IMPORTANT NOTICE - Banco Best

IMPORTANT NOTICE
THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER
(1) QIBs WHO ARE ALSO QPs (EACH AS DEFINED BELOW) OR
(2) NON-U.S. PERSONS OR ADDRESSEES OUTSIDE OF THE U.S.
IMPORTANT: You must read the following before continuing. The following applies to the attached Prospectus, and you are
therefore advised to read this carefully before reading, accessing or making any other use of the Prospectus. In accessing the
Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them any time you
receive any information from us as a result of such access. You acknowledge that this electronic transmission and the delivery
of the attached Prospectus is intended for you only and you agree you will not forward this electronic transmission or the
attached Prospectus to any other person.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN
ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES AND THE LOANS HAVE NOT
BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
‘‘SECURITIES ACT’’), OR THE SECURITIES LAWS OF ANY STATE OF THE U.S. OR OTHER JURISDICTION AND
THE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN
ACCORDANCE WITH RULE 144A UNDER THE U.S. SECURITIES ACT (‘‘RULE 144A’’) TO A PERSON THAT THE
HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVE IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A (A ‘‘QIB’’) THAT IS ALSO A QUALIFIED
PURCHASER AS DEFINED IN SECTION 2(a)(51) OF THE U.S. INVESTMENT COMPANY ACT OF 1940 (A ‘‘QP’’)
THAT (A) IS NOT A BROKER-DEALER WHICH OWNS AND INVESTS ON A DISCRETIONARY BASIS LESS THAN
U.S.$25 MILLION IN SECURITIES OF UNAFFILIATED ISSUERS, (B) IS NOT A PARTICIPANT DIRECTED
EMPLOYEE PLAN, SUCH AS A 401(K) PLAN, (C) WAS NOT FORMED FOR THE PURPOSE OF INVESTING IN
TRANSCAPITALINVEST LIMITED, (D) IS ACQUIRING THE NOTES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QIB THAT IS ALSO A QP, IN A PRINCIPAL AMOUNT THAT IS NOT LESS THAN U.S.$100,000,
(E) UNDERSTANDS THAT TRANSCAPITALINVEST LIMITED MAY RECEIVE A LIST OF PARTICIPANTS
HOLDING POSITIONS IN ITS SECURITIES FROM ONE OR MORE BOOK-ENTRY DEPOSITORIES AND (F) WILL
PROVIDE NOTICE OF THE TRANSFER RESTRICTIONS TO ANY SUBSEQUENT TRANSFEREE, OR (2) IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE
SECURITIES ACT (‘‘REGULATION S’’) TO OR FOR THE ACCOUNT OR BENEFIT OF A PERSON NOT KNOWN
TO THE TRANSFEROR TO BE A U.S. PERSON (AS DEFINED IN REGULATION S), BY PREARRANGEMENT OR
OTHERWISE, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES.
THE ATTACHED PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND
MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR
REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY
WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS
OF OTHER JURISDICTIONS. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSION CONTRARY TO ANY OF
THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORISED AND WILL NOT BE ABLE TO PURCHASE
ANY OF THE SECURITIES DESCRIBED THEREIN.
Confirmation of your Representation: In order to be eligible to view the Prospectus or make an investment decision with respect
to the securities, investors must be either (1) Qualified Institutional Buyers (‘‘QIBs’’) (within the meaning of Rule 144A under
the Securities Act) that are also ‘‘qualified purchasers’’ (‘‘QPs’’) as defined in Section 2(a)(51) of the U.S. Investment Company
Act of 1940, as amended, or (2) non-U.S. persons (within the meaning of Regulation S under the Securities Act) outside the
United States who are not acting for the account or benefit of U.S. persons. By accepting the e-mail and accessing the
Prospectus, you shall be deemed to have represented to us that (1) you and any customers you represent are either (a) QIBs
that are also QPs or (b) not a U.S. person and/or are not acting for the account or benefit of a U.S. person and the electronic
mail address that you gave us and to which this e-mail has been delivered is not located in the U.S. and (2) you consent to
delivery of such Prospectus by electronic transmission.
The Prospectus may only be communicated or caused to be communicated to persons in the United Kingdom in circumstances
where section 21(1) of the Financial Services and Markets Act 2000 (the ‘‘FSMA’’) does not apply and may be distributed in
the United Kingdom only to persons who (i) have professional experience in matters relating to investments falling within
Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) (the ‘‘Order’’), or
(ii) are persons falling within Article 49(2)(a) to (d) (‘‘high net worth companies, unincorporated associations etc.’’) of the Order
(all such persons together being referred to as ‘‘Relevant Persons’’). In the United Kingdom, the Prospectus is directed only at
Relevant Persons and must not be acted on or relied on by persons who are not Relevant Persons. Any investment or
investment activity to which the Prospectus relates is available only to Relevant Persons and will be engaged in only with
Relevant Persons.
You are reminded that the Prospectus has been delivered to you on the basis that you are a person into whose possession the
Prospectus may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not,
nor are you authorised to, deliver or disclose the contents of the Prospectus to any other person.
The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any
place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed
broker or dealer and the Managers or any affiliate of the Managers is a licensed broker or dealer in that jurisdiction, the
offering shall be deemed to be made by the Managers or such affiliate on behalf of TransCapitalInvest Limited in such
jurisdiction.
The Prospectus has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may
be altered or changed during the process of electronic transmission and, consequently, none of TransCapitalInvest Limited,
Transneft, the Managers nor any of their respective affiliates accepts any liability or responsibility whatsoever in respect of any
difference between the Prospectus distributed to you in electronic format and the hard copy version available to you on request.
You are responsible for protecting against viruses and other destructive items. Your use of this e-mail is at your own risk and
it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.

U.S.$500,000,000 6.103 per cent. Loan Participation Notes due 2012
and
A700,000,000 5.381 per cent. Loan Participation Notes due 2012
each issued by, but with limited recourse to,
TransCapitalInvest Limited
for the sole purpose of financing a corresponding loan to
OJSC AK TRANSNEFT
Issue Price of the Dollar Notes: 100 per cent.
Issue Price of the Euro Notes: 100 per cent.
TransCapitalInvest Limited, a company organised and existing as a limited liability company under the laws of Ireland (‘‘TCI Limited’’ or the ‘‘Issuer’’) is
issuing an aggregate principal amount of U.S.$500,000,000 6.103 per cent. Loan Participation Notes due 2012 (the ‘‘Dollar Notes’’) and an aggregate
principal amount of A700,000,000 5.381 per cent. Loan Participation Notes due 2012 (the ‘‘Euro Notes,’’ and together with the Dollar Notes, the ‘‘Notes’’)
for the sole purpose of financing a U.S. dollar loan (the ‘‘Dollar Loan’’) and a euro loan (the ‘‘Euro Loan’’ and together with the Dollar Loan, the
‘‘Loans’’) to OJSC AK Transneft (‘‘Transneft’’, ‘‘OAO Transneft’’, ‘‘JSC Transneft’’ or the ‘‘Borrower’’) pursuant to a U.S. dollar loan agreement dated 22
June 2007 (the ‘‘Dollar Loan Agreement’’) and a euro loan agreement dated 22 June 2007 (the ‘‘Euro Loan Agreement,’’ and together with the Dollar Loan
Agreement, the ‘‘Loan Agreements’’), in each case, between TCI Limited and the Borrower. Interest on the Dollar Notes will be payable semi-annually in
arrear on 27 June and 27 December in each year, commencing on 27 December 2007, as described under ‘‘Terms and Conditions of the Dollar Notes – 5.
Interest’’. Interest on the Euro Notes will be payable annually in arrear on 27 June in each year, commencing on 27 June 2008, as described under ‘‘Terms
and Conditions of the Euro Notes – 5. Interest’’. The Dollar Loan will bear interest of 6.103 per cent. per annum and the Euro Loan will bear interest of
5.381 per cent. per annum.
Subject to the provisions of the trust deeds relating to each of the Dollar Notes and the Euro Notes (the ‘‘Trust Deeds’’) to be dated on or about 27 June
2007 between TCI Limited and Citicorp Trustee Company Limited (the ‘‘Trustee’’), TCI Limited will charge as security for its payment obligations in respect
of the Notes and under each Trust Deed (i) its rights to all payments of principal, interest and additional amounts (if any) under the relevant Loan
Agreement, (ii) its rights to receive all sums that may be or may become payable under any claim, award or judgment relating to the relevant Loan
Agreement and (iii) amounts deposited in an account of TCI Limited pursuant to the relevant Loan Agreement, in each case to the Trustee, as trustee for
the benefit of the holders of the Dollar Notes and the Euro Notes, respectively (together and separately, as the context may require, the ‘‘Noteholders’’).
Furthermore, under the terms of the Trust Deeds, TCI Limited will assign all of its rights under the relevant Loan Agreement, except for any Reserved
Rights (as defined in the relevant Trust Deeds) and rights subject to the charge, to the Trustee for the benefit of the Noteholders.
The Notes are limited recourse obligations of TCI Limited. In each case where amounts of principal, interest and additional amounts (if any) are stated to
be payable in respect of the Notes, the obligation of TCI Limited to make such payment will constitute an obligation only to account to the Noteholders, on
each date upon which such amounts of principal, interest and additional amounts (if any) are due in respect of the Notes, for an amount equivalent to all
principal, interest and additional amounts (if any) actually received by or for the account of TCI Limited pursuant to the relevant Loan Agreement,
excluding amounts paid in respect of Reserved Rights (as defined in the relevant Trust Deed). TCI Limited will have no other financial obligation under the
Notes. Noteholders will be deemed to have accepted and agreed that they will be relying solely and exclusively on the credit and financial standing of Transneft in
respect of the financial servicing of the Notes.
Except as set forth herein under ‘‘Taxation’’, payments in respect of the Notes (and the Loans) will be made without any deduction or withholding on
account of taxes. As set forth more fully in each Loan Agreement, Transneft may prepay each Loan at its principal amount, in whole but not in part,
together with accrued interest, if (i) Transneft or TCI Limited must deduct or withhold certain taxes from payments they make in respect of such Loan or
the corresponding Notes, respectively, or (ii) it becomes illegal for such Notes or such Loan to remain outstanding. Upon such occurrence, TCI Limited will,
subject to the receipt of the relevant funds from Transneft, prepay the principal amount of all such Notes outstanding, together with accrued interest.
Except as otherwise expressly provided in this Prospectus and in the Trust Deeds, no proprietary or other direct interest in TCI Limited’s rights under orin
respect of the Loan Agreements, or in any rights that TCI Limited may receive by way of assignment in respect of the Loans, exists for the benefit of the
Noteholders. Subject to the terms of the Trust Deed, no Noteholder will be entitled to enforce any provisions of the Loan Agreements or have direct
recourse to the Borrower.
AN INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. SEE ‘‘RISK FACTORS’’ ON PAGE 14.
The Notes and the Loans have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’), and, subject to
certain exceptions, may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S
under the Securities Act (‘‘Regulation S’’)). The Notes may be offered and sold (i) within the United States to qualified institutional buyers (as defined in
Rule 144A under the Securities Act (‘‘Rule 144A’’)) that are also qualified purchasers (‘‘QPs’’) as defined in Section 2(a)(51) of the U.S. Investment Company
Act of 1940 (the ‘‘Investment Company Act’’) in reliance on the exemption from registration under the Securities Act provided by Rule 144A (such Notes,
the ‘‘Rule 144A Notes’’); and (ii) to certain persons in offshore transactions in reliance on Regulation S (such Notes, the ‘‘Regulation S Notes’’). TCI
Limited has not been and will not be registered under the Investment Company Act. Prospective purchasers are hereby notified that sellers of the Notes may
be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of these and certain further
restrictions, see ‘‘Subscription and Sale’’ and ‘‘Transfer Restrictions’’.
Application has been made to the Irish Financial Services Regulatory Authority (the ‘‘Financial Regulator’’), as competent authority under Directive 2003/71/
EC (the ‘‘Prospectus Directive’’), for the prospectus (the ‘‘Prospectus’’) to be approved. Application has been made to the Irish Stock Exchange for the
Notes to be admitted to the Official List and trading on its regulated market (the ‘‘Market’’). The Market is a regulated market for the purposes of the
Investment Services Directive 93/22/EEC. References in this Prospectus to Notes being ‘‘listed’’ in Ireland (and all related references) shall mean that such
Notes have been admitted to trading on the Market and have been listed on the Irish Stock Exchange. There is no assurance that a trading market in the
Notes will develop or be maintained. This Prospectus constitutes a ‘‘prospectus’’ for the purposes of the Prospectus Directive.
The Dollar Notes will be offered and sold in the minimum denomination of U.S.$100,000 and integral multiples of U.S.$1,000 thereafter. The Euro Notes
will be offered and sold in the minimum denomination of A50,000 and integral multiples of A1,000 thereafter. The Regulation S Notes will initially be
represented by interests in (i) a global unrestricted Dollar Note in registered form (the ‘‘Regulation S Dollar Global Note’’) and (ii) a global unrestricted
Euro Note in registered form (the ‘‘Regulation S Euro Global Note,’’ and together with the Regulation S Dollar Global Note, the ‘‘Regulation S Global
Notes’’), each without interest coupons, which will be deposited with a common depositary for, and registered in the name of a nominee of, Euroclear Bank
S.A./N.V. (‘‘Euroclear’’) and Clearstream Banking, société anonyme (‘‘Clearstream, Luxembourg’’) on 27 June 2007 (the ‘‘Issue Date’’). Beneficial interests in
the Regulation S Global Notes will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear or Clearstream,
Luxembourg. The Rule 144A Notes will initially be represented by (i) a global restricted Dollar Note in registered form (the ‘‘Rule 144A Dollar Global
Note’’) and (ii) a global restricted Euro Note in registered form (the ‘‘Rule 144A Euro Global Note,’’ and together with the Rule 144A Dollar Global Note,
the ‘‘Rule 144A Global Notes’’), each without interest coupons, which will be deposited with a custodian for, and registered in the name of a nominee of,
The Depository Trust Company (‘‘DTC’’) on the Issue Date. Beneficial interests in the Rule 144A Global Notes will be shown on, and transfers thereof will
be effected only through, records maintained by DTC and its participants. The Regulation S Global Notes and the Rule 144A Global Notes are together
referred to as the ‘‘Global Notes.’’ See ‘‘Summary of the Provisions Relating to the Notes in Global Form’’. Individual definitive Notes in registered form
(‘‘Definitive Notes’’) will only be available in certain limited circumstances as described herein.
Joint Lead Managers
Goldman Sachs International Citi UBS Investment Bank
The date of this Prospectus is 22 June 2007.

This Prospectus comprises a prospectus for the purposes of Article 5 of the Prospectus Directive and
for the purpose of giving information with respect to Transneft, TCI Limited, the Loans and the
Notes. Each of Transneft and TCI Limited accepts responsibility for the information given in this
Prospectus. Having taken all reasonable care to ensure that such is the case, each of Transneft and
TCI Limited declares that the information given in this Prospectus is, to the best of its knowledge, in
accordance with the facts and does not omit anything likely to affect its import.
This Prospectus does not constitute an offer of, or an invitation by or on behalf of any of TCI
Limited, Transneft or any Manager (as defined in ‘‘Subscription and Sale’’) to subscribe for or
purchase any Notes. The distribution of this Prospectus and the offer or sale of the Notes in certain
jurisdictions may be restricted by law. TCI Limited, Transneft and the Managers each require any
persons into whose possession this Prospectus comes to inform themselves about and to observe any
such restrictions.
The Notes and the Loans have not been and will not be registered under the Securities Act and,
subject to certain exemptions, may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons (as defined in Regulation S). Prospective purchasers are hereby
notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of
the Securities Act provided by Rule 144A. For a description of these and certain further restrictions
on offers, sales and transfers of the Notes and the distribution of this Prospectus, see ‘‘Subscription
and Sale’’ and ‘‘Transfer Restrictions’’.
This document is only being distributed to and is only directed at:
* persons who are outside the United Kingdom of Great Britain and Northern Ireland (the
‘‘United Kingdom’’);
* investment professionals falling within Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the ‘‘Order’’); and
* high net worth companies, and other persons to whom it may lawfully be communicated, falling
within Article 49(2)(a) to (d) of the Order,
such persons collectively being referred to as ‘‘relevant persons’’. The Notes are only available to, and
any invitation, offer or agreement to subscribe, purchase or otherwise acquire the Notes will be
engaged in only with, relevant persons. Any person who is not a relevant person should not act or
rely on the contents of this Prospectus.
Information set forth in this Prospectus is not an advertisement of the Notes in the Russian
Federation and is not intended to create or maintain an interest in Transneft, TCI Limited, the Notes
or the Loans or to facilitate any sale, exchange or transfer of the Notes in the Russian Federation or
to or for the benefit of any Russian person or entity.
The Notes are securities of a foreign issuer under Russian law. No sale, exchange or transfer of the
Notes may take place in the Russian Federation or to or for the benefit of any Russian person or
entity. Neither the issue of the Notes nor a securities prospectus in respect of the Notes has been, or
is intended to be, registered with the Federal Service for Financial Markets of the Russian
Federation. The information set forth in this Prospectus is not an offer of, or an invitation to make
offers of, sell, exchange or transfer, the Notes in the Russian Federation or to or for the benefit of
any Russian person or entity.
This Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore.
Accordingly, this Prospectus and any other document or material in connection with the offer or sale,
or invitation for subscription or purchase, of the Notes may not be circulated or distributed, nor may
the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase,
whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under
Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the ‘‘SFA’’), (ii) to a
relevant person pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A),
and in accordance with the conditions specified in Section 275, of the SFA or (iii) otherwise pursuant
to, and in accordance with the conditions of, any other applicable provision of the SFA.
In making an investment decision, prospective investors must rely on their own examination of TCI
Limited and Transneft and the terms of this Prospectus, including the risks involved. No person is
authorised to provide any information or to make any representation not set forth in this Prospectus.
Any information or representation not so set forth must not be relied upon as having been authorised
by or on behalf of any of TCI Limited, Transneft, the Trustee or any Manager. The delivery of this
ii

Prospectus at any time does not imply that the information set forth in it is correct as at any time
after its date.
Neither the delivery of this Prospectus nor the offering, sale or delivery of any Note shall in any
circumstances create any implication that there has been no adverse change, or any event reasonably
likely to involve any adverse change, in the condition (financial or otherwise) of TCI Limited or
Transneft since the date of this Prospectus. None of TCI Limited, Transneft or any Manager or any
of their respective representatives makes any representation to any offeree or purchaser of the Notes
offered hereby regarding the legality of an investment by such offeree or purchaser under applicable
legal, investment or similar laws. Each investor should consult with their own advisers as to the legal,
tax, business, financial and related aspects of the purchase of the Notes.
Prospective purchasers must comply with all laws that apply to them in any place in which they buy,
offer or sell any Notes or possess this Prospectus. Any consents or approvals that are needed in order
to purchase any Notes must be obtained. TCI Limited, Transneft and the Managers are not
responsible for compliance with these legal requirements. The appropriate characterisation of the
Notes under various legal investment restrictions, and thus the ability of investors subject to these
restrictions to purchase the Notes, is subject to significant interpretative uncertainties. No
representation or warranty is made as to whether or the extent to which the Notes constitute a legal
investment for investors whose investment authority is subject to legal restrictions. Such investors
should consult their legal advisers regarding such matters.
Copies of this Prospectus have been filed with and approved by the Financial Regulator as required
by the Prospectus Directive. Upon approval of this Prospectus by the Financial Regulator, this
Prospectus will be filed with the Companies Registration Office of Ireland in accordance with
Regulation 38(1)(b) of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the ‘‘Prospectus
Regulations’’).
TCI Limited is not and will not be regulated by the Financial Regulator as a result of issuing the
Notes. Any investment in the Notes does not have the status of a bank deposit and is not within the
scope of the deposit protection scheme operated by the Financial Regulator.
The Managers and their respective affiliates may perform in the future various financial advisory,
investment banking and commercial banking services for, may arrange non-public market financing
for, and may enter into derivatives transactions with, Transneft and its affiliates.
NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY THE
MANAGERS OR ANY OF THEIR AFFILIATES AS TO THE ACCURACY OR
COMPLETENESS OF THE INFORMATION SET FORTH IN THIS PROSPECTUS, AND
NOTHING CONTAINED IN THIS PROSPECTUS IS, OR SHALL BE RELIED UPON AS, A
PROMISE OR REPRESENTATION, WHETHER AS TO THE PAST OR THE FUTURE.
EACH PERSON RECEIVING THIS PROSPECTUS ACKNOWLEDGES THAT SUCH PERSON
HAS NOT RELIED ON THE MANAGERS OR ANY OF THEIR AFFILIATES OR ANY
PERSON ACTING ON THEIR BEHALF IN CONNECTION WITH ITS INVESTIGATION OF
THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION OR ITS INVESTMENT
DECISION. EACH PERSON CONTEMPLATING MAKING AN INVESTMENT IN THE
NOTES FROM TIME TO TIME MUST MAKE ITS OWN INVESTIGATION AND ANALYSIS
OF THE CREDITWORTHINESS OF TCI LIMITED AND TRANSNEFT AND ITS OWN
DETERMINATION OF THE SUITABILITY OF ANY SUCH INVESTMENT, WITH
PARTICULAR REFERENCE TO ITS OWN INVESTMENT OBJECTIVES AND EXPERIENCE
AND ANY OTHER FACTORS WHICH MAY BE RELEVANT TO IT IN CONNECTION WITH
SUCH INVESTMENT.
THE NOTES AND THE LOANS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
U.S. SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION IN THE UNITED STATES OR ANY OTHER U.S. REGULATORY
AUTHORITY NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR
ENDORSED THE MERITS OF THE OFFERING OF NOTES OR THE ACCURACY OR THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENCE IN THE UNITED STATES.
In connection with the issue of the Notes, Goldman Sachs International (the ‘‘Stabilising Manager’’)
or any person acting on behalf of the Stabilising Manager may over-allot Notes (provided that the
aggregate principal amount of Notes allotted does not exceed 105 per cent. of the aggregate principal
iii

amount of the Notes) or effect transactions with a view to supporting the market price of the Notes
at a level higher than that which might otherwise prevail. However, there is no assurance that the
Stabilising Manager (or any persons acting on behalf of the Stabilising Manager) will undertake
stabilisation action. Any stabilisation action may begin on or after the date on which adequate public
disclosure of the terms of the offer of the Notes is made and, if begun, may be ended at any time,
but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days
after the date of the allotment of the Notes.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT, NOR AN APPLICATION
FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE
REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE, NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED, NOR A PERSON IS LICENSED IN THE STATE
OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF
NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE,
COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT
AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE OF NEW HAMPSHIRE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN
APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO
MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR
CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS
PARAGRAPH.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Notes in Canada is being made only on a private placement basis exempt
from the requirement for an issuer to prepare and file a prospectus with the securities regulatory
authorities in each province where trades of the Notes are made. Any resale of the Notes in Canada
must be made under applicable securities laws, which will vary depending on the relevant jurisdiction
and which may require resales to be made under available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Notes.
Representations of Purchasers
By purchasing the Notes in Canada and accepting a purchase confirmation, a purchaser is
representing to TCI Limited, Transneft and each Manager (or affiliate thereof) from whom the
purchase confirmation is received that:
* the purchaser is entitled under applicable provincial securities laws to purchase the Notes
without the benefit of a prospectus qualified under those securities laws;
* where required by law, the purchaser is purchasing as principal and not as agent;
* the purchaser has reviewed the text above under Resale Restrictions; and
* the purchaser acknowledges and consents to the provision of specified information concerning its
purchase of the Notes to the regulatory authority that by law is entitled to collect the
information.
Further details concerning the legal authority for this information collection is available on request
from the Managers.
Rights of Action – Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who purchase a security offered by this
Prospectus during the period of distribution will have a statutory right of action for damages, or
while still the owner of the Notes, for rescission against TCI Limited and Transneft in the event that
this Prospectus contains a misrepresentation, without regard to whether the purchaser relied on the
misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days
iv

from the date the purchaser first had knowledge of the facts giving rise to the cause of action and
three years from the date on which payment is made for the Notes. The right of action for rescission
is exercisable not later than 180 days from the date on which payment is made for the Notes. If a
purchaser elects to exercise the right of action for rescission, the purchaser will have no right of
action for damages against TCI Limited and Transneft. In no case will the amount recoverable in any
action exceed the price at which the Notes were offered to the purchaser, and if the purchaser is
shown to have purchased the securities with knowledge of the misrepresentation, TCI Limited and
Transneft will have no liability. In the case of an action for damages, TCI Limited and Transneft will
not be liable for all or any portion of the damages that are proven to not represent the depreciation
in value of the Notes as a result of the misrepresentation relied upon. These rights are in addition to,
and without derogation from, any other rights or remedies available at law to an Ontario purchaser.
The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of the directors and officers of TCI Limited and Transneft, as well as the experts named herein,
may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to
effect service of process within Canada upon TCI Limited and Transneft or those persons. All or a
substantial portion of the assets of TCI Limited and Transneft, and the assets of those persons may
be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against
TCI Limited and Transneft or those persons in Canada or to enforce a judgment obtained in
Canadian courts against TCI Limited and Transneft or those persons outside of Canada.
Taxation and Eligibility for Investment
Canadian purchasers of the Notes should consult their own legal and tax advisers with respect to the
tax consequences of an investment in the Notes in their particular circumstances and about the
eligibility of the Notes for investment by the purchaser under relevant Canadian legislation.
AVAILABLE INFORMATION
Each of Transneft and TCI Limited has agreed that, for so long as any Notes are ‘‘restricted
securities’’ within the meaning of Rule 144(a)(3) under the Securities Act, Transneft or TCI Limited
will, during any period in which it is neither subject to Section 13 or 15(d) of the Exchange Act nor
exempt from reporting pursuant to Rule 12g3-2(b) thereunder, provide to any holder or beneficial
owner of such restricted securities or to any prospective purchaser of such restricted securities
designated by such holder or beneficial owner or to the Trustee for delivery to such holder, beneficial
owner or prospective purchaser, in each case upon the request of such holder, beneficial owner,
prospective purchaser or Trustee, the information required to be provided by Rule 144A(d)(4) under
the Securities Act.
v

FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus are not historical facts but constitute ‘‘forward-looking
statements’’. This Prospectus contains certain forward-looking statements in various sections,
including, without limitation, under the headings ‘‘Overview’’, ‘‘Risk Factors’’, ‘‘Management’s
Discussion and Analysis of Results of Operations and Financial Condition’’ and ‘‘Business’’.
Transneft may from time to time make written or oral forward-looking statements in reports to
shareholders, holders of debt securities and in other communications. Examples of such forwardlooking
statements include, but are not limited to:
* statements of Transneft’s plans, objectives or goals, including those related to its business;
* statements of future economic performance; and
* statements of assumptions underlying such statements.
Forward-looking statements that may be made by Transneft from time to time (but that are not
included in this Prospectus) may also include projections or expectations of revenues, income (or
loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios.
Words such as ‘‘believes’’, ‘‘anticipates’’, ‘‘expects’’, ‘‘estimates’’, ‘‘intends’’ and ‘‘plans’’ and similar
expressions are intended to identify forward-looking statements but are not the exclusive means of
identifying such statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general
and specific, and risks exist that the predictions, forecasts, projections and other forward-looking
statements will not be achieved. Prospective investors should be aware that a number of important
factors could cause actual results to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements. These factors include:
* the effects of, and changes in, the policy of the government (the ‘‘Government’’ or the ‘‘Russian
Government’’) of the Russian Federation (‘‘Russia’’), in particular with respect to the regulation
of, and tariff setting for, Transneft’s core business;
* the effects of changes in laws, regulations, taxation or accounting standards or practices;
* mergers, acquisitions or divestitures, in particular the proposed merger with Transnefteprodukt;
* technological changes;
* the effects of international political events on Transneft’s business; and
* Transneft’s success at managing the risks of the aforementioned factors.
This list of important factors is not exhaustive. When relying on forward-looking statements,
prospective investors should carefully consider the aforementioned factors and other uncertainties and
events, especially in light of the political, economic, social and legal environment in which Transneft
operates. Such forward-looking statements speak only as at the date on which they are made and are
not subject to any continuing obligations under any guidelines issued by the Irish Stock Exchange.
Accordingly, Transneft does not undertake any obligation to update or revise any of them, whether
as a result of new information, future events or otherwise. Transneft does not make any
representation, warranty or prediction that the results anticipated by such forward-looking statements
will be achieved, and such forward-looking statements represent, in each case, only one of many
possible scenarios and should not be viewed as the most likely or standard scenario.
vi

ENFORCEABILITY OF JUDGMENTS
Transneft is an open joint-stock company incorporated under the laws of Russia and all its assets and
the assets of its subsidiaries are currently located outside the United States and the United Kingdom.
In addition, all of Transneft’s directors and executive officers are residents of countries other than the
United States and the United Kingdom. As a result, it may not be possible for Noteholders to:
* effect service of process within the United States or the United Kingdom upon Transneft or any
of its directors or executive officers named in this Prospectus, notwithstanding that Transneft
has, under the Loan Agreement, appointed an agent for service of process; or
* enforce, in the U.S. or English courts, judgements obtained outside U.S. or English courts
against Transneft or any of Transneft’s directors and executive officers named in this Prospectus,
including actions under the civil liability provisions of the U.S. securities laws or any state or
territory of the United States.
In addition, it may be difficult for Noteholders to enforce, in original actions brought in courts in
jurisdictions located outside the United States or the United Kingdom, liabilities predicated upon U.S.
securities laws or upon English laws.
Judgements rendered by a court in any jurisdiction outside Russia will be recognised by courts in
Russia only if (i) an international treaty providing for the recognition and enforcement of judgements
in civil cases exists between Russia and the country where the judgement is rendered and/or (ii) a
federal law of Russia provides for the recognition and enforcement of foreign court judgements. No
such treaty exists between the United States and Russia or the United Kingdom and Russia for the
reciprocal enforcement of foreign court judgements. However, we are aware of at least one instance in
which Russian courts have recognised and enforced an English court judgment. The basis for this was
a combination of the principle of reciprocity and the existence of a number of bilateral and
multilateral treaties to which both the United Kingdom and the Russian Federation are parties. The
courts decided that such treaties constituted grounds for the recognition and enforcement of the
relevant English court judgment in Russia. In the absence of established court practice, however, it is
difficult to predict whether a Russian court will be inclined in any particular instance to recognise
and enforce an English court judgment on these grounds. Even if there were such a treaty, Russian
courts could nonetheless refuse to recognise or enforce a foreign court judgement on the grounds set
forth in such treaty and in Russian law in effect on the date on which such recognition or
enforcement is sought. Moreover, Russia has adopted no such law.
Each Loan Agreement will be governed by English law and will provide for certain disputes,
controversies and causes of action between TCI Limited and Transneft to be settled by arbitration in
accordance with the Rules of the London Court of International Arbitration (‘‘LCIA’’). Russia is a
party to the 1958 United Nations (New York) Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (the ‘‘New York Convention’’). However, it may be difficult to enforce
arbitral awards in Russia due to:
* the inexperience of the Russian courts in international commercial transactions;
* official and unofficial political resistance to the enforcement of awards against Russian
companies in favour of foreign investors; and
* the inability of Russian courts to enforce such awards.
Enforcement of any arbitral awards pursuant to arbitration proceedings in accordance with the rules
of the LCIA is subject to the exceptions and limitations provided for in the New York Convention
and Russian procedural laws.
vii

PRESENTATION OF FINANCIAL AND OTHER INFORMATION
This Prospectus includes:
* audited consolidated financial statements of Transneft and its consolidated subsidiaries as at and
for the year ended 31 December 2006, the audit report of ZAO PricewaterhouseCoopers Audit
thereon and the related notes thereto;
* audited consolidated financial statements of Transneft and its consolidated subsidiaries as at and
for the year ended 31 December 2005, the audit report of ZAO KPMG thereon and the related
notes thereto; and
* audited consolidated financial statements of Transneft and its consolidated subsidiaries as at and
for the year ended 31 December 2004, the audit report of KPMG Limited thereon and the
related notes thereto.
The audited consolidated financial statements of Transneft and its consolidated subsidiaries (together,
the ‘‘Group’’) contained in this Prospectus have been prepared in accordance with International
Financial Reporting Standards (‘‘IFRS’’), as promulgated by the International Accounting Standards
Board (‘‘IASB’’). The audited consolidated financial statements as at and for the year ended 31
December 2006 have been audited by ZAO PricewaterhouseCoopers Audit, independent auditors
(‘‘PwC’’), located at Kosmodamianskaya Nab. 52, Building 5, 115054 Moscow, Russia. The audited
consolidated financial statements as at and for the years ended 31 December 2005 and 31 December
2004 have been audited, respectively, by ZAO KPMG and KPMG Limited, independent auditors,
located at 11 Gogolevsky Boulevard, 119019 Moscow, Russia.
Such annual financial statements are available as described in ‘‘General Information’’.
Transneft’s independent auditors for the year ended 31 December 2006 were PwC. Following a tender
held in April 2007, an agreement is to be signed with KPMG appointing them as auditor for 2007.
KPMG were Transneft’s auditors for the period from 2003 to 2005.
Reclassifications
As discussed in Notes 3 and 4 to the Group’s audited consolidated financial statements as at and for
the year ended 31 December 2006, certain balances in the comparative 2005 financial statement
information included in the Group’s audited consolidated financial statements as at and for the year
ended 31 December 2006 presented on pages F-2 to F-31 of this Prospectus have been reclassified to
conform with the 2006 presentation. Below are explanations of the major reclassifications made.
The effect of reclassification on the consolidated balance sheet is as follows:
As at 31
December
2005
In millions of
RUR
Increase in
Inventories ........................................................................................................................... 4,267
Decrease in
Property, plant and equipment ........................................................................................... 4,267
The effect of reclassification on the consolidated income statement is as follows:
Year ended
31 December
2005
In millions of
RUR
Decrease in
Sales..................................................................................................................................... 1,829
Operating expenses .............................................................................................................. 924
Net other operating expenses .............................................................................................. 905
Gains on financial assets at fair value through profit or loss ............................................. 35
viii

Within operating expenses:
Year ended
31 December
2005
In millions of
RUR
Increase in
Salaries and pension expense............................................................................................... 1,854
Other.................................................................................................................................... 905
Decrease in
Insurance expense................................................................................................................ 1,854
Customs duties on oil sales ................................................................................................. 1,835
Within net other operating expenses:
Year ended
31 December
2005
In millions of
RUR
Increase in
Charitable contributions...................................................................................................... 1,595
Decrease in
Other operating expenses .................................................................................................... 2,470
Change in provision against doubtful debts and other receivables .................................... 30
The audited consolidated financial statements as at and for the years ended 31 December 2005 and 31
December 2004 presented on pages F-32 to F-83 of this Prospectus have not been adjusted to take
into account the changes described above that were effective in 2006. Accordingly, the audited
consolidated financial statements as at and for the years ended 31 December 2005 and 31 December
2004 are not comparable in certain respects to the presentation of the 2006 and 2005 financial
information contained in this Prospectus.
The consolidated financial statements of Transneft and its consolidated subsidiaries apply the Russian
rouble as their functional currency.
Hydrocarbons
Hydrocarbons are compounds formed from the elements hydrogen (H) and Carbon (C) and existing
in solid, liquid or gaseous forms. In this Prospectus, all references to:
* ‘‘crude oil’’ are to oil and gas condensate; and
* ‘‘gas’’ are to non-associated gas (i.e. natural gas) and associated gas.
Like many other Russian and European oil companies, Transneft uses the metric ton as the standard
unit of measurement for quantities of crude oil.
Currencies
In this Prospectus:
* ‘‘Russian rouble’’, ‘‘Russian roubles’’ or ‘‘RUR’’ refers to the lawful currency of Russia;
* ‘‘U.S. dollar’’, ‘‘U.S. dollars’’ or ‘‘U.S.$’’ refers to the lawful currency of the United States of
America; and
* ‘‘euro’’ or ‘‘A’’ refers to the single currency of the participating member states in the Third Stage
of the European Economic and Monetary Union of the Treaty Establishing the European
Community, as amended from time to time.
ix

Convenience Translations
This Prospectus contains conversions of certain amounts into U.S. dollars at specified rates solely for
the convenience of the reader. The U.S. dollar amounts have been translated from the Russian rouble
amounts at the rate of RUR 26.33 = U.S.$1.00, which was the rate published by the Central Bank of
Russia (‘‘CBR’’) on 31 December 2006.
No representation is made that the U.S. dollar amounts referred to in this Prospectus could have
been or could be converted into Russian roubles or U.S. dollars, as the case may be, at the above
exchange rates or at all.
Rounding
Rounding adjustments have been made in calculating some of the financial information included in
this Prospectus. As a result, numerical figures shown as totals in some tables may not be exact
arithmetic aggregations of the figures that precede them.
Tariffs and Oil Sales Prices
Average tariffs and oil sales prices are stated on a VAT-exclusive basis and are calculated by the
Group on the basis of Russian Accounting Standards (‘‘RAS’’).
INFORMATION DERIVED FROM THIRD PARTIES
Transneft has obtained certain statistical and market information that is presented in this Prospectus
on such topics as the Russian oil industry, the Russian economy in general and related subjects from
the following third party sources:
* statistics provided by the Central Dispatch Unit of the Ministry of Industry and Energy of
Russia;
* statistics provided by Agency of Petroleum Information;
* statistics provided by Rosstat, the Federal State Statistics Service of Russia;
* the Statistical Review of World Energy, June 2006, published by British Petroleum plc;
* the Russia Oil and Gas Yearbook 2006 published by Renaissance Capital; and
* annual and other reports published by other international hydrocarbons transportation
companies and Russian oil producing companies, including information from OJSC
Transnefteprodukt’s website.
This third party information is presented in the following sections of this Prospectus: ‘‘Overview’’,
‘‘Risk Factors’’, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations’’ and ‘‘Business’’.
Transneft takes responsibility for the accurate reproduction of such information and, as far as
Transneft is aware and is able to ascertain from information published by such third party, no facts
have been omitted that would render the reproduced information inaccurate or misleading.
Nevertheless, prospective investors are advised to consider this data with caution. Market studies are
often based on information or assumptions that may not be accurate or appropriate, and their
methodology is inherently predictive and speculative. Prospective investors should note that
Transneft’s estimates are based on such third party information. None of Transneft, TCI Limited or
the Managers has independently verified the figures, market data or other information on which third
parties have based their studies.
Some of the information contained in this Prospectus has been derived from official data of Russian
Government agencies and the CBR. The official data published by Russian federal, regional and local
government agencies are substantially less complete or researched than those of more developed
countries. Official statistics, including those produced by the CBR, may also be produced on different
bases than those used in more developed countries. Any discussion of matters relating to Russia in
this Prospectus must, therefore, be subject to uncertainty due to concerns about the completeness or
reliability of available official and public information.
Neither the contents of Transneft’s website nor the contents of OJSC Transnefteprodukt’s website
form any part of this Prospectus.
x

EXCHANGE RATE INFORMATION
The table below sets forth, for the periods and dates indicated, certain information regarding the
exchange rate between the Russian rouble and the U.S. dollar, based on the official exchange rate
quoted by the CBR. Fluctuations in the exchange rates between the Russian rouble and the U.S.
dollar in the past are not necessarily indicative of fluctuations that may occur in the future.
High
Low
Period
average (1)
Period end
RUR per U.S. dollar
Year ended 31 December
2006 ....................................................................... 28.48 26.18 27.19 26.33
2005 ....................................................................... 29.00 27.46 28.33 28.78
2004 ....................................................................... 29.45 27.75 28.73 27.75
2003 ....................................................................... 31.88 29.25 30.61 29.45
2002 ....................................................................... 31.86 30.13 31.69 31.78
Month ended
30 June 2007 (up to and including 19 June 2007). 26.05 25.82 25.93 25.96
31 May 2007.......................................................... 25.92 25.73 25.82 25.90
30 April 2007 ......................................................... 26.01 25.69 25.84 25.69
31 March 2007....................................................... 26.24 25.97 26.11 26.01
28 February 2007................................................... 26.55 26.16 26.34 26.16
31 January 2007..................................................... 26.58 26.45 26.53 26.53
31 December 2006 ................................................. 26.39 26.18 26.29 26.33
Source: Central Bank of Russia
Note:
(1) The average of the exchange rates on the last business day of each month for the relevant annual period and on each business day
for any other period.
This Prospectus contains conversions of certain amounts into U.S. dollars at specified rates solely for
the convenience of the reader. The U.S. dollar amounts have been translated from the Russian rouble
amounts at the rate of RUR 26.33 = U.S.$1.00, which was the rate published by the CBR on 31
December 2006.
No representation is made that the U.S. dollar amounts referred to in this Prospectus could have
been or could be converted into Russian roubles or U.S. dollars, as the case may be, at the above
exchange rates or at all.
xi

Table of Contents
NOTICE TO NEW HAMPSHIRE RESIDENTS..................................................................
iv
NOTICE TO CANADIAN RESIDENTS..............................................................................
iv
AVAILABLE INFORMATION.............................................................................................
v
FORWARD-LOOKING STATEMENTS..............................................................................
vi
ENFORCEABILITY OF JUDGMENTS .............................................................................. vii
PRESENTATION OF FINANCIAL AND OTHER INFORMATION.............................. viii
INFORMATION DERIVED FROM THIRD PARTIES.....................................................
x
EXCHANGE RATE INFORMATION.................................................................................
xi
OVERVIEW ............................................................................................................................ 1
SUMMARY FINANCIAL AND OPERATING DATA...................................................... 5
SUMMARY OF THE OFFERING....................................................................................... 8
DESCRIPTION OF THE TRANSACTION ......................................................................... 12
RISK FACTORS .................................................................................................................... 14
USE OF PROCEEDS ............................................................................................................. 28
CAPITALISATION AND INDEBTEDNESS....................................................................... 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.............. 30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION .................................................................................... 32
SUMMARY OF CERTAIN DIFFERENCES BETWEEN IFRS AND U.S. GAAP ......... 52
BUSINESS............................................................................................................................... 56
MANAGEMENT AND CORPORATE GOVERNANCE ................................................... 80
RELATED PARTY TRANSACTIONS ................................................................................ 87
SHARE CAPITAL AND DIVIDENDS ................................................................................ 88
REGULATION....................................................................................................................... 90
TRANSCAPITALINVEST LIMITED................................................................................... 98
THE DOLLAR LOAN AGREEMENT................................................................................. 100
THE EURO LOAN AGREEMENT...................................................................................... 125
TERMS AND CONDITIONS OF THE DOLLAR NOTES ................................................ 127
TERMS AND CONDITIONS OF THE EURO NOTES ..................................................... 137
SUMMARY OF THE PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM 139
SUBSCRIPTION AND SALE ............................................................................................... 146
TRANSFER RESTRICTIONS .............................................................................................. 149
TAXATION ............................................................................................................................ 152
CERTAIN ERISA CONSIDERATIONS .............................................................................. 160
GENERAL INFORMATION................................................................................................ 161
INDEX OF FINANCIAL STATEMENTS ........................................................................... F-1
xii

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xiii

OVERVIEW
The following summary should be read in conjunction with, and is qualified in its entirety by reference
to, the more detailed information and consolidated financial statements, which are set out elsewhere in
this Prospectus. See ‘‘Risk Factors’’ for a discussion of certain factors that should be considered by
potential investors prior to an investment in the Notes.
Transneft
OJSC AK Transneft (‘‘Transneft’’) and its 12 crude oil transportation subsidiaries (together with the
support and service subsidiaries described below, the ‘‘Group’’) own and operate what Transneft
believes to be the largest crude oil pipeline system in the world, based on its own estimates and data
published by major international crude oil transportation companies, totalling 47,865.3 km as at 1
April 2007. In 2006, the Group was responsible for the transportation of 458.5 million metric tons of
crude oil from the main oil producing regions of Russia and certain neighbouring countries to
refineries in Russia, export sea terminals and the oil pipeline networks of neighbouring countries, as
compared to 452.2 million metric tons during 2005. For each of the last three years, the volume of
crude oil transported by Transneft represented more than 90 per cent. of the volume of crude oil
produced in Russia and approximately 80 per cent. of the volume of all Russian crude oil exports, in
each case as estimated by Transneft based on data published by the Central Dispatch Unit of the
Ministry of Industry and Energy and by the Agency of Petroleum Information.
The Group’s total sales for 2006 were RUR 202,427 million (U.S.$7,688 million), as compared to
RUR 179,697 million for 2005 and RUR 150,441 million for 2004. The Group had EBITDA (as
defined under ‘‘Summary Financial and Operating Data’’) of RUR 104,620 million (U.S.$3,973
million) for 2006 and RUR 94,057 million for 2005 and has maintained an EBITDA margin (as
defined under ‘‘Summary Financial and Operating Data’’) of over 50 per cent. for each of the three
years ended 31 December 2006, 2005 and 2004. Transneft’s total debt as at 31 December 2006 was
RUR 70,881 million (U.S.$2,692 million), as compared to RUR 17,939 million as at 31 December
2005.
As a monopoly operating in the second largest crude oil producing country in the world in 2005
according to the BP Statistical Review of World Energy, June 2006, Transneft believes that it does
not have any immediate peers or competitors within Russia or the Commonwealth of Independent
States (‘‘CIS’’). International companies comparable to Transneft include Enbridge Energy LP, Energy
Transfer Partners LP, Oneok LP, TransCanada Pipeline Ltd, Kinder Morgan, Inc. and Enterprise
Products Partners LP, each operating internationally including, in particular, in Canada and the
United States.
The Government of Russia (the ‘‘Government’’ or ‘‘Russian Government’’) has owned, since
Transneft’s incorporation in 1993, 100 per cent. of Transneft’s ordinary voting shares, representing
75 per cent. of Transneft’s total issued share capital (see ‘‘Share Capital and Dividends’’). The
remaining 25 per cent. was issued in non-voting preferred share form and is held by various Russian
and international investors, including former and current Group employees. As and when the
proposed merger with OJSC Transnefteprodukt (‘‘Transnefteprodukt’’) is completed and the
contemplated share issuance made, the percentage of Russian Government ownership of Transneft’s
total issued share capital is, by order of a Presidential Decree, to be not less than 75 per cent. plus
one share, and may increase, depending on the exact structure of the issuance (see ‘‘Share Capital
and Dividends’’). Transnefteprodukt is 100 per cent. indirectly owned by the Russian Government.
All of the members of the Board of Directors of Transneft were appointed by the Russian
Government as shareholder, and eight of the nine members are also officials in the Russian
Government or governmental agencies.
In addition, the Russian Government exercises further substantial influence over Transneft through its
regulatory and legislative powers. As Transneft is a ‘‘natural monopoly’’ in the transportation of
crude oil by pipeline under the Federal Law No. 147-FZ dated 17 August 1995 (as amended) ‘‘On
Natural Monopolies’’ (the ‘‘Natural Monopoly Law’’), state authorities regulate the tariffs that
Transneft charges for the transportation of crude oil through its crude oil trunk pipelines and other
matters affecting Transneft’s business. Transneft is also on the Russian Government’s list of strategic
entities, which, inter alia, sets out a special bankruptcy and insolvency regime applicable to Transneft
and provides for a special procedure with respect to the sale or dilution of any of the voting shares
in Transneft.
1

