible to determine specific acts of the Company if any out of the provided risks occur because the elaboration of measures adequate to the corresponding events is complicated due to uncertainty of the situation in future. Parameters of the taken measures will depend on the specific situation on a case-by-case basis. PJSC “Magnit” cannot guarantee that the measures taken to overcome negative changes will remedy the situation, as the majority of the described risks are beyond the Company’s control. The Company and the Group apply systematic approach to risk management in accordance with the Internal control and risk management policy of PJSC “Magnit” (hereinafter – “the Policy”). The key elements of the risk management policy in each area are: • Risk identification • Risk assessment • Elaboration and implementation of risk management framework • Ongoing monitoring of risks Risk management is carried out in respect of the entire Group. In respect of the industry risks the mid and long-term assessment of the industry is made based on the macroeconomic forecasts of the Ministry of Economic Development and Trade and investment analysts. The assessment covers the future demand based on the forecasts of the population incomes and the level of consumption. The assessments includes industry trends in respect of various channels, segmentation of demand by channels and competitive environment. Based on the analysis the strategy of development is worked out to strengthen the competitive position and increase the market share of the Company. In respect of the country and regional risks, the Company monitors political and economic situation and estimates the level of risk of acts of elements, possible disruption of transportation in the regions of “Magnit” stores’ presence. Territorial diversification of operation of “Magnit” group of companies contributes to additional reduction of these risks. In respect of the financial risks, the level of interest rate, currency, credit and liquidity risks is estimated. 83 Interest risk is managed by means of choosing the most optimal financing methods and matching of timing of mobilization of resources with the timing of the projects which are financed by them. To optimize the resources the Company develops its credit history, expands the data base of potential creditors and diversifies instruments to receive the funds. The reduction of cost of the received resources is achieved due to the policy aiming at improvement of the information transparency. One of the tools of interest risk management is the forecasting the changes of interest rates and assessment of the appropriate leverage level of the Group adjusted for this possible change of interest rates. In respect of the currency risk, the Company estimates forecasts of the analysts on the possible change of the exchange rates and makes decisions on the acceptable amount of assets and liabilities in the foreign currency. In respect of the liquidity risks, the Issuer and the Group in general maintain well- balanced ratio of assets and liabilities in terms of timing. In respect of credit risks, the Company analyzes financial position of counteragents and applies the system of limits. Legal risks management is based on the strict compliance with the applicable Russian legislation. Legal department monitors all changes in legislation concerning the Company’s activity, and conducts legal examination of all contracts and agreements. INDUSTRY RISKS Risks related to the consumer demand and competition Unfavorable changes of macroeconomic conditions and decrease of consumer demand in Russia may negatively affect sales and income of the Group The Group operates in the FMCG retail sector. The development of the retail sector, in which the Group operates, in many aspects depends on macroeconomic factors because the demand for the consumer goods is conditioned by the disposable income of population. In case of economic instability the decrease of the real disposable income of population may lead to weaker dynamics of growth and profitability of the industry. It should be noted that the state of the Russian economy is conditioned a lot by the oil price and other energy and mineral resources on the world market. Decrease of oil prices and prices on the other mineral resources may have material negative impact on the economy of the Russian Federation. Besides, introduction and further tightening of economic sanctions against the Russian Federation by the United States of America, European Union and other countries due to the developments in Ukraine was and continues to be detrimental to the state of the economy. Consumer demand on the markets where the Group operates depends on the number of factors which are beyond the Group’s control, including demographic factors, consumer preferences and their purchasing power. The decline of the consumer demand or the change of the consumer preferences may significantly reduce sales and income of the Group and negatively influence the business activity, financial condition and operational results of the Group and the Issuer. Besides, seasonality of the consumer demand may lead to considerable fluctuations of the Group’s results in different periods of time. High level of competition may lead to the decline of the Group’s market share and the reduction of its revenue 84 The Group operates in the territory of the Russian Federation with the highest concentration in the Southern, North-Caucasian, Central and Volga federal districts. The Group plans to continue its expansion in the other regions of Russia: North-West, Urals and Siberia federal districts. Retail market of the Southern federal region, where the Issuer is registered and where its Head Office is located, as well as retail markets of the Central and Volga federal districts, where most of the Group’s stores are located, are quite competitive regional markets in Russia and are represented by most of the large Russian players as well as by a number of foreign companies. Russian retail is characterized by a high level of competition. The Group competes with a the significant number of Russian and international companies. In recent years the growth of consumer demand in Russia has attracted new market participants and resulted in the increase of competition. Retail chains compete with each other primarily on the ground of the store locations, product quality, service and price, product mix and store conditions. Entrance of additional players to the Russian market may further intensify competition and reduce the efficiency of the Group. Main competitors of the Group in the “convenience store” format are “Pyaterochka” and “Dixy”, while in the “hypermarket” format these are “Auchan”, “Perekrestok”, “Karusel”, “Lenta”, “O’key”. The Group also competes with regional and local retail chains, individual groceries and food markets. Some of the Group’s competitors which are present on the market today, and also those planning to enter the Russian market, are large international companies and have better opportunities to mobilize the resources than the Group. Moreover, many other international players including those with better financial and other opportunities vs. the Group will enter the Russian market in the nearest years through acquisition of local players or building up their own greenfield networks. If the above process is intensive, competition may substantially increase, which may negatively influence the market share of the Group and its competitive position. The ability of “Magnit” retail chain to retain its competitive position depends on its opportunities to maintain and develop the existing stores and open new stores in good locations, as well as to offer competitive prices and services. There is no guarantee that the Group will be able to successfully compete with the existing or new competitors in future. At the current stage of competitive activity considerable risks for the Group are also linked to the fact that the main competitors of the Group use more aggressive methods, such as winning the additional target markets through expansion of franchising schemes. Such approach enables the competitors to expand their presence rapidly in many regions of Russia as well as to considerably reduce the costs of the new store openings. Non-use of the franchising schemes by the Group which may lead to serious reduction of flexibility in geographical coverage, and as a result to the loss of a considerable market share. These factors together with the economic environment and strategy of the discount pricing may lead to further competition intensification and negatively affect business, financial position and operational results of the Group and the Company. Risks related to the intensive growth Failure of the Group’s strategy of intensive expansion may delay its further growth The stores operating under “Magnit” brand are located in the Southern, Central, Volga, North-Caucasian, North-Western, Urals and Siberian federal region. Following its strategy the Group plans to considerably increase the number of its stores 85 in the above regions maintaining the same development rates as well as to further expand its chain in a number of subjects of the Russian Federation. The development strategy of the Group makes it dependent on the economic conditions and some other factors. The successful implementation of the Group’s development strategy depends on its ability to identify and acquire the suitable premises or land plots for store construction on commercially reasonable terms, to open new stores in due time in compliance with the Group standards, to employ, train and keep extra store and management personnel and to integrate new stores into the Group’s existing operation on a profitable basis. It is impossible to guarantee that the Group will achieve the target growth and that the new stores will profit. Among other factors, the development strategy plans also depend on the general economic situation, availability of financing and no negative changes in legislation. There is no guarantee that operational, administrative, financial and human resources will be sufficient for successful implementation of the Group’s development strategy. Moreover, there is no guarantee that the expansion plans, if carried out, will have no negative impact on the quality of service and sales profitability. Expansion of the Group through acquisition of other companies or their assets may be fraught with different risks which may have serious negative impact on the economic activity of the Group and its financial position The Group does not rule out the possibility to expand its operation through acquisitions. Acquisition opportunities imply certain risks, including failure to carry out adequate due diligence of the acquirees’ operations, their assets and/or financial position, and much higher financial risks and operational expenses than expected before acquisition. At the same time, there is a risk of impossibility of successful assimilation of operations and personnel of the acquiree, lack of introduction and integration of all necessary systems and control, risk of customer loss, as well as the risk of entering the markets, where the Group has no or minor experience, and/or markets with the limited access to the necessary logistic support and distribution network, as well as the risk of operational disruptions and loss of the Group’s management resources. If the Group is not able to successfully integrate its acquisitions, such failures may have a material negative effect on its financial position and operational results. Failure to raise enough funds may prevent the Group from realization of its expansion plans Implementation of the Group’s expansion strategy may require large capital expenditures. There’s no guarantee that the operational cash flow of the Group and/or borrowings from financial institutions or proceeds received from the stock market would be enough to finance its scheduled expenses in the nearest future. If the Group fails to receive sufficient cash flows or raise sufficient capital to finance its planned expenditures, it may have to cut, slow down or cease expansion of its network. Rapid growth of the Group may lead to deficiency of administrative, industrial and financial resources Historically range of the Group’s operations has been growing fast. The growth is expected to continue in the projected future which may lead to the significant lack of administrative, operational and financial resources. As a result, “Magnit” retail chain will have 86 improvement of particularly to continue the its operational and financial systems, administrative management and management techniques. The Group will also have to achieve strict coordination of operation of transportation, technical, accounting, legal, financial, marketing, warehouse and store personnel. If the Group fails to meet the above challenges, it may negatively influence the operations and financial position of the Group and the Issuer. Due to the ongoing growth, the Group may experience difficulties with continuation of usage, extension and improvement of its management and information system. If the Group fails to maintain its management information system, financial accounting and in-house audit systems at a proper level, its economic activity and financial position may substantially suffer. Besides, there exist a risk of narrowing of the target audience in the course of time if the population income grows significantly, which may lead to the outflow of customers from “Magnit” stores. The Russian food retail market is subject to changing customers’ preferences, needs and trends. The Group’s target audience is mainly the consumers with low or medium income level. If the disposable income will continue to grow, the Group may not be able to adjust the product mix in its stores according to the changed consumer needs, and thus may lose part of its target audience. As a result, the number of customers who shop at the Group’s stores may reduce (or the growth rate of the number of customers may significantly reduce compared to the previous periods), or the size of the average ticket in “convenience” format may reduce (or its growth rate may reduce compared to the previous periods), which could detrimental to on the business of the Group, its operational results, financial position and prospects. Risks related to real estate investments and lease of real estate Lack of reliable information on the real estate market in the Russian Federation makes it difficult to estimate the value of the real estate owned by the Group The amount of reliable public information and research concerning the real estate market in Russia is limited. The volume of the available data is not that comprehensive and complete as similar data on the real estate market in other industrially developed countries. The lack of information makes it difficult to assess the market value and the rent price of the real estate in Russia. Therefore, there is no confidence that the price set to the real estate of the Group reflects its market value. The Group in whole and the Company in particular make substantial investments into the real estate for store premises. The market of any goods including commercial property is subject to fluctuations. Market value of the real estate may decline or grow due to different factors, i.e.: a) changes in the competitive environment; b) changes of the attractiveness level of the real estate on the Russian market in general and on the regional markets where the real estate objects of the Company are located due to the changes of the country and regional risks; c) fluctuations of the demand for commercial real estate. As a result of negative changes on the real estate market, the value of the real estate acquired by the Company or its subsidiaries may decline and thus negatively affect the assets’ value of the Group. Thus, in case of disposal of such property the Group won’t be able to compensate its acquisition costs, what may negatively affect the financial position of the Group and the Company. 