RAV.L Regulatory News (RAV)

18 March 2019

Raven Property Group Limited ("Raven" or the "Company" or the "Group")

Results for the year ended 31 December 2018

The Board of Raven Property Group release results for the year ended 31 December 2018.

Highlights

· A good trading performance adversely affected by currency movements;

· Occupancy up from 81% to 89% at 31 December 2018 and 90% today;

· Two warehouse acquisitions completed in the second half of the year;

· Rouble valuation of the investment portfolio up 8% but falling by 10% after currency exchange losses;

· Secured debt facilities moving to Roubles;

· Underlying earnings of £20.0 million and IFRS loss of £120.7 million after revaluation currency loss;

· Tender offer buy back of 2 in 51 shares at 45p, equating to 1.75p per share, giving full year distribution of 3p.

CEO Glyn Hirsch said "Local market conditions are improving. Vacancy rates are down, rents are rising and the overall performance of the Russian economy is strengthening. Annoyingly the low year end Rouble exchange rate has not allowed this to be reflected once translated into Sterling."

Enquiries

About Raven Property Group

Raven was founded in 2005 to invest in class A warehouse complexes in Russia and lease to Russian and International tenants. Its Ordinary Shares, preference shares and warrants are listed on the Main Market of the London Stock Exchange and admitted to the Official List of the UK Listing Authority and the Official List of The International Stock Exchange ("TISE"). Its Ordinary Shares also have a secondary listing on the main board of the Johannesburg Stock Exchange and the Moscow Stock Exchange. Its convertible preference shares are admitted to the Official List of TISE and to trading on the SETSqx market of the London Stock Exchange. The Group operates out of offices in Guernsey, Cyprus and Moscow and has an investment portfolio of circa 1.9 million square metres of Grade "A" warehouses in Moscow, St Petersburg, Rostov-on-Don, Novosibirsk and Nizhny Novgorod and 49,000 square metres of commercial office space in St Petersburg. For further information visit the Company's website: www.theravenpropertygroup.com

Chairman's Message

I am pleased to report that we have made significant progress in the year. We now consider ourselves a Rouble operating business and our balance sheet exposure to US Dollar liabilities has greatly reduced.

The market fundamentals in the warehouse market have steadily improved and our warehouse occupancy levels have increased from 81% at 1 January 2018 to 89% at 31 December 2018 with a further increase to 90% today.

In 2018 we completed two further acquisitions of grade A warehouse space, totalling 123,200sqm, for Roubles 5.3 billion, which should generate an additional Roubles 580 million of income per annum. Since April 2017 we have acquired Roubles 14.6 billion of new assets and, together with increased occupancy, this has supported our top line as legacy US Dollar pegged leases mature.

Our exposure to US Dollar financing facilities has reduced from 92% at the beginning of the year to 34% of the Group's secured debt at 31 December 2018. We still have some work to do but we are confident that 2019 will see the residue of US Dollar balance sheet exposure disappear.

The certainty of a long term Rouble rental market and the shift away from a US Dollar financing model has led us to reconsider a number of currency related issues. For the first time our valuers have applied Rouble estimated rental values ("ERVs") in the valuation model of our investment portfolio and as at 31 December 2018 all of our investment properties are valued in Roubles rather than US Dollars. This has precipitated a review of both the balance sheet functional currency of our subsidiaries and also the presentation currency we use in our Annual Report. The most obvious change being that we have reverted to a Sterling presentation policy for our Annual Report, the currency of our share capital and preference shares.

The weak Rouble exchange rate at 31 December 2018 has had a detrimental impact on our property valuations. Rouble valuations of the investment portfolio improved in the year but exchange losses caused a revaluation loss on translation. Underlying earnings of £20.0 million support our distribution for the year. IFRS losses of £120.7 million reflect the impact of the weak Rouble on valuation movements.