Transneft’s management and financial controls, including customer contracts, are centralised, with
Transneft (the borrower of the Loans described in this Prospectus) receiving substantially all of the
revenues generated through the Group’s crude oil transportation activities. Transneft’s central
management centre in Moscow monitors, controls and manages the crude oil transportation system
throughout Russia in real time. Transneft’s 12 crude oil transportation subsidiaries are responsible for
transporting and delivering crude oil at the direction of Transneft.
The Russian Government has approved plans to merge Transneft with Transnefteprodukt, the
operator of a pipeline system in Russia for refined oil products, as further described in ‘‘Business –
Proposed Merger with Transnefteprodukt’’. When such merger is completed, depending on the exact
structure it is expected that Transnefteprodukt will become a subsidiary of Transneft.
History
Transneft is the successor to the USSR Ministry of Oil Industry Main Production Department for Oil
Transportation and Supplies (‘‘Glavtransneft’’) and was established in Russia as an open joint-stock
company pursuant to Russian Government Resolution No. 810 dated 14 August 1993, issued to
implement Presidential Decree No. 1403 dated 17 November 1992. Transneft was registered in the
Moscow Registration Chamber on 26 August 1993, registration certificate No. 026.800. Transneft is
registered with the Unified State Register of Legal Entities under number 1027700049486. Transneft’s
registered office is at ul. Bolshaya Polyanka 57, 119180 Moscow, Russia, and its telephone number is
+7 (495) 950 89 48.
Prior to the establishment of Transneft, Glavtransneft was responsible for managing the entire USSR
pipeline system, which in 1987 totalled 94,000 km of oil and oil products trunk pipelines. Significant
pipeline construction began in the USSR after the Second World War under the central department
of the USSR People’s Commissariat for Internal Affairs, later reorganised into Glavneftegazstroj (the
Central Committee for Oil and Gas Construction). Glavtransneft itself was formed in 1970.
When the USSR ceased to exist in 1991, Glavtransneft’s assets were distributed among 15 new states
and, after a period of further reorganisation, Transneft was subsequently formed in 1993 to manage
the system which remained in Russia.
Investment Highlights
Transneft believes that an investment in the Notes benefits from the following key factors:
* Transneft has a crude oil pipeline transportation monopoly in the world’s second largest crude oil
producing and exporting country
Transneft estimates that, in 2005, the oil industry contributed approximately one quarter of
Russia’s GDP, one quarter of the Russian Government’s income and half of Russia’s export
revenues, based on publicly available data. In many regions of Russia, Transneft’s pipeline
network is the only method for Russian oil producers to transport the majority of their crude
oil, as there is no infrastructure, or inadequate infrastructure, in place to support alternative
means of transport for such large volumes of oil and the costs to a potential alternative
operator of constructing such an infrastructure would be substantial. In addition, where
alternative means of transporting crude oil do exist, transportation services offered by Transneft
have historically been more cost-effective than such alternatives. Transneft believes that these
factors have made and will continue for the foreseeable future to make Transneft an integral
part of one of Russia’s most important industrial sectors.
* Transneft continues to maintain a strong relationship with the Russian Government
The Russian Government has owned Transneft since its establishment in 1993, continues to own
100 per cent. of the voting shares of Transneft and appoints its senior management. As a result
of this ownership and managerial control, all aspects of Transneft’s business and operations,
including Transneft’s budget, capital expenditure programme and borrowing programme, are
controlled either by the Russian Government as shareholder or by members of the Russian
Government in their capacities as directors of Transneft. Transneft is also on the Russian
Government’s list of strategic entities, which, inter alia, sets out a special bankruptcy and
insolvency regime applicable to Transneft and provides for a special procedure with respect to
the sale or dilution of any of the voting shares in Transneft.
2

* A tariff environment and regulatory system that Transneft believes offers financial stability and stable
and predictable cash flow
Pursuant to current law and regulation, the Federal Tariff Service (‘‘FTS’’) sets the Group’s
tariffs for the transportation of oil through its pipelines. The proceeds of such tariffs are
designed to cover, on the basis of Russian Accounting Standards (‘‘RAS’’), the operating
expenses (including interest expense) that the Group estimates it will incur during the relevant
period in connection with the provision of crude oil transportation services and provide a level
of net income. The amount of required net income is determined on the basis of the amount of
capital expenditures that the Group estimates it will be required to incur for the repair,
maintenance and reconstruction of its current pipelines and profit tax. Pursuant to applicable
regulation, Transneft’s expansion projects for the construction of new pipelines should be
financed by borrowings. Transneft is then permitted to apply for a tariff increase when such new
construction is finished, to cover the amount of principal to be repaid. The regulatory system
also allows Transneft to revise the tariff, which is set annually, as and when Transneft identifies
a requirement for revenues to cover expenses that were not factored into the regular annual
tariff calculation. Based on existing practice in the application of regulations and its record of
agreeing tariffs with the FTS, Transneft expects to be able to apply for and receive further tariff
increases when required to meet projected operational and capital costs. See ‘‘Management’s
Discussion and Analysis of Results of Operations and Financial Condition—Key Factors
Affecting the Group’s Results of Operations and Financial Condition—Tariffs’’.
* An experienced management team with an established track record of conservative financial management
Since 2000, when the current management of Transneft was appointed by the Russian
Government, the pipeline network has been repaired and upgraded at a cost of approximately
U.S.$1 billion per annum during 2000 to 2003, rising to approximately U.S.$1.5 billion in each
of the last three years (see ‘‘Business—Diagnostics, Maintenance and Upgrade’’). As a result,
Transneft’s throughput has increased and its rate of accidents for 2006 was significantly lower
than its peers in Europe and the United States (see ‘‘Business—Maintenance, Diagnostics and
Upgrade—Accidents, Theft and Other Losses of Oil’’). Due to the tariff system which, for
example, helps finance operational expenditures and many capital expenditures, Transneft’s
management has been able to maintain Transneft’s debt levels at relatively low levels and its
profit margins at relatively high levels (see ‘‘Summary Financial and Operating Data’’),
notwithstanding this significant expenditure.
Strategy
Transneft’s strategy is to implement the Russian Government’s policy for the development of the
Russian crude oil industry generally and crude oil transportation in particular (as set out in the
Russian Industry and Energy Ministry’s ‘‘General Plan for the Development of Oil Pipeline Transport
for the period to 2020’’ (the ‘‘Plan’’)) and to serve the needs of oil producers by providing high
quality, reliable transportation services in a cost-efficient manner. Strategic initiatives such as
expansion projects are proposed by the Russian Government and the detail of the plan is then
formulated and implemented by Transneft, with the approval at each key stage of project
development by the Russian Government, initially as sole voting shareholder and through its
representation on the Board of Directors and subsequently through its role as Transneft’s regulator.
The preliminary findings of the Plan, announced in October 2006, were that crude oil production
patterns are expected to change by 2020, principally due to new fields being brought into operation in
the Russian Far East, Eastern Siberia and the Timano-Pechorsky region. In addition, oil production
in Russia has risen from 324 million metric tons in 2000 to 470 million metric tons in 2005,
according to data published by the Ministry of Finance of Russia, and is forecast to rise to 445-490
million metric tons by 2010 and to 450-520 million metric tons by 2020, according to ‘‘On the Energy
Strategy of Russia for the period to 2020’’, approved by Russian Government Order 1234-r dated 28
August 2003 (the ‘‘Energy Strategy’’).
Accordingly, the Group’s key strategic objective is to implement the Plan by upgrading the pipeline,
increasing the pipeline’s overall capacity and developing new export routes to support projected
increases in Russian crude oil production, in particular in the Russian Far East, Eastern Siberia and
the Timano-Pechorsky region. Existing road and rail infrastructure and climatic conditions are poor
in these areas and the Group’s pipelines are often the only means of transporting significant amounts
of crude oil to refineries and consumers. Transneft is engaged in a number of projects designed to
3

meet this growing demand, in particular the ESPO Pipeline Project, as defined and described in
further detail in ‘‘Business—Investment Projects and Expansion’’.
Recent Developments
On 13 and 14 June 2007, Sberbank was selected through a tender process to provide a credit facility
in the amount of RUR 145 billion to Transneft and RUR 65 billion to OOO Vostoknefteprovod,
respectively. Following the conclusion of this tender process, the approval of Transneft’s Board of
Directors and sole voting shareholder, as well as the relevant corporate approvals for OOO
Vostoknefteprovod, are required before any documentation can be executed. These credit facilities will
be used by Transneft to finance the ESPO Pipeline Project and other pipeline projects approved by
the Russian Government, and by OOO Vostoknefteprovod to finance the ESPO Pipeline Project.
4

SUMMARY FINANCIAL AND OPERATING DATA
The selected consolidated financial information set forth below shows Transneft’s consolidated
financial information as at 31 December 2006, 2005 and 2004 and for the years then ended. The
financial information as at 31 December 2006, 2005 and 2004 and for the years then ended has been
derived from, and should be read in conjunction with, the annual audited consolidated financial
statements included elsewhere in this Prospectus. The selected consolidated financial information set
forth below should also be read in conjunction with ‘‘Management’s Discussion and Analysis of
Results of Operations and Financial Condition’’. As described in ‘‘Presentation of Financial and
Other Information—Reclassifications’’, certain balances in the comparative 2005 financial statement
information included in the Group’s audited consolidated financial statements as at and for the year
ended 31 December 2006 presented on pages F-2 to F-31 of this Prospectus have been reclassified to
conform with the 2006 presentation. The selected consolidated financial information presented herein
as at and for the year ended 31 December 2005 reflect these classifications. No such reclassifications
have been made to the consolidated financial statements balances as at and for the year ended
31 December 2004.
Transneft’s annual consolidated financial statements have been prepared in accordance with IFRS,
which includes International Accounting Standards (‘‘IAS’’) and Interpretations issued by the IASB.
IFRS differs in certain respects from U.S. GAAP. For a summary of certain differences between
IFRS and U.S. GAAP that are relevant to Transneft, see ‘‘Summary of Certain Differences between
IFRS and U.S. GAAP’’.
The U.S. dollar amounts set forth below were not included in Transneft’s annual consolidated
financial information and are provided for convenience only. Totals may not sum due to rounding.
The U.S. dollar amounts should not be construed as representations that the Russian rouble amounts
have been or could be converted into U.S. dollars at that or any other rate or as being representative
of the U.S. dollar amounts that would have resulted if Transneft reported in U.S. dollars. The U.S.
dollar amounts have been translated from the Russian rouble amounts at the rate of RUR 26.33 =
U.S.$1.00, which was the rate published by the CBR on 31 December 2006.
Year ended 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
(amounts in millions)
Income Statement Data
Sales (1) ................................................................................................ 7,688 202,427 179,697 150,441
Operating expenses (1) .......................................................................... (4,361) (114,813) (104,428) (87,873)
Operating profit.................................................................................. 3,115 82,027 75,176 60,804
Total financial items (1) ........................................................................ (45) (1,198) (1,776) (1,511)
Profit before profit tax (1) .................................................................... 3,070 80,829 73,400 59,293
Profit for the period (1) ........................................................................ 2,084 54,861 53,779 43,523
Profit attributable to shareholders of OJSC AK Transneft (1) ........... 1,960 51,599 51,511 41,155
Profit attributable to minority interest............................................... 124 3,262 2,268 2,368
Note:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
5

As at 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
(amounts in millions)
Balance Sheet Data
Total non-current assets (1) .................................................................. 18,968 499,418 337,696 297,664
Total current assets (1) ......................................................................... 2,898 76,303 80,630 61,093
Total assets......................................................................................... 21,866 575,721 418,326 358,757
Share capital....................................................................................... 12 307 307 307
Retained earnings............................................................................... 13,935 366,917 316,708 265,912
Attributable to the shareholders of OJSC AK Transneft.................. 13,947 367,224 317,015 266,219
Minority interests ............................................................................... 680 17,912 14,650 12,382
Total equity........................................................................................ 14,627 385,136 331,665 278,601
Total non-current liabilities................................................................ 3,262 85,884 36,672 49,826
Total current liabilities ....................................................................... 3,976 104,701 49,989 30,330
Total liabilities.................................................................................... 7,238 190,585 86,661 80,156
Total equity and liabilities ................................................................. 21,866 575,721 418,326 358,757
Note:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
Year ended 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
(amounts in millions)
Cash Flow Data
Net cash from operating activities ..................................................... 3,935 103,619 84,873 60,635
Net cash used in investing activities................................................... (5,679) (149,534) (66,326) (56,176)
Net cash from/(used in) financing activities....................................... 1,756 46,234 (6,662) (4,257)
Cash and cash equivalents at the beginning of the period ................ 1,107 29,138 17,220 17,219
Cash and cash equivalents at the end of the period .......................... 1,113 29,293 29,138 17,220
Year ended 31 December
2006 2005 2004
Key Operating Data
Crude oil transported (millions of metric tons) (1) ................................... 458.5 452.2 447.3
Crude oil transported (millions of metric tons by km travelled) (2) ........ 1,091,443 1,093,019 1,060,778
Notes:
(1) Totals for crude oil transported in this table and in ‘‘Business’’ and ‘‘Overview’’ include crude oil transferred to the Caspian
Pipeline Consortium (‘‘CPC’’) (see ‘‘Business – Export and Domestic Transportation Volumes’’) and thus differ from those
presented in the financial statements included in this Prospectus and the corresponding sections of ‘‘Management’s Discussion and
Analysis of Results of Operations and Financial Condition’’, which do not include crude oil transferred to the CPC.
(2) Transneft presents millions of metric tons by kilometres travelled as a measure of the turnover of its crude oil transportation
services. Distance is measured as the distance for crude oil to be transported, as contracted for by Transneft’s clients.
6

As at and for the year ended 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
(amounts in millions, except for ratios)
Certain Non-IFRS Items and Ratios
EBITDA (1)(6) .................................................................................... 3,973 104,620 94,057 77,870
EBITDA Margin (2)(6) ....................................................................... — 51.7% 52.3% 51.8%
Total Debt (3)(6) ................................................................................. 2,692 70,881 17,939 17,514
Total Debt/EBITDA ratio (4)(6) ........................................................ — 0.68 0.19 0.22
Interest Expense (6) ............................................................................ 73 1,923 1,216 2,264
EBITDA/Interest Expense ratio (5)(6) ................................................ — 54.4 77.3 34.4
Notes:
(1) Transneft defines EBITDA as profit for the period before taxation, interest expense and depreciation and amortisation for the
relevant period.
For the year ended 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
Profit for the period (7) ......................................................................................... 2,084 54,861 53,779 43,523
Depreciation........................................................................................................ 831 21,868 19,441 16,313
Interest expense................................................................................................... 73 1,923 1,216 2,264
Profit tax expense................................................................................................ 986 25,968 19,621 15,770
EBITDA.............................................................................................................. 3,973 104,620 94,057 77,870
(2) EBITDA margin is EBITDA divided by total sales for the relevant period.
(3) Transneft defines total debt as current borrowings and finance lease obligations plus non-current borrowings and finance lease
obligations, as at the end of the relevant period.
As at 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
Non-current liabilities/Borrowings and finance lease obligations....................... 64 1,681 1,649 14,969
Current liabilities/Borrowings and finance lease obligations.............................. 2,628 69,200 16,290 2,545
Total Debt........................................................................................................... 2,692 70,881 17,939 17,514
(4) The total debt/EBITDA ratio is total debt as at the end of the relevant period divided by EBITDA for the relevant period.
(5) The EBITDA/interest expense ratio is EBITDA for the relevant period divided by interest expense for the relevant period.
(6) EBITDA and total debt are presented as supplemental measures of Transneft’s operating and financial performance and financial
condition, which Transneft believes are frequently used by securities analysts, investors and other interested parties in the
evaluation of companies in the hydrocarbons transportation industry.
EBITDA and total debt have limitations as analytical tools, and investors should not consider them in isolation, or as substitutes
for analysis of Transneft’s operating results and financial condition as reported under IFRS. Some of these limitations are as
follows:
* EBITDA does not reflect the impact of financing costs, which can be significant and could further increase if Transneft incurs
more debt, on Transneft’s operating performance.
* EBITDA does not reflect the impact of income taxes on Transneft’s operating performance.
* EBITDA does not reflect the impact of depreciation on Transneft’s operating performance. The assets of Transneft’s
businesses which are being depreciated will have to be replaced in the future and such depreciation expense may approximate
the cost to replace these assets in the future. By excluding this expense from EBITDA, EBITDA does not reflect Transneft’s
future cash requirements for these replacements.
* Other companies in the hydrocarbons transportation industry may calculate EBITDA and/or total debt differently or may use
them for different purposes than Transneft, limiting their usefulness as comparative measures.
Transneft uses EBITDA and total debt only supplementally. See the financial statements prepared in accordance with IFRS
included elsewhere in this Prospectus. EBITDA and total debt are not defined by, or presented in accordance with, IFRS.
EBITDA and total debt are not measurements of Transneft’s operating performance or financial condition under IFRS and
should not be considered as an alternative to profit, operating profit, net cash provided by operating activities or any other
measure of performance under IFRS or as a measure of Transneft’s liquidity. In particular, EBITDA should not be considered as
a measure of discretionary cash available to Transneft to invest in the growth of its business.
(7) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
7

SUMMARY OF THE OFFERING
The following summary contains basic information about the Notes and the Loans and should be read in
conjunction with, and is qualified in its entirety by, the information set forth under ‘‘The Dollar Loan
Agreement’’, ‘‘The Euro Loan Agreement’’, ‘‘Terms and Conditions of the Dollar Notes’’ and ‘‘Terms
and Conditions of the Euro Notes’’ appearing elsewhere in this Prospectus.
Terms of the Notes
The Issuer
The Offer
Issue Price
Issue Date 27 June 2007.
Maturity Date 27 June 2012.
Interest
Yield
Use of Proceeds
Form of the Notes
Trustee
Registrar
Principal Paying and Transfer
Agent
Paying Agent and Transfer Agent
Irish Paying and Transfer Agent
Initial Delivery of Notes
TransCapitalInvest Limited (‘‘TCI Limited’’), a private company
organised and existing as a limited liability company under the laws
of Ireland.
U.S.$500,000,000 6.103 per cent. Loan Participation Notes due
2012 and A700,000,000 5.381 per cent. Loan Participation Notes
due 2012.
100 per cent. of the principal amount of the Notes.
Interest on the Dollar Notes will be payable semi-annually in arrear
on 27 June and 27 December in each year, commencing on 27
December 2007. Interest on the Euro Notes will be payable
annually in arrear on 27 June in each year, commencing on 27 June
2008. On each Payment Date the Issuer shall account to the
Noteholders for an amount equivalent to amounts of interest
actually received by or for the account of the Issuer pursuant to the
relevent Loan Agreement which interest under the Dollar Loan is
equal to 6.103 per cent. per annum and under the Euro Loan is
equal to 5.381 per cent. per annum.
U.S.$6,103 per U.S.$100,000 in nominal amount of the Notes held
in respect of the Dollar Notes and A2,690.50 per A50,000 in nominal
amount of the Notes held in respect of the Euro Notes.
TCI Limited will use the net proceeds of the issue of the Notes for
the sole purpose of financing the Loans to Transneft pursuant to
the Loan Agreements.
The Dollar Notes will be issued in registered form in minimum
denominations of U.S.$100,000 and integral multiples of
U.S.$1,000 in excess thereof. The Euro Notes will be issued in
registered form in minimum denominations of A50,000 and integral
multiples of A1,000 in excess thereof. The Regulation S Notes and
the Rule 144A Notes will be represented by the Regulation S
Global Note and the Rule 144A Global Note, respectively, in each
case without interest coupons. The Global Notes will be
exchangeable for Definitive Notes in the limited circumstances
specified in the Global Notes.
Citicorp Trustee Company Limited.
Citigroup Global Markets Deutschland AG & Co. KGaA.
Citibank, N.A., London Branch.
Citibank, N.A., New York Branch.
Citibank International Plc.
On or before the Issue Date, the Rule 144A Global Notes will be
deposited with a custodian for The Depository Trust Company and
the Regulation S Global Notes will be deposited with a common
depositary for Euroclear and Clearstream, Luxembourg. The Rule
144A Global Notes will be registered in the name of a nominee of
The Depository Trust Company, and the Regulation S Global
Notes will be registered in the name of a nominee of Euroclear and
Clearstream, Luxembourg.
8

Limited Recourse
Security
Redemption by TCI Limited
Optional Redemption by the
Noteholders upon a Change of
Control
Withholding Tax or Increased
Costs
The Notes are limited recourse obligations of TCI Limited. The
Notes will constitute the obligation of TCI Limited to apply the net
proceeds from the issue of the Notes solely for financing the
corresponding Loan and to account to Noteholders for amounts
equivalent to sums of principal, interest and any additional
amounts actually received by or for the account of TCI Limited
pursuant to the relevant Loan Agreement, less any amounts in
respect of Reserved Rights (as defined in the relevant Trust Deed).
See ‘‘Terms and Conditions of the Notes—1. Status’’.
The Notes will be secured by a charge (the ‘‘Charge’’) in favour of
the Trustee for the benefit of the relevant Noteholders, of:
(a) all rights to principal, interest and additional amounts (if any)
payable by Transneft to TCI Limited under the relevant Loan
Agreement;
(b) the right to receive all sums that may be or may become
payable by Transneft under any claim, award or judgment
relating to the relevant Loan Agreement; and
(c) all the rights, title and interest in and to all sums of money
held from time to time in an account specified in the relevant
Loan Agreement, together with the debts represented thereby
(including interest earned on the account, if any),
provided in each case that Reserved Rights (as defined in the
relevant Trust Deed), and any amounts in respect thereof, are
excluded from the Charge.
Furthermore, under the terms of the Trust Deeds, TCI Limited will
assign absolutely all of its rights under the relevant Loan
Agreement, except for any Reserved Rights (as defined in the
relevant Trust Deed), to the Trustee for the benefit of the
Noteholders.
If Transneft prepays the Dollar Loan or the Euro Loan pursuant to
the relevant Loan Agreement, whether for tax reasons or by reason
of increased costs or illegality, all relevant Notes then remaining
outstanding will thereupon become due and redeemable or
repayable at 100 per cent. of the principal amount together with
the accrued and unpaid interest and additional amounts, if any, all
as more fully described in ‘‘Terms and Conditions of the Notes—6.
Redemption’’.
Upon the occurrence of a Change of Control (as defined in each
Loan Agreement), the relevant Notes may be redeemed at the
option of a Noteholder at their principal amount together with
accrued and unpaid interest and additional amounts, if any, all as
more fully described in ‘‘Terms and Conditions of the Notes—6.
Redemption’’.
Transneft will make all payments of principal and interest under the
Loan Agreements free and clear of all taxes, duties, assessments or
governmental charges, except as required by law.
If:
(a) any taxes, duties, assessments or governmental charges
become payable in respect of a Loan; or
(b) certain other circumstances result in TCI Limited incurring
increased costs associated with a Loan,
Transneft must, subject to certain exceptions, pay TCI Limited
under the relevant Loan Agreement an increased amount equal to
the amount that TCI Limited would have received absent deduction
or withholding of such taxes, duties, assessments, governmental
charges or increased costs. The sole obligation of TCI Limited will
be to pay to the relevant Noteholders amounts equivalent to the
amounts received from Transneft.
9

Events of Default and Relevant
Events
Selling Restrictions
Further Issuances
Ratings
Listing
Security Codes
Governing Law
Terms of the Loans
Lender
Borrower
Principal Amount of the Loans
Interest on the Dollar Loan
If either an Event of Default (as defined in a Loan Agreement) or a
Relevant Event (as defined in a Trust Deed) occurs, the Trustee
may, subject to the provisions of the relevant Trust Deed:
(a) in the case of an Event of Default, declare all amounts
payable by Transneft under the relevant Loan Agreement to
be due and payable and to do all such other acts in connection
therewith that the Trustee may direct; or
(b) in the case of a Relevant Event, enforce the security created
by the relevant Trust Deed.
Upon repayment of a Loan following an Event of Default, the
relevant Notes will be redeemed and repaid at their principal
amount, together with interest accrued to the date fixed for
redemption and thereupon shall cease to be outstanding.
The Notes have not been and will not be registered under the
Securities Act and, subject to certain exceptions, may not be offered
or sold within the United States. The Notes may be sold in other
jurisdictions (including, without limitation, the United Kingdom,
Ireland, Russia and Singapore) only in compliance with applicable
laws and regulations. See ‘‘Subscription and Sale’’.
TCI Limited may, from time to time and without the consent of the
relevant Noteholders, create and issue further notes on the same
terms as the existing Dollar Notes or Euro Notes (except for the
first payment of interest). Such further notes may be consolidated
and form a single series with such existing Dollar Notes or Euro
Notes, as the case may be .
The Notes have been rated:
(a) ‘‘A2’’ by Moody’s; and
(b) ‘‘BBB+’’ by Standard & Poor’s,
in each case with a stable outlook.
A rating is not a recommendation to buy, sell or hold securities and
may be subject to revision, suspension or withdrawal at any time by
the assigning rating organisation.
Application has been made to the Financial Regulator for this
Prospectus to be approved. Application has been made for the
Notes to be listed on the Irish Stock Exchange and admitted to
trading on the Irish Stock Exchange’s regulated market.
Dollar Notes
Regulation S ISIN:
XS0306899765
Regulation S Common Code: 030689976
Rule 144A ISIN:
US89354FAB76
Rule 144A Common Code: 030690109
Rule 144A CUSIP:
89354FAB7
Euro Notes
Regulation S ISIN:
XS0306900795
Regulation S Common Code: 030690079
Rule 144A ISIN:
US89354FAC59
Rule 144A Common Code: 030690125
Rule 144A CUSIP:
89354FAC5
The Notes and the Trust Deed will be governed by English law.
TCI Limited, a private company organised and existing as a limited
liability company under the laws of Ireland.
OJSC AK Transneft, an open joint-stock company incorporated
under the laws of Russia.
U.S.$500,000,000 and A700,000,000.
6.103 per cent.
10

Interest on the Euro Loan
Use of Proceeds
Prepayment by Transneft
Prepayment upon a Change of
Control
Certain Covenants
Negative Pledge
Events of Default and Relevant
Events
Governing Law
5.381 per cent.
Transneft will use the proceeds of the Loans to finance the ESPO
Pipeline Project.
Each Loan may be prepaid at Transneft’s option in whole, but not
in part at the principal amount thereof, together with accrued and
unpaid interest and additional amounts, if any, to the date of
repayment, for certain tax reasons or by reason of certain increased
costs or illegality, all as more fully described in ‘‘The Dollar Loan
Agreement’’ and ‘‘The Euro Loan Agreement’’.
If any Notes are redeemed pursuant to the Put Option upon a
Change of Control (as defined in ‘‘The Dollar Loan Agreement’’
and ‘‘The Euro Loan Agreement’’) a corresponding portion of the
relevant Loan must be prepaid in whole or in part by Transneft at
100 per cent. of its relevant principal amount, together with accrued
and unpaid interest and additional amounts, if any, all as more
fully described in ‘‘The Dollar Loan Agreement’’ and ‘‘The Euro
Loan Agreement’’.
As long as any of the Notes remains outstanding, TCI Limited has
covenanted under the relevant Trust Deed that it will not, without
the prior written consent of the Trustee, agree to any amendment to
or any modification or waiver of, or authorise any breach or
proposed breach of, the terms of the relevant Loan Agreement,
except as otherwise expressly provided in the relevant Trust Deed
or the relevant Loan Agreement.
The Loan Agreements will, among other things, restrict, with
certain exceptions, the ability of Transneft and its subsidiaries to
create or incur liens.
As described under ‘‘— Terms of the Notes’’.
Each Loan Agreement will be governed by English law.
An investment in the Notes involves a high degree of risk. See ‘‘Risk Factors’’ on page 14.
11

DESCRIPTION OF THE TRANSACTION
The following summary contains basic information about the Notes and the Loans and should be read in
conjunction with, and is qualified in its entirety by, the information set forth under ‘‘The Dollar Loan
Agreement’’, ‘‘The Euro Loan Agreement’’, ‘‘Terms and Condition of the Dollar Notes’’ and ‘‘Terms and
Conditions of the Euro Notes’’ appearing elsewhere in this Prospectus.
The transaction will be structured as a U.S. dollar loan and a euro loan from TCI Limited to
Transneft. TCI Limited will issue U.S. dollar denominated notes and euro denominated notes, which
will be limited recourse loan participation notes issued for the sole purpose of funding the
corresponding Loan to Transneft. The Notes are limited recourse obligations and TCI Limited will
not have any obligation to the Noteholders other than the obligation to account to the Noteholders
for payment of principal and interest received by it under the corresponding Loan. In the event that
the amount due and payable by TCI Limited under the Notes exceeds the sums so received or
recovered pursuant to the corresponding loan, the right of any person to claim payment of any
amount exceeding such sums shall be extinguished, and Noteholders may take no further action to
recover such amounts. Noteholders of the Dollar Notes will have no claims on the Euro Loan
Agreement or assets securing the Euro Notes and Noteholders of the Euro Notes will have no claims
on the Dollar Loan Agreement or assets securing the Dollar Notes.
The Dollar Notes and the Euro Notes will each have the benefit of, and be constituted by, a Trust
Deed. As provided in each Trust Deed, TCI Limited will charge, by way of a charge in favour of the
Trustee, for the benefit of the relevant Noteholders as continuing security for its payment obligations
in respect of the relevant Notes:
* all rights to principal, interest and additional amounts (if any) payable by Transneft to TCI
Limited under the relevant Loan Agreement;
* the right to receive all sums that may be or become payable by Transneft under any claim,
award or judgment relating to the relevant Loan Agreement; and
* all the rights, title and interest in and to all sums of money held from time to time in an
account specified in the relevant Loan Agreement, together with the debts represented thereby
(including interest earned on the account, if any),
provided, in each case, that Reserved Rights (as defined in each Trust Deed), and any amounts in
respect thereof, are excluded from the charge. In addition, TCI Limited will assign to the Trustee
certain administrative rights under the relevant Loan Agreement. See ‘‘Terms and Conditions of the
Dollar Notes’’ and ‘‘Terms and Conditions of the Euro Notes’’.
In addition, TCI Limited with full title guarantee will assign absolutely to the Trustee for the benefit
of itself and the relevant Noteholders all the rights, title, interest and benefits, both present and
future, that may accrue to TCI Limited as lender under or pursuant to the corresponding Loan
Agreement (including, without limitation, the right to declare the corresponding Loan immediately
due and payable and to commence proceedings to enforce the obligations of Transneft thereunder),
other than any rights, interests benefits that are subject to the Charge and other than Reserved
Rights (as defined in the relevant Trust Deed), and any amounts relating thereto. As a consequence
of such assignment, the Trustee will assume the rights of TCI Limited under the relevant Loan
Agreement, as set forth in the relevant provisions of each Trust Deed.
TCI Limited will agree in each Trust Deed not to agree to any amendments to or modification or
waiver of, and not to authorise any breach of, the relevant Loan Agreement unless the Trustee has
given its prior written consent or unless authorised to do so by an Extraordinary Resolution (as
defined in each Trust Deed) of the relevant Noteholders, except in respect of Reserved Rights (as
defined in each Trust Deed). TCI Limited will agree to act at all times in accordance with any
instructions of the Trustee with respect to the relevant Loan Agreement, except as provided in each
Trust Deed and except in respect of Reserved Rights (as defined in each Trust Deed). The Trustee
will notify the Noteholders of any amendments, modifications, waivers or authorisations made with
the Trustee’s consent in accordance with ‘‘Terms and Conditions of the Dollar Notes—14. Notices’’
and ‘‘Terms and Conditions of the Euro Notes—14. Notices’’, which amendments, modifications,
waivers or authorisations will be binding on the Noteholders. TCI Limited does not intend to provide
post-issuance transaction information regarding the Notes or the performance of the Loans.
Payments in respect of the Notes will be made without any deduction or withholding for or on
account of taxes, except as required by law. If any deduction or withholding is required by law, TCI
Limited must, except in certain limited circumstances, pay additional amounts to the extent it receives
12

corresponding amounts from Transneft pursuant to the relevant Loan Agreement (as the case may
be). In addition, payments under each Loan Agreement will be made without deduction or
withholding for or on account of taxes, except as required by law. If any deduction or withholding is
required by law with respect to payments under the Notes or a Loan Agreement, Transneft must,
except in certain limited circumstances, increase the amounts payable under such Loan Agreement by
an amount equivalent to the required tax payment.
Transneft may prepay a Loan at its principal amount, together with accrued and unpaid interest and
additional amounts, if any, if Transneft is required to increase the amount payable or to pay
additional amounts on account of the taxes in respect of which it is required to pay additional
amounts under the relevant Loan Agreement or if it is required to pay additional amounts on
account of certain costs incurred by TCI Limited. As set forth in each Loan Agreement, TCI Limited
may, at its own discretion, require Transneft to prepay the relevant Loan if it becomes unlawful for
the relevant Loan or the corresponding Notes to remain outstanding. Each Loan has characteristics
that demonstrate a capacity to produce funds to service any payments due and payable on the
corresponding Notes.
Set forth below is a diagram of the structure for the Dollar Notes and the Euro Notes and the
corresponding Loans:
Noteholders
Proceeds of
the Notes
Payments on
the Notes
TransCapitalInvest Limited
Proceeds of
the Loans
Payments under
the Loan
Agreements
OJSC AK Transneft
as Borrower
13

RISK FACTORS
An investment in the Notes involves a high degree of risk. Investors should carefully consider the
following information about these risks, together with the information contained in this Prospectus,
before they decide to buy Notes. The actual occurrence of any of the following risks could adversely
affect Transneft’s operating results and financial condition. In such case, the value of the Notes could
also decline and investors could lose all or part of their investment.
The risks and uncertainties discussed below are those that Transneft believes are material, but these risks
and uncertainties may not be the only ones that Transneft faces. Additional risks and uncertainties,
including those Transneft’s management currently is not aware of or deems immaterial, may also result
in decreased revenues, increased expenses or other events that could lead to a decline in the value of the
Notes.
Risks Relating to Transneft
The Russian Government, whose interests may not coincide with those of the Noteholders, controls Transneft
and has a substantial degree of influence over Transneft’s operations and those of its customers, and may cause
Transneft to engage in business practices that do not benefit Noteholders
The Russian Government owns 100 per cent. of Transneft’s ordinary voting shares, and manages this
stake through the Federal Agency for the Management of Federal Property (‘‘Rosimushchestvo’’). In
addition, eight members of Transneft’s nine-member Board of Directors are officials in the Russian
Government or governmental agencies, and all nine members, including the President of Transneft,
were nominated and appointed by the Russian Government. The Russian Government controls
Transneft’s operations, including approving Transneft’s budget, capital expenditure programme and
borrowing programme, through its share ownership and its representation on Transneft’s Board of
Directors, acting within the framework established by Russian corporate law and rules for stateowned
companies. The Russian Government may also exercise substantial influence over Transneft’s
operations through its regulatory, taxation and legislative powers, as well as through informal
channels. For example, Transneft is a ‘‘natural monopoly’’ in the transportation of crude oil by
pipeline under the Natural Monopoly Law. As a result, state authorities regulate the tariffs that
Transneft charges for the transportation of crude oil through its crude oil trunk pipelines and other
matters affecting Transneft’s business. Due to these factors, the Russian Government could, through
its share ownership and representation on the Board of Directors or through its regulatory, taxation
or legislative powers, cause Transneft to take actions that may not coincide with the interests of the
Noteholders.
In addition, the Russian Government has in the past limited the amount of export sales of crude oil
by Russian producers by limiting the share of crude oil that may be transported for export through
export oil pipelines and required them to sell a portion of the hard currency proceeds from exports.
The Russian Government also determined the amounts of crude oil for delivery for state needs and
to certain customers, such as the military, agricultural concerns and remote regions, which, though in
compliance with Russian law, may have been on non-market terms and may have taken priority over
sales in the ordinary course of business. Actions such as these could adversely affect the demand for
Transneft’s crude oil transportation services from Transneft’s customers, which could in turn have a
material adverse effect on Transneft’s operating results and financial condition or on the value of the
Notes.
Transneft’s strategy, business and operations are heavily dependent on the continued support of the Russian
Government, both through the maintenance of share ownership and through the continuation of the currently
favourable regulatory regime
Transneft believes that current Russian law, regulation and practice governing the manner in which
crude oil transportation tariffs are set, as well as the factors that can and must be taken into account
by the FTS, the relevant regulator, in approving such tariffs, offer a degree of protection to
Transneft’s business from a number of operational risks to which it would otherwise be subject. See
‘‘Business—Tariffs’’, ‘‘Management’s Discussion and Analysis of Results of Operations and Financial
Condition—Key Factors Affecting the Group’s Results of Operations and Financial Condition—
Tariffs’’, and ‘‘Regulation’’. In particular, as the currently applicable law provides that Transneft’s
projected operating costs as specified by such law, including the potentially adverse effects on
Transneft of, inter alia, inflation, foreign exchange currency fluctuations, specified operational expenses
and income taxes should all be taken into account by the FTS when approving the annual basic tariff
14

equested by Transneft, Transneft believes that it is significantly less exposed to the negative effects of
such factors than other companies operating heavy industrial businesses in Russia.
In addition, Transneft’s business, including the development of the crude oil pipelines discussed in
‘‘Business—Investment Projects and Expansion’’, any other as yet unidentified expansion projects and
the general repair and maintenance of Transneft’s existing assets, requires significant capital
expenditure. Pursuant to current tariff-setting regulations and practice, Transneft expects to finance its
operational capital expenditure out of net cash provided by operating activities and its expansion
capital expenditure through borrowings (including the Loans), the debt service of which can, in the
manner specified in such regulations, be factored into the tariff charged by Transneft.
However, the FTS is not required by law or otherwise committed to approve tariff increases at the
levels suggested by Transneft, or at all, and, even where it does, there may be a delay between the
adverse effect on Transneft and any related tariff increase. Any refusal by the FTS to approve a
requested tariff increase at the level suggested by Transneft, or any delay in implementing an increase,
or any change to this regulatory environment from the current system that affects Transneft’s ability
to factor the costs of such operational risks and capital expenditures into the tariff, may result in a
material adverse effect on Transneft, including as a result of Transneft becoming exposed to various
risks, such as:
* increased expenses and/or losses of revenue arising from any failure of or damage to critical
pieces of equipment, such as the crude oil pipeline, pumping stations, storage tanks and sea
ports and export terminals, due to unanticipated events such as the breakdown or failure of
equipment or processes, performance below expected levels of output or efficiency, labour
disputes, earthquakes and other natural disasters, terrorism or the theft of crude oil through
illegal tapping of the crude oil pipeline. Any such equipment failure or damage may require
Transneft to incur additional expense, including to repair or replace faulty machinery or to heat
oil that, consequently, cannot be transported to prevent it from freezing;
* the risk of liability arising from environmental damage or pollution and the cost of any
associated remedial work. In Russia in particular, federal, regional and local authorities may
enforce existing laws and regulations more strictly than they have done in the past and may
impose stricter environmental standards, or higher levels of fines and penalties for violations,
than those now in effect. Accordingly, Transneft is unable to estimate the future financial
impact of its environmental obligations;
* the risk of increased cost of maintenance and repair and construction of additional crude oil
pipelines, due, among other reasons, to the harsh climate found in the remote areas of Russia
where Transneft often operates and the risk that Transneft may not complete the large
maintenance, upgrade and expansion programmes that it is committed to (see ‘‘Business—
Diagnostics, Maintenance and Upgrade’’ and ‘‘Business—Investment Projects and Expansion’’)
on time or within budget. In the absence of a tariff increase to cover any increased costs,
Transneft may be unable to raise additional financing required to finance and complete such
projects. Capital expenditure could exceed budget for a variety of reasons, including inflation,
unanticipated accidents or events or potential increases in the price of the construction materials
Transneft requires to implement such projects;
* inflation; and
* transactional foreign currency exchange rate risks arising as a result of payments Transneft
makes or receives that involve foreign currency exchange. Although both Transneft’s revenues
and its costs are generally denominated in Russian roubles, future exchange rate fluctuations
may affect its results of operations to the extent there is not an exact natural hedge between
revenues and costs, as Transneft does not use derivative financial instruments (forwards and
options) to mitigate potential losses from any sudden, significant decrease or foreign currency
exchange rate fluctuations (both short- and long-term). In addition, to the extent that Transneft
pays expenses in one currency and obtains payment for its services in another currency, its
profit margins may be affected by exchange rate fluctuations and, to the extent Transneft
borrows in a foreign currency, it will be exposed to any devaluation of the Russian rouble.
In addition, while to date Transneft has not experienced any significant competition relative to the
operation of its crude oil pipeline system, there can be no assurances that future Russian governments
will not seek to promote competition for the transport of crude oil, or that alternative transport
methods such as railways will not reduce tariffs or increase efficiency to levels such that they start to
offer serious competition to Transneft in certain areas of Russia.
15

Finally, while current and proposed future regulation limit the ability of the Russian Government to
sell or otherwise dispose of or dilute any or all of its voting shares in Transneft (see ‘‘Regulation’’),
there can be no assurance that these laws will not change in the future or that the Russian
Government will not, in compliance with such laws, obtain the relevant presidential approvals and
pass the relevant laws to enable such sale, disposal or dilution. However, holders of the Notes will
have the right to cause the Issuer to redeem its Notes (and Transneft to prepay the Loans) at 100 per
cent. of their aggregate principal amount upon the occurrence of a Change of Control (as defined
herein). See ‘‘The Dollar Loan Agreement’’ and ‘‘The Euro Loan Agreement’’. There is no assurance
that Transneft could finance the repayment of either Loan upon a Change of Control.
Any change in the current tariff-setting regime or promotion of competition by the Russian
Government, any refusal or delay by the FTS in agreeing a tariff at a level considered necessary by
Transneft to support its business, or any sale, disposal or dilution of Transneft’s voting shares by the
Russian Government, could expose Transneft to the operating risks described above, which could in
turn have a material adverse effect on Transneft’s operating results and financial condition or on the
value of the Notes.
Transneft may experience equipment failure, maintenance and investment programme delays or other
unanticipated events, which may result in significant interruption in the transport of crude oil through its
crude oil pipelines and possibly liability under its crude oil transport contracts
Transneft’s crude oil transportation system depends on the uninterrupted operation of critical pieces
of equipment, such as the pipeline itself, pumping stations, storage tanks and equipment at its export
terminal. This equipment may, on occasion, be out of service as a result of malfunction or defect. In
addition, Transneft’s facilities are subject to the risk of damage, and its maintenance, upgrade and
capital expenditure programmes are subject to the risk of delays due to unanticipated events such as
earthquakes and other natural disasters, labour disputes, terrorism or sabotage to Transneft’s
extensive crude oil pipeline network, as well as the theft of crude oil through illegal tapping of the
pipeline. In the event of equipment failure or damage to its pipeline and supporting facilities, or
should a maintenance, upgrade or investment expenditure programme experience delays, Transneft
may experience loss of revenues due to the possible reduction of crude oil transportation and it may
incur liability to its customers under the contracts for the transport of crude oil into which it enters.
Any decrease of revenues or the incurrence of any such liability could have a material adverse effect
on Transneft’s operating results and financial condition or on the value of the Notes.
As an energy company operating in Russia, Transneft faces significant environmental regulation
Transneft’s operations, which are often potentially hazardous, are subject to possible regulatory risks
arising from environmental damage or pollution. Transneft has an established environmental policy
and monitors its operations in an effort to meet applicable environmental standards. However, in
Russia in particular, federal, regional and local authorities may enforce existing laws and regulations
more strictly than they have done in the past and may impose stricter environmental standards, or
higher levels of sanctions for violations, than those now in effect. Accordingly, Transneft may suffer
penalties for severe environmental violations, including suspension of its activities. Any suspension of
activities, whether or not anticipated, could cause Transneft to experience loss of revenues due to the
possible reduction of crude oil transportation, and it may incur liability to its customers under the
contracts for the transport of crude oil into which it enters, each of which could have a material
adverse effect on Transneft’s operating results and financial condition or on the value of the Notes.
The tariffs that Transneft charges are established with reference to expenses projected on the basis of Russian
accounting standards and, therefore, expenses calculated on an IFRS basis may not always be covered
Transneft is entitled to factor its operating, capital and maintenance expenses, including debt service
expenses, into tariff calculations on the basis set out therein. However, under current Russian law, the
amounts of all such expenses are projected on the basis of Russian Accounting Standards (‘‘RAS’’).
Transneft prepares its internationally-published financial statements in accordance with IFRS, which is
the basis of preparation of all of the audited or reviewed financial statements and financial
information presented in this Prospectus. Accordingly, there is a risk that the actual cost incurred by
Transneft in a particular financial period in relation to such expenses when accounted for on an
IFRS basis may not always be covered in that period by the tariff calculated on a RAS basis, due to
certain differences in accounting principles, including in relation to the timing of accounting for and
recognising expenses between IFRS and RAS. Any such uncovered cost overrun in a financial period
could have a material adverse effect on Transneft’s operating results and financial condition for that
period as shown in accordance with IFRS or on the value of the Notes.
16

Transneft does not carry insurance against all potential risks and losses, and its insurance might be inadequate
to cover all of its losses or liabilities
Transneft maintains insurance cover for its key operating risks, including for certain third party
environmental liabilities and for damages to its property. See ‘‘Business—Insurance’’. However, the
scope of such cover is more limited than that which would normally be held by similar companies in
Western countries. As a consequence, there is a risk that the loss or destruction of certain assets
could have a material adverse effect on Transneft’s operating results and financial condition or on the
value of the Notes.
Fluctuations in the foreign currency exchange rates of the Russian rouble and the U.S. dollar, and reporting
and measuring Transneft’s financial performance in the Russian rouble, may cause Transneft to suffer losses
Transneft is exposed to translational foreign currency exchange rate risks. The currencies giving rise
to this risk are primarily the U.S. dollar and the Russian rouble.
Translational foreign currency exchange rate risks are the result of translating assets and liabilities
denominated in any currency other than the Russian rouble into Russian rouble amounts for financial
reporting purposes, as the consolidated financial statements of Transneft, which are prepared in
accordance with IFRS, apply the Russian rouble as its measurement and reporting currency.
Transneft, therefore, is subject to foreign currency risk on borrowings that are denominated in a
currency other than the Russian rouble.
Any such loss resulting from a fluctuation in foreign currency exchange rates could have a material
adverse effect on Transneft’s operating results and financial condition or on the value of the Notes.
Transneft depends on key accounting staff for the preparation and timely reporting of its consolidated IFRS
financial information
The preparation of Transneft’s consolidated IFRS financial statements is a difficult task, requiring
IFRS-experienced accounting personnel. However, there is an increasing demand for the small number
of IFRS-experienced accounting personnel as more Russian companies begin to prepare financial
statements on the basis of IFRS or other international standards. Such competition may hinder
Transneft’s efforts to hire and retain key staff. While Transneft strives to employ and retain the best
personnel, a lack of qualified accounting staff would substantially increase both the difficulty in
preparing Transneft’s consolidated IFRS financial statements and the likelihood that such financial
statements would not be reported on a timely basis, which could have a material adverse effect on
Transneft’s operating results and financial condition or on the value of the Notes.
Transneft’s revenue is indirectly dependent on international demand for and prices of crude oil, as its customer
base consists primarily of Russian crude oil producing companies
Transneft is engaged in the transportation of significant volumes of crude oil through its pipeline
system, and substantially all of Transneft’s customers are Russian oil producing companies.
Transneft’s ten largest customers, all of which are major Russian oil producers, accounted for
approximately 87 per cent. of Transneft’s revenue in 2006. Transneft is, therefore, heavily dependent
on the Russian crude oil producing industry, and any decline in the volume of crude oil transported
by such companies through the crude oil transportation system operated by Transneft could adversely
affect Transneft’s revenue.
International demand for crude oil is a major factor that determines the volume of crude oil
transported through the pipelines operated by Transneft, as a decline in demand internationally for
Russian crude oil will generally lead to less crude oil being transported by Transneft. As a result, a
decline in demand, which could be driven by variations in the international price of crude oil, could
adversely affect Transneft’s revenue.
International crude oil prices have fluctuated widely in response to changes in many factors over
which Transneft has no control. These factors include: economic and political developments in oil
producing regions, particularly in the Middle East; global regional supply and demand, and
expectations regarding future supply and demand; the ability of members of the Organisation of
Petroleum Exporting Countries (‘‘OPEC’’) and other crude oil producing nations to agree upon and
maintain specified global production levels; other actions taken by major crude oil producing or
consuming countries; prices and availability of alternative fuels; global economic and political
conditions; prices and availability of new technologies; and weather conditions.
A decline in international crude oil prices may cause investment in crude oil exploration and
production of crude oil to decrease, which could lead to a decreased level of crude oil transportation.
17