87 Inability to obtain rights on the suitable real estate object on commercially reasonable terms, to protect rights of the Group for the real estate or to construct new stores on the acquired land plots may have a material adverse effect on the economic operation and financial position of the Group Ability of the Group to open new stores largely depends on identification and lease and/or acquisition of the real estate appropriate for its needs on commercially reasonable terms. The property market in large cities of Russia is highly competitive, and in conditions of favorable economic environment the competition for and therefore the cost of high quality land plots may increase. If in the future due to any reason, including competition from the other companies, which are interested in the similar objects, the Group is not able to identify and lease and/or buy the new objects in due time, the Group’s anticipated growth will be negatively affected. Even after the Group procures rights on the suitable land plots and premises, it may experience difficulties or delays when obtaining permissions from various regional authorities, required for the exercise of the Group rights to use, renovate or reequip the stores. Therefore, there’s no guarantee that the Group will be able to successfully identify, lease and/or purchase the appropriate real estate objects on acceptable terms. Failure to renew lease contracts for the stores or extend them on reasonable terms may have materially adverse effect on the economic activity and financial position of the Group It is impossible to guarantee that the Group will be able to prolong its lease contracts on acceptable terms, and even the possibility to prolong lease contracts itself upon their expiration. If the Group is not able to extend the lease contracts for its stores as they expire or lease another suitable objects on reasonable terms, or if the actual lease contracts of the Group are terminated for any reason (including loss of right on such objects by the lessor), or if the contract terms are revised in the prejudice of the Group, it may have a negative impact on its financial position and operation results. Deficiency of professional building contractors may negatively affect the development strategy of the Group The ability of the Group to construct and/or equip the new specially built stores is extremely important for its strategy and commercial success. The Group operates in the markets which face the deficiency of highly-skilled contractors able to build new stores in due time and in compliance with standardized requirements of the Group. It is impossible to guarantee that the Group will be able to find sufficient number of qualified projectors which could enable the Group to construct and open new stores in due time. Failure of the Group to construct and equip new stores on the newly acquired land plots in due time may be detrimental to its ability to perform tasks, which are set in its plans of strategic development and to achieve planned operational results. Dispute of the Group’s rights for the real estate or cessation of the Group’s projects for new stores’ construction may have materially adverse effect on the economic activity and financial position of the Group 88 Group’s operations include obtaining of ownership rights on land plots and buildings for the purposes of the construction and/or equipping new stores. Besides, the Group owns buildings and facilities where its offices are located. Russian land and property legislation is complex and often ambiguous, and may contain contradictory provisions at the federal and regional levels. In particular, it is not always clear which state authority is entitled to lend particular land plots, besides the procedures of construction approval are complex, the decisions made in compliance with these procedures can be contested or cancelled. Construction and environmental regulations often contain the requirements which are in practice impossible to meet in full. As a result, ownership and lease rights of the Group for land plots and premises may be challenged by governmental authorities and third parties, and thus, its construction projects may be delayed or cancelled. According to the Russian legislation, real estate transactions may be disputed on many grounds, including ineligibility of the property seller or right holder to dispose such property, breach of internal corporate requirements of the counterparty and failure to register the transfer of rights in the unified state register of rights to real estate and transactions therewith. As a result, breaches in the past real estate transactions may lead to invalidation of such transactions with certain real estate objects, which may negatively influence the rights of the Group on this real estate. It is also worth noting that, Russian law does not require certain encumbrances over real estate (including leases for less than one year and uncompensated use agreements) to be registered with the unified state register of rights to real estate and transactions therewith to legally validate the charge. Besides, the time limits within which the charge liable for registration in the unified state register of rights to real estate and transactions therewith should be entered into this register, are not stipulated in the law. Therefore, there is always a risk that the third parties at any time may register or claim the existence of encumbrances (of which the Group had not been aware of) on the real estate owned or leased by the Group. Risks related to the increase of costs Unionization of the Group employees may have a material adverse effect on its financial position and operational results At the present time the majority of Group employees do not league any labor unions. If the considerable part of Group employees league labor unions, it may substantially affect the payroll costs of the Group and/or settlement of labor conflicts, which in its turn may have a substantial negative impact on financial position and operational results of the Group. Risks related to the possible fluctuations of the prices for raw materials, services used by the Issuer in its operations (separately on the internal and external markets), and their influence on the Issuer’s operations and its fulfillment of obligations on the securities The Company and the Group operate only on the Russian internal market. The Company and the Group do not operate on or plan to expand into the external market. The information about the risks described refers to the internal market. The increase of the Group’s expenses may have a material adverse effect on its profitability. The operating efficiency of the Company and its subsidiaries largely depend on the prices for the products purchased for the retail sale, as well as on the prices for the services 89 used by them in their operation and on the amount of rent payment for movable and real property and construction, acquisition and opening costs. Changes in the agreement processes and procedures of obtaining rights for the land plots (including lease right), fluctuations of the norms and regulations applicable to the Group activity, town-planning, tax and environmental legislations in particular, may entail the growth of the store opening costs or costs for the use of the premises for stores as well as the increase of the payback period for the Issuer and its subsidiaries. The growth of the purchasing prices, the growth of the store opening costs, growth of the price of the land plots (or any other real estate) and the amount of rent payment for their use, as well as the growth of employees’ wages may lead to the substantial growth of the Group’s expenses, and thus, seriously affect the profitability of the Issuer if the Group is not able to adequately increase the sale prices due to low purchasing power of the population in particular. Since the retail chain of the Group while working with one of the most economical formats mainly targets at customers with the income below the average, the Group is substantially subject to the above risk. Decrease of profitability may negatively affect the ability of the Company’s relevant authority to decide on the payment of yield on the securities and the market value of the Company’s securities as well as affect the fulfillment of obligations on the placed bonds in full. Risks related to the possible fluctuations of the prices on products and/or services of the Issuer (separately on the domestic and foreign markets), and their influence on the Company’s activity and its fulfillment of obligations on the securities The Issuer and the Group operate only on the Russian domestic market. The Issuer and the Group do not operate on or plan to expand into the foreign market. The information about the risks described refers to the internal market. The reduction of product prices at “Magnit” stores may lead to the profitability decrease of the Group. Changes of the product prices at “Magnit” stores are largely determined by changes of purchase prices of the Group. The Group is doing their best not to increase the mark up on the products. The growth of the product prices may negatively affect the purchasing power of the population. Amidst inflation the growth of the product prices is more likely to happen, which causes the erosion of purchasing power of the population. Deterioration of the macroeconomic environment and the subsequent erosion of purchasing power of the population may also lead to the decline of selling prices. If the purchase prices are less reduced than the selling prices, it will lead to the decline of Group profitability. The dramatic deterioration of macroeconomic situation and intensification of competition may force “Magnit” chain to cut the prices for products in order to maintain the target turnover growth and market share, which may also lead to the profitability decline. The assumed actions of the Issuer in case of industrial fluctuations • In case one or several risks arise the Company will undertake all possible measures to reduce the effect of the existing fluctuations. It is impossible to determine particular actions of the Issuer in case any of the events listed in the risk factors and described in this paragraph occur in future, because elaboration of the adequate is complicated due to uncertainties of the developments in future. The character of the applied actions will depend on the specific situation of every case. The Company cannot guarantee that the activities taken to overcome negative fluctuations will lead to considerable changes in 90 the situation, as most of the above risks are out of the Issuer’s control. In case of deterioration of the situation in the sector, the Company plans: • To continue, if possible, to expanding its operations in order to reduce the cost of goods and diversify some risks through the ongoing growth of scale; • To continue monitoring the least prospective stores and, if the measures to raise profitability of these stores are not rewarding, to close such stores expeditiously; • To extend the territory of its operation by choosing the most profitable regions of Russian Federation in terms of growth prospects; • To carry out adequate changes in pricing policy for maintaining the demand for goods on the necessary level; • To take additional measures to cut the costs; • to continue attracting highly-skilled specialists as well as entering into agreements with reliable partners, counteragents and contractors, which enables further risk minimization, and to conduct the detailed analysis of the planned operations of the Issuer in order to reduce the cost of investments, reduce the expenses and receive higher profits. COUNTRY AND REGIONAL RISKS The Company and JSC “Tander” (the main operating company of the Group which controls trading assets and is the Group’s center of revenue consolidation) are registered as a tax-payer in the Southern federal region, Krasnodar. As the Group operates in the Russian Federation, the main country and regional risks affecting the operation of the Group and the Company are the risks within the Russian Federation. However, due to the globalization of the world economy, considerable deterioration of the economic situation in the world may lead to the serious economic recession in Russia and as a result to the decrease of demand for consumer goods. Despite the fact that during the last few years there were positive changes in many public spheres in Russia - the economy was growing, certain political stability was achieved, Russia is still the state with the rapidly developing and changing political, economic and financial systems. Apart from economic risks, Russia is more exposed to the political and regulatory risks than the other countries with the developed market economy. POLITICAL RISKS Political instability in Russia may have a negative effect on the cost of investments in Russia as well as on share the price of the Issuer Since 1991 Russia is undergoing the transformation from the single-party government with the centralized planned economy to the federal republic with democratic institutions and market-oriented economy. The progress of political and other reforms from 1991 was uneven. The composition of the Government of the Russian Federation, including the prime minister, was unstable on a periodic basis. For example, from March 1998 to May 2008 there were six prime-minister shifts. Vladimir Putin was elected the President of Russia in March 2000. Since that the composition of the Government in Russia has been highly stable. In March 2008 Dmitry Medvedev was elected the President of Russia, during his administration Vladimir Putin was the Prime Minister. In March 2012 Vladimir Putin was again elected the President and came to office on the 7th of 91 May, 2012 for the six-year term. Currently Dmitry Medvedev is the Prime Minister. Although it ensured state stability, oppositional organizations were very active from the end of 2011 to the middle of 2013, mainly due to the results of the parliament and president elections. Political instability may lead to deterioration of the macroeconomic situation, including flight of capital, decrease of investments and business activity. Accession of Crimea to Russia caused strong negative reaction of the western countries. In particular, the United States of America and the European Union countries as well as Ukraine strongly reject to acknowledge the referendum held in Crimea and further accession of Crimea to the Russian Federation legitimate. Beginning from March 2014 the United States of America, the European Union countries and some other countries started to introduce various sanctions against a number of the Russian administrative officials, politicians, businessmen, companies and banks. The beginning and further escalation of the Ukrainian conflict between the army and the other armed groups of Ukraine on one hand, and advocates of independency from Ukraine on the other hand, caused significant expansion and toughening of sanctions against Russia on the part of western countries starting from July 2014. In particular, the United States of America introduced the so-called sectoral sanctions against Russian state banks as well as a number of companies operating in the power generating and military sectors of economy. The most meaningful part of the sectoral sanctions for the Russian economy and financial system is the prohibition on purchase, sale, investment services and assistance in issuance or any other transactions with the securities and money market instruments with the circulation period of over 30 days if the issuer is (i) one of the five Russian state banks (Sberbank, VTB Bank, Gazprombank, Vnesheconombank or Russian Agricultural Bank), one of their subsidiaries or a person, acting on behalf of or on the instructions of these Russian state banks and their subsidiaries; (ii) one of a number of the Russian companies, which operations are primarily related to and is mainly about invention, production, sales and export of military equipment or services related to the military sector, or one of its subsidiaries or a person, acting on behalf of and on the instructions of these military companies or their subsidiaries; (iii) one of a number of the Russian companies controlled by the government or with the government stake of over 50% and the value of assets exceeding 1 trillion rubles and with the expected profit of over 50% coming from sale and transportation of crude oil and oil products (such as Gazprom Neft, Transneft and Rosneft), or one of their subsidiaries or a person, acting on behalf of and on the instructions of these companies or their subsidiaries. Similar sanctions blocking access to the western capital markets were also introduced by the European Union countries nearly against the same Russian state banks, power generating and military companies. Besides, there were sanctions introduced to prohibit export of products and technologies for military purposes, dual-use products and technologies (which may be used for both civil and military purposes), as well as products and technologies necessary for oilfield development in deep water areas, Arctic shelf and shale stratum, to Russia. Significant escalation of geopolitical situation due to the development in the Eastern Ukraine and the introduction of the above sanctions not only restricted access to the western capital markets for banks and companies under sanctions, but also extremely complicated access to the international debt and equity capital markets for the other Russian companies and banks, which may now turn to be unable to refinance its current debt in the foreign currencies by new debt on the international capital markets. Very limited access to the international capital markets creates a threat that at least some of those companies and banks with significant debt in the foreign currencies may be unable to settle their existing loans in the foreign currency in time, which may result in their bankruptcy and negatively impact the entire Russian economy. 92 Besides, significant part of funds, earlier raised by the Russian banks on the international capital markets, was channeled for crediting of the Russian companies and population. The restriction of access to such relatively cheap source of financing may negatively cut volumes of crediting of the Russian companies and population by the Russian banks and significantly increase the credit rates, which may negatively impact the state of the Russian economy. It is impossible to rule out further escalation of sanctions against Russian business and individuals in future, which may have even more negative impact on the Russian economy, financial and banking markets, and result in the increase of the capital outflow from Russia and significantly deteriorate the investment climate and business environment in Russia. Reconsideration of reforms and the government policy with regard to certain individuals may negatively impact the business of the Group and the investment attractiveness of Russia. In the past, including the recent past, the Russian law enforcement agencies opened criminal cases against a number of Russian companies, their officials and shareholders on a charge of tax evasion, other tax crimes and absolutely different illegal actions. On some of such investigations the accused people were sentenced to be confined and pay the understated taxes. According to the statements in the Russian press, such companies included Yukos, TNK and VimpelCom. In Autumn 2014 by the decision of the Moscow Court of Arbitration the controlling interest in Bashneft, earlier owned by AFK “Sistema”, was returned in state ownership in grounds of law violation in the course of privatization of Bashneft. AFK “Sistema” acquired Bashneft, privatized earlier, for US$ 2 billion in 2009. In the course of judicial proceedings the chairman of the Board of Directors and the largest shareholder of AFK “Sistema” Vladimir Evtushenkov was accused of money laundering and he was temporarily placed under house arrest. Some analysts think that such actions of government agencies speak of the intention to reconsider political and economic reforms of the last two decades. However, other analysts are confident that these were one-off cases and do speak of any backtracking on major political and economic reforms. Conflicts between federal and regional authorities and other domestic political conflicts may create unfavorable economic conditions which may negatively impact the operations and financial position of the Group. Distribution of powers between federal and regional authorities, as well as between different authorities on the federal level in some cases remains unclear and disputable. In this connection, Russian political system is subject to certain internal contradictions and conflicts between federal and regional authorities regarding different issues, particularly, tax collection, property right for land, powers to regulate individual industry sectors and regional autonomy. Conflicts between different authorities may have serious adverse effect on the price of the Company’s shares. Besides, ethnical, religious and other segregations may provoke public tension and sometimes result into conflicts including the armed ones. For example, the continuous conflict in Chechnya negatively affected economic and political situation in Chechnya, the neighboring regions and Russia on the whole. Terrorist activity and