O'Key Group SA Annual Report 2015

FY2015 Annual Report · O'Key Group SA

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OVERCOMING CHALLENGES,
DELIVERING CHANGE

O’Key Group S.A. Annual Report 2015

AT O’KEY, WE ARE COMMITTED
TO DELIVERING MAXIMUM
VALUE AND QUALITY FOR OUR
CUSTOMERS, WHILE GROWING
SUSTAINABLY AS A LEADER IN
THE LONG-TERM DEVELOPMENT
OF THE RUSSIAN RETAIL SECTOR.

We are building a world-class retailer with a passion
for quality and the ambition to deliver a unique
customer experience. We are developing on the
basis of three world-class formats – hypermarkets,
supermarkets and discounter stores – and have earned
an unrivalled reputation for product quality and
customer service.

OVERVIEW

1-3

STRATEGIC REPORT

4-26

GOVERNANCE

27-34

FINANCIAL STATEMENTS 35-74

Financial &
Operational Highlights

O’KEY Group at a Glance

Chairman and
Chief Executive’s Statement

Our Strategy

In Focus – Private Label

In Focus – Online Shopping

Board of Directors

Senior Management

Corporate Governance

Ownership and
Shareholder Structure

Management & Directors
Responsibility Statement

Statement of CEO
of Discounter Format

Our Marketplace

Corporate Social
Responsibility

Financial Review

Risk Management

Report of the Réviseur
d’Entreprises Agréé

Consolidated Statement
of Financial Position

Consolidated Statement
of Profit or Loss and Other
Comprehensive Income

Consolidated Statement
of Changes in Equity

Consolidated Statement
of Cash Flows

Notes to the Consolidated
Financial Statements

Overview
Financial & Operational Highlights

In 2015, O’KEY Group delivered revenue
growth of 6.9%, driven by the Company’s
expansion and despite the strong
headwinds in the Russian retail market.
The Group’s gross margin declined
year-on-year due to the decision to
offer a better value proposition
to customers.

Revenue (RUB billion)

2015

2014

162.5

152.0

Gross profit (RUB billion)

38.4
37.2

23.6
24.5

2015

2014

Gross margin (%)

2015

2014

EBITDA (RUB billion)

2015

2014

EBITDA margin (%)

2015

2014

10.1

11.3

6.2

7.4

Operating profit (RUB billion)

2015

2014

5.9

8.6

Net profit (RUB billion)

1.9

2015

2014

5.2

593,000 m2 of
selling space
(compared to
552,000 m2 in 2014)

Total stores
(compared to
108 in 2014)

593K
146
32
6.9%

Presence in
32 Russian cities
(compared to
28 in 2014)

Revenue growth
in 2015

O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewMurmansk

2 HM

St Petersburg

20 HM

20 SM

Cherepovets

Moscow

1 HM

10 HM

7 SM

Ivanovo

1 HM

1 SM

Syktyvkar

1 HM

Lipetsk

1 HM

1 SM

Rostov-on-Don

2 HM

1 SM

Krasnodar

4 HM

1 SM

Sochi

1 HM

Stavropol

1 HM

Voronezh

2 HM

1 SM

Volgograd

1 HM

3 SM

Saratov

1 HM

1 SM

Astrakhan

2 HM

1 SM

Nizhniy Novgorod

3 HM

Togliatti

1 HM

1 SM

Ufa

3 HM

Sterlitamak

1 HM

Orenburg

1 HM

Hypermarket (HM)

Supermarket (SM)

Discounter stores (DS)

Yekaterinburg

2 HM

Surgut

2 HM

Tyumen

2 HM

Omsk

1 HM

1 SM

Novosibirsk

2 HM

Krasnoyarsk

2 HM

1 SM

Tver
1 DS

Kaluga
1 DS

Tula
4 DS

Tver region
1 DS

Moscow
11 DS

Ryazan
2 DS

Kaluga region
1 DS

Moscow region
20 DS

Murmansk
2 HM

Tula region
4 DS

St Petersburg
20 HM
20 SM

Ryazan region
2 DS

Moscow
10 HM
7 SM

Cherepovets
1 HM

Ivanovo
1 HM
1 SM

Syktyvkar
1 HM

Lipetsk
1 HM
1 SM

Nizhny Novgorod
3 HM

Togliatti
1 HM
1 SM

Ufa
3 HM

Yekaterinburg
2 HM

Surgut
2 HM

Rostov-on-Don
2 HM
1 SM

Krasnodar
4 HM
1 SM

Sochi
1 HM

Stavropol
1 HM

Voronezh
2 HM
1 SM

Volgograd
1 HM
3 SM

Saratov
1 HM
1 SM

Orenburg
1 HM

Sterlitamak
1 HM

Astrakhan
2 HM
1 SM

Tyumen
2 HM

Omsk
1 HM
1 SM

Novosibirsk
2 HM

Krasnoyarsk
2 HM
1 SM

146 stores in 32
cities in Russia

Hypermarket (HM)
Supermarket (SM)
Discounter stores (DS)

Our History:

2001-2002
– Founding of O’KEY Group
– First O’KEY hypermarket opened

in St. Petersburg

2003-2006
– Strategy of establishing regional

market leadership

– Further 8 hypermarkets and

2 supermarkets opened in St. Petersburg

– Total selling space increased from

6,000 m2 to 87,000 m2

2007-2008
– Focus on expansion in Russia’s regions
– Stores opened in 6 new regions
– Total stores reaches 37, selling space

2009-2014
– Emergence as a leading national

2015
– Rollout of market-leading hypermarket

Russian retailer

online sales platform

– Rapid expansion in Moscow and key

– Strengthening of international

doubled to >190k m2

regional markets

management team

– O’KEY enters into ranks of Russia’s

top-10 retailers by revenue

– IPO on the London Stock Exchange
– Total stores exceeds 100, selling space

– Launch of the new discounter format

under the DA! brand

over 550k m2

– Total stores reaches 146, selling space

reaches 593k m2

Tver

[XX] DS

Moscow

11 DS

Ryazan

2 DS

Yaroslavl

[XX] DS

Vladimir

[XX] DS

Smolensk

1 DS

Kaluga

1 DS

Tula

1 DS

Supermarkets

Discounter stores

Hypermarkets

71
40
35
146

O’KEY Group

AT A GLANCE

O’KEY IS THE SEVENTH LARGEST
RUSSIAN RETAILER. OUR PRIMARY
RETAIL FORMAT IS THE MODERN
EUROPEAN-STYLE HYPERMARKET
UNDER THE ‘O’KEY’ BRAND, REINFORCED
BY O’KEY SUPERMARKETS. IN 2015,
THE GROUP LAUNCHED THE ‘DA!’
DISCOUNTER STORE. IN ADDITION,
THE GROUP WAS THE FIRST AMONG
HYPERMARKET CHAINS IN RUSSIA
TO LAUNCH ONLINE FOOD SALES.

What We Do:
We opened our first hypermarket in St. Petersburg in 2002
and have demonstrated continuous growth ever since. Our
customer value proposition is built on an outstanding customer
experience with high-quality products delivered at competitive
prices. Our global depositary receipts (‘GDRs’) have been listed
on the London Stock Exchange since 2010.

– We operated 146 stores in 32 cities in Russia as at

31 December 2015

– 71 hypermarkets, with average of 30,000 SKUs
– 40 supermarkets, with average of 10,000 SKUs
– 35 discounter stores, with average of 1,500 SKUs
– 14.8% 5-year CAGR retail growth in RUB terms (2011-2015)

Growth in Total Stores 2011-2015

146

108

39
0

34
0

31
0

29
0

2011

2012

2013

2014

2015

Hypermarkets
Supermarkets
Discounter stores

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportChairman and Chief Executive’s Statement

AN EVENTFUL
AND CHALLENGING
YEAR

LAST YEAR SAW US MAKE
NECESSARY LONG-TERM
CHANGES IN OUR BUSINESS
WHILE OVERCOMING
A CHALLENGING MARKET
ENVIRONMENT.

Dear Customers, Investors, Colleagues and Partners,

2015 was a year when we started the transformation of our
business to get closer to our customers. I am pleased to report
that, despite significant macroeconomic headwinds, we were
able to execute our turnaround strategy, achieve a recovery in
traffic growth and deliver solid operational results.

During the year, we rebalanced product assortment,
enhancing the value proposition in our core hypermarket
and complementary supermarket format, re-launched our
private-label lines, saw early positive results in our unique
online shopping platform and successfully launched a new
discounter format. In addition, we embarked on long-term
projects aimed at improving efficiency in logistics, marketing
and IT systems.

I believe the robust measures taken last year, and continuing
into 2016, will ensure we have the right fundamentals in place
to deliver long-term, sustainable growth.

Delivering Change
Although I was appointed Chief Executive Officer (‘CEO’) in
May 2015, I had the privilege of working with O’KEY at the very
beginning, advising the Group’s founders on the development
and launch of their first hypermarkets in St. Petersburg.
And I have served on the Board of Directors since 2010

When I assumed the CEO post, I had a clear mandate to deliver
change in order to improve traffic. The turnaround strategy
was based on three equally important pillars: to focus on our
customers by offering the best value proposition; to deliver
operational excellence at every link of the value chain; and to
create an efficient and strong team.

These pillars complement each other, of course. We have
strengthened our senior management team with best-in-class
professionals delivering change in how we manage logistics,
marketing, sales, e-commerce, product quality and security
among other areas. And we have a retail professional with a
wealth of experience in managing discounter stores heading
our new discounter store format.

Reacting to the changes in the marketplace and disposable
income, we enhanced our value proposition and rebalanced our
product assortment in the lower price-range to make it more
appealing to the customer base. We also relaunched private-
label brands in the low and medium price ranges. During the
year we have already seen a strong take up in sales and we
expect to grow the share of private label products in sales to
double-digit figures till the end of 2017. Overall, we
are now offering attractive prices to our customers without
sacrificing the product and customer service quality that is
the hallmark of the O’KEY brand.

‘THANKS TO OUR NEW STRATEGY
AIMED AT GETTING CLOSER TO
OUR CUSTOMERS, WE WERE ABLE
TO DELIVER A STRONGER THAN
EXPECTED 6.9% REVENUE
INCREASE AND 4.3% LIKE-FOR-
LIKE TRAFFIC GROWTH.’
Heigo Kera, Chairman of the Board of Directors
and Chief Executive Officer

Our agenda for 2016 is a busy one. The Group will continue the
robust roll-out of the discounter stores, while focusing on
high-growth markets for our hypermarkets and supermarkets
and raising traffic at existing stores. We need to continue
working with federal suppliers to improve margins and are
enhancing logistics with the opening of distribution centres in
St. Petersburg and Moscow. Meanwhile, we are investing in IT
to be more efficient across operations with a particular focus
on purchasing, logistics, marketing and sales. We are in the
process of upgrading our ERP system with a deadline of the
end of 2017.

On behalf of the Board of Directors and Management Team,
I would like to thank all of our stakeholders for their continued
belief in the O’KEY story and for staying with us during this
challenging year.

Yours truly,

Heigo Kera
Chairman of the Board of Directors
and Chief Executive Officer

In addition, we are also applying new technology to give our
customers added convenience, launching an online shopping
platform in Moscow and St. Petersburg last year. We are the
first national food retailer to launch an online platform with a
full hypermarket assortment.

So we are doing more than just investing in prices; we are,
over the longer term, remaking key parts of our business,
such as improving buying conditions and centralising logistics
to be more efficient. These sorts of steps help to improve our
commercial margin.

Tale of Two Halves
We are pleased with our results in 2015 but cannot be
complacent and must do more to retain customers and
maintain margins in the current macroeconomic situation.
The first half of the year was distinctly tough but, thanks
to our new strategy aimed at getting closer to our customers,
we were able to deliver a stronger than expected 6.9%
revenue increase and 4.3% like-for-like traffic growth,
driven by a particularly strong fourth quarter.

Due to the challenging first half, as well as the rollout of the
discounter chain, EBITDA and net profit both declined, however,
we remain consistently profitable with strong margins.
We maintain a conservative approach to borrowing – our
debt leverage remains sustainable, based on such metrics
as a net debt to EBITDA ratio of 2.6 as of the end of 2015.

Store-opening pace for hypermarkets and supermarkets was
conservative and we expect this to remain the case for 2016 as
we concentrate on the highest value markets, in particular with
our ‘compact hypermarket’ format targeting areas with higher
population density.

The launch of our ‘DA!’ discounter format in Moscow was a
step-change for the Group as we opened 35 stores in the final
months of 2015. The hard discounter format, with limited SKUs,
a focus on private-label products and highly efficient logistics,
is new to Russia and we see considerable long-term potential.
The stores target an urban audience seeking value for money.
We are also realising economies of scale for the Group through
joint procurement with discounter stores and leveraging their
experience in private-label development and marketing.

Outlook
We made important progress last year, but it is only the
beginning of a long process. The Russian retail market will
see even stronger competition and pressure on prices. Real
incomes fell by 4.0% in 2015 and inflation reached a multi-year
high. We continue to believe in the Russian growth story, but
it is how retailers adapt to new market realities, after years
of rapid consumer market and income growth, that will be
the real test of all players.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportStrategy

OUR STRATEGY

Our strategy is built around developing a modern, multi-format
food retailer in Russia with a passion for quality and the
ambition to deliver a unique customer experience. We plan
to grow sustainably our presence in the hypermarket and
supermarket formats in key regions of the country, as well as
aggressively expand our footprint in our new discounter stores.

Ensure a truly ‘one-stop
shop experience’ while
offering quality products
for all wallets

Develop our key
format of ‘city
hypermarket’, where
shopping becomes a
truly enjoyable
experience

r o p o s ition

e p

Stren

gth

Ensure the
sustainable growth
of our hypermarket
footprint with a focus
on the most attractive
markets

Continue the
rollout of ‘DA!’
stores, a discounter
model unique in the
Russian market

Achieve robust
like-for-like sales growth
while maintaining
profitability levels

Increase the share
of our affordable
private-label
products

eliver the b e st v a l u

Improve
commercial margin
by obtaining better
condition with
suppliers while
maintaining attractive
product range for
customers on
store shelves

C
u

c
o

b
u
s

Leverage
‘Big Data’ to better
understand our
customers
and cater to
their needs

v
i
n

g efficiency of
d IT systems

Enhance
technological platform
to support the roll-out
of new formats and
online channels

E n h a

e s u p ply chain

Maintain high shelf
availability and optimal
inventory levels

Optimise supply
chain for every
product category
and SKU and
implement a smart,
end-to-end
supply chain

208 MILLION CUSTOMERS
SERVED IN 2015

Introduce state-of-the-art
IT solutions to improve
business processes in sales
and marketing, logistics
and accounting to realise
efficiencies across
operations

Improve efficiency
of logistics supporting
import and private-label
operations

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic Report

4.6% of sales in 2015
were private label

4.6%

In Focus

PRIVATE
LABEL

AN IMPORTANT STEP IN OUR
TURNAROUND STRATEGY IN
2015 WAS THE COMPLETE
RE-LAUNCH OF OUR PRIVATE-
LABEL RANGES AND WE SAW
STRONG EARLY RESULTS.

Before 2015, we maintained two private-label lines in food
products, a generic ‘no-name’ first-position brand and
an O’KEY brand. However, we concluded that we had not
developed our private-label brands to their full potential.
We believed there were additional opportunities to increase
margin and pass along the savings to our customers.

Last year we launched a new first-price private-label brand
called ‘Just what you need’, with around 400 SKUs in 2015 and
plans for additional SKUs in 2016. We also re-designed the
O’KEY private-label logo covering around 40 SKUs in 2015
and plans for approximately 650 SKUs in 2016.

Beyond new logos, the new lines cover significantly different
product categories in order to better meet consumer needs
and match offers by competitors. Our O’KEY brand positioned
in the second basket remains a by-word for quality, as before,
but also offers a price proposition that is truly competitive.

We have an ambitious promotional plan for the O’KEY private
label in 2016, with inclusion in our catalogues, dedicated
catalogues twice a year and a major advertising campaign.
In our stores, we are ensuring the right shelf positioning and
constant availability for consumers. We have seen strong early
customer response. Already in 2015, we saw the share of
private label in sales reach 4.6%. We plan to achieve double-
digit share in sales till the end of 2017.

87.5% SHARE OF
FOOD IN REVENUES

O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewO’KEY Group S.A. Annual Report & Accounts 2015Strategic ReportIn Focus

ONLINE
SHOPPING

LAST YEAR WE ROLLED OUT AN
ONLINE SHOPPING PLATFORM
THAT IS UNIQUE ON THE RUSSIAN
MARKET TODAY AND FITS OUR
STRATEGY OF USING TECHNOLOGY
TO GIVE OUR CUSTOMERS NEW
SHOPPING CHANNELS WHILE
GROWING REVENUES.

We began work on the Online Shopping platform in 2014 and
launched it last year in Moscow in February 2015, expanding
it to St. Petersburg later in the year. We developed a new
IT platform and created an online store that has our full
hypermarket selection, unlike other online shopping platforms
operating in Russia that offer a much more limited selection.

For convenience, we built pick-up points in selected
hypermarkets. These have temperature-controlled zones
and the pick-ups are designed to take less than five minutes.
In addition, we launched a delivery service in Moscow in
April and in St. Petersburg in December. The service has
proved particularly popular, regularly booking out several
days in advance.

The online platform has proved an early hit with customers
and attracted a strong demographic. Customers on average
spend more online than in the bricks-and-mortar stores.
We plan to expand the geography of the service quickly but
sustainably and to include a drive-through zone in our stores
to accommodate the future growth of the service.

We see the opportunity to grow revenues through this channel
substantially in the coming years. It represents another channel
for our customers and is in line with our strategy of building
customer loyalty with multiple shopping platforms. It is also
Russia’s first hypermarket online food sales platform,
unmatched by other top-10 retailers, and another example
of O’KEY leading the market place.

