Annual Report 2022 UTLC ERA — Corporate governance

History

clear history

Elena
Sapronova

Legal Department Director

Corporate Governance

Corporate Governance Structure Authorized Capital Dividend Policy General Meeting of Shareholders Board of Directors Corporate Secretary and Committee Secretary Management Board and General Director Remuneration System Control System Risk Management Results for 2022

Corporate Governance Structure

An effective corporate governance system is a major driver of UTLC ERA’s sustainable development.

We have an advanced corporate governance system based on the Russian statutory requirements and the best corporate practices.

In line with the recommendations of the Corporate Governance Code of the Bank of Russia, we are governed by the following key principles for building the corporate governance system:

Equal treatment of the rights and interests of the shareholders

Respect and protection of shareholder rights

Consistent and inclusive decision making

Dedicated and professional members of the Board of Directors and the Management Board

Stable and transparent dividend policy

Openness and transparency

Zero tolerance to any forms of corruption

Compliance with the code of conduct

Corporate social responsibility

Number of General Meetings of Shareholders / Meetings of the Board of Directors and its Committees, the Management Board in 2022

General Meetings of Shareholders

meetings

2 meetings in the form of joint attendance (with a possibility to deliver early voting ballots), 2 meetings in the form of absentee voting (by sending out ballots)

2 meetings in the form of joint attendance (with a possibility to deliver early voting ballots), 2 meetings in the form of absentee voting (by sending out ballots).

Board of Directors

meetings

9 meetings in the form of joint attendance (8 meetings by video conference, 1 meeting with joint attendance), 4 meetings in the form of absentee voting

9 meetings in the form of joint attendance
(8 meetings by video conference, 1 meeting with joint attendance),
4 meetings in the form of absentee voting.

There are no independent directors in the Board of Directors:

Two representatives of JSCo "RZD"

Two representatives of JSC “NC “KTZ”

Two representatives of the Belarusian Railway

There were no independent directors in the Board of Directors.

Strategy Committee under the Board of Directors

meetings

3 meetings in the form of joint attendance,
5 meetings in the form of absentee voting

The Strategy Committee is composed of:

Two representatives of JSCo "RZD"

Two representatives of JSC “NC “KTZ”

Two representatives of the Belarusian Railway

Two representatives of UTLC ERA

Audit Committee under the Board of Directors

meetings

5 meetings in the form of joint attendance,
2 meetings in the form of absentee voting

The Audit Committee is composed of:

Two representatives of JSCo "RZD"

Two representatives of JSC “NC “KTZ”

Two representatives of the Belarusian Railway

Two representatives of UTLC ERA

HR, Remuneration and Corporate Governance
Committee under the Board of Directors

meetings

5 meetings in the form of joint attendance,
2 meetings in the form of absentee voting

The HR, Remuneration and Corporate Governance Committee is composed of:

Two representatives of JSCo "RZD"

Two representatives of JSC “NC “KTZ”

Two representatives of the Belarusian Railway

One representative of UTLC ERA

Management Board

meetings

30 meetings in the form of joint attendance,
1 meeting in the form of absentee voting

The Management Board is composed of six representatives of UTLC ERA

Corporate Governance Structure

UTLC ERA was established following the spin-off reorganization of JSC UTLC resulting in establishment of three companies

JSC "UTLC ERA"

JSC "UTLC Logistics"

JSC "UTLC Finance"

After the reorganization, the company is based on equal participation of three railway administrations

JSCo "RZD"

33,333333%

Joint Stock Company “Russian Railways”, PSRN 1037739877295, located at Building 1, 2/1 Novaya Basmannaya Street, Basmanny Municipal District Intra-City Territory, Moscow: 33.333333%

JSC “NC “KTZ”

33,333333%

Joint Stock Company “National Company “Kazakhstan Temir Zholy” registered under number 11867-1901-АО, located at 6 D. Kunayev Street, Astana, Republic of Kazakhstan: 33.333333%

Belarusian Railway

33,333333%

State Association “Belarusian Railway”, UNP 100088574, OKPO 00047792, located at 17 Lenin Street, Minsk, Republic of Belarus: 33.333333%

The authorized capital of UTLC ERA is 98,127,000 rubles

The company’s authorized capital consists of 98,127 ordinary registered uncertified shares with a nominal value of one thousand (1,000) rubles each. Each of the three participants holds 32,709 shares.

