[September 18, 2009] Interim Results Report Tweet (Hugin (English) Via Acquire Media NewsEdge) 18 September 2009 Prosperity Russia Domestic Fund Limited Half-yearly results for the six months ended 30 June 2009 Prosperity Russia Domestic Fund Limited ("PRDF") a Guernsey incorporated, closed-ended investment company admitted to AIM, today announces its half-yearly results for the six months ended 30 June 2009. PRDF has been established with the principal purpose of providing investors with a listed vehicle through which to participate in the investment opportunities arising from the corporate restructuring and consolidation which are currently taking place in the small and mid-cap markets in Russia and, to a lesser extent, other newly independent states of the former Soviet Union. Key developments: * Unaudited net asset value per share of US$0.373 (based on mid-prices) at 30 June 2009, representing an increase in the first half of the year of 57%, against an increase in the Russian RTS index of 56% * Key investments at 30 June 2009 were Center Telecom (9.9% of net assets), M Video (7.6% of net assets), Efes Breweries (7.6% of net assets), Magnit (6.8% of net assets), Dixy Group (6.5% of net assets), Bashkirenergo (5.9% of net assets) and Sistema (5.1% of net assets) * Latest unaudited net asset value per share of US$0.522 (based on mid-prices) at 11 September 2009, an increase of 120% since the last year end resulting in a significant outperformance of the RTS index which rose by 84% in the same period The half-yearly results are unaudited. Commenting, Sir David Kinloch, Chairman said: "I am pleased to be able to report that we have witnessed something of a sea change in investor sentiment during the half year to 30 June 2009 and this has continued to the time of writing. Although the Russian economy remained rather flat during the first half of 2009, there are now some pointers towards a return to growth, aided in part by a recovery in commodity prices and in particular the oil price. At the time of writing we believe that the fundamentals of our investment portfolio are attractive. However, there remain uncertainties and accordingly we continue to be cautiously optimistic regarding longer term prospects." Enquiries: Prosperity Capital Management Limited Elly Wordsworth Tel: 020 7299 6950 Kleinwort Benson (Channel Islands) Fund Services Limited Company Secretary Tel: 01481 727111 CHAIRMAN'S STATEMENT I am pleased to be able to report that we have witnessed something of a sea change in investor sentiment during the half year to 30 June 2009 and this has continued to the time of writing. This was particularly welcome following the dramas of 2008 which persisted into the first quarter of 2009. During the 6 months ended 30 June 2009 our NAV per share increased by 57% to $0.373, which was slightly ahead of the performance of the RTS index over the period. However, by the end of August 2009 our reported NAV per share of $0.465 had increased by 96% since 31 December 2008, which was well ahead of the advance in the RTS index of 68% over the same period. The main driver of our performance was our focus on domestic stocks which have moved ahead strongly in recent months as sentiment improved, particularly in our chosen sectors. Although the Russian economy remained rather flat during the first half of 2009, there are now some pointers towards a return to growth, aided in part by a recovery in commodity prices and in particular the oil price which has risen significantly since the beginning of the year. During the latter part of 2008 and early 2009 the Russian Central Bank achieved a carefully managed devaluation of the ruble of some 30%. Foreign Exchange reserves rose to over $400 billion by July 2009. There are clear signs of a return of confidence although the banking sector remains fragile. As more fully described in the accompanying Manager's Report, we have adhered to our policy of remaining fully invested and we have retained a strong bias towards the domestic sector. This has stood us in good stead, particularly during the second quarter of 2009. At the time of writing we believe that the fundamentals of our investment portfolio are attractive. However, there remain uncertainties relating to the sustainability of the present slow recovery in economies worldwide, and sentiment towards the global banking sector is understandably fragile so soon after the credit crisis. Accordingly, we continue to be cautiously optimistic regarding longer term prospects. Yours sincerely, Sir David Kinloch Chairman September 2009 MANAGER'S REPORT After an extremely challenging year in 2008, the first half of 2009 has been much more promising for the Prosperity Russia Domestic Fund (the "Fund" or "PRDF"). Although the economy did not quite manage an unequivocal return to growth during the first six months of the year, share prices staged a strong, partial recovery, particularly during the second quarter. By the end of June, the RTS index of leading Russian stocks was up 56% from the beginning of the year. PRDF held its own, gaining 57% during H109, even though the Fund's domestic focus meant it was under-weight in the export-focussed oil and gas "blue chips" that led the first-half rally as commodity prices rose. By the end of August, amid strong signs that Russia's economy has turned the corner and economic growth has resumed, the RTS had risen further and was up 69% year to date. As retail and consumer good stocks have come back into favour, PRDF has surged. The Fund was up 96% by the end of last month - an out-performance over the market index of 27 percentage points. MARKET/ECONOMIC UPDATE As the credit crunch intensified, and the global economy lurched, 2008 became the most financially volatile year since the Second World War. Having weathered the storm well during the first half of last year, Russia was hit badly during the summer of 2008 by falling oil prices, perceived political risks linked to the Georgia conflict and, following the collapse of Lehman Brothers in September, by the global "rush from risk". During 2008 as a whole, the Russian economy grew 5.6% - but much of that growth took place during the first six months. After prolonged bouts of "forced selling", as leveraged portfolio investors struggled to meet margin calls and offloaded shares into a falling market, the RTS ended 2008 down 73% - the first annual drop in eight years. Not surprisingly, this sentiment spilt over into 2009 as the global outlook remained gloomy. During the first quarter of this year, the RTS was relatively flat, oscillating within a 500-650 point corridor (compared to its 2,488 peak in May 2008). Share prices languished at multiples that, for the most part, remained well below "fundamental value". By the end of the first quarter, though, as commodity prices began to recover, the RTS was up 10% year-to-date. But PRDF remained 4% down at the end of March, in part due to its oil/gas-underweight. During Q109 especially, currency fears and a lack of bank lending starved firms of liquidity, causing double-digit percentage drops in industrial production and investment. During March, real GDP was 9.5% lower than it was during the same month the year before. Strong GDP growth during the first half of 2008 meant that annual GDP numbers continued to be weighed-down by "adverse base" effects during the second quarter of 2009 as well, even as economic activity began to recover. In recent months, though, ultra-low valuations, and genuine signs that the economy is through the worst, have seen renewed investor interest across a range of sectors. In April and May, for instance, the RTS rose 22% and 31% respectively as the Russian economy began to stabilise and domestic investors (for the most part) started to return to the market. During Q209, real GDP was no less than 7.4% higher than it was during the first quarter of 2009, even though it remained heavily down year-on-year. At the same time, Russia's All-sector PMI index, having dipped sharply during the five months to January 2009, has risen for the last seven months in a row. In August, the Manufacturing PMI index reached an 11-month high, signalling that the industry is on the brink of expansion, with the Service PMI showing that increasingly important sector of the Russian economy growing for the first time since September 2008. In the coming months, Russia should benefit from strong commodity-prices, recovering global demand (from other emerging markets, at least) and a 30% depreciation of the ruble since last summer - not to mention a sizeable fiscal boost. At the same time, the Central Bank of Russia (the "CBR") has lowered its main interest rate six times since April, in a bid to stimulate bank lending. The most recent cut in mid-September saw rates fall to 10.5%. Further reductions could happen before the end of the year. While Russia's economic recovery is fragile, the Investment Manager ("the Manager") believes that the country is in the relatively early stages of a period of strong long-term growth - based on commodity-linked exports and a domestic expansion that will play an increasingly important role in the years to come. Although Russia will this year run a fiscal deficit for the first time in a decade - not least due to anti-crisis measures - the macro backdrop remains solid. In June, Russia had a trade surplus of $10.3bn and a current account surplus equal to 1% of GDP. During the first six months of 2009 as whole, the trade surplus was $52.9bn - down from $109.9bn during the first half of last year. While exports fell 47% during this period, not least due to lower commodity prices, imports also contracted sharply - by 43%. This illustrates the ability of the Russian economy to react quickly to adversity. Faced with a slowdown and falling incomes, large parts of the Russian population simply switched from expensive imported food and other consumer goods to cheaper domestic products. Many Russian companies also cancelled or postponed purchases of capital goods from overseas - which, as recently as 2008, made up 40% of all imports. Crucial to the strong performance of the Russian market during H109 has been the CBR's management of the ruble. On January 22nd 2009, the authorities announced they would defend the currency within a band of between 26 and 41 against the combined dollar-euro basket. While