counter measures aimed at the elimination of violence, particularly by imposing emergency rule in certain territorial subjects of the Russian Federation may have an adverse negative effect on the potential of Russian business on the whole and the Group’s performance in particular, especially, taking into 93 consideration the significant scale of the Group’s operations in the Southern and North Caucasian Federal Region. Any instability in the social sphere may negatively impact the confidence in Russian economy and its investment potential, and may also have negative impact on the operations of the Group and result in losses or impact the business of the Group, results of its operations, its financial position and prospects in a different way. ECONOMIC RISKS Economic instability in Russia may have negative impact on the consumer demand which may significant negative influence the business of the Issuer In the past the Russian economy was and continues to be exposed to: • Significant decrease of its Gross Domestic Product and the growth rates of the Gross Domestic Product; • High inflation; • High and rapidly growing interest rates; • Unstable crediting conditions; • Unstable ruble rate; • Massive flight of capital; • High level of government debt versus gross domestic product; • Low diversification of economy which is relies heavily on global commodity prices; • Sharp decline of oil prices, other energy materials and other commodities; • Inability of the banking system to provide Russian companies with sufficient liquidity; • Continuation of work of unprofitable enterprises due to lack of efficient bankruptcy procedures; • High level of corruption and penetration of organized criminality in economics; • Ubiquitous evasion of taxes; • Significant growth of unemployment and subemployment; • Introduction and further escalation of various sanctions against a number of Russian companies, banks, officials, politicians and businessmen; and • Low incomes of the majority of the Russian population. Over the past few years the Russian economy has been marked by instability of debt and equity capital markets (for example, the Russian equity market saw significant slowdown in the second half of 2008). As a result, the market regulators suspended trades on the Russian stock exchanges, MICEX and RTS (merged in 2011 into the MOEX) many times. The Russian economy has been also marked by significant decline of foreign investments and sharp decrease of the gross domestic product in certain years. For example, in 2009 the Russian gross domestic product decreased by 7.8% in real terms. As Russia produces and exports significant volumes of crude oil, natural gas, oil products and other mineral resources, the Russian economy is very vulnerable to the fluctuations of oil and gas prices and the other commodities, the prices on which significantly decreased in the course of the global financial crisis, started in the second half of 2008. Decrease of oil prices and prices on the other mineral resources may have material negative impact on the 94 economy of the Russian Federation. Besides, introduction and further tightening of economic sanctions against the Russian Federation by the United States of America, European Union and other countries due to the developments in Ukraine was and continues to be detrimental to the state of the economy. Introduction and further escalation of sanctions against a number of Russian companies, banks, officials, politicians and businessmen on the part of western countries and escalation of geopolitical tensions between Russia and Ukraine, as well as a number of western countries, were among key reasons which caused downgrades of long-term credit ratings of Russia by the leading international rating agencies. Russia being the country with the developing economy is highly exposed to further external shocks. Developments in economy and in the financial market of one of the large countries of the region, sometimes lead to the situation when the international investors lose their interest to the entire region or the class of investments – this is called “chain reaction”. In the past Russia already suffered from similar chain reaction, and it is possible that the Russian investment market, including the share price of the Issuer, will correspondingly suffer in future due to negative economic and financial developments in the other countries. Economic instability or the future economic crisis may explode the confidence of investors in the Russian markets and in the ability of the Russian companies to attract capital on the global markets, which in its turn, may have significant negative impact on the Russian economy. Deterioration of the economic situation may, in its turn, result in the significant decrease of the consumer demand in the country, which may negatively impact the operating results, financial position and development prospects of the Group and the Issuer. Russian physical infrastructure is in poor condition, which may cause damage to the regular operating activity, while the efforts of the Government of the Russian Federation on improvement of the national infrastructure may result in the additional costs for the Group. Most of the Russian physical infrastructure was established in the soviet period and during many years it was not duly financed and maintained. In certain regions roads, manufacturing, electric power delivery, communication systems and stock of buildings are in the very poor condition. Roads in Russia are of the poor quality, some of them do not meet the minimal requirements in usability and safety, which complicates the in-time delivery of products to the Group’s stores, taken into account the distance of deliveries. Further deterioration of the Russian physical infrastructure may cause damage to the national economy, disrupt the product deliveries, increase business costs and disrupt the operations. SOCIAL RISKS Inability of the government and many private companies to pay out the wages in time, and altogether deceleration of wages and benefits vs. rapidly growing living costs, led in the past and may lead in the future to labor and social disorders. Similar actions, labor and social disorders may have negative political, social and economic consequences including the nationalism growth, imposing limitations on the foreign involvement in Russian economy and the violence growth. If any of these results of the growth of social instability materialize, the operations of the Issuer may be limited and the profitability of the Group may decrease. Crime and corruption may have an adverse negative effect on the operation and financial position of the Group 95 According to the reports of the local and international press, organized crime and corruption remain significant problems for the companies operating in Russia. Besides, diverse publications indicate that some members of the Russian media regularly publish biased articles for remuneration. The Group activity may be affected by illegal actions, corruption and accusation of the Group of illegal operation and therefore have a negative impact on the Group’s operation and price of Company’s shares. Prospective measures of the Company in case if changes of the situation in the country and region have negative effect on the Group’s operation The majority of the above political, economic and social risks are out of the Issuer’s control due to their global scale. The companies which are included in the Group have reached the certain level of financial stability which helps to overcome the short-term negative economic fluctuations in the country. In case if significant political and economic instability in Russia or in the certain region, which will negatively impact the operations and the revenues of the Group, the Issuer assumes that the Group will undertake a number of measures in order to mobilize business and minimize negative impact of the unfavorable political and economic situation in the country and/or region on the business of the main companies of the Group. It is impossible to determine the specific measures of the Group in case some of the above events occur in future, as the elaboration of the adequate and relevant measures is complicated by the uncertainty of the future developments. The parameters of the applied measure will depend on the specific situation in each case. The Issuer cannot guarantee that the activities taken to overcome negative fluctuations will lead to considerable change in the situation as most of the above risks hereof are out of the Issuer’s control. However, in case of negative impact of the country and regional changes on the Group’s operations, the Issuer plans to take the following measures to maintain the profitability of the Group’s operations: • • • if possible, to save fixed assets until the situation improves; to undertake measures aimed at sustainment of the Group’s employees and on their productivity; to introduce adequate changes to the pricing policy to maintain the demand on the products on the proper level; to take additional measures on cost saving, including measures to reduce purchasing prices and to limit wage expense; to revise the capital expenditure program. . In order to minimize the risks related to the force majeure circumstances (military conflicts, riots, natural disasters, state of emergency) the Issuer reflects the possibility of such events within its contract activity. • • The Company acts under paragraph 401 of the Civil Code of the Russian Federation which states that the person who does not exercise the obligations due to force majeure circumstances provided herein does not bear responsibility to the counterparty. To reduce the above risks the Group plans to further expand its operations in different regions of Russia in order to diversify risks. Risks related to the possible military conflicts, state of emergency and strikes in the country and regions where the Issuer is registered as a tax payer and (or) operates its business. 96 The Russian Federation is a multinational country consisting of the regions with different social and economic development levels; thus, it is impossible to completely eliminate the possibility of internal tension in Russia including the armed conflicts. The Company as well cannot absolutely exclude risks related to the emergency state. According to the Ministry of Emerging Situations of Russia, terrorism is one of the most real threats to the stable social and economic development of the country as well as to an improvement of the living standards of population and strengthening of the national security of the Russian Federation. The danger of the acts of terror still exists on the entire territory of the Group’s operations, especially in the North Caucasus and the Southern Federal Regions, as well as in the larger cities of Russia. Risks related to the geographical peculiarities of the country (countries) and the region where the Company is registered as a tax payer and (or) performs the main activity, including high threat of natural disasters, possible stop of transport connection due to remoteness and (or) inaccessibility, etc. The regions with the Group’s presence may face the drastic consequences of conflagrations on the economic objects and in the public sector, accidents and failures of utility systems and transport, natural fire, dangerous hydro-meteorological phenomena (strong winds, frosts, heavy snowfalls and heavy rains), earthquakes, land subsidence and sinkhole collapse, contagion outbreaks among people and animals. For example, exposure to natural and climatic is distinctive risks, geographical feature of the Southern Federal District. including natural disasters (hurricanes, floods, earthquakes, etc) The geographical peculiarities of the region do not eliminate the risk of possible stop of transport connection due to remoteness and/or inaccessibility of the city or any other location. ECOLOGICAL RISKS Accidents at the environmentally hazardous industrial facilities of the Russian Federation and environmental pollution may negatively impact the Group’s operations In respect of all components of the environment (air, water sources, soil and land resources, wildlife) large industrial cities face the unfavorable ecological situation for population. The above factors negatively affect the health of the nation. Moreover, nuclear and other dangerous objects are located in the territory of Russia, while the system of control over ecologically dangerous objects is not sufficiently effective. Accidents on these objects and an unfavorable ecological situation in large Russian industrial cities may have an adverse negative effect on the Group’s activity. FINANCIAL RISKS Risks related to the changes of the interest rates, foreign currency exchange rates associated with the Company’s operation or hedging carried out by the Company to reduce adverse impact of the risks indicated above The Company is exposed to risks related to the changes of interest rates. The Group’s companies raise borrowed funds to finance business development of the Group and to expand its resource base. Changes of the interest rates may have substantial negative effect on the operational results of the companies of the Group. 97 Import products comprise a certain share of revenue, which makes the Company dependent on the possible fluctuations of exchange rates. The Company does not hedge its risks. Exposure of the financial position of the Company, its liquidity, funding sources, operational results, etc. to the foreign exchange movements (currency risks) Over the last twenty years Russia faced considerable fluctuations of the exchange rate of the Russian ruble to the foreign currencies. Substantial ruble devaluation may result in the reduction of the relative cost of dollar-denominated sales and assets of the Group, such as bank deposits and accounts receivable. Additionally, decrease of the ruble exchange rate may lead to the decline of the dollar cost of tax deductions arising from the realization of capital investments, since the balance sheet assets will reflect their ruble value at the moment of acquisition. The Group does not export its products, and all its main obligations are ruble denominated. Import products comprise a certain share of revenue, which makes the Company dependent on the possible foreign exchange fluctuations. In case of such fluctuations, the Group is able to modify the structure of goods purchases in favor of the Russian counterparts. Thus, the rise of such risk may have an adverse effect on the Group’s revenue and profitability. The Group purchases and plans to purchase in future the import equipment and vehicles for foreign currency, thus, considerable decline of the ruble exchange rate may lead to the increase of the Group’s expenses in ruble terms and negatively affect the results of its operation. Dramatic ruble devaluation may have a negative effect on the country’s economy on the whole and lead to the decline of the purchasing power. Prospective measures of the Company in case if currency fluctuations and interest rates have negative effect on the Group operation In case if movements of exchange rates and/or interest rates are negative for the Company, it plans to carry out tough policy of cost saving. However, it should be taken into consideration, that part of the risk cannot be completely neutralized, since the indicated risks mainly lie beyond Company’s control but depend on the general economic situation in the country. Inflation influence on the payment on securities The Company faces inflation risks which may have an adverse effect on its business activity. The purchasing prices on the products depend on the overall price level in Russia. The acceleration of inflation growth rates may negatively affect the financial performance of the Group. The growth of the purchasing prices may lead to further increase of retail prices on the products and other goods sold by the Company and its subsidiaries, and as a result negatively influence the competitiveness of the Group. If the exchange rate of the ruble to US dollar increases simultaneously with inflation, the Group may face expenses increase in dollar terms on certain cost items. Some expense items of the Group, such as payroll, expenses on construction, rent and utilities are sensitive to the overall growth of the price level in Russia. Due to competitive pressure or legal restrictions the Group may not be able to properly increase its prices in order to retain its profit rate and, moreover, to increase its profit rate. Inflation growth in the Russian Federation may also entail the overall growth of the interest rates. 