SCM Annual Report 2007

PUBLIC REPORT 2007

SCM

2006

+75%

2007

2006

+85%

2007

2006

+71%

2007

2006

+42%

2007

2006

+94%

2007

11,372

5,220

1,585

6,719

704

1,366

9,563

2,715

9,668

19,903

KEY FINANCIAL INDICATORS, SCM

Assets, US $ million

Equity, US $ million

2006

+75%

2007

2006

+85%

2007

2006

+71%

2007

2006

+42%

2007

2006

+94%

2007

11,372

5,220

1,585

6,719

704

1,366

9,563

2,715

9,668

19,903

EBITDA, US $ million

Revenue, US $ million

Profit for the year, US $ million

4 SCM Group Annual Report 2007

CEO STATEMENT 6KEY EVENTS OF 2007 9

SCM: IN STEP WITH THE MILLENNIUM 12 THE HISTORY OF THE GROUP 13MISSION, VISION, VALUES 16GROUP MANAGEMENT 18THE GROUP’S CORPORATE STRUCTURE 34Management Structure 34Business Structure 38

SCM GROUP’S BUSINESSES 42CORE BUSINESS AREAS Mining and metals 43Energy 48Financial services 52

ALTERNATIVE COMMERCIAL DEVELOPMENT Telecommunications 54Real estate 56Media 58Clay mining 60Retail trade 61Petroproduct retailing 63

CONTENTS

5

SOCIAL RESPONSIBILITYAND SUSTAINABLE GROWTH 64THE SIX CSR POLICIES OF THE SCM GROUP Business and corporate ethics 67Working conditions 68The environment 71Local communities 73Social investments 75Sponsorships and charity 77

BEST INFORMATION ANALYSIS CENTER (BUREAU FOR ECONOMIC AND SOCIAL TECHNOLOGIES) 78

SHAKHTAR FOOTBALL CLUB 79

FOUNDATION FOR THE DEVELOPMENT OF UKRAINE 80

KEY DIRECTIONS: STRATEGIC GROWTH AREAS FOR 2008-2012 82

KEY EXPECTED EVENTS FOR 2008 86

Contents


CEO STATEMENT

Dear Colleagues and Partners,

I am proud to present to you the 2007 Public Report of the SCM Group, Ukraine’s largest diversified holding company. For SCM, this year was marked by the continued restructur-ing of the Group and the dynamic growth and strengthening of our positions in our priority markets. From this report, you will find out about SCM’s most important development milestones, achievements of the businesses we invest in, as well as our strategic plans.

2007 was a year of tremendous growth op-portunities for SCM, of which we have taken full advantage. In 2007 we have completed our main goal – we laid the firm foundation of our long-term sustainability that will allow us to remain effective both in times of dynamic growth, as 2007 demonstrated, as well as in less favorable times.

In 2007, SCM Group made a further step towards completing the large-scale corpo-rate restructuring program, launched in 2006. The expected results of this program, to be achieved by 2008, are a transparent share-holding structure for the Group, a corporate governance system in line with the world best practice, and a well-balanced investment portfolio.

The management model we have chosen enables us to diversify our investment priori-ties across six main areas: mining and metals; energy; finance; telecommunications; media and real estate. As well as being present in each of these areas as a strategic investor, we also understand the specifics of each industry and possess a wide range of resources to real-ize their full potential. We paid special attention this year to the structuring and development of our telecommunications and media businesses, as well as to laying the foundation for success-ful development in real estate.

By rigorously following our balanced diversifi-cation strategy, in 2007 we focused on strength-ening our positions in the six priority areas through both organic growth and new acquisi-tions. To achieve this goal, SCM as a strategic investor, contributed to our target markets’ development financially and by soliciting the necessary skills and expertise from the best professionals.

We also made a number of important steps in new business areas in 2007. As of this moment, these areas are not strategic for SCM, but we regard them as having significant long-term growth potential. In particularly, we entered the retail sector, structured our assets in clay mining, and began the restructuring process in petroleum products retail.

7CEO statement

In 2007 SCM Group started a second pivotal process – exiting from businesses that do not meet our investment strategy. We sold our shareholding and exited the boards of sev-eral machine-building enterprises, as well as withdrawing from the baking business. We also started the preparations for withdrawal from the brewing business.

To fully realize our development plans, we entered the international debt capital markets and secured syndicated loans. We did, however, remain true to our rather conservative ap-proach to soliciting external funding. The share of debt in SCM Group’s capital structure is relatively small.

This year we publicly presented SCM Group’s corporate social responsibility strategy. As Ukraine’s largest company, SCM contributes to the social and economic development of its regions of presence and recognizes its respon-sibilities to Ukrainian society. We pay significant attention to advancing our social policy and reporting system, allowing us to harmonize business interests and development priorities at both national and regional levels.

Within its corporate responsibility strategy, SCM Group initiated and actively participated in several public events dedicated to introduc-ing the ISO 26000 standard on CSR which is currently being developed and promoting best practice in corporate social responsibility in Ukraine. Implementing CSR best practices allows us to increase our assets’ productiv-ity. To further implement the SCM Group CSR strategy, responsible employer practices were introduced at all Metinvest and DTEK enterpris-es, including employee professional develop-ment, and performance based compensation and bonus systems.


At the end of 2007 we can definitely say that SCM Group has systematically achieved the goals set before us in 2006. To keep up the pace and remain focused on the key business goals, we have defined the Group’s strategic develop-ment areas for the next five years. Those entail: further improvement of corporate governance and ongoing asset portfolio structuring; devel-opment of the Group’s industrial businesses (mining, metals and energy) and active invest-ment in non-industrial, opportunity businesses; as well as enhancing our businesses’ manage-ment teams by recruiting leading profession-als. In addition, we are constantly aware of our responsibility to society and this motivates us to abide by the highest performance standards at all levels.

OLEG POPOV Chief Executive Officer

Each day we discover new opportunities before us, allowing us to build the future day by day. We embrace the rapidly changing world around us, as well as understand the scale of those changes and we are ready for the challenges ahead. We are prepared to perform in any circumstances and – we are willing to walk the road to leadership together with our part-ners. Our goal for the next five years will be to enhance SCM Group’s competitiveness and ef-fectiveness on both a national and global scale.

9

KEY EVENTS OF 2007

JANUARYSCM became an industry partner of the World Economic Forum in Davos, the leading international talk shop for global development issues. Today, SCM is one of only two Ukrainian companies that are represented in the international economic club. SCM representatives participated in meetings with top managers of the leading mining and metal companies in the world, where discussion focused on development trends in the sector for the next 5 to 10 years.

MARCHSCM signed an agreement with BNP Paribas (Suisse) for a 4-year credit line worth US $400 million. This money will be drawn on to finance the further expansion of the SCM Group’s businesses.

MAYSCM and BNP Paribas (Suisse) successfully completed the first stage of credit syndication estab-lished two months earlier raising US $545 million. As a result of the syndication, four leading inter-national banks became the sub-underwriters of this loan. Those banks were: NATIXIS, Raiffeisen Zentralbank Osterreich, Standard Bank, and Bayerische Hypo- und Vereinsbank (UniCredit Group).

Key events of 2007


JULYMetinvest Holding, which manages SCM Group’s mining and metal businesses, received a syndi-cated loan worth US $1.5 billion. The lead managers of the loan were the prominent international banks: ABN AMRO, BNP Paribas, Deutsche Bank, and ING. BNP Paribas was the creditor and docu-ment coordinator. This credit will be issued in two tranches, the first of which was for pre-export financing (lending collateralized by export contracts) that was transferred on July 23 in the amount of US $1.0 billion. The second tranche worth US $500 million is a revolving line of credit. This loan is unique in many aspects. Firstly, it is the largest loan ever issued to a private Ukrainian company. Secondly, Metinvest Holding received the most favorable terms ever given to a private Ukrainian company: interest on the syndicated loan is LIBOR+1.7%.

AUGUST

SCM became a member of the European Business Association (EBA). The EBA is one of the leading international business associations in Ukraine, bringing together around 750 European, Ukrainian, and international companies. This organization sees itself as an instrument for the open and trans-parent representation of business interests by lobbying government policy-makers. The participa-tion of a major player on the Ukrainian market, such as the SCM Group, with an active presence on European Union markets, in the EBA not only strengthens the position of this business association, but can also foster the process of European integration of Ukraine.

SEPTEMBERIn September, a steel company on a global scale was formed in Ukraine when SCM and Smart Hold-ing agreed to merge their mining and metal assets. During the course of negotiations concerning a joint modernization of Makeyevka Steel Plant, a decision was made to expand SCM’s cooperation with Smart Holding in the mining and metal business. As a result of the merger, Smart Holding will become the second shareholder in Metinvest Holding, in exchange for its stake in Makeyevka Steel Plant, Ingulets Mining and Enrichment Plant (InGOK) and Promet Steel in Bulgaria. The planned merger will help strengthen the position of the domestic steel industry on world markets, will sup-port the growth of Ukraine’s economy, and will give the country a higher profile in the global steel sector.

11

PricewaterhouseCoopers completed its review of the consolidated financial statements of SCM Group for 2006. The Consolidated Statement was presented in compliance with International Financial Reporting Standards. This is the third consolidated statement issued by SCM Group that complies with IFRS and passed an international audit (the Group issued its first such statement for 2004).

OCTOBERSCM Group launched a new business - retail trading. The Ukrainian Retail company made a public presentation of its plans to develop its own chain of stores under Brusnytsya brand name.

NOVEMBERА decision was made to set up a television media holding company on the basis of the TRK Ukraine Television Channel. In addition to its own channel, TRK Ukraine, the new media company will also set up specialized television channels, such as News (an information channel with an accent on social and regional issues) and Football.

In November, Metinvest Holding signed an agreement with the Malacalza Group (Italy) to acquire a 100% stake in two companies: Trametal (Italy) and Spartan UK (Great Britain). The future plan is to combine the two companies with the Ferriera Valsider steelmill, which is part of the Metinvest Holding. It is also planned to consolidate milling capacities into a single company with an output capacity of more than 1 million tonnes of thick rolled steel a year for EU markets. This will improve the position of the domestic steel industry on world markets and support the growth of Ukraine’s economy. Metinvest’s long-term strategy is to form a balanced steel company that will be a major player on European and world markets. Expanding the holding’s rolling capacities will make it pos-sible to maximize the use of raw materials and the Group’s production capacities. It will also bring significant added shareholder value through synergies and a stronger global competitive edge for SCM’s business and for Ukraine’s entire mining and metal complex.

Key events of 2007


SCM: IN STEP WITHTHE MILLENIUM

13

THE HISTORY OF THE GROUP

System Capital Management (SCM) was founded in 2000 in Donetsk. Its main purpose is to invest strategically in key sectors of the Ukrainian economy. These are primarily mining and metals, energy, telecommunications, banking, insurance, real estate, media, clay mining, retail, and petroleum retail sectors. Since its foundation, SCM has been building up its business areas based on the industrial assets it owns and making large-scale investments, both in Ukraine and abroad. Today, the history of the Group can be presented in four major stages.

2000–2002 GROWING THE PORTFOLIOThe first stage of SCM’s development concentrated on expanding the Group’s investment portfolio. It was during this period that the company acquired most of its businesses and began to introduce a single standard of management across the Group.

2002–2004 INVESTINGDuring this period, the main focus was on establishing world standards of business management at all of the company’s key assets. Meanwhile, enterprises were modernized and production indicators were raised, where possible, using experience and know-how accumulated by SCM professionals.The company began to implement its long-term growth strategy and to increase the effectiveness of its business. This meant building vertically-integrated industrial organizations at the company’s two main holdings (Metinvest and DTEK) and forming a team of world-class managers capable of running them.

2004–2006 EXPANDINGBanking and insurance businesses joined the list of key areas SCM was expanding into.During the same period, SCM began actively expanding its telecom business. With this goal in mind, the company acquired Farlep Invest and Optima Telecom. A strategic investment was made in Astelit, a mobile telecoms business operating under the life:) brand. The company instituted the preparation of consolidated financial statements in accordance with international financial reporting standards (IFRS) and began the process of building a transparent business and management structure for the Group.

2007–TODAY LOOKING AT THE FUTURESCM group continued the implementation of large-scale corporate restructuring program, launched in 2006. An expected result of this programm to be completed in 2008 will be clear and transparent group shareholder structure.SCM group has formulated a clear development strategy. The company plans to expand its business based on organic growth and also through new acquisitions in important areas of the economy and industry (metal, energy, financial services, telecommunications, real estate, retail trade, and so on). The goal is to make SCM not only the leading financial industrial group (FIG) in ukraine and a national business leader, but also a truly competitive and successful global business.

SCM: in step with the millennium | The story of the group


15 November 2000

30 June 2003

28 August 2003

27 January 2004

19 July 2004

20 August 2004

25 February 2005

6 July 2005

27 September 2005

10 October 2005

25 November 2005

6 December 2005

17 April 2006

21 April 2006

30 May 2006

6 June 2006

7 June 2006

KEY EVENTS IN THE EVOLUTION OF SCM

System Capital Management company is registered.

SCM Group acquires Pavlogradugol Mining & Extraction Complex.

SCM acquires a controlling stake in the Khartsyzsk Pipe Plant.

SCM gets the green light from the Anti-Monopoly Committee to acquire Vostokenergo, an energy generation utility.

SCM Group acquires a controlling stake in the Northern and Central Ore Mining and Enrich-ment Plants (SevGOK and CGOK).

SCM acquires three companies that were part of UkrRudProm State Joint Stock Company (Dokuchayevsk Flux and Dolomite Plant, Novotroitskoye Ore Mining (NTRU), and Krivbass- vzryvprom Explosives Company), an ore conglomerate, through privatization tenders.

SCM Group increases its stake of shareholder capital in the First Ukrainian International Bank from 49% to 99%.

SCM Group forms DTEK, a holding company, to manage its enterprises in the energy sector.

SCM acquires a 91% stake in Farlep Invest.

SCM concludes a deal to acquire Leman Commodities (Switzerland), a metal trader.

SCM acquires a controlling stake in Ferriera Valsider, an Italian engineering rolled steel producer.

Oleg Popov becomes General Manager of SCM.

SCM purchases 100% ownership stake in Optima Telecom.

SCM becomes one of the founding members of the UN Global Compact in Ukraine.

SCM Group forms SCM Estate to manage its enterprises in the real estate sector, later re-named ESTA Holding.

SCM Group forms Metinvest Holding to manage its enterprises in the mining and metal complex.

SCM announces the merger of Optima Telecom and Farlep Invest into a single telecom group.

15

20 July 2006

2 November 2006

21 December 2006

26 January 2007

2 March 2007

6 March 2007

11 July 2007

26 July 2007

25 September 2007

6 October 2007

12 October 2007

17 October 2007

12 November 2007

11 December 2007

SCM becomes the general sponsor of Shakhtar Football Club.

For the first time, a consolidated financial statement is published for SCM Group in accor-dance with IFRS (audited by PriceWaterhouseCoopers).

SCM Group purchases a 100% ownership stake in Avlita Stevedoring Company. This pur-chase expands the raw materials import opportunities for for the Group’s metal companies, as well as product export opportunities for Metinvest Holding companies.

SCM Group becomes an industry partner of the World Economic Forum in Davos.

United Minerals Group (UMG) is formed, to manage SCM Group’s assets in the clay mining sector.

SCM signs an agreement with BNP Paribas (Suisse) for a syndicated loan worth US $545 million.

SCM Group approves its long-term business development strategy and announces its inten-tions to invest more than US $6.2 billion in the expansion of its business over the next five years.

Metinvest Holding signs a syndicated loan worth US $1.5 billion.

SCM and Smart Holding announced the intention to combine their assets in mining and metals, within the framework of Metinvest Holding.

Metinvest Holding is the first Ukrainian company to become a permanent member of the International Iron and Steel Institute (now the World Steel Association), the leading global association in this sector.

DTEK is given a long-term credit rating of B2 by Moody’s. This offers the company direct ac-cess to world capital markets.

SCM Group presents a new business venture, Ukrainian Retail, to manage a shopping chain under the Brusnytsya brand.

Metinvest Holding signs a deal to acquire two steelmills, Trametal (Italy) and Spartan UK (Great Britain).

Metinvest Holding completes the restructuring of its sales division. This allowes the consoli-dation of sales by region into the four channels, provided by different companies.

SCM: in step with the millennium | The story of the group


MISSION, VISION, VALUES

THE SCM MISSION: SUCCESS, TOGETHERWe invest in the continuous growth and improvement of our businesses, and through this support the economic and social development of society as a whole.

THE SCM VISION: CREATING THROUGH DEVELOPMENTWe build effective businesses and manage them according to best world standards and practice, ensuring long-term growth in the value of our investments and participating in the multifaceted development of the regions, in which we have a presence.

17

OUR VALUES: EFFECTIVENESS, PROFESSIONALISM, ACCOUNTABILITY Effectiveness as a means to achieve the best results in everything that we do. For us, effectiveness is:

reaching the goals we set •using contemporary technologies and approaches to doing business•constantly improving the processes and methods of doing business•rational allocation and use of resources•seeking new opportunities•being ready for change•

Professionalism in doing business, including investing in people and stimulating innovation and enthusiasm towards work. For us, there is particular importance in:

meeting the highest standards•stimulating initiative and innovation•investing in professional development•attracting and keeping highly qualified employees•

Accountability to our employees, our partners, our communities, and society as a whole.

SCM: in step with the millennium | Mission, vision, values


Roman Vodolazkyy Chief Financial Officer

Ilya Arkhipov Business Development Director

Oleg Popov Chief Executive Officer

GROUP MANAGEMENT

19SCM: in step with the millennium | Group management

Jock Mendoza-WilsonInternational and Investor Relations Director

Nikolai Nesterenko New Business Development Director

Roman BugayovCorporate Rights and Foreign Asset Management Director

Natalia YemchenkoPublic Relations and Com-munications Director


CEO OF SCM SINCE DECEMBER 2005.2001-2005 – EXECUTIVE DIRECTOR.2000 – HIRED BY SCM AS DEPUTY TO THE CEO.1992-2000 – WORKED IN VARIOUS GOVERN-MENT OFFICES AND PRIVATE COMPANIES.

CHAIRMAN OF THE BOARD FOR FC SHAKHTAR.REPRESENTS SCM INTERESTS ON THE BOARDS OF DTEK, FIRST UKRAINIAN INTER-NATIONAL BANK, DONGORBANK, UKRAINIAN RETAIL, AND ON THE METINVEST HOLDING AUDITING COMMITTEE.

AREAS OF RESPONSIBILITY: TAKING AND CONFIRMING KEY FINANCIAL, INVESTMENT AND PERSONNEL DECISIONS, BOTH DIRECTLY AT SCM AND IN THE GROUP ASSETS, AS WELL AS EVALUATING THE PERFORMANCE OF THE MANAGERS OF THESE ASSETS.