Conversely, an increase in international crude oil prices may result in alternative methods of crude oil
transportation (in particular, transportation of crude oil by rail) becoming more economical for
Russian oil companies, since the costs of transportation relative to the revenues obtained would fall.
This may cause Transneft’s share of the market for crude oil transportation in Russia to fall.
In each case, as the existing transportation contracts between Transneft and Russian crude oil
producing companies are not ‘‘take-or-pay’’ contracts, such companies are not committed to transport
specific volumes of crude oil through the crude oil transportation system operated by Transneft.
Therefore, the effect of a change in international oil prices, which are volatile, is difficult to predict
and any significant increase or decrease could adversely affect Transneft’s revenue by reducing
demand for Transneft’s transportation services.
Transneft’s projections for future transportation volumes and revenue are dependent upon the
increase in or stability of the global demand for crude oil and continued investment by crude oil
producers to support an increase in the levels of crude oil produced in Russia. Any prolonged or
material decline in the demand for Transneft’s crude oil transportation services by Russian oil
companies could have a material adverse effect on Transneft’s operating results and financial
condition or on the value of the Notes.
Following the proposed merger with Transnefteprodukt, Transneft may not be able to integrate the business
and operations of Transnefteprodukt successfully.
In April 2007, President Putin signed a presidential decree approving the merger of Transneft with
Transnefteprodukt, which owns and operates Russia’s pipeline network for the transportation of
refined crude oil products. Transneft may also acquire or be merged with other businesses and legal
entities in the future. The integration of Transnefteprodukt and any other such businesses may be
difficult for a variety of reasons, including differing culture or management styles. As a result, the
need to integrate Transnefteprodukt or any potential future acquisitions poses risks to Transneft’s
existing operations, including:
* additional demands placed on Transneft’s senior management, who are also responsible for
managing Transneft’s existing operations;
* increased overall operating complexity of Transneft’s business, requiring greater personnel
and other resources;
* additional cash expenditures; and
* the need to attract and retain sufficient numbers of qualified management and other
personnel.
Any failure to successfully integrate Transnefteprodukt or future acquisitions could adversely affect
Transneft’s business, financial condition and results of operations. Morever, even if Transneft is
successful in integrating Transnefteprodukt or any other such businesses, expected synergies and cost
savings may not materialise, resulting in lower than expected profit margins.
Risks relating to Russia
Emerging markets such as Russia are subject to greater risks than more developed markets, and financial
turmoil in any emerging market could disrupt Transneft’s business, as well as cause the value of an investment
in the Notes to suffer
Generally, investment in emerging markets is suitable only for sophisticated investors who are familiar
with and who fully appreciate the significance of the risks involved in investing in emerging markets.
Investors should note that emerging markets such as Russia are subject to rapid change and that the
information set out in this Prospectus may become outdated relatively quickly. Moreover, financial
turmoil in any emerging market country tends to adversely affect prices in debt markets of all
emerging market countries as investors move their money to more stable developed markets. As has
happened in the past, financial problems or an increase in the perceived risks associated with
investing in emerging economies could dampen foreign investment in Russia and adversely affect the
Russian economy. In addition, during such times, companies that operate in emerging markets can
face severe liquidity constraints as foreign funding sources are withdrawn. Thus, even if the Russian
economy were to remain relatively stable, financial turmoil in any emerging market country could
have a material adverse effect on Transneft’s operating results and financial condition or on the value
of the Notes.
18

Political Risks
Conflict between federal and regional authorities and other domestic political conflicts could create an
uncertain operating environment and hinder Transneft’s ability to plan long-term and adversely affect the value
of Transneft’s investments in Russia
Russia is a federation of 84 sub-federal political units, some of which exercise considerable autonomy
over their internal affairs pursuant to agreements with the federal authorities. In practice, the division
of authority between federal and regional authorities remains uncertain and contested. This
uncertainty could hinder Transneft’s long-term planning efforts, create uncertainties in Transneft’s
operating environment in Russia and prevent Transneft from effectively and efficiently carrying out its
business strategy.
In the past, ethnic, religious, historical and other divisions have given rise to tensions and, in certain
cases, military conflict—such as in Chechnya, where normal economic activity ceased for a period of
time. Violence and attacks in connection with this conflict also spread to other parts of Russia and
resulted in terrorist attacks in Moscow. In the future, such tensions, military conflict or terrorist
activities could result in significant political consequences, including the imposition of a state of
emergency in some or all of Russia or heightened security measures, which could disrupt normal
economic activity and could have a material adverse effect on Transneft’s operating results and
financial condition or on the value of the Notes.
Political and governmental instability could adversely affect the value of investments in Russia, including the
Notes
Since 1991, Russia has changed from a one-party state with a centrally planned economy to a federal
republic with democratic institutions and a market-oriented economy. However, the Russian political
system remains vulnerable to popular dissatisfaction, including dissatisfaction with the results of
privatisations in the 1990s, as well as to demands for autonomy from particular regional and ethnic
groups. The course of political, economic and other reforms has in some respects been uneven, and
the composition of the Russian Government—the prime minister and the other heads of federal
ministries—has at times been unstable. For example, six different prime ministers headed parliaments
between March 1998 and May 2000. During his term as President, President Putin has generally
maintained governmental stability. In addition, the elections to the lower house of the legislature, the
State Duma, in December 2003 resulted in a substantial majority for parties supporting President
Putin.
In February 2004, just prior to his election to a second term as President, President Putin dismissed
his entire cabinet, including the prime minister. He subsequently appointed Mikhail Fradkov as prime
minister and issued a presidential decree that significantly reduced the number of federal ministries,
redistributed certain functions amongst various agencies of the Russian Government and announced
plans for a major overhaul of the federal administrative system. Many of these changes have since
been implemented. President Putin has also introduced reforms by which executives of all of the subfederal
political units in Russia are no longer elected by the population but instead are nominated by
the President of Russia and confirmed by the legislature of the sub-federal political unit. Pursuant to
legislation that was adopted on 18 May 2005 and took effect on 7 December 2005, single-member
district elections for the State Duma are to be eliminated, and all votes are instead to be cast on a
party-list basis.
Future changes in the Russian Government during elections scheduled for 2007 and 2008, as well as
major policy shifts or lack of consensus among President Putin, the Government, Russia’s parliament
and powerful economic groups, could lead to political instability, which could have a material adverse
effect on the value of investments in Russia generally. Further governmental instability or
discontinuation of reform policies could have a material adverse effect on Transneft’s operating
results and financial condition or on the value of the Notes.
Arbitrary, selective or unlawful state action, in particular by the tax authorities, could have a material adverse
effect on Transneft’s business
State authorities have a high degree of discretion in Russia and at times exercise their discretion
arbitrarily, without hearing or prior notice, and sometimes in a manner that is contrary to law.
Possible state actions include withdrawal of licences, interference with or nullification of contracts and
transactions entered into in connection with privatisations, invalidation of share issuances and
registrations, sudden and unexpected tax audits, criminal prosecutions and civil actions.
19

In particular, the Ministry for Taxes and Levies (now succeeded by the Federal Tax Service) has
begun to attack certain Russian companies’ use of tax-optimisation schemes, and press reports have
speculated that these enforcement actions have been selective. Partly in response to a statement by
President Putin that tax authorities should not ‘‘terrorise’’ taxpayers, the State Duma recently
approved amendments to the Russian Tax Code to facilitate the procedure for tax inspections and to
make the activities of tax authorities more transparent. However, some of the amendments reduce the
rights of taxpayers, and there can be no assurance that the Federal Tax Service will not become more
aggressive in respect of future tax audits.
Arbitrary, selective or unlawful state action, if directed at Transneft, could lead to the loss of key
licences, termination of contracts, civil litigation, criminal proceedings and imprisonment of key
personnel, any of which could have a material adverse effect on Transneft’s operating results and
financial condition or on the value of the Notes.
Economic Risks
The Russian economy could be affected by instability in the global economy
Since the dissolution of the Soviet Union, the Russian economy has experienced at various times:
* significant declines in gross domestic product;
* hyperinflation;
* an unstable currency;
* high state debt relative to gross domestic product;
* a weak banking system providing limited liquidity to Russian enterprises;
* a large number of loss-making enterprises that continued to operate due to the lack of effective
bankruptcy proceedings;
* significant use of barter transactions and illiquid promissory notes to settle commercial
transactions;
* widespread tax evasion;
* the growth of ‘‘black’’ and ‘‘grey’’ market economies;
* high levels of capital flight;
* high levels of corruption and the penetration of organised crime into the economy;
* significant increases in unemployment and underemployment; and
* the impoverishment of a large portion of the Russian population.
The Russian economy has been subject to abrupt downturns. For example, on 17 August 1998, in the
face of a rapidly deteriorating economic situation, the Russian Government defaulted on its Russian
rouble-denominated securities, the CBR stopped its support of the Russian rouble and a temporary
moratorium was imposed on certain hard currency payments. These actions resulted in: an immediate
and severe devaluation of the Russian rouble and a sharp increase in the rate of inflation; a dramatic
decline in the prices of Russian debt and equity securities; and an inability of Russian issuers to raise
funds in the international capital markets. These problems were aggravated by the near-collapse of
the Russian banking sector after the events of 17 August 1998, which further impaired the ability of
the banking sector to act as a reliable and consistent source of liquidity to Russian companies and
resulted in the loss of bank deposits in some cases. In 2004 several Russian banks experienced a
sharp reduction in liquidity, and the licences of certain of them were withdrawn.
There can be no assurance that the positive trends in the Russian economy, such as the increase in
the gross domestic product, a relatively stable Russian rouble and a reduced rate of inflation, will
continue or will not be abruptly reversed. In particular, as Russia produces and exports large
quantities of oil and natural gas, the Russian economy is vulnerable to fluctuations in the prices of
oil and natural gas on the global market, which reached record high levels in 2006. A significant or
sustained decline in the price of oil or natural gas could significantly slow or disrupt the Russian
economy. The occurrence of any of these events could adversely affect Russia’s economy and, to the
extent they relate to Transneft or Transneft’s customers, could have a material adverse effect on
Transneft’s operating results and financial condition or on the value of the Notes.
20

The Russian banking system remains underdeveloped, with a limited number of creditworthy Russian banks,
and another banking crisis could place severe liquidity constraints on Transneft’s business
Russia’s banking and other financial systems are not well developed or well regulated, and Russian
legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent
application. The 1998 financial crisis resulted in the bankruptcy and liquidation of many Russian
banks and almost entirely eliminated the developing market for commercial bank loans at that time.
Between April and July 2004, the Russian banking sector experienced its first serious turmoil since the
financial crisis of August 1998. As a result of various market rumours and, in some cases, certain
regulatory and liquidity problems, several privately-owned Russian banks experienced liquidity
problems and were unable to attract funds on the interbank market or from their client base.
Simultaneously, they faced large withdrawals of deposits by both retail and corporate customers.
Several of these privately-owned Russian banks collapsed or ceased or severely limited their
operations. As a result, there are currently only a limited number of creditworthy Russian banks,
most of which are located in Moscow. Russian banks owned or controlled by the Russian
Government or the CBR and foreign-owned banks were not generally adversely affected by the
turmoil.
There are few safe Russian rouble-denominated instruments in which Transneft may invest any excess
Russian rouble cash. Another banking crisis or the bankruptcy or insolvency of the banks with which
Transneft holds funds could result in the loss of Transneft’s deposits or affect its ability to complete
banking transactions in Russia, which could have a material adverse effect on Transneft’s operating
results and financial condition or on the value of the Notes.
Russia’s physical infrastructure is in poor condition
The physical infrastructure in Russia, including rail and road networks, power generation and
transmission, communication systems and building stock, largely dates back to Soviet times and has
not been adequately funded and maintained. Electricity and heating shortages in some regions of
Russia have seriously disrupted the local economies. In May 2005, an electricity blackout affected
much of Moscow and some other regions in the central part of Russia for one day, disrupting
normal business activity. Other parts of the country face similar problems.
Road conditions throughout Russia are also poor, with many roads not meeting modern quality
requirements. Some areas within Russia, particularly those surrounding ageing nuclear power plants,
are potentially hazardous. The Russian Government is actively pursuing the reorganisation of the
nation’s rail, electricity and telephone systems. Any such reorganisation may result in increased
charges and tariffs for rail transport, electricity and telephones, and may not lead to the desired level
of repair and maintenance of and improvement to these systems.
As Transneft operates a pipeline network which spans Russia and is engaged in various maintenance
and upgrading work thereon, the poor condition or further deterioration of Russia’s physical
infrastructure could delay or increase the costs incurred by Transneft in relation to such work. In
addition, this poor condition or further deterioration may harm the national economy, disrupt access
to communications, increase the cost of doing business in Russia or disrupt business operations. The
occurrence of any or all of these events could have a material adverse effect on Transneft’s operating
results and financial condition or on the value of the Notes.
There continues to be a lack of reliable official data
Official statistics and other data published by Russian federal, regional and local governments and
federal agencies are substantially less complete or reliable than those of Western countries, and there
can be no assurance that the official sources from which certain of the information set forth herein
has been drawn are reliable or complete. Official statistics may also be produced on different bases
than those used in Western countries. Any discussion of matters relating to Russia herein may
therefore be subject to uncertainty due to concerns about the completeness or reliability of available
official and public information.
Social Risks
Crime and corruption could disrupt Transneft’s ability to conduct its business and could materially adversely
affect Transneft’s financial condition and results of operations
Organised criminal activity has reportedly increased significantly since the dissolution of the Soviet
Union in 1991, particularly in large metropolitan centres. In addition, the Russian and international
press have historically reported high levels of official corruption in Russia and certain other countries
21

through which Transneft transits crude oil, including the bribery of officials for the purpose of
initiating investigations by state agencies. Press reports have also described instances in which state
officials have engaged in selective investigations and prosecutions to further the interests of the state
and individual officials. Additionally, published reports indicate that a significant number of Russian
media organisations regularly publish slanted articles in return for payment. Illegal activities and
corruption could have a material adverse effect on Transneft’s operating results and financial
condition or on the value of the Notes.
Social instability could increase support for renewed centralised authority, nationalism or violence and thus
materially adversely affect Transneft’s ability to conduct its business effectively
The failure of the state and many private enterprises to pay full salaries on a regular basis and the
failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living have
led in the past to social unrest. For example, in early 2005, pensioners in cities across Russia
protested against the replacement of certain in-kind benefits with cash allowances. These protests
periodically blocked highways and streets in major Russian cities. Such social unrest may have
political, social and economic consequences, such as increased support for a renewal of centralised
authority, increased nationalism, including restrictions on foreign involvement in the economy of
Russia, and increased violence. Any of these could restrict Transneft’s operations and lead to a loss
of revenue, which could have a material adverse effect on Transneft’s operating results and financial
condition or on the value of the Notes.
Risks Relating to the Russian Legal System and Russian Legislation
Russia’s property law is subject to uncertainty and contradiction
The legal framework relating to the ownership and use of land and other real property in Russia is
not yet sufficiently developed to support private ownership of land and other real estate to the same
extent as is common in some of the more developed market economies of North America and
Europe. It is often difficult to determine with certainty the validity and enforceability of title to land
in Russia and the extent to which it is encumbered. Moreover, in order to use and develop real
property in Russia, approvals, consents and registrations of various federal, regional and local
governmental authorities are required. Furthermore, it is not always clear which governmental body
or official has the right to lease or otherwise regulate the use of real property. In addition, building
and environmental regulations often contain requirements that are impossible to fully comply with in
practice. Failure to obtain or comply with the required approvals, consents, registrations or other
regulations may lead to severe consequences for the landowners and other real estate owners and
lessees, including in respect of any current construction activities. If the real property owned or leased
by Transneft is found not to be in compliance with all applicable approvals, consents, registrations or
other regulations, Transneft may lose the use of such real property, which could have a material
adverse effect on Transneft’s operating results and financial condition or on the value of the Notes.
Weaknesses relating to the Russian legal system and Russian legislation create an uncertain environment for
investment and for business activity
Russia continues to develop its legal framework in accordance with the international standards and
requirements of a market economy. Since 1991, new Russian domestic legislation has been put in
place. Currently, this system includes the Constitution of Russia of 1993; the Civil Code of Russia
(the ‘‘Civil Code’’); and other federal laws, decrees, orders and regulations issued by the President,
the Russian Government and federal ministries, which can be complemented by regional and local
rules and regulations. These legal norms, on the one hand, can overlap or contradict one another
and, on the other hand, can leave gaps in the regulatory infrastructure. Several Russian laws have
only recently become effective. Consequently, certain areas of judicial practice are not yet formed and
are often difficult to predict.
Among the risks inherent in the current Russian legal system are:
* inconsistencies among (1) federal laws, (2) decrees, orders and regulations issued by the
President, the Russian Government, federal ministries and regulatory authorities and (3) regional
and local laws, rules and regulations;
* limited judicial and administrative guidance on interpreting Russian legislation;
* the relative inexperience of judges and courts in interpreting new principles of Russian
legislation, particularly business and corporate law;
* substantial gaps in the regulatory structure due to delay or absence of implementing legislation;
22

* a high degree of unchecked discretion on the part of governmental authorities; and
* bankruptcy procedures that are not well developed and are subject to abuse.
All of these weaknesses could affect Transneft’s ability to enforce its rights under contracts or to
defend itself against claims by others, which could have a material adverse effect on Transneft’s
operating results and financial condition or on the value of the Notes.
The lack of independence of certain members of the judiciary, the difficulty of enforcing court decisions and
governmental discretion in instigating, joining and enforcing claims could prevent Transneft from obtaining
effective redress in a court proceeding and could materially adversely affect the value of the Notes
The independence of the judicial system and its immunity from economic, political and nationalistic
influences in Russia is also less than complete. The Russian court system in the past has been and
may still be understaffed and underfunded. Russia, along with many Western European states, such
as Germany and France, is a civil law jurisdiction and, as such, judicial precedents generally have no
binding effect on subsequent decisions. Enforcement of court judgments by law enforcement agencies
can sometimes be time-consuming because of the large number of outstanding court judgments.
Additionally, court claims are often used in furtherance of political aims. Transneft may be or
become subject to such claims and may not be able to receive a fair trial, which could have a
material adverse effect on Transneft’s operating results and financial condition or on the value of the
Notes.
Transneft may experience difficulty in enforcing its rights
The current status of the Russian legal system makes it uncertain whether Transneft would be able to
enforce its rights in disputes with its contractual partners or other parties. Furthermore, the
dispersion of regulatory power among a number of Government agencies in Russia has resulted in
inconsistent or contradictory regulations and unpredictable enforcement. The Russian Government has
rapidly introduced laws and regulations and has changed its legal structures in an effort to make the
Russian economy more market-oriented, resulting in considerable legal confusion. No assurance can
be given that local laws and regulations will become stable in the future. Transneft’s ability to
operate in Russia could be adversely affected by difficulties in protecting and enforcing its rights and
by future changes to local laws and regulations. Furthermore, its ability to protect and enforce such
rights is dependent on the Russian courts, which are not always effective. Enforcement of court
orders can in practice be very difficult in Russia.
Shareholder liability under Russian legislation could cause Transneft to become liable for the obligations of its
Russian subsidiaries
Under Russian law, Transneft may be jointly and severally liable for the obligations of its
subsidiaries, together with such entities, if (i) Transneft, as a result of its ownership interest or subject
to a contract between them or otherwise is able to determine the decisions made by such subsidiary,
(ii) Transneft has the ability to issue mandatory instructions to such subsidiaries and that ability is
provided for by the charter of the relevant subsidiary or in a binding contract; and (iii) the relevant
subsidiary concludes a transaction pursuant to Transneft’s mandatory instructions. In addition,
Transneft may have secondary liability for the obligations of its subsidiaries if the relevant subsidiary
becomes insolvent due to Transneft’s fault, in the event that Transneft exercised its right to issue
mandatory instructions knowing that this would result in the bankruptcy of the relevant subsidiary.
This type of liability could result in significant losses and could have a material adverse effect on
Transneft’s operating results and financial condition or on the value of the Notes.
Changes and inconsistencies in the Russian tax system could adversely affect Transneft’s business
Transneft is subject to a broad range of taxes imposed at the federal, regional and local levels,
including, but not limited to, profits tax, VAT, property tax, land tax and the unified social tax. The
discussion below provides general information regarding Russian taxes and is not intended to be
inclusive of all issues. Investors should seek advice from their own tax advisers as to these tax
matters before investing in the Notes.
The tax environment in Russia has historically been complicated by the fact that various authorities
have often issued contradictory pieces of tax legislation and regulation.
Tax reform commenced in 1999 with the introduction of Part One of the Russian Tax Code, which
sets out general taxation guidelines. Since then, Russia has been in the process of replacing legislation
regulating the application of major taxes such as corporate income tax, VAT and property tax with
new chapters of the Tax Code. For instance, new chapters of the Tax Code on VAT, unified social
23

tax and personal income tax came into force on 1 January 2001; the profits tax and mineral
extraction tax chapters came into force on 1 January 2002.
Russia’s tax laws and regulations are subject to frequent change, varying interpretations and
inconsistent enforcement. In some instances, despite constitutional prohibition, Russian tax authorities
have applied certain taxes retrospectively. In addition to the usual tax burden imposed on Russian
taxpayers, these conditions complicate tax planning and related business decisions. Tax laws are
unclear with respect to the deductibility of certain expenses. This uncertainty could expose Transneft
to significant fines and penalties and to enforcement measures despite its best efforts at compliance
and could result in a greater than expected tax burden. It is not uncommon for differing opinions
regarding legal interpretation to exist both between companies subject to such taxes and the ministries
and organisations of the Russian Government and between different branches of the Russian
Government such as the Federal Tax Service and its various local tax inspectorates, resulting in
uncertainties and areas of conflict. The fact that a tax declaration has been audited by the tax
authorities does not bar that declaration, or any other tax declaration applicable to that year, from a
further tax review by a superior tax authority during a three year period. In addition, on 14 July
2005, the Russian Constitutional Court issued a decision that effectively allowed the statute of
limitations for tax penalties to be extended beyond the three year term set forth in the Tax Code if a
court determines that the taxpayer has obstructed the course of tax inspection. Recent amendments to
Part One of the Tax Code effective as of 1 January 2007 provide for the possibility of extension of
the three year term in cases where actions of the audited taxpayer created insurmountable
obstructions to the tax authorities’ audit. Since the term ‘‘obstructed’’ is not specifically defined in the
Russian law, the tax authorities may attempt to interpret this term broadly, effectively linking any
difficulty experienced in the course of their tax audit with obstruction by the taxpayer and using that
as a basis to seek tax penalties beyond the three year term. In some instances, changes in tax
regulations have been given retrospective effect.
The Constitutional Court also introduced the concept of ‘‘a taxpayer acting in bad faith’’ without
clearly stipulating the criteria for it. Similarly, this concept is not defined in Russian tax law.
Nonetheless, this concept is increasingly used by the tax authorities to deny, for instance, the taxpayer
the right to rely on the letter of the tax law. The tax authorities often exercise significant discretion in
interpreting this concept in a manner that is unfavourable to taxpayers.
There is no concept of a tax group in Russia, nor can a consolidated filing be made by Russian
companies for tax purposes. Therefore, Russian companies and each of their Russian subsidiaries pay
their own Russian taxes and may not surrender profit or losses to other group companies for tax
purposes.
The conditions mentioned above create tax risks in Russia that may be more significant than those
typically found in countries with more developed tax systems, imposing additional burdens and costs
on Transneft’s operations and management resources. In addition to creating a substantial tax
burden, these risks and uncertainties complicate Transneft’s tax planning and related business
decisions, potentially exposing it and its Russian subsidiaries to significant penalties and interest and
enforcement measures, and could adversely affect Transneft’s business, financial condition and results
of operations. In addition, there can be no assurance that the current tax rates will not be increased
or that new taxes will not be introduced. In some instances, the Russian tax authorities have applied
new provisions of tax legislation retroactively, in violation of Russian law. Increases in the taxes
payable by Transneft and the imposition of penalties or interest charges could have a material
adverse effect on Transneft’s operating results and financial condition or on the value of the Notes.
Vaguely drafted Russian transfer pricing rules and lack of reliable pricing information may affect Transneft’s
results of operations
Russian transfer pricing rules came into force in 1999, giving the tax authorities the right to make
transfer pricing adjustments and impose additional tax liabilities in respect of ‘‘controlled’’
transactions, provided that the transaction price differs from the market price by more than 20 per
cent. ‘‘Controlled’’ transactions currently include transactions with related parties, barter (in-kind
exchange) transactions, foreign trade transactions and any transactions with significant price
fluctuations (i.e. if the price of such transactions differs from the prices on similar transactions by
more than 20 per cent. within a short period of time). Transfer pricing adjustments are also
applicable to transactions with securities and derivatives.
The transfer pricing rules are vaguely drafted, generally leaving wide scope for interpretation by the
tax authorities and courts. Moreover, in the event that a transfer pricing adjustment is assessed by
24

the tax authorities, the transfer pricing rules do not provide for an offsetting adjustment to the
related counterparty in the transaction.
At the moment, a draft law is under discussion in the Russian Government that will potentially
tighten transfer pricing rules further. This law may be enacted between 2008 and 2010. At present, it
cannot be predicted what the effect on taxpayers, including Transneft, may be.
While Transneft and certain of its subsidiaries engage in numerous transactions that may be deemed
to be related-party transactions, they seek to conduct such transactions at prices that would be
considered market prices in transactions between unrelated parties. However, it is not always possible
to determine a market price for a specific transaction, and the Russian tax authorities may take a
view as to what constitutes an appropriate market price that differs from Transneft’s view. As a
result, the Russian tax authorities may challenge prices in such transactions and propose tax
adjustments. If any such tax adjustments are implemented, Transneft could incur significant additional
liabilities on account of taxes, interest and penalties. Such additional liabilities could have a material
adverse effect on Transneft’s operating results and financial condition or on the value of the Notes.
Risks Relating to the Notes
Noteholders have limited recourse to TCI Limited, as payments under the Notes are limited to the amount of
certain payments received by TCI Limited under the corresponding Loan Agreement
TCI Limited has an obligation under the Terms and Conditions of the Dollar Notes and of the Euro
Notes and in each Trust Deed to pay such amounts of principal, interest, and additional amounts (if
any) as are due in respect of the Notes. However, TCI Limited’s obligation to pay is limited to the
amount of principal, interest and additional amounts (if any) actually received from Transneft by or
for the account of TCI Limited pursuant to the corresponding Loan Agreement. Consequently, if
Transneft fails to meet its payment obligations under a Loan Agreement in full, this will result in the
relevant Noteholders receiving less than the scheduled amount of principal, interest, or other amounts,
if any.
Noteholders have no direct recourse to Transneft
Except as otherwise expressly provided in the Terms and Conditions of the Dollar Notes and of the
Euro Notes and in each Trust Deed, no proprietary or other direct interest in TCI Limited’s rights
under or in respect of the Loan Agreements exists for the benefit of the Noteholders. Subject to the
terms of each Trust Deed, no Noteholder can enforce any provision of a Loan Agreement or have
direct recourse to Transneft as borrower except through an action by the Trustee pursuant to the
rights granted to the Trustee in each Trust Deed. Under each Trust Deed and the relevant Terms and
Conditions, the Trustee shall not be required to take proceedings to enforce payment under a Loan
Agreement unless it has been indemnified or secured by the relevant Noteholders to its satisfaction. In
addition, neither TCI Limited nor the Trustee is required to monitor Transneft’s financial
performance. See ‘‘Terms and Conditions of the Dollar Notes’’ and ‘‘Terms and Conditions of the
Euro Notes’’.
Payment in full of principal and interest by Transneft pursuant to a Loan Agreement to, or to the
order of, the Trustee or the Principal Paying Agent will satisfy TCI Limited’s obligations in respect
of the corresponding Notes. Consequently, Noteholders will have no further recourse against TCI
Limited or Transneft after such payment in full is made.
TCI Limited’s rights to receive payments under each Loan Agreement (and therefore its ability to make
payments in full under the corresponding Notes as they fall due) are effectively subordinated to any liabilities
of Transneft’s subsidiaries and could be adversely affected if any of these subsidiaries declares bankruptcy,
liquidates or reorganises
Transneft’s subsidiaries’ assets constitute a significant part of the Group’s operating assets, as each
subsidiary owns the pipeline that it operates. Because Transneft’s subsidiaries do not guarantee the
payment obligations under the Loan Agreements or TCI Limited’s payment obligations under the
Notes, neither TCI Limited nor the Noteholders will have any direct claim on Transneft’s
subsidiaries’ assets. The Loan Agreements and the Notes do not limit the amount of indebtedness
that may be incurred by Transneft and do not limit the amount of effectively senior indebtedness that
may be incurred by Transneft’s subsidiaries. In the event of a bankruptcy, liquidation or
reoganisation of any of Transneft’s subsidiaries, their creditors will generally be entitled to payment
of their claims from the assets of those subsidiaries before any assets are made available for
25

distribution to Transneft as a shareholder. This may adversely affect Transneft’s ability to service its
payment obligations under the Loan Agreements.
The lack of a public market for the Notes could reduce the value of the Notes
There may not be an existing market for the Notes at the time they are issued. The Notes are
expected to be listed and admitted to trading on the regulated market of the Irish Stock Exchange.
However, there can be no assurance that a liquid market will develop for the Notes, that holders of
the Notes will be able to sell their Notes, or that such holders will be able to sell their Notes for a
price that reflects their value.
Payments Transneft makes under the Loan Agreements may be subject to Russian withholding tax
In general, payments of interest on borrowed funds by a Russian entity to a non-resident legal person
are subject to Russian withholding tax at the rate of 20 per cent., absent reduction or elimination
pursuant to the terms of an applicable double tax treaty. Based on professional advice Transneft has
received, Transneft believes that payments of interest under the Loan Agreements should not be
subject to withholding tax under the terms of the double tax treaty between Russia and Ireland.
However, there can be no assurance that such relief will be obtained in respect of the Loan
Agreements. In addition, if interest under the Loans becomes payable to the Trustee pursuant to the
Trust Deeds, any benefit of the double tax treaty between Russia and Ireland will cease and payments
of interest could be subject to Russian withholding tax.
If the payments under the Loans are subject to any withholding of Russian tax (as a result of which
TCI Limited would reduce payments under the Notes in the amount of such withholding), Transneft
is obliged to increase payments as may be necessary so that the net payments received by the
Noteholders will not be less than the amounts they would have received in the absence of such
withholding. It should be noted, however, that gross-up provisions may not be enforceable under
Russian law.
Furthermore, if Transneft is obliged to increase payments, for example, as a result of an amendment
to the double tax treaty between Russia and Ireland, it may, subject to certain conditions, prepay the
sums due under the Loan Agreements in full. In such case, an amount of the outstanding Notes
corresponding to such received prepayment would be redeemable at their principal amount
outstanding, together with accrued interest. See ‘‘Terms and Conditions of the Notes’’.
Tax might be withheld on dispositions of the Notes in Russia, reducing their value
If a non-resident holder that is a legal person or organisation under foreign law and that holds and
disposes of the Notes other than through a permanent establishment in Russia, sells any Notes and
receives proceeds from a source within Russia, there is a risk that the part of the payment, if any,
representing accrued interest may be subject to a 20 per cent. Russian withholding tax. Where
proceeds from a disposition of the Notes are received from a source within Russia by an individual
non-resident holder, there is a risk that Russian personal income tax would be charged at a rate of
30 per cent. on gross proceeds from such disposal of the Notes less any available cost deduction. The
imposition or possibility of imposition of this personal income tax could adversely affect the value of
the Notes. See ‘‘Taxation—Russia’’.
Examiners, preferred creditors under Irish law and floating charges
TCI Limited has its registered office in Ireland. As a result, there is a rebuttable presumption that its
centre of main interest (‘‘COMI’’) is in Ireland and, consequently, that any main insolvency
proceedings applicable to it would be governed by Irish law. In the recent decision by the European
Court of Justice (‘‘ECJ’’) in relation to Eurofood IFSC Limited, the ECJ restated the presumption in
Council Regulation (EC) No. 1346/200 of 29 May 2000 on Insolvency Proceedings that the place of a
company’s registered office is presumed to be the company’s COMI and stated that the presumption
can only be rebutted if ‘‘factors which are both objective and ascertainable by third parties enable it
to be established that an actual situation exists which is different from that which locating it at the
registered office is deemed to reflect’’. As TCI Limited has its registered office in Ireland, has Irish
directors, is registered for tax purposes in Ireland and has an Irish corporate services provider, TCI
Limited does not believe that factors exist that would rebut this presumption, although this would
ultimately be a matter for the relevant court to decide, based on the circumstances existing at the
time when it was asked to make that decision.
26

An examiner may be appointed to an Irish company in circumstances where it is unable, or likely to
be unable, to pay its debts. One of the effects of such an appointment is that during the period of
appointment, there is a prohibition on the payment of pre-petition debts by TCI Limited and the
taking of enforcement action by any creditors of the company. Given that TCI Limited is a special
purpose entity, the limited recourse nature of its liabilities and the structure of the transaction, it is
unlikely that an examiner would be appointed to TCI Limited.
In an insolvency of TCI Limited, the claims of certain preferential creditors (including the Irish
Revenue Commissioners for certain unpaid taxes) will rank in priority to claims of unsecured
creditors and claims of creditors holding floating charges. In addition, the claims of creditors holding
fixed charges may rank behind other ‘‘super’’ preferential creditors (including expenses of any
examiner appointed and certain capital gains tax liabilities) and, in the case of fixed charges over
book debts, may rank behind claims of the Irish Revenue Commissioners for PAYE and VAT.
In certain circumstances, a charge which purports to be taken as a fixed charge may take effect as a
floating charge. Under Irish law, for a charge to be characterised as a fixed charge, the charge holder
is required to exercise the requisite level of control over the assets purported to be charged and the
proceeds of such assets including any bank account into which such proceeds are paid.
If TCI Limited becomes subject to an insolvency proceeding and has obligations to creditors that are
treated under Irish law as creditors that are senior relative to the Noteholders, the Noteholders may
suffer losses as a result of their subordinated status during such insolvency proceeding.
27

USE OF PROCEEDS
TCI Limited will lend an amount equivalent to U.S.$500,000,000, being the gross proceeds of the
Dollar Notes, and an amount equivalent to A700,000,000, being the gross proceeds of the Euro Notes,
to Transneft.
Transneft intends to use such gross proceeds to finance the ESPO Pipeline Project.
Total commissions and expenses relating to the offering of the Dollar Notes are expected to be
U.S.$1,149,520 and A612,500 relating to the offering of the Euro Notes. The net proceeds that
Transneft will receive from the offering of the Dollar Notes, after deducting estimated commissions
and expenses incurred in connection with the offering of the Dollar Notes, will be U.S.$498,850,480,
and the net proceeds that Transneft will receive from the offering of the Euro Notes, after deducting
estimated commissions and expenses incurred in connection with the offering of the Euro Notes, will
be A699,387,500.
28

CAPITALISATION AND INDEBTEDNESS
The following table sets out the consolidated capitalisation and indebtedness of Transneft as at
31 December 2006. The following table should be read in conjunction with ‘‘Management’s
Discussion and Analysis of Results of Operations and Financial Condition’’ and the audited
consolidated annual financial statements of Transneft and its consolidated subsidiaries as at and for
the year ended 31 December 2006 included in this Prospectus:
As at 31
December
2006
RUR millions
Share capital ........................................................................................................................ 307
Retained earnings ................................................................................................................ 366,917
Minority interests ................................................................................................................ 17,912
Total Equity......................................................................................................................... 385,136
Current borrowings and finance lease obligations (including current portion of noncurrent
borrowings and finance lease obligations).......................................................... 69,200
Non-current borrowings and finance lease obligations (net of current portion) ................ 1,681
Total capitalisation and indebtedness (6) ................................................................................ 456,017
Notes:
(1) As at 31 December 2006, Transneft has drawn down the full amount of a six year RUR 65,000 million revolving credit facility with
Sberbank, such drawdowns having a one year term and OOO Vostoknefteprovod (‘‘Vostoknefteprovod’’), a subsidiary of
Transneft, has drawn down, as at 31 December 2006, RUR 1,221 million of an RUR 15,000 million revolving credit facility with
Sberbank, such drawdown having a one year term. The remaining RUR 13,779 million of such facility was drawn down in early
2007. As at 19 June 2007, certain amounts under these Sberbank credit facilities had been repaid ahead of schedule by Transneft,
in the amount of RUR 42,714 million and further draw downs under these Sberbank credit facilities had been made by Transneft
in the amount of RUR 41,679 million, resulting in an amount outstanding under these Sberbank credit facilities of RUR 63,965
million as at 19 June 2007. As at such date, the full amount of RUR 15,000 million drawn down by Vostoknefteprovod remained
outstanding. On 5 March 2007, a U.S.$1,300 million 5.67 per cent. loan, due to be repaid in 2014, was received from the Issuer.
Also in March 2007, Transneft approved the increase of its RUR 65,000 million revolving credit facility with Sberbank to
RUR 80,000 million.
These new debts, partially set off by regular repayments of existing debt, increased Transneft’s consolidated total current and noncurrent
borrowings to RUR 78,965 million and U.S.$1,300 million (RUR 33,670.3 million) as at 19 June 2007.
(2) There were no dividends paid out in 2007 as at the date of this Prospectus.
(3) Of the debt outstanding at 31 December 2006, RUR 97 million was secured.
(4) As at 31 December 2006, the Group had no material contingent liabilities.
(5) Save as described above, there has been no material change in the capitalisation and indebtedness of Transneft since 31 December
2006.
(6) Total capitalisation and indebtedness is calculated as the sum of total equity, current and non-current borrowings and finance
lease obligations.
29

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information set forth below shows Transneft’s consolidated
financial information as at 31 December 2006, 2005 and 2004 and for the years then ended. The
financial information as at 31 December 2006, 2005 and 2004 and for the years then ended has been
derived from, and should be read in conjunction with, the annual audited consolidated financial
statements included elsewhere in this Prospectus. The selected consolidated financial information set
forth below should also be read in conjunction with ‘‘Management’s Discussion and Analysis of
Results of Operations and Financial Condition’’. As described in ‘‘Presentation of Financial and
Other Information—Reclassifications’’, certain balances in the comparative 2005 financial statement
information included in the Group’s audited consolidated financial statements as at and for the year
ended 31 December 2006 presented on pages F-2 to F-31 of this Prospectus have been reclassified to
conform with the 2006 presentation. The selected consolidated financial information presented herein
as at and for the year ended 31 December 2005 reflect these classifications. No such reclassifications
have been made to the consolidated financial statements balances as at and for the year ended 31
December 2004.
Transneft’s annual consolidated financial statements have been prepared in accordance with IFRS,
which includes IAS and Interpretations issued by the IASB. IFRS differs in certain respects from
U.S. GAAP. For a summary of certain differences between IFRS and U.S. GAAP that are relevant
to Transneft, see ‘‘Summary of Certain Differences between IFRS and U.S. GAAP’’.
The U.S. dollar amounts set forth below were not included in Transneft’s annual consolidated
financial information and are provided for convenience only. Totals may not sum due to rounding.
The U.S. dollar amounts should not be construed as representations that the Russian rouble amounts
have been or could be converted into U.S. dollars at that or any other rate or as being representative
of the U.S. dollar amounts that would have resulted if Transneft reported in U.S. dollars. The U.S.
dollar amounts have been translated from the Russian rouble amounts at the rate of RUR 26.33 =
U.S.$1.00, which was the rate published by the CBR on 31 December 2006.
Year ended 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
(amounts in millions)
Income Statement Data
Sales (1) ........................................................................................... 7,688 202,427 179,697 150,441
Operating expenses (1) ..................................................................... (4,361) (114,813) (104,428) (87,873)
Operating profit............................................................................. 3,115 82,027 75,176 60,804
Total financial items (1) ................................................................... (45) (1,198) (1,776) (1,511)
Profit before profit tax (1) ............................................................... 3,070 80,829 73,400 59,293
Profit for the period (1) ................................................................... 2,084 54,861 53,779 43,523
Profit attributable to shareholders of OJSC AK Transneft (1) ...... 1,960 51,599 51,511 41,155
Profit attributable to minority interest.......................................... 124 3,262 2,268 2,368
Note:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
30

As at 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
(amounts in millions)
Balance Sheet Data
Total non-current assets (1) ............................................................. 18,968 499,418 337,696 297,664
Total current assets (1) .................................................................... 2,898 76,303 80,630 61,093
Total assets.................................................................................... 21,866 575,721 418,326 358,757
Share capital.................................................................................. 12 307 307 307
Retained earnings.......................................................................... 13,935 366,917 316,708 265,912
Attributable to the shareholders of OJSC AK Transneft............. 13,947 367,224 317,015 266,219
Minority interests .......................................................................... 680 17,912 14,650 12,382
Total equity ................................................................................... 14,627 385,136 331,665 278,601
Total non-current liabilities........................................................... 3,262 85,884 36,672 49,826
Total current liabilities .................................................................. 3,976 104,701 49,989 30,330
Total liabilities............................................................................... 7,238 190,585 86,661 80,156
Total equity and liabilities ............................................................ 21,866 575,721 418,326 358,757
Note:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
Year ended 31 December
2006 2005 2004
U.S.$ RUR RUR RUR
(amounts in millions)
Cash Flow Data
Net cash from operating activities ................................................ 3,935 103,619 84,873 60,635
Net cash used in investing activities.............................................. (5,679) (149,534) (66,326) (56,176)
Net cash from/(used in) financing activities .................................. 1,756 46,234 (6,662) (4,257)
Cash and cash equivalents at the beginning of the period ........... 1,107 29,138 17,220 17,219
Cash and cash equivalents at the end of the period ..................... 1,113 29,293 29,138 17,220
31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis is intended to assist in the understanding and assessment of the
trends and significant changes in the Group’s results of operations and financial condition. Historical
results may not indicate future performance. The forward-looking statements contained in this discussion
and analysis are subject to a variety of factors that could cause actual results to differ materially from
those contemplated by such statements. Factors that may cause such a difference include, but are not
limited to, those discussed in ‘‘Forward-Looking Statements’’ and ‘‘Risk Factors’’. In this Prospectus, the
consolidated financial statements presented are those of the Group. This discussion is based on the
consolidated financial statements of the Group and should be read in conjunction with its consolidated
financial statements and the accompanying notes appearing elsewhere in this Prospectus. Unless otherwise
indicated, all of the financial data and discussions thereof are derived from financial statements prepared
in accordance with IFRS.
As described in ‘‘Presentation of Financial and Other Information—Reclassifications’’, certain balances in
the comparative 2005 financial statement information included in the Group’s audited consolidated
financial statements as at and for the year ended 31 December 2006 presented on pages F-2 to F-31 of
this Prospectus have been reclassified to conform with the 2006 presentation. The consolidated financial
information presented herein as at and for the year ended 31 December 2005 reflect these classifications.
No such reclassifications have been made to the consolidated financial statements balances as at and for
the year ended 31 December 2004.
Overview
The Group owns and operates what Transneft believes to be the largest crude oil pipeline system in
the world, based on its own estimates and data published by major international crude oil
transportation companies, totalling 47,865.3 km as at 1 April 2007. In 2006, the Group was
responsible for the transportation of 458.5 million metric tons of crude oil from the main oil
producing regions of Russia, certain neighbouring countries to refineries in Russia and export sea
terminals and the oil pipeline networks of neighbouring countries, as compared to 452.2 million
metric tons during 2005. For each of the last three years, the volume of crude oil transported by the
Group represented more than 90 per cent. of the volume of the crude oil produced in Russia and
approximately 80 per cent. of the volume of all Russian crude oil exports, in each case as estimated
by Transneft based on data published by the Central Dispatch Unit of the Ministry of Industry and
Energy and by the Agency of Petroleum Information.
The Group’s total sales for 2006 were RUR 202,427 million, as compared to RUR 179,697 million
for 2005 and RUR 150,441 million for 2004.
As a monopoly operating in the second largest crude oil producing country in the world in 2005,
according to the BP Statistical Review of World Energy, June 2006, Transneft believes that it does
not have any immediate peers or competitors within Russia or the CIS. International companies
comparable to Transneft include Enbridge Energy LP, Energy Transfer Partners LP, Oneok LP,
TransCanada Pipeline Ltd, Kinder Morgan, Inc. and Enterprise Products Partners LP, each operating
internationally including, in particular, in Canada and the United States.
The Russian Government has owned, since Transneft’s incorporation in 1993, 100 per cent. of
Transneft’s ordinary voting shares, representing 75 per cent. of Transneft’s total issued share capital
(see ‘‘Share Capital and Dividends’’). The remaining 25 per cent. was issued in non-voting preferred
share form and is held by various Russian and international investors, including former and current
Group employees. As and when the proposed merger with Transnefteprodukt is completed and the
contemplated share issuance made, the percentage of Russian Government ownership of Transneft’s
total issued share capital is, by order of a Presidential Decree, to be not less than 75 per cent. plus
one share, and may increase, depending on the exact structure of the issuance. (See ‘‘Share Capital
and Dividends’’). All of the members of the Board of Directors of Transneft were appointed by the
Russian Government as shareholder, and eight of the nine members are also officials in the Russian
Government or governmental agencies.
In addition, the Russian Government exercises further substantial influence over Transneft through its
regulatory and legislative powers. As Transneft is a ‘‘natural monopoly’’ in the transportation of
crude oil by pipeline under the Natural Monopoly Law, state authorities regulate the tariffs that
Transneft charges for the transportation of crude oil through its crude oil trunk pipelines and other
matters affecting Transneft’s business. Transneft is also on the Russian Government’s list of strategic
entities, which, inter alia, sets out a special bankruptcy and insolvency regime applicable to Transneft
32

and provides for a special procedure with respect to the sale or dilution of any of the voting shares
in Transneft.
Transneft’s management and financial controls, including customer contracts, are centralised, with
Transneft (the borrower of the Loans described in this Prospectus) receiving substantially all of the
revenues generated through the Group’s crude oil transportation activities. Transneft’s central
management centre in Moscow monitors, controls and manages the crude oil transportation system
throughout Russia in real time. Transneft’s 12 crude oil transportation subsidiaries are responsible
solely for transporting and delivering crude oil at the direction of Transneft.
Key Factors Affecting the Group’s Results of Operations and Financial Condition
The key factors affecting the Group’s results of operations and financial condition during the periods
under review are the following:
Tariffs
Overview
During each of the three years ended 31 December 2006, 2005 and 2004, more than 90 per cent. of
the Group’s sales were generated through the tariffs charged for transporting crude oil across its
network of pipelines. The Group’s transportation activities are regulated in accordance with the
Natural Monopoly Law. The FTS regulates and sets the Group’s tariffs pursuant to Regulation No.
380-e/2 of 17 August 2005 (‘‘Regulations on the establishment of tariffs for the transportation of oil
through trunk pipelines’’, approved by the FTS) (the ‘‘Tariff Regulation’’), which specifies the basis
for the calculation and application of the Group’s tariffs.
Approval Process
Under procedures set out in the Tariff Regulation, a scheduled review of all of the tariffs that the
Group charges is carried out annually, on the basis of historical, and in certain cases, projected data
produced by the Group from certain accounting, statistical and departmental reports that it is
required to maintain by the FTS and the results of the Group’s operations during the relevant
reporting period. Typically, the process for this scheduled review of tariffs starts in September of each
year, when the Group submits a request to the FTS for the approval of the tariffs that the Group
will be permitted to charge for the following calendar year. The FTS will generally approve in
December the tariffs, which will come into effect on the following 1 January.
A non-scheduled review of the Group’s tariffs may be carried out by the FTS at the request of the
Group:
* should the Russian Government decide that tariff increases should finance the construction or
reconstruction of capital assets or the repayment of debt raised for such purposes; or
* in the event of a material change in the operating environment caused by reasons beyond the
Group’s control, such as a significant inflationary or foreign currency exchange-driven effect.
There was one unscheduled review in 2006, under the first bullet-point category above. The amended
tariffs were effected to finance payments of interest and principal under loan facilities with Sberbank
described under ‘‘—Liquidity and Capital Resources—Borrowings’’ which the Group had entered into
during 2006. These facilities, which were specifically contemplated by the relevant Russian
Government project approval, were entered into to finance the ESPO Pipeline Project described under
‘‘—Capital Expenditures—ESPO Pipeline Project’’ and ‘‘Business—Investment Projects and
Expansion—Eastern Siberia—Pacific Ocean Pipeline’’. The Group anticipates further reviews of the
tariffs under this bullet-point category in 2007 and 2008 to finance payments in respect of additional
debt that the Group expects to incur to finance the ESPO Pipeline Project, including the Loans
described in this Prospectus. There can be no assurance that the FTS will in fact approve any such
tariff increases.
Tariff Calculation
The Group’s tariffs, including tariffs for services related to the pumping of crude oil through the
Group’s pipelines (the ‘‘Pumping Tariff’’) and for services related to dispatching crude oil deliveries
(the ‘‘Dispatch Tariff’’, and together with the Pumping Tariff, the ‘‘basic tariff’’) are determined by
dividing the relevant projected tariff revenues by the relevant projected throughput volume of crude
oil. Pursuant to the Tariff Regulation, the projected tariff revenues for a period are designed to
generate an economically reasonable amount of funds required to cover the operational expenses that
the Group estimates it will incur during the relevant period in connection with the provision of crude
33

oil transportation services and an economically reasonable amount of net income sufficient to fund,
inter alia, capital expenditures and repay borrowings relating to expansion projects. The tariff
revenues are calculated in accordance with the following formula and with reference to projected
consolidated financial information of the Group prepared on the basis of RAS:
TR = E - B + T + NI +/- RR Delta, where
‘‘TR’’ represents the projected tariff revenues to be calculated;
‘‘E’’ represents certain operating expenses related to crude oil transportation activities which are
chargeable to costs, such as depreciation expenses, salaries and mandatory pensions payments,
electricity expenses and maintenance and repair expenses;
‘‘B’’ represents the balance of certain other revenues and expenses (whether operating or nonoperating)
to the extent that they are attributable to crude oil transportation activities, and includes:
* interest expense (being the cost of servicing borrowings incurred in respect of the capital repair,
diagnosis, reconstruction and modernisation of existing pipelines and associated facilities or
expansion projects);
* expenses related to the dismantling of capital assets; and
* certain other economically reasonable expenses.
‘‘T’’ represents the amount of tax on the Group’s income generated by crude oil transportation
activities;
‘‘NI’’ represents the economically reasonable amount of RAS net income required to be generated in
order to:
* finance programmes for the repair, maintenance and upgrade of the pipeline;
* repay the principal amount of borrowings incurred in respect of the capital repair of existing
pipelines and associated facilities or expansion projects involving the construction of new
pipelines and associated facilities, after the pipelines and associated facilities constructed or
reconstructed with such funds are put into operation; and
* cover other economically reasonable expenses chargeable to net income.
‘‘RR Delta’’ represents certain other adjustments contemplated by the Tariff Regulation.
For example, projections related to borrowings made to finance investment projects such as the ESPO
Pipeline Project, including the Sberbank facilities and the Loans described in this Prospectus, are
accounted for under B (in respect of interest expense) and NI (in respect of the scheduled repayment
of principal). As a debt is incurred during the year, the Group generally calculates the RAS net
income amount needed to be generated to make scheduled interest and principal payments, and
would expect to apply to the FTS for a corresponding tariff adjustment.
The total aggregate projected figure for the Group’s tariff revenues are apportioned for each section
of pipeline operated by each of the Group’s 12 pipeline transportation subsidiaries, and as between
the Dispatch Tariff element and the Pumping Tariff element, described in more detail below
Types of Tariff
In addition to the basic tariff, which has represented substantially all of the Group’s revenues in
2006, 2005 and 2004, there are other tariffs that can be applied, as described in more detail below.
Basic Tariff
The activities relating to the Pumping Tariff and the Dispatch Tariff are treated by the Tariff
Regulation as part of one unified and integrated technological process. Accordingly, these two tariffs,
each currently established per 100 metric tons of crude oil per km (excluding VAT), are generally
referred to as elements of the ‘‘basic tariff’’ for crude oil transportation activities.
Dispatch Tariff
In accordance with the Tariff Regulation, the Dispatch Tariff is designed to fund, in general,
economically reasonable expenses incurred by the Group that are common to the entire pipeline
network, such as the upgrading of the overall system and other such capital expenditures, and
accordingly is expressed as a standard tariff amount across the Group’s entire pipeline network. The
Dispatch Tariff is determined on the basis of:
* borrowings incurred in respect of the capital repair of existing pipelines and associated facilities
or expansion projects;
34