98 Inflation indices critical for the Company and prospective measures of the Company to reduce the risk Today the 30-35% level of inflation is considered critical by the Company. Serious acceleration of the price increase rate may lead to the growth of Company’s expenses, loan funds costs, and result in the profitability downturn. Therefore, in case of dramatic excess of actual inflation indices over the forecasts of the Russian Federation Government, the Company plans to take all required measures to limit the other expenses’ growth (not related to the purchase of the products for disposal), to reduce the account receivables and its average term. Risks related to the dependence on the Russian banks The Russian bank and other financial systems are not properly developed and regulated, and the Russian legislation related to banks and bank accounts may be interpreted ambiguously and is applied inconsistently. Nowadays there are a limited number of creditworthy Russian banks (most part of which have their headquarters in Moscow) that are able to provide services to a company similar in size of the Issuer. Many Russian banks do not meet international banking standards, and the transparency of the Russian bank sector to a certain extent falls behind the international level. Supervision of bank activity is also often insufficient, whereby many Russian banks do not observe the actual instructions of the Central Bank of the Russian Federation regarding loan criteria, credit quality, loan loss provision, risks’ diversification and other requirements. Application of more severe regulations or interpretations may result into insufficient equity capital or insolvency of some banks. As a rule the Group supports relations and keeps its accounts only with a limited joint-stock company number of reliable creditworthy Russian banks, including public “Sberbank of Russia” (PJSC “Sberbank”), joint-stock company “ALFA-BANK” (JSC “ALFA- BANK”), public joint-stock company VTB Bank (PJSC “VTB Bank”), “Gazprombank” (joint- stock company) and public joint-stock company “ROSBANK”. Bankruptcy of one or several of the specified banks may negatively affect the Group’s business. Moreover, the lingering and severe bank crisis or bankruptcy of those banks with which the Group keeps its funds may lead to inaccessibility to the cash assets for several days or even to the loss of all Group’s deposits in such banks, which may have substantial negative effect on the Group’s business activity, operational results, financial position and prospects. Risks related to the transfer pricing The Tax Code of the Russian Federation establishes special criteria for determination of prices for the taxation purposes in transactions executed between related parties. The established transfer pricing rules significantly increase the tax burden on a taxpayer due to the necessity of identification and separate records of controlled transactions, “price testing” in terms of compliance with the market level, preparation of documentation, as well as provision of notifications of controlled transactions. The legislation provided for the right of the Russian tax authorities to apply adjustments to the tax base and to charge additional amounts of income tax with relation to all controlled transactions, if the price applied to the transaction differs from the range of market prices. The current law enforcement and judicial practice is contradictory due to different interpretation of the applied criteria by the Russian tax authorities, arbitration courts and taxpayers. Therefore, 99 tax authorities can try to challenge prices for transactions of the Issuer and its subsidiaries and adjust accrued taxes. The law provides for large amounts of penalties for the non-payment or underpayment of tax amounts as a result of applying in a controlled transaction the price not comparable with financial terms of transactions between parties which are not related. The amount of these penalties is 20% of the outstanding tax amount until 2017 and 40% of the outstanding tax amount but not less than 30 thousand rubles from 2017. Financial report statements of the Company mostly subject to changes under the foregoing financial risks (including risks, probability of their occurrence and nature of changes in reports) The Group’s expenses and profit are mostly exposed to the influence of the foregoing financial risks. In case of unfavorable change of the situation upon realization of one or several risks, the expenses will be the first to grow and will entail profit reduction correspondingly In case of substantial inflation growth and/or significant ruble devaluation and therefore the expenses growth, the Group may increase the prices on the products for sale. Moreover, in case of significant ruble devaluation and growth of inflation and/or interest rates the Group plans to take the following measures: revision of the programs of capital investments and loans; • • optimize the receivables turnover; • additional measures to reduce costs; • revision of the financing structure. At the moment hedging of the foregoing risks is not carried out. The Group is also exposed to the liquidity risk, i.e. the risk of losses due to deficiency of funds within the established terms and as a result, risk of inability of the Group to fulfill its obligations. Realization of such risk may entail penalties, fines, injury to the goodwill of the Group, etc. The Group manages liquidity risk through analysis of the scheduled cash flows. Exposure of the financial report statements to the foregoing financial risks Risks Probability Nature of changes in the report Interest rates growth high Inflation rates growth high Interest rates growth will increase the cost of borrowings for the Group, thus it may have negative effect on the Group’s financial position, particularly, will increase the operational expenditures of the Group and reduce its profit. Inflation rates growth will lead to the increase of the Group’s expenses (raw commodities costs, payroll expenses, etc.). At the same time the acceleration of the inflation rate growth will result in the growth of the consumer prices for the Group products and correspondingly increase the sales of the Group. Thus, the part of increase of the Group’s expenses will be compensated by the increase of the product prices. Such inflation will also lead to devaluation of the real cost of the ruble obligation. 100 Change of the exchange rate of US dollar to ruble Liquidity risk (risk of undue obligation fulfillment) LEGAL RISKS high It does not produce strong effect, as the main profits and losses of the Company are ruble denominated. medium Failure of the Group to fulfill its obligations in due time may entail penalties, fines, etc., which will result in unscheduled expenses and reduce the Group’s profit. In connection herewith, the Group carries out the policy of the cash flows’ planning. The Company and the Group operate only on the Russian domestic market. The Company and the Group do not operate and do not plan to operate on the international market. The description of the risks refers to the domestic market If one or several of the below risks occur, the Company and the Group will undertake all possible measures to reduce their negative impact on their operation. The Company does not guarantee that the measures taken to overcome the negative changes would improve the situation as the described factors are beyond control of the Company and the Group. The Company and the Group are exposed to the following legal risks: Common risks inherent to legal entities according to the legislation of the Russian Federation: Certain transactions with participation of the Group’s companies may be acknowledged related party transactions. These transactions may include, inter alia, sales and purchase agreements of manufactured goods, purchase of shares and service contracts. If such transactions or their actual approvals are successfully contested, or if the approval of transactions of the Group’s companies which require special approval according to the legislation of the Russian Federation is prevented in future, it may limit the flexibility of the Group’s companies in the operational issues and may have negative effect on its operating activity. In practice, standards of corporate governance remain underdeveloped in many Russian companies, and minority shareholders of these companies may experience difficulties with the exercise of their legal rights and may bear losses. Although the Federal Law “On Joint-Stock Companies” and the Civil Code of the Russian Federation (in the wording of the Federal law №315-FZ of October 22, 2014) entitle the shareholder (shareholders) to file a claim against (i) an individual authorized to act on behalf of the joint-stock company under the law, other legal act or constituent document of this joint-stock company, (ii) members of collective bodies of the joint-stock company and (iii) individuals who are actually able to determine actions of the joint- stock company, who caused damage to the joint-stock company by their activity (or inactivity) and who acted unscrupulously and irrationally during the performance of their duties, Russian courts do not have enough experience of handling with such claims. Therefore, the feasibility of investors to get the compensation from the Company is limited. As a result, protection of interests of minority shareholders is limited. The Civil Code of the Russian Federation and the Federal Law “On Joint-Stock 101 Companies” provide that the shareholders of the joint-stock company are not liable for its obligations and are only exposed to the risk of loss of the investments. However, if the bankruptcy of the legal entity is caused by the shareholders, the owner of the property of the legal entity or other persons who are entitled to give instructions, which are mandatory for this legal entity, or otherwise determine its actions, subsidiary liability for the obligations of the legal entity may rest on them in case of deficiency of the property of the legal entity. Thus, being the parent company with regard to the subsidiaries in which PJSC “Magnit” directly or indirectly owns more than 50% of the charter capital, the Company may bear responsibility for the obligations in the above cases. Responsibility for obligations of the subsidiaries may have significant negative effect on the financial position of the Company. Ensuring the rights of shareholders according the Russian legislation may lead to additional expenses, which may lead to the deterioration of the Company’s performance. According to the Russian legislation, shareholders who voted against or abstained from voting on certain issues have appraisal rights. Shareholders have the appraisal rights if they vote against or abstain from voting on the following issues: reorganization; • • major transaction which is subject to approval by the general shareholders meeting; • amendments restricting the shareholders’ rights to the charter of the Company or ratification of the Charter in a new edition; • decision to make the statement on delisting of the Company’s shares (exclusion of securities from the list of securities admitted to trading at the stock exchange) and (or) issued securities of the Company convertible into its shares. • Obligation of the Company to buy the shares back may have significant negative effect on the cash flows of the Company and its ability to manage the debt of the Group. Legal risks inherent in the Russian Federation Weakness of the Russian legal system and imperfection of the Russian legislation provide vague environment for investments and business activity Efficient legal system essential for the functioning of the market economy in Russia is still in the formation process. It is only in recent times that many crucial laws have come into effect. Sometimes insufficient consensus on the scope, content and period of economic and political reforms, rapid development of the Russian legal system, which is not always consistent with the directions for the development of the market relations, are expressed in uncertainty, inconformity and inconsistency of the provisions of the law and subordinate acts. Additionally, the Russian legislation often refers to the statutory acts which are to be adopted, leaving considerable loopholes in the mechanism of the legal regulation. Sometimes new laws and regulatory acts are adopted without being comprehensively discussed with the interested participants, whose activity is related to the legal system and/or with the law enforcement practice, or in the society in general and do not contain any adequate transitional provisions, which creates serious complexities in their application. Defects of the Russian legal system may negatively influence the ability of the Group to exercise its rights in accordance with contracts as well as the ability to defend against the claims of the third parties. Besides, the Group cannot guarantee that the governmental and judicial agencies as well as the third parties would not litigate the Group’s meeting of the requirements of the laws and subordinate acts. 102 Risks inherent in the currency regulation There are risks of the regulation of a number of the currency operations. Significant changes in the currency regulation and currency control may complicate fulfillment of obligations under the agreements with the counterparties. In the opinion of the Company’s management these risks influence the Group as is the case with the other market entities. The Company conducts continuous monitoring of the regulatory environment of the currency regulation and control and conforms to the established rules. During the reporting period there were no amendments introduced to the Russian legislation on the currency regulation and the currency control which may influence the operations of the Company and the Group. Risks inherent in the protection of investors Russian investor protection legislation may be less favorable than the legislation of the other countries with the developed market economy. Besides, there is a risk of changes of the applicable legislation in future which may be unfavourable for investors. Income of the foreign investors from the investments into the Company’s shares may be taxed in accordance with the Russian legislation. Deterioration of the general economic and political situation in the country may result in tightening of the currency regulation and control and in limitation of the performance of transactions with the Company’s shares. Risks inherent in the tax legislation Tax legislation of the Russian Federation is exposed to frequent changes. In the Company’s opinion these risks influence it as is the case with the other market participants. The following amendments in the Russian tax system may negatively influence the operations of the Group’s: The following factors may negatively influence the operations of the Group: • Amendments of the acts of the tax and levy legislation related to the increase of the tax • rates; and Introduction of new taxes. These amendments, if they are significant, as well as other significant amendments of the tax legislation may result in the increase of tax payments and consequently in the reduction of the net profit of the Company. Amendments of the Russian tax legislation may negatively influence the attractiveness of investments in the Company’s shares. Russian companies make considerable tax payments of the great number of taxes. These taxes, inter alia, include: • Income tax; • Value added tax; • Excise taxes; • Land tax; and • Property tax. Legislative and subordinate acts which regulate the above taxes lack sufficient history of application compared to the other countries. Therefore, the law enforcement practice is often ambiguous or is not yet established. Currently there are very few generally accepted clarifications and interpretations of the tax legislation. Different ministries and authorities often have different interpretations of the tax legislation, which creates uncertainty and grounds for the conflict. Tax system in Russia changes frequently, and the tax legislation is inconsistently applied on the federal, regional and local levels. Due to vague legislation the Group is exposed to the 103 risk of material penalty fees despite the Group’s efforts to comply with the legislation, which may lead to the increase of tax burden. The Company is aimed at complying with the applicable tax legislation in full, which, nevertheless, does not eliminate the potential risk of division of opinions with the relevant regulatory bodies on controversial issues. At present, tax administration is relatively inefficient, and the government may have to introduce new taxes to increase its income. Thus, the Company may have to pay considerably higher taxes, which may negatively influence the business, operational results and financial position of the Company and the Group. In the course of operations the Company conducts operational monitoring of the tax legislation and enforcement of the applicable legal provisions. The Company estimates and forecasts the extent of potential negative influence of amendments of the tax legislation aiming efforts at minimization of risks related to such changes. Generally, the tax risks inherent in the Company’s activity characterize most of the businesses operating on the territory of the Russian Federation and may be regarded as national. Risk inherent in the impossibility of foreign investors to export the return on shares of the Company Today, the Russian legislation on dividend payment sets forth that dividends on shares in rubles may be paid to the shareholders without limitations. Possibility of the foreign investors to convert rubles into any freely convertible currency (“FCC”) depends on the availability of such currency on the Russian exchange markets. Although in Russia there is the market for conversion of rubles into FCC, including trading on the exchange market of the Moscow Exchange as well as over-the-counter markets and currency futures markets, further development prospects of this market remain vague. Risks inherent in the customs control and duties Changes of customs control and duties may entail the increase of the purchasing prices on the imported goods, which may result in the decrease of the Group’s income. The Company and the Group are exposed to certain risks inherent in amendments to the customs legislation regulating the setting of the procedure of movement of goods across the customs border of the Russian Federation, setting and application of the customs regimes and introduction and levying of customs payments. The Company is aimed at complying with the requirements of the customs control, processing of all documentation necessary for import transactions in time and has sufficient financial and personnel resources to follow the regulations of the customs legislation. Risks inherent in the requirements of licensing of the primary activity of the Company or licensing of the rights of use of objects which are limited in the turnover (including natural resources) The primary activity of the Company is coordination of operations of the companies of the Group, lease of property and retail which is not subject to licensing. The companies of the Group have the license for the retail sale of alcohol consumed not in the point of sale. If the licensing requirements change, the Company will operate under the new requirements including re-issuance and obtaining of the new licenses. The Company does not use the objects with the limited presence in the turnover (including natural resources). The Company assesses risks inherent in the licensing requirements minimal. 