We welcome Michael Hough to the Board. Michael joined as a non executive director on 9 October 2018 and has a strong commercial pedigree and previous experience of the Russian market. We are sad to say that Stephen Coe will step down from the Board following this year's AGM. Stephen has been an invaluable member of the non executive team for many years and will be missed. We wish him well. Michael will take over the role of Audit Committee Chairman following Stephen's retirement. This signals the resumption of our succession planning for the Board. We had put this on hold following the turbulence of the oil and Rouble collapse in late 2014 and expect to make an ordered rotation over the next three years.

We have successfully completed two secondary listings of our ordinary shares on the Johannesburg Stock Exchange ("JSE") and the Moscow Stock Exchange ("MOEX") during the year and we hope that this will provide an opportunity to widen our shareholder base in the future.

It has been another busy year and as always, we are grateful for the support of our shareholders.

Richard Jewson

Chairman

17 March 2019

Strategic Report

Chief Executive's Report

Dear Shareholders,

We have nearly completed our transition to a Rouble business and in Rouble terms we are performing well. Annoyingly the low year end Rouble exchange rate has not allowed this to be reflected once translated into Sterling. On 1 January 2018 the Rouble/Sterling exchange rate was 77.88. At 31 December 2018 that rate had fallen 13.4% to 88.35. Today it is 86.12.

Local market conditions are improving. Vacancy rates are down, rents are rising and the overall performance of the Russian economy is strengthening. 

In our own portfolio we have seen occupancy rise from 81% to 89% in the year with a further increase to 90% today.

Rents have firmed consistently through the year and Moscow rents are now at 3,800 - 4,000 Roubles per sqm for standard space. Our average warehouse rental rates are Roubles 4,900 per sqm after taking into account higher tenant specification, office and mezzanine content. We expect these rates to continue to improve as demand and supply is out of balance and there are exceptionally low levels of speculative development.

At the year end the portfolio revaluation in Roubles has shown an increase of 8%.

We have made good acquisitions in the period and look forward to their full year contribution to results in 2019. We have also invested close to £19 million in Rouble interest rate hedging, capping our Rouble cost of debt at a rate of 8.25% for periods of five to seven years. We are nearly out of dollar debt and by refinancing in Roubles and Euros have maintained a cost of debt of 7.69%. The portfolio valuation yields were between 11% and 12.5% at the year end.

In the meantime the Russian e-commerce sector continues to develop successfully with some impressive players emerging. We anticipate that they will soon start to make a significant impact on the logistics real estate market.

Frustratingly, since the US sanctions in August, the Rouble fall has resulted in Sterling fully diluted NAV per share dropping to 48p at 31 December 2018

We are pleased to be making a final distribution of 1.75p by way of tender offer buy back of 2 shares in every 51 at 45p, meaning we will have distributed a total of 3p for the year.

The business is now well positioned as a local market leader in one of the world's most appealing property sectors. We are close to having restructured our balance sheet so are in a strong position to benefit from a continued improvement in our market and at some point a significant change in valuations.

Our prospects look better than they have at any time since 2014 and we are confident about the future.

Glyn Hirsch

Chief Executive Officer

17 March 2019

Business Model

Our Strategy

We continue with our strategy of holding an investment portfolio of Grade A logistics warehouses in Russia for the long term, with the aim of producing rental income that delivers progressive distributions to our shareholders. We will consider other asset classes in the region if the property and financial metrics are attractive and we have a small office portfolio in St Petersburg which we also intend to hold for long term income returns.

Business Model

We acquire investment assets typically with yields of between 11% and 14% and have bank financing costs across the Group of 7.69%. We now run a Rouble operating model but continue to have legacy US Dollar pegged leases which will mature over the next three years. As explained in last year's Annual Report, our aim was to adapt our business model, moving the Group's secured banking facilities out of US Dollars and to a Rouble/Euro mix to reduce our foreign currency exposure whilst managing the cost of debt. This process is now well underway.