* research and development expenses;
* interest expense related to borrowings;
* an amount of income tax, calculated on the basis of the net income (‘‘NI’’) element of the tariff
calculation formula discussed above); and
* such other economically reasonable expenses as relate to the system as a whole.
Pumping Tariff
The Pumping Tariff is determined on the basis of those expenses not taken into account in
determining the Dispatch Tariff and the Loading Tariff described below. The Pumping Tariff varies
among each section of pipeline and among the regions operated by each pipeline subsidiary.
Loading Tariff
The tariff established for the loading and unloading or the delivery and acceptance of crude oil at
entry and exit points to the pipeline (the ‘‘Loading Tariff’’) is established in respect of each such
entry and exit point. The Loading Tariff is expressed as a Russian rouble amount per 100 tons of
crude oil.
Other Tariffs
The Tariff Regulation also allows the Group, subject to FTS approval, to set negotiated, long-term,
competitive and network tariffs, as described below. These tariffs are additional to the basic tariff and
are tailored to provide for the particular needs of oil producers and the Group or the particular
circumstances of a pipeline. These negotiated, long-term, competitive and network tariffs are rarely
used in practice, and in 2005 represented only approximately 2.3 per cent. of the Group’s total sales.
Negotiated Tariff
A negotiated or contractual tariff can be set if the Group expects to incur expenses to upgrade the
reliability, or expand the throughput capacity, of a particular existing pipeline or pipelines, if the
expenses to be incurred in connection with such work were not contemplated during the annual
scheduled tariff review. Such an adjustment can only be approved by the FTS, at the request of
Transneft, if the Group has the prior written consent of all of the oil producers using the relevant
section(s) of pipeline(s). Negotiated tariffs may be established as an additional charge to the effective
tariffs approved during the annual scheduled tariff review.
Long-Term Tariff
Provided the Group and the relevant customer agree, the Group may offer such customer the
opportunity to fix, for a term of not less than three years, the tariff to be paid by such customer for
the transportation of crude oil on a particular route or routes, depending on the current and
projected future capacity of, and demand for, transportation of crude oil on such route or routes. A
long-term tariff may be established as an additional charge to the effective tariffs approved during the
annual scheduled tariff review and may, in certain circumstances, result in the relevant customer
paying less than the scheduled basic tariff. For example, the contract that the Group has in place
with the oil transport operator of Azerbaijan in relation to the transportation of Azerbaijani crude oil
sets a long-term tariff.
Competitive Tariff
The Group has the potential flexibility to adjust tariffs to make certain routes more competitive
against alternative means of transportation, for example rail. The rate of a competitive tariff is
established in the form of caps on the rates of tariffs or in the form of a ratio calculated in
accordance with market pricing methods linked to the cost of transporting crude oil along a
particular route. The competitive tariff can therefore result in a reduction for a particular route or
routes to the effective tariffs approved during the annual scheduled tariff review.
Network Tariff
In order to optimise the utilisation rate of certain routes with more than one end destination of oil
supply, a network tariff can be established for the transportation per metric ton of crude oil,
independent of the length of the transportation route, in contrast to other tariffs which are with
reference to the distance travelled. The Group used a network tariff on sections of the Baltic Pipeline
System (the ‘‘BPS’’) following construction thereof and is likely to use it in relation to the ESPO
pipeline when constructed.
35

Total Tariff Payable
Based on the above tariffs, the total tariff payable by an oil producer to the Group for the
transportation of crude oil along a particular route will be a combination of the following tariffs and
factors:
* the volume in metric tons of crude oil to be transported, multiplied by the length of the route
in kilometres, multiplied by the tariff charged for the relevant route (being the Pumping Tariff
(variable per route), the Dispatch Tariff (the same for all routes) as adjusted up or down by any
negotiated, long-term, competitive or network tariff charged on such route); and
* the volume in metric tons of crude oil (if any) to be loaded, unloaded, delivered and /or
accepted multiplied by the applicable Loading Tariff.
Tariff History
The following table shows the history of average annual tariff increases over the five years ended
31 December 2006:
Year ended 31 December
2006 2005 2004 2003 2002
Total revenues from oil
transportation
services (RUR million)................ 184,016 163,918 133,939 106,361 89,183
Volume transported (million metric
tons) ............................................ 458.5 452.2 447.3 414.8 372.9
Average tariff for the period
(RUR/t)....................................... 401.3 362.5 299.4 256.4 239.2
Increase in average annual tariff
(RUR/t) (%) ................................ 10.7% 21.1% 16.8% 7.2% 35.9%
Production price index (%) (1) .......... 10.4% 13.4% 28.8% 12.5% 17.7%
For reference:
Number of tariff reviews for the
year.............................................. 2 2 2 3 2
Note:
(1) According to Rosstat.
Other Revenues
Where applicable, the Group will charge specific oil producers agency fees for monitoring the oil that
they transit across certain neighbouring countries, such as Belarus. These charges are not part of the
basic tariff and accordingly are not regulated by the FTS.
Pursuant to intergovernmental agreements between Russia and each of Azerbaijan and Kazakhstan,
Transneft has entered into a ten year contract with the Azerbaijan International Operating Company
(‘‘AMOK’’) which acts on behalf of the state oil company of Azerbaijan and other Azerbaijani oil
producing companies and a one year contract with KazTransOil of Kazakhstan, which represents all
of the oil producing companies of Kazakhstan, for the transportation of crude oil from Azerbaijan
and Kazakhstan across Russia, mainly to the port of Novorossiysk.
Transneft charges a fixed tariff (currently U.S.$15.67 per one metric ton of crude oil) set pursuant to
the relevant contract and inter-governmental agreement and denominated and payable in U.S. dollars
for the transportation of crude oil from Azerbaijan to Novorossiysk (and may set tariffs for
transportation to other destinations). It charges a distance-related tariff denominated and payable in
U.S. dollars and set by the FTS for the transportation of Kazakhstan crude oil in Russia from the
Atyrau—Samara pipeline (currently U.S.$0.73 per 100 metric tons of crude oil per kilometre) and
fixed tariffs set pursuant to the relevant contract and inter-governmental agreement and denominated
and payable in U.S. dollars for the transportation of Kazakhstan crude oil through the
Makhachkala—Novorossiysk pipeline (currently U.S.$7.06 per metric ton of crude oil). These tariffs
are each, on average, higher than the rates that Transneft charges to Russian oil producers.
Capacity driven by crude oil production and export volumes
In recent years, the volume of crude oil transported by the Group has generally increased. The
Group’s crude oil pipeline transport volumes increased 1.4 per cent. to 458.5 million metric tons in
36

2006 from 2005, 1.1 per cent. to 452.2 million metric tons in 2005 from 2004 and 7.8 per cent. to
447.3 million metric tons in 2004 from 2003.
In recent years, crude oil production and export volumes in Russia have also generally increased.
Annual oil production increased 2.1 per cent. to 480 million metric tons in 2006 from 2005, 2.4 per
cent. to 470 million metric tons in 2005 from 2004 and 9.0 per cent. to 459 million metric tons in
2004 from 2003, while annual oil exports decreased 1.6 per cent. to 248 million metric tons, on an
annualised basis, in 2006 from 2005 and 2.3 per cent. to 252 million metric tons in 2005 from 2004,
and increased 13.2 per cent. to 258 million metric tons in 2004 from 2003, according to Rosstat.
Historically, the volumes of crude oil transported by the Group have been closely correlated with
Russian production and exports of crude oil, save where pricing becomes a factor as described under
‘‘—Relationship of oil price and transport competition’’. Increases in production and exports required
the Group to increase volumes of crude oil transported, which required increased expenditures on
maintaining and upgrading existing pipelines, facilities and equipment and investments in new
infrastructure. The Group’s capital expenditure cash flows (purchase of property, plant and
equipment) totalled RUR 151,826 million in the year ended 31 December 2006, RUR 66,786 million
in the year ended 31 December 2005 and RUR 56,970 million in the year ended 31 December 2004.
See ‘‘—Capital Expenditure’’.
Relationship of oil price and transport competition
In many areas of Russia where the Group operates, there are no alternative means of transporting
crude oil. Where such alternatives (principally railways) do exist, the Group generally maintains a
competitive advantage over them due to the relatively low cost of the tariffs charged by the Group
compared to the costs of such alternative means of transport. However, Transneft believes that when
the market price for oil is above approximately U.S.$60 per barrel, Russian oil producers have
historically proved more likely to use rail to transport some of their crude oil production, particularly
to avoid blending their higher quality oil with others of a lesser grade or because pipeline capacity is
limited.
Recent and future projects
Based on the findings of the Russian Industry and Energy Ministry’s ‘‘General Plan for the
Development of Oil Pipeline Transport for the period to 2020’’, the Group’s key strategic objectives
include developing overall capacity for projected increases in Russian crude oil production; servicing
the development of new oilfields on Sakhalin, the Timano-Pechorsky province and Eastern Siberia;
and diversifying export routes. See ‘‘Business—Strategy’’ and ‘‘Business—Investment Projects and
Expansion’’.
The Russian Government has prioritised the development of the ESPO Pipeline Project, in order to
provide new and future expected oilfields with transport facilities and exploit emerging sales
opportunities in China and the rest of the Pacific basin.
In the year ended 31 December 2006, the Group made cash expenditures of RUR 87,728 million on
the ESPO Pipeline Project. See ‘‘—Capital Expenditure’’. The first phase of the ESPO Pipeline Project
is expected to become operational at the end of 2008.
The BPS, which was completed in 2006, was developed to lower the cost of oil deliveries by
shortening the pipeline portion of the transport route to the Group’s Baltic sea port and avoiding
transit through third countries. The total cost of the BPS was approximately U.S.$2.5 billion
(approximately RUR 67 billion). See ‘‘—Capital Expenditure’’ and ‘‘Business—Principal Business
Activities—Baltic Pipeline System (‘‘BPS’’)’’.
Critical Accounting Estimates and Judgements
The Group’s accounting policies are integral to understanding the financial condition and results of
operations presented in the consolidated financial statements and the related notes thereto. The
Group’s significant accounting policies are described in the notes to the consolidated financial
statements appearing elsewhere in this Prospectus. The preparation of these financial statements
requires the Group’s management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of sales and expenses during the reported
period. On an ongoing basis, the Group’s management evaluates its estimates and judgments,
including those related to allowance for losses, investments, income taxes, contingencies, fair value of
financial instruments and properties, and litigation and arbitration. Management bases its estimates
and judgments on historical experience and on various other factors that are believed to be
37

easonable under the circumstances. Actual results may differ from estimates under different
assumptions or conditions.
The Group’s management believes that the following critical accounting policies require more critical
judgments or estimates or involve a relatively greater degree of complexity in the application of
accounting policies that affect the Group’s financial condition and results of operations:
Provision for dismantlement
Provisions for dismantlement are recognised for the costs arising from the Group’s constructive
obligations to dismantle pipelines at the end of their useful lives.
The Group’s estimates for provisions for dismantlement are based on currently available facts and the
Group’s estimates of the ultimate outcome or resolution of the liability in the future. Actual results
may differ from the estimates, and the Group’s estimates can be revised in the future, either
negatively or positively, depending upon the outcome or expectations based on the facts surrounding
each exposure.
Provisions are established for the expected cost of dismantling parts of the existing pipeline network
based on the average current cost per kilometre of removal according to an estimated plan of
replacement over the long term. The provision calculation is based on the assumption that
dismantlement activities are expected to cover the same number of kilometres each year over the
useful life of the network. Changes in this assumption or assumptions with regard to expected costs,
technical change, and discount rate may result in adjustments to the established provisions and assets.
Additional provisions are made when the total length of the network increases, and reductions occur
when sections of the pipeline are decommissioned. Other changes are made when the expected pattern
or unit cost of dismantlement is changed. The expected costs at the dates of dismantlement have been
discounted to net present value using a nominal rate of 7.0 per cent. per year.
Interpretation of Russian tax legislation
Russian tax and customs legislation is subject to varying interpretations and changes that can occur
frequently. Management’s interpretation of such legislation as applied to the transactions and activity
of the Group may be challenged by the relevant regional and federal authorities. Recent events within
Russia suggest that the tax authorities may be taking a more assertive position in their interpretation
of the legislation and it is possible that transactions and activities that have not been challenged in
the past may be challenged in the future. As a result, significant additional taxes, penalties and
interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes
for the three calendar years preceding the year of review. Under certain circumstances, reviews may
cover longer periods.
Impairment assessment
Accounting for impairment includes provisions against capital construction projects and other longterm
assets. The Group records impairment when its assessments indicate that it is probable that a
liability has been incurred or an asset will not be recovered, and an amount can be reasonably
estimated.
At each balance sheet date the Group assesses whether there is any indication that the recoverable
value of the Group’s assets has declined below the carrying value. When such a decline is identified,
the carrying amount is reduced to the recoverable amount. The recoverable amount is the higher of
an asset’s fair value less costs to sell and its value in use. The amount of the reduction is recorded in
the consolidated income statement in the period in which the reduction is identified. An impairment
loss recognised for an asset in prior years is reversed if there has been a change in the estimates used
to determine the asset’s recoverable amount. Non-financial assets are grouped at the lowest levels for
which there are separately identifiable cash flows (cash-generating units). Non-financial assets that
suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. A
reversal of an impairment loss for a cash-generating unit shall be allocated to the assets of the unit
pro rata with the carrying amount of those assets.
Useful lives of property, plant and equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation. The
estimation of the useful life of an item of property, plant and equipment is a matter of management
judgment based upon management’s experience with similar assets. In determining the useful life of
an asset, management considers the expected usage, estimated technical obsolescence, physical wear
38

and tear and the physical environment in which the asset is operated. Changes in any of these
conditions or estimates may result in adjustments to future depreciation rates.
Explanation of Certain Key Income Statement Items
The following discussion describes certain line items in the Group’s consolidated income statement:
Sales
Oil transportation services
Domestic revenues comprise revenues earned from oil transportation services provided within Russia,
and are recognised when oil reaches its final destination in Russia. Export revenues comprise revenues
relating to the Russian portions of international routings, which are recognised when oil reaches the
Russian border, and agency commissions earned from arranging transport through non-Russian
pipelines, which are recognised when oil reaches its final destination outside Russia.
Oil sales
Oil sales do not currently comprise part of the Group’s core business activities. During each of the
last five years, volumes of oil sold did not exceed 0.4 per cent. of total volumes of oil transported,
while revenues from oil sales did not exceed 4.7 per cent. of total sales. The sale of surplus
technological oil used to support the transportation process (‘‘linefill’’) is accounted for as revenue
and included in sales.
Other revenues
Other revenues comprise mainly revenues from oil blending (compounding), when oil that does not
meet required quality standards is mixed with better quality oil, and from oil warehousing. These
charges are paid by oil producers, are not regulated by the FTS and are recognised when the work is
completed.
Operating expenses
Save as noted below, all operating expenses are accounted for in calculating the tariff. See ‘‘—
Tariffs’’.
Depreciation
Depreciation expense comprises depreciation and impairment charges on property, plant and
equipment.
Salaries
For the years ended 31 December 2006, 2005 and 2004, salaries expense comprises the cost of
salaries, wages and other benefits for the Group’s employees, other than for members of Transneft’s
Administrative Board and general directors of Transneft’s subsidiaries, which were recorded under the
‘‘key management personnel compensation’’ operating expense line item. For the years ended 31
December 2006 and 2005 salaries expense also comprises pension expense.
Electricity
Electricity expense comprises the cost of electricity used by the Group.
Materials
Materials expense comprises the costs of materials (including pipes, pumping equipment and wells)
used by third party contractors or the Group in effecting routine repairs and maintenance and
stationery and office equipment. In the periods under review, the Group’s third party contractors,
where possible, used materials from the Group’s inventory in performing routine maintenance and
upgrades. Such material is expensed in the period used. This usage was made possible by
improvements to the Group’s inventory control systems. In addition, where possible, the Group
attempts to reduce the cost of third party contractors (recorded under the ‘‘repairs and maintenance’’
operating expense line item) by purchasing materials at wholesale prices for use by them in
performing routine maintenance and upgrades. Likewise, the cost of such materials is expensed in the
period in which it is used.
Insurance
Insurance expense comprises the cost of the Group’s insurance premiums.
39

Repairs and maintenance
Repairs and maintenance expense comprises the cost of maintenance performed by third party
contractors. The share of maintenance performed by third party contractors to total maintenance, and
overall volumes of maintenance performed by third party contractors, both increased in the periods
under review. Beginning in the year ended 31 December 2005, the Group, whenever possible, used its
inventory to provide many of the materials used by third party contractors, with the effect of limiting
increases or achieving reductions in the ‘‘repairs and maintenance’’ operating expense line item.
However, as inventory is gradually depleted, this effect may diminish or disappear.
Cost of oil surplus sold
Cost of oil surplus sold is accounted for at weighted average cost and is not accounted for in the
calculation of tariffs. See ‘‘— Key Factors Affecting the Group’s Results of Operations and Financial
Condition — Tariffs’’.
Net other operating expenses
Save as noted below, net other operating income/(expenses) are not accounted for in calculating
tariffs. See ‘‘— Key Factors Affecting the Group’s Results of Operations and Financial Condition —
Tariffs’’.
Oil surpluses (deficits)
Oil surpluses (deficits) comprises the initial recognition of surplus/deficit linefill.
Gain/(loss) on disposal of property, plant and equipment and social assets
Gain/(loss) on disposal of property, plant and equipment and social assets comprises the gain/(loss)
recognised on the disposal of these assets.
Charitable contributions
Charitable contributions approved by the Administrative Board for sports, art and social facilities are
accounted for in calculating tariffs. See ‘‘— Key Factors Affecting the Group’s Results of Operations
and Financial Condition — Tariffs’’.
Net financial items
Net financial items comprise exchange losses/(gains) and interest expense.
Profit tax expense
The statutory tax rate for legal entities in Russia is 24 per cent. The Group’s effective tax rate may
vary from the statutory rate primarily due to non-deductible expenses.
40

Results of Operations for the years ended 31 December 2006, 2005 and 2004
Year ended 31 December
2006 2005 2004
RUR millions
Sales (1) .......................................................................................... 202,427 179,697 150,441
Operating expenses (1) ................................................................... (114,813) (104,428) (87,873)
Net other operating expenses (1)(2) ................................................ (5,587) (93) (1,764)
Operating profit ........................................................................... 82,027 75,176 60,804
Financial items, net (1) .................................................................. (1,198) (1,776) (1,511)
Exchange gains/(losses) ........................................................... (53) (178) 222
Gains/(losses) on financial assets at fair value through profit or
loss (1) ....................................................................................... — — 553
Interest expense, net ................................................................. (1,145) (1,598) (2,286)
Profit before profit tax (1) ............................................................. 80,829 73,400 59,293
Profit tax expense ........................................................................ (25,968) (19,621) (15,770)
Profit for the period (1) .................................................................. 54,861 53,779 43,523
Notes:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
(2) For the year ended 31 December 2004, this line item combines net other operating expenses of RUR (2,736) million and reversal of
impairment provisions of RUR 972 million.
Sales
The following table sets forth sales for the years ended 31 December 2006, 2005 and 2004,
respectively:
Year ended 31 December
2006 2005 2004
RUR millions
Total revenues from oil transportation services .......................... 184,016 163,918 133,939
Domestic................................................................................... 74,074 64,374 55,819
Export ...................................................................................... 109,942 99,544 78,120
Revenues from oil sales (1) ............................................................ 9,465 5,718 7,103
Other revenues (1) .......................................................................... 8,946 10,061 9,399
Sales (1) .......................................................................................... 202,427 179,697 150,441
Note:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
Sales increased by RUR 22,730 million, or 12.6 per cent., for the year ended 31 December 2006 as
compared to the year ended 31 December 2005. Sales increased RUR 29,256 million, or 19.4 per cent.,
for the year ended 31 December 2005 as compared to the year ended 31 December 2004. In each
year, such increases were mainly due to increases in revenues from oil transportation services driven
by increases in tariff rates and, to a lesser extent, growth in volume of oil transported.
Oil transportation services
Revenues from oil transportation services increased RUR 20,098 million, or 12.3 per cent., for the
year ended 31 December 2006 as compared to the year ended 31 December 2005, and increased
RUR 29,979 million, or 22.4 per cent., for the year ended 31 December 2005, as compared to the
41

year ended 31 December 2004. In each year, such increases were due principally to tariff growth and,
to a lesser extent, volume growth.
Average tariffs increased RUR 402.0 per metric ton, or 10.7 per cent. for the year ended
31 December 2006 as compared to the year ended 31 December 2005 and increased
RUR 63.6 per metric ton, or 21.5 per cent. for the year ended 31 December 2005, as compared to
the year ended 31 December 2004.
Total volumes in 2006 increased 6.3 million metric tons, or 1.4 per cent., to 458.5 million metric tons
from 452.2 million metric tons for 2005, due principally to increased oil production in Russia, and, to
a lesser extent, increased pipeline throughput capacity, which accommodated volumes transported by
pipeline rather than rail as a result of the lower average price of crude oil during the period. Total
volumes in 2005 increased 4.9 million metric tons, or 1.1 per cent., to 452.2 million metric tons from
447.3 million metric tons for 2004, due primarily to increases in oil production in Russia and growth
in throughput volumes made possible by capacity increases, in particular as a result of the
construction of the BPS, which facilitated an increase in export volumes through the Primorsk sea
terminal. See ‘‘—Key Factors Affecting the Group’s Results of Operations and Financial Condition—
Relationship of oil price and transport competition’’.
Oil sales
Revenues from oil sales increased RUR 3,747 million, or 65.5 per cent., for the year ended 31
December 2006, as compared to the year ended 31 December 2005, due to an increase in the volume
of oil sold and an increase in the average price per metric ton for oil sold. Revenues for oil sales
decreased RUR 1,385 million, or 19.5 per cent., for the year ended 31 December 2005, as compared
to the year ended 31 December 2004 as export duty was deducted from revenue from oil sales for the
year ended 31 December 2005 but was not so deducted in 2004. In 2005 and 2004, oil sales included
the sale of oil received in payment for transportation services provided to certain oil producers.
The average price of oil sold for the year ended 31 December 2006 was RUR 5,778 per metric ton,
as compared to RUR 4,398 per metric ton for the year ended 31 December 2005 and RUR 4,713 per
metric ton for the year ended 31 December 2004.
Total volumes of oil sales for the year ended 31 December 2006 were 1.6 million metric tons as
compared to 1.3 million metric tons for the year ended 31 December 2005 and 1.5 million metric tons
for the year ended 31 December 2004.
Other revenues
Other revenues decreased RUR 1,115 million, or 11.1 per cent., for the year ended 31 December 2006
as compared to the year ended 31 December 2005, due to a reduction in non-core business activities
(such as repairs and maintenance), reflecting a deliberate effort by the Group to focus on oil
transportation activities.
Other revenues increased RUR 662 million, or 7.0 per cent., for the year ended 31 December 2005 as
compared to the year ended 31 December 2004, due to demand-driven increases in transport-related
services, principally oil compounding (blending), in line with increases in volumes of crude oil
transported.
42

Operating expenses
The following table sets forth operating expenses for the years ended 31 December 2006, 2005 and
2004, respectively:
Year ended 31 December
Percentage of total operating
expenses, year ended 31 December
2006 2005 2004 2006 2005 2004
RUR millions
per cent.
Depreciation ............................................. 21,868 19,441 16,313 19.05 18.62 18.56
Staff costs:
Salaries and pension expense (1) ................ 20,056 18,764 13,680 17.47 17.97 15.57
Unified Social Fund contributions........... 4,049 3,794 3,269 3.53 3.63 3.72
Key management personnel
compensation....................................... 238 154 126 0.21 0.15 0.14
Social expenses ......................................... 3,718 2,882 2,204 3.24 2.76 2.51
Energy ...................................................... 16,277 15,690 13,265 14.18 15.02 15.10
Materials................................................... 10,151 9,011 6,360 8.84 8.63 7.24
Cost of oil sold (1) ...................................... 8,558 5,099 4,355 7.45 4.88 4.96
Insurance expense (1) .................................. 6,011 5,213 6,181 5.24 4.99 7.03
Repairs and maintenance ......................... 7,867 10,294 8,658 6.85 9.86 9.85
Administrative expense............................. 3,511 2,927 2,045 3.06 2.80 2.33
Transport expense .................................... 1,489 1,856 1,796 1.30 1.78 2.04
Taxes other than profit tax:
Property tax.............................................. 1,192 887 1,001 1.04 0.85 1.14
Other taxes ............................................... 251 237 209 0.22 0.23 0.24
Other (1) ..................................................... 9,577 8,179 8,411 (2) 8.34 7.83 9.57
Operating Expenses .................................. 114,813 104,428 87,873 100 100 100
Notes:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
(2) For the year ended 31 December 2004, this line item combines customs duties on oil sales of RUR 2,054 million, diagnostics
expense of RUR 2,415 million, communication expense of RUR 370 million, IT and software maintenance expense of
RUR 290 million and other, net of RUR 3,282 million.
Operating expenses increased RUR 10,385 million, or 9.9 per cent., for the year ended 31 December
2006, as compared to the year ended 31 December 2005, and increased RUR 16,555 million, or 18.8
per cent., for the year ended 31 December 2005, as compared to the year ended 31 December 2004.
In each year, such increases were mainly due to increases in expenses for depreciation, salaries,
electricity and materials. The rate of growth of operating expenses was lower between 31 December
2006 and 31 December 2005 than that between 31 December 2005 and 31 December 2004, principally
due to lower inflation in Russia during 2006, as compared to 2005.
Set forth below are descriptions of the material operating expense items for the years ended
31 December 2006, 2005 and 2004:
Depreciation
Depreciation expense increased RUR 2,427 million, or 12.5 per cent., for the year ended 31 December
2006, as compared to the year ended 31 December 2005, and RUR 3,128 million, or 19.2 per cent.,
for the year ended 31 December 2005, as compared to the year ended 31 December 2004. In each
year, such increases were due principally to upgrades of existing and construction of new, property,
plant and equipment, including, in particular, in connection with construction of the BPS and, to a
lesser extent, impairment of existing equipment.
Salaries
Salaries expense increased RUR 1,292 million, or 6.9 per cent., for the year ended 31 December 2006,
as compared to the year ended 31 December 2005, and increased RUR 5,084 million, or 37.2 per
cent., for the year ended 31 December 2005, as compared to the year ended 31 December 2004. In
each year, such increases were due principally to inflation and average salary increases in the Russian
oil sector.
43

Electricity
Electricity expense increased RUR 587 million, or 3.7 per cent., for the year ended 31 December
2006, as compared to the year ended 31 December 2005, and RUR 2,425 million, or 18.3 per cent.,
for the year ended 31 December 2005, as compared to the year ended 31 December 2004. In each
year such increases were due to increases in electricity tariffs (also set by the Russian Government)
and increases in the use of electricity due to increased pipeline throughput capacity.
Repairs and maintenance
Repairs and maintenance expense decreased RUR 2,427 million, or 23.6 per cent., for the year ended
31 December 2006, as compared to the year ended 31 December 2005 due to the supply requirements
of third-party contractors increasingly being satisfied by the Group’s inventory due to improvements
in inventory control systems. Repairs and maintenance expense increased RUR 1,636 million, or
18.9 per cent., for the year ended 31 December 2005, as compared to the year ended 31 December
2004, due to increases in the volumes of repair and maintenance work performed in the periods and
inflation.
Materials
Materials expense increased RUR 1,140 million, or 12.7 per cent., for the year ended 31 December
2006, as compared to the year ended 31 December 2005, and RUR 2,651 million, or 41.7 per cent.,
for the year ended 31 December 2005, as compared to the year ended 31 December 2004. In each
year, such increases were principally due to increased purchases of specialised materials for use by
third-party contractors, and inflation.
Insurance
Insurance expense increased RUR 798 million, or 15.3 per cent., for the year ended 31 December
2006, as compared to the year ended 31 December 2005, and decreased RUR 968 million, or 15.7 per
cent., for the year ended 31 December 2005, as compared to the year ended 31 December 2004. In
the year ended 31 December 2004, insurance expense included pension expense in relation to the nonstate
defined contribution plan. The increase in 2006 was due principally to significant increases in the
value of the Group’s property, plant and equipment, principally as a result of upgrades of the
existing network and construction of the BPS, and inflation.
Cost of oil sold
Cost of oil sold increased RUR 3,459 million, or 67.8 per cent., for the year ended 31 December
2006, as compared to the year ended 31 December 2005, principally due to the increase in volumes
sold as described in ‘‘—Sales—Oil sales’’. Cost of oil sold increased RUR 744 million, or 17.1 per
cent., for the year ended 31 December 2005, as compared to the year ended 31 December 2004,
principally due to a higher cost per metric ton of oil sold.
Net other operating expenses
The following table sets forth net other operating expenses for the years ended 31 December 2006,
2005 and 2004, respectively:
Year ended 31 December
2006 2005 2004
RUR millions
Oil (surplus)/deficit ...................................................................... (7,103) (2,308) (2,125)
Loss on disposal of property, plant and equipment (1) ................ 797 806 709
Charge due to change in the route of the ESPO Pipeline Project 6,613 — —
Changes in provision against doubtful debts and other
receivables ............................................................................... — — (82)
Charitable contributions (1) ........................................................... 5,280 1,595 4,234
Net other operating expenses (1) .................................................... 5,587 93 2,736
Note:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
44

Net other operating expenses increased RUR 5,494 million, or 5,907.5 per cent., for the year ended
31 December 2006, as compared to the year ended 31 December 2005, due primarily to expenses
related to a change in the project design of the ESPO Pipeline Project, principally the rerouting of the
project described under ‘‘Business – Investment Projects and Expansion – Eastern Siberia – Pacific
Ocean Pipeline’’.
Net other operating expenses decreased RUR 2,643 million, or 96.6 per cent., for the year ended
31 December 2005 as compared to the year ended 31 December 2004, which was attributable
primarily to a decrease in charitable contributions.
Net financial items
The following table sets forth net financial items for the years ended 31 December 2006, 2005 and
2004, respectively:
Year ended 31 December
2006 2005 2004
RUR millions
Financial items, net:
Exchange losses/(gains)................................................................ 53 178 (222)
(Gains)/losses on financial assets at fair value through profit or
loss, net (1) ................................................................................ — — (553)
Interest expense, net .................................................................... 1,145 1,598 2,286
Total financial items (1) .................................................................. 1,198 1,776 1,511
Note:
(1) Data for 2005 includes amounts reclassified to conform to the presentation adopted in the audited consolidated financial
statements as at and for the year ended 31 December 2006. See ‘‘Presentation of Financial and Other Information—
Reclassifications’’.
Net financial items decreased RUR 578 million, or 32.5 per cent., for the year ended 31 December
2006 as compared to the year ended 31 December 2005, principally due to a decrease of
RUR 453 million, or 28.3 per cent., in net interest expense due to the repayment of borrowings
described below, and to a lesser extent due to a decrease of RUR 125 million, or 70.2 per cent., in
exchange losses resulting from lower foreign currency liabilities in the period after repayment of
foreign currency borrowings.
Net financial items increased RUR 265 million, or 17.5 per cent., for the year ended 31 December
2005 as compared to the year ended 31 December 2004, due to an increase in exchange losses from
foreign currency transactions.
The following table sets forth net interest expense for the years ended 31 December 2006, 2005 and
2004, respectively:
Year ended 31 December
2006 2005 2004
RUR millions
Interest expense............................................................................ 1,923 1,216 2,264
Interest income ............................................................................ (778) (344) (166)
Effect of change in discount rate................................................. — 726 188
Interest expense, net ..................................................................... 1,145 1,598 2,286
Net interest expense decreased RUR 453 million, or 28.3 per cent., for the year ended 31 December
2006 as compared to the year ended 31 December 2005, principally due to an increase of RUR 434
million in interest income and a reduction of RUR 726 million in the effect of change in discount
rate, as the discount rate for 2006 was the same as for 2005. This decrease was partially offset by an
increase in gross interest expense due to an increase in Group debt and a higher average interest rate
45

applicable to Russian rouble debt entered into during the year ended 31 December 2006 as compared
to the foreign currency debt in place during the year ended 31 December 2005.
Net interest expense decreased RUR 688 million, or 30.1 per cent., for the year ended 31 December
2005 as compared to the year ended 31 December 2004, resulting from the Group restructuring its
debt in May 2005.
Profit tax expense
The following table sets forth profit tax expense for the years ended 31 December 2006, 2005 and
2004, respectively:
Year ended 31 December
2006 2005 2004
RUR millions
Current profit tax expense........................................................... 25,405 21,572 16,973
Deferred profit tax expense/(benefit) ........................................... 563 (1,951) (1,203)
Profit tax expense ........................................................................ 25,968 19,621 15,770
Profit tax expense increased RUR 6,347 million, or 32.3 per cent., for the year ended 31 December
2006 as compared to the year ended 31 December 2005 and increased RUR 3,851 million, or 24.4 per
cent., for the year ended 31 December 2005 as compared to the year ended 31 December 2004, in line
with the increase in taxable profit.
The effective profit tax rate (calculated as profit tax expense divided by profit before tax) was 32.1 per
cent. for the year ended 31 December 2006 as compared to 26.7 per cent. for the year ended
31 December 2005 and 26.6 per cent. for the year ended 31 December 2004, primarily due to
expenses related to the change in the project design of the ESPO Pipeline Project discussed above,
which were not deductible for the purposes of calculating current profit tax.
Liquidity and Capital Resources
The Group’s principal sources of liquidity are cash flows from operating activities and external
sources of financing. The Group’s primary liquidity requirements are to fund investing activities and
to repay long- and short-term borrowings.
Cash flow
The Group presents cash flows using the direct method, whereby major classes of gross cash receipts
and gross cash payments are disclosed. As at 31 December 2006, the Group had cash and cash
equivalents of RUR 29,293 million. Management believes that working capital is sufficient to satisfy
the Group’s present requirements.
46

The following table sets forth the Group’s net cash flows from or used in operating, investing and
financing activities for the periods indicated:
Year ended 31 December
2006 2005 2004
RUR millions
Net cash from operating activities......................................................... 103,619 84,873 60,635
Cash receipts from customers (1) ......................................................... 234,693 218,824 177,346
Cash paid to suppliers and employees, and taxes other than profit
tax...................................................................................................... (130,014) (123,533) (111,056)
Interest paid ....................................................................................... (874) (1,074) (1,349)
Profit tax paid.................................................................................... (25,341) (20,504) (15,123)
Other proceeds from operating activities (2) ....................................... 25,155 11,160 10,817
Net cash used in investing activities...................................................... (149,534) (66,326) (56,176)
Purchase of property, plant and equipment ...................................... (151,826) (66,786) (56,970)
Proceeds from sales of property, plant and equipment..................... 1,514 439 50
Interest and dividends received.......................................................... 374 577 67
Other proceeds/(purchases) from investing activity (3) ........................ 404 (556) 677
Net cash (used in)/from financing activities .......................................... 46,234 (6,662) (4,257)
Proceeds from long- and short-term borrowings............................... 76,459 7,456 2,397
Repayment of long- and short-term borrowings ............................... (24,708) (10,799) (2,871)
Finance lease payments...................................................................... (4,196) (2,577) (4) —
Dividends paid ................................................................................... (1,321) (742) (3,783)
Effects of exchange rate changes on cash and cash equivalents ........... (164) 33 (201)
Net (decrease)/increase in cash and cash equivalents............................ 155 11,918 1
Cash and cash equivalents at the beginning of the period.................... 29,138 17,220 17,219
Cash and cash equivalents at the end of the period ............................. 29,293 29,138 17,220
Notes:
(1) Includes proceeds from the disposal of surplus linefill. See ‘‘—Explanation of Certain Key Income Statement Items—Sales—Oil
Sales’’.
(2) In the years ended 31 December 2006 and 2005, includes input VAT refunds and other purchases from operating activities.
(3) Includes net purchases/proceeds of notes receivable and short and long term investments.
(4) Comprises RUR 1,023 million for payment of finance lease liabilities and RUR 1,554 million for finance lease payments made in
advance.
Cash flow from operating activities
Cash flow from operating activities primarily consists of receipts from customers and other proceeds
from operating activities, adjusted for cash paid to suppliers and employees and taxes other than
profit tax and interest paid.
The increase of RUR 18,746 million, or 22.1 per cent., in net cash from operating activities in the
year ended 31 December 2006 as compared to the year ended 31 December 2005 was due to increases
of RUR 13,995 million, or 125.4 per cent., in other proceeds from operating activities, principally
reflecting increases in VAT refunds (which generally can be reclaimed for VAT paid to outside
contractors after one month for work within Russia or three months for export VAT) and RUR
15,869 million, or 7.3 per cent., in cash receipts from oil transportation services due principally to
tariff growth and, to a lesser extent, volume growth, partially offset by increases of RUR 6,481
million, or 5.2 per cent., in cash paid to suppliers and employees and taxes other than profit tax due
to inflation, and RUR 4,837 million, or 23.6 per cent., in profit tax paid. The increase of RUR
24,238 million, or 40.0 per cent., in net cash from operating activities in the year ended 31 December
2005 as compared to the year ended 31 December 2004 was primarily due to a RUR 41,478 million,
or 23.4 per cent., increase in cash receipts from oil transportation services, principally reflecting tariff
growth, partially offset by increases of RUR 12,477 million, or 11.2 per cent., in cash paid to
suppliers and employees and taxes other than profit tax due to inflation, and RUR 5,381 million, or
35.6 per cent., in profit tax paid.
Cash flow used in investing activities
Cash flow used in investing activities principally consists of cash disbursed in connection with the
purchase of property, plant and equipment. The increase of RUR 83,208 million, or 125.5 per cent.,
47

in net cash used in investing activities in the year ended 31 December 2006 as compared to the year
ended 31 December 2005 was due principally to an increase of RUR 85,040 million, or 127.3 per
cent., in cash used in the purchase of property, plant and equipment primarily connected with the
start of the ESPO Pipeline Project and expansion of the BPS, partially offset by an increase of RUR
1,075 million, or 244.9 per cent., in proceeds from sales of property, plant and equipment arising
mainly from disposals of assets made by Black Sea Main Pipelines, one of Transneft’s subsidiaries.
The increase of RUR 10,150 million, or 18.1 per cent., in net cash used in investing activities in the
year ended 31 December 2005 as compared to the year ended 31 December 2004 was due principally
to a RUR 9,816 million, or 17.2 per cent., increase in cash used in the purchase of property, plant
and equipment connected with expansion of the BPS.
Cash flow from/(used in) financing activities
Cash flow from financing activities principally consists of proceeds from long- and short-term
borrowings, while cash flow used in financing activities principally consists of repayment of long- and
short-term borrowings and finance lease payments. There was net cash from financing activities of
RUR 46,234 million in the year ended 31 December 2006 as compared to net cash used in financing
activities of RUR 6,662 million in the year ended 31 December 2005, due principally to an increase
of RUR 69,003 million in cash proceeds from long- and short-term borrowings, partially offset by
increases of RUR 13,909 million, or 128.8 per cent., in cash used in repayment of long- and shortterm
borrowings, and RUR 1,619 million, or 62.8 per cent., in cash used in payment of finance lease
obligations. The increase of RUR 2,405 million, or 56.5 per cent., in net cash used in financing
activities in the year ended 31 December 2005 as compared to the year ended 31 December 2004 was
due principally to increases of RUR 7,928 million, or 276.1 per cent., in repayment of long- and
short-term borrowings, which were partially offset by an increase of RUR 5,059 million, or 211.1 per
cent., in proceeds from long- and short-term borrowings and a decrease of RUR 3,041 million, or
80.4 per cent., in dividends paid pursuant to a shareholders’ resolution approved with the support of
Transneft’s sole voting shareholder, the Russian Government.
Cash and cash equivalents
The Group held cash and cash equivalents of RUR 29,293 million as at 31 December 2006 as
compared to RUR 29,138 million as at 31 December 2005 and RUR 17,220 million as at 31
December 2004. The increase of RUR 11,918 million, or 69.2 per cent., for the year ended 31
December 2005 as compared to the year ended 31 December 2004 was due to planned cash
accumulation needed for the prepayment of certain loans in February 2006.
Borrowings
The Group’s total borrowings and finance lease obligations as at 31 December 2006 were RUR
70,881 million. The Group’s only material borrowing facilities are described below.
Sberbank revolving credit facility
In August 2006, Transneft entered into a six year framework credit facility with Sberbank, a statecontrolled
bank, which provided for up to RUR 65,000 million to be available for the purpose of
financing the first stage of the ESPO Pipeline Project. Under this framework credit facility agreement,
amounts are generally drawn pursuant to one-year loan agreements. As of 31 December 2006, all
RUR 65,000 million had been drawn down. Interest is payable at a rate which is below the market
rate for Sberbank’s major clients and which is subject to revision if the CBR increases or decreases
interest rates by more than 10 per cent. of that rate. The framework credit facility will expire in June
2012.
As at 19 June 2007, certain amounts under these Sberbank credit facilities had been repaid ahead of
schedule by Transneft, in the amount of RUR 42,714 million and further draw downs under these
Sberbank credit facilities had been made by Transneft in the amount of RUR 41,679 million. Also in
March 2007, Transneft approved the increase of its RUR 65,000 million revolving credit facility with
Sberbank to RUR 80,000 million.
In November 2006, OOO Vostoknefteprovod (‘‘Vostoknefteprovod’’), a 100 per cent. subsidiary of
Transneft, entered into a seven year framework credit facility with Sberbank which provided for up
to RUR 15,000 million to be available for the purpose of financing the first stage of the ESPO
Pipeline Project. Under this framework credit facility agreement, amounts are generally drawn
pursuant to one-year loan agreements. As at 31 December 2006 RUR 1,221 million of this credit
facility had been drawn down. The remaining RUR 13,779 million of such facility was drawn down
48

in early 2007. As at such date the full amount of RUR 15,000 million drawn down by
Vostoknefteprovod remained outstanding. Interest is payable on the same terms as the RUR 65,000
million framework credit facility.
On 5 March 2007, a U.S.$1,300 million 5.67 per cent. loan, due to be repaid in 2014, was received
from the Issuer, to finance the construction of the ESPO Pipeline Project.
On 13 and 14 June 2007, Sberbank was selected through a tender process to provide further credit
facilities to Transneft and Vostoknefteprovod, respectively. See ‘‘Overview – Recent Developments’’.
Off Balance Sheet Arrangements
The Group has no off balance sheet arrangements.
Budgeted Financial Commitments
The following table presents aggregate budgeted cash outflows, presented on a cash basis, for the
years ended 31 December 2007 through 2011 resulting from principal repayments on long-term bank
debt, capital lease obligations, operating lease obligations, purchase obligations and other long-term
commitments of the Group as at 31 December 2006:
2007
(budgeted)
Year ended 31 December
2008
(budgeted)
2009
(budgeted)
2010
(budgeted)
2011
(budgeted)
Total,
2007-2011
(budgeted)
RUR millions
Payments to suppliers and
employees ........................... 109,500 119,900 138,900 151,400 165,000 684,700
Purchases of property, plant
and equipment.................... 206,060 113,346 47,472 64,400 70,000 501,278
Repayment of long- and shortterm
borrowings ................. 65,000 36,400 41,600 26,000 49,700 218,700
Other long-term commitments 4,300 4,700 5,100 5,600 6,100 25,800
Budgeted financial
commitments, total.............. 384,860 274,346 233,072 247,400 290,800 1,430,478
Capital Expenditures
The Group anticipates making significant capital expenditures to maintain and expand its existing
operations over the medium term. Capital expenditures consist of capital investments and capital
improvements. Capital investments comprise investments for new capital assets. Capital improvements
comprise investments to increase the useful life or capacity of existing capital assets.
The Group’s capital expenditure cash flows (purchase of property, plant and equipment) amounted to
RUR 151,826 million for the year ended 31 December 2006 (including RUR 87,728 million in respect
of the ESPO Pipeline Project), RUR 66,786 million for the year ended 31 December 2005 and RUR
56,970 million for the year ended 31 December 2004.
The Group’s major planned capital investment is the ESPO Pipeline Project. Additionally, if final
approval is received from the Russian Government, the Group may commence work on the proposed
BPS II project and the proposed Khariaga-Indiga Pipeline (Northern Route). However, due to the
preliminary stage of these projects, pending Russian Governmental approval, no detailed capital
expenditure plan is available for these projects. Other possible projects described in ‘‘Business—
Investment Projects and Expansion’’ are at tentative planning stages and planned capital investment
data cannot currently be provided.
ESPO Pipeline Project
The ESPO Pipeline Project is expected to be completed in two Phases, the first of which has four
stages. In stages one, two and three of Phase 1, a pipeline of 2,757 km in length, having an annual
capacity of 30 million metric tons per annum, is expected to be constructed along with a sea terminal
at Kozmino, at a cost of approximately U.S.$11 billion (approximately RUR 300 billion) at 2006
prices, taking into account a change of route following publicly expressed environmental concerns.
Stage four of Phase 1 involves the construction of a short spur to China, which would be at the
49

expense of the China National Petroleum Company, not the Group. In Phase 2, a further 2,100 km
of pipeline is expected to be constructed and the capacity of the pipeline may be further upgraded to
up to 80 million metric tons per annum, depending on the need for further capacity. The Group has
not completed its cost estimates for Phase 2. See ‘‘Business—Investment Projects and Expansion—
Eastern Siberia—Pacific Ocean Pipeline (the ‘‘ESPO Pipeline Project’’).
Proposed BPS II Project
The proposed BPS II project contemplates the construction of approximately 1,157 km of pipeline
running from Unecha, via Velikie Luki, to the port of Primorsk. Total capital expenditure on this
project has not yet been estimated. See ‘‘Business—Investment Projects and Expansion—BPS II’’.
Proposed Khariaga-Indiga Pipeline (Northern Route)
Expected capital expenditure for the proposed Khariaga-Indiga Pipeline (Northern Route) covers
expenditures associated with construction of 430 km of pipeline and two loading berths at Indiga on
the Barents Sea coast. Total capital expenditure on this project is estimated to be U.S.$2.2 billion
(approximately RUR 59 billion). See ‘‘Business—Investment Projects and Expansion—Proposed
Khariaga-Indiga Pipeline (Northern Route)’’.
The following table sets forth the Group’s actual and budgeted capital expenditure cash flows for the
ESPO Pipeline Project and existing infrastructure for the years ended 31 December 2006, 2007 and
2008 1 :
Year ended 31 December
2006
(actual)
2007
(budgeted)
2008
(budgeted)
Total
2006-2008
RUR millions
Capital investments for the ESPO Pipeline
Project ...................................................... 87,728 147,086 68,469 303,283
Capital improvements................................... 77,042 58,944 44,877 180,863
Note:
(1) Expressed on a VAT-inclusive basis.
Expected Impact on Tariff
In accordance with its tariff policy, the Group expects to recover interest on indebtedness incurred to
finance the above capital expenditures through increases to the dispatch element of the basic tariff,
and to repay principal through increases to the pumping element of the basic tariff for users of the
new pipelines. As stated in ‘‘—Key Factors Affecting the Group’s Results of Operations and
Financial Condition—Tariffs’’, such increases would need to be approved by the Russian
Government.
Market Risks
In the ordinary course of its business, the Group is exposed to a variety of market risks that are
typical for the industry and sectors in which the Group operates. The principal market risk that
affects the Group’s financial position, results of operations and prospects relates to counterparties.
The term ‘‘counterparty risk’’ refers to the risk that the counterparty to the transaction will not be
able to perform its obligation to pay for services that are sold. The Group attempts to reduce
counterparty risk requiring compulsory prepayments for all customers.
The Group currently does not use derivative instruments. Following the Loans, Transneft will have
material U.S. dollar borrowings. This liability gives rise to a translational foreign currency exchange
rate exposure on conversion into Russian rouble amounts. For a description of the foreign currency
exchange rate risks that the Group may face, see ‘‘Risk Factors – Fluctuations in the foreign
currency exchange rates of the Russian rouble and the U.S. dollar, and reporting and measuring
Transneft’s financial performance in the Russian rouble, may cause Transneft to suffer losses’’ and
‘‘Risk Factors – Transneft’s strategy, business and operations are heavily dependent on the continued
support of the Russian Government, both through the maintenance of share ownership and through
the continuation of the currently favourable regulatory regime’’.
50