104 Risks related to the change of the judicial practice on issues related to the Issuer’s operation (including licensing issues) which adversely affect the results of its operation, as well as the results of the current legal proceedings in which the Issuer is involved While carrying out commercial activity and making business decisions, the Issuer takes into consideration the law enforcement practice in order to estimate and forecast possible scenarios and to foresee the risks. The Issuer regularly monitors decisions made by the high courts and estimates the trends of the law enforcement practice, formed at the level of district arbitration courts, actively implementing and using it not only for the protection of its rights and legitimate interests through legal proceedings but also for the resolution of legal issues arising in the course of the Company’s operation. Therefore, the risks related to the change of the judicial practice are considered to be insignificant. Risk of loss of business reputation (reputational risk) Risks related to the sale of private label products As a way of attracting customers and strengthening the consumer loyalty for private label, the Group plans to continue the sale of private label products. Therefore, there exists the probability of potential customer claims to the quality of the Group’s private label products. High product quality is of the utmost importance for the private label, and chain operators are exposed to serious risks while promoting poor quality products under private label. Claims to the quality or other characteristics of such products may dramatically damage the image of the Company on the whole, the brand attractiveness for the Company customers and lead to considerable financial losses. Risks related to the quality of products for sale There is a risk related to the Group’s responsibility for the quality of products sold at the Group’s stores as well as the risk of filing a claim due to the harm to life and health. According to the agreements entered into with the majority of suppliers, the producer takes the material liability for the quality of sold products, provided that the Group observes the necessary storage conditions. Such claims may also be addressed to the seller of the products at the discretion of a complainant. Any similar situation may damage the Company’s image and reputation, reduce the market share of the Group and negatively affect its financial position. Moreover, there is a risk related to the careless attitude of the Group personnel to the storage conditions of the products, which may lead to legal material liability of the Group under such claims. The “Magnit” word mark is used by other participants of the sales turnover as a component of the company name, which may have material effect on the operation of the Group. The Group invested substantial funds in promotion of its “Magnit” brand on the Russian market, including the private label products of the Group. Due to “Magnit” brand the Group achieved great success in its operation. Meanwhile, the trademark “Magnet” in Latin letters in the certain classes is registered in the name of the third party. A certain risk of interests’ conflict between the owners of the trademark “Magnit” (or ‘’Magnet”) definitely exists, the Group might be forced to re-brand its stores. The expenses for such re-branding may negatively affect the operation results of the Group. 105 Moreover, due to the fact that Russian legislation provides limited protection for the company names on the market, there exist a number of other organizations using “Magnit” in their names. Business activity of some of them has partially similar features to the operation of the Group. The Group cannot prevent these organizations from using such names, and this may result in negative effect of these companies’ activity on the business activity and reputation of the Group. Strategy risk Risks related to the implementation of the long-term strategy of the Group One of the main components of the long-term strategy of the Group is the expansion of existing store chain. The expansion of the chain will have the following directions: within the existing formats and the introduction to the market of the new formats. Within geographical position the chain will expand in regions with the maximum concentration of existing stores (in the Southern, North-Caucasian, Central and Volga federal districts) and in the other regions of Russia. The strategy success will depend on a number of factors within and out of Company’s control. These factors include: -Ability to raise enough funds for capital investments. If the Group fails to raise enough funds for chain expansion at the scheduled scale, the Group may have to considerably limit the scale of the chain expansion and take disadvantageous position versus competitors who will develop their business activity faster, which may lead to the loss of the market share and deterioration of the operational results; -Ability of the operating professional team to carry out the projects on business expansion and subsequently to manage it. The abilities of the operating management team may turn out to be insufficient for maintenance of the operation efficiency within the conditions of dynamic expansion. Business expansion makes it more complicated to manage the Group in terms of operation and increases the workload upon employees. Therefore, the improvement of operational and financial systems together with control measures and procedures will be required. Furthermore, the systems of purchasing, logistics, information technologies, accounting, financing, marketing and sales will need to be revised. If the Group fails to update the management system in time, it may negatively affect the business activity, operating results and financial position; -Success of the Group’s expansion in new regions will largely depend on its ability to identify attractive opportunities on the markets of the potential growth, on the ability to successfully implement assortment matrix appropriate for each region and establish the effective purchasing system as well as on ability to manage the operation on the new local markets. Thus, the Group may not achieve the expected profit and/or lose the part of the funds invested in the new projects; -Implementation of the effective marketing strategy which will provide not lower level of the effectiveness of sales or insignificant decline of sales than the Group managed to achieve in the past. Due to the increase of the competition in retail sector, the effectiveness of the Group’s marketing campaign may considerably decrease in the future which will reduce the amount of its customers and consequently reduce the sales turnover. Moreover, the chain expansion in the territory of one urban area may result in the cannibalization which will lead to the reduction of the sales turnover in the average within the stores of the Group; -The Group’s growth strategy foresees changes in the business activity model concerning the ownership rights on the sales areas. Within the development of the operating 106 formats the Group plans to carry out the independent construction/acquisition of premises and purchase the equipment for the stores more actively than before, which will mainly affect the structure of its assets and operating results and, therefore, the performance indicators; -Availability of the necessary space areas and land plots for the new stores. The market may not have the sufficient number of areas suitable for store constructions, which may slowdown the retail chain expansion rates against the scheduled strategy and result in the loss of the Group’s market share in favor of competitors; -Competition level in some regions at the moment of the store openings by the Group may prove to be extremely high for Group to enter the markets of these regions, which will not allow to achieve the expected profitability level; and - Within the economic slowdown on the regional markets, the retail chain expansion on new territories may turn out to be not as successful as expected by the Group, which may have negative effect on the Company’s business and profitability. Risks related to the Company’s operation The Issuer is involved in a number of legal proceedings which arise in the ordinary course of business and do not pose any material risk to the financial and operating performance of the Issuer. Risks related to the inability to extend the Company’s license for a particular type of activity or for the use of objects limited in the turnover (including natural resources): The core business of the Company is coordination of Group companies’ operation, the lease of property and retail business which is not subject to licensing. The Group sells a wide range of product assortment, and today the retail sale of alcohol drinks is subject to licensing which relates to all Group’s enterprises engaged in such activity. The Group has licenses for retail sale of alcohol consumed not at the point of sale. In case of changes in the requirements for licensing, the Company will operate under the new requirements, including the license re-issuance and new licenses’ obtaining. Risks related to the possible liability of the Company for the third parties’ debts including the subsidiaries of PJSC “Magnit” The Issuer provided the security in the form of the guarantee for the purpose of obtaining of credits by JSC “Tander” (the main operating company of the Group which controls the trading division and is the center of profit consolidation of the Group). The Issuer is liable to creditors for the fulfillment by JSC “Tander” of its obligations in full, including repayment of credit amounts, payment of interest in credit, fees and penalties. At the moment the Issuer considers that JSC “Tander” is able to fulfill its obligations properly. However, as the majority of the risks are out of the Issuer’s control, the Issuer cannot entirely exclude their occurrence in future, which may negatively affect the ability of JSC “Tander” to fulfill its obligations properly, which in turn may cause material adverse effects to the operation of the Group. Risks related to the possible customer loss the turnover of which amounts to not less than 10 percent of the total sales of products (works, services) of the Company The receivers of the PJSC “Magnit” services are its subsidiaries. Therefore, the operation of the Company and the risk of loss of its main consumers are determined by the financial condition and position of the entire Group. 107 Other risks related to the Company’s operation As the Company exercises functions of the holding company of the Group, the Company significantly depends on the operations of its subsidiaries. Risks related to the possible restriction of competition The Russian legislation limits the activity of the bodies which occupy the dominant position on the market. If any of the Group’s companies is declared the body occupying the dominant position, its activity (including pricing policy) may be restricted. Such situation may have negative effect on the operational activity of the Group and its regional expansion strategy. Some legislation initiatives aimed at competition protection and regulation of trade activity may have negative consequences for the Group’s business. Specifically, in accordance with the Federal Law № 381 – FL “On the principles of state regulation of trade activity in the Russian Federation” effective from February 1, 2010, dominant food chains (which threshold of dominance on the retail market within the boundaries of the region, municipal area or urban district exceeds 25%) are prohibited from purchasing and renting additional selling space within the boundaries of the relevant administrative-territorial entity. The risk related to management members’ loss and failure to engage qualified employees in the future The future success of the Group will largely depend on the ongoing cooperation with the top management of the Group, particularly with the following managers: Vladimir Gordeychuk, Andrey Arutyunyan, Khachatur Pombukhchan, Aslan Shkhachemukov, Denis Fedotov, Ilya Sattarov and Marina Ivanova. According to the labor contracts entered between the Group’s companies and the some bodies indicated above, they have the right to resign office by filing the notification 1 month prior to the dismissal. The Group is not insured from the harm which can be caused to the Group by the loss (discharge) of its leading specialists and top managers. The Company strives to hire the most qualified and experienced personnel, and adjust its compensation policy to the changing standards of the Russian labor market. The loss of one or more managers or failure to attract and motivate extra highly skilled employees required for effective management of a large-scale business may have material negative effect on the business activity, operating results and financial position of the Group. Risks related to the accounting and control system The system of the Group’s financial and management reporting currently operating is based on the volume of operations exercised by the Group within the certain period of time. In case of substantial business expansion of the Group, the technical level of the accounting and control system may fail to meet the requirements of the information processing efficiency and lead to the delays in receiving the adequate data for making tactic and strategic management decisions and thus damage the effective operation of the Group. The risks related to the computer network failure Managing and processing of operational and financial information in the Group is carried out via electronic devices of information transmission and processing including the network of the personal computers, access to Internet and system of financial accounting and 108 automated system of stock management. As a result, effectiveness of operational performance of the Group as well as its ability to collect, process and provide in time adequate data to adopt accurate management decisions depend on the efficient and stable work of computer and information networks. The systems and their functioning are subject to operation failures, which may be caused by human factor, natural disasters, blackouts, computer viruses, willful acts of vandalism and similar factors. There is no guarantee that in the future there will be no serious systemic failures resulting in interruption of functioning of the network or significantly slowing its functioning. The blackout in computer network or system failures resulting in interruption of functioning of the network or significantly slowing its functioning may lead to the sudden interruptions of customers service, failures in the stock registration system, degradation of the customer service quality and damage to the goodwill of the Company and the Group, mistakes in the management decisions which may result in the loss of customers, the growth of operating expenses and financial losses. Risks related to the operations with the large cash flows The specific character of the Company’s business activity and the current level of the bank sector development in Russia provide that the substantial part of the Group’s operations is exercised with the cash funds. Thus, the risk of insufficient payments caused by unintentional actions of the Group’s personnel as well as by deliberate thefts and robberies increases. Risks related to the protection of intellectual property If the Group fails to successfully protect its rights for the intellectual property or successfully prove that it shall not be liable for it or forfeit any rights for the intellectual property due to claims from the third parties for the intellectual property, supposedly caused the violation of their rights, the Group may lose its rights or bear serious responsibility for damages. For execution and protection of its rights for intellectual property, the Group firstly relies on copyright, trademarks rights, legislation on commercial secret protection, on its user policy, on the license agreements and the restrictions on the information disclosure. Despite the above precautionary measures, third parties may illegally copy or otherwise receive or use intellectual property of the Group. On the whole Russia does not provide enough protection of the rights for the intellectual property as compared to many other countries with the developed economy. Failure of the Group to protect the rights for the intellectual property from violation and misappropriation may negatively affect its financial position and the ability of the Group to develop its business activity. Moreover, the Group may be involved in the legal proceedings on protection of its rights for intellectual property or on establishing the validity and the scope of rights of other parties. Any lawsuit may lead to substantial expenses, distraction of the management and of the Group resources, which may negatively affect the operation and financial position of the Group. Conduct of premature policy on securing interests in terms of intellectual property of the Group may seriously hinder its future business activity The Group is on the stage of intensive development and expansion of all its business spheres. Measures on securing the rights of the Group for certain objects of intellectual property have to be taken on the basis of the existing plans of commercial development and go ahead of any commercial activity. Insufficient experience of Russian companies in elaborating policy related to the objects of intellectual property produces the whole set of risks of unfavorable 109 effect, including the problems of using the promoted trade marks for individual products (services) in a number of countries, conflicts with employees, involved specialists and organizations regarding determination of rights for jointly manufactured products and split of the use rights on these products between the Group and other bodies. Risks related to the Company’s plans to increase the sales of the private label products and the development of new brands The expansion strategy of the Group presupposes the growth of sales of private label products (“for “Magnit” stores”). The scheduled growth may prove to be unachievable if the commercial expenses for popularization of such brand will considerably exceed the Group’s relevant budget. Alongside, the creation of the new brands may weaken the existing brands and require additional investments for maintaining their market position. Risks related to insufficiency of insurance coverage for damages arising from the forced interruption of activity, damages to the Group’s property or responsibility to the third parties The Group does not apply insurance for the forced interruption of its business activity, bringing to responsibility for products quality, fire (except for stocks and supplies) or changes in core management, and does not enter into insurance agreements on real estate property, distribution centers, stores or stocks at the warehouses (with rare exception). Moreover, the Group does not form special reserve or other funds to cover possible losses or settle claims with the third parties. Thus, in case of occurrence of any of such uninsured risks they may drastically disrupt the Group’s operation, cause considerable damage and/or require expenses which will not be compensated. All the foregoing circumstances may have negative effect on the business activity of the Group, its financial position and prospects. A major accident may result in substantial property losses and incapability to restore it. If in case of a major accident one or more objects of the Group (e.g. the headquarters in Krasnodar, distribution center or hypermarket) are seriously damaged, the Company may not be able to resume its activity within the established time period. The Group does not exercise the insurance or form special funds to cover such accidents. Any such accident may have negative effect on the Group’s business activity, its operational results, financial position and prospects. 