At the year end, US Dollar leases account for 26% of the Gross Lettable Area ("GLA") of our warehouse portfolio (2017: 31%). Our office portfolio has a currency exposure to Euro on 20% (2017: 23%) of its GLA and 9% to US Dollar (2017: 9%).

The Group's secured banking facilities are 31% (2017: 0%) Rouble denominated, 35% (2017: 8%) Euro and 34% (2017: 92%) of US Dollar, at year end exchange rates. We expect to convert all remaining US Dollar facilities in the current year.

Each of the facilities secured on our property assets sits in a special purpose vehicle ("SPV") structure to minimise recourse to the overall portfolio. At the year end, asset specific debt represented 54.1% loan to value (2017: 53%).

Our average letting size by tenant is 9,000sqm (2017: 8,760sqm). We do not have one tenant with more than 8% (2017: 11%) of our portfolio's GLA and the top ten tenants account for 42% (2017: 41%) of our portfolio in GLA terms and 53% (2017: 54%) in income terms.

Key Performance Indicators ('KPIs')

Occupancy levels and average Rouble rental levels achieved are our primary operating focus.

The ability to distribute to ordinary shareholders from cash covered underlying earnings and operating cash flows after interest remains our focus when determining distribution policy.

All of the above underpin financial targets set for annual bonus incentives.

Portfolio Review

Leasing and maturities

During the year we completed two acquisitions; the final phase of Logopark Sever, a warehouse complex north of Moscow, and Logopark Volga, a warehouse complex with development land in Nizhny Novgorod. In aggregate these were acquired for a total consideration of Roubles 5.3 billion for 123,200sqm at a blended initial annualised yield of 12.4% assuming the leasing of vacant space. The acquisitions did not have a material impact on income in 2018 but we expect them to contribute Roubles 580 million of NOI during 2019.

Occupancy has improved considerably during the year and stands at 90% today with a further 1% covered by letters of intent ("LOIs").

253,000sqm of existing leases have been renegotiated and extended in the financial year and 241,000sqm of new leases signed. Significant new lettings include 11,800sqm to Accord Post, 16,000sqm to Mir Instrumenta, 16,200sqm to Cotton Club and 18,200sqm to Perspectiva, all in Moscow.

Space vacated on maturity, breaks exercised and early terminations totalled 92,000sqm which, together with existing vacant space, gives 206,000sqm of vacancy in our warehouse portfolio at 31 December 2018. There are also potential breaks in the portfolio of 91,600sqm in 2019 and 199,900sqm in 2020. For 2019 we currently expect tenants who occupy circa 17,000sqm to exercise their breaks and vacate.

Since the year end we have signed a further 31,850sqm of deals of which 23,000sqm were new lettings and 8,850sqm were renewals or extensions. We currently have 79,800sqm of LOI's for renewals, extensions and new lettings. If these are signed vacancy will reduce by a further 24,250sqm.

At the year end 26% (2017: 31%) of our warehouse GLA had US Dollar denominated leases with an average warehouse rental level of $148 per sqm (2017: $143 per sqm) and a weighted average term to maturity of 2.1 years (2017: 3.0 years). Rouble denominated leases account for 61% (2017: 47%) of our total warehouse space with an average warehouse rent of Roubles 4,900 per sqm (2017: 5,200 per sqm) and weighted average term to maturity of 4.5 years (2017: 3.6 years). Rouble leases have an average minimum annual indexation of 5.9% (2017: 6.8%).

The currency split is based on the year end Sterling presentation so will be somewhat volatile, a weak Rouble, as was the case last year, will increase the contribution of US Dollar pegged leases, a stronger Rouble will reduce that contribution.

Investment Portfolio

Moscow

We have ten warehouse projects in Moscow totalling 1,331,000sqm with 88% of space let at the year end, excluding LOIs, up from 78% at the beginning of the year.