EDUCATIONGRADUATED FROM DONETSK STATE UNIVER-SITY IN 1996. GRADUATED FROM DONETSK POLYTECHNICAL INSTITUTE IN 1990.

Oleg Popov Chief Executive Officer


— WHAT EVENTS WOULD YOU SAY WERE KEY TO THE GROWTH OF THE GROUP IN 2007?

— The main event was the merger of Metinvest Holding with the metallurgical assets of Smart Holding, within the framework of Metinvest Holding. This was an important launching pad for the further development of the Group’s metal business because we strengthened our position in supplying iron ore and now we have the opportunity to expand our steel making capacities. In addition, in 2007 we embarked on areas of business that were new for us: real estate and retail trade. Plus, we made a decision to get out of some of our non-core areas. For instance, we sold a minority stake in the Ukrainian Industrial Transport Company and prepared to exit the baked goods business. Altogether, 2007 was a year in which we actively worked on structuring our port-folio of assets. — WHAT, IN YOUR OPINION, IS THE MOST IMPORTANT ACHIEVEMENT IN SCM’S CORPORATE POLICY?

— The most important point when we were in the midst of such major corporate transformationswas that the best and the brightest professionals remained with the Group, both in SCM Company and in the holdings. We’ve been able to create a highly effective team.

— WHAT ARE THE GROUP’S KEY STRATEGIC GROWTH OBJECTIVES?

— First, to improve the management of Metinvest Holding and DTEK. Second, to invest in attrac-tive sectors, such as: telecom, media, real estate, and so on. Third, to decide on the future of other businesses in our portfolio, that is to continue the process of structuring. Fourth, to look for new opportunities for investing. Today, these are our four strategic growth objectives.


CFO OF SCM SINCE JUNE 2005.FEBRUARY-JUNE 2005 – SENIOR FINANCIAL MANAGER (TITLE CHANGED TO CFO).2002 – BEGAN AT SCM AS MANAGER FOR THE GROUP’S METAL DIVISION.OCTOBER 2000-SEPTEMBER 2002 – AUDITOR FOR PRICEWATERHOUSECOOPERS IN KIEV.MARCH 1999-OCTOBER 2000 – WORKED IN THE FINANCIAL DEPARTMENT OF MCDONALD’S UKRAINE.1994-1999 – ACCOUNTANT AND CHIEF ACCOUN-TANT FOR VARIOUS UKRAINIAN COMPANIES.

REPRESENTS THE INTERESTS OF SCM ON THEBOARDS OF DTEK AND FC SHAKHTAR.CHAIRS THE AUDITING COMMITTEES FOR MET-INVEST HOLDING AND DTEK.

AREAS OF RESPONSIBILITY: MANAGING THE GROUP’S FINANCIAL DEPARTMENT, BUDGETING, PREPARING FINANCIAL REPORTS, TREASURY FUNCTIONS, AND INTERNAL AUDIT. UNDER HIS LEADERSHIP, SCM HAS SHOWN ITSELF TO BE A COMPANY WITH IMPECCABLE FINANCIAL REPORTING THAT HAS BEEN APPROVED BY TOP INTERNATIONAL AUDITING COMPANIES. AS RESULT, THE GROUP STRENGTHENED ITS REPUTATION IN INTERNATIONAL CREDIT MAR-KETS AND WAS ABLE TO ORGANIZE THE FIRST SYNDICATED LOAN FOR SCM AT THE HOLDING COMPANY LEVEL IN THE GROUP’S HISTORY.

EDUCATIONMBA FROM INSEAD (FRANCE), A TOP EUROPE-AN BUSINESS SCHOOL IN 2007, AND MEMBER OF THE BRITISH ASSOCIATION OF CERTIFIED CHARTERED ACCOUNTANTS (ACCA) SINCE 2004.GRADUATED FROM THE KHERSON STATE TECHNICAL UNIVERSITY AS A SPECIALIST IN ACCOUNTING AND COMPUTER SOFTWARE IN 1998.

Roman VodolazkyyChief Financial Officer


— WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST IMPORTANT FOR THE GROUP’S DEVELOPMENT?

— 2007 was a dynamic year filled with important milestones. Among the main ones, I would name two huge steps in the development of the Group. First, in 2007, SCM went to foreign credit markets for the first time, as a holding company. Second, at the end of the year, the decision was made about the merger of SCM Group’s mining and metal assets with those of Smart Holding. — WHAT KEY ACHIEVEMENTS IN THE FINANCIAL DEPARTMENT WOULD YOU SINGLE OUT FOR 2007?

— First of all, the support of BNP Paribas (Suisse) SA in our bid for a syndicated loan worth US $545 million. Borrowing on foreign markets is an enormous task, and one that we were already looking at in 2006. In 2007, we started a project to automate the process of preparing consoli-dated financial reports, according to international standards. This is a very challenging task that requires serious resources, and we will continue it in 2008.

— WHAT OPPORTUNITIES FOR FURTHER GROWTH DO YOU SEE?

— We plan to secure a credit rating for SCM as a holding company, which should offer us much broader options for borrowing. We also intend to continue our expansion into capital markets.


Ilya Arkhipov Business Development Director

BUSINESS DEVELOPMENT DIRECTOR FOR SCM SINCE OCTOBER 2005.2001-2005 – CONSULTANT, MCKINSEY & CO, MOSCOW.2000-2001 – OPERATIONS MANAGER FOR RUSSIA’S LARGEST ON-LINE AUCTION SITE, MOLOTOK.RU FOR NETBRIDGE, AN INTERNET COMPANY.1995-2000 – CONSULTANT, COOPERS & LY-BRAND AND PRICEWATERHOUSECOOPERS, MOSCOW.

REPRESENTS SCM INTERESTS ON THE BOARDS OF FARLEP INVEST, FIRST UKRAI-NIAN INTERNATIONAL BANK, DONGORBANK, UASK ASKA, SEGODNYA MULTIMEDIA AND THE TRK UKRAINE TELEVISION CHANNEL.

AREAS OF RESPONSIBILITY: PARTICIPATING IN DETERMINING THE OVERALL PORTFOLIO STRATEGY OF THE GROUP, AS WELL AS IN CORPORATE RESTRUCTURING. IN PARTICU-LAR, MR. ARKHIPOV IS INVOLVED IN DEVE- LOPING SCM’S BUSINESS STRATEGY REGAR- DING TELECOMS, BANKING AND INSURANCE SERVICES, AND THE MEDIA.

EDUCATION:MBA FROM INSEAD (FRANCE), A TOP EURO-PEAN BUSINESS SCHOOL, IN 2004.GRADUATED FROM THE PLEKHANOV ACAD-EMY OF ECONOMICS IN RUSSIA AS A SPECIA- LIST IN ENTERPRISE MANAGEMENT IN 1999.


— WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST SIGNIFICANT IN THE HISTORY OF THE GROUP?

— When it comes to SCM Group, then the most important event was the decision to merge mining and metal assets with Smart Holding. This was a major business event in Ukraine and the world of metallurgy as a whole. As to those areas that I’m in charge of, then I would say that 2007 was a breakthrough year for the development of the Group’s telecommunications business. In addition to that, our insurance busi-ness maintained its share and developed positively in a rather competitive market. We also began forming the publishing holding, Segodnya Multimedia, and we now have a centralized publishing business that includes one of the most popular Ukrainian papers, Segodnya, and a range of regional publications in Eastern Ukraine. — IN 2007, SCM ACTIVELY INVESTED IN THE TRK UKRAINE TELEVISION CHANNEL. WHAT ARE THE RESULTS OF THAT?

— Firstly, we completed the team with top foreign specialists. Secondly, we continued to work on program content so that our channel would be interesting to a wide range of audiences. We’ve been making considerable efforts and we’ve had matching results, as the channel’s ratings have picked up considerably.

— PLEASE, NAME THE MOST IMPORTANT GROWTH PLANS IN YOUR AREAS.

— The main focus for television business, I would say, is on forming a media group that becomes one of Ukraine’s leaders by 2009. This means that a range of thematic channels will be estab-lished, our own production of original programming will be set up, as well as we will draw on new creative resources. In telecommunications business – it will be further securing the market posi-tions of our fixed-line operator and expansion of our geography of presence. In finances, we are also aimed at strengthening the market positions of our financial institutions, as well as expand-ing the product lines of our banks (including the introduction of retail products) and insurance companies.


NEW BUSINESS DEVELOPMENT DIRECTOR AT SCM SINCE SEPTEMBER 2007. 2002-2007 – SENIOR MANAGER FOR STRATEGY DEVELOPMENT IN A RANGE OF THE GROUP’S COMPANIES. WITH THE GROWTH OF SCM GROUP, THIS AREA BECAME MORE AND MORE SIGNIFICANT AND A DECISION WAS MADE TO INSTITUTE THE POSITION OF DIRECTOR FOR NEW BUSINESS DEVELOPMENT.2001 – STARTED AT SCM AS MANAGER OF THE FINANCIAL CONTROL DEPARTMENT.1997-2001 – WORKED AT KERAMET INVEST, RISING FROM STOCK BROKER TO GENERAL MANAGER.

AREAS OF RESPONSIBILITY: DETERMINING STRATEGIC BUSINESS DEVELOPMENT IN REAL ESTATE, MACHINE-BUILDING AND TRANS-PORT SECTORS AT SCM; SEEKING NEW AREAS OF INVESTMENT.

GENERAL MANAGER OF ESTA HOLDING, WHICH MANAGES SCM GROUP PROJECTS IN REAL ESTATE.

EDUCATION:MBA FROM INSEAD (FRANCE), A LEADING EUROPEAN BUSINESS SCHOOL, IN 2007.GRADUATED FROM THE FINANCIAL AC-COUNTING DEPARTMENT OF DONETSK STATE UNIVERSITY IN 1998.

Nikolai Nesterenko New Business Development Director


— WHAT PROJECTS AND MANAGEMENT BODIES ARE YOU INVOLVED IN AT SCM?

— My main area of responsibility at SCM is business development in real estate. Being General Manager of ESTA Holding and a member of the Investment Committee under the Holding’s Board, I have a fairly broad remit in business development in this area at SCM. — WHAT KEY ACHIEVEMENTS WOULD YOU NOTE IN THIS SPHERE?

— What is most important is the consolidation of SCM property assets under the various holdings. We began this process in 2006 and we’re still working on it. We’ve put together a solid team and we’ve worked out the corporate procedures for these activities. Among 2007’s projects, I would say that three were key: developing a concept for the Pushkinskiy Multi-functional Complex in Donetsk, acquiring a 50% stake in the Leonardo project, and starting construction of a warehouse and distribution center in Dnepropetrovsk.

— What are your future plans at ESTA?

— We’re moving in three major directions. First, concentrating our operations in the Ukrainian market, which is promising but not fully developed. Second, we’re planning to actively develop management of outside projects, that is, managing property in the broadest sense. Third, we’re preparing the launches of a number of our own projects. It’s wonderful how many major develop-ment opportunities the Ukrainian property market represents.


INTERNATIONAL AND INVESTOR RELATIONS DIRECTOR AT SCM SINCE 2006.2005-2006 – DIRECTOR OF CORPORATE COM-MUNICATIONS FOR THE SCM GROUP.1989 – LAUNCHED HIS OWN PR CONSULTANCY IN LONDON AND ADVISED US GOVERNMENT AGENCIES ON THEIR PUBLIC DIPLOMACY PROGRAMS IN THE MIDDLE EAST.1984 – BEGAN HIS CAREER WITH THE FORD EUROPE COMPANY.

AREAS OF RESPONSIBILITY: DEVELOPING AND IMPLEMENTING COMMUNICATIONS STRATE-GIES AND PROGRAMS AIMED AT ESTABLI-SHING CONTACTS WITH BOTH GOVERNMENT OFFICES AND NGOS; DEVELOPING RELATIONS WITH INTERNATIONAL GOVERNMENTS, INSTI-TUTIONS, BUSINESSES, AND MEDIA, AS WELL AS BUILDING RELATIONS WITH THE INVEST-MENT AND FINANCE INDUSTRY.

EDUCATION:GRADUATED AS AN ECONOMIST FROM HERI-OT-WATT UNIVERSITY IN EDINBURGH IN 1984.

Jock Mendoza-WilsonInternational and Investor Relations Director


— WHAT ARE SOME OF THE INTERNATIONAL ORGANIZATIONS SCM WORKS WITH?

— As a business leader in Ukraine, SCM is involved in many global and regional initiatives. Among others, the Group signed an agreement on a strategic partnership with the United Na-tions regarding the development of corporate social responsibility (CSR) in Ukraine. SCM is also a member of the European Business Association and an industry partner of the World Economic Forum in Davos. — WHAT ARE SCM’S MAIN ACCOMPLISHMENTS IN CSR?

We put considerable emphasis on developing policy and accountability in the company in terms of corporate responsibility. For us, it is not just a passing fad. We see major benefits to the manage-ment and value of our business from implementing a systematic approach to corporate respon-sibility, which we believe will lead to sustainable growth. In 2007, we prepared a CSR report that will be published in 2008, and we established a system for regular internal CSR reporting within the Group.

— WHAT ARE SCM’S PRIORITIES IN THIS AREA?

— One important goal for 2008 is to bring our CSR reporting in line with international standards. We will be improving and developing the principles underlying the company’s environmental policy and projects to promote health and safety in the work place.


PUBLIC RELATIONS AND COMMUNICATIONS DIRECTOR AT SCM SINCE DECEMBER 2006.2005-2006 – PUBLIC RELATIONS MANAGER FOR SCM GROUP.2003 – BEGAN WORKING FOR SCM GROUP AS MANAGER OF A SECTOR GROUP.2001-2003 – DIRECTOR, KERAMET INVEST.1998-2001 – FINANCIAL MANAGER OF KOLO, AN INVESTMENT COMPANY.

CHAIR OF THE AUDITING COMMITTEE OF THE TRK UKRAINE TELEVISION CHANNEL.

AREAS OF RESPONSIBILITY: COMMUNICATING WITH TARGET AUDIENCES, INCLUDING THE MEDIA, EMPLOYEES, RESIDENTS OF REGIONS WHERE THE COMPANY HAS A PRESENCE, THE GOVERNMENT, COMMUNITY ORGANIZATIONS, AND THE GENERAL PUBLIC, AS WELL AS MANAGING THE COMPANY’S REPUTATION.

EDUCATION:GRADUATED FROM DONETSK NATIONAL UNI-VERSITY AS A SPECIALIST IN FINANCE AND CREDIT IN 1998.

Natalia YemchenkoPublic Relations and Communications Director


— WHICH EVENTS DO YOU CONSIDER THE MOST IMPORTANT IN THIS REPORTING YEAR?

— First of all is the restructuring of the Group’s core business areas, then the merger with Smart Holding, and the formation of holding companies for new business areas. One significant event I think was starting to work on the Brusnytsya retail chain. — WHAT ARE THE PRIORITY DEVELOPMENT AREAS FOR THE GROUP?

— In its evolution, SCM holds to the principle of deliberate diversification, which means both growing our industrial holdings and activating alternative areas of investment, especially our presence on the services market. Of course, we’re also talking about working effectively in capital markets. Yet another important point is improving our standards of corporate governance. Ukraine is and will remain the main ‘address‘ for SCM investments.

— WHAT WOULD YOU SAY WAS SCM’S BIGGEST ACHIEVEMENT IN CSR IN 2007? WHAT SPECIFIC AREAS ARE PRIORITIES WHEN IT COMES TO CORPORATE SOCIAL RESPONSIBILITY?

— Among our main accomplishments, I would distinguish the Foundation for the Development of Ukraine, under whose aegis we’ve launched a range of comprehensive charity programs, as well as simply more active corporate philanthropy and cooperation with international organizations.One of SCM’s policy priorities is ecology and an environmental program in the regions where it has a presence, ensuring on-the-job safety, as well as the development of local communities. Naturally, the company’s development strategy includes social investment not only on the national level, but also in the regions.


CORPORATE RIGHTS AND FOREIGN ASSET MANAGEMENT DIRECTOR AT SCM SINCE SEP-TEMBER 2007.2005–2007 – MANAGER OF THE CORPORATE RIGHTS DEPARTMENT FOR SCM GROUP.2003 – JOINED SCM GROUP AS AN ECONO-MIST.2002-2003 – ECONOMIST AT KERAMET INVEST.1996-2002 – WORKED IN THE DONETSK OBLAST OFFICE OF THE ANTI-MONOPOLY COMMITTEE OF UKRAINE AS A SPECIALIST, SENIOR SPECIALIST, THEN DEPARTMENT MANAGER.

REPRESENTS SCM INTERESTS ON THE BOARD OF DTEK.SITS ON THE AUDITING COMMITTEES OF THE TRK UKRAINE TELEVISION CHANNEL AND BU-REAU OF ECONOMIC AND SOCIAL TECHNOLO-GIES (BEST) ANALYTICAL CENTER.

AREAS OF RESPONSIBILITY: DETERMIN-ING AND IMPLEMENTING COMPANY POLICY REGARDING THE MANAGEMENT OF CORPO-RATE RIGHTS, ORGANIZING AND HANDLING OPERATIONS INVOLVING CORPORATE RIGHTS BELONGING TO THE COMPANY AND ITS SUB-SIDIARIES, AND ORGANIZING THE ACTIVITIES OF FOREIGN COMPANIES BELONGING TO SCM.

EDUCATION:GRADUATED FROM THE DONETSK INSTITUTE OF ENTREPRENEURSHIP AS A SPECIALIST IN ORGANIZATIONAL MANAGEMENT IN 2000, WITH MAJOR IN THE ECONOMIC AND LEGAL ASPECTS OF COMMERCIAL ACTIVITY.

Roman BugayovCorporate Rights and Foreign Asset Management Director


— WHAT WOULD YOU SAY WERE THE MOST IMPORTANT EVENTS IN 2007?

— We undertook the structuring of our sectoral holdings, and I consider four events of utmost signifi-cance in this area. Firstly, handing over the bulk of corporate rights to the Group’s mining and metal businesses to Metinvest Holding. Secondly, handing over corporate rights to those of our companies that are involved in extracting and processing thermal coal to DTEK. Thirdly, setting up the UMG holding, which manages companies involved in mining clay.Last, but not least, we began to work on forming a publishing holding based on the company Segod-nya Multimedia. — NAME THE KEY ACHIEVEMENTS IN THE DEVELOPMENT OF ALTERNATIVE AREAS OF COMMER-CIAL ACTIVITY.

— We started the process of setting up new holdings in telecommunications, in real estate andin retail trading of petroleum products, as well as of transferring corporate rights over our compa-nies that work in those areas of business.

— WHAT ARE THE PRIORITY AREAS FOR FURTHER DEVELOPMENT IN THE GROUP?

