ANNEX 1.
RISK MANAGEMENT

Risk
Description
Mitigation
1.
Country and regional risks
1.1
Risks related to the political and economic situation in the country.

These risks mainly result from the activities of government agencies and third parties. The key risks related to the economic and political situation in the country in the near term may arise in case the state funding of aircraft programmes is reduced.

It is accepted that the most effective way of mitigating the risks related to the political and economic situation is to increase the efficiency of management and production.


1.2
Risks of military conflicts, imposing a state of emergency and risks of terrorist threats.

The risks of military conflicts, imposing a state of emergency and risks of terrorist threats can be qualified as nation-wide risks.

The terrorist threats are addressed by the relevant law enforcement agencies (including the agencies in charge of the territory where a specific facility is located), and the relevant functions of PJSC UAC that implement scheduled activities under the direction of the said agencies.

In the event of occurrence of any of these risks, PJSC UAC will act in line with the current legislation.


1.3
Geographic risks in the regions of presence.

Various disruptive events of general nature, such as persistent climate change, natural disasters, epidemics, transport accidents and man-made disasters that may materially affect the production efficiency of PJSC UAC.

At the moment, these risks are forecasted, approved by the Russian Ministry of Emergency Situations for the planning period (calendar year), and are used as the basis for planning the resources that may be required to address potential emergencies. The subsidiaries of PJSC UAC participate in implementing the plan provided by the Russian Ministry of Emergency Situations.

2.
Industry risks
2.1
Risks of potential changes in the price of goods and services.

Changes in the foreign contract prices due to a decrease in the rouble-denominated export revenues as the result of the strengthening of the Rouble to the main foreign currencies (US Dollar, Euro) will lead to an imbalance of cash flows.

An increase or decrease of market prices for the Corporation’s products and services will cause fluctuations in the demand, which will affect the business performance of the Corporation.

To mitigate the risk of potential changes in the export contract prices that may affect the business performance, a number of specific steps are taken, such as contracting and obtaining export loans in the currency of contract.

To mitigate the risks of changes in the market prices for the Corporation’s products (services), fixed prices are set for the contracts signed. In addition, measures are implemented to improve the legislation on the internal aircraft market protection and ensure state stimulation of demand.


2.2
Risks of potential changes in the price of commodities and services used by the Corporation in the course of its operations and the potential effect of such risks on the Company’s operations and the execution of its obligations on securities.

Significant changes in the internal market prices for main materials and parts, price growth rates above the predicted national average (industry forecasts by the Russian Ministry of Economic Development).

To mitigate the risks, the Company maintains long-term partnership relations with the suppliers of key parts and materials, explores the possibilities of cooperation and import substitution and considers alternative suppliers who are not dependent on imports.

3.
Financial risks
3.1
Currency risks.

The subsidiaries and affiliates of PJSC UAC conduct export and import transactions and are therefore affected by the fluctuations of currency exchange rates, primarily, the US Dollar and the Euro. In addition, currency risks may arise when joint venture companies are established to support international cooperation.

To mitigate currency risks, the following measures are implemented:

• To ensure advance financing of its business operations, the UAC Group obtains credits in foreign currency that will be repaid with the revenues from foreign currency export contracts;

• As a remedial measure, the UAC Group strives to reduce the amount of contracts for its products denominated in the US Dollar and other foreign currencies.


3.2
Interest rate risks.

The interest rate risks are the risks associated with interest rate fluctuations that may have an adverse effect on the financial performance of the Company and the UAC.

Target financing from the federal budget, state contracts and state guarantees of the Russian Federation and subsidies to cover the interest on loans obtained to deliver on the state defence order and the Federal Target Programme for the development of the Russian military-industrial complex in 2011―20 enable the Corporation to increase its reliability as a borrower and minimise the cost of credit and thus streamline its interest expenses.


3.3
Liquidity risks.

Liquidity risks may arise if the available financial resources are not sufficient enough to meet the current liabilities. Given the current financial position, these risks may be considered as negligible.

To mitigate liquidity risks, detailed budgeting and cash flow forecasting procedures are used. In addition, finance and production plans are developed for the Corporation’s enterprises that make it possible to timely identify liquidity gaps and attract the required financing.

Another liquidity management instrument is the unsecured renewable line of credit at partner banks that the UAC Group can use if there is an urgent need to cover the liquidity shortage.

The risks of non-payment by buyers that can also result in liquidity issues are mitigated through advance payment.


3.4
Inflation risks.

Inflation processes may affect the business performance and financial results of the UAC Group. In some cases the UAC Group delivers the products (transfers the results of the work, provides services, etc.) on deferred payment terms. In this case there is a time lapse between the delivery of products (work, services) to the customer and the payment in full. The negative effect of inflation on the operations of the UAC Group is associated with the following risks:

• risk of losses due to the change in the actual value of receivables if there is a significant deferral or delay in payment;

• risk of increase of interest expense on borrowed funds;

• risk of non-implementation of investment programmes due the decrease of the actual value of the allocated funds.

