Annual Report 2007 - Severstal

OAO Severstal and subsidiaries
Notes to the consolidated financial statements
for the year ended December 31, 2007
(Amounts expressed in thousands of US dollars, except as otherwise stated)
32. Commitments and contingencies
a. For litigation, tax and other liabilities
The taxation system and regulatory environment of the Russian Federation are relatively new and characterized by numerous taxes and frequently
changing legislation, which is often unclear, contradictory and subject to varying interpretations between the differing regulatory authorities and
jurisdictions, who are empowered to impose significant fines, penalties and interest charges. Events during the recent years suggest that the regulatory
authorities within the Russian Federation are adopting a more assertive stance regarding the interpretation and enforcement of legislation. This situation
creates substantial tax and regulatory risks. Management believes that it has complied in all material respects with all relevant legislation.
At the balance sheet date, the Russian tax authorities had made claims for taxes, fines and penalties in the amount of approximately US$ 32 million,
mostly related to mineral extraction tax and water usage tax by certain of the Group’s entities in the Mining segment. Management does not agree with
the tax authorities’ claims and believes that the Group has complied with existing legislation in all material respects. Management is unable to assess the
ultimate outcome of the claims and the outflow of financial sources to settle such claims, if any. Management believes that it has made adequate
provisions for other possible tax claims.
On July 26, 2007 Lucchini SpA received notice by the Tuscan regional fiscal authorities for storing waste from the steel making process in the Piombino
steel making facilities. In the notice the authorities specified the potential amount of penalties of €52.5 million (US$ 76.9 million at December 31, 2007
exchange rate). Management has cooperated fully with the authorities and presented the mitigating submissions which should substantially reduce the
initial amounts indicated by the authorities. Consequently, these financial statements contain provisions for this issue in accordance with management
assessments performed.
b. Long-term purchase and sales contracts
In the normal course of business group companies enter into long term purchase contracts for raw materials, and long term sales contracts. These contracts
allow for periodic adjustments in prices dependent on prevailing market conditions.
c. Capital commitments
At the balance sheet date the Group had contractual capital commitments of US$ 411.7 million (December 31, 2006: US$ 291.1 million; December 31,
2005: US$ 435.4 million).
d. Insurance
The Group has insured its property and equipment to compensate for expenses arising from accidents. In addition, the Group has insurance for business
interruption on a basis of reimbursement of certain fixed costs. The Group has also insured third-party liability in respect of property or environmental
damage. However, the Group does not have a full insurance coverage.
e. Guarantees
At the balance sheet date the Group had US$ 143.2 million (December 31, 2006: US$ 22.2 million; December 31, 2005: US$ 23.8 million) of guarantees
issued.
33. Financial instruments
The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and
to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the
Group’s activities.
The Group’s Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and
reviews the adequacy of the risk management framework in relation to the risks faced by the Group.
Exposure to credit, liquidity, interest rate and currency risk arises in the normal course of the Group’s business. The Russian Steel, Metalware, IPM and
Mining segments of the Group have not used derivative financial instruments to reduce exposure to fluctuations in foreign exchange rates and interest
rates. The use of Severstal North America and Lucchini segments of derivatives to hedge their interest rates, commodity inputs and foreign exchange rate
exposures were not material to these consolidated financial statements. As at December 31, 2007, 2006 and 2005, the Financing segment had no
outstanding derivatives.
Management believes that the fair value of its financial assets and liabilities approximates their carrying amounts except for the following long-term
fixed rate borrowings:
December 31, 2007
Market value Book value Difference
Citibank CLN – Eurobonds 2009 330,513 325,000 5,513
Citibank CLN – Eurobonds 2014 398,781 375,000 23,781
729,294 700,000 29,294
December 31, 2006
Market value Book value Difference
Citibank CLN – Eurobonds 2009 337,857 325,000 12,857
Citibank CLN – Eurobonds 2014 407,616 375,000 32,616
745,473 700,000 45,473
Severstal Annual Report 2007 111