*Excludes space let to Roslogistics

Occupancy has improved in the Moscow portfolio with a net, like for like, increase in occupied area of 132,500sqm during the year, a combination of new letting and successful lease renewals. The Moscow market has seen vacancy decrease and record take up in the past year reflected in a hardening of rents. The market is well set for rental growth in 2019. We expect occupancy to remain in the low 90%'s during the year, held back slightly by over 90,000sqm expiring in Krekshino towards the end of June. We are already working to mitigate this by pro-actively leasing space prior to expiry.

St Petersburg and Regions

*Excludes space let to Roslogistics

Warehouse occupancy in the regional markets of St Petersburg, Rostov and Novosibirsk has strengthened and we have seen a lot of activity. Vacancy has reduced in all three markets as at today's date and rents have begun to grow, particularly in Novosibirsk where we are now commanding over Roubles 4,000 per sqm.

Tenant Mix

Office Portfolio

We have continued implementing our asset management strategy in the St Petersburg office properties. At Kellerman, we have undertaken cosmetic improvements to the common areas, restructured leases and re-let space at enhanced rents. There is more work to do, but the market is strong and we expect to make additional improvements in value and income. In Primium where the lease of the sole tenant expires in the summer, we have already put in place a comprehensive re-letting plan which will mean we suffer little or no vacancy on expiry, including recently signing a new lease with Tele2 on 4,000sqm.

Portfolio Yields

The investment properties and additional phases of existing projects were valued by Jones Lang LaSalle ("JLL") at the year end, in accordance with the RICS Valuation and Appraisal guidelines, and are carried at a market value of £1.2 billion (see notes 11 & 12 to the financial statements). This has resulted in a net loss on revaluation of £121 million in portfolio value during the year, although in Rouble terms the value of the properties has increased by 8%.

All significant yield inputs have remained static for the year reflecting a reasonably stable market place. JLL still quote a range of yields across all sectors to reflect the difference in quality of assets, leases and differing currencies. The yields used for the portfolio fall within this range.

The property investment market had a very slow year in 2018 with the volume of transactions dropping by around 40%. The political environment and additional sanctions conspired to make many investors sit on their hands, either waiting for things to get better (sellers) or get worse (buyers). Domestic buyers remain the largest part of the market with western capital almost non existent, foreign investment instead coming from China and the Middle East. The cost of finance has remained broadly flat during the year although the Central Bank of Russia did raise its key lending rate marginally to combat inflation.

Land Bank

In Moscow, as the market tightens, we are considering developing up to an additional 75,000sqm at Nova Riga, subject to pre lets or Build to Suit requests.

The Market

Demand in 2018 was at record levels in Moscow and the Moscow region where we have the majority of our assets. Take up in 2018 was 1,600,000sqm with new supply at 918,000sqm, causing the vacancy rate to shrink. Demand was strongest from the retail and distribution businesses which accounted for 40% and 14% respectively. E-commerce is now an increasing area of demand with total space of 208,000sqm taken by the sector in 2018. This is a strengthening trend and already in 2019 we have seen Ozon lease 122,000sqm in Moscow and Yandex negotiating for up to 80,000sqm. We expect take up from the e-commerce sector to accelerate over the next few years, mirroring other European markets.

The vacancy rate in the market is now around 5% and rents have clearly started to grow. Whilst there are still specific sub markets where demand is weaker and rents lower, the general consensus is that the market is poised for another strong year. A lot will depend on the supply side and the volume of build to suit projects ("BTS") that are actually delivered. Preliminary estimates show that new delivery will be circa 990,000sqm and demand expected to be circa 1,400,000sqm. Of that only 416,000sqm or 42% will be speculative. History tells us the supply side is generally over estimated or delayed, so all things being equal rents should continue to grow. Construction cost inflation is starting to develop, driven partly by the currency effect of imported specialist materials and also by rising labour costs. This will result in less space being built or rents increasing as developers look to maintain their profit levels.