this announcement was greeted with derision from some quarters, the new ruble band has held firm - and, as of the end of June, the currency stood at 36.8 to the basket. From $386bn in January, CBR reserves grew during H109 to $412bn (the world's third largest haul). Crucially, bank deposits have also increased in recent months as the general population switches back into rubles, amidst a growing belief the domestic currency is "safe" once more. One reason that the ruble stabilised is that oil prices have risen considerably during the first half of 2009, with crude averaging almost $72/barrel during June. The currency has also been helped by Russia's trade and current account surpluses. For the last seven months, the ruble basket has oscillated between a relatively narrow range of 36.5 to 41. Such stability, if sustained, is likely to be positive for Russian asset prices, as currency concerns, which were legion last autumn and winter, feature less prominently in assessments of investment risk. In August, CBR Chairman Sergei Ignatiev said the central bank had "considerably" lessened the scope and frequency of its interventions in recent months and, for the most part, once again become a net buyer of foreign currency. He stressed that the CBR wanted "gradually" to move toward inflation targeting, with the aim of allowing the ruble to float freely by 2011. During Q408 and Q109, it is no exaggeration to say that Russia's currency went through a perfect storm - with oil prices falling from $147 all the way down to below $40 in February and the world's currency markets smelling blood as the country's economy stalled. During Q209 though, and into this autumn, the fact that the currency stabilised, and households and companies didn't lose any of their bank deposits, has significantly enhanced the credibility - both at home and abroad - of the CBR. The Manager views this as a significant positive development. THE FUND The net asset value per share of PRDF gained 57% during the first six months of 2009 and, by the end of August, was 96% up year-to-date. The RTS index rose 69% during the year to the end of August. During H109, the Manager stuck to the Fund's broad investment principles - pursuing a research-driven, unlevered, "fundamental growth and value" investment strategy. The strategy maintained its focus on firms benefiting from the on-going development of Russia's consumer sector and domestic capital investment, with exposure primarily to small/mid cap companies and particularly those set to become more liquid as the domestic economy develops. The Fund's telecoms exposure rose from 13.6% of AUM at the start of the year to 22.4% by the end of June, at which point the sector had the highest weighting and Center Telecom amounted to PRDF's single biggest position. In August, though, the Manager divested the Fund's stake in Center Telecom at a significant premium to the market. By the end of June, PRDF's telecom exposure traded at 7x 2009 P/E. Retail and consumer stocks suffered during the first quarter of the year, as investors switched into energy blue chips. But the Fund's exposure to these sectors performed well during the second quarter, as the domestic economy started to recover, a trend that continued over the summer. By the end of June, retail and consumer goods accounted for 21.5% and 18.4% of the Funds assets respectively, up from 14.2% and 12.6% at the end of March. Quite a few companies in these two sectors have continued to deliver strong revenue growth during the first half of 2009, despite the slowdown. Food retailer Magnit, a company long-favoured by PCM and the Fund's second-largest position as of the end of August, saw annual ruble-terms EBITDA growth of no less than 97% during H109. The Fund has benefited during this period from the strong performance of Efes breweries (not least after its main owner offered to buy the free-float) and M.Video (which became Russia's largest electronics retailer by market share). At the end of June, the Fund's retail holdings traded at 10x 2009 P/E and its exposure to Russia's consumer goods sector was valued at 7x 2009 P/E. Mriya (Ukrainian agricultural firm) and MHP (integrated Ukrainian poultry producer) each accounted for nearly 5% of the Fund's net assets at the end of H109. The Manager feels that both holdings have high-growth potential, and they have recently performed well (with Mriya up 9.1% in June and MHP rising no less than 42.3% during the same month). The Manager also acquired a stake in Furshet, Ukraine's third largest supermarket chain, which has a joint-venture with French retailer Auchan. PRDF's exposure to Kazkommertsbank weighed on the Fund's performance , given the adverse conditions in the Kazakh banking sector. The country's financial services sector remains among the hardest hit from the credit crunch. The Manager remains convinced, though, that Kazakhstan's largest bank will emerge as a strong going-concern and finds the stock extremely cheap, trading at 2009 P/E of 1.0x and 0.2x price-to-book at the end of June. Overall, at the end of H109, the Fund's assets were valued at an average 2009 P/E of 5.6x and a 2010 P/E of 4.6x. As of the end of August, these diagnostics had risen to 7.4x and 4.8x respectively - still representing a 20% discount to RTS. The Manager expects most of PRDF's mid-cap stocks to be re-rated as the Russian market continues to recover and liquidity improves. It is also pleasing that while the Fund still trades at a discount to its NAV on AIM, after considerable efforts to find buyers this discount is much narrower than many other traded emerging market funds. LOOKING FORWARD It is the belief of Prosperity Capital Management ("PCM") that global macroeconomic trends could bode well for Russian asset prices in the months and years to come. Given on-going currency stability, and the continued recovery of the domestic economy, the market could not only attract more domestic money but also enjoy more inflows from abroad - not least due to low economy-wide leverage and the country's abundance of real assets. Both these factors - Russia's relatively low household, corporate and sovereign debt service, and its enviable stock of tangible assets - should prove increasingly attractive as the Western world "de-leverages" and Western central banks undermine faith in paper-based fiat currencies with so-called "quantitative easing". The drop in the value of the ruble should also provide Russia with a significant competitive boost as global investors retain some of their risk appetite and begin, once again, to search for yield. Amid on-going uncertainty on global markets, PCM maintains its strong belief in the long-term growth potential of Russia. Our position in the market and the scope of our investments reflects the fact that the country is well on its way to becoming a fully-fledged Western economy - with capital needs that go way beyond oil and gas. We acknowledge that much of the rest of the world remains to be convinced, but we maintain that while that gap between perception and reality is a huge challenge, it also represents an enormous investment opportunity. Despite signs of recovery, the economic situation is materially different from a year ago - and, even if the economy surges during the second half of 2009, GDP for the year as a whole will certainly contract. Having said that, most forecasters are predicting growth of 3-5% next year. In the meantime, while Russia faces economic challenges, many firms remain in a situation where restructuring and consolidation can lead to enhanced profitability even in a low-growth environment. The assets owned by the Fund are, for the most part, unimpaired and continue to trade at extremely low valuations by any measure. Political risk is often seen as the key concern among global portfolio investors interested in Russia. While Russia is a relatively new market economy and institution-building remains a work in progress, the situation is rarely as bad as described by the Western press - which, over many years, has generally covered the country in a very "negative" manner. As the Manager has long maintained, corporate governance is anyway a much bigger risk than political considerations when investing in Russia. That is why PCM continues to be a highly "active" shareholder, with a large on-the-ground presence in Moscow and often holding significant minority stakes and boards seats, so enabling a proper monitoring of management performance. The Manager, and the entire PCM team, works hard to stand up for our shareholder rights and brings litigation and other legitimate pressures to bear on counterparties whom we feel have acted in an illegal or otherwise improper manner. CONCLUSION In summary, during the first half of this year PRDF slightly out-performed the RTS - despite the Fund's considerable under-weight in the large energy blue-chips which led the rally. During the year to the end of August, amid signs of economy recovery in Russia, PRDF considerably out-performed its RTS benchmark. This encouraging performance has been achieved by an investment strategy that has continued to focus on well-managed, unimpaired companies - not least in the consumer-retail sector - which are benefiting from the continued development of Russia's fast-developing domestic sector. Given that the RTS is still trading at one of the lowest valuations of any major stock index in the world - and small- and mid-cap stocks such as those targeted by PRDF at even lower multiples the Manager feels that the Fund remains extremely good value. PRDF's performance during 2008 was obviously disappointing. As a result of last year's fall in Russian assets prices, as of the end of August the Fund's NAV remained 52% below its price at the time of its inception in February 2007. Having said that, the Fund's H109 performance has been promising and the Manager expects the fundamental value of our portfolio companies to rise as the Russian market continues to recover - and, once again, attracts the attention of significant money from overseas portfolio investors. Please rest assured that the Manager will continue to work hard for Fund shareholders throughout the rest of 2009 and into the new year. We will maintain our established channels of communication - through our monthly performance reports, PCM newsletters and investor conference calls. We are fully focused on realizing the value of our holdings and will continue to be an "active" investor - doing everything we can to guard against poor corporate governance. While the Russian market has, in some sense, been through a "perfect storm", asset prices are now showing considerable improvement. At the time of writing, Russia is the third best performing stock market in the world so far in 2009. In that context, along with the managers of our portfolio companies, we at PCM will continue to do everything in our power to deliver healthy shareholder returns. KEY INVESTMENTS (as of 30th June 2009) Center Telecom (9.9% of net assets) The largest regional fixed-line telecom subsidiary of a state-controlled holding company - with over 6m access lines in operation. Low financial multiples (P/E 4.9x) and high dividend yield (over 20% for preferred shares) provide a solid basis for share price appreciation. Efes Breweries International (7.6% of net assets) EFES Breweries International, which is 70% owned by the largest Turkish brewer, Anadolu Efes, has 10% of the Russian beer market and 25% of the Kazakh beer market via a JV with Heineken, as well as dominant positions in Moldova and Georgia. Russia is the third largest beer market in the world and still has too many players. The stock trades at 7.6x 2009 P/E and 6.1x 2010 P/E. M Video (7.6% of net assets) Having registered $3bn of sales in 2008 (+44% YoY), M Video recently became the largest consumer electronics retailer in Russia. It operates over 140 standardized hypermarkets on mainly leased premises in shopping centers in over 40 Russian cities. The stock trades at 6.3x 2009 P/E and 3.4x 2010 P/E. Magnit (6.8% of net assets) Magnit operates an ever-growing number of discount supermarkets. In addition to trading with a 10.9x 2009 P/E and 7.3x 2010 P/E the company has a strong history of reporting double-digit sales growth - even during the recent slowdown. Magnit operates in a cost-conscious segment of the market and has seen its market share increase amid the overall market contraction. Dixy Group OJSC (6.5% of net assets) With $1.9bn sales (+34% YoY in 2008) Dixy Group is the third largest discount food retailer in Russia. The company operates over 450 leased (70%) and owned (30%) stores in residential areas of large and small cities in Central Russia, the North-West and in the Urals. We see an upside to profitability relative to the peer group and view the 3.8x 2010 P/E as undemanding given structural undersupply of modern retail in Russia and significant space growth potential. Bashkirenergo (5.9% of net assets) A 4,600 MW capacity integrated power utility in the region of Bashkiria. The company trades at a significant discount to its Russian peers on capacity valuation and has a 2010E P/E of only 3.7x. The stock has risen over 200% so far in 2009 following the purchase of a majority control of the Bashkirian energy assets, including Bashkirenergo, by Sistema Holding. This is seen as a positive catalyst for the company's development and Sistema's capital market credentials should raise Bashkirenergo's profile with international investors. We see further potential upside coming from unbundling and new ownership so as to eliminate the significant discount to the value of the component assets. Sistema JSFC (5.1% of net assets) Sistema is the conglomerate owning a controlling share in MTS, the largest Russian mobile operator; Comstar, national CLEC operator; Sitronics, an IT manufacturing company; private pharma, tourism and financial companies and a recently acquired oil company - Bashneft - which is the eighth largest in Russia. The company trades at a deep discount to the sum of its parts and has a 5.6x 2009 P/E and a 2.8x 2010 P/E. MHP SA (4.8% of assets) MHP SA is a low-cost Ukrainian integrated poultry-producer. The company has a 45% market share in poultry production (over 80% of MHP's sales) and trades at a 10% discount to its meat processing peers based on a 12-month forward EV/EBITDA. MHP has a 5.9x 2010 P/E and is another deep-value play. Mriya Agro Hldg (4.7% of net assets) Mriya Agro is an agricultural company in Ukraine with a 15-year track record of superior yields and control over 250,000 hectares of land. We expect the company to generate significant EBITDA, which in the Manager's view will show strong YoY growth - largely driven by the cultivation of 180,000 hectares in 2009. The company trades with a 2.1x 2010 P/E that is viewed by the Manager as excellent value for a firm with high growth potential. Mobile Telesystems OJSC (4.2% of net assets) Mobile Telesystems (MTS) provides mobile telephone services in Russia and the CIS. The company has a 3x EBITDA, stable revenue and dividend yield. Mobile Telesystems trades at a 12.7x 2009 P/E and 6.2x 2010 P/E. TOP POSITIONS (as of 30th June 2009) +--------------------------------------------------------------+ | | % of Net | | | Name | Assets | US$m | |-----------------------------------+--------------+-----------| | Center Telecom | 9.9% | 12.7 | |-----------------------------------+--------------+-----------| | Efes Breweries International | 7.6% | 9.7 | |-----------------------------------+--------------+-----------| | M Video | 7.6% | 9.7 | |-----------------------------------+--------------+-----------| | Magnit | 6.8% | 8.7 | |-----------------------------------+--------------+-----------| | Dixy Group | 6.5% | 8.4 | |-----------------------------------+--------------+-----------| | Bashkirenergo | 5.9% | 7.5 | |-----------------------------------+--------------+-----------| | Sistema | 5.1% | 6.5 | |-----------------------------------+--------------+-----------| | MHP SA | 4.8% | 6.2 | |-----------------------------------+--------------+-----------| | Mriya Agro | 4.7% | 6.1 | |-----------------------------------+--------------+-----------| | Mobile Telesystems | 4.2% | 5.4 | |-----------------------------------+--------------+-----------| | | 63.1% | 80.9 | +--------------------------------------------------------------+ SECTOR ALLOCATION +---------------------------------------------------------+ | | % of Net | | | Sector | Assets | US$m | |-------------------------------+--------------+----------| | Consumer, non-cyclical | 40.15% | 51.5 | |-------------------------------+--------------+----------| | Telecommunication | 22.37% | 28.7 | |-------------------------------+--------------+----------| | Power | 13.73% | 17.6 | |-------------------------------+--------------+----------| | Industrial | 8.47% | 10.9 | |-------------------------------+--------------+----------| | Financial | 6.58% | 8.4 | |-------------------------------+--------------+----------| | Consumer, cyclical | 4.97% | 6.4 | |-------------------------------+--------------+----------| | Transport | 0.25% | 0.3 | |-------------------------------+--------------+----------| | Energy | 0.13% | 0.2 | |-------------------------------+--------------+----------| | Media | 0.09% | 0.1 | |-------------------------------+--------------+----------| | Real Estate | 0.02% | 0.1 | |-------------------------------+--------------+----------| | | 96.76% | 124.2 | +---------------------------------------------------------+ Prosperity Capital Management Limited Grand Cayman September 2009 Consolidated Supplemental Schedule of Investments (unaudited) As at 30 June 2009 (All amounts stated in United States Dollars) 30 June 2009 31 December 2008 % of net % of net Description Cost Fair Value assets[1] Cost Fair Value assets[1] Analysis of securities by industry: Consumer, Cyclical 3,234,852 6,386,726 4.97% 5,292,846 1,494,459 1.88% Consumer, Non-cyclical 83,582,030 51,531,785 40.15% 89,331,236 22,464,842 28.23% Energy 464,000 163,313 0.13% 490,167 224,959 0.28% Financial 32,509,621 8,442,020 6.58% 56,483,597 17,687,652 22.24% Industrial 46,842,981 10,870,116 8.47% 46,908,654 13,264,589 16.68% Media 9,396,309 114,329 0.09% 9,396,309 94,329 0.12% Power 39,484,010 17,627,401 13.73% 58,689,788 10,739,651 13.51% Real Estate 52,446 23,399 0.02% 6,902,555 1,641,151 2.06% Telecommunication 45,509,646 28,717,175 22.37% 69,241,129 11,666,283 14.67% Transport 3,232,298 320,990 0.25% 3,232,298 362,408 0.46% 264,308,193 124,197,254 96.76% 345,968,579 79,640,323 100.13% Concentration of investments: As of 30 June 2009, the Group invested in certain companies which had estimated fair market values that were individually in excess of 5% of net assets. These companies are identified in the schedule below: 30 June 2009 31 December 2008 Fair % of net Fair % of net Value assets[1] Value assets[1] Center Telecom 12,712,142 9.90% 5,516,128 6.94% M Video OJSC 9,745,247 7.59% - - Efes Breweries International 9,728,688 7.58% 4,650,060 5.85% Magnit 8,715,151 6.79% - - Dixy Group OJSC 8,354,440 6.51% 4,520,107 5.68% Bashkirenergo 7,544,430 5.88% - - Sistema 6,485,477 5.05% - - Kazkommertsbank - - 5,630,954 7.08% Alliance Bank - - 5,435,648 6.83% Sberbank Rossii - - 4,222,077 5.31% 63,285,575 49.30% 29,974,974 37.69% [1] Except as otherwise expressly indicated, the term "net assets" (total assets less total liabilities) as used in the financial statements refers to net assets as determined in accordance with IFRS and as reflected on the Consolidated Statement of Financial Position. 30 June 2009 31 December 2008 % of % of Fair net Fair net Description Cost Value assets[1] Cost Value assets[1] Analysis of securities: Total unlisted securities 8,188,248 1,628,979 1.27% 8,188,248 1,255,239 1.58% Total listed securities* 256,119,945 122,568,275 95.49% 337,780,331 78,385,084 98.55% 264,308,193 124,197,254 96.76% 345,968,579 79,640,323 100.13% [1] Except as otherwise expressly indicated, the term "net assets" (total assets less total liabilities) as used in the financial statements refers to net assets as determined in accordance with IFRS and as reflected on the Consolidated Statement of Financial Position. * In the absence of readily ascertainable market values from an exchange and where the 'Over The Counter' (OTC) market is considered more appropriate, listed securities representing 4.82% of net assets (31 December 2008: 9.11% of net assets) when valued at bid prices had their values estimated by the Manager, for which the Administrator receives confirmation from independent brokers and are approved in good faith by the Board of Directors. (See note 5, regarding the Company's policy with respect to determining the fair value of investments). Consolidated Statement of Comprehensive Income (unaudited) For the six months ended 30 June 2009 (All amounts stated in United States Dollars) Note Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$ Investment income Income 3 3,207,582 3,343,581 Net gain/(loss) on investments designated at 4 (45,203,764) fair value through profit or loss 47,295,201 Net foreign exchange (28,105) 3,152 (loss)/gain Total investment gain/(loss) 50,474,678 (41,857,031) Operating expenses 11 (1,395,833) (4,678,533) Total comprehensive 49,078,845 (46,535,564) income/(loss) before finance costs Finance costs Withholding tax (260,774) (492,499) Interest expense - (22,693) Total finance costs (260,774) (515,192) Total comprehensive 48,818,071 (47,050,756)income/(loss) for the period Earnings/(loss) per ordinary share Basic & diluted 7 US$0.14 (US$0.13) Weighted average ordinary shares outstanding Number Number Basic & diluted 350,000,000 350,000,000 All items in the above statement are derived from continuing operations. All income is attributable to the ordinary shareholders of the Company. The accompanying notes form an integral part of the financial statements. Consolidated Statement of Changes in Equity (unaudited) For the six months ended 30 June 2009 (All amounts stated in United States Dollars) Ordinary Share Share Other Retained Shares capital premium Reserves earnings Total Number US$ US$ US$ US$ US$ Balance at 31 December 2007 350,000,000 3,500,000 134,400,629 200,000,000 63,427,372 401,328,001 Total comprehensive loss for the period - - - - (47,050,756) (47,050,756) Balance at 30 June 2008* 350,000,000 3,500,000 134,400,629 200,000,000 16,376,616 354,277,245 Balance at 31 December 2008 350,000,000 3,500,000 134,400,629 200,000,000 (258,363,321) 79,537,308 Total comprehensive income for the period - - - - 48,818,071 48,818,071 Balance at 30 June 2009 350,000,000 3,500,000 134,400,629 200,000,000 (209,545,250) 128,355,379 The accompanying notes form an integral part of the financial statements. *In line with IAS 34, the comparative period for the Consolidated Statement of Changes in Equity is the six months ended 30 June 2008. The balance at that period end will not equate to the balance at 31 December 2008, the date of the comparative Consolidated Statement of Financial Position. Consolidated Statement of Financial Position (unaudited) As at 30 June 2009 (All amounts stated in United States Dollars) Note 30 June 31 December 2009 2008 US$ US$ Assets Financial assets at fair value 5 through profit or loss 124,197,254 79,640,323 Cash 6 5,043,949 670,588 Dividends receivable 1,475,819 54,986 Amounts receivable on investments sold 962,337 1,293,260 Total assets 131,679,359 81,659,157 Liabilities Amounts payable on investments purchased 2,560,175 1,049,690 Accrued expenses 11 763,805 1,072,159 Total liabilities 3,323,980 2,121,849 Net assets 128,355,379 79,537,308 Equity Share capital 8 3,500,000 3,500,000 Share premium 9 134,400,629 134,400,629 Other reserves 200,000,000 200,000,000 Net deficit (209,545,250) (258,363,321) Equity attributable to equity holders 128,355,379 79,537,308 These consolidated financial statements were approved by the Board of Directors on 16 September 2009. The accompanying notes form an integral part of the financial statements. Consolidated Statement of Cash Flows (unaudited) For the six months ended 30 June 2009 (All amounts stated in United States Dollars) Note Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$ Operating activities Total comprehensive 48,818,071 (47,050,756) income/(loss) Adjustments for: Changes in net unrealised 4 (126,217,320) loss/(gain) on investments 52,748,061 Realised loss/(gain) on 4 78,922,119 investments (7,544,297) 1,522,870 (1,846,992) Increase in receivables (1,420,833) (1,239,533) Decrease in payables (308,354) (13,624,766) Net proceeds from repurchase - agreements 4,090,500 Cash used in operations (1,729,187) (10,773,799) Cash flows used in operating (206,317) activities (12,620,791) Cash flows from investing activities Purchases of investments (34,347,447) (43,930,586) Proceeds from sale of 69,027,252 investments 38,927,125 Cash flows provided by investing activities 4,579,678 25,096,666 Net increase in cash 4,373,361 12,475,875 Cash at beginning of period 670,588 323,681 Cash at end of period 5,043,949 12,799,556 Supplementary information Interest received 547 10,948 Dividends received 1,623,476 1,595,165 The accompanying notes form an integral part of the financial statements. Notes to the Consolidated Financial Statements (unaudited) 1. Organisation and structure Prosperity Russia Domestic Fund Limited (the "Company") was registered on 29 December 2006 with registered number 46129, is domiciled in Guernsey, Channel Islands, and commenced its operations on 22 February 2007. The Company is a closed-ended investment company incorporated in Guernsey with limited liability under the Companies Law of Guernsey (the "Companies Law"), and its ordinary shares are listed on the Alternative Investment Market ("AIM") of the London Stock Exchange. The registered office of the Company is Dorey Court, Admiral Park, St. Peter Port, Guernsey, Channel Islands. "Group" is defined as the Company and its subsidiary, Roselia Limited. The Company's investment objective is to achieve capital growth by investing in a portfolio of securities issued by companies in the sectors of the domestic economies of Russia and other NIS (Newly Independent States) countries which are expected to benefit from the increase in consumer demand and capital investment in such countries. The Group will invest primarily in small and medium-sized companies, with the aim of being an active and influential minority shareholder. The Group will invest at least 75% of its gross assets in the securities of companies established or having their principal operations in Russia. The Group may invest up to 25% of its gross assets in the securities of companies established or having their principal operations in NIS countries other than Russia, which the Manager expects to be primarily the Ukraine and Kazakhstan, however, the Group may, within such limitation and on an opportunistic basis, invest in the securities of companies established or having their principal operations in other NIS countries. The Group's investment management activities are managed by Prosperity Capital Management Limited (the "Manager"). It was incorporated with limited liability and registered as an exempted company under the laws of the Cayman Islands. The Group has entered into a management agreement (the "Management Agreement") under which the Manager, subject to the overall supervision and control of the Directors, has responsibility for identifying, analysing, timing and making the Group's investments, as well as monitoring and disposing of such investments. The Manager will assist and advise the Directors if required with the valuation of the Group's assets generally. Under the terms of the Management Agreement, the Company has agreed to pay the Manager a management fee and a performance fee. Refer to note 11 for further details. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the "Administrator"). Investors Fund Services (Ireland) Limited (IFSIL) provides certain administration services to the Group under a sub-administration agreement between IFSIL, the Administrator and the Group. This sub-administration agreement novated from Investors Fund Services (Ireland) Limited (IFSIL) to State Street Fund Services (Ireland) Limited on 17 July 2009. The Company owns 100% of the share capital of Roselia Limited, a Cyprus company. Roselia Limited is a subsidiary of the Company as Prosperity Russia Domestic Fund Limited retains control over the company through its retention of all the risks and rewards of the assets transferred to, or purchased from Roselia Limited. 2. Significant accounting policies Statement of compliance These unaudited interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Roselia Limited (the "Subsidiary") (together "The Group") and are prepared in accordance with International Financial Reporting Standards ("IFRS") and interpretations approved by the International Accounting Standards Board ("the IASB"). Except as described overleaf, the principle accounting policies applied in the preparation of these financial statements are consistent with those applicable for the annual audited financial statements. Basis of preparation The consolidated financial statements are presented in United States Dollars which is the functional currency of the Group reflecting the fact that the Company's shares are issued and redeemed in United States Dollars and distributions to investors are also made in United States Dollars. Change in accounting policy The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2009. (i) IAS 1 (revised), 'Presentation of financial statements'. The revised standard prohibits the presentation of items of income and expenses (that is 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity. All 'non-owner changes in equity' are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Company has elected to present one statement; a statement of comprehensive income. The interim financial statements have been prepared under the revised disclosure requirements. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share. (ii) On 30 November 2006, the International Accounting Standards Board issued IFRS 8, Operating Segments, which replaces IAS 14 Segment Reporting. This puts an emphasis on the "management approach" to reporting on operating segments. It does not have any impact on the interim financial statements of the Company. (iii) Amendment to IAS 32, Financial Instruments: Presentation clarifies under which circumstances puttable financial instruments and obligations arising on liquidation have to be treated as equity instruments. The adoption of the amendment does not have a significant impact on these financial statements. (iv) Amendment to IFRS 7, Financial Instruments: Disclosures was issued by the IASB on 5 March 2009. These amendments require the inclusion of an explicit three-level fair value hierarchy which groups fair value measurements based on their observability and requires numerical disclosure of fair values recognised in a tabular format organised by the level within each hierarchy. Use of estimates and judgements The preparation of consolidated financial statements in accordance with the recognition and measurement principles of IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the period. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Basis of consolidation These Consolidated Financial Statements comprise the financial statements of the Company and the Subsidiary for the period ended 30 June 2009. The Subsidiary has been consolidated from the date on which control was transferred to the Company and will cease to be consolidated from the date on which control is transferred from the Company. At 30 June 2009, the Subsidiary was the Company's only subsidiary. Subsidiary The Company expects to make the majority of its investments through its Cyprus subsidiary. The Russia/Cyprus double taxation treaty is expected to provide for a reduced rate of Russian withholding tax on distributions made by securities in the Group's portfolio. Financial instruments (i) Classification Financial instruments designated at fair value through profit or loss upon initial recognition include investments in listed and unlisted equity instruments. All other assets are carried at amortised cost. Financial liabilities are carried at amortised cost. (ii) Recognition The Group recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. Transactions are recognised using trade date accounting. (iii) Measurement Financial instruments are measured initially at fair value (transaction price). Transaction costs on financial assets designated at fair value through profit or loss are expensed immediately. Subsequent to initial recognition, all financial instruments classified at fair value through profit or loss are measured at fair value with changes in their fair value recognised in the consolidated statement of comprehensive income. All other assets and liabilities are carried at amortised cost. (iv) Derecognition The Group derecognises a financial asset when the contractual rights to the flows from the financial asset expire or it transfers the financial asset and the transfer qualifies for derecognition in accordance with IAS 39. The Group uses the First in - First out (FIFO) method to determine realised gains and losses on financial asset derecognition. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. Repurchase transactions Securities sold subject to a simultaneous agreement to repurchase these securities at a certain later date at a fixed price are retained in the financial statements and are measured in accordance with their original measurement principles. The proceeds of the sale are reported as liabilities and are carried at amortised cost as loan amounts outstanding. Foreign currency translation Transactions in foreign currency are translated into the functional currency at the foreign exchange rate prevailing on the transaction date. Monetary assets and liabilities denominated in foreign currencies at the statement of financial position date are translated to United States Dollars at the foreign exchange rates ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at the foreign exchange rates ruling at the dates that the values were determined. Foreign exchange differences arising on translation and realised gains and losses on disposals are recognised in the consolidated statement of comprehensive income. Foreign exchange gains and losses on financial assets and financial liabilities at fair value through profit or loss are recognised together with other changes in the fair value. Included in the consolidated statement of comprehensive income line item net foreign exchange loss are net foreign exchange gains/(losses) on monetary financial assets and financial liabilities other than those classified at fair value through profit or loss. Interest income Interest income arises from cash deposits and is recognised in the consolidated statement of comprehensive income by the Group using the effective interest rate method on an accrual basis. Dividend income Dividend income is recognised in the consolidated statement of comprehensive income on the later of the day the board of the investee company recommends the dividends and the ex-dividend date to the shareholders for approval (where the board recommends an ex-dividend date prior to the recommendation date); and the ex-dividend date. In prior periods, dividend income was recognised in the consolidated statement of comprehensive income on the approval date of the dividend. In accordance with IFRS 8, this represents a change in accounting policy. This change was applied as the Directors considered that it was a more appropriate method of recognising dividend income as it results in a more accurate net asset value. This change in accounting policy was considered to have an immaterial effect on the prior period results and therefore no restatement of the comparative figures was deemed necessary. In some cases, the Group may receive or choose to receive dividends in the form of additional shares rather than cash. In such cases the Group recognises the dividend income for the amount of the cash dividend alternative, with the corresponding debit treated as an additional investment. Dividend income received by the Group may be subject to withholding tax imposed in the country of origin. Dividend income is recorded gross of such taxes and the withholding tax is recognised as a finance expense. Expenses All expenses are recognised in the consolidated statement of comprehensive income on an accrual basis. Capital expenses The expenses of the Group directly attributable to the issuance of shares are charged to the share premium account. 3. Income Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$ Interest income from cash and cash 547 10,948 equivalents Dividend income 3,207,035 3,332,633 3,207,582 3,343,581 4. Gains and losses on investments designated at fair value through profit or loss upon initial recognition Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$ Net realised (loss)/gain on (78,922,119) 7,544,297 investments Net unrealised gain(loss) on 126,217,320 (52,748,061) investments 47,295,201 (45,203,764) 5. Investments in securities designated at fair value through profit or loss upon initial recognition The following is the Group's policy with respect to determining the fair value of investments: (i) At the reporting date, the fair value of financial instruments is based on quoted market prices traded in active markets, without any deduction for estimated future selling costs. An active market exists if quoted prices are regularly and readily available from an exchange, dealer, broker, industry group, pricing services or regulatory agency, and those prices represent active and regularly occurring market transactions on an arm's length basis. For financial instruments that are exchange traded and where the exchange has been determined to be the appropriate active market for these instruments, the quoted market price is based on the bid price obtainable from either the Russian Trading Systems (RTS), the Moscow Interbank Currency Exchange (MICEX), Ukrainian Stock Exchange (PFTS) or Kazakhstan Stock Exchange (KASE). These securities fall into Level 1 of the fair value hierarchy as defined by IFRS 7 (see note 12). (ii) At the reporting date, the market prices for non-exchange traded financial instruments, and exchange traded financial instruments, where the exchange is not considered by the Directors to be an appropriate active market for these instruments, are estimated by the Manager using market information. The Administrator receives confirmation of these bid prices from independent brokers. These securities fall into Level 2 of the fair value hierarchy as defined by IFRS 7 (see note 12). (iii) The values of assets or liabilities in currencies other than United States Dollars are converted into United States Dollars at the prevailing market rate for such currencies at the close of business in the local market as at the last available trading date in the period. In the absence of readily ascertainable market values for the unquoted investments and for certain listed securities which are not actively traded, the Board of Directors has approved the estimated market values determined by the Manager as an estimate of the amount that might reasonably be realised on their sale. This market value determination was made after considering certain pertinent factors including the inherent worth of the security. In addition, the Administrator has received independent confirmation from independent brokers that these prices correspond to fair value. However, because of the inherent uncertainty of valuation, those estimated values may differ from the values that would have been used had a ready market for the investments existed and the differences could be material. The details are as follows: Fair market values 30 June 2009 % of net 31 December % of net estimated by the US$ assets 2008 US$ assets Manager in accordance with IFRS Listed securities 6,189,934 4.82% 7,244,225 9.11% Unlisted securities 1,628,979 1.27% 1,255,239 1.58% Total 7,818,913 6.09% 8,499,464 10.69% The net unrealised loss on investments whose values were estimated by the Manager using market information is US$13,908,442 (31 December 2008: net unrealised loss of US$32,888,286). The Group invests in countries with limited and developing capital markets. Investing in Russian and CIS securities involves risks not normally associated with investing in more developed markets and politically and economically stable jurisdictions. These risks include political, economic and legal uncertainties, delays in settling portfolio transactions and the risk of loss from Russia's and the CIS underdeveloped systems for share registration and transfer. The limited size of the Russian and the CIS markets for securities also potentially results in a lack of liquidity. As a result, the Group may be unable to liquidate its positions easily and may not receive proceeds approximating estimated fair values. The Group has certain investments in relatively illiquid securities and currencies for which there is no guarantee of a return on the investment and no guarantee that a return or repatriation of any invested amounts in a convertible currency will be possible. These investments may involve greater risks than investments in more developed markets and the prices of such investments may be volatile due to the perceived credit risk. The consequences of political, social or economic changes in these markets may also have disruptive effects on the market prices of the Group's investments and the income they generate. The Russian Federation has historically experienced political and economic instability, which has affected and may continue to affect the activities of enterprises operating in this environment. Consequently, operations in the Russian Federation involve risks which do not typically exist in other markets. These consolidated financial statements reflect the Board's assessment of the impact of the Russian business environment on the investments held by the Group. The future business environment may differ from the Manager's current assessment. The impact of such differences on the investments held by the Group may be significant. The immediate effects of such risks could include declines in economic growth, a reduction in the availability of credit and borrowers' ability to service debt, an increase in interest rates, changes and increases in taxes, an increased rate of inflation, devaluation of the Russian Rouble, restrictions on convertibility of the Russian Rouble and movements of hard currency, an increase in the number of bankruptcies of entities (including bank failures), labour unrest and strikes resulting from the possible increase in unemployment and political turmoil. These and other potentially significant economic and political conditions and future policy changes could have a material adverse effect on the operations of the Group and the realisation and settlement of its assets and liabilities. 6. Cash Cash balances are held by Investors Trust and Custodial Services (Ireland) Limited (a State Street Bank and Trust Company). The credit rating of State Street Bank and Trust is A1. 7. Earnings per share 30 June 2009 30 June 2008 Earnings for the purpose of the basic and diluted earnings per share is: Net income/(loss) attributable to US$48,818,071 (US$47,050,756) shareholders Weighted average number of shares 350,000,000 350,000,000 outstanding - basic and diluted Basic and diluted earnings per share US$0.14 (US$0.13) for the period 8. Share capital Authorised share capital - 30 June 2009 Number of ordinary shares 30 June 2009 US$ Ordinary shares of par value 1,000,000,000 10,000,000 US$0.01 each Issued and fully paid - 30 June 2009 Number of ordinary 30 June 2009 shares US$ Balance at beginning and end of 350,000,000 3,500,000 period Authorised share capital - 31 December 2008 Number of ordinary shares 31 December 2008 US$ Ordinary shares of par 1,000,000,000 10,000,000 value US$0.01 each Issued and fully paid - 31 December 2008 Number of ordinary 31 December 2008 shares US$ Balance at beginning and end of 350,000,000 3,500,000 year The authorised share capital of the Company on incorporation was US$10,000, divided into 1,000,000 ordinary shares of US$0.01 each. By special resolution dated 5 February 2007, the authorised share capital of the Company was increased to US$10,000,000, divided into 1,000,000,000 ordinary shares of US$0.01 each. On incorporation, 2 ordinary shares were issued, fully paid to the subscribers to the memorandum of association of the Company. Those ordinary shares have been made available under the initial placing. The placing price of US$1 per placing share represents a premium of 99 cents to the nominal value of an ordinary share. Every shareholder present in person or by proxy at the annual general meeting has one vote. Upon a poll, every member present in person or by proxy has one vote for each share held by him. On winding-up of the Company, after paying all the debts attributable to and satisfying all the liabilities of the Company, shareholders shall be entitled to receive by way of capital any surplus assets of the Company attributable to the shares as a class in proportion of their holdings. 9. Share premium 30 June 2009 31 December 2008 US$ US$ Balance at the beginning of the period/year 134,400,629 134,400,629Balance at the end of the period/year 134,400,629 134,400,629 10. Taxation Guernsey taxation The Company has applied for and been granted exempt status for Guernsey income tax purposes under the Income Tax (Exempt Bodies) (Bailiwick of Guernsey) Ordinance 1989. Under the provision of the Ordinance, the Company will pay an annual fee to the Guernsey Income Tax Authority, which is currently fixed at £600, but will not be liable to Guernsey income tax, other than on Guernsey source income (excluding, by concession, Guernsey bank deposit interest). Cyprus taxation A Cypriot company will not be subject to corporation tax in Cyprus on dividends received from a Russian company in which its holding is 1% or more of the issued share capital of that Russian company. However, it will be liable to defence fund tax in Cyprus, at the rate of 15%, if it receives dividends from a Russian company in which its holding is less than 1% of the issued share capital of that Russian company. Any tax withheld in Russia can be set off against the Cyprus 15% defence fund tax. No withholding tax will be due on the payment of dividends by a Cypriot company to a company in Guernsey, under a domestic law exemption which is available when the owner of the Cyprus entity is a corporation residing outside Cyprus. The Group expects to make the majority of its investments through one or more entities organised as Cyprus subsidiaries. Management and control of the Subsidiary will take place in Cyprus and it is therefore expected that the subsidiary will be treated as resident in Cyprus for tax purposes. As a result, investments in securities are expected to be subject to reduced withholding taxes in Russia on dividend income received in Cyprus. Under the Russia/Cyprus Double Taxation Treaty, the rate of Russian withholding tax on dividends may be reduced to 5% (10% if the amount of investment in the Russian company is less than US$100,000). Russian taxation Taxation of dividends Currently, dividends distributable by a Russian company to a foreign investor which does not have a permanent establishment in Russia are generally subject to withholding tax on Russian source income at 15%, unless a reduced rate of taxation is provided by a double taxation treaty (DTT). Pursuant to the effective Russia/Cyprus DTT, Russian withholding tax on income at a rate of 5% applies to dividends paid by Russian companies to the Subsidiary when the latter has invested at least US$100,000 in the Russian company. A 10% withholding rate applies if this condition is not met. The reduced tax rates can only be applied in accordance with the Russia/Cyprus DTT, if the Subsidiary does not have a permanent establishment in Russia. Taxation of capital gains Under the Russia/Cyprus DTT, income from the sale of shares of a Russian company is not taxed in Russia, as the Subsidiary is not considered to have a permanent establishment in Russia. The Directors believe that the Subsidiary conducts its affairs in such a way that it will not be deemed to have a permanent establishment in Russia. Should the Russian authorities regard the Subsidiary as having a permanent establishment in Russia to which the investments in Russian companies are attributed, and over 50% of the Subsidiary's assets consists of immovable property located in Russia, capital gains from the disposal of shares in such Russian investments would be subject to profits tax at a rate of 20% on gross income or 24% on the difference between sales proceeds and cost. 11. Operating expenses, material agreements and related parties Six months ended Six months ended 30 June 2009 30 June 2008 US$ US$ Expenses Management fee (934,835) (3,892,399) Administration fee (133,891) (180,023) Directors' fees (111,881) (141,031) Custodians' fees (54,524) (86,292) Audit fee (48,194) (193,574) Registrar fee (8,394) (13,783) Other expenses (104,114) (171,431) Total operating expenses (1,395,833) (4,678,533) ManagerThe Company is party to a Management Agreement with Prosperity Capital Management Limited, dated 15 February 2007, pursuant to which the Manager provides investment management services to the Company. The Company pays the Manager a management fee and a performance fee. Management Fee The Company has agreed to pay the Manager a management fee, which is equal to 2% of the net asset value per annum, which is payable quarterly in arrears. The management fee charge for the six months ended 30 June 2009 was US$934,835 (30 June 2008: US$3,892,399). At 30 June 2009 US$556,093 (31 December 2008: US$656,451) was payable. Performance Fee The Company has agreed to pay the Manager a performance fee payable in respect of each reference period following the end of such reference period. The performance fee will be calculated on an ordinary share by ordinary share basis, by reference to the performance of such ordinary shares over each reference period as follows: (i) the performance fee in respect of any ordinary share will be an amount equal to 20% of the excess (if any) of (a) the adjusted closing net asset value per ordinary share for such ordinary share over (b) the greater of (i) the opening net asset value per ordinary share and (ii) the high water mark (the highest net asset value per ordinary share as at the date of issuance of such ordinary share and as at the last day of all prior reference periods in which a performance fee was payable with respect to such ordinary share, net of any such performance fee) for such ordinary share; and (ii) The performance fee in respect of any ordinary share will be payable only where the adjusted closing net asset value per ordinary share for such ordinary share would, when taken together with all distributions (if any) made by the Company with respect to such ordinary share in all preceding reference periods, be sufficient to provide an internal rate of return on the placing price which is equal to or greater than 8%. No performance fees were charged during or payable at the end of the current period or the comparative period. Administration Fee The Company is party to an administration agreement with Kleinwort Benson (Channel Islands) Fund Services Limited dated 15 February 2007, pursuant to which the Administrator has agreed to provide administrative and company secretarial services to the Company. The Administrator will receive a fee of 0.0925% of the net asset value per annum, subject to a minimum monthly fee of US$16,000, from the Company for its services. The Company will reimburse the Administrator for all reasonable out-of-pocket expenses incurred by the Administrator solely in connection with the performance of its services. The Administrator fee charge for the period was US$133,891 (30 June 2008: US$180,023). At 30 June 2009 US$26,494 (31 December 2008: US$31,073) was payable. The Administrator will be responsible for the fees of the Sub-Administrator. Custodians' Fees The Subsidiary has appointed ING Bank (Eurasia) ZAO as the Russian Custodian. The Russian Custodian will provide custodial services in relation to the Subsidiary's Russian assets, which include the safe keeping of securities certificates and recording and certifying the rights to securities. The Russian Custodian receives a fee for its services, payable monthly in arrears, which is within the range 0.03% to 0.08% per annum of the net asset value of equities, international securities and exchange-traded securities held by the Subsidiary. The Custodians' fees charged for the period ended 30 June 2009 was US$54,524 (30 June 2008: US$86,292). At 30 June 2009 US$9,086 (31 December 2008: US$30,293) was payable. The Company has appointed Investors Trust and Custodial Services (Ireland) Limited as the Global Custodian. The Global Custodian will act as custodian of the US Dollar and non-Russian securities of the Company and will provide the Company with execution and settlement services. The Company will pay the Global Custodian a fee, payable monthly in arrears, in an amount of: (i) 0.08% of the net asset value up to US$2,500,000,000, (ii) 0.07% of the net asset value exceeding US$2,500,000,000, up to US$5,000,000,000, and (iii) 0.06% of the net asset value exceeding US$5,000,000,000. The Company will also reimburse the Global Custodian's reasonable out-of-pocket expenses. Registrar Fee The Registrar is entitled to a minimum annual registration fee of £4,500 and an annual fee of £1,500 for the maintenance of the share register. Other fees are payable according to the usage of its services by the Company. The Company will reimburse the Registrar for all reasonable disbursements incurred in the proper execution of its duties to the Company. The Registrar fee charged for the period ended 30 June 2009 was US$8,394 (30 June 2008: US$13,783). At 30 June 2009 US$578 (31 December 2008: US$4,446) was payable. Directors' Fees During the period ended 30 June 2009, the Directors charged fees of US$111,881 (30 June 2008: US$141,031). At 30 June 2009 US$52,135 (31 December 2008: US$64,671) was payable. 12. Financial risk management Strategy in using financial instruments The Group's activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Group's and the Manager's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. Market risk embodies the potential for both losses and gains and includes currency risk, interest rate risk and price risk. Market risk arises mainly from uncertainty about future prices of the financial instruments held. It represents the potential loss the Group might suffer through holding market positions that fluctuate in market value. The Manager considers the diversification of the portfolio in order to minimise the risk associated with particular countries or industry sectors while continuing to pursue the Group's investment objective. Market price risk The investments of the Company are subject to market fluctuations and the risk inherent in investment in financial instruments and there can be no assurance that the investments will appreciate in value. All securities investments present a risk of loss of capital. The Manager aims to moderate this risk through the selection of securities with an appropriate risk/reward profile. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The Group's equity investments are susceptible to market price risk arising from uncertainties about future prices of the investments. At 30 June 2009, the Company's market risk is affected by two main components: changes in actual market prices and foreign currency movements. An analysis of securities by industry and details of concentration of investments, where the Company invested in certain companies which had estimated fair market value that were individually in excess of 5% of net assets are shown in the consolidated schedule of investments. Foreign currency movements are covered in the notes below. Foreign currency risk Currency risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates. All investments in securities are valued in United States Dollars. However the companies in which the Group invests are almost all Russian companies which have their primary area of business within Russia. The values of such companies will be affected by many factors including, inter alia, the general Russian business environment and the value of the Russian currency, the Russian Rouble, as expressed against other currencies particularly the US Dollar. The degree to which a change in the exchange rate between the Russian Rouble and the US Dollar affects the value of an investment in a foreign company varies depending on how the market values the underlying assets of that company. The Group also incurs foreign currency risk on cash, dividends receivable, other receivables and payable balances that are denominated in currencies other than US Dollars (predominately Russian Rouble). Currency Profile 30 June 2009 Investments at fair Other assets and value liabilities Total US$ US$ US$ Kazakhstan Tenge 4,211,303 - 4,211,303 Russian Rouble *107,446,998 (122,019) 107,324,979 Ukraine Hryvna 12,538,953 - 12,538,953 Total 124,197,254 (122,019) 124,075,235 At 31 December 2008 the Group's exposure to foreign currency, based on the carrying value of monetary assets and liabilities, was as follows: 31 December Investments at fair Other assets and 2008 value liabilities Total US$ US$ US$ Kazakhstan Tenge 10,658,566 - 10,658,566 Russian Rouble *64,664,640 7,397 64,672,037 Ukraine Hryvna 4,317,117 - 4,317,117 Total 79,640,323 7,397 79,647,720 * These investments were settled in US Dollars by the Company. However the underlying exposure is to Russian Roubles. Currency risk sensitivity At 30 June 2009, had the exchange rate between the US Dollar and other currencies increased or decreased by 5% with all other variables held constant, the increase or decrease respectively in the value of the Company's investments denominated in currencies other than US Dollars attributable to holders of ordinary shares would have amounted to a maximum US$6,209,863 (31 December 2008: US$3,982,016). At 30 June 2009, had the exchange rate between the US Dollar and other currencies above increased or decreased by 5% with all other variables held constant, the increase or decrease respectively in other net assets and liabilities attributable to holders of Ordinary Shares would have amounted to US$6,101 (31 December 2008: US$370). Price risk Price risk is the risk that the value of the investments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk), whether caused by factors specific to an individual investment, its issuer or all factors affecting all instruments traded in the market. As the majority of the Company's financial instruments are carried at fair value with fair value changes recognised in the income statement, all changes in the market conditions will directly affect net investment income. Price risk is managed by the Company's Manager by constructing a diversified portfolio of instruments traded on various markets. Price sensitivity analysis At 30 June 2009, 98.69% (31 December 2008: 98.42%) of the Company's equity investments are listed on RTS, MICEX and other major exchanges. A 3% increase in stock prices at 30 June 2009 would have increased the net assets attributable to holders of ordinary shares and the changes in net assets attributable to holders of ordinary shares by US$3,677,048 (31 December 2008: US$2,351,553). An equal change in the opposite direction would have decreased the net assets attributable to holders of ordinary shares and the changes in net assets attributable to holders of ordinary shares by an equal, but opposite amount. Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments. Due to the Manager's prominence in the Russian equities market, it is possible for total shareholdings amongst all funds managed by the Manager to become a significant proportion of certain of the investees' outstanding shares. Liquidity risk may result from an inability to sell investments quickly at close to fair value. However, as the Company does not allow for redemption of any shares for shareholders, the only significant commitments arise out of the investment process. The Manager takes into account the liquidity of investee's stakes and the required time to liquidate stakes via the market or a block trade without impairment to fair value. Liquidity risk is monitored through the regular fund cash reports, enabling the Manager to potentially foresee liquidity shortages, and to allocate or liquidate assets accordingly to fund additional commitments. This information is provided by the Administrator and can be accessed by all members of the Manager and Adviser who initiate or monitor transactions, and is reconciled against the data delivered by the Custodian on a regular basis. The table below analyses the Group's financial liabilities into relevant maturity groupings based on the remaining year at the balance sheet date to the contractual maturity date. The amounts in the table are in contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. Less than 1 1-3 months 3-12 months Total month As at 30 June 2009 US$ US$ US$ US$ Liabilities Accrued expenses 763,805 - - 763,805 Amounts payable on - 2,560,175 - 2,560,175 investments purchased Total liabilities 763,805 2,560,175 - 3,323,980 Less than 1 1-3 months 3-12 Total month months As at 31 December 2008 US$ US$ US$ US$ Liabilities Accrued expenses 686,744 385,415 - 1,072,159 Amounts payable on 1,049,690 - - 1,049,690 investments purchased Total liabilities 1,736,434 385,415 - 2,121,849 Credit risk Financial assets which potentially expose the Group to credit risk consist principally of investments in cash balances and deposits with and receivable from brokers. The extent of the Group's exposure to credit risk in respect of these financial assets approximates their carrying value. Management does not anticipate any material losses as a result of these concentrations. The Group will be exposed to credit risk on parties with whom it trades and will also bear the risk of settlement default. The Group minimises concentration of credit risk by undertaking transactions with a large number of customers and counterparties on recognised and reputable exchanges. Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered small due to the short settlement period involved and the high credit quality of the brokers used. The Company monitors the credit rating and financials of the brokers used to further mitigate the risk. Substantially all the assets of the Company are held with the Custodian. Bankruptcy or insolvency of the Custodian may cause the Company's rights with respect to cash held with it to be delayed or limited. The Manager analyses credit concentration based on the counterparty and the industry of the financial assets that the Company holds. Other then those outlined above, there were no significant concentrations of credit risk to counterparties at 30 June 2009. Valuation of Financial Instruments IFRS 7 requires disclosures regarding the level in the fair value hierarchy in which fair value measurements are categorised for assets and liabilities measured in the Statement of Financial Position. The determination of fair value for financial assets and financial liabilities for which there is no observable market price requires the use of valuation techniques as described in Note 2, Significant accounting policies. For financial instruments that trade infrequently and have little price transparency, fair value is less objective and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Company's accounting policy on fair value measurements is discussed in Note 5, Investments in securities designated at fair value through profit or loss on initial recognition. The Company categorises investments using the following hierarchy as defined by IFRS 7: * Level 1 - Quoted market price in an active market for an identical instrument. * Level 2 - Valuation techniques based on observable inputs. This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. * Level 3 - Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs could have a significant impact on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The following is a summary of the inputs used as of 30 June 2009 in valuing the Company's financial instruments carried at fair value: Financial assets Level 1 Level 2 Level 3 Total designated at fair US$ US$ US$ US$ value through profit or loss 30 June 2009 Equities 110,503,881 13,693,373 - 124,197,254 31 December 2008 Equities 77,393,707 2,246,616 - 79,640,323 Four securities that were previously valued using quoted market prices in an active market (Level 1 inputs) on 31 December 2008 were valued based on other observable market inputs on 30 June 2009, as the securities had not been actively traded on the financial reporting date. The following table shows the total transfers during the period between Level 1 and Level 2 of the fair value hierarchy for financial assets recognised at fair value: Financial assets designated at fair Transfers from Level 1 value through profit or loss to Level 2 US$ Equities 4,831,671 13. Foreign exchange rates The following foreign exchange rates were used to translate assets and liabilities into the reporting currency (United States Dollars): 30 June 2009 31 December 2008 Kazakhstan Tenge 150.43 120.8750 Russian Rouble 31.116 30.5350 Ukraine Hryvna 7.72 7.93 14. Reconciliation of net asset value On an on-going basis, the Group plans to publish net asset value and net asset value per share determinations calculated on a basis that differs from the basis used to determine the Group's net asset value for the purposes of the Group's IFRS financial statements. This alternate basis of calculation used to calculate the published net asset value and net asset value per share differs from the IFRS calculation used in these financial statements in that: * Unquoted investments where there has been a third party transaction will be valued at the transaction price, where it has been verified by at least two leading brokers of Russian securities. This may lead to the investments not being carried at fair value as prescribed by IFRS. IFRS requires such investments to be carried at fair value which should be estimated using an appropriate valuation technique as prescribed by IAS 39; Financial Instruments: Recognition and Measurement. Carrying at cost or the last third party transaction price may not equate to the investments' fair value at a point in time; * For securities which are unlisted and for which broker quotes are normally available, such securities will be valued at the last third party transaction price, where it has been verified by at least two leading brokers of Russian securities. This may lead to the investment not being carried at fair value as prescribed by IFRS. IFRS requires such investments to be carried at the current bid price at the date of valuation. At any valuation point, the current bid price may differ from the last third party price; * Listed securities are valued at the last trade price on the valuation date, where the last trade price falls within the closing bid/ask spread, and at the average of best bid and best ask price, where the last trade price falls outside the closing bid/ask spread. IFRS requires securities that are quoted in an active market to be valued at the current bid price. The adjustments result in the following: 30 June 2009 31 December 2008 US$ US$ Net assets attributable to 130,392,552 82,780,446 shareholders at market mid prices Adjustment to value of investments at (2,037,173) (3,243,138) bid prices Net assets attributable to shareholders as per Consolidated 128,355,379 79,537,308 Statement of Financial Position *30 June 2009 31 December 2008 US$ US$ Net asset value per share at market mid prices 0.373 0.24 Adjustment per share to value of investments at bid prices (0.005) (0.01) Net asset value per share at bid prices 0.368 0.23 * During the period the directors resolved to publish the net asset value per share to three decimal places. 15. Transactions with related parties A director and certain key employees of the Investment Adviser and a shareholder of the Manager, are also directors of other companies in which the Group has an investment. The largest of these investments are Central Telecom, Magnit and Dixy Group. The fair market value of all 14 investments which have related party representatives on their boards of directors determined in accordance with IFRS represents 33.86% (31 December 2008: 30.15%) of the fair market value of the Group's net assets determined in accordance with IFRS. During the period ended 30 June 2009, the Directors charged fees of US$111,881 (30 June 2008: US$141,031). At 30 June 2009 US$52,135 (31 December 2008: US$64,671) was payable. During the previous financial period the Directors of the Company did not receive a discount for the purchase of the shares of the Company. On 25 March 2008 a related company managed by the Manager entered into a share sale and purchase agreement whereby it purchased investments in two Russian banks. The agreement provides an option for that company to sell the investments back to the counterparty at the purchase price should the Russian banks fail to meet certain financial targets. The Subsidiary has indirectly participated in this agreement by purchasing a portion of the investments in the Russian banks specified in the agreement and therefore may participate in any sale back to the counterparty via the related company should this occur. In March 2009 the Russian banks released financial statements to the related company indicating the financial targets had not been met, thus providing the related company and the Subsidiary with the opportunity to exercise the put option. Based on the uncertainty around the ability of the counterparty to fulfil its obligations in this respect, the option had an estimated fair value of US$Nil at 30 June 2009 and 31 December 2008. In July 2009 the related party exercised the option to sell the securities back to the counterparty. However, based on the financial condition of the counterparty, the amounts receivable from these transactions are not being valued in the subsequent period based on the exercise price but rather on the current market value of the underlying securities. During the period the Group entered into transactions with other funds managed by the Manager. The aforementioned transactions were conducted for efficiency purposes whereby the Group purchased and/or sold securities on behalf of other funds managed by the Manager and then purchased or sold them on to the relevant counterparties. The trades took place at market value and therefore the Group was neither advantaged nor disadvantaged due to these transactions. The transactions were as follows: Value US$ New Russian Generation Limited Total purchases 125,407 Total sales 1,206,212 Prosperity Voskhod Fund Limited Total sales 623,943 The Prosperity Cub Fund Total purchases 1,133,599 Total sales 19,980 The Prosperity Quest Fund Total purchases 253,087 Total sales 267,401 The Russian Prosperity Fund Total purchases 24,211 The Russian Prosperity Fund (Euro) Total purchases 126,900 16. Subsequent Events On 17 July 2009, the sub-administration agreement novated from Investors Fund Services (Ireland) Limited (IFSIL) to State Street Fund Services (Ireland) Limited and the Global Custodian Agreement novated from Investors Trust Custodial Services (Ireland) Limited to State Street Custodial Services (Ireland) Limited. In July 2009 the Subsidiary participated in an option exercised by a related party to sell certain investments (see note 15). 17. Approval of Financial Statements The financial statements were approved by the Board of Directors on 16 September 2009. ---END OF MESSAGE--- This announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement. http://hugin.info/141352/R/1342348/321283.pdf Copyright © Hugin AS 2009. All rights reserved. [ Back To TMCnet.com's Homepage ]