Our online shop awarded Global CIO Project of the
Year Award in the Retail and Distribution category

Tonnes delivered
in 2015

126
22K

SKUs
available in
our online
shop

9.8 MILLION LOYALTY
CARD HOLDERS
IN TOTAL

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportMurmansk

2 HM

St Petersburg

20 HM

20 SM

Cherepovets

Moscow

1 HM

10 HM

7 SM

Ivanovo

1 HM

1 SM

Syktyvkar

1 HM

Lipetsk

1 HM

1 SM

Rostov-on-Don

2 HM

1 SM

Krasnodar

4 HM

1 SM

Sochi

1 HM

Stavropol

1 HM

Voronezh

2 HM

1 SM

Volgograd

1 HM

3 SM

Saratov

1 HM

1 SM

Astrakhan

2 HM

1 SM

Nizhniy Novgorod

3 HM

Togliatti

1 HM

1 SM

Ufa

3 HM

Sterlitamak

1 HM

Orenburg

1 HM

Hypermarket (HM)

Supermarket (SM)

Discounter stores (DS)

Yekaterinburg

2 HM

Surgut

2 HM

Tyumen

2 HM

Omsk

1 HM

1 SM

Novosibirsk

2 HM

Krasnoyarsk

2 HM

1 SM

Tver
1 DS

Kaluga
1 DS

Tula
4 DS

Moscow
11 DS

Ryazan
2 DS

New discount
stores opened
in 2015

Tver region
1 DS

Moscow
11 DS

Kaluga region
1 DS

Tula region
4 DS

Moscow region
20 DS

Ryazan region
2 DS

Statement of CEO of Discounter Format

DISCOUNTER
STORES

IN SEPTEMBER – DECEMBER 2015,
WE LAUNCHED OUR FIRST 35
DISCOUNTER STORES UNDER
THE DA! BRAND AND OPENED
A NEW FRONTIER FOR THE
O’KEY GROUP AND FOR THE
RUSSIAN MARKETPLACE.

Dear Customers, Investors, Colleagues and Partners,

The launch was the culmination of 18 months of careful
preparation, including the creation of a new company,
development of the brand concept and private-label line as
well as finding the right locations for our stores. We created
a new, state-of-the-art 52,000 m2 distribution centre for the
new format, allowing us to supply all of our new discount
stores opened in 2015 and ensure a base for organic growth in
Moscow and the Moscow region. This lowers our costs and
helps us maintain tight logistics and quality controls at
each step.

The hard discount store format is well-established in Western
and Central Europe, but today is unique in the Russian market.
It has around 1,500 SKUs, of which around 700 are private-
label products. While ‘DA!’, is run as a separate business unit,
we are able to achieve efficiencies of scale in purchasing with
our hypermarkets and supermarkets and pass these savings
along to the consumer.

Our stores provide a hard discount price proposition, while
still offering a modern and bright pleasant shopping experience
with the right product mix and fresh products. We supply all
our stores with fresh fruit and vegetables and have a bakery
on the premises.

We were very pleased with the results of the first 35 store
openings in 2015 and believe we can tap enormous market
potential. We opened a further four stores in the first two
months of 2016 and plan to maintain a robust store-opening
pace in 2016 and beyond, in line with the macroeconomic
situation and the Group’s overall plans. Over the medium
to long term, the discounter format provides the Group with
a powerful additional growth driver in Russia, targeting all
customer demographics, and able to grow in urban locations
with small store footprints.

Yours truly,

Armin Burger
Chief Executive of the Discounter Chain

1,500

SKUs on average
per store

750

SKUs of private label
products

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportIn Focus

OUR
MARKETPLACE

WITH 144 MILLION CONSUMERS,
RUSSIA IS THE WORLD’S FIFTH-
LARGEST GROCERY MARKET
IN TERMS OF REVENUE.

The total consumer market was valued at US$250 billion
at the beginning of 20161. Despite short-term challenges,
it has enormous pent-up growth opportunities due to the
still-evolving retail landscape and unmet appetite for a variety
of Western-style shopping formats in many regions. Over
the medium to long term, retailers able to weather the
current macroeconomic headwinds and offering the right
consumer value proposition have the opportunity to capture
this vast growth potential.

Headwinds
The Russian consumer market has endured two tough years in
2014 and 2015, the result of overall macroeconomic challenges
faced by the country. However, the market retains vast upside
potential due its sheer size, latent consumer demand, retail
market fragmentation among many smaller players and still
large share of traditional retail venues, such as markets, in
many parts of Russia.

By various estimates, less than a third of the Russian retail
market is controlled by the top-10 retailers, unlike Western
European markets or consolidated local markets in the US.
Most analysts see this market consolidating around the largest
players as measured by annual turnover. This suggests room
for larger players, such as O’KEY, to deliver sustainable
growth, using differentiated formats to reach target consumer
segments according to buying power and preference.

One example is the hard discounter format. With limited SKUs,
a high proportion of sales of private-label products, world-
class logistics and a high level of service, this format is new
to the Russian market, but is a proven one in Europe. A large
and demographically-attractive consumer base gives it
considerable room to grow in Moscow, the Moscow Region
and the surrounding regions, before spreading to other cities.

1. Source: Goldman Sachs.
2. Source: Data from Rosstat, Euromonitor and Candean; analysis by BCG.

RUSSIAN CONSUMER PRICE INDEX (%)
Source: Rosstat

REAL DISPOSABLE INCOME GROWTH (Y-O-Y CHANGE)
Source: Rosstat

-2

-4

-6

2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

RUSSIAN CONSUMER CONFIDENCE*
Source: Rosstat

RETAIL SALES GROWTH (Y-O-Y CHANGE)
Source: Rosstat

-10

-20

-30

-5

-10

2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

* as at Q4 each year

While the Russian retail segment has seen two challenging
years, the market grew at double-digit rates until 20132.
The years 2014 and 2015 saw a confluence of negative factors,
including rising consumer price inflation, falling consumer
confidence and a decline in real disposable income. Price
inflation, while not always harmful, has been dragging down
real wage growth.

Outlook
The outlook for 2016 looks similar, with HSBC forecasting a
2% decline in real wages, caused by external macroeconomic
forces, driving more consumers to seek lower-priced
alternatives. Many observers see a recovery in the second
half of 2016 and 2017, but retailers will seek to cut overheads
and invest in prices for their customers, and many consumers
will have spent down their savings during the downturn.
Food producers and retailers will seek to avoid price hikes
to maintain customer flow, hitting margins.

While we do see some upside from a recovery in consumer
spending through improvement in real wages and slowing
consumer price inflation, our strategy is based on a more
cautious scenario. We believe by investing in our business
today to enhance efficiency and ensure price competitiveness
alongside our established reputation for quality and service,
we will be one of the best-positioned retailers in the Russian
marketplace to benefit from market growth opportunities,
with the goal of delivering on behalf of all our stakeholders.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportCorporate Social Responsibility

MEETING THE HIGHEST
STANDARDS

SINCE OUR FOUNDING, WE HAVE
BEEN COMMITTED TO MEETING
THE HIGHEST STANDARDS
IN CORPORATE SOCIAL
RESPONSIBILITY (CSR) IN EVERY
ASPECT OF OUR BUSINESS.

We believe that our greatest contribution to society is the
long-term growth of our business and resulting contribution
to Russia’s economic growth and sustainable development.
Equally, we believe our long-term growth is only possible
through sustainability and partnership with all of our
stakeholders. In this spirit, our CSR efforts are focused on
four priority areas: preventing corruption, health and safety,
recruitment and employee retention, and working with our
local communities.

Preventing Corruption
We have put in place clear policies to prevent the appearance
of corruption in our business as well as to detect and avoid
potential conflicts of interest. O’KEY Group has a ‘zero
tolerance’ policy towards corruption. This is applied rigorously
to our internal processes and is enshrined in our contractual
relationships with suppliers. Our managers adhere to strict
policy regarding gifts and discounts. We maintain a confidential
whistle-blower e-mail address for reporting potential
problems to our internal audit and security departments.

We established our Supplier Policy in 2010 as part of our
efforts to ensure transparency and fairness throughout our
supply chain. It establishes strict guidelines designed to
identify and eliminate potential conflicts of interest when
choosing a supplier. Under the policy, we conduct an open
tender process to ensure that all potential suppliers are judged
on their merits. A committee approves all tender outcomes.

Once we have selected a supplier, our contract conditions
now include an addendum stipulating that the supplier will
inform the Group about any known incidents of corruption.
In particular, under our contracts, suppliers must report any
instances of a Group employee soliciting an unauthorised
payment or bribe. These reporting requirements provide
us with an additional level of security.

In the last few years, we have enforced our supplier selection
procedures still further in the interests of strengthening
transparency. The Group has put in place specific requirements
for the selection of service providers for security and
construction services. We have also created expert oversight
committees composed of members chosen from a range
of departments, including finance and legal, to ensure a fair
and informed decision-making process.

Throughout 2015, our efforts focused on continued awareness
building, training both managers and employees to identify
potential instances of corruption or conflicts of interest and
making them aware of the resources available for reporting
these issues without fear of negative repercussions.

Health and Safety
We are committed to providing our customers with a safe
shopping environment and our employees with safe working
conditions. As part of our Health and Safety monitoring
process, we conduct regular inspections of our work sites
to ensure they are in full compliance with Russian legislation
governing workplace safety.

We support these assessments with a reporting system
introduced across the Group in 2013. We have also developed
and implemented integrated systems for regular tracking
of working conditions and all accidents and injuries in line
with the best international practices. We have a systematic
approach for investigating any accidents involving our
employees or customers. Thanks to our systematic approach
to safety management at work, the number of work-related
injuries in 2015 continued to fall.

Recruitment
Our success is built on recruiting and retaining top talent
while embracing diversity. Our HR strategy requires that
we hire talented people to support our continued growth.
Embracing diversity is not only the right thing to do, it is
also crucial for our business, as it is how we ensure that
we recruit the best people.

We are particularly proud of our efforts to promote gender
equality in the workplace. We believe gender diversity is
important for any business, and are particularly proud of
our performance in this area, although there is still room for
further progress. In 2015, women made up around 70% of store
directors, more than 75% of the Group’s overall workforce.
Our Recruitment Policy expressly prohibits any discrimination
on the grounds of race, age, gender or religious persuasion.
We conduct regular workshops to raise awareness of diversity
and its positive impact on our business.

75%Of the group’s overall workforce are women

To share our vision and values, as well as practical experience,
we hold regular career days and conduct professional
seminars for students with a demonstrated interest in
pursuing a career in the retail sector.

Employee Retention
We see retention as a bellwether of our success in being
an Employer of Choice. We maintain a Talent Management
system, designed to assess and grow talented managers
across all departments and develop incentives aimed at
retaining talent within the Group. We provide our managers
with a clear pathway to future growth and supply them with
the tools to maximise their talents and achieve their potential
within O’KEY.

Our motivation system is also designed to give our employees
the right tools and incentives to deliver the world-class service
to every customer that is the hallmark of the O’KEY brand.

As well as benefits provided to employees under Russian
legislation, O’KEY offers additional benefits such as
supplementary medical insurance, access to gym and sports
facilities and, should one of our people find themselves in need,
emergency financial aid.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic Report
Corporate Social Responsibility continued

“O’KEY HAS BUILT AN

INTEGRATED PROGRAMME
OF CHARITY AND
SOCIAL INVESTMENT
DESIGNED TO ALIGN THE
GROUP’S OBJECTIVES”

We conduct an annual performance appraisal every year
for our employees. It is designed not only to grade employee
performance and reward excellence, but also to receive their
feedback about the organisation. The appraisal system has
been designed to be transparent and employees can appeal
disputed findings to a committee.

In addition, we reach out to every employee through proactive
internal communications, including our in-house magazine.
We celebrate work anniversaries at every store for our people
and their families.

Development and Training
We believe that the key to retaining the best people is to provide
the resources needed for them to reach their full potential within
O’KEY Group. In 2015, a record 85% of our employees participated
in training programmes, including programmes in inventory
management, display, customer service and merchandising.

Working with our Communities
O’KEY has built an integrated programme of charity and
social investment designed to align the Group’s objectives
with addressing social problems. This approach involves
working together with local authorities, business partners,
non-governmental organisation and our customers for the
benefit of the community as a whole.

In line with our mission, we place particular emphasis on
targeted assistance and support programmes helping orphans
and children lacking parental care, as well as large families
with five or more children. To this end, our key areas of
charitable activity include:

– Support of educational programmes for children in

orphanages: our goal is to help these vulnerable children
overcome the challenges facing them in life and integrate
into wider society

– Support for gifted children lacking parental care
– Holistic support of large families, designed to improve

their financial position

Many charitable projects have grown out of the initiatives
of our employees. We believe it is crucial to foster this passion
through our local efforts. In St. Petersburg, for example, our
employees are driving a major programme to share goods with
orphanages, NGOs and religious charitable organisations
helping children.

We are particularly proud of our support for Advita, a charitable
organisation helping children and adults suffering from
cancer. In September 2015, we organised a campaign in our
St. Petersburg stores to raise funds for two Advita patients
recovering from major surgery. Our customers donated funds
and bought 3,600 packages with various necessities, including
nappies, napkins, cleansers and baby food.

In late 2015, with the assistance of the Arithmetic of Good
charity, our employees bought and sent presents to children
from orphanages in Ivanovo and Voronezh.

In May 2015, Russia celebrated the 70th anniversary of the
victory in the Second World War. To mark the event, O’KEY

organised a campaign to support Russian veterans. In St.
Petersburg, we offered our customers the opportunity to buy
packages of gifts for war veterans and congratulated our
veterans on the anniversary. Overall, nearly 1,800 packages
were sold for a total of over RUB 600,000.

We are also engaged in charitable activities of our partners.
In 2015, we joined forces with P&G to support SOS Children’s
Villages, an organisation providing a family-based approach
to the long-term care of orphaned, abandoned children or
those whose families are unable to care for them. In autumn
2015, a portion of the revenues from sales of P&G products in
O’KEY stores was transferred to SOS Children Village. Overall,
with the help of our customers, we were able to donate over
RUB 4 million to this project.

Not only are we active in charitable programmes, but also
we aim to promote charity in society. In 2014 and 2015,
we sponsored the Dobry Piter charitable festival in
St. Petersburg, where over 40 organisations were able to
present their projects, collect funds and engage volunteers
in their activities. Prior to the New Year holidays, we invited
over 30 organisations to set up stands and collect funds in
our stores.

We also aim to support the most vulnerable categories of
society by providing discounts and maintaining low level of
prices on vital staple products. In December 2014, despite the
sharp devaluation of the ruble, we introduced a freeze on
prices for essential products in St. Petersburg and Leningrad
Region, Krasnoyarsk and Volgograd. Between March and May
2015, building on the success of that campaign, we introduced
low prices for 30 essential product items in all of our stores,
selling them at minimal mark-up or even below cost.
In addition, we also expanded our programme supporting
the most vulnerable members of society, including pensioners,
schoolchildren, students and pregnant women, by offering
a discount to holders of special social cards. These
programmes have been launched in Moscow, Moscow Region
and Krasnoyarsk Region. In Moscow Region, we are also
providing discounts to social workers caring for the disabled.

Being a responsible corporate citizen and contributing to
society is one of O’KEY’s overriding priorities. By supporting
a diverse range of initiatives in these areas, the Group aims
to improve life for individuals, communities and the nation
as a whole.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportFinancial Review

RUB million

Revenue
Gross profit
Gross margin
EBITDA
EBITDA margin
Operating profit
Net Profit

2015

2014

Year-on-year
change, %

General, selling and administrative expenses

162,510
38,367
23.6%
10,109
6.2%
5,848
1,918

151,983
37,205
24.5%%
11,270
7.4%
8,566
5,226

6.9
3.1
-0.9 pp
-10.3
-1.2 pp
-31.7
-63.6

Revenue
For the year, like-for-like (LFL) revenue was impacted by profound changes in customer behaviour driven by the worsening
macroeconomic conditions, declining disposable incomes and import restrictions. LFL revenue increased by 0.6% due to a
1.3% increase in average ticket as a result of inflation, while LFL traffic fell 0.7%.

Facing macroeconomic headwinds and intensifying competition, in summer 2015 we launched a turnaround strategy, rebalanced
product assortment to face the clients and address the changing demands and streamlined marketing efforts to drive traffic to
our stores. Results of the turnaround strategy were already visible in Q4 2015 when LFL revenue grew by 3.8% year-on-year with
LFL traffic increasing by 4.3% year-on-year.

During the year, the Group continued to strengthen its presence with a focus on the strongest markets. Selling space rose 7.4%
after the net opening of two hypermarkets, one supermarket and 35 discounters and reached 593 thousand m2. in 2015.

Sales Performance

Trade revenue FY 2015
Trade revenue LFL FY 2015

Retail revenue
growth, %

Traffic growth, %

Av. Ticket growth,
%

6.9
0.6

7.2
-0.7

-0.4
1.3

Cost of goods sold and gross profit
The cost of goods sold increased 8.2% in 2015 to RUB 124,143 million. In the table below, we provide further detail about the cost
of goods sold in 2014 and 2015:

RUB million

Revenue
Cost of goods sold, including
Cost of trading stock (less supplier bonuses)
Inventory shrinkage
Logistics costs
Packaging and labelling costs
Gross profit

2015

Percentage of
2015 revenue

162,510
(124,143)
(117,725)
(3,391)
(2,214)
(814)
38,367

100.0
76.4
72.4
2.1
1.4
0.5
23.6

2014

151,983
(114,779)
(110,100)
(2,161)
(1,797)
(721)
37,205

Percentage of
2014 revenue

Change, p.p.

100.0
75.5
72.4
1.5
1.2
0.5
24.5

0.9
0.0
0.6
0.2
0.0
-0.9

Gross profit increased by 3.1% to RUB 38,367 million in 2015, compared to RUB 37,205 million in 2014 as the Group’s decision to
offer better value proposition to customers was balanced by our sustained efforts to obtain better commercial terms with
suppliers. Gross margin contracted by 0.9 pp to 23.6% impacted by:
– higher shrinkage rate attributable to supply chain disruptions following the introduction by the government of special

economic measures pertaining to food import; and

– higher logistics costs as the Group embarked upon centralization of logistics to improve inventory management.

RUB million

Personnel costs
Operating leases
Depreciation and amortisation
Communication and utilities
Advertising and marketing
Security expenses
Repairs and maintenance costs
Insurance and bank commission
Operating taxes
Legal and professional expenses
Materials and supplies
Other costs

Year ended
31 December 2015

Percentage of
revenue (%)

Year ended
31 December 2014

Percentage of
revenue (%)

Change, p.p.

(14,989)
(4,728)
(3,838)
(3,046)
(1,651)
(740)
(940)
(687)
(759)
(660)
(300)
(33)

9.2
2.9
2.4
1.9
1.0
0.5
0.6
0.4
0.5
0.4
0.2
0.0

(13,929)
(3,873)
(3,056)
(2,687)
(1,823)
(833)
(726)
(661)
(633)
(517)
(345)
(34)

9.2
2.5
2.0
1.8
1.2
0.5
0.5
0.4
0.4
0.3
0.2
0.0

0.0
0.4
0.4
0.1
-0.2
0.0
0.1
0.0
0.1
0.1
0.0
0.0

0.7

Total general, selling and administrative expenses

(32,371)

19.9

(29,117)

19.2

The Group’s general, selling and administrative expenses grew 11.2% y-o-y to RUB 32,371 million in 2015, primarily attributable
to higher lease expenses resulting from the increase in the selling space as well the impact of the ruble depreciation on
foreign currency denominated leases in US dollars and euro. General, selling and administrative expenses were also impacted
by an increase in D&A resulting from the opening of new stores. As a percentage of revenue, the Group’s general, selling and
administrative expenses increased by 0.7 pp to 19.9% in 2015.