The plans of PJSC UAC to increase the price of its products are based on the projections of the Russian Ministry of Economic Development on the dynamics of inflation that is reflected in the Forecast of Social and Economic Development of the Russian Federation for 2018 and for the forecasting period of 2019―20.

The UAC Group implements remedial measures aimed at receiving advance payment for the products (work, services) to be delivered, and at reducing the settlement period. In addition, the financial strategy of the UAC Group provides for a possibility to adjust the plans for the gradual increase of price for the products in a timely manner: the price to be fixed in the contracts is determined taking into account the real-time inflation. The financial strategy also implies that inflation should be factored in when calculating the cost of products and services, which contributes to the sustainability of operations.

If there is an escalation of inflation, the UAC Group will focus on increasing the current assets turnover, primarily by introducing changes in the existing contractual relations with the customers to reduce the accounts receivable. On the whole, the effect of inflation on the financial stability of the UAC Group in the longer term appears insignificant and is taken into account in the financial plans of the UAC Group.

4.
Legal risks
4.1
Risk associated with the changes in the legislation and regulations.

The risk of losses due to non-compliance with the legislation, failure to timely reflect the changes in the Russian legislation in company regulations and procedures, and changes in the legislation that may have a negative effect on the Company’s operations.

To mitigate these risks, the Company constantly monitors the changes in the legislation.


4.2
Risks associated with changes in lawenforcement practices.

The risks associated with the negative effect of changes in the law-enforcement practices on matters related to the operations of the Company, including the positions of supreme judicial authorities, on the Company’s performance and on the outcome of the ongoing judicial proceedings.

To mitigate these risks, the Company regularly monitors the decisions of supreme courts, analyses the trends in law-enforcement practices, their application in the settlement of disputes arising in the course of operations.

5.
Strategic risk
.
.

The strategic risk is understood as nonachievement of goals outlined in the Development Strategy of PJSC UAC.

The projects aimed at achieving strategic goals and objectives are assessed on a regular basis.

6.
6. Risk of damages to the reputation (reputational risk)
.
.

The reputational risk is related to losses incurred by the Company due to the decrease in the number of customers (clients) as the result of a negative opinion on the Company’s financial stability and financial standing, on the quality of its products, work, services, its management of deadlines for delivering products, performing work or providing services, or on the nature of its activity at large.

One of the Company’s priorities is to provide timely and accurate information to the public on its financial performance and future development plans. The Company’s market position depends on how the Company is presented in the mass media and how it is perceived by the professional and expert communities and the general public. In line with the established procedure and in compliance with corporate rules and regulations, the Company representatives disseminate the information on the Company’s activities, give comment and explanations to mass media on specific data and facts. The Company also regularly monitors mass media publications.

7.
Risks related to the activities of the Company
7.1
Risks related to the termination of licence.

There is little risk of license termination, except where a license has to be reissued to continue to perform licensable activities that were rendered impossible or overly expensive due to newly established requirements.

The Company regularly assesses its compliance with the licensing requirements.


7.2
Risks related to potential liabilities for debts of third parties, including the Company’s subsidiaries.

Risks related to potential liabilities of the Company for debts of third parties, including the subsidiaries of PJSC UAC may be defined as potential financial losses incurred by the Company due to the failure of a subsidiary (borrower) to fulfil its obligations on the repayment of debts secured by the surety of the Company, and the transfer of the obligations on the agreement from the borrower to the guarantor (surety), i.e. the Company.

In this case, the Company and the borrower will be jointly liable to the creditor, unless the agreement provides for secondary liability.

There is little risk of potential liability for debts of third parties, including the subsidiaries of PJSC UAC, since the Company has a system of intra-group financing and a centralised function overseeing the external financing of subsidiaries that ensures that decisions are taken at the Company level, with due account for the financial and economic performance of the subsidiaries, their financing needs, the terms and cost of financing and availability of sources of repayment, including alternative sources.

PJSC UAC constantly monitors the financial and economic performance of the subsidiaries through their governing bodies; it implements a set of measures aimed at optimising the volume and value of debt and controlling the sources of repayment, thus sufficiently minimising the risk of potential liabilities for debts of the subsidiaries of PJSC UAC.


7.3
Risks of losing key customers.

Given the support from the Russian government, there is every sign that major customers are becoming increasingly interested in the products of PJSC UAC.

To mitigate this risk, the Company seeks to make its customers base more diversified, in particular, by extending its geographic reach, attracting new operators, expanding the list of partner leasing companies, signing long-term contracts for the delivery of products (provision of services).

Seeking to consolidate the benefits of cooperation with Russian and foreign customers, PJSC UAC has worked on continuously improving its aftersales services to ensure that they meet the highest global standards.


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ANNEX 2. ABBREVIATIONS AND GLOSSARY

Structure
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