OJSC NK RussNeft · Stock Company “RussNeft” (PJSC “RussNeft”) due to a change of the legal form from joint stock company to public joint stock company. In November 2016,

PJSC “RussNeft”

Interim Condensed Consolidated Financial Statements (Unaudited)

for the six months ended 30 June 2018

August 2018

PJSC “RussNeft”

Interim Condensed Consolidated Financial Statements (Unaudited)


2

Contents

Report on Review of the Interim Financial Information ................................................................ 3 Interim Condensed Consolidated Financial Statements Interim Condensed Consolidated Statement of Profit or Loss and Other Comprehensive

Income ..................................................................................................................................... 5 Interim Condensed Consolidated Statement of Financial Position .............................................. 6 Interim Condensed Consolidated Statement of Changes in Equity ............................................. 7 Interim Condensed Consolidated Statement of Cash Flows........................................................ 8 Notes to the Interim Condensed Consolidated Financial Statements 1. Corporate information ............................................................................................................. 9 2. Basis of preparation ................................................................................................................ 9 3. Changes in accounting policies ............................................................................................ 11 4. New standards and interpretations issued but not yet effective............................................ 12 5. Segment information............................................................................................................. 12 6. Subsidiaries of the Group ..................................................................................................... 13 7. Non-controlling interests ....................................................................................................... 15 8. Investments in associates and joint ventures ....................................................................... 16 9. Revenue ............................................................................................................................... 18 10. Cost of sales ......................................................................................................................... 19 11. Selling, general and administrative expenses ...................................................................... 19 12. Finance income and expense ............................................................................................... 20 13. Other operating income and expenses ................................................................................. 20 14. Property, plant and equipment .............................................................................................. 21 15. Goodwill ................................................................................................................................ 22 16. Exploration and evaluation assets ........................................................................................ 22 17. Other long-term and short-term financial assets ................................................................... 23 18. Inventories ............................................................................................................................ 23 19. Trade and other receivables ................................................................................................. 24 20. Cash and cash equivalents................................................................................................... 24 21. Share capital ......................................................................................................................... 24 22. Long-term and short-term loans and borrowings .................................................................. 26 23. Decommissioning liability ...................................................................................................... 27 24. Other long-term liabilities, trade and other payables and accrued liabilities ......................... 28 25. Income tax ............................................................................................................................ 29 26. Transactions with related parties .......................................................................................... 29 27. Fair value measurement ....................................................................................................... 30 28. Contingencies, commitments and operating risks ................................................................ 32 29. Subsequent events ............................................................................................................... 35

PJSC “RussNeft”

Interim Condensed Consolidated Statement of Financial Position (Unaudited)

as at 30 June 2018

(in millions of Russian rubles)

The accompanying notes are an integral part of these interim condensed consolidated financial statements (unaudited). 6

Notes 30 June

2018 31 December

2017 Assets Non-current assets Property, plant and equipment 14 135,245 122,180 Goodwill 15 13,501 13,543 Deferred tax assets 17,765 16,380 Exploration and evaluation assets 16 277 247 Other long-term financial assets 17 60,378 49,610 Other non-current assets 416 260 Total non-current assets 227,582 202,220 Current assets Inventories 18 8,466 7,108 Trade and other receivables 19 7,598 8,034 Income tax receivable 37 41 VAT receivable 905 819 Other short-term financial assets 17 150 4,848 Cash and cash equivalents 20 5,151 1,962 Other current assets 8 11 Total current assets 22,315 22,823

Total assets 249,897 225,043 Equity and liabilities Equity attributable to shareholders of the Parent Share capital 21 196 196 Share premium 60,289 60,289 Foreign currency translation reserve 1,125 2,842 Accumulated loss (12,568) (11,585) Total equity attributable to shareholders of the Parent 49,042 51,742 Non-controlling interests 7 16,665 15,084 Total equity 65,707 66,826 Long-term liabilities Long-term loans and borrowings 22 85,956 81,334 Deferred tax liabilities 6,598 6,435 Decommissioning liability 23 13,777 7,542 Other long-term liabilities 24 28,740 25,494 Total long-term liabilities 135,071 120,805 Short-term liabilities Short-term loans and borrowings 22 2,961 133 Trade and other payables and accrued liabilities 24 32,557 28,610 Taxes and levies payable (excluding income tax) 24 10,275 8,154 Income tax payable 363 165 Other short-term liabilities 2,963 350 Total short-term liabilities 49,119 37,412

Total liabilities and equity 249,897 225,043

PJSC “RussNeft”

Interim Condensed Consolidated Statement of Changes in Equity (Unaudited)




Equity attributable to shareholders of the Parent

Notes Share capital

Share premium

Foreign currency

translation reserve

Retained earnings /

(accumulated loss)

Shareholders’ equity

Non-controlling interests

Total equity

31 December 2016 196 60,289 1,849 (17,283) 45,051 16,656 61,707

Profit/(loss) for the period – – – 3,217 3,217 (325) 2,892 Foreign currency translation reserve – – 504 – 504 (410) 94 Total comprehensive income/(loss) for the

period – – 504 3,217 3,721 (735) 2,986

Dividends – – – (2,360) (2,360) (5) (2,365) Dividends refund – – – – – 1 1 Non-controlling interests in shareholders’

contribution to subsidiaries’ equity – – – (31) (31) 31 – Changes in non-controlling interests in

subsidiaries due to purchase of treasury shares by subsidiaries – – – (9) (9) (38) (47)

Other equity transactions – – – (3) (3) – (3)

30 June 2017 196 60,289 2,353 (16,469) 46,369 15,910 62,279 31 December 2017 196 60,289 2,842 (11,585) 51,742 15,084 66,826

Profit for the period – – – 1,778 1,778 120 1,898 Foreign currency translation reserve – – (1,717) – (1,717) 1,255 (462) Total comprehensive income/(loss) for the

period – – (1,717) 1,778 61 1,375 1,436

Dividends 6, 21 – – – (2,551) (2,551) (3) (2,554) Non-controlling interests in shareholders’

contribution to subsidiaries’ equity – – – (65) (65) 65 – Changes in non-controlling interests in

subsidiaries 7 – – – (145) (145) 144 (1)

30 June 2018 196 60,289 1,125 (12,568) 49,042 16,665 65,707

PJSC “RussNeft”

Interim Condensed Consolidated Statement of Cash Flows (Unaudited)




Notes

Six months ended 30 June

2018

Six months ended 30 June

2017 Cash flows from operating activities Profit before tax 2,354 4,486 Profit before tax 2,354 4,486 Adjustments for items to reconcile profit before income tax to

net cash flows Depreciation, depletion and amortization 10 7,467 5,818 Loss on disposal of property, plant and equipment 13 178 90 Impairment of financial investments 13 281 21 (Reversal of impairment) / Impairment of property, plant and

equipment 13 (21) 160 Benefit obligations, bad debt allowance and other provisions 13 (497) (479) Loss on cash flow hedge 13 11,419 – Derecognition of provisions 13 (109) – Loss on liquidation of a subsidiary 13 43 – Finance income 12 (1,542) (1,936) Finance expense 12 4,057 3,976 Foreign exchange differences, net 770 (337) Other adjustments 24 56 Net operating cash flows before working capital changes 24,424 11,855 Working capital adjustments Increase in inventories (1,244) (692) Decrease in trade and other receivables 387 660 (Decrease)/increase in trade and other payables (1,087) 778 Decrease/(increase) in other current assets 2 (69) Income tax paid (1,430) (1,167) Net cash from operating activities 21,052 11,365 Cash flows from investing activities Purchase of property, plant and equipment and other non-current

assets (14,257) (9,488) Proceeds from disposal of property, plant and equipment 139 52 Loans issued (233) (118) Proceeds from loans issued 17 324 57 Interest received 5 69 Net cash used in investing activities (14,022) (9,428) Cash flows from financing activities Acquisition of non-controlling interests in subsidiaries and purchase

of treasury shares by subsidiaries from non-controlling shareholders 6 (1) (47) Proceeds from loans and borrowings received – 58 Repayment of loans and borrowings received 22 (2) (369) Interest paid 22 (2,984) (2,704) Exercise of options 27 (968) – Net cash used in financing activities (3,955) (3,062) Effect of foreign exchange rate changes on balances of cash and

cash equivalents 114 (57) Change in cash and cash equivalents 3,189 (1,182) Cash and cash equivalents at the beginning of the period 1,962 3,068

