Dear Shareholders!

We would like to present the last Annual Report in the history of RAO "UES of Russia".

As resolved by shareholders, the reorganization of RAO "UES of Russia" is to be completed by 1 July 2008, following which the Company will cease its operations. This resolution was backed by over 95.43 percent of the shareholders who took part in the EGM held in October 2007.

During the reporting period, the Management Board of RAO "UES of Russia" focused on completing the corporate restructuring and creation of the electricity markets. Special emphasis was placed on raising funds to finance the investment projects of RAO UES energy companies. In 2007, as a result of physical meetings and absentee votes, the Company's Management Board took decisions on 815 items of business.

By May 2008, jointly with the Board of Directors and the management bodies of the RAO UES subsidiaries and dependent companies, we practically completed our many years' work to establish new companies which will form the core of the post-reform sector structure — six thermal wholesale generation companies (WGCs), HydroWGC, fourteen territorial generation companies (TGCs), Federal Grid Company, System Operator, and eleven interregional distribution companies (IDCs). Upon completion of the reorganization of RAO "UES of Russia", three more energy companies, IDC Holding, RAO "Energy Systems of the East", and OAO "INTER RAO UES", will complete their formation process. The shareholders who approved the implementation of the final phase of the Company's reorganization will receive shares in 23 newly-established companies in proportion to their stakes in RAO "UES of Russia".

By acquiring stakes in the new generation companies, major Russian and foreign investors simultaneously became key players of the electricity market. The liberalized wholesale market created in September 2006, in just under two years of operation proved its efficiency. It gives clear price signals to customers and electricity producers and promptly responds to demand and supply fluctuations. Currently, about 20 percent of electricity on the wholesale market is sold at unregulated prices. In 2008, the launch of markets for capacity, system services, and derivative financial instruments will complete the creation of a fully-fledged system of electricity markets in Russia.

The corporate restructuring and creation of the electricity market made it possible to achieve the key goal of the reform, viz. attraction of large-scale private investments to finance the development of Russia's electricity sector. As at end-Q1 2008, RUB750 billion of private investments (including over RUB600 billion raised during the calendar year of 2007) were raised through the issuance and sale of shares in the thermal generation companies. These funds became the basis for the five-year investment programme of the RAO UES energy companies for the period until 2011, which is estimated at RUB3.4 trillion. Under the programme, it is planned to bring on line about 29 GW of new generation capacity, 70,000 km of power transmission lines, and substations with 100,000 MVA of transformer capacity.

Over the last year, as a result of implementation of the Investment Programme, the installed capacity of the RAO UES power plants grew to 161,200 MW as a result of commissioning of new power units with an aggregate capacity of 2,000 MW at the Bureyskaya HPP, CHPP-27 of "Mosenergo", Belgorodskaya CHPP, and mobile gas-turbine units. In 2008, we expect to put into service another 2,500 MW of turbine capacity, 14,000 km of power transmission lines, and 21,000 MVA of transformer capacity.

The Master Plan for the Location of Energy Facilities until 2020 gives a detailed assessment of the short- and long-term sector development prospects. This document was developed by the Ministry of Industry and Energy of the Russian Federation with the participation of energy industry and academic research institutes and approved by the Russian Government in February 2008. The Master Plan is used as a basis for the energy companies' five-year investment programmes. In the spring of 2008, the Company's Management Board approved a new investment programme for the period from 2008 to 2012.

One of the key goals of the last year was to arrange the floatation of the companies comprising the intended sector structure, and primarily, generation companies, on the stock market. That task was successfully accomplished. In December 2007, the process was completed to consolidate the assets of all thermal generation companies and their shares were admitted to trading on stock exchanges. In February 2008, HydroWGC, which had completed the first phase of its consolidation in January 2008, became another major player on the stock market.

We are convinced that the aggregate market capitalization of the energy companies comprising the intended (post-reform) sector structure will be greater than the current market value of RAO "UES of Russia", which is confirmed by expert appraisals. According to the current consensus forecast of market analysts, as of March 2008, the potential for growth of the aggregate capitalization was at least 40%.

During the reporting period, the Management Board paid a lot of attention to issues of transparency, social corporate responsibility, and environmental protection activities. The efforts made by the managers in these areas were highly appreciated. In 2007, RAO "UES of Russia" was named among Russia's top five most transparent companies in the Standard and Poor's Rating and received the highest international CSR rating among Russian companies in the Accountability Rating.

Completing its activities, the Company's Management Board is confident that the future of the energy industry will be entrusted to safe hands. The new electricity industry created as a result of the large-scale reform will become the key driver for Russia's stable economic growth, development, and prosperity of the entire country.

       A.B. CHUBAIS