New Accounting Developments
For a summary of new accounting developments as at 31 December 2006, see Note 4 to the audited
consolidated annual financial statements as at and for the year ended 31 December 2006.
51

SUMMARY OF CERTAIN DIFFERENCES BETWEEN IFRS AND U.S. GAAP
The financial information for Transneft included in this Prospectus is prepared and presented in
accordance with IFRS. Certain differences exist between IFRS and U.S. GAAP, which might be
material to the financial information herein. The matters described below summarise certain
differences between IFRS and U.S. GAAP that may be material. Transneft is responsible for
preparing the summary below. Transneft has not prepared a complete reconciliation of its
consolidated financial statements and related footnote disclosures between IFRS and U.S. GAAP and
has not quantified such differences. Accordingly, no assurance is provided that the following summary
of differences between IFRS and U.S. GAAP is complete. In making an investment decision,
investors must rely upon their own examination of Transneft, the terms of the offering and the
financial information contained in the Prospectus. Potential investors should consult their own
professional advisers for an understanding of the differences between IFRS and U.S. GAAP and how
those differences might affect the financial information herein.
IFRS
U.S. GAAP
Accounting framework
Historical cost is the main accounting convention.
However, IFRS permits the revaluation of
intangible assets, property, plant and equipment
(PPE) and investment property. IFRS also requires
certain categories of financial assets to be reported
at fair value.
No revaluations are permitted except for certain
types of financial instruments.
Depreciation of property, plant and equipment
The depreciable amount of an item of property,
plant and equipment must be allocated on a
systematic basis over its useful life, reflecting the
pattern in which the entity consumes the asset’s
benefits. Any changes in the depreciation method
used for an asset are treated as change in accounting
estimate reflected in the depreciation charge for the
current and prospective periods. The depreciation
methods, residual values and useful lives are
reviewed at least at each balance sheet date.
Similar to IFRS, FAS 154 requires that a change in
the depreciation method be accounted for as a
change in accounting estimate affected by a change
in accounting principle. Periodic reviews of
depreciation methods, residual values and useful
lives are not required.
Impairment of assets
An entity should assess at each reporting date
whether there are any indications that an asset may
be impaired. The asset is tested for impairment if
there is any such indication. An impairment loss is
recognised in the income statement when an asset’s
carrying amount exceeds its recoverable amount
(see below).
The impairment loss is the difference between the
asset’s carrying amount and its recoverable amount.
The recoverable amount is the higher of the asset’s
fair value less costs to sell and its value in use. Value
in use is the future cash flows to be derived from the
particular asset, discounted to present value using a
pre-tax market-determined rate that reflects the
current assessment of the time value of money and
the risks specific to the asset for which the future
cash flows estimates have not been adjusted.
A long-lived asset should be tested for recoverability
whenever events or changes in circumstances
indicate that the asset’s carrying value is not
recoverable. An impairment loss shall be recognised
only if the carrying value of an asset is not
recoverable and exceeds its fair value. The
recoverability of the carrying amount of a long-lived
asset is determined by reference to the sum of
undiscounted cash flows expected to result from the
use and eventual disposition of an asset.
The impairment loss is measured as the excess of the
carrying amount over the asset’s fair value, being
determined as either market value (if an active
market for the asset or similar assets exists), or the
sum of discounted future cash flows, or with
application of other valuation techniques, using
market assumptions.
52

An impairment loss recognised for an asset (other
than goodwill) should be reversed if there has been
a change in the estimates used to determine the
asset’s recoverable amount since the last
impairment loss was recognised, in which case, the
carrying amount of the asset should be increased to
its recoverable amount.
Impairment losses cannot be reversed for assets to
be held and used, as the impairment loss results in a
new cost basis for the asset. For assets to be
disposed of, a loss shall be recognised for any initial
or subsequent write-down to fair value less cost to
sell. A gain shall be recognised for any subsequent
increase in fair value less cost to sell, but not in
excess of the cumulative loss previously recognised
(for a write-down to fair value less cost to sell).
Statement of recognised income and expense (SoRIE)/Other comprehensive income and statement of
accumulated other comprehensive income
Entities that present a statement of recognised
income and expense (SoRIE) are prohibited from
presenting a statement of changes in shareholders’
equity as a primary statement; supplemental equity
information is provided in a note. Total recognised
income and expense is separately highlighted in the
statement of changes in shareholders’ equity if a
SoRIE is not presented as a primary statement.
Entities that choose to recognise actuarial gains and
losses from post-employment benefit plans in equity
in the period in which they occur are required to
present a SoRIE.
Statement of changes in shareholders’ equity is
presented as a primary statement unless a SoRIE is
presented as a primary statement. Supplemental
equity information is presented in the notes when a
SoRIE is presented. It should show capital
transactions with owners, the movement in
accumulated profit and a reconciliation of all other
components of equity. Certain items are permitted
to be disclosed in the notes rather than in the
primary statement.
The total comprehensive income and accumulated
other comprehensive income are disclosed,
presented either as a separate primary statement or
combined with the income statement or with the
statement of changes in shareholders’ equity.
Similar to IFRS except statement is presented as a
primary statement.
Definition of a subsidiary
Focuses on the concept of the power to control in
determining whether a parent/subsidiary
relationship exists. Control is the parent’s ability to
govern the financial and operating policies of a
subsidiary to obtain benefits. Control is presumed
to exist when a parent owns, directly or indirectly
through subsidiaries, more than one half of an
entity’s voting power. Control also exists when
parent owns half or less of the voting power but has
legal or contractual rights to control the majority of
the entity’s voting power or board of directors. A
parent could have control over an entity in
circumstances where it holds less than 50 per cent.
of the voting rights of an entity and no legal or
contractual rights by which to control the majority
of the entity’s voting power or board of directors
(de facto control). Entities acquired (disposed of)
are included in (excluded from) consolidation from
the date on which control passes. Currently
exercisable potential voting rights should also be
A bipolar consolidation model is used, which
distinguishes between a variable interest model and
a voting interest model.
Control may be direct or indirect and may exist with
a lesser percentage of ownership (voting interest
model). ‘‘Effective control’’ which is a similar
notion to de facto control under IFRS, is very rarely
if ever employed in practice.
53

considered to determine whether control exists.
Special purpose entities that an entity controls are
consolidated.
Inventories
Inventories are carried at the lower of cost or net
realisable value (selling price less all further costs to
bring the inventories to completion and necessary
costs to make the sale). The cost of inventories
(other than items that are not ordinarily
interchangeable and goods or services produced and
segregated for specific projects) shall be assigned by
using the first-in, first-out (FIFO) or weighted
average cost formula. LIFO is prohibited. Reversal
(limited to the amount of the original write-down) is
required for a subsequent increase in value of
inventory previously written down.
Broadly consistent with IFRS, in that the lower of
cost and market value is used to value inventories.
Market value is defined as being current
replacement cost subject to an upper limit of net
realisable value (i.e. estimated selling price in the
ordinary course of business less reasonably
predictable costs of completion and disposal) and a
lower limit of net realisable value less a normal
profit margin. Reversal of a write-down is
prohibited, as a write-down creates a new cost basis.
Use of LIFO is permitted.
Taxation
Current and deferred taxes are measured based on
tax laws and rates that have been enacted or
‘‘substantively enacted’’ by the balance sheet date.
Under IFRS, deferred tax is recognised on
undistributed profit of subsidiaries except when the
parent is able to control the distribution of profit
and it is probable that the temporary difference will
not reverse in the foreseeable future.
Under IFRS, deferred tax is recognised on
undistributed profit of joint ventures except when
the venturer can control the sharing of profits and it
is probable that the temporary difference will not
reverse in the foreseeable future.
Under IFRS, deferred tax is recognized on
undistributed profit of associates except when the
investor can control the sharing of profits and it is
probable that the temporary difference will not
reverse in the foreseeable future.
Current and deferred taxes are measured using
enacted tax laws and rates. Use of ‘‘substantively
enacted’’ rates is not permitted.
No deferred taxes are recognised on undistributed
profits of foreign subsidiaries that are expected to be
permanently reinvested.
No deferred taxes are recognised on undistributed
profits of foreign corporate joint ventures that are
expected to be permanently reinvested.
Deferred tax is recognised on temporary differences
relating to investments in associates (whether
domestic or foreign).
Deferred tax assets
A deferred tax asset is recognised if it is probable
(more likely than not) that sufficient taxable profit
will be available against which the temporary
difference can be utilised.
A deferred tax asset is recognised in full but is then
reduced by a valuation allowance if it is more likely
than not that some or all of the deferred tax asset
will not be realised.
Restructured liabilities
A substantial modification of the terms of an existing
financial liability or a part of it shall be accounted for
as an extinguishment of the original financial liability
and the recognition of a new financial liability. The
difference between the carrying amount of a liability
(or a portion thereof) extinguished or transferred
and the amount paid for it should be recognised in
net profit or loss for the period.
Similar to IFRS but U.S. GAAP is more restrictive
than IFRS concerning what represents a significant
modification of terms.
54

Related parties
If there have been transactions between related
parties, the nature and extent of the transactions
and the nature of the relationship are disclosed,
together with the amounts involved. There is no
specific requirement to disclose the name of the
related party (other than the entity’s parent and, if
different, the ultimate controlling party). There is a
requirement to disclose the amounts involved in a
transaction, the amount, terms and nature of the
outstanding balances and any doubtful amounts
related to those outstanding balances for each
major category of related parties.
The compensation of key management personnel is
disclosed in total and by category of compensation.
Similar to IFRS, except that disclosure of
compensation of key management personnel is not
required.
55

BUSINESS
Overview
The Group owns and operates what Transneft believes to be the largest crude oil pipeline system in
the world, based on its own estimates and data published by major international crude oil
transportation companies, totalling 47,865.3 km as at 1 April 2007. In 2006 the Group was
responsible for the transportation of 458.5 million tons of crude oil from the main oil producing
regions of Russia and certain neighbouring countries to refineries in Russia, export sea terminals and
the oil pipeline networks of neighbouring countries, as compared to 452.2 million metric tons during
2005. For each of the last three years, the volume of crude oil transported by the Group represented
more than 90 per cent. of the volume of crude oil produced in Russia and approximately 80 per cent.
of the volume of all Russian crude oil exports, in each case as estimated by Transneft based on data
published by the Central Dispatch Unit of the Ministry of Industry and Energy and by the Agency
of Petroleum Information.
The Group’s total sales for 2006 were RUR 202,427 million (U.S.$7,688 million), as compared to
RUR 179,697 million for 2005 and RUR 150,441 million for 2004. The Group had EBITDA (as
defined under ‘‘Summary Financial and Operating Data’’) of RUR 104,620 million (U.S.$3,973
million) for 2006 and RUR 94,057 million for 2005 and has maintained an EBITDA margin (as
defined under ‘‘Summary Financial and Operating Data’’) of over 50 per cent. for each of the three
years ended 31 December 2006, 2005 and 2004. The Group’s total debt as at 31 December 2006 was
RUR 70,881 million (U.S.$2,692 million), as compared to RUR 17,939 million as at 31 December
2005.
As a monopoly operating in the second largest crude oil producing country in the world in 2005,
according to the BP Statistical Review of World Energy, June 2006, Transneft believes that it does
not have any immediate peers or competitors within Russia or the CIS. International companies
comparable to Transneft include Enbridge Energy LP, Energy Transfer Partners LP, Oneok LP,
TransCanada Pipeline Ltd, Kinder Morgan, Inc. and Enterprise Products Partners LP, each operating
internationally including, in particular, in Canada and the United States.
The Russian Government has owned, since Transneft’s incorporation in 1993, 100 per cent. of
Transneft’s ordinary voting shares, representing 75 per cent. of Transneft’s total issued share capital
(see ‘‘Share Capital and Dividends’’). The remaining 25 per cent. was issued in non-voting preferred
share form and is held by various Russian and international investors including former and current
Group employees. As and when the proposed merger with Transnefteprodukt is completed and the
contemplated share issuance made, the percentage of Russian Government ownership of Transneft’s
total issued share capital is, by order of a Presidential Decree, to be not less than 75 per cent. plus
one Share, and may increase, depending on the exact structure of the issuance (see ‘‘Share Capital
and Dividends’’). All of the members of the Board of Directors of Transneft were appointed by the
Russian Government as shareholder, and eight of the nine members are also officials in the Russian
Government or governmental agencies.
In addition, the Russian Government exercises further substantial influence over Transneft through its
regulatory and legislative powers. As Transneft is a ‘‘natural monopoly’’ in the transportation of
crude oil by pipeline under the Natural Monopoly Law, state authorities regulate the tariffs that
Transneft charges for the transportation of crude oil through its crude oil trunk pipelines and other
matters affecting Transneft’s business. Transneft is also on the Russian Government’s list of strategic
entities, which, inter alia, sets out a special bankruptcy and insolvency regime applicable to Transneft
and provides for a special procedure with respect to the sale or dilution of any of the voting shares
in Transneft.
Investment Highlights
Transneft believes that an investment in the Notes benefits from the following key factors:
* Transneft has a crude oil pipeline transportation monopoly in the world’s second largest crude oil
producing and exporting country
Transneft estimates that, in 2005, the oil industry contributed approximately one quarter of
Russia’s GDP, one quarter of the Russian Government’s income and half of Russia’s export
revenues, based on publicly available data. In many regions of Russia, Transneft’s pipeline
network is the only method for Russian oil producers to transport the majority of their crude
oil, as there is no infrastructure, or inadequate infrastructure, in place to support alternative
56

means of transport for such large volumes of oil and the costs to a potential alternative
operator of constructing such an infrastructure would be substantial. In addition, where
alternative means of transporting crude oil do exist, transportation services offered by Transneft
have historically been more cost-effective than such alternatives. Transneft believes that these
factors have made and will continue for the foreseeable future to make Transneft an integral
part of one of Russia’s most important industrial sectors.
* Transneft continues to maintain a strong relationship with the Russian Government
The Russian Government has owned Transneft since its establishment in 1993, continues to own
100 per cent. of the voting shares of Transneft and appoints its senior management. As a result
of this ownership and managerial control, all aspects of Transneft’s business and operations,
including Transneft’s budget, capital expenditure programme and borrowing programme, are
controlled either by the Russian Government as shareholder or by members of the Russian
Government in their capacities as directors of Transneft. Transneft is also on the Russian
Government’s list of strategic entities, which, inter alia, sets out a special bankruptcy and
insolvency regime applicable to Transneft and provides for a special procedure with respect to
the sale or dilution of any of the voting shares in Transneft.
* A tariff environment and regulatory system that Transneft believes offers financial stability and stable
and predictable cashflow
Pursuant to current law and regulation, the Federal Tariff Service (‘‘FTS’’) sets the Group’s
tariffs for the transportation of oil through its pipelines. The proceeds of such tariffs are
designed to cover, on the basis of Russian Accounting Standards (‘‘RAS’’), the operating
expenses (including interest expense) that the Group estimates it will incur during the relevant
period in connection with the provision of crude oil transportation services and provide an
amount of net income. The amount of required net income is determined on the basis of the
amount of capital expenditures that the Group estimates it will be required to incur for the
repair, maintenance and reconstruction of its current pipelines and profit tax, excluding
depreciation. Pursuant to applicable regulation, Transneft’s expansion projects for the
construction of new pipelines should be financed by borrowings. Transneft is then permitted to
apply for a tariff increase when such new construction is finished, to cover the amount of
principal to be repaid. The regulatory system also allows Transneft to revise the tariff, which is
set annually, as and when Transneft identifies a requirement for revenues to cover expenses that
were not factored into the regular annual tariff calculation. Based on existing practice in the
application of regulations and its record of agreeing tariffs with the FTS, Transneft expects to
be able to apply for and receive further tariff increases when required to meet projected
operational and capital costs. See ‘‘Management’s Discussion and Analysis of Results of
Operations and Financial Condition—Key Factors Affecting the Group’s Results of Operations
and Financial Condition—Tariffs’’.
* An experienced management team with an established track record of conservative financial management
Since 2000, when the current management of Transneft was appointed by the Russian
Government, the pipeline network has been repaired and upgraded at a cost of approximately
U.S.$1 billion per annum during 2000 to 2003, rising to approximately U.S.$1.5 billion in each
of the last three years (see ‘‘Business—Maintenance, Diagnostics and Upgrade’’). As a result,
Transneft’s throughput has increased and its rate of accidents for 2006 was significantly lower
than its peers in Europe and the United States (see ‘‘Business—Diagnostics, Maintenance and
Upgrade—Accidents, Theft and Other Losses of Oil’’). Due to the tariff system, which, for
example, helps finance operational expenditures and many capital expenditures, Transneft’s
management has been able to maintain Transneft’s debt levels at relatively low levels and its
profit margins at relatively high levels (see ‘‘Summary Financial Information and Operating
Data’’), notwithstanding this significant expenditure.
Strategy
Transneft’s strategy is to implement the Russian Government’s policy for the development of the
Russian crude oil industry generally and crude oil transportation in particular (as set out in the
Russian Industry and Energy Ministry’s ‘‘General Plan for the Development of Oil Pipeline Transport
for the period to 2020’’ (the ‘‘Plan’’)) and to serve the needs of oil producers by providing high
quality, reliable transportation services in a cost-efficient manner. Strategic initiatives such as
57

expansion projects are proposed by the Russian Government and the detail of the plan is formulated
and implemented by Transneft, with the approval at each key stage of project development by the
Russian Government, initially as sole voting shareholder and through its representation on the Board
of Directors and subsequently through its role as Transneft’s regulator.
The preliminary findings of the Plan, announced in October 2006, were that crude oil production
patterns are expected to change by 2020, principally due to new fields being brought into operation in
the Russian Far East, Eastern Siberia and the Timano-Pechorsky region. In addition, oil production
in Russia has risen from 324 million metric tons in 2000 to 470 million metric tons in 2005,
according to data published by the Ministry of Finance of Russia, and is forecast to rise to 445–490
million metric tons by 2010 and to 450-520 million metric tons by 2020, according to the Energy
Strategy.
Accordingly, the Group’s key strategic objective is to implement the Plan by upgrading the pipeline,
increasing the pipeline’s overall capacity and developing new export routes to support projected
increases in Russian crude oil production, in particular in the Russian Far East, Eastern Siberia and
the Timano-Pechorsky region. Existing road and rail infrastructure and climatic conditions are poor
in these areas and the Group’s pipelines are often the only means of transporting significant amounts
of crude oil to refineries and consumers. Transneft is engaged in a number of projects designed to
meet this growing demand, in particular the ESPO Pipeline Project, as defined and further described
in ‘‘—Investment Projects and Expansion’’.
Corporate Structure and History
Corporate Structure
Historically, Transneft was a holding company which operated its business through a number of
direct and indirect wholly- or majority-owned subsidiaries. Each subsidiary was responsible for its
area of operations and exercised management control without central supervision.
However, following the appointment of the current President in September 1999 and the subsequent
recruitment of a new management team during 2000, Transneft has increasingly centralised its
operations, and Transneft’s head office in Moscow now exercises full managerial and financial control
over the Group’s operations. Functions and responsibilities of the head office team include:
* strategy, planning and budgeting;
* external financing, financial reporting and allocation of financial resources;
* supervision of principal areas at operations, such as construction, maintenance and renewals,
investment projects, transportation and equipment procurement. In particular, Transneft’s
management centre, based at its head office, continuously monitors, controls and manages the
crude oil transportation system throughout Russia in real time. Transneft’s head office also
processes operational information, including data on transported crude oil volumes;
* the management of all customer relations activities, including the management of client contracts
and the receipt of payments from clients; and
* handling payments to suppliers and sub-contractors and administration.
Transneft (the borrower of the Loans described in this Prospectus) receives substantially all of the
revenues generated through the Group’s activities.
Transneft’s subsidiaries include 12 crude oil transportation subsidiaries, responsible for transporting
and delivering crude oil at the direction of Transneft, which each receive a fee from Transneft for
such services. Transneft and each subsidiary hold legal title to the pipelines that they operate.
Transneft also has subsidiaries responsible for a number of other activities, including technical
supervision of Transneft’s pipeline systems, research and development, data processing, insurance and
procurement.
The Russian Government has approved plans to merge Transneft with Transnefteprodukt, operator of
a pipeline system in Russia for refined oil products, as further described in ‘‘Business—Proposed
Merger with Transnefteprodukt’’. When such merger is completed, depending on the exact structure
adopted, it is expected that Transnefteprodukt will become a subsidiary of Transneft.
58

Transneft currently has the following key subsidiaries:
Subsidiary companies
Main pipeline subsidiaries
100%
100%
100%
100%
64%
100%
100%
75.5%
100%
100%
100%
100%
Source: Transneft
Upper Volga Main
Pipelines
Nizhny Novgorod
Druzhba Main Pipelines
Bryansk
Volga Main Pipelines
Samara
Northern Main Pipelines
Ukhta
North Western Main
Pipelines
Kazan
Sibnefteprovod
Tyumen
Trans-Siberian Main
Pipelines
Omsk
Ural-Siberian Main
Pipelines
Ufa
Central Siberian Main
Pipelines
Tomsk
Black Sea Main Pipelines
Novorossiysk
Baltic Main Pipelines
Saint Petersburg
East Siberian Main
Pipelines
Bratsk
100%
100%
100%
100%
100%
100%
99.5%
100%
100%
100%
100%
100%
Support/Services
Subsidiaries
Svyaztransneft
Moscow
Volzhysky Podvodnik
Nizhy Novgorod
Centre for Technical
Diagnostics
Moscow Area
CUP Stroyneft
Moscow
Giprotruboprovod
Moscow
Transneft Finance
Moscow
“Transneft” Insurance
Company
Moscow
Centre for Metrological
Support
Moscow
Primorsk Specialised
Oil Loading Sea Port
St. Petersburg area
Transpress
Moscow
“Transneft” Pension
Fund
Moscow
CUP VSTO
Angarsk
Communication and
network support
Diagnostics/ repair
of underwater
pipelines
Diagnostics of main
pipelines
Main pipeline
construction
management
Feasibility studies
and research
Financial &
Accounting Services
Insurance
services
Metrology
support
Freight loading/
unloading, oil
transport
Publishing
Supplementary
pension plans
ESPO
construction
management
The 36 per cent. minority shareholding in North Western Main Pipelines is held by the Republic of
Tatarstan. The 24.5 per cent. minority shareholding in Ural-Siberian Main Pipelines is held by the
Republic of Bashkortostan. The 0.5 per cent. minority shareholding in Transneft Insurance Company
is held by CJSC ‘‘National Reinsurance Company’’, which is not a member of the Group.
History
The first oil pipeline in Russia (including the former USSR) was built in the Baku region in 1878.
After the Second World War, intensive growth of oil production in the Volga and Urals regions
demanded the swift development of oil transportation infrastructure. New oil pipelines were built,
including the Tujmazy—Ufa (Naryshevo)—Ufa pipeline connecting the Urals region with Siberia,
which opened on 3 September 1947.
Between 1946 and 1950, the USSR oil pipeline system was launched to connect the key oil
production and refining stations with the main oil consumption areas. By 1950, the total length of the
oil pipelines in the USSR was approximately 5,400 km and, by late 1955, was over 10,000 km. The
Central Department of the USSR People’s Commissariat for Internal Affairs, later reorganised into
Glavneftegazstroj (the Central Committee for Oil and Gas Construction), was responsible for the
construction and management of the system. Construction of the 3,662 km long Trans-Siberian
Tujmazy—Irkutsk oil pipeline began in 1957.
Development of the West Siberian oil fields commenced in the early 1960s. In 1965, approximately
1 million metric tons of oil was tapped in that area but there were difficulties in developing oil
transportation routes. By the end of 1970, three Siberian pipelines transported oil to the basic routes
and refineries. The total length of pipelines in the USSR reached 38,500 km. Between 1971 and 1975,
oil pipeline construction intensified, and approximately 19,000 km of pipelines were built. In 1973,
West Siberia was the leading region in the whole of the USSR in terms of volumes of oil production.
59

By 1987, 94,000 km of oil and products trunk pipelines had been built and commissioned in the
USSR. They were managed by the USSR Ministry of Oil Main Production Department for Oil
Transportation and Supplies (Glavtransneft, the successor to Glavneftegazstroj, which was founded in
1970). Glavtransneft included 16 departments, which by 1990 serviced over 70,000 km of oil trunk
pipelines. In addition, Glavtransneft included the Start-Adjustment Department, the Directorate for
Construction of Oil Pipelines and various other departments. Glavtransneft was also responsible for
oil exports.
By 1990, economic and political changes had led to a halt in the construction of new trunk pipelines.
In late 1991, the USSR ceased to exist and Glavtransneft’s assets, including oil pipelines, were
distributed among 15 new states. On 1 July 1992, the assets of the various state enterprises and
production associates involved in oil transportation in Russia were valued and, in accordance with
major privatisation legislation, these state enterprises and production associations were converted into
joint-stock companies. Ordinary shares of these joint-stock companies were issued with a total share
capital of RUR 6,219,502 and by 1997 ownership of these shares was passed to Transneft following
its incorporation in 1993.
As a result, Transneft took responsibility for operation of the remaining Russian network. In 1993,
Transneft was operating 49,600 km of oil trunk pipelines, 404 pumping stations and 934 storage
tanks, and the system contained approximately 26 million metric tons of ‘‘linefill’’ or ‘‘technical oil’’.
The operation of the oil pipeline system was implemented by 11 joint-stock companies, all of which
were subsidiaries of Transneft.
Proposed Merger with Transnefteprodukt
Overview of the proposed merger
On 13 April 2007, President Putin signed Presidential Decree No. 473, and on 10 May 2007 the
Prime Minister of Russia signed Governmental Order of the Russian Federation No. 585-P, each
approving a merger between Transneft and OJSC Transnefteprodukt (‘‘Transnefteprodukt’’), which
owns and operates a pipeline network for the transportation of refined oil products within Russia.
100 per cent. of the ordinary shares of Transnefteprodukt are beneficially owned by the Russian
Government. The announced purpose of the merger in these decrees was to facilitate the formation of
a uniform system within Russia for the transportation of oil and oil products.
According to the terms of these decrees, such shares in Transnefteprodukt will be contributed by the
Russian Government to the shareholders’ equity of Transneft as payment for the issue by Transneft
of additional ordinary shares in Transneft as part of a capital increase. Following such issuance,
Transnefteprodukt is expected to become a 100 per cent. owned subsidiary of Transneft.
The total share of the Russian Government in the share capital of Transneft will not fall below 75
per cent. plus one share as a result of these transactions, and the Russian Government will remain
the sole holder of ordinary voting shares in Transneft. While these transactions will dilute the
percentage ownership level of existing preferred shareholders of Transneft, such holders will remain
entitled to dividends as described in ‘‘Share Capital and Dividends’’.
The merger is expected to be completed by October 2007.
Overview of Transnefteprodukt
Transnefteprodukt was founded by Russian Governmental Order No. 871 on 30 August 1993, and in
accordance with Presidential Decree No. 1403 passed on 17 November 1992, in the form of an open
joint-stock company. The Russian Government is currently the beneficial owner of 100 per cent. of
the share capital of Transnefteprodukt.
Transnefteprodukt is one of the world’s largest, and the only Russian, transporter of light oil
products (including diesel fuel, gasoline and kerosene). Transnefteprodukt’s pipelines transport such
products from refineries in Russia and Belarus to various regions of Russia, Ukraine, Belarus, Latvia
and Kazakhstan, and also to export markets outside the former Soviet Union. Transnefteprodukt and
its consolidated subsidiaries (the ‘‘Transnefteprodukt Group’’) are also engaged in the short-term
storage of oil products in storage tanks and provide various other services related to the transport of
oil products by rail and truck.
Transnefteprodukt co-ordinates and manages a network of main oil pipelines through eight operating
subsidiaries. In addition, the Transnefteprodukt Group consists of seven other specialised subsidiaries,
which perform a variety of management and administrative support functions. Transnefteprodukt also
centralises control of cash flows within the Transnefteprodukt Group.
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According to Transnefteprodukt’s website (the contents of which do not form part of this Prospectus)
the overall length of Transnefteprodukt’s system of oil pipelines is approximately 19,000 kilometres
(15,000 kilometres of main pipeline and more than 4,000 kilometres of distributive pipeline).
In addition to the pipelines described above, the Transnefteprodukt Group operates approximately
100 pumping stations and employs approximately 16,000 people. In 2004, the Transnefteprodukt
Group transported 27.3 million metric tons of refined oil products, of which 17.5 million metric tons
were exported and 9.8 million metric tons were delivered within the Russian Federation. The average
utilisation rate of the Transnefteprodukt Group’s pipelines during 2004 was 54.7 per cent.
According to the Transnefteprodukt Group’s audited IFRS consolidated financial statements for the
year ended 31 December 2005, Transnefteprodukt’s sales for the year ended 31 December 2005 were
RUR 13,911 million (as compared to RUR 12,246 million for the year ended 31 December 2004)
amounting to approximately to 7.7 per cent. of the consolidated sales of Transneft for the year ended
31 December 2005. The Transnefteprodukt Group’s net profit for the year ended 31 December 2005
was RUR 4,454 million (in 2004, RUR 3,466 million).
Tariffs
The tariffs that Transnefteprodukt charges for its transport services are regulated by the Russian
Government. Transport tariffs are established for each route for the transportation of oil products
and are regulated by the FTS, which also sets tariffs for the storage of oil products.
According to current tariff regulation in the Russian Federation, the tariffs applicable to
Transnefteprodukt are:
— tariffs for pumping oil products, established in Russian roubles for one metric ton of oil
products for each transportation route, up to a maximum of 70 per cent. of the tariffs for
railway transportation on similar routes;
— tariffs for dispatch services; and
— tariffs for filling services.
Transnefteprodukt’s principal customers are large Russian oil companies such as LUKOIL, TNK-BP,
Tatneft, MNK, Surgutneftegaz, ANK Bashneft and Bashneftekhim.
Strategy
As a result of this merger, Transneft expects to be able to offer services not only for the
transportation of crude oil to refineries, but also to transport oil products from refineries to
consumers in the Russian Federation and abroad. Transneft believes that, in the long-term, these
prospects for increasing business and economies of scale and other synergies created by the merger,
will have a positive effect on the business of Transneft.
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Transneft’s Proposed Role in the Caspian Pipeline Consortium (‘‘CPC’’)
The CPC owns and operates a pipeline system connecting the oil fields of Western Kazakhstan with a
sea terminal in Russia near the port of Novorossiysk, totalling 1,510 kilometres in length and
responsible for the transportation of 31.1 million metric tons of crude oil in 2006. The CPC currently
consists of two companies: the Caspian Pipeline Consortium Russia (‘‘CPC-R’’) registered in Russia
and the Caspian Pipeline Consortium Kazakhstan (‘‘CPC-K’’), registered in Kazakhstan. CPC-R and
CPC-K were established according to various agreements between the governments of Russia,
Kazakhstan, Oman and certain oil companies. Three governments and eight oil companies own shares
in both companies. The current shareholdings in the CPC are:
Ownership
Shareholder
in per cent.
Russia....................................................................................................................................... 24
Kazakhstan .............................................................................................................................. 19
Oman ....................................................................................................................................... 7
Chevron Caspian Pipeline Consortium Company................................................................... 15
LUKARCO B.V. ..................................................................................................................... 12.5
Rosneft-Shell Caspian Ventures Limited................................................................................. 7.5
Mobil Caspian Pipeline Company........................................................................................... 7.5
BG Overseas Holding Ltd ....................................................................................................... 2
ENI International .................................................................................................................... 2
Kazakhstan Pipeline Ventures LLC ........................................................................................ 1.75
Oryx Caspian Pipeline LLC..................................................................................................... 1.75
In April 2007, the President of the Russian Federation signed Presidential Decree No. 565 authorising
the transfer of a 24 per cent. stake in each of CPC-R and CPC-K held by the Russian Government
to Transneft into entrusted management, a Russian law concept described below. It is currently
contemplated that Transneft, as entrusted manager, will enter into an entrusted management
agreement with the Federal Agency for the Management of Federal Property (‘‘Rosimushchestvo’’).
The terms of the entrusted management agreement are currently being considered by the Russian
Government.
According to Russian law, an entrusted manager fulfils its role in relation to securities by exercising
rights in relation to such securities in the interest of the owner of the shares, in this case
Rosimushchestvo. The entrusted manager generally exercises the following shareholders’ rights: to
receive dividends, to participate in shareholders meetings, and to obtain a part of the property
remaining after its liquidation. According to Russian law, shares transferred into entrusted
management do not legally form part of the beneficial assets and property of the entrusted manager
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and are reflected in a separate balance sheet. In connection with the signing of the entrusted
management agreement, the financial results and financial position of CPC are not expected to be
consolidated with those of Transneft in the financial statements of Transneft under IFRS and Russian
accounting standards.
Principal Business of the Group
Overview
The Group’s principal business activity is the transportation of crude oil to refineries in Russia and
through export terminals and connections with the pipelines of neighbouring countries outside Russia.
The Group has, over the last six years, spun-off its non-core businesses in order to focus on this
activity.
Description of Transneft’s Pipeline System
As at 1 April 2007, the Group collected, transported, stored and delivered a substantial majority of
the crude oil produced in Russia via its network of 47,865.3 km of pipelines; 362 pumping stations;
851 storage tanks with a total capacity of approximately 14,747,730 cubic metres; and facilities
located at three oil loading export sea terminals in Primorsk (owned by the Group, located on the
Baltic Sea), as well as in Novorossiysk and Tuapse (not owned or operated by the Group, located on
the Black Sea) and Transneft controls and manages the transportation of crude oil across the whole
pipeline network from a central management centre located in Moscow. Systems in place in the
management centre help enable employees to monitor oil flows and disruptions and the loading of
tankers at sea terminals in real time.
The Group transports crude oil through a complex pipeline network inside Russia to Russian
destinations (including refineries and chemical plants) and through three principal pipeline export
routes: the BPS, the Druzhba pipeline and the pipelines to the Black Sea terminals. Exports to China
by Russian oil producers are made at present through a combination of delivery channels: Transneft’s
pipeline to Irkutsk (at the end of the Trans-Siberian pipeline) and then by railway cars not owned or
operated by Transneft. Save for the linefill crude oil discussed below, the Group does not obtain legal
title over the crude oil it is transporting in its pipeline system on behalf of its customers at any time.
Transneft’s pipeline network is highly integrated to help ensure reliable crude oil deliveries to its
customers and export channels. Transneft can in many cases meet its contractual crude oil supply
commitments even if an individual stretch of pipeline fails because:
* it has storage tanks along each route, and in particular at key destinations, from which it can
release crude oil to the contracted destination;
* it can, subject to available capacity in other parts of the pipeline network, reroute oil supplies
around the blockage using other branches in the network;
* it can, subject to available capacity, use pipelines that run in parallel with the affected pipelines;
and
* although rarely done in practice, it is able to temporarily increase the throughput in remaining
pipelines by increasing pumping pressure or, through the use of certain harmless additives,
reducing the viscosity of the crude oil in the relevant pipelines. Reducing viscosity is the
preferable method to achieve this temporary increase as it offers less risk of damage to the
pipeline, whereas increasing pressure can cause the pipeline to fracture or burst.
Transneft’s maintenance, diagnostics and upgrade programme (see ‘‘—Diagnostics, Maintenance and
Upgrade’’) has significantly reduced the number of such failures per year.
In addition, Transneft owns approximately 27 million metric tons of crude oil currently in its pipeline
system, substantially all of which was acquired by Transneft from the newly-formed joint-stock
companies in 1993 at a cost of less than RUR 1 per metric ton of crude oil. This technical or linefill
crude oil fills substantially all of the pipeline system at any one time and generally allows Transneft
to deliver crude oil to any contracted destination within one day of delivery of crude oil to the
pipeline at any point by the relevant customer of Transneft. To do this, Transneft will exchange the
crude oil delivered to Transneft by such customer for linefill crude oil located close to the delivery
destination. Transneft is able to make this exchange as all of the oil it transports and owns as linefill
is in the form of ‘‘Urals blend’’ as discussed below. Transneft purchased a small quantity
(approximately 0.5 million metric tons) of additional linefill crude oil in connection with the
construction of the BPS in 2001, and expects to make a similar small purchase in connection with the
ESPO Pipeline Project. Generally, however, the volume of linefill crude oil remains stable even if the
63

throughput capacity of the pipeline network increases, as the requirement for additional linefill is
driven by an increase in physical capacity and not simply throughput.
As a result of the factors described above, Transneft believes that since the beginning of 2003, it has
not materially breached its contractual supply commitments, even though there have been occasional
instances of unexpected shutdowns on stretches of pipeline.
Transneft operates and services the pipeline network on a regional basis through 13 subsidiaries (the
12 crude oil pipeline subsidiaries and a subsidiary which operates the Primorsk seaport) that are
responsible for the operation and maintenance of the trunk pipelines, crude oil transit, crude oil
storage, deliveries of crude oil to destinations in Russia and for export. Transneft’s management
centre, located in Moscow, controls and manages the pipeline network and all crude oil
transportation in Russia in real time.
The pipeline network consists of multiple parallel lines of pipes of varying diameters. Narrow
diameter pipes are those with diameters of between 150 mm and 400 mm and account for 3.5 per
cent. of the total pipeline system. Medium diameter pipes are those with diameters of between 500
mm and 800 mm and account for 51 per cent. of the total pipeline system. Large diameter pipes are
those with diameters of 1,000 mm to 1,220 mm and account for the remainder of the pipeline system.
The crude oil transported through Transneft’s pipeline system and Transneft’s own linefill crude oil is
generally (save as discussed below) a blend of the crude oil produced by the various Russian oil
companies that use the pipeline. This crude oil varies in quality and composition. The standard type
of Russian crude oil blended in Transneft’s pipeline is usually referred to as ‘‘Urals blend’’. Since
Transneft does not operate a ‘‘quality bank’’ (an arrangement whereby oil companies that supply
lower quality (heavy and sour) crude oil to a pipeline system pay more for the use of pipelines than
those who supply higher quality crude oil), the customer does not receive any premium for supplying
superior quality crude oil to the system. See ‘‘Regulation’’. However, Transneft operates one
dedicated pipeline linking Rosneft’s Western Siberian fields both with the Tuapsinskiy Refinery and
with the marine export terminal at Tuapse. Crude oil transported through this pipeline is not blended
and is referred to as ‘‘Siberian Light’’ quality, which has a price premium over Urals blend.
Pursuant to the Natural Monopoly Law, the Ministry of Industry and Energy, based on information
provided by the Federal Energy Agency, allocates Transneft’s pipeline network and export sea
terminal capacity to oil producers for export deliveries on a quarterly basis.
Capacity and Utilisation
Transneft measures pipeline utilisation in percentage terms, based on the volume of oil (in millions of
metric tons) actually pumped through the network during each year compared with the maximum
volume of oil which could be pumped according to the design specification of the network. For the
purpose of calculating capacity, a year is deemed to have 350 days (the remaining 15 or 16 days are
set aside for maintenance and upgrading). Planned maintenance and upgrading during these periods is
not taken into account when calculating utilisation. Unlike the equipment used in some other
industrial businesses, the service lifespan of physical crude oil pipelines is generally longer when they
are subject to utilisation at their design capacity (as they are within Transneft’s system), as below
approximately 60 per cent. utilisation there is a danger that the pipeline will start to rust.
Transneft has increased the capacity of its pipeline network in recent years in order to allow it to
respond to increases in demand and to enable it to provide alternative transportation capacity for its
customers when maintaining or upgrading parts of the network. The table below sets out the
utilisation and capacity figures and any surplus of capacity maintained by Transneft for the four
years ended 31 December 2003, 2004, 2005 and 2006:
2003 2004 2005 2006
(millions of metric tons)
Projected throughput............................................. 429.6 456.3 487.0 497.2
Actual throughput ................................................. 414.8 447.3 452.2 458.5
Capacity utilisation (%)......................................... 97% 98% 93% 92%
Surplus capacity..................................................... 14.8 9.0 34.8 38.7
Crude Oil Transportation Subsidiaries
Transneft controls and manages the transportation of crude oil across the whole pipeline network
from a central management centre located in Moscow. Systems in place in the management centre
64