Cash and cash equivalents at the end of the period 5,151 1,886

PJSC “RussNeft”

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)



9

1. Corporate information The interim condensed consolidated financial statements of Public Joint Stock Company “RussNeft” (the “Parent” or the “Company”) and its subsidiaries (collectively referred to as the “Group”) for the six months ended 30 June 2018 were authorized for issue in accordance with a resolution of management on 27 August 2018. The Group comprises joint stock companies and limited liability companies as defined in the Civil Code of the Russian Federation. In addition, the Group includes limited liability companies in the Republic of Belarus, the Republic of Azerbaijan, the United Kingdom of Great Britain and Northern Ireland, the Republic of Cyprus, the Islamic Republic of Mauritania, the British Virgin Islands and the Cayman Islands. The principal activities of the Group are exploration, development, production and marketing of oil and gas and oil products. Principal subsidiaries included in the interim condensed consolidated financial statements and respective ownership interests of the Company as at 30 June 2018 and 31 December 2017 are presented in Note 6. The Parent was incorporated on 17 September 2002. According to the decision of the general meeting of the Company’s shareholders, which took place on 14 September 2016, the Company’s name in the Unified State Register of Legal Entities was changed on 13 October 2016 to Public Joint Stock Company “RussNeft” (PJSC “RussNeft”) due to a change of the legal form from joint stock company to public joint stock company. In November 2016, the Parent made a public placement of common shares on the Moscow Exchange. As at 30 June 2018, the person who is able to control the actions of the Company is Mikhail Safarbekovich Gutseriev. As at 30 June 2018, the average number of employees employed by the Group was 9,538 people (30 June 2017: 9,857 people, 31 December 2017: 9,818 people). The Parent is located at 69 Pyatnitskaya Street, Moscow, Russian Federation, tel.: +7 (495) 411-63-09, e-mail: [email protected], www.russneft.ru. 2. Basis of preparation Statement of compliance The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2018 have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for 2017 prepared in accordance with International Financial Reporting Standards (“IFRS”).

mailto:[email protected]

PJSC “RussNeft”

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

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2. Basis of preparation (continued) Basis of accounting The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements. The Group omitted disclosures which would duplicate the information contained in its 2017 audited consolidated financial statements, such as accounting policies, significant estimates and judgments, financial risk disclosures and other disclosures that have not been changed significantly in the amount or composition. Management believes that these interim condensed consolidated financial statements reflect all adjustments required to present fairly the Group’s financial position, performance results, and statements of changes in equity and cash flows for the interim reporting periods. The principal adjustments relate to the consolidation of subsidiaries, goodwill recognition, accounting for jointly controlled transactions and investments in associates, expense and revenue recognition, valuation allowances for unrecoverable assets, depreciation and valuation of property, plant and equipment, use of fair values, impairment of assets, foreign currency translation, financial instruments, deferred taxes, the decommissioning liability and land restoration liability. The Group’s interim condensed consolidated financial statements are presented in millions of Russian rubles (“RUB million”), unless otherwise indicated. Functional currency and foreign currency translation The financial statements of each of the Group’s companies are measured using the currency of the primary economic environment in which the company operates (the “functional currency”). The functional currency of the Group’s subsidiaries operating in Russia, the Parent and certain foreign subsidiaries of the Group incorporated due to the extension of the Parent’s operations is the Russian ruble. The functional currency of other foreign subsidiaries is the US dollar. In individual companies, transactions in foreign currencies are initially recorded in the functional currency by applying the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the official exchange rate set by the Central Bank of Russia (the “CBR”) at the reporting date. All resulting exchange differences are included in the interim condensed consolidated statement of profit or loss and other comprehensive income. Non-monetary assets and liabilities that are measured at historical cost and denominated in a foreign currency are translated into the functional currency using the rates of exchange as at the dates of the initial transactions. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into the functional currency using the rate of exchange at the date the fair value was determined. As at the reporting date, assets and liabilities (including related goodwill) of non-RUB functional currency subsidiaries, joint ventures and associates are translated in these interim condensed consolidated financial statements into the presentation currency of the Group using the rate of exchange effective at the reporting date. The performance results and cash flows of non-RUB functional currency subsidiaries, joint ventures and associates are translated into Russian rubles using the average rates of exchange for the reporting period; in case of significant exchange rate fluctuations certain significant transactions are translated at the exchange rate ruling at the date of the transaction. The exchange differences arising on such translation are recorded as a separate equity component. On disposal of a company whose functional currency is different from the presentation currency, the cumulative amount of the foreign currency translation reserve recorded within equity and related to that particular company is recognized in the interim condensed consolidated statement of profit or loss and other comprehensive income.

PJSC “RussNeft”


11

2. Basis of preparation (continued) Functional currency and foreign currency translation (continued) As at 30 June 2018 and 31 December 2017, the exchange rates used for the translation of USD-denominated transactions and balances were equal to the official CBR exchange rates of RUB 62.7565 and RUB 57.6002 per one US dollar, respectively. As at 27 August 2018, the official exchange rate was RUB 67.7911 per one US dollar. Going concern These interim condensed consolidated financial statements have been prepared on a going concern basis that assumes the sale of assets and the settlement of any liabilities (including contractual) in the normal course of business. This statement was made based on the assessment of the Group’s ability to continue as a going concern for at least 12 months after the end of the reporting period. 3. Changes in accounting policies The accounting principles adopted in the preparation of the interim condensed consolidated financial statements are consistent with those applied in the preparation of the Group’s annual consolidated financial statements for the year ended 31 December 2017, except for the adoption of new standards and interpretations (including those requiring additional disclosures) effective as at 1 January 2018, which had no significant impact on the Group’s financial position and performance. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments, which replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard brings together all three phases of the financial instruments accounting project: classification and measurement, impairment and hedge accounting. The Group analyzed the classification of all of its available financial instruments as per the consolidated statement of financial position as at 31 December 2017 and concluded that they had not been significantly affected by IFRS 9. At the same time, the Group implemented an internal model to assess expected credit losses. The model was developed in accordance with IFRS 9 and is designed to assess credit risk exposure of counterparties taking into account the characteristics of financial assets. The Group did not identify any significant differences between the amounts of reserves recognized in the consolidated financial statements as at 31 December 2017 and those obtained using the model. Therefore, the Group did not restate respective indicators as at 1 January 2018 and does not include any additional disclosures in the interim condensed consolidated financial statements. As for trade accounts receivable, the Group estimates expected credit losses using a simplified approach as envisaged by IFRS 9.

PJSC “RussNeft”


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3. Changes in accounting policies (continued) IFRS 15 Revenue from Contracts with Customers A new standard IFRS 15 Revenue from Contracts with Customers was issued in May 2014. The new standard contains complete guidance for revenue recognition and establishes a new five-step model that will apply to revenue arising from contracts with customers and includes a comprehensive set of the relevant disclosure requirements for financial statements. The new standard replaces IAS 18 Revenue, IAS 11 Construction Contracts and a number of IFRS interpretations on revenue recognition. The Group analyzed all key contracts with customers using a modified retrospective approach and estimated the effect of the application of IFRS 15 as insignificant. As for advances received from customers, the Group accrues interest for early payments, except for short-term advances for goods to be delivered and/or services to be provided within one year. For these advances, the Group assesses the effect of a significant financing component as insignificant. The amendments to IFRS summarized below did not have a significant effect on these interim condensed consolidated financial statements of the Group:

► Amendments to IAS 28 Investments in Associates and Joint Ventures;

► Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions;

► IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration;

► Amendments to IAS 40 Transfers of Investment Property;

► Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts;

► Amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. 4. New standards and interpretations issued but not yet effective The complete list of new standards, amendments to and interpretations of the existing standards that become effective after the annual period ended 31 December 2017 is provided in the Group’s consolidated financial statements for 2017. The Group intends to adopt these standards and interpretations when they become effective. 5. Segment information Operations of the Group are represented by the exploration and production segment comprising the Parent, production subsidiaries and subsidiaries providing operator and other services relating to oil and gas exploration, development, production and transportation. Operating results of the other subsidiaries are generally insignificant and management of the Group does not use them for the purpose of taking financial and operational decisions. Revenue from external customers broken down by key products and services and geographical areas as well as information about major customers is disclosed in Note 9 Revenue. Geographical distribution of the Group’s non-current assets, except for financial instruments, deferred tax assets and other assets, is disclosed in Note 14 Property, plant and equipment.

PJSC “RussNeft”


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6. Subsidiaries of the Group

Company Principal activity Country of

incorporation

Effective ownership

Effective ownership

30 June 2018 31 December 2017 Russneft (UK) Limited Marketing of crude oil and

petroleum products United Kingdom 100% 100%

Russneft Cyprus Limited1 Other Republic of Cyprus 20% 20% Kura Valley Petroleum Company1 Other Cayman Islands 20% 20% Kura Valley Development Company1

(under dissolution) Other Cayman Islands 20% 20%

Kura Valley Operating Company1 (under dissolution)

Evaluation and exploration of oil and gas

Cayman Islands 16% 16%

Russneft (BVI) Limited1 Other BVI 20% 20% Edmarnton Limited1 Other BVI 20% 20% International Petroleum Grouping S.А. 1 Evaluation and exploration of

oil and gas Islamic Republic of

Mauritania 11% 11%

CJSC IP Slavneftehim Marketing of crude oil and petroleum products

Republic of Belarus 99% 99%

LLC Torgovy Dom Russneft Other Russian Federation 100% 100% LLC M-Trade Other Russian Federation 100% 100% JSC Belkam-Trade Other Russian Federation 100% 100% LLC Rustrade Other Russian Federation 100% 100% OJSC Saratovneftegaz Extraction and marketing of

crude oil and gas Russian Federation 96% 96%

JSC Saratov-Burenie Extraction and marketing of crude oil

Russian Federation 96% 96%

LLC SO Agro Other Russian Federation 96% 96% JSC Upravlenie Povysheniya

Nefteotdachi Plasta i Kapitalnogo Remonta Skvazhin

Other Russian Federation 96% 96%

LLC Neftebytservis Other Russian Federation 96% 96% JSC Geofizservis Other Russian Federation 96% 96% JSC Servis-Centr Neftepromyslovogo i

Burovogo Oborudovania (to be dissolved)


LLC Saratovenergoneft Other Russian Federation 96% 96% LLC Zavolzhskoe Upravlenie

Technologicheskogo Transporta Transportation services Russian Federation 96% 96%

JSC Upravlenie Promishlennoy Avtomatiki (to be dissolved)


LLC RedOil Extraction and marketing of crude oil and gas


PI DOC Rovesnik Other Russian Federation 96% 96% OJSC MPK Aganneftegazgeologiya Extraction and marketing of

crude oil and gas Russian Federation 98% 97%

LLC Agan-Trans (dissolved) Other Russian Federation – 97%

1 Entities in which the Group has a direct and/or indirect interest via Russneft Cyprus Limited, a subsidiary, 100% of

whose voting shares are held by the Parent.

PJSC “RussNeft”


14

6. Subsidiaries of the Group (continued)

Company Principal activity Country of

incorporation

Effective ownership

Effective ownership

30 June 2018 31 December 2017 OJSC Ulyanovskneft Extraction and marketing of

crude oil Russian Federation 100% 100%

LLC Geophisic (to be reorganized through merger with JSC Geofizservis)


LLC KOLOS Other Russian Federation 100% 100% OJSC Nefterazvedka Extraction and marketing of


JSC Mohtikneft Extraction and marketing of crude oil


OJSC Varyeganneft Extraction and marketing of crude oil and gas


LLC Valyuninskoe Extraction and marketing of crude oil


LLC Novo-Aganskoe Extraction and marketing of crude oil


LLC Upravlenie Avtomatizatsii i Energetiki Neftyanogo Proizvodstva


LLC Upravlenie po Remontu i Obsluzhivaniyu Neftepromyslovogo Oborudovaniya


LLC Proizvodstvenno-Bytovoe Upravlenie


LLC Upravlenie Technologicheskogo Transporta

Transportation services Russian Federation 95% 93%

ST JSC Goloil Extraction and marketing of crude oil


LLC Belye Nochi Extraction and marketing of crude oil


LLC INA-Neftetrans Transportation services Russian Federation 100% 100% OJSC NAK Aki-Otyr Extraction and marketing of


JSC Nazymskaya Neftegazorazvedochnaya Ekspeditsiya

Extraction and marketing of crude oil and gas


JSC Khanty-Mansiyskaya Neftyanaya Kompaniya

Extraction and marketing of crude oil and gas


JSC Chernogorskoe Extraction and marketing of crude oil


LLC Tomskaya Neft Extraction and marketing of crude oil


LLC NK Russneft-Bryansk Transportation services Russian Federation 51% 51% Global Energy Cyprus Limited1 Other Republic of Cyprus 20% 20% GEA Holdings Limited1 Other BVI 20% 20% Kura Valley Holding Company1 Other Cayman Islands 20% 20% Karasu Petroleum Company1 Other Cayman Islands 20% 20%

Karasu Development Company1,2 Other Cayman Islands 20% 20%

2 Including Karasu Operating Company recognized in these interim condensed consolidated financial statements as a

joint operation under a production sharing agreement.

PJSC “RussNeft”


15

6. Subsidiaries of the Group (continued) During the reporting period, the Parent performed the following transactions with shares in the Group’s subsidiaries:

• In February 2018, acquisition of shares in the following subsidiaries that were purchased and previously recognized on the balance sheets of these subsidiaries as treasury shares: OJSC Varyeganneft (507,022 common shares or 1.90% of the share capital), OJSC MPK Aganneftegazgeologiya (1,244,840 common shares or 1.23% of the share capital), OJSC Saratovneftegaz (3,478 common shares or 0.105% of the share capital) and OJSC Ulyanovskneft (2 common shares or 0.003% of the share capital). The above transactions have resulted in insignificant changes in the Parent’s effective interest in the share capital of these subsidiaries.

• In January 2018, acquisition of 49% of shares in OJSC Nefterazvedka at an auction from the Federal Agency for State Property Management (Rosimushchestvo). As a result of the acquisition, the Parent’s interest in the subsidiary increased to 100%.

