Open Joint Stock Company Gazprom

OAO GAZPROMNOTES TO THE IAS CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(In millions of Russian Roubles in terms of the equivalent purchasing power of the Rouble at31 December 2001, except as noted)26 FINANCIAL INSTRUMENTSFinancial risk managementThe Group exports gas to European countries and attracts substantial amount of foreign currencydenominated long-term borrowings and is thus exposed to foreign exchange risk. Foreign currencydenominated assets (see Note 8) and liabilities (see Note 15) together with long-term salescommitments to European countries (see Note 25) give rise to foreign exchange exposure.The Group is exposed to interest rate risk through market value fluctuations of interest-bearinglong-term borrowings (see Note 15).The Group does not have formal hedging arrangements to mitigate interest rate risks or foreignexchange risks of the Group's operations. However, on a long-term perspective management believesthat the Group is secured from financial risks; foreign currency denominated sales are secured by longtermcontracts to supply gas to European countries and the revenue from such contracts is used tocover repayment of foreign currency denominated borrowings.Fair valuesThe fair value of financial instruments is determined with reference to various market informationand other valuation methods as considered appropriate. At 31 December 2000 and 1999, the fair valuesof financial instruments other than long-term investments, trade receivables and trade payables are heldby the Group did not materially differ from their carrying value. The historical cost carrying amount ofreceivables and payables subject to normal trade credit terms approximates their fair value.Management does not believe it is practicable to estimate the fair value of long-term investments, othertrade receivables and trade payables. These financial instruments are not traded at financial market andan objective estimate of fair value is not, therefore, available. Information on the fair values of off-balancesheet derivative instruments is included below.Credit risksFinancial instruments, which potentially subject the Group to concentrations of credit riskprimarily consist of accounts receivables. Credit risks related to accounts receivable are systematicallymonitored and are considered when bad debt provisions are established. A significant portion of theGroup's accounts receivable are from local gas distribution companies and energy companies. Althoughcollection of these receivables could be influenced by governmental and economic factors affectingthese industries, management believes there is no significant risk of losses to the Group, other than tothe extent to which provision for doubtful accounts has already been made.Cash is placed in financial institutions which are considered at time of deposit to have minimalrisk of default.Off-balance sheet derivative instrumentsAt 31 December 2000, the Group had outstanding contracts with banks operating in the RussianFederation and foreign banks, whereby it had agreed to buy or sell Roubles in exchange for anothercurrency at an exchange rate agreed at the date of the contract. Management believes that it is possiblethat contracts between banks operating in the Russian Federation may become void or other remedialmeasures may eventually become available. In the event the outstanding contracts are declared void orsettled at an amount different than the amount stipulated in the contract, the losses and gains would beadjusted and the difference would be recognised in the consolidated statement of operations in theperiod that the settlement occurs.F-36