In order to streamline investment portfolio and focus on the most efficient markets, the Group has divested 8 objects (5 stores
under construction and 3 land plots) and closed two hypermarkets and two supermarkets.

Personnel costs
Personnel costs grew 7.6% y-o-y to RUB 14,989 million in 2015. This was mainly a result of a 5.0% increase in average headcount
and an increase in salaries in line with the industry trends.

RUB million

Wages and salaries
Social security contributions
Employee benefits and bonuses
Other staff costs

Total payroll

2015

9,894
3,037
966
1,092

2014

8,814
2,796
1,219
1,100

14,989

13,929

Year-on-year
change

12.3%
8.6%
-20.8%
-0.7%

7.6%

Operating leases
A 22.1% y-o-y increase in lease costs in 2015 was primarily attributable to the net opening of two hypermarkets, one supermarket
and 35 discounter stores and the impact of ruble depreciation on the payments under the leases linked to the US dollar and euro.

Communications and utilities
Costs related to communications and utilities increased by 13.4% y-o-y in 2015 to RUB 3,046 million, mostly as a result of adding
new stores, including discounter stores, and increased utilities tariffs.

Advertising and marketing
Advertising and marketing costs declined by 9.4% in 2015 to RUB 1,651 million as the Group has improved efficiency of
marketing efforts.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportWorking capital
As of 31 December 2015, the Group’s working capital, defined as current assets (excluding cash and cash equivalents and
short-term investments) less current liabilities (excluding short-term loans), was a negative RUB 8, 023 compared to negative
RUB 9,043 million, at the end of 2014. Working capital figures in the food retail industry are usually negative, and the Group
intends to maintain a negative working capital position.

The Group considers the net debt/EBITDA ratio as the principal means for evaluating the impact on its operations of the size of the
Group’s borrowings. As of 31 December 2015, O’KEY’s net debt/EBITDA ratio was 2.6x. The increase in this ratio was driven by a
decline in EBTIDA, while the amount of net debt fell by 2%.

RUB million

Total debt
Short-term debt
Long-term debt
Less cash and equivalents
Net debt
Net debt/EBITDA

2015

2014

35,558
12,000
23,558
(9,768)
25,790
2.6

32,081
12,426
19,655
(5,810)
26,271
2.3

Financial Review continued

Operating profit
In 2015, the Group reported a 31.7% decline in operating profit to RUB 5,848 million from RUB 8,566 million due to an increase in
SG&A driven by Company’s expansion and inflationary pressure. The decline was also impacted by a rise in other operating
expenses the amount of RUB 126 million due to the recognition of the loss from the disposal of other non-current assets relating
to the stores and land plots closed by the Group in 2015 partially offset by the income generated as a result of the streamlining of
our real estate portfolio. This compares to an increase in operating income in 2014 attributable to the gain from the disposal of
non-current assets in the amount of RUB 743 million which was partially offset by an impairment charge of RUB 200 million,
which mainly related to the leasehold improvements in two loss-making stores.

Financing costs
Financing costs increased 2.2x to RUB 3,413 million in 2015, due to the higher value of the Group’s average loan portfolio
(consolidated debt stood at RUB 35,558 million as of 31 December 2015; it was RUB 32,081 million on 31 December 2014, and
it was RUB 16,755 million on 31 December 2013) and an increase in the Group’s weighted average interest rate in 2014 to 12.5%
from 9.4% in 2014 driven by worsening market conditions.

Profit before income tax
Profit before income tax declined by 70.0% to RUB 1,901 million in 2014 from RUB 6,314 million in 2014. Key factors influencing
the decrease include a substantial increase in finance costs, a foreign exchange loss of RUB 615 million primarily attributable to a
US dollar loan from a related party and an increase in D&A due to expansion of the Group’s footprint.

In 2015, the Group realized income tax benefit in the amount of RUB 16 million impacted by a tax reimbursement of RUB 702
million paid for 2013 and 2014 and a decline in profit before income tax compared to 2014. In 2014, the Group reported income tax
expense in the amount of RUB 1,089 million as the tax authorities reimbursed to the Group RUB 764 million of income tax
previously paid for the years 2010-2012, in addition RUB 191 million were claimed for recovery for prior years.

Profit for the year
During 2015, net profit fell by 63.6% y-o-y to RUB 1,918 million with a net profit margin of 1.2%.

Cash flows and working capital

RUB million

Net cash from operating activities
Net cash used in investing activities
Net cash (used in)/from financing activities
Net increase in cash and cash equivalents
Effect of exchange rate fluctuations on cash and cash equivalents

2015

2014 Restated

9,140
(2,332)
(2,885)
3,923
34

9,378
(16,287)
9,583
2,674
129

Cash flows from operating activities
In 2015, the operating cash flows were impacted by a decline in EBITDA while working capital demonstrated positive dynamics.
As a result, net cash from operating activities fell slightly by 2.5% to RUB 9,140 million. Cash receipts from customers grew by
6.8%, in line with revenue increases.

Cash used in investing activities
Net cash used in investing activities declined from RUB 16,287 million in 2014 to RUB 2,332 million in 2015 as a result of the
Company’s efforts aimed at streamlining its real estate portfolio. In 2015, proceeds from sales of property, plant and equipment
and intangible assets (excluding VAT) amounted to RUB 6,289 million. Prepayments for PPE fell from RUB 4,867 million to
RUB 1,704 million.

Cash flows from financing activities
Proceeds from new loans and borrowing less the repayments reached RUB 3,091 million as the Group made significant
repayments during the period and finance costs rose following the increase in weighted average interest rate. In addition,
the Group decreased the level of dividend payments from RUB 2,929 million in 2014 to RUB 1,644 in 2015.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportRisk Management

Risk management plays an integral part in how we plan and execute our business strategies. Our risk management process aims
to enable us to pursue our strategy of sustainable growth while ensuring risks to the business are minimised and managed at an
appropriate level. It also provides assurance to our shareholders, employees, customers and suppliers.

The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.
The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk
limits and controls and to monitor risks and adherence to limits. Risk management policies are reviewed regularly to reflect
changes in market conditions and the Group’s activities.

The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive
control environment in which all employees understand their roles and obligations.

The Group’s Audit Committee oversees how management monitors compliance with the Group’s risk management policies and
procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Internal
Audit assists the Group’s Audit Committee in its oversight role. Internal Audit undertakes both regular and ad hoc reviews of risk
management controls and procedures, the results of which are reported to the Audit Committee.

Below we describe the key risks that could have a material adverse effect on our business, our financial and operational
performance and, as a result, could impact our share price and our reputation. Additional risks not known to us, or those
risks that we currently consider immaterial, may also impair our business operations.

Operational Risks

Name of Risk

Definition and Potential Impact

Mitigating Actions

Changing customer
expectations

We strive to provide our customers with a wide range of goods
and services, at competitive prices. However, we recognise that
our customers’ shopping habits and expectations are influenced
by the economic environment and will change over time.

Employee recruitment
and retention

Competition for highly qualified management and store personnel
remains intense in Russia. To meet our expansion plans we need
highly-skilled employees. Our future success depends in part
on our continued ability to hire and retain new employees. We
understand that any inability to attract and retain highly-qualified
employees and key personnel in the future could have a material
adverse effect on our business.

We are constantly assessing and reviewing our
business processes to ensure that we follow the
evolving customer expectations.

To maximise the efficiency and relevance of such
assessments, we monitor internal and external
reports on retail market development and changes
in O’KEY positioning.

We are developing IT solutions, particularly a Client
Relationship Management (‘CRM’) system, that will
enable us to understand better and react quicker to
changes in consumer behaviour.

To improve motivation we have developed
a system of Performance Appraisal that is
conducted on a regular basis and rewards
employees based on their individual results.

We also promote internal opportunities for career
development via trainings and special programs.

Additionally, to facilitate adaptation of new
employees, we organise introductory courses
and coaching in our stores.

We do not expect to incur any risks that may jeopardise the continuity of our business.

Supply chain risk

Principal Risks

Strategic Risks

Name of Risk

Economic outlook

Competition risk

Political risk

Regulatory risk

Definition and Potential Impact

Mitigating Actions

Our business is affected by uncertainties associated
with changing economic conditions, particularly in the
current environment of global economic instability.
Therefore we may face reduced customer demand as
the income and purchasing power of our customers
decreases under the impact of the weaker macroeconomic
environment exacerbated by declining oil prices and
sustained ruble volatility.

We closely monitor the changes in the macroeconomic
environment, income levels, consumer confidence index
and other indicators. Therefore, if significant unfavourable
developments occur, we are ready to take corrective steps
and adjust our business model. During 2015, we reduced
prices in our O’KEY stores to respond to the declining
purchasing power of our customers and invested in the
roll-out of discounter stores.

The retail sector in Russia is highly competitive. We
face strong competition from other retailers (Russian
and international), some of which are larger and have
greater resources. Retail chains compete mainly for
store locations, product assortment, price, service
and store conditions. Some competitors might be
more effective and faster in capturing certain market
opportunities, which in turn may negatively impact
our market share and our ability to achieve our
performance and expansion targets.

Political developments may adversely impact the
macroeconomic environment and the market in which our
Company operates. Although political stability in Russia
has improved, Russia is still a state whose political,
economic and financial systems are rapidly developing
and changing.

We maintain and further develop our key differentiators
that create loyalty and lend uniqueness to our offering.

We constantly monitor our customers’ perception
of O’KEY and our main competitors to ensure we can
respond appropriately. Our pricing policy, based on
the price- matching concept, aims to guarantee the
competitiveness of the core assortment.

Although these risks are outside the control of the Group,
O’KEY monitors political developments closely and
maintains strong relationships with various national
industry bodies.

Our operations are subject to various government
regulations and industry-specific legislation with
respect to quality, packaging, health and safety, labelling,
distribution and other standards. Some regulations are
still being developed in Russia. Current and future
government regulations or changes thereto may require
us to change the way we run our operations and could
result in cost increases. Failure to comply with regulations
can also lead to reputational damage.

We aim to ensure compliance with all applicable
regulations by monitoring regulatory developments and
changes, and following up and responding to changes
in regulations and standards in a timely manner.

We participate in the regulatory development of Russian retail
through The Retail Companies Association (‘ACORT’).

Monitoring results in a timely update of relevant
internal policies/bylaws and, consequently, the Group’s
business processes.

IT platform development

Managing store-opening
process

IT security threats

Our financial performance depends in part on reliable and effective
supply chain management. We rely on third parties to supply us with
merchandise and services. The third parties that supply us with
merchandise and services also have other customers and may not
have sufficient capacity to meet all of their customers’ needs,
including ours, during periods of excess demand. Shortages and
delays could materially harm our business. Unanticipated increases
in prices could also adversely affect our performance. Furthermore,
we may be exposed to risk of delays and interruptions to our supply
chain as a consequence of natural disasters, in case we are unable
to identify alternative sources of supply in a timely manner.

To minimise the impact of potential disruptions
in deliveries, we form a short list of suppliers
for every product in every city. This ensures
that if one supplier is unable to fulfil an order,
an alternative supplier can provide it.

We also have systematised standards and requirements
for warehouse operators, and conduct regular
checks for compliance. This allows us to promptly
change the warehouse operator in the case of
service quality deterioration.

Execution of our strategic targets requires adaptation of current
IT infrastructure to the changing business needs. As the business
grows the complexity of processes supporting it and diversity of
tasks around such growth are increasing. Delayed or inappropriate
decisions on development of the infrastructure can lead to failures
in meeting Group goals and impede attainment of longer-term goals.

The achievement of our expansion strategy depends upon our
ability to locate and acquire locations for future stores, manage
counterparties involved in the construction process and obtain all
necessary permits. There are several factors which may affect our
ability to open new stores:

– Availability of locations that meet our investment criteria;

– Ability of subcontractors to deliver results in a timely manner;

– Risks associated with developers’ ability to execute projects;

– Regulatory system and permitting process run by local

administrations; and

– Local community action opposed to the location of specific

stores at specific sites.

These factors alone or in combination may negatively impact our
store-opening process and result in significant opening delays.

We are observing an increase in IT security threats and higher levels
of professionalism in computer crime. Our systems and solutions, as
well as those of our counterparties remain potentially vulnerable to
attacks. Depending on their nature and scope, such attacks could
potentially lead to the leakage of confidential information, improper
use of our systems, manipulation and destruction of data, sales
downtimes and supply shortages, which in turn could adversely affect
our reputation, competitiveness, and business, financial and
operational performance.

We are putting plans in place to enhance our existing
systems and are considering further development of
our IT platform to ensure that we are well supported
for the future growth.

We aim to maintain a large portfolio of approved
and secured projects for future development
to cover more than two years of expansion.

We also conduct regular performance reviews for
our subcontractors to ensure sufficient control over
construction process.

Finally, we maintain active and constructive dialogue
with local authorities in accordance with the law to
resolve emerging issues.

We employ a number of measures, including
employee training, comprehensive monitoring of our
networks and systems, and maintenance of backup
and protective systems such as firewalls and virus
scanners in attempt to reduce the threats to our
IT security.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic ReportRisk Management continued

FINANCIAL RISKS

Name of Risk

Definition and Potential Impact

Mitigating Actions

Providing sufficient
level of financing

Tax regulations

Recent changes in the macroeconomic situation might
result in a liquidity squeeze and tightening of lending
policies by Russian banks. Given the expansion programme
in the coming periods, issues with availability of external
financing or significant changes in its cost can negatively
impact our Group’s ability to execute its expansion program.

Russian tax law has complex tax rules, which may be
interpreted in different ways and tax rules are subject
to frequent changes. Examinations by tax authorities
and changes in tax regulations could adversely affect
our business and financial and operational performance.

Changes in tax law could result in higher tax expense
and payments. Furthermore, legislative changes could
materially impact tax receivables and liabilities as well
as deferred tax assets and deferred tax liabilities.

We maintain available lines of credit to close potential
liquidity gaps.

We diversify and enlarge the list of partnering banks
to increase our control over the availability and cost of
financing. Our securities are listed on the London Stock
Exchange that allows us to utilise secondary placement
of shares as an alternative way of financing.

Our tax and legal specialists review compliance with
applicable tax regulations, current interpretations issued
by the authorities and judicial precedents resulting from
tax disputes. This work is conducted on a regular basis and
in a consistent manner and ensures we are aware of any
changes we may need to enforce.

Changes in working capital

Inability to control and manage elements of the working
capital can result in negative changes for the operating
cash flow and lead to liquidity gaps and excessive reliance
on external financing.

We exercise constant control over the working capital,
which is detailed in our monetary policy. The aim of this
policy is to minimise prepayment balances and control
of overdue receivables.

Risks of currency and
interest rates volatility

Risk of misstatements
in financial statements

We are exposed to fluctuations in exchange rates because
of loans received in USD and contractual obligations in
USD and EUR. Although measures are taken to minimise
this risk, there can be no assurance that exchange rate
and interest rate fluctuations will not negatively influence
our results.

We face exposure to risks relating to failures in
proper financial reporting and the classification of
accounting entries, and risks of making inaccurate
accounting estimates.

We are also taking steps to improve stock management
efficiency by establishing and monitoring KPIs and
organising training sessions for store employees.

Certain interest rate risks are hedged using derivative
financial instruments. Interest rate risks are also
managed by borrowing money at both variable and fixed
interest rates

We regularly test internal controls over financial reporting
to prevent misstatements in financial statements. We have
a qualified team of finance professionals preparing our
financial statements and we are currently implementing
a new accounting system that will help us improve
automation during the preparation of our consolidated IFRS
financial statements. For a description of financial risks
and exposure calculation please refer to the note 27 in the
Group Consolidated Financial Statements.

Board of Directors

Our current Board of Directors was elected at the Extraordinary General Meeting
(‘EGM’) of Shareholders held on 13 October 2015.

Members of the Board of Directors of O’KEY Group S.A., as at 31 December 2015:

Heigo Kera
Chairman of the
Board and Chief
Executive Officer

Heigo was elected as a
Member of the Group’s
Board of Directors on 30
June 2010, with effect from
13 July 2010, re-elected on
28 October 2013 and 13
October 2015, effective from
the same date. He is a
Member of the Audit
Committee and Chair of the
Remuneration Committee.

Heigo was appointed Chief
Executive Officer of the
O’KEY Group effective 1 May
2015. He was with the Group
from the very beginning,
and was first employed
by the O’KEY Group to
provide consultation
on the development of a
hypermarket format concept
in Russia from 1998 until
2002. Heigo has been the
owner and, since 2008, a
Member of the Board of
Directors of Silverko Consult
OU, an Estonian consulting
Group with an international
client base. From 2008,
he has worked as Retail
Projects Manager with HT
Project Management OU,
where he was responsible
for launching a gourmet
supermarket in Ukraine.
Prior to that, from 2002
until 2008, he provided
private consulting services,
including research on
retail markets in Belarus,
Kazakhstan and China.
Heigo is a graduate of the
Tallinn Technical University
(Estonia) and holds a degree
in economics.

Dmitrii Troitskii
Director

Dmitry Korzhev
Director

Boris Volchek
Director

Mykola Buinyckyi
Independent Director

Dmitrii was elected as a
Member of the Group’s
Board of Directors on 30
June 2010, with effect from
13 July 2010; he was
re-elected on 28 October
2013 and 13 October 2015,
effective from the same
date. He is a Member of the
Remuneration Committee.

Dmitry was elected as a
Member of the Group’s
Board of Directors on
30 June 2010, with effect
from 13 July 2010,
re-elected on 28 October
2013 and 13 October 2015,
effective from the same
date. He is a Member of the
Audit Committee.

Boris was elected as a
Member of the Group’s
Board of Directors on 30
June 2010, with effect from
13 July 2010, re-elected
on 28 October 2013 and
13 October 2015, effective
from the same date. He is
a Member of the Audit and
Remuneration Committee.

Mykola was elected as a
Member of the Group’s
Board of Directors on 13
October 2015. He served on
the Board in 2010-2013. In
October 2013, he stepped
down from the Board of
Directors, although he
continued to serve as chair
of the Audit Committee.