The difference between the consideration paid and the carrying amount of the non-controlling interests is recorded in the interim condensed consolidated statement of changes in equity. At the annual shareholder meetings, OJSC Varyeganneft and OJSC Saratovneftegaz decided to pay dividends to preference shareholders for 2017, due to which these shares ceased to be voting at the reporting date. The dividends accrued on preference shares to non-controlling shareholders are recognized in the interim condensed consolidated statement of changes in equity. 7. Non-controlling interests The non-controlling interests include:

30 June

2018

Six months ended

30 June 2018

31 December 2017

Six months ended

30 June 2017

Non-controlling interests in

share capital

Non-controlling interests in net

assets

Non-controlling interests in profit/(loss)

Non-controlling interests in

share capital

Non-controlling interests in net

assets

Non-controlling interests in profit/(loss)

% RUB million RUB million % RUB million RUB million Russneft Cyprus Limited and

its subsidiaries and joint ventures 80%, 84%, 89% 15,313 57 80%, 84%, 89% 13,935 (377)

OJSC Varyeganneft and its subsidiaries 5% 1,210 67 5% 1,180 32

OJSC Saratovneftegaz and its subsidiaries 4% 714 (7) 4% 721 (10)

Other 1%-49% (572) 3 1%-49% (752) 30 Non-controlling interests at

the end of the period 16,665 120 15,084 (325)

As at the reporting date, non-controlling voting interests in OJSC Varyeganneft and OJSC Saratovneftegaz were 1.504% and 0.858%, respectively. The voting interest of PJSC “RussNeft” in Russneft Cyprus Limited is 100%.

PJSC “RussNeft”


16

8. Investments in associates and joint ventures GEA Holdings Limited Group The Group recognizes its participation in production sharing agreements (the “PSA”) in the interim condensed consolidated financial statements as joint operations involving subsidiaries and joint ventures of GEA Holdings Limited group (“GEA group”). GEA Holdings Limited through its subsidiaries and joint ventures participates in exploration and extraction projects in the Republic of Azerbaijan under the PSA structure with the State Oil Company of the Azerbaijan Republic (SOCAR) and SOCAR Oil Affiliate (SOA). Assets and liabilities, revenue and expenses of the operating companies in which the Group participates as a contractor under the PSA are recorded in accordance with the interests of the Group. Joint operations are structured through the incorporation of separate legal entities (operating companies). Joint ventures of GEA group are as follows: Company

Principal activity

Country of incorporation

Share in equity 30 June 20183

Share in equity 31 December 20173

Consolidation method

Global Energy Azerbaijan Limited Other BVI 50% 50% Equity method Global Energy Azerbaijan Management

Limited Other BVI 50% 50% Equity method

Neftechala Petroleum Limited Other BVI 50% 50% Equity method Neftechala Investments Limited Other BVI 50% 50% Equity method Neftechala Operating Company Extraction and

marketing of crude oil under

PSA

BVI 40% 40% Assets, liabilities, revenue and expenses related to the

Group’s interest

Absheron Petroleum Limited Other BVI 50% 50% Equity method Apsheron Investments Limited Other BVI 50% 50% Equity method Absheron Operating Company Limited Extraction and


PSA


Group’s interest

Shirvan Petroleum Limited Other BVI 50% 50% Equity method Shirvan Investments Limited Other BVI 50% 50% Equity method Shirvan Operating Company Limited Extraction and


PSA


Group’s interest

Repleton Enterprises Limited Other Republic of Cyprus 50% 50% Equity method AZEN OIL COMPANY B.V. Other Kingdom of the

Netherlands 50% 50% Equity method

Binagadi Oil Company Extraction and marketing of

crude oil under PSA

Cayman Islands 38% 38% Assets, liabilities, revenue and expenses related to the

Group’s interest

Global Energy Caspian Limited Other BVI 50% 50% Equity method

3 Excluding the interest of PJSC “RussNeft” in Russneft Cyprus Limited, the parent company of GEA group (Note 6).

PJSC “RussNeft”


17

8. Investments in associates and joint ventures (continued) GEA Holdings Limited Group (continued) Summarized financial information of the joint ventures of the GEA group and carrying amounts of investments in joint ventures are provided below. The statement of financial position as at 30 June 2018 and 31 December 2017:

30 June

2018 31 December

2017 RUB million RUB million Non-current assets 45,773 41,708 Current assets 3,185 2,446 including cash 438 32 Long-term liabilities (60,792) (51,414) including long-term financial liabilities (59,582) (50,317) Short-term liabilities (2,970) (5,530) including short-term financial liabilities (382) (3,547)

Total equity (14,804) (12,790) The statement of profit or loss and other comprehensive income for the six months ended 30 June 2018 and 30 June 2017:

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Revenue 3,153 2,654 Cost of sales (2,476) (2,413) including depreciation, depletion and amortization (1,058) (1,204) Other operating (expenses)/income, net4 (57) 22 Operating profit 620 263 Finance income 173 165 Finance expense (1,420) (1,949) Loss before income tax (627) (1,521) Income tax expense (195) (12)

Loss for the period (822) (1,533) Group’s share in loss for the period (411) (766) Unrecognized share in loss for the period 411 766

Share in loss of associates and joint ventures – –

4 The net amounts of exploration expenses, selling expenses, general and administrative expenses and other operating

expenses/income are recorded in aggregate.

PJSC “RussNeft”


18

8. Investments in associates and joint ventures (continued) GEA Holdings Limited Group (continued)

30 June

2018 31 December

2017 RUB million RUB million Total unrecognized share in loss at the beginning of the period (6,395) (5,200) Unrecognized share in loss for the period (411) (1,477) Foreign currency translation reserve for the period (596) 282

Total unrecognized share in loss at the end of the period (7,402) (6,395) As at 30 June 2018 and 31 December 2017, the carrying amount of investments in associates and joint ventures equals to zero. 9. Revenue Revenue from external customers broken down by geographical segments is presented based on the location of customers. The Group operates in three principal geographical areas: Europe, the Commonwealth of Independent States (the “CIS”) and the Russian Federation (Russia). The Group’s non-current assets are located primarily in the Russian Federation except for those disclosed in Note 8. Information on revenue is presented in the table below:

Europe and other export CIS

(other than Russia) Russian

Federation Total

Six months ended

30 June 2018

Six months ended

30 June 2017

Six months ended

30 June 2018

Six months ended

30 June 2017

Six months ended

30 June 2018

Six months ended

30 June 2017

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million RUB million RUB million RUB million RUB million RUB million RUB million Revenue from external

customers

Crude oil sales 26,176 18,906 7,020 4,291 50,929 32,241 84,125 55,438 Petroleum product sales 726 8 1,354 511 63 – 2,143 519 Gas sales – – – – 1,334 1,183 1,334 1,183 Other sales – – – – 763 550 763 550

Total revenue 26,902 18,914 8,374 4,802 53,089 33,974 88,365 57,690

Revenue includes revenue from two customers for the reporting period (whereby the revenue from each customer exceeds 10% of the total revenue), net of export duty:

Geographical

location

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Major customer 1 Crude oil sales Europe and other

export 21,615 14,043 Major customer 2 Crude oil sales Russian Federation 18,022 12,813 Total revenue from sales

to major customers 39,637 26,856

PJSC “RussNeft”


19

10. Cost of sales

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Mineral extraction tax 33,096 22,529 Cost of crude oil and petroleum products sold 7,959 2,467 Depreciation, depletion and amortization 7,467 5,818 Payroll and related taxes 3,466 3,163 Utilities 2,856 3,014 Raw materials and supplies used in production 2,197 1,195 Production services 1,795 1,874 Equipment repair, operation and maintenance 1,067 994 Transportation expenses 545 517 Processing fees 64 15 Other expenses 1,986 2,019

Total cost of sales 62,498 43,605 11. Selling, general and administrative expenses Selling expenses comprise:

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Pipeline tariffs and transportation expenses 5,212 4,973 Other selling expenses 10 12 Excise 9 43

Total selling expenses 5,231 5,028 General and administrative expenses comprise the following:

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Payroll and related taxes 1,154 885 Office rent 170 178 Entertainment and business travel 158 170 Bad debt allowance 141 51 Software 78 58 Utilities 59 38 Consulting services 54 39 Repair and maintenance 46 54 Bank services 24 33 Taxes other than income tax, including fines and penalties 18 27 Allowance for inventory obsolescence (29) – Other expenses 200 95

Total general and administrative expenses 2,073 1,628

PJSC “RussNeft”


