Dear Shareholders!

Last year, the Board of Directors of RAO "UES of Russia" paid special attention to the improvement of corporate governance and streamlining shareholders relations mechanisms developed in the previous years in the context of preparation for the Company's reorganization. This was facilitated, in particular, by an increase in the number of directors representing minority shareholders on the Board of Directors from 2 to 3. For the first time ever, an independent director was elected to serve on the Board of Directors. The Annual General Meeting of shareholders of OAO RAO "UES of Russia" held in June 2002 approved changes to the Charter to reflect the amendments to the Federal Law "On Joint-Stock Companies". At the same time, some minority shareholders urged the Company to increase shareholders’ control over activities of the management of the Company's subsidiaries and dependent companies (SDCs).

In July 2002, the Board of Directors of RAO "UES of Russia" established a Working Group comprised of government officials, representatives of minority shareholders and corporate management. The Working Group has developed recommendations for improving the procedure used by the Company's Board of Directors for approval of transactions involving the SDCs' assets and shares, and for taking decisions in respect of transactions connected with disposal or pledge of shares (stakes) in the companies that are SDCs’ subsidiaries and dependent companies. These proposals were used as a basis for the document called "Procedure for Cooperation of RAO "UES of Russia" with Companies Whose Shares are Held by RAO "UES of Russia". This document was approved by the Board and became effective on 1 September 2002. In early 2003, the results of practical application of the "Procedure for cooperation" were generalized and used to prepare amendments and additions to the Charter of RAO "UES of Russia". These amendments and additions are submitted by the Board of Directors for shareholders’ approval at the AGM. Amendments to the Charter are designed to enhance the corporate culture and transparency of the Company. The Board of Directors also recommends that the corresponding amendments and additions be made to the Charters of the Company's subsidiaries and their dependent companies.

The Board of Directors treated the issues relating to finalizing the corporate strategy for the restructuring period as a key priority. The work on the draft strategy is conducted by the Working Group set up by the Board of Directors. The Working Group consists of representatives of minority shareholders, management, independent experts, and the Alfa-Bank/Merrill Lynch advisory consortium. On the proposal of the Working Group, the Board of Directors took a decision in principle to ban the sale of core assets of RAO "UES of Russia" and its subsidiaries until the Holding Company's restructuring is completed. The Board also approved the criteria for selection of the Holding Company's assets to be included in the List of core assets which may not be divested or pledged, and a list of the Holding Company's assets to be included in said List as a matter of first priority.

The Board of Directors of RAO "UES of Russia" took several decisions aimed at implementation of the Government's electricity sector reform program. Specifically, the Board of Directors approved the sale of the Company's stake in ZAO "CDR FOREM" to Non-profit Partnership "Administrator of Trading System of the Wholesale Electricity Market of the Unified Energy System" (NP "ATS") and the transfer to NP "ATS" of part of the functions of RAO "UES of Russia" connected with the management and development of the Federal Wholesale Market of Electricity (Capacity) ("FOREM"). The Board also reviewed issues concerning operations of the Federal Grid Company ("FGC") and the System Operator ("SO").

The Board of Directors deemed it advisable, in the context of change in the dividend policy principles of RAO "UES of Russia", to use EBITDA (earnings before interest, taxes, depreciation, and amortization) in respect of its SDCs to analyze their financial state. This measure significantly increases transparency of the whole dividend calculation system at the SDCs.

As regards operational control, the Board of Directors approved the measures taken by the Management Board to implement the Government programs for building new generating facilities in some of Russia's regions suffering from energy shortages. These projects include the construction of Kaliningradskaya CHPP-2, Sochinskaya CHPP, and Bureyskaya HPP.

Since its election in June 2002, the Board of Directors of RAO "UES of Russia" has held over 20 meetings, both by direct vote or by absentee vote, and considered over 200 issues.

Summing up the work done by the Board of Directors, one might say that the shareholders relations system established at the Company in the past few years has proved to be efficient and effective both in day-to-day management and in strategic decision-making. I am confident that further development of these mechanisms will be a priority for the Board of Directors of RAO "UES of Russia" and will help enhance the Company's attractiveness to investors and deliver increased returns to shareholders.