Last year prime rents were in a range from Roubles 3,600 per sqm to Roubles 4,000 per sqm for Grade A space. Today the bottom end of that range has increased to closer to Roubles 3,800 per sqm and the top end is pushing above Roubles 4,000 per sqm. We are already negotiating deals around Roubles 4,000 per sqm and as vacancy continues to decline tenants will be faced with less choice hopefully causing rents to rise further. In St Petersburg and our two regional hubs of Rostov and Novosibirsk rental levels are broadly the same as in Moscow.

Investment volumes in the year decreased to $2.9 billion, with 66% of this in Moscow. Over 72% of all deals were funded by Russian capital, and only 14% of the total capital or $400 million went into the warehouse sector. JLL predict prime yields in the range of 10.75-12.25% for Moscow warehouses. We are seeing a number of new acquisition opportunities, although our preference is to acquire newly completed or recently let properties as these generally offer the best long term prospects for value appreciation and sustainable cash flows.

2019 has started positively and all local indicators seem to point to improvements in occupancy and rents. Yields will remain a function of interest rates and the strength of investor appetite, but if rents begin to grow then yields should certainly begin to adjust downwards to reflect the potential of rental growth from under rented leases expiring. In any other European market yields would be considerably lower than we see today, and in the medium term this must be an opportunity.

Finance Review

Asset acquisitions and increased occupancy in the investment portfolio have supported our net rental income. The second half of the year has also seen a concerted effort to reduce our exposure to US Dollar financing, moving to a Rouble/Euro mix. The balance sheet at 31 December 2018 gives a snapshot of the business part way through that process and we are very pleased with progress so far. In the current year we expect to convert all remaining US Dollar debt facilities and then move steadily to a Rouble balance sheet in the medium term, with an eye on managing the dynamic between the cost of debt and currency exposure as we go along.

At 31 December 2018, JLL have undertaken Rouble valuations of our investment portfolio for the first time, rather than US Dollar. Combined with the Group's balance sheet debt transitioning out of US Dollars, this has triggered a review of all of the functional currencies of our subsidiaries. Where previously some of our asset owning subsidiaries had a mix of Rouble and US Dollar functional currency, they are now wholly Rouble functional currency from 31 December 2018. As the US Dollar has a reducing impact on both our operating results and balance sheet, we have also made the decision to revert to Sterling as our presentation currency, being the currency of our capital instruments.

Income Statement

We continue to assess our ability to make covered distributions with reference to underlying earnings and operating cash flows after interest. The former also allows a comparison of operating results before mark to market valuation movements. The reconciliation between underlying and IFRS earnings is given in note 9 to the accounts.

When comparing to 2017, this year's results are distorted by two items. Firstly, the one off income of £16.4 million generated from UK land bank sales in 2017 and a negative swing of £8.6 million on unrealised foreign exchange movements, the latter being the effect of the weak Rouble rate at 31 December 2018 of 88.3 to £1 (31 December 2017: 77.9). This masks the improved performance of our underlying investment portfolio.

Net Rental and Related Income

The table above illustrates the impact of acquisitions and the proceeds from the UK land sales in 2017 on our net rental income over the last two years.

The majority of the movement on the existing investment portfolio is simply the translation to Sterling presentation, the weaker average Rouble/Sterling rate in 2018 of 83.7 (2017: 75.2) reducing equivalent Sterling amounts. The existing investment portfolio actually generated increased Rouble income of 7.7 billion in 2018 compared to 7.2 billion 2017, higher occupancy matching any step down to market rents, and we expect a full year of income from acquisitions in 2019 to contribute Roubles 1.9 billion.

Underlying Administrative Expenses

Underlying administrative expenses increase primarily as a result of bonuses paid in early 2018 in relation to 2017 performance targets. Legal and professional expenses increased in the year for various reasons including an increase in valuation fees with the change in valuation approach, PR costs and finance related costs.