20

12. Finance income and expense Finance income comprises the following:

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Interest income on loans issued 1,410 1,936 Other finance income 132 –

Total finance income 1,542 1,936 Finance expense comprises the following:

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Interest expense on loans and borrowings, for early payments 3,681 3,532 Unwinding of the discount on long-term provisions (Note 23) 376 420 Other finance expense – 24

Total finance expense 4,057 3,976 13. Other operating income and expenses

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Loss on cash flow hedge and exercise of options (Note 27) 11,419 – Charity and other gratuitous expenses 843 473 Impairment of financial investments 281 21 Loss on disposal of property, plant and equipment 178 90 Public service advertising 50 47 Loss on liquidation of a subsidiary 43 – Loss on sale of inventories and other assets 17 – Derecognition of provisions (109) – Fines and penalties received due to contractual breaches (28) (79) Reversal of impairment / Impairment of property, plant and equipment

(Note 14) (21) 160 Other income (37) (70) Other expenses 80 43

Total other operating expenses, net 12,716 685

PJSC “RussNeft”


21

14. Property, plant and equipment

Oil and gas properties

Other property, plant and

equipment Construction in progress Total

RUB million RUB million RUB million RUB million 1 January 2017 Cost 186,691 3,087 – 189,778 Accumulated depreciation and impairment (74,900) (2,813) – (77,713)

Net book value as at 1 January 2017 111,791 274 – 112,065 Additions 26,185 274 51 26,510 Decommissioning liability (2,609) – – (2,609) Transfer from construction in progress – 51 (51) – Depreciation (11,851) (53) – (11,904) Impairment (675) (1) – (676) Reversal of impairment 232 1 – 233 Disposals, net (774) – – (774) Foreign currency translation, net (665) – – (665) 31 December 2017 Cost 207,232 3,390 – 210,622 Accumulated depreciation and impairment (85,598) (2,844) – (88,442)

Net book value as at 31 December 2017 121,634 546 – 122,180 Additions 13,852 6 22 13,880 Decommissioning liability 5,941 – – 5,941 Transfer from construction in progress – 19 (19) – Depreciation (7,442) (24) – (7,466) Reversal of impairment 21 – – 21 Disposals, net (456) (4) – (460) Foreign currency translation, net 1,135 14 – 1,149 30 June 2018 Cost 226,629 3,284 3 229,916 Accumulated depreciation and impairment (91,944) (2,727) – (94,671)

Net book value as at 30 June 2018 134,685 557 3 135,245 The Group’s non-current assets are located primarily in the Russian Federation, except for assets located in the Republic of Azerbaijan in accordance with the Group’s participation in PSA (Note 8). As at 30 June 2018 and 31 December 2017, the Group has no significant pledges of property, plant or equipment. Impairment losses The Group assesses at each reporting date whether there is an indication that an asset may be impaired. Based on the assessment, the Group reversed an allowance of RUB 21 million and recognized an allowance of RUB 160 million during the first six months of 2018 and 2017, respectively. As at 30 June 2018 and 31 December 2017, the allowance amounts to RUB 4,762 million and RUB 4,873 million, respectively. Given the specifics of the Group’s activities, information on the assets’ fair value is in general difficult to obtain, unless there are negotiations with potential buyers. As a result, the recoverable amount used for the purpose of assessing the impairment accrued is determined based on the discounted cash flow model.

PJSC “RussNeft”


22

15. Goodwill RUB million 1 January 2017 13,544 Foreign currency translation (1) 31 December 2017 13,543 Liquidation of a subsidiary (43) Foreign currency translation 1

30 June 2018 13,501 Goodwill impairment test The Group conducts a goodwill impairment test annually at 31 December of each annual reporting period. During the reporting period, the Group analyzed whether there were indicators of potential impairment. The analysis identified no goodwill impairment as at 30 June 2018. The carrying amount of goodwill is allocated to each of the cash-generating units as follows:

30 June

2018 31 December

2017 RUB million RUB million OJSC Saratovneftegaz Exploration and production 9,046 9,046 OJSC MPK Aganneftegazgeologiya Exploration and production 3,118 3,161 OJSC Varyeganneft Exploration and production 624 624 OJSC Ulyanovskneft Exploration and production 228 228 OJSC NAK Aki-Otyr Exploration and production 95 95 Other 390 389

13,501 13,543 16. Exploration and evaluation assets At the reporting date, the allowance for impairment of exploration and evaluation assets under some projects in the Republic of Azerbaijan and the Islamic Republic of Mauritania, which was recognized in previous reporting periods, amounts to RUB 7,083 million. As at 31 December 2017, the allowance for impairment of exploration and evaluation assets amounted to RUB 6,501 million.

PJSC “RussNeft”


23

17. Other long-term and short-term financial assets

Currency 30 June

2018 31 December

2017 RUB million RUB million Long-term loans issued to related parties USD 60,218 49,222 Long-term loans issued to related parties RUB 208 206 Long-term loans issued to other companies RUB 2,414 2,378 Long-term loans issued to other companies BYN – 182 Allowances for impairment of long-term loans issued (2,462) (2,378)

60,378 49,610 Short-term loans issued to related parties USD 150 4,848

150 4,848 During the reporting period the Group did not perform significant operations with loans issued. Loans issued and repaid are recorded within investing activities in the interim condensed consolidated statement of cash flows and within other long-term and short-term financial assets in the interim condensed consolidated statement of financial position. The loans issued are recognized in these interim condensed consolidated financial statements at amortized cost. The Group assessed loans issued using IFRS 9, including the expected credit loss model. The aggregate effect was overal insignificant for this type of financial assets. The Parent records loans issued by related parties to GEA group companies under the equity method as long-term financial assets in these interim condensed consolidated financial statements (Note 8). As at 30 June 2018 and 31 December 2017, the loans receivable (including accumulated interest and impairment) were USD 774 million and USD 758 million (RUB 48,602 million and RUB 43,643 million at the exchange rate as at the respective reporting dates), respectively. As at 30 June 2018 and 31 December 2017, outstanding balances related to long-term and short-term financial investments (including interest) comprise outstanding balances of loans issued to related parties by GEA group companies in the amount of USD 90 million and USD 87 million (RUB 5,645 million and RUB 5,037 million), respectively. During the reporting period, certain loans were extended, which had no significant effect on the financial statements. As at 30 June 2018 and 31 December 2017, RUB-denominated loans to Claymon Enterprises Limited were fully covered by allowances in the amount of RUB 2,399 million and RUB 2,363 million, respectively. 18. Inventories

30 June

2018 31 December

2017 RUB million RUB million Crude oil 4,410 3,904 Raw materials and components 4,403 3,694 Petroleum products 342 191 Allowance for inventory obsolescence (689) (681)

Total inventories 8,466 7,108

PJSC “RussNeft”


24

19. Trade and other receivables

30 June

2018 31 December

2017 RUB million RUB million Trade receivables 4,981 5,445 Prepayments 2,241 1,610 Other receivables 1,440 1,884 Allowance for bad debt and impairment (1,064) (905)

Total trade and other receivables 7,598 8,034 Movements in the bad debt allowance for trade and other receivables are as follows:

30 June

2018 31 December

2017 RUB million RUB million At the beginning of the period (905) (911) Charge (141) (29) Allowance used – 25 Foreign currency translation (18) 10

At the end of the period (1,064) (905) 20. Cash and cash equivalents

30 June

2018 31 December

2017 RUB million RUB million Foreign currency-denominated cash at bank and on hand 4,422 1,125 Deposits and other cash equivalents 448 2 RUB-denominated cash at bank and on hand 281 835

Total cash and cash equivalents 5,151 1,962 21. Share capital As at the reporting date, the Parent had placed 294,120,000 common shares and 98,032,000 cumulative preference shares with a nominal value of RUB 0.5 each. As at the reporting date, the Company had the right to place 105,880,000 additional common shares and 101,968,000 additional cumulative preference shares with the same nominal value of RUB 0.5 each.

