PRELIMINARY OFFERING CIRCULAR DATED 17 OCTOBER 2001

U.S.$ll% Loan Participation Notes due 20ll

issued by ABN AMRO Bank (Luxembourg) S.A.on a limited recourse basis for the sole purpose of financing a loan to

OJSC Oil Company Rosneft

The issue price of the U.S.$l l% Loan Participation Notes due 20ll (the ‘‘Notes’’) of ABN AMRO Bank (Luxembourg) S.A. (the ‘‘Bank’’) isl% of their principal amount.

The Notes are limited recourse obligations of the Bank and are being offered for the sole purpose of funding a l year loan (the ‘‘Loan’’) toOJSC Oil Company Rosneft (the ‘‘Borrower’’, the ‘‘Company’’ or ‘‘Rosneft’’) pursuant to a loan agreement (the ‘‘Loan Agreement’’) between theBank and the Borrower. The Notes will be constituted by, be subject to, and have the benefit of, a trust deed dated l 2001 (the ‘‘Trust Deed’’) betweenthe Bank and The Bank of New York, as trustee for the holders of the Notes (the ‘‘Trustee’’). The Bank will, in the Trust Deed, charge in favour of theTrustee for the benefit of the Noteholders (as defined herein) as security for its payment obligations in respect of the Notes (a) its right to principal,interest and additional amounts (if any) as lender under the Loan Agreement and (b) amounts received pursuant to the Loan in an account of the Bank(as described herein), in each case other than certain amounts in respect of Reserved Rights (as defined in ‘‘Terms and Conditions of the Notes’’). TheBank will also assign its administrative rights under the Loan Agreement to the Trustee.

Subject to timely receipt of the relevant amounts in U.S. Dollars from the Borrower (as further described in ‘‘Terms and Conditions of theNotes’’), interest on the Notes is payable semi-annually in arrear, on l and l in each year commencing on l l 2002. In each case where amounts ofprincipal, interest and additional amounts (if any) are stated to be payable in respect of the Notes, the obligation of the Bank to make any such paymentshall constitute an obligation only to pay to Noteholders, on each date upon which such amounts of principal, interest and additional amounts (if any)are due in respect of the Notes, an amount equal to and in the same currency as sums of principal, interest and additional amounts (if any) actuallyreceived by or for the account of the Bank pursuant to the Loan Agreement less any amount in respect of the Reserved Rights. The Bank will have noother financial obligations under the Notes. Noteholders will be deemed to have accepted and agreed that they will be relying solely and exclusively onthe covenant, credit and financial standing of the Borrower in respect of the financial servicing of the Notes.

Payments in respect of the Notes will, except in certain limited circumstances, be made without any deduction or withholding for or on accountof Luxembourg taxes except as required by law. In that event, the Bank will only be required to pay additional amounts to the extent that it receivescorresponding amounts under the Loan Agreement. Payments under the Loan Agreement shall, except in certain limited circumstances, be madewithout any deduction or withholding for or on account of Russian taxes, except as required by law, in which event the Borrower will be obliged toincrease the amounts payable under the Loan Agreement. In certain circumstances the Loan may be prepaid at its principal amount, together withaccrued interest, at the option of the Borrower upon the Borrower being required to increase the amount payable or to pay additional amounts onaccount of Russian or Luxembourg taxes or required to pay additional amounts on account of certain costs incurred by the Bank pursuant to the LoanAgreement. The Bank may (in its own discretion) require the Loan to be prepaid if it becomes unlawful for the Loan or the Notes to remainoutstanding, as set out in the Loan Agreement. In addition, in the event of a Change of Control (as defined in ‘‘Terms and Conditions of the Notes –Redemption and Purchase’’), the holder of a Note may, by exercise of the relevant option, request the Bank to give notice to the Borrower, inaccordance with the provisions of the Loan Agreement, that the Loan be prepaid in an amount representing the aggregate principal amount of theNotes relating to the exercise of such option together with accrued interest. In each case (to the extent that the Bank has actually received the relevantfunds from the Borrower) the payment amount of the relevant Notes (or in the case of a prepayment for tax reasons or illegality, all outstanding Notes)will be prepaid by the Bank together with accrued interest. See ‘‘Loan Agreement – Prepayment – Prepayment for Tax Reasons and Change inCircumstances’’ and ‘‘Terms and Conditions of the Notes – Redemption and Purchase’’.

The Notes will be offered and sold in an offering in the United States to ‘‘qualified institutional buyers’’ (as defined in Rule 144A (‘‘Rule 144A’’)under the United States Securities Act of 1933, as amended (the ‘‘Securities Act’’)) in reliance on Rule 144A and in offshore transactions outside theUnited States in reliance on Regulation S under the Securities Act (‘‘Regulation S’’). See ‘‘Subscription and Sale’’ and ‘‘Form of Notes and TransferRestrictions’’.

Application has been made to list the Notes on the Luxembourg Stock Exchange. Application has also been made for the Notes issued and soldin reliance on Rule 144A to be designated as eligible for trading on PortalSM, a subsidiary of NASDAQ Stock Market, Inc. (‘‘PORTAL’’).

AN INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. SEE ‘‘RISK FACTORS’’.

THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT, OR ANY STATESECURITIES LAW, AND THE NOTES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THEACCOUNT OR BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S), EXCEPT TO QUALIFIEDINSTITUTIONAL BUYERS IN RELIANCE ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THESECURITIES ACT PROVIDED BY RULE 144A OR OTHERWISE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTIONNOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. PROSPECTIVE PURCHASERS OF NOTESARE HEREBY NOTIFIED THAT SELLERS OF NOTES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OFSECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A. SEE ‘‘FORMS OF NOTES AND TRANSFER RESTRICTIONS’’.

Notes offered and sold outside the United States in reliance on Regulation S (‘‘Unrestricted Notes’’) will be offered and sold in denominationsof U.S.$1,000 or any amount in excess thereof which is an integral multiple of U.S.$1,000, and will be transferable in denominations of U.S.$10,000 orany amount in excess thereof which is an integral multiple of U.S.$1,000. Notes offered and sold to qualified institutional buyers in the United States inreliance on Rule 144A (‘‘Restricted Notes’’) will be offered and sold in denominations of U.S.$1,000 or any amount in excess thereof which is anintegral multiple of U.S.$1,000, and will be transferable in denominations of U.S.$100,000 or any amount in excess thereof which is an integral multipleof U.S.$1,000. Unrestricted Notes will be represented by beneficial interests in an unrestricted global note certificate (the ‘‘Unrestricted Global NoteCertificate’’) in registered form, without interest coupons attached, which will be registered in the name of The Bank of New York Depository(Nominees) Limited as nominee for, and shall be deposited on or about l 2001 (the ‘‘Closing Date’’) with The Bank of New York as commondepositary for, and in respect of interests held through, Euroclear Bank, S.A./N.V., as operator of the Euroclear System (‘‘Euroclear’’) and ClearstreamBanking, societe anonyme (‘‘Clearstream, Luxembourg’’). Restricted Notes will be represented by beneficial interests in a restricted global notecertificate (the ‘‘Restricted Global Note Certificate’’ and together with the Unrestricted Global Note Certificate, the ‘‘Global Note Certificates’’) inregistered form, without interest coupons attached, which will be deposited on or about the Closing Date with The Bank of New York as custodian for,and registered in the name of Cede & Co. as nominee for, The Depository Trust Company (‘‘DTC’’). Interests in the Restricted Global Note Certificatewill be subject to certain restrictions on transfer. See ‘‘Forms of Notes and Transfer Restrictions’’. Beneficial interests in the Global Note Certificateswill be shown on, and transfers thereof will be effected only through, records maintained by DTC, Euroclear and Clearstream, Luxembourg and theirparticipants. Except as described herein, Note Certificates in definitive form will not be issued in exchange for beneficial interests in the Global NoteCertificates.

ABN AMRO DRESDNER KLEINWORT WASSERSTEIN

The date of this Offering Circular is l 2001Th

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Other than information relating to the Bank for which no representation or warranty is made by theCompany, the Company, having made all reasonable enquiries, confirms that (i) this Offering Circular (the‘‘Offering Circular’’) contains all information with respect to the Company, the Company and itssubsidiaries, the Loan Agreement and Notes, which is (in the context of the issue, of the Notes) material; (ii)such information is true and accurate in all material respects and is not misleading in any material respect;(iii) any opinions, predictions or intentions expressed in this Offering Circular on the part of the Companyare honestly held or made, have been reached after considering all relevant circumstances, are based uponreasonable assumptions and are not misleading in any material respect; (iv) this Offering Circular does notomit to state any material fact necessary to make such information, opinions, predictions or intentions (inthe context of the issue of the Notes) not misleading in any material respect; and (v) this Offering Circulardoes not contain any untrue statement of a material fact nor does it omit to state any material fact necessaryto make the statements therein, in the light of the circumstance under which they were made, not misleading.Accordingly, save as set out below, the Company accepts responsibility for the information and statementscontained in this Offering Circular other than information relating to the Bank. The Bank acceptsresponsibility for information in respect of itself accordingly. The sections entitled ‘‘Russian Federation –General Overview’’ and ‘‘Overview of the Russian Oil and Gas Industry’’ have been extracted frompublicly available data, and the Company accepts responsibility for accurately extracting such data butaccepts no further responsibility in respect of such information.

No person has been authorised in connection with the offering of the Notes to give any information ormake any representation regarding the Company and the Notes other than as contained in this OfferingCircular. Any such representation or information must not be relied upon as having been authorised by theBank, the Company, the Trustee or the Managers (as defined in ‘‘Subscription and Sale’’). The delivery ofthis Offering Circular at any time does not imply that the information contained in it is correct as of anytime subsequent to its date.

The Managers have not separately verified the information contained in this Offering Circular and donot make any representation or warranty, express or implied, as to the accuracy or completeness of theinformation in this Offering Circular. Each person receiving this Offering Circular acknowledges that suchperson has not relied on the Managers or any person affiliated with any Manager in connection with itsinvestigation of the accuracy of such information or its investment decision. Each person contemplatingmaking an investment in the Notes must make its own investigation and analysis of the creditworthiness ofthe Bank and the Company and its own determination of the suitability of any such investment, withparticular reference to its own investment objectives and experience, and any other factors which may berelevant to it in connection with such investment.

This Offering Circular does not constitute an offer or an invitation by or on behalf of the Bank, theCompany or the Managers to subscribe or purchase, any of the Notes. The distribution of this OfferingCircular and the offer or sale of the Notes in certain jurisdictions is restricted by law. Persons into whosepossession this Offering Circular may come are required by the Bank, the Company and the Managers toinform themselves about and to observe any such restrictions. In particular, the Notes have not beenapproved or disapproved by the U.S. Securities and Exchange Commission, any State securitiescommission in the United States or any other U.S. regulatory authority, nor have any of the foregoingauthorities passed upon or endorsed the merits of the offering of the Notes or the accuracy or adequacy ofthis Offering Circular. Any representation to the contrary is a criminal offence in the United States. Inaddition, the Bank has not authorised any issue of Notes to the public in the United Kingdom within themeaning of the Public Offers of Securities Regulations 1995 (the ‘‘Regulations’’). Notes may not lawfully beoffered or sold to persons in the United Kingdom except in circumstances that do not result in an offer tothe public in the United Kingdom within the meaning of the Regulations or otherwise in compliance with allother applicable provisions of the Regulations. Further information with regard to restrictions on offers andsales of the Notes and the distribution of this Offering Circular is set out under ‘‘Subscription and Sale’’ and‘‘Forms of Notes and Transfer Restrictions’’.

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TABLE OF CONTENTS

Page

NOTICE TO NEW HAMPSHIRE RESIDENTS...................................................................................... 4

AVAILABLE INFORMATION .................................................................................................................. 4

FORWARD LOOKING STATEMENTS .................................................................................................. 4

ENFORCEABILITY OF JUDGMENTS .................................................................................................... 5

FINANCIAL AND OTHER INFORMATION ........................................................................................ 6

SUMMARY ...................................................................................................................................................... 7

DESCRIPTION OF THE TRANSACTION AND THE SECURITY .................................................. 13

USE OF PROCEEDS...................................................................................................................................... 15

RISK FACTORS .............................................................................................................................................. 16

RUSSIAN FEDERATION-GENERAL OVERVIEW ............................................................................ 30

OVERVIEW OF THE RUSSIAN OIL AND GAS INDUSTRY .......................................................... 32

SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA.................................... 39

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS ................................................................................ 43

CAPITALISATION ........................................................................................................................................ 51

ROSNEFT.......................................................................................................................................................... 52

BUSINESS ........................................................................................................................................................ 57

ENVIRONMENTAL MATTERS ................................................................................................................ 77

LABOUR SAFETY ........................................................................................................................................ 78

LITIGATION.................................................................................................................................................... 79

INSURANCE.................................................................................................................................................... 80

JOINT VENTURES ........................................................................................................................................ 81

INDEBTEDNESS ............................................................................................................................................ 84

TAXES AND DUTIES ON OIL AND GAS ............................................................................................ 85

CHARTER CAPITAL AND SHAREHOLDERS.................................................................................... 87

MANAGEMENT AND EMPLOYEES ...................................................................................................... 88

TERMS AND CONDITIONS OF THE NOTES ...................................................................................... 91

SUMMARY OF PROVISIONS OF THE NOTES WHILE IN GLOBAL FORM ............................ 103

LOAN AGREEMENT.................................................................................................................................... 104

ABN AMRO BANK (LUXEMBOURG) S.A. .......................................................................................... 133

TAXATION ...................................................................................................................................................... 134

CERTAIN ERISA CONSIDERATIONS.................................................................................................... 139

FORMS OF NOTES AND TRANSFER RESTRICTIONS.................................................................... 141

SUBSCRIPTION AND SALE ...................................................................................................................... 146

GENERAL INFORMATION ...................................................................................................................... 148

SUMMARY OF RELEVANT SIGNIFICANT DIFFERENCES BETWEENUS GAAP AND RUSSIAN ACCOUNTING REGULATIONS .......................................................... 149

FINANCIAL STATEMENTS AND AUDITORS’ REPORT ................................................................ F-1

APPENDIX A – RAR FINANCIAL STATEMENTS ............................................................................ A-1

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In connection with this issue, ABN AMRO Bank N.V. may over-allot or effect transactions thatstabilise or maintain the market price of the Notes at a level that might not otherwise prevail. Suchstabilising, if commenced, may be discontinued at any time.

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATIONFOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIREREVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT ASECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OFNEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEWHAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE ANDNOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OREXCEPTION IS AVAILABLE FOR A SECURITY OR TRANSACTION MEANS THAT THESECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS ORQUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TOANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATIONINCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

AVAILABLE INFORMATION

Each of the Company and the Bank have agreed that, for so long as any Notes are ‘‘restrictedsecurities’’ within the meaning of Rule 144(a)(3) under the Securities Act, it will, during any period inwhich it is neither subject to Section 13 or 15(d) of the U.S. Securities Exchange Act of 1934 (the‘‘Exchange Act’’) nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, provide to anyholder or beneficial owner of such restricted securities or to any prospective purchaser of such restrictedsecurities designated by such holder or beneficial owner or to the Trustee for delivery to such holder,beneficial owner or prospective purchaser, in each case upon the request of such holder, beneficial owner,prospective purchaser or Trustee, the information required to be provided by Rule 144A(d)(4) under theSecurities Act.

FORWARD-LOOKING STATEMENTS

This Offering Circular contains forward-looking statements that involve risks and uncertainties, inparticular under ‘‘Management’s Discussion and Analysis of Financial Condition and Results ofOperations’’ and ‘‘Business’’. In some cases, words such as ‘‘believe’’, ‘‘intend’’, ‘‘expect’’, ‘‘anticipate’’,‘‘plan’’, ‘‘target’’ and similar expressions are used to identify forward-looking statements. All statementsother than statements of historical facts, including, among others, statements regarding the Company’sfuture financial position, business strategy, budgets, reserve information, projected levels of capacity andproduction, projected costs, estimates of capital expenditure and plans and objectives of management forfuture operations, are forward-looking statements. Investors should not place undue reliance on theseforward-looking statements. The Company’s actual results could differ materially from those anticipatedin the forward-looking statements for many reasons, including the risks described above and elsewhere inthis Offering Circular.

Although the Company believes that the expectations reflected in the forward-looking statementsare reasonable, no assurance can be given that its future results, level of activity, performance orachievements will meet these expectations. Moreover, neither the Company nor any other personassumes responsibility for the accuracy and completeness of the forward-looking statements. Unlessrequired by law to update these statements, the Company will not necessarily update any of thesestatements after the date of this Offering Circular, either to conform them to actual results or to changesin its expectations.

4

ENFORCEABILITY OF JUDGMENTS

The Company is an open joint stock company organised under the laws of the Russian Federation.None of the directors and executive officers of the Company is a resident of the United States, and all or asubstantial portion of the assets of the Company and such persons are located outside the United States.As a result, it may not be possible for investors to effect service of process within the United States uponthe Company or such persons or to enforce against any of them in the United States courts judgmentsobtained in United States courts, including judgments predicated upon the civil liability provisions of thesecurities laws of the United States or any State or territory within the United States. Russian courts willnot enforce any judgment obtained in a court established in a country other than Russia unless there is atreaty in effect between such country and Russia providing for reciprocal recognition and enforcement ofcourt judgments. If there is such a treaty, Russian courts may nonetheless refuse to recognise and enforcea foreign court judgment on the grounds provided in such treaty and in Russian legislation in effect on thedate on which such recognition and enforcement are sought. It is expected that Russian procedurallegislation may be changed, inter alia, by way of inserting further grounds preventing foreign courtjudgments from being recognised and enforced in Russia.

5

FINANCIAL AND OTHER INFORMATION

This Offering Circular includes audited consolidated financial statements of the Company and itsconsolidated subsidiaries as of and for the years ended 31 December 1998, 1999 and 2000, audited byArthur Andersen ZAO (‘‘Arthur Andersen’’), independent certified public accountants, located at 52/2Kosmodamianskaya nab., 113054 Moscow, Russia. The consolidated financial statements as of and for theyears ended 31 December 1998, 1999 and 2000 (the ‘‘US GAAP Financial Statements’’) have beenprepared in accordance with United States generally accepted accounting principles (‘‘US GAAP’’).Arthur Andersen issued unqualified reports on the Company’s 2000 and 1999 US GAAP FinancialStatements, however, their opinion on the 1998 US GAAP Financial Statements was qualified withrespect to the fact that an independent reserve report was not available as at 31 December 1998. TheCompany does not currently prepare interim consolidated financial statements in accordance with USGAAP.

Additionally, this Offering Circular includes consolidated financial statements of the Company andits consolidated subsidiaries as of and for the years ended 31 December 1999 and 2000 and as of and forthe six month periods ended 30 June 2000 and 2001 (the ‘‘RAR Financial Statements’’), included inAppendix A of this Offering Circular. The RAR Financial Statements have been prepared in accordancewith the Regulations of Accounting and Reporting of the Russian Federation (‘‘RAR’’). The RARFinancial Statements as of and for the years ended 31 December 1999 and 2000 have been audited byArthur Andersen. The RAR Financial Statements as of and for the six month periods ended 30 June 2000and 2001 are unaudited.

Prospective investors should note that there are significant differences between US GAAP andRAR. For a discussion of the significant differences between US GAAP and RAR, see ‘‘Summary ofRelevant Significant Differences between US GAAP and Russian Accounting Regulations.’’

In this Offering Circular, all references to ‘‘Roubles’’ and ‘‘RUB’’ are to the lawful currency for thetime being of the Russian Federation and all references to ‘‘U.S. Dollars’’, ‘‘Dollars’’, ‘‘U.S.$’’ and ‘‘$’’are to the lawful currency for the time being of the United States of America.

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SUMMARY

The following summary should be read in conjunction with, and is qualified in its entirety by referenceto, the more detailed information and financial statements and notes appearing elsewhere in this OfferingCircular. See ‘‘Risk Factors’’ for a discussion of certain factors that should be considered by potentialinvestors prior to an investment in the Notes.

Overview

Rosneft is a vertically integrated petroleum company with upstream, midstream and downstreamoperations based principally in Russia. Rosneft is active in the exploration and development of crude oiland natural gas fields.

As of 31 December 2000, Rosneft had net proved developed and undeveloped reserves in theRussian Federation of approximately 138.9 million tonnes of crude oil and condensate (or 1,021.6 millionbarrels) and 25,182.3 million cubic metres of natural gas (which includes associated and non-associated gas).

In 2000, Rosneft’s production subsidiaries produced 13,117 thousand tonnes of crude oil andcondensate, representing 4.1% of the total production of crude oil and condensate in the RussianFederation in 2000 and making Rosneft the seventh largest Russian oil producer. In 2000, Rosneftpurchased 76% of the crude oil produced by its subsidiaries. Rosneft also purchases crude oil from otherRussian producers. The oil purchased from Rosneft’s production subsidiaries and third parties is (1)exported, (2) consumed or used internally as feedstock in Rosneft’s refining operations, (3) sold to thirdparties in the Russian Federation and (4) delivered to third party refiners in Russia who process the crudeinto refined products for Rosneft. Rosneft’s share in total Russian exports of crude oil in 2000 was 5.6%.Rosneft produced 5,581.6 million cubic metres of gas in 2000, representing approximately 1% of the totalproduction of natural gas in the Russian Federation. Of the amount, 3,282.5 million cubic metres wasnon-associated gas.

Rosneft is one of the major refiners of petroleum products in the Russian Federation. Rosneftoperates two crude oil refineries and a specialised refinery which produces a number of lubricants andoils. In 2000, Rosneft’s refineries processed 7,097,500 tonnes of crude oil, making Rosneft the tenthlargest refiner in the Russian Federation in 2000 on the basis of crude oil processed. Rosneft’s refineriesproduce gasoline, diesel, jet fuel, fuel oil and other refined products. Rosneft’s two crude oil refineriesoperated at 84% and 62% of capacity, respectively, in 2000. In addition, Rosneft delivers a portion of thecrude oil it purchases from its production subsidiaries to third party refineries that process the crude intorefined products on behalf of Rosneft for a fee. These refined products, together with the refined productoutput from Rosneft’s refineries and refined products purchased from unaffiliated parties, are sold towholesale customers in the Russian Federation, through Rosneft’s retail network of service stations andare also sold for export. Rosneft’s refineries also process crude oil on behalf of other Russian oilproduction companies who pay a processing fee to Rosneft’s refineries for processing their crude oil intorefined products.

Rosneft has one of the largest distribution networks for refined products in the Russian Federationconsisting of 89 petroleum storage depots and approximately 558 operational retail service stations(which also offer storage services) as of 30 June 2001. Rosneft has also started franchising the Rosneftbrand to approximately 100 service stations that are operated by third parties. This distribution networkcovers 13 constituent entities of the Russian Federation, which are located in Western Siberia, SakhalinIsland, North Caucasus and the Arctic regions of Russia. Rosneft also sells its refined products through itswholesale distribution network.

Business Strategy

Rosneft’s long-term strategy is to reinforce its position as a leading Russian vertically integrated oiland gas company by increasing its production, refining and marketing of oil and gas in Russia anddeveloping its international operations. The key elements of this strategy include the following:

Increasing production of oil and gas in Russia. Rosneft aims to increase its oil and gas production byapproximately 5% per annum by: (i) increasing the yield of its existing fields by recommencingproduction from inactive wells and employing improved extraction and bed stimulation technologies, (ii)improving the efficiency of its producing wells by reducing idle periods and bolstering well maintenanceand workover programmes, (iii) participating in major new oil field development projects, particularly inWestern Siberia and off Sakhalin Island (including through participation in production sharing

7

arrangements and joint ventures with international oil companies to manage operational and financialrisks associated therewith) and (iv) continuing to drill new wells and pursue the acquisition of additionalreserves. In addition, over the next five to ten years Rosneft aims to substantially increase the proportionof its total revenues generated by the production and sale of natural gas, with a particular focus on servingthe growing markets of the Russian Far East, Japan, Korea and China.

Improving its refining and marketing operations. Rosneft intends to invest substantially in themodernisation of its existing refineries in order to (i) increase refining capacity and improve capacityutilisation, (ii) broaden the range of lighter and higher-value refined products produced and (iii) ensurethat products can meet increasingly stringent environmental requirements in Russian and overseasmarkets. In addition, Rosneft plans to upgrade and expand its network of retail service stations in certainregions in Russia so as to secure additional domestic distribution channels for its expanded refineryoutput and derive additional margins from the sale of refined products. The minimum investmentprogramme is expected to be implemented by Rosneft if the crude oil price does not fall under U.S.$17per barrel, and the maximum planned investment programme is expected to be implemented by Rosneftif the crude oil price maintains a level of U.S.$22 per barrel.

Developing its international and other operations. With a view to broadening its reserve base,Rosneft will seek to identify international opportunities and to participate, together with foreign jointventure partners, in the exploration and development of oil and gas fields outside Russia. In the longterm, Rosneft may consider investing in other fuel and energy businesses in Russia with a view tostrengthening its overall position in the Russian energy market.

Enhancing financial controls and improving efficiency of corporate governance. Rosneft intends toimprove its financial controls and risk management so as to be able to manage more precisely theoperational and financial risks associated with its business. In addition, Rosneft will seek to ensure that itslenders and investors benefit from financial and accounting transparency (through the adoption ofinternational accounting practices by all members of its group and more regular consolidated financialreporting). Rosneft also intends to improve the flexibility of its corporate organisational structure,improve its investment planning system, introduce a cost management and financial risk managementsystem and install a SAP R/3 corporate management information system.

Developing new technologies. Rosneft plans to continue investing in proprietary research anddevelopment projects and to otherwise seek out new technologies which will enable it to improve oil andgas production, ensure maintenance of high standards of environmental safety and reduce the negativeimpact on the environment of exploration and production activities.

Summary Consolidated Financial and Statistical Data

The following tables set forth summary consolidated financial and statistical data of Rosneft underUS GAAP and RAR. For a discussion of the significant differences between US GAAP and RAR, see‘‘Summary of Relevant Significant Differences between US GAAP and Russian AccountingRegulations’’.

US GAAP Financial and Statistical Data

The following summary consolidated financial data presented below should be read together withthe US GAAP Financial Statements, including the notes thereto, and ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations’’ included elsewhere in this Offering Circular.

The summary consolidated financial data presented below has been derived from the US GAAPFinancial Statements as of and for the years ended 31 December 1998, 1999 and 2000 included elsewherein this Offering Circular. The US GAAP Financial Statements have been prepared in accordance withUS GAAP. The US GAAP Financial Statements have been audited by Arthur Andersen. ArthurAndersen issued unqualified reports on the Company’s 2000 and 1999 US GAAP Financial Statements,however, their opinion on the 1998 US GAAP Financial Statements was qualified with respect to the factthat an independent reserve report was not available as at 31 December 1998.

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Year ended 31 December

1998 1999 2000

U.S.$ U.S.$ U.S.$(in thousands, except per share amounts)

Statements of OperationsRevenues

Oil and gas sales............................................................................ 798,646 796,666 1,176,312Refined products and processing fees ........................................ 384,613 598,940 1,045,245Support services and other sales ................................................ 258,759 174,133 245,216

Total revenues .......................................................................... 1,442,018 1,569,739 2,466,773

Operating expensesCost of sales

Production costs ........................................................................ 368,431 292,498 303,779Cost of refined products and processing fees ...................... 224,333 152,326 254,741Cost of support services and other sales .............................. 185,095 170,184 142,365

Total cost of sales...................................................................... 777,859 615,008 700,885Selling, general and administrative ............................................ 335,965 259,796 502,032Exploratory expenses.................................................................... 59,391 16,054 37,243Depreciation, depletion and amortisation ................................ 446,969 282,933 222,364Impairment loss ............................................................................ 330,372 – –Taxes other than income taxes .................................................. 287,962 164,704 200,327

Total operating expenses ........................................................ 2,238,518 1,338,495 1,662,851

Operating income (expense) ............................................................ (796,500) 231,244 803,922

Other income (expense)Interest expense ............................................................................ (67,710) (33,549) (46,691)Equity share in affiliates .............................................................. (89,168) (5,696) 21,221Other non-operating (expenses)/income, net............................ 121,089 (25,146) (36,541)Minority interest............................................................................ 245,570 120,917 81,845Currency translation (loss) gain.................................................. 489,909 38,247 (2,358)

Total other income.................................................................... 699,690 94,773 17,476

Profit/(loss) before provision for income tax ................................ (96,810) 326,017 821,398Provision for income taxes .......................................................... 1,645 (142,794) (366,190)

Net profit/(loss) ................................................................................ (95,165) 183,223 455,208

Dividends declared on preferred shares of subsidiaries.......... (3,460) (5,841) (13,980)

Net profit/(loss) available for common shareholders ................ (98,625) 177,382 441,228

Basic and diluted profit/(loss) per common share (dollars) .. (1.11) 2.00 4.97

Average number of common shares outstanding(thousands of shares) ................................................................ 88,733 88,733 88,733

9

At 31 December

1998 1999 2000

U.S.$ U.S.$ U.S.$(in thousands, except per share amounts)

Balance SheetAssets

Current assets:Cash and cash equivalents ................................ 25,867 51,080 75,980Short-term investments ...................................... 7,045 15,620 99,609Accounts receivable, net of allowance for

doubtful accounts of U.S.$96,449,U.S.$98,620 and U.S.$84,530, respectively .. 144,656 188,556 258,651

Inventories............................................................ 119,790 146,917 233,871Prepaid expenses ................................................ 26,035 75,662 59,316

Total current assets ........................................ 323,393 477,835 727,427

Long term investments ...................................... 92,844 110,577 145,695Oil and gas properties, net ................................ 1,734,047 1,635,866 1,736,214Property, plant and equipment, net ................ 869,536 802,644 830,464Construction in progress .................................... 200,307 205,481 298,817Other non-current assets .................................... 6,735 3,599 5,983

Total assets ...................................................... 3,226,862 3,236,002 3,744,600

Liabilities and Shareholders’ CapitalCurrent liabilities:

Accounts payable and accrued liabilities ........ 266,096 231,451 352,034Short term loans and current portion of

long term debt ................................................ 128,293 254,168 374,643Accrued income and other taxes ...................... 154,438 133,898 124,508

Total current liabilities .................................. 548,827 619,517 851,185

Site restoration costs .......................................... 102,034 108,475 103,547Long term debt.................................................... 268,151 151,667 123,577Deferred tax liability .......................................... – – 94,690Minority interest.................................................. 1,483,957 1,363,040 1,165,479

Total liabilities ................................................ 2,402,969 2,242,699 2,338,478

Shareholders’ capital:Common stock (shares issued and outstanding:

88,733,312 for 2000, 1999 and 1998) ................ 19,430 19,430 19,430Preferred stock (shares issued and outstanding:

1,446,047 for 2000, 1999 and 1998) .................. 247 247 247Retained earnings.................................................... 804,216 973,626 1,386,445

Total shareholders’ capital ................................ 823,893 993,303 1,406,122

Total liabilities and shareholders’ capital........ U.S.$3,226,862 U.S.$3,236,002 U.S.$3,744,600

RAR Financial and Statistical Data

The summary consolidated financial data presented below should be read in conjunction with theRAR Financial Statements, including the notes thereto, and with ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations’’ included elsewhere in this Offering Circular.The summary consolidated financial data presented below has been derived from the RAR FinancialStatements as of and for the years ended 31 December 1999 and 2000 and as of and for the six monthperiods ended 30 June 2000 and 2001, included in Appendix A to this Offering Circular. The RARFinancial Statements have been prepared in accordance with RAR. The RAR Financial Statements as ofand for the years ended 31 December 1999 and 2000 have been audited by Arthur Andersen inaccordance with Russian auditing standards. The summary consolidated financial data set forth below as

10

of and for the six month periods ended 30 June 2000 and 2001 are unaudited and, in the opinion ofmanagement, reflect all adjustments (consisting only of normal recurring adjustments) necessary for thefair presentation of the financial condition and results of operations of the Company and its subsidiariesat the date and for the periods indicated.

Solely for the convenience of the reader, statements of operations financial data for the six monthsended 30 June 2001 and for the year ended 31 December 2000 has been translated into U.S. Dollars at therate of RUB 28.7999 to U.S.$1.00, and RUB 28.11 to U.S.$1.00, respectively, an average of the officialRouble/U.S. Dollar exchange rates reported by the Central Bank of the Russian Federation (the ‘‘CentralBank’’) for the respective periods. Balance sheet financial data as of 30 June 2001 and 31 December 2000has been translated into U.S. Dollars at the rate of RUB 29.07 to U.S.$1.00, and RUB 28.16 to U.S.$1.00,respectively, the official closing Rouble/U.S. Dollar exchange rate on 30 June 2001 and 31 December2000, respectively, as reported by the Central Bank. However, such translations should not be construedas representations that the Rouble amounts have been, could have been or could be converted into U.S.Dollars at that or any other exchange rate.

Year ended 31 December Six months ended 30 June

1999 2000 2000 2001

RUB RUB U.S.$ RUB RUB U.S.$Unaudited Unaudited

(in millions) (in millions)Statements of OperationsSales ................................................................ 39,880 69,513 2,473 32,712 34,241 1,189

Cost of sales .............................................. 20,500 27,253 970 14,889 17,067 593Selling expenses ........................................ 3,178 6,358 226 1,002 3,850 134Administrative expenses .......................... 721 1,928 69 961 830 29

Operating profit ............................................ 15,481 33,974 1,208 15,860 12,494 433

Operating revenue/expensesInterest revenue ........................................ 94 242 9 111 209 7Interest expense ........................................ 127 763 27 114 728 25Equity share in affiliates .......................... 25 295 11 216 235 8Other operating revenue.......................... 20,144 53,319 1,897 19,165 22,378 777Other operating expenses ........................ 22,537 54,688 1,946 21,071 23,184 805

Non-operating revenue/expensesNon-operating revenue ............................ 1,593 3,401 121 1,405 933 32Non-operating expenses .......................... 2,294 4,903 174 1,885 1,378 48Capitalized revenue .................................. 203 555 20 – – –

Profit (loss) before income taxes ................ 12,582 31,432 1,119 13,687 10,959 379

Income tax and other similar levies ...... 3,800 7,423 264 4,337 3,320 114Profit (loss) from ordinary activities ........ 8,782 24,010 855 9,350 7,639 265

Minority interest............................................ 642 5,032 173 1,920 3,056 105

Extraordinary revenue/expensesExtraordinary revenue.............................. – 1 – – 2 –Extraordinary expenses ............................ – 1 – – – –

Net profit ........................................................ 8,140 18,977 682 7,430 4,585 160

Year ended 31 December Six months ended 30 June

1999 2000 2000 2001

RUB RUB U.S.$ RUB RUB U.S.$Unaudited Unaudited

(in millions) (in millions)Balance SheetNon-current assets ........................................ 22,572 39,507 1,403 26,996 44,215 1,521Current assets ................................................ 15,086 23,769 844 19,871 32,786 1,128

Total assets ................................................ 37,658 63,276 2,247 46,867 77,001 2,649

Share capital .................................................. 90 90 3 90 90 3Additional paid in capital ............................ 6,845 12,356 439 6,515 13,968 481Reserves and retained earnings .................. 2,847 14,514 515 5,708 16,561 570

Total capital and reserves ........................ 9,782 26,960 957 12,313 30,619 1,054Minority interest payable ............................ 7,105 10,891 387 12,036 11,072 381Long-term liabilities...................................... 7,189 4,831 172 7,238 7,915 272Short-term liabilities .................................... 13,582 20,594 731 15,280 27,395 942

Total shareholders’ capital and liabilities 37,658 63,276 2,247 46,867 77,001 2,649

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Summary Reserves

At the request of the Company, DeGolyer and MacNaughton, independent petroleum engineeringconsultants, have carried out an independent evaluation of Rosneft’s crude oil and condensate andnatural gas reserves at 31 December 1999 and 31 December 2000. Reserve engineering is a process offorecasting the recovery and sale of oil and gas from a reservoir and is in part subjective. It is clearlyassociated with considerable uncertainty, often positive, but also negative. The accuracy of any reserveinformation is a function of the quality of available data and of engineering and interpretation andjudgment. For further information regarding Rosneft’s reserves, see ‘‘Business – Exploration andProduction – Oil and Natural Gas Reserves’’.

Net proved reserves at31 December

1999 2000

Crude oil and condensate (million barrels) .......................................................... 782.1 1,021.6Crude oil and condensate (million tonnes) .......................................................... 107.6 138.9Natural gas (billion cubic metres) .......................................................................... 18.2 25.2

Summary Oil and Gas Production Information

The following table sets forth the gross production of crude oil and natural gas of the Company’sproduction subsidiaries for the periods indicated.

Year ended 31 December

Production 1998 1999 2000

Crude oil and condensate (million tonnes) .................................. 12.3 12.2 13.1Crude oil and condensate (million barrels) .................................. 89.5 88.8 95.4Non-associated gas (million cubic metres).................................... 2,750 2,825 3,282

Sales Volume Information

The following table sets forth sales volume information for crude oil, natural gas and refinedproducts for the periods indicated.

Year ended 31 December

1998 1999 2000

Export crude sales (million tonnes) .............................................. 6.8 5.4 6.9Export crude sales (million barrels)(1) .......................................... 49.5 39.3 50.2Domestic crude sales (million tonnes) .......................................... 4.3 2.3 0.2Domestic crude sales (million barrels)(1) ...................................... 31.3 16.7 1.5Non-associated gas (billion cubic metres) .................................... 2.4 2.5 3.0Refined products (million tonnes) .................................................. 2.8 6.2 7.8

Note:

(1) The original oil production and sales figures are provided by the Company in tonnes. These figures have been translated into barrels solely forthe convenience of the reader at the average conversion rate of 7.28 barrels per tonne applied by the Company for internal purposes. Thisconversion rate is not applied by DeGolyer and MacNaughton for purposes of their evaluation of the Company’s reserves under U.S. reservesclassifications described above.

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DESCRIPTION OF THE TRANSACTION AND THE SECURITY

The following summary description should be read in conjunction with, and is qualified in its entiretyby, the Terms and Conditions of the Notes and the provisions of the Loan Agreement appearing elsewherein this Offering Circular.

The transaction will be structured as a loan to Rosneft by the Bank. The Bank will issue the Noteswhich will be limited recourse loan participation notes issued for the sole purpose of funding the Loan toRosneft. The Notes will be constituted by, be subject to, and have the benefit of, the Trust Deed. Theobligations of the Bank to make payments under the Notes shall constitute an obligation only to pay tothe Noteholders an amount equal to and in the same currency as sums of principal, interest and/oradditional amounts (if any) actually received by or for the account of the Bank pursuant to the LoanAgreement less any amount in respect of the Reserved Rights (as further described under ‘‘Terms andConditions of the Notes’’).

As provided in the Trust Deed, the Bank will charge in favour of the Trustee for the benefit of theNoteholders as security for its payment obligations in respect of the Notes (a) its rights to principal,interest and additional amounts (if any) as lender under the Loan Agreement and (b) amounts receivedpursuant to the Loan in an account with The Bank of New York, in the name of the Bank together withthe debt represented thereby (other than interest from time to time earned thereon) (the ‘‘Account’’), ineach case other than certain amounts in respect of the Reserved Rights. The Bank will assign certainadministrative rights under the Loan Agreement to the Trustee. The Borrower will be obliged to makepayments under the Loan (other than in respect of the Reserved Rights) to the Bank in accordance withthe terms of the Loan Agreement to the Account.

The Bank will covenant not to agree to any amendments to or any modification or waiver of, orauthorise or any breach or potential breach of, the terms of the Loan Agreement unless the Trustee hasgiven its prior written consent (except in relation to the Reserved Rights). The Bank will further agree toact at all times in accordance with any instructions of the Trustee from time to time with respect to theLoan Agreement (subject to being indemnified and/or secured to its satisfaction), save as otherwiseprovided in the Trust Deed and except in relation to the Reserved Rights. Any amendments,modifications, waivers or authorisations made with the Trustee’s consent shall be notified to theNoteholders in accordance with Condition 12 (Notices) of the Terms and Conditions relating to the Notesand shall be binding on the Noteholders.

The security under the Trust Deed will become enforceable upon the occurrence of a RelevantEvent, as further described in the Terms and Conditions of the Notes.

Payments in respect of the Notes will, except in certain limited circumstances, be made without anydeduction or withholding for or on account of Luxembourg taxes except as required by law. See ‘‘Termsand Conditions of the Notes – Taxation’’. In that event, the Bank will only be required to pay additionalamounts to the extent that it receives corresponding amounts under the Loan Agreement. The LoanAgreement provides for the Borrower to pay such corresponding amounts in these circumstances. Inaddition, payments under the Loan Agreement shall, except in certain limited circumstances, be madewithout any deduction or withholding for or on account of Russian taxes, except as required by law, inwhich event the Borrower will be obliged to increase the amounts payable under the Loan Agreement.See ‘‘Risk Factors – Risks Relating to the Notes – Taxation’’.

In certain circumstances (including in certain circumstances following enforcement of the securityupon a Relevant Event) the Loan may be prepaid at its principal amount, together with accrued interest,at the option of the Borrower upon the Borrower being required to increase the amount payable or to payadditional amounts on account of Russian or Luxembourg taxes pursuant to the Loan Agreement orrequired to pay additional amounts on account of certain costs incurred by the Bank. The Bank may (inits own discretion) require the Loan to be prepaid if it becomes unlawful for the Loan or the Notes to

13

remain outstanding, as set out in the Loan Agreement. In addition, in the event of a Change of Control(as defined in ‘‘Terms and Conditions of the Notes – Redemption and Purchase’’), the holder of a Notemay, by exercise of the relevant option, request the Bank to give notice to the Borrower, in accordancewith the provisions of the Loan Agreement, that the Loan be prepaid in an amount representing theaggregate principal amount of the Notes relating to the exercise of such option together with accruedinterest. In each case (to the extent that the Bank has actually received the relevant funds from theBorrower) the payment amount of the relevant Notes (or in the case of a prepayment for tax reasons orillegality, all outstanding Notes) will be prepaid by the Bank together with accrued interest. See ‘‘RiskFactors – Risk Factors Relating to the Notes – Taxation’’, ‘‘Loan Agreement – Prepayment – Prepaymentfor Tax Reasons and Change in Circumstances’’ and ‘‘Terms and Conditions of the Notes – Redemptionand Purchase’’.

The Borrower has agreed and the Noteholders will be deemed to have acknowledged, accepted andagreed that the Bank is entitled to deduct the Bank’s and Trustee’s expenses, the Managers’ commissionsand certain other expenses from the advance to be made to the Borrower pursuant to the LoanAgreement.

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USE OF PROCEEDS

The proceeds from the offering of the Notes will be used by the Bank for the sole purpose offinancing the Loan. The net proceeds of the Loan, expected to amount to approximately U.S.$l, will beused by Rosneft for general corporate purposes, including (1) to increase production of oil and gas and toincrease oil and gas reserves; (2) to increase the quality of the refined products produced by Rosneft,upgrade its refining operations and expand its retail distribution network. See also ‘‘Business – Strategy’’and ‘‘Business – Capital Expenditures’’.

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RISK FACTORS

Investment in the Notes involves a high degree of risk. Potential investors should carefully review thisentire Offering Circular and in particular should consider all the risks inherent in making such aninvestment, including the risk factors set forth below, before making a decision to invest. These risk factors,individually or together, could have a material adverse effect on the Company.

Risks Relating to the Russian Federation

Rosneft is a vertically-integrated petroleum company with upstream, midstream and downstreamoperations based primarily in Russia, and virtually all of its assets are located on Russian territory. Set outbelow is a brief description of some of the risks incurred by investing in Russia, although the list is not anexhaustive one.

Political and Social Risks

In recent years, Russia has been undergoing a substantial political transformation from a centrallycontrolled command economy under communist rule to a pluralist market-oriented democracy. Therecan be no assurance that the political and economic reforms necessary to complete such a transformationwill continue. In its current relatively nascent stage, the Russian political system is vulnerable to thepopulation’s dissatisfaction with reform, social and ethnic unrest and changes in governmental policies,any of which could have a material adverse effect on Rosneft and its ability to meet its obligations underthe Loan.

During this transformation, legislation has been enacted to protect private property againstexpropriation and nationalisation. However, due to the lack of experience in enforcing these provisions inthe short time they have been in effect and due to potential political changes in the future, there can be noassurance that such provisions would be enforced in the event of an attempted expropriation ornationalisation. Expropriation or nationalisation of any substantial assets of the Rosneft group orportions thereof, potentially without adequate compensation, would have a material adverse effect onRosneft.

The Russian Government has been highly unstable, having experienced four changes in primeminister since March 1998, as well as the resignation of former President Yeltsin on 31 December 1999and the subsequent election of President Putin on 26 March 2000. The various government institutionsand the relations between them, as well as the Russian Government’s policies and the political leaderswho formulate and implement them, are subject to rapid change. Any major changes in, or rejection of,current policies favouring political and economic reform by the Russian Government may have amaterial adverse effect on Rosneft.

Russia is a federation of republics, territories, regions, districts, cities of federal importance, andautonomous areas. The delineation of authority among the constituent entities of the Russian Federationand federal government authorities is often uncertain and at times contested. Lack of consensus betweenlocal and regional authorities and the Russian Government often results in the enactment of conflictinglegislation at various levels, and may result in political instability. This lack of consensus may havenegative economic effects on Rosneft, which could be material to its ability to meet its financialobligations.

In addition, ethnic, religious, historical and other divisions have, on occasion, given rise to tensionsand, in certain cases, military conflict. Russian military and paramilitary forces have been engaged inChechnya in the recent past and continue to maintain a presence there. The spread of violence, or itsintensification, could have significant political consequences. These include the imposition of a state ofemergency in some parts or throughout the Russian Federation. These events could materially adverselyaffect the investment environment in Russia.

The failure of many Russian companies to pay full salaries on a regular and timely basis, and thefailure of salaries and benefits to keep pace with the increasing cost of living, could lead in the future tolabour and social unrest. This may have political, social and economic consequences, such as increasedsupport for a renewal of centralised authority, increased nationalism with restrictions on foreigninvolvement in the Russian economy and increased violence, any of which could have a material adverseeffect on Rosneft.

The privatisation of the oil and gas industry in Russia, which is a vital sector of the nationaleconomy, continues to be a source of political controversy. There can be no assurance that currentgovernment policies liberalising control over the oil and gas industry will endure. Furthermore, control

16

over natural resources such as oil and gas and their exploitation remains an issue between the federalauthorities and the regions. The Company’s operations could be materially affected by the increasedpolitical independence of the regions in which it conducts its operations or through which its natural gas,crude oil or refined products are transported.

Economic Risks

Simultaneously with the enactment of political reforms, the Russian Government has beenattempting to implement policies of economic reform and stabilisation. These policies have involvedliberalising prices, reducing defence expenditures and subsidies, privatising state-owned enterprises,reforming the tax and bankruptcy systems, and introducing legal structures designed to facilitate private,market-based activities, foreign trade and investment.

Despite the implemented reform policies the Russian economy has been characterised by decliningindustrial production, significant inflation, an unstable but managed currency, rising unemployment andunderemployment, high government debt relative to gross domestic product, high levels of corporateinsolvency with little recourse to restructuring or liquidation in bankruptcy proceedings, a weak bankingsystem, widespread tax evasion, and the impoverishment of a large portion of the Russian population.

Additionally, the events and aftermath of 17 August 1998 – the Russian Government’s default on itsshort-term Rouble-denominated treasury bills and other Rouble-denominated securities, theabandonment of the Rouble corridor by the Central Bank and the temporary moratorium on certainhard-currency payments – led to a severe devaluation of the Rouble, a sharp increase in the rate ofinflation, the significant deterioration of the country’s banking system, significant defaults on hardcurrency obligations, a dramatic decline in the prices of Russian debt and equity securities, and aninability to raise funds on international capital markets.

While the Russian economy has improved in a number of areas since 1998, it is impossible toestimate how long the impact of the August 1998 events will be felt or to quantify the impact they mayhave on Rosneft.

The prospect exists of widespread bankruptcy, mass unemployment and the collapse of certainsectors of the Russian economy. Moreover, there is a lack of consensus as to the scope, content and paceof economic and political reform. No assurance can be given that reform policies will continue to beimplemented and, if implemented, will be successful, that Russia will remain receptive to foreign tradeand investment, or that the economy in Russia will improve. Any failure of the current policies ofeconomic reform and stabilisation could have a material adverse effect on the operations of Rosneft.

Funding from International Organisations; Access to the International Capital Markets

Russia in the past has received substantial financial assistance from several foreign governments andinternational organisations, including the International Monetary Fund. No assurance can be given thatany such financing will be further provided to Russia. If such financial assistance is eliminated, economicdevelopment in Russia may be adversely affected.

Moreover, due to defaults on certain obligations and other factors, the Russian Government may beunable to raise funds on international capital markets, which may lead to direct or indirect monetaryfinancing of the budget deficit, putting further pressure on inflation and the value of the Russian Rouble.

The considerable external debt of Russia, as well as the failure to obtain funding from foreigngovernments and international organisations, or increased rates of inflation or devaluation arising fromthe need to resort to monetary financing of the budget deficit in the absence of access to the internationalcapital markets, could materially adversely affect the country and lead to economic downturns.

Lack of Liquidity

Russian businesses have a limited history of operating in free-market conditions and have hadlimited experience (compared with Western companies) of entering into and performing contractualobligations. Russian businesses, when compared to Western, are often characterised by management thatlacks experience in responding to changing market conditions and limited capital resources with which todevelop their operations. In addition, Russia has a limited infrastructure to support a market system.Communications, banks and other financial infrastructure are less well developed and less well regulatedthan their Western counterparts.

17

Russian companies face significant liquidity problems due to a limited supply of domestic savings,few foreign sources of funds, high taxes, limited lending by the banking sector to the industrial sector andother factors. Many Russian companies cannot make timely payments for goods or services and owe largeamounts of overdue federal and local taxes, as well as wages to employees. Many Russian companieshave also resorted to paying their debts or accepting settlement of accounts receivable through barterarrangements or through the use of promissory notes.

These problems were aggravated by the 1995 Russian banking crisis and by the impact on theRussian banking system of the events of August 1998. This further impaired the ability of the bankingsector to act as a consistent source of liquidity to Russian companies. An intensification of liquidityproblems or a further deterioration of the Russian banking system could have a material adverse effecton the Company’s operations and financial performance.

Legal Risks

Risks associated with the Russian legal system include, inter alia: (i) the untested nature of theindependence of the judiciary and its immunity from economic, political or nationalistic influences; (ii)inconsistencies among laws, Presidential decrees, and Government and ministerial orders and resolutions;(iii) the lack of judicial or administrative guidance on interpreting the applicable rules; (iv) a high degreeof discretion on the part of governmental authorities; (v) conflicting local, regional and federal rules andregulations; (vi) the relative inexperience of judges and courts in interpreting new legal norms; and (vii)the unpredictability of enforcement of foreign judgments and foreign arbitral awards.

The laws in Russia regulating ownership, control and corporate governance of Russian companiesare relatively new and, by and large, have not yet been tested in the courts. Disclosure and reportingrequirements do not guarantee that material information will always be available and antifraud andinsider trading legislation is generally rudimentary. The concept of fiduciary duties on the part of themanagement or directors to their companies or the shareholders is not well developed.

In addition, substantive amendments to several fundamental Russian laws (including those relatingto the tax regime, corporations and licensing) have recently been adopted and will shortly becomeeffective. The recent nature of much of Russian legislation, the lack of consensus about the scope, contentand pace of economic and political reform, and the rapid evolution of the Russian legal system in waysthat may not always coincide with market developments may result in ambiguities, inconsistencies andanomalies, the enactment of laws and regulations without a clear constitutional or legislative basis, andultimately in investment risks that do not exist in more developed legal systems. Therefore, no assurancecan be given that the development or implementation or application of legislation (includingGovernment resolutions or Presidential decrees) will not have a material adverse effect on foreigninvestors (or private investors generally).

The existing business culture in Russia continues to be influenced by attitudes formed in the periodof the Soviet planned economy, in which survival often depended on finding ways to avoid the impositionof (often arbitrarily applied) laws and regulations. As a result, the commitment of business people,Government officials and agencies, and the judicial system to abide by legal requirements and negotiatedagreements is still uncertain.

Many Russian laws are structured in a way that provides for significant administrative discretion inapplication and enforcement. Reliable texts of laws and regulations at the regional and local levels maynot be available, and usually are not updated or catalogued. As a result, applicable law is often difficult toascertain and apply, even after reasonable effort. Russia does not have a judicial system based onprecedents. In addition, the laws are subject to different and changing interpretations and administrativeapplications. As a result of these factors, even the best efforts to comply with the laws may not alwaysresult in full compliance.

Russian laws often provide general statements of principles rather than a specific guide toimplementation, and Government officials may be delegated or exercise broad authority to determinematters of significance. Such authority may be exercised in an unpredictable way and effective appealprocesses may not be available. In addition, breaches of Russian law, especially in the area of currencycontrol, may involve severe penalties and consequences that could be considered as disproportionate tothe violation committed.

The independence of the judicial system and its immunity from economic, political and nationalisticinfluences in Russia remains largely untested. Judges and courts are generally inexperienced in the areasof business and corporate law. Judicial precedents generally have no binding effect on subsequent

18

decisions. Not all Russian legislation and court decisions are readily available to the public or organisedin a manner that facilitates understanding. The Russian judicial system can be slow. All of these factorsmake judicial decisions in Russia difficult to predict and effective redress uncertain. Additionally, courtclaims are often used to further political aims. Additionally, court decisions are not always enforced orfollowed by law-enforcement agencies. There is no guarantee that the proposed judicial reform aimed atbalancing the rights of private parties and governmental authorities in courts and reducing grounds for re-litigation of decided cases will be implemented and succeed in building a reliable and independentjudicial system.

Foreign Court Judgments or Arbitral Awards

The Russian Federation is not a party to any multilateral or bilateral treaties with most Westernjurisdictions for the mutual enforcement of court judgments. Consequently, should a judgment beobtained from a court in any of such jurisdictions it is highly unlikely to be given direct effect in Russiancourts. However, the Russian Federation (as successor to the Soviet Union) is a party to the 1958 NewYork Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the LoanAgreement contains a provision allowing for arbitration of disputes. A foreign arbitral award obtained ina state which is party to that Convention should be recognised and enforced by a Russian court (subjectto the qualifications provided for in the Convention and compliance with Russian civil procedureregulations and other procedures and requirements established by Russian legislation). It is expected thatRussian procedural legislation will be changed, inter alia, by way of introducing further groundspreventing foreign court judgments and arbitral awards from being recognised and enforced in Russia. Inpractice, reliance upon international treaties may meet with resistance or a lack of understanding on thepart of Russian court or other officials, thereby introducing delay and unpredictability into the process ofenforcing any foreign judgment or any foreign arbitral award in the Russian Federation.

Exchange Rates, Exchange Controls and Repatriation Restrictions

In recent years, the Rouble has experienced a significant depreciation relative to the U.S. Dollar. Inthe middle of August 1998, the value of the Rouble against the U.S. Dollar fell by more than 300% inseveral days. Before August 1998 the Central Bank had been trying to support the Rouble within acertain band. However, after the significant August 1998 devaluation of the Rouble, the band wascancelled. The ability of the Russian Government and the Central Bank to reduce the volatility of theRouble will depend on many political and economic factors, including their ability to control inflation andthe availability of foreign currency. Furthermore, uncertainties exist with respect to the continuation ofthe Central Bank’s current policy.

The Rouble is not convertible outside Russia. A market exists within Russia for the conversion ofRoubles into other currencies, but it is limited in size and is subject to rules limiting the purposes forwhich conversion may be effected. There can be no assurance that such a market will continueindefinitely. Currently, 50% of foreign currency revenues from export sales must be converted intoRoubles. The relative stability of the exchange rate of the Rouble against the U.S. Dollar since 1999 hasmitigated risks associated with forced conversion, but no assurance can be given that such stability willcontinue. Moreover, the banking system in Russia is not as developed as its Western counterparts, andconsiderable delays may occur in the transfer of funds within, and the remittance of funds out of, Russia.

While the current policy of the Russian Government is to allow the repatriation by foreign investorsof profits earned in Roubles, there are restrictions on such repatriation. Rouble proceeds from certainoperations of foreign investors are required to be frozen for 365 days before they may be converted intohard currency.

Lack of Official Data Reliability

Official statistics and other data published by Russian federal, regional and local governments, andfederal agencies are substantially less complete or reliable than those of Western countries, and there canbe no assurance that the official sources from which certain of the information set forth herein has beendrawn are reliable or complete. Official statistics may also be produced on different bases than those usedin Western countries. Any discussion of matters relating to Russia herein must therefore be subject touncertainty due to concerns about the completeness or reliability of available official and publicinformation.

19

Risks Relating to the Company and the Russian Oil and Gas Industry

Uncertainties in Estimates of Oil and Gas Reserves

There are numerous uncertainties inherent in estimating quantities of proved reserves and inprojecting future rates of production and the timing of development expenditures, including many factorsbeyond the control of the Company. The reserves data included in this Offering Circular, which is derivedfrom the Reserves Reports (as defined in ‘‘Business – Exploration and Production – Oil and Natural GasReserves’’), as well as Rosneft’s internal estimates of its reserves included herein, represent onlyestimates and should not be construed as exact quantities. Estimating oil and gas reserves is a subjectiveprocess and estimates of different engineers often vary significantly. In addition, results of drilling, testingand production subsequent to the date of an estimate generally result in revisions to that estimate.Accordingly, reserves estimates may be materially different from the quantities of crude oil that areultimately recovered and, if recovered, the revenue therefrom could be less and the costs related theretocould be more than estimated amounts. The significance of such estimates is highly dependent upon theaccuracy of the assumptions on which they were based, the quality of the information available and theability to verify such information against industry standards. The reserves evaluations carried out byDeGolyer and MacNaughton were based on production data, prices, costs, ownership, geological andengineering data, and other information provided by the Company and accepted without independentverification. The Reserves Reports assume, among other things, that the future development of theCompany’s oil fields and the future marketability of the Company’s oil will be similar to pastdevelopment and marketability. These economic assumptions may prove to be incorrect. In particular,the Russian economy is more unstable and subject to more significant and sudden changes than theeconomies of many other countries, and thus economic assumptions in Russia are subject to a significantdegree of uncertainty. Potential investors should not place undue reliance on the forward-lookingstatements in the Reserves Reports or on comparisons of similar reports concerning companiesestablished in places with more mature economic systems.

Failure to Acquire or Find and Develop Additional Reserves

The majority of the Company’s proved reserves are in the Yamalo-Nenetskii Autonomous Region,in its new resource province. Except to the extent the Company conducts successful exploration anddevelopment activities or acquires properties containing proved reserves, or both, the Company’s provedreserves will decline as reserves are produced. In addition, the volume of production from oil and naturalgas properties generally declines as reserves are depleted. The Company’s future production is highlydependent upon its success in finding or acquiring and developing additional reserves. If the Company isunsuccessful, it may not meet its production targets and its total proved reserves and production willdecline, which will adversely affect its results of operations and financial condition.

Drilling

Rosneft is exploring in various geographical areas, including new resource provinces such asYamalo-Nenetskii Autonomous Region, where environmental conditions are challenging and costs canbe high. Rosneft is also considering exploration activities in international areas where costs may be high.In addition, the Company’s use of advanced technologies such as hydraulic fracturing and horizontaldrilling (which includes applying the thermal bed stimulation methods) requires greater pre-drillingexpenditures than traditional drilling strategies. The cost of drilling, completing and operating wells isoften uncertain. As a result, Rosneft may incur cost overruns or may be required to curtail, delay orcancel drilling operations because of a variety of factors, including unexpected drilling conditions,pressure or irregularities in geological formations, equipment failures or accidents, adverse weatherconditions, compliance with governmental requirements and shortages or delays in the availability ofdrilling rigs and the delivery of equipment. The Company’s overall drilling activity or drilling activitywithin a particular project area may be unsuccessful. Such failure may have a material adverse effect onthe Company’s results of operations and financial condition.

Production

Rosneft’s oil production declined in 1998 and 1999. A number of factors contributed to this declinein Rosneft’s production, including decreased domestic demand due to weak economic conditions, exportrestrictions in relation to refined products, and impaired assets due to inadequate maintenance. Inaddition, the Company’s principal producing oil fields (in common with those of many other Russian oilproducers) are mature and are in natural production decline, with lower well productivity.

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In 2000, Rosneft’s production increased to 35,974 tonnes per day, a level which the Group ismaintaining in 2001. However, an increase in production costs (particularly in the Yamalo-NenetskiiAutonomous Region, where the bulk of the Company’s proved reserves are located) and heavy indirecttaxation may constrain the Company’s ability to maintain production at existing levels or to do soprofitably. In 2000, production levels were maintained in a significant measure due to the ability of theCompany to bring idle wells back into production – a process which involved lower cost than the drillingof new wells. Rosneft’s ability to continue this process economically is increasingly constrained by thereduction in the number of idle wells available.

In order to mitigate these factors the Company is actively seeking to acquire and developadditional, lower cost reserves, although the exploitation of any such reserves over time will requiresignificant capital expenditure. See ‘‘Business – Capital Expenditures’’.

Price of Crude Oil and Refined Products in Russia; Fluctuations in International Crude Oil and RefinedProducts Prices

Domestic Russian crude oil prices were set by the Russian Government in the past at levelssubstantially below those of world market prices. The Russian Government ceased to regulate domesticprices in early 1995, but domestic prices have continued to be below world levels primarily due to largeregional surpluses in Russia and Russia’s economic recession. There can be no assurance that Russiandomestic prices for crude oil will equal world market prices in the near future.

Domestic Russian refined product prices have historically been subject to government pricecontrols, although not to the same degree as crude oil prices. Some price controls still remain in effect. Inparticular, Decree No. 221 of the President of the Russian Federation ‘‘On Measures to Adjust StatePrice (Rates) Controls’’ of 28 February 1995 established the general rule that free market prices and ratesare used in the domestic market of the Russian Federation and imposed State control over a limited list ofgoods approved by the Government of the Russian Federation (such list includes fuel oil, kerosene andliquefied gas sold directly to the public). The prices used in deliveries of the associated gas to gasrefineries for further gas conversion are established by the Ministry of Economic Development and Tradein consultation with the Ministry of Energy. Local governments generally establish control over the retailprice of gasoline.

No assurance can be given that governmental price controls will not be increased for politicalreasons, resulting in a significant difference between world market prices and the domestic prices forrefined products.

Furthermore, prices for oil and refined products have historically fluctuated widely in response tochanges in many factors, over which Rosneft does not and will not have control. These factors include:

l global and regional economic and political developments in resource-producing regions,particularly in the Middle East;

l global and regional supply and demand;

l the ability of the Organisation of Petroleum Exporting Countries and other producing nationsto influence global production levels and prices;

l Russian and foreign governmental regulations and actions;

l global economic conditions;

l price and availability of new technology; and

l weather conditions.

It is impossible to predict future oil and refined product price movements with certainty. Sinceexports are the Company’s primary source of hard currency revenues and an important source of itsearnings and cash flows, declines in oil or refined product prices will adversely affect the Company’sbusiness, results of operations and financial condition, liquidity and its ability to finance planned capitalexpenditures. For an analysis of the impact on income from changes in oil, gas and refined product prices,see ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations – FactorsAffecting Results of Operations’’. Lower oil or refined product prices also may reduce the amount of oilthat the Company can produce economically or reduce the economic viability of projects planned or indevelopment.

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It should be noted that state tax authorities are entitled to check prices charged under certaintransactions during their audits in accordance with Article 40 of the Russian Tax Code. These controlsover oil prices are conducted in relation to barter transactions, or in situations of price fluctuations ofmore than 20% above or below the seller’s prices in recent transactions, or where the parties are ‘‘inter-dependent’’ (i.e., affiliated) (which include Rosneft and its subsidiaries). The tax amounts to be paid tothe state budget may be subsequently adjusted if the price is found to differ by more than 20% from themarket price for the same or similar goods. Amendments to these provisions of the Russian Tax Code arebeing discussed in order to further restrict transfer pricing within vertically integrated companies. Suchrestrictions may force oil companies to increase inter-company sales prices and result in the increase oftheir tax liabilities, which could negatively affect Rosneft’s results of operations.

Sales Generally; Available Transport

The Russian oil and gas export regime is complex, in a state of flux, and is subject to legislativeuncertainties. No assurance can be given that Rosneft will be able to meet its sales objectives domesticallyor on the export market if factors outside the control of Rosneft prevent it from transporting and shippingoil. The uncertainty of availability or physical condition of the Transneft pipeline system, sea terminals,changes in the governmental policy on access to the Transneft pipeline system and sea terminals forshipping oil, or overall economic conditions could affect Rosneft’s ability to sell oil. A shortage of seatankers, limited port storage capacity, limited railway facilities, and high railway-transportation tariffspresent additional restrictions on the oil transportation system in Russia.

Like all other oil companies operating in Russia, Rosneft is dependent on the Transneft system (astate-controlled network of crude oil trunk pipelines in Russia) for the transportation of the majority ofits oil. The Transneft system is subject to breakdowns and leakage. Further, Transneft has in the pastbeen required by court order to cease transporting oil produced by a Rosneft competitor as a result of alegal dispute between a regional Russian authority and that competitor as well as following a disputebetween the competitor and one of its shareholders. Although these legal disputes did not affect theCompany, in the light of the precedents set in the legal disputes described above, there can be noassurance that Rosneft’s use of the Transneft system will not be interrupted in the future as a result oflegal disputes between Rosneft and governmental authorities or other third parties.

Oil Quality-Related Compensation Payments

The Russian Government and Transneft have expressed their intent to launch a system wherebycompanies shipping heavy and sour crude will compensate the shippers of higher-quality crude oil for thedeterioration in the crude quality arising from its blending in the Transneft pipeline system. The potentialoverall effect of such a compensatory system on the operations of Rosneft, which ships oil of varyingquality, is hard to predict. Rosneft believes that it will benefit from the introduction of such compensatorysystem as its oil is of higher quality, although the effects on Rosneft of such a system, if adopted, cannotbe predicted.

Export Oil Sales; Export Capacity Allocation

Access to trunk pipelines and sea terminals is regulated by the Russian Government; access isgranted in proportion to volumes of oil produced and delivered to the trunk pipeline system. Currently,access rights are granted to Rosneft’s production subsidiaries, rather than to Rosneft, but commencingfrom 2002, Rosneft will be able to obtain access rights as a parent company for its oil productionsubsidiaries. Rosneft utilises pipeline and sea terminal access allocations granted to its productionsubsidiaries, either by effecting export sales on their behalf, or by having access rights assigned to it by itsproduction subsidiaries in conjunction with the sale of oil. However, the laws currently governing theaccess rights to the pipeline system and sea terminals are unclear, and there is uncertainty in respect ofthe transferability and enforceability of such access rights. The allocation of access rights to the pipelinesystem and sea terminals and the potential assignment of such rights to third parties, as set forth in therelevant Russian regulations, depend upon, among other things, the absence of outstanding tax liabilitiesof the transferor and transferee (as applicable) of such access rights. Therefore, a failure by Rosneft or itsproduction subsidiaries to meet tax obligations may adversely affect the ability of Rosneft to continue itsexport operations.

The system of access rights allocation is currently being reformed. Although recent legislativedevelopments indicate that the once-expected system of tender sale of access rights will not be introducedin the near future, there is no assurance that the law will not eventually change. The introduction of atender system may substantially increase the costs of oil transportation for Rosneft.

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Export Quotation and Licencing System

The general system of export quotas and licencing of exports was abolished in 1995. At present,quantitative restrictions on export may be imposed only if required to comply with Russia’s obligationsunder international treaties or for national security purposes, and no such restrictions currently apply tothe export of crude oil, gas or petroleum products. However, the legislation may change, and quantitativerestrictions on the existing or extended legal grounds may be re-introduced, if the current liberalisationpolicy of the Russian Government is reversed.

Required Domestic Supplies of Oil and Refined Products

Historically, the Russian Government used various administrative measures to ensure sufficientsupplies of oil and refined products were made available to domestic customers. In particular, the RussianGovernment used to limit access to the pipeline system and sea terminals if a company failed to providethe required domestic supplies. The mandatory domestic supply of oil and refined products, with orwithout the corresponding limitation or ban of export sales, may be renewed or extended if the domesticmarket starts experiencing a shortage of refined products. Such extension is highly probable with respectto domestic supplies of refined products on a seasonal basis, as it has been the case periodically for diesel,fuel oil and liquefied gas in recent years. These measures may force Rosneft to curtail its exports of oiland refined products, which are a key source of hard currency for Rosneft and sales of which are generallymade at higher prices when exported than when sold in the domestic market. Therefore, the renewal orextension of domestic supply requirement could have a material adverse effect on the Company’sbusiness, financial condition or results of operations.

Black Sea Shipments

A substantial part of Rosneft’s export sales are routed through the Black Sea crude export terminalsin Novorossiisk and Tuapse to the Mediterranean ports. The Novorossiisk sea terminal experiencesoccasional shutdowns due to bad weather. In addition, the transit capacity of the Bosphorus Strait, whichis the only outlet from the Black Sea to the Mediterranean, imposes limits on the volume of oil andrefined products that may be exported through Black Sea crude oil terminals. These climatic,geographical and infrastructure limits may adversely affect Rosneft’s export operations and the prospectsof their extension.

Railway Transportation

Rosneft depends on railway transportation for its export and domestic supplies of refined products.Although railway transportation tariffs are subject to antimonopoly control, historically they have tendedto increase. Accordingly, the increase in railway transportation tariffs results in a corresponding increasein the prices of refined products and may have an adverse effect on the operations of Rosneft.

Use of the Russian railway system exposes Rosneft to risks such as the disruption in transportationschedules due to the declining physical condition of Russian railway facilities and shortage of tank cars,theft of products during transportation, and spills, including those due to poorly maintained tank cars andtrain collisions. Additional costs and logistical constraints are imposed by the incompatibility of theRussian broad-gauge railway system with the railway systems of other countries.

Plans for Consolidation or Privatisation

In 1999, the Russian Government expressed its intention to consolidate shares in various Russian oilcompanies that were held by the state (including Rosneft), thus creating a single state oil company.Alternatively, the Company itself would be privatised.

Although there are currently no indications of the Russian Government’s intention either toconsolidate state-owned stakes in Russian oil companies or to privatise Rosneft in the near future, thereis no assurance that the Russian Government will not act on either plan. It is hard to assess to what extentand in what manner the control over Rosneft or its production subsidiaries, as well as the relatedGovernment policy towards Rosneft, will change upon or in connection with the implementation of eitherof these proposals. Thus, the potential change of the shareholder structure of Rosneft should beconsidered a risk factor.

Gas Operations: General Considerations

Participation in the Russian natural gas industry by Rosneft and its subsidiaries poses the same orsimilar regulatory and infrastructural risks on Rosneft and its subsidiaries as are associated with their oil

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and refining operations. However, the structure of the Russian natural gas industry and the relevantgovernmental policy exposes Rosneft and its subsidiaries to additional risks, as further described below.

Gas Licencing

Current gas-industry laws and regulations protect Gazprom’s monopolistic position in the gasmarket and gas transportation system, which puts other gas-market participants in disadvantageouspositions in relation to these areas. An investor in possession of an exploration licence is meant to obtaina development licence if a large deposit is discovered and categorised as being of strategic importance forthe state. An investor is entitled to compensation for exploration expenses when the deposit is includedinto the fund of federal reserve deposits; however, such compensation may be affected by the Roubledevaluation. The implication of these rules may adversely affect the ability of Rosneft or its productionsubsidiaries to expand their gas production operations.

Gas Pricing

Unlike crude oil prices, wholesale domestic prices for natural gas sold by Gazprom, other majorproducers of gas (including Rosneft’s Sakhalinmorneftegas subsidiary), and their affiliates, are regulated.As such, Sakhalinmorneftegas and, if a qualifying affiliation is found, Rosneft’s other subsidiaries, cannotfreely establish their wholesale gas prices. In addition, the Russian Government restricts prices of all gassupplies to gas refineries. The Russian Government’s policy has historically been to benefit domesticconsumers with gas prices that are considerably lower than world market prices and to encouragegasification of the country. Many consumers, mostly in the municipal-utilities sector, have been unable topay for gas for various reasons. However, antimonopoly or state procurement regulations may preclude aRussian company from ceasing to supply gas to an insolvent consumer. Although the recent policy of theRussian Government is to focus on ensuring prompt payment for gas and to maintain gas prices ateconomically substantiated levels, there is no guarantee that Rosneft and its gas-producing subsidiarieswill be able to continue or expand their gas production on terms they consider to be economically sound.

Gas Transportation

At present, every gas-producing company in Russia is dependent upon the possibility oftransportation of extracted hydrocarbons by the gas and condensate trunk pipeline system owned byGazprom. Although legislative measures have been adopted to ensure access to the gas trunk pipelinesystem for gas-producing companies not associated with Gazprom, in practice such access rights remainunclear. In particular, Rosneft is currently negotiating with Gazprom on the technical and financial termsof Rosneft’s access to the Gazprom gas pipeline which is required for the transportation of gas producedfrom the Kharampourskoye field. Some gas producers other than Gazprom may consider the constructionof their own gas pipelines as an alternative to gaining access to Gazprom’s transportation infrastructure; ifimplemented, this would technically vest the owners of such pipeline with the status of a naturalmonopoly in pipeline transportation and subject them to additional regulation and restrictions.Notwithstanding the declared governmental strategy of facilitating the emergence of independent gassuppliers and gas-transportation operators, the infrastructural and regulatory considerations mentionedabove may pose significant constraints on the ability of Rosneft to secure independent transportation forits gas.

Government Influence

Through its ownership of 100% of the share capital of the Company, the Russian Government hasexercised and can be expected to continue to exercise significant influence over Rosneft’s operations.Although the Company believes that such influence has, on the whole, been positive, the RussianGovernment has caused the Company to take actions, including the undertaking of projects and thesupply of goods and services to customers, that may not be in the best interests of the Company. Actionsof this kind have had in the past and may have in the future an adverse impact on the operations andfinancial results of Rosneft.

Taxation

Taxes payable by Russian companies are substantial and include value added tax, excise duties,profit and turnover taxes, payroll-related taxes, property taxes and other taxes. Historically, the system oftax collection has been relatively ineffective, resulting in the imposition of new taxes in an attempt toincrease Government revenues. However, the Russian Government has initiated reforms of the taxsystem, including the enactment of the Tax Code (Part One, and during 1998 to 2001 some chapters of

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Part Two of the Tax Code were enacted). The reforms have resulted in a relative improvement in the taxclimate. The recently enacted profits tax chapter of the Tax Code envisages a reduction in the corporateprofits tax rate from 35% to 24% as of 1 January 2002.

Meanwhile, the taxation system in Russia is currently in transition and is subject to varyinginterpretations, frequent changes and inconsistent enforcement at federal, regional and local levels. Incertain instances, tax laws have been interpreted retroactively to the detriment of taxpayers. The heavyburden of taxation and the instability of the tax regime create a particularly difficult environment withinwhich the Company has to operate. There is also a potential risk that the Company may not be able tomeet its tax liabilities in a timely fashion in the event that customers of Rosneft fail to perform theirpayment obligations to the Company in relation to a significant part of its production.