Dividend Policy

The annual General Meeting of Shareholders approved the Regulations on UTLC ERA’s Dividend Policy on June 30, 2021 (Minutes No. 14 dated 30.06.2021). The dividend policy shall apply from the date of fulfillment of the Company’s dividend payment obligations for the reporting year 2020.

Three main principles

Legality

We respect the shareholders’ rights in accordance with the Russian laws and the best international corporate governance practices

Balanced goals

We pay dividends to, and act in the interests of, our shareholders by developing the business

Transparency

We make the dividend definition and payment mechanism more transparent, facilitate access to information and advise the shareholders

Dividend payment resolutions are adopted by the General Meeting of Shareholders only at the end of the six-month period and at the end of the reporting year based on the recommendations given by the Board of Directors of UTLC ERA. We also meet the frequency requirements by paying dividends at the end of the six months and at the end of the reporting year.

The prerequisites for
the resolution on dividend
announcement and payment

The prerequisites for the resolution on dividend announcement and payment

Net profit is defined on the basis of UTLC ERA’s (financial) accounting as per the Russian Accounting Standards

At least 50% of UTLC ERA’s net profit in the reporting period (fixed amount) is subject to distribution

The resolution is not in conflict with any obligations of the company or with the Russian laws

The total dividend amount is based on the company’s financial situation and the forecast working capital demand

Dividends Accrued and Paid in 2022

General Meeting of Shareholders

The General Meeting of Shareholders is the supreme management body of UTLC ERA in charge of making crucial business decisions as defined in Federal Law No. 208-FZ On Joint Stock Companies dated December 26, 1995.

The management body is governed by the effective Russian laws, the Shareholders’ Agreement, UTLC ERA’s Articles of Association, the Regulation on Arranging and Holding the General Meeting of Shareholders and other internal documents.

The General Meeting of Shareholders is authorized to adopt resolutions within its remit if it is attended by the company’s shareholders who hold a total of 3/4 votes granted by UTLC ERA’s placed voting shares. Therefore, all three shareholders of the company shall take part in the General Meeting. The matters within the remit of the General Meeting of Shareholders are divided into critical, special and other matters.

Main Resolutions Adopted in 2022

Extraordinary General Meeting of Shareholders
on April 7, 2022

The chairman was elected for the Extraordinary General Meeting of Shareholders of UTLC ERA

The powers of the member of the Management Board of UTLC ERA were terminated early

Extraordinary General Meeting of Shareholders
on May 13, 2022

The chairman was elected for the Extraordinary General Meeting of Shareholders

The powers of the members of the Board of Directors of UTLC ERA were terminated early

A new Board of Directors of UTLC ERA was elected

The Chairman of the Board of Directors was elected

Extraordinary General Meeting of Shareholders on September 29, 2022:

The resolution was adopted regarding dividend payment/announcement for the first six months of 2022

Annual General Meeting of Shareholders
on June 15, 2022

UTLC ERA’s annual accounting (financial) statements for 2021 as per the Russian Accounting Standards were approved

The company’s annual financial statements for 2021 as per the International Financial Reporting Standards were approved

The company’s annual report for 2021 was approved

The resolution was adopted regarding distribution of the net profit generated by UTLC ERA in 2021

The resolution was adopted regarding dividend payment/announcement for 2021

The resolution was adopted regarding the payment of the annual remuneration to the members of the Board of Directors of UTLC ERA in accordance with the Regulations on the Procedure for Payment of Remunerations and Compensations to Members of the Board of Directors approved by the Annual General Meeting of Shareholders (Minutes No. 10 dated 16.09.2020)

The resolution was adopted regarding the payment of the annual remuneration to the members of the Audit Commission of UTLC ERA in accordance with the Regulations on the Procedure for Payment of Remunerations and Compensations to Members of the Audit Commission approved by the Extraordinary General Meeting of Shareholders (Minutes No. 2 dated 10.10.2018)

A new Board of Directors of UTLC ERA was elected

The Chairman of the Board of Directors was elected

A new Audit Commission was elected

A new member of the Management Board of UTLC ERA was elected for a term from June 15, 2022 to April 1, 2024 inclusive

Board of Directors

The Board of Directors of UTLC ERA is a corporate body in charge of strategic management of the company’s business in order to increase its shareholder value.

The Board of Directors adopts resolutions on all general governance matters other than those within the remit of the General Meeting of Shareholders, the Management Board, and the General Director. The Board of Directors plays a key role in establishing and developing the corporate governance system, protects and exercises the rights of shareholders, supervises the activities of the executive bodies.