110 16. KEY ASPECTS OF THE SOCIAL AND ENVIRONMENTAL POLICY SOCIAL RESPONSIBILITY “Magnit” retail chain is Russia’s largest non-governmental employer. As of December 31, 2016 the company’s total headcount comprised 271,369 employees, out of which: 200,233 – in-store personnel, 35,651 – people engaged in distribution, 21,654 – people in regional branches, 11,151 – Head Office employees, 2,680 – other personnel (own production, LLC “Magnit Energo”, LLC “Green Line” greenhouse complex). Each week Magnit opens several hundred job vacancies. The company offers a decent salary and the extended number of the employee benefits including seniority bonuses, corporate pension programs in the company’s own pension fund, corporate mobile communications plans, corporate taxi services, corporate educational programs, discount tours and tours, 60% of cost of which are paid by the company, for the company’s employees and their children, special offers on the services of the company’s partners, gym for the Head Office employees etc. The company operates in accordance with the Labor Code of the Russian Federation and the company’s internal regulations on staff relations. Magnit is strongly committed to the principle of equal opportunities, fairness and tactful attitude towards its employees. In accordance with the “Code of business ethics of PJSC “Magnit” the company’s high level of business culture is based on the transparency of all personnel-related procedures, accounting and payment policies, incentives and social measures taken to ensure the comfortable working conditions of the employees across the company. The staff business relations are based on the principles of justice, trust, honesty and ethics. New employees are selected on a competitive basis if their professional knowledge, skills and experience correspond to the required skills and company’s values. The company’s hiring process is effectuated in accordance with the “Recruitment regulations”, which reflect overall rules of the hiring procedure, determination of the hiring needs, steps to be taken through the recruitment process, procedure of collaboration with the divisions participating in the hiring process, vacancies closing dates. All Magnit’s vacancies are publicly available on its official website www.magnit- info.ru as well as on other job search websites. Magnit collaborates with the leading universities in the regions with the demand for students or graduates. The company regularly participates in career fairs, career and faculty days, organizes specific courses and provides the students with the opportunity to do internships. In spring of 2016 the company launched a new program “Magnit: new generation”, which includes provision information about the company, practical training and pre-graduation internship in the retail chain. Internship is paid by the company at all stages. Over 250 applications from students were considered for the period of existence of the program, 110 of them were approved following the results of the competitive selection. More than 70 future specialists have already taken paid practical trainings in different specializations and continue to get knowledge of the retail chain. A part of the students has been employed. Within this program the company cooperates with the leading higher education institutes of Krasnodar region: Kuban State University, Kuban State Agrarian University and Kuban State Technological University. The 111 program “Magnit: new generation” will be implemented on the regular basis. It gives students an opportunity to get a stable and well-paid job even at the stage of education or immediately after graduation from the institute. In its turn the company forms a necessary candidates pool and attracts young specialists. According to the “Code of business ethics”, all preferences including nationality, gender, age, religion etc. are prohibited in the company. If an employee experiences any aspects of biased attitude or discrimination, they may address the special complaints processing commission, which has an obligation to thoroughly examine the issue. The salary and incentives of all employees are determined for the specific positions and do not depend on gender, nationality or age of an employee but only on their performance. The company’s turnover is one of the lowest in the Russian food retail sector. One of the company’s priorities is to take consistent steps in order to decrease the turnover rates. That is why their level has been constantly slowing down and for the last several years almost halved. The company’s labor relations fully conform to the provisions of the Russian Labor Code. Moreover, the company has internal Standards and Regulations based on the legislation, which stipulate all HR management procedures, payroll calculation, benefits and compensation schemes, internal labor policies and procedures etc. All workplaces comply with the legislation and the company’s standards. According to the latter all workplaces shall be ergonomic, safe and aesthetic. The company’s Health and safety department closely monitors and assesses the existing working conditions, elaborates and implements the procedures of their enhancement. Magnit conducts projects related to health and safety culture development, labor protection and the development of the occupational risk management system and practice. Under these projects Magnit implements the following priorities of its labor protection policy: • health and safety protection of the company’s employees, • compliance with the requirements of the applicable Russian legislation and other labor protection regulations; • employees’ engagement in active participation in all labor protection measures and events; • constant improvement of the company’s labor protection management system. The measures taken to ensure that employees are provided with the decent working conditions are the following: • All equipment and raw materials are tested and thoroughly examined before their actual use by the employees; • Workplaces come under close scrutiny and assessment; • Organization of health and safety courses, trainings and tests of the employees’ knowledge and understanding of the topic; • Purchases of the safety clothing, footwear and equipment; • Mandatory medical examination of the employees; • Compliance of all buildings, construction and production sites, facilities etc. with the applicable Russian legislation. The company keeps the statistics of accidents. As a result of measures taken to reduce the number of occupational injuries, the total accident frequency rate of the company (number of accidents per 1,000 employees) in 2016 compared to 2015 decreased by 4.3%, the number of injuries fell by 3.6%. 112 In 2016 the company worked hard and took the following steps to reduce the number of accidents: • safety culture campaign. Information on the labor protection measures taken by the company is systematically published in "Nash Magnit" corporate newspaper; • • improvement of provision of the personal protection equipment; planned introduction of the new labor safety practices in all business divisions in compliance with the employment legislation and work safety regulations; • regular notification of employees of the occupational safety rules: allocation of visual materials, such as instruction sheets and occupational safety stands, demonstration of videos about safe working methods in all business divisions of the company; • development of the "Regulations on the safety management system" in the company including the procedure of the special assessment of the working conditions in accordance with the legislation; • development and introduction of labor protection regulations by professions and types or work; • holding of regular daily briefings together with the heads of the structural divisions of the company concerning the safety provision, labor protection and reduction of the accident frequency rate. The company has developed and implemented the "Standard on the financial assistance to employees in difficult straits", according to which in case of a serious disease or injury the company provides financial help to the employee. If an employee gets a serious occupational injury, the company takes care of this person by organizing a special commission in order to monitor the condition of the injured and to provide a timely financial assistance. The company has the “Employees and applicants claims commission” which is authorized to conduct official investigations of claims related to labor and social disputes. The commission considers objectively each claim from employees and applicants received by the company’s hotline. Following the results of claims consideration, the Commission makes decisions on administrative actions against those responsible, as well as on the change of the company’s technologies, rules and work standards to settle conflicts, reduce social strain of the personnel and develop the culture of respect for employees. As a result of work of the “Employees claims commission” the company can see a significant decrease in the number of claims to the external labor inspections. In order to provide employees with additional social guarantees the company implements a number of social programs, which can be used by any employee regardless of the length of employment, professional achievements and position occupied. The company carries out the following social programs: • financial assistance of employees in difficult straits; • health resort tours partly (up to 60% of cost) paid by the company for employees who have the need of health resort treatment including the company’s assistance in payment of transfer to the health resort and back for those employees who work far from the location of a resort; • financial assistance of employees who raise children in one-parent or multiple children families, as well as disabled children, in payment of recreation, rehabilitation and treatment; • provision of employees with an opportunity to buy tours to health resorts, hotels, and children’s camps at corporate discount prices; 113 • provision of employees with an opportunity to buy products and use services of organizations of different business areas on special favorable terms and/or at discounts provided only to the company’s employees; corporate pension programs of the company’s own pension fund; bus service, corporate taxi service; blood donor assistance for seriously ill employees and their close family • • • members; • • In 2016 more than 170 thousand employees used the above mentioned social programs. Apart from various social programs, the company holds different regular corporate events and motivation programs which are an important and essential part of the corporate culture of the company and are aimed at: New Year gifts for children of employees; free corporate gym to the Head Office employees. development of corporate culture and team spirit, recognition of personal and professional achievements, promotion of sport and attracting employees to a healthy lifestyle. • • motivation of employees and increase of loyalty to the company, • • These measures develop, unite and engage employees into participation in the company’s life. They are aimed at encouragement and recognition of employees and give them the opportunity of self-fulfillment at and outside work (sport, teambuilding, professional, creativity competitions). The company attaches great importance to provision of its employees with the timely and correct information about its mission, values, culture, development priorities, innovations, etc. For these purposes the company uses different tools, such as: portal of internal communications, corporate newspaper, weekly electronic digest of retail market news, internal newsletters to the company’s employees, informational stands in different divisions of the company, various training programs for new employees, holding of regular meetings and daily briefings, as well as corporate events and teambuildings. ENVIRONMENTAL RESPONSIBILITY Environmental policy of the Company is based on the balanced and socially acceptable combination of economic growth and maintenance of a favorable environment for future generations. Maintenance of a favorable environment is the Company’s liability and it provides significant opportunities to increase the efficiency of its development and to reduce costs, and in some cases to get additional income. Environmental policy of the Company is based on the Constitution of the Russian Federation, federal laws and other regulatory legal acts of the Russian Federation, international legal documents related to the protection of the environment and sustainable use of natural resources. The Company has the following liabilities that are fulfilled by it and it requires their fulfillment by its partners and contractors: 1. To ensure the compliance with all environmental regulations and requirements established by the legislation of the Russian Federation, international legal documents related to the protection of the environment. 114 2. To ensure a reduction of a negative impact on the environment, efficient use of resources. 3. To ensure compensation of a possible damage to the environment. 4. To take preventive acts to avoid a negative impact on the environment which means the priority of preventive measures to avoid a negative impact over the measures to relieve the consequences of such impact. 5. To increase the energy efficiency of operation processes. 6. To ensure involvement of the Company’s employees in activity related to the reduction of environmental risks, continuous improvement of the environmental management system, performance in terms of protection of the environment. 7. To increase the level of awareness and competence of the Company’s employees in terms of solving the issues of environment protection. 8. To participate in environmental programs and in projects aimed at maintenance of a favorable environment in the regions of presence. Mechanisms for implementation of environmental policy liabilities The main mechanisms for implementation of the Company’s environmental policy liabilities are: 1. Industrial environmental control and monitor, evaluation of impact of the Company’s business activity on the environment. 2. Compulsory record-keeping of environmental aspects and evaluation of risks while planning the activity, developing and implementing projects. 3. Implementation of innovative projects aimed at the increase of energy efficiency, use of renewable energy resources and nonconventional energy resources. 4. Maximum use of waste as secondary raw materials and energy resources. 5. Application of the best available technologies at different stages of operational procedures, including purchases of technologies, materials and equipment. 6. Involvement of all employees of the Company in the activity related to the environmental management system. 7. Improvement of the system of environmental training of the Company’s employees. 8. Interaction with organizations and parties interested in the increase of the environmental safety of the Company; 9. Communication of the Environmental policy liabilities to all persons working for the Company or on its behalf, including contractors working at the Company’s facilities. 10. Participation in environmental programs and projects aimed at maintenance of a favorable environment. 115 17. CORPORATE GOVERNANCE To enhance the attractiveness of the Company for existing and potential investors, PJSC “Magnit” strives to a full compliance with the best practices and standards of the corporate governance. The Company works consistently on maintaining an effective system of corporate governance by its sustainable development and improvement. PJSC “Magnit” fully meets the requirements of securities laws, company laws and other statutory enactments. Adherence of the Company to the main and most significant principles of the Corporate Governance Code recommended for application by the Bank of Russia is aimed at the achievement of a reasonable balance of the Company’s interests as a business entity and as a joint stock company and at the efficient interaction between shareholders and management of the Company . Board of Directors of PJSC “Magnit” 116 PJSC “MAGNIT” CORPORATE GOVERNANCE AND CONTROL STRUCTURE The General Shareholders Meeting is the supreme management body of the Company. The Board of Directors, elected by the shareholders and accountable to them, provides strategic management and oversight of the work of the executive bodies, namely the Chief Executive Officer, the Chairman of the Management Board and the Management Board. The executive bodies effect the current management of the Company and carry out the tasks entrusted to them by the shareholders and the Board of Directors. The Company has built an effective system of the corporate governance and internal control over financial and economic activity to protect the shareholders’ rights and legitimate interests. The Board of Directors oversees the Audit Committee, which in conjunction with the Internal Audit Department helps the management bodies to ensure the Company’s effective operation. The Revision Commission monitors the Company’s compliance with the regulations and the legality of its operations. The Internal Control and Risk Management Department of the Company was formed for the purpose of effective organization and functioning of the internal control and risk management system. To inspect and verify the Company’s financial statements PJSC “Magnit” invites the external auditor with no property interest related to the Company or its shareholders. The HR and Remuneration Committee, which is a part of the Board of Directors, provides the recommendations on the key appointments and incentives of the members of the Board of Directors, executive and controlling bodies. The Corporate governance department which performs functions of the Corporate secretary was formed in the Company for the purposes of efficient interaction with shareholders, coordination of the company’s activities in terms of protection of shareholders’ rights and interests, and maintenance of the efficient performance of the Board of Directors. The Company timely and in full discloses reliable information, including details of its financial position, economic performance and ownership structure, thereby giving shareholders and investors the opportunity to make valid decisions. The information is disclosed in compliance with the Russian legislation and the requirements of the UK financial regulator, the Federal Conduct Authority (FCA). The Company also has its own Regulations on the access to insider information, the PJSC “Magnit” Rules of protection of confidential and insider information and control over compliance with the legislative requirements against the misuse of insider information and market abuse. GENERAL SHAREHOLDERS MEETING The Company’s shareholders participate in the management of the Company by making decisions at the General Shareholders Meeting. Shareholders may considerably influence the business by means of voting, specifically, the powers of the General Shareholders Meeting include approval of the annual report and accounting statements, profit allocation, including the dividend payment, election of the Company’s core management and control bodies, approval of major and related-party transactions, and some other important issues. The procedure of holding of the General Shareholders Meeting is aimed at observance of the shareholders’ rights and meets all requirements of the Russian legislation, as well as the UK financial regulator, the Federal Conduct Authority (FCA). 