MANAGEMENT SYSTEM

The Company's management is based on a comprehensive system for analysis, planning, and control, covering all aspects of the Company's operations and using uniform corporate standards. Its principal elements are financial management, business planning, property management, human resources and operational management.

The financial management policy of RAO "UES of Russia" is geared towards concentration of resources and their sound use to boost efficiency of the Company's key activities.

The current system of financial management used in the Company is designed to address the following issues:

• financial planning - both long-term planning which determines decisions regarding long-term investments in assets in line with the Company's long-term development plans, and short-term planning which covers management of the Company's current assets and liabilities through a system of budgeting and treasury operations;
• preparation of reliable financial information to be presented to shareholders and potential investors;
• financial analysis.

The financial policy of RAO "UES of Russia" is primarily implemented through financial resources management within the budgeting system. The budgeting system is a set of tools used for streamlining the Company's finance and business operations and for financial management of its subsidiaries and dependent companies. It ensures most efficient financial management in accordance with the common development strategy.

For the purpose of improving the budgeting process, in 2002 the energy companies of RAO "UES of Russia" Holding Company developed and implemented the "Regulation for Forming Cash Flows and Reports on its Fulfilment by Regional Energos and AO-Power Plants". The Regulation is designed to increase responsiveness of financial management and improve quality of budget planning.

The requirement to increase responsiveness of financial management is due to the need to react promptly to changes in the financial situation at energy companies of the Holding Company. In order to reduce the time needed for managerial decisions, the Company has given up the corporate procedures, which required approval of the budgets and the respective adjustments to them by the SDCs' boards of directors. These powers have now been transferred to the executive bodies of energy companies, which raises their responsibility for the decisions taken. The number of control figures has also been reduced to simplify and expedite the process of preparing, approving, and adjusting SDCs' budgets.

The approved "Regulation for Forming Cash Flows and Reports on its Fulfilment by Regional Energos and AO-Power Plants" ensures efficient control and management of cash flows, helps to substantiate managerial decisions taken, control funds invested in projects and adequately assess efficiency of the Company's lines of business.

Further development of the budgeting system at RAO "UES of Russia" is aimed at adjusting the financial management technologies through establishment of a common information/analysis database.

Based on the documents developed, a dedicated information portal for Internet-based budgeting is expected to go live in 2003. The approved intracorporate standard will help consolidate the central system of RAO "UES of Russia" and those of its SDCs into a common information network. On this basis, a multilevel support for decision-making using an indicative interface will be implemented in the Holding Company.

Further development of the Company's budgeting system involves:

• standardization of procedures, forms, and timeframes for business planning and budgeting;
• distribution of responsibility for preparation and presentation of information in the course of production, business and financial planning;
• identifying key analytical aspects of budgeting for its further integration with management accounting;
• establishing a common database on contracts and agreements in place;
• using documents in the budgeting process that are essentially the same in form and structure as those used in financial reporting;
• consolidation of budgets at the level of cash flows budget of the Holding Company.

Financial Markets Operations

In 2002, the Company's operations on financial markets were carried out in two principal areas: debt financing and management of idle cash.

The borrowing policy of OAO RAO "UES of Russia" was designed to optimize the amounts and structure of borrowings, diversify its debt portfolio and minimize debt servicing expenses.

The overall amount of bank loans received by the Company in 2002 reached RUB 7,899.96 million. Compared to last year, there is a reduction in the volume of borrowings and a decline in the amount of principal outstanding as a result of early repayment of loans. In 2002, the Company obtained loans at the lowest interest rates possible and was able to reduce the interest rate on the loan made by the Savings Bank of Russia. In 2002, OAO RAO "UES of Russia" continued its proactive cooperation with major Russian banks. As a result, the Company entered into agreements for new credit lines with the Bank of Moscow (credit limit of RUB 1 billion), Alfa-Bank (RUB 1.5 billion), and Mezhprombank (RUB 1.5 billion).

In October 2002, the Company issued RUB 3 billion of bonds, making an important step towards increased diversification of borrowings. This bond issue was declared one of the best issues floated in 2002; currently the yield of OAO RAO "UES of Russia" bonds is considered one of market benchmarks in corporate debt.

Company's loans and debt issues as at 31 December 2002
Creditor bank	Loan currency	Contractual amount of loan, RUB million	Amount outstanding in loan currency, million*	Amount outstanding, RUB million (exchange rate as at 31 Dec 2002)
Loans
European Bank for Reconstruction and Development	EUR	100.000	74.600	2,469.991
Savings Bank of the Russian Federation	RUB	24,000.000	9,801.912	9,801.912
Total loans:				12,271.903
Bond Issues
RAO "UES of Russia" bonds, Series R1 (tranche 2)	RUB	2,017.813	2,017.813	2,017.813
RAO "UES of Russia" bonds, Series R2	RUB	3,000.000	3,000.000	3,000.000
RF Ministry of Finance (IBRD bonds)	USD	29.000	2.755	87.587
Total debt issues:				5,105.400
Total				17,377.303
* less interest on loan

The high creditworthiness of RAO "UES of Russia" has been confirmed by the leading rating agencies. In August 2002, Standard & Poor's rated RAO "UES of Russia" Company at "B/stable" (international credit rating) and ruA+ (national credit rating). The debt issue of OAO RAO "UES of Russia", Series R2, was rated as follows: Standard & Poor's - ruA+, Russian rating agency "Expert RA" - A+, which means that the Company has the capacity to meet its financial commitments in respect of this bond issue timely and fully.

Management of idle cash at OAO RAO "UES of Russia" is conducted on the principles of maximum economic efficiency and minimization of exposures. An ongoing analysis of the financial position of potential counterparty banks and establishment of limits only for financially sound credit institutions ranking among Russia's largest banks, makes it possible to carefully choose counterparties and set limits for different types of investments and instruments.

Throughout 2002, funds were invested at interest rates equal to or exceeding the average market rates. As of year-end, the revenues received by the Company from investment of idle cash totalled RUB 78 million, which is 54.8% more than the corresponding figure for 2001.