— In 2008, plans are to complete the transfer of corporate rights of our mining and ore companiesto Metinvest Holding. We hope to finish establishing new holdings in real estate and in petroleum products retail trading.


THE GROUP’S CORPORATE STRUCTURE

THE GROUP’S ASSET MANAGEMENT SYSTEMUntil the beginning of 2006, when the deci-sion was made to restructure the business, SCM Group saw itself as the conglomeration of different assets that were directly run by the company. The program of corporate transfor-mation that was approved has the institution a modern, understandable system of corporate governance and the switch to a targeted corpo-rate structure as its goals.

SCM Group’s target business model provides, first and foremost, for a change in the role of the SCM Company in the system of manage-ment: a switch from operational management of individual enterprises to strategic manage-ment of newly-formed sectoral holdings or Group business areas. In accordance with the program approved in 2006, the process of combining the Group’s operational companies within the framework of specific sectoral holdings began. Those holdings received the right to own and manage SCM assets in their specific sectors. The sectoral holdings were also tasked with managing the assets that were handed over to them, including devising and imple-menting their business development strategies.

This new business structure and the important change in the role of the SCM Company in the deci-sion-making system, as well as SCM’s unswerving determination to match international standards drove the switch to what was, for SCM, a funda-mentally new system of corporate governance.

In working on formulating a target structure of corporate governance, SCM studied best international practice and clearly designated its

key features and the basic principles on which it is built.

The key features of SCM’s system of corporate governance are:

simplicity and intelligence, clearly-defined are-•as of competence along all the links in the chain

effective decision-making processes•

suitability for the business’s target structure •for managing corporate rights

compliance with best world standards•

SCM Group’s system of corporate governance is based on the principles of transparency and compliance with the law that lie at the heart of all its activities.

RESTRUCTURING SCM GROUP’S BUSINESSESSCM Group undertook reform of its asset management structure during 2007, with the objective of increasing the effectiveness of enterprise management and forming focused sectoral holdings. The Group’s holding system of structuring business is in line with its vision of the development of SCM as a professio-nally managed company, as well as in line with global corporate standards.

THE SYSTEM OF CORPORATE GOVERNANCESCM’s system of corporate governance is oriented towards the highest international standards and is based on best world practice. For this reason, SCM is able to quickly and effectively make the decisions necessary to en-

MANAGEMENT STRUCTURE

35

sure the dynamic growth of each of our sector holdings and the Group’s business areas.

Based on the approved program of corporate transformation, the company began a radi-cal restructuring of its business in 2006. This particular program called for a transition from the historical structure of managing corporate rights and decision-making system to a new business model. One of the key components of the program was the establishment of a contemporary, transparent, and highly effective system of corporate governance.

As the majority shareholder and main inves-tor, SCM decides who will represent it on the Boards of the various sectoral holdings.

The participation of minority shareholders in the governing of these holdings is also executed through their representatives on the Board.

The Supervisory Board governs the sectoral holdings. For individual areas of business where there are no sectoral holdings, the system of corporate governance works through the immediate Supervisory Boards of these operating companies. These Boards include representatives of SCM, minority shareholders and independent (external) experts. The mem-bers of each Board vote to elect a Chair from among their number. The Boards determine business development areas and the standards for engaging in specific businesses; they ap-prove strategies, budgets and major contracts and oversee their implementation; they track business indicators, appoint top managers, es-tablish incentives for them, and evaluate their performance. The members of the Supervisory Boards, together with independent experts, may also participate in specialized committees including: the Audit Committee, the Strategy and Investment Committee, and the Appoint-ment and Compensation Committee.

The Audit Committee prepares recommenda-tions for the Supervisory Boards regarding the approval of accounting policy and procedures for preparing financial reports; the depth and accuracy of financial reporting provided by each holding; the reliability and effectiveness of the internal auditing system, internal over-sight, and risk management; the independence

of internal and external audits; and the process of ensuring compliance with the laws and norms governing business ethics.

The Strategy and Investment Committee prepares and submits for review to the Su-pervisory Board recommendations regarding opportunities for the holdings to be involved in investment projects and exit strategies for specific projects; recommendations regarding the strategic goals and objectives of the various holdings, and the implementation of agree-ments on mergers and acquisitions (M&A).

The Appointment and Compensation Commit-tee recommends to the Supervisory Boards candidates for management positions in the sectoral holdings. With this purpose in mind, the Committee organizes interviews with applicants for specific positions and decides whom to recommend for those positions. The Committee also prepares recommendations re-garding the rotation of top managers within the sectoral holdings, proposes ways to incentivize top managers, and participates in shaping the corporate culture and staffing, in determining the prospects for personal development of managers, and so on.

The General Manager of a sectoral holding is appointed by the Supervisory Board in order to manage the holding’s operations. As a member of the Board, this person takes an active part in the strategic planning of the holding’s activities.

The Executive Council is the highest body in the operational management of a holding. Each holding’s Executive Council is established col-legially. The Chair of the Executive Council is the General Manager of the holding.

The Supervisory Boards of operating com-panies are responsible for their sustainable financial and commercial growth, greater effec-tiveness in their activities and increased com-petitiveness. They keep track of the upholding of shareholder rights, make decisions about when to hold General Shareholders’ Meetings, establish the agenda for such meetings, draft corporate policy, and so on.

The members of the Supervisory Boards of operating companies are appointed by their exe- cutives and approved by the Supervisory Board of the relevant sectoral holding.

SCM: in step with the millennium | The group’s corporate structure


Minority shareholdersSCM

Supervisory Boards of holding companies

Audit Committee

Strategy and Investment Committee

Appointment and Compensation Committee

Holding BoardGeneral Managerof holding

In cases where a decision is made not to form a holding company.

In cases where a decision is made to form a holding company.

Operating companies

Holding company for sectoral holding

Supervisory Boards of operating companies

CORPORATE GOVERNANCE STRUCTURE OF SCM GROUP

37

Minority shareholdersSCM

Supervisory Boards of holding companies

Audit Committee

Strategy and Investment Committee

Appointment and Compensation Committee

Holding BoardGeneral Managerof holding

In cases where a decision is made not to form a holding company.

In cases where a decision is made to form a holding company.

Operating companies

Holding company for sectoral holding

Supervisory Boards of operating companies



CORE BUSINESS AREAS

Mining and metal

As part of restructuring its business, in 2007, stakes in certain of the Group’s mining and metal enterprises that belonged to SCM and its subsidiaries – SCM Ltd. (Cyprus) and USH (cyprus) – were transferred to Metinvest Holding, which handles the strategic management of SCM Group’s mining and metal business.Specifically, Metinvest Holding was given the shares of northern ore mining and enrichment plant (SevGOK), Avdeyevka coke and chemical plant (AKHZ), Yenakiyevo steel plant (YeMZ), Azovstal steel plant (AZOVSTAL), Khartsyzsk pipe plant (KhTZ), and Prometei.At the end of 2007, the restructuring of SCM Group’s mining and metal businesses remained in progress and will be completed in 2008.

Energy

As part of restructuring SCM Group’s business, DTEK, which manages the Group’s energy assets, was given the shares of Pavlogradugol, Oktyabrskaya and Dobropolye central enrichment plants (CEP).At the end of 2007, the restructuring of SCM Group’s energy businesses remained in progress and will be completed in 2008.

Financial services

Previously, the financial assets of the SCM Group were combined under the aegis of a managing company called SCM Finance. As part of the further restructuring of the Group’s business, SCM took certain steps in 2007 to strengthen its financial institutions. This process was accompanied by the delegation of a range of key functions from the holding com-pany to the Group’s financial institutions and, as a result, a change in the role of SCM Finance.These measures meant that SCM Finance was no longer at the center of key strategic decision-making, retaining only the function of corporate center.

BUSINESS STRUCTURE

39

ALTERNATIVE COMMERCIAL DEVELOPMENT

Telecommunications

In 2007, the consolidation of fixed-line telecommunications assets was begun in relation to the Group’s Farlep Optima company. The shares of all telecom assets related to the Group’s fixed line business were consolidated through Farlep Invest as the managing company. This year was spent focusing on strengthening the Group’s presence in the telecoms business by acquiring new assets. The formation of a Telecom Holding will be concluded in 2008.SCM Group is also one of the shareholders in Astelit, a company that provides mobile communications services under the brand life:) and which is among the top three mobile operators in Ukraine.

Real estate

To provide effective management of property assets, the SCM Estate Holding was set up in 2006. Later, it was renamed ESTA Holding. Today, SCM Group has a major portfolio of real estate properties, land bank, and developments, which have considerable investment appeal.

Media

In 2007, the process of organizing media assets continued, with the aim of improving the effectiveness of their commer-cial activities. Given the fundamental differences in the natures of print media and television broadcasting, the Group established two major media holdings: Segodnya Multimedia and the TRK Ukraine Broadcasting Company.

Clay mining

In 2007, SCM Group strengthened its presence in the clay mining business by increasing its stake in enterprises that belong to the Group. Those were consolidated into a sectoral holding called United Minerals Group, which was given the right to own and manage three clay mining assets: Ogneupornerud, Vesko, and Druzhkovskoye Mines Management.

Retail trade

In 2007, SCM Group began to expand into a new area of business, retailing, with the establishment of Ukrainian Retail. The development priority for the Group’s retail chain is a “neighborhood store” format, which operates under the Brus-nytsya brand. Ukrainian Retail plans to open 400 stores over the next five years in a chain that will cover all of Eastern Ukraine.

Petroproduct retailing

SCM Group’s companies have been successfully wholesaling and retailing petroleum products for more than 12 years. This business area is represented by a network of filling stations under the Parallel, Gefest and PitStop brand names. SCM owns 70 gas stations, mostly located in Eastern Oblasts of Ukraine and in Crimea.



ПИ

ВОБ

ЕЗАЛ

КОГО

ЛЬН

ИІ Н

АПОЇ

Група «Сармат»*

«Дніпр»* «Крим»*

Луган-ський ПЗ*

«Полтав-пиво»*

КиївськийПЗ №1*

*The chart does not include businesses where SCM Group is a minority shareholder.

** SCM Group’s machine-building restructuring process will be continued in 2008.

*** These assets are to be sold in 2008 to outside investors as part of the restructuring of the Group.

Mining & Metal (Metinvest Holding)

MIning & Metal Division

Coal and Coke Division

Northern Ore Mining and Enrichment Plant (SevGOK)

Central Ore Mining and Enrichment Plant (CGOK)

Inguletsky Ore Mining and Enrichment Plant (InGOK)

Dokuchayevsk Flux and Dolomite Plant (DFDK)

Novotroitskoye Mines Management

Krivoy Rog Mining Equipment Plant

Krivbassvzryvprom Explosives Company

Krasnodonugol

Avdeyevka Coke and Chemical Plant

Avlita Stevedoring

Sales

Metinvest Int.

Metinvest Ukraine

Metinvest SMTs

Metinvest Eurasia

Steel and Rolled Products Division

Azovstal Steel Plant

Khartsyzk Pipe Plant

Ferriera Valsider

Prometei

Skif Shipping

YEMZ Group

Yenakiyevo Steel Plant

Metalen

Energy (DTEK)

Coal Mining and Enrichment

Power Generation

Pavlogradugol

Komsomolets Donbassa

Pavlogradskaya CEP

Mospino Coal Processing Company

Dobropolye CEP

Oktyabrskaya CEP

Kurakhovskaya CEP

Vostokenergo

Tekhrempostavka

Power DIstribution

Service Invest

PES Energougol

Hotels

Other Properties Under Development

Leonardo

Donbass Palace

Opera

Optima Telecom

Farlep

IP Telecom

Ucomline

Vilcom

Vesko

Druzhkovskoye Mines Management

Ogneupornerud

TRK Ukraina Television Channel

Segodnya Multimedia

Ukrainian Retail (retail chain under Brusnytsya brand)

Parallel

Gefest

PitStop

Heavy Engineering**

Druzhkovka Heavy Engineering Plant

Gorlovskiy Mashinostroitel Engineering Plant

Donetskiy Energozavod Engineering Plant

Sverdlovskiy Heavy Engineering Plant

Sarmat Group

Krym***

Lugansk Brewery***

Dnipro***

Poltavpyvo***

Banking

First Ukrainian International Bank

Dongorbank

Financial Services

Insurance

ASKA

ASKA–Life

Real Estate (ESTA Holding)

Telecom (Farlep–Optima)

Clay Mining (United Minerals Group)

Media Retail TradeTrade in Petroleum Products

Other Assets

STRUCTURE OF SCM GROUP ASSETS AS OF 2007 *

41

ПИ

ВОБ

ЕЗАЛ

КОГО

ЛЬН

ИІ Н

АПОЇ

Група «Сармат»*

«Дніпр»* «Крим»*

Луган-ський ПЗ*

«Полтав-пиво»*

КиївськийПЗ №1*

*The chart does not include businesses where SCM Group is a minority shareholder.

** SCM Group’s machine-building restructuring process will be continued in 2008.

*** These assets are to be sold in 2008 to outside investors as part of the restructuring of the Group.

Mining & Metal (Metinvest Holding)

MIning & Metal Division

Coal and Coke Division

Northern Ore Mining and Enrichment Plant (SevGOK)

Central Ore Mining and Enrichment Plant (CGOK)

Inguletsky Ore Mining and Enrichment Plant (InGOK)

Dokuchayevsk Flux and Dolomite Plant (DFDK)

Novotroitskoye Mines Management

Krivoy Rog Mining Equipment Plant

Krivbassvzryvprom Explosives Company

Krasnodonugol

Avdeyevka Coke and Chemical Plant

Avlita Stevedoring

Sales

Metinvest Int.

Metinvest Ukraine

Metinvest SMTs

Metinvest Eurasia

Steel and Rolled Products Division

Azovstal Steel Plant

Khartsyzk Pipe Plant

Ferriera Valsider

Prometei

Skif Shipping

YEMZ Group

Yenakiyevo Steel Plant

Metalen

Energy (DTEK)

Coal Mining and Enrichment

Power Generation

Pavlogradugol

Komsomolets Donbassa

Pavlogradskaya CEP

Mospino Coal Processing Company

Dobropolye CEP

Oktyabrskaya CEP

Kurakhovskaya CEP

Vostokenergo

Tekhrempostavka

Power DIstribution

Service Invest

PES Energougol

Hotels

Other Properties Under Development

Leonardo

Donbass Palace

Opera

Optima Telecom

Farlep

IP Telecom

Ucomline

Vilcom

Vesko

Druzhkovskoye Mines Management

Ogneupornerud

TRK Ukraina Television Channel

Segodnya Multimedia

Ukrainian Retail (retail chain under Brusnytsya brand)

Parallel

Gefest

PitStop

Heavy Engineering**

Druzhkovka Heavy Engineering Plant

Gorlovskiy Mashinostroitel Engineering Plant

Donetskiy Energozavod Engineering Plant

Sverdlovskiy Heavy Engineering Plant

Sarmat Group

Krym***

Lugansk Brewery***

Dnipro***

Poltavpyvo***

Banking

First Ukrainian International Bank

Dongorbank

Financial Services

Insurance

ASKA

ASKA–Life

Real Estate (ESTA Holding)

Telecom (Farlep–Optima)

Clay Mining (United Minerals Group)

Media Retail TradeTrade in Petroleum Products

Other Assets



SCM GROUP’S BUSINESSES

43SCM Group’s businesses | Core business areas

MINING AND METALS: METINVEST HOLDING

THE MINING AND METAL COMPLEX IS THE FOUNDATION OF MUCH OF UKRAINE’S ECONOMY. METAL OUTPUT ALONE AC-COUNTS FOR NEARLY A QUARTER OF ALL OF UKRAINE’S INDUSTRIAL PRODUCTION. DURING 2006–2007, METALS WERE ONE OF THE ENGINES DRIVING UKRAINE’S ECONOMIC PROGRESS: ANNUAL GROWTH IN THIS SECTOR WAS AROUND 8–9%.THE MINING AND METAL COMPLEX IS ONE OF UKRAINE’S CONTRIBUTIONS IN THE GLOBAL ECONOMY. UKRAINE IS 8TH IN THE WORLD AMONG STEEL PRODUCERS AND IS THE THIRD LARGEST EXPORTER, AFTER CHINA AND JAPAN. FERROUS AND NON-FERROUS METALS AND METAL PRODUCTS CONSTITUTE CLOSE TO 40% OF ALL OF UKRAINE’S EXPORTS. IN 2007, THE GROWTH IN WORLD MARKETS AND FAVORABLE PRICES FOR RAW MATERIALS HAVE OPENED UP GOOD OPPORTUNITIES FOR UKRAINE’S MINING AND METAL BUSINESSES.

Metinvest Holding includes all SCM Group’s as-sets in the mining and metal complex, as well as companies that service it. The Holding is the biggest vertically integrated mining and metal company in Ukraine, with a total of 110,000 employees across all its companies.

Metinvest Holding is highly diversified in terms of its sales markets. This helps provide protec-tion for the company against fluctuations in any of these markets. At the same time, Metinvest Holding is focusing on the dynamic domestic market. In 2007, the share of income from the Ukrainian market in the holding’s turnover was over 33%, up from 30% in 2006.

Geographic breakdown of Metinvest Holding sales in 2007

CORE BUSINESS AREAS

UKRAINEEUROPEMIDDLE EAST & NORTH AFRICACIS (INCL. RUSSIA)SOUTHEAST ASIAOTHER COUNTRIES

33%24%15%

13%11%

4%


33%

24%15%

13%

11%

4%

62%

20%

16%

2%

Key indicators for Metinvest Holding2006

Sales volume, mn $

Asset value, mn $

EBITDA, mn $

Net profit, mn $

Iron ore output, mn tonnes

Steel output, mn tonnes

Rolled steel output, mn tonnes

5,271.0

7,063.0

1,482.0

813.0

16.8

8.6

9.2

2007

7,425.0

12,439.0

2,279.0

1,321.0

18.5

9.1

9.5

Change

+40.9%

+76.1%

+53.8%

+62.5%

+10.1%

+5.8%

+3.3%

To improve effectiveness in managing the assets of the vertically-integrated Metinvest Holding, the business is organized into three divisions:

the iron ore division•

the coal and coke division•

the steel and rolled products division•

THE IRON ORE DIVISIONThe main objective of the Iron Ore Division of Metinvest is to supply the holding’s companies with iron ore as a raw material. This division manages seven assets:

•NorthernOreMiningandEnrichmentPlant(SevGOK), one of the largest mining companies in Europe with a closed production cycle for iron ore concentrate and pellets. Annual output capacity at SevGOK is 13.4 mn tonnes of iron ore concentrate and over 11.0 mn tonnes of iron ore pellets.

•CentralOreMiningandEnrichmentPlant(CGOK) is a unique enterprise in Ukraine, combining opencast and shaft mining for the extraction of ores, and recycling enrichment wastes. Annual output capacity at the CGOK is 6.9 mn tonnes of iron ore concentrate and 2.2 mn tonnes of pellets.

