STATEMENT BY BOARD CHAIRMAN AND MANAGEMENT BOARD CHAIRMAN OF RAO "UES OF RUSSIA"

2

Dear Shareholders,

Last year, the Board of Directors and the Management Board of the Company focused on implementing the structural and market reforms, i.e. the establishment of interregional generation and power grid companies, completing the restructuring at all regional energy systems, and creating a competitive marketplace for electric energy and capacity.

In 2005, we completed the state registration of all 7 wholesale generation companies (WGCs), 13 out of 14 territorial generation companies (TGCs), and all 4 interregional distribution companies (IDCs). To date, TGC-3, TGC-5, WGC-3, and WGC-5 have completed the establishment of their target corporate structure, and their shares have been floated on the Russian stock market. As at 1 May 2006, shares of over 120 entities established in the course of the reform-generation, grid, retail, R&M, and management companies-were traded on stock markets. In 2006-2007, the interregional companies are expected to complete the consolidation process.

As at end-2005, functional unbundling was completed at 47 regional energos, and 21 more energy companies were still in the process of restructuring. The companies are now actively engaged in the establishment of a corporate governance system; work is underway to build teams of qualified managers.

Considerable success has been achieved in the development of the wholesale market for electric power and capacity. There has been significant growth in the free (competitive) trading segment of the wholesale electricity market: today, the segment has over 220 trading participants, 140 of which are RAO UES subsidiaries. Last year, competitive trading volumes reached nearly USD3 billion. In October 2005, a competitive balancing market for electricity was inaugurated.

During the reporting period, efforts were continued to implement the Government's electricity reform programme aimed at the establishment of a new system of regulated bilateral contracts for the wholesale electricity market. In March 2006, simulation trading using the new wholesale electricity market model was organized by NP "Administrator of Trading System" and OAO "UES SO-CDA" for the wholesale market players in the European part of Russia and Siberia. During the year, the rules for retail electricity markets were drafted and submitted to the relevant ministries and government agencies. These rules lay the foundation for relationships among retail market players and introduce the category of guaranteeing suppliers in the sector.

The results of these efforts were highly appreciated by the investment community. This is best evidenced by the rise of RAO UES companies' stock prices. From 29 June 2005 (the date of the previous AGM of OAO RAO "UES of Russia") to 1 May 2006, the Company's market capitalization grew two-and-a-half-fold from USD12.8 billion to USD32.2 billion.

The capitalization of OAO "WGC-5" rose 33.3% to USD2.4 billion on 1 May 2006 from USD1.8 billion as at 16 September 2005, the date when the company's shares started trading on the stock market. The capitalization of OAO "WGC-3" increased by 40.0% to USD2.1 billion on 1 May 2006 from USD1.5 billion on 9 February 2006, when WGC-3 shares were floated.

The Company's operating results improved in 2005: electricity generation by RAO UES power plants increased to 665.4 billion kWh in 2005 from 651.9 billion kWh in 2004.

During 2005, the Board of Directors and Management Board made key decisions needed to ensure reliable operation of the nation's energy system. In particular, they drafted and adopted the Programme of Actions to Increase the Reliability of the UES of Russia. The Company also introduced a new position-that of Technical Director, a member of the Management Board responsible for organizing and controlling the entire scope of work in that area.

These measures were taken after a careful investigation into the causes of the blackout in the Moscow energy system in May 2005. The lessons learned from that event, as well as the experience gained from running the Unified Energy System during the extremely cold winter of 2005/2006, once again demonstrated the need for large-scale investments in the electricity industry.

In 2005, in accordance with the resolutions adopted by the Board of Directors and the Management Board of the Company, new generating facilities were put into commercial operation, helping address the issue of energy shortfalls in some areas of Russia. For instance, the first power unit brought on line at the Kaliningradskaya CHPP-2 meets 70% of the electricity demand in the Kaliningrad Region. The launch of the fourth hydro power unit at the Bureyskaya HPP contributed to increased energy security within the Far Eastern energy system, making it more robust and reliable. During the reporting year, new power generators and equipment were brought on line at CHPP "Luch", Novocherkasskaya TPP, Dzerzhinskaya CHPP, and some other power plants.

The Board of Directors resolved in March 2006 to implement a project to build the Boguchanskaya HPP with a capacity of 3,000 MW, the largest investment project being implemented in Russia's electricity industry today. Simultaneously, a smelter will be built in the neighbourhood which will produce 600,000 tonnes of aluminium annually. The project will be implemented by OAO "HydroWGC", a subsidiary of OAO RAO "UES of Russia", and will be funded through project finance, on a parity basis with the strategic investor, RUSAL.

As a measure to increase reliability of the energy system, the Company purchased shares in OAO "Power Machines", which manufactured 70% of the equipment installed at RAO UES power plants. OAO RAO "UES of Russia" now controls a blocking stake in OAO "Power Machines" (as a shareholder and as a fiduciary).

In December 2005, Russia's Government broadly approved the progress of the reform aimed at the creation of a competitive market and stepping up the investment process in the electricity industry. With electricity consumption growing rapidly and plant assets becoming obsolete or retired, the task of attracting investments is becoming a key strategic priority for the Company at the final stage of the reform. In order to ensure sustained economic growth in Russia and remove the threat of energy shortages in most areas of the country, it is necessary to start the construction and put into operation, by 2011, at least 20,000 MW of generating capacity, new transmission lines, and upgrade and modernize the existing equipment. Originally, this was the primary strategic objective of the electricity reform in Russia. In order to achieve that objective, the Company developed a concept for expanding the investment process based on the results of the reform. This concept, presented to the Government of the Russian Federation and backed by the Russian President, provides for the use of primarily private investments in the competitive businesses of the electricity industry and primarily government investments in the natural monopoly segments. Currently, the Company is exploring various options for attracting investments in generation companies through additional share issues, use of the investment guarantee mechanism introduced by a Government Resolution; direct investment mechanism, and raising development loans. It is assumed that investments in Federal Grid Company (FGC) and System Operator (SO-CDA) may come from the budget and connection charges, as well as from internal tariff sources of funds.

We expect that these measures, together with the steps to complete the sector reform, ensure reliable power, and restructure the Company, will be supported by the shareholders of OAO RAO "UES of Russia" and successfully implemented.