help enable employees to monitor oil flows and disruptions and the loading of tankers at sea
terminals in real time. Transneft’s crude oil transportation subsidiaries described below generally hold
legal title to the pipeline in the regions in which they are located and carry out transportation
activities at the direction of Transneft, receiving a fee from Transneft for such services.
Sibnefteprovod (Tyumen)
Sibnefteprovod owned the largest network of crude oil pipelines of any of Transneft’s subsidiaries,
totalling, as at 1 April 2007, approximately 9,300 km of crude oil pipelines, 69 pumping stations and
151 storage tanks with a total capacity of approximately 2.6 million cubic metres. It operates the
main oil pipelines of Western and North Western Siberia.
Ural-Siberian Main Pipelines (Ufa)
Ural-Siberian Main Pipelines owned, as at 1 April 2007, approximately 6,000 km of crude oil
pipelines, 46 pumping stations and 104 storage tanks with a total capacity of 1.1 million cubic metres.
It operates the crude oil pipelines of the Urals region of Russia.
North Western Main Pipelines (Kazan)
North Western Main Pipelines owned, as at 1 April 2007, approximately 6,000 km of crude oil
pipelines, 47 pumping stations and 79 storage tanks with a capacity of approximately 1.4 million
cubic metres. It operates the crude oil pipelines of North Western Russia.
Volga Main Pipelines (Samara)
Volga Main Pipelines owned, as at 1 April 2007, approximately 5,300 km of crude oil pipelines, 42
pumping stations, two bulk-oil railway loading facilities and 134 storage tanks with a total capacity
of 2.0 million cubic metres. It operates the crude oil pipelines of the Volga region.
Druzhba Main Pipelines (Bryansk)
Druzhba Main Pipelines owned, as at 1 April 2007, approximately 4,000 km of crude oil pipelines, 39
pumping stations and 52 storage tanks with a total capacity of approximately 1.6 million cubic
metres. It operates the export pipeline that connects Russia with the countries of Eastern and Western
Europe.
Trans-Siberian Main Pipelines (Omsk)
Trans-Siberian Main Pipelines owned, as at 1 April 2007, approximately 3,600 km of crude oil
pipelines, 18 pumping stations and 66 storage tanks with a capacity of approximately 1.1 million
cubic metres. It operates the crude oil pipelines of Western, Central and Eastern Siberia.
Black Sea Main Pipelines (Novorossiysk)
Black Sea Main Pipelines owned, as at 1 April 2007, approximately 3,200 km of crude oil pipelines,
29 pumping stations and 125 storage tanks with a capacity of 1.8 million cubic metres. It operates
pipelines in the south of Russia. It also operates facilities (pipelines and monitoring equipment)
terminating at Novorossiysk and Tuapse.
Baltic Main Pipelines (St Petersburg)
Baltic Main Pipelines owned, as at 1 April 2007, approximately 3,200 km of crude oil pipelines, 21
pumping stations and 34 storage tanks with a capacity of 0.6 million cubic metres. It was responsible
for the construction and expansion of the Baltic Pipeline System and it now operates the BPS (see
‘‘—Pipelines Constructed since the Incorporation of Transneft – Baltic Pipeline System’’).
Upper Volga Main Pipelines (Nizhny Novgorod)
Upper Volga Main Pipelines owned, as at 1 April 2007, approximately 2,900 km of crude oil
pipelines, 25 pumping stations and 23 storage tanks with a total capacity of approximately 0.6 million
cubic metres. It operates the crude oil pipelines which connect the oil fields of Western Siberia,
Tatarstan and Komi with Russian refineries.
Northern Main Pipelines (Ukhta)
Northern Main Pipelines owned, as at 1 April 2007, approximately 1,600 km of crude oil pipelines,
15 pumping stations and 25 storage tanks with a total capacity of 0.4 million cubic metres. It
operates the crude oil pipelines that connect oil producing regions in the north of the European part
of Russia with the centre of Russia.
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Central Siberian Main Pipelines (Tomsk)
Central Siberian Main Pipelines owned, as at 1 April 2007, approximately 1,400 km of crude oil
pipelines, five pumping stations and 23 storage tanks with a total capacity of almost 0.5 million cubic
metres. It operates the crude oil pipelines that transport oil extracted in the north of the Tyumen and
Tomsk areas. Transneft expects the pipelines operated by Central Siberian Main Pipelines to form
one of the main supply routes for the ESPO Pipeline Project.
East Siberian Main Pipelines (Bratsk)
East Siberian Main Pipelines owned, as at 1 April 2007, approximately 1,300 km of crude oil
pipelines, six pumping stations and 12 storage tanks with a capacity of approximately 0.2 million
cubic metres. It was established for the purpose of operating the ESPO Pipeline when completed.
Pipelines Constructed since the Incorporation of Transneft
Most of the pipelines operated by the Group are a legacy of the system constructed in the former
USSR prior to Transneft’s incorporation in 1993. No new pipelines were constructed between 1993
and 1999. Since 1999, a pipeline has been constructed to bypass Chechnya and ensure safe shipment
of oil from fields in Azerbaijan to Novorossiysk. The pipeline is 312 km long, uses pipes with a
diameter of 720 mm and was completed in 2000. A further pipeline was built in 2001 to bypass
Ukrainian territory, in order to increase reliability of supply and operational efficiency. This pipeline
is 261 km long and comprises pipes that have a diameter of 1,020 mm.
The most significant new part of the network built by Transneft since 1993 is the BPS.
Baltic Pipeline System
The BPS was commissioned to create a new Baltic route for crude oil export, reducing the
dependence of Russian oil companies on the pipelines and sea terminals of the Baltic States.
The first section of the BPS went into operation in December 2001 with a capacity of 12 million
metric tons per annum, two new pumping stations and a total pipeline length of 457 km. There was
a high demand for the route and the capacity of the pipeline was progressively increased to 18
million metric tons per annum in June 2003, 50 million metric tons in December 2004 and 74 million
metric tons in November 2006, while new pumping stations were built. As at November 2006, the
total length of the BPS pipeline was 1,470 km, 17 pumping stations had been renovated and seven
new pumping stations had been built. The total capital expenditure involved in constructing and
expanding the BPS was approximately RUR 67 billion (U.S.$2.5 billion).
In May 2007, pursuant to Governmental Order No. 621-r, it was resolved to commence the
development of a second Baltic pipeline (‘‘BPS II’’). See ‘‘Investment Projects and Expansion—BPS
II’’.
Tariffs and other revenues
Tariffs
During each of the three years ended 31 December 2004, 2005 and 2006 more than 90 per cent. of
the Group’s sales were generated through the tariffs charged for transporting crude oil across its
network of pipelines. The Group’s transportation activities are regulated in accordance with the
Natural Monopoly Law. The FTS regulates and sets the Group’s tariffs pursuant to the Tariff
Regulation, which specifies the basis for the calculation and application of the Group’s tariffs. See
‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition—Tariffs’’.
Other revenues
Where applicable, the Group will charge specific oil producers agency fees for monitoring the oil that
they transit across certain neighbouring countries, such as Belarus and Ukraine. These charges are not
part of the tariff system and accordingly are not regulated by the FTS. The Group also generates
revenues by selling small quantities of crude oil at market prices, as and when it receives crude oil
instead of cash in payment for transportation services.
Export and Domestic Transportation Volumes
Transneft’s pipelines link the main oil producing regions of Russia and certain neighbouring countries
to domestic refineries, export sea terminals and connection points with oil pipeline networks of
neighbouring countries.
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The following table sets forth a breakdown of crude oil transported by Transneft’s pipelines by
destination and volume for the years ended 31 December 2003, 2004, 2005 and 2006:
2003 2004 2005 2006
(millions of metric tons)
Oil refineries in Russia .......................................... 207.3 209.3 198.8 202.9
Transfer to the Caspian Pipeline Consortium (1) .. 0.0 0.6 4.0 4.0
Total export........................................................... 207.5 237.4 249.4 251.6
of which is oil transported on behalf of:
Kazakhstan ....................................................... 17.5 18.6 18.9 18.8
Azerbaijan ......................................................... 2.6 2.8 4.1 4.5
Turkmenistan .................................................... 0.1 0.0 0.0 0.0
Total oil transported............................................... 414.8 447.3 452.2 458.5
Note:
(1) The Caspian Pipeline Consortium (the ‘‘CPC’’) operates a pipeline running between Tengiz in Kazakhstan and Novorossiysk, and
is owned and operated by a consortium of three governments and eight companies. In April 2007, the President of the Russian
Federation signed Decree No. 565 authorising the transfer of the 24 per cent. stake in CPC held by the Russian Government to
Transneft in entrusted management, as described under ‘‘– Transneft’s Proposed Role in the Caspian Pipeline Consortium’’.
The Group’s pipelines and the facilities it owns and operates at sea terminals are Russia’s principal
oil export channels, handling approximately 80 per cent. of Russian crude oil exports, according to
estimates prepared by Transneft based on data published by the Central Dispatch Unit of the
Ministry of Industry and Energy and by the Agency of Petroleum Information. Some of the crude oil
transported by Transneft is produced in Azerbaijan and Kazakhstan and then delivered through
Transneft’s pipeline network pursuant to inter-governmental agreements. Most of the oil from
Azerbaijan and Kazakhstan is transported to the port of Novorossisk for export. See ‘‘Customers—
Transportation of Foreign Oil’’.
The pipeline network operated by Transneft is integrated within the European oil supply chain. Other
than to Europe, oil is exported by Russian crude oil producers to North America and to the
Asia-Pacific region, in particular to China, Japan and South Korea. Exports to the Asia-Pacific region
are expected to increase following the construction of the ESPO Pipeline Project (see ‘‘—Investment
Projects and Expansion—Eastern Siberia-Pacific Ocean Pipeline’’).
Where an oil producer requires oil to be transported through Russia and then through a transit
country, Transneft will, pursuant to its contract with such oil producer and a route instruction for
the particular delivery, transport the oil to the Russian border. For the non-Russian leg, Transneft
may agree with the oil producer to act as its agent to facilitate onward transportation of the relevant
oil. In this capacity, Transneft is responsible only for paying the local transportation provider (subject
to receipt of funds from the oil producer) and for monitoring the activities of the local transportation
provider. Transneft charges the oil producer an agency fee for this service.
The Russian Government’s recent policy has been to reduce Russia’s dependence on transit countries
for conducting oil exports, and this policy has been one of the principal factors underlying
Transneft’s development of the BPS. See ‘‘—Pipelines Constructed since the Incorporation of
Transneft—Baltic Pipeline System’’ and ‘‘Investment Projects and Expansion—BPS II’’.
For the years ended 31 December 2006, 2005 and 2004, export crude oil transportation volumes
represented 54.9 per cent., 55.0 per cent. and 53.1 per cent. of Transneft’s total transportation volume
for the same years, respectively.
Customers
In 2007, the Group had 146 contracts for oil transportation with oil producing companies (157 in
2006).
Although no single customer accounted for more than 20 per cent. of the oil volume pumped by the
Group during 2006, the five main customers by volume during this year, LUKOIL, TNK-BP,
Rosneft, Gazprom Neft and Surgutneftegaz, accounted in aggregate for approximately 70 per cent. of
this volume. The Group’s top 10 customers accounted in aggregate for approximately 87 per cent. of
volume pumped during the same year.
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Customer Contracts
All of Transneft’s contracts with its Russian customers have terms of one year and include a standard
set of provisions with respect to the rights and obligations of both Transneft and its customers,
including with respect to transportation liability issues, settlement mechanics and fees and expenses.
The contracts provide that crude oil will be accepted into the pipeline network on the basis that it
meets a minimum quality requirement and that transportation will be carried out in accordance with
the applicable regulations and the quotas set thereunder (see ‘‘Regulation’’). During the course of the
year, each producer is required to submit an application 15 days before the start of each month
specifying the quantity of oil it wishes to ship and the source(s) and the destination(s) of the oil
shipments. For each shipment, Transneft issues a formal ‘‘route instructions’’ document, specifying the
amount of oil that will actually be supplied and details of the route and cost.
Transit Agency
In certain cases, Transneft agrees with an oil producer to arrange for the passage of crude oil
through transit countries, in particular Belarus and Ukraine. It will enter into a contract with the
customer accordingly, whereby it acts as agent for that customer and agrees to monitor the transit
and arrange for the payment of the relevant transit fees in those transit countries. Transneft is not
liable for the actions of the third party transit operators. In the event that a customer of Transneft
wishes to bring a claim against a third party transit operator, Transneft may agree to act on behalf
of, and at the expense of, its customer in such proceedings. Transneft’s transit activities are carried
out pursuant to intergovernmental agreements between the transit countries and Russia, which set the
framework for the transit of crude oil, for a transit fee to be set by each transit country, and
contracts between Transneft and the transportation operators of such countries. Transneft entered
into three 15 year contracts with two Belarussian transportation operators in 2005 and with the
Ukrainian transportation operator in 2004. These contracts set the tariffs for the transit of crude oil
across such territories to be paid by Transneft in an agency capacity acting on behalf of Russian oil
producers.
Transneft was acting in such an agency capacity in January 2007 when 77,000 metric tons of crude
oil belonging to a customer or customers of Transneft was removed from the pipeline system of
Belarus during a dispute between the Russian Government and the government of Belarus. This crude
oil was returned several days later. This dispute also resulted in the suspension of deliveries to and
through Belarus being halted for a number of days. Transneft did not suffer any liability towards its
customers, although it did incur an expense of approximately RUR 9 million as it was required to
heat crude oil in its pipeline to prevent the crude oil from freezing while it was not being transported.
Transportation of Foreign Oil
Pursuant to intergovernmental agreements between Russia and each of Azerbaijan and Kazakhstan,
Transneft has entered into a ten year contract with the Azerbaijan International Operating Company
(‘‘AMOK’’) which acts on behalf of the state oil company of Azerbaijan and other Azerbaijani oil
producing companies and a one year contract with KazTransOil of Kazakhstan, which represents all
of the oil producing companies of Kazakhstan, for the transportation of crude oil from Azerbaijan
and Kazakhstan across Russia, mainly to the port of Novorossiysk.
Transneft charges a fixed tariff (currently U.S.$15.67 per one metric ton of crude oil) set pursuant to
the relevant contract and inter-governmental agreement and denominated and payable in U.S. dollars
for the transportation of crude oil from Azerbaijan to Novorossiysk (and may set tariffs for
transportation to other destinations). It charges a distance-related tariff denominated and payable in
U.S. dollars and set by the FTS for the transportation of Kazakhstan crude oil in Russia from the
Atyrau—Samara pipeline (currently U.S.$0.73 per 100 metric tons per kilometre) and fixed tariffs set
pursuant to the relevant contract and inter-governmental agreement and denominated and payable in
U.S. dollars for the transportation of Kazakhstan crude oil through the Makhachkala—Novorossiysk
pipeline (currently U.S.$7.06 per metric ton of crude oil). These tariffs are each higher than the rates
that Transneft charges to Russian oil producers.
During each of 2005 and 2006, Transneft transported approximately 19 million metric tons of crude
oil from Kazakhstan and 4 million metric tons of crude oil from Azerbaijan.
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Other Facilities
Pumping Stations
Transneft’s overall trunk pipeline system has 362 pumping stations (as at 1 April 2007), containing in
total approximately 1,900 pumps. These stations are used to pump crude oil through the pipelines
and are also used as bases for various support and maintenance services. The distance between
pumping stations is generally between 50 km and 150 km (the distances between older pumping
stations are shorter), with the average distance being approximately 80 km. Pumping stations are
equipped with main pumping units, which were manufactured in Russia and the former USSR and
are designed to operate trunk pipelines. Engines, turbines and other pumping equipment are regularly
tested and have an average service life of 30 years. If necessary, the crude oil flow direction in a
pipeline can be reversed by switching the input and output at the pumping stations. Actual pressure
in the pipelines is maintained at 20 per cent. to 80 per cent. below the maximum pressure capacity of
the pumping stations.
Storage
Transneft operates 851 storage tanks (as at 1 April 2007) located across the pipeline network.
Transneft uses these storage tanks to accumulate optimum volumes for certain deliveries, in particular
deliveries for customers whose regular oil volumes are small. A further use for these storage tanks is
oil blending (compounding), when oil that does not meet the required quality standards is mixed with
better quality oil and stored. At Transneft’s destination ports, a large storage capacity is required.
This is driven by a number of factors, including: the need to accumulate a full vessel volume to
provide fast loading and departure; the need to facilitate the storage of volumes of crude oil that
cannot be shipped during storms and bad weather; the need to store oil for a specified vessel or
vessels; or to comply with the particular request of the oil owner. Transneft can generally sell space
in its storage tanks to crude oil producers which use the facilities to secure reserves for various
purposes. All of the storage provided at the request of customers is provided at additional cost. As at
1 April 2007, the total volume of crude oil stored at Transneft’s storage tanks was approximately
14,747,730 cubic metres.
Oil Loading Sea Terminals
The Group owns and operates the oil loading sea terminal at Primorsk (on the Baltic Sea). It also
owns and operates certain facilities, in particular pipes and monitoring equipment, terminating at the
sea terminals of Novorossiysk and Tuapse (on the Black Sea).
The sea terminal at Primorsk is operated by Specialised Oil Loading Sea Port Primorsk, a subsidiary
of Baltic Main Pipelines (see ‘‘—Crude Oil Transportation Subsidiaries’’). It has 23 storage tanks with
a total capacity of 0.92 million cubic metres, a main pumping station, a fire depot, deep-water
moorings for oil tankers, a laboratory for oil analysis, and cleaning facilities.
Certain facilities at the sea terminals of Novorossiysk and Tuapse are operated by Black Sea Main
Pipelines (see ‘‘—Crude Oil Transportation Subsidiaries’’).
Communications Network
Transneft’s current communications network is operated by its Svyaztransneft subsidiary and consists
of 14 communications centres throughout Russia and an electromechanical factory at Ryazan.
Svyaztransneft’s network was developed to enable remote management of the operation of oil
pipelines and swift information interchange between the personnel of the different Group companies
and to facilitate maintenance activities by providing reliable communication around the pipeline
network. This communications network permits ‘‘real time’’ monitoring of the Transneft network
from the control room at head office in Moscow. There is also a system in place by which
management can observe, via high resolution video cameras, activity at each of the port locations,
including activity at the storage tanks and the loading of vessels at export sea terminals.
Diagnostics, Maintenance and Upgrade
Overview
Transneft has put in place an extensive maintenance, diagnostics and upgrade programme, as a result
of which it has been able to extend the physical life of many of its pipelines from their initial lifetime
of 33 years (for those pipelines constructed during the Soviet era).
The pipeline system operated by Transneft was constructed mainly during the 1970s and 1980s, with
34 per cent. of the system being built between 1930 and 1969, 59 per cent. between 1970 and 1989
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and 7 per cent. after 1990. Transneft has a comprehensive control system that monitors whether
maintenance, diagnostic work and upgrading is completed on time and within budget, and prevents
possible fraud.
Diagnostics
In 2006, Transneft carried out diagnostic checks on approximately 30,000 km of its pipeline network.
Diagnostic services are carried out by a subsidiary, OJSC ‘‘Technical Diagnostics Centre Diascan’’
(‘‘Diascan’’). Diascan monitors the conditions of the Group’s oil pipelines through the use of up-todate
systems for the detection, measurement, classification and analysis of defects in pipelines with
diameters ranging from 325 to 1,220 mm. These systems include various IT systems and other
advanced tools and equipment, including:
* the ‘‘Calliper’’ tool, which can travel through the pipeline and which has sensors on its surface
that can detect (to a high degree of accuracy) hollows, dents, ovals and other anomalies in the
pipeline. Information is recorded on a flash disc on the vessel itself;
* ultrasonic flaw detectors and magnetic-field flaw detectors, which are generally mounted on the
outside of the physical pipeline for the detection and high-accuracy measurement of corrosion
(both isolated instances and more widespread damage) and general wastage, stratification
(division into layers), scratches, foreign bodies in the pipeline, cracks and fractures in the
structure as well as circumferential weld defects; and
* auxiliary equipment for pipeline calibration and cleaning and systems for accurate location
finding.
Diascan also monitors the state of Transneft’s storage tanks (through acoustic emissions, ultrasonic
flaw detection and by gauging the thickness of acoustically active zones) and measures such tanks.
These and other methods permit the early detection and location of incipient defects and their actual
or potential sizes, which are difficult to detect and locate by other methods without withdrawing a
particular installation or facility from operation. Diascan also produces pipeline scrapers and devices
for detection and tracking, sealing collars, packing seals and discs for cleaning scrapers as well as
other articles from polyurethane. Diascan uses equipment produced by leading global firms, which
also provide training to its personnel.
When diagnosis of a section of pipeline or a storage tank is carried out, that section or tank is
labelled as ‘‘red’’, ‘‘yellow’’ or ‘‘green’’, depending on the level of risk identified. A ‘‘red’’ risk requires
immediate rectification, and the Group’s cash flows will be re-allocated if necessary to remedying the
defect which has been identified. A ‘‘yellow’’ risk is one which will require remediation within the
next two to three years. A ‘‘green’’ section is where no defect has been identified, although ‘‘green’’
pipelines and tanks will still be included in upgrading programmes. As at 31 December 2006 all
pipelines and tanks were in the ‘‘green’’ category.
Maintenance and Upgrade of Existing Network
Since 1999, the Group has implemented a major asset modernisation programme, spending
approximately U.S.$1 billion annually (rising to approximately U.S.$1.5 billion in each of the last
three years) on maintenance, asset repairs and upgrades. This programme uses the results of the
diagnostics described above to prioritise repair and upgrade work.
As a result, the number of defects to be repaired each year has fallen from 108,800 in 2000 to 24,700
in 2006.
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The following table shows Transneft’s maintenance and upgrade record for the five years ended 31
December 2006:
For the year ended 31 December
2002 2003 2004 2005 2006
Pipeline replaced, km ...................... 645 430 797 544 842
Coating replaced, km ...................... 374 267 87 12 2
Replacement and rehabilitation,
percentage of network................. 2.1 1.5 1.8 1.2 1.8
Pumping stations upgraded............. 73 41 7 19 14
Underwater crossings repaired ........ 373 — 41 11 1
Underwater crossings replaced........ 66 42 37 24 7
Diagnostics, 1,000 km ..................... 22.5 24.7 27.7 28.1 30.1
Defects repaired, thousands ............ 49.0 58.9 41.0 57.0 24.7
New High Speed Digital Communications Network
Transneft is in the process of upgrading its existing digital communications network. As at 31
December 2006, a network of 2,146 km of fibre optical cables had been constructed and high
specification digital equipment had been installed. Once this network is fully operational, it is
currently planned that further cables will be laid along the pipelines operated by the subsidiaries,
Upper Volga Main Pipelines, North Western Main Pipelines, Volga Main Pipelines and Baltic Main
Pipelines. Eventually the network is expected to include 7,276 km of cables.
Completion of the construction of this high speed digital communications network, scheduled for
2010, is expected to provide significant improvements for Transneft in the quantity of data which can
be sent between parts of Transneft’s pipeline network and the speed at which data can be
transmitted. Transneft expects the upgrade of the communications network, when completed, to be of
particular benefit to its central management centre based in Moscow and also to assist in the
distribution across the Group of accounting and tax information and production volumes. Once the
new network has been completed, cost savings are also expected, as Transneft will no longer be
required to pay third party communications providers commercial rates for the use of their facilities.
Accidents and Other Losses of Oil
Transneft’s accident rate per 1,000 km was 0.04 during 2003, 0.06 for 2004, 0.04 for 2005 and 0.06
for 2006. Accidents are recorded if they involve an oil spillage of greater than 10 cubic metres of
crude oil, any spillage into bodies of water or any fire at a facility. Transneft believes that its accident
rates for the last three years are substantially lower than average accident rates for comparable crude
oil transportation services in the U.S. and Europe. Transneft believes that its stringent programme of
maintenance and upgrading is the principal reason for the low rate of accidents. Transneft also
believes that the criteria it applies to what constitutes a reportable accident are amongst the strictest
in the industry.
To date there have been no terrorist attacks on Transneft’s pipeline network. In addition to the
protection afforded by Transneft’s own security team, Transneft has a three year co-operation
agreement in place with the Ministry of Internal Affairs and the Federal Security Service to help
protect the pipeline system.
Illegal Tapping of Pipelines
Unauthorised ‘‘tapping’’ of pipelines, or the theft of oil from pipelines, has become common in recent
years. Tapping has the potential to cause economic loss, explosions, accidents, injury and death, and
environmental damage through crude oil spills occurring during such tapping. In 2006, there were 831
tapping incidents. In most of these cases, Transneft’s security team intervened promptly and oil
spillages and theft were prevented. Tapping has not caused Transneft to lose a material volume of
crude oil.
On 6 December 2006, the State Duma legislated to create a new criminal offence (which is now in
force) of theft of crude oil and products. As a result, theft is punishable by a fine of RUR 100,000 to
500,000 or an amount calculated according to the salary of the offender, or by imprisonment for
between two and six years, in addition to a fine. In addition, damage to oil or gas pipelines is
punishable by a fine of RUR 400,000 to 500,000 or an amount calculated according to the salary of
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the offender, or by imprisonment for between two and eight years (depending on the severity of the
incident).
Investment Projects and Expansion
The Group is assessing and undertaking a number of investment projects in conjunction with the
Plan. The Plan is a research and development initiative with the following objectives: (i) to analyse
the current position in long-distance oil pipeline transportation in Russia; (ii) to produce a forecast of
internal and external crude oil consumption markets; (iii) to review Russia’s sources of raw materials;
(iv) to study existing schemes for major oil pipelines; and (v) to assess options for the development of
long-distance oil pipeline transportation.
The Plan’s preliminary findings, announced in October 2006, were that crude oil production patterns
are expected to change by 2020, principally due to new fields being brought into operation in
Sakhalin, Eastern Siberia and the Timano-Pechorsky province, and an expected decline in production
in Western Siberia and Volga-Ural due to the depletion of existing reserves over time. The study also
predicts a shift towards higher-yield refining methods and more export-oriented refineries. By 2020,
the main crude oil export routes are expected to be: (i) to the Asia-Pacific region (the ESPO Pipeline
Project); (ii) to Northern Europe (Baltic Pipeline System); (iii) across Northern Russia (Kharyaga-
Indiga); and (iv) across Southern Russia (to Novorossiysk).
Investment projects are generally proposed and evaluated in accordance with the following procedure:
* Proposal: Transneft presents a declaration of intent in connection with the investment project to
the relevant regional administration. Once the regional administration has approved the project
in principle, a more detailed proposal is prepared by Transneft.
* Feasibility study: An environmental study, which includes an assessment of the environmental
impact of the project, is commissioned (see ‘‘Regulation – Ecological Expert Review’’). Public
hearings are held and documents and materials are published for public inspection.
* Examination by panel of federal experts: If the results of the environmental study and public
hearings are positive, the plans are examined by a panel of federal experts, which focuses on the
technical and economic aspects of the project.
* Government resolution: If the panel of experts approves the project, the Government is asked to
pass a resolution authorising the raising of funds for, and the implementation of, the project.
Projects may be initiated by Transneft alone but, in practice, they will usually be put forward only
after consultation with the Government and/or with the major oil producers. Whenever a new project
is initiated, Transneft builds a model to forecast future revenues and the timeframe within which the
capital expenditure is expected to be recovered. The main requirement imposed by the Government is
that each project should eventually pay for itself.
Eastern Siberia-Pacific Ocean Pipeline
Overview
Transneft’s most significant ongoing project is the ESPO Pipeline Project, which is being developed in
two Phases in accordance with the Plan and is based upon an analysis set out in the Plan of longterm
forecasts for oil production and consumption in Russia and future demand in Asia-Pacific
markets. Phase 1 of the project is scheduled for completion in late 2008 and the total cost to
Transneft of Phase 1 is expected to be approximately U.S.$11 billion (approximately RUR 300
billion). The cost of Phase 2 of the project has not yet been evaluated.
The ESPO pipeline is expected to transport a total of 30 million metric tons annually when Phase 1
is completed and, depending on production levels in the region, up to 80 million metric tons of oil
annually as and when Phase 2 is completed. The original plan for the project was approved in 2004.
However, as the original route which had been approved passed close to Lake Baikal, the Russian
Government decided to amend it in April 2006, following environmental concerns expressed by the
public. Transneft was then obliged to have the new route re-approved.
Phase 1 of the ESPO Pipeline Project, which began in 2006 and is scheduled for completion in late
2008, is being constructed in four stages as follows:
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* First stage: the construction of a section of pipeline from Taishet to Ust-Kut, and a section of
pipeline from Tynda to Skovorodino. This stage comprises construction along the original route
that was not changed by the diversion around Lake Baikal, and accordingly the original
approval for this stage remained effective and work has begun as planned. (see ‘‘Construction
Progress’’)
* Second stage: the construction of a section of pipeline from Ust-Kut to Tynda, completing the
link from Taishet to Skovorodino. This stage comprises construction along the revised route
created due to the diversion around Lake Baikal, and accordingly approval for this stage is
being sought in parts.
* Third stage: the construction of a sea terminal in Kozmino Bay on the Pacific Ocean.
* Fourth stage: Transneft is in discussions with China National Petroleum Corporation (‘‘CNPC’’)
regarding the construction of a possible spur to run from Skovorodino to the Chinese border,
which Transneft expects to be financed by CNPC and then owned and operated by the Group.
The total length of the pipeline constructed during Phase 1 is expected to be 2,757 km. Seven
pumping stations are scheduled to be built and a series of storage tanks with a total volume of
1,380,000 cubic metres (530,000 cubic metres of which is expected to be located at Kozmino Bay).
Phase 2 will consist of the construction of a pipeline from Skovorodino to Kozmino, as well as the
expansion of the pipeline and sea terminal constructed in Phase 1 to carry up to 80 million metric
tons of oil annually, as and when demand requires. The costs for this Phase have not yet been
calculated.
Sources of Crude Oil
Crude oil for the ESPO Pipeline Project is expected to come from Western Siberia, as well as the new
oil provinces of Eastern Siberia.
The Market
The ESPO Pipeline Project is intended to enable Russian oil companies to increase exports of crude
oil to the Asia-Pacific region, a rapidly growing segment of the global crude oil and oil products
markets.
The Route
The proposed route is shown in the map below:
As discussed above, the route will now avoid Lake Baikal and the closest point of the pipeline will
now be 400 km from the lake.
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There are complex geological, hydro-geological and seismic conditions along the proposed route. It is
expected that at least part of the pipeline will be laid underground. There are areas of marshlands
and rocks, fissures, carst rocks, mudflows and hillsides with significant slopes.
Pipes of up to 1,220 mm in diameter are expected to be used in the construction of the ESPO
Pipeline. The design of the underground pipeline includes three layers of anti-corrosion coating made
of special materials and seam insulation which will be provided by heat-shrinkage insulation.
Pipeline maintenance will be performed by teams of engineers stationed along the pipeline at intervals
of approximately 300 km to 350 km. Remote pumping stations and linear valves in areas where there
are no roads are projected to be equipped with helipads.
Construction Progress
As at 1 April 2007, 930 km of pipeline had been built between Taishet and Ust-Kut and between
Tynda and Skovorodino.
The review of the feasibility study for the section of the ESPO pipeline running from Ust-Kut to the
Talakanskoke oilfield was completed and approved in November 2006. Construction was put out to
tender and work on this section has commenced, involving approximately 5,000 people and 2,000
units of equipment. The section is expected to be 540 km long and pass through the Irkutsk region
and the Republic of Sakha-Yakutia.
A feasibility study regarding an oil terminal in Kozmino Bay on the Pacific Ocean has been
completed and is now under federal review. It is currently proposed that a railroad overpass, inner oil
pipeline, petroleum storage with a capacity of 530,000 cubic metres and two remote loading machines
for loading oil onto tankers be constructed.
Environmental Protection
The ESPO Pipeline Project has been designed to provide a high level of reliability and minimal
environmental impact. Advanced technologies will be used in the construction and operation of the
pipeline, reflecting the latest technical findings in the field of environmental protection and nature
management.
These include:
* complex solutions for sewage disposal, designed to protect the water supply;
* underwater crossings constructed using directional drilling and micro-tunnelling methods. These
advanced technologies are designed to avoid any adverse impact on the riverbed during pipeline
construction and virtually eliminate the possibility of oil spill into water in case of accident;
* highly efficient methods of waste disposal aimed at protecting soil and ground water from
pollution; and
* advanced methods of damaged soil re-cultivation designed to protect and rehabilitate fertile
soils.
BPS II
Transneft has been evaluating a proposed route from Unecha, via Velikie Luki, to the port of
Primorsk. The projected route of 1,157 km of pipeline passes through the territories of Bryansk,
Smolensk, Tver, Novgorod and Leningrad. The expected capacity of the new pipeline at the first
stage of development is planned to reach 50 million metric tons of crude oil a year with an
opportunity to further increase capacity up to 75 million metric tons of crude oil a year. Transneft
has presented a declaration of intent in connection with the project to the relevant regional
administrations. After the regional administrations have approved the project in principle, a more
detailed proposal will be prepared by Transneft. Transneft expects that the realisation of the BPS II
project will offer Russian oil companies an alternative route for the export of crude oil to Europe
and thereby increase the reliability of delivery, although at this stage in the development process no
assurances can be given as to when the project will be completed, if at all.
In May 2007, pursuant to Governmental Order No. 621-r, it was resolved to commence the
development of BPS II.
Burgas-Alexandrupolis Pipeline Project
The construction of the Burgas-Alexandrupolis pipeline through Bulgaria and Greece as an alternative
oil transfer pipeline from Russia and the CIS countries bypassing the Bosporus channel was initially
proposed in 1994 by a number of Russian and Greek companies. At the request of the Greek
74

epresentative in the proposed project, the German company ILF prepared technical specifications and
an economic evaluation for the project. In 2001, ILF conducted a feasibility analysis of the Burgas-
Alexandrupolis pipeline project. The parties also agreed on the text of a trilateral intergovernmental
memorandum on co-operation during the project implementation, although no agreement was reached
regarding distribution of the parties’ shares. Further funding may be raised from third parties.
The proposed pipeline would, when completed, be 279 km long, have a diameter of 900 mm and be
capable of pumping 15-23 million metric tons of oil a year at the completion of its first phase, rising
to 35 million metric tons of crude oil a year at the completion of its second and final phase. The
timetable for completing each phase of the proposed project has not yet been agreed.
Transneft, Gazprom Neft and Rosneft have signed an agreement to develop the Russian section of
the Burgas-Alexandrupolis pipeline as a consortium (the ‘‘Consortium’’). On 1 November 2006, the
Board of Directors of Transneft approved the decision to enter into the Consortium, in which
Transneft has a leading role through its ownership of 33.34 per cent. of the Consortium (the two
other companies owning 33.33 per cent. each).
On 15 March 2007, an agreement between the Governments of the Russian Federation, Bulgaria and
Greece relating to co-operation in the construction and operation of the Burgas-Alexandrupolis
pipeline was signed.
Proposed Khariaga-Indiga Pipeline (Northern Route)
A pipeline from Khariaga to Indiga has been proposed which would increase access to the Timan-
Pechora region where proven reserves are high. The pipeline would be 430 km long and would
transport oil to a seaport with two loading berths near Indiga on the Barents Sea coast. The location
is favourable, as a result of the warmer waters of the Gulf Stream which extends to Indiga. This
means that, unlike many northern ports where access is extremely limited in winter, ice-breaking ships
will only be required to operate for three months each winter to ensure continuity of access. The
total cost of the project is estimated to be U.S.$2.2 billion (approximately RUR 59 billion) and the
pipeline would have a capacity of 12 million metric tons per year. Transneft’s declaration of intent
has been submitted to, and approved by, the relevant local authorities. An environmental impact
assessment has also been conducted. The next stage is an evaluation of the detailed project proposals
by a panel of experts at the federal level.
Financing
Transneft has historically, as required by the applicable regulations, divided the financing of its
capital expenditure requirements by type of capital expenditure. Repair, maintenance and operational
capital expenditure (other than new pipeline projects) is financed through operational cash flows
generated from the tariffs it charges for the transit of crude oil. Borrowings are generally made only
to finance new pipeline projects. Borrowings made to finance the construction of a new pipeline are
repaid from tariffs for the use of such pipelines. Interest expenses are also factored into tariff
calculations. See ‘‘Management’s Discussion and Analysis of Results of Operations and Financial
Condition—Tariffs’’.
Research and Development
The following table sets out the actual expenditure of the Group (calculated on the basis of RAS) on
research and development for the years ended 31 December 2003, 2004, 2005 and 2006:
2003 2004 2005 2006
Research and Development expenditure
(RUR million) ....................................................... 158.2 215.4 593.0 699.1
These research and development costs comprise the amounts paid by the Group to outside
contractors as commissions and fees in respect of projects.
These outside contractors include 25 academic and scientific research institutes, which are involved in
developing new equipment and technology for the Group, together with 27 facilities and organisations
for research and production, including 14 industrial facilities, an agency for space exploration and the
Ministry of Atomic Energy of Russia.
Research and development projects developed by these contractors for the Group since 2000 include
systems improving the reliability and safety of the Group’s oil pipelines, new designs for the polymer
75

insulating covers the Group uses on its pipelines with a service life of more than 30 years, mobile
pumping units and equipment for extinguishing fires at pumping stations and in storage tank farms.
At a board meeting of the Group held in November 2006, a plan for research and development
expenditure for 2007 was approved. There were 76 items in the plan, many of which concerned the
development of new technologies and engineering and securing high levels of reliability and safety
across the pipeline network. In particular, a number of the items related to the development of
diagnostic tools for the Diascan subsidiary. In addition to its Diascan subsidiary, Transneft has two
scientific research laboratories in operation.
Competition
As a natural monopoly operating oil transport pipelines in Russia, Transneft is not generally subject
to competition. While it is possible to transport oil within Russia on the railway system, by ship and
by road, the costs of such alternative means of transport are extremely high compared to the tariffs
charged by Transneft. In addition, while some of the major oil companies also operate small
proprietary pipelines, the costs of using such pipelines is also far higher than the tariffs charged by
Transneft. For example, the tariffs charged for the use of LUKOIL’s pipeline are approximately 6
times higher than the corresponding Transneft tariff and the CPC pipeline’s tariff for 2006 was
U.S.$29.90 per metric ton for transport along a 1,510 km route, equating to U.S.$1.980 to transport
one metric ton of crude oil a distance of 100 km, approximately three times higher than the
corresponding Transneft tariff of U.S.$0.61 (see ‘‘– Transneft’s proposed role in the CPC’’ for recent
developments involving Transneft in respect of the Russian Government’s 24 per cent. stake in the
CPC).
Transneft can deliver oil much faster than other methods of transportation since the pipeline system
contains 27 million metric tons of linefill crude oil owned by Transneft and this oil, along with
blended oil already in the pipeline, can generally be transferred to the destination point the day after
a crude oil producer delivers crude oil to the Transneft pipeline system. In addition, Transneft does
not generally differentiate between high and low quality oil (as crude oil in Transneft’s pipeline is
blended), whereas rail transportation is charged at a higher rate for high quality oil and thus
Transneft believes that rail is generally only economically feasible during times where the prevailing
price of oil exceeds approximately U.S.$60 per barrel. Russian oil companies often use alternative
means of oil transport to complement their use of Transneft’s pipeline, rather than in competition,
especially to mitigate seasonal effects and certain other factors. For example, when shipping crude oil
to China, crude oil travels to the far east point of the existing Transneft pipeline network and is then
loaded onto rail cars for delivery to the ultimate destination.
Transneft believes that this environment of limited competition will remain for the foreseeable future,
in particular due to the current regulatory regime and the substantial capital expenditure required by
any company wishing to construct competing pipelines.
Environmental and Health and Safety Issues
The Group’s operations are subject to various environmental and health and safety laws and
regulations in Russia. These laws govern emissions, discharges of waste into water, the reclamation of
contaminated soil, the use, handling and disposal of hazardous substances and waste and employee
health and safety. In addition, the Group has long-term obligations concerning the decommissioning
of operational facilities.
The Group’s total expenses for environmental protection were RUR 1,446.8 million in 2004, RUR
1,079.4 million in 2005 and RUR 1,934 million (U.S.$75.7 million) in 2006.
In carrying out its environmental policies, the Group generally seeks to adhere to international
standards for environmental protection and monitors its compliance with these principles. Transneft
also works with its operating subsidiaries to implement Government regulations and meet safety
standards.
In order to continuously improve the Group’s environmental performance, Transneft conducts
systematic in-house environmental audits covering all aspects of its environmental activities. The
Group has 40 laboratories which manage ecological control issues and 150 employees are trained to
carry out ecological audits. The Group has undergone 157 inspections by responsible federal and local
authorities in the last three years, including 120 audits of its ecological laboratories.
Task forces have been established to deal quickly with eliminating oil spills. 40 units, comprising
7,000 employees, have been trained to react to environmental accidents and are supported by three
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fleets, comprising 14 specially equipped boats, which have been established at the ports of Primorsk,
Novorossiysk and Tuapse. The Group also has 536 sets of equipment for gathering and remedying oil
spillages up to a maximum capacity of 176,000 cubic metres.
The following table sets out the fines and penalties incurred by the Group in relation to
environmental pollution for the years ended 31 December 2003, 2004, 2005 and 2006:
2003 2004 2005 2006
RUR millions
Fines and penalty payments for environmental
pollution ................................................................ 0.174 0.014 0.00 0.05
Since the recruitment of the new management team in 2000, the Group has prioritised environmental
management with a view to reducing pollution levels to a minimum.
There have been no material violations of environmental regulations during 2004, 2005 or 2006. The
only matter which resulted in complaints from the public was the original route planned for the
ESPO Pipeline Project, close to Lake Baikal. The route has since been changed. There have been no
claims against the Group relating to environmental matters since Transneft was incorporated in 1993.
Environmental Certification
In 2004, Transneft and all its crude oil production subsidiaries were awarded ISO 14001 Certification
for environmental management by IQNet (International Certification Network) and DQS (Germany),
the two certifying bodies.
Transneft’s export sea terminal in Primorsk has been certified to IQNet and European EVROCERT
international environmental standards.
Insurance
The Group has taken out insurance policies to cover various risks with the Transneft Insurance
Company (‘‘Transneft Insurance’’) (one of its wholly-owned service subsidiaries) and with Russia’s
leading insurance providers, primarily Reso Garantiya. As at 1 April 2007, Transneft’s assets were
insured up to a maximum of RUR 1,369 million and the assets of the rest of the Group were insured
up to a maximum of RUR 434,466 million.
Transneft Insurance provides insurance to Transneft and its subsidiaries. Transneft Insurance offers
property insurance, environmental insurance, voluntary medical and personal insurance for employees
and members of their families, insurance against damage to heavy machinery and electronic
equipment and civil liability insurance for the crude oil transportation subsidiaries.
In addition, the Group has taken out civil liability insurance for personal injury, damage to the
property of a third party and environmental harm. As at 1 April 2007, this insurance provided
maximum coverage of RUR 3,498 million in respect of those subsidiaries which operate potentially
dangerous industrial equipment. Transneft believes that all of its key operating assets (including the
pipeline, storage tanks, pumping stations, facilities at its export terminals and other equipment) are
fully insured against accidental damage, theft and other damage caused by third parties. In addition,
Transneft’s 27 million metric tons of technical or linefill crude oil is insured for RUR 155,826 million.
Risks are reinsured through reinsurance arrangements with leading reinsurance companies, including
Swiss Re and SCOR. The majority of the Group’s risks are reinsured.
Employees
The following table shows the average number of employees of the Group for the years ended 31
December 2004, 2005 and 2006:
As at 31 December
2004 2005 2006
Transportation............................................................................. 62,815 62,755 62,022
Other (subsidiaries)...................................................................... 9,799 10,181 10,797
Head office................................................................................... 425 439 415
Total............................................................................................. 73,039 73,375 73,234
The number of employees of the Group has not changed materially since 31 December 2006.
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The Group employs approximately 73,000 people, 21,000 of whom are either managers or technical
specialists. Of the workforce, 56 per cent. has some form of higher or professional education.
Transneft is committed to developing its staff: in 2006, approximately 26,000 employees received
training or re-training to improve their skills. Some of this training focused on preparing employees
for the ESPO Pipeline Project. As at 1 April 2007, the majority of Transneft’s employees were
members of trade unions, generally local to the area of operation of each subsidiary. Transneft agrees
the framework of collective bargaining agreements centrally and then each subsidiary enters into a
collective bargaining agreement with its local trade union based on such framework for a term of
between two and three years. Wages are set according to governmental guidance, indexed to the
wages of the 10 largest Russian oil producers, and not in accordance with these collective bargaining
agreements.
No material wage arrears are currently known to exist, and the Group has not experienced any
material labour disputes or strikes. The Board considers employee relations to be good. Pay and
benefits are generous because competition for skilled personnel is high in the oil sector. Incentives
take the form of bonuses and overtime payments. Most employees have access to personal pensions
and medical insurance.
Pension Schemes
Transneft sponsors a defined contribution plan in accordance with Russian legislation. Contributions
are tax deductible and made to the statutory maximum of 12 per cent. of the total salary bill. Over
40,000 employees have personal pension accounts. The Group has no unfunded pension obligations.
As at 31 December 2006, the assets in the pension fund totalled RUR 7.8 billion. Transneft also
operates a defined benefit plan.
Training Centres and Vocational Colleges
The Group operates three educational centres to train and improve the skills of its employees: the
Tyumen Educational Centre, the Novokuybyshevsk Petrotechnical Education Unit and the Northern
Main Pipelines Regional Educational Centre.
The Group operates a number of vocational colleges in Russia, such as the Tomsk State Industrial
and Humanitarian College, College No. 36 in the Tyumen region and Professional College No. 2 in
Khasavurt in the Republic of Dagestan. These colleges provide high quality technical education
designed to prepare students for employment by the Group or other employers after graduation,
often as electricians, welders or mechanics.
Legal Proceedings
From time to time, the Group is involved in litigation in the ordinary course of its business activities.
Transneft believes that such ordinary course litigation is immaterial and is unlikely to affect the
Group’s operating results or financial position significantly. The Group is not currently involved in
any material legal proceedings.
Licences
Transneft and its subsidiaries have obtained five key licences for their business operations, the first
four of which are no longer required due to a change in Russian law in December 2006:
* a licence for the transportation of oil through the pipeline, issued by the Ministry of Energy
until October 2007;
* a licence for the sale of crude oil and gas, issued by the Ministry of Energy until November
2007;
* a licence for the operation of the main pipelines issued by the Federal Service for Ecological,
Technological and Nuclear Supervision (‘‘FSETNS’’) until February 2010;
* a licence for the storage of crude oil, issued by the FSETNS until November 2009; and
* a licence for the retention of documents relating to state secrets, issued by the Federal Security
Service until August 2008.
In addition, each member of the Group also holds certain licences which are important to its business
operations.
The Group has not experienced and does not expect to experience any material difficulty in renewing
required licences as needed.
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Information Technology
A local area network has been established at Transneft’s head office in Moscow and at the offices of
each subsidiary. The Group uses Oracle for database management. Systems are in place to monitor
levels of crude oil at the storage facilities around the network in real time. Software for accounting
and for service and maintenance is provided by a Russian software company.
79

MANAGEMENT AND CORPORATE GOVERNANCE
General
GENERAL MEETING OF SHAREHOLDERS
(Government maintains 100% of voting rights)
INTERNAL AUDITING COMMISSION
(Three members from various Government
ministries)
BOARD OF DIRECTORS
(all members appointed by the Government)
PRESIDENT
(Mr Simon Vainshtock)
ADMINISTRATIVE BOARD
(Nine managers of the Group)
In accordance with Federal Law No. 208-FZ of 26 December 1995 ‘‘On Joint-Stock Companies’’ (as
amended) (the ‘‘Joint-Stock Companies Law’’) and Transneft’s charter (the ‘‘Charter’’), as adopted by
a decision of the General Meeting of Shareholders taken on 28 June 2002 and registered on 6 August
2006, Transneft’s operations are governed by its General Meeting of Shareholders, Board of
Directors, Administrative Board and the President. The General Meeting of Shareholders is
Transneft’s highest governing body and, among other things, elects its Board of Directors. The Board
of Directors is responsible for formulating Transneft’s strategy and the Administrative Board and the
President are responsible for implementing Transneft’s strategy and for managing Transneft on a dayto-day
basis.
General Meeting of Shareholders
The General Meeting of Shareholders takes place annually, usually in June. The following decisions,
among others, can be taken only by the General Meeting of Shareholders: amendments to the
Charter; the reorganisation or liquidation of Transneft; the election of the members of its Board of
Directors and Internal Auditing Commission; appointment of the President; determination of the
quantity, category and nominal price of authorised shares as well as rights arising out of the
ownership of shares; increases in the charter capital (where such decision is reserved for the General
Meeting of Shareholders by the Charter in accordance with provisions of the Joint-Stock Companies
Law); reduction of the charter capital; approval of the annual report and annual accounts; and
approval of major transactions and transactions that involve interested parties, in accordance with the
terms of the Joint-Stock Companies Law.
As the Russian Government controls 100 per cent. of the voting stock of Transneft, the Federal
Agency for the Management of Federal Property (‘‘Rosimushchestvo’’), in accordance with Resolution
No. 738 of the Russian Government of 3 December 2004 ‘‘On Management of Shares of Open Joint-
Stock Companies Being the Federal Property and Exercise of a Special Right of the Russian
Federation to Manage Open Joint-Stock Companies (‘‘golden share’’)’’ (as amended) (‘‘Resolution
No. 738’’), is empowered to perform all of the activities within the competence of the General
Meeting of Shareholders (see ‘‘Regulation—Regulatory Authorities’’). Accordingly, decisions of the
General Meeting of Shareholders are taken in the form of Resolutions passed by Rosimushchestvo.
Board of Directors
The Board of Directors is responsible for the general management of Transneft’s activities and meets
several times each year. Under Transneft’s Charter, the Board of Directors must consist of at least
80

nine members. It currently consists of nine such members. In November 2006, Mr. Shkolov resigned
from the Administrative Board due to the demands of his new role within the Government. He also
asked to step down from the Board of Directors, but under applicable Russian law will remain on
the Board of Directors and is eligible, and required, to vote on issues such as major transactions until
the next annual general meeting of shareholders, currently expected to be held in June 2007. Eight
members of the Board of Directors currently hold positions in the Government or governmental
agencies, and all of the members of the current Board of Directors were nominated by the Russian
Government. The Chairman of Transneft’s Board of Directors, Mr Khristenko, was appointed as
Minister of Industry and Energy of Russia in March 2004 and has been a member of Transneft’s
Board of Directors since 2001.
As the Russian Government controls 100 per cent. of the voting stock of Transneft, members of
Transneft’s Board of Directors are required to vote (with respect to issues of importance, such as
major transactions) in meetings of the Board of Directors in accordance with directives issued by the
Russian Government pursuant to Government Resolution No. 91-r of 23 January 2003.
The powers of the Board of Directors include the following: to determine the priorities of Transneft’s
operations; to approve annual budgets; to call General Meetings of Shareholders and to determine the
agenda for such meetings; to determine the record date for General Meetings of Shareholders and for
the payment of dividends; to increase Transneft’s charter capital (except where such increase is within
the competence of the General Meeting of Shareholders); to issue bonds or other securities in
accordance with the Joint-Stock Companies Law; to appoint Transneft’s Administrative Board; to
decide on early termination of the powers of the Administrative Board; to approve candidates
nominated by the President for membership of the Administrative Board; to determine the
remuneration of the President; to recommend the size of dividends; to use the reserve and other
funds; to create branch and representative offices; and to adopt decisions on certain major
transactions and certain transactions that involve related parties (except such major or interested
party transactions, the approval of which is within the competence of the General Meeting of
Shareholders).
Members of the Board of Directors are elected by the General Meeting of Shareholders through a
system of cumulative voting for a term lasting until the next annual General Meeting of Shareholders
and may be re-elected an unlimited number of times. The General Meeting of Shareholders may also
terminate the authority of all members of the Board of Directors before the expiration of their terms.
Members of the Administrative Board may not comprise more than one-quarter of the Board of
Directors. The Chairman of the Board of Directors is elected from and by the members of the Board
of Directors by a majority vote and may be re-elected at any time by a Directive of the Russian
Government. The President cannot simultaneously serve as the Chairman of the Board of Directors.
Administrative Board
The Administrative Board and the President are Transneft’s executive bodies. Members of the
Administrative Board, except for the President, are nominated by the President of the Company and
are appointed by the Board of Directors (for a term of five years). The Board of Directors has the
right to terminate the authority of any member of the Administrative Board.
The competence of the Administrative Board includes, inter alia:
* decisions on transactions with an overall value of between 10 to 25 per cent. of total assets
(according to the most recent balance sheet);
* development of Transneft’s production plans;
* selection of Transneft’s contractors and customers to be targeted;
* negotiation of collective bargaining agreements; and
* other issues that are not within the exclusive competence of the General Meeting of
Shareholders or the Board of Directors.
The Administrative Board meets several times each year in accordance with a schedule which is
provided by the Regulation on the Administrative Board of Transneft.
The President
The President has authority to act in Transneft’s name without power of attorney, and presents
Transneft’s interests; approves staff appointments; approves transactions with a value of less than 10
per cent. of the Group’s total assets; issues orders and decrees; gives instructions to be carried out by
81

all the employees of Transneft; and issues internal documents relating to current activities (with the
exception of internal documents that are within the competence of Transneft’s other management
organs.) The President is appointed by the General Meeting of Shareholders for a period of five
years.
Management of Subsidiaries
Although formally Transneft does not act as a management company in respect of its subsidiaries,
Transneft is able to control all material decisions made by its subsidiaries. Transneft as a sole or
majority shareholder exerts significant influence on the activities of its subsidiaries by the following
means:
* appointment of representatives to the board of directors and appointment of the general
director;
* limitation of authorities of the general meeting of shareholders and the board of directors; and
* approval of certain transactions.
By exercising its powers as a shareholder, Transneft appoints the board of directors and the general
director of each of its subsidiaries. This enables Transneft to supervise the day-to-day activities of its
subsidiaries and facilitates the adoption of uniform operating and financial management practices
across all subsidiaries.
In addition, the charter of each of Transneft’s subsidiaries requires the consent of the Board of
Directors of Transneft before certain decisions can be taken by the relevant subsidiary’s board of
directors or meeting of shareholders. These decisions include the reorganization of the subsidiary;
winding-up; determination of the number, par value and category (types) of authorised shares and the
rights attached to such shares; increases in charter capital; the splitting and consolidation of shares;
and approval of major transactions.
Furthermore, before any transaction between a subsidiary and a foreign counterparty can take place,
the President of Transneft must issue a written internal consent order approving such transaction.
Share Ownership of Directors and Administrative Board Members
None of the members of the Board of Directors, Administrative Board or Audit Committee holds
any shares in Transneft.
Board of Directors
Members of the Board of Directors do not receive salaries for fulfilling their roles as such. Transneft
believes that there are no potential conflicts of interest between any duties to Transneft of the
members of Transneft’s Board of Directors and their private interests and/or other duties.
Transneft’s Board of Directors resides at the main office of Transneft, which address is ul. Bolshaya
Polyanka 57, 119180 Moscow, Russia. The members of Transneft’s Board of Directors and their key
positions within the Russian Government are set out below. Mr. Vainshtock does not hold any office
outside of the Group.
Viktor B. Khristenko
Minister of Industry and Energy of Russia.
Mr Khristenko was born in 1957. In 2001 he was appointed Deputy Chairman of the Russian
Government. He joined the Board of Directors in 2001 and was appointed chairman of the Board of
Directors of Transneft in March 2004, when he was also appointed Minister of Energy and Industry
of Russia.
Simon M. Vainshtock
Member of the Board of Directors, President of Transneft.
See below under ‘‘—Administrative Board’’ for a summary of Mr Vainshtock’s professional
background.
Arkady V. Dvorkovich
Head of the President of Russia’s Expert Department.
Mr Dvorkovich was born in 1972. In 2000, he was appointed counsellor to the Minister of Economic
Development and Trade. From 2001 to 2004, he served as the Deputy Minister of Economic
82