Debt Collection and Non-Cash Settled Transactions

Tight money supply, the persistence of certain elements of the command economy and high taxeshave resulted in many entities in Russia being unable to make payment for supplies of goods or servicesin cash. Difficulties in collecting receivables in the past placed a burden on the cash flow of the Companywhich (in common with many other Russian companies) it has sought to alleviate through the use of non-cash settled arrangements. Such transactions are, however, less efficient than cash settlement as theycannot be used to fund certain operational or capital expenditure which must be settled in cash. TheCompany is actively trying to increase the proportion of cash settled transactions, and in 2000 non-cashsettled transactions represented approximately 0.7% of Rosneft’s sales and other operating revenues.

Working Capital and Exchange Rates

Like most Russian enterprises, Rosneft previously experienced severe working capital difficulties,due in large part to the factors indicated above. Thus, Rosneft had from time to time deferred obligationsto pay certain operating expenses, including salaries and taxes. However, the Company has notexperienced such severe working capital difficulties recently.

Although the Company has significant accounts receivable, uncertainty exists as to when or if theseaccounts receivable will be collected. A substantial portion of Rosneft’s accounts receivable relate tosupplies of oil and other products to the constituent entities of the Russian Federation and for satisfyingState needs. Under Russian law, the constituent entities and the state-owned or other consumersappointed by the state are obliged to pay for these supplies. However, due to the economic situation inRussia, in the past these consumers have not consistently paid for these supplies or have on occasionshifted responsibility for payment to the actual recipients of the supplies, who were often unable to pay ina timely manner or at all.

While the majority of the Company’s revenues and costs are denominated in Roubles, the Companyalso realises significant revenues and, to a lesser extent, has costs denominated in other currencies,primarily U.S. Dollars. Because the Company has significant export revenues, the Company’s financialresults may be negatively affected by an appreciation of the Rouble relative to the U.S. Dollar, and wouldbe positively affected by a devaluation of the Rouble relative to the U.S. Dollar.

Capital Requirements

The Company estimates that it will need to spend significant amounts to maintain and improve oilproduction and refining capacity and to expand its retail and distribution in accordance with its corporateplan. See ‘‘Capital Expenditures’’. It is unlikely that internally generated funds will be sufficient tofinance a significant portion of these capital expenditures. While Rosneft has in some cases obtainedexternal financing, no assurance can be given that all its financing can be arranged on terms the Companywould find attractive. In addition, in the past, the Company has found it difficult to finance certain capitalexpenditures, due to commercially favourable terms not being available, in amounts sufficient to permitoperations to be maintained at current levels.

Corporate Governance, Disclosure and Accounting Standards

The corporate affairs of Rosneft are governed by the laws governing companies incorporated inRussia and by its Charter. The rights of shareholders and the responsibilities of members of the Board ofDirectors and Management Board under Russian law are different from, and may be subject to certainrequirements not generally applicable to, corporations organised in the United States, the UnitedKingdom, and other jurisdictions.

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A principal objective of the securities laws of the United States and the United Kingdom and othercountries is to promote full and fair disclosure of all material corporate information to the public. Rosneftis subject to Russian law requirements, which oblige Rosneft to publish annual financial statements.However, there is less publicly available or other information about Rosneft than the informationregularly published by or about listed companies in the United States, the United Kingdom or certainother jurisdictions.

Liability for the Obligations of Subsidiaries

Russian corporate law provides that generally the shareholders of a Russian joint stock companyand participants in a Russian limited liability company are not liable for the obligations of such companyand bear only the risk of loss of their investment. This principle is subject to certain exceptions. A parentcompany bears joint and several responsibility for transactions concluded by its subsidiary in furtheranceof obligatory directions given by the parent company. In addition, any person who may give obligatorydirections to, or otherwise determine the actions of, a company is secondarily liable for the debts of suchcompany if the latter becomes insolvent or bankrupt through the fault of such person. Depending on thedegree of Rosneft’s control over its subsidiaries, and on the manner in which such control is exercised,these provisions of Russian law may render Rosneft liable for the debts of its subsidiaries.

Management Structures and Information Systems

The Company was formed in 1995 out of a number of state-owned enterprises that previouslyoperated on a semi-autonomous basis, under the supervision of the Ministry of Energy. These enterpriseshad operated within a command economy, where management decisions were directed by production,rather than profitability, goals.

The Company has recognised a need to develop and implement a corporate structure that willcentralise strategic and financial decision-making, while de-centralising operational decision-making. TheCompany has recently begun to install modern management information systems and financial controlsnecessary to manage its business effectively, but these are not yet comparable to such systems andcontrols in similar Western companies.

Dependence on Key Management

Rosneft is dependent on its senior management for the implementation of its strategy and operationof its day-to-day activities. In addition, personal connections and relationships of members of seniormanagement are important to the conduct of its business. No assurance can be given that managementwill continue to make their services available to Rosneft.

Competition

Significant and increasing competition exists for new oil and gas acquisition opportunities in theRussian Federation. As a result of this competition, a substantial part of which is with large vertically-integrated oil and gas companies, Rosneft may be unable to acquire rights to exploit additional attractiveoil and gas properties on terms it considers acceptable. Accordingly, there can be no assurance thatRosneft will acquire any interest in additional properties that would yield or result in commercial oil andgas operations.

Rosneft competes with major oil and gas companies in the acquisition, exploration, financing anddevelopment of new properties and projects. Some of these companies are more experienced, larger, andbetter capitalised than Rosneft, and carry out refining operations and market petroleum and otherproducts on a world-wide basis. Rosneft’s competitive position will depend upon its ability to successfullyand economically explore, acquire and develop new and existing oil and gas properties or projects.Factors which allow producers to remain competitive in the market over the long term include cost ofproduction and proximity to market.

Environmental Risks

The Company’s operations are subject to the environmental risks inherent in the oil industry.Russian environmental legislation consists of numerous federal and regional regulations which quiteoften conflict with each other and cannot be consistently interpreted. As a result, full environmentalcompliance may not always be ensured. It is possible that environmental laws are not enforced vigorouslyagainst Rosneft while it is State-owned, which may change with privatisation. In addition, Russian

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federal, regional and local authorities may adopt stricter environmental standards than those now ineffect and are expected to move toward more stringent enforcement of existing laws and regulations.

Although the measures taken by the Company in relation to environmental regulations have nothad a material adverse effect on the Company’s financial condition or results of operations to date, noassurance can be given that the costs of such measures in the future and liabilities due to environmentaldamage caused by the Company will not be material. To date, the Company has not considered itappropriate to establish any provisions for potential environmental liabilities.

Participation in Foreign Exploration and Development Projects

The Company’s participation in foreign exploration and development projects is governed, inparticular, by Central Bank regulations on the investments in foreign joint ventures and financing theimplementation of the projects. Furthermore, Rosneft activities carried out as a foreign investor involvedin natural-resources exploration and development will be governed by legislation of the country on whoseterritory these resources are located. The Company’s operations and their results depend on suchregulations and, particularly, on any restrictions and limitations imposed on the foreign investments orthe subsoil use by the foreign entities. Thus, Rosneft’s primary risks in pursuing successful foreignexploration and production projects lie in the possibility of foreign countries imposing extraordinaryrestrictions on the Company in the jurisdiction in which it is doing business, as well as in the additionalhindrances imposed by the Central Bank.

Recent Events

On 11 September 2001, terrorist attacks were conducted against multiple targets in the UnitedStates causing large loss of life and extensive damage. These events, and their aftermath, have had asignificant effect on international financial markets generally and may in the future have further sucheffects internationally and, specifically, in the Asian region (including Russia), which in turn may impactthe Company.

Risks Relating to the Notes

Taxation

In general, interest payments on borrowed funds made by a Russian entity to a non-resident aresubject to Russian withholding tax at a rate of 15% (20% from 1 January 2002), unless they are reducedor eliminated pursuant to the terms of an applicable tax treaty. Based on professional advice it hasreceived, the Company believes that interest payments on the Loan made to the Bank will not be subjectto withholding under the terms of the double tax treaty between the Russian Federation andLuxembourg. However, there can be no assurance that such an exemption will be available. If paymentsunder the Loan are subject to any withholding, the Company will be obliged to increase the amountspayable as may be necessary to ensure that the recipient receives a net amount that will not be less thanthe amount it would have received in the absence of such withholding. In addition, payments in respect ofthe Notes will, except in certain limited circumstances, be made without deduction or withholding for oron account of Luxembourg taxes except as required by law. In that event, the Bank will only be requiredto pay additional amounts to the extent that it receives corresponding amounts from the Borrower underthe Loan Agreement. The Loan Agreement provides for the Borrower to pay such correspondingamounts in these circumstances. Under the Russian Tax Code each person must pay taxes established bylaw individually, whereas grossing-up provisions (whether in relation to Russian taxes which may berequired to be withheld by the Borrower or Luxembourg taxes which may be required to be withheld bythe Bank) can be interpreted as requiring the Borrower to pay the tax liabilities of the Bank and theNoteholders. Accordingly, there is some doubt as to whether these gross-up clauses contained in the LoanAgreement are enforceable under Russian law. Because of the limited recourse nature of the Notes, if theBorrower fails to pay any such gross-up amounts, the amounts payable by the Bank under the LoanAgreement will be correspondingly reduced. Any failure by the Borrower to pay such amounts wouldconstitute an Event of Default under the Loan Agreement. In certain circumstances (including in certaincircumstances following enforcement of the security upon a Relevant Event, as described below), in theevent that the Company is obliged to increase the amounts payable, it may prepay the principal of theLoan together with accrued interest, and (to the extent that it has actually received the relevant fundsfrom the Company) all outstanding Notes would be redeemed by the Bank.

The Bank has granted security over certain of its rights in the Loan Agreement to the Trustee inrespect of its obligations under the Notes. The security under the Trust Deed will become enforceableupon the occurrence of a Relevant Event, as further described in the Terms and Conditions of the Notes.

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In these circumstances, payments under the Loan Agreement (other than in respect of Reserved Rights)would be required to be made to, or to the order of, the Trustee. The first interest payment under theLoan Agreement will be made in 2002. Under Russian tax law, payments of interest (starting from1 January 2002) and other payments made by the Company to the Trustee will in general be subject toRussian income tax withholding at a rate of 20%. It is not expected that the Trustee will, or will be ableto, claim a withholding tax exemption under any double tax treaty. In addition, while it may be possiblefor some Noteholders who are eligible for an exemption from Russian withholding tax under doubletaxation treaties to claim a refund of tax withheld, such refunds can be made only in Roubles, and therewould be considerable practical difficulties in obtaining any such refund.

As indicated above, it is currently unclear whether the provisions obliging the Borrower to gross-uppayments will be enforceable in Russia. If a Russian court does not rule in favour of the Bank or theTrustee and Noteholders, there is a risk that gross-up for withholding tax will not take place and thatpayment made by the Company under the Loan Agreement will be reduced by Russian income taxwithheld by the Borrower at a rate of 20%.

See also ‘‘Loan Agreement – Prepayment’’, ‘‘Loan Agreement – Taxes’’, ‘‘Terms and Conditions ofthe Notes – Redemption and Purchase’’, ‘‘Terms and Conditions of the Notes – Taxation’’ and ‘‘Taxation– Russian Taxation’’.

Payments Under the Notes Limited in Amount to the Amount of Certain Payments Received by the Bankunder the Loan Agreement

The Bank is only obliged to make payments under the Notes to the Noteholders in an amount equalto and in the same currency as sums of principal, interest and/or certain additional amounts (if any)actually received by or for the account of the Bank pursuant to the Loan Agreement (less any amount inrespect of the Reserved Rights). Consequently, if the Borrower fails to meet its payment obligationsunder the Loan Agreement in full this will result in the Noteholders receiving less than the scheduledamount of principal or interest on the relevant due date.

No Direct Recourse of the Noteholders to the Borrower

Except as otherwise expressly provided in the Terms and Conditions and in the Trust Deed, theNoteholders do not have any proprietary or other direct interest in the Bank’s rights under or in respectof the Loan Agreement or the Loan. Subject to the terms of the Trust Deed, no Noteholder will have anyentitlement to enforce any of the provisions of the Loan Agreement or have direct recourse to theBorrower except through action by the Trustee under the Security Interests (as defined in the Trust Deedand described in the Terms and Conditions of the Notes). Neither the Bank nor the Trustee shall berequired to take proceedings to enforce payment under the Loan Agreement unless and until it has beenindemnified and/or secured by the Noteholders to its satisfaction in connection therewith.

In addition, under the Terms and Conditions of the Notes, Noteholders will be deemed to haveaccepted that:

(i) neither the Bank nor the Trustee makes any representation or warranty in respect of, and shallat no time have any responsibility for, or liability, or obligation in respect of the performanceand observance by the Borrower of its obligations under the Loan Agreement or therecoverability of any sum of principal, interest or additional amounts (if any) due or tobecome due from the Borrower under the Loan Agreement;

(ii) neither the Bank nor the Trustee shall at any time have any responsibility for, or obligation orliability in respect of, the financial condition, creditworthiness, affairs, status or nature of theBorrower;

(iii) neither the Bank nor the Trustee shall at any time be liable for any misrepresentation orbreach of warranty or any act, default or omission of the Borrower under or in respect of theLoan Agreement;

(iv) neither the Bank nor the Trustee (acting as Trustee) shall at any time have any responsibilityfor, or liability or obligation in respect of, the performance and observance by the Agents oftheir respective obligations under the Agency Agreement;

(v) the financial servicing and performance of the terms of the Notes depend solely andexclusively upon performance by the Borrower of its obligations under the Loan Agreement,its covenant to pay under the Loan Agreement and its credit and financial standing; and

28

(vi) the Bank (and, following the Loan Administration Transfer (as defined in the LoanAgreement), the Trustee) is entitled, in the absence of manifest error, to rely on certificates ofthe Borrower delivered pursuant to the terms of the Loan Agreement and, in the case of theTrustee, of the Bank pursuant to the terms of the Trust Deed as a means of monitoringwhether the Borrower and, in the case of the Trustee, the Bank is complying with itsobligations under the Loan Agreement or, as the case may be, the Trust Deed and shall nototherwise be responsible for investigating any aspect of the Borrower’s nor, as the case maybe, the Bank’s performance in relation thereto and, subject as further provided in the TrustDeed, the Trustee shall not be bound or concerned to enquire into or be liable for any defector failure in the right of title of the Bank to the Secured Property (as described in the Termsand Conditions of the Notes) whether such defect or failure was known to the Trustee ormight have been discovered upon examination or enquiry or whether capable of remedy ornot, nor will it have any liability for any failure, omission or defect in perfecting, protecting orfurther assuring the Secured Property or the Security Interests including (without prejudice tothe generality of the foregoing) any failure, omission or defect in registering or filing orprocuring registration or filing of or otherwise protecting or perfecting the Secured Propertyor the Security Interests and the Trustee has no responsibility for, and shall be entitled toassume, the suitability, adequacy, fitness, efficacy and/or enforceability of the SecuredProperty, the Security Interests or any of the terms of the Loan Agreement, the Notes or theTrust Deed.

Discharge of Bank’s Obligations

In the event that (including, without limitation following enforcement of the security created by theTrust Deed), any amounts of principal, interest or other amounts (other than in respect of the ReservedRights) are received by the Trustee under the Loan Agreement, such amounts shall (for the purposes ofthese Conditions) be deemed to have been received by or on behalf of the Bank and to give rise to theobligation on the part of the Bank to make payments equal to and in the same currency as such amounts.Any amounts so received by the Trustee will satisfy pro tanto the obligations of the Bank in respect of theNotes and Noteholders will have no further recourse against the Bank or the Borrower after suchpayment is made.

No Existing Market/Market Volatility

Application has been made to list the Notes on the Luxembourg Stock Exchange. However, therecan be no assurance that an active trading market for the Notes will develop, or, if one does develop, thatit will be maintained. If an active trading market for the Notes does not develop or is not maintained, themarket price and liquidity of the Notes may be adversely affected.

The market for securities issued by Russian issuers is influenced by economic and market conditionsin other Eastern European countries and other emerging markets. Although international markets havestabilised since the Asian crisis in 1997 and the devaluation of the Russian Rouble in August 1998, therecan be no assurance that events will not cause a recurrence of such market volatility or that such volatilitywill not adversely affect the price of the Notes.

Credit Rating

Outstanding Russian Eurobonds are rated ‘‘B2’’ (outlook positive) by Moody’s Investors’ Service;‘‘B’’ (outlook positive) by Standard & Poor’s Rating Services, a division of The McGraw Hill Companies,Inc.; and ‘‘B+’’ (outlook stable) by Fitch. A security rating is not a recommendation to buy, sell or holdsecurities and may be subject to revision or withdrawal at any time by the assigning rating organisation.

Rosneft has received a long-term debt rating of l from l and l.

Any change in the credit rating of either Rosneft or Russia could adversely affect the Notes.

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RUSSIAN FEDERATION – GENERAL OVERVIEW

Territory and Administrative Divisions

The Russian Federation is the largest country in the world, with a land area of 6.6 million squaremiles. Spanning 11 time zones, it stretches across the continents of Europe and Asia and borders Poland,Belarus, Ukraine and the Baltic countries to the west, Finland and Norway to the north and Georgia,Azerbaijan, Kazakhstan, Mongolia, the People’s Republic of China and North Korea to the south. As ofJanuary 2001, the population of the Russian Federation was approximately 144.8 million.

The Russian Federation is divided into 89 constituent entities, including 21 republics with their ownindependent governments, 10 autonomous regions, 49 territories (including one autonomous territory),six districts and two cities of federal importance (Moscow and St. Petersburg). The republics have agreater degree of autonomy than other constituent entities of the Russian Federation.

Government and Political Factors

The Russian Federation was the dominant member of the former Soviet Union. Following thedisintegration of the Soviet Union in 1991, the Russian Federation emerged as one of the 15 newlyindependent former Soviet republics, and is now a member of the Commonwealth of Independent States(CIS).

A new Russian Constitution was approved by referendum on 12 December 1993, creating apresidential republic with the President wielding extensive executive powers.

Russia’s legislature, the Federal Assembly, consists of a lower chamber, the State Duma, and anupper chamber, the Federation Council.

Boris Yeltsin was elected President of the Russian Federation in June 1991 and was re-elected inJuly 1996. After his resignation on 31 December 1999, Vladimir Putin assumed the position of actingpresident and was subsequently elected President in 2000. In his earliest statements, Putin advocated a‘‘moderately liberal’’ economic policy, involving the strengthening of legal institutions, maintaining stateregulation of certain portions of the economy, nonpreferential treatment of organisations, and caution informulating policy. As Putin articulated his economic priorities, a few themes emerged: improving thebusiness climate for both Russian and foreign companies, attracting foreign investment, reformingRussia’s tax and customs system and land reform. These and other concepts were incorporated into a 10-year action plan adopted in the summer of 2000.

In 2001, Putin has cited a number of additional economic reform priorities. These include bankingreform, currency liberalisation, diminishing Russian bureaucracy and red tape, addressing property andshareholder rights and the reform of Russian natural monopolies (in particular, gas, electricity, andrailways).

Economic Factors and the General Regulation of Business

Russia has exceptionally rich natural resources, such as oil, diamonds, gold, copper, rare metals,manganese, bauxite, uranium, silver, graphite and platinum, all of which are a source of hard currencybecause of world-wide demand. In particular, about 10% of the world’s proven oil reserves are located inRussia. The Russian Federation is a major producer of most types of minerals and, in many cases, it is theworld’s leading producer and exporter. It was reported that in 1995, the country accounted for 11% ofworld oil output, 30% of gas, and 10% of hard coal. Siberia and the Russian Far East are considered theresource backbone of the Russian economy.

According to the European Bank for Reconstruction and Development, the GDP per capita inRussia climbed steadily from 1991 to 1997 (1995: U.S.$1,868; 1996: U.S.$2,910; 1997: U.S.$3,056), but thendropped sharply in 1998, to U.S.$1,867 per capita. However, in 1999 per capita GDP was reported to haverecovered, reaching approximately U.S.$4,200.

According to Goskomstat, industrial production in the late 1990s was only 45% of the levelsachieved in 1990; other sources suggest larger declines. Among those sectors hit the hardest by this severedecline were the military-industrial complex and light industry.

One of the effects of the August 1998 crisis described below was to facilitate, at least temporarilyand only for some sectors, progress at stimulating local production and import substitution. Industrialoutput in 1999, and again in 2000, reflected this influence and other factors. Although output at mediumand large Russian enterprises for the most part steadily declined throughout the 1990s, while smallcompanies and joint ventures were largely responsible for increased output, the Russian financial crisis

30

somewhat altered this dynamic, with some of the medium- and large-sized enterprises ramping upproduction and their market orientation towards stronger domestic competitiveness.

Russia’s economic growth in 2000 was the highest achieved in the last three decades, but manyanalysts are reluctant to proclaim that this growth – or other isolated macroeconomics indicators showingimprovement in 2000 – indicate real economic turnaround. Higher world prices for fuel and metalsfacilitated improvements, as did ongoing effects of the 1998 Rouble devaluation, which rendered Russianproducts relatively less expensive compared to imports and contributed to increased domestic purchasesand exports, as well as a decline in barter transactions.

In late 2000, economic growth slowed. Many initial estimates for 2001, including estimates byinternational organisations, have predicted continued, albeit slower, economic growth in the vicinity of3% to 4%. Alternative estimates suggest the possibility of 0% economic growth.

Privatisation

Russia has moved through four phases of privatisation. The first phase began in October 1992, andinvolved the distribution of privatisation vouchers among the population and holding voucher auctions.The second phase of privatisation was initiated in July 1994, and involved the privatisation of Russiancompanies for cash, including privatisation of some of the largest Russian enterprises. The third phase,which began in the second half of 1995, involved the controversial ‘‘loan-for-shares’’ auctions in which theRussian Government borrowed long-term loans from major Russian banks against the collateral ofcontrolling stakes in the largest Russian enterprises as collateral, together with voting and managementrights. Lastly, since late 1995, Russia has been selling shares – primarily to domestic investors – inapproximately 140 enterprises considered the ‘‘crown jewels’’ of the Russian industry.

In 1997, President Yeltsin signed a decree on plans to privatise Russia’s natural monopolies,including power and gas enterprises, as well as Russian railroads; however, privatisation of the naturalmonopolies continues to be a disputed issue. In late 2000, the State Duma halted privatisation of thelargest Russian companies until a new privatisation law is passed. A draft of the new privatisation wasadopted by the State Duma in the first reading in June 2001 and is still under review.

By the mid 1990s, 75% of medium- and large-scale enterprises in Russia had been privatised. SinceJanuary 1996, the Russian Government has reported that at least 70% of Russian GDP is composed ofgoods and services accounted for by the private sector. In early 1997 Russian Government figuresreported that the private sector accounted for 75% of manufacturing enterprises, 85% of manufacturingand more than 80% of the Russian workforce.

Inflation and Hard Currency Rates

The Rouble exchange rate has declined dramatically since the onset of economic reforms. Monetaryauthorities concerned with the danger of frequent wide fluctuations have attempted to stabilise theRouble within a band. The fluctuation band in January 1997 was set at 5,500-6,100 Roubles to U.S.$1.00.

On 1 January 1998, the Russian Federation redenominated the Rouble, introducing new bills withthree fewer zeros than pre-1998 Roubles. At the same time, the Russian Federation reintroduced thekopeck, valued at 1/100 of a Rouble.

In August 1998, the country’s banking system was paralysed by financial crisis. In 1998, the totalannual inflation rate grew almost eight times (84.4%) in comparison with 1997 (11%). At the end of 1999the Rouble exchange rate to the U.S. Dollar was 27:1.

In 2000, Russian inflation continued to decrease from the peak that followed Russia’s 1998 financialcrisis. The total annual rate of inflation for the year 2000 was equal to 20.2%. The average Roubleexchange rate to the U.S. Dollar in 2000 was 28.11:1.

Although initial predictions estimated year-end inflation in 2001 to be around 12%, both Russia andinternational financial institutions adjusted estimates upward to 20% or more in early 2001.

Labour

The Russian Federation benefits from a large workforce and, as a result of, among other things,growing unemployment, there is now an increasing pool of available labour which includes individualswith Western business exposure, education and experience. Employment statistics from the RussianFederation are unreliable and official unemployment statistics are believed to be artificially low.

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OVERVIEW OF THE RUSSIAN OIL AND GAS INDUSTRY

The information set forth in this section is based on publicly available information.

Privatisation of Russian Oil Industry

The privatisation of the Russian oil industry was launched by Decree of the President of the RussianFederation No. 1403 ‘‘On the Specifics of Privatisation and Reorganisation into Joint Stock Companies ofthe State Enterprises, Industrial and Scientific Units in the Oil and Oil Refining Industries, dated17 November 1992 (‘‘Decree 1403’’), which established the federal framework for privatising Russian oilcompanies and was the basis for the transformation of numerous state-owned exploration, production,refining and distribution enterprises into several major vertically-integrated companies. At the first stageof this privatisation, state oil enterprises were reorganised into corporations; substantial blocks of theirshares were transferred to the state enterprise Rosneft with the remaining shares being sold to investorsand employees. In 1995, Rosneft was reorganised in a joint stock company (though it remained State-owned) and further shares in various oil and gas producers and refineries were transferred to it. See‘‘Rosneft – Foundation and Reorganisation’’. The privatisation of the Russian oil industry continued in1993-1997; shares in oil companies held by Rosneft were sold to investors or found new owners as a resultof the ‘‘loan-for-shares’’ auctions. The number of oil enterprises in which Rosneft had equity intereststhereby reduced from 259 in 1992 to 32 (including seven oil producing entities) in late 1997. During theseyears, Russia’s major private oil companies (LUKoil, Surgutneftegas, YUKOS, Sibneft, TNK andSIDANCO) emerged.

The process of vertical integration of privatised companies was facilitated by a Presidential decreeissued on 1 April 1995, allowing the integration of subsidiaries into vertically-integrated companiesthrough share exchanges. After the privatisation of major Russian oil producers and refineries Rosnefttook on and implemented the same management and operational integration strategies as privatevertically-integrated companies.

Russian vertically-integrated oil companies (both private and State-owned) differ as to their size ofoperations, geographic focus and management philosophy. Moreover, the Russian Government hasapplied different policies with respect to such companies at various times since the commencement of oilindustry privatisation. Some companies (including Rosneft) concentrate primarily on opportunities intheir historical regions of operations within Russia or within the former Soviet Union.

Russian Classification of Reserves

Russian methodologies for calculating reserves and Russian classifications of reserves differmaterially from accepted practices in the United States and other parts of the world. Reservescalculations performed using different methodologies cannot be accurately reconciled.

Under the Russian classification system, reserves are subdivided depending on their degree ofsubstantiation into the following categories: explored reserves represented by categories A, B and C1;preliminary estimated reserves represented by category C2 and C3; and forecast resources represented bythe categories D1 and D2. Russian reserves calculations have historically not used economic assumptionsin calculating reserves estimates. Generally, Russian methodologies classify oil and gas deposits asreserves if such deposits are technically recoverable, even if the recovery of a portion of such reservesusing currently available technology is uneconomic. In contrast, U.S. methodology classifies oil and gasdeposits as reserves only if such deposits are economically extractable on the basis of existingtechnologies, prices and costs.

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Russian Reserves Classification System

Classification Scope of Classification Characteristic Event

A ........................ Producing Reserves Development wells have been completed and the reserves arebeing produced

B ........................ Certified Reserves Development wells are being drilled, but reserves are not yetbeing produced (transition category)

C1 ...................... Delivered Reserves ‘‘Delineation’’ wells have been drilled and an exploration planhas been prepared

C2 ...................... Discovery A discovery well has been drilled and hydrocarbonsdiscovered but no further drilling has occurred

C3 ...................... Prospective Exploratory activities sufficient to delineate oil-bearing areashave occurred, and the deep drilling of traps is prepared

D1 ...................... Basin Some exploratory activities have occurred and data has beenobtained, such as seismic, gravimetric or magnetic data froman appraisal well indicating the possible presence ofhydrocarbons

D2 ...................... Basin A geologist has formed an opinion that a basin exists thatshares characteristics of other basins known to containhydrocarbons

Production

Oil production in Russia has been declining since the late 1980s. The decrease in production isattributable to many factors, including overproduction of wells during the Soviet period, lack of funds forcapital expenditures to maintain operations, inefficient secondary recovery methods, insufficienttransportation capacity in the pipeline system, losses during transit, and reduced demand attributableto Russian economic conditions.

In general, commercial incentives are now prompting the Russian Government and the Russian oilindustry to adopt alternative production practices. However, domestic pricing remains significantly belowworld levels, hampering the ability of companies to reinvest or modernise production practices,equipment and facilities.

In 2000, Russia produced 323 million tonnes of crude oil, which represented a 5.9% increase over1999. The following table shows approximate crude oil production levels of Russian oil companies in2000.

Company2000

(million tonnes)(1)

LUKoil ...................................................................................................................................... 62.2YUKOS .................................................................................................................................... 49.5Surgutneftegas.......................................................................................................................... 40.6TNK .......................................................................................................................................... 28.5Tatneft ...................................................................................................................................... 24.3Sibneft ...................................................................................................................................... 17.2Rosneft...................................................................................................................................... 13.4(2)

SIDANCO................................................................................................................................ 12.9Slavneft .................................................................................................................................... 12.7Bashneft .................................................................................................................................... 11.9Gazprom .................................................................................................................................. 10.0Onako........................................................................................................................................ 7.5Others........................................................................................................................................ 32.2

Source: InfoTEK, journal published by the Ministry of Energy of the Russian Federation (‘‘InfoTEK’’).

Notes:

(1) Including gas condensate production.

(2) According to the Company’s internal data, it produced 13.1 million tonnes of oil and condensate in 2000. In its internal calculations, theCompany does not include the production of Yugneftegas, a subsidiary of the Company’s Kransodarneftegas subsidiary, and the production ofArkhangelskgeoldobycha, an affiliated person.

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Domestic Crude Oil Supply

While crude oil production in Russia has fallen in the last decade, demand has fallen further, leadingto excess domestic supplies of crude oil. This decline in demand and constraints on exports are factorsthat have kept domestic prices low and hindered a significant real increase in the domestic price of crudeoil. Although the devaluation of the Rouble in the course of the August 1998 Russian financial crisis gaveimpetus to domestic oil production, the additional production was mainly export-oriented, as world oilprices rose dramatically in 1999-2000. Russian vertically-integrated oil companies are now seeking toincrease the utilisation of their refining capacities but, given the increased profitability of export sales,many of them still find it more profitable to export crude oil at high world prices than to expend resourceson refining.

Crude Oil Exports

Russia has significantly increased its crude oil exports since 1991. Contributing factors include thefall in domestic demand, the substantial differential between domestic and foreign prices, and theelimination of export quotas and licencing requirements in 1995. Exports have been, and will continue tobe, restricted in the medium term by limited domestic and international pipeline transportation and portcapacity. In 2000, Russia exported approximately 125.1 million tonnes of crude oil, a 4% increase over1999.

Crude Oil and Refined Product Transportation Network

The trunk pipelines for the transport of crude oil and refined products in Russia are controlled byTransneft and Transneftproduct, State-controlled companies. The Russian Government is expected toretain control over these entities for the foreseeable future.

The Transneft network consists of approximately 47,000 km of pipeline, 870 storage tanks, 390 oilpump stations and 2,000 pumping units.

The limited capacity of the pipeline network acts as a constraint on crude oil production in Russiaand especially affects the ability of producers to export crude oil. Furthermore, the pipeline facilities havenot been well maintained in recent years, and effective capacity has significantly diminished. At present,the portion of the Transneft system dedicated to the export of crude oil is operating at or near capacity.Moreover, there are important capacity constraints in Russian oil-shipment terminals. Although there areGovernment-sponsored and private programmes to improve pipeline and port capacity, there appearslittle likelihood that the situation will improve significantly in the medium term.

Refining

Although refinery utilisation increased in 2000 due to some increase in domestic demand and, moreimportantly, to increased export of light petroleum products, the refinery utilisation rates remain low byinternational measures. Their level reflects demand for refined products, the inability of a substantialnumber of customers to pay for them and, in some instances, the reluctance of vertically integratedcompanies to expend resources on refining.

In 2000, the refined volume reached 174 million tonnes, representing a 2.7% increase over 1999. Thefollowing table shows approximate refining volumes for Russian oil companies in 2000.

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Company2000

(million tonnes)

LUKoil ...................................................................................................................................... 23.4YUKOS .................................................................................................................................... 21.9Bashneft .................................................................................................................................... 20.2Surgutneftegas.......................................................................................................................... 15.9Sibneft ...................................................................................................................................... 12.6TNK .......................................................................................................................................... 12.4Slavneft .................................................................................................................................... 10.9CTK-Moskovsky Refinery .................................................................................................... 9.3Angarskaya Oil and Chemistry Company .......................................................................... 7.7Rosneft...................................................................................................................................... 7.1Tatneft ...................................................................................................................................... 5.6Onako........................................................................................................................................ 4.3SIDANCO................................................................................................................................ 3.7Others........................................................................................................................................ 18.9

Source: InfoTEK.

Regulation of the Russian Oil Industry

General

Regulation of the oil industry in Russia is still evolving with federal, regional and local authoritieseach promulgating rules.

At the federal level, mainly the Ministry of Energy, the Federal Energy Commission and theGovernment Commission on the Use of Trunk Oil and Gas Pipelines set governmental policy for theindustry and regulate the activities of oil companies, pipeline access and tariffs. Generally, the Ministry ofNatural Resources (or its regional department) licences the use of subsoil resources together with therelevant regional authority as described below. In certain circumstances (for example, in relation tosubsoil resources on the continental shelf) licences are granted by the Russian Government.

Federal legislation also affords a measure of autonomy to regional and local authorities to exerciserights to the use of natural resources and provides that the use of subsoil is under the joint jurisdiction ofthe federal and regional authorities. While, in principle, Russian federal law prevails over contradictoryregional or local laws, authorities at the regional or local level may have substantial practical authorityover the operations of an oil company in a particular location. Regional authorities generally sharejurisdiction over the grant of subsoil licences with the Ministry of Natural Resources. Regional and localauthorities enforce their taxation regimes, administer land-use regulations and oversee compliance withenvironmental and worker-safety codes. Local and regional authorities also exercise some control overthe use of the national and local pipeline grid through their jurisdiction to regulate land-use andenvironmental matters.

Operations in offshore areas beyond the 12-mile territorial sea limit are separately governed byFederal Law ‘‘On the Continental Shelf of the Russian Federation’’ of 30 November 1995.

Petroleum operations carried out under a production sharing agreement (‘‘PSA’’) are governed bythe Federal Law ‘‘On Production Sharing Agreements’’ of 30 December 1995, as amended (the ‘‘PSALaw’’). This provides that operations conducted under a production sharing agreement pursuant to thePSA Law would be governed by the PSA itself and not be affected by contrary provisions of any otherlegislation, including the Federal Law ‘‘On Subsoil’’ dated 21 February 1992 (the ‘‘Subsoil Law’’).Furthermore, production sharing agreements entered into by the Russian Government prior to theenactment of the PSA Law are recognised (the so-called ‘‘grand-fathered PSAs’’).

The regime governing PSAs is still developing. Recent legislation (enacted in 2001) has introducedgreater consistency between the tax regime for PSAs and the general tax system. However, much of thesubordinate legislation necessary for full implementation of the PSA Law remains to be enacted,including in particular issues of cost recovery, abandonment (decommissioning), procurement andaccounting.

The Ministry of Economic Development and Trade has recently been given the responsibility ofoverseeing PSAs. It has been charged with directing the activity of State representatives in managingcommittees established under PSAs, and monitoring the production of mineral raw materials and their

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allocation between PSA investors and the State. The Ministry of Economic Development and Trade wasalso given the power to examine feasibility studies and to propose new fields eligible for development ona PSA basis, to initiate exemptions from tender procedures generally required for conclusion of PSAs,and to propose tariff concessions.

Licencing

The licencing regime for exploration and production is established primarily by the Subsoil Law andthe regulations issued pursuant to it (the ‘‘Subsoil Regulations’’). Until January 2000, when substantialamendments to the Subsoil Law were introduced, exploration licences were typically granted for up tofive years, while production licences were granted for up to twenty years and combined exploration/production licences were granted for up to twenty five years. Pursuant to the Subsoil Law as currently ineffect, the maximum exploration term is still five years, and a production term is as long as required (asshown in the feasibility study) for rational full exploitation of the deposit. The Subsoil Law does notexpressly provide for a combined exploration/production term, but the Ministry of Natural Resourcesissues combined licences for the term contemplated for production licences.

Generally, production licences and combined licences are awarded by tender or auction held jointlyby the Ministry of Natural Resources (or its regional department) and the relevant regional authority.The winner is the participant which submits the most technically competent, financially attractive andenvironmentally sound proposal that meets published tender terms and conditions. Exploration licencesare generally awarded without a tender upon a decision of the Ministry of Natural Resources (or itsregional department) that has been approved by the relevant regional authority. Upon discovery of oil, aproduction licence is issued without a tender to a holder of an exploration licence. Licences may betransferred only under certain limited circumstances. A licensee is also generally granted rights to useland covering the licenced area.

The licensee is ordinarily required to undertake certain commitments, including to maintainproduction at a certain level each year (applicable only to production and combined licence holders), tokeep environmental pollutants within specified limits and to remedy environmental contamination. Thelicensee may also be obliged to fulfil certain social obligations in the area to which the licence relates,such as to pay certain compensation to local ethnic groups that populate the licencing area and providethem with other support. Failure to comply with the terms of the licence or with the provisions of theSubsoil Law or Subsoil Regulations can lead to fees and penalties, stoppages of production andrevocation of the licence. The Ministry of Natural Resources oversees compliance with the terms of thelicence.

If a subsoil licence is revoked, all oil and gas facilities in the relevant licencing area, includingunderground facilities, must be liquidated or undergo conservation. In accordance with both liquidationand conservation regulations, all mining facilities and oil and gas wells must be maintained at a level thatis safe for the general population, environment, buildings and other facilities. Conservation proceduresmust also secure the conservation of the relevant oil and gas field, mining facilities and wells for the fullperiod of conservation. These procedures may result in significant unforeseen costs.

A holder of a production licence is subject to an annual royalty, ordinarily calculated as apercentage of the value of (i) the resources produced during the term of the licence and (ii) their naturalloss. Currently, royalties must be within the range of 6% to 16% of the value of the resources to beextracted. In addition, the Subsoil Law and Subsoil Regulations provide for a licence fee (usually in theorder of several thousand dollars), payments for exploration rights and payments to a fund for resourcedevelopment (for oil and gas currently 10% of the value of the first commercial product). These royalties,taxes, fees and payments are generally in addition to tax obligations that may be applicable to the licenceholder. The combination of taxes, royalties and fees imposes a significant financial burden.

Federal Law ‘‘On Licensing of Certain Types of Activities’’, dated 25 September 1998, listsactivities relating to the oil and gas industry which require separate licencing. These include, amongothers, the design, construction, operation, repair, manufacture and installation of oil and gas mains andother equipment, the storage of oil and gas and their respective products, the processing andtransportation of hydrocarbons and hydrocarbon products, and the construction and manufacture ofbuildings and other structures connected with oil and gas activities. The Ministry of Energy and thegovernmental agency Gosgortekhnadzor are authorised to issue these separate licences.

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Federal Law ‘‘On Licensing of Certain Types of Activities’’, dated 8 August 2001, which comes intoforce in January 2002, removes licencing requirements for certain activities in the oil and gas industry, butintroduces a requirement that the sale of oil and its products be subject to licencing.

Crude Oil and Refined Product Transportation Regime

From 1995, as part of a scheme to deregulate prices and liberalise export controls, the RussianGovernment established equal pipeline and sea terminal access procedures for all oil companies inproportion to the actual production volume of each company. This system allowed Russian oil companiesto export, on average, 30-35% of the produced oil.

Currently the allocation of pipeline and sea terminal access rights is overseen by the GovernmentCommission on the Use of Trunk Oil and Gas Pipelines. This Commission approves quarterly scheduleswhich, inter alia, detail the precise volumes of oil that each oil producer can pump through the Transneftsystem. Such quarterly schedules provide certain stability in the export regime for Russian oil companies.Once the access rights are allocated, oil producers generally cannot increase their allotted capacity in theexport pipeline system, although they do have limited flexibility in altering delivery routes. Oil producersare generally allowed to assign their access rights to a third party.

In August 2001, the Russian Government started implementing the reform of allocation of pipelineand sea terminal access rights. From 11 September 2001, pipeline and sea terminal access rights aredistributed among oil producers and their parent companies in proportion to the volumes of oil producedand delivered to the Transneft pipeline system (and not in proportion to mere oil production volumes).Previously, the plan of reform envisaged that pipeline and sea terminal access rights would be sold at atender (starting with 25% of pipeline capacity at the first stage).

Transneft has a very limited ability to transport individual batches of crude oil with the result thatcrude oil of differing qualities, delivered in the pipeline system, is blended. Transneft does not currentlyoperate a system whereby companies shipping heavy and sour crude would compensate the shippers ofhigher-quality crude oil for the deterioration in the crude quality arising from blending. Although theintroduction of such a compensatory system is currently under discussion between Transneft and theRussian Government, these prospects cause aggressive resistance from regions whose reserves are low-grade.

The tariffs for using Transneft’s pipelines are set by Transneft, subject to the oversight of theFederal Energy Commission. The Federal Energy Commission was established in 1995 to regulatemonopolies in the petroleum and energy-transmission network, including their tariff structure.

Volume and Price Controls on Natural Gas

Pursuant to the Federal Law ‘‘On Gas Supply in the Russian Federation’’, dated 31 March 1999, andthe General Provisions on Formation and State Regulation of Gas Prices and Tariffs for the Services ofGas Transportation (approved by Decision of the Russian Government) dated 3 January 2001, thewholesale prices of gas are established by the Federal Energy Commission and its regional departments.The gas prices for sale to refineries are regulated by the Ministry of Economic Development and Trade.Gas prices are not subject to indexation with crude oil prices. The prices differ for different constituententities of the Russian Federation.

Imports and Exports

In the past, the Russian Government imposed seasonal limitations on the export of certain refinedproducts (diesel, fuel oil, gasoline and kerosene). No such restrictions are applied at present. However,the Ministry of Energy suggests flexible seasonal regulation of the export duties on refined products andimposition of the State non-tariff measures on the domestic refined products market.

To protect national economic interests, the Russian Government implements tariff regulations viathe export duty. The amount of the export duty varies depending on the country’s demand for oilproducts and the oil price.

State customs authorities of the Russian Federation (the Energy Customs and regional customsauthorities) perform statistical monitoring of the price level with respect to oil and oil products. When oiland refined products are shipped for export a provisional customs freight declaration is executedindicating the value of the oil and oil products calculated as of the date of the customs freight declaration.Following shipment under the customs freight declaration, the customs freight declaration is closed at theprice stated in the invoice related to the shipment under the customs freight declaration. The price

37

calculation in the closing of the customs freight declaration is checked by the currency department of theregional customs authorities and the oil department of the Energy Customs. The value of the quotationson the date of the price calculation, conformity of the price calculation procedure and the amount of thedeductible discount to the conditions of the foreign trade contracts and the price level of other exportersare checked. In some cases the Russian customs authorities may request documents confirming the valueof the deductible discount.

Environmental

Russian industry has tended to cause excessive levels of pollution compared to Western standards.As a result of the damage inflicted on the environment under the Soviet regime, environmental issues andpollution control have won widespread support.

Two main sets of regulations govern environmental protection. The first set includes the FederalLaw ‘‘On Environmental Protection’’ of 19 December 1991 and the Federal Law ‘‘On Ecological ExpertReview’’ of 23 November 1995. These laws require that an environmental impact assessment be madeprior to implementation of a project related to the use of natural resources. Companies are also requiredto obtain operational licences and permits authorising the discharge of pollutants into the air, water andsoil under a ‘‘pay-to-pollute’’ regime. If discharge exceeds permissible levels, a company is subject to finescalculated as a multiple of the original ‘‘fee’’ set for discharge of pollutants. The second set of regulationson environmental protection comprises a series of laws and regulations that relate to the use of naturalresources, including the Subsoil Law.

While protection of the environment is apparently not an issue of immediate priority to the currentRussian Government, it is widely expected that, as the economic situation improves, enforcement ofexisting legislation and environmental standards and rules will become more stringent, and that morecomprehensive legislation will be adopted. For example, in May 1999, new rules on obligatorycertification of oil and gas field specialised equipment came in effect.

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SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA

The following tables set forth selected consolidated financial and statistical data of Rosneft under USGAAP and RAR. For a discussion of the significant differences between US GAAP and RAR, see‘‘Summary of Relevant Significant Differences between US GAAP and Russian Accounting Regulations’’.

US GAAP Financial and Statistical Data

The following selected consolidated financial data presented below should be read together with theUS GAAP Financial Statements, including the notes thereto, and ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations’’ included elsewhere in this Offering Circular.

The selected consolidated financial data presented below has been derived from the US GAAPFinancial Statements as of and for the years ended 31 December 1998, 1999 and 2000 included elsewherein this Offering Circular. The US GAAP Financial Statements have been prepared in accordance withUS GAAP. The US GAAP Financial Statements have been audited by Arthur Andersen. ArthurAndersen issued unqualified reports on the Company’s 2000 and 1999 US GAAP Financial Statements,however, their opinion on the 1998 US GAAP Financial Statements was qualified with respect to the factthat an independent reserve report was not available as at 31 December 1998.

Year ended 31 December

1998 1999 2000

U.S.$ U.S.$ U.S.$Statements of Operations (in thousands, except per share amounts)Revenues

Oil and gas sales............................................................................ 798,646 796,666 1,176,312Refined products and processing fees ........................................ 384,613 598,940 1,045,245Support services and other sales ................................................ 258,759 174,133 245,216

Total revenues .......................................................................... 1,442,018 1,569,739 2,466,773

Operating expensesCost of sales

Production costs ........................................................................ 368,431 292,498 303,779Cost of refined products and processing fees ...................... 224,333 152,326 254,741Cost of support services and other sales .............................. 185,095 170,184 142,365

Total cost of sales...................................................................... 777,859 615,008 700,885Selling, general and administrative ............................................ 335,965 259,796 502,032Exploratory expenses.................................................................... 59,391 16,054 37,243Depreciation, depletion and amortisation ................................ 446,969 282,933 222,364Impairment loss ............................................................................ 330,372 – –Taxes other than income taxes .................................................. 287,962 164,704 200,327

Total operating expenses ........................................................ 2,238,518 1,338,495 1,662,851

Operating income (expense) ............................................................ (796,500) 231,244 803,922

Other income (expense)Interest expense ............................................................................ (67,710) (33,549) (46,691)Equity share in affiliates .............................................................. (89,168) (5,696) 21,221Other non-operating (expenses)/income, net............................ 121,089 (25,146) (36,541)Minority interest............................................................................ 245,570 120,917 81,845Currency translation (loss) gain.................................................. 489,909 38,247 (2,358)

Total other income.................................................................... 699,690 94,773 17,476

Profit/(loss) before provision for income tax ................................ (96,810) 326,017 821,398Provision for income taxes .......................................................... 1,645 (142,794) (366,190)

Net profit/(loss) ................................................................................ (95,165) 183,223 455,208

Dividends declared on preferred shares of subsidiaries.......... (3,460) (5,841) (13,980)

Net profit/(loss) available for common shareholders ................ (98,625) 177,382 441,228Basic and diluted profit/(loss) per common share (dollars) .. (1.11) 2.00 4.97

Average number of common shares outstanding (thousandsof shares) .................................................................................... 88,733 88,733 88,733

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At 31 December

1998 1999 2000

U.S.$ U.S.$ U.S.$(in thousands, except per share amounts)

Balance SheetAssets

Current assets:Cash and cash equivalents .......................................... 25,867 51,080 75,980Short-term investments ................................................ 7,045 15,620 99,609Accounts receivable, net of allowance for doubtful

accounts of U.S.$96,449, U.S.$98,620 andU.S.$84,530, respectively .......................................... 144,656 188,556 258,651

Inventories...................................................................... 119,790 146,917 233,871Prepaid expenses .......................................................... 26,035 75,662 59,316

Total current assets .................................................. 323,393 477,835 727,427Long term investments ................................................ 92,844 110,577 145,695Oil and gas properties, net .......................................... 1,734,047 1,635,866 1,736,214Property, plant and equipment, net .......................... 869,536 802,644 830,464Construction in progress .............................................. 200,307 205,481 298,817Other non-current assets .............................................. 6,735 3,599 5,983

Total assets ................................................................ 3,226,862 3,236,002 3,744,600

Liabilities and Shareholders’ CapitalCurrent liabilities:

Accounts payable and accrued liabilities .................. 266,096 231,451 352,034Short term loans and current portion of long term

debt................................................................................ 128,293 254,168 374,643Accrued income and other taxes ................................ 154,438 133,898 124,508

Total current liabilities ............................................ 548,827 619,517 851,185

Site restoration costs .................................................... 102,034 108,475 103,547Long term debt.............................................................. 268,151 151,667 123,577Deferred tax liability .................................................... – - 94,690Minority interest............................................................ 1,483,957 1,363,040 1,165,479

Total liabilities .......................................................... 2,402,969 2,242,699 2,338,478

Shareholders’ capital:Common stock (shares issued and outstanding:88,733,312 for 2000, 1999 and 1998) .............................. 19,430 19,430 19,430Preferred stock (shares issued and outstanding:1,446,047 for 2000, 1999 and 1998) ................................ 247 247 247Retained earnings.............................................................. 804,216 973,626 1,386,445

Total shareholders’ capital .......................................... 823,893 993,303 1,406,122

Total liabilities and shareholders’ capital.................. U.S.$3,226,862 U.S.$3,236,002 U.S.$3,744,600

RAR Financial and Statistical Data

The selected consolidated financial data presented below should be read in conjunction with theRAR Financial Statements, including the notes thereto, and with ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations’’ included elsewhere in this Offering Circular.The selected consolidated financial data presented below has been derived from the RAR FinancialStatements as of and for the years ended 31 December 1999 and 2000 and as of and for the six monthperiods ended 30 June 2000 and 2001, included in Appendix A to this Offering Circular. The RARFinancial Statements have been prepared in accordance with RAR. The RAR Financial Statements as ofand for the years ended 31 December 1999 and 2000 have been audited by Arthur Andersen inaccordance with Russian auditing standards. The selected consolidated financial data set forth below as ofand for the six month periods ended 30 June 2000 and 2001 are unaudited and, in the opinion of

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management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for thefair presentation of the financial condition and results of operations of the Company and its subsidiariesat the date and for the periods indicated.

Solely for the convenience of the reader, statements of operations financial data for the six monthsended 30 June 2001 and for the year ended 31 December 2000 has been translated into U.S. Dollars at therate of RUB 28.7999 to U.S.$1.00, and RUB 28.11 to U.S.$1.00, respectively, an average of the officialRouble/U.S. Dollar exchange rates reported by the Central Bank for the respective periods. Balancesheet financial data as of 30 June 2001 and 31 December 2000 has been translated into U.S. Dollars at therate of RUB 29.07 to U.S.$1.00, and RUB 28.16 to U.S.$1.00, respectively, the official closing Rouble/U.S. Dollar exchange rate on 30 June 2001 and 31 December 2000, respectively, as reported by theCentral Bank. However, such translations should not be construed as representations that the Roubleamounts have been, could have been or could be converted into U.S. Dollars at that or any otherexchange rate.

Year ended 31 December Six months ended 30 June

1999 2000 2000 2001

RUB RUB U.S.$ RUB RUB U.S.$Unaudited Unaudited

(in millions)

Statements of OperationsSales ...................................................... 39,880 69,513 2,473 32,712 34,241 1,189

Cost of sales .................................... 20,500 27,253 970 14,889 17,067 593Selling expenses .............................. 3,178 6,358 226 1,002 3,850 134Administrative expenses ................ 721 1,928 69 961 830 29

Operating profit .................................. 15,481 33,974 1,208 15,860 12,494 433

Operating revenue/expensesInterest revenue .............................. 94 242 9 111 209 7Interest expense .............................. 127 763 27 114 728 25Equity share in affiliates ................ 25 295 11 216 235 8Other operating revenue................ 20,144 53,319 1,897 19,165 22,378 777Other operating expenses .............. 22,537 54,688 1,946 21,071 23,184 805

Non-operating revenue/expensesNon-operating revenue .................. 1,593 3,401 121 1,405 933 32Non-operating expenses ................ 2,294 4,903 174 1,885 1,378 48Capitalised revenue ........................ 203 555 20 – – –

Profit (loss) before income taxes ...... 12,582 31,432 1,119 13,687 10,959 379

Income tax and other similarlevies.................................................. 3,800 7,423 264 4,337 3,320 114

Profit (loss) from ordinary activities 8,782 24,010 855 9,350 7,639 265

Minority interest.................................. 642 5,032 173 1,920 3,056 105

Extraordinary revenue/expensesExtraordinary revenue.................... – 1 – – 2 –Extraordinary expenses .................. – 1 – – – –

Net profit .............................................. 8,140 18,977 682 7,430 4,585 160

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Year ended 31 December Six months ended 30 June

1999 2000 2000 2001

RUB RUB U.S.$ RUB RUB U.S.$Unaudited

(in millions)Balance SheetNon-current assets .............................. 22,572 39,507 1,403 26,996 44,215 1,521Current assets ...................................... 15,086 23,769 844 19,871 32,786 1,128

Total assets ...................................... 37,658 63,276 2,247 46,867 77,001 2,649

Share capital ........................................ 90 90 3 90 90 3Additional paid in capital .................. 6,845 12,356 439 6,515 13,968 481Reserves and retained earnings ........ 2,847 14,514 515 5,708 16,561 570

Total capital and reserves .............. 9,782 26,960 957 12,313 30,619 1,054Minority interest payable .................. 7,105 10,891 387 12,036 11,072 381Long-term liabilities............................ 7,189 4,831 172 7,238 7,915 272Short-term liabilities .......................... 13,582 20,594 731 15,280 27,395 942

Total shareholders’ capital andliabilities................................................ 37,658 63,276 2,247 46,867 77,001 2,649

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

Rosneft does not currently prepare interim consolidated financial statements in accordance with USGAAP. Accordingly, this Offering Circular only contains interim unaudited consolidated financialstatements prepared in accordance with RAR, and the comparison below of Rosneft’s results of operationsfor the six months ended 30 June 2000 and 30 June 2001 is based on and should be read in conjunction withthe Company’s RAR Financial Statements. The discussions below comparing Rosneft’s results ofoperations for the years ended 31 December 1998, 1999 and 2000, however, are based on and should beread in conjunction with the US GAAP Financial Statements. Prospective investors should note that thereare significant differences between US GAAP and RAR. See ‘‘Summary of Relevant Significant Differencesbetween US GAAP and Russian Accounting Regulations’’. Therefore, prospective investors are cautionedagainst comparing the interim consolidated financial information prepared in accordance with RARcontained in this Offering Circular with the US GAAP Financial Statements.

Overview

Revenues

Oil and Gas Sales

The Company’s oil and gas sales principally include oil and gas produced by its subsidiaries, whichthe Company purchases and resells in the domestic market and for export.

Refined Products and Processing Fees

Rosneft’s refined product sales include sales of refined products produced by Rosneft’s refineries,products produced by third party refineries on behalf of Rosneft, as well as smaller amounts of refinedproducts purchased from third persons, to wholesale and retail customers in the domestic market. Inaddition, Rosneft exports refined products. See also ‘‘Business – Refining and Marketing of PetroleumProducts – Marketing, Sales, Distribution and Exporting of Refined Petroleum Products’’. Rosneft’srefineries also process crude oil on behalf of other Russian oil-production companies, which pay aprocessing fee for processing their crude oil into refined products at Rosneft’s refineries.

Support Services and Other Sales

The Company’s support services and other sales consist primarily of the leasing of floating drillingrigs and vessels supporting such rigs and other vessels; insurance services; and research and developmentworks.

Operating Expenses

Cost of Sales – Production Costs

Oil and gas production costs and expenses consist primarily of costs related to the extraction of oiland gas and treatment of the extracted oil and gas, including desludging and purification from water, saltand other foreign substances. Production costs also include costs of raw materials, wages and well work-overs.

Cost of Sales – Cost of Refined Products and Processing Fees

Cost of refined products and processing fees consists primarily of the cost of crude oil Rosneftpurchases from unaffiliated production companies in Russia as feedstock for its refineries and the feesRosneft pays to unaffiliated refiners who process on behalf of Rosneft crude oil produced by Rosneft’sproduction subsidiaries, as well as operating costs of Rosneft’s refineries.

Rosneft’s production subsidiaries produce limited amounts of oil in the region where theKomsomolsky refinery is located, and therefore Rosneft purchases crude oil from third parties to increasethe utilisation rate of this refinery.

Cost of Sales – Cost of Support Services and Other Sales

The Company’s cost of support services and other sales includes maintenance and repair of leasedvessels and salaries and expenses of employees involved in support services and other sales.

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Selling, General and Administrative Expenses

Rosneft’s selling, general and administrative expenses include costs related to the selling andmarketing of its products (oil, gas and refined products), salaries and related expenses. In particular,selling expenses include advertisement and market research costs, maintenance of Rosneft’s distributionnetwork, including oil storage depots and service stations, transportation costs, lease payments andmaintenance of office premises and other business expenses, including business development expensesand salaries and benefits of employees involved in sales and management. Selling, general andadministrative expenses also include provision for doubtful debts.

Exploratory Expenses

The Company follows the successful efforts method of accounting for its oil and gas exploration andproduction activities.

Lease acquisition costs related to properties held for oil and gas production are capitalised whenincurred. Unproved properties with acquisition costs, which are individually significant, are assessed on aproperty-by-property basis, and a loss is recognized, by provision of a valuation allowance, when theassessment indicates impairment in value.

Exploratory costs, excluding the costs of exploratory wells, are charged to expenses as incurred.Costs of drilling exploratory wells, including stratigraphic test wells, are capitalised pendingdetermination whether such wells have found proved reserves which justify commercial development.If such reserves are not found, the drilling costs are charged to exploratory expenses. Intangible drillingcosts applicable to productive wells and to development dry holes, as well as tangible equipment costs andcosts of injection wells related to development of oil and gas reserves, are capitalised.

Depreciation, Depletion and Amortisation Expenses

Depreciation, depletion and amortisation of the Company’s oil and gas properties is provided onthe unit-of-production method based on the ratio of current year production to total estimated futureproduction from proved developed reserves at the beginning of the period.

Estimated costs of dismantling oil and gas production facilities, including abandonment and siterestoration costs, are reserved using the unit-of-production method and included as a component ofdepreciation, depletion and amortisation.

The provision for depreciation and amortisation with respect to operations other than oil and gasproducing activities is computed using the straight-line method based on estimated economic lives.Composite depreciation rates are applied to similar types of buildings and equipment having similareconomic characteristics.

Taxes other than Income Taxes

Rosneft’s taxes other than income taxes include excise duties, royalties, property tax, mineralreplacement tax and the fines and penalties for untimely tax payments and provision for taxcontingencies.

Factors Affecting the Company’s Results of Operations

The Company’s results of operations substantially depend on:

. crude oil trading prices, which increased significantly in 1999 and 2000;

. natural gas contract prices, which declined in 1999 but which strengthened considerably in2000;

. trends in the exchange rate between the U.S. Dollar, in which the trading price of export crudeoil is generally stated, and the Rouble, in which the Company’s accounts are held and asubstantial portion of its costs are incurred; and

. the Company’s oil and gas production volumes, which in turn depend on the level of itsavailable hydrocarbon reserves and its own as well as its partners’ expertise in recovering oiland gas from those reserves.

The Company’s results will also be affected by trends in the international oil industry including:

44

. recent volatility in the levels of international oil prices and possible continued actions bymembers of the Organisation of Petroleum Exporting Countries affecting price levels;

. recent consolidation in the industry, including mergers creating so-called ‘‘super majors’’,which is increasing competition for exploration and production opportunities; and

. deregulation of the natural gas market, which may cause substantial changes to the existingmarket structure and to the overall level and volatility of prices.

Results of Operations

The following table shows certain statements of operations data, expressed in each case as apercentage of revenues, based on the US GAAP Financial Statements.

Year ended 31 December

1998 1999 2000

Consolidated Statements of OperationsRevenuesOil and gas sales............................................................................................ 55% 51% 48%Refined products and processing fees ........................................................ 27% 38% 42%Support services and other sales ................................................................ 18% 11% 10%

Total revenues .......................................................................................... 100% 100% 100%

Operating expensesCost of sales

Production costs ........................................................................................ 26% 19% 12%Cost of refined products and processing fees ...................................... 16% 10% 10%Cost of support services and other sales .............................................. 13% 11% 6%

Total cost of sales...................................................................................... 54% 40% 28%Selling, general and administrative ............................................................ 23% 17% 20%Exploratory expenses.................................................................................... 4% 1% 2%Depreciation, depletion and amortisation .............................................. . 31% 18% 9%Impairment loss ............................................................................................ 23% – –Taxes other than income taxes .................................................................. 20% 10% 8%

Total operating expenses ........................................................................ 155% 85% 67%

100% 100% 100%Operating income (expense) ...................................................................... (55%) 15% 33%Other income (expense)Interest expense ............................................................................................ 5% 2% 2%Equity share in affiliates .............................................................................. 6% – 1%Other non-operating (expenses)/income, net............................................ 8% 2% 2%Minority interest............................................................................................ 17% 1% 3%Currency translation (loss) gain.................................................................. 34% 2% –

Total other income.................................................................................... 49% 6% 1%

Six Months Ended 30 June 2001 Compared to Six Months Ended 30 June 2000

The following discussion is based on and should be read in conjunction with the Company’s RARunaudited consolidated interim financial statements for the six month periods ended 30 June 2001 and30 June 2000 appearing in Appendix A to this Offering Circular.

Revenues

Revenues increased 5% to RUB 34.2 billion in the six months ended 30 June 2001 from RUB 32.7billion in the six months ended 30 June 2000. This increase was principally due to increased sales ofrefined products, particularly in the domestic market, and higher product prices in the domestic market,partially offset by a reduction in crude oil sales.

Cost of Sales

Cost of sales increased 15% to RUB 17.1 billion in the six months ended 30 June 2001 from RUB14.9 billion in the six months ended 30 June 2000. This increase was primarily due to increased cost ofmaterials, transport expenses and selling expenses, particularly as a result of the expansion of theCompany’s distribution network.

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Year Ended 31 December 2000 Compared to Year Ended 31 December 1999

The following discussion is based on and should be read in conjunction with the US GAAPFinancial Statements.

Revenues

Revenues increased 57% to U.S.$2.5 billion in 2000 from U.S.$1.6 billion in 1999. This increase wasmainly due to a 48% increase in oil and gas sales and a 75% increase in sales of refined products andprocessing fees. These increases were principally due to higher domestic and export prices in 2000 bothfor crude oil and refined products, higher volumes of crude oil and refined products sold on the domesticand export markets and higher domestic sales volumes of gas in 2000.

Oil and Gas Sales. The Company’s oil and gas sales increased 48% to U.S.$1.2 billion in 2000 fromU.S.$796.7 million in 1999. This increase was primarily due to higher crude oil and gas prices on thedomestic and export markets in 2000, increased sales volumes of crude oil on the domestic and foreignmarkets and increased gas sales volumes on the domestic market.

Refined Products and Processing Fees. The Company’s refined product sales and processing feesincreased 75% to U.S.$1.0 billion in 2000 from U.S.$598.9 million in 1999. This increase was mainly dueto higher domestic and export refined product prices and increased sales volumes of refined products onthe domestic and foreign markets, as well as an increase in processing fees.

Support Services and Other Sales. The Company’s support services and other sales increased 41% toU.S.$245.2 million in 2000 from U.S.$174.1 million in 1999. This increase was primarily due to increasedlease payments from the chartering of vessels and increased research and development works performedfor third parties.

Operating Expenses

The Company’s operating expenses increased 24% to U.S.$1.7 billion in 2000 from U.S.$1.3 billionin 1999. This was principally due to a 93% increase in selling, general and administrative expenses and a67% increase in the cost of refined products and processing fees. The increase in selling, general andadministrative expenses resulted primarily from the increase in refined product sales and expansion of theCompany’s retail distribution network, which in turn required higher costs relating to marketing,maintenance and wages relating to Rosneft’s retail distribution network, as well as increasedtransportation costs resulting from higher volume sales. In addition, the increase resulted from anincrease of the tariff on exports of refined products. The increase in operating expenses also resulted fromincreases in taxes other than income taxes, exploratory expenses and production costs.

Cost of Sales – Production Costs. Production costs increased 4% to U.S.$303.8 million in 2000 fromU.S.$292.5 million in 1999. This increase was primarily due to an increase in the cost of electricity andother fuel and energy resources and materials used in the process of oil and gas exploration, as well ascosts related to putting idle wells into operation.

Cost of Sales – Cost of Refined Products and Processing Fees. The Company’s cost of refinedproducts and processing fees increased 67% to U.S.$254.7 million in 2000 from U.S.$152.3 million in1999. This increase was principally due to higher domestic oil prices in 2000, which increased the cost ofcrude oil purchased from third parties as feedstock for Rosneft’s refineries, the cost of electricity andother fuel and energy resources used by the refineries and an increase in inflation, which resulted in theincrease of Rosneft’s Rouble payments.

Cost of Sales – Costs of Support Services and Other Sales. Rosneft’s cost of support services andother sales decreased 16% to U.S.$142.4 million in 2000 from U.S.$170.2 million in 1999. This decreasewas mainly due to the impact of cost-cutting measures implemented by the Company.

Selling, General and Administrative Expenses. The Company’s selling, general and administrativeexpenses increased 93% to U.S.$502.0 million in 2000 from U.S.$260.0 million in 1999. This increaseresulted primarily from the increase in refined product sales and expansion of the Company’s retaildistribution network, which in turn required higher costs relating to marketing, maintenance and wagesrelating to Rosneft’s retail distribution network, as well as increased transportation costs resulting fromhigher volume sales. In addition, the increase resulted from an increase of the tariff on exports of refinedproducts.

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Exploratory Expenses. The Company’s exploratory expenses increased 132% to U.S.$37.2 million in2000 from U.S.$16.1 million in 1999. This increase was due to the increased geological and geophysicalwork performed by the Company in 2000.

Depreciation, Depletion and Amortisation. Depreciation, depletion and amortisation decreased21% to U.S.$222.4 million in 2000 from U.S.$282.9 million in 1999. This decrease was due to higher crudeoil production in 2000 and an increase in the Company’s proved developed reserves.

Taxes Other than Income Taxes. Taxes other than income taxes increased 22% to U.S.$200.3 millionin 2000 from U.S.$164.7 million in 1999. This increase was due primarily to the increase in 2000 in thevolume of crude oil and refined products sold and higher oil, gas and refined product prices in 2000, whichin turn resulted in the Company paying increased amounts of taxes and royalties.

Other Income (Expenses)

The Company’s other income decreased 82% to U.S.$17.5 million in 2000 from U.S.$94.8 million in1999. This decrease was primarily due to the significant devaluation of the Rouble in the second half of1998, which continued into 1999, but then stabilised in 2000.

Year Ended 31 December 1999 Compared to Year Ended 31 December 1998

The following discussion is based on and should be read in conjunction with the US GAAPFinancial Statements.

Revenues

Revenues increased 9% to U.S.$1.6 billion in 1999 from U.S.$1.4 billion in 1998. This increase wasprincipally due to a 56% increase in refined product sales, which was partially offset by a 0.3% decreasein crude oil sales. The increase in refined product sales was primarily due to higher domestic and exportrefined product prices and increased sales volumes of refined products on the export and domesticmarkets.

Oil and Gas Sales. Rosneft’s oil and gas sales decreased 0.3% to U.S.$796.7 thousand in 1999 fromU.S.$798.6 thousand in 1998. Although the export price for oil increased in the second half of 1999compared to 1998, Rosneft exported lower volumes of oil in the second half of 1999 while it exportedgreater volumes of oil in the first half of 1999 when oil prices were lower.

Refined Products and Processing Fees. The Company’s refined product sales and processing feesincreased 56% to U.S.$598.9 million in 1999 from U.S.$384.6 million in 1998. This increase was primarilydue to the increased sales of refined products on the domestic and export markets, as well as an increasein processing fees earned by Rosneft by processing at its refineries crude oil produced by unaffiliatedproduction companies.

Support Services and Other Sales. Rosneft’s support services and other sales decreased 33% toU.S.$174.1 million in 1999 from U.S.$258.8 million in 1998. This decrease was principally due to thedevaluation of the Rouble in 1998 which continued into 1999.

Operating Expenses

The Company’s operating expenses decreased 40% to U.S.$1.3 billion in 1999 from U.S.$2.2 billionin 1998. This was principally due to a 21% decrease in cost of sales, a 37% decrease in depreciation,depletion and amortisation and a 43% decrease in taxes other than income taxes. The decrease inoperating expenses also resulted from a 23% decline in selling, general and administrative expenses and a73% decline in exploratory expenses.

Cost of Sales – Production Costs. Production costs decreased 21% to U.S.$292.5 million in 1999from U.S.$368.4 million in 1998. This decrease was primarily due to the devaluation of the Rouble in 1998and 1999.

Cost of Sales – Cost of Refined Products and Processing Fees. The Company’s cost of refinedproducts and processing fees decreased 32% to U.S.$152.3 million in 1999 from U.S.$224.3 million in1998. This decrease was primarily due to lower oil prices in the domestic market, which resulted in adecrease in the cost of crude oil purchased from third parties by the Company for processing at itsrefineries. The decrease in domestic oil prices resulted from increased domestic supplies of oil caused bythe decrease in the export quota determined by the Government. The devaluation of the Rouble in 1998and 1999 also contributed to the decline in cost of sales.

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Cost of Sales – Cost of Support Services and Other Sales. Rosneft’s cost of support services and othersales decreased 8% to U.S.$170.2 million in 1999 from U.S.$185.1 million in 1998. This decrease wasprimarily due to the devaluation of the Rouble in 1998 and 1999.

Selling, General and Administrative Expenses. The Company’s selling, general and administrativeexpenses decreased 23% to U.S.$259.8 million in 1999 from U.S.$336.0 million in 1998. This decreaseresulted primarily from the decrease in provisions for doubtful debts, as well as the devaluation of theRouble.

Exploratory Expenses. The Company’s exploratory expenses decreased 73% to U.S.$16.1 million in1999 from U.S.$59.4 million in 1998. This decrease was due largely to the devaluation of the Rouble.

Depreciation, Depletion and Amortisation. Depreciation, depletion and amortisation decreased37% to U.S.$282.9 million in 1999 from U.S.$447.0 million in 1998. Data from new drilling anddevelopment activities and the increase in export prices for oil towards the end of 1999 resulted in anincrease in independently appraised proved developed reserves, and as such, in reduced depreciation,depletion and amortisation expenses.

Taxes Other than Income Taxes. Taxes other than income taxes decreased 43% to U.S.$164.7million in 1999 from U.S.$288.0 million in 1998. This decrease was primarily due to the decreasedprovision for tax contingencies in 1999 and the Rouble devaluation.

Other Income (Expenses)

The Company’s other income decreased 86% to U.S.$94.8 million in 1999 from U.S.$699.7 millionin 1998. This decrease was primarily due to the significant devaluation of the Rouble in the second half of1998. As a result, currency translation gains in 1999 decreased significantly compared to 1998.

Liquidity

The following discussion is based on and should be read in conjuction with the US GAAPFinancial Statements.

Net Cash Provided by Operating Activities

Net cash provided by operating activities amounted to U.S.$280.1 million in 2000 compared toU.S.$181.6 million in 1999. This 54% increase was primarily attributable to the increase in net profit,deferred income taxes and accounts payable and accrued liabilities in 2000. Net cash provided byoperating activities in 1998 amounted to U.S.$224.6 million. The 19% decrease in 1999 compared to 1998was principally due to significantly higher non-cash charges for depreciation, depletion and amortisation,as well as losses on disposals of fixed assets in 1998 as compared to 1999, partially offset by the net profitin 1999 versus a net loss in 1998. This change was also impacted by net movement in operating assets andliabilities between periods.

Net Cash Used in Investing Activities

Net cash used in investing activities amounted to U.S.$435.9 million in 2000 compared to U.S.$163.0million in 1999. This 167% increase was primarily due to increased capital and exploration expendituresand increased purchase of short-term investments in 2000, as well as cash used in the acquisition ofadditional shares in subsidiaries in 2000. Net cash used in investing activities amounted to U.S.$190.4million in 1998. The 14% decrease in 1999 compared to 1998 resulted from higher purchase of andcontribution to long-term investments in 1998, partially offset by lower capital and explorationexpenditures in 1999.

Net Cash Used in/Provided by Financing Activities

Net cash provided by financing activities amounted to U.S. $180.7 million in 2000 compared to U.S.$6.6 million in 1999. This significant increase was primarily due to the significant increase in proceedsfrom short-term debt, partially offset by increased repayment of short-term and long-term debt in 2000.Net cash used in financing activities amounted to U.S.$50.7 million in 1998 compared to U.S.$6.6 millionof net cash provided by financing activities 1999, as a result of higher repayment of short-term debt andlower proceeds from short-term debt in 1998, partially offset by higher proceeds from long-term in 1999.

In the year ended 31 December 2000, the Company paid a dividend of U.S.$14.2 million on itscommon and preferred shares. For the year ended 31 December 1999, the Company paid a

48

U.S.$2.8 million dividend on its preferred shares, and for the year ended 31 December 1998 no dividendswere paid.

Impact of Inflation

The Company’s results in recent years have been affected by inflation. At the same time this impacthas been partially offset by the increase in oil export prices and, therefore, in the increase in oil exportprofits. The 2000 inflation rate did not have a significant impact on the Company’s operating results.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (the ‘‘FASB’’) issued Statement ofFinancial Accounting Standards (‘‘SFAS’’) 133, ‘‘Accounting for Derivative Instruments and HedgingActivities’’. SFAS 133 establishes accounting and reporting standards requiring that every derivativeinstrument (including certain derivative instruments embedded in other contracts) be recorded on thebalance sheet as either an asset or liability measured at its fair value. The statement requires that changesin the derivative’s fair value be recognised currently in earnings unless specific accounting criteria aremet. If a derivative instrument qualifies for hedge accounting, the gains or losses from the derivative mayoffset results from the hedged item in the statement of operations or other comprehensive income,depending on the type of hedge. To adopt hedge accounting, a company must formally document,designate and assess the effectiveness of transactions that receive hedge accounting.

In June 2000, the FASB issued SFAS 138, ‘‘Accounting for Certain Derivative Instruments andCertain Hedging Activities’’. This Statement addresses a limited number of issues causingimplementation difficulties for numerous entities that apply SFAS 133 and this Statement amends theaccounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedgingactivities.

SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after 15 June 2000. Acompany may implement the statements as of the beginning of any fiscal quarter after issuance; however,SFAS 133 cannot be applied retrospectively.

Management of the Company considers that the adoption of SFAS 133, SFAS 137 and SFAS 138will not have a material impact on the financial position or the results of operations of the Company.