From 2005 until 2007,
Dmitrii served as a Member
of the Board of Directors of
the Ochakovo Dairy Plant.
He also serves as a Member
of the Supervisory Board
of Bank Saint Petersburg,
a position he has held since
December 2005, and as
Development Director of
Neva-Rus, a position he
has held since 2005. He
graduated from Leningrad
Shipbuilding Institute,
currently known as the
State Marine Technical
University of St. Petersburg,
and holds a degree in
engineering. Dmitrii indirectly
owns approximately 23.49%
of the shares of O’KEY
Group S.A.

From 2005 until April 2010,
Dmitry served as a Member
of the Supervisory Board
of Bank Saint Petersburg.
He graduated from
Leningrad Shipbuilding
Institute, currently known
as the State Marine
Technical University of
St. Petersburg, and holds
a degree in engineering.
Dmitry indirectly owns
approximately 23.49% of the
shares of O’KEY Group S.A.

Boris has also served as
President of the Union
Group of companies since
1995. In addition, since
2000, he has served as
General Director
of St. Petersburg
Automobile Museum. He
graduated from the
Leningrad Institute of
Railway Engineers,
currently known as the
St. Petersburg State
University of
Communications, and holds a
degree in engineering. Boris
indirectly owns 25.001% of
the shares of O’KEY Group
S.A.

His experience includes
over 35 years in international
financial management and
over 20 years of experience
in Russia. Prior to working
in Russia, he worked for
seven years as a
management consultant
with Coopers & Lybrand.
Prior to that, he worked for
several years in senior
financial management
positions in oil support
services, construction,
IT and retail sectors. In
addition, he has experience
in corporate finance
including investment
appraisals, raising funds
on public and private equity
and debt markets, as well
as dealing with international
financial institutions, banks
and ratings agencies. He is
a graduate of Edinburgh
University in the UK and is also
a fellow of the Chartered
Institute of Management
Accountants and a Member
of the Institute of British
Management. He holds
joint diploma in management
accounting.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewStrategic Report

Senior Management

One of O’KEY Group’s key competitive advantages is the strength and experience
of its international management team. This group of professionals brings to the
table deep knowledge of the Russian marketplace combined with international best
practices. The team was further strengthened through the recruitment of selected
senior managers in 2015.

Heigo Kera
Chairman of the Board
and Chief Executive Officer

Armin Burger
Chief Executive Officer
of Fresh Market LLC

Heigo was appointed Chief Executive
Officer (‘CEO’) effective 1 May 2015.
He was with the Group from the
very beginning, and was first
employed by O’KEY Group to provide
consultation on the development
of a hypermarket format concept
in Russia from 1998 until 2002.
He was elected as Member of the
Group’s Board of Directors in 2010
and became Chairman of the Board
of Directors in October 2015.

Heigo has been the owner and,
since 2008, a Member of the Board
of Directors of Silverko Consult OU,
an Estonian consulting Group with
an international client base. Also
since 2008, he has additionally
worked as Retail Projects Manager
with HT Project Management OU,
where he was responsible for
launching a gourmet supermarket
in Ukraine. Prior to that, from 2002
until 2008, he provided private
consulting services, including
research on retail markets in
Belarus, Kazakhstan and China.
Heigo is a graduate of the Tallinn
Technical University (Estonia) and
holds a degree in economics.

In October 2013, Armin was
appointed Chief Executive Officer
(‘CEO’) of Fresh Market LLC, the
operating company for the Group’s
‘DA!’ discounter stores, where he
oversaw the successful launch of
the format in September 2015. In his
current role he oversees all aspects
of the development of the discounter
format, including operations, the
management of real estate, buying,
information technology, human
resources, marketing, public and
investor relations.

Prior to joining O’KEY, Armin
worked in a variety of senior
management roles in leading
European retail groups. From 2012
to 2013, he was CEO and Member
of the Supervisory Board of
Prakitker AG, where he managed
the company’s restructuring
process. In April 2011, he founded
Vienna Estate SE, an Austrian
real-estate developer, and from
February 2011 to June 2012, he
headed the Supervisory Board of
Vivatis AG, in Austria. Previously,
he spent nearly two decades in
progressively senior roles at Aldi in
Germany and in the UK and Hofer
KG, in Austria. Armin has a graduate
degree in economics from the
University of Freiburg, Germany.

Dmitry Pryanikov
Chief Financial Officer

Angelo Turati
Commercial Director

Pavel Tomanek
Sales Director

Marc Leblond
Supply Chain Director

Peter Rachovides
Trade Development Director

Elena Polozova
Human Resources Director

Dmitry has been with the Group
since its founding in June 2001.
Having served as Chief Financial
Officer (‘CFO’) of O’KEY Trading
Company for several years, he
became Group CFO.

In his role, Dmitry manages such
business streams as accounting,
liquidity management, financial
control, internal audit and control,
project management, insurance,
business processes, corporate
reporting, and planning and control.
Dmitry’s leadership of our finance
team was instrumental in making
possible our successful initial public
offering (‘IPO’) on the London Stock
Exchange in November 2010.

Prior to joining O’KEY, Dmitry held
various positions at Bank of Saint
Petersburg and other private
companies from 1995 to 2001.

Dmitry holds a degree in
Economics and Management
from St. Petersburg State
Technical University.

Angelo joined the Group in 2014 as
Commercial Director and Member
of the Management Board.

In his position, Angelo develops and
executes the commercial strategy
as part of the global corporate
strategy, builds on category
management capabilities for both
hypermarkets and supermarkets,
drives the Group’s buying agenda as
part of category management
initiatives, manages the private-
label business and its profitability,
as well as designs, enhances and
implements uniform standards and
technology in order to achieve
maximum commercial efficiency.

Angelo previously served as
Commercial Director for X5 Retail
Group. Prior to this, he worked as
Managing Director for Metro Cash &
Carry Croatia and Vice President of
Metro Cash & Carry International.

Angelo holds a degree in Business
Economics (Trade Marketing &
Retail, Management) from Bocconi
University as well as professional
development diplomas (Logistics,
and Retail) from the European Social
Fund and London Business School.

Pavel joined O’KEY Group in 2015 as
Sales Director for the Northwest
and Southern regions. In February
2016, after the reporting period, he
became Sales Director for all
regions, responsible for developing
and implementing Group strategy
designed to strengthen O’KEY’s
market leadership, in particular the
operational management of stores.
His work is focused on growing
store traffic, the development and
implementation of innovative retail
solutions, increasing trade turnover
and EBITDA and creating and
maintaining strong regional
management teams.

Pavel has extensive retail
experience and worked for 15 years
at leading international retail
chains. Before joining O’KEY, he
worked for three years at X5 Retail
Group. Previously, he was
responsible for operations and
logistics at Lenta and was a regional
director for Tesco in Czech Republic.
Pavel graduated from Masaryk
University in Brno, Czech Republic,
with a degree in clinical psychology.

Marc was appointed as Supply
Chain Director in 2014 to achieve
a step-change in our supply chain
infrastructure and ensure the
success of this transformation.

Previously, Marc served as
Supply Chain Director for X5 Retail
Group. Prior to this, he worked
as IT & Supply Chain Director
for Orangina Schweppes. As a
seasoned logistics professional
with more than four decades of
expertise, he has also worked at
such companies as Galeries
Lafayette, Carrefour and Lactalis.

Marc holds a degree in Transport
and Logistics from Val de Marne
University, Paris, as well as
professional development diplomas
in Finance and Accounting.

Peter joined as Trade Development
Director in September 2015, and
he heads a team responsible for
developing the marketing strategy,
implementing trade concept in
the Group’s stores and developing
concepts for growing traffic,
increasing sales volumes, raising
profits and improving the overall
operational efficiency of the
business. He also oversees
assortment management and
price formation, as well as analysis
of sales and consumer demand.

Peter has more than 20 years of
experience in the retail sector.
Prior to joining O’KEY, he worked
for ten years in various senior
management positions at Tesco,
the largest retailer in the UK. Prior
to this, he was in charge of space
range planning at Safeway Stores
in the UK.

Elena has headed the Human
Resources (‘HR’) Department for
O’KEY Group since September 2015.
She joined O’KEY in January 2013
and over the following two years
served in HR management positions
the Group’s Sales Department.
In her position, she oversees the
Group’s centralised HR function,
which sets the strategy for
developing the Group’s human
capital, as well as introducing best
practices in HR for increasing
employee productivity.

Elena is a highly experienced
specialist with more than a decade
of experience in HR. Before joining
O’KEY, she was an HR business
partner at Magnit, overseeing the
efficiency of its HR processes. She
graduated from the Department
of Business and Management of
Lipetsk State Technical University
with a degree in psychology.
She also obtained an MBA, with
a specialisation in HR, from
Moscow International Higher School
of Business (‘MIRBUS’).

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewGovernance
Corporate Governance

Governance System
O’KEY Group S.A. is company incorporated under the Laws of Grand Duchy of Luxembourg with Global Depositary Receipts
(‘GDRs’) listed on the London Stock Exchange, and as such is not required to comply with UK Corporate Governance Code.
O’KEY Group is committed to managing and conducting its operations in accordance with applicable regulations of Luxembourg
and London Stock Exchange We recognise our obligation to our shareholders to adopt appropriate standards of governance
and control both at Board level and within our management teams and aim to establish and support a corporate governance
framework that is necessary for development of our business and meets the requirements of our shareholders.

Key elements of O’KEY Group’s corporate governance policy include:

– Appointing individuals with relevant skills and experience to our Board of Directors who occupy key positions and participate
fully in the most senior level of management in the Group (see page 27 for further information on the members of our Board
of Directors).

– The Board is responsible for taking key decisions relating to Group strategy and strategic direction.
– The Board exercises oversight of the Group’s internal control and risk management procedures.
– The Group has in place a system of Board Committees, which ensures due consideration of key decisions by experienced

individuals and provides an appropriate system of checks and balances, including in the areas of remuneration and incentives
(further information on the committees, their functions and their membership can be found below).

Composition of the Board of Directors
There are five members of our Board, including one independent Director. The General Meeting of Shareholders appoints Board
members by a simple majority of votes cast, for a period not exceeding six years or until their successors are elected.

During the reporting period, on 29 April 2015, Heigo Kera was appointed the Chief Executive – at this point he was no longer
considered independent. On 13 October 2015 the General Meeting of Shareholders of O’KEY Group S.A. has re-elected the Board
of Directors, and Mykola Buinyckyi was appointed independent Director in place of Tony Maher, who decided to step down from
his position as a Chairman and a Member of the Board.

Following the re-election of the Board of Directors, on 14 October 2015, Heigo Kera was re-elected as a Chairman of the Board –
a position he held until October 2013.

As at 31 December 2015, the Board of Directors consisted of five members, including one Independent Director.

Name

Mr. Heigo Kera
Mr. Dmitrii Troitskii
Mr. Dmitry Korzhev
Mr. Boris Volchek
Mr. Mykola Buinyckyi

Office

Chairman
Director
Director
Caraden Director
Independent Director

Date of appointment

13 October 2015
13 October 2015
13 October 2015
13 October 2015
13 October 2015

The rules governing the appointment and replacement of the Directors and the amendment of the Articles are set out under the
law of 10 August 1915 on commercial companies, as amended, and the Articles (in particular Articles 8, 15 and 16).

The consolidated version of the Articles is published under the Shareholders section on http://okeyinvestors.ru/shareholder/
documents/.

Powers of the Board
The Board is vested with the broadest powers to manage the business of the Company and to authorise and perform all acts
of disposal and administration falling within the purposes of the Company.

The Board is not authorised to issue or buy back shares. The validity period of the authorised un-issued share capital expired on
10 December 2010 and the relevant provisions were crossed out from the new edition of the Articles as approved by the General
Meeting of the Shareholders held on 10 June 2015. The repurchase by the Company of its own shares is subject to the conditions
set out in the Company Law and the Articles.

Board Committees
There are two committees on the Board of Directors, the Audit Committee and the Remuneration Committee. The Board’s
committees conduct an initial review and discussion of the issues for which they are responsible, before making
recommendations to the full Board of Directors.

The composition and the key responsibilities of the Board’s committees are described below:

Audit Committee
Membership:

Mykola Buinyckyi
Boris Volchek
Dmitry Korzhev
Heigo Kera
Ilya Ilin
Alvidas Brusokas

(Chairman, non-Director)
(Member, Director)
(Member, Director)
(Member, Director)
(Member, non-Director)
(Member, non-Director)

Description:
The Audit Committee is responsible for overseeing the integrity of the Group’s financial statements, including periodically
reporting to the full Board of Directors on its activities and on the adequacy of internal control systems over financial reporting.

The committee also makes recommendations regarding the appointment, compensation, retention and supervision of the
external auditors, and monitors their independence. The committee performs such other duties as are imposed by applicable
laws and regulations of the regulated market or markets on which the Group’s shares or global depositary receipts may be listed,
as well as any other duties entrusted to it by the Board of Directors. The ultimate responsibility for preparing the annual report
and accounts and the half-yearly reports remains with the full Board of Directors.

The Independent Director Mykola Buinyckyi remains the Chair of the Audit Committee. Mykola’s qualifications and extensive
experience in international financial management with major companies in Moscow, London, Paris, Brussels, Prague, Vilnius
and Lagos is extremely valuable and we believe his membership of the Audit Committee will continue to benefit the Group.

Remuneration Committee
Membership:

Heigo Kera
Boris Volchek
Dmitrii Troitskii
Alvidas Brusokas
Ilya Ilin

(Chairman, Director)
(Member, Director)
(Member, Director)
(Member, non-Director)
(Member, non-Director)

Description:
The responsibilities of the remuneration committee include reviewing compensation policy, making proposals to the full
Board of Directors regarding the remuneration of Executive Directors and management, and advising on any benefit or
incentive schemes. The Board of Directors determines the remuneration and any bonuses paid to the Chief Executive Officer
of O’KEY Group.

Board of Directors and Management Remuneration
In 2015, key management personnel of O’KEY Group were paid an aggregate amount of RUB 683,060 thousand in remuneration
and other compensation. Members of the Board of Directors of O’KEY Group S.A. and the Audit Committee of O’KEY Group S.A.
were paid a net fee of US$241,998. No more than US$800,000 is to be paid per year in compensation to the entire Board and other
senior officers of O’KEY Group S.A.

Dividends
In 2015, O’KEY Group paid a total of US$24 million in dividends.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewGovernanceOwnership and Shareholder Structure

Legal and Ownership Structure (as of 1 March 2016)

38.171%

23.020%

38.809%

BoNY (Nominees)
(of them Freefloat – 24.047%)

GSU Ltd
(together with GDRs – 25.001%)

NISEMAX Co Ltd
(together with GDRs – 50.952%)

O’KEY Group S.A. (Luxembourg)

O’KEY Group LLC

O’KEY LLC

Dorinda JSC

– Employer for senior

management

– Management company for

Dorinda JSC and O’KEY LLC

– Retail operations
– Employer of all store

personnel

– Owner of real estate and
long-term lease rights

O’KEY Logistics LLC

Fresh Market LLC

– Import operations
– Supplier of non-food products,
non-branded and private-
label goods

– Employer for personnel

and owner and operator of
a new retail chain under
‘DA!’ trademark

Transfer Restrictions
As of 31 December 2015 and the date hereof, to the knowledge of the Company, all the shares in issue in the Company are freely
transferable, provided that the transfer formalities set out under Article 6 of the Articles are fulfilled.

The Company has no information about any agreements between shareholders which may result in restrictions on the transfer of
securities or voting rights, as mentioned under Article 11 (1) (g) of the Directive 2004/25/EC of the European Parliament and of the
Council of 21 April 2004 on takeover bids.

Special Control Rights
All the issued and outstanding shares of the Company have equal voting rights and there are no special control rights attaching to
shares of the Company.

The Caraden Shareholder (as defined in the Articles) has, under the condition of holding a minimum amount of shares in the
Company, a specific right with respect to the appointment and removal of Directors since at least one Director (designated as the
Caraden Director) must be appointed from a list of candidates proposed from the Caraden Shareholder and may be removed at
the initiative of the Caraden Shareholder (additional information may be found under Article 8 of the Articles).

The positive vote of the Caraden Shareholder is required, under certain conditions, to amend the provisions of the Articles relating
to: (i) the rights and prerogatives of the Caraden Shareholder; and (ii) the appointment, removal, replacement, rights, prerogatives
and positive vote of the Caraden Director (additional information may be found under Article 16.4 of the Articles).

Voting Rights
Each share issued and outstanding in the Company bears one vote.

The Articles do not provide for any voting restrictions.

In accordance with the Articles, a record date for the admission to a general meeting may be set by the Board (Article 15 of the
Articles). Only those Shareholders as shall be shareholders of record on any such record date shall be entitled to notice of and
to vote at any general meeting and any adjournment thereof, or to give any such consent, as the case may be.

In accordance with the Articles, the Board may determine such other conditions that must be fulfilled by Shareholders for them
to take part in any meeting of shareholders in person or by proxy (Article 15 of the Articles).

Appointment of the Directors, Amendment of the Articles
The rules governing the appointment and replacement of the directors and the amendment of the Articles are set out under the
Company Law and the Articles (in particular Articles 8, 15 and 16).

The consolidated version of the Articles is published under the Shareholders section on http://www.okmarket.ru/en/investors/
shareholder_documents.

Significant Agreements or Essential Business Contracts
The Board is not aware of any significant agreements to which the Company is a party and which take effect, alter or terminate
upon a change of control of the Company following a takeover bid.

The Board has considered essential business contracts and concluded that there is none.

Agreements with Directors and Employees
As of the date hereof, no agreements between the Company and its Directors or employees exist that provide for compensation
if the Directors or the employees resign or are made redundant without valid reason or if their employment ceases because of
a takeover bid.

Footnote: for the purposes of Luxembourg law sections 1 through 33 of this Annual report shall be considered the consolidated director’s report for the year ended
31 December 2015.

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Report of the Réviseur d’Entreprises Agréé

We confirm, to the best of our knowledge, that the consolidated financial statements which have been prepared in accordance
with the International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets,
liabilities, financial position and profit or loss of O’KEY Group S.A. and the undertakings included in the consolidation taken as a
whole, and that the consolidated Directors’ report includes a fair review of the development and performance of the business and
the position of O’KEY Group S.A. and the undertakings included in the consolidation taken as a whole, together with a description
of the principal risks and uncertainties they face.

Luxembourg, 8 March 2016

Member of the Board of Directors

Heigo Kera
Chairman/CEO

Dmitry Pryanikov
Financial Director

KPMG Luxembourg, Société coopérative
39, Avenue John F. Kennedy
L-1855 Luxembourg

Tel: +352 22 51 51 1
Fax: +352 22 51 71
Email: info@kpmg.lu
Internet: www.kpmg.lu

To the Shareholders of
O’KEY GROUP S.A.
23, rue Beaumont
L-1219 Luxembourg

Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of O’KEY GROUP S.A., which comprise the consolidated
statement of financial position as at December 31, 2015, the consolidated statements of profit or loss and other comprehensive
income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other
explanatory information.