Development and Trade. In 2004, he was appointed Head of the President of Russia’s Expert
Division.
Lev V. Feodosjev
Head of Department of the Ministry for Trade and Economic Development of Russia.
Mr Feodosjev was born in 1979. In 2002, he graduated from the Moscow State Technology
University of Bauman. Prior to joining Transneft, he worked in the investment department of the
Ministry of Energy. From 2003 to 2006, he worked in the tariff regulation department of the
Ministry of Economic Development. In August 2006, he was appointed Deputy Director of the
department of state regulation of tariffs of the Ministry of Economic Development.
Yuri M. Medvedev
Deputy Head of Rosimushchestvo.
Mr Medvedev was born in 1948. From 2000 to 2004, he served as the First Deputy Minister of
Property Relations of Russia. In May 2004, he was appointed Deputy Head of Rosimushchestvo.
Sergey A. Oganesyan
Head of Russia’s Federal Energy Agency.
Mr Oganesyan was born in 1953. From 2000 to 2004, he served as the Vice President of OJSC AK
Transneft. In March 2004, he was appointed Head of the Federal Energy Agency.
Dmitriy A. Ryzhkov
Deputy Head of Government Staff.
Mr Ryzhkov was born in 1964. From 2000 to 2004, he served as the Head of the Administration
Office of the First Deputy Director of the Federal Security Service. From May 2004 to September
2004, he served as the Director of the Administrative Department of the Russian Government. In
September 2004, he was appointed Deputy Head of the Administration Department of the Russian
Government.
Andrei V. Sharonov
Deputy Minister for Trade and Economic Development of Russia.
Mr Sharonov was born in 1964. From 2000 to 2003, he served as the Deputy Minister of Economic
Development and Trade. From 2003 to 2004, he served as the First Deputy Minister of Economic
Development and Trade. From 2004 to 2005, he again served as the Deputy Minister of Economic
Development and Trade. In November 2005, he was appointed state secretary and Deputy to the
Minister of Economic Development and Trade.
Evgeny M. Shkolov
Head of the Department of Economic Security of the Ministry of Internal Affairs of Russia.
Mr Shkolov was born in 1955. He graduated from the Energy Institute of Ivanovo and began his
career in 1977 as an engineer. From 1998 to 2000, he held a variety of management positions
including co-ordinator of the Union of Industrialists and Entrepreneurs and Chief Federal Inspector
of Ivanovo region. From September 2002 until March 2005, he was Chief’s Assistant in the President
of Russia’s Administration. In August 2004, he was elected a member of the Board of Directors of
Transneft and in March 2005, he was appointed to Transneft’s Administrative Board, from which
post he resigned in November 2006.
Administrative Board
The current members of the Administrative Board of Transneft are:
Simon M. Vainshtock
Member of the Board of Directors and President of Transneft.
Mr Vainshtock was born on 5 October 1947. He graduated from Kiev Engineering and Construction
Institute as a construction engineer and later undertook postgraduate studies at Tyumen Oil and Gas
University. He is a doctor of social sciences and a professor. Mr Vainshtock is the author of a
number of works on the management of oil and gas enterprises, and a member of the International
Information Technology Academy and the Mining Science and Technological Science Academies of
Russia. Mr Vainshtock has worked in the oil industry since 1982. He has occupied positions as the
83

Deputy Head of Povhneft oil and gas department and as Deputy General Director of
Kogalymneftegaz production association of the USSR Oil Ministry, Glavtyumenneftegaz. In 1988, he
became Deputy Director General, and in 1993, Director General of LUKOIL-Kogalymneftegaz jointstock
company. Between 1995 and 1999, he was Vice-President of OJSC LUKOIL and Director
General of LUKOIL-Western Siberia Ltd. In September 1999, he was elected President of Transneft.
Vladimir V. Kalinin
First Vice-President of Transneft with responsibility for technical policy, production activity and
environmental matters.
Mr Kalinin was born on 21 July 1959. In 1981, he graduated from Ukhta Industrial Institute as a
mining engineer for the development of oil and gas fields. He worked at Povhneft oil and gas
department as an oil operator, foreman, chief engineer-technologist, then shop superintendent.
Between 1989 and 1995, he was appointed chief engineer, then head of Druzhbaneft oil and gas
department. Between 1995 and 1999, Mr Kalinin occupied the position of First Deputy Director
General for production at LUKOIL-Western Siberia Ltd.
In September 1999, he was appointed Vice-President and, in March 2000, First Vice-President of
Transneft.
Evgeny I. Astafjev
Vice-President of Transneft with responsibility for financial and economic activities.
Mr Astafjev was born on 23 March 1955. In 1977, he graduated from Ufa Oil Institute as a mining
engineer. He worked as a fitter, a mechanic at a compressor station, the foreman for production of
oil and gas, shop technologist, chief engineer and deputy head of the oil and gas department. In
1985, he was appointed deputy head of the central technological engineering service for Western
Siberia Bashneft production association, then head of Vatjeganneft oil department. In 1990, he was
elected chairman of Kogalym City Executive Committee of the Soviet of People’s Deputies. Between
1992 and 1995, Mr Astafjev was Deputy Director General for Kogalymneftegaz economics and then
Deputy Director General of LUKOIL-Western Siberia Ltd.
In September 1999, he was appointed Vice-President of Transneft.
Sergej V. Grigorjev
Vice-President of Transneft with responsibility for media relations and security.
Mr Grigorjev was born on 10 September 1959. He began his working career in 1976 as a radio
equipment adjuster at the Promavtomatika plant. In 1982, he graduated from Grozny Oil Institute as
engineer-mechanic, then started to work in the Tyumen region as a mechanic in the Megionsky
drilling department. Between 1993 and 1999, he worked for LUKOIL-Kogalymneftegaz joint-stock
company, then for LUKOIL-Western Siberia Ltd.
In September 1999, Mr Grigorjev was appointed Vice-President of Transneft.
Sergei K. Evlakhov
Vice-President of Transneft with responsibility for crude oil transportation activities.
Mr Evlakhov was born on 5 November 1960. In 1983, he graduated from Grozny Oil Institute as a
specialist in the chemical technology of oil and gas refining. He worked for 16 years in the Tyumen
region as an engineer-technologist, chief engineer-technologist, superintendent of a shop section for oil
preparation and pumping and deputy head of the oil and gas department, as well as in other
positions at Kogalymneftegaz production association and LUKOIL-Western Siberia Ltd. Between
1999 and 2000 he worked as the Head of Transport and Oil Quality and the accounting departments
of Transneft.
In September 2000, Mr Evlakhov was appointed Vice-President of Transneft.
Elena P. Kolesova
Adviser to the President of the Group.
Ms Kolesova was born in Moscow on 1 October 1950. She graduated from Moscow Energy Institute
and the Russian Economic Academy of Plekhanov as an economist specialising in book-keeping and
auditing. She is a Member of Russia’s Institute of Professional Bookkeepers. Ms Kolesova worked
for several years at the Instruments Construction Research Institute. Between 1994 and 1995, she was
the chief accountant of SC Paritet. Since 1995, she has worked for Transneft as book-keeper, deputy
and acting chief accountant.
84

In July 2000, Ms Kolesova was appointed chief accountant of Transneft and since April 2006 has
served as the Adviser to the President of the Group.
Yuri V. Lisin
Vice-President of Transneft, responsible for the operation of lines and stations and for scientific and
technical development.
Mr Lisin was born on 24 April 1955. In 1978, he graduated from Ufa Oil Institute as a mechanical
engineer in projects and exploitation of oil and gas pipelines, gas storages and tank farms. He worked
as engineer, head of department and chief engineer of a district oil pipeline department. Between 1994
and 1996, Mr Lisin was head of department for technical exploitation of oil trunks and tank farms of
Transneft.
In January 1999, Mr Lisin was appointed Vice-President of Transneft.
Igor G. Solyarsky
Vice-President of Transneft, with responsibility for human resources and communications.
Mr Solyarsky was born on 31 October 1955. In 1977, he graduated from Zhitomir Higher Officers
College in anti-aircraft defence radioelectronics and, in 1993, from the Russian Academy of State
Service of the President of Russia. He graduated as an engineer and an expert/adviser on
management issues. Before being appointed as Vice-President of Transneft in 2001, Mr Solyarsky
undertook military service in the Russian Armed Forces.
Marat I. Sajfutdinov
Vice-President of Transneft, with responsibility for construction and strategic development.
Mr Sajfutdinov was born on 29 September 1966. In 1988, he graduated from Ufa Oil Institute as a
mechanical engineer. He is a doctor of technical sciences. Mr Sajfutdinov worked at the oil pipeline
enterprises of Ufa, Yaroslavl, Novopotsk and Bryansk. He has worked for Transneft since 1992.
Before being appointed Vice-President in June 2005, Mr Sajfutdinov worked as director of Transneft’s
Department of Construction and Strategic Development.
Internal Auditing Commission
The Internal Auditing Commission is comprised of three members who are independent of the
management of Transneft. It operates in accordance with Transneft’s Charter and Provisions on the
Internal Auditing Commission including oversight and co-ordination of internal audits of Transneft’s
financial and economic activity. The principal duties of the Internal Auditing Commission are
ensuring that Transneft’s operations comply with applicable laws and do not infringe shareholders’
rights and that accounting and reporting do not contain any material misstatements. The General
Meeting of Shareholders elects the Internal Auditing Commission members for one year terms.
Members of the Administrative Board, including the President, may not serve on the Internal
Auditing Commission.
The current members of Transneft’s Internal Auditing Commission are:
Dennis Volkov
Head of Department, the Russian Federal Tariff Service.
Alexander Gladkov
Deputy Head of Department of the Ministry for Trade and Economic Development of Russia.
Viacheslav V. Kravchenko
Head of Department, the Russian Industry and Energy Ministry.
Internal Systems of Financial Control
Following the appointment of the current management team in 2000, the systems of financial and
operational control within the Group have been reorganised. As part of that process, in 2003,
employees in the internal auditing departments of the subsidiaries started reporting to Transneft
management but remained employees of those subsidiaries. Following the incorporation of Transneft
Finance in 2006, these employees were moved to Transneft Finance. There are three levels of financial
control within the Group:
85

Internal Audit
The Internal Audit department has three employees who are employees of Transneft Finance. These
employees monitor the Group’s accounting information systems and compliance with accounting
guidelines and procedures.
Control and Analysis
The Control and Analysis team deals primarily with operating information such as volumes of oil
transported and maintenance statistics. It reports to members of Transneft’s Administrative Board.
Control over the Financial Unit
Control over the Financial Unit is carried out by Transneft Finance, which is responsible for
monitoring the financial control and reporting systems of the Group, checking that funds have been
used for their intended purposes and monitoring whether budgets have been met. It receives daily
reconciliations of the accounts of each subsidiary and generates weekly and monthly reports for
review by members of Transneft’s Administrative Board. The weekly and monthly reports include
details of inventory levels and receivables and whether tax has been paid and received in a timely
manner.
Reports are generated automatically if a subsidiary makes tax payments too early or if tax receipts
are claimed later than scheduled. It is important for the cash flow of the group that VAT is
reclaimed in a timely manner. Generally the Group can reclaim VAT paid to outside contractors after
one month (for work within Russia) or three months (for export VAT). Most of the companies in the
Group maintain bank accounts with Sberbank.
Directors’ and Officers’ Compensation
Transneft’s Charter does not contain any provisions directly relating to the power of directors to
approve remuneration (including pensions or other benefits) for themselves or any other member of
Transneft’s Board of Directors.
Compensation payable to the key management personnel of Transneft (being the President, the First
Vice President, the six Vice Presidents and the Financial Adviser to the President) and its subsidiaries
consists of contractual remuneration for their services in full-time executive positions. Compensation
amounts paid to such key management for the three years ended 31 December 2006, 2005 and 2004,
set by the General Meeting of Shareholders as a percentage (revised each year based on Transneft’s
performance) of the net profit of Transneft on a non-consolidated RAS basis, were as follows:
For the year ended 31 December
2006 2005 2004
(RUR millions)
Salaries and bonuses.................................................................... 192 126 112
Termination benefits .................................................................... 4 4 1
Other (1) ......................................................................................... 27 24 13
Total............................................................................................. 223 154 126
Note:
(1) Consists of payments made in respect of the successful completion of projects and other extraordinary payments.
86

RELATED PARTY TRANSACTIONS
The Russian Government owns 100 per cent. of Transneft’s ordinary voting shares, representing 75
per cent. of Transneft’s total issued share capital. The remaining 25 per cent. is issued in non-voting
preferred share form and is held by various Russian and international investors and current and
former employees of the Group. All of the members of the Board of Directors of Transneft were
nominated by the Russian Government and the Chairman of the Board of Directors is the Minister
of Energy and Industry for Russia. See ‘‘Management and Corporate Governance’’.
The Group’s transactions with other entities directly or indirectly controlled by the Russian
Government, or with entities with common shareholders or directors, occur in the ordinary course of
business and include, but are not limited to: the purchase of electricity for production needs; the
transportation of oil produced by state-owned entities; and transactions with state-controlled banks.
Such entities include RAO UES, Gazprom, Sberbank, OJSC Vnesheconombank, OJSC Gazprombank,
Rosneft and various federal agencies, including the tax authorities. Transneft believes that these
transactions will continue in the foreseeable future. These transactions are not always approved by
Transneft as interested party transactions as required by Russian law. Although Transneft believes
these interested party transactions took place on market terms, there is a risk that Transneft’s
shareholders could challenge such transactions in court. See ‘‘Risk Factors—Risks relating to
Transneft—The Russian Government, whose interests may not coincide with those of the
Noteholders, controls Transneft and has a substantial degree of influence over Transneft’s operations
and those of its customers and may cause Transneft to engage in business practices that do not
benefit Noteholders’’.
The Group undertook the following significant transactions with state-controlled entities for the years
ended 31 December 2006, 2005 and 2004:
* Revenues from oil transportation services (comprising payments received from state-controlled
oil production companies such as Rosneft) totalling RUR 50,912 million (U.S.$1,934 million) for
the year ended 31 December 2006, RUR 27,834 million for the year ended 31 December 2005
and RUR 5,637 million for the year ended 31 December 2004;
* Electricity expenses (comprising payments made to state-controlled electricity provider RAO
UES) totalling RUR 2,800 million (U.S.$106 million) for the year ended 31 December 2006,
RUR 6,429 million for the year ended 31 December 2005 and RUR 5,084 million for the year
ended 31 December 2004;
* Interest expenses (comprising interest payments made to Sberbank) totalling RUR 976 million
(U.S.$37 million) for the year ended 31 December 2006, RUR 782 million for the year ended 31
December 2005 and RUR 1,267 million for the year ended 31 December 2004; and
* Customs duties on oil sales (comprising duties paid to federal agencies) totalling nil for the year
ended 31 December 2006, RUR 1,835 million for the year ended 31 December 2005 and RUR
2,054 million for the year ended 31 December 2004.
The Group had the following significant balances with state-controlled entities as at 31 December
2006, 2005 and 2004:
* Receivables and prepayments (comprising amounts owed to the Group by state-controlled oil
companies) totalling RUR 20 million (U.S.$0.76 million) as at 31 December 2006, RUR 519
million as at 31 December 2005 and RUR 163 million as at 31 December 2004;
* Cash (comprising cash balances held at Sberbank) totalling RUR 1,157 million (U.S.$44 million)
as at 31 December 2006, RUR 12,487 million as at 31 December 2005 and RUR 3,879 million
as at 31 December 2004;
* Trade and other payables (comprising amounts owed to RAO UES) totalling RUR 3,570
million (U.S.$136 million) as at 31 December 2006, RUR 1,564 million as at 31 December 2005
and RUR 351 million as at 31 December 2004; and
* Non-current and current borrowings (comprising monies owed by the Group to state-controlled
banks) totalling RUR 66,260 million (U.S.$2,517 million) as at 31 December 2006, RUR 6,925
million as at 31 December 2005 and RUR 17,268 million as at 31 December 2004.
Payments of tax are disclosed in the financial statements included in this Prospectus.
87

SHARE CAPITAL AND DIVIDENDS
As at the date of this Prospectus, Transneft’s share capital consisted of 4,664,627 authorised, issued
and fully paid ordinary voting shares and 1,554,875 authorised, issued and fully paid preferred nonvoting
shares, each with a par value of RUR 1. See ‘‘Business – Proposed Merger with
Transnefteprodukt’’ for a discussion of a proposed new issue of ordinary voting shares to the Russian
Government.
Ownership
All of the ordinary voting shares of Transneft, representing 75 per cent. of the total issued share
capital of Transneft, are held by the Russian Government through the Federal Agency for the
Management of Federal Property (‘‘Rosimushchestvo’’). The remaining 25 per cent. of the issued
share capital is in the form of preferred non-voting shares, and is held by various domestic and
international investors and current and former employees of the Group and traded on the secondary
markets of the Russian Trading System (‘‘RTS’’) and the Moscow Interbank Currency Exchange
(‘‘MICEX’’) exchanges in Moscow.
The rights of Transneft’s shareholders are set out in Resolution No. 810 dated 14 August 1993 and
Decree No. 1403 dated 17 November 2002 and contained in Transneft’s Charter. Transneft is
managed by its directors in accordance with Transneft’s Charter and Russian law.
As a result of its shareholding, the Russian Government controls the Group’s investment and
dividend policy, and influences the Group’s business through its regulation of Transneft activities,
investment projects and key negotiations (for example with transit countries). The Russian
Government receives detailed information on Transneft’s business as all nine members of the Board
of Directors are appointed by the Russian Government, and such members include the Minister of
Industry and Energy and other high-ranking Government officials. Transneft has a history of paying
only modest dividends (see ‘‘—Dividends’’ below).
Ordinary Shares
Key rights relating to corporate governance attaching to ordinary shares are set out in ‘‘Management
and Corporate Governance’’.
Preferred Shares
The preferred shares were created in 1997 pursuant to Regulation No. 1083 of the Russian
Government of 2 November 1995 and distributed by the Russian Government to employees of
Transneft pursuant to applicable privatisation legislation. In July 2002 the preferred shares were listed
on MICEX and on the RTS and are freely traded on the secondary markets of such exchanges.
Under Transneft’s Charter, if the General Meeting of Shareholders of Transneft declares a dividend
for the relevant financial year, holders of the preferred shares are entitled to receive dividends of 10
per cent. of the net profits of Transneft for the most recent financial year (on a non consolidated
basis in accordance with RAS). Dividends on the preferred shares are not cumulative. The preferred
shares are not convertible into ordinary shares or any other security interest.
Holders of preferred shares are entitled to participate in the General Meeting of Shareholders and
may vote on the following matters:
* the reorganisation and liquidation of Transneft;
* the introduction of amendments and addenda to Transneft’s Charter which limit the rights of
holders of preferred shares, including the determination or increase in the amount of dividends
and/or determination or liquidation cost to be paid on preferred shares of the previous level of
priority; and
* all issues within the competence of the General Meeting of Shareholders, beginning with the
General Meeting of Shareholders following an annual General Meeting of Shareholders where
no decision on the payment of dividends was adopted or where a decision was adopted on the
partial payment of dividends on preferred shares. This right terminates after the first full
payment of dividends on such shares.
Trading in the preferred shares was suspended in 1998, and again in 2006, as a result of a dispute
regarding their ownership. This dispute was between private individuals, including former management
of Transneft who ceased to work for Transneft in July 1998, and did not relate to the conduct or
88

privatisation of Transneft in any way. Trading in the preferred shares resumed again in September
2006 and the owners of the relevant preferred shares were confirmed as having good title to those
preferred shares.
Dividends
The following dividends were approved in respect of the years ended 31 December 2004, 2005 (as of
the date of this Prospectus, no interim dividends for 2006 were paid):
For the year ended
31 December 2004
RUR
per share
Total RUR
(millions)
Ordinary shares.................................................................................................. 53.64 250
Preferred shares ................................................................................................. 321.81 500
750
For the year ended
31 December 2005
RUR
per share
Total RUR
(millions)
Ordinary shares.................................................................................................. 184.52 861
Preferred shares ................................................................................................. 296.36 460
1,321
On 29 May 2007, the Board of Directors decided to pay dividends for the year ended 31 December
2006 to the holders of preferred shares in the amount of RUR 350.5 million and to the holder of its
ordinary shares in the amount of RUR 472.2 million.
However, this decision of the Board of Directors requires approval by the Annual General Meeting
of Shareholders of Transneft, expected to be held in June 2007.
89

REGULATION
The Russian legal system’s rapid evolution during the last 10 years is particularly evident in the
context of oil industry regulation. Below is a brief overview of certain key aspects of the current
regulatory regime for transportation of crude oil in Russia and certain proposed amendments to such
regime.
The regulation of legal and economic relations connected with the transportation of crude oil is based
on the Constitution of Russia, Federal Law No. 147-FZ of 17 August 1995 on Natural Monopolies
(as amended) (the ‘‘Natural Monopoly Law’’) and a number of Russian Governmental Resolutions
related to access to trunk crude oil pipelines and related infrastructure.
Regulatory Authorities
Presidential Decree No. 649 dated 20 May 2004 (as amended) and Presidential Decree No. 314 dated
9 March 2004 (as amended) establish the general framework and structure for the state authorities
which govern Transneft’s operations.
Prior to 2004, the Ministry of Property Relations was responsible for the management of the shares
owned by Russia in joint stock companies such as Transneft. Beginning in 2004, these powers were
vested with Rosimushchestvo. The powers of Rosimushchestvo are regulated by Regulation No. 691
of the Russian Government of 27 November 2004 ‘‘On the Federal Agency for the Management of
Federal Property’’. Rosimushchestvo reports to the Ministry of Economic Development and Trade.
Pursuant to Resolution No. 738, the Russian Government can reserve certain key decisions in respect
of Transneft’s management, including, inter alia: determination of priority activities for Transneft;
approval of an agenda for shareholders’ meetings; increase of its share capital; issuance of bonds and
other securities; evaluation of assets, placement price of shares subject to redemption in cases required
by Russian law; appointment of its collective management body; recommendations in respect of the
payment of dividends; and approval of major transactions (if required by Russian law).
The Ministry of Industry and Energy (‘‘MIE’’) is responsible for approving the quarterly schedules
for oil transportation, although the Russian Government is expected to adopt a special resolution to
transfer this responsibility to another authority (Resolution No. 284 of the Russian Government of 16
June 2004 ‘‘On Approval of the Regulations on the Ministry of Industry and Energy of Russia’’ (as
amended)). The timing of any such transfer and the identity of the transferee remains unclear.
The Federal Tariff Service (‘‘FTS’’) is generally responsible for regulating natural monopolies and sets
the tariffs that oil companies are charged for the use of Transneft’s pipelines, pursuant to Resolution
No. 332 of the Russian Government of 30 June 2004 ‘‘On Approval of the Regulations on the
Federal Tariff Service’’, as amended. See ‘‘Business—Tariffs’’ and ‘‘Management’s Discussion and
Analysis of Results of Operations and Financial Condition—Tariffs’’.
The Federal Anti-Monopoly Service is vested with general control over compliance by the natural
monopolies with anti-trust legislation and, in particular, over the access granted to all customers of
the services provided by the natural monopolies, pursuant to Resolution No. 331 of the Russian
Government of 30 June 2004 ‘‘On Approval of the Regulations on the Federal Anti-Monopoly
Service’’ (as amended).
The Federal Service for Ecological, Technological and Nuclear Supervision (‘‘FSETNS’’) is
responsible for industrial safety, environmental expert reviews and the protection of the environment
from the potentially negative impact of industrial activity. It issues licences and permits for various
activities, such as licences for the use of explosive materials and for industrial activities which have a
negative impact on the environment.
The Ministry of Natural Resources regulates, and is responsible for the Russian Government’s overall
strategy for, the protection of natural resources (including subsoil, forest, water, flora and fauna). The
Federal Service for Supervision in the Sphere of Environmental Use, which reports to the Ministry of
Natural Resources, is vested with control and supervision powers.
Regional and local authorities enforce their taxation regimes, administer land-use regulations and
oversee compliance with environmental and employee safety rules.
Strategic Entity
Transneft is included in the list of Russia’s strategic companies. Any decision to privatise such entities
can be taken by the Russian Government only after the President of Russia decides to exclude the
90

elevant company from the list. Pursuant to Federal Law No. 178-FZ of 21 December 2001 ‘‘On
Privatization of State and Municipal Property’’ (as amended), a chief executive officer of a strategic
company is not allowed to sell any shares which were contributed to the share capital of such
strategic company in accordance with the decision of the Russian Government. A chief executive
officer is also prohibited from executing transactions on behalf of a strategic company if such
transactions could result in any sale of, or introduction of trust management in relation to, such
contributed shares, without the prior consent of the Russian Government or other authorised agency.
Moreover, any decrease of the federal stake in a strategic company as a result of additional share
issuance shall only be permitted by the President of Russia and is subject to the state retaining at
least 50 per cent. plus one voting share. In addition, the liquidation and reorganisation of such
strategic companies can be carried out by the Russian Government only on the basis of a presidential
decision.
There are also special rules related to the bankruptcy of such entities permitting the Russian
Government to, inter alia, take measures to prevent their bankruptcy and to participate in
negotiations with the creditors of such entities in order to reach an agreement on the restructuring of
their debt (including by providing state guarantees). The bankruptcy regime of natural monopolies is
regulated by Federal Law No. 122-FZ of 24 June 1999 ‘‘On the Peculiarities of the Insolvency
(Bankruptcy) of Natural Monopolies in the Fuel and Energy Sectors’’. From 1 July 2009, this Law
will be substituted by paragraph 6 of Chapter 9 of Federal Law No. 127-FZ dated 26 October 2002
‘‘On Insolvency (Bankruptcy)’’. The changes will include a reduction of the minimum amount of
outstanding debt which permits the bringing of a bankruptcy claim and reduction of the maximum
term of external management (from five to two years). Also, the procedure for the sale of assets of a
bankrupt natural monopoly will be regulated differently from those involving other businesses. In
particular, Russia, its regions and municipalities will have a right of first refusal over the productionrelated
assets of a bankrupt entity sold during bankruptcy proceedings.
Natural Monopoly Law
The Natural Monopoly Law regulates those markets where ‘‘demand is more efficiently satisfied in
the absence of competition due to the technological aspects of the production process… and the
goods produced by the natural monopolies cannot be substituted by other goods’’ (Article 3). The list
of regulated activities provided by Article 4 of the Natural Monopoly Law includes, inter alia, the
transportation of crude oil through trunk pipelines and the services of terminals and ports. The list of
entities which are natural monopolies is maintained by the FTS, and Transneft is included on this
list. The key elements of the regime established by the Natural Monopoly Law applicable to
Transneft are:
* certain types of transactions (including, inter alia, (i) investments outside the regulated activity
of a natural monopoly (in Transneft’s case its regulated activity is the transportation of crude
oil through trunk pipelines and the provision of services through its transportation terminals at
sea ports) and (ii) any sale, lease or other transaction which results in another entity obtaining
title to a part of its main assets used for the production of the regulated goods), in each case
exceeding ten per cent. of the natural monopoly’s own capital, must be approved by the body
responsible for its regulation (the ‘‘Natural Monopolies Regulator’’) pursuant to the Natural
Monopoly Law (Article 7.2);
* the Natural Monopolies Regulator has the power to determine the categories of consumer who
are entitled to require the natural monopoly to provide them with a certain level or volume of
services: in the case of Transneft, oil companies have mandatory access to crude oil trunk
pipelines and crude oil export terminals located at sea ports. In addition, Article 8.1 prohibits
natural monopolies from refusing to enter into contracts with particular customers, provided
that the relevant natural monopoly has the requisite capacity;
* tariffs of such natural monopolies are regulated by the Natural Monopolies Regulator (Articles
6 and 11); and
* notification and reporting requirements apply to the natural monopoly’s operations (Article 8.2).
Access to Transneft’s Pipelines and Other Infrastructure
Access to Transneft’s pipeline system is regulated by the Natural Monopoly Law and two
Government Resolutions (Resolution No. 1446 of the Russian Government of 31 December 1994
approving ‘‘The Main Terms of the Use of Oil, Oil Products Trunk Pipeline Systems and Terminals
91

in Sea Ports for the Export of Oil and Oil Products Outside the Customs Territory of Russia’’ (as
amended) (‘‘Resolution No. 1446’’) and Resolution No. 209 of the Russian Government of 28
February 1995 ‘‘On the Regulation of Access to Oil, Oil Products Trunk Pipeline Systems and
Terminals in Sea Ports for the Export of Oil and Oil Products Outside the Customs Territory of
Russia’’ (as amended) (‘‘Resolution No. 209’’)), which detail the procedure for the allocation of
capacity in the pipeline and terminals. Domestic transportation is not regulated by the Government
specifically. However, as Transneft’s export facilities and pipelines for delivery of oil to Russian
consumers constitute one system, domestic transportation is regulated by the MIE through the
approval of transportation schedules as described below.
Pipeline capacity is allocated quarterly, according to schedules approved by the MIE. Oil producers
are required to send applications to Transneft specifying their projected volumes of production for the
upcoming quarter and actual volumes of production for the previous quarter not later than 30 days
before the beginning of the next quarter. Transneft is then required to supply the MIE with
information on its pipeline and sea port capacity, specifying the names of the oil suppliers requiring
capacity. The MIE summarises the information provided by Transneft and approves the
transportation schedules. These schedules are not publicly available. Transportation is then carried
out by Transneft in accordance with the agreements signed with oil suppliers and the approved
schedules. Once the transportation schedules are set, oil producers are not generally able to increase
their oil export volumes, although they do have limited flexibility to change delivery routes.
Generally, where the capacity of the pipeline is not sufficient to meet the crude oil transportation
requirements of Transneft’s customers, capacity is distributed between the oil producing companies in
proportion to the volumes of crude oil produced by such companies in the previous quarter.
While the Natural Monopoly Law provides that pipeline and sea terminal access rights are allocated
between oil producers in proportion to the volumes of crude oil produced and delivered to
Transneft’s pipeline system (i.e. without specifying the quarterly period, and not simply in proportion
to oil production volumes), this principle is not applied in practice and access rights are allocated to
oil companies in proportion to the volumes of crude oil produced in the previous quarter in
accordance with the Resolutions No. 1446 and No. 209 as described above. Resolution No. 209 also
provides for priority access rights for certain deliveries of crude oil in accordance with the
international obligations of Russia.
Pursuant to Resolution No. 1446 and the Regulations on the Procedure for the Assignment of the
Right of Access to the Oil Pipeline System and Terminals in the Sea Ports for the Export of Oil
Outside the Customs Territory of Russia approved by the Ministry of Fuel and Energy on 4 August
1995 (as amended), oil producers are permitted to assign their access rights to others. The volumes of
assigned capacity cannot exceed the monthly capacity allocated to the assignor. Any assignment
agreement must be presented to the MIE so that it can correct the crude oil transportation schedule.
Documentation relating to the transportation of the assigned volumes of crude oil must be presented
by the assignee to Transneft not later than the fifteenth day of the month during which
transportation is carried out. Oil producers who have any tax indebtedness are prohibited from
assigning their crude oil pipeline capacity.
General Anti-Monopoly Requirements
Under Federal Law No. 135-FZ of 26 July 2006 ‘‘On Protection of Competition’’ (the ‘‘Competition
Law’’), natural monopoly entities are regarded as entities occupying a ‘‘predominant position’’ on the
relevant market.
Article 10 of the Competition Law prohibits certain actions (or inactions) by market participants
occupying a predominant position on the market which will result or may result in the prevention,
limitation or elimination of competition or the infringement of the interests of other market
participants. These rules are primarily intended to prevent the imposition of discriminatory terms or
other burdensome or irrelevant contractual terms on, or a refusal to provide services to, consumers or
the creation of obstacles to the development of competition on the relevant market. The Competition
Law specifically provides that the tariffs approved by the Natural Monopolies Regulator may not be
viewed as abuse by a natural monopoly of its predominant position on the market.
Article 18 of the Competition Law requires a natural monopoly entity to enter into, inter alia,
property, pension and personal insurance contracts or contracts relating to services on securities
markets with companies selected through an open tender.
92

Land Use
In accordance with the Land Code of Russia No. 136-FZ, dated 25 October 2001 (as amended) (the
‘‘Land Code’’), companies usually own or lease the land where their assets are located. Servitudes
(rights of use by a third party) are also available for underground facilities, although they are rarely
used.
The majority of the land on which the Group’s facilities are located was granted to the Group under
the right of the perpetual use of land which existed prior to the enactment of the Land Code.
Pursuant to the Federal Law on Introduction of the Land Code No. 137-FZ of 25 October 2001 (as
amended) all legal entities, with certain exceptions, are obliged to convert their right of the perpetual
use into either ownership or lease until 1 January 2008. From 2001 onwards, the Group has usually
obtained leases for the land required for the construction of its facilities.
Historically, the construction of industrial facilities in Russia has been permitted on land categorised
for industrial use. Where the land required by the Group fell within an alternative category (such as
forestry or agriculture), a complicated process of re-categorisation of such land into industrial land
(either permanently for surface facilities or, in the case of underground facilities, for the period of
construction) was required. In 2005, amendments were introduced to the Land Code which provided
that agricultural land could be used to construct pipelines without needing to transfer such land into
the ‘‘industrial’’ or ‘‘settlement’’ category, subject to the approval of the project for the remediation
of the relevant land after such use has finished by state authorities. This simplified the obtaining of
land rights for the construction of pipelines.
Where pipelines are buried in the soil, a subsurface use licence is generally not required unless the
pipeline is laid more than 5 metres deep. A subsurface use licence is required, however, for the
construction of underground oil storage facilities. From 1 January 2007 onwards, when the Water
Code of Russia No. 74-FZ dated 3 June 2006 (as amended) (the ‘‘Water Code’’) came into force, the
right to use water for pipeline construction will be granted on the basis of decisions of federal or
local authorities (depending on the body of water) and a water use agreement.
Article 21 of the New Forest Code of Russia No. 200-FZ dated 4 December 2006, which came into
force on 1 January 2007, also specifically provides for the right to construct pipelines on forested
land. For the purpose of such construction, trees within ‘‘protection zones’’ created around industrial
facilities (such as pipelines) may be removed to ensure safety and to enable the operation of such
facilities. Forested land used for the construction of pipelines must be restored after such use has
finished. Pipelines may not be constructed on lands falling within the category of federal ‘‘protected’’
natural territories.
Environmental Requirements
The principal Russian law governing Transneft’s environmental compliance is Federal Law No. 7-FZ,
dated 10 January 2002 ‘‘On Environmental Protection’’ (as amended), (the ‘‘Environmental Protection
Law’’). The Environmental Protection Law establishes what is colloquially known as a ‘‘pay-topollute’’
regime administered by the FSETNS and local authorities.
Under the ‘‘pay-to-pollute’’ regime, companies are required to obtain licences and permits authorising
the discharge of pollutants into the air, water and soil. These licences and permits establish specific
limits for permitted pollution. Fees are assessed for both pollution within the agreed limits and for
pollution in excess of these limits (the latter containing a penalty element). There are additional fines
for certain other breaches of environmental regulations. The Environmental Protection Law contains
an obligation to make compensation payments to the budget for all environmental losses caused by
pollution. The limitation period for claims for compensation for pollution is 20 years.
Payments of higher fees and fines do not relieve a company of its responsibility to take environmental
protection measures and undertake remediation and clean-up obligations. If the operations of a
company violate environmental requirements or cause harm to the environment or any individual or
legal entity, a court action may be brought to limit or ban these operations and require the company
to remedy the effects of the violation. Any company or employee that fails to comply with the
requirements of applicable environmental laws and regulations may be subject to administrative and/
or criminal liability. Courts may also impose clean-up obligations in lieu of or in addition to
imposing fines.
93

Ecological Expert Review
An ecological expert review (the ‘‘EER’’) must be carried out prior to the implementation of any
project that could cause harm to the environment, such as the construction and operation of a
pipeline. If a company does not obtain an EER approving the relevant project, its development is
prohibited. The EER is carried out by a commission created by the FSETNS.
During preparation of materials for the EER, the company proposing the project must carry out an
environmental impact assessment (the ‘‘EIA’’). The purpose of the EIA is to investigate, identify and
analyse the consequences of the project’s anticipated impact on the environment and to establish
measures to protect against and minimise such impact.
Depending on the potential significance and threat of the project, an EER can be carried out at a
federal or regional level.
The public must be supplied with initial information concerning the planned activities and their
potential impact on the environment. Comments from members of the public must be taken into
account and reflected in the preparation and further development of the proposed project and the
assessment thereof. Public hearings are not required in every case but could be held by the company
proposing the project depending on the level of the project, its potential impact on the environment
and the interest of the public in the project. The public may also carry out an independent review,
except where project materials constitute commercial or state secrets. The conclusion of the public
independent review will have legal effect only if approved by the FSETNS.
Oil Spills and Soil Contamination
Any contamination of soil and ground water resulting from oil spills may create a number of
obligations on Transneft.
On 21 August 2000, the Russian Government approved the ‘‘Basic Requirements for the Plans of
Prevention and Clean up of Accidental Oil Spills’’, which obliges companies such as Transneft to
develop plans for the prevention and clean up of accidental oil spills. Such plans must be approved
by a number of State authorities. Resolution No. 240 of the Russian Government of 15 April 2002
‘‘On approval of the Rules for Organisation of the Prevention and Liquidation of the Spills of Oil
and Oil Products on the Territory of Russia’’ requires oil producing, transportation, refinery and
storage companies to have their own dedicated human, technical and financial resources to clean up
oil spills as and when they occur.
In addition, the Environmental Protection Law and the Land Code contain provisions relating to the
payment of compensation for damage resulting from the contamination of land. According to Article
14 of the Land Code, if a company’s activities cause chemical contamination of land, making it
impossible to use such land for a ‘‘designated purpose’’ (for example, agriculture or forestry) or
reduces its quality generally, the relevant company must pay compensation to the owner of the land
in respect of such damage, any agricultural losses and costs of cleaning up the land so that it can
again be used for its ‘‘designated purpose’’.
Companies which damage the fertile soil layer of land during construction or other activities are
required to remediate the land at the end of their activities at their own expense and in accordance
with remediation programmes approved by an EER, pursuant to Resolution No. 140 of the Russian
Government of 23 February 1994 ‘‘On Restoration of Land and Removal, Storage and Use of the
Fertile Soil Layer’’.
According to the Water Code, water users are required to take measures to prevent and clean up
accidents that may affect the condition of rivers, lakes or other bodies of water. Facilities for the
transportation and storage of oil cannot operate without devices for the prevention of contamination
of rivers, lakes or other bodies of water and for the control and detection of oil spills.
In addition to the compensation to be paid in respect of damages caused by soil and water
contamination, a company responsible for such contamination may also be subject to fines or the
suspension of its activities for up to 90 days.
Laying of Pipelines
Russian legislation contains certain requirements related to the laying of pipelines. Resolution No. 997
of the Russian Government of 13 August 1996 imposes specific fauna protection requirements such
that certain pipelines must be buried in soil. If that is not possible in some areas, special animal
passageways must be constructed by raising parts of the pipeline to a height of not less than three
metres.
94

Health and Safety
The principal law regulating industrial safety is Federal Law No. 116-FZ of 21 July 1997 ‘‘On
Industrial Safety of Dangerous Industrial Facilities’’ (as amended) (the ‘‘Safety Law’’). The Safety
Law applies, in particular, to industrial facilities and sites where certain activities are conducted,
including sites where flammable materials or hazardous equipment such as lifting machines are used.
The Safety Law also contains a comprehensive list of dangerous substances and their permitted
concentrations, and extends to facilities and sites where these substances are used.
Transneft’s activities also include operation of certain hazardous industrial sites regulated by the
FSETNS. Any construction, reconstruction, liquidation or other activities in relation to such regulated
industrial sites is subject to a state industrial safety review. Any deviation from project documentation
in the process of construction, reconstruction and liquidation of regulated industrial sites is prohibited
unless reviewed by a licensed expert and approved by the FSETNS. Companies that operate such
industrial facilities and sites have a wide range of obligations under the Safety Law. In particular,
they must limit access to such sites to qualified specialists, maintain industrial safety controls and
carry insurance for third-party liability for injuries caused in the course of operating regulated
industrial sites. The Safety Law also requires these companies to enter into contracts with professional
demolition companies or create their own demolition services in certain cases, conduct personnel
training programmes, create systems to cope with and inform the FSETNS of accidents and maintain
these systems in good working order. In certain cases, companies operating regulated industrial sites
must also prepare declarations of industrial safety which summarise the risks associated with
operating a particular regulated industrial site and measures the company has taken and will take to
mitigate such risks and use such site in accordance with applicable industrial safety requirements.
Such declaration must be adopted by the chief executive officer of the company, who is personally
responsible for the completeness and accuracy of the data contained therein. The industrial safety
declaration, as well as a state industrial safety review, are required for the issuance of a licence
permitting the operation of a dangerous industrial facility.
In addition, companies with more than 50 employees must have a special work safety service or a
work safety officer. Business entities are required to spend 0.2 per cent. of their production expenses
on improvement of work safety. Any company or individual violating industrial safety rules may
incur administrative and/or civil liability. A company that violates safety rules in a way that
negatively impacts the health of an individual may also be obligated to compensate the individual for
lost earnings, as well as health-related damages.
In the event of an accident, a special commission led by a representative of the FSETNS conducts a
technical investigation. The company operating the industrial facility where the accident took place
bears all costs of an investigation. The officials of the FSETNS have the right to access industrial
sites and may inspect documents to ensure a company’s compliance with safety rules. The FSETNS
may suspend or terminate a company’s operations or impose administrative liability on a company or
its officials.
Draft Law on Trunk Pipelines
The draft Law ‘‘On Trunk Pipeline Transport’’ was considered by the State Duma in a first reading
in 1999. It was then substantially amended and the State Duma planned to consider this draft in a
second reading in December 2006. However, its consideration was postponed for an indefinite period.
The draft Law also provides that the Russian Federation must own at least 75 per cent. of all shares
of companies owning trunk oil pipelines to ensure state control over trunk pipelines in Russia.
The draft Law provides that the operator of a trunk pipeline must ensure non-discriminatory access
to the pipeline to any legal entity on the basis of a ‘‘fairness approach’’. Access to export facilities
will be regulated by the Russian Government.
The draft Law regulates distribution of pipeline capacity. In particular, a list of high priority types of
delivery will be determined (presumably by the Government); after allocation of pipeline capacity to
such priority deliveries, free capacity must be distributed between the suppliers in proportion to the
share of each supplier in the aggregate volume of products to be transported.
The draft Law introduces a ‘‘quality bank’’ for the pipeline system. Transneft has very limited ability
to transport individual batches of crude oil, which results in the blending of crude oil of differing
qualities. Transneft and the Russian Government have been discussing the introduction of a ‘‘quality
bank’’ for the Transneft system for several years. Such proposals generally meet with aggressive
resistance from producers with low-quality reserves, as well as regional authorities where such reserves
95

