Corporate Governance

The supreme management body of OAO RAO "UES of Russia" is the general meeting of its shareholders. Shareholders delegate to the Board of Directors the principal powers to manage the Company's operations. The Board of Directors appoints the Management Board to run the Company on a day-to-day basis.

The new Board of Directors, elected by the Company's shareholders at the AGM held on 28 June 2002 consists of 10 Government representatives (Chairman of the Management Board of RAO "UES of Russia" Anatoly Chubais is a representative of the State), 1 representative from the Management, 3 representatives from minority shareholders, and 1 independent director.

The year under review saw continued work of the Reform Committee, which was formed in August 2001 to study the corporate reorganization issues submitted for discussion by the Board of Directors in depth. The Committee comprises representatives of the Government, minority shareholders, the European Bank for Reconstruction and Development, and the Company's management. Virtually all issues relating to the Company's reorganization, before being submitted for review by the Board of Directors of RAO "UES of Russia", are discussed by the Committee, which has the powers to make recommendations to the Board of Directors.

In April 2002, the Board of Directors of RAO "UES of Russia" formed a Committee for corporate assets valuation in the process of reorganization. The Valuation Committee consists of 12 members representing the relevant ministries and agencies, minority shareholders, and the management of RAO "UES of Russia". The Committee is chaired by Sergey Kosarev, member of the Board of Directors of RAO "UES of Russia" and Deputy Minister of Property Relations of the Russian Federation. The Board of Directors gave the newly formed Committee a task to develop the procedure and rules for assets valuation at RAO "UES of Russia", its subsidiaries and dependent companies in the process of corporate reorganization.

In September 2002, the Board of Directors of RAO "UES of Russia" established a Working Group to finalize the Company's corporate strategy for the reform period. The Working Group includes representatives from the Federal Government and minority shareholders, as well as experts who are managers of well-known Western investment funds that have significant electricity assets under management.

At the AGM held on 28 June 2002, the shareholders approved amendments to the Charter of the Company to reflect the revised Federal Law "On Joint-Stock Companies". The revised Charter defines the procedure for increasing the authorized capital more precisely, sets limits on dividend amounts, adjusts the provisions regulating preparation of lists of shareholders entitled to dividends, the dividend payment dates and amounts, and changes the timeframe for events relating to the preparation and conduct of a Shareholders Meeting.

At the AGM the shareholders also approved a set of important bylaws regulating the conduct of shareholders meetings, and activities of the Board of Directors, Management Board, Audit Commission of OAO RAO "UES of Russia". For the first time in the Company's history, the shareholders meeting approved regulations on payment of compensation to members of the Board of Directors and members of the Audit Commission of OAO RAO "UES of Russia" for the performance of their duties, and reimbursement of expenses incurred by members of the Board of Directors of the Company in the performance of their duties.

The Company was among the first in Russia to adopt a Corporate Governance Code. This Code incorporates statements of voluntary obligations undertaken by the participants in the Holding Company, including shareholders, members of the Board of Directors and the Management Board of RAO "UES of Russia".

The provisions of corporate governance set forth in the Code serve as an addition to the legislative and bylaw requirements, allowing to achieve an optimal balance of interests through formalization of agreements and arrangements among all corporate stakeholders, including different (from the viewpoint of interests) groups of shareholders, representatives of supervisory agencies and the companies' management bodies.

Special attention is given to the issues of information and financial transparency of RAO "UES of Russia" operations. In addition to publication of information pursuant to the laws in force, the Company has developed a special program for disclosure of additional information. Under the program, the Company prepares quarterly reports on business operations of the Company and the Holding Company, and quarterly financial statements in accordance with the IAS, making them available to shareholders. The Holding Company's management holds regular briefings and conference calls on key issues of RAO "UES of Russia" activities. Such a comprehensive information policy enables shareholders to get a complete picture of the changes that take place in the Company, particularly those connected with its reorganization.

In 2000-2001, the Company was able to create an efficient system of corporate governance at SDCs. The basic principles of corporate governance are as follows:

The year 2002 saw the next stage of the effort to improve SDCs' management systems. It focuses on establishing a governance system for SDCs' subsidiaries and dependent companies, and a system of control over transactions involving SDCs' property and shareholdings (stakes) in SDCs' subsidiaries and dependent companies.

In August 2002, the Board of Directors of OAO RAO "UES of Russia" approved the Procedure for Interaction of RAO "UES of Russia" with Business Companies Whose Shares are Owned by RAO "UES of Russia". This document is designed to increase the Parent Company's control over transactions in SDCs' shares and stakes throughout the reorganization period and ensures closer cooperation between the Parent Company and its SDCs. The Procedure regulates the exercise by RAO "UES of Russia" of its rights in relation to its subsidiaries and dependent companies, enabling officials of RAO "UES of Russia" to effectively influence the decision-making process at shareholders’ meetings, and the activities of the SCDs' Boards of Directors and Audit Commissions.

In pursuance of the resolutions of the Board of Directors of OAO RAO "UES of Russia", work is underway to develop amendments and additions to Charters of the SDCs and SDCs' subsidiaries and dependent companies to allow greater control over transactions during the reorganization period.

The dividend payment procedures at OAO RAO "UES of Russia" are established by the Federal Laws "On Joint-Stock Companies" and "On Federal Budget", and by the Company's Charter.

The total amount of dividends paid on preferred shares should be at least 10% of the Company's net profit divided by the number of shares which make up 25% of the authorized capital of the Company (Article 5.3 of the Charter). The dividend per preferred share may not be less than the amount of dividend per ordinary share.

The amount of dividend payable on ordinary shares is to be determined taking into account the target set by the Ministry of Property Relations of the Russian Federation regarding the state-owned shareholding, formed on the basis of the plan of revenues from management of state property as stated in the Law "On Federal Budget" for the relevant year.

Based on the documents submitted by the Company's Management Board, the Board of Directors of OAO RAO "UES of Russia" gives recommendations on the amount of dividends and dividend dates. These recommendations are then submitted for approval by the Annual General Meeting.

In 2002, RUB 2.0 billion will be allocated for payment of dividends, which exceeds the amount paid in 2001 by more than 1.5 times.

The aggregate amount of dividends paid by subsidiaries and dependent joint-stock companies of OAO RAO "UES of Russia" for 2001 amounted to RUB 3,647 million, including RUB 2,112 million in dividends on the shares held by OAO RAO "UES of Russia". On 1 January 2002, the SDCs of OAO RAO "UES of Russia" carried out a revaluation of their fixed assets. Because of this, the total profit is expected to decrease in all SDCs of OAO RAO "UES of Russia" to RUB 7.4 billion in 2002 from RUB 13.4 million in 2001. As a result, given the significant drop in net profit, OAO RAO "UES of Russia" expects to receive RUB 2.9 billion in dividends from its SDCs in 2002, including RUB 1.65 billion in dividends on its shares in OAO RAO "UES of Russia"

Aggregated amount of dividends paid by SDCs of OAO RAO "UES of Russia", RUB million



Dividends paid in 2000 in respect of 1999	1,117

Dividends paid in 2001 in respect of 2000	2,389

Dividends paid in 2002 in respect of 2001	3,647

In 2002, the dividends on preferred shares in the SDCs of OAO RAO "UES of Russia" in respect of 2001 were calculated with due regard to the rights of preferred shareholders. The fact that dividends on preferred shares were paid in full enabled OAO RAO "UES of Russia" to preserve its percentage of voting shares that could vote at the general meetings of shareholders in subsidiaries and dependent companies of OAO RAO "UES of Russia".

The year 2003 saw changes in the Company's dividend policy. The Board of Directors of the Company approved the new principles of dividend policy of OAO RAO “UES of Russia” with respect to its subsidiaries and dependent companies on 31 January 2003. The dividends paid for 2001 were calculated based on the net profit and financial position of the SDCs of OAO RAO "UES of Russia". According to the new principles, the dividend amount will depend on the EBITDA, on the financial position of a SDC of OAO RAO "UES of Russia", and on the incorporation of the planned dividend amount in the tariff. This will make it possible to increase the dividend amount, on the one hand, and to optimize the dividend burden borne by the SDCs of OAO RAO "UES of Russia", on the other hand.


			COMPANY'S MANAGEMENT