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OAO Severstal and subsidiariesOAO Severstal and subsidiariesNotes to the consolidated financial statementsfor the years ended December 31, 2008, 2007 and 2006(Amounts expressed in thousands of US dollars, except as stated otherwise)Notes to the consolidated financial statementsfor the years ended December 31, 2008, 2007 and 2006(Amounts expressed in thousands of US dollars, except as stated otherwise)1081. OperationsThese consolidated financial statements of OAO Severstal and subsidiaries comprise the parent company, OAOSeverstal (‘Severstal’ or ‘the Parent Company’) and its subsidiaries (collectively ‘the Group’) as listed in Note 30.Severstal began operations on August 24, 1955 and completed the development of an integrated iron and steelmill in Cherepovets during February 1959 when the first steel was rolled. On September 24, 1993, as a part ofthe Russian privatization program, Severstal was registered as a Joint Stock Company (‘OAO’) and privatized.Through participating in Severstal’s privatization auctions and other purchases, Alexey Mordashov (the “MajorityShareholder”) has purchased shares in Severstal such that as at December 31, 2008, 2007 and 2006 he controlled,directly or indirectly, 82.37% of Severstal’s share capital.Severstal’s global depositary receipts (GDRs) have been quoted on the London Stock Exchange since November2006. Severstal’s shares are quoted on the Russian Trading System (‘RTS’) and on the Moscow Interbank CurrencyExchange (‘MICEX’). Severstal’s registered office is located at Ul Mira 30, Cherepovets, Russia.The Group comprises the following segments:• Mining segment – this segment comprises two iron ore complexes, Karelsky Okatysh and Olkon in northwestRussia, and two coal mining complexes, Vorkutaugol in northwest Russia and PBS Coals Ltd, located in the USA,as well as gold mining assets in the eastern part of Russia, in Africa and in Kazakhstan.• Russian Steel – this segment consists primarily of the Group’s steel production and high-grade automotivegalvanizing facilities in Cherepovets, rolling mill 5000 in Kolpino, both in northwest Russia, a ferrous scrapmetal recycling business operating in northwest and central Russia (previously reported within Mining segment),as well as various worldwide supporting functions for trading, maintenance and transportation.• Lucchini – this segment comprises several plants and service centers, including Piombino and Ascometalbusiness units. It produces special and high quality steel and quality and specialty long products. Productionsites are located in Western Europe, primarily in Italy and France. This segment also includes its distributionnetwork companies, which are located primarily in Western Europe.• North America – this segment consists of two integrated iron and steel mills, Severstal North America in GreatLakes region and Sparrows Point on the East Coast of the USA, two producers of flat rolled and other high valueadded steel products, Severstal Wheeling (former Esmark group of companies) on the East Coast of the USA andSeverstal Warren Inc. (former WCI Steel Inc.) in the northeast region of the USA, a mini-mill, SeverCorr LLC on thesoutheast of the USA and a coking coal production facility, Mountain State Carbon LLC on the East Coast of theUSA.• Izhora Pipe Mill (‘IPM’) – this segment operates a large-diameter pipe mill in northwest Russia.• Metalware segment – this segment comprises three plants in Russia, one plant in Ukraine, one plant in theUnited Kingdom and one plant in Italy containing wire drawing equipment that takes long products (mainly wire)from the Russian Steel and Lucchini segments and external suppliers and turns them into products with a highervalue added for the Russian and international markets.• Financing segment – this segment operated a retail bank until November 2007 when the bank was disposed off.This transaction was accounted for as a discontinued operation. The transaction is further discussed in Note 29to these consolidated financial statements.A segmental analysis of the consolidated balance sheet and income statement is given in Note 31.Economic environmentThe Group’s activity in all its operating segments have been adversely affected by the uncertainty and instabilityin international financial, currency and commodity markets resulting from the global financial crisis. The recessionaffecting most economic regions, forcing the Group to reduce production, cut costs and manage increased risk factors.As a result of slower demand for steel products the Group’s production has declined at its steel plants in Russia, NorthAmerica and Europe commencing October 2008. As a consequence, the Group’s workforce, plant and equipmentexperience downtimes.Furthermore, a large part of the Group is based in the Russian Federation and is consequently exposed to the economicand political effects of the policies adopted by the Russian government. The Russian Federation has been experiencingpolitical and economic change that has affected, and may continue to affect, the activities of enterprises operating inthis environment. Consequently, operations in the Russian Federation involve risks that typically do not exist in othermarkets.The consolidated financial statements reflect management’s assessment of the impact of the global financial andeconomic crisis as well as the impact of the Russian business environment on the operations and the financial positionof the Group. The future business environment may differ from management’s assessment.International sales of rolled steel from the Group’s Russian operations have been the subject of several anti-dumpinginvestigations. The Group has taken steps to address the concerns of such investigations and participates actively intheir resolution. A brief description of protective measures effective at Severstal’s key export markets is given below:• Exports of hot-rolled coils and thin sheets from Russia to the USA are restricted by the minimum prices issuedquarterly by the US Department of Commerce and annual quotas.• Exports of hot-rolled plates from Russia to the USA are restricted by the minimum prices established based on theproducer’s actual cost and profit on the domestic market. Severstal is the first and exclusive Russian company, forwhich since September 2005 the hot-rolled plates market is open.• The Canadian market of hot-rolled plate was restricted by minimum prices in 2007. However, effective January 9,2008, this restriction had been cancelled.• The European Union (‘EU’) market is protected by quotas. During the last few years quotas have been raisedconsistently after adjusting for the effects of EU enlargements, equaling 3.031 mln. tons in 2008. Severstaltraditionally gets approximately 35% of the total Russian quota and strives to utilize it fully because the EU marketis a key market for the Group.2. Basis for preparation of the consolidated financialstatementsStatement of complianceThese consolidated financial statements are prepared in accordance with International Financial Reporting Standards(‘IFRS’) as issued by the International Accounting Standards Board.Basis of measurementThe consolidated financial statements are prepared on the historic cost basis except for financial instruments at fairvalue through profit and loss and available-for-sale financial assets stated at fair value.109