PJSC “RussNeft”


25

21. Share capital (continued) Interests in the share capital of the Parent as at the reporting date are presented below (shareholders owning at least 5 percent of share capital or at least 5 percent of common shares):

Name

Percentage of share capital,

%

Percentage of common shares,

% OJSC IC Nadezhnost 4.95 6.60 CJSC Mlada 7.70 10.27 RAMBERO HOLDING AG 23.46 31.28 BELYRIAN HOLDINGS LIMITED 19.19 25.59 JSC ROST BANK 27.71 3.61 The annual general shareholders meeting of the Company held in June 2018 made a decision to pay dividends on cumulative preference shares for 2017: dividends per one share were declared in the amount of USD 0.40803 at the CBR rate effective at the date of actual payment. The declared dividends totaled USD 40 million or RUB 2,551 million at the exchange rate as at the date of dividends accrual. As the declared dividends were not yet due at the reporting date, the respective amount payable was RUB 2,510 million at the exchange rate as at the reporting date (Note 29). Earnings per share Basic earnings per share are calculated by dividing the profit for the reporting period attributable to common equity holders of the Parent, as adjusted, by the weighted average number of common shares outstanding during the reporting period. The average weighted number of the Company’s outstanding common shares did not change in the reporting period. The Group did not place securities which may have a potential diluting effect, therefore basic and diluted earnings per share are the same.

Six months ended

30 June 2018

Six months ended

30 June 2017

Profit attributable to shareholders of the Parent RUB million 1,778 3,217 Dividends on cumulative preference shares5 RUB million – – Profit attributable to shareholders of the Parent,

as adjusted RUB million 1,778 3,217 Weighted average number of common shares

outstanding million 294 294 Effect of dilution – – Basic and diluted earnings per share RUB per share 6 11

5 The effect of distribution of dividends on cumulative preference shares for 2017 was included in the calculation of

earnings per share in 2017 in the amount of USD 40 million or RUB 2,304 million at the exchange rate effective as at 31 December 2017.

PJSC “RussNeft”


26

22. Long-term and short-term loans and borrowings

Currency

Weighted average interest rate by type of

liability as at 30 June

2018 30 June

2018 % RUB million Long-term loans and borrowings Bank loans USD 7.84% 79,280 Borrowings USD 8.59% 8,818 Borrowings RUB 6.50% 719 Current portion of long-term debt (2,861)

Total long-term loans and borrowings 85,956 Short-term loans and borrowings Bank loans USD 7.84% 96 Borrowings RUB 7.00% 4 Current portion of long-term debt 2,861

Total short-term loans and borrowings 2,961

Currency

Weighted average interest rate by type of liability as at 31 December

2017 31 December

2017 % RUB million Long-term loans and borrowings Bank loans USD 7.16% 72,766 Borrowings USD 8.60% 7,866 Borrowings RUB 6.50% 702

Total long-term loans and borrowings 81,334 Short-term loans and borrowings Bank loans USD 7.16% 129 Borrowings RUB 7.00% 4

Total short-term loans and borrowings 133 In May 2015, PJSC VTB Bank issued a loan of USD 2,302 million (RUB 115,048 million at the exchange rate as at the date of receipt) to the Company with the original maturity in March 2023 and the original fixed interest rate of 8.3%. The parties revised the loan agreement with PJSC VTB Bank several times. The most recent amendments in the terms of the PJSC VTB Bank loan to the Company under an addendum signed in December 2016 included a revision of the payment schedule and the maturity date (extended until March 2026). The interest rate was 3m LIBOR + margin 5.5% p.a.

PJSC “RussNeft”


27

22. Long-term and short-term loans and borrowings (continued) The Company repays accrued interest on a quarterly basis, in accordance with the schedule and the interest rate set for the date of payment. During the first six months of 2018, the Company made scheduled interest payments of USD 49 million or RUB 2,978 million at the exchange rate effective at the payment date under the loan issued by PJSC VTB Bank. Outstanding principal payable to PJSC VTB Bank amounts to USD 1,263 million or RUB 79,280 million at the exchange rate as at the reporting date. Current interest payable amounts to USD 1.5 million or RUB 96 million at the exchange rate as at the reporting date. The loan from PJSC VTB Bank was secured by pledge of the common shares of the Parent and the equity interests that the Parent holds in certain subsidiaries. At the same time, certain subsidiaries of the Group and other related parties are joint guarantors to the creditor with regard to the Parent’s liabilities. The loan agreement contains a number of financial and operational covenants that the Company shall comply with during the term of the agreement. Non-fulfillment of some of the agreed covenants makes the creditor entitled to claim early repayment of the principal amount and accrued interest, including interest penalties. The outstanding amount payable under the loan in foreign currency received from the related party by a GEA group company is recorded at amortized cost using the market discount rate of 8.5% p.a. The outstanding amount is USD 74 million or RUB 4,617 million at the exchange rate at the reporting date. Interest accrued is primarily repaid simultaneously with the principal amount, unless otherwise specified in loan agreements, and presented as long-term loans and borrowings. 23. Decommissioning liability 30 June 2018 31 December 2017

Decommis-sioning liability

Land restoration

liability

Decommis-sioning liability

Land restoration

liability RUB million RUB million RUB million RUB million At the beginning of the period 5,734 1,808 7,413 1,959 Acquisitions 118 169 295 457 Disposals (122) (8) (355) (197) Change in estimate 4,432 1,243 (2,239) (580) Unwinding of the discount on

decommissioning liability 281 95 637 169 Foreign currency translation 27 – (17) –

At the end of the period 10,470 3,307 5,734 1,808 The Group makes a provision for the future cost of decommissioning oil production facilities and restoring land on a discounted basis as the facilities are put into operation or sites are damaged. The Group estimated the provision taking into account existing oil extraction technologies and current estimates of decommissioning costs (adjusted for inflation projections) and discounted the provision at the rate of 7.81% (2017: 10.48%).

PJSC “RussNeft”


28

23. Decommissioning liability (continued) The decommissioning liability represents the present value of decommissioning costs relating to oil and gas properties which are expected to be incurred up to 2092 depending on the recovery period of proved reserves for each group of oil and gas fields. Management makes assumptions based on the current economic environment and believes that they are a reasonable basis upon which the future liability is estimated. These estimates are reviewed regularly to take into account any material changes in the assumptions. Actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning work which will reflect specific market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates. This, in its turn, will depend on future oil and gas prices, which are inherently uncertain. 24. Other long-term liabilities, trade and other payables and accrued liabilities

Other long-term liabilities 30 June

2018 31 December

2017 RUB million RUB million Long-term advances received 19,866 21,502 Derivative instruments at fair value (Note 27) 7,748 2,890 Long-term trade and other payables 1,126 1,102

Total other long-term liabilities 28,740 25,494

Trade and other payables and accrued liabilities 30 June

2018 31 December

2017 RUB million RUB million Trade payables 13,059 13,248 Advances received 11,040 11,986 Derivative instruments at fair value (Note 27) 6,351 1,226 Other short-term payables and accrued liabilities 2,107 2,150

Total trade and other payables and accrued liabilities 32,557 28,610

Taxes and levies payable (excluding income tax) 30 June

2018 31 December

2017 RUB million RUB million Mineral extraction tax 6,304 5,331 Value added tax 3,295 2,152 Property tax 342 345 Other taxes and levies (excluding income tax) 334 326

Total taxes and levies payable (excluding income tax) 10,275 8,154 As at 30 June 2018, the Group’s short-term liabilities exceeded its current assets by RUB 26,804 million (31 December 2017: RUB 14,589 million). Based on operating cash flows from ordinary activities and existing arrangements with major creditors, the Group’s management performed ongoing analysis with regard to liquidity risk and assesses the risk as low.

