Risk control

The Company operates internationally and is exposed to foreign exchange risk due to fluctuations in exchange rates, mainly the U.S. dollar. The occurrence of foreign exchange risk is associated with foreign currency assets, liabilities, commercial and financial transactions. The Company controls the sensitivity of the financial situation to the increase or decrease of the U.S. dollar and euro against the Russian ruble.

The Company controls the risk of changes in prices for crude oil, natural gas and their refined products, their impact on future performance and operating results. It performs centralized management of the overall strategy for the production and sale of crude oil, natural gas and refined products, regularly analyzing possible scenarios of changes in commodity prices and the impact of such changes on operational and investment decisions.

Financial instrument price risk is the risk that changes in market prices as a result of factors related to the issuer of financial instruments (specific risk) and the general changes in market prices of financial instruments (general risk) will affect the fair value or future cash flows from a financial instrument and, as a result, the Group’s profitability. The risk is managed by: (a) maintaining a diversified portfolio structure, and (b) setting limits for positions (i.e. limits that restrict the total investment amount or the maximum discrepancy between relevant assets and liabilities) as well as stop-loss and call-level limits. In addition, the Company sets limits on the maximum term of debt financial instruments. If necessary, the Company sets margin and collateral requirements.

The risk of changes in prices for financial instruments is managed mainly through daily procedures for evaluating instruments at current market prices, conducting sensitivity analysis and controlling the limits established for different types of financial instruments. Sensitivity to changes in other prices is assessed using the value at risk (VaR) methodology. This is a way to assess potential losses that may occur for a risk position as a result of changes in market rates and prices in a certain period of time with a given level of confidence level.

The Company is exposed to credit risk, which arises as a result of the Group’s credit and other transactions with counterparties, resulting in financial assets and off-balance sheet credit commitments. The maximum level of credit risk of the Company is presented in the carrying value of financial assets in the consolidated statement of financial standing.

The Company’s approach to liquidity management is to provide, to the maximum extent possible, the ability to constantly maintain an adequate level of liquidity for the timely settlement of its obligations in both normal and adverse conditions, which allows to avoid unacceptable losses or risks of damage to the Company’s reputation. By managing liquidity risk, the Company maintains the required volumes of financial assets and liabilities, constantly monitors forecast and actual cash flows and compares the maturity dates for financial assets and liabilities related to non-banking activities. The Company develops various financial plans (monthly, quarterly, annual), which allow to be confident that it has enough cash to cover expected operating expenses, financial obligations and provide investment activities for 30 days or more. To finance longer-term cash needs, the Company typically raises long-term borrowed funds in the international and domestic markets.

The Company implements comprehensive actions aimed at ensuring compliance with applicable legislative requirements, including internal control and monitoring procedures for all aspects of its activities. Measures are also being taken to facilitate adaptation to the proposed changes in the regulatory framework.

The Company analyzes risks of prices and demand for oil and oil products based on modeling of various scenarios with constant monitoring of the dynamics of prices and demand for oil and oil products. The Company’s corporate model of strategic and current planning provides for appropriate adjustments. The Company has the internal potential to redistribute commodity flows in the event of a significant price difference between domestic and international markets, demand for crude oil and oil products, and the ability to reduce or rebalance capital and operating costs in order to fulfill its obligations in the event of a sharp decline in oil, gas, and oil product prices.

The Company pays special attention to development and application of cutting-edge technologies in all lines of its business; as one of the innovation leaders in the industry in Russia, it develops its own research and production base, interacts with advanced industry research centers. Target focus is the technology required to implement the strategy, effective investment in R&D, and pilot developments, as well as IT infrastructure based on a single information management platform.

The region of the Company’s principal activities is not remote in terms of transport and other infrastructure. The Company monitors closely the development and maintenance of transport infrastructure required to deliver oil and oil products to buyers, as well as the tariff policy, and participates actively in the relevant industrial discussions and initiatives.

The Company has developed a comprehensive program aimed at mitigating negative situations associated with industrial and environmental risks. The Company continuously implements new technical and organizational measures to minimize the impact of such risks. The Company provides liability insurance for a number of facilities. The Company is committed to becoming a leader in the field of industrial, labor, and environmental safety of production, minimizing the impact on the environment. Comprehensive actions in this field have resulted in the reduction of environmental footprint to the level where there is a potential for self-recovery of ecosystems.

The Company implements program activities to reduce the carbon footprint, monitors the accounting of greenhouse gas emissions, and also carries out planning to reduce anthropogenic impact in each of its areas of activity.

When planning its activities, the Company takes into account the geographical, including climatic, features of the region of operation. Against the possibility of negative consequences for the Company’s activities that may be caused by natural disasters, the Company has approved procedures and policies aimed at the prompt elimination of such consequences and, in case of emergency, to reduce the impact of such situations on the life, health, and safety of employees and residents of the regions of operation as well as on the production activities of the Company. There are monitoring procedures that, with the use of the latest technical means, are aimed at preventing the possibility of adverse consequences of natural phenomena and informing the population of the region where the Company carries out its operations about the possibility of such consequences.