•InguletskyOreMiningandEnrichmentPlant(InGOK) uses a technology that is unique for Ukraine, flotation concentration. The company became part of the Metinvest Holding portfo-lio at the end of 2007, based on an agreement with Smart Holding. Annual output capacity at InGOK is 14 mn tonnes of iron ore concentrate.

•DokuchayevskFluxandDolomitePlant(DFDK) is the largest producer of fired metal-lurgical dolomite in Ukraine and the only plant producing powders for converter firebricks. Annual output capacity of the company is 7.7 mn tonnes of finished product.

•NovotroitskoyeMinesManagement(NTRU)extracts metallurgical alums and dolomite with annual capacity of 2.7 mn tonnes of finished product.

•KrivoyRogCentralOreMiningEquipmentRepair Plant (KCRZ-KZGO) is one of the leading companies in Ukraine producing a wide selection of mining, enriching and transporting equipment and spare parts.

•KrivbassvzryvpromExplosivesCompanyprovides detonation services in the mining and extraction industry and produces explosive materials.

THE COAL AND COKE DIVISION The Coal and Coke Division provides a critically important resource – coking coal – for holding companies. The Division manages three key assets:

•Krasnodonugolisoneofthebiggestcompa-nies in Ukraine extracting and enriching high energy coal for coke production. This produc-tion conglomerate includes seven mines and ore plants, two enrichment plants, and service departments. Total volume of extracted coal is up to 5.7 mn tonnes per year, which is nearly 20% of all coking coal extracted in Ukraine.

45

33%

24%15%

13%

11%

4%

62%

20%

16%

2%

•AvdeyevkaCokeandChemicalPlant(AKHZ)is the largest high-technology company in Europe’s coking coal industry. Annual output of coke is over 3 mn tonnes.

•AvlitaStevedoringCompanycontrolstwodeep water berths in Sevastopol Bay that are open all year round. The company specializes in handling dry cargo (metals, grains).

THE STEEL AND ROLLED PRODUCTS DIVISION The Steel and Rolled Products Division controls the final links in the added-value process at Metinvest Holding: smelting steel, manufacturing rolled products and selling finished goods. This division includes both Ukrainian and for-eign assets:

•AzovstalSteelPlantisamodern,high-tech-nology company that produces a wide assort-ment of metal products and is among the top three steelmakers in Ukraine in terms of output volume. Annual production capacities for the company are 6.4 mn tonnes of pig iron, 6.4 mn tonnes of steel, and 4.7 mn tonnes of rolled steel.

•YeMZGroupincludesYenakiyevoSteelPlantand the Joint Venture Limited Liability Company Metalen, which have a consolidated produc-tion cycle. YeMZ Group produces various types of rolled steel (rods, cast billets, rolled bars, graded sections). Annual output capacity is 2.8 mn tonnes of steel.

•KhartsyzskPipePlant(KHTZ)isthebiggestproducer of straight-seam electro-welded large diameter (478–1,420 mm) piping in the CIS, which is primarily used in the oil and gas in-dustries. Annual production capacities are over 1.5 mn tonnes of piping, including up to 700,000 tonnes of pipes with anticorrosion coating.

•FerrieraValsider(Italy)isaplantthatmakesstructural rolled steel. Its supply of raw materi-als is 80–90% provided by the Azovstal plant. Annual production capacity is around 500,000 tonnes of thick sheet steel and 700,000 tones of hot rolled coil.

•ThePrometeiFinancialIndustrialCompanyis one of the largest operators on the Ukrainian

market of ferrous scrap metals. It supplies the holding’s companies with raw materials.

•SkifShippingisalogisticscompanythatpro-vides the entire range of services for transporting, loading and documenting cargo.

•SpartanandTrametalarekeyplayersintheEuropean market for thick sheet steel: total an-nual capacity between the two pants is 530,000 tonnes of high-quality thick rolled sheet. Met-invest Holding reached an agreement with the Malacalza Group concerning purchasing from the family-owned Italian group 100% ownership stakes in Spartan and Trametal companies in November 2007. The expansion of the holding’s rolling capacity will provide for the most effec-tive usage of the Group’s mining and production potential. As well as it will lead to significant growth in the Group mining and metal assets’ value due to the potential synergies and will increase the competitiveness of the SCM Group business and of the Ukrainian mining and metal complex as a whole. Approval from the Euro-pean Commission is expected at the beginning of 2008.

In 2007, Metinvest Holding completed the reor-ganization of its sales department in the Steel and Rolled Products Division. As a result, four sales channels provided by four different com-panies have been established to ensure sales in the regions. At the same time, efforts were undertaken to unify standards and business processes across sales departments. Today, four companies handle sales of the holding’s products:

•MetinvestInternational(previouslyLemanCommodities) is a wholesale channel, respon-sible for external markets outside the CIS. Its headquarters are in Geneva, with representa-tive offices in 11 countries, which allows the company to cover the largest steel markets in the world.

•MetinvestUkraineisawholesalechannelthatsells the holding’s products in Ukraine and CIS countries, with the exception of Russia by the railcar load quantities (from 65 tons).

•MetinvestEurasiaisthechannelforsalesofthe division’s steel and rolled steel in Russia.

SCM Group’s businesses | Core business areas


33%

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2007 through the prism of Metinvest Holding’s investment projects

Completed:Construction of two new sections at the ore enrichment facility #1 at Northern Ore Mining and Enrichment •Plant (SevGOK). Result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total invest-ment: $6.2 mn.Launch of a facility for preliminary enrichment of settled sands in the slurry ponds at Central Ore Mining and •Enrichment Plant (CGOK). Result: improved operational efficiency, increased production of concentrate, and increased processing of production wastes. According to the results of 2007, the project allowed to grow the volume of production wastes processing by 60%. Total investment: $5.7 mn.Construction of the blast furnace №5 at Yenakiyevo Steel Plant (YeMZ). Result: additional output of 1.05 mn •tonnes of pig iron per year. Total investment: $140 mn.Launch of a new facility at Yenakiyevo Steel Plant (YeMZ) for production of technical oxygen from air. Result: •steel production capacity growth and quality enhancement potential increased. Total investment: $45 mn.Launch of a new facility at Azovstal Steel Plant for production of technical oxygen from air. Result: annual •steel production capacity growth increased by 1.5 mn tonnes. Total investment: $72 mn.Construction of the first part of the large diameter pipe production line at Khartsyzsk Pipe Plant (KHTZ). •Such pipes are used for main gas and oil pipelines construction. Result: single-joint tubes of up to 1,420 cm in diameter can now be produced. Total investment: $24.3 mn.

Launched: Upgrade of two sections at the №1 ore enrichment facility of Northern Ore Mining and Enrichment Plant •(SevGOK). Expected result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total in-vestment: $46.8 mn. Completion: Q2 2008Installation of the 5th stage of magnetic separation at the №1 ore enrichment facility of Northern Ore Mi- •ning and Enrichment Plant (SevGOK). Expected result: better quality iron ore concentrate. Total investment: $4.6 mn. Completion: Q2 2008Repair of the №3 blast furnace at Azovstal Steel Plant. Expected result: greater efficiency in the blasting •conversion, reduced negative impact on the environment. Total investment: $31 mn. Completion: Q2 2008Construction of a new №3 blast furnace at Yenakiyevo Steel Plant (YeMZ). Expected result: increased vo- •lumes of smelted pig iron output, greater production efficiency, reduced negative impact on the environment. New blast furnace planned production capacity is 1 mn tones of pig iron per year. Total investment: $262 mn. Completion: 2010Reconstruction of the benzol scrubber in the capturing facility №1 at Avdeyevka Coke and Chemical Plant. •Expected result: greater energy efficiency in the process of benzol extracting and reducing exhaust into the air. Total investment: $2.4 mn. Completion: Q1 2008

It handles both wholesale and retail sales of metal products in Russia, which is one of the main markets for Ukrainian steel products.

•MetinvestSMTsisaretailchannelfortheholding’s products and those of other CIS companies in Ukraine and Eastern Europe. This network of companies includes 11 metal centers.

IN 2007, SCM GROUP AND SMART HOLDING MADE A DECISION REGARDING THE MERGER OF THEIR MINING AND METAL ASSETS. THIS WAS THE FIRST SECTORAL AGREEMENT OF SUCH A SCALE IN THE CIS.THE JOINT COMPANY WILL TAKE SECOND PLACE IN THE CIS REGION IN TERMS OF IRON ORE OUTPUT AND FOURTH PLACE IN TERMS OF SMELTED STEEL.

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Minimal costs

Investment in up-to-date equipment

Vertical integration

Strengthening positions on highly profitable markets

On-the-job safety

Minimal environmental impact

Greater social responsibility

For employees

For consumersFor partners and investors

SUCCESS

We are a leader

in efficiency

We can ensure long-term

competitiveness

We are a safe and friendly company

We are an important company

Metinvest Holding Development Strategy



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ENERGY. DONBASS FUEL & ENERGY COMPANY (DTEK)

THE FUEL & ENERGY COMPLEX IS A MAJOR COMPONENT IN THE INFRASTRUCTURE OF UKRAINE’S ECONOMY. AL-THOUGH UKRAINE IS A NET IMPORTER OF FUELS, THE COUNTRY HAS A STRONG ENERGY SECTOR AND RANKS 7TH IN THE WORLD FOR CONFIRMED COAL RESERVES.

UKRAINE HAS ENORMOUS POTENTIAL IN TERMS OF ELECTRICITY AND IN TERMS OF THE VARIETY OF FUEL RESOUR- CES. THE RATIO BETWEEN THE VOLUMES EXTRACTED AND CONFIRMED RESERVES IS CONSIDERABLY LOWER THAN THE AVERAGE IN THE WORLD TODAY. STILL, THESE OPPORTUNITIES ARE NOT BEING TAKEN ADVANTAGE OF SUFFI-CIENTLY. EXTRACTION OF FUEL AND ENERGY MATERIALS CONTRACTED BY 2% IN 2007, AGAINST OVERALL INDUSTRI-AL GROWTH OF 10.2% FOR THE YEAR. PRODUCTION OF READY COAL SHRANK EVEN MORE, BY 4.5% IN 2007. ENERGY GENERATION IS ALSO LAGGING IN GROWTH, COMPARED TO AVERAGE INDICATORS FOR INDUSTRIAL OUTPUT. IN A SITUATION WHEN THE GLOBAL TREND IS TOWARDS HIGHER PRICES FOR FUEL AND ENERGY, IT BECOMES CRITI-CALLY IMPORTANT TO INCREASE ENERGY EFFICIENCY USING INNOVATION. THIS APPROACH IS PARTICULARLY SIG-NIFICANT FOR UKRAINE, WHOSE ECONOMY IS ONE OF THE MOST ENERGY INTENSIVE IN THE WORLD. DEALING WITH SUCH CHALLENGES IS WITHIN THE CAPACITIES OF VERTICALLY-INTEGRATED COMPANIES WITH HIGHLY EFFECTIVE MANAGERS, AS THEY ARE THE MOST INTERESTED IN MINIMIZING COSTS ON PRIMARY RESOURCES IN THEIR OWN VALUE-ADDED CHAIN.

The Donbass Fuel & Energy Company combines all SCM Group’s assets in energy. This holding is the first and largest vertically-integrated company in this sector in Ukraine. Its share of extracted coal is 21%, its share of energy generation 27%, and its share of electricity distribution in Ukraine is over 5%. More than 50,000 people are employed by the holding’s companies.

DTEK’s thermoelectric generating stations (TES) are protected from an anticipated increase in the price of imported natural gas in Ukraine to match European prices.

DTEK’s TESs boast one of the lowest indicators for the share of gas in fuel consumed, with only 1%, whereas the Ukrainian average is 9.7%.

In order to maximize the effectiveness of the way these assets are managed, DTEK has de-fined three main areas of business:

coal extraction and enrichment;•

energy generation;•

energy distribution.•

Key indicators for DTEK2006

Sales volume, mn $

Asset value, mn $

EBITDA, mn $

Net profit, mn $

Coal extracted, mn tonnes

Energy generated, KWH

1,000.0

1,736.0

233.0

98.0

15.3

16.3

2007

1,776.0

2,654.0

477.0

236.0

15.8

18.1

Change

+77.6%

+52.9%

+104.7%

+140.8%

+3.3%

+11.0%

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COAL MINING AND ENRICHMENTThe main objective of the coal extraction and enrichment business is to ensure that the holding’s TESs have reliable fuel supplies. This area includes nine assets:

•Pavlogradugolisthelargestcoalextractionenterprise in Ukraine. In 2007, the company produced 12.4 mn tonnes of coal or 16.4% of the total coal extracted in Ukraine. The company owns 10 mines, as well as transport and production infrastructure. In addition to thermal coal, the company also extracts coking coal.

•KomsomoletsDonbassaMineisoneofthelargest producers of thermal coal in Ukraine. In 2007, it produced 3.4 mn tonnes of coal or 4.5% of total extraction. The enterprise has its own coal enrichment plant.

•PavlogradskayaCentralEnrichmentPlant(CEP) is one of the biggest coal enrichment enterprises in Ukraine. Annual output capacity is 5.3 mn tonnes of coal.

•MospinoCoalProcessingCompanyisaproducer of enriched coal and concentrate for TESs. Annual output capacity is 2 mn tonnes of coal.

•DobropolyeCentralEnrichmentPlant(CEP)isa producer of enriched energy coal for coking. Annual output capacity is 2.6 mn tonnes of coal.

•OktyabrskayaCentralEnrichmentPlant(CEP)is a producer of coking and thermal coal for electrical generation. Annual output capacity is 2.4 mn tonnes of coal.

•KurakhovskayaCentralEnrichmentPlant(CEP) produces coal concentrate for TESs. An-nual output capacity is 1.9 mn tonnes of coal.

•Ekoenergoresursisanancillarycompanythatprovides cleaning services for the tailing ponds at Pavlogradskaya Central Enrichment Plant (CEP).

•PershotravenskRepairandMechanicsFac-tory is the biggest enterprise in the Western Donbass region that specializes in repairing underground mining equipment.

2007 through the prism of DTEK’s investment projects

Completed:Capital repairs of the power generating unit №3 at Kurakhovskaya TES and the power generating unit •№9 at Luganskaya TES. Result: greater efficiency and reliability, as well as 6 year-long increase in lifespan. Total investment: $13.5 mn.Comprehensive reconstruction of the Yenakiyevo substation, owned by Service Invest. Result: lower •risk of accidents, reduced annual operating costs. Total investment: $5.9 mn.

Launched:Reconstruction of the power generating unit №5 at the Kurakhkovskaya TES. Expected result: in-•creased capacity, range of maneuverability, lower relative cost for nominal fuels, lower electricity costs for own use, extended lifespan. Total investment: $30.6 mn. Completion: Q4 2008Expansion of capacity, range of maneuverability, lower relative cost of nominal fuels, lower electricity •costs for own use, extended lifespan. Total investment: $15.4 mn. Completion: Q4 2008Comprehensive work on the use of methane at Komsomolets Donbassa Mine. Expected result: using •methane gas in the mine to provide electricity to the company, participating in projects under the Kyoto Protocol. Total investment: $7.2 mn. Completion: Q4 2012



33%

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ELECTRIC ENERGY GENERATIONThe energy generation business generates electricity at energy stations that belong to the SCM Group. This area involves two assets:

•Vostokenergoisaprivateenergy-generatingcompany. The company’s output capacity is handled by three thermal power plants (TESs): Zuevskaya, Kurakhovskaya, and Luganskaya. These plants have a total of 18 power generating units between them, whose combined energy output is 4,060 MWt, of which 17 power generating units are used to generate electricity, for a total output capacity of 3,785 MWt. The company is the biggest producer of thermal electricity in Ukraine. In 2007, the three TESs belonging to Vostokenergo supplied Energory-nok, the state-owned energy wholesaler, with a total of 18.1 bn kWh of electricity or 27% of all the thermoelectricity generated in Ukraine. The company’s share of total electricity generated in Ukraine, including nuclear power, hydro power, and others, is 10%.

•Tekhrpompostavkaishandlingthemoder- nization and reconstruction of energy equip-ment at the Zuevskaya, Kurakhovskaya, and Luganskaya TESs in order to increase their technical and economic efficiency, as well as to improve the maneuverability of the equipment.

ELECTRIC ENERGY DISTRIBUTION

The final link in the system of adding value in the vertically-integrated chain is energy distri-bution. This area is represented by two assets:

•ServiceInvest,whichmanages67substa-tions in Dnepropetrovsk and Donetsk Oblasts. In 2007, the company transmitted 11.1 bn kWh of energy.

•EnergougolEnergyGridCompany,whichmanages 75 substations in Dnepropetrovsk and Donetsk Oblasts. In 2007, the company trans-mitted 11.1 bn kWh of energy.

The main consumers of electricity generated by DTEK are major industrial enterprises in Eastern Ukraine, including Azovstal Steel Plant, Yenakiyevo Steel Plant, MMZ Istil, and Northern Ore Mining and Enrichment Plant (SevGOK). The holding is oriented towards large and promising enterprises that can generate a high profit rate and stable sales.

Breakdown of sales by sector at DTEK in 2007

METALLURGY OTHERCOAL & MININGUTILITIES

62%20%16%

2%

51

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DTEK Development Strategy

Building a transnational company that combines Ukraine, Russia, and the EU in a single electricity cycle

Diversifying supply base

Developing alternative energy sources

Raising the efficiency of power generation

Cutting line losses

Minimizing impact on the environment and raising job safety standards

Expanding generating capacities

Acquiring targeted assets in Ukraine, Russia and the EU

SUCCESS

Leadership Stability

Growth Efficiency



33%

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FINANCIAL SERVICES: BANKS AND INSURANCE COMPANIES

THE FINANCIAL SERVICES MARKET IN UKRAINE HAS SHOWN ONE OF THE FASTEST RATES OF GROWTH IN THE WORLD. IN 2007, BANK ASSETS INCREASED BY 76%, AND GROSS PREMIUMS AT INSURANCE COMPANIES ROSE BY 30%. AT A TIME WHEN THE COUNTRY WAS EXPERIENCING STEADY DYNAMIC MACROECONOMIC GROWTH, A STEEP RISE IN DISPOSABLE INCOMES, AND A RELATIVELY UNSATURATED MARKET FOR FINANCIAL SERVICES, COMPANIES IN THIS SECTOR WERE PRESENTED WITH EXCELLENT OPPORTUNITIES FOR GROWTH.

SCM Group has assets in the financial services sector in both banking and insurance.

SCM owns two assets in the banking sector:

First Ukrainian International Bank is one of •the largest banks in Ukraine that, according to National Bank of Ukraine (NBU) data, ranks 13th in size by assets. First Ukrainian Interna-tional Bank is a diversified banking institution serving both corporate and consumer clients as well as handling investment banking. The bank is national in scale and has a diverse country-wide network.

Dongorbank is one of the larger Ukrainian •banks, ranked 28th by assets. It specializes in corporate clients. The key regions in which it operates are the Eastern Oblasts and Kiev.

In the insurance business, SCM Group owns two main assets:

•UASKASKAisoneoftheleadinginsurancecompanies in Ukraine and the country’s first non-government insurer. ASKA has licenses to provide 16 types of optional insurance and 10 types of mandatory insurance.

Key indicators for the Group’s financial assets

Banking assets FUIB DONGORBANK

2006 2007 Change 2006 2007 Change

Assets, mn $ 1,045.0 2,207.5 +111.3% 592.8 1,050.1 +77.2%

Capital, mn $ 182.6 482.7 +164.4% 69.9 106.5 +52.3%

Commercial loans, mn $ 610.2 1,281.7 +110.0% 278.3 493.8 +77.4%

Personal loans, mn $ 91.0 402.8 +342.5% 44.8 135.6 +202.4%

Insurance assets ASKA ASKA-life

2006 2007 Change 2006 2007 Change

Assets, mn $ 44.4 66.3 +49.3% 17.0 23.9 +40.9%

Capital, mn $ 30.5 42.6 +39.8% 2.6 3.3 +30.3%

Insurance premiums, mn $ 42.9 66.2 +54.4% 5.6 6.1 +9.2%

Insurance payouts, mn $ 15.1 45.2 +199.5% 1.1 0.2 -78.5%

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•ASKA-Lifeisoneofthemarketleadersinlifeinsurance, providing a full range of services.

STRATEGIC ORIENTATION IN THE DEVELOPMENT OF SCM GROUP’S FINANCIAL ASSETSThe development strategy for SCM Group’s banking and insurance assets is based on long-term value growth. SCM works continually to increase the efficiency and competitiveness of its financial institutions. Together with metal-lurgy and electricity, the financial business is one of the core areas of SCM Group’s activities. Over 2008–2010, the Group plans to invest at least $1bn in growing its financial business.

The Group’s banking assets are focused on clients in specific, targeted segments. The confirmed strategy plans for First Ukrainian In-

ternational Bank to develop as a national bank that specializes in corporate and consumer accounts. Dongorbank is positioning itself as a strong regional bank that is among the top banks in Eastern Ukraine and Kiev, which is where the major industrial corporations and their parent companies are located.

One of the main strategic indicators for developing SCM’s insurance business is to maintain and support leadership positions on the insurance market. The bulk of the capital planned for investment in the insurance business will be directed at developing a sales network and expanding ASKA’s regional presence. Particular attention will be paid to introducing and up-grading information technology, motivating and training personnel, increasing capitalization and creditworthiness, as well as marketing.

2007 through the prism of innovative projects by the Group’s financial assets

Completed:First Ukrainian International Bank successfully completed the certification process for Visa International and Master-•Card Worldwide payment systems in 2007, using EMV technology and concluded its pilot project, issuing chip cards. With the Visa Classic Unembossed product, the bank completed a co-branding program with Azovstal Steel Plant.In the course of expanding the model line of terminal equipment for its acquiring network, First Ukrainian Interna-•tional Bank and its partner banks at the processing center successfully certified new models of VeriFone and Ingencio POS terminals.The systems for credit risk management at the bank underwent changes in 2007 in the process of crediting SME •clients within vertically-integrated corporate businesses. The system of internal reporting on retail risk management was improved. To provide an all-encompassing analysis of its credit portfolio. First Ukrainian International Bank be-gan using historical analysis. This makes it possible to calculate the level of delinquency, according to groups of credit operations, based on the time that the operation appeared on the bank’s balance. This kind of analysis also allows the company to track the migration of delinquent debts, which shows the likelihood that overdue debts will be switched from their original category to a category that has a longer delinquency period. To secure its information systems, First Ukrainian International Bank was first, not only in Ukraine, but in the entire •CIS, to use the context analysis electronic mail system called IQ.Suite from Group Technologies.

Launched:The switch to broadband (1-2 MB) communication channels between First Ukrainian International Bank head office •and its branches was begun in 2007. This considerably raised the productivity of banking operations.ASKA began to introduce the INSIS accounting system, which considerably expands the options for analytical accoun- •ting, automating accounting processes and monitoring the completeness of insurance contracts and their compliance with legal standards.ASKA–Life began to introduce LISA software for tracking insurance activities. LISA will provide more options for ana-•lytical accounting and the automation of accounting processes for the entire life of an insurance contract.



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TELECOMMUNICATIONS: THE FARLEP OPTIMA GROUP*

2007 through the prism of Farlep Optima Group investment projects

Completed:Modernization and expansion of municipal communication networks. Result: The launch of telephone routers with •capacity for 882 E1, 206,000 telephone ports, a broadband access network for the ports, a broadband access network for 23,000 ADSL ports, a transport network for 314 SDH hubs. Total investment: $4.4 mn.Construction of a national MPLS multiservice transport network. Result: Improved hubs in the transport networks of •Dnepropetrovsk, Donetsk, Kherson, Krivoy Rog, Kiev, L’vov, Mariupol, Nikolayev, Odessa, and Zaporozhye. Total invest-ment: $0.9 mn.Modernization and expansion of the intercity telephone network. Result: contemporary communications infrastructure •in Dnepropetrovsk, Donetsk, Ivano-Frankovsk, Kharkov, L’vov, Nikolayev, Sevastopol, Simferopol, and Zaporozhye. Total investment: $0.8 mn.Construction of corporate IT infrastructure. Result: own corporate network in cities where Farlep Invest has a presence, •with a data processing center in Kiev. Total investment: $0.7 mn.Introduction of a system to manage mutual settlements with communications operators. Result: a system that ensures •transparency of account settlements with communications operators and timely billings. Total investment: $0.5 mn.

Launched:Construction of a national transport network. Expected result: company’s own main fiber-optic trunk line of 4,700 km •with hubs in 20 oblast capitals in Ukraine. Total investment: $11.8 mn. Completion: 2009.Launch of a network in new cities where the company has a presence. Expected results: the launch of services in 23 •populated areas Total investment: $3.9 mn. Completion: 2009Introduction of a customer billing system. Expected result: centralized, efficient management of service rates and rate •packages. Total investment: $1.1 mn. Completion: 2009Introduction of internet protocol television services. Total investment: • $1.0 mn. Completion: 2009

*In 2008 company name changes to Vega.

THE UKRAINIAN TELECOMS MARKET CONTINUES TO GROW STEADILY. IT HAS BEEN GROWING AT AN ANNUAL RATE OF 15%. MOREOVER, THE GROWTH OF DIFFERENT SEGMENTS OF THIS MARKET VARIES. FOR INSTANCE, THE GROWTH OF VOICE COMMUNICATIONS SERVICES IS TAPERING OFF (WHICH MATCHES GLOBAL TRENDS), WHILE THE DATA TRANSMISSION AND BROADBAND ACCESS SEGMENTS ARE SHOWING CONSIDERABLE POTENTIAL AND ARE GROWING AT AROUND 40–50%. THE SITUATION IN UKRAINE TODAY CAN BE DESCRIBED AS A BOOM IN BROADBAND ACCESS SERVICES SIMILAR TO THAT WHICH OCCURRED IN DEVELOPED ECONOMIES ABOUT FIVE YEARS AGO. TOGETHER WITH GROWING DEMAND AMONG UKRAINIAN CONSUMERS FOR QUALITY TELECOM SERVICES, THE LONG-TERM PROS-PECTS FOR GROWTH IN THIS SECTOR ARE ALSO ON AN UPSWING.

ALTERNATIVE COMMERCIAL DEVELOPMENT

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2008 2009 2010 2011

SCM Group’s businesses | Alternative commercial development

Ensuring annual profits of 20%

Doubling customer base and covering 53 cities by 2012

Seeking syngeries, providing a wide range of services

Raising operational efficiency

Seeking economies of scale

Concentrating on highly profitable services (internet access, data transmission)

Developing Fiber To The Building (FTTB) technology to provide Triple-Play services to private individuals

Raising the quality of services,oriented at customer needs

SUCCESS

Growth Efficiency

Products

The Farlep Optima Group of companies Development Strategy

Farlep Invest is the company that manages SCM Group’s fixed line telecommunications assets, con-solidated under Farlep Invest company. The Farlep Optima Group of companies constitutes the largest private sector operator of fixed line communica-tions in Ukraine and serves 8% of the market.

Farlep Optima is second in the country after the national operator, Ukrtelecom, for telephony services and among the top three leaders for broadband services.

Farlep Invest manages five telecommunications assets in the SCM Group:

•OptimaTelecomisacompanythatprovidesfixedline telecommunications services and internet ac-cess in Kiev, Odessa, Dnepropetrovsk, Zaporozhye, and other Ukrainian cities - altogether 20 urban areas.

•Farlepisacompanythatprovidesfixedlinetele-communications services and internet access in Kiev, Odessa, Donetsk, Dnepropetrovsk, L’vov, and other Ukrainian cities - altogether 12 urban areas.

•IPTelecomisaprominentinternetservicesprovider in Kiev and Odessa.

•UcomlineisaninternetandIPtelephonyserviceprovider that serves businesses and organizations (B2B segment).

•VilcomTelephoneCompanyisaprovideroffixedline telecommunications services in Kharkov and Kharkov Oblast.

By the end of 2007, Farlep Invest companies rendered the following services:

Fixed telephone lines, individual clients

Fixed telephone lines, corporate clients

Broadband XDSL access lines

2006

350,531

217,092

36,454

2007

396,352

265,021

71,161

Change

+13.0%

+22.0%

+95.2%


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REAL ESTATE: ESTA HOLDING

THE ESSENTIAL FEATURE OF THE 2007 UKRAINIAN PROPERTY MARKET WAS A HIGH LEVEL OF UNSATISFIED DE-MAND, WHICH OFFERED GOOD OPPORTUNITIES FOR GROWTH. COMPARED TO EUROPEAN CITIES, UKRAINIAN CITIES HAVE MUCH LOWER LEVELS OF OFFICE, RETAIL, AND HOTEL SPACE AVAILABLE PER HEAD OF POPULATION. BY COM-PARISON, THE WORLD’S MAJOR CITIES HAVE SIGNIFICANTLY MORE COMMERCIAL SPACE AVAILABLE. THIS SHORTAGE OF SPACE IS A PROBLEM IN ALL SEGMENTS, FROM RESIDENTIAL TO SHOPPING AND ENTERTAINMENT, FROM CLASS A TO CLASS C OFFICE SPACE, FROM LUXURY CLASS TO ECONOMY CLASS HOUSING. THIS SITUATION OFFERED EXCEL-LENT OPPORTUNITIES FOR GROWTH AND INVESTMENT, AS WELL AS HIGH PROFIT MARGINS FOR DEVELOPMENT PROJECTS.

ESTA Holding, known as SCM Estate prior to 2008, is the sector holding, which manages SCM Group’s assets in the property and hotel business. The holding was established in May 2006 in order to consolidate all SCM assets in real estate under a single managing entity.

This area of business is key for the diversified development of the Group. It is the focus of increased attention, as the property market in Ukraine continues to develop actively and real unsatisfied demand for world class services in the office and hotel segments continues.

SCM Group manages a number of assets in this sector:

•TheDonbassPalaceHotelisafive-starhotelin the center of Donetsk. The World Travel Awards Association named it the best hotel in Ukraine in 2005, 2006 and 2007. Total rooms: 129.

•TheOperaHotelisafive-starhotelinthecenter of Kiev. In 2007, it was recognized as the best new business hotel in Europe. Total rooms: 138.

•TheLeonardoBusinessCenterisamulti-usecomplex in the center of Kiev, not far from the Opera Hotel. In 2007, SCM Group acquired a 50% ownership stake in this asset’s capital. Total area: 38,000 square meters.

•Otherassetsthatareinthedevelopmentstage.

ESTA Holding’s major development projects

Pushkinskiy Multi-use Complex in Donetsk. A Class A facility in the center of the city with a total area of •52,600 square meters. Total investment: $130 mn. Expected completion: 2011.Zhovtneviy Multi-use Complex in Kiev. A Class A facility with a convenient location and easy access to trans-•port. Overall area: 3 hectares. Total investment: $500 mn.Suburban residential development south of Kiev. A unique property with a total area of 43 hectares, located •on the banks of an open body of water. Total investment: $200 mn.

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ESTA Holding Development Strategy

Forming an optimized portfolio of projects in terms of profitability and risks

Identifying the most promising market segments for profitability

Setting up a professional client service (to organize building construction) and managing company (to service buildings)

Maximizing opportunities to acquire undervalued properties that are up for privatization

Forming long-term partnerships with the best professional market players

Growing the value of net assets of companies with average annual growth of at least 10–15%

SUCCESS

Focus Efficiency

Growth



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MEDIA. SEGODNYA MULTIMEDIA PUBLISHING HOLDING AND TRK UKRAINA TELEVISION CHANNELIN 2007, THE MEDIA BUSINESS WAS GROWING RAPIDLY IN UKRAINE. ACCORDING TO THE UKRAINIAN ASSOCIA-TION OF PERIODICALS PUBLISHERS, UKRAINE BOASTED NEARLY 2,400 NEWSPAPERS AND OVER 1,700 MAGAZINES. BOOMING GROWTH IN CABLE TELEVISION SERVICES AND BROADBAND INTERNET ACCESS LED TO INCREASE IN THE NUMBER OF UKRAINIANS WHO USED ELECTRONIC MEDIA - TELEVISION AND WEB RESOURCES. NEARLY 96% OF UKRAINIAN FAMILIES HAVE A TELEVISION. ACCORDING TO GEMIUS UKRAINE, THE COUNTRY’S AUDIENCE FOR THE INTERNET SEGMENT IS OVER 6 MILLION USERS AND IS GROWING STEADILY AT ABOUT 4–5% A MONTH. ACCORDING TO CORTEX, ADVERTISING SPENDING GREW BY 27% IN 2007 IN UKRAINE. THE TOTAL VOLUME OF MEDIA ADVERTISING BUDGETS WAS ESTIMATED AT $1,071 MN, OF WHICH TELEVISION TAKES A 44% MARKET SHARE IN UKRAINE.

In the publishing business, SCM Group’s assets are consolidated into Segodnya Multimedia, a publishing holding that includes:

Segodnya newspaper that is #1 in Kiev and •#2 in Ukraine among dailies

Vecherniy Donetsk•

Donetskiye Novosti•

Kurier•

Salon•

RIO•

Priazovskiy Rabochiy•

Mariupolskaya Nedelya•

Dom Sovietov•

and an educational publication for young •people called Priviet, Rebyata!

Media assets managed by SCM Group fall into two companies that operate in the television and publishing.

In the television business, SCM Group owns TRK Ukraine Television Channel, one of the leading national channels, covering all viewer groups (information and analysis, current af-fairs, culture and arts, documentary, sports, and children’s programs). Broadcast coverage is around 91% of the population of the coun-try. According to GfK Ukraine’s people meter panels, TRK Ukraine is 6th among Ukraine’s channels with national coverage (in 2007, the channel’s average audience share was 5.14%).

2007 through the prism of SCM Group media assets’ investment projects

Update of the TRK Ukraina Television Channel’s equipment and facilities. •Result: higher quality television broadcasting, the creation and launch of information and entertainment programs, the start of new TV projects. Total investment: $8.3 mn.Technical re-equipping of the Vyshgorod print plant. Result: increased productivity and efficiency in •managing the production process. Total investment volume exceeded $2 mn.Securing the rent of land in Dnepropetrovsk to be further used for building a printing plant. •Total investment: $1.8 mn.

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In addition, Segodnya Multimedia manages web resources, including: the www.segodnya.ua information and news portal (9–10th place among Ukrainian web-based news offerings for number of hits), www.dnews.donetsk.ua, www.pr.ua, and www.salon.donetsk.ua portals.

The holding also has its own production facili-ties with a unique newspaper printing press in Vyshgorod.

STRATEGIC DEVELOPMENT AREAS FOR SCM GROUP’S MEDIA ASSETSTRK Ukraine Television Channel faces a num-ber of strategic goals and objectives:

to improve the channels competitive position •on the Ukrainian television market by expanding program content;

expanding the channel’s market share•

increasing production capacities in Kiev and •Donetsk;

launching thematic television channels and •further combining them into a holding;

strengthening the channel’s brand.•

The strategic goal of Segodnya Multimedia for the next five years is to actively participate in the main segments of the market for print publications. In order to become the unques-tionable leader in terms of mass circulation in Ukraine, Segodnya Multimedia will develop a network of regional editions of the Segodnya daily by setting up regional offices. Plans are to continue to improve quality and content of printed periodicals with the objective of making Segodnya Multimedia the absolute leader of Ukraine’s media market.



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CLAY MINING: UNITED MINERALS GROUP

CLAY MINING IS A BUSINESS WITH CONSIDERABLE POTENTIAL FOR DIVERSIFIED SALES. AS A RAW MATERIAL, CLAY CAN BE USED BOTH ON THE B2C (HOUSEHOLD) MARKET SECTOR AND ON THE B2B (INDUSTRIAL ENTERPRISES) SECTOR. THE NUMBER OF ENTERPRISES THAT USE CLAY AS A RAW MATERIAL IS HUGE, RANGING FROM MAKERS OF HOUSEHOLD CERAMICS TO INDUSTRIAL FIREPROOFING, FROM INSULATORS TO BRICKS. GROWING DEMAND FROM USERS IN 2007, BOTH IN UKRAINE AND AROUND THE WORLD, FOR HOME RENOVATION AND THE DEVELOPMENT OF INFRASTRUCTURE, COMBINED TO SPUR RAPIDLY ESCALATING DEMAND FOR PRODUCTS FROM CLAY MINING ENTER-PRISES.

United Minerals Group (UMG) manages SCM Group assets in the clay mining complex. The company is one of the largest suppliers of clay for ceramics, porcelain and fireproofing indus-tries in the world. In 2007, UMG’s share of clay mining in Ukraine was 50% of the local market, while its share of sales in the same market was 34%.

The products made by UMG companies are sold in 20 different countries, including Ukraine, Russia, Italy, Spain, Turkey, India, and Poland. Thus, 87% of sales are generated abroad. The company makes clay under brands such as Vesko Keramik, Vesko Granitik, Vesko Prima, DN-1, DN-2 and others.

At this time, UMG controls the shares of three major mining companies:

•Veskospecializesinminingandprocessingclay for the ceramics, china and fireproofing industries. It is the biggest supplier of clay in Ukraine and Russia, and one of the biggest in Italy, Spain, Turkey, India and the United Arab Emirates (UAE). Annual volume of extracted clay is 1.7 mn tonnes.

•DruzhkovskoyeMinesManagementspecial-izes in mining and processing clay for the

ceramics, china and fireproofing industries, as well as the extraction of formation sand. It is the biggest supplier of formation sand in Ukraine and of clay in Belarus, as well as one of the biggest suppliers of clay to Italy, Spain and Turkey. Annual volume of extraction is 0.8 mn tonnes.

•Ogneupornerudspecializesinclayminingforthe ceramics, china and fireproofing industries. Annual volume of extraction is 0.5 mn tonnes.

STRATEGIC DEVELOPMENT AREAS FOR UNITED MINERALS GROUP

SCM Group’s clay mining area has a clear strategy of expanding its business through capital construction of new quarries, developing transportation infrastructure and acquiring clay deposits with unique chemical and plastic qualities. By 2012, United Minerals Group plans to increase the annual volume of clay mined to 4 mn tonnes. UMG intends to analyze the market of other useful deposits for the ceramic and building industries, as well as to consider the benefits of building a ceramics plant in Ukraine.

Key indicators for United Minerals Group*

Sales volumes, mn $

Asset value, mn $

EBITDA, mn $

Net profits, mn $

Clay mining, mn tonnes

2007

77.4

57.0

32.0

23.5

3.0* Since the holding was formed in 2007, there is no comparative data for 2006.

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RETAIL TRADE: UKRAINIAN RETAIL

THE RETAIL TRADE SEGMENT IS GROWING QUICKLY IN UKRAINE: IN 2007, RETAIL TURNOVER GREW BY 28.8%. THE MAIN ENGINE DRIVING THIS DYNAMIC TREND IS THE IMPRESSIVE GROWTH OF REAL DISPOSABLE INCOMES AMONG UKRAINIAN CONSUMERS, WHICH ROSE BY 12% IN 2007. A CONSIDERABLE CONTRIBUTION TO THE EXPANSION OF TRADE ALSO CAME FROM DYNAMIC CONSUMER LENDING, WITH LOANS ISSUED TO UKRAINIANS DOUBLING IN 2007.IN ADDITION TO A GENERALLY HIGH GROWTH DYNAMIC, UKRAINIAN RETAIL SECTOR IS UNDERGOING STRUCTURAL CHANGES. FOOD AND GENERAL PRODUCT STORES ARE BEING REPLACED BY MODERN RETAIL FORMATS, SUCH AS SUPERMARKETS, LEASED RETAIL CHAINS, AND SO ON.

In 2006, SCM Group made a decision to enter the retail trade market by settingup company named Ukrainian Retail. The company’s goal is to establish one of the biggest retail chains in Ukraine under the Brusnytsya brand. The plan is to gain consumer trust and loyalty by selling only high-quality products at a competi-tive price in the most convenient retail format and with an appropriate level of service. The overall investment made in Ukrainian Retail in 2007 was $40 mn. Most of this capital went into buying the property and equipment necessary to put this project into operation.

The first store opened on March 10, 2007 and by the end of the year Brusnytsya chain boasted 15 stores in Donetsk and Donetsk Oblast. Food dominates in the stores with an 80% share, while 20% of sales come non-food items.

The Brusnytsya chain operates in two formats:

•Convenience(or‘neighborhood’)store:floorspace of 300–400 sq m; selection of 4,500 items.

•Handysupermarket:retailspaceof800–1,200sq m; selection of 5,500 items.

Already in 2007, effectively in its first year of operations, Ukrainian Retail has a 0.5% share of the grocery market in Donetsk Oblast. The main competitive advantages of the Brusny-tsya chain include: compact space, carefully selected products, variety, optimal number of staff, high level of service, and personal, prompt responses to shoppers’ requests in every specific area (something large stores cannot afford to do).



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STRATEGIC DEVELOPMENT AREAS FOR UKRAINIAN RETAILThe business development strategy is aimed at evenly covering populated areas in Dnepro-petrovsk, Donetsk, Kharkov, Lugansk, and Zaporozhye Oblasts with at least 15,000 resi-dents. Over the next five years, the company plans to open around 400 retail points, thus, covering whole of Eastern Ukrainian region: Dnepropetrovsk, Donetsk, Zaporozhye, Lu-gansk, and Kharkov Oblasts, in total amounting to 15,5% of Eastern Ukrainian market. Over 2008–2012, investment in the development of the Group’s retail chain will be $200 mn.

NON-RETAIL SPACERETAIL SPACE

Retail and non-retail space at Ukrainian Retail, ’000 square meters*

200OVER 2008–2012, TOTAL INVESTMENT IN THE DEVELOPMENT OF THE GROUP’S RETAIL CHAIN WILL AMOUNT TO

$MN

* 2007 – current retail and non-retail space 2008-2011 – planned retail and non-retail space

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TRADE IN PETROLEUM PRODUCTS

IN 2007, IN TERMS OF VOLUME OF CARS SOLD, THE UKRAINIAN MARKET RANKED SEVENTH IN EUROPE, BUT ITS PACE OF GROWTH PUT IT IN SECOND PLACE. DURING THAT YEAR, UKRAINE SAW NEARLY 542,000 NEW CARS SOLD, WHICH WAS 46% MORE THAN IN 2006. ACCORDING TO INDUSTRY ANALYSTS, CAR SALES WILL CONTINUE TO GROW IN THE NEXT YEAR, WHICH MEANS THAT FOR THE RETAIL PETROLEUM PRODUCT BUSINESS, THE FUNDAMENTALS ARE THERE FOR LONG-TERM GROWTH.

SCM Group companies have been working suc-cessfully for more than 12 years in the whole-sale and retail markets for petroleum products. This business area is represented by a network of filling stations operating under the Parallel, Gefest and PitStop names. SCM Group owns 70 filling stations, mostly in Eastern Oblasts of Ukraine and in Crimea. The Group’s share of the Ukrainian market for petroleum products is 2%, although in Donetsk it is the leader in sales.

In 2007, 150 mn liters of mid-range gasoline and 65 mn liters of premium class gasoline were sold. SCM Group companies have a fuel quality control laboratory and petroleum storage with a capacity of 68,000 tonnes, 25 gas pumps, 23 modern retail shops with annual sales of $400,000 each. SCM lab was a finalist in the Fourth All-Ukrainian 100 Top Products in Ukraine Quality Goods Competition in the category for Laboratory services for petroleum products quality verification. Gas stations operating under the Parallel brand are oriented towards the premium segment of the mar-ket and work with both wholesale and retail customers. Customers at Parallel gas stations can take advantage of special services such as mini-markets and car washes. The Paral-lel chain of filling stations covers Donetsk and Donetsk Oblast.

The medium-range network of gas stations operates under the Gefest name and offers a wide selection of fuels of different brands. The gas station network under Gefest brand is primarily focused on serving corporate clients. Gefest stations are located in Dnepropetrovsk, Donetsk, Kirovograd, Kharkov, Lugansk, Sumy, and Zakarpatye Oblasts and Crimea.

The target customer of the PitStop brand of gas stations is “young in spirit” consumer who likes to drive fast. The PitStop brand offers its

customers high quality, branded gasoline.

The main suppliers to Group companies are Mazeikiu Nafta (Lithuania) and the Kremenchug Oil Refinery (Ukraine). In 2007, the selection of gasoline at Parallel filling stations was expan- ded to include a high-quality premium-class fuel named Perfekt, which was offered in the entire line of gasoline and diesel fuels: Perfekt 92, Perfekt 95, Perfekt 98, and Perfekt Diesel. This fuel is processed jointly by Parallel and interna-tional chemicals giant BASF. The fuel under-went testing by prominent Donbass car dealers, who recommended the new fuel to drivers.

In 2007, the companies invested UAH 24.3 mn in reconstructing filling stations with the change of the Gefest brand to the Parallel brand and the expansion of the range of ser-vices. UAH 6.1 mn went to purchase petrol tank trucks, while UAH 3.3 mn went to reconstruct petroleum storage tanks.

STRATEGIC BUSINESS DEVELOPMENT AREASBy 2012, the company plans to continue ex-panding its presence in Zaporozhye, Kharkov, Dnepropetrovsk, and Lugansk Oblasts and in Crimea, as well as to enter the Kiev Oblast market. During this time, it expects to double its sales for petroleum products and triple the volumes of sales of ancillary products and services.

The rebranding of a part of Gefest gas stations to Parallel will continue, with further development of the chain of mini markets and car washes (20 filling stations in 2008).

In addition, the companies plan to invest in a customer loyalty program and to improve brand perception.



SOCIAL RESPONSIBILITY AND SUSTAINABLE GROWTH

65

SCM GROUP HAS A MAJOR IMPACT ON THE SOCIAL AND ECONOMIC DEVELOPMENT OF UKRAINE AND FULLY RECOG-NIZES ITS OBLIGATIONS TO UKRAINIAN SOCIETY. IMPLEMENTING THE PRINCIPLES OF CORPORATE SOCIAL RESPON-SIBILITY (CSR) IS A CORE ELEMENT OF SCM’S BUSINESS STRATEGY. SCM GROUP MAINTAINS A PHILOSOPHY THAT ALLOWS THE HARMONIOUS INTEGRATION OF BUSINESS WITH BASIC HUMAN VALUES AND NATIONAL DEVELOPMENT PRIORITIES.

SCM FOLLOWS THE HIGHEST STANDARDS AND APPLIES BEST WORLD PRACTICE IN CORPORATE SOCIAL RESPONSI-BILITY, ADAPTED TO MEET UKRAINIAN CONDITIONS. THE GROUP’S CSR ACTIVITIES HAVE LED TO LONG-TERM, STABLE PRACTICAL RESULTS THAT FOSTER THE DEVELOPMENT OF LOCAL COMMUNITIES IN THE REGIONS WHERE SCM IS PRESENT, AS WELL AS THE DEVELOPMENT OF UKRAINIAN SOCIETY AS A WHOLE.

THE COMPANY’S CORPORATE SOCIAL RESPONSIBILITY IS REFLECTED IN SIX KEY AREAS: BUSINESS AND CORPO-RATE ETHICS, WORKING CONDITIONS, THE ENVIRONMENT, LOCAL COMMUNITIES, SOCIAL INVESTMENT, SPONSOR-SHIP, AND CHARITY. EVERY COMPANY AND ORGANIZATION THAT IS PART OF SCM MAKES ITS CONTRIBUTION TO THE GROUP’S MISSION IN TERMS OF CORPORATE SOCIAL RESPONSIBILITY.

THE SIX CSR POLICIES OF THE SCM GROUP

Social responsibility and sustainable growth | The six CSR policies of the SCM Group

Business and corporate ethics

Working conditions

The environment

Sponsorships and charity

6 CSR POLICIES

Social investments

Local communities


16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

In terms of realizing SCM’s policies in corpo-rate social responsibility, the company has been assisted by research and analysis under-taken by the Bureau of Economic and Social Technologies (BEST), and its social investment projects were developed and implemented by the Foundation for the Development of Ukraine.

In 2006, SCM Group joined the United Nations’ Global Compact, the largest global initiative for implementing and promoting CSR. In April 2007, SCM presented its CSR strategy during the first international conference on Corporate Responsibility in Ukraine, organized by the leading Ukrainian business magazine, Expert.

SCM Group invested a total of UAH 224 mn in social development in 2007

INVESTMENT IN THE REGIONS OF PRESENCE CHARITYNATIONAL-LEVEL SOCIAL INVESTMENTSSPONSORSHIP

47%

36%16%

1%

67

16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

BUSINESS AND CORPORATE ETHICS

SCM GROUP RUNS ITS BUSINESSES IN AN OPEN AND TRANSPARENT MANNER, UPHOLDING ALL LEGAL AND NORMA-TIVE STANDARDS. THE COMPANY RECOGNIZES ITS RESPONSIBILITY BEFORE ITS EMPLOYEES, ITS BUSINESS PART-NERS, ITS INVESTORS, UKRAINIAN SOCIETY, AND LOCAL COMMUNITIES FOR ACTIONS RELATED TO ITS BUSINESS ACTIVITIES. SCM GROUP COMMUNICATES OPENLY WITH ALL STAKEHOLDERS ABOUT ITS BUSINESS ACTIVITIES AND OPERATIONS, WHILE RESPECTING THEIR RIGHTS AND POINTS OF VIEW.

SCM RUNS ITS BUSINESSES PROFESSIONALLY TO THE HIGHEST INTERNATIONAL STANDARDS, INVESTING IN PEOPLE AND STIMULATING BOTH INNOVATION AND AN ENTHUSIASTIC APPROACH TOWARDS WORK. ONE OF THE KEY ELE-MENTS OF ITS CONCEPT FOR RAISING THE STANDARDS OF BUSINESS AND CORPORATE ETHICS IS INTRODUCING A TRANSPARENT, OBJECTIVE SYSTEM OF INCENTIVES. SCM HAS A POLICY OF FAIR PAY FOR WORK BASED ON INDIVIDU-AL CONTRIBUTIONS TO THE OVERALL BUSINESS.

KEY EVENTS

In November 2007, SCM became one of the sponsors in Ukraine of the development of ISO 26000, the new international standard of social responsibility, which is in the process of being drafted by the International Standards Organization (ISO) in Geneva. The new stan-dard will become a global template for social responsibility. SCM has provided funding for Ukrainian organizations including business, unions, NGOs, and government agencies to participate in the development of the standard and to raise awareness of the standard, and of CSR in Ukraine.

In 2007, modernizing and automating the production process at Pavlogradugol resulted in staff layoffs. In order to offer them outplace-ment support, the Center of Social Adaptation was founded. Its functions were to teach and assist workers in finding employment, to dis-seminate information about available vacancies at State Employment Centers, at Pavlograd enterprises, and Pavlograd region. In 2007, the center had served 50 individual clients.

The company is developing a system of bonuses for workers on the basis of key performance

indicators (KPIs). This programs has been most successfully introduced at DTEK, where the corporate center switched to rewarding managers, based on these KPIs. In 2007, a pilot version of a KPI-based bonus system was launched at Pavlogradugol.

Since October 2005, a program called “Setting up a fair, transparent and competitive system and policy of incentives” has been operating at Azovstal Steel Plant. The purpose has been to increase the motivation of workers at the plant. The system is based on an evaluation of tasks, according to three criteria: knowledge and skills, the complexity of the job that needs handling, and responsibility. Depending on the evaluation for each job and specialization at the factory, a range of pay is set with an appropriate minimum and maximum wage. With the intro-duction of the new system, the payroll budget has grown 8% and its distribution has become more transparent and effective. In 2007, this method, whose effectiveness has been proven at Azovstal, was introduced at the Northern Ore Mining and Enrichment Plant (SevGOK). As a result, on the average in 2007 wages at SevGOK increased by 20.6% and by 21.3% – at the Cen-tral Ore Mining and Enrichment Plant (CGOK).



16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

WORKING CONDITIONS

SCM LOOKS TO HIRE THE BEST EXPERTISE AND TALENT IN EACH AREA OF ITS BUSINESS. THE GROUP HAS A TOTAL OF NEARLY 160,000 EMPLOYEES WORKING ACROSS ALL OF ITS BUSINESSES. SCM PAYS ALL ITS EMPLOYEES SALARY LEVELS IN ACCORDANCE WITH CURRENT LEGISLATION AND, AS A MINIMUM, MEETS LEGAL REQUIREMENTS ON SO-CIAL GUARANTEES TO EMPLOYEES. ALTOGETHER, SALARIES AT THE GROUP’S ENTERPRISES ARE HIGHER THAN THE AVERAGE IN EACH OF THE SECTORS WHERE SCM DOES BUSINESS.

Average salary level comparison of those at SCM Group enterprises and industry average

1 – Other industries2 – Machinery and equipment production3 – Electric energy, gas, and water generation and distribution4 – Natural resources mining, (excluding fuel & energy)5 – Steel and rolled metal6 – Coal mining7 – Finance

Industries *

Sala

ry, U

AH

* Industries are classified, in accordance with Ukrainian State Statistics Bureau

AVERAGE BY INDUSTRYAVERAGE AT SCM GROUP

69

16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

The Group is committed to improving health and safety in the workplace and to lowering industrial injuries and occupational illnesses, as well as to having the necessary staff levels. SCM’s industrial businesses work to the best world practice, following the OHSAS 18001 series of international standards on health and safety. Total investment of SCM Group compa-nies in improving employee health and safety in 2007 was UAH 286.4 mn, of which Metinvest Holding contributed UAH 209.9 mn and DTEK UAH 76.5 mn.

SCM respects the right of its employees to establish a professional union and other as-sociations to represent their interests. SCM provides equal opportunities for all employees and invests in the professional development and learning of its employees to allow each individual the opportunity to realize their full potential. By doing so, SCM helps promote a positive, results orientated corporate culture.

KEY EVENTS

Pavlogradugol has instituted the practice of daily briefings for miners before they go on shift and has improved the quality of investiga-tions into accidents that have taken place. Prior to the start of a shift, the workers undergo video instructions and safety briefings in dedicated briefing rooms fitted out with audio visual equipment. In 2007, 10 videos were shot in-house on the subject of on-the-job safety and security. In 2008, a professional studio will be engaged to prepare videos on work safety issues and these videos will become the intel-lectual property of Pavlogradugol.

Previously, Avdeyevka Coal and Chemical Plant (AKHZ) medical team was provided by the local hospital and consisted of emergency medical assistants and two GPs based at the plant. To-day, the plant has its own medical department

with 20 highly qualified doctors and 42 medical assistants. The medical section is equipped with modern diagnostic technology, a clinical laboratory, a day ward, a 24-hour emergency department, a rehabilitation department, an ultrasound room, functional diagnostics, a massage room, and a room for internal exami-nations. Last year, 2,712 individuals underwent preventive or regular examinations. In 2007, the company invested UAH 800,000 in new medical equipment.

286,4TOTAL INVESTMENT OF SCM GROUP COMPANIES IN IMPROVING EMPLOYEE HEALTH AND SAFETY

UAHMN



16,47%

60,68%

9,69%

6,78%

5.96%

0,26%0,16%

2004

coef

ficie

nt

0.000.200.400.600.801.001.201.401.60

2005 2006 2007

0.931.06

1.241.43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33,4%

19,5%

18,4%

13,7%

10,6%

4,1%0,3%

Industrial injury coefficient dynamics for SCM Group main businesses, 2004-2007

In September 2007, Metinvest Holding gained the status of an Accredited ACCA Employer. Metinvest was the only Ukrainian company to be certified for “Professional Development” and “Continuous Education” during the year by the organization. ACCA accreditation provides international recognition of the effectiveness of training and the development on finance and accounting in accordance with highest interna-tional qualification standards.

Pavlogradugol has a training and accreditation center (NKK) in Ternovka, as well as 10 training points located at its mines. In 2007, the center trained 1,697 people in different specializations. Without interrupting their production work, 5,272 individuals improved their qualifications while 5,837 underwent entry-level training.