The proceedings of the Board of Directors is defined by the Regulation on the Board of Directors of UTLC ERA approved by the General Meeting of Shareholders on July 22, 2021. There are no independent directors in the Board of Directors.

The Board of Directors is elected by the General Meeting of Shareholders of UTLC ERA for a term until the next annual General Meeting of Shareholders, and consists of six members, of which:

Two are elected from among JSCo "RZD" nominees

Two are elected from among JSC “NC “KTZ” nominees

Two are elected from among Belarusian Railway nominees

The Board of Directors is governed by the effective laws of the Russian Federation, the Shareholders’ Agreement, the Company’s Articles of Association, the Regulations on the Board of Directors and other internal documents of UTLC ERA.

The Board of Directors is authorized to adopt resolutions within its remit if its meeting is attended by at least half of the elected members. A critical prerequisite is that at least one nominee of each shareholder shall be present (or provide a written opinion).

Chairman of the Board of Directors

The Chairman of the Board of Directors plays the key role in ensuring the effective operation of the Board of Directors by coordinating its activities, including minute taking, convening and chairing meetings.

The Chairman of the Board of Directors also exercises other functions stipulated by the effective laws, the Company’s Articles of Association, the Regulation on the Board of Directors of UTLC ERA and other internal documents.

The Chairman of the Board of Directors is elected by the General Meeting of Shareholders of UTLC ERA concurrently with the election of the Board of Directors, subject to the provisions of the Shareholders’ Agreement.

If this position is not filled at the General Meeting of Shareholders, then the Board of Directors, at its first meeting after the election, elects the Chairman of the Board of Directors by a simple majority vote of the total number of members.

The Board of Directors may re-elect its chairman at any time by a majority vote of the members present at the meeting, subject to the provisions of the Shareholders’ Agreement.

Liability Insurance

In 2022, one of UTLC ERA shareholders (JSCo "RZD") obtained liability insurance for UTLC ERA directors and officers.

Committees of the Board of Directors

On July 24, 2019, the Board of Directors resolved to set up the Strategy Committee, the Audit Committee, and the HR, Remuneration and Corporate Governance Committee under the Board of Directors of UTLC ERA (Minutes No. 15 dated July 24, 2019).

The Committees were set up to facilitate the effective operations of the Board of Directors. The Committees report to the Board of Directors of UTLC ERA and act as its consultative and advisory bodies. The resolutions of the Committees are of advisory nature. The main task of the Committees is to provide preliminary review and recommendations for the Board of Directors.

On September 24, 2019, the Board of Directors approved the Regulations on Committees of the Board of Directors of UTLC ERA: Strategy Committee, Audit Committee, and HR, Remuneration and Corporate Governance Committee (Minutes No. 17 dated September 24, 2019). On October 10, 2020, the Board of Directors approved amendments to the above regulations with regard to payment of remuneration to the Committee members and secretary (Minutes No. 25 dated June 10, 2020). On January 25, 2021, amendments to the Regulations on the Strategy Committee were approved with regard to its remit expansion.

Corporate Secretary

The Corporate Secretary of UTLC ERA elected by the Board of Directors is in charge of communication with the shareholders and the Board of Directors, coordinates protection of their rights and interests, ensures adoption of corporate resolutions and exercises a number of other functions.

The Corporate Secretary acts in accordance with the Company’s Articles of Association and the Regulations on the Corporate Secretary approved by the Board of Directors. In addition, the Corporate Secretary acts as Secretary at the Company’s General Meeting of Shareholders.

From January 1 to May 13, 2022, the functions of the Corporate Secretary were exercised by Olga Smirnova elected by the Board of Directors (Minutes No. 39 dated 21.07.2021). From May 14 to June 23, 2022, the Company had no Corporate Secretary. From June 24, 2022 until present, the functions of the Corporate Secretary have been exercised by Dmitri Bulgakov elected by the Board of Directors (Minutes No. 53 dated 24.06.2022).

Committee Secretary

The Committee Secretary is in charge of informational and documentary support of the Committee’s operations.

This person is responsible for following up on the Committee’s resolutions. The Committee Secretary is responsible for retaining minutes and other Committee’s documents and records in accordance with UTLC ERA’s documentation retention procedures.

The Committee Secretary is elected by the relevant Committee. The job responsibilities for the position are described in the Regulations on the Committee and are aligned with the Russian laws and the Company’s Articles of Association. The Committee Secretary reports to the Committee Chairperson.

