Dear Shareholders,

Last year was a major milestone on the way to our Company's principal objectives—completion of restructuring at RAO "UES of Russia" Holding Company and preparation of our companies for working in a competitive market environment.

The Russian Government has given us a task to complete the key steps to implement the electricity reform by the end of 2006. Over these two years, we are to create all major participants of Russia's electricity market (wholesale generation companies (WGCs) and territorial generation companies (TGCs)), to build a vertically integrated structure of the dispatching/control system, and to consolidate the transmission network assets.

Throughout the reporting period, the Management Board and the Board of Directors of OAO RAO "UES of Russia" endeavoured to ensure direct shareholder involvement in the Company's activities.

The Board of Directors held 26 meetings, during which the Board members discussed over 300 items of business.

An important role in making key decisions affecting the Company's activities was played by the advisory bodies under the Board of Directors—the Strategy and Reform Committee, the Audit Committee, and the Appraisal Committee. These Committees include representatives of all shareholder groups, the Company management, and independent experts. In March 2005, the Board of Directors decided to establish a new committee designed to address the HR and remunerations issues—the Personnel and Remunerations Committee.

Since the last Annual General Meeting, the Board of Directors and the Management Board of OAO RAO "UES of Russia" have adopted 13 plans for regional energos restructuring, approved the plans for the establishment of all 7 wholesale generation companies, 12 out of 14 territorial generation companies, and 4 interregional distribution companies.

These decisions enabled us to complete, by the beginning of May 2005, the unbundling of 37 regional energos, and to effect the registration with the authorities of all 7 WGCs and 10 of the 14 TGCs. Proactive efforts are underway to consolidate the transmission network assets under the Federal Grid Company, and to reform the research and development sector, and the repair and service operations. The creation of the vertical structure of the dispatching/control system within the System Operator (OAO "UES SO-CDA") has entered its final phase.

Last year saw further development of the free electricity trading sector. Already in 2004, the free trading sector became one of the world's ten largest power exchanges in terms of electricity trading volume. In May 2005, the free trading segment expanded into the Siberia energy area. Today, among the free trading sector participants are virtually all energy enterprises of the Holding Company operating in the energy areas of the European part of Russia, the Urals, and Siberia.

In the spring of 2004, the Board of Directors of the Company adopted a new corporate governance system. The new system comprises 5 Business Units, the Corporate Center, and the Reform Management Center. Using the Key Performance Indicators (KPIs), the Corporate Center sets targets for the management of the subsidiaries and dependent companies (SDCs) included in the Business Units, and monitors the achievement of these targets. As a result, the SDCs' net profit in 2004 rose 69% on 2003.

The energy companies achieved strong production results in 2004. The power plants of the Holding Company generated 651.9 billion kWh of electricity, an increase of 2.5% compared to 2003.

The collection of consumer payments owed for the electricity and heat supplied by the Holding Company's entities amounted to 100% of the current charges, whereas the arrears of electricity bills declined by 9.8%.

RAO "UES of Russia" Holding Company ranks among Russia's top companies in terms of sales volume (about RUB797 billion in 2004) and one of the nation's largest taxpayers (the taxes paid to the consolidated budget in 2004 totalled RUB106.5 billion).

For the fifth consecutive year, the UES of Russia worked 100% of calendar time with the standard AC frequency established by the GOST, the Russian state standard. Since 2004, the AC frequency in the energy pool of Russia, the CIS and Baltics fully has been in accordance with the requirements established by the West European energy pool, UCTE (50.00±0.05 Hz).

Last year saw further implementation of the Company's capital investment projects. At the power plants of the Holding Company, new generating facilities were commissioned with a total capacity of 980.1 MW, including the third hydropower unit at the Bureyskaya HPP (300 MW), power units at the Sochinskaya TPP (78 MW) and the Tyumenskaya CHPP-1 (220 MW). In 2005, we continued to expand our investments in the construction, re-equipment, and modernization of the generating and power grid facilities of the Holding Company, and the upgrade of the dispatching system.

Regrettably, there were not only positive events in the period under review. As a result of the accident on 25 May 2005, there was a power outage in several energy systems of the Central IES. It is too early to draw final conclusions. However, it is already clear that it was the largest cascading blackout in Russian electricity sector which led to grave social and economic consequences. Analysis of the outage indicates that investments in the electricity industry are becoming a top priority. The technological security of the energy sector, and consequently, the entire national economy and each citizen, is directly dependent on the sector investments. This task can only be accomplished if we continue the reform implementation.

In the reporting year, the Company faced one more entirely new problem, viz. a decline in the liquidity and value of shares in the SDCs undergoing reorganization. This is largely due to the inadequacy of the Russian legislation governing corporate reorganization through spin-off. As a result, shares of the newly established companies obtain stock exchange listings moths after they register with the state authorities. This seriously complicates the determination of the fair market value of the companies' shares and adversely affects their capitalization. However, these problems might have been less significant if the Company's managers had prepared better and acted more professionally. This omission will be remedied.

Increasing the liquidity of all SDCs is one of the absolute priorities for the Company. In the spring of 2005, the Board of Directors approved a comprehensive plan prepared by the Management Board. This plan is designed to enhance the liquidity of shares of the companies established in the course of the reform.

The market participants' assessments and expectations about the Company are positive. This is confirmed by the high credit ratings of OAO RAO "UES of Russia" and its securities. In November 2004, Standard & Poor's Ratings Services raised its long-term credit rating of the Company to B+ (outlook stable) and affirmed the Company's ruA+ national scale rating. Interfax Rating Agency in association with Moody's Investors Service confirmed the Company's long-term national credit rating of Aa3 (rus) and its short-term credit rating of RUS-1. "Expert RA" Rating Agency confirmed their rating of A+ assigned to the Company's bonds.

The shareholders and managers' principal objectives remain unchanged: completion of the Company's restructuring taking into account the rights and interests of all shareholders, and the launch of a full-scale competitive market for electricity in Russia. We confident that a constructive dialogue between the shareholders and management of the Company is a pledge of success in achieving these objectives.