Board of Directors’ responsibility for the consolidated financial statements
The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as
the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.

Responsibility of the Réviseur d’Entreprises agréé
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our
audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du
Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the judgement of the Réviseur d’Entreprises agréé, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.
In making those risk assessments, the Réviseur d’Entreprises agréé considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated
financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of O’KEY
GROUP S.A. as of December 31, 2015, and of its consolidated financial performance and its consolidated cash flows for the
year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.

Report on other legal and regulatory requirements
The consolidated Directors’report, including the corporate governance statement, which is the responsibility of the Board of
Directors, is consistent with the consolidated financial statements and includes the information required by the law with respect
to the Corporate Governance Statement.

Luxembourg, 8 March 2016

KPMG Luxembourg, Société coopérative
Cabinet de révision agréé

Jean-Manuel Séris

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewGovernance

Consolidated Statement of Financial Position
as at 31 December 2015

Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2015

’000 RUB

Note

2015

2014

ASSETS
Non-current assets
Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Deferred tax assets
Other non-current assets

Total non-current assets

Current assets
Inventories
Trade and other receivables
Prepayments
Cash and cash equivalents

Total current assets

Total assets

EQUITY AND LIABILITIES
Equity
Non-current liabilities
Loans and borrowings
Deferred tax liabilities
Other non-current liabilities

Total non-current liabilities

Current liabilities
Loans and borrowings
Trade and other payables
Current income tax payable

Total current liabilities

Total liabilities

Total equity and liabilities

’000 RUB

Revenue
Cost of goods sold

Gross profit
General, selling and administrative expenses
Other operating income and expenses

Operating profit

Finance income
Finance costs
Foreign exchange loss

Profit before income tax
Income tax benefit/(expense)

Profit for the year

Other comprehensive income
Items that will never be reclassified to profit or loss
Exchange differences on translating to presentation currency
Items that are or may be reclassified subsequently to profit or loss
Change in fair value of hedges and reclassification from hedging reserve
Income tax on other comprehensive income

Other comprehensive income for the year, net of income tax

Total comprehensive income for the year

Earnings per share
Basic and diluted earnings per share (RUB)

Note

2015

2014

8 162,510,392

151,983,180
(124,143,425) (114,778,593)

38,366,967
(32,371,077)
(148,353)

37,204,587
(29,117,399)
478,362

5,847,537

8,565,550

81,691
(3,413,258)
(614,562)

1,901,408
16,299

24,197
(1,587,734)
(687,529)

6,314,484
(1,088,765)

1,917,707

5,225,719

12,14

266,887

392,973

(308,749)
61,750

19,888

135,159
(27,032)

501,100

1,937,595

5,726,819

7.1

19.4

The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to,
and forming part of, the consolidated financial statements set out on pages 40 to 74.

564,000
43,088,062
6,694,671
1,293,723
654,512
6,934,782

548,500
40,006,546
7,180,792
539,435
1 ,144,855
11,004,304

59,229,750

60,424,432

12,628,304
6,937,346
1,515,881
9,768,130

12,859,297
6,207,273
1,277,663
5,810,182

30,849,661

26,154,415

90,079,411

86,578,847

24,490,967

24,197,143

23,558,269
826,874
99,352

19,655,016
835,550
78,044

24,484,495

20,568,610

11,999,730
28,817,333
286,886

12,425,527
29,098,249
289,318

41,103,949

41,813,094

65,588,444

62,381,704

90,079,411

86,578,847

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewGovernanceConsolidated Statement of Changes in Equity
for the year ended 31 December 2015

’000 RUB

Note

Share
capital

Legal
reserve

Additional
paid-in capital

Hedging
reserve

Retained
earnings

Translation
reserve

Total
equity

’000 RUB

Note

Share
capital

Legal
reserve

Additional
paid-in capital

Hedging
reserve

Retained
earnings

Translation
reserve

Total
equity

Balance at 1 January 2014

119,440

10,597

8,903,606

– 12,187,055

178,687 21,399,385

Balance at 1 January 2015

119,440

10,597

8,903,606

108,127 14,483,713

571,660 24,197,143

Total comprehensive income for

the year

Profit for the year

Other comprehensive income
Foreign currency translation

differences

Change in fair value of hedges and
reclassification from hedging
reserve

Income tax on other comprehensive

income

Total other comprehensive income

Total comprehensive income for

the year

Transactions with owners,
recorded directly in equity

Contributions by and distributions

to owners
Dividends paid

Total contributions by and
distributions to owners

–

5,225,719

–

5,225,719

–

392,973

135,159

(27,032)

108,127

–

135,159

(27,032)

392,973

501,100

Total comprehensive income for

the year

Profit for the year

Other comprehensive income
Foreign currency translation

differences

Change in fair value of hedges and
reclassification from hedging
reserve

Income tax on other comprehensive

income

Total other comprehensive income

Total comprehensive income for

108,127

5,225,719

392,973

5,726,819

the year

–

(2,929,061)

–

(2,929,061)

Transactions with owners,
recorded directly in equity

Contributions by and distributions

to owners
Dividends paid

Total contributions by and
distributions to owners

–

– (308,749)

–

61,750

– (246,999)

1,917,707

–

266,887

–

266,887

(308,749)

61,750

19,888

– (246,999)

1,917,707

266,887

1,937,595

–

(1,643 771)

–

(1,643 771)

Balance at 31 December 2014

119,440

10,597

8,903,606

108,127 14,483,713

571,660 24,197,143

Balance at 31 December 2015

119,440

10,597

8,903,606 (138,872) 14,757,649

838,547 24,490,967

The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the
consolidated financial statements set out on pages 40 to 74.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewFinancial Statements
Consolidated Statement of Cash Flows
for the year ended 31 December 2015

Notes to the Consolidated Financial Statements
for the year ended 31 December 2015

’000 RUB

Cash flows from operating activities
Cash receipts from customers
Other cash receipts
Interest received
Cash paid to suppliers and employees
Operating taxes
Other cash payments
VAT paid
Income tax paid

Net cash from operating activities

Cash flows from investing activities
Purchase of property, plant and equipment and initial cost of land lease (excluding VAT)
Purchase of other intangible assets (excluding VAT)
Proceeds from sales of property, plant and equipment and intangible assets (excluding VAT)

Net cash used in investing activities

Cash flows from financing activities
Proceeds from loans and borrowings
Repayment of loans and borrowings
Interest paid
Dividends paid
Other financial (payments)/proceeds

Net cash (used in)/from financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Effect of exchange rate fluctuations on cash and cash equivalents

Cash and cash equivalents at end of the year

Note

2015

2014

Restated

185,480,172
381,666
49,708
(175,156,270)
(681,509)
(205,326)
(762,978)
34,651

173,675,975
187,512
13,678
(159,017,273)
(583,609)
(137,106)
(2,898,021)
(1,863,368)

9,140,114

9,377,788

(8,348,734)
(272,017)
6,289,003

(16,095,340)
(204,896)
13,292

(2,331,748)

(16,286,944)

18,002,000
(14,911,105)
(4,303,410)
(1,643,771)
(28,205)

16,974,749
(2,139,482)
(2,353,426)
(2,929,061)
30,516

(2,884,491)

9,583,296

3,923,875
5,810,182
34,073

2,674,140
3,006,730
129,312

9,768,130

5,810,182

The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated
financial statements set out on pages 40 to 74.

1 Reporting entity
(a) Organisation and operations
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union for the year ended 31 December 2015 for O’KEY Group S.A. and its subsidiaries
(together referred to as the ‘Group’).

The Company was incorporated and is domiciled in Luxembourg. The Company was set up in accordance with Luxembourg
regulations. The main part of the Group is located and conducts its business in the Russian Federation.

The major shareholders of the Group are three individuals, Mr. Korzhev, Mr. Troitsky and Mr. Volchek (‘the shareholder Group’).
They also have a number of other business interests outside of the Group.

As at 31 December 2015 the Company’s shares are listed on the London Stock Exchange in the form of Global Depositary
Receipts (GDRs).

Related party transactions are detailed in note 31.

The Company’s registered address is: Luxembourg 23, rue Beaumont, L-1219 Luxembourg.

The Group’s principal business activity is the operation of a retail chain in Russia under the brand name ‘O’KEY’. In September
2015 the Group launched the discounter chain under the brand name ‘DA!’. At 31 December 2015 the Group operated 146 stores
including 35 discounter stores (31 December 2014: 108 stores) in major Russian cities, including but not limited to Moscow,
St. Petersburg, Murmansk, Nizhniy Novgorod, Rostov-on-Don, Krasnodar, Lipetsk, Volgograd, Ekaterinburg, Novosibirsk,
Krasnoyarsk, Ufa, Astrakhan and Surgut.

(b) Business environment
The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and
financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory
frameworks continue development, but are subject to varying interpretations and frequent changes which together with other
legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation.

The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of
America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted
in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction
in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some
Russian entities may be experiencing difficulties in accessing international equity and debt markets and may become increasingly
dependent on Russian state banks to finance their operations. The longer-term effects of implemented sanctions, as well as the
threat of additional future sanctions, are difficult to determine.

The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment
on the operations and the financial position of the Group. The future business environment may differ from management’s
assessment.

2 Basis of accounting
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union and were authorised for issue by the Board of Directors on 8 March 2016.

3 Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary
economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are
presented in Russian Roubles. All financial information presented in RUB has been rounded to the nearest thousand, except
when otherwise indicated.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewFinancial Statements

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2015

The results and financial position of the Group entities, which functional currencies are different from Russian Roubles,
are translated into the presentation currency as follows:

– assets and liabilities for each statement of financial position presented are translated at the closing rate of the year end;
– profit and loss items for each statement of profit and loss and other comprehensive income are translated at the date of

transaction;

– all resulting exchange differences are recognised as translation reserve in equity.

At 31 December 2015 the principal rate of exchange used for translating foreign currency balances were USD 1 = 72.8827 RUB;
EUR 1 = 79.6972 RUB (2014: USD 1 = RUB 56.2584; EUR 1 = RUB 68.3427).

4 Use of estimates and judgments
The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities,
income and expenses. Actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimates are revised and in any future periods affected.

Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements and
estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial
year include:

Tax legislation. The Group is subject to income taxes in several jurisdictions. Significant judgment is required in determining
the provision for income taxes. The major part of the tax burden refers to Russian tax, currency and customs legislation, which
is subject to varying interpretations. Refer to note 30.

Bonuses from suppliers. The Group receives various bonuses from suppliers which represent a significant reduction in cost
of sales and inventory cost. The calculation of these amounts is in part dependent on an estimation of whether amounts due
under agreements with suppliers have been earned at the reporting date based on inventory purchased and other conditions.
The process for calculating and recording supplier bonuses involves significant manual processes which are more susceptible
to error. Furthermore, the allocation of the bonuses to inventory cost also has some element of judgement.

Determination of net realisable value of inventory. The Group performs analysis of stock for write-off as at each reporting date
and writes down inventories to their net realisable value when necessary. For details of approach used for determination of net
realisable value refer to note 20.

5 Determination of fair values
A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and
non-financial assets and liabilities.

When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are
categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

– Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
– Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly

(i.e. as prices) or indirectly (i.e. derived from prices).

– Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value
hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest
level input that is significant to the entire measurement.

The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the
change has occurred.

5 Determination of fair values continued
Fair values have been determined for measurement and for disclosure purposes based on the following methods. When
applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that
asset or liability.

(a) Investment property
An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in
the location and category of property being valued, values the Group’s investment property every year. The fair values are based
on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between
a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted
knowledgeably and willingly.

In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated
cash flows expected to be received from renting out the property. A yield that reflects the specific risks inherent in the net cash
flows then is applied to the net annual cash flows to arrive at the property valuation.

Valuations reflect, when appropriate, the type of tenants actually in occupation or responsible for meeting lease commitments
or likely to be in occupation after letting vacant accommodation and the allocation of maintenance and insurance responsibilities
between the Group and the lessee.

(b) Non-derivative financial assets
The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate
of interest at the reporting date. This fair value is determined for disclosure purposes.

(c) Derivatives
The fair value of interest rate swaps is estimated by discounting estimated future cash flows based on the terms and maturity
of each contract and using market interest rates for a similar instrument at the measurement date.

Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity
and counterparty when appropriate.

(d) Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest
cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is
determined by reference to similar lease agreements.

6 Operating segments
The Group is engaged in management of retail stores located in Russia. Although the Group is not exposed to concentration
of sales to individual customers, all the Group’s sales are in the Russian Federation. As such, the Group is exposed to the
economic development in Russia, including the development of the Russian retail industry. The Group has no significant non-
current assets outside the Russian Federation.

The Group identified its operating segments in accordance with the criteria set in IFRS 8 Operating Segments and based on the
way the operations of the Group are regularly reviewed by the chief operating decision maker to analyse performance and
allocate resources within the Group.

The Group’s chief operating decision maker has been determined as the CEO.

In September 2015 the Group launched discounter chain under brand name ‘DA!’ and since then the Group has two reportable
segments. Previously the Group identified retail operations as a single reportable segment. Each new segment has similar
format of their stores which is described below:
– O’KEY –chain of modern Western European-style hypermarkets under the ‘O’KEY’ brand reinforced by O’KEY supermarkets

throughout Russian Federation;

– ‘DA!’ – chain of discounter stores in Moscow and Central region.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewFinancial StatementsNotes to the Consolidated Financial Statements continued
for the year ended 31 December 2015

The assortment of goods in each chain is different, and the segments are managed separately. For each of the segments,
the CEO of the Group reviews internal management reports on at least a monthly basis.

Within each reportable segment all business components demonstrate similar characteristics:

– the products and customers;
– the business processes are integrated and uniform: the components manage their operations centrally. Purchasing, logistics,

finance, HR and IT functions are centralised;

– the components’ activities are mainly limited to Russia which has a uniform regulatory environment.

The CEO assesses the performance of the operating segment based on earnings before interest, tax, depreciation and amortisation
(EBITDA) adjusted for one-off items. Term EBITDA is not defined in IFRS. Other information provided to the CEO is measured
in a manner consistent with that in the consolidated financial statements. The accounting policies used for the segment are the
same as accounting policies applied for the consolidated financial statements as described in note 35.

The segment information for the year ended 31 December 2015 is as follows:

’000 RUB

External revenue
EBITDA

O’Key

2015

2014

Da!

2015

2014

Total

2015

2014

161,822,399
11,672,274

151,983,180
11,836,850

687,993
(1,563,108)

– 162,510,392
10,109,166

(567,342)

151,983,180
11,269,508

Inter-segment revenue for 2015 amounts RUB 12,338 thousand (2014: Nil) and relates to a rental agreement between LLC
Fresh-Market (operator of discounter chain ‘DA!’) and LLC O’KEY.

A reconciliation of EBITDA to profit for the year is as follows:

’000 RUB

EBITDA
Revaluation of investment property
(Loss)/gain from disposal of non-current assets
Impairment of non-current assets
Loss from write-off of receivables
Reversal of impairment/(impairment) of receivables
Depreciation and amortisation
Finance income
Finance costs
Foreign exchange loss
Other expenses

Profit before income tax
Income tax benefit/(expense)

Profit for the year

2015

2014

10,109,166
(49,854)
(126,069)
(41,127)
(137,696)
(848)
(3,838,115)
81,691
(3,413,258)
(614,562)
(67,920)

1,901,408
16,299

11,269,508
7,528
724,595
(199,697)
(198,243)
17,747
(3,055,888)
24,197
(1,587,734)
(687,529)
-

6,314,484
(1,088,765)

1,917,707

5,225,719

7 Subsidiaries
Details of the Company’s significant subsidiaries at 31 December 2015 and 31 December 2014 are as follows:

Subsidiary

Country of incorporation

Nature of operations

LLC O’KEY
JSC Dorinda
Axus Financial Ltd
LLC O’KEY Group
LLC O’KEY Logistics
LLC Fresh Market

Russian Federation
Russian Federation
BVI
Russian Federation
Russian Federation
Russian Federation

Retail
Real estate
Financing
Managing company
Import operations
Retail and real estate

2015
Ownership/voting

2014
Ownership/voting

100%
100%
100%
100%
100%
100%

8 Revenue

’000 RUB

Sales of trading stock
Sales of self-produced catering products

Revenue from sale of goods
Rental income
Revenue from advertising services

Total revenues

2015

2014

153,112,272
7,172,270

142,613,948
7,340,159

160,284,542
1,529,250
696,600

149,954,107
1,501,627
527,446

162,510,392

151,983,180

Total revenues comprise sale of goods, rental income from tenants, which rent trade area in the Group stores and income from
placing advertising in the Group stores.

9 General, selling and administrative expenses

’000 RUB

Note

2015

2014

Personnel costs
Operating leases
Depreciation and amortisation
Communication and utilities
Advertising and marketing
Repairs and maintenance costs
Operating taxes
Security expenses
Insurance and bank commission
Legal and professional expenses
Materials and supplies
Other costs

15, 16, 18

(14,988,722)
(4,728,035)
(3,838,115)
(3,046,569)
(1,650,564)
(940,327)
(758,886)
(739,972)
(687,075)
(659,763)
(300,245)
(32,804)

(13,928,875)
(3,872,641)
(3,055,888)
(2,687,257)
(1,822,828)
(725,920)
(632,734)
(833,025)
(661,191)
(517,361)
(345,419)
(34,260)

(32,371,077)

(29,117,399)

Fees billed to the Company and its subsidiaries by KPMG Luxembourg Societe cooperative, and other member firms of the KPMG
network during the year are as follows:

’000 RUB

Auditors’ remuneration for annual and consolidated accounts
Auditors’ remuneration for other assurance services
Auditors’ remuneration for tax advisory services

2015

13,905
3,534
855

18,294

2014

9,316
3,269
2,411

14,996

10 Other operating income and expenses

12 Finance income and finance costs

’000 RUB

Note

2015

2014

’000 RUB

2015

2014

(Loss)/Gain from disposal of non-current assets
Impairment of non-current assets
Loss from write-off of receivables
(Impairment) of receivables/reversal of impairment
(Loss)/Gain from revaluation of investment property
Sundry income

15,16,18

(126,069)
(41,127)
(137,696)
(848)
(49,854)
207,241

724,595
(199,697)
(198,243)
17,747
7,528
126,432

(148,353)

478,362

Loss from disposal of other non-current assets amounted RUB 126,069 thousand relating to stores and land plots in Moscow and
other regions which the Group closed or disposed of during the year 2015.