From January 1, 2022, the functions of the Committee Secretary were exercised by Margarita Gerasina (Strategy Committee Minutes No. 11 dated 30.07.2021, No. 20 dated 11.07.2022; Audit Committee Minutes No. 11 dated 05.08.2021, No. 18 dated 06.07.2022; Minutes of the HR, Remuneration and Corporate Governance Committee No. 9 dated 02.08.2021, No. 15 dated 15.06.2022). Her powers were terminated early starting from September 6, 2022. From September 29, 2022 until present, the functions of the Committee Secretary have been exercised by Dmitri Bulgakov (Strategy Committee Minutes No. 23 dated 29.09.2022; Audit Committee Minutes No. 19 dated 29.09.2022; Minutes of the HR, Remuneration and Corporate Governance Committee No. 17 dated 29.09.2022).

Dmitri
Bulgakov

Deputy Director of Legal Corporate Service Department

Year of birth

1992

Nationality

Russian Federation

Career

2023 until present

Deputy Director of Corporate Service Legal Department, UTLC ERA

2019 — 2022

Head of Corporate Service Department, UTLC ERA

2016 — 2019

Head of Corporate Department, JSC GU ZKH

Education

Saratov State Academy of Law (SSAL), major in Legal Studies

Kutafin Moscow State Law University, major in Corporate Law

Share in UTLC ERA authorized capital — 0%

Share of UTLC ERA ordinary stock — 0%

Management Board and General Director

UTLC ERA’s executive bodies, the Management Board and the General Director, play a key role in ensuring prompt and effective solutions to the day-to-day and strategic tasks.

The Company’s Articles of Association assign all day-to-day business matters to the remit of the executive bodies, apart from the matters within the remit of the General Meeting of Shareholders and the Board of Directors.

The executive bodies report to the General Meeting of Shareholders and the Board of Directors. The General Director presents quarterly reports, which help assess UTLC ERA’s performance, to the Board of Directors.

General Director

The General Director is the sole executive body of UTLC ERA elected by the General Meeting of Shareholders for a term defined by such Meeting. The employment contract with the General Director is signed on behalf of the Company by the Chairperson of the Board of Directors or his/her authorized person.

The General Director is in charge of the company’s operational management and acts within his/her remit (in accordance with the Articles of Association of UTLC ERA).

The General Director

Represents UTLC ERA’s interests

Enters into transactions on behalf of the company that do not require approval by the Management Board, the Board of Directors and the General Meeting of Shareholders

Signs financial documents

Approves the staff list, enters into employment agreements with the employees, applies rewards and sanctions to the employees

Approves the internal documents of UTLC ERA governing the company’s day-to-day business activities other than internal documents that are to be approved by the Management Board, the Board of Directors and the General Meeting of Shareholders in accordance with the Company’s Articles of Association

Issues binding orders and directions

Administers the activities of the Management Board

Performs other functions defined by the Articles of Association of UTLC ERA

Alexey Grom was elected General Director until April 1, 2024.

Alexey
Grom

General Director, Chairman of the Management Board

Year of birth

1971

Nationality

Russian Federation

Career

2019 until present

General Director of UTLC ERA, Chairman of the Management Board

2018–2019

President of UTLC ERA, Chairman of the Management Board

2016–2020

President of JSC UTLC, Chairman of the Management Board

2014–2015

First Deputy General Director of LLC “PО UTLC”

2012–2014

First Vice President of FESCO

Education

Moscow Institute of Transport Engineering, major in Transportation Process Management

Stockholm School of Economics, Master of Business Administration (MBA)

Share in UTLC ERA authorized capital — 0%

Share of UTLC ERA ordinary stock — 0%

Management Board

The Management Board is the collective executive body of UTLC ERA, which administers effective management of the company’s day-to-day business activities, participates in the development and implementation of the strategy, and ensures fulfillment of the resolutions adopted by the General Meeting of Shareholders and the Board of Directors. The Management Board is governed by the effective laws, the Shareholders’ Agreement, the Articles of Association of UTLC ERA, the Regulations on the Management Board and other internal documents. The General Meeting of Shareholders defines the composition (six members from among the employees) and the term in office of the Management Board, taking into account the candidates proposed by the General Director.

Meetings of the Management Board are convened as necessary, but at least once a month, and are generally held in the form of joint attendance. The Management Board acts on the basis of the approved plan.

