Dear shareholders!

The year 2001 has become a turning point in the history of RAO "UES of Russia". We came out of the stage of anti-crisis management and have now commenced normal work without any emergency rush. This has become possible primarily thanks to the fact that the parent company and its subsidiaries last year introduced modern financial management practices, including budgeting, administering the budget by the Treasurer, separate accounting for various types of activities, business planning and accounting policy.

A new fundamental component in the management system of RAO "UES of Russia" is the Corporate Governance Code adopted by the Board of Directors. The main objective of the Code is to strike a balance of interests between shareholders and the company's management, between the management and the Board of Directors, and between the shareholders themselves. The importance of the Code is not only in the formal division of functions of the Сompany's governance bodies but in a considerable increase of the degree of interaction, in the precise definition of responsibilities of the parties to each other and, what is more important, to the owners of the Сompany. This is of particular importance for the protection of shareholders' rights and interests and for the minimisation of potential risks resulting from the restructuring of the Company.

Summing up the results of the past year I would like to mention the substantial improvement of the Holding's production and financial performance, mainly due to the active sales policy pursued by the Company. According to the results of the year 2001 the level of cash payments for the electrical and thermal power consumed rose by 20% to 103% (the figure includes the repayment of earlier debts); debts to creditors were reduced by 19%, consumers' debts - by 16%; the negative debit balance was eliminated.

Compared to the year 2000 the amount of tax payments to the federal budget has increased by a factor of 2.2, to local budgets - by a factor of 1.5. In 2001 we carried out the restructuring of the Holding's debt of 58.4 bln roubles owed to the federal and local budgets and to non-budgetary funds. We settled the debts owed to our suppliers: 18 bln roubles to RAO Gasprom, 5.3 bln roubles to Rosenergoatom. As a result, now the Company has practically no outstanding debts. This creates the necessary conditions for the financial recovery of the energy companies within the Holding and for the improvement of the structure of their balance sheets. The only exception is the debt owed to coal companies, which we intend to settle in the year 2002.

All this made it possible for the Holding to avoid regional energy crises in the autumn and winter seasons of peak consumption for the first time in the past few years. I would like to separately acknowledge the work of the Anti-Crisis Headquarters specially set up at the Management Board. It carried out a very complex day-to-day work of co-ordinating the preparation for the winter season, the accumulation of fuel reserves and equipment repairs in the energy systems of the "crisis" regions. As a result, at the time of the autumn and winter consumption peaks the companies of the Holding had the highest in the past 5 years reserves of coal and fuel oil exceeding the planned figures by 30 - 40%. All the companies of the Holding timely obtained readiness passports and 121% of the fuel supplied was paid for in cash (this figure includes the repayment of the debts accumulated in the past years). In 2001 the incidence of primary equipment breakdowns at power stations and substations decreased by 2%, the number of industrial injuries dropped by 23%, the number of fires - by 11%. The energy companies introduced a comprehensive system for analysis and reporting of technical failures and accidents.

In the past year we also enjoyed the first results of the implementation of the cost reduction programmes at RAO UES's subsidiaries and dependent companies. This allowed us to cut costs by 12.3 bln roubles.

In 2001, for the first time in the history of RAO "UES of Russia", we have been able to maintain the standard GOST frequency 100% of the time. It is remarkable that the Central Dispatch Administration of the UES of Russia together with its counterparts from the CIS and the Baltic states were able to maintain such standards in 14 out of 15 countries of the former USSR. We are now planning to employ western electricity quality standards in order to synchronise our system with the energy systems of Western Europe. The objective is to improve reliability of the energy systems operation, use fuel in a more rational way and develop competition.

In 2001 we continued the implementation of our priority investment projects. Among such projects were the commissioning of the second turbo generating unit at the Kharanor CPP (Chita oblast), the second hydroelectric generator at Irganai HPP (Dagestan), the first power-generating unit at Mutnovskaya geothermal station (Kamchatka), the first Russian testing stand for gas turbines at Ivanovo CPP. In total, 25 turbo generator sets with an aggregate capacity of 1330.2 MW and 1819.5 km of power transmission lines with a voltage of 35 kW and higher were commissioned.

In addition our Company together with a group of independent international consultants developed the "5000 MW" Programme. It’s objective is to involve western and Russian investors in the construction of the most promising generating facilities. The first tenders under this programme will be held in 2002.

The approval by the Russian Government of the sector's reform programme was a strategic decision creating new opportunities for the attraction of investments in the power sector. In 2002 we shall embark on the most important stage of the structural reforms that will be implemented under conditions of competition between power generators. We shall work on reforming the Company in the most transparent way maintaining regular contacts with shareholders and all other interested parties. We have a common goal of creating a modern, dynamically developing and strong power industry for Russia and making the power industry attractive to investors.

Chairman of the Management Board

Anatoly Chubais