are located, and the quality bank system is not operated by Transneft currently. Under a quality
bank system, oil companies that supply lower-quality (heavy or sour) crude oil to the system
compensate suppliers of higher-quality crude oil for the deterioration in the crude quality due to
blending, or, alternatively, suppliers of lower-quality crude oil might pay more for the use of pipelines
than those who supply higher-quality crude oil.
This description of certain provisions of the draft Law is based on the bill proposed for the second
reading. No assurance can be given that the draft Law will not change.
Transneft believes that any effect that the draft Law has on its business and operations will be
positive, in particular, because, according to information available to Transneft, it will further
simplify the procedure for obtaining land rights for pipeline construction.
Employment
Labour matters in Russia are primarily governed by the Labour Code of Russia No. 197-FZ dated
20 December 2001 (as amended) (the ‘‘Labour Code’’). In addition to this core legislation,
relationships between employers and employees are regulated by several federal laws, such as Law
No. 1032-1 ‘‘On Employment in Russia’’ of 19 April 1991 and Federal Law No. 173-FZ ‘‘On Labour
Pensions in Russia’’ of 17 December 2001.
Employment Contracts
As a general rule, employment contracts for an indefinite term are concluded with all employees.
Russian labour legislation expressly limits the possibility of entering into limited-term employment
contracts. However, an employment contract may be entered into for a fixed term of up to five years
in certain cases where labour relations may not be established for an indefinite term due to the nature
of the duties or the conditions of the performance of such duties, as well as in other cases expressly
identified by federal law.
An employer may terminate an employment contract only on the basis of the specific grounds
contemplated by the Labour Code. An employee dismissed from an enterprise due to downsizing or
liquidation is entitled to receive compensation, including a severance payment and, depending on the
circumstances, salary payments for a certain period of time up to three months’ salary. Any
termination by an employer that is inconsistent with the Labour Code requirements may be
invalidated by a court and the employee may be reinstated and compensated with back-pay.
Work Time
The Labour Code generally sets the regular working week at 40 hours; however, for certain specified
categories of employees the Labour Code sets a reduced working week, subject to, inter alia, the age
and state of health of the employee and hazardous working conditions. Annual paid vacation leave
under the law is generally 28 calendar days. The Labour Code contemplates additional paid vacation
leave in a number of cases, including for work on an unlimited hours basis, night-shifts, work under
harmful conditions and work in the northern regions of Russia.
Relations concerning retirement age and retirement benefits are regulated by Federal Law No. 173-FZ
‘‘On Labour Pensions in Russia’’ of 17 December 2001, as amended. The general retirement age in
Russia is 60 years for men and 55 years for women.
Trade Unions
The activities of trade unions are generally governed by Federal Law No. 10-FZ ‘‘On Trade Unions,
Their Rights and Guarantees of Their Activity’’ of 12 January 1996 (the ‘‘Trade Union Law’’).
The Trade Union Law defines a trade union as a voluntary union of individuals with common
professional and other interests that is incorporated for the purposes of representing and protecting
the rights and interests of its members. National trade union associations, which co-ordinate activities
of trade unions throughout Russia, are also permitted.
As part of their activities, trade unions may:
* negotiate collective contracts and agreements such as those between the trade unions and
employers, federal, regional and local governmental authorities and other entities;
* monitor compliance with labour laws, collective contracts and other agreements;
* access work sites and offices, and request information relating to labour issues from the
management of companies and state and municipal authorities;
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* represent their members and other employees in individual and collective labour disputes with
management;
* participate in strikes; and
* monitor redundancy of employees and seek action by municipal authorities to delay or suspend
mass lay-offs.
Russian laws require that companies co-operate with trade unions and do not interfere with their
activities.
If a trade union discovers any violation of work condition requirements, notification is sent to the
employer with a request to cure the violation and to suspend work if there is an immediate threat to
the lives or health of employees. The trade union may also apply to state authorities and labour
inspectors and prosecutors to ensure that an employer does not violate Russian labour laws. Trade
unions may also initiate collective labour disputes which may lead to strikes.
Energy Charter Treaty
The Energy Charter (the ‘‘EC’’) was officially adopted in December 1991. It is not legally binding on
any of its parties. At present, 54 countries have signed the EC, including member states of the
European Union (the ‘‘EU’’). In December 1994, following three years of negotiations, the general
intentions contained in the EC were put into a legally binding form, the Energy Charter Treaty (the
‘‘ECT’’). As at January 2005, 51 countries have signed the ECT, including Russia and the member
states of the EU. The ECT has been ratified by 46 countries.
The main objectives of the ECT are to:
* provide a stable energy supply;
* provide effective production, processing, transportation, distribution and consumption of energy
resources;
* assist in the development of the European energy market and the improvement of the global
energy market by implementing principles of non-discriminatory access and free market pricing;
and
* legally protect the interests of energy-related companies and entities on issues relating to
investments, transit, trade and dispute resolution procedures.
Although Russia signed the ECT in December 1994, the State Duma of Russia has not yet ratified it,
in part due to concerns regarding the impact of the ECT on pipeline access. Accordingly, it is
generally considered that the ECT is not binding upon Russia. However, although Russia has not
ratified the ECT, it is a member of the Energy Charter Conference and participates in the Energy
Charter Secretariat’s day-to-day activities. Transneft believes that any effect that the ECT following
its ratification has on its business and operations will not materially change its position.
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TRANSCAPITALINVEST LIMITED
General
TransCapitalInvest Limited (‘‘TCI Limited’’) is a special-purpose vehicle established for the purpose
of issuing debt securities and was incorporated in Ireland as a private limited company on
26 January 2007, registered number 433584 under the name TransCapitalInvest Limited, under the
Companies Acts 1963-2005 (as amended) of Ireland (the ‘‘Companies Acts’’). The registered office of
TCI Limited is 5 Harbourmaster Place, IFSC, Dublin 1, Ireland and the telephone number is +353 1
680 6000.
The authorised share capital of TCI Limited is A100 divided into 100 ordinary shares of par value A1
each (the ‘‘Shares’’). TCI Limited has issued 1 Share, which is fully paid and is held on trust by
Deutsche International Finance (Ireland) Limited (the ‘‘Share Trustee’’) under the terms of a
declaration of trust (the ‘‘Declaration of Trust’’) dated 20 February 2007, under which the Share
Trustee holds the Share on trust for charity. The Share Trustee has no beneficial interest in and
derives no benefit (other than any fees for acting as Share Trustee) from its holding of the Share. The
Share Trustee will apply any income derived from TCI Limited solely for the above purposes.
Deutsche International Corporate Services (Ireland) Limited (the ‘‘Corporate Services Provider’’), an
Irish company, acts as the corporate services provider for TCI Limited. The office of the Corporate
Services Provider serves as the general business office of TCI Limited. Through the office of the
Corporate Services Provider and pursuant to the terms of the corporate services agreement entered
into on 20 February 2007 between TCI Limited and the Corporate Services Provider (the ‘‘Corporate
Services Agreement’’), the Corporate Services Provider performs various management functions on
behalf of TCI Limited, including the provision of certain clerical, reporting, accounting, administrative
and other services until termination of the Corporate Services Agreement. In consideration of the
foregoing, the Corporate Services Provider receives various fees and other charges payable by TCI
Limited at rates agreed upon from time to time plus expenses. The terms of the Corporate Services
Agreement provide that either party may terminate the Corporate Services Agreement upon the
occurrence of certain stated events, including any material breach by the other party of its obligations
under the Corporate Services Agreement which is either incapable of remedy or which is not cured
within 30 days from the date on which it was notified of such breach. In addition, either party may
terminate the Corporate Services Agreement at any time by giving at least 90 days’ written notice to
the other party. The Corporate Services Agreement contains provisions for the appointment of a
successor corporate services provider if necessary.
The Corporate Services Provider’s principal office is 5 Harbourmaster Place, IFSC, Dublin 1, Ireland.
Business
The principal objects of TCI Limited are set forth in clause 2 of its Memorandum of Association and
include, inter alia, the power to issue securities and to raise or borrow money, to grant security over
its assets for such purposes and to lend with or without security.
TCI Limited is organised as a special-purpose company. TCI Limited was established to raise funds
by the issue of debt securities and to use the proceeds of each such issuance to make loans to
Transneft.
So long as any of the Notes remain outstanding, TCI Limited will be subject to the restrictions set
out in Condition 4 of each of the Dollar Notes and the Euro Notes and in each Trust Deed.
There has been no material adverse change in the financial position or prospects of TCI Limited since
the date of its incorporation. Save for the issues of Notes described in this Prospectus and the issue
of U.S.$1,300,000,000 5.67 per cent. Loan Participation Notes due 2014 on 5 March 2007 (the
‘‘March 2007 LPN’’) and their related arrangements, TCI Limited has no borrowings or indebtedness
in the nature of borrowings (including loan capital issued or created but unissued), term loans,
liabilities under acceptances or acceptance credits, mortgages, charges or guarantees or other
contingent liabilities.
Directors and Company Secretary
TCI Limited’s Articles of Association provide that the Board of Directors of TCI Limited will consist
of at least two Directors.
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The Directors of TCI Limited and their business addresses are as follows:
Jennifer Coyne
5 Harbourmaster Place, IFSC, Dublin 1, Ireland.
Carmel Naughton 5 Harbourmaster Place, IFSC, Dublin 1, Ireland.
The Company Secretary is Deutsche International Corporate Services (Ireland) Limited.
Financial Statements
Since its date of incorporation and other than the March 2007 LPN, TCI Limited has not carried on
any business activities and no financial statements of TCI Limited have been prepared as at the date
of this Prospectus. TCI Limited intends to publish its first financial statements in respect of the
period ending on 31 December 2007. TCI Limited will not prepare interim financial information. The
financial year of TCI Limited ends on 31 December in each year.
The profit and loss account and balance sheet can be obtained free of charge from the registered
office of TCI Limited. TCI Limited must hold its first annual general meeting within 18 months of
the date of its incorporation (and no more than nine months after the financial year end) and
thereafter the gap between its annual general meetings must not exceed 15 months. One annual
general meeting must be held in each calendar year.
TCI Limited has appointed as its auditors PricewaterhouseCoopers of 1 Spencer Dock, North Wall
Quay, Dublin 1, Ireland who are chartered accountants and are members of the Institute of
Chartered Accountants and registered auditors qualified to practise in Ireland.
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THE DOLLAR LOAN AGREEMENT
The following is the text of the Dollar Loan Agreement that has been entered into between Transneft
and TCI Limited.
THIS LOAN AGREEMENT is made on 22 June 2007
BETWEEN:
(1) JSC ‘‘Transneft’’, a joint stock company established and existing under the laws of the Russian
Federation and having its registered address at ul. Bolshaya Polyanka 57 119180 Moscow,
Russian Federation, as borrower (‘‘Transneft’’); and
(2) TransCapitalInvest Limited, a company organised and existing as a private limited liability
company under the laws of Ireland, having its registered office at 5 Harbourmaster Place, IFSC,
Dublin 1 (the ‘‘Lender’’).
WHEREAS:
The Lender has at the request of Transneft agreed to make available to Transneft a loan facility in
the amount of U.S.$500,000,000 on the terms and subject to the conditions of this Agreement.
NOW IT IS HEREBY AGREED as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
In this Agreement (including the recitals), the following terms shall have the meanings indicated:
‘‘Account’’
‘‘Accounting Standards’’
‘‘Affiliate’’
‘‘agreed funding’’
‘‘agreed funding
agreements’’
‘‘agreed funding source’’
means the account in the name of the Lender with Citibank, N.A.,
London Branch, or such other account as may from time to time be
agreed by the Lender with the agreed funding source, or any assignee
or transferee appointed in connection with the agreed funding, and
notified in writing to Transneft at least 15 Business Days in advance
of such change;
means IFRS, US GAAP or any other internationally recognised set
of accounting standards deemed equivalent to IFRS by the relevant
regulators for the time being; PROVIDED, however, that where
such term is used with respect to the financial statements of
Subsidiaries of Transneft in the definition of ‘‘Principal
Subsidiary’’ in this Agreement, it shall be deemed to include
Russian accounting standards as well as the foregoing;
of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purpose of this
definition, ‘‘control’’ when used with respect to any Person means the
power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by
contract or otherwise; provided that beneficial ownership of 10 per
cent. or more of the Voting Stock of a Person shall be deemed to be
control; and the terms ‘‘controlling’’ and ‘‘controlled’’ have
meanings correlative to the foregoing;
means the Indebtedness (including in the form of securities) owed by
the Lender to the agreed funding source;
means any debt instrument or facility, trust deed, agency agreement
or underwriting agreement entered into in connection with the
agreed funding and any side or fee letters ancillary thereto;
means any Person to whom the Lender owes any Indebtedness
(including securities), which Indebtedness was incurred to fund the
Loan (including a designated representative of such Person);
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‘‘Agreement’’
‘‘Auditors’’
‘‘Authorisation’’
‘‘Business Day’’
‘‘Capital Stock’’
‘‘Central Bank’’
‘‘Change of Control’’
‘‘Change of Control
Payment Date’’
‘‘Closing Date’’
‘‘Environmental Law’’
means this Agreement as originally executed or as it may be amended
from time to time;
means the auditors of Transneft’s financial statements (prepared in
accordance with applicable Accounting Standards) for the time being
or, if they are unable or unwilling to carry out any action requested
of them under this Agreement, such other internationally recognised
firm of accountants appointed by Transneft for such purpose;
means an authorisation, consent, approval, resolution, licence,
exemption, filing, notarisation or registration;
means a day on which (i) the London Interbank Market is open for
dealings between banks generally, and (ii) if on that day a payment is
to be made hereunder, commercial banks generally are open for
business in Ireland, London, New York City and Moscow;
means, with respect to any Person, any and all shares, interests,
participations, rights to purchase, warrants, options, or other
equivalents (however designated) of capital stock of a corporation
and any and all equivalent ownership interests in a Person other than
a corporation, in each case whether now outstanding or hereafter
issued;
means the Central Bank of the Russian Federation;
means the Federal Agency for the Management of Federal Property
and/or any other federal or state agencies appropriately authorised
to hold the shares of Transneft ceasing to own and control (directly
or indirectly) 100% of the issued and outstanding voting share capital
of Transneft;
means the Business Day falling 10 Business Days after Transneft
gives notice to the Lender of a Change of Control pursuant to Clause
5.6 (Prepayment in the event of a Change of Control);
means 27 June 2007 (or such later date not later than 11 July 2007 as
may be agreed between the Lender and Transneft);
means any applicable law in Russia which relates to pollution or
protection of the environment or harm to or the protection of human
health or the health of animals or plants;
‘‘Event of Default’’ has the meaning assigned to such term in Clause 11.1;
‘‘Facility’’
means the U.S.$500,000,000 term loan facility granted by the Lender
to Transneft as specified in Clause 2;
‘‘Group’’
means Transneft and its Subsidiaries for the time being;
‘‘IFRS’’ means International Financial Reporting Standards, including
International Accounting Standards and Interpretations issued by
the International Accounting Standards Board in effect from time to
time;
‘‘Indebtedness’’
means any obligation for the payment of money in any currency,
whether sole, joint or several, and whether actual or contingent, in
respect of:
(a) moneys borrowed (including the capitalised value of
obligations under financial leases and hire purchase
agreements and deposits, but excluding moneys raised by way
of the issue of share capital (whether or not for a cash
consideration) and any premium on such share capital) and
interest and other charges thereon or in respect thereof;
(b) any liability under any debenture, bond, note, loan stock or
other security or under any acceptance or documentary credit,
bill discounting or note purchase facility or any similar
instrument;
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(c)
(d)
(e)
any liability in respect of the deferred acquisition cost of
property, assets or services to the extent payable after the time
of acquisition or possession thereof by the party liable, but not
including any such liability in respect of normal trade credit for
a period not exceeding six months for goods or services
supplied;
any liability under any interest rate or currency hedging
agreement; and
(without double counting) any guarantee or other assurance
against financial loss in respect of such moneys borrowed,
interest, charges or other liability (whether the person liable in
respect of such moneys borrowed or raised, interest, charges or
other liability is or is not a member of the Group).
‘‘Interest Payment Date’’ means 27 June and 27 December of each year, commencing on 27
December 2007;
‘‘Interest Period’’ has the meaning assigned to such term in Clause 4.2;
‘‘Lien’’
‘‘Loan’’
‘‘Material Adverse Effect’’
‘‘Merge’’
‘‘Officers’ Certificate’’
‘‘Opinion of Counsel’’
‘‘Person’’
‘‘Potential Event of
Default’’
‘‘Preferred Stock’’
means any mortgage, charge, pledge, lien (other than a lien arising
solely by operation of law which is discharged within 90 calendar
days of arising) or other security interest securing any obligation of
any Person or any other type of preferential arrangement (including
any title transfer and arrangement) having a similar effect;
means the loan made or to be made under the Facility or the
principal amount outstanding for the time being of that loan;
means a material adverse effect on (a) the financial condition or
operations of Transneft and the Group taken as a whole or (b)
Transneft’s ability to perform any significant obligation under this
Agreement or (c) the rights or remedies of the Lender under this
Agreement;
means consolidate with, merge with or into or sell, convey, transfer,
lease or otherwise dispose of all or substantially all of the property or
assets of one Person to another Person and ‘‘Merged’’ and ‘‘Merger’’
shall have the correlative meaning;
means a certificate signed on behalf of Transneft by two authorised
signatories of Transneft at least one of whom shall be the principal
executive officer, principal accounting officer or principal financial
officer of Transneft in the form of Schedule 1;
means a written opinion from international legal counsel who is
acceptable to the Lender;
means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organisation, government, or any agency or political
subdivision thereof or any other entity;
means an Event of Default or any event or circumstance which
would (with the expiry of a grace period, the giving of notice, the
passage of time or any combination of any of the foregoing) be an
Event of Default;
means with respect to any Person, Capital Stock of any class or
classes (however designated) of such Person that is preferred as to the
payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution
of such Person, over the Capital Stock of any other class of such
Person, whether now outstanding or issued after the date of this
Agreement and including, without limitation, all classes and series of
preferred or preference stock of such Person;
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‘‘Principal Subsidiary’’
‘‘Put Option’’
means at any relevant time, a Subsidiary of Transneft:
(a)
(b)
whose total assets or gross revenues (or, where the Subsidiary
in question prepares consolidated accounts, whose total
consolidated assets or gross consolidated revenues, as the
case may be) represent not less than ten per cent. of the total
consolidated assets or the gross consolidated revenues of
Transneft and its Subsidiaries, all as calculated in good faith by
the senior management of Transneft, with respect to Transneft,
by reference to its then latest audited consolidated accounts
and, with respect to its Subsidiaries, on the basis of financial
statements of such Subsidiaries as they would exist in
accordance with applicable Accounting Standards,
consistently applied with those of Transneft, in any event,
including, but without limitation, OAO Sibnefteprovod, OAO
Druzhba MN, OAO Severo-Zapadny MN, OAO Transsibneft,
OAO Uralsibnefteprovod, OAO Verkhnevolzhsknefteprovod,
OAO Tsentrsibnefteprovod (CSN), OAO Severny MN, OAO
Chernomortransneft (CHMT), OOO Baltnefteprovod, OOO
Vostoknefteprovod, OAO Privolzhsknefteprovod and LLC
Specialised Oil Loading Sea Port Primorsk; or
to which is transferred all or substantially all the assets and
undertaking of a Subsidiary which immediately prior to such
transfer is a Principal Subsidiary;
means the Put Option granted to the agreed funding source under the
agreed funding;
‘‘Rate of Interest’’ has the meaning assigned to such term in Clause 4.1;
‘‘Relevant Indebtedness’’
‘‘Repayment Date’’ means 27 June 2012;
‘‘Rouble’’, ‘‘Ruble’’,
‘‘RUR’’ and ‘‘Rbs’’
‘‘Same-Day Funds’’
means any Indebtedness which (a) (i) is in the form of or represented
by any bond, note, debenture stock, loan stock, certificate or other
debt instrument which is listed or quoted on any stock exchange or
(ii) is in the form of a loan which finances the issuance of any of the
foregoing forms of debt in sub-clause (a)(i), where such issuance is by
a special purpose company or a bank or any other entity in the form
of loan participation notes; and (b) in the case of the debt referred to
in sub-clause (a)(i) or the debt financed by a loan referred to in subclause
(a)(ii), was initially offered and distributed (as to more than 50
per cent. of the original principal amount of such debt) outside the
Russian Federation. For the avoidance of doubt, Relevant
Indebtedness shall not include any Indebtedness incurred by any
entity other than Transneft or any Subsidiary, if such Indebtedness is
entirely without recourse to any member of the Group;
mean the lawful currency from time to time of the Russian
Federation;
means Dollar funds settled through the New York Clearing House
Interbank Payments System or such other funds for payment in
Dollars as the Lender may at any time reasonably determine to be
customary for the settlement of international transactions in New
York City of the type contemplated hereby;
‘‘Securities Act’’ means the U.S. Securities Act of 1933;
‘‘Subsidiary’’
‘‘Tax Deduction’’
means any company or corporation which is or is required to be fully
consolidated under the applicable Accounting Standards in the
financial statements of Transneft or a Subsidiary of Transneft;
means a withholding, deduction or payment for or on account of
taxes, levies or duties;
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‘‘Taxes’’
‘‘Trust Deed’’
‘‘Trustee’’
‘‘US Dollars’’, ‘‘Dollars’’
and ‘‘U.S.$’’
‘‘US GAAP’’
‘‘VAT’’
‘‘Voting Stock’’
means any taxes (including interest or penalties thereon) which are
now or at any time hereafter imposed, assessed, charged, levied,
collected, demanded, withheld or claimed by the Russian Federation,
Ireland or any other jurisdiction in which the payer is resident for tax
purposes or through which any payment is made, or any taxing
authority thereof or therein, provided however that for the purposes
of this definition and any related provisions of this Agreement
(including Clauses 5.2, 9.2(e) and (f) and 10.4(c)), references to
Ireland shall, (a) upon the occurrence of a Relevant Event (as the
term is defined in the Trust Deed), be deemed to include references to
any jurisdiction in which the Trustee is domiciled or resident for tax
purposes and (b) upon any change of the Lender’s tax residence, be
deemed to include references to any jurisdiction in which the Lender
becomes tax resident (notwithstanding the prohibitions on changes
to the Lender’s tax residence contained herein and in the Trust
Deed); and the terms ‘‘Taxation’’ and ‘‘Taxing Jurisdiction’’ shall be
construed accordingly;
means the deed to constitute the funding source between the Lender
in its capacity as Lender of the funding source and the Trustee, as
amended, varied or supplemented from time to time;
means Citicorp Trustee Company Limited as Trustee under the
Trust Deed and any successor thereto as provided thereunder;
denote the lawful currency of the United States of America;
means generally accepted accounting principles, standards and
practices in the United States of America;
means value added tax and any other tax of a similar nature; and
of any Person as of any date means the Capital Stock of such Person
that is at the time ordinarily entitled to vote in the election of the
board of directors of such Person.
1.2 Other Definitions
Unless the context otherwise requires, terms used in this Agreement which (i) are not defined in
this Agreement but which are defined in, or (ii) are defined by cross reference to definitions in,
or other provisions of, any agreed funding agreements shall have the meanings assigned to such
terms therein.
1.3 Interpretation
Unless the context or the express provisions of this Agreement otherwise require, the following
shall govern the interpretation of this Agreement:
(a)
(b)
(c)
all references to ‘‘Clause’’ or ‘‘sub-Clause’’ are references to a Clause or sub-Clause of this
Agreement;
the terms ‘‘hereof’’, ‘‘herein’’ and ‘‘hereunder’’ and other words of similar import mean
this Agreement as a whole and not any particular part hereof;
words importing the singular number include the plural and vice versa;
(d) all references to ‘‘taxes’’ include all present or future taxes, levies, imposts, duties,
assessments or other charges or withholding of any nature (including any penalty or
interest payable in connection with any failure to pay or any delay in paying any of the
same) and the terms ‘‘tax’’ and ‘‘taxation’’ shall be construed accordingly;
(e)
(f)
the table of contents and the headings are for convenience only and shall not affect the
construction hereof;
any reference to the ‘‘Lender’’ or ‘‘Transneft’’ shall be construed so as to include its
successors in title, permitted assigns and permitted transferees;
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(g)
(h)
(i)
(j)
unless otherwise specified, if reference is made to make a calculation or a number is to be
calculated or construed by reference to the accounts or financial statements of Transneft,
that will be construed as a reference to such financial statements whether or not they have
been made public or provided to any agreed funding source;
any reference to an agreement, instrument or provision of law is a reference to that
agreement, instrument or provision of law as amended, novated, replaced or re-enacted;
any reference to a document prepared for the listing of the agreed funding shall also be
deemed to include a separate and independent reference to any preliminary version thereof;
and
unless otherwise stated, whenever an amount in one currency needs to be converted into
an amount in another currency for the purposes of determining compliance with any
provision under this Agreement, such calculation shall be determined in good faith on the
basis of reasonable exchange rates by a responsible financial or accounting officer of
Transneft and, for the avoidance of doubt, whenever it is necessary thereafter to determine
whether Transneft complied with any such provision, such determination shall be made on
the basis of the conversion rate applied in compliance with the foregoing provisions hereof.
2. FACILITY
2.1 Facility
On the terms and subject to the conditions set forth herein, the Lender hereby agrees to lend
Transneft and Transneft hereby agrees to borrow from the Lender an amount of
U.S.$500,000,000.
2.2 Purpose
The proceeds of the Loan will be used for the purposes set out in the document prepared for
the listing of the agreed funding, but the Lender shall not be concerned with the application
thereof.
2.3 Facility Fee
In consideration of the Lender making the Facility available to Transneft, Transneft hereby
agrees to pay fees as increased by applicable front-end expenses in the amount of U.S.$1,149,520
to the Lender (the ‘‘Facility Fee’’). Transneft shall pay the Facility Fee to or to the order of the
Lender in Same-Day Funds two Business Days prior to the Closing Date. The Lender shall,
prior to such date, submit an invoice to Transneft providing for the amount due. Subsequently,
Transneft and the Lender shall enter into and sign a delivery and acceptance act (an ‘‘Act of
Acceptance’’) as provided in Clause 3.4.
3. DRAWDOWN
3.1 Drawdown
On the terms and subject to the conditions of this Agreement, on the Closing Date the Lender
shall advance the full amount of the Facility to Transneft and Transneft shall make a single
drawing in the full amount of the Facility.
3.2 Disbursement
Subject to the conditions set forth herein, on the Closing Date the Lender shall transfer the
amount of the Facility to Transneft’s account as follows: Account No. 40702840000020206767,
with Sberbank (Operations Department) Moscow; (SWIFT: SABRRUMM (011)); through their
Account No. 890-0057-610 with The Bank of New York, NY (SWIFT: IRVTUS3N);
Beneficiary: JSC ‘‘Transneft’’.
3.3 Ongoing Fees and Expenses
In consideration of the Lender (i) making available the Facility hereunder and (ii) supporting
such a continuing facility and managing the Account, Transneft shall pay to the Lender each
year all properly incurred ongoing fees as increased by properly incurred expenses (including
properly incurred and documented corporate service provider fees and audit fees and any
expenses incurred in order to maintain the Lender as a validly incorporated company and any
expenses required to cover the Lender’s anticipated winding-up expenses). Payments to the
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Lender referred to in this Clause 3.3 shall be made by Transneft as soon as reasonably
practicable and in any event no later than 15 days following receipt of an invoice from the
Lender setting out in detail the nature and calculation of the relevant payment and providing
sufficient documentary evidence thereof. In addition, Transneft and the Lender shall enter and
sign an Act of Acceptance as provided in Clause 3.4.
3.4 Acts of Acceptance
In connection with all payments to be made under Clauses 2.3, 3, 12 and 14.1, Transneft and
the Lender shall within 30 days of such payment becoming due or such indemnity claim having
been made, enter into and sign an Act of Acceptance (which Transneft and/or the Lender, or
persons acting on behalf of either, shall prepare) with respect to the amounts to be paid by
Transneft. Invoices and delivery and acceptance acts shall separately specify: (i) the net amount
due, (ii) any applicable withholding taxes, (iii) any applicable VAT and (iv) the resulting total
amount inclusive of tax.
4. INTEREST
4.1 Rate of Interest
Transneft will pay interest in Dollars to the Lender on the outstanding principal amount of the
Loan from time to time at the rate of 6.103 per cent. per annum (the ‘‘Rate of Interest’’).
4.2 Payment
Interest at the Rate of Interest shall accrue from day to day, starting from (and including) the
Closing Date and shall be paid in arrear not later than 10.00 a.m. (New York City time) one
Business Day prior to each Interest Payment Date. Interest on the Loan will cease to accrue
from the due date for repayment thereof unless payment of principal due on such date is
withheld or refused, in which event interest will continue to accrue (before and after any
judgment) at the Rate of Interest to, but excluding, the date on which payment in full of the
principal thereof is made.
The amount of interest payable in respect of the Loan for any Interest Period shall be
calculated by applying the Rate of Interest to the Loan, dividing the product by two and
rounding the resulting figure to the nearest cent (half a cent being rounded upwards). If interest
is required to be calculated for any other period, it will be calculated on the basis of a 360-day
year consisting of 12 months of 30 days each and, in the case of an incomplete month, the
number of days elapsed.
‘‘Interest Period’’ means each period beginning on (and including) the Closing Date or any
Interest Payment Date and ending on (but excluding) the next Interest Payment Date.
5. REPAYMENT AND PREPAYMENT
5.1 Repayment
Except as otherwise provided herein, Transneft shall repay the Loan not later than 10.00 a.m.
(New York City time) one Business Day prior to the Repayment Date.
5.2 Prepayment in the event of Taxes or Increased Costs
If, (i) as a result of the application of, or any amendment, change or clarification to (including
a change in the interpretation or application of), the double tax treaty between the Russian
Federation and Ireland or the laws or regulations of the Russian Federation or Ireland or any
political subdivision or any authority thereof or therein having power to tax, or any change in
the application or official interpretation of such treaty, laws or regulations, which change or
amendment becomes effective on or after the date hereof, Transneft would thereby be required
to make or increase any payment as provided in Clause 6.2 or 6.3 or (ii) (for whatever reason)
Transneft would have to or has been required to pay additional amounts pursuant to Clause 8,
and in any such case such obligation cannot be avoided by Transneft taking reasonable
measures available to it, then Transneft may (without premium or penalty), upon not less than
10 days’ notice to the Lender (which notice shall be irrevocable), prepay the Loan in whole (but
not in part) at any time.
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5.3 Prepayment in the event of Illegality
If, at any time after the date hereof by reason of the introduction of, or any change in, any
applicable law or regulation or regulatory requirement or directive of any agency or state, the
Lender reasonably determines (such determination being accompanied by an Opinion of Counsel
at the request of Transneft, with the cost of such Opinion of Counsel being borne solely by
Transneft) that it is or would be unlawful or contrary to any applicable law or regulation or
applicable regulatory requirement or applicable directive of any agency of any state or otherwise
for the Lender to allow all or part of the Loan or the agreed funding to remain outstanding or
for the Lender to maintain or give effect to any of its obligations in connection with this
Agreement and/or to charge or receive or to be paid interest at the rate then applicable to the
Loan, then the Lender shall promptly notify Transneft and, following the execution of the
agreed funding agreements, the party designated by such agreed funding agreements, upon
becoming aware of such event (setting out in reasonable detail the nature and extent of the
relevant circumstances). Upon such notice, Transneft and the Lender shall consult in good faith
as to a solution which eliminates the application of such circumstances; provided however that
the Lender shall be under no obligation to continue with such consultation if agreement as to a
solution has not been reached within 30 days of the date on which it so notified Transneft (or
such sooner date as would be required by applicable law or requirements), then upon notice by
the Lender to Transneft in writing setting out in reasonable detail the nature and extent of the
relevant circumstances, Transneft shall prepay the Loan in whole (but not in part) on the next
Interest Payment Date or on such earlier date as the Lender shall certify to be necessary to
comply with such requirements (being no earlier than the last day of any applicable grace period
permitted by law).
5.4 Reduction of the Loan Upon Redemption and Cancellation of the agreed funding
Transneft or any Subsidiary of Transneft (or the Lender on behalf of Transneft if the Lender is
put in funds in advance of the purchase of agreed funding) may from time to time, in
accordance with the Conditions of the agreed funding, purchase agreed funding in the open
market or by tender or by a private agreement at any price. In the event that an amount of
agreed funding is surrendered to the Lender (as issuer of such agreed funding) for cancellation
by Transneft or any of Transneft’s Subsidiaries (or by the Lender on behalf of Transneft) and
cancelled, the Loan shall be deemed to have been prepaid by Transneft in an amount
corresponding to the aggregate principal amount of the agreed funding surrendered to the
Lender for cancellation, together with accrued interest and other amounts (if any) thereon and
no further payment shall be made or required to be made by Transneft in respect of such
amounts.
5.5 Payment of Other Amounts
If the Loan is to be prepaid by Transneft pursuant to Clause 5.2 or 5.3, Transneft shall
substantially simultaneously with such prepayment, pay to the Lender: (a) accrued interest on
the Loan to the date of actual payment, (b) any costs and expenses incurred by the Lender in
connection with such prepayment and (c) all other sums payable by Transneft pursuant to this
Agreement. For the avoidance of doubt, if the principal amount of the Loan is reduced
pursuant to the provisions of Clause 5.4, then no interest shall accrue or be payable during the
Interest Period in which such reduction takes place in respect of the amount by which the Loan
is so reduced and the Lender shall not be entitled to any interest in respect of the cancelled
agreed funding.
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5.6 Prepayment in the event of a Change of Control
(a)
If, following a Change of Control, any agreed funding source has exercised its Put Option,
Transneft shall, on the Change of Control Payment Date, prepay the principal amount of
the Loan in an amount which corresponds to the aggregate principal amount of the
securities issued pursuant to the agreed funding in relation to which the Put Option has
been duly exercised in accordance with the conditions of the agreed funding source.
(b)
(c)
Promptly, and in any event within 30 calendar days after the date of any Change of
Control, Transneft shall deliver to the Lender a written notice in the form of an Officers’
Certificate, which notice shall be irrevocable, stating that a Change of Control has
occurred and stating the circumstances and the relevant facts giving rise to such Change of
Control.
The Lender shall notify Transneft not more than seven Business Days after receipt of the
notice thereof, the amount of the Loan to be prepaid as a result of the exercise of the Put
Option by any agreed funding source.
5.7 Notices Irrevocable
Any notice of cancellation or prepayment given under this Clause 5 shall be irrevocable and,
unless a contrary indication appears in this Agreement, shall specify the date or dates upon
which the relevant cancellation or prepayment is to be made and the amount of that
cancellation or prepayment.
5.8 Provisions Exclusive
Transneft shall not prepay or repay all or any part of the amount of the Loan except at the
times and in the manner expressly provided for in this Agreement. Transneft shall not be
permitted to reborrow any amounts prepaid or repaid.
6. PAYMENTS
6.1 Making of Payments
All payments of principal, interest and other amounts to be made by Transneft under this
Agreement shall be made unconditionally by credit transfer to the Account not later than 10.00
a.m. (New York City time) one Business Day prior to each Interest Payment Date or the
Repayment Date or the date of any payment (as the case may be) in Same-Day Funds to the
Account. The Lender agrees with Transneft that it will not deposit any other monies into the
Account and that no withdrawals shall be made from the Account other than as provided for
and in accordance with the agreements entered into in connection with the agreed funding.
6.2 No Set-Off, Counterclaim or Withholding; Gross-Up
All payments to be made by Transneft under this Agreement shall be made in full without setoff
or counterclaim and (except to the extent required by law) free and clear of and without
withholding or deduction for or on account of any Taxes. If Transneft shall be required by
applicable law to make any deduction or withholding from any payment under this Agreement
for or on account of any such Taxes, it shall increase the payment by such amount as may be
necessary to ensure that the Lender receives a net amount in Dollars equal to the full amount
which it would have received had payment not been made subject to such Taxes, and shall
promptly account to the relevant authorities for the relevant amount of such Taxes so withheld
or deducted within the timeframe allowed for such payment under applicable law and shall
deliver to the Lender without undue delay evidence reasonably satisfactory to the Lender of
such deduction or withholding and of the accounting therefor to the relevant taxing authority. If
the Lender is required to pay or pays any amount in respect of such Taxes, Transneft shall put
the Lender in funds or reimburse the Lender, as the case may be, in Dollars for such payment
on demand and the Lender shall provide such documentation as Transneft may reasonably
require to support such demand. For the avoidance of doubt, this Clause 6.2 is without
prejudice to the obligations of the Lender pursuant to Clause 10.4(a). The provisions of this
Clause shall not apply to any tax imposed on or calculated by reference to the overall net
income of the Lender in the Lender’s jurisdiction of residence.
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6.3 Withholding on agreed funding
Without prejudice to the provisions of Clause 6.2, upon becoming so aware, the Lender shall
notify Transneft (setting out in reasonable detail the nature of the obligation with such
supporting evidence and documentation as Transneft may reasonably require) that it has become
obliged to make any withholding or deduction for or on account of any Taxes imposed, levied,
collected, withheld or assessed by or on behalf of a Taxing Jurisdiction in respect of an amount
payable under or in relation to the agreed funding. Transneft agrees to pay into the Account,
no later than one Business Day prior to the date on which such payment is due to the agreed
funding source, such additional amounts as are equal to the additional amounts (if any) which
the Lender will be required to pay under the terms of the agreed funding agreements in order
that the net amounts received by the agreed funding source, after such withholding or
deduction, will equal the respective amounts which would have been received by the agreed
funding source in the absence of such withholding or deduction. The Lender will provide
Transneft with such information as the Lender has access to as issuer of the agreed funding that
may help in determining whether the agreed funding source is entitled to additional amounts
pursuant to the terms of the agreed funding insofar as permitted by applicable laws. To the
extent that the agreed funding source is not entitled to such additional amounts pursuant to the
terms and conditions of the agreed funding and the Lender receives any reimbursement of such
amounts, the Lender shall immediately upon receipt of such reimbursement pay such reimbursed
amounts (net of tax) to Transneft (it being understood that neither the Lender other than as
stated above nor any agent of the Lender shall have any obligations to determine whether the
agreed funding source is entitled to any such additional amount).
Any notification by the Lender to Transneft in connection with this Clause 6.3 shall be given as
soon as reasonably practicable after the Lender becomes aware of any obligation on it to make
any such withholding or deduction.
6.4 Reimbursement
(a) To the extent that the Lender subsequently obtains or uses any tax credit, refund or
allowance or other reimbursements relating to a deduction or withholding with respect to
which Transneft has made a payment pursuant to this Clause 6, it shall pay to Transneft
so much of the benefit it received (net of tax) as will leave the Lender in substantially the
same position as it would have been in had no additional amount been required to be paid
by Transneft pursuant to this Clause 6; provided, however, that the question of whether
any such benefit has been received, and accordingly, whether any payment should be made
to Transneft, the amount of any such payment and the timing of any such payment, shall
be determined by the Lender acting reasonably and in consultation with Transneft. The
Lender shall use best endeavours at Transneft’s expense and request (and upon being put
in funds to fund such request) to obtain any tax credits or refunds available to the Lender
and shall notify Transneft of any such available tax credits or allowances.
(b)
If as a result of a failure to obtain relief from deduction or withholding of any Taxes
referred to in Clause 6.2, (a) such Taxes are deducted or withheld by Transneft and
pursuant to Clause 6.2 an increased amount is paid by Transneft to the Lender in respect
of such deduction or withholding, and (b) following the deduction or withholding of Taxes
as referred to above, the Lender as represented by Transneft applies to the competent
taxing authority for a Tax refund (it being agreed that the Lender hereby authorises
Transneft to make such application) and such Tax is refunded or repaid by the relevant
taxing authority to the Lender, the Lender shall as soon as reasonably practicable notify
Transneft of the receipt of such Tax refund and promptly transfer the actually received
amount of the Tax refund (net of any tax imposed on the Lender) in the currency actually
received and less any applicable cost to a bank account of Transneft specified for that
purpose by Transneft.
(c)
The Lender agrees promptly, upon becoming aware of such, to notify Transneft if it ceases
to be resident in Ireland or if any of the representations set forth in Clause 9.2 are no
longer true and correct.
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6.5 Evidence of Debt
The entries made in the accounts of the Lender shall, in the absence of manifest error,
constitute conclusive evidence of the existence and amounts of Transneft’s obligations to pay
amounts to the Lender, as recorded therein.
6.6 Mitigation
If at any time either party hereto becomes aware of circumstances which would or might, then
or thereafter, give rise to an obligation on the part of Transneft to make any deduction,
withholding or payment as described in Clauses 6.2 or 6.3, then, without in any way limiting,
reducing or otherwise qualifying the Lender’s rights, or Transneft’s obligations, under such
Clauses, such party shall promptly upon becoming aware of such circumstances notify the other
party, and thereupon, the parties shall consider and consult with each other in good faith with a
view to finding, agreeing upon and implementing a method or methods by which any such
obligation may be avoided or mitigated and, to the extent that both parties can do so without
taking any action which in the reasonable opinion of such party is prejudicial to its own
position, take such reasonable steps as may be reasonably available to it to avoid such
obligation or mitigate the effect of such circumstances. Transneft agrees to reimburse the Lender
for all properly incurred costs and expenses (including but not limited to legal fees) incurred by
the Lender in connection with this Clause 6.6.
7. CONDITIONS PRECEDENT
The obligation of the Lender to advance the Facility shall be subject to, as at the Closing Date,
(i) no Potential Event of Default having occurred, (ii) the Lender having received the full
amount of the subscription moneys as set out in the agreed funding agreements; and (iii) the
Lender having received in full the Facility Fee pursuant to Clause 2.3 hereof.
8. CHANGE IN LAW; INCREASE IN COST
8.1 Compensation
In the event that after the date of this Agreement there is any change in or introduction of any
tax, law, regulation, regulatory requirement or official directive (whether or not having the force
of law but, if not having the force of law, the observance of which is in accordance with the
generally accepted financial practice of financial institutions in the country concerned) or in the
interpretation or application thereof by any person charged with the administration thereof,
which:
(a)
(b)
(c)
subjects or will subject the Lender to any taxes with respect to payments of principal of or
interest on the Loan or any other amount payable under this Agreement (other than any
taxes payable by the Lender on its overall net income or any Taxes referred to in Clauses
6.2 or 6.3); or
increases or will increase the taxation of or changes or will change the basis of taxation of
payments to the Lender of principal of or interest on the Loan or any other amount
payable under this Agreement (other than any such increase or change which arises by
reason of any increase in the rate of tax payable by the Lender on its overall net income
or as a result of any Taxes referred to in Clauses 6.2 or 6.3); or
imposes or will impose on the Lender any other condition affecting this Agreement or the
Loan,
and if as a result of any of the foregoing:
(x)
(y)
(z)
the cost to the Lender of making, funding or maintaining the Loan is increased; or
the amount of principal, interest or other amount payable to or received by the Lender
hereunder is reduced; or
the Lender makes any payment or foregoes any interest or other return on or calculated
by reference to the gross amount of any sum receivable by it from Transneft hereunder or
makes any payment or foregoes any interest or other return on or calculated by reference
to the gross amount of the Loan,
then subject to the following, and in each such case:
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(i) the Lender shall, as soon as practicable after becoming aware of such increased cost,
reduced amount or payment made or foregone, give written notice to Transneft, together
with a certificate signed by two directors of the Lender or by any person empowered by
the board of directors of the Lender to sign on behalf of the Lender describing in
reasonable detail the introduction or change or request which has occurred and the
country or jurisdiction concerned and the nature and date thereof and demonstrating the
connection between such introduction, change or request and such increased cost, reduced
amount or payment made or foregone, and setting out in reasonable detail the basis on
which such amount has been calculated, and all relevant supporting documents evidencing
the matters set out in such written notice; and
(ii) Transneft, in the case of Clauses (a) and (c) above, shall on demand by the Lender, pay to
the Lender such additional amount as shall be necessary to compensate the Lender for
such increased cost, and, in the case of Clause (b) above, at the time the amount so
reduced would otherwise have been payable, pay to the Lender such additional amount as
shall be necessary to compensate the Lender for such reduction, payment or foregone
interest or other return,
provided that this Clause 8.1 will not apply to or in respect of any matter for which the Lender
has already been compensated under Clauses 6.2 or 6.3.
8.2 Mitigation
In the event that the Lender becomes entitled to make a claim pursuant to Clause 8.1:
(a) the Lender shall consult in good faith with Transneft and shall use reasonable efforts
(based on the Lender’s reasonable interpretation of any relevant tax, law, regulation,
requirement, official directive, request, policy or guideline) to reduce, in whole or in part,
Transneft’s obligations to pay any additional amount pursuant to such sub-clause; and
(b) Transneft may, only in accordance with Clause 18 of the Trust Deed (including with the
consent of the Trustee thereunder), require the substitution of the Lender as lender under
the Loan Agreement and as issuer of the agreed funding,
except that nothing in this Clause 8.2 shall obligate the Lender to incur any costs or expenses in
taking any action hereunder unless Transneft agrees to reimburse the Lender such costs or
expenses.
9. REPRESENTATIONS AND WARRANTIES
9.1 Transneft’s Representations and Warranties
Transneft represents and warrants to the Lender, with the intent that such shall form the basis
of this Agreement and shall remain in full force and effect, at the date hereof and shall be
deemed to be repeated by Transneft on the Closing Date, that:
(a) Transneft is duly organised and incorporated and validly existing under the laws of the
Russian Federation and has the power and legal right to own all its property material to
its business, as currently conducted and to enter into and to perform its obligations under
this Agreement and to borrow the Loans;
(b) Transneft has full power and authority to enter into and to perform its obligations under
this Agreement and the transactions contemplated hereby and has taken all necessary
corporate, legal and other action required in connection with (i) the borrowing of the Loan
on the terms and subject to the conditions of this Agreement, (ii) the execution, delivery,
legality and validity of this Agreement by Transneft and all other documents to be
executed and delivered by it in connection with this Agreement by Transneft, (iii) the
performance of this Agreement by Transneft in accordance with its terms, and (iv) the
admissibility in evidence of this Agreement, and all such consents, authorisations,
approvals or filings are in full force and effect or will be in full effect by the Closing Date;
(c) this Agreement has been duly authorised, executed and delivered by Transneft and
constitutes valid and legally binding obligations of Transneft, enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium and similar laws
affecting creditors’ rights generally, and subject, as to enforceability, (i) to general
principles of equity (regardless of whether enforcement is sought in a proceeding in equity
or at law), (ii) to the fact that gross-up and indemnity provisions may not be enforceable
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(d)
(e)
(f)
(g)
(h)
under Russian law and (iii) with respect to the enforceability of a judgment, whether there
is a treaty in force relating to the mutual recognition of such foreign judgments and
whether there is a federal law of the Russian Federation for the recognition of such
foreign judgments;
other than the applications made to the Irish Financial Services Regulatory Authority and
to the Irish Stock Exchange for the agreed funding to be admitted to the Official List and
trading on the Irish Stock Exchange’s market for listed securities no consent, approval,
authorisation, licence or qualification of or with any court or governmental agency or body
is required to be obtained for the execution, delivery or performance by Transneft or the
legality, validity, enforceability, and admissibility in evidence (subject to a Russian legal
requirement to provide to a Russian court a duly certified translation thereof into Russian)
of this Agreement, the carrying out by Transneft of all transactions contemplated by this
Agreement or the compliance by Transneft with the terms of this Agreement;
the execution, delivery and performance of this Agreement by Transneft, the carrying out
by Transneft of the other transactions contemplated herein and therein and compliance by
Transneft with their respective terms do not and will not (a) conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a default under, (i)
the documents, rules and regulations constituting Transneft, or (ii) any indenture, trust
deed, mortgage or other agreement or instrument to which Transneft, or any of its
Subsidiaries is a party or by which it or any of their respective properties or assets is
bound, or (b) infringe any existing applicable law, rule, regulation, judgment, order or
decree of any government, governmental body or court, domestic or foreign, having
jurisdiction over Transneft, any such Subsidiary or any of their respective properties, save
in each case (a)(ii) and (b) above for such breach, violation, infringement or default which
could not reasonably be expected to have a Material Adverse Effect;
save as disclosed in the document prepared for the listing of the agreed funding, there are
no pending actions, suits or proceedings against or affecting Transneft or any of its
Subsidiaries or any of their respective properties which, if determined adversely to
Transneft or any such Subsidiaries, could individually or in the aggregate be reasonably
expected to have a Material Adverse Effect and, to the best of Transneft’s knowledge, no
such actions, suits or proceedings are threatened or pending;
save for Liens that exist in the ordinary course of trading and save as disclosed in the
document prepared for listing of the agreed funding, Transneft and each of its Principal
Subsidiaries has good title to its property free and clear of all Liens (other than Liens
which would not cause a Material Adverse Effect); and Transneft’s obligations under the
Loan rank at least pari passu with all its other unsecured and unsubordinated
Indebtedness, except as otherwise provided by mandatory provisions, applicable law
relating to bankruptcy and analogous events;
(a) the annual audited consolidated financial statements of Transneft and its consolidated
subsidiaries as of and for the years ended 31 December 2006, 2005 and 2004 (the ‘‘Audited
Accounts’’), as included in the document prepared for the listing of the agreed funding,
present a true and fair view of the financial position of the Group, as of the dates shown
and its results of operations and cash flows for the periods shown, and, except as
otherwise disclosed in the document prepared for the listing of the agreed funding, such
financial statements have been prepared in conformity with IFRS applied on a consistent
basis throughout the periods involved and, save as disclosed in the document prepared for
listing of the agreed funding, presented and prepared in a form consistent with that which
will be adopted in the Group’s next published annual financial statements having regard to
accounting standards and policies and legislation applicable to such annual financial
statements, and the Audited Accounts have been independently audited in accordance with
International Auditing Standards or an equivalent standard; and (b) except as disclosed in
the document prepared for the listing of the agreed funding, since 31 December 2006 there
has not been any change, or any development or event reasonably likely to involve a
prospective change that could individually or in the aggregate be reasonably expected to
have a material adverse effect on the business or financial condition, or on the prospects,
trading position or property of Transneft or the Group as a whole, whether or not arising
in the ordinary course of business or that would adversely affect the ability of Transneft to
perform its obligations under this Agreement and (c) the selected financial data and the
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summary financial information included in the document prepared for listing of the agreed
funding has been accurately extracted or derived from, and has been compiled on a basis
consistent with, the Audited Accounts;
(i) the execution, delivery and enforceability of this Agreement is not subject to any tax, duty,
fee or other charge imposed by or within the Russian Federation or any political
subdivision or taxing authority thereof or therein, including, but without limitation to, any
registration or transfer tax, stamp duty or similar levy, imposed by or within the Russian
Federation;
(j) neither Transneft nor any of its Subsidiaries nor their respective material property has any
right of immunity from suit, execution, attachment or other legal process on the grounds
of sovereignty or otherwise in respect of any action or proceeding relating in any way to
this Agreement;
(k) save as disclosed in the document prepared for listing of the agreed funding by Transneft
or such Subsidiary each of Transneft and its Subsidiaries has carried on and is carrying on
its business and operations in accordance with applicable laws, regulations, articles of
association or by-laws of the Russian Federation, save where such failure could not
reasonably be expected to have a Material Adverse Effect;
(l) the choice of English law as the governing law of this Agreement and any arbitration
award obtained in England in relation thereto will be recognised and enforced in the
Russian Federation after compliance with the applicable procedural rules and other legal
requirements in Russia;
(m) under the laws of the Russian Federation, and subject to Clauses 10.4(a) and 10.4(b), it is
not required to make any deduction or withholding for or on account of tax from any
payment it may make under this Agreement;
(n) save as disclosed in the document prepared for listing of the agreed funding neither
Transneft nor its Subsidiaries is in violation of any statute, rule, regulation, decision or
order of any governmental agency or regulatory body or any court, domestic or foreign,
relating to the use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or toxic
substances, owns or operates any real property contaminated with any substance that is
subject to any Environmental Laws, is liable for any off-site disposal or contamination
pursuant to any Environmental Laws, or is subject to any claim relating to any
Environmental Laws, save in each case for any such violation or liability or claim which
could not reasonably be expected to have a Material Adverse Effect; as far as Transneft is
aware there is no such pending or threatened action, suit, proceeding or claim by any
party against Transneft or any of its Subsidiaries arising under or pursuant to any
Environmental Laws;
(o) Transneft is not aware of any costs and liabilities arising from or relating to
Environmental Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental Laws, or
any permit, licence or approval, any related constraints on operating activities and any
potential liabilities to third parties), including those pursuant to reasonably anticipated
future changes to Environmental Laws, that are reasonably likely to have, singly or in the
aggregate, a Material Adverse Effect;
(p) it is subject to civil and commercial law with respect to its obligations under this
Agreement, and its execution of this Agreement constitutes, and its exercise of its rights
and performance of its obligations hereunder will constitute, private and commercial acts
done and performed for private and commercial purposes (rather than public and
governmental purposes);
(q) Transneft has no knowledge of any tax deficiency which, if determined adversely to
Transneft or any of its Subsidiaries could reasonably be expected to have a Material
Adverse Effect; and
(r) neither Transneft nor any Principal Subsidiary has taken any corporate action nor as far
as Transneft is aware, have any other steps been taken or legal proceedings been started or
threatened against it or any Principal Subsidiary, in each case where such action, steps or
proceedings are still in effect or continuing and have not been dismissed, as for (a) its
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liquidation or bankruptcy or the appointment of a liquidation commission (likvidatsionnaya
komissiya) or a similar officer of it, (b) the institution of supervision (nablyudeniye),