PJSC “RussNeft”


29

25. Income tax The major components of income tax benefit and income tax expense are:

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Current income tax 1,678 1,182 Current income tax expense 1,657 715 Income tax relating to previous years 21 467 Deferred income tax (1,222) 412 Relating to origination and reversal of temporary differences (409) 914 Change in deferred income tax relating to previous periods (813) (502) Income tax expense reported in the interim condensed

consolidated statement of profit or loss and other comprehensive income 456 1,594

26. Transactions with related parties The Group’s transactions with its subsidiaries that are related parties are excluded from the interim condensed consolidated financial statements and are not disclosed in this Note. Transactions with joint ventures before consolidation adjustments are fully disclosed herein. The nature of the related party relations for those related parties with whom the Group entered into significant transactions in the six months ended 30 June 2018 and 30 June 2017 or had significant balances outstanding as at 30 June 2018 and 31 December 2017 is detailed below. Transactions with related parties for the six months ended 30 June 2018 and 30 June 2017: Six months ended 30 June 2018 Sales

Other transactions Purchases

Finance income

Finance expense

RUB million RUB million RUB million RUB million RUB million Entities/Individuals with significant

influence over the Group 21,6156 – 41 – 539 Associates and joint ventures 68 11 365 1,144 173 Other related parties 20,370 14 6,638 191 –

Total 42,053 25 7,044 1,335 712 Six months ended 30 June 2017 Sales

Other disposals Purchases

Finance income

Finance expense

Dividends accrued

RUB million RUB million RUB million RUB million RUB million RUB million Entities/Individuals with significant

influence over the Group 14,0437 – 81 – 876 2,3608 Associates and joint ventures 63 14 369 1,717 189 – Other related parties 14,363 18 2,793 193 – –

Total 28,469 32 3,243 1,910 1,065 2,360

6 Excluding export duty. 7 Excluding export duty. 8 At the rate as at the date of declaration of dividends on cumulative preference shares.

PJSC “RussNeft”


30

26. Transactions with related parties (continued) As at 30 June 2018 and 31 December 2017, amounts due to and due from related parties are as follows:

30 June 2018 Receivables Loans issued Payables

Loans received

Guarantees issued

Guarantees issued to

secure liabilities


influence over the Group 683 – 29,104 – 24,049 – Associates and joint ventures 252 54,247 315 5,618 – – Other related parties 2,344 6,281 2,854 – 61 20,748

Total 3,279 60,528 32,273 5,618 24,110 20,748

31 December 2017 Receivables Loans issued Payables

Loans received

Guarantees issued

Guarantees issued to

secure liabilities


influence over the Group 199 – 29,508 – – – Associates and joint ventures 273 48,680 287 4,988 – – Other related parties 2,721 5,596 2,912 – 59 21,234

Total 3,193 54,276 32,707 4,988 59 21,234 Pricing policy The Group determines prices for related party transactions within the range of market prices. In addition, the Group’s management performs control envisaged by the regulation governing transactions between related parties. Key management personnel Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, either directly or indirectly, including directors (executive and other directors) of the Group. There were no significant transactions carried out during the reporting year with directors or key management personnel. In the first half of 2018, key management personnel compensation expense consisting of salaries, bonuses and payroll taxes totaled RUB 655 million (the first half of 2017: RUB 454 million). In 2017, the Company adopted a new three-year long-term motivation program for senior and medium management. The Group recognizes the phantom shares to be settled in cash as a liability expensed to bonuses during the period that services are rendered. Planned payments are calculated upon reaching the target program criteria in each reporting period. 27. Fair value measurement All financial instruments are measured at fair value using a valuation model based on Level 3 non-market observable inputs that require additional evaluations and corrections. There have been no transfers between the levels of the fair value hierarchy during the reporting period.

PJSC “RussNeft”


31

27. Fair value measurement (continued) Management believes that the fair value of the Group’s cash, short-term financial assets, short-term trade payables and short-term loans and borrowings is equal to their carrying amount. The fair value of long-term loans and borrowings received by the Group, long-term trade payables and loans issued is determined using a discounted cash flow model based on the discount rates that are equal to the market rates effective at the reporting date. As at 30 June 2018, management classified the risk of default as remote. The accounting classification of each category of financial instruments, their carrying amounts and fair values are as follows: 30 June 2018 31 December 2017

Carrying amount

Fair value

Carrying amount

Fair value

RUB million RUB million Financial assets measured at amortized

cost9 Loans issued 60,528 60,159 54,458 54,148 Trade and other receivables 4,949 4,949 5,417 5,417 Cash and cash equivalents 5,151 5,151 1,962 1,962 Financial liabilities measured at

amortized cost Trade and other payables 14,180 14,013 14,338 14,145 Loans and borrowings 88,917 94,439 81,467 89,819 In 2017, the Company entered into a number of agreements to hedge future cash flows with banks, including non-deliverable put options (in foreign currency) and call options (in Russian rubles). Fair values of derivative financial options are measured using designated mathematical models at the reporting date; the revaluation effect (loss) of RUB 9,983 million was recognized within other operating expenses in the interim condensed consolidated statement of profit or loss and other comprehensive income. The Group does not apply hedge accounting on the options through other comprehensive income. As at the end of the reporting period, the Company recognized option exercise expenses of RUB 1,436 million. The respective amount due was RUB 468 million as at the reporting date.

Derivative financial instruments at fair value 30 June

2018 31 December

2017 RUB million RUB million Long-term derivative financial assets 398 727 Short-term derivative financial assets 47 68 Long-term derivative financial liabilities (8,146) (3,617) Short-term derivative financial liabilities (6,398) (1,294)

Total10 (14,099) (4,116) 9 Financial assets are classified as at the reporting date in accordance with IFRS 9 based on the respective asset

management business model and characteristics of the financial assets. 10 The fair value of derivative instruments is measured on a net basis and recorded in other long-term liabilities and

payables (Note 24).

PJSC “RussNeft”


32

27. Fair value measurement (continued)

Six months ended

30 June 2018

Six months ended

30 June 2017

RUB million RUB million Change in fair value of options 9,983 – Exercise of options 1,436 –

Loss on cash flow hedge and exercise of options (Note 13) 11,419 – 28. Contingencies, commitments and operating risks Operating environment of the Group The Group’s principal activities are performed in the Russian Federation. Business operations in the Russian Federation involve risks that typically do not exist in other markets. The Russian economy is characterized by significant vulnerability to the world price for crude oil, market fluctuations and economic slowdowns elsewhere in the world. The ongoing sanctions imposed against the Russian Federation still induce reduced capital availability, higher costs of capital and uncertainty regarding economic growth, thus giving rise to the risk of an adverse effect on the Group’s financial position, performance and business prospects. The existing trends can persist for an indefinite period of time. The interim condensed consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the financial position and performance of the Group. The future business environment may differ from management’s current assessment. The Company’s management regularly monitors the potential risks, including an analysis of country risks. Should any risk occur, the Company will develop measures to minimize potential adverse effects on the Group. The extent of such effects cannot currently be determined. Taxation Russian tax, currency and customs legislation is subject to varying interpretation and changes which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group’s entities may be challenged by the relevant regional and federal authorities. The tax authorities can take a more assertive position in their interpretation of the legislation and tax assessments. It is therefore possible that transactions and accounting methods that have not been challenged in the past may be challenged by the tax authorities. As such, additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances, reviews may cover longer periods. The fact that a year has been reviewed does not close that year, or any tax return applicable to that year, from further review during the three-year period. For taxes where uncertainty exists, the Group has accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits which will be required to settle these liabilities.