The competencies of the Management Board

Develops and implements UTLC ERA’s current business policy

Approves transactions connected with the company’s business financing or the loan funds granted to the company, including by way of a loan, financial aid or donation agreement, for a total amount exceeding 2% of the book value of the assets as of the latest reporting date

Approves write-off of UTLC ERA’s accounts receivable and payable if the amount of such accounts and/or claims exceeds 2% of the book value of the assets as of the latest reporting date

Approves the list of services rendered by the company, and the prices for such services

Exercises other authorities in accordance with the effective law, the Shareholders’ Agreement, the Company’s Articles of Association, the Regulation on the UTLC ERA Management Board and other internal documents

Remuneration system

Marina

Ivanova

HR Management Department Director

General Director

In order to motivate the General Director to improve the management efficiency and to solve the strategic tasks set by the shareholders and the Board of Directors, the company has the effective Regulations on General Director Rewards.

The document provides for the following rewards:

Quarter-end bonus
Year-end bonus
Outstanding performance bonus.

The resolution on rewarding the General Director for the reporting period is adopted by the Board of Directors upon reviewing the General Director’s budget performance report for the corresponding period. The General Director’s performance assessment results are also taken into account. Performance means meeting the qualitative, quantitative and key performance indicators (KPI).

The KPI list, weight and targets for the General Director of UTLC ERA are focused on the company’s operating model, which is based on all transit traffic operations in direct rail or mixed rail and sea service through the territories of at least two shareholders via the border or port stations, including, but not limited to: Dostyk, Altynkol, Brest, Brugi, Svisloch, Mamonovo, Zheleznodorozhny, Kaliningrad-Sortirovochny (Kaliningrad Trade Sea Port), Baltiysk (Baltyisk Port), Buslovskaya and Wartsila, (Finland).

The integral assessment of the general director’s performance by the Board of Directors is performed in the following areas:

Corporate discipline
High quality and timely budget development for the current and future reporting periods
Procurement planning and implementation
Contract management and execution
Interaction with the Board of Directors

The list of areas is subject to change by the Board of Directors. Performance in each area is assessed according to a four-point grading scale (excellent — 3 points; good — 2; satisfactory — 1; unsatisfactory — 0), with an average grade percentage subsequently calculated for all areas.

Outstanding performance is rewarded as resolved by the Board of Directors on the basis of the General Director’s proposal with the attached performance calculations and supporting indicators. Outstanding performance may be rewarded throughout the reporting period as resolved by the Board of Directors, but no more frequently than once in a quarter.

The General Director’s KPIs are approved by the Board of Directors on an annual basis. The following KPIs were approved for 2022 (Minutes No. 46):

Meeting the net profit indicator (weight: 30%)
Meeting the return on sales indicator (weight: 20%)
Meeting the transit container traffic volume indicator, which is defined as the ratio of actual transit container traffic volume in the reporting period to the volume according to the budget, and calculated in percent (weight: 40%)
Integral assessment of the director’s performance by the members of the Company’s Board of Directors with a 10% weight

For the first three KPIs, a target performance range is defined, with a 0, 0.5 or 1 coefficient to be applied within this range.

Members of the Management Board

To provide material incentives to the members of the Management Board for achieving the top corporate performance, improve the work quality and encourage the professional and creative activity, the Company has the effective Regulations on Rewards for Members of the Management Board.

It provides for the following rewards:

Quarter-end bonus
Year-end bonus
Outstanding performance bonus

Rewarding the members of the Management Board at the end of the reporting period is the employer’s right, not a guaranteed benefit. It depends on the qualitative and quantitative key performance indicators of the employees, the company’s financial standing and other factors that may affect the reward availability and amount.

The resolution on rewarding the members of the Management Board is adopted by a majority vote of the Board of Directors upon reviewing the General Director’s budget performance report for the reporting period.

2022 key performance indicators for the members of the Management Board were defined by the Board of Directors of UTLC ERA on December 27, 2021 (Minutes No. 46) and distributed among the members of the Management Board in accordance with their functions and remit.

Key Performance Indicators for Members of the Management Board of UTLC ERA in 2022

