MANAGEMENT BOARD CHAIRMAN'S STATEMENT

Dear Shareholders,

For RAO "UES of Russia", the year 2003 saw the launch of the implementation stage of the Russian electric power industry reform.

At the very beginning of this process, the Company was able to maintain stability and improve its business and production performance in 2003. The collected payments for electricity and heat throughout RAO "UES of Russia" in 2003 made 101% of the amounts charged (this figure includes collection of the previously accumulated debt). During the year, the accounts receivable of the Holding Company's entities for the energy supplied decreased by 15.2%. In 2003, the Holding Company's entities were able to pay the arrears of payments to the budgets and extra-budgetary funds in the amount of over RUB3 billion. During the year, the entities of RAO "UES of Russia" paid about RUB100 billion in taxes to the consolidated budget of the Russian Federation.

For the fourth consecutive year, the Unified Energy System of Russia operated 100% of calendar time at the standard electrical frequency prescribed by the Federal standard (GOST), 50.00 Hz.

The Company commissioned 2,087.9 MW of capacity in 2003, a threefold increase from 2002. In particular, two generation units of Bureyskaya HPP, the second generating unit at Nizhnevartovskaya TPP, and two generating units at Mutnovskaya Geothermal Power Plant were put into operation.

The Management Board of the Company paid special attention to the preparation for the autumn-winter period of 2003/2004. Due to the well-organized work of the Holding Company's entities, we were able to pass the winter peak load without system failures or regional crises.

In 2003, the Company started its transition to a new tariff policy. We decided to abandon the previously used "costs plus" principle of tariff setting, which was based on the energy companies' expenses, and proposed a new principle called "inflation minus". This proposal made by the RAO UES management was backed by the Government of the Russian Federation. The gist of the new tariff system is that during the next three years, the tariff growth will be limited by the inflation rate. This means that by 2007 it will be possible to stop the growth of tariffs or even decrease them in real terms.

The new tariff policy provides incentives for the Holding Company's entities to cut their costs. Last year, the implementation of the cost control program at RAO "UES of Russia" entities resulted in RUB18.7 billion cost reduction.

Our efforts have been appreciated by the investment community. In 2003, the Company's capitalization grew 2.1 times from US$5,614 million to US$11,980 million. Standard & Poor's upgraded its credit rating outlook for RAO "UES of Russia" from "stable" to "positive". S&P also affirmed the Company's international credit rating of B and national credit rating of ruA+. The Russian rating agency "Interfax" in association with Moody's Investors Service assigned RAO "UES of Russia" a long-term national credit rating of Aa3 (rus) and a shortterm credit rating of RUS-1.

A key priority for the Company is the reform of the electricity industry in Russia. In 2003, we continued to form the Unified National Power Grid and the systems of operational dispatch based on the Company's subsidiaries, OAO "Federal Grid Company" and OAO "UES System Operator - Central Dispatch Administration". Implementation of the first restructuring projects was launched at several regional energos, OAO "Kalugaenergo", OAO "Bryanskenergo" and OAO "Orelenergo". The management of RAO "UES of Russia" continues its constructive dialogue with the shareholders of the Company and the Holding Company's entities, as well as with the investment community.

One of the milestones of the year was the launch of the competitive segment of the wholesale electricity market ("5-15% market") on 1 November 2003 on the trading floor of Non-Profit Partnership "Administrator of Trading System", which has already become one of the world's ten largest competitive power exchanges in terms of turnover.

In a few years, Russia will have a fully developed competitive electricity market. Russia's electricity industry will have a strong incentive to develop on the basis of private investments. All achievements of 2003 strengthen our assurance in that.