Gain from disposal of non-current assets for the year ended 31 December 2014 includes gain from exchange of land plot on store
premises in the amount of RUB 742,787 thousand and represents the difference between carrying amount of land plot
transferred and fair value of premises received. Carrying amount of store premises was measured at fair value as determined by
an independent appraiser. The appraiser used the income approach for determining the fair value.

In 2013 one of Group’s stores suffered from a fire. In 2014 the Group agreed with its insurance company compensation for losses
incurred due to this accident in the amount of RUB 117,994 thousand. The compensation was recognised within the sundry income
in profit and loss for 2014.

Sundry income for 2015 includes gain in the amount of RUB 115 871 thousand from one-off construction services performed to
third party.

11 Personnel costs

’000 RUB

Wages and salaries
Social security contributions
Employee benefits
Other personnel costs

Total personnel costs

2015

2014

(9,894,169)
(3,036,655)
(965,467)
(1,092,431)

(8,814,028)
(2,796,237)
(1,218,688)
(1,099,922)

(14,988,722)

(13,928,875)

During the year ended 31 December 2015 the Group employed 28 thousand employees on average (2014: 26.8 thousand
employees on average). Approximately 95% of employees are store and warehouse employees and the remaining part
is office employees.

Recognised in profit or loss
Interest income on loans and receivables
Other finance income

Finance income

Interest costs on loans and borrowings

Finance costs

Net finance costs recognised in profit or loss

The above financial income and costs include the following in respect for assets/(liabilities)

not at fair value through profit and loss:

Total interest income on financial assets

Total interest expense on financial liabilities

’000 RUB

Recognised in other comprehensive income
Change in fair value of hedges
Income tax on income and expense recognised in other comprehensive income

Finance (costs)/income recognised in other comprehensive income, net of tax

67,866
13,825

81,691

21,048
3,149

24,197

(3,413,258)

(1,587,734)

(3,413,258)

(1,587,734)

(3,331,567)

(1,563,537)

81,691

24,197

(3,413,258)

(1,587,734)

2015

2014

(308,749)
61,750

135,159
(27,032)

(246,999)

108,127

During 2015 the Group has capitalised interests in the value of property, plant and equipment. The amount of capitalised interest
comprised RUB 1,054,770 thousand (2014: RUB 745,811 thousand).

In 2015 a capitalisation rate of 12.99% was used to determine the amount of borrowing costs eligible for capitalisation
(2014: 9.25%).

13 Foreign exchange loss
During 2015 the Russian Rouble significantly weakened against the USD. Net foreign exchange loss recognised in profit and loss
in the amount of RUB 614,562 thousand for the year ended 31 December 2015 (2014: loss RUB 687,529 thousand) mainly relates
to USD-denominated borrowing. In 2015 the Group has not used hedging instruments to hedge foreign exchange risks.

The Group’s risk management policy is to receive borrowings in the same currency which generated revenue (Russian Rouble).
As at 31 December 2015, the share of USD-denominated borrowings in Group’s debt was not significant. The Group’s exposure
to currency risk is disclosed in note 27.

14 Income tax benefit/(expense)
The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2014: 20%).

15 Property, plant and equipment

’000 RUB

Current tax benefit/(expense)
Deferred tax (expense)/benefit

Total income tax benefit/(expense)

2015

2014

559,716
(543,417)

(1,529,920)
441,155

16,299

(1,088,765)

Income tax recognised directly in other comprehensive income

2015

2014

’000 RUB

Land

Buildings

Cost or deemed cost
Balance at 1 January 2014
Additions
Transfers
Transfers from initial cost of land lease
Disposals

3,948,145
2,398,555
424
115,741
(438,439)

22,437,166
4,588,355
2,515,178
–
–

Leasehold
improvements

4,334,777
820,907
280,983
–
(22,328)

Machinery and
equipment,
auxiliary facilities
and other fixed
assets

Construction in
progress

Total

9,846,112
1,683,907
335,114
–
(237,448)

5,094,522
5,293,688
(3,131,699)
–
(53,395)

45,660,722
14,785,412
–
115,741
(751,610)

’000 RUB

Before tax

Tax

Net of tax

Before tax

Tax

Net of tax

Balance at 31 December 2014

6,024,426

29,540,699

5,414,339

11,627,685

7,203,116

59,810,265

Foreign currency translation

differences

Change in fair value of hedges and

266,887

–

266,887

392,973

–

392,973

reclassification from hedging reserve

(308,749)

(41 862)

61,750

(246,999)

19,888

135,159

528,132

(27,032)

108,127

501,100

Reconciliation of effective tax rate:

’000 RUB

Profit before income tax

Income tax at applicable tax rate (2015: 20%, 2014: 20%)
Effect of income taxed at different rates
Tax effect of items which are not deductible for taxation purposes:
– Inventory shrinkage expenses
– Other non-deductible expenses
Tax withheld on dividends received from subsidiaries
Adjustments to current income tax for previous periods
Other items

Income tax benefit/(expense) for the year

2015

2014

1,901,408

6,314,484,

(380,281)
(41,053)

(1,262,896)
221,215

(100,783)
(64,619)
(88,213)
702,255
(11,007)

(410,606),
(157,284)
(148,734)
955,095
(285,555)

16,299

(1,088,765)

During the year ended 31 December 2015 tax authorities reimbursed to the Group RUB 702,255 thousand of income tax previously
paid for 2013 and 2014.

During the year ended 31 December 2014 tax authorities reimbursed to the Group RUB 764,302 thousand of income tax
previously paid for the years 2010-2012. In 2014 the Group also claimed for reimbursement income tax paid for 2013 in the
amount of RUB 190,793 thousand. This amount was reimbursed in 2015.

The amount of income tax reimbursed for previous years was recognised as reduction of income tax expense and relates
to expenses, which the Group treats as deductible since 2014.

Balance at 1 January 2015
Additions
Transfers
Disposals

6,024,426
99,682
–
(1,284,920)

29,540,699
315,512
3,894,591
(1,337,159)

5,414,339
–
1,901,588
(397,779)

11,627,685
2,124,001
974,790
(379,596)

7,203,116
8,775,248
(6,770,969)
(2,512,724)

59,810,265
11 314 443
–
(5,912,178)

Balance at 31 December 2015

4,839,188

32,413,643

6,918,148

14,346,880

6,694,671

65,212,530

Depreciation and impairment losses
Balance at 1 January 2014
Depreciation for the year
Impairment losses
Disposals

Balance at 31 December 2014

Balance at 1 January 2015
Depreciation for the year
Impairment losses
Disposals

Balance at 31 December 2015

Carrying amounts
At 1 January 2014

At 31 December 2014

At 31 December 2015

–
–
–
–

–

–
–
–
–

–

(2,888,988)
(804,037)
–
–

(1,010,208)
(413,621)
(199,697)
14,970

(5,960,373)
(1,560,954)
–
222,305

(22,324)
–
–
–

(9,881,893)
(2,778,612)
(199,697)
237,275

(3,693,025)

(1,608,556)

(7,299,022)

(22,324)

(12,622,927)

(3,693,025)
(1,044,440)
(41,127)
128,567

(1,608,556)
(462,381)
–
231,563

(7,299,022)
(1,991,854)
–
350,478

(22,324)
–
–
22,324

(12,622,927)
(3,498,675)
(41,127)
732,932

(4,650,025)

(1,839,374)

(8,940,398)

–

(15,429,797)

3,948,145

19,548,178

3,324,569

3,885,739

5,072,198

35,778,829

6,024,426

25,847,674

3,805,783

4,328,663

7,180,792

47,187,338

4,839,188

27,763,618

5,078,774

5,406,482

6,694,671

49,782,733

During 2015 the Group has capitalised interest in the value of property, plant and equipment. The amount of capitalised interest
comprised RUB 1,054 770 thousand (2014: RUB 745,811 thousand). In 2015 capitalisation rate of 12.99% was used to determine the
amount of borrowing costs eligible for capitalisation (2014: 9.25%).

Depreciation expense of RUB 3,498,675 thousand has been charged to selling, general and administrative expenses
(2014: RUB 2,778,612 thousand). Impairment loss in the amount of RUB 41,127 thousand was recognised in 2015
(2014: RUB 199,697 thousand).

As at 31 December 2014 the Group performed impairment test for low-performing stores. For two stores carrying amount
exceeded recoverable amount and the Group recognised an impairment loss of RUB 199,697 thousand. The Group estimated
the recoverable amount of stores being their value in use using income approach. As at 31 December 2015 the Group analysed
whether there are impairment indicators in relation to each individual store. Despite turbulent market environment, the Group
concluded that there are no impairment indicators for any of its stores, except for one store which the Group committed to sell
at price below carrying amount. For this store the Group recognised write-down to expected sales price in the amount of
RUB 41,127 thousand.

Security
At 31 December 2015, four stores have been pledged to third parties as collateral for borrowings (2014: four stores). Refer to
notes 25 and 30.

17 Investment property
(a) Reconciliation of carrying amount

16 Intangible assets

’000 RUB

Cost
Balance at 1 January 2014
Additions
Transfer
Disposals

Balance at 31 December 2014

Balance at 1 January 2015
Additions
Transfer

Balance at 31 December 2015

Amortisation and impairment losses
Balance at 1 January 2014
Amortisation for the year
Transfer
Disposals

Balance at 31 December 2014

Balance at 1 January 2015
Amortisation for the year
Transfer

Balance at 31 December 2015

Carrying amounts
At 1 January 2014

At 31 December 2014

At 31 December 2015

Software

Lease right

Other intangible
assets

Total

692,872
159,809
(621)
(289)

851,771

851,771
241,279
(44)

491,475
–
–
(87,319)

404,156

404,156
657,817
–

43,249
5,904
621
(66)

1,227,596
165,713
–
(87,674)

49,708

1,305,635

49,708
78,404
44

1,305,635
977,500
–

1,093,006

1,061,973

128,156

2,283,135

(298,503)
(123,227)
626
289

(368,869)
(47,138)
748
86,622

(10,175)
(5,261)
(1,374)
62

(677,547)
(175,626)
–
86,973

(420,815)

(328,637)

(16,748)

(766,200)

(420,815)
(137,318)
56

(328,637)
(74,671)
–

(16,748)
(11,223)
(56)

(766,200)
(223,212)
–

(558,077)

(403,308)

(28,027)

(989,412)

394,369

430,956

534,929

122,606

75,519

658,665

33,074

32,960

550,049

539,435

100,129

1,293,723

Amortisation and impairment losses
Amortisation of RUB 223,212 thousand has been charged to selling, general and administrative expenses (2014: RUB 175,626 thousand).

’000 RUB

Investment properties at fair value as at 1 January 2014
Expenditure on subsequent improvements
Fair value gain (unrealised)

Investment properties at fair value as at 31 December 2014

Investment properties at fair value as at 1 January 2015
Expenditure on subsequent improvements
Fair value loss (unrealised)

Investment properties at fair value as at 31 December 2015

Note

Investment
property

540,000
972
7,528

548,500

548,500
65,354
(49,854)

564,000

(b) Measurement of fair value
The carrying amount of investment property is the fair value of the property as determined by registered independent appraisers
having an appropriate recognised professional qualification and recent experience in the location and type of the property
being valued.

The fair value measurement for investment property has been categorised as a Level 3 fair value based on the inputs to the
valuation technique used (see note 5).

The appraisers used the income approach for determining the fair value. An estimate was made of annual net operating income
for five years which is mainly based on annual net rent rate of RUB 7,000 per sq. m. (2014: RUB 8,000) and expected occupancy of
95% (2014: 95%). The annual net operating income was assumed to be constant from year six to perpetuity. Discount rate of 19%
(2014: 19%) was applied to discount future cash flows.

There were no direct operating expenses arising from investment property that did not generate rental income for the year ended
31 December 2015 (2014: Nil).

18 Other non-current assets

’000 RUB

Initial cost of land lease
Long-term prepayments to entities under control of shareholder group
Prepayments for property plant and equipment
Long-term deposits to lessors
Other non-current receivables

2015

2014

4,188,872
651,302
1,703,876
390,732
-

4,540,476
511,619
4,866,979
303,241
781,989

6,934,782

11,004,304

Initial cost of land lease includes purchase price, costs directly attributable to the acquisition of lease rights, and is amortised
over the period of the lease (49-51 years).

Long-term prepayments to entities under control of the shareholder group represent prepayments for rent of hypermarkets for
the period until 2034. Related party transactions are detailed in note 31.

Movements in the carrying amount of initial cost of land lease were as follows:

’000 RUB

Cost
Balance at 1 January
Additions
Disposals

Balance at 31 December

Amortisation and impairment losses
Balance at 1 January
Amortisation charge
Disposals

Balance at 31 December

Net book value

2015

2014

5,476,402
103 363
(354,557)

4,825,525
793,009
(142,132)

5,225,208

5,476,402

(935,926)
(116,228)
15,808

(860,667)
(101,650)
26,391

(1,036,336)

(935,926)

4,188,872

4,540,476

Amortisation of RUB 116,228 thousand has been charged to selling, general and administrative expenses (2014: RUB 101,650 thousand).

At 31 December 2015 no initial cost of land lease was pledged to third parties as collateral for borrowings (2014: none).

19 Deferred tax assets and liabilities
(a) Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:

’000 RUB

Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables

and payables

Tax loss carry-forwards

Tax assets/(liabilities)
Set off of tax

Assets

2015

2014

2015

2014

Liabilities

Net

2015

–
357,514
–
–
–
572,154

–
537,207

–
186,488
–
–
60,656
716,188

247,782
163,658

(1,113)
(922 764)
(210,954)
(95,313)
(118,434)
(29,245)

(261,414)
–

(4,203)
(856,180)
(149,162)
(14,649)
–
(41,273)

–
–

1,466,875
(812,363)

1,374,772
(229,917)

(1 639 237)
812,363

(1,065,467)
229,917

(1,113)
(565 250)
(210,954)
(95,313)
(118,434)
542,909

(261,414)
537,207

(172,362)
–

Net tax assets/(liabilities)

654,512

1,144,855

(826,874)

(835,550)

(172,362)

2014

(4,203)
(669,692)
(149,162)
(14,649)
60,656
674,915

247,782
163,658

309,305
–

309,305

(b) Unrecognised deferred tax liability
As at 31 December 2015 a temporary difference of RUB 22,842,672 thousand (2014: RUB 24,344,483 thousand) relating to
investments in subsidiaries has not been recognised as the Group is able to control the timing of reversal of the difference, and
reversal is not expected in the foreseeable future. If the temporary difference were reversed in form of distributions remitted to
the Company, then an enacted tax rate of 5-15% would apply.

19 Deferred tax assets and liabilities continued
(c) Movement in temporary differences during the year

’000 RUB

Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables and payables
Tax loss carry-forwards

’000 RUB

Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables and payables
Tax loss carry-forwards

20 Inventories

’000 RUB

Goods for resale
Raw materials and consumables
Write-down to net realisable value

1 January
2015

Recognised in
profit or loss

(4,203)
(669,692)
(149,162)
(14,649)
60,656
674,915
247,782
163,658

3,090
104 442
(61,792)
(80,664)
(179,090)
(132,006)
(570,946)
373,549

Recognised
in other
comprehensive
income

–
–
–
–
–
–
61,750
–

31 December
2015

(1,113)
(565 250)
(210,954)
(95,313)
(118,434)
542,909
(261,414)
537,207

309,305

(543 417)

61,750

(172 362)

1 January
2014

Recognised in
profit or loss

36,193
(659,869)
(95,823)
2,630
10,258
325,198
214,730
61,865

(40,396)
(9,823)
(53,339)
(17,279)
50,398
349,717
60,084
101,793

Recognised in
other
comprehensive
income

–
–
–
–
-
–
(27,032)
–

31 December
2014

(4,203)
(669,692)
(149,162)
(14,649)
60,656
674,915
247,782
163,658

(104,818)

441,155

(27,032)

309,305

2015

2014

12,436,674
595,017
(403,387)

12,713,083
417,893
(271,679)

12,628,304

12,859,297

Due to write-off and discount given for obsolete and slow moving goods for resale the Group tested the related stock for
write-off and also wrote down the related inventories to their net realisable value, which resulted in decrease of carrying value
of stock by RUB 403,387 thousand as at 31 December 2015 (2014: RUB 271,679 thousand). The write down to net realisable value
was determined applying the percentages of discount on sales and write-offs of slow moving goods to the appropriate ageing
of the goods. The percentages of discount were based on the management’s best estimate following the experience of the
discount sales.

The write-down is included in cost of goods sold.

21 Trade and other receivables

’000 RUB

Trade receivables
VAT receivable
Prepaid taxes other than income
Prepaid income tax
Interest rate swap receivables
Bonuses receivable from suppliers
Other receivables

2015

2014

362,599
1,902,761
67,747
791,787
–
1,653,027
2,159,425

243,483
2,743,875
14,822
342,389
135,159
2,281,600
445,945

6,937,346

6,207,273

The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in
note 27.

22 Cash and cash equivalents

’000 RUB

Cash on hand
RUB-denominated bank current account
USD-denominated bank current account
RUB term deposits (interest rate: 2015: 5%-11% p.a.; 2014: 12%-24% p.a.)
Cash in transit

Cash and cash equivalents

Term deposits had original maturities of less than three months.

2015

2014

404,853
728,549
10,586
7,180,674
1,443,468

437,753
544,109
14,048
3,517,607
1,296,665

9,768,130

5,810,182

The Group keeps its deposits in the following banks: VTB bank, Rosbank and Unicredit bank.

The Group’s exposure to credit and currency risks related to cash and cash equivalents is disclosed in note 27.

23 Equity
Reconciliation of number of shares from 1 January to 31 December is provided in the table below.

Number of shares unless otherwise stated

Par value
On issue at 1 January

On issue at 31 December, fully paid

Ordinary shares

2015

2014

EUR 0.01
269,074,000

269,074,000 269,074,000

As at 31 December 2015 the Group’s subscribed share capital of RUB 119,440 thousand (EUR 2,691 thousand) is represented
by 269,074,000 shares with a par value of 0.01 EUR each.

In accordance with Luxemburg Company Law, the Company is required to transfer a minimum of 5% of its net profits for
each financial year to a legal reserve. This requirement ceases to be necessary once the balance of the legal reserve reaches
10% of the issued share capital. The legal reserve is not available for distribution to the shareholders. During the year
ended 31 December 2015 there were no transfers to legal reserve (2014: Nil). In 2015 the Group paid interim dividends to
shareholders in amount of RUB 1,643,770 thousand (2014: RUB 2,929,061 thousand). Interim dividends paid were recognised
as distribution to owners in the Consolidated Statement of Changes in Equity.

