Financial risk management
The Company’s Financial Risk Management Policy is the framework document of the financial risk management system.
The Company’s financial risk management system
Risk management principles
Management tools, including hedging
- analysis and assessment,
- adoption of decision (selection of risk management strategy),
- actual risk management, including using hedging tools if necessary,
- monitoring of results,
- assessment of effectiveness of financial risk management measures (self-diagnostics).
The centre for decision-making with respect to financial risk management is the Company’s Financial Risk Management Commission — a collective body comprised of representatives from several Departments chaired by the senior vice president for economics and finance. The Commission held 6 meetings in 2015.
The Company focuses on managing the following key financial risks:
In order to manage credit risks, Russian Railways has approved methods for calculating credit limits and regulatory documents that govern work with bank guarantees and sureties, including the unified corporate standard of the Russian Railways Group for work with collateral instruments. Based on the credit limit calculation methods, the Company conducts an assessment of financial institutions and calculates the relevant credit limits to regulate transactions with banks involving deposits and the receipt of bank guarantees depending on the assessment of the condition of the corresponding financial institution.
When interacting with companies in the real sector, Russian Railways employs a system of management standards that includes standard settlement terms with counterparties, interim measures, treasury control, rate setting of receivables and payables, commitment bank guarantees for the proper performance of obligations (including over warranty periods for supply contracts), repayment of advances and sureties of parent companies in order to ensure that Russian Railways is protected against risks of counterparties failing to execute (improperly executing or late execution of) their obligations. Financial institutions that issue bank guarantees and sureties are selected taking into account credit history and the existing credit limits.
The Company performs operational management of liquidity based on the balance of payments, payment schedule and payment positions within the limits of the approved budgets. Depending on current liquidity, the Company promptly attracts or deposits funds under the best market conditions. Operational management of liquidity is performed based on the systems of Reuters and Bloomberg.
Currency, interest and price risks
In order to assess these risks, the Company utilises modelling and an assessment of budget parameters taking into account potential volatility in the relevant market indicators.
The assessment of the currency risks faced by Russian Railways and the selection of a currency risk management tool is based on an analysis of the Company’s foreign currency exposure. In order to estimate foreign currency exposure, the Company’s transactions are analysed and categorised in terms of investment, operating and financial activities. The amount and structure of the estimated foreign currency exposure impacts the Company’s borrowing policy and determines the hedging approaches. The Company regularly reviews its foreign currency exposure and makes the relevant adjustments to manage foreign currency risks and the foreign currency borrowing portfolio.
The Company minimises its currency risks by reducing its foreign currency exposure, including by utilising derivative financial instruments.
In addition, given the Company’s foreign currency-denominated assets and liabilities, Russian Railways has used hedge accounting since 16 July 2015 for liabilities denominated in foreign currency. An example of a hedged item is revenue from transit operations denominated in Swiss francs as well as investments in GEFCO denominated in euros. Hedging tools include loans in Swiss francs and U.S. dollars (with conversion into Swiss francs) and partial loans in euros, i.e. the corresponding amount of net investments in GEFCO. Hedge accounting reflects the effect of the currency risk management policy and reduces the volatility of the Group’s financial results given the changes in foreign exchange rates. In particular, the exchange rate differences on loans involved in hedging are recognised as equity and then re-classified under the profit and loss statement based on the receipt of foreign currency earnings and/or the sale of a foreign currency-denominated asset.
The interest risk is assessed based on an analysis of the volatility of floating interest rates and the corresponding effect on the borrowing portfolio of Russian Railways.
As regards price risk, the Company seeks to establish settlement and indexation terms in contracts with counterparties that mitigate this risk as much as possible.