№KPI	Indicator	Type of indicator	Calculation formula	Distribution and weight share (%)
1	Fulfillment of General Director’s assignments	Quantitative	Not required	First Deputy General Director -10% Deputy General Director - Commercial Director - 10% Deputy General Director - Transportation Director -10% Deputy General Director (Interaction with SA BZD) - 10% Deputy General Director (Legal) - 10%
2	Attainment of Net Income indicator	Financial and economic	X = Net Income (Actual) /Net Income (Plan) * 100%	First Deputy General Director - 30 Deputy General Director - Commercial Director - 30% Deputy General Director - Transportation Director - 30% Deputy General Director (Interaction with SA BZD) - 30%
3	Keeping within the contractual accounts receivable	Financial and economic	X = Accounts receivable (Actual) / Accounts receivable (Established limit) * 100%	Deputy General Director - Commercial Director - 20% Deputy General Director (Interaction with SA BZD) - 20%
4	Attainment of UTLC ERA Transit Container Traffic indicator	Qualitative	X = Transit traffic (Actual) / Transit traffic (Plan)’100%	First Deputy General Director - 40% Deputy General Director - Commercial Director - 40% Deputy General Director - Transportation Director - 40% Deputy General Director (Interaction with SA BZD) - 40% Deputy General Director (Legal) - 40%
5	Minimization of empty car supply costs	Financial and economic	X = Empty car supply expenses as part of transportation cost per 1 TEU (Actual) / Empty car supply expenses as part of transportation cost per 1 TEU (Plan) * 100%	First Deputy General Director -20% Deputy General Director - Transportation Director -20%
6	Creation and maintenance of the Company’s contract management system (development of regulatory documents and standard contracts)	Quantitative	Defined in accordance with the Company General Director’s assessment based on summarized information about repeated violations received from supervisory authorities, external and internal auditors, contracting parties, and heads of the Company’s business units	Deputy General Director (Legal) - 25%
7	No violations of law confirmed by court decisions, or enacted official orders, on matters within the remit of Deputy General Director (Legal)	Quantitative	Not required	Deputy General Director (Legal) - 25%

The KPIs for the General Director and the members of the Management Board in 2022 were mostly met/exceeded, with minor deviations due to the measures taken to enhance the company’s business efficiency.

Control System

Irina

Pavlushkova

Chief Accountant — Department Director

Our company targets higher reliability and efficiency standards of our control systems: risk management, compliance and data security.

UTLC ERA’s control system is formalized and based on the generally accepted international standards, covering the business processes and all company’s management levels.

The system operation is supervised by the Board of Directors, including supervision through the Audit Committee.

Audit Commission

The Audit Commission of UTLC ERA is a permanent elected body. The Audit Commission acts on the basis of the Articles of Association of UTLC ERA and the Regulations on the Audit Commission approved by the Extraordinary General Meeting of Shareholders on July 22, 2021. The Audit Commission monitors generation of reliable financial and accounting statements and other information about the UTLC ERA’s financial and business operations and financial situation, as well as asset management improvements, mitigation of financial and operational risks and internal control system improvements.

The Audit Commission of UTLC ERA is elected by the Annual General Meeting of Shareholders for one year until the next Annual General Meeting of Shareholders, and is composed of three members:

One representative of JSCo "RZD"
One representative of JSC “NC “KTZ”
One representative of the Belarusian Railway

Competencies of the Audit Commission

Confirms reliability of the information contained in the annual report and the annual accounting (financial) statements
Reviews the financial situation of UTLC ERA
Arranges and carries out inspection (audit) of UTLC ERA’s financial and business operations
Monitors safety and use of fixed assets and expenditure of UTLC ERA’s funds in accordance with the budget
Monitors generation and use of UTLC ERA’s reserve fund and other special funds
Follows up on earlier directives issued to eliminate violations and shortcomings revealed by previous inspections (audits)
Takes other actions (measures) related to the audit of UTLC ERA’s financial and business operations

Auditor

Our company engages an independent external auditor to carry out the annual audit of our financial statements in accordance with the Russian Accounting Standards (RAS) and the International Financial Reporting Standards (IFRS). The auditor is approved by the General Meeting of Shareholders and nominated by the Board of Directors.

The auditor of UTLC ERA is CATR – Auditing Services LLC (TIN 7709383532).

On April 6, 2022, the Board of Directors approved the procedure for selecting the auditor of UTLC ERA in 2022 and established the initial (maximum) price of the contract to audit the company’s 2022 accounting (financial) statements in the amount of 8,267,010.00 rubles, excluding 20% VAT (Minutes No. 50 dated 06.04.2022).

Our company held a closed tender to select an auditor who is sufficiently qualified to provide auditor services according to RAS and IFRS to cover the needs of UTLC ERA in 2022. Based on the tender, CATR – Auditing Services LLC was nominated to the Board of Directors and approved on June 24, 2022 (Minutes No. 53 dated 24.06.2022).

The remuneration of UTLC ERA’s auditor is seven million (7,000,000.00) rubles, excluding 20% VAT.

Risk Management

Anna

Belyakova

Deputy Commercial Director — Director of Account Settlement Control and Production Analysis Department, Commercial Directorate

In view of the high geopolitical tension, the Management Board of UTLC ERA resolved to set up a comprehensive risk management system.