Dividends per share recognised as distribution to shareholders for the year ended 31 December 2015 amounted to RUB 6.1
(2014: RUB 10.9).

23 Equity continued
In June 2015 shareholders of the Company approved annual dividends for the year ended 31 December 2014. The amount
of annual dividends for 2014 was paid by the Group to shareholders as interim dividends in 2014 in the amount of
RUB 2,929,061 thousand.

There were no movements in additional paid-in capital during the year ended 31 December 2015.

24 Earnings per share
The calculation of basic earnings per share at 31 December 2015 was based on the profit attributable to ordinary shareholders of
RUB 1,917,707 thousand (2014: RUB 5,225,719 thousand), and a weighted average number of ordinary shares outstanding of
269,074,000, calculated as shown below. The Company has no dilutive potential ordinary shares.

Number of shares

Issued shares at 1 January

Weighted average number of shares for the year ended 31 December

2015

2014

269,074,000

269,074,000 269,074,000

25 Loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are
measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity
risk, see note 27.

’000 RUB

Non-current liabilities
Secured bank loans
Unsecured bank facilities
Unsecured bonds
Unsecured loans from related parties
Unsecured loans from third parties

Current liabilities
Unsecured bank facilities
Unsecured bonds
Unsecured bonds interest
Unsecured loans from third parties

2015

2014

5,000,000
17,052,875
385,144
1,117,400
2,850

5,000,000
8,699,975
4,980,000
975,041
–

23,558,269

19,655,016

1,780,993
9,980,000
238,714
23

9,314,926
3,000,000
107,730
2,871

11,999,730

12,425,527

As at 31 December 2015 loans and borrowings with carrying value of RUB 5,000,000 thousand were secured by property,
plant and equipment (2014: RUB 5,000,000 thousand). Refer to note 30.

As at 31 December 2015 the Group has RUB 6,300,000 thousand of undrawn, committed borrowing facilities available
in respect of which all conditions present had been met.

(a) Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:

31 December 2015

31 December 2014

27 Financial instruments and risk management
(a) Overview
The Group has exposure to the following risks from its use of financial instruments:

’000 RUB

Currency

Year of maturity

Face
value

Unsecured bonds
Secured bank facility
Unsecured bank facility
Unsecured loans from related parties
Unsecured loans from other

companies

RUB 2016 – 2017
2018
RUB
2016-2019
RUB
2018
USD

10,603,858
5,000,000
18,833,868
1,117,400

Carrying amount

10,603,858
5,000,000
18,833,868
1,117,400

Face
value

Carrying amount

8,087,730
5,000,000
18,014,901
975,041

RUB

2017

2,873

2,871

35,557,999

32,080,543

During 2012 and 2013 the Group placed unsecured bonds on Moscow Exchange which mature after five years in 2017 and 2018,
accordingly. However, bond holders have an option to claim repayment after three years. In 2015 part of the bond holders used
their option and claimed a repayment in the amount of RUB 2,614,856 thousand.

During the year ended 31 December 2015 the Group issued bonds in the amount of RUB 5,000,000 thousand which expire after
five years in 2020. Bonds holders have an option to claim repayment in April 2016.

– credit risk;
– liquidity risk; and
– market risk.

This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and
processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are
included throughout these consolidated financial statements.

Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.

The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate
risk limits and controls, and to monitor risks and adherence to limits. Risk management policies are reviewed regularly to
reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards
and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their
roles and obligations.

Compliance with loan covenants
The Group monitors compliance with loan covenants on an ongoing basis. Where noncompliance is unavoidable in management’s
view, the Group requests waiver letters from the banks before the year-end, confirming that the banks shall not use its right
to demand early redemption.

The Group’s Audit Committee oversees how management monitors compliance with the Group’s risk management policies and
procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group’s
Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews
of risk management controls and procedures, the results of which are reported to the Audit Committee.

At 31 December 2015 and during the year then ended the Group complied with all loan covenants.

26 Trade and other payables

’000 RUB

Trade payables
Advances received
Taxes payable (other than income tax)
Payables to staff
Deferred income
Interest rate swap liability
Other current payables

2015

2014

24,000,558
1,772,204
627,824
1,603,412
85,310
173,590
554,435

26,272,658
335,282
644,760
1,322,765
76,632
–
446,152

28,817,333

29,098,249

The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 27.

(b) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its
contractual obligations, and arises principally from the Group’s receivables from customers and investments.

(i) Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the
reporting date was:

’000 RUB

Trade and other receivables
Cash and cash equivalents

Note

Carrying amount

2015

2014

4,175,051
9,768,130

3,106,187
5,810,182

13,943,181

8,916,369

Due to the fact that the Group’s principal activities are located in the Russian Federation the credit risk is mainly associated with
its domestic market. The credit risks associated with foreign counterparties are considered to be remote, as there are only few
foreign counterparties and they were properly assessed for creditability.

(ii) Trade and other receivables
The Group has no considerable balance of trade receivables because the majority of its customers are retail consumers,
who are not provided with any credit. Therefore the Group’s trade receivables primarily include receivables from tenants
and receivables connected to provision of advertising services. Usually the Group provides advertising services to suppliers
of goods sold in O’KEY stores. Thus, the credit risk in part of trade receivables is mostly managed through procedures for
selection of suppliers and tenants.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other
receivables. The main component of this allowance is a specific loss component that relates to individually significant exposures.

Impairment losses
The aging of trade and other receivables at the reporting date was:

’000 RUB

Not overdue and past due less than 90 days
Past due 90-180 days
Past due 181-360 days
More than 360 days

Gross
2015

Impairment
2015

Gross
2014

Impairment
2014

4 064 535
57 304
36 799
45 690

–
–
–
(29,277)

2,813,630
75,980
9,191
235,815

–
–
–
(28,429)

4,204,328

(29,277)

3,134,616

(28,429)

The movement in the allowance for impairment in respect of trade receivables during the year was as follows:

’000 RUB

Balance at beginning of the year
Impairment loss recognised
Impairment loss reversed

Balance at end of the year

2015

28,429
848
–

29,277

2014

46,176
–
(17,747)

28,429

The management has performed a thorough analysis of the recoverability of the receivables and impaired the balances
outstanding for more than one year. Based on past experience management believes that normally the balances outstanding less
than 360 days should not be impaired.

(iii) Cash and cash equivalents
The Group held cash and cash equivalents of RUB 9,768,130 thousand at 31 December 2015 (2014: RUB 5,810,182 thousand), which
represents its maximum credit exposure on these assets. Cash and cash equivalents are mainly held with banks which are rated
from BB+ to B based on Standard and Poor’s and Fitch national rating for Russian Federation.

(c) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities
that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as
possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the Group’s reputation.

Liquidity risk management is a responsibility of the Treasury under the supervision of the Group’s Financial Director.
The Group’s liquidity risk management objectives are as follows:

– Maintaining financial independence: a share of one creditor in debt portfolio should not exceed 30%;
– Maintaining financial stability: the ratio DEBT/EBITDA should not exceed 4.0;
– Monitoring of compliance with debt covenants;
– Planning: timely preparation of operating, investing and financing cash-flow forecasts on a rolling basis.

27 Financial instruments and risk management continued
(c) Liquidity risk continued
(i) Exposure to liquidity risk
The following are the contractual maturities of financial liabilities, including future interest payments:

2015

’000 RUB

Non-derivative financial liabilities
Secured bank loan
Unsecured bonds
Unsecured bank facilities
Unsecured loans from related parties
Unsecured loans from other companies
Trade and other payables

Carrying
amount

Contractual
cash flows

0-6 mths

6-12 mths

1-5 yrs

5,000,000
10,603,858
18,833,868
1,117,400
2,873
26,331,994

(5,858,020)
(11,277,679)
(23,184,757)
(1,303,777)
(2,878)
(26,331,994)

(207,034)
(5,724,587)
(1,846,406)
(44,329)
(25)
(26,331,994)

(210,466)
(5,125,475)
(2,216,104)
(44,329)
(1)
–

(5,440,520)
(427,617)
(19,122,247)
(1,215,119)
(2,852)
–

61,889,993

(67,959,105)

(34,154,375)

(7,596,375)

(26,208,355)

As at 31 December 2015 Group’s current liabilities exceed current assets by RUB 10,254,288 thousand (2014: RUB 15,658,679
thousand). Excess of current liabilities over current assets is usual for retail industry. The Group uses excess of trade and other
payables over inventory to finance its investing activities.

During 2012, 2013 and 2015 the Group placed unsecured bonds on the Moscow Exchange which mature after five years in 2017,
2018, 2020 respectively. Bond holders have an option to claim repayment of bonds after three years (after one year for the 2015
bond issuance), thus a three year period (one year for new bond) are used for contractual cash flows calculation purposes

2014

’000 RUB

Non-derivative financial liabilities
Secured bank loan
Unsecured bonds
Unsecured bank facilities
Unsecured loans from related parties
Unsecured loans from other companies
Trade and other payables

There are no payments due after five years.

Carrying
amount

Contractual
cash flows

0-6 mths

6-12 mths

1-5 yrs

5,000,000
8,087,730
18,014,901
975,041
2,871
28,041,575

(6,306,546)
(9,206,360)
(23,235,154)
(1,059,456)
(2,873)
(28,041,575)

(208,178)
(480,705)
(9,207,764)
(38,681)
(22)
(28,041,575)

(209,322)
(3,375,025)
(2,723,745)
(38,681)
(2,851)
–

(5,889,046)
(5,350,630)
(11,303,645)
(982,094)
–
–

60,122,118

(68,851,964)

(37,976,925)

(6,349,624)

(23,525,415)

(d) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect
the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage
and control market risk exposures within acceptable parameters, while optimising the return.

The Group buys derivatives in order to manage market risk. All such transactions are carried out within the guidelines set in
Group’s policy on hedging market risk. The Group applies hedge accounting in order to manage volatility in profit or loss.

(i) Currency risk
The Group holds its business in the Russian Federation and mainly collects receivables nominated in Russian Roubles.
However financial assets and liabilities of the Group are also denominated in other currencies, primarily US Dollar.

Thus the Group is exposed to currency risk, which may materially influence the financial position and financial results of the
Group through the change in carrying value of financial assets and liabilities and amounts on foreign exchange rate gains or
losses. The Group ensures that its exposure is kept to an acceptable level by keeping the proportion of financial assets and
liabilities in foreign currencies to total financial liabilities at an acceptable level. From time to time the Group converts assets and
liabilities from one currency to another. The Group regularly considers the necessity of using derivatives to hedge its exposure to
currency risk.

Exposure to currency risk
The Group’s exposure to foreign currency risk was as follows based on national amounts:

’000 RUB

Trade and other receivables
Unsecured loans from related parties
Trade and other payables

Gross exposure

Of which carrying amount of hedged financial assets and financial liabilities

Net exposure

The following significant exchange rates applied during the year:

USD-
denominated
2015

2,101
(1,117,400)
(760,753)

USD-
denominated
2014

251,011
(975,041)
(120,810)

(1,876,052)

(844,840)

–

(1,876,052)

(844,840)

Russian Rouble equals

US Dollar

Average rate

Reporting date rate

2015

2014

2015

2014

60,9579

38,4217

72,8827

56,2584

Sensitivity analysis
A 20% weakening of the RUB against USD at 31 December 2015 would have decreased equity and profit and loss by
RUB 375,210 thousand (2014: RUB 168,968 thousand). This analysis is based on foreign currency exchange rate variances
that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other
variables, in particular interest rates, remain constant. The analysis was performed on the same basis for 2014.

A strengthening of the RUB against the USD at 31 December would have had the equal but opposite effect on equity and profit
and loss, on the basis that all other variables remain constant.

(ii) Interest rate risk
The Group has material exposure to interest rate risk. As at 31 December 2015, 39% of the Group’s interest-bearing financial
liabilities were subject to re-pricing within six months after the reporting date (2014: 56%).

The Group uses swaps to hedge its exposure to variability of interest rates. As at 31 December 2015 the Group had interest
swap agreements with two banks. Under these agreements the Group swaps Mosprime rate for fixed rate. At inception,
the swaps had a maturity of three years. As at 31 December 2015 fair value of swaps was RUB (173,590) thousand
(31 December 2014: RUB 135,159 thousand).

27 Financial instruments and risk management continued
(d) Market risk continued
Profile
At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was:

’000 RUB

Fixed rate instruments
Financial assets
Financial liabilities

Variable rate instruments
Financial liabilities

Carrying amount

2015

2014

7,180,674
(26,736,999)

3,517,607
(21,019,143)

(8,821,000)

(11,061,400)

Cash flow sensitivity analysis for variable rate instruments
A change of 500 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by
the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
The analysis was performed on the same basis for 2014.

’000 RUB

2015
Variable rate instruments
Interest rate swap

Cash flow sensitivity (net)

2014
Variable rate instruments
Interest rate swap

Cash flow sensitivity (net)

Profit or loss

Equity

500 bp increase

500 bp decrease

500 bp increase

500 bp decrease

(441,050)
163,250

441,050
(163,250)

(277,800)

277,800

246,893

(231,668)

(553,070)
76,500

553,070
(76,500)

(476,570)

476,570

–
55,628

55,628

–
(56,213)

(56,213)

(e) Offsetting of financial assets and financial liabilities
The Group may enter into sales and purchase agreements with the same counterparty in the normal course of business. The related
amount receivable and payable do not always meet the criteria for offsetting in the statement of financial position. This is because
the Group may not have any currently legally enforceable right to offset recognised amounts, because the right to offset may be
enforceable only on the occurrence of future events. In particular, in accordance with the Russian civil law an obligation can be
settled by offsetting against a similar claim if it is due, has no maturity or is payable on demand.

The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements.

’000 RUB

31 December 2015
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria

Net amounts presented in the statement of financial position
Amounts related to recognised financial instruments that do not meet some or all of the

offsetting criteria

Net amount

’000 RUB

31 December 2014
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria

Net amounts presented in the statement of financial position
Amounts related to recognised financial instruments that do not meet some or all of the

offsetting criteria

Net amount

Trade and other
receivables

Trade and other
payables

1,222,653
(1,053)

9,429,773
(1,053)

1,221,600

9,428,720

(1,221,600)

–

8,207,120

Trade and other
receivables

Trade and other
payables

1,463,010
(2,560)

8,833,587
(2,560)

1,460,450

8,831,027

(1,460,421)

7,370,606

The net amounts presented in the statement of financial position disclosed above form part of trade and other receivables and
trade and other payables, respectively. Other amounts included in these line items do not meet the criteria for offsetting and are
not subject to the agreements described above.

Amounts offset in accordance with IAS 32 offsetting criteria comprise mainly trade payables for goods and bonuses receivable
from suppliers.

(f) Fair values
Basis for determination of fair value of financial assets and liabilities is disclosed in note 5. Fair value of Group’s financial assets
and liabilities, including loans and borrowings, approximates their carrying amounts.

(g) Fair value hierarchy
Group’s derivative financial assets and liabilities comprise interest rate swaps which are carried at fair value. Fair value of swaps
was determined based on observable market data (Level 2 fair value), including forward interest rates. The Group has no financial
assets and liabilities measured at fair value based on unobservable inputs (Level 3 fair value).

28 Operating leases
Leases as lessee
The Group has both owned and leased land plots. The owned land plots are included in property, plant and equipment. Leased
land plots are treated as operating leases. In case the Group incurs costs directly attributable to acquisition of operating lease
rights, these costs are capitalised as initial cost of land lease and are amortised over the period of the lease (49-51 years).
The further information on leases is detailed below.

When the Group leases land plots under operating leases, the lessors for these leases are State authorities and third parties.
The leases are typically run for two to three years, after which long-term operating lease contract is concluded for 49 years.

The Group also rents premises under operating leases. These leases typically run up to ten years, although some leases may
be for longer periods. Property leases can be renewed based on mutual agreement of the lessor and the Group. The Group
has subleases. Fees payable by the Group for operating leases of stores comprise fixed payments and contingent rent which
is determined as an excess of 2-6% of the revenue of related stores over the fixed rent rate.

During the year ended 31 December 2015 RUB 4,844,263 thousand was recognised as an expense (including amortisation of initial
cost of land lease amounting to RUB 116 228 thousand) in the profit and loss in respect of operating leases (2014: RUB 3,974,291
thousand). Contingent rent recognised as an expense for the year ended 31 December 2015 amounted to RUB 1,076,139 thousand
(2014: RUB 866,605 thousand).

At 31 December, the future minimum lease payments under non-cancellable leases were payable as follows:

RUB 000’

Less than one year
Between one and five years
More than five years

2015

2014

3,012,410
10,775,153
20,743,629

2,634,774
8,525,459
15,809,958

34,531,192

26,970,191

Future minimum lease payments as at 31 December 2015 include RUB 26,722,003 thousand (31 December 2014: RUB 18,713,753
thousand) in respect of property leases cancellable only with the permission of the lessor. Management believes that the Group
is able to negotiate early cancellation of these leases, if necessary.

Leases as lessor
The Group leases out its investment property and some space in the buildings of hypermarkets. During the year ended
31 December 2015 RUB 1,529,250 thousand was recognised as rental income in the consolidated statement of profit or loss
and other comprehensive income (2014: RUB 1,501,627 thousand). All leases where the Group is lessor are cancellable.
The Group has contingent rent arrangements.

Group’s bonds are listed on Moscow Exchange. Fair value of bonds payable was determined for disclosure purposes based on
active market quotations (Level 1 fair value).

Contingent rent recognised as income amounted to RUB 67 483 thousand for the year ended 31 December 2015 (2014: RUB 52,275
thousand). Contingent rent is determined as an excess of 4%-25% of the tenant’s revenue over the fixed rent rate.

(h) Capital management
The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain
future development of the business. Neither the Company nor its subsidiaries are subject to externally imposed capital
requirements, except for statutory requirement in relation to minimum level of share capital; the Group follows this requirement.

29 Capital commitments
The Group has capital commitments to acquire property, plant and equipment and intangible assets amounting to RUB 3,570,470
thousand as at 31 December 2015 (2014: RUB 8,616,146 thousand). The capital commitments mostly consist of construction
contracts for stores.

30 Contingencies
(a) Legal proceedings
From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates
and both internal and external professional advice management is of the opinion that no material losses will be incurred in
respect of claims.

31 Related party transactions continued
(c) Transactions with other related parties
Other related parties are entities which belong to the Shareholder group (see note 1).

The Group’s other related party transactions are disclosed below.

(b) Taxation contingencies
The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official
pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different
tax authorities.

Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines,
penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar
years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation
suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement
of tax legislation.

These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other
countries. Management believes that it has provided adequately for the Group’s tax positions based on its interpretations of
applicable Russian tax legislation, official pronouncements and court decisions. In addition to tax liabilities recognised in these
consolidated financial statements, the Group is exposed to uncertain tax positions for which no provision has been made because
management has assessed that additional payments are not probable. However, the interpretations of the relevant authorities
could differ. If the authorities would be successful in enforcing their interpretations, the maximum unrecognised exposures
approximate RUB 2,000 million as at 31 December 2015.

’000 RUB

Property, plant & equipment (carrying value)

Total

Note

2015

2014

2,592,895

2,643,191

2,592,895

2,643,191

(i) Revenue

’000 RUB

Services provided:
Other related parties

Transaction value
2015

Transaction value
2014

Trade payables
2015

Trade payables
2014

35,562

44,279

(6,007)

(5,200)

All outstanding balances with related parties are to be settled in cash within six months of the reporting date. None of the
balances are secured.

(ii) Expenses

’000 RUB

Other related parties
Including:

Rental fee
Reimbursement of utilities
Reimbursement of other expenses

Other services received:
Other related parties

Finance costs:

Other related parties

Transaction value
2015

Transaction
value
2014

Prepayments
2015

Prepayments
2014

(726,151)

(734,345)

936,956

678,885

(616,077)
(54,518)
(55,556)

(634,537)
(60,592)
(39,216)

(3,922)

(3,345)

(76,095)

(63,730)

–
–
–

–

–
–
–

236

–

(806,168)

(801,420)

936,956

679,121

31 Related party transactions
(a) Major shareholders
The major Shareholders of the Group are three individuals Mr. Korzhev, Mr. Troitsky and Mr. Volchek (‘the shareholder group’).

(b) Transactions with management
(i) Management remuneration
Key management received the following remuneration during the year, which is included in personnel costs (see note 11):

In 2015 no finance costs from related parties were capitalised in the cost of property, plant and equipment (2014: Nil).
Outstanding balance for lease of premises as at 31 December 2015 represents net balance of prepayments for rent of
hypermarkets for the period until 2034 in the amount of RUB 938,329 thousand (2014: RUB 760,516 thousand) and current
liabilities for rent of hypermarkets in the amount RUB 1,373 thousand (2014: RUB 1,799 thousand). Long-term part of
prepayments is RUB 651,301 thousand (2014: RUB 511,619 thousand), refer to note 18.

All other outstanding balances are to be settled in cash within six months of the reporting date. None of the balances
are secured.

’000 RUB

Salaries and bonuses
Social security contributions
Long-service bonus
Other payments

2015

2014

236,815
16,389
28,691
401,165

683,060

221,300
4,849
137,931
–

364,080

(iii) Loans

’000 RUB

Loans paid back:
Other related parties

Amount
loaned
2015

Amount
loaned
2014

Outstanding
balance
2015

Outstanding
balance
2014

–

(1,117,400)

(975,041)

In addition members of Board of Directors received remuneration in the amount of RUB 32,438 thousand for the year ended
31 December 2015 (2014: RUB 15,758 thousand) which is included in Legal and professional expenses.

The loans from other related parties bear interest at 8% per annum and are payable in 2018.

(d) Pricing policies
Related party transactions are not necessarily based on market prices.

32 Events subsequent to the reporting date
There are no events subsequent to the reporting date which require disclosure.

33 Basis of measurement
The consolidated financial statements are prepared on the historical cost basis except for the following:

– Derivative financial instruments are stated at fair value;
– Liabilities incurred in cash-settled share-based payment transactions are remeasured at fair value;
– Investment property is remeasured at fair value.

34 Significant accounting policies
The accounting policies set out below have been consistently applied to all periods presented in these consolidated financial
statements, and have been applied consistently by Group entities, except as explained in note 35, which addresses changes in
accounting policies.

(a) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that control ceases. The accounting policies of
subsidiaries have been changed when necessary to align them with the policies adopted by the Group.

(ii) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions,
are eliminated in preparing the consolidated financial statements.

(b) Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates
at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are
retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary
items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective
interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of
the reporting period.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the
functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency
that are measured based on historical cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising in retranslation are recognised in profit or loss.

(ii) Foreign operations
The assets and liabilities of foreign operations are translated to RUB at the exchange rates at the reporting date. The income and
expenses of foreign operations are translated to RUB at exchange rates at the dates of the transactions.

Foreign currency differences are recognised directly in other comprehensive income. Since 1 January 2005, the Group’s date of
transition to IFRSs, such differences have been recognised in the foreign currency translation reserve. When a foreign operation
is disposed of such that control or joint control is lost, the cumulative amount in the translation reserve related to that foreign
operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest
in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is
reattributed to non-controlling interests. When the Group disposes of only part of its investment in joint venture that includes
a foreign operation while retaining joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss.

Foreign exchange gains and losses arising from a monetary item received from or payable to a foreign operation, the settlement of
which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation
and are recognised in other comprehensive income, and are presented within equity in the foreign currency translation reserve.

34 Significant accounting policies continued
(c) Financial instruments
Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings,
and trade and other payables.

(i) Non-derivative financial assets and financial liabilities – recognition and derecognition
The Group initially recognises loans and receivables and debt securities issued on the date that they are originated. All other
financial assets and financial liabilities are recognised initially on the trade date at which the Group becomes a party to the
contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards
of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the
Group is recognised as a separate asset or liability.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when,
the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the
liability simultaneously.

(ii) Non-derivative financial assets – measurement
The Group has the following non-derivative financial assets: loans and receivables.

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such
assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans
and receivables are measured at amortised cost using the effective interest method, less any impairment losses.

Loans and receivables comprise trade and other receivables and cash and cash equivalents.

Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank
overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component
of cash and cash equivalents for the purpose of the statement of cash flows.

(iii) Non-derivative financial liabilities – measurement
The Group has the following non-derivative financial liabilities: loans and borrowings, bank overdrafts, trade and other payables.

Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial
recognition, these financial liabilities are measured at amortised cost using the effective interest method.

(iv) Derivative financial instruments
The Group holds derivative financial instruments to hedge its interest rate and foreign currency risk exposures.

On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and hedged
items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods
that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception
of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be ‘highly effective’
in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is
designated, and whether the actual results of each hedge are within a range of 80-125%. For a cash flow hedge of a forecast
transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that
could ultimately affect reported net income.

Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when
incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for
as described.

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular
risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the
effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the
hedging reserve in equity. The amount recognised in other comprehensive income is removed and included in profit or loss in the
same period as the hedged cash flows affect profit or loss under the same line item in the statement of profit and loss and other
comprehensive income as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised
immediately in profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the
designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in
other comprehensive income and presented in the hedging reserve in equity remains there until the forecast transaction affects
profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is
recognised immediately in profit or loss.

(d) Transactions with owners
(i) Ordinary shares/share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are
recognised as a deduction from equity, net of any tax effects.

(ii) Distributions to owners/contributions from owners
The dividends paid to the shareholders are recognised directly in equity once the decision on the payment takes place. The transfers
of assets to the related parties (companies under the control of the Group’s ultimate shareholders) or other benefits to such
related parties are recognised directly in equity as distributions to the shareholders.

(e) Property, plant and equipment
(i) Recognition and measurement
Items of property, plant and equipment, except for land, are measured at cost less accumulated depreciation and impairment
losses. The cost of property, plant and equipment at 1 January 2005, the date of transition to IFRSs, was determined by reference
to its fair value at that date.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes
the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for
their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and
capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised
as part of that equipment.

Any gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal
with the carrying amount of property, plant and equipment, and is recognised net within ‘other income’ in profit or loss.

(ii) Subsequent costs
The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is
probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably.
The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment
are recognised in profit or loss as incurred.

(iii) Depreciation
Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect
of internally constructed assets, from the date that the asset is completed and ready for use. Depreciation is based on the cost of
an asset less its residual value. Significant components of individual assets are assessed and if a component has a useful life that
is different from the remainder of that asset, that component is depreciated separately.

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of
property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic
benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless
it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

34 Significant accounting policies continued
(e) Property, plant and equipment continued
The estimated useful lives of significant items of property, plant and equipment for the current and comparative periods are
as follows:

– Buildings
– Machinery and equipment, auxiliary facilities
– Motor vehicles
– Leasehold improvements
– Other fixed assets

30 years;
2-20 years;
5-10 years;
over the term of underlying lease;
2-10 years.

Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.

(f) Investment property
Investment property is property held by the Group to earn rental income or for capital appreciation and which is not occupied by
the Group.

Investment property, including investment property under construction, is initially recognised at cost, including transaction
costs, and subsequently remeasured at fair value with any change therein recognised in profit or loss. If fair value of investment
property under construction is not reliably determinable, the Group measures that investment property under construction
at cost until either its fair value becomes reliably determinable or construction is completed (whichever is earlier).

Fair value of the Group’s investment property is determined by independent appraisers, who hold a recognised and relevant
professional qualification and who have recent experience in valuation of property of similar location and category.

When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of
reclassification becomes its cost for subsequent accounting.

(g) Intangible assets
(i) Other intangible assets
Other intangible assets that are acquired by the Group have finite useful lives and are measured at cost less accumulated
amortisation and accumulated impairment losses. Other intangible assets primarily include capitalised computer software,
patents and licenses. Acquired computer software, licenses and patents are capitalised on the basis of the costs incurred to
acquire and bring them to use.

(ii) Subsequent expenditure
Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which
it relates. All other expenditure is recognised in the profit or loss as incurred.

(iii) Amortisation
Amortisation is based on the cost of the asset less its estimated residual value.

Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets from
the date that they are available for use since this most closely reflects the expected pattern of consumption of future economic
benefits embodied in the asset. The estimated useful lives for the current and comparative periods are as follows:

– lease rights
– software licenses
– other intangible assets

5-10 years;
1-7 years;
1-5 years.

Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewFinancial Statements

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2015

(h) Leased assets
(i) Operating leases
Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership
from the lessor to the Group, the total lease payments, including those on expected termination, are charged to profit or loss
on a straight-line basis over the period of the lease.

Where the Group is a lessee in a land lease, the initial cost of land lease is amortised using straight-line method over the period
of lease being up to 51 years.

(ii) Finance leases
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases.
Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of
the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting
policy applicable to that asset.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of future finance charges, are shown as other payables (long-term
accounts payable for amounts due after 12 months from reporting date). The interest cost is charged to the profit or loss over the
lease period using the effective interest method.

(i) Inventories
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted moving
average principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs
incurred in bringing them to their existing location and condition.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and
selling expenses.

(j) Impairment
(i) Financial assets
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there
is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has
occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash
flows of that asset that can be estimated reliably.

Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount
due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy,
observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets.

The Group considers evidence of impairment for receivables at both a specific asset and collective level. All individually significant
receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are
then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually
significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics.

In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the
amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such
that the actual losses are likely to be greater or less than suggested by historical trends.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying
amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses
are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues
to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to
decrease, the decrease in impairment loss is reversed through profit or loss.

34 Significant accounting policies continued
(j) Impairment continued
(ii) Non-financial assets
The carrying amounts of the Group’s non-financial assets, other than investment property, inventories and deferred tax assets
are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then
the asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of
assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups
of assets (the ‘cash-generating unit’).

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are
allocated to reduce the carrying amount of assets in the unit (group of units) on a pro rata basis.

Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased
or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable
amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(k) Employee benefits
(i) Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate
entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution
pension plans, including Russia’s State pension fund, are recognised as an employee benefit expense in profit or loss in the
periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that
a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than
12 months after the end of the period in which the employees render the service are discounted to their present value.

(ii) Other long-term employee benefits
Other long-term employee benefits represent long-service bonuses. Long-term employee benefits are expensed evenly during
the periods in which they are earned by employees.

(iii) Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service
is provided.

A liability is recognised for the amount expected to be paid under short-term bonus if the Group has a present legal or constructive
obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

(l) Provisions
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be
estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions
are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments
of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.

(m) Revenue
Revenue is measured at the fair value of the consideration received or receivable, net of VAT, returns and discounts.

(i) Goods sold
Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods, for retail
trade it is normally at the cash register.

(ii) Services
Revenue from services rendered is recognised in profit or loss when the services are rendered, by reference to stage of
completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services
to be provided.

Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. When
assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line
basis over the lease term. Lease incentives granted are recognised as an integral part of the total rental income.

(n) Cost of sales
Cost of sales include the purchase price of the goods sold and other costs incurred in bringing the inventories to the location and
condition ready for sale. These costs include costs of purchasing, packaging and transporting of goods to the extent that it relates
to bringing the inventories to the location and condition ready for sale.

The Group receives various types of bonuses from suppliers of inventories, primarily in the form of volume discounts and slotting
fees. These bonuses are recorded as reduction of cost of sales as the related inventory is sold.

Losses from inventory shortages are recognised in cost of sales.

(o) Finance income and costs
Finance income comprises interest income on issued loans and bank deposits. Interest income is recognised as it accrues in
profit or loss, using the effective interest method.

Finance costs comprise interest expense on borrowings and unwinding of the discount on provisions. Borrowing costs that are
not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using
the effective interest method.

Foreign currency gains and losses are reported on a net basis.

(p) Income tax
Income taxes have been provided in the consolidated financial statements in accordance with Russian legislation, as well as
Luxembourg, BVI and Cyprus legislation for corresponding companies of the Group. Income tax expense comprises current
and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business
combination, or items recognised directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary
differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither
accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and joint arrangements to the extent
that it is probable that they will not reverse in the foreseeable future. A deferred tax asset is recognised for unused tax losses,
unused tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be
available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realised.

34 Significant accounting policies continued
(p) Income tax continued
The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the
end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based
on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset
if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same
tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on
a net basis or their tax assets and liabilities will be realised simultaneously.

In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may
not be set off against taxable profits and current tax liabilities of other Group companies.

In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and
whether additional taxes, penalties and late-payment interest may be due. The Group believes that its accruals for tax liabilities
are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior
experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events.
New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax
liabilities; such changes to tax liabilities will impact the tax expense in the period that such a determination is made.

(q) Earnings per share
The Group presents basic and diluted earnings per share (‘EPS’) data for its ordinary shares. Basic EPS is calculated by dividing
the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares
outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable
to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the
effects of all dilutive potential ordinary shares.

(r) Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating
segments’ operating results are reviewed regularly by the Group’s CEO to make decisions about resources to be allocated to the
segment and assess its performance, and for which discrete financial information is available.

(s) Value added tax
Input value added tax (VAT) is generally reclaimable against sales VAT when the right of ownership on purchased goods
is transferred to the Group or when the services are rendered to the Group. The tax authorities permit the settlement of
VAT on a net basis. VAT related to sales and purchases which have not been settled at the balance sheet date (VAT deferred)
is recognised in the statement of financial position on a gross basis and disclosed separately as an asset and liability.

(t) Presentation of the statement of cash flows
The Group reports cash flows from operating activities using direct method. Cash flows from investing activities are presented
net of VAT. VAT paid to suppliers of non-current assets and VAT in proceeds from sale of non-current assets are presented in line
‘VAT paid’ in operating activities.

(u) Guarantees
The Group considers that financial guarantee contracts entered into by the Group to guarantee the indebtedness of other parties
are insurance arrangements, and accounts for them as such. In this respect, the Group treats the guarantee contract as a
contingent liability until such time as it becomes probable that the Group will be required to make a payment under the guarantee.

(v) New Standards and Interpretations not yet adopted
A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2015,
and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially
the following will have an impact on the Group’s operations. The Group plans to adopt these pronouncements when they
become effective.

– IFRS 9 Financial Instruments, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial
instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general
hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments
from IAS 39.

35 Changes in accounting policies
Group has consistently applied the accounting policies set out in note 34 to all periods presented in these consolidated financial
statements, except for change in presentation of the consolidated statement of cash flows described below.

Previously the Group presented cash paid for acquisition of non-current assets including VAT and recovery of related input VAT
in investing activities.

Since 2015 the Group presents cash flows from investing activities net of VAT. VAT paid to suppliers of non-current assets and
VAT in proceeds from sale of non-current assets are presented in line ‘VAT paid’ in operating activities.

Comparative information has been restated so that it is also in conformity with the revised accounting policy.

The Group does not intend to adopt this standard early as it is not yet endorsed by the European Union.

The following table summarises the impact of changes in accounting policy on cash-flows from operating and investing activities:

The Group has not analysed the likely impact of the new Standard on its financial position or performance.

’000 RUB

– IFRS 15 Revenue from Contracts with Customers establishes a comprehensive framework for determining whether, how

much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11
Construction Contracts and IFRIC 13 Customer Loyalty Programmes. The core principle of the new standard is that an entity
recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard results
in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed
comprehensively and improves guidance for multiple-element arrangements.

The Group does not intend to adopt this standard early as it is not yet endorsed by the European Union.

The Group has not analysed the likely impact of the new Standard on its financial position or performance.

– IFRS 16 replaces the existing lease accounting guidance in IAS 17 Leases, IFRIC 4 Determining whether an Arrangement

contains a lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal
Form of a Lease. It eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet
finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that
is similar to current finance lease accounting.

Lessor accounting remains similar to current practice – i.e. lessors continue to classify leases as finance and operating leases.

The Group is a lessee in significant number of operating lease agreements (stores and land plots). Application of IFRS 16 will

result in recognition of these leases as asset on balance sheet. At the same time, a financial liability will be recognised.

The Group does not intend to adopt this standard early as it is not yet endorsed by the European Union.

The Group has not analysed the likely impact of the new Standard on its financial position or performance.

VAT paid
Recovery of input VAT from investing activities

Net cash from operating activities

Purchase of property, plant and equipment and initial cost of land lease
Recovery of input VAT from investing activities
Proceeds from sales of property, plant and equipment and intangible assets

Net cash used in investing activities

2014 as previously
reported

Effect of change in
accounting policy

2014 restated

(491,268)
(1,947,277)

(2,406,753)
1,947,277

(2,898,021)
–

9,837,264

(459,476)

9,377,788

(18,504,486)
1,947,277
15,685

2,409,146
(1,947,277)
(2,393)

(16,095,340)
–
13,292

(16,746,420)

459,476

(16,286,944)

O’KEY Group S.A. Annual Report & Accounts 2015O’KEY Group S.A. Annual Report & Accounts 2015GovernanceFinancial StatementsStrategic ReportOverviewFinancial StatementsNotes

Content by Edward Austin
www.edward-austin.com
+44 (0)207 193 4402

O’KEY Group S.A. Annual Report & Accounts 2015Financial StatementsNikolay Minashin

Head of Investor Relations

Nikolay.Minashin@okmarket.ru

+ 7 495 663 66 77 ext 127

+ 7 985 180 31 07