117 BOARD OF DIRECTORS The Company’s Board of Directors is a core element of the PJSC “Magnit” corporate governance system. The Board of Directors represents the shareholders’ interests and is responsible for the increase of the business value by organizing the efficient management. The Board of Directors of the Company carries out overall management of the Company’s activities in compliance with the provisions of the Company’s Charter, Regulations on the Board of Directors of PJSC “Magnit” and the requirements of the legislation of the Russian Federation. The main goals of the Board of Directors are the following: • • • • to achieve the maximum profit amount and increase the Company’s assets; to protect the rights and legitimate interests of the Company’s shareholders; to monitor the executive bodies’ activity; to ensure that the Company’s public information is complete, accurate and objective. Members of the Company’s Board of Directors are elected by the General Shareholders Meeting for a term lasting until the next annual General Shareholders Meeting. The members of the Board of Directors are elected by the cumulative voting. Decisions of the Company’s Board of Directors are approved by the majority of the Board of Directors’ members participating in the meeting, unless otherwise is stipulated by the Charter or the Company’s internal documents and the legislation. Every member of the Board of Directors has one vote while making the decisions at the Board of Directors meeting. Meetings of the Board of Directors are held when necessary but at least once in two months. The Chairman of the Board of Directors calls a meeting on his own initiative or at the request of the Board of Directors’ member, the Revision Commission or the Auditor of the Company, the Chief Executive Officer of the Company and at the request of other persons specified by the Federal Law “On Joint Stock Companies” and the Company’s Charter. The Chairman of the Company’s Board of Directors organizes and manages the Board of Directors work. In accordance with the best corporate governance practices, in compliance with the recommendations of the Corporate Governance Code and requirements of the Listing Rules of the Moscow Exchange, the Board of Directors comprises 3 (Three) independent directors. The Company uses recommendations of the Corporate Governance Code and other acknowledged native and foreign criteria for specification of the Board of Directors’ member independence criteria. The Board of Directors has two specialized committees: • Audit Committee; • HR and Remuneration Committee. The committees work in compliance with the Regulations on Committees of the Board of Directors of PJSC “Magnit”. 118 The members of PJSC “Magnit” Board of Directors, information on the meetings of the Board of Directors in 2016 year, report on the operation of the Board of Directors and other information are represented in the previous sections of the present Annual Report. MANAGEMENT BOARD The Management Board is the collective executive body of PJSC “Magnit” which together with the Chief Executive Officer (Chairman of the Management Board) manage current operations. The Management Board reports to the General Shareholders Meeting and the Board of Directors. The Management Board acts in compliance with the Russian legislation, the Charter and the Regulations on the Management Board, which has been approved by the General Shareholders Meeting. The Board of Directors determines the personal composition of the Management Board, elects and early terminates the powers of its members every year at the first Board of Directors’ meeting held after the annual General Shareholders Meeting. The Chief Executive Officer forms a part of the Management Board and performs functions of the Chairman of the Management Board. The powers of the Chairman of the Management Board terminate with the powers of a Chief Executive Officer of the Company. The Management Board is responsible for the Company’s current operations except for the issues referred to the competence of the General Shareholders Meeting and the Board of Directors, and implements the decisions adopted by these bodies. More detailed information on the powers of the Management Board is provided in the Charter of the Company and in the Regulations on the Management Board of PJSC “Magnit”. THE CHIEF EXECUTIVE OFFICER – THE CHAIRMAN OF THE MANAGEMENT BOARD In accordance with the PJSC “Magnit” Charter, the Chief Executive Officer of the Company has the full authority to manage the Company’s current operations and resolve the relevant issues not referred to the competence of the General Shareholders Meeting, Board of Directors and Management Board of the Company. The Chief Executive Officer of the Company manages the Company’s operations in accordance with the provisions of the Company’s Charter, the requirements of the legislation of the Russian Federation and with the internal documents of the Company. THE CORPORATE SECRETARY A special structural division which performs the functions of the corporate secretary – Corporate governance department – was formed in the Company for the purpose of efficient interaction with shareholders, coordination of the company’s actions in terms of protection of rights and interests of shareholders, maintenance of the efficient performance of the Board of Directors in accordance with the recommendations of the Corporate Governance Code and requirements of the Listing Rules of the Moscow Exchange. The head of this division is the Corporate governance director who is the Company’s official. The Corporate governance department reports to the Board of Directors of the Company. The main functions performed by the Corporate governance department are: 119 • • Involvement in improvement of the system and practice of the company’s corporate governance; Involvement in preparation and holding of general shareholders meetings of the company; • Maintenance of work of the Board of Directors and its committees; • Involvement implementation of the company’s policy on disclosure, ensuring storage of corporate documents of the company; in information • Ensuring the interaction of the company with its shareholders and involvement in prevention of corporate conflicts; • Ensuring the interaction of the company with regulatory authorities, market operators, registrar, and other professional securities market players within the authorities assigned to the Corporate governance department; Immediate informing the Company’s Board of Directors of all identified law violations, as well as provisions of the company’s internal documents securing the compliance of which is a function of the Corporate governance department; • • Ensuring of implementation of procedures established by the legislation and the company’s internal documents, which ensure execution of rights and realization of legitimate interests of shareholders, and control over their fulfillment. The Regulations on the corporate governance department of PJSC “Magnit” were approved by the Decision of the PJSC “Magnit” Board of Directors on May 27, 2016, and Ekaterina Kister was approved for the position of the Director for corporate governance. Biographical information: Name: Ekaterina Kister. Year of birth: 1978. Education: higher - in 2000 graduated from the Kuban State University – a law degree. Information on the primary employment: - Director for corporate governance of JSC “Tander”; - Director for corporate governance of PJSC “Magnit” (secondary employment). BODIES SUPERVISING FINANCIAL AND ECONOMIC ACTIVITY OF PJSC “MAGNIT” Internal control and audit of the Group is an essential part of the corporate governance and one of the most important factors of effective work of the Company. The internal control and audit bodies ensure the sustainability of PJSC “Magnit” development and protect the shareholders and investors’ interests, thus increasing the investment attractiveness of the Company. Internal control and audit comply with the best world practices and meet the requirements of the Russian legislation. The bodies supervising financial and economic activity of PJSC “Magnit” have the following structure: • Revision Commission of PJSC “Magnit”; • Audit Committee of the Board of Directors of PJSC “Magnit”; • Internal Audit Department; 120 Internal Control and Risk Management Department • • External Auditor. Revision commission of PJSC “Magnit” The Revision Commission of the Company verifies the Company’s compliance with the applicable legislation and other statutory acts that regulate its activity and the legality of the Company’s operations. The Revision Commission is elected at the annual General Shareholders Meeting of PJSC “Magnit” and consists of 3 (Thee) members. The General Shareholders Meeting determines its personal composition for the period until the next annual General Shareholders Meeting. On June 2, 2016 at the annual General Shareholders Meeting the following candidates were elected to the Revision Commission: 1. Roman Efimenko; 2. Anzhela Udovichenko; 3. Denis Fedotov. On December 8, 2016 at the extraordinary General Shareholders Meeting the decision to early terminate the authorities of the members of PJSC “Magnit” Revision commission was made and the following candidates were elected to the Revision Commission: 1. Roman Efimenko; 2. Anzhela Udovichenko; 3. Lyubov Shaguch. Audit committee of PJSC “Magnit” Board of Directors The Audit Committee was established in accordance with the Regulations on the committees of PJSC “Magnit” Board of Directors. The committee is established by the decision of the Board of Directors which determines its quantitative and personal composition and elects the Chairman of the Committee. The Committee consists of 3 (Three) members. The Committee members are elected for the term until the termination of the Board of Directors’ powers. The audit committee performs the following functions: 1) In terms of accounting (financial) statements: to ensure that the company’s financial statements are complete, accurate and credible; • • analysis of the material aspects of the accounting policy of the company; • participation in consideration of material issues and judgments related to the accounting (financial) statements of the company; • analysis of significant changes to the legislation which may influence the accounting (financial) statements of the company and of the results of inspections of the company by any regulatory authorities; cooperation with the Revision Commission and auditors of the company; • 2) In terms of risk management, internal control and corporate governance: 121 • determination of the operational principles of the system of internal control and risk • management; to ensure that the system of risk management and internal control and the corporate governance system are efficient and reliable, including assessment of efficiency of procedures of risk management and internal control of the company, of the corporate governance practice, and suggestions for their improvement; • analysis and evaluation of compliance with the company’s policy for the risk • management and internal control; control over procedures ensuring the compliance of the company with the legal requirements, as well as ethical standards, rules and procedures of the company, requirements of stock exchanges; • analysis and evaluation of compliance with the company’s policy for management of the conflict of interests; • analysis and evaluation of compliance with the company’s Policy for the risk • • management and internal control; evaluation of efficiency of the system of risk management and internal control of the Company and preparation of suggestions for their improvement; analysis and evaluation of performance of the system of risk management and internal control, including preparation of suggestions for the system improvement; 3) In terms of performance of the internal and external audit: • • • • • • • • • • to ensure that the internal and external audit functions are performed in an independent and objective way; consideration of the Regulations on the internal audit; consideration of the business plan of the Internal audit department; receipt of the information on the performance of the business plan and of the internal audit; consideration and preliminary approval of the decisions on appointment, termination of appointment and determination of remuneration of the head of the Internal audit department; consideration of the existing limitations of authorities or budget for the performance of the internal audit which can negatively affect the efficient performance of the internal audit; evaluation of the efficiency of performance of the internal audit, including the assessment of the efficiency of the internal and external audit process; evaluation of independence, objectivity and absence of the conflict of interests of external auditors of the company, including assessment of candidates for the position of the company’s auditor, generation of proposals on appointment, reelection and removal of external auditors of the company, on payment for their services and terms of their involvement; supervision over the external audit and assessment of quality of the audit and the auditors’ conclusions, including the assessment of the company’s external auditors’ conclusions provided for the future provision to shareholders by the company as materials for the annual General shareholders meeting; to secure the efficient interaction between the Internal audit department and external auditor of the company; 122 • development and control over company’s compliance with the policy determining the principles of rendering and combining auditing and non-auditing services by the auditor to the company; • preliminary consideration of reports on the results of performance of the Internal audit • department; consideration of any material disagreements between auditors, Revision Commission and the company’s management related to the accounting (financial) statements; 4) In terms of countermeasures against unfair acts of the company’s employees and third parties: • • • to ensure the efficiency of the system of notification of the possible fraud by the company’s employees and third parties as well as other disorders in the company; control over the conduct of special investigations on issues of the possible fraud, dishonest use of the inside or confidential information; control over the implementation of measures adopted by the executive management of the company on informing on the possible unfair acts of employees and other breaches, including the analysis and evaluation of execution of the provisions of the company’s Code of business ethics; 5) preparation of recommendations for major transactions, related party transactions and transactions subject to the approval in accordance with the company’s charter, which the company plans to execute; 6) consideration of issues related to the company’s compliance with its information policy; 7) making decisions on other issues related to the financial activity, risk management, internal audit, corporate governance in cases when, according the chairman of the Audit committee, such issue relates to the Committee’s functions. On June 17, 2015 at the meeting of the Board of Directors the decision to elect the following 3 (three) candidates to the audit committee of the PJSC “Magnit” Board of Directors was made: Alexander Zayonts, Aleksandr Aleksandrov and Alexey Pshenichniy. On June 22, 2016 at the meeting of the Board of Directors the decision to elect the following 3 (three) candidates to the audit committee of the PJSC “Magnit” Board of Directors was made: Alexander Zayonts, Aleksandr Aleksandrov and Alexey Pshenichniy. Internal audit department of PJSC “Magnit” According to the PJSC “Magnit” Regulations on the internal audit for the achievement of the stated objectives the Internal Audit Department performs the tasks on the following main directions: 1) assistance to the executive bodies of the Company and employees of the Company in the development and monitoring of performance of procedures and actions on the improvement of the systems of risk management and internal control and corporate governance of the Company; 2) coordination of activities with the external auditor of the Company as well as with the persons providing consulting services in the sphere of risk management, internal control and corporate governance; 123 3) the conduction of the internal audit of subsidiaries of the Company under the established procedure; 4) preparation and provision to the Company’s Board of Directors and executive bodies of reports on the Internal Audit Department’s operation results (including information on existing risks, problems, results and effectiveness of corrective actions of revealed problems, the results of performance of operating plan of internal audit, results of evaluation of actual condition, reliability and effectiveness of the risk management, internal control and corporate governance system); 5) check of compliance with the legislation and policies of the Company, concerning inside information and anticorruption efforts, by the members of executive bodies of the Company and its employees. For the purpose of solution of stated problems and achievement of objectives the Internal Audit Department performs the following functions: 1. evaluation of adequacy and effectiveness of the internal control system; 2. evaluation of the effectiveness of risk management system; 3. evaluation of corporate governance; 4. auditing in accordance with the approved performance plan of internal audit; 5. conduction of other verifications, performance of other tasks on request/ by order of the Board of Directors (Audit Committee of the Board of Directors and/or executive bodies of the Company) within their competence; consultation of executive bodies of the Company on the issues of risk management, internal control and corporate governance (under the condition of securing of independence and objectiveness of internal audit activity); 6. 