PJSC “RussNeft”


33

28. Contingencies, commitments and operating risks (continued) Taxation (continued) Russian transfer pricing legislation allows the Russian tax authorities to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market price. Transactions between related parties in the domestic market are deemed controlled if the proceeds (the amount of all transactions) between related parties in 2017 and 2018 exceed RUB 1 billion for the respective calendar year. In case a domestic transaction results in an accrual of additional income tax liabilities for one party, the other party may correspondingly adjust its income tax liabilities. In 2017 and 2018, the Company determined its tax liabilities arising from these controlled transactions using actual transaction prices or, in cases where the transaction price deviated from the market price, using prices adjusted pursuant to the Russian Tax Code. With respect to transactions for 2017, the tax base was adjusted in the annual income tax return for 2017. In 2017, the Company and a number of its subsidiaries determined their tax liabilities arising from controlled transactions using actual transaction prices or, in case the transaction price deviated from the market price, using prices adjusted pursuant to the Russian Tax Code. Symmetric adjustments were made, and the revised income tax returns were filed. There are control procedures applied to all types of controlled transactions to ensure consistency between the prices used in the controlled transactions and the level of market prices for the purposes of taxation, which are updated on an annual basis taking into account current legal requirements. The activities performed focus on minimizing tax risks of the Group. Due to the uncertainty and absence of practice of the application of current Russian transfer pricing legislation, the Russian tax authorities may challenge the level of prices applied by the Group under the controlled transactions and accrue additional tax liabilities unless the Group is able to prove the use of market prices with respect to the controlled transactions, and that there has been proper reporting to the Russian tax authorities, supported by appropriate available transfer pricing documentation. At the same time, the Company will be entitled to symmetrical adjustments with regard to the arrears provided that the other party to a controlled transaction complies with the decision of a tax authority regarding accrual of additional tax liabilities. To ensure compliance with the legislation governing taxation of controlled foreign companies and mitigate related tax risks, the Group’s management has developed a set of internal routine procedures. The legislation governing taxation of controlled foreign companies requires that the Company’s income tax calculation for 2017 include the financial results of individual controlled foreign companies of the Group whose income is subject to taxation as part of income of the Parent. A similar calculation will also be submitted together with the Company’s income tax return for 2018. Following a field tax audit for 2012-2013, the tax authorities issued claims against the Parent in the total amount of RUB 233 million, including penalties of RUB 5 million. Before the decision of the tax authorities entered into force, the Company filed an appeal to the Federal Tax Service of Russia. The decision of the tax authority became effective in July 2016. This amount was recognized in full in the 2016 consolidated financial statements. The Group takes measures to reduce its tax risks on a regular basis. Management believes that the Group has complied with all regulations, and paid and accrued all taxes that are applicable.

PJSC “RussNeft”


34

28. Contingencies, commitments and operating risks (continued) Compliance with the terms and conditions for subsoil use Licenses for subsoil use are issued by the Russian Federal Subsoil Use Agency. Management believes that under current legislation, the Group is entitled to renew the licenses for all available fields after the expiry of the initially stated periods. Authorized state agencies regularly review the Group’s activity for compliance with the terms and conditions for subsoil use. Failure to meet the terms and conditions for subsoil use may result in penalty accruals and sanctions, including license suspension or revocation. Management takes appropriate measures to comply with the terms and conditions for subsoil use, including rectification of all shortcomings identified in reviews and instructions from the authorized state agencies within the established timeframes. Liabilities concerning environmental and safety matters In recent years, Russian environmental and safety legislation has been rapidly developing, taking into account general requirements and international law enforcement practice in this field. Management of the Group understands its responsibilities concerning environmental and safety matters and undertakes to comply with the requirements of federal, regional and industry regulations concerning environmental protection, sustainable use of mineral resources and safety, including international environmental and labor safety management standards. The Group implements a corporate policy on environmental protection and safety matters that complies with Russian legislation and international standards on environmental and safety matters. Management believes that, considering existing controls and current legislation, the Group is not exposed to significant risks or liabilities except for those that are recognized in these interim condensed consolidated financial statements and relate to ordinary business operations. Insurance The Group does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents at the Group’s facilities or relating to the Group’s operations. The Group applies the Insurance Policy, which describes the Company’s key insurance principles and procedures. In accordance with the applied Insurance Policy, the Group has insured its major oil and gas extraction facilities. The Group’s subsidiaries and the Parent insure especially hazardous facilities pursuant to Federal Law No. 225-FZ On Compulsory Insurance of Civil Liability of the Owner of a Hazardous Facility for Damages Caused by an Accident dated 27 July 2010. The Group also takes out selective MOD insurance for vehicles. In addition, the Group purchases mandatory third-party liability insurance policies for all automobiles, special purpose equipment, trailers and other vehicles. Retirement and post-retirement benefit obligations The Group makes contributions to the Pension Fund of the Russian Federation. These payments are calculated by the employer as a percentage from gross salary expense and are expensed as accrued. The Group adhers to its Regulation on Non-state Pension Benefits for the Group’s Employees. The Group’s subsidiaries entered into pension insurance agreements with Non-state Pension Fund Elektroenergetiki (JSC Non-state Pension Fund LUKOIL-GARANT since August 2018).

PJSC “RussNeft”


35

28. Contingencies, commitments and operating risks (continued) Litigations Following the field tax audit for 2012-2013, the tax authority decided to charge additional income tax in the amount of RUB 228 million and penalty in the amount of RUB 5 million. In June 2016, the Company filed a suit to the Moscow Arbitration Court against the above decision. In July 2016, in accordance with the decision following the field tax audit for 2012-2013, the Company accrued income tax in the amount of RUB 228 million and penalty in the amount of RUB 5 million for tax accounting purposes. The additional tax liabilities were settled in full. In August 2017, the Ninth Appeal Arbitration Court upheld the Decision of the Moscow Arbitration Court. In the reporting period, the Supreme Court of the Russian Federation rejected the Company’s request to refer its claim to the Judicial Board of the Supreme Court of the Russian Federation for Economic Disputes. Management believes that there are no current cases or claims outstanding which could have a material effect on the results of operations or financial position of the Group and which have not been accrued or disclosed in these interim condensed consolidated financial statements. Guarantees issued in favor of third parties and related parties The Group’s subsidiaries are joint guarantors to PJSC VTB Bank with regard to the Parent’s liabilities under the loan agreement with an outstanding balance (including interest) of USD 1,265 million or RUB 79,376 million at the exchange rate as at the reporting date (Note 22). The Parent is a guarantor for its subsidiary’s liabilities to a related party in the amount of USD 383 million or RUB 24,049 million at the exchange rate at the reporting date. The Parent has concluded independent guarantee agreements with LLC VTB Capital Trading with regard to the liabilities of a related party under an oil supply contract in the total amount of RUB 1,922 million and with PJSC VTB Bank with regard to the liabilities of a related party in the total amount of USD 300 million or RUB 18,827 million at the exchange rate as at the reporting date (the underlying liability is to be repaid on or before 28 April 2025). International ratings Moody’s rating agency and Fitch rating agency have assigned a B1 rating with a “positive” outlook and B rating with a “stable” outlook to the Company, respectively. The Company’s management plans to implement measures which may help keep the rating at the current level or increase it in the 12 months after the reporting date. The next rating review is scheduled for 2018. 29. Subsequent events In July 2018, the Group sold 100% of shares in CJSC IP Slavneftehim for the consideration of USD 1.8 million or RUB 113 million at the exchange rate as at the date of the transactions, which will be recorded as a subsidiary disposal in the annual consolidated financial statements. In July 2018, the Parent paid dividends on preference shares in the amount of USD 40 million or RUB 2,523 million at the exchange rate as at the date of payment, in accordance with the minutes of the general shareholders’ meeting. In August 2018, the Company’s guarantee for the related party to LLC VTB Capital Trading was terminated due to the fulfillment of liabilities under the oil supply agreement.

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OJSC NK RussNeft · Stock Company “RussNeft” (PJSC “RussNeft”) due to a change of the legal form from joint stock company to public joint stock company. In November 2016,