Underlying Net Finance Charge

Net finance costs increase with a full year of preference share coupon on the tranche raised in 2017, the refinancing of acquisitions and a reduction in interest received as our average cash balances reduced.

IFRS Earnings

The difference between underlying earnings and IFRS earnings is principally down to mark to market movements on various items, the most obvious being the property revaluation loss of £121 million in the year (see comments below). New interest hedging arrangements on Russian Central Bank rates generated increased volatility on mark to market movements and the amortisation of loan origination costs and premiums payable on preference shares also has an impact (see note 7). Administration expenses include £1.6 million of abortive deal costs relating to one potential acquisition project and the final charge for the Retention Scheme is also expensed in share based payments.

Investment Properties

Our investment properties valuation (note 11) harbours the majority of the foreign exchange impact on our Sterling net asset value. The Rouble valuation movement on the portfolio was positive as ERVs and yields began to tighten, giving a Rouble 8.9 billion uplift in the year. However, the change in functional currency from US Dollars to Roubles at a time of Rouble weakness, the year end US Dollar rate being 69.4 compared to an average of 62.8 in the year, gives a significant foreign exchange loss as part of the revaluation movement. This is partly offset by a presentational currency gain through reserves when switching to Sterling presentation. The allocation of these unrealised foreign exchange gains and losses is down to accounting convention but the fundamentals do not change. The underlying Rouble metrics are improving but a weak year end Rouble rate means our Net Assets at 31 December 2018 reduce when converted to the reporting currency.

Debtors and Creditors

Larger movements in debtors and creditors relate to financing and acquisition costs. Derivative financial instruments increase to £22.3 million following the acquisition of interest caps on Russian Central Bank rates. Trade and other receivables reduce on receipt of deferred consideration on the UK Land sales completed in 2017 and the recovery of VAT on asset acquisitions. Deferred consideration on acquisitions falls to £12.2 million from £25.3 million in 2017, reducing Trade and other payables and long term other payables. Construction payables reduce following the completion of a one off project at Pushkino.

Cash and Debt

The profile of our cash and debt has changed significantly over the last 24 months and it is simpler to look at the combined cash flows over the last two years to better understand how the various elements interact. This also deals with the distortion of a refinancing which straddled the 2017 year end.

The Group has used a combination of the convertible preference share issue, debt refinancing and existing cash reserves to fund acquisitions and other capital requirements. Tender offer distributions are funded from operating cash after interest, including preference share coupon paid.

Significant progress has been made moving secured debt facilities out of US Dollar and increasing Rouble exposure to match the Group's changing income profile.

The currency profile of secured debt at 31 December 2018 was:

At the year end, the Group had 15 separate secured facilities, five US Dollar denominated, three Euro denominated and seven, a blended mix of Rouble and Euro. The average split on the blended facilities is 61% Rouble, 39% Euro. Higher US LIBOR and the effect of the Rouble loans have increased our weighted average cost of debt to 7.69% from 7.62%. The Group also had one small unsecured facility.

The debt maturity profile at the year end is:

Of the three facilities maturing in the current year, one was extended in January and we are finalising terms on the remaining two. Of the five US Dollar facilities remaining, one has been converted since the year end and we have agreed terms on the conversion of the others and expect the majority to have switched to a Rouble/Euro mix by the half year. We have refinanced all of the projects acquired in the last two years except for Nizhny Novgorod. That is now at document stage and will be a Rouble facility.

The wholesale change in the secured facility profile has meant that we have adapted our interest hedge cover, purchasing a series of caps with terms of between 5 and 7 years. The total cost of this exercise was £18.7 million, the majority of cost for capping Rouble facilities at a strike of 8.25bps for the Central Bank Rate. Since the year end, we have sold existing US LIBOR hedging instruments for £2.3 million.

Taxation

Tax paid reduces in the year, partly a function of exchange rates when converting the Rouble expense and no significant deferred tax liability movements when compared to 2017. In cash terms, £7.3 million was paid in the year (2017:£11.0 million).

Net Asset Value

With our change in presentation currency we include 3 years of balance sheets in our primary statement. This illustrates the impact of the Rouble volatility on our equivalent Sterling Net Asset Value this year. A reasonably benign year of exchange volatility in 2017 meant no significant foreign exchange hit to net assets but as explained in the investment property section above, the weakening Rouble in the last quarter of 2018 had a detrimental impact on our Sterling Diluted Net Asset Value per share, dropping from 59p to 48p in the year.

Subsidiaries

Roslogistics' underlying Rouble results were slightly down on prior year with transport reducing contribution and overheads up slightly. The majority of the variance to 2017 however is the conversion to Sterling with the weaker Rouble.

Raven Mount was effectively dormant this year after the flurry of land sales in 2017. The joint venture at "The Lakes" continues to make a steady contribution of £1.6 million to profit and £3.0 million in dividends in the year.

Risk Report

Risk Appetite

As explained in last year's annual report, the Group is adapting its balance sheet to deal with the heightened foreign exchange risk that followed the depreciation of the Rouble in late 2014:

- We reduced existing US Dollar gearing to dampen the effects of Rouble exchange rate volatility on secured debt covenant requirements;

- We have completed a number of acquisitions to enhance our Rouble income streams; and

- We are now converting all of our US Dollar secured debt into a Rouble/Euro mix of facilities.

We are well into the last stage of this transition and expect to completely eliminate any exposure to US Dollar facilities in the current year. As well as re-balancing our currency risk we believe that this will also reduce our exposure to future sanctions risks.

The fundamentals of our market have stabilised and there is a distinct possibility of a continued tightening in supply putting pressure on ERVs and property yields. We intend to continue with our acquisition and growth strategy to take advantage of the opportunities that will arise.

Risk Management and Internal Controls

Risk assessment is built into the Group's operating model and performed throughout the organisation as part of day to day operations. The Board is ultimately responsible for the management of risk and regularly carries out a robust assessment of the principal risks and uncertainties affecting the business, discusses how these may impact on operations, performance and solvency and what mitigating actions, if any, can be taken. The Audit Committee is responsible for ensuring that the internal control procedures are robust and that risk management processes are appropriate. A fuller explanation of the process is given in the Audit Committee Report. The Cypriot holding company is an important part of the day to day management of the Group's operational risks through its authorisation procedures and management oversight duties. It has also recently engaged an outsourced, internal audit function to assist with its responsibilities in managing and monitoring the effectiveness of the internal control systems in place between Cyprus and Russia. The weekly operational committee meetings for each department within the Group allow operational and management information to flow through the Group's risk matrix in a timely manner.

The risk management process is designed to identify, evaluate and mitigate any significant risk the Group faces. The process aims to manage rather than eliminate risks and can only provide reasonable and not absolute assurance.

No significant failings or weaknesses in the internal control and risk assessment procedures have been identified during the year.

Principal Risks and Uncertainties

We have set out in the following tables the principal risks and uncertainties that face our business, our view on how those risks have changed during the year and a description of how we mitigate or manage those risks. We have also annotated those risks that have been considered as part of the viability assessment.

Political and Economic Risk

Financial Risk

Property Investment

Russian Domestic Risk

Personnel Risks

Change key

↑ Increased risk in the period

→  Stable risk in the period

↓ Decreased risk in the period

Signed for and on behalf of the Board

Colin Smith

Director

17 March 2019

Directors' Responsibility Statement

The Statement of Directors' Responsibilities below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 31 December 2018.

The Board confirms to the best of its knowledge:

The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole;

The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

The Annual Report and Accounts, taken as a whole, are fair balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

This responsibility statement was approved by the Board of Directors on 17 March 2019 and is signed on its behalf by:

Mark Sinclair Colin Smith

Chief Financial Officer Chief Operating Officer