71

16,47%

60,68%

9,69%

6,78%

5.96%

0,26%0,16%

2004

coef

ficie

nt

0.000.200.400.600.801.001.201.401.60

2005 2006 2007

0.931.06

1.241.43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33,4%

19,5%

18,4%

13,7%

10,6%

4,1%0,3%

THE ENVIRONMENT

SCM SEES ENVIRONMENTAL SUSTAINABILITY AS AN ESSENTIAL ELEMENT OF BUSINESS STRATEGY. THE GROUP MEETS ALL LEGAL REQUIREMENTS IN TERMS OF PROTECTING THE ENVIRONMENT AND CONSTANTLY STRIVES TO DELIVER PERFORMANCE ON ENVIRONMENTAL INDICATORS THAT EXCEED THE ESTABLISHED NORMS.

1SCM GROUP INVESTED IN ENVIRONMENTAL PROTECTION MEASURES

UAH BN


SCM supports the introduction of interna-tional environmental standards in Ukraine. For instance, DTEK’s TESs meet European clean air standards, which limit dust emissions to the at-mosphere to no more than 50mg/m3. The Group is actively working on evaluating, tracking and managing possible risks to the environment and to local communities, which could result from production processes.

SCM is introducing new technologies and pro-cesses that have a positive impact on the local environment and public health. The company also plans to reduce energy consumption and use more energy-efficient technologies. Group companies continually analyze their CO2 emis-sions and those of other greenhouse gases, in order to effectively manage and reduce them. When implementing new investment projects, SCM introduces efficient and environmentally friendly technologies.

SCM actively cooperates with community organizations, governments and local com-munities, in order to address environmental concerns, and also takes stakeholder opinions into account when reaching its own decisions. SCM Group management actively encourages employees to protect the environment and biodiversity.

Environmental issues are of primary impor-tance to the Group’s manufacturing enter-prises. Management of environmental issues

is based on best world practice on meeting the ISO 14000 environmental standards. In accordance with ISO 14001 requirements, Metinvest Holding has instituted and certified environmental management systems at all six of its companies in the Ore Mining Division and also at the Khartsyzsk Pipe Plant (KHTZ). Other companies in the Holding are currently undergoing preparations to implement these standards.

At DTEK, elements of the ISO 14001 system have also been instituted and all companies are expected to receive ISO certification by the end of 2010.

SCM Group invested a total of over UAH 1 bn in environmental protection measures at its industrial enterprises during 2007, of which nearly UAH 920 mn was invested by Metinvest Holding and nearly UAH 90 mn by DTEK.


16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

sum used to install new gas particle filtering equipment. Implementing the moderniza-tion program and its stringent environmental protection measures will make it possible to reduce the release of harmful emissions into the atmosphere by 25.1%, while at the same time increasing output by 26.5%.

A major program was undertaken at the Azovstal Steel Plant in 2007 to introduce energy-saving technologies. A range of mea-sures was taken to improve the operation of equipment that uses significant amounts of energy, for example, the systems for heating metallurgical and electrical equipment. This allowed savings of 11.8 mn kWh of electricity over the year, worth UAH 10 mn, and 15 mn cubic meters of natural gas, worth UAH 8 mn to be made.

In 2007, a production line to recycle polymer wastes was installed at the Khartsyzsk Pipe Plant (KHTZ). The new, modern line makes it possible to produce polyethylene granules from the wastes created during the process of apply-ing an anti-corrosion coating to large diameter pipes. Average monthly polyethylene wastes was 25-30 tonnes, and prior to the launch of the new production line, the disposal of this waste posed considerable problems. Total investment was around UAH 1.1 mn.

KEY EVENTS

In October 2007, deputies from the City Council of Yenakiyevo unanimously approved a draft development program for the Yenakiyevo Steel Plant (YeMZ), in compliance with environmental requirements for 2007–2015. The draft contains two main parts: radical modernization of pro-duction equipment, including the installation of modern, environmentally friendly technologies, and the most efficient treatment and disposal of production wastes.

Companies in the coal mining sector of DTEK have developed and now are implementing a comprehensive plan to utilize the multi-tonne wastes from coal extraction to reclaim land which was flooded or suffered from subsidence. The reclaimed area in 2007 amounted to 13.8 hectares. Metinvest Holding is also reclaiming land which was previously used for industrial purposes. Northern and Central Ore Mining and Enrichment Plants (SevGOK and CGOK) formed a partnership with the Krivoy Rog Botanical Gardens to institute a long-term program of biological reclamation of iron ore waste spoils and disused quarries. In 2007, over 4,000 seed-lings were planted under the program.

At the Komsomolets Donbassa Mine, work has begun to utilize coal bed methane gas. Methane extracted from the mine will be used to fuel the heating system at the mine during the winter heating season, while during the warm season the excess gas will be flared. Flaring methane and using it to fuel the mine’s heating system will make it possible to reduce emissions by 16,500 tonnes per annum. Altogether, DTEK hopes to reduce its greenhouse gas emissions by 2.7% or about 600,000 tonnes, compared to 2006.

In 2007, Metinvest Holding approved a develop-ment concept for its Azovstal Steel Plant. For the period 2008–2020, over $5 bn is expected to be invested in modernizing production, of which $970 mn will be directed at investment projects that reduce the negative impact of produc-tion on the environment, with - $117 mn of the

5IS EXPECTED TO BE INVESTED IN MODERNIZING PRODUCTION

$BN

1,1TOTAL INVESTMENT WAS AROUND

UAH MN

73

16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

LOCAL COMMUNITIES

MANY COMPANIES AT SCM GROUP ARE THE LEADING EMPLOYERS IN THE CITY OR TOWN WHERE THEY ARE BASED AND SO PLAY A MAJOR ROLE IN THE LIVES OF LOCAL COMMUNITIES. SCM IS CONCERNED ABOUT THE ENVIRONMENT IN WHICH ITS EMPLOYEES LIVE AND WORK, AND GROUP COMPANIES PLAY AN ACTIVE PART IN TACKLING THE SOCIO-ECONOMIC PROBLEMS IN THE AREAS WHERE THEY ARE LOCATED. THEY DO THIS BY INVESTING IN THE DEVELOP-MENT OF LOCAL INFRASTRUCTURE, AND BY SUPPORTING LEISURE, HEALTH, AND EDUCATION FACILITIES. TO HELP IMPROVE THE QUALITY OF LIFE OF LOCAL RESIDENTS, SCM WORKS IN PARTNERSHIP WITH ALL INTEREST GROUPS AND WITH LOCAL GOVERNMENT TO IMPLEMENT PROJECTS. THROUGH JOINT EFFORTS, THEY PUT TOGETHER A CON-SENSUAL STRATEGY AND A PLAN WHICH FOCUSES ON DELIVERING SUSTAINABLE RESULTS AND REAL CHANGES. AT THE SAME TIME, THE COMPANY’S ENTERPRISES WELCOME AND SUPPORT THE DESIRE OF THEIR EMPLOYEES TO PARTICIPATE IN THE WORK OF LOCAL GOVERNMENT BODIES.

Distribution of SCM Group investments in the regions of its presence, 2007

60.68%16.47%

9.69%6.78%5.96%0.26%0.16%

INFRASTRUCTURE CULTURE AND SPORTLOCAL COMMUNITIESHEALTHCAREEDUCATIONCHILDREN’S HOMESOTHER



16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

Investments by Group companies in the development of the regions where they are located in 2007 added up to UAH 103 mn.

KEY EVENTSIn December 2007, DTEK and USAID signed a Memorandum on Cooperation. According to this document, under the “Economic Development of Cities” project, DTEK and USAID agreed to provide expertise and consultative support to City Councils where Group enterprises are located, namely Zugres, Kirovskoe, Kurakhovo, Pavlograd, Pershotravensk, Shchastye, and Ternovka. The purpose of the program is to cre-ate strategic economic development plans at the local level, to develop the potential of local government bodies, and to improve the local investment climate.

In September 2007, Krasnodonugol trans-ferred the first tranche of UAH 650,000 under a Social Partnership Agreement signed with the Krasnodon City Council. This funding was to be used to prepare community properties and the City Council for the winter heating season. The city used this money to acquire equipment and materials, including boiler equipment, piping, electric motors, pumps, heating radiators, cor-rugated metal, plaster, bricks and so on, for the Teplo and Karsnodonteploenergo communal enterprises, the residential services bureaus, and the City Department of Education.

DTEK’s most significant and large-scale social project in 2007 was the modernization and reconstruction of the boilers and heating networks in the cities of Ternovka and Per-shotravensk in Dnepropetrovsk Oblast, where the Pavlogradugol mines are located. UAH 30

mn was given to implement this project, and after its completion, the heating facilities were turned over to communal ownership.

At the beginning of 2007, an agreement on socio-economic cooperation was signed between the Azovstal Steel Plant and Mari-upol City Council. Azovstal committed itself to provide organizational, financial and mate-rial assistance for municipal social programs intended to improve elementary, secondary and post-graduate educational institutions, and to foster the improvement of the city’s social facilities and the development of municipal infrastructure.

Dokychayevsk Flux and Dolomite Plant (DFDK) organized a recreational area in Dokuchayevsk. Just 10 years ago, the location had been an abandoned children’s camp that slowly turned into a city dump. DFDK employees cleaned up the territory, planted trees and bushes, built walkways, put up a conservatory and a mini zoo, and also built a children’s railway. Every year, the company’s workers continue to im-prove the park area, which has become a real asset for the city. In 2007, the plant spent over UAH 1 mn to maintain and develop this recre-ation area.

30

1

TO IMPLEMENT THE LOCAL BOILER-ROOMS AND HEATING SYSTEMS MODERNIZATION AND RECONSTRUCTION PROJECT, PAVLOGRADUGOL ALLOCATED OVER

SPENT TO MAINTAIN AND DEVELOP THE RECREATION AREA

UAHMN

UAHMN

75

16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

SOCIAL INVESTMENT

SCM HAS VOLUNTARILY TAKEN ON THE MISSION OF DIRECTING BOTH MATERIAL AND NON-MATERIAL RESOURCES TO IMPLEMENT SOCIAL PROGRAMS AT THE NATIONAL LEVEL, WHICH SUPPORT THE SUSTAINABLE GROWTH AND DEVE-LOPMENT OF UKRAINIAN SOCIETY. THE SOLE PURPOSE OF THE COMPANY’S SOCIAL INVESTMENTS IS TO IMPROVE THE QUALITY OF LIFE OF ORDINARY UKRAINIANS. AT THE HEART OF SCM GROUP’S STRATEGY TO HELP UKRAINE SWITCH FROM SOVIET-STYLE PATERNALISTIC SOCIAL POLICIES TO STRUCTURED SOCIAL INVESTMENTS IN IMPROV-ING THE LIFE OF THE SOCIETY THAT SCM IS PART OF.

KEY EVENTS

In 2007, the Bureau for Economic and Social Technologies (BEST) prepared a number of reports including two quarterly publications, “Ukraine: An Economic Perspective” and “So-cial Monitoring In Ukraine,” a monthly review of the economy and politics called “Trends and Comments”, and a 10-year macroeconomic forecast for Ukraine and analytical review titled “Ukraine’s Investment Climate”.

SCM sponsored events dedicated to Europe Day in Ukraine in 2007. This special day promotes closer ties between Ukraine and the European Union and assists in a better understanding of Ukraine’s role as a European nation.

SCM became a partner of PRESSzvaniye 2007 and sponsored the Business Competition for journalists working for Ukraine’s business and general media. The event promotes high stan-dards in Ukrainian media.

In June 2007, the Foundation for the Develop-ment of Ukraine’s “Stop Tuberculosis” cam-paign was launched. The project covers three main areas: devising and introducing mecha-nisms to overcome the tuberculosis epidemic in Ukraine; developing and introducing an effective system to combat tuberculosis in Donetsk Oblast; and running a relevant public awareness campaign. Plans are to complete the campaign in May 2012.

In May 2007, the Foundation for the Develop-ment of Ukraine, together with the independent Ukrainian news and information agency UNIAN, launched a project called UNIAN–Health, which is a regular bulletin on healthcare issues. The on-line (http://health.unian.net/) publication’s sections cover world, national and regional medical news, statistical data, results of stud-ies, thematic features, useful information, re- ferences and advice, as well as event an-nouncements. Total investment into the project in 2007 was UAH 177,000.

177THE TOTAL VOLUME OF INVESTMENT, ALLOCATED TO IMPLE-MENT THE UNIAN-HEALTH PROJECT IN 2007, AMOUNTED TO

000UAH



16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

In November 2007, the Foundation for the Development of Ukraine funded the opening of the most up-to-date “digital journalism” studio in Ukraine at the National University of Kiev-Mohyla Academy (NaUKMA). The university is also a partner in the project. Total investment in this project in 2007 was UAH 2 mn.

Over 14 years, First Ukrainian International Bank has been a partner to the famous Ukrai-nian ballet festival, Ballet Stars of the World. Every year, the bank also sponsors an inter-national competition for young pianists in the birthplace of Sergei Prokofyev in the village of Krasnoe, Donetsk Oblast.

One of SCM Group’s largest-scale social projects in 2007 was the opening of a campus of the Junior League Football Academy of Shakhtar FC in Yenakiyevo. More than 100 boys from Yenakiyevo and neighboring towns were able to play football at a renovated stadium, visit professional training sessions, and learn the principles of a healthy lifestyle. Total invest-ment in this project was $1 mn.2

THE TOTAL INVESTMENT VOLUME, ALLOCAT-ED TO CREATE UKRAINE’S MOST MODERN “DIGITAL JOURNALISM” STUDIO IN 2007, AMOUNTED TO

UAHMN

1THE TOTAL INVESTMENT IN CREATING A CAMPUS OF THE JUNIOR LEAGUE FOOTBALL ACADEMY OF SHAKHTAR FC AMOUNTED TO

UAHMN

77

16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

SPONSORSHIPS AND CHARITY WORK

SCM PROVIDES FUNDS FOR SPONSORSHIPS AND CHARITY PROGRAMS THAT ADDRESS THREE KEY AREAS: EDUCA-TION, HEALTHCARE, AND CULTURE. AS A RESPONSIBLE CORPORATE CITIZEN, SCM GROUP ALSO ALLOCATES FUNDS TO SPONSORSHIP AND CHARITABLE PROGRAMS, CONTRIBUTING TO THE SOLUTION OF SOCIAL PROBLEMS. OUR DONATIONS ARE SERIOUS CONTRIBUTIONS TO SOCIAL PROJECTS AND CAMPAIGNS, AIMED AT HELPING TO DELIVER FINANCIAL RESOURCES TO CHARITABLE ORGANIZATIONS, WHICH SUPPORT COMMUNITIES AND PEOPLE IN NEED.

SCM ALSO PROVIDES TARGETED ASSISTANCE TO HELP PEOPLE WHO HAVE FOUND THEMSELVES IN DIFFICULT CIRCUMSTANCES AND FUNDS THE ACTIVITIES OF CHARITABLE ORGANIZATIONS. IN 2007, THE COMPANY AND THE GROUP ENTERPRISES DIRECTED NEARLY UAH 82 MN TO CHARITY ACTIVITIES.

SCM DOES NOT SPONSOR OR PROVIDE FUNDS FOR POLITICAL PARTIES, IN-DIVIDUAL POLITICIANS, OR POLITICAL EVENTS. SCM GROUP DOES NOT PROVIDE SPONSORSHIP FUNDING TO INSTI-TUTIONS, EVENTS OR CAMPAIGNS THAT SUPPORT A PARTICULAR RELIGION, OR TO ORGANIZATIONS WHOSE GOALS ARE PURELY COMMERCIAL IN NATURE, AND WHO EXPECT TO GAIN BENEFIT FROM SCM’S SUPPORT AS A SPONSOR.

SCM Group sponsorship funds allocation, 2007 (SCM Group com-panies contributed sponsorship funding worth UAH 3 mn)

82DIRECTED NEARLY UAH 82 MN INTO CHARITY ACTIVITIES

UAH MN

33.4%

19.5%

18.4%13.7%

10.6%

4.1%

0.3%

CULTURE AND ARTSCONFERENCES, SEMINARS SPORTBROAD-BASED NON-PROFIT ORGANIZATIONSISSUE-BASED NON-PROFIT ORGANIZATIONS INTERNATIONAL ORGANIZATIONSACADEMIC INSTITUTIONS



16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

MAIN AREAS OF ACTIVITY

Devising monitoring products, analyzing the •dynamic of the country’s socio-economic development at macro- and microeconomic levels, including regional and sectoral aspects.

Undertaking both theoretical and empirical •studies on the issues of socio-economic policy.

Providing consulting services (developing •consultative products on issues of socio-economic policy, corporate governance, and corporate social responsibility).

BEST IS AN INFORMATION ANALYSIS CENTER SPECIALIZING IN RESEARCH AND CONSULTING ON SOCIAL AND ECO-NOMIC POLICY ISSUES. THE CENTER’S OBJECTIVE IS TO FOSTER THE DEVELOPMENT OF A MARKET ECONOMY IN UKRAINE AND TO ENCOURAGE STABLE ECONOMIC GROWTH. BEST IS AN EXPERT PLATFORM FOR HOLDING PUBLIC DEBATE ON SOCIO-ECONOMIC POLICY ISSUES AND FOR ARRANGING DIALOG BETWEEN GOVERNMENT AND BUSI-NESS. BEST’S KEY RESEARCH AREAS INCLUDE: DETERMINING MACROECONOMIC POLICY, STRUCTURAL REFORMS, SOCIAL POLICY, AND THE DEVELOPMENT OF DEMOCRATIC INSTITUTIONS.

BEST INFORMATION ANALYSIS CENTER

79

16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

The football club has a well-developed athletic infrastructure that includes, among others, a modern training base that was originally opened in 1990 and a football academy. In 2006, the construction of a new 50,000-seat home stadium, named the Donbass Arena, was launched. It will be the first stadium in Eastern Europe to be designed and built to UEFA’s 5-star standard.

FC SHAKHTAR (DONETSK) HAS A 70-YEAR HISTORY OF ACHIEVEMENT AND HAS SKILLS AND PROFESSIONALISM OF ITS FOOTBALL PLAYERS AND TRAINERS, THEIR TEAMWORK AND FIGHTING SPIRIT TO THANK FOR ITS SPOR- TING SUCCESSES. SCM AND FC SHAKHTAR ARE TWIN LEADERS WHOSE COOPERATION IS DIRECTED AT DEVELOPING UKRAINIAN FOOTBALL AS A WHOLE. SHAKHTAR HAS A TRACK RECORD OF SUCCESS, HAVING WON THE UKRAINIAN CHAMPIONSHIPS (2002, 2005, 2006), THE UKRAINE CUP (1995, 1997, 2001, 2002, 2004), AND THE UKRAINE SUPER CUP (2005). THE CLUB’S BUDGET FOR THE 2006/7 SEASON WAS $73.5 MN. BOTH IN UKRAINE AND ABROAD, THERE ARE MORE THAN 90 ACTIVE FC SHAKHTAR FAN CLUBS OFFICIALLY REGISTERED.

SHAKHTAR FOOTBALL CLUB

Social responsibility and sustainable growth | BEST, FC Shakhtar


16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

to cooperate with the government in pre-•serving the national culture and strengthening traditions, while supporting innovative projects which develop contemporary Ukrainian culture.

The Foundation for the Development of Ukraine considers it extremely important to respond immediately and effectively to critical health is-sues facing the Ukrainian nation: the spread of tuberculosis and the high level of illness among children. In 2007, the Fund’s three main areas of activities were the projects “Stop Tubercu-losis”, “Children’s Hospital of the Future”, and assistance to victims of natural disasters.

Key Foundation for the Development of Ukraine charity programs for 2007, mn UAH

The Fund’s objectives are:

to help the most active, talented and educa- •ted young people, who are the most promising resource in Ukraine’s society, to realize their potential; to devise ways to support the best educators in the school system;

to introduce and support cutting-edge me- •thods and technologies; to support institutional change in the healthcare system; to shape a responsible attitude towards their own health among the Ukrainian citizens;

All program events

Modern Education Program

The Health of the Nation Program, including:

Stop Tuberculosis

The Children’s Hospital of the Future

The Cultural Heritage Program

Targeted Assistance, including:

victims of natural disasters

60.8

3.0

30.6

5.4

21.7

2.6

24.6

22.3

THE KEY CHANNEL FOR THE GROUP’S SOCIAL INVESTMENT AND CHARITABLE ACTIVITIES IS THE FOUNDATION FOR THE DEVELOPMENT OF UKRAINE, A CHARITABLE FOUNDATION.

THE FOUNDATION FOR THE DEVELOPMENT OF UKRAINE IS A NON-PROFIT ORGANIZATION FOUNDED JOINTLY BY SCM AND SHAKHTAR FC IN 2005. THE FUND’S MISSION IS TO SUPPORT THE SUCCESSFUL AND SUSTAINABLE DEVELOP-MENT OF UKRAINIAN SOCIETY BY INVESTING IN THE EDUCATION OF FUTURE GENERATIONS, PROMOTING PUBLIC HEALTH, AS WELL AS PRESERVING AND DEVELOPING UKRAINIAN CULTURE. THE FUND UNDERTAKES ITS OWN PRO- JECTS, PARTICIPATES IN FUNDING THE PROGRAMS OF OTHER CHARITABLE ORGANIZATIONS, AND PROVIDES SUP-PORT FOR COMMUNITY INITIATIVES. THE FOUNDATION FOR THE DEVELOPMENT OF UKRAINE’S ACTIVITIES ARE CAR-RIED OUT, FOLLOWING THE PRINCIPLES OF TRANSPARENCY AND OPENNESS.

FOUNDATION FOR THE DEVELOPMENT OF UKRAINE

81

16.47%

60.68%

9.69%

6.78%

5.96%

0.26%0.16%

2004

коеф

іцієнт

0,000,200,400,600,801,001,201,401,60

2005 2006 2007

0,931,06

1,241,43

10

1000

1500

2000

2500

3000

3500

2 3 4 5 76

500

47%

36%

16%

1%

33.4%

19.5%

18.4%

13,7%

10.6%

4.1%0.3%

Social responsibility and sustainable growth | Foundation for the development of Ukraine

The project “Stop Tuberculosis” was launched in June 2007. A comprehensive program for countering the TB epidemic was developed jointly with several partners, including: the World Health Organization (WHO), the Donetsk Oblast Administration, Ukrainian media, and others. Donetsk Oblast was chosen to be the project pilot area.

In six months, the project managed two main achievements:

a 1.3% reduction in mortality. A decline •in mortality was observed in 22 of Donetsk Oblast’s 40 territorial units;

a 3.2% reduction in new cases of infection. •New cases fell in 11 out of 21 cities and 9 out of 19 counties in Donetsk Oblast.

Nor did the Foundation for the Development of Ukraine stand aside during two disasters in 2007 - the destruction of an apartment building in Dnepropetrovsk by a gas explosion and a major accident at Zasyadko mine in Donetsk. Victims and the families of those who died were provided assistance worth more than UAH 23 mn.

KEY EVENTS

After an explosion destroyed an apartment building in Dnepropetrovsk in October 2007, the Foundation for the Development of Ukraine di-rected UAH 11.7 mn to provide comprehensive assistance to the families of the dead and those injured or affected by the blast. The Fund also responded to the tragedy at the Zasyadko mine at the end of 2007, providing UAH 10.6 mn. In December 2007, Foundation for the Develop-ment of Ukraine also supported an initiative by the President of Ukraine and provided UAH 15 mn for the program “Support to Large Families.”

15

3,3

FOR THE PROGRAM “SUPPORT TO LARGE FAMILIES”

INTENSIVE CARE UNIT AT THE OBLAST CHILDREN’S HOSPITAL

UAHMN

UAHMN

In 2007, the Foundation for the Development of Ukraine funded capital works at the Inten-sive Care Unit at the Oblast Children’s Hospital and Clinic in the city of Donetsk. The unit was equipped to the most up-to-date European medical standards. Under the educational provisions of the project, physicians in the unit were given additional training and skills. Total investment for this project in 2007 was UAH 3.3 mn.

In 2007, the ongoing program “From Azovstal to Our Kids,” in which the plant regularly provides assistance to boarding schools, the municipal child rehabilitation center and orphanages, continued. Altogether, Azovstal Steel Plant directed UAH 80,000 to charitable events for children and underprivileged families.

Over the last 11 years, First Ukrainian Inter-national Bank has been supporting the Nadia (Hope) Pediatric Cancer Center in Donetsk. The bank equipped the therapy unit and is upgra- ding the computer equipment and software at the Center, which will make it possible to pro-vide more timely and accurate analysis results. The bank helps the Center resolve day-to-day issues, regularly provides funding to supply the Center with medication, and organizes charity drives to collect items for children who are suf-fering from leukemia.


KEY DIRECTIONS: STRATEGIC GROWTH AREAS FOR 2008-2012

83

KEY DIRECTIONS

SCM Group intends not only to remain the leader in the Ukrainian market, but also to strengthen its position on international markets. To reach this goal, the Group needs a realistic and balanced growth strategy. SCM has determined seven main areas of strategic

growth for the next five years. The inter-related nature of these areas and their focus on results and sustainable growth are guarantees that the Group will be transformed into a leading world-class managing company.

1. IMPROVING THE GOVERNANCE OF THE LARGEST SECTORAL HOLDINGS, METINVEST HOLDING AND DTEK

BASED ON THE SIZE OF THEIR ASSETS, METINVEST HOLDING AND DTEK ARE THE KEY COMPONENTS OF THE SCM GROUP TODAY. NOTABLY, ON BOTH THE UKRAINIAN AND WORLD MARKETS, AND IN EACH INDUSTRIAL SECTOR, GENERALLY THE MOST POWERFUL PLAYERS ARE ACTIVE, AND COMPETITION IS TENSE. THE WINNER IN THIS COM-PETITIVE BATTLE WILL BE THE COMPANY THAT IS ABLE TO ENSURE THE HIGHEST LEVEL OF EFFICIENCY IN THE OPERATIONS OF ITS ASSETS AND TO ACHIEVE A HIGH LEVEL OF SYNERGY AMONG THEM. SCM GROUP INTENDS TO PRIORITIZE THE INTEGRATION OF THE RELEVANT ASSETS, BOTH INTERNALLY AND EXTERNALLY, TO IMPROVE COR-PORATE GOVERNANCE, AND TO REACH THE HIGHEST MANAGEMENT STANDARDS IN EACH LINK OF THE CHAIN, FROM THE PRODUCTION PROCESS TO THE BOARD.

2. INVESTING IN SECTORS THAT ARE ATTRACTIVE FROM THE POINT OF VIEW OF PROFIT-ABILITY AND LONG-TERM GROWTH. DEVELOPING WORKING SKILLS IN THESE SECTORS.

THE GROUP PAYS CONSIDERABLE ATTENTION TO SUCH SECTORS AS TELECOM, FINANCIAL SERVICES, MEDIA, AND REAL ESTATE. THE GROUP IS SETTING UP SECTOR-BASED HOLDING COMPANIES TO ENSURE A HIGH QUALITY OF ASSET MANAGEMENT. THE GROUP HAS SET ITSELF A TARGET RATIO BETWEEN THE CORE HEAVY INDUSTRY (MINING, METALS, AND ENERGY) AND ALTERNATIVE AREAS IN ITS ASSET PORTFOLIO OF 70:30, RESPECTIVELY. THE CURRENT, RATIO IS AROUND 85:15.

Strategic growth areas for 2008-2012


3. THE STRUCTURING OF PORTFOLIO ASSETS UNDER MANAGEMENT

THE GROUP IS CURRENTLY IN THE PROCESS OF STRUCTURING ITS ASSETS. OVER 2007 (TO BE CONTINUED IN 2008), IN THE COURSE OF REVIEWING ITS INVESTMENT PORTFOLIO, THE GROUP HAS DECIDED TO OPTIMIZE THE STRUC-TURE OF ITS ASSETS. FOR INSTANCE, SCM EXITED THE BAKED GOODS AND BREWING BUSINESS, AS THOSE ENTER-PRISES DID NOT FIT SCM GROUP’S PROFILE, WHILE THEIR WEAK LINKS TO OTHER ASSETS MADE IT DIFFICULT TO FIND SYNERGISTIC VALUE. TODAY, ONE FOCUS FOR RESTRUCTURING IS THE GROUP’S MACHINE BUILDING ENTER-PRISES. SCM GROUP NOW HAS A STAKE IN A NUMBER OF MACHINE-BUILDING ASSETS AND IS FORMING A BUSINESS STRATEGY FOR THESE INVESTMENTS.

4. ENTERING NEW, ATTRACTIVE SECTORS

AS A WORLD-CLASS MANAGEMENT COMPANY, SCM GROUP IS LOOKING FOR NEW OPPORTUNITIES TO INVEST. SPECIFICALLY, IT OPENED THE FIRST RETAIL STORES IN A MARKET SEGMENT THAT IS PROMISING FOR UKRAINE, THE “NEIGHBORHOOD STORE” OR CONVENIENCE FORMAT. THE SEARCH FOR NEW, ATTRACTIVE SECTORS TO ENTER THAT OFFER ACCESS TO CORE MARKETS WILL HAVE A POSITIVE IMPACT ON THE GROUP’S STABLE GROWTH AND THE DIVERSIFICATION OF ITS ASSETS.

5. BECOMING MORE ACTIVE ON DEBT CAPITAL MARKETS

THE GROUP’S AMBITIOUS INVESTMENT PLANS REQUIRE FINANCIAL SUPPORT. THIS HAS SPURRED THE GROUP TO MAKE SURE THAT ITS SECTOR-BASED HOLDINGS ARE GIVEN CREDIT RATINGS AND CAN BORROW CAPITAL AT THE MOST FAVORABLE RATES. HOWEVER, IN ITS EXTERNAL BORROWING POLICY, SCM CONTINUES TO TAKE THE CONSER-VATIVE APPROACH. SCM GROUP IS AIMED AT MAINTAINING A HIGH LIQUIDITY LEVEL AND A RELATIVELY SMALL SHARE OF EXTERNAL BORROWING IN ITS CAPITAL STRUCTURE.

85

6. FORMING PROFESSIONAL MANAGEMENT TEAMS

IN THE PROCESS OF ENSURING THE MOST EFFECTIVE MANAGEMENT OF THE GROUP’S ASSETS, THE KEY ROLE IS PLAYED BY HUMAN CAPITAL. SCM WILL CONTINUE THE DEVELOPMENT OF PROFESSIONAL MANAGEMENT TEAMS FOR ALL ITS BUSINESS AREAS BY ATTRACTING TOP SPECIALISTS AND HIRING THE MOST TALENTED INDIVIDUALS.

7. OFFERING A HIGH STANDARD OF CORPORATE SOCIAL RESPONSIBILITY (CSR)

SCM IS CONVINCED THAT THE COMPANY’S SUSTAINABILITY LIES IN MAXIMIZING BENEFITS FOR NOT ONLY ITS OWN SHAREHOLDERS, BUT ALSO FOR A BROADER CIRCLE OF STAKEHOLDERS. FOR THIS REASON, THE COMPANY INTENDS TO CONTINUE TO DEVELOP ITS CORPORATE SOCIAL RESPONSIBILITY POLICY IN LINE WITH INTERNATIONAL STAN-DARDS. KEY PRIORITIES FOR THE GROUP IN THIS AREA ARE: ENVIRONMENTAL PROGRAMS IN REGIONS WHERE THE COMPANY HAS A PRESENCE, HEALTH AND SAFETY, AND THE DEVELOPMENT OF LOCAL COMMUNITIES.

Strategic growth areas for 2008-2012


KEY EXPECTED EVENTS FOR 2008

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JANUARYThe process of forming the Group’s publishing holding has begun. Its management will be handled by Segodnya Multimedia, in which SCM controls 100% of the statutory capital. At the first stage of developing this publishing holding, SCM transferred to Segodnya Multimedia the rights to own and manage the corporate rights to a range of the Group’s print assets.

A new quality program content development concept was launched in 2008 at the TRK Ukraine Television Channel. This concept fully corresponds to the channel’s aggressive strategy and its ambitions to implement a wide variety of projects. Social issues are discussed at an investigative show called Critical Point. Viewers also saw an updated version of the channel’s debate show, Duel, whose presenter is now prominent Ukrainian journalist Serhiy Rakhmanin. New entertainment show formats have also been produced including: TV Star - Superstar, What’s That Tune? and the Verka Serdiuchka Show.

Metinvest Holding received the green light from the EU anti-monopoly bodies to acquire controlling stakes in steel companies in Italy (Trametal) and Great Britain (Spartan UK).

MARCHSCM Group launched sectoral holding, ESTA, formerly SCM Estate, which will manage the Group’s real estate investments.

SCM Group obtained the go-ahead from the Anti-Monopoly Committee to acquire more than 50% ownership stake in TsOS an Odessa-based telecommunications company. In 2008, this asset will be integrated into SCM’s existing fixed-line telecommunications business sector.

APRILIn April, a free newspaper called Vecherkom (part of Segodnya Multimedia publishing holding) came out in Kiev in a handy, innovative evening format.

REAL TIME PROGRESS: KEY EVENTS IN 2008

Key expected events for 2008


MAYDTEK signed an agreement to acquire the company’s first internationally syndicated loan, worth $150 mn. The money was lent at an annual rate of LIBOR+3% for a 24-month term, with an option to extend for another 12 months.

Segodnya Multimedia publishing holding began a range of new projects. For instance, residents of Kharkiv and Donetsk began to read a localized edition of the national paper Segodnya, which clearlyresponds to reader requests and interests.

JUNEFirst Ukrainian International Bank raised a syndicated loan worth $50 mn. The organizers of the loan were VTB Bank Europe, GarantiBank International, and ING Bank. Interest on the 12-month loan was set at LIBOR+1.85%.

JULYSCM exited as a shareholder from Sarmat Group. Control of the brewer was transferred from SCM Group to a new owner, SABMiller, which is one of the leading international brewers. The Group sold its brewing assets for an excellent price, just as the value of Ukrainian assets peaked, prior to the downturn on stock markets. Also, within the framework of the brewing business exit strategy, SCM Group sold Krym Brewery in 2008.

SCM Group also exited as a shareholder from Slavtyazhmash. The investment in this asset was a good portfolio match, but not strategic. The company had never been part of SCM Group, which held only a mi-nority stake and could therefore not have any serious influence on the company’s commercial operations. For that reason, the Group decided to exit from this asset.

Incor & Co, a development and production union, joined the Coal and Coking Division of Metinvest Holding. This addition was part of the vertical integration strategy, designed to ensure much deeper processing of coke and chemical materials, in order to manufacture more competitive products with higher added value.

DTEK completed the procedures for issuing domestic bonds worth UAH 500 mn. The securities were issued with a 36-month term, dividends payable by coupons with an annual interest rate of 10.5%. DTEK plans to use the money borrowed to replace collateralized loans on the Ukrainian market and also for other corpo-rate purposes. Fitch Ratings gave these securities an AA-(ukr) rating. At the moment, this is the first issue by a Ukrainian energy company with an international rating the issuer and the bonds, as well as the first hryvnya bond issue from an SCM Group company.

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DTEK was granted a stand-by loan facility worth EUR 50 mn. The organizers of the loan were the interna-tional group Erste Bank and Erste Bank (Ukraine). DTEK has the option of using the facility either in the form of a credit, or as a certification and guarantee. The funds are planned to be used to buy additional manufacturing capacity in the coal industry and to acquire shares in energy companies.

AUGUSTSCM exited as shareholder of Donbass Trade Fleet and Azov Shipyard Plant. The decision was made within the framework of implementing SCM Group business development strategy, based on the effective invest-ment principle.

SEPTEMBERMoody’s gave Metinvest Holding a rating of Ba3 with a positive outlook. This rating level was the result of consistently high financial indicators, based on the holding’s strong market positions in the metal produc-tion and steel-making segments; a positive situation on world raw materials and steel markets; and the company’s high level of protection against fluctuations in world prices for basic inputs. Other factors also taken into account in deciding upon the rating include: a two-year history of financial success and busi-ness expansion despite an unstable political and economic situation; changing tax policy and legislation in Ukraine; volatility on the semi-finished steel products market; and potential risks related to capital ex-penditure programs. For a private company to be awarded such a rating, which is higher than the country’s sovereign rating, is unprecedented for Ukraine’s financial market. From the moment the corporate rating given to Metinvest Holding was announced, it extends to all the holding’s companies and covers the corpo-rate ratings issued earlier, including that of Azovstal Steel Plant.

The new football stadium being built in Donetsk, which will be home to Shakhtar FC, has been named Don-bass Arena. It will be one of the jewels in Ukraine’s staging of the Euro–2012 football championships which will be jointly hosted with Poland. SCM Group, Shakhtar FC’s general sponsor, considers the Donbass Arena to be important significant in the development of Ukraine as a European country.

The Tvoye newspaper came out, which is a guide for Ukrainian consumers and a collection of daily advice for life and work. Tvoye is a project of Segodnya Multimedia publishing holding.

OCTOBERESTA Holding made a decision to enter as investor and developer into the modern multi-use complex con-struction project in the center of Kyiv, with a total are over 70 000 square meters. Total expected investment will exceed $200 mn.

Key expected events for 2008

SCM Annual Report 2007

Documents

Transcript of SCM Annual Report 2007