7. development of internal control operation plan; 8. preparation and provision to the Board of Directors (Audit Committee of the Board of Directors) and the sole executive body of the Company the report following the operating results of internal audit; cooperation with the divisions of the Company regarding to the internal audit activity; 9. 10. control of rectification of violations detected following the verifications and employee investigations; 11. analyses of audit results of the Company, control of development and implementation of plans and procedures of rectification of violations detected during the auditing; 12. preparation of proposals on the improvement of internal control procedures; 13. development of documents regulating the activities of Internal Audit Department. Based on the principles of the Corporate governance code and the corresponding international policies and standards, the Internal audit department evaluated the level of organization and performance of the system of internal control and risk management of PJSC “Magnit” for the year 2016. Evaluation of the level of organization and performance of the system of internal control and risk management of PJSC “Magnit” for the year 2016 was conducted in accordance with the Information of the Ministry of Finance of Russia No. PZ-11/2013 "Organization and implementation of economic entity's internal control performed facts of economic life, accounting and accounting (financial) statements", COSO framework “Internal Control - Integrated Framework” (2013), COSO framework “Enterprise Risk Management - Integrated Framework” (2004). 124 The evaluation was conducted in terms of components of the process of internal control and risk management: internal (control) environment, targets setting, event definition, risk assessment, risk response, means of control, information and communications, monitor. Parameters were identified for the components of the process of internal control and risk management, and the current state of the parameters characterizing the level of organization and performance of the system of internal control and risk management according to COSO was determined. According to the results of evaluation of the Internal audit department, the current level of organization and performance of the system of internal control and risk management was recognized as well-established and meeting the requirements of the Company. The report of the Internal audit department on organization, performance and efficiency of the system of internal control and risk management of PJSC “Magnit” for the year 2016, containing the evaluation results, was reviewed by the Company’s Board of Directors at the meeting on March 28, 2017. Following the results of the report consideration the findings of evaluation of the system efficiency and suggested measures for its improvement were approved. In December 2016 the Board of Directors approved the business plan of the Internal audit department for the year 2017. Internal control and risk management department of PJSC “Magnit The Internal Control and Risk Management Department was formed for the purpose of effective organization and functioning of internal control and risk management system in the Company. For the achievement of specified goals the Internal Control and Risk Management Department performs the following tasks: - building of corporate system of internal control and risk management of the Company; - general coordination of internal control and risk management processes; - development of methodological documents in the field of securing of the internal control and risk management process; - organization of procedures regarding to the identification, classification, analysis, - managing and monitoring of risks in the sphere of Company’s activities; assuring of the process of development and realization of risk management activities; - preparation of recommendations on the determination of the risk appetite of the Company and estimation of the level of acceptable risk of the Company (the level of risk tolerance of the Company); analysis of risk portfolio of the Company and generation of proposals on the order of response to the correspondent risks; - - monitoring and control of risk management procedures of the Company, as well as satisfying the requirements of internal regulations in the sphere of internal control and risk management; - making recommendations focused on improvement of effectiveness of control procedures, reduction of influence of realized and potential risks of realization of business processes; formation of consolidated reporting on the risks of the Company; - 125 - efficient verification of internal control and risk management process by the divisions of the Company and in the established procedure by subsidiary companies; - organization of consulting of Company’s employees in the sphere of internal control - and risk management; informing of the Company’s Board of Directors and executive bodies of the organization of internal control and risk management processes, as well as of other issues, required by the Policy. Independent auditor Ernst & Young LLC (Taxpayer Id. Number 7709383532), registered in the Russian Federation at 77 Sadovnicheskaya embankment, building 1, Moscow, was approved as the auditor of the consolidated financial reports of the Company prepared in accordance with the International Financial Reporting Standards by the annual General Shareholders Meeting on June 2, 2016. Ernst & Young LLC is a member of the Self-regulatory organization of auditors “Russian union of auditors” (Association) (SRO RUA) (Certificate of October 20, 2016, decision No. 274 of 20.10.2016, Principal Number of Registration Entry 11603050648) and is one of the global leaders in the audit services. Ernst & Young LLC is part of Ernst & Young Global Limited. Ernst & Young Global Limited received worldwide recognition and was awarded many times for the high quality of services and unique corporate culture. In the reporting year the auditor conducted the audit of the consolidated financial statements of PJSC “Magnit” and its subsidiaries in accordance with the IFRS for the year 2016. Following the results of the conducted audit, the auditor of PJSC “Magnit” expressed an opinion on the fair presentation of the consolidated financial statements prepared in accordance with the IFRS. Audit Firm “Faber Lex” LLC, located at 144/2 Krasnykh Partisan Street, Krasnodar, was approved as the auditor of the accounting (financial) statement of the Company for 2016 year prepared in accordance with the Russian Accounting Standards by the annual General Shareholders Meetings on June 2, 2016. AF “Faber Lex” LLC is a member of the Self-regulatory organization of auditors “Russian union of auditors” (Association) (SRO RUA) with the main registration number (Principal Number of Registration Entry) of 10203002910, Certificate of membership in SRO RUA of 03.08.2016. Following the results of the conducted audit, the auditor of PJSC “Magnit” expressed an opinion on the fair presentation of the financial position of the Company in all respects in the accounting (financial) statements. INFORMATION ON THE COMPLIANCE WITH THE PRINCIPLES AND RECOMMENDATIONS OF THE CORPORATE GOVERNANCE CODE Within the preparation of the report on the compliance of PJSC “Magnit” with the principles and recommendations of the Corporate Governance Code the evaluation method and prospective form of the report recommended by the Letter of the Bank of Russia №ИН-06-52/8 as of 17.02.2016 were used. The report is an integral part of the present Annual Report and contains in the annex hereto (ref. Annex №6). 126 ENHANCEMENT OF MODEL AND PRACTICE OF CORPORATE GOVERNANCE The corporate governance of PJSC “Magnit” is performed in accordance with the current legislation of the Russian Federation and the Charter of the Company in compliance with the rules and traditions of the corporate governance, which correspond to the basic Russian and international standards and contribute to the creation of a positive image of the Company in the eyes of investors, clients and employees. PJSC “Magnit” constantly masters new methods and approaches and rejects from the practice, which doesn’t meet current requirements. In 2016 the Company extensively introduced the standards recommended by the Corporate Governance Code, in particular: 1. On March 29, 2016 the PJSC “Magnit” Board of Directors approved the Internal control and risk management policy for the purpose of establishing the rules of organization of activity in terms of forming the system of internal control and risk management and securing the performance of the efficient system of internal control and risk management, consistent with the values and the Company’s areas of activity. The key issues set out in this document are: - establishment of targets, tasks, principles and components of the process of the internal control and risk management; - determination of the levels of the system of internal control and risk management bodies and distribution of obligations and authorities between them; - determination of the procedure of interaction of management bodies, divisions and executives performing functions within the system of internal control and risk management. 2. On May 27, 2016 in accordance with the recommendations of the Corporate Governance Code, the Board of Directors ratified the Regulations on the Public Joint Stock Company “Magnit" Corporate governance department which performs the functions of the Corporate secretary in the Company, and approved the nominee for the position of the Director for corporate governance. The department provides efficient current interaction with shareholders, coordination of the Company’s actions in terms of protection of rights and interests of the shareholders, maintenance of the efficient performance of the Company’s Board of Directors, as well as compliance of the Company with the applicable legislation securing exercise of rights and legitimate interests of shareholders. 3. On May 27, 2016 the Board of Directors approved the Regulations on the dividend policy in the new edition. The Regulations on the dividend policy of PJSC “Magnit” have been brought into conformity with requirements of the applicable legislations and recommendations of the Corporate Governance Code. 4. On December 15, 2016 the Board of Directors of PJSC “Magnit” ratified the Regulations on the committees of the PJSC “Magnit” Board of Directors in the new edition. The Regulations on the committees of the PJSC “Magnit” Board of Directors have been brought into conformity with requirements of the applicable legislations, Listing Rules of CJSC “MICEX Stock Exchange” (presently – PJSC “Moscow Exchange”) and recommendations of the Corporate Governance Code. 127 Among material amendments to the legislation of the Russian Federation for 2016 there is reorganization of corporate actions, namely, entry into force of the provisions of the federal laws “On Joint Stock Companies”, “On Securities Market” and “On the Central Depositary, introduced by the Federal law No. 210-FZ of 29.06.2015 and establishing, but not limited to, the following provisions of the reform: the approach to the listing of securities holders has been changed; • • a new procedure of exercise of rights has been introduced for the conduction of • corporate operations centrally through accounting system institutions; the central depositary has been entitled to establish the form of electronic interaction at the exercise of rights for securities; • new ways of participation of securities holders in general shareholders meetings have been introduced — in particular, voting in an electronic form using the services of the depositary and voting in an electronic form in the Internet. By the end of 2017 it is planned to bring some internal documents of the Company, particularly Regulations on the information policy, into compliance with the recommendations of the Corporate Governance Code. 128 18. INFORMATION ON THE AUDITOR AND THE CONSULTANT OF THE COMPANY Under the resolution of the annual General Shareholders Meeting of June 2, 2016 (minutes of 03.06.2016) the auditing firm AF “Faber Lex” LLC was appointed as the Company’s auditor in accordance with Russian Accounting Standards for the year 2016. Among the factors which were taken into account to choose the auditing firm are: duration of auditing company, the cost of auditing services, the number of employees and their qualification. Information on the auditor of the Company which conducted the audit of the statements of the Company for the year 2016 in accordance with the Russian Accounting Standards: The auditor of the Company in 2016 was Limited Liability Company Auditing Firm “Faber Lex”, address: 144/2 Krasnykh Partizan Street, Krasnodar. AF “Faber Lex” LLC is a member of the Self-regulatory organization of auditors “Russian union of auditors” (Association) (SRO RUA) with the main registration number (Principal Number of Registration Entry) of 10203002910, Certificate of membership in SRO RUA of 03.08.2016. Telephone number: +7 (861) 220-03-20, 221-41-42, 226-41-41, 226-45-22, 226-38-15, 226-44- 54. Information on the auditor of the Company which conducted the audit of the statements of the Company for the year 2016 in accordance with the International Financial Reporting Standards: The 2015 year statements in accordance with the International Financial Reporting , address: 77 Standards were audited by Limited Liability Company ”Ernst&Young” Sadovnicheskaya embankment, bldg. 1, Moscow, 115035, Russian Federation. “Ernst&Young” LLC is the member of the Self-regulatory organization of auditors “Russian union of auditors” (Association) (SRO RUA) (Certificate of October 20, 2016, decision No. 274 of 20.10.2016, Principle Number of Registration Entry 11603050648). Information on the financial consultant of the Company on the securities market, which signed the securities prospectus registered on 06.03.2006: Full name of organization Short name of organization Open Joint-Stock Company «Federal Fund Corporation» OJSC «FFC» Address 25 Ostozhenka street, Moscow, Russia Phone number (including city code) +7 (495) 737-86-30 Fax number (including city code) +7 (495) 737-86-32 Website of the financial consultant to disclose the information about the Issuer according to www.fscorp.ru 129 the requirements of the Regulation on the information disclosure by the issuer of securities, approved by FFMS The number of license of the professional on the securities market Date of issue Period of validity Issuing authority License of the professional participant of the securities market for brokerage activity № 077-06174-100000, License of the professional participant of the securities market for dealer activity № 077-06178- 010000 August 29, 2003 Without restriction on the period of validity Federal Commission for Securities Market Services provided by the financial consultant: - Preparation of the draft prospectus according to the information provided by the Company; - Signing of the prospectus approved by the Company, after adequate verification based on all the documents provided by the Company, according to the written inquiries of the Financial Consultant and receipt of the proper written certifications of the Company on reliability, adequacy and completeness of the information contained in the above indicated document and to be included in the prospectus, except for the part, verified by the auditor and/or appraiser; - Expertise of the documents filed to the registration authority for the prospectus registration; - Signing of documentation, which might be required from the Company for organization of stock trading with the trade organizers; - Consulting on securities issue, including information disclosure on the securities market according to the requirements of the legislation. 130 19. INFORMATION ON THE VOLUMES OF THE UTILIZED ENERGY RESOURCES WITHIN 2016 Type of energy resources Nuclear energy Heating energy Electrical energy Electromagnetic energy Oil Petrol Diesel oil Furnace oil Natural gas Coal Shale oil Peat Other: Unite of measure Utilization capacity in volume terms Utilization capacity in money terms, thousand rubles - - - - - - - - - - - - - - The quantitative accounting is not maintained The quantitative accounting is not maintained - - - - - The quantitative accounting is not maintained - - - - - 861.7 2,187.1 - - - - - 419.9 - - - - Other types of energy resources, except for those specified in the table, were not consumed and used in the reporting year. 131 20. MANAGEMENT RESPONSIBILITY STATEMENT I confirm that: - - the financial statements prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and its consolidated subsidiaries taken as a whole; and the management report includes a fair review of the development and performance of the business and the position of the Company and its consolidated subsidiaries taken as a whole, together with a description of the principal risks and uncertainties that they face. On behalf of the Management Board, Sergey Galitskiy CEO, Chairman of the Management Board 132 ANNEXES TO FY 2016 ANNUAL REPORT OF PJSC “MAGNIT” ANNEX No. 1: Consolidated financial statements of PJSC “Magnit” for the year ended on December 31, 2016. ANNEX No. 2: Consolidated financial statements of PJSC "Magnit" for the year 2016 prepared in accordance with the Federal law N 208-FZ "On consolidated financial statements". ANNEX No. 3: Accounting report of JSC “Tander” for the year 2016 prepared in accordance with RAS: Auditor’s report of “Faber Leks” Audit Limited Liability Company of the annual accounting report of JSC “Tander” for the financial year 2016 Accounting reports of JSC “Tander” for the year 2016 Explanations to the accounting reports of JSC "Tander" for the year 2016 ANNEX No. 4: Accounting report of PJSC “Magnit” for the year 2016 prepared in accordance with RAS: Auditor’s report of “Faber Leks” Audit Limited Liability Company of the annual accounting report of PJSC “Magnit” for the financial year 2016 Accounting reports of PJSC “Magnit” for the year 2016 Explanations to the balance sheet and income statement of PJSC "Magnit" for the year 2016 ANNEX No. 5: Transactions executed within the year 2016 considered related party transactions according to the Federal law “Оn Joint Stock Companies”. ANNEX No. 6: Report on the compliance with the principles and recommendations of the corporate governance code for the year 2016. 133 

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