A risk management team was formed (UTLC ERA Order No. 64 dated December 24, 2021)
UTLC ERA’s risk management policy was approved (BoD Minutes No. 52 dated May 11, 2022)
UTLC ERA’s Risk Management Regulations and Recommended Risk Management Practices were approved on May 11, 2022
Training was held for a wide audience of employees involved in the risk management processes

SWOT analysis

INTERNAL FACTORS

Strengths

Unique resource — international cooperation in the EAEU
Cost leadership in the market achieved by continuous optimization and building of a long-term partnership system
Adaptivity of the company’s established business processes to external challenges
Streamlined technology for en route container unit train management
One-stop customer service
Company’s operational and financial stability

Weaknesses

Business model limitations, including the company’s operation area
No access to end consignors
Lack of information on the cost of the integrated logistics service components outside the company’s remit
Overlapping structure of customers and service component providers (the same companies)
Slow corporate decision making due to the need to align the interests of three shareholders
No customer relations management IT system

EXTERNAL FACTORS

Opportunities

Growing demand for import and export traffic with China
Implementation of a coordinated development and integration program for the EAEU transport system
Development of international programs with the company’s participation aimed at testing new, primarily digital, technologies and services
Transformation of the container traffic market structure, new emerging routes/market players
Development of the terminal network in the EAEU
Potential demand due to rail transport stability

Threats

Reduced subsidies for rail transportation in China
EU sanction policy
Refusal of international insurance companies to insure cargoes transported via the company’s operation area
Stronger competition among international transport corridors and development of alternative border crossings
Changes in the shareholders’ tariff policy in regard to the company
Unfavorable market fluctuations for currency pairs

Key risk management tasks

The risk management model is built on the three-line defense concept:

Line 1

Risk owners — business units

Tasks

Bear the ultimate responsibility for management of risks related to the company’s day-to-day operations

Functions

Identify and analyze risks inherent in the day-to-day operations within their discipline
Share information/discuss risks with the management to integrate risks into the decision making process
Develop and implement measures and monitoring procedures to minimize the risks within their discipline

Line 2

Supervising units

Risk management unit

Tasks

Identify the emerging risks, practice a proactive approach, identify potential gaps in the control system

Functions

Risk management

Bears responsibility for methodological support and coordination of risk management processes.
Provides advisory support to the first line of defense in terms of risk identification and assessment, definition of an acceptable risk level, development of measures and monitoring procedures.
Prepares risk management reports with up-to-date and adequate risk information.

Other supervising units

Perform/assist the first line of defense in identification and analysis of cross-functional risks within their discipline.
Develop and implement measures and supervising procedures to minimize cross-functional risks within their discipline.

Line 3

Internal audit

Tasks

Provides for a fair and independent auditor opinion, assesses efficiency of the first and second line services

Functions

Makes an independent assessment of the risk management system.
Assists development and follow-up monitoring of the procedures and measures to improve the risk management system.
Coordinates with the risk management consulting service providers.

Risk management model

Board of Directors

Approves Risk Management Policy

Audit Committee

Reviews risk materials and prepares recommendations for the Board of Directors
Reviews results of independent risk management system assessment

Management Board

Signs off corporate risk management regulations
Signs off register, risk map, acceptable risk value, and risk treatment plan
Signs off Risk Management Report

General Director

Approves risk management procedures and methodical recommendations
Approves risk management plan
Approves key risks, risk map, and acceptable risk value
Approves risk treatment plan

Risk Management Team

Examines identified risks for completeness and conformity to risk management methods
Rates risks by criticality level
Validates acceptable risk value indicators
Escalates risk information to be taken into account in decision making by management bodies

Business Development
and Risk Analysis Director

Prepares draft updates of management regulations
Examines identified risks for completeness and conformity to risk management methods
Examines proposed risk treatment actions
Coordinates and monitors risk management processes and risk treatment actions
Provides guidance and advice to risk owners
Consolidates information - forms register, risk map, and risk treatment plan
Prepares periodic risk management reports

Risk owners

Identify, analyze and assess risks in the course of financial and business operations
Prepare proposals on acceptable risk value indicators
Develop and implement risk treatment measures; monitor implementation
Conduct in-process monitoring of acceptable risk value indicators, risk level, risk realization events
Escalate risk information to be taken into account in decision making by management bodies

Board of Directors

Approves Risk Management Policy

Audit Committee

Reviews risk materials and prepares recommendations for the Board of Directors
Reviews results of independent risk management system assessment