In July 2001, the FASB issued SFAS No. 141, ‘‘Business Combinations’’ and SFAS No. 142,‘‘Goodwill and Other Intangible Assets’’. SFAS No. 141 requires the use of the purchase method ofaccounting for all business combinations initiated after 30 June 2001. SFAS No. 141 requires intangibleassets to be recognised if they arise from contractual or legal rights or are ‘‘separable’’, i.e., it is feasiblethat they may be sold, transferred, licensed, rented, exchanged or pledged. As a result, it is likely thatmore intangible assets will be recognised under SFAS No. 141 than its predecessor, APB Opinion No. 16although in some instances previously recognised intangibles will be subsumed into goodwill.

Under SFAS No. 142, goodwill will no longer be amortised on a straight line basis over its estimateduseful life, but will be tested for impairment on an annual basis and whenever indicators of impairmentarise. The goodwill impairment test, which is based on fair value, is to be performed on a reporting unitlevel. A reporting unit is defined as a SFAS No. 131 operating segment or one level lower. Goodwill willno longer be allocated to other long-lived assets for impairment testing under SFAS No. 121, Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Additionally,goodwill on equity method investments will no longer be amortised; however, it will continue to be testedfor impairment in accordance with Accounting Principles Board Opinion No. 18, The Equity Method ofAccounting for Investments in Common Stock. Under SFAS No. 142 intangible assets with indefinitelives will not be amortised. Instead they will be carried at the lower cost or market value and tested forimpairment at least annually. All other recognised intangible assets will continue to be amortised overtheir estimated useful lives.

SFAS No. 142 is effective for fiscal years beginning after 15 December 2001 although goodwill onbusiness combinations consummated after 1 July 2001 will not be amortised. On adoption the companymay need to record a cumulative effect adjustment to reflect the impairment of previously recognisedintangible assets. In addition, goodwill on prior business combinations will cease to be amortised. TheCompany has not determined the impact that these Statements will have on intangible assets or whether acumulative effect adjustment will be required upon adoption.

In June 2001, the FASB issued SFAS No. 143, ‘‘Accounting for Asset Retirement Obligations’’.SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in

49

the period in which it is incurred if a reasonable estimate of fair value can be made. The associated assetretirement costs are capitalised as part of the carrying amount of the long-lived asset. An entity shallmeasure changes in the liability for an asset retirement obligation due to passage of time by applying aninterest method of allocation to the amount of the liability at the beginning of the period. The interestrate used to measure that change shall be the credit-adjusted risk-free rate that existed when the liabilitywas initially measured. That amount shall be recognised as an increase in the carrying amount of theliability and as an expense classified as an operating item in the statement of income. SFAS No. 143 iseffective for fiscal years beginning after 15 June 2002. When SFAS No. 143 is adopted the Company willneed to recognise the full amount of the estimated site restoration provision and to gross up fixed assetsby a corresponding amount. The Company is not able to currently estimate the impact that theStatement, if adopted, would have had on its statement of operations for the year ended 31 December2000 due to the fact that this is a recent release.

In August 2001, the FASB issued SFAS No. 144, ‘‘Accounting for the Impairment or Disposal ofLong-Lived Assets’’. SFAS No. 141 establishes a single accounting model for long-lived assets to bedisposed of by sale consistent with the fundamental provisions of SFAS 121 ‘‘Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of’’. Whilst it supersedesAPB Opinion 30 ‘‘Reporting the Results of operations – Reporting the Effects of Disposal of a Segmentof a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions’’ itretains the presentation of discontinued operations but broadens that presentation to include acomponent of an entity (rather than a segment of a business). However, discontinued operations are nolonger recorded at net realizable value and future operating losses are no longer recognised before theyoccur. Under SFAS No. 144 there is no longer a requirement to allocate goodwill to long-lived assets tobe tested for impairment. It also establishes a probability weighted cash flow estimation approach to dealwith situations in which there are a range of cash flows that may be generated by the asset being tested forimpairment. SFAS No. 144 also establishes criteria for determining when an asset should be treated asheld for sale.

SFAS No. 144 is effective for fiscal years beginning after 15 December 2001 and interim periodswithin those fiscal years, with early application encouraged. The provisions of the Statement are generallyto be applied prospectively. The Company currently has no plans to dispose of any operations andaccordingly, does not anticipate that adoption of SFAS No. 144 will have a material impact on its resultsof operations or its financial position.

Impact of Currency Fluctuations

Fluctuating foreign exchange rates can have a significant impact on the Company’s operatingresults. The Company’s export revenues are mainly denominated in U.S. Dollars, while its operatingexpenses accrue to a large extent in Roubles. In general, an increase in the value of the U.S. Dollaragainst the Rouble can be expected to increase Rosneft’s reported earnings. As a result, such an increasewould favour Rosneft if maintained in the longer term. However, because Rosneft’s current outstandingdebt is principally denominated in U.S. Dollars while its non-export revenues are denominated inRoubles, an accelerated devaluation of the Rouble would make it more expensive for Rosneft to serviceits U.S. Dollar denominated debt.

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CAPITALISATION

The following table sets out the consolidated capitalisation of Rosneft as at 30 June 2001 and isderived from the RAR Financial Statements of Rosneft as at 30 June 2001. Except as set forth in thenotes below, there has been no material change to the consolidated capitalisation of Rosneft since 30 June2001.

At 30 June 2001

RUB U.S.$(1)

Unaudited(in millions)

Current liabilitiesBorrowed funds .......................................................................................... 17,812 613Payables and other liabilities .................................................................... 9,583 330

Total current liabilities .................................................................................. 27,395 942

Long-term liabilities(2)

Borrowed funds .......................................................................................... 7,127 245Other long-term liabilities.......................................................................... 788 27

Total long-term liabilities .......................................................................... 7,915 272

Minority interest payable .......................................................................... 11,072 381Total liabilities ............................................................................................ 46,382 1,595

Capital and reservesShare capital ................................................................................................ 90 3Additional paid in capital .......................................................................... 13,968 481Reserves........................................................................................................ 902 31Retained earnings........................................................................................ 15,659 539

Total capital and reserves .......................................................................... 30,619 1,054

Total shareholders’ capital and liabilities................................................ 77,001 2,649

Notes:

(1) Solely for the convenience of the reader, Rouble amounts have been translated into U.S. Dollars at the rate of RUB 29.07 = U.S.$1.00, theofficial closing Rouble/U.S. Dollar exchange rate on 30 June 2001 as reported by the Central Bank.

(2) In September 2001, Sakhalinmorneftegas borrowed an additional U.S.$40 million from the EBRD under a U.S.$90 million facility. See‘‘Indebtedness’’.

For a more detailed description of the Company’s share capital, please see ‘‘Charter Capital andShareholders’’.

51

ROSNEFT

Foundation and Reorganisation

Rosneft was created as a state enterprise on 14 May 1993 in accordance with Decree 1403 andpursuant to Resolution of the Russian Government No. 357 On Foundation of State Enterprise‘‘Rosneft’’, dated 22 April 1993.

Prior to its own reorganisation Rosneft was primarily responsible for the commercial managementof State-owned blocks of shares in a number of newly created joint stock companies which were formerState-owned oil enterprises. There were approximately 50 agreements entered into by Rosneft for thecommercial management of such shares. All these agreements were terminated, primarily due to theCompany’s reorganisation into a joint stock company in 1995.

Following a decision by the Russian Government (under Resolution No. 971 On Transformation ofthe State Enterprise ‘‘Rosneft’’ into the Open Joint Stock Company ‘‘Oil Company Rosneft’’, dated29 September 1995 (‘‘Resolution 971’’)), Rosneft was officially registered as an open joint stock companyon 7 December 1995.

Under Russian law, an open joint stock company is a company whose charter capital is divided intoa number of shares certifying the rights and obligations of shareholders of the company. There can be anynumber of shareholders in an open joint stock company. Generally, shareholders are not liable for theobligations of the joint stock company and such shareholders bear the risk of losses related to theactivities of the company only to the extent of the value of shares owned by them. There may be twotypes of shares in a joint stock company, i.e., ordinary shares and preference shares. Except forextraordinary circumstances, only ordinary shares carry voting rights.

The Company’s Charter (the initial version was approved by Resolution 971 and was subsequentlyamended) permits Rosneft to undertake a wide range of activities relating to the development,production, processing, storing, transportation and sale of oil and gas and their derivative products.Rosneft undertakes such activities in conjunction with its subsidiaries and affiliated companies. TheCharter expressly authorises Rosneft to engage in scientific, technical, publishing, marketing, consultingand training activities as well as becoming involved in investment and federal state supplies. Furthermore,Rosneft may undertake other activities which are not restricted by Russian law.

Under the 1995 Charter of Rosneft, the charter capital was set in the amount of RUB90,174,900,000, which was divided into 90,174,900 ordinary shares with a nominal value of RUB 1,000per share. This capital was formed with the assets of the former state entity Rosneft and the shares in its32 subsidiaries, most of which Rosneft had previously managed as described above. These shares weretransferred to Rosneft pursuant to Resolution 971 and Resolution No. 273-r of the State PropertyManagement Committee, dated 29 February 1996. In 1998, while finalising the formalities related to theformation of the Company’s charter capital, and due to the change in face value of the currency of theRussian Federation, the amount of the charter capital was recalculated and the charter capital of Rosneftwas determined in the amount of RUB 90,179,359 and divided into 88,733,312 ordinary shares (98.4% ofthe charter capital) and 1,446,047 preference shares (1.6% of the charter capital), nominal value RUB 1.0per share. The Federal Commission on the Securities Market (the ‘‘FCSM’’) registered the reports on theissuance of both ordinary and preference shares of Rosneft on 19 March 1998.

Under Resolution 971, 51% of the shares in Rosneft were to be retained under State ownership fora period of three years, which expired on 29 September 1998.

Rosneft’s privatisation has been proposed many times and attempted in 1998, but no bidders cameforward. In the course of preparation for the investment tender in relation to Rosneft shares in 1998, 75%plus one share of Rosneft were transferred from the State Property Management Committee to theRussian Federal Property Fund (a special entity in charge, inter alia, of sales of State-owned shares duringthe course of privatisation). The investment tender was supposed to be held during the period from 5June 1998 until 21 July 1998. This term was further extended until 27 October 1998 and the term forsummarising the results of the investment tender was postponed until 30 October 1998. The investmenttender was later abolished by the Ordinance of the Russian Government No. 1557-r, dated 31 October1998 since no bidders came forward, and shares were to be transferred back to the State PropertyManagement Committee. During 1998 and 1999, blocks of Rosneft shares were transferred back andforth between the State Property Management Committee and the Ministry of Property Relations, beingthe successor of the former, on the one hand, and the Russian Federal Property Fund, on the other hand.

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As of 1 October 2001, all of the Rosneft shares are held by the State. Currently 75% less one shareare held by the Ministry of Property Relations and 25% plus one share are held by the Russian FederalProperty Fund.

As of 1 October 2001, Rosneft holds shares and participatory interests in 67 companies (includingoriginal subsidiaries), mostly connected with the oil and gas industry. Forty-three of these 67 companiesare currently Rosneft subsidiaries. Further, of Rosneft’s initial 32 subsidiaries, 26 remain under Rosneft’scontrol, two of which are being liquidated, and six companies ceased to be Rosneft’s subsidiaries throughliquidation, bankruptcy or other procedures.

Structure

As of 1 October 2001, the Rosneft corporate structure included the following 43 subsidiaries:

Rosneft share in the charter capital

No. Name and major type of activity

Charter capital(RUB thousands,with mentioned

exceptions)

RUB thousands(unless otherwise

indicated)

% in the chartercapital / % ofvoting shares

1. OJSC Rosneft-DagneftExploration and development of oil and gas fields,production of oil and gas

534.319 203.041 38/50.67

2. OJSC Rosneft-KrasnodarneftegasExploration and development of oil and gas fields,production of oil and gas

111,138.700 42,232.7 38/50.67

3. OJSC Rosneft-PurneftegasExploration and development of oil and gas fields,production of oil and gas

4,454.641 3,199.297 71.8/76.53

4. OJSC Rosneft-SakhalinmorneftegasExploration and development of oil and gas fields,production of oil and gas

3,249.647 1,739.282 53.52/71.3

5. OJSC Rosneft-StavropolneftegasExploration and development of oil and gas fields,production of oil and gas

480.990 218.976 45.53/57.29

6. OJSC Rosneft-TermneftExploration and development of oil and gas fields,production of oil and gas

108.986 41.415 38/50.67

7. OJSC Rosneft-Komsomolsky RefineryRefining

236.439 151.886 64.24/65.87

8. OJSC Rosneft-Tuapse RefineryRefining

364.356 141.531 38.84/51.79

9. OJSC MOPZ NefteproductOil products production(production of special oils and lubricants)

22,384.32 14,644.616 65.42/87.23

10. OJSC Rosneft-AltainefteproductMarketing and distribution

90,080.88 34,230.624 38/50.67

11. OJSC ARTAGMarketing and distribution

79.249 30.115 38/50.67

12. OJSC Rosneft-ArkhangelsknefteproductMarketing and distribution

136.663 51.932 38/50.67

13. OJSC Rosneft-KabbalknefteproductMarketing and distribution

75.896 28.840 38/50.67

14. OJSC Rosneft-Karachaevo-CherkessknefteproductMarketing and distribution

98.480 84.686 58.398/50.67

15. OJSC Rosneft-KubannefteproductMarketing and distribution

200.211 76.080 38/50.67

16. OJSC Rosneft-KurgannefteproductMarketing and distribution

8,292.894 3,151.298 38/50.67

17. OJSC Rosneft-KemerovonefteproductMarketing and distribution

209.746 79.703 38(undergoingbankruptcyprocedures)

18. OJSC Rosneft-MurmansknefteproductMarketing and distribution

220.532 83.802 38/50.67

19. OJSC Rosneft-NakhodkanefteproductMarketing and distribution

22,596.0 8,586.400 38/50.67

20. OJSC Rosneft-SmolensknefteproductMarketing and distribution

76.93 29.233 38/50.67

21. OJSC Rosneft-SevernefteserviceMarketing and distribution

42.947 24.25 54.46

22. OJSC Rosneft-TuapsenefteproductMarketing and distribution

266.994 101.458 38/50.67

23. OJSC Rosneft-YamalnefteproductMarketing and distribution

49.331 24.429 49.52

53

Rosneft share in the charter capital

No. Name and major type of activity

Charter capital(RUB thousands,with mentioned

exceptions)

RUB thousands(unless otherwise

indicated)

% in the chartercapital / % ofvoting shares

24. OJSC Rosneft-NeftegazsnabMaterial resources supplies

0.104 0.0395 38(being

liquidated)

25. OJSC Rosnefteimpex NK RosneftExport, import, re-export, barter, commercial operationswith oil and oil products

12.413 4.717 38/50.67

26. OJSC Rosneft-CKB ASU NefteproductScientific and technical support of oil marketing anddistribution companies

9.034 3.433 38/50.67

27. OJSC Rosneft-NeftekomplectMaterial resources supplies

41.892 15.919 38/50.67

28. CJSC VostokshelfParticipation in the ‘‘Sakhalin-3’’ project

20.0 20.0 100

29. LLC Rosneft-International Ltd.Participation in and management of international projects

10,000.0 Irishpounds

10,000.0 Irishpounds

100

30. OJSC Rosneft-GrozneftegasGeological exploration, production, transportation andrefining of oil

83.49 83.49 100

31. LLC Rosneft-Krasnodar Oil departmentOil products storage and sale

100.0 100.0 100

32. LLC SK NeftepolisInsurance

25,000.0 24,790.0 99.16

33. LLC RN-PerspektivaProduction of oil and services on calculation of naturalresources reserves

8.4 8.316 99

34. LLC RN-KazakhstanExploration of oil, gas and condensate fields; production,transportation and sale of oil, gas and condensate

100.0 99.0 99

35. LLC Rosneft-TeleportInformation technologies, communication devices services

8.4 8.316 99

36. CJSC RN-AstraDevelopment, production and sale of hydrocarbon rawmaterials

10.0 9.9 99

37. LLC RosneftetransGoods transportation arrangement

8.4 7.98 95

38. CJSC Rosneft-YugshelfCrane ship ‘‘Ispolin’’ construction

173.3 130.0 75

39. OJSC All-Russian Bank for Reconstruction andDevelopmentBanking activity

575,000.0 330,000.0 57.39

40. OJSC Rosneft-SakhalinParticipation in the ‘‘Sakhalin-1’’ project

200.0 110.0 55

41. LLC Rosneft Shell Caspian Ventures LimitedProduction and sale of oil, participation in the CaspianPipeline Consortium

U.S.$.10,000.0 U.S.$5,100.0 51

42. CJSC Trade House NK RosneftTrade and supplies

200.0 102.0 51(being

liquidated)43. CJSC FK Rosneft-Finance 2,150.0 1,000.0 46.5

Significant Subsidiaries

Rosneft has two significant subsidiaries, both responsible for the exploration, development andproduction of oil and gas reserves. These subsidiaries are OJSC Rosneft-Purneftegas (‘‘Purneftegas’’) andOJSC Rosneft-Sakhalinmorneftegas (‘‘Sakhalinmorneftegas’’) (together the ‘‘Significant Subsidiaries’’).

Purneftegas and Sakhalinmorneftegas are the largest subsidiaries in terms of assets and revenuecontributions to Rosneft. Apart from its interest in the Significant Subsidiaries, Rosneft has equityinterests in several other entities as described in this section. None of these other interests currently hasan equal material effect on the financial position or results of operations of the Company.

Rosneft has over time increased its shareholding in both Significant Subsidiaries. As a result, as of1 October 2001, Rosneft has a controlling interest in each of the Significant Subsidiaries.

The composition of the charter capital of the Significant Subsidiaries is as follows:

l Purneftegas – 83,524,525 ordinary shares (75% of the charter capital), and 27,841,500preference shares (25% of the charter capital);

54

l Sakhalinmorneftegas – 60,987,925 ordinary shares (75% of the charter capital), and 20,253,250preference shares (25% of the charter capital).

The shareholding of Rosneft in the Significant Subsidiaries as of 1 October 2001 is as follows:

TotalNumber of

RosneftOwnership of

Rosneft %Ownership of

SubsidiaryOrdinary

SharesPreference

SharesOrdinary

SharesPreference

SharesOrdinary

SharesPreference

Shares

Purneftegas ................ 83,524,525 27,841,500 63,922,234 16,060,182 76.53 57.7Sakhalinmorneftegas. 60,987,925 20,253,250 43,482,061 0 71.3 0

The other ordinary and preference shares of each of the Significant Subsidiaries are held by avariety of other persons including the management of the relevant Significant Subsidiary, privateindividuals and Russian and foreign companies. Rosneft intends to increase its share in Purneftegas andSakhalinmorneftegas up to 81.01% and 83.10% of the voting shares, respectively.

History of the Significant Subsidiaries

Purneftegas

Purneftegas is one of Rosneft’s oil and gas exploration and production subsidiaries. Its predecessorwas established in 1986 as a production association for the development of oil fields in the Yamalo-Nenetskii Autonomous Region. Pursuant to Decree 1403, the State-owned Production AssociationPurneftegas was transformed into an open joint stock company and registered as such on 14 October1993. Being repeatedly renamed, it was finally registered in Yamalo-Nenetskii Autonomous Region asOJSC Rosneft-Purneftegas on 21 May 1997.

The privatisation plan of Purneftegas followed the standard pattern developed for other Russian oilcompanies. The plan provided that 50.65% of Purneftegas’ ordinary shares (38% of its total chartercapital) would be retained by the State for a period of three years. These shares were transferred underthe commercial management of Rosneft in February 1994. The other ordinary shares and all preferenceshares were sold to investors and distributed to employees and management of Purneftegas in 1994 and1995. Pursuant to Resolution of the Russian Government No. 452, dated 5 May 1994, the State-ownedshares in Purneftegas were transferred to the charter capital of SIDANCO oil company.

On 24 January 1995, 38% of the shares in Purneftegas were excluded from the charter capital ofSIDANCO by Ordinance of the Russian Government No.112-r, dated 24 January 1995. These shareswere returned under the commercial management of Rosneft on 26 January 1995 and on 1 March 1996were contributed to the charter capital of Rosneft, as provided in Resolution 971.

Purneftegas shares are traded on the Russian Trade System and the St. Petersburg Stock Exchange.

At the annual general meeting of Purneftegas shareholders held on 23 October 2000, theshareholders defined the number of authorised shares in the amount of 120 billion ordinary shares and40 billion preference shares, nominal value of 4 kopecks (0.04 Roubles) each, which may be issued upon adecision of the board of directors of Purneftegas.

Sakhalinmorneftegas

Sakhalinmorneftegas is an oil and gas exploration and production subsidiary of Rosneft, which isalso the oldest oil and gas production company in Russia. Its initial predecessor was established in 1928 todevelop oil fields in Sakhalin. Currently Sakhalinmorneftegas produces oil located in Sakhalin’s oil fieldsand in the continental shelf.

Under Decree 1403, the State Production Association for Oil and Gas ExtractionSakhalinmorneftegas was transformed into an open joint stock company and registered as such on24 March 1994.

The privatisation plan of Sakhalinmorneftegas followed the standard pattern developed for otherRussian oil companies. The privatisation plan provided that 50.65% of Sakhalinmorneftegas’ ordinaryshares (38% of its total charter capital) would be retained by the State for three years. The other ordinaryshares and all preference shares were sold to private investors and distributed among the employees andmanagement of Sakhalinmorneftegas. The State-owned shares in Sakhalinmorneftegas were under the

55

commercial management of Rosneft. In 1996, pursuant to Resolution 971, the State-owned shares inSakhalinmorneftegas were transferred to Rosneft as a contribution to the charter capital of Rosneft.

Sakhalinmorneftegas shares are traded on the Russian Trade System and the Moscow InterbankCurrency Exchange.

At the general meeting of Sakhalinmorneftegas shareholders held on 28 April 1999, theshareholders authorised a further issuance of 42,691,547,500 ordinary shares and 14,177,275,000preference shares, which may be issued upon a decision of the board of directors of Sakhalinmorneftegas.

56

BUSINESS

Overview

Rosneft is a vertically integrated petroleum company with upstream, midstream and downstreamoperations based principally in Russia. Rosneft is active in the exploration and development of crude oiland natural gas fields.

As of 31 December 2000, Rosneft had net proved developed and undeveloped reserves in theRussian Federation of approximately 138.9 million tonnes of crude oil and condensate (or 1,021.6 millionbarrels) and 25,182.3 million cubic metres of natural gas.

In 2000, Rosneft’s production subsidiaries produced 13,117 thousand tonnes of crude oil andcondensate, representing 4.1% of the total production of crude oil and condensate in the RussianFederation in 2000 and making Rosneft the seventh largest Russian oil producer. In 2000, Rosneftpurchased 76% of the crude oil produced by its subsidiaries. Rosneft also purchases crude oil from otherRussian producers. The oil purchased from Rosneft’s production subsidiaries and third parties is (1)exported, (2) consumed or used internally as feedstock in Rosneft’s refining operations, (3) sold to thirdparties in the Russian Federation and (4) delivered to third party refiners in Russia who process the crudeinto refined products for Rosneft. Rosneft’s share in total Russian exports of crude oil in 2000 was 5.6%.Rosneft produced 5,581.6 million cubic metres of gas in 2000, representing approximately 1% of the totalproduction of natural gas in the Russian Federation. Of the amount, 3,282.5 million cubic metres wasnon-associated gas.

Rosneft is one of the major refiners of petroleum products in the Russian Federation. Rosneftoperates two crude oil refineries and a specialised refinery which produces a number of lubricants andoils. In 2000, Rosneft’s refineries processed 7,097,500 tonnes of crude oil, making Rosneft the tenthlargest refiner in the Russian Federation in 2000 on the basis of crude oil processed. Rosneft’s refineriesproduce gasoline, diesel, jet fuel, fuel oil and other refined products. Rosneft’s two crude oil refineriesoperated at 84% and 62% of capacity, respectively, in 2000. In addition, Rosneft delivers a portion of thecrude oil it purchases from its production subsidiaries to third party refineries that process the crude intorefined products on behalf of Rosneft for a fee. These refined products, together with the refined productoutput from Rosneft’s refineries and refined products purchased from unaffiliated parties, are sold towholesale customers in the Russian Federation, through Rosneft’s retail network of service stations andare also sold for export. Rosneft’s refineries also process crude oil on behalf of other Russian oilproduction companies who pay a processing fee to Rosneft’s refineries for processing their crude oil intorefined products.

Rosneft has one of the largest distribution networks for refined products in the Russian Federationconsisting of 89 petroleum storage depots and approximately 558 operational retail service stations(which also offer storage services) as of 30 June 2001. Rosneft has also started franchising the Rosneftbrand to approximately 100 service stations that are operated by third parties. This distribution networkcovers 13 constituent entities of the Russian Federation, which are located in Western Siberia, SakhalinIsland, North Caucasus and the Arctic regions of Russia. Rosneft also sells its refined products through itswholesale distribution network.

Strategy

Rosneft’s long-term strategy is to reinforce its position as a leading Russian vertically integrated oiland gas company by increasing its production, refining and marketing of oil and gas in Russia anddeveloping its international operations. The key elements of this strategy include the following:

Increasing production of oil and gas in Russia. Rosneft aims to increase its oil and gas production byapproximately 5% per annum by: (i) increasing the yield of its existing fields by recommencingproduction from inactive wells and employing improved extraction and bed stimulation technologies, (ii)improving the efficiency of its producing wells by reducing idle periods and bolstering well maintenanceand workover programmes, (iii) participating in major new oil field development projects, particularly inWestern Siberia and off Sakhalin Island (including through participation in production sharingarrangements and joint ventures with international oil companies to manage operational and financialrisks associated therewith) and (iv) continuing to drill new wells and pursue the acquisition of additionalreserves. In addition, over the next five to ten years Rosneft aims to substantially increase the proportionof its total revenues generated by the production and sale of natural gas, with a particular focus on servingthe growing markets of the Russian Far East, Japan, Korea and China.

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Improving its refining and marketing operations. Rosneft intends to invest substantially in themodernisation of its existing refineries in order to (i) increase refining capacity and improve capacityutilisation, (ii) broaden the range of lighter and higher-value refined products produced and (iii) ensurethat products can meet increasingly stringent environmental requirements in Russian and overseasmarkets. In addition, Rosneft plans to upgrade and expand its network of retail service stations in certainregions in Russia so as to secure additional domestic distribution channels for its expanded refineryoutput and derive additional margins from the sale of refined products. The minimum investmentprogramme is expected to be implemented by Rosneft if the crude oil price does not fall under U.S.$17per barrel, and the maximum planned investment programme is expected to be implemented by Rosneftif the crude oil price maintains a level of U.S.$22 per barrel.

Developing its international and other operations. With a view to broadening its reserve base,Rosneft will seek to identify international opportunities and to participate, together with foreign jointventure partners, in the exploration and development of oil and gas fields outside Russia. In the longterm, Rosneft may consider investing in other fuel and energy businesses in Russia with a view tostrengthening its overall position in the Russian energy market.

Enhancing financial controls and improving efficiency of corporate governance. Rosneft intends toimprove its financial controls and risk management so as to be able to manage more precisely theoperational and financial risks associated with its business. In addition, Rosneft will seek to ensure that itslenders and investors benefit from financial and accounting transparency (through the adoption ofinternational accounting practices by all members of its group and more regular consolidated financialreporting). Rosneft also intends to improve the flexibility of its corporate organisational structure,improve its investment planning system, introduce a cost management and financial risk managementsystem and install a SAP R/3 corporate management information system.

Developing new technologies. Rosneft plans to continue investing in proprietary research anddevelopment projects and to otherwise seek out new technologies which will enable it to improve oil andgas production, ensure maintenance of high standards of environmental safety and reduce the negativeimpact on the environment of exploration and production activities.

Exploration and Production

Rosneft explores for, develops and produces crude oil and natural gas in six constituent entities ofthe Russian Federation.

Licences

Within Russia, Rosneft held, as of 1 October 2001, a total of 219 licences comprising 142 productionlicences, 70 combined exploration and production licences and seven exploration licences for theexploration of undeveloped reserves.

Licensing of the oil industry in Russia is complex and involves federal, regional and localauthorities. Until January 2000 (when substantial amendments to the Subsoil Law were introduced),exploration licences were typically granted for five years, while production licences were granted fortwenty years and combined exploration and production licences were granted for twenty five years. Mostof the Rosneft licences and licences of its subsidiaries were issued prior to January 2000 for the termsmentioned above.

Following amendments made to the Subsoil Law, exploration licences are currently issued for amaximum term of five years and production licences for as long as required (as shown in the feasibilitystudy) for rational full exploitation of the deposit. No term for combined exploration and productionlicences is expressly provided for in the current version of the Subsoil Law, but the Russian Ministry ofNatural Resources issues combined licences for the term contemplated for production licences. Upondiscovery of oil, a production licence is issued without a tender to a holder of the exploration licence. See‘‘Overview of the Russian Oil and Gas Industry – Regulation of the Oil and Gas Industry – Licencing’’.In general, Rosneft’s exploration licences may be renewed for an additional two-year term uponapplication prior to expiration of the original term. The regulatory conditions applicable to the operationsof an oil company in a particular location depend on the relevant local, regional and federal authoritiesand that company.

A licencee is ordinarily required to make a number of commitments, including a commitment tomaintain oil production at a certain level each year (applicable only to production and combined licenceholders) and to keep environmental pollutants within specified limits. The terms of Rosneft’s productionand combined licences require it to maintain the exploration works, and levels of oil and gas production

58

for each field in accordance with the feasibility study approved by the Central Commission on the FieldsDevelopment of the Russian Ministry of Energy.

Rosneft is obligated to make a progressive annual minimum exploration investment relating to theexploration blocks in respect of which the exploration licences are issued.

Rosneft’s most important licences are held through its Significant Subsidiaries, Purneftegas andSakhalinmorneftegas, which hold 16 and 37 subsoil licences, respectively, of which Purneftegas holds 12combined production and exploration licences and four exploration licences, and Sakhalinmorneftegasholds 30 production licences, six combined production and exploration licences and one explorationlicence. Two exploration licences for fields located in the Astrakhanskaya Region have been revokedupon the Company’s initiative, since the Company, after in-depth exploration of these fields, found themprospectless.

Oil and Natural Gas Reserves

Rosneft’s reserves are held through its seven exploration and production subsidiaries:

. Purneftegas;

. Sakhalinmorneftegas;

. OJSC Rosneft-Krasnodarneftegas (‘‘Krasnodarneftegas’’);

. OJSC Rosneft-Stavropolneftegas (‘‘Stavropolneftegas’’);

. OJSC Rosneft-Dagneft (‘‘Dagneft’’);

. OJSC Rosneft-Termneft (‘‘Termneft’’); and

. OJSC Rosneft-Grozneftegas (‘‘Grozneftegas’’).

Grozneftegas reserves are accounted in Rosneft’s reserves starting from 2000. Prior to 2000 it wasimpossible to audit these reserves due to the military conflict followed by the state of emergency in theChechnya region, where Grozneftegas reserves are located.

All of Rosneft’s oil and gas reserves are located entirely in the Russian Federation. Historically,Rosneft has estimated its hydrocarbon reserves in accordance with Russian classifications andmethodologies, which only take into account the technical factors of extracting reserves. In 1999 and2000, Rosneft engaged DeGolyer and MacNaughton, a U.S. oil and gas consulting firm based in Dallas,Texas, to conduct an independent evaluation of Rosneft’s crude oil and condensate as well as natural gasreserves taking into account both technical and economic factors using U.S. reserves classifications andmethodologies. The reserves reports prepared by DeGolyer and MacNaughton as at 31 December 1999(the ‘‘1999 Reserves Report’’) and at 31 December 2000 (the ‘‘2000 Reserves Report’’ and, together withthe 1999 Reserves Report, the ‘‘Reserves Reports’’) evaluate the reserves held by Rosneft’s Purneftegas,Sakhalinmorneftegas, Krasnodarneftegas and Stavropolneftegas subsidiaries. Rosneft estimates thatapproximately 92% of its hydrocarbon reserves are held through these four subsidiaries and accordinglyselected the reserves of these four subsidiaries to be evaluated by DeGolyer and MacNaughton. Theinformation below sets forth Rosneft’s proved hydrocarbon reserves based on U.S. reserves classificationsand methodologies as set forth in the Reserves Reports, as well as Rosneft’s internal estimates of itshydrocarbon reserves based on Russian classifications and methodologies, which include the reserves ofall seven exploration and production subsidiaries listed above.

U.S. Reserves Classification

Rosneft’s net proved reserves as evaluated by DeGolyer and MacNaughton at 31 December 2000were 1,021.6 million barrels of crude oil and condensate and 25,182.3 million cubic metres of natural gas,an increase of 31% in crude oil and condensate reserves and a 38% increase in natural gas reservescompared to 31 December 1999.

The following table, derived from the Reserves Reports, sets forth Rosneft’s net interest in thecrude oil and condensate and natural gas proved developed and undeveloped reserves of its principalexploration and production subsidiaries as at 31 December 1999 and 2000:

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Crude Oiland

Condensate

Crude Oiland

Condensate Natural Gas

Barrels (inmillions)

Tonnes (inthousands)

CubicMetres

(in millions)

Proved Developed and Undeveloped ReservesReserves at 31 December 2000Purneftegas

Developed ...................................................................................... 488.8 65,914.9 7,887.9Undeveloped .................................................................................. 367.2 50,029.8 6,697.4

SakhalinmorneftegasDeveloped ...................................................................................... 54.6 7,723.3 7,262.3Undeveloped .................................................................................. 38.1 5,389.6 2,275.3

KrasnodarneftegasDeveloped ...................................................................................... 41.2 5,685.3 1,059.5Undeveloped .................................................................................. – – –

StavropolneftegasDeveloped ...................................................................................... 31.7 4,197.8 –Undeveloped .................................................................................. – – –

TotalDeveloped ...................................................................................... 616.3 83,521.3 16,209.7Undeveloped .................................................................................. 405.3 55,419.4 8,972.7

Total Proved ...................................................................................... 1,021.6 138,940.7 25,182.3

Reserves at 31 December 1999Purneftegas

Developed ...................................................................................... 356.2 48,601.0 6,309.0Undeveloped .................................................................................. 339.0 46,904.0 6,447.0

SakhalinmorneftegasDeveloped ...................................................................................... 39.8 5,628.0 4,276.0Undeveloped .................................................................................. 19.5 2,762.0 858.0

KrasnodarneftegasDeveloped ...................................................................................... 13.7 1,844.0 348.6Undeveloped .................................................................................. – – –

StavropolneftegasDeveloped ...................................................................................... 13.9 1,888.8 –Undeveloped .................................................................................. – – –

TotalDeveloped ...................................................................................... 423.6 57,961.8 10,933.6Undeveloped .................................................................................. 358.5 49,666.0 7,305.0

Total Proved ...................................................................................... 782.1 107,627.8 18,238.6

Rosneft’s net interest in the proved reserves of its principal exploration and production subsidiariesset forth in the foregoing table is calculated on the basis of its percentage ownership of the charter capitalof each such subsidiary as of 31 December 2000. As of 31 December 2000, Rosneft owned 38.0%, 57.2%,38.0% and 45.5%, of the charter capital of Purneftegas, Sakhalinmorneftegas, Krasnodarneftegas andStavropolneftegas, respectively. Since that time, Rosneft has increased its ownership interest inPurneftegas and decreased its ownership interest in Sakhalinmorneftegas, and as of 1 October 2001 itowned 71.8% and 53.5% of the charter capital of Purneftegas and Sakhalinmorneftegas, respectively. See‘‘Rosneft – Significant Subsidiaries’’. Accordingly, Rosneft’s net interest in the proved reserves of thesesubsidiaries is expected to increase in future year end periods assuming Rosneft maintains its increasedownership interest in Purneftegas.

Oil and gas proved reserves cannot be measured precisely. Reserve estimates are based on manyfactors related to reservoir performance which require evaluation by engineers interpreting the availabledata, as well as price and other economic factors. The reliability of these estimates at any point in timedepends on both the quality and quantity of the technical and economic data, the productionperformance of the reservoirs as well as extensive engineering judgement. Consequently, reserve

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estimates are subject to revision as additional data become available during the producing life of areservoir. When a commercial reservoir is discovered, proved reserves are initially determined based onlimited data from the first well or wells. Subsequent data may better define the extent of the reservoir andadditional production performance, well tests and engineering studies will often improve the reliability ofthe reserve estimate.

Russian Reserves Classification

The following table sets forth Rosneft’s internal estimates of the total crude oil and non-associatedgas reserves of its seven exploration and production subsidiaries and Rosneft’s net interest in suchreserves as of 31 December 1998, 1999 and 2000 calculated in accordance with the Russian classificationA, B and C1. See ‘‘Overview of the Russian Oil and Gas Industry – Russian Classification of Reserves’’for a description of the Russian reserves classification system. Rosneft’s net reserves are calculated on thebasis of Rosneft’s share in the charter capital of each of its subsidiaries as of 31 December 1998, 1999 and2000. Since 31 December 2000, Rosneft has increased its ownership interest in Purneftegas and decreasedits ownership interest in Sakhalinmorneftegas. Rosneft’s net interest in the reserves of these subsidiariesis expected to be higher in subsequent periods.

Crude Oiland

Condensate

Non-Associated

Gas

Tonnes (inmillions)

CubicMeters

(in billions)

Reserves at 31 December 2000Total ........................................................................................................................ 780.6 938.0Rosneft.................................................................................................................... 339.2 375.0

Reserves at 31 December 1999Total ........................................................................................................................ 731.3 916.7Rosneft.................................................................................................................... 277.9 348.3

Reserves at 31 December 1998Total ........................................................................................................................ 745.3 917.7Rosneft.................................................................................................................... 283.2 348.7

Major Fields

Rosneft’s 219 licences cover a total of 223 oil and gas fields. However, Rosneft’s proved reserves areconcentrated in a small number of fields. Almost 60% of Rosneft’s net proved crude oil and condensatereserves are located in four fields and 40% of its net proved natural gas reserves are concentrated in threefields.

The following table sets forth Rosneft’s net interest in the crude oil and natural gas proveddeveloped and undeveloped reserves of its exploration and production subsidiaries as of 31 December2000 by major field. Each of the fields listed below is owned by Rosneft’s Purneftegas subsidiary, otherthan the Uzlovoye field which is owned by Sakhalinmorneftegas:

ProvedReserves of

Crude Oiland

Condensate

ProvedReserves of

Crude Oiland

Condensate

% of TotalRosneft Net

ProvedReserves

Barrels(in millions)

Tonnes(in millions)

(%)

FieldKomsomolskoye ............................................................................ 170.1 22.7 16.7North Komsomolskoye ................................................................ 169.7 23.6 16.6Tarasovskoye.................................................................................. 149.8 19.6 14.7Barsukovskoye .............................................................................. 115.3 16.2 11.3

Total .................................................................................................... 604.9 82.1 59.2

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ProvedReserves of

Natural Gas

% of TotalRosneft Net

ProvedReserves

CubicMetres

(in millions)

(%)

FieldNorth Komsomolskoye ........................................................................................ 4,670.0 18.5Tarasovskoye.......................................................................................................... 2,995.3 11.9Uzlovoye ................................................................................................................ 2,469.2 9.8

Total ............................................................................................................................ 10,134.5 40.2

Komsomolskoye field. The Komsomolskoye field is a high temperature and high pressure oil fieldthat lies in the Yamalo-Nenetskii Autonomous Region and has been developed since 1988. Rosneft’s netinterest in the proved reserves of this field was 170.1 million barrels of oil and condensate and 1,315.4million cubic metres of natural gas as at 31 December 2000. 238 wells have been drilled in this field.Through 31 December 2000, a total of 4.9 million tonnes of crude oil has been extracted from this field,representing 4.0% of the total recoverable reserves in this field (based on Russian reserve classificationA, B and C1). In 2000, 517.6 thousand tonnes of oil was extracted from this field.

Initially, the Company planned to use advanced experimental oil extraction technology in theKomsomolskoye field and to attract a partner to develop the field on PSA terms. However, in 1994 thefurther exploratory drilling works were stopped due to the complicated extraction technology and failureto arrange a PSA. In 1999 the drilling resumed. The main impediment to production and development ofthis field has been the separation of beds. Accordingly, Rosneft is currently conducting research anddevelopment to develop technology of casing the controlled directional wells to overcome thisimpediment.

North Komsomolskoye field. The North Komsomolskoye field is located in the Yamalo-NenetskiiAutonomous Region, and is currently under the first stage of development. It has been developed since 1995.Rosneft’s net interest in the proved reserves of this field was 169.7 million barrels of oil and condensate and4,670.0 million cubic metres of natural gas as at 31 December 2000. Through 31 December 2000, a total of 1.2thousand tonnes of oil and 73.3 thousand tonnes of condensate has been extracted from this field. Extractionof oil and condensate from this field involves implementation of such advanced technologies as thermal bedstimulation, which is the subject of an on-going research and development project.

Tarasovskoye field. The Tarasovskoye field is located in the Yamalo-Nenetskii AutonomousRegion. This field has been developed since 1986 and is the most productive oil field of all thosedeveloped by Purneftegas, with total oil production through 31 December 2000 exceeding 50 milliontonnes. Rosneft’s net interest in the proved reserves of this field was 149.8 million barrels of oil andcondensate and 2,995.3 million cubic metres of natural gas as at 31 December 2000. Separate resevoirscontain large amounts of non-associated gas, which may be developed subsequently by the Company. TheTarasovskoye field is a maturing field and since 1991 the amount of oil extracted from this field each yearis constantly decreasing. Through 31 December 2000, in excess of 50.0 million tonnes of crude oil hasbeen extracted from this field, representing 39% of the total recoverable reserves in this field (based onRussian reserve classification A, B and C1). In 2000, 2.3 million tonnes of oil was extracted from this field.

Barsukovskoye field. The Barsukovskoye field is located in the Yamalo-Nenetskii AutonomousRegion. It has been developed since 1987. Rosneft’s net interest in the proved reserves of this field was115.3 million barrels of oil and condensate and 874.6 million cubic metres of natural gas as at31 December 2000. The gas reserves mostly consist of associated gas, however, there is also some non-associated gas present. 1,401 wells are currently drilled at the field, 646 of which are productive. Through31 December 2000, a total of 28.6 million tonnes of crude oil has been extracted from this field,representing 37% of the total recoverable reserves in this field (based on Russian reserve classification A,B and C1). In 2000, 2.3 million tonnes of oil was extracted from this field, a 2% decrease from amountsextracted in 1999. Production in this field has declined each year since 1995 and is expected to continue todecline further in the future.

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In 2000, new exploration and development technologies and new chemical reagents, such asTemposcrean, Neftelon NZ and Inol EM, were introduced to increase the production capacity ofreservoirs in this field.

All Purneftegas crude oil reserves have low sulphur content, ranging from 0.28% to 0.58%.

The Tarasovskoye and Barsukovskoye fields are maturing fields and therefore oil production inthese fields is expected to gradually decline. At the same time, the Komsomolskoye and NorthKomsomolskoye fields are relatively new fields where production is or is expected to gradually increase inthe future. Thus, as production in the Tarasovskoye and Barsukovskoye declines, Rosneft expects thatthis decline will be offset by increasing production in the future from the Komsomolskoye, NorthKomsomolskoye and other fields.

Uzlovoye gas field. The Uzlovoye gas field is located on the shore of Sakhalin Island. The field wasdiscovered in 1969, and its development started in 1997. The reserves in this field are largely gas reserves.Rosneft’s net interest in the proved natural gas reserves of this field was 2,469.2 million cubic metres as at31 December 2000.

The gas from the Uzlovoye field is being extracted by 15 wells. In 2000, 449.4 million cubic metres ofnon-associated gas and 7.7 thousand tonnes of condensate were extracted from the field. Through31 December 2000, a total of 26.1 thousand tonnes of condensate and 1.375 billion cubic metres of non-associated gas has been extracted from this field.

Oil and Gas Production

In 2000, Rosneft produced 4.1% of the total volume of crude oil and condensate extracted in theRussian Federation and approximately 1% of the total volume of natural gas extracted in the RussianFederation.

Production Data

The following tables set forth the gross average daily production of oil and condensate and non-associated gas of Rosneft’s exploration and production subsidiaries for the years ended 31 December1998, 1999 and 2000:

Year ended 31 December

1998 1999 2000

(in tonnes)

Average daily oil and condensate productionPurneftegas .................................................................................... 22,752 22,492 24,456Sakhalinmorneftegas .................................................................... 4,018 3,984 4,025Krasnodarneftegas ........................................................................ 2,958 3,014 3,298Stavropolneftegas .......................................................................... 2,486 2,521 2,787Dagneft .......................................................................................... 986 988 892Termneft ........................................................................................ 353 354 362Grozneftegas .................................................................................. – – 154

Total production ................................................................................ 33,553 33,353 35,974

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Year ended 31 December

1998 1999 2000

Cubic Metres (in thousands)

Average daily non-associated gas productionSakhalinmorneftegas .................................................................... 4,180 3,882 3,954Dagneft .......................................................................................... 1,679 1,901 1,884Krasnodarneftegas ........................................................................ 1,129 1,266 2,339Purneftegas .................................................................................... 376 516 609Stavropolneftegas .......................................................................... 92 109 118Termneft ........................................................................................ 77 68 64Grozneftegas .................................................................................. – – –

Total production ................................................................................ 7,533 7,742 8,968

Production Cost Data

The following table sets forth for each of Rosneft’s exploration and production subsidiaries(excluding Grozneftegas which commenced producing crude oil in limited amounts in 2000) the averageproduction costs per tonne of crude oil and per thousand cubic meters of natural gas produced for theyears ended 31 December 1998, 1999 and 2000:

PurneftegasStavropol-

neftegasKrasnodar-

neftegasSakhalinmor-

neftegas Termneft Dagneft

(RUB)

For the year ended 31 December 1998Average production costs per

tonne of crude oil............................................ 318.6 428.5 375.4 533.5 592.0 400.3

Average production cost per thousand cubicmeters of gas .................................................... 157.0 157.0 84.0 120.7 169.8 73.8

For the year ended 31 December 1999Average production costs per

tonne of crude oil............................................ 471.6 715.0 1,107.0 992.8 1,407.1 1,115.5

Average production cost per thousand cubicmeters of gas .................................................... 182.4 156.1 121.1 123.9 206.4 102.5

For the year ended 31 December 2000Average production costs per

tonne of crude oil............................................ 677.4 1,157.2 1,248.0 1,564.0 1,704.2 1,603.4

Average production cost per thousand cubicmeters of gas 230.7 252.5 141.3 195.9 272.6 127.6

Production costs and sales prices differ significantly among Rosneft’s subsidiaries. The new oil fieldswith a high yield, which are developed by Purneftegas, have the lowest oil production cost of all Rosneftsubsidiaries. In comparison with Purneftegas, the development of fields of Sakhalinmorneftegas andother subsidiaries have higher exploitation costs to extract the crude oil.

Drilling

As of 31 December 2000, Rosneft’s oil producing wells totalled 8,434, of which 7,616, or 90.3%,were in production. In 1998 and 1999, the proportion of Rosneft’s wells which were in production wasapproximately 77.5% and 82.1%, respectively.

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The following table sets forth Rosneft’s wells by region as of 31 December 2000:

As of 31 December 2000

TotalWestern Siberia

PurneftegasSakhalin

Sakhalinmorneftegas

North CaucasusOther Rosneft

subsidiaries

Exploratory wellsSuccessful...................... 23 5 3 15Dry ................................ 27 12 2 13

Development oil wellsTotal .............................. 8,434 2,494 2,385 3,555Running ........................ 8,010 2,335 2,278 3,397Productive .................... 7,616 2,260 2,085 3,271Idle ................................ 818 234 300 284Out of Production ...... 395 137 104 154

Gas wells .......................... 273 7 64 202Running ........................ 189 6 58 125

Injection wells .................. 1,439 658 504 277Running ........................ 1,102 535 440 127

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The following table sets forth the wells, including a breakdown of exploratory, running andproductive wells, of each of Rosneft’s exploration and production subsidiaries for the years ended31 December 1998, 1999 and 2000:

Year ended 31 December

1998 1999 2000

EnterprisePurneftegasExploratory .................................................................... 9 11 17

Successful.................................................................... 3 3 5Dry .............................................................................. 6 8 12

Development wells........................................................ 1,986 2,120 2,494Running wells ............................................................ 1,549 1,748 2,335Productive wells ........................................................ 1,488 1,697 2,260

SakhalinmorneftegasExploratory .................................................................... 3 1 5

Successful.................................................................... 1 1 3Dry .............................................................................. 2 0 2

Development wells........................................................ 2,284 2,442 2,385Running wells ............................................................ 2,053 2,222 2,278Productive wells ........................................................ 1,810 2,023 2,085

KrasnodarneftegasExploratory .................................................................... 5 9 16

Successful.................................................................... 4 6 11Dry .............................................................................. 1 3 5

Development wells........................................................ 1,780 1,994 2,137Running wells ............................................................ 1,723 1,937 2,090Productive wells ........................................................ 1,672 1,887 2,045

StavropolneftegasExploratory .................................................................... 2 4 6

Successful.................................................................... 0 0 0Dry .............................................................................. 2 4 6

Development wells........................................................ 847 787 690Running wells ............................................................ 426 456 614Productive wells ........................................................ 371 412 564

TermneftExploratory .................................................................... 1 3 4

Successful.................................................................... 1 2 3Dry .............................................................................. 0 1 1

Development wells........................................................ 548 602 608Running wells ............................................................ 537 591 597Productive wells ........................................................ 458 532 577

DagneftExploratory .................................................................... 1 1 2

Successful.................................................................... 0 0 1Dry .............................................................................. 1

Development wells........................................................ 96 114 114Running wells ............................................................ 50 64 90Productive wells ........................................................ 47 63 79

GrozneftegasExploratory .................................................................... 0 0 0

Successful.................................................................... 0 0 0Dry .............................................................................. 0 0 0

Development wells........................................................ 0 0 6Running wells ............................................................ 0 0 6Productive wells ........................................................ 0 0 6

TotalExploratory .................................................................... 21 29 50

Successful.................................................................... 9 12 23Dry .............................................................................. 12 17 27

Development wells........................................................ 7,541 8,059 8,434Running wells ............................................................ 6,338 7,018 8,010Productive wells ........................................................ 5,846 6,614 7,616

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Transportation and Storage of Crude Oil and Natural Gas

Crude Oil

The Russian national crude oil pipeline network is operated by a State-controlled company,Transneft. See ‘‘Overview of the Russian Oil and Gas Industry – Crude Oil and Refined ProductTransportation Network’’. The Russian Government determines quarterly an export pipeline allocationschedule which, inter alia, details the volumes of oil that each oil producer can pump through theTransneft system. Each producer is allowed to transport a certain percentage of its production throughthe Transneft system. This percentage is calculated on the basis of the volumes of oil produced by thecompany and delivered to the trunk pipeline system. This schedule provides some stability and effectivelyserves as an export quota for Russian oil companies. Once the quota is set, oil producers generally cannotincrease their allotted capacity in the export pipeline system, although they do have limited flexibility inaltering delivery routes.

Approximately 90% of the oil produced by Rosneft is transported by the Transneft system. Rosneftmaintains crude oil storage tanks for maximum accumulation of crude oil and subsequent transfer to theTransneft system. These oil storage tanks are located mostly at the production fields.

Sakhalinmorneftegas also has its own pipeline network from oil fields in Sakhalin to the De-Kastrioffshore export terminal and the Komsomolsky refinery. The total length of the Sakhalinmorneftegas oilpipelines is 865 kilometres, including 724 kilometres of long-distance pipelines. This pipeline network isused for the transportation of oil produced by Sakhalinmorneftegas, which constitutes approximately10% of the total amount produced by Rosneft’s exploration and production subsidiaries. The oildelivered to the De-Kastri terminal is exported to Northern China and South-East Asia by sea.

Natural Gas

Rosneft has a network of facilities allowing the accumulation of the extracted natural gas and itstransportation to the local consumers and to Gazprom, which is one of the purchasers of the natural gasproduced by Rosneft’s subsidiaries. The transportation network comprises local pipelines, some of whichgo straight to the consumers from the production areas, gas accumulating and storage depots and otherfacilities. The total length of these gas accumulating and transportation facilities is 3,350.1 kilometres. Ofthis total length Sakhalinmorneftegas maintains a long-distance gas pipeline with a length of 665kilometres and Krasnodarneftegas maintains a pipeline with a length of 37 kilometres.

Crude Oil and Natural Gas Sales and Deliveries

Crude oil produced by Rosneft’s exploration and production subsidiaries is purchased by Rosneftand (1) sold in the export market, (2) used internally as feedstock for Rosneft’s refineries, (3) processedby unaffiliated third party refineries for Rosneft and (4) sold to third parties in Russia. In 2000, Rosneftpurchased 76% of the crude oil produced by its subsidiaries. Rosneft also purchases crude oil fromunaffiliated third parties in addition to the crude oil produced by its subsidiaries, which it resells in theexport market.

Since export prices for crude oil are higher than domestic prices, Rosneft tends to export its oil inthe maximum amounts allowable by the quarterly schedules determined by the Russian Government. Inaddition, export volumes were historically affected by government regulations and indirect administrativemeasures, which imposed on Russian oil companies seasonal mandatory supply requirements of refinedproducts for use in the domestic market, which in turn required increased deliveries of crude oil torefineries for processing, thereby limiting amounts of oil that could be exported. There can be noassurances that similar requirements will not be imposed in the future. See ‘‘Risk Factors – RisksRelating to the Company and the Russian Oil and Gas Industry – Required Domestic Suppliers of Oiland Refined Products’’.

The following table sets forth a breakdown of Rosneft’s crude oil deliveries and sales for the yearsended 31 December 1998, 1999 and 2000 (excluding crude oil amounts purchased from third parties asfeedstock for its refineries):

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Year ended 31 December

1998 % 1999 % 2000 %

(in thousand tonnes, except percentages)

Rosneft production delivered to itsrefineries .......................................... 179.3 2 3,617 31 3,644 28

Rosneft production processed bythird parties .................................... 289.3 2 356.8 3 2,135.5 16.5

Exports of Rosneft production ........ 6,817.9 56 5,392 45 6,818.6 52.7Exports by Rosneft of oil purchased

from third parties .......................... 613.1 5 278 2 107.4 0.8Domestic sales of Rosneft

production........................................ 4,278.9 35 2,287.9 19 230.9 2Total Rosneft deliveries .................... 12,178.5 100 11,931.7 100 12,936.4 100

74.1% of Rosneft’s total export volumes were exported to Southern Europe, 15.5% to NorthernEuropean refineries and 10.4% to South-East Asia. In 2000, Rosneft exported 6.9 million tonnes of crudeoil, representing 5.6% of the total crude oil exports from Russia in that year.

Since 2000, Rosneft has entered into a number of material contracts for exports of crude oil, whichare currently in effect with a number of large international consumers, such as Statos Petroleum S.A.,Petraco Oil Company Ltd., Vitol S.A., Daxin Petroleum PTE Ltd. and Lucille 1 S.A.

The natural gas produced by Rosneft’s subsidiaries is sold either to Gazprom for its further deliveryto consumers or to local consumers within the regions where the gas is produced. Local consumersinclude industrial enterprises, energy companies and entities providing public gas supply to thepopulation. The gas is also sold to consumers through unaffiliated distributors such as Mezhregiongas, aGazprom subsidiary.

The sales volumes of gas depend significantly on the season of the year, significantly falling in thesummer period and rising in winter. In particular, the sales in summer fall on average by 40% atKrasnodarneftegas, by 28% at Sakhalinmorneftegas and by 63% at Dagneft. In 2000, Rosneft’ssubsidiaries sold a total of 2,967.7 million cubic meters of natural gas. The table below shows the naturalgas sales volumes of Rosneft’s production subsidiaries for the years ended 31 December 1998, 1999 and2000.

Year ended 31 December

1998 1999 2000

(million cubic meters)

Sakhalinmorneftegas ........................................................................ 1,258.4 1,172.0 1,212.0Krasnodarneftegas ............................................................................ 402.6 451.9 835.5Dagneft .............................................................................................. 607.8 683.9 678.5Purneftegas ........................................................................................ 137.3 187.3 222.1Stavropolneftegas .............................................................................. 0 0 0Termneft ............................................................................................ 18.8 20.6 19.7

Total ................................................................................................ 2,425.0 2,515.7 2,967.7

Generally, total gas sales account for less than 2% of Rosneft’s total revenues.

Refining and Marketing of Petroleum Products

The refining and marketing and distribution segments of Rosneft consist of processing crude oil intorefined petroleum products, and transporting, marketing and distributing refined petroleum products. In2000, the total distillation capacity of Rosneft’s two crude oil refineries was approximately 10.0 milliontonnes and these refineries processed 7.1 million tonnes of crude oil in 2000, making Rosneft the tenthlargest refiner in the Russian Federation on the basis of crude oil processed.

Rosneft also has one of the largest refined products marketing and distribution operations in theRussian Federation in terms of sales volume. In 2000, Rosneft exported 2,948.5 thousand tonnes ofvarious refined products (such as gasoline, diesel, jet fuel and fuel oil), and sold 4,842 thousand tonnes ofrefined products in the domestic market.

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Refining Facilities

Rosneft operates three refineries in the Russian Federation, of which two are crude oil refineries,the Komsomolsky refinery in Komsomolsk-on-Amur, Khabarovskii Krai, and the Tuapse refinery inKrasnodarskii Krai. Rosneft’s third refinery, Neftproduct, is located on Shosse Entuziastov in Moscow,and produces a wide range of lubricants and oil.

Komsomolsky Refinery

The Komsomolsky refinery had a primary distillation capacity to process 5,807,000 tonnes of crudeoil per annum as of 31 December 2000. Located in Komsomolsk-on-Amur in Khabarovskii Krai in theRussian Far East region, the Komsomolsky refinery has access to crude oil sources in Western Siberia andSakhalin Island. The Komsomolsky refinery is connected to the Sakhalin fields by theSakhalinmorneftegas pipeline. The Western Siberian oil, produced by third parties as well as byRosneft’s Purneftegas subsidiary, is supplied to the refinery by railroad and the refined products producedby the refinery are distributed in the Far East region by railroad, sea and roads; refined products are alsotransported to sea terminals by railway and exported by sea. It is one of the most important processingcentres for supplying refined products to Russia’s Far East and exports through the Nakhodka port. Theprincipal products produced by the refinery are gasoline, diesel, jet fuel, fuel oil and vacuum distilled gasoil. Currently, the depth of processing, being the amount of light refined product (i.e., any oil productexcept fuel oil) that can be produced from a tonne of oil, is approximately 60%.

Tuapse Refinery

As of 31 December 2000, the Tuapse refinery had a primary distillation capacity to process4,150,000 tonnes of crude oil per year. Located in the North Caucasus in Tuapse, Krasnodarskii Krai, theTuapse refinery has access to crude oil sources in Western Siberia and the Stavropolsky region via theTransneft pipeline system and is one of the most important oil processing centres in the South of Russia.

The Tuapse refinery comprises three primary refining units, a catalytic reformer unit and auxiliaryunits. The principal products produced by the refinery are premium grade gasoline, diesel and fuel oil.

Products produced by the Tuapse refinery are exported by Rosneft from its own terminal on theBlack Sea in the North Caucasus region. Since the Tuapse refinery and terminal are located in the sametown, the transportation of the refined products to the terminal does not require railway transport. In2000, 67% of the products refined at the Tuapse refinery were exported. Currently, the depth ofprocessing at the Tuapse refinery is 55%.

Nefteproduct Refinery

The Nefteproduct refinery has been in operation since 1932. Located in Shosse Entuziastov,Moscow, the Nefteproduct refinery currently concentrates on producing lubricants, natural and syntheticoils and special liquids. As of 31 December 2000, the Nefteproduct refinery had a primary distillationcapacity to process 5,800 tonnes of a wide range of oil products per year.

The main sources of raw materials to the Nefteproduct refinery are supplied to the refinery by otherRussian oil companies such as YUKOS and Slavneft. The Nefteproduct refinery consists of technologicalunits for the production of oils, lubricants and other products, together with a complex of auxiliary units.The refinery has its own transportation network which permits the supply to and delivery from therefinery of products by means of vehicles, railway and aircraft.

Approximately half of the oils and lubricants processed at the Nefteproduct refinery is purchased bythe State and the other half is purchased by other Russian consumers. Synthetic oils, lubricants andspecial liquids are currently processed at the refinery for special defence needs and are not exported.

Supply of Crude Oil to the Refineries

Currently, all crude oil supplies to Rosneft’s refineries are controlled and coordinated by Rosneft.Rosneft purchases crude oil from its exploration and production subsidiaries, as well as from unaffiliatedcrude oil producers, for processing by its refineries. In addition, Rosneft’s refineries process crude oil onbehalf of unaffiliated production companies who pay a processing fee to have their oil processed intorefined products, and Rosneft coordinates the supplies of oil from these production companies to itsrefineries.

In 2000, Rosneft supplied to its refineries 3.6 million tonnes of crude oil produced by its explorationand production subsidiaries, representing approximately 28% of the total crude oil production of these

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subsidiaries, and 81% and 35% of the total feedstock for the Komsomolsky and Tuapse refineries,respectively. Rosneft also purchased 582,000 tonnes of crude oil in 2000 from unaffiliated productioncompanies in Russia for processing in its refineries. In addition, the Tuapse refinery processed 2.3 milliontonnes of crude oil in 2000 on behalf of Yugnefteproduct and NITEK, other Russian oil companies, thatpay a processing fee for processing their crude oil, and the Komsomolsky refinery processed 0.6 milliontonnes of crude oil in 2000 on behalf of other Russian oil companies. Amounts processed by Rosneft’srefineries on behalf of third parties accounted for approximately 33% of the total amount of crude oilprocessed by such refineries in 2000. The Komsomolsky refinery itself also purchased an additional563,000 tonnes in 2000 from an unaffiliated oil production company located in Siberia. Currently, Rosneftdoes not import crude oil for processing by its refineries.

In order to capture the higher margins associated with lighter products, Rosneft plans to reduce itsoutput of cheaper fuel oil, which is currently 47% of the total refined products output, and concentrate onincreasing its output of high quality products by increasing the depth of refining.

Refining Capacity and Throughput

In 2000, Rosneft processed 7,095,500 tonnes of crude oil in its refineries, representing approximately4.1% of the total crude oil processed in Russian refineries in 2000 and making Rosneft the tenth largestrefiner in the Russian Federation in 2000 on the basis of crude oil processed. The total crude oil capacityof Rosneft’s refineries was 9,957,000 tonnes per year in 2000. Rosneft’s refineries ran at a weightedaverage of approximately 71% of design capacity, compared to an average for Russian refineries of61.9%.

The following table sets forth Rosneft’s total primary distillation capacity per annum, crude oilthroughput and crude oil distillation capacity utilisation rate for its two crude oil refineries for the yearsended 31 December 1998, 1999 and 2000.

1998 1999 2000

Refinery

PrimaryDistillation

CapacityCrude Oil

ThroughputUtilisation

Rate

PrimaryDistillation

CapacityCrude Oil

ThroughputUtilisation

Rate

PrimaryDistillation

on CapacityCrude Oil

ThroughputUtilisation

Rate(in thousand tonnes, except utilisation rate data in percentages)

Komsomolsky ...... 5,807 1,943.0 33.5 5,807 3,141.7 54.1 5,807.0 3,619.5 62.3Tuapse .................. 3,300 1,591.6 48.2 3,300.0 3,278.4 99.4 4,150.0 3,478 83.8Total ...................... 9,107 3,534.6 38.5 9,107 6,420.1 70.5 9,957 7,097.5 71.3

Refined Product Output

Rosneft produces a full range of refined petroleum products. These products are produced atRosneft’s refineries as well as by other unaffiliated refineries to whom Rosneft pays processing fees forprocessing its crude oil. The following table sets forth the output of the various refined products producedby Rosneft’s two crude oil refineries and by unaffiliated refineries on behalf of Rosneft for the three yearsended 31 December 1998, 1999 and 2000:

1998Production

% of TotalProduction

1999Production

% of TotalProduction

2000Production

% of TotalProduction

(in thousand tonnes, except data in percentages)Gasoline .......................... 31.1 15.6 581.2 15.7 620.6 11.9Diesel .............................. 65.6 32.9 1,078.1 29.2 1,550.7 29.7Jet fuel ............................ – – 252.4 6.8 324.4 6.2Fuel oil ............................ 93.07 46.8 1,658.6 44.9 2,422.9 46.5Car gasoline.................... 9.3 4.7 125.1 3.4 295.2 5.7

Refinery Investment Projects

All three of Rosneft’s refineries are large, but relatively unsophisticated by Western Europeanstandards. Rosneft plans to make significant investments to upgrade its existing refineries in order toenhance refining efficiency, increase the production of lighter and higher-value products by increasing thedepth of processing and comply with stricter environmental requirements.

In an effort to reduce pollution caused by automobiles, Russian governmental agencies have issuedregulations containing content specifications for gasoline to promote the use of cleaner burning fuels.Rosneft has begun to upgrade its facilities systematically either by changing its production process orinstalling new equipment to produce cleaner burning fuels that comply with the new regulations.

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Rosneft’s strategy for oil refining is to increase the quantity and quality of refined productsproduced to capture the higher cash margin on sales of refined products to the domestic market versussales of crude oil to the domestic market.

Komsomolsky Refinery

In 1999, Rosneft began to modernise its Komsomolsky refinery. In 2001, a catalytic reforming unitwas purchased for U.S.$34 million and installed. As a consequence, the refinery can currently produce450,000 tonnes of high-octane and environmentally friendly types of gasoline annually, including up to390,000 tonnes per year of AI-92 and AI-95 graded gasoline.

Rosneft intends to build an nk-70 degrees C straight run isomerisation unit, which will make itpossible to increase production of high-octane types of gasoline.

Other refinery upgrade and improvement projects include:

l construction of a delayed carbonisation complex capable of processing one million tonnes ofcrude oil per year. Such complex is intended to increase the total depth of processing at thisrefinery;

l construction of a hydrocracking complex, which will increase depth of refining and output ofhigher quality products; and

l construction of a diesel fuel and aviation kerosene hydrofining unit with a capacity of2,100,000 tons a year.

Tuapse Refinery

Rosneft intends to modernise the Tuapse refinery beginning in 2003 or 2004 so long as internationaloil prices remain above U.S.$17 per barrel.

The modernisation programme is expected to include the construction of a pressure vacuum unitand hydrocracking complex to improve depth of refining and increase output of higher margin products.

The programme is also expected to include the construction of a naphtha hydrofining, catalyticreforming and isomerisation unit. The construction of this unit will enable the Company to produce a fullrange of engine fuel, including high-quality motor fuel and fuel oil as well as AI-95 graded gasoline andtherefore satisfy the demand of regional consumers for high-octane gasoline.

Nefteproduct Refinery

The Company also intends to modernise the Nefteproduct refinery in order to increase theprocessing capacity from its current 5,000 tonnes up to 20,000 tonnes per year, only five thousand of whichwill be supplied to the State for special defence needs. The plan is to preserve the existing range ofproducts at newly installed facilities and to produce new types of lubricants in particularly high demand,such as chemical reagents necessary for advanced methods of oil extraction and the base for synthetic oil,which are not currently produced in Russia.

Marketing, Sales, Distribution and Exporting of Refined Petroleum Products

Rosneft operates an extensive sales, distribution and export system for refined petroleum products.As of 31 December 2000, Rosneft’s distribution network covered 13 constituent entities of the RussianFederation, which are located in Western Siberia, Sakhalin Island, North Caucasus and the ArcticRegions of Russia.

In 2000, Rosneft and its subsidiaries sold a total of 7,790.5 thousand tonnes of refined products. Thetable below sets forth the distribution of sales volumes by product for the three year period ended31 December 2000. The sales volumes presented below include (1) products produced at Rosneft’srefineries, (2) products produced by unaffiliated refineries to whom Rosneft pays processing fees forprocessing its crude oil and (3) refined products purchased by Rosneft from unaffiliated refineries, whichRosneft resells domestically and for export.

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Year ended 31 December

1998 1999 2000

(million tonnes)

Gasoline .............................................................................................. 0.7 1.4 1.6Diesel .................................................................................................. 0.9 2.0 2.4Jet Fuel .............................................................................................. 0.05 0.07 0.06Fuel Oil .............................................................................................. 1.0 2.1 3.1Other .................................................................................................. 0.2 0.6 0.7

Total .................................................................................................... 2.9 6.2 7.8

All refined products sold by Rosneft are produced in Russia. In 2000, Rosneft’s petroleum productsstorage depots amounted to 141, whose total oil products capacity was 2,134.2 thousand cubic meters.Rosneft sells refined products to wholesale customers, through its retail distribution network and forexport.

Wholesale Distribution

In 2000, Rosneft sold refined products to approximately ten Russian wholesale customers. Rosneft’swholesale customers include large end-users and independent distributors as well as certain specialcustomers designated by the central government, such as the Ministry of Defence, OJSCKamchatskenergo, and for agricultural needs. Diesel fuel and gasoline are the principal products soldto wholesale customers. The refined products are principally delivered by railway.

Retail Distribution

As of 30 June 2001, Rosneft’s retail distribution network consisted of 558 wholly-owned andoperated service stations, and 37 leased service stations that are usually operated by Rosneft under theRosneft brand. Most of the service stations are located in regions close to Rosneft’s refineries. Inaddition, Rosneft has commenced a franchising programme whereby it is franchising the Rosneft brandto approximately 100 service stations that are operated by third parties.

The refined products are transported by railway from the refineries to Rosneft’s marketingsubsidiaries’ petroleum storage depots. The service stations themselves are generally located in relativelyclose proximity to the petroleum storage depots.

Rosneft believes its retail sites satisfy only a small portion of the potential consumer demand in theregions in which Rosneft operates. Most of the sites are still operating with outdated equipment and offera limited range of services. Rosneft is in the process of modernising its existing service stations andbuilding new stations. In the future, Rosneft is planning to implement a programme for the constructionand modernisation of approximately 60 to 70 gas stations per annum. During 2001 Rosneft plans to:construct 29 new filling stations; expand its distribution network up to 587 stations; and modernise andupgrade 69 of its existing filling stations. Due to the antiquated condition of many of its existing servicestations, Rosneft’s modernisation programme for existing stations will largely involve the completereconstruction of these stations. Rosneft intends to increasingly offer value-added services at its existingand new service stations, such as fast food outlets, convenience stores, kiosks and car washes.

Rosneft is planning to develop its service station network in the regions surrounding its oilrefineries. These include: the Far East region, including Khabarovskii Krai, Primorskii Krai and Sakhalin;and the South region, including Krasnodarskii Krai, Stavropolskii Krai and the North Caucasus.

Exports

Rosneft exports a wide range of refined products to a number of foreign purchasers. These productsinclude diesel, gasoline, fuel oil and others. In 2000, Rosneft exported approximately 2,948.5 thousandtonnes of refined products, or 38% of its total refined product sales. 50% of these exports were sent toEurope and 50% to South-East Asia. Major Rosneft refined products export transactions are conductedwith various off-shore companies, including Merrington Trading Ltd., Rinex Energy S.A., TotalInternational Limited and International Petroleum Products Oy, located in Bermuda, British VirginIslands, Singapore, Finland and Cyprus.

The refined products are exported from both Rosneft oil refineries to: the countries of South-EastAsia from the Komsomolsky refinery; and to the Mediterranean region from the Tuapse refinery. The

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latter is located near the sea, and does not require railway delivery of the oil products. Rosneft alsoexports refined products to North Western Europe. Rosneft also exports from two other refineries notowned by Rosneft – Surgutneftegas-Kirishinefteorgsintez and Slavneft-Yaroslavnefteproduct – whichprocess crude oil on behalf of Rosneft. From these refineries supplies are made by railway.

Competition

Rosneft is a major competitor in the Russian oil and gas sector. Rosneft’s main competitors areother Russian oil companies which compete on the domestic market.

In comparison with other Russian oil companies, Rosneft benefits from its developed regional salesnetwork, extensive reservoir facilities, high quality oil products, and access to marine facilities on theNorth, South and Far East coasts, via Rosneft-Severnefteservice, Rosneft-Tuapsenefteproduct andRosneft-Nakhodkanefteproduct.

In relation to the sales market, Rosneft has to compete with oil companies which are able toproduce larger amounts of oil and therefore establish more competitive prices for oil. Increased overalloil extraction in 2000 to 2001 by Russian oil companies has increased competition in the Russian oilmarket. Russian oil companies with extensive sales networks located close to their oil consumers havedominated the Russian market. By contrast, most of Rosneft’s oil extraction sites are located in distantregions.

In order to increase the range and volume of its oil products sales, Rosneft is involved in therenovation and construction of service stations. Rosneft is further expanding its sales network byfranchising the Rosneft brand to other companies.

Rosneft’s main marketing strategy is to seek a reduction in transport costs whilst achieving anincrease in refined product sales.

It is likely that the effect of this factor shall reduce in the course of further operations.

Exploration and Production

The business of exploration and development of crude oil and natural gas is highly competitive.Rosneft competes in the Russian market primarily for the acquisition of desirable oil and gas prospects. Italso competes in the international and domestic capital markets to finance its operations, includingexploration, development and production activities. Rosneft’s principal competitors in the Russianmarket are the major Russian oil companies, such as LUKoil, YUKOS, Surgutneftegas, TNK, Sibneft andSIDANCO and foreign oil companies such as Exxon and BP.

Refining and Marketing of Refined Petroleum Products

Rosneft controls one of the largest refining businesses in Russia as measured by the crude oilprocessed and the refined petroleum products distributed. Rosneft expects that the competition willcontinue to increase.

Market participants compete primarily on the basis of quality of products and service, efficiency ofoperations including proximity to customers and awareness of brand name.

With respect to Rosneft’s main areas of marketing and sales of refined products, Rosneft mainlycompetes with the following Russian oil companies: LUKoil and TNK on the North West; TNK, YUKOSand Sibneft in the Urals; YUKOS and LUKoil in the North Caucasus region; and YUKOS and AllianceGroup in the Far East.

In the Sakhalin oil products market, the main competitors of Rosneft are LLC Petrooil and CJSCPetrosakh as well as some other oil companies located in Siberia.

Patents and Trademarks

Rosneft, together with its subsidiaries, has 39 patents in the Russian Federation for the developmentof oil fields, oil extraction and exploitation of wells. Rosneft registered three trademarks in the RussianFederation and has two more pending trademark applications.

Rosneft’s major patents relate to the drilling methods such as a deep-well pumping unit with highgas-oil ratio and methods of oil extraction from horizontal wells and wells and pipeline construction suchas pipeline crossing methods.

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Research and Development

Rosneft performs research and development principally through its subsidiary LLC RN-Perspektiva(‘‘Perspektiva’’). Perspektiva’s research and development activities are focused on three main areas:

. development of technologies and methods for enhanced oil and gas recovery, includingtechnologies for developing offshore fields using horizontal drilling techniques and thermalmethods for ductile oil field;

. development of technologies and manufacturing processes to increase the efficiency andoutput of Rosneft’s refineries and to enable the production of higher quality and new types ofrefined products, including lubricants; and

. development of technologies and processes related to the modernisation of Rosneft’s sales andmarketing distribution network.

Perspektiva works with Rosneft’s exploration and production and refining and marketingsubsidiaries to develop new technologies, methods and processes and to assist the subsidiaries inimplementing the results of Perspektiva’s research and development work. Perspektiva also co-operateswith third parties, including international integrated oil and gas companies, to develop new technologiesand to incorporate advanced technologies developed by third parties into Rosneft’s exploration andproduction, refining and marketing and other activities.

Research and development expenses are financed largely through a research and development fundestablished by Rosneft to which each subsidiary contributes a fixed amount.

Capital Expenditures

Capital Expenditures

Rosneft has significant capital expenditure requirements in order to maintain its existing operations.In addition, Rosneft’s strategy of expansion will require a large commitment of resources and capital.

Rosneft’s investment activity is largely aimed at the development of its major lines of business: oiland gas production, oil refining, and marketing and sales. The bulk of the capital expenditures in 1999 to30 June 2001 related to oil and gas production, which accounted for approximately 82% of total capitalexpenditures during this period. Expenditures related to oil refining and marketing and sales accountedfor 8.5% and 9.5%, respectively, of total capital expenditures during this period.

Capital expenditures for the years ended 31 December 1998, 1999 and 2000 and the six monthsended 30 June 2001 were as follows:

Year ended 31 December

Six monthsended

30 June

1998 1999 2000 2001

RUB (in billions)

Exploration and production .................................... 1.77 3.82 10.54 5.0Refining ...................................................................... 0.08 0.25 1.47 0.4Marketing and distribution ...................................... 0.16 0.52 1.28 0.5

Total ............................................................................ 2.01 4.59 13.29 5.9

Capital Expenditure Programmes

The Company has two different capital expenditure programmes, which depend on movements ininternational crude oil prices. The first programme is based on a crude oil price of U.S.$17 per barrel. Thetable below sets forth this first programme.

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2001 2002 2003 2004 2005 2006

U.S.$ million

ProjectsSakhalin projects ................ 66.0 161.5 229.4 287.7 255.4 1,000.0

Rosneft portion(1)............ – – – – – –Others(1)............................ 66.0 161.5 229.4 287.7 255.4 1,000.0

Komsomolskoye field(2)...... 28.3 95.4 39.0 179.9 177.4 520.1Kharampourskoye field(2) .. 8.9 249.8 176.0 116.5 98.8 650.0Komsomolsky refinery........ 33.9 145.3 190.7 99.1 99.1 568.2

Total Projects ...................... 137.1 652.1 635.1 683.2 630.8 2,738.2

Other capital expendituresNorth Komsomolskoye field – 40.0 40.0 30.0 30.0 140.0Other oil production .......... 293.4 114.0 102.6 85.2 136.6 731.8Tuapse refinery .................... – – – 200.0 200.0 400.0Other oil refinery ................ 36.7 14.2 12.8 10.6 17.1 91.4Sales and Marketing .......... 23.8 9.2 8.4 6.9 11.1 59.4Development of the

corporate communicationnetwork SAP R3 ............ 12.8 5.0 4.5 3.7 6.0 32.0

Total other capitalexpenditures .................... 366.7 182.4 168.3 336.4 400.8 1454.6

Total ...................................... 503.8 834.5 803.4 1019.6 1031.6 4192.8

Notes:(1) The capital expenditure programme for the Sakhalin projects assumes that 100% of the capital expenditures for these

projects will be financed by Rosneft’s project partners with recourse to project assets only. With respect to the Sakhalin 1project, in which subsidiaries of Rosneft hold a 20% interest in the project, these subsidiaries have signed carry financeagreements with ONGC Videsh pursuant to which ONGC Videsh will finance the subsidiaries’ funding requirements forSakhalin 1, with recourse to project assets only. With respect to the Sakhalin 3, Sakhalin 4 and Sakhalin 5 projects, Rosneftexpects that its funding obligations in relation to these projects will be fully financed by third parties on a non-recourse basis.Accordingly, the capital expenditure programme for the Sakhalin projects currently assumes that all capital expenditures forthese projects will be financed by third parties on a non-recourse basis. See ‘‘Joint Ventures’’.

(2) The capital expenditure programme assumes 100% ownership by the Company in these fields. The Company, however, hasentered into letters of intent (protocols) with potential joint venture parties (TotalFinaElf with respect to theKomsomolskoye field and Gazprom with respect to the Kharampourskoye field) to take a participating interest in thesefields, which would decrease Rosneft’s capital expenditures relating to these fields proportionately. See ‘‘Joint Ventures’’.

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The Company’s second programme of financing is based on crude oil price of U.S.$22 per barrel.The table below shows the Company’s estimated investments adjusted to a higher crude oil price.

2001 2002 2003 2004 2005 2001-2005

U.S.$ million

ProjectsSakhalin projects ................ 66.0 161.5 229.4 287.7 255.4 1,000.0

Rosneft portion(1)............ – – – – – –Others(1)............................ 66.0 161.5 229.4 287.7 255.4 1,000.0

Komsomolskoye field(2)...... 28.3 95.4 39.0 179.9 177.4 520.0Kharampourskoye field(2) .. 8.9 249.8 176.0 116.5 98.8 650.0Komsomolsky refinery........ 33.9 145.3 190.7 99.1 99.2 568.2

Total Projects ...................... 137.1 652.1 635.1 683.2 630.8 2,738.2

Other capital expendituresNorth Komsomolskoye field – 40.0 40.0 30.0 30.0 140.0Other oil production .......... 293.4 323.3 167.8 227.4 291.6 1,303.5Tuapse refinery .................... – – 100.0 200.0 200.0 500.0Other oil refinery ................ 36.7 40.4 21.0 28.4 36.5 163.0Sales and Marketing .......... 23.8 26.3 13.7 18.4 23.7 105.9Development of the

corporate communicationnetwork SAP R3 ............ 12.8 14.1 7.3 10.0 12.7 56.9

Total other capitalexpenditures .................... 366.7 444.1 349.8 514.2 594.5 2,269.3

Total ...................................... 503.8 1,096.2 984.9 1,197.4 1,225.3 5,007.5

Notes:(1) The capital expenditure programme for the Sakhalin projects assumes that 100% of the capital expenditures for these

projects will be financed by Rosneft’s project partners with recourse to project assets only. With respect to the Sakhalin 1project, in which subsidiaries of Rosneft hold a 20% interest in the project, these subsidiaries have signed carry financeagreements with ONGC Videsh pursuant to which ONGC Videsh will finance the subsidiaries’ funding requirements forSakhalin 1, with recourse to project assets only. With respect to the Sakhalin 3, Sakhalin 4 and Sakhalin 5 projects, Rosneftexpects that its funding obligations in relation to these projects will be fully financed by third parties on a non-recourse basis.Accordingly, the capital expenditure programme for the Sakhalin projects currently assumes that all capital expenditures forthese projects will be financed by third parties on a non-recourse basis. See ‘‘Joint Ventures’’.

(2) The capital expenditure programme assumes 100% ownership by the Company in these fields. The Company, however, hasentered into letters of intent (protocols) with potential joint venture parties (TotalFinaElf with respect to theKomsomolskoye field and Gazprom with respect to the Kharampourskoye field) to take a participating interest in thesefields, which would decrease Rosneft’s capital expenditures relating to these fields proportionately. See ‘‘Joint Ventures’’.

The actual amounts and timing of capital expenditures, and of funds raised, are subject to changedepending on economic and political conditions. See ‘‘Risk Factors – Risks Relating to the Company andthe Russian Oil and Gas Industry – Capital Requirements’’.

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ENVIRONMENTAL MATTERS

Rosneft is attentive to environmental matters in all its activities. In carrying out its policies, Rosneftgenerally seeks to adhere to international standards for environmental protection and monitorscompliance with these principles. Rosneft works with its operational subsidiaries to implementGovernment regulations and meet safety standards. In order to improve Rosneft’s environmentalactivities, a decision was taken to conduct systematic environmental audits, and a programme covering allaspects of Rosneft’s environmental activities was prepared.

In 1998, Rosneft started implementing an Environmental Management System for a VerticallyIntegrated Company based on the ISO 14000 international standard. In 2001, Rosneft adopted aComprehensive Environmental and Production Safety Programme for 2001 so as to supervise and co-ordinate its safety requirements and environmental policies in order to improve its environmentalprotection standards in relation to its operations in the current year. In 2001, Rosneft plans to start theimplementation of an Environmental Monitoring Plan and a new Environmental Management System inorder to monitor compliance with environmental standards and control the effects of Rosneft’s activitieson the environment.

Each year all of Rosneft’s subsidiaries adopt Emergency Control Plans which are approved byGosgortechnadzor, a competent state agency. These plans include a set of measures aimed at preventingand controlling emergency spillages of oil and refined products. In addition, in light of GovernmentResolution No. 613, dated 21 August 2000, Sakhalinmorneftegas, Purneftegas, the Komsomolskyrefinery, Murmansknefteproduct and Nefteproduct refinery have adopted Plans to Prevent and ControlEmergency Oil Spills (‘‘PCEOS’’) which were also approved by relevant local authorities. Several ofRosneft’s other subsidiaries submitted their PCEOS for consideration by, and approval of, relevantauthorities.

These plans enable Rosneft’s subsidiaries to react quickly to emergencies and take measures tolocalise and control the effects of environmental pollution by crude oil and refined products. Moreover,Rosneft has adopted a programme to replace ageing and low-quality pipes with new pipes which haveanti-corrosion protection. Rosneft monitors the number and volume of oil spillages and reactsimmediately to such spillages by implementing appropriate measures, within its technical capabilities, tocontrol them.

In addition to controlling air, water and soil pollution and replacing worn out or damaged sectionsof pipes, Rosneft is installing up-to-date environmental protection facilities.

In respect of Stravropoloneftegas, Rosneft is resolving the radiation safety problems that it hasencountered. The problem is due to salts of natural radioactive nuclides accumulating on the innersurface of production pipes as sediment. As a result, production pipes are regularly replaced with newones. The replaced pipes are transported to, and stored in, a specially-designed warehouse until they aredecontaminated in a special facility. The resulting radioactive waste is dumped by two specialised Russianfactories, Radon Company in the City of Rostove and Hydrometallurgical Plant in the City ofLermontovo. Thereafter, the decontaminated pipes may be re-used in oil production. Stavropolneftegashas a licence permitting it to handle such radioactive substances, during the transportation and storagephase, which is issued by the Federal Supervisory Agency for Nuclear and Radiation Safety. The licenceis valid until 31 December 2003.

Stavropolneftegas regularly monitors radiation and salinity levels in its vaporisation areas, conductspersonal dosimetric control of its staff, and radiation monitoring of populated areas.

Rosneft’s total expenses on environmental protection were RUB 162 million in 1998, RUB 343million in 1999 and RUB 739 million in 2000.

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LABOUR SAFETY

In accordance with international practices, Rosneft in 1999 adopted a Declaration on Policy forHealth and Labour Safety, Prevention of Accidents and Environmental Protection under which everyemployee must observe the requirements of Russian legislation in relation to industrial safety, and all ofRosneft’s subsidiaries carry out their operations with regard to the provisions of federal and internationalregulations on health protection, accident prevention and environmental protection.

Annually, Rosneft’s subsidiaries draw up and implement industrial labour and safety plans, andlabour safety collective bargaining agreements.

Rosneft has adopted an integrated programme on Environment and Industrial Safety for the period1998 to 2000, and a similar programme for the year 2001.

Typically, labour protection and safety measures include certification of work places, training andcertification of personnel, acquisition of clothes and other articles of individual and collective protection,installation and repairs of sanitary facilities, and review of labour protection internal regulations inaccordance with new federal legislation.

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LITIGATION

Since it became an open joint stock company, Rosneft has been involved in a number of litigationmatters. As of September 2001, Rosneft believes that it is not subject to any legal claims or disputes,which, individually or in aggregate, could have a material adverse effect on the business of the Companyor its results of operations.

Below is a description of material and pending litigation matters involving Rosneft between theperiod 1996 and 2001:

Protection of Rosneft’s Vertically Integrated Structure and Intercompany Relations

During 1998 and 1999, several of Rosneft’s subsidiaries were involved in bankruptcy proceedings,all of which were settled in the early stages of proceedings.

In 1998 the creditors of Purneftegas initiated bankruptcy proceedings against this Rosneftsubsidiary in the Arbitrazh Court of Yamalo-Nentskii Autonomous Region. In February 1999,proceedings ceased and a settlement agreement was concluded between Purneftegas and its creditors.The settlement agreement provided for the restructuring of Purneftegas and set Purneftegas’ debts in theamount of RUB 515,369,334 and U.S.$217,509,504. The repayment of debts by Purneftegas is scheduledto continue until 2006.

Rosneft participated in three more insolvency litigations in relation to its subsidiariesMurmansknefteproduct, Tuapse Refinery and Severnefteservice. Following Rosneft’s intervention, thedisputes were terminated by means of settlement, and Rosneft regained control over its subsidiaries.

Recovery of Debts

As of September 2001, the debt owed by Kazakhstan for oil purchases totalling U.S.$41,869,782 hasnot been paid to Rosneft. Due to the fact that the limitation period has expired, steps are now being takenby the Intergovernmental Commission for the Collaboration between the Russian Federation and theRepublic of Kazakhstan to recover this debt.

Recovery of Sums Payable by Rosneft

Rosneft settled claims brought against it by two Russian banks under credit agreements, one in theamount of U.S.$18,886,819 and the other in the amount of U.S.$50,780,000. In the latter case, Rosneft hadacted as surety for one of its subsidiaries. Rosneft concluded settlement agreements with these creditorsand, as of September 2001, duly satisfied the debt in the amount of U.S.$18,883,819 to one bank and thedebt in the amount of U.S.$44,776,239 to the other bank.

Pending Litigation

Sakhalinmorneftegas is currently involved in two litigations related to carrying out of a joint ventureagreement concluded by Sakhalinmorneftegas with Zarubezhneft on 6 May 1994. The parties have filedcounter claims with respect to the joint venture agreement, with Zarubezhneft claiming the recovery ofapproximately U.S.$15 million principal amount under the agreement and Sakhalinmorneftegas claimingthe agreement is void. The second claim is currently awaiting consideration by the Arbitrazh Court ofMoscow.

Tax Disputes and Other Administrative Litigation

Rosneft has been regularly involved in various tax and other administrative disputes, none of whichthe Company believes are material.

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INSURANCE

The insurance industry is not well developed in Russia and many common forms of insuranceprotection in the West are unavailable. In 1999, Rosneft maintained only minimum levels of insurance forits asset base. During the period 2000 to 2001, Rosneft and its subsidiaries obtained various insurancepolicies from its insurance broker LLC SK Neftepolis (‘‘Neftepolis’’), a 99.16% owned subsidiary ofRosneft. Neftepolis specialises in providing insurance cover for risks associated with large industrialfacilities, including, but not limited to, those risks associated with oil refineries, floating drilling units anddrilling works. As of 1 July 2001, Neftepolis has reserves totalling RUB 274,418,000 or approximatelyU.S.$9,439,900. Neftepolis limits its exposure to larger risks through reinsurance policies with financiallystable Russian and Western reinsurance companies.

Since 1999, Rosneft and its subsidiaries have taken out over 50 insurance polices, each covering inexcess of U.S.$5 million, thereby insuring themselves against loss of operational revenues and assets dueto accident, fire or operational failure. In general, the insurance policies provide cover for risks arising outof, or in connection with, the following: damage to buildings, plant, machinery and vehicles (whether theproperty is owned or leased); risks associated with the transportation of crude oil and oil related products,including oil spillages and damage to the oil pipeline system; and industrial and environmental issues.

Environmental risks, which are currently insured by Rosneft, follow the formula set forth in theapplicable Russian legislation. The mandatory insurance policy covers, among other things, the risk ofdamage to the life, health and property of third parties; and the risk of damage directly affecting theenvironment, or any part of it, as a result of any premises and/or equipment relating to the industrialfacilities being destroyed. Uncontrolled explosions and the discharge, release or emission of pollutants orhazardous materials from Rosneft’s production, transportation and refining facilities are also covered bythe policy.

As required by Russian legislation, all of Rosneft’s subsidiaries, which handle and utilise hazardousmaterial and substances as part of Rosneft’s production, transportation and refining processes, haveobtained all of the requisite mandatory insurance policies. In addition to the mandatory insurancecoverages, Neftepolis is currently preparing environmental insurance policies for Rosneft and itssubsidiaries which will protect against the risks of any hazardous material and/or substance beingreleased, emitted or introduced into the air; and discharged or released into surrounding water, therebycausing damage to the environment.

In 2001, Rosneft obtained insurance cover to safeguard against disruption of production at theKomsomolsky refinery. In addition, Rosneft also obtained insurance cover for the property pledged byRosneft’s Purneftegas and Stavropolneftegas subsidiaries to secure obligations under loan agreementswith the National Savings Bank of the Russian Federation. The bank is a beneficiary under these policies,and the obligations are secured in the amount of RUB 2,268,723,660.

Rosneft has also placed some policies on behalf of employees in respect of life, health and disabilityinsurance.

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JOINT VENTURES

Joint Ventures

Rosneft intends to increase its reserve base and production of hydrocarbons through joint ventureswith international and local oil and gas companies. Rosneft believes that through these joint ventures, itwill be able to attract additional external financing for oil and gas development projects; share any projectrisks and expenses associated with these projects and enhance the development of existing and new fieldsin which it has an interest by partnering with companies that have significant technical and financialresources.

Projects on the Territory of the Russian Federation

Rosneft regards participation in joint ventures for the exploration and development of oil and gasfields located in the Russian Federation and, in particular, on the continental shelf of Sakhalin Island, asits major investment activity. Set forth below is a brief description of Rosneft’s on-going and prospectiveRussian joint venture projects.

Sakhalin Projects

Sakhalin 1

On 11 May 1995, Rosneft, through its subsidiary companies OJSC Rosneft-Sakhalin and CJSCSakhalinmorneftegas-Shelf (‘‘SMNG’’) (a subsidiary of Sakhalinmorneftegas), signed a Joint OperatingAgreement (the ‘‘JOA’’) with Exxon Neftegas Ltd. (‘‘Exxon’’) and Sakhalin Oil DevelopmentCorporation (‘‘SODECO’’) for the Chayvo, Arkutun-Dagi and Odoptu areas located off the shore ofSakhalin Island (‘‘Sakhalin 1’’). According to the 2000 Reserves Report, Sakhalin 1 contains 1.6 billionbarrels of gross probable oil and condensate reserves, 1.1 billion barrels of gross possible oil andcondensate reserves, and 416.4 billion metric tonnes of gross probable gas reserves. In general, reservesclassified as ‘‘probable’’ are less certain of development than proved reserves, and reserves classified as‘‘possible’’ are less certain of development than proved and probable reserves.

Under the JOA, a consortium was formed for the exploration and development of these areas undera Production Sharing Agreement (the ‘‘PSA’’). The PSA was signed by the consortium and the relevantRussian authorities on 30 June 1995.

Initially, the consortium participants – Rosneft-Sakhalin, SMNG, Exxon and SODECO – heldinterests of 17%, 23%, 30% and 30%, respectively, in such consortium.

On 10 February 2001, Rosneft-Sakhalin and SMNG signed an Assignment Agreement and CarryFinance Agreements with ONGC Videsh Ltd. (‘‘ONGC Videsh’’), an Indian national oil company,whereby the Rosneft companies assigned 8.5% and 11.5% of their respective participatory interests in theSakhalin 1 project to ONGC Videsh. As part of the consideration, ONGC Videsh undertook, on a non-recourse basis, to perform all of the obligations of Rosneft’s subsidiaries in relation to financing thesubsidiaries’ portion of the consortium’s funding obligations.

It is currently estimated that ONGC Videsh’s financing obligation for the share of Rosneft’ssubsidiaries will amount to approximately U.S.$800 million. Interest of LIBOR + 3% will be charged tothe subsidiaries on any amount of financing provided by ONGC Videsh to the subsidiaries. Prior to thedevelopment stage and the sale of oil, accrued interest will be capitalised every 6 months. Thereafter, thesubsidiaries will repay the outstanding debt to ONGC Videsh by applying the proceeds of the sale fromtheir respective share of oil and gas from the project.

Until September 2001, the consortium was carrying out exploration and appraisal of the relevantareas. Currently, the consortium plans to announce a commercial discovery and turn to the developmentphase of the project.

Sakhalin 3 Projects

Rosneft believes that its largest and most promising project on the Sakhalin continental shelf afterSakahlin 1 are the Sakhalin 3 projects (‘‘Sakhalin 3’’) and in particular the Kirinskii block. The Sakhalin 3projects include:

Kirinskii Block. The Sakhakin 3 project covering the Kirinskii block is to be developed on a PSAbasis. The conclusion of a PSA with respect to the Kirinskii block is already provided forunder the relevant Russian federal law. The investors in this project are: Mobil Sakhalin Neftegas Inc.(‘‘Exxon Mobile’’), Texaco Exploration Sakhalin Inc., Vostokshelf (a Rosneft subsidiary), and CJSC

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Sakhalinmorneftegas-KMK (a Sakhalinmorneftegas subsidiary) with shares of 331/3%, 331/3%, 162/3% and162/3%, respectively, in the Pegastar LLP based in Delaware, USA. Although no PSA has been executedto date, a joint venture agreement was entered into in 1998, and the joint venture vehicle was registeredby the investors in Delaware, USA.

Ayashskii and Vostochno-Odoptinskii Blocks. The Sakhalin 3 project covering the Ayashskii andVostochno-Odoptinskii blocks is also planned to be developed on the basis of a PSA. However, thefederal law designating such fields as PSA fields has not yet been adopted. The prospective investors havesigned a non-binding protocol pursuant to which it is intended that Exxon Neftegas Limited will have a661/3% stake, Rosneft will have a 162/3% stake, and Sakhalinmorneftegas will have a 162/3% stake.

Sakhalin 4 and 5

Rosneft is a party to an Alliance Agreement dated 11 July 2001 with BP Exploration OperatingCompany Limited (‘‘BP’’) and Sakhalinmorneftegas with respect to participation in the proposedSakhalin 4 and Sakhalin 5 projects, which cover certain blocks offshore Sakhalin Island. Rosneft,Sakhalinmorneftegas and BP have 25.5%, 25.5% and 49% interests in the venture, respectively. Theagreement provides that BP will finance the exploration costs within a range to be set forth in the relevantPSA. Federal laws designating Sakhalin 4 have been adopted but not Sakhalin 5. No PSA has been signedto date.

Siberian Projects

Apart from the Sakhalin projects, Rosneft is seeking to develop its Siberian fields by entering intojoint ventures. In particular, Rosneft intends to attract strategic partners to develop the Komsomolskoyeand Kharampourskoye fields on the basis of PSAs. These fields are already designated as PSA fieldsunder the appropriate federal laws of the Russian Federation.

With respect to the Komsomolskoye field, the licence to this field is held by Purneftegas.TotalFinaElf has expressed its intent to invest in the development of this field within the framework ofthe current tax system before signing the PSA. At present, the parties’ intentions are detailed in aMemorandum on Arrangement with respect to the TotalFinaElf participation in the development of thefield, although no definitive agreement has been signed yet. Rosneft and TotalFinaElf expect to hold 60%and 40% in the joint venture, respectively.

With respect to the Kharampourskoye field, the licence to this field is held by Purneftegas. Rosneftand Gazprom recently signed a protocol to develop the Kharampourskoye gas field. This protocol alsorelates to the joint exploration and development of a number of other oil and gas fields, including theVyngayakhinskoye, Teypourovskoye, Prirazlomnoye and Shtokmanovskoye fields, which Gazpromaffiliates hold the licences to. Rosneft and Gazprom intend to form a joint venture to jointly developthese fields. Financing of each field development is expected to be in proportion to the relevant interest ofRosneft and Gazprom in the venture, which is initially contemplated to be 50-50. The protocols, however,provide for other partners, particularly foreign partners, to join Rosneft and Gazprom in developingthese fields.

International Projects

Rosneft is also investing in joint ventures in the Caspian region and in Kazakhstan. The Company iscurrently considering other future projects. Set forth below are brief descriptions of Rosneft’s currentprojects in these regions.

Caspian Pipeline Consortium

On 12 November 1996 Rosneft and Shell-Caspian B.V. signed an agreement for the establishmentof a joint venture for the Caspian Pipeline Consortium project (‘‘CPC’’) whereby Shell-Caspian agreed todefray Rosneft’s participation costs in the CPC at the initial construction stage in exchange for the optionto participate in the project. In consideration, Shell-Caspian will be entitled to most of Rosneft’s share ofthe profits; until all of its costs have been recovered. The basic project agreement for the establishment ofthe joint venture, the structure of the consortium and the intentions of the shareholders to the jointventure was executed on 6 December 1996 (the ‘‘CPC Agreement’’).

Up until the summer of 2001, CPC’s primary activity focused on the construction of an exportpipeline system, including a sea terminal with coastal installations, pipeline and pumping stations, and acommunications network. The pipeline is planned to be formally commissioned in October 2001.

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Upon completion of the initial stage of the pipeline construction, which will have a capacity of 28million metric tonnes per year, the joint venture will receive a transportation quota of 3 million tonnesper year, of which Rosneft will have a 51% stake. By the end of 2005, should there be a need to increasepumping capacity to 38 million metric tonnes per year, the transportation quota will also increase to5 million tonnes per year. The planned maximum capacity of the CPC pipeline is 65 million tonnesper year.

Kazakhstan

Rosneft is participating in the development of the Adaysky Block, in the Atyrau region inKazakhstan having entered into a Joint Operating Agreement between LLC RN-Kazakhstan, a Rosneftwholly-owned subsidiary, and First International Oil Corporation, USA (‘‘FIOC’’), dated 12 July 2001.Exploration rights for the Adaysky Block are held by Aday Petroleum Company, Kazakhstan, a jointventure between FIOC and LLC RN-Kazakhstan. FIOC and LLC RN-Kazakhstan will jointly fund theexploration and development, which will include seismic prospecting and exploratory drilling of subsaltand oversalt wells.

The proximity of the Fyodorovsky Prospective Block in Northwest Kazakhstan to the Uralsk-Samara Pipeline and the Orenburg refinery has precipitated another area of interest for Rosneft inKazakhstan. In order to explore and develop this field, a consortium has been set up, consisting ofRosneft, FIOC and Itera, with a 45%, 25% and 30% respective share therein.

Rosneft is currently considering possible involvement in other oil and gas projects in Kazakhstan.

Rosneft State-Authorised Participation in the Preparation of Russian PSAs

On 30 August 2001, pursuant to its Resolution No. 1155-r, the Russian Government appointedRosneft, along with the state enterprise Zarubezhneft, to be its duly authorised representatives chargedwith safeguarding the interests of the state during the preparation and implementation of PSAs overspecific hydrocarbon fields. The scope of Rosneft’s duties shall be set out in separate special agreementswhich the Russian Ministry of Economic Development and Trade plans to conclude with these entities. Ingeneral, Rosneft will help assist the Ministry in preparing a feasibility study, organising PSA tenders,drafting and negotiating PSAs, and in monitoring implementation of the PSA projects. To avoid apotential conflict of interest arising, Rosneft is not permitted simultaneously to act as the State’srepresentative and investor in the same project.

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INDEBTEDNESS

Rosneft has obtained additional financing from Russian and foreign banks in recent years, both tocarry out its ordinary activities and to accomplish particular projects. The State does not finance Rosneft’sactivities. The loans granted to Rosneft are generally secured by the pledge of property and the rightsunder crude oil export contracts. In order to satisfy the loan terms and perform its obligations to foreignbanks, Rosneft maintains a certain level of crude oil exports.

The table below shows the current status of outstanding loans of Rosneft and its SignificantSubsidiaries as of 9 September 2001.

Borrower Lender Principal amount(U.S.$)

Interest rate Outstandingdebt

(U.S.$)(1)

Maturity date Security of the loan

Rosneft Raiffeisen ZentralbankOsterreichAktiengesellschaft

50,000,000 LIBOR +3.875per annum

50,000,000 1.08.2003 Pledge of the rightsunder crude oilexport contract

Rosneft ABN AMRO BankA.O. Moscow

30,000,000 LIBOR+4.25%per annum

5,000,000 25.10.2001 Pledge of the rightsunder crude oilexport contracts,pledge of bankaccounts, andsurety

Rosneft ABN AMRO Bank(Luxembourg) S.A.

150,000,000 LIBOR+3.9%per annum

150,000,000 15.06.2003 Pledge of the rightsunder crude oilexport contract andsurety ofPurneftegas

Rosneft Moscow InternationalBank

140,000,000 LIBOR+4.5%per annum

140,000,000 12.06.2003 Pledge of propertyand surety ofPurneftegas

Rosneft Sberbank 14,000,000 12% perannum

14,000,000 11.04.2002 Pledge ofequipment and ofthe rights undercrude oil exportcontract

Rosneft Sberbank 20,000,000 12% perannum

20,000,000 24.04.2002 Pledge ofequipment and ofthe rights undercrude oil exportcontract

Rosneft Sberbank 90,000,000 10.5% perannum

90,000,000 18.09.2002 Pledge ofequipment and ofthe rights undercrude oil exportcontract

Rosneft Imperial Bank 50,779,678 N/A(2) 6,179,397 25.05.2002

Purneftegas EBRD 89,300,000 6.505% perannum

39,226,232 15.06.2006 The surety of theRussian Ministry ofEnergy

Purneftegas IBRD 116,400,000 6.83% perannum

51,971,567 15.12.2006 The surety of theRussian Ministry ofEnergy

Purneftegas Credit LyonnaisRusbank

12,000,000 LIBOR+3%per annum

363,828.1 30.09.2001 Assignment andpledge of the rightsunder crude oilexport contract;third partyguarantee

Sakhalin-morneftegas

EBRD 90,000,000 (ofwhich 40,000,000were drawn down)

LIBOR+5.25% 40,000,000 31.12.2009 Pledge of Sakhalin-morneftegasproperty

Total 606,741,024.1

Note:

(1) The outstanding debt does not include interest amount.

(2) Under a settlement agreement, Rosneft is repaying a fixed amount. See ‘‘Litigation – Recovery of Sums Payable by Rosneft’’.

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TAXES AND DUTIES ON OIL AND GAS

Profits Tax

Profits tax applies to the Company’s profit (revenue less expenses) at a rate of 11%-35%, dependingon the rate established by regional and local administrations. For the purposes of calculating profits, thereare certain restrictions on the deductibility of costs. Depreciation rates are somewhat slow. Thedeductibility of advertising expenses, representative expenses, business trip expenses and interest issubject to limitation.

Starting from 1 January 2002, the rate of profits tax is set at the basic rate of 24%, depending on therate established by regional and local administrations. Further, limitations on the deductibility of severaltypes of expenses (advertising, business trip and representative expenses) are to be either abolished ormade less restrictive.

VAT

VAT at a rate of 20% applies to all domestic sales and almost all domestic purchases. VAT payableto the budget is equal to output VAT received as a result of sales of goods (work or services) less inputVAT incurred as a result of the acquisition of goods (work or services). Export sales are exempted fromVAT with credit; refunds of input VAT in connection with these sales involve numerous administrativeprocedures and requirements and are usually made inaccurately and with significant delays. From 1 July2001, sales to CIS countries are treated as export sales for VAT purposes in contrast to the previousprocedure, whereby CIS sales were treated as domestic sales. The exception is made for oil, includingstable gas condensate and natural gas exported to CIS countries, which will be subject to VAT as before.

Road Users’ Tax

Road users’ tax applies at the rate of 1% to gross sales receipts (excluding output VAT) until31 December 2002, at which time it is to be abolished.

Export Duty

Export duty applies to exports of crude oil and gas. The current export duty on crude oil and oilproducts is set at 23.4 euros per tonne. The export duty is set at 40 euros per tonne for liquified natural gasand 10% but not less than 5 euro per tonne for natural gas in gaseous state.

Assets Tax

Assets tax applies at the rate of 2% to the average annual value of assets, including fixed assets,intangible assets, prepaid costs, work-in-progress, etc.

Royalties

Royalty payments are established in the licence agreement for each oil and gas field. The rate for oiland gas is set between 6% and 16% of the value of extracted gas and oil, depending on the particularconditions of each field. Losses of oil and gas in excess of the norms established by the annual plans ofwork are taxable at double this rate. Royalties will be abolished with the introduction of tax on theextraction of mineral resources on 1 January 2002 (see below).

Mineral Replacement Tax

Until the end of 2001, mineral replacement tax (‘‘MRT’’) applies to the value of oil and gas sold byoil and gas producing enterprises. The rate for crude oil and natural gas is 10% of the product’s price, netof VAT and excise duty. Part of the contributions allocated to regional budgets may be transferred toextraction organizations and enterprises for independent financing of exploratory work. This tax will beabolished with the introduction of tax on the extraction of mineral resources on 1 January 2002 (seebelow).

Excise Duty

Sales of crude oil and natural gas, including export, tolling and free-of-charge transfers, are subjectto excise duty. The rate for crude oil is set at RUB 66 per tonne. A rate of 15% applies to domestic salesof natural gas, including in cases in which gas is used for own purposes. The export excise duty rate fornatural gas is 30%. The tax base is the value of gas transferred for own use ‘‘at its accounting value’’, i.e.,the cost, but not less than the statutory regulated wholesale price calculated in accordance with the

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requirements of the Federal Energy Commission. Excise duty on crude oil will be abolished with theintroduction of tax on the extraction of mineral resources on 1 January 2002 (see below).

Tax on the Extraction of Mineral Resources

Beginning on 1 January 2002, this tax replaces the excise duty on crude oil, royalties and mineralreplacement tax. In 2002-2004 the tax rate for crude oil is set at RUB 340 per tonne, subject toadjustments depending on world prices for crude oil. From 1 January 2005, the rate will be 16.5% of thesales price of extracted oil. Tax on natural gas will be paid at a rate of 16.5% of the sales price ofextracted gas from 1 January 2002.

Unified Social Tax

As an employer, Rosneft pays a ‘‘unified social tax’’, which comprises contributions to the PensionFund, Social Insurance Fund and Medical Insurance Fund. Employees are not payers of unified social tax.The employer’s tax rate ranges from 35.6% to 5% of gross payroll, depending on the amount of theemployee’s annual gross income (2% from 1 January 2002).

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CHARTER CAPITAL AND SHAREHOLDERS

Under the 1995 Charter of Rosneft, the charter capital was set in the amount of RUB90,174,900,000, which was divided into 90,174,900 ordinary shares with a nominal value of RUB 1,000.This capital was formed with the assets of the former state entity Rosneft and the shares in its 32subsidiaries, most of which Rosneft had previously managed. See ‘‘Rosneft – Foundation andReorganisation’’. These shares were transferred to Rosneft pursuant to Resolution 971 and ResolutionNo. 273-r of the State Property Management Committee, dated 29 February 1996.

In 1998, while finalising the formalities related to the formation of the Company’s charter capitaland due to the change in face value of the Russian currency, the amount of the charter capital wasrecalculated and the charter capital of Rosneft was determined in the amount of 90,179,359 Roubles anddivided into 88,733,312 ordinary shares (98.4% of the charter capital) and 1,446,047 preference shares(1.6% of the charter capital), nominal value RUB 1.0 per share. The Federal Commission on theSecurities Market (the ‘‘FCSM’’) registered the reports on the issuance of both ordinary and preferenceshares of Rosneft on 19 March 1998.

Under Resolution 971, 51% of Rosneft shares were to be retained under State ownership for aperiod of three years, which expired on 29 September 1998. As of August 2001, all of the Rosneft sharesare held by the State.

As of 1 October 2001, 75% less one share of the total number of Rosneft shares are held by theMinistry of Property Relations of the Russian Federation and 25% plus one share of the total number ofRosneft shares are held by the Russian Federal Property Fund.

According to Resolution 971, the State Property Management Committee (‘‘GKI’’) was entitled toexercise the powers of the Russian Federation as a 100% shareholder of Rosneft. Pursuant to theResolution of the Russian Government No. 929, dated 11 August 1998, both of the above agencies areentitled to exercise the authority of the sole shareholder – the Russian Federation – upon the co-ordination of their position with the Ministry of Energy of the Russian Federation.

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MANAGEMENT AND EMPLOYEES

Management

The Board of Directors of the Company (the ‘‘Board’’) currently consists of 12 members. TheBoard directs the strategy and policy of the Company between shareholders’ meetings and has authorityto make decisions on all aspects of the Company’s activities, except those matters explicitly reserved tothe shareholders in the Company’s Charter. Each of the current directors, all of whom were appointed bythe State, was elected at a meeting on 7 June 2001.

The members of Rosneft’s Management Board are appointed by the Board following a proposal ofRosneft’s President, and are responsible for the day-to-day management of the Company. They includethe President, First Vice-Presidents, Vice-Presidents and the Councillor to the President of the Company.

The current Board members are as follows:

Name Age PositionOther Significant Positions Held(as of 31 August 2001)

Greff G. O. 37 Chairman of the Board Minister of Economic Developmentand Trade of the Russian Federation

Bogdanchikov S. M. 44 Member of the Board Rosneft President

Gitlin I. B. 39 Member of the Board Head of Department of the Ministryof Energy of the Russian Federation

Danilov-Danilyan A. V. 35 Member of the Board Head of the Economic Directorate ofthe President of the Russian Federation

Mazepin D. A. 33 Member of the Board Deputy Chairman of the RussianFederal Property Fund

Malin V. V. 42 Member of the Board Chairman of the Russian FederalProperty Fund

Matlashov I. A. 55 Member of the Board First Deputy Minister of the Ministryof Energy of the Russian Federation

Medvedev Iu. M. 53 Member of the Board First Deputy Minister of PropertyRelations of the Russian Federation

Pak V. A. 42 Member of the Board First Deputy Minister of the NaturalResources of the Russian Federation

Riybak O. P. 44 Member of the Board Councillor of the Minister of PropertyRelations of the Russian Federation

Sedov M. S. 60 Member of the Board Head of Division of the Departmentof the Ministry of Property Relationsof the Russian Federation

Tsiyganov A. G. 40 Member of the Board Deputy Minister of AntimonopolyPolicy and Support of EntrepreneurialActivity of the Russian Federation

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The members of Rosneft’s Management Board are as follows:

Name Age Position

Other SignificantPositions Held(as of 31 August 2001)

Bogdanchikov S. M. 44 Chairman of the Management Board Rosneft President

Borisenko N. A. 45 Member of the Management Board First Vice-President

Terpugov E. K. 48 Member of the Management Board First Vice-President

Loktionov A. G. 54 Member of the Management Board First Vice-President

Baranovskyi A. I. 59 Member of the Management Board Vice-President

Oganesyan S. A. 48 Member of the Management Board Vice-President

Khachaturov R. M. 69 Member of the Management BoardCounsellor to thePresident of Rosneft

The business address of all of the Directors and members of the management board is that of theregistered office of the Company.

Employees

As at 31 December 2000, Rosneft and its subsidiaries had approximately 54,832 employees. As partof its legal and structural reorganisation and due to decreased oil production, Rosneft and its subsidiariesreduced the number of their employees by over 7.6% between 31 December 1998 and 31 December 1999.Since 1999, the overall number of employees has been increasing. The Company expects further increasesin the number of employees as production volumes increase.

Although in the past the Company and its subsidiaries experienced difficulties in paying wages dueto cash flow shortages, similar to those experienced by other Russian companies, no wage arrearscurrently exist and the Company has experienced no material labour disputes or strikes at its oilproduction, refining or distribution subsidiaries. The Directors consider employee relations to be good.

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The following table shows the approximate number of employees of the Company and its subsidiaries in the threeyears ended 31 December 2000 and at 30 June 2001:

1998 1999 200030 June

2001

Oil Production .......................................................... 37,205 32,331 35,996 38,143Refining ...................................................................... 2,541 2,611 2,983 2,931Distribution and Sales .............................................. 10,367 9,201 9,094 9,465Other (subsidiaries) .................................................. 6,870 8,537 6,191 3,799Head Office ................................................................ 570 515 568 561Total ............................................................................ 57,553 53,195 54,832 54,899

The Company believes that its employee turnover is similar to other Russian oil companies.

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TERMS AND CONDITIONS OF THE NOTES

The following is the text of the Terms and Conditions of the Notes which, subject to amendment andcompletion, will be endorsed on each Note Certificate in definitive form (if issued):

The U.S.$l l% Loan Participation Notes due 20ll (the ‘‘Notes’’), which expression includes anyfurther notes issued pursuant to Condition 14 (Further issues) and forming a single series therewith ofABN AMRO Bank (Luxembourg) S.A. (the ‘‘Bank’’) are (a) constituted by, subject to, and have thebenefit of, a trust deed dated l 200l (as amended or supplemented from time to time, the ‘‘Trust Deed’’)between the Bank, and The Bank of New York as trustee (the ‘‘Trustee’’, which expression includes allpersons for the time being appointed as trustee or trustees under the Trust Deed) and (b) are the subjectof an agency agreement dated l 200l (as amended or supplemented from time to time, the ‘‘AgencyAgreement’’) between the Bank, The Bank of New York as registrar (the ‘‘Registrar’’, which expressionincludes any successor registrar appointed from time to time in connection with the Notes), The Bank ofNew York as principal paying agent (the ‘‘Principal Paying Agent’’, which expression includes anysuccessor principal paying agent appointed form time to time in connection with the Notes), the transferagents named therein (the ‘‘Transfer Agents’’, which expression includes any successor or additionaltransfer agents appointed from time to time in connection with the Notes), the paying agents namedtherein (together with the Principal Paying Agent, the ‘‘Paying Agents’’, which expression includes anysuccessor or additional paying agents appointed from time to time in connection with the Notes) and theTrustee. References herein to the ‘‘Agents’’ are to the Registrar, the Principal Paying Agent, the TransferAgents and the Paying Agents and any reference to an ‘‘Agent’’ is to any one of them.

The Bank has authorised the creation, issue and distribution of the Notes for the sole purpose offunding the U.S.$l l-year loan (the ‘‘Loan’’) to OJSC Oil Company Rosneft (the ‘‘Borrower’’). Theterms of the Loan are set forth in a loan agreement (the ‘‘Loan Agreement’’) dated l 200l between theBank and the Borrower.

In each case where amounts of principal, interest and additional amounts (if any) are stated in theseconditions or in the Trust Deed to be payable in respect of the Notes, the obligations of the Bank to makeany such payment shall constitute an obligation only to pay to the Noteholders (as defined in Condition1.2) on each date upon which such amounts of principal, interest and additional amounts (if any) are duein respect of the Notes, an amount equal to and in the same currency as sums of principal, interest at theContract Rate (as defined in the Loan Agreement and described below) and certain additional amounts(if any) actually received (and not required to be repaid) by or for the account of the Bank pursuant tothe Loan Agreement less any amount in respect of the Reserved Rights (as defined below).

The Bank with full title guarantee and as continuing security for the payment and discharge of theSecured Obligations has charged to the Trustee to hold the same on trust on the terms set out in the TrustDeed by way of first fixed charge (the charge so created being defined in the Trust Deed as the‘‘Charge’’):

(a) all principal, interest (at the Contract Rate) and other amounts now or hereafter payable bythe Borrower to the Bank as lender under the Loan Agreement;

(b) the right to receive all sums which may be or become payable by the Borrower under anyclaim, award or judgment relating to the Loan Agreement; and

(c) all the rights, title and interest in and to all sums of money now or in the future deposited inthe Account (as defined in the Trust Deed) in the name of the Bank with the Principal PayingAgent and the debts represented thereby (other than interest, if any, from time to time earnedthereon) (the rights and property described in paragraphs (a), (b) and (c) being defined in theTrust Deed together as the ‘‘Charged Property’’),

provided, however, that the Reserved Rights and any amounts payable by the Borrower in relationto the Reserved Rights are not subject to the Charge and, accordingly, do not form part of the ChargedProperty.

In addition, the Bank with full title guarantee has assigned absolutely to the Trustee for the benefitof itself and the Noteholders all the rights, titles, interests and benefits of the Issuer whatsoever, bothpresent and future, whether proprietary, contractual or otherwise under or arising out of or evidenced bythe Loan Agreement (including, without limitation, the right to declare the Loan immediately due andpayable and to take proceedings to enforce the obligations of the Borrower thereunder) other than theCharged Property and the Reserved Rights and any amounts payable by the Borrower in relation to theCharged Property and the Reserved Rights (the rights so transferred being defined in the Trust Deed as

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the ‘‘Transferred Rights’’). The security created by the provisions of the Trust Deed described in this andthe above paragraph being defined in the Trust Deed as the ‘‘Security Interests’’.

In the Trust Deed:

‘‘Reserved Rights’’ are defined to mean all and any rights, interests and benefits in respect of theobligations of the Borrower under the following Clauses of the Loan Agreement:

Clause 2.1 (The Facility); Clause 3 (Availability of the Facility); Clause 5.3 (Prepayment forIllegality) (other than the right to receive any amount payable under such Clause); Clause 5.5 (Costs ofPrepayment); Clauses 6 (Interest Periods) and 7 (Interest) (but only to the extent of interest payblethereunder at the Additional Margin as defined in the Loan Agreement); Clause 8.1 (Costs relating to theAgreement); Clause 8.2 (Deductions from Advance); Clause 8.3 (Invoices); Clause 9.2 (Tax Indemnity);Clause 9.3 (Taxes on Notes) (but only to the extent that Issuer’s rights thereunder relate to amountspayable by the Borrower to the Issuer to indemnify the Issuer against any payment or liability, togetherwith any interest, penalties, costs and expenses payable or incurred in connection therewith, in respect ofor on account of Taxes imposed on the Issuer by any taxing authority of or in, or having authority to taxin, the Russian Federation or Luxembourg other than by deduction or withholding on any payment madeby the Issuer under the Notes); Clause 9.4 (Tax Credits and Tax Refunds); Clause 9.5 (Delivery of Forms);Clause 11 (Change in Circumstances); Clause 17.1 (General Indemnity); Clause 17.2 (IndependentObligation); Clause 17.3 (Survival) (to the extent the Issuer’s rights thereunder relate to Clause 9.2 (TaxIndemnity) or the portion of Clause 9.3 (Taxes on Notes) hereinbefore referred to, or Clause 17.1(General Indemnity)); Clause 18.1 (Currency of Account) and Clause 18.2 (Currency Indemnity) (in eachcase, to the extent that the Issuer’s rights are in respect of one of the other Clauses of the LoanAgreement, or relevant portion thereof, set forth in this definition); Clause 19.3 (Clear Payments) (butonly to the extent that the Issuer’s rights thereunder relate to any payment due to the Issuer under anyother Clause, or portion thereof, specified in this definition), Clause 20.3 (Certificate of Bank) (but only tothe extent that the Issuer’s rights thereunder relate to amounts payable to the Issuer under any otherClause, or portion thereof, specified in this definition); Clause 22.1 (Costs Relating to Preservation ofRights); Clause 22.2 (Taxes); Clause 22.3 (Costs Relating to Amendments and Waivers) (but only to theextent the Issuer’s rights thereunder relate to time, costs and expenses of the Bank and its directors,officers and employees); Clause 24 (Remedies and Waivers) (but only to the extent that the Issuer’s rightsthereunder relate to its rights under any other Clause, or portion thereof, specified in this definition);Clause 27 (Partial Invalidity) (but only to the extent that the Issuer’s rights thereunder relate to its rightsunder any other Clause, or portion thereof, specified in this definition); Clause 30 (Law and Jurisdiction)(but only to the extent that the Issuer’s rights thereunder relate to its rights under any other Clause, orportion thereof, specified in this definition);

‘‘Secured Obligations’’ are defined to mean all present and future obligations and liabilities of theBank to the Trustee and the Noteholders and any Receiver (as defined in the Trust Deed) appointedunder the Trust Deed (or any of them) under or in relation to any one or more of the Notes, the AgencyAgreement or the Trust Deed provided that no obligation or liability shall be included in the definition of‘‘Secured Obligations’’ to the extent that, if it were so included, the Security Interests (or any partthereof) created by the Trust Deed or any other provision of the Trust Deed would be unlawful orprohibited by any applicable law; and

‘‘Secured Property’’ is defined to mean the Charged Property and the Transferred Rights.

In certain circumstances, the Trustee can (subject to it being indemnified and/or secured to itssatisfaction) be required by Noteholders holding at least one quarter of the principal amount of the Notesoutstanding or by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders toexercise certain of its powers under the Trust Deed (including those arising in connection with theSecurity Interests).

Certain provisions of these Conditions are summaries of the Trust Deed and the AgencyAgreement and are subject to their detailed provisions. The Noteholders are bound by, and are deemedto have notice of, all the provisions of the Trust Deed and the Agency Agreement applicable to them.Copies of the Trust Deed, the Agency Agreement and the Loan Agreement are available for inspectionby Noteholders during normal business hours at the Specified Offices (as defined in the AgencyAgreement) of each of the Agents, the initial Specified Offices of which are set out below, and at theregistered office for the time being of the Trustee, being at the date hereof One Canada Square, LondonE14 5AL, United Kingdom.

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1. Form, Denomination and Title

1.1 The Notes are in registered form in the denomination of U.S.$1,000. Notes may be held in holdingsin the aggregate principal amount of U.S.$10,000 and integral multiples of U.S.$1,000 in excessthereof (each, an ‘‘Authorised Holding’’).

1.2 The Registrar will maintain a register (the ‘‘Register’’) in respect of the Notes in accordance withthe provisions of the Agency Agreement. In these Conditions, the ‘‘Holder’’ of a Note means theperson in whose name such Note is for the time being registered in the Register (or, in the case of ajoint holding, the first named thereof) and ‘‘Noteholder’’ shall be construed accordingly. Acertificate (each, a ‘‘Note Certificate’’) will be issued to each Noteholder in respect of its registeredholding. Each Note Certificate will be numbered serially with an identifying number that will berecorded in the Register.

1.3 The Holder of each Note shall (except as otherwise required by law) be treated as the absoluteowner of such Note for all purposes (whether or not it is overdue and regardless of any notice ofownership, trust or any other interest therein, any writing on the Note Certificate relating thereto(other than the endorsed form of transfer) or any notice of any previous loss or theft or such NoteCertificate) and no person shall be liable for so treating such Holder.

1.4 No person shall have any right to enforce any term or condition of the Notes under the Contracts(Rights of Third Parties) Act 1999.

2. Transfers

2.1 Subject to Conditions 2.4 and 2.5, a Note may be transferred upon surrender of the relevant NoteCertificate, with the endorsed form of transfer duly completed, at the Specified Office of theRegistrar or any Transfer Agent, together with such evidence as the Registrar or (as the case maybe) such Transfer Agent may reasonably require to prove the title of the transferor and theauthority of the individuals who have executed the form of transfer; provided, however, that (a) aNote may not be transferred unless the principal amount of Notes transferred and (where not all ofthe Notes held by a Holder are being transferred) the principal amount of the balance of Notes nottransferred are Authorised Holdings and (b) Notes which are restricted securities within themeaning of Rule 144(a)(3) under the United States Securities Act of 1933 may only be transferredin a minimum aggregate amount of U.S.$100,000.

2.2 Within five business days of the surrender of a Note Certificate in accordance with Condition 2.1,the Registrar will register the transfer in question and deliver a new Note Certificate of a likeprincipal amount to the Notes transferred to each relevant Holder at its Specified Office or (as thecase may be) the Specified Office of any Transfer Agent or (at the request and risk of any suchrelevant Holder) by uninsured first class mail (airmail if overseas) to the address specified for thepurpose by such relevant Holder. In this Condition 2.2, ‘‘business day’’ means a day on whichcommercial banks are open for business (including dealings in foreign currencies) in the city wherethe Registrar or (as the case may be) the relevant Transfer Agent has its Specified Office.

2.3 The transfer of a Note will be effected without charge by or on behalf of the Bank, the Registrar orany Transfer Agent but against such indemnity as the Registrar or (as the case may be) suchTransfer Agent may require in respect of any tax or other duty of whatsoever nature which may belevied or imposed in connection with such transfer.

2.4 Noteholders may not require transfers to be registered during the period of 15 days ending on thedue date for any payment of principal or interest in respect of the Notes.

2.5 All transfers of Notes and entries on the Register are subject to the detailed regulations concerningthe transfer of the Notes scheduled to the Agency Agreement. The regulations may be changed bythe Bank with the prior written approval of the Trustee and the Registrar. A copy of the currentregulations will be mailed (free of charge) by the Registrar to any Noteholder who requests a copyof such regulations in writing.

3. Status

3.1 The sole purpose of the issue of the Notes is to provide the funds for the Bank to fund the Loan.The Notes constitute the obligation of the Bank to apply the proceeds from the issue of the Notessolely for funding the Loan and to pay to the Noteholders an amount equal to and in the samecurrency as sums of principal, interest (at the Contract Rate) and additional amounts (if any)

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actually received (and not required to be repaid) by or for the account of the Bank pursuant to theLoan Agreement less any amounts in respect of the Reserved Rights.

3.2 Payments in respect of the Notes equal to the sums actually received (and not required to be repaid)by or for the account of the Bank by way of principal, interest (at the Contract Rate) or additionalamounts (if any) pursuant to the Loan Agreement less any amounts in respect of the ReservedRights will be made to the Noteholders (to each Noteholder pro rata to the principal amount ofNotes held by such Noteholder) in the currency of, and subject to the conditions attaching to, theequivalent payment under the Loan Agreement, and on the Business Day after receipt by the Bankof such payment. The Bank shall not be liable to make any payment in respect of the Notes otherthan as expressly provided in these Conditions. The Bank shall be under no obligation to exercise infavour of the Noteholders any rights of set-off or of banker’s lien or to combine accounts orcounterclaim that may arise out of other transactions between the Bank and the Borrower. In theseConditions, ‘‘Business Day’’ means a day (other than a Saturday or a Sunday) on which banks aregenerally open for business (including dealings in foreign exchange and foreign currency accounts)in Luxembourg and New York city.

3.3 It is hereby expressly provided that, and Noteholders are deemed to have accepted that:

(a) neither the Bank nor the Trustee makes any representation or warranty in respect of, and shallat no time have any responsibility for, or liability, or obligation in respect of the performanceand observance by the Borrower of its obligations under the Loan Agreement or therecoverability of any sum of principal, interest or additional amounts (if any) due or tobecome due from the Borrower under the Loan Agreement;

(b) neither the Bank nor the Trustee shall at any time have any responsibility for, or obligation orliability in respect of, the financial condition, creditworthiness, affairs, status or nature of theBorrower;

(c) neither the Bank nor the Trustee shall at any time be liable for any misrepresentation orbreach of warranty or any act, default or omission of the Borrower under or in respect of theLoan Agreement;

(d) neither the Bank nor the Trustee (acting as Trustee) shall at any time have any responsibilityfor, or liability or obligation in respect of, the performance and observance by the Agents oftheir respective obligations under the Agency Agreement;

(e) the financial servicing and performance of the terms of the Notes depend solely andexclusively upon performance by the Borrower of its obligations under the Loan Agreement,its covenant to pay under the Loan Agreement and its credit and financial standing; and

(f) the Bank (and, following the Loan Administration Transfer (as defined in the LoanAgreement), the Trustee) is entitled , in the absence of manifest error, to rely on certificates ofthe Borrower delivered pursuant to the terms of the Loan Agreement and, in the case of theTrustee, of the Bank pursuant to the terms of the Trust Deed as a means of monitoringwhether the Borrower and, in the case of the Trustee, the Bank is complying with itsobligations under the Loan Agreement or, as the case may be, the Trust Deed and shall nototherwise be responsible for investigating any aspect of the Borrower’s nor, as the case maybe, the Bank’s performance in relation thereto and, subject as further provided in the TrustDeed, the Trustee shall not be bound or concerned to enquire into or be liable for any defector failure in the right of title of the Bank to the Secured Property whether such defect orfailure was known to the Trustee or might have been discovered upon examination or enquiryor whether capable of remedy or not, nor will it have any liability for any failure, omission ordefect in perfecting, protecting or further assuring the Secured Property or the SecurityInterests including (without prejudice to the generality of the foregoing) any failure, omissionor defect in registering or filing or procuring registration or filing of or otherwise protecting orperfecting the Secured Property or the Security Interests and the Trustee has no responsibilityfor, and shall be entitled to assume, the suitability, adequacy, fitness, efficacy and/orenforceability of the Secured Property, the Security Interests or any of the terms of the LoanAgreement, the Notes or the Trust Deed.

3.4 Save as otherwise expressly provided in the Trust Deed, no proprietary or other direct interest inthe Bank’s rights under or in respect of the Loan Agreement or the Loan exists for the benefit of theNoteholders. Save as otherwise expressly provided in the Trust Deed (including in relation to the

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Security Interests), no Noteholder will have any entitlement to enforce any of the provisions of theLoan Agreement or have direct recourse to the Borrower. Neither the Bank nor the Trusteefollowing the Loan Administration Transfer shall be required to take proceedings to enforcepayment under the Loan Agreement unless it has been indemnified and/or secured by theNoteholders to its satisfaction.

3.5 The obligations of the Bank to make payments (once such obligations have arisen following receiptof the relevant amounts from the Borrower as described in Conditions 3.1 and 3.2) constitute directand general obligations of the Bank which will at all times rank pari passu among themselves and atleast pari passu with all other present and future unsecured obligations of the Bank, save for suchobligations as may be preferred by provisions of law that are both mandatory and of generalapplication.

3.6 In the event that (including, without limitation following enforcement of the security created by theTrust Deed), any amounts of principal, interest or other amounts (other than in respect of theReserved Rights) are received by the Trustee under the Loan Agreement, such amounts shall (forthe purposes of these Conditions) be deemed to have been received by or on behalf of the Bank andto give rise to the obligation on the part of the Bank to make payments equal to and in the samecurrency as such amounts. Any amounts so received by the Trustee will satisfy pro tanto theobligations of the Bank in respect of the Notes.

4. Restrictive Covenant

As provided in the Trust Deed, so long as any of the Notes remain outstanding (as defined in theTrust Deed), the Bank will not, without the prior written consent of the Trustee, agree to anyamendments to or any modification or waiver of, or authorise any breach or proposed breach of, theterms of the Loan Agreement and will act at all times in accordance with any instructions of the Trusteefrom time to time with respect to the Loan Agreement (subject to being indemnified and/or secured to itssatisfaction), except, in either case, in relation to the Reserved Rights. Any such amendment,modification, waiver or authorisation made with the consent of the Trustee shall be binding on theNoteholders and, unless the Trustee agrees otherwise, any such amendment or modification shall benotified by the Bank to the Noteholders in accordance with Condition 12 (Notices).

5. Interest

5.1 Subject to and in accordance with Condition 6 (Payments), on each Interest Payment Date the Bankshall pay to the Noteholders an amount equal to and in the same currency as the amount of interestat the Contract Rate actually received by or for the account of the Bank on the Business Daypreceding such Interest Payment Date pursuant to the Loan Agreement. Under the LoanAgreement, ‘‘Contract Rate’’ means l% per annum.

5.2 Interest shall accrue on the Loan from day to day from (and including) the Closing Date to (butexcluding) the due date for repayment thereof unless payment of principal is improperly withheld orrefused, in which event interest will continue to accrue (before or after any judgement) at theInterest Rate to but excluding the date on which payment in full of the principal thereof is made.Under the Loan Agreement, ‘‘Interest Rate’’ is defined as the sum of the Contract Rate and theAdditional Margin (which forms part of the Reserved Rights).

5.3 The amount of interest payable in respect of the Loan for any Interest Period shall be calculated byapplying the Rate of Interest to the principal amount of the Loan, dividing the product by two androunding the resulting figure to the nearest cent (half a cent being rounded upwards).

5.4 If interest on the Loan is required to be calculated for any other period, it will be calculated on thebasis of a year of 360 days consisting of 12 months of 30 days each and, in the case of an incompletemonth, the actual number of days elapsed, provided that for the purposes of calculating the amountof interest payable in respect of such period under the Loan, such period shall be deemed to end oneBusiness Day after the date on which the relevant amount is payable (or, as the case may be, paid)under the Loan.

5.5 In the event that, and to the extent that the Bank actually receives any amounts in respect ofinterest on payments of principal improperly withheld or refused by the Borrower after the due datefor repayment pursuant to Clause 6 (Interest Periods) of the Loan Agreement, the Bank shall pay tothe Noteholders an amount equal to and in the same currency as such amounts actually received byor for the account of the Bank in accordance with the Loan Agreement less any amount in respect

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of the Reserved Rights. Any payments made by the Bank under this Condition 5.5 will be made onthe next following Business Day after the day on which the Bank receives such amounts from theBorrower all subject to and in accordance with Condition 6 (Payments).

5.6 As used in this Condition 5 (Interest), ‘‘Closing Date’’, ‘‘Interest Payment Date’’ and ‘‘InterestPeriod’’ shall have the meanings given to them in the Loan Agreement. In the Loan Agreement,‘‘Interest Payment Date’’ is defined as l and l in each year. Under the Loan Agreement, theBorrower is required, one Business Day prior to each Interest Payment Date, to pay to the Bank anamount equal to and in the same currency as the full amount of interest accruing during the InterestPeriod ending on such Interest Payment Date.

6. Payments

6.1 Payments of principal shall be made by U.S. dollar cheque drawn on, or, upon application by aHolder of a Note to the Specified Office of the Principal Paying Agent not later than the fifteenthday before the due date for any such payment, by transfer to a U.S. dollar account maintained bythe payee with, a bank in New York City upon surrender (or, in the case of part payment only,endorsement) of the relevant Note Certificates at the Specified Office of any Paying Agent.

6.2 Payments of interest shall be made by U.S. dollar cheque drawn on, or upon application by a Holderof a Note to the Specified Office of the Principal Paying Agent not later than the fifteenth daybefore the due date for any such payment, by transfer to a U.S. dollar account maintained by thepayee with, a bank in New York City and (in the case of interest payable on redemption) uponsurrender (or, in the case of part payment only, endorsement) of the relevant Note Certificates atthe Specified Office of any Paying Agent.

6.3 All payments in respect of the Notes are subject in all cases to any applicable or other laws andregulations in the place of payment, but without prejudice to the provisions of Condition 8(Taxation). No commissions or expenses shall be charged to the Noteholders in respect of suchpayments.

6.4 Where payment is to be made by transfer to a U.S. dollar account, payment instructions (for valuethe due date, or, if the due date is not a business day, for value the next succeeding business day)will be initiated and, where payment is to be made by U.S. dollar cheque, the cheque will be mailed(a) (in the case of payments of principal and interest payable on redemption) on the later of the duedate for payment and the day on which the relevant Note Certificate is surrendered (or, in the caseof part payment only, endorsed) at the Specified Office of a Paying Agent and (b) (in the case ofpayments of interest payable other than on redemption) on the due date for payment. A Holder of aNote shall not be entitled to any interest or other payment in respect of any delay in paymentresulting from (i) the due date for a payment not being a business day or (ii) a cheque mailed inaccordance with this Condition 6 (Payments) arriving after the due date for payment or being lost inthe mail. In this Condition 6.4, ‘‘business day’’ means any day on which banks are open for business(including dealings in foreign currencies) in New York City.

6.5 If the Principal Paying Agent makes a partial payment in respect of any Note, the Bank shallprocure that the amount and date of such payment are noted on the Register and, in the case ofpartial payment upon presentation of a Note Certificate, that a statement indicating the amount andthe date of such payment is endorsed on the relevant Note Certificate.

6.6 Each payment in respect of a Note will be made to the person shown as the Holder in the Registerat the opening of business in the place of the Registrar’s Specified Office on the fifteenth day beforethe due date for such payment (the ‘‘Record Date’’). Where payment in respect of a Note is to bemade by cheque, the cheque will be mailed to the address shown as the address of the Holder in theRegister at the opening of business on the relevant Record Date.

6.7 Save as the Trustee may otherwise direct at any time after any of the Security Interests createdpursuant to the Trust Deed becomes enforceable, the Bank will pursuant to the provisions of Clause7 (Payments to the Principal Paying Agent) of the Agency Agreement require the Borrower to makeall payments of principal and interest to be made pursuant to the Loan Agreement, less anyamounts in respect of the Reserved Rights, to the Account.

6.8 Notwithstanding any other provision of the Notes, the obligations of the Bank to make paymentsunder the Notes shall constitute an obligation only to pay to the Noteholders on such date uponwhich a payment is due in respect of the Notes, an amount equal to and in the same currency as

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sums of principal, interest at the Contract Rate and/or applicable additional amounts (if any)actually received by or for the account of the Bank pursuant to the Loan Agreement less anyamount in respect of the Reserved Rights. The Bank shall make payment hereunder on theBusiness Day after the date on which it has received the corresponding amount from the Borrowerunder the Loan.

6.9 In acting under the Agency Agreement and in connection with the Notes, the Agents act solely asagents of the Bank and (to the extent provided therein) the Trustee and do not assume anyobligations towards or relationship of agency or trust for or with any of the Noteholders. The initialAgents and their initial Specified Offices are listed below. The Bank reserves the right (with priorapproval of the Trustee) at any time to vary or terminate the appointment of any Agent and toappoint a successor registrar or principal paying agent and additional or successor paying agents andtransfer agents; provided, however, that the Bank shall at all times maintain a paying agent andtransfer agent in Luxembourg, a registrar and a principal paying agent. In addition, the Bankundertakes that, if the conclusions of the ECOFIN Council meeting of 26-27 November 2000 areimplemented, the Bank will ensure that to the extent reasonably practicable it maintains a payingagent in a European Union member state that will not be obliged to withhold or deduct taxpursuant to any European Union Directive referred to in Condition 8.1(c). Notice of any change inany of the Agents or in their Specified Offices shall promptly be given to the Noteholders inaccordance with Condition 12 (Notices).

7. Redemption and Purchase

7.1 Unless previously redeemed or purchased by the Borrower and cancelled by or on behalf of theIssuer as provided below, the Notes will be redeemed at their principal amount on l l 200l,subject to receipt by the Bank of the corresponding amount under the Loan Agreement andotherwise as provided in Condition 6 (Payments). Under the Loan Agreement, the Borrower isrequired to repay the Loan in full one Business Day prior to such date.

7.2 Under the Loan Agreement: :

(a) the Borrower may, in the circumstances set out in Clause 5.1 (Prepayment for Tax Reasonsand Changes in Circumstances) of the Loan Agreement prepay the Loan in whole but not inpart; and

(b) the Bank may require the Borrower to prepay the Loan in whole in the circumstances set outin Clause 5.3 (Prepayment for Illegality) of the Loan Agreement.

In the event that the Bank receives a notice from the Borrower pursuant to Clause 5.1 (Prepaymentfor Tax Reasons and Change in Circumstances) or the Loan is to be repaid pursuant to Clause 5.3(Prepayment for Illegality), then the Bank shall within 10 Business Days of receiving such noticeunder Clause 5.1 (Prepayment for Tax Reasons and Change in Circumstances) or of the Loanbecoming repayable under Clause 5.3 (Prepayment of Illegality) deliver notice thereof to theNoteholders in accordance with condition 12 (Notices). A copy of the Borrower’s notice ofprepayment under Clause 5.1 (Prepayment for Tax Reasons and Change in Circumstances) or theBank’s notice contemplated by Clause 5.3 (Prepayment for Illegality) of the Loan Agreement andthe date fixed for repayment of the Loan shall be set forth in the notice given to Noteholdershereunder.

If the Loan is to be prepaid pursuant to Clause 5.1 (Prepayment for Tax Reasons and Change inCircumstances) or Clause 5.3 (Prepayment for Illegality), then the Loan shall be repaid by theBorrower on the Business Day falling one Business Day prior to (as the case may be) (i) the datespecified by the Borrower pursuant to Clause 5.1 (Prepayment for Tax Reasons and Change inCircumstances); or (ii) the date specified by the Bank pursuant to Clause 5.3 (Prepayment forIllegality), together in any such case with (A) accrued interest calculated in respect of the whole ofthe period ending on (as the case may be) such date specified by the Borrower, or date specified bythe Bank and (B) any other amounts payable by the Borrower pursuant to the Loan Agreement.

The Trustee shall be entitled to accept any notice or certificate delivered by the Bank in accordancewith this Condition 7.2 or the Loan Agreement or by the Borrower in accordance with the LoanAgreement as sufficient evidence of the satisfaction of the applicable circumstances in which eventthey shall be conclusive and binding on the Noteholders.

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On the Business Day following the date the Loan is properly repaid in accordance with Clause 5.1(Prepayment for Tax Reasons and Change in Circumstances) or Clause 5.3 (Prepayment forIllegality) (as the case may be), the Bank shall be bound to redeem the Notes in accordance with thisCondition 7 (Redemption and Purchase), subject as provided in Condition 6 (Payments).

7.3 The Bank shall, at the option of the Holder of any Note redeem such Note on the sixtieth day afternotice has been given by or on behalf of the Bank to Noteholders of a Change of Control (as definedin the Loan Agreement and described below) in accordance with Condition 12 (Notices) (the ‘‘PutSettlement Date’’) at its principal amount together with accrued interest at the Contract Rate,subject as provided in Condition 6. Pursuant to Clause 5.2 (Prepayment in the Event of Change ofControl) of the Loan Agreement, the Borrower is required to give notice to the Bank (and,following the Loan Administration Transfer, the Trustee), promptly, and in any event within oneLocal Business Day (as defined in the Loan Agreement) after the date of any Change of Controland to prepay the Loan to the extent of the aggregate principal amount of the Notes to be properlyredeemed in accordance with this Condition 7.3. Under the Loan Agreement, the Borrower isrequired to prepay such amount on the Business Day prior to the Put Settlement Date togetherwith, inter alia, accrued interest calculated in respect of the whole of the period ending on the PutSettlement Date. In order to exercise the option contained in this Condition 7.3, the Holder of aNote must, not less than 15 days before the Put Settlement Date, deposit with any Paying Agent theNote Certificate relating to such Note and a duly completed put option notice (a ‘‘Put OptionNotice’’) in the form obtainable from any Paying Agent. No Note Certificate, once deposited with aduly completed Put Option Notice in accordance with this Condition 7.3, may be withdrawn;provided, however, that if, prior to the Put Settlement Date, a Relevant Event (as defined below)has occurred or, upon due presentation of any Note Certificate on the Put Settlement Date,payment of the redemption moneys is improperly withheld or refused, such Note Certificate shall,without prejudice to the exercise of the Put Option, be returned to the Holder by uninsured firstclass mail (airmail if overseas) at such address as may have been given by such Holder in therelevant Put Option Notice.

‘‘Change of Control’’ is defined in the Loan Agreement to mean the government of the RussianFederation ceasing to own and control (directly or indirectly) at least 51% of the issued andoutstanding share capital of the Borrower.

Subject to timely receipt of the relevant amounts from the Borrower under the Loan Agreement,the Bank shall be bound to redeem the Notes in accordance with this Condition 7 (Redemption andPurchase) on the Put Settlement Date, subject as provided in Condition 6 (Payments).

7.4 To the extent that the Bank receives amounts of principal, interest or other amounts (other thanamounts in respect of the Reserved Rights) following acceleration of the Loan pursuant to Clause16.3 (Acceleration), the Bank shall pay an amount equal to and in the same currency as suchamounts on the Business Day following receipt of such amounts, subject as provided in Condition 6(Payments).

7.5 The Loan Agreement provides that the Borrower may, among others things, from time to timedeliver to the Bank Notes, having an aggregate principal value of at least U.S.$1,000,000 togetherwith a request for the Bank to present such Notes to the Registrar for cancellation, whereupon theBank shall, pursuant to the Agency Agreement, request the Registrar to cancel such Notes. Uponany such cancellation by or on behalf of the Registrar, the principal amount of the Loancorresponding to the principal amount of such Notes shall be deemed to have been redeemed as ofthe date of such cancellation and no further payment shall be made or required to be made by theBank in respect of such Notes.

7.6 The Loan Agreement provides that so long as any of the Notes is outstanding, neither the Borrowernor any of its affiliates shall resell any Notes (whether acquired by it in the open market orotherwise) to U.S. persons or within the United States as such terms are defined in Regulation Sunder the United States Securities Act of 1933.

7.7 The Bank shall not be entitled to redeem the Notes otherwise than as provided in this Condition 7.

8. Taxation

8.1 All payments of principal and interest in respect of the Notes shall be made free and clear of, andwithout withholding or deduction for, any taxes, duties, assessments or governmental charges ofwhatsoever nature imposed, levied, collected, withheld or assessed by Luxembourg or any political

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subdivision or any authority having power to tax therein, unless such withholding or deduction isrequired by law. In that event, the Bank shall, subject to the provisions of Condition 6, pay suchadditional amounts as will result in the receipt by the Noteholders of such amounts as would havebeen received by them if no such withholding or deduction had been required, except that no suchadditional amounts shall be payable in respect of any Note:

(a) presented for payment by a Holder who is liable to such taxes, duties, assessments orgovernmental charges in respect of such Note by reason of such holder having someconnection with Luxembourg other than the mere holding of such Note; or

(b) where (in the case of a payment of principal or interest on redemption) the relevant NoteCertificate is surrendered for payment more than 30 days after the Relevant Date except tothe extent that the relevant Holder would have been entitled to such additional amounts if ithad surrendered the relevant Note Certificate on the last day of such period of 30 days; or

(c) where such withholding or deduction is imposed on a payment to an individual and is requiredto be made pursuant to any European Union Directive on the taxation of savingsimplementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 orany law implementing or complying with, or introduced in order to conform to, such Directive;or

(d) where (in the case of a payment of principal or interest on redemption) the relevant NoteCertificate is surrendered for payment by or on behalf of a Holder who would have been ableto avoid such withholding or deduction by surrendering the relevant Note Certificate toanother Paying Agent in a member state of the European Union.

8.2 Notwithstanding the provisions of Condition 8.1, the Bank shall only make such additionalpayments to the Noteholders to the extent that it shall have actually received an equivalent amountfrom the Borrower under Clause 9.3 (Taxes on Notes) of the Loan Agreement and on the BusinessDay after receipt of such equivalent amount.

8.3 To the extent that the Bank receives a lesser additional amount from the Borrower, the Bank shallpay to each Noteholder an additional amount equal to and in the same currency as a pro rataproportion of such additional amount (if any) as is actually received by, or for the account of, theBank pursuant to the provision for the Loan Agreement on the Business Day following, in thecurrency of, and subject to any conditions attaching to the payment of such additional amount to theBank.

8.4 In these Conditions, ‘‘Relevant Date’’ means whichever is the later of (a) the date on which thepayment in question first becomes due and (b) if the full amount payable has not been received inNew York by the Principal Paying Agent on or prior to such due date, the date on which (the fullamount having been so received) notice to that effect has been given to the Noteholders.

8.5 Any reference in these Conditions to principal or interest shall be deemed to include any additionalamounts in respect of principal or interest (as the case may be) which may be payable under thisCondition 8 (Taxation) or any undertaking given in addition to or in substitution of this Condition 8(Taxation) pursuant to the Trust Deed.

8.6 The references to Luxembourg in Clause 9.3 (Taxes on Notes) of the Loan Agreement shall, uponthe occurrence of a Relevant Event (as this term is defined in the Trust Deed), be deemed to bereferences to Luxembourg and the jurisdiction in which the Trustee is domiciled for tax purposes.

9. Prescription

Claims for principal and interest on redemption shall become void unless the relevant NoteCertificates are surrendered for payment within ten years of the appropriate Relevant Date.

10. Replacement of Note Certificates

If any Note Certificate is lost, stolen, mutilated, defaced or destroyed, it may be replaced at theSpecified Office of the Registrar and the Transfer Agent having its Specified Office in Luxembourg,subject to all applicable laws and stock exchange requirements, upon payment by the claimant of theexpenses incurred in connection with such replacement and on such terms as to evidence, security,indemnity and otherwise as the Bank may reasonably require. Mutilated or defaced Note Certificatesmust be surrendered before replacements will be issued.

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11. Meetings of Noteholders; Modification and Waiver; Substitution

11.1 The Trust Deed contains provisions for convening meetings of Noteholders to consider mattersrelating to the Notes, including the modification of any provision of the Loan Agreement, theseConditions or the Trust Deed. Any such modification may be made if sanctioned by anExtraordinary Resolution. Such a meeting may be convened by the Trustee, the Bank or by theTrustee upon the request in writing of Noteholders holding not less than one-tenth of the aggregateprincipal amount of the outstanding Notes. The quorum at any meeting will be one or more personsholding or representing one more than half of the aggregate principal amount of the outstandingNotes or, at any adjourned meeting, one or more persons being or representing Noteholderswhatever the principal amount of the Notes held or represented; provided, however, that certainproposals (including any proposal to change any date fixed for payment of principal or interest inrespect of the Notes, to reduce the amount of principal or interest payable on any date in respect ofthe Notes, to alter the method of calculating the amount of any payment in respect of the Notes orthe date for any such payment, to change the currency of payments under the Notes or to changethe quorum requirements relating to meetings or the majority required to pass an ExtraordinaryResolution, to change any date fixed for payment of principal or interest under the LoanAgreement, to alter the method of calculating the amount of any payment under the LoanAgreement or to change the currency of payment under the Loan Agreement (each, a ‘‘ReservedMatter’’)) may only be sanctioned by an Extraordinary Resolution passed at a meeting ofNoteholders at which one or more persons holding or representing not less than three-quarters or,at any adjourned meeting, one quarter of the aggregate principal amount of the outstanding Notesform a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding onall the Noteholders, whether present or not.

11.2 A resolution in writing signed by or on behalf of all Noteholders who for the time being are entitledto receive notice of a meeting of Noteholders under the Trust Deed will take effect as if it were anExtraordinary Resolution. Such a resolution in writing may be contained in one document orseveral documents in the same form, each signed by or on behalf of one or more Noteholders.

11.3 The Trustee may, without the consent of the Noteholders agree to (a) any modification of theNotes, the Trust Deed (other than in respect of a Reserved Matter) or, following the LoanAdministration Transfer, the Loan Agreement which is, in the opinion of the Trustee, proper tomake if, in the opinion of the Trustee, such modification will not be materially prejudicial to theinterests of Noteholders or (b) any modification of the Notes, the Trust Deed or, following the LoanAdministration Transfer the Loan Agreement which is of a formal, minor or technical nature or tocorrect a manifest error. In addition, the Trustee may, without the consent of the Noteholders,authorise or waive any proposed breach or breach of the Notes or the Trust Deed or, following theLoan Administration Transfer, the Loan Agreement (other than a proposed breach or breachrelating to the subject of a Reserved Matter) or determine that any event which could or mightotherwise give rise to a right of acceleration under the Loan Agreement shall not be treated as suchif, in the opinion of the Trustee, the interests of the Noteholders will not be materially prejudicedthereby. Unless the Trustee agrees otherwise, any such authorisation, waiver or modification shallbe notified to the Noteholders as soon as practicable thereafter.

11.4 The Trust Deed contains provisions under which any Successor in Business (as defined in the TrustDeed) may, without the consent of the Noteholders assume the obligations of the Bank as principaldebtor under the Trust Deed and the Notes provided that certain conditions specified in the TrustDeed are fulfilled.

11.5 No Noteholder shall, in connection with any substitution, be entitled to claim any indemnification orpayment in respect of any tax consequence thereof for such Noteholder, except to the extentprovided for in Condition 8 (Taxation) (or any undertaking given in addition to or substitution for itpursuant to the provisions of the Trust Deed).

11.6 The provisions of Articles 86 to 94-8 of the Luxembourg law of 10 August 1915 on commercialcompanies (as amended) on representation of Noteholders are not applicable to the Notes.

12. Notices

Notices to the Noteholders will be sent to them by first class mail (or its equivalent) or (if posted toan overseas address) by airmail at their respective addresses on the Register. Any such notice shall bedeemed to have been given on the fourth day after the date of mailing. In addition, so long as Notes arelisted on the Luxembourg Stock Exchange and the rules of that exchange so require, notices to

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Noteholders will be published on the date of such mailing in a daily newspaper of general circulation inLuxembourg (which is expected to be the Luxembourger Wort) or, if such publication is not practicable,in a leading English language daily newspaper having general circulation in Europe.

13. Trustee

13.1 Under the Trust Deed, the Trustee is entitled to be indemnified and relieved from responsibility incertain circumstances and to be paid its costs and expenses in priority to the claims of theNoteholders. In addition, the Trustee is entitled to enter into business transactions with the Bank,the Borrower and any entity relating to the Bank or the Borrower without accounting for any profit.

13.2 In the exercise of its powers and discretions under these Conditions and the Trust Deed, the Trusteewill have regard to the interests of the Noteholders as a class and will not be responsible for anyconsequence for individual Holders of Notes or as a result of such Holders being connected in anyway with a particular territory or taxing jurisdiction.

13.3 The Trustee may at any time, at its discretion and without notice, institute such proceedings as itthinks fit to enforce its rights under the Trust Deed in respect of the Notes, but it shall not be boundto do so unless:

(a) it has been so requested in writing by the Holders of a least one quarter in principal amount ofthe outstanding Notes or has been so directed by an Extraordinary Resolution; and

(b) it has been indemnified or provided with security to its satisfaction.

13.4 No Noteholder may proceed directly against the Bank unless the Trustee, having become bound todo so, fails to do so within a reasonable time and such failure is continuing.

13.5 The Trust Deed also provides that, in the case of an Event of Default (as defined in the LoanAgreement), or a Relevant Event (as defined in the Trust Deed and described below), the Trusteemay, and shall if requested to do so by Noteholders holdings at least one-quarter in principalamount of the Notes outstanding or if directed to do so by an Extraordinary Resolution and, ineither case, subject to it being secured and/or indemnified to its satisfaction, declare all amountspayable under the Loan Agreement by the Borrower to be due and payable (in the case of an Eventof Default), or enforce the security created in the Trust Deed in favour of the Noteholders (in thecase of a Relevant Event). For the purposes of this Condition 13.4, ‘‘Relevant Event’’ is defined inthe Trust Deed to mean the earlier of the failure by the Bank to make any payment of principal orinterest on the Notes when due under these Conditions following receipt of the correspondingamount under the Loan Agreement, the institution of controlled management (gestion controlee),suspension of payment (sursis de paiement) or liquidation (liquidation) pursuant to the provisions ofPart IV of the Luxembourg law of 5 April 1993 on the Financial Sector, the order by theCommission de Surveillance du Secteur Financier to suspend the activities of the Bank pursuant toarticle 59 of the Luxembourg law of 5 April 1993 on the Financial Sector or the taking of any actionin furtherance of the dissolution of the Bank.

14. Further Issues

The Bank may from time to time, without the consent of the Noteholders and in accordance withthe Trust Deed, create and issue further notes having the same terms and conditions as the Notes in allrespects (or in all respects except for the first payment of interest) so as to form a single series with theNotes. In relation to any further issue which is to form a single series with the Notes, the Bank will enterinto a loan agreement with the Borrower on the same terms as the Loan Agreement (or on the sameterms except for the first payment of interest) subject to any modifications which, in the sole opinion ofthe Trustee, only relate to the Reserved Rights and would not materially prejudice the interests of theNoteholders. The Bank may from time to time, with the consent of the Trustee, create and issue otherseries of notes having the benefit of the Trust Deed.

15. Provision of Information

The Bank shall, during any period in which it is not subject to the reporting requirements of Section13 or 15(d) of the US Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) nor exempt from reportingpursuant to Rule 12g3-2(b) under the Exchange Act, duly provide to any Noteholder or any prospectivepurchaser of such securities designated by such Noteholder, upon the written request of such Noteholderor (as the case may be) prospective purchaser addressed to the Bank and delivered to the Bank or to the

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Specified Office of the Registrar, the information specified in Rule 144A(d)(4) under the United StatesSecurities Act of 1933, as amended.

16. Governing Law and Jurisdiction

16.1 The Trust Deed and the Notes are governed by, and shall be construed in accordance with, Englishlaw.

16.2 The Bank has in the Trust Deed (a) submitted irrevocably to the jurisdiction of the courts ofEngland for the purposes of hearing and determining any suit, action or proceedings or settling anydisputes arising out of or in connection with the Trust Deed or the Notes; (b) waived any objectionwhich it might have to such courts being nominated as the forum to hear and determine any suchsuit, action or proceedings or to settle any such disputes and agreed not to claim that any such courtis not a convenient or appropriate forum; and (c) designated a person in England to accept serviceof any process on its behalf.

There will appear at the foot of the Terms and Conditions endorsed on each Note Certificate indefinitive form the names and Specified Offices of the Paying Agents as set out at the end of this OfferingCircular.

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SUMMARY OF PROVISIONS OF THE NOTES WHILE IN GLOBAL FORM

The Global Note Certificates contain provisions which apply to the Notes in respect of which theGlobal Note Certificates are issued, some of which modify the effect of the Conditions set out in thisOffering Circular. Terms defined in the Conditions have the same meaning in the paragraphs below. Thefollowing is a summary of those provisions:

Meetings

The registered holder of each Global Note Certificate will be treated as being two persons for thepurpose of any quorum requirements of a meeting of Noteholders and, at any such meeting, as having onevote in respect of each U.S.$1,000 principal amount of Notes for which the Global Note Certificates areissued. The Trustee may allow a person with an interest in Notes in respect of which a Global NoteCertificate has been issued to attend and speak at a meeting of Noteholders on appropriate proof of hisidentity and interest.

Cancellation

Cancellation of any Note will be effected by a reduction in the principal amount of the Notes in theregister of Noteholders.

Payment

To the extent that the Bank has actually received the relevant funds from the Borrower, paymentsof principal and interest in respect of Notes represented by a Global Note Certificate will be madewithout presentation or if no further payment is to be made in respect of the Notes against presentationand surrender of such Global Note Certificate to or to the order of the Principal Paying Agent or suchother Paying Agent as shall have been notified to the Noteholders for such purpose.

Exercise of Put Option

In order to exercise the option contained in Condition 7.3, the registered holder of the relevantGlobal Note Certificate must, within the period specified in the Conditions for the deposit of the relevantNote Certificate and put notice, give written notice of such exercise to the Principal Paying Agentspecifying the principal amount of the Notes in respect of which such option is being exercised. Any suchnotice will be irrevocable and may not be withdrawn. In addition, so long as the Notes are held on behalfof DTC, Euroclear or Clearstream, Luxembourg, the exercise of any such put option will be subject to thenormal rules and operating procedures of DTC, Euroclear and Clearstream, Luxembourg, as appropriate.

Notices

So long as the Notes are represented by a Global Note Certificate and such Global Note Certificateis held on behalf of DTC, Euroclear or Clearstream, Luxembourg, or any successor depositary, notices toNoteholders may be given by delivery of the relevant notice to DTC, Euroclear or Clearstream,Luxembourg, or any successor depositary, for communication by it to entitled accountholders insubstitution for notification as required by the Conditions. For so long as the Notes are listed on theLuxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, notice shallalso be published in a leading newspaper having general circulation in Luxembourg (which is expected tobe the Luxemburger Wort).

Transfers

Transfers of interests in the Notes will be effected through the records of DTC, Euroclear andClearstream, Luxembourg and their respective direct and indirect participants.

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LOAN AGREEMENT

The following is the text of the Loan Agreement (other than the Schedules) which has been enteredinto between the Bank and the Company:

THIS AGREEMENT is dated l 2001 and made between:

(1) OJSC OIL COMPANY ROSNEFT an open joint-stock company incorporated in the RussianFederation whose principal office is at Sofiyskaya Naberezhnaya 26, Building 1, 113035 Moscow,Russian Federation, as borrower (the ‘‘Borrower’’); and

(2) ABN AMRO BANK (Luxembourg) S.A. a Bank organised and existing under the laws ofLuxembourg, whose principal office is at 46, Avenue J.F. Kennedy, L-1855 Luxembourg,Luxembourg, as bank (the ‘‘Bank’’).

1. Definitions and Interpretation

1.1 Definitions

In this Agreement the following terms have the following meanings.

‘‘Additional Margin’’ means the rate per annum specified in a letter of even date herewith from theBank to the Borrower.

‘‘Advance’’ means the advance made or to be made by the Bank under Clause 3 (Availability of theFacility) in the amount of the Facility.

‘‘Affiliate’’ of any specified person means (i) any other person, directly or indirectly, controlling orcontrolled by or under direct or indirect common control with such specified person, (ii) any otherperson who is a director or officer (A) of such specified person, (B) of any Subsidiary of suchspecified person or (C) of any person described in clause (i) or (ii) above.

‘‘Affiliate Transaction’’ has the meaning ascribed to such term in Clause 15.5 (Transactions withAffiliates).

‘‘Account’’ means the account of the Bank with The Bank of New York specified in a letter of evendate herewith between the Bank and The Bank of New York or such other account as the Bank maynominate from time to time.

‘‘Agency’’ means any agency, authority, central bank, department, government, legislature,minister, official or public statutory person (whether autonomous or not) of, or of the governmentof, any state or supra-national body.

‘‘Auditors’’ means Arthur Andersen or any internationally recognised firm of accountants approvedby the Bank (and, following the Loan Administration Transfer, the Trustee without regard to theBank), such approval not to be unreasonably withheld.

‘‘Authorised Signatories’’ means the persons identified by the Borrower as such in a written noticegiven by the Borrower to the Bank (and, following the Loan Administration Transfer, the Trustee)from time to time.

‘‘Business Day’’ means a day (other than a Saturday or Sunday) on which banks generally are openfor business (including dealings in foreign exchange and foreign currency accounts) in Luxembourg,and New York City.

‘‘Capitalised Lease Obligations’’ means an obligation that is required to be classified and accountedfor as a capitalised lease for financial reporting purposes in accordance with US GAAP; and theamount of Indebtedness represented by such obligation will be the capitalised amount of suchobligation determined in accordance with US GAAP. For purposes of Clause 15.4 (Limitation onEncumbrances), a Capitalised Lease Obligation shall be deemed secured by an Encumbrance on theproperty or assets being leased.

‘‘Central Bank Licence’’ means a permission issued by the Central Bank of the Russian Federationto the Borrower for the purpose of raising the Loan, repayment of the Loan and making otherpayments to and by the Borrower and deductions from the payments to be made to the Borrowerunder or in connection with this Agreement, the Subscription Agreement, the Trust Deed and anyother agreement that has been or will be entered into by the Borrower in connection with the Notes,in form and substance satisfactory for the Bank.

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‘‘Change of Control’’ means the government of the Russian Federation ceasing to own and control(directly or indirectly) at least 51% of the issued and outstanding share capital of the Borrower.

‘‘Change of Control Payment Date’’ means the date, as determined by the Bank (and, following theLoan Administration Transfer, the Trustee without regard to the Bank), which is 60 days afternotice has been given by or on behalf of the Bank to the Holders that a Change of Control hasoccurred.

‘‘Closing Date’’ means the date specified in Schedule A hereto or, if different, the date on which theNotes are issued and the subscription monies therefor paid under the Subscription Agreement.

‘‘Consolidated Indebtedness’’ means, as of any date of determination (and without duplication), allIndebtedness of the Borrower and any of its Subsidiaries outstanding on such date, determined on aconsolidated basis in accordance with US GAAP.

‘‘Consolidated Net Indebtedness’’ means, as of any date of determination, the sum of (i)Consolidated Indebtedness as of such date minus (ii) all cash and cash equivalents (as would beshown on a consolidated balance sheet of the Borrower as of such date in accordance with USGAAP) held by the Borrower or any Subsidiary as of such date.

‘‘Consolidated Net Worth’’ means, as of any date of determination, the shareholders’ capital of theBorrower as would be reflected on a consolidated balance sheet of the Borrower as of such date inaccordance with US GAAP.

‘‘Contract Rate’’ means the rate per annum equal to l% per annum.

‘‘EBITDA’’ means, at any time, the annual consolidated pre-tax profit of the Borrower and itsconsolidated Subsidiaries before taking into account extraordinary gains and losses, foreignexchange gains and losses, interest payable in respect of consolidated Indebtedness, interest incomeand any amounts in respect of depreciation and amortisation, each as shown in the most recentannual audited Financial Statements prepared in accordance with US GAAP.

‘‘Encumbrance’’ means any mortgage, charge, pledge, security interest, lien, easement, restriction,covenant, right-of-way, servitude, adverse claim or other encumbrance of any kind or anyarrangement having similar effect, including, without limitation any Sale/Leaseback Transactionand Transfer of Assets Transaction.

‘‘Event of Default’’ means any of the circumstances described as such in Clause 16 (Events ofDefault).

‘‘Environmental Laws’’ means all laws, rules, regulations, ordinances, judgments, orders, decreesand agreements with, and licenses, permits or franchises from, governmental entities and all otherregulatory restrictions (whether or not having the force of law) that (i) have been, are or maybecome applicable to the Borrower or any Subsidiary or any properties or business now or in thepast owned, leased, occupied or operated by the Borrower or any Subsidiary and (ii) relate to theenvironment, health and safety, the use, possession, collection, storage, processing, treatment,emission, release, discharge, disposal, transfer or transport of Materials of Environmental Concern,or similar matters, or the remedying of any of the foregoing.

‘‘Facility’’ means the U.S.$l million term loan facility granted by the Bank to the Borrower in thisAgreement.

‘‘Financial Statements’’ shall mean the annual and semi-annual consolidated financial statements ofthe Borrower.

‘‘Group’’ means the Borrower and its Subsidiaries from time to time included, or to be included, inthe Financial Statements.

‘‘Guarantee’’ means any obligation, contingent or otherwise, of any person directly or indirectlyguaranteeing any Indebtedness or other obligation of any other person and any obligation, direct orindirect, contingent or otherwise, of such person (i) to purchase or pay (or advance or supply fundsfor the purchase of payment of) such Indebtedness or other obligation of such other person(whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchaseassets, goods securities or services, to take-or-pay or maintain financial statement conditions orotherwise) or (ii) entered into for purposes of assuring in any other manner the creditor or obligeeof such Indebtedness or other obligation of the payment thereof or to protect such creditor orobligee against loss in respect thereof (in whole or in part); provided, however, that the term

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‘‘Guarantee’’ will not include endorsements for collection or deposit in the ordinary course ofbusiness. The term ‘‘Guarantee’’ used as a verb has a corresponding meaning.

‘‘Holder’’ has the meaning given to it in the terms and conditions relating to the Notes as annexedto the Trust Deed.

‘‘Incur’’ means issue, assume, Guarantee, incur or otherwise become liable for; provided, however,that any Indebtedness of a person existing at the time such person becomes a Subsidiary (whetherby merger, consolidation, acquisition or otherwise) or is merged into a Subsidiary will be deemed tobe Incurred or issued by such Subsidiary at the time it becomes or is merged into a Subsidiary.

‘‘Indebtedness’’ with respect to any person means, at any time, without duplication, (a) its liabilitiesfor borrowed money; (b) any amount raised by acceptance under an acceptance credit facility; (c)any amount raised pursuant to a note purchase facility or by the issue of bonds, notes, debentures,loan stock or any similar instrument; (d) its liabilities for the deferred purchase price of propertyacquired by such person; (e) receivables which are sold or discounted with recourse to the seller; (f)any amount raised pursuant to an issue of shares which are expressed to be redeemable; (g) allliabilities appearing on its most recent balance sheet prepared in accordance with US GAAP inrespect of Capitalised Lease Obligations; (h) all liabilities for borrowed money secured by anyEncumbrance with respect to the property owned by such person (whether or not it has assumed orotherwise become liable for such liabilities); (i) any amount raised under any other transaction(including any forward sale or purchase agreement) having the commercial effect of a borrowing; (j)all liabilities in respect of interest rate swaps, currency swaps, forward foreign exchangetransactions, cap, floor, collar or option transactions or any other treasury transaction or anycombination thereof or any other programme entered into in connection with the management ofrisks related to financial indebtedness (and the amount of the Indebtedness in relation to any suchtransaction shall be calculated by reference to the net marked to market valuation of suchtransaction at the relevant time after taking into account any off-setting position); (k) anyGuarantees, standby letters of credit or other instruments issued in connection with theperformance of contracts and (l) any Guarantee of such person with respect to liabilities of atype described in clause (a) through (j) hereof; provided, however, that the following shall beexcluded from the definition: (i) Trade Payables; (ii) bills of exchange evidencing indebtedness asbetween the Borrower and its Subsidiaries or as between Subsidiaries; and (iii) indebtedness of theBorrower and its Subsidiaries to the federal budget, regional budgets, local budgets and non-budgetary funds on account of current taxes which are not overdue. For the avoidance of doubt, theamount appearing in the Financial Statements as ‘‘minority interests’’ shall not be considered to be‘‘Indebtedness’’ solely by virtue of being included in the Financial Statements as ‘‘minorityinterests’’.

‘‘Independent Appraiser’’ means an investment banking firm of international standing or any thirdparty appraiser of international standing; provided, however, that such firm of appraiser is not anAffiliate of the Borrower.

‘‘Interest Period’’ means, save as otherwise provided in this Agreement, any of those periodsmentioned in Clause 6 (Interest Periods).

‘‘Interest Payment Date’’ means the dates specified in Schedule B hereto.

‘‘Interest Rate’’ means the rate per annum equal to the sum of (i) the Contract Rate and (ii) theAdditional Margin.

‘‘Leverage Test’’ means, as of any date of determination, the quotient of (i) Consolidated NetIndebtedness as at such date and (ii) the aggregate amount of EBITDA at such time.

‘‘Loan Administration Transfer’’ means the assignment by the Bank to the Trustee of theTransferred Rights pursuant to the Trust Deed.

‘‘Loan’’, at any time, means the aggregate principal amount advanced by the Bank pursuant to thisAgreement and outstanding at such time.

‘‘Local Business Day’’ means a day (other than a Saturday or Sunday) on which banks generally areopen for business in Moscow and Luxembourg.

‘‘Material Adverse Effect’’ means, in the opinion of the Bank (and, following the LoanAdministration Transfer, the Trustee without regard to the Bank), a material adverse effect onthe business, operations, property, condition (financial or otherwise) or prospects of the Borrower

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and its Subsidiaries taken as a whole or the Borrower’s ability to perform or comply with itsobligations hereunder or the validity or enforceability of this Agreement, the Trust Deed or anydocument related to them, or the rights and remedies of any person thereunder.

‘‘Materials of Environmental Concern’’ means any toxic, ignitable, corrosive, reactive, radioactiveor caustic substance and any other substance considered a pollutant, contaminant or hazardous orpotentially hazardous substance or waste.

‘‘Material Subsidiary’’ means OJSC ‘‘Rosneft-Purneftegas’’ and OJSC ‘‘Rosneft-Sakhalinmorneftegas’’ and, at any time, any other Subsidiary of the Borrower:

(i) whose total assets (being the total of fixed assets and current assets but excluding receivablesfrom other members of the Group) (consolidated in the case of a Subsidiary which itself hasSubsidiaries) represent at least 5 per cent. of the total assets (being the total of fixed assets andcurrent assets) of the Borrower; or

(ii) whose revenues (consolidated in the case of a Subsidiary which itself has Subsidiaries)represents at least 5 per cent. of the revenues of the Borrower,

in the case of a Subsidiary of the Borrower, as calculated from the then latest financialstatements, audited if prepared, of that Subsidiary and, if that Subsidiary has been acquiredafter the period with respect to which the then latest published Financial Statements of theBorrower were drawn up, calculated as if such Subsidiary has been a member of the Groupduring such period.

In addition, in the event that the aggregate amount of total assets or revenues (but deducting,for this purpose, any revenues generated by the relevant Subsidiary from transactions withother members of the Group) of those Subsidiaries of the Borrower which are not MaterialSubsidiaries (the ‘‘Minority Group’’) exceeds 20 per cent. (in the case of assets) or 20 per cent.(in the case of revenues) of the total assets, or as the case may be, revenues of the Borrower,then the Borrower shall forthwith nominate in writing to the Bank (and, following the LoanAdministration Transfer, the Trustee) such members of the Minority Group to be MaterialSubsidiaries so as to ensure that the percentages for the Minority Group referred to in thisparagraph are not exceeded, whereupon such members shall be deemed to be MaterialSubsidiaries for the purposes of this Agreement.

For the avoidance of doubt, a Subsidiary of the Borrower may become, or cease to beMaterial Subsidiary as a result of a reorganisation (but without prejudice to any restrictions onsuch reorganisation under this Agreement), in which event calculations shall be made underparagraphs (i) and (ii) above as if the financial statements for such Subsidiary had been drawnup immediately after such reorganisation and such financial statements shall form the basis ofthe relevant calculation.

A report by the Auditors to the Borrower (whether or not addressed to the Bank (or,following the Loan Administration Transfer, the Trustee) and whether or not containingmonetary or other limit on the liability of the Auditors) that in their opinion a Subsidiary ofthe Borrower is or is not or was or was not at any particular time or throughout any period aMaterial Subsidiary shall, in the absence of manifest error, be conclusive and binding on allparties.

‘‘Maturity Date’’ means the date specified as such in Schedule B.

‘‘Non-recourse Project Financing’’ means any financing of all or part of the costs of the acquisition,construction or development of any project if the person or persons providing such financing (i)expressly agree to limit their recourse to the project financed and the revenues derived from such asthe principal source of repayment for the moneys advanced and (ii) have been provided with afeasibility study prepared by competent independent experts on the basis of which it is reasonableto conclude that such project would generate sufficient operating income to service substantially allIndebtedness Incurred in connection with such project.

‘‘Notes’’ means the U.S.$l l% Loan Participation Notes due 20ll proposed to be issued by theBank pursuant to the Subscription Agreement for the sole purposes of funding the Advance.

‘‘Officers’ Certificate’’ will mean a certificate signed on behalf of the Borrower by (i) the principalexecutive officer and (ii) the principal accounting officer or principal financial officer of theBorrower.

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‘‘Original Financial Statements’’ means the audited Financial Statements of the Borrower for thethree financial years ended 31 December 2000 prepared in accordance with US GAAP.

‘‘Original RAR Financial Statements’’ means the audited Financial Statements of the Borrower forthe two financial years ended 31 December 2000 and the unaudited semi-annual FinancialStatements of the Borrower for the six-month periods ending 30 June 2000 and 30 June 2001, eachprepared in accordance with RAR.

‘‘Permitted Encumbrances’’ means:

(i) Encumbrances in connection with any Non-recourse Project Financing, provided that theassets or property affected by such Encumbrances form part of the relevant project and arespecified in the relevant feasibility study;

(ii) Encumbrances securing Indebtedness of a person existing at the time that such person ismerged into or consolidated with the Borrower or a Subsidiary; provided that suchEncumbrances were not created in contemplation of such merger or consolidation and donot extend to any assets or property other than the assets or property subject to suchEncumbrances immediately prior to such merger or consolidation (other than the proceeds ofsuch assets or property);

(iii) Encumbrances on assets or property acquired by the Borrower or a Subsidiary; provided thatsuch Encumbrances were not created in contemplation of such acquisition and do not extendto any other asset or property (other than proceeds of such acquired assets or property).

(iv) Encumbrances incurred, or pledges and deposits in connection with, workers’ compensation,unemployment insurance and other social security benefits, and leases, appeal bonds and otherobligations of like nature incurred in the ordinary course of business;

(v) Encumbrances imposed by law, including, without limitation, mechanics’, carriers’warehousemen’s, materialmen’s, suppliers’ and vendors’ Encumbrances, incurred in theordinary course of business;

(vi) Encumbrances for ad valorem, income or property taxes or assessments and similar chargeswhich either are not delinquent or are being contested in good faith by appropriateproceedings for which the Borrower has set aside on its books reserves to the extent requiredby US GAAP;

(vii) easements, rights of way, restrictions (including zoning restrictions), reservations, permits,servitudes, minor defects or irregularities in title and other similar charges or encumbrances,and Encumbrances arising under leases or subleases granted to others, in each case notinterfering in any material respect with the business of the Borrower or any of the Subsidiariesand existing, arising or incurred in the ordinary course of business;

(viii) (a) bankers’ Encumbrances in respect of deposit accounts, (b) statutory landlords’Encumbrances, (c) deposits to secure the performance of bids, trade contracts, governmentcontracts, leases, statutory obligations, surety and appeal bonds, performance and return-of-money bonds or liabilities to insurance carriers under insurance or self-insurancearrangements and other obligations of like nature (so long as, in each case with respect toitems described in subclauses (a), (b) and (c) of this clause (x), such Encumbrances do notsecure obligations constituting Indebtedness for borrowed money and are incurred in theordinary course of business), and (d) Encumbrances arising from any judgment, decree orother order which does not constitute an Event of Default;

(ix) any Encumbrance upon, or with respect to, any of its present or future assets or revenues orany part thereof which is created pursuant to (a) any securitisation, asset backed financing orlike arrangement and whereby all payment obligations secured by such Encumbrance orhaving the benefit of such Encumbrance, are to be discharged solely from such assets orrevenues or (b) any issue of secured bonds, secured debentures, secured notes or other securedsecurities;

(x) any Encumbrance as described in Schedule D;

(xi) any renewal of or substitution for any Encumbrance permitted by any of the preceding clauses(i) through (x); provided, however, that, with respect to Encumbrances incurred pursuant tothis clause (xi), the principal amount secured has not increased and the Encumbrances have

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not been extended to any additional property, assets or revenues (other than proceeds of theproperty, assets or revenues in question);

provided that neither (a) the aggregate amount of Indebtedness secured by Encumbrancesdescribed in clauses (i) through (xi) above shall at any time exceed U.S.$950 million in total nor (b)shall the aggregate value of the assets or revenues the subject of such Encumbrances at any timeexceed U.S.$1.6 billion.

‘‘Potential Event of Default’’ means any event which may become (with the passage of time, thegiving of notice and/or the making of a determination under this Agreement) an Event of Default.

‘‘RAR’’ means Russian Accounting Regulations being the accounting standards established by theapplicable legislation of the Russian Federation from time to time.

‘‘Relevant Event’’ has the meaning given thereto in the Trust Deed.

‘‘Sale/Leaseback Transaction’’ means an arrangement relating to property now owned or hereafteracquired whereby the Borrower or any Subsidiary of the Borrower transfers such property to aperson and the Borrower or such Subsidiary leases it from such person.

‘‘Subscription Agreement’’ means the subscription agreement dated l 2001 in respect of the Notesbetween the Bank, the Borrower and the managers named therein.

‘‘Subsidiary’’ of a company or corporation means any company or corporation:

(a) which is controlled, directly or indirectly, by the first-mentioned company or corporation; or

(b) more than half the issued share capital of which is beneficially owned, directly or indirectly, bythe first-mentioned company or corporation; or

(c) which is a Subsidiary of another Subsidiary of the first-mentioned company or corporation.

‘‘Taxes’’ means any taxes, levies, duties, imposts or other charges or withholding of a similar nature(including interest and penalties thereon).

‘‘Trade Payables’’ means, with respect to any person, any accounts payable or any Indebtedness ormonetary obligation to trade creditors created, assumed or guaranteed by such person arising in theordinary course of business of such person in connection with the acquisition of goods or services onarm’s length terms.

‘‘Transfer of Assets Transaction’’ means an arrangement (whether created as a single document orotherwise) relating to property now owned or hereafter acquired by any Subsidiary whereby suchproperty is transferred by such Subsidiary to the Borrower or another Subsidiary and the transferorretains or is granted the right to use the property so transferred.

‘‘Transferred Rights’’ has the meaning given thereto in the Trust Deed.

‘‘Trust Deed’’ means the trust deed dated the date hereof between the Bank and The Bank of NewYork as trustee (the ‘‘Trustee’’).

‘‘US GAAP’’ means accepted accounting principles in the U.S.

1.2 Construction

Any reference in this Agreement to:

the ‘‘assets’’ of any person means all or any part of its business, undertaking, property, assets,revenues (including any right to receive revenues) and uncalled capital, wherever situated.

the ‘‘Bank’’ shall, save where the context otherwise indicates, be construed so as to include its, andany subsequent successors, transferees and assigns in accordance with their respective interests;

a person shall be taken as having ‘‘control’’ over another if that first person (whether directly orindirectly and whether by ownership of share capital, the possession of voting power, control orotherwise) has the power to appoint and/or remove all or a majority of the members of the board ofdirectors or other governing body of that other person or if the first person possesses over 50% ofthe share capital or voting rights in the other person (and ‘‘controlled’’ and ‘‘controlling’’ shall beconstrued accordingly).

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a ‘‘person’’ shall be construed as a reference to any person, firm, company, corporation,government, state or agency of a state or any association or partnership (whether or not havingseparate legal personality) of two or more of the foregoing;

‘‘repay’’ (or any derivative form thereof) shall, subject to any contradictory indication, be construedso as to include ‘‘prepay’’ (or as the case may be, the corresponding derivative form thereof);

‘‘VAT’’ shall be construed as a reference to value added tax or any similar tax which may beimposed in addition to it or in place of it;

the ‘‘winding-up’’, ‘‘dissolution’’ or ‘‘administration’’ of a company or corporation shall beconstrued so as to include any equivalent or analogous proceedings under the law of the jurisdictionin which such company or corporation is incorporated or any jurisdiction in which such company orcorporation carries on business, including the seeking of liquidation, winding-up, reorganisation,dissolution, administration, arrangement, adjustment, protection from creditors or relief of debtors.

1.3 Currency

‘‘U.S.$’’ and ‘‘Dollars’’ denote the lawful currency of the United States of America for the timebeing.

1.4 Statutes

Any reference in this Agreement to a statute shall be construed as a reference to such statute as thesame may have been, or may from time to time be, amended or re-enacted.

1.5 Clauses and Schedules

Any reference in this Agreement to a Clause or Schedule is, unless indicated to the contrary, areference to a clause hereof or a schedule hereto. Clause and Schedule headings are for ease ofreference only and shall not affect the interpretation of this Agreement.

2. The Facility

2.1 The Facility

On the terms and subject to the conditions hereof, the Bank agrees to lend and the Borrower agreesto borrow from the Bank an amount of U.S.$l million by way of a single disbursement term loanfacility.

2.2 Purpose

The Advance, less any amount applied in accordance with Clause 8.2 (Deductions from Advance), isintended for general corporate purposes and, accordingly the Borrower shall apply all amountsraised by it hereunder in or towards satisfaction of its general corporate financing requirements butthe Bank (and, following the Loan Administration Transfer, the Trustee) shall not be concernedwith the application thereof.

3. Availability of the Facility

3.1 Documents to be Delivered

The Facility will be available by way of single Advance which will be drawn by the Borrower and,subject to receipt by the Bank of the following documents in form and substance satisfactory to theBank, on or before the Closing Date, made by the Bank to the Borrower on the Closing Date:

(a) A closing certificate of the Borrower dated the Closing Date substantially in the form ofSchedule C;

(b) An opinion of Allen & Overy dated the Closing Date, regarding issues of Russian law in formand substance satisfactory to the Bank;

(c) An opinion of White & Case, regarding issues of English law in form and substancesatisfactory to the Bank;

(d) An opinion of White & Case, regarding issues of Russian law in form and substancesatisfactory to the Bank;

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(e) An opinion of Elvinger, Hoss & Prussen, regarding issues of Luxembourg law in form andsubstance satisfactory to the Bank;

(f) An opinion of Ernst & Young, regarding issues of Russian tax in form and substancesatisfactory to the Bank;

(g) A copy of the Central Bank Licence or a copy of a letter from the Central Bank in form andsubstance acceptable to the Bank advising that no Central Bank Licence is required by theBorrower for or in connection with this Agreement, in either case, certified to be a true copyby a duly authorised officer of the Borrower;

(h) Copies, each certified a true copy by a duly authorised officer of the Borrower, of the OriginalFinancial Statements;

(i) Copies, each certified a true copy by a duly authorised officer of the Borrower of the OriginalRAR Financial Statements, together with English translations thereof;

(j) Evidence that The Law Debenture Trust Corporation Limited has agreed to act as the agentof the Borrower for the service of process in England;

(k) The most recent certificates (spravka) from the Borrower’s tax authorities with respect to theBorrower’s tax indebtedness;

(l) Payment of all fees, costs and expenses which are due to be paid to the Bank pursuant to thisAgreement prior to the Closing Date;

(m) An opinion of BDO Compagnie Fiduciaire, regarding issues of Luxembourg tax in form andsubstance satisfactory to the Bank; and

(n) Certified copies of any consents, authorisations and approvals of regulatory authorities inLuxembourg, Russia or elsewhere (including, without limitation, the approval of the CentralBank of Russia for payments to be made to and by the Borrower and deductions frompayments to be made to the Borrower under the Subscription Agreement and thisAgreement) required for the execution delivery and performance of this Agreement, theTrust Deed, the Agency Agreement and the Subscription Agreement and the issuance andoffering of the Notes and the performance thereof.

3.2 Additional Conditions

The obligations of the Bank to make the Advance shall be subject to further conditions precedentthat as at the Closing Date (i) the Bank has received the full amount of the Net Proceeds as definedin the Subscription Agreement; (ii) no Event of Default or Potential Event of Default has occurred;(iii) the representations and warranties set out in Clause 12 (Representations and Warranties) aretrue and accurate on and as of the proposed date for the making of such Advance; and (iv) theBorrower shall be in full compliance with all of its obligations under this Agreement and there shallhave been no breach of any such obligations.

3.3 Drawdown

On the terms and subject to the conditions of this Agreement, on the Closing Date the Bank shallmake the Advance to the Borrower and the Borrower shall make a single drawing in the fullamount of the Facility. The Bank shall have the right to make the deductions provided in Clause 8.2(Deductions from Advance) at such date. The Bank shall transfer the amount of the Advance (afterany such deductions) to a U.S. Dollar account specified in a letter dated the date hereof between theBank and the Borrower.

4. Repayment

The Borrower shall repay the Loan in full on the Business Day falling one Business Day prior to theMaturity Date.

5. Prepayment

5.1 Prepayment for Tax Reasons and Change in Circumstances

If, as a result of any amendment to or change in the double tax treaty between the RussianFederation and Luxembourg (the ‘‘Double Tax Treaty’’) or the laws or regulations of the RussianFederation or Luxembourg or of any political sub-division thereof or any authority therein having

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power to tax, the Borrower would thereby be required to increase the payment of principal orinterest or any other payment due hereunder as provided in Clause 9.1 (Tax Gross-up) or to payadditional amounts as provided in Clause 9.3 (Taxes on Notes), or, if (for whatever reason) theBorrower would have to or has been required to pay additional amounts pursuant to Clause 11(Change in Circumstances) or, if, after a Relevant Event, the Borrower is or would be required toincrease the payment of principal or interest or any other payment due hereunder as provided inClause 9.1 (Tax Gross-up) as a result of such payments being made to any person other than theBank to whom the benefit of the Double Tax Treaty is unavailable, and, in any such case, suchobligation cannot be avoided by the Borrower taking reasonable measures available to it, then theBorrower may (without premium or penalty), upon not less than 30 days’ nor more than 70 days’notice to the Bank (and, following the Loan Administration Transfer, the Trustee) specifying thedate of payment and including a certification by the principal financial officer of the Borrower thatthe Borrower would be required to increase the amount payable or to pay additional amounts,supported by an opinion of an independent tax advisor of recognised standing in the relevant taxjurisdiction which notice shall be irrevocable, prepay the Loan in whole (but not in part).

5.2 Prepayment in the Event of Change of Control

(a) In the event of a Change of Control, the Borrower shall prepay the Loan (without premium orpenalty) to the extent of the aggregate principal amount of the Notes to be properly redeemedin accordance with Condition 7.3 of the terms and conditions of the Notes on the Change ofControl Payment Date which shall be notified to the Borrower by the Bank.

(b) Promptly, and in any event within one Local Business Day after, the date of any Change ofControl, the Borrower shall deliver to the Bank (and, following the Loan AdministrationTransfer, the Trustee) a written notice in the form of an Officers’ Certificate stating:

(i) that a Change of Control has occurred; and

(ii) the circumstances and relevant facts giving rise to such Change of Control and the dateupon which such Change of Control is deemed to have occurred.

(c) The Bank shall notify the Borrower not more than three Business Days after receipt of noticethereof from the Paying Agent, the amount of the Loan to be prepaid as a consequence of theexercise by Holders of the option contained in Condition 7.3 of the terms and conditions of theNotes.

5.3 Prepayment for Illegality

If, at any time, the Bank determines that it is or would be unlawful or contrary to any applicable lawor regulation or regulatory requirement or directive of any agency or any state or otherwise of theBank to allow all or part of the Loan or the Notes to remain outstanding or for the Bank to maintainor give effect to any of its obligations in connection with this Agreement and/or to charge or receiveor to be paid interest at the rate applicable in relation to the Loan (an ‘‘Illegality’’), then uponnotice by the Bank to the Borrower in writing, the Borrower and the Bank shall, to the extentreasonably practicable in the circumstances, consult in good faith as to a basis which eliminates theapplication of such Illegality. If such a basis has not been agreed within such 30 day period (or suchlesser period if it is not reasonably practicable for such period to continue for 30 days) from the dateon which the Bank so notifies the Borrower and such Illegality is continuing, then the Borrowershall prepay the Loan (without penalty or premium) in whole on the date which is 90 days from thedate of such notification or such earlier date as may be required by law.

5.4 Amounts Payable in Respect of Prepayments

If the Loan is to be prepaid pursuant to Clause 5.1 (Prepayment for Tax Reasons and Change inCircumstances), Clause 5.2 (Prepayment in the Event of Change of Control) or Clause 5.3(Prepayment for Illegality), then the Loan (or, if applicable, the relevant portion thereof) shall berepaid by the Borrower on the Business Day falling one Business Day prior to (as the case may be)(i) the date specified by the Borrower pursuant to Clause 5.1 (Prepayment for Tax Reasons andChange in Circumstances); (ii) the Change of Control Payment Date; or (iii) the date specified bythe Bank pursuant to Clause 5.3 (Prepayment for Illegality), together in any such case with (A)accrued interest calculated in respect of the whole of the period ending on (as the case may be) suchdate specified by the Borrower, Change of Control Payment Date or date specified by the Bank and(B) any other amounts payable by the Borrower pursuant to this Agreement.

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5.5 Costs of Prepayment

The Borrower shall indemnify the Bank on demand against any costs and expenses reasonablyincurred and properly documented by the Bank in connection with any prepayment made inaccordance with this Clause 5 (Prepayment).

5.6 No Other Prepayments and No Reborrowing

The Borrower shall not repay all or any part of the amount of the Loan except at the times and inthe manner expressly provided for in this Agreement. The Borrower shall not be permitted toreborrow any amounts repaid.

5.7 Resale of Notes and Reduction of Loan upon Cancellation of Notes

(a) So long as any of the Notes is outstanding, neither the Borrower nor any of its affiliates shallresell any Notes (whether acquired by it in the open market or otherwise) to U.S. persons orwithin the United States as such terms are defined in Regulation S under the United StatesSecurities Act of 1933.

(b) The Borrower may from time to time deliver to the Bank Notes, having an aggregate principalvalue of at least U.S.$1,000,000, together with a request for the Bank to present such Notes tothe Registrar for cancellation, and may from time to time procure the delivery to the Registrarof a Global Note with instructions to cancel a specified aggregate principal amount of Notes(being at least U.S.$1,000,000) represented thereby (which instructions shall be accompaniedby evidence satisfactory to the Registrar that the Borrower is entitled to give suchinstructions), whereupon the Bank shall, pursuant to Clause 9.1 (Cancellation) of theAgency Agreement, request the Registrar to cancel such Notes (or specified aggregateprincipal amount of Notes represented by such Global Note). Upon any such cancellation byor on behalf of the Registrar, the principal amount of the Loan corresponding to the principalamount of such Notes shall be deemed to have been redeemed as of the date of suchcancellation.

6. Interest Periods

The Borrower will pay interest in Dollars to the Bank on the outstanding principal amount of theLoan from time to time at the Interest Rate, calculated in accordance with the provisions of thisAgreement (including, without limitation, Clause 7.2 (Calculation of Interest)). Interest shall accrue onthe Loan from day-to-day from and including the Closing Date. Each period beginning on (andincluding) the Closing Date or any Interest Payment Date and ending on (but excluding) the next InterestPayment Date or the Maturity Date is herein called an ‘‘Interest Period’’. Subject as provided in Clause7.2 (Calculation of Interest), interest on the Loan will cease to accrue from the due date for repaymentthereof unless payment of principal is improperly withheld or refused, in which event interest willcontinue to accrue (before or after any judgement) at the Interest Rate to but excluding the date onwhich payment in full of the principal thereof is made.

7. Interest

7.1 Payment of Interest

The Borrower shall pay interest in arrears in respect of each Interest Period calculated inaccordance with Clause 7.2 (Calculation of Interest) on the Business Day falling one Business Dayprior to the Interest Payment Date on which such Interest Period ends.

7.2 Calculation of Interest

The amount of interest payable in respect of the Loan for any Interest Period shall be calculated byapplying the Interest Rate to the Loan, dividing the product by two and rounding the resultingfigure to the nearest cent (half a cent being rounded upwards). If interest is required to becalculated for any other period, it will be calculated on the basis of a year of 360 days consisting of12 months of 30 days each and, in the case of an incomplete month, the actual number of dayselapsed, provided that for the purposes of calculating the amount of interest payable in respect ofsuch period, such period shall be deemed to end one Business Day after the date on which therelevant amount is payable (or, as the case may be, paid) hereunder.

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8. Fees, Commission, Costs and Expenses

8.1 Costs relating to the Agreement

The Borrower shall reimburse the Bank for all costs and expenses (including legal fees) togetherwith any VAT incurred by it in connection with the negotiation, preparation and execution of thisAgreement and the completion of the transactions contemplated in this Agreement and theperformance of any of its duties or exercise of any of its rights hereunder.

8.2 Deductions from Advance

The Bank shall be entitled and is hereby authorised by the Borrower to deduct from the Advanceprior to the payment thereof to the Borrower; (i) the amounts to which it is entitled under Clause8.1 (Costs relating to the Agreement) and (ii) the amounts which are to be deducted from theAdvance pursuant to Clause 3 (Commission and Expenses) of the Subscription Agreement.

8.3 Invoices

The Bank shall provide to the Borrower an invoice in its customary format in respect of anyamounts payable under this Clause 8, in case of amounts which are payable on the Closing Date, onor before the Closing Date and, in the case of amounts which become payable after the ClosingDate, as and when such amounts become payable.

9. Taxes

9.1 Tax Gross-up

Each payment to be made by the Borrower hereunder shall be made in full without set off orcounterclaim, free and clear of and without deduction for or on account of Taxes imposed by anytaxing authority of or in, or having authority to tax in, the Russian Federation or any country orstate from or through which the Borrower makes payment hereunder in connection herewith(‘Russian Taxes’’), unless the Borrower is required by applicable law to make such payment subjectto the deduction or withholding of Russian Taxes, in which case, the Borrower shall, on the due datefor such payment, increase the amounts payable as may be necessary to ensure that the recipientreceives a net amount in Dollars which, following any such deduction or withholding on account ofRussian Taxes, shall be equal to the full amount which it would have received had the payment notbeen made subject to Russian Taxes so withheld or deducted and shall deliver to the Bank (and,following the Loan Administration Transfer, the Trustee) without undue delay, evidencesatisfactory to the Bank (and, following the Loan Administration Transfer, the Trustee) of suchdeduction or withholding and of the accounting therefore to the relevant authority.

9.2 Tax Indemnity

If the Bank pays any amount in respect of such Russian Taxes, penalties or interest, the Borrowershall reimburse the Bank in Dollars for such payment on demand.

9.3 Taxes on Notes

Without prejudice to the provisions of Clause 9.1 (Tax Gross-up), if the Bank notifies the Borrowerthat it (a) is required to make any payment on account of Taxes imposed by any taxing authority ofor in, or having authority to tax in, the Russian Federation or Luxembourg, or (b) is required tomake any deduction or withholding on any payment made by the Bank the Borrower agrees to payto the Bank, no later than one Business Day prior to the date on which payment is due to theHolders (which, for the purposes of this Clause, shall be deemed to be the day on which the relevantpayment referred to in sub-clause (b) above is required to be made) or on such other date as theBank shall notify to the Borrower, such additional amounts as are equal to the additional paymentswhich the Bank would be required to make in order that the net amount received by each Holder isequal to the amount which such Holder would have received had no such withholding or deductionbeen made under or in respect of the Notes or if any liability in respect of any such payment is atany time asserted, imposed, levied or assessed against the Bank, the Borrower shall, within 30 daysof demand made by the Bank, indemnify the Bank against such properly documented payment orliability, together with any interest, penalties, costs and expenses payable or incurred in connectiontherewith; provided, however, that the Bank shall upon receipt of any reimbursement of the sumspaid pursuant to this provision, to the extent that the Holders, as the case may be, are not entitled tosuch amounts pursuant to the terms and conditions of the Notes, pay such amounts to the Borrower(it being understood that the Bank shall have no obligation to determine whether any Holder is

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entitled to such amount). The references to Luxembourg in this Clause 9.3 shall, upon theoccurrence of a Relevant Event (as this term is defined in the Trust Deed), be deemed to bereferences to Luxembourg and the jurisdiction in which the Trustee is domiciled for tax purposes.

9.4 Tax Credits and Tax Refunds

If an additional amount is paid under Clauses 9.1 (Tax Gross-up) or 9.2 (Tax Indemnity) by theBorrower for the benefit of the Bank and the Bank, in its reasonable opinion, determines that it hasreceived or been granted a credit against, a relief or remission for, or a repayment of, any tax, then,if and to the extent that the Bank, in its reasonable opinion, determines that such credit, relief,remission or repayment is in respect of or calculated with reference to the deduction or withholdinggiving rise to such additional payment or, in the case of an additional payment made pursuant toClause 9.2 (Tax Indemnity), with reference to the liability, expense or loss to which the paymentgiving rise to the additional payment relates, the Bank shall, to the extent that it can do so withoutprejudice to the retention of the amount of such credit, relief, remission or repayment, pay to theBorrower such amount as is attributable to such deduction or withholding or, as the case may be,such liability, expense or loss provided that the Bank shall not be obliged to make any paymentunder this Clause 9.4 in respect of such credit, relief, remission or repayment until the Bank is, in itsreasonable opinion, satisfied that its tax affairs for its tax year in respect of which such credit, relief,remission or repayment was obtained have been finally settled. Any such payment shall, in theabsence of manifest error and subject to the Bank specifying in writing in reasonable detail thecalculation of such credit, relief, remission or repayment and of such payment and providingrelevant supporting documents evidencing such matters, be conclusive evidence of the amount dueto the Borrower hereunder and shall be accepted by the Borrower in full and final settlement of itsrights of reimbursement hereunder in respect of such deduction or withholding. Nothing containedin this Clause 9.4 shall interfere with the right of the Bank to arrange its tax affairs generally inwhatever manner it thinks fit nor oblige the Bank to disclose any information relating to its taxaffairs generally or any computations in respect thereof.

9.5 Delivery of Forms

The Bank shall within 30 days of the written request of the Borrower deliver to the Borrower suchduly completed application and, if required, other forms, together with a power of attorney in formand substance acceptable to the Bank authorising the Borrower to file such forms on behalf of theBank with the relevant tax authorities in Russia, and such other information as may reasonably berequired to be duly completed and delivered by the Bank, to enable the Borrower to apply to obtainrelief from deduction or withholding of Russian Tax after the date of this Agreement or, as the casemay be, to apply to obtain a tax refund if a relief from deduction or withholding of Russian Tax hasnot been obtained, provided that the Bank is not subject to any restriction, under applicable law orotherwise, which would prevent it from providing such documentation or information. The Bankshall, within 30 days of the written request of the Borrower from time to time deliver to theBorrower any additional duly completed application forms as may reasonably be required to beduly completed and delivered by the Bank to enable the Borrower to apply to obtain relief fromdeduction or withholding of Russian Tax or, as the case may be, to apply to obtain a tax refund if arelief from deduction or withholding of Russian Tax has not been obtained. The application and, ifrequired, other forms referred to in this Clause 9.5 shall be duly signed by the Bank and, to theextent that the Bank is reasonably able to procure it, stamped or otherwise approved by thecompetent tax authority in Luxembourg (if any approval is required). Any cost incurred by theBank in the performance of its obligations under this Clause 9.5 shall be for the account of theBorrower. The Bank shall be under no obligation to make any independent filing, application orsubmission in relation to the matters referred to in this Clause 9.5.

9.6 Mitigation

If circumstances arise which would result in any payment to be made by the Borrower pursuant toClause 9 (Taxes) or Clause 11 (Change in Circumstances), the Bank shall notify the Borrower afterbecoming aware of such circumstances and shall, if reasonably requested by the Borrower, and atthe cost of the Borrower, make reasonable efforts to communicate with the relevant tax, regulatoryor prudential authority and to file any document reasonably requested of it, to mitigate the effects ofsuch circumstances; provided, however, that the Bank shall, in no circumstances, be required to takeany action which, in the sole opinion of the Bank may be prejudicial to its business, operations,

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prospects or reputation or undertake any expense prior to being ensured to its satisfaction that itwill be reimbursed therefor.

10. Tax Receipts

10.1 Notification of Requirement to Deduct Tax

If at any time the Borrower is required by law to make any deduction or withholding from any sumpayable by it hereunder (or if thereafter there is any change in the rates at which or the manner inwhich such deductions or withholdings are calculated) the Borrower shall promptly notify the Bank(and, following the Loan Administration Transfer, the Trustee).

10.2 Evidence of Payment of Tax

If the Borrower makes any payment hereunder in respect of which it is required to make anydeduction or withholding, it shall pay the full amount required to be deducted or withheld to therelevant taxation or other authority (subject to the right which the Borrower may have to contestsuch payment) within the time allowed for such payment under applicable law and shall deliver tothe Bank (and, following the Loan Administration Transfer, the Trustee), within 30 days after it hasmade such payment to the applicable authority, an original receipt (or a certified copy thereof)issued by such authority evidencing the payment to such authority of all amounts so required to bededucted or withheld in respect of such payment.

11. Change in Circumstances

11.1 Change in Law or Banking Practice or Increased Costs

In the event that after the date of this Agreement there is any change in or introduction of any tax,law, regulation, regulatory requirement or official directive (whether or not having the force of lawbut, if not having the force of the law, the observance of which is in accordance with the generallyaccepted financial practice of financial institutions in the country concerned) or in the interpretationor application thereof by any person charged with the administration thereof and/or any complianceby the Bank in respect of the Loan or the Facility with any request, policy or guideline (whether ornot having the force of law but, if not having the force of the law, the observance of which is inaccordance with the generally accepted financial practice of financial institutions in the countryconcerned) from or of any central or other fiscal, monetary or other authority, agency or any officialof any such authority, which:

(a) subjects or will subject the Bank to any taxes with respect to payments of principal of orinterest on the Loan or any other amount payable under this Agreement (other than any taxespayable by the Bank on its overall net income or any Taxes referred to in Clause 9.1 (TaxGross-up)); or

(b) increases or will increase the taxation of or changes or will change the basis of taxation ofpayments to the Bank of principal of or interest on the Loan or any other amount payableunder this Agreement (other than any such increases or change which arises by reason of anyincrease in the rate of tax payable by the Bank on its overall net income or as a result of anyTaxes referred to in Clause 9.1 (Tax Gross-up); or

(c) imposes, modifies or deems applicable any capital adequacy, reserve or deposit requirementsattributable to this Agreement or to a class of business or transaction which, in the opinion ofthe Bank, includes this Agreement, against assets held by, or deposits in or for the account of,or credit extended by an office of the Bank; provided, however, that the foregoing shall notinclude any increase in the rate of tax payable on the overall net income of the Bank as a resultof any change in the manner in which the Bank is required to allocate resources to thisAgreement; or

(d) imposes or will impose on the Bank any other condition affecting this Agreement, the Facilityor the Loan,

and, if as a result of any of the foregoing:

(i) the cost to the Bank of making, funding or maintaining the Loan or the Facility isincreased; or

(ii) the amount of principal, interest or other amount payable to or received by the Bankhereunder is reduced; or

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(iii) the Bank makes any payment or foregoes any interest or other return on or calculated byreference to the gross amount of any sum receivable by it hereunder, or makes anypayment or foregoes any interest or other return on or calculated by reference to thegross amount of the Loan,

then, and in each case:

(A) the Bank shall, as soon as practicable after becoming aware of such increased cost,reduced amount or payment made or foregone, give written notice to theBorrower, together with a certificate describing in reasonable detail theintroduction or change or request which has occurred and the country orjurisdiction concerned and the nature and date thereof and demonstrating theconnection between such introduction, change or request and such increased cost,reduced amount or payment made or foregone, and all relevant supportingdocuments evidencing the matters set out in such certificates; and

(B) upon demand by the Bank to the Borrower, the Borrower shall pay to the Banksuch additional amount as shall be necessary to compensate the Bank for any suchincreased cost or for any such reduction, payment or foregone interest or otherreturn, provided, however, that the amount of such increased cost, reduced amountor payment made or foregone shall be deemed not to exceed an amount equal tothe proportion which is directly attributable to this Agreement, and provided,further, that the Bank will not be entitled to such additional amount where suchreduction, payment or foregone interest or other return arises as a result of thegross negligence or wilful default of the Bank.

12. Representations and Warranties

The Borrower makes the representations and warranties set out in this Clause 12 (Representationsand Warranties) on and as of the date of this Agreement and acknowledges that the Bank has enteredinto this Agreement in reliance on such representations and warranties. The representations andwarranties set out in Clause 12.3 (No Immunity), Clause 12.4 (Governing Law), Clause 12.5 (Pari Passu),Clause 12.9 (No Filing, Taxes, etc.) and Clause 12.10 (Valid and Binding Obligations) are subject to thequalifications as to matters of law contained in the legal opinions of White & Case and of Allen & OveryLegal Services mentioned in Clause 3.1 (Documents to be Delivered).

12.1 Due Organisation

It is an open joint stock company duly organised and incorporated and validly existing under thelaws of the Russian Federation being a separate legal entity with corporate existence capable ofsuing and being sued and has the power and authority to own its assets and to conduct its businessand operations which it currently conducts and has full power, authority and the legal right to enterinto this Agreement and to exercise its rights and perform its obligations under this Agreement andall corporate, legal and other action required to authorise its due execution and delivery of thisAgreement and its performance and observance of its obligations under this Agreement has beenduly taken.

12.2 No Deduction

Under the laws of the Russian Federation in force at the date of this Agreement, it will not berequired to make any deduction or withholding from any payment it may make under thisAgreement.

12.3 No Immunity

The execution by the Borrower of this Agreement constitutes, and its exercise of its rights andperformance of its obligations under this Agreement will constitute, private and commercial actsdone and performed for private and commercial purposes and in any proceedings taken in theRussian Federation in relation to this Agreement, the Borrower will not be entitled to claim foritself or any of its assets immunity from suit, execution, attachment (before or after judgment) orother legal process.

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12.4 Governing Law

In any proceedings taken in the Russian Federation in relation to this Agreement, the choice ofEnglish law as the governing law of this Agreement and any arbitral award with respect to thisAgreement obtained in England will be recognised and enforced in the Russian Federation aftercompliance with the applicable procedural rules and all other legal requirements in the RussianFederation.

12.5 Pari Passu

Under the laws of the Russian Federation in force at the date of this Agreement, the claims of theBank (and following the Loan Administration Transfer, the Trustee) against the Borrower underthis Agreement will rank at least pari passu with the claims of all its other unsecured creditors savethose whose claims are preferred by any bankruptcy, insolvency, liquidation, moratorium or similarlaws of general application.

12.6 Admissibility

All acts, conditions and things required to be done, fulfilled and performed in order to make thisAgreement admissible in evidence in the Russian Federation and England have been done, fulfilledand performed.

12.7 Consents

All licences, consents, approvals, examinations, clearances, filings, registrations and authorisationswhich are or may be necessary to enable the Borrower and each Subsidiary to own its assets andcarry on its business as currently conducted are, and shall remain, in full force and effect.

12.8 No Strikes

There are no strikes or employment disputes against or affecting the Borrower or any Subsidiarywhich are pending or, to the Borrower’s knowledge threatened which have or may have a MaterialAdverse Effect.

12.9 No Filing, Taxes, etc.

Under the laws of the Russian Federation in force at the date of this Agreement, it is not necessarythat this Agreement be filed, recorded or enrolled with any court or other Agency in suchjurisdiction or that any stamp, registration or similar tax, duty, fee or charge be paid on or inrelation to this Agreement.

12.10 Valid and Binding Obligations

This Agreement has been duly and validly executed and delivered by the Borrower and theobligations expressed to be assumed by it in this Agreement are legal and valid and bindingobligations, enforceable against it in accordance with their terms.

12.11 No Winding-up

Neither the Borrower nor any Material Subsidiary has taken any corporate action nor have anyother steps been taken or legal proceedings been started or (to the best of the Borrower’sknowledge and belief) threatened against any of them for its winding-up, dissolution, administrationor re-organisation or for the appointment of a receiver, administrator, administrative receiver,trustee or similar officer of it or of any or all of its assets or revenues.

12.12 No Default

No Event of Default or Potential Event of Default has occurred and is continuing and neither theBorrower nor any Material Subsidiary is in breach of or in default under any agreement to which itis a party or which is binding on it or any of its assets to an extent or in a manner which might have aMaterial Adverse Effect and no such event will occur upon the making of the Advance.

12.13 No Proceedings

No action, judicial or administrative proceeding or arbitration proceeding of or before any court,Agency or arbitration panel have been started or threatened which might (a) prohibit the executionand delivery of this Agreement or the Borrower’s compliance with its obligations hereunder or (b)

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adversely effect the rights and power of the Borrower to enter into this Agreement or (c) have aMaterial Adverse Effect.

12.14 Financial Statements

The Original Financial Statements were prepared in accordance with US GAAP current as at thedate of presentation thereof, except where specifically stated therein and the Original RARFinancial Statements were prepared in accordance with RAR current as at the date of presentationthereof, except where specifically stated therein, and in each case give (in conjunction with the notesthereto) a true and fair view of the financial condition of the Group at the date as of which theywere prepared and the results of the Group’s operations during the financial years or periods thenended.

12.15 No Material Adverse Change

No event or circumstance has occurred since the date of publication of the Original FinancialStatements which has had or might in the reasonable opinion of the Bank (and, following the LoanAdministration Transfer, the Trustee without regard to the Bank) have a Material Adverse Effect.

12.16 No Undisclosed Material Assets or Liabilities

Neither the Borrower nor any other member of the Group had, as at the date as of which theOriginal Financial Statements were prepared, any material assets or liabilities (contingent orotherwise) which were not disclosed (including in the notes thereto) or reserved against nor werethere at that date any unrealised or anticipated losses of the Borrower or the Group arising fromcommitments entered into by it which were not so disclosed or reserved against.

12.17 Information

The information supplied by the Borrower or any of its Subsidiaries to the Bank in connection withthis Agreement is true, complete and accurate in all material respects and it is not aware of anymaterial facts or circumstances that have not been disclosed to the Bank and which is likely to havea Material Adverse Effect.

12.18 Permitted Encumbrance

Except for any Permitted Encumbrance or Encumbrance that has been created in compliance withClause 15.4 (Limitation on Encumbrances), the Borrower and each Subsidiary has good title to itsassets free and clear of all Encumbrances

12.19 No Obligation to Create Encumbrance

Its execution of this Agreement and its exercise of its rights and performance of its obligationsunder this Agreement will not result in the existence of nor oblige the Borrower or any Subsidiaryto create any Encumbrance over all or any of its present or future revenues or assets.

12.20 No Conflict

The execution and delivery of this Agreement and the exercise by the Borrower of its rights andperformance of its obligations under this Agreement do not and will not conflict with or result in abreach of or violation of:

(a) any applicable law, regulation or official or judicial order; or

(b) its constitutive documents and rules and regulations; or

(c) to the extent that such conflict, breach or violation might have a Material Adverse Effect, anyagreement, undertaking, mortgage, bond or other instrument or treaty to which it is a party orwhich is binding upon it or any of its assets.

12.21 Compliance with Laws

The Borrower and each Subsidiary is in compliance, in all material respects, with all applicable laws.

12.22 Environmental

Save to the extent disclosed in writing to the Bank prior to the date hereof, the Borrower and eachSubsidiary (i) has duly complied with, and has operated, used and only permitted the use of all

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properties and business owned, leased, occupied or operated by it in compliance with, allEnvironmental Laws, non-compliance with which might have a Material Adverse Effect, (ii) afterdue inquiry, the Borrower is not aware and has no reason to suspect that any property or businessnow owned, leased, occupied, or operated by it or any Subsidiary is or may be contaminated by, or isadjacent to any property that may be contaminated by, or used in connection with any Material ofEnvironmental Concern where such contamination might have a Material Adverse Effect or thatany such property or business was used or operated by any prior owner, lessee, occupant or operatoror other third party (with or without permission) in any way that constituted or now may constitutea violation of any Environmental Law for which the Borrower or any Subsidiary may be heldresponsible and which might have a Material Adverse Effect, (iii) has not received any notice of anyviolation or alleged violation of any provisions of Environmental Law for which the Borrower orany Subsidiary may be held responsible and which might have a Material Adverse Effect and (iv) tothe best of the Borrower’s knowledge, has no obligations or liabilities, contingent or absolute,relating to the use, possession, collection, storage, processing, treatment, emission, release,discharge, disposal, transfer or transport of Materials of Environmental Concern which might havea Material Adverse Effect.

12.23 Repetition of Representations

Each of the representations and warranties in Clauses 12.1 (Due Organisation) to 12.22(Environmental) of this Clause 12 (Representations and Warranties) will be correct and compliedwith on the date on which the Advance is made.

13. Representations and Warranties of the Bank

The Bank makes the representations and warranties set out in Clause 13.1 (Status and DueAuthorisation) to Clause 13.4 (Consents and Approvals) (inclusive) as of the date hereof andacknowledges that the Borrower has entered into this Agreement in reliance on thoserepresentations and warranties.

13.1 Status and Due Authorisation

The Bank is duly incorporated under the laws of Luxembourg, is resident in Luxembourg forLuxembourg tax purposes and has full power and capacity to execute this Agreement and theSubscription Agreement and to undertake and perform the obligations expressed to be assumed byit therein and the Bank has taken all necessary action to approve and authorise the same.

13.2 Execution of Agreement

The execution of this Agreement and the Subscription Agreement and the undertaking andperformance by the Bank of the obligations expressed to be assumed by it therein will notmaterially conflict with, or result in a material breach of or material default under, the laws ofLuxembourg.

13.3 Valid and Binding Obligations

This Agreement and the Subscription Agreement constitute legal, valid and binding obligations ofthe Bank.

13.4 Consents and Approvals

All material authorisations, consents and approvals required by the Bank (if any) for or inconnection with the execution of this Agreement and the performance by the Bank of theobligations expressed to be undertaken by it herein have been obtained and are in full force andeffect.

14. Financial Information

14.1 Annual Financial Statements

The Borrower shall deliver to the Bank (and, following the Loan Administration Transfer, theTrustee) as soon as the same become available, but in any event within 240 days after the end of itsfinancial year, the audited consolidated Financial Statements of the Group for such financial yearprepared in accordance with US GAAP (current at the date of preparation) including the notesthereto and the accompanying report of the Auditors.

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14.2 Semi-Annual Financial Statements

The Borrower shall as soon as the same become available, but in any event within 90 days after theend of each half of its financial years, deliver to the Bank (and, following the Loan AdministrationTransfer, the Trustee) the unaudited half-yearly Financial Statements of the Borrower prepared inaccordance with RAS for such period.

14.3 Further Information

In addition to the Financial Statements which the Borrower is required to provide to the Bank (and,following the Loan Administration Transfer, the Trustee) under Clause 14.1 (Annual FinancialStatements) and Clause 14.2 (Semi-Annual Financial Statements), the Borrower shall also from timeto time on the request of the Bank (or, following the Loan Administration Transfer, the Trustee),provide the Bank (and, following the Loan Administration Transfer, the Trustee) with:

(a) such information about the business and financial condition of the Group or any member ofthe Group as the Bank (or, following the Loan Administration Transfer, the Trustee withoutregard to the Bank) may reasonably require including, without limitation, any information orcertification which the Bank may require in connection with the Trust Deed and itsundertakings thereunder;

(b) all documents despatched by it on a regular basis as required by applicable law to itsshareholders (or any class of them) or its creditors (or any class of them) at the same time asthey are despatched to such persons and any document containing information which ismaterial to the Borrower’s obligations under this Agreement, in each case, which contain anyinformation which is not contained in the Original Financial Statements or in any financialinformation otherwise delivered to the Bank (and, following the Loan AdministrationTransfer, the Trustee) pursuant to this Clause 14 (Financial Information).

(c) promptly upon the occurrence of a merger, consolidation or combination with another person,certification in the English language by two of its Authorised Signatories that such merger,consolidation or combination is not in breach of its obligations under Clause 15.8(Consolidation and Merger).

14.4 Certified and Audited

The Borrower shall ensure that:

(a) each set of Financial Statements delivered by it pursuant to this Clause 14 (FinancialInformation) is prepared in accordance with US GAAP or RAR, as appropriate, and certifiedby a duly authorised officer of the Borrower as giving a true and fair view of the financialcondition of the Group as a whole, or the Borrower, where appropriate, as at the end of theperiod to which those Financial Statements relate and of the results of its operations duringsuch period;

(b) each set of Financial Statements delivered by it pursuant to Clause 14.1 (Annual FinancialStatements) has been audited by the Auditors; and

(c) it provides to the Bank, (and, following the Loan Assignment Transfer, the Trustee) within 10days of any request by the Bank (or, following the Loan Administration Transfer, the Trustee)and at the time of the despatch to the Bank (or, following the Loan Administration Transfer,the Trustee) of its audited Financial Statements pursuant to this Clause 14 (FinancialInformation), a certificate in form and substance acceptable to the Bank (and, following theLoan Administration Transfer, the Trustee), signed by two Authorised Signatories of theBorrower certifying that up to a specified date not earlier than 7 days prior to the date of suchcertificate (the ‘‘Certified Date’’) the Borrower has complied with all of its obligations underthis Agreement (or if such is not the case, giving details of the circumstances of such non-compliance) and that as at such date there did not exist nor had there existed at any time priorthereto since the Certified Date in respect of the previous such certificate (or, in the case of thefirst such certificate, since the date of this Agreement) any Event of Default or Potential Eventof Default or, if such is not the case, specifying the same and specifying what action theBorrower proposes to take with respect thereto.

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14.5 Accounting Practice

The Borrower shall ensure that each set of Financial Statements delivered to the Bank (and,following the Loan Administration Transfer, the Trustee) pursuant to this Clause 14 (FinancialInformation) is prepared using accounting policies, practices, procedures and reference periodconsistent with those applied in the preparation of (i) in the case of Financial Statements preparedin accordance with US GAAP, its Original Financial Statements; and (ii) in the case of FinancialStatements prepared in accordance with RAR, its Original RAR Financial Statements, unless, inrelation to any such set of Financial Statements, the Borrower notifies the Bank (and, following theLoan Administration Transfer, the Trustee) that there have been one or more changes in any suchaccounting policies, practices, procedures or reference period and the Borrower or the Auditorsprovide:

(a) a description of the changes and the adjustments which would be required to be made to thoseFinancial Statements in order to reconcile them with the accounting policies, practices,procedures and reference period upon which its Original Financial Statements or its OriginalRAR Financial Statements, as appropriate, were prepared; and

(b) sufficient information, in such detail and format as may be reasonably required by the Bank(and, following the Loan Administration Transfer, the Trustee), to enable the Bank (and,following the Loan Administration Transfer, the Trustee) to make an accurate comparisonbetween the financial positions indicated by those Financial Statements and by the OriginalFinancial Statements or the Original RAR Financial Statements, as appropriate,

and any reference in this Agreement to those Financial Statements shall be construed as a referenceto those Financial Statements as adjusted to reflect the basis upon which the Original FinancialStatements or the Original RAR Financial Statements, as appropriate, were prepared.

14.6 Notice of Change

As soon as, but in any event within 10 Local Business Days after, (i) a new Material Subsidiary iscreated or (ii) an existing Subsidiary becomes a Material Subsidiary or (iii) a decision is taken tocreate such Material Subsidiary or to transform an existing Subsidiary into a Material Subsidiary ismade the Borrower shall notify the Bank (and, following the Loan Administration Transfer, theTrustee) and such notice shall include a copy of such decision and a brief description of suchMaterial Subsidiary.

15. Undertakings

15.1 Compliance with Applicable Laws

The Borrower shall obtain, comply with the terms of and, for so long as the Loan or any otheramounts due or to become due under this Agreement are outstanding, do all that is necessary torenew and maintain in full force and effect all authorisations, approvals, licences and consents fromthe government or the relevant agency of the Russian Federation or any political subdivisionthereof or therein required to enable it lawfully to enter into and, to make payments and to performits obligations under this Agreement and to ensure the legality, validity, enforceability oradmissibility in evidence in the Russian Federation and England of this Agreement.

15.2 Leverage Test

The Borrower shall not at any time permit the Leverage Test to exceed 1.5.

15.3 Limitation on Indebtedness

The Borrower shall not, at any time, permit the total Indebtedness of the Borrower and itsSubsidiaries (including, without limitation, the Indebtedness under this Agreement) to exceedU.S.$1.25 billion.

For purposes of this Clause 15.3 (Limitation on Indebtedness), the Dollar-equivalent amount of anynon-Dollar denominated Indebtedness will be calculated based on the relevant currency exchangerate in effect on (i) the date of this Agreement in the case of Indebtedness Incurred on or before theClosing Date and (ii) the date such Indebtedness was Incurred, in the case of Indebtedness Incurredafter the Closing Date.

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15.4 Limitation on Encumbrances

The Borrower shall not, and shall not permit any Subsidiary to, directly or indirectly, create, incuror permit to exist any Encumbrances, other than Permitted Encumbrances, on any of its present orfuture assets or revenues securing any Indebtedness, unless the Loan is secured equally and rateablywith such other Indebtedness.

15.5 Transactions with Affiliates

The Borrower shall not, and shall not permit any Material Subsidiary to, directly or indirectly,conduct any business, enter into or permit to exist any transaction or series of related transactions(including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any propertyor the rendering of any service) with, or for the benefit of, any Affiliate of the Borrower (an‘‘Affiliate Transaction’’) including intercompany loans unless (i) the terms of such AffiliateTransaction are no less favourable to the Borrower or such Material Subsidiary, as the case may be,than those that could be obtained in a comparable arm’s-length transaction with a person that is notan Affiliate of the Borrower or such Material Subsidiary and (ii) with respect to an AffiliateTransaction involving aggregate payments or value in excess of U.S.$15 million, the Borrower shalldeliver to the Bank a written opinion from an Independent Appraiser to the effect that suchAffiliate Transaction is fair, from a financial point of view, to the Borrower and such AffiliateTransaction is summarised in the footnotes to the Financial Statements provided for in Clause 14(Financial Information); provided, however, that this Clause shall not restrict any AffiliateTransaction between the Borrower and any Subsidiary or between any Subsidiaries. Anysubsequent renewal or repetition of any Affiliate Transaction shall be required to comply withclauses (i) and (ii) of this Clause 15.5.

15.6 Limitation on Sale of Assets

The Borrower shall not and shall ensure that no Subsidiary shall, in any financial year, sell, lease,transfer or otherwise dispose of, by one or more transactions or series of transactions (whetherrelated or not), the whole or any part of its revenues or its assets which have an aggregate value inexcess of U.S.$300 million or the equivalent thereof in any currency or currencies to any personother than the Borrower or a Subsidiary, provided that the Borrower and each Subsidiary maydispose of assets in exchange for other assets of a comparable or superior type, value and qualityand may dispose of obsolete or redundant assets or assets, which the Borrower shall have certifiedto the Bank, are not related to the principal business activity of the Borrower or the relevantSubsidiary and provided further that this restriction shall not apply to sales of stock in trade in theordinary course of business at arm’s length. In the case of any sales, leases, transfers or disposals,other than as provided in the provisos to the foregoing sentence, the Borrower shall, within 270 daysof such sale, lease transfer or disposal, apply any amount by which the proceeds thereof, aggregatedwith all other sales, leases or transfers in the same financial year, exceed U.S.$40 million, towardsthe acquisition of additional assets or investment in its business or to pay down Indebtedness underthis Agreement or Indebtedness which ranks in seniority to or pari passu with Indebtedness underthis Agreement.

15.7 Change of Control

Upon the occurrence of a Change of Control, the Borrower shall promptly prepay all or such part ofthe Loan in accordance with Clause 5.2 (Prepayment in the Event of Change of Control).

15.8 Consolidation and Merger

The Borrower shall not, without the prior written consent of the Bank (and, following the LoanAdministration Transfer, the Trustee), enter into any reorganisation (including, without limitation,by way of a merger, accession, division, separation or transformation, as these terms are construedby applicable Russian legislation), or participate in any other type of corporate reconstruction andthe Borrower shall ensure that no Subsidiary shall enter into any reorganisation (including, withoutlimitation, by way of a merger, accession, division, separation or transformation as these terms areconstrued by applicable Russian legislation), or participate in any other type of corporatereconstruction unless the Bank (and following the Loan Administration Transfer, the Trustee) hascertified that, in its sole opinion, such reorganisation or other type of corporate reconstruction willnot have a Material Adverse Effect, provided, however, that nothing in this Clause 15.8 shall

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prevent or restrict the Borrower or a Subsidiary from entering into a reorganisation with aSubsidiary.

15.9 Insurance

The Borrower shall, and shall ensure that each Subsidiary shall maintain insurance on and inrelation to its business and assets with underwriters or insurance companies against such risks and tosuch extent as is usual for companies carrying on a business in the Russian Federation (in relation tothe business of such companies in the Russian Federation) such as that carried on by the Borroweror such Subsidiary (including, for the avoidance of doubt, insurance for environmental liability).

15.10 Untrue Representations

Before the making of the Advance, the Borrower shall notify the Bank of the occurrence of anyevent which will cause or may reasonably be expected to cause any of the representations containedin Clause 12 (Representations and Warranties) to be untrue at or before the time of the making ofsuch Advance.

15.11 No Event of Default

The Borrower shall promptly inform the Bank (and, following the Loan Administration Transfer,the Trustee) of the occurrence of any Event of Default or Potential Event of Default and, uponreceipt of a written request to that effect from the Bank (or, following the Loan AdministrationTransfer, the Trustee), confirm to the Bank that, save as previously notified to the Bank or asnotified in such confirmation, no Event of Default or Potential Event of Default has occurred.

15.12 Ranking of Claims

The Borrower shall ensure that at all times the claims of the Bank and the Trustee against it underthis Agreement rank at least pari passu with the claims of all its other unsecured creditors save thosewhose claims are preferred by any bankruptcy, insolvency, liquidation or similar laws of generalapplication.

15.13 Maintenance of Assets

The Borrower shall, and shall cause each Subsidiary to, maintain and preserve its and their materialassets which are necessary or useful for the proper conduct of its business in good working order.

15.14 Change of Business

The Borrower will procure that no material change is made to the general nature or scope of thebusiness of the Group as a whole from that carried on at the date of this Agreement.

15.15 Withholding Tax Exemption

The Borrower shall provide the Bank with all assistance it may require to ensure that, prior to thefirst Interest Payment Date, at the beginning of each calendar year and at any other time that theBank may so request, the Bank can complete and submit any document required for an advanceexemption from withholding tax to the relevant tax authorities.

15.16 Compliance with Environmental Laws

The Borrower will and will procure that each Subsidiary (i) will duly comply with, and operate, useand only permit the use of all properties and business owned, leased, occupied or operated by it incompliance with, all Environmental Laws, non-compliance with which might have a MaterialAdverse Effect, (ii) ensure that any property or business now owned, leased, occupied, or operatedby it or any Subsidiary is not contaminated by, or is not adjacent to any property that may becontaminated by, or used in connection with any Material of Environmental Concern where suchcontamination might have a Material Adverse Effect or that any such property or business is usedor operated by any owner, lessee, occupant or operator or other third party (with or withoutpermission) in any way that constitutes a violation of any Environmental Law which might have aMaterial Adverse Effect, (iii) will not violate any provisions of Environmental Law for which theBorrower or any Subsidiary may be held responsible and which might have a Material AdverseEffect and (iv) will not use, possess, collect, store, process, treat, emit, release, discharge, dispose,transfer or transport any Materials of Environmental Concern other than in compliance withEnvironmental Law which might have a Material Adverse Effect.

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15.17 Provision of Information

At any time that the Bank is required to provide information to any person pursuant to Condition15 (Provision of Information) of the Notes, the Borrower shall, at the request of the Bank, provideto the Bank such information and at such times as it may require to comply with its obligationsunder such Condition 15.

15.18 Compliance Certificate

(a) On each Interest Payment Date, the Borrower shall deliver to the Bank (and, following theLoan Administration Transfer, the Trustee), written notice in the form of an Officers’Certificate stating whether any Potential Event of Default or Event of Default has occurredand, if it has occurred and shall be continuing, what action the Borrower is taking or proposesto take with respect thereto.

(b) Each set of Financial Statements delivered by it pursuant to Clause 14.1 (Annual FinancialStatements) shall be accompanied by a certificate of the Auditors stating that as of the date towhich such Financial Statements were prepared the Borrower was in compliance with Clause15.2 (Leverage Test) and Clause 15.3 (Limitation on Indebtedness) and certifying whichSubsidiaries are Material Subsidiaries.

16. Events of Default

16.1 Events of Default

Each of Clause 16.1(a) (Non-Payment) to Clause 16.1(n) (Failure to Comply with Obligations)describes the circumstances which constitute an Event of Default for the purposes of thisAgreement. If one or more Event of Default shall occur, the Bank (and, following the LoanAdministration Transfer, the Trustee) shall be entitled to the remedies set forth in Clause 16.3(Acceleration)

(a) Non-Payment

The Borrower fails to pay any sum other than interest due from it at the time, in the currency and inthe manner specified in this Agreement or fails to pay interest within three Business Days of the duedate for payment thereof, in the currency and in the manner specified in this Agreement.

(b) Breach of Covenants

The Borrower fails duly to perform or comply with, or is otherwise in breach of, any other of theobligations expressed to be assumed by it in this Agreement and such failure or breach is notremedied within 14 days after the Bank (and, following the Loan Administration Transfer, theTrustee) has given notice of it to the Borrower.

(c) Non-Payment of Indebtedness

Any Indebtedness of the Borrower or any Subsidiary is not paid when due after the expiration ofany originally applicable grace period, or any Indebtedness of the Borrower or any Subsidiary isdeclared to be or otherwise becomes due and payable prior to its specified maturity, provided,however, that no Event of Default shall have occurred if the aggregate amount of such Indebtedness(or its equivalent) which is not paid when due (after the expiration of any originally applicable graceperiod) or is due and payable prior to its specified maturity date is equal to or less than U.S.$10million (or its equivalent in another currency).

(d) Insolvency

The Borrower or any Material Subsidiary becomes insolvent, is unable to pay its debts as they falldue, stops, suspends or threatens to stop or suspend payment of all or any part of its Indebtednesswhich it will or might otherwise be unable to pay when due, commences negotiations with any oneor more of its creditors with a view to the general readjustment or rescheduling of its Indebtednessor makes a general assignment for the benefit of or a composition with its creditors.

(e) Winding-Up

The Borrower or any Material Subsidiary takes any corporate action or other steps are taken orlegal proceedings are started for its winding-up, dissolution, administration or re-organisation or for

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the appointment of a liquidator, receiver, administrator, administrative receiver, conservator,custodian, trustee or similar officer of it or of any or all of its revenues and assets.

(f) Execution or Distress

Any execution or distress is levied against, or a secured party takes possession of the whole or anypart of, the property, undertaking or assets, having an aggregate value in excess of U.S.$10 million,of the Borrower or any Material Subsidiary.

(g) Non-Satisfaction of Judgments

The aggregate amount of unsatisfied judgments, decrees or orders of courts or other appropriatelaw-enforcement bodies for the payment of money against any one or more of the Borrower and itsSubsidiaries, in the aggregate, exceeds U.S.$10 million or the equivalent thereof in any othercurrency or currencies, and there is a period of 45 days following (i) the entry thereof during whichsuch judgment, decree or order is not discharged, waived or the execution thereof stayed, or (ii) inthe case of any tax judgments, decrees or orders, that the Borrower is disputing in good faith onreasonable grounds, either (a) the issue of a final decision (determining liability and the amountpayable) of a competent court (‘‘sud pervoi instantsiyi’’) or a competent appeal court or an appealdivision thereof (in each case, ‘‘apellatsionnaya instantsiya’’) which, in any such case, is notchallenged within 30 days upon its coming into force, or (b) the issue of a decision (determiningliability and the amount payable) of a competent cassation court or a cassation division thereof (ineach case, ‘‘cassatsionnaya instantsiya’’).

(h) Analogous Proceedings

Any event occurs which under the laws of any jurisdiction has a similar or analogous effect to any ofthose events mentioned in Clause 16.1(d) (Insolvency), Clause 16.1(e) (Winding-Up,) Clause 16.1(f)(Execution or Distress), or Clause 16(g) (Non-Satisfaction of Judgments) including, for theavoidance of doubt and without prejudice to any events specified in Clause 16.1(d) (Insolvency),Clause 16.1(e) (Winding-Up), Clause 16.1(f) (Execution or Distress) Clause 16(g) (Non-Satisfactionof Judgments) (i) the Borrower or any Material Subsidiary seeking, consenting to or acquiescing inthe introduction of proceedings for its liquidation or bankruptcy or the appointment of a liquidationcommission (‘‘likvidatsionnaya komissiya’’) or similar officer of the Borrower or any MaterialSubsidiary; (ii) the appointment of an external manager (‘‘vneshniy upravlayushiy’’), bankruptcymanager (‘‘konkursniy upravlayushiy’’) or similar officer of the Borrower or any MaterialSubsidiary or a liquidation commission (‘‘likvidatsionnaya komissiya’’) of the Borrower or anyMaterial Subsidiary; (iii) the convening or announcement of an intention to convene a meeting ofcreditors of the Borrower or any Material Subsidiary for the purposes of considering a voluntaryarrangement as referred to in section VII of the federal law of the Russian Federation ‘‘OnInsolvency (Bankruptcy)’’ No. 6-FZ of 8 January 1998 as amended and revised from time to time;or (iv) any extra-judicial winding-up, liquidation or any analogous act by any Agency of theBorrower or any Material Subsidiary.

(i) Adverse Government Action

Any government, Agency or court takes any action that, in the opinion of the Bank (and, followingthe Loan Administration Transfer, the Trustee), has a Material Adverse Effect on the Borrower orany Subsidiary.

(j) Consents and Approvals

Any consent, approval, authorisation or licence necessary for the performance of any obligation ofthe Borrower under this Agreement fails or ceases to be in full force and effect.

(k) Repudiation

The Borrower repudiates this Agreement or does or causes to be done any act or thing evidencingan intention to repudiate this Agreement.

(l) No Action Taken

At any time any act, condition or thing required to be done, fulfilled or performed in order (i) toenable the Borrower lawfully to enter into, exercise its rights under and perform the obligationsexpressed to be assumed by it in this Agreement, (ii) to ensure that the obligations expressed to be

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assumed by it in this Agreement are legal, valid and binding, or (iii) to make this Agreementadmissible in evidence in the Russian Federation or in England, is not done, fulfilled or performed.

(m) Obligations Unlawful

At any time it is or becomes unlawful for the Borrower to perform or comply with any or all of itsmaterial obligations under this Agreement or any of the obligations of the Borrower under thisAgreement are not or cease to be legal, valid and binding.

(n) Failure to Comply with Obligations

Any circumstances arise which give reasonable grounds in the opinion of the Bank (and, followingthe Loan Administration Transfer, the Trustee), for belief that the Borrower may not (or may beunable to) perform or comply with its material obligations under this Agreement.

16.2 Notice of Default

The Borrower shall deliver to the Bank (and, following the Loan Administration Transfer, theTrustee), within three days after the occurrence thereof, written notice in the form of an Officers’Certificate of any event which is, or with the giving of notice or the lapse of time, or both, wouldbecome, an Event of Default, its status and what action the Borrower is taking or proposes to takewith respect thereto.

16.3 Acceleration

Upon the occurrence of an Event of Default, provided such Event of Default is continuing, theBank (and, following the Loan Administration Transfer, the Trustee and not the Bank) may bywritten notice to the Borrower declare the Loan to be immediately due and payable (at which pointthe same shall become so payable together with accrued interest and any other sums then owed bythe Borrower under this Agreement) or declare the Loan to be due and payable on demand.

17. Borrower’s Indemnities

17.1 General Indemnity

The Borrower undertakes to the Bank, that if the Bank or any of its Affiliates, or any director,officer, employee or agent of the Bank or any such Affiliate or any person controlling the Bankwithin the meaning of the United States securities laws (each an ‘‘indemnified party’’) incurs anyloss, liability, cost, claim, charge, expense (including, without limitation, reasonable and properlydocumented legal fees and expenses and any amount payable by the Bank under the Trust Deed,where such amount is subject to receipt by the Bank of the relevant amount from the Borrower),demand or damage (a ‘‘Loss’’) as a result of or in connection with the Loan, this Agreement (orenforcement thereof), or the issue, constitution, sale, listing or enforcement of the Notes or theNotes being outstanding or any combination of any of the foregoing, the Borrower shall pay to theBank on demand an amount equal to such Loss and all costs, charges and expenses which it or anyindemnified party may pay or incur in connection with investigating, disputing or defending anysuch action or claim as such costs, charges and expenses are incurred, unless such Loss was causedby the negligence or wilful misconduct of such indemnified party or arises out of a breach of anyrepresentations or warranties of the Bank in this Agreement. The Bank shall not have any duty orobligation, whether as fiduciary or trustee, for any indemnified party or otherwise, to recover anysuch payment or to account to any other person for any amounts paid to it under this Clause 17.1.

17.2 Independent Obligation

Clause 17.1 (General Indemnity) constitutes a separate and independent obligation of the Borrowerfrom its other obligations under or in connection with this Agreement or any other obligations ofthe Borrower in connection with the issuance of the Notes by the Bank and shall not affect, or beconstrued to affect, any other provision of this Agreement or any such other obligations.

17.3 Survival

The obligations of the Borrower pursuant to Clauses 9.1 (Tax Gross-up), 9.2 (Tax Indemnity), 9.3(Taxes on Notes) and 17.1 (General Indemnity) shall survive the execution and delivery of thisAgreement, the drawdown of the Facility and the repayment or prepayment of the Loan, in eachcase by the Borrower.

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18. Currency of Account

18.1 Currency of Account

The Dollar is the currency of account and payment for each and every sum at any time due from theBorrower under this Agreement provided that:

(a) each payment in respect of costs and expenses shall be made in the currency in which the samewere incurred; and

(b) each payment pursuant to Clause 9.2 (Tax Indemnity), Clause 9.3 (Taxes on Notes) or Clause11.1 (Change in Law or Banking Practice or Increased Costs) shall be made in the currencyspecified by the party claiming.

18.2 Currency Indemnity

If any sum due from the Borrower under this Agreement or any order or judgment given or made inrelation to this Agreement has to be converted from the currency (the ‘‘first currency’’) in which thesame is payable under this Agreement or under such order or judgment into another currency (the‘‘second currency’’) for the purpose of (a) making or filing a claim or proof against the Borrower,(b) obtaining an order or judgment in any court or other tribunal, or (c) enforcing any order orjudgment given or made in relation to this Agreement, the Borrower shall indemnify and holdharmless each of the persons to whom such sum is due from and against any loss suffered orincurred as a result of any discrepancy between (i) the rate of exchange used for such purpose toconvert the sum in question from the first currency into the second currency and (ii) the rate or ratesof exchange at which such person may in the ordinary course of business purchase the first currencywith the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of anysuch order, judgment, claim or proof.

19. Payments

19.1 Payment to Bank

On each date on which this Agreement requires an amount to be paid by the Borrower, theBorrower shall make the same available to the Bank by payment in Dollars and in same day funds(or such other funds as may for the time being be customary in New York City for the settlement inNew York City of international banking transactions in Dollars) by no later than 10.00 a.m. (NewYork City time) to the Account other than amounts in respect of the Additional Margin which theBorrower shall pay to such account as the Bank shall notify to the Borrower; provided that, if at anytime after the Loan Administration Transfer, the Trustee notifies the Borrower that a RelevantEvent has occurred, the Borrower shall make all subsequent payments, which would otherwise bemade to the Account, to such other account as shall be notified by the Trustee to the Borrower.

19.2 Alternative Payment Arrangements

If, at any time, it shall become impracticable (by reason of any action of any governmental authorityor any change of law, exchange control regulations or any similar event) for the Borrower to makeany payments under this Agreement in the manner specified in Clause 19.1 (Payment to Bank), thenthe Borrower may agree with the Bank (or, after the delivery of any such notice, agree with theTrustee) alternative arrangements for the payment to the Bank (or, as the case may be, the Trustee)of amounts due (prior to the delivery of any notice referred to in Clause 19.1) under this Agreementprovided that, in the absence of any such agreement with the Bank (or, as the case may be, theTrustee), the Borrower shall be obliged to make all payments due to the Bank in the mannerspecified above.

19.3 Clear Payments

Any payment required to be made by the Borrower under this Agreement shall be calculatedwithout reference to any set-off or counterclaim and shall be made free and clear of and without anydeduction for or on account of any set-off or counterclaim.

20. Calculations and Evidence of Debts

20.1 Maintain Accounts

The Bank shall maintain in accordance with its usual practice accounts evidencing the amounts fromtime to time lent by and owing to it under this Agreement.

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20.2 Prima Facie Evidence

In any legal action or proceeding arising out of or in connection with this Agreement, the entriesmade in the accounts maintained pursuant to Clause 20.1 (Maintain Accounts) shall be prima facieevidence of the existence and amounts of the specified obligations of the Borrower.

20.3 Certificate of Bank

A certificate of the Bank as to the amount for the time being required to indemnify it against anysuch cost, payment or liability as is mentioned in Clause 9.2 (Tax Indemnity), Clause 9.3 (Taxes onNotes), Clause 11.1 (Change in Law or Banking Practice or Increased Costs), Clause 17 (Borrower’sIndemnities), or Clause 18.2 (Currency Indemnity), setting out in reasonable detail the grounds forthe indemnity claim and the method of calculation, shall be prima facie evidence of the existenceand amounts of the specified obligations of the Borrower.

21. Assignments and Transfers

21.1 Successors and Assigns

This Agreement shall be binding upon and inure to the benefit of each party to this Agreement andits or any subsequent successors, assignees and transferees.

21.2 Assignment by Borrower

The Borrower shall not be entitled to assign or transfer all or any of its rights, benefits andobligations under this Agreement.

21.3 Assignment or Transfer by Bank

The Bank may, at any time, with the consent of the Borrower (not to be unreasonably withheld ordelayed) and (after the Loan Administration Transfer) the Trustee assign or transfer (as the casemay be) all or any of its rights, benefits and obligations under this Agreement, provided, however,that the Borrower’s consent shall not be required in connection with any assignment or transfer tothe Trustee or any assignment or transfer which will not materially affect the Borrower’s obligationsunder this Agreement.

21.4 Disclosure of Information

The Bank may disclose to any actual or potential assignee or transferee or to any person who mayotherwise enter into contractual relations with the Bank in relation to this Agreement suchinformation about the Borrower and the Group as the Bank shall consider appropriate.

22. Expenses

22.1 Costs relating to Preservation of Rights

The Borrower shall, from time to time on demand of the Bank, reimburse the Bank for all costs andexpenses (including legal fees) together with any VAT incurred in or in connection with thepreservation or the enforcement of any of the rights of the Bank under this Agreement.

22.2 Taxes

The Borrower shall pay all stamp, registration and other taxes to which this Agreement or anyjudgment given in connection with this Agreement is or at any time may be subject and shall, fromtime to time on demand of the Bank, indemnify the Bank against any liabilities, costs, claims andexpenses resulting from any failure to pay or any delay in paying any such tax.

22.3 Costs relating to Amendments and Waivers

The Borrower shall, from time to time on demand of the Bank (and without prejudice to theprovisions of Clause 22.1 (Costs relating to Preservation of Rights))(and, following the LoanAdministration Transfer, the Trustee) compensate the Bank (and, as the case may be, the Trustee)at such daily and/or hourly rates as the Bank (or, as the case may be, the Trustee) shall from time totime reasonably determine for all time expended by the Bank (or, as the case may be, the Trustee),their respective directors, officers and employees, and for all costs and expenses (includingtelephone, fax, copying, travel and personnel costs) they may incur, in connection with the Bank(and, as the case may be, the Trustee) taking such action as it may consider appropriate inconnection with:

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(a) the granting or proposed granting of any waiver or consent requested under this Agreementby the Borrower;

(b) any actual, potential or suspected breach by the Borrower of any of its obligations under thisAgreement;

(c) the occurrence of any event which is an Event of Default or a Potential Event of Default; or

(d) any amendment or proposed amendment to this Agreement requested by the Borrower.

23. Prescription

Subject to the Bank having received the relevant principal amount or interest amount from theBorrower, the Bank shall repay to the Borrower the principal amount or the interest amount inrespect of any Notes upon the relevant Note Certificates pertaining thereto becoming void pursuantto Condition 9 (Prescription) of the Notes.

24. Remedies and Waivers

No failure to exercise, nor any delay in exercising, on the part of the Bank (or, after the LoanAdministration Transfer, the Trustee), any right or remedy under this Agreement shall operate as awaiver, nor shall any single or partial exercise of any right or remedy prevent any further or otherexercise or the exercise of any other right or remedy. The rights and remedies provided in thisAgreement are cumulative and several and not exclusive of any rights or remedies provided by law.

25. Notices

25.1 Written Notice

All notices, requests, demands or other communication to be made under this Agreement shall bein writing and, unless otherwise stated, shall be delivered by fax, telex or post.

25.2 Giving of Notice

Any communication or document to be delivered by one person to another pursuant to thisAgreement shall (unless that other person has by 15 days written notice specified another address)be made or delivered to that other person, addressed as follows:

(a) If to the Borrower:

OJSC Oil Company RosneftSofiyskaya Naberezhnaya 26Building 1113035 MoscowRussian Federation

Attention: Anatoly Baranovsky

Tel: +7 095 777 4425Fax: +7 095 777 4415

(b) If to the Bank

ABN AMRO Bank (Luxembourg) S.A.46, Avenue J.F. KennedyL-1855 Luxembourg, Luxembourg

Attention: Piet Roels, Loan Products

Tel: +352 26 072 358Fax: +352 26 072 970

and shall be deemed to have been delivered when despatched (in the case of any communication byfax or telex (with confirmed answerback)) or (in the case of any communication made by letter)when left at the address or (as the case may be) 10 days after being deposited in the post postageprepaid in an envelope addressed to it at that address.

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26. Language

26.1 English Language

Each communication and document delivered by one party to another pursuant to this Agreementshall be in the English language or accompanied by a translation into English certified (by an officerof the person delivering the same) as being a true and accurate translation. In the event of anydiscrepancies between the English and Russian versions of such communication or document, orany dispute regarding the interpretation of any provision in the English or Russian versions of suchcommunication or document, the English version of such communication or document shall prevail,unless the document is a statutory or other official document.

26.2 Language of Agreement

This Agreement has been executed in the English language. Although this Agreement may betranslated into the Russian language, the Russian version of this Agreement is for information only.In the event of any discrepancies between the English and Russian versions of this Agreement, orany dispute regarding the interpretation of any provision in the English or Russian versions of thisAgreement, the English version of this Agreement shall prevail and any question of interpretationshall be addressed solely in the English language.

27. Partial Invalidity

If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respectunder the law of any jurisdiction, neither the legality, validity or enforceability of the remainingprovisions of this Agreement nor the legality, validity or enforceability of such provision under the law ofany other jurisdiction shall in any way be affected or impaired.

28. Third Party Rights

It is agreed that:

(a) otherwise than in circumstances where the requirements of this Agreement with regard toassignments and transfers are satisfied, no term of this Agreement shall be enforceable by aperson who is not a party to this Agreement (a ‘‘third party’’); and

(b) this Agreement may be rescinded or altered without the consent of any such third party.

29. Counterparts

This Agreement may be executed in any number of counterparts and all of such counterparts takentogether shall be deemed to constitute one and the same instrument.

30. Law and Jurisdiction

30.1 Governing Law

This Agreement is governed by and shall be construed in accordance with English law.

30.2 Arbitration

The Borrower agrees that the Bank (and, after the Loan Administration Transfer, the Trustee) mayelect by written notice to the Borrower that any claim, dispute or difference of whatever naturearising under, out of or in connection with this Agreement (including a claim, dispute or differenceregarding the existence, termination or validity of this Agreement) (a ‘‘Dispute’’) between theparties to this Agreement shall be finally settled by arbitration in accordance with the Rules of theLondon Court of International Arbitration (the ‘‘Rules’’) as at present in force and as modified bythis paragraph, which Rules shall be deemed incorporated in this paragraph. The number ofarbitrators shall be three. The parties may nominate and the LCIA Court may appoint arbitratorsfrom among the nationals of any country, whether or not a party is a national of that country. Eacharbitrator appointed shall be an attorney experienced in international securities transactions. Theseat of arbitration shall be London, England and the language of arbitration shall be English.Sections 45 and 69 of the Arbitration Act 1996 shall not apply.

30.3 English Courts

Subject to Clause 30.2 (Arbitration), each of the parties agrees that the courts of England shall havejurisdiction to hear and determine any suit, action or proceedings arising out of or in connection

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with this Agreement (‘‘Proceedings’’) and, for such purposes, irrevocably submits to the jurisdictionof such courts.

30.4 Appropriate Forum

For the purposes of Clause 30.3 (English Courts) and Clause 30.6 (Non-exclusive Submissions), theBorrower irrevocably waives any objection which it might now or hereafter have to any of thespecified courts being nominated as the forum to hear and determine any Proceedings and agreesnot to claim that any such court is not a convenient or appropriate forum.

30.5 Service of Process

The Borrower agrees that the process by which any Proceedings are begun may be served on it bybeing delivered in connection with any Proceedings in England, to The Law Debenture TrustCorporation Limited at 5th Floor, 100 Wood Street, London EC2V 7EX, England or, if different, itsprincipal place of business in England for the time being. If such person is not or ceases to beeffectively appointed to accept service of process on behalf of the Borrower, the Borrower shall, onthe written demand of the Bank (or, after the Loan Administration Transfer, the Trustee), appointa further person in England to accept service of process on its behalf and, failing such appointmentwithin 15 days, the Bank (or, as the case may be, the Trustee) shall be entitled to appoint such aperson by written notice to the Borrower. Nothing in this Clause 30.5 shall affect the right of theBank (or, as the case may be, the Trustee) to serve process in any other manner permitted by law.

30.6 Non-exclusive Submissions

Subject to Clause 30.2 (Arbitration), the submissions to the jurisdiction of the courts referred to inClause 30.3 (English Courts) shall not (and shall not be construed so as to) limit the right of anyparty to take Proceedings in any other court of competent jurisdiction, nor shall the taking ofProceedings in any one or more jurisdictions preclude the taking of Proceedings in any otherjurisdiction (whether concurrently or not).

30.7 Consent to Enforcement

The Borrower irrevocably consents to the giving of any relief or the issue of any process inconnection with any Proceedings, or arbitral proceedings pursuant to Clause 30.2 (Arbitration),including (without limitation) the making, enforcement or execution against any propertywhatsoever (irrespective of its use or intended use) of any order or judgment or award whichmay be made or given in such Proceedings or arbitral proceedings.

30.8 Waiver of Immunity

To the extent that the Borrower may in any jurisdiction claim for itself or its assets or revenuesimmunity from suit, execution, attachment (whether in aid of execution, before the making of ajudgment or award or otherwise) or other legal process including in relation to the enforcement ofarbitration award and to the extent that such immunity (whether or not claimed) may be attributedin any such jurisdiction to the Borrower or its assets or revenues, the Borrower agrees not to claimand irrevocably waives such immunity to the full extent permitted by the laws of such jurisdictionand, in particular, to the intent that in any proceedings taken in the County of New York theforegoing waiver of immunity shall have effect under and be construed in accordance with theUnited States Foreign Sovereign Immunities Act of 1976.

31. Schedules

The Schedules to this Agreement constitute integral parts hereof.

THIS AGREEMENT has been entered into on the date stated at the beginning of this Agreement.

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ABN AMRO BANK (LUXEMBOURG) S.A.

ABN AMRO Bank (Luxembourg) S.A. is incorporated in Luxembourg as a societe anonyme withan unlimited duration and is registered under RCS Luxembourg n8B 19.116.

The Bank was established in Luxembourg as a societe anonyme under the name of ‘‘ComptoirLuxembourgeois de Gestion Financiere’’ on 2 February 1982, as published in the official gazetteMemorial C Recueil des Societes et Associations (the ‘‘Memorial’’) on 10 May 1982. The Bank wasrenamed AMRO Bank (Luxembourg) S.A. on 31 March 1988.

Following the merger between AMRO Bank (Luxembourg) S.A. and Algemene Bank Nederland(Luxembourg) S.A., effective 1 July 1991, the name of the Bank was changed to ABN AMRO Bank(Luxembourg) S.A.

The Bank’s Articles of Incorporation, which have been amended several times since first published,were last amended on 24 May 2000 (and published in the Memorial on 2 October 2000). Copies of theArticles of Incorporation of the Bank may be inspected or obtained at the Company Registrar inLuxembourg.

The issued and paid up capital of the Bank is A372,000,000 divided into 12,339 shares. On31 December 2000 the reserves of the Bank amounted to A38,400,000 of which A34,400,000 were freereserves. The Bank is supervised and regulated by the Commission de Surveillance du Secteur Financier.The share capital of the Bank is owned by ABN AMRO Bank N.V., a corporation incorporated in theNetherlands. The Bank was licensed as a bank in Luxembourg with effect from 8 March 1988 and isengaged in various commercial, corporate and private banking activities in Luxembourg.

The Board of Directors of the Bank are Messrs. Jan Koopman, Chairman, Gerard Donlin, Reinoutvan Lennep, Jean-Louis Milin, Frits Deiters and Peter Aelbers. The members of the Managing Board ofthe Bank are Messrs. Frits Deiters, Managing Director, Peter Aelbers, Serge Behm and Jean-ClaudeThoma.

Since the Bank’s sole obligation in respect of the Notes is to make payments of amounts equal toand in the same currency as principal, interest and additional amounts (if any) actually received from theBorrower pursuant to the provisions of the Loan Agreement (less amounts in respect of ReservedRights), financial information relating to the Bank is not set out in this Offering Circular. However, forthe purposes of and in accordance with the provisions of the Law of 10 August 1915 on CommercialCompanies the annual financial statements of the Bank for the year ended 31 December 2000 areincorporated by reference herein. In addition, copies of the Bank’s financial statements may be inspectedor obtained at the Company Registrar in Luxembourg.

The financial statements of the Bank are audited by Ernst & Young S.A., Parc d’Activite Syrdall, 7,L-5365 Luxembourg.

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TAXATION

The following is a general description of certain Russian, Luxembourg, US and European Union taxconsiderations relating to the Notes. It does not purport to be a complete analysis of all tax considerationsrelating to the Notes, whether in those countries or elsewhere. Prospective purchasers of Notes shouldconsult their own tax advisers as to which countries’ tax laws could be relevant to acquiring, holding anddisposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes andthe consequences of such actions under the tax laws of those countries. This summary is based upon the lawas in effect on the date of this Offering Circular and is subject to any change in law that may take effect aftersuch date.

Russian Taxation

Taxation of the Notes

General

Noteholders that are legal entities registered outside of Russia without permanent establishments inRussia and physical persons that spend less than 183 days in a calendar year in Russia will be referred toas ‘‘non-resident Noteholders’’. Russian legal entities, Russian permanent establishments of foreign legalentities (the ‘‘Russian corporate taxpayers’’) and physical persons who spend more than 183 days in acalendar year in Russia will be collectively referred to as ‘‘Russian taxpayers’’. All comments belowrelate to the taxation of legal entities unless indicated otherwise.

The tax treatment of the Loan and of certain transactions with the Notes will be regulated byRussian tax legislation. The profits tax chapter of the Russian Tax Code will enter into force from 1January 2002. Although the profits tax chapter of the Russian Tax Code has been signed by the Presidentand officially published, Russian authorities are currently working on amendments thereto that areexpected to be enacted by 1 January 2002. In addition, the Russian tax authorities are working on officialinterpretations of the profits tax chapter that are also expected to be finalized and published by the end of2001. Although the official interpretation should not differ from the rules provided in the Tax Code, thetax authorities’ explanations and procedures frequently go beyond the scope of the law. Therefore, thereis no certainty that the tax rules and procedures described below will not be complicated or changed byeither the new amendments to the Tax Code or the official interpretations thereof by the Russian taxauthorities.

Sale of the Notes by Non-Resident Noteholders

Capital gains realized by non-resident Noteholders from the sale of the Notes would not be subjectto Russian income tax, unless non-resident Noteholders receive income from a Russian source. Russiansource income arises when a non-resident Noteholder sells the Notes to a Russian taxpayer. If such atransaction occurs in 2001, the Russian corporate taxpayer will be required to withhold Russian incometax at the rate of 20% from the capital gain remitted to the non-resident Noteholder, subject to doubletax treaty relief. The tax basis for withholding is determined as the difference between the sales andpurchase prices of the Notes for the non-resident Noteholder. However, a non-resident Noteholdershould provide the purchaser of the Notes being the Russian corporate taxpayer with documentsconfirming its cost basis of the Notes. If the cost basis of the Notes for the non-resident Noteholder is notdocumented, the tax authorities may seek that tax be withheld at the rate of 20% from the entire amountpaid to the non-resident Noteholder for the Notes. Furthermore, any gain realised on a sale or otherdisposal of the Notes, if calculated in Roubles to fulfill Russian statutory requirements, may be caused ofaffected by changes in the exchange rates between the currency of acquisition, the currency of sale andRoubles. Double tax treaty relief is claimed by submitting an application to the Russian tax authoritiesusing form 1013DT. There can be practical difficulties claiming double tax treaty relief in Russia, aswithholding tax exemption applications are handled by local tax inspectorates that can have differentinterpretations of the law.

From 1 January 2002, under the provisions of the Tax Code capital gains realised by a corporatenon-resident Noteholder from selling the Notes will not be subject to income tax withholding underRussian tax law. However, this may not apply to the accrued interest on the Notes.

Sale of the Notes by Non-Resident Individuals

The Russian tax rules applicable to securities, and in particular to the tax treatment of a tax non-resident holder of securities, are characterized by significant uncertainties and by an absence ofinterpretative guidance.

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Sourcing

Decision as to whether income received by an individual is received from a Russian source, and thuswhether it is subject to Russian tax for a non-resident individual, is based on the place of transaction. It isnot clearly based on the residence of the company issuing the securities. If the Notes are sold abroad,income received will be treated as non-Russian source income. The law is not completely clear whatconstitutes a sale abroad (a sale to a foreign purchaser, a sale under which the proceeds are remitted to anaccount abroad, a sale of shares in a non-Russian company, etc).

Taxable base for non-residents

Only Russian source income is included in the taxable base of individuals who are not Russian taxresidents. Prior to 3 July 2001, property deduction was disallowed for non-resident individuals. Currently,taxation of capital gains is governed by the Russian Tax Code, which does not distinguish between taxresident and non-resident recipients. Capital gain of an individual is equal to the difference between saleproceeds and either of:

– actual documented expenses for acquisition, holding and alienation of securities, or

– a ‘‘property deduction’’ of RUB 125,000 annually, or full proceeds if securities are owned for 3years or more.

However, the Russian Tax Ministry has continued to take the position that non-residents are notentitled to either of the above deductions. Therefore, non-resident individuals receiving income fromRussian source form the sale of the Notes face the risk that the entire amount of proceeds they receivewill be subject to Russian personal income tax at the rate of 30%, subject to availability of double taxtreaty relief. There is a risk that the taxable base may be affected by changes in the exchange ratesbetween the currency of acquisition of the Notes, the currency of sale and Roubles.

Personal Income Tax Withholding

The Russian Tax Code establishes two alternative tax collection procedures:

– withholding by a tax agent (a Russian corporate taxpayer or individual entrepreneur), or

– under tax declaration.

Treaty relief

Generally, capital gains may be subject to tax only in the country of treaty residency of theindividual recipient, unless the income is sourced to the other country.

Redemption of the Notes

Redemption of the Notes by the Issuer will not result in any Russian tax consequences fornon-resident Noteholders.

Resident Noteholders

Noteholders who are Russian Taxpayers will be subject to all applicable Russian taxes.

Taxation of the issuance of Notes by the Bank and the granting of the Loan to the Borrower

The issuance of Notes by the Bank will not be subject to Russian state duties or tax onoperations with securities, as the Notes will be issued outside Russia. Receipt of the Loan by theBorrower will not be subject to any taxes or duties due to the fact that the receipt of a loan does not entailany Russian taxes.

Taxation of the Loan

Taxation of interest payments

Under the new profits tax chapter of the Russian Tax Code, effective from 1 January 2002, interestpayments, in the absence of double tax treaty relief, will be subject to income tax withholding at source ata rate of 20%. As international double tax treaties take legal precedence over Russian domestic law, theLuxembourg/Russia Double Tax Treaty will continue to apply, which would allow an exemption fromwithholding tax on interest on the Loan payable by the Borrower to the Bank. The procedure forobtaining double tax treaty relief is expected to be simplified under new legislative provisions (it may be

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sufficient to provide the Russian tax authorities with a confirmation of residence of a foreign recipient ofincome in order to take advantage of a double tax treaty).

Withholding tax consequences and Russian taxation risks, in particular those related to interestpayments received by the Trustee, are also discussed in the Section ‘‘Risk Factors Relating to the Notes(Taxation)’’.

Taxation of other payments

The Russian tax authorities may conceivably deny a withholding tax exemption and profits taxdeduction for the reimbursement of foreign taxes pursuant to Clause 9.3 (‘‘Taxes on the Notes’’) of theLoan Agreement, as under this Clause the Borrower would indemnify another person of its tax liabilitieswhich is generally not permitted by Russian tax law.

Withholding tax consequences and Russian taxation risks in a situation where such payments aremade directly to the Trustee are discussed in ‘‘Risk Factors – Risks Relating to the Notes – Taxation’’.

Repayment of the Loan

Repayment of the principal amount of the Loan by the Borrower either to the Bank or to theTrustee is not subject to Russian taxes.

Transfer pricing rules

Despite the fact that Russian transfer pricing rules are in their infancy and are not yet applied in aneffective manner, the scope of these rules is very broad. In particular, they can be applied to cross-bordertransactions, irrespective of whether related parties are involved. As the Loan will constitute a cross-border transaction, the Russian tax authorities will be able to apply transfer pricing rules to the amount ofinterest accrued and paid by the Borrower for the purposes of withholding tax exemptions and profits taxdeductions. After 1 January 2002, interest will be allowed as a deduction if the amount of interestincurred in respect of a debt obligation does not deviate by more than 20% from the average level ofinterest charged on debt obligations issued in the same accounting period under comparable conditions.There is a risk that the interest rate may be challenged by the tax authorities, which may result in theassessment of an additional tax liability to the Borrower. If interest is increased due to gross-upprovisions, this will increase the transfer pricing risk, as the gross-up can raise the interest rate above themarket value.

Luxembourg

Under Luxembourg tax law currently in effect, there is no withholding tax on payments of principalor interest, nor on accrued but unpaid interest in respect of the Notes, nor is any Luxembourgwithholding tax payable upon redemption of the Notes.

Noteholders who are non-residents of Luxembourg and who do not hold Notes through apermanent establishment in Luxembourg are not liable for Luxembourg income tax on payments ofprincipal, interest, accrued but unpaid interest or upon redemption of, or on capital gains upon the saleof, any Notes.

No stamp, value added, issue, registration, transfer or similar taxes or duties will, under presentLuxembourg law, be payable in Luxembourg by the Noteholders in connection with the issue of theNotes.

United States Federal Income Taxation

The following is a summary of the material U.S. federal income tax consequences of the acquisition,ownership and retirement of Notes by a Noteholder. This summary only applies to Notes held as capitalassets and does not address aspects of U.S. federal income taxation that may be applicable to Noteholdersthat are subject to special tax rules, such as financial institutions, insurance companies, real estateinvestment trusts, regulated investment companies, tax-exempt organizations or dealers or traders insecurities or currencies, or to Noteholders that will hold a Note as part of a position in a ‘‘straddle’’ or aspart of a ‘‘hedging’’, ‘‘conversion’’ or ‘‘integrated’’ transaction for U.S. federal income tax purposes orthat have a ‘‘functional currency’’ other than the U.S. dollar. Moreover, this summary does not addressthe U.S. federal estate and gift or alternative minimum tax consequences of the acquisition, ownership orretirement of Notes and does not address the U.S. federal income tax treatment of Noteholders that donot acquire Notes as part of the initial distribution at their initial issue price. Each prospective purchaser

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should consult its tax advisor with respect to the U.S. federal, state, local and foreign tax consequences ofacquiring, holding and disposing of Notes.

This summary is based on the Internal Revenue Code of 1986, as amended, existing and proposedTreasury Regulations, administrative pronouncements and judicial decisions, each as available and ineffect on the date hereof. All of the foregoing are subject to change (possibly with retroactive effect) ordiffering interpretations which could affect the tax consequences described herein.

For purposes of this summary, a ‘‘U.S. Noteholder’’ is a beneficial owner of Notes who for U.S.federal income tax purposes is (i) a citizen or resident of the United States; (ii) a corporation orpartnership organised in or under the laws of the United States or any State thereof (including theDistrict of Columbia); (iii) an estate the income of which is subject to U.S. federal income taxationregardless of its source; or (iv) a trust (1) that validly elects to be treated as a United States person forU.S. federal income tax purposes or (2)(a) the administration over which a U.S. court can exerciseprimary supervision and (b) all of the substantial decisions of which one or more United States personshave the authority to control. A ‘‘Non-U.S. Noteholder’’ is a beneficial owner of Notes other than a U.S.Noteholder.

Interest

Interest paid on a Note (including any additional amounts paid by the Bank to the Noteholderspursuant to Condition 8 (Taxation) of the ‘‘Terms and Conditions of the Notes’’) will be included in aU.S. Noteholder’s gross income as ordinary interest income in accordance with the U.S. Noteholder’susual method of tax accounting. In addition, interest on the Notes will be treated as foreign sourceincome for U.S. federal income tax purposes. For U.S. foreign tax credit limitation purposes, interest onthe Notes generally will constitute ‘‘passive income,’’ or, in the case of certain U.S. Noteholders,‘‘financial services income,’’ unless such interest is subject to withholding tax at a rate of 5% of more, inwhich case such interest will constitute ‘‘high withholding tax interest.’’

Subject to the discussion below under ‘‘U.S. Backup Withholding Tax and Information Reporting,’’payments of interest on a Note to a Non-U.S. Noteholder generally will not be subject to U.S. federalincome tax unless such income is effectively connected with the conduct by such Non-U.S. Noteholder ofa trade or business in the United States.

Sale, Exchange or Retirement

Upon the sale, exchange or retirement of a Note, a U.S. Noteholder will recognise taxable gain orloss equal to the difference, if any, between the amount realised on the sale, exchange or retirement(other than accrued but unpaid interest which will be taxable as such) and the U.S. Noteholder’s adjustedtax basis in such Note. A U.S. Noteholder’s adjusted tax basis in a Note generally will equal the cost ofsuch Note to such U.S. Noteholder. Any such gain or loss will be capital gain or loss. In the case of a non-corporate U.S. Noteholder, the maximum marginal U.S. federal income tax rate applicable to such gainwill be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income ifsuch U.S. Noteholder’s holding period for such Note exceeds one year and will be further reduced if suchNote was held for more than five years. Any gain or loss realised on the sale, exchange or retirement of aNote generally will be treated as U.S. source gain or loss, as the case may be.

Subject to the discussion below under ‘‘U.S. Backup Withholding Tax and Information Reporting,’’any gain realised by a Non-U.S. Noteholder upon the sale, exchange or retirement of a Note generallywill not be subject to U.S. federal income tax, unless (i) such gain is effectively connected with theconduct by such Non-U.S. Noteholder of a trade or business in the United States or (ii) in the case of anygain realised by an individual Non-U.S. Noteholder, such Non-U.S. Noteholder is present in the UnitedStates for 183 days or more in the taxable year of such sale, exchange or retirement and certain otherconditions are met.

U.S. Backup Withholding Tax and Information Reporting

U.S. backup withholding tax and information reporting requirements apply to certain payments ofprincipal of, and interest on, an obligation and to proceeds of the sale or redemption of an obligation, tocertain non-corporate Noteholders that are United States persons. The payor currently will be requiredto withhold backup withholding tax from any such payment within the United States on a Note to aNoteholder that is a United States person (other than an ‘‘exempt recipient,’’ such as a corporation) ifsuch Noteholder fails to furnish its correct taxpayer identification number or otherwise fails to complywith, or establish an exemption from, such backup withholding requirements. However, under recently

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enacted legislation, the backup withholding tax rate of 30.5% will be reduced to 30% for years 2002 and2003, 29% for years 2004 and 2005, and 28% for years 2006 through 2010.

Payments within the United States of principal and interest to a Noteholder that is not a UnitedStates person will not be subject to backup withholding tax and information reporting requirements if anappropriate certification is provided by the Noteholder to the payor and the payor does not have actualknowledge or reason to know that the certificate is false.

In the case of payments to a foreign partnership, a foreign simple trust, or a foreign grantor trust,other than payments to a foreign partnership, a foreign simple trust, or a foreign grant trust that qualifiesas a withholding foreign partnership or a withholding foreign trust within the meaning of the TreasuryRegulations and payments to a foreign partnership, a foreign simple trust, or a foreign grantor trust thatare effectively connected with the conduct of a trade or business in the United States, the partners ofthese partnerships, the beneficiaries of the foreign simple trust, or the persons treated as the owners of theforeign grantor trust, as the case may be, will be required to provide the certification discussed above inorder to establish an exemption from withholding and backup withholding tax requirements.

European Union

The European Union is currently considering proposals for a new directive regarding the taxation ofsavings income. Subject to a number of important conditions being met, it is proposed that MemberStates will be required to provide the tax authorities of another Member State details of payments ofinterest or other similar income paid by a person within its jurisdiction to an individual resident in thatother Member State, subject to the right of certain Member States to opt instead for a withholding systemfor a transitional period in relation to such payments.

THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETEANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OF NOTES.PROSPECTIVE PURCHASERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORSCONCERNING THE TAX CONSEQUENCES OF THEIR PARTICULAR SITUATIONS.

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CERTAIN ERISA CONSIDERATIONS

Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to the UnitedStates Employee Retirement Income Security Act of 1974, as amended (‘‘ERISA’’), including entitiessuch as collective investment funds and separate accounts whose underlying assets include the assets ofsuch plans (collectively, ‘‘Plans’’), should consider the fiduciary standards of ERISA in the context of thePlan’s particular circumstances before authorising an investment in the Notes. Accordingly, among otherfactors, the fiduciary should consider whether the investment would satisfy the prudence anddiversification requirements of ERISA and would be consistent with the documents and instrumentsgoverning the Plan.

Under a regulation (the ‘‘Plan Assets Regulation’’) issued by the U.S. Department of Labour (the‘‘DOL’’), the Loan may be deemed to be a ‘‘plan asset’’ of an investing Plan for purposes of ERISA andSection 4975 of the U.S. Internal Revenue Code of 1986, as amended (the ‘‘Code’’), if ‘‘plan assets’’ ofthe Plan were used to purchase the Notes and no exception were applicable under the Plan AssetsRegulation. If the Loan were deemed to be a ‘‘plan asset’’ of investing Plans, it would be subject to therequirements of ERISA, including the requirement under ERISA, and a regulation promulgatedthereunder (the ‘‘Indicia of Ownership Rules’’), that no fiduciary under ERISA may maintain the indiciaof ownership of assets of a Plan outside the jurisdiction of the Federal district courts of the United Statesexcept in certain qualifying locations and subject to certain specified conditions. Following the LoanAdministration Transfer, the Loan Agreement will be maintained in the custody of the Trustee at itsspecified office in London. Any fiduciary or other person making the decision to purchase the Notes onbehalf of or with ‘‘plan assets’’ of any Plan should consult with their counsel regarding the potentialapplication of the Indicia of Ownership Rules to such purchase of the Notes and to the Loan.

Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well as individual retirementaccounts and Keogh plans subject to Section 4975 of the Code (also ‘‘Plans’’), from engaging in certaintransactions involving ‘‘plan assets’’ with persons who are ‘‘parties in interest’’ under ERISA or‘‘disqualified persons’’ under Section 4975 of the Code (‘‘Parties in Interest’’) with respect to such Plans.A violation of these ‘‘prohibited transaction’’ rules may result in an excise tax, penalty or other liabilitiesunder ERISA and/or Section 4975 of the Code for such persons, unless exemptive relief is available underan applicable statutory or administrative prohibited transaction exemption. Employee benefit plans thatare governmental plans (as defined in Section 3(32) of ERISA) or certain church plans (as defined inSection 3(33) of ERISA) are not subject to the requirements of ERISA or Section 4975 of the Code.However, a governmental plan may be subject to federal, state or local laws which are similar to theprovisions of ERISA or Section 4975 of the Code.

Certain transactions contemplated in connection with the offering of the Notes could be deemed toconstitute direct or indirect prohibited transactions under ERISA and Section 4975 of the Code withrespect to a Plan if the Notes were acquired or accepted with ‘‘plan assets’’ of such Plan. For example, ifeither the Bank or the Borrower is a Party in Interest with respect to an investing Plan (either directly orindirectly by reason of its ownership of or its being owned by a Party in Interest to such Plan), extensionsof credit either between the investing Plan and the Bank (as represented by the Notes) or between theBank and the Borrower (as evidenced by the Loan Agreement) may be deemed to constitute prohibitedtransactions under Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unlessexemptive relief were available under an applicable prohibited transaction exemption. In addition, thepurchase of Notes from a Manager by an investing Plan may constitute a prohibited sale or exchangebetween such Plan and such Manager by reason of Section 406(a) (1) (A) of ERISA and Section 4975(c)(1)(A) of the Code, unless exemptive relief were available under an applicable prohibited transactionexemption.

The DOL has issued five prohibited transaction class exemptions (‘‘PTCEs’’) that may provideexemptive relief for direct or indirect prohibited transactions resulting from the purchase, holding ordisposition of the Notes by an investing Plan. Those class exemptions are PTCE 96-23 (for certaintransactions determined by in-house asset managers), PTCE 95-60 (for certain transactions involvinginsurance company general accounts), PTCE 91-38 (for certain transactions involving bank collectiveinvestment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts),and PTCE 84-14 (for certain transactions determined by qualified professional asset managers).

Any insurance company proposing to invest assets of its general account in the Notes shouldconsider the implications of the United States Supreme Court’s decision in John Hancock Mutual LifeInsurance Co. v. Harris Trust and Savings Bank, 510 U.S. 86 (1993), which, in certain circumstances, treatsthe assets of an insurance company’s general account as assets of Plans that own policies or other

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contracts with the insurance company, as well as the effect of Section 401(c) of ERISA as interpreted byregulations issued by the DOL in January 2000 and the extent to which exemptive relief under PTCE 95-60 will apply to such investment.

Because of the considerations discussed above, Notes may not be purchased or held by any Plan,any entity whose underlying assets include ‘‘plan assets’’ by reason of any Plan’s investment in the entity(a ‘‘Plan Asset Entity’’) or any person investing ‘‘plan assets’’ of any Plan, unless such purchaser or holderis eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. Anypurchaser or holder of the Notes and any subsequent transferee of a Note will be deemed to haverepresented, that it either (a) is not a Plan or a Plan Asset Entity and is not purchasing such Notes onbehalf of or with ‘‘plan assets’’ of any Plan or (b) is eligible for the exemptive relief available under PTCE96-23, 95-60, 91-38, 90-1 or 84-14 with respect to such purchase, holding, disposition or transfer. See‘‘Form of Notes and Transfer Restrictions’’.

Due to the complexity of these rules and the penalties that may be imposed upon persons involvedin non-exempt prohibited transactions, it is particularly important that fiduciaries or other personsconsidering purchasing Notes on behalf of, or with ‘‘plan assets’’ of, any Plan consult with their counselregarding the potential consequences if the Loan were deemed to be ‘‘plan assets’’ and the availability ofexemptive relief under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14, and determine on its own whether all ofthe conditions of the applicable prohibited transaction exemption have been satisfied and that itspurchase and holding of the Notes will be entitled to full exemptive relief under that prohibitedtransaction exemption. The fiduciary of an employee benefit plan that is not subject to ERISA or Section4975 of the Code proposing to invest in the Notes must make its own determination that such investmentis permitted under applicable law.

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FORMS OF NOTES AND TRANSFER RESTRICTIONS

The following information relates to the form and transfer of the Notes. Terms defined in theConditions have the same meanings in the paragraphs below.

Form of Notes

All Notes will be in fully registered form, without interest coupons attached. Notes offered and soldoutside the United States in reliance on Regulation S will be represented by interests in one or moreUnrestricted Global Note Certificate(s), in fully registered form, without interest coupons attached,which will be deposited on or about the Closing Date with The Bank of New York, as common depositaryfor, and registered in the name of, The Bank of New York Depository (Nominees) Limited, as nomineefor such common depositary in respect of interests held through Euroclear or Clearstream, Luxembourg.Beneficial interests in the Unrestricted Global Note Certificate(s) may at all times be held only throughEuroclear or Clearstream, Luxembourg.

Notes offered and sold in reliance on Rule 144A will be represented by interests in one or moreRestricted Global Note(s), in fully registered form, without interest coupons attached, which will beregistered in the name of Cede & Co., as nominee for, and which will be deposited on or about theClosing Date with The Bank of New York, as custodian (the ‘‘Custodian’’) for, and registered in thename of Cede & Co., as nominee for, DTC. The Restricted Global Note Certificate(s) (and any NoteCertificates in definitive form issued in exchange therefor) will be subject to certain restrictions ontransfer contained in a legend appearing on the face of each such Note as set forth below.

The Unrestricted Global Note Certificate(s) will have an ISIN and the Restricted Global NoteCertificate(s) will have a CUSIP number.

Transfer Restrictions

On or prior to the 40th day after the Closing Date, a beneficial interest in the Unrestricted GlobalNote Certificate(s) may be transferred to a person who wishes to take delivery of such beneficial interestthrough the Restricted Global Note Certificate(s) only upon receipt by the Registrar or any TransferAgent of a written certification from the transferor (in the applicable form set out in the Schedule to theAgency Agreement) to the effect that such transfer is being made to a person whom the transferorreasonably believes is purchasing for its own account or accounts as to which it exercise sole investmentdecision, is a qualified institutional buyer within the meaning of Rule 144A, in a transaction meeting therequirements of Rule 144A and in accordance with any applicable securities laws of any state of theUnited States or any other jurisdiction. After such 40th day, such certification requirements will nolonger apply to such transfers, but such transfers will continue to be subject to the transfer restrictionscontained in the legend appearing on the face of such Note, as set out below.

A beneficial interest in the Restricted Global Note Certificate(s) may also be transferred to a personwho wishes to take delivery of such beneficial interest through the Unrestricted Global NoteCertificate(s) only upon receipt by the Registrar of a written certification from the transferor (in theform set out in the Schedule to the Agency Agreement) to the effect that such transfer is being made inaccordance with Regulation S or Rule 144 (if available) under the Securities Act.

Any beneficial interest in either the Restricted Global Note Certificate(s) or the UnrestrictedGlobal Note Certificate(s) that is transferred to a person who takes delivery in the form of a beneficialinterest in the other Global Note Certificate will, upon transfer, cease to be a beneficial interest in suchGlobal Note Certificate and become a beneficial interest in the other Global Note Certificate and,accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to abeneficial interest in such other Global Note Certificate for so long as such person retains such an interest.

The Notes are being offered and sold in the United States only to qualified institutional buyerswithin the meaning of and in reliance on Rule 144A. Because of the following restrictions, purchasers ofNotes offered in the United States in reliance on Rule 144A are advised to consult legal counsel prior tomaking any offer, resale, pledge or transfer of such Notes.

Each purchaser of Notes offered hereby pursuant to Rule 144A will be deemed to have represented,agreed and acknowledged as follows (terms used herein that are defined in Rule 144A are used herein asdefined therein):

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(i) The purchaser (A) is a qualified institutional buyer within the meaning of Rule 144A, (B) isacquiring the Notes for its own account or for the account of such a qualified institutional buyer and(C) such person is aware that the sale of the Notes to it is being made in reliance on Rule 144A.

(ii) The Notes are being offered only in a transaction not involving any public offering in the UnitedStates within the meaning of the Securities Act, and the Notes offered hereby have not been andwill not be registered under the Securities Act and may not be re-offered, resold, pledged, orotherwise transferred except in accordance with the legend set forth below.

(iii) The Restricted Global Note Certificate(s) and Note Certificates in definitive form (if any) issued inexchange for an interest in the Restricted Global Note Certificate(s) will bear a legend to thefollowing effect, unless the Bank determines otherwise in accordance with applicable law:

‘‘THE NOTES EVIDENCED HEREBY HAVE NOT BEEN AND WILL NOT BEREGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE‘‘SECURITIES ACT’’), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANYSTATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED,RESOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) TO ABN AMRO BANK(LUXEMBOURG) S.A. OR AN AFFILIATE OF ABN AMRO BANK (LUXEMBOURG) S.A., (2)IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT (‘‘RULE 144A’’) TO APERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONALBUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNTOR PURCHASING FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, (3) INAN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OFREGULATION S UNDER THE SECURITIES ACT OR (4) PURSUANT TO AN EXEMPTIONFROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144THEREUNDER (IF APPLICABLE), IN EACH CASE IN ACCORDANCE WITH ANYAPPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. NOREPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTIONPROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RE-SALES OF THIS NOTE.’’

(iv) The Borrower, the Bank, the Registrar, the Managers and their affiliates and others will rely on thetruth and accuracy of the foregoing acknowledgements, representations and agreements. If it isacquiring any Notes for the account of one or more qualified institutional buyers, it represents thatit has sole investment discretion with respect to each such account and that it has full power to makethe foregoing acknowledgements, representations and agreements on behalf of each such account.

(v) The purchaser understands and acknowledges that its purchase and holding of such Notesconstitutes a representation and agreement by it that (1) either (a) it is not an employee benefit plansubject to the United States Employee Retirement Income Security Act of 1974, as amended, nor aplan, subject to Section 4975 of the United States Internal Revenue Code of 1986, as amended, noran entity whose underlying assets include ‘‘plan assets’’ by reason of any such employee benefitplan’s or plan’s investment in that entity or a person otherwise investing ‘‘plan assets’’ of any suchemployee benefit plan or plan (each of the foregoing, a ‘‘Plan’’), and it is not purchasing such Notesor any interest therein on behalf of, or with the assets of, a Plan, or (b) all or part of the assets to beused by it to purchase and hold such Notes constitute assets of one or more Plans, or such purchaseand holding is on behalf of a Plan, and, in each such case, its purchase, holding and disposition ofsuch Notes is covered by the exemptive relief provided by Prohibited Transaction Class Exemption96-23, 95-60, 91-38, 90-1 or 84-14, and (2) it will not sell or otherwise transfer such Notes to any Planotherwise than to a purchaser or transferee that is deemed to represent and agree with respect to itspurchase and holding of such Notes to the same effect as the purchaser’s representation andagreement set forth in this sentence.

Each purchaser of Notes outside the United States pursuant to Regulation S, and each subsequentpurchaser of such Notes in re-sales during the period which expires on and includes the 40th day after thelater of the commencement of the offering of the Notes and the Closing Date (the ‘‘distributioncompliance period’’), will be deemed to have represented, agreed and acknowledged as follows:

(i) It is, or at the time Notes are purchased will be, the beneficial owner of such Notes and (A) it is nota U.S. Person and it is located outside the United States (within the meaning of Regulation S) and(B) it is not an affiliate of the Bank or the Borrower or a person acting on behalf of such an affiliate.

(ii) It understands that such Notes have not been and will not be registered under the Securities Act andthat, prior to the expiration of the distribution compliance period, it will not offer, sell, pledge or

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otherwise transfer such Notes except (A) in accordance with Rule 144A to a person that it and anyperson acting on its behalf reasonably believe is a qualified institutional buyer purchasing for itsown account or the account of a qualified institutional buyer or (B) in an offshore transaction inaccordance with Rule 903 or Rule 904 of Regulation S, in each case in accordance with anyapplicable securities laws of any State of the United States.

(iii) The Borrower, the Bank, the Registrar, the Managers and their affiliates and others will rely uponthe truth and accuracy of the foregoing acknowledgements, representations and agreements.

Exchange of Interests in Global Note Certificates for Note Certificates

Exchange of interests in Restricted Global Note Certificate(s), in whole but not in part, forRestricted Notes represented by Note Certificates in definitive form (the ‘‘Restricted Note Certificates’’)will not be permitted unless (i) DTC or a successor depositary notifies the Bank and the Trustee that it isno longer willing or able to discharge properly its responsibilities as depositary with respect to theRegistered Global Note Certificate(s) or ceases to be a ‘‘clearing agency’’ registered under the ExchangeAct, or is at any time no longer eligible to act as such, and the Bank is unable to locate a qualifiedsuccessor within 90 days of receiving notice of such ineligibility on the part of such depositary, or (ii)following a failure to pay an amount in respect of any Notes within five days of the date on which suchamount became due and payable in accordance with the Conditions.

Exchange of interests in Unrestricted Global Note Certificate(s), in whole but not in part, forUnrestricted Notes represented by Note Certificates in definitive form (the ‘‘Unrestricted NoteCertificates’’ and, together with the Restricted Note Certificates, the ‘‘Note Certificates’’) will not bepermitted unless (i) Euroclear or Clearstream, Luxembourg is closed for business for a continuous periodof 14 days (other than by reason of legal holidays) or announces an intention permanently to ceasebusiness or (ii) following a failure to pay an amount in respect of any Notes within five days of the date onwhich such amount became due and payable in accordance with the Conditions.

In such circumstances, the relevant Global Note Certificate shall be exchanged for Note Certificatesand the Bank will, at the cost of the Bank (to the extent reimbursed by the Borrower and against suchindemnity as the Registrar or any relevant Transfer Agent may require in respect of any tax or other dutyof whatever nature which may be levied or imposed in connection with such exchange), cause sufficientNote Certificates to be executed and delivered to the Registrar for completion, authentication anddispatch to the relevant Noteholders within 30 days of the relevant event. A person having an interest ina Global Note Certificate must provide the Bank and the Registrar with (i) a written order containinginstructions and such other information as the Bank and the Registrar may require to complete, executeand deliver such Note Certificates and (ii) in the case of the Restricted Global Note Certificate(s) only, afully completed, signed certificate substantially to the effect that the exchanging holder is not transferringits interest at the time of such exchange or, in the case of simultaneous sale pursuant to Rule 144A orRegulation S, that the transfer is being made in compliance with the provisions of Rule 144A orRegulation S. Note Certificates issued in exchange for a beneficial interest in the Restricted Global NoteCertificate(s) shall bear the legends applicable to transfers pursuant to Rule 144A, as set out above under‘‘Transfer Restrictions’’.

The holder of a Note, represented by a Note Certificate, may transfer such Note in accordance withthe provisions of Condition 2 (Transfers). Note Certificates may not be eligible for trading in the facilitiesof Euroclear, Clearstream, Luxembourg or DTC.

Upon the transfer, exchange or replacement of a Restricted Note Certificate bearing the legendreferred to under ‘‘Transfer Restrictions’’, or upon specific request for removal of the legend on aRestricted Note Certificate, the Bank will deliver only Restricted Note Certificates that bear such legend,or will refuse to remove such legend, as the case may be, unless there is delivered to the Bank and theRegistrar or any Transfer Agent such satisfactory evidence, which may include an opinion of counsel, asmay reasonably be required by the Bank that neither the legend nor the restrictions on transfer set forththerein are required to ensure compliance with the provisions of the Securities Act. See ‘‘Terms andConditions of the Notes - Redemption and Purchase’’.

Euroclear, Clearstream, Luxembourg and DTC Arrangements

So long as DTC or its nominee or Euroclear, Clearstream, Luxembourg or the nominee of theircommon depositary is the registered holder of a Global Note Certificate, DTC, Euroclear, Clearstream,Luxembourg or such nominee, as the case may be, will be considered the sole owner or holder of theNotes represented by such Global Note Certificate for all purposes under the Agency Agreement and the

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Notes. Payments of principal, interest and additional amounts (if any) in respect of Global NoteCertificates will be made to DTC, Euroclear, Clearstream, Luxembourg or such nominee, as the case maybe, as the registered holder thereof. None of the Bank, the Borrower, the Trustee, any Agent or anyManager or any affiliate of any of them or any person by whom any of them is controlled for the purposesof the Securities Act will have any responsibility or liability for any aspect of the records relating to orpayments made on account of beneficial ownership interests in Global Note Certificates or formaintaining, supervising or reviewing any records relating to such beneficial ownership interests.

Distributions of principal and interest with respect to book-entry interests in the Notes held throughEuroclear or Clearstream, Luxembourg will be credited, to the extent received by Euroclear orClearstream, Luxembourg from the Principal Paying Agent, to the cash accounts of Euroclear orClearstream, Luxembourg customers in accordance with the relevant system’s rules and procedures.

Holders of book-entry interests in the Notes through DTC will receive, to the extent received byDTC from the Principal Paying Agent, all distributions of principal and interest with respect to book-entry interests in the Notes from the Principal Paying Agent through DTC. Distribution in the UnitedStates will be subject to relevant United States tax laws and regulations.

Interest on the Notes (other than interest on redemption) will be paid to the holder shown on theRegister on the fifteenth day before the due date for such payment so long as the Notes are representedby a Global Note Certificate, and on the fifteenth day before the due date for such payment if the Notesare in the form of Note Certificates (the ‘‘Record Date’’). Trading between the Restricted Global NoteCertificate(s) and the Unrestricted Global Note Certificate(s) will therefore be net of accrued interestfrom the relevant Record Date to the relevant interest payment date.

The laws of some states of the United States require that certain persons take physical delivery ofsecurities in definitive form. Consequently, the ability to transfer interests in a Global Note Certificate tosuch persons may be limited. Because DTC, Euroclear, and Clearstream, Luxembourg can only act onbehalf of indirect participants, the ability of a person having an interest in a Global Note Certificate topledge such interest to persons or entities which do not participate in the relevant clearing system, orotherwise take actions in respect of such interest, may be affected by the lack of a physical certificate inrespect of such interest.

The holdings of book-entry interests in the Notes through DTC, Euroclear, and Clearstream,Luxembourg will be reflected in the book-entry accounts of each such institution. As necessary, theRegistrar will adjust the amounts of Notes on the Register for the accounts of (i) The Bank of New YorkDepository (Nominees) Limited and (ii) Cede & Co. to reflect the amounts of Notes held through DTC,Euroclear and Clearstream, Luxembourg, respectively. Beneficial ownership in the Notes will be heldthrough financial institutions as direct and indirect participants in DTC, Euroclear and Clearstream,Luxembourg.

Beneficial interests in the Unrestricted Global Note Certificate(s) and the Restricted Global NoteCertificate(s) will be in uncertificated book-entry form.

Trading between Euroclear and Clearstream, Luxembourg Accountholders

Secondary market sales of book-entry interests in the Notes held through Euroclear or Clearstream,Luxembourg to purchasers of book-entry interests in the Notes through Euroclear or Clearstream,Luxembourg will be conducted in accordance with the normal rules and operating procedures ofEuroclear and Clearstream, Luxembourg and will be settled using the procedures applicable toconventional eurobonds.

Trading between DTC Participants

Secondary market sales of book-entry interests in the Notes between DTC participants will occur inthe ordinary way in accordance with DTC rules and will be settled using the procedures applicable toUnited States corporate debt obligations in DTC’s Same Day Funds Settlement System.

Trading between DTC Seller and Euroclear or Clearstream, Luxembourg Purchaser

When book-entry interests in Notes are to be transferred from the account of a DTC participantholding a beneficial interest in the Restricted Global Note Certificate(s) to the account of a Euroclear orClearstream, Luxembourg accountholder wishing to purchase a beneficial interest in the UnrestrictedGlobal Note Certificate(s) (subject to such certification procedures as are provided in the AgencyAgreement), the DTC participant will deliver instructions for delivery to the relevant Euroclear or

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Clearstream, Luxembourg accountholder to DTC by 12 noon, New York time, on the settlement date.Separate payment arrangements are required to be made between the DTC participant and the relevantEuroclear or Clearstream, Luxembourg accountholder, as the case may be. On the settlement date, theCustodian will instruct the Registrar to (i) decrease the amount of Notes registered in the name of Cede& Co. and evidenced by the Restricted Global Note Certificate(s) and (ii) increase the amount of Notesregistered in the name of The Bank of New York Depository (Nominees) Limited and evidenced by theUnrestricted Global Note Certificate(s). Book-entry interests will be delivered free of payment toEuroclear or Clearstream, Luxembourg, as the case may be, for credit to the relevant accountholder onthe first business day following the settlement date. See above concerning the Record Date for paymentsof interest.

Trading between Euroclear or Clearstream, Luxembourg Seller and DTC Purchaser

When book-entry interests in Notes are to be transferred from the account of a Euroclear orClearstream, Luxembourg accountholder holding a beneficial interest in the Unrestricted Global NoteCertificate(s) to the account of a DTC participant wishing to purchase a beneficial interest in theRestricted Global Note Certificate(s) (subject to such certification procedures as are provided in theAgency Agreement), the Euroclear or Clearstream, Luxembourg accountholder must send to Euroclearor Clearstream, Luxembourg delivery free of payment instructions by 7:45 p.m., Brussels or Luxembourgtime, one business day prior to the settlement date. Euroclear or Clearstream, Luxembourg, as the casemay be, will in turn transmit appropriate instructions to the common depositary for Euroclear andClearstream, Luxembourg and the Registrar to arrange delivery to the DTC participant on the settlementdate. Separate payment arrangements are required to be made between the DTC participant and therelevant Euroclear or Clearstream, Luxembourg accountholder, as the case may be. On the settlementdate, the common depositary for Euroclear and Clearstream, Luxembourg will (i) transmit appropriateinstructions to the Custodian who will in turn deliver such book-entry interests in the Notes free ofpayment to the relevant account of the DTC participant and (ii) instruct the Registrar to (a) decrease theamount of Notes registered in the name of The Bank of New York Depository (Nominees) Limited andevidenced by the Unrestricted Global Note Certificate(s) and (b) increase the amount of Notes registeredin the name of the Cede & Co. and evidenced by the Restricted Global Note Certificate(s). See aboveconcerning the Record Date for payments of interest.

Although the foregoing sets out the procedures of DTC, Euroclear and Clearstream, Luxembourgin order to facilitate the transfers of interests in the Notes among the participants of DTC, Euroclear andClearstream, Luxembourg, none of DTC, Euroclear or Clearstream, Luxembourg is under any obligationto perform or continue to perform such procedures, and such procedures may be discontinued at anytime. None of the Bank, the Borrower, the Trustee, any Agent or Manager or any affiliate of any of themor any person by whom any of them is controlled for the purposes of the Securities Act, will have anyresponsibility for the performance by DTC, Euroclear or Clearstream, Luxembourg or their respectivedirect or indirect participants or accountholders of their respective obligations under the rules andprocedures governing their operations or for the sufficiency for any purpose of the arrangementsdescribed above.

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SUBSCRIPTION AND SALE

ABN AMRO Bank N.V., and Dresdner Bank AG London Branch (together the ‘‘LeadManagers’’), l and l (together with the Lead Managers, the ‘‘Managers’’) have, in a subscriptionagreement dated l 2001 (the ‘‘Subscription Agreement’’) and made between the Bank, the Companyand the Managers upon the terms and subject to the conditions contained therein, jointly and severallyagreed to subscribe and pay for the Notes at their issue price of l% of their principal amount plus anyaccrued interest in respect thereof and less a combined management and underwriting commission of l%of their principal amount. The Company has also agreed to reimburse the Managers for certain of theirexpenses incurred in connection with the management of the issue of the Notes. The Managers areentitled in certain circumstances to be released and discharged from their obligations under theSubscription Agreement prior to the closing of the issue of the Notes.

The Notes have not been and will not be registered under the Securities Act and may not be offeredor sold within the United States or to, or for the account or benefit of, U.S. persons except in certaintransactions exempt from the registration requirements of the Securities Act. Terms used in thisparagraph have the meanings given to them by Regulation S.

The Notes are being offered and sold outside of the United States to non-U.S. persons in reliance onRegulation S. The Subscription Agreement provides that the Lead Managers and any other Managerwith the prior consent of the Lead Managers may directly or through its U.S. broker-dealer affiliatearrange for the offer and resale of Notes within the United States only to qualified institutional buyers inreliance on Rule 144A.

In addition, until 40 days after commencement of the offering, an offer or sale of Notes within theUnited States by a dealer that is not participating in the offering may violate the registrationrequirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule144A.

Each Manager has further represented and agreed that:

(a) it has not offered or sold and will not offer or sell any Notes to persons in the United Kingdomprior to the expiry of the period six months from the Closing Date except to persons whoseordinary activities involve them in acquiring, holding, managing or disposing of investments(as principal or agent) for the purposes of their business or otherwise in circumstances whichhave not resulted and will not result in an offer to the public in the United Kingdom within themeaning of the Public Offers of Securities Regulations 1995;

(b) it has complied and will comply with all applicable provisions of the Financial Services Act1986 with respect to anything done by it in relation to the Notes in, from or otherwiseinvolving the United Kingdom; and

(c) it has only issued or passed on and will only issue or pass on in the United Kingdom anydocument received by it in connection with the issue of the Notes to a person who is of a kinddescribed in article 11(3) of the Financial Services Act 1986 (Investment Advertisement)(Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully beissued or passed on.

Each Manager has agreed that the Notes will not be offered, transferred or sold as part of theirinitial distribution or at any time thereafter to or for the benefit of any person (including legal entities)resident, incorporated, established or having their usual residence in the Russian Federation or to anyperson located within the territory of the Russian Federation.

The Notes have not been and will not be authorised for public offering in Luxembourg and may notbe offered or sold in Luxembourg in circumstances that would constitute a public offer unless therequirements of Luxembourg law concerning public offers have been complied with.

The Managers have acknowledged that no sales prospectus (Verkaufsprospekt) under the GermanSecurities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz) has been, or will be, prepared bythe Issuer or the Borrower in connection with the offering and sale of the Notes. In addition, eachManager has represented, warranted and undertaken to the Issuer and the Borrower that it has offeredand sold, and will offer and sell, the Notes only in full accordance with the German Securities SalesProspectus Act.

Each Manager has represented to and agreed with the Issuer, the Borrower and each otherManager that it has not offered, sold or transferred and will not offer, sell or transfer any Notes, directly

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or indirectly, as part of their initial distribution or at any time thereafter, in The Netherlands other than tobanks, pension funds, insurance companies, securities firms, investment institutions and other entities(including, among others, treasuries and finance companies of large enterprises) which trade or invest insecurities in the conduct of their business or profession.

The offering of the Notes has not been cleared by CONSOB (the Italian Securities ExchangeCommission) pursuant to Italian securities legislation and accordingly, each Manager has representedand agreed that it has not offered, sold or delivered any Notes nor distributed any copies of the OfferingCircular or any other document relating to the Notes, and will not offer, sell or deliver any Notes nordistribute any copies of the Offering Circular or any other document relating to the Notes, in Italy,except: (i) to professional investors (‘‘operatori qualificati’’); (ii) in circumstances which are exempt fromthe rules on solicitation of investments; or (iii) to an Italian resident who submits an unsolicited offer toany of the Managers to purchase the Notes. Each Manager further represents and agrees that any offer,sale or delivery of the Notes or distribution of copies of the Offering Circular or any other documentrelating to the Notes in Italy under (i) or (ii) above has or will be: (1) made by an investment firm, bank orfinancial intermediary permitted to conduct such activities in the Republic of Italy in accordance with theapplicable laws and regulations; and (2) in compliance with Article 129 of Legislative Decree No. 385 of1 September 1993 and the implementing guidelines of the Bank of Italy, pursuant to which the issue oroffer of securities in Italy may need to be preceded and followed by an appropriate notice to be filed withthe Bank of Italy depending, inter alia, on the aggregate value of the securities offered in Italy and theircharacteristics.

Recipients of this Offering Circular should note that no prospectus related to the offering referredto herein will be submitted to the approval of the Commission des Operations de Bourse in France. Eachof the Managers and the Issuer has represented and agreed that it has not offered or sold and will notoffer or sell, directly or indirectly, Notes to the public in the Republic of France, and has not distributedor caused to be distributed and will not distribute or cause to be distributed to the public in the Republicof France, this Offering Circular or any other offering material relating to the Notes, and that such offers,sales and distributions have been and shall only be made in the Republic of France to qualified investors(investisseurs qualifies) acting for their own account all as defined in and in accordance with articlesL411-1 and L411-2 of the Code Monetaire et Financier and decret no. 98-880 dated 1 October 1998.

Investors in the Republic of France may only participate in the issue of the Notes for their ownaccount in accordance with the condition set out in decret no. 98-880 dated 1 October 1998. Notes soacquired may only be distributed, directly or indirectly, to the public in the Republic of France inaccordance with articles L411-1, L411-2 and L621-8 of the Code Monetaire et Financier.

No action has been or will be taken in any jurisdiction by the Bank, the Company or any Managerthat would, or is intended to, permit a public offering of the Notes, or possession or distribution of thisOffering Circular or any other offering material, in any country or jurisdiction where action for thatpurpose is required. Persons into whose hands this Offering Circular comes are required by the Bank, theCompany and the Managers to comply with all applicable laws and regulations in each country orjurisdiction in which they purchase, offer, sell or deliver Notes or have in their possession, distribute orpublish this Offering Circular or any other offering material relating to the Notes, in all cases at their ownexpense.

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GENERAL INFORMATION

1. The Loan has been authorised by the decision of the Board of Directors of the Company dated l

2001. The creation and issue of the Notes for the sole purpose of funding the Loan has been dulyauthorised by a resolution of the board of directors of the Bank dated l October 2001.

2. Save as disclosed in this Offering Circular, the Company has obtained or will have obtained on orbefore the Closing Date all necessary consents, approvals and authorisations in connection with theLoan.

3. No consents, approvals, authorisations or orders of any regulatory authorities are required by theBank under the laws of Luxembourg for the maintaining of the Loan or for the issue andperformance of the Notes.

4. Save as disclosed in this Offering Circular, there are no litigation or arbitration proceedings againstor affecting the Company, any of its subsidiaries or any of their respective assets, nor is theCompany aware of any pending or threatened proceedings, which are or might be material in thecontext of the Loan or issue of the Notes.

5. Save as disclosed in this Offering Circular, there has been no adverse change, or any developmentreasonably likely to involve an adverse change, in the condition (financial or otherwise) or generalaffairs of the Company since 31 December 2000 that is material in the context of the issue of theNotes.

6. For so long as any of the Notes are outstanding, copies of the following documents may be inspectedduring normal business hours at the Specified Office of each Paying Agent:

(a) the Agency Agreement;

(b) the Loan Agreement, and

(c) the Trust Deed.

7. For so long as any of the Notes are outstanding, copies of the following documents in English maybe obtained, free of charge, during normal business hours at the Specified Office of each PayingAgent:

(a) the audited consolidated financial statements of the Company prepared in accordance withUS GAAP for the years ended and as at 31 December 2000, 1999 and 1998;

(b) the audited consolidated financial statements of the Company prepared in accordance withRAR for the years ended 31 December 1999 and 2000;

(c) the unaudited consolidated financial statements of the Company prepared in accordance withRAR for the six month periods ended 30 June 2001 and 2000; and

(d) the latest published audited year-end non-consolidated and consolidated financial statementsof the Company.

The Company does not publish interim financial statements.

8. In connection with the application for the Notes to be listed on the Luxembourg Stock Exchange,copies of the Statutes of the Company (together with English translations thereof) and a legal noticerelating to the issue of the Notes will be deposited prior to listing with the Greffier en Chef duTribunal d’Arrondissement de et A Luxembourg, where they may be inspected and copies obtainedupon request.

9. The Notes have been accepted for clearance through Euroclear, Clearstream, Luxembourg andDTC. The common code of the Unrestricted Notes is l and the ISIN is l. The CUSIP number ofthe Restricted Notes is l and the ISIN is l. In addition, application has been made to trade theNotes on the PORTAL Market of the National Association of Securities Dealers, Inc.

10. Subject as provided herein under ‘‘Terms and Conditions of the Notes’’ and ‘‘Form of Notes andTransfer Restrictions’’, there are no restrictions on the transfer of the Notes. In accordance with theRules and Regulations of the Luxembourg Stock Exchange, no transaction, once effected on theExchange, may be cancelled.

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SUMMARY OF RELEVANT SIGNIFICANT DIFFERENCES BETWEEN US GAAPAND RUSSIAN ACCOUNTING REGULATIONS

The consolidated financial statements for the years ended 31 December 1998, 1999 and 2000 havebeen prepared in accordance with generally accepted accounting principles in the United States(‘‘US GAAP’’) which differ in certain significant respects Russian Accounting Regulations (‘‘RAR’’).

A brief description of certain significant differences between US GAAP and RAR that effect theconsolidated financial statements for the three years ended 31 December 2000 is set out below. Theorganisations that promulgate US GAAP and RAR have projects ongoing that could have a significantimpact on future comparisons between US GAAP and RAR.

1. Financial Reporting in Highly Inflationary Economies

US GAAP requires that where an entity operates in a highly inflationary economy the financialstatements shall be adjusted as if the functional currency were the reporting currency. US GAAP doesnot establish a specific inflation rate at which highly inflation is deemed to arise, although the standarddoes suggest that economies should be regarded as highly inflationary if the cumulative inflation rate overa period of three years exceeds 100%, among other factors. The general inflation rates in Russia for theperiod from 1 January to 31 December, 1998, 1999 and 2000 were 84.4%, 36.5% and 20.2% respectively.

Under RAR no specific standards address the accounting in highly inflationary economies.

2. Accounting for Subsidiaries

Under US GAAP, except when control is likely to be temporary or control is not held by themajority owner, the operations of all subsidiaries in which a company directly or indirectly owns morethan 50% of the common shares, should be consolidated.

Under RAR the criteria for consolidation, and rules regarding the recording of minority interest,conform to that of US GAAP, but in practice many Russian companies do not prepare consolidatedRAR financial information because they are not subject to tax on a consolidated basis. Therefore it is nota requirement to prepare consolidated financials.

3. Accounting for Investments in Associates

Under US GAAP investments in associates should be accounted for in consolidated financialstatements under the equity method except when the investment is acquired and held exclusively with aview to its disposal in the near future, in which case it should be accounted for under the cost method.For this purpose ‘‘associate’’ is defined as an enterprise in which an investor has significant influence, andwhich is neither a subsidiary nor a joint venture. Significant influence is the power to participate in thefinancial and operating policy decisions of the investee, but is not control over these policies. A provisionis made, if required, to recognize an other than temporary decline in the value of the investments.

Under RAR the general approach is the same as for US GAAP, except that provisions forimpairment are only recorded when management have determined that there has been a permanentimpairment in value.

4. Revaluation of Fixed Assets

Under US GAAP revaluation of fixed assets is not permitted.

Until 1 January 1997 companies following RAR were obliged to perform revaluation of fixed assets,using indexes provided by the Government. Periodic revaluations performed by an independentappraiser are also allowed under RAR to bring asset values in line with their fair value as of the date ofrevaluation. The surplus arising from such revaluation is normally credited to a revaluation reserve withinshareholders’ equity.

5. Oil and Gas Accounting

Under US GAAP companies with oil and gas production activities are required to follow either thesuccessful efforts or full cost methods of accounting. The Company has adopted the successful effortsmethod in its US GAAP financial statements.

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Under the successful efforts method, acquisition costs of oil and gas properties are capitalized whenincurred. Exploratory costs, excluding the costs of exploratory wells, are charged to expense as incurred.Costs of drilling exploratory wells, including stratigraphic test wells, are capitalized pendingdetermination whether such wells have found proved reserves which justify commercial development.If such reserves are not found, the drilling costs are charged to exploratory expenses.

Development costs, including the costs of all development wells, whether successful or not, arecapitalized as incurred. Costs related to the development of improved recovery systems for oil and gasreserves are also capitalized.

Depreciation, depletion and amortization of capitalized costs are computed on a property byproperty basis using the unit-of-production method. The unit-of-production ratio is computed as the ratioof current period production to total estimated future production from proved developed reserves at thebeginning of the period.

Estimated costs of dismantling oil and gas production facilities, including abandonment and siterestoration costs, are reserved using the unit-of-production method and included as a component ofdepreciation, depletion and amortization.

The carrying value of unproved properties, which are individually significant, is assessed on aproperty-by-property basis, and a loss is recognized, by provision of a valuation allowance, when theassessment indicates an impairment in value. See section 7 for details regarding the impairment of provedproperties.

RAR largely conforms with the successful efforts method as far as cost capitalisation, except that (i)direct general and administrative costs associated with acquisition, exploration and developmentactivities are capitalized; and (ii) certain improved recovery costs are expensed as production costs.

Individual assets are depreciated using the straight-line method based on asset lives specified inaccounting legislation. Such lives are not necessarily consistent with what management would consider tobe the useful life of the asset. Moreover, no distinction is made between oil and gas properties and otherfixed assets. As such, the unit-of-production method is not applied to oil and gas properties.

Future site abandonment and restoration costs are not provided for in RAR financial statements.

6. Impairment of Long-Lived Assets

Under US GAAP, long-lived assets must be assessed for impairment whenever events orcircumstances indicate that the asset may be impaired. The determination of whether an asset is impairedinvolves comparing the carrying value with the estimated undiscounted cash flows to be generated by theasset. If that test indicates a deficit then an impairment loss is recognized based on the estimated fairvalue of the asset, which is often determined by reference to discounted cash flows. For a depreciableasset, the new cost shall be depreciated over the asset’s remaining useful life. For assets held and used, animpairment loss creates a new cost basis and reversal is prohibited.

No guidance exists under RAR for impairment of long-lived assets.

7. Deferred Taxes

US GAAP requires recognition of deferred taxes in full using the liability method. Under thismethod, deferred tax liabilities and assets are determined on the basis of temporary differences betweenthe book and tax bases of assets and liabilities using currently enacted tax rates. A change in tax law ortax rates is recognized in the period in which the change is enacted. If it is more likely than not that someor all of a deferred tax asset will not be realized (i.e., for the future usage of a net operating loss carry-forward), a valuation allowance should be established through a charge to income.

Furthermore, under US GAAP deferred taxes are recognized in respect of the difference betweenthe fair value attributable to the net assets of an acquired business and their underlying tax basis. Thedeferred tax recognized directly impacts the amount of goodwill calculated or the fair value assigned tooil and gas properties acquired.

RAR do not provide for the recognition of deferred taxes.

8. Inventory

Under US GAAP raw materials, supplies and trading goods are valued at purchase cost, while onlydirect and indirect manufacturing costs are allocated to the value of finished goods and work in progress.

150

Provision is made against slow moving and obsolete materials and supplies, based on estimates ofmanagement, as well as to reduce the carrying value of inventory to market value in the event marketvalue is deemed to be less than cost.

Under RAR inventories are recorded at cost while finished goods and work in progress are valuedat manufacturing cost, which includes all direct, indirect and administrative costs of production.Provision for unrealizable inventory is created on a similar basis as for US GAAP.

9. Accrued Liabilities

US GAAP requires a liability to be accrued when an enterprise has a present obligation (legal orconstructive) as a result of a past event and it is probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation, and a reliable estimate can be made of theamount of the obligation. Such liabilities are reviewed at each balance sheet date and adjusted to reflectthe current best estimate.

Generally, under RAR, liabilities are only recorded when and if sufficient support documentation isin place to justify recognition. As such, accrued liabilities based on management estimates are generallynot recorded.

10. Contingencies and post-balance sheet events

Under US GAAP loss contingencies should be accrued if (based on information available prior toissuance of financial statements) it is probable that an asset has been impaired or a liability has beenincurred as of the balance sheet date and the amount of the loss can be reasonably estimated. If a loss isonly reasonably possible, it should be disclosed. General contingency reserves are not permitted. Gaincontingencies should not be recognized prior to realization.

Material post-balance sheet events should either be accrued in the financial statements or disclosedin the related notes depending upon the circumstances of the event.

Prior to 1 January 2001 there were no requirements under RAR to recognize or disclosecontingencies. A recent enactment, which took effect from 1 January 2001 conforms to US GAAP.

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152

FINANCIAL STATEMENTS AND AUDITORS’ REPORT

TABLE OF CONTENTS

Report of Independent Public Accountants .................................................................................... F-2Consolidated Balance Sheets .............................................................................................................. F-4Consolidated Statements of Operations ............................................................................................ F-5Statements of Changes in Shareholder’s Capital ............................................................................ F-5Consolidated Statement of Cash Flows ............................................................................................ F-6Notes to the Consolidated Financial Statements ............................................................................ F-7

F-1

Report of independent public accountants

To the Shareholders of OJSC Oil Company Rosneft:

We have audited the accompanying consolidated balance sheets of OJSC Oil Company Rosneft, aRussian open joint stock company (the ‘‘Company’’), and subsidiaries as of 31 December 2000, 1999 and1998, and the related consolidated statements of operations, changes in shareholders’ capital and cashflows for the years then ended. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidated financialstatements based on our audits. We did not audit the financial statements of OJSC Rosneft-Purneftegas, asubsidiary of the Company, as of and for the year ended 31 December 1998. These financial statementsreflect total assets and total revenues of 44 percent and 37 percent in 1998, respectively, of the relatedconsolidated totals. Those statements were audited by other auditors, whose report has been furnished tous, and our opinion, insofar as it relates to the amounts included for OJSC Rosneft-Purneftegas, is basedsolely on the report of other auditors. Those financial statements were prepared in accordance withInternational Accounting Standards and have been adjusted to comply with generally acceptedaccounting principles in the United States, and we have audited the significant adjustments thereon.

Except as discussed in the following paragraph, we conducted our audits in accordance withInternational Standards on Auditing. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our audits, and the report of otherauditors, provide a reasonable basis for our opinion.

As discussed in Note 2, the Company had an independent evaluation of the Company’s oil and gasreserves (‘‘Reserve Report’’) as of 31 December 2000, 1999 and 1 July 1998. However, no suchindependent evaluation was carried out as of 31 December 1998. The oil and gas properties and therelated provision for depreciation, depletion and amortization as of and for the year ended 31 December1998 have been estimated by the Company on the basis of the Reserve Report as of 1 July 1998 and noton the basis of a Reserve Report as of 31 December 1998 as required by generally accepted accountingprinciples in the United States.

In our opinion, based on our audits and the report of other auditors insofar as it relates to OJSCRosneft-Purneftegas’ financial statements prepared in accordance with International AccountingStandards as of and for the year ended 31 December 1998, and except for the effects, if any, on thecarrying value of oil and gas properties and related provision for depreciation, depletion and amortizationhad an independent Reserve Report been available as at 31 December 1998, as discussed in the precedingparagraph, the consolidated financial statements present fairly, in all material respects, the financialposition of OJSC Oil Company Rosneft and subsidiaries as of 31 December 2000, 1999 and 1998, and theresults of their operations and their cash flows for the years ended 31 December 2000, 1999 and 1998 inconformity with generally accepted accounting principles in the United States.

ARTHUR ANDERSEN ZAO

Moscow, Russia31 May 2001

F-2

OJSC Oil Company RosneftConsolidated Balance Sheets

as of 31 December 2000, 1999 and 1998(Thousands of US Dollars)

Notes31 December

200031 December

199931 December

1998

AssetsCurrent assets:Cash and cash equivalents ...................................... 3 $ 75,980 $ 51,080 $ 25,867Short-term investments ............................................ 99,609 15,620 7,045

Accounts receivable, net of allowance fordoubtful accounts of U.S.$84,530, U.S.$98,620and U.S.$96,449, respectively .................................... 4 258,651 188,556 144,656Inventories.................................................................... 5 233,871 146,917 119,790Prepaid expenses ...................................................... 59,316 75,662 26,035

Total current assets .................................................. 727,427 477,835 323,393

Long-term investments .............................................. 6 145,695 110,577 92,844Oil and gas properties, net ........................................ 7 1,736,214 1,635,866 1,734,047Property, plant and equipment, net ........................ 8 830,464 802,644 869,536Construction in progress ............................................ 9 298,817 205,481 200,307Other noncurrent assets .......................................... 5,983 3,599 6,735

Total assets ................................................................ $ 3,744,600 $ 3,236,002 $ 3,226,862

Liabilities and Shareholders’ CapitalCurrent liabilities:Accounts payable and accrued liabilities .............. 10 $ 352,034 $ 231,451 266,096Short-term loans and current portionof long term debt ...................................................... 11 374,643 254,168 128,293Accrued income and other taxes ............................ 12 124,508 133,898 154,438

Total current liabilities 851,185 619,517 548,827

Site restoration costs ................................................ 13 103,547 108,475 102,034Long-term debt.......................................................... 11 123,577 151,667 268,151Deferred tax liability ................................................ 15 94,690 – –Minority interest........................................................ 1,165,479 1,363,040 1,483,957

Total liabilities .......................................................... 2,338,478 2,242,699 2,402,969

Shareholders’ capital:Common stock (Shares issued and outstanding:88,733,312 for 2000, 1999 and 1998) ...................... 19,430 19,430 19,430Preferred stock (Shares issued andoutstanding: 1,446,047 for 2000, 1999and 1998) .................................................................... 14 247 247 247Retained earnings...................................................... 1,386,445 973,626 804,216

Total shareholders’ capital ...................................... 17 1,406,122 993,303 823,893

Total liabilities and shareholders’ capital.............. $ 3,744,600 $ 3,236,002 $ 3,226,862

The accompanying notes to the consolidated financial statements are integral part of these statements.

F-3

OJSC Oil Company RosneftConsolidated Statements of Operations

for the years ended 31 December 2000, 1999 and 1998(Thousands of US Dollars)

Notes 2000 1999 1998

RevenuesOil and gas sales........................................................ $ 1,176,312 $ 796,666 $ 798,646Refined products and processing fees .................... 1,045,245 598,940 384,613Support services and other sales ............................ 245,216 174,133 258,759

Total revenues .......................................................... 2,466,773 1,569,739 1,442,018

Operating expensesCost of sales:

Production costs .................................................... 303,779 292,498 368,431Cost of refined products and processing fees .. 254,741 152,326 224,333Cost of support services and other sales .......... 142,365 170,184 185,095

Total cost of sales...................................................... 700,885 615,008 777,859Selling, general and administrative ........................ 502,032 259,796 335,965Exploratory expenses................................................ 37,243 16,054 59,391Depreciation, depletion and amortization ............ 222,364 282,933 446,969Impairment loss ........................................................ – – 330,372Taxes other than income taxes .............................. 200,327 164,704 287,962

Total operating expenses ........................................ 1,662,851 1,338,495 2,238,518

Operating income (expense) .................................. 17 803,922 231,244 (796,500)

Other income (expense)Interest expense ........................................................ (46,691) (33,549) (67,710)Equity share in affiliates .......................................... 21,221 (5,696) (89,168)Other non-operating (expenses)/income, net........ (36,541) (25,146) 121,089Minority interest........................................................ 81,845 120,917 245,570Currency translation (loss)/gain .............................. (2,358) 38,247 489,909

Total other income.................................................... 17,476 94,773 699,690

Profit/(loss) before provision for income taxes ...... 18 821,398 326,017 (96,810)

Provision for income taxes ...................................... 15 (366,190) (142,794) 1,645

Net profit/(loss) $ 455,208 $ 183,223 (95,165)

Dividends declared on preferred shares ofsubsidiaries ................................................................ (13,980) (5,841) (3,460)

Net profit/(loss) available for commonshareholders .............................................................. $ 441,228 $ 177,382 $ (98,625)

Basic and diluted profit/(loss) per common share(dollars) ...................................................................... $ 4.97 $ 2.00 $ (1.11)

Average number of common shares outstanding(thousands of shares) ................................................ 88,733 88,733 88,733

The accompanying notes to the consolidated financial statements are integral part of these statements.

F-4

OJSC Oil Company RosneftStatements of Changes in Shareholders’ Capital

for the years ended 31 December 2000, 1999 and 1998(Thousands of US Dollars)

CommonStock

PreferrredStock

RetainedEarnings

Shareholders’Capital

Balance at 31 December 1997 ........ $ 19,430 $ 247 $ 902,841 $ 922,518Net (loss) for the year ...................... – – (98,625) (98,625)

Balance at 31 December 1998 ........ $ 19,430 $ 247 $ 804,216 $ 823,893

Net profit for the year ...................... – – 183,223 183,223Dividends declared on preferredshares of subsidiaries ........................ – – (5,841) (5,841)Dividends on common stock .......... – – (7,972) (7,972)

Balance at 31 December 1999 ........ $ 19,430 $ 247 $ 973,626 $ 993,303

Net profit for the year ...................... – – 455,208 455,208Dividends declared on preferredshares of subsidiaries ........................ – – (13,980) (13,980)Dividends on common stock .......... – – (28,409) (28,409)

Balance at 31 December 2000 ........ $ 19,430 $ 247 $ 1,386,445 $ 1,406,122

The accompanying notes to the consolidated financial statements are integral part of these statements.

F-5

OJSC Oil Company RosneftConsolidated Statements of Cash Flows

for the years ended 31 December 2000, 1999 and 1998(Thousands of US Dollars)

2000 1999 1998

Operating activitiesReconciliation of net income to net cash provided byoperating activities:Net profit (loss) ........................................................................................ $ 455,208 $ 183,223 $ (98,625)Non-cash activities .................................................................................... (371,150) (33,458) 35,262Depreciation, depletion and amortization ............................................ 222,364 282,933 446,969Investment income .................................................................................... (19,283) (5,827) –Exploratory expenses................................................................................ 37,243 16,054 59,391Losses on disposals and write-down of assets ...................................... 22,116 18,920 329,729Write-down of investments...................................................................... 18,930 10,183 53,816Increase (decrease) in deferred income taxes ...................................... 94,690 – (30,200)Equity share in affiliates .......................................................................... (21,221) 5,696 89,168(Decrease) increase in allowance for doubtful accounts andprovision for materials and supplies ...................................................... (14,090) 2,171 (50,620)Minority interest........................................................................................ (81,845) (120,917) (245,570)Changes in operating assets and liabilities:

(Increase) in accounts receivable........................................................ (58,149) (51,898) 243,775(Increase) in inventories ...................................................................... (86,954) (27,127) 146,936Decrease (increase) in prepaid expenses .......................................... 16,346 (49,627) 8,193Increase (decrease) in accounts payable and accrued liabilities.... 75,287 (28,204) (483,459)(Decrease) in accrued income and other taxes ................................ (9,390) (20,540) (280,125)

Net cash provided by operating activities ............................................ 280,102 181,582 224,640

Investing activitiesCapital and exploration expenditures .................................................... (285,307) (143,417) (133,463)Purchase of short-term investments ...................................................... (86,273) (8,575) –Sales of short-term investments .............................................................. 13,687 – 6,713Proceeds from sale of property, plant and equipment........................ 22,731 16,775 –Cash used in acquisition of additional shares in subsidiary .............. (90,704) – –Interest received ........................................................................................ 2,144 3,797 –Dividends received.................................................................................... 11,141 2,030 –Purchase of and contribution to long-term investments .................... (23,314) (33,612) (63,602)

Net cash used in investing activities ...................................................... (435,895) (163,002) (190,352)

Financing activitiesProceeds from short-term debt .............................................................. 982,745 160,014 95,829Repayment of short-term debt................................................................ (654,247) (86,659) (279,842)Proceeds from long-term debt ................................................................ 36,435 451 201,220Repayment of long-term debt ................................................................ (175,920) (64,415) (67,910)Proceeds from sale of treasury stock of subsidiaries .......................... 5,976 – –Common dividends paid .......................................................................... (7,072) – –Preferred dividends paid by subsidiaries .............................................. (7,224) (2,758) –

Net cash provided by financing activities .............................................. 180,693 6,633 (50,703)

Increase in cash and cash equivalents.................................................... 24,900 25,213 (16,415)Cash and cash equivalents at beginning of year .................................. 51,080 25,867 42,282

Cash and cash equivalents at end of year ............................................ $ 75,980 $ 51,080 $ 25,867

Supplemental disclosures of cash flow informationCash paid for interest .............................................................................. 35,686 67,313 30,678Cash paid for income taxes .................................................................... 170,364 57,231 29,361Income taxes paid under barter transactions........................................ 110,214 61,433 20,278

Supplemental disclosure of non-cash activitiesCapital expenditures made under barter transactions ........................ (363,957) (282,598) (657,499)Acquisition of investments and repayment of loans underbarter transactions .................................................................................... (174,478) (34,591) –Disposals of assets under barter transactions ...................................... 167,285 283,731 692,761

The accompanying notes to the consolidated financial statements are integral part of these statements.

F-6

OJSC Oil Company RosneftNotes to the Consolidated Financial Statements

as of 31 December 2000, 1999 and 1998

1 The Company

Description of Business

OJSC Oil Company Rosneft (the ‘‘Company’’ or ‘‘Rosneft’’) and its subsidiaries, (the ‘‘Group’’),are principally engaged in exploration, production and sale of crude oil, and the refining, transportationand sale of petroleum products in the Russian Federation and overseas. Rosneft was incorporated as anopen joint stock company on 7 December 1995. All assets and liabilities previously managed by theenterprise ‘‘Rosneft’’ were transferred to the Company at their book value effective on that date togetherwith the Government of the Russian Federation’s (the ‘‘State’’) ownership in other privatized oil and gascompanies. The transfer of assets and liabilities was made in accordance with Resolution No. 971, ‘‘Onthe transformation of Rosneft into an open joint stock company ‘‘NK Rosneft’’, dated 29 September1995. Such transfers represent a reorganization of assets under the common control of the State and,accordingly, are accounted for at their book value. As of 31 December 2000, the State maintains a 100%interest in Rosneft.

Principal subsidiary companies included in the consolidated financial statements and ownershipinterests of Rosneft as of 31 December 2000 are as follows:

Name Nature of BusinessTotal

sharesVotingshares

% %Exploration and productionOJSC Rosneft-Purneftegas ................................ Oil and gas production 38.0 50.67OJSC Rosneft-Sakhalinmorneftegas ................ Oil and gas production 57.20 76.20OJSC Rosneft-Krasnodarneftegas .................... Oil and gas production 38.0 50.67OJSC Rosneft-Stavropolneftegas...................... Oil and gas production 45.53 57.29OJSC Rosneft-Dagneft ...................................... Oil and gas production 38.0 50.67OJSC Rosneft-Termneft .................................... Oil and gas production 38.0 50.67CJSC Rosneft-Sakhalin ...................................... Exploration 80.0 80.0

RefineriesOJSC Rosneft-Tuapse Refinery........................ Petroleum refining 38.0 50.67OJSC Rosneft-Komsomolsky Refinery............ Petroleum refining 38.0 50.67OJSC MOPZ Nefteproduct .............................. Petroleum refining 65.42 87.23

Petroleum marketing and distributionOJSC ARTAG .................................................... Marketing and distribution 38.0 50.67OJSC Rosneft-Altainefteproduct...................... Marketing and distribution 57.07 57.07OJSC Rosneft–Arkhangelsknefteproduct ...... Marketing and distribution 38.0 50.67OJSC Rosneft-Kabbalknefteproduct................ Marketing and distribution 38.0 50.67OJSC Rosneft-Kubannefteproduct .................. Marketing and distribution 38.0 50.67OJSC Rosneft-Karachaevo-Cherkessknefteproduct ...................................... Marketing and distribution 85.99 87.46OJSC Rosneft-Kurgannefteproduct ................ Marketing and distribution 38.0 50.67OJSC Rosneft-Murmansknefteproduct............ Marketing and distribution 38.0 50.67OJSC Rosneft-Nakhodkanefteproduct ............ Marketing and distribution 38.0 50.67OJSC Rosneft-Smolensknefteproduct.............. Marketing and distribution 38.0 50.67OJSC Rosneft-Tuapsenefteproduct.................. Marketing and distribution 38.0 50.67OJSC Rosneft-Yamalnefteproduct .................. Marketing and distribution 49.52 66.03

OtherOJSC Rosneft-Neftecomplect .......................... Petroleum equipment supply 38.0 50.67OJSC Rosnefteimpex NK Rosneft .................. Petroleum and product trading 38.0 50.67OJSC CKB ASU Nefteproduct ........................ Software support 38.0 50.67LLC SK Neftepolis (consolidated in 2000FY) Insurance 99.20 99.20OJSC Rosneft-Neftegazsnab (consolidatedduring 1998-1999FY) .......................................... Petroleum equipment supply 38.0 50.67

F-7

All of the above subsidiaries are incorporated in the Russian Federation.

In addition to the principal subsidiaries, the Group historically included four subsidiaries, OJSCRosneft-Krasnodarnefteorgsintez, OJSC Rosneft-Kemerovonefteproduct, OJSC Rosneft-Severnefte-service and LLC Rosneft-Krasnodar Oil department which are subject to bankruptcy proceedings and arecurrently under external management. Accordingly, these subsidiaries have not been consolidated in theaccompanying statements. Management believes that there will be no additional liability to the Group tofund unsettled creditor claims.

Russian Environment and Economic Conditions

Russia continues to undergo substantial political, economic and social changes. As an emergingmarket, Russia does not possess a well-developed business and regulatory infrastructure that wouldgenerally exist in a more mature market economy. Furthermore, the Russian Government has not yetfully implemented the reforms necessary to create banking, judicial, taxation and regulatory systems thatusually exist in more developed markets. As a result, and as reflected in the Government’s debt defaultand rouble devaluation during August 1998, operations in Russia involve risks that are not typicallyassociated with those in developed markets. Such risks persist in the current environment with results thatinclude, but are not limited to, a currency that is not freely convertible outside of the country, onerouscurrency controls, low liquidity levels for debt and equity markets, and continuing high rates of inflationalthough the rate has decreased from the rate encountered in 1998 (see Note 2).

As a result of predominately high oil prices in 1999 and 2000, the Company’s financial condition hasgenerally improved. Management is of the opinion that the severe affects of the economic crisis triggeredin August 1998 have subsided, that the potential environment is now more certain and, as a result, futureoperations will become more stable.

However, there is no guarantee that the current upturn in economic conditions will continue, andthe Company may be affected by significant uncertainties in Russia. The significant uncertainties inrespect of the political, legal and economic situation, including potential changes in one of these factors,may affect the ability of the Russian companies to carry out operations. The accompanying consolidatedfinancial statements do not include any adjustments that may result from the future clarification of theseuncertainties. Such adjustments, if any, will be reported in the Company’s consolidated financialstatements in the period when they become known and estimable.

Currency Exchange and Control

Foreign currencies, in particular the US dollar, play a significant role in the underlying economics ofmany business transactions in Russia. The following table summarizes the exchange rate of the rouble to1 US dollar (‘‘U.S.$’’):

DateExchange

Rate

As of 31 December 2000.................................................................................................................. 28.16As of 31 December 1999.................................................................................................................. 27.00As of 31 December 1998.................................................................................................................. 20.65As of 31 December 1997.................................................................................................................. 5.96

As of 31 May 2001, the exchange rate was 29.09 roubles to 1 US dollar.

The Company’s principal currency exchange rate risk relates to the ability of the Company to pay itsU.S.$ debts. The Company must maintain certain levels of crude oil exports to meet these obligations.For the years ended 31 December 2000, 1999 and 1998, the Company exported 52%, 48% and 60% of itsoil production, respectively.

The Central Bank of Russia has established strict currency control regulations designed to promotethe commercial utilization of the rouble. Such regulations place restrictions on the conversion of roublesinto hard currencies and establish requirements for conversion of hard currency sales to roubles.

Establishment of Prices

Prior to 1995, the Russian government determined the domestic price for the sale of crude oil thatwas significantly lower than the price for which the same crude could be sold on the world market. During1995, the government withdrew its price control of domestic crude. During 2000, the Group’s domesticcrude and refined product prices were approximately 32% and 60% of the respective world market price

F-8

for equivalent crude and refined products (37% and 79%, respectively, during 1999 and 42% and 76%,respectively, during 1998).

2 Summary of Significant Accounting Policies

Form and Content of the Consolidated Financial Statements

The Company and its subsidiaries maintain their books and records in accordance with accountingprinciples and practices mandated by Russian Accounting Regulations (‘‘RAR’’). Accordingly, taxconsiderations embodied within the regulations result in significant departures from generally acceptedaccounting principles in the United States (‘‘US GAAP’’).

The consolidated financial statements as of and for the years ended 31 December 2000, 1999 and1998 have been reformatted for international presentation from the Russian statutory financialstatements of the Company and adjusted to comply with US GAAP. The Company’s subsidiary, OJSCRosneft-Purneftegas, prepared its accounts in accordance with International Accounting Standards as ofand for the year ended 31 December 1998. Those accounts were reformatted to comply with US GAAP.

Principles of Consolidation

The operations of all significant subsidiaries, in which the Company directly or indirectly owns morethan 50% of the common shares, and which the Company controls, are included in the consolidatedfinancial statements All significant intercompany balances and transactions have been eliminated.Investments in other significant entities in which the Company owns between 20% and 50% areaccounted for under the equity method of accounting. Investments in other companies are accounted forat cost and adjusted for estimated impairment.

The Company accounts for its investment in Sakhalin 1 Production Sharing Agreement inaccordance with the equity method of accounting, and follows the successful efforts method of accountingfor its oil and gas exploration and production activities. Depreciation, depletion and amortization ofcapitalized costs will be computed on the unit-of-production method over the estimated recoverable oiland gas reserves, or charged to expense if economic recoverable reserves are not determined to exist or ifsatisfactory legislation is not adopted.

Included in the consolidated financial statements as a subsidiary is OJSC Rosneft-Krasnodarneftegas (‘‘KNG’’), in which the Company has a voting majority of the ordinary shares. Asof 31 December 2000, 1999 and 1998 there was a dispute over the legality of voting rights transferred topreferred shares due to the partial payment of dividends on preferred shares. As of 31 May 2001 thisdispute was resolved and the Company now holds the majority of voting shares in OJSC Rosneft-Krasnodarneftegaz (see Note 19).

Minority Interest in Subsidiary Companies

Minority interest in the consolidated balance sheets reflects minority owners’ percentage share ofshareholders’ capital in subsidiaries. The minority interest is calculated based on the shareholders’ equityof each subsidiary as determined under US GAAP. The actual rouble denominated balance attributableto minority interests may differ from this amount. Minority owners’ interest in the Company’ssubsidiaries’ net assets, is as follows:

F-9

2000 1999

NameMinority

interest

Minorityinterest

share in netassets

Minorityinterest

Minorityinterest

share in netassets

% %OJSC Rosneft-Purneftegas ...................................... 62.0 490,326 62.0 583,665OJSC Rosneft-Sakhalinmorneftegas ...................... 42.80 237,738 62.0 342,310OJSC Rosneft-Krasnodarneftegas .......................... 62.0 81,572 62.0 72,591OJSC Rosneft-Stavropolneftegas............................ 54.47 73,157 62.0 93,971OJSC Rosneft-Tuapsenefteproduct........................ 62.0 74,084 62.0 65,351OJSC Rosneft-Komsomolsky Refinery.................. 62.0 33,448 62.0 32,688OJSC Rosneft-Tuapse Refinery.............................. 62.0 18,283 62.0 17,315Other .......................................................................... 156,871 155,149

Total ............................................................................ 1,165,479 1,363,040

1998

NameMinority

interest

Minorityinterest

share in netassets

%OJSC Rosneft-Purneftegas ...................................................................................... 62.0 616,004OJSC Rosneft-Sakhalinmorneftegas ...................................................................... 62.0 428,459OJSC Rosneft-Krasnodarneftegas .......................................................................... 62.0 72,071OJSC Rosneft-Stavropolneftegas............................................................................ 62.0 113,958OJSC Rosneft-Tuapsenefteproduct........................................................................ 62.0 57,674OJSC Rosneft-Komsomolsky Refinery.................................................................. 62.0 29,236OJSC Rosneft-Tuapse Refinery.............................................................................. 62.0 16,482Other .......................................................................................................................... 150,073

Total ............................................................................................................................ 1,483,957

During 2000, the Company extended its ownership in six of its subsidiaries through a series ofpurchase transactions of additional shares amounting to U.S.$90.7 million. The Company’s share in thesubsidiaries’ net assets at the date of acquisition exceeded the purchase price by U.S.$40.9 million. Thiscreated a negative goodwill, which has been charged, in consolidation, against oil and gas properties inaccordance with the provisions of Accounting Principles Board Opinion (‘‘APB Opinion’’) No. 16. Thesetransactions have been accounted for under the purchase method of accounting.

Management Estimates

The preparation of the consolidated financial statements in conformity with US GAAP requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilitiesin the consolidated balance sheet as well as the revenues and expenses during the reporting periods.Actual results could differ from those estimates.

Foreign Currency Translation

Translation (remeasurement) of the Company’s rouble denominated financial statements into U.S.$has been performed in accordance with the provisions of Statement of Financial Accounting Standards(‘‘SFAS’’) No. 52, ‘‘Foreign Currency Translation’’, as they relate to hyperinflationary economies. Theobjective of this remeasurement process is to produce the same results that would have been reported ifthe accounting records had been kept in U.S.$. In 2000, 1999 and 1998, Russia experienced cumulativeinflation in excess of 100 percent over a three-year period, as determined by government statistics. Thefollowing table summarizes the annual rate of inflation for each year in the three-year period ended31 December 2000.

F-10

For the Year Ended 31 DecemberAnnual

Inflation

%

2000...................................................................................................................................................... 20.21999...................................................................................................................................................... 36.51998...................................................................................................................................................... 84.4

Monetary assets and liabilities have been translated at the rate prevailing at each balance sheetdate. Non-monetary assets and liabilities have been translated at historical rates. Revenues, expenses andcash flows have been translated at monthly average rates. Translation differences resulting from the useof these rates have been accounted for in currency translation gains or losses in the accompanyingconsolidated statements of operations.

The Company’s principal future operating cash flows (domestic revenues, production costs andgeneral and administrative expenses) will be generated in roubles. As a result, future movements in theexchange rate between the rouble and the U.S.$ will affect the carrying value of the Company’s assets andliabilities. Such changes may also affect the Company’s ability to realize assets as represented in terms ofU.S.$ in the accompanying consolidated financial statements.

The Company’s management plans to increase exports of crude oil and oil production in 2000.

Cash and Cash Equivalents

Cash represents cash on hand and in the Company’s bank accounts and cash equivalents representdeposits with original maturity dates of three months or less. Foreign currency deposits are translated atyear-end exchange rates.

Accounts Receivable

Accounts receivable are shown at their net realizable value which approximates fair value, and arepresented net of an allowance for doubtful accounts. Management provides an allowance on amounts duefrom main and other customers, principally based on the overall delinquency in customer payments andalso calculated specific allowance for doubtful customers.

Inventories

Inventories, consisting primarily of crude oil, petroleum products and materials and supplies, arestated at the lower of weighted average cost or market value. A reserve is established against slow movingand obsolete materials and supplies.

Oil and Gas Properties

The Company follows the successful efforts method of accounting for its oil and gas exploration andproduction activities.

Exploratory costs, excluding the costs of exploratory wells, are charged to expenses as incurred.Costs of drilling exploratory wells, including stratigraphic test wells, are capitalized pendingdetermination whether such wells have found proved reserves which justify commercial development.If such reserves are not found, the drilling costs are charged to exploratory expenses. Intangible drillingcosts applicable to productive wells and to development dry holes, as well as tangible equipment costs andcosts of injection wells related to development of oil and gas reserves are capitalized.

In accordance with SFAS 121 ‘‘Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of’’, the Company assesses the carrying value of oil and gas propertiesagainst the projection of undiscounted net future pre-tax cash flows. Revenues used in calculating futurepre-tax cash flow are based on the ultimate selling price of the Company. The test is performed for eachextraction division (NGDU) which is the lowest level for which there are identifiable cash flows that arelargely independent of the cash flows of other groups of assets. Where an assessment indicatesimpairment in value, the oil and gas properties are written down to their fair value, as determined by theprojection of discounted net future pre-tax cash flows.

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As of 31 December 2000 and 1999, the Company used oil and gas reserves determined inaccordance with the Society of Petroleum Engineers of the United States’ definitions and independentlyestimated by DeGoyler and MacNaugton for all of its significant exploration and production subsidiaries.

As of 31 December 1998, the Company used oil and gas reserves determined in accordance with theSociety of Petroleum Engineers of the United State’s definitions and independently estimated by Millerand Lents as of 1 July 1998 for its subsidiary OJSC Rosneft-Purneftegas, which amounted toapproximately 80% of the Company’s total proved reserves, and independently estimated by DeGolyerand MacNaughton as of 31 December 1997 for its subsidiary, OJSC ‘‘Rosneft-Sakhalinmorneftegas’’,which amounted to approximately 16% of the Company’s total proved reserves. For the calculation ofD,D&A and site restoration expense for the year ended 31 December 1998 and performing the ceilingtest as of 31 December 1998 the Company rolled back its oil and gas reserves to 31 December 1997 basedon the aftorementioned Reserve Reports for OJSC ‘‘Rosneft-Sakhalinmorneftegas’’ and crude oilproduced during the first six months of 1998 for OJSC ‘‘Rosneft-Purneftegas’’. If the Company hadReserve Reports as of 31 December 1998 those numbers could differ significantly from the numbersincluded in the financial statements for the year ended 31 December 1998. All other subsidiaries’ reserveestimates were based on Russian engineering standards as of 31 December 1998. Russian engineeringstandards do not include economic parameters in consideration of recoverable reserves, and as a result,overestimate available future reserves. As a result of this evaluation, a writedown was made for theCompany’s subsidiaries, OJSC ‘‘Rosneft-Sakhalinmorneftegas’’ and OJSC ‘‘Rosneft-Purneftegas’’ as of31 December 1999 and 1998, respectively, (See Note 8)

Gains or losses arising from the sale of proved and unproved properties are recognized in income.

Property, Plant and Equipment

Property, plant and equipment are stated at historical cost translated as at the date of acquisition. Inaccordance with SFAS No. 121, the carrying value of property, plant and equipment is assessed againstthe future undiscounted cash flows to assess the recoverability of the asset.

The cost of maintenance, repairs, and replacement of minor items of property is charged tomaintenance expense. Renewal and betterment of assets are capitalized. Upon sale or retirement ofproperty, plant and equipment, the cost and related accumulated depreciation are eliminated from theaccounts. Any resulting gains or losses are included in the determination of net income.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization of oil and gas properties is provided on the unit-of-production method based on the ratio of current year production to total estimated future productionfrom proved developed reserves at the beginning of the period.

Estimated costs of dismantling oil and gas production facilities, including abandonment and siterestoration costs, are reserved using the unit-of-production method and included as a component ofdepreciation, depletion and amortization.

The provision for depreciation and amortization with respect to operations other than oil and gasproducing activities is computed using the straight-line method based on estimated economic lives.Composite depreciation rates are applied to similar types of buildings and equipment having similareconomic characteristics, as shown below:

Asset Group Average Life

Buildings and constructions ...................................................................................................... 15-45 yearsPlant and machinery and equipment ...................................................................................... 20-30 yearsVehicles and other assets .......................................................................................................... 3-12 yearsService vessels.............................................................................................................................. 20 yearsOffshore drilling rigs .................................................................................................................. 20 years

F-12

Refinery Shutdown Costs

The Company recognizes costs of overhauls and periodic maintenance as expenses when incurred.

Capitalized Interest

Interest is capitalized on expenditures made in connection with capital projects that, theoretically,could have been avoided if expenditures for the assets had not been made. Interest is only capitalized forthe period that activities are in progress to bring these projects to their intended use. The amount ofinterest costs capitalized during 2000, 1999 and 1998 was not significant.

Income Taxes

The Company is not subject to taxation on a consolidated basis. Current income taxes are providedon the accounting profit as determined under RAR at a rate of 30 percent for the year ended31 December 2000 and 35 percent for the first quarter of 1999 and 30 percent for the remainder of theyear ended 31 December 1999 and 35 percent for the year ended 31 December 1998, after adjustments forcertain items which are not deductible for taxation purposes, and after consideration of tax allowances.

The accompanying consolidated financial statements reflect deferred income taxes of the Companyand its subsidiaries using the liability method, which requires that deferred tax assets and liabilities berecorded based on enacted tax rates for the expected future tax consequences of existing differencesbetween financial reporting and tax reporting bases of assets and liabilities, and loss or tax creditcarryforwards (see Note 15).

Deferred tax assets arising from temporary differences between the tax base of the Company’sbalance sheet and its accounting balance sheet have been fully provided for as there is significantuncertainty concerning the Russian taxation environment (see Note 12).

Comprehensive Income

The Company adopted SFAS No. 130, ‘‘Reporting Comprehensive Income’’, effective 1 January1998. This statement establishes standards for the reporting and display of comprehensive income (netincome plus all other changes in net assets from non-owner sources) and its components in consolidatedfinancial statements. For the years ended 31 December 2000, 1999 and 1998, comprehensive incomeequaled net income.

Earnings per Share

Earnings per share have been determined using the weighted average number of shares outstandingduring the year. Treasury shares are not considered to be outstanding for the purpose of suchdetermination. There are no potentially dilutive securities.

Fair Value of Financial Instruments

Currently in Russia there is no market for financial instruments. Management is of the opinion thatreceivables are liquid and collectible and an allowance for doubtful accounts is created as described inNote 4. Management expects payables and other borrowings to be settled as more fully described inNote 10 and 11.

As discussed in Note 6, the Company has investments in certain Russian companies carried at cost.An impairment write down is recorded in accordance with the principles of SFAS 121.

The carrying amount of all other financial instruments approximates fair value.

Accounting for Contingencies

Certain conditions may exist as of the date these consolidated financial statements are issued, whichmay result in a loss to the Company, but which will only be resolved when one or more future eventsoccur or fail to occur. The Company’s management assesses such contingent liabilities. The assessment ofloss contingencies necessarily involves an exercise of judgment and is a matter of opinion. In assessingloss contingencies related to legal proceedings that are pending against the Company or unasserted claimsthat may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of anylegal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought orexpected to be sought therein.

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If the assessment of a contingency indicates that it is probable that a material loss has been incurredand the amount of the liability can be estimated, then the estimated liability would be accrued in theCompany’s consolidated financial statements. If the assessment indicates that a potentially material losscontingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then thenature of the contingent liability, together with an estimate of the range of possible loss if determinableand material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, inwhich case the nature of the guarantee would be disclosed. However, in some instances in whichdisclosure is not otherwise required, the Company may disclose contingent liabilities of an unusual naturewhich, in the judgment of management and its legal counsel, may be of interest to shareholders or others.

The Company’s management believes that potential future contingencies, not recorded in theattached consolidated financial statements, are not significant and will not effect the future financialposition of the Company.

Revenue

Revenues are recognized when title passes to the customer, the selling price is fixed or determinableand collectibility is reasonably assured. Specifically, crude oil sales and petroleum product and materialssales are recognized when they are shipped to customers. In the accompanying consolidated financialstatements revenues are stated net of taxes and customs duties.

Retirement and Other Benefit Obligations

The Company and its subsidiaries make contributions to the State pension fund of the RussianFederation, which requires current contributions by the employer calculated as a percentage of currentgross salary payments; such contributions are charged to expense as incurred. The Company has no post-retirement benefits or significant other compensated benefits requiring accrual.

In 2000 the Group created a Pension Fund to finance non-government pensions mainly at theemployer’s expense. The Fund plans to provide non-government pensions on the basis of fixed interestfor contributors.

Non-cash Transactions

A portion of the Company’s accounts is settled by non-cash transactions. These transactions aregenerally either in the form of direct settlement by goods or services to the final customer or through achain of non-cash transactions. In such cases, both sales and purchases are recorded as a result of the non-cash transaction. Non-cash transactions have been recorded in the consolidated financial statements atthe approximate market value of the goods or services provided.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of Financial AccountingStandards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133establishes accounting and reporting standards requiring that every derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded on the balance sheet as either anasset or liability measured at its fair value. The statement requires that changes in the derivative’s fairvalue be recognized currently in earnings unless specific accounting criteria are met. If a derivativeinstrument qualifies for hedge accounting, the gains or losses from the derivative may offset results fromthe hedged item in the statement of operations or other comprehensive income, depending on the type ofhedge. To adopt hedge accounting, a company must formally document, designate and assess theeffectiveness of transactions that receive hedge accounting.

In June 2000, the Financial Accounting Standards Board issued SFAS 138, Accounting for CertainDerivative Instruments and Certain Hedging Activities. This Statement addresses a limited number ofissues causing implementation difficulties for numerous entities that apply SFAS 133 and this Statementamends the accounting and reporting standards of SFAS 133 for certain derivative instruments andcertain hedging activities.

SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after 15 June 2000. Acompany may implement the statements as of the beginning of any fiscal quarter after issuance; however,SFAS 133 cannot be applied retroactively.

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Management of the Company considers that the adoption of SFAS 133, SFAS 137, and SFAS 138will not have a material impact on the financial position or the results of operations of the Company.

3 Cash and Cash Equivalents

Cash and cash equivalents as of 31 December comprise the following (in U.S.$ thousands):

2000 1999 1998

Cash in bank and on hand – roubles ............................................ 20,092 14,467 7,691Cash in bank – hard currency ........................................................ 41,906 19,180 12,641Restricted cash .................................................................................. 8,872 3,182 1,071Cash equivalents................................................................................ 5,110 14,251 4,464

Total cash and cash equivalents...................................................... 75,980 51,080 25,867

Restricted cash secures letters of credit.

4 Accounts Receivable

Accounts receivable as of December 31 comprise the following (in U.S.$ thousands):

2000 1999 1998

Trade receivables .............................................................................. 141,916 198,790 188,841Value Added Tax receivable .......................................................... 84,799 33,099 16,720Other taxes receivable...................................................................... 49,999 - -Other receivables .............................................................................. 66,467 55,287 35,544Less allowance for doubtful accounts ............................................ (84,530) (98,620) (96,449)

Total accounts receivable ................................................................ 258,651 188,556 144,656

The Company’s accounts receivables are denominated primarily in roubles and are short-term innature.

5 Inventories

Inventories as of 31 December comprise the following (in U.S.$ thousands):

2000 1999 1998

Materials and supplies ...................................................................... 122,539 85,684 95,590Crude oil and petroleum products ................................................ 111,332 61,233 24,200

Total inventories................................................................................ 233,871 146,917 119,790

Materials and supplies are mostly comprised of repair parts, construction materials and pipes.

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6 Long-term Investments

Equity and other long-term investments as of December 31 comprise the following (in U.S.$thousands):

2000 1999 1998

Equity investments‘‘Sakhalin 1’’ PSA ............................................................................ 74,708 65,348 58,452Polar Lights ........................................................................................ 21,305 11,086 1,044OJSC Arkhangelskgeoldobycha...................................................... 7,135 - -Others.................................................................................................. 10,954 1,914 1,319

114,102 78,348 60,815

Other investmentsOAO Gazprom.................................................................................. 4,553 – –Nefteprombank.................................................................................. 3,645 3,645 3,645Puragrouk .......................................................................................... – – 4,845Other investments, at cost .............................................................. 23,395 28,584 23,539

Total long-term investments............................................................ 145,695 110,577 92,844

Sakhalin 1 PSA

In June 1995, an agreement for the joint exploration and development of the Chayvo, Odoptu andArkutun-Dagi oil, gas and condensate fields offshore Sakhalin Island, Russia was signed between ExxonNeftegas Limited (30%), Sakhalin Oil Development Cooperation Company Limited (30%), CJSCSakhalinmorneftegas-Shelf, a wholly-owned subsidiary of OJSC Rosneft-Sakhalinmorneftegas (23%) andOJSC Rosneft-Sakhalin, a subsidiary of the Company (17%). Exxon Neftegas Limited acts asthe operator.

In February 2001, CJSC Sakhalinmorneftegas-Shelf and OJSC Rosneft-Sakhalin signed anagreement to sell half of their interest to the Indian state owned oil company, ONGC Videsh Limited(see Note 19).

The total contribution made by the Company and its subsidiary OJSC Rosneft-Sakhalinmorneftegas, amounted to U.S.$24.4 million, U.S.$21.2 million and U.S.$53.4 million for theyears ended 31 December 2000, 1999 and 1998, respectively. Due to unsuccessful exploratory and drillingworks, the investment was partially written down by U.S.$15.0 million, U.S.$15.6 million and U.S.$83.1million in 2000, 1999 and 1998, respectively. During 1998 Exxon Neftegas Limited made contributions tothe Sakhalin 1 PSA on behalf of the Company and, therefore, included in the long-term investment andtrade accounts payable as of 31 December 1998 is U.S.$26.4 million payable to Exxon Neftegas Limited.There were no accounts payable related to Sakhalin 1 PSA as of 31 December 2000 and 1999.

As of 31 December 2000, there has been no production, although management is confident of therealisability of the carrying value of the investment.

LLC Polar Lights Company (‘‘PLC’’)

PLC is a limited liability company owned 50% by Conoco Timan-Pechora Limited, 30% by OJSCArkhangelskgeoldobycha and 20% by the Company. PLC’s primary emphasis has been the developmentof the Ardalin field, an oil field in the Timan-Pechora Basin located 125 kilometers south of the BarentsSea above the Arctic Circle. Development work on the Ardalin Field began in late 1992 and first oil wasproduced in 1994.

JV Puragrouk

In 1999, the Company’s subsidiary, OJSC Rosneft-Purneftegas, increased its shareholdings in JVPuragrouk, a joint-venture agricultural company, to 97% from 34%, and accordingly, have included thisentity into the consolidated financial statements beginning in 1999.

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OJSC Arkhangelskgeoldobycha

OJSC Arkhangelskgeoldobycha is engaged in exploration, production and development of crude oiland gas. As of 31 December 2000 and 1999 the Company owned 25.50% in OJSCArkhangelskgeoldobycha.

Nefteprombank

Nefteprombank is a bank owned 25.99%, 30.99% and 30.99% by the Company as of 31 December2000, 1999 and 1998, respectively.

Gazprom

The Company has a 0.087% share in the ordinary shares of Gazprom as of 31 December 2000 and1999. At 31 December 1999 this investment was held for resale and classified as a short-term investment.During 2000, management decided to retain these shares as a long-term investment.

7 Oil and Gas Properties, net

Oil and gas properties as of 31 December comprise the following (in U.S.$ thousands):

2000 1999 1998

Oil and gas properties ...................................................................... 3,643,566 3,543,886 7,973,962Pipelines.............................................................................................. 150,257 85,236 1,211,124Less: accumulated depletion............................................................ (2,057,609) (1,993,256) (7,451,039)

Net oil and gas properties................................................................ 1,736,214 1,635,866 1,734,047

As a result of the Company’s assessment of the recoverability of long-lived assets, write-downs ofU.S.$12.2 million for gas producing equipment for OJSC Rosneft-Sakhalinmorneftegas as of 31 December1999 and U.S.$284 million for oil and gas properties for OJSC Rosneft-Purneftegas as of 31 December1998 were necessary. In accordance with SFAS 121, the value of the asset is written down to its realizableamount and depreciation is subsequently charged against this value.

The impairment loss has been included in the consolidated statements of operations as an operatingexpense. There was no impairment of oil and gas properties in the year ended 31 December 2000.

8 Property, Plant and Equipment, net

Property, plant and equipment as of 31 December comprise the following (in U.S.$ thousands):

2000 1999 1998

Offshore drilling assets .................................................................... 170,156 170,156 182,554Service vessels.................................................................................... 118,678 121,926 139,242Buildings ............................................................................................ 951,253 842,408 850,818Plant and machinery ........................................................................ 717,706 768,994 732,547Vehicles and other equipment ........................................................ 240,592 225,738 211,059

Total cost ............................................................................................ 2,198,385 2,129,222 2,116,220Less: Accumulated Depreciation.................................................... (1,367,921) (1,326,578) (1,246,684)

Net property, plant and equipment................................................ 830,464 802,644 869,536

As a result of the Company’s evaluation of the recoverability of property, plant and equipment, awrite-down of U.S.$35.9 million was recognized in relation to offshore assets and service vessels of theCompany’s subsidiary, OJSC Rosneft-Sakhalinmorneftegas, as of 31 December 1998. In accordance withSFAS 121, the value of the asset is written down to its realizable amount and depreciation is subsequentlycharged against this value. The impairment loss has been included in the consolidated statements ofoperations as operating expense.

F-17

9 Construction in Progress

Construction in progress includes various construction projects and machinery and equipmentdelivered but not yet installed. As of 31 December 2000, construction in progress comprise the following(in U.S.$ thousands):

ConstructionWork inProgress

Machinery/Equipment to

be installed Total

Buildings ............................................................................ 102,256 – 102,256Plant and machinery ........................................................ 151,897 11,348 163,245Vehicles and other equipment ........................................ 30,030 3,286 33,316

Total at 31 December 2000 ............................................ 284,183 14,634 298,817

Buildings ............................................................................ 170,691 – 170,691Plant and machinery ........................................................ 8,012 3,990 12,002Vehicles and other equipment ........................................ 16,267 6,521 22,788

Total at 31 December 1999 ............................................ 194,970 10,511 205,481

Buildings ............................................................................ 154,295 – 154,295Plant and machinery ........................................................ 19,873 6,923 26,796Vehicles and other equipment ........................................ 14,166 5,050 19,216

Total at 31 December 1998 ............................................ 188,334 11,973 200,307

As a result of the Company’s assessment of the recoverability of long-lived assets, a write-down ofU.S.$10 million for the Company’s subsidiary, OJSC Rosneft-Purneftegas as of 31 December 1998 wasrecognized in relation to construction-in-progress objects. In accordance with SFAS 121, the value of theasset is written down to its realizable value. The impairment loss has been included in the consolidatedstatements of operations as operating expense.

10 Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities as of 31 December comprise the following (in U.S.$thousands):

2000 1999 1998

Trade accounts payable.................................................................... 108,930 106,255 156,001Salary, insurance and other payable .............................................. 17,867 17,695 25,021Advances received ............................................................................ 27,863 42,441 19,721Dividends payable ............................................................................ 41,340 13,247 -Promissory notes payable ................................................................ 61,688 244 -Other accounts payable and accrued liabilities ............................ 94,346 51,569 65,353

Total accounts payable and accrued liabilities ............................ 352,034 231,451 266,096

The Company’s accounts payable are denominated primarily in roubles and are short-term innature.

F-18

11 Short-term Loans and Long-term Debt

Short-term loans from banks and other organizations as of 31 December comprise the following (inU.S.$ thousands):

2000 1999 1998

U.S.$ denominatedBank loans.......................................................................................... 293,689 109,256 25,358Other borrowings .............................................................................. – 4,878 13,494

Rouble denominatedBank loans.......................................................................................... 8,888 52 73Other borrowings .............................................................................. 9,786 9,216 11,122

312,363 123,402 50,047Current portion of long-term debt ................................................ 62,280 130,766 78,246

Total .................................................................................................... 374,643 254,168 128,293

The U.S.$ denominated loans bear interest at a range of 6.0 percent to 12.0 percent for the yearended 31 December 2000, 12.0 percent to 24.0 percent for the year ended 31 December 1999 and LIBORplus 8.0 percent to 10.0 percent for the year ended 31 December 1998. The rouble denominated loansbear interest at a range of 5.0 percent to 30.0 percent for the year ended 31 December 2000, 18.0 percentto 37.0 percent for the year ended 31 December 1999 and 9.0 percent to 38.0 percent for the year ended31 December 1998.

During the year ended 31 December 2000 the weighted average hard currency and roubledenominated short-term debt balances outstanding were U.S.$188.9 million and U.S.$26.7 million,respectively, with weighted average interest rates of 11.4% and 19.6%, respectively.

Long-term debt as of 31 December comprise the following (in U.S.$ thousand):

2000 1999 1998

Bank loans–U.S.$ denominated ...................................................... 176,238 252,674 326,442Bank loans–Rouble denominated .................................................. – 6,290 15,698Long-term accounts payable............................................................ 9,102 21,924 –Other .................................................................................................. 517 1,545 4,257

185,857 282,433 346,397Less current portion of long term debt ........................................ (62,280) (130,766) (78,246)

Total long-term debt ........................................................................ 123,577 151,667 268,151

The U.S.$ denominated debts due to banks bear interest at LIBOR plus 0.1% to LIBOR plus 4.0%for the year ended 31 December 2000 and 5.0% to LIBOR plus 4.5% for the years ended 31 December1999 and 1998 with original maturity dates from September 2001 to December 2006. Due to the default inpayment on these loans in 1998 maturity dates were rescheduled according to a debt restructuringagreement. The rouble denominated debts due to banks bear interest at 33.0% for the year ended31 December 1999 with original maturity payments made in 2000.

As of 31 December 2000 the Company’s short-term and long-term bank loans were secured byequipment for the amount of 3,153 million roubles (U.S.$112 million at the exchange rate as of31 December 2000), goods and other inventory of 378 million roubles (U.S.$13 million at the exchangerate as of 31 December 2000) and U.S.$21 million. Loans are also secured by hard currency exportproceeds of U.S.$455 million.

Debt Restructuring

The Company’s subsidiary OJSC Rosneft-Purneftegas entered into a restructuring agreement withthe certain banks and other short-term creditors on 4 February 1999. This agreement rescheduled OJSCRosneft-Purneftegas’ payments over the period until the year 2006, commencing on 30 June 1999. Thematurity debt table represented below has been adjusted accordingly.

F-19

During 2000, the Company and its subsidiaries OJSC Rosneft-Sakhalinmorneftegas and OJSCRosneft-Stavropolneftegas signed a restructuring agreement with the bank and agreed the new extendedtime frame for the repayment of the remaining amounts with all future interest payments rolled-up.

The aggregate maturity of long-term debt outstanding at December 31 is as follows (in U.S.$thousand):

2000 1999 1998

1999...................................................................................................... – – 78,2462000...................................................................................................... – 130,766 116,3372001...................................................................................................... 62,280 61,026 47,4992002...................................................................................................... 39,082 18,566 26,4742003...................................................................................................... 19,943 18,020 21,9692004...................................................................................................... 19,943 18,020 55,8722005 and after .................................................................................... 44,609 36,035 –

Total long-term debt ........................................................................ 185,857 282,433 346,397

12 Accrued Income and Other Taxes

Accrued income and other taxes as of 31 December comprise the following (in U.S.$ thousands):

2000 1999 1998

VAT .................................................................................................... 38,635 34,045 32,025Mineral Replenishment tax ............................................................ 6,404 13,229 11,718Road Users tax .................................................................................. 8,536 10,137 12,378Excise tax............................................................................................ 1,382 1,701 8,804Royalties ............................................................................................ 5,353 6,352 9,750Property tax........................................................................................ 3,457 1,805 4,140Income tax.......................................................................................... 22,493 31,571 7,441Social Maintenance Tax .................................................................. 1,970 1,538 4,233Other taxes ........................................................................................ 23,179 23,566 19,764Fines, penalties and interest ............................................................ 13,099 9,954 44,185

Total accrued income and other taxes .......................................... 124,508 133,898 154,438

Russia currently has a number of laws related to various taxes imposed by both federal and regionalgovernmental authorities. Applicable taxes include value added tax, corporate income tax (income tax), anumber of turnover based taxes, and payroll (social) taxes, together with others. In addition, theCompany’s subsidiaries are also subject to various industry taxes including excise, royalty and mineralreplenishment taxes. Laws related to these taxes have not been in force for significant periods, in contrastto more developed market economies; therefore, implementing regulations are often unclear, nonexistentand if they exist can be contradictory. These facts create tax risks in Russia substantially more significantthan typically found in countries with more developed tax systems.

Generally, tax declarations remain open and subject to inspection for a period of three years.Management believes that the Company is in compliance with the tax laws affecting its operations. Thefact that a year has been reviewed does not close that year, or any tax declaration applicable to that year,from further review during the three year period.

The amounts reflected above in respect of fines, penalties and interest payable have been recordedafter taking into account the provisions of Decision No. 576 of the Government of the Russian Federationdated 9 June 1998. This Decision allowed companies to apply for a reduction of the level of penaltiesoutstanding as at 1 April 1998 by a factor of five. The decision also provided for the recalculation ofinterest owing on any unpaid balances at reduced rates.

13 Site Restoration Costs

Future site restoration costs represent the provision for estimated future rouble cost to abandonwells and production facilities.

F-20

During 1999 and 1998, the Company included U.S.$6.4 million and U.S.$11.4 million, respectively,of such costs as components of depreciation, depletion and amortization expense. Rouble devaluationresulted in a net decrease in the liability balance as of 31 December 1999. During 2000, management ofthe Company reassessed its estimates of future site restoration costs and reduced the provision as aconsequence, by U.S.$4.9 million.

The Company has estimated its liability based on site restoration costs incurred during 2000, 1999and 1998 and will continue to update its estimates in the future. However, Russian environmentalregulations and their enforcement can have a significant impact on these costs and the future actual costsassociated with these liabilities may differ from the recorded amounts.

14 Capitalization

The shareholders’ capital account represents the authorized capital of the Company, as stated in itscharter document. The common shareholders are allowed one vote per share. The preferred sharesbecome voting if a re-organization or liquidation of the Company is being discussed, or if the annualshareholders meeting does not approve a full payment of declared dividends on preferred shares. Suchshares cease their voting rights once dividends have been paid in full. Dividends on common shares paidto shareholders, are determined by the directors and approved at the annual shareholders’ meeting.Preferred shareholders are entitled to a dividend of 10% of net profit, as determined under Russianstatutory reporting. However, if dividends are paid on common shares, the amount of dividends paid onpreferred shares can not be less than the common dividends.

As of 31 December 2000, 1999 and 1998, the Company’s entire stock was held by the Governmentof the Russian Federation.

In accordance with Russian Accounting Regulations, earnings available for dividends are limited toincome, retained earnings and other income, denominated in roubles, after certain deductions. The Boardof Directors declared a dividend on common shares of U.S.$28.4 million and U.S.$7.4 million at theexchange rate as of 31 December 2000 and 1999, for the years then ended, respectively. Dividends for1999 were approved by the shareholders at the annual meeting dated 30 June 2000 and were paid outduring 2000.

15 Income Taxes

The Company’s provision for income taxes as reported in the accompanying consolidatedstatements of operations, for the years ended December 31 comprise the following (in U.S.$ thousands):

2000 1999 1998

Current income taxes........................................................................ 271,500 142,794 28,555Deferred income taxes (credit) ...................................................... 94,690 - (30,200)

Total provision/(benefit) for income taxes .................................... 366,190 142,794 (1,645)

The provision for income taxes represents the total income tax expense for the Company and eachof its subsidiaries. Due to the uncertainties inherent in the Russian environment described in Note 1 andthe corresponding uncertainty of realization, deferred income tax assets have been fully reserved.

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Temporary differences between the Russian statutory accounts and these consolidated financialstatements give rise to the following deferred tax assets and liabilities as of 31 December (inU.S.$ thousands):

2000 1999 1998

Deferred tax asset arising from tax effect of:Fixed Assets ...................................................................................... 24,683 65,554 94,905Accounts Receivable ........................................................................ 15,914 20,031 33,471Site Restoration Costs ...................................................................... 28,298 25,234 –Long-term Investments .................................................................... 15,789 1,679 –Loans .................................................................................................. 18,151 17,625 –Accounts Payable .............................................................................. 4,431 889 –Inventory Obsolescence .................................................................. 5,110 6,320 –Other .................................................................................................. 6,858 28,211 63,202

119,234 165,543 191,578Reserve for deferred income tax assets ........................................ (119,234) (165,543) (191,578)

Net deferred tax asset ...................................................................... – – –

Deferred tax liability arising from tax effect of:Fixed Assets ...................................................................................... (94,690) – –

Net deferred tax liability.................................................................. (94,690) – –

Although the Company does not pay tax on a consolidated basis, a reconciliation of expectedincome tax expense to the actual tax expense, for the years ended 31 December is as follows (in U.S.$thousands):

2000 1999 1998

Income before income taxes............................................................ 821,398 326,017 (100,270)Statutory income tax rate ................................................................ 30% 30% 35%

‘‘Expected’’ income tax expense/(benefit) .................................... 246,419 97,805 (35,095)Add (deduct) tax effect of:Minority interest effect on income ................................................ (24,554) (36,275) (85,950)Change in valuation allowance reserved ...................................... (46,309) (26,035) (86,773)Permanent accounting differences arising from:Investment credit & non-deductible items, net ............................ 64,999 (4,387) (30,200)Foreign currency translation differences ...................................... 125,635 111,686 236,373

Income taxes ...................................................................................... 366,190 142,794 (1,645)

Russian tax regulations allow a company to carry forward its tax losses for the next five years at theamount of up to 50% of its taxable profits. Given the uncertainty over Russian tax regulations describedin Note 12, and the uncertain economic situation (See Note 1), valuation allowances have been created tooffset the full amount of such tax carryforwards resulting from tax losses.

16 Commitments and Contingencies

Capital projects for Exploration and Development of Production Facilities, and ModernizationRefineries and Distribution Network

The Company and its subsidiaries are engaged in continuous capital projects for exploration anddevelopment of production facilities and modernization refineries and distribution network. Managementestimates the total cost of such programs to be U.S.$318.5 million (unaudited) over the next year at itsexploration and production subsidiaries and U.S.$82.8 million (unaudited) over the next year at itsrefining and marketing subsidiaries. Depending on the current market situation actual expenditures mayvary from the above estimates. As of 31 December 2000 there was some U.S.$67 million (unaudited) ofpurchase commitments outstanding in connection with these projects.

The Company plans to finance a significant portion of these projects internally. At the same time,the Company is looking for external sources of financing. It is the opinion of management that the

F-22

Company will be able to obtain all necessary financing to complete the existing and planned capitalprojects.

Bankrupt Entities

The Company holds controlling interests in certain entities that are subject to bankruptcyproceedings. Management believes that there will be no additional liability to fund unsettled creditorclaims.

Environmental Matters

Companies operating in the oil and gas industry are continuously subject to environmental risk.Management is of the opinion that the Company has met the local and Federal governments’requirements concerning environmental matters, and therefore believes that the Company does not haveany material current environmental liabilities other than those provided.

Insurance Matters

In 1999, the Company maintained only minimal levels of insurance on its existing asset base, or incertain cases self-insures. In addition, Russian insurance providers do not usually offer businessinterruption insurance. In 2000, the Company initiated an extensive insurance program to providecoverage of its assets, goods, transportation, building and erection works. In 2001, the Company signed acontract for a comprehensive insurance of its assets and insurance against work disruption losses at OJSCRosneft Komsomolsky Refinery.

Social Commitments

The Company possesses social infrastructure assets for the use of employees. In accordance with thePresidential Decree on privatization in Russia, the Company is required to transfer the socialinfrastructure assets to the relevant local city administrations for no significant consideration.Accordingly, as the Company does not have ownership of these assets, they are not recorded in thesefinancial statements.

The Company has incurred U.S.$70.3 million, U.S.$35.8 million and U.S.$35.7 million in expenses ofsocial nature for the years ended 31 December 2000, 1999 and 1998, respectively.

Investment in Sakhalin 1 PSA

Management is of the opinion that the gross future funding requirements for phase 1 of Sakhalin 1PSA could be significant, estimated at U.S.$3.4 billion (unaudited) over 7 years (unaudited). Thesubsequent phases of Sakhalin 1 PSA will be funded from the project’s own future cashflows. With thesale of half of its share in Sakhalin 1 PSA to ONGC Videsh Limited, the Company through itssubsidiaries retains 20% in the project (see Note 19). The subsidiaries are required to pay 20% of thesubsequent funding on an as needed basis over the life of the agreement. The Company’s subsidiarieshave signed carry finance agreements with ONGC Videsh Limited such that the subsidiaries subsequentfunding requirement for Sakhalin 1 project will be financed by ONGC Videsh Limited. The financing willbe repaid solely out of the proceeds from the sales of hydrocarbons from the PSA. Subject to certainpriority payments being made, the subsidiaries will be entitled to 10% of their share of hydrocarbonsrevenues, as defined in the PSA, until the debt is repaid. After the debt is repaid the subsidiaries areentitled to full stream of their sales proceeds after certain obligatory payments, as defined in the PSA.The Company has not guaranteed any obligations arising out of or in connection with the agreementssigned by the subsidiaries.

Participation in Caspian Pipeline Consortium

On 6 February 1997 the Company through Rosneft-Shell Caspian Ventures Ltd., a joint venturebetween Rosneft and Shell-Caspian, where the Company has 51% ownership, signed an agreement witheight oil and gas companies and state authorities of Russia and Kazakhstan for assessing, financing,construction and use of an oil pipeline from Western Kazakhstan oil fields to Novorossiysk, Russia underthe name of Caspian Pipeline Consortium (‘‘CPC’’). Rosneft-Shell has a 7.5% interest in the CPC.

The agreement between Rosneft and Shell-Caspian is signed in the form of an arrangementwhereby Shell-Caspian agreed to defray the Company’s related costs of participation in the CPC and isentitled to all the revenue until all costs have been recovered, after which time Rosneft will share in both

F-23

costs and revenues. The Company records its share of revenue, operating expenses and subsequentdevelopment costs only after the payout from the CPC occurs (i.e. when Shell-Caspian recoups its costs).

In 2000 the CPC’s primary activity focused on construction of the export pipeline system, includinga sea terminal, a pipeline and pumping stations. CPC continued its practice of inviting bidders for theproject design and procurement and placed major supply contracts with the winners. The pipeline will becompleted within the first 6 months of 2001. Total capital expenditures of the project as of 31 December2000 amounted to U.S.$2,788 million.

Segment Information

Presented below is information about the Company’s operating segments for the years ended31 December 2000, 1999 and 1998, in accordance with SFAS 131, ‘‘Disclosures about Segments of anEnterprise and Related Information’’. The Company determined its operating segments based ondifferences in the nature of their operations. The performance of these operating segments is assessed bymanagement on a regular basis, based upon Russian statutory accounting, stated in roubles. For thepurposes of these consolidated financial statements, this management reporting, by operating segment,has been restated into U.S.$. The exploration and production segments explore, find, develop andproduce crude oil and natural gas. The refinery, marketing and distribution segments process crude oiland other feedstock into refined products and purchase, sell, transport crude oil and refined petroleumproducts. Other segments include drilling services, vessel hire management, software support and otheractivities.

The accounting policies applied to each segment are consistent with the Russian statutoryaccounting policies as adjusted and applied to the consolidated financial statements. Intersegment salesand services are conducted at agreed prices between the Company and its subsidiaries. Intersegmentreceivables are representative of normal trade balances. The Company and its subsidiaries operations areconducted within the Russian Federation. The Company had crude oil export sales of U.S.$1,119 million,U.S.$642 million and U.S.$517 million and for the years ended 31 December 2000, 1999 and1998, respectively.

Operating Segments 2000Exploration

andProduction

Refining,Marketing and

Distribution Others Consolidated

Total revenues .......................................... 1,587,323 1,192,629 324,144 3,104,096Less: intersegmental revenues ................ (411,011) (147,384) (78,928) (637,323)

Revenues from external customers ........ 1,176,312 1,045,245 245,216 2,466,773Operating income...................................... 521,201 271,600 11,121 803,922Interest expense ........................................ (22,412) (19,610) (4,669) (46,691)Equity share in affiliates .......................... 21,221 – – 21,221Depreciation, depletion andamortization .............................................. (106,735) (93,393) (22,236) (222,364)Provision for income taxes ...................... (175,771) (153,800) (36,619) (366,190)Investments in equity method investees 114,102 – – 114,102Capital expenditures ................................ (585,660) (63,604) – (649,264)Total assets ................................................ 1,797,408 1,572,732 374,460 3,744,600

F-24

Operating Segments 1999Exploration

andProduction

Refining,Marketing and

Distribution Others Consolidated

Total revenues .......................................... 1,001,009 662,887 216,934 1,880,830Less: intersegmental revenues ................ (204,343) (63,947) (42,801) (311,091)

Revenues from external customers ........ 796,666 598,940 174,133 1,569,739Operating income/(loss) .......................... 173,587 133,081 (75,424) 231,244Interest expense ........................................ (17,110) (12,749) (3,690) (33,549)Equity share in affiliates .......................... (5,696) - - (5,696)Depreciation, depletion andamortization .............................................. (144,296) (107,515) (31,122) (282,933)Provision for income taxes ...................... (72,825) (54,262) (15,707) (142,794)Investments in equity method investees 78,348 - - 78,348Capital expenditures ................................ (377,024) (48,991) - (426,015)Total assets ................................................ 1,650,361 1,229,681 355,960 3,236,002

Operating Segments 1998Exploration

andProduction

Refining,Marketing and

Distribution Consolidated

Total revenues ...................................................................... 852,555 655,385 1,507,940Less: intersegmental revenues ............................................ (53,909) (12,013) (65,922)

Revenues from external customers .................................... 798,646 643,372 1,442,018Operating income/(loss) ...................................................... (785,736) (10,764) (796,500)Interest expense .................................................................... (50,210) (17,500) (67,710)Equity share in affiliates ...................................................... (89,168) – (89,168)Depreciation, depletion and amortization ........................ (406,077) (40,892) (446,969)Income tax expense .............................................................. 20,674 (19,029) 1,645Investments in equity method investees ............................ 60,815 – 60,815Capital expenditures ............................................................ (750,112) (40,850) (790,962)Total assets ............................................................................ 2,716,132 510,730 3,226,862

17 Reconciliation to Russian Statutory Accounting (Unaudited)

The following represents the reconciliation between total capitalization determined under RARand US GAAP. For reconciliation purposes, the total combined capitalization in accordance with RAR,approximating 39,468 million roubles, 18,884 million roubles and 10,685 million roubles as of31 December 2000, 1999 and 1998, respectively, were converted into U.S.$ at the year end exchangerates (in U.S.$ thousands):

2000 1999 1998

RAR equity........................................................................................ 1,401,563 699,401 517,455

Increase/(decrease) due to effect of:Minority interest effects .................................................................. (1,165,479) (1,363,040) (1,483,957)Fixed assets valuation ...................................................................... 1,635,661 1,923,641 2,014,469Tax contingencies and other tax .................................................... (122,966) (15,625) (19,404)Accrued site restoration .................................................................. (103,547) (108,475) (102,034)Accounts receivable valuation, net ................................................ (92,995) (89,530) (109,388)Inventory valuation .......................................................................... (34,562) 17,307 (12,944)Investments valuation ...................................................................... 47,831 37,913 33,948Accounts payable and accrued liabilities valuation, net ............ (39,834) (1,064) –Dividends payable ............................................................................ (41,340) (13,247) –Other .................................................................................................. (78,210) (93,978) (14,252)

US GAAP equity .............................................................................. 1,406,122 993,303 823,893

F-25

Differences in fixed assets valuation are principally attributable to the use of year-end exchangerates to translate RAR equity and the use of historical rates in the consolidated financial statements.

The following represents reconciliation between earnings determined under RAR and US GAAP.For reconciliation purpose, total combined statutory net income before tax for years 2000, 1999 and 1998in accordance with RAR, approximating 31,939 million roubles, 12,069 million roubles and (5,242)million roubles, respectively, were converted into U.S.$ at the year average exchange rates (in U.S.$thousands):

2000 1999 1998

Statutory pre-tax income/(loss) ...................................................... 1,136,215 490,604 (541,162)

Increase/(decrease) due to effect of:Foreign currency gain/(loss) ............................................................ (2,358) 38,247 489,909Differences in depreciation, depletion and amortization............ (159,826) (226,752) (243,314)Taxes, fines and penalties ................................................................ (6,427) (9,412) (15,705)Effect of Minority Interest .............................................................. 81,845 120,917 245,570Exploratory expenses........................................................................ (37,243) (16,054) –Loss on disposals of fixed assets and construction in progress .. (21,621) (6,717) (330,372)Accounts receivable and inventory valuation, net ...................... (3,460) (8,051) (45,805)Expenses included under RAR into funds .................................. (114,475) (108,303) (105,516)Equity shares in affiliate .................................................................. 21,221 (5,696) (89,168)Investment valuation ........................................................................ (18,245) (8,685) (37,571)Other non GAAP items .................................................................. (54,228) 65,919 572,864

US GAAP pre-tax income/(loss).................................................... 821,398 326,017 (100,270)

18 Subsequent Events

On 10 February 2001 the Company’s subsidiary, OJSC Rosneft-Sakhalin, together with CJSCSakhalinmorneftegas-Shelf (‘‘SMNG-Shelf’’), the subsidiary of OJSC Rosneft-Sakhalinmorneftegassigned an agreement to sell in total a 20% stake in the PSA 1 project to the Indian state owned oilcompany, ONGC Videsh Limited, for a total of U.S.$319.3 million plus certain additional costs(unaudited). This would leave SMNG-Shelf with an 11.5% stake in the project, down from an originalstake of 23% and OJSC Rosneft-Sakhalin with an 8.5% stake, down from 17%.

On 24 April 2001 the annual general meeting of the shareholders of OJSC Rosneft-Krasnodarneftegas elected the new OJSC Rosneft-Krasnodarneftegas Board of Directors with themajority of seats held by Rosneft representatives. On 31 May 2000 the annual general meeting ofshareholders of OJSC Rosneft-Krasnodarneftegaz made a decision to pay dividends on preferred sharesfor 2000 in full. The Company’s management believes that Rosneft has resolved the problem of controlover the above subsidiary (see Note 2).

In May 2001 the Company has received a syndicated bank loan of $140 million spread over twoyears (unaudited). The loan will finance operational expenses of Rosneft and is secured by theCompany’s oil exports.

F-26

APPENDIX A

Report of independent auditors

Legal address: 14 Staraya Basmannaya St., 103064 Moscow, Russia

Licence to perform general audit No 006000 issued by the Ministry of Finance of the Russian Federation.The licence is valid until 28 June 2003.

The state registration certificate of ZAO ‘‘Arthur Andersen’’ No 021566 issued by Moscow RegistrationChamber on 11 February 1993.

Current account No 40702810600700353028, BIC No 044525202 in Citibank, Moscow.

The audit was performed by:

Colin Brown Audit Partner

Pushkin Sergei Yurievich Accounting Services Partner

Marianovskaya Elena Dmitrievna Audit Manager

Ivannikova Natalia Arturovna Audit Senior

Auditor Sergei Yurievich PushkinCertificate of auditor No. 014306

A-1

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

Report of independent auditorsto the shareholders on the consolidated statutory accounting reports ofOJSC Rosneft Oil Company for the year ended 31 December 2000

1. We have carried out an audit of the consolidated statutory accounting reports of open joint stockcompany Rosneft Oil Company (hereinafter OJSC NK Rosneft) as of and for the year ended31 December 2000, including statutory accounting reports of OJSC NK Rosneft and its subsidiaries.These statutory accounting reports were prepared by the management of OJSC NK Rosneft inaccordance with the Federal Law No 129-FZ of 21 November 1996 ‘‘On Accounting’’ and the‘‘Regulations for Accounting and Reporting in the Russian Federation’’ enacted by the Decree ofthe Ministry of Finance of the Russian Federation #34n of 29 July 1998 and with the Order of theMinistry of Finance of the Russian Federation No 112 of 30 December 1996 ‘‘Guidelines for thePreparation of Consolidated Statutory Accounting Reports’’. The accounting reports prepared inaccordance with the Federal Law No 129-FZ of 21 November 1996 ‘‘On Accounting’’ and the‘‘Regulations for Accounting and Reporting in the Russian Federation’’ enacted by the Decree ofthe Ministry of Finance of the Russian Federation #34n of 29 July 1998 and with the Order of theMinistry of Finance of the Russian Federation No 112 of 30 December 1996 ‘‘Guidelines for thePreparation of Consolidated Statutory Accounting Reports’’ significantly differ from the financialstatements prepared in accordance with International Accounting Standards.

2. Preparation of these consolidated statutory accounting reports is the responsibility of themanagement of OJSC NK Rosneft. Our responsibility is to express an opinion on theseconsolidated statutory accounting reports based on our audit.

3. We carried out our audit in accordance with the Decree of the President of the Russian FederationNo 2263 of 22 December 1993 ‘‘Temporary Rules of Audit Activity in the Russian Federation’’. Weplanned and performed our audit to obtain reasonable assurance that the statutory accountingreports have been prepared in accordance with the Federal Law No 129-FZ of 21 November 1996‘‘On Accounting’’ and the ‘‘Regulations for Accounting and Reporting in the Russian Federation’’enacted by the Decree of the Ministry of Finance of the Russian Federation #34n of 29 July 1998and with the Order of the Ministry of Finance of the Russian Federation No 112 of 30 December1996 ‘‘Guidelines for the Preparation of Consolidated Statutory Accounting Reports’’. Our auditincluded examining, on a test basis, evidence supporting the amounts and disclosures in theconsolidated statutory accounting reports. We believe that our audit provides a reasonable basis forour opinion on the consolidated statutory accounting reports.

4. In our opinion, the consolidated statutory accounting reports attached to this Report present, in allmaterial respects, the assets and liabilities of OJSC NK Rosneft, its subsidiaries as of 31 December2000 and its financial results for the year ended 31 December 2000 in accordance with the FederalLaw No 129-FZ of 21 November 1996 ‘‘On Accounting’’ and the ‘‘Regulations for Accounting andReporting in the Russian Federation’’ enacted by the Decree of the Ministry of Finance of theRussian Federation #34n of 29 July 1998 and with the Order of the Ministry of Finance of theRussian Federation No 112 of 30 December 1996 ‘‘Guidelines for the Preparation of ConsolidatedStatutory Accounting Reports’’.

Partner /signed/ Colin Brown

Auditor /signed/ Sergei Yurievich Pushkin

31 May 2001

A-2

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

CONSOLIDATED BALANCE SHEETSAs of 1 January 2000 and 2001

Appendixto the Order #4n of the RF Finance Ministry

of 13 January 2000 #4n

Company: OJSC Oil Company RosneftTaxpayer’s identification number: 7706107510Form of incorporation: OJSC (open joint-stock company)All amounts are in Rb mln.Address:Sofiyskaya nab., 26/1, Moscow 113035, Russia

As of 1 January

CodeLine 2000 2001

AssetsNon-Current AssetsIntangible assets (04, 05) .......................................................................... 110 93.5 1,513.8

including:patents, licenses, trademarks (service marks), other similar

rights and assets ................................................................................ 111 8.1 83.4organisational costs .............................................................................. 112goodwill .................................................................................................. 113 – 1,387.2

Fixed assets (01, 02, 03) ............................................................................ 120 15,960.2 21,196.6including:land and natural resources .................................................................. 121 0.1 9.1buildings, machinery and equipment.................................................. 122 13,161.9 18,558.0

Construction in progress (07, 08, 16, 61)................................................ 130 3,545.0 10,178.4Investments in fixed assets (03) ................................................................ 135 – –

including:leased out assets .................................................................................... 136 – –assets provided under the project contract ...................................... 137 – –

Long-term investments (06, 82) .............................................................. 140 2,973.0 6,616.6including:investments in subsidiaries .................................................................. 141 91.0 21.6investments in affiliates ........................................................................ 142 112.7 1,006.5investments in other parties ................................................................ 143 292.4 173.0loans granted for periods over 12 months ........................................ 144 377.3 344.5other long-term investments................................................................ 145 2,099.6 5,071.0

Other non-current assets .......................................................................... 150 – 1.6

Total Non-Current Assets........................................................................ 190 22,571.7 39,507.0Current AssetsInventories .................................................................................................. 210 4,390.6 8,319.5

including:raw materials, supplies and other similar assets (10, 15, 13, 16) .. 211 2,086.7 4,219.2livestock (11).......................................................................................... 212 0.8 0.9work-in-process (20, 21, 23, 29, 30, 36, 44) ...................................... 213 292.1 634.3finished goods and goods for re-sale (16, 40, 41) ............................ 214 1,650.4 2,444.8goods dispatched (45) .......................................................................... 215 258.3 135.3prepaid expenses (31) .......................................................................... 216 90.5 800.6other inventories and costs .................................................................. 217 11.8 84.4

Value-added tax receivable (19) .............................................................. 220 876.4 1,572.1Receivables (due in over 12 months after the reporting date) ............ 230 140.8 191.5

including:amounts due from clients (62, 76, 82)................................................ 231 103.7 38.9promissory notes receivable (62) ........................................................ 232 – 107.9

A-3

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

As of 1 January

CodeLine 2000 2001

due from subsidiaries and affiliates (78)............................................ 233 – –advances paid (61) ................................................................................ 234 – –other receivables.................................................................................... 235 37.1 44.7

Receivables (due within 12 months after the reporting date) .............. 240 8,206.1 8,502.7including:amounts due from clients (62, 76, 82)................................................ 241 4,266.9 2,332.8notes receivable (62) ............................................................................ 242 10.4 103.6due from subsidiaries and affiliates (78)............................................ 243 10.1 14.7contributions due from shareholders (partners) (75) ...................... 244 – 0.1advances paid (61) ................................................................................ 245 1,531.3 1,954.9other receivables.................................................................................... 246 2,387.4 4,096.6

Short-term investments (56, 58, 82) ........................................................ 250 80.7 3,035.8including:loans granted for terms under 12 months ........................................ 251 – 344.1treasury stock ........................................................................................ 252 – –other short-term investments .............................................................. 253 80.7 2,691.7

Cash and cash equivalents ........................................................................ 260 1,391.2 2,147.2including:petty cash (50) ...................................................................................... 261 3.3 27.9current account (51) ............................................................................ 262 371.0 60.7foreign currency accounts (52)............................................................ 263 519.6 1,118.1other cash and cash equivalents (55, 56, 57) .................................... 264 497.3 394.5

Other current assets .................................................................................. 270 – –

Total Current Assets ................................................................................ 290 15,085.8 23,768.8

TOTAL ASSETS (sum of lines 190+290) ............................................ 300 37,657.5 63,275.8

Shareholders’ Capital and LiabilitiesShareholders’ CapitalShare capital (85) ...................................................................................... 410 90.2 90.2Additional capital (87) .............................................................................. 420 6,845.0 12,355.8Reserve capital (86) .................................................................................. 430 310.9 851.0

including:mandatory provisions .......................................................................... 431 0.2 1.0reserves provided under the charter documents ............................ 432 310.7 850.0

Social fund (88) ........................................................................................ 440 475.0 833.6Accumulation fund .................................................................................... 445 1,110.3 7,165.2Consumption fund .................................................................................... 446 82.1 101.2Working capital replenishment fund ...................................................... 447 – 6,049.3Special purpose financing (96) ................................................................ 450 – –Retained earnings – previous years (88) ................................................ 460 3,792.2 167.5Uncovered loss of previous periods (88) ................................................ 465 2,923.7 2,397.0Retained earnings – reporting year(88) .................................................. 470 – 19,052.8Deficit – reporting year (88) .................................................................... 475 – 75.4Appropriation of retained earnings (funds) for 1999 .......................... 476 – –Appropriation of retained earnings (funds) for 2000 .......................... 477 – 17,234.9Appropriation of retained earnings (funds) for 2001 .......................... 478 – –

Total Shareholders’ Capital .................................................................. 490 9,782.0 26,959.3

Minority interest........................................................................................ 500 7,104.7 10,891.4Long-term LiabilitiesLong-term loans and borrowings (92, 95) ............................................ 510 7,189.1 4,831.3

including:

A-4

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

As of 1 January

CodeLine 2000 2001

bank loans due in over 12 months after the reporting date .......... 511 6,913.4 4,831.3borrowings due in over 12 months after the reporting date .......... 512 275.7 0.0

Other long-term liabilities ........................................................................ 520 – –

Total Long-term Liabilities .................................................................... 590 7,189.1 4,831.3

Short-term LiabilitiesLoans and credits (90, 94)........................................................................ 610 3,741.0 9,872.9

including:bank loans due within 12 months after the reporting date ............ 611 3,301.5 8,751.5borrowings due within 12 months after the reporting date............ 612 439.5 1,121.4

Accounts payable ...................................................................................... 620 8,913.3 8,777.0including:suppliers and contractors (60, 76) ...................................................... 621 2,830.4 3,152.5promissory notes payable (60) ............................................................ 622 4.1 71.3due to subsidiaries and affiliates (78) ................................................ 623 264.3 285.2due to employees (70) .......................................................................... 624 246.2 351.1payables due to social funds (69) ...................................................... 625 251.4 158.5taxes payable to the budget (68) ........................................................ 626 2,237.3 2,056.3advances received (64) ........................................................................ 627 1,516.3 893.9other payables........................................................................................ 628 1,563.3 1,808.2

Profits distributable among shareholders (partners) (75) 630 52.1 107.1Deferred income (83) ................................................................................ 640 632.0 563.8Accruals (89) .............................................................................................. 650 243.3 1,179.4Other short-term liabilities........................................................................ 660 – –

Total Short-term Liabilities.................................................................... 690 13,581.7 20,593.8

TOTAL SHAREHOLDERS’ CAPITAL AND LIABILITIES(sum of lines 490+500+590+690) ........................................................ 700 37,657.5 63,275.8

Statement of Valuables on Off Balance Sheet AccountsDescription of off balance sheet accountLeased fixed assets (001) .......................................................................... 910 599.0 2,439.6incl. Under lease contracts ........................................................................ 911 – 1.8Inventory in custody (002) ...................................................................... 920 1,166.2 2,602.7Goods accepted for commission (004) .................................................. 930 47.3 10.8Bad debts written-off (007) ...................................................................... 940 733.7 1,891.2Collaterals received (008) ........................................................................ 950 1,163.3 1,769.8Collaterals provided (009) ........................................................................ 960 3,739.2 16,932.0Depreciation of social facilities (014) .................................................... 970 64.1 60.1Depreciaition of area betterment and similar projects (015) .............. 980 6.5 7.1

A-5

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

CONSOLIDATED STATEMENT OF OPERATIONSas of 1 January 2000 and 2001

Company: OJSC Oil Company RosneftTaxpayer’s identification number: 7706107510Form of incorporation: OJSC (open joint-stock company)All amounts are in Rb mln.Address:Sofiyskaya nab., 26/1. Moscow 113035. Russia

CodeLine

Currentreporting period

Same period ofprevious year

Revenues and costs from ordinary activities..........................Proceeds (net) from sale of goods, products, services (net ofvalue-added tax, excise taxes and similar payments)................ 2010 69,512.7 39,879.6Cost of goods, products, services sold ...................................... 2020 27,253.2 20,499.7

Gross Margin .............................................................................. 2029 42,259.5 19,379.9

Selling expenses............................................................................ 2030 6,357.8 3,177.7Administrative expenses .............................................................. 2040 1,927.9 721.2

Operating revenue (lines (010-020-030-040))........................ 2050 33,973.8 15,481.0

Operating revenue and expensesInterest revenue ............................................................................ 2060 241.7 94.4Interest expense ............................................................................ 2070 762.6 126.9Equity share in affiliates ............................................................ 2080 295.0 25.2Other operating revenue ............................................................ 2090 53,318.9 20,144.1Other operating expenses............................................................ 2100 54,687.6 22,537.4

Non-operating revenue and expensesNon-operating revenue................................................................ 2120 3,400.7 1,592.8Non-operating expenses .............................................................. 2130 4,902.5 2,293.8

Capitalised income .................................................................... 555.0 203.2

Profit (loss) before taxes (lines (050+060-070+080+090-100+120-130)).............................................................................. 2140 31,432.4 12,582.6Income tax and other similar levies ........................................ 2150 7,422.8 3,800.2Income (loss) from ordinary activities (140-150).................. 2160 24,009.6 8,782.4Minority interest.......................................................................... 2165 5,032.3 642.9Extraordinary revenue and expensesExtraordinary revenue ................................................................ 2170 0.8 –Extraordinary expenses .............................................................. 2180 0.7 –

Net profit (retained earnings (deficit) for the currentreporting period) (lines (160+170-180)) ................................ 2190 18,977.4 8,139.5

A-6

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

DISCLOSURE OF CERTAIN PROFIT AND LOSS ITEMS

Current reporting periodSame period ofprevious year

CodeLine Income Loss Income Loss

Fines and penalties recognised orsupported by the appropriate court(arbitration) decision ................................ 2210 53.8 55.9 90.7 144.3Profit (loss) of the previous periods........ 2220 558.2 786.3 1,089.9 1003.2Indemnification against nonfulfillment orpartial fulfillment of obligations .............. 2230 – – – –Translation gains/(losses).......................... 2240 953.5 1,282.1 1,245.4 3293.5Inventory impairment as of period-end .. 2250 – – – –Write-off of accounts payable/receivablewith expired period of limitation ............ 2260 90.1 282.4 173.9 529.4

A-7

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYas of 1 January 2000 and 2001

Company: OJSC Oil Company RosneftTaxpayer’s identification number: 7706107510Form of incorporation: OJSC (open joint-stock company)All amounts are in Rb mln.Address:Sofiyskaya nab., 26/1, Moscow 113035, Russia

CodeLine

Balance asof the

beginningof the

reportingyear

Proceedsin the

reportingyear

Spent in thereporting

year

Balance asof the end

of thereporting

year

Shareholders’ Equity ................................ 3010 90.2 90.2Share capital .............................................. 3020 6,845.0 13,275.5 7,764.7 12,355.8Additional capital ...................................... 3030 310.9 857.8 317.7 851.0Reserve fund .............................................. 3040 (2,923.7) – (526.7) (2,397)Uncovered loss of prior years .................. 3050 3,792.2 – 3,624.7 167.5Retained earnings of prior years.............. 3051 – (75.4) – (75.4)Uncovered loss of the reporting year ...... 3052 – 19,052.8 – 19,052.8Retained earnings of the reporting year.. 3053 – 6,813.1 763.8 6,049.3Accumulation fund .................................... 3054 82.1 423.9 404.8 101.2Consumption fund .................................... 3055 1,110.3 13,207.5 7,152.6 7,165.2Working capital replenishment fund ...... 3060 475.0 905.3 546.7 833.6Social fund.................................................. 3072 – – 17,234.9 (17,234.9)Appropriation of retained earnings(funds) for 2000 ........................................ 3073 – – – –Total Shareholders’ Equity .................... 3079 9,782.0 54,460.5 37,283.2 26,959.3

Accruals ...................................................... 3080 243.3 1,479.8 543.7 1,179.4Revaluation reserves, total 3090 438.3 1,063.3 1,272.4 229.2

Changes in equity

CodeLine

Reportingyear

Prioryear*

Balance as of the beginning of the reporting period ............................ 3100 9,782.0 10,574.7Increase in capital ...................................................................................... 3110 37,585.6 8,456.7including: additional issue of shares ...................................................... 3111 – –assets revaluation ...................................................................................... 3112 – –assets additions .......................................................................................... 3113 5,510.8 –reorganisation (merger. acquisitions)...................................................... 3114 – –revenue items directly charged under RAR to increase inshare capital .............................................................................................. 3115 32,074.8 8,456.7Capital reduction, gross ............................................................................ 3120 20,408.3 9,249.4including: due to a reduction of par value ............................................ 3121 – –due to a reduction in number of shares ................................................ 3122 – –due to reorganisation (subdivision. divestiture).................................... 3123 – –revenue items directly charged under RAR to decrease inshare capital .............................................................................................. 3124 20,408.3 9,249.4Balance as of the end of the reporting period ...................................... 3130 26,959.3 9,782.0

* – Unaudited.

A-8

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

SUPPLEMENTAL INFORMATION

As of 1 January

CodeLine 2000 2001

Net assets ...................................................................................... 3150 16,922.4 37,991.4

From the budget From extrabudgetary funds

reportingyear prior year*

reportingyear prior year*

Allocated by:expense lines of ordinary business ........ 3160 103.4 28.3 167.5 86.7including: 3161Research and development ...................... 3162 26.3 18.8 164.6 86.7Capital investments in non-current assets 3170 591.2 191.3 277.4 106.3

* – Unaudited.

A-9

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

CONSOLIDATED STATEMENT OF CASH FLOWSas of 1 January 2001

Company: OJSC Oil Company RosneftTaxpayer’s identification number: 7706107510Form of incorporation: OJSC (open joint-stock company)All amounts are in Rb mln.Address:Sofiyskaya nab., 26/1, Moscow 113035, Russia

CodeLine Amount

operatingactivities

Includinginvestingactivities

financingactivities

Cash – balance as of the beginning of year .. 4010 1,286.3Cash proceeds, gross .......................................... 4020 139,103.7 133,583.7 832.4 4,687.6including:sale of goods, products and services 4030 63,850.3 63,850.3 – –sale of fixed assets and other assets ................ 4040 12,844.7 11,326.7 317.7 1,200.3advances received from clients.......................... 4050 6,142.8 6,142.8 – –budget allocations and special purposefinancing .............................................................. 4060 460.4 104.7 355.3 0.4donations .............................................................. 4070 – – – –loans received ...................................................... 4080 28,332.5 25,150.0 32.3 3,150.2borrowings received ............................................ 4085 414.1 318.2 95.9 –dividends and interest from investments ........ 4090 339.4 – 4.5 334.9other proceeds .................................................... 4110 26,719.5 26,691.0 26.6 1.9Cash paid, gross .................................................. 4120 138,459.1 118,403.9 9,900.8 10,154.4including:purchase of goods, products, services .............. 4130 40,283.1 37,723.8 2,550.8 8.5salaries and wages .............................................. 4140 4,357.4 4,353.0 4.4 –contributions to governmental non-budgetaryfunds ...................................................................... 4150 1,697.0 1,697.0 – –loans to personnel .............................................. 4160 318.1 317.4 0.7 –advances paid ...................................................... 4170 3,650.9 3,639.5 11.4 –shared construction funding .............................. 4180 622.6 0.5 622.1 –purchase of machinery, equipment andvehicles.................................................................. 4190 4,841.6 37.4 4,804.2 –investments .......................................................... 4200 5,789.2 274.9 968.0 4,546.3dividends and interest on securities ................ 4210 454.6 – 97.8 356.6taxes payable........................................................ 4220 14,711.8 14,711.8 – –interest and principal amounts on credits andloans received ...................................................... 4230 19,758.2 16,895.3 790.0 2,072.9other payments. transfers. etc. .......................... 4250 41,974.6 38,753.3 51.5 3,169.8Cash – balance as of the end of year .............. 4260 1,930.9 – – –

Reference:proceeds in cash from line 020 (except line 100)– total .................................................................... 4270 5,142.5 – – –including settlement operations:with legal entities ................................................ 4280 639.7 – – –with individuals.................................................... 4290 4,502.9 – – –including using:cash registers ........................................................ 4291 4,372.0 – – –registered high-security forms .......................... 4292 130.9 – – –Petty cash:received from a bank to the company ............ 4295 3,954.3 – – –delivered to the bank from the company........ 4296 1,146.3

A-10

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

CONSOLIDATED APPENDIXTO THE BALANCE SHEETS

as of 1 January 2001

Company: OJSC Rosneft Oil CompanyLegal form: open joint stock companyGovernment property management bodyAll amounts in Rb mln.

1. MOVEMENT OF BORROWED FUNDS

Index Code Line

Balance-beginning

of year Received PaidBalance –

end of year

Long-term loans, .............................. 5110 6,913.4 1,826.0 3,908.1 4,831.3incl. Overdue.................................. 5111 683.7 160.4 417.6 426.5

Long-term borrowings, .................... 5120 275.7 156.9 432.6 –incl. Overdue.................................. 5121 – – – -

Short-term loans, .............................. 5130 3,301.5 7,822.5 2,372.5 8,751.5incl. Overdue.................................. 5131 1.4 – 1.4 –

Short-term borrowings, .................... 5140 439.5 7,462.1 6,780.2 1,121.4incl. Overdue.................................. 5141 21.7 – 2.5 19.2

2. ACCOUNTS PAYABLE AND RECEIVABLE

Index Code Line

Balance-beginning

of yearLiabilities

arisenLiabilities

settledBalance –

end of year

Accounts receivable:short-term ...................................... 5210 8,206.1 173,213.5 172,916.9 8,502.7incl. overdue .................................. 5211 2,243.4 12,428.4 13,670.8 1,001.0incl. for the term of over

3 months .................................... 5212 1,763.9 3,072.0 4,075.7 760.2long-term ........................................ 5220 140.8 141.9 91.2 191.5incl. overdue .................................. 5221 117.3 10.6 72.6 55.3incl. for the term of over

3 months .................................... 5222 62.7 2.0 20.4 44.3in line 220 accounts receivable

with payment expected in over12 months after the reportingdate .............................................. 5223 71.0 122.2 27.7 165.5

Accounts payable:short-term ...................................... 5230 8,913.3 121,024.6 121,160.9 8,777.0incl. overdue .................................. 5231 1,729.6 4,575.5 5,261.2 1,043.9incl. for the term of over

3 months .................................... 5232 1,366.0 1,966.6 2,722.1 610.5long-term ........................................ 5240 – – – –incl. overdue .................................. 5241 – – – –incl. for the term of over

3 months .................................... 5242 – – – –in line 220 accounts payable with

payment expected in over 12months after the reporting date 5243 – – – –

Guarantees:received .......................................... 5250 1,163.3 2,089.7 1,483.2 1,769.8incl. form third parties.................. 5251 1.3 12.7 6.2 7.8given ................................................ 5260 3,739.2 16,565.7 2,732.4 17,572.5incl. to third parties ...................... 5261 41.7 656.9 48.1 650.5

A-11

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

REFERENCE INFORMATION – SECTION 2

Index Code Line

Balance-beginning

of yearLiabilities

arisenLiabilities

settledBalance –

end of year

(1) Promissory notesPromissory notes given .................... 5262 4.1 87.5 20.3 71.3

incl. Overdue.................................. 5263 3.2 – 3.2 –Promissory notes received .............. 5264 10.4 252.8 51.7 211.5

Incl. Overdue ................................ 5265 2.6 – 1.0 1.6

3. DEPRECIABLE ASSETS

Index Code Line

Balance-beginning

of year Received DisposedBalance –

end of year

1. Intangible assetsRights to intellectual (industrial)

property .......................................... 5310 83.0 30.3 4.4 108.9including rights under author’sand other contracts on scientific,literary and art items as well asallied rights items, computerprograms, databases, etc............... 5311 12.9 27.5 – 40.4rights under patents of invention,industrial items, collectibles,trademarks and service marks .... 5312 70.1 2.8 3.9 69.0rights to know-how ...................... 5313 – – – –

Rights to use of natural resources.. 5320 3.0 6.7 1.8 7.9Organisational expenditures ............ 5330 – – – –Goodwill ............................................ 5340 – 1,387.2 – 1,387.2Other .................................................. 5349 37.4 55.6 27.8 65.2Total (lines 310+320+330+340+349) 5350 123.4 1,479.8 34.0 1,569.2

2. Fixed assetsLand and natural resources ............ 5360 9.1 – – 9.1Buildings ............................................ 5361 2,626.6 1,191.4 472.5 3,345.5Constructions .................................... 5362 26,188.9 5,068.7 2,807.6 28,450.0Machinery and equipment .............. 5363 6,383.1 2,950.6 922.8 8,410.9Vehicles .............................................. 5364 1,483.1 732.8 152.6 2,063.3Industrial equipment ........................ 5365 71.1 142.5 15.8 197.8Livestock ............................................ 5366 2.3 – – 2.3Productive livestock .......................... 5367 – – – –Perennial wood 5368 – – – -Other fixed assets .............................. 5369 1,069.2 308.9 117.4 1,260.7Total (lines 360 – 369)...................... 5370 37,833.4 10,394.9 4,488.7 43,739.6

including:production assets .......................... 5371 37,243.4 10,215.7 4,393.2 43,065.9non-production assets .................. 5372 590.0 179.2 95.5 673.7

A-12

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

REFERENCE INFORMATION – SECTION 3

Index Code LineBeginning

of year* End of year

Line 371, items 3 and 6:leased assets – total:...................................................................... 5387 2,335.6 3,123.0

including:buildings.......................................................................................... 5388 97.2 194.8constructions .................................................................................. 5389 765.2 374.5assets in conservation .................................................................. 5392 4,566.3 4,319.6

Depreciation of depreciable assets:intangible assets ............................................................................ 5393 29.9 55.4fixed assets – total ........................................................................ 5394 21,873.2 22,543.0

incl.:buildings and constructions.......................................................... 5395 16,694.9 16,943.5machinery, equipment, vehicles .................................................. 5396 4,415.7 4,573.8other ................................................................................................ 5397 318.9 372.1investments in long-term assets .................................................. 5398 – –

REFERENCE INFORMATION:Indexing – revaluation of fixed assets:initial (replacement) cost ............................................................ 5401 587.5 –depreciation.................................................................................... 5402 265.5 15.9Pledged assets ................................................................................ 5403 3,565.4 3,153.0

Depreciable assets currently not depreciated – total .................. 5404 5,591.0 10,803.1including:intangible assets ............................................................................ 5405 17.2 35.3fixed assets...................................................................................... 5406 5,573.8 10,768.1

*unaudited

4 LONG-TERM INVESTMENTS

Index Code Line

Balance-beginning

of year Accrued UsedBalance –

end of year

The Company’s own funds – total .. 5410 1,021.5 14,835.9 15,396.1 461.3incl.:retained profit (accumulationfund) ................................................ 5411 512.2 12,921.1 13,085.5 347.8Depreciation .................................. 5412 509.3 1,914.3 2,310.6 113.0

Raised funds – total .......................... 5420 71.1 3,396.2 3,225.6 241.7including:bank loans ...................................... 5421 34.9 177.4 147.1 65.2loans form other parties .............. 5422 23.1 1,446.9 1,388.1 81.9participating interest inconstruction .................................... 5423 13.1 76.7 56.4 33.4budget funds .................................. 5424 – 591.2 591.2 –non-budget funds .......................... 5425 – 154.8 154.8 –other ................................................ 5426 – 949.2 888.0 61.2

Own and raised funds, total(lines 410 + 420) ............................ 5430 1,092.6 18,232.1 18,621.7 703.0

REFERENCE INFORMATION:Construction in progress .................. 5440 2,844.3 18,904.1 12,656.7 9,091.7Investments in subsidiaries .............. 5450 91.0 2,640.1 2,709.6 21.5Investments in affiliates.................... 5460 112.7 895.8 2.0 1,006.5

A-13

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

5 INVESTMENTSLong-term Short-term

Index Code LineBeginning

of year*end of

yearBeginning

of year*end of

year

Shares .................................................. 5510 496.1 1,201.0 2.8 1,298.2Notes and other debt securities ...... 5520 7.1 12.2 1.2 52.6Loans granted .................................... 5530 377.3 344.5 – 344.1Other .................................................. 5540 2,092.5 5,058.8 76.7 1,340.9

*unaudited

6. COMPANY COSTS

Index Code LineReporting

year Prior year*

Materials ............................................................................................ 5610 25,858.9 18,347.1Salaries ................................................................................................ 5620 5,579.9 3,121.4Social costs ........................................................................................ 5630 1,671.1 978.3Depreciation of fixed assets ............................................................ 5640 1,714.6 1,617.5Other costs ........................................................................................ 5650 7,685.9 5,371.2Total .................................................................................................... 5660 42,510.4 29,435.5

Changes of balances increase [+], decrease [-]: work in progress 5670 342.2 819.8prepaid expenses .............................................................................. 5680 710.1 67.7accruals................................................................................................ 5690 936.1 95.9

*unaudited

7. SOCIAL INDICESIndex Code Line Due Spent Transferred

to Social Insurance Funds........................................ 5710 365.7 162.2 198.3to Pension Fund ........................................................ 5720 1,455.8 – 1,453.1to Employment Fund................................................ 5730 80.6 – 80.5medical insurance ...................................................... 5740 180.8 – 218.3deducted to non-governmental pension funds...... 5750 – – –Insurance premiums on optional pensioninsurance contracts.................................................... 5755 0.5 – –Average number of employees .............................. 5760 52,097.0Payments and premiums other than those relatedto production, work, services .................................. 5770 431.4Profit on shares and contributions to companyproperty ...................................................................... 5780 410.0

Chief Executive Officer A. I. Baranovsky /signed/Chief Accountant S. N. Kim /signed/

A-14

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

These footnotes are an integral part of the statutory accounting reports of OJSC Oil CompanyRosneft prepared in compliance with Russian Accounting Regulations (‘‘RAR’’).

1. Background Information

The Company

OJSC Rosneft Oil Company (the ‘‘Company’’ or ‘‘Rosneft’’) was incorporated as an open jointstock company on 7 December 1995. All assets and liabilities previously managed by the enterprise‘‘Rosneft’’ were transferred to the Company at their book value effective on that date together with theGovernment of the Russian Federation’s (the ‘‘State’’) ownership in other privatised oil and gascompanies. The transfer of assets and liabilities was made in accordance with Resolution No. 971, ‘‘Onthe transformation of Rosneft into an open joint stock company ‘‘Oil Company Rosneft’’, dated29 September 1995. Such transfers represent a reorganisation of assets under the common control of theState and, accordingly, are accounted for at their book value. As of 1 January 2001, the State maintains a100% ownership interest in Rosneft.

Description of Business

Primary activities of the Company and its subsidiaries (hereinafter ‘‘the Group’’) comprise:

. Oil and gas exploration and prospecting

. Oil and gas production and refining

. Sales of oil, gas and petroleum products

. Investment activity

2. Performance Indicators

In 2000 the Company reported an increase in revenues from the sales of crude oil and petroleumproducts primarily due to crude and products price increases. Operating income was Rb33,973.8 million.

In 2000 the Company produced 13.1 million tons of oil and 5.6 billion cubic meters of gas, whichcomprised 107.7% and 104.8% compared to 1999, respectively.

The Company invested and utilised Rb13.73 billion. Financing was provided out of the Company’sretained earnings.

The Company put into operation 305 new oil wells, which allowed the Company to expandproduction of oil and associated gas.

3. Summary of Significant Accounting Policies and Methods of Preparation of Accounting Reports

Basis of Accounting

The consolidated statutory accounting reports of the Company have been prepared in compliancewith the Regulations for Accounting and Reporting in the Russian Federation enacted by the Decree ofthe Ministry of Finance of the Russian Federation #34n of 29 July 1998 and the Regulations for theStatutory Accounting Reports of Organisations (RAR 4/96) enacted by the Decree of the Ministry ofFinance of the Russian Federation #10 of 8 February 1996.

Methods of Preparation of Consolidated Accounting Reports

The consolidated accounting reports of the Company include the Company’s consolidated balancesheets, consolidated statements of profit and loss and the related footnotes prepared in compliance withthe Guidelines for Preparation of the Consolidated Statutory Accounting Reports enacted by the Decreeof the Ministry of Finance of the Russian Federation #112 of 30 December 1996.

These Guidelines set forth a procedure for consolidation of statutory accounting reports byorganisations having subsidiaries and related companies. It mandates, among other things, exclusion of allinter-group transactions and inclusion of assets, liabilities and financial results of the entities in which theCompany has 100% or less interest.

A number of subsidiaries have been excluded from consolidation due to their insignificance to theGroup’s overall financial position and results of operations.

A-15

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

Principles of Consolidation

The operations of all significant subsidiaries, in which the Company owns more than 50% of thecommon voting shares, are included in the consolidated statutory accounting reports. All significant inter-group transactions have been eliminated in consolidation. Investments in other significant entities inwhich the Company owns between 20% and 50% are accounted for under the equity method ofaccounting. Investments in other companies are accounted for at cost and adjusted for estimatedimpairment.

In 2000 the Company focused on strengthening its control over the Group entities and investees. Inthe reporting year the Company increased its equity share in the following subsidiaries: OJSC Rosneft-Sakhalinmorneftegas, OJSC Rosneft-Stavropolneftegas, OJSC Moscow OPZ Nefteproduct, OJSCRosneft-Karachaevo-Cherkessknefteproduct, OJSC Rosneft-Severnefteservice. As a result of theabove increase in shareholdings the Company reflected goodwill of Rb1,387.2 million in theconsolidated financial statements for 2000.

Where RAR does not provide complete instructions on consolidation methodology the Companyutilises a consolidation approach consistent with International Accounting Standards.

Subsidiaries and Related Companies Included in Consolidation

The table below provides a list of Rosneft subsidiaries included into the consolidated accountingreports with the Company equity share as of 1 January 2001.

Name Nature of Business Sharestotal,

%

Votingshares,

%

Exploration and productionOJSC Rosneft-Purneftegas .......................................... Oil and gas production 38.0 50.67OJSC Rosneft-Sakhalinmorneftegas .......................... Oil and gas production 57.2 76.20OJSC Rosneft-Krasnodarneftegas .............................. Oil and gas production 38.0 38.0OJSC Rosneft-Stavropolneftegas................................ Oil and gas production 45.53 57.29OJSC Rosneft-Dagneft ................................................ Oil and gas production 38.0 50.67OJSC Rosneft-Termneft .............................................. Oil and gas production 38.0 50.67CJSC Rosneft-Sakhalin ................................................ Exploration 80.0 80.0

RefineriesOJSC Rosneft-Tuapse Refinery.................................. Petroleum refining 38.0 50.67OJSC Rosneft-Komsomolsky Refinery...................... Petroleum refining 38.0 50.67OJSC MOPZ Nefteproduct ........................................ Petroleum refining 65.42 87.23

Petroleum marketing and distributionOJSC ARTAG .............................................................. Marketing and distribution 38.0 50.67OJSC Rosneft – Arkhangelsknefteproduct .............. Marketing and distribution 38.0 50.67OJSC Rosneft-Kabbalknefteproduct.......................... Marketing and distribution 38.0 50.67OJSC Rosneft-Kubannefteproduct ............................ Marketing and distribution 38.0 50.67OJSC Rosneft-Karachaevo-Cherkessknefteproduct Marketing and distribution 85.99 87.46OJSC Rosneft-Kurgannefteproduct .......................... Marketing and distribution 38.0 50.67OJSC Rosneft-Murmansknefteproduct...................... Marketing and distribution 38.0 50.67OJSC Rosneft-Nakhodkanefteproduct ...................... Marketing and distribution 38.0 50.67OJSC Rosneft-Smolensknefteproduct........................ Marketing and distribution 38.0 50.67OJSC Rosneft-Tuapsenefteproduct............................ Marketing and distribution 38.0 50.67OJSC Rosneft-Yamalnefteproduct ............................ Marketing and distribution 38.0 50.67OJSC Rosneft-Severnefteservis .................................. Marketing and distribution 72.62 72.62LLC Krasnodar petroleum tank storage .................. Marketing and distribution 100 100OJSC Rosneft Altainefteproduct................................ Marketing and distribution 57.07 57.07

A-16

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

Name Nature of BusinessShares

total, %

Votingshares,

%

OtherOJSC Rosneft-Neftegazsnab ...................................... Petroleum equipment supply 38.0 50.67CJSC Vostokshelf.......................................................... International investment

projects100.0 100.0

LLC RN Perspektiva .................................................... P&E prospective analysis 99.0 99.0LLC SK Neftepolis ...................................................... Insurance 99.0 99.0LLC RN Teleport ........................................................ Information systems

implementation99.0 99.0

OJSC Rosneftrans ........................................................ Transportation services 95.0 95.0OJSC Rosneft-Neftecomplect .................................... Petroleum equipment supply 38.0 50.67OJSC Rosneftimpex NK Rosneft .............................. Crude and products trading 38.0 50.67OJSC CKB ASU Nefteproduct .................................. Software support 38.0 50.67

Related PartiesOJSC Arkhangelskgeoldobycha..................................(statutory capital Rb 1.9 million)

Oil and gas production 25.5 25.5

LLC Polar Lights ..........................................................(statutory capital Rb 8.8 million)

Oil and gas production 20.0 20.0

All the above companies are legal entities registered in the Russian Federation.

Significant Accounting Policies

In 2000 the Company and its subsidiaries recognised revenue from sales of products (services) onaccruals basis for accounting purposes.

Subsidiaries were permitted to recognise revenue for tax purposes using either the accruals or cashmethod. In 2000 no changes in the accounting policy were made compared to 1999.

Assets and Liabilities Denominated in Foreign Currencies

Foreign currencies, in particular the U.S. dollar, play a significant role in the underlying economicsof many business transactions in Russia.

The following table summarises the exchange rate of the rouble to 1 US dollar (‘‘US$’’):

DateExchange

Rate

As of 31 December 2000.................................................................................................................. 28.16As of 31 December 1999.................................................................................................................. 27.00As of 31 December 1998.................................................................................................................. 20.65

Exchange gains/losses resulting from the transactions with the Company’s assets and liabilities andtheir translation as of the reporting date were reflected in the profit and loss account.

4. Property, Plant and Equipment

Property, plant and equipment (‘‘PP&E’’) are stated at revalued historical cost net of depreciationaccumulated during their time in service.

PP&E depreciation is accumulated based on depreciation rates adopted in accordance with theDecree of the Council of Ministers No. 1072 of 22 October 1990. No depreciation of construction-in-progress is provided prior to commencement of operations.

PP&E carrying value as of 1 January 2001 was Rb 21,196.6 million net of accumulated depreciation.

A-17

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

5. Intangible Assets

Intangible assets are stated at historical cost.

The carrying value of intangible assets as of the reporting date was Rb 1,513.8 million.

Intangible assets reflect cost of licenses, software products and other intangible assets, includinggoodwill in the amount of Rb 1,387.2 million.

6. Inventories

Inventories as of 31 December 2000 were Rb 8,319.5 million.

7. Long-term Investments

Equity and other long-term investments of the Company as of 1 January 2001 were Rb 6,616.5million.

Sakhalin 1 Profit Sharing Agreement

In June 1995, an agreement for the joint exploration and development of the Chayvo, Odoptu andArkutun-Dagi oil, gas and condensate fields offshore Sakhalin Island, Russia was signed between ExxonNeftegas Limited (30%), Sakhalin Oil Development Corporation Company Limited (30%), CJSCSakhalinmorneftegas-Shelf, a wholly-owned subsidiary of OJSC Rosneft-Sakhalinmorneftegas (23%) andOJSC Rosneft-Sakhalin, a subsidiary of the Company (17%). Exxon Neftegas Limited acts as theoperator.

The total amount of the Company’s investments into Sakhalin 1 during 2000 was Rb685.9 million.

LLC Polar Lights Company (‘‘PLC’’)

PLC is a limited liability company owned 50% by Conoco Timan-Pechora Limited, 30% by OJSCArkhangelskgeoldobycha and 20% by the Company. PLC’s primary activity has been the development ofthe Ardalin field, an oil field in the Timan-Pechora Basin located 125 kilometres south of the Barents Seaabove the Arctic Circle. Development work on the Ardalin Field began in late 1992 and first oil wasproduced in 1994. Investments into LLC Polar Lights Company are accounted for by the equity method.

LLC Geoilbent

The Company owns 33% in LLC Geoilbent, a limited liability partnership exploring and developingoil and gas fields, as of 31 December 2000 and 1999.

Nefteprombank

As of 1 January 2001 the Company owned 25.99% of Nefteprombank.

Caspian Pipeline Consortium

On 6 February 1997 the Company, through Rosneft-Shell Caspian Ventures Ltd., a joint venture,where the Company has 51% ownership, signed an agreement with eight oil and gas companies and stateauthorities of Russia and Kazakhstan for assessing, financing, construction and use of an oil pipeline fromWestern Kazakhstan oil fields to Novorossiysk port, Russia under the name of Caspian PipelineConsortium (‘‘CPC’’). Rosneft-Shell has a 7.5% interest in the CPC.

The agreement between Rosneft and Shell-Caspian is signed in the form of an arrangementwhereby Shell-Caspian agreed to defray the Company’s related costs of participation in the CPC and isentitled to all the revenue until all costs have been recovered, after which time Rosneft will share in bothcosts and revenues. The Company records its share of revenue, operating expenses and subsequentdevelopment costs only after payout from the CPC occurs (i.e. when Shell-Caspian recoups its costs).

In 2000 the CPC’s primary activity focused on construction of the export pipeline system. CPCcontinued its practice of inviting bidders for the project design and procurement and placed major supplycontracts with the winners. The pipeline will be completed within the second half of 2001.

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Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

8. Short-term Loans and Long-term Debt

Short-term loans from banks and other organisations as of 1 January 2001 amounted to Rb 9,872.9million.

The hard currency denominated loans bear interest at a range of 6.0% to 12.0% for the year ended31 December 2000. The rouble denominated loans bear interest at a range of 5.0% to 30.0% for the yearended 31 December 2000.

Long-term debt as of 1 Janaury 2001 amounted to Rb 4,831.4 million.

Debt Restructuring

The Company’s subsidiary OJSC Rosneft-Purneftegas entered into a restructuring agreement withcertain banks and other short-term creditors on 4 February 1999. This agreement rescheduled OJSCRosneft-Purneftegas’ payments over the period until the year 2006.

During 2000, the Company and its subsidiaries OJSC Rosneft-Sakhalinmorneftegas and OJSCRosneft-Stavropolneftegas signed a restructuring agreement with one of its banks and agreed a newextended time frame for the repayment of the remaining amounts including all future interest payments.

9. Income Taxes

The Company is not subject to taxation on a consolidated basis. Current income taxes are providedon the accounting profit as determined under RAR at a rate of 30% for the year ended 31 December 2000and 35% for the first quarter of 1999 and 30% for the remainder of the year ended 31 December 1999,after adjustments for certain items which are not deductible for taxation purposes, and afterconsideration of tax allowances.

Legally, tax declarations remain open and subject to inspection for a period of three years.Management believes that the Company is in compliance with the tax laws affecting its operations. Thefact that a period has been reviewed does not close that period, or any tax declaration applicable to thatperiod, from further review during the three-year period.

As of 1 January 2001 the Group’s outstanding tax payables were Rb 2,056.3 million.

10. Disclosure of Certain Balance Sheet Items

As of the reporting date consolidated accounts payable amounted to Rb 8,777 million. Accountspayable are primarily denominated in Russian roubles and are of a short-term nature.

Receivables from major trade debtors may in some instances be offset against trade payables. Tofurther mitigate risks of nonpayments the Company entered into a number of barter agreements whereinliabilities are repaid by either goods or services employed in production, or promissory notes andgovernment securities.

As of the reporting date consolidated trade receivables amounted to Rb 8,694.2 million. Themanagement provides for all amounts whose collection seems doubtful. In the consolidated balancesheets accounts receivable are stated net of provision for doubtful accounts.

Management provides an allowance on amounts due from commercial and industrial customers,principally based on the overall delinquency in customer payments in the previous periods. Tradeaccounts receivable are primarily denominated in roubles and are of a short-term nature.

11. Provision for Doubtful Accounts

Management is of the opinion that receivables are liquid and collectible and where necessary aprovision for doubtful accounts is created. As described in Note 7, the Company has investments in anumber of Russian entities carried at cost. As these financial instruments lack market quotation,determining their fair value would require significant additional expenses.

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Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

12. Shareholders’ Equity

Changes in Shareholders’ Equity

The Company shareholders’ equity comprises OJSC Oil Company Rosneft share capital and equityshares in the Company’s subsidiaries.

The statutory capital in 2000 remained unchanged in the amount Rb 90.2 million. The number ofcommon shares was 88,733,312, preferred shares – 1,446,047.

Changes in Reserves and Paid-in Capital

Equity also includes amounts of paid-in and reserve capital. The Groups reserve capital is aconsolidated total of reserve capitals of the Group companies provided in compliance with their statutorydocuments.

The Group’s paid-in capital is a consolidated total of paid-in capitals of the Group companies.

13. Distribution of Dividends

The share capital is the stated capital of the Company according to statutory documents. Eachcommon share gives its owner one vote at the shareholders meeting. Dividends are proposed by theBoard of Directors and approved at the annual general shareholders meeting.

As of 1 January 2001, 100% of the Company’s shares were in the government ownership.

On 7 June 2001, at the annual general shareholders’ meeting, dividends on common shares wereapproved in the amount of Rb 800 million.

14. Minority Interest in Subsidiary Companies

Minority interest in the consolidated balance sheets reflects minority owners’ percentage share ofshareholders’ capital in subsidiaries. The minority interest is calculated based on the shareholders’ equityof each subsidiary as determined under RAR.

15. Non-Operating Income and Expenses

Non-operating income includes:– Accounts payable with the expired period of limitation;– Fines and penalties received under business agreements;– Previous periods income realised during the current year;– Exchange gains.

Non-operating expenses include:– Accounts receivable with the expired period of limitation;– Fines and penalties paid under business agreements;– Previous periods losses realised during the current year;– Exchange and translation losses.

16. Environmental Matters

Companies operating in the oil and gas industry are continuously subject to environmental risk.Management is of the opinion that the Company has met the legal requirements concerningenvironmental matters, and therefore believes that the Company does not have any material currentenvironmental liabilities.

17. Subsequent Events

On 10 February 2001 the Company’s subsidiary, OJSC Rosneft-Sakhalin, together with CJSCSakhalinmorneftegas-Shelf (‘‘SMNG-Shelf’’), the subsidiary of OJSC Rosneft-Sakhalinmorneftegassigned an agreement to sell in total a 20% stake in the PSA 1 project to the Indian state owned oilcompany, ONGC Videsh Limited. This deal will be closed when all matters are agreed upon with federaland local authorities and the purchaser.

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Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

On 24 April 2001 the extraordinary annual general meeting of the shareholders of OJSC Rosneft-Krasnodarneftegas elected the new OJSC Rosneft-Krasnodarneftegas Board of Directors with themajority of seats held by Rosneft representatives. On 31 May 2001 the annual general meeting ofshareholders of OJSC Rosneft-Krasnodarneftegas made a decision to pay dividends on preferred sharesfor 2000 in full.

On 30 January 2001 RVO Zarubezhneft filed a lawsuit against OJSC Rosneft-Sakhalinmorneftegas,the Company’s subsidiary, for the amount of US$ 14.5 million. On 3 January 2001 Jagson Internationalfiled a lawsuit with International Arbitration Commission against CJSC Sakhalinmorneftegaz-Shelf, theOJSC Rosneft-Sakhalinmorneftegas’s subsidiary for the amount of US$ 11.6 million. Management is ofthe opinion that decisions as a result of both claims will be in favour of the company.

18. Commitments and Contingencies

Capital projects for Exploration and Development of Production Facilities

The Company and its subsidiaries are engaged in continuous capital projects for exploration anddevelopment of production facilities. The Company plans to finance a significant portion of these projectsinternally. At the same time, the Company is looking for external sources of financing. It is the opinion ofmanagement that the Company will be able to obtain all necessary financing to complete the existing andplanned capital projects.

Bankrupt Entities

The Company holds controlling interests in certain entities that are subject to bankruptcyproceedings. Management believes that there will be no additional liability to the Group to fundunsettled creditor claims.

Litigation

The Company acts as claimant or defendant in various litigation proceedings connected with itsbusiness activity. Although the outcome of the above proceedings could not be defined at this point intime, management is of the opinion that any potential obligations that may arise would unlikely have anymaterial effect on the Company’s financial position and results of operations.

Insurance Matters

In 2000, the Company initiated an extensive insurance programme to provide coverage of its assets,goods, transportation, building and construction works.

19. Commodity Pricing

Prior to 1995, the Russian government controlled oil prices on the domestic market and such priceswere significantly lower than the world prices. In 1995 the government abandoned state control overcommodity pricing. During 2000 the Group’s selling prices for crude and oil products on the domesticmarket were approximately 32% and 60% of the world prices, respectively (during 1999 37% and 79%,respectively).

20. Contingencies

As of the reporting date there might be circumstances that given one or several outside factorscould generate cash for the Company. For instance, chances are high (up to 100%) that the outcome ofthe pending litigation in which the Company acts as a claimant and decisions anticipated in thesubsequent periods will be in favour of the Company.

As of 31 December 2000 OJSC Rosneft-Sakhalinmorneftegas, had outstanding receivables fromOJSC InterTEKbank in the amount of Rb 173 million. OJSC InterTEKbank is currently in liquidation.The Company filed writs of execution with the receiver manager to recover the debt. The liquidationprocess is not yet finished.

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Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

In 2000 an amicable agreement was reached between GP VO Mashinoimport and OJSC Rosneft-Sakhalinmorneftegas, the Company’s subsidiary, in connection with the settlement of the former’s debt inthe amount of US$ 5.9 million. The debt was written off in 1999.

As of the reporting date the Company was being sued by MMG for the amount of US$ 9.8 million,final outcome of which is not possible to determine at present. However, the management is of theopinion that the decision on this case will be in favour of the company.

As a result of an audit performed by Rosreserve a penalty in the amount of Rb 349.5 million wasimposed on OJSC Rosneft-Altainefteproduct, the Company’s subsidiary. The Company challenged thisdecision as illegal and believes that an arbitration court will decide in its favour.

As of 1 January 2001 the Company did not have any disputes with its clients in connection with thelate deliveries and demurrages.

21. Balance Sheet Structure Analysis.

As of 1 January 2001 the balance sheet structure is characterised by the following indices:

Index* Norm

Current liquidity ratio .......................................................................... 1.27 > 2

Net assets................................................................................................ Rb 37,991.4million

In excess of thestatutory capital

* Indices are calculated based on the government-approved system for balance sheet analysis.

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Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

22. Segment Information (Rb mln)

Under RAR #12/2000 operating segment information is presented with consideration to generaleconomic, currency, credit and pricing risks associated with an organisation’s activities.

Sales (net)Operating

profit

Oil production............................................................................................................ 32,657.6 9,159.9Refining ...................................................................................................................... 3,673.5 801.5Oil products sales ...................................................................................................... 9,361.2 1,665.6Other* ........................................................................................................................ 23,820.4 22,346.8

Total ............................................................................................................................ 69,512.7 33,973.8

AssetsAccounts

Payable

Oil production............................................................................................................ 31,803.0 5,990.9Refining ...................................................................................................................... 2,214.4 506.1Oil products sales ...................................................................................................... 4,503.8 1,243.1Other* ........................................................................................................................ 24,754.6 1,036.9

Total ............................................................................................................................ 63,275.8 8,777.0

Fixed Assets Depreciation

Oil production............................................................................................................ 33,095.2 19,783.7Refining ...................................................................................................................... 1,482.7 674Oil products sales ...................................................................................................... 2,678.4 1,170.1Other* 6,483.3 915.2

Total ............................................................................................................................ 43,739.6 22,543.0

During 2000 the Company exported 52% of its total produced crude oil and up to 40% of its oilproducts.

*‘‘Other’’ includes head office data as well as intersegment transactions and consolidation adjustments.

A-23

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

OJSC Rosneft Oil CompanyFootnotes to the Consolidated Statutory Accounting Reports as of 1 January, 2001

23. OJSC Oil Company Rosneft Board of Directors

Greff German Oskarovich Minister of Economic Development and Trade of the RussianFederation

Gaipov Valeriy Zainulovich Deputy Minister of Energy of the Russian Federation

Gitlin Igor Borisovich Head of Department of the RF Ministry of Energy

Golovka Andrei Vladimirovich Deputy Head of Economic Department of Presidential Administration

Matlashov Ivan Andreevich First Deputy Minister of Energy of the Russian Federation

Malin Vladimir Vladimirovich Chairman of the Russian Property Fund

Mazepin Dmitryi Arkadeevich Deputy Chairman of the Russian Property Fund

Pak Valeryi Anatolievich First Deputy Minister of Resources of the Russian Federation

Renov Eduard Nikolaevich Deputy Chairman of the Supreme Court of Arbitration of the RussianFederation

Riybak Olga Petrovna Head of Fuel Energy Department of the Ministry of Property Relationsof the Russian Federation

Sedov Mikhael Sergeevich Division Head of Fuel Energy Department of the Ministry of PropertyRelations of the Russian Federation

Tsiyganov Andrei GennadievichDeputy Antimonopoly Minister of the Russian Federation

Bogdanchikov SergeiMikhailovich

President of OJSC NK Rosneft

Vice President [signed] A.I. Baranovskyi

Chief Accountant [signed] S.N. Kim

A-24

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

CONSOLIDATED BALANCE SHEETS

as of 1 July 2000 and 2001

Company: OJSC Oil Company RosneftTaxpayer’s identification number: 7706107510Form of incorporation: OJSC (open joint-stock company)All amounts are in Rb mln.Address:Sofiyskaya nab., 26/1, Moscow 113035, Russia

As of 1 July

2000 2001CodeLine

(unaudited)AssetsNon-Current AssetsIntangible assets (04, 05) .......................................................................... 110 113.7 1,457.5

including:patents, licenses, trademarks (service marks), other similar

rights and assets ................................................................................ 111 96.4 69.6organisational costs .............................................................................. 112 – 0.7goodwill .................................................................................................. 113 – 1,387.2

Fixed assets (01, 02, 03) ............................................................................ 120 17,704.8 22,880.0including:land and natural resources .................................................................. 121 9.1 9.1buildings, machinery and equipment.................................................. 122 11,880.0 19,102.1

Construction in progress (07, 08, 16, 61)................................................ 130 4,856.2 11,823.2Investments in fixed assets (03) ................................................................ 135 – -

including:leased out assets .................................................................................. 136 – -assets provided under the project contract ...................................... 137 – -

Long-term investments (06, 82) .............................................................. 140 4,321.0 8,054.2including:investments in subsidiaries .................................................................. 141 37.4 82.2investments in affiliates ........................................................................ 142 135.2 264.6investments in other parties ................................................................ 143 281.5 177.4loans granted for periods over 12 months ........................................ 144 3,293.3 1,833.0other long-term investments................................................................ 145 573.6 5,697.1

Other non-current assets .......................................................................... 150 – -

Total Non-Current Assets........................................................................ 190 26,995.7 44,214.9

Current AssetsInventories.................................................................................................. 210 3,072.9 9,603.8

including:raw materials, supplies and other similar assets (10, 15, 13, 16) .. 211 1,060.3 4,193.8livestock (11).......................................................................................... 212 0.8 0.9work-in-process (20, 21, 23, 29, 30, 36, 44) ...................................... 213 499.8 1,124.8finished goods and goods for re-sale (16, 40, 41) ............................ 214 956.8 2,269.8goods dispatched (45) .......................................................................... 215 11.9 115.7prepaid expenses (31) .......................................................................... 216 499.1 1,647.9other inventories and costs .................................................................. 217 44.2 250.9

Value-added tax receivable (19) .............................................................. 220 1,165.4 2,521.9Receivables (due in over 12 months after the reporting date) ............ 230 76.6 247.8

including:amounts due from clients (62, 76, 82)................................................ 231 42.7 2.8promissory notes receivable (62) ........................................................ 232 – 209.4

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Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

As of 1 July

2000 2001CodeLine

(unaudited)due from subsidiaries and affiliates (78)............................................ 233 – –advances paid (61) ................................................................................ 234 – –other receivables.................................................................................... 235 33.9 35.6

Receivables (due within 12 months after the reporting date) .............. 240 12,859.9 12,575.3including:amounts due from clients (62, 76, 82)................................................ 241 5,170.0 4,551.0notes receivable (62) ............................................................................ 242 33.1 174.5due from subsidiaries and affiliates (78)............................................ 243 33.9 162.6contributions due from shareholders (partners) (75) ...................... 244 – 0.1advances paid (61) ................................................................................ 245 4,260.2 4,135.8other receivables.................................................................................... 246 3,362.6 3,551.3

Short-term investments (56, 58, 82) ........................................................ 250 752.7 4,785.7including:loans granted for terms under 12 months ........................................ 251 548.2 609.6treasury stock ........................................................................................ 252 0.4 –other short-term investments .............................................................. 253 204.1 4,176.1

Cash and cash equivalents: ...................................................................... 260 1,943.3 2,737.4including:petty cash (50) ...................................................................................... 261 2.8 43.9current account (51) ............................................................................ 262 882.6 1,208.3foreign currency accounts (52)............................................................ 263 627.4 892.8other cash and cash equivalents (55, 56, 57) .................................... 264 430.4 592.4

Other current assets .................................................................................. 270 – 314.4

Total Current Assets ................................................................................ 290 19,870.8 32,785.7

TOTAL ASSETS (sum of lines 190+290) ............................................ 300 46,866.5 77,000.7

Shareholders’ Capital and LiabilitiesShareholders’ CapitalShare capital (85) ...................................................................................... 410 90.2 90.2Additional capital (87) .............................................................................. 420 6,514.6 13,968.3Reserve capital (86) .................................................................................. 430 51.7 902.2

including:mandatory provisions............................................................................ 431 0.1 1.1reserves provided under the charter documents 432 51.5 901.1

Social fund (88) ........................................................................................ 440 352.3 921.9Accumulation fund .................................................................................... 445 3,255.8 8,471.2Consumption fund .................................................................................... 446 139.3 119.0Working capital replenishment fund ...................................................... 447 3,165.2 7,008.5Dividends fund .......................................................................................... 448 438.5 –Special purpose financing (96) ................................................................ 450 118.0 –Retained earnings – previous years (88) ................................................ 460 271.3 2,371.0Uncovered loss of previous periods (88) ................................................ 465 (3,469.3) (2,403.9)Retained earnings – reporting year(88) .................................................. 470 7,430.1 4,705.4Deficit – reporting year (88) .................................................................... 475 (25.4) (120.0)Appropriation of retained earnings (funds) for 1999 .......................... 476 – –Appropriation of retained earnings (funds) for 2000 .......................... 477 (6,019.8) (870.9)Appropriation of retained earnings (funds) for 2001 .......................... 478 – (4,543.7)

Total Shareholders’ Capital.................................................................... 490 12,312.5 30,619.2

Minority interest........................................................................................ 500 12,036.3 11,071.8

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Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

As of 1 July

2000 2001CodeLine

(unaudited)

Long-term LiabilitiesLong-term loans and borrowings (92, 95) ............................................ 510 7,237.5 7,127.2

including:bank loans due in over 12 months after the reporting date .......... 511 6,077.0 5,809.5borrowings due in over 12 months after the reporting date .......... 512 1,160.5 1,317.7

Other long-term liabilities ........................................................................ 520 – 787.5

Total Long-term Liabilities .................................................................... 590 7,237.5 7,914.7

Short-term LiabilitiesLoans and credits (90, 94)........................................................................ 610 5,948.4 17,812.2

including:bank loans due within 12 months after the reporting date ............ 611 5,754.2 14,076.2borrowings due within 12 months after the reporting date............ 612 194.2 3,736.0

Accounts payable ...................................................................................... 620 8,789.5 7,072.6including:suppliers and contractors (60, 76) ...................................................... 621 2,534.2 1,560.2promissory notes payable (60) ............................................................ 622 45.6 233.8due to subsidiaries and affiliates (78) ................................................ 623 291.9 -due to employees (70) .......................................................................... 624 283.6 378.2payables due to social funds (69) ...................................................... 625 147.4 155.1taxes payable to the budget (68) ........................................................ 626 3,083.6 2,155.0advances received (64) ........................................................................ 627 720.5 447.4other payables........................................................................................ 628 1,682.7 2,142.9

Profits distributable among shareholders (partners) (75) .................... 630 206.3 785.4Deferred income (83) ................................................................................ 640 37.4 689.8Accruals (89) .............................................................................................. 650 298.6 898.4Other short-term liabilities........................................................................ 660 – 136.6

Total Short-term Liabilities.................................................................... 690 15,280.2 27,395.0

TOTAL SHAREHOLDERS’ CAPITAL AND LIABILITIES(sum of lines 490+500+590+690).............................................................. 700 46,866.5 77,000.7

Statements of Valuables on Off Balance Sheet AccountsDescription of off balance sheet accountLeased fixed assets (001) .......................................................................... 910 1,306.8 1,649.8incl. under lease contracts ........................................................................ 911 – 1.7Inventory in custody (002) ...................................................................... 920 1,024.4 4,517.6Goods accepted for commission (004) .................................................. 930 21.9 616.2Bad debts written-off (007) ...................................................................... 940 623.7 1,770.6Collaterals received (008) ........................................................................ 950 1,858.3 1,656.3Collaterals provided (009) ........................................................................ 960 8,910.7 17,017.6Depreciation of social facilities (014) .................................................... 970 71.0 31.8Depreciaition of area betterment and similar projects (015) .............. 980 – 1.4

A-27

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

CONSOLIDATED STATEMENT OF OPERATIONS

as of 1 July 2001 and 2000

Company: OJSC Oil Company RosneftTaxpayer’s identification number: 7706107510Form of incorporation: OJSC (open joint-stock company)All amounts are in Rb mln.Address:Sofiyskaya nab., 26/1, Moscow 113035, Russia

As of 1 July

2001 2000CodeLine

(unaudited)Sales ............................................................................................................ 2010 34,240.9 32,711.7Cost of Sales .............................................................................................. 2020 17,066.6 14,888.7

Gross Margin ............................................................................................ 2029 17,174.3 17,823.0Selling expenses.......................................................................................... 2030 3,850.0 1,002.1Administrative expenses ............................................................................ 2040 830.4 960.9

Operating profit (lines (010-020-030-040)) ........................................ 2050 12,493.9 15,860.0

Operating revenue/expensesInterest revenue .......................................................................................... 2060 209.1 111.2Interest expense .......................................................................................... 2070 727.9 113.7Equity share in affiliates .......................................................................... 2080 235.0 215.6Other operating revenue .......................................................................... 2090 22,378.2 19,164.9Other operating expenses.......................................................................... 2100 23,184.0 21,071.1

Non-operating revenue/expensesNon-operating revenue.............................................................................. 2120 932.9 1,405.2Non-operating expenses ............................................................................ 2130 1,378.1 1,885.1

Net profit before income tax(lines (050+060-070+080+090-100+120-130)) .............................. 2140 10,959.1 13,687.0

Income tax and other similar levies ........................................................ 2150 3,320.1 4,336.9

Net profit before minority interest (140-150) ...................................... 2160 7,639.1 9,350.1Minority interest........................................................................................ 2165 3,055.6 1,920.0Extraordinary revenue/expensesExtraordinary revenue .............................................................................. 2170 2.3 –Extraordinary expenses ............................................................................ 2180 0.4 –

Net profit (lines (160+170-180) ............................................................ 2190 4,585.4 7,430.1

A-28

Note: Uncertified English translation of Report and Financial Statements originally prepared and issued in Russian, and not to be used by parties notfamiliar with Russian Accounting Regulations.

PRINCIPAL OFFICE OF THE BANK

ABN AMRO Bank (Luxembourg) S.A.46, Avenue J.F. Kennedy

L-1855, Luxembourg-Kirchberg

PRINCIPAL OFFICE OF THE COMPANY

OJSC Oil Company RosneftSofiyskaya Naberezhnaya 26

Building 1113035, Moscow

Russia

TRUSTEE

The Bank of New YorkOne Canada Square

London E14 5ALEngland

REGISTRAR, PRINCIPAL PAYINGAGENT AND TRANSFER AGENT

The Bank of New YorkOne Canada Square

London E14 5ALEngland

PAYING AGENT AND TRANSFER AGENTThe Bank of New York (Luxembourg) S.A.

Aerogolf Center, 1A, Hoehenhof,L-1736 Senningerberg

Luxembourg

LEGAL ADVISERS

To the Company as to English law:Allen & Overy

One New ChangeLondon EC4M 9QQ

England

To the Company as to Russian law:Allen & Overy

Dmitrovsky Pereulok 9103031 Moscow

Russia

To the Managers as to Englishand U.S. law:

To the Managers as to Russianlaw:

To the Managers as toLuxembourg law:

White & Case7-11 Moorgate

London EC2R 6HHEngland

White & Case4 Romanov Pereulok

103009 MoscowRussia

Elvinger, Hoss & Prussen2, Place Winston Churchill

B.P. 425 L-2014 Luxembourg

To the Trustee as to English Law

White & Case7-11 Moorgate

London EC2R 6HHEngland

AUDITORS TO THE COMPANY

Arthur Andersen ZAO52/2 Kosmodamianskaya nab.

113054 MoscowRussia

LISTING AGENT

The Bank of New York (Luxembourg) S.A.Aerogolf Center1A, Hoehenhof

L-1736 SenningerbergLuxembourg

RF60116 Printed by Royle Financial Print