Management Board

Signs off corporate risk management regulations
Signs off register, risk map, acceptable risk value, and risk treatment plan
Signs off Risk Management Report

General Director

Approves risk management procedures and methodical recommendations
Approves risk management plan
Approves key risks, risk map, and acceptable risk value
Approves risk treatment plan

Risk Management Team

Examines identified risks for completeness and conformity to risk management methods
Rates risks by criticality level
Validates acceptable risk value indicators
Escalates risk information to be taken into account in decision making by management bodies

Business Development and Risk Analysis Director

Prepares draft updates of management regulations
Examines identified risks for completeness and conformity to risk management methods
Examines proposed risk treatment actions
Coordinates and monitors risk management processes and risk treatment actions
Provides guidance and advice to risk owners
Consolidates information - forms register, risk map, and risk treatment plan
Prepares periodic risk management reports

Risk owners

Identify, analyze and assess risks in the course of financial and business operations
Prepare proposals on acceptable risk value indicators
Develop and implement risk treatment measures; monitor implementation
Conduct in-process monitoring of acceptable risk value indicators, risk level, risk realization events
Escalate risk information to be taken into account in decision making by management bodies

Risk management process

Monitoring

Monitoring is a continuous process covering all risk management stages Monitoring includes review of risk treatment implementation status and analysis of changes to be taken into consideration in the course of risk management

Planning

Risk management planning includes definition of the purpose and application sphere of risk management, subject to the internal and external context, and development of implementation plan.

Risk identification and analysis

Risk identification and analysis include search, identification, description and classification of risks that may impact achievement of the Company’s goals, as well as cause and effect analysis.

Recording

Recording the results of risk management stages is intended to raise awareness of, and responsibility for, risk management.

Risk assessment

Risk assessment means determining the extent of risk impact on the Company’s goals.

Risk response

Risk response involves a choice of the most effective risk management measures to mitigate risk probability or damage.

Information exchange and communication

The purpose of information exchange and communication is to ensure the Company’s awareness about risks and response possibilities

Results for 2022

In 2022, UTLC ERA identified 52 risks, including 12 key risks deemed highly probable and material:

Key risks:

1.

Risk of declining political stability in the countries where the company/its partners operate and in the countries along the route
2.

Risk of reduction/stagnation of traffic volumes in the corridor via Kazakhstan
3.

Risk of amendments to the railway transit service terms in the UTLC ERA member countries
4.

Risk of closure/partial operating limitations of the checkpoints on the EU border
5.

Risk of creating a negative image of the company
6.

Risk of significant disruptions/railway infrastructure limitations in the 1,520 mm track gauge areas
7.

Risk of increasingly unbalanced container traffic flows
8.

Risk of impossibility to make payments
9.

Risk of banks failing to fulfill their cash management obligations
10.

Risk of data corruption/inaccessibility or loss, IT unavailability caused by cyber security incidents
11.

Currency risk
12.

Risk of non-applicability of special tariff terms

To mitigate the risks and the consequences of potential risk realization scenarios, we developed and approved UTLC ERA’s risk mitigation plan for 2022. The key priorities for 2022 were the export and import traffic development actions, which helped make up for the adverse impact of reduced China–Europe–China transit volume caused by geopolitical confrontation.

Out of 52 identified risks, 7 were realized,
including 3 key risks:

1.

Risk of declining political stability in the countries where the company / its partners operate and in the countries along the route (key risk)
2.

Risk of significant disruptions / railway infrastructure limitations in the 1,520 mm track gauge areas (key risk)
3.

Risk of failure to provide the required rail car fleet
4.

Risk of increasing platform procurement costs
5.

Accounting misstatement risk
6.

Rail car seizure risk
7.

Currency risk (key risk).

The main priority for 2023 in terms of the risk management system development will be automation of the main processes.

Next section

Appendices

Send by mail

Number of General Meetings of Shareholders / Meetings of the Board of Directors and its Committees, the Management Board in 2022

Authorized Capital

Dividend Policy

General Meeting of Shareholders

Main Resolutions Adopted in 2022

Board of Directors

Corporate Secretary

Committee Secretary

Management Board and General Director

Remuneration system

General Director

Members of the Management Board

Key Performance Indicators for Members of the Management Board of UTLC ERA in 2022

Control System

Audit Commission

Auditor

Risk Management

SWOT analysis

Key risk management tasks

Line 1

Line 2